Wednesday, September 03, 2014

A Conversation with Lars Hansen

See also conversations with Peter Diamond and Edmund Phelps.

    Posted by on Wednesday, September 3, 2014 at 09:00 AM in Econometrics, Economics, Video | Permalink  Comments (0)

    Minority Mortgage Market Experiences and the Financial Crisis

    Stephen Ross at Vox EU:

    Minority mortgage market experiences leading up to and during the Financial Crisis, by Stephen L. Ross, Vox EU: The subprime lending crisis in the US triggered a broad financial panic that lead to the global recession. Domestically, it meant bankruptcy and disaster for many households. This column analyses racial discrimination in subprime lending. Careful estimation of a detailed dataset reveals across-lender effects to have substantially disadvantaged black and Hispanic borrowers.

    The concluding paragraph:

    ... Minority homebuyers – especially blacks – tend to face a higher cost of mortgage credit and had substantially worse credit market outcomes during the recent downturn than white homebuyers with equivalent mortgage risk factors. In terms of the price of credit, a majority of the unexplained differences are associated with the lender from which the homebuyer obtained credit. These effects are felt most among minority borrowers with the lowest levels of education, and are likely due in part to the concentrated activity of subprime lenders in minority neighborhoods and a lack of knowledge of financial markets among minority borrowers with low levels of education. On the other hand, most of the racial differences in loan performance that are unexplained by traditional credit risk factors cannot be captured by controlling for the lender or other aspects of subprime lending. African-Americans and Hispanics appear to be more vulnerable to an economic downturn and to the associated risks of unemployment and housing price declines than observationally similar white homeowners. This higher vulnerability is most pronounced for borrowers who purchased their homes right before the onset of the financial crisis, even after controlling for the increased risk of negative equity associated with buying at the peak of the market. While the expansion of the subprime sector may have contributed to a higher cost of credit for black homebuyers, their concentration in high cost loans (and in the subprime market more generally) can explain only a small portion of the racial differences in foreclosure. Rather, a broad spectrum of black and Hispanic borrowers appear to be especially vulnerable to the economic downturn and associated shocks to their ability to meet their mortgage commitments.

      Posted by on Wednesday, September 3, 2014 at 08:00 AM in Economics, Financial System, Housing | Permalink  Comments (34)

      The Cause of Sagging Job Growth Since 2000

      I have another article at MoneyWatch:

      Sagging job growth: It's not a skills gap, by Mark Thoma: Many economists believe the rise in inequality can be explained by factors that have increasingly rewarded college-educated workers over those without a college degree. This "skills premium" has caused the middle class to shrink and polarized the labor market. The solution to these problems is the often-heard call for improved education and retraining programs that will give workers the skills they need to thrive in modern economies.
      Employment in manufacturing industries has been hit particularly hard over the last few decades, and economists have pointed to work by David Autor, an economics professor at MIT, and others suggesting that this has resulted more from technological change than from globalization and declining bargaining power of workers (e.g. due to the power of unions).
      According to this view, outsourcing is not the main problem. ... However, new work by Autor and several prominent co-authors calls this into question...

        Posted by on Wednesday, September 3, 2014 at 07:46 AM in Economics, Unemployment | Permalink  Comments (24)

        Links for 9-03-14

          Posted by on Wednesday, September 3, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (79)

          Tuesday, September 02, 2014

          Fed Watch: Solid Start to September

          Tim Duy:

          Solid Start to September, by Tim Duy: The ISM manufacturing report came in ahead of expectations with the strongest number since 2011:


          Moreover, strength was evident throughout the internal components:


          Note too that the report is consistent with other manufacturing numbers:


          If this is a taste of the data to expect this fall, it is tough to see how the Fed will be able to maintain their "considerable period" language much longer.

            Posted by on Tuesday, September 2, 2014 at 11:49 AM in Economics, Fed Watch, Health Care, Monetary Policy | Permalink  Comments (6)

            Objections to Fiscal Policy are Groundless—It Works

            I have a new column:

            Objections to Fiscal Policy are Groundless—It Works: One of the more controversial policies instituted in an attempt to stimulate the economy out of the Great Recession was the $816.3 billion fiscal stimulus package enacted just after Obama took office. ...

            [The artwork is a bit mixed up, it has Keynes in a helicopter dropping money...]

              Posted by on Tuesday, September 2, 2014 at 07:47 AM in Economics, Fiscal Policy | Permalink  Comments (19)

              How to Shock the U.S. Economy Back to Life

              At MoneyWatch:

              How to shock the U.S. economy back to life, by Mark Thoma: During the Great Recession, U.S. gross domestic production -- the nation's total output of goods and services -- dropped below the trend rate of growth that prevailed before the collapse. More than five years into the recovery, the economy shows no signs of returning to that prior rate of growth.
              Instead, as the following graph shows, although the economy is growing at roughly the same rate as before the crisis, the growth is from a much lower level of output:
              Is this the "new normal" we hear so much about? Do Americans have no choice but to accept the lower level of output, and the lower level of employment and living standards that comes with it, or is there something we can do to push the economy back to the pre-Great Recession trend? ...[continue]...

                Posted by on Tuesday, September 2, 2014 at 07:38 AM in Economics, Fiscal Policy | Permalink  Comments (19)

                Fed Watch: Fed Positioning to Normalize Policy

                Tim Duy:

                Fed Positioning to Normalize Policy, by Tim Duy: With the leaves turning to gold signaling the end of summer, so too will the Fed be facing its own change of seasons as quantitative easing comes to an end. With asset purchases likely ending in October, time is growing short for the Fed to communicate a plan for the normalization of policy. To be sure, the outline of the plan is already in place, with interest on reserves playing a primary role backed by overnight repurchase operations. The timing of any action to raise rates, however, is likely to become a more contentious issue during the fall. Hawks will be pitted against doves as the former focus on improving labor markets while the latter point to underemployment and low inflation as reason for patience. The baseline scenario is that Fed Chair Janet Yellen guides the Fed to a delayed and gradual rate hike scenario. Given that this is just about the most dovish scenario imaginable at this juncture, the balance of risks is weighted toward a more aggressive approach to normalization.
                The FOMC next meets Sept. 16 and 17. The almost certain outcome of that meeting will be another $10 billion cut from the Fed's asset purchase program. The subsequent press conference provides the opportunity to communicate more clearly the technical elements of the normalization process if the Fed feels sufficiently confident in the broad outlines of their plan. Less certain is a change in the forward guidance to reflect the the dissent of Philadelphia Federal Reserve Charles Plosser:
                Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.
                The ability to maintain the considerable period language will likely be dependent on the next employment report. The pattern of initial unemployment claims data points toward fairly strong momentum in labor markets:


                Further improvements in labor markets will be make it difficult to promise a "considerable" period of time before the FOMC decides conditions are ripe for the first rate hike. Moreover, I found Yellen's language regarding the summary of labor market conditions in her Jackson Hole speech to be intriguing:
                One convenient way to summarize the information contained in a large number of indicators is through the use of so-called factor models. Following this methodology, Federal Reserve Board staff developed a labor market conditions index from 19 labor market indicators, including four I just discussed. This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.
                Notice that the unemployment rate only "somewhat" overstates improvement in labor market conditions. "Somewhat" is not a word that suggests much conviction. Quite the contrary. And Yellen would have good reason to have little conviction on this point. I would caution against reading too much of significance into the Fed's new labor market indicators. I think the insightful Carola Binder absolutely nailed this one:
                The main reason I'm not too excited about the LMCI is that its correlation coefficient with the unemployment rate is -0.96. They are almost perfectly negatively correlated--and when you consider measurement error you can't even reject that they are perfectly negatively correlated-- so the LMCI doesn't tell you anything that the unemployment rate wouldn't already tell you. Given the choice, I'd rather just use the unemployment rate since it is simpler, intuitive, and already widely-used.
                Yellen sent her staff to prove that the unemployment rate does not accurately represent labor market improvement, and they created a measure that is almost perfectly negatively correlated with unemployment. In effect, the staff proved what Yellen has said repeatedly. For example, back in April:
                I will refer to the shortfall in employment relative to its mandate-consistent level as labor market slack, and there are a number of different indicators of this slack. Probably the best single indicator is the unemployment rate.
                If the unemployment rate remains the single-best indicator, it is no wonder then that Yellen's Jackson Hole speech was pragmatic not dogmatic. And pragmatic relative to the current baseline suggests the risk is toward tighter than expected monetary policy.
                All that said, the actual inflation data still argues for patience. The higher inflation we witnessed this spring proved to be temporary:



                Moreover, the flattening yield curve is suggestive of global deflationary forces:



                And financial markets are not sending a warning that inflation expectations are shifting upward:


                How do I put this all together? I tend to think the risk is that the employment data pulls the timing of the first rate hike forward. I have been focused on mid-year with a preference for the second quarter over the third. That said, I find it difficult to entirely discount the March meeting, especially if we see a string of solid employment reports. The March meeting also has the benefit of having a press conference. The inflation data, however, still argue for a gradual pace of interest rate hikes, thus Yellen should be able to argue that as long as inflation remains contained, there is no need to normalize policy aggressively even if such a policy begins a little earlier.
                Indeed, I think the hawks will argue that Yellen is most likely to be able to maintain a dovish trajectory if she pulls forward the timing of the first rate hike to reflect that the Fed is close to meeting its targets. This is also the easiest way to alleviate any tension in FOMC if incoming labor reports suggest to FOMC members that the zero interest rate stance is excessively accommodative. It would also be arguably a pragmatic approach to policy making as Yellen outlined at Jackson Hole:
                My colleagues on the Federal Open Market Committee (FOMC) and I look to the presentations and discussions over the next two days for insights into possible changes that are affecting the labor market. I expect, however, that our understanding of labor market developments and their potential implications for inflation will remain far from perfect. As a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.
                Bottom Line: The baseline path for interest rates is a delayed and gradual rate hike scenario beginning mid-2015. It seems reasonable, however, to believe that the risk is that this baseline is too dovish given the general progress toward the Fed's goals, a point made repeatedly by Fed hawks. Internal dissension to the baseline would only intensify in the face of another six months of generally solid economic news, especially on the labor front. Yellen would not want to risk the recovery, however, on an overly aggressive approach, especially in the face of low inflation. Considering the path of the data relative to the various policy factions with the Fed, I believe the risk is that the Fed pulls forward the date of the first rate hike as early as March - still seven months away! - while maintaining expectations for a gradual subsequent rate path.

                  Posted by on Tuesday, September 2, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (2)

                  Links for 9-02-14

                    Posted by on Tuesday, September 2, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (124)

                    Monday, September 01, 2014

                    'What Unions No Longer Do'

                    Justin Fox:

                    What Unions No Longer Do, by Justin Fox: Forty years ago, about quarter of American workers belonged to unions, and those unions were a major economic and political force. Now union membership is down to 11.2% of the U.S. workforce, and it’s increasingly concentrated in the public sector — only 6.7% of private-sector workers were union members in 2013.
                    This isn’t exactly news... What doesn’t get talked about so much, though, are the consequences. Income inequality has, for example, become a hot topic. You might think that the dwindling away of an institution that devoted much of its energy to equalizing incomes would be a big part of that discussion. It hasn’t been.
                    Jake Rosenfeld, an associate professor of sociology at the University of Washington ... is out to change that. His book What Unions No Longer Do ... is an account of Rosenfeld’s attempt to empirically establish (mainly through a lot of regressions...) the consequences of Big Labor’s decline. ... [H]ere, for Labor Day, are the four big things that, according to Rosenfeld, unions in the U.S. no longer do:
                    Unions no longer equalize incomes. ...
                    Unions no longer counteract racial inequality. ...
                    Unions no longer play a big role in assimilating immigrants. ...
                    Unions no longer give lower-income Americans a political voice. ...
                    The decline of unions in the U.S. has often been painted as inevitable, or at least necessary for American businesses to remain internationally competitive. There are definitely industries where this account seems accurate. ... But ... even if the decline of unions was inevitable or desirable, that still leaves those tasks unions once accomplished — which on the whole seem like things that are good for society, and good for business — unattended to. Who’s going to do them now?

                    [See also, "The Origins of Labor Day" by Tim Taylor.]

                      Posted by on Monday, September 1, 2014 at 08:16 AM in Economics, Unions | Permalink  Comments (37)

                      Paul Krugman: The Medicare Miracle

                      Good news on health care costs:

                      The Medicare Miracle, By Paul Krugman, Commentary, NY Times: So, what do you think about those Medicare numbers? What, you haven’t heard about them? Well, they haven’t been front-page news. But something remarkable has been happening on the health-spending front, and it should (but probably won’t) transform a lot of our political debate.
                      The story so far: We’ve all seen projections of giant federal deficits... Policy wonks have long known ... that ... health care, rather than retirement, was driving those scary projections. Why? Because, historically, health spending has grown much faster than G.D.P., and it was assumed that this trend would continue.
                      But a funny thing has happened: Health spending has slowed sharply ... This is a really big deal...
                      But what accounts for this good news? ... Medicare is spending much less than expected, and those Obamacare cost-saving measures are at least part of the story. The conventional wisdom on what is and isn’t serious is completely wrong.
                      While we’re on the subject of health costs, there are two other stories you should know about.
                      One involves the supposed savings from running Medicare through for-profit insurance companies. That’s the way the drug benefit works, and conservatives love to point out that this benefit has ended up costing much less than projected, which they claim proves that privatization is the way to go. But the budget office has a new report on this issue, and it finds that privatization had nothing to do with it. Instead, Medicare Part D is costing less than expected partly because enrollment has been low and partly because an absence of new blockbuster drugs has led to an overall slowdown in pharmaceutical spending.
                      The other involves the “sticker shock” that opponents of health reform have been predicting for years. Bulletin: It’s still not happening. ...
                      What’s the moral here? For years, pundits and politicians have insisted that guaranteed health care is an impossible dream, even though every other advanced country has it. Covering the uninsured was supposed to be unaffordable; Medicare as we know it was supposed to be unsustainable. But it turns out that incremental steps to improve incentives and reduce costs can achieve a lot, and covering the uninsured isn’t hard at all.
                      When it comes to ensuring that Americans have access to health care, the message of the data is simple: Yes, we can.

                        Posted by on Monday, September 1, 2014 at 12:24 AM in Economics, Health Care | Permalink  Comments (121)

                        Links for 9-01-14

                          Posted by on Monday, September 1, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (67)

                          Sunday, August 31, 2014

                          What Savings Glut?

                          Joe Stiglitz in a review of Martin Wolf's new book "The Shifts and the Shocks":

                          ... If I have a point of difference with Wolf’s analysis, it is that he ... is insufficiently critical of the “savings glut” hypothesis advanced by former Federal Reserve chairman Ben Bernanke, among others, which presents what used to be a virtue (savings) as a vice, shifting blame to China and (less vocally) to Germany. Yet the investment needs of today are staggering: for infrastructure in the developing world, let alone in the US; for retrofitting the global economy to cope with global warming; even for small and medium-sized enterprises starved of capital in much of the world. This should make it obvious that the problem is not an excess of savings but a financial system that is more fixated on speculation than on fulfilling its societal role of intermediation ... in which scarce savings are allocated to the investments of highest social returns.

                          The problem goes beyond a "financial system that is more fixated on speculation":

                          It is striking how much Wolf, like so many advocates of financial reform, focuses on protecting us against the banks: making sure that they don’t engage in excessive risk-taking... Wolf doesn’t dwell much on some of the more antisocial aspects evidenced in the aftermath of the crisis: the market manipulation (as in the Libor and forex scandals), the anti-competitive practices, the predatory and discriminatory lending, the lack of transparency, the fraudulent behavior. Presumably, this is because he believes, or hopes, that even too-big-to-fail and too-big-to-jail banks won’t be politically powerful enough to continue such behavior unimpaired. But he says too little about what might be done to make banks actually fulfill the societal role that they should be playing. ...

                            Posted by on Sunday, August 31, 2014 at 08:52 AM in Economics, Financial System, Regulation | Permalink  Comments (29)

                            'Where Danger Lurks'

                            Olivier Blanchard (a much shortened version of his arguments, the entire piece is worth reading):

                            Where Danger Lurks: Until the 2008 global financial crisis, mainstream U.S. macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment. ...
                            That small shocks could sometimes have large effects and, as a result, that things could turn really bad, was not completely ignored by economists. But such an outcome was thought to be a thing of the past that would not happen again, or at least not in advanced economies thanks to their sound economic policies. ... We all knew that there were “dark corners”—situations in which the economy could badly malfunction. But we thought we were far away from those corners, and could for the most part ignore them. ...
                            The main lesson of the crisis is that we were much closer to those dark corners than we thought—and the corners were even darker than we had thought too. ...
                            How should we modify our benchmark models—the so-called dynamic stochastic general equilibrium (DSGE) models...? The easy and uncontroversial part of the answer is that the DSGE models should be expanded to better recognize the role of the financial system—and this is happening. But should these models be able to describe how the economy behaves in the dark corners?
                            Let me offer a pragmatic answer. If macroeconomic policy and financial regulation are set in such a way as to maintain a healthy distance from dark corners, then our models that portray normal times may still be largely appropriate. Another class of economic models, aimed at measuring systemic risk, can be used to give warning signals that we are getting too close to dark corners, and that steps must be taken to reduce risk and increase distance. Trying to create a model that integrates normal times and systemic risks may be beyond the profession’s conceptual and technical reach at this stage.
                            The crisis has been immensely painful. But one of its silver linings has been to jolt macroeconomics and macroeconomic policy. The main policy lesson is a simple one: Stay away from dark corners.

                            That may be the best we can do for now (have separate models for normal times and "dark corners"), but an integrated model would be preferable. An integrated model would, for example, be better for conducting "policy and financial regulation ... to maintain a healthy distance from dark corners," and our aspirations ought to include models that can explain both normal and abnormal times. That may mean moving beyond the DSGE class of models, or perhaps the technical reach of DSGE models can be extended to incorporate the kinds of problems that can lead to Great Recessions, but we shouldn't be satisfied with models of normal times that cannot explain and anticipate major economic problems.

                              Posted by on Sunday, August 31, 2014 at 08:24 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (8)

                              Links for 8-31-14

                                Posted by on Sunday, August 31, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (74)

                                Saturday, August 30, 2014

                                'Incarceration Society'

                                Dan Little:

                                Incarceration society: It is becoming increasingly clear that the criminal justice system is an important component of the system of race in the United States today. Michelle Alexander's important book The New Jim Crow: Mass Incarceration in the Age of Colorblindness makes the case that the war on drugs and the war on crime have functioned disproportionately to incarcerate and control young black men in America's inner cities. ...

                                  Posted by on Saturday, August 30, 2014 at 09:40 AM in Economics | Permalink  Comments (73)

                                  Nobel Warnings

                                  I have interviews with Peter Diamond and Edmund Phelps available here and here, and an interview I did with Lars Hansen should be available later this week. All are from the Nobel Meetings in Economics at Lindau, Germany last week. But if you are itching for still more from the Nobel Laureates in economics (four of the five were not in Lindau), here is a set of interviews available at the IMF:

                                  • Global Warming by George A. Akerlof
                                  • Increasing Demand by Paul Krugman
                                  • Secular Stagnation by Robert Solow
                                  • Inclusiveness by Michael Spence
                                  • Inequality by Joseph Stiglitz

                                    Posted by on Saturday, August 30, 2014 at 08:47 AM in Economics | Permalink  Comments (4)

                                    Links for 8-30-14

                                      Posted by on Saturday, August 30, 2014 at 12:33 AM in Economics, Links | Permalink  Comments (65)

                                      Friday, August 29, 2014

                                      Paul Krugman: The Fall of France

                                      Why didn't François Hollande reverse austerity policies in France?:

                                      The Fall of France, by Paul Krugman, Commentary, NY Times: François Hollande, the president of France since 2012, coulda been a contender. He was elected on a promise to turn away from the austerity policies that killed Europe’s brief, inadequate economic recovery... But it was not to be. Once in office, Mr. Hollande promptly folded, giving in completely to demands for even more austerity.
                                      Let it not be said, however, that he is entirely spineless. Earlier this week, he took decisive action, but not, alas, on economic policy... Mr. Hollande ... was focused on purging members of his government daring to question his subservience to Berlin and Brussels.
                                      It’s a remarkable spectacle. To fully appreciate it, however, you need to understand two things. First, Europe, as a whole, is in deep trouble. Second,... France’s performance is much better than you would guess from news reports. France isn’t Greece; it isn’t even Italy. But it is letting itself be bullied as if it were a basket case. ...
                                      Why ... does France get such bad press? It’s hard to escape the suspicion that it’s political: France has a big government and a generous welfare state, which free-market ideology says should lead to economic disaster. So disaster is what gets reported, even if it’s not what the numbers say.
                                      And Mr. Hollande, even though he leads France’s Socialist Party, appears to believe this ideologically motivated bad-mouthing. Worse, he has fallen into a vicious circle in which austerity policies cause growth to stall, and this stalled growth is taken as evidence that France needs even more austerity.
                                      It’s a very sad story, and not just for France.
                                      Most immediately, Europe’s economy is in dire straits. ... Meanwhile, Germany is incorrigible. Its official response to the shake-up in France was a declaration that “there is no contradiction between consolidation and growth” — hey, never mind the experience of the past four years, we still believe that austerity is expansionary.
                                      So Europe desperately needs the leader of a major economy — one that is not in terrible shape — to stand up and say that austerity is killing the Continent’s economic prospects. Mr. Hollande could and should have been that leader, but he isn’t.
                                      And if the European economy continues to stagnate or worse, what will become of the European project — the long-term effort to secure peace and democracy through shared prosperity? In failing France, Mr. Hollande is also failing Europe as a whole — and nobody knows how bad it might get.

                                        Posted by on Friday, August 29, 2014 at 04:26 AM in Economics, Fiscal Policy | Permalink  Comments (127)

                                        Links for 8-29-14

                                          Posted by on Friday, August 29, 2014 at 04:04 AM in Economics, Links | Permalink  Comments (59)

                                          Thursday, August 28, 2014

                                          Repugnant Markets and Prohibited Transactions

                                          There seems to be a problem with embedding this video -- it's here:

                                          Repugnant Markets and Prohibited Transactions

                                            Posted by on Thursday, August 28, 2014 at 09:21 AM in Economics | Permalink  Comments (1)

                                            When Do We Start Calling This 'The Greater Depression'?

                                            Brad DeLong:

                                            When Do We Start Calling This “The Greater Depression”?: We started by calling it the financial crisis of 2007. Then it became the financial crisis of 2008. Next it was the downturn of 2009-2009. By the middle of 2009 it was clearly the biggest thing since the 1930s, and acquired the name of “The Great Recession”. By the end of 2009 the business cycle trough had been passed, and people breathed a sigh of relief: “The Great Recession” would be its stable name–we would not have to change its name again, and move on to labels containing the D-word.
                                            But we breathed our sigh of relief too soon..., the United States did not experience a rapid V-shaped recovery carrying it back to the previous growth trend of potential output. ...
                                            Things have been even worse in Europe. The Eurozone experienced not recovery but renewed recession with a second-wave downturn starting in 2010...
                                            Cumulative output losses relative to the 1995-2007 trends now stand at 78% of a year’s GDP for the United States, and at 60% of a year’s GDP for the Eurozone. These are extraordinary magnitudes of foregone prosperity...: nobody back in 2007 was forecasting ... the ... extraordinary decline in the rate of growth of potential output that statistical and policymaking agencies are now baking into their estimates. These magnitudes made me conclude at the start of 2011 that “The Great Recession” was no longer adequate: it was time to start calling this episode “The Lesser Depression”. ...

                                              Posted by on Thursday, August 28, 2014 at 07:18 AM in Economics | Permalink  Comments (58)

                                              Links for 8-28-14

                                                Posted by on Thursday, August 28, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (98)

                                                Wednesday, August 27, 2014

                                                'On the Relationships between Wages, Prices, and Economic Activity'

                                                This is from Edward S. Knotek II and Saeed Zaman of the Cleveland Fed:

                                                On the Relationships between Wages, Prices, and Economic Activity: Labor costs and labor compensation have garnered considerable attention from economists in the wake of the financial crisis and recession. Across a range of measures, wage growth slowed sharply during the recession. Recently, wage growth has remained near historically low levels despite improvements in the labor market.
                                                Subdued wage growth has been variously seen as both a cause and a consequence of the slow pace of economic growth and persistently low inflation rates. It also may have contributed to rising inequality. In some forecast narratives, a pickup in wage growth is viewed as a necessary condition for a stronger recovery and rising inflation. In others, it is a natural consequence of a tightening labor market.
                                                This Commentary takes a closer look at the relationships between wages, prices, and economic activity. It finds that the connections among wages, prices, and economic activity are more akin to a tangled web than a straight line. In the United States, wages and prices have tended to move together, and causal relationships are difficult to identify. We do find that wages are sensitive to economic activity and the level of slack in the economy, but our forecasting results suggest that the ability of wages to help predict future inflation is limited. Thus, wages appear to be useful in assessing the current state of labor markets, but not necessarily sufficient for thinking about where the economy and inflation are going. ...

                                                So even if wages do finally begin rising, policymakers shouldn't panic about inflation (wishful thinking).

                                                  Posted by on Wednesday, August 27, 2014 at 07:00 AM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  Comments (35)

                                                  Filling the Gap: Monetary Policy or Tax Cuts or Government Spending?

                                                  Simon Wren-Lewis (a bit technical):

                                                  Filling the gap: monetary policy or tax cuts or government spending: Suppose there is a shortfall in aggregate demand associated with a rise in involuntary unemployment in a simple closed economy with no capital. Do we try and raise private consumption (C) or government consumption (G)? If the former, why do we prefer to use monetary policy rather than tax cuts? ...

                                                    Posted by on Wednesday, August 27, 2014 at 07:00 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (18)

                                                    State Income Taxes Have Little Impact on Interstate Migration

                                                    From Michael Mazerov of the CBPP:

                                                    More Evidence That State Income Taxes Have Little Impact on Interstate Migration: The New York Times’ Upshot blog has published a fascinating set of graphs of Census Bureau data on interstate migration patterns since 1900, bolstering our argument that state income taxes don’t have a significant impact on people’s decisions about where to live.
                                                    We plotted the same Census data, which shows which states do the best job of retaining their native-born populations, on the chart below, also noting which states have (or don’t have) a state income tax.  Our chart shows that taxes have little to do with the extent to which native-born people leave their states of origin.
                                                    If Heritage Foundation economist Stephen Moore’s claim (which other tax-cut advocates often repeat) that “taxes are indisputably a major factor in determining where . . . families locate” were true, states without income taxes would see below-average shares of their native-born populations leaving at some point in their lifetime, while states with relatively high income taxes would see the opposite.  But the graph shows no such pattern...

                                                      Posted by on Wednesday, August 27, 2014 at 07:00 AM in Economics, Taxes | Permalink  Comments (33)

                                                      Links for 8-27-14

                                                        Posted by on Wednesday, August 27, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (89)

                                                        Tuesday, August 26, 2014

                                                        A Reason to Question the Official Unemployment Rate

                                                        [Still on the road ... three quick ones before another long day of driving.]

                                                        David Leonhardt:

                                                        A New Reason to Question the Official Unemployment Rate: ...A new academic paper suggests that the unemployment rate appears to have become less accurate over the last two decades, in part because of this rise in nonresponse. In particular, there seems to have been an increase in the number of people who once would have qualified as officially unemployed and today are considered out of the labor force, neither working nor looking for work.
                                                        The trend obviously matters for its own sake: It suggests that the official unemployment rate – 6.2 percent in July – understates the extent of economic pain in the country today. ... The new paper is a reminder that the unemployment rate deserves less attention than it often receives.
                                                        Yet the research also relates to a larger phenomenon. The declining response rate to surveys of almost all kinds is among the biggest problems in the social sciences. ...
                                                        Why are people less willing to respond? The rise of caller ID and the decline of landlines play a role. But they’re not the only reasons. Americans’ trust in institutions – including government, the media, churches, banks, labor unions and schools – has fallen in recent decades. People seem more dubious of a survey’s purpose and more worried about intrusions into their privacy than in the past.
                                                        “People are skeptical – Is this a real survey? What they are asking me?” Francis Horvath, of the Labor Department, says. ...

                                                          Posted by on Tuesday, August 26, 2014 at 06:52 AM in Economics, Methodology, Unemployment | Permalink  Comments (55)

                                                          'Who Pays Corporate Taxes?'

                                                          Justin Fox

                                                          Who Pays Corporate Taxes? Possibly You: Who pays corporate income taxes? Just one thing’s for sure: it’s not corporations. ...
                                                          For a long time it was thought the owners paid the tax. That belief can be traced largely to a classic 1962 theoretical analysis by economist Arnold Harberger...
                                                          Harberger saw this as a bad thing. By taking money away from capital owners, the corporate income tax was depressing investment and distorting the economy. But for those more concerned with the distributional effects of taxation, Harberger’s model at least showed the burden landing on people who were wealthier than average.
                                                          His theoretical model, however, assumed a closed economy... As the world’s economies became more intertwined in recent decades, economists — Harberger among them — began constructing open-economy models that showed workers bearing a larger share of the burden. ...
                                                          So in the past few years there’s been a determined attempt to answer the question empirically... Gravelle has a 2011 summary of this work, and her chief conclusions are that the results are all over the place and the most dramatic ones just aren’t credible. But most of these studies do show some significant chunk of the corporate tax burden landing on workers, which is perhaps not yet conclusive but is really interesting.
                                                          Most public discussions of corporate taxes in the U.S., however, still ignore the possibility that workers might actually be the ones bearing the burden. ... Perhaps it’s ... just that, if corporations pay lower taxes, individuals have to pick up the slack. And even if you understand tax incidence perfectly well, a direct tax is still more noticeable than an indirect one.

                                                            Posted by on Tuesday, August 26, 2014 at 06:51 AM in Economics, Taxes | Permalink  Comments (57)

                                                            'Property Rights and Saving the Rhino'

                                                            Tim Taylor:

                                                            Property Rights and Saving the Rhino: South Africa is the home for 75% of the world's population of black rhinos and  96% of the world's population of white rhinos. There must be some lessons for conservationists behind those statistics. Michael 't Sas-Rolfes tells the story in "Saving African Rhinos: A Market Success Story," written as a case study for the Property and Environment Research Center (PERC).

                                                            The story isn't just about markets. In 1900, the white rhinoceros had been hunted almost to extinction, with about 20 remaining in a single game preserve in South Africa. The population slowly recovered a bit, and by the middle of the 20th century, there were enough to start relocating breeding groups of white rhinos to other national parks in South Africa, as well as private game ranches. In 1968, the first legal hunt of a white rhino was authorized.

                                                            But by the 1980s, Sas-Rolfes reports, a strange disjunction had emerged. In 1982, the Natal Parks Board had a list price for a white rhino of about 1,000 South African rands, but the average price paid by a hunter for a rhino trophy that year was 6,000 rands. Private game preserves were quick to take advantage of the arbitrage opportunity. The Natal Parks Board soon began auctioning its rhinos. In 1989, it was selling rhinos for 49,000 rand, but the average price to a hunter for a rhino trophy had risen to 92,000 rand. There were obvious questions about whether this system of raising and hunting rhinos was a useful tool from a broader environmental perspective.

                                                            But property rights and markets enter the story in a different way in 1991.
                                                            Before 1991, all wildlife in South Africa was treated by law as res nullius or un-owned property. To reap the benefits of ownership from a wild animal, it had to be killed, captured, or domesticated. This created an incentive to harvest, not protect, valuable wild species—meaning that even if a game rancher paid for a rhino, the rancher could not claim compensation if the rhino left his property or was killed by a poacher. . . . Recognizing the problems associated with the res nullius maxim, the commission drafted a new piece of legislation: the Theft of Game Act of 1991. This policy allowed for private ownership of any wild animal that could be identified according to certain criteria such as a brand or ear tag. The combined effect of market pricing through auctions and the creation of stronger property rights over rhinos changed the incentives of private ranchers. It now made sense to breed rhinos rather than shoot them as soon as they were received.
                                                            For a sense of how much difference these issues of property rights and incentives can make to conservation, consider the difference in populations between black and white rhinos. Sas-Rolfes explains: "Figure 2 shows trends in white rhino numbers from 1960 until 2007. Contrast those
                                                            numbers with the black rhino, which mostly lived in African countries with weak or absent wildlife market institutions such as Kenya, Tanzania, and Zambia. In 1960, about 100,000 black rhinos roamed across Africa, but by the early 1990s poachers had reduced their numbers to less than 2,500. . . . Unprotected wild rhino populations are rare to non-existent in modern Africa. The only surviving African rhinos remain either in countries with strong wildlife market institutions (such as South Africa and Namibia) or in intensively protected zones."
                                                            A strong demand for rhino horn remains, and especially since about 2008, rhinos across Africa face a risk of illegal poachers. Here's a figure from the conservation group Save the Rhino showing the level of rhino poaching in South Africa:
                                                            Along with the existing choices of "intensively protected zones"--which implies costly and not-very-corruptible protectors--and allowing for private game preserves, the other option is to seek to undercut the black market for rhino horn with a legal market. Other more controversial options discussed at the Save the Rhinos website include de-horning rhinos, to make them less attractive to poachers, and perhaps even allowing legal sale of these rhino horns, to undercut the prices paid to poacher. Rhino horns are made of keratin, similar to the substance in fingernails and hair, and the horn could be removed every year or two. There are strong arguments on both sides of allowing legal sale of rhino horn: perhaps rather than undercutting the illegal market, it might also make it easier for poachers to sell their illegally obtained rhino horn. In the end, given that South Africa is now the home to most of the world's rhinos, I suspect that South Africa will end up making the decision about whether to proceed with these options.

                                                            Those interested in how property rights might be one of the tools for helping to protect endangered species might also want to check this post on "Saving Jaguars and Elephants with Property Rights and Incentives" (December 19, 2011).  

                                                              Posted by on Tuesday, August 26, 2014 at 06:51 AM in Economics, Environment | Permalink  Comments (11)

                                                              Links for 8-26-14

                                                                Posted by on Tuesday, August 26, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (92)

                                                                Monday, August 25, 2014

                                                                Paul Krugman: Wrong Way Nation

                                                                Why have sunbelt states experienced faster job growth than other regions of the country?:

                                                                Wrong Way Nation by Paul Krugman, Commentary, NY Times: Gov. Rick Perry of Texas is running for president again. What are his chances? ... I have absolutely no idea. This isn’t a horse-race column.
                                                                What I’d like to do, instead, is take advantage of Mr. Perry’s ambitions to talk about one of my favorite subjects: interregional differences in economic and population growth.
                                                                You see, while Mr. Perry’s hard-line stances and religiosity may be selling points for the Republican Party’s base, his national appeal, if any, will have to rest on claims that he knows how to create prosperity. And it’s true that Texas has had faster job growth than the rest of the country. So have other Sunbelt states with conservative governments. The question, however, is why.
                                                                The answer from the right is, of course, that it’s all about avoiding regulations that interfere with business and keeping taxes on rich people low, thereby encouraging job creators to do their thing. But it turns out that there are big problems with this story..., wages in the places within the United States attracting the most migrants are typically lower than in the places those migrants come from...
                                                                So why are people moving to these relatively low-wage areas? Because living there is cheaper, basically because of housing. ...
                                                                In other words, what the facts really suggest is that Americans are being pushed out of the Northeast (and, more recently, California) by high housing costs rather than pulled out by superior economic performance in the Sunbelt. ...
                                                                So conservative complaints about excess regulation and intrusive government aren’t entirely wrong, but the secret of Sunbelt growth isn’t being nice to corporations and the 1 percent; it’s not getting in the way of middle- and working-class housing supply.
                                                                And this, in turn, means that the growth of the Sunbelt isn’t the kind of success story conservatives would have us believe. Yes, Americans are moving to places like Texas, but ... they’re moving the wrong way, leaving local economies where their productivity is high for destinations where it’s lower. And the way to make the country richer is to encourage them to move back, by making housing in dense, high-wage metropolitan areas more affordable.
                                                                So Rick Perry doesn’t know the secrets of job creation, or even of regional growth. It would be great to see the real key — affordable housing — become a national issue. But I don’t think Democrats are willing to nominate Mayor Bill de Blasio for president just yet.

                                                                  Posted by on Monday, August 25, 2014 at 12:33 AM in Economics | Permalink  Comments (81)

                                                                  Links for 8-25-14

                                                                    Posted by on Monday, August 25, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (69)

                                                                    Sunday, August 24, 2014

                                                                    The Acemoglu-Robinson Critique of Piketty

                                                                    Branko Milanovic:

                                                                    My take on the Acemoglu-Robinson critique of Piketty: A couple of days ago Daron Acemoglu and James Robinson published a critique of Piketty’s Capital in the 21st century. It is published here.  Because of the renown of the authors, perhaps more than because of its intrinsic quality, it is a review worth reading. I read it today and my brief reaction to the three main critiques by Acemoglu and Robinson is as follows. ...

                                                                    [Travel day, squeezing this one in before hurrying to my next flight.]

                                                                      Posted by on Sunday, August 24, 2014 at 03:43 PM in Economics, Income Distribution | Permalink  Comments (64)

                                                                      Links for 8-24-14

                                                                        Posted by on Sunday, August 24, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (107)

                                                                        Saturday, August 23, 2014

                                                                        A Conversation with Edmund Phelps

                                                                          Posted by on Saturday, August 23, 2014 at 12:33 AM in Economics, Video | Permalink  Comments (4)

                                                                          Links for 8-23-14

                                                                            Posted by on Saturday, August 23, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (164)

                                                                            Friday, August 22, 2014

                                                                            'Three Conditions Must be Satisfied for Helicopter Money Always to Boost Aggregate Demand'

                                                                            David Keohane at FT Alphaville:

                                                                            Buiter on helicopter drops: Some further, further reading on Friday — a new paper from Citi’s Willem Buiter, on why helicopter drops of money always work. From the abstract...:

                                                                            Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable – viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists – even in a permanent liquidity trap – a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, ‘lowflation’ and secular stagnation are therefore unnecessary. They are policy choices.

                                                                            The full paper is here.

                                                                              Posted by on Friday, August 22, 2014 at 10:10 AM in Economics, Monetary Policy | Permalink  Comments (40)

                                                                              Minority Mortgage Market Experiences During the Financial Crisis

                                                                              Via Vox EU:

                                                                              Minority mortgage market experiences leading up to and during the financial crisis, by Stephen L. Ross, Vox EU: The foreclosure crisis that followed the subprime crisis has had significant negative consequences for minority homeowners. This column reviews recent evidence in the racial and ethnic differences in high cost loans and in loan performance. Minority homeowners, especially black homebuyers, faced higher price of mortgage credit and had worse credit market outcomes during the crisis. This is largely due to the fact that minority borrowers are especially vulnerable to the economic downturn. ...

                                                                                Posted by on Friday, August 22, 2014 at 09:51 AM in Economics, Financial System, Housing | Permalink  Comments (11)

                                                                                Paul Krugman: Hawks Crying Wolf

                                                                                The inflation "obsession" continues despite the fact that there is little evidence that inflation is likely to be a problem. Why?:

                                                                                Hawks Crying Wolf, by Paul Krugman, Commentary, NY Times: According to a recent report in The Times, there is dissent at the Fed: “An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly” from its easy-money policies, which they warn run the risk of causing inflation. ...
                                                                                That may well be the case. But there’s something you should know: That “vocal minority” has been warning about soaring inflation more or less nonstop for six years. And the persistence of that obsession seems, to me, to be a more interesting and important story than the fact that the usual suspects are saying the usual things. ...
                                                                                The point is that when you see people clinging to a view of the world in the teeth of the evidence, failing to reconsider their beliefs despite repeated prediction failures, you have to suspect that there are ulterior motives involved. So the interesting question is: What is it about crying “Inflation!” that makes it so appealing that people keep doing it despite having been wrong again and again? ...
                                                                                Eight decades ago, Friedrich Hayek warned against any attempt to mitigate the Great Depression via “the creation of artificial demand”; three years ago, Mr. Ryan all but accused Ben Bernanke, the Fed chairman at the time, of seeking to “debase” the dollar. Inflation obsession is as closely associated with conservative politics as demands for lower taxes on capital gains.
                                                                                It’s less clear why. But faith in the inability of government to do anything positive is a central tenet of the conservative creed. Carving out an exception for monetary policy ... may just be too subtle a distinction to draw in an era when Republican politicians draw their economic ideas from Ayn Rand novels.
                                                                                Which brings me back to the Fed, and the question of when to end easy-money policies.
                                                                                Even monetary doves like Janet Yellen, the Fed chairwoman, generally acknowledge that there will come a time to take the pedal off the metal. And maybe that time isn’t far off...
                                                                                But the last people you want to ask about appropriate policy are people who have been warning about inflation year after year. Not only have they been consistently wrong, they’ve staked out a position that, whether they know it or not, is essentially political rather than based on analysis. They should be listened to politely — good manners are always a virtue — then ignored.

                                                                                  Posted by on Friday, August 22, 2014 at 02:34 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (154)

                                                                                  Links for 8-22-14

                                                                                    Posted by on Friday, August 22, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (50)

                                                                                    Thursday, August 21, 2014

                                                                                    A Conversation with Peter Diamond

                                                                                      Posted by on Thursday, August 21, 2014 at 03:43 AM in Economics, Unemployment, Video | Permalink  Comments (4)

                                                                                      Who Wins and Loses from Global Trade?

                                                                                      At MoneyWatch

                                                                                      Who wins and loses from global trade?: Why are most economists more in favor of free trade than the general public?
                                                                                      One reason may be that the models economists use to evaluate the impact of global trade often overlook some significant ways it affects jobs, income and social services. ...

                                                                                        Posted by on Thursday, August 21, 2014 at 03:42 AM in Economics, International Trade | Permalink  Comments (87)

                                                                                        Inflation, Fear of Inflation, and Public Debt

                                                                                        Posting the video mysteriously causes formatting problems for the blog, so took it down and replaced it with link to the video:

                                                                                        Chris Sims: Inflation, Fear of Inflation, and Public Debt

                                                                                          Posted by on Thursday, August 21, 2014 at 01:18 AM in Budget Deficit, Economics, Inflation, Video | Permalink  Comments (12)

                                                                                          Links for 8-21-14

                                                                                            Posted by on Thursday, August 21, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (127)

                                                                                            Wednesday, August 20, 2014

                                                                                            Understanding Social Mobility

                                                                                              Posted by on Wednesday, August 20, 2014 at 08:41 AM in Economics, Income Distribution | Permalink  Comments (19)

                                                                                              'What Does the Fed Have to do with Social Security? Plenty'

                                                                                              Dean Baker:

                                                                                              What does the Fed have to do with Social Security? Plenty: Most of the people who closely follow the Federal Reserve Board’s decisions on monetary policy are investors trying to get a jump on any moves that will affect financial markets. Very few of the people involved in the debate over the future of Social Security pay much attention to the Fed. That’s unfortunate because the connections are much more direct than is generally recognized. ...

                                                                                                Posted by on Wednesday, August 20, 2014 at 04:46 AM in Economics, Monetary Policy, Social Security | Permalink  Comments (63)

                                                                                                Have Blog, Will Travel

                                                                                                I am here today:

                                                                                                5th Lindau Meeting on Economic Sciences
                                                                                                19-23 August 2014, Lindau, Germany
                                                                                                Lindau Meeting of the Laureates of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel
                                                                                                The 5th Lindau Meeting on Economic Sciences will provide an open exchange of economic expertise and inspire cross-cultural and inter-generational encounters among economists from all over the world. From 19 to 23 August, the participating 18 Nobel Laureates and 460 young scientists will have plenty of opportunity for an intensive exchange of ideas.
                                                                                                The meeting will open on 20 August with a keynote address by the German Chancellor Angela Merkel, and will also feature “a panoramic view on the situation and prospects in Latin America” by Mario Vargas Llosa, the 2010 Nobel Laureate in Literature. The scientific programme will address central fields of the discipline, ranging from econometrics, game theory, and neo-classical growth theory to mechanism design and systemic risk measurement. The overarching question “How useful is economics – how is economics useful?” will also be subject of the meeting’s closing panel debate on Mainau Island on Saturday, 23 August.
                                                                                                The scientific programme of the 5th Lindau Meeting on Economic Sciences will comprise lectures and panel discussions (accessible for all registered meeting participants and guests), as well as discussion sessions and master classes (both accessible only for participating Nobel Laureates and young scientists).
                                                                                                A detailed version of the programme including all lecture titles of the participating laureates with links to their abstracts is available in the Lindau Mediatheque. Please find a PDF version of the printed programme here. To get an overview of the meeting schedule you can also download the programme structure.
                                                                                                Participating Laureates
                                                                                                18 Laureates will attend the 5th Lindau Meeting on Economic Sciences. Among 17 economists there will also be Mario Vargas Llosa, Nobel Laureate in Literature in 2010, participating in the meeting. Please find further information on the Laureates' profiles including their CVs in the Lindau Mediatheque.
                                                                                                Robert Aumann
                                                                                                Peter DiamondLars Peter Hansen
                                                                                                Finn Kydland
                                                                                                Eric Maskin
                                                                                                Daniel McFadden
                                                                                                Robert C. Merton
                                                                                                James Mirrlees
                                                                                                Roger Myerson
                                                                                                Edmund Phelps
                                                                                                Edward Prescott
                                                                                                Alvin Roth 
                                                                                                Reinhard Selten
                                                                                                William Sharpe
                                                                                                Christopher Sims
                                                                                                Vernon Smith
                                                                                                Joseph Stiglitz
                                                                                                Mario Vargas Llosa

                                                                                                Today's Program:

                                                                                                Wednesday, 20 August
                                                                                                8.30 Plenary Lecture Inselhalle Lars Peter Hansen Uncertainty and Valuation
                                                                                                 09.00 Plenary Lecture Inselhalle Alvin E. Roth Repugnant Markets and Prohibited Transactions
                                                                                                09.30 Plenary Lecture Inselhalle Edmund S. Phelps Bringing Dynamism, Homegrown Innovation and Human Flourishing into Economics
                                                                                                10.00 Coffee Break
                                                                                                10.30 Plenary Lecture Inselhalle Christopher A. Sims Inflation, Fear of Inflation, and Public Debt
                                                                                                11.00 Plenary Lecture Inselhalle Vernon L. Smith Rethinking Market Experiments in the Shadow of Recessions: The Good and the Sometimes Ugly; Propositions on Recessions
                                                                                                14.00 Opening Ceremony Inselhalle Opening Ceremony
                                                                                                Angela Merkel Chancellor of the Federal Republic of Germany Master of Ceremony
                                                                                                16.00 Discussion Lars Peter Hansen Discussion with young scientists
                                                                                                16.00 Discussion Edmund S. Phelps Discussion with young scientists
                                                                                                16.00 Alvin E. Roth Discussion with young scientists
                                                                                                16.00 Discussion Christopher A. Sims Discussion with young scientists
                                                                                                 16.00 Discussion Vernon L. Smith Discussion with young scientists
                                                                                                17.30 Break
                                                                                                20.00 Social Function Inselhalle Get-Together

                                                                                                  Posted by on Wednesday, August 20, 2014 at 04:23 AM in Conferences, Economics, Travel | Permalink  Comments (1)

                                                                                                  Links for 8-20-14

                                                                                                    Posted by on Wednesday, August 20, 2014 at 03:33 AM in Economics, Links | Permalink  Comments (66)

                                                                                                    Tuesday, August 19, 2014

                                                                                                    'Very Confused About Cyclical Recovery'

                                                                                                    Brad DeLong tries to make sense of the labor market:

                                                                                                    Over at Equitable Growth: In Which I Make Myself Very Confused About Cyclical Recovery: Will somebody please tell me that I have made a gross arithmetic error in what is below, and can be much more optimistic? ...
                                                                                                    I really do not understand the triumphalism of the very sharp Steve Braun et al. from the CEA...
                                                                                                    So the labor market is, they say, 5/6 of the way back to normal--the current unemployment rate of 6.2% is 3.8%-points down from the peak of 10.0%, and has only 0.8%-point left to go before it hits a pre-crisis NAIRU of 5.4%. When it does, we will attain a "cyclically normal" labor market with a participation rate at 63.4%, 0.5%-points higher than today's 62.9%, and an associated employment-to-population ratio of 60.0%.
                                                                                                    By that metric, we have done 3/4 of the work of cyclical recovery: from a 5.5%-point gap between employment and participation at the trough to a 3.9%-point gap now and a 3.4%-point gap at NAIRU. We will have made 1.7%-points back from the trough on the employment-to-population ratio when cyclical recovery is complete. The permanent damage to employment from the Great Recession Lesser Depression appears to be less than 0.9%-points of participation because there are also ongoing "cohort effects unrelated to aging" that reduce participation.
                                                                                                    Let me stress that this is not senior and not-so-senior White House officials under pressure from political operatives putting as positive a spin on things as they can without actually losing their... No: what I mean to say is this: this is what the CEA's Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock actually believe is true about the world--that the labor market is recovering successfully and strongly from the disaster of 2008-9.
                                                                                                    But I look at 25-54. The employment rate is down from 79.9% in 2007 to 76.6% in July 2014--3.3%-points less, compared to 4.0%-point a fall from 63% to 59% over the entire population. The participation rate is down from 80.8% in July 2014 compared to 83.1% for 2007--2.3%-points, compared to the 3.1%-point fall from 66.0% to 62.9% over the entire population.
                                                                                                    A normal NAIRU spread would put the 25-54 employment-to-population ratio at 78.7%, 2.5%-points below the 81.2% cyclically-adjusted 25-54 participation ratio. When cyclical recovery is complete, we would then expect to make back 3.7%-points back from the trough on the 25-54 employment-to-population ratio. So far we have made back only 1.0%-point.
                                                                                                    So which is it? Has hysteresis done 1.8%-points of damage to 25-54 employment or 0.9%-points to total employment? Have we done 3/4 of the work of recovery relative to the proper labor force-trend share benchmark? Or have we done only 1/3 of the work of recovery?
                                                                                                    The 25-54 data and the economy-wide aging trend-adjusted data used by the CEA appear to be telling us very different things both about the cyclical state of the labor market and about the damage done by hysteresis. How to reconcile? Which is right?

                                                                                                      Posted by on Tuesday, August 19, 2014 at 01:42 PM in Economics, Unemployment | Permalink  Comments (78)