Friday, April 04, 2014

Paul Krugman: Rube Goldberg Survives

Supporters of health reform should "go ahead and celebrate":

Rube Goldberg Survives, by Paul Krugman, Commentary, NY Times: Holy seven million, Batman! ...Obamacare has made a stunning comeback from its shambolic start..., the original target of seven million signups, widely dismissed as unattainable, has been surpassed.
But what does it mean? That depends on whether you ask the law’s opponents or its supporters. You see, the opponents think that it means a lot, while the law’s supporters are being very cautious. And, in this one case, the enemies of health reform are right. This is a very big deal indeed.
Of course, you don’t find many Obamacare opponents admitting outright that 7.1 million and counting signups is a huge victory... But their reaction to the results — It’s a fraud! They’re cooking the books! — tells the tale. ...
So why are many reform supporters ... telling us not to read too much into the figures? ... I’d argue that they’re missing the forest for the trees.
The crucial thing to understand about the Affordable Care Act is that it’s a Rube Goldberg device, a complicated way to do something inherently simple. ... Remember, giving everyone health insurance doesn’t have to be hard; you can just do it with a government-run program..., extending Medicare to everyone would have been technically easy.
But it wasn’t politically possible,... health reform had to be run largely through private insurers, and be an add-on to the existing system... And, as a result, it had to be somewhat complex. ... It’s a system in which many things can go wrong; the nightmare scenario has always been that conservatives would seize on technical problems to discredit health reform... And last fall that nightmare seemed to be coming true.
But the nightmare is over. ... Now we know that the technical details can be managed... This thing is going to work.
And, yes, it’s also a big political victory for Democrats. They can point to a system that is already providing vital aid to millions of Americans, and Republicans — who were planning to run against a debacle — have nothing to offer in response. And I mean nothing. ...

So my advice to reform supporters is, go ahead and celebrate. Oh, and feel free to ridicule right-wingers who confidently predicted doom.

Clearly, there’s a lot of work ahead, and we can count on the news media to play up every hitch and glitch as if it were an existential disaster. But Rube Goldberg has survived; health reform has won.

    Posted by on Friday, April 4, 2014 at 12:24 AM in Economics, Health Care, Politics | Permalink  Comments (26)


    Links for 4-04-14

      Posted by on Friday, April 4, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (53)


      Thursday, April 03, 2014

      Fed Watch: Employment Report Ahead

      Tim Duy:

      Employment Report Ahead, by Tim Duy: Sorry for the light blogging this week - just getting back into the swings of things during the first week of spring term. But nothing like an employment report to pull me out of hibernation.
      It is no secret that the employment report has a significant impact on monetary policy. And we need to make increasingly deeper dives at the data to discern the implications for policy. Federal Reserve Chair Janet Yellen made that clear in her speech this week when she outlined a number of indicators - part-time but want full-time, wages,long-term unemployment, and labor force participation - as evidence of slack in the labor market. Such slack is sufficient, in her view, to justify maintaining accommodative policy for a considerable period (although note that accommodative does not mean zero rates).
      Yellen, I think, outlined the most dovish case possible given the current information set. This suggests to me that the risk lies in the hawkish direction. Moreover, I think that Yellen and the remaining doves are losing the internal policy battle, leaving policy with a generally overall hawkish tone. Gone is the Evans rule and explicit allowance for above target inflation, gone, it seems, is a low bar for slowing the taper, gone is quantitative guidance in favor of qualitative guidance, gone is rules-based policy in favor of ad-hockery. And now departing Governor Jeremy Stein leaves behind an intellectual legacy that raises the importance of financial stability concerns when setting policy. Altogether, the stage is set for the Fed to move in a sharply more hawkish direction with just a little push from the data.
      That said, that little push from the data is important. While I believe that the Fed has a hawkish bias, that bias will not be realized in the absence of data that is reasonably stronger than the Fed's forecasts. Which brings us to the next employment report. In general, the consensus view that the labor market shook off the winter doldrums with a 206k gain in nonfarm payrolls and 6.6% unemployment rate is probably pretty close to the Fed's expectations. The forecast range for payrolls, however, is skewed to the upside, with a range from 175k to 275k. The possibility of upside surprise follows from an expectation of a sharper bounce from earlier weather-related softness. This was evident in the employment component of the ISM Services report:

      ISM0400314

      In addition, weekly initial claims have improved in recent weeks, lending additional credence to expectations for a better-than-expected report:

      INITCLAIMS0400314

      Finally, the ADP number for private employment growth came in at a solid 191k for the month (noting of course, the less than perfect signal ADP provides). My quick and dirty approach - which admittedly was not particularly effective in recent months - points at a nfp gain of 199k in March, in line with consensus expectations:

      NFPFOR0400314

      As always, usual caveats apply. Guessing the preliminary numbers of a heavily revised data series is by itself something of a questionable game, a game we all play nonetheless.
      As I noted earlier, however, headline numbers won't tell the whole story. The Fed will be looking deeper into the numbers for evidence of greater slack than indicated by the unemployment rate. My opinion is that if the slack is diminishing faster than the Fed doves expect, it is most likely we will see wage growth accelerate. If wage growth remains low, then the Fed will be confident that there is little incipient inflation pressure to justify a more aggressive reduction of policy accommodation.
      Bottom Line: The baseline case remains zero rates until the middle to end of 2015, followed by a gentle pace of rate hikes. That said, it is all data dependent, and the baseline case appears to be contingent on a particularly dovish forecast. It seems to me that the risk thus lies in a less than dovish reality. SIgns that wages are increasing more rapidly would suggest just that. Still stagnant wage growth, however, gives the Fed more room to stick with the current policy path.

        Posted by on Thursday, April 3, 2014 at 05:23 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (4)


        'Jeremy Stein to Resign From Fed Board'

        When the Federal reserve Board is fully staffed, the Board members outnumber the regional bank presidents 7-5 on the FOMC (the committee that sets monetary policy). Presently, however, the power balance has shifted and it may shift even more:

        Jeremy Stein to Resign From Fed Board, by Binyamin Appelbaum, NY Times: Jeremy Stein, a member of the Federal Reserve’s board..., will resign at the end of May and return to his previous role at Harvard. Mr. Stein, who joined the Fed in 2012, needed to return within two years to preserve his tenured professorship. ...
        Mr. Stein, an economist and noted academic, has helped to provide an intellectual rationale for the cautious evolution of the Fed’s stimulus campaign, which has not succeeded in returning either unemployment or inflation to normal levels.
        He has argued that the Fed should temper its efforts to minimize unemployment because those policies encourage financial risk-taking, which can undermine long-term growth by destabilizing markets and causing new crises. ...
        His views remain controversial. ... Mr. Stein’s tenure will be among the shortest in recent Fed history...
        His departure could create a fourth vacancy on the seven-member board. Two nominees, Stanley Fischer and Lael Brainard, are awaiting Senate confirmation. Mr. Obama has not announced a nominee for a third vacancy, created last month when Sarah Bloom Raskin became deputy Treasury secretary.

        I think the Fed should have been more aggressive, especially early on, but it was probably good to have someone asking questions about QE and risk-taking.

          Posted by on Thursday, April 3, 2014 at 01:07 PM in Economics, Monetary Policy | Permalink  Comments (4)


          The Downward Drift in Real Interest Rates

          David Wessel reports on the IMF's World Economic Outlook:

          The Downward Drift in Inflation-Adjusted Interest Rates: Why? And So What?, by David Wessel, WSJ:

          Real-rates

          ...Two economists writing in the International Monetary Fund’s new World Economic Outlook note that inflation-adjusted interest rates have been coming down for more than three decades and suggests they may remain lower than normal for a very long time. ... But the important point is the trend towards lower interest rates began long before the Great Recession and advent of the Fed’s quantitative easing...
          Why does this matter? ... It also would pose a big challenge for the Fed. For one thing, it boosts the risk that investors will do foolish things to get a little extra yield and provoke the much-dreaded “financial instability.”
          It also increases the likelihood the economy will spend a whole lot more time with nominal rates ... uncomfortably close to zero, where it’s much harder for a central bank to use interest rates to steer the economy out of recessions.  ...
          If so, that argues ... for worrying a lot less about government budget deficits and a lot more about using government spending to give the economy a lift that monetary policy cannot provide. ...

          And at the same time, "Governments Scale Back Spending on School Construction, Public Safety."

            Posted by on Thursday, April 3, 2014 at 09:53 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (27)


            Links for 4-03-14

              Posted by on Thursday, April 3, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (114)


              Wednesday, April 02, 2014

              'The Wealth Gap in America Is Growing, Too'

              This shouldn't be a surprise:

              The Wealth Gap in America Is Growing, Too, by Annie Lowrey, NY Times: It is, by now, well known that income inequality has increased in the United States. The top 10 percent of earners took more than half of the country’s overall income in 2012, the highest proportion recorded in a century of government record keeping.
              But wealth inequality has been increasing too, as a new study by Thomas Piketty of the Paris School of Economics and Gabriel Zucman of the University of California, Berkeley, shows. In a preliminary report, Mr. Zucman and Emmanuel Saez, also of Berkeley, find that at the very top, wealth is distributed as unevenly as it was in the early 20th century. And the wealthiest 0.1 percent, and especially the 0.01 percent, have left the rest of the 1 percent in the dust. ...

                Posted by on Wednesday, April 2, 2014 at 09:39 AM in Economics, Income Distribution | Permalink  Comments (45)


                'Same As He Ever Was'

                More on the Ryan budget. This is Paul Krugman:

                Same As He Ever Was: ... The latest Paul Ryan budget is getting a lot of well-deserved flak, and so is Ryan himself. The combination of cruelty and raw dishonesty is so obvious, it’s hard to see how anyone can fail to see what’s going on.
                But Ryan hasn’t changed; his budgets have always been like this, and so has he. Yet for years he was the darling of centrist pundits, who proclaimed him an “honest, open-minded, solution-oriented fiscal conservative.” What were they thinking?
                The answer was that they wanted someone to fill that role; they knew, just knew, that there had to be people like that — because if there weren’t, if there weren’t any serious, honest conservatives with real influence, shrill people like me were actually right. And that couldn’t be true. So they invented a character called “Paul Ryan” who was what they wanted to see, but bore no resemblance to the real character with that name.
                And while Ryan himself may have been devalued — although I’m not even sure of that — there will be others. Remember all the praise lavished on Chris Christie until Bridgegate broke? Again, it was easy to see what Christie was — but only, apparently, for those of us not committed to the belief that sensible moderates must exist in the GOP.
                So, who’s next?

                This post from 2012 "Ryan's Budget: The Most Fraudulent Proposal in American History" still gets quite a bit of traffic.

                  Posted by on Wednesday, April 2, 2014 at 09:32 AM in Economics, Politics | Permalink  Comments (4)


                  'Inequality is Caused by Ideology, not Technology'

                  John Quiggin:

                  Inequality is caused by ideology, not technology, by  John Quiggin: I’ve just had an article published at New Left Project, under the title Don’t Blame the Internet for Rising Inequality. Much of it will be familiar, but I want to stress a particular, and I think novel, critique of the idea that skill-intensive technology is responsible for rising inequality

                  ...The real gains over this period have gone to a subset of the top 1 per cent, dominated by CEOs, other senior managers and finance industry operators. This group has nearly quadrupled its real income over the past 30 years...

                  This is a major problem for the Race Against the Machine hypothesis. Much of the growth in income share of the top 1 per cent occurred before 2000, when the stereotypical CEO was a technological illiterate who had his (sic) secretary print out his emails. Even today, the technology available to the typical senior manager—a PC with access to the Internet, and a corporate intranet with very limited capabilities—is no different to that of the average knowledge worker, and inferior to that of workers in tech-intensive specialties.

                  Nor does the ownership of capital explain much here. Even for tech-intensive jobs, the capital and telecomm requirements for an individual worker cost no more than $10,000 for a top-of-the-line computer setup (amortized over 3-5 years), and perhaps $1000 a year for a broadband internet connection. This is well within the capacity of self-employed professional workers to pay for themselves, and in fact many professionals have better equipment at home than at work. Advances in information and communications technology thus can’t explain the vast majority of the growth in inequality over the past three decades.

                  ...

                    Posted by on Wednesday, April 2, 2014 at 09:32 AM in Economics, Income Distribution, Politics, Technology | Permalink  Comments (65)


                    Links for 4-02-14

                      Posted by on Wednesday, April 2, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (99)


                      Tuesday, April 01, 2014

                      'Ryan Budget Shows G.O.P. Stuck in Rah-Rah Land'

                      Another quick one. John Cassidy on Paul Ryan's budget:

                      Ryan Budget Shows G.O.P. Stuck in Rah-Rah Land, by John Cassidy: Here’s all you need to know about the G.O.P.’s effort to face reality, moderate its policies, and present a more coherent policy platform to voters in 2016. David Camp, the Michigan Republican who chairs the powerful House Ways and Means Committee, and who in February introduced a sweeping tax-reform plan that, at least, recognized the basic laws of arithmetic, is leaving Congress. Paul Ryan, the conservative Moses of Capitol Hill, is sticking around. On Wednesday, he unveiled the latest of his right-wing manifestos, thinly disguised as a serious budget, proposing to repeal Obamacare, privatize Medicare, and slash spending on Medicaid and food stamps.
                      No, it wasn’t an April Fool’s joke. The Republican Party’s reform effort, which was heralded by a March, 2013, internal report that said that the G.O.P. was trapped in “an ideological cul de sac,” is over almost before it had begun. On issue after issue (gun control, immigration, gay marriage, Obamacare, climate change, unemployment benefits, the minimum wage), suggestions that the Party might revise its extreme positions have been stomped on. The ultras have won out. And nowhere is this more true than in the biggest policy area of all: taxes and spending. ...

                        Posted by on Tuesday, April 1, 2014 at 02:03 PM in Budget Deficit, Economics, Politics | Permalink  Comments (18)


                        'High Speed Trading and Slow-Witted Economic Policy'

                        Busy morning, so I will take advantage of the Creative Commons license and do a quick post. This is from Dean Baker:

                        High Speed Trading and Slow-Witted Economic Policy, by Dean Baker: Michael Lewis' new book, Flash Boys, is leading to large amounts of discussion both on and off the business pages. The basic story is that a new breed of traders can use sophisticated algorithms and super fast computers to effectively front-run trades. This allows them to make large amounts of money by essentially skimming off the margins. By selling ahead of a big trade, they will push down the price that trader receives for their stock by a fraction of a percent. Similarly, by buying ahead of a big trade, they will also raise the price paid for that trade by a fraction of a percent. Since these trades are essentially a sure bet (they know that a big sell order or a big buy order is coming), the profits can be enormous.
                        This book is seeming to prompt outrage, although it is not clear exactly why. The basic story of high frequency trading is not new. It has been reported in most major news outlets over the last few years. It would be nice if we could move beyond the outrage to a serious discussion of the policy issues and ideally some simple and reasonable policy to address the issue. (Yes, simple should be front and center. If it's complicated we will be employing people in pointless exercises -- perhaps a good job program, but bad from the standpoint of effective policy.)
                        The issue here is that people are earning large amounts of money by using sophisticated computers to beat the market. This is effectively a form of insider trading. Pure insider trading, for example trading based on the CEO giving advance knowledge of better than expected profits, is illegal. The reason is that it rewards people for doing nothing productive at the expense of honest investors.
                        On the other hand, there are people who make large amounts of money by doing good research to get ahead of the market. For example, many analysts may carefully study weather patterns to get an estimate of the size of the wheat crop and then either buy or sell wheat based on what they have learned about the about this year's crop relative to the generally held view. In principle, we can view the rewards for this activity as being warranted since they are effectively providing information to the market with the their trades. If they recognize an abundant wheat crop will lead to lower prices, their sales of wheat will cause the price to fall before it would otherwise, thereby allowing the markets to adjust more quickly. The gains to the economy may not in all cases be equal to the private gains to these traders, but at least they are providing some service.
                        By contrast, the front-running high speed trader, like the inside trader, is providing no information to the market. They are causing the price of stocks to adjust milliseconds more quickly than would otherwise be the case. It is implausible that this can provide any benefit to the economy. This is simply siphoning off money at the expense of other actors in the market.
                        There are many complicated ways to try to address this problem, but there is one simple method that would virtually destroy the practice. A modest tax on financial transactions would make this sort of rapid trading unprofitable since it depends on extremely small margins. A bill proposed by Senator Tom Harkin and Representative Peter DeFazio would impose a 0.03 percent tax on all trades of stocks, bonds, and derivatives. This would quickly wipe out the high-frequency trading industry while having a trivial impact on normal investors. (Most research indicates that other investors will reduce their trading roughly in proportion to the increase in the cost per trade, leaving their total trading costs unchanged.)The Joint Tax Committee projected that this tax would raise roughly $400 billion over a decade.
                        A scaled tax that imposed a somewhat higher fee on stock trades and lower fee on short-term assets like options could be even more effective. Japan had a such tax in place in the 1980s and early 1990s. It raised more than 1 percent of GDP ($170 billion a year in the United States). Representative Keith Ellison has proposed this sort of tax for the United States.
                        If the political system were not so corrupt, such taxes would be near the top of the policy agenda. Even the International Monetary Fund has complained that the financial sector is under-taxed. However, because of the money and power of the industry the leadership of both political parties will run away from imposing any tax on the financial industry. In fact Treasury Secretary Jack Lew has been working to torpedo the imposition of such a tax in Europe. So look for lots of handwringing and outrage in response to Lewis' book. And look also for nothing real to be done. 

                          Posted by on Tuesday, April 1, 2014 at 09:33 AM in Economics, Financial System, Taxes | Permalink  Comments (54)


                          Links for 4-01-14

                            Posted by on Tuesday, April 1, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (88)


                            Monday, March 31, 2014

                            Inequality: Echoes of the Past

                            This sounds familiar:

                            Should we care about inequality?, by David Stasavage, Monkey Cage, Washington Post: ...As a firm believer that commercial societies would witness an inexorable increase in inequality, [Jean-Jacques] Rousseau in his “Discourse on Political Economy” wrote of the corrupting influence of inequality and “luxury” and of the need to levy taxes on the rich to curb the problem. ...
                            Rousseau’s text was originally published in Denis Diderot’s famous Encyclopedia as the entry for “Political Economy.” ... Jean-François de Saint-Lambert was commissioned by Diderot to write the article on “Luxury” for the encyclopedia. The interest of such a text was obvious; at the time the pundits of the day were fiercely debating the virtues and vices of “luxury” and its potentially corrupting effect on nations. Take our 21st century debates, substitute the word “inequality” for “luxury,” and you get a sense of the tone.
                            Saint-Lambert was among the first to move the debate in a new direction. He suggested that luxury itself was not the problem; what mattered was how luxury was generated. If luxury was earned thanks to institutionalized privilege, or by those who had gamed the system, then it would inevitably have a corrupting influence. The effects for the nation would be disastrous. ...
                            Now in cases where luxury is instead acquired through industriousness, Saint-Lambert argued that it would not have these nefarious effects. ...

                              Posted by on Monday, March 31, 2014 at 01:24 PM in Economics, History of Thought, Income Distribution | Permalink  Comments (43)


                              'What the Federal Reserve is Doing to Promote a Stronger Job Market'

                              Janet Yellen says the Fed cares about the unemployed:

                              What the Federal Reserve is Doing to Promote a Stronger Job Market, by Janet L. Yellen, Federal Reserve: ... The past six years have been difficult for many Americans, but the hardships faced by some have shattered lives and families. Too many people know firsthand how devastating it is to lose a job at which you had succeeded and be unable to find another; to run through your savings and even lose your home, as months and sometimes years pass trying to find work; to feel your marriage and other relationships strained and broken by financial difficulties. And yet many of those who have suffered the most find the will to keep trying. I will introduce you to three of these brave men and women, your neighbors here in the great city of Chicago. These individuals have benefited from just the kind of help from community groups that I highlighted a moment ago, and they recently shared their personal stories with me.
                              It might seem obvious, but the second thing that is needed to help people find jobs...is jobs. No amount of training will be enough if there are not enough jobs to fill. I have mentioned some of the things the Fed does to help communities, but the most important thing we do is to use monetary policy to promote a stronger economy. The Federal Reserve has taken extraordinary steps since the onset of the financial crisis to spur economic activity and create jobs, and I will explain why I believe those efforts are still needed.
                              The Fed provides this help by influencing interest rates. Although we work through financial markets, our goal is to help Main Street, not Wall Street. By keeping interest rates low, we are trying to make homes more affordable and revive the housing market. We are trying to make it cheaper for businesses to build, expand, and hire. We are trying to lower the costs of buying a car that can carry a worker to a new job and kids to school, and our policies are also spurring the revival of the auto industry. We are trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery.
                              When the Federal Reserve's policies are effective, they improve the welfare of everyone who benefits from a stronger economy, most of all those who have been hit hardest by the recession and the slow recovery.
                              Now let me offer my view of the state of the recovery, with particular attention to the labor market and conditions faced by workers. Nationwide, and in Chicago, the economy and the labor market have strengthened considerably from the depths of the Great Recession. Since the unemployment rate peaked at 10 percent in October 2009, the economy has added more than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points to 6.7 percent. That progress has been gradual but remarkably steady--February was the 41st consecutive month of payroll growth, one of the longest stretches ever. ...
                              But while there has been steady progress, there is also no doubt that the economy and the job market are not back to normal health. ...
                              The recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics. At 6.7 percent, the national unemployment rate is still higher than it ever got during the 2001 recession. ... It certainly feels like a recession to many younger workers, to older workers who lost long-term jobs, and to African Americans, who are facing a job market today that is nearly as tough as it was during the two downturns that preceded the Great Recession.
                              In some ways, the job market is tougher now than in any recession. The numbers of people who have been trying to find work for more than six months or more than a year are much higher today than they ever were since records began decades ago. We know that the long-term unemployed face big challenges. Research shows employers are less willing to hire the long-term unemployed and often prefer other job candidates with less or even no relevant experience.3
                              That is what Dorine Poole learned, after she lost her job processing medical insurance claims, just as the recession was getting started. Like many others, she could not find any job, despite clerical skills and experience acquired over 15 years of steady employment. When employers started hiring again, two years of unemployment became a disqualification. Even those needing her skills and experience preferred less qualified workers without a long spell of unemployment. That career, that part of Dorine's life, had ended.
                              For Dorine and others, we know that workers displaced by layoffs and plant closures who manage to find work suffer long-lasting and often permanent wage reductions.4 Jermaine Brownlee was an apprentice plumber and skilled construction worker when the recession hit, and he saw his wages drop sharply as he scrambled for odd jobs and temporary work. He is doing better now, but still working for a lower wage than he earned before the recession.
                              Vicki Lira lost her full-time job of 20 years when the printing plant she worked in shut down in 2006. Then she lost a job processing mortgage applications when the housing market crashed. Vicki faced some very difficult years. At times she was homeless. Today she enjoys her part-time job serving food samples to customers at a grocery store but wishes she could get more hours.
                              Vicki Lira is one of many Americans who lost a full-time job in the recession and seem stuck working part time. The unemployment rate is down, but not included in that rate are more than seven million people who are working part time but want a full-time job. As a share of the workforce, that number is very high historically.
                              I have described the experiences of Dorine, Jermaine, and Vicki because they tell us important things that the unemployment rate alone cannot. First, they are a reminder that there are real people behind the statistics, struggling to get by and eager for the opportunity to build better lives. Second, their experiences show some of the uniquely challenging and lasting effects of the Great Recession. Recognizing and trying to understand these effects helps provide a clearer picture of the progress we have made in the recovery, as well as a view of just how far we still have to go.
                              And based on the evidence available, it is clear to me that the U.S. economy is still considerably short of the two goals assigned to the Federal Reserve by the Congress. The first of those goals is maximum sustainable employment, the highest level of employment that can be sustained while maintaining a stable inflation rate. Most of my colleagues on the Federal Open Market Committee and I estimate that the unemployment rate consistent with maximum sustainable employment is now between 5.2 percent and 5.6 percent, well below the 6.7 percent rate in February.
                              The other goal assigned by the Congress is stable prices, which means keeping inflation under control. In the past, there have been times when these two goals conflicted--fighting inflation often requires actions that slow the economy and raise the unemployment rate. But that is not a dilemma now, because inflation is well below 2 percent, the Fed's longer-term goal.
                              The Federal Reserve takes its inflation goal very seriously. One reason why I believe it is appropriate for the Federal Reserve to continue to provide substantial help to the labor market, without adding to the risks of inflation, is because of the evidence I see that there remains considerable slack in the economy and the labor market. Let me explain what I mean by that word "slack" and why it is so important.
                              Slack means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill. During a period of little or no slack, there still may be vacant jobs and people who want to work, but a large share of those willing to work lack the skills or are otherwise not well suited for the jobs that are available. ...
                              But a lack of jobs is the heart of the problem when unemployment is caused by slack, which we also call "cyclical unemployment." The government has the tools to address cyclical unemployment. Monetary policy is one such tool, and the Federal Reserve has been actively using it to strengthen the recovery and create jobs, which brings me to why the amount of slack is so important.
                              If unemployment were mostly structural, if workers were unable to perform the jobs available, then the Federal Reserve's efforts to create jobs would not be very effective. Worse than that, without slack in the labor market, the economic stimulus from the Fed could put attaining our inflation goal at risk. In fact, judging how much slack there is in the labor market is one of the most important questions that my Federal Reserve colleagues and I consider when making monetary policy decisions, because our inflation goal is no less important than the goal of maximum employment.
                              This is not just an academic debate. For Dorine Poole, Jermaine Brownlee, and Vicki Lira, and for millions of others dislocated by the Great Recession who continue to struggle, the cause of the slow recovery is enormously important. As I said earlier, the powerful force that sustains them and others who keep trying to succeed in this recovery is the faith that their job prospects will improve and that their efforts will be rewarded.
                              Now let me explain why I believe there is still considerable slack in the labor market, why I think there is room for continued help from the Fed for workers, and why I believe Dorine Poole, Jermaine Brownlee, and Vicki Lira are right to hope for better days ahead.
                              One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of "partly unemployed" workers is a sign that labor conditions are worse than indicated by the unemployment rate. Statistics on job turnover also point to considerable slack in the labor market. Although firms are now laying off fewer workers, they have been reluctant to increase the pace of hiring. Likewise, the number of people who voluntarily quit their jobs is noticeably below levels before the recession; that is an indicator that people are reluctant to risk leaving their jobs because they worry that it will be hard to find another. It is also a sign that firms may not be recruiting very aggressively to hire workers away from their competitors.
                              A second form of evidence for slack is that the decline in unemployment has not helped raise wages for workers as in past recoveries. Workers in a slack market have little leverage to demand raises. Labor compensation has increased an average of only a little more than 2 percent per year since the recession, which is very low by historical standards.5 Wage growth for most workers was modest for a couple of decades before the recession due to globalization and other factors beyond the level of economic activity, and those forces are undoubtedly still relevant. But labor market slack has also surely been a factor in holding down compensation. The low rate of wage growth is, to me, another sign that the Fed's job is not yet done.
                              A third form of evidence related to slack concerns the characteristics of the extraordinarily large share of the unemployed who have been out of work for six months or more. These workers find it exceptionally hard to find steady, regular work, and they appear to be at a severe competitive disadvantage when trying to find a job. The concern is that the long-term unemployed may remain on the sidelines, ultimately dropping out of the workforce. But the data suggest that the long-term unemployed look basically the same as other unemployed people in terms of their occupations, educational attainment, and other characteristics. And, although they find jobs with lower frequency than the short-term jobless do, the rate at which job seekers are finding jobs has only marginally improved for both groups. That is, we have not yet seen clear indications that the short-term unemployed are finding it increasingly easier to find work relative to the long-term unemployed. This fact gives me hope that a significant share of the long-term unemployed will ultimately benefit from a stronger labor market.
                              A final piece of evidence of slack in the labor market has been the behavior of the participation rate--the proportion of working-age adults that hold or are seeking jobs. Participation falls in a slack job market when people who want a job give up trying to find one. When the recession began, 66 percent of the working-age population was part of the labor force. Participation dropped, as it normally does in a recession, but then kept dropping in the recovery. It now stands at 63 percent, the same level as in 1978, when a much smaller share of women were in the workforce. Lower participation could mean that the 6.7 percent unemployment rate is overstating the progress in the labor market.
                              One factor lowering participation is the aging of the population, which means that an increasing share of the population is retired. If demographics were the only or overwhelming reason for falling participation, then declining participation would not be a sign of labor market slack. But some "retirements" are not voluntary, and some of these workers may rejoin the labor force in a stronger economy. Participation rates have been falling broadly for workers of different ages, including many in the prime of their working lives. Based on the evidence, my own view is that a significant amount of the decline in participation during the recovery is due to slack, another sign that help from the Fed can still be effective.
                              Since late 2008, the Fed has taken extraordinary steps to revive the economy. At the height of the crisis, we provided liquidity to help avert a collapse of the financial system, which enabled banks and other institutions to continue to provide credit to people and businesses depending on it. We cut short-term interest rates as low as they can go and indicated that we would keep them low for as long as necessary to support a stronger economic recovery. And we have been purchasing large quantities of longer-term securities in order to put additional downward pressure on longer-term interest rates--the rates that matter to people shopping for a new car, looking to buy or renovate a home, or expand a business. There is little doubt that without these actions, the recession and slow recovery would have been far worse.
                              These different measures have the same goal--to encourage consumers to spend and businesses to invest, to promote a recovery in the housing market, and to put more people to work. Together they represent an unprecedentedly large and sustained commitment by the Fed to do what is necessary to help our nation recover from the Great Recession. For the many reasons I have noted today, I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed.
                              In this context, recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labor market means our aid for the recovery need not grow as quickly. Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come.
                              This commitment is strong, and I believe the Fed's policies will continue to help sustain progress in the job market. But the scars from the Great Recession remain, and reaching our goals will take time. ...
                              It is my hope that the courageous and determined working people I have told you about today, and millions more, will get the chance they deserve to build better lives. ...

                                Posted by on Monday, March 31, 2014 at 10:33 AM in Economics, Monetary Policy, Unemployment | Permalink  Comments (17)


                                Paul Krugman: Jobs and Skills and Zombies

                                There is no skills gap:

                                Jobs and Skills and Zombies, by Paul krugman, Commentary, NY Times: A few months ago, Jamie Dimon, the chief executive of JPMorgan Chase, and Marlene Seltzer, the chief executive of Jobs for the Future, published an article in Politico titled “Closing the Skills Gap.” They began portentously: “Today, nearly 11 million Americans are unemployed. Yet, at the same time, 4 million jobs sit unfilled” — supposedly demonstrating “the gulf between the skills job seekers currently have and the skills employers need.”
                                Actually,... multiple careful studies have found no support for claims that inadequate worker skills explain high unemployment.
                                But the belief that America suffers from a severe “skills gap” is one of those things that everyone important knows must be true, because everyone they know says it’s true. It’s a prime example of a zombie idea — an idea that should have been killed by evidence, but refuses to die.
                                And it does a lot of harm. ...
                                So how does the myth of a skills shortage ... persist...? Well, there was a nice illustration of the process last fall, when some news media reported that 92 percent of top executives said that there was, indeed, a skills gap. The basis for this claim? A telephone survey in which executives were asked, “Which of the following do you feel best describes the ‘gap’ in the U.S. workforce skills gap?” followed by a list of alternatives. Given the loaded question, it’s actually amazing that 8 percent of the respondents were willing to declare that there was no gap.
                                The point is that influential people move in circles in which repeating the skills-gap story — or, better yet, writing about skill gaps in media outlets like Politico — is a badge of seriousness, an assertion of tribal identity. And the zombie shambles on.
                                Unfortunately, the skills myth — like the myth of a looming debt crisis — is having dire effects on real-world policy. Instead of focusing on the way disastrously wrongheaded fiscal policy and inadequate action by the Federal Reserve have crippled the economy and demanding action, important people piously wring their hands about the failings of American workers.
                                Moreover, by blaming workers for their own plight, the skills myth shifts attention away from the spectacle of soaring profits and bonuses even as employment and wages stagnate. Of course, that may be another reason corporate executives like the myth so much.
                                So we need to kill this zombie, if we can, and stop making excuses for an economy that punishes workers.

                                  Posted by on Monday, March 31, 2014 at 12:24 AM Permalink  Comments (160)


                                  Links for 3-31-14

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


                                    Sunday, March 30, 2014

                                    The Two Percent *Ceiling* for Inflation

                                    The Fed has consistently missed its inflation target:

                                    Monetary Policy And Secular Stagnation, by Atif Mian and Amir Sufi: ...The Fed’s goal is to achieve the target of 2% inflation in the long-term, and its preferred price index is the core personal consumption expenditure price index that excludes the volatile food and energy sectors (or core PCE for short). So how has the Fed performed in achieving its target of 2% inflation in the past 15 years?

                                    Ch1_20140325_1

                                    The chart above plots the implied core PCE index if inflation had met its 2% target (red line), and the actual core PCE index (blue line) starting from 1999. ... The divergence between target and actual inflation is all the more striking given the elevated rate of unemployment during the sample period. ...
                                    It is hard to fault the Fed for not trying... The Fed’s difficulty in maintaining a 2% target is not just about the Great Recession. The divergence started in the 2000′s... In fact the only period when the blue line runs parallel to the red (implying a 2% rate of inflation for a while) is the 2004-2006 period when the economy witnessed an unprecedented growth in credit. ...
                                    What we are witnessing is the limit of what monetary policy alone can do. Sometimes there is a tendency to assume that the Fed can “target” any inflation rate it wishes, or that it can target the overall price level – the so-called nominal GDP targeting. The evidence suggests that the Fed may not be so omnipotent. ...

                                    Another interpretation is that, at least during normal times, the Fed does have quite a bit of control over the inflation rate, but it treats 2% inflation as a ceiling (i.e. inflation must never rise above 2%) rather than a central tendency (i.e. inflation is allowed to fluctuate both above and below the 2% target so that, on average, inflation is 2%).

                                      Posted by on Sunday, March 30, 2014 at 11:10 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (16)


                                      Links for 3-30-14

                                        Posted by on Sunday, March 30, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (81)


                                        Saturday, March 29, 2014

                                        'The Skills Zombie'

                                        Paul Krugman:

                                        The Skills Zombie: One of the most frustrating aspects of economic debate since 2008 has been the preference of influential people for stories about our troubles that sound serious as opposed to those that actually are serious. The reality, all along, has been that our economy is depressed because there isn’t enough spending... But policymakers and pundits want to hear about tough decisions and hard choices, and they just recoil from any suggestion that terrible problems might have easy answers.
                                        The most destructive example is, of course, the deficit obsession... The deficit obsession has faded a bit; but we still have others..., namely, the notion that we have big problems because our work force lacks essential skills.
                                        This is very much a zombie doctrine — that is, a doctrine that should be dead by now, having been repeatedly refuted by evidence...
                                        Yet the skills story just keeps showing up in supposedly informed discussion. Again, I think that this is because it sounds like the kind of thing serious people should say.
                                        The sad truth is that while disasters brought on by inadequate demand have an easy economic answer — just spend more! — the psychology of policy elites is such that they generally refuse to believe in this answer, and look for tough choices to make instead. And the result is that unless something comes along to jolt them out of that mindset — something like a war — the slump goes on for a very long time.

                                        I think there is also a prefeence for explanations and policies that won't take money out of their (VSP's) pockets. "Tough choices" = things that are hard for other people.

                                          Posted by on Saturday, March 29, 2014 at 08:40 AM in Economics | Permalink  Comments (113)


                                          Links for 3-29-14

                                            Posted by on Saturday, March 29, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (40)


                                            Friday, March 28, 2014

                                            'Save Capitalism from the Capitalists by Taxing Wealth'

                                            Thomas Piketty:

                                            Save capitalism from the capitalists by taxing wealth, by Thomas Piketty, Commentary, FT: The distribution of income and wealth is one of the most controversial issues of the day. ...
                                            America ... was conceived as the antithesis of the patrimonial societies of old Europe. ... Until the first world war, the concentration of wealth in the hands of the rich was far less extreme in the US than Europe. In the 20th century, however, the situation was reversed.  ... US income inequality has sharpened since the 1980s, largely reflecting the huge incomes of people at the top. ...
                                            The ideal solution would be a global progressive tax on individual net worth. ... This would keep inequality under control and make it easier to climb the ladder. And it would put global wealth dynamics under public scrutiny. The lack of financial transparency and reliable wealth statistics is one of the main challenges for modern democracies. ...

                                            There's quite a bit more in the article.

                                              Posted by on Friday, March 28, 2014 at 12:14 PM in Economics, Income Distribution | Permalink  Comments (102)


                                              Links for 3-28-14

                                                Posted by on Friday, March 28, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (60)


                                                Paul Krugman: America’s Taxation Tradition

                                                "Confiscatory taxation" was an "American invention":

                                                America’s Taxation Tradition, by Paul Krugman, Commentary, NY Times: ...Some conservatives argue that focusing on inequality is ... un-American — that we’ve always celebrated those who achieve wealth...
                                                And they’re right. No true American would say this: “The absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power,” and follow that statement with a call for “a graduated inheritance tax on big fortunes ... increasing rapidly in amount with the size of the estate.” 
                                                Who was this left-winger? Theodore Roosevelt, in ... 1910...
                                                The truth is that, in the early 20th century, many leading Americans warned about the dangers of extreme wealth concentration, and urged that tax policy be used to limit the growth of great fortunes. Here’s another example: In 1919, the great economist Irving Fisher ... devoted his presidential address to the American Economic Association largely to warning against the effects of “an undemocratic distribution of wealth.” And he spoke favorably of proposals to limit inherited wealth through heavy taxation of estates.
                                                Nor was the notion of limiting the concentration of wealth, especially inherited wealth, just talk..., “confiscatory taxation of excessive incomes” — that is, taxation ... to reduce income and wealth disparities, rather than to raise money — was an “American invention.”...
                                                Back when Teddy Roosevelt gave his speech, many thoughtful Americans realized ... that the New World was at risk of turning into Old Europe. And they were forthright in arguing that public policy should seek to limit inequality for political as well as economic reasons, that great wealth posed a danger to democracy. ...
                                                You sometimes hear the argument that concentrated wealth is no longer an important issue... But ...... the share of wealth held at the very top ... has doubled since the 1980s, and is now as high as it was when Teddy Roosevelt and Irving Fisher issued their warnings. ...
                                                We aren’t yet a society with a hereditary aristocracy of wealth, but, if nothing changes, we’ll become that kind of society over the next couple of decades.
                                                In short, the demonization of anyone who talks about the dangers of concentrated wealth is based on a misreading of both the past and the present. Such talk isn’t un-American; it’s very much in the American tradition. And it’s not at all irrelevant to the modern world. So who will be this generation’s Teddy Roosevelt?

                                                  Posted by on Friday, March 28, 2014 at 12:06 AM in Economics, Income Distribution, Politics | Permalink  Comments (98)


                                                  Thursday, March 27, 2014

                                                  'The Misuse of Theoretical Models in Finance and Economics'

                                                   Stanford University's Paul Pfleiderer:

                                                  Chameleons: The Misuse of Theoretical Models in Finance and Economics, by Paul Pfleiderer, March 2014: Abstract In this essay I discuss how theoretical models in finance and economics are used in ways that make them “chameleons” and how chameleons devalue the intellectual currency and muddy policy debates. A model becomes a chameleon when it is built on assumptions with dubious connections to the real world but nevertheless has conclusions that are uncritically (or not critically enough) applied to understanding our economy. I discuss how chameleons are created and nurtured by the mistaken notion that one should not judge a model by its assumptions, by the unfounded argument that models should have equal standing until definitive empirical tests are conducted, and by misplaced appeals to “as-if” arguments, mathematical elegance, subtlety, references to assumptions that are “standard in the literature,” and the need for tractability.

                                                    Posted by on Thursday, March 27, 2014 at 11:18 AM in Economics, Methodology | Permalink  Comments (21)


                                                    'Nafta Still Bedevils Unions'

                                                    I still believe international trade makes us better off on net, but there are winners and losers from these agreements and we don't do anywhere near enough to help those who are hurt by these deals -- no wonder they are opposed:

                                                    Nafta Still Bedevils Unions, by Annie Lowrey, NY Times: Two decades after its enactment, the North American Free Trade Agreement — better known as Nafta — remains a source of deep disagreement among economists.
                                                    Maybe it has led employers to add tens of thousands of jobs. Or perhaps it has caused the loss of 700,000 jobs. Maybe it has been “a bonanza for U.S. farmers and ranchers,” as the United States Chamber of Commerce has said. But perhaps it has depressed wages for millions of working families. Then again, maybe all sides are wrong: “Nafta brought neither the huge gains its proponents promised nor the dramatic losses its adversaries warned of,” wrote Jorge G. Castañeda in an essay for Foreign Affairs this winter. “Everything else is debatable.”
                                                    But for labor groups, there is no debate: Nafta hurt American jobs and household earnings. And the sweeping trade agreement cast a shadow that persists today, spurring deep skepticism of the major trade deals the Obama administration is negotiating with Europe and a dozen Pacific Rim countries. ...
                                                    On Thursday, the A.F.L.-C.I.O. released a report excoriating Nafta... Among its conclusions: That Nafta increased corporate profits while depressing wages; that its labor-protection provisions have not improved labor conditions on the ground; that its environmental standards have not protected the environment; and that higher trade flows have not meant shared prosperity. ...

                                                      Posted by on Thursday, March 27, 2014 at 10:07 AM in Economics, Income Distribution, International Trade | Permalink  Comments (21)


                                                      'Why the Income Distribution Matters for Macroeconomics'

                                                      Atif Mian and Amir Sufi:

                                                      Why the Income Distribution Matters for Macroeconomics, by Atif Mian and Amir Sufi: A central argument we have made on this blog and in our book is that the distribution of income/wealth matters a great deal for thinking about the macro-economy. Convincing some of this fact is not easy...
                                                      Perhaps the easiest way to see the importance of the income distribution is to examine how households respond to a windfall of cash or wealth. Do they spend the money, or do they save it? And does the spending response to a windfall of cash depend on the income of the household?
                                                      The answer is a resounding yes: low income households spend a much higher fraction of cash windfalls than high income households. In the parlance of economics, low income households have a much higher marginal propensity to consume, or MPC, than high income households.
                                                      This is one of the most well-established facts in empirical research in macroeconomics. Here is a summary: ...[reviews evidence]...
                                                      The implications of the differences in spending propensities across the population are enormous, especially if we believe that inadequate demand explains economic weakness during severe recessions. For example, facilitating debt forgiveness or progressive fiscal stimulus rebates will likely boost spending during the most severe part of a recession.
                                                      But perhaps even more interesting are the implications for the secular stagnation hypothesis, which holds that we are in a long-run stagnating economy because of inadequate demand. Is it a coincidence that the secular stagnation hypothesis is being revived exactly when income inequality is accelerating? If a higher share of income goes to the wealthiest households who spend very little of it, then perhaps these two trends are closely related.

                                                        Posted by on Thursday, March 27, 2014 at 10:07 AM in Economics, Income Distribution | Permalink  Comments (39)


                                                        'Redistribution is ... as American as Apple Pie'

                                                        Paul Krugman:

                                                        What America Isn’t, Or Anyway Wasn’t: ...one point Piketty makes is that the modern notion that redistribution and “penalizing success” is un- and anti-American is completely at odds with our country’s actual history. ... America actually pioneered very high taxes on the rich...
                                                        Why...? Piketty points to the American egalitarian ideal, which went along with fear of creating a hereditary aristocracy. High taxes, especially on estates, were motivated in part by “fear of coming to resemble Old Europe.” Among those who called for high estate taxation on social and political grounds was the great economist Irving Fisher.
                                                        Just to reemphasize the point: during the Progressive Era, it was commonplace and widely accepted to support high taxes on the rich specifically in order to keep the rich from getting richer — a position that few people in politics today would dare espouse.
                                                        ...redistribution is ... as American as apple pie.

                                                          Posted by on Thursday, March 27, 2014 at 09:09 AM in Economics, Links | Permalink  Comments (16)


                                                          Links for 3-27-14

                                                            Posted by on Thursday, March 27, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (65)


                                                            Wednesday, March 26, 2014

                                                            'The EITC Is No Substitute for the Safety Net'

                                                            From the CBPP:

                                                            Why the EITC Is No Substitute for the Safety Net, CBPP: The Earned Income Tax Credit is a critically important and highly effective part of the safety net, but it can’t — and wasn’t meant to — stand alone as our answer to poverty, according to our new commentary.  Here’s the opening:

                                                            House Budget Committee Chair Paul Ryan’s recent report on safety net programs rightly praised the Earned Income Tax Credit (EITC) for reducing poverty and promoting work.  But, Ryan’s report criticizes much of the rest of the safety net.  And, over the past several years, Chairman Ryan’s budget plans have targeted low-income programs such as SNAP (formerly food stamps) and Medicaid for extremely deep cuts.  While it’s heartening to hear Chairman Ryan trumpet the EITC’s success, the EITC alone can’t do what’s needed to ameliorate poverty and hardship./p>

                                                            The things that the EITC — and its sibling the Child Tax Credit, which helps offset the cost of raising children — can’t do without other safety net programs include:

                                                            • help people who are out of work or can’t work;
                                                            • help families get health care;
                                                            • help families on a monthly basis;
                                                            • serve as an effective automatic stabilizer for the economy in recessions; and
                                                            • keep large numbers of people out of “deep poverty,” or above half the poverty line.

                                                            ...

                                                              Posted by on Wednesday, March 26, 2014 at 10:19 AM in Economics, Social Insurance | Permalink  Comments (25)


                                                              Video: Robert Shiller on Market Bubbles – And Busts

                                                                Posted by on Wednesday, March 26, 2014 at 09:38 AM in Economics, Financial System, Video | Permalink  Comments (0)


                                                                Links for 3-26-14

                                                                  Posted by on Wednesday, March 26, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (94)


                                                                  Tuesday, March 25, 2014

                                                                  Stop Long-term Unemployment Before It Starts

                                                                  Catherine Rampell:

                                                                  When long-term unemployment becomes self-perpetuating, by Catherine Rampell, Commentary, Washington Post: Say it with me: The long-term unemployed are not lazy. Nor are they coddled, hammocked or enjoying a coordinated, taxpayer-funded vacation.
                                                                  They are, however, extremely unlucky — and getting unluckier by the day. ...
                                                                  It was already known that the longer workers have been out of a job, the lower their chance of finding work in the coming month. The Brookings paper — by the former Obama administration economist Alan Krueger and his Princeton colleagues Judd Cramer and David Cho — took this analysis a step further: What about (gulp) these workers’ longer-run prospects?
                                                                  It turns out that from 2008 to 2012, only one in 10 people who were already long-term unemployed in a given month had returned to “steady, full-time employment” ... a little more than a year later. “Steady” in this case means that they were working for at least four consecutive months. And the other nine in 10 workers? They were still out of work, toiling in part-time or transitory jobs or had dropped out of the labor force altogether.  ...
                                                                  One implication of the Brookings research is that policymakers should have done more to prevent the short-term jobless from falling into long-term joblessness in the first place. ...

                                                                    Posted by on Tuesday, March 25, 2014 at 04:31 PM in Economics, Unemployment | Permalink  Comments (44)


                                                                    'Democracy, What Is It Good For?'

                                                                    Democracy is good for growth:

                                                                    Democracy, What Is It Good For?, by Daron Acemoglu and James Robinson: ...[There is] a consensus engulfing both academia and the popular press that democracy is at its best irrelevant for growth, and perhaps even a hindrance. ...
                                                                    A recent survey of the recent literature ... concludes:
                                                                    The net effect of democracy on growth performance cross-nationally over the last five decades is negative or null.
                                                                    ... Our paper ... (joint with Suresh Naidu and Pascual Restrepo) is out, and as the title suggests “Democracy Does Cause Growth, it sharply disagrees with this consensus. ...
                                                                    Our baseline estimates suggest that a country that democratizes increases its GDP per capita by about 20% in the next 20-30 years. Not a trivial effect at all. ...

                                                                    In all, the evidence seems to be fairly clear that democracy is good for economic growth.
                                                                    Why? This is a harder question to answer. Our evidence shows that democracies are better at implementing economic reforms, and also increase education. They also probably increase the provision of public goods (though the evidence here is a little less robust).
                                                                    But none of this is conclusive evidence. ...

                                                                      Posted by on Tuesday, March 25, 2014 at 12:02 PM in Economics, Politics | Permalink  Comments (17)


                                                                      Wanted: A New Approach to Growth Policy

                                                                      I have a new column:

                                                                      Broadening the Discussion about Economic Growth, by Mark Thoma: Macroeconomic policy can be divided into two types, stabilization policy that attempts to keep the economy as close as possible to full employment, and growth policy that tries to make the economy expand as fast as possible over time. ...
                                                                      Prior to the onset of our recent economic troubles, much of the research in economics and much of the political debate was about growth policy rather than stabilization policy. ...
                                                                      That changed when the Great Recession hit. Suddenly, questions about stabilization policy came to the forefront. ...
                                                                      Now that we are beginning to come out of the recession ... the focus is once again turning to economic growth. And it’s not just the political right that is thinking about the growth question. The left is thinking about growth too. ...
                                                                      Increasingly, the idea that the ever-growing inequality can be harmful to economic growth has been taking hold. ...
                                                                      Cutting taxes in the heyday of supply-side economics did not produce robust economic growth and ever lasting prosperity, and it did not solve the problem of rising inequality. If anything it made the problem worse. As we begin to focus on economic growth once again, it’s time for a new approach, one that recognizes the advantages of a more equitable distribution of income.

                                                                        Posted by on Tuesday, March 25, 2014 at 08:59 AM in Economics | Permalink  Comments (30)


                                                                        Links for 3-25-14

                                                                          Posted by on Tuesday, March 25, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (56)


                                                                          Monday, March 24, 2014

                                                                          Fed Watch: Williams Acknowledges Forecast Change

                                                                          Tim Duy:

                                                                          Williams Acknowledges Forecast Change, by Tim Duy: Earlier today I said:

                                                                          Fourth, the dots undeniably moved forward and steeper, which means individual outlooks on the definitions of "considerable period" or "accommodative" did in fact change in meaningful ways. I am surprised, however, that this was not anticipated by market participants given the rapid decline in the unemployment rate. Along any given Fed objective function, one would expect that a more rapid decrease in unemployment would move forward and steepen the interest rate trajectory, even if just by 25 or 50pb.

                                                                          The Washington Post's Ylan Mui had a sitdown with Federal Reserve President John WIlliams:

                                                                          Logically, given that the unemployment rate is a little bit lower, that suggests a little bit higher interest rate in 2016. Is that a big shift in the timing of the first rate increase? We’re talking about a relatively small change in terms of the forecast, and I wouldn’t see that as a significant shift.

                                                                          When I look at the SEP projections for 2015, I just don’t see much of a change in the views on policy -- definitely not the kind of change in views on policy that represents some shift in our policy framework. The fact that unemployment has come down since December a little more than we thought, this is not news. Everybody knows that.

                                                                          Also, regarding financial stability, I said Friday:

                                                                          In short, if you believe that the Fed will not use monetary policy to address financial stability concerns, I think you might not be paying attention. They are already using monetary policy to address those concerns by not taking more aggressive action. Don't look to what they will do in the future for confirmation; look to what they are not doing right now.

                                                                          I meant "aggressive action" as policy to speed the pace of the recovery, whereas current policy is geared toward ending asset purchases and paving the way for rate hikes. Williams on the topic:

                                                                          I think our policies are doing about as well as we can without creating excessive risks down the road, either for the economy or financial stability. I think there is a little bit of a tradeoff between trying to push this economy now even harder and maybe having some unintended consequences down the road -- not today, not next year, probably not the year after -- and also the potential of making the exit out of our very accommodative policies a little more difficult to navigate.

                                                                          Also, if you get a chance, read Gavin Davies at the Financial Times:

                                                                          But in a wider sense there has been an unmistakable shift in the FOMC’s centre of gravity in the past few months. The key to this shift is that the mainstream doves who have dominated policy decisions in the past few years have now essentially stopped arguing against either the tapering of the balance sheet or the start of rate hikes within about a year from now. Only the isolated Narayana Kocherlakota remains in the aggressive dovish corner.

                                                                          Bottom Line: Those who expected Federal Reserve Chair Janet Yellen to push for a more dovish policy path continue to be dissapointed.

                                                                            Posted by on Monday, March 24, 2014 at 11:44 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (3)


                                                                            Paul Krugman: Wealth Over Work

                                                                            The drift toward oligarchy:

                                                                            Wealth Over Work, by Paul Krugman, Commentary, NY Times: ...“Capital in the Twenty-First Century,” the magnum opus of the French economist Thomas Piketty,... does more than document the growing concentration of income in the hands of a small economic elite. He also makes a powerful case that we’re on the way back to “patrimonial capitalism,” in which the commanding heights of the economy are dominated not just by wealth, but also by inherited wealth, in which birth matters more than effort and talent.

                                                                            To be sure, Mr. Piketty concedes that we aren’t there yet. ... But six of the 10 wealthiest Americans are already heirs rather than self-made entrepreneurs... As Mr. Piketty notes, “the risk of a drift toward oligarchy is real and gives little reason for optimism.”

                                                                            Indeed. And if you want to feel even less optimistic,... America’s nascent oligarchy may not yet be fully formed — but one of our two main political parties already seems committed to defending the oligarchy’s interests.

                                                                            Despite the frantic efforts of some Republicans to pretend otherwise, most people realize that today’s G.O.P. favors the interests of the rich over those of ordinary families. I suspect, however, that fewer people realize the extent to which the party favors returns on wealth over wages and salaries. And the dominance of income from capital, which can be inherited, over wages — the dominance of wealth over work — is what patrimonial capitalism is all about.

                                                                            To see what I’m talking about, start with ... Representative Paul Ryan’s “road map” — calling for the elimination of taxes on interest, dividends, capital gains and estates. Under this plan, someone living solely off inherited wealth would have owed no federal taxes at all. ...

                                                                            Why is this happening? Well, bear in mind that both Koch brothers are numbered among the 10 wealthiest Americans, and so are four Walmart heirs. Great wealth buys great political influence — and not just through campaign contributions. Many conservatives live inside an intellectual bubble of think tanks and captive media that is ultimately financed by a handful of megadonors. Not surprisingly, those inside the bubble tend to assume, instinctively, that what is good for oligarchs is good for America.

                                                                            As I’ve already suggested, the results can sometimes seem comical. The important point to remember, however, is that the people inside the bubble have a lot of power, which they wield on behalf of their patrons. And the drift toward oligarchy continues.

                                                                              Posted by on Monday, March 24, 2014 at 12:24 AM in Economics, Politics | Permalink  Comments (98)


                                                                              Fed Watch: Post-FOMC Fedspeak

                                                                              Tim Duy:

                                                                              Post-FOMC Fedspeak, by Tim Duy: Some thoughts on post-FOMC activity as we head into Monday.

                                                                              First, I did not cover Federal Reserve Chair Janet Yellen's definition of a "considerable period" as six months in my review of the FOMC statement. I did not highlight the issue because when I went back to the tape, it looked clear to me that the bulk of the bond market response came at the release of the statement and projections. To be sure, the equity market stumbled, but here I completely agree with Felix Salmon:

                                                                              But here’s the thing: the market didn’t freak out....last Thursday, for instance, the yield fell by a good 10bp when John Kerry made noises about imposing sanctions on Russia. And overall, the yield has stayed comfortably in a range between 2.6% and 2.8%.

                                                                              What’s more, the big FOMC-related move in the 10-year bond yield happened immediately at 2pm, when the statement was released. Yellen’s “gaffe” caused barely a wobble.

                                                                              So why does everybody think that Yellen blundered? The answer is simple: they were looking at the stock market (which doesn’t matter), rather than the bond market (which does). Stocks fell, briefly; not a lot, and not for long, but enough that people noticed.

                                                                              It is the bond market response that is important, and that response was pre-Yellen. It is not entirely clear that the six months timeline was new information. Or, at least, it wasn't to St. Louis Federal Reserve President James Bullard:

                                                                              “That wasn’t very different from what we had heard from financial markets, so I think she’s just repeating that at that time period,” Bullard said at a roundtable at the Brookings Institution. Bullard doesn’t vote on policy this year.

                                                                              Second, the more important issue appears to be the interest rate projections, the now infamous dot chart. In her press conference, Yellen attempted to deny the projections contained much useful information in her testimony:

                                                                              But more generally, I think that one should not look to the dot-plot, so to speak, as the primary way in which the committee wants to or is speaking about policies to the public at large. The FOMC statement is the device that the committee as a policy-making group uses to express its – its opinions. And we have expressed a number of opinions about the likely path of rates.

                                                                              Dallas Federal Reserve President Richard Fisher went further. Via Bloomberg:

                                                                              Fisher suggested investors were placing too much emphasis on the change in forecasts, which the Fed illustrates as dots plotted on a chart.

                                                                              There is a “fixation if not a fetish on the dots,” he said at the London School of Economics. The change in forecasts by Fed officials came before this week’s meeting, he said.

                                                                              “Somehow, this was read as a massive shift,” Fisher said. “These are our best guesses.”

                                                                              The Fed wants markets to focus on the distance between the bulk of the dots and participants view of normal. Back to Yellen:

                                                                              Looking further out, let's say if you look at toward the end of 2016, when most participants are projecting that the employment situation, that the unemployment rate will be close to their notions of mandate-consistent or longer-run normal levels. What you see -- I think if you look, this time if you gaze at the picture from December or September, which is the first year that we showed those dot-plots for the end of 2016, is the massive points that are notably below what the participants believed is the normal longer-run level for nominal shortterm rates. And the committee today for the first time endorsed that as a committee view.

                                                                              That said, it is clear the dots moved:

                                                                              So I think that's significant. I think that's what we should be paying attention to. And I would simply warn you that these dots -- these dots are going to move up and down over time, a little bit this way or that. The dots moved down a little bit in December relative to September. And they moved up ever so slightly. I really don't think it's appropriate to read very much into it.

                                                                              What should we take away from all of this? Well, first of all, I think it is absolutely ludicrous that the Fed is trying to claim the dots have no value. Seriously, can they work any harder to raise the act of bungling their communications strategy to an art form? If the dots have no value, then why force feed this information to market participants in the first place?

                                                                              Second, yes, the dots do not represent the FOMC consensus. The statement represents the consensus. But the consensus is vague about what defines a "considerable period" or "accommodative" policy. Each individual participant has their own definition of these terms, and the dots thus provide value by quantifying the vagueness of the consensus. That is the real problem here - as a group, the Fed wants qualitative discretionary policy, and the dots provide quantifiable guidance. If they want qualitative discretionary policy, they need to pull all the numbers from their communications.

                                                                              Third, Yellen needs to accept responsibility for mangling communications. She has been pushing her optimal control story for a long, long time. In the process, she has convinced market participants on the importance of the forward projections of economic variables. Yet now forward projections are meaningless?

                                                                              Fourth, the dots undeniably moved forward and steeper, which means individual outlooks on the definitions of "considerable period" or "accommodative" did in fact change in meaningful ways. I am surprised, however, that this was not anticipated by market participants given the rapid decline in the unemployment rate. Along any given given Fed objective function, one would expect that a more rapid decrease in unemployment would move forward and steepen the interest rate trajectory, even if just by 25 or 50pb.

                                                                              Why, why, why should Federal Reserve participants be permitted to change their outlooks but the Fed believes financial market participants are not allowed to follow suit?

                                                                              Perhaps it is that while - and I believe this - the Fed's reaction function did not change, I suspect there is a very good chance that market participants expected it to change in a more dovish direction. This follows directly again from Yellen's optimal control story. How many analysts were expecting a September lift-off on the basis of her charts? How many expected Yellen push for a more dovish reaction function? I think you need to throw any analysis that explicitly allowed for above target inflation out the window - and that includes the optimal control framework.

                                                                              In my opinion, some financial market participants are resisting abandoning their dovish interpretation of Fed policy. For instance, Jan Hatzius of Goldman Sachs continues to hold to its 2016 rate hike call. Via the Wall Street Journal:

                                                                              “Rate hikes are far off,” wrote Jan Hatzius, Goldman’s chief Fed watcher, in a note to clients late Thursday. “Our central forecast for the first hike remains early 2016, although the risks now tilt in the direction of a slightly earlier move.”

                                                                              Recall, however, Goldman's view from November:

                                                                              According to an analysis from Jan Hatzius, chief economist at Goldman Sachs, the two Fed papers actually would imply an earlier reduction of QE than planned—perhaps as soon as December—while the zero-bound interest rates could remain in place until 2017 and kept below normal into "the early 2020s."

                                                                              Why? Because of extensions of the optimal control framework.

                                                                              "The studies suggest that some of the most senior Fed staffers see strong arguments for a significantly greater amount of monetary stimulus than implied by either a Taylor rule or the current 6.5 percent/2.5 percent threshold guidance," Hatzius wrote. "Given the structure of the Federal Reserve Board, we believe it is likely that the most senior officials—in particular, Ben Bernanke and (Chair-elect) Janet Yellen—agree with the basic thrust of the analysis."

                                                                              And more from Hatzius from Bill McBride at Calculated Risk:

                                                                              It is hard to overstate the importance of two new Fed staff studies that will be presented at the IMF's annual research conference on November 7-8. The lead author for the first study is William English, who is the director of the Monetary Affairs division and the Secretary and Economist of the FOMC. The lead author for the second study is David Wilcox, who is the director of the Research and Statistics division and the Economist of the FOMC. The fact that the two most senior Board staffers in the areas of monetary policy analysis and domestic macroeconomics have simultaneously published detailed research papers on central issues of the economic and monetary policy outlook is highly unusual and noteworthy in its own right. But the content and implications of these papers are even more striking.

                                                                              ...[O]ur initial assessment is that they considerably increase the probability that the FOMC will reduce its 6.5% unemployment threshold for the first hike in the federal funds rate, either coincident with the first tapering of its QE program or before.
                                                                              ...
                                                                              [O]ur central case is now that the FOMC will reduce the threshold from 6.5% to 6% at the March 2014 FOMC meeting, alongside the first tapering of QE; however, a move as early as the December 2013 meeting is possible, and if so, this might also increase the probability of an earlier tapering of QE.

                                                                              In comparison to these expectations, the Fed is downright hawkish despite no change to their reaction function. The point is that, in my opinion, reality is starting to set in and financial market participants are walking back on their caricaturization of Yellen and the most dovish of all doves.

                                                                              Bottom Line: The Fed is pushing back on the dots because they don't want quantitative guidance, and they forgot they were giving it. Expectations that Yellen will push for a more dovish reaction function are being disappointed. Note that the interest rates forecasts are just that - forecasts. They will evolve in one direction or the other in response to incoming data. But incoming data on unemployment undeniably pushes in the direction of an earlier liftoff and, subsequently, a steeper trajectory for rates. If they want to lean against those expectations, the Fed does need to change its reaction function, but to a more dovish one. That, I think, is not the direction of policy at this point.

                                                                                Posted by on Monday, March 24, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (2)


                                                                                Links for 3-24-14

                                                                                  Posted by on Monday, March 24, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (52)


                                                                                  Sunday, March 23, 2014

                                                                                  'Secular Stagnation and Wealth Inequality'

                                                                                  Atif Mian and Amir Sufi:

                                                                                  Secular Stagnation and Wealth Inequality, by Atif Mian and Amir Sufi: Alvin Hansen introduced the notion of “secular stagnation” in the 1930s. Hansen’s hypothesis has been brought back to life by Larry Summers...
                                                                                  A brief summary of the hypothesis goes something like this: A normally functioning economy would lower interest rates in the face of low current demand for goods and services... A lower interest rate helps boost demand.
                                                                                  But what if ... real interest rates need to be very negative to boost demand, but prevailing interest rates are around zero, then we will have too much savings in risk-free assets — what Paul Krugman has called the liquidity trap. In such a situation, the economy becomes demand-constrained.
                                                                                  The liquidity trap helps explain why recessions can be so severe. But the Summers argument goes further. He is arguing that we may be stuck in a long-run equilibrium where real interest rates need to be negative to generate adequate demand. Without negative real interest rates, we are doomed to economic stagnation. ...
                                                                                  In our view, what is missing from the secular stagnation story is the crucial role of the highly unequal wealth distribution. Who exactly is saving too much? It certainly isn’t the bottom 80% of the wealth distribution! We have already shown that the bottom 80% of the wealth distribution holds almost no financial assets.
                                                                                  Further, when the wealthy save in the financial system, some of that saving ends up in the hands of lower wealth households when they get a mortgage or auto loan. But when lower wealth households get financing, it is almost always done through debt contracts. This introduces some potential problems. Debt fuels asset booms when the economy is expanding, and debt contracts force the borrower to bear the losses of a decline in economic activity.
                                                                                  Both of these features of debt have important implications for the secular stagnation hypothesis. We will continue on this theme in future posts.

                                                                                    Posted by on Sunday, March 23, 2014 at 11:11 AM in Economics, Financial System, Income Distribution | Permalink  Comments (46)


                                                                                    On Greg Mankiw's 'Do No Harm'

                                                                                    A rebuttal to Greg Mankiw's claim that the government should not interfere in voluntary exchanges. This is from Rakesh Vohra at Theory of the Leisure Class:

                                                                                    Do No Harm & Minimum Wage: In the March 23rd edition of the NY Times Mankiw proposes a 'do no harm' test for policy makers:

                                                                                    …when people have voluntarily agreed upon an economic arrangement to their mutual benefit, that arrangement should be respected.

                                                                                    There is a qualifier for negative externalities, and he goes on to say:

                                                                                    As a result, when a policy is complex , hard to evaluate and disruptive of private transactions, there is good reason to be skeptical of it.

                                                                                    Minimum wage legislation is offered as an example of a policy that fails the do no harm test. ...

                                                                                    There is an immediate 'heart strings' argument against the test, because indentured servitude passes the 'do no harm' test. ... I want to focus instead on two other aspects of the 'do no harm' principle contained in the words 'voluntarily'and 'benefit'. What is voluntary and benefit compared to what? ...

                                                                                    When parties negotiate to their mutual benefit, it is to their benefit relative to the status quo. When the status quo presents one agent an outside option that is untenable, say starvation, is bargaining voluntary, even if the other agent is not directly threatening starvation? The difficulty with the `do no harm’ principle in policy matters is the assumption that the status quo does less harm than a change in it would. This is not clear to me at all. Let me illustrate this...

                                                                                    Assuming a perfectly competitive market, imposing a minimum wage constraint above the equilibrium wage would reduce total welfare. What if the labor market were not perfectly competitive? In particular, suppose it was a monopsony employer constrained to offer the same wage to everyone employed. Then, imposing a minimum wage above the monopsonist’s optimal wage would increase total welfare.

                                                                                    [There is also an example based upon differences in patience that I left out.]

                                                                                      Posted by on Sunday, March 23, 2014 at 09:29 AM in Economics, Market Failure, Methodology | Permalink  Comments (64)


                                                                                      Links for 3-23-14

                                                                                        Posted by on Sunday, March 23, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (66)


                                                                                        Saturday, March 22, 2014

                                                                                        Fed Watch: Kocherlakota's Dissent

                                                                                        Tim Duy:

                                                                                        Kocherlakota's Dissent, by Tim Duy: Minneapolis Federal Reserve President Narayana Kocherlakota defended his dissent at the March FOMC meeting. I thought it was quite remarkable. The reason of the dissent itself is not particularly unexpected:

                                                                                        I dissented from the new guidance for two reasons. The first reason is that the new guidance weakens the credibility of the Committee’s commitment to target 2 percent inflation. The second reason is that the new guidance fosters policy uncertainty and thereby suppresses economic activity.

                                                                                        I have already discussed the implications of dropping the Evans rule in regards to inflation. It implies an intention to approach the inflation target from below as well as a lack of tolerance for above target inflation. As far as the second point, Kocherlakota is arguing that the lack of quantitative guideposts increases uncertainty about the path of policy and that uncertainty tends to make economic agents risk adverse. Market participants, for example, might rationally believe they should react to that risk by moving up their expectations of the first rate hike, which by itself induces somewhat less accommodative policy.

                                                                                        More interesting, in my opinion, was Kocherlakota's alternative language. Consider for a moment the Evans rule as it was in January:

                                                                                        The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

                                                                                        Now consider Kocherlakota's version of the Evans rule:

                                                                                        For example, the Committee could have adopted language of the following form: “the Committee anticipates keeping the fed funds rate in its current range at least until the unemployment rate has fallen below 5.5 percent, as long as the one-to-two-year-ahead outlook for PCE inflation remains below 2 1/4 percent, longer-term inflation expectations remain well-anchored, and possible risks to financial stability remain well-contained.”

                                                                                        Kocherlakota has to come up with something he can sell to the rest of the FOMC. It says something about the rest of the FOMC that the most he thinks he can sell is a meager 25bp bump above the Federal Reserve inflation target. It says even more if that's the most he could sell to himself. If the most dovish member of the FOMC can tolerate no more than a 25bp upside miss on inflation, what does it say about the other FOMC members? Regardless of whether this is Kocherlakota's max or the best he thinks he can get, it tells you that 2% is really a ceiling, not a target. Now, generously, it maybe that the FOMC believes that they cannot exceed 2% politically given the amount of extraordinary stimulus already in place. But that still leaves 2% as a ceiling.

                                                                                        Moreover, look at the addition of the "possible risks to financial stability remain well-contained" language. It is no longer just about the length of accomodative policy, but about the first rate hike itself. It suggests that a rate hike to snuff out financial stability is clearly on the table. Moreover, if Kocherlakota thinks the only way he can sell his new version of the Evans rule is address financial stability, it means that such concerns are already an impediment to even more supportive monetary policy. This is something I noted yesterday with respect to Yellen's comments about the tapering debate last spring.

                                                                                        In short, if you believe that the Fed will not use monetary policy to address financial stability concerns, I think you might not be paying attention. They are already using monetary policy to address those concerns by not taking more aggressive action. Don't look to what they will do in the future for confirmation; look to what they are not doing right now.

                                                                                        Bottom Line: Kocherlakota's dissent paints the rest of the FOMC as surprisingly hawkish.

                                                                                          Posted by on Saturday, March 22, 2014 at 12:33 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (44)


                                                                                          Links for 3-22-14

                                                                                            Posted by on Saturday, March 22, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (84)


                                                                                            Friday, March 21, 2014

                                                                                            'Labor Markets Don't Clear: Let's Stop Pretending They Do'

                                                                                            Roger farmer:

                                                                                            Labor Markets Don't Clear: Let's Stop Pretending They Do: Beginning with the work of Robert Lucas and Leonard Rapping in 1969, macroeconomists have modeled the labor market as if the wage always adjusts to equate the demand and supply of labor.

                                                                                            I don't think that's a very good approach. It's time to drop the assumption that the demand equals the supply of labor.
                                                                                            Why would you want to delete the labor market clearing equation from an otherwise standard model? Because setting the demand equal to the supply of labor is a terrible way of understanding business cycles. ...
                                                                                            Why is this a big deal? Because 90% of the macro seminars I attend, at conferences and universities around the world, still assume that the labor market is an auction where anyone can work as many hours as they want at the going wage. Why do we let our students keep doing this?

                                                                                              Posted by on Friday, March 21, 2014 at 11:07 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (47)


                                                                                              'The Counter-Factual & the Fed’s QE'

                                                                                              I tried to make this point in a recent column (it was about fiscal rather than monetary policy, but the same point applies), but I think Barry Ritholtz makes the point better and more succinctly:

                                                                                              Understanding Why You Think QE Didn't Work, by Barry Ritholtz: Maybe you have heard a line that goes something like this: The weak recovery is proof that the Federal Reserve’s program of asset purchases, otherwise known as quantitative easement, doesn't work.
                                                                                              If you were the one saying those words, you don't understand the counterfactual. ...
                                                                                              This flawed analytical paradigm has many manifestations, and not just in the investing world. They all rely on the same equation: If you do X, and there is no measurable change, X is therefore ineffective.
                                                                                              The problem with this “non-result result” is what would have occurred otherwise. Might “no change” be an improvement from what otherwise would have happened? No change, last time I checked, is better than a free-fall.
                                                                                              If you are testing a new medication to reduce tumors, you want to see what happened to the group that didn't get the test therapy. Maybe this control group experienced rapid tumor growth. Hence, a result where there is no increase in tumor mass in the group receiving the therapy would be considered a very positive outcome.
                                                                                              We run into the same issue with QE. ... Without that control group, we simply don't know. ...

                                                                                                Posted by on Friday, March 21, 2014 at 09:55 AM in Economics, Fiscal Policy, Methodology, Monetary Policy | Permalink  Comments (26)


                                                                                                The Fool on the Icy Hill

                                                                                                As a follow-up to Krugman's article, this is something I wrote in January of 2009:

                                                                                                ...I think the stimulus package is like driving up an icy hill. If you don't have enough momentum from the start and fail to provide enough "stimulus" to get the car over the crest of the hill, you can slide all the way back to the bottom, crashing into things along the way and ending up worse off than when you started. Maybe you can give it more gas along the way if needed without spinning out, and perhaps you can hold your position if you don't make it to the top, and then start again from the higher level, but that's not a chance I want to take when I'm sitting at the bottom wondering if I can make it to the top without wrecking my car -- the possibility of falling all the way back to the bottom and ending up worse off would make me want to start with sufficient momentum and then some. Essentially, I am arguing that there are crucial economic and psychological "tipping points" that must be reached in order for the economic recovery package to be effective (or at least, there's enough of a chance that they exist that they cannot be ignored when formulating robust policy). ...

                                                                                                Paul Krugman added:

                                                                                                I’d add that there may also be a political tipping point: if the stimulus package is too weak, conservatives will pile on after it fails to deliver, claiming that the whole concept has been discredited.

                                                                                                  Posted by on Friday, March 21, 2014 at 09:21 AM in Economics, Fiscal Policy, Monetary Policy, Politics | Permalink  Comments (11)


                                                                                                  Paul Krugman: The Timidity Trap

                                                                                                  When policymakers are overly cautious, it can backfire:

                                                                                                  The Timidity Trap, by Paul Krugman, Commentary, NY Times: There don’t seem to be any major economic crises underway right this moment, and policy makers in many places are patting themselves on the back. ...
                                                                                                  Unfortunately, that ... just goes to show how accustomed we’ve grown to terrible economic conditions. We’re doing worse than anyone could have imagined a few years ago, yet people seem increasingly to be accepting this miserable situation as the new normal.
                                                                                                  How did this happen? ... I’d argue that an important source of failure was what I’ve taken to calling the timidity trap — the consistent tendency of policy makers who have the right ideas in principle to go for half-measures in practice, and the way this timidity ends up backfiring, politically and even economically.
                                                                                                  In other words, Yeats had it right: the best lack all conviction, while the worst are full of passionate intensity.
                                                                                                  About the worst: If you’ve been following economic debates these past few years, you know that both America and Europe have powerful pain caucuses — influential groups fiercely opposed to any policy that might put the unemployed back to work. There are some important differences between the U.S. and European pain caucuses, but both now have truly impressive track records of being always wrong, never in doubt. ...
                                                                                                  So what has been the response of the good guys?
                                                                                                  For there are good guys out there... But these good guys never seem willing to go all-in on their beliefs.
                                                                                                  The classic example is the Obama stimulus, which was obviously underpowered... Some of us warned right from the beginning that the plan would be inadequate — and that because it was being oversold, the persistence of high unemployment would end up discrediting the whole idea of stimulus in the public mind. And so it proved.
                                                                                                  What’s not as well known is that the Fed has, in its own way, done the same thing. From the start, monetary officials ruled out the kinds of monetary policies most likely to work — in particular, anything that might signal a willingness to tolerate somewhat higher inflation, at least temporarily. As a result, the policies ... have fallen short of hopes, and ended up leaving the impression that nothing much can be done. ...
                                                                                                  You might ask why the good guys have been so timid, the bad guys so self-confident. I suspect that the answer has a lot to do with class interests. But that will have to be a subject for another column.

                                                                                                    Posted by on Friday, March 21, 2014 at 12:24 AM in Economics, Fiscal Policy, Monetary Policy, Politics | Permalink  Comments (62)


                                                                                                    Links for 3-21-14

                                                                                                      Posted by on Friday, March 21, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (60)