Thursday, April 13, 2017

The Zero Lower Bound on Interest Rates: How Should the Fed Respond?

Ben Bernanke:

...the Fed and other central banks cannot ignore the risks created by a low level of “normal” interest rates, which in turn limit the scope for interest-rate cuts. A wide-ranging discussion of alternative policy approaches would thus be welcome. Although raising the inflation target is one of the options that should be considered, that approach has significant drawbacks. Fortunately, there are promising policy options that may be able to mitigate the effects of the zero lower bound on interest rates without forcing the public to accept a permanently higher rate of inflation. Two such options (which are related, and could be combined) are price-level targeting and a “make-up” approach, under which the central bank commits to compensating for “missing” monetary ease after the economy leaves the zero lower bound.

Much more here: The zero lower bound on interest rates: How should the Fed respond? (link fixed).

    Posted by on Thursday, April 13, 2017 at 06:59 AM in Economics, Monetary Policy | Permalink  Comments (68) 


    Tax Reforms and Top Incomes

    Enrico Rubolino and Daniel Waldenström at VoxEU:

    Tax reforms and top incomes: The link between tax progressivity and the income distribution is the subject of intense debate. This column presents new evidence from tax reforms during the 1980s and 1990s to examine how reduced progressivity affects top income shares. Reduced progressivity boosted top incomes, particularly for those in the top 0.1% of earners. Income tax changes are a plausible candidate for explaining the recent surge in income inequality. ...
    Tax reforms did not increase the size of the cake
    Tax progressivity was reduced in the 1980s on the argument that there would be a positive impact on economic activity and efficiency (Auerbach and Slemrod 1997, Gale and Samswick 2014). Therefore it could be that the estimated boost in top shares reflects new resources created in top groups, rather than a redistribution of incomes away from the bottom and middle. We evaluate this hypothesis..., this analysis does not show large real income responses to reductions in progressivity. ...
    Taxation and inequality
    Our findings suggest that tax progressivity changes influence pre-tax income inequality. Focusing on large, progressivity-reducing tax reforms in the 1980s and 1990s, we show that they had a positive, increasing effect on top income shares in all the countries we studied. ...

      Posted by on Thursday, April 13, 2017 at 12:15 AM in Economics, Income Distribution, Taxes | Permalink  Comments (29) 


      Links for 04-13-17

        Posted by on Thursday, April 13, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (119) 


        Wednesday, April 12, 2017

        The End of China’s Export Juggernaut

        Thomas Klitgaard and Harry Wheeler at the NY Fed's Liberty Street Economics blog:

        The End of China’s Export Juggernaut: China has been an exporting juggernaut for decades. In the United States, this has meant a dramatic increase in China’s share of imports and a ballooning bilateral trade deficit. Gaining sales in the United States at the expense of other countries, Chinese goods rose from only 2 percent of U.S. non-oil imports in 1990 to 8 percent in 2000 and 17 percent in 2010. But these steady gains in U.S. import share have stopped in recent years, with China even losing ground to other countries in some categories of goods. One explanation for this shift is that Chinese firms now have to directly compete against manufacturers in high-skill developed countries while also fending off competition from lower-wage countries, such as Vietnam. This inability to make additional gains at the expense of other countries means that exports don’t contribute as much to China’s overall growth as they used to.
        Taking the U.S. Market by Storm—And Then, Not so Much
        The United States had a merchandise trade deficit of $350 billion with China in 2016, accounting for roughly half of the overall U.S. trade deficit. The import growth of goods from China has been impressive, with imports from China growing at an annual rate of 14 percent since 1990, while total U.S. imports were growing at an annual rate of only 6 percent. That is, China has had great success in selling to the United States by taking market share away from other countries.
        A breakdown of U.S. imports into the four largest categories, accounting for roughly two-thirds of the total, demonstrates the source of this success. As seen in the chart below, China’s import shares for apparel, electronics, electric machinery, and non-electric machinery were all fairly high in 2002, the beginning of the data series used here, and continued to increase. In 2002, China accounted for 25 percent of all U.S. apparel imports and 15 percent of all electronics imports. By 2010, these shares were up to 50 percent and 40 percent, respectively. Market-share increases in general machinery and electrical machinery were less dramatic but still substantial over this period, rising by 8 percentage points (to 15 percent) and 11 percentage points (to 35 percent), respectively.

        China's Share of U.S. Imports

         

        So which countries were losing market share during this period? In apparel, Mexico’s share of U.S. imports dropped by 7 percentage points and Hong Kong’s slipped by 6 percentage points from 2002 to 2010. South Korea and Taiwan had smaller losses in market share over the same horizon. Japan was the main loser of U.S. import share for other major manufactured goods. For electronics, Japan’s U.S. share fell by 7 percentage points, while 2-percentage-point share declines were reported for South Korea, Singapore, Taiwan, and Canada. For electrical equipment, Japan lost 7 percentage points of the U.S. market, with Germany, the United Kingdom, and Taiwan also losing market share. For non-electric machinery, China’s gains were largely at the expense of goods produced in Japan.
        Around 2010, China’s ability to gain market share from other imports faltered. The import share for Chinese apparel has dropped over the past five years, while the share for electronics, by far the largest of the four categories, declined last year. China’s share of the U.S. electric machinery market is showing tentative signs of falling and its gains in the non-electric machinery category have ended.
        Limits to China Increasing Its Market Share
        It is not a complete surprise that Chinese goods would eventually peak as a share of U.S. imports. To keep increasing their share of the U.S. import market, Chinese firms would need to gain sales by competing more directly against manufacturers in Europe, Japan, and other advanced economies. China would also need to successfully compete against other developing countries with lower labor costs. Indeed, China has been ceding market share to Vietnam for electronics and electrical machinery, while India and Bangladesh have been making gains in apparel. It may be the case that assembly operations are moving from China to lower-wage countries, repeating the process that previously benefited China.
        The challenge for China is that its exports to the United States are now only growing as fast as total U.S. imports since its goods are no longer displacing those from other countries. From 2000 to 2010, U.S. imports from China grew at a 20 percent annualized rate. From 2010 to 2016, the rate of growth dropped to 4 percent. This slowdown has also hit China’s exports (in U.S. dollars) to the rest of the world, which slowed from a 21 percent annual growth rate in the 2000-10 period to 5 percent since 2010.
        Measuring the Impact of Slower Export Growth Is a Challenge
        When evaluating the slowdown in China’s exports, it is important to recognize that trade data measure the value of goods that arrive from a particular country, not that country’s contribution to the item’s value. For example, if a U.S. import from China is largely made of components produced in Japan and assembled in China, then the import data would significantly overstate the revenue that ended up in China from that sale. Cross-border supply chains are motivated, in part, by differences in labor costs, with components manufactured using high-wage labor and the assembly of these parts done in low-wage countries. This processing of components into final goods has been an important attribute of Chinese exports. The chart below shows that exports of such goods peaked in 2000 at almost 60 percent of China’s total exports. So, to the extent that China’s export growth figures reflect trade in processed goods, they overstate the domestic gains China has realized from these export sales when taken at face value.

         

        China: Processing Exports Share of Total Exports

         

        More recently, however, the data show a significant decrease in China’s processing trade amid an overall slowdown in export growth. Processing exports fell to 50 percent of China’s total exports in 2010 and then declined rapidly, hitting 35 percent in early 2017. This transformation partly reflects rising wages in China (as the skill level of its workers increases) and the related migration of assembly operations from China to lower-wage countries. A positive take on these developments is that each dollar of exports now has a larger positive impact on domestic income. The negative take is that China’s much more modest export performance is, in part, due to the loss of processing exports that would have otherwise been a source of income.
        Challenge for China
        Exports have been a great boost to China’s economic development, with rapid increases in foreign sales helping to transform the economy into a major producer of the world’s manufactured goods. The slowdown in export growth in recent years has been substantial and highlights the difficulties of trying to compete in foreign markets against both high- and low-wage countries. One of the consequences of the end of China’s export boom is that it puts more pressure on domestic demand to sustain the country’s rate of growth.

        Disclaimer
        The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

          Posted by on Wednesday, April 12, 2017 at 09:29 AM in China, Economics, International Trade | Permalink  Comments (42) 


          How Big a Problem is the Zero Lower Bound on Interest Rates?

          Ben Bernanke:

          How big a problem is the zero lower bound on interest rates?: If inflation is too low or unemployment too high, the Fed normally responds by pushing down short-term interest rates to boost spending. However, the scope for rate cuts is  limited by the fact that interest rates cannot fall (much) below zero, as people always have the option of holding cash, which pays zero interest, rather than negative-yielding assets.[1] When short-term interest rates reach zero, further monetary easing becomes difficult and may require unconventional monetary policy, such as large-scale asset purchases (quantitative easing).
          Before 2008, most economists viewed this zero lower bound (ZLB) on short-term interest rates as unlikely to be relevant very often and thus not a serious constraint on monetary policy. (Japan had been dealing with the ZLB for several decades but was seen as a special case.) However, in 2008 the Fed responded to the worsening economic crisis by cutting its policy rate nearly to zero, where it remained until late 2015. Although the Fed was able to further ease monetary policy after 2008 through unconventional methods, the ZLB constraint greatly complicated the Fed’s task.
          How big a problem is the ZLB likely to be in the future? ...

            Posted by on Wednesday, April 12, 2017 at 07:48 AM in Economics, Monetary Policy | Permalink  Comments (84) 


            Links for 04-12-17

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              Tuesday, April 11, 2017

              Links for 04-11-17

                Posted by on Tuesday, April 11, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (171) 


                Fed Watch: Solid Employment Report

                Tim Duy:

                Solid Employment Report, by Tim Duy: Labor markets were generally solid in March, with nothing by itself to dissuade the Fed from its current path. We should be watching for the Fed reaction to the decline in the unemployment rate, assuming it persists in the coming months. Could be dovish if the Fed lowers its estimate of the natural rate. Could be hawkish if they see a higher risk of undershooting the natural rate.
                Nonfarm payroll growth slowed to 98k:

                NfpA0317

                While this was below expectations, it wasn't a surprise. My interpretation is that most analysts expected downside risk to the estimates based on cold weather in March. No reason to think the basic underlying trend of solid but slowing declining job growth.
                The unemployment rate dipped to a cycle low of 4.5% and stands below the Federal Reserve's longer run unemployment projection:

                NfpB0317

                This will raise some eyebrows at the Federal Reserve. The median FOMC participant forecast 4.5% for December. So we are a little ahead of schedule on that. Does this mean the economy is poised to overheat? The wage numbers do not support that hypothesis:

                NfpC0317

                Wage growth flattened out in recent months, suggesting the economy is not yet in danger of overheating. Policymakers will be closely watching this dynamic and, more importantly, the path of inflation, between now and the next meeting. If inflation looks to be overshooting the forecast, the Fed may conclude that weak wage growth reflects low productivity rather than slack in the economy. That would be hawkish. Keep an eye on this space.
                While the headline jobs growth numbers disappointed, note that the forward looking indicator temporary help payrolls remains on an uptrend:

                NfpD0317

                In some ways this feels like 1995-96, with a temporary slowdown followed by a sustained period of solid growth.
                The back-to-back declines in retail trade reflected the ongoing stress in that sector:

                RetailB0317

                Note too slowing wage growth in retail trade:

                RetailC0317

                As of the last JOLTS report, the dynamics in retail trade employment are not driven by layoffs, but by a hiring slowdown:

                RetailA0317

                Looks like both quits and hirings rolled over in recent months. What is interesting is that the due to the labor churn in the sector, a slowdown in hiring alone can have significant impact on the net job growth without relying on mass layoffs - at least not yet. Notice that discharges and layoffs in the sector are down from 2015. Still, the decline in the level of quits reflects employee worries about the state of the industry - they don't see it quite as easy to find a new job as they did in 2015.
                One data point that doesn't seem to fit with the story of an industry in decline is the level of job openings:

                RetailD0317

                If the sector is experiencing a truly apocalyptic event, we would expect job openings to roll over. How will the Fed view this story? Most likely as industry specific and not indicative of the broader economy but they will attempting to gauge the resulting slack, if any, in labor markets.
                Bottom Line: Employment report was in line with (diminished) expectations. Most important for monetary policy was the decline in the unemployment rate. But absent more data, the exact implication could be either dovish or hawkish. Until the fog on that issues clears, expect the Fed to stick to its story: More tightening is coming, but at a gradual pace.

                  Posted by on Tuesday, April 11, 2017 at 12:06 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (5) 


                  Monday, April 10, 2017

                  Blanchard: On the Need for (At Least) Five Classes of Macro Models

                  Olivier Blanchard:

                  On the Need for (At Least) Five Classes of Macro Models: One of the best pieces of advice Rudi Dornbusch gave me was: Never talk about methodology. Just do it. Yet, I shall disobey and take the plunge.
                  The reason and the background for this blog is a project started by David Vines about DSGEs, how they performed in the crisis, and how they could be improved.[1] Needled by his opinions, I wrote a PIIE Policy Brief. Then, in answer to the comments to the brief, I wrote a PIIE RealTime blog. And yet a third, another blog, each time hopefully a little wiser. I thought I was done, but David organized a one-day conference on the topic, from which I learned a lot and which has led me to write my final (?) piece on the topic.
                  This piece has a simple theme: We need different types of macro models. One type is not better than the other. They are all needed, and indeed they should all interact. Such remarks would be trivial and superfluous if that proposition were widely accepted, and there were no wars of religion. But it is not, and there are.
                  Here is my attempt at typology, distinguishing between five types. (I limit myself to general equilibrium models. Much of macro must, however, be about building the individual pieces, constructing partial equilibrium models, and examining the corresponding empirical micro and macro evidence, pieces on which the general equilibrium models must then build.) In doing so, I shall, with apologies, repeat some of what was in the previous blogs. ...

                    Posted by on Monday, April 10, 2017 at 12:56 PM in Economics, Macroeconomics, Methodology | Permalink  Comments (6) 


                    Paul Krugman: Publicity Stunts Aren’t Policy

                    All hat and no cattle:

                    Publicity Stunts Aren’t Policy, by Paul Krugman, NY Times: Does anyone still remember the Carrier deal? Back in December President-elect Donald Trump announced, triumphantly, that he had reached a deal ... to keep 1,100 jobs in America rather than moving them to Mexico. And the media spent days celebrating the achievement. ...
                    Around 75,000 U.S. workers are laid off or fired every working day, so a few hundred here or there hardly matter.... Whatever Mr. Trump did or didn’t achieve with Carrier, the real question was whether he would take steps to make a lasting difference.
                    So far..., there isn’t even the vague outline of a real Trumpist jobs policy. And corporations and investors seem to have decided that ... Mr. Trump is a paper tiger in practice. ...
                    In other words, showy actions that win a news cycle or two are no substitute for actual, coherent policies. Indeed, their main lasting effect can be to squander a government’s credibility. Which brings us to last week’s missile strike on Syria.
                    The attack instantly transformed news coverage of the Trump administration. Suddenly stories about infighting and dysfunction were replaced with screaming headlines about the president’s toughness...
                    But outside ... the news cycle, how much did the strike actually accomplish? A few hours after the attack, Syrian warplanes were taking off from the same airfield, and airstrikes resumed on the town where use of poison gas provoked Mr. Trump into action. ...
                    In fact, if last week’s action was the end of the story, the eventual effect may well be to strengthen the Assad regime — Look, they stood up to a superpower! — and weaken American credibility. ...
                    The media reaction ... showed that many pundits and news organizations have learned nothing from past failures. ...
                    The U.S. fired off some missiles, and ... Mr. Trump “became president.” Aside from everything else, think about the incentives this creates. The Trump administration now knows that it can always crowd out reporting about its scandals and failures by bombing someone. ...
                    Real leadership means devising and carrying out sustained policies that make the world a better place. Publicity stunts may generate a few days of favorable media coverage, but they end up making America weaker, not stronger, because they show the world that we have a government that can’t follow through.
                    And has anyone seen a sign, any sign, that Mr. Trump is ready to provide real leadership in that sense? I haven’t.

                      Posted by on Monday, April 10, 2017 at 02:34 AM in Economics, Policy, Politics | Permalink  Comments (156) 


                      The Fed, the Reality of Tax Cuts Reality, and Donald Trump

                      I have a new column:

                      The Fed, the Reality of Tax Cuts Reality, and Donald Trump: For many years, Republicans argued that tax cuts for the wealthy pay for themselves. Cutting taxes on the wealthy, according to Republicans, allows them to keep a larger share of anything new they create and this leads to new economic activity and new innovation – so much that the resulting increase in economic growth and tax revenue fully offsets the budgetary effects of the tax cuts. Everyone is better off as income “trickled down” from the top.
                      What actually happened is that the tax cuts had very little, if any, impact on economic growth. Deficits went up, and somehow income never trickled down – if anything, it trickled up. Today, Republicans are less likely to argue that tax cuts pay for themselves, though you still hear it, but they still insist tax cuts for the wealthy magically increase economic growth and offset much of the revenue loss.
                      But even in the very unlikely case that Trump’s proposed tax cuts are successful (beyond increasing the income of the wealthy which many argue is the true goal), the economic growth rates Trump has promised are unlikely to be attained. ...

                        Posted by on Monday, April 10, 2017 at 02:25 AM in Economics, Monetary Policy, Politics, Taxes | Permalink  Comments (33) 


                        Links for 04-10-17

                          Posted by on Monday, April 10, 2017 at 12:06 AM Permalink  Comments (65) 


                          Sunday, April 09, 2017

                          Why People Prefer Unequal Societies

                          People prefer fair inequality:

                          Why people prefer unequal societies, by Christina Starmans , Mark Sheskin  & Paul Bloom, Nature Human Behaviour 1, Article number: 0082 (2017): Abstract There is immense concern about economic inequality, both among the scholarly community and in the general public, and many insist that equality is an important social goal. However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. We suggest that these two phenomena can be reconciled by noticing that, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness. ...

                            Posted by on Sunday, April 9, 2017 at 10:51 AM in Economics, Income Distribution | Permalink  Comments (51) 


                            Saturday, April 08, 2017

                            Links for 04-08-17

                              Posted by on Saturday, April 8, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (228) 


                              Friday, April 07, 2017

                              Paul Krugman: The Bad, the Worse and the Ugly

                              Donald Trump is ugly:

                              The Bad, the Worse and the Ugly, by Paul Krugman, NY Times: This week’s New York Times interview with Donald Trump was horrifying, yet curiously unsurprising. Yes, the world’s most powerful man is lazy, ignorant, dishonest and vindictive. But we knew that already.
                              In fact, the most revealing thing in the interview may be Mr. Trump’s defense of Bill O’Reilly, accused of sexual predation and abuse of power: “He’s a good person.” This, I’d argue, tells us more about both the man from Mar-a-Lago and the motivations of his base than his ramblings about infrastructure and trade.
                              First, however, here’s a question: How much difference has it made, really, that Donald Trump rather than a conventional Republican sits in the White House?
                              The Trump administration is, by all accounts, a mess. ... Yet Mr. Trump’s first great policy and political debacle — the ignominious collapse of the effort to kill Obamacare — owed almost nothing to executive dysfunction. Repeal-and-replace ... failed because Republicans have been lying about health care for eight years. ...
                              Similar considerations apply on other fronts. Tax reform looks like a bust ...
                              What about areas where Mr. Trump sometimes sounds very different from ordinary Republicans, like infrastructure? ... [G]iven what we heard in the interview ... it’s clear that the administration has no actual infrastructure plan...
                              True, there are some places where Mr. Trump does seem likely to have a big impact — most notably, in crippling environmental policy. But that’s what any Republican would have done...
                              So Trumpist governance in practice so far is turning out to be just Republican governance with (much) worse management. Which brings me back to the original question: Does the appalling character of the man on top matter?
                              I think it does. The substance of Trump policy may not be that distinctive in practice. But style matters, too, because it shapes the broader political climate. And what Trumpism has brought is a new sense of empowerment to the ugliest aspects of American politics. ...
                              One way to think about Fox News in general, and Mr. O’Reilly in particular, is that they provide a safe space for people who want an affirmation that their uglier impulses are, in fact, justified and perfectly O.K. And one way to think about the Trump White House is that it’s attempting to expand that safe space to include the nation as a whole.
                              And the big question about Trumpism — bigger, arguably, than the legislative agenda — is whether unapologetic ugliness is a winning political strategy.

                                Posted by on Friday, April 7, 2017 at 02:43 AM in Economics, Politics | Permalink  Comments (159) 


                                Fed Watch: Fed Likely To Discount Weakness in March Employment Report

                                Tim Duy:

                                Fed Likely To Discount Weakness in March Employment Report, Tim Duy: It seems that we are conditioned for a disappointing jobs report tomorrow. Although the ADP report came in strong, we have mixed signals from the employment components of the ISM reports, with the employment index up in manufacturing but down in the much bigger service sector. In addition, weather may be a factor - did warm weather goose the January and February numbers and now we will see payback due to a cold March? I expect that the Fed will be expecting the latter. The minutes suggest they are already primed for weaker first quarter numbers to begin with:
                                Participants generally saw the incoming economic information as consistent, overall, with their expectations and indicated that their views about the economic outlook had changed little since the January-February FOMC meeting. Al­though GDP appeared to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality.
                                They would probably write off a weak headline payrolls numbers as a reflection of just another temporary factor. Of course, that also means they will embrace a solid number. It's kind of a heads they win, tails you lose situation for the Fed.
                                Consensus is looking for 175k on the payrolls in a range of 125k to 202k. This sounds reasonable; my estimate is 190k within a wider range of 106k to 275k:

                                Nfpfor0317

                                Variance on these estimates, however, is notoriously high. My inclination is to expect the actual print to be more likely below and above 190k.
                                Assuming a weak read of payrolls that is written off to weather, the rest of the report is more important. The Fed maintains a laser sharp focus on signs unemployment is significantly undershooting the natural rate. Consensus expects the rate to hold at 4.7%. A drop would raise eyebrows at the Fed. An increase in the participation rate, however, would be welcome news that they can maintain a gradual pace of tightening. And wages of course will help guide them as they assess their distance from the natural rate.
                                Bottom Line: Unless the report is a complete disaster, I would expect the Fed is poised to look though any weakness. But that means a strong report will grab their attention.

                                  Posted by on Friday, April 7, 2017 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (9) 


                                  Links for 04-07-17

                                    Posted by on Friday, April 7, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (41) 


                                    Thursday, April 06, 2017

                                    Fed Watch: Lots To Chew On In The FOMC Minutes

                                    Tim Duy:

                                    Lots To Chew On In The FOMC Minutes, by Tim Duy: The minutes of the March FOMC meeting confirmed that the Fed remains poised to tighten policy further, first via raising the federal funds rate followed by action to reduce the balance sheet later in the year. It appears most likely that the Fed will see the latter as a substitute for the former. That means rate hikes would perhaps be on hold during the start of 2018 as the Fed assesses the efficacy of its actions. To be sure, however, the pace and mix of tightening remain data dependent. With the Fed in general agreement that the economy is near full employment, an uptick in either the pace of growth or inflation concerns will prompt the Fed begin murmuring about an accelerated the pace of tightening.
                                    The Fed tackled balance sheet strategy early in the meeting. On timing, the policymakers thought thought it soon be upon us:
                                    Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year.
                                    Now place that prediction in the context of this discussion from the committee action portion of the minutes:
                                    Members generally noted that the increase in the target range did not reflect changes in their assessments of the economic outlook or the appropriate path of the federal funds rate, adding that the increase was consistent with the gradual pace of removal of accommodation that was anticipated in December, when the Committee last raised the target range.
                                    The median rate projection in March held at a total of three hikes for 2017. The Fed believes that the March rate hike was consistent with the gradual pace of policy removal as anticipated in December. Assume then that the economy continues to stay the course, holding generally in line with the Fed's forecasts. Suppose that means the current pace of tightening holds as well.
                                    A continuation of the current pace of tightening - one action per quarter - would put rate hikes in June and September. At that point, the target range in 1.25-1.5%. That is roughly halfway to the currently anticipated neutral rate. Then the normalization of rate policy would be well underway, and then, in December, the Fed switches gears to balance sheet reduction. Later this year, as stated in the minutes.
                                    That suggests that "gradual" means policy action once a quarter. (Remember the Fed began 2016 thinking four hikes? I think once a quarter seems about right to them.) If so, and they still intend a total of three rates hikes and balance sheet action for 2018, it implies they think, reasonably, that action on balance sheet reduction is a substitute for rate hikes. And, furthermore, that the balance sheet forecast is implicitly built into the median rate forecast. If not for having to deal with the balance sheet, I suspect the median forecast for 2017 would be 4 rate hikes.
                                    That gets you through 2017. What about 2018? They probably have in mind that the phasing out of reinvestments could take six months, though this has not yet been decided. Back to the minutes:
                                    An approach that phased out reinvestments was seen as reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the Committee's policy intentions while only modestly slowing reductions in the Committee's securities holdings. An approach that ended reinvestments all at once, however, was generally viewed as easier to communicate while allowing for somewhat swifter normalization of the size of the balance sheet.
                                    The Fed could go cold turkey on reinvestments, option 2, but I suspect will choose to ease into balance sheet reduction, option 1. Less chance of disrupting financial markets. That would mean policy action at the second meeting of 2018 to get reinvestment strategy on its final path, followed up quarterly rate hikes after that.
                                    Assuming this is the schedule they have in mind, policymakers expect to tighten policy once per quarter for the next two years, trading off between rate hikes and balance sheet policy. The risk, however is that balance sheet reduction takes longer than expected, or it more disruptive than expected, thus reducing the scope for rate hikes in 2018. Time will tell on that one.
                                    The Fed, however, could step up the pace of action. On the mandates:
                                    Nearly all participants judged that the U.S. economy was operating at or near maximum employment. In contrast, participants held different views regarding prospects for the attainment of the Committee's inflation goal.
                                    Inflation continues to be the sticking point. If inflationary pressures were more visible, the Fed would be acting more aggressively. Watch this space, and core-PCE inflation in particular. It picked up in January and February. If that continues into March and April, the Fed will worry that they have pushed "gradual" as far as it will go. Watching employment, however, is a bit more tricky. For now, I expect the Fed to get nervous of a significant undershoot if the unemployment rate dips much further. Persistent low inflation, however, could yield a decrease in the Fed's estimate of the natural rate of unemployment.
                                    Finally, note this:
                                    In their discussion of recent developments in financial markets, participants noted that financial conditions remained accommodative despite the rise in longer-term interest rates in recent months and continued to support the expansion of economic activity. Many participants discussed the implications of the rise in equity prices over the past few months, with several of them citing it as contributing to an easing of financial conditions. A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high-yield corporate bonds, and commercial real estate, had also risen significantly in recent months. In contrast, prices of farmland reportedly had edged lower, in part because low commodity prices continued to weigh on farm income. Still, farmland valuations were said to remain quite high as gauged by standard benchmarks such as rent-to-price ratios.
                                    Fed officials aren't growing nervous about just equities. They are seeing high prices across a wide range of risky assets. If it was just one asset class, they might conclude that it doesn't pose systemic risk for the US economy. Or they might conclude that macro prudential policies were sufficient to maintain financial stability. But a wide range of assets might require a more blunt tool - like higher rates. Another space to watch. Where this space gets messy is the tendency of equity prices to remain high even as the Fed tightens - a pattern which may induce the Fed to tighten much more aggressively than they should.
                                    Bottom Line: The Fed clearly anticipates more tightening, likely at a pace of one action per quarter between interest rates and balance sheet. My interpretation of the minutes is that with the economy near full employment and assuming asset prices stay high, it wouldn't take much movement on the labor market or inflation expectations to make Fed officials sufficiently nervous that you begin to hear more about stepping up the pace of tightening.

                                      Posted by on Thursday, April 6, 2017 at 05:49 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (31) 


                                      A Right-Wing Case for Taxing Private Schools

                                      Chris Dillow:

                                      A right-wing case for taxing private schools: Sensible right-wingers should support Labour's plan to impose VAT on private schools.
                                      Let’s start from the fact that Labour wants to “bash the rich”, and you’ll not convince them otherwise. The question therefore is whether to do this by taxing their incomes or taxing their spending. Yes, Labour will probably do both – but more of one should mean less of the other.
                                      To the extent that VAT on school fees means lower top tax rates than would otherwise be the case, the right should welcome this. They believe that high top tax rates reduce the labour supply and increase tax-dodging – Laffer curves and all that. By contrast, the behavioural effect of VAT on private schools is small: the IFS has estimated a price elasticity of demand for them of only around -0.26. From the right’s point of view, therefore VAT is more likely to raise revenues and less likely to deter productive activity than higher top income taxes. In fact, it might even incentivize hard work, as parents will have to work harder to afford school fees.
                                      Yes, the move would hurt hard-working families who are struggling to pay the fees. But income taxes hurt hard-workers too. The solution to this is to shift taxes onto land. But nobody wants to deny Englishmen their god-given right to get something for nothing by watching their house prices rise.
                                      What's more, zero-rating school fees introduces a distortion into the tax system. It means these are cheaper relative to (say) cars or holidays than they’d be in a free market system. If you think the free market price system is a good signal of relative costs and benefits, you’ll want to remove this distortion.
                                      Worse still, our current VAT operates as a form of protectionism. In making schools cheaper relative to BMWs than they’d be in a free market, it encourages consumers to shift their spending towards a domestic business. ...
                                      This raises the question: what might be the justification for giving private schools a tax break? One argument would be that they have positive externalities. They take pupils out of the state sector and so reduce the cost of state education. And their top-quality education provides us with the great leaders who have made our politics, media and businesses who have made us the envy of the world.
                                      But if you’re a free marketeer, you’ll see this as a dangerous slippery slope. Yes, private schools reduce the expense to the tax-payer. But equally, people who eat healthily reduce the burden on the NHS. So why not tax fatty and sugary foods more heavily that healthy ones? But free marketeers are opposed to the latter. By the same logic, however, they should oppose the tax break for private schools. We could go further. People who obey the law save tax-payers the expense of police and prisons. So why not give a tax break for things that help people stay out of trouble, such as games consoles that keep youngsters indoors rather than out on the streets?
                                      Once you start seeing positive externalities in private schools, you’ll soon see them everywhere. That’s a licence to intervene everywhere.
                                      Right-wingers, therefore, should welcome Corbyn’s plan. ... Being on the right doesn’t mean having to defend all privilege. Does it?

                                        Posted by on Thursday, April 6, 2017 at 05:43 AM Permalink  Comments (5) 


                                        Links for 04-06-17

                                          Posted by on Thursday, April 6, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (94) 


                                          Wednesday, April 05, 2017

                                          Why Regulators Should Focus on Bankers’ Incentives

                                          Charles Goodhart:

                                          Why regulators should focus on bankers’ incentives: Last autumn, Charles Goodhart gave a special lecture at the Bank. In this guest post he argues that regulators should focus more on the incentives of individual decision makers.
                                          The incentive for those in any institution is to justify and extol the virtues of the decisions that they have taken. Criticisms of current regulatory measures are more likely to come from outsiders, perhaps especially from academics, (with tenure), who can play the fool to the regulatory king. I offer some thoughts here from that perspective. I contend that the regulatory failures that led to the crisis and the shortcomings of regulation since are largely derived from a failure to identify the persons responsible for bad decisions. Banks cannot take decisions, exhibit behavior, or have feelings – but individuals can. The solution lies in reforming the governance set-up and realigning incentives faced by banks’ management. ...
                                          There are two questions that need reconsideration. The first relates to the scope of responsibility for outcomes in a hierarchical institution; the second relates to the downside that those responsible should face when failure or bad behavior occurs. ...

                                          He concludes with:

                                          If a bank CEO knew that his own family’s fortunes would remain at risk throughout his subsequent lifetime for any failure of an employee’s behavior during his period in office, it would do more to improve banking ‘culture’ than any set of sermons and required oaths of good behavior. The root of the problem is the bad behavior of bankers, not of banks, who are incapable of behavior, for good or ill. The regulatory framework should be refocused towards the latter, with a focus on reforming incentives.

                                            Posted by on Wednesday, April 5, 2017 at 05:34 AM in Economics, Financial System, Regulation | Permalink  Comments (25) 


                                            How Do People Find Jobs?

                                            R. Jason Faberman, Andreas I. Mueller, Ayşegül Şahin, Rachel Schuh, and Giorgio Topa at the NY Fed's Liberty Street Economics:

                                            How Do People Find Jobs?: Most people find themselves looking for work at some point in their adult lives. But what brings employers and job seekers together? And does searching for a new job while unemployed lead to different outcomes
                                             than searching while employed? Little is known about the job search process for unemployed workers. Even less is known about the search process and outcomes for currently employed workers—so‑called “on‑the‑job” search. This Liberty Street Economics post aims to shed light on these questions and to draw some conclusions for our understanding of labor market dynamics more generally.
                                            The New York Fed has been fielding a labor market supplement to its Survey of Consumer Expectations every October since 2013. The supplement focuses on the job search process for all individuals, regardless of their employment status. The questions cover search behavior (for instance, what methods respondents used to look for jobs, the time spent searching for work, the number and type of contacts with employers, and job interviews), as well as the nature, number, and characteristics of any job offers received. Pooling together three successive waves of the survey supplement yields data on about 2,300 employed workers, 165 unemployed workers, and 430 respondents who are classified as being out of the labor force, all between eighteen and sixty-four years of age. Labor force status is defined using the Bureau of Labor Statistics definition: Specifically, individuals are classified as unemployed if they are not currently employed, actively looked for work in the last four weeks, and are available to start work within the next seven days. Workers on temporary layoff are also classified as unemployed.
                                            How Do People Look for Jobs?
                                            The table below describes the “extensive margin” of job search, by labor force status: That is, how many people actively searched for work in the last four weeks, regardless of how much effort they put into it. We employ various definitions to measure active search. The first definition is based on whether respondents report having used at least one job search method out of a comprehensive list of possible methods, which includes applying for jobs, looking at job postings online or elsewhere, sending out resumes, and contacting employers, employment agencies, former coworkers, or other professional contacts. The second definition focuses on those who applied to at least one job posting. The final definition is a measure based on whether respondents spent any time searching for jobs in the last seven days.

                                            How Do People Find Jobs?

                                             The most surprising finding is that search is common among employed workers. Depending on the specific measure used, roughly one in five or one in four employed
                                             workers actively looked for work during the four weeks preceding the survey. Almost all of the unemployed actively searched—a predictable finding, given the definition of unemployment. (The only exceptions come from those on temporary layoff.) A small fraction of respondents who were not in the labor force also searched. These are respondents who searched but were not available to start work in the next seven days and were therefore classified as out of the labor force.
                                            Let us now turn to the “intensive margin” of job search: Conditional on having actively searched, how intensively did people in our survey look for jobs? Here we employ two measures: one is a measure of hours spent searching in the last seven days; the other is the number of job applications sent out (either online or through other means) in the last four weeks. We also further distinguish the employed by their “extensive margin”—that is, by whether or not they are actively looking for work. The table below reports the results. The main finding is that unemployed job seekers search harder than the employed. On average, the unemployed spend 8.4 hours per week searching, compared with 1.2 hours for the employed, and send out 8.1 applications per month, compared with 1.2 for the employed. If we focus on employed workers actively looking for work, we find that their search effort is still only about half that of the unemployed.

                                            How Do People Find Jobs?

                                             What Works?
                                            So far, we have focused on what people do to look for work. But how effective is their search? To answer this question, we have to look at the outcomes of their efforts. Here we consider two measures, both computed over the preceding four weeks: the number of employers who contacted our respondents about a job opening, and the number of actual job offers received. We can summarize the results as follows (see the table below): First, even though unemployed workers search about seven times as hard as the employed (as illustrated in the table just above), they only generate about twice the number of offers. Thus, searching while unemployed is much less effective in generating offers than searching while on the job. Second, employed workers actively looking for work receive the greatest number of employer contacts and job offers. So, again, searching while employed seems to have the highest return in terms of generating new offers. Third, even those employed workers who are not looking for new work receive a substantial number of employer contacts and offers. This finding illustrates the importance of informal contacts and recruiting. Informal contacts can include networking at industry events; conversations with friends, present or former coworkers, or business associates; and unsolicited contacts by employers, recruiters, or headhunters.

                                            How Do People Find Jobs?

                                             These results are summarized in a slightly different way in the table below. Unemployed workers make up about 7 percent of our sample. They send out 40 percent of the total applications in the sample, but receive only about 16 percent of the total offers. By comparison, those employed and actively looking for work make up about 20 percent of the sample but receive almost half of all offers. Further, the employed not looking for work receive about one‑fourth of all the offers in our sample—more than the unemployed! They also receive more than half of all the unsolicited offers in our sample. These findings again point to the importance of informal contacts and recruiting in labor market churning.

                                            How Do People Find Jobs?

                                            Conclusion
                                            We have found that “on‑the‑job” search is common among employed workers, and that the job search process is more effective for currently employed workers than for the unemployed. In the paper cited as the source of our table estimates, we also show that offers received by employed workers are better than those received by the unemployed, both in terms of the wage associated with them and in terms of their nonwage benefits. This is true even after controlling for detailed worker characteristics and prior work history.
                                            What are the broader implications of these findings for our understanding of labor market dynamics? We know that job-to-job transitions are an important component of new hires, and an important driver of wage growth in the economy. Voluntary quits (typically followed by a transition to a new job) have been described by Chair Janet Yellen as an important marker of the health of the labor market. By highlighting the importance and pervasiveness of on‑the‑job search, we have provided some evidence on the search mechanisms that underlie voluntary quits and job‑to‑job transitions. By tracking these search processes over time we can gain further insights into the likely evolution of these important labor market markers going forward.
                                            ______________
                                            Disclaimer The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

                                              Posted by on Wednesday, April 5, 2017 at 05:31 AM in Economics, Monetary Policy, Unemployment | Permalink  Comments (16) 


                                              Links for 04-05-17

                                                Posted by on Wednesday, April 5, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (191) 


                                                Tuesday, April 04, 2017

                                                Departing Thoughts

                                                Federal Reserve Governor Daniel K. Tarullo: 

                                                Departing Thoughts: Tomorrow is my last day at the Federal Reserve. So in this, my final official speech, it seems appropriate to offer a broad perspective on how financial regulation changed after the crisis. In a moment, I shall offer a few thoughts along these lines. Then I am going to address in some detail the capital requirements we have put in place, including our stress testing program. Eight years at the Federal Reserve has only reinforced my belief that strong capital requirements are central to a safe and stable financial system. It is important for the public to understand why this is so, especially at a moment when there is so much talk of changes to financial regulation. ...

                                                  Posted by on Tuesday, April 4, 2017 at 01:43 PM in Economics, Monetary Policy, Regulation | Permalink  Comments (15) 


                                                  The Myth That the Estate Tax Threatens Small Farms

                                                  This is from Chloe Cho of the CBPP:

                                                  The Myth That the Estate Tax Threatens Small Farms: Ahead of tomorrow’s House Agriculture Committee hearing on tax reform, a group of agricultural trade associations have called for repealing the estate tax on inherited wealth, arguing that “all too often at the time of death, farming and ranching families are forced to sell off land, farm equipment, parts of the operation or take out loans” due to the tax. Their arguments miss the mark.  Only 50 small farm and small business estates in the entire country will pay any estate tax in 2017 (see chart), and they’ll owe less than 6 percent of their value in tax, on average, the Tax Policy Center estimates

                                                  4-4-17estatetax

                                                  ...Moreover, most farmers and business owners with estates large enough to owe the tax have sufficient liquid assets ... to pay the tax without having to touch other assets or liquidate their farm and business, a 2005 Congressional Budget Office (CBO) study found. Today’s estate tax rules are even more generous than those CBO assumed. ...
                                                  While doing next to nothing for family farms, repeal would provide a windfall to the wealthiest 0.2 percent of estates — the only ones large enough to pay the tax.  A repeal proposal recently reintroduced in the Senate would provide the 0.2 percent of wealthiest estates with an average tax cut of more than $3 million in 2017.  Roughly 330 estates worth more than $50 million would get more than $20 million apiece in tax cuts, the Joint Committee on Taxation estimates.  The proposal would also cost $269 billion over the decade, expanding deficits and adding to pressure for cuts in federal programs.

                                                    Posted by on Tuesday, April 4, 2017 at 01:28 PM in Economics, Politics, Taxes | Permalink  Comments (25) 


                                                    Links for 04-04-17

                                                      Posted by on Tuesday, April 4, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (138) 


                                                      Monday, April 03, 2017

                                                      Do Election Outcomes Matter?

                                                      Lane Kenworthy:

                                                      Do election outcomes matter?: Most Americans identify as either a Democrat or a Republican. As figure 1 shows, the Democrats currently enjoy an advantage of about ten percentage points. Vote totals in elections for the presidency, the Senate, and the House of Representatives are often closer than this, and in recent elections American voters have been fairly evenly split between the two parties.

                                                      Figure 1. Party identification
                                                      Share of US adults. Question: “Generally speaking, do you usually think of yourself as a …?” ANES has seven response options: strong Democrat, weak Democrat, independent leaning Democrat, independent, independent leaning Republican, weak Republican, strong Republican. GSS has eight response options: strong Democrat, not strong Democrat, independent leaning Democrat, independent, independent leaning Republican, not strong Republican, strong Republican, other party. “Democrat” here is the three Democrat groups. “Republican” is the three Republican groups. Those choosing “other party” in the GSS, usually just 1% or 2%, are excluded. Data sources: American National Election Studies, electionstudies.org, series party identification; General Social Survey, sda.berkeley.edu, series partyid.

                                                      The political left and right tend to differ along three main axes. One is economic, with the left preferring more government support for security and fairness and the right prioritizing freedom for individuals and firms. A second is social-cultural, with the left here emphasizing individual liberty and the right privileging order, tradition, and community. A third is foreign policy. Here the left has tended to be more isolationist, the right more favorably disposed to intervention abroad. In the United States, the Democrats and the Republicans have differed on the economic axis since the early 1930s and on the social-cultural and foreign policy axes since the late 1960s.

                                                      Given these differing aims and priorities, election results should produce differences in economic and social outcomes. Do they? ...

                                                        Posted by on Monday, April 3, 2017 at 04:45 PM in Economics, Politics | Permalink  Comments (55) 


                                                        Links for 04-03-17

                                                          Posted by on Monday, April 3, 2017 at 09:19 AM in Economics, Links | Permalink  Comments (93) 


                                                          Paul Krugman: Trump Is Wimping Out on Trade

                                                          “Talk loudly and carry a small stick”:

                                                          Trump Is Wimping Out on Trade, by Paul Krugman, NY Times: During the campaign, Donald Trump talked loudly and often about how he was going to renegotiate America’s “horrible trade deals,” bringing back millions of good jobs. So far, however, nothing has happened...
                                                          So on Friday the White House scheduled a ceremony in which Mr. Trump would sign two new executive orders on trade. The goal, presumably, was to counteract the growing impression that his bombast on trade was sound and fury signifying nothing.
                                                          Unfortunately, the executive orders in question were, to use the technical term, nothingburgers. One called for a report on the causes of the trade deficit; wait, they’re just starting to study the issue? The other addressed some minor issues of tariff collection, and its content apparently duplicated an act President Obama already signed last year. ...
                                                          Oh, and last week a draft proposal for revising the North American Free Trade Agreement circulated around Congress; instead of sweeping changes in what candidate Trump called the “worst trade deal” ever signed, the administration appears to be seeking only modest tweaks.
                                                          This surely isn’t what working-class Trump supporters thought they were voting for. So why can Trumpist trade policy be summarized — to quote The Times’s Binyamin Appelbaum — as “talk loudly and carry a small stick”? Let me give two reasons.
                                                          First, back when Mr. Trump was railing against trade deals, he had no idea what he was talking about. (I know, you’re shocked to hear that.) ...
                                                          Which brings me to Trumptrade’s second big obstacle: Whatever you think of past trade agreements, trade is now deeply embedded in the economy. ...
                                                          Economists talk, with considerable justification, about the “China shock”: the disruptive effect on jobs and communities of the rapid growth of Chinese exports from the 1990s through 2007. But reversing globalization now would produce an equally painful “Trump shock,” disrupting jobs and communities all over again — and would also be painful for some of the big corporate interests that, strange to say, have a lot of influence in this supposedly populist regime. ...
                                                          Mr. Trump came into office talking big, sure that his predecessors had messed everything up and he — he alone — could do far better. And millions of voters believed him.
                                                          But governing America isn’t like reality TV. A few weeks ago Mr. Trump whined, “Nobody knew that health care could be so complicated.” Now, one suspects, he’s saying the same thing about trade policy.

                                                            Posted by on Monday, April 3, 2017 at 12:59 AM in Economics, International Trade, Politics | Permalink  Comments (134) 


                                                            Sunday, April 02, 2017

                                                            Links for 04-02-17

                                                              Posted by on Sunday, April 2, 2017 at 08:46 AM in Economics, Links | Permalink  Comments (72) 


                                                              Friday, March 31, 2017

                                                              Blog Note

                                                              Things have been really slow here lately -- have been traveling. Have a really long travel day today (to Dubai via London and Frankfurt), but will start posting regularly again as soon as I can.

                                                                Posted by on Friday, March 31, 2017 at 11:25 AM in Economics, Weblogs | Permalink  Comments (180) 


                                                                Links for 03-31-17

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                                                                  Thursday, March 30, 2017

                                                                  Links for 03-30-17

                                                                    Posted by on Thursday, March 30, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (141) 


                                                                    Wednesday, March 29, 2017

                                                                    Economic Growth in the US: A Tale of Two Countries

                                                                    Thomas Piketty, Emmanuel Saez, and Gabriel Zucman at VoxEU:

                                                                    Economic growth in the US: A tale of two countries: The rise of economic inequality is one of the most hotly debated issues today in the US (Furman 2016) and indeed in the world. Yet economists and policymakers alike face important limitations when trying to measure and understand the rise of inequality.

                                                                    One major problem is the disconnect between macroeconomics and the study of economic inequality. Macroeconomics relies on national accounts data to study the growth of national income, while the study of inequality relies on individual or household income, survey, and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60% of the national income recorded in the national accounts, with this gap increasing over the past several decades.1

                                                                    This disconnect between the different data sets makes it hard to address important economic and policy questions, such as:

                                                                    • What fraction of economic growth accrues to those in the bottom 50%, the middle 40%, and the top 10% of the income distribution?
                                                                    • What part of the rise in inequality is due to changes in the share of national income that goes to workers (labor income) and owners (capital income) versus changes in how these labour and capital incomes are distributed among individuals?

                                                                    A second major issue is that economists and policymakers do not have a comprehensive view of how government programs designed to ameliorate the worst effects of economic inequality actually affect inequality. Americans share almost one-third of the fruits of economic output (via taxes that help pay for an array of social services) through their federal, state, and local governments. These taxes collectively add up to about 30% of national income, and are used to fund transfers and public goods that ultimately benefit all US families. Yet we do not have a clear measure of how the distribution of pre-tax income differs from the distribution of income after taxes are levied and after government spending is taken into account. This makes it hard to assess the extent to which governments make income growth more equal.2

                                                                    In a recent paper, we attempt to create inequality statistics for the US that overcome the limitations of existing data by creating distributional national accounts (Piketty et al. 2016). We combine tax, survey, and national accounts data to build a new series on the distribution of national income. National income is the broadest measure of income published in the national accounts and is conceptually close to gross domestic product, the broadest measure of economic growth.3 Our distributional national accounts enable us to provide decompositions of growth by income groups consistent with macroeconomic growth.

                                                                    In our paper, we calculate the distribution of both pre-tax and post-tax income. The post-tax series deducts all taxes and then adds back all transfers and public spending so that both pre-tax and post-tax incomes add up to national income. This allows us to provide the first comprehensive view of how government redistribution in the US affects inequality. Our benchmark series use the adult individual as the unit of observation and split income equally among spouses in married couples. But we also produce series where each spouse is assigned their own labour income, allowing us to study gender inequality and its impact on overall income inequality. In this column, we would like to highlight three striking findings.

                                                                    Our first finding: A surge in income inequality...

                                                                    Our second finding: Policies to ameliorate income inequality fall woefully short ...

                                                                    Our third finding: Comparing income inequality among countries is enlightening ...

                                                                      Posted by on Wednesday, March 29, 2017 at 12:18 PM in Economics, Income Distribution | Permalink  Comments (51) 


                                                                      Links for 03-29-17

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                                                                        Tuesday, March 28, 2017

                                                                        Links for 03-28-17

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                                                                          Monday, March 27, 2017

                                                                          Paul Krugman: How to Build on Obamacare

                                                                          "If Mr. Trump really wanted to honor his campaign promises about improving health coverage..., there’s a lot he could do":

                                                                          How to Build on Obamacare, by Paul Krugman, NY Times: “Nobody knew that health care could be so complicated.” So declared Donald Trump three weeks before wimping out on his promise to repeal Obamacare. ...
                                                                          Actually, though, health care isn’t all that complicated. Basically, you need to induce people who don’t currently need medical treatment to pay the bills for those who do, with the promise that the favor will be returned if necessary.
                                                                          Unfortunately, Republicans have spent eight years angrily denying that simple proposition. ... But put politics aside..., what could be done to make health care work better...?
                                                                          The Affordable Care Act deals with the fundamental issue of health care provision in two ways. More than half of the gains in coverage have come from expanding Medicaid... And that part of the program is working fine, except in Republican-controlled states that won’t let the federal government aid their residents.
                                                                          But Medicaid only covers the lowest-income families. Above that level, the A.C.A. relies on private insurance companies, using a combination of regulations and subsidies to keep policies affordable. This has worked well in some places. ...
                                                                          Overall, however, too few healthy people have purchased insurance, despite the penalty for failing to sign up... As a result, some companies have pulled out of the market. And this has left some areas, especially rural counties in small states, with few or no insurers.
                                                                          No, it’s not a “death spiral”... But the system could and should be improved. ...
                                                                          What about the problem of inadequate insurance industry competition? ... At the very least, there ought to be public plans available in areas no private insurer wants to serve. There are other more technical things we should do too...
                                                                          So if Mr. Trump really wanted to honor his campaign promises about improving health coverage..., there’s a lot he could do... And he would get plenty of cooperation from Democrats along the way.
                                                                          Needless to say, I don’t expect to see that happen. ...
                                                                          And the tweeter-in-chief’s initial reaction to health care humiliation was, predictably, vindictive. He blamed Democrats, whom he never consulted, for Trumpcare’s political failure, predicted that “ObamaCare will explode,” and that when it does Democrats will “own it.” Since his own administration is responsible for administering the law, that sounds a lot like a promise to sabotage Americans’ health care and blame other people for the disaster.
                                                                          The point, however, is that building on Obamacare wouldn’t be hard, and wouldn’t even be all that complicated.

                                                                            Posted by on Monday, March 27, 2017 at 10:40 AM in Economics, Health Care, Politics | Permalink  Comments (121) 


                                                                            Markets Are Witnessing a Yellen Fed at Its Humblest

                                                                            Tim Duy at Bloomberg:

                                                                            Markets Are Witnessing a Yellen Fed at Its Humblest: It finally looks like when Federal Reserve officials say markets can expect multiple interest-rate increases this year, they really mean it. Even noted dove Chicago Federal Reserve President Charles Evans believes that another two hikes in 2017 is possible following last week's boost. Going one further, Philadelphia Federal Reserve President Patrick Harker left open the possibility of more than three total this year.
                                                                            And yet the Fed has set the stage to be deep into the policy normalization process by the end of the year despite an inflation forecast that not only never cracks 2 percent but has repeatedly fallen short of its mark for years. The threat of inflation, not inflation itself, is what motivates the Fed after deciding long ago in favor of preemptive policy action to stay ahead of the curve. ...

                                                                              Posted by on Monday, March 27, 2017 at 09:03 AM in Economics, Monetary Policy | Permalink  Comments (36) 


                                                                              Tax Cuts Can’t be Financed by Reducing Government Waste

                                                                              I have a new column (my title was "Some of These Markets are Not Like the Others"):

                                                                              It’s a Ruse: Tax Cuts Can’t be Financed by Reducing Government Waste: The Republicans suffered a humiliating defeat on their proposal to cut taxes for the wealthy disguised as healthcare reform. But as the Trump administration has made clear, they are not about to give up on their tax cut plans.
                                                                              But how will those tax cuts be financed? The Republican’s health care reform plan would have delivered $600 billion in tax cuts, but with that option gone where will the money come from? ...

                                                                                Posted by on Monday, March 27, 2017 at 08:57 AM in Economics, Politics, Social Insurance, Social Security, Taxes | Permalink  Comments (35) 


                                                                                Links for 03-27-17

                                                                                  Posted by on Monday, March 27, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (169) 


                                                                                  Sunday, March 26, 2017

                                                                                  The Need for a Reformation of Authority and Hierarchy Among Economists in the Public Sphere

                                                                                  Brad Delong:

                                                                                  The Need for a Reformation of Authority and Hierarchy Among Economists in the Public Sphere: I find that I have much more to say (or, rather, largely, republish) relevant to the current debate between Simon Wren-Lewis and Unlearning Economics.

                                                                                  Let me start by saying that I think Unlearning Economics is almost entirely wrong in his proposed solutions.

                                                                                  Indeed, he does not seem especially knowledgeable about his cases. For example:

                                                                                  1. the trashing of the Grameen Bank is undeserved;

                                                                                  2. the blanket denunciation of RCTs as having "benefited global and local elites at the expensive of the poorest" is just bonkers;

                                                                                  3. Merton and Scholes's financial math was correct, and the crash of their hedge fund did not require any public-money bailout;

                                                                                  4. Janine Wedel is not a reliable source on Russian privatization, which I saw and see as the only practical chance to try to head off the oligarchic plutocracy that has grown up in Russia under Yeltsin and Putin (and, no, my freshman roommate Andrei was not prosecuted for "fraud in Russia", but rather the Boston U.S. Attorney's office overreached and was unwilling to admit it);

                                                                                  5. Unlearning Economics confuses the more-sinister Friedrich von Hayek (who welcomed Pinochet's political "excesses" as a necessary Lykurgan moment) with the truly-libertarian Milton Friedman, who throughout his whole life was dedicated to not telling people what to do, and who saw Pinochet as another oppressive authoritarian who might be induced to choose better rather than worse economic policies;

                                                                                  6. and then there is Reinhart and Rogoff, where I think Unlearning Economics is right.

                                                                                  So Unlearning Economics is batting 0.170 in their examples of "mainstream economics considered harmful". But there is that one case. And I do not think that Simon Wren-Lewis handles that one case well. And he needs to--I need to. And, since neither he nor I have, this is a big problem.

                                                                                  Let me put it this way: Carmen Reinhart and Ken Rogoff are mainstream economists.

                                                                                  The fact is that Carmen Reinhart and Ken Rogoff were wrong in 2009-2013. Yet they had much more influence on economic policy in 2009-2013 than did Simon Wren-Lewis and me. They had influence. And their influence was aggressively pro-austerity. And their influence almost entirely destructive.

                                                                                  Simon needs to face that fact squarely, rather than to dodge it. The fact is that the "mainstream economists, and most mainstream economists" who were heard in the public sphere were not against austerity, but rather split, with, if anything, louder and larger voices on the pro-austerity side. (IMHO, Simon Wren-Lewis half admits this with his denunciations of "City economists".) When Unlearning Economics seeks the destruction of "mainstream economics", he seeks the end of an intellectual hegemony that gives Reinhart and Rogoff's very shaky arguments a much more powerful institutional intellectual voice by virtue of their authors' tenured posts at Harvard than the arguments in fact deserve. Simon Wren-Lewis, in response, wants to claim that strengthening the "mainstream" would somehow diminish the influence of future Reinharts and Rogoffs in analogous situations. But the arguments for austerity that turned out to be powerful and persuasive in the public sphere came from inside the house! ...[continue]...

                                                                                    Posted by on Sunday, March 26, 2017 at 10:47 AM in Economics | Permalink  Comments (150) 


                                                                                    Saturday, March 25, 2017

                                                                                    Links for 03-25-17

                                                                                      Posted by on Saturday, March 25, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (182) 


                                                                                      Friday, March 24, 2017

                                                                                      Why Scrapping NAFTA Would be Trump’s Big Gift to China

                                                                                      Larry Summers:

                                                                                      Why scrapping NAFTA would be Trump’s big gift to China: I was in Mexico Thursday seeing the Mexican president, foreign minister and finance minister and addressing a convention of bankers. The only subjects anyone is interested is the future of NAFTA and U.S. Mexican relations.
                                                                                      I came to Mexico from Beijing, and so I was able to report that there was no greater strategic gift the United States could give China than to abrogate NAFTA and rupture the North American community. ... China apart, NAFTA strengthens the U.S. economy. ...
                                                                                      There is a silver lining in all the fuss over NAFTA — it needs updating. Digital trade didn’t exist in 1993. Thinking has shifted on the need to assure that trade agreements are in worker interests. This means more emphasis on labor standards and more need to ensure that dispute settlement systems do not overly empower corporate interests. Most important, with more competition from Asia and with the increased sophistication of the Mexican economy, there is a strong case for strengthened rules of origin that enhance North American manufacturing.
                                                                                      Changes along these lines may have an “America first” aspect but they are also in Mexico’s interest. They are the right way forward.
                                                                                      It is also essential that the United States and Mexico find a way forward on immigration. A wall is a 19th-century response to a 21st-century concern. I’m told that most illegal immigration does not take place through people crossing open borders in the desert — the only thing a wall could address. Rather it takes place through illegal entry at legal checkpoints as people are smuggled in in freight containers and the like. This will be unaffected by a wall. Technology, data science, enhanced collaboration, and cooperation with respect to Central America are much better ways to resist illegal immigration flows. They are also much more likely to strengthen our alliance with our most populous neighbor.

                                                                                        Posted by on Friday, March 24, 2017 at 01:22 PM in China, Economics, International Trade | Permalink  Comments (114) 


                                                                                        The Saga of Currency Unions and Trade

                                                                                        Douglas Campbell:

                                                                                        The Saga of Currency Unions and Trade: One of the first full papers I wrote was on currency unions and trade. I was taking Alan Taylor's field course at UC Davis, which was essentially and Open-Economy Macro History course, and the famous Glick/Rose findings that currency unions double trade was on the syllabus. Not to be outdone, Robert Barro and coauthors then found that currency unions increase trade on a 7-fold and 14-fold basis! This raised the prospect that Frenchman may suddenly go out and buy a dozen or more Volkswagens instead of settling for just one after the adoption of the Euro. Another paper, published in the QJE, found that currency unions even raise growth, via trade. In that case, one can only imagine what the Greek economy would look like if they hadn't joined the Euro. No result, it seems, can be too fanciful.
                                                                                        Always a doubting Thomas, I was instantly skeptical. ...
                                                                                        So, I fired up Stata, and after a solid 30 minutess, I discovered part of what was driving the seemingly magical effect. Roughly one-quarter of the CU changes were of countries that had former colonial relationships... It turns out that the impact of the "former colony" dummy in the gravity equation has been decaying slowly over time. This led to a more interesting insight -- that history matters for trade... For other country pairs aside from colonies, there were other problems. ...
                                                                                        In any case, in 2015, I deleted this paper and my regression and code from my webpage, and assigned the paper to my brilliant undergraduate students. They alerted me to the fact that Glick and Rose had recently written a mea culpa, where the authors declared that they could no longer have confidence in the results. ... However, Glick and Rose changed their minds, and decided instead to double-down on a positive, measurable impact of currency unions on trade. This time, they concluded that the Euro has increased trade by a smaller, but still magical, 50%. ... 
                                                                                        In any case, Jeff Frankel at Harvard apparently used to assign his Ph.D.'s students a "search-and-destroy" mission on the original CU effect. Thus, thanks to the fact that Andrew Rose still provides his data online -- for which I'm grateful -- I've just assigned my students a similar mission on the new EMU result. Thus, we get to see if they can overturn anything that the good referees at the European Economic Review may have overlooked. If I were a gambling man, and I am, I would put my money on my sharp undergraduates at the New Economic School over the academic publication process. If I were Croatia, or Greece, contemplating the relative merits of joining/staying in the Euro, I would write off the academic literature on this topic completely. 

                                                                                          Posted by on Friday, March 24, 2017 at 01:16 PM in Economics, Financial System, International Trade | Permalink  Comments (5) 


                                                                                          Paul Krugman: The Scammers, the Scammed and America’s Fate

                                                                                          "The destructive effects of false symmetry in reporting":

                                                                                          The Scammers, the Scammed and America’s Fate, by Paul Krugman, NY Times: ...Mr. Ryan’s proposed Obamacare replacement ... is one of the worst bills ever presented to Congress.
                                                                                          It would deprive tens of millions of health insurance — the decline in the number of insured Americans would be larger than ... simple repeal of Obamacare! — while sharply raising expenses for many of those who remain. It would be especially punitive for lower-income, older, rural voters.
                                                                                          In return, we would get a small reduction in the budget deficit. Oh, and a tax cut, perhaps as much as $1 trillion, for the wealthy.
                                                                                          This is terrible stuff. It’s made worse by the lies Mr. Ryan has been telling about his plan. ...
                                                                                          Some people seem startled both by the awfulness of Mr. Ryan’s plan and by the raw dishonesty of his sales pitch. But why..., he’s still the same guy I wrote about back in 2010, in a column titled “The Flimflam Man.”
                                                                                          I wrote that column in response to what turned out to be the first of a series of high-profile Ryan budget proposals. ... It was a con job all the way.
                                                                                          So how did Mr. Ryan reach a position where his actions may reshape the lives of so many ... for the worse? The answer lies in the ... news media, who made him what he is.
                                                                                          You see, until very recently both news coverage and political punditry were dominated by the convention of “balance.” ... And this ... meant that it was necessary to point to serious, honest, knowledgeable proponents of conservative positions.
                                                                                          Enter Mr. Ryan, who isn’t actually a serious, honest policy expert, but plays one on TV. He rolls up his sleeves! He uses PowerPoint! He must be the real deal! So that became the media’s narrative. And media adulation, more than anything else, propelled him to his current position.
                                                                                          Now, however, the flimflam has hit a wall. ... The C.B.O. told the devastating truth about his plan, and his evasions and lies were too obvious to ignore.
                                                                                          There’s an important lesson here, and it’s not just about health care or Mr. Ryan; it’s about the destructive effects of false symmetry in reporting at a time of vast asymmetry in reality.
                                                                                          This false symmetry — downplaying the awfulness of some candidates, vastly exaggerating the flaws of their opponents — isn’t the only reason America is in the mess it’s in. But it’s an important part of the story. And now we’re all about to pay the price.

                                                                                            Posted by on Friday, March 24, 2017 at 01:29 AM in Budget Deficit, Economics, Health Care, Politics, Press | Permalink  Comments (350) 


                                                                                            Links for 03-24-17

                                                                                              Posted by on Friday, March 24, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (53) 


                                                                                              Thursday, March 23, 2017

                                                                                              The Natural Rate of Interest: Estimates for the Euro Area

                                                                                              From Adrian Penalver at the Bank of France's Eco Notepad:

                                                                                              Billet_11_-_figure_2_-_eng[More at The natural rate of interest: estimates for the euro area.]

                                                                                                Posted by on Thursday, March 23, 2017 at 10:16 AM in Economics, Monetary Policy | Permalink  Comments (14) 


                                                                                                Compensation Benchmarking, Leapfrogs, and the Surge in Executive Pay

                                                                                                A follow-up to "Inequality and the Lake Wobegon Effect":

                                                                                                Compensation Benchmarking, Leapfrogs, and the Surge in Executive Pay, by Thomas A. DiPrete; Gregory M. Eirich; Matthew Pittinsky, American Journal of Sociology: Abstract: Scholars frequently argue whether the sharp rise in chief executive officer (CEO) pay in recent years is "efficient" or is a consequence of "rent extraction" because of the failure of corporate governance in individual firms. This article argues that governance failure must be conceptualized at the market rather than the firm level because excessive pay increases for even relatively few CEOs a year spread to other firms through the cognitively and rhetorically constructed compensation networks of "peer groups," which are used in the benchmarking process to negotiate the compensation of CEOs. Counterfactual simulation based on Standard and Poor's ExecuComp data demonstrates that the effects of CEO "leapfrogging" potentially explain a considerable fraction of the overall upward movement of executive compensation since the early 1990s. [download]

                                                                                                  Posted by on Thursday, March 23, 2017 at 09:58 AM in Academic Papers, Economics, Income Distribution | Permalink  Comments (11) 


                                                                                                  Links for 03-23-17

                                                                                                    Posted by on Thursday, March 23, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (221) 


                                                                                                    Wednesday, March 22, 2017

                                                                                                    Fed Watch: Is Bank Lending A Concern?

                                                                                                    Tim Duy:

                                                                                                    Is Bank Lending A Concern?, by Tim Duy: I have seen some angst recently over declining growth in commercial bank lending. See, for example, the Wall Street Journal:
                                                                                                    Bank loans across all categories are increasing 4.6% annually, the slowest pace since 2014, according to weekly Fed lending data from March 1. The trend is particularly marked in business loans, which are increasing 3.9% annually, a rate that is a nearly six-year low.
                                                                                                    A number of factors are at play, including rising interest rates; bankers also said some business clients put borrowing on hold before the U.S. election and aren't confident enough to jump back in.
                                                                                                    The slowdown is noteworthy because it is occurring when many metrics show the U.S. economy strengthening.
                                                                                                    Looking at the weekly data, there does on the surface look to be some reason for concern:

                                                                                                    Busloans5

                                                                                                    These low rates of growth are rarely seen outside of recessions. Still, optical econometrics suggests this is more of a lagging than leading indicator. Moreover, we have another indicator that also exhibited behavior only seen in recessions. Spot the odd man out:

                                                                                                    Busloans7

                                                                                                    Recall a year ago when weak industrial production numbers raised recession concerns that proved unfounded. We could be seeing something similar in bank lending. Consider that industrial production might be a leading indicator for bank loans:

                                                                                                    Busloans4

                                                                                                    Here I focus on the post-1984 period (the Great Moderation). Optical econometrics again suggests to me that lending lags industrial production. To quantify that a bit more, I converted the data to log differences (multiplied by 100), and ran it through a 13 lag vector autoregression. Granger causality tests (the f-tests here) indicate that loans (DLOANS) do not cause (or are predictive of) industrial production (DIND):

                                                                                                    Busloans1

                                                                                                    Impulse response functions (in this case, the responses are converted to impacts on the levels of the variables) illustrate the dynamics of the system:

                                                                                                    Busloans3

                                                                                                    The impact of a shock to industrial production on commercial lending (lower left chart) is delayed six months and then builds gradually over the next 18 months. The impact of a shock to lending on industrial production (upper right chart) is negligible. Ordering of the variables does not affect these results. If I use the full sample (data begin 1947:1), both variables Granger cause each other, but the impact of loans on industrial production in the short-run is minimal and dies out in the long-run:

                                                                                                    Busloans6

                                                                                                    Bottom Line: The fall in commercial lending growth looks more consistent with a lagged impact from the industrial slowdown that weighed on the US economy last year than with a warning about future activity. Something to keep an eye on, to be sure, but if past history is a guide, it is more likely than not that lending will pick up over the next year.

                                                                                                      Posted by on Wednesday, March 22, 2017 at 11:41 AM in Economics, Fed Watch, Financial System, Monetary Policy | Permalink  Comments (22)