Saturday, May 14, 2016

Why “Make America Denmark Again” Will Not Happen

Branko Milanovic:

Why “Make America Denmark Again” will not happen: The rise of inequality in rich countries is way over-explained. Because income inequality (evaluated at the level of households or individuals) is such a complex variable, the outcome of a vast number of technological, political,  demographic and behavioral factors and its neat decomposition into these various factors is impossible, we shall always have a plethora of potential explanations. This way a point nicety raised in a recent post by Chico Ferreira from the World Bank.
But not all explanations are equally powerful or make sense. A couple of days ago at a conference at Northwestern University, I listened to the explanation proposed by Gerald Davis from University of Michigan. Davis argued ... that the rise of US inequality coincides with the decline of large companies that used to employ hundreds of thousands or even millions of workers and by their substitution by much smaller companies. ... His argument is that large hierarchical structures have to engage in some evening out of salaries (internal redistribution) in order to keep cooperation, needed for the success of the enterprise, going.
I think that the deconcentration of which Davis  writes is only a proximate cause of the rise in inequality. The “deep cause” was technological change, combined in an inextricable way (as I argue in my “Global inequality”) with globalization. What happened, I think , was that advances in technology such as stock management (just-in-time), ability of speedy “bespoke” production, and crucially advances in telecommunications made “broken up” (devolved) production more efficient. The concentration of workers in one place that, at the origin of the Industrial Revolution, was made indispensable by the importance of the energy sources available at discrete physical points, could now be reversed. We could go back to a type of production that predates the Industrial Revolution, a kind of a modernized “putting out” system.
In doing so companies were helped by globalization because the area over which the putting out system can now extend was the globe itself, not only villages 10 miles in perimeter from Manchester.  ...
My view is indeed one that may be called “technological determinism”, but that determinism is playing itself out on an ever expanding field made possible by globalization.  In other words, technological determinism is itself a function of globalization ... and technological determinism in turns helps globalization. So the two go together. Moreover even things that seem to be policy-related (say, decline of trade unions) may in many instances be driven by the combination of new technology and globalization.
It is for that reason that I am skeptical that “the happy days of the 1960s” will ever come back. This is the idea that  I somewhat jokingly called “Make America Denmark  Again”. That world made sense with the technology and the policy as it was in the 1960s but not today. The world of large-scale manufacturing, homogeneous working class, trade unions, capital controls and a quasi-closed economy (US exports and imports combined were less than 10 percent of American GDP in the 1960s; they are more than 30 percent today) is over. When we think of how to address inequality today we should move from the ideas that worked half-a-century ago.

    Posted by on Saturday, May 14, 2016 at 02:13 PM Permalink  Comments (145) 

    Links for 05-14-16

      Posted by on Saturday, May 14, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (176) 

      Friday, May 13, 2016

      Economics 101, Good or Bad?

      James Kwak:

      Economics 101, Good or Bad?: Over at the Washington Post, Michael Strain of the American Enterprise Institute is upset that people are picking on Economics 101. He singles out Paul Krugman and Noah Smith in particular for claiming that “the pages of economics 101 textbooks are filled with errors, trivia and ‘useless fables.'” Instead, Strain insists, “an economics 101 textbook is a treasure.” He continues by discussing some of the key insights that you can gain from the basic models presented in an introductory economics class.
      Except, for the most part, Strain is rebutting an argument that no one is making. ...

        Posted by on Friday, May 13, 2016 at 10:06 AM in Economics | Permalink  Comments (81) 

        Ending "Too Big to Fail": What's the Right Approach?

        Ben Bernanke:

        Ending "too big to fail": What's the right approach?: In a recent speech at the Hutchins Center at the Brookings Institution, Neel Kashkari, the new president of the Federal Reserve Bank of Minneapolis, argued that we need new strategies to tackle the problem of “too big to fail” (TBTF) financial institutions. On Monday, I’ll be on a panel at the Minneapolis Fed on the issue. This post previews my comments. In short, it seems to me that a lot of progress has been made (and more is in train)... To say that “nothing has been done” is simply not correct. ...
        At the 50,000-foot level, a key question is the extent to which structural change in the financial industry is needed to end TBTF, and, to the extent it is, what that change should look like. The argument of this post is that, while substantial and even fundamental changes may ultimately be necessary, we don’t yet know exactly what they will be. Instead, the legacy of the Dodd-Frank Act, the Basel agreements, and other reforms is a sensible process which, with sustained effort, will help us solve the problem. A key element of the strategy is that it gives banks strong incentives to shrink or otherwise restructure themselves to reduce the risk they pose to the financial system.
        Why not just break up big banks? ...
        My takeaway is not that the problem is solved—that will take more time—but rather that the current approach amounts to a process that will help us find the solution. In particular, the government’s strategy for ending TBTF addresses the deficiencies, noted above, of imposing arbitrary limits on bank size. Most obviously, the strategy does not make the mistake of treating size as the only determinant of systemic risk (e.g., capital surcharges depend on a variety of criteria). ...
        If, as seems probable, bank managers and shareholders better understand the institution’s motivations for size and complexity than regulators do, it makes sense to use that knowledge. To do that, the right incentives need to be provided: The privately perceived benefits of TBTF status need to be reduced and the costs increased, so that bank managers and shareholders are considering something closer to the social costs and benefits of size and complexity when they think about how to organize their business. ...
        To a first approximation, that’s what the government’s approach aims to do. For example, the capital surcharge and similar regulations directed at systemically important institutions act like taxes on size and complexity. ... That is, the extra costs that regulators impose on systemic institutions force their decisionmakers to “internalize the externality” that their firms create for the financial system. [4] Similarly, the development of the liquidation authority (which raises the probability that creditors will take losses) and improvements in the overall resilience of the financial system (which would reduce any incentive that future regulators might have to try to engineer a bailout) should reduce the perceived benefits associated with TBTF status, as measured in terms of funding costs, for example. Putting creditors at risk also brings market discipline back into play, putting additional pressure on managers not to take excessive risks. Together with the requirements imposed by the living will process, better incentives for managers, shareholders, and creditors should lead, over time, to a banking system that is safer, but also more competitive and efficient.

          Posted by on Friday, May 13, 2016 at 08:24 AM in Economics, Financial System, Regulation | Permalink  Comments (49) 

          Paul Krugman: Trump and Taxes


          Trump and Taxes, by Paul Krugman, NY Times: This seems to be the week for Trump tax mysteries. ... On the first mystery: Mr. Trump’s excuse, that he can’t release his returns while they’re being audited, is an obvious lie. ... Clearly, he must be hiding something. What?
          It could be how little he pays in taxes... But I doubt it..., he’d probably boast that his ability to game the tax system shows how smart he is compared to all the losers out there.
          So my guess ... is that the dirty secret ... is that he isn’t as rich as he claims to be. In Trumpworld, the revelation ... would be utterly humiliating. ...
          Meanwhile, however, we can look at the candidate’s policy proposals. ... The story so far: Last fall Mr. Trump suggested that he would break with Republican orthodoxy by raising taxes on the wealthy. But then he unveiled a tax plan that would, in fact, lavish huge tax cuts on the rich..., adding around $10 trillion to the national debt over a decade.
          Now, the inconsistency between Mr. Trump’s rhetoric and his specific proposals didn’t seem to hurt him in the Republican primaries. ...
          Having secured the nomination, however, Mr. Trump apparently feels the need to seem more respectable. ...
          But what’s really interesting is whom ... Mr. Trump has brought in to revise his plans: Larry Kudlow of CNBC and Stephen Moore of the Heritage Foundation. That news had economic analysts spitting out their morning coffee all across America. ...Mr. Kudlow has a record of being wrong about, well, everything. ... Mr. Moore has a comparable forecasting record, but he also has a remarkable inability to get facts straight. ...
          So why would Mr. Trump turn to these of all people to, ahem, fix his numbers?
          It could be ... an attempt to reassure insiders by bringing in ... influential members of the Republican establishment — which incidentally tells you a lot about their party.
          But my guess is that the explanation is simpler: The candidate has no idea who is and isn’t competent. I mean, it’s not as if he has any independent knowledge of economics...
          So he probably just went with a couple of guys he’s seen on TV...
          Now, you might wonder how someone that careless and incurious was such a huge success in business. But one answer is, how successful was he, really? What’s in those tax returns?

            Posted by on Friday, May 13, 2016 at 07:38 AM in Economics, Politics | Permalink  Comments (15) 

            Links for 05-13-16

              Posted by on Friday, May 13, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (173) 

              Thursday, May 12, 2016

              Fed Watch: Fed Speak, Claims

              Tim Duy:

              Fed Speak, Claims, by Tim Duy: The Fed is not likely to raise rates in June. But not everyone at the Fed is on board with the plan. Serial dissenter Kansas City Federal Reserve President Esther George repeated her warnings that interest rates are too low:
              I support a gradual adjustment of short-term interest rates toward a more normal level, but I view the current level as too low for today’s economic conditions. The economy is at or near full employment and inflation is close to the FOMC’s target of 2 percent, yet short-term interest rates remain near historic lows.
              Her motivation stems primarily from concerns about financial imbalances:
              Just as raising rates too quickly can slow the economy and push inflation to undesirably low levels, keeping rates too low can also create risks. Interest-sensitive sectors can take on too much debt in response to low rates and grow quickly, then unwind in ways that are disruptive. We witnessed this during both the housing crisis and the current adjustments in the energy sector. Because monetary policy has a powerful effect on financial conditions, it can give rise to imbalances or capital misallocation that negatively affects longer-run growth. Accordingly, I favor taking additional steps in the normalization process.
              Separately, Boston Federal Reserve President Eric Rosengren, currently in a post-dove phase, reiterated his warning that financial markets just don't get it:
              In my view, the market remains too pessimistic about the fundamental strength of the U.S. economy, and the likelihood of removing monetary accommodation is higher than is currently priced into financial markets based on current data.
              He does see benefits from the current stance of policy:
              I believe that one of the benefits of our current accommodative monetary policy, even as we approach full employment, is that it fosters continued gradual improvement in labor markets. As I have noted in the past, it is quite appropriate to probe on the natural rate of unemployment to see how low it might be, given the benefit to workers. We have seen workers rejoin the labor force, many of them previously having given up looking for work.
              But, like George, the risks of imbalances are growing too large for his liking:
              However, there can be potential costs to accommodation if rates stay too low for too long. One cost involves the potential of very low interest rates encouraging speculative behavior. One area where I have some concern in this regard is the commercial real estate market.
              In addition, he worries that unemployment threatens to descend too far below the natural rate:
              A second possible cost of keeping rates too low for too long relates to the limits we see in monetary policy’s ability to “fine tune” the economy...Once unemployment has reached its low point in the economic cycle, it is unusual for it to proceed smoothly back to the natural rate...There are no episodes in which unemployment rose a bit and remained stable at its natural employment rate. Instead, relatively soon after the periods shown here with red highlighting, unemployment rises significantly – that is, we experience a recession, as indicated by the gray shading.
              The chart strongly suggests that it has proven difficult to calibrate policy so as to gradually increase the unemployment rate, gently nudging it back toward full employment. The lesson is that policymakers should avoid significantly overshooting their best estimates of the natural rate of unemployment.
              Here I would suggest that the failure of policymakers to better manage the economy at turning points is not because it is impossible, but because they have overtightened in the latter stage of the cycle, forgetting to pay attention to the lags in policy they think are so important during the early stages of the cycle. He continues:
              Today, the unemployment rate is still somewhat above my estimate of the natural rate, 4.7 percent. But waiting too long to have more normalized rates risks possibly overshooting on the unemployment rate, and needing to tighten more quickly than would be desirable.
              Note that Rosengren is not deterred by the flattening of the unemployment rate:


              because he pegs his estimate of sustainable job growth at 80-100k per month, well below current rates of growth. Thus he expects the unemployment rate will soon resume its decline. I would say that he should be cautious of that estimate when labor force participation is rising.
              I think it likely George will dissent again in June while Rosengren, a nonvoter, at a minimum would like to keep the June meeting alive. In an important difference from George and Rosengren, New York Federal Reserve President William Dudley is less concerned with potential financial imbalances at this point (be sure to read Gavyn Davies for more on Dudley):
              I would say at this point I don’t see a lot of things that disturb me. The things that would disturb me would be things that are very excessive in terms of valuation and very large in terms of the weight that they carry for the economy. If you think back to the financial crisis, you had a big bubble for the U.S. housing sector which was very large and affects lots of people, so that was a huge bubble in terms of the consequences for the economy. Obviously it was magnified by the fact that there were structural weaknesses in the financial system that, rather than dampen the impact of the decline in housing, actually tended to amplify it. I don’t see anything like that today. There are some areas you might point to and say that those look excessive, but some of the areas you might have pointed to six months ago, they’ve actually sort of self-corrected.
              Hence, Dudley remains more cautious on raising rates. His view is actually fairly optimistic:
              My view is still that we’re looking for 2 percent real G.D.P. growth over the next year. If that’s right, the labor market should continue to improve. We should continue to see tightening of the U.S. labor market, probably a gradual acceleration in wages as the labor market gets tighter. And if that’s how the economy plays out, then I think we’re going to see further moves by the Fed to gradually normalize interest rates.
              Note that 2 percent is above his estimate of potential growth (and Rosengren's, who puts it at 1.75 percent), and hence if he gets that as expected, it is reasonable to expect two rates hikes:
              The expectations that were shown in the March summary of economic projections, the median of two rate hikes, seems like a reasonable expectation. But it depends on how the economy evolves. Two seems like a reasonable number sitting here today, but it could be more if the economy is stronger and inflation comes back more quickly, or it could be less if the economy disappoints.
              Two is of course greater than market expectations, hence he is not inconsistent with Rosengren. But he doesn't feel the need to warn on this as strongly as Rosengren, nor does he share the concern regarding the financial imbalances. And Dudley still sees value in letting the economy somewhat "hot," suggesting more willingness to embrace a modest decline in unemployment below the natural rate. Hence he is less eager to raise rates. 
              Finally, an bit on initial claims. Claims rose to their highest level in a year, but this was driven by a bump in New York that appears related to the Verizon strike and spring break schedules. Dispersion of claim weakness remains very low overall:


              In other words, move along, nothing to see here.
              Bottom Line: Ultimately, I suspect the FOMC will not find sufficient reason in the data before June to convince the Fed that growth is sufficiently strong to justify a hike. Hence I anticipate that they will pass on that opportunity to raise rates. Look for an opportunity in September, assuming that growth firms to 2% and the unemployment rate resumes its decline over the summer. I doubt, however, that most on the Fed are pleased that market participants have already priced out a June hike on the basis of the April employment report. Even Dudley claims it did little to change his expectations. While they won't raise rates in June, they do not see the outcome as already preordained.

                Posted by on Thursday, May 12, 2016 at 02:35 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (12) 

                Democrats Want the Fed to Increase the Number of Minorities in Leadership Positions

                The Fed is "overwhelmingly and disproportionately white and male":

                Federal Reserve change sought by liberals: Democratic lawmakers called on the Fed to increase the number of minorities in leadership positions. They also urged the central bank to consider the high unemployment rate among some racial groups as it debates whether to keep pulling back its support for the American economy.
                In a letter to Fed Chair Janet Yellen, the lawmakers argued that more minority representation would help broaden the Fed’s internal discussions about the health of the economy. In addition to Sanders, 10 senators signed the letter, including banking committee members Elizabeth Warren of Massachusetts, Jeff Merkley of Oregon and Robert Menendez of New Jersey. California Rep. Maxine Waters, ranking member of the House financial services committee, was among the more than 100 House Democrats who joined the effort as well. ...

                  Posted by on Thursday, May 12, 2016 at 10:41 AM in Economics, Monetary Policy | Permalink  Comments (32) 

                  Impact of Chinese Slowdown on U.S. No Longer Negligible

                  This is from the Dallas Fed:

                  Impact of Chinese Slowdown on U.S. No Longer Negligible by Alexander Chudik and Arthur Hinojosa: China has become a systematically important economy in the world, accounting for about one-sixth of the global economy.1 It is, therefore, of no surprise that a slowdown of Chinese economic activity impacts many economies globally, including the U.S.
                  Reliably quantifying these effects is very challenging. Most notably, data quality and availability and changing relationships between economies over time complicate efforts. There are also some technical (but nevertheless important) problems arising from modeling the global economy that features many interdependent individual economies.
                  Using an econometric technique that examines interdependence of individual economies in the global economy, the Chinese slowdown and its impact on U.S. output growth can be assessed, as well as changes in the relationship since 2000.
                  Thus, it appears that the impact of slowdown in China on the U.S. economy has increased over time—at the turn of the century, slower growth in China would have had a small effect on the U.S. Today, reducing Chinese output growth by 1 percentage point shaves about 0.2 percentage points from U.S. output growth. ...

                    Posted by on Thursday, May 12, 2016 at 09:01 AM in China, Economics | Permalink  Comments (51) 

                    Links for 05-12-16

                      Posted by on Thursday, May 12, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (109) 

                      Wednesday, May 11, 2016

                      Send In The Clowns

                       Paul Krugman:

                      Send In The Clowns: Still boggled by reports that Trump, having realized that the numbers on his tax plan aren’t remotely credible, has decided to fix things by bringing in as experts … Larry Kudlow and Stephen Moore. I mean, at some level this was predictable. But it still tells you a lot about both Donald the Doofus and his chosen party.
                      Granted that Trump is deeply ignorant about policy; still, you might have thought that he would try to signal his independence from the establishment by, say, turning to some business economist. Instead, he turned to the usual suspects from the right-wing noise machine. And what a choice!
                      I mean, Kudlow is to economics what William Kristol is to political strategy: if he says something, you know it’s wrong. When he ridiculed “bubbleheads” who thought overvalued real estate could bring down the economy, you should have rushed for the bomb shelters; when he proclaimed Bush a huge success, because a rising stock market is the ultimate verdict on a presidency (unless the president is a Democrat), you should have known that the Bush era would end with epochal collapse.
                      And then there’s Moore, who has a similarly awesome forecasting record, and adds to it an impressive lack of even minimal technical competence. Seriously: read the CJR report on his mess-up over job numbers...
                      Of course, Moore remains the chief economist at Heritage. And maybe Trump believes that this is a certificate of quality, that anyone in that position must be a real expert.
                      Truly, Donald Trump, you know nothing.


                        Posted by on Wednesday, May 11, 2016 at 10:42 AM in Economics, Politics | Permalink  Comments (75) 

                        Links for 05-11-16

                          Posted by on Wednesday, May 11, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (148) 

                          Tuesday, May 10, 2016

                          Brad DeLong on Hamiltonian Economics and U.S. Economic History

                          The beginning of a fairly long interview:

                          Brad DeLong on Hamiltonian economics and U.S. economic history: ...Why don’t you lay out for us the competing economic approaches of Thomas Jefferson and Alexander Hamilton, the two main characters in the first part of your book, and then we’ll go from there.
                          Brad DeLong: Well let’s start with Jefferson. Let’s start with Jefferson the ideologue, Jefferson the agrarian, Jefferson the person who above else was scared of corrupt imperial monarchical authoritarian autocratic London.
                          Jefferson was a very smart guy, was a very forward looking guy.
                          Jefferson also tended to believe his teachers, and his teachers had taught him a particular version of ancient history – call it the republican virtue tradition, right, that once upon a time there had been a Roman republic, and it was virtuous because it was composed of small farmers who ploughed their own land, and lived simply and ate porridge and loved freedom and would rebel against kings or foreigners or anyone else who tried to take control of their lives.
                          And as long as the basis of Rome was the small farmer, who really didn’t want to be in government, say Cincinnatus – if you named Cincinnatus to be dictator to command the armies of Rome, he would come, and he would command the armies of Rome in their wars against their foes because he loved the republic. But as soon as he possibly could he would abandon Rome itself and go back to his farm and go back to his plough.
                          That’s what he really wanted to do. And indeed, there’s no doubt that this had a huge influence on America in the generation of the founding.
                          We have a city called Cincinnati, for heaven’s sake. We had a Society of the Cincinnati, made up of George Washington’s army officers during the Revolutionary War.
                          Against this, against this belief that the only way to have a virtuous republic in which people were free was to have small holding farmers dominate, against this, in Jeffersonians’ imaginations, was imperial Rome or imperial London. The Rome that had conquered the Mediterranean Basin, in the process acquired millions of slaves, handed out those slaves to the politically powerful oligarchs of Rome who then got their enormous estates on which they lived lives of luxury. As they lived lives of luxury they lost their concern with the republic, they lost their republican virtue, they lost their ability to stand up to foreigners and to would-be kings. And the whole system comes crashing down with the wars of the first Century BC, and then with the ascent of first Julius Caesar and then the Emperor Augustus who stabilises the situation, who keeps Rome powerful, who keeps Rome rich — but who makes Rome not free.
                          That was how Jefferson was taught Roman history had gone, and Jefferson’s teachers said that’s what’s happening to imperial Britain in his day, in the late 18th Century. That’s what’s going on in London now, as trade grows and commerce grows and manufacturing grows and corruption grows and aristocracy grows, and the wealth of the elite grows.
                          And the remnants of political freedom that still remain are, Jefferson and company thought, about to be stomped into oblivion. That’s why Jefferson and company made the America Revolution, in response to insults and exactions from the British mother country that were quite small relative to the size of the American economy of the day, or indeed that were quite small relative to the taxes that other people had to pay in other countries.
                          But they thought it was a matter of life and death to get out from under this growing imperial structure.
                          And then no sooner do they win independence but Jefferson turns around, looks at New York, Philadelphia, looks at Hamilton, and says by heaven’s sake, they’re trying to do the same thing to us here. If Hamilton has his way, Philadelphia and New York will be the new London, and we’ll have done the revolution for absolutely nothing.
                          So that’s Jefferson. He has a very simple vision of how the world works. It reassures him. It allows him to think that he understands things, and can to some degree be in control of them.
                          And it leads to very strong conclusions.
                          Like the conclusion that the British mercantile system, the idea that America should simply produce primary products and ship them to Britain, while London handled all the commerce, all the banking, all the manufacturing — that that was actually a very good thing for America, because it kept America free. That to grab for a share of the manufacturing, the commercial, the banking business, would be to make America richer, but at the process of endangering its liberty. That the growth of finance, and especially the growth of banks, were an enormous danger. That the growth of manufacturing, that urban workers who weren’t out on the farm breathing healthy air, working largely for themselves, but were instead concentrated in cities working for masters — that that was a great danger as well.
                          With that set of principles as his lodestone, Jefferson knew exactly what to do in response to every single political question that came up, which is to exalt the yeoman farmer, and make sure that people who might challenge the dominance of yeoman farmers over American politics, and indeed in the American economy, should be discouraged and stomped as fast as possible.
                          That’s why Jefferson was so opposed to Hamilton’s assumption of the debt, to Hamilton’s national bank, to Hamilton’s encouragement of manufactures, to Hamilton’s plans for an army large enough to defend the United States from a Britain coming down from Canada…

                            Posted by on Tuesday, May 10, 2016 at 06:50 AM in Economics | Permalink  Comments (26) 

                            As Jobs Vanish, Forgetting What Government Is For

                            Eduardo Porter: 

                            As Jobs Vanish, Forgetting What Government Is For: America has been here before. At the dawn of the 20th century, the economy was already well into a fundamental transformation of the labor force, as industry replaced farming and crafts as the primary source of new jobs. ...
                            The nation is well on its way through a second transition, this time to a postindustrial economy with little factory work to be had. Even as industrial production has grown, the economy has shed seven million manufacturing jobs since 1980. ...
                            During much of the 19th and 20th centuries, government at multiple levels played an essential role in shaping the nation’s transition from farms and small towns to cities and factories. It could do so again. What has stopped it is not the lack of practical ideas but the encrusted ideological opposition to government activism of any kind. ...
                            Why American politics turned against this successful model of pragmatic policy-making remains controversial. Perhaps it was the increasing footprint of money in politics, which has given more clout to corporate interests lobbying for smaller government and lower taxes. Maybe desegregation led to increasing distrust in government by white voters. Perhaps it was the combination of a recession and high inflation of the 1970s, which discredited interventionist government policies.
                            In any event, there is much the government could do. ...
                            So what’s holding us back? The loss of a vision, once shared across much of the ideological spectrum, of what government can accomplish, when it is allowed to do its job.

                              Posted by on Tuesday, May 10, 2016 at 06:39 AM in Economics | Permalink  Comments (43) 

                              Links for 05-10-16

                                Posted by on Tuesday, May 10, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (198) 

                                Monday, May 09, 2016

                                Fed Watch: June Fades Away

                                Tim Duy:

                                June Fades Away, by Tim Duy: At the beginning of last week, monetary policymakers were trying to keep the dream of June alive. Via Bloomberg:
                                “I would put more probability on it being a real option,” Lockhart told reporters at the Atlanta Fed’s financial markets conference at Amelia Island, Florida, when asked about the low implied odds of a move next month. “The communication of committee participants and members between now and mid-June obviously should try to prepare the markets for at least a realistic range of possibilities” for the next policy meeting...
                                ...Williams, a former head of research to Fed Chair Janet Yellen, said he would support raising rates at the next meeting, provided the economy stayed on track.
                                “In my view, yes, it would be appropriate, given all of the things that we’ve talked about, to go that next step,” Williams told Kathleen Hays in an interview on Bloomberg Radio. “But you know, a lot can happen between now and June.” Williams is also not an FOMC voter this year.
                                Later in the week, however, financial market participants took one look at the employment report and concluded the Fed was all bark and no bite. Markets see virtually no possibility of a Fed rate hike in June.
                                That - a desire to keep June in play coupled with insufficient data to actually make June happen - all happened faster than I anticipated. But don't think the Fed will go down without a fight. New York Federal Reserve President William Dudley played down the April employment numbers. Via his must-read interview with Binyamin Applebaum of the New York Times:
                                I wouldn’t make too much about the headline payroll number being a little softer, because there’s other things in the report that are more positive. For example, total hours worked were up quite a bit; average hourly earnings were up quite a bit. So there’s actually a lot of income being generated from the labor market. And the data on payrolls is quite volatile month to month — 160,000 sounds like a lot weaker than the 200,000 people were expecting, but it’s actually well within what you’d expect in terms of normal volatility. It’s a touch softer, maybe, than what people were expecting, but I wouldn’t put a lot of weight on it in terms of how it would affect my economic outlook.
                                I would agree that the report is within the bounds from normal volatility. From my tweet ahead of the report:


                                The pace of job growth has softened, though only modestly so:


                                But if we view the labor report through Janet Yellen's eyes, the picture becomes somewhat murkier:



                                Generally solid numbers, but I can't help but notice the unemployment rate is flattening out, and so too has progress on part-time employment and long-term unemployment. Indeed, I found this from Dudley somewhat odd:
                                The news from this latest payroll unemployment report was actually quite positive in terms of the long-term unemployed. I think what’s happening is, as we’ve run the labor market to a higher degree of utilization, the long-term unemployed are getting picked up and getting more employment opportunities.
                                He appears to be focusing on just the last month of data while ignoring the trend over the last year. But someone at the next FOMC meeting will surely draw that trend to his attention.
                                Note that unemployment is settling into a level slightly above the Fed's estimate of the natural rate of unemployment:


                                For Yellen, this should be something of a red flag. The plan was to let the economy run hot enough that unemployment sank somewhat below the natural rate, thereby more aggressively reducing underemployment. Now, you can argue that this plan has faltered for a good reason - the labor participation rate rose, placing upward pressure on the unemployment rate. That however gets you to the same place as a more negative story. It reveals that there is substantial excess capacity in the labor market, and consequently the Fed should not be in a rush to raise rates. Indeed, because they have underestimated the slack in the economy, they need to let the economy run hot for even longer if they wish to push inflation back up to target - of which it remains woefully below:


                                Bottom Line: The Fed breathed a sigh of relief after financial markets stabilized. That opened up the possibility that June would still be on the table, leaving them the option for three rate hikes this year. I don't think that policymakers will abandon June as easily as financial market participants. My sense is that they will remain coy, implying odds closer to 50-50. But the data are not in their favor. The employment report was by no means a disaster, but nor was it a blowout. Moreover, I think they will be wary to hike rates until unemployment resumes its decline or underemployment more broadly improves. And we won't have enough data to see such a trend until September.

                                  Posted by on Monday, May 9, 2016 at 11:10 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (22) 

                                  Paul Krugman: The Making of an Ignoramus

                                  Donald Trump is "frighteningly uninformed":

                                  The Making of an Ignoramus, by Paul Krugman, NY Times: Truly, Donald Trump knows nothing. He is more ignorant about policy than you can possibly imagine...
                                  Last week the presumptive Republican presidential nominee ... finally revealed his plan to make America great again. Basically, it involves running the country like a failing casino: he could, he asserted, “make a deal” with creditors that would reduce the debt burden if his outlandish promises of economic growth don’t work out.
                                  The reaction from everyone who knows anything about finance or economics was a mix of amazed horror and horrified amazement. ...
                                  So why is Mr. Trump even talking about this subject? Well, one possible answer is that lots of supposedly serious people have been hyping the alleged threat posed by federal debt for years. ...
                                  A lot of this debt hysteria was really about trying to bully us into cutting Social Security and Medicare, which is why so many self-proclaimed fiscal hawks were also eager to cut taxes on the rich. But Mr. Trump apparently wasn’t in on that particular con, and takes the phony debt scare seriously. Sad!
                                  Still..., how can he imagine that it would be O.K. for America to default? One answer is that he’s extrapolating from his own business career, in which he has done very well by running up debts, then walking away from them.
                                  But it’s also true that much of the Republican Party shares his insouciance about default. Remember, the party’s congressional wing deliberately set about extracting concessions from President Obama, using the threat of gratuitous default via a refusal to raise the debt ceiling.
                                  And quite a few Republican lawmakers defended that strategy of extortion by arguing that default wouldn’t be that bad...
                                  In fact, it’s remarkable how many ridiculous Trumpisms were previously espoused by Mitt Romney in 2012, from his claim that the true unemployment rate vastly exceeds official figures to his claim that he can bring prosperity by starting a trade war with China.
                                  None of this should be taken as an excuse for Mr. Trump. He really is frighteningly uninformed...
                                  Oh, and just for the record: No, it’s not the same on the other side of the aisle. You may dislike Hillary Clinton, you may disagree sharply with her policies, but she and the people around her do know their facts. Nobody has a monopoly on wisdom, but in this election, one party has largely cornered the market in raw ignorance.

                                    Posted by on Monday, May 9, 2016 at 07:35 AM in Economics, Policy, Politics | Permalink  Comments (56) 

                                    The Economic "Disease" Eating away at the U.S.

                                    At MoneyWatch (they choose the titles, not me):

                                    The economic "disease" eating away at the U.S.: It's no secret that productivity -- an essential driver for economic growth -- has weakened in recent years in the U.S. and around the world. Less evident is what, if anything, can be done about it.
                                    "Productivity isn't everything, but in the long run it is almost everything," Nobel Laureate economist Paul Krugman wrote in "The Age of Diminishing Expectations." "A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker." ...
                                     Recent data suggest that pattern is likely to continue for some time.
                                    Over the first three months of the year, productivity increased 0.6 percent. That's below the 1.1 percent rate of growth since the end of the recession, and far below the 2.3 percent average rate of growth from 1990 to the onset of the Great Recession.
                                    What does seem to be a secret is how to fix the problem... What can be done to boost productivity? ...

                                      Posted by on Monday, May 9, 2016 at 07:08 AM in Economics, MoneyWatch, Productivity | Permalink  Comments (34) 

                                      Links for 05-09-16

                                        Posted by on Monday, May 9, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (118) 

                                        Sunday, May 08, 2016

                                        When Rhetoric Distorts Statistics

                                        At the New Yorker:

                                        When Rhetoric Distorts Statistics, by Zachary Karabell: On Friday morning, Donald Trump appeared on Fox & Friends to talk about running mates and bad-mouth the economy, which, he said, was “terrible,” proof that the Democrats don’t know what they are doing. “The real unemployment rate is probably twenty per cent. ...”
                                        Never mind that, on the same morning, the Labor Department reported that the unemployment rate was five per cent, unchanged from the previous month, and that a modest hundred and sixty thousand new jobs had been created in April. ...
                                        For Donald Trump, all that data was worthless. It is true that the official unemployment rate often understates real unemployment... But by another measure, which includes both discouraged workers and part-time workers who would like to be full-time workers,... the rate was more like 9.7 per cent—certainly nowhere near twenty per cent. ... Donald Trump is running in part on the narrative that the “official” unemployment rate is a lie. ...
                                        Trump is only articulating what others have asserted. ... Yet it is a small but consequential step from blasting the numbers as lies to the territory of conspiracy, imagining reasons for why we are being lied to, none of which augur well for the thread of collective trust that is very nearly frayed already. That poses a challenge to any who prefer to argue in terms of an agreed-upon set of facts and numbers, even accepting how limited and incomplete those numbers often are. ...

                                          Posted by on Sunday, May 8, 2016 at 02:25 PM Permalink  Comments (48) 

                                          Links for 05-08-16

                                            Posted by on Sunday, May 8, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (92) 

                                            Saturday, May 07, 2016

                                            Where Do Trump’s Bad Ideas Come From?

                                            Paul Krugman:

                                            Where Do Trump’s Bad Ideas Come From?: So everyone is having fun with Donald Trump’s suggestion that he’ll negotiate forgiveness on U.S. debt — making America great by running it like a failing Atlantic City casino. ... A number of people have also pointed out that willingness to trifle with the full faith and credit of the U.S. government didn’t start with Trump — it started with Republicans in the House, who casually tried to extort concessions by refusing to raise the debt limit.
                                            But one thing I haven’t seen much discussion of is the question of why Trump imagines that we have a severe debt problem, requiring extraordinary measures. Here, after all, is what U.S. interest payments look like:


                                            See the crisis? Neither do I.
                                            But Trump, we can assume, doesn’t look at economic data, or for that matter employ anyone who can. Remember how unemployment is really 42 percent? What he does do is pick up stuff that everyone around him says.
                                            And here’s the thing: claims that America is facing a debt crisis have been all over the political landscape for years... So it’s not really surprising that Trump, who doesn’t know much about policy, would pick up on all this buzz, and not get the memo that it’s all really about finding excuses to slash social programs. And he knows, or thinks he knows, a lot about being overextended on credit; so let’s declare bankruptcy and make a deal!
                                            The point is that this isn’t coming solely from the would-be ignoramus-in-chief...

                                              Posted by on Saturday, May 7, 2016 at 07:20 AM in Economics, Politics | Permalink  Comments (70) 

                                              Links for 05-07-16

                                                Posted by on Saturday, May 7, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (95) 

                                                Friday, May 06, 2016

                                                Paul Krugman: Truth and Trumpism

                                                Don't believe everything you read:

                                                Truth and Trumpism, by Paul Krugman, NY Times: How will the news media handle the battle between Hillary Clinton and Donald Trump? I suspect I know the answer — and it’s going to be deeply frustrating. But maybe, just maybe, flagging some common journalistic sins in advance can limit the damage. ...
                                                First, and least harmful, will be the urge to make the election seem closer than it is, if only because a close race makes a better story. You can already see this tendency...
                                                A more important vice in political coverage, which we’ve seen all too often in previous elections — but will be far more damaging if it happens this time — is false equivalence.
                                                You might think that this would be impossible on substantive policy issues, where the asymmetry between the candidates is almost ridiculously obvious. ... But beware of news analyses that, in the name of “balance,” downplay this contrast. ...
                                                And what about less quantifiable questions about behavior? I’ve already seen pundits suggest that both presumptive nominees fight dirty, that both have taken the “low road” in their campaigns. For the record, Mr. Trump has impugned his rivals’ manhood, called them liars and suggested that Ted Cruz’s father was associated with J.F.K.’s killer. On her side, Mrs. Clinton has suggested that Bernie Sanders hasn’t done his homework on some policy issues. These things are not the same.
                                                Finally, I can almost guarantee that we’ll see attempts to sanitize the positions and motives of Trump supporters, to downplay the racism that is at the heart of the movement and pretend that what voters really care about are the priorities of D.C. insiders — a process I think of as “centrification.” ...
                                                 I’m seeing suggestions that Trumpism is driven by concerns about political gridlock. No, it isn’t. It isn’t even mainly about “economic anxiety.”
                                                Trump support in the primaries was strongly correlated with racial resentment: We’re looking at a movement of white men angry that they no longer dominate American society the way they used to. And to pretend otherwise is to give both the movement and the man who leads it a free pass.
                                                In the end, bad reporting probably won’t change the election’s outcome, because the truth is that those angry white men are right about their declining role. ...
                                                Still, the public has a right to be properly informed. The news media should do all it can to resist false equivalence and centrification, and report what’s really going on.

                                                  Posted by on Friday, May 6, 2016 at 07:55 AM in Economics, Politics, Press | Permalink  Comments (63) 

                                                  Payroll Number Lower than Expected but Trend Holds at 200,000

                                                  Jared Bernstein on the jobs report:

                                                  Jobs report: Payroll number lower than expected but trend holds at 200,000: Payrolls rose 160,000 last month, less than the 200,000 we’ve come to expect and the smallest monthly gain since last September. Revisions to the prior two months data shaved 19,000 off of their previously reported gains.
                                                  However, though this slower pace could represent a downshift in the rate of job creation, it is far too soon to jump to that conclusion. These monthly numbers are jumpy and require averaging a few months’ gains to get at the underlying trend. In fact, the monthly trend over the past three months is precisely 200,000... So, even while one can point to other slowing indicators, especially the 0.5% GDP growth in the first quarter of the year, do not assume the job market is softening.
                                                  The rest of the report provides indicators that bounce both ways. On the soft side, the slipping of the labor force participation rate was a real disappointment and a reversal of a recent upward trend in this closely watched metric of movements in and out of the labor force (see figure). After rising from a low of 62.4% last September to 63% in April, the LFPR ticked back down in May to 62.8%. That’s still significantly off its lows, and again, the monthly numbers are jumpy, but this was the number I liked least in today’s report, especially since the same 0.2 percentage point decline was seen among prime-age workers, meaning the drop can’t be pinned on aging retirees.
                                                  On the other hand, both average hourly wages and weekly earnings continue to beat (very low) inflation (weekly hours ticked up slightly last month), with both earnings measures up 2.5% over the past year, while inflation’s running around 1%. ...
                                                  Underemployment, which includes about six million part-time workers who’d rather work full-time (and are thus under-employed), ticked down slightly but remains elevated at 9.7%. I’ve argued that an underemployment rate about a percentage point lower than this is consistent with full-employment, meaning there’s still slack left to be squeezed out of the job market. ...
                                                  As noted, GDP rose only 0.5% and productivity fell 1% in the first quarter of this year, obviously weak indicators. Now we can add a jobs report that’s off its recent pace. Is the U.S. economy, just about to hit year seven of an expansion that begin in mid-2009, heading toward recession?
                                                  That’s unknowable, but I would strongly avoid reading too much into these indicators. On a year-over-year basis, GDP is up about 2%, which is about its trend in the recovery. ...
                                                  In other words, filtering out some statistical noise, we’re growing at trend. Productivity is too low, but the job market is tightening and wage growth is getting a bit of a boost. We certainly want to take note of the weaknesses in the “high-frequency” data, but a month or a quarter does not a new trend make.

                                                  Dean Baker:

                                                  ... The April job growth figure is lower than most economists had expected, but still quite fast given the pace of economic growth. Unless there is a marked speed up in the recovery to a pace of more than 2.0 percent, it is likely that job growth will slow further. It seems implausible that productivity growth will remain below 1.0 percent. ...

                                                  Also: Calculated Risk, White House.

                                                    Posted by on Friday, May 6, 2016 at 07:33 AM in Economics, Unemployment | Permalink  Comments (67) 

                                                    Links for 05-06-16

                                                      Posted by on Friday, May 6, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (97) 

                                                      Thursday, May 05, 2016

                                                      Hofstadter on the American right

                                                      Daniel Little:

                                                      Hofstadter on the American right: Richard Hofstadter opened his 1963 Herbert Spencer Lecture at Oxford with these prescient words:

                                                      Although American political life has rarely been touched by the most acute varieties of class conflict, it has served again and again as an arena for uncommonly angry minds. Today this fact is most evident on the extreme right wing, which has shown, particularly in the Goldwater movement. how much political leverage can he got out of the animosities and passions of a small minority. Behind such move­ments there is a style of mind, not always right-wing in its affiliations, that has a long and varied history. I call it the paranoid style simply because no other word adequately evokes the qualities of heated exaggeration, suspiciousness, and conspiratorial fantasy that I have in mind. (3)

                                                      This lecture became the title essay of The Paranoid Style in American Politics. Its emphasis on "uncommonly angry minds" is of obvious relevance to the politics of the right in the United States today. There is more that has a great resonance today:

                                                      But there is a vital difference between the para­noid spokesman in politics and the clinical paranoiac: although they both tend to be overheated, oversuspicious, overaggres­sive, grandiose, and apocalyptic in expression, the clinical paranoid sees the hostile and conspiratorial world in which he feels himself to be living as directed specifically against him; whereas the spokesman of the paranoid style finds it directed against a nation, a culture, a way of life whose fate affects not himself alone but millions of others.... His sense that his political passions are unselfish and patriotic, in fact, goes far to intensify his feeling of righteousness and his moral indignation. (4)

                                                      Hofstadter mentions the particular objects of paranoid wrath in the 1950s and 1960s: gun control, fluoridation of municipal water, and international Communist conspiracy. Most especially, the paranoid philosophy is nativist; it directs fear and hostility against "others" (in the first half of the twentieth century in the United States, Masons, Catholics, and Mormons, for example; 9). We can hear these same strands of thought to be expressed in current political bigotry against immigrants, Muslims, and transgendered people.

                                                      Hofstadter offers perspective on this strand of American political thought from an historian's point of view. He takes up the American campaign against Illuminism and Masonry in the early part of the nineteenth century as an example.

                                                      The anti-Masonic movement of the late 1820's and 1830's took up and extended the obsession with conspiracy. At first blush, this movement may seem to be no more than an exten­sion or repetition of the anti-Masonic theme sounded in the earlier outcry against the Bavarian Illuminati--and, indeed, the works of writers like Robison and Barruel were often cited again as evidence of the sinister character of Masonry.  But whereas the panic of the 1790's was confined mainly to New England and linked to an ultra-conservative argument, the later anti-Masonic movement affected many parts of the northern United States and was altogether congenial to popu­lar democracy and rural egalitarianism. (14)

                                                      So what about the content of paranoid politics in the twentieth century?

                                                      If we now take the long jump to the contemporary right wing. we find some rather important differences from the nineteenth-century movements. The spokesmen of those earlier movements felt that they stood for causes and personal types that were still in possession of their country--that they were fending off threats to a still well-established way of life in which they played an important part. But the mod­ern right wing. as Daniel Bell has put it, feels dispossessed: America has been largely taken away from them and their kind, though they are determined to try to repossess it and to prevent the final destructive act of subversion. The old Amer­ican virtues have already been eaten away by cosmopolitans and intellectuals; the old competitive capitalism has been gradually undermined by socialist and communist schemers; the old national security and independence have been de­stroyed by treasonous plots, having as their most powerful agents not merely outsiders and foreigners but major states­men seated at the very centers of American power. Their predecessors discovered foreign conspiracies; the modem radical right finds that conspiracy also embraces betrayal at home. (23-24)

                                                      Hofstadter believed that mass media had a lot to do with the deepening influence of paranoid politics in the 1960s; it isn't difficult to argue that social media takes that influence to an even greater pitch in the current environment.

                                                      He closes the essay with yet another astute observation very relevant to contemporary right-wing rhetoric:

                                                      In American experience, ethnic and religious conflicts, with their threat of the submergence of whole systems of values, have plainly been the major focus for militant and suspicious minds of this sort, but elsewhere class conflicts have also mobilized such energies. The paranoid tendency is aroused by a confrontation of opposed interests which are (or are felt to be) totally irreconcilable, and thus by nature not susceptible to the normal political processes of bargain and compromise. The situation becomes worse when the representatives of a particular political interest--perhaps because of the very un­realistic and unrealizable nature of their demands--cannot make themselves felt in the political process. Feeling that they have no access to political bargaining or the making of deci­sions, they find their original conception of the world of power as omnipotent, sinister, and malicious fully confirmed. They see only the consequences of power--and this through distorting lenses--and have little chance to observe its actual machinery. L. B. Namier once said that "the crowning attain­ment of historical study" is to achieve "an intuitive sense of how things do not happen." It is precisely this kind of awareness that the paranoid fails to develop. He has a special resist­ance of his own, of course, to such awareness, but circumstances often deprive him of exposure to events that might enlighten him. We are all sufferers from history, but the paranoid is a double sufferer, since he is afflicted not only by the real world, with the rest of us, but by his fantasies as well. (39-40)

                                                      This is brilliant diagnosis of the political psychology of reaction, very much in line with Fritz Stern's analysis of the politics of cultural despair in the context of Weimar Germany (link). What Hofstadter does not clearly distinguish here is the political psychology of followers and leaders.  But much about mass political mobilization turns on this point. Much of what seems to have transpired in the current political season is the artful orchestration of messages of fear, resentment, and antagonism along the lines of paranoid politics that Hofstadter describes. Antagonism and suspicion appear to be powerful motivators in a mass movement, and scapegoating of minority groups is a familiar and repugnant strategy. These messages have succeeded in motivating followers and voters in support of candidates espousing these messages. What is unclear is what political values actually motivate the candidates; and it is fair enough to speculate that there is a substantial degree of cynical manipulation at work in the message mills of the right in creating a movement around these hateful and suspicious themes.

                                                      These are important historical observations by Hofstadter, and they seem to shed a great deal of light on the political rhetoric and successes of the right in the United States over the past fifty years. They capture important insights into the mentality and rhetoric of the political passions that have animated a lot of political activity, both electoral and social, throughout the past half century. They point to the underpinnings of suspicion, hatred, and alienation which seem to drive the bus on the extreme right. And what was on the "extreme" right a decade ago has become mainstream conservatism today. It seems crucial for the future of our democracy to reawaken the political values of trust, mutual acceptance, and equality which are so fundamental to stable and sustainable civic peace within a mass democracy. Significantly, this was the core political message of Barack Obama in 2008.

                                                      (There is a thread here that I haven't mentioned but may also be illuminating -- Hofstadter's analysis of American political consciousness seems to shed some indirect light on the Bernie Sanders phenomenon as well. Hofstadter notes several times above that class conflict has not been a prominent theme in American politics. But perhaps part of the appeal of the Sanders candidacy is exactly his ability to speak about the one percent in ways that resonate with younger voters; and this is a class-based message. Wouldn't it be interesting if large numbers of young and poor voters in the United States became active in support of their long-term economic interests.)

                                                        Posted by on Thursday, May 5, 2016 at 03:47 PM in Economics, Politics | Permalink  Comments (32) 

                                                        The White House Attacks the Spread of Abusive Non-Compete Agreements

                                                        From the EPI:

                                                        The White House attacks the spread of abusive non-compete agreements: The White House released a report this morning that illuminates another part of the complex problem of stagnating wages—the rise of non-compete agreements and their spread to low-wage employment. Non-compete agreements, or “non-competes,” are contracts that ban workers at one company from going to work for a competing employer within a certain period of time after leaving a job. They can make sense when a worker has trade secrets or intellectual property in which the employer has invested. But they make no sense when applied to health care workers, retail and restaurant employees, and other low wage employees. All they do is limit opportunity and shackle people to an employer who will have less incentive to give a raise to retain them.
                                                        Employers are imposing non-competes in occupations with no possible trade secret justification—even doggy day care providers! The Treasury Department has found that one in seven Americans earning less than $40,000 a year is subject to a non-compete. This is astonishing, and shows how easily businesses abuse their power over employees..., workers often accept jobs without ever knowing that they have signed their rights away.
                                                        The Treasury Department has done groundbreaking work to show that non-competes have a measurable, negative effect on wages, as one would expect from a practice that limits employee mobility. The report also provides evidence that non-competes can reduce entrepreneurship and innovation.
                                                        But Treasury has done more than analyze the problem and presents a menu of steps governments can take to limit non-competes and prevent the worst abuses. They include prohibiting non-competes for low-paid employees or for particular occupations, requiring transparency and disclosure of non-competes in employment contracts and fair consideration like severance pay, or voiding them unless a legitimate business interest can be established. ...

                                                          Posted by on Thursday, May 5, 2016 at 08:37 AM in Economics | Permalink  Comments (62) 

                                                          Links for 05-05-16

                                                            Posted by on Thursday, May 5, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (125) 

                                                            Wednesday, May 04, 2016

                                                            The Productivity Slump and What to Do about It

                                                            Jared Bernstein:

                                                            The productivity slump and what to do about it:, I’d like to explore ... the significant downshift in productivity growth. ... I’m afraid the slowdown is real... I think there are 5 reasons: slower growth of capital per worker, slower TFP, capital misallocation, the absence of full employment, and dysfunctional government (labor quality has been pretty constant, so it isn’t much implicated in the slowdown). ...
                                                            First, as I detail here, there’s The Big Short problem: we have been misallocating capital to non-productive finance. ...
                                                            Second, we are failing to tap a full employment productivity multiplier (FEPM). Among the pantheon of wrong-headed economic theories is the one that says: firms failing to operate at the edge of their productivity potential will be competed out of business by more productive firms. Unfortunately, in slack labor and credit markets, inefficient firms can handily maintain profit margins by squeezing workers and rolling over cheap loans. At full employment, workers have more bargaining clout, labor costs go up, and inefficiencies become more costly (Josh Bivens agrees and offers some evidence.)
                                                            Third, analysis by Barry Eichengreen et al suggests that dysfunctional government eventually grinds down productivity growth. This strikes me as intuitive: an $18 trillion economy requires a government that can efficiently diagnose problems and prescribe solutions in areas of climate, infrastructure, education, innovation, social insurance, poverty and more. Our government, on the other hand, tends to engage in aimless votes to defund Obamacare and shudder the EPA and IRS.
                                                            So, how can we better allocate capital, move toward full employment and restore functional government? ... A deep infrastructure dive ... would be a big twofer, both on the productivity and full employment fronts. And by tightening the job market, there’d be positive feedback impact from the FEPM. ...
                                                            But here’s another idea with multiple benefits in this space: pay for these productivity enhancing investments with a small tax on financial transactions. That would both raise revenues needed for public investment and raise the cost of non-productive, “noise” trading. ...

                                                              Posted by on Wednesday, May 4, 2016 at 08:00 AM in Economics, Productivity | Permalink  Comments (98) 

                                                              Ben Bernanke and Democratic Helicopter Money

                                                              Simon Wren-Lewis:

                                                              Ben Bernanke and Democratic Helicopter Money: “The fact that no responsible government would ever literally drop money from the sky should not prevent us from exploring the logic of Friedman’s thought experiment, which was designed to show—in admittedly extreme terms—why governments should never have to give in to deflation.”
                                                              The quote above is from a post by Ben Bernanke... I put it up front because it expresses a macroeconomic truth that no one should ever forget: persistent recessions and deflation are never inevitable, and always represent the failure of policy makers to do the right thing.
                                                              There are many useful points in his post, but I just want to talk about one: Bernanke is in fact not talking about helicopter money in its traditional sense, but what I have called elsewhere ‘democratic helicopter money’.
                                                              When most people talk about HM, they imagine some scheme whereby the central bank sends ‘everyone’ a cheque in the post, or transmits some money to each individual some other way. It is what economists would call a reverse lump sum tax, or reverse poll tax: the amount you get is independent of your income. That makes it different from a normal tax cut.
                                                              In practice the central bank could only really do this with the cooperation of governments. It would not want to take the decision about what 'everyone' means on its own. (Do we include children or not. How do we find everyone?) But once those details had been sorted out, a system would be in place that the central bank could operate whenever it needed to.
                                                              Bernanke suggests an alternative. The central bank sets aside a sum of newly created money, and the fiscal authorities then spend it as they wish. They could decide to use all the money to build bridges or schools rather than give it to individuals. There might be two reasons for doing HM this way. First, for some reason the fiscal authorities are reluctant to spend if they have to fund it by creating more debt, so it may allow them to get around this (normally self-imposed) ‘constraint’. Second, a money financed fiscal expansion could be more expansionary than a bond financed fiscal expansion. Lets leave the second advantage to one side, as the first is sufficient in a world obsessed by government debt.
                                                              I have talked about something similar in the past (first here, but later here and here), which I have called democratic helicopter money. This label also seems appropriate for Bernanke’s scheme, because the elected government decides on the form of fiscal expansion. The difference between what I had discussed earlier under this label and Bernanke’s suggestion is that in my scheme the fiscal authorities and the central bank talk to each other before deciding on how much money to create and what it will be spent on (although the initiative always comes from the central bank, and would only happen in a recession where interest rates were at their lower bound). The reason I think talking would be preferable is simply that it helps the central bank decide how much money it needs to create. ...
                                                              While democratic HM is not talked about much among economists (Bernanke excepted), I think there are good political economy reasons why it may be the form of HM that is eventually tried. As I have said, conventional HM of the cheque in the post kind almost certainly requires the involvement of government. Once governments realise what is going on, they may naturally think why set up something new when they could decide how the money is spent themselves in a more traditional manner. Democratic HM is essentially a method of doing a money financed fiscal expansion in a world of independent central banks.
                                                              Which brings me back to the quote at the head of this post. The straight macroeconomics of most versions of HM is clear: all the discussion is about institutional and distributional details. If it is beyond us to manage to set in place any of them before the next recession that would be a huge indictment of our collective imagination, and is probably a testament to the power of imaginary fears and taboos created in very different circumstances.

                                                                Posted by on Wednesday, May 4, 2016 at 07:36 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (23) 

                                                                Neo-Fisherian Policies Impart Unavoidable Instability

                                                                My colleagues have a new paper on interest rate pegs in New Keynesian models:

                                                                Interest Rate Pegs in New Keynesian Models by George W. Evans and Bruce McGough Abstract: John Cochrane asks: "Do higher interest rates raise or lower inflation?" We find that pegging the interest rate at a higher level will induce instability and most likely lead to falling inflation and output over time. Eventually, this will precipitate a change of policy. ...
                                                                Conclusions: Following the Great Recession, many countries have experienced repeated periods with realized and expected inflation below target levels set by policymakers. Should policy respond to this by keeping interest rates near zero for a longer period or, in line with neo-Fisherian reasoning, by increasing the interest rate to the steady-state level corresponding to the target inflation rate? We have shown that neo-Fisherian policies, in which interest rates are set according to a peg, impart unavoidable instability. In contrast, a temporary peg at low interest rates, followed by later imposition of the Taylor rule around the target inflation rate, provides a natural return to normalcy, restoring inflation to its target and the economy to its steady state.

                                                                  Posted by on Wednesday, May 4, 2016 at 05:15 AM in Academic Papers, Economics, Monetary Policy | Permalink  Comments (16) 

                                                                  Links for 05-04-16

                                                                    Posted by on Wednesday, May 4, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (137) 

                                                                    Tuesday, May 03, 2016

                                                                    The Davos Lie

                                                                    Kevin O'Rourke:

                                                                    The Davos lie: ... If there's one thing that people agree about in Davos, it's that globalisation is a Good Thing. ...
                                                                    As is well known, many Western societies have become more unequal over the past two decades... During the 1980s and 1990s, the consensus was that this growing inequality was due not to international trade, but to technological change that was systematically favouring skilled over unskilled workers. ...
                                                                    More recently, however, the debate has swung back towards the view that trade is important in explaining rising inequality...
                                                                    Unfortunately for Davos, globalisation's losers are becoming increasingly hostile to trade (and immigration)..., ordinary people's attitudes towards globalisation are exactly what Heckscher-Ohlin economics would predict. ...
                                                                    Economists can tut-tut all they want about working-class people refusing to buy into the benefits of globalisation, but as social scientists we surely need to think about the predictable political consequences of economic policies. Too much globalisation, without domestic safety nets and other policies that can adequately protect globalisation's losers, will inevitably invite a political backlash. Indeed, it is already upon us.

                                                                      Posted by on Tuesday, May 3, 2016 at 08:33 AM in Economics, Income Distribution, International Trade | Permalink  Comments (90) 

                                                                      The Political Consequences of Slow Economic Growth

                                                                      I have a new column:

                                                                      How Slow Economic Growth Could Thwart a Clinton Presidency : Much has been written about the economic consequences of the slowdown in economic growth in recent years, but what about the political implications? If the slowdown continues, and there is reason to believe that it will, how will it affect the ability of the next president to implement his, or more likely her, economic agenda?
                                                                      If Hillary Clinton wins in November and economic growth remains low, the call from Republicans for tax cuts will become louder than it already is. ...
                                                                      If growth remains low we will also hear much more about how government regulation is stifling business activity. ...

                                                                      And so on (it's already started, John Cochrane, calling for deregulation "While the current presidential front-runners are not championing economic growth, House Speaker Paul Ryan and other House members are.").

                                                                        Posted by on Tuesday, May 3, 2016 at 07:05 AM in Economics, Fiscal Times, Politics | Permalink  Comments (31) 

                                                                        When Markets Aren't Perfect, Government Can Help

                                                                        At CBS MoneyWatch:

                                                                        When Markets Aren't Perfect, Government Can Help, by Mark Thoma: In response to a question about economic theory and its role in the financial crisis, Nobel Prize-winning economist Joseph Stiglitz said:
                                                                        "The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand."
                                                                        Even worse, those who have pointed out the markets' limitations have often been attacked as anti-market, against capitalism or favoring large government. That' a mischaracterization of this point of view. ...

                                                                          Posted by on Tuesday, May 3, 2016 at 05:52 AM in Economics, Market Failure | Permalink  Comments (19) 

                                                                          Links for 05-03-16

                                                                            Posted by on Tuesday, May 3, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (126) 

                                                                            Monday, May 02, 2016

                                                                            Growth of Income and Welfare in the U.S, 1979-2011

                                                                            From the NBER:

                                                                            Growth of income and welfare in the U.S, 1979-2011, by John Komlos, NBER Working Paper No. 22211 Issued in April 2016: We estimate growth rates of real incomes in the U.S. by quintiles using the Congressional Budget Office’s (CBO) post-tax, post-transfer data as basis for the period 1979-2011. We improve upon them by including only the present value of earnings that will accrue in retirement and excluding items included in the CBO income estimates such as “corporate taxes borne by labor” that do not increase either current purchasing power or utility. We estimate a high and a low growth rate using two price indexes, the CPI and the Personal Consumption Expenditure index. The major consistent findings include what in the colloquial is referred to as the “hollowing out” of the middle class. According to these estimates, the income of the middle class 2nd and 3rd quintiles increased at a rate of between 0.1% and 0.7% per annum, i.e., barely distinguishable from zero. Even that meager rate was achieved only through substantial transfer payments. In contrast, the income of the top 1% grew at an astronomical rate of between 3.4% and 3.9% per annum during the 32-year period, reaching an average annual value of $918,000, up from $281,000 in 1979 (in 2011 dollars). Hence, the post-tax, post-transfer income of the 1% relative to the 1st quintile increased from a factor of 21 in 1979 to a factor of 51 in 2011. However, income of no other group increased substantially relative to that of the lowest quintile. Oddly, the income of even those in the 96-99 percentiles increased only from a multiple of 8.1 to a multiple of 11.3. We next estimate growth in welfare assuming diminishing marginal utility of income. A logarithmic utility function yields a growth in welfare for the middle class of roughly 0.01% to 0.07% per annum, which is indistinguishable from zero. With interdependent utility functions only the welfare of the 5th quintile experienced meaningful growth while those of the first four quintiles tend to be either negligible or even negative.

                                                                            [Open link to earlier version.]

                                                                              Posted by on Monday, May 2, 2016 at 11:22 AM in Academic Papers, Economics, Income Distribution | Permalink  Comments (8) 

                                                                              The Legacy of Joan Robinson

                                                                              This is by Barkley Rosser (I left quite a bit out, including the connections to the Sander's campaign):

                                                                              The Legacy of Joan Robinson: ... Joan Violet Maurice Robinson (1903-1983) was without doubt the most important woman economist born before 1930 and maybe still the most important woman economist ever. ...

                                                                              While she nearly got a Nobel Prize, and certainly deserved one, she suffered professionally from being a woman. She was only appointed a Lecturer at Cambridge in 1937, well after she had already published several highly innovative and influential works. She was only made a Full Professor at Girton College at Cambridge University (which she had attended) in 1965, the year her husband retired from his professorship. Rumor has it that she came closest to receiving the Nobel Prize in 1975, the year Kantorovich and Koopmans got it for linear programming (which created a major stink among mathematicians who said that at a minimum George Dantzig should have shared it). I do not know if she was thought of as a possible third for them or a replacement for them, perhaps with Piero Sraffa sharing, who also never got one while arguably deserving it, who could have shared it credibly with Leontief in 1973 for input-output analysis. The Encyclopedia Britannica reports that her leftwing political views may have played a role in her not getting it. I also heard it from a primary source that Assar Lindbeck, the committee's dominant figure then, once said that if either Joan Robinson or James Buchanan got it, it would be over his dead body, although Buchanan did get it in 1986, with Lindbeck still on the committee and not dead, although Joan Robinson had been dead for three years by then.

                                                                              As evidence that she was clearly in contention in the mid-70s, I shall report something I observed on an elevator in the New York Hilton during the 1973 AEA meetings (the first I ever attended). Lionel McKenzie, another who never got the prize but should have, was talking to somebody else. McKenzie told this other person that "they are going to give it to Joan Robinson next for her Economics of Imperfect Competition, but she will refuse it." As it was, she never got the chance to do so.

                                                                              Speaking of that 1933 book, that was her first major publication and remains one of her most important, indeed worthy of a trip to Stockholm in and of itself. Among other things in it, she invented the word "monopsony." While she later wrote less about monopolistic competition, one can see that it remained very much on her mind if one reads her excellent 1977 article in the JEL, "What are the Questions?" a good overview of how she viewed economics near the end of her life. She spends quite a bit of it going on about the issue of monopoly power and its importance. I note that this is one area where her concerns are very relevant to current economics, with many now posing that increased monopoly power in the US economy may be playing a role in secular stagnation.

                                                                              She was indeed a core Keynesian, one of the three people thanked by Keynes himself in the Preface to his 1936 General Theory. She also supported Kalecki, whom Keynes had in to Cambridge, but by all accounts did not like. In 1937 she wrote her influential essay on "Beggar thy neighbour policies," which made the concept associated with competitive devaluations widely known, although the term had appeared before previously, used once by Adam Smith and also by a British economist named Gower in 1932.

                                                                              In 1941 she published her famous Essay on Marxian Economics, in which she rejected the labor theory of value and basically supported redoing Marx along Keynesian and Sraffian lines. She would indeed later praise both Maoist China and North Korea, but saw China in particular as possibly offering another way of modifying Marx along useful lines. However, Robinson was always known for her pithy remarks, and one from that era was "There is only one thing worse than being exploited, and that is not being exploited" (that is, unemployed).

                                                                              The 1950s may have seen the high water mark of her work. She set off the Cambridge capital theory debates with her 1954 paper in the Review of Economic Studies, "The production function and the theory of capital," in which she took apart the idea of aggregate capital, with Paul Samuelson in 1966 agreeing that she was right. The first time I ever met Samuelson (in the early 70s) I gave him a hard time about this issue, and he just completely agreed with her and said that capital must be modeled as being heterogeneous. One of the more hidden but very important roles she played in the 1950s was to work on Piero Sraffa to finally complete his short, but important, 1960 book, Production of Commodities by Commodities: A Prelude to a Critique of Economic Theory. He had been working on it for 35 years, but it was still only a prelude to a critique, not a critique itself. Samuelson claimed that if he had published it in 1930, he would indeed have shared the Nobel Prize with Leontief.

                                                                              In 1956 she published what is probably her magnum opus, although now widely ignored, The Accumulation of Capital, which in contrast to her later critiques of analytical equilibrium analysis in favor of looking at "historical time," was in fact a study of various equilibrium growth models, many of which she provided amusing names for such as "bastard golden age" and "creeping platinum age." She did not generally use formal equations but rather favored figures and graphs backed up by clear verbal descriptions and discussions. Apparently in 1949 Koopmans asked her to be on the board of the Econometric Society, but she refused on the grounds that she did not want to be part of something that produced things she could not read. After 1960 her work increasingly moved towards more methodological issues, such as her 1962 Economic Philosophy, as well as work looking at development issues, especially in India, but also her highly controversial work on China and North Korea. ...

                                                                              The final, and maybe most important, influence of Joan Robinson today is on Post Keynesian economics, or post-Keynesian economics...
                                                                              Joan Robinson's thought and career are both relevant and currently influencing many economists today, including many who have never heard of her through some of her ideas simply entering into basic textbooks, such as "monopsony."

                                                                                Posted by on Monday, May 2, 2016 at 08:44 AM in Economics, History of Thought | Permalink  Comments (101) 

                                                                                Paul Krugman: The Diabetic Economy

                                                                                "How should we think about these incredibly low interest rates?":

                                                                                The Diabetic Economy, by Paul Krugman, Commentary, NY Times: Things are terrible here in Portugal, but not quite as terrible as they were a couple of years ago. The same thing can be said about the European economy as a whole. That is, I guess, the good news.

                                                                                The bad news is that eight years after what was supposed to be a temporary financial crisis, economic weakness just goes on and on... And that’s something that should worry everyone, in Europe and beyond. ...
                                                                                Look at what financial markets are saying.
                                                                                When long-term interest rates on safe assets are very low, that’s an indication that investors don’t see a strong recovery on the horizon. Well, German five-year bonds currently yield minus 0.3 percent...
                                                                                How should we think about these incredibly low interest rates? Recently Narayana Kocherlakota ... offered a brilliant analogy. Responding to critics of easy money who denounce low rates as “artificial” ... he suggested that we compare low interest rates to the insulin injections that diabetics must take.
                                                                                Such injections aren’t part of a normal lifestyle, and may have bad side effects, but they’re necessary to manage the symptoms of a chronic disease.
                                                                                In the case of Europe, the chronic disease is persistent weakness in spending... The insulin of cheap money helps fight that weakness, even if it doesn’t provide a cure. ...
                                                                                The thing is, it’s not hard to see what Europe should be doing to help cure its chronic disease. The case for more public spending, especially in Germany — but also in France, which is in much better fiscal shape than its own leaders seem to realize — is overwhelming. ...
                                                                                But doing the right thing seems to be politically out of the question. Far from showing any willingness to change course, German politicians are sniping constantly at the central bank, the only major European institution that seems to have a clue...
                                                                                Put it this way: Visiting Europe can make an American feel good about his own country.
                                                                                Yes, one of our two major parties is poised to nominate a dangerous blowhard for president — but ... the odds are that he won’t actually end up in the White House.
                                                                                Meanwhile, the overall economic and political situation in America gives ample grounds for hope, which is in very short supply over here.
                                                                                I’d love to see Europe emerge from its funk. The world needs more vibrant democracies! But at the moment it’s hard to see any positive signs.

                                                                                  Posted by on Monday, May 2, 2016 at 07:37 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (81) 

                                                                                  Links for 05-02-16

                                                                                    Posted by on Monday, May 2, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (134) 

                                                                                    Sunday, May 01, 2016

                                                                                    Technology versus the Distribution of Workers in Aggregate Productivity

                                                                                    Dietrich Vollrath:

                                                                                    Technology versus the Distribution of Workers in Aggregate Productivity: There was a recent post by an engineer rebutting Robert Gordon’s (and others) thesis that technological change was slowing down. The evidence cited is a series of plots and figures showing how specific technologies (battery storage, energy efficiency, computer speed, etc..) are advancing just as fast as they have for decades, if not faster. And there were a number of responses along the lines of “See, Gordon is wrong!”.
                                                                                    The mistake here is that this doesn’t constitute evidence that Gordon is wrong. But the mistake is partly forgivable because Gordon himself indulges in these kinds of anecdotal arguments to advance his thesis, and so it seems as if you could refute his conclusions by offereing alternative anecdotes.
                                                                                    But the important part of Gordon’s argument is not that specific technologies are or are not advancing. It is that aggregate productivity growth is slowing down. And aggregate productivity growth depends not only on individual technologies, but crucially on the distribution of workers using those technologies. Arguing about only those individual technologies is like using an increase in the price of milk to argue that inflation must be high.
                                                                                    Aggregate productivity growth depends on what we can call “within-sector” growth, which is going to be tied closely to those individual technologies. But it also depends on “across-sector” growth, which is tied to the movement of workers from one sector (or job) to another. If workers are shifting from high- to low-productivity sectors or jobs, then aggregate productivity growth may fall even though nothing happened to actual technological change.
                                                                                    I’ll make this more clear below, but here’s a quick summary of what I’ll try to establish. Gordon’s critics could well be right about their individual technologies, and yet wrong about this having anything to do with aggregate growth, because those sectors may not employ many people. And Gordon can be right about aggregate growth, but wrong about individual technologies stagnating, because the movement of workers to low-productivity sectors may be dragging down growth. In short, you cannot talk about aggregate productivity growth without talking about both technology and the distribution of workers across sectors.
                                                                                    Gruesome Detail...

                                                                                      Posted by on Sunday, May 1, 2016 at 08:12 AM in Economics, Productivity | Permalink  Comments (44) 

                                                                                      Saturday, April 30, 2016

                                                                                      When Europe Stumbled

                                                                                      Paul Krugman:

                                                                                      When Europe Stumbled: Doing some homework on the European economy...

                                                                                      ... What was happening in 2011-2012? Europe was doing a lot of austerity. But so, actually, was the U.S., between the expiration of stimulus and cutbacks at the state and local level. The big difference was monetary: the ECB’s utterly wrong-headed interest rate hikes in 2011, and its refusal to do its job as lender of last resort as the debt crisis turned into a liquidity panic, even as the Fed was pursuing aggressive easing.
                                                                                      Policy improved after that... But I think you can make the case that the policy errors of 2011-2012 rocked the euro economy back on its heels...
                                                                                      Oh, and America might have turned European too if the Bernanke-bashers of the right had gotten what they wanted.

                                                                                        Posted by on Saturday, April 30, 2016 at 02:13 PM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (60) 

                                                                                        Links for 04-30-16

                                                                                          Posted by on Saturday, April 30, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (127) 

                                                                                          Friday, April 29, 2016

                                                                                          Listen Carefully for Signs of the Next Global Recession

                                                                                          Robert Shiller:

                                                                                          Listen Carefully for Signs of the Next Global Recession: Economists are good at measuring the past but inconsistent at forecasting future events, particularly recessions. That’s because recessions aren’t caused merely by concrete changes in the markets. Beliefs and stories passed on by thousands of individuals are important factors, maybe even the main ones, in determining big shifts in the economy.

                                                                                          That is likely to be the case again, whenever we next endure a global recession. Worries that a big downturn might be imminent seem to have abated, but they still abound. In April, for example, the International Monetary Fund reported in its World Economic Outlook that while very modest growth is likely this year, the world economy was in a “fragile conjuncture.”

                                                                                          It is therefore worth asking what actually sets off a real global recession. ...

                                                                                          He end with:

                                                                                          We don’t know whether any specific event — say, an unexpected spike in oil prices or a decline in the stock market — will help transform any of the current social stories into a truly virulent economic disruption. We don’t know what is coming or when. But history does tell us that human imagination can spontaneously transform discrete events into world-shaking narratives of unexpected color and force.

                                                                                            Posted by on Friday, April 29, 2016 at 09:55 AM in Economics | Permalink  Comments (25) 

                                                                                            Paul Krugman: Wrath of the Conned

                                                                                             The fall of the Republican establishment:

                                                                                            Wrath of the Conned, by Paul Krugman, Commentary, NY Times: ... Think about where we were a year ago. At the time, Hillary Clinton and Jeb Bush were widely seen as the front-runners for their parties’ nods. If there was any dissent from the commentariat, it came from those suggesting that Mr. Bush might be supplanted by a fresher, but still establishment, face, like Marco Rubio.
                                                                                            And now here we are. But why did Mrs. Clinton ... go the distance, while the G.O.P. establishment went down to humiliating defeat? ... [B]asically it comes down to fundamental differences between the parties and how they serve their supporters.
                                                                                            Both parties make promises to their bases. But while the Democratic establishment more or less tries to make good on those promises, the Republican establishment has essentially been playing bait-and-switch for decades. And voters finally rebelled against the con.
                                                                                            First, about the Democrats: Their party defines itself as the protector of the poor and the middle class, and especially of nonwhite voters. Does it fall short of fulfilling this mission much of the time? Are its leaders sometimes too close to big-money donors? Of course. Still, if you look at the record of the Obama years, you see real action on behalf of the party’s goals.
                                                                                            Above all, you have the Affordable Care Act, which has given about 20 million Americans health insurance, with the gains biggest for the poor, minorities and low-wage workers. That’s what you call delivering for the base... And this was paid for largely with higher taxes on the rich...
                                                                                            Things are very different among Republicans. Their party has historically won elections by appealing to racial enmity and cultural anxiety, but its actual policy agenda is dedicated to serving the interests of the 1 percent, above all through tax cuts for the rich — which even Republican voters don’t support, while they truly loathe elite ideas like privatizing Social Security and Medicare.
                                                                                            What Donald Trump has been doing is telling the base that it can order à la carte. He has, in effect, been telling aggrieved white men that they can feed their anger without being forced to swallow supply-side economics, too. Yes, his actual policy proposals still involve huge tax cuts for the rich...
                                                                                            Mr. Trump is playing a con game of his own, and they’ll eventually figure that out, too. But it won’t happen right away, and in any case it won’t help the party establishment. Sad!

                                                                                              Posted by on Friday, April 29, 2016 at 07:15 AM Permalink  Comments (124) 

                                                                                              Fed Watch: Warning: Hawkishness Ahead

                                                                                              Tim Duy:

                                                                                              Warning: Hawkishness Ahead, by Tim Duy: The Fed has proven very dovish since their December rate hike. Tumultuous financial markets gave the Fed doves the upper hand, leading the Fed to pause in it’s “normalization” campaign and cut in half the expected pace of rate hikes this year.
                                                                                              But be prepared for the tenor of the song to change. I would not be surprised to see doves shedding their feathers to reveal the hawk underneath.
                                                                                              Boston Federal Reserve President Eric Rosengren exemplifies this shift. Twice in recent weeks, Rosengren, typically considered a notable dove, warned that financial markets were underestimating the odds of rates hikes this year. The Fed made clear in the dots they expect at least two hikes; financial markets anticipate only one.
                                                                                              What is going on here? First, as I said earlier this week, the Fed is not happy that markets wrote of a June rate hike. I am wary that the data arrives to support a rate hike, but don’t think the Fed is ready to give up on that hike just yet.
                                                                                              One thing to remember is that the Fed still prefers to hike early and slowly if possible. They are more aware of the asymmetric risks they face than in December, and hence recognize that they should error on the side of looser policy in an uncertain environment. Hence skip March and April. But once the risk subsides, they will return to old habits. And old habits in this case mean a return to quarterly rate hikes.
                                                                                              My assumption is that they want the option to both hike quarterly and hike three times should the economic environment shift. That means they are thinking June-September-December is a possibility still (the dots are just a forecast, they are not committed to just two rate hikes). So they really need to keep the June option open, otherwise they run a greater risk of bunching up the next few hikes. Which means they want to raise the odds of a June hike to something closer to 50-50. The recent FOMC statement, in which declined to mention the risks, was an early signal of the direction they want to move.
                                                                                              And note that not mentioning the risks at all is arguably a de facto assessment of balanced risks in the world of central banking. My suspicion is the Fed feared that actually saying “balanced” would be a stronger indicator than they wanted to send. But they still said a lot by saying nothing at all.
                                                                                              Now, why should the Fed have a change of heart? Didn’t Federal Reserve Chair Janet Yellen just go all dovish? How can they change their story so fast?
                                                                                              They can change their story within the scope of six weeks. Just like they did from the December to January meetings. And they have the one good reason to change the story: The dramatically change in financial market conditions.
                                                                                              The tightening in financial markets during the winter was the proximate cause of a more cautious Fed. The data didn’t help, to be sure, but more on that later. The combination of a surging dollar, collapsing oil, and a stock market headed only south signaled that the Fed’s policy stance has turned too hawkish, too fast. The Fed relented and heeded the market’s warnings.
                                                                                              But things are different now. US stock market rebounded. The dollar is languishing. And oil is holding its gains, despite disappointment with the lack of an output agreement.
                                                                                              This improvement will not go unnoticed on Constitution Ave. Even among the doves.
                                                                                              That brings us to the data story. To be sure, incoming data this quarter has been lackluster. But that might soon be changing. Gavyn Davies, writing for the FT, is spinning a more optimistic tale:
                                                                                              The Fulcrum nowcast suggest that US activity growth fell continuously from the beginning of 2015 to February 2016, by which time it was around 1.0 per cent. However, in a potentially important change, the nowcast moved sharply higher in March and April, and it is now fluctuating around 2.0-2.5 per cent. This change was rapidly reflected in the prices of US risk assets, which recovered slightly before, and then along with, the daily US nowcasts.
                                                                                              Financial markets do not wait for quarterly GDP to be published, and they often ignore it altogether when it does finally appear. We prefer to ignore the noise from quarterly GDP, while focusing attention on the underlying activity factor that is driving the business cycle.
                                                                                              He includes this picture:


                                                                                              Be forewarned: The Fed is primed by financial markets to change their story. If the data shifts as well, they will be looking hard at June. I don’t think the data will line up in time, but the possibility should be on your radar. There is a lot of data between the April and June meetings – two releases of many critical indicators. Too much data to be complacent.
                                                                                              Bottom Line: Remember, the Fed can turn hawkish as quickly as it turned dovish.

                                                                                                Posted by on Friday, April 29, 2016 at 03:00 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (25) 

                                                                                                Links for 04-29-16

                                                                                                  Posted by on Friday, April 29, 2016 at 12:06 AM in Economics, Links | Permalink  Comments (98) 

                                                                                                  Thursday, April 28, 2016

                                                                                                  Another Weak Quarter for U.S. GDP

                                                                                                  Jim Hamilton:

                                                                                                  Another weak quarter for U.S. GDP: The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 0.5% annual rate in the first quarter. That’s disappointing, even by standards of the weak growth that has become the norm since getting out of the Great Recession. ...
                                                                                                  Housing investment was one bright point. Another was growth in government spending at the state and local level which more than made up for a drop at the federal level. An important drag came from the decline in exports, reflecting economic weakness outside the United States. The biggest negative was a drop in nonresidential fixed investment, which by itself subtracted 3/4 of a percent from the Q1 annual growth rate. ... Further declines in investment spending in the oil-producing sector contributed to that. ...
                                                                                                  The disappointing Q1 GDP numbers brought our Econbrowser Recession Indicator Index up to 15.7%. ... That’s still significantly below the 67% threshold at which our algorithm would declare that the U.S. had entered a new recession. ...
                                                                                                  U.S. growth is certainly facing some significant headwinds, and lower oil prices do not appear to have helped. Nevertheless, the employment numbers have been showing strong momentum, and housing can make further positive contributions in the coming two years. Maybe not enough to get us back to 3%. But we can still hope to get back to 2%.

                                                                                                  The White House's view: Advance Estimate of Gross Domestic Product for the First Quarter of 2016, by Jason Furman,

                                                                                                  [I should add that the estimate will be revised later, and there are questions about the seasonal adjustment procedure for 1st quarter numbers.]

                                                                                                    Posted by on Thursday, April 28, 2016 at 09:35 AM in Economics | Permalink  Comments (41) 

                                                                                                    High-Risk Pools Don't Work, Have Never Worked, and Won't Work in the Future

                                                                                                     Kevin Drum:

                                                                                                    High-Risk Pools Don't Work, Have Never Worked, and Won't Work in the Future: Even among conservative voters, Obamacare's protection of people with pre-existing conditions has always been popular. ... But popular or not, Paul Ryan wants nothing to do with it:

                                                                                                    ..."Less than 10 percent of people under 65 are what we call people with pre-existing conditions, who are really kind of uninsurable," Ryan, a Wisconsin Republican, told a student audience at Georgetown University. "Let's fund risk pools at the state level to subsidize their coverage, so that they can get affordable coverage," he said. "You dramatically lower the price for everybody else. You make health insurance so much more affordable, so much more competitive and open up competition."

                                                                                                    It's true that the cost of covering sick people raises the price of insurance for healthy people. That's how insurance works. But there's no magic here. It costs the same to treat sick people whether you do it through Obamacare or through a high-risk pool—and it doesn't matter whether you fund it via taxes for Obamacare or taxes for something else. However, there are some differences:

                                                                                                    • Handling everyone through a single system is more efficient and more convenient.
                                                                                                    • High-risk pools have a lousy history. They just don't work.
                                                                                                    • Implementing them at the state level guarantees a race to the bottom, since no state wants to attract lots of sick people into its program.
                                                                                                    • Ryan's promise to fund high-risk pools is empty. He will never support the taxes it would take to do it properly, and he knows it.

                                                                                                    This is just more hand waving. Everyone with even a passing knowledge of the health care business knows that high-risk pools are a disaster, but Republicans like Ryan keep pitching them anyway as some kind of bold, new, free-market alternative to Obamacare. They aren't. They've been around forever and everyone knows they don't work.

                                                                                                    See also Shorter Paul Ryan to Cancer Patients: Die Quickly from Charles Gaba.

                                                                                                    Sorry, that's really the only headline which came to mind when I read this story...

                                                                                                    The magic solution to the problem, according to Ryan and the GOP, is "high risk pools", which simply means separating out the sickest, most expensive people in the country and dumping them into a separate program.

                                                                                                    With the "bad apples" (ie, human beings with terrible medical problems) safely tucked out of the way, the average cost of treating everyone else supposedly suddenly becomes less pricey.

                                                                                                    This is the exact opposite of the entire point of health insurance in the first place...spreading the risk. In addition, as Jean P. Hall notes in this Commonwealth Fund analysis, it doesn't actually save anyone a dime...

                                                                                                    Harold Pollack put it far more succinctly for the Twitter age:

                                                                                                    @charlesornstein @LenMNichols @Reuters_Health high risk pools are among the very worst ideas in health policy.

                                                                                                    — Harold Pollack (@haroldpollack) April 28, 2016

                                                                                                      Posted by on Thursday, April 28, 2016 at 09:23 AM in Economics, Health Care | Permalink  Comments (24)