- The Hutchins Center Explains: Public investment - Brookings
- Chickens are intelligent, caring, and complex - EurekAlert!
- Rethinking Labor Mobility - Harold James
- Trump and the Chevy Cruze - EconoSpeak
- Dirty Money - Scientific American
- Following the Overseas Money - macroblog
- Three Takes on China to Start a New Year - Brad Setser
- China’s Growing Influence on Asian Financial Markets - Econbrowser
- Childhood poverty can rob adults of psychological health - EurekAlert!
- Unusual outcomes and uncertain times - VoxEU
- Sexual orientation and earnings - VoxEU
Wednesday, January 04, 2017
Tuesday, January 03, 2017
Trying to Remain Positive: With inauguration day in the United States just two weeks away, it is difficult to harbor optimism about what the Trump presidency will mean for this country and for the world in realms ranging from economic progress to national security to personal liberty... In the wake of the election, expectations are no better, including in the environmental realm... And since then, the President-elect’s announced nominations for key positions in the administration have probably eliminated whatever optimism some progressives may have been harboring.
Remarkably, the least worrisome development in regard to anticipated climate change policy may be the nomination of Rex Tillerson to become U.S. Secretary of State. Two months ago it would have been inconceivable to me that I would write this about the CEO of Exxon-Mobil taking over the State Department (and hence the international dimensions of U.S. climate change policy). But, think about the other likely candidates. And unlike many of the other top nominees, Mr. Tillerson is at least an adult, and – in the past (before the election) – he had led his company to reverse course and recognize the scientific reality of human-induced climate change (unlike the President-elect), support the use of a carbon tax when and if the U.S. puts in place a meaningful national climate policy, and characterize the Paris Climate Agreement as “an important step forward by world governments in addressing the serious risks of climate change.”
It’s fair to say that it is little more than damning with faint praise to characterize this pending appointment as “the least worrisome development in regard to climate change policy,” but the reality remains. ... Of course, whether Mr. Tillerson will maintain and persevere with his previously stated views on climate change is open to question. And if he does, can he succeed in influencing Oval Office policy when competing with Scott Pruitt, Trump’s pick to run EPA, not to mention Rick Perry, Trump’s bizarre choice to become Secretary of Energy?
In the face of all this (and much else), is it possible to offer any statement of optimism or at least hope? The answer may be found in the reality that U.S. policy – in many issue areas – consists of much more than the policies of the Federal government. In a variety of policy realms, the states play an exceptionally important role. One might not normally think about this in the context of addressing a global commons problem, such as climate change, but these are not normal times.
And so I will try to rescue myself from my current mental state – at least temporarily – by focusing today on policy developments in the State of California. To do this, I offer an op-ed I recently wrote with Professor Lawrence Goulder of Stanford University, which was published in the Sacramento Bee a week before the November election. Good policy developments at the state level are, of course, even more important now than they were then. ...
- Making of a black intellectual - Understanding Society
- Engels Rebuts Malthus - Tim Taylor
- When the Health Care Market Cannot Regulate Itself - RegBlog
- The Abandonment of Progress - Jean Pisani-Ferry
- “America First” and Global Conflict Next - Nouriel Roubini
- Global reflation continues into 2017 - Gavyn Davies
- Central Bank Independence: Growing Threats - Cecchetti & Schoenholtz
Monday, January 02, 2017
I have a new column:
Why Trump Needs to Take the Economy More Seriously: Donald Trump tried to take credit for Sprint’s plan to create 5,000 jobs in the U.S. The plans were in place before the election, so there is some question about how much credit he should get. But Trump’s habit of claiming more credit than he deserves stands in sharp contrast to President Obama’s inability to communicate all of the good things that have happened during his presidency. ...
"This debacle didn’t come out of nowhere":
America Becomes a Stan, by Paul Krugman, NY Times: In 2015 the city of Ashgabat, the capital of Turkmenistan, was graced with a new public monument: a giant gold-plated sculpture portraying the country’s president on horseback. This may strike you as a bit excessive. But cults of personality are actually the norm in the “stans,” the Central Asian countries that emerged after the fall of the Soviet Union, all of which are ruled by strongmen who surround themselves with tiny cliques of wealthy crony capitalists.
Americans used to find the antics of these regimes, with their tinpot dictators, funny. But who’s laughing now?
We are, after all, about to hand over power to a man who has spent his whole adult life trying to build a cult of personality around himself; remember, his “charitable” foundation spent a lot of money buying a six-foot portrait of its founder. ... So we can expect lots of self-aggrandizement once he’s in office. I don’t think it will go as far as gold-plated statues, but really, who knows?
Meanwhile, with only a couple of weeks until Inauguration Day, Donald Trump has done nothing substantive to reduce the unprecedented — or, as he famously wrote on Twitter, “unpresidented” — conflicts of interest created by his business empire. Pretty clearly, he never will — in fact, he’s already in effect using political office to enrich himself...
This means that Mr. Trump will be in violation of the spirit, and arguably the letter, of the Constitution’s emoluments clause... But who’s going to hold him accountable? Some prominent Republicans are already suggesting that, rather than enforcing the ethics laws, Congress should simply change them to accommodate the great man.
And the corruption won’t be limited to the very top: The new administration seems set to bring blatant self-dealing into the center of our political system..., assembling a team of cronies, choosing billionaires with obvious, deep conflicts of interest for many key positions in his administration.
In short, America is rapidly turning into a stan. ...
But this debacle didn’t come out of nowhere...: an increasingly radical G.O.P., willing to do anything to gain and hold power, has been undermining our political culture for decades. ...
The only question now is whether the rot has gone so deep that nothing can stop America’s transformation into Trumpistan. One thing is for sure: It’s destructive as well as foolish to ignore the uncomfortable risk, and simply assume that it will all be O.K. It won’t.
- Can the blockchain kill fake news? - MacroMania
- Who is responsible when an article gets misread? - Noahpinion
- Pushing the Boundaries of Economics - Carola Binder
- Headquarter separation and multi-plant operation - VoxEU
- Why central bankers favour monetary policy inertia - VoxEU
- Some thoughts on UBI, jobs, and dignity - Noahpinion
- Get Used To It - Economic Principals
Saturday, December 31, 2016
2007 Krugman on Milton Friedman: As you read this direct Paul Krugman quote, do you hear this song in the background.
"What’s odd about Friedman’s absolutism on the virtues of markets and the vices of government is that in his work as an economist’s economist he was actually a model of restraint. As I pointed out earlier, he made great contributions to economic theory by emphasizing the role of individual rationality—but unlike some of his colleagues, he knew where to stop. Why didn’t he exhibit the same restraint in his role as a public intellectual?
The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy.
In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed—a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived. But there’s a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world needs now, I’d argue, is a counter-counterreformation."
- Rethinking how the housing crisis happened - MIT Sloan
- A (Keynesian) Change Is in the Air - Baseline Scenari
- Understand the Energy Department Before Closing It - Noah Smith
- Grand Hotel Abyss - Understanding Society
- Free Market for Education? Economists Generally Don’t Buy It - NYTimes
- The Econocracy: a review - Stumbling and Mumbling
- Trade Engagement? - Robin Hanson
- Will Dollar Strength Trigger Intervention in 2017? - Carmen Reinhart
- A Socialist Market Economy With Chinese Contradictions - Adair Turner
- Lessons From My Anxious Holiday Shopping - Mohamed El-Erian
Friday, December 30, 2016
"Obamacare has, in fact, been a big success":
Snatching Health Care Away From Millions, by Paul Krugman, NY Times: ...health reform, President Obama’s signature achievement, is stabilizing after a bumpy year.
This means that the huge gains achieved so far — tens of millions of newly insured Americans and dramatic reductions in the number of people skipping treatment or facing financial hardship because of cost — look as if they’re here to stay.
Or they would be here to stay if the man who squeaked into power thanks to Mr. Comey and Vladimir Putin wasn’t determined to betray his supporters, and snatch away the health care they need. ...
In a way, Democrats should hope that Republicans follow through on their promises to repeal health reform. ... They’ve spent seven years promising something very different from yet better than Obamacare, but keep failing to deliver, because they can’t; the logic of broad coverage, especially for those with pre-existing conditions, requires either an Obamacare-like system or single-payer, which Republicans like even less. ...
As a result, repeal would have devastating effects... Independent estimates suggest that Republican plans would cause 30 million Americans to lose coverage, with about half the losers coming from the Trump-supporting white working class. At least some of those Trump supporters would probably conclude that they were the victims of a political scam — which they were. ...
How will Republicans try to contain the political fallout if they go ahead with repeal, and tens of millions lose access to health care? No doubt they’ll try to distract the public — and the all-too-compliant news media — with shiny objects of various kinds.
But surely a central aspect of their damage control will be an attempt to push a false narrative about Obamacare’s past. Health reform, they’ll claim, was always a failure, and it was already collapsing on the eve of the G.O.P. takeover. When the number of uninsured Americans skyrockets on their watch, they’ll claim that it’s not their fault — like everything, it’s the fault of liberal elites.
So let’s refute that narrative in advance. Obamacare has, in fact, been a big success — imperfect, yes, but it has greatly improved (and saved) many lives. And all indications are that this success is sustainable, that the teething problems of health reform weren’t fatal and were well on their way to being solved at the end of 2016.
If, as seems all too likely, a health care debacle is imminent, blame must be placed where it belongs: on Donald Trump and the people who put him over the top.
A World at Risk: My last day as President of the Federal Reserve Bank of Minneapolis was on December 31, 2015. I began blogging on January 2, 2016... In my first post, I wrote that “economic policymakers can do better. Indeed, I increasingly believe that they must do better.” In my view, the global political events of 2016 show why I wrote those words.
That first post argued that macroeconomic policy remained much too tight around the developed world. It closed with the following warning and admonition:
“We are only beginning to see the impact of tight policy choices on our economies … Given these kinds of macroeconomic outcomes, it should not be surprising that we see increasing signs of social fracturing and disengagement in many developed countries.”
The process of “social fracturing and disengagement” to which I referred continued apace in 2016. In the UK, Britons voted to break away from the European Union. In the US, a political outsider used a platform of economic isolationism to defeat a string of establishment candidates from both major parties.
There will be elections in France and Germany in 2017. I expect large, and possibly decisive, repudiations of the political establishment in both votes.
Will policymakers begin to engage in the kind of fiscal/monetary easing that is needed to heal our economies and our societies? Possibly – there is talk from the incoming American administration of increases in government spending and tax cuts. But many elected officials (and professional economists) have also expressed strong opposition to these policy choices.
Those opponents should bear in mind that there are grave risks associated with overly tight macroeconomic policy and the accompanying shortfall of aggregate demand. As I wrote on January 8 of this year,
“Much of the world experienced a significant global demand shortfall throughout the 1930s … It is true that if we fast forward to 1950, the demand shortfall had been largely cured. Unfortunately, I suspect that the destruction associated with World War II was an important part of the “solution”. During the course of that War, over 50 million people were killed, and many others were injured severely. Much of the physical capital of Asia and Europe had been destroyed. The world didn’t put [its] “idle men and machines” to work - it destroyed them instead … the experience of the 1930s and 1940s is unfortunately suggestive of how the economic pressures of a global demand shortfall can give rise to highly adverse geo-political outcomes.”
Unfortunately, I see many more signs to support the possibility of “adverse geo-political outcomes” (to use my euphemism) than I did in early 2016.
So, as we enter 2017, the world needs easier fiscal and monetary policy in the form of more government debt, lower taxes (especially on investment), more infrastructure and lower interest rates. But this prescription has been the right one for at least eight years. We can only hope that we have not left the problem unattended for too long.
Improving How Job Markets Function: Active Labor Market Policies: A more fluid labor market is socially valuable, because it helps unemployment rates stay lower and offers broader opportunity. Also, employers who know that employees have decent and readily available outside options have better incentive to treat employees well. But most economists recognize that labor markets are full of "frictions," which is a catch-all term for the costs involved in making connections between willing workers and willing employers. (Indeed, the 2010 Nobel Prize in economics went to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides "for their analysis of markets with search frictions".) There's an old rule of thumb that one should expect a month of job search for every $10,000 you would like to earn, and even though that specific number is probably an unreliable guess, the comment makes the point that the time and information costs involved in finding a new job can be high. One of the very practical barriers for a lot of unemployed workers is a lack of information about available jobs, and a lack of experience in how to find the relevant information.
Active labor market policies are a government attempt to reduce these costs. In a December 2016 Issue Brief, the Council of Economic Advisers discusses the subject of "Active Labor Market Policies: Theory and Evidence for What Works." The CEA defines active labor market policies as "policies that promote participation in the labor force and help workers match to employment opportunities. These programs include employment services, job search assistance, job training programs, and employment subsidies. But the empirical evidence also finds that not all approaches to supporting employment and earnings are equally successful, with some programs having substantial benefits relative to their costs while others do not."
As I have pointed out here before, US spending on active labor market policies (as a share of GDP) is considerably less than most other high-income countries. Here's a figure from the CEA:
Moreover, even this low US level has been on a generally downward trend for several decades:
Of course, the hard-headed question is whether active labor market policies work--and whether some work better than others. The CEA report cites an array of evidence on this point (for readability, the quotations that follow omit citations and footnotes).
On offering job search assistance and requiring participation from those receiving government benefits: "While job search assistance leads to faster employment, there is little evidence that it affects wages. Job search programs may also yield other benefits. When job search is required of recipients of unemployment insurance (UI), research shows that reemployment assistance typically saves the government several hundred dollars per participant in UI benefits by reducing time to reemployment ..."
On offering job training for various groups: "Job training programs focusing on economically disadvantaged adults, typically those with low earnings or levels of education, consistently yield significant positive effects on employment outcomes. Recent evidence comes from evaluations of WIA [Workforce Investment Act] training programs for disadvantaged adults ... these training programs increased quarterly earnings between $500 and $800 (in the range of 10 to 25 percent increases) for workers by three years after receiving training, in addition to positive employment effects. ... Sectoral training, one specific type of training program that focuses on training workers for jobs in particular industries and which typically develops and implements training programs in partnership with employers, is an especially promising avenue for disadvantaged workers. ... In one successful example of training leading to positive results for mid-career workers ... when dislocated workers obtain training in the form of community college coursework, the equivalent of one academic year of courses translates into increases in long-term earnings of between seven and ten percent. They also find that these effects are more pronounced when coursework is concentrated on quantitative courses."
On employment subsidies for hiring workers: "While effective at encouraging employment, an important consideration for employment subsidies is that they be designed and administered in ways that mitigate two potential drawbacks: The first is that some portion of their value may be captured by firms who would have hired such workers in any event. A second is that targeted employer-based subsidies may lead to stigmatization of the targeted group among potential employers." I've written before on "What Do We Know about Subsidized Employment Programs?" (April 25, 2016), and noted that there are a couple of large-scale studies underway that should provide fuller evidence here.
Just to be clear, not all the evidence on active labor market policies is positive. The design and context of active labor market policies matters. But in my reading, the evidence is certainly strong enough to support additional large-scale experimentation with these policies, which can be designed in a way to facilitate a later evaluation of the results.
Finally, I'll add that the main focus of the CEA report is on US-based evidence about active labor policies, but an array of international evidence is also available. For a literature review, interested readers might begin with a literature review paper by David Card, Jochen Kluve and Andrea Weber What Works? A Meta Analysis of Recent Active Labor Market Program Evaluations," published by the German Institute for the Study of Labor (IZA Discussion Paper No. 9236, July 2015).
- The American Public Against Trump - Alan Blinder
- Global economic forces conspire to stymie U.S. manufacturing - Brookings
- Are mergers good or bad for the economy? - CBS News
- The current and future state of the sharing economy - Brookings
- Fake Academe, Looking Much Like the Real Thing - The New York Times
- Make the Risk Premium small again - Antonio Fatas
- Why Didn't the U.S Enact Carbon Cap and Trade in 2009? - Mathew Kahn
- The Diocletian Edict: Price-Fixing in History - Tim Taylor
- Trump’s Extreme Oligarchy - Simon Johnson
- How Has Wives' Share of Income Changed? - St. Louis Fed
- The Year in Review, 2016: The Triumph of the Blowhards - Econbrowser
- Americans believe crazy, wrong things - The Washington Post
- Keynes Reborn - Koichi Hamada
- Trump's Trade Chief Makes a Rookie Mistake - Noah Smith
- Monetary misperceptions, food banks, and NGDP targeting - Basil Halperin
- Economics in the ancient world? - Notes On Liberty
Thursday, December 29, 2016
Greed Springs Eternal: Jonathan Chait catches Larry Kudlow praising the Orange One for choosing a cabinet of billionaires, because rich men are incorruptible — after all, they don’t need even more money. As Chait says, this is ludicrous on its face; consider, for example, Russia’s oligarchs.
What Chait doesn’t note is the special irony of seeing this argument from Kudlow, or indeed any right-wing advocate of supply-side economics. Remember, their whole worldview is based around the claim that cutting taxes on rich people will work economic miracles, because of incentives: let a plutocrat keep more of an extra dollar in income, and he’ll innovate, create jobs, lead us to an earthly paradise in order to get that extra income.
To belabor what should be obvious: either the wealthy care about having more money or they don’t. If lower marginal tax rates are an incentive to produce more, the prospect of personal gain is an incentive to engage in corrupt practices. You can’t go all Ayn Rand/Gordon Gekko on the importance of greed as a motivator while claiming that wealth insulates ... from temptation. ...
And this is telling us something significant: namely, that supply-side economic theory is and always was a sham. It was never about the incentives; it was just another excuse to make the rich richer.
- The Age of Incompetence - J. Bradford DeLong
- The returns to societal capital - Dietrich Vollrath
- Why Hayek Was not a Conservative - Uneasy Money
- Is the AER Replicable? And is it Robust? - Replication Network
- Price Controls in the Colonial United States - Tim Taylor
- Why Low Rates Failed to Boost Business Investment - Noah Smith
Wednesday, December 28, 2016
American Believe Crazy, Wrong Things: Many Americans believe a lot of dumb, crazy, destructive, provably wrong stuff. Lately this is especially (though not exclusively) true of Donald Trump voters, according to a new survey.
The survey, from the Economist/YouGov, was conducted in mid-December, and it finds that willingness to believe a given conspiracy theory is (surprise!) strongly related to whether that conspiracy theory supports one’s political preferences. ...
- Tariffs and the Trade Balance (Wonkish) - Paul Krugman
- The Age of Incompetence - J. Bradford DeLong
- The returns to societal capital - Dietrich Vollrath
- More on Orthogonal Regression - Dave Giles
- Why Hayek Was not a Conservative - Uneasy Money
- A Letter to Donald Trump About Health Care - David Leonhardt
- Is the AER Replicable? And is it Robust? - Replication Network
- Price Controls in the Colonial United States - Tim Taylor
- Why Low Rates Failed to Boost Business Investment - Noah Smith
- How a Budget Chief Can Wreak Havoc - The New York Times
Tuesday, December 27, 2016
Is The Fed About To Experience A Repeat of 2016?, by Tim Duy: In the most recent Summary of Economic Projections, Fed officials penciled in three 25bp rate hikes for 2017. The reality, however, could be very different. We all remember how “four” became “one” in 2016. The median dots are neither a promise nor an official forecast. As 2016 progressed, forecasts associated with a lower path of SEP “dots” evolved as the consensus view of policymakers. Will the same happen this year? I don’t think so; it is hard to see the Fed on pause for another twelve months.
As a starting point, I think it best to assume the US economy is near full-employment. But the US economy was near full-employment at this time last year as well. I think the key difference between then and now is that then the after-effect of the oil price slide and dollar surge placed a drag on the US economy sufficient to ease hiring pressure. At the same time, labor force participation perked up, setting the stage for a flat unemployment rate for most of the year. Inflationary pressures eased as well; the January inflation pop proved to be short-lived:
In effect, the US economy settled into a nice little equilibrium in 2016 that obviated the need for additional rate hikes. To expect a repeat scenario in 2017, one would need to assume that the US economy does not pick up speed and threaten that equilibrium by pushing past full employment.
Evidence, however, piles up suggesting that the slowdown of the past year is drawing to a close. ISM manufacturing and nonmanufacturing surveys are stronger, temporary help employment is heading up again, new manufacturing orders for nondefence, nonair capital goods have flattened out, and the broader inventory overhang is easing:
All of this occurs in the context of an unemployment rate that suddenly dipped toward the lower end of the Fed’s estimates of the natural rate of unemployment. And if the demographic forces reassert themselves, there is likely to be further downward pressure on the unemployment rate – job growth is well above estimates necessary to hold unemployment constant.
But would a total of 75bp of hikes be necessary to hold inflation in check? That depends in part the sensitivity of inflation to greater resource utilization. Greg Ip of the Wall Street Journal noted last week:
Unlike in 2009, this fiscal stimulus will be hitting when the economy is close to full employment with far less spare capacity. Yet it’s premature to assume inflation will therefore jump. In the last decade inflation, excluding swings due to energy, has proven surprisingly inertial, barely moving in response to high unemployment. The same is likely true if unemployment drops further below its “natural” level.
It is true that inflation is fairly inertial, although some policymakers will dismiss the lack of response to high unemployment as a consequence of downward nominal wage rigidity. Moreover, others will claim the reason for inertial inflation is that the Fed has properly responds to weak or strong economic conditions to hold inflation and, importantly, inflation expectations, in check. In other words, you won’t see inflation if the Fed acts preemptively.
Still, the broader point remains true that while further declines in unemployment will pressure the Fed to hiking rates more aggressively, low inflation like seen in November will temper that response.
In addition, policy going forward depends on the relative tightness of financial markets in general, and the dollar in particular. And the dollar has been on a tear in recent weeks:
The dollar serves as a break on the US economy. If activity expands as I anticipate, and the economy is near full employment as I believe, then some demand will be offshored as the rising dollar prompts the trade deficit to widen. Consequently, the Fed needs to be wary of feedback effects from the dollar as they tighten policy.
Bottom Line: The economic situation on the ground is very different from December of last year. Whereas the decision to raise rates at that time looked ill-advised, this latest action appears more appropriate given the likely medium-term path of the US economy. Assuming the US economy is near full employment, that path likely contains enough upward pressure on activity to justify more than one more rate increase in 2017. Three I think is more likely than one. That said, the change in administrations and the path of fiscal policy creates uncertainties in both directions.
- America’s concern for the poor is about to be tested - The Washington Post
- Analytics of Trade Deficits and Manufacturing Employment - Paul Krugman
- Sraffa’s Revolution in Economic Theory - INET
- The Curse of Credentialism - Baseline Scenario
- Democracy Is Dying as Technocrats Watch - William Easterly
- China's Awkward Exchange Rate Regime - Cecchetti & Schoenholtz
- Rosy scenarios, Monetary policy, and Trump - CFE
- Specification Testing With Very Large Samples - Dave Giles
Monday, December 26, 2016
I have a new post at CBS MoneyWatch:
Commentary: Can Trump grow the economy as much as he promises?: File this under promises that will be next to impossible to keep: President-elect Donald Trump’s vow to create 25 million new jobs over the next decade and boost economic growth to 3.5 percent annually, and perhaps as high as 4 percent. ...
Trade war. What is it good for?:
And the Trade War Came, by Paul Krugman, NY Times: Donald Trump got ... overwhelming support from white working-class voters. These voters trusted his promise to bring back good manufacturing jobs while disbelieving his much more credible promise to take away their health care. They have a rude shock coming.
But white workers aren’t alone in their gullibility: Corporate America is still in denial about the prospects for a global trade war, even though protectionism was a central theme of the Trump campaign. ... The ... relevant legislation gives the occupant of the White House remarkable leeway should he choose to go protectionist. ...
Oh, and don’t expect attempts by experts to point out the holes in this view ... to make any impression. Members of the Trump team believe that all criticism of their economic ideas reflects a conspiracy among think tanks that are out to undermine them. ...
There will be retaliation, big time. When it comes to trade, America is not that much of a superpower...
And retaliation isn’t the whole story; there’s also emulation. Once America decides that the rules don’t apply, world trade will become a free-for-all.
Will this cause a global recession? Probably not — those risks are, I think, exaggerated. ...
What the coming trade war will do, however, is cause a lot of disruption. Today’s world economy is built around “value chains” that spread across borders: your car or your smartphone contain components manufactured in many countries, then assembled or modified in many more. A trade war would force a drastic shortening of those chains, and quite a few U.S. manufacturing operations would end up being big losers, just as happened when global trade surged in the past.
An old joke tells of a motorist who runs over a pedestrian, then tries to fix the damage by backing up — and runs over the victim a second time. Well, the effects of the Trumpist trade war on U.S. workers will be a lot like that.
Given these prospects, you might think that someone will persuade the incoming administration to rethink its commercial belligerence. That is, you might think that if you have paid no attention to the record and character of the protectionist in chief. Someone who won’t take briefings on national security because he’s “like, a smart person” and doesn’t need them isn’t likely to sit still for lessons on international economics.
No, the best bet is that the trade war is coming. Buckle your seatbelts.
Sunday, December 25, 2016
Charles Dickens on Seeing the Poor: Charles Dickens wrote what has become one of the iconic stories of Christmas day and Christmas spirit in A Christmas Carol. But of course, the experiences of Ebenezer Scrooge are a story, not a piece of reporting. Here's a piece by Dickens written for the weekly journal Household Words that he edited from 1850 to 1859. Here's another piece from Dickens from the journal from the issue of January 26, 1856, with his first-person reporting on "A Nightly Scene in London." Poverty in high-income countries is no longer as ghastly as in Victorian England, but for those who take the time to see it in our own time and place, surely it is ghastly enough.
Economists might also wince just a bit... Dickens writes: "I know that the unreasonable disciples of a reasonable school, demented disciples who push arithmetic and political economy beyond all bounds of sense (not to speak of such a weakness as humanity), and hold them to be all-sufficient for every case, can easily prove that such things ought to be, and that no man has any business to mind them. Without disparaging those indispensable sciences in their sanity, I utterly renounce and abominate them in their insanity ..." Here's Dickens:
A Nightly Scene in London
On the fifth of last November, I, the Conductor of this journal, accompanied by a friend well-known to the public, accidentally strayed into Whitechapel. It was a miserable evening; very dark, very muddy, and raining hard.
There are many woful sights in that part of London, and it has been well-known to me in most of its aspects for many years. We had forgotten the mud and rain in slowly walking along and looking about us, when we found ourselves, at eight o'clock, before the Workhouse.
Crouched against the wall of the Workhouse, in the dark street, on the muddy pavement-stones, with the rain raining upon them, were five bundles of rags. They were motionless, and had no resemblance to the human form. Five great beehives, covered with rags— five dead bodies taken out of graves, tied neck and heels, and covered with rags— would have looked like those five bundles upon which the rain rained down in the public street.
"What is this! " said my companion. "What is this!"
"Some miserable people shut out of the Casual Ward, I think," said I.
We had stopped before the five ragged mounds, and were quite rooted to the spot by their horrible appearance. Five awful Sphinxes by the wayside, crying to every passer-by, " Stop and guess! What is to be the end of a state of society that leaves us here!"
As we stood looking at them, a decent working-man, having the appearance of a stone-mason, touched me on the shoulder.
"This is an awful sight, sir," said he, "in a Christian country!"
"GOD knows it is, my friend," said I.
"I have often seen it much worse than this, as I have been going home from my work. I have counted fifteen, twenty, five-and-twenty, many a time. It's a shocking thing to see."
"A shocking thing, indeed," said I and my companion together. The man lingered near
us a little while, wished us good-night, and went on.
We should have felt it brutal in us who had a better chance of being heard than the working-man, to leave the thing as it was, so we knocked at the Workhouse Gate. I undertook to be spokesman. The moment the gate was opened by an old pauper, I went in, followed close by my companion. I lost no time in passing the old porter, for I saw in his watery eye a disposition to shut us out.
"Be so good as to give that card to the master of the Workhouse, and say I shall be glad to speak to him for a moment."
We were in a kind of covered gateway, and the old porter went across it with the card. Before he had got to a door on our left, a man in a cloak and hat bounced out of it very sharply, as if he were in the nightly habit of being bullied and of returning the compliment.
"Now, gentlemen," said he in a loud voice, "what do you want here?"
"First," said I, " will you do me the favor to look at that card in your hand. Perhaps you may know my name."
"Yes," says he, looking at it. " I know this name."
"Good. I only want to ask you a plain question in a civil manner, and there is not the least occasion for either of us to be angry. It would be very foolish in me to blame you, and I don't blame you. I may find fault with the system you administer, but pray understand that I know you are here to do a duty pointed out to you, and that I have no doubt you do it. Now, I hope you won't object to tell me what I want to know."
"No," said he, quite mollified, and very reasonable, " not at all. What is it?"
"Do you know that there are five wretched creatures outside?"
"I haven't seen them, but I dare say there are."
"Do you doubt that there are?"
"No, not at all. There might be many more."
''Are they men? Or women?"
"Women, I suppose. Very likely one or two of them were there last night, and the night before last."
"There all night, do you mean?"
My companion and I looked at one another, and the master of the Workhouse added quickly, "Why, Lord bless my soul, what am I to do? What can I do ? The place is full. The place is always full—every night. I must give the preference to women with children, mustn't I? You wouldn't have me not do that?"
"Surely not," said I. "It is a very humane principle, and quite right; and I am glad to hear of it. Don't forget that I don't blame you."
"Well!" said he. And subdued himself again. ...
"Just so. I wanted to know no more. You have answered my question civilly and readily, and I am much obliged to you. I have nothing to say against you, but quite the contrary. Good night!"
"Good night, gentlemen!" And out we came again.
We went to the ragged bundle nearest to the Workhouse-door, and I touched it. No movement replying, I gently shook it. The rags began to be slowly stirred within, and by little and little a head was unshrouded. The head of a young woman of three or four and twenty, as I should judge; gaunt with want, and foul with dirt; but not naturally ugly.
"Tell us," said I, stooping down. "Why are you lying here?"
"Because I can't get into the Workhouse."
She spoke in a faint dull way, and had no curiosity or interest left. She looked dreamily at the black sky and the falling rain, but never looked at me or my companion.
"Were you here last night?"
"Yes, All last night. And the night afore too."
"Do you know any of these others?"
"I know her next but one. She was here last night, and she told me she come out of Essex. I don't know no more of her."
"You were here all last night, but you have not been here all day?"
"No. Not all day."
"Where have you been all day?"
"About the streets."
''What have you had to eat?"
"Come!" said I. "Think a little. You are tired and have been asleep, and don't quite consider what you are saying to us. You have had something to eat to-day. Come! Think of it!"
"No I haven't. Nothing but such bits as I could pick up about the market. Why, look at me!"
She bared her neck, and I covered it up again.
"If you had a shilling to get some supper and a lodging, should you know where to get it?"
"Yes. I could do that."
"For GOD'S sake get it then!"
I put the money into her hand, and she feebly rose up and went away. She never thanked me, never looked at me— melted away into the miserable night, in the strangest manner I ever saw. I have seen many strange things, but not one that has left a deeper impression on my memory than the dull impassive way in which that worn-out heap of misery took that piece of money, and was lost.
One by one I spoke to all the five. In every one, interest and curiosity were as extinct as in the first. They were all dull and languid. No one made any sort of profession or complaint; no one cared to look at me; no one thanked me. When I came to the third, I suppose she saw that my companion and I glanced, with a new horror upon us, at the two last, who had dropped against each other in their sleep, and were lying like broken images. She said, she believed they were young sisters. These were the only words that were originated among the five.
And now let me close this terrible account with a redeeming and beautiful trait of the poorest of the poor. When we came out of the Workhouse, we had gone across the road to a public house, finding ourselves without silver, to get change for a sovereign. I held the money in my hand while I was speaking to the five apparitions. Our being so engaged, attracted the attention of many people of the very poor sort usual to that place; as we leaned over the mounds of rags, they eagerly leaned over us to see and hear; what I had in my hand, and what I said, and what I did, must have been plain to nearly all the concourse. When the last of the five had got up and faded away, the spectators opened to let us pass; and not one of them, by word, or look, or gesture, begged of us.
Many of the observant faces were quick enough to know that it would have been a relief to us to have got rid of the rest of the money with any hope of doing good with it. But, there was a feeling among them all, that their necessities were not to be placed by the side of such a spectacle; and they opened a way for us in profound silence, and let us go.
My companion wrote to me, next day, that the five ragged bundles had been upon his bed all night. I debated how to add our testimony to that of many other persons who from time to time are impelled to write to the newspapers, by having come upon some shameful and shocking sight of this description. I resolved to write in these pages an exact account of what we had seen, but to wait until after Christmas, in order that there might be no heat or haste. I know that the unreasonable disciples of a reasonable school, demented disciples who push arithmetic and political economy beyond all bounds of sense (not to speak of such a weakness as humanity), and hold them to be all-sufficient for every case, can easily prove that such things ought to be, and that no man has any business to mind them. Without disparaging those indispensable sciences in their sanity, I utterly renounce and abominate them in their insanity; and I address people with a respect for the spirit of the New Testament, who do mind such things, and who think them infamous in our streets.
- The economics of Christmas, a holiday satire - John Carney
- Don't Blame Macroeconomics (Wonkish And Petty) - Paul Krugman
- A short note on Skidelsky’s interpretation of Schumpeter - globalinequality
- Banana Republic and Auerbach’s Destination-Based Cash Flow Tax - EconoSpeak
- The Fundamental Fallacy of Pop Economics - Noahpinion
Saturday, December 24, 2016
This is a repeat from previous years, something my grandfather read to us each Christmas Eve, Twas The Night Before Christmas:
was the night before Christmas, when all through the house
Not a creature was stirring, not even a mouse;
The stockings were hung by the chimney with care
In hopes that St. Nicholas soon would be there;
he children were nestled all snug in their beds,
While visions of sugar-plums danced in their heads;
And mamma in her kerchief, and I in my cap,
Had just settled our brains for a long winter's nap,
hen out on the lawn there arose such a clatter,
I sprang from the bed to see what was the matter.
Away to the window I flew like a flash,
Tore open the shutters and threw up the sash.
he moon on the breast of the new-fallen snow
Gave the lustre of mid-day to objects below,
When, what to my wondering eyes should appear,
But a miniature sleigh, and eight tiny reindeer,
ith a little old driver, so lively and quick,
I knew in a moment it must be St. Nick.
More rapid than eagles his coursers they came,
And he whistled, and shouted, and called them by name:
ow, Dasher! now, Dancer! now, Prancer and Vixen!
On, Comet! on, Cupid! on, Donder and Blitzen!
To the top of the porch! to the top of the wall!
Now dash away! dash away! dash away all!"
s dry leaves that before the wild hurricane fly,
When they meet with an obstacle, mount to the sky;
So up to the house-top the coursers they flew,
With the sleigh full of Toys, and St. Nicholas too.
nd then, in a twinkling, I heard on the roof
The prancing and pawing of each little hoof.
As I drew in my head, and was turning around,
Down the chimney St. Nicholas came with a bound.
e was dressed all in fur, from his head to his foot,
And his clothes were all tarnished with ashes and soot;
A bundle of Toys he had flung on his back,
And he looked like a peddler just opening his pack.
is eyes—how they twinkled! his dimples how merry!
His cheeks were like roses, his nose like a cherry!
His droll little mouth was drawn up like a bow,
And the beard of his chin was as white as the snow;
he stump of a pipe he held tight in his teeth,
And the smoke it encircled his head like a wreath;
He had a broad face and a little round belly,
That shook when he laughed, like a bowlful of jelly.
e was chubby and plump, a right jolly old elf,
And I laughed when I saw him, in spite of myself;
A wink of his eye and a twist of his head,
Soon gave me to know I had nothing to dread;
e spoke not a word, but went straight to his work,
And filled all the stockings; then turned with a jerk,
And laying his finger aside of his nose,
And giving a nod, up the chimney he rose;
e sprang to his sleigh, to his team gave a whistle,
And away they all flew like the down of a thistle.
But I heard him exclaim, ere he drove out of sight,
"Happy Christmas to all, and to all a good-night."
- Some States Create Lots of Jobs But Lose People - Justin Fox
- IO linkages and income differences across countries - VoxEU
- Liberation from the shackles of space - Branko Milanovic
- Price disparities before 1914 - Notes On Liberty
- The Crisis of Market Fundamentalism - Anatole Kaletsky
- Macro Musings Podcast: Xmas Economics - David Beckworth
- Kudlow and Economics in the Trump Administration - Baseline Scenario
Friday, December 23, 2016
"Trumpism ... is anything but populist":
Populism, Real and Phony, by Paul Krugman, NY Times: Authoritarians with an animus against ethnic minorities are on the march across the Western world. ... But what should we call these groups? Many reporters are using the term “populist,” which seems both inadequate and misleading..., are the other shared features of this movement — addiction to conspiracy theories, indifference to the rule of law, a penchant for punishing critics — really captured by the “populist” label?
Still, the European members of this emerging alliance — an axis of evil? — have offered some real benefits to workers. ... Trumpism is, however, different..., the emerging policy agenda is anything but populist.
All indications are that we’re looking at huge windfalls for billionaires combined with savage cuts in programs that serve not just the poor but also the middle class. And the white working class, which provided much of the 46 percent Trump vote share, is shaping up as the biggest loser. ...
Both his pick as budget director and his choice to head Health and Human Services want to dismantle the Affordable Care Act and privatize Medicare. His choice as labor secretary is a fast-food tycoon who has been a vociferous opponent both of Obamacare and of minimum wage hikes. And House Republicans have already submitted plans for drastic cuts in Social Security, including a sharp rise in the retirement age. ...
In other words..., European populism is at least partly real, while Trumpist populism is turning out to be entirely fake, a scam sold to working-class voters who are in for a rude awakening. Will the new regime pay a political price?
Well, don’t count on it..., you know that there will be huge efforts to shift the blame. These will include claims that the collapse of health care is really President Obama’s fault; claims that the failure of alternatives is somehow the fault of recalcitrant Democrats; and an endless series of attempts to distract the public.
Expect more Carrier-style stunts that don’t actually help workers but dominate a news cycle. Expect lots of fulmination against minorities. And it’s worth remembering what authoritarian regimes traditionally do to shift attention from failing policies, namely, find some foreigners to confront. Maybe it will be a trade war with China, maybe something worse.
Opponents need to do all they can to defeat such strategies of distraction. Above all, they shouldn’t let themselves be sucked into cooperation that leaves them sharing part of the blame. The perpetrators of this scam should be forced to own it.
An interview of a colleague:
Do Mergers Benefit or Harm the Economy? Q&A with Bruce Blonigen: Do large mergers benefit or harm consumers? Over the years, corporations and economists have argued that mergers benefit consumers by increasing efficiency, reducing production costs, and, in turn, lowering prices.
A new paper by economists Justin Pierce of the Federal Reserve Board of Governors and Bruce Blonigen from the University of Oregon, however, shows the opposite is the case. By utilizing new techniques to isolate the effects of mergers, they find no evidence that mergers increase efficiency, but do find evidence that they increase market power, meaning they allow companies to generate higher profits by raising prices.
Blonigen and Pierce focus on the manufacturing sector, which is responsible for roughly 25 percent of M&A deals in the U.S. Relying on data covering the entire sector from 1997 through 2007, they are able to compare data from factories that were acquired during mergers to similar factories that weren’t, and to factories where an acquisition has been announced, but not yet completed.
While they find no statistically significant evidence that mergers have a positive effect on productivity or efficiency, Blonigen and Pierce do find substantial price increases following mergers, with markups ranging from 15 percent to 50 percent.
In the past two years, as issues related to antitrust and concentration came back to the forefront of American political discourse, economists and policymakers have been increasingly concerned that competition is weakening in most U.S. industries. In order to better understand the effect that mergers have on the economy, and the methods used to generate this new data, we recently interviewed Blonigen, the Philip H. Knight Professor of Social Science at the University of Oregon. ...
- The false assumptions that sustain current inequities - Jared Bernstein
- Ayn Rand and Corporate Tax Cuts Won’t Mend the Economy - John Cassidy
- A 10% Across-the-Board Tariff? - Econbrowser
- Global interactions of monetary and regulatory policies - VoxEU
- Networks of value-added trade - VoxEU
- An astounding number of insects migrate overhead - EurekAlert!
- An Appetizer Buffet of Economic Research Highlights - Tim Taylor
Thursday, December 22, 2016
The Case for Protecting Infant Industries: I must say, it’s been almost breathtaking to see how fast the acceptable terms of debate have shifted on the subject of trade. Thanks partly to President-elect Donald Trump’s populism and partly to academic research showing that the costs of free trade could be higher than anyone predicted, economics commentators are now happy to lambast the entire idea of trade. I don’t want to do that -- I think a nuanced middle ground is best. But I do think it's worth reevaluating one idea that the era of economic dogmatism had seemingly consigned to the junk pile -- the notion of infant-industry protectionism. ...
- Labor Productivity: New Normal or Real-Time Noise? - FRB Cleveland
- Economic Power and Regulatory Failure in the New Gilded Age - ProMarket
- The Connection Between Work and Dignity - Noah Smith
- Against busyness - Stumbling and Mumbling
- When is an economic recovery not a recovery? - mainly macro
- Global firms: Insights for trade and trade policy - VoxEU
- What to Learn from US Govt Strategy on AI - Digitopoly
- A lender of last resort is born in 1866 - Bank Underground
- Christmas Quiz - Bank Underground
Wednesday, December 21, 2016
CFPB Tales Told Out of School: Former CFPB enforcement attorney Ronald Rubin has a lengthy attack on the CFPB in the National Review. It's got lots of sultry details, but there's nothing new and verifiable in the piece. Instead, it's all tales told out of school, unverifiable personal anecdotes by Rubin, who seems to have an particular axe to grind with certain other CFPB staffers, and an ideological one too. Incredibly, Rubin, a former Managing Director for legal and compliance at Bear Stearns, holds up the oft-feckless SEC as a model of good enforcement practice, and criticizes the CFPB for any departures from that practice.
The point of the piece seems to be that the CFPB is an agency gone rogue and that this wouldn't have happened if the CFPB had just been structured as a bi-partisan commission. That's hogwash. Assume that everything Rubin claims is true and correct. Even if so, every single problem Rubin identifies in the piece could just as easily have occurred at a bi-partisan commission. ...
Rubin's conclusions just don't follow from his non-verifiable personal evidence. Indeed, the very fact that the CFPB hired people like Rubin and Leonard Chanin seems to belie his claims of partisan hiring practices; Rubin is a guy who went from the CFPB to be a Republican staffer for the House Financial Services Committee, after all. Rubin's conclusions do follow from his anti-regulatory world view whose "primary influences were my business-school professors at the University of Chicago, the epicenter of free-market capitalism." Yup.
- Back to normal? - Econbrowser
- Did Obama Save The World From A Second Great Depression? - EconoSpeak
- Bayes' theorem began as a defense of Christianity - The .Plan
- Book Review: Karl Polanyi: A Life on the Left by Gareth Dale - LSE
- Why central bank models failed and how to repair them - VoxEU
- Manufacturing Matters Even If It Doesn't Create Many Jobs - Justin Fox
- The Surprising Use of Automation by Regulatory Agencies - RegBlog
- A Shifting U.S. Policy Mix: Global Rewards and Risks - iMFdirect
- The Recession and Recovery Have Been Tough on Everyone - Equitable Growth
- Appreciate the Disaggregated Dollar - Brad Setser
- An appeal for ground truth - Chris Dillow
Tuesday, December 20, 2016
The implications of hysteresis for fiscal policy:
Hysteresis and Fiscal Policy, by Philipp Engler and Juha Tervala, December 19, 2016: Abstract Empirical studies support the hysteresis hypothesis that recessions have a permanent effect on the level of output. We analyze the implications of hysteresis for fiscal policy in a DSGE model. We assume a simple learning-by-doing mechanism where demand-driven changes in employment can affect the level of productivity permanently, leading to hysteresis in output. We show that the fiscal output multiplier is much larger in the presence of hysteresis and that the welfare multiplier of fiscal policy -- the consumption equivalent change in welfare for one dollar change in public spending -- is positive (negative) in the presence (absence) of hysteresis. The main benefit of accommodative fiscal policy in the presence of hysteresis is to diminish the damage of a recession to the long-term level of productivity and, thus, output.
Jeb Hensarling and the Allure of Economism: The Wall Street Journal has a profile up on Mike Crapo and Jeb Hensarling, the key committee chairs (likely in Crapo’s case) who will repeal or rewrite the Dodd-Frank Wall Street Reform and Consumer Protection Act. It’s clear that both are planning to roll back or dilute many of the provisions of Dodd-Frank, particularly those that protect consumers from toxic financial products and those that impose restrictions on banks (which, together, make up most of the act).
Hensarling is about as clear a proponent of economism—the belief that the world operates exactly as described in Economics 101 models—as you’re likely to find. He majored in economics at Texas A&M, where one of his professors was none other than Phil Gramm. Hensarling described his college exposure to economics this way:
“Even though I had grown up as a Republican, I didn’t know why I was a Republican until I studied economics. I suddenly saw how free-market economics provided the maximum good to the maximum number, and I became convinced that if I had an opportunity, I’d like to serve in public office and further the cause of the free market.”
This is not a unique story...
Introductory economics, and particularly the competitive market model, can be seductive that way. The models are so simple, logical, and compelling that they seem to unlock a whole new way of seeing the world. And, arguably, they do: there are real insights you can gain from a working understanding of supply and demand curves.
The problem, however, is that the people ... forget that the power of a theory in the abstract bears no relationship to its accuracy in practice. ...
Hensarling, who likes to quote market principles in the abstract, doesn’t appear to have moved on much from Economics 101. ... This ritual invocation of markets ignores the fact that there is no way to design a contemporary financial system that even remotely resembles the textbook competitive market: perfect information, no barriers to entry, a large number of suppliers such that no supplier can affect the market price, etc. ...
Regulatory policy that presumes well-functioning markets that don’t exist is unlikely to work well in the real world. Actually, Bill Clinton and George W. Bush tried that already, and we got the financial crisis. But to people who believe in economism, theory can never be disproved by experience. Hensarling is “always willing to compromise policies to advance principles,” he actually said to the Journal. That’s a useful trait in an ideologue. It’s frightening in the man who will write the rules for our financial system.
This is from an Interview with Gita Gopinath conducted by Douglas Clement (many other topics are covered as well):
Interview with Gita Gopinath:... Monetary unions and sovereign debt
Region: You’ve done quite a lot of other work on monetary unions, much of it with Aguiar, Amador and Farhi. In “Coordination and Crisis in Monetary Union,” you examine the incentives that high-debt nations face when joining a monetary union. Standard theory suggests that the low-inflation credibility of an austere monetary union might be optimal for high-debt countries, since the union’s low inflation won’t tempt high-debt nations to borrow more in the hope that debts will be inflated away.
But your research suggests otherwise. You find that in some cases, high-debt nations would want a mix of nations, some with similar high-debt profiles as well as some low-debt nations.
Could you explain that result? Why would a nation like Greece benefit from being with other high-debt countries like Italy, as well as low-debt countries like Germany?
Gopinath: The way to understand the result is to recognize that while there are some debt crises that are based on fundamentals—such as when the government spends excessively relative to output, or output growth collapses—there are others that arise from market failures like coordination failures among lenders. In the case of coordination failures, debt crises arise when panicking investors refuse to roll over debt at low enough interest rates; that panicked response pushes a country into default.
The classical argument applied to a world where such crises did not arise. As all crises were assumed to be driven by bad decisions of governments, the argument went that a country like Greece with high debt should be in a union with Germany because that made it able to credibly commit not to inflate away its debt. Greece would also want to be in such a union with Germany because then it could borrow at lower interest rates.
But what if it’s not just about the problems created by the government, but you also have problems created by the markets: financial contagion or self-fulfilling crises, coordination failures among investors, problems along those lines? What happens in that world? Well, in that world, you actually want a central bank who is able to credibly say that it will intervene in the events of markets going haywire to prevent the price of your bonds from collapsing, to prevent a crisis from occurring. This credibility arises when the union has a sufficient number of high-debt members.
Region: Mario Draghi provided that kind of reassurance in his July 2012 London speech, no?
Gopinath: Exactly! “Draghi’s put,” which we can always interpret in many different ways, but his strong suggestion was that the European Central Bank would intervene to buy sovereign debt and prevent its prices from collapsing.
Region: It was simply the promise of “whatever it takes.”
Gopinath: Simply the promise.
Region: Regardless of its actual policy implementation, and it never was—it was rendered unnecessary because it calmed markets.
Gopinath: Exactly, and those are the situations where you actually know it’s a panic-driven crisis. If it were a fundamentals-driven crisis, then if the ECB said, “OK, we’re going to bail out these guys,” and the fundamentals were actually bad, then they would have needed a bailout.
But if it is driven by market panic, then just reassuring markets kills the panic and prevents a debt crisis.
Another reason it is important is that when they were having discussions way back in the beginning about monetary union, they spent a lot of time talking about what happens if we bring Germany and Greece together and they have very different growth rates and inflation rates. If we have just one instrument, just one interest rate for both those countries, that can be a problem. That was one of the standard concerns.
What they spent a lot less time thinking about is, what if you bring countries with different levels of debt together? Who’s going to play the lender of last resort?
Region: But the Stability and Growth Pact addressed that to some degree, didn’t it? And your research provides support for the debt ceiling set in the pact.
Gopinath: The Stability and Growth Pact does not help to deal with self-fulfilling debt crises. What it does help with is addressing excessive debt accumulation in the union. An individual country in the union may think, “I’m a small part of the whole union, so if I on the margin raised my debt by a little bit, I’m not going to have much of an effect on the central bank’s temptation to inflate.” But if every country does that, you will end up having an effect on inflation. That’s the fiscal externality, and that’s why you would need a Stability and Growth Pact.
The fact that it was forbidden for the European Central Bank to be the lender of last resort was, in the original rules of the game for the ECB, meant to prevent moral hazard problems of countries borrowing excessively. I think it’s a perfectly good argument, but you have to recognize that there will be times when it’s not about a government behaving badly, but about market panic.
Our paper was basically arguing that—while not ignoring issues in the debt market—monetary policy has a legitimate role to play. After the Draghi put, the ECB was taken to court as it was argued that this was not part of the original [EMU] agreement. This is a very reasonable question for people to ask: Is there a role for monetary authorities in debt crises? And I think our paper basically says yes. You certainly do not want to be the central bank that always bails out governments in trouble, but it absolutely has to give itself the possibility of doing it—once in a while. ...
- Reality TV Populism - Paul Krugman
- A Computer Can’t Do the Fed’s Job - WSJ
- Bad News for America’s Workers - Joseph E. Stiglitz
- Kudlow Is a Troubling Economics Adviser for Trump - Noah Smith
- Why a gold standard is a very bad idea - Cecchetti & Schoenholtz
- The Bank Charter Act goes on trial in 1847 - Bank Underground
- Dust Bowl would devastate today’s crops, study finds - UChicago News
- China’s November Reserve Drain - Brad Setser
- Americans are Moving Less - Tim Taylor
- Machines as Bureaucrats - RegBlog
- The decline of public service - Stumbling and Mumbling
- The physics of phase transitions - Understanding Society
- ‘Metrics Monday: Testing for Mechanisms - Marc Bellemare
- When Can Trend-Cycle Decompositions Be Trusted? - FRB
- The International Barriers to Trump’s Economic Plan - Mohamed El-Erian
- Not All Measures of GDP are Created Equal - Dave Giles
- What is wrong with Italy's economy? - Centre for European Reform
- Understanding free trade - mainly macro
Monday, December 19, 2016
"The process of destroying democratic substance while preserving forms is already underway":
How Republics End, by Paul Krugman, NY Times: ...Lately I’ve been reading a lot about the ancient world. Initially..., I was doing it for entertainment and as a refuge from news that gets worse with each passing day. But I couldn’t help noticing the contemporary resonances of some Roman history — specifically, the tale of how the Roman Republic fell.
Here’s what I learned: Republican institutions don’t protect against tyranny when powerful people start defying political norms. And tyranny, when it comes, can flourish even while maintaining a republican facade.
On the first point: Roman politics involved fierce competition among ambitious men. But ... “However important it was for an individual to win fame and add to his and his family’s reputation, this should always be subordinated to the good of the Republic … no disappointed Roman politician sought the aid of a foreign power.”
America used to be like that, with prominent senators declaring that we must stop “partisan politics at the water’s edge.” But now we have a president-elect who openly asked Russia to help smear his opponent..., the good of the republic be damned.
And what happens to the republic as a result? Famously..., the transformation of Rome from republic to empire never happened. Officially, imperial Rome was still ruled by a Senate that just happened to defer to the emperor ... on everything that mattered. We may not go down exactly the same route..., but the process of destroying democratic substance while preserving forms is already underway. ...
Why is this happening? ... And let’s be clear: This is a Republican story, not a case of “both sides do it.” ..., what directly drives the attack on democracy, I’d argue, is simple careerism on the part of people who are apparatchiks within a system insulated from outside pressures by gerrymandered districts, unshakable partisan loyalty, and lots and lots of plutocratic financial support.
For such people, toeing the party line and defending the party’s rule are all that matters. ...
One thing all of this makes clear is that the sickness of American politics didn’t begin with Donald Trump, any more than the sickness of the Roman Republic began with Caesar. The erosion of democratic foundations has been underway for decades, and there’s no guarantee that we will ever be able to recover.
But if there is any hope of redemption, it will have to begin with a clear recognition of how bad things are. American democracy is very much on the edge.
I have a new column:
When It Comes to Trumponomics, Economists Are on High Alert: Faith in macroeconomic models plummeted after the Great Recession, and for good reason. The models failed to foresee the economic problems that were coming, the severity of the recession was misjudged, and the models provided little guidance on how policymakers should respond to the economic crisis.
Macroeconomists have since overcome many of these problems. For example, the failure to integrate a meaningful financial sector into the models and working out how monetary and fiscal policy impact the economy when it is stuck at the zero bound. But even today, as Berkeley economist Brad DeLong points out (and as I pointed out long ago), macroeconomists cannot even agree on the importance of various explanations about the primary cause(s) of the recession.
Does that mean economics has little to offer when it comes to evaluating policy proposals from the Trump administration? Have macroeconomic models been tarnished to the point where the Trump administration can disregard economic analyses unfavorable to their proposals because the experts don’t know what they are talking about? ...
Sunday, December 18, 2016
Saturday, December 17, 2016
Managed to get out of Eugene just ahead of the ice storm, and going to enjoy some sunshine today. So a quick post that echoes a post from Brad DeLong, and that may be it for today:
Has Academic Thinking About Countercyclical Fiscal Policy Changed?: Has academic thinking about countercyclical fiscal policy changed recently? I would not say that thinking has changed. I would say that there is a good chance that thinking is changing–that academia is swinging back to a recognition that monetary policy cannot do the stabilization policy by itself, at least not under current circumstances. But it may not be.
If things are swinging back, it is as a result of a whole bunch of extraordinary surprises.
Back in 2007 we thought we understood the macroeconomic world, at least in its broad outlines and essentials. It has become very clear to us since 2007 that that is not the case. Right now we have a large number of competing diagnoses about where we were most wrong. We clearly were very wrong about the abilities of major money center banks to manage their derivatives books, or even to understand to understand what their derivatives books were. We clearly did not fully understand how those markets should be properly regulated.
Right now, however:
- We have people who think the key flaw in the world economy today is an extraordinary shortage of safe assets. Nobody trusts private sector enterprises to do the risk transformation properly. Probably people will not again trust private sector enterprises for at least a generation.
- We have those who think the problem is an excessive debt load where–I think we should distinguish between debt for which there is nothing safer, the debt of sovereigns that possess exorbitant privilege, and all other debts.
- We have those who think we are undergoing a necessary deleveraging.
- We have those who look for causes in the demography.
- And then there is Larry Summers, as the third coming of British turn-of-the 20th century economist John Hobson. (The second coming was Alvin Hansen in the 1930s.) And the question: just what is Larry talking about?
- Is Larry talking about the inevitable consequences of the coming of the demographic transition and of the end of Robert Gordon’s long second Industrial Revolution of extremely rapid economic growth?
- Or is he talking a collapse of the ability of financial markets to do the risk transformation–to actually shrink the equity risk premium from its current absurd level down to something more normal?
If you look at asset prices now, you confront the minus two percent real return on the debt of sovereigns that possess exorbitant privilege with what Justin Lahart of the Wall Street Journal tells me is now a 5.5% real earnings yield on the U.S. stock market as a whole. That 7.5% per year equity premium is a major derangement of asset prices. It makes it very difficult for us to use our standard tools to think about what good policy would be…
- Kudlow for CEA? - Jared Bernstein
- The Outlook for the Economy - FRBSF
- Can you do historical counter-factuals? - Dietrich Vollrath
- Want to Get Rid of Obamacare? Be Careful What You Wish For - Robert Frank
- The Labor Market Experience of Blacks and Whites is Similar - Dean Baker
- Across Age Groups, Whites Fared Worse in Employment Rates - NYTimes
- Am I Still Bitter Over Republican Perfidy in 2009? Oh Yes. - Kevin Drum
- I'm a Scientist, and I Don't Believe in Facts - Scientific American
- The Trump Shock and Interest Rates - David Beckworth
- Why populism should be no surprise - mainly macro
- A View into Dynamic Gains from Trade - Fed Notes
- Public policy in a zero-growth scenario - Enrico Perotti
- Podcast: The Macroeconomics of Star Wars and Star Trek - David Beckworth
- The Anti-Competitive Effects of Common Ownership - Martin Schmalz
- The Impact of Extraordinary Policy on Interest and Exchange Rates - macroblog
- China Must Quickly Tackle its Corporate Debt Problems - iMFdirect
- Academy schools and the English education system - OUPblog
- Tax evasion and the social environment - VoxEU
- Four Ways to Help the Midwest - Noah Smith
Friday, December 16, 2016
"There were a lot of useful idiots this year, and they made the election hack a success":
Useful Idiots Galore, by Paul Krugman, NY Times: On Wednesday an editorial in The Times described Donald Trump as a “useful idiot” serving Russian interests. That may not be exactly right. After all, useful idiots are supposed to be unaware of how they’re being used, but Mr. Trump probably knows very well how much he owes to Vladimir Putin. ...
But let’s be honest: Mr. Trump is by no means the only useful idiot in this story..., bad guys couldn’t have hacked the U.S. election without a lot of help, both from U.S. politicians and from the news media. ...
The pro-Putin tilt of Mr. Trump and his advisers was obvious months before the election... By midsummer the close relationship between WikiLeaks and Russian intelligence was also obvious, as was the site’s growing alignment with white nationalists.
Did Republican politicians, so big on flag waving and impugning their rivals’ patriotism, reject this foreign aid to their cause? No...
This shouldn’t come as a surprise. It has long been obvious ... that the modern G.O.P. is a radical institution that is ready to violate democratic norms in the pursuit of power. ...
The bigger surprise was the behavior of the news media, and I don’t mean fake news; I mean big, prestigious organizations. Leaked emails ... were breathlessly reported as shocking revelations, even when they mostly revealed nothing more than the fact that Democrats are people.
Meanwhile, the news media dutifully played up the Clinton server story, which never involved any evidence of wrongdoing...
And then there was the Comey letter. The F.B.I. literally found nothing at all. But the letter dominated front pages and TV coverage, and that coverage — by news organizations that surely knew that they were being used as political weapons — was almost certainly decisive on Election Day.
So as I said, there were a lot of useful idiots this year, and they made the election hack a success.
Now what? If we’re going to have any hope of redemption, people will have to stop letting themselves be used... And the first step is to admit the awful reality of what just happened. ...
And it means not acting as if this was a normal election whose result gives the winner any kind of a mandate, or indeed any legitimacy beyond the bare legal requirements. It might be more comfortable to pretend that things are O.K., that American democracy isn’t on the edge. But that would be taking useful idiocy to the next level.
Donald Trump won the electoral college at least in part by promising to bring coal jobs back to Appalachia and manufacturing jobs back to the Rust Belt. Neither promise can be honored – for the most part we’re talking about jobs lost, not to unfair foreign competition, but to technological change. But a funny thing happens when people like me try to point that out: we get enraged responses from economists who feel an affinity for the working people of the afflicted regions – responses that assume that trying to do the numbers must reflect contempt for regional cultures, or something.
Is this the right narrative? I am no longer comfortable with this line:
…for the most part we’re talking about jobs lost, not to unfair foreign competition, but to technological change.
Try to place that line in context with this from Noah Smith:
Then, in the 1990s and 2000s, the U.S opened its markets to Chinese goods, first with Most Favored Nation trading status, and then by supporting China's accession to the WTO. The resulting competition from cheap Chinese goods contributed to vast inequality in the United States, reversing many of the employment gains of the 1990s and holding down U.S. wages. But this sacrifice on the part of 90% of the American populace enabled China to lift its enormous population out of abject poverty and become a middle-income country.
Was this “fair” trade? I think not. Let me suggest this narrative: Sometime during the Clinton Administration, it was decided that an economically strong China was good for both the globe and the U.S. Fair enough. To enable that outcome, U.S. policy deliberately sacrificed manufacturing workers on the theory that a.) the marginal global benefit from the job gain to a Chinese worker exceeded the marginal global cost from a lost US manufacturing job, b.) the U.S. was shifting toward a service sector economy anyway and needed to reposition its workforce accordingly and c.) the transition costs of shifting workers across sectors in the U.S. were minimal.
As a consequence – and through a succession of administrations – the US tolerated implicit subsidies of Chinese industries, including national industrial policy designed to strip production from the US.
And then there was the currency manipulation. I am always shocked when international economists claim “fair trade,” pretending that the financial side of the international accounts is irrelevant. As if that wasn’t a big, fat thumb on the scale. Sure, "currency manipulation" is running the other way these days. After, of course, a portion of manufacturing was absorbed overseas. After the damage is done.
Yes, technological change is happening. But the impact, and the costs, were certainly accelerated by U.S. policy.
It was a great plan. On paper, at least. And I would argue that in fact points a and b above were correct.
But point c. Point c was a bad call. Point c was a disastrous call. Point c helped deliver Donald Trump to the Oval Office. To be sure, the FBI played its role, as did the Russians. But even allowing for the poor choice of Hilary Clinton as the Democratic nominee (the lack of contact with rural and semi-rural voters blinded the Democrats to the deep animosity toward their candidate), it should never have come to this.
The transition costs were not minimal.
Consider this from the New York Times:
As the opioid epidemic sweeps through rural America, an ever-greater number of drug-dependent newborns are straining hospital neonatal units and draining precious medical resources.
The problem has grown more quickly than realized and shows no signs of abating, researchers reported on Monday. Their study, published in JAMA Pediatrics, concludes for the first time that the increase in drug-dependent newborns has been disproportionately larger in rural areas.
The latest causalities in the opioid epidemic are newborns.
The transition costs were not minimal.
My take is that “fair trade” as practiced since the late 1990s created another disenfranchised class of citizens. As if we hadn’t done enough of that already. Then we weaponized those newly disenfranchised citizens with the rhetoric of identity politics. That’s coming back to bite us. We didn’t really need a white nationalist movement, did we?
Now comes the big challenge: What can we do to make amends? Can we change the narrative? And here is where I agree with Paul Krugman:
Now, if we want to have a discussion of regional policies – an argument to the effect that my pessimism is unwarranted – fine. As someone who is generally a supporter of government activism, I’d actually like to be convinced that a judicious program of subsidies, relocating government departments, whatever, really can sustain communities whose traditional industry has eroded.
The damage done is largely irreversible. In medium-size regions, lower relative housing costs may help attract overflow from the east and west coast urban areas. And maybe a program of guaranteed jobs for small- to medium-size regions combined with relocation subsidies for very small-size regions could help. But it won’t happen overnight, if ever. And even if you could reverse the patterns of trade – which wouldn’t be easy given the intertwining of global supply chains – the winners wouldn’t be the same current losers. Tough nut to crack.
Bottom Line: I don’t know how to fix this either. But I don’t absolve the policy community from their role in this disaster. I think you can easily tell a story that this was one big policy experiment gone terribly wrong.
- This Is What Climate Change Costs Us - The New York Times
- The ‘how’ and the ‘when’ in fiscal adjustments - VoxEU
- Why Doesn’t Apple Export More Services (Wonky) - Brad Setser
- What are populist policies? - mainly macro
- More evidence for voter irrationality - Stumbling and Mumbling
- Killing Them Softly? - Gloomy European Economist
Thursday, December 15, 2016
Travel day (from cold to warm). Will post as I can.
Fed Turns Hawkish, by Tim Duy: The FOMC raised the target range for the federal funds rate by 25bp today, as expected. But the tone of the press conference and the summary of economic projections were more hawkish than I anticipated. The Fed is shifting gears, a shift I did not expect until more data piled up in the first quarter of 2017.
My error in analyzing this meeting was thinking that the Fed would nudge down the longer term estimate of unemployment - essentially, the natural rate of unemployment - on the basis the 4.6% unemployment rate in November. Such a downward drift happened in 2015:
I expected something similar given that the pace of inflation and wage gains remains moderate. But the Fed stuck to their prior estimates, 4.8% with a central tendency of 4.7-5.0% and an overall range of 4.5-5.0%. They didn't budge.
What did budge was the rate forecast, the dots. The median dot shifted up 25bp; the September median forecast of 50bp of rate hikes for 2017 is now 75bp. My interpretation is that rather than showing up in a declining estimate of the natural rate, the unemployment drop showed up as a rise in the rate forecast. This is important. It is almost as if the Fed is drawing a line in the sand with an increased confidence that they have the correct natural rate estimate. Their tolerance for further declines below that line is wearing thin.
Assuming that the natural rate forecast does not change - which essentially depends on the path of wages and inflation - this means that you should anticipate that further declines in unemployment will be met with a more aggressive Fed in 2017. I don't think this will be the last increase in the median rate forecast for 2017.
It is reasonable to argue that the median dot doesn't really represent the Fed's forecast for rates. But I think the shifts in the dots at a minimum reflect general changes in sentiment. Down for more dovish. Up for more hawkish. This is more hawkish.
Federal Reserve Chair Janet Yellen exuded confidence in the economic outlook during the press conference. Three points were particularly notable:
- The Fed is obviously watching the path of fiscal policy, but it is too early to say what it meant for monetary policy. She did note, however, that fiscal stimulus was not needed to help the economy reach full employment. The implication was that fiscal policy designed to boost demand rather than productivity would be met by a faster pace of rate increases. This sets the stage for a potential conflict with the Trump Administration.
- She repeatedly argued that her run a "high-pressure" economy comments from October were misinterpreted. She was recommending a research program, not a policy path. If you were expecting otherwise, time to get over it.
- She did not dismiss the possibility of staying on as a board member after her term as Chair ends. Another potential conflict with the Trump Administration.
Bottom Line: Sentiment on Constitution Ave. is shifting toward a modestly more hawkish stance a few months ahead of my schedule. Policymakers finally see the light at the end of the tunnel.
- Notes on the Macroeconomic Situation - Paul Krugman
- The Age of Hyper-Uncertainty - Barry Eichengreen
- Academic signaling and the post-truth world - Noahpinion
- What Is the Excellence of an Economist? - Brad DeLong
- The Phrase "Structural Reform" Considered Harmful... - Brad DeLong
- Trump Ought Not to Be an Austerian Pain-Caucus President - Brad DeLong
- Can Corruption Explain the Success of Donald Trump? - ProMarket
- Income Inequality's Past, Present And Pending Future - On Point
- The shifting natural wealth of nations - VoxEU
- Slavery and Capitalism Redux - EconoSpeak