Kathleen Geier on "The rigged economics of race in America, in five studies":
Inequality in Black and White: For the past few years, Americans have been engaged in two big public conversations about inequality. One is about economic insecurity (stagnant wages, wealth concentration, Occupy Wall Street). The other is about racial inequality (incarceration rates, police brutality, disenfranchisement). Often, these two discussions are kept separate, but they are closely intertwined.
The economic trends that have battered Americans have been exceptionally hard on African Americans, making them perhaps the truest face of economic inequality. Much of the progress in the workplace and in schools that African Americans have made since the 1964 Civil Rights Act has now ground to a halt, or worse. Blacks are nearly three times as likely to be poor as whites and more than twice as likely to be unemployed. Compared to whites with the same qualifications, blacks remain less likely to be hired and more likely to earn lower wages, to be charged higher prices for consumer goods, to be excluded from housing in white neighborhoods, and to be denied mortgages or steered into the subprime mortgage market. Racial disparities in household wealth haven’t just persisted; they’ve increased. What’s more, the reasons for these divergences aren’t always outwardly apparent or easy to understand. ...
Posted by Mark Thoma on Tuesday, March 17, 2015 at 10:00 AM in Economics, Income Distribution |
Some of you may be interested in this:
Causal Inference in Social Science An elementary introduction, by Hal R. Varian, Google, Inc, Jan 2015, Revised: March 7, 2015: Abstract This is a short and very elementary introduction to causal inference in social science applications targeted to machine learners. I illustrate the techniques described with examples chosen from the economics and marketing literature.
Posted by Mark Thoma on Tuesday, March 17, 2015 at 09:12 AM in Econometrics, Economics |
I get tired of saying that tax cuts don't pay for themselves, so I'll turn it over to Josh Barro:
Tax Cuts Still Don’t Pay for Themselves: Last week, I wrote about the new tax plan from Senator Marco Rubio and Senator Mike Lee... It calls for big tax credits for middle-income families with children, corporate tax cuts and complete elimination of the capital gains tax — and as a result would cost trillions of dollars in revenue over a decade.
Or would it? The Tax Foundation released a report last week arguing the Rubio-Lee plan would generate so much business investment that, within a decade, federal tax receipts would be higher than if taxes hadn’t been cut at all. ...
I discussed the Tax Foundation report with 10 public finance economists ranging across the ideological spectrum, all of whom said its estimates of the economic effects of tax cuts were too aggressive. “This would not pass muster as an undergraduate’s model at a top university,” said Laurence Kotlikoff, a Boston University professor whom the Tax Foundation specifically encouraged me to call. ...
[T]he House adopted a rule in January that requires “dynamic scoring” of tax bills... In principle, dynamic scoring is fine. Tax policy really does affect the economy... But as the Tax Foundation report shows, dynamic scoring can be misused: You can get essentially any answer you want ... by changing the assumptions...
The crucial thing to watch, in the guts of future C.B.O. reports that rely on dynamic scoring, will be whether the new dynamic assumptions are more reasonable than zero — or whether, like the Tax Foundation assumptions, they take us farther away from accuracy, and make unsupportable promises of tax cuts paying for themselves.
Posted by Mark Thoma on Tuesday, March 17, 2015 at 09:07 AM in Budget Deficit, Economics, Politics, Taxes |
Posted by Mark Thoma on Tuesday, March 17, 2015 at 12:06 AM in Economics, Links |
Survival of the 'socially fit':
Wealth and power may have played a stronger role than 'survival of the fittest': ... In a study led by scientists from Arizona State University, the University of Cambridge, University of Tartu and Estonian Biocentre, and published March 13 in an online issue of the journal Genome Research, researchers discovered a dramatic decline in genetic diversity in male lineages four to eight thousand years ago -- likely the result of the accumulation of material wealth, while in contrast, female genetic diversity was on the rise. This male-specific decline occurred during the mid- to late-Neolithic period.
Melissa Wilson Sayres, a leading author and assistant professor with ASU's School of Life Sciences, said, "Instead of 'survival of the fittest' in biological sense, the accumulation of wealth and power may have increased the reproductive success of a limited number of 'socially fit' males and their sons." ...
Posted by Mark Thoma on Monday, March 16, 2015 at 03:07 PM in Economics |
What was Netanyahu's real purpose?:
Israel’s Gilded Age, by Paul Krugman, Commentary, NY Times: Why did Prime Minister Benjamin Netanyahu of Israel feel the need to wag the dog in Washington? For that was, of course, what he was doing in his anti-Iran speech to Congress. If you’re seriously trying to affect American foreign policy, you don’t insult the president and so obviously align yourself with his political opposition. No, the real purpose of that speech was to distract the Israeli electorate with saber-rattling bombast, to shift its attention away from the economic discontent that, polls suggest, may well boot Mr. Netanyahu from office in Tuesday’s election.
But wait: Why are Israelis discontented? After all, Israel’s economy has performed well by the usual measures. ...
Israel has experienced a dramatic widening of income disparities. Key measures of inequality have soared; Israel is now right up there with America as one of the most unequal societies in the advanced world. And Israel’s experience shows that this matters, that extreme inequality has a corrosive effect on social and political life. ...
Still, why is Israeli inequality a political issue? Because it didn’t have to be this extreme.
You might think that Israeli inequality is a natural outcome of a high-tech economy that generates strong demand for skilled labor — or, perhaps, reflects the importance of minority populations with low incomes, namely Arabs and ultrareligious Jews. It turns out, however, that those high poverty rates largely reflect policy choices: Israel does less to lift people out of poverty than any other advanced country — yes, even less than the United States.
Meanwhile, Israel’s oligarchs owe their position not to innovation and entrepreneurship but to their families’ success in gaining control of businesses that the government privatized in the 1980s — and they arguably retain that position partly by having undue influence over government policy, combined with control of major banks.
In short, the political economy of the promised land is now characterized by harshness at the bottom and at least soft corruption at the top. And many Israelis see Mr. Netanyahu as part of the problem. He’s an advocate of free-market policies; he has a Chris Christie-like penchant for living large at taxpayers’ expense, while clumsily pretending otherwise.
So Mr. Netanyahu tried to change the subject from internal inequality to external threats, a tactic those who remember the Bush years should find completely familiar. We’ll find out on Tuesday whether he succeeded.
Posted by Mark Thoma on Monday, March 16, 2015 at 09:01 AM in Economics, Income Distribution |
The End of "Patient" and Questions for Yellen, by Tim Duy: FOMC meeting with week, with a subsequent press conference with Fed Chair Janet Yellen. Remember to clear your calendar for this Wednesday. It is widely expected that the Fed will drop the word “patient” from its statement. Too many FOMC participants want the opportunity to debate a rate hike in June, and thus “patient” needs to go. The Fed will not want this to imply that a rate hike is guaranteed at the June meeting, so look for language emphasizing the data-dependent nature of future policy. This will also be stressed in the press conference.
Of interest too will be the Fed’s assessment of economic conditions since the last FOMC meeting. On net, the data has been lackluster – expect for the employment data, of course. The latter, however, is of the highest importance to the Fed. I anticipate that they will view the rest of the data as largely noise against the steadily improving pace of underlying activity as indicated by employment data. That said, I would expect some mention of recent softness in the opening paragraph of the statement.
I don’t think the Fed will alter its general conviction that low readings on inflation are largely temporary. They may even cite improvement in market-based measures of inflation compensation to suggest they were right not to panic at the last FOMC meeting. I am also watching for how they describe the international environment. I would not expect explicit mention of the dollar, but maybe we will see a coded reference. Note that in her recent testimony, Yellen said:
But core PCE inflation has also slowed since last summer, in part reflecting declines in the prices of many imported items and perhaps also some pass-through of lower energy costs into core consumer prices.
Stronger dollar means lower prices of imported items.
The press conference will be the highlight of the meeting. Presumably, Yellen will continue to build the case for a rate hike. Since the foundation of that case rests on the improvement in labor markets and the subsequent impact on inflationary pressures, it is reasonable to ask:
On a scale of zero to ten, with ten being most confident, how confident is the Committee that inflation will rise toward target on the basis on low – and expected lower - unemployment?
Considering that low wage growth suggests it is too early to abandon Yellen’s previous conviction that unemployment is not the best measure of labor market tightness, we should consider:
Is faster wage growth a precondition to raising interest rates?
I expect the answer would be “no, wages are a lagging indicator.” The Federal Reserve seems to believe that policy will still remain very accommodative even after the first rate hike. We should ask for a metric to quantify the level of accommodation:
What is the current equilibrium level of interest rates? Where do you see the equilibrium level of interest rates in one year?
A related question regards the interpretation of the yield curve:
Do you consider low interest long-term interest rates to be indicative of loose monetary conditions, or a signal that the Federal Reserve needs to temper its expectations of the likely path of interest rates as indicated in the “dot plot”?
Relatedly, differential monetary policy is supporting capital inflows, depressing US interest rates and strengthening the dollar. This dynamic ignited a debate of what it means for the economy and how the Fed should or should not respond. Thus:
The dollar is appreciating at the fastest rate in many years. Is the appreciating dollar a drag on the US economy, or is any negative impact offset by the positive demand impact of looser monetary policy abroad? How much will the dollar need to appreciate before it impacts the direction of monetary policy?
Given that the Fed seems determined to raise interest rates, we should probably be considering some form of the following as a standard question:
Consider the next six months. Which is greater - the risk of moving too quickly to normalize policy, or the risk of delay? Please explain, with specific reference to both risks.
Finally, a couple of communications questions. First, the Fed is signaling that they do not intend to raise rates on a preset, clearly communicated path like the last hike cycle. Hence, we should not expect “patient” to be replaced with “measured.” But it seems like the FOMC is too contentious to expect them to shift from no hike one meeting to 25bp the next, then back to none – or maybe 50bp. So, let’s ask Yellen to explain the plan:
There appears to be an effort on the part of the FOMC to convince financial markets that rate hikes, when they begin, will not be on a pre-set path. Given the need for consensus building on the FOMC, how can you credibly commit to renegotiate the direction of monetary policy at each FOMC meeting? How do you communicate the likely direction of monetary policy between meetings?
Finally, as we move closer to policy normalization, the Fed should be rethinking the “dot plot,” which was initially conceived to show the Fed was committed to a sustained period of low rates. Given that the dot-plot appears to be fairly hawkish relative to market expectations, it may not be an appropriate signal in a period of rising interest rates. Time for a change? But is the Fed considering a change, and when will we see it? This leads me to:
Cleveland Federal Reserve President Loretta Mester has suggested revising the Summary of Economic Projections to explicitly link the forecasts of individual participants with their “dots” in the interest rate projections. Do you agree that this would be helpful in describing participants’ reaction functions? When will this or any other revisions to the Summary of Economic Projections be considered?
Bottom Line: By dropping "patient" the Fed will be taking another step toward the first rate hike of this cycle. But how long do we need to wait until that first hike? That depends on the data, and we will be listening for signals as to how, or how not, the Fed is being impacted by recent data aside from the positive readings on the labor market.
Posted by Mark Thoma on Monday, March 16, 2015 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Monday, March 16, 2015 at 12:06 AM in Economics, Links |
In case this was missed when it was in the daily links. This is from Tim Taylor:
When a Summer Job Could Pay the Tuition: When I was graduating from high school in 1978, a number of my friends went to the hometown University of Minnesota. At the time, it was possible to pay tuition and a substantial share of living expenses with the earnings from a full-time job in the summer and a part-time job during the school year. Given the trends in costs of higher education and the path of the minimum wage since then, this is no longer true.
Here's an illustration of the point with the University of Minnesota, with its current enrollment of about 41,000 undergraduates,as an example. (The figure is taken from a presentation by David Ernst, who among his other responsibilities is Executive Director of the Open Textbook Network, which provides links to about 170 free and open-license textbooks in a variety of subjects.)
Just to put this in perspective, say that a full-time student works 40 hours per week for 12 weeks of summer vacation, and then 10 hours per week for 30 weeks during the school year--while taking a break during vacations and finals. That schedule would total 780 hours per year. Back in the late 1970s, even being paid the minimum wage, this work schedule easily covered tuition. By the early 1990s, it no longer covered tuition. According to the OECD, the average annual hours worked by a US worker was 1,788 in 2013. At the minimum wage, that's now just enough to cover tuition--although it doesn't leave much space for being a full-time student.
[Me on the same topic.]
Posted by Mark Thoma on Sunday, March 15, 2015 at 09:57 AM in Economics, Universities |
Posted by Mark Thoma on Sunday, March 15, 2015 at 12:06 AM in Economics, Links |
Paul Krugman defends IS-LM analysis (I'd make one qualification. Models are built to answer specific questions, we do not have one grand unifying model to use for all questions. IS-LM models were built to answer exactly the kinds of questions we encountered during the Great Recession, and the IS-LM model provided good answers (especially if one remembers where the model encounters difficulties). DSGE models were built to address other issues, and it's not surprising they didn't do very well when they were pushed to address questions they weren't designed to answer. The best model to use depends upon the question one is asking):
John and Maynard’s Excellent Adventure: When I tell people that macroeconomic analysis has been triumphantly successful in recent years, I tend to get strange looks. After all, wasn’t everyone predicting lots of inflation? Didn’t policymakers get it all wrong? Haven’t the academic economists been squabbling nonstop?
Well, as a card-carrying economist I disavow any responsibility for Rick Santelli and Larry Kudlow; I similarly declare that Paul Ryan and Olli Rehn aren’t my fault. As for the economists’ disputes, well, let me get to that in a bit.
I stand by my claim, however. The basic macroeconomic framework that we all should have turned to, the framework that is still there in most textbooks, performed spectacularly well: it made strong predictions that people who didn’t know that framework found completely implausible, and those predictions were vindicated. And the framework in question – basically John Hicks’s interpretation of John Maynard Keynes – was very much the natural way to think about the issues facing advanced countries after 2008. ...
I call this a huge success story – one of the best examples in the history of economics of getting things right in an unprecedented environment.
The sad thing, of course, is that this incredibly successful analysis didn’t have much favorable impact on actual policy. Mainly that’s because the Very Serious People are too serious to play around with little models; they prefer to rely on their sense of what markets demand, which they continue to consider infallible despite having been wrong about everything. But it also didn’t help that so many economists also rejected what should have been obvious.
Why? Many never learned simple macro models – if it doesn’t involve microfoundations and rational expectations, preferably with difficult math, it must be nonsense. (Curiously, economists in that camp have also proved extremely prone to basic errors of logic, probably because they have never learned to work through simple stories.) Others, for what looks like political reasons, seemed determined to come up with some reason, any reason, to be against expansionary monetary and fiscal policy.
But that’s their problem. From where I sit, the past six years have been hugely reassuring from an intellectual point of view. The basic model works; we really do know what we’re talking about.
[The original is quite a bit longer.]
Posted by Mark Thoma on Saturday, March 14, 2015 at 09:09 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Saturday, March 14, 2015 at 12:06 AM in Economics, Links |
Is the rising value of the dollar good news?:
Strength Is Weakness, by Paul Krugman, Commentary, NY Times: We’ve been warned over and over that the Federal Reserve, in its effort to improve the economy, is “debasing” the dollar..., the Fed’s critics keep insisting that easy-money policies will lead to a plunging dollar. Reality, however, keeps declining to oblige. Far from heading downstairs to debasement, the dollar has soared through the roof. ... Hooray for the strong dollar!
Or not. ... Currency markets ... always grade countries on a curve. The United States isn’t exactly booming, but it looks great compared with Europe... Markets have responded to those poor prospects by pushing interest rates incredibly low. In fact, many European bonds are now offering negative interest rates.
This remarkable situation makes even those low, low U.S. returns look attractive by comparison. So capital is heading our way, driving the euro down and the dollar up.
Who wins from this market move? Europe: a weaker euro makes European industry more competitive against rivals, boosting both exports and firms that compete with imports, and the effect is to mitigate the euroslump. Who loses? We do, as our industry loses competitiveness, not just in European markets, but in countries where our exports compete with theirs. ...
In effect, then, Europe is managing to export some of its stagnation to the rest of us. ... And the effects may be quite large. ...
One thing that worries me is that I’m not at all sure that policy makers have fully taken the implications of a rising dollar into account. The Fed, still eager to raise interest rates despite low inflation and stagnant wages, seems to me to be too sanguine about the economic drag. ...
Oh, and one more thing: a lot of businesses around the world have borrowed heavily in dollars, which means that a rising dollar may create a whole new set of debt crises. Just what the global economy needed.
Is there a policy moral to all this? One thing is that it’s really important for all of us that Mario Draghi at the European Central Bank and associates succeed in steering Europe away from a deflationary trap; the euro is their currency, but it turns out to be our problem. Mainly, though, this is another reason for the Fed to fight the urge to pretend that the crisis is over. Don’t raise rates until you see the whites of inflation’s eyes!
Posted by Mark Thoma on Friday, March 13, 2015 at 09:36 AM in Economics, International Finance, Monetary Policy |
Posted by Mark Thoma on Friday, March 13, 2015 at 12:06 AM in Economics, Links |
Will the Dollar Impact US Growth?, by Tim Duy: A quick one while I wait for my flight at National. Scott Sumner argues that the strong dollar will not impact US growth. In response to a Washington Post story, he writes:
This is wrong, one should never reason from a price change. There are 4 primary reasons why the dollar might get stronger:
1. Tighter money in the US (falling NGDP growth expectations.)
2. Stronger economic growth in the US.
3. Weaker growth overseas.
4. Easier money overseas.
In my view the major factor at work today is easier money overseas. For instance, the ECB has recently raised its growth forecasts for 2015 and 2016, partly in response to the easier money policy adopted by the ECB (and perhaps partly due to lower oil prices—but again, that’s only bullish if the falling oil prices are due to more supply, not less demand–see below.) That sort of policy shift in Europe is probably expansionary for the US.
The initial point is correct - arguing from a price change is a risky proposition. Go to the underlying factors. But I think the next paragraph is a bit questionable. I think that the policy shift in Europe does reduce tail risk for the global economy, and is therefore a positive for the US economy (I suspect the Fed thinks so as well). But it reduces tail risk because ECB policy is supporting not one but two positive economic shocks - both falling oil and a rising falling Euro. And, all else equal, a rising falling euro means a stronger dollar, which means a negative for the US economy. Tail risk for Europe is reduced at a cost for the US economy (a cost that the Federal Reserve and US Treasury both seem willing to endure).
That said, all this means is that Sumner is right, you can't reason from a price change, but reasoning in a general equilibrium framework is very, very hard. Sumner gets closer here, but still I think falls short:
However NGDP growth forecasts in the Hypermind market have trended slightly lower in the past couple of months. Unfortunately, this market is still much too small and illiquid to draw any strong conclusions. Things will improve when the iPredict futures market is also up and running, and even more when the Fed creates and subsidizes a NGDP prediction market. But that’s still a few years away. Nonetheless, let’s assume Hypermind is correct. Then perhaps money in the US has gotten slightly tighter, and perhaps this will cause growth to slow a bit. But in that case the cause of the slower growth would be tighter money, not a stronger dollar.
So let's try to close the circle - not only can't you reason from a price change, but also you need to pay attention to the entire constellation of prices. If ECB policy - and, by extension, the falling euro - was a net positive for the US economy, shouldn't we expect higher long US interest rates? But long US rates continue to hover around 2%, which seems crazy given the Fed's stated intention to start raising rates. Consider, however, that the stronger dollar does in fact represent tighter monetary conditions, but long interest rates are falling, which acts as a counterbalance by loosening financial conditions. Essentially, markets are anticipating that the stronger dollar saps US growth, but the Fed will respond with a slower pace of policy normalization, which acts in the opposite direction. So the stronger dollar does negatively impact growth, but market participants expect a monetary offset.
Hence - and I think Sumner would agree with this - the ball is in the Federal Reserve's court. The stronger dollar is a negative for the US economy, while the expected impact on monetary policy is a positive. The net impact is neutral. You should anticipate a stronger domestic economy offset by a larger trade deficit.
That is, of course, assuming the Federal Reserve takes sufficient note of the rising dollar, and its impact on inflation, by lowering the expected path of short term interest rates. And perhaps this is exactly what is revealed in next week's Summary of Economic Projections. Look for the possibility next week that the Fed is both hawkish - by opening the door for a June hike - and dovish - by lowering the median rate projections in the dot plot.
Update: I see Paul Krugman is lamenting the possibility that some FOMC members interpret falling interest rates as reason to tighten policy more aggressively - a view primarily outlined by New York Federal Reserve President William Dudley. My read of the bond market implies that market participants expect the opposite - the Fed needs to accept additional financial accommodation. That said, Dudley's stance clearly opens the door to the possibility of the Fed running an excessively tight policy stance, which wouldn't happen if they took their inflation target seriously.
Posted by Mark Thoma on Thursday, March 12, 2015 at 11:54 AM in Economics, Fed Watch, International Finance, Monetary Policy |
Thoughts about monetary and fiscal policy in a post-inflation world, Brookings: ... Why are we still so focused on fighting inflation? Why are so many people in this room devoting so much time and attention to guessing when the Federal Reserve will start raising short-term interest rates and get back to its “normal” job of protecting us from inflation? Is inflation an important threat to our economic well-being? Is when to raise interest rates the most urgent question facing the Fed at the moment? Or are we suffering from cultural lag?
Collecting linguistic evidence of cultural lags is a minor hobby of mine. I smile when I catch myself referring to the refrigerator as the “ice box,” because that was what my mother called it... I am amused when young people tell me their phones are “ringing off the hook.” Have they ever used a phone with a receiver on a hook? When bureaucrats say they are eager to break out of their silos, I wonder if they if they have ever lived on a farm or anywhere close to a silo. So when politicians and financial journalists ask me earnestly, as they do, whether the Federal Reserve isn’t risking devastating “run-away” inflation by buying all those bonds, I suspect cultural lag. What Inflation? We should be so lucky! Central banks have amply proved that they know how to stop inflation—Paul Volcker showed that. They have been much less successful in getting little inflation going.
A lecture in honor of Paul Volcker is the perfect occasion for raising the fundamental question: are the major advanced economies (US, Europe, Japan) facing a new normal for which current tools of monetary, fiscal, and regulatory policy need to be restructured? ...
Over-coming cultural lag in order to prosper in a post-inflation world will take significant shifts in the mind-set of economists, economic policy-makers, politicians and the public. I see four major challenges to current thinking:
- We have to recognize that the main job of central banks is avoiding financial crisis.
- We will have to get used to central banks operating at quite low interest rates much of the time and managing big balance sheets without apologies.
- We have to rehabilitate budget policy to make it useable again and move to a sustainable debt track at the same time
- We have to find constitutional ways of reducing the power of big money in politics and economic policy—or change the Constitution.
I will get back to these four challenges, but first a very quick tour through the macro-policy landscape of the last five or six decades. ...
And, later in the essay (it is relatively long, and I don't agree with every single point that is made, e.g. when she defends ‘Simpson-Bowlesism’ and discusses the need to rein in entitlement spending, and when she argues against selling the idea "that unspecified government spending would add to aggregate demand and accelerate the recovery without adverse consequences to the long-run debt... Unspecified spending and near-term debt increase are what the public and elected officials fear, and they are skeptical of fee lunches. Instead, we have to make the case for very specific public investments that can be shown to have positive impacts on productivity growth and future prosperity" -- deficit spending in a recession has a role to play in stimulating the economy in the short-run, we shouldn't focus only on the long-run growth potential of policy -- but I do agree with the the general thrust of her comments):
... Political polarization has led to angry confrontations over the budget for the last several years complete with threats to shut down the government or default on the national debt and bizarre budget decision processes, such as the Super Committee, the fiscal cliff, and sequestration. These shenanigans are unworthy of a mature democracy and horrendously destructive of confidence in rational economic governance. The result has been worse than gridlock. It has been insanely counterproductive budget policy at a time when the federal budget could have been contributing both to faster recovery and to longer run productivity growth.
I believe the Great Recession would have been longer and deeper without the stimulus package of 2009. If the stimulus had been larger and lasted longer, recovery would have been more robust and the Fed might not have found it necessary to do so much quantitative easing. Indeed, it is pretty crazy economics for a country trying to climb out of a deep recession to put the burden of accelerating a recovery on the monetary authorities—a job they have never been great at—in the face of sharply declining federal deficits that made the task of stimulating recovery with monetary tools a lot more challenging. But that is what we did.
I also believe that the United States has been dangerously under-investing in public infrastructure, scientific research, and the skills of our future labor force. Doing everything we can to nudge productivity growth back up again is essential to future prosperity. With the private investment awaiting more demand and confidence, the public sector should be moving strongly into the breach with well-structured investment in everything from roads to technical training to basic research. Instead, our bizarre budget process has been squeezed the very budget accounts that contain most opportunity for public investment. Discretionary spending is at record lows in relation to the size of the economy and headed lower while the highway trust fund is running dry. How crazy is that?
Making budget policy useful again will take major shifts in political thinking, and here I think economists can help if they use arguments the public and politicians can relate to. First, I would recommend not pushing the argument that unspecified government spending would add to aggregate demand and accelerate the recovery without adverse consequences to the long-run debt. Ball, Summers and DeLong may well be right that hysteresis is so serious a consequence of recession that spending now would juice recovery enough to bring down long run debt. But they are never going to sell that argument. Unspecified spending and near-term debt increase are what the public and elected officials fear, and they are skeptical of fee lunches.
Instead, we have to make the case for very specific public investments that can be shown to have positive impacts on productivity growth and future prosperity. This should not be an argument for larger government, but for shifting from less to more effective government spending and from consumption-oriented spending (including spending in the tax code) to growth oriented spending over time. And, oh yes, that means making the tax code more progressive, more pro-growth, and raising additional revenue, as well as restructuring entitlement programs. There is plenty is such an agenda for both liberals and conservatives to like—if only they could be persuaded to talk about it. ...
Posted by Mark Thoma on Thursday, March 12, 2015 at 11:07 AM in Budget Deficit, Economics, Fiscal Policy, Monetary Policy, Politics |
The government is the only reason the US has more inequality than Sweden, by Dylan Matthews: ...the income distribution in the US still stands out as particularly uneven. ...
The US actually isn't especially unequal if you look at income before taxes or government transfers like Social Security and food stamps..., a whole number of wealthy countries — Israel, the UK, Greece, Poland, Germany, Finland, and Ireland — have more pre-tax/transfer inequality than we do... Spain, Norway, the Netherlands, and Sweden all have exactly the same level as the US does.
The entire difference comes after taxes and transfer spending. ...Germany and Ireland both have significantly more pre-tax/transfer inequality than the US, but significantly less post-tax/transfer inequality... Meanwhile, the Netherlands and Sweden, which have famously egalitarian economies with generous welfare states, have the exact same level of pre-tax/transfer inequality as the US. It's not that their societies just naturally produce more equitable distributions. Their governments simply do more redistribution. ...
Note that the pre-tax/transfer number doesn't take out the effects of government policy entirely; there's a lot the government can do to alter the pre-tax/transfer distribution, including promoting or hampering labor unions or increasing the minimum wage. A number of countries, including Japan, Korea, and Switzerland, boast significantly lower pre-tax/transfer inequality than the US. ...
Posted by Mark Thoma on Thursday, March 12, 2015 at 10:19 AM in Economics, Income Distribution, Politics |
Projections of budget problems in the future are about health care costs, and there is improvement on that front:
The Truth About Entitlements, by Paul Krugman: As part of another project, I was looking at CBO historical budget data, and realized that you can summarize a lot about all those much-denounced “entitlements” with this figure:
Credit: Congressional Budget Office
Here, income security is mainly EITC, food stamps, and unemployment benefits, plus a few other means-tested aid programs. Health is all major programs — Medicare, Medicaid/CHIP, and at the very end the exchange subsidies.
What this chart tells you right away:
1. The “nation of takers” stuff is deeply misleading. Until the economic crisis, income security had no trend at all. ...
2. When people claimed that spending was exploding under Obama, the only thing actually happening was a surge in income-support programs at a time of genuine distress. People smirked knowingly and declared that everyone knew that the bump in spending would become permanent; it didn’t.
3. If there is a long-run spending problem, it’s overwhelmingly about health care. And we have lately been making remarkable progress on that front.
More on the same topic from the CBPP:
Low-Income Programs Not Driving Nation’s Long-Term Fiscal Problem, by Robert Greenstein, Isaac Shapiro, and Richard Kogan: Low-income programs are not driving the nation’s long-term fiscal problems, contrary to the impression that a narrow look at federal spending during the Great Recession and the years that immediately followed might leave. Lawmakers should bear this in mind as they consider proposals that may emerge in coming weeks for deep cuts in this part of the budget.
Low-income program spending grew significantly between 2007 and 2010 in response to the severe economic downturn, helping to mitigate its worst effects. Since peaking in 2010 and 2011, federal spending on low-income programs other than health care has fallen considerably and will continue to fall as a percent of gross domestic product (GDP) as the economy more fully recovers. By 2018, it will — based on Congressional Budget Office estimates — drop below its average over the past 40 years, (from 1975 to 2014) and continue declining as a share of GDP after that.  (See Figure 1.)
As a result, these programs do not contribute to the nation’s long-term fiscal problems. ...
Posted by Mark Thoma on Thursday, March 12, 2015 at 09:46 AM in Budget Deficit, Economics, Politics, Social Insurance |
Posted by Mark Thoma on Thursday, March 12, 2015 at 12:06 AM in Economics, Links |
Fear of Cheap Foreign Labor in the Long Depression: 1873-1879: The US economy was in a continuous recession for 65 months from October 1873 to March 1879. Historians call is the "Long Depression," because the Great Depression from 1929 to 1933 saw "only" 42 consecutive months of economic decline. For comparison, the more recent Great Recession lasted 18 months. ...
Precise government statistics are not available for this time period, of course, but estimates of the unemployment rate for the later part of this period often exceeded 20%, and some exceeded 30%. For those with a job, real wages fell by half. Even those real wages were often paid in the form of company scrip, which could only be used at the company store, and was worth substantially less than cash. ... Output fell sharply. ...
And what was the cause of this collapse? At least one writer back in October 1879, writing for the Atlantic Monthly, believed that globalization and competition from China, India, and Brazil were to blame. An author identified as W.G.M. wrote an essay called "Foreign Trade No Cure for Hard Times," which through the magic of the web can be read online here. W.G.M. argued:
"We read in a London paper that the Chinese government have purchased machinery, and engaged experienced engineers and spinners in Germany to establish cotton mills in China, so as to free that country from dependence upon English and Russian imports. Though China is somewhat tardy in her action, we may be certain that she is thorough. ... More than this, the time is not far distant when the textiles from the Chinese machine looms, iron and steel and cutlery from the Chinese furnaces, forges and workshops, with everything that machinery and cheap labor can produce, will crowd every market. The four hundred millions of China, with the two hundred and fifty millions of India,--the crowded and pauperized populations of Asia,--will offer the cup of cheap machine labor, filled to the brim, to our lips, and force us to drink it to the dregs, if we do not learn wisdom. It is in Asia, if anywhere, that the world is to find its workshop. There are the masses, and the conditions, necessary to develop the power of cheapness to perfection, and they will be used. For years we have been doing our utmost to teach the Chinese shoemaking, spinning and weaving, engine driving, machine building, and other arts, in California, Massachusetts, and other States; and we may be sure they will make good use of their knowledge; for there is no people on earth with more patient skill and better adapted to the use of machinery than the Chinese. When the Chinese government is doing for China, Dom Pedro is doing for Brazil [this would be Dom Pedro II, the last ruler of the Empire of Brazil], though in a different form."
It gives me a smile to think that that dangers of global competition from China, India, and Brazil were being stated so eloquently back in 1879! ...
I wonder how the 1879 argument would have differed if the writer had been able to see how little progress the economies of China and India had made even 100 years after the writing of the article in 1979! For me, an ongoing lesson is that when economic times are rough, blaming other countries is always an easy temptation. ...
Posted by Mark Thoma on Wednesday, March 11, 2015 at 01:25 PM in Economics, International Trade |
Austerity, Gramscian Hegemony, and Hard Money: To the Re-Education Camp! Weblogging: ... Paul Krugman tries to untangle why so many center-right and right-wing economists are so resistant to the elementary logic of Hicks (1937) and the IS-LM model—even those who, like Marty Feldstein, teach the IS-LM model to their students, and teach it very well (after all: he taught it to me).
Back in 2009 ... Mark Thoma wrote a good piece giving what seemed to me to be the correct answer to the inflationistas: He wrote that there was some reason to fear an outburst of inflation when and if the long run came in which the government budget constraint bound and yet congress was continuing to refuse to either:
- curb the growth of public health care costs, or
- raise taxes to pay for them.
But, he went on, the IS-LM logic meant that that was not a risk in the short run. And the cost of the stimulus program and how much debt was "monetized" by QE had at best a second decimal-place effect on the vulnerability of the U.S. to long-run inflation driven by the fiscal theory of the price level. The big enchilada was health-care costs...[quotes my old post]...
That seemed and seems to me to be right, and that is driven by a coherent theoretical view: (i) an unemployment short-run until production returns to potential output, (ii) a medium run in which confidence and interest rates and full-employment growth rates depend on market assessments of how the long-run fiscal gap will be closed, and (iii) a long run in which, perhaps suddenly and unexpectedly, the fiscal theory of the price level binds.
The only thing wrong with Mark's analysis back in 2009 that I saw then and that I see now--other than the short run being a very long time indeed, the bending of the health care costs curve occurring much more sharply than I had imagined possible, and a configuration of interest rates which raises the strong possibility that the long-run in which the fiscal theory of the price level binds has been put off to infinity--was that it missed the easiest way of shrinking the velocity of money in a recovery: raising reserve requirements. So I always had a very hard time figuring out what Feldstein and company were fearing at all...
Indeed, it seemed to me not to be coherent:
Martin Feldstein: "The unprecedented explosion of the US fiscal deficit raises the spectre of high future inflation. ... It is surprising that the long-term interest rates do not yet reflect the resulting risk of future inflation...
... As I looked back on the situation in 2009 and 2010--with a dead housing credit channel, and the increasing likelihood of a recovery characterized not as a V or as a U but as an L--I find myself thinking that Marty Feldstein and the others had turned all their smarts to trying to find reasons not to believe the IS-LM models that they (or at least Feldstein and Taylor) had taught, and not to believe that the marginal investor in financial markets was not-stupid. That fiscal and monetary ease would bring back the 1970s in short order was their conclusion. The task was to think of not-implausible reasons and mechanisms that would make this so.
The corollary, of course, is that for them the only good policies are hard-money austerity policies; and the only good portfolios are those that assume a departure from hard-money austerity will produce inflation.
So perhaps there is a deeper problem somewhere..., it really makes no sense for my contemporaries to be hard-money believers. Yet an astonishing share of the rich among them are.
A great and enduring puzzle...
So: To the re-education camp! I have a lot of rethinking to do--but not about IS-LM, hysteresis, or the fiscal theory of the price level; rather, about the connecting-belts between asset values, wealth levels, and people's ideal interests of what proper monetary and fiscal policy should be.
Posted by Mark Thoma on Wednesday, March 11, 2015 at 11:04 AM in Economics, Inflation, Monetary Policy |
TPP at the NABE: I was in DC yesterday, giving a talk to the National Association of Business Economists. The subject was the Trans-Pacific Partnership; slides for my talk are here.
Not to keep you in suspense, I’m thumbs down. I don’t think the proposal is likely to be the terrible, worker-destroying pact some progressives assert, but it doesn’t look like a good thing either for the world or for the United States, and you have to wonder why the Obama administration, in particular, would consider devoting any political capital to getting this through.
Actually, I was glad to see Larry Summers weigh in on the same subject in yesterday’s FT. Reading that piece, you may wonder what just happened – did Larry come out for the deal or against it? The answer, I think (slide 1), is that he basically supported an idealized TPP that could have been, but came out against the TPP that actually seems to be on the table. And that means that he and I are in a similar place.
So, about the deal. ...
See also Brad DeLong and Tyler Cowen.
Posted by Mark Thoma on Wednesday, March 11, 2015 at 09:42 AM in Economics, International Trade, Politics |
Posted by Mark Thoma on Wednesday, March 11, 2015 at 12:06 AM in Economics, Links |
Spending on Our Crumbling Infrastructure: Larry Summers recently said something startling: “At this moment . . . the share of public investment in GDP, adjusting for depreciation, so that’s net share, is zero. Zero. We’re not net investing at all, nor is Western Europe”...
In other words, total federal, state, and local government investment is enough to cover only the amount of wear and tear on bridges, roads, airports, rails, and pipes. “Can that possibly make sense?” asked the former Treasury secretary, who has been campaigning for more government spending on infrastructure.
I wondered whether Mr. Summers was hyping the data to make his point. So I checked. ... Mr. Summers wasn’t exaggerating. ...
All this is happening at a time when the U.S. government can borrow money at very low interest rates... It would seem a good time for the government to borrow for long-term investments, as Mr. Summers frequently says. ...
Posted by Mark Thoma on Tuesday, March 10, 2015 at 01:10 PM in Economics, Fiscal Policy |
I have a new column:
The Death of Blogs has been Greatly Exaggerated: Are blogs dead? A few prominent bloggers who have moved on to more traditional media sites, or sites of their own creation have proclaimed that they are. That’s not surprising. Of course they believe they moved on to bigger and better things, and that their exit signals the end of one era and the beginning of another. But those of us who still blog every day – I just passed my ten-year anniversary as an economics blogger – believe that economics blogging continues to play a very important role in the public discourse. ...
[The title of the column is different -- I did not choose it.]
Posted by Mark Thoma on Tuesday, March 10, 2015 at 08:49 AM in Economics, Weblogs |
A small part of a much longer interview:
Thomas Piketty on the Euro Zone: 'We Have Created a Monster', Interview by Julia Amalia Heyer and Christoph Pauly: ... SPIEGEL: ... What do mean when you refer to impenetrable political instruments?
Piketty: We may have a common currency for 19 countries, but each of these countries has a different tax system, and fiscal policy was never harmonized in Europe. It can't work. In creating the euro zone, we have created a monster. Before there was a common currency, the countries could simply devalue their currencies to become more competitive. As a member of the euro zone, Greece was barred from using this established and effective concept.
SPIEGEL: You're sounding a little like Alexis Tsipras, who argues that because others are at fault, Greece doesn't have to pay back its own debts.
Piketty: I am neither a member of Syriza nor do I support the party. I am merely trying to analyze the situation in which we find ourselves. And it has become clear that countries cannot reduce their deficits unless the economy grows. It simply doesn't work. We mustn't forget that neither Germany nor France, which were both deeply in debt in 1945, ever fully repaid those debts. Yet precisely these two countries are now telling the Southern Europeans that they have to repay their debts down to the euro. It's historic amnesia! But with dire consequences.
SPIEGEL: So others should now pay for the decades of mismanagement by governments in Athens?
Piketty: It's time for us to think about the young generation of Europeans. For many of them, it is extremely difficult to find work at all. Should we tell them: "Sorry, but your parents and grandparents are the reason you can't find a job?" Do we really want a European model of cross-generational collective punishment? It is this egotism motivated by nationalism that disconcerts me more than anything else today. ...
Posted by Mark Thoma on Tuesday, March 10, 2015 at 08:47 AM in Economics |
On the costs of unemployment:
Being 'laid off' leads to a decade of distrust, EurekAlert!: People who lose their jobs are less willing to trust others for up to a decade after being laid-off, according to new research from The University of Manchester.
Being made redundant or forced into unemployment can scar trust to such an extent that even after finding new work this distrust persists, according to the new findings of social scientist Dr James Laurence. This means that the large-scale job losses of the recent recession could lead to a worrying level of long-term distrust among the British public and risks having a detrimental effect on the fabric of society.
Dr Laurence ... finds that being made redundant from your job not only makes people less willing to trust others but that this increased distrust and cynicism lasts at least nine years after being forced out of work. It also finds that far from dissipating over time, an individual can remain distrustful of others even after they find a new job. ...
Posted by Mark Thoma on Tuesday, March 10, 2015 at 08:46 AM in Economics, Unemployment |
Posted by Mark Thoma on Tuesday, March 10, 2015 at 12:06 AM in Economics, Links |
If the financial sector gets too big or grows too fast, it's bad for growth:
Finance is great, but it can be a real drag, too: When we were college students in the mid-1970s, some of our friends wanted to change the world and our understanding of it. They worked on things like galactic structures, superconductors, computer algorithms, subcellular mechanisms, and genetic coding. Their work aimed at providing cheap energy, improving information technology, curing cancer, and generally making our lives and our appreciation of the world around us better.
By the 1990s, attitudes had changed. Many top students, including newly-minted Ph.D.s, moved from natural science and engineering to finance. Their goal was to get high-paying jobs.
Would we be better off today if some of these financial wizards had focused instead on inventing more efficient solar cells or finding ways to forestall dementia? The older we get, the more we think so (especially when it comes to dementia). And, believe it or not, there is now notable, cross-country evidence buttressing this view.
For the past few years, one of us (Steve) has been studying the relationship between economic growth and finance. The results are striking. They come in two categories. First, the financial system can get too big – to the point where it drags productivity growth down. And second, the financial system can grow too fast, diminishing its contribution to economic growth and welfare.
Just to get this on the record: we really like finance. Without efficient financial services, there would be no prosperous economies today. Intermediaries and financial markets both mobilize and channel savings to those who can use capital most productively; they also allocate risk to those persons who are most able to bear it. Despite its recently tarnished reputation, financial innovation greatly improves people’s lives (see here). As a result, when finance is properly harnessed, it makes economies more productive, enhancing employment and growth, and makes the world a better place.
So, we badly need efficient finance. But how much do we really need? And, should we be concerned if financial sector growth sharply outpaces the growth in the rest of the economy? ...
After answering these questions, explaining the results, and discussing how finance can lower growth, they conclude:
... Many observers (especially the largest financial intermediaries themselves) are critical of the increased regulation of the financial sector following the crisis of 2007-2009, arguing that it will slow economic growth. We, too, can think of some misdirected regulatory efforts that may diminish long-run efficiency without reducing systemic risk (see, for example, our take on raising the maximum loan-to-value ratio for mortgages to 97%).
But, we strongly support the authorities’ efforts to raise capital requirements in order to make the financial system safer. If anything, the research on finance and economic growth strengthens that view, suggesting that there will be little, if any, cost in terms of economic growth even if further increases in capital requirements were to lead to some shrinkage of the size of the financial sector in the advanced economies.
Posted by Mark Thoma on Monday, March 9, 2015 at 10:07 AM in Economics, Financial System, Regulation |
Publicly funded inequality, Brookings: One of the factors driving the massive rise in global inequality and the concentration of wealth at the very top of the income distribution is the interplay between innovation and global markets. In the hands of a capable entrepreneur, a technological breakthrough can be worth billions of dollars, owing to regulatory protections and the winner-take-all nature of global markets. What is often overlooked, however, is the role that public money plays in creating this modern concentration of private wealth.
As the development economist Dani Rodrik recently pointed out, much of the basic investment in new technologies in the United States has been financed with public funds. The funding can be direct, through institutions like the Defense Department or the National Institutes of Health (NIH), or indirect, via tax breaks, procurement practices, and subsidies to academic labs or research centers.
When a research avenue hits a dead end – as many inevitably do – the public sector bears the cost. For those that yield fruit, however, the situation is often very different. Once a new technology is established, private entrepreneurs, with the help of venture capital, adapt it to global market demand, build temporary or long-term monopoly positions, and thereby capture large profits. The government, which bore the burden of a large part of its development, sees little or no return. ...
A combination of measures and international agreements must be found that would allow taxpayers to obtain decent returns on their investments, without removing the incentives for savvy entrepreneurs to commercialize innovative products.
The seriousness of this problem should not be understated. The amounts involved contribute to the creation of a new aristocracy that can pass on its wealth through inheritance. If huge sums can be spent to protect privilege by financing election campaigns (as is now the case in the US), the implications of this problem, for both democracy and long-term economic efficiency, could become systemic. The possible solutions are far from simple, but they are well worth seeking.
["Several ways to change such a system" are also discussed.]
Posted by Mark Thoma on Monday, March 9, 2015 at 09:47 AM in Economics, Income Distribution, Market Failure, Policy, Technology |
Partying Like It’s 1995, by Paul Krugman, Commentary, NY Times: Six years ago, Paul Ryan,... the G.O.P.’s leading voice on matters economic,... warned that the efforts of the Obama administration and the Federal Reserve to fight the effects of financial crisis would bring back the woes of the 1970s, with both inflation and unemployment high.
True, not all Republicans agreed with his assessment. Many asserted that we were heading for Weimar-style hyperinflation instead.
Needless to say, those warnings proved totally wrong. ... Far from seeing a rerun of that ’70s show, what we’re now looking at is an economy that in important respects resembles that of the 1990s. ... The Fed currently estimates the Nairu at between 5.2 percent and 5.5 percent, and the latest report puts the actual unemployment rate at 5.5 percent. So we’re there — time to raise interest rates!
Or maybe not. The Nairu is supposed to be the unemployment rate at which ... an inflationary spiral starts to kick in. But there is no sign of inflationary pressure. ...
The thing is, we’ve been here before. In the early-to-mid 1990s, the Fed generally estimated the Nairu as being between 5.5 percent and 6 percent, and by 1995, unemployment had already fallen to that level. But inflation wasn’t actually rising. So Fed officials ... held their fire... And it turned out that the ... economy was capable of generating millions more jobs, without inflation...
Are we in a similar situation now? Actually, I don’t know — but neither does the Fed. The question, then, is what to do in the face of that uncertainty...
To me, as to a number of economists ... the answer seems painfully obvious: Don’t ... pull that rate-hike trigger until you see the whites of inflation’s eyes. If it turns out that the Fed has waited a bit too long, inflation might overshoot 2 percent for a while, but that wouldn’t be a great tragedy. But if the Fed moves too soon, we might end up losing millions of jobs we could have had — and in the worst case, we might end up sliding into a Japanese-style deflationary trap...
What’s worrisome is that it’s not clear whether Fed officials see it that way. They need to heed the lessons of history — and the relevant history here is the 1990s, not the 1970s. Let’s party like it’s 1995; let the good, or at least better, times keep rolling, and hold off on those rate hikes.
Posted by Mark Thoma on Monday, March 9, 2015 at 09:04 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Monday, March 9, 2015 at 12:06 AM in Economics, Links |
A trade deal must work for America’s middle class: Over the next few months the question of US participation in the Trans-Pacific Partnership trade deal is likely to be resolved one way or the other. It is, to put it mildly, a highly controversial issue. ... I believe that the right TPP is very much in the American national interest.
First, in considering what is most fundamental — the interests of American workers... The view now is that trade and globalisation have increased inequality... But increases in the extent of US trade are driven largely by technology and by the increased sophistication of developing country economies — not by trade agreements. ...
Arrangements such as TPP have the potential to tilt the gains from trade towards the American middle class. This is due to the fact that the US has been a very open market for a long time. It means that properly negotiated trade agreements bring down foreign barriers and promote exports to a much greater extent than they ... benefit imports.
Crucially, TPP is necessary to let American producers compete on a level playing field... Only through TPP do we have the chance to manage international competition in the interests of American workers through binding arrangements in areas such as labour and environmental standards. ...
Posted by Mark Thoma on Sunday, March 8, 2015 at 09:39 AM in Economics, Income Distribution, International Trade |
Posted by Mark Thoma on Sunday, March 8, 2015 at 12:06 AM in Economics, Links |
...the current situation looks quite a lot like the mid-90s, with unemployment basically at the Fed’s estimate of “full employment” but no sign of inflation — except that back then wages were rising much more vigorously than now. Now, as then, there is a very real possibility that we have lots more room to run, if the Fed lets us.
[Travel day today, will post more if and as I can.]
Posted by Mark Thoma on Saturday, March 7, 2015 at 07:32 AM in Economics, Monetary Policy, Unemployment |
Posted by Mark Thoma on Saturday, March 7, 2015 at 12:06 AM in Economics, Links |
Patient' is History: The February employment report almost certainly means the Fed will no longer describe its policy intentions as "patient" at the conclusion of the March FOMC meeting. And it also keep a June rate hike in play. But for June to move from "in play" to "it's going to happen," I still feel the Fed needs a more on the inflation side. The key is the height of that inflation bar.
The headline NFP gain was a better-than-expected 295k with 18k upward adjustment for January. The 12-month moving average continues to trend higher:
Unemployment fell to 5.5%, which is the top of the central range for the Fed's estimate of NAIRU. Still, wage growth remains elusive:
Is wage growth sufficient to stay the Fed's hand? I am not so sure. I recently wrote:
My take is this: To get a reasonably sized consensus to support a rate hike, two conditions need to be met. One is sufficient progress toward full-employment with the expectation of further progress. I think that condition has already been met. The second condition is confidence that inflation will indeed trend toward target. That condition has not been met. To meet that condition requires at least one of the following sub-conditions: Rising core-inflation, rising market-based measures of inflation compensation, or accelerating wage growth. If any were to occur before June, I suspect it would be the accelerating wage growth.
I am less confident that we will see accelerating wage growth by June, although I should keep in mind we still have three more employment reports before that meeting. Note, however, low wage growth does not preclude a rate hike. The Fed hiked rates in 1994 in a weak wage growth environment:
And again in 2004 liftoff occurred on the (correct) forecast of accelerating wage growth:
So wage growth might not be there in June to support a rate hike. And, as I noted earlier this weaker, I have my doubts on whether core-inflation would support a rate hike either. That leaves us with market-based measures of inflation compensation. And at this point, that just might be the key:
If bond markets continue to reverse the oil-driven inflation compensation decline, the Fed may see a way clear to hiking rates in June. But the pace and timing of subsequent rate hikes would still be data dependent. I would anticipate a fairly slow, halting path of rate hikes in the absence of faster wage growth.
Bottom Line: "Patient" is out. Tough to justify with unemployment at the top of the Fed's central estimates of NAIRU. Pressure to begin hiking rates will intensify as unemployment heads lower. The inflation bar will fall, and Fed officials will increasingly look for reasons to hike rates rather than reasons to delay. They may not want to admit it, but I suspect one of those reasons will be fear of financial instability in the absence of tighter policy. June is in play.
Posted by Mark Thoma on Friday, March 6, 2015 at 11:58 AM in Economics, Fed Watch, Monetary Policy |
Research on networks could be very helpful in determining when financial systems are under the type of stress that could lead to a major collapse:
Connections in the modern world: Network-based insights, by Matthew O. Jackson, Brian Rogers, and Yves Zenou, Vox EU: There have been 24 outbreaks of the Ebola virus since it first appeared in 1976. Most were limited to dozens of cases, or at most hundreds – but the 2014 outbreak reached tens of thousands (Global Alert and Response, World Health Organization 2014). Although this latest outbreak now appears to be contained, the world may have dodged a dangerous bullet. If the disease had gotten a toehold in one of the many large urban slums throughout the world, the toll could have been dramatically larger. The same year saw an outbreak of measles in the US unlike any in decades, as a combination of complacency and fears of side effects led to lapses in vaccinations that allowed for susceptibility to contagion. Indeed, even small percentages of unvaccinated people – especially children – can lead small seeds of a very virulent disease to snowball into widespread infection.
The combination of world population growth and an increasingly interconnected society is producing new dynamics. Of course, deadly pandemics are not new. The Black Death (bubonic plague) wiped out tens of millions of people between the 14th and 19th centuries. Modern medicine and especially vaccinations have helped the world mitigate and even prevent many such catastrophes. But a changing world brings new challenges. Social distances between individuals currently average less than five degrees (Ugander et al. 2011) so that it is typically possible to go from one person via a friend to another friend, and another – and within five steps or so reach much of the rest of the world.
Historical data suggest that this closeness is indeed a modern phenomenon. For instance, using data from the spread of the bubonic plague, Marvel et al. (2013) estimate that in the Middle Ages average social distances between people were many times higher than they are today. The plague spread relatively slowly from one area to the next, taking four years to travel across Europe at a pace of less than a thousand kilometers per year, as people interacted mostly in limited local patterns. In contrast, modern travel means that a healthcare worker exposed to Ebola in a village in Sierra Leone can easily be in London or New York before showing symptoms. A child who catches measles in Anaheim, California can board a plane and bring it home thousands of miles away. Increased mobility combined with tightly clustered interactions (e.g. children in schools), mean that small pockets of vaccination lapses can generate heavy outbreaks. Limiting the terrible costs that can be imposed by contagious diseases including Ebola, measles, HIV, and many others, remains an important priority. What are the most effective ways to employ preventative measures, treatment for the ill, and barriers to contagion – including travel bans and the like? Properly addressing such questions requires understanding the complex networks of interactions that govern transmission, and a systematic framework for trading off the costs and benefits of policies.
Disease is but one example of diffusion through connections. As we have seen recently, despite the advantages of modern financial systems they are susceptible to systemic failures – a downturn in one country can lead to cascading downturns in others. In the EU the largest 50 or so banking institutions are now highly connected, with interbank exposures exceeding one trillion euros, more than their total Tier 1 capital (Alves et al. 2013). While disease and financial contagion share certain similarities, they differ in fundamental respects. Financial contagion is less well studied and the challenge of how to ‘vaccinate’ an institution without slowing the economy is significant. How can we identify which institutions are really ‘too connected to fail’? Which financial institutions require regulation and how should regulatory policy be guided? Should financial integration be encouraged or discouraged? Again, answering these questions necessitates a network-based approach.
» Continue reading "'Connections in the Modern World: Network-Based Insights'"
Posted by Mark Thoma on Friday, March 6, 2015 at 10:19 AM in Economics, Financial System, Regulation |
How inequality harms health -- and the economy: One of the hottest topics around lately concerns the widespread effects of inequality. For example, evidence suggests that when inequality is very large, it can lower economic growth. But there's quite a bit of uncertainty about how this occurs. What are the pathways that connect large disparities in income and wealth to economic growth?
Recent research (summarized here) from UCLA's Fielding School of Public Health provides evidence that income inequality is associated with inequality in health. In particular, lower income is associated with "high levels of stress, exhaustion, cardiovascular disease, lower life expectancy and obesity." These factors alone could lead to lower economic growth than we would have if the work force were healthier.
Also important when thinking about the impacts on long-run growth are the potential intergenerational impacts. As Dr. Linda Rosenstock, the UCLA paper's senior author, noted, these health effects aren't limited to the parents -- children are also affected.
Does this matter for economic growth and intergenerational mobility? Some research says it does. ...
Posted by Mark Thoma on Friday, March 6, 2015 at 10:18 AM
Why are Republicans in the grips of "Big Pizza"?:
Pepperoni Turns Partisan, by Paul Krugman, Commentary, NY Times: If you want to know what a political party really stands for, follow the money. ... Major donors ... generally have a very good idea of what they are buying, so tracking their spending tells you a lot.
So what do contributions in the last election cycle say? The Democrats are, not too surprisingly, the party of Big Labor (or what’s left of it) and Big Law: unions and lawyers are the most pro-Democratic major interest groups. Republicans are the party of Big Energy and Big Food: they dominate contributions from extractive industries and agribusiness. And they are, in particular, the party of Big Pizza.
No, really. ... And pizza partisanship tells you a lot about what is happening to American politics as a whole. ...
The rhetoric of this fight is familiar. The pizza lobby portrays itself as the defender of personal choice and personal responsibility. It’s up to the consumer, so the argument goes, to decide what he or she wants to eat, and we don’t need a nanny state telling us what to do. ...
But..., anyone who has struggled with weight issues ... knows that this is a domain where the easy rhetoric of “free to choose” rings hollow. Even if you know very well that you will soon regret that extra slice, it’s extremely hard to act on that knowledge. Nutrition, where increased choice can be a bad thing,... it ... is one of those areas — like smoking — where there’s a lot to be said for a nanny state.
Oh, and diet isn’t purely a personal choice, either; obesity imposes large costs on the economy as a whole.
But you shouldn’t expect such arguments to gain much traction. For one thing, free-market fundamentalists don’t want to hear about qualifications to their doctrine..., and partisan orientation: heavier states tend to vote Republican...
At a still deeper level, health experts may say that we need to change how we eat, pointing to scientific evidence, but the Republican base doesn’t much like experts, science, or evidence. Debates about nutrition policy bring out a kind of venomous anger ... that is all too familiar if you’ve been following the debate over climate change.
Pizza partisanship, then, sounds like a joke, but it isn’t. It is, instead, a case study in the toxic mix of big money, blind ideology, and popular prejudices that is making America ever less governable.
Posted by Mark Thoma on Friday, March 6, 2015 at 09:58 AM
Dean Baker on the employment report (subtitle: The strongest wage growth is showing up in the lowest-paying sectors):
Job Growth Remains Strong in February (CC): The labor market had another strong month in February, with employers adding 295,000 in the month. While there were small downward revisions to the January numbers, this still left the three month average at 288,000 jobs. The unemployment rate dropped to 5.5 percent, its lowest level since May of 2008, the early days of the recession. The employment-to-population ratio (EPOP) remained at 59.3 percent, more than 3.0 percentage points below its pre-recession level.
The February performance is especially impressive given that an unusually severe winter might have been expected to dampen job growth, especially in sectors like construction and restaurants. Construction added 29,000 jobs and restaurants added an extraordinary 58,700 jobs. Of course, some of the weather effect may show up in the March data, since the worst weather came towards the end of the month, after the reference week for the survey.
The gain in construction brings the average over the last four months to 38,000 jobs. This comes to a 7.5 percent annual growth rate in a context where reported construction spending has been relatively flat. This suggests that there could be some serious measurement issues in the data. Manufacturing employment growth slowed to 8,000 after averaging 28,000 the prior three months. Retail continues to show strong growth, adding 32,000 jobs, bringing its average since August to 29,900. The professional and technical services category, which tends to be higher paying, again showed strong growth, adding 31,800. This is roughly even with its 30,800 average over the last four months.
There were some anomalies in the data that are likely to be reversed. The courier sector added 12,300 jobs, while education services reportedly added 21,300 jobs. Data in both sectors are highly erratic and almost certain to be largely reversed in future months. The temp sector lost 7,800 jobs in February, its second consecutive decline. Health care job growth fell back to 23,800, compared to an average of 39,250 over the prior four months. The 58,700 jobs added in the restaurant sector was the largest monthly gain since November of 2000.
The data in the household survey was mostly positive. Involuntary part-time employment fell by another 175,000 in February and is now 570,000 below its year-ago level. There was a small rise in the number of people who have voluntarily chosen to work part-time. It is now 750,000 above its year-ago level and almost 900,000 higher than in February of 2013, before the exchanges from the Affordable Care Act came into existence.
The percentage of people unemployed because they voluntarily quit their job rose from 9.5 percent to 10.2 percent, its highest level since May of 2008. This is still close to 2.0 percentage points below the pre-recession levels.
The recovery continues to disproportionately benefit less educated workers. The unemployment rate for workers without a high school degree edged down by 0.1 percentage point to 8.4 percent, 1.4 percentage points below its year-ago level. The current unemployment rate for this least educated group of workers is roughly a percentage point above its pre-recession level, while the unemployment rate for college grads is 0.7 percentage points higher at 2.7 percent. However, the contrast in EPOP is striking. The EPOP for workers without high school degrees is down by roughly a percentage point from its pre-recession level, while the EPOP for college grads is down by close to four percentage points.
Reported wage growth for the month was weak, as expected, following a large reported gain in January. Taking the average for the last three months compared to the prior three months, the annual rate of growth was just 1.8 percent, down from 2.0 percent over the last year. The data on wage growth continue to indicate there is still a large amount of slack in the labor market. There is some evidence of more rapid wage growth in the lowest paying sectors, which is to be expected as workers can increasingly find better jobs elsewhere, but higher-paying sectors continue to show very weak wage growth.
If the economy can sustain job growth in the neighborhood of 300,000 per month, by the end of the year we may start seeing substantial wage gains.
Posted by Mark Thoma on Friday, March 6, 2015 at 09:16 AM in Economics, Unemployment |
Posted by Mark Thoma on Friday, March 6, 2015 at 12:06 AM in Economics, Links |
Economists' Biggest Failure: One of the biggest things that economists get grief about is their failure to predict big events like recessions. ...
Pointing this out usually leads to the eternal (and eternally fun) debate over whether economics is a real science. The profession's detractors say that if you don’t make successful predictions, you aren’t a science. Economists will respond that seismologists can’t forecast earthquakes, and meteorologists can’t forecast hurricanes, and who cares what’s really a “science” anyway.
The debate, however, misses the point. Forecasts aren’t the only kind of predictions a science can make. In fact, they’re not even the most important kind.
Take physics for example. Sometimes physicists do make forecasts -- for example, eclipses. But those are the exception. Usually, when you make a new physics theory, you use it to predict some new phenomenon... For example, quantum mechanics has gained a lot of support from predicting the strange new things like quantum tunneling or quantum teleportation.
Other times, a theory will predict things we have seen before, but will describe them in terms of other things that we thought were totally separate, unrelated phenomena. This is called unification, and it’s a key part of what philosophers think science does. For example, the theory of electromagnetism says that light, electric current, magnetism, radio waves are all really the same phenomenon. Pretty neat! ...
So that’s physics. What about economics? Actually, econ has a number of these successes too. When Dan McFadden used his Random Utility Model to predict how many people would ride San Francisco's Bay Area Rapid Transit system,... he got it right. And he got many other things right with the same theory -- it wasn’t developed to explain only train ridership.
Unfortunately, though, this kind of success isn't very highly regarded in the economics world... Maybe now, with the ascendance of empirical economics and a decline in theory, we’ll see a focus on producing fewer but better theories, more unification, and more attempts to make novel predictions. Someday, maybe macroeconomists will even be able to make forecasts! But let’s not get our hopes up.
I've addressed this question many times, e.g. in 2009, and to me the distinction is between forecasting the future, and understanding why certain phenomena occur (re-reading, it's a bit repetitive):
Are Macroeconomic Models Useful?: There has been no shortage of effort devoted to predicting earthquakes, yet we still can't see them coming far enough in advance to move people to safety. When a big earthquake hits, it is a surprise. We may be able to look at the data after the fact and see that certain stresses were building, so it looks like we should have known an earthquake was going to occur at any moment, but these sorts of retrospective analyses have not allowed us to predict the next one. The exact timing and location is always a surprise.
Does that mean that science has failed? Should we criticize the models as useless?
No. There are two uses of models. One is to understand how the world works, another is to make predictions about the future. We may never be able to predict earthquakes far enough in advance and with enough specificity to allow us time to move to safety before they occur, but that doesn't prevent us from understanding the science underlying earthquakes. Perhaps as our understanding increases prediction will be possible, and for that reason scientists shouldn't give up trying to improve their models, but for now we simply cannot predict the arrival of earthquakes.
However, even though earthquakes cannot be predicted, at least not yet, it would be wrong to conclude that science has nothing to offer. First, understanding how earthquakes occur can help us design buildings and make other changes to limit the damage even if we don't know exactly when an earthquake will occur. Second, if an earthquake happens and, despite our best efforts to insulate against it there are still substantial consequences, science can help us to offset and limit the damage. To name just one example, the science surrounding disease transmission helps use to avoid contaminated water supplies after a disaster, something that often compounds tragedy when this science is not available. But there are lots of other things we can do as well, including using the models to determine where help is most needed.
So even if we cannot predict earthquakes, and we can't, the models are still useful for understanding how earthquakes happen. This understanding is valuable because it helps us to prepare for disasters in advance, and to determine policies that will minimize their impact after they happen.
All of this can be applied to macroeconomics. Whether or not we should have predicted the financial earthquake is a question that has been debated extensively, so I am going to set that aside. One side says financial market price changes, like earthquakes, are inherently unpredictable -- we will never predict them no matter how good our models get (the efficient markets types). The other side says the stresses that were building were obvious. Like the stresses that build when tectonic plates moving in opposite directions rub against each other, it was only a question of when, not if. (But even when increasing stress between two plates is observable, scientists cannot tell you for sure if a series of small earthquakes will relieve the stress and do little harm, or if there will be one big adjustment that relieves the stress all at once. With respect to the financial crisis, economists expected lots of little, small harm causing adjustments, instead we got the "big one," and the "buildings and other structures" we thought could withstand the shock all came crumbling down. On prediction in economics, perhaps someday improved models will allow us to do better than we have so far at predicting the exact timing of crises, and I think that earthquakes provide some guidance here. You have to ask first if stress is building in a particular sector, and then ask if action needs to be taken because the stress has reached dangerous levels, levels that might result in a big crash rather than a series of small stress relieving adjustments. I don't think our models are very good at detecting accumulating stress...
Whether the financial crisis should have been predicted or not, the fact that it wasn't predicted does not mean that macroeconomic models are useless any more than the failure to predict earthquakes implies that earthquake science is useless. As with earthquakes, even when prediction is not possible (or missed), the models can still help us to understand how these shocks occur. That understanding is useful for getting ready for the next shock, or even preventing it, and for minimizing the consequences of shocks that do occur.
But we have done much better at dealing with the consequences of unexpected shocks ex-post than we have at getting ready for these a priori. Our equivalent of getting buildings ready for an earthquake before it happens is to use changes in institutions and regulations to insulate the financial sector and the larger economy from the negative consequences of financial and other shocks. Here I think economists made mistakes - our "buildings" were not strong enough to withstand the earthquake that hit. We could argue that the shock was so big that no amount of reasonable advance preparation would have stopped the "building" from collapsing, but I think it's more the case that enough time has passed since the last big financial earthquake that we forgot what we needed to do. We allowed new buildings to be constructed without the proper safeguards.
However, that doesn't mean the models themselves were useless. The models were there and could have provided guidance, but the implied "building codes" were ignored. Greenspan and others assumed no private builder would ever construct a building that couldn't withstand an earthquake, the market would force them to take this into consideration. But they were wrong about that, and even Greenspan now admits that government building codes are necessary. It wasn't the models, it was how they were used (or rather not used) that prevented us from putting safeguards into place.
We haven't failed at this entirely though. For example, we have had some success at putting safeguards into place before shocks occur, automatic stabilizers have done a lot to insulate against the negative consequences of the recession (though they could have been larger to stop the building from swaying as much as it has). So it's not proper to say that our models have not helped us to prepare in advance at all, the insulation social insurance programs provide is extremely important to recognize. But it is the case that we could have and should have done better at preparing before the shock hit.
I'd argue that our most successful use of models has been in cleaning up after shocks rather than predicting, preventing, or insulating against them through pre-crisis preparation. When despite our best effort to prevent it or to minimize its impact a priori, we get a recession anyway, we can use our models as a guide to monetary, fiscal, and other policies that help to reduce the consequences of the shock (this is the equivalent of, after a disaster hits, making sure that the water is safe to drink, people have food to eat, there is a plan for rebuilding quickly and efficiently, etc.). As noted above, we haven't done a very good job at predicting big crises, and we could have done a much better job at implementing regulatory and institutional changes that prevent or limit the impact of shocks. But we do a pretty good job of stepping in with policy actions that minimize the impact of shocks after they occur. This recession was bad, but it wasn't another Great Depression like it might have been without policy intervention.
Whether or not we will ever be able to predict recessions reliably, it's important to recognize that our models still provide considerable guidance for actions we can take before and after large shocks that minimize their impact and maybe even prevent them altogether (though we will have to do a better job of listening to what the models have to say). Prediction is important, but it's not the only use of models.
Posted by Mark Thoma on Thursday, March 5, 2015 at 10:17 AM in Econometrics, Economics, Macroeconomics, Methodology |
I wasn't aware of this, apparently for good reason:
Washington Strips New York Fed’s Power, by Jon Hilsenrath, WSJ: The Federal Reserve Bank of New York, once the most feared banking regulator on Wall Street, has lost power... The Fed’s center of regulatory authority is now a little-known committee run by Fed governor Daniel Tarullo , which is calling the shots in oversight of banking titans such as Goldman Sachs Group Inc. and Citigroup Inc .
The new structure was enshrined in a previously undisclosed paper written in 2010 known as the Triangle Document. ... The power shift, initiated after the financial crisis and slowly put in place over the past five years, is more than a bureaucratic change. ...
During internal debates on a range of issues ... New York Fed examiners have been challenged by Washington. At times they have been shut out of policy meetings and even openly disparaged by Mr. Tarullo for failing to stem problems at banks...
The Fed undertook the reorganization with little disclosure about what was taking place...
Officials in Washington say centralizing regulatory authority in D.C. gives the Fed a broader view of risks across the whole system and a more evenhanded oversight approach. ...
Posted by Mark Thoma on Thursday, March 5, 2015 at 10:17 AM in Economics, Financial System, Regulation |
Today is the ten-year anniversary for this blog. Ten years! It hardly seems like that long. When I started, I didn't expect much.
So far as I can recall, I haven't missed a single day in all that time. Sometimes it's just a simple post with links, etc., but there have been new posts every single day for 10 years.
My life has changed a lot in the last year and a half, and I can't promise that I won't miss a day now and then -- there will be times soon, I think, when the record may end. Ten years straight seems like enough in any case.
But for now, it continues...
Thanks to all who have stopped by over the years!
Posted by Mark Thoma on Thursday, March 5, 2015 at 08:39 AM in Economics, Weblogs |
Posted by Mark Thoma on Thursday, March 5, 2015 at 12:06 AM in Economics, Links |
Paul Ryan says "I do not like cap and trade because I think the costs far outweigh the benefits." John Whitehead (who provides the Ryan quotes) responds:
Rep. Paul Ryan is getting the economics wrong on cap and trade and a revenue neutral carbon tax: Way wrong...
The costs of cap and trade do not outweigh the benefits. It might be the case that the costs of a climate policy, any climate policy, outweigh the benefits. But cap and trade is a policy instrument, not something for which you conduct a benefit-cost analysis. The economics says that if the government decided to undertake climate policy, cap and trade would be one of the most cost-effective ways of doing it.
Ryan also says (when asked about a revenue-neutral carbon tax), "I don’t like that either. I think these tax-and-spend ideas are the wrong way to go. They hurt economic growth. They’re very regressive. They hurt people who rely on disposable income solely — the poor. And they make our manufacturing industry much less competitive. So why don’t we get faster economic growth, more upward mobility, help increase people’s take-home pay, and finance research to innovate ourselves to come up with better technology. This is Madison, Wisconsin. We’re good at researching stuff. So why don’t we just research."
John Whitehead once again:
And that brings us to the revenue-neutral carbon tax (another cost-effective way of undertaking climate policy). The idea behind this is to tax a bad thing (pollution, carbon) and reduce taxes on a good thing (work effort). Revenue neutral means that the additional tax revenue from the carbon tax would be completely offset by the reduction in tax revenue from lower income taxes. The income tax reduction could be designed such that any regressivity of a carbon tax could be avoided.
Tax and spend policies are usually thought of as an increase in taxes (carbon and income) where the additional revenue is used to pay for a government policy. But, a revenue neutral carbon tax would not raise any additional revenue. I really don't see how a revenue neutral carbon tax could be classified as a tax and spend idea. ...
The only conclusion that I can reach is that Rep. Ryan doesn't understand climate economics very well.
Posted by Mark Thoma on Wednesday, March 4, 2015 at 09:54 AM in Economics, Environment, Politics |
Bad news for those who propose education as the solution to inequality:
How Higher Education Perpetuates Intergenerational Inequality, by Tim Taylor: Part of the mythology of US higher education is that it offers a meritocracy, along with a lot of second chances, so that smart and hard-working students of all background have a genuine chance to succeed--no matter their family income. But the data certainly seems to suggest that family income has a lot to do with whether a student will attend college in the first place, and even more to do with whether a student will obtain a four-year college degree.
Margaret Cahalan and Laura Perna provide an overview of the evidence in "2015 Indicators of Higher Education Equity in the United States: 45 Year Trend Report," published by the Pell Institute for the Study of Opportunity in Higher Education and the and University of Pennsylvania Alliance for Higher Education and Democracy (PennAHEAD). ...
The report offers a range of evidence that the affordability of college is a bigger problem for students from low-income families even after taking financial aid into account. Students from low-income families take out more debt, and are more likely to attend for-profit colleges. Indeed, a general pattern for higher education a whole is that even as the cost of attending has risen, the share of the cost paid by households, rather than by the state or federal government, has been rising. ...
The effects of these patterns on inequality of incomes in the United States are clearcut: higher income families are better able to provide financial and other kinds of support for their children, both as they grow up, and when it comes time to attend college, and when it comes time to find a job after college. In this way, higher education has become a central part part of the process by which high-income families can seek to assure that their children are more likely to have high incomes, too.
This connection is perhaps underappreciated. After all, it's a lot easier for professors and college students to protest high levels of compensation for the top professionals in finance, law, and the corporate world who are in the top 1% of the income distribution, rather than to face the idea that their own institutions of higher education are implicated in perpetuating inequality of incomes across generations. ...
[He also has a long quote from Alan Krueger on this topic.]
Posted by Mark Thoma on Wednesday, March 4, 2015 at 09:46 AM in Economics, Income Distribution, Universities |
Friederike Niepmann and Tim Schmidt-Eisenlohr of the NY Fed's Liberty Street Economics blog:
No Guarantees, No Trade!: World trade fell 20 percent relative to world GDP in 2008 and 2009. Since then, there has been much debate about the role of trade finance in the Great Trade Collapse. Distress in the financial sector can have a strong impact on international trade because exporters require additional working capital and rely on specific financial products, in particular letters of credit, to cope with risks when selling abroad. In this post, which is based on a recent Staff Report, we shed new light on the link between finance and trade, showing that changes in banks’ supply of letters of credit have economically significant effects on firms’ export behavior. Our research suggests that trade finance helps explain the drop in exports in 2008–2009, especially to smaller and poorer markets. ...
Posted by Mark Thoma on Wednesday, March 4, 2015 at 09:24 AM in Economics, Financial System, International Finance, International Trade |
Posted by Mark Thoma on Wednesday, March 4, 2015 at 12:06 AM in Economics, Links |