Category Archive for: Policy [Return to Main]

Monday, October 27, 2014

'Climate Change: Lessons for our Future from the Distant Past'

David Hendry at Vox EU:

Climate change: Lessons for our future from the distant past, by David F. Hendry: Summary Climate change has been the main driver of mass extinctions over the last 500 million years. This column argues that current evidence provides a stark warning. Human activity is producing greenhouse gases, and as a consequence global temperatures and ocean heat content are rising. Such trends raise the risk of tipping points. Economic analysis offers a number of ideas, but a key problem is that distributions of climate variables can shift, invalidating stationarity-based analyses, and making action to avoid possible future shifts especially urgent.

His conclusions:

Economic analysis offers many insights – externalities need to be either priced or regulated, and climate change is the largest ever worldwide externality. All approaches are affected by the possibility of abrupt changes and the resulting unknown uncertainty when distributions shift, making action more urgent to avoid possible future shifts. Adaptation is not meaningful if food, water, and land resources become inadequate. Conversely, mitigation steps need not be costly, and could stimulate innovation. International negotiations are more likely to succeed if the largest players act first in their own counties or groups – also creating opportunities for their societies as new technologies develop.
Planet Earth will survive whatever humanity is doing – the crucial issue is the effect of climate change on its present inhabitants. It is a risky strategy to do nothing if there are potentially huge costs when the costs of initial actions are small. The obvious time to start is now, and the obvious actions are the many low-cost implementations that mitigate greenhouse gases (see Stern 2008 for a list) – just in case.

[See also "U.N. Climate Change Draft Sees Risks of Irreversible Damage - Scientific American".]

Monday, October 13, 2014

Paul Krugman: Revenge of the Unforgiven

Why didn't homeowners, unlike banks, get the debt relief they needed?:

Revenge of the Unforgiven, by Paul Krugman, Commentary, NY Times: Stop me if you’ve heard this before: The world economy appears to be stumbling. For a while, things seemed to be looking up, and there was talk about green shoots of recovery. But now growth is stalling, and the specter of deflation looms.
If this story sounds familiar, it should; it has played out repeatedly since 2008. ... Why does this keep happening? ... The answer, I’d suggest, is an excess of virtue. Righteousness is killing the world economy.
What, after all, is our fundamental economic problem? ... In the years leading up to the Great Recession, we had an explosion of credit..., debt levels that would once have been considered deeply unsound became the norm.
Then the music stopped, the money stopped flowing, and everyone began trying to “deleverage,” to reduce the level of debt. For each individual, this was prudent. But ... when everyone tries to pay down debt at the same time, you get a depressed economy.
So what can be done? Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. ...
What’s striking about the past few years, however, is how little debt relief has actually taken place. ...
Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.
So the policy response to a crisis of excessive debt has, in effect, been a demand that debtors pay off their debts in full. What does history say about that strategy? That’s easy: It doesn’t work. ...
But it has been very hard to get either the policy elite or the public to understand that sometimes debt relief is in everyone’s interest. Instead, the response to poor economic performance has essentially been that the beatings will continue until morale improves.
Maybe, just maybe, bad news — say, a recession in Germany — will finally bring an end to this destructive reign of virtue. But don’t count on it.

Wednesday, October 08, 2014

Wellbeing: Busts Hurt More Than Booms Help

If the number of retweets of a link is any indication, there seems to be a lot of interest in this paper:

Busts hurt more than booms help: New lessons for growth policy from global wellbeing surveys, by Jan-Emmanuel De Neve and Michael I. Norton, Vox EU: Wellbeing measures allow us to distinguish higher incomes from higher happiness. This column looks at new welfare measures and macroeconomic fluctuations. It presents evidence that the life satisfaction of individuals is between two and eight times more sensitive to negative economic growth than it is to positive economic growth. Engineering economic ‘booms’ that risk even short ‘busts’ is unlikely to improve societal wellbeing in the long run. 

To say it another way, "policymakers seeking to raise wellbeing should focus more on preventing busts than inculcating booms."

Tuesday, September 23, 2014

'Credibility'

Chris Dillow:

"Credibility": At the end of an interview with Ed Balls this morning, Sarah Monague (02h 22m in) gave us a wonderful example of the ideological presumptions of supposedly neutral BBC reporting. She asked Nick Robinson: "It's about economic credibility here, isn't it?"
What's going on here is a double ideological trick.
First, "credibility" is defined in terms of whether Labour's plans are sufficiently fiscally tight*. This imparts an austerity bias to political discourse. There's no necessary reason for this. We might instead define credibility in terms of whether the party is offering enough to working people, and decry the derisory rise in the minimum wage as lacking credibility from the point of view of the objective of improving the lot of the low-paid.
Which brings me to a second trick. Credible with whom? We might ask: are Balls' policies credible with bond markets - the guys who lend governments money - or will they instead cause a significant rise in borrowing costs? Or we could ask: are they credible with working people? ... The judges of what's credible seem to be her and Nick themselves - who, not uncoincidentally, are wealthy, public school-educated people.
This poses the question: what is the origin of this double bias? ...

Wednesday, June 25, 2014

'That Big Negative Q1 GDP Revision'

Jared Bernstein:

Whoa! Whassup With That Big Negative Q1 GDP Revision?: Yes, you read those headlines right: real GDP contracted at a 2.9% rate according to revised data released this AM. That’s contracted, as in went down.
So, are we, like, back in recession (granting that a lot of people think we never left)?
Nope. That was a truly lousy quarter but it’s highly unlikely to be repeated any time soon. The particularly bad winter weather played a role; both residential and commercial building were negative. Heavy inventory buildups in earlier quarters were reversed, which usually implies a positive bounce-back in coming quarters. Exports were revised down and imports up, so the trade deficit subtracted a large 1.5 points from the bottom line; that drag will likely diminish in coming quarters.
Health care spending, a strong contributor in earlier estimates of Q1 growth, went from contributing 1 percentage point to growth in an earlier vintage of Q1 GDP to subtracting 0.16 points in this update, suggesting earlier estimates of the pace of increased coverage were overstated. That doesn’t mean they’re not happening; it just means they’ll be spread out over more quarters. [Update: check that--a colleague tells me that what's really happening here is that people didn't use as many services as first thought. I'll try to look further into this.] ...
Year-over-year—a good way to squeeze out some quarterly noise—real GDP is up 1.5%. That’s better than the headline number, but it too is actually a weak number. The trend over the last two years is 2.1% growth... I don’t believe today’s revisions really signal a decline in that trend rate and most analysts expect coming quarters to clock in at 2.5-3%. ...

I still think that policymakers should revise their priors (downward), particularly given their tendency to brush off any bad news as temporary changes that will surely be reversed in coming quarters.

Thursday, June 05, 2014

Energy Choices

Paul Krugman:

Energy Choices, by Paul Krugman: Nate Silver got a lot of grief when he chose Roger Pielke Jr., of all people, to write about environment for the new 538. Pielke is regarded among climate scientists as a concern troll – someone who pretends to be open-minded, but is actually committed to undermining the case for emissions limits any way he can. But is this fair?
Well, I’m happy to report that Pielke has a letter in today’s Financial Times about the economics of emissions caps – something I know a fair bit about – that abundantly confirms his bad reputation. Better still, the letter offers a teachable moment, a chance to explain why claims that we can’t limit emissions without destroying economic growth are nonsense. ...

Thursday, May 29, 2014

The Great Recession's 'Biggest Policy Mistake'

At MoneyWatch:

The Great Recession's "biggest policy mistake", by Mark Thoma, CBS News: Two recent books, Timothy Geithner's "Stress Test: Reflections on Financial Crises" and "House of Debt" by Atif Mian and Amir Sufi, have reignited a discussion over the Obama administration's policies and attitude on mortgage debt relief.
In contrast with the former New York Fed president and later Treasury Secretary's account about the efforts to save the U.S. economy from the collapsing housing market, others say the administration -- more particularly the Geithner-led Treasury -- did not push aggressively for mortgage debt relief .
As a result, very little was done to help households struggling with mortgage debt. Indeed, Mian and Sufi argue that "The fact that Secretary Geithner and the Obama administration did not push for debt write-downs more aggressively remains the biggest policy mistake of the Great Recession."
Who is correct? ...[continue]...

Monday, May 19, 2014

Paul Krugman: Springtime for Bankers

Heckuva job?:

Springtime for Bankers, by Paul Krugman, Commentary, NY Times: By any normal standard, economic policy since the onset of the financial crisis has been a dismal failure. It’s true that we avoided a full replay of the Great Depression. But employment has taken more than six years to claw its way back to pre-crisis levels...
Now Timothy Geithner, who was Treasury secretary for four of those six years, has published a book, “Stress Test,” about his experiences. And basically, he thinks he did a heckuva job. ...
Much of Mr. Geithner’s book is devoted to a defense of the U.S. financial bailout, which he sees as a huge success story — which it was, if financial confidence is viewed as an end in itself. ... But where is the rebound in the real economy? Where are the jobs? ...
One reason for sluggish recovery is that U.S. policy “pivoted,” far too early, from a focus on jobs to a focus on budget deficits. Mr. Geithner denies ... any responsibility for this... That doesn’t match independent reporting, which portrays Mr. Geithner ridiculing fiscal stimulus as “sugar” that would yield no long-term benefit.
But fiscal austerity wasn’t the only reason recovery has been so disappointing..., the burden of high household debt, a legacy of the housing bubble, has been a big drag on the economy. And there was, arguably, a lot the Obama administration could have done to reduce debt burdens without Congressional approval. But it didn’t... Why? According to many accounts, the biggest roadblock was Mr. Geithner’s consistent opposition to mortgage debt relief — he was, if you like, all for bailing out banks but against bailing out families.
“Stress Test” asserts that no conceivable amount of mortgage debt relief could have done much to boost the economy. But the leading experts on this subject are ... Atif Mian and Amir Sufi, whose just-published book “House of Debt” argues very much the contrary. ...
In the end, the story of economic policy since 2008 has been that of a remarkable double standard. Bad loans always involve mistakes on both sides — if borrowers were irresponsible, so were the people who lent them money. But when crisis came, bankers were held harmless for their errors while families paid full price.
And refusing to help families in debt, it turns out, wasn’t just unfair; it was bad economics. Wall Street is back, but America isn’t, and the double standard is the main reason.

Thursday, May 15, 2014

'Why Inequality Lowers Social Mobility'

This was in the daily links, but thought it deserved additional highlighting. It's from Miles Corak:

Joseph Fishkin’s book, “Bottlenecks,” explains why inequality lowers social mobility, by Miles Corak: [The Brookings Institution has been having an online discussion of Bottlenecks: A New Theory of Equal Opportunity, a book by Joseph Fishkin. This post is a re-blog of my contribution, "Money: a Bottleneck with Bite."]
... So far, it has been politically convenient to focus on upward mobility of children from the bottom of the income distribution, measured in some absolute sense, because it puts broader issues of the influence of inequality to one side.
The mobility-only approach puts the onus of the problem on the poor—their incomes, their work ethic, their schooling, their fertility choices, their parenting strategies—and abstracts from the broader context within which they must engage, define themselves, and raise their children. The rich are not part of this story.
But Professor Fishkin is right: “anyone concerned with equal opportunity ought also to be concerned with limiting inequality of income and wealth.” ...
The factors impacting on child development certainly include non-financial ones, including what social scientists clinically label the “unobserved parental characteristics”, which are correlated with income.
But inequality alters the rules of the game. It narrows the goals we pursue as individuals, shapes values, and more importantly it turns our pursuit of the good life into an arms race over positional goods, and changes both incentives and opportunities. That is what makes money a bottleneck that bites.
Bottlenecks outlines a theory of opportunity that gives us good reason to worry about outcomes, because to some important degree unequal outcomes lead to unequal opportunities. ...
Money is a significant bottleneck. Facing that fact can only be healthy, if somewhat more challenging, for the way we think about public policy. ...

Monday, May 12, 2014

'How to Shrink Inequality'

Robert Reich:

How to Shrink Inequality: Some inequality of income and wealth is inevitable, if not necessary. If an economy is to function well, people need incentives to work hard and innovate. The pertinent question is ... at what point do these inequalities become so great as to pose a serious threat to our economy, our ideal of equal opportunity and our democracy. We are near or have already reached that tipping point. ...But a return to the Gilded Age is not inevitable. ... There is no single solution for reversing widening inequality. ... Here are ten initiatives that could reverse the trends..:

1) Make work pay. ... [Min wage, EITC, etc.]
2) Unionize low-wage workers. ...
3) Invest in education. ...
4) Invest in infrastructure. ...
5) Pay for these investments with higher taxes on the wealthy. ...
6) Make the payroll tax progressive. ...
7) Raise the estate tax and eliminate the “stepped-up basis” for determining capital gains at death. ...
8) Constrain Wall Street. ...
9) Give all Americans a share in future economic gains. ... [Diversified index of stocks and bonds given to all at birth]
10) Get big money out of politics. ...

[The essay, which is much, much longer, also talks about how inequality has happened, how it threatens the foundations of our society, and why it has happened.]

Monday, April 07, 2014

Paul Krugman: Oligarchs and Money

Class interests stand in the way of raising the inflation target:

Oligarchs and Money, by Paul Krugman, Commentary, NY Times: Econonerds eagerly await each new edition of the International Monetary Fund’s World Economic Outlook. ... This latest report ... in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries. ...
First, let’s talk about the case for higher inflation. ... It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices...
But ... would it be enough to get back to 2 percent, the official inflation target...? Almost certainly not.
You see, monetary experts ... thought that 2 percent was high enough to ... make liquidity traps ... very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.
Furthermore,... there’s strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash..., thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.
So why is the obvious unsayable? One answer is that serious people like to prove their seriousness by calling for tough choices and sacrifice (by other people, of course). They hate being told about answers that don’t involve more suffering.
And behind this attitude, one suspects, lies class bias. Doing what America did after World War II — using low interest rates and inflation to erode the debt burden — is often referred to as “financial repression,” which sounds bad. But who wouldn’t prefer modest inflation and a bit of asset erosion to mass unemployment? Well, you know who: the 0.1 percent... Modestly higher inflation, say 4 percent, would be good for the vast majority of people, but it would be bad for the superelite. And guess who gets to define conventional wisdom.
Now, I don’t think that class interest is all-powerful. Good arguments and good policies sometimes prevail even if they hurt the 0.1 percent — otherwise we would never have gotten health reform. But we do need to make clear what’s going on, and realize that in monetary policy as in so much else, what’s good for oligarchs isn’t good for America.

Tuesday, November 12, 2013

'The Inequality of Climate Change'

Annie Lowrey:

The Inequality of Climate Change, by Annie Lowrey, NY Times: ... “No nation will be immune to the impacts of climate change,” said a major World Bank report on the issue last year. “However, the distribution of impacts is likely to be inherently unequal and tilted against many of the world’s poorest regions, which have the least economic, institutional, scientific and technical capacity to cope and adapt.”
That is the firmly established view of numerous national governments, development and aid groups and the United Nations as well. ...
The reason is twofold. First..., poorer lower-latitude regions are expected to face desertification and more-intense storms. The increase in the sea level might be 15 to 20 percent higher in the tropics than the global average, meaning flooding for coastal cities in regions like southern Asia. Droughts are also expected to increase significantly in lower-latitude areas, including in Africa and the Middle East. (The United States and Australia might also be hard hit...) Moreover, in many countries, the vulnerable poor might cluster in areas where climate change might have a disproportionate impact, like flood zones and dry rural areas. ...
The second, more significant reason is that the poorer the country, the harder it might be for it to respond to a changing climate. ...
For that reason, many poorer countries hold rich countries like the United States responsible for climate change, and want them to help pay for its effects. ...
“Poverty reduction and climate change are linked,” said Dr. Jim Yong Kim, the president of the World Bank... He concluded: “If we don’t confront climate change, we won’t end poverty.”

Friday, November 08, 2013

Paul Krugman: The Mutilated Economy

Policy failures can be very costly:

The Mutilated Economy, by Paul Krugman, Commentary, NY Times: Five years and eleven months have now passed since the U.S. economy entered recession. ... Official unemployment remains high, and it would be much higher if so many people hadn’t dropped out of the labor force. Long-term unemployment ... is four times what it was before the recession.
These dry numbers translate into millions of human tragedies — homes lost, careers destroyed, young people who can’t get their lives started. And many people have pleaded all along for policies that put job creation front and center. Their pleas have, however, been drowned out by the voices of conventional prudence. We can’t spend more money on jobs, say these voices, because that would mean more debt. We can’t even hire unemployed workers and put idle savings to work building roads, tunnels, schools. Never mind the short run, we have to think about the future!
The bitter irony, then, is that it turns out that by failing to address unemployment, we have ... been sacrificing the future, too. ... Or so say researchers from the Federal Reserve, and I’m sorry to say that I believe them. ...
According to the paper..., our seemingly endless slump has done long-term damage through multiple channels. The long-term unemployed eventually come to be seen as unemployable; business investment lags thanks to weak sales; new businesses don’t get started; and existing businesses skimp on research and development.
What’s more, the authors ... suggest that economic weakness has already reduced America’s economic potential by ... more than $1 trillion a year ... for multiple years. ... The ...evidence is overwhelming that ... by not even making unemployment a major policy priority ... we’ve done ourselves immense long-term damage.
And it is, as I said, a bitter irony, because one main reason we’ve done so little about unemployment is the preaching of deficit scolds, who have wrapped themselves in the mantle of long-run responsibility — which they have managed to get identified in the public mind almost entirely with holding down government debt. ...
Is there any chance of reversing this damage? The Fed researchers are pessimistic, and, once again, I fear that they’re probably right. America will probably spend decades paying for the mistaken priorities of the past few years.
It’s really a terrible story: a tale of self-inflicted harm, made all the worse because it was done in the name of responsibility. And the damage continues as we speak.

Thursday, October 24, 2013

'Gambling with Civilization'

In case you missed this in the daily links. From Paul Krugman:

Gambling with Civilization, by Paul Krugman, NYRB [Review of The Climate Casino: Risk, Uncertainty, and Economics for a Warming World, by William D. Nordhaus]:
1. Forty years ago a brilliant young Yale economist named William Nordhaus published a landmark paper, “The Allocation of Energy Resources,” that opened new frontiers in economic analysis. [1] Nordhaus argued that to think clearly about the economics of exhaustible resources like oil and coal, it was necessary to look far into the future, to assess their value as they become more scarce—and that this look into the future necessarily involved considering not just available resources and expected future economic growth, but likely future technologies as well. Moreover, he developed a method for incorporating all of this information—resource estimates, long-run economic forecasts, and engineers’ best guesses about the costs of future technologies—into a quantitative model of energy prices over the long term.
The resource and engineering data for Nordhaus’s paper were for the most part compiled by his research assistant, a twenty-year-old undergraduate... It was an invaluable apprenticeship. My reasons for bringing up this bit of intellectual history, however, go beyond personal disclosure—although readers of this review should know that Bill Nordhaus was my first professional mentor. For if one looks back at “The Allocation of Energy Resources,” one learns two crucial lessons. First, predictions are hard, especially about the distant future. Second, sometimes such predictions must be made nonetheless.
Looking back at “Allocation” after four decades, what’s striking is how wrong the technical experts were about future technologies. For many years all their errors seemed to have been on the side of overoptimism, especially on oil production and nuclear power. More recently, the surprises have come on the other side, with fracking having the biggest immediate impact on markets, but with the growing competitiveness of wind and solar power—neither of which figured in “Allocation” at all—perhaps the more fundamental news. For what it’s worth, current oil prices, adjusted for overall inflation, are about twice Nordhaus’s prediction, while coal and especially natural gas prices are well below his baseline.
So the future is uncertain, a reality acknowledged in the title of Nordhaus’s new book, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World. Yet decisions must be made taking the future—and sometimes the very long-term future—into account. ... And as Nordhaus emphasizes, although perhaps not as strongly as some would like, when it comes to climate change uncertainty strengthens, not weakens, the case for action now.
Yet while uncertainty cannot be banished from the issue of global warming, one can and should make the best predictions possible. Following his work on energy futures, Nordhaus became a pioneer in the development of “integrated assessment models” (IAMs), which try to pull together what we know about two systems—the economy and the climate—map out their interactions, and let us do cost-benefit analysis of alternative policies. [2] At one level The Climate Casino is an effort to popularize the results of IAMs and their implications. But it is also, of course, a call for action. I’ll ask later in this review whether that call has much chance of succeeding. ...[continue]...

Monday, September 30, 2013

'World Leaders Must Act Faster on Climate Change'

Speaking of the GOP undermining of the public's faith in the government's ability to solve important problems. This is from Nicholas Stern:

World leaders must act faster on climate change, by Nicholas Stern, Commentary, Financial Times: Governments and businesses should be left in no doubt about the dangers of delaying further cuts in greenhouse gas emissions following the publication of the new assessment report by the Intergovernmental Panel on Climate Change. ... [W]e are seeing fundamental changes to the world’s climate, which could soon be ... causing mass migration and endless conflict. This should focus minds...
But all governments must recognise that they themselves potentially pose the biggest threat. There is a danger that, through vacillation and confusion, they will create policy risk that undermines the confidence of the companies largely responsible for delivering the transition to low-carbon economic growth and development. ...
Some politicians will still seek to deny the science and downplay the risks. Many of them have vested financial interests in protecting the status quo, or ideological beliefs that mean they cannot acknowledge the logic of correcting market failures ... to strengthen the role of markets... Although they are small in number, they still have the power to create confusion and slow action.
But everywhere evidence is emerging of opportunities afforded by new energy sources that are more efficient and less polluting. No investor should fail to be impressed by how rapidly the costs of solar photovoltaics and other technologies are falling. ...
The new IPCC report should now convince all world leaders to accelerate their efforts to tackle climate change and create a safer and more prosperous world.

Given the (intentionally created) political climate surrounding attempts to address this problem, it's hard for me to imagine anything of significance happening anytime soon.

Tuesday, September 17, 2013

'Is Obama Getting Bad Economic Advice?'

Heidi Moore chronicles the administration's failures in economic policy:

The Larry Summers flop: more proof Obama is getting bad economic advice, by Heidi Moore: Is President Obama the victim of bad economic advice?
The evidence points to "yes". The president's economic initiatives – food stamps, manufacturing, infrastructure, raising the debt ceiling, appointing a new chairman of the Federal Reserve – have mostly ended in either neglect or shambles. After five years, the Obama Administration's stated intentions to improve the fortunes of the middle class, boost manufacturing, reduce income inequality, and promote the recovery of the economy have come up severely short.
Despite this, the president believes he is negotiating his economic agenda with Congress from a position of strength, and almost every speech includes some self-congratulatory note about how far the economy has come. ...
The president could not be more wrong or misleading in the way in which he presents our economic progress. One can perfectly understand economist Dean Baker's horror when he realized, back in August, that Obama's economic team believes it is doing a good job.
It's time to end the delusion that this White House has accomplished even a fraction of what it should be doing to help the economy. It should have been focusing all its efforts on employment, perhaps by boosting job-retraining programs, providing tax incentives for employers or supporting a comprehensive infrastructure effort. Instead, the administration is falling victim to political distractions and lack of follow-through and wasting its meager political capital on the wrong fights.
The latest example is the debacle around Larry Summers. ...
To shut out the opposition to Summers, the president had to have been wearing earplugs. How closed is his economic circle? How well do they fit the profile of honest brokers about our economic situation? Loyalty is a great thing. But that kind of trust is clearly not working for Obama. Maybe he should stop relying on those he knows, and rely instead on those who know what they're doing.

Gridlock in Congress is real, and legislation involving additional fiscal policy measures or job creation would be difficult or impossible. But part of that is due to the administration's failure to lead the conversation, to hammer home at every opportunity how Congress is failing the middle class. The charge that the administration is guilty of "political distractions and lack of follow-through and wasting its meager political capital on the wrong fights" is accurate in my view, particularly the lack of follow through. How many times has the president announced some major effort at job creation, and that's the last we hear about it? I don't think people understand how awful Congress has been where fiscal policy is concerned. I suppose the administration is worried about being blamed for the poor economy, so instead it talks about "how far the economy has come" due to its policies. But why not just tell the truth? Why not point at Congress and call for job creation through infrastructure construction at every opportunity, and let people know that Congress is to blame if it doesn't happen? Yes, the other side will try to blame the administration is if admits the economy is doing poorly, but that will happen anyway and it's a debate the administration ought to be able to win.

Saturday, August 24, 2013

'Public Policies, Made to Fit People'

You may need a nudge to read this one:

Public Policies, Made to Fit People, by Richard Thaler, Commentary, NY Times: I have written here before about the potential gains to government from involving social and behavioral scientists in designing public policies. My enthusiasm comes in part from my experiences as an academic adviser to the Behavioral Insights Team created in Britain by Prime Minister David Cameron.
Thus I was pleased to hear reports that the White House is building a similar initiative here in the United States. Maya Shankar, a cognitive scientist and senior policy adviser at the White House Office of Science and Technology Policy, is coordinating this cross-agency group, called the Social and Behavioral Science Team; it is part of a larger effort to use evidence and innovation to promote government performance and efficiency. I am among a number of academics who have shared ideas with the administration about how research findings in social and behavioral science can improve policy.
It makes sense for social scientists to become more involved in policy, because many of society’s most challenging problems are, in essence, behavioral. Using social scientists’ findings to create plausible interventions, then testing their efficacy with randomized controlled trials, can improve — and sometimes save — people’s lives, all while reducing the need for more government spending to fix problems later.
Here are three examples of social science issues that have attracted the team’s attention ...
All of these examples show that the role of behavioral science in policy isn’t for the government to tell people how to think or act. It is to help them achieve their own goals. ...

Tuesday, July 30, 2013

Income Inequality: Obama vs.Limbaugh--Middle Out or Trickle Down?

We are, as they say, live:

FT

Income Inequality: Obama vs.Limbaugh--Middle Out or Trickle Down?, by Mark A. Thoma: President Obama unveiled his latest initiative to enhance economic growth, create quality jobs, and reduce inequality last week, an approach he calls growing from the “middle out.” The basis of this approach is the idea that rising inequality has redirected income from the middle class to the top of the income distribution, and the reduced buying power of the middle class has reduced economic growth. Thus, the key to higher growth is to enact policies that increase the share of national income that flows to the middle class.
Of course, as with previous initiatives from the Obama administration to address our economic problems, a divided, gridlocked government means there is no chance of this initiative actually passing. In fact, the response from the political right was predictable, a claim that “trickle-down” supply-side policy is the key to fixing all that ails the economy. For example, Rush Limbaugh reacted the president’s speech by saying ...

But, as the column goes on to explain, this is a false debate (and there's a connection to inequality).

Thursday, July 04, 2013

'The Knowledge Transmission Mechanism'

Ha, visiting Belize during the rainy season may not have been the best idea I ever had. It's pouring rain, thunder, lightening, all tours are canceled, internet, phone, and TV are out (at least we have electricity now), and the roads (mostly dirt/gravel) are horrid. So instead of taking my mind off of things, nothing to do but sit in my room and think.

So I called a cab, went to the BTL (phone) store, got a sim chip, many gigs of data, and finally connected to the outside world once again.

This is supposed to continue for several more days and I want to preserve my data -- so, quickly, from Simon Wren-Lewis:

The Knowledge Transmission Mechanism: In a comment on my last post, Joseph Grossman asks “If the vast majority grasp and support the basic shape of the [fiscal] stimulus solution, and if we live in democracies, isn't it time to shift the analysis to expose the exact and precise mechanisms by which our electoral systems are failing miserably?” This is the question which, since 2010, I have asked myself almost every day. The question becomes even more relevant as the intellectual case for austerity crumbles, but the policy continues, and in some cases even appears to gain ground. ... I want to use this example to look at the question of the transmission of economic ideas more generally. So let’s break the question down.
First, do the vast majority of economists agree? In the case of fiscal policy, I think the honest answer here is: majority, probably yes, vast, almost certainly no. ...
However, what the majority - vast or not - of economists think would be irrelevant if no one listened to them. The transmission mechanism from economists to economic policy works along many channels. It may be direct. It may be mediated through the civil service. It may work through economists influencing popular opinion, which then influences policymakers. I think the last of these is the least important. ...

After a discussion of some of the problems in the transmission of ideas to policymakers, he Simon Wren-Lewis concludes:

My own current view is that these structural weaknesses are to a large extent inherent in liberal democratic societies, where restrictions on what money can do are very limited. That has led me to be much more favourably disposed to the delegation of economic decisions, even though this appears less democratic, and can be seen as representing arrogance and self-interest by the academic community. Yet the problem is real enough. And it is personal: when you study, teach and research in a subject where some of its most basic findings - understood for more than half a century- can be brushed aside so easily, and millions of people are worse off as a result, you have to ask yourself what the point is.

Thursday, June 13, 2013

'Is This (Still) The Age of the Superstar?'

Paul Krugman comments on the Alan Krueger speech (see the post below this one):

Is This (Still) The Age of the Superstar?: This will be a quick piece... Alan Krueger gave a fun talk at the Rock and Roll Hall of Fame, in which he used evidence of growing inequality among musical artists as a jumping off point for a discussion of broader inequality issues. As he notes, there is a widely known theory from Rosen actually called the superstar theory, which could explain the takeoff of the 1 percent, in rock and in life.
But I was struck by the fact that his chart of growing inequality in the music business cut off in 2003. A lot has happened in the decade since: basically, the music business has been hugely disrupted by the Internet. I’d be very curious to know whether that hasn’t changed the calculus...
And we also seem to be seeing a general shift in the sources of rising inequality, from inequality in compensation to good old-fashioned capital versus labor.
So I wonder if even Alan Krueger is now behind the curve here — and in any case I’d love to see how the trend for the music business looks since 2003.

A quick comment on this "quick piece". Inequality can arise for many reasons, e.g. differences in economic power that distort income shares, capture of the political system by the wealthy, skill-biased technical change, and so on, and the debate is often cast as one versus the other. But the causes are not mutually exclusive and may, in some cases, reinforce each other (e.g. economic inequality from skill-biased technical change leading to political inequality and a political bias against unions, or, changes in production techniques that make it harder to disrupt production with a strike can undermine union power). Endless debate on the one true cause of rising inequality is fruitless when there is, as I believe, evidence of multiple causes -- both sides can point to evidence favoring their position leading to a standoff that can forestall needed policy changes. Better to acknowledge that both sides have a point, and move on to the push for policies that are robust against the underlying cause (or separate policies to address each type of problem).

Wednesday, April 24, 2013

'Unemployment and the Free Market'

Chris Dillow takes on the idea that free market policies can solve our unemployment problem:

Unemployment and the Free Market, Stumbling and Mumbling: Bryan Caplan deserves praise for calling on free market economists to pay more attention to the "grave evil" of unemployment. I fear, though, that he overstates what free market policies can contribute to solving the problem.
My chart shows the problem. It shows the UK unemployment rate between 1855 (when data begins) and 1914. You can see that the jobless rate was often high - it averaged 4% - and volatile.

Unem1855
Note: data comes from the Bank of England.

And this was during a period of as free markets as one could practically get. This undermines at least three "free market" explanations for unemployment:
- "Welfare benefits mean the unemployed have little incentive to get work." In the 19th C, though, the only state support the unemployed got was in the Workhouse - and even as late as in my lifetime, this was spoken of with terror.
- "Big government and taxes deter job creation." But public spending in this time averaged only around 10% of GDP, and labour market regulation except for a few Factory Acts was nugatory by modern standards.
- "Wages are too rigid". But wages fell in nominal terms in 13 of the 59 years here, and in real terms in 12 of these years. Average nominal wages fell by 9% between 1874 and 1879, which is consistent with some sectors seeing very large falls.
There is, though, an alternative theory that fits these data. It's that a free market will see large swings in aggregate demand and employment, and that unemployment cannot be prevented by wage reductions alone. This was pointed out most famously - well famous in my house anyway - by Michal Kalecki in 1935... [long quote] ...
There's a good reason why almost all major economies abandoned free market economics. It's that such economies didn't and couldn't avoid mass unemployment.
I'll concede - much more than most lefties - that there's a big place for free market economics. But the labour market ain't it. 

Saturday, April 20, 2013

'The Economy Will Not Manage Itself, At Least Not In A Good Way'

Brad DeLong on the role of government in a market economy:

Economic Policy: Saturday Twentieth Century Economic History Weblogging: Note well: the economy will not manage itself, at least not in a good way.

As John Maynard Keynes shrilly stated back in 1926:

Let us clear… the ground…. It is not true that individuals possess a prescriptive 'natural liberty' in their economic activities. There is no 'compact' conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened… individuals… promot[ing] their own ends are too ignorant or too weak to attain even these. Experience does not show that… social unit[s] are always less clear-sighted than [individuals] act[ing] separately. We [must] therefore settle… on its merits… "determin[ing] what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion".

The management of economies by governments in the twentieth century was at best inept. And, as we have seen since 2007, little if anything has been durably learned about how to regulate the un-self-regulating market in order to maintain prosperity, or ensure opportunity, or produce substantial equality.

Before the start of the nineteenth century, there were markets but there was not really a market economy—and the peculiar dysfunctions that we have seen the market economy generate through its macroeconomic functioning were, if not absent, at least rare and in the background of attention. Wars, famines, government defaults were threats to life and livelihood. The idea that Alice might be poor and hungry because Bob would not buy stuff from her because Bob was unemployed because Carl wanted to deleverage because Dana was no longer a good credit risk because Alice had stopped paying rent to Dana--that and similar macroeconomic processes are a post-1800 phenomenon.

The problems of economic policy in the modern age are, speaking very broadly, threefold: first, the problem of attempts to replace the market with central planning--which is, for reasons well-outlined by the brilliant Friedrich von Hayek, a subclass of the problem of twentieth-century totalitarian tyranny--second, the problem of managing what Karl Polanyi called "fictitious commodities"; and, third, the problem of managing aggregate demand. ...[much more]...

Friday, April 05, 2013

Paul Krugman: The Urge to Purge

We need to purge rotten economic policy out of our economic system:

The Urge to Purge, by Paul Krugman, Commentary, NY Times: When the Great Depression struck, many influential people argued that the government shouldn’t even try to limit the damage. According to Herbert Hoover, Andrew Mellon, his Treasury secretary, urged him to “Liquidate labor, liquidate stocks, liquidate the farmers. ... It will purge the rottenness out of the system.” Don’t try to hasten recovery, warned the famous economist Joseph Schumpeter, because “artificial stimulus leaves part of the work of depressions undone.”
Like many economists, I used to quote these past luminaries with a certain smugness. After all, modern macroeconomics had shown how wrong they were, and we wouldn’t repeat the mistakes of the 1930s, would we?
How naïve we were. It turns out that the urge to purge — the urge to see depression as a necessary and somehow even desirable punishment for past sins, while inveighing against any attempt to mitigate suffering — is as strong as ever. Indeed, Mellonism is everywhere these days. Turn on CNBC or read an op-ed page, and the odds are that you ... encounter an alleged expert ranting about the evils of budget deficits and money creation, and denouncing Keynesian economics as the root of all evil.
Now, the fact is that these ranters have been wrong about everything, at every stage of the crisis, while the Keynesians have been mostly right. ... But the Mellonites just keep coming. The latest example is David Stockman...
So what should we be doing? ... To deal with the crisis..., we need monetary and fiscal stimulus, to induce those who aren’t too deeply indebted to spend more while the debtors are cutting back.
But that prescription is, of course, anathema to Mellonites, who wrongly see it as more of the same policies that got us into this trap. And that, in turn, tells you why liquidationism is such a destructive doctrine: by turning our problems into a morality play of sin and retribution, it helps condemn us to a deeper and longer slump.
The bad news is that sin sells. Although the Mellonites have, as I said, been wrong about everything, the notion of macroeconomics as morality play has a visceral appeal that’s hard to fight. Disguise it with a bit of political cross-dressing, and even liberals can fall for it.
But they shouldn’t. Mellon was dead wrong in the 1930s, and his avatars are dead wrong today. Unemployment, not excessive money printing, is what ails us now — and policy should be doing more, not less.

Sunday, March 03, 2013

Christina Romer: The Business of the Minimum Wage

Christina Romer on the minimum wage (the article explains her arguemts in more detail):

The Business of the Minimum Wage, by Christina Romer, Commentary, NY Times: Raising the minimum wage, as President Obama proposed in his State of the Union address, tends to be more popular with the general public than with economists.
I don’t believe that’s because economists care less about the plight of the poor... Rather, economic analysis raises questions about whether a higher minimum wage will achieve better outcomes for the economy and reduce poverty. ...
[M]ost arguments for instituting or raising a minimum wage are based on fairness and redistribution. Even if workers are getting a competitive wage, many of us are deeply disturbed that some hard-working families still have very little. ...
It’s precisely because the redistributive effects of a minimum wage are complicated that most economists prefer other ways to help low-income families. For example, the ... earned-income tax credit... This approach is very well targeted — the subsidy goes only to poor families — and could easily be made more generous. ...
So where does all of this leave us? The economics of the minimum wage are complicated, and it’s far from obvious what an increase would accomplish. If a higher minimum wage were the only anti-poverty initiative available, I would support it. ...
But we could do so much better if we were willing to spend some money. A more generous earned-income tax credit would provide more support for the working poor and would be pro-business at the same time. And pre-kindergarten education, which the president proposes to make universal, has been shown in rigorous studies to strengthen families and reduce poverty and crime. Why settle for half-measures when such truly first-rate policies are well understood and ready to go?

The point of the argument that the minimum wage and EITC are complements rather than substitutes (i.e. they fill different needs and hence work together) is to avoid setting one against the other in a political fight. The minimum wage costs the federal government nothing, while an expansion of the EITC would requite an increase in federal spending. My fear is that opponents of the minimum wage on the right will team up with well-meaning Democrats to say yes, we agree, the EITC is much, much better way to help the poor -- that's what we should do -- and use it as an excuse to block minimum wage legislation. Then, when it comes time to fund the EITC, we'll here that it's a good idea, but with the budget the way it is, we just can't afford it right now.

There was a time when I would have joined the "let's use the EITC rather than the minimum wage to attack this problem," but I've been convinced the minimum wage and the EITC really are complementary, and the political reality right now is that if we are going to help the poor at all in an environment where the right has whipped up so much fear of the government debt as a way of reducing support for social programs, the best bet is the minimum wage.

Wednesday, February 06, 2013

Jagdish Bhagwati Does Not Seem to Like Al Gore

Not sure where to start with this one other than to note that Jagdish Bhagwati does not seem to like Al Gore:

Futurama, by Jagdish Bhagwati: ...Al Gore ... surely succeeded beyond his wildest expectations as the author of An Inconvenient Truth. But his phenomenal success had little to do with science (which has remained somewhat controversial: many of us remember for instance the not-too-distant scare about global cooling, also from climate scientists) and much to do with the photographs of polar bears caught on drifting ice as glaciers melted. An image like that is what we all need when we push our pet agendas. Alas, none of us is so fortunate. Nor is Gore as he turns now to writing about our future. ...
The problem Gore faces in the bulk of this book therefore is that his identification of problems, and his proposed solutions, are not compelling. His erudition is considerable but is necessarily limited since he casts his net wide, and he is both unfamiliar with important issues pertinent to his analysis and also shallow in his prescriptions for remedial policies. ...
Given Gore’s justified reputation on climate change, a disappointing feature of Gore’s book is in the chapter titled “The Edge.” I agree with him that the evidence on climate change, and the contribution to it by man-made carbon emissions, is about as good as science can provide; and he is persuasive in his sketch of the scenario of the dangers that global warming, unchecked, hold for mankind. Where he fails is in the remedies that he discusses. To focus on just one issue: there is now agreement from the last meeting at Cancún on the attempted renewal of Kyoto Protocol that $100 billion be found annually to create new technologies of mitigation and adaptation to climate change. It is expected that a significant share of this will be public funds. We have the precedent that public monies should largely be used to create public good: thus the new seeds under the green revolution were publicly financed and they were available to everyone virtually for free. Should we then not expect the green technologies developed with public funds to be available for free to Mars, China, and India?
But, to my knowledge, Gore has not embraced this proposal, which would make, say, India accept more ambitious targets of carbon reduction because it would reduce the cost of doing so. I would not make the ferocious charges that Gore levels at the opponents of climate change (see page 283). But may I wonder whether the reason for Gore’s omission is that he is heavily invested in green-energy stocks and would like to see public funds to be used only for private payoffs by these firms?
The good in the book is therefore offset by the bad. But even the bad will produce good if it irritates us into thinking harder about the many issues that Gore correctly insists we must confront.

Gore's sin is not embracing a particular proposal, and it must be because "he is heavily invested in green-energy stocks?" Pretty thin charge, and pretty speculative -- I expected a more compelling complaint. (Bhagwati agress with Gore on the science, says he's persuasive, etc., and acts like the know-it-all judge of all things related to climate change, yet he tosses out the global cooling thing? There's a reason this is called the "global cooling myth.")

In another part, I was surprised to hear a call for unions:

...The problem in this world of competition among similar products is that comparative advantage is now fragile: it has a “knife-edge” quality. One day you have it; the next day you do not. Almost every entrepreneur has a rival breathing down his neck; and this need not be from China or India, with their “low wages”—what Gore frets about—but may be Poland or France or Sweden. There are three implications.
First, firms need flexibility in firing if they are to hire.
Second, we can no longer assure economic security for workers by giving them lifetime employment. The security has to be for the worker herself, unrelated to specific occupation and employment.
Third, the volatility also means that we can no longer expect firms to provide training and hence “human capital” to blue-collar workers who can be expected to leave at the next sign of trouble at their plant or firm. We therefore have to provide this human capital through efforts by unions, employers, community colleges, etc.
Gore also accepts uncritically the notion that we are doomed to greater inequality in a globalized world of trade and multinational investment. The evidence is more mixed than he reports...

I think it would only be fair to note the incentives work the other way as well. With firms willing to fire workers at the drop of a hat -- older social obligations to retain workers through tough times are largely gone -- there's no incentive for workers to invest in themselves if the human capital is unique to the particular firm. Why bother if you are unlikely to be there for very long? (That is, I don't think the problem is workers who "leave at the next sign of trouble." f course they'll leave for another opportunity if they fear they'll be fired in the near future due to the "trouble.")

Sunday, January 27, 2013

Climate Policy in Obama's Second Term

I think of Robert Stavins as being on the optimistic side when it comes to action on climate change, but even he seems discouraged despite Obama's mention of this issue in his inaugural address:

The Second Term of the Obama Administration, by Robert Stavins: In his inaugural address on January 21st, President Obama surprised many people – including me – by the intensity and the length of his comments on global climate change.  Since then, there has been a great deal of discussion in the press and in the blogosphere about what climate policy initiatives will be forthcoming from the administration in its second term. ...
Although I was certainly surprised by the strength and length of what the President said in his address, I confess that it did not change my thinking about what we should expect from the second term.  Indeed, I will stand by an interview that was published by the Harvard Kennedy School on its website five days before the inauguration (plus something I wrote in a previous essay at this blog in December, 2012).  Here it is, with a bit of editing to clarify things, and some hyperlinks inserted to help readers. ...
Q: In the Obama administration’s second term, are there openings/possibilities for compromises...?
A: It is conceivable – but in my view, unlikely – that there may be an opening for implicit (not explicit) “climate policy” through a carbon tax. At a minimum, we should ask whether the defeat of cap-and-trade in the U.S. Congress, the virtual unwillingness over the past 18 months of the Obama White House to utter the phrase “cap-and-trade” in public, and the defeat of Republican Presidential candidate Mitt Romney indicate that there is a new opening for serious consideration of a carbon-tax approach to meaningful CO2 emissions reductions in the United States.
First of all, there surely is such an opening in the policy wonk world. Economists and others in academia, including important Republican economists such as Harvard’s Greg Mankiw and Columbia’s Glenn Hubbard, remain enthusiastic supporters of a national carbon tax. And a much-publicized meeting in July, 2012, at the American Enterprise Institute in Washington, D.C. brought together a broad spectrum of Washington groups – ranging from Public Citizen to the R Street Institute – to talk about alternative paths forward for national climate policy. Reportedly, much of the discussion focused on carbon taxes.
Clearly, this “opening” is being embraced with enthusiasm in the policy wonk world. But what about in the real political world? The good news is that a carbon tax is not “cap-and-trade.” That presumably helps with the political messaging! But if conservatives were able to tarnish cap-and-trade as “cap-and-tax,” it surely will be considerably easier to label a tax – as a tax! Also, note that President Obama’s silence extends beyond disdain for cap-and-trade per se. Rather, it covers all carbon-pricing regimes.
So as a possible new front in the climate policy wars, I remain very skeptical that an explicit carbon tax proposal will gain favor in Washington. ...
A more promising possibility – though still unlikely – is that if Republicans and Democrats join to cooperate with the Obama White House to work constructively to address the short-term and long-term budgetary deficits the U.S. government faces,... then there could be a political opening for new energy taxes, even a carbon tax. ...
Those who recall the 1993 failure of the Clinton administration’s BTU-tax proposal – with a less polarized and more cooperative Congress than today’s – will not be optimistic. ... The key group to bring on board will presumably be conservative Republicans, and it is difficult to picture them being more willing to break their Grover Norquist pledges because it’s for a carbon tax.

Here's the surprising part (to me anyway), some optimism after all:

What remains most likely to happen is what I’ve been saying for several years, namely that despite the apparent inaction by the Federal government, the official U.S. international commitment — a 17 percent reduction of CO2 emissions below 2005 levels by the year 2020 – is nevertheless likely to be achieved!  The reason is the combination of CO2 regulations which are now in place because of the Supreme Court decision [freeing the EPA to treat CO2 like other pollutants under the Clean Air Act], together with five other regulations or rules on SOX [sulfur compounds], NOX [nitrogen compounds], coal fly ash, particulates, and cooling water withdrawals. All of these will have profound effects on retirement of existing coal-fired electrical generation capacity, investment in new coal, and dispatch of such electricity.
Combined with that is Assembly Bill 32 (AB 32) in the state of California, which includes a CO2 cap-and-trade system that is more ambitious in percentage terms than Waxman-Markey was in the U.S. Congress, and which became binding on January 1, 2013. ...  In other words, there will be actions having significant implications for climate, but most will not be called “climate policy,” and all will be within the regulatory and executive order domain, not new legislation. ...

Friday, January 25, 2013

Paul Krugman: Deficit Hawks Down

Deficit hawks are losing their clout:

Deficit Hawks Down, by Paul Krugman, Commentary, NY Times: President Obama’s second Inaugural Address offered a lot for progressives to like. ... But arguably the most encouraging thing of all was what he didn’t say: He barely mentioned the budget deficit..., the latest sign that the self-styled deficit hawks — better described as deficit scolds — are losing their hold over political discourse. And that’s a very good thing.
Why have the deficit scolds lost their grip? I’d suggest four interrelated reasons.
First, they ... spent three years warning of imminent crisis — if we don’t slash the deficit now now now, we’ll turn into Greece... But that crisis keeps not happening ... So the credibility of the scolds has taken a ... well-deserved, hit.
Second, both deficits and public spending as a share of G.D.P. have started to decline..., and reasonable forecasts ... suggest that the federal deficit will be below 3 percent of G.D.P., a not very scary number, by 2015.
And it was, in fact, a good thing that the deficit was allowed to rise as the economy slumped. With private spending plunging..., the willingness of the government to keep spending was one of the main reasons we didn’t experience a full replay of the Great Depression. Which brings me to the third reason the deficit scolds have lost influence: the ... claim that we need to practice fiscal austerity even in a depressed economy, has failed decisively in practice. Consider ... the case of Britain. In 2010, when the new government of Prime Minister David Cameron turned to austerity policies,... the sudden, severe medicine ... threw the nation back into recession.
At this point, then, it’s clear that the deficit-scold movement was based on bad economic analysis. But ... there was also ... a lot of bad faith involved, as the scolds tried to exploit an economic (not fiscal) crisis on behalf of a political agenda that had nothing to do with deficits. And the growing transparency of that agenda is the fourth reason the deficit scolds have lost their clout. ... Prominent deficit scolds can no longer count on being treated as if their wisdom, probity and public-spiritedness were beyond question. But what difference will that make?
Sad to say, G.O.P. control of the House means that we won’t do what we should be doing: spend more, not less, until the recovery is complete. But the fading of deficit hysteria means that the president can turn his focus to real problems. And that’s a move in the right direction.

Friday, December 21, 2012

Paul Krugman: Playing Taxes Hold ’Em

I think Justin Wolfer's claim that there are now three parties, the Democrats, the Republicans, and the Tea Party, at odds in the House is correct. That appears to be working in the president's favor, at least for the moment:

Playing Taxes Hold ’Em, by Paul Krugman, Commentary, NY Times: A few years back, there was a boom in poker television — shows in which you got to watch the betting and bluffing of expert card players. Since then, however, viewers seem to have lost interest. But I have a suggestion: Instead of featuring poker experts, why not have a show featuring poker incompetents — people who fold when they have a strong hand or don’t know how to quit while they’re ahead?
On second thought, that show already exists. It’s called budget negotiations, and it’s now in its second episode.
The first episode ran in 2011, as President Obama made his first attempt to cut a long-run fiscal deal — a so-called Grand Bargain... Mr. Obama was holding a fairly weak hand... The deal, if implemented, would have been a huge victory for Republicans... But ... Mr. Boehner and members of his party couldn’t bring themselves to accept even a modest rise in taxes. And their intransigence saved Mr. Obama from himself.
Now the game is on again — but with Mr. Obama holding a far stronger hand. ...
Yet earlier this week progressives suddenly had the sinking feeling that it was 2011 all over again, as the Obama administration made a budget offer that .. involved giving way on issues where it had promised to hold the line... Are we about to see another round of the president negotiating with himself, snatching policy and political defeat from the jaws of victory?
Well, probably not. Once again, the Republican crazies ... have saved the day. ... Mr. Boehner had evident problems getting his caucus to support Plan B, and he took the plan off the table Thursday night; it would have modestly raised taxes on the really wealthy, the top 0.1 percent, and even that was too much for many Republicans. ...
As in 2011, then, the Republican crazies are doing Mr. Obama a favor, heading off any temptation he may have felt to give away the store in pursuit of bipartisan dreams.
And there’s a broader lesson... This is no time for a Grand Bargain, because the Republican Party, as now constituted, is just not an entity with which the president can make a serious deal. If we’re going to get a grip on our nation’s problems ... the power of the G.O.P.’s extremists, and their willingness to hold the economy hostage if they don’t get their way, needs to be broken. And somehow I don’t think that’s going to happen in the next few days.

The U.S. Labor Market: Status Quo or a New Normal?

The introduction to this NBER Digest research summary says it well, "[There is no] compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the [recent] pattern of persistently high unemployment rates." I've noted this research before, but it's worth emphasizing again, particularly since one of the authors, Ed Lazear, was the Chairman of the President’s Council of Economic Advisers during the Bush Administration:

The U.S. Labor Market: Status Quo or a New Normal?, by Laurent Belsie, NBER Digest: The recession of 2007 to 2009 caused such high and persistent unemployment that it led many to conclude that the labor market had undergone structural changes, making it difficult or impossible to return to pre-recession employment levels. But in The United States Labor Market: Status Quo or A New Normal? (NBER Working Paper No. 18386), Edward Lazear and James Spletzer suggest that cyclical, not structural forces, are behind the surge in unemployment from 4.4 percent in the spring of 2007 to 10 percent in the fall of 2009, and the slow decline since then.
"[T]he current recession does not appear fundamentally different from prior ones, except that it is worse," they conclude. They fail to find "any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates." Instead, they note that "the evidence points to primarily cyclic factors."
The authors note that there are a number of ongoing, long-term industrial and demographic shifts in the labor market, but that none of these factors can explain the recent rise in unemployment. For example, the relative decline in U.S. manufacturing jobs has been under way for a half century, and the rise in female employment dates back to the second half of the twentieth century. The U.S. labor force is also aging, but again this is a long-term trend.
The authors' evidence suggests that long-term trends played a limited role in the recent recession and other past recessions. For example, in each of the business cycles between December 1979 and March 2012, the rise or fall in unemployment can be explained by changes in gender-specific unemployment rates, not by shifts in the gender composition of the workforce. Similarly, the aging of the workforce does not correlate very strongly with shifts in the unemployment rate during business cycle sub-periods. Since November 1982 the changing age composition of the workforce has lowered the unemployment rate by eight-tenths of a percentage point. This trend is reinforced by changes such as the rising education of the workforce and the shift toward service jobs, which have worked to lower unemployment over the last four decades.
The authors suggest that the rapid rise in unemployment during the 2007-9 recession can be explained almost entirely by the rise in unemployment within industries. Some industries such as construction, manufacturing, and retail trade saw unemployment soar. But these were the same industries that saw large decreases in unemployment during the recovery. The construction sector, for example, accounted for 19.4 percent of the increase in the national unemployment rate during the recession; this sector also accounted for 21.5 percent of the decline in the unemployment rate during the recovery.
The same phenomenon has occurred with mismatch -- the difference between vacancies and the number of unemployed in an industry, occupation, or location. Industrial mismatch rose during the 2007-9 recession, and then declined just as quickly. Occupational mismatch -- always higher than industrial mismatch and less sensitive to the business cycle -- rose during the recent recession but has since fallen below its pre-recession level. "There is no evidence that the recession resulted in a long-lasting skills gap that would require retraining experienced workers to work in different industries," the authors conclude. "Turning unemployed manufacturing and construction workers into nurses and teachers would not provide those workers with immediate jobs; there is already a surplus of unemployed even in the low unemployment industries."
There are at least two areas where this recession appears different than previous ones. First, the long-term unemployed make up a larger share of total unemployment than in past downturns, even those with comparably high unemployment rates. Second, there are more vacancies per unemployed person than even a couple of years ago. This shift of the Beveridge curve -- which measures the relationship between job openings and the unemployment rate -- may suggest that some permanent structural change is under way and is keeping the unemployed from filling the jobs that are available. The authors conclude that the reason for such a shift, if it has indeed occurred, won't be known until unemployment returns to normal levels.

On the Beveridge curve, see here.

Thursday, December 06, 2012

'Climate Science Predictions Prove Too Conservative'

Don't say you weren't warned about the risks of climate change, though you might be able to say you weren't adequately warned:

Climate Science Predictions Prove Too Conservative, by Glenn Scherer and DailyClimate.org: Across two decades and thousands of pages of reports, the world's most authoritative voice on climate science has consistently understated the rate and intensity of climate change and the danger those impacts represent, say a growing number of studies on the topic. 
This conservative bias, say some scientists, could have significant political implications, as reports from the group – the U.N. Intergovernmental Panel on Climate Change – influence policy and planning decisions worldwide, from national governments down to local town councils.
As the latest round of United Nations climate talks in Doha wrap up this week, climate experts warn that the IPCC's failure to adequately project the threats that rising global carbon emissions represent has serious consequences: The IPCC’s overly conservative reading of the science, they say, means governments and the public could be blindsided by the rapid onset of the flooding, extreme storms, drought, and other impacts associated with catastrophic global warming. ...

Stiglitz: America’s Hope Against Hope

Joe Stiglitz lists things we should hope for (though not necessarily expect) in Obama's second term:

America’s Hope Against Hope, by Joseph Stiglitz, Commentary, Project Syndicate: After a hard-fought election campaign,... not much has changed... With America facing a “fiscal cliff”..., could there be anything worse than continued political gridlock?
In fact, the election had several salutary effects – beyond showing that unbridled corporate spending could not buy an election, and that demographic changes ... may doom Republican extremism. The Republicans’ explicit campaign of disenfranchisement in some states... backfired... In Massachusetts, Elizabeth Warren, a ... tireless warrior ... to protect ordinary citizens from banks’ abusive practices, won a seat in the Senate.
Some of Mitt Romney’s advisers seemed taken aback by Obama’s victory:... They were confident that Americans would forget how the Republicans’ deregulatory zeal had brought the economy to the brink of ruin, and ... how their intransigence in Congress had prevented more effective policies... Voters, they assumed, would focus only on the current economic malaise.
The Republicans should not have been caught off-guard ..., much of the rise in US economic inequality is attributable to a government in which the rich have disproportionate influence... Obviously, issues like reproductive rights and gay marriage have large economic consequences as well.
In terms of economic policy for the next four years, the main cause for post-election celebration is that the US has avoided measures that would have pushed it closer to recession, increased inequality, imposed further hardship on the elderly, and impeded access to health care for millions of Americans.
Beyond that, here is what Americans should hope for...[list/discussion]..., though I am not sanguine that they will get much of it. More likely, America will muddle through – here another little program for struggling students and homeowners, there the end of the Bush tax cuts for millionaires, but no wholesale tax reform, serious cutbacks in defense spending, or significant progress on global warming. ...

Friday, October 19, 2012

Paul Krugman: Snow Job on Jobs

There is no Romney jobs plan:

Snow Job on Jobs, by Paul Krugman, Commentary, NY Times: Mitt Romney talks a lot about jobs. ... But Mr. Romney, it turns out, doesn’t have a plan; he’s just ... telling lies: claiming that ... independent studies support its position when those studies do no such thing. ...
Mr. Romney’s ... jobs plan ... has five points but contains no specifics. ... Mr. Romney says that the plan would create 12 million jobs over the next four years.
Where does that number come from? When pressed, the campaign cited three studies that it claimed supported its assertions. In fact, however, those studies did no such thing.
Just for the record, one study concluded that America might gain two million jobs if China stopped infringing on U.S. patents and other intellectual property..., but Mr. Romney hasn’t proposed anything that would bring about that outcome. Another study suggested that growth in the energy sector might add three million jobs... — but these were predicted gains under current policy,... not as a consequence of the Romney plan.
Finally, a third study examined the effects of the Romney tax plan and argued (implausibly...) that it would lead to a large increase in the number of Americans who want to work. But how does that help cure a situation in which there are already millions more Americans seeking work than there are jobs available? It’s irrelevant to Mr. Romney’s claims.
So when the campaign says that these three studies support its claims about jobs, it is, to use the technical term, lying — just as it is when it says that six independent studies support its claims about taxes (they don’t).
What do Mr. Romney’s economic advisers actually believe? As best as I can tell, they’re placing their faith in the confidence fairy, in the belief that their candidate’s victory would inspire an employment boom without the need for any real change in policy. In fact, in his infamous Boca Raton “47 percent” remarks, Mr. Romney himself asserted that he would give a big boost to the economy simply by being elected, “without actually doing anything.” ...
To summarize, then, the true Romney plan is to create an economic boom through the sheer power of Mr. Romney’s personal awesomeness. But the campaign doesn’t dare say that, for fear that voters would (rightly) consider it ridiculous. So what we’re getting instead is an attempt to brazen it out with nakedly false claims. There’s no jobs plan; just a plan for a snow job on the American people.

Friday, October 05, 2012

'The Community Reinvestment Act Did Not Induce Subprime Lending'

Via Richard Green:

Rub ́en Herna ́ndez-Murillo, Andra C. Ghent, and Michael T. Owyang show that the Community Reinvestment Act did not induce subprime lending: They look at lending originations and loan performance on either side of the CRA thresholds. If CRA encouraged subprime lending, one should see a discontinuity at the thresholds, but there is none.
These are originations for 2-28 subprime loans. Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income. If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically). They find the same result when looking at pricing and default.

Sunday, September 23, 2012

'Mitt Romney's Housing Market Plan Has to Be a Joke'

Brad DeLong points to Joe Weisenthal's response to the Romney campaign's housing plan (calling it a "plan" gives it more credit than it deserves):

Mitt Romney's Housing Market Plan Has Got to Be a Joke, by Joe Weisenthal: At this point, we have no choice but to conclude that the Mitt Romney campaign is just trolling whiny journalists who have complained about the lack of detail in his plans.

Yesterday evening (a Friday evening!) the campaign revealed a whitepaper titled Securing the American Dream and The Future of Housing Policy that's so unsubstantial, we half-suspect the timing was done so that nobody would see it amid the release of the 2011 tax documents, which came out about 20 minutes earlier. This is honestly a sentence in his whitepaper on The Future Of Housing Policy:

The Romney-Ryan plan will completely end “too-big-to-fail” by reforming the GSEs.

Romney and Ryan believe that "too-big-to-fail", which generally refers to the assumption that a collapse of a major Wall Street institution would be catastrophic to the overall economy, thus making a bailout imperative, would be solved by the reform of Fannie and Freddie. Or maybe Romney and Ryan believe that only Fannie and Freddie are too big to fail, and that the collapse of a mega-bank would be fine. Those are the only possible readings of that sentence. As for Romney and Ryan's plan to reform the GSEs, the plan is to... reform them..., basically there are no details at all. Too Big To Fail will be fixed by reforming the GSEs, and the GSEs will be fixed... somehow….

It's reasonable to think that the challenger who is trying to disrupt the status quo, actually says something that would... disrupt the status quo. Failing to provide any details or a plan during the heart of the campaign undermines the notion that he is a serious alternative.

Bonus Brad DeLong ridicule of the "plan":

"End 'Too-Big-to-Fail' by Reforming the GSEs": Are Romney and His Campaign That Pig-Ignorant?

The Romney-Ryan plan will completely end “too-big-to-fail” by reforming the GSEs. The four years since taxpayers took over Fannie Mae and Freddie Mac, spending $140 billion in the process, is too long to wait for reform. Rather than just talk about reform, a Romney-Ryan Administration will protect taxpayers from additional risk in the future by reforming Fannie Mae and Freddie Mac and provide a long-term, sustainable solution for the future of housing finance reform in our country.

That is the Romney housing white paper's section on the GSEs and "Too-Big-to-Fail".

That is not the introduction to the section.

That is the section.

That is the entire section.

I don't know which is scarier:

  1. That Romney and everybody else in his campaign think that a "white paper" on housing can cover both the GSEs and "Too-Big-to-Fail" in 85 words.

  2. That Romney and everybody else in his campaign think that if the GSEs are somehow "reformed" that that can somehow magically resolve "Too-Big-to-Fail" as well--make it so that there are no longer any problems of systemic risk associated with the potential bankruptcy of Citi, JPMC, Wells-Fargo, BoA, GS, Morgan Stanley, or any of the other systemically-important financial institutions.

People: which scares you more?...

Tuesday, August 28, 2012

Republicans: We Won't Build That

I couldn't resist commenting on the economic policies being promoted at the Republican National Convention:

Republicans: We Won't Build That

(The discussion of Republican policy is at the end of the article.)

Saturday, June 09, 2012

Did Republicans Deliberately Crash the US Economy?

Michael Cohen, followed by a few comments of my own:

Did Republicans deliberately crash the US economy?, by Michael Cohen, CIF: So why does the US economy stink?

Why has job creation in America slowed to a crawl? Why, after several months of economic hope, are things suddenly turning sour? The culprits might seem obvious – uncertainty in Europe, an uneven economic recovery, fiscal and monetary policymakers immobilized and incapable of acting. But increasingly, Democrats are making the argument that the real culprit for the country's economic woes lies in a more discrete location: with the Republican Party.

In recent days, Democrats have started coming out and saying publicly what many have been mumbling privately for years – Republicans are so intent on defeating President Obama for re-election that they are purposely sabotaging the country's economic recovery ... in order to hurt Obama politically. Considering that presidents – and rarely opposition parties – are held electorally responsible for economic calamity, it's not a bad political strategy.

Then again, it's a hard accusation to prove: after all, one person's economic sabotage is another person's principled anti-government conservatism.

Beyond McConnell's words, though, there is circumstantial evidence to make the case. Republicans have opposed a lion's share of stimulus measures that once they supported, such as a payroll tax break, which they grudgingly embraced earlier this year. Even unemployment insurance, a relatively uncontroversial tool for helping those in an economic downturn, has been consistently held up by Republicans or used as a bargaining chip for more tax cuts. Ten years ago, prominent conservatives were loudly making the case for fiscal stimulus to get the economy going; today, they treat such ideas like they're the plague.

Traditionally, during economic recessions, Republicans have been supportive of loose monetary policy. Not this time. Rather, Republicans have upbraided Ben Bernanke, head of the Federal Reserve, for even considering policies that focus on growing the economy and creating jobs.

And then, there is the fact that since the original stimulus bill passed in February of 2009, Republicans have made practically no effort to draft comprehensive job creation legislation. Instead, they continue to pursue austerity policies, which reams of historical data suggest harms economic recovery and does little to create jobs. In fact, since taking control of the House of Representatives in 2011, Republicans have proposed hardly a single major jobs bill that didn't revolve, in some way, around their one-stop solution for all the nation's economic problems: more tax cuts.

Still, one can certainly argue – and Republicans do – that these steps are all reflective of conservative ideology. If you view government as a fundamentally bad actor, then stopping government expansion is, on some level, consistent. ...

Presidents get blamed for a bad economy... The obligation will be on Obama to make the case that it is the Republicans, not he, who is to blame – a difficult, but not impossible task.

In the end, that might be the worst part of all – one of two major political parties in America is engaging in scorched-earth economic policies that are undercutting the economic recovery, possibly on purpose, and is forcing job-killing austerity measures on the states. And they have paid absolutely no political price for doing so. If anything, it won them control of the House in 2010, and has kept win Obama's approval ratings in the political danger zone. It might even help them get control of the White House.

Sabotage or not, it's hard to argue with "success" – and it's hard to imagine we've seen the last of it, whoever wins in November.

Has the Republican Party's strategy been deliberate? Yes, of course, the things the Party proposes do not fall randomly from the sky, they are the result of GOP choices. So the question of whether they did this on purpose is easy to answer, it's yes.

Is it intended to undermine the president's agenda? Again, of course it is. The alternative would be to support Obama's policies, and they aren't about to do that. So Republicans have been deliberately obstructive, and it would be hard to argue otherwise.

Have they intentionally done harm? This is where flip-flops from what Republicans supported in the past matters. If they truly believed that all Keynesian type policies are harmful, then blocking them, and in the process blocking any policy at all -- which is essentially what they are doing since they surely know their pet policies have little chance of escaping a veto -- could not be considered an act of sabotage. The policies may be quite harmful in reality, but if they truly believe they are avoiding harm by blocking stimulus policies it would be hard to accuse them of sabotaging the economy in order to make political gains. But the fact that they have flip-flopped time and again on policies they supported when Republican presidents were in office and the economy needed help leads to the strong suspicion that blocking Obama's policy initiatives is a political strategy. The strategy is justified by a story about Keynesian economics being harmful that they clearly do not believe in their heart of hearts (witness, for example, Romney worrying about the consequences of the fiscal cliff, or their knee-jerk appeal to Keynesian principles when defense cuts are proposed). They have also concocted a story where a confidence fairy can make austerity work to support their ideological pursuit of smaller government. But this is quite a departure from the stimulative polices that Republicans presidents have pursued in recent years giving it every appearance of a belief of convenience rather than of true conviction. To me, the refusal to support policies they would have supported had the president been a Republican tells me everything I need to know about whether this is strategic or a true belief.

Sunday, May 06, 2012

"Learned Helplessness"

I talked a bit yesterday about the political hurdles standing in the way of more help for job creation, something that is desperately needed if we want to avoid the permanent scars of high unemployment. Robin Wells has more on the hurdles, in this case "learned helplessness" (though I might have called it something like "convenient claims of helplessness"):

In weakened economy, policymakers give in to learned helplessness, by Robin Wells, Commentary, guardian.co.uk: Yet another disappointing statistic today from the US labor market – only 115,000 jobs added in April, barely enough to keep the unemployment rate from rising given the growth in population... While not necessarily a sign that the economy is headed for another turn downward, April's job numbers signal a repeat of the pattern seen in 2011 – a recovery that is halting, unpredictable, and agonizingly slow. ...
And it's not surprising given the continued heavy drag on the economy from high levels of household debt, high oil prices, and significant budget cutbacks by state and local governments. Moreover, the longer the economy limps along, the harder it appears to be for policymakers to accept that another outcome is possible. ... Learned helplessness sets in.
One could not have asked for a clearer example of learned helplessness than Ben Bernanke's recent press conference, where he labeled calls for further Fed stimulus "reckless" and appeals for a higher inflation target "irresponsible" because it would, in his view, sacrifice its commitment to a 2% inflation target. Higher inflation helps stimulate a depressed economy... But that is just one example of the implicit deference given by policymakers to views that ignore the plight of the unemployed.
Another variant of this mindset is the appeals to "structural unemployment" as the problem. ... [W]e are not in normal times, and appeals to structural unemployment is a red herring that only serves to distract from what focusing on pushing for we can do. It's a travesty given the state of public education in the US that we've laid off hundreds of thousands of schoolteachers; rehiring them would not only help the economy but it would also improve our long-run growth potential. Ditto for hiring laid-off construction workers to repair falling-down bridges and schools and repairing broken roads.
Perhaps the most maddening area of willful policy blindness is failure to address the foreclosure crisis. Obama's own inspector general has roundly criticized the treasury department for its glacial approach in helping underwater homeowners and its unwillingness to pressure the big banks – recipients of Tarp bailouts, mind you – to help. ...
So where does this leave us? First, we need to understand that a "slow bleed" of the economy – chronically high but not catastrophic rates of unemployment, low levels of private investment, and deteriorating public infrastructure – are nonetheless devastating. Many workers will lead permanently diminished careers, and the economy's long-run productive capacity may be permanently lowered. Second, recognize that it is all too likely that policymakers will fail to advocate for policies to get this economy going. Learned helpless is, unfortunately, a comfortable state of affairs.
Finally, that leaves us with the distinct possibility that without a political sea-change in favor of more progressive policies, we have reached the limits of what is possible. It's up to US voters to overcome their habit of learned helplessness as well.

Friday, May 04, 2012

Paul Krugman: Plutocracy, Paralysis, Perplexity

Inequality is contributing to the slow recovery from the recession:

Plutocracy, Paralysis, Perplexity, by Paul Krugman, Commentary, NY Times: ...Did the rise of the 1 percent (or, better yet, the 0.01 percent) cause the Lesser Depression we’re now living through? It probably contributed. But the more important point is that inequality is a major reason the economy is still so depressed and unemployment so high. For we have responded to crisis with a mix of paralysis and confusion — both of which have a lot to do with the distorting effects of great wealth on our society. ...
For the past century, political polarization has closely tracked income inequality, and there’s every reason to believe that the relationship is causal. Specifically,... the increasing wealth of a tiny minority has effectively bought the allegiance of one of our two major political parties, in the process destroying any prospect for cooperation.
And the takeover of half our political spectrum by the 0.01 percent is, I’d argue, also responsible for the degradation of our economic discourse...
Disputes in economics used to be bounded by a shared understanding of the evidence, creating a broad range of agreement about economic policy. ... Now, however, the Republican Party is dominated by doctrines formerly on the political fringe. Friedman called for monetary flexibility; today, much of the G.O.P. is fanatically devoted to the gold standard. N. Gregory Mankiw ... once dismissed those claiming that tax cuts pay for themselves as “charlatans and cranks”; today, that notion is very close to being official Republican doctrine.
And why is the G.O.P. so devoted to these doctrines regardless of facts and evidence? It surely has a lot to do with the fact that billionaires have always loved the doctrines in question, which offer a rationale for policies that serve their interests. Indeed, support from billionaires has always been the main thing keeping those charlatans and cranks in business. And now the same people effectively own a whole political party.
Which brings us to the question of what it will take to end this depression we’re in.
Many pundits assert that the U.S. economy has big structural problems that will prevent any quick recovery. All the evidence, however, points to a simple lack of demand, which could and should be cured very quickly through a combination of fiscal and monetary stimulus.
No, the real structural problem is in our political system, which has been warped and paralyzed by the power of a small, wealthy minority. And the key to economic recovery lies in finding a way to get past that minority’s malign influence.

Tuesday, February 28, 2012

"How to Bring Jobs to People Who Need Them Most"

We must do a better job of protecting workers and their families from the short-run and long-run consequences of globalization and technological change:

How to Bring Jobs to People Who Need Them Most, by Mark Thoma: Is manufacturing special? Should the US do more to preserve its manufacturing base? President Obama brought these questions to the forefront with his recent proposal to use tax breaks and other encouragements to revive the manufacturing sector. Some people such as former Clinton economic advisor Laura Tyson argue that “manufacturing matters.” But others such as her UC Berkeley colleague and former Obama advisor Christina Romer argue against such special treatment.
Who is right? In the past, I have given a lukewarm endorsement to the president’s proposal. I believe manufacturing is one of the more promising avenues for the future economic growth, but I’m wary of picking winners. I’d prefer that we create the conditions for winners to emerge instead of putting too much emphasis on any one area.
But perhaps a more targeted approach is justified after all. Recent research by David Autor, David Dorn, and Gordon Hanson highlights the large detrimental effects that the loss of manufacturing jobs has had on some communities. ...[continue reading]...

(Apologies that it is split into two pages, it's not my choice -- single page, bare bones, no comments, print version here.)

Monday, January 30, 2012

Paul Krugman: The Austerity Debacle

Austerity in recessions is a bad idea:

The Austerity Debacle, by Paul Krugman, Commentary, NY Times: Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. ...
Nor is Britain unique. Italy is also doing worse..., and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.
And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years. ...
Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”
Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.
Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.
And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.
The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

Friday, January 13, 2012

"Mind over Market"

Michael Spence surprises me by making many of the points about markets I've been trying to emphasize lately (and help making these points is more than welcome), in particular that markets are not very good at addressing stability, distributional equity, and sustainability issues:

Mind over Market, by Michael Spence, Commentary, Project Syndicate: In the 66 years since World War II ended, virtually all centrally planned economies have disappeared, largely as a result of inefficiency and low growth. Nowadays, markets, price signals, decentralization, incentives, and return-driven investment characterize resource allocation almost everywhere.
This is not because markets are morally superior... Markets are tools that, relative to the alternatives, happen to have great strengths with respect to incentives, efficiency, and innovation. But they are not perfect; they underperform in the presence of externalities (the un-priced consequences – for example, air pollution – of individual actions), informational gaps and asymmetries, and coordination problems when there are multiple equilibria, some superior to others.
But markets have more fundamental weaknesses. Or, rather, most societies have important economic and social objectives that markets and competition are not designed to achieve. In today’s rapidly globalizing world, the most important of these objectives – expressed in various ways through the political and policymaking process in a wide range of countries – are stability, distributional equity, and sustainability. ... Stability, equity, and sustainability challenges have become crucially important, and the role of the state in relation to markets may need re-thinking as a result. ...[continue reading]...

Thursday, December 08, 2011

The US is Almost Last in Relative Labor Market Policy Spending

Labor

More here.

Monday, November 21, 2011

Paul Krugman: Boring Cruel Romantics

Real technocrats don't take "refuge in fantasy as things go wrong"

Boring Cruel Romantics, by Paul Krugman, Commentary, NY Times: There’s a word I keep hearing lately: “technocrat.” ... I call foul. I know from technocrats; sometimes I even play one myself. And these people — the people who bullied Europe into adopting a common currency, the people who are bullying both Europe and the United States into austerity — aren’t technocrats. They are, instead, deeply impractical romantics. ...
And to save the world economy we must topple these dangerous romantics from their pedestals.
Let’s start with the creation of the euro. ...Europe’s march toward a common currency was, from the beginning, a dubious project on any objective economic analysis. ...
So why did those “technocrats” push so hard for the euro, disregarding many warnings from economists? Partly it was the dream of European unification, which the Continent’s elite found so alluring... And partly it was a leap of economic faith ... driven by the will to believe ... that everything would work out as long as nations practiced the Victorian virtues of price stability and fiscal prudence.
Sad to say, things did not work out as promised. But rather than adjusting to reality, those supposed technocrats just doubled down — insisting, for example, that Greece could avoid default through savage austerity, when anyone who actually did the math knew better.
Let me single out in particular the European Central Bank (ECB), which is supposed to be the ultimate technocratic institution, and which has been especially notable for taking refuge in fantasy as things go wrong. Last year, for example, the bank affirmed its belief in the confidence fairy ... that hasn’t happened anywhere.
And now, with Europe in crisis — a crisis that can’t be contained unless the ECB steps in to stop the vicious circle of financial collapse —... Mario Draghi, the ECB’s new president, declared that “anchoring inflation expectations” is “the major contribution we can make in support of sustainable growth, employment creation and financial stability.”
This is an utterly fantastic claim to make at a time when expected European inflation is, if anything, too low, and what’s roiling the markets is fear of ... financial collapse. ...
Just to be clear, this is not an anti-European rant, since we have our own pseudo-technocrats warping the policy debate. ...
So am I against technocrats? Not at all. I like technocrats — technocrats are friends of mine. And we need technical expertise to deal with our economic woes.
But our discourse is being badly distorted by ideologues and wishful thinkers — boring, cruel romantics — pretending to be technocrats. And it’s time to puncture their pretensions.

Friday, October 21, 2011

Paul Krugman: Party of Pollution

As I said the other day, the GOP's jobs proposals amount to picking something that they (or the people who finance their campaigns) don't like — the EPA, Dodd-Frank, health care legislation, Sarbanes-Oxley, etc. — and then finding some way to argue that eliminating it will create jobs:

Party of Pollution, by Paul Krugman, Commentary, NY Times: Last month President Obama finally unveiled a serious economic stimulus plan — far short of what I’d like to see, but a step in the right direction. Republicans, predictably, have blocked it. ...
So what is the G.O.P. jobs plan? The answer, in large part, is to allow more pollution. ... Both Rick Perry and Mitt Romney have ... put weakened environmental protection at the core of their economic proposals, as have Senate Republicans. Mr. Perry has put out a specific number — 1.2 million jobs — that appears to be based on a study released by the American Petroleum Institute ... claiming favorable employment effects from removing restrictions on oil and gas extraction. The same study lies behind the claims of Senate Republicans.
But does this oil-industry-backed study actually make a serious case for weaker environmental protection as a job-creation strategy? No.
Part of the problem is that the study relies heavily on an assumed “multiplier” effect, in which every new job in energy leads indirectly to the creation of 2.5 jobs elsewhere. Republicans, you may recall, were scornful of claims that government aid that helps avoid layoffs of schoolteachers also indirectly helps save jobs in the private sector. But I guess the laws of economics change when it’s an oil company rather than a school district doing the hiring.
Moreover,... the big numbers in the report are projections for late this decade. The report predicts fewer than 200,000 jobs next year, and fewer than 700,000 even by 2015. You might want to compare these numbers with ... the 14 million Americans currently unemployed, and the one million to two million jobs that independent estimates suggest the Obama plan would create, not in the distant future, but in 2012. ...
More pollution, then, isn’t the route to full employment. But is there a longer-term economic case for less environmental protection? No. ... The important thing to understand is that ... pollution ... does real, measurable damage, especially to human health. ...
How big are these damages? A new study by researchers at Yale and Middlebury College ... estimates ... that there are a number of industries inflicting environmental damage that’s worth more than the sum of the wages they pay and the profits they earn — which means, in effect, that they destroy value rather than creating it. ...
Republicans, of course, have strong incentives to claim otherwise: the big value-destroying industries are concentrated in the energy and natural resources sector, which overwhelmingly donates to the G.O.P. But the reality is that more pollution wouldn’t solve our jobs problem. All it would do is make us poorer and sicker.

Tuesday, August 30, 2011

Policymakers Need Better Data on the Economy

Binyamin Appelbaum recently highlighted the measurement problems we have with US data. Not only are the data often very slow to arrive, there can be substantial revisions to many series after they are released and the revisions can change the picture of the economy substantially.

As I've written about before, I would like to see resources devoted to improving our ability to understand the state of the economy in (near) real time. The lack of accurate data made it much more difficult to respond to the current recession, e.g. (this was December 2009 and is far from the only example where revisions told a very different story than the initial relase):

When it was announced two months ago that GDP had grown by 3.5 percent in the third quarter of this year, it took the sails out of any movement toward another stimulus package. Now the number has been revised downward to 2.2 percent.

At a growth rate of 3.5 percent, the economy would be growing slightly faster than the long-run trend so that, although progress would be very, very slow, the economy would at least be catching up to the long-run trend (in the recovery from previous recessions, it was not unusual for GDP to grow at 6 or 7 percent...). At a growth rate of 2.2 percent, the economy is not even treading water let alone making up for past losses.

The economy needs more help, but the 3.5 percent initial figure was heralded as the sign that better times were just around the corner. This undermined the case for a new fiscal stimulus package and likely caused the Fed to back off of any further plans it might have had to do more to help the economy recover. ...

This points to the fact that policymakers need better and more timely data. The fourth quarter is almost over yet we are still trying to figure out what happened in the third quarter, and we still don't know for sure. There has been lots of criticism of how policymakers have reacted in this recession, much of it deserved, but little of that discussion has recognized the data problems. ... If we can give policymakers better and more timely guidance about the state of the economy, it could improve policy considerably, and that would be money well spent.

In any case, let me say one more time as loudly as I can that given the data that we do have, it's clear that the economy -- the labor market in particular -- needs more help.

But if we are stuck with what we have, as we are, then this is a sensible suggestion: 

Focus On Unemployment To Measure Output Gap, by Mathew Ygesias: Sveriges Riksbank deputy governor Lars E.O. Svensson, my favorite central banker, delivered a speech a few months ago (it’s English title “For a Better Monetary Policy: Focus on Inflation and Unemployment” makes it sound totally banal but it’s not) that had bearing on the question of what’s a policymaker to do in a world where government statisticians can’t accurately measure recessions fast enough to do stabilization policy. He argues that we should forget about the GDP output gap and just pay attention to unemployment:

I believe instead that the unemployment gap is the most appropriate measure of resource utilisation. There are several reasons for this. Unemployment is measured often and is not revised. GDP on the other hand is measured less often and is highly uncertain, and major revisions are made. Unemployment is also directly related to welfare – one of the worst things that can happen to a household is that one of the members of the household loses his or her job. Unemployment is also the indicator of resource utilisation that is best known and easiest for the public to understand. The preparatory works for the Sveriges Riksbank Act state that the Riksbank should support the objectives of general economic policy. One of the main objectives of economy policy in Sweden is to limit unemployment, for example by improving the functioning of the labour market and increasing the incentives to look for work.

Sounds good to me.

Friday, August 19, 2011

Greg Ip: The Republicans’ New Voodoo Economics?

Greg Ip:

The Republicans’ new voodoo economics?, by Greg Ip, Commentary, Washington Post: When John McCain was running for the Republican presidential nomination nearly 12 years ago, he declared that Alan Greenspan was so critical to the economy that, if the then-Federal Reserve chairman died, he’d put sunglasses on the body, prop him up and hope no one noticed. It’s safe to say that GOP opinions of the Fed have slipped a bit since. ...
If Republicans dislike monetary stimulus, they loathe its fiscal cousin even more... They want balanced budgets, the sooner the better. ... This, too, is at odds with the party’s earlier views. The administration of George W. Bush sold its 2001 and 2003 tax cuts as Keynesian-style economic stimulus. Lawrence Lindsey, a top Bush adviser, even likened opponents of the tax cuts to President Herbert Hoover, whose obsession with balancing the budget in 1932 worsened the Great Depression.
Certainly, some of this rhetoric is just political opportunism. ... But something more fundamental is going on: The economic ideology of the Republican Party has changed in recent years... In their view, the government has no more role meddling in the business cycle than in any other market. ...
This is not to be confused with supply-side economics... The new GOP views actually have a much longer pedigree: They are rooted in an intellectual contest that raged during the 1930s and 1940s, and had long been settled by the opposing side.
Before then, orthodox economics held that the economy was self-correcting. ... The Great Depression shattered that orthodoxy, as high unemployment became entrenched... John Maynard Keynes convincingly argued that when interest rates were zero — a condition he termed a “liquidity trap” — the economy’s self-correcting properties did not operate. The best solution, he argued, was a burst of public spending to restore demand and employment. ... Keynes’s views ... won out and came to dominate postwar economic policy. ...
Many Republicans consider the tepid economic recovery an indictment of Keynesianism... They argue that aggressive fiscal and monetary stimulus have made things worse by generating uncertainty among firms and investors, and that austerity would put things right.
They almost surely have it wrong...

Republican Attacks on the EPA

The reasons behind the recent Republican attacks on the EPA are coming into focus:

Getting ready for a wave of coal-plant shutdowns, by Brad Plumer: Over the next 18 months, the Environmental Protection Agency will finalize a flurry of new rules to curb pollution from coal-fired power plants. Mercury, smog, ozone, greenhouse gases, water intake, coal ash—it’s all getting regulated. And, not surprisingly, some lawmakers are grumbling.
Industry groups such the Edison Electric Institute, which represents investor-owned utilities, and the American Legislative Exchange Council have dubbed the coming rules “EPA’s Regulatory Train Wreck.” The regulations, they say, will cost utilities up to $129 billion and force them to retire one-fifth of coal capacity. Given that coal provides 45 percent of the country’s power, that means higher electric bills, more blackouts and fewer jobs. The doomsday scenario has alarmed Republicans in the House, who have been scrambling to block the measures. Environmental groups retort that the rules will bring sizeable public health benefits, and that industry groups have been exaggerating the costs of environmental regulations since they were first created.
So, who’s right? This month, the nonpartisan Congressional Research Service, which conducts policy research for members of Congress, has been circulating a paper that tries to calmly sort through the shouting match. ... And the upshot is that CRS is awfully skeptical of the “train wreck” predictions. ...
The CRS report doesn’t try to evaluate the costs of the new rules, noting that it will depend on site-specific factors and will vary by utility and state. ... But, the report says, industry groups have almost certainly overstated the costs. ...
The CRS report also agrees with green groups that the benefits of these new rules shouldn’t be downplayed. Those can be tricky to quantify, however. In one example, the EPA estimates that an air-transport rule to clamp down on smog-causing sulfur dioxide and nitrogen dioxide would help prevent 21,000 cases of bronchitis and 23,000 heart attacks, and save 36,000 lives. That’s $290 billion in health benefits, compared with $2.8 billion per year in costs by 2014. “In most cases,” CRS notes, “the benefits are larger.”
Granted, few would expect this report to change many minds in Congress. Just 10 days ago, Michele Bachmann was on the campaign trail promising that if she becomes president, “I guarantee you the EPA will have doors locked and lights turned off, and they will only be about conservation.” ...

There's a generous interpretation -- Republicans are ideologically opposed to regulation and this is consistent with their general philosophy. There's also an explanation that isn't as generous that involves using a call for free markets to do what's best for those who provide campaign cash.

I think it's hard to deny that there is market failure in the electricity generation industry. The externalities are pretty clear. If this was about making markets work, then the debate ought to be about how best to force firms to internalize all of the costs of production (and if some firms are unprofitable when they are forced to pay all costs, then that's the market speaking and Republicans ought to listen). Should we impose a tax of some sort? Should we rely upon market-based regulation, or is command and control better in this instance? Is this a case where the market failures are so small that any intervention would do more harm than good? Is there a case for self-regulation given the history in this industry? And so on.

But that's not how the debate is carried out. It seems to be more of a knee-jerk reflexive defense whenever supporter's interests are threatened in any way. Politicians in particular hide behind a call for free markets without ever explaining how letting markets be free to fail, and fail badly, is the best choice for society (not in every case, of course, there are certainly those who are ideologically consistent). That leads me to suspect that while there are certainly people on the right who are interested in using things like carbon taxes to overcome these market failures, we shouldn't underplay the extent to which the opposition to the EPA and to regulation more generally is driven by other factors.

Tuesday, August 02, 2011

Our Dysfunctional Congress

I have a new column:

Congress: The Inmates Are Running the Asylum

[I would have chosen a different title, but mine isn't great either.]

Sunday, July 10, 2011

Historical Patterns, Okun's Law, and the Great Recession

Arin Dube shows that estimates of Okun's law are inconsistent with the assertion that most of the unemployment problem is structural rather than cyclical:

Historical Patterns, Okun's Law, and the Great Recession, by Arin Dube: After reading Paul Krugman's post today, I decided to follow up by actually estimating out-of-sample unemployment rate change forecasts during the Great Recession based on a pre-2007 Okun's law relationship (i.e., a regression of change in the unemployment rate on percentage change in real GDP).
As a starting point, let's estimate the pre-2007 Okun's Law relationship using data from 1948 to 2006. (I use 2007 instead of 2008 just because the unemployment rate started rising in 2007 - but as you will see, this makes no real difference for any of the conclusions below.)

G1

As expected, it shows that you need GDP growth above 2 percent or so to bring down the unemployment rate.
So what happens if we use this historical Okun's law to predict unemployment rate changes in the 2007-2011 period? In the next graph I plot the actual unemployment change by quarter with the predicted amount. The red line is just the 45 degree line to help us see what the actual change in unemployment would be if it behaved exactly according to the historical Okun's Law relationship. (The labels are a little bit off here: "01jan2010" really means "2010q1," "01apr2010" means "2010q2," etc.) I think this chart shows quite clearly what's going on:

G2

Several things jump out:
1. First of all, note that over this period, during 9 quarters the historical forecast underpredicted the change in the unemployment rate, while during 8 quarters it overpredicted it. The forecast error ranged from -0.85 to 0.73, with a mean of 0.03. So there is absolutely no evidence that the unemployment rate stands at a much higher level than would be predicted by movements in GDP.
2. In fact, during the past 6 quarters, the actual reduction in unemployment rate has been greater than what would be predicted by real GDP growth--i.e., the forecast errors have been negative.
3. However, it is also the case that during the initial downturn (especially 2008-2009), the unemployment change was greater than would have been predicted by GDP reduction - i.e., positive forecast errors. (You can also see that the inclusion of 2007 makes very little difference here - as those data points are quite close to the predictions.)
4. Overall, the main conclusion is that based on a historical Okun's Law and actual GDP growth, at least as of 2011q1, both the initial rise in unemployment and the subsequent reduction had been more amplified. This not the signature of structural unemployment. A structural unemployment scenario would show an asymmetry: a growth in unemployment that is near or even above the norm based on GDP slowdown, but a reduction in unemployment that is muted in comparison to the GDP growth. This is not what we see. The point is made even more sharply in the next graph which simply plots the same red 45 degree line along with the in-sample linear fit (with data from 2007 forward).

G3

The blue in-sample linear regression line has a slope of around 1.96 - in other words, the sensitivity of the unemployment rate to GDP growth during the Great Recession seems to have been twice as large as compared to historical norms - and this is true both in the downturn and the "expansion." (Split sample regressions confirm this point, which is also clearly shown in the earlier scatterplot.)
Now what is behind the "excess sensitivity" of unemployment rate to GDP growth? This is indeed an interesting question - and deserves to be studied further. It's possible that financial accelerators played a role early on, and as the financial markets stabilized, this effect unwound - leaving (normal) aggregate demand as the main constraint. This of course is just speculation, and I myself have some doubts about this story. However, what is not in question is that growth has been anemic, and that this anemic growth can more than explain the unemployment trajectory during the "expansion." Structural unemployment? Not so much. Reality-sensitive economists (and dare we say politicians?) should digest this simple fact.
Data Source: http://www.stlouisfed.org/
The two data series are UNRATE and GDPC1

Wednesday, June 15, 2011

Kash Mansori: Has the Bad Housing Market Reduced Labor Mobility?

Kash Mansori:

Has the Bad Housing Market Reduced Labor Mobility?, by Kash Mansori: Economists Colleen Donovan and Calvin Schnure have written an interesting new paper examining whether the fall in house prices since 2007 in the US -- which has left many home-owners owing more on their house than it is worth -- created a lock-in effect that depressed labor mobility. ...

The evidence presented in this paper indicates that the fall in house prices has indeed caused a "lock-in" effect, but has not significantly impacted labor market efficiency. Here's the abstract:

Locked in the House: Do Underwater Mortgages Reduce Labor Mobility?: The collapse of the housing boom led to an unprecedented number of homeowners who are “underwater”... These homeowners cannot move without incurring significant losses on their homes, possibly causing a “lock-in” effect reducing geographic mobility. This raises concerns that a reduction in labor market mobility may hamper the ability to move to accept employment in another geographic market, degrading labor market efficiency and contributing to higher structural unemployment.

This paper ... finds significant evidence of a lock-in effect. The lock-in, however, results almost entirely from a decline in within-county moves. As local moves are generally within the same geographic job market, this decline is not likely to affect labor market matching. In contrast, moves out-of-state, which are more likely to be in response to new employment opportunities, show no decline, and in fact are higher in counties with greater house price declines. Housing market lock-in does not appear to have degraded the efficiency of the labor market and does not appear to have contributed to a higher unemployment rate.

This is a significant piece of evidence against the "structural unemployment" explanation for the US's high and persistent unemployment rate... [T]he underwater mortgage "lock-in" phenomenon that has been cited as the primary reason why the US's labor market suddenly got so much worse starting in 2008 simply does not match the evidence. As a result, if we want to understand why unemployment has been so persistently high in the US since 2008, we have to look beyond "structural" or supply-side explanations. Once again, the far simpler explanation seems to better match the evidence: there's just not enough demand, so businesses aren't hiring, and people remain unemployed.

If the problem is structural, there's not a lot that policy can do to help in the short-run. Social insurance can ease the pain. Government can provide short-term employment to tide workers over, create incentives for both workers and firms to relocate, provide retraining, etc., but these problems take time to work themselves out. However, if the problem is lack of demand, then there is much more that policymakers can do to help the economy get back on its feet. The key is to offset the fall in demand through monetary and fiscal policy measures so that businesses will be willing to hire people again.