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Wednesday, August 31, 2011

links for 2011-08-31

    Posted by on Wednesday, August 31, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (11) 

    Posen: No Excuse for Inaction from Central Banks

    Adam Posen says there's no excuse for inaction from the Fed and other central banks:

    No excuse for inaction, by Adam Posen, Reuters: It is past time for monetary policy to be doing more to support recovery. The Jackson Hole conference has come and gone, and no shortage of excuses was provided for central banks to hold their fire — even though most economists acknowledged the grim outlook for the advanced economies. ...
    It is also past time to stop fearing inflationary ghosts. There is no credible threat of sustained higher inflation in the advanced economies that should restrain central bank action. ...
    The evidence is clear that the Bank of England’s and the Federal Reserve’s asset purchases had a positive significant effect on consumption, on the relative prices of riskier assets, on credit availability, and on liquidity in the financial system. If the improvement was insufficient, because the response to a given injection was less than some hoped, increase the dose.
    There are no negative side-effects to speak of from greater asset purchases, beyond some politically induced nausea (which central bankers simply have to suffer through). ...

      Posted by on Wednesday, August 31, 2011 at 03:24 PM in Economics, Monetary Policy | Permalink  Comments (20) 

      "Job Insecurity Remains High"

      Workers don't feel very secure:

      Job Insecurity Remains High, by Catherine Rampell, NY Times: ...workers still employed remain anxious about their job security... A USA Today/Gallup Poll conducted in mid-August, based on a survey of 489 adults employed full or part time, found that 30 percent said they were worried about being laid off, similar to the 31 percent who answered this way in August 2009. The survey also found that workers were concerned that their hours, wages and benefits would be cut back. Benefit cuts were the most common worry...
      Lower-income workers were especially likely to be concerned about their job security...

      The prospect of long-term unemployment, which is very high right now, makes the expected cost of unemployment particularly large. A strong social safety net can help to offset the negative economic consequences that uncertainty causes (e.g. unwillingness to make long-term commitments such as the purchase of a new car). Conversely, a weakened social safety net -- which if anything is the direction we are headed -- makes the problem worse.

        Posted by on Wednesday, August 31, 2011 at 11:24 AM in Economics, Unemployment | Permalink  Comments (24) 

        The Balanced Budget Multiplier: Job Creation without Increasing the Deficit

        [Here is an op-ed I started, and then abandoned in favor of another topic (so it hasn't been thoroughly edited and is several hundred words too long). I decided to post it because I want to at least raise the possibility of using the balanced budget multiplier as a way of using budget neutral policies to stimulate the economy. As explained below, those policies would work best if we ask the wealthy to finance job creation programs. It's not as powerful as deficit spending, but it's better than nothing at all:]

        Despite the advice from many economists urging the Fed to do more to help the economy, and despite hopes in the business community that the Fed would follow this advice, Ben Bernanke made it clear in his speech at Jackson Hole last Friday that policy is on hold. He noted they will discuss this at their September meeting, but I am not very hopeful that policy will change at that time. I disagree strongly with the Fed's decision to remain on hold, we need to attack the employment crisis with all the policy tools at our disposal, but the Fed disagrees.

        With the Fed unlikely to ease policy any further, what about fiscal policy? Would another round of fiscal policy be helpful, or would it do more harm than good? There are very clear political problems involved with fiscal policy, more on that below, but what about the economics? Would further stimulus be beneficial?

        The economics does provide a further case for intervention. As I’ve explained previously on these pages, not all recessions are alike. They have different causes, e.g. recessions can be caused by oil price shocks, productivity shocks, monetary policy shocks, and bursting asset price bubbles. When a bubble bursts wiping out household retirement, education, and other savings households rely upon for security it is known as a balance sheet recession. Recovering losses from this type of recession, i.e. rebuilding the balance sheet, are notoriously difficult and “lost decades” such as Japan experienced in the 1990s are not uncommon.

        What to do? The slow recovery can be attributed in large part to the fact that households must reduce consumption and increase savings in order to recover their losses, and so long as consumption remains low the economy will continue have problems. In ordinary, mild recessions monetary policy is the best approach, and it can generally handle the problem on its own. But in a deep balance sheet recession monetary policy alone isn’t enough. In large recessions fiscal policy that targets the problem – balance sheets in this case – has an important role to play.

        How can fiscal policy be used to attack the type of recession we are having?  Mortgage relief, and debt relief more generally, is first on the list. Debt relief improves household balance sheets, and hence directly targets the problem. There were a few half-hearted attempts to do something like this, but nothing like what is needed.

        Thus, fiscal policy directed at two goals, balance sheet repair and job creation, would do a lot to ease current conditions and to allow us to exit the recession sooner.

        But is there any way at all to get more fiscal policy through Congress? Probably not. But the problem is important enough, and the crack in the door is open just enough (and opening more with each new piece of information indicating a sluggish recovery at best), that it’s worth it to at least try.

        We do have a long run debt problem to bring under control, but in the short-run we need more, not less deficit spending. But the political atmosphere will not allow any further increase in government debt. If anything, it will move in the other (and wrong) direction. However, there is something called the balanced budget multiplier that could still be useful and would perhaps -- emphasis on perhaps -- find political support.

        How could, say, an increase in government spending of $100 on new goods and services financed by a $100 increase in taxes stimulate the economy? The $100 purchase by the government increases aggregate demand by the same amount. But the increase in taxes does not fully offset the increase in demand because the tax bill will be paid, in part, from savings. For example, suppose that the household pays its tax bill by reducing consumption by $80 and reducing saving by $20. Then the net impact on aggregate demand will be the $100 in government spending minus the $80 reduction in consumption for a net change of $20. That’s not as large as the $100 we could get from deficit spending, i.e. increasing government expenditures without increasing taxes, but it’s better than not doing anything at all (and this is just the impact effect, the $20 will create more than $20 in spending due to standard multiplier effects).

        This also tells us who should be asked to pay these taxes if we want to have the maximum impact on the economy. If more of the bill is paid from saving, e.g. $30 instead of $20, then the net impact will be bigger. Thus taxes that are levied on those most likely to pay out of saving, the wealthy, will have the largest impact on aggregate demand (e.g. if it is paid fully out of saving, there is no offset at all). I don't have any illusions about the difficulty of getting a tax increase on the wealthy through Congress, but it could be done -- perhaps -- by closing loopholes, credits, deductions, exclusions, etc. which seems to have a bit more support.

        On the other side, what should the government spend its money on? The usual answer is infrastructure since it stimulates the economy in the short-run and also helps with long-run growth. But one thing we learned from the previous round of infrastructure spending is that infrastructure construction has a relatively low labor intensity per dollar spent. But long-run growth is not the only goal of this spending, job creation is just as important. In addition emphasizing employment keeps people connected to the labor market, and this can also have positive effects on long-run growth (by, for example, keeping people from permanently dropping out of the labor force). The first round of spending emphasized long-run growth, but I would like to see this round concentrate spending in areas where it is likely to have the most effect on employment.

        The spending programs should end once the economy improves, e.g., I would link the spending to the unemployment rate and end it once unemployment falls below some threshold (and include automatic, distasteful cuts in the legislation if the two sides do not reverse the spending to help to ensure it is temporary -- that will help to mollify the concerns of those who worry about using stabilization policy to increase the size of government). But the tax increases/closed loopholes, credits, deductions, etc. on the wealthy should continue so that in the long-run the tax increase can help with deficit reduction.

        I don’t have any doubt about the need for such initiatives, nor do I have any illusions about politicians endorsing this or any other stimulus plan – raising taxes on the wealthy is most likely a non-starter. But taxes on the wealthy are going to go up, if not sooner than later. Our long-run budget picture demands it and recent polls show that the public is behind this. So why not do it now when it can help with the employment, household debt, infrastructure problems immediately and improve our long-run debt outlook instead of waiting until we can only help with a subset of those problems? The answer, of course, is that helping households overcome debt problems and helping the unemployed would cause taxes on the wealthy to go up, and that is very unlikely to happen. And the dismal chances of providing help to middle and lower class households struggling with debt problems and high unemployment by asking the wealthy to pay more says a lot about who has power in Washington.

        [Update: I probably should have noted that both Robert Shiller and Joe Stiglitz, among others, have suggested the same thing.]

          Posted by on Wednesday, August 31, 2011 at 08:37 AM in Budget Deficit, Economics, Fiscal Policy, Monetary Policy, Politics, Unemployment | Permalink  Comments (35) 

          Tuesday, August 30, 2011

          links for 2011-08-30

            Posted by on Tuesday, August 30, 2011 at 10:04 PM in Economics, Links | Permalink  Comments (40) 

            More Dovish Than We Thought?

            There is news from the Fed. First, from Narayana Kocherlakota of the Minneapolis Fed:

            Fed’s Kocherlakota Suggests Dissent Won’t Be Repeated, by Michael S. Derby, WSJ: One member of the troika who opposed the Federal Reserve‘s recent decision to keep rates at rock bottom levels for two years suggested he won’t be repeating his disagreement at coming central bank gatherings.
            In a speech, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday “I see no reason to revisit the decisions” made last month, and added “I plan to abide by the August 2011 commitment in thinking about my own future decision.”
            The reason? With the Fed having made its pledge, “I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future.” ...
            That said, the official spent a considerable amount of his speech — his comments came from remarks prepared for delivery before the National Association of State Treasurers in Bismarck, N.D. — explaining why he did not think the Fed made the right decision on its forward interest rate commitment. He indicated there was even a case to be made for going the other way on policy and tightening it. ...

            Brad Delong comments here, and also notes (approvingly) remarks by Charles Evans of the Chicago Fed:

            Fed official makes plea for more stimulus, by Robin Harding, FT: A leading Fed policymaker made an aggressive call for more monetary stimulus on Tuesday as it emerged that staff of the US central bank have permanently cut their growth forecasts. In an interview with CNBC, Charles Evans of the Chicago Fed said that he would “favour more accommodation” and became the first policymaker on the rate-setting Federal Open Market Committee to explicitly countenance letting inflation rise above the Fed’s target of 2 per cent in the short-term. ...

            I don't think it's a secret that I favor more accomodative policy as well. Finally, the minutes from the last FOMC meeting were released today, and they showed a divided committee, but more dovishness than most people expected:

            Participants discussed the range of policy tools available to promote a stronger economic recovery should the Committee judge that providing additional monetary accommodation was warranted. Reinforcing the Committee's forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates. Some participants noted that additional asset purchases could be used to provide more accommodation by lowering longer-term interest rates. Others suggested that increasing the average maturity of the System's portfolio--perhaps by selling securities with relatively short remaining maturities and purchasing securities with relatively long remaining maturities--could have a similar effect on longer-term interest rates. Such an approach would not boost the size of the Federal Reserve's balance sheet and the quantity of reserve balances. A few participants noted that a reduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions. In contrast, some participants judged that none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output. Consequently, these participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment. Participants noted that devoting additional time to discussion of the possible costs and benefits of various potential tools would be useful, and they agreed that the September meeting should be extended to two days in order to provide more time.

            The last part where they say they need more time to discuss "the possible costs and benefits of the various potential tools" is a bit worrisome. We all know what the policy options are, and they should have been prepared with that information coming in. I think what they're really saying is that thay've gone as far as they're willing to go for now, and they want to wait to see what happens to the economy and then discuss it further. Should things get worse, they want to make sure that they have enough time to thoroughly review their options. But they're hoping things stabilize or get better so they don't have to seriously confront the question.

            The release of the minutes seems to have raised the expectation that more action is coming, so it will be interesting to see if Fedspeak tries to reduce expectations in coming days.

              Posted by on Tuesday, August 30, 2011 at 02:07 PM in Economics, Monetary Policy | Permalink  Comments (18) 

              Help Households Not Banks

              Here is my contribution to The New Republic's symposium "Is There Anything That Can Be Done?"

              Help Households Not Banks

              I was asked to answer relatively specific questions, so if you've been hanging around here for awhile you will have heard some of these arguments before.

              For all contributions (they are still adding to the collection) click here. Here's the collection so far:

                Posted by on Tuesday, August 30, 2011 at 07:29 AM in Economics | Permalink  Comments (27) 

                DeLong: Ben Bernanke’s Dream World

                Brad DeLong is unhappy with Ben Bernanke:

                Ben Bernanke’s Dream World, by Brad Delong, Commentary, Project Syndicate: US Federal Reserve Board Chairman Ben Bernanke is not regarded as an oracle in the way that his predecessor, Alan Greenspan, was before the financial crisis. But financial markets were glued to the speech he gave in Jackson Hole, Wyoming on August 26. What they heard was a bit of a muddle. ...[continue reading]...

                  Posted by on Tuesday, August 30, 2011 at 07:20 AM in Economics, Monetary Policy | Permalink  Comments (11) 

                  Are Macroeconomists Making Progress?

                  Some thoughts after attending the 4th Meeting of the Nobel Laureates in Economics:

                  Are Macroeconomists Making Progress?

                  Update: I should note that I originally ended the column on a slightly more positive note, but then cut this part to make the word limit (the conference is intended to bring young economists together with the Nobel laureates so that the young economists can benefit from their wisdom):

                  But I do have hope. The young economists I talked to are eager to move things forward, and refreshingly free of the theoretical and ideological divides that exist in the older generation of economists. I have little faith that the older generation will ever acknowledge the models they spent their lives building are fundamentally flawed. But the disappointment I felt listening to the older and supposedly wiser economists at the conference give conflicting advice based upon failed models was absent in these conversations with the next generation. Some day they too will dig in their heels and defend their lives’ work against challenges, but for now it's up to them to forge a new way forward.

                    Posted by on Tuesday, August 30, 2011 at 06:03 AM in Economics, Fiscal Times, Macroeconomics, Methodology | Permalink  Comments (45) 

                    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.

                      Posted by on Tuesday, August 30, 2011 at 05:40 AM in Economics, Methodology, Policy | Permalink  Comments (11) 

                      Monday, August 29, 2011

                      links for 2011-08-29

                        Posted by on Monday, August 29, 2011 at 10:05 PM in Economics, Links | Permalink  Comments (37) 

                        Sachs: The Economics of Happiness

                        Jeff Sachs is unhappy with the "relentless pursuit of higher income" as a means of obtaining "greater happiness":

                        The Economics of Happiness, by Jeffrey Sachs, Commentary, Project Syndicate: We live in a time of high anxiety. Despite the world’s unprecedented total wealth, there is vast insecurity, unrest, and dissatisfaction. In the United States, a large majority of Americans believe that the country is “on the wrong track.” Pessimism has soared. The same is true in many other places.
                        Against this backdrop, the time has come to reconsider the basic sources of happiness in our economic life. The relentless pursuit of higher income is leading to unprecedented inequality and anxiety, rather than to greater happiness and life satisfaction. Economic progress is important and can greatly improve the quality of life, but only if it is pursued in line with other goals. ...
                        The mad pursuit of corporate profits is threatening us all. To be sure, we should support economic growth and development, but only in a broader context: one that promotes environmental sustainability and the values of compassion and honesty that are required for social trust. ...

                          Posted by on Monday, August 29, 2011 at 05:04 PM in Economics | Permalink  Comments (32) 

                          Alan Krueger Nominated to Head the Council of Economic Advisors

                          I have a few quick comments on the appointment at MoneyWatch.

                            Posted by on Monday, August 29, 2011 at 09:27 AM in Economics, Politics | Permalink  Comments (16) 

                            Paul Krugman: Republicans Against Science

                            The GOP's willful ignorance and anti-intellectualism is getting worse:

                            Republicans Against Science, by Paul Krugman, Commentary, NY Times: Jon Huntsman Jr., a former Utah governor and ambassador to China, isn’t a serious contender for the Republican presidential nomination. And that’s too bad, because Mr. Hunstman has been willing to say the unsayable about the G.O.P. — namely, that it is becoming the “anti-science party.” This is an enormously important development. And it should terrify us.
                            To see what Mr. Huntsman means, consider recent statements by the two men who actually are serious contenders for the G.O.P. nomination: Rick Perry and Mitt Romney.
                            Mr. Perry ... recently made headlines by dismissing evolution as “just a theory,” one that has “got some gaps in it” — an observation that will come as news to the vast majority of biologists. But what really got peoples’ attention was what he said about climate change: “I think there are a substantial number of scientists who have manipulated data so that they will have dollars rolling into their projects. And I think we are seeing almost weekly, or even daily, scientists are coming forward and questioning the original idea that man-made global warming is what is causing the climate to change.”
                            That’s a remarkable statement — or maybe the right adjective is “vile.” ... In fact, if you follow climate science at all you know that the main development over the past few years has been growing concern that projections of future climate are underestimating the likely amount of warming. ...
                            So how has Mr. Romney  ... responded to Mr. Perry’s challenge? In trademark fashion: By running away. In the past, Mr. Romney ... has strongly endorsed the notion that man-made climate change is a real concern. But, last week, he softened that to a statement that he thinks the world is getting hotter, but “I don’t know that” and “I don’t know if it’s mostly caused by humans.” Moral courage!
                            Of course, we know what’s motivating Mr. Romney’s sudden lack of conviction. According to Public Policy Polling, only 21 percent of Republican voters in Iowa believe in global warming (and only 35 percent believe in evolution). Within the G.O.P., willful ignorance has become a litmus test for candidates, one that Mr. Romney is determined to pass at all costs. ... And the deepening anti-intellectualism of the political right, both within and beyond the G.O.P., extends far beyond the issue of climate change. ...
                            Now, we don’t know who will win next year’s presidential election. But the odds are that one of these years the world’s greatest nation will find itself ruled by a party that is aggressively anti-science, indeed anti-knowledge. And, in a time of severe challenges — environmental, economic, and more — that’s a terrifying prospect.

                              Posted by on Monday, August 29, 2011 at 12:33 AM in Economics, Environment, Politics, Science | Permalink  Comments (181) 

                              Fed Watch: Brief Hiatus

                              Tim Duy:

                              Brief Hiatus, by Tim Duy: I remained under the radar for the past two weeks. Summer finally got the best of me, perhaps just as well, as I did not have the opportunity to backtrack from my last assessment of Fed policy:

                              All in all, this is pretty weak medicine given the condition of the patient. I would have preferred to see an open-ended commitment to asset purchases - buying up anything not nailed to the floor at a rate of $10 or $15 billion a week until achieving the dual mandate is in clear sight. But policymakers, on average tend to think they have relatively weak ammunition to stimulate growth. Their tools are more effective against deflation. And until the former turns into the latter, expect the Fed to do little more than modifications of the basic zero interest rate / hold balance sheet constant policy combination.

                              As was widely noted, Federal Reserve Chairman Ben Bernanke emphasized the Fed’s “wait-and-see” position, offering only an extended September meeting to consider the available options. Nothing specific to hang our hats on, no clear guidance as to the next move – suggesting the next "move" is likely to be more of the same, especially if financial markets stabilize and growth lifts off the first and second quarter floors. I believe we need to see even weaker growth, coupled with a steeper drop in long-term inflation expectations to prompt additional action.

                              The failure of Bernanke to push for more aggressive action is even more puzzling in the wake of this speech. According to the Fed chair, the situation is becoming urgent:

                              Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months. Under these unusual circumstances, policies that promote a stronger recovery in the near term may serve longer-term objectives as well. In the short term, putting people back to work reduces the hardships inflicted by difficult economic times and helps ensure that our economy is producing at its full potential rather than leaving productive resources fallow. In the longer term, minimizing the duration of unemployment supports a healthy economy by avoiding some of the erosion of skills and loss of attachment to the labor force that is often associated with long-term unemployment.

                              I suppose I should be happy that someone in Washington considers unemployment to be a crisis, both near and long term. That said, Bernanke follows up with this:

                              Notwithstanding this observation, which adds urgency to the need to achieve a cyclical recovery in employment, most of the economic policies that support robust economic growth in the long run are outside the province of the central bank. We have heard a great deal lately about federal fiscal policy in the United States, so I will close with some thoughts on that topic, focusing on the role of fiscal policy in promoting stability and growth.

                              So he passes the ball to fiscal policy. With good reason, to be sure. Congress and the Administration are failing miserably at macroeconomic policy. The debt debate was an unnecessary, destabilizing, pointless disaster. Does this mean the Fed should be let off the hook? Consider that question in the context of Bernanke’s speech on February 3 of this year:

                              Although large-scale purchases of longer-term securities are a different monetary policy tool than the more familiar approach of targeting the federal funds rate, the two types of policies affect the economy in similar ways…By easing conditions in credit and financial markets, these actions encourage spending by households and businesses through essentially the same channels as conventional monetary policy, thereby supporting the economic recovery.

                              A wide range of market indicators supports the view that the Federal Reserve's securities purchases have been effective at easing financial conditions. For example, since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels…Interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement of a significant expansion in securities purchases. The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.

                              Funny that additional quantitative easing yielded “significant support to job creation” in February, when Bernanke wanted to justify QE2, yet now “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank.” Sometimes I think the only person who doesn’t read Bernanke’s past speeches is Bernanke himself. In any event, it seems the key difference between then and now, from the perspective of the Federal Reserve, is that the recent burst of inflation spooked them badly, raising in their minds the possibility of any central banker’s worse fear, an inflation spiral.

                              The bottom line: We are playing a data game as we approach the next FOMC meeting – lacking a more extensive collapse of growth forecasts and or inflation expectations, the Fed looks likely to stay the course.

                              As to my absence alluded to earlier, this summer finally caught up with me. My son being out of school was no small issue – parents are well aware with the requirements of summer camps. New schedule, new location each week. A bit different than I recall of my summers growing up, which were much more of the “go away and try not to wind up in the hospital” variety.

                              In addition, my wife was in trial in late July. For those of you married to a litigator, you understand what happened to July, and by my recollection, half of June (although I am confident the latter claim will be subject to family debate for years). Household production shifted to my corner.

                              Most importantly, my father passed away ten days ago after a sixteen-month battle with leukemia. I feel compelled to put a something in words, but none of you should feel compelled to keep reading (the Fed Watch part is obviously done for the day). The battle began at the end of winter term 2010 when I drove him to OHSU for an initial diagnosis and ended on August 18 at his home with his immediate family (my mother, my sister, and myself). As I am sure any of you who have faced the illness of a family member understand, the process is draining. I surely have a greater appreciation of both the possibilities and limitations of modern medicine. We were sure we lost him last September, when he fell into a coma during the first round of treatment. It is tough to forget my mother and I trying to understand the difference between “life-supporting” and “life-extending” treatments when one doctor wants to push forward yet another, just before moving onto dialysis, assured us that no one ever walks away at that point.

                              As it turns out, at least one person walked away, and my Dad recovered to dictate his own treatment for the next year, right up to the point when he knew he ran out of options and the end was near. We were lucky that my family moved to Eugene after my first child was born, giving us the opportunity to support each other through this ordeal. Still, throughout the year, my mother and sister were the real heroes. It was a year of sorrow, pain, uncertainty, and unexpected opportunities. My father passed on his woodworking skills to my sister as they completed projects such as a beautiful maple coffee table:


                              Moreover, there was a furious effort to produce a large quantity of end-grain cutting boards as “goodbye presents” to friends and family:


                              We had some very good times even during the last week. That week he managed to convince me to take a trip to introduce his friend and former business associate to cask conditioned ale (you do need to have your priorities straight). An unambiguously fun night regardless of the circumstances. Another night with just the two of us. And a final trip to the family cabin. Good memories to add to a long list.
                              In short, more nights with family left fewer nights for blogging. And I will most likely sink below the radar again for the next week. My calendar tells me I am supposed to be walleye fishing in Canada – a trip planned by my father after he recovered from the coma – but instead we will be taking our traditional summer-end vacation near home. For the next few days we will disappear into Central and Eastern Oregon where, much to my wife’s dismay, I have planned a rock-hunting trip in the desert. Moreover, not one of her carefully planned (and almost certainly successful) trips; more one of my “vague, have-car-will-travel, sort of know where the campgrounds are, hope I can get 3G reception as a backup” kind of trip. This is really for my son, who became interested in rocks after a presentation in his kindergarten class. Supporting that interest is a small price to pay given the teacher managed to get him reading at a third grade level after just nine months. Any attempt by his parents to accomplish the same were worse than pulling teeth. That and Oregon is a vast and diverse state, and I want to get to a few places I have yet to see.
                              Enjoy the end of summer, and look forward to all the possibilities of the next year.

                                Posted by on Monday, August 29, 2011 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (13) 

                                Sunday, August 28, 2011

                                links for 2011-08-28

                                  Posted by on Sunday, August 28, 2011 at 10:04 PM in Economics, Links | Permalink  Comments (13) 

                                  "Welfare to Work Doesn’t Work Without Work"

                                  The program Jared Bernstein is highlighting (here) has not received enough attention:

                                  Welfare to Work Doesn’t Work Without Work, by Jared Bernstein: There have been a number of posts and articles on the 1996 welfare reform law (TANF—Temporary Assistance for Needy Families), as it turned 15 last week. I argued that it’s a fair weather ship, performing far better amidst strong labor demand, foundering otherwise. My CBPP colleague Donna Pavetti posts some compelling evidence in that regard here too.

                                  Rep Dave Camp, the Republican chairman of the House Ways and Means Committee, feels differently. He released a statement including this point:

                                  Welfare reform has worked to reduce dependence by promoting work, as intended. But the job is not finished. Not only are more reforms needed to ensure that all families on welfare can and do prepare for work, but other programs can and should be reformed to follow suit. Welfare reform proved that low-income families want to work and support themselves. We ought to build on those successes by taking steps to ensure that government programs support and not undermine that enduring American work ethic.

                                  Now, look at this trend in employment rates—share of the group with jobs—for low-income single moms (family income below two times the poverty level) from 1995 to 2009. If Rep Camp had made this statement in 1999, he might have had a case. But since then, the share of low-income single moms with jobs has consistently fallen, and, given a welfare program now conditioned on work, the safety net failed to adequately catch them and their kids.

                                  Source: Census ASEC data, analyzed by Arloc Sherman

                                  His whole statement is pure “supply-side” as if promoting work, wanting to work, being prepared to work, gets you a job. In fact, when the strong demand side conditions of the latter 1990s faded, the fair-weather ship of welfare reform hit the shoals....

                                  I happen to think he’s right that families want to support themselves, but go ahead and make all the rules in the world...: if there are not enough jobs for people, they won’t be able to support themselves or their families through work.

                                  In this regard, ensuring “that gov’t programs support…that enduring American work ethic” means making sure people have jobs. It so happens there’s a great way to do that—a jobs program from the Recovery Act that was highly successful in helping the TANF population find work—read about it here.

                                  If Rep Camp and others want to preserve the work ethic, they’re going to need to help create some work.

                                    Posted by on Sunday, August 28, 2011 at 02:07 AM in Economics, Politics, Social Insurance, Unemployment | Permalink  Comments (34) 

                                    "Academic freedom from Hofstadter to Dworkin"

                                    What is academic freedom?:

                                    Academic freedom from Hofstadter to Dworkin, by Daniel Little: Academic freedom is a core value in American higher education. At certain times in our history it is a value that has been severely challenged, including especially during the McCarthy period of the 1950s. But what, precisely, does it entail?

                                    One way of starting on this topic is to consider Richard Hofstadter's writings on the subject. Hofstadter was an historian who did an excellent job of tracking some deep currents in American political culture, including the powerful currents of progressivism, conservatism and paranoia that American politics have embodied over the past two centuries (The Progressive Movement: 1900-1915, Anti-Intellectualism in American Life, The Paranoid Style in American Politics). (Here is an informative review of Hofstadter's biography in the New York Times.)

                                    One of those currents on the progressive side is the idea of academic freedom. Hofstadter was a champion of the value of intellectual discourse in a democracy, and Development of Academic Freedom in United States (with Walter Metzger, 1955) was a direct response to the attack on the academic freedoms of professors of the McCarthy period beginning in 1953. (The first part of this book was later published as Academic Freedom in the Age of the College (1961), which covers the history of the freedoms assigned to colleges and universities from the European middle ages to American colleges at the time of the Civil War.) The project as a whole is an interesting one. It was funded by the American Academic Freedom Project at Columbia as a response to Joseph McCarthy's attack on universities and professors. Hofstadter's part of the project was to write a history of the evolving idea of academic freedom from the European middle ages through the American colleges of the 1860s. Walter Metzger's contribution analyzed the development of universities and academic freedom in America after the 1860s. Robert MacIver wrote a companion volume, Academic Freedom in Our Time.

                                    What is lacking in Development of Academic Freedom is an analytical definition of the idea of academic freedom. Hofstadter is clearest in his defense of the idea of the independent intellectual, whether in the medieval Italian university of the nineteenth century American university. But neither he nor Metzger give a succinct definition of the concept of academic freedom itself.

                                    So what is academic freedom? And how is it distinct from the other kinds of freedoms we have as either constitutional protections or fundamental human rights -- freedom of association, freedom of speech and thought, freedom of expression? Fundamentally the idea is that the faculty of a university have a more extensive and specialized version of each of these fundamental freedoms, and that their exercise of their academic freedom cannot be used as a basis for dismissing them from their positions within the university. (This is the fundamental justification of the system of faculty tenure.) The employees of a corporation have a right of freedom of expression; but their conditions of employment may set limits on their exercise of that freedom. For example, there are numerous examples of people dismissed from their jobs in the private sector as a result of their comments about the company they work for. The idea of academic freedom is that professors have a special right to think, reason, and express their ideas about subjects relevant to their teaching and research responsibilities without fear of sanction by the universities (or legislatures) that employ them.

                                    A second dimension of the idea of academic freedom is institutional. The university ought to be significantly autonomous from the power centers of society in its internal organization and decision-making. The curriculum, the subjects that are taught and researched, and the processes of appointment and review of faculty should be governed by the processes of the university rather than external powers in society. And most fundamentally, this aspect of the idea depends on the notion that the pursuit of truth should depend on the rational procedures of the disciplines of the sciences and humanities, not on the particular interests of powerful segments of society.

                                    The classical justification for the idea of a form of academic freedom more extensive than the general freedoms that citizens enjoy qua citizens derives essentially from arguments expressed in the nineteenth century in John Stuart Mill's On Liberty: the pursuit of truth requires the untrammeled exploration of and expression of conflicting ideas, so that rational citizens can arrive at a better understanding of the issues. Here is how the 1940 AAUP statement puts the point (link):

                                    Academic freedom is essential to these purposes and applies to both teaching and research. Freedom in research is fundamental to the advancement of truth. Academic freedom in its teaching aspect is fundamental for the protection of the rights of the teacher in teaching and of the student to freedom in learning. It carries with it duties correlative with rights.[1]

                                    The argument is fundamentally utilitarian: Society is best served when it embodies a university system that is fundamentally committed to the the principles of academic freedom.

                                    Here is the classic statement of academic freedom from the AAUP Red Book, drafted in 1940 (link).

                                    Academic Freedom

                                    1. Teachers are entitled to full freedom in research and in the publication of the results, subject to the adequate performance of their other academic duties; but research for pecuniary return should be based upon an understanding with the authorities of the institution.
                                    2. Teachers are entitled to freedom in the classroom in discussing their subject, but they should be careful not to introduce into their teaching controversial matter which has no relation to their subject.[2] Limitations of academic freedom because of religious or other aims of the institution should be clearly stated in writing at the time of the appointment.[3]
                                    3. College and university teachers are citizens, members of a learned profession, and officers of an educational institution. When they speak or write as citizens, they should be free from institutional censorship or discipline, but their special position in the community imposes special obligations. As scholars and educational officers, they should remember that the public may judge their profession and their institution by their utterances. Hence they should at all times be accurate, should exercise appropriate restraint, should show respect for the opinions of others, and should make every effort to indicate that they are not speaking for the institution.[4]

                                    This statement refers to three zones of academic freedom: in research and publication, in the classroom, and in "extramural expressions" by faculty members in the exercise of their ordinary citizens' rights of expression. Essentially this final point comes down to the idea that a faculty member has an ordinary citizen's right to express ideas that are unpopular to the public without punishment, "censorship or discipline" from the university for this expression. Noam Chomsky's opinions about the Vietnam War or the Gulf War were often unpopular with officials and the public; but his academic freedom assured that he would not be censored by his university employer. An employee of Northrup or Krogers would not have had the same protections. (Note that principle 3 is the most qualified of the three, and sets somewhat vague limits on the content and form of extra-mural utterances by the faculty member.)

                                    The AAUP statement does not separately justify its inclusion of the extramural principle; but presumably it goes along these lines. Determining public policy in a democracy requires open debate among well informed citizens. Faculty members are well positioned to develop their knowledge and arguments about important public issues -- welfare reform, desegregation, war and peace. The public and the common good are well served by a set of arrangements that enable faculty members to speak their minds without fear of retaliation from their university employers. So it is felicitous to extend the protections of academic freedom to expressions by faculty members in the public sphere as well as within the university.

                                    The philosopher of jurisprudence Ronald Dworkin provided a pivotal contribution to Louis Menand's The Future of Academic Freedom (1998). Dworkin argues that the issues surrounding academic freedom have shifted since the 1970s, and that they have as much to do with criticisms of faculty speech from the left as from the right. Here is how Dworkin describes the essentials of academic freedom:

                                    We begin reinterpreting academic freedom by reminding ourselves of what, historically, it has been understood to require and not to require. It imposes two levels of insulation. First, it insulates universities, colleges, and other institutions of higher education from political institutions like legislatures and courts and from economic powers like large corporations. A state legislature has, of course, the right to decide which state universities to establish -- whether, for example, to add an agricultural or a liberal arts college to the existing university structure. But once political officials have established such an institution, fixed its academic character and its budget, and appointed its officials, they may not dictate how those they have appointed should interpret that character or who should teach what is to be taught, or how. Second, academic freedom insulates scholars from the administrators of their universities: university officials can appoint faculty, allocate budgets to departments, and in that way decide, within limits, what curriculum will be offered. But they cannot dictate how those who have been appointed will teach what has been decided will be taught. (183)

                                    In addition to the utilitarian reasons for defending academic freedom mentioned above, Dworkin argues that there is also a principled ethical basis for these institutional protections based on his theory of "ethical individualism".

                                    It seems relatively clear that academic freedom is a fragile value that depends substantially on the willingness of the public to recognize its crucial role in securing democratic progress, and legislatures and elected officials who are prepared to resist the inclination to narrow its scope. And it also seems right that Hofstadter's central intuitions about universities are still the strongest justification for the defense of academic freedom: the integrity of intellectuals and scholars seeking and debating the truth and the contribution they can make to a civil democracy. Here is how Robert MacIver puts this point in Academic Freedom in Our Time:

                                    The search for knowledge, honestly undertaken, is a moral discipline. With the pursuit of this discipline goes the liberation from intolerance. . . Thus the intellectual mission of the university becomes also a moral one. Men sensitive to experience may learn the lesson in other ways, but the institution of learning is a major training ground. . . . Not knowledge itself but the free search for and the free communication of knowledge distinguishes the open mind from the closed mind, and the open society from the closed society.... The attack on academic freedom is an attack on all these values. (261-262.)
                                    Here is a review of Hofstadter and Metzger, Development of Academic Freedom in United States as well as MacIver, Academic Freedom in Our Time. Here is an article in the Journal of Philosophy on MacIver's book, including a fascinating letter by John Dewey to the New York Times in 1949 on the subject of academic freedom. And here is an AAUP piece in Academe on what it regards as a different kind of threat to academic freedom -- from commercial and corporate interests.

                                      Posted by on Sunday, August 28, 2011 at 01:17 AM in Economics, Universities | Permalink  Comments (9) 

                                      "The United States of Unemployment"

                                      David Wessel:

                                      The United States of Unemployment, by David Wessel: There are 13.9 million unemployed people in the U.S. – and that just counts those looking for work. That works out to 9.1% of the labor force, the widely publicized unemployed rate.
                                      But here are a few more ways to look at it.
                                      There are more unemployed people in the U.S. than there are people in the state of Illinois, the fifth largest state.
                                      In fact there, there are more unemployed people in the U.S. than there are people in 46 of the 50 states, all but Florida, New York, Texas and California.
                                      There are more unemployed than the combined populations of Wyoming, Vermont, North Dakota, Alaska, South Dakota, Delaware, Montana, Rhode Island, Hawaii, Maine, New Hampshire, Idaho and the District of Columbia.
                                      If they were a country, the 13.9 million unemployed Americans would be the 68th largest country in the world...

                                      Maybe we should do something.

                                        Posted by on Sunday, August 28, 2011 at 01:08 AM in Economics, Unemployment | Permalink  Comments (26) 

                                        Video: Ed Prescott on "The Current State of Aggregate Economics"

                                        Stephen Williamson says, "If you have never seen an Ed Prescott talk, here is your chance. Don't pay attention to how he's saying it, just listen closely. This is interesting, just to hear how he thinks about what he does."

                                        I'd guess I was far less impressed, but here's the video so you can make up your own mind:

                                          Posted by on Sunday, August 28, 2011 at 12:42 AM in Economics, Macroeconomics, Methodology, Video | Permalink  Comments (13) 

                                          Saturday, August 27, 2011

                                          links for 2011-08-27

                                            Posted by on Saturday, August 27, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (23) 

                                            How Long Will It Take for the Economy to Recover?

                                            I don't think we'll attain the growth rates the CBO is forecasting -- an average of 3.6% from 2013 to 2016 is a lot to ask for (especially if there is substantial deficit reduction over that time period). But even the CBO's optimistic estimates imply we won't fully recover until 2017. And if growth is a bit slower, well, yikes!:

                                            Lots of ground to cover: An update, David Altig: ...There are two pieces of information that emphasize the economy's recent weakness and potential slow growth going forward. The first is this week's revised forecasts and potential for gross domestic product (GDP) from the Congressional Budget Office (CBO), and the second is today's revision of second quarter GDP from the U.S. Bureau of Economic Analysis (BEA). Though estimates of potential GDP have not greatly changed, the CBO's downgrade in forecasts and BEA's report of much lower than potential growth in the second quarter have the current and prospective rates of resource utilization lower than when macroblog covered the issue just about a month ago.

                                            Key to the CBO's estimates is a reasonably good outlook for GDP growth after we get past 2012:

                                            "For the 2013–2016 period, CBO projects that real GDP will grow by an average of 3.6 percent a year, considerably faster than potential output. That growth will bring the economy to a high rate of resource use (that is, completely close the gap between the economy's actual and potential output) by 2017."

                                            The margin for slippage, though, is not great. Assuming that GDP ends 2011 having grown by about 2.3 percent—as projected by the CBO—here's a look at gaps between actual and potential GDP for different, seemingly plausible growth rates:

                                            Attaining 3.5 percent growth by next year moves the CBO's date for closing the output gap up by about a year. On the other hand, a fall in output growth to an average of 3 percent per year moves the date for eliminating resource slack back to 2020. If growth remains below that—well, let's hope it doesn't.

                                            Maybe policymakers should do something to try and improve the odds?

                                              Posted by on Saturday, August 27, 2011 at 02:25 AM in Economics, Monetary Policy | Permalink  Comments (76) 

                                              How Should We Measure the Poverty Rate?

                                              Lane Kenworthy:

                                              How should we measure the poverty rate?, Consider the Evidence: Perhaps we shouldn’t.
                                              The idea behind a poverty rate is that we set an income line below which people’s resources are deemed insufficient for a minimally decent standard of living. The poverty rate is the share of people in households with income below that line.
                                              Because it’s a binary measure, it’s a crude one. Suppose a lot of the poor at time 1 have incomes just below the poverty line. The economy then improves, or the benefit amount for a government transfer program is increased, so at time 2 a number of those people have moved above the line. It will appear that poverty has been sharply reduced, even though the amount of genuine progress is small. Similarly, suppose a number of people who formerly had very low incomes move into the work force and experience an income rise, but that rise doesn’t quite get them above the poverty line. This is a significant improvement, but it won’t show up at all in the poverty rate.
                                              This problem is well known among social scientists. Some therefore also calculate the “poverty gap” — the distance between the poverty line and the average income of those below the line. To that we can add inequality among the poor. Measures exist to incorporate either or both of these. But they are complicated and thus difficult to communicate to a nontechnical audience. One common measure, for instance, is the poverty rate multiplied by the poverty gap. This is better than the poverty rate by itself, but the numbers yielded by the measure don’t have an intuitive feel.
                                              Another problem with poverty rates is that much hinges on where the line is drawn, so we end up mired in interminable debates about exactly where that should be (here, here).
                                              Is there a useful alternative? I think so.
                                              Instead of a relative poverty rate, such as the official measure used by the European Union, I recommend the p50/p10 income ratio. Relative poverty is essentially a measure of inequality within the lower half of the distribution, so why not use a measure that more clearly conveys that? The 50/10 ratio is an inequality measure already familiar to social scientists, and it’s fairly simple to explain and understand. And as the first of the following two charts shows, the 50/10 ratio is very similar to the poverty rate multiplied by the poverty gap (the correlation is .96). The second chart shows that the poverty rate is a less effective proxy for the rate x gap.

                                              Instead of an absolute poverty rate, such as the official poverty measure in the United States, we can use absolute household income at the tenth percentile (p10) of the distribution. Across countries and over time, this measure is very similar to the absolute poverty rate multiplied by the absolute poverty gap. But it’s much simpler and easier to comprehend. Also, it’s a low-end analogue to median (p50) household income, a common indicator of the living standards of the middle class.
                                              Why the tenth percentile rather than the fifth or the fifteenth? Actually, I’d prefer the fifth, but there sometimes is reason to worry about data quality as we get close to the very bottom of the distribution. The tenth is reasonably close but not too close to the bottom, it’s a nice round number, and it already is commonly used in inequality measures such as the 50/10 ratio and the 90/10 ratio. But in truth, the choice of the tenth is arbitrary; it’s no more representative than the seventh or the twelfth or any other point at the low end of the distribution.
                                              So we have good alternatives to the two most common poverty rate measures. But what about political impact? Isn’t the poverty rate a helpful tool in pressing policy makers to keep their eye on the least well-off? Maybe. Yet hardly any of Europe’s rich nations had an official poverty rate measure prior to the EU’s introduction of one a decade ago, while here in the U.S. we’ve had an official poverty rate for nearly half a century. The absence of an official poverty rate doesn’t seem to have impeded government commitment to the poor in Europe. And I’m not sure the presence of one has helped a whole lot here.
                                              I don’t expect policy makers or social scientists to stop using poverty rates any time soon. And it won’t be disastrous if they don’t. But we could do better.

                                                Posted by on Saturday, August 27, 2011 at 02:07 AM in Economics | Permalink  Comments (28) 

                                                Money Creation

                                                From the NY Fed's Liberty Street Economics blog:

                                                These “Clams” Really Were Money, New York Fed Research Library: While money has taken all forms—precious commodities, beads, wampum, the large stones of Yap—we tend to think of those forms of money as archaic. Yet shells were used as money in California as late as 1933!
                                                Here is what happened. In 1933, during the Depression, the nation experienced a banking panic as people scrambled to withdraw their savings before their bank failed. In March of that year, President Roosevelt ordered a four-day bank holiday to curtail the run on banks. The closing of the banks prompted many people to hoard their money. With less cash in circulation, communities created emergency money, or “scrip,” so that they could continue doing business. For example, Leiter’s Pharmacy in Pismo Beach, California, issued this clamshell as emergency money. As the clamshell went from person to person, it was signed, and when cash became available again, the clamshell could finally be redeemed. Other forms of emergency money were also fashioned.

                                                  Posted by on Saturday, August 27, 2011 at 01:17 AM in Economics | Permalink  Comments (6) 

                                                  Friday, August 26, 2011

                                                  links for 2011-08-26

                                                    Posted by on Friday, August 26, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (11) 

                                                    Bernanke: We'll Wait and See

                                                    Here's a quick response to Bernanke's speech:

                                                    Bernanke: We’ll Wait and See, but No Changes in Policy for Now

                                                      Posted by on Friday, August 26, 2011 at 07:56 AM in Economics, Monetary Policy | Permalink  Comments (26) 

                                                      Video: Akerlof's Identity Economics and Stiglitz on Macro Models

                                                      I enjoyed this talk:

                                                      George Akerlof: Identity Economics

                                                      Abstract: Identity economics constitutes the first sustained effort to incorporate the effects of social context into our understanding of why people make the economic decisions they do, and why certain people, given different identities, make markedly different decisions in the same situations. It yields a more realistic and deeper account of behavior, and thereby a better basis for shaping organizations and public policies. The lecture will give a brief introduction to the book Identity Economics by George Akerlof and Rachel Kranton. It will give a motivation for identity economics and why it matters.

                                                      This one too:

                                                      Joseph Stiglitz: Imagining an Economics tthat Works: Crisis, Contagion and the Need for a New Paradigm

                                                      Abstract: The standard macroeconomic models have failed, by all the most important tests of scientific theory. They did not predict that the financial crisis would happen; and when it did, they understated its effects. Monetary authorities allowed bubbles to grow and focused on keeping inflation low, partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth. Advocates of capital market liberalization argued that it would lead to greater stability: countries faced with a negative shock borrow from the rest of the world, allowing cross-country smoothing. The crisis showed the deep flaws in this thinking, but policymakers have been slow to rethink the paradigms they relied on. There is a need for a fundamental re-examination of the models. This lecture first describes the failures of the standard models in broad terms, and then develops the economics of deep downturns, and shows that such downturns are endogenous. Further, the lecture will argue that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis, contrary to what the standard models argued. In particular, the lecture will explore how integration can exacerbate contagion; and how a failure in one country can more easily spread to others. There are conditions under which such adverse effects overwhelm the putative positive effects. Finally, the lecture will contrast the policy implications of our framework with those of the standard models; for instance, how capital controls can be welfare enhancing, reducing the risk of adverse effects from contagion.

                                                        Posted by on Friday, August 26, 2011 at 07:02 AM in Economics, Methodology, Video | Permalink  Comments (24) 

                                                        Paul Krugman: Bernanke’s Perry Problem

                                                        I came to the same conclusion:

                                                        Bernanke’s Perry Problem, by Paul Krugman, Commentary, NY Times: As I write this, investors around the world are anxiously awaiting Ben Bernanke’s speech at the annual Fed gathering at Jackson Hole, Wyo. They want to know whether Mr. Bernanke ... will unveil new policies that might lift the U.S. economy out of what is looking more and more like a quasi-permanent state of depressed demand and high unemployment.
                                                        But I’ll be shocked if Mr. Bernanke proposes anything significant... Why...? In two words: Rick Perry. ... I’m using Mr. Perry — who has famously threatened Mr. Bernanke with dire personal consequences if he pursues expansionary monetary policy before the 2012 election — as a symbol of the political intimidation that is killing our last remaining hope for economic recovery.
                                                        To see what I’m talking about, let’s ask what policies the Fed actually should be pursuing right now. ... Well, in 2000 ... Ben Bernanke offered a number of proposals for policy at the “zero lower bound.” True, the paper was focused on policy in Japan... But America is now very much in a Japan-type economic trap, only more acute. ...
                                                        Back then, Mr. Bernanke suggested that the Bank of Japan could get Japan’s economy moving with a variety of unconventional policies...: purchases of long-term government debt (to push interest rates, and hence private borrowing costs, down); an announcement that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates; an announcement that the bank was seeking moderate inflation, “setting a target in the 3-4% range for inflation, to be maintained for a number of years,” which would encourage borrowing and discourage people from hoarding cash; and “an attempt to achieve substantial depreciation of the yen”...
                                                        So why isn’t the Fed pursuing the agenda its own chairman once recommended for Japan?
                                                        Part of the answer is internal dissension..., with three inflation hawks on the committee... The larger answer, however, is outside political pressure. Last year, the Fed actually did institute a policy of buying long-term debt, generally known as “quantitative easing”... But it faced a political backlash out of all proportion...
                                                        Now just imagine the reaction if the Fed were to act on the other and arguably more important parts of that Bernanke 2000 agenda, targeting a higher rate of inflation and welcoming a weaker dollar. With prominent Republicans like Representative Paul Ryan already denouncing policies that allegedly “debase the dollar,” a political firestorm would be guaranteed.
                                                        So now you see why I don’t expect any substantive policy announcements at Jackson Hole. ... In effect, it has been politically intimidated into standing by while the economy stagnates. And that’s a very, very bad thing.
                                                        Political opposition has already crippled fiscal policy; instead of helping to create jobs, the federal government is pulling back, acting as a drag on output and employment.
                                                        With the Fed also intimidated into inaction, it’s hard to see any end to the ongoing economic disaster.

                                                          Posted by on Friday, August 26, 2011 at 06:48 AM in Economics, Monetary Policy, Politics | Permalink  Comments (120) 

                                                          GDP Growth Revised Downward, but GDI Growth Revised Upward

                                                          The estimate of GDP growth for the second quarter of the year was revised downward today:

                                                          Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.0 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.
                                                          The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 1.3 percent (see "Revisions" on page 3).

                                                          Thus, once again the situation is worse than we initially thought. However, Justin Wolfers finds reason to upgrade his forecast:

                                                          There's more news in the first GDI estimates than in the revision to GDP. And it's good news.
                                                          Given the track record of GDP v. GDI, I'm actually revising upward my views based on this report. Oh, BEA, why bury the lede in Appendix A?

                                                          He is basing this on GDI rather than GDP (which in theory ought to be equal, but practically are not, and GDI is often more reliable) which grew at 2.5% the first quarter (GDP growth was .4%), and in the second quarter it was 1.5% (GDP was 1.0%). That's still not great, or even good, but it is better than the GDP numbers (see here for a comparison of the two measures).

                                                          My own view is that whichever set of numbers you look at, they cry out for more aggressive policy.

                                                            Posted by on Friday, August 26, 2011 at 06:21 AM in Economics | Permalink  Comments (14) 

                                                            Decision Fatigue

                                                            I couldn't decide whether to post this or not:

                                                            Do You Suffer From Decision Fatigue?, NY Times: Three men doing time in Israeli prisons recently appeared before a parole board consisting of a judge, a criminologist and a social worker. ...
                                                            There was a pattern to the parole board’s decisions, but it wasn’t related to the men’s ethnic backgrounds, crimes or sentences. It was all about timing, as researchers discovered by analyzing more than 1,100 decisions over the course of a year. Judges, who would hear the prisoners’ appeals and then get advice from the other members of the board, approved parole in about a third of the cases, but the probability of being paroled fluctuated wildly throughout the day. Prisoners who appeared early in the morning received parole about 70 percent of the time, while those who appeared late in the day were paroled less than 10 percent of the time. ...
                                                            There was nothing malicious or even unusual about the judges’ behavior, which was reported earlier this year by Jonathan Levav of Stanford and Shai Danziger of Ben-Gurion University. The judges’ erratic judgment was due to the occupational hazard of being, as George W. Bush once put it, “the decider.” The mental work of ruling on case after case, whatever the individual merits, wore them down. This sort of decision fatigue can make quarterbacks prone to dubious choices late in the game and C.F.O.’s prone to disastrous dalliances late in the evening. It routinely warps the judgment of everyone, executive and nonexecutive, rich and poor — in fact, it can take a special toll on the poor. Yet few people are even aware of it, and researchers are only beginning to understand why it happens and how to counteract it. ...
                                                            Once you’re mentally depleted, you become reluctant to make trade-offs, which involve a particularly advanced and taxing form of decision making. ... Shopping can be especially tiring for the poor, who have to struggle continually with trade-offs. ...

                                                            [The full article is much longer.]

                                                              Posted by on Friday, August 26, 2011 at 03:24 AM in Economics | Permalink  Comments (6) 

                                                              Video: Paul Samuelson and the Neoclassical Synthesis

                                                                Posted by on Friday, August 26, 2011 at 03:06 AM in Economics, Video | Permalink  Comments (1) 

                                                                Thursday, August 25, 2011

                                                                links for 2011-08-25

                                                                  Posted by on Thursday, August 25, 2011 at 10:04 PM in Economics, Links | Permalink  Comments (18) 

                                                                  Why is the Fed Hesitant to Do More for the Economy?

                                                                  I try to explain why the Fed is unlikely to do more to help the economy:

                                                                  Why is the Fed Hesitant to Do More for the Economy?

                                                                    Posted by on Thursday, August 25, 2011 at 04:05 PM in Economics, Monetary Policy | Permalink  Comments (25) 

                                                                    Glasner: Barro on Keynesian Economics vs. Regular Economics

                                                                    "I am sure that Professor Barro, very, very clever fellow that he is, will clear all this up":

                                                                    Barro on Keynesian Economics vs. Regular Economics, by David Glasner: Readers ... may have guessed by now that I am not a fan of The Wall Street Journal editorial page. ... But I have to admit that even I was not quite prepared for Robert Barro’s offering in today’s Journal. You don’t have to be a Keynesian economist – and I have never counted myself as one – to find Barro’s piece, well, let’s just say, strange....

                                                                    Barro ... draws the contrast ... between Keynesian economics and regular economics. Regular economics is the economics of scarcity and tradeoffs in which there is no such thing as a free lunch, in which to get something you have to give up something else. Keynesian economics on the other hand is the economics of the multiplier in which government spending not only doesn’t come at the expense of private sector spending, amazingly it increases private sector spending. Barro throws up his hands in astonishment:

                                                                    If [the Keynesian multiplier were] valid, this result would be truly miraculous. The recipients of food stamps get, say, $1 billion but they are not the only ones who benefit. Another $1 billion appears that can make the rest of society better off. Unlike the trade-off in regular economics, that extra $1 billion is the ultimate free lunch.

                                                                    Quickly composing himself, Barro continues:

                                                                    How can it be right? Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people? Keynes in his “General Theory” (1936), was not so good at explaining why this worked, and subsequent generations of Keynesian economists (including my own youthful efforts) have not been more successful.

                                                                    Nice rhetorical touch, that bit of faux self-deprecation, referring to his own fruitless youthful efforts. But the real message is: “I’m older and wiser now, so trust me, the multiplier is a scam.”

                                                                    But wait a second. What does Barro mean by his query: “Where was the market failure that allowed the government to improve things just by borrowing money and giving it to people?” Where is the market failure? Hello. Real GDP is at least 10% below its long-run growth trend, the unemployment rate has been hovering between 9 and 10% for over two years, and Professor Barro can’t identify any market failure? Or does Professor Barro, like many real-business cycle theorists (say, Charles Plosser, for instance?), believe that fluctuations in output and employment are optimal adjustments to productivity shocks involving intertemporal substitution of leisure for labor during periods of relatively low productivity?

                                                                    Perhaps that is what Barro thinks now,... but about two and a half years ago, writing another op-ed piece for the Journal, Barro had a slightly different take on what is going on during a depression.

                                                                    [A] simple Keynesian macroeconomic model implicitly assumes that the government is better than the private market at marshalling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

                                                                    John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall.

                                                                    So in January 2009, Barro was at least willing to entertain the possibility that some kind of obstacle to necessary price and wage reductions might be responsible for the failure of markets to generate a spontaneous recovery from a recession, so that a sufficient monetary expansion could provide a cure for this problem by making wage-and-price reductions unnecessary. But ... it would be interesting to know if he thinks that monetary expansion ... is not somehow inconsistent with his conception of regular economics. I mean you print up worthless pieces of paper and, poof, all of a sudden all that output that private markets couldn’t produce gets produced, and all those workers that private markets couldn’t employ get employed. In Professor Barro’s own words, How can that be right? ...

                                                                    Well,... if restoring full employment by printing money does not contradict regular economics, I have trouble seeing why restoring full employment by borrowing and government spending does contradict regular economics. But I am sure that Professor Barro, very, very clever fellow that he is, will clear all this up for us in due course...

                                                                    [In a part I left out, he explains the similarity between the two types of policy in more detail.]

                                                                      Posted by on Thursday, August 25, 2011 at 02:34 AM in Economics, Fiscal Policy, Market Failure, Methodology | Permalink  Comments (35) 

                                                                      The Nobel Laureates Meetings at Lindau

                                                                      Today's conference line-up:

                                                                      THURSDAY, AUGUST 25TH  
                                                                      09:00 - 09:30 Prof. Dr. Myron S. Scholes Economic Sciences Quantitative Finance and the Intermediation Process 
                                                                      09:30 - 10:00 Prof. Dr. William F. Sharpe Economic Sciences Post-Retirement Economics 
                                                                      10:00 - 10:30 Prof. Dr. Sir James A. Mirrlees Economic Sciences Poverty, Inequality, and Food 
                                                                      10:30 - 11:00 Coffee Break
                                                                      11:00 - 11:30 Dr. John F. Nash Jr. Economic Sciences Ideal Money and the Motivation of Savings and Thrift 
                                                                      11:30 - 12:00 Prof. Dr. Edward C. Prescott Economic Sciences The Current State of Aggregate Economics 
                                                                      12:00 - 12:30 Prof. Dr. Robert J. Aumann Economic Sciences Challenging Nash Equilibrium: Rational Expectation in Games 
                                                                      12:30 - 13:00 Prof. Dr. Robert A. Mundell Economic Sciences Currency Wars, Euro-Mania and the Price of Gold 
                                                                      13:00 - 15:00 Lunch Break
                                                                      15:00 - 16:30 Panel "Behavioural Economics": George A. Akerlof, Robert J. Aumann, Eric S. Maskin, Daniel L. McFadden, Edmund S. Phelps, Reinhard Selten (Chair: Martin Wolf, Financial Times)
                                                                      17:00 - 18:30 Afternoon Discussions with Laureates Aumann, Mirrlees, Mundell, Nash Jr., Prescott, Scholes and Sharpe (for Laureates and Young Economists only)
                                                                      20:00 - 22:00 Dinner at various restaurants

                                                                      Update: So far, today has been a series of lectures (see above). The first two were about finance – math and all – but no talk at all about the financial crisis. It’s as though no questions at all were raised about these models by recent events in financial markets. From the perspective of the students who are here, I think it would have been much more valuable for Scholes and Sharpe to explain where the research agenda in this area ought to be headed. What are the major questions that need to be answered?


                                                                      The talk I'm waiting for is Prescott's discussion of the current state of macro models. I'm guessing it will be mostly a love fest, but he does say that "I will discuss deviations from theories that need resolution as well as the successes," so perhaps I'll be pleasantly surprised. 

                                                                        Posted by on Thursday, August 25, 2011 at 02:25 AM Permalink  Comments (3) 

                                                                        Not Learning from the Past

                                                                        The Frum Forum notes that many economists are now assigning a high probability to a double-dip, and adds:

                                                                        If a double dip does come, it will be the inaction in the face of warnings that it was on the way which future generations will be most baffled by.

                                                                        One quibble, calling it a policy of inaction is too kind. There has been action, but the wrong kind:

                                                                        At this point the entire advanced world is doing exactly what basic macroeconomics says it shouldn’t be doing: slashing spending in the face of high unemployment, slow growth, and a liquidity trap. It’s a global 1937. And if the result is another recession, the witch-doctors will just demand more bleeding.

                                                                        It's hard to believe we're doing this again.

                                                                          Posted by on Thursday, August 25, 2011 at 02:07 AM in Economics, Fiscal Policy | Permalink  Comments (66) 

                                                                          No Evidence That Government Housing Policy Caused the Crisis

                                                                          This shouldn't be news -- the idea that the CRA or GSEs caused the crisis doesn't hold up against the evidence. But people still believe the myth, so it doesn't hurt to have one more paper showing that there is "little evidence to support the view that either the CRA or the GSE goals caused excessive or less prudent lending than otherwise would have taken place. ... In fact, the evidence suggests that loan outcomes may have been marginally better in tracts that were served by more CRA-covered lenders":

                                                                          The Subprime Crisis: Is Government Housing Policy to Blame?, by Robert B. Avery and Kenneth P. Brevoort, Working paper, FRB: Abstract: A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and the affordable housing goals of the government sponsored enterprises, may have caused the subprime crisis. The conclusions drawn in this literature, for the most part, have been based on associations between aggregated national trends. In this paper we examine more directly whether these programs were associated with worse outcomes in the mortgage market, including delinquency rates and measures of loan quality. We rely on two empirical approaches. In the first approach, which focuses on the CRA, we conjecture that historical legacies create significant variations in the lenders that serve otherwise comparable neighborhoods. Because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the CRA's effect. We test this conjecture by examining whether neighborhoods that have been disproportionally served by CRA-covered institutions historically experienced worse outcomes. The second approach takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility, where any effect of the CRA or GSE goals should be clearest. We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending. Similarly, the threshold tests show no evidence that either program had a significantly negative effect on outcomes.

                                                                            Posted by on Thursday, August 25, 2011 at 01:17 AM in Economics, Financial System, Housing | Permalink  Comments (49) 

                                                                            Warren Samuels on the "Invisible Hand"

                                                                            Gavin Kennedy has been trying to extinguish the invisible hand myth for some time now:

                                                                            Warren Samuels on the "Invisible Hand," Adam Smith's Lost Legacy: More good news on Warren Samuels new book in the publisher’s blurb, posted in the Coordinating Problem Blog (here):

                                                                            The post, “Warren Samuels (1933-2011)”, is by Peter Boettke of George Mason University, Fairfax, Virginia, and the academic home of my friendly sparing partner on the “invisible hand”, Daniel Klein.

                                                                            Regular readers will see immediately why I am so excited to read an outline of its main theme and one of its concluding assertions: that ‘no such thing as an invisible hand exists’. Yes, it was a metaphor.

                                                                            This conclusion is from a most highly respected source in the history of economic thought.

                                                                            The scholarly profession will sit up and note what Warren Samuels says, even if it has not responded positively yet to the six-year campaign of Lost Legacy to alert it to the errors of the modern myths about Adam Smith’s use of the invisible hand metaphor.

                                                                            “Erasing the Invisible Hand” (Cambridge, 2011) is described by the publisher as follows:

                                                                            This book examines the use, principally in economics, of the concept of the invisible hand, centering on Adam Smith. It interprets the concept as ideology, knowledge and a linguistic phenomenon. It shows how the principal Chicago School interpretation misperceives and distorts what Smith believed on the economic role of government. The essays further show how Smith was silent as to his intended meaning, using the term to set minds at rest; how the claim that the invisible hand is the foundational concept of economics is repudiated by numerous leading economic theorists; that several dozen identities given the invisible hand renders the term ambiguous and inconclusive; that no such thing as an invisible hand exists; and that calling something an invisible hand adds nothing to knowledge. Finally, the essays show that the leading doctrines purporting to claim an invisible hand for the case for capitalism cannot invoke the term but that other non-normative invisible hand processes are still useful tools.”

                                                                            Review copies are circulating - but none has come this way.

                                                                              Posted by on Thursday, August 25, 2011 at 01:08 AM in Economics, History of Thought | Permalink  Comments (8) 

                                                                              "Rules-based Keynesian Policy?"

                                                                              Is John Taylor anti-Keynesian?:

                                                                              Rules-based Keynesian Policy?, Twenty Cent Paradigms: John Taylor, who is one of the most prominent academic critics of administration and Fed policy over the past several years, grapples with the label "anti-Keynesian" that was pinned on him by The Economist. He writes:

                                                                              In a follow-up to the Economist article, David Altig, with basic agreement from Paul Krugman, argued that it was a misnomer because I developed and used macro models (now commonly called New Keynesian) with price and wage rigidities in which the government purchases multiplier is positive (though usually less than one), or because the Taylor rule includes real variables in addition to the inflation rate. In my view, rigidities exist in the real world and to describe accurately how the world works you need to incorporate such rigidities in your models, which of course Keynes emphasized. But you also need to include forward-looking expectations, incentives, and growth effects—which Keynes usually ignored.

                                                                              In my view the essence of the Keynesian approach to macro policy is the use by government officials of discretionary countercyclical actions and interventions to prevent or mitigate recessions or to speed up recoveries. Since I have long been critical of the use of discretionary policy in this way, I think the Economist is correct so say that I am anti-Keynesian in this sense of the word. Indeed, the models that I have built support the use of policy rules, such as the Taylor rule for monetary policy or the automatic stabilizers for fiscal policy, which are the polar opposite of Keynesian discretion. As a practical prescription for improving the economy, the empirical evidence is clear in my view that discretionary Keynesian policy does not work and the experience of the past three years confirms this view.

                                                                              "Keynesian" means different things to different people - at its broadest, it means accepting that there are frictions in the economy which mean that aggregate demand matters and policy can have real effects. This is in contrast to the pure classical view, in which Say's law holds, demand is irrelevant, and output depends on technology and preferences. In the version of Keynesian economics in our undergraduate textbooks - the IS-LM/AS-AD framework - the frictions are nominal rigidities and the Keynesian model deals with "short run" fluctuations around a "long run" equilibrium determined by the classical model. In this setting, both monetary and fiscal policy matter (by shifting the LM and IS curves, respectively), though early Keynesians emphasized fiscal policy and "monetarists" (most prominently Milton Friedman), gave primacy to monetary policy. The version of Keynesian economics in our graduate textbooks and academic journals - "New Keynesian" - combines dynamic optimization with sticky prices, and explicitly addresses the lack of "forward looking expectations" in the traditional textbook version. Furthermore, some argue that both the IS-LM and New Keynesian incarnations really miss the point and gloss over more fundamental irrationality and instability Keynes saw in the capitalist system.

                                                                              As Taylor describes his views of the economy (and from what I know of his academic work), it seems consistent with mainstream New Keynesian economics (though his version has been less favorable to fiscal policy than some others). His criticism of recent fiscal and monetary policy grows out of another longstanding conundrum in macroeconomics, "rules versus discretion." He is not claiming that countercyclical fiscal and monetary policy are fundamentally impossible, which is what I would say is the true "anti-Keynesian" view. Rather, he is arguing that discretionary policy may do more harm than good, and policy should be based on stable, predictable rules.

                                                                              A primary argument for rules is that discretionary "fine tuning" is impractical based on "long and variable" lags associated with (i) recognizing the state of the state of the economy, (ii) designing and implementing a policy and the (iii) the policy's impact reaching the economy. Often lurking behind this argument is a political philosophy that is skeptical of government (no coincidence that Milton Friedman was the most famous proponent of rules - Brad DeLong recently argued this is how he resolved the contradiction between an economics that said monetary policy can be effective with a libertarian political philosophy).

                                                                              Taylor is careful to say that he opposes "discretionary Keynesian policy" - I think "anti-discretion" might be a better characterization of his critique than "anti-Keynesian." Of course, that only matters if it is possible to be "anti-discretion" without being "anti-Keynesian." I think it is.

                                                                              I don't share the political philosophy, but the experience of the last several years has underscored the practical difficulties of discretionary policy. The early-2009 Obama administration with large congressional majority is about as close to government by center-left mainstream Keynesian technocrats as the American political system is likely to ever give us. In retrospect, it is clear they misjudged the scope and duration of the downturn and were not able make adjustments as that became apparent.

                                                                              Monday morning quarterbacking in April, I suggested that the stimulus should have been designed in a "state-contingent" fashion to remain in place until the recovery reached certain benchmarks. It is a small step from there to a "rules based" countercyclical fiscal policy - policies like aid to state governments, extended unemployment benefits, payroll tax cuts and even increased infrastructure spending could be designed to kick in and ramp down automatically based on the state of the economy (e.g., with triggers based on the unemployment rate). To me, that's very "Keynesian", but also "rules-based", and its easy to imagine that might have worked better than the actual policies that were put in place.

                                                                                Posted by on Thursday, August 25, 2011 at 12:42 AM in Economics, Fiscal Policy, Methodology, Monetary Policy | Permalink  Comments (14) 

                                                                                Wednesday, August 24, 2011

                                                                                links for 2011-08-24

                                                                                  Posted by on Wednesday, August 24, 2011 at 10:04 PM in Economics, Links | Permalink  Comments (16) 

                                                                                  The Nobel Laureates Meetings at Lindau

                                                                                  Here's today's lineup:

                                                                                  WEDNESDAY, AUGUST 24TH  
                                                                                  09:30 - 11:00 Opening Ceremony // Welcome Address of German Federal President Christian Wulff // Induction Honorary Senate //
                                                                                  Plenary Panel Discussion "Sustainability in International Economics" with Laureates McFadden, Myerson, Stiglitz and Young Economists
                                                                                  11:00 - 11:30 Coffee Break
                                                                                  11:30 - 12:00 Prof. Dr. Peter A. Diamond Economic Sciences Search and Macro  
                                                                                  12:00 - 12:30 Prof. Dr. Christopher A. Pissarides Economic Sciences The Future of Work in Europe  
                                                                                  12:30 - 14:30 Lunch Break
                                                                                  14:30 - 16:00 Panel "Demographic Change, Economics and Politics": Peter A. Diamond, Sir James A. Mirrlees, Christopher A. Pissarides, Edward C. Prescott (Chair: Martin Wolf, Financial Times)
                                                                                  16:30 - 18:00 Afternoon Discussions with Laureates Diamond, Mortensen and Pissarides (for Laureates and Young Economists only)
                                                                                  20:00 - 22:00 Get-Together Evening at Congress Venue Inselhalle

                                                                                  The purpose of the meetings is to "provide a globally recognised forum for the exchange of knowledge between Nobel Laureates and young researchers." These young researchers -- at least the ones interested in macro -- are the ones who will be most likely to shake off the shackles of the past and develop new theories of the macroeconomy. So I'll be curious to see how that topic is handled. Will Stiglitz push hard in this direction and if so, how will the other Laureates, e.g. Phelps and Prescott, respond? Note that Prescott's abstract starts with "This is the golden age of aggregate economics." Stiglitz's abstract, on the other hand, begins with "The standard macroeconomic models have failed, by all the most important tests of scientific theory." Those two talks aren't until later in the week, but as I said I'll be very interested to see how this critical issue is presented to the upcoming generation of economists.

                                                                                  Update: I'm glad Stiglitz is here. In the opening panel, he began the discussion of macro models, and said (to applause) that macroeconomic models played a role in creating policies that caused the crisis. He also attacked austerity. Without him, there wouldn't be a strong advocate for these views at this meeting.

                                                                                    Posted by on Wednesday, August 24, 2011 at 03:33 AM in Conferences, Economics | Permalink  Comments (9) 

                                                                                    Bhagwati: The Outsourcing Bogeyman

                                                                                    Jagdish Bhagwati says outsourcing myths are standing in the way of free trade initiatives ("If free trade is to regain the support of statesmen who now hesitate over liberalizing trade with developing countries, the myths that turn outsourcing into an epithet must be countered"). He says we shouldn't worry about outsourcing jobs because we can always use protectionism to save them:

                                                                                    there are manmade restrictions to outsourcing particular types of expertise: professional organizations often intervene to kill outsourcing simply by requiring credentials that only they can provide. Thus, foreign radiologists need US certification before they are allowed to read the x-rays sent from the US. Until recently, only two foreign firms qualified.

                                                                                    So no need to worry. If assembly line work is threatened by outsourcing, simple, just require US certification for the workers who produce these goods.

                                                                                    Don't get me wrong, I think free trade is almost always the best answer. But in supporting it, we shouldn't hide from the short-run distributional consequences that fall on some segments of the population. Acknowledging that the costs exist, and then addressing them is a much better route to preserving free trade inititatives.

                                                                                      Posted by on Wednesday, August 24, 2011 at 03:24 AM in China, Economics, Productivity, Technology | Permalink  Comments (85) 

                                                                                      "A New look at the Industrial Revolution"

                                                                                      I'm curious to read the comments on this one:

                                                                                      Opening Pandora’s box: A new look at the industrial revolution, by Tony Wrigley, Vox EU: The most fundamental defining feature of the industrial revolution was that it made possible exponential economic growth – growth at a speed that implied the doubling of output every half-century or less. This in turn radically transformed living standards. Each generation came to have a confident expectation that they would be substantially better off than their parents or grandparents. Yet, remarkably, the best informed and most perspicacious of contemporaries were not merely unconscious of the implications of the changes which were taking place about them but firmly dismissed the possibility of such a transformation. The classical economists Adam Smith, Thomas Malthus, and David Ricardo advanced an excellent reason for dismissing the possibility of prolonged growth.
                                                                                      Smith and Ricardo as growth pessimists
                                                                                      They thought in terms of three basic factors of production, i.e. land, labor, and capital. The latter two were capable of indefinite expansion in principle but the first was not. The area of land which could be used for production was limited, yet its output was basic – not just to the supply of food but of almost all the raw materials which entered into material production. This was self-evidently true of animal and vegetable raw materials – wool, cotton, leather, timber, etc. But it was also true of all mineral production since the smelting of ores required much heat and this was obtained from wood and charcoal. Expanding material production meant obtaining a greater volume of produce from the land but that in turn meant either taking into cultivation land of inferior quality, or using existing land more intensively, or both. This necessarily meant at some point that returns both to capital and labor would fall. In short, the very process of growth ensured that it could not be continued indefinitely. This was a basic characteristic of all “organic” economies, those which were universal before the industrial revolution. Adam Smith summarized the problem as follows:
                                                                                      In a country which had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries, allowed it to acquire; which could, therefore, advance no further, and which was not going backwards, both the wages of labor and the profit of stock would probably be very low. (Smith 1789)
                                                                                      He went on to spell out in greater detail what his statement implied for the living standards of the bulk of the population and for the return on capital. When Ricardo tackled the same issue he came to the same conclusion and was explicit in insisting that the resulting situation “will necessarily be rendered permanent by the laws of nature, which have limited the productive powers of the land” (Ricardo 1817).
                                                                                      The constraint stressed by the classical economists can be expressed differently in a way that highlights the change that transformed the possibilities of expanding output and enabled an industrial revolution to take place.
                                                                                      Every form of material production involves the expenditure of energy and this is equally true of all forms of transport. In organic economies the dominant source of the energy employed in production was the process of photosynthesis in plants. The quantity of energy which reaches the surface of the earth each year from the sun is vast but photosynthesis captures less than 0.5% of the energy in incident sunlight.
                                                                                      Photosynthesis was the source of mechanical energy which came predominantly from human and animal muscle power derived from food and fodder. Wind and water power were of comparatively minor importance. Photosynthesis was also the source of all heat energy used in production processes since the heat came from burning wood.
                                                                                      The implications of this situation in limiting productive potential are clear and dire. The land constraint was a severe impediment to growth. It is epitomized in a phrase of Sir Thomas More. He remarked that sheep were eating up men. An expansion of wool production meant less land available to grow food crops. Or again, it is easy to show that, if iron smelting had continued to depend upon charcoal, a rise in the production of iron to the scale which became normal in the mid-nineteenth century would have involved covering the entire land surface of Britain with woodland.
                                                                                      Breaking free from photosynthesis
                                                                                      Access to energy that did not spring from the annual product of plant photosynthesis was a sine qua non for breaking free from the constraints afflicting all organic economies. By an intriguing paradox, this came about by gaining access to the products of photosynthesis stockpiled over a geological time span. It was the steadily increasing use of coal as an energy source which provided the escape route.

                                                                                      Continue reading ""A New look at the Industrial Revolution"" »

                                                                                        Posted by on Wednesday, August 24, 2011 at 03:06 AM in Economics | Permalink  Comments (15) 

                                                                                        Sharing the Burden

                                                                                        It's true that raising taxes on the wealthy won't, by itself, solve the long-run deficit problem. But it can still contribute quite a bit to the solution:

                                                                                        ...Returning the average tax rate on the top 1 percent of taxpayers to its 1996 level of 29 percent could raise about $100 billion a year, or $1 trillion over the next decade.
                                                                                        By itself, of course, that wouldn’t solve the country’s long-term fiscal problems. ...  But $1 trillion over ten years is real money and would make a real dent in the deficit.

                                                                                          Posted by on Wednesday, August 24, 2011 at 02:07 AM in Economics, Equity, Taxes | Permalink  Comments (35) 

                                                                                          Tuesday, August 23, 2011

                                                                                          links for 2011-08-23

                                                                                            Posted by on Tuesday, August 23, 2011 at 10:04 PM in Economics, Links | Permalink  Comments (22) 

                                                                                            Future Skill Shortages in the US Economy?

                                                                                            Via Vox EU:

                                                                                            Future skill shortages in the US economy? Sorting out the evidence, by Marisol Cuellar Mejia, Hans Johnson, and David Neumark, Vox EU: Ageing workforces pose challenges to governments around the world. While fiscal issues surrounding pension and social security have been very much in the news, a less well-known issue concerns skills.
                                                                                            The impending retirement of the baby-boom cohort brings with it the potential for skill shortages. The boomers are well-educated, having come into adulthood as the nation was rapidly expanding post-secondary educational opportunities. In earlier decades, younger workers replacing older workers were both much more educated and much more numerous. But the baby boomers are nearly as educated as current younger cohorts (Figure 1) and are large in number. Thus, their retirement will slow the growth of skill levels in the workforce, leading to shortages if skill demands continue to increase.

                                                                                            Figure 1. Number of adults with at least a bachelor’s degree
                                                                                            by age group (25-44 and 45-64)
                                                                                            Source: Decennial Census (1990 and 2000); American Community Survey (2008).

                                                                                            Carnevale et al (2010) recently projected large shortages by the end of this decade: “By 2018, the postsecondary system will have produced 3 million fewer college graduates than demanded by the labour market” (p 16). But Harrington and Sum (2010) criticise these projections, instead seeing over-education or “mal-employment” – college workers in jobs that do not require college degrees – as “perhaps the most pressing problem facing college graduates in the nation today ….”

                                                                                            Our projections of skill supplies and demands for the US economy stake out a middle ground. We foresee rising demand for highly-educated workers. But in the near term this rising demand will by and large be met by rising education levels among the US population, suggesting little risk of a substantial workforce skills gap. At the same time, there are greater risks of skill shortages in states with large and growing, and less-educated, immigrant populations. And over the longer-term, as more baby boomers retire, there is greater risk of substantial skill shortages nationwide.

                                                                                            Projections of skill supplies and demands through 2018

                                                                                            Our demand projections rest on US Bureau of Labour Statistics (BLS) projections of employment growth by occupation to 2018 (Lacey and Wright 2009). To project the education requirements of future jobs, we could also rely on the BLS, which classifies occupations by educational requirements. However, using data from the American Community Survey (ACS), we find substantial labour market returns, within occupations, to educational levels beyond those that the BLS deems “required” (see Neumark et al 2011). We therefore instead use empirical evidence on employment practices to estimate and project workforce skills needs, starting with the baseline education distribution of workers by occupation in 2008 and applying recent trend growth in education distributions within occupation (using ACS and Decennial Census data). Applying these estimates to the occupational projections, we obtain projected skill (education) demands.

                                                                                            To project supply, we construct new population forecasts that take account of nativity (unlike US Census Bureau population projections), and we project population by education, and labour force participation. Three important factors underlie our projections:

                                                                                            Continue reading "Future Skill Shortages in the US Economy?" »

                                                                                              Posted by on Tuesday, August 23, 2011 at 03:06 AM in Economics, Unemployment | Permalink  Comments (60) 

                                                                                              Krugman vs. Rogoff: How to Fix the Economy


                                                                                                Posted by on Tuesday, August 23, 2011 at 02:07 AM in Economics, Video | Permalink  Comments (35) 

                                                                                                Monday, August 22, 2011

                                                                                                links for 2011-08-22

                                                                                                  Posted by on Monday, August 22, 2011 at 10:01 PM in Economics, Links | Permalink  Comments (19) 

                                                                                                  The suburbs

                                                                                                  I set up 18 posts before I left for Lindau. Most are of the "Here's [name] talking about [subject]" variety, and two or three will post automatically each day:

                                                                                                  The suburbs, by Dan Little: There has been lots of work on urban history, and rural life has come in for its own specialized study for almost two centuries as well. But what about the suburbs? Is there anything distinctive about suburban life in the United States that suggests that it needs its own sociology and history? Kevin Kruse and Tom Sugrue think so, and their volume, The New Suburban History (Historical Studies of Urban America). Kruse and Sugrue think that this history is actually crucial to understanding many things about the United States since the 1950s.

                                                                                                  In the still-developing history of the postwar United States, suburbs belong at center stage. The rise and dominance of suburbia in America after the Second World War is inescapable. In 1950, a quarter of all Americans lived in suburbs; in 1960, a full third; and by 1990, a solid majority. (1)

                                                                                                  This question divides naturally into two tracks. First, has there been a distinctive sociology of suburban life that needs to be tracked? And second, does this social-demographic fact about post-war America have important consequences for larger issues -- electoral politics, race, education, cultural homogenization, and economic competitiveness? Kruse and Sugrue think that suburbanization has implications for each of these topics, and the volume makes the case.

                                                                                                  The subject of suburban history isn't a new one. But what is new about the approach taken by the contributors is the fact that they treat the suburbs as part of a system. They treat regions as metropolitan systems including inner cities and multiple suburban places.

                                                                                                  Continue reading "The suburbs" »

                                                                                                    Posted by on Monday, August 22, 2011 at 07:29 PM in Economics | Permalink  Comments (13) 


                                                                                                    I'm traveling here today. I'll post as (and if) I can.

                                                                                                      Posted by on Monday, August 22, 2011 at 12:24 PM in Economics, Travel | Permalink  Comments (8)