« May 2013 |
| July 2013 »
Jesse Rothstein finds that the rise in disability filings in recessions is
not due to people "exaggerating real disabilities or through outright
Are Long-Term Unemployed Taking Refuge in Disability?, by Ben Casselman, WSJ:
The sharp rise in federal disability rolls in recent years ... is troubling
to economists and policymakers because the program, administered by
the Social Security Administration, is expensive, and because once workers
go on disability, they rarely come off.
Economists have long known that disability filings go up during recessions,
but they aren’t sure why. Perhaps the most worrisome theory is that
displaced workers are essentially using disability insurance as a form of
extended unemployment benefits, either by exaggerating real disabilities or
through outright fraud.
University of California, Berkeley economist Jesse Rothstein set out to test
that theory. He reasoned that if the increase is being driven by unemployed
workers gaming the system, there ought to be a correlation between expiring
jobless benefits rising disability claims. ... When Mr. Rothstein looked at
the data, however,
he found no such correlation. ... Mr. Rothstein’s findings ... are still
Then why do disability rolls rise in bad times?:
A construction worker who hurts his back, for example, might be able to get
a desk job during good economic times; when unemployment is high, however,
making such a career switch could be much harder. Moreover, companies are
much more likely to make accommodations for existing workers who become
disabled than to hire a disabled worker — so a person with a disability who
loses a job might well struggle to find a new one. ...
Basically, people with disabilities face a choice, apply (and likely get)
disability, or continue working in another occupation where the disability is
less of (or not) an obstacle. In bad times, alternatives that will allow the
disabled to continue working in another occupation dry up, and the first choice
-- going on disability -- is more likely. As the article notes, once this
(expensive) choice is made it is generally not reversed when the economy
Posted by Mark Thoma on Friday, June 14, 2013 at 09:49 AM in Economics, Social Insurance, Unemployment |
If the share of income going to labor continues to decline, how should we
Sympathy for the Luddites, by Paul Krugman, Commentary, NY Times: In
1786, the cloth workers of Leeds, a wool-industry center in northern
England, issued a protest against the growing use of “scribbling” machines,
which were taking over a task formerly performed by skilled labor. “How are
those men, thus thrown out of employ to provide for their families?”
asked the petitioners. “And what are they to put their children
Those weren’t foolish questions. Mechanization eventually ... led to a broad
rise in British living standards. But it’s far from clear whether typical
workers reaped any benefits during the early stages of the Industrial
Revolution; many workers were clearly hurt. And often the workers hurt most
were those who had, with effort, acquired valuable skills — only to find
those skills suddenly devalued.
So are we living in another such era? ...
The McKinsey Global Institute recently released a report on a dozen
major new technologies that it considers likely to be “disruptive”... and
... some of the victims of disruption will be workers who are currently
considered highly skilled...
So should workers simply be prepared to acquire new skills? The woolworkers
of 18th-century Leeds addressed this issue back in 1786: “Who will maintain
our families, whilst we undertake the arduous task” of learning a new trade?
Also, they asked, what will happen if the new trade, in turn, gets devalued
by further technological advance?
And the modern counterparts of those woolworkers might well ask further,
what will happen to us if, like so many students, we go deep into debt to
acquire the skills we’re told we need, only to learn that the economy no
longer wants those skills?
Education, then, is no longer the answer to rising inequality, if it ever
was (which I doubt).
So what is the answer? If the picture I’ve drawn is at all right, the only
way we could have anything resembling a middle-class society — a society in
which ordinary citizens have a reasonable assurance of maintaining a decent
life as long as they work hard and play by the rules — would be by having a
strong social safety net, one that guarantees not just health care but a
minimum income, too. And with an ever-rising share of income going to
capital rather than labor, that safety net would have to be paid for to an
important extent via taxes on profits and/or investment income.
I can already hear conservatives shouting about the evils of
“redistribution.” But what, exactly, would they propose instead?
Posted by Mark Thoma on Friday, June 14, 2013 at 12:33 AM in Economics, Income Distribution, Technology |
From OECD Insights:
The impact of immigrants – it’s not what you think, by Brian Keeley:
In the land of tabloid terrors, immigrants loom large. Flick through the
pages or online comments of some of the racier newspapers, and you’ll see
immigrants being accused of stealing jobs or, if not that, of being workshy
and “scrounging benefits”.
Such views may be at the extreme end of the spectrum, but they do seem to
reflect a degree of public ambivalence, and even hostility, towards
immigrants in a number of OECD countries. Anecdotal evidence is not hard to
find. ... Surveys offer further evidence...
New research from the OECD indicates that ... across OECD countries, the
amount that immigrants pay to the state in the form of taxes is more or less
balanced by what they get back in benefits. Even where immigrants do have an
impact on the public purse – a “fiscal impact” – it amounts to more than
0.5% of GDP in only ten OECD countries, and in those it’s more likely to be
positive than negative. In sum, says the report, when it comes to their
fiscal impact, “immigrants are pretty much like the rest of the population”.
The extent to which this finding holds true across OECD countries is
striking, although there are naturally some variations. Where these exist,
they largely reflect the nature of the immigrants who arrive in each
country. ... Indeed, one objection that’s regularly raised to lower-skilled
immigrants is the fear that they will live off state benefits.
But, here again, the OECD report offers some perhaps surprising insights. It
indicates that low-skilled migrants – like migrants in general – are neither
a major drain nor gain on the public purse. Indeed, low-skilled immigrants
are less likely to have a negative impact than equivalent locals.
Posted by Mark Thoma on Friday, June 14, 2013 at 12:24 AM in Economics, Immigration, Social Insurance |
Posted by Mark Thoma on Friday, June 14, 2013 at 12:03 AM in Economics, Links |
For those of you interested in the finer details of the legal issues surrpounding ECB government bond purchases, Volker Wieland emails that he has a new note (together with Helmut Siekmann,
a law colleague of his and a leading authority and currency and central bank
law) "on the legal issues and concerns that the German Constitutional Court is
deliberating on regarding the ECB's OMT, including some analysis of what is to
be expected in terms of a decision. It is written not as advocacy piece but as
an explanatory contribution":
The European Central Bank’s Outright Monetary Transactions and the Federal
Constitutional Court of Germany Helmut Siekmann and Volker Wieland, June 11,
2013: Abstract This note reviews the legal issues and
concerns that are likely to play an important role in the ongoing
deliberations of the Federal Constitutional Court of Germany concerning the
legality of ECB government bond purchases such as those conducted in the
context of its earlier Securities Market Programme or potential future
Outright Monetary Transactions.
1. The OMT controversy and how it became central to the German
Constitutional Court’s deliberations in summer 2013 The European
Central Bank’s August 2, 2012 announcement that it would be willing to buy
government bonds without limit in certain scenarios arguably constitutes the
most controversial decision in its 15-year history. Already the limited
purchases of euro crisis countries’ sovereign bonds under the ECB’s
Securities Markets Programme (SMP) since May 2012 had been cited as the
reason for the resignations of Axel Weber, then-President of the Bundesbank
and member of the ECB Governing Council, and Jürgen Stark, then the ECB
Board Member in charge of its Directorate General Economics. The 2012
announcement of potentially unlimited future Outright Monetary Transactions
(OMT) was publicly opposed by Jens Weidmann, Weber’s successor as Bundesbank
President, and has been criticized heavily by former ECB Board Members Otmar
Issing and Jürgen Stark, while Stark’s successor, Jörg Asmussen, turned out
to be a staunch supporter of this policy. Weidmann and Asmussen have been
called to testify during the hearings of the Federal Constitutional Court on
June 11- 12, 2013 on the legitimacy of the OMT. In this note, we review the
legal issues and concerns regarding the OMT that will be the focus of the
Court’s deliberations and discuss potential outcomes. ...
Posted by Mark Thoma on Thursday, June 13, 2013 at 11:12 AM
Two For Tapering, by Tim Duy: Today's data was supportive of the Fed scaling back its asset purchase
program sooner than later - although it is important to clarify that "sooner"
does not mean next week, but September. Later is December. Data dependent, of
course. But the data is not yet taking the kind of downward turn needed to turn
talk away from tapering.
Retail sales rose 0.6% in May, slightly ahead of expectations of a 0.5% gain.
Excluding autos and gas, the general upward trend of recent months is steady:
That said, the pace of growth isn't exactly something to get excited about:
At best, year-over-year growth is just pulling back into the range seen for most
of 2012. We are getting spending growth, just not as much as would normally be
seen in an expansion. That lack of growth, however, was evident before the
tapering talk emerged, suggesting that the Fed does not see the current pace of
activity as an impediment to tapering. Talk about diminished expectations....
Somewhat more optimistic was the drop in initial unemployment claims:
Volatile data, to be sure, but I still don't see reason to believe the downward
trend is broken. We are heading into a range generally consistent with solid
job growth, a key focus of monetary policymakers as they assess the pace of
Separately, Zero Hedge
is quoting economist David Rosenberg:
From what I hear, Ben Bernanke convinced the FOMC in December that in
order to get ahead of a potential 'fiscal cliff' in December, it was a
matter of having to 'shoot first and ask questions later'. In other words,
take a pre-emptive strike in December against the prospect of falling off
the proverbial cliff and into recession in the opening months of 2013. But
what happened next was a fiscal deal that was reached in early January and
the economy faced a hill, not a cliff. The economy still faces near-term
sequestering hurdles, but the reality is that a bold policy move aimed at
thwarting off recession is now being reconsidered. Bernanke
apparently told the hawks on the FOMC that if the economy was not in
contraction mode by now, the 'tapering off' talk would ensue — and that is
exactly what has happened.
An interesting anecdote, and, if true, suggests that Federal Reserve Chairman
Ben Bernanke is not quite the dove many believe him to be. Moreover, it would be
consistent with my belief that Bernanke uses the next press conference to clear
the way for tapering.
Finally, Edward Harrison, in his review of global market volatility (behind
paywall), worries that the worst is still ahead of us with regards to fiscal
In North America, the talk is of tapering and the markets are in a tissy.
It shows you that QE is really about risk-on risk-off and the markets are
moving to risk off because they don’t believe in the Bernanke put anymore.
In the real economy, it’s stall speed and I expect it to stay that way until
Q4, when the next year of fiscal cuts come. The Republicans are now ready to
make serious cuts to defense. Someone I know who does budgeting at Defense
told me no one made any real cuts this year because they had budget
headroom. The real cuts are coming in FY 2014. I think FY 2014 is going to
The Fed is thinking the impact of fiscal contraction will fade as 2013
progresses. Harrison is suggesting this is wishful thinking.
Bottom Line: Today's data appears consistent with Fed expectations that they
can begin tapering asset purchases this year. Still a horse race between
September and December, although I think the Fed is aiming for the earlier date
if data allows.
Posted by Mark Thoma on Thursday, June 13, 2013 at 09:48 AM in Economics, Fed Watch, Monetary Policy |
Paul Krugman comments on the Alan Krueger speech (see the
post below this one):
Is This (Still) The Age of the Superstar?: This will be a quick piece...
Alan Krueger gave a
fun talk at the Rock and Roll Hall of Fame, in which he used evidence of
growing inequality among musical artists as a jumping off point for a
discussion of broader inequality issues. As he notes, there is a widely
known theory from Rosen actually called the superstar theory, which could
explain the takeoff of the 1 percent, in rock and in life.
But I was struck by the fact that his chart of growing inequality in the
music business cut off in 2003. A lot has happened in the decade since:
basically, the music business has been hugely disrupted by the Internet. I’d
be very curious to know whether that hasn’t changed the calculus...
And we also seem to be seeing a general shift in the sources of rising
inequality, from inequality in compensation to good old-fashioned capital
So I wonder if even Alan Krueger is now behind the curve here — and in any
case I’d love to see how the trend for the music business looks since 2003.
A quick comment on this "quick piece". Inequality can arise for many reasons,
e.g. differences in economic power that distort income shares, capture of the
political system by the wealthy, skill-biased technical change, and so on, and
the debate is often cast as one versus the other. But the causes are not
mutually exclusive and may, in some cases, reinforce each other (e.g. economic
inequality from skill-biased technical change leading to political inequality
and a political bias against unions, or, changes in production techniques that
make it harder to disrupt production with a strike can undermine union power).
Endless debate on the one true cause of rising inequality is fruitless when
there is, as I believe, evidence of multiple causes -- both sides can point to
evidence favoring their position leading to a standoff that can forestall needed
policy changes. Better to acknowledge that both sides have a point, and move on to the push for policies that are robust against the underlying cause (or separate policies to address each type of problem).
Posted by Mark Thoma on Thursday, June 13, 2013 at 08:31 AM in Economics, Income Distribution, Policy, Politics |
Posted by Mark Thoma on Thursday, June 13, 2013 at 12:03 AM in Economics, Links |
Insurance Tyranny: Many of us wish that Obamacare were a simpler
system... Political reality, unfortunately, ensured that many people will
receive coverage from private insurers, selling policies — often with
subsidies — on the "exchanges". And naturally enough, the Obama
administration is teaming up with the insurers... to help inform Americans of the benefits to which they will be
legally entitled, starting Jan. 1.
And in the eyes of Republicans, Bloomberg
reports, this makes Obama a “bully” — dragooning those private companies
into helping sell a public program that will increase their profits. Why,
it’s tyranny, I tell you!
Yes, it’s ridiculous. But they can’t help themselves. I suspect that the
idea of helping lower-income Americans in any way would drive the GOP
bonkers; but the idea that this help might come from Obama (implementing a
program originally designed by Republicans, but never mind), and that
Obama’s plan might actually work, drives them crazy.
Posted by Mark Thoma on Wednesday, June 12, 2013 at 03:11 PM in Economics, Health Care, Politics |
How to reinvigorate the centre-left? Predistributionm by Jacob Hacker,
guardian.co.uk: ... Center-left progressives seem to have lost their
ability to provide a clear alternative to either current conservative
nostrums, or the "third way" many of them staked out before the fall.
The only way out is a new governing approach – one that I have
infelicitously called "predistribution", but which can be more simply summed
up as "making markets work again for the middle class". Third way jujitsu
rested on two maxims: let markets be markets, and use redistribution to
clean up afterward. For the left, this has proved fatal... [explains why,
Predistribution may not be a catchy slogan, but the left does not need more
slogans. It needs to take a cold, hard look at the concessions made to the
rhetorical and political triumphs of the right. Yes, inequality is a global
trend. Yes, globalization places real limits on economic strategies. Yes,
labor is weaker, and must be retooled and supplemented. And yes, the state
cannot do everything. But there is a vital place for active governance in
the 21st century economy, and not just in softening the sharp edges of
capitalism. Now more than ever, governments need to step in with boldness
and optimism to make markets work for the middle class.
I don't quite agree with the description of the "third way" -- let markets
work and clean up afterwards. For me, markets only work if they are reasonable
approximations of the classic textbook case of "pure competition." The first
step for the third way then is to correct market failures that cause significant
departures from this ideal (including how income is distributed). I wish the
article had done more to emphasize this aspect of the problem since it's an
essential element of his call for "making markets work again for the middle
class" (it does so indirectly, e.g. the call for worker organizations recognizes
unequal market/negotiating power over wages, and the call for public goods and a
reduction in carbon emissions, but it does not recognize this as part of the
"'third way' many [center-left progressives] staked out before the fall" and I'd like to see the general market failure problem receive more emphasis).
The second thing to realize is that market outcomes depend upon the initial
distribution of income and wealth. If initial allocations are highly unequal, as
they are presently, the market outcome will reflect that.
How to correct this? One way is to equalize opportunity, and I fully agree
with all his recommendations that push in this direction (this seems to be the
essence of predistribution -- but you'll need to read the article for the full
description of what predistribution means). But some correction of past
inequities through post-distribution may be necessary to sufficiently
equalize opportunity. Otherwise, those inequities will be perpetuated even with
reasonably competitive markets and reasonably equal opportunity.
For a long time I believed that equal opportunity, sufficiently competitive
markets, and equitable initial allocations of wealth would be enough. Everyone
has a fair chance, so there was no reason to worry about inequality of outcomes.
But it may be that even under those conditions rising inequality will continue.
For example, if technology continues to wipe out the middle class even
after we've provided education, health, and so on to everyone, then some degree
post-distribution may be necessary to prevent an ever widening income gap.
That's a position -- a fair start may still produce inequities that will
subsequently be perpetuated if we don't intervene -- I've come to reluctantly.
I'm fully on board with predistribution, but the article seems to deemphasize
post-distribution, in part because the wealthy have the political power to
Redistribution itself is never popular. Citizens want a job and
opportunities for upward mobility more than a public cheque. Meanwhile, the
super-wealthy loudly resent the increased tax bite they face – and have
enormous political influence to back up their complaints.
But he does add:
Taxation and redistribution are cornerstones of progressive governance
Again, let's work on instituting the ideas behind the label "predistribution."
But I think it would be a big mistake to, at the same time, deemphasize
the need for post-distribution. That day may come, but we aren't there yet.
Posted by Mark Thoma on Wednesday, June 12, 2013 at 08:21 AM in Economics, Income Distribution, Market Failure, Politics |
Posted by Mark Thoma on Wednesday, June 12, 2013 at 12:03 AM in Economics, Links |
Via Jared Bernstein:
S&P Revises Up Its Outlook for US Debt: Markets Yawn, by Jared Bernstein:
Perhaps you recall back in August of 2011 when S&P’s credit rating agency
downgraded US debt…no?? ... Markets shook it off, maybe because a) it didn’t
make a lick of sense at
the time, b)
the credit raters hadn’t exactly distinguished themselves during the debt
Well today they revised their outlook from “negative” to “stable.” And
again, I expect no one to notice.
In fact, here’s the trajectory of 10-year Treasury yields since the
downgrade, wherein you see a conspicuous lack of reaction to the downgrade.
I often poke at financial markets for not being as all-knowing as assumed,
but in this case, I gotta give it up: they correctly ignored
Ratings agencies are supposed to solve an asymmetric information problem -- buyers are not as well informed about assets as sellers -- but if nobody trusts them (because the often add noise rather than clarity), what use are they?
Posted by Mark Thoma on Tuesday, June 11, 2013 at 12:57 PM in Economics, Financial System, Market Failure |
Bullard Holds His Ground, by Tim Duy: St. Louis Federal Reserve President James Bullard reaffirmed his commitment
to the current policy stance. From his
“Labor market conditions have improved since last summer, suggesting the
Committee could slow the pace of purchases, but surprisingly low inflation
readings may mean the Committee can maintain its aggressive program over a
longer time frame,” Bullard concluded.
This is not surprising. Bullard has long been more focused on the
implications of inflation for policy, believing that employment is largely out
of the Fed's hands at this point. More from
"What's not encouraging in this picture is that it's (inflation) just
going down and so far it hasn't moved back at all. So I would have expected
our very aggressive purchase program to turn that process, inflation
expectations would go up and actual inflation would follow behind, which is
what happened in the QE2 period," said St. Louis Fed President James
I think that Bullard is something of an outlier at this point. Ongoing
declines in inflation would eventually cause his worries to spread further
through the Fed, and could very well delay any effort to cut back on asset
purchases. That, however, is not the baseline case. As a general rule,
policymakers are more focused on the path of unemployment, which leads them to
expect tapering to begin as early as in a few months. See Robin Harding
On the subject of tapering, Jon Hilsenrath
had this to say over the weekend:
The hangup for Fed officials is the word “tapering” suggests a slow,
steady and predictable reduction from the current level of $85 billion a
month at a succession of Fed meetings, say to $65 billion per month, then to
$45 billion and so on. And that’s not necessarily what Fed officials
Because Fed officials are uncertain about the economic outlook and the
pros and cons of their own program, they might reduce their bond purchases
once and then do nothing for a while. Or they might cut their bond buying
once and then later increase it if the economy falters. Or they might indeed
reduce their purchases in a series of steps if warranted by economic
developments — but they don’t want the markets to think that’s a set plan.
It is, as Fed officials like to say, “data dependent.”
Which is interesting given that Bullard
had this to say regarding inflation and policy:
"Maybe this is noise in the data, maybe this will turn around, but I'd
like to see some reassurance that this is going to turn around before we
start to taper our asset purchase program," he said.
If the Fed wants us to stop using the word "taper," they will need to take
the lead. Or is Bullard just being honest - any reasonable forecast matched
against their past behavior suggests the Fed tapers. On financial stability,
Bullard adds this:
He noted that the Fed remains vigilant about the potential for financial
market excess in the U.S. “An important concern for the FOMC is that low
interest rates can be associated with excessive risk-taking in financial
markets,” Bullard said. “So far, it appears that this type of activity
has been limited since the end of the recession in 2009.” While the
Dodd-Frank Act is meant to help contain some dimensions of this activity,
“Still, this issue bears careful watching: Both the 1990s and the
2000s were characterized by very large asset bubbles,” he added.
The Fed is keeping an eye out for bubbles, but the bulk of policymakers
aren't finding them. Consequently, the issue of financial stability is not a
primary driver of policy. At best it is a distant third, far behind
unemployment first and inflation second.
Bottom Line: Bullard remains focused on inflation. If his colleagues were
to join him, they would stop pointing us toward cutting asset purchases in the
next few months. As a general rule, however, for now low inflation is seen as
an aberration, not the forecast.
Posted by Mark Thoma on Tuesday, June 11, 2013 at 12:33 AM in Economics, Fed Watch, Inflation, Monetary Policy |
Alan Blinder says "the fiscal cupboard is not bare":
Fiscal Fixes for the Jobless Recovery, by Alan Blinder, Commentary, WSJ:
Do you sense an air of complacency developing about jobs in Washington and
in the media? ... The Brookings Institution's Hamilton Project ...
estimates ... the "jobs gap" ... is 9.9 million jobs.
... So any complacency is misguided. Rather, policy makers should be running
around like their hair is on fire. ...
The Federal Reserve has worked overtime to spur job creation, and there is
not much more it can do. Fiscal policy, however, has been worse than AWOL—it
has been actively destroying jobs. ... So Congress could make a good start
on faster job creation simply by ending what it's doing—destroying
government jobs. First, do no harm. But there's more.
Virtually since the Great Recession began, many economists have suggested
offering businesses a tax credit for creating new jobs. ... You might imagine that Republicans would embrace an idea like that. After
all, it's a business tax cut... But you would be wrong. Maybe it's because
President Obama likes the idea. Maybe he should start saying he hates it.
Another sort of business tax cut may hold more political promise. ...
Suppose Congress enacted a partial tax holiday that allowed companies to
repatriate profits held abroad at some bargain-basement tax rate like 10%.
The catch: The maximum amount each company could bring home at that low tax
rate would equal the increase in its wage payments as measured by Social
My general point is that the fiscal cupboard is not bare. There are things
we could be doing to boost employment right now. That we are not doing
anything constitutes malign neglect of the nation's worst economic problem
Posted by Mark Thoma on Tuesday, June 11, 2013 at 12:15 AM in Economics, Fiscal Policy, Taxes, Unemployment |
A bit truncated today -- nothing after 1:30 pm PST -- I'll update later if I can.
Posted by Mark Thoma on Tuesday, June 11, 2013 at 12:03 AM in Economics, Links |
Why don't politicians care about the unemployed?:
The Big Shrug, by Paul Krugman, Commentary, NY Times: ...For more than
three years some of us have fought the policy elite’s damaging obsession
with budget deficits ... that led governments to cut investment when they
should have been raising it, to destroy jobs when job creation should have
been their priority. That fight seems largely won —... I don’t think I’ve
ever seen anything quite like the sudden intellectual collapse of austerity
economics as a policy doctrine.
But while insiders no longer seem determined to worry about the wrong
things, that’s not enough; they also need to start worrying about the right
things — namely, the plight of the jobless and the immense continuing waste
from a depressed economy. And that’s not happening. Instead, policy makers
both here and in Europe seem gripped by a combination of complacency and
fatalism, a sense that nothing need be done and nothing can be done. Call it
the big shrug.
Even the people I consider the good guys ... aren’t showing much sense of
urgency these days. For example,... the Federal Reserve’s ... talk of “tapering,” of
letting up on its efforts, even though inflation is below target, the
employment situation is still terrible and the pace of improvement is
glacial at best. ...
Why isn’t reducing unemployment a major policy priority? One answer may be
that inertia is a powerful force... As long as we’re adding jobs, not losing
them, and unemployment is basically stable or falling ... policy makers
don’t feel any urgent need to act.
Another answer is that the unemployed don’t have much of a political voice.
... A third answer is that while we aren’t hearing so much these days from
the self-styled deficit hawks, the
monetary hawks ... have, if anything, gotten even more vociferous. It
doesn’t seem to matter that the monetary hawks, like the fiscal hawks, have
an impressive record of being wrong about everything (where’s that runaway
inflation they promised?). ...
The tragedy is that it’s all unnecessary. Yes, you hear talk about a “new
normal”..., but all the reasons given for this ... fall apart when subjected
to careful scrutiny. If Washington would reverse its destructive budget
cuts, if the Fed would show the “Rooseveltian resolve” that Ben Bernanke demanded of
Japanese officials back when he was an independent economist, we would
quickly discover that there’s nothing normal or necessary about mass
So here’s my message to policy makers: Where we are is not O.K. Stop
shrugging, and do your jobs.
Posted by Mark Thoma on Monday, June 10, 2013 at 12:24 AM in Budget Deficit, Economics, Inflation, Politics, Unemployment |
Posted by Mark Thoma on Monday, June 10, 2013 at 12:03 AM in Economics, Links |
Spent the day in
Albi, France and rented a car to go to painted caves (Grotte
de Niaux) and a castle (Chateau de
Montsegur) tomorrow (both were suggestions from the conference). I travel home
the next day so -- though I don't usually do this -- limited blogging.
Every once in awhile I kind of need a bit of a break, so I
decided to stay in Toulouse a few extra days. I ran out
of energy a few weeks ago (as you may have noticed) and need to recharge so I can get back to it once I return to
Eugene. I'll do
my best until then, daily links at least somehow and short "echo" posts as usual, but I
doubt I'll have time to say much myself -- we'll see how it goes (running out of energy plus travel also explains the lack of posts
from me the last week or so, and I have quite a bit of travel yet to come this summer).
I'm reluctant to do this -- I find it really hard to back off -- and I'll probably end up posting more than I expect. Again, we'll see how it goes.
[There's a reason I haven't missed a day posting to the blog
in over eight years. When I first started, I was afraid that if I missed a day new readers would bail out -- I didn't want a new reader to return the next day and and find the same posts they had already seen and conclude it wasn't a very active site -- so I made sure that didn't happen. I realize a missed day
won't kill the blog at this point, but it's still important to me to keep
posting every day.]
One other blogging note: I sent the first set of "whitelisted commenters" to TypePad, and they are passing them along to the service that does comment filtering for them, but I don't know how long it will take to process the list (I also sent a second list awhile ago, and will continue doing so until it this is fixed).
Posted by Mark Thoma on Sunday, June 9, 2013 at 01:11 PM in Economics, Weblogs |
The overly humble Sheila Bair:
Everything the IMF wanted to know about financial regulation and wasn’t
afraid to ask, by Sheila Bair, Vox EU: I was honored when the IMF asked
me to moderate the Financial Regulation panel at this year’s Rethinking
Macro II conference. And while naturally, I delivered one of the more
enlightening and thought-provoking policy discussions of the conference, I
did fail in my duties as moderator to make sure my panelists covered all the
excellent questions our sponsors submitted to us. Of course, this was to be
expected, as panelists at these types of events almost never address the
topics requested of them (I certainly never do), but rather, like
Presidential candidates, answer the questions they want to answer. However,
being the conscientious person I am, who accepts responsibility for my
mismanagement (unlike some bank CEOs we know), I will now step up and answer
those questions myself.
1) Does anybody have a clear vision of the desirable financial system of the
Yes, me. It should be smaller, simpler, less leveraged and more focused on
meeting the credit needs of the real economy. And oh yes, we should ban
speculative use of credit default swaps from the face of the planet.
2) Is the ATM the only useful financial innovation of the last thirty years?
No. If bankers approach the business of banking as a way to provide greater
value at less cost to their customers, (I know – for a few bankers, that
might be a big 'if') technology provides a virtual gold mine for product
innovations. For instance, I am currently testing out a pre-paid, stored
value card which lets me do virtually all my banking on my I-phone. It
tracks expenses, tells me when I’ve blown my budget, and lets me temporarily
block usage of the card when my daughter, unbeknownst to me, has pulled it
out of my wallet to buy the latest jeans from Aeropostale. The card, aptly
called Simple, was engineered by two techies in Portland, Oregon. (Note to
mega-banks: ditch the pin stripes for dockers and flip flops. The techies
are coming for you next.)
3) Does the idea of a safe, regulated, core set of activities, and a less
safe, less regulated, non-core make sense?
The idea of a safe, regulated, core set of activities with access to the
safety net (deposit insurance, central bank lending) and a less safe, MORE
regulated, noncore set of activities which DO NOT UNDER ANY CIRCUMSTANCES
have access to the safety net – that makes sense.
4) How do the different proposals (Volcker rule, Liikanen, Vickers) score in
Put them all together and you are two-thirds of the way there. The Volcker
Rule acknowledges the need for tough restrictions on speculative trading
throughout the banking organization, including securities and derivatives
trading in the so-called “casino bank”. Liikanen and Vickers acknowledge the
need to firewall insured deposits around traditional commercial banking and
force market funding of higher risk “casino” banking activities. Combining
them would give us a much safer financial system.
But none of these proposals fully address the problem of excessive risk
taking by non-bank financial institutions like AIG. Title I of Dodd-Frank
empowers the Financial Stability Oversight Council to bring these kinds of
“shadow banks” under prudential supervision by the Fed. Of course, that law
was enacted three years ago and for nearly two years now, the regulators
have promised that they will be designating shadow banks for supervisory
oversight “very soon”. This was repeated most recently by Treasury Secretary
Jack Lew on 22 May 2013, before the Senate Banking Committee (but this time
he REALLY meant it). For some reason, the Fed and Treasury Department were
able to figure out that AIG and GE Capital were systemic in a nano-second in
2008 when bailout money was at stake, but when it comes to subjecting them
to more regulation now, well, hey we need to be careful here.
5) How much do higher capital ratios actually affect the efficiency and the
profitability of banks?
You don’t have to be very efficient to make money by using a lot of leverage
to juice profits then dump the losses on the government when things go bad.
In my experience, the banks with the stronger capital ratios are the ones
that are better managed, do a better job of lending, and have more
sustainable profits over the long term, with the added benefit that they
don’t put taxpayers at risk and keep lending during economic downturns.
6) Should we go for very high capital ratios?
Yep. I’ve argued for a minimum leverage ratio of 8%, but I like John Vickers
10% even better (and yes, he put out that news-making number during my
7) Is there virtue in simplicity, for example, simple leverage rather than
capital ratios, or will simplicity only increase regulatory arbitrage?
The late Pat Moynihan once said that there are some things only a PhD can
screw up. The Basel Committee’s rules for risk weighting assets are Exhibit
These rules are hopelessly overcomplicated. They were subject to rampant
gaming and arbitrage prior to the crisis and still are. (If you don’t
believe me, read Senator Levin’s report on the London Whale.) A simple
leverage ratio should be the binding constraint, supplemented with a
standardized system of risk weightings to force higher capital levels at
banks taking undue risks. It is laughable to think that the leverage ratio
is more susceptible to arbitrage than the current system of risk weightings
given the way risk weights were gamed prior to the crisis, e.g. moving
assets to the trading book, securitizing loans to get lower capital charges,
wrapping high risk CDOs in CDS protection to get near-zero risk charges,
blindly investing in triple A securities, loading up on high-risk sovereign
debt, repo financing … need I go on?
8) Can we realistically solve the “too big to fail” problem?
We have to solve it. If we can’t, then nationalize these behemoths and pay
the people who run them the same wages as everyone else who work for the
9) Where do we stand on resolution processes, both at the national level and
Good progress, but not enough. Resolution authority in the US could be
operationalized now, if necessary, but it would be messy and unduly
expensive for creditors. We need thicker cushions of equity at the
mega-banks, minimum standards for both equity and long-term debt issuances
at the holding company level to facilitate the FDIC’s “single point of
entry” strategy, and most importantly, we need regulators who make clear
that they have the guts to put a mega-bank into receivership. The industry
says they want to end “too big to fail” but they aren’t doing everything
they can to make sure resolution authority works smoothly. For instance,
industry groups like ISDA could greatly facilitate international resolutions
by revising global standards for swap documentation to recognise the
government’s authority to require continued performance on derivatives
contracts in a Dodd-Frank resolution.
10) Can we hope to ever measure 'systemic risk'?
Yes. It’s all about inter-connectedness which mega-banks and regulators
should be able to measure. Ironically, inter-connectedness is encouraged by
those %$#@& Basel capital rules for risk weighting assets. Lending to IBM is
viewed 5 times riskier as lending to Morgan Stanley. Repos among financial
institutions are treated as extremely low risk, even though excessive
reliance on repo funding almost brought our system down. How dumb is that?
We need to fix the capital rules. Regulators also need to focus more
attention on the credit exposure reports that are required under Dodd-Frank.
These reports require mega-banks to identify and quantify for regulators how
exposed they are to each other. Mega-bank failure scenarios should be
factored into stress testing as well.
[Since these questions relate to financial regulation, I will not opine on
measuring systemic risks building as a result of loose monetary policy.]
10) Are banks in effect driving the reform process?
Sure seems that way.
11) Can regulators ever be as nimble as the regulatees?
Yes. Read Roger Martin’s Fixing the Game. Financial regulators should look
to the NFL for inspiration.
12) Given the cat and mouse game between regulators and regulatees, do we
have to live with regulatory uncertainty?
Simple regulations which focus on market discipline and skin-in-the-game
requirements are harder to game and more adaptable to changing conditions
than rules which try to dictate behavior. For instance, thick capital
cushions will help ensure that whatever dumb mistakes banks may make in the
future (and they will), there will be significant capacity to absorb the
resulting losses. Unfortunately, the trend has been toward complex,
prescriptive rules which smart banking lawyers love to exploit. Industry
generally likes the prescriptive rules because they always find a way around
them, and the regulators don’t keep up.
You can see that dynamic playing out now, where the securitization industry
is seeking to undermine a Dodd-Frank requirement that securitizers take 5
cents of every dollar of loss on mortgages they securitize. They say risk
retention is no longer required because the Consumer Bureau has promulgated
mortgage lending standards. But these rules are pretty permissive (no down
payment requirement, and a whopping 43% debt-to-income ratio) and I’m sure
that the Mortgage Bankers Association is already trying to figure out ways
to skirt them.
Rules dictating behavior can sometime be helpful, but forcing market
participants to take the losses from their risk-taking can be much more
effective. One approach tells them what kinds of loans they can make. The
other says that whatever kind of loans they make, they will take losses if
those loans default.
Posted by Mark Thoma on Sunday, June 9, 2013 at 12:24 AM
Haven't checked in with Robert Reich for awhile:
The Quiet Closing of Washington, by Robert Reich: Conservative
Republicans in our nation’s capital have managed to accomplish something
they only dreamed of when Tea Partiers streamed into Congress at the start
of 2011: They’ve basically shut Congress down. Their refusal to compromise
is working just as they hoped: No jobs agenda. No budget. No grand bargain
on the deficit. No background checks on guns. Nothing on climate change. No
tax reform. No hike in the minimum wage. Nothing so far on immigration
It’s as if an entire branch of the federal government — the branch that’s
supposed to deal directly with the nation’s problems, not just execute the
law or interpret the law but make the law — has gone out of business...
But the nation’s work doesn’t stop even if Washington does. By default, more
and more of it is shifting to the states, which are far less gridlocked than
Washington. Last November’s elections resulted in one-party control of both
the legislatures and governor’s offices in all but 13 states — the most
single-party dominance in decades.
This means many blue states are moving further left, while red states are
heading rightward. In effect, America is splitting apart without going
through all the trouble of a civil war. ... [gives several examples] ...
Federalism is as old as the Republic, but not since the real Civil War have
we witnessed such a clear divide between the states on central issues
Some might say this is a good thing. It allows more of us to live under
governments and laws we approve of. And it permits experimentation: Better
to learn that a policy doesn’t work at the state level, where it’s affected
only a fraction of the population, than after it’s harmed the entire nation.
As the jurist Louis Brandies once said, our states are “laboratories of
But the trend raises three troubling issues.
First, it leads to a race to bottom. ...
Second, it doesn’t take account of spillovers — positive as well as
Finally, it can reduce the power of minorities. ...
A great nation requires a great, or at least functional, national
government. The Tea Partiers and other government-haters who have caused
Washington to all but close because they refuse to compromise are
threatening all that we aspire to be together.
Posted by Mark Thoma on Sunday, June 9, 2013 at 12:15 AM in Economics, Politics |
Posted by Mark Thoma on Sunday, June 9, 2013 at 12:03 AM in Economics, Links |
Comments on this?:
What is the price of freedom?, by James Choi: Are some things still
worth dying for? Is the American idea one such thing? Are you up for a
thought experiment? What if we chose to regard the 2,973 innocents killed in
the atrocities of 9/11 not as victims but as democratic martyrs, “sacrifices
on the altar of freedom”? In other words, what if we decided that a certain
baseline vulnerability to terrorism is part of the price of the American
idea? And, thus, that ours is a generation of Americans called to make great
sacrifices in order to preserve our democratic way of life—sacrifices not
just of our soldiers and money but of our personal safety and comfort? In
still other words, what if we chose to accept the fact that every few years,
despite all reasonable precautions, some hundreds or thousands of us may die
in the sort of ghastly terrorist attack that a democratic republic cannot
100-percent protect itself from without subverting the very principles that
make it worth protecting? Is this thought experiment monstrous? Would it be
monstrous to refer to the 40,000-plus domestic highway deaths we accept each
year because the mobility and autonomy of the car are evidently worth that
high price? ... What are the effects on the American idea of Guantánamo, Abu
Ghraib, PATRIOT Acts I and II, warrantless surveillance, Executive Order
13233, corporate contractors performing military functions, the Military
Commissions Act, NSPD 51, etc., etc.? Assume for a moment that some of these
measures really have helped make our persons and property safer—are they
worth it? --David Foster Wallace, The Atlantic, on the
trade-off between liberty and security.
Posted by Mark Thoma on Saturday, June 8, 2013 at 09:55 AM in Economics, Terrorism |
Just a quick note to say how impressed I've been with the progress that
The Toulouse School of
Economics (TSE) has made in attracting first-rate scholars to their program.
They have an excellent department -- I didn't realize how excellent it was until
I got here (which, I suppose, was part of the reason to bring me here to the TIGER forum). I talked
to Olivier Blanchard a bit about the progress that Europe more generally has
made in economics, and he told me that there were some fairly special conditions
that allowed Toulouse to make such great progress, and he also cited a few other
universities that have also made large strides (again, also due to special
conditions, in particular having advocates within the bureaucratic structure).
But, special conditions or not, it is clear that Europe is making more progress
than I was aware of, and it has attracted far more high powered brain power in
macroeconomics than I realized (it is highly probable that the same is true in
microeconomics, but since I mainly attended the macrofinance seminars at this
conference, I can't speak to that first-hand -- but all the evidence points
strongly in that direction). The sessions I attended were every bit as good as
any NBER session, and the gains that Europe is making is an encouraging
development. If the universities that have made the greatest strides continue to
be successful, then perhaps lessons will be learned and it won't be necessary to
exploit special conditions to the same degree in order for European universities
to prosper academically (though there are significant institutional hurdles).
Toulouse itself is also a wonderful place to visit, and some of the
sessions/dinners were hold in awesome places (e.g. Trichet's talk was at at the
Augustins museum). The hospitality has been unsurpassed (thanks to Paul
Seabright for all the tips about places to visit while I'm here, this is my
first time to France so I really appreciated that and am taking full advantage
of his suggestions). If you get a chance to attend this conference, go for it!
I'm looking forward to returning in 2014 (this was their first attempt, and it
will only get better in future years).
Posted by Mark Thoma on Saturday, June 8, 2013 at 09:42 AM in Economics, Universities |
Good news. TypePad says they can now "whitelist" specific commenters, so when I release your comments from here on I will also send them the info they need to add you to the list. *If* this works, it should help quite a bit.
Posted by Mark Thoma on Saturday, June 8, 2013 at 05:33 AM in Economics, Weblogs |
Posted by Mark Thoma on Saturday, June 8, 2013 at 12:03 AM in Economics, Links |
Total information awareness?, Understanding Society: I'm finding myself
increasingly distressed at this week's revelations about government
surveillance of citizens' communications and Internet activity. First was
the revelation in the Guardian of a wholesale FISA court order to
Verizon to provide all customer "meta-data" for a three-month period -- and
the clarification that this order is simply a renewal of orders that have
been in place since 2007. (One would certainly assume that there are similar
orders for other communications providers.) And commentators are now
spelling out how comprehensive this data is about each of us -- who we call,
who those people call, when, where, … This comprehensive data collection
permits the mother of all social network analysis projects -- to reconstruct
the widening circles of persons with whom person X is associated. This is
its value from an intelligence point of view; but it is also a dark,
brooding risk to the constitutional rights and liberties of all of us.
Second is the even more shocking disclosure -- also in the Guardian --
of an NSA program called PRISM that claims (based on the secret powerpoint
training document published by the Guardian) to have reached
agreements with the major Internet companies to permit direct government
access to their servers, without the intermediary of warrants and requests
for specific information. (The companies have denied knowledge of such a
program; but it's hard to see how the Guardian document could be a
simple fake.) And the document claims that the program gives the
intelligence agencies direct access to users' emails, videos, chats, search
histories, and other forms of Internet activity.
Among the political rights that we hold most basic are the rights of
political expression and association. It doesn't matter much if a government
agency is able to work out the network graph of people with whom I am
associated around the project of youth soccer in my neighborhood. But if I
were an Occupy Wall Street organizer, I would be VERY concerned about the
fact that government is able to work out the full graph of my associates,
their associates, and times and place of communication. At the least this
fact has a chilling effect on political organization and protest -- both of
which are constitutionally protected rights of US citizens. At the worst it
makes possible police intervention and suppression based on the
"intelligence" that is gathered. And the activities of the FBI in the 1960s
against legal Civil Rights organizations make it clear that agencies are
fully capable of undertaking actions in excess of their legal mandate. For
that matter, the rogue activities of an IRS office with respect to the
tax-exempt status of conservative political organizations illustrates the
same point in the same news cycle!
The whole point of a constitution is to express clearly and publicly what
rights citizens have, and to place bright-line limits on the scope of
government action. But the revelations of this week make one doubt whether a
constitutional limitation has any meaning anymore. These data collection and
surveillance programs are wrapped in tight secrecy -- providers are not
permitted to make public the requests that have been presented to them. So
the public has no legitimate way of knowing what kind of information
collection, surveillance, and intelligence activity is being undertaken with
respect to their activities. In the name of homeland security, the evidence
says that government is prepared to transgress what we thought of as
"rights" with abandon, and with massive force. (The NSA data center under
construction in Utah gives some sense of the massiveness of these data
We are assured by government spokespersons that appropriate safeguards are
in place to ensure and preserve the constitutional rights of all of us. But
there are two problems with those assurances, both having to do with
secrecy. Citizens are not provided with any account by government about how
these programs are designed to work, and what safeguards are incorporated.
And citizens are prevented from knowing what the exercise and effects of
these programs are -- by the prohibition against telecom providers of giving
any public information about the nature of requests that are being made
under these programs. So secrecy prevents the very possibility of citizen
knowledge and believable judicial oversight. By design there is no
transparency about these crucial new tools and data collection methods.
All of this makes one think that the science and technology of encryption is
politically crucial in the Internet age, for preserving some of our most
basic rights of legal political activity. Being able to securely encrypt
one's communications so only the intended recipients can gain access to them
sounds like a crucial right of self-protection against the surveillance
state. And being able to anonymize one's location and IP address -- through
services like TOR router systems -- also seems like an important ability
that everyone ought to consider making use of. Voice services like Skype
seem to be fully compromised -- Microsoft, the owner of Skype, was the first
company to accept the PRISM program, according to the secret powerpoint. But
perhaps new Internet-based voice technologies using "trust no one"
encryption and TOR routers will return the balance to the user.
Intelligence and law enforcement agencies sometimes suggest that only
people with something to hide would use an anonymizer in their interactions
on the Web. But given the MASSIVE personalized data collection that
government is engaged in, it would seem that every citizen has an interest
in preserving his or her privacy to whatever extent possible. Privacy is an
important human value in general; and it is a crucial value when it comes to
the exercise of our constitutional rights of expression and association.
Government has surely overstepped through creation of these programs of data
collection and surveillance; and it is hard to see how to put the genie back
in the bottle. One step would be the creation of much more stringent legal
limits on the data collection capacity of agencies like NSA (and commercial
agencies, for that matter). But how can we trust that those limits will be
respected by agencies that are accustomed to working in the dark?
Posted by Mark Thoma on Friday, June 7, 2013 at 02:03 PM in Economics, Technology |
In a long response to my complaint about coments and the post recommending people avoid TypePad (actually two responses after (I reactred a bitr negatively to the first), I'm told it's a top priority, blah, blah, assured it's more than lip service, and that:
We're also working on integrating Disqus as an option. That will take a lot of testing but it's in progress.
Hoping we'll get that option soon (or the spam filter begins behaving).
Posted by Mark Thoma on Friday, June 7, 2013 at 02:01 PM in Economics, Weblogs |
More of the Same, by Tim Duy: Unless you thought the job market tanked
in May, the employment report contained little if any new information. The
labor market continues to grind upward at a pace that most of us consider
subpar, but fast enough that monetary policymakers are willing to consider
pulling back on asset purchases as early as September. I don't see anything
is this report that will alter the Fed's rhetoric on tapering one way or the
other. Expect policymakers to continue to say "Not now, maybe in a few
Nonfarm payrolls rose 175k in May, just above the consensus forecast of
167k. March was revised up, April down, for a net loss of 12k compared to
previous estimates. The payroll gain was almost exactly the twelve-month
Taken in context of the Yellen indicators, tough to say that much has
The unemployment rate did tick up as the labor force rose. In theory, a
rapid rise in labor force participation could dissuade the Fed from tapering
as it would push back the expected date
of hitting the 6.5% unemployment threshold. But the little gain in this
month's report would be considered just noise at this point.
Other labor market indicators are generally holding their previous trends,
for better or worse:
The lack of wages gains is a disappointment and a clear signal that plenty
of slack remains in the labor market. That slack is revealed in
underemployment indicators, which remain elevated and making only gradual
A hint of good news in the decline of those not in the labor force, but
available for work. Perhaps an early sign of a more general acceleration in
labor markets? Too early to tell, but something to watch.
Bottom line: An unexciting report. Little to change the view that the
economy continues to shuffle forward despite the numerous negative shocks
since the recovery began. At best, some hints of future strength in the
labor force gains. Overall, little reason to believe the employment report
will alter thinking on Constitution Ave.
Posted by Mark Thoma on Friday, June 7, 2013 at 08:28 AM in Economics, Fed Watch, Monetary Policy, Unemployment |
Why are many Republican-dominated states opting out of Obamacare's federally financed expansion of Medicaid?:
The Spite Club, by Paul Krugman, Commentary, NY Times: House
Republicans have voted 37 times to repeal ObamaRomneyCare... Nonetheless,
almost all of the act will go fully into effect at the beginning of next
There is, however, one form of obstruction still available to the G.O.P.
Last year’s Supreme Court decision upholding the law’s constitutionality
also gave states the right to opt out of one piece of the plan, a federally
financed expansion of Medicaid. Sure enough, a number of
Republican-dominated states seem set to reject Medicaid expansion, at least
And why would they do this? ... The ... only way to understand the refusal to expand Medicaid is as an act
of sheer spite. And the cost of that spite won’t just come in the form of
lost dollars; it will also come in the form of gratuitous hardship for some
of our most vulnerable citizens. ...
A new study from the RAND Corporation ... examines the consequences if 14
states whose governors have declared their opposition to Medicaid expansion
do, in fact, reject the expansion. The result ... would be a huge financial
hit: the rejectionist states would lose more than $8 billion a year in
federal aid, and would also find themselves on the hook for roughly $1
billion more to cover the losses hospitals incur when treating the
Meanwhile, Medicaid rejectionism will deny health coverage to roughly 3.6
million Americans, with essentially all of the victims living near or below
the poverty line. And since past experience shows that Medicaid expansion is
associated with significant declines in mortality, this would mean a lot of
avoidable deaths: about 19,000 a year, the study estimated.
Just think about this... It’s one thing when politicians refuse
to spend money helping the poor and vulnerable; that’s just business as
usual. But here we have a case in which politicians are, in effect, spending
large sums, in the form of rejected aid, not to help the poor but to hurt
And ... it doesn’t even make sense as cynical politics. ... What it might do
... is drive home to lower-income voters — many of them nonwhite — just how
little the G.O.P. cares about their well-being, and reinforce the already
strong Democratic advantage among Latinos, in particular.
Rationally, in other words, Republicans should accept defeat on health care,
at least for now, and move on. Instead, however, their spitefulness appears
to override all other considerations. And millions of Americans will pay the
Posted by Mark Thoma on Friday, June 7, 2013 at 02:45 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Friday, June 7, 2013 at 12:03 AM in Economics, Links |
I just let Typepad know that the comment situation is unacceptable. They need to allow me to approve commenters by IP so this doesn't happen, fix it themselves, or I am going to have to switch to a new blog provider. I can't take this much longer.
For now, if you are thinkig of starting a blog, I'd recommend something other than Typepad.
Posted by Mark Thoma on Thursday, June 6, 2013 at 06:38 AM in Economics, Weblogs |
The Hidden Jobless Disaster, by Edward Lazear, Commentary, WSJ: The ...
unemployment rate is not the best guide to the strength of the labor market,
particularly during this recession and recovery. Instead, the Fed and the
rest of us should be watching the employment rate. There are two reasons.
First, the better measure of a strong labor market is the proportion of the
population that is working, not the proportion that isn't. ... By this
measure, the labor market's health has barely changed over the past three
Second... Every time the unemployment rate changes, analysts and reporters
try to determine whether unemployment changed because more people were
actually working or because people simply dropped out of the labor market
entirely, reducing the number actively seeking work. The employment
rate—that is, the employment-to-population ratio—eliminates this issue by
going straight to the bottom line...
While the unemployment rate has fallen over the past 3½ years, the
employment-to-population ratio has stayed almost constant at about 58.5%,
well below the prerecession peak. ...
The U.S. is not getting back many of the jobs that were lost during the
recession. At the present slow pace of job growth, it will require more than
a decade to get back to full employment defined by prerecession standards.
No problems so far, but the next part goes off the rails:
Why have so many workers dropped out of the labor force and stopped actively
seeking work? Partly this is due to sluggish economic growth. But research
by the University of Chicago's Casey Mulligan has suggested that because
government benefits are lost when income rises, some people forgo poor jobs
in lieu of government benefits—unemployment insurance, food stamps and
disability benefits among the most obvious. ...
These disincentives to seek work may also help explain the unusually high
proportion of the unemployed who have been out of work for more than 26
If the Mulligan story doesn't hold, then the conclusion about QE below
doesn't hold either (notice the qualifier "may" in Lazear's statement
"disincentives to seek work may also help explain the unusually high proportion
of the unemployed")
The Fed may draw two inferences from the experience of the past few years.
The first is that it may be a very long time before the labor market
strengthens enough to declare that the slump is over. The lackluster job
creation and hiring that is reflected in the low employment-to-population
ratio has persisted for three years and shows no clear signs of improving.
The second is that the various programs of quantitative easing (and other
fiscal and monetary policies) have not been particularly effective at
stimulating job growth. Consequently, the Fed may want to reconsider its
decision to maintain a loose-money policy until the unemployment rate dips
We don't know what job growth would have been without fiscal policy and QE --
it could have been even worse (as many econometric examinations imply).
Why am I skeptical about the claim above? There's no evidence that I'm aware
of that shows conclusively (or at all) that the supply of workers rather than
the demand for workers is the problem. That is, with the ratio of the number of
people seeking jobs to the number of available jobs so high, how is it that jobs
are going unfilled due to social insurance programs? Do we see, for example,
wages rising as firms have trouble finding workers (because they are all
enjoying the meager benefits they get so much that there is a shortage)?
Maybe I'm missing something, but if no jobs are going unfilled, then how are
social insurance programs holding back the recovery rather than making life a
bit less miserable for those who cannot find work?
Posted by Mark Thoma on Thursday, June 6, 2013 at 02:08 AM in Economics, Social Insurance, Unemployment |
The end of an era?:
Persuasion, Great and Intimate, by David Warsh: ...The
Great Persuasion: Reinventing Free Markets Since the Depression by Angus
Burgin, of Johns Hopkins University ... is the latest of a lengthening shelf
of books by intellectual historians that seek to explain the election of
Ronald Reagan in 1980 in terms of the influence of ideas or money or both.
To most of those writing the narrative of American politics in the 1970s,
the enthusiasm for markets and reduced government that accompanied “the
Reagan revolution” (or, earlier, the deregulation of transportation, under
Jimmy Carter, or finance, under Richard Nixon and Gerald Ford), seemed to
come out of nowhere. They were expecting, per Keynes and Schumpeter, “the
end of laissez-faire.”
Burgin’s argument is that a group of market advocates formed in the late
1930s, around a discussion of Walter Lippmann’s The Good
Society, then took flight after World War II as the Mont
Pelerin Society, and subsequently influenced the evolution of postwar
economic and political thought. That thought isn’t
new, but Burgin’s is the by far the best account of the organization’s
history. The MPS was the brainchild of Austrian economist and social
philosopher Friedrich von Hayek, then in the process of relocating from
London to Chicago. He intended the organization to be “something
halfway between a scholarly association and a political society.”
Thirty nine persons attended its first meeting, in April 1947, at a mountain
hotel near Vevey, Switzerland, on the north shore of Lake Geneva, not far
Among them were
economists (Hayek, Lionel Robbins, Maurice Allais, Fritz Machlup, Ludwig von
Mises, Frank Knight, Milton Friedman, George Stigler, Aaron Director);
philosophers (Karl Popper, Michael Polanyi, Bertrand de Jouvenal);
journalists (Henry Hazlitt, John Davenport); and activists (Leonard Read and
representatives of the Volker Fund, the Kansas City, Mo., foundation that
bankrolled the Americans’ participation) – a regular Who’s Who of young men
(only one woman, British historian Veronica
Wedgewood, was included). They would become influential theorists of the
turn towards markets.
Burgin, a historian, shows that from the beginning the group comprised two
factions, European traditionalists and American upstarts. The
Europeans were concerned with the difficulty of reconciling capitalism with
social traditions that had evolved over the centuries. The Americans were
not. Eventually, Burgin writes, Milton Friedman got the upper hand and
brought in “a more strident version” of market fundamentalism. His
predecessors’ work, Burgin writes, had been “ingrained with a sense of
caution at the knife’s edge of catastrophe. Friedman’s was infused with Cold
War dualisms…. Friedman’s philosophical models brooked no concessions to
communism, and the America of his time found a ready audience for a
philosophy that did not allow itself to be measured in degrees.”
For all his fascination with Friedman, Burgin does not pay much attention to
developments in economics itself. Robert Solow, of the Massachusetts
Institute of Technology, has
written that Burgin tends to endow the MPS with more significance than
it ever really has, whether within the economics profession or in the world
at large.” And surely Burgin stints the debates that gave rise to the
Mont Pelerin Society. He doesn’t mention the “calculation debate”
about the technical possibility of planning that had preoccupied the
Austrians economists since Germany’s surprisingly successful administration
of its national economy during World War I; nor the controversy over the New
Deal’s National Industrial Recovery Act of 1933, which was the background
for the Lippmann book; nor the various crises of peacetime planning that
were unfolding in Europe as the group first met.
Moreover, as a historian of ideas, Burgin ignores various more purely
experiential means of persuasion by which faith in markets was renewed in
the 1960s,’70s and ’80s. There was the success of Toyota, for example,
in improving standards of automotive quality. Then, too, the Cultural
Revolution in China and the Prague Spring of 1968 had powerful effects on
views of political economy, in both East and West; so did the US war in
Vietnam. Populism, meaning the durable sectional rivalries within the
US itself (Midwest vs. the Coasts, South vs. North) played a role as well.
So did rivalries between the United States and Europe.
For my money, Burgin’s real find (apparently for his, too, since his book
ends with an account of it) is a 1988 essay by Milton and Rose Friedman (his
economist wife and collaborator) tucked away in a Hoover Institution
volume, Thinking About America: The United States in the 1990s. In “The Tide
in the Affairs of Men,” they discerned a tendency of powerful social
movements to begin as works of opinion, spread eventually to the conduct of
policy, then generate (often) their own reversal, only to be succeeded by
another tide. The Friedmans discerned three such movements in the past 250
years – a laissez-faire or Adam Smith tide, beginning in 1776 and lasting
until around 1883 in Britain and the United States (with policy lagging:
1820-1900 in Britain, 1840-1930 in the US); a Welfare State or Fabian
tide, beginning around 1883 and lasting until 1950 in Britain and 1970 in
the US (policy tide 1900-1978 in Britain, 1930-1980 in the US); and a
resurgence of free markets or Hayek tide, beginning around 1950 in Britain
and 1980 in the US, whose opinion phase was “approaching middle age” and
whose policy phase twenty-five years ago was “still in its infancy.”
This is standard cycle theory, familiar to readers of Ralph Waldo Emerson,
Henry Adams, Arthur Schlesinger Sr. and Jr, Albert Hirschman and a host of
others, unexceptional except insofar as it portends, even in the Friedmans’
view, not exactly the end of laissez-faire, but the beginning of some new
tide of emphasis on the social. Burgin doesn’t make much of it except
to note that, at the height of the financial crisis, in the autumn of 2008,
“commentators on both sides of the political aisle declared that a long era
in American political history was drawing to a close.” ...
Posted by Mark Thoma on Thursday, June 6, 2013 at 01:28 AM in Economics |
A paper I need to read:
Complexity and Monetary Policy, by Athanasios Orphanides and Volker Wieland,
CFS Working Paper: Abstract
The complexity resulting from intertwined uncertainties regarding model
misspecification and mismeasurement of the state of the economy defines the
monetary policy landscape. Using the euro area as laboratory this paper
explores the design of robust policy guides aiming to maintain stability in
the economy while recognizing this complexity. We document substantial
output gap mismeasurement and make use of a new model data base to capture
the evolution of model specification. A simple interest rate rule is
employed to interpret ECB policy since 1999. An evaluation of alternative
policy rules across 11 models of the euro area confirms the fragility of
policy analysis optimized for any specific model and shows the merits of
model averaging in policy design. Interestingly, a simple difference rule
with the same coefficients on inflation and output growth as the one used to
interpret ECB policy is quite robust as long as it responds to current
outcomes of these variables.
Posted by Mark Thoma on Thursday, June 6, 2013 at 01:19 AM in Academic Papers, Economics, Monetary Policy |
Posted by Mark Thoma on Thursday, June 6, 2013 at 12:03 AM in Economics, Links |
Falling Inflation Expectations, by Tim Duy: I had thought that early iterations of quantitative easing were flawed
because they were based on a fixed amounts of total purchases. The size and
length of the programs were effectively arbitrary as they were not linked to
economic outcomes. This, combined with clear indications that policymakers
desired to reduce the balance sheet as soon as possible, meant that the Fed was
not able to sufficiently affect longer term expectations about the future price
level or inflation to yield sustained improvement in economic activity.
In effect, the Fed was shooting itself in the foot with temporary programs.
I had thought that open-ended quantitative easing tied to economic outcomes
would resolve the problem of stabilizing expectations of future inflation, thus
supporting a "stronger and sustainable" recovery.
The initial gains in inflation expectations seemed to justify such optimism.
But a funny thing happened on the way to the show - inflation expectations
TIPS-measured inflation expectations began falling in March, and now stand at
pre-QE3 levels. Also telling is the Cleveland Federal Reserve Measures of
inflation expectations. Longer run expectations remain well below 2%:
and, with perhaps more important policy implications, the term structure of
expected future inflation has shifted down over the past year:
Arguably, by these measures a lot of policy has gone into accomplishing very
little. The Fed, however, will tend to take solace from the Survey of
The median is hovering near 2%, but at the bottom end of the range. So even if
financial markets are anticipating lower inflation, professional forecasters are
not. But professional forecasters really have not deviated from 2% since prior
to the crisis, whereas the Fed has seen sufficient numerous threats to price
stability to engage in repeated asset purchase programs. So one wonders how
much weight the Fed places on this measure. Or, probably more accurately, they
place more weight on this measure when it suits their purposes, such as if they
are interested in ending the asset purchase program.
Form the perspective of policy, however, I am not so confident the survey is
the best measure of inflation expectations. The Federal Reserve transmits
policy through financial markets, and if those markets are not signaling stable
or, more importantly, higher inflation expectations, then it is arguable that by
itself, quantitative easing has limited impacts on economic activity. It can
put a floor under the economy, but not accelerate activity.
Perhaps at best, quantitative easing does not cause higher inflation. At
worst, some argue it
is actually deflationary. The latter argument, however, will not get much
support at the Federal Reserve, at least not yet.
Alternatively, one could argue that the Fed can indeed affect inflation
expectations and really what is going on is that the Fed botched policy. Again.
This is the "they have some slow learners on Constitution Avenue" story.
Inflation expectations turned down in March, just when the Fed
started sending signals that tapering was on the horizon. In this story,
the Fed extrapolated a handful of data into the future and decided enough was
enough. But that data was endogenous to Fed policy, and threatening to remove
that policy once again undermined the economic outlook. In short, just by
talking about tapering in an uncertain economic environment, the Fed pulled the
plug on a successful policy.
But what should the Fed do now? Can they reverse the decline of inflation
expectations merely by ending expectations of tapering? I am somewhat doubtful;
the cat is out of the bag. They may very well have to expand asset purchases if
they want market participants to believe "no, we were just kidding."
Indeed, I suspect that at least one policymaker, current voting member St.
Louis Federal Reserve President James Bullard, would push for expanding asset
purchases given the inflation and inflation expectations data. It would be
interesting if he dissented a "hold steady" statement at the next meeting on
There will be, however, strong resistance to raising the pace of asset
purchases. Yes, I know the Fed said they could move up or down. But I think the
idea of "up" would only come after a "down." And clearly, if inflation
expectations are any guide, market participants are getting the message that
"down" is what is coming. And they are not getting that from just the hawkish
policymakers. The doves too have been getting
in on the action.
Moreover, I have to imagine that the recent market action in Tokyo has made
some policymakers a little bit nervous about the limits to quantitative easing.
The Nikkei's rise and fall seems to indicate that at some point asset purchases
do in fact become destabilizing.
My view is that asset purchases would be most effective if coupled with
fiscal stimulus. Working only through financial markets may be simply too
restrictive to yield broad-based economic improvement. It is almost as if the
Fed is trying to force a fire hose of policy through a garden hose. Keep
turning up the volume, and eventually that hose bursts. And that might be what
we are seeing in Japan.
Bottom Line: Inflation expectations are falling, and that by itself should
complicate the Fed's expectation that they can start scaling back asset
purchases at the end of the summer. But falling inflation expectations may
complicate monetary policy more broadly by revealing the limits to quantitative
easing. And Japan isn't helping.
Posted by Mark Thoma on Wednesday, June 5, 2013 at 02:12 PM in Economics, Fed Watch, Monetary Policy |
Deficit reduction as a "sacred excuse for ... cruelty":
Welfare for the Wealthy, by Mark Bittman, Commentary, NY Times: The
critically important Farm Bill is impenetrably arcane, yet as it worms its
way through Congress, Americans who care about justice ... can parse enough of it to become outraged. The legislation costs
around $100 billion annually, determining policies on matters that are
The current versions of the Farm Bill in ... the House ... is proposing $20 billion in cuts to SNAP —
equivalent ... to “almost half of all the charitable food assistance that
food banks and food charities provide to people in need.”
Deficit reduction is the sacred excuse for such cruelty, but the first could
be achieved without the second. Two of the most expensive programs are food
stamps, the cost of which has justifiably soared since the beginning of the
Great Recession, and direct subsidy payments.
This pits the ability of poor people to eat — not well, but sort of enough —
against the production of agricultural commodities. That would be a
difficult choice if the subsidies were going to farmers who could be crushed
by failure, but in reality most direct payments go to those who need them
Among them is Congressman Stephen Fincher, Republican of Tennessee, who
justifies SNAP cuts by quoting 2 Thessalonians 3:10: “For even when we were
with you, we gave you this command: Anyone unwilling to work should not
Even if this quote were not taken out of context... [there is no need] to
break a sweat countering his “argument”... 45 percent of food stamp
recipients are children, and in 2010, the U.S.D.A. reported that as many as
41 percent are working poor. ... Fincher himself [is] a hypocrite.
For the God-fearing Fincher is one of the largest recipients of U.S.D.A.
farm subsidies in Tennessee history; he raked in $3.48 million in taxpayer
cash from 1999 to 2012, $70,574 last year alone. The average SNAP recipient
in Tennessee gets $132.20 in food aid a month; Fincher received $193 a day.
Fincher is not alone in disgrace, even among his Congressional colleagues,
but he makes a lovely poster boy for a policy that steals taxpayer money
from the poor and so-called middle class to pay the rich...
Posted by Mark Thoma on Wednesday, June 5, 2013 at 08:10 AM in Budget Deficit, Economics, Social Insurance |
I am at the TIGER Forum: Economic
Growth: Challenges for Regulatory Change in Toulouse, France today (TIGER = Toulouse - Industry - Globalization - Environment - Regulation).
Lots of good speakers, e.g. Jean-Claude Trichet talks tomorrow evening.
Posted by Mark Thoma on Wednesday, June 5, 2013 at 08:01 AM in Conferences, Economics |
Posted by Mark Thoma on Wednesday, June 5, 2013 at 12:03 AM in Economics, Links |
Quick one, then I have to figure out how to get to Toulouse (missed
connection, in Paris now ... but should be able to get there ... long day so far):
Is the Information Technology Revolution Over?, by David M. Byrne, Stephen
D. Oliner, and Daniel E. Sichel, FRB: Abstract: Given
the slowdown in labor productivity growth in the mid-2000s, some have argued
that the boost to labor productivity from IT may have run its course. This
paper contributes three types of evidence to this debate. First, we show
that since 2004, IT has continued to make a significant contribution to
labor productivity growth in the United States, though it is no longer
providing the boost it did during the productivity resurgence from 1995 to
2004. Second, we present evidence that semiconductor technology, a key
ingredient of the IT revolution, has continued to advance at a rapid pace
and that the BLS price index for microprocesssors may have substantially
understated the rate of decline in prices in recent years. Finally, we
develop projections of growth in trend labor productivity in the nonfarm
business sector. The baseline projection of about 1¾ percent a year is
better than recent history but is still below the long-run average of 2¼
percent. However, we see a reasonable prospect--particularly given the
ongoing advance in semiconductors--that the pace of labor productivity
growth could rise back up to or exceed the long-run average. While the
evidence is far from conclusive, we judge that "No, the IT revolution is not
Posted by Mark Thoma on Tuesday, June 4, 2013 at 06:07 AM
How a College Education Can Close the Income Gap
The title doesn't quite capture the main topic -- it's a plea to do more to help students from low income households attend
Posted by Mark Thoma on Tuesday, June 4, 2013 at 05:49 AM in Economics, Income Distribution, Universities |
Posted by Mark Thoma on Tuesday, June 4, 2013 at 12:03 AM in Economics, Links |
Long, long travel day ahead, and to add to the fun a flight delay means I'll miss a connection in Paris (tomorrow's links may be a bit delayed), so a
quick one before departure:
Fiscal Headwinds: Is the Other Shoe About to Drop?, by Brian
Lucking and Daniel Wilson, FRBSF Economic Letter: Federal fiscal policy
during the recession was abnormally expansionary by historical standards.
However, over the past 2½ years it has become unusually contractionary as a
result of several deficit reduction measures passed by Congress. During the
next three years, we estimate that federal budgetary policy could restrain
economic growth by as much as 1 percentage point annually beyond the normal
fiscal drag that occurs during recoveries.
The current recovery has been disappointingly weak compared with past U.S.
economic recoveries. Researchers and policymakers have pointed to a number
of potential causes for this unusual weakness, including contractionary
fiscal policy. For example, Federal Reserve Vice Chair Janet Yellen (2013)
argues that three tailwinds that typically help drive strong
recoveries—investment in housing, consumer confidence, and discretionary
fiscal policy—have been absent or turned into headwinds this time.
Changes in fiscal policy have been substantial over the past two years,
including passage of the Budget Control Act of 2011, which led to
sequestration spending cuts. In addition, temporary payroll tax cuts expired
and income tax rates for higher-income taxpayers rose following passage of
the American Taxpayer Relief Act of 2012. Two important questions are how
much has federal fiscal policy been a drag on growth in the recovery to date
and to what extent will it affect growth over the next few years? Moreover,
is this fiscal drag unusual or part of the normal pattern in which
government spending tends to fall and tax collections tend to rise as
economic activity gains momentum?
In this Economic Letter, we examine these questions by estimating
what fiscal policy would be if it followed historical patterns in the
relationship between fiscal policy and the business cycle. We then compare
this historically based estimate with actual fiscal policy during the
recession and recovery to date. We also look at government projections of
fiscal policy over the next three years to see how these compare with
estimates based on the historical norm. Finally, we discuss what these
trends in federal fiscal policy imply for economic growth.
The historical norm of federal fiscal policy
Historically, fiscal policy tends to be expansionary in recessions. As
economic activity slows, tax revenue falls and government spending rises,
giving a boost to the economy. The opposite occurs during expansions, as tax
revenue rises and government spending falls. Much of this countercyclical
pattern is by design. During a recession, so-called automatic stabilizers
kick in. These are programs that boost government spending and reduce tax
receipts without explicit legislative action. For example, income taxes fall
and unemployment insurance and Medicaid automatically rise during downturns,
adding to the federal deficit and ideally stimulating economic activity.
During upturns, the process automatically reverses as spending on safety net
and income-support programs falls and tax revenue rises, trimming the
Much of the analysis of the countercyclical effects of federal fiscal policy
only takes these automatic stabilizer programs into account. For instance,
the Congressional Budget Office regularly produces estimates of the cyclical
component of the federal deficit based on automatic stabilizers (CBO 2013).
Yet, automatic programs are only part of the picture. Discretionary fiscal
policy, that is, legislated tax and spending changes, often tends to be
countercyclical. Congress commonly passes temporary tax cuts or stimulus
spending to counteract downturns. Therefore, to fully capture the cyclical
effects of government budgetary trends, we consider both automatic
stabilizers and discretionary fiscal policy.
To analyze whether recent fiscal policy has followed historical patterns, we
use a statistical model of the relationship between fiscal policy and the
business cycle based on three variables: government spending other than
interest payments, tax revenue, and the difference between the two, which is
known as the primary deficit (see Lucking and Wilson 2012). We measure these
over time as a share of gross domestic product. We measure the business
cycle using the difference between actual GDP and the CBO’s estimate of
potential GDP, which is known as the output gap.
Our model allows us to estimate what fiscal policy is likely to be at any
point in time given the state of the business cycle. We call these estimates
the historical norm since they are based on the average historical
relationship between fiscal policy and the business cycle. We can also use
this model to estimate a historical-norm level of fiscal policy in coming
years given CBO’s projections of the output gap.
Fiscal policy in the recession and the recovery
Figure 1 compares actual fiscal policy with estimates based on the
historical norm for noninterest federal spending, tax revenue, and the
primary deficit. It shows that federal fiscal policy was unusually
expansionary during the Great Recession. Federal spending grew more and tax
receipts fell more than usual, even taking into account the recession’s
severe depth and duration, and the resulting very large output gap. This
reflects both automatic stabilizers and discretionary changes in spending
and tax policy, such as the American Recovery and Reinvestment Act, the
economic stimulus program passed by Congress in 2009. As a consequence,
federal government saving in the recession fell faster—that is, the deficit
grew faster—than our historical norm would predict.
This more-expansionary-than-usual federal fiscal policy continued through
the recession and into the early part of the recovery. But in mid-2010,
fiscal policy sharply reversed course. Since then, federal fiscal policy has
been much more contractionary than normal. Spending has fallen sharply since
2011, and tax revenue has grown faster than usual given the weak recovery.
However, the larger-than-usual deficit growth early in the recovery has
offset the larger-than-usual drop in the deficit since mid-2010. As a
result, overall for the recovery, fiscal policy has been only slightly more
contractionary than the historical norm.
U.S. fiscal policy: Projections vs. historical norm
Source: Bureau of Economic Analysis, CBO, and authors’ calculations.
Measuring excess fiscal drag in the recovery
Analysts often measure the “fiscal impetus” of policy, that is, how much
policy changes contribute to real GDP growth over a given period. Positive
impetus indicates expansionary policy changes and negative impetus,
contractionary changes. Thus, fiscal impetus can be thought of as measuring
the degree to which policy is a tailwind or headwind for economic growth.
Estimating fiscal impetus has two components. The first is the change in
fiscal policy as a share of GDP. The second is the multiplier, that
is, the change in GDP caused by a given change in government spending or
taxes. Researchers do not agree on what multipliers are most accurate. Here,
we use a multiplier of one, which is near the middle of the range of
empirical estimates (see Wilson 2012). Doing so allows us to focus on the
effects of changes in fiscal policy on fiscal impetus.
Figure 1 shows our calculations of fiscal impetus based on actual and
historical-norm estimates of noninterest spending, tax revenue, and the
primary deficit. In Figure 1, the vertical line divides our results into two
periods: the recovery from mid-2009 to the end of 2012, and the three years
through the end of 2015. We refer to the difference between historical-norm
and actual fiscal impetus as the excess drag of fiscal policy. The excess
drag tells exactly how much fiscal policy is slowing the current recovery
beyond the historical norm.
Panel C of Figure 1 shows the actual and the historical-norm primary
deficits. The fiscal impetus based on both the actual and historical-norm
deficits since the start of the recovery has been identical, −0.2 percentage
point per year. In other words, federal fiscal policy has been a modest
headwind to economic growth so far in the recovery, but no more so than
usual given the weak pace of growth.
Fiscal drag in coming years
To assess whether fiscal policies might cause excess drag in the future, we
look at projections through 2015 from the CBO for the output gap, as well as
for federal spending, revenue, and the deficit. We base our calculations on
the CBO’s February 2013 outlook report, which contained scenarios both with
and without the sequestration budget cuts, rather than the most recent May
report, which omitted the scenario without sequestration. The results for
the scenario including sequestration using the May projections are very
similar to those based on the February projections.
While our estimates show that fiscal policy has held back the recovery
slightly to date, the effect over the next three years looks much bigger.
The CBO projects that the federal deficit as a share of GDP will drop 1.4
percentage points per year over the next three years. This projection would
ease slightly to 1.2 percentage points per year if sequestration spending
cuts were reversed. By contrast, our calculation of the historical-norm
deficit decline through 2015 is 0.4 percentage point per year based on the
CBO’s output gap projections. This implies that the excess drag from the
rapidly shrinking deficit would reduce real GDP growth annually by between
0.8 and 1.0 percentage point, depending on whether sequestration is
reversed. Thus, with or without sequestration, fiscal policy is expected to
be a much greater drag on economic growth over the next three years than it
has been so far.
Surprisingly, despite all the attention federal spending cuts and
sequestration have received, our calculations suggest they are not the main
contributors to this projected drag. The excess fiscal drag on the horizon
comes almost entirely from rising taxes. Specifically, we calculate that
nine-tenths of that projected 1 percentage point excess fiscal drag comes
from tax revenue rising faster than normal as a share of the economy. As
Panel B shows, at the end of 2012, taxes as a share of GDP were below both
their historical norm in relation to the business cycle and their long-run
average of about 18%. However, over the next three years, they are projected
to rise much faster than our estimate of the usual cyclical pattern would
indicate. The CBO points to several factors underlying this “super-cyclical”
rise, including higher income tax rates for high-income households, the
recent expiration of temporary Social Security payroll tax cuts, and new
taxes associated with the Obama Administration’s health-care legislation.
Federal fiscal policy has been a modest headwind to economic growth so far
during the recovery. This is typical for recovery periods and in line with
the historical relationship between the business cycle and fiscal policy.
However, CBO projections and our estimate based on the countercyclical
history of fiscal policy suggest that federal budget trends will weigh on
growth much more severely over the next three years. The federal deficit is
projected to decline faster than normal over the next three years, largely
because tax revenue is projected to rise faster than usual. Given reasonable
assumptions regarding the economic multiplier on government spending and
taxes, the rapid decline in the federal deficit implies a drag on real GDP
growth about 1 percentage point per year larger than the normal drag from
fiscal policy during recoveries.
Congressional Budget Office. 2013. “The
Effects of Automatic Stabilizers on the Federal Budget as of 2013.” Report,
Lucking, Brian and Daniel Wilson. 2012. “U.S.
Fiscal Policy: Headwind or Tailwind?” FRBSF Economic Letter 2012-20
Wilson, Daniel. 2012. “Government
Spending: An Economic Boost?” FRBSF Economic Letter 2012-04
Yellen, Janet. 2013. “A
Painfully Slow Recovery for America’s Workers: Causes, Implications, and the
Federal Reserve’s Response.” Remarks at the “A Trans-Atlantic Agenda for
Shared Prosperity,” conference sponsored by the AFL-CIO, Friedrich Ebert
Stiftung, and IMK Macroeconomic Policy Institute, Washington, DC (February
Posted by Mark Thoma on Monday, June 3, 2013 at 04:15 PM
One more from Tim Duy:
More Tapering Talk, by Tim Duy: Despite
the soft ISM number this morning, two Federal Reserve policymakers
reiterated their expectation that asset purchases will slow in the months ahead.
First up is Atlanta Federal Reserve President Dennis Lockhart, who was on the
speaking circuit today. Via the
Wall Street Journal:
“We are approaching a period in which an adjustment to the asset purchase
policy can be considered,” Mr. Lockhart said in the interview. Referring to
coming Fed policy meetings, he said of a potential slowing in the purchases:
“Whether that’s June, August, September or later in the year, to me, isn’t
really the issue,” even as he acknowledged, “It’s the issue for the
Of course, June is probably out of the question:
It would be too soon to pull back now, Mr. Lockhart said. “I don’t think
that as of today we have a set of conditions that absolutely justify an
adjustment,” he explained. While the official suggested the most likely
direction would be to slow the buying from its current pace, he said he
doesn’t have “a fixed sense” of how the Fed should slow down on the buying.
No, June is too early - they are waiting for more jobs data before making a
move. Lockhart is also selling the story that less is not really less:
If the Fed does slow the pace of its bond buying, “this is not a decisive
removal of accommodation. This is a calibration to the state of the economy
and the outlook. It is not a big policy shift, and I would hope the markets
understand that,” Mr. Lockhart said.
I know that the Fed does not want market participants to associate a slowing
of asset purchases with tighter policy. I am not sure, however, that it will be
easy to persuade Wall Street otherwise. After all, if the Fed wanted looser
policy, they would increase the pace of asset purchases. If more is "looser,"
then why isn't less "tighter?" Alternatively, is "less accommodative" really
different from "tighter"?
Lockhart adds this:
The central banker acknowledged that markets are struggling with the
issue, and he said any perception that the Fed has been sending mixed
messages is mainly a function of the complexity of the ongoing debate Fed
officials are having about the issue. But he also cautioned market
participants not to get ahead of themselves in trying to divine the
Isn't that one of the jobs of market participants? To engage in various
trading strategies based on the expected path of, among other things, monetary
policy? After all, that seems to be the primary reason for the intense interest
Separately, San Francisco Federal Reserve President also reiterated his
expectation that policy would be making a shift sooner or later. Again, via the
Wall Street Journal:
“If the forecast goes as I hope and we see continuing good signs from the
labor market [and] overall economic conditions [and] continued confidence in
that forecast of substantial improvement, I could see, my own view is that
as early as this summer [there could be] some adjustment, maybe modest
adjustment downward, in our purchase program,” San Francisco Fed President John
Williams told reporters on the sidelines of a conference here.
The outlook is of course data dependent. At the current pace of data flow,
however, policymakers have their eye on tapering. Williams also makes some
comments on inflation, via
Williams noted that underlying inflation was at 1 percent, below the
Fed's target of 2 percent. Speaking on the sidelines of a seminar in the
Swedish capital, he said he saw temporary factors as being the main reason
inflation was being held low and expected the inflation rate to return to 2
Still, it was one of the factors the Fed should watch when deciding on
policy, he said.
"If we see continued low inflation and, more worrisome, a fall in
long-term inflation expectations, well below 2 percent, then those would be
factors that argue for, all else equal, greater total purchases for our
program than otherwise," he said.
If the employment outlook holds steady, but price trends conspire to put the
Fed's inflation forecast in jeopardy, expect the Fed to push back the timing of
a policy shift.
Bottom Line: Fed is looking to pull back on asset purchases. They expect
the data to give them room to do so.
Posted by Mark Thoma on Monday, June 3, 2013 at 03:08 PM in Economics, Fed Watch, Monetary Policy |
Slow Start, by Tim Duy: ISM data came in on the soft side this morning,
with a sub-50 reading:
I would be a little cautious about saying that "manufacturing is
contracting" based on a diffusion index. That said, the headline number
suggests overall weakness. What is the source of that weakness? I think
once again the external sector is a drag. While new orders were down
exports orders were down sharply:
But note that import orders held their ground:
Import orders should be a reflection of domestic demand. The steady reading
in those suggests that manufacturing weakness in the headline numbers stems
from external sources which has not yet filtered broadly into the domestic
That, at least, is the optimistic view. Also more optimistic was the 52.3
manufacturing number from the competing
Markit report. But optimism aside, put this morning's ISM report under
the "delay tapering" column.
Posted by Mark Thoma on Monday, June 3, 2013 at 01:21 PM in Economics, Fed Watch, Monetary Policy |
All the hand-wringing you hear over the cost of social insurance programs
such as Medicare and Social Security is a ploy from the right designed to get
you to support cuts -- don't fall for it:
The Geezers Are All Right, by Paul Krugman, Commentary, NY Times: Last
month the Congressional Budget Office released its
much-anticipated projections for debt and deficits, and there were cries of
lamentation from the deficit scolds who have had so much influence on our
policy discourse. The problem, you see, was that the budget office numbers
looked, well, O.K... But if you’ve built your career around proclamations of
imminent fiscal doom, this definitely wasn’t the report you wanted to see.
Still... Doesn’t the rising tide of retirees mean that Social Security and
Medicare are doomed unless we radically change those programs now now now?
To be fair, the reports of the Social Security and Medicare trustees
released Friday do suggest that America’s retirement system needs some
significant work. The ratio of Americans over 65 to those of working age
will rise inexorably over the decades ahead, and this will translate into
rising spending on Social Security and Medicare as a share of national
But the numbers aren’t nearly as overwhelming as you might have imagined,...
the data suggest that we can, if we choose, maintain social insurance as we
know it with only modest adjustments. ...
So what are we looking at here? The latest projections show the combined
cost of Social Security and Medicare rising by a bit more than 3 percent of
G.D.P. between now and 2035, and that number could easily come down with
more effort on the health care front. Now, 3 percent of G.D.P. is a big
number, but it’s not an economy-crushing number. The United States could,
for example, close that gap entirely through tax increases, with no
reduction in benefits at all, and still have one of the lowest overall tax
rates in the advanced world.
But haven’t all the great and the good been telling us that Social Security
and Medicare ... are unsustainable, that they must be totally revamped — and
made much less generous? Why yes, they have; they’ve also been telling us
that we must slash spending right away or we’ll face a Greek-style fiscal
crisis. They were wrong about that, and they’re wrong about the longer run,
The truth is that the long-term outlook for Social Security and Medicare,
while not great, actually isn’t all that bad. It’s time to stop obsessing
about how we’ll pay benefits to retirees in 2035 and focus instead on how
we’re going to provide jobs to unemployed Americans in the here and now.
Posted by Mark Thoma on Monday, June 3, 2013 at 12:24 AM in Economics, Social Insurance |
On September. by Tim Duy: We are heading into a big data week, beginning
with ISM and culminating with the employment report for May. As I believe
the Fed is seriously looking at September to pull back on QE, I will be
looking for data that pushes that timing off to December. The employment
report is the most important release of course, not just for what nonfarm
payrolls tell us about "stronger and sustainable," but also the unemployment
rate. The latter is the specific concern of the threshold condition for
reviewing the stance of interest rates, but it is also a concern for the
pace of asset purchases. The faster we are moving toward 6.5%, the sooner
policymakers will want to pull the plug on QE.
Consider the path of unemployment:
Unemployment is declining at a very steady pace, and at that pace will hit
the 6.5% threshold in September of 2014. To be sure, past performance is no
guarantee of future performance. We may see, for example, the long-awaiting
return to rising labor force participation rates. But we could also see an
acceleration in job growth, perhaps sufficient to more than offset any
increase in labor force participation, and thus the unemployment rate falls
faster than anticipated. A safe bet, however, is more of the same steady
decline in rates that we have seen since 2010.
The Fed, I suspect, wants to conclude asset purchases well before they hit
the 6.5% threshold and have to make a decision about interest rates. That will take at least three months, but they would probably error on the side of caution
and shoot for six months out. That suggests they would like to wind down
quantitative easing by March of 2014. Assume further that they do not want
to go cold turkey, but rather reduce the pace of purchases across multiple
meetings, maybe slowly at first, but more quickly later. So you need about
6 months, or 4 meetings, to wind down asset purchases. That pretty much
pushes you back to the September meeting of this year.
To be sure, everything is data dependent. But my point is that the calendar
is probably a driving force in timing the end of QE. Just estimate when the
unemployment rate will hit 6.5%, work backwards, and it becomes evident why
so many Fed officials appear to be leaning toward ending quantitative easing
sooner rather than later.
But, you wisely say, but what about inflation? Because inflation is clearly
not a problem - or, more specifically, high inflation is not a problem.
Arguably low inflation is a problem:
Clearly trending down and away from the Fed's definition of price stability,
or 2% inflation. Smoking gun, you say. The Fed can't think about backing
off QE with inflation trending down.
Perhaps. But let me offer another interpretation. Consider the claim that
the failure of inflation to fall further was taken by some as evidence that
the economy was near potential output, and that much of the unemployment was
structural. The counterargument was that downward nominal wage rigidities
keep a floor on wage gains, and thus there is a floor on inflation as well.
Thus, the failure of inflation to fall even further, or tip into deflation,
tells us little about structural unemployment.
Indeed, the fact that inflation has fallen even as unemployment rates come
down is further evidence that structural unemployment was limited. Score
one for the importance of downward nominal wage rigidities.
But now those rigidities become a double-edged sword. Policymakers can be
relatively confident that deflation will not emerge even when the economy is
faced with substantially unemployment gap. Consequently, there is very
little chance of deflation, inflation expectations are thus well-anchored,
and there is no reason that low inflation should dissuade the Fed from
slowing the pace of asset purchases as long as we continue to see "stronger
and sustainable" improvement in labor markets.
By extension, policymakers will have an asymmetric response to inflation
because they see a lower bound on the downside, but no such bound on the
upside. But we can come back to that when rising inflation is a problem.
But what if inflation falls even further? There must be some non-negative
rates that prompts additional easing, or, at a minimum, a halt to efforts to
reduce asset purchases? Yes, one would be rational to believe that the Fed
pushes any policy shift back to December if inflation continues to decline.
That said, however, I think you are also still in the world of costs and
benefits, and here I will hazard another another conjecture: If I was an
monetary policymaker, and I were to look at some of the crazy volatility in
Japan, I might reasonably conclude that yes, there may be a point where the
destabilizing impacts outweigh the benefits. And the benefits to further
action may be very limited considering that the steady decline in the
unemployment rate suggests that monetary policy can put a floor under the
economy, but may not be able to further lift the pace of activity.
Bottom Line: As always, the data will drive the Fed's next move. My
expectation is that data evolves in such a way that policy will shift in
September. I think there is currently a bias toward ending QE, so I
anticipate a willingness of policymakers to focus on stronger numbers and
downplay the importance of weaker numbers. In other words, I think we need
to see some reasonably big downside misses to push policy back to December
or later. Policymakers will be watching the unemployment rate, realizing
that it has steadily declined despite a number of negative shocks since the
recession ended. Expectations of continued declines help focus policymakers
on winding down by the end of this year or early next year. If they want to
meet that goal while not cutting asset purchases abruptly, then they will
need to begin sooner than later. Hence why September comes into focus.
Posted by Mark Thoma on Monday, June 3, 2013 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Monday, June 3, 2013 at 12:03 AM in Economics, Links |
Is this a clue about Bernanke's plans for the future (i.e. if he wants to be
renewed as Fed chair)?:
I wrote recently to inquire about the status of my leave from the
It's in the introduction to a
graduation speech he gave at Princeton. Calculated Risk
comments: on a different passage:
I enjoyed this speech, but Bernanke's comment that "careful economic
analysis ... can help kill ideas that are completely logically inconsistent
or wildly at variance with the data" is at odds with the sequestration
budget cuts, "debt ceiling" nonsense, expansionary austerity, and more. I
wish data and careful analysis could actually kill bad ideas, but I'm not
sure what Paul Ryan would do with his life.
Yep. [Update: I probably should have noted that, for the most part, the speech has been widely praised.]
Update: On his inquiry about leave from Princeton, not sure when this footnote was added, but I just noticed it:
Note to journalists: This is a joke. My leave from Princeton expired in
Posted by Mark Thoma on Sunday, June 2, 2013 at 12:27 PM in Economics, Monetary Policy |