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Friday, June 14, 2013

Why Do Disability Filings Rise in Bad Times?

Jesse Rothstein finds that the rise in disability filings in recessions is not due to people "exaggerating real disabilities or through outright fraud":

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 preliminary...

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 improves.

    Posted by on Friday, June 14, 2013 at 09:49 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (21) 


    Paul Krugman: Sympathy for the Luddites

    If the share of income going to labor continues to decline, how should we respond?:

    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 apprentice to?”
    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 on Friday, June 14, 2013 at 12:33 AM in Economics, Income Distribution, Technology | Permalink  Comments (117) 


      'The Impact of Immigrants'

      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 on Friday, June 14, 2013 at 12:24 AM in Economics, Immigration, Social Insurance | Permalink  Comments (18) 


        Links for 06-14-2013

          Posted by on Friday, June 14, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (54) 


          Thursday, June 13, 2013

          'The European Central Bank’s Outright Monetary Transactions and the Federal Constitutional Court of Germany'

          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 on Thursday, June 13, 2013 at 11:12 AM Permalink  Comments (22) 


            Fed Watch: Two For Tapering

            Tim Duy:

            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:

            RETAIL0613

            That said, the pace of growth isn't exactly something to get excited about:

            RETAIL20613

            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:

            CLAIMS0613

            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 quantitative easing.
            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 contraction:
            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 be ugly.
            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 on Thursday, June 13, 2013 at 09:48 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (13) 


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

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

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

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

                Posted by on Thursday, June 13, 2013 at 08:31 AM in Economics, Income Distribution, Policy, Politics | Permalink  Comments (7) 


                Alan Krueger: Rock and Roll, Economics, and Rebuilding the Middle Class

                  Posted by on Thursday, June 13, 2013 at 12:24 AM in Economics, Income Distribution, Politics, Video | Permalink  Comments (2) 


                  Links for 06-13-2013

                    Posted by on Thursday, June 13, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (46) 


                    Wednesday, June 12, 2013

                    'They Can’t Help Themselves'

                    Paul Krugman:

                    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 on Wednesday, June 12, 2013 at 03:11 PM in Economics, Health Care, Politics | Permalink  Comments (57) 


                      Hacker: Reinvigorate the Center-Left through Predistribution

                      Jacob Hacker:

                      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, describes predistribution]...
                      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 resist it:

                      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 on Wednesday, June 12, 2013 at 08:21 AM in Economics, Income Distribution, Market Failure, Politics | Permalink  Comments (120) 


                        Links for 06-12-2013

                          Posted by on Wednesday, June 12, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (99) 


                          Tuesday, June 11, 2013

                          'S&P Revises Up Its Outlook for US Debt: Markets Yawn'

                          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 bubble.
                          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 non-information.

                          treas_10

                          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 on Tuesday, June 11, 2013 at 12:57 PM in Economics, Financial System, Market Failure | Permalink  Comments (8) 


                            Fed Watch: Bullard Holds His Ground

                            Tim Duy:

                            Bullard Holds His Ground, by Tim Duy: St. Louis Federal Reserve President James Bullard reaffirmed his commitment to the current policy stance. From his press release:

                            “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 Reuters:

                            "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 Bullard.

                            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 here.

                            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 envision.

                            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 on Tuesday, June 11, 2013 at 12:33 AM in Economics, Fed Watch, Inflation, Monetary Policy | Permalink  Comments (48) 


                              Blinder: Fiscal Fixes for the Jobless Recovery

                              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 Security records....
                              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 on Tuesday, June 11, 2013 at 12:15 AM in Economics, Fiscal Policy, Taxes, Unemployment | Permalink  Comments (42) 


                                Links for 06-11-2013

                                A bit truncated today -- nothing after 1:30 pm PST -- I'll update later if I can.

                                Update:

                                  Posted by on Tuesday, June 11, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (75) 


                                  Monday, June 10, 2013

                                  Paul Krugman: The Big Shrug

                                  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 long-term unemployment.
                                  So here’s my message to policy makers: Where we are is not O.K. Stop shrugging, and do your jobs.

                                    Posted by on Monday, June 10, 2013 at 12:24 AM in Budget Deficit, Economics, Inflation, Politics, Unemployment | Permalink  Comments (84) 


                                    Links for 06-10-2013

                                      Posted by on Monday, June 10, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (94) 


                                      Sunday, June 09, 2013

                                      Blogging Note

                                      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.

                                      Thanks.

                                      [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 on Sunday, June 9, 2013 at 01:11 PM in Economics, Weblogs | Permalink  Comments (19) 


                                        Bair: Everything the IMF Wanted to Know about Financial Regulation

                                        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 future?
                                        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?
                                        No.
                                        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 that respect?
                                        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 panel…)
                                        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 A.
                                        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 government.
                                        9) Where do we stand on resolution processes, both at the national level and cross border?
                                        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 on Sunday, June 9, 2013 at 12:24 AM Permalink  Comments (24) 


                                          'The Quiet Closing of Washington'

                                          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 reform. 
                                          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 affecting Americans.
                                          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 democracy.”
                                          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 negative. ..s.
                                          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 on Sunday, June 9, 2013 at 12:15 AM in Economics, Politics | Permalink  Comments (46) 


                                            Links for 06-09-2013

                                              Posted by on Sunday, June 9, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (81) 


                                              Saturday, June 08, 2013

                                              'What is the Price of Freedom?'

                                              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 on Saturday, June 8, 2013 at 09:55 AM in Economics, Terrorism | Permalink  Comments (94) 


                                                The Toulouse School of Economics

                                                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 on Saturday, June 8, 2013 at 09:42 AM in Economics, Universities | Permalink  Comments (14) 


                                                  TypePad Comments

                                                  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 on Saturday, June 8, 2013 at 05:33 AM in Economics, Weblogs | Permalink  Comments (8) 


                                                    Links for 06-08-2013

                                                      Posted by on Saturday, June 8, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (27) 


                                                      Friday, June 07, 2013

                                                      Total Information Awareness

                                                      Dan Little:

                                                      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 collection efforts.)
                                                      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 on Friday, June 7, 2013 at 02:03 PM in Economics, Technology | Permalink  Comments (68) 


                                                        TypePad's Broken Comments

                                                        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 on Friday, June 7, 2013 at 02:01 PM in Economics, Weblogs | Permalink  Comments (7) 


                                                          Fed Watch: More of the Same

                                                          Tim Duy:

                                                          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 months."
                                                          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 average:

                                                          EMP1060713

                                                          Taken in context of the Yellen indicators, tough to say that much has changed:

                                                          EMP2060713

                                                          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:

                                                          EMP3060713

                                                          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 improvement:

                                                          EMP4060713

                                                          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 on Friday, June 7, 2013 at 08:28 AM in Economics, Fed Watch, Monetary Policy, Unemployment | Permalink  Comments (29) 


                                                            Paul Krugman: The Spite Club

                                                            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 year.
                                                            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 at first.
                                                            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 uninsured.
                                                            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 them.
                                                            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 price.

                                                             

                                                              Posted by on Friday, June 7, 2013 at 02:45 AM in Economics, Health Care, Politics | Permalink  Comments (92) 


                                                              Links for 06-07-2013

                                                                Posted by on Friday, June 7, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (107) 


                                                                Thursday, June 06, 2013

                                                                Legitimate Comments Marked as Spam

                                                                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.

                                                                Mark

                                                                  Posted by on Thursday, June 6, 2013 at 06:38 AM in Economics, Weblogs | Permalink  Comments (9) 


                                                                  'The Hidden Jobless Disaster'

                                                                  Ed Lazear:

                                                                  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 years.
                                                                  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 weeks. ...

                                                                  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 to 6.5%.

                                                                  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 on Thursday, June 6, 2013 at 02:08 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (104) 


                                                                    'The Great Persuasion: Reinventing Free Markets Since the Depression'

                                                                    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 from Lausanne.
                                                                    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 on Thursday, June 6, 2013 at 01:28 AM in Economics | Permalink  Comments (31) 


                                                                      Orphanides and Wieland: Complexity and Monetary Policy

                                                                      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 on Thursday, June 6, 2013 at 01:19 AM in Academic Papers, Economics, Monetary Policy | Permalink  Comments (1) 


                                                                        Links for 06-06-2013

                                                                          Posted by on Thursday, June 6, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (51) 


                                                                          Wednesday, June 05, 2013

                                                                          Fed Watch: Falling Inflation Expectations

                                                                          Tim Duy:

                                                                          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 reversed course:

                                                                          INFEXP1

                                                                          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%:

                                                                          CLEVINF1

                                                                          and, with perhaps more important policy implications, the term structure of expected future inflation has shifted down over the past year:

                                                                          CLEVINF2

                                                                           

                                                                          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 Professional Forecasters:

                                                                          SPFINF

                                                                          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 that basis.

                                                                          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 on Wednesday, June 5, 2013 at 02:12 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (28) 


                                                                            'Welfare for the Wealthy'

                                                                            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 strikingly diverse...
                                                                            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 least.
                                                                            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 eat.”
                                                                            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 on Wednesday, June 5, 2013 at 08:10 AM in Budget Deficit, Economics, Social Insurance | Permalink  Comments (87) 


                                                                              Have Blog, Will Travel: TIGER Forum in Toulouse, France

                                                                              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 on Wednesday, June 5, 2013 at 08:01 AM in Conferences, Economics | Permalink  Comments (6) 


                                                                                Links for 06-05-2013

                                                                                  Posted by on Wednesday, June 5, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (37) 


                                                                                  Tuesday, June 04, 2013

                                                                                  Is the Information Technology Revolution Over?

                                                                                  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 over."

                                                                                    Posted by on Tuesday, June 4, 2013 at 06:07 AM Permalink  Comments (81) 


                                                                                    Help Students from Low Income Households Attend College

                                                                                    New column:

                                                                                    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 college.

                                                                                      Posted by on Tuesday, June 4, 2013 at 05:49 AM in Economics, Income Distribution, Universities | Permalink  Comments (14) 


                                                                                      Links for 06-04-2013

                                                                                        Posted by on Tuesday, June 4, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (22) 


                                                                                        Monday, June 03, 2013

                                                                                        FRBSF Economic Letter: Fiscal Headwinds: Is the Other Shoe About to Drop?

                                                                                        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 federal deficit.
                                                                                        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.

                                                                                        Figure 1
                                                                                        U.S. fiscal policy: Projections vs. historical norm

                                                                                        Federal government spending
                                                                                        Federal government tax revenue
                                                                                        C. Federal government saving

                                                                                        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.
                                                                                        Conclusion
                                                                                        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.
                                                                                        References
                                                                                        Congressional Budget Office. 2013. “The Effects of Automatic Stabilizers on the Federal Budget as of 2013.” Report, March.
                                                                                        Lucking, Brian and Daniel Wilson. 2012. “U.S. Fiscal Policy: Headwind or Tailwind?” FRBSF Economic Letter 2012-20 (July 2).
                                                                                        Wilson, Daniel. 2012. “Government Spending: An Economic Boost?” FRBSF Economic Letter 2012-04 (February 6).
                                                                                        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 11).

                                                                                          Posted by on Monday, June 3, 2013 at 04:15 PM Permalink  Comments (5) 


                                                                                          Fed Watch: More Tapering Talk

                                                                                          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 markets.”

                                                                                          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 monetary-policy outlook.

                                                                                          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 in policy.

                                                                                          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 Reuters:

                                                                                          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 percent.

                                                                                          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 on Monday, June 3, 2013 at 03:08 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (9) 


                                                                                            Fed Watch: Slow Start

                                                                                            Tim Duy:

                                                                                            Slow Start, by Tim Duy: ISM data came in on the soft side this morning, with a sub-50 reading:

                                                                                            PMI10603

                                                                                            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 slightly:

                                                                                            PMI20603

                                                                                            exports orders were down sharply:

                                                                                            PMI30603

                                                                                            But note that import orders held their ground:

                                                                                            PMI40603

                                                                                            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 economy.
                                                                                            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 on Monday, June 3, 2013 at 01:21 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (4) 


                                                                                              Paul Krugman: The Geezers Are All Right

                                                                                              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?
                                                                                              Maybe not.
                                                                                              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 income.
                                                                                              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, too.
                                                                                              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 on Monday, June 3, 2013 at 12:24 AM in Economics, Social Insurance | Permalink  Comments (60) 


                                                                                                Fed Watch: On September

                                                                                                Tim Duy:

                                                                                                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:

                                                                                                UNTREND0603

                                                                                                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:

                                                                                                PCEINF0531

                                                                                                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 on Monday, June 3, 2013 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (3) 


                                                                                                  Links for 06-03-2013

                                                                                                    Posted by on Monday, June 3, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (52) 


                                                                                                    Sunday, June 02, 2013

                                                                                                    Bernanke's Plans for the Future?

                                                                                                    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 university...

                                                                                                    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 2005.

                                                                                                      Posted by on Sunday, June 2, 2013 at 12:27 PM in Economics, Monetary Policy | Permalink  Comments (8)