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Sunday, June 02, 2013

'We Must Not Accept This New Normal'

Senator Bernie Sanders:

We must not accept this economic 'new normal', by Bernie Sanders, guardian.co.uk: The front pages of American newspapers are filled with stories about how the US economy is recovering. ... But in the midst of this slow recovery, we must not accept a "new normal".
We must not be content with an economic reality in which the middle class of this country continues to disappear, poverty is near an all-time high and the gap between the very rich and everyone else grows wider and wider. ...
The American people get the economic realities. According to a Gallup poll, nearly six out of 10 believe that money and wealth should be more evenly distributed among a larger percentage of the people in the US, while only a third of Americans think the current distribution is fair. A record-breaking 52% of the American people believe that the federal "government should redistribute wealth by heavy taxes on the rich".
The United States Congress and the president must begin listening to the American people. While there clearly has been some improvement in the economy over the last five years, much more needs to be done. We need a major jobs program which puts millions back to work rebuilding our crumbling infrastructure. We need to tackle the planetary crisis of global warming by creating jobs transforming our energy system away from fossil fuels and into energy efficiency and sustainable energy.
We need to end the scandal of one of four corporations paying nothing in federal taxes while we balance the budget on the backs of the elderly, the children, the sick and the poor.

It would be better termed the "New Abnormal" and there's no reason to accept that it's inevitable.

    Posted by on Sunday, June 2, 2013 at 10:24 AM in Economics, Income Distribution, Unemployment | Permalink  Comments (39) 

    The Aggregate Supply—Aggregate Demand Model in the Econ Blogosphere

    Peter Dorman would like to know if he's wrong:

    Why You Don’t See the Aggregate Supply—Aggregate Demand Model in the Econ Blogosphere: Introductory textbooks are supposed to give you simplified versions of the models that professionals use in their own work. The blogosphere is a realm where people from a range of backgrounds discuss current issues often using simplified concepts so everyone can be on the same page.
    But while the dominant framework used in introductory macro textbooks is aggregate supply—aggregate demand (AS-AD), it is almost never mentioned in the econ blogs. My guess is that anyone who tried to make an argument about current macropolicy using an AS-AD diagram would just invite snickers. This is not true on the micro side, where it’s perfectly normal to make an argument with a standard issue, partial equilibrium supply and demand diagram. What’s going on here?
    I’ve been writing the part of my textbook where I describe what happened in macro during the period from the mid 70s to the mid 00s, and part of the story is the rise of textbook AS-AD. Here’s the line I take:
    The dominant macro model, now crystallized in DSGE, is much too complex for intro students. It is based on intertemporal optimization and general equilibrium theory. There is no possible way to explain it to students in their first exposure to economics. But the mainstream has rejected the old income-expenditure models that graced intro texts in the 1970s and were, in skeleton form, the basis for the forecasting models used back in those days. So what to do?
    The solution has been to use AS-AD as a placeholder. It allows instructors to talk about both prices and quantities in a rough market context. By putting Y on one axis and P on another, you can locate any macroeconomic outcome in the upper-right quadrant. It gets students “thinking like economists”.
    Unfortunately the model is unsound. If you dig into it you find contradictions that can’t be papered over. One example is that the AS curve depends on the idea that input prices for firms systematically lag output prices, but do you really want to argue the theoretical and empirical case for this? Or try the AD assumption that, even as the price level and real output in the economy go up or down, the money supply remains fixed.
    That’s why AS-AD is simply a placeholder. It has no intrinsic value as an economic model. No one uses it for policy purposes. It can’t be found in the econ blogs. It’s not a stripped down version of DSGE. Its only role is to occupy student brain cells until the real work of macroeconomic instruction can begin in a more advanced course.
    If I’m wrong I’d like to know before I cut off all lines of retreat.

    This won't fully answer the question (many DSGE adherents deny the existence of something called an AD curve), but here are a few counterexamples. One from today (here), and two from the past (via Tim Duy here and here).

    Update: Paul Krugman comments here.

      Posted by on Sunday, June 2, 2013 at 12:15 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (53) 

      Links for 06-02-2013

        Posted by on Sunday, June 2, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (62) 

        Saturday, June 01, 2013

        Simon Wren-Lewis: My verdict on NGDP Targets

        Simon Wren-Lewis:

        My verdict on NGDP Targets: At the beginning of the year I decided I needed to firm up my views on nominal GDP (NGDP) targets... I think I have now done enough to reach a tentative conclusion. I also gave a policy talk at the Bank of England yesterday, which was a useful incentive to get my thoughts in order.
        Here is a link to the slides from my presentation. What I first do is compare targeting the level of NGDP to an ideal discretionary monetary policy. That is a demanding standard of comparison, but I argue that NGDP targets have the potential advantage over discretion that they may allow central banks to pursue a time inconsistent policy after inflation shocks that would otherwise be politically difficult (see this post). More speculatively, the uncertainty for borrowers of NGDP variation may be more costly than uncertainty over inflation, as Sheedy argues (see this post).
        Against these advantages, I see two major negatives. First, following a shock to inflation, I think NGDP targets would hit output more than is optimal (see here and here). Second, if there is inflation inertia..., then targeting the level of NGDP is welfare reducing, because it is better in that case to let bygones be bygones. (There is a related point about ignoring welfare irrelevant movements in non-core inflation, but that probably needs an additional post to develop.)
        So far, so typical two handed economist. But now let’s shift the comparison to actual monetary policy, rather than some ideal. Or in other words, how does actual policy as practiced in the UK, US and Eurozone compare to an ideal policy? While NGDP targets may well hit output too hard following inflation shocks (and more generally gets the short run output inflation trade off wrong), current policy seems even worse. One interpretation of this is that policymakers are obsessed with fighting what they see as the last war. Outside the US this is often institutionalized by having inflation targets... As attitudes or institutional frameworks are unlikely to change soon, moving to NGDP targets represent a move towards optimality.
        This bias in policy is particularly unfortunate when we are at the zero lower bound (ZLB), because unconventional monetary policy is far less predictable and efficient. Although fiscal stimulus is likely to be less costly as a way of raising output at the ZLB than committing to higher future inflation, monetary policy has to work with fiscal policy as it is. (However policymakers have a responsibility to let the public know when inappropriate fiscal policy is making it difficult for monetary policy to meet its objectives...)
        With perverse fiscal policy and uncertain unconventional monetary policy, we need to raise inflation expectations as a means of overcoming the ZLB and raising demand. Here I agree with Christina Romer: we need to indicate something rather more fundamental than the kind of marginal change implied by the forward guidance we currently have in the US and are likely to have soon in the UK. My proposal is therefore the adoption of a target path for the level of NGDP that monetary policy can use as a guide to efficiently achieving either the dual mandate, or the inflation target if we are stuck with that. NGDP would not replace the ultimate objectives of monetary policy, and policymakers would not be obliged to try and hit that reference path come what may, but this path for NGDP would become their starting point for judging policy, and if policy did not move in the way indicated by that path they would have to explain why.
        To some supporters of NGDP targets this advocacy may seem a little wimpish. Why limit NGDP to an intermediate target that can be overridden? Given the problems with NGDP targets that I mention above, it would I believe be foolish to force monetary policymakers to follow them regardless. In general I think intermediate targets should never supplant ultimate objectives, and NGDP is an intermediate target. ...

          Posted by on Saturday, June 1, 2013 at 11:12 AM in Economics, Monetary Policy | Permalink  Comments (6) 

          'Little Cause for Inflation Worries'

          Remember those predictions that we'd have runaway inflation by now?:

          Little Cause for Inflation Worries, by Catherine Rampell, NYT: Periodically I am asked whether we should worry about inflation, given how much money the Federal Reserve has pumped into the economy. Based on the Bureau of Economic Analysis data released Friday morning, this answer is still emphatically no.
          The personal consumption expenditures, or P.C.E., price index, which the Fed has said it prefers to other measures of inflation, fell from March to April by 0.25 percent. On a year-over-year basis, it was up by just 0.74 percent. Those figures are quite low by historical standards...
          When looking at price changes, a lot of economists like to strip out food and energy, since costs in those spending categories can be volatile. Instead they focus on so-called “core inflation.” On a monthly basis, core inflation was flat. But year over year, this core index grew just 1.05 percent, which is the lowest pace since the government started keeping track more than five decades ago. ...

            Posted by on Saturday, June 1, 2013 at 12:24 AM in Economics, Inflation, Unemployment | Permalink  Comments (85) 

            Links for 06-01-2013

              Posted by on Saturday, June 1, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (38)