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 Mark Thoma on Sunday, June 2, 2013 at 10:24 AM in Economics, Income Distribution, Unemployment |
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
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
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
Update: Paul Krugman comments here.
Posted by Mark Thoma on Sunday, June 2, 2013 at 12:15 AM in Economics, Macroeconomics, Methodology |
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
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
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
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 Mark Thoma on Saturday, June 1, 2013 at 11:12 AM in Economics, Monetary Policy |
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
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 Mark Thoma on Saturday, June 1, 2013 at 12:24 AM in Economics, Inflation, Unemployment |