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Wednesday, July 31, 2013

FOMC Press Release: No Changes of Note

No big changes, or even little ones other than a few changes in language, so not much to report from the Fed's press release describing the FOMC meeting that ended today:

Press Release, Release Date: July 31, 2013, For immediate release: ... To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. ...
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. ...
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

    Posted by on Wednesday, July 31, 2013 at 11:30 AM in Economics, Monetary Policy | Permalink  Comments (14) 

    'A False Equivalence Classic'

    News organizations should listen to James Fallows. It's soooo frustrating to see reporting like this:

    A False Equivalence Classic, by James Fallows: A reader sent in the paragraph below as another classic in the false-equivalence chronicles. It comes from a bigtime news organization... I'm intentionally leaving out the details, because what makes the story significant is not that it's exceptional but that it's representative.

    The article is about the risk that the economy will be disrupted yet again, by yet another showdown over raising the federal debt ceiling...:

    With investors already nervous about the Federal Reserve's plan to start scaling back its stimulus program, another fiscal policy standoff could be more disruptive this time around.
    In recent days, both Democrats and Republicans have been digging in their heels, setting up another possible nerve-wracking battle over the debt ceiling, which the Treasury expects to hit by November.
    "Hearing Washington banter back and forth over this again was like a recurring bad dream," said [I'll leave out this guy's name too]...

    That's one way to describe what's going on: Another damned partisan flap! Can't these politicians grow up and stop squabbling? ... This is of course the tone that runs through most gridlock/ dysfunction stories...

    If you describe the "disagreement" [this] ... way, no one's really to blame. It's just politics, a sign of the symmetrical dysfunction that plagues us all.

    If you describe it [a] second way, then one side is sticking to historic norms and practices -- and the other is deliberately bringing on a showdown, with the all consequent risks for the domestic and international economies, via demands and threats out of scale with what previous Congresses have done. This second version is what's happening. ...

    What's going on now is ... like the 1970s-era hijackers Brendan Koerner describes in his recent book, who would threaten to blow up the plane unless they got the ride to Cuba they wanted. Or, if you want a less violent analogy, it's like me walking into a restaurant, ordering and enjoying a meal, and then when I finished just tearing up the check and saying that I was "digging in my heels" about whether I should pay. ...

    Decent reporting on these issues that places the blame where it belongs would help immensely, but I probably shouldn't hold my breath waiting for this to change.

      Posted by on Wednesday, July 31, 2013 at 09:45 AM in Economics, Press | Permalink  Comments (62) 

      Why Should Government Grow at the Same Rate as GDP?

      I have a question. Why should government spending as a percentage of GDP stay constant as GDP grows? It seems that, as we grow wealthier as a society, we would want relatively more of the kinds of goods government provides, e.g. social insurance.

        Posted by on Wednesday, July 31, 2013 at 12:33 AM in Economics, Fiscal Policy | Permalink  Comments (157) 

        Fed Watch: While We Wait...

        Tim Duy:

        While We Wait..., by Tim Duy: While we wait for the second quarter GDP report and the outcome of the FOMC meeting, you can amuse yourself watching  Lakshman Achuthan of the Economic Cycle Research Institute desperately clinging to his call that a recession started in the middle of 2012:
         A reminder of the high-frequency data employed in recession dating:

        RECESS073113[Click to enlarge]

        I am not saying its the most exciting data, but it still isn't a recession.  Achuthan is apparently clinging to a thin reed of hope that every major data series is revised substantially downward.  Given the low expectations for the second quarter GDP report, personally I would hold out hope for a surprise negative print.  I still don't think the NBER would see such an outcome as anything more than a one quarter aberration, but I suspect it is Achuthan's best hope at this point.

          Posted by on Wednesday, July 31, 2013 at 12:24 AM Permalink  Comments (3) 

          Links for 07-31-2013

            Posted by on Wednesday, July 31, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (63) 

            Tuesday, July 30, 2013

            Fed Watch: Hawks and Doves, Again

            Tim Duy:

            Hawks and Doves, Again, by Tim Duy: Neil Irwin argues that the classification of Fed policymakers into hawks and doves is too simplistic, and, of course, he is correct. He concludes:

            In other words, maybe instead of classifying central bankers by the variety of bird they most resemble, we should instead judge them on their ability to adapt their thinking to circumstance.

            That said, I doubt we are going to change this convention anytime in the near future. We can, however, better define the terms to at least reduce the negative connotations associated with either identifier. I use the terms to refer to a policymaker's judgment as to the appropriate level of monetary accommodation given the current and expected economic situation. A "dovish" policymaker tends to view the economy as likely needing more monetary accommodation than a "hawkish" policymaker. Similarly, if I say the risk is that tomorrow's FOMC statement will sound "dovish," it means that it will suggest a greater amount of monetary accommodation relative to the last FOMC statement. I think this is a refinement of my thoughts the last time I tackled this subject:

            I tend to think of the distinction in terms of the policymaker's inflation forecast. A hawk is a policymaker who perceives a greater upside risk to the inflation forecast and thus anticipates policy will turn tighter sooner than later. On the other side, doves tend to see less upside risk to the inflation forecast, or even downside risk, and thus do not anticipate a tighter policy in the near term.

            As Irwin points out, a policymaker might not be hawkish because of the current inflation risk, but because of risk of financial instability. Thus, it is more appropriate to use the terms to refer to a policy outlook rather than the specific reason (such as inflation, deflation, financial instability, etc.) for that outlook.

            The key is that the terms hawks or doves refer to a perception about the appropriate path of monetary policy, and it is possible - and desirable - that the perceive path changes as the economy changes. In other words, a policymaker could be "dovish" at one point in the business cycle, and "hawkish" at another. If the FOMC turns "hawkish" in the near future, we can expect less accommodation (or even tighter policy), which is what we would expect if the economy were accelerating.

            This definition does not imply that "hawks" or "doves" have different inflation targets, which I think is an outdated classification. On that basis, there are no such things as hawks or doves - the FOMC has already quantified their objective of 2% annual PCE inflation over the longer run. Even the Evan's rule is not technically at odds with that objective; it merely allows the Fed to reach that objective from above, making clear that actual inflation will likely be within a range around 2%. In other words, the target is not a ceiling.

            So when we learn that the doves, and specifically Vice Chair Janet Yellen, have been better forecasters than the hawks, we should not conclude that those favoring a higher inflation target have been correct. We should conclude that those who favored additional monetary accommodation on the basis of their forecasts were correct. Those who favored relatively less accommodation based on their forecasts were incorrect.

            The hawks/doves distinction has returned with the great debate over who should take the helm of the Federal Reserve when current-chairman Ben Bernanke steps down. Sadly, there is an effort to paint Janet Yellen in a negative light because she is a "dove" and thus will favor higher inflation, the debasing of the currency, cats and dogs living together, etc. This is the negative connotation associated with the outdated definition of hawks and doves. The attack on Yellen takes an ugly turn in the Wall Street Journal:

            Janet Yellen, the current Fed vice chairman, has emerged as the favorite of the Democratic left. As an economist with long experience at the Fed, she doesn't lack for professional credentials. But her cause has been taken up by the liberal diversity police as a gender issue because she'd be the first female Fed chairman.

            Nancy Pelosi has bellowed her support, and Christina Romer, who was chief White House economist for the first two years of Mr. Obama's Presidency, has all but said it would be a defeat for women if Ms. Yellen doesn't get the Fed job. That led our friends at the New York Sun to wonder if they had somehow missed the creation of "the female dollar" given that they thought the Fed's main task is to preserve the value of the currency.

            Ms. Yellen is also seen, in and outside the Fed, as a leading monetary dove. That isn't limited to her backing for Mr. Bernanke's monetary interventions since the 2008 panic. We've followed Ms. Yellen for 20 years and can't recall a key juncture when her default policy wasn't to keep spiking the punchbowl. Many Democrats think the Fed needs to keep interest rates at near zero through the 2016 election, and Ms. Yellen is their woman.

            I suppose we are supposed to infer that all women are at heart dovish policymakers bent on debasing the US currency. I think Kansas City Federal Reserve President Esther George would disagree. And I am not sure how you read this passage without realizing the case against Yellen is, at its core, nothing more than sexism. Moreover, I am not sure how you read this column and not realize the ignorance of the author. Regarding the punchbowl comment, Neil Irwin, unsurprisingly, has a better recollection of the past twenty years:

            For example, Janet Yellen, the current Fed vice-chair, is viewed in markets as an uber-dove because she has been a strong advocate of the Fed’s unconventional monetary easing to try to help the job market. But it wasn’t always so. Larry Meyer served as a Fed governor with Yellen in the 1990s. In 1996, the two of them had concluded that the Fed needed to raise interest rates to fight the threat of inflation. They went to Alan Greenspan and told him of their concerns, threatening to dissent at a future meeting unless there was a rate increase. They lost the argument, but it is a sign that while Yellen may be a dove right now, the same would not be true in all states of the world.

            I also have followed Yellen for the better part of 20 years and never for a moment considered her a dove relative to the old, outdated definition. If anything, I would have considered her a hawk relative to the current 2% target. Recall that she was an early advocate of numerical targets. From 2005:

            ...I find myself still pretty comfortable with the numerical objective I had recommended almost a decade ago. More specifically, I would now favor a 1.5 percent numerical objective for inflation as measured using the core personal consumption expenditures (PCE) price index, which, given the recent average differences in measurement bias, corresponds to a 2 percent objective for the core CPI. If the stability of my own views on the appropriate numerical inflation objective is representative, it seems likely that the FOMC’s numerical inflation objective would probably change fairly little over time due to economic factors.

            If you assume that core and headline rates converge to the same over time, than at one time Yellen favored what could be considered a relatively more hawkish stance regarding the appropriate rate of inflation. The next year she suggested that even lower inflation was acceptable:

            I see an inflation rate between 1 and 2 percent, as measured by the core personal consumption expenditures price index, as an appropriate price stability objective for the Fed.

            But what she has not changed her view on achieving that outcome within the structure of the dual mandate:

            However, I also think it is critically important that a numerical inflation objective not weaken our commitment to a dual mandate that includes full employment. Therefore, I would see the numerical objective as a long-run goal, and would want the Committee to have a flexible timeframe within which to maintain it. We’ve done a good job under Chairman Greenspan of promoting both price stability and full employment. I believe that a numerical long-run objective for inflation will enhance our ability to maintain that success even in the face of the significant challenges that may come up.

            Yellen doesn't view an inflation target as being inconsistent with achieving full employment. And guess what? She has been right. The current pursuit of full employment certainly has not fueled inflation. But if it did, if the 2% target was in jeopardy, I am confident Yellen would act accordingly. Indeed, I think she would surprise those who deride her as a "dove."

            Bottom Line: The classification of policymakers into hawks and doves is unfortunate given the negative connotation associated with doves in particular. It is even more unfortuate that Yellen has been identified as a dove innumerable times in the press and blogs (myself included). I don't know that we can easily abandon the terminolgy, but we very much need to work to eliminate any negative connotations to the terms.

              Posted by on Tuesday, July 30, 2013 at 04:32 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (9) 

              Roger Strassburg Interview of Jamie Galbraith

              Haven't checked in with Jamie Galbraith for awhile (this came by email, so no link -- also, it's relatively long, and I suppose I should note that I don't agree with everything that is said):

              Roger Strassburg:  I was listening to your speeches.  One of them that I found was kind of interesting was the one in Croatia, where you talked about true and false Keynesianism.  What does that actually mean?
              James Galbraith:  Well, it's a politer term for the subspecies that John Robinson referred to by a somewhat ruder word.  What I'm getting at there, hoping to stick some needles under the skin of certain people, is the misleading, and I think fundamentally anti-Keynesian idea that the macro-economic task consists of stimulating, and thereby returning the economy from its present state to the track of potential output, which was previously considered to be normal.  What's wrong with this, is two things.  First of all, it conveys the false impression that the macro-economic problem is a short-term problem amenable to a relatively short-term solution consisting largely just of increased spending or reduction of taxes.  That, in turn diverts attention away from the problems that I think are effective barriers to such a return.
              So my view is that the Keynes, were he around today, would have a vivid appreciation of the difficulties and would be taking a strategic and long-term approach to these issues, putting in place institutional changes that in my view are required.  They include, first of all, regulation of the debt issue, a transformation and restructuring of the banking sector, new institutions to provide employment to those who need it, and a strengthened system of comprehensive social insurance.  All of those things were part of the New Deal formula, and they are all, I think, palpably essential, not to restore growth and full employment, but to face the much more urgent task of preventing any imminent disaster.
              Roger Strassburg:  So you don't necessarily think that the growth trend is a good measure?

              Continue reading "Roger Strassburg Interview of Jamie Galbraith" »

                Posted by on Tuesday, July 30, 2013 at 10:18 AM in Economics | Permalink  Comments (19) 

                'Howard Dean Sells Out'

                This was in today's links, but it's worth highlighting:

                Howard Dean Sells Out: Monday Health Care Lobbyist Smackdown Weblogging, by Brad DeLong: The government already sets rates for Medicare, through the RVS and the RUC process.
                The Independent Payment Advisory Board--IPAB--is an attempt to set rates in a less-stupid and more evidence-based way.
                Thus Howard Dean claiming that "the ACA's rate-setting won't work", thereby telling his readers that the creation of IPAB introduces rate-setting into some equilibrium of free-market prices for Medicare, is Howard Dean being mendacious to try to protect the profits of the clients of McKenna, Long, & Aldridge. It is not Howard Dean weighing in on public policy trying to make America a better place.
                Shame on Howard Dean. Disgraceful. ...

                  Posted by on Tuesday, July 30, 2013 at 06:21 AM in Economics, Health Care, Politics | Permalink  Comments (11) 

                  U.S. Higher Education Enrollments, Falling Behind

                  Tim Taylor:

                  In almost every high income country, the share of 25-34 year-olds with higher education is higher than that for the age 25-64 population as a whole--about 7 percentage points higher. This is the pattern one would expect to see if a country is expanding access to higher education. But the U.S. is an exception, where the share of 25-34 year-olds with with a tertiary education degree is lower than for the age 25-64 population.

                  More here.

                    Posted by on Tuesday, July 30, 2013 at 12:42 AM in Economics, Universities | Permalink  Comments (37) 

                    Income Inequality: Obama vs.Limbaugh--Middle Out or Trickle Down?

                    We are, as they say, live:


                    Income Inequality: Obama vs.Limbaugh--Middle Out or Trickle Down?, by Mark A. Thoma: President Obama unveiled his latest initiative to enhance economic growth, create quality jobs, and reduce inequality last week, an approach he calls growing from the “middle out.” The basis of this approach is the idea that rising inequality has redirected income from the middle class to the top of the income distribution, and the reduced buying power of the middle class has reduced economic growth. Thus, the key to higher growth is to enact policies that increase the share of national income that flows to the middle class.
                    Of course, as with previous initiatives from the Obama administration to address our economic problems, a divided, gridlocked government means there is no chance of this initiative actually passing. In fact, the response from the political right was predictable, a claim that “trickle-down” supply-side policy is the key to fixing all that ails the economy. For example, Rush Limbaugh reacted the president’s speech by saying ...

                    But, as the column goes on to explain, this is a false debate (and there's a connection to inequality).

                      Posted by on Tuesday, July 30, 2013 at 12:33 AM in Economics, Income Distribution, Policy, Politics | Permalink  Comments (26) 

                      Links for 07-30-2013

                        Posted by on Tuesday, July 30, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (64) 

                        Monday, July 29, 2013

                        Cheating on Charter School Evaluation

                        Mark Kleiman:

                        (Un)accountability, by Mark Kleiman: What does a Republican charter-school enthusiast who believes in school-level accountability for educational results do when a charter school run by a big Republican donor gets a lousy evaluation score? Why, he cheats, of course.

                        Tony Bennett, former head education honcho in Indiana and current head education honcho in Florida, to his chief of staff:

                        Anything less than an A for Christel House compromises all of our accountability work.

                        Bennett to the official in charge of the grading system for schools:

                        I hope we come to the meeting today with solutions and not excuses and/or explanations for me to wiggle myself out of the repeated lies I have told over the past six months.

                        Somehow, magically, the score for Christel House went from 2.9 (C+) to 3.75 (a solid A).

                        Look: I believe in outcomes measurement. I believe in accountability. ... What I don’t believe is that the current set of testing/accountability/choice racketeers is going to make things better rather than worse. The cheating is so pervasive that I now see no basis for believing any claimed good result. ...

                        You’d have thought that charter schools, like private prisons, could hardly have done worse than their big, clumsy, bureaucratic, union-dominated public competition. But you would have been wrong, twice.

                          Posted by on Monday, July 29, 2013 at 06:04 PM in Economics | Permalink  Comments (22) 

                          Has Obamanomics Fueled Inequality? Nope.

                          I wanted to respond to this silly commentary in the WSJ, The Inequality President, claiming that Obama has fueled inequality, but never managed to do it. So I'm glad someone else (S.M. at The Economist) took up the cause:

                          Growth and inequality, by S.M., Democracy in Action, The Economist: The Wall Street Journal is deeply unhappy with Barack Obama’s recent speech on the economy at Knox College in Galensburg, Illinois. The rising inequality in Americans’ incomes that Mr. Obama bemoaned last week, the Journal claims, is a direct result of his administration’s policies...

                          The Journal is right that the middle class has seen little benefit from the modest recovery... But is it true that “Obamanomics” is to blame for the plight of the middle class? ...

                          A pair of disingenuous arguments fuel the Journal’s claim that Mr Obama’s policies have put a brake on the recovery. Here is the first:

                          The food stamp and disability rolls have exploded, which reduces inequality but also reduces the incentive to work and rise on the economic ladder.

                          The Onion has exposed the oddity of this proposition as well as anyone, and recent research into the relationship between the Supplemental Nutrition Assistance Program (SNAP) and work incentives belies the Journal’s claim. It stands to reason that a few hundred dollars in food stamps for you and your family every month would not turn you into a beach bum or deter you from searching for a job. ...

                          More to the point, in the mid-2000s about 96% of people who worked before receiving food stamps continued to work after entering the program. So helping people put food on the table does not seem to contribute to unemployment and does not, according to available evidence, hamper economic growth.

                          The Journal’s second warrant for the claim that Mr Obama's policies are anti-growth is equally weak:

                          Mr. Obama's record tax increases have grabbed a bigger chunk of affluent incomes, but they created uncertainty for business throughout 2012 and have dampened growth so far this year.

                          This bald assertion makes little sense. Uncertainty may have plagued the business community in the run-up to the fiscal cliff, but since the year-ending deal to very modestly increase tax rates on the highest earners, there have been no real surprises. ...

                          [A]s Mr Obama emphasized in his speech last week, the middle class continues to fall behind even as the stock market surges and the housing market picks up, and there is no apparent quick fix for what seems to be a worsening trend over at least the past decade. The president promises to provide detailed proposals for a long-term solution in the coming weeks, and his ideas should be scrutinized carefully. But dismissive, fact-blind critiques of Mr. Obama as an “inequality president” are no help at all.

                            Posted by on Monday, July 29, 2013 at 09:05 AM in Economics, Income Distribution | Permalink  Comments (71) 

                            Paul Krugman: Stranded by Sprawl

                            What's the matter with Atlanta?:

                            Stranded by Sprawl, by Paul Krugman, Commentary, NY Times: Detroit is a symbol of the old economy’s decline. ... Atlanta, by contrast, epitomizes the rise of the Sun Belt...
                            Yet in one important respect booming Atlanta looks just like Detroit gone bust: both are places where the ... children of the poor have great difficulty climbing the economic ladder. In fact, upward social mobility ... is even lower in Atlanta than it is in Detroit. And it’s far lower in both cities than it is in, say, Boston or San Francisco, even though these cities have much slower growth than Atlanta.
                            So what’s the matter with Atlanta? A new study suggests that the city may just be too spread out ... Atlanta is the Sultan of Sprawl, even more spread out than other major Sun Belt cities. This would make an effective public transportation system nearly impossible to operate... As a result, disadvantaged workers often find themselves stranded; there may be jobs available somewhere, but they literally can’t get there.
                            The apparent inverse relationship between sprawl and social mobility obviously reinforces the case for “smart growth” urban strategies... But it also bears on a larger debate about what is happening to American society. I know I’m not the only person who read the ... new study and immediately thought, “William Julius Wilson.”
                            A quarter-century ago Mr. Wilson, a distinguished sociologist, famously argued that the postwar movement of employment out of city centers to the suburbs dealt African-American families, concentrated in those city centers, a heavy blow, removing economic opportunity just as the civil rights movement was finally ending explicit discrimination. And he further argued that social phenomena such as the prevalence of single mothers, often cited as causes of lagging black performance, were actually effects —... the family was being undermined by the absence of good jobs.
                            These days,... traditional families have become much weaker among working-class whites, too. Why? Well,... the new research on social mobility suggests that sprawl — not just the movement of jobs out of the city, but their movement out of reach of many less-affluent residents of the suburbs, too — is ... playing a role.
                            As I said, this observation clearly reinforces the case for policies that help families function without multiple cars. But you should also see it in the larger context of a nation that has lost its way, that preaches equality of opportunity while offering less and less opportunity to those who need it most.

                              Posted by on Monday, July 29, 2013 at 12:37 AM in Economics, Income Distribution | Permalink  Comments (88) 

                              Fed Watch: FOMC Week

                              Tim Duy:

                              FOMC Week, by Tim Duy: With the FOMC widely expected to hold the pace of its asset purchase program steady, the real action will be in the statement. Two issues bear watching, the economic outlook and and the forward guidance. The risk is that one or both are more dovish than the last FOMC statement. But, interestingly, being more dovish does not necessarily imply a delay to asset purchase tapering; it could also mean that the Fed leaves a September tapering in place, while using forward guidance to ease policy policy by signaling an even more extended period of low rates.

                              At this risk of oversimplifying the last FOMC statement, narrow the Fed's June outlook to:

                              Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace...

                              ... The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.

                              Putting inflation aside for a moment, the Fed can move in a dovish direction by downgrading from "moderate" to "modest." As Calculated Risk notes, much here hinges on the Fed's interpretation of what is largely expected to be a weak GDP report (released the same day as the FOMC statement), on the order of 1% or less for the second quarter. I tend to think the Fed will largely dismiss the report as an artifact of fiscal contraction and other one-off events. Indeed, in his recent Congressional testimony, Federal Reserve Chairman Ben Bernanke indicated that the Fed's forecast had not changed significantly since the last FOMC meeting despite knowing that the second quarter GDP would be lackluster. Has he had a change of heart since then?

                              Another possible hint on the outlook could be the consistency of the last two Beige Books. From the June Beige Book:

                              Overall economic activity increased at a modest to moderate pace since the previous report across all Federal Reserve Districts except the Dallas District, which reported strong economic growth.

                              The language was similar in July:

                              Reports from the twelve Federal Reserve Districts indicate that overall economic activity continued to increase at a modest to moderate pace since the previous survey.

                              Arguably a downgrade, but I doubt policy is likely to shift on a minor pullback in activity in just one Federal Reserve District. Still, given that the data flow has certainly not been better than expected, even if they do not downgrade the basic assessment, they could suggest that the risks to the outlook are more balanced (rather than "diminished" as in June). With this in mind, recall that Bernanke's assessment of the risk appeared more balanced in his Congressional testimony, which suggests this week's FOMC statement will indicate the same.

                              Regarding inflation, the Fed last concluded:

                              The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

                              This assessment is not likely to change. Possible, though I think unlikely, would be a change to this sentence:

                              Partly reflecting transitory influences, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

                              A decidedly dovish shift would be to remove the reference to "transitory influences." Even more dovish would be to suggest that inflation expectations are trending down, but I very much doubt the Fed will go that far.

                              In addition to shifting their assessment of the economy, the Fed may choose to tighten up it's forward guidance. Considering that Fed speakers, including Bernanke, have indicated that, given the inflation outlook, interest rates will remain unchanged even after the unemployment rate hits 6.5%, it seems possible that the FOMC could shift the unemployment threshold down to 6%. They could also formalize Bernanke's 7% unemployment for ending quantitative easing. What they won't do is increase the 2.5% inflation threshold; indeed, that one I view more as a trigger than a threshold in any event.

                              It may be the case that, barring a sharp deterioration in the economy, we will find that changes in the economic assessment should be interpreted as changes in the expected timing of the first rate hike rather than the pace of the exit from quantitative easing. This may be the case even if the forward guidance is left unchanged. The Fed seems to desire a shift in the mix of policy while maintaining the current level of accommodation, and they may use the statement to signal such an intention.

                              Moreover, arguably there is little harm at this point to sticking with a plan to end asset purchases by the middle of next year. Bernanke already shifted expectations in such a way that interest rates jumped to a new range around 2.5%. In order to reverse that increase, I suspect the Fed would need to do more than just suggest a delay in the tapering. I suspect they would need to surprise markets with an increase in the pace of purchases. But I don't see much appetite at the FOMC for such a move other than perhaps St. Louis Federal Reserve President James Bullard. Thus, FOMC members could decide that they still want out of QE and just use forward guidance to control the pace of any further rate gains.

                              Bottom Line: This will be a very interesting FOMC meeting even if the statement is left largely unchanged. That alone reveals that the Fed is moving ahead with their plan to taper undeterred by any soft spots in the data. After all, wouldn't this just be another midyear slowdown in the data flow? A move to a more dovish statement, either in the economic assessment or fine-tuning the forward guidance, however, does not necessarily mean any change in the plan to end asset purchases. It could all be about the timing of the first rate hike at this point. The plan to end asset purchases may have had more to do with market functioning than economic activity in the first place. And that debate is really over regardless of when the Fed actually tapers. Whether September or December or early next year is probably no longer very important; the date of the first rate hike, however, is still very important.

                                Posted by on Monday, July 29, 2013 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (8) 

                                Links for 07-29-2013

                                  Posted by on Monday, July 29, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (52) 

                                  Sunday, July 28, 2013

                                  'Advertising, Paternalism, Information and Plain Packaging of Cigarettes'

                                  Simon Wren-Lewis on the economics of advertising for cigarettes. He asks, is banning advertising paternalistic, or does it enhance our freedom?:

                                  Advertising, Paternalism, Information and Plain Packaging of Cigarettes: This is off the usual macro beat, so probably this point has been made in a much clearer way by others, but it is hardly ever made in the public debate, and I have read economists who argue the opposite. It was prompted by the UK government’s predictable decision to kick ‘plain packaging’ of cigarettes (example...) into the long grass. One of the arguments used against plain packaging is that it represents yet more paternalism by the government. My general thought is this: is banning advertising paternalistic, or is it enhancing our freedom? ...
                                  The argument for advertising has to be that the benefits to the few in getting useful information outweighs the costs to the many in either avoiding it, or getting information they do not want. It is not paternalistic to ban advertising, just as it is not paternalistic to stop people being stalked.
                                  That is the general point which hardly ever seems to be made. ... However the debate about ‘plain packaging’ is not about either packaging that is plain, or the pros and cons of advertising. The Australian version of plain packaging replaces the logo of the cigarette with a picture of one of the health risks if you smoke these cigarettes (see [here]). So it is not about banning advertising, but replacing one type of advertising with another.
                                  Those who do not smoke and have no intention of smoking are not forced to look at these adverts, so banning this kind of advertising would not increase their freedom. For those who do not smoke but might smoke, and probably for those who do smoke, the information content of the ‘plain packages’ is clearly much greater than packages that were dominated by a logo. So this is one example where the information content of advertising does dominate any reduction in freedom that the advertising entails. ...

                                  [I cut quite a bit from the original, particularly on the costs and benefits of advertising in general that set up the second paragraph above.]

                                    Posted by on Sunday, July 28, 2013 at 09:31 AM in Economics, Market Failure | Permalink  Comments (22) 

                                    'Inequality of Opportunity Begins at Birth'

                                    The beginning of health inequality:

                                    Inequality of Opportunity Begins at Birth, by Bill Gardner: Equality of opportunity means that we are not a caste society. Who we will become is not fixed by the circumstances of our births. Some children will do better than others, but this should result from a fair competition. ...
                                    But we don’t appreciate how deep inequality runs. The graph below is from a presentation by Angus Deaton which (I believe) reported data from the National Health Interview Survey. The horizontal axis is the logarithm of family income in 1982 dollars, running from about $3600 to over $80,000. The vertical axis is self-reported ill-health (higher numbers reflect worse health). The parallel lines represent different age groups of respondents.

                                    Screen Shot 2013-07-25 at 8.59.04 PM

                                    There are three important facts packed into this slide. First, the lines stack up in order of increasing age, meaning that older people reported worse health than younger people. Second, all the lines slope downward, meaning that the poorer you were, the more likely you had poor health. ...

                                    Lastly, notice how the age lines are much more dispersed on the left (poorest) side of the graph than the right (richest) side of the graph. This means that health deteriorates more quickly with age among the poor than among the rich.

                                    ...there is substantial evidence that health inequality starts at birth, or even conception. As Janet Currie argues, there is

                                    huge inequality in health at birth. For example, the incidence of low birth weight (birth weight less than 2500 grams) is more than three times higher among children of black high school dropout mothers than among children of white college educated mothers.

                                    ...the infants of the poor are also at risk because poor mothers have poorer health, are more stressed, and are more likely to be exposed to environmental toxins. Poverty gets underneath the skin, starting in the uterus.

                                    Poor health deriving from inequality of economic well-being begins at birth and accumulates as children develop. We are farther from equality of opportunity than most of us acknowledge.

                                      Posted by on Sunday, July 28, 2013 at 12:24 AM in Economics, Health Care | Permalink  Comments (55) 

                                      Links for 07-28-2013

                                        Posted by on Sunday, July 28, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (56) 

                                        Saturday, July 27, 2013

                                        The Political Right's Affection for QE

                                        This (from Paul Krugman) describes my position on QE:

                                        ...QE, in the eyes of its most enthusiastic advocates, can return us to Milton’s Eden. And they are determined to read the evidence as confirming that hopeful notion.
                                        Yet there are many economists, myself included, who regard this view as highly unrealistic, yet support more aggressive Fed action all the same. Why? First, because it might help and is unlikely to do harm. Second, because the alternative — fiscal policy — may be of proven effectiveness, but is also completely blocked by politics. So the Fed’s efforts are all we have.

                                        And I think his explanation for why so many conservatives have embraced QE is right on the mark as well:

                                        the affection for QE comes, instead, from the alluring prospect — to some conservatives, at least — of getting economic stabilization without any need for activist government outside the narrow sphere of monetary policy. What he doesn’t say clearly, at least in this piece, is that this was the allure of old-fashioned monetarism too. Just stabilize the money supply, declared Milton Friedman, and we don’t need any of this Keynesian stuff (even though Friedman, when pressured into providing an underlying framework, basically acknowledged that he believed in IS-LM). Why, if only the Fed had stabilized M2, there would have been no Great Depression!

                                        I'd add that conservatives favor a rules-based QE rather than a discretionary QE for the same reason, e.g. just stabilize nominal GDP and all will be well in the world, no need for Fed activism beyond that simple rule.

                                          Posted by on Saturday, July 27, 2013 at 10:12 AM in Economics, Monetary Policy, Politics | Permalink  Comments (209) 

                                          U.S. Firms Holding $1.8 Trillion in Liquid Assets

                                          Tim Taylor:

                                          U.S. Firms Holding $1.8 Trillion in Liquid Assets, by Tim Taylor: U.S. firms are holding $1.8 trillion in liquid assets: that is, either cash or marketable securities. What's going on here?  Laurie Simon Hodrick tackles the question, "Are U.S. Firms Really Holding Too Much Cash?" in a July 2013 Policy Brief written for the Stanford Institute for Economic Policy Research.
                                          For background, here are a couple of figures. The first shows cash and marketable securities of firms over time--that is, "liquid assets"--rising rapidly. The second shows these liquid assets as a share of the short-term liabilities of firms. Of course, firms always like to have some cash on hand, but historically, that has been about 30% of all short-term liabilities. In the last few years, liquid assets have climbed to almost half of all short-term liabilities.


                                          The argument usually heard for holding additional liquid assets is that the last few years have been times of considerable uncertainty about the economy and economic policy, so firms need a bigger cushion. This explanation has some truth in it, but it's not all of the truth.
                                          1) This need for additional liquid assets is not affecting all firms or all industries equally, but instead is affecting a smaller number of highly profitable companies. ... As Hodrick explains: "... [C]ash holdings are concentrated among highly profitable firms, many in the technology and health care sectors."
                                          2)  Some of the cash holdings seem related to issues of the taxation of multinational firms. ...
                                          3) There's a long tradition in the economics and corporate finance literature of being suspicious about firms that hold large amounts of cash. After all, large amounts of cash on hand might help the job security and emotional comfort of the managers, but not necessarily be in the best interests of shareholders. There's an argument that cash-heavy firms should either have a plan for at least potentially investing that cash in a project that will increase future company profits... Saying that you need a cash reserve to take advantage of unexpected opportunities sounds great--but after a few years of doing this, shouldn't firms be able to point to a series of actual unexpected opportunities of which they did take advantage?
                                          There's are a few signs that, under pressure from shareholders and other investors, some firms are starting to pay out some of their cash hoard. "On April 23, 2013, Apple Inc. announced its intention to pay out a total of $100 billion in cash by the end of calendar year 2015, the largest total payout ever authorized." However, by some estimates this payout will only be enough to keep Apple's overall cash hoard from increasing--not actually to diminish it.

                                            Posted by on Saturday, July 27, 2013 at 01:34 AM in Economics | Permalink  Comments (53) 

                                            Links for 07-27-2013

                                              Posted by on Saturday, July 27, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (57) 

                                              Friday, July 26, 2013

                                              Gone Fishin'

                                              Trout fishing in America today (near French Pete). Back later.

                                                Posted by on Friday, July 26, 2013 at 07:56 AM in Economics, Miscellaneous, Oregon | Permalink  Comments (5) 

                                                Paul Krugman: Republican Health Care Panic

                                                The success of Obamacare is driving Republicans to yet another round of potentially damaging brinsmanship:

                                                Republican Health Care Panic, by Paul Krugman, Commentary, NY Times: Leading Republicans appear to be nerving themselves up for another round of attempted fiscal blackmail. With the end of the fiscal year looming, they aren’t offering the kinds of compromises that might produce a deal and avoid a government shutdown; instead, they’re drafting extremist legislation ... that has no chance of becoming law. Furthermore, they’re threatening, once again, to block any rise in the debt ceiling, a move that would damage the U.S. economy and possibly provoke a world financial crisis.
                                                Yet even as Republican politicians seem ready to go on the offensive, there’s a palpable sense of anxiety, even despair, among conservative pundits and analysts. Better-informed people on the right seem, finally, to be facing up to a horrible truth: Health care reform, President Obama’s signature policy achievement, is probably going to work.
                                                And the good news about Obamacare is, I’d argue, what’s driving the Republican Party’s intensified extremism. Successful health reform wouldn’t just be a victory for a president conservatives loathe, it would be an object demonstration of the falseness of right-wing ideology. So Republicans are being driven into a last, desperate effort to head this thing off at the pass. ...
                                                Over all,... health reform will help millions of Americans who were previously either too sick or too poor to get the coverage they needed, and also offer a great deal of reassurance to millions more...; it will provide these benefits at the expense of a much smaller number of other Americans, mostly the very well off. ...
                                                And the prospect that such a plan might succeed is anathema to a party whose whole philosophy is built around doing just the opposite, of taking from the “takers” and giving to the “job creators,” known to the rest of us as the “rich.” Hence the brinkmanship.
                                                So will Republicans actually take us to the brink? If they do, it will be crucial to understand why they would do such a thing, when their own leaders have admitted that confrontations over the budget inflict substantial harm on the economy. It won’t be because they fear the budget deficit, which is coming down fast. Nor will it be because they sincerely believe that spending cuts produce prosperity.
                                                No, Republicans may be willing to risk economic and financial crisis solely in order to deny essential health care and financial security to millions of their fellow Americans. Let’s hear it for their noble cause!

                                                  Posted by on Friday, July 26, 2013 at 12:33 AM in Economics, Health Care, Politics | Permalink  Comments (186) 

                                                  'US Infrastructure UnderInvestment vs Other Developed Nations'

                                                  This is via Barry Ritholtz at The Big Picture:

                                                  McKinsey: US Infrastructure UnderInvestment vs Other Developed Nations, by Barry Ritholtz:: The United States must raise infrastructure spending by 1 percentage point of GDP to meet future needs
                                                  Click to enlarge Source: McKinsey

                                                    Posted by on Friday, July 26, 2013 at 12:24 AM in Economics, Fiscal Policy | Permalink  Comments (31) 

                                                    How Anti-Poverty Programs Go Viral

                                                    This is a summary of research by Esther Duflo, Abhijit Banerjee, Arun Chandrasekhar, and Matthew Jackson on the spread of information about government programs through social networks:

                                                    How anti-poverty programs go viral, by Peter Dizikes, MIT News Office: Anti-poverty researchers and policymakers often wrestle with a basic problem: How can they get people to participate in beneficial programs? Now a new empirical study co-authored by two MIT development economists shows how much more popular such programs can be when socially well-connected citizens are the first to know about them.
                                                    The economists developed a new measure of social influence that they call “diffusion centrality.” Examining the spread of microfinance programs in rural India, the researchers found that participation in the programs increases by about 11 percentage points when well-connected local residents are the first to gain access to them.
                                                    “According to our model, when someone with high diffusion centrality receives a piece of information, it will spread faster through the social network,” says Esther Duflo, the Abdul Latif Jameel Professor of Poverty Alleviation at MIT. “It could thus be a guide for an organization that tries to [place] a piece of information in a network.”
                                                    The researchers specifically wanted to study how knowledge about a program spreads by word of mouth, MIT professor Abhijit Banerjee says, because “while there was a body of elegant theory on the relation between what the network looks like and the speed of transmission of information, there was little empirical work on the subject.”
                                                    The paper, titled “The Diffusion of Microfinance,” is published today in the journal Science. ...
                                                    Microfinance is the term for small-scale lending, popularized in the 1990s, that can help relatively poor people in developing countries gain access to credit they would not otherwise have. The concept has been the subject of extensive political debate; academic researchers are still exploring its effects across a range of economic and geographic settings.
                                                    “Microfinance is the type of product which is very interesting to study,” Duflo says, “because in many cases it won’t be well known, and hence there is a role for information diffusion.” Moreover, she notes, “It is also the kind of product on which people could have strongly held … opinions.” So, she says, understanding the relationship between social structure and adoption could be particularly important.
                                                    Other scholars believe the findings are valuable. Lori Beaman, an economist at Northwestern University, says the paper “significantly moves forward our understanding of how social networks influence people’s decision-making,” and suggests that the work could spur other on-the-ground research projects that study community networks in action.
                                                    “I think this work will lead to more innovative research on how social networks can be used more effectively in promoting poverty alleviation programs in poor countries,” adds Beaman... “Other areas would include agricultural technology adoption … vaccinations for children, [and] the use of bed nets [to prevent malaria], to name just a few.”  ...

                                                      Posted by on Friday, July 26, 2013 at 12:15 AM in Academic Papers, Economics | Permalink  Comments (1) 

                                                      Links for 07-26-2013

                                                        Posted by on Friday, July 26, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (81) 

                                                        Thursday, July 25, 2013

                                                        Fed Watch: Negative Feedback Loops?

                                                        More on housing from Tim Duy, and how it might or might not influence thinking at the Federal Reserve:

                                                        Negative Feedback Loops?, by Tim Duy: Earlier this week, we were greeted with news that new homes sales posted a solid increase in June:


                                                        Calculated Risk has more here and here, with the conclusion that is was "a solid report even with the downward revisions to previous months." More interesting, though, is that the gains came amid a spike in mortgage rates. This could be taken as evidence that the rate rise has had only minimal impacts on housing markets, thus clearing the way for the Fed to scale back asset purchases sooner than later.
                                                        That said, today we learned this, via Bloomberg:
                                                        Rising mortgage rates contributed to increased cancellations and a dropoff in traffic in June, according to Fort Worth, Texas-based D.R. Horton....
                                                        ....Homebuyers are “shocked and disturbed” rates have moved up so fast, D.R. Horton Chief Executive Officer Donald Tomnitz said on a conference call.
                                                        But not everyone in the industry is singing the same tune:
                                                        Richard Dugas, PulteGroup’s chief executive officer, said on a conference call today that the higher mortgage rates haven’t hurt demand and buyer traffic remained consistent throughout the quarter and into July.
                                                        “We’re in the camp that if higher rates reflect improving economic conditions we’d expect a housing recovery to remain on track,” Dugas said. “As an industry, we can sell more houses if more people have jobs, even with modestly higher rates.”
                                                        On the margin, some buyers were certainly impacted by the sharp gain in rates, but rates are only one part of the buying decision - factors like job growth also matter. The initial sticker shock might only be temporary. And perhaps even higher rates are necessary to make a significant dent in the housing market. From Bloomberg:
                                                        As Jed Kolko, Trulia’s chief economist wrote yesterday, homebuyers say rising rates is their top worry when looking to buy, even more so than rising prices or finding a home they like. But as Kolko points out, people’s actions aren’t matching their words so far. Despite the higher rates, applications for purchase mortgages rose in June, as did asking prices for homes. Trulia’s data suggest that mortgage rates around 6 percent would be a tipping point that cause a majority of people to reconsider buying.
                                                        Overall, I would say the negative anecdotal housing evidence is too limited at this point to have a policy impact. And note the positive anecdotal evidence from the latest Beige Book:
                                                        Residential real estate activity increased at a moderate to strong pace in most Districts. Most Districts reported increases in home sales. Cleveland noted that June sales of single-family homes were down compared with earlier in the spring but up from last year. Boston, New York, Minneapolis, Kansas City, Dallas, and San Francisco noted strong residential real estate markets. Home prices increased throughout the majority of the reporting Districts. Boston, New York, Richmond, Atlanta, Minneapolis, Kansas City, and Dallas noted low or declining home inventories and upward pressures on home prices in some areas. Residential construction activity also improved moderately across the Districts, and contacts in New York, Philadelphia, Chicago, Minneapolis, Dallas, and San Francisco reported faster growth in multi-family construction, in particular.
                                                        Moreover, it is not clear that taking some steam off the housing market was not an intent of some policymakers. San Francisco Federal Reserve President John Williams was quoted recently saying:
                                                        “The outsized response” in the yields of 10-year Treasuries in recent weeks may have stemmed from complacency and “froth” in the market, Williams said. Some investors expected the Fed to keep quantitative easing and zero interest rates in place for longer than officials were anticipating.
                                                        “The market reaction to me probably is a sign that there was complacency and excesses going on,” Williams said. “It’s a good thing that maybe came to an end, or maybe was lessened.”
                                                        But earlier in the article he said:
                                                        Federal Reserve Bank of San Francisco President John Williams, who has never dissented from a policy decision, said “it’s still too early” for the Fed to begin trimming its bond-buying, warning of risks to the economy from low inflation and government budget cuts.
                                                        “We need to be sure that the economy can maintain its momentum in the face of ongoing fiscal contraction,” Williams said in a speech today in Rohnert Park, California. “It is also prudent to wait a bit and make sure that inflation doesn’t keep coming in below expectations, possibly signaling a more persistent decline in inflation.”
                                                        I find a lot of inconsistency in Fedspeak of late. If the economy needs continued support, why even begin the tapering discussion? And if the economy needs continuing support, then the rate rise represents a real tightening of monetary conditions, not just a lessening of accommodation, so how can Fed officials cheer-lead the rate rise? We saw something similar from Federal Reserve Chairman Ben Bernanke:
                                                        The second reason for increases in rates is probably the unwinding of leveraged and perhaps excessively risky positions in the market. It's probably a good thing to hav e that happen, although the tightening that's associated with that is unwelcome. But at least the benefit of that is that some concerns about building financial risks are mitigated in that way and probably make some FOMC participants comfortable with this tool going forward.
                                                        In my opinion, we no longer know the Fed's reaction function. The reaction function does not appear to be entirely dependent on unemployment and inflation. There was never any reason to adjust QE on that basis, that's why Bernanke's post-FOMC comments caught everyone by surprise. If you take the economy off the table, then the Fed appears to have a financial stability variable now built into their reaction function. Perhaps that variable reflects concerns about leverage, perhaps, as Izabella Kamiska suggests, it reflects liquidity issues. Maybe they were worried about lighting a fire beneath Housing Bubble 2.0. We just don't know; we just know that they are not entirely dissatisfied with rising rates despite the potential for negative feedback on the economy.
                                                        Bottom Line: Still too early to conclude the extent of the negative feedback of the recent rise in rates. Moreover, it is not clear to what extent Fed officials are unhappy with that feedback. Less so than we might suppose if they now have a financial stability variable in their reaction function. If so, policy efforts will center less on reversing the rate increase than in moderating the pace of increases.

                                                          Posted by on Thursday, July 25, 2013 at 11:49 AM in Economics, Fed Watch, Financial System, Housing, Monetary Policy | Permalink  Comments (38) 

                                                          Hamilton: Krugman's Worries about China

                                                          Jim Hamilton says to keep your eyes on China's economy:

                                                          Worries about China, by Jim Hamilton: Paul Krugman is among those starting to be concerned about an economic downturn in China. Here are my thoughts on this issue.

                                                          ... What rings alarm bells for me is the recent sharp spikes in interbank lending rates..., such moves could definitely be signaling some financial fragility. ...

                                                          Paul Krugman writes:

                                                          Suppose that those of us now worried that China's Ponzi bicycle is hitting a brick wall (or, as some readers have suggested, a BRIC wall) are right. How much should the rest of the world worry, and why?

                                                          I'd group this under three headings:

                                                          1. "Mechanical" linkages via exports, which are surprisingly small.
                                                          2. Commodity prices, which could be a bigger deal.
                                                          3. Politics and international stability, which involves some serious risks.

                                                          To Paul's list, I would add a fourth: financial linkages. If there are significant disruptions to China's system for funding credit, that could have implications for anyone borrowing from or lending to Chinese entities.....

                                                          I'd also like to add an observation to Paul's second point involving commodity prices. A significant economic downturn in China could well mean a collapse in oil prices. One would think that, as a net importer, this would be an overall favorable development for the United States, and certainly it would be a significant plus for many individual U.S. firms and producers. But it's worth remembering what happened after the collapse in oil prices in 1986. In the years leading up to that, just as today, there had been a dramatic economic boom in the U.S. oil-producing states... When oil prices collapsed, domestic producers took a significant hit. ...

                                                          My bottom line: China is worth watching.

                                                            Posted by on Thursday, July 25, 2013 at 11:06 AM in China, Economics, Financial System, International Trade, Oil, Politics | Permalink  Comments (30) 

                                                            'Comments on New Home Sales'

                                                            Haven't checked in with Calculated Risk for awhile. He remains optimistic:

                                                            A Few Comments on New Home Sales, by Bill McBride, Calculated Risk: ... Looking at the first half of 2013, there has been a significant increase in sales this year.  ... This was the highest sales for the first half of the year since 2008.
                                                            And even though there has been a large increase in the sales rate, sales are just above the lows for previous recessions. This suggests significant upside over the next few years. Based on estimates of household formation and demographics, I expect sales ... substantially higher than the current sales rate.
                                                            And an important point worth repeating every month: Housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades. ...

                                                            I'm a bit more cautious about the future (and I hope policymakers don't assume that we can sound the all clear). What do you think?

                                                              Posted by on Thursday, July 25, 2013 at 10:02 AM in Economics, Housing | Permalink  Comments (7) 

                                                              'A Better Way to Think About Trade'

                                                              Simon Johnson:

                                                              A Better Way to Think About Trade, by Simon Johnson, Commentary, NY Times: Representative Sander Levin of Michigan, the senior Democrat on the Ways and Means Committee, which has jurisdiction over many trade issues, proposed this week that the United States make a significant change in its approach to international trade. ...
                                                              Mr. Levin made three main proposals... The first point is that enforceable labor and environmental standards need to be given more emphasis in American trade agreements... Recent horrendous events in Bangladesh have driven home the unfortunate truth that if matters are left purely “to the market,” there will be ... dangerous working conditions. ...
                                                              When I discuss these matters with global business executives, almost without exception they are of the opinion that health and safety should be subject to minimum acceptable ... standards everywhere. Mr. Levin is pushing on an open door.
                                                              Mr. Levin’s second point is just as compelling. ... Many countries claim to engage in free trade. But some governments ... have become adept at ... engaging in unfair trade practices.
                                                              Mr. Levin is talking about removing government distortions, and this is why I expect he may receive a great deal of Republican support.
                                                              And this is also where Mr. Levin’s third proposal will really hit a nerve. There are countries that manipulate their exchange rate ... in order to gain a competitive advantage... Again, the issue is ... governments’ getting away with actions that distort markets on a grand scale. Here, too, I don’t know many Republicans who would feel good about this. ...
                                                              This is a targeted and responsible proposal. It should get support from both sides of the aisle on Capitol Hill. ...

                                                              Short on time and it's late, so I'm going to turn this over to you. Here's a counterargument to one of the points:

                                                              Safety laws do workers more harm than good, by Jagdish Bhagwati and Amrita Narlikar

                                                              But I don't expect it will find a very receptive audience. Comments?

                                                                Posted by on Thursday, July 25, 2013 at 01:59 AM in Economics, International Trade | Permalink  Comments (29) 

                                                                Links for 07-25-2013

                                                                  Posted by on Thursday, July 25, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (49) 

                                                                  Wednesday, July 24, 2013

                                                                  Fed Watch: Shock and Awe(ful)

                                                                  Tim Duy:

                                                                  Shock and Awe(ful), by Tim Duy: Yesterday's hot story from Ezra Klein that Larry Summers was the lead candidate for the top spot at the Federal Reserve was greeted with shock and awe(ful). I wish I could say that I was surprised, but at the end of last month I tweeted:

                                                                  I often think we have prematurely declared Janet Yellen the front runner. We forget that politics will be in play. http://t.co/ghIPnl0kjj

                                                                  My concerns were only reinforced when news broke last week of the campaign against current Vice Chair Janet Yellen. From Ezra Klein:

                                                                  The favored parlor game of the political-economic complex right now is guessing who will replace Ben Bernanke as chairman of the Federal Reserve. The clear front-runner is Federal Reserve Vice Chairman Janet Yellen. But she’s by no means a sure thing.

                                                                  One important reason she’s not — and I don’t know another way to say this — is sexism, as evidenced by the whispering campaign that’s emerged against her.

                                                                  Yesterday, Klein declared Summers the front-runner:

                                                                  People dismissed Summers’s chances a month or two ago, but he’s increasingly viewed as the leading candidate today — and opinions on this, for reasons I don’t fully understand (though I suspect have to do with a bunch of elite trial balloons going up at the same time), have really hardened in the last 72 hours.

                                                                  Klein lists a variety of reasons in favor of Summers, most important of which I think is that President Obama and his staff know and like Summers, while Yellen is a virtual unknown in White House circles. This is also the message of Washington Post reporter Zachary Goldfarb's tweet yesterday:

                                                                  Larry Summers visited White House 14 times in past 2yrs. Janet Yellen visited once, records show. pic.twitter.com/ufFuVbrH7V

                                                                  — Zachary A. Goldfarb (@Goldfarb) July 23, 2013

                                                                  Reaction was swift and fierce from some quarters of the blogosphere. Cardiff Garcia begins with a defense of Summers:

                                                                  ...Some of the mistakes of his past, such as his role in deregulating derivatives (the Brooksley Born episode) or the Harvard interest rate blowup, don’t really tell us much about his capacity to guide macroeconomic stabilisation policy.

                                                                  His more recent mistakes, specifically his failure to better advise Obama on the stimulus (should have been bigger) and housing policy (should have done more for people in foreclosure and underwater homeowners), included political considerations that are hard to untangle from his actual views.

                                                                  before launching into his reasons for supporting Yellen, beginning with the most important:

                                                                  The simplest reason is that she is more conventionally qualified for the job, boasting a much longer entry in her CV as a monetary policymaker.

                                                                  Like him or hate him, Summers lacks Yellen's depth of exposure to monetary policy. If relative experience with monetary policy is a requirement for the job, Yellen clearly has the upper hand. Felix Salmon, not exactly a fan of Summers to begin with, sums up the situation:

                                                                  ...if Obama picks Summers, it won’t be on the merits; instead, it will be on the grounds that Obama likes Summers, and is in awe of his intelligence. (Summers is, to put it mildly, not good at charming those he considers to be his inferiors, but he’s surprisingly excellent at cultivating people with real power.)

                                                                  Salmon then launches into an attack on Summers:

                                                                  What’s more, the move would be a calculated snub to bien pensant opinion. Never mind the utter shambles that Summers made of Harvard, or the way he treated Cornell West, or his tone-deaf speech about women’s aptitude, or the pollution memo, or the Shleifer affair, or the way he shut down Brooksley Born at the CFTC, or his role in repealing Glass-Steagal, or his generally toxic combination of ego and temper — so long as POTUS likes Larry, and/or so long as Summers is good at working key Obama advisors like Geithner, Lew, and Rubin, that’s all that matters.

                                                                  Evidently, Salmon holds a grudge a bit longer than Garcia. Now, if only President Obama would shift his focus from Summers and Yellen to Ben Stein, then we would see some real fireworks from Salmon.

                                                                  Mark Thoma has a more succint reaction:

                                                                  Larry Summers is the Front-Runner? WTF?

                                                                  Perhaps not all is lost. Back to Klein:

                                                                  That’s not to say Summers is anywhere near a sure thing. His confirmation would be far tougher than Yellen’s, as Republicans will make him answer for the stimulus and the bailouts, and progressive Democrats have a list of grievances going back to financial deregulation in the Clinton-era. There’s also the simple fact that appointing Yellen would break a significant glass ceiling — and do so in an administration that hasn’t always been great about appointing women to top economic positions. And Summers continues to be a polarizing figure: Those who like him love him, but those who don’t like him really don’t like him.

                                                                  That said, one gets the feeling that this is not a sudden decision. Instead it is one that has been building for weeks, at least since June 29, when I began to get nervous about the assumption of Yellen as a front-runner. I suspect that if the position has hardened within the White House as Klein suggests, it is because Obama has made his choice and it is time for everyone to get on board.

                                                                  I have to say that if Yellen is not the pick, I will be disappointed. I think she the best qualified candidate for the job, and agree with the pro-Yellen arguments of Garcia, Salmon, and Bill McBride. I am very concerned about Summer's disposition to be a de-regulator, especially after we see that the Federal Reserve, in its infinite wisdom, gave permission for investment banks to openly manipulate commodity markets. Does anyone see Summers pushing back at that kind of regulation, or getting on board? I don't think that he is the kind of person to take the words of Adam Smith to heart:

                                                                  The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens. The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

                                                                  Bottom Line: Nothing is certain until the announcement is made and the Senate takes its turn, but it is looking like the White House is pushing to make Larry Summers the next Federal Reserve Chairman. The curse of the Vice Chair would then live on.

                                                                    Posted by on Wednesday, July 24, 2013 at 10:33 AM Permalink  Comments (61) 

                                                                    'Why Economics Needs Economic History'

                                                                    Kevin O'Rourke on the need for economic history:

                                                                    Why economics needs economic history, by Kevin H O’Rourke: The current economic and financial crisis has given rise to a vigorous debate about the state of economics, and the training which graduate and undergraduates economics students are receiving. Importantly, among those arguing most strongly for a change in the way that young economists are trained are the ultimate employers of these students, in both the private and the public sector. Employers are increasingly complaining that young economists don’t understand how the financial system actually works, and are ill-prepared to think about appropriate policies at a time of crisis.

                                                                    Strikingly, many employers and policymakers are also arguing that knowledge of economic history might be particularly useful.

                                                                    • Stephen King, Group Chief Economist at HSBC, argues that: “Too few economists newly arriving in the financial world have any real knowledge of events that, while sometimes in the distant past, may have tremendous relevance for current affairs…The global financial crisis can be more easily interpreted and understood by someone who has prior knowledge about the 1929 crash, the Great Depression and, for that matter, the 1907 crash” (Coyle 2012).
                                                                    • Andrew Haldane, Executive Director for Financial Stability at the Bank of England, has written that “financial history should have caused us to take credit cycles seriously,” and that the disappearance of subfields such as economic and financial history, as well as money, banking and finance, from the core curriculum contributed to the neglect of such factors among policymakers, a mistake that “now needs to be corrected” (Coyle 2012, pp).
                                                                    • In a recent Humanitas Lecture in Oxford, Stan Fischer said that “I think I’ve learned as much from studying the history of central banking as I have from knowing the theory of central banking and I advise all of you who want to be central bankers to read the history books” (2013).

                                                                    The benefits of trying to understand economic history

                                                                    • Knowledge of economic and financial history is crucial in thinking about the economy in several ways.

                                                                    Most obviously, it forces students to recognise that major discontinuities in economic performance and economic policy regimes have occurred many times in the past, and may therefor occur again in the future. These discontinuities have often coincided with economic and financial crises, which therefore cannot be assumed away as theoretically impossible. A historical training would immunise students from the complacency that characterised the “Great Moderation”. Zoom out, and that swan may not seem so black after all.

                                                                    • A second, related point is that economic history teaches students the importance of context.

                                                                    As Robert Solow points out, “the proper choice of a model depends on the institutional context” (Solow 1985, p. 329), and this is also true of the proper choice of policies. Furthermore, the 'right' institution may itself depend on context. History is replete with examples of institutions which developed to solve the problems of one era, but which later became problems in their own right.

                                                                    • Third, economic history is an unapologetically empirical field, exclusively dedicated to understanding the real world.

                                                                    Doing economic history forces students to add to the technical rigor of their programs an extra dimension of rigor: asking whether their explanations for historical events actually fit the facts or not. Which emphatically does not mean cherry-picking selected facts that fit your thesis and ignoring all the ones that don't: the world is a complicated place, and economists should be trained to recognise this. An exposure to economic history leads to an empirical frame of mind, and a willingness to admit that one’s particular theoretical framework may not always work in explaining the real world. These are essential mental habits for young economists wishing to apply their skills in the work environment, and, one hopes, in academia as well.

                                                                    • Fourth, economic history is a rich source of informal theorising about the real world, which can help motivate more formal theoretical work later on (Wren-Lewis 2013).

                                                                    Habakkuk (1962) and Abramowitz (1986) are two examples that immediately spring to mind, but there are many others.

                                                                    • Fifth, even once the current economic and financial crisis has passed, the major long run challenges facing the world will still remain.

                                                                    Among these is the question of how to rescue billions of our fellow human beings from poverty that would seem intolerable to those of us living in the OECD. And yet such poverty has been the lot of the vast majority of mankind over the vast majority of history: what is surprising is not the fact that 'they are so poor', but the fact that 'we are so rich'. In order to understand the latter puzzle, we have to turn to the historical record. What gave rise to modern economic growth is the question that prompted the birth of economic history in the first place, and it remains as relevant today as it was in the late nineteenth century. Apart from issues such as the rise of Asia and the relative decline of the West, other long run issues that would benefit from being framed in a long-term perspective include global warming, the future of globalisation, and the question of how rapidly we can expect the technological frontier to advance in the decades ahead.

                                                                    • Sixth, economic theory itself has been emphasising – for well over 20 years now – that path dependence is ubiquitous (David 1985).
                                                                    • Finally, and perhaps most importantly from the perspective of an undergraduate economics instructor, economic history is a great way of convincing undergraduates that the theory they are learning in their micro and macro classes is useful in helping them make sense of the real world.

                                                                    Far from being seen as a 'soft' alternative to theory, economic history should be seen as an essential pedagogical complement. There is nothing as satisfying as seeing undergraduates realise that a little bit of simple theory can help them understand complicated real world phenomena. Think of Obstfeld and Taylor’s use of the Mundell-Fleming trilemma to frame students’ understanding of the history of international capital market integration over the last 150 years; or Ronald Rogowski’s use of Heckscher-Ohlin theory to discuss political cleavages the world around in the late nineteenth century; or the Domar thesis, referred to in Temin (2013), which is a great way to talk to students about what drives diminishing returns to labour. Economic history is replete with such opportunities for instructors trying to motivate their students.


                                                                    Abramovitz, M (1986), “Catching Up, Forging Ahead, and Falling Behind,” Journal of Economic History 46, 385-406.

                                                                    Coyle, D (2012), What’s the Use of Economics?: Teaching the Dismal Science After the Crisis, London Publishing Partnership.

                                                                    David, P A (1985), "Clio and the Economics of QWERTY." The American Economic Review (Papers and Proceedings) 75, 332-37.

                                                                    Fischer, S (2013), video, quotation begins at 43.48, available online at http://www.youtube.com/watch?v=5Y-ZhFbw2H4.

                                                                    Habakkuk, H J (1962), American and British Technology in the Nineteenth Century, Cambridge University Press.

                                                                    Solow, R (1985), “Economic History and Economics,” The American Economic Review 75, 328-31

                                                                    Temin, P (2013), “The Rise and Fall of Economic History at MIT,” MIT Department of Economics Working Paper 13-11 (June).

                                                                    Wren-Lewis, S (2013), “Economic History and Krugman’s Crib Sheet”.

                                                                      Posted by on Wednesday, July 24, 2013 at 10:21 AM in Economics, History of Thought | Permalink  Comments (11) 

                                                                      'U.S. Health Spending: One of These Things Not Like Others'

                                                                        Posted by on Wednesday, July 24, 2013 at 12:33 AM Permalink  Comments (67) 

                                                                        'Some of the Harshest Cuts in Memory to Government Benefit Programs for Families and Children'

                                                                        Why so little support from the political right for programs that help children?:

                                                                        Pro-Baby, but Stingy With Money, by Eduardo Porter, NY Times: Conservatives have a particularly soft spot for babies. They tend to have more children than liberals and they are much more likely to oppose abortion rights. They also appreciate babies’ power.
                                                                        In December, Ross Douthat wrote an Op-Ed column for The New York Times titled “More Babies, Please,” which noted that the United States’ relatively high birthrates would give it an edge against aging rivals around the world.
                                                                        But there is an odd inconsistency in conservatives’ stance on procreation: many also support some of the harshest cuts in memory to government benefit programs for families and children.
                                                                        First Focus, an advocacy group for child-friendly policies, will release on Wednesday its latest “Children’s Budget,” which shows how federal spending on children has declined more than 15 percent in real terms from its high in 2010, when the fiscal stimulus law raised spending on programs like Head Start and K-12 education.
                                                                        Some school districts have been forced to fire teachers, cut services and even shorten the school week. Head Start has cut its rolls. Families have lost housing support. And the 2014 budget passed by Republicans in the House cuts investments in children further — sharply reducing money for the Departments of Education, Labor and Health and Human Services. ...
                                                                        If conservatives truly believe that the United States needs more babies, they might temper their hostility to programs that help families afford them. ...

                                                                          Posted by on Wednesday, July 24, 2013 at 12:24 AM in Economics | Permalink  Comments (57) 

                                                                          Links for 07-24-2013

                                                                            Posted by on Wednesday, July 24, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (52) 

                                                                            Tuesday, July 23, 2013

                                                                            Larry Summers is the Front-Runner? WTF?

                                                                            In case you missed the news:

                                                                            Right now, Larry Summers is the front-runner for Fed chair by Ezra Klein: The word among Federal Reserve watchers right now is that the choice is down to Janet Yellen or Larry Summers as Ben Bernanke’s replacement. ...
                                                                            People dismissed Summers’s chances a month or two ago, but he’s increasingly viewed as the leading candidate today — and opinions on this, for reasons I don’t fully understand..., have really hardened in the last 72 hours. So after conversations with plugged-in sources both inside and outside the process, here’s what’s behind the changing odds:
                                                                            1) President Obama really likes Summers. ...
                                                                            3) This White House, more so than any other in modern memory, knows in its bones that the economy can fall apart at any second. ... This White House is very comfortable with how Summers handles a crisis.
                                                                            4) There’s also a feeling that the chair of the Federal Reserve can do more if he or she is truly trusted by markets. Rightly or wrongly, there’s a sense that Summers has the market’s trust in a way Yellen doesn’t.
                                                                            5) The big open question is Summers’s ability to manage the Federal Reserve’s Open Markets Committee. Here, Summers’s reputation for being difficult to work with is a big issue. But inside the White House, that reputation is considered overblown...
                                                                            That’s not to say Summers is anywhere near a sure thing. ...
                                                                            Against all that, the conventional wisdom — which I fully bought into — a month or two ago was that Summers had little real chance. The politics of it just didn’t make sense. ...

                                                                            The politics of it still doesn't make any sense, and Yellen is more qualified for the job (and the suggestion that a woman can't handle a crisis as well as a man is just wrong -- as I see it, Summers is as likely to create problems as solve them; plus, his record on financial regulation is anything but stellar).

                                                                            I'm very much in the Yellen camp.

                                                                              Posted by on Tuesday, July 23, 2013 at 02:18 PM in Economics, Monetary Policy | Permalink  Comments (128) 

                                                                              Middle-Out Economics

                                                                              Has the administration finally realized that we ought to do something about stagnating wages, the millions of unemployed, etc.? Is this a serious effort, or is it, as in the past, mostly just for show (I'll believe it when I see some of it actually happening)?:

                                                                              President Obama Needs to Ground “Middle-Out” Economics in Broad-Based Wage Growth, by Larry Mishel, EPI: Tomorrow at Knox College, President Obama will kick off a series of speeches outlining his vision for rebuilding the U.S. economy. He is expected to talk about how the economy works best when it grows from the “middle-out,” not from the top down.
                                                                              Growing from the middle out is indeed the right approach to economic growth. I hope that President Obama will get to the heart of the matter, which is that, adjusted for inflation, wages and benefits for the vast majority of workers have not grown in ten years. This is true even for college graduates, including those in business occupations or in STEM fields, whose wages have been stagnant since 2002. Low and middle-wage workers, meanwhile, have not seen much wage growth since 1979. Corporate profits, on the other hand, are at historic highs. Income growth in the United States has been captured by those in the top one percent, driven by high profitability and by the tremendous wage growth among executives and in the finance sector.
                                                                              The real challenge is how to generate broad-based real wage growth, which was only present during the last three decades for a few short years at the end of the 1990s.
                                                                              To generate wage growth, we will need to rapidly lower unemployment, which can only be accomplished by large scale public investments and the reestablishment of state and local public services that were cut in the Great Recession and its aftermath. The priority has to be jobs now, rather than any deficit reduction... Overall, it means paying attention to job quality and wage growth as a key priority in and of itself, and as a mechanism for economic growth and economic security for the vast majority. ...

                                                                                Posted by on Tuesday, July 23, 2013 at 11:11 AM in Economics, Fiscal Policy, Income Distribution, Politics, Unemployment | Permalink  Comments (39) 

                                                                                Never Having to Say You're Sorry

                                                                                On the "inflationphobes":
                                                                                This Time Was Predictable, by Paul Krugman: Bruce Bartlett continues his interesting series on inflation panic, this time focusing on the economists and politicians who keep predicting runaway inflation year after year after year, and never seem to acknowledge having been wrong. ...
                                                                                And that ... gets at the true sin of the inflationphobes. They were wrong; well, that happens to everyone now and then. But the question is what you do when events prove your doctrine wrong — especially when they unfold almost exactly the way people with a different doctrine predicted. Do you admit that maybe your premises were misguided? Do you admit that maybe those other guys were on to something? Or do you just keep predicting the same thing, never admitting your past mistakes?

                                                                                Guess what the answer turned out to be.

                                                                                  Posted by on Tuesday, July 23, 2013 at 09:30 AM in Economics, Inflation | Permalink  Comments (6) 

                                                                                  'Major Cities Often the Safest Places in the US'

                                                                                  Where are you safest?:

                                                                                  Major cities often the safest places in the US, Penn Medicine study finds, EurekAlert: Overturning a commonly-held belief that cities are inherently more dangerous than suburban and rural communities, researchers from the Perelman School of Medicine at the University of Pennsylvania and the Children's Hospital of Philadelphia (CHOP) have found that risk of death from injuries is lowest on average in urban counties compared to suburban and rural counties across the U.S. The new study, which appears online ahead of print in the Annals of Emergency Medicine, found that for the entire population, as well as for most age subgroups, the top three causes of death were motor vehicle collisions, firearms, and poisoning. When all types of fatal injuries are considered together, risk of injury-related death was approximately 20 percent lower in urban areas than in the most rural areas of the country.
                                                                                  "Perceptions have long existed that cities were innately more dangerous than areas outside of cities, but our study shows this is not the case" said lead study author, Sage R. Myers, MD, MSCE, assistant professor of Pediatrics, Perelman School of Medicine and attending physician, Department of Emergency Medicine at CHOP. "These findings may lead people who are considering leaving cities for non-urban areas due to safety concerns to re-examine their motivations for moving. And we hope the findings could also lead us to re-evaluate our rural health care system and more appropriately equip it to both prevent and treat the health threats that actually exist." ...[more]...

                                                                                    Posted by on Tuesday, July 23, 2013 at 12:24 AM in Economics | Permalink  Comments (24) 

                                                                                    Links for 07-23-2013

                                                                                      Posted by on Tuesday, July 23, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (100) 

                                                                                      Monday, July 22, 2013

                                                                                      'In Climbing Income Ladder, Location Matters'

                                                                                      This article, which I somehow failed to include in today's links, is getting a lot of attention today:

                                                                                      In Climbing Income Ladder, Location Matters, by David Leonhardt, NY Times: Stacey Calvin spends almost as much time commuting to her job — on a bus, two trains and another bus — as she does working part-time at a day care center. She knows exactly where to board the train and which stairwells to use at the stations so that she has the best chance of getting to work on time in the morning and making it home to greet her three children after school.
                                                                                      “It’s a science you just have to perfect over time,” said Ms. Calvin, 37.
                                                                                      Her nearly four-hour round-trip stems largely from the economic geography of Atlanta, which is one of America’s most affluent metropolitan areas yet also one of the most physically divided by income. The low-income neighborhoods here often stretch for miles, with rows of houses and low-slung apartments, interrupted by the occasional strip mall, and lacking much in the way of good-paying jobs.
                                                                                      Stacey Calvin plays Scrabble with her three children, Jayde, 6, Jaela, 9, and Jevon, 12, at their apartment in Stone Mountain, Ga. David Walter Banks for The New York Times
                                                                                      This geography appears to play a major role in making Atlanta one of the metropolitan areas where it is most difficult for lower-income households to rise into the middle class and beyond, according to a new study that other researchers are calling the most detailed portrait yet of income mobility in the United States. ...

                                                                                        Posted by on Monday, July 22, 2013 at 10:13 AM in Economics, Income Distribution | Permalink  Comments (34) 

                                                                                        Paul Krugman: Detroit, the New Greece

                                                                                        The deficit scolds have a new battle cry -- ignore them:

                                                                                        Detroit, the New Greece, by Paul Krugman, Commentary, NY Times: When Detroit declared bankruptcy, or at least tried to — the legal situation has gotten complicated — I know that I wasn’t the only economist to have a sinking feeling about the likely impact on our policy discourse. Was it going to be Greece all over again? ...
                                                                                        O.K., what am I talking about? As you may recall, a few years ago Greece plunged into fiscal crisis. ... Now, the truth was that Greece was a very special case, holding few if any lessons for wider economic policy — and even in Greece, budget deficits were only one piece of the problem. Nonetheless, for a while policy discourse across the Western world was completely “Hellenized” — everyone was Greece, or was about to turn into Greece. And this intellectual wrong turn did huge damage to prospects for economic recovery.
                                                                                        So now the deficit scolds have a new case to misinterpret...; let’s obsess about municipal budgets and public pension obligations!
                                                                                        Or, actually, let’s not.
                                                                                        Are Detroit’s woes the leading edge of a national public pensions crisis? No. State and local pensions are indeed underfunded,... Boston College estimates suggest that overall pension contributions this year will be about $25 billion less than they should be. But in a $16 trillion economy, that’s just not a big deal...
                                                                                        So was Detroit just uniquely irresponsible? Again, no. Detroit does seem to have had especially bad governance, but for the most part the city was just an innocent victim of market forces. ...
                                                                                        True, in Detroit’s case matters seem to have been made worse by political and social dysfunction. ... So by all means let’s have a serious discussion about how cities can best manage the transition when their traditional sources of competitive advantage go away. And let’s also have a serious discussion about our obligations, as a nation, to those of our fellow citizens who have the bad luck of finding themselves living and working in the wrong place at the wrong time — because, as I said, decline happens, and some regional economies will end up shrinking, perhaps drastically, no matter what we do.
                                                                                        The important thing is not to let the discussion get hijacked, Greek-style. There are influential people out there who would like you to believe that Detroit’s demise is fundamentally a tale of fiscal irresponsibility and/or greedy public employees. It isn’t. For the most part, it’s just one of those things that happens now and then in an ever-changing economy.

                                                                                          Posted by on Monday, July 22, 2013 at 12:34 AM in Budget Deficit, Economics | Permalink  Comments (166) 

                                                                                          Links for 07-22-2013

                                                                                            Posted by on Monday, July 22, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (49) 

                                                                                            Sunday, July 21, 2013

                                                                                            'When is the Time for Austerity?'

                                                                                            In case you missed this:

                                                                                            When is the time for austerity? - Alan Taylor

                                                                                            Kevin O'Rourke at the Irish Economy Blog has a succinct explanation of the findings:

                                                                                            The boom, not the slump, is the right time for austerity, by Kevin O’Rourke: Alan Taylor has a piece on Vox today that is a nice contribution to the debate on the output effects of austerity. That debate has largely been about the endogeneity of fiscal policy: the more you take this into account, the more contractionary austerity becomes. He and Oscar Jorda show that if you give less weight to episodes where the austerity/no austerity policy choice was more predictable (i.e. more endogenous) and more weight to episodes where the policy choice was less predictable (i.e. more exogenous) then you find that austerity was extremely contractionary in slumps. This does not mean that fiscal consolidation is never necessary, but that the time for consolidation is when times are good, not when times are bad. It would be nice if Austerians could display a similar recognition that context matters.

                                                                                              Posted by on Sunday, July 21, 2013 at 02:56 PM in Economics, Fiscal Policy | Permalink  Comments (11) 

                                                                                              'The Great Pension Scare'


                                                                                              The Great Pension Scare: OK, this is quite amazing: Dean Baker catches the WaPo editorial page claiming that we have $3.8 trillion in unfunded state and local pension liabilities. Say it in your best Dr. Evil voice: THREE POINT EIGHT TRILLION DOLLARS. Except the study the WaPo cites very carefully says that it’s $3.8 trillion in total liabilities, not unfunded; unfunded liabilities are only $1 trillion.
                                                                                              I’ll be curious to see how the paper’s correction policy works here. ...
                                                                                              According to the survey,... state and local governments are ... underfunding their pensions by around ... around $25 billion a year.
                                                                                              A $25 billion shortfall in a $16 trillion economy. We’re doomed!
                                                                                              OK, there are some questions about the accounting, mainly coming down to whether pension funds are assuming too high a rate of return on their investments. But even if the shortfall is several times as big as the initial estimate, which seems unlikely, this is just not a major national issue.
                                                                                              So, why is it being hyped? Do I even need to ask?

                                                                                                Posted by on Sunday, July 21, 2013 at 06:05 AM in Economics | Permalink  Comments (92) 

                                                                                                Links for 07-21-2013

                                                                                                  Posted by on Sunday, July 21, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (64) 

                                                                                                  Saturday, July 20, 2013

                                                                                                  'Profits, Norms and Power'

                                                                                                  Chris Dillow:

                                                                                                  Profits, norms and power, by Chris Dillow: Jesse Norman says companies have a duty not just to obey the law but to follow an ethic of good stewardship. Andrew Lilico and Stephen Pollard disagree. Implicit in this debate is something that should be made explicit - the role of corporate power.
                                                                                                  Lilico and Pollard are following the tradition of Milton Friedman, who argued that "the social responsibility of business is to increase its profits."
                                                                                                  This principle is an expression of the first theorem of welfare economics ... which says that rational self-interest will lead to socially optimum outcomes.
                                                                                                  However, this is only the case under a particular condition - that companies' economic and political power is limited. ...
                                                                                                  Now, here's the thing. When Friedman advocated profit-maximization as a socially optimal strategy, he did so at a time when firms faced countervailing power. In a pre-globalized era of strong unions, they couldn't easily maximize profits by paying lousy wages or offering degrading conditions, and they couldn't so easily dodge taxes. With their power limited, it was at least possible that profit-maximization did increase aggregate welfare. Friedman acknowledged this when he said that firms should "[conform] to the basic rules of the society, both those embodied in law and those embodied in ethical custom."
                                                                                                  But things have changed. Firms' bargaining power is now so great that there can be a tension between profit-maximizing and welfare. Maximizing profits now entails ducking taxes, paying wages which are regarded by many as unfair, and producing unpriced externalities such as risk pollution (pdf).This is exacerbated by the fact that "ethical custom", as perceived by capitalists and their apologists, tolerates such behaviour.
                                                                                                  There are several possible responses to this:
                                                                                                  - To ignore the role of power. Doing so, I suspect is an example of how beliefs, such as Friedman's, can persist after the conditions in which they were reasonable have disappeared.
                                                                                                  - To think that power can be restrained by social norms, as Jesse does. It's a good conservative position, to think that free markets are welfare-enhancing if they operate within a particular moral code.
                                                                                                  - To think legislation is necessary to rein in firms. This is the statist social democratic view.
                                                                                                  There is, though, a fourth view - the Marxian one. This says that the tension between profit maximization and welfare hasn't increased simply because of a failure of law and morals, but because of a genuine shift in the balance of class power. Firms now have power and one thing we know about power is that it'll be used. Unless this changes, hopes of reconciling profit maximization with well-being might well prove mistaken.

                                                                                                    Posted by on Saturday, July 20, 2013 at 09:45 AM in Economics, Market Failure, Unions | Permalink  Comments (42) 

                                                                                                    Two Quick Notes

                                                                                                    I haven't been much in the mood for writing the last few weeks, but I hope that will change soon.

                                                                                                    I've also lost track of comments lately, including those trapped in the spam filter.


                                                                                                      Posted by on Saturday, July 20, 2013 at 09:37 AM Permalink  Comments (11)