Eric Maskin versus readers of the NY Times on whether economics is a science.
Saturday, August 31, 2013
The growth in inequality has accelerated in recent years:
... One way to see the acceleration in inequality is to look at the ratio of average to median annual wages. From 2001 through 2008, during the George W. Bush administration, that ratio grew at 0.28 percentage point per year. From 2009 through 2011, the latest year for which the data is available, the ratio increased 1.14 percentage points annually, or roughly four times faster. ...
A Carbon Tax That America Could Live With: ... If the government charged a fee for each emission of carbon, that fee would be built into the prices of products and lifestyles. When making everyday decisions, people would naturally look at the prices they face and, in effect, take into account the global impact of their choices. In economics jargon, a price on carbon would induce people to “internalize the externality.”
A bill introduced this year by Representatives Henry A. Waxman and Earl Blumenauer and Senators Sheldon Whitehouse and Brian Schatz does exactly that. Their proposed carbon fee — or carbon tax, if you prefer — is more effective and less invasive than the regulatory approach that the federal government has traditionally pursued.
The four sponsors are all Democrats, which raises the question of whether such legislation could ever make its way through the Republican-controlled House of Representatives. The crucial point is what is done with the revenue raised by the carbon fee. If it’s used to finance larger government, Republicans would have every reason to balk. But if the Democratic sponsors conceded to using the new revenue to reduce personal and corporate income tax rates, a bipartisan compromise is possible to imagine. ...
Mankiw once said that economists shouldn't consider the political realities of policy, they should just recommend the best policy:
Politics aside: I have finally gotten around to reading the new Ebenstein biography of Milton Friedman. Here is a quotation from Milton that I particularly like:“The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible’ and then to recommend it.”
So now, when I advocate raising gasoline taxes and cutting income taxes, and my conservative friends tell me that the plan is politically unrealistic, that the government will just keep the extra revenue instead of cutting income taxes, I can quote Milton....
I get that Mankiw really wants his personal taxes to be lowered, he seems to hate the idea of paying a fair share in taxes from what he makes from the textbook he hawks at every opportunity. But why, from an economic standpoint, is lowering his personal taxes (corporate taxes too) the best option (as opposed to simply trying to find something that is politically acceptable to the right)? Has he made that argument? The revenue could be used to help low income households that would be hurt by the tax, for deficit reduction without cutting programs, there are all sorts of ways the revenue could be used and it's not at all clear that his recommendation is, from an economic rather than a political view, the best way to use the revenue from a carbon tax.
Dean Baker (my comments are at the end):
Scary Thought on Labor Day Weekend: Obama's Economic Team Think They Are Doing a Good Job: Ezra Klein gives us some terrifying news in a Bloomberg column today. President Obama's economic team think they are doing a great job, hence the desire to bring back former teammate Larry Summers as Fed chair. This is terrifying because the economy this Labor Day is described by a set of statistics that can only be described as horrible.
We are almost 9 million jobs below the trend level of employment. The number of people involuntarily working part-time is still up by almost 4 million from its pre-recession level. Wages have been stagnant for a decade and show no signs of increasing any time soon. And, according to the Congressional Budget Office, the economy is still operating more than $1 trillion (6 percent) below its potential. Oh, and by the way, the financial sector is more concentrated than ever, with top honchos drawing the same sort of paychecks they did before the crisis.
I could go on but what's the point? This is an economy that under other circumstances we would all say is awful. ...
The best that can be said is that the crew has been ineffectual in the face of Republican opposition in building any sort of political support for a stronger economic agenda. But ineffectual is not a much better recommendation than incompetent.
And it's hard to blame items like the "pivot to deficit reduction" on the Republicans. If the Obama team has an aggressive plan for turning the economy around that is being stifled by the nasty Republicans they have not done a very good job of even making it known, must less rallying support.
I suppose if they think everything in the economy is just great that would explain why they want Larry Summers back. That's pretty bad news on Labor Day. ...
Paul Krugman, following up on post from Brad DeLong, makes a point along the same lines:
Bankers, Workers, Obama and Summers: Brad DeLong has an excellent piece distinguishing between two views of central banking. There’s the “banking camp,” which sees the central bank’s job as being to secure the stability of the financial system – full stop. OK, maybe also price stability. And then there’s the “macroeconomics camp,” which sees the central bank’s job as being to achieve full employment; banking stability and even price stability are basically means towards that end.
Brad complains that the Fed has ended up being much more in the banking camp than many macroeconomists would have wanted. See, for example, the harsh criticisms leveled at the Bank of Japan by one Ben Bernanke in 2000, criticisms that apply almost perfectly to the Bernanke Fed of today.
But I think Brad casts his net too narrowly: it’s not just central bankers who fall into these two camps. And one important consequence of this division is an utterly different read on recent history.
Ask yourself: How well did we respond to the crisis of 2008?
If you’re in the banking camp, here’s what you see [graph]... The financial system was in great danger – but catastrophe was averted. We’re heroes!
On the other hand, if you’re in the macroeconomics camp, here’s what you see [graph]... A catastrophic collapse in employment, with only a modest recovery even after all these years. ... We blew it!
Which brings us to what looks more and more like Obama’s decision to choose Larry Summers as Fed chair, passing over Janet Yellen.
As of right now, Summers is clearly not in the banking camp; the stuff he has been writing about fiscal policy makes it clear that he very much believes that the job of economic recovery is not done. On that basis, you would expect him to prod the Fed into doing much more than it is. On the other hand, given Bernanke’s pre-Fed record you would have expected the same thing — maybe even more so... Once at the Fed, however, Bernanke appears to have been assimilated by the Borg, moving much closer to the banking camp.
Would the same thing happen to Summers? I worry. And one of the strong (though probably futile at this point) arguments for Yellen is that she spent years at the Fed without being assimilated, never losing sight of the crucial importance of employment.
While Summers isn’t in the banking camp, however, Obama is. ...
Obviously I’m in the macroeconomics camp, not the banking camp, so this is all depressing, in several senses. It means, among other things, that even if Summers is the right choice — which we’ll never really know — it’s a choice that Obama is making for all the wrong reasons.
I don't like the framing of banking camp versus macroeconomic camp. Even the banking camp thinks it is doing what it can to stabilize the broader economy. I don't think their concern is simply to help bankers, I give them more credit than that. It's just that some members of the Fed do not believe the Fed has much influence over the economy beyond stabilizing the financial system. Once that is done, the Fed's powers are very limited (when at the zero bound) and -- in the eyes of some members of the Fed -- the risks of further aggressive action, e.g. QE, outweigh the potential benefits. So I think both camps have the same goal, stabilizing the macroeconomy, the difference is in the view of how much the Fed can do without risking bubbles, inflation, etc.
I believe the Fed should do more, that it could help some, but I am also doubtful about how much more the Fed can accomplish in helping with the unemployment problem. What we need is sane fiscal policy, that's what could really help the unemployed, but instead we are focused on the Fed chair, dividing economists into camps, etc. We need fiscal policymakers to be in the macroeconomics camp rather than the political/ideological camp that is driving things like austerity, potential government shutdowns over manufactured crises, worries about the debt used to push for smaller government, and so on that are harming the recovery.
DeLong and Summers were trying to help along these lines with their Brookings piece showing the benefits of government spending in deep recessions, but that effort has subsided and for the most part there hasn't been much push from economists on the fiscal policy front. Yes. it's politically unlikely that a fiscal policy package could get through Congress, but that doesn't mean we should give up our role in educating the public about just how terrible the performance of fiscal policy has been. And if we speak out, perhaps it could even matter at the margin, an extra infrastructure project here and there perhaps. Every additional job matters tremendously to families who are still struggling to get back on their feet.
I just can't understand why so many people are letting fiscal policymakers off the hook. It's not for lack of time or space -- a considerable amount is written daily about the Fed. We ought to be skewering both politicians and economists who are standing in the way of fiscal policy measures, infrastructure in particular, that could strengthen the economy and put people back to work -- both theory and the empirical evidence are clear on this point -- but instead it's mostly silence.
Update: Paul Krugman just put up a post about fiscal policy: The Arithmetic of Fantasy Fiscal Policy.
- A Comment on a Talk by Warren Mosler... - Brad DeLong
- How the Fed chair race became a public circus - Neil Irwin
- The New Keynesian model in grad school macro - mainly macro
- Right-Tail Augmented Dickey-Fuller Tests in EViews - Dave Giles
- The Audacity of the Fight for Higher Wages - NYTimes.com
- Why India’s Economy Is Stumbling - NYTimes.com
- Insincerity in climate science - Magic, maths and money
- Still Waiting for Takeoff... - macroblog
- After the crash, the comeback - FT.com
- Predicting start-up success with Google trends - Digitopoly
- How can you get an economy INTO a liquidity trap? - Nick Rowe
- Heteroskedasticity, Econometrica and the Greeks - No Hesitations
- Identifying conventional and unconventional monetary shocks - vox
- Monkeying With The Rupee - Chhota Pegs
- The Baht and the Bubble Excuse - Paul Krugman
- Why Wall Street Wants Larry Summers... - The Exchange
- People in Economics - Stan Fischer - Finance & Development
Friday, August 30, 2013
Here's the conclusion to a FRBSF Economic Letter from Vasco Cúrdia and Andrea Ferrero on the question of How Stimulatory Are Large-Scale Asset Purchases?:
... Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation. Research suggests that the key reason these effects are limited is that bond market segmentation is small. Moreover, the magnitude of LSAP effects depends greatly on expectations for interest rate policy, but those effects are weaker and more uncertain than conventional interest rate policy. This suggests that communication about the beginning of federal funds rate increases will have stronger effects than guidance about the end of asset purchases.
The Fed could sure use some help from fiscal policy (instead, we appear to be headed for yet another manufactured crisis over the debt). As Paul Krugman notes today, the fiscal policy measures that we did take were relatively meager, and for too short-lived:
Too Little, Gone Too Soon: One of the things you always heard, back when we were actually talking about stimulus rather than fighting a rearguard action against destructive austerity, was the claim that stimulus spending would inevitably end up becoming a permanent fixture of the economy. This was always said with an air of worldly wisdom — of course that’s how these things work! — even though history said very much the opposite.
But anyway, the invaluable FRED now has a series on exactly that subject, and here’s what it looks like ... calculated as a percentage of the CBO estimate of potential GDP:
Stimulus as percent of potential GDP
So next time someone goes on about how we had this huge stimulus that failed, you can tell him that the “huge” stimulus — in response to the worst financial crisis in three generations — peaked at a whopping 1.6 percent of GDP, and was effectively gone in a bit over two years.
Berkeley sociologist Claude Fischer on how the US became known as the land of economic equality and opportunity:
Economic equality, 1774 and beyond: ... Writing in the current Journal of Economic History, Peter H. Lindert and Jeffrey G. Williamson ... put together a picture of Americans’ incomes before and after the Revolution (gated here; earlier pdf version here.). By interconnecting complex varieties of data, they are able to estimate incomes and standards of living in American households in 1774 and in 1800. ...
Incomes were more equally distributed across households in 1774 America than they were elsewhere. Lindert and Williamson ... show that American income was notably less concentrated at the top and more equally shared in the middle. ... And this was equality at a high level of income. Except for those at the very top, colonists at every rank of the economic ladder (including slaves) made more than did the English at those same ranks.
Thus, when America gained the reputation centuries ago that it was the land of economic opportunity and economic equality, that reputation was based on reality. We must underline, of course, that this was opportunity and equality for free heads of households, i.e., largely white men. Equality across households does not take into account inequality within households, which is where much of early American inequality rested: between the male heads and the women of the household; between the masters and the household servants, apprentices, farm hands, and of course, slaves. That is another equality story altogether (told, e.g., here).
America’s egalitarian reputation has now been tarnished. Other western nations have in recent generations attained greater income equality across households than the United States. ...
History as we remember it hangs heavily over our national discussions today. The memory of American egalitarianism so long ago — “Equality forever” says the stamp — too often makes us think that we are still the beacon of equal opportunity and thus too often undermines our efforts to realize that equality once again.
How worried should we be about recent declines in emerging-market currencies?:
The Unsaved World, by Paul Krugman, Commentary, NY Times: The rupiah is falling! Head for the hills! On second thought, keep calm and carry on.
In case you’re wondering, the rupiah is the national currency of Indonesia... The thing is, the last big rupiah plunge was in 1997-98, when Indonesia was the epicenter of an Asian financial crisis. In retrospect, that crisis was a sort of dress rehearsal for the much bigger crisis that engulfed the advanced world a decade later. So should we be terrified about Asia all over again?
I don’t think so... Consider, for example, the worst-case nation during each crisis: Indonesia then, Greece now.
Indonesia’s slump, which saw the economy contract 13 percent in 1998, was a terrible thing. But a solid recovery was under way by 2000. By 2003, Indonesia’s economy had passed its precrisis peak; as of last year, it was 72 percent larger than it was in 1997.
Now compare this with Greece, where output is down more than 20 percent since 2007 and is still falling fast. Nobody knows when recovery will begin, and my guess is that few observers expect to see the Greek economy recover to precrisis levels this decade.
Why are things so much worse this time? One answer is that Indonesia had its own currency, and the slide in the rupiah was, eventually, a very good thing. Meanwhile, Greece is trapped in the euro. In addition, however, policy makers were more flexible in the ’90s than they are today. The International Monetary Fund initially demanded tough austerity policies in Asia, but it soon reversed course. This time, the demands placed on Greece and other debtors have been relentlessly harsh, and the more austerity fails, the more bloodletting is demanded.
So, is Asia next? Probably not. Indonesia has a much lower level of foreign debt ... than it did in the 1990s. India, which also has a sliding currency that worries many observers, has even lower debt. So a repetition of the ’90s crisis, let alone a Greek-style never-ending crisis, seems unlikely.
What about China? Well, as I recently explained, I’m very worried, but for entirely different reasons...
But let’s be clear: Even if we are spared the spectacle of yet another region plunged into depression, the fact remains that the people who congratulated themselves for saving the world in 1999 were actually setting the world up for a far worse crisis, just a few years later.
- Larry Summers and the politicization of the Fed - Felix Salmon
- Economic equality, 1774 and beyond - The Berkeley Blog
- Why our galaxy’s black hole is a finicky eater - MIT News
- Fiscal Stimulus & the Open Economy Relative Multiplier - owenzidar
- Obama should take lessons from Sweden to G-20 - Fred Bergsten
- Keep It Simple, Stupid: Math Doesn’t Have to Be “Complex” - Sci Am
- A Simpler Approach to Financial Reform - Morgan Ricks
- Tattoos, options & cognitive biases - Stumbling and Mumbling
- The Central Challenge in U.S. Health Policy - NYTimes.com
- What $3.4tn will not buy you - Antonio Fatas
- The Gloire To Come - Paul Krugman
- New Econometrics Journal - Dave Giles
- Macroeconomists at War - Paul Krugman
- A new taxonomy of Sudden Stops - vox
- Asian Vulnerability, Then and Now - Paul Krugman
- More Mental Clutter on Climate Change - EconoSpeak
- Summers and the Banks - Jared Bernstein
Thursday, August 29, 2013
Poverty and economics, by Daniel Little: How important should the subject of poverty be within the discipline of economics? Some economists appear to think it is a very small issue compared to the magnificent mathematics of general equilibrium theory. Others believe that economics should fundamentally be about the sources of human well-being and misery, and that understanding poverty is absolutely fundamental for economics. How should we try to sort this out?
Among the contemporary economists who have given the greatest attention to poverty and deprivation, Amartya Sen and Jean Dreze are particularly outstanding. Their research on well-being, quality of life, and hunger set a standard for the point of view that says that life quality and deprivation need to be at the top of the list of economic research goals. Here I'm thinking of books like Inequality Reexamined, Poverty and Famines: An Essay on Entitlement and Deprivation, and Hunger and Public Action.
The neoclassical free market purists stand at the other end of the garden. The economists of the Chicago School put primary emphasis on the beneficent effects of untrammeled market behavior, and they give little attention to the "market imperfections" that poverty and deprivation represent. (The word "poverty" does not occur in the index of John Van Overtveldt's good intellectual history of the Chicago School, The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business.) Poverty seems to be viewed as a normal and fair result of the workings of market institutions: some people make large contributions and earn high income, and others make small or zero contributions and earn low income.
The closing chapter of Milton Friedman's Capitalism and Freedom is entitled "The Alleviation of Poverty." Here Friedman admits that poverty is a problem, but conceives of only two solutions: private charity (which he agrees will not work in a large complex society) and direct transfers from tax revenues to payments to the poor (which is limited by the willingness of citizens to provide taxes for this purpose). The mechanism he prefers is a negative income tax: persons with incomes below a given threshold would receive payments determined by their income levels. "In this way, it would be possible to set a floor below which no man's net income (defined now to include the subsidy) could fall" (192).
What this analysis leaves out is any consideration of the economic mechanisms that produce poverty within an affluent society, and how institutions could be adjusted so that poverty and inequality tended to fall over time as a consequence of the normal workings of economic institutions. Take race in America, for example -- a set of institutions that many observers see as being crucial mechanisms in the production of urban poverty. Writing in 1962, Friedman argues that racial discrimination in employment is essentially impossible within a competitive market system (link). But we now understand the geography and social structuring of poverty much better. Racial segregation in housing has not disappeared; it has only worsened. Low-quality and ineffective schools are concentrated in low-income and racially segregated neighborhoods, so poor people have reduced educational opportunities. Access to jobs is also constrained by geography and educational opportunity. (Here is a recent post on the mechanisms of racial disparities; link). So it seems clear that our economy systematically reproduces poverty in inner cities rather than reducing it. And the situation of rural poverty is not substantially better.
This all has to do with the dynamics of income at the bottom end. But we have also seen persistent widening of income at the top end. American capitalism has produced ever-widening inequalities of income for at least the past forty years. Consider these two graphs of income by percentile provided by Lane Kenworthy:
(Source: Lane Kenworthy, Consider the Evidence blog (link))
So the idea that a properly functioning market economy will tend to reduce poverty and narrow the extremes of income inequality has been historically refuted -- at least in the case of American capitalism.
It is apparent that the ills of poverty are debilitating to the families who experience it; their quality of life is dramatically lower than it needs to be in an affluent society. So that is one reason for economists to give higher priority to the study of the mechanisms and structures that reproduce poverty in the United States. But there is a more systemic reason as well: if 15% of all Americans live in poverty (46 million people), and if 22% of children live in poor households (16 million children), this implies a huge drain on the productive capacity of the American economy. Education, health, and inclusion are important components of economic growth; and each of these is harmed by the persistence of poverty. So economists ought to be in the lead when it comes to placing a priority on poverty research.
We need to have a much more systematic understanding of the institutions and structures through which access to income and the necessities of life is created. And this implies that the mainstream might be well advised to take counsel from structuralist economists like Lance Taylor. Here is how Taylor describes the intellectual foundations of structuralist macroeconomics in Reconstructing Macroeconomics: Structuralist Proposals and Critiques of the Mainstream:
In the North Atlantic literature, structuralism's intellectual foundations lie within a complex described by labels such as [original, neo-, post-]-[Keynesian, Kaleckian, Ricardian, Marxian] which nonmainstream economists have adopted; numerous variants exist in developing countries as well. The fundamental assumption of all these schools is that an economy's institutions and distributional relationships across its productive sectors and social groups play essential roles in determining its macro behavior. (1)
This emphasis on study of the concrete institutions embodied in a given economy, and the distributive characteristics that these create, seems like a very good starting point for arriving at a better understanding of the economic foundations of poverty than we currently have.
Via Austin Frakt at The Incidental Economist, a chart showing the slowdown in the growth of Medicare spending:
Chart of the day: Medicare spending growth slowdown: From recent analysis by Michael Levine and Melinda Buntin of the CBO:
...To try to identify the causes of that slowdown, we performed a series of descriptive and statistical analyses based on a diverse array of data sources. However, those analyses did not yield an explanation for most of the slowdown in spending growth.
Fully 75% of the 3.2 percentage point difference between 2000-2005 and 2007-2012 per beneficiary spending growth cannot be explained by payment rate changes, beneficiary demand due to age and health status, Part A only enrollment, prescription drug use, the financial crisis and economic downturn, supplemental coverage.
Needless to say, this is a big and important mystery.
This expands on one of the points I tried to make here:
Macro workers and macro wars, by Simon Wren-Lewis: ... Nearly fifteen years ago I began working with DSGE models looking at monetary and fiscal interactions.  Doing this work taught me a lot about how fiscal policy worked in New Keynesian models. I understood more clearly why monetary policy was the stabilisation tool of choice in those models, but also why fiscal policy - appropriately designed - was also quite effective in that role if monetary policy was absent (individual countries in the Eurozone) or impaired (the ZLB). Why New Keynesian models? Because if you were interested in business cycle stabilisation, that is the framework that most involved in that area (academics and policymakers) were using. So when we hit the ZLB, the reaction of policymakers in using fiscal stimulus seemed logical, entirely appropriate and fully in line with current theory.
I also found that in these models the basics of Barro’s tax smoothing hypothesis continues to apply, so if you needed to reduce debt, you should do so as gradually as possible. This also seemed like as robust a result as one can get in macro.
The acid test for macro came in 2010. Policymakers, for a variety of reasons, went into reverse with fiscal policy. Austerity replaced stimulus around the world. If academic macroeconomists had been true to their discipline, they would have been united in saying that our standard models tell us this will reduce output and raise unemployment. They would have said that if markets allow, the time to reduce debt is when the ZLB comes to an end, and then it should be done gradually. Many did say that, but many did not. This division at least encouraged policymakers to continue with austerity.
So macroeconomists as a collective failed this test, repeating errors made in the 1930s. But unlike the 1930s, it did not have ignorance as an excuse.
This is a crucial point that many on both sides tend to ignore. In 2010, the standard business cycle model was the New Keynesian model, and the implications of that model for the efficacy of appropriately designed fiscal policy are clear. So to blame the failure of 2010 on the current dominant macro model is just wrong. You may not like that model, but it cannot be blamed for the widespread adoption of austerity, or the ambivalent attitude of many macroeconomists towards that policy change.
So in my view macroeconomists, not the dominant macroeconomic model, failed. ...
There's quite a bit more in the post.
- The Asian Crisis Versus The Euro Crisis - Paul Krugman
- Carney: Bank of England Ready to Inject More Stimulus - WSJ.com
- The two James Tobins - Nick Rowe
- Perceiving Job Insecurity - Not Quite Noahpinion
- Market-based bank capital regulation - vox
- Social structures and causal powers - Understanding Society
- Markets must force banks, like petulant toddlers, to grow up - FT.com
- How Australia weathered the global financial crisis... - David Alexander
- New Census Numbers Show Recession’s Effect on Families - NYTimes.com
- What Happened to Jobs and Justice? - NYTimes.com
- The black-white economic gap hasn’t budged in 50 years - Brad Plumer
- Banks are special because the medium of exchange is special - Nick Rowe
- The Importance of Financial Visibility - Liberty Street Economics
- Popping the "Bubble" Bubble - Not Quite Noahpinion
- Takeaways from Jackson Hole - Bruegel
- A New Study of Uncertainty and Investment - Carola Binder
Wednesday, August 28, 2013
James Kwak is not happy:
Regulators Repeat Exactly What They Did During the Last Housing Boom, by James Kwak: The Dodd-Frank Act was supposed to require securitizers to retain 5 percent of the credit risk of the mortgage-backed securities that they issued, in order to reduce the risk of a repeat of the last housing bubble. Today, the federal financial regulators said, “Whatever,” and ignored that requirement. In particular, they created an exemption that would have covered at least 98 percent of all mortgages issued last year.
“adding additional layers of regulation would have contracted credit for first time home buyers and borrowers without large down payments, and prevented private capital from entering the market.”
That’s according to the head of the Mortgage Bankers Association.
This is the exact same argument that was made in favor of deregulation during the two decades prior to the last financial crisis, without the slightest hint of irony. It’s further proof that everyone has either forgotten that the financial crisis happened or is pretending that it didn’t happen because, well, maybe it won’t happen again?
Even leaving aside the specific merits of this decision, the worrying thing is that the intellectual, regulatory, and political climate seems to be basically the same as it was in 2004: no one wants to to anything that might be construed as hurting the economy, and no one wants to offend the housing industry.
The Myth Behind the Origins of Summer Vacation: Why do students have summer vacation? One common answer is that it's a holdover from when America was more rural and needed children to help out on the farm, but even just a small amount of introspection suggests that answer is wrong. Even if you know very little about the practical side of farming, think for just a moment about what are probably the most time-sensitive and busiest periods for a farmer: spring planting and fall harvest. Not summer!
I'm not claiming to have made any great discovery here that summer vacation didn't start as result of following some typical pattern of agricultural production. Mess around on the web a bit, and you'll find more accurate historical descriptions of how summer vacation got started (for example, here's one from a 2008 issue of TIME magazine and here's one from the Washington Post last spring). My discussion here draws heavily on a 2002 book by Kenneth M. Gold, a professor of education at the City University of New York, called School's In: The History of Summer Vacation in American Public Schools.
Gold points out that back in the early 19th century, US schools followed two main patterns. Rural schools typically had two terms: a winter term and a summer one, with spring and fall available for children to help with planting and harvesting. The school terms in rural schools were relatively short: 2-3 months each. In contrast, in urban areas early in the first half of the 19th century, it was fairly common for school districts to have 240 days or more of school per year, often in the form of four quarters spread over the year, each separated by a week of official vacation. However, whatever the length of the school term, actual school attendance was often not compulsory.
In the second half of the 19th century, school reformers who wanted to standardize the school year found themselves wanting to length the rural school year and to shorten the urban school year, ultimately ending up by the early 20th century with the modern school year of about 180 days. ...
With these changes, why did summer vacation arise as a standard pattern during the second half of the 19th century, when it had not been common in either rural or urban areas before that? At various points, Gold notes a number of contributing factors. ...
This is live at the Fiscal Times:
Kind of a pessimistic conclusion.
How Dr. King Shaped My Work in Economics, by Joseph Stiglitz, Commentary, NY Times: I had the good fortune to be in the crowd in Washington when the Rev. Dr. Martin Luther King Jr. gave his thrilling “I Have a Dream” speech on Aug. 28, 1963. I was 20 years old, and had just finished college. It was just a couple of weeks before I began my graduate studies in economics at the Massachusetts Institute of Technology. ...
Listening to Dr. King speak evoked many emotions for me. Young and sheltered though I was, I was part of a generation that saw the inequities that had been inherited from the past, and was committed to correcting these wrongs. Born during World War II, I came of age as quiet but unmistakable changes were washing over American society. As president of the student council at Amherst College, I had led a group of classmates down South to help push for racial integration. We couldn’t understand the violence of those who wanted to preserve the old system of segregation. When we visited an all-black college, we felt intensely the disparity in educational opportunities that had been given to the students there, especially when compared with those that we had received in our privileged, cloistered college. It was an unlevel playing field, and it was fundamentally unfair. It was a travesty of the idea of the American dream that we had grown up with and believed in.
It was because I hoped that something could be done about these and the other problems I had seen so vividly growing up in Gary, Ind. — poverty, episodic and persistent unemployment, unending discrimination against African-Americans — that I decided to become an economist, veering away from my earlier intention to go into theoretical physics.
I turned 70 earlier this year. Much of my scholarship and public service in recent decades — including my service at the Council of Economic Advisers during the Clinton administration, and then at the World Bank — has been devoted to the reduction of poverty and inequality. I hope I’ve lived up to the call Dr. King issued a half-century ago.
He was right to recognize that these persistent divides are a cancer in our society, undermining our democracy and weakening our economy. His message was that the injustices of the past were not inevitable. But he knew, too, that dreaming was not enough.
- 'The Great Shift': Americans Not Working - NYTimes.com
- The downsizing dilemmas of European employers - vox
- Here’s where middle-class jobs are vanishing the fastest - Brad Plumer
- Predicting Growth From the Path of a Cricket Ball - Simon Johnson
- Reverse Repos and Fed Intervention - Stephen Williamson
- DeLong (1996): Review of "A Tract on Monetary Reform" - Brad DeLong
- Intuition for "Speculation and Risk Sharing..." - Richard Serlin
- Macroeconomics: The Illustrated Edition - Not Quite Noahpinion
- Limits to agency - Stumbling and Mumbling
- A new age of uncertainty? - vox
Tuesday, August 27, 2013
Can you help David Andolfatto with his puzzle?:
Whither the consumer?: ...So, I'm looking at some graphs that my colleague, Fernando Martin, prepared..., there is something rather odd about the recent recovery dynamic. In the U.S., the business cycle is mostly about investment spending. Consumer spending (non-durables and services) is relatively stable. And in the typical recovery dynamic, consumption and investment tend to move together (this applies to booms as well).
The following figure plots (detrended) real per capita consumption (non-durables and services) and investment (includes consumer durables). With the onset of the 2008 recession, we see the sharp drop in consumption and the even sharper drop in investment. The decline in both series initially was not unusual--apart from the severity of the shock. What is unusual is the subsequent recovery dynamic: consumption and investment appear to be heading in different directions, relative to their historical trends. ...
Here's the ... data ... with investment decomposed into residential and non-residential investment.
So, residential investment behaves largely like other forms of investment, except that it is considerably more volatile. In particular, the recovery dynamic for residential investment looks like what one might expect, given the large negative shock in that sector. And yet consumer spending continues to fall away from its historical trend, even as residential investment recovers (albeit, slowly).
Can someone point me to a theoretical model that generates this type of consumption-investment dynamic during a recovery?
Household deleveraging surely has to be a big part of the explanation here--see the following diagram (source). [It is curious to note, however, that consumption seemed below trend even during the mid-2000s boom period--will have to think about that.]
These debt-service ratios are now at or close to their historical lows. Is the consumer now ready for a major comeback?
Well, I’m sorry to say that they’ve gotten it almost all wrong. Only “almost”: they’re entirely right that economics isn’t behaving like a science, and economists – macroeconomists, anyway – definitely aren’t behaving like scientists. But they misunderstand the nature of the failure, and for that matter the nature of such successes as we’re having....
It’s true that few economists predicted the onset of crisis. Once crisis struck, however, basic macroeconomic models did a very good job in key respects — in particular, they did much better than people who relied on their intuitive feelings. The intuitionists — remember, Alan Greenspan was supposed to be famously able to sense the economy’s pulse — insisted that budget deficits would send interest rates soaring, that the expansion of the Fed’s balance sheet would be inflationary, that fiscal austerity would strengthen economies through “confidence”. Meanwhile, wonks who relied on suitably interpreted IS-LM confidently declared that all this intuition, based on experiences in a different environment, would prove wrong — and they were right. From my point of view, these past 5 years have been a triumph for and vindication of economic modeling.
Oh, and it would be a real tragedy if the takeaway from recent events becomes that you should listen to impressive-looking guys with good tailors who stroke their chins and sound wise, and ignore the nerds; the nerds have been mostly right, while the Very Serious People have been wrong every step of the way.
Yet obviously something is deeply wrong with economics. While economists using textbook macro models got things mostly and impressively right, many famous economists refused to use those models — in fact, they made it clear in discussion that they didn’t understand points that had been worked out generations ago. Moreover, it’s hard to find any economists who changed their minds when their predictions, say of sharply higher inflation, turned out wrong. ...
So, let’s grant that economics as practiced doesn’t look like a science. But that’s not because the subject is inherently unsuited to the scientific method. Sure, it’s highly imperfect — it’s a complex area, and our understanding is in its early stages. And sure, the economy itself changes over time, so that what was true 75 years ago may not be true today — although what really impresses you if you study macro, in particular, is the continuity, so that Bagehot and Wicksell and Irving Fisher and, of course, Keynes remain quite relevant today.
No, the problem lies not in the inherent unsuitability of economics for scientific thinking as in the sociology of the economics profession — a profession that somehow, at least in macro, has ceased rewarding research that produces successful predictions and rewards research that fits preconceptions and uses hard math instead.
Why has the sociology of economics gone so wrong? I’m not completely sure — and I’ll reserve my random thoughts for another occasion.
I talked about the problem with the sociology of economics awhile back -- this is from a post in August, 2009:
In The Economist, Robert Lucas responds to recent criticism of macroeconomics ("In Defense of the Dismal Science"). Here's my entry at Free Exchange's Robert Lucas Roundtable in response to his essay:
Lucas roundtable: Ask the right questions, by Mark Thoma: In his essay, Robert Lucas defends macroeconomics against the charge that it is "valueless, even harmful", and that the tools economists use are "spectacularly useless".
I agree that the analytical tools economists use are not the problem. We cannot fully understand how the economy works without employing models of some sort, and we cannot build coherent models without using analytic tools such as mathematics. Some of these tools are very complex, but there is nothing wrong with sophistication so long as sophistication itself does not become the main goal, and sophistication is not used as a barrier to entry into the theorist's club rather than an analytical device to understand the world.
But all the tools in the world are useless if we lack the imagination needed to build the right models. Models are built to answer specific questions. When a theorist builds a model, it is an attempt to highlight the features of the world the theorist believes are the most important for the question at hand. For example, a map is a model of the real world, and sometimes I want a road map to help me find my way to my destination, but other times I might need a map showing crop production, or a map showing underground pipes and electrical lines. It all depends on the question I want to answer. If we try to make one map that answers every possible question we could ever ask of maps, it would be so cluttered with detail it would be useless, so we necessarily abstract from real world detail in order to highlight the essential elements needed to answer the question we have posed. The same is true for macroeconomic models.
But we have to ask the right questions before we can build the right models.
The problem wasn't the tools that macroeconomists use, it was the questions that we asked. The major debates in macroeconomics had nothing to do with the possibility of bubbles causing a financial system meltdown. That's not to say that there weren't models here and there that touched upon these questions, but the main focus of macroeconomic research was elsewhere. ...
The interesting question to me, then, is why we failed to ask the right questions. For example,... why policymakers didn't take the possibility of a major meltdown seriously. Why didn't they deliver forecasts conditional on a crisis occurring? Why didn't they ask this question of the model? Why did we only get forecasts conditional on no crisis? And also, why was the main factor that allowed the crisis to spread, the interconnectedness of financial markets, missed?
It was because policymakers couldn't and didn't take seriously the possibility that a crisis and meltdown could occur. And even if they had seriously considered the possibility of a meltdown, the models most people were using were not built to be informative on this question. It simply wasn't a question that was taken seriously by the mainstream.
Why did we, for the most part, fail to ask the right questions? Was it lack of imagination, was it the sociology within the profession, the concentration of power over what research gets highlighted, the inadequacy of the tools we brought to the problem, the fact that nobody will ever be able to predict these types of events, or something else?
It wasn't the tools, and it wasn't lack of imagination. As Brad DeLong points out, the voices were there—he points to Michael Mussa for one—but those voices were not heard. Nobody listened even though some people did see it coming. So I am more inclined to cite the sociology within the profession or the concentration of power as the main factors that caused us to dismiss these voices.
And here I think that thought leaders such as Robert Lucas and others who openly ridiculed models they disagreed with have questions they should ask themselves (e.g. Mr Lucas saying "At research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another", or more recently "These are kind of schlock economics"). When someone as notable and respected as Robert Lucas makes fun of an entire line of inquiry, it influences whole generations of economists away from asking certain types of questions, some of which turned out to be important. Why was it necessary for the major leaders in macroeconomics to shut down alternative lines of inquiry through ridicule and other means rather than simply citing evidence in support of their positions? What were they afraid of? The goal is to find the truth, not win fame and fortune by dominating the debate.
We need to take a close look at how the sociology of our profession led to an outcome where people were made to feel embarrassed for even asking certain types of questions. People will always be passionate in defense of their life's work, so it's not the rhetoric itself that is of concern, the problem comes when factors such as ideology or control of journals and other outlets for the dissemination of research stand in the way of promising alternative lines of inquiry.
I don't know for sure the extent to which the ability of a small number of people in the field to control the academic discourse led to a concentration of power that stood in the way of alternative lines of investigation, or the extent to which the ideology that markets prices always tend to move toward their long-run equilibrium values caused us to ignore voices that foresaw the developing bubble and coming crisis. But something caused most of us to ask the wrong questions, and to dismiss the people who got it right, and I think one of our first orders of business is to understand how and why that happened.
I think the structure of journals, which concentrates power within the profession, also influence the sociology of the profession (and not in a good way).
Calculated Risk (Bill McBride) is still optimistic:
The Future is Still Bright!, by Bill McBride: For new readers: I was very bearish on the economy when I started this blog in 2005 - back then I wrote mostly about housing (see: LA Times article and more here for comments about the blog). I started looking for the sun in early 2009, and now I'm even more optimistic looking out over the next few years.
Early this year I wrote The Future's so Bright .... In that post I outlined why I was becoming more optimistic, even though there might be too much deficit reduction in 2013. As I noted, "ex-austerity, we'd probably be looking at a decent year" in 2013. And of course - looking forward - Congress remains the key downside risk to the U.S. economy.
It still appears economic growth will pickup over the next few years. With a combination of growth in the key housing sector, a significant amount of household deleveraging behind us, the end of the drag from state and local government layoffs (four years of austerity mostly over), some loosening of household credit, and the Fed staying accommodative (even if the Fed starts to taper, the Fed will remain accommodative).
Here are some updates to the graphs I posted in January:..
Overall it appears the economy is poised for more growth over the next few years.
And in the longer term, I remain very optimistic too. ...
- Stuck Working Part-Time? Blame the Economy - WSJ
- The Taper Versus The Crazy - Paul Krugman
- Is Microsoft of the 1990s similar to Apple of today? - Digitopoly
- Wage Stagnation and Market Outcomes - NYTimes.com
- Cheap Ways to Boost Middle-Class Living Standards - EPI
- News Flash: The CBO Isn't Stupid - Paul Krugman
- Robert Murphy Simply Doesn't Do His Homework - Brad DeLong
- Japan's pump-primed recovery proves US deficit hawks wrong - Dean Baker
- A note on the ineffectiveness of monetary stimulus - John Quiggin
- Religion and Monetary Policy: Is There a Difference? - Josiah Neeley
- SNAP: Disentangling Business Cycles and Policy Changes - Owen Zidar
- The Danger of an All-Powerful Federal Reserve - John Cochrane
- C-Sections: Trends and Comparisons - Tim Taylor
- Full Time, Part Time, Good Jobs, Bad - NYTimes.com
- Two Approaches to Fiscal Policy - Econbrowser
- Bringing the law to the factory - MIT News
- The Mystery Is That Robert Hall Finds a Mystery… - Brad DeLong
- Contra Hall - Angry Bear
Monday, August 26, 2013
... The single most effective way of avoiding another financial crisis is to reduce the political influence of the banking sector.
A new paper in the QJE shows that financial innovation raises portfolio risks:
Rethinking investment risk, by Peter Dizikes, MIT News: Financial innovation is supposed to reduce risk -- in theory, at least. Yes, new financial instruments based on the housing market helped cause the financial crisis of 2008. But in the abstract, those same instruments have the potential to spread risk more evenly throughout the marketplace by making it possible to trade debt more extensively, rather than having it concentrated in a relatively few hands.
Now a paper published by MIT economist Alp Simsek makes the case that even in theory, financial innovation does not lower portfolio risk. Instead, it raises portfolio risks by creating situations in which parties sit on opposing sides of deep disagreements about the value of certain investments.
"In a world in which investors have different views, new securities won't necessarily reduce risks," says Simsek, an assistant professor in MIT's Department of Economics. "People bet on their views. And betting is inherently a risk-increasing activity."
In a paper published this month in the Quarterly Journal of Economics, titled "Speculation and Risk Sharing with New Financial Assets," Simsek details why he thinks this is the case. The risk in portfolios, he argues, needs to be divided into two categories: the kind of risk that is simply inherent in any real-world investment, and a second type he calls "speculative variance," which applies precisely to new financial instruments designed to generate bets based on opposing worldviews.
To be clear, Simsek notes, financial innovation may have other benefits -- it may spread information around world markets, for instance -- but it is not going to lead to lower risks for investors as a whole.
"Financial innovation might be good for other reasons, but this general kind of belief that it reduces the risks in the economy is not right," Simsek says. "And I want people to realize that." ...
[There's quite a bit more explanation in the original post.]
The biggest companies eventually become complacent and lose their leading role in the marketplace. Does that mean we shouldn't worry about their monopoly power?:
The Decline of E-Empires, by Paul Krugman, Commentary, NY Times: Steve Ballmer’s surprise announcement that he will be resigning as Microsoft’s C.E.O. ... has me thinking about network externalities and Ibn Khaldun. ...
First, about network externalities: Consider the state of the computer industry circa 2000... By all accounts, Apple computers were better than PCs... Yet the vast majority of desktop and laptop computers ran Windows. Why?
The answer, basically, is that everyone used Windows because everyone used Windows. ... Software was designed to run on PCs; peripheral devices were designed to work with PCs. That’s network externalities in action, and it made Microsoft a monopolist. ...
The trouble for Microsoft came with the rise of new devices whose importance it famously failed to grasp. “There’s no chance,” declared Mr. Ballmer in 2007, “that the iPhone is going to get any significant market share.”
How could Microsoft have been so blind? ... Ibn Khaldun ... was a 14th-century Islamic philosopher... Desert tribesmen, he argued, always have more courage and social cohesion than settled, civilized folk, so every once in a while they will sweep in and conquer lands whose rulers have become corrupt and complacent. They create a new dynasty — and, over time, become corrupt and complacent themselves, ready to be overrun by a new set of barbarians.
I don’t think it’s much of a stretch to apply this story to Microsoft, a company that did so well with its operating-system monopoly that it lost focus, while Apple — still wandering in the wilderness after all those years — was alert to new opportunities. And so the barbarians swept in from the desert. ...
Anyway, the funny thing is that Apple’s position in mobile devices now bears a strong resemblance to Microsoft’s former position in operating systems. ...Apple ... products ... are, by most accounts, little if any better than those of rivals, while selling at premium prices.
So why do people buy them? Network externalities: lots of other people use iWhatevers, there are more apps for iOS... Meet the new boss, same as the old boss.
Is there a policy moral here? ... Microsoft was a monopolist, it did extract a lot of monopoly rents, and it did inhibit innovation. Creative destruction means that monopolies aren’t forever, but it doesn’t mean that they’re harmless while they last. This was true for Microsoft yesterday; it may be true for Apple, or Google, or someone not yet on our radar, tomorrow.
- Time for Rudd to give a fulldefence of Keynesian stimulus - John Quiggin
- We’re All Still Hostages to the Big Banks - NYTimes.com
- Unnatural Models of the Labor Market (Wonkish) - Paul Krugman
- Why does capital flow from poor to rich countries? - Daniel Gros
- Summers: A (Mildly) Exculpatory Note - Economic Principals
- The Future is still Bright! - Calculated Risk
- Stagnant Wages Crimping Economic Growth - WSJ.com
- Exponential Smoothing Again: Structural Change - No Hesitations
- The geography of success - Econbrowser
- Way More Heat than Light - EconoSpeak
- Banks and macroeconomic models- interfluidity
Sunday, August 25, 2013
Chris Blattman on cash transfers to the poor:
Is it nuts to give money to the poor?: ...Cash transfers have been my day job for quite some days now. If you’ve been following this blog, you might have seen me describe my study of a wildly successful government program in Uganda, one that sent $8000 to groups of 20 young people to help them start skilled trades. Or an even more successful charitable program in Uganda that gave some of the poorest women on the planet cash to become traders. “Dear governments,” I wrote, “Want to help the poor and transform your economy? Give people cash.”
What’s interesting is that journalists keep turning to me to rain on my own parade. That’s fair, because that’s one of the things I do best. A few days after my plea to governments, I wrote another post, “Why cash transfers are not the next big thing.”
Perhaps that’s why I appear in Goldstein’s article as the skeptical academic. GiveDirectly is very optimistic about giving $1000 to poor people in Kenya. So am I, I say, but the research doesn’t really support it. Yet. ... Actually, there are couple of good reasons I’m well placed to be the skeptic.
One is that the wildly successful projects I studied gave other stuff, such as training or conditions or social pressure to invest. That probably mattered a lot, and we simply don’t know if pure cash will work as well.
That brings me to the second reason: I have two other projects in the field right now that give plain cash, and the signs are not so good. ... The early signs on cash transfers are not promising, but again, less than half the data are in. So maybe I, and GiveDirectly, will prove ourselves wrong.
So why am I still an optimist? I think sometimes it will work and sometimes it won’t, but ... I think these studies will give guidance about why and for whom cash works best. That’s important. ...
This is actually the reason that GiveDirectly is a big deal. It’s the same reason randomized control trials in aid are a big deal. Economists can argue about whether any result from any study even applies to the village down the road, let alone the country next door. ...
GiveDirectly and randomized trials are helping drive a big, big change: those who help other people for a living are, for the first time, being forced to think about their top and their bottom lines. How much does what we do work? And is it worth the cost?
Believe it or not, these questions don’t really get asked. ...
I think this will remake the charity map in my lifetime. If I play but a tiny role in this change, it will be more impactful on poverty and misery than anything else I do in my petty little academic life. So expect me to keep writing long, blathering posts on cash transfers and field experiments...
I've had many posts on the Autor and Dorn paper on the hollowing out of the middle class (see here too), and this is yet another, but let me add one thing. This explains the demise of the middle class as a result of technological change. However, there are those who argue that the troubles of the working class has happened for other reasons, e.g. the demise of unions as politicians favored business over labor, or that there have been other political/institutional changes that worked against the middle class. My own view is that it wasn't one or the other, both technology and politics mattered:
How Technology Wrecks the Middle Class, by David Autor and David Dorn, Commentary, NY Times: In the four years since the Great Recession officially ended, the productivity of American workers — those lucky enough to have jobs — has risen smartly. But the United States still has two million fewer jobs than before the downturn, the unemployment rate is stuck at levels not seen since the early 1990s and the proportion of adults who are working is four percentage points off its peak in 2000.
This job drought has spurred pundits to wonder whether a profound employment sickness has overtaken us. And from there, it’s only a short leap to ask whether that illness isn’t productivity itself. Have we mechanized and computerized ourselves into obsolescence?
Are we in danger of losing the “race against the machine,” as the M.I.T. scholars Erik Brynjolfsson and Andrew McAfee argue in a recent book? Are we becoming enslaved to our “robot overlords,” as the journalist Kevin Drum warned in Mother Jones? Do “smart machines” threaten us with “long-term misery,” as the economists Jeffrey D. Sachs and Laurence J. Kotlikoff prophesied earlier this year? Have we reached “the end of labor,” as Noah Smith laments in The Atlantic? ...
- Is there a future for international banks? - vox
- Commercial Banks As Creators of "Money" - Paul Krugman
- Josh Bivens: Slow Wage Growth Just - Brad DeLong
- Steve Ballmer, Meet Ibn Khaldun - Paul Krugman
- Untangling Trade and Technology - owenzidar
- Maybe They'll Never Figure It Out - Paul Krugman
- Labour's cost of living problem - Stumbling and Mumbling
- On The Symmetry Between Microsoft And Apple - Paul Krugman
Saturday, August 24, 2013
You may need a nudge to read this one:
Public Policies, Made to Fit People, by Richard Thaler, Commentary, NY Times: I have written here before about the potential gains to government from involving social and behavioral scientists in designing public policies. My enthusiasm comes in part from my experiences as an academic adviser to the Behavioral Insights Team created in Britain by Prime Minister David Cameron.
Thus I was pleased to hear reports that the White House is building a similar initiative here in the United States. Maya Shankar, a cognitive scientist and senior policy adviser at the White House Office of Science and Technology Policy, is coordinating this cross-agency group, called the Social and Behavioral Science Team; it is part of a larger effort to use evidence and innovation to promote government performance and efficiency. I am among a number of academics who have shared ideas with the administration about how research findings in social and behavioral science can improve policy.
It makes sense for social scientists to become more involved in policy, because many of society’s most challenging problems are, in essence, behavioral. Using social scientists’ findings to create plausible interventions, then testing their efficacy with randomized controlled trials, can improve — and sometimes save — people’s lives, all while reducing the need for more government spending to fix problems later.
Here are three examples of social science issues that have attracted the team’s attention ...
All of these examples show that the role of behavioral science in policy isn’t for the government to tell people how to think or act. It is to help them achieve their own goals. ...
Simon Wren-Lewis is frustrated with the IMF (for good reason):
Missing the point at the IMF, by Simon Wren-Lewis: The IMF have just published a working paper entitled: ‘Assessing the Impact and Phasing of Multi-year Fiscal Adjustment: A General Framework’. Or to put it more simply: should austerity be front loaded or delayed? A really important topic and one where the views of the IMF are of some importance.
I guess if you call anything a ‘General Framework’ you are taking a risk. But honestly, if you also write this“our framework does not explicitly model the monetary policy response, which could have an important impact on output”
then you have no business using the word ‘Framework’, let alone ‘General’. 
We need to go through the logic one more time. When monetary policy is not constrained (we are not at the Zero Lower Bound), monetary policy can (and to a first approximation should) completely offset the impact of any fiscal consolidation. The multiplier in that case will be approximately zero.  However if we are at the ZLB, then within the current monetary policy framework (essentially inflation targeting), and unless you are really optimistic about unconventional policy, the ability of monetary policy to stimulate aggregate demand is severely compromised. As a result, any fiscal multiplier will be substantially greater than zero.
Now consider two periods. In the first, we are at the ZLB. In the following period, we are not. Consider two fiscal consolidation programs. In the first, everything is front loaded into the first period. In the second, nothing happens in the first period, and all fiscal consolidation takes place in the second. Design the two programs so that we end up with the same debt to GDP ratio by the end of the second period, so they are neutral in this respect.
What is the overall impact on output of the two programs? Frontloading hits output in the ZLB period, with possible hysteresis effects in the second. Delaying consolidation until the second period has no impact on output whatsoever, because any impact on output is offset by monetary policy. Simple. So the choice is a no-brainer - you delay fiscal adjustment until the ZLB period has ended.
You would think that with these very dramatic implications for the optimal path for fiscal consolidation, allowing for monetary policy would have to be part of any ‘general framework’. ...
This is by now such an obvious and basic point I can only wonder why it is not incorporated into the analysis. By ignoring this point, what has been done is just inapplicable to some major economies. I do not like being so critical and blunt, but this is no academic debating point. And I would hate to think that this reasoning has been ignored precisely because its implications about the timing of fiscal consolidation are so clear. ...
- The Monetary Base, IS-LM, And All That (Very Nerdy) - Paul Krugman
- Shopping - Language Log
- Do Savers Need to be Saved? - Not Quite Noahpinion
- Creativity, cities and innovation - vox
- New Keynesian models and the labour market - mainly macro
- Wormholes May Save Physics From Black Hole Infernos - Scientific American
- The relationship between maths and economics- Magic, maths and money
- Looking Back at the Baby Boom - Tim Taylor
- Singapore Is The New Chile - Paul Krugman
- Lockhart ‘Comfortable’ With Slowing Pace of Bond Buying - WSJ
- It Wasn’t Brain Surgery - It Was the First Economic Table - Liberty Street
Friday, August 23, 2013
New home sales fell in July (see New Home Sales decline sharply to 394,000 Annual Rate in July). Calculated Risk (Bill McBride) has "Three key comments":
1. This is just one month of data (I note this whenever we see a weak or strong sales report). There is plenty of month-to-month noise for new home sales and frequent large revisions.
2. The downward revisions to previous months were expected (In the weekly schedule I wrote: "Based on the homebuilder reports, there will probably be some downward revisions to sales for previous months."). But these revisions do suggest the housing recovery was not as strong as previously thought.
3. Important: Any impact from rising mortgage rates would show up in the New Home sales report before the existing home sales report. New home sales are counted when contracts are signed, and existing home sales when the transactions are closed - so the timing is different. For existing home sales, I think there was a push to close before the mortgage interest rate lock expired - so closed existing home sales in July were strong - and I expect a decline in existing home sales in August.
For New Home sales, I expect some buyers were shocked by the increase in rates - and they held off signing a contract in July. But this doesn't mean the housing recovery is over - far from it. In fact I think the housing recovery (starts / new home sales) has just begun.
Looking at the first seven months of 2013, there has been a significant increase in sales this year. The Census Bureau reported that there were 271 new homes sold in the first half of 2013, up 21.5% from the 223 thousand sold during the same period in 2012. This was the highest sales for the first seven months 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 to increase to 750 to 800 thousand over the next several years - substantially higher than the current sales rate. ...
Mike the Mad Biologist:
The Age of Denial and the Marketplace of Ideas: I probably should have written “The Age of Denial Results from the Marketplace of Ideas.” Physicist Adam Frank at the NY Times tackles the topic of denialism and science ...
Mark Thoma lists a bunch of reasons why this might be the case (boldface mine):
•The cranks have always been there, but today digital technology makes it easier to gain a platform.
•The stakes are higher, so winning is the only thing.
•Scientists have pushed too far and offered evidence as though it were fact, only to have to reverse themselves later (e.g. types of food that are harmful/helpful) eroding trust.
•Science education is so bad that the typical reporter has no idea how to tell fact from “manufactured doubt,” and the resulting he said, she said journalism leaves the impression that both sides have a valid point.
•Scientists became too arrogant and self-important to interact with the lowly public, and it has cost them.
•The political sphere has become ever more polarized and insular making it much easier for false ideas intended to promote political or economic gain to reverberate within the groups.
•Nothing has really changed, old people always think their age was the golden one.
I would add to the list:
•The opposition to certain fields and findings of science is central to self-identity and part of a larger world view and way of life (e.g., fundamentalist doctrines). It transcends data-driven assessment of single issues. Typically, people will resist changing their minds and only do so after a trauma or betrayal (personal or group) forces them to confront their inconsistencies.
I would argue the widespread acceptance of racism–I mean the flat-out, stone cold kind, not subtle prejudice–for much of the twentieth century has to be one of the dumbest displays of denialism. And it was certainly tied into notions of self-identity (“If you ain’t better than a…, then who are you better than?”). So the oldsters, like Tolstoy’s unhappy families, were stupid in their own ways.
But I want to return to the notion of a marketplace of ideas. I dislike that metaphor because it implies ideas are judged not on their validity, but on how well they are marketed. The implication of this is that once some rich wacko decides to fund a ‘faith-tank’, that entity essentially becomes a Self-Perpetuating Bullshit Machine, and is unstoppable. It’s relatively cheap to ‘put ideas out there.’ More importantly, there’s no way to stop them from doing so, nor do the individual actors pushing these ideas have any incentive to stop.
One more way we have commodified the previously uncommodifiable*.
*Or least to a recently unprecedented extent.
Why have so many bubbles emerged around the world in recent decades?:
This Age of Bubbles, by Paul Krugman, Commentary, NY Times: So, another BRIC hits the wall. Actually, I’ve never much liked the whole “BRIC” — Brazil, Russia, India, and China — concept: Russia, which is basically a petro-economy, doesn’t belong there at all, and there are large differences among the other three. Still, it’s hard to deny that India, Brazil, and a number of other countries are now experiencing similar problems. And those shared problems define the economic crisis du jour.
What’s going on? It’s a variant on the same old story: investors loved these economies not wisely but too well, and have now turned on the objects of their former affection. ... As a result, India’s rupee and Brazil’s real are plunging, along with Indonesia’s rupiah, the South African rand, the Turkish lira, and more.
Does this reversal of fortune pose a major threat to the world economy? I don’t think so (he said with his fingers crossed behind his back). ...
Still,... this latest financial turmoil raises a broader question: Why have we been having so many bubbles? ...
The thing is, it wasn’t always thus. The ’50s, the ’60s, even the troubled ’70s, weren’t nearly as bubble-prone. So what changed?
One popular answer involves blaming the Federal Reserve — the loose-money policies of Ben Bernanke and, before him, Alan Greenspan. ...
But the Fed was only doing its job. It’s supposed to push interest rates down when the economy is depressed and inflation is low. And what about the series of earlier bubbles, which ... reach back a generation? ... Besides, isn’t the sign of excessive money printing supposed to be rising inflation? We’ve had a whole generation of successive bubbles — and inflation is lower than it was at the beginning.
O.K., the other obvious culprit is financial deregulation — not just in the United States but around the world, and including the removal of most controls on the international movement of capital. Banks gone wild were at the heart of the commercial real estate bubble of the 1980s and the housing bubble that burst in 2007. Cross-border flows of hot money were at the heart of the Asian crisis of 1997-98 and the crisis now erupting in emerging markets — and were central to the ongoing crisis in Europe, too.
In short, the main lesson of this age of bubbles ... is that when the financial industry is set loose to do its thing, it lurches from crisis to crisis.
- Yes, productivity matters – but it is not everything - FT.com
- What is shadow banking? - vox
- Japan's Women to the Rescue - NYTimes.com
- What Steve Keen is maybe trying to say - Nick Rowe
- Central bank chiefs need to master the art of storytelling - FT.com
- Janet Yellen, economists' choice for next Fed chair - Heidi Moore
- Friedman on racial discrimination - Understanding Society
- Obama's Backup Plan on Colleges - NYTimes.com
- The Affordable Care Act and Part-Time Work - NYTimes.com
- Thoughts on the Diamond-Water Paradox - Tim Taylor
- Forecasting From Log-Linear Regressions - Dave Giles
- What’s wrong with Economath? - Angry Bear
- More Economath - Paul Krugman
- Emerging markets central banks’ emergency reserves drop - FT.com
- Karl Rove Shouldn't Pretend He Understands Health Policy - Paul Krugman
Thursday, August 22, 2013
One more -- Antonio Fatas is reevaluating how he teaches about inflation:
Teaching about inflation is fun (but dangerous): Teaching about inflation is fun. Most people who have never been exposed to macroeconomics before are surprised when you show the correlation between inflation and money growth in a large sample of countries. You then produce some data about some hyperinflation countries that include a picture of some bank note with lots of zeros (thank you Zimbabwe) and the students love it. ...
The notion that inflation is (mainly) a monetary phenomenon is new to many students and going through the history of inflation and monetary policy regimes is a very rewarding exercise for a teacher.
But there is a problem with the way we teach inflation: in many countries inflation has been under control for decades now. And this control does not come from the fact that monetary policy was anchored to a physical commodity such as gold but from the actions and credibility of the central bank. ...
In this environment, inflation is almost constant and the correlation between money supply and inflation is inexistent. But we leave this fact for the last five minutes of the class given how much fun it was to talk about Germany in 1923, Hungary in 1946 and Zimbabwe in 2008.
So given the way we have been teaching about inflation it is not that surprising that for the last five years some have been worrying so much about inflation or even hyperinflation as central banks balance sheets have grown very fast. [There is, of course, the mistake that many do of not understanding the difference between the monetary base and the money supply but I will leave that for another post.]
Next time I teach my macroeconomics course I will spend less time talking about inflation and if I talk about it, I will not show the picture of the one hundred trillion dollars note from Zimbabwe, instead I will spend more time about the incredible stability of inflation in many countries. ...
The point about the difference between the monetary base and the money supply is important. Money piling up in banks is not inflationary, it has to be spent to create the demand needed to force prices up. Having the money stockpiled and available makes people and businesses feel safer in bad economic times, but once things improve there's a danger that quite a bit of the pent up demand could hit the marketplace all at once creating large upward pressure on prices. So long as the Fed can vacuum up the money through open market operations, or hold it in place with mechanisms such as paying higher interest on reserves as conditions improve there won't be an inflation problem. I am confident the Fed can do this, my fear is that they will get antsy and start the process too soon which could harm economic growth.
Travel day today, so quick one from Brad Delong:
And I Do Not Understand the Federal Reserve's Current Thinking at All...: There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.
Yet real GDP in the U.S. today is and remains at least 5.5% below the path that past history tells us is consistent with stable inflation, and thus with rough balance in the labor market.
It is true that fiscal policy is and has been sub-optimally tight due to Republican Congressional obstruction and the Obama administration's turn in January 2010 to deficit reduction as job #1 with Obama's call that since "families across the country are tightening their belts… the federal government should do the same". It is true that financial policy with respect to housing has been highly suboptimal due to the Obama administration's commitment of the Japanese Mistake with its failure to replace Ed DeMaro as head of FHFA with someone who understood the situation--and this in spite of all Tim Geithner's reassurances in 2009 that he understood the lessons from the Japanese Mistake, and that the Obama administration would not repeat them.
Nevertheless, when fiscal policy and financial policy are suboptimal it is the responsibility of the Federal Reserve to take proper steps to offset them. Potential harms from accelerating the Federal Reserve's quantitative-easing asset-purchase policies do not appear major. The actual harm from the disaster of a depressed economy is immediate and dire.
Given the history of the past six years, right now I would expect the Federal Reserve Open Market Committee to have reached the conclusion that a CPE Deflator inflation target of 2%/year with no catchup after shortfalls is inconsistent with its accomplishing both parts of its dual mandate, and that it needs to shift to a 2%/year inflation target with level catchup, to nominal GDP targeting, or to a 3%/year or 4%/year inflation target in order to accomplish its congressional mandate.
Failing that, I would expect an FOMC to announce that the slow pace of real economic growth requires an acceleration of asset purchases, not a tapering.
Yet those two positions, which seem to me the reasonable, sound, sensible, technocratic positions, appear to have no votes on the FOMC.
Why not? What are they thinking? ...
Adam Frank wonders how it became "politically effective, and socially acceptable, to deny scientific fact" (this one is also in today's links):
Welcome to the Age of Denial, Commentary, NY Times: ...The triumph of Western science led most of my professors to believe that progress was inevitable. While the bargain between science and political culture was at times challenged — the nuclear power debate of the 1970s, for example — the battles were fought using scientific evidence. Manufacturing doubt remained firmly off-limits.
Today, however, it is politically effective, and socially acceptable, to deny scientific fact. ...My professors’ generation could respond to silliness like creationism with head-scratching bemusement. My students cannot afford that luxury. Instead they must become fierce champions of science in the marketplace of ideas.
During my undergraduate studies I was shocked at the low opinion some of my professors had of the astronomer Carl Sagan. For me his efforts to popularize science were an inspiration, but for them such “outreach” was a diversion. That view makes no sense today.
The enthusiasm and generous spirit that Mr. Sagan used to advocate for science now must inspire all of us. There are science Twitter feeds and blogs to run, citywide science festivals and high school science fairs that need input. For the civic-minded nonscientists there are school board curriculum meetings and long-term climate response plans that cry out for the participation of informed citizens. ...
Behind the giant particle accelerators and space observatories, science is ..., simply put, a tradition. And as we know from history’s darkest moments, even the most enlightened traditions can be broken and lost. Perhaps that is the most important lesson all lifelong students of science must learn now.
I've been trying to think of some reasons why it might have changed:
- The cranks have always been there, but today digital technology makes it easier to gain a platform.
- The stakes are higher, so winning is the only thing.
- Scientists have pushed too far and offered evidence as though it were fact, only to have to reverse themselves later (e.g. types of food that are harmful/helpful) eroding trust.
- Science education is so bad that the typical reporter has no idea how to tell fact from "manufactured doubt," and the resulting he said, she said journalism leaves the impression that both sides have a valid point.
- Scientists became too arrogant and self-important to interact with the lowly public, and it has cost them.
- The political sphere has become ever more polarized and insular making it much easier for false ideas intended to promote political or economic gain to reverberate within the groups.
- Nothing has really changed, old people always think their age was the golden one.
What else might have caused this? What's the most important factor?
Diversity in Economics, by Carola Binder: Bank of England Governor Mark Carney, in an interview earlier this month, pointed out that there are no women on the Monetary Policy Committee (MPC). There also happen to be no female ministers in the Treasury. Carney suggested,
“What we have to do at the Bank of England is grow top female economists all the way through the ranks. That adds to the diversity in macroeconomic thinking, it adds to qualified candidates for the MPC including qualified candidates to be a future governor.”
This seems like a reasonable message, but Philip Booth at the Institute of Economic Affairs wonders "why Osborne and Cameron are not hauling Carney in for a dressing down." He makes a deeply confusing comparison between Carney and Larry Summers, and then adds:
"It is worth noting that I am quite comfortable with the idea that the sexes are complementary and that, in any business, social or family situation, they may (on average) bring different characteristics to the table. However, if Carney holds this position, there are some interesting conclusions because, if it is accepted that women (on average) might exhibit certain skills in greater preponderance than men, then the opposite may have to be accepted too. But, let’s move on…"
Before moving on, though, what are these "interesting" conclusions? If men do exhibit certain skills (like passive-aggressive ellipses usage) in greater preponderance than women, do we really know that each of these man-skills are beneficial for monetary policymaking?
Booth writes, "Surely, there can only be two reasons [for Carney's remarks] – that Carney believes that there are intrinsic differences between the ways in which men and women reason and assess evidence or that their social experiences are different from those of men who have similar career patterns."
Really, can these be the only two reasons? Isn't it also plausible that Carney thinks the lack of women on the MPC is a sign that some qualified candidates are, for various and perhaps subtle reasons, not making it into or up the ranks, and that excluding part of a talent pool is a generally bad idea? ... Does Booth himself think that it is just a big coincidence that there are zero women out of nine on the committee? Surely his manly math skills are good enough that he doesn't chalk that up to random chance. ...
Next, Booth manages to list eight female economists, but doesn't personally think that any of them would add diversity to the MPC. He thinks Gillian Tett might add diversity to the group, "but it is the fact that she is an anthropologist that ensures that her views add diversity, not the fact that she is a woman." ...
He is inadvertently proving Carney's point, just as he is trying to tear it down. If he thinks that intellectually diverse women do not choose to become economists, he needs to ask himself why that is. It might help to read Neil Irwin's article about what happens when a certain female economist does "contribute to diversity" ...
Felix Salmon summarizes Irwin's reasons why the White House is uneasy about Yellen:
"The first is the 'team player' attack: Yellen is an independent thinker more than she is a loyal deputy to Bernanke... She never became part of the boys’ club which was making enormous decisions on a daily basis in the fall of 2008... The 'team player' argument, then, is basically the 'one of us' argument, thinly disguised. Which is the first place that the sexism comes in...
This second reason essentially takes the 'team player' argument past its breaking point, to the point at which the Obama team is basically saying 'Yellen needs to share our biggest weaknesses.'"
I hope this post was not too much of a rant. I just wanted to make the point that Governor Carney's remarks are perfectly acceptable and in fact welcome.
Even if it was a rant, it would be ok and more than justified.
- Welcome to the Age of Denial - NYTimes.com
- The Government and the Entrepreneurs - Simon Johnson
- The Point of Economath - Paul Krugman
- Economath Fails the Cost-Benefit Test - Bryan Caplan
- Is money exogenous or endogenous? - Nick Rowe
- Creating a History of U.S. Inflation Expectations - Liberty Street
- Left, Right and Centre: some recent observations - mainly macro
- Teaching about inflation is fun (but dangerous) - Antonio Fatas
- College Costs: Rising, Yet Often Exaggerated - NYTimes.com
- Immigration, diversity, and economic prosperity - vox
- What to do about data and privacy - Digitopoly
- FOMC Minutes - Real Time Economics
- FOMC minutes - FT Alphaville
- FOMC Minutes - Calculated Risk
- 2009 And All That - Paul Krugman
Wednesday, August 21, 2013
White House wants pushover bubble-watching Fed chair who would be fun to have a beer with during a crisis: That’s our exaggerated (but not too much) reaction to reading Neil Irwin’s column on the reasons that White House insiders are uneasy with Janet Yellen as Fed chair.
Roughly, the reasons are that she has demonstrated an independent streak in her role as Fed vice chair, is big on preparation and prefers deliberate thinking to a “manic” problem-solving approach, and is more worried about unemployment right now than about fighting asset bubbles.
To reiterate, those are considered bad things.
Look, there are intelligent cases to be made for Summers over Yellen, though obviously we disagree with them. Brad DeLong has made one, as have Tyler Cowen and Roger Altman.
But if Irwin’s column accurately reflects the sophistication of the thinking inside the Obama administration, then it would seem to confirm what we originally thought: the White House, whether because of laziness or an insulated process, just hasn’t done anything close to the appropriate diligence on what the moment requires from a new Fed chair. ...
The White House’s anti-Yellen sexism, cont.: Neil Irwin is not going to have made many friends in the White House with today’s piece on the problems the Obama administration has with Janet Yellen. It makes the White House economic team seem insular, sexist, and deeply mistaken about what the right and proper role of the chairman of the Federal Reserve Board should be. Worse, there’s every reason to believe that Irwin’s piece is entirely accurate.
Irwin enumerates three main reasons why the White House is underwhelmed with Yellen. The first is the “team player” attack: Yellen is an independent thinker more than she is a loyal deputy to Bernanke. And because she was 3,000 miles away from the action during the financial crisis (she was running the San Francisco Fed), she never became part of the boys’ club which was making enormous decisions on a daily basis in the fall of 2008.
As Irwin puts it, “she was on the outside looking in regarding some of the seat-of-the-pants decisions that were being made over how to rescue the American economy” — and the people who made those decisions are the exact same people who are advising Obama on whom to nominate as Fed chair. They have all worked closely with Summers, they enjoy the way he makes decisions, and they’ve all been through various crises with each other.
The “team player” argument, then, is basically the “one of us” argument, thinly disguised. Which is the first place that the sexism comes in: everybody named as being part of the “team” (Larry Summers, Tim Geithner, Ben Bernanke, Bill Dudley, Don Kohn, Kevin Warsh, Gene Sperling) is undeniably male — and, what’s more, the kind of male who takes great pride in his own intelligence, and loves it when the world knows just how smart he is.
But it gets worse...
Neil Irwin Listens to Footsteps in the Topkapi Palace: Federal Reserve Succession Weblogging: ... I am not at all sure that what Neil has heard is what the White House staff meant for him to hear. But I must say that I find my line--that either would be an excellent choice, but that I have a small preference for Summers over Yellen because if we wind up in the lower tail of the outcomes distribution we would rather have a central banker not bound by a perhaps-outdated past Fed consensus--more convincing.
Wanted: A Boring Leader for the Fed: The debate over who should succeed Ben S. Bernanke, the chairman of the Federal Reserve, has been exceptionally personality-driven. Supporters and opponents of the two leading contenders — Lawrence H. Summers ... and Janet L. Yellen ... have been feuding in public. ...
What all sides seem to misunderstand, however, is the proper nature of the central bank’s role in the economy. Instead of casting about for a new maestro, we need to return the Fed to dullness and its chairman to obscurity. ...
The Fed’s chairmen in recent decades have been eminently qualified individuals of undisputed probity. But they are humans, too, whose blind spots, egos and potential conflicts of interest — Mr. Greenspan has had a lucrative post-Fed career giving speeches and advice — raise real concerns about hubris, even bias. ...
Perhaps the most important qualification for the next Fed leader is one all too rare in Washington: humility.
Yellen is my choice, by a considerable margin.
... Trade theory emphasizes that those who benefit from free trade should be able to compensate those who suffer, making everyone better off. What trade theory doesn’t explain is why the beneficiaries would offer such compensation unless they are forced to do so. ...
And if one political party is absolutely opposed to redistribution no matter what -- even if it's to compensate the losers in a way that makes everyone better off -- then government can't ensure that the beneficiariues are "forced to" compensate the losers.
They Can’t Handle The Health Care Truth: Aaron Carroll talks about the Republican health care dilemma, and makes a good point: it runs deeper than the specific fact that Obamacare looks the way it does because it has to. At the most fundamental level, you can’t guarantee adequate health care to everyone unless the people who don’t need help right now — the young, healthy, and affluent — are induced, one way or another, to contribute to the care of those who do need help. You can do this purely with taxes, via a single-payer system (and maybe even by having the government act as provider), or you can do it, Swiss or Massachusetts style, via a combination of regulation, taxes, and subsidies. But some way of corralling the lucky healthy into contributing is necessary.
For the vast majority of this group, this is still a good deal — as Ezra Klein says, nobody stays young and healthy forever, and only a very small number of people are so rich that they are better off on a lifetime basis with no guarantee of insurance at all. But conservatives balk at the notion of any kind of redistribution, even if it makes almost everyone better off. So they are unable to come up with an alternative.
What they have are fantasies — claims that somehow unleashing the magic of the marketplace can make health care so cheap that everyone can afford it. There is absolutely no reason to believe that this is true. ...
- Rupee Panic - Paul Krugman
- Measuring the cost of austerity - mainly macro
- The mystery of economic growth - Consider the Evidence
- Coming Full Circle in Energy, to Nuclear - NYTimes.com
- First evidence on co-funding of Chinese firms - vox
- Likely Lot of New Fed Faces in 2014 - WSJ
- A few words about math - Noahpinion
- Why economics is case-based - The Incidental Economist
- Health costs are growing really slowly - Sarah Kliff
- Asymmetries in Aggregate Supply in Two Frameworks - Econbrowser
- Faith, Hope and Charity in actuarial science - Magic, maths and money
- Areas of high unemployment bear the brunt of bank closures - EurekAlert
- Coalmines and Aliens, Again - Paul Krugman
- The Debate Over the Next Fed Chair - Jared Bernstein
- The Economic Policy of Data Caps - Digitopoly
Tuesday, August 20, 2013
Adam Posen has a question:
Why has the Fed given up on America’s unemployed?: ... There is a rush in the US and Europe to prematurely declare stimulus policies ineffective at reducing unemployment. Much of the persistent joblessness is deemed structural and the costs of addressing long-term unemployment too daunting. Labor regulations and skills mismatches clearly play some role in keeping the jobless out of work, but their impact is exaggerated to excuse inaction. ...
So there is no reason to hold back on trying to drive US unemployment down through monetary and fiscal policy. An elastic supply of labour will keep wage growth low, which will suppress inflationary pressure. ... At present, there is no danger of a 1970s-style wage-price spiral. ...
The costs of pushing a bit too far are small and reversible. But the costs of letting unemployment persist are vast. ... There is no good reason for the Fed to give up on the labor market – and thus no good argument for allowing the de facto tightening of monetary conditions to stand.
I'd also ask why Congress has turned its back on the unemployed, but I think we know the answer to that.
Noah Smith says moderate inflation would be a good thing (each point is explained in detail in his post):
Learn to stop worrying and love (moderate) inflation, by Noah Smith: The Federal Reserve's unprecedented programs of Quantitative Easing have not, as many predicted, resulted in substantially increased inflation. But I view this as a failure of the policy, not a success.
Inflation is grossly underappreciated. Economists consistently fail to educate the public about what they mean by the term "inflation". People think it just means "a rise in the price of something" (though that's not really what it means). And people don't like prices rising, because it seems like it should make stuff more expensive - and who wants that?
We're told that inflation is a necessary cost of improving the economy. And in fact, that's exactly what monetarist macroeconomists (think of Mike Woodford, Miles Kimball, etc.) tell us that it is. We must accept higher inflation, they tell us, in order to also get better GDP growth. But given our 'druthers, they tell us, we'd rather have very low inflation. No one wants to become like Zimbabwe, or the Weimar Republic, right??
I'm not so sure this is true, and I'll explain why later. But first, let me dispel a couple of popular myths about inflation.
Popular Inflation Myth 1: "Inflation means I can't buy as much stuff." ...
Popular Inflation Myth 2: "Inflation punishes savers." ...
Inflation Benefit 1: Your debt goes away. ...
Inflation Benefit 2: The federal government debt goes away. ...
Inflation Benefit 3 (?): "Balance sheet recession" might go away! ...
Now, I have to be fair, so I should mention that of course inflation has its costs as well. One of these is the pure nuisance cost - constantly changing prices is a nuisance, and that nuisance can become extremely economically damaging in a hyperinflation. Second, high inflation leads to variable inflation, increasing uncertainty and depressing investment. And finally there might even be government moral hazard; if the government decides it can simply inflate away its debt, it might engage in more irresponsible spending. These costs are all especially severe for higher levels of inflation.
But anyway I hope, after reading this, that you will be a little more wary of all those warnings about the evils of inflation. stop listening to poorly informed politicians, "Austrian" forum trolls, and your uncle who thinks he's still in the 70s. Inflation does not rob the poor man of his hard-earned wages; in fact, it is more likely to unburden the poor man from his crippling debt. And inflation helps get rid of all that debt, both public and private, that many people believe is clogging up our economic system.
We don't want to let inflation get out of hand. But a higher Fed inflation target for the next decade - say, 4% or 5%, instead of our current 2% - would probably be a good thing for most Americans.
I'm not so sure about raising the target that high for an entire decade, but overshooting the 2% target (o raising the target) during the recovery could have helped to speed the return to normal.
... I do want to point out that the fundamental changes occurring in the labor market are best seen at the occupational level not the industry level. When discussing cognitive or routine or manual type functions and how technological change is impacting them, these generally cut across industries by occupation. When I look at employment growth from 2010 to 2012, using occupational groups, I get the following (trying to match the great graphics that both the WSJ and Atlanta Fed use)..
What we see here is strong job growth at both the top and bottom ends of the wage spectrum. Yes, food preparation and personal care account for a disproportionately large share of jobs gained in recent years, but so too have business and financial services, healthcare practitioners, computer and mathematical occupations and management. Where we have seen slower growth is in the middle. The light blue bars, which I term lower middle-wage jobs account for about 40% of all occupations in 2012 yet account for just 26% of the growth. The dark blue bars, which I term upper middle-wage jobs, account for another 19% of all occupations and 0% of the growth. This, by definition, is job polarization. ...
There really is a KDS (Krugman Derangement Syndrome).
How did inequality and poverty change during the Great Recession?:
Inequality and Poverty in the United States: the Aftermath of the Great Recession, by Jeffrey P. Thompson and Timothy M. Smeeding, FRB Working Paper: Abstract: This paper explores trends in inequality and poverty using both market and after-tax and transfer income in the period during and after the Great Recession (through 2011). Using market income (or wages), inequality and poverty rose sharply between 2008 and 2010. The primary exception is measures for the top of the distribution; annual wage and income shares of the top one percent dipped in 2008 and 2009. Including taxes and transfers, broad-based inequality measures also fell, and the poverty increase was muted. Tax and transfer policies lowered inequality and poverty, but those policies were not equal across the population. Poverty declined among the elderly, changed little among children, and rose sharply among the working-age. Inequality fell across the total population, but was unchanged among working-age households. Since 2009, as the economy has grown slowly, inequality has risen for all groups, and poverty remains high for the working-age.