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Monday, September 30, 2013

'World Leaders Must Act Faster on Climate Change'

Speaking of the GOP undermining of the public's faith in the government's ability to solve important problems. This is from Nicholas Stern:

World leaders must act faster on climate change, by Nicholas Stern, Commentary, Financial Times: Governments and businesses should be left in no doubt about the dangers of delaying further cuts in greenhouse gas emissions following the publication of the new assessment report by the Intergovernmental Panel on Climate Change. ... [W]e are seeing fundamental changes to the world’s climate, which could soon be ... causing mass migration and endless conflict. This should focus minds...
But all governments must recognise that they themselves potentially pose the biggest threat. There is a danger that, through vacillation and confusion, they will create policy risk that undermines the confidence of the companies largely responsible for delivering the transition to low-carbon economic growth and development. ...
Some politicians will still seek to deny the science and downplay the risks. Many of them have vested financial interests in protecting the status quo, or ideological beliefs that mean they cannot acknowledge the logic of correcting market failures ... to strengthen the role of markets... Although they are small in number, they still have the power to create confusion and slow action.
But everywhere evidence is emerging of opportunities afforded by new energy sources that are more efficient and less polluting. No investor should fail to be impressed by how rapidly the costs of solar photovoltaics and other technologies are falling. ...
The new IPCC report should now convince all world leaders to accelerate their efforts to tackle climate change and create a safer and more prosperous world.

Given the (intentionally created) political climate surrounding attempts to address this problem, it's hard for me to imagine anything of significance happening anytime soon.

    Posted by on Monday, September 30, 2013 at 10:02 AM in Economics, Environment, Policy, Politics, Regulation | Permalink  Comments (50) 

    'Thank the GOP for the Shutdown and Holding the Economy Hostage'

    Dean Baker:

    Thank the GOP for the shutdown and holding the economy hostage, by Dean Baker, theguardian.com: Here we go again: the GOP is ready to stall the US economy and shut down the government in a crusade to cut government spending. Proponents of austerity both in the United States and Europe are eager to claim success for their policies. In spite of economies that look awful by normal standards, austerity advocates are able to claim victory for their policies by creating a new meaning for the word.
    In Europe, we have the bizarre story of both George Osborne ... and Olli Rehn ... claiming success for their austerity policies based on one quarter of growth. ...
    In the United States, we were treated to the Wall Street Journal (WSJ) boasting of the success of the 2011 debt ceiling agreement on the eve of another standoff on the budget and the debt ceiling. The measure of success in this case appears to be that the sequester budget cuts put in place by the agreement are still in place and that the economy has not collapsed as a result. ...
    First, it is worth noting that many of the disaster warnings about the sequester from President Obama and the Democrats were grossly exaggerated. ...
    However, this doesn't mean that the sequester is harmless. ...
    We ... know the sequester will give us deteriorating government services, higher unemployment, and slower economic growth. That's the track record which prompts the Wall Street Journal's boasts – and the GOP's misguided actions – in favor of even more austerity.

    But if the real goal of the GOP is to reduce the size of government, particularly social insurance, and if the fact that it comes at the expense of the most vulnerable in society is not that great of a concern, then it's not at all clear that austerity has been a failure (and Republicans have also managed to undermine the public's faith in the ability of government to solve important problems whch could also be added to the success side of the ledger). The GOP often argues in terms of jobs and growth, but it is usually cover for a broader agenda.

      Posted by on Monday, September 30, 2013 at 09:32 AM in Economics, Fiscal Policy, Politics, Social Insurance | Permalink  Comments (41) 

      Paul Krugman: Rebels Without a Clue

       It's irrepsonsible for the GOP to take this kind of risk with the economy:

      Rebels Without a Clue, by Paul Krugman, Commentary, NY Times: This may be the way the world ends — not with a bang but with a temper tantrum.
      O.K., a temporary government shutdown ... wouldn’t be the end of the world. But a U.S. government default, which will happen unless Congress raises the debt ceiling soon, might cause financial catastrophe. Unfortunately, many Republicans either don’t understand this or don’t care. ...
      Today we have a weak economy, with falling government spending one main cause of that weakness. A shutdown would amount to a further economic hit...
      Still, a government shutdown looks benign compared with the possibility that Congress might refuse to raise the debt ceiling.
      First of all, hitting the ceiling would force a huge, immediate spending cut, almost surely pushing America back into recession. Beyond that, failure to raise the ceiling would mean missed payments on existing U.S. government debt. And that might have terrifying consequences. ...
      No sane political system would run this kind of risk. But we don’t have a sane political system; we have a system in which a substantial number of Republicans believe that they can force President Obama to cancel health reform by threatening a government shutdown, a debt default, or both, and in which Republican leaders who know better are afraid to level with the party’s delusional wing. ...
      Meanwhile,... reasonable people know that Mr. Obama can’t and won’t let himself be blackmailed in this way... After all, once he starts making concessions to people who threaten to blow up the world economy unless they get what they want, he might as well tear up the Constitution. But Republican radicals — and even some leaders — still insist that Mr. Obama will cave in to their demands.
      So how does this end? ... Ironically, considering who got us into our economic mess, the most plausible answer is that Wall Street will come to the rescue — that the big money will tell Republican leaders that they have to put an end to the nonsense.
      But what if even the plutocrats lack the power to rein in the radicals? In that case, Mr. Obama will either let default happen or find some way of defying the blackmailers, trading a financial crisis for a constitutional crisis.
      This all sounds crazy, because it is. But the craziness, ultimately, resides not in the situation but in the minds of our politicians and the people who vote for them. Default is not in our stars, but in ourselves.

        Posted by on Monday, September 30, 2013 at 12:24 AM in Economics, Politics | Permalink  Comments (77) 

        Links for 09-30-2013

          Posted by on Monday, September 30, 2013 at 12:06 AM in Economics, Links | Permalink  Comments (29) 

          Sunday, September 29, 2013

          'Creating a New Responsibility'

          David Warsh:

          Creating a New Responsibility: Between the political posturing in Washington, and the excellent nuts-and-bolts reporting of the major news organizations, it is easy to lose sight of what is about happen on Tuesday.
          When the Affordable Care Act takes effect, October 1, requiring most US citizens to obtain health insurance one way or another or pay a tax penalty for going without, a new obligation of citizenship will have been recognized by law.
          The responsibility to take care of oneself will have been joined, however loosely, to the long-established right to emergency medical care.
          Something like 25 million citizens, more than half of those who are currently uninsured, will enter into a relationship with a medical practice within the next few years. They’ll join more than 250 million Americans who are currently insured in the biggest undertaking to improve public health since the days of city sanitation and the war on communicable disease more than a century ago.
          In many states, collective well-being will begin to improve almost immediately (the initial enrollment period extends through the end of March). In other states, especially those in the Southeast, where Republican governors have dug in against implementation of the law, a more complicated political game will play on. Everywhere, changes within the enormous health care sector, already underway, will gather momentum.
          No wonder the fuss is so great...
          On Tuesday the Affordable Care Act goes into effect. It was passed by the Congress and upheld by the Supreme Court. The White House holds all the cards. The Defunders, the operating arm of the Tea Party in Congress, are certain to lose if the president remains firm. He should simply state: you don’t negotiate with terrorists.
          As if to underscore the point, Senator Tom Coburn (R-Oklahoma), a veteran of the government shutdowns of 1995-96, told Politico last week that if If the Republicans succeed in shutting down the government Tuesday, “they’ll fold like hotcakes” after a week or two, when constituents begin to complain about the lack of service. “You do not take a hostage you are not going to for sure shoot. And we will not for sure shoot this hostage.”
          And in the longer term? My guess is that Tea Party dissidents will lose ground in the midterm elections next year; that the GOP will split in the 2016 campaign and that a Democrat will be elected president; that in 2018 the Tea Party will further fade. And by 2020, the Republican governors who are successful in implementing the Affordable Health Care Act will be running for president, strongly, on the strength of their records.

            Posted by on Sunday, September 29, 2013 at 01:54 PM in Economics, Health Care, Politics | Permalink  Comments (77) 

            'Information, Beliefs, and Trading'

            Under the weather today, so I'll hand the microphone over to Rajiv Sethi:

            Information, Beliefs, and Trading: Even the most casual observer of financial markets cannot fail to be impressed by the speed with which prices respond to new information. Markets may overreact at times but they seldom fail to react at all, and the time lag between the emergence of information and an adjustment in price is extremely short in the case of liquid securities such as common stock.
            Since all price movements arise from orders placed and executed, prices can respond to news only if there exist individuals in the economy who are alert to the arrival of new information and are willing to adjust positions on this basis. But this raises the question of how such "information traders" are able to find willing counterparties. After all, who in their right mind wants to trade with an individual having superior information?
            This kind of reasoning, when pushed to its logical limits, leads to some paradoxical conclusions. As shown by Aumann, two individuals who are commonly known to be rational, and who share a common prior belief about the likelihood of an event, cannot agree to disagree no matter how different their private information might be. That is, they can disagree only if this disagreement is itself not common knowledge. But the willingness of two risk-averse parties to enter opposite sides of a bet requires them to agree to disagree, and hence trade between risk-averse individuals with common priors is impossible if they are commonly known to be rational.
            This may sound like an obscure and irrelevant result, since we see an enormous amount of trading in asset markets, but I find it immensely clarifying. It means that in thinking about trading we have to allow for either departures from (common knowledge of) rationality, or we have to drop the common prior hypothesis. And these two directions lead to different models of trading, with different and testable empirical predictions.
            The first approach, which maintains the common prior assumption but allows for traders with information-insensitive asset demands, was developed in a hugely influential paper by Albert Kyle. Such "noise traders" need not be viewed as entirely irrational; they may simply have urgent liquidity needs that require them to enter or exit positions regardless of price. Kyle showed that the presence of such traders induces market makers operating under competitive conditions to post bid and ask prices that could be accepted by any counterparty, including information traders. From this perspective, prices come to reflect information because informed parties trade with uninformed market makers, who compensate for losses on these trades with profits made in transactions with noise traders.
            An alternative approach, which does not require the presence of noise traders at all but drops the common prior assumption, can be traced to a wonderful (and even earlier) paper by Harrison and Kreps. Here all traders have the same information at each point in time, but disagree about its implications for the value of securities. Trade occurs as new information arrives because individuals interpret this information differently. (Formally, they have heterogeneous priors and can therefore disagree even if their posterior beliefs are commonly known.) From this perspective prices respond to news because of heterogeneous interpretations of public information.
            Since these two approaches imply very different distributions of trading strategies, they are empirically distinguishable in principle. But identifying strategies from a sequence of trades is not an easy task. At a minimum, one needs transaction level data in which each trade is linked to a buyer and seller account, so that the evolution of individual portfolios can be tracked over time. From these portfolio adjustments one might hope to deduce the distribution of strategies in the trading population.
            In a paper that I have discussed previously on this blog, Kirilenko, Kyle, Samadi and Tuzun have used transaction level data from the S&P 500 E-Mini futures market to partition accounts into a small set of groups, thus mapping out an "ecosystem'' in which different categories of traders "occupy quite distinct, albeit overlapping, positions.'' Their concern was primarily with the behavior of high frequency traders both before and during the flash crash of May 6, 2010, especially in relation to liquidity provision. They do not explore the question of how prices come to reflect information, but in principle their data would allow them to do so.
            I have recently posted the first draft a paper, written jointly with David Rothschild, that looks at transaction level data from a very different source: Intrade's prediction market for the 2012 US presidential election. Anyone who followed this market over the course of the election cycle will know that prices were highly responsive to information, adjusting almost instantaneously to news. Our main goal in the paper was to map out an ecology of trading strategies and thereby gain some understanding of the process by means of which information comes to be reflected in prices. (We also wanted to evaluate claims made at the time of the election that a large trader was attempting to manipulate prices, but that's a topic for another post.)
            The data are extremely rich: for each transaction over the two week period immediately preceding the election, we know the price, quantity, time of trade, and aggressor side. Most importantly, we have unique identifiers for the buyer and seller accounts, which allows us to trace the evolution of trader portfolios and profits. No identities can be deduced from this data, but it is possible to make inferences about strategies from the pattern of trades.
            We focus on contracts referencing the two major party candidates, Obama and Romney. These contracts are structured as binary options, paying $10 if the referenced candidate wins the election and nothing otherwise. The data allows us to compute volume, transactions, aggression, holding duration, directional exposure, margin, and profit for each account. Using this, we are able to group traders into five categories, each associated with a distinct trading strategy.
            During our observational window there were about 84,000 separate transactions involving 3.5 million contracts and over 3,200 unique accounts. The single largest trader accumulated a net long Romney position of 1.2 million contracts (in part by shorting Obama contracts) and did this by engaging in about 13,000 distinct trades for a total loss in two weeks of about 4 million dollars. But this was not the most frequent trader: a different account was responsible for almost 34,000 transactions, which were clearly implemented algorithmically.
            One of our most striking findings is that 86% of traders, accounting for 52% of volume, never change the direction of their exposure even once. A further 25% of volume comes from 8% of traders who are strongly biased in one direction or the other. A handful of arbitrageurs account for another 14% of volume, leaving just 6% of accounts and 8% of volume associated with individuals who are unbiased in the sense that they are willing to take directional positions on either side of the market. This suggests to us that information finds its way into prices largely through the activities of traders who are biased in one direction or another, and differ with respect to their interpretations of public information rather than their differential access to private information.
            Prediction markets have historically generated forecasts that compete very effectively with those of the best pollsters.  But if most traders never change the direction of their exposure, how does information come to be reflected in prices? We argue that this occurs through something resembling the following process. Imagine a population of traders partitioned into two groups, one of which is predisposed to believe in an Obama victory while the other is predisposed to believe the opposite. Suppose that the first group has a net long position in the Obama contract while the second is short, and news arrives that suggests a decline in Obama's odds of victory (think of the first debate). Both groups revise their beliefs in response to the new information, but to different degrees. The latter group considers the news to be seriously damaging while the former thinks it isn't quite so bad. Initially both groups wish to sell, so the price drops quickly with very little trade since there are few buyers. But once the price falls far enough, the former group is now willing to buy, thus expanding their long position, while the latter group increases their short exposure. The result is that one group of traders ends up as net buyers of the Obama contract even when the news is bad for the incumbent, while the other ends up increasing short exposure even when the news is good. Prices respond to information, and move in the manner that one would predict, without any individual trader switching direction.
            This is a very special market, to be sure, more closely related to sports betting than to stock trading. But it does not seem implausible to us that similar patterns of directional exposure may also be found in more traditional and economically important asset markets. Especially in the case of consumer durables, attachment to products and the companies that make them is widespread. It would not be surprising if one were to find Apple or Samsung partisans among investors, just as one finds them among consumers. In this case one would expect to find a set of traders who increase their long positions in Apple even in the face of bad news for the company because they believe that the price has declined more than is warranted by the news. Whether or not such patterns exist is an empirical question that can only be settled with a transaction level analysis of trading data.
            If there's a message in all this, it is that markets aggregate not just information, but also fundamentally irreconcilable perspectives. Prices, as John Kay puts it, "are the product of a clash between competing narratives about the world." Some of the volatility that one observes in asset markets arises from changes in perspectives, which can happen independently of the arrival of information. This is why substantial "corrections" can occur even in the absence of significant news, and why stock prices appear to "move too much to be justified by subsequent changes in dividends." What makes markets appear invincible is not the perfect aggregation of information that is sometimes attributed to them, but the sheer unpredictability of persuasion, exhortation, and social influence that can give rise to major shifts in the distribution of narratives. 

              Posted by on Sunday, September 29, 2013 at 09:42 AM in Economics, Financial System | Permalink  Comments (3) 

              Links for 09-29-2013

                Posted by on Sunday, September 29, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (35) 

                Saturday, September 28, 2013

                'Housing Market Is Heating Up, if Not Yet Bubbling'

                Robert Shiller:

                Housing Market Is Heating Up, if Not Yet Bubbling, by Robert Shiller, Commentary, NY Times: Home prices have been rising rapidly, so much so that there is talk that we are entering another national bubble. ...
                Is it possible that we are lapsing into what I call a bubble mentality — a self-reinforcing cycle of popular belief that prices can only go higher? ...
                People who are now inclined to buy a home are most often just thinking that we are gradually recovering from a recession and that this is a good time to buy. The mental framing still seems to be about economic recovery and the likelihood that interest rates will rise. People mostly don’t seem to be prompted by the anticipation of another housing boom.
                That’s the thinking at the moment. But whether these attitudes mutate into a national epidemic of bubble thinking — one big enough to outweigh higher mortgage rates, fiscal austerity in Congress and other factors — remains to be seen.

                  Posted by on Saturday, September 28, 2013 at 04:16 PM in Economics, Financial System, Housing | Permalink  Comments (48) 

                  Links for 09-28-2013

                    Posted by on Saturday, September 28, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (59) 

                    Friday, September 27, 2013

                    Fed Watch: A Synopsis of Fedspeak

                    Tim Duy:

                    A Synopsis of Fedspeak, by Tim Duy: Much Fedspeak this week, expressing a wide variety of views. I need a scorecard to keep track, and I probably still missed one or two:

                    New York Federal Reserve President William Dudley
                    Event: Speech, interview
                    Taper?: Sets a high bar for taper, seeing insufficient evidence that the recovery is either sufficient or sustainable.
                    Notable quote: "Although the neutral rate should gradually normalize over the long-run as economic fundamentals continue to improve and headwinds abate, this process will likely take many years. In the meantime, the federal funds rate level consistent with the Committee’s objectives of maximum sustainable employment in the context of price stability will likely be well below the long-run level."

                    St. Louis Federal Reserve President James Bullard
                    Event: Speech
                    Taper?: September was a close call, October possible
                    Notable quote: “We said it was data dependent,” Bullard told reporters after a speech in New York. “It turned out it was data dependent. It enhanced our credibility in the sense that it showed we really are paying attention to the data.”

                    Federal Reserve Governor Jeremy Stein
                    Event: Speech
                    Taper?: September close, but he supported holding back. Likely would not oppose taper.
                    Notable Quote: "...my personal preference would be to make future step-downs a completely deterministic function of a labor market indicator, such as the unemployment rate or cumulative payroll growth over some period. For example, one could cut monthly purchases by a set amount for each further 10 basis point decline in the unemployment rate."

                    Minneapolis Federal Reserve President Narayana Kocherlakota
                    Event: Speech
                    Taper?: Believes the Fed should do more, not necessarily more QE.
                    Notable Quote: "Doing whatever it takes in the next few years will mean something different. It will mean that the FOMC is willing to continue to use the unconventional monetary policy tools that it has employed in the past few years. Indeed, it will mean that the FOMC is willing to use any of its congressionally authorized tools to achieve the goal of higher employment, no matter how unconventional those tools might be." Shades of Draghi, no?

                    Dallas Federal Reserve President Richard Fisher
                    Event: Speech
                    Taper?: Hell, yes, that's how we do it in Texas.
                    Notable Quote: "Here is a direct quote from the summation of my intervention at the table during the policy “go round” when Chairman [Ben] Bernanke called on me to speak on whether or not to taper: “Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.” I believe that is exactly what has occurred, though I take no pleasure in saying so."

                    Kansas City Federal Reserve President Esther George
                    Event: Speech
                    Taper?: If you need to ask, you aren't paying attention.
                    Notable Quote: "Delaying action not only allows potential costs to grow, it also has the potential to threaten the credibility and the predictability of future monetary policy actions. Policy moves that surprise the market often result in additional volatility. And by deciding that it needs to await further data, the Committee is suggesting its desire to be “data dependent” involves putting more emphasis on the most recent data points, which can be volatile and subject to revision,rather than on its own medium-term view of the economy."

                    Chicago Federal Reserve President Charles Evans
                    Event: Speech (FYI: Great slides!)
                    Taper?: Close call, could still be this year.
                    Notable Quote: The Fed's current monetary policy "admits the possibility of overshooting our inflation objectives," Evans said..."We could even do this as long as inflation was below 3 pct because I think symmetry around the inflation target is incredibly important," he added.

                    Richmond Federal Reserve President Jeffery Lacker
                    Event: Speech
                    Taper?: Yes, never a supporter in the first place.
                    Notable Quote: "Yielding to the temptation to implicitly renege by reworking decision criteria or citing unforeseen economic developments may have short-term appeal, but widely perceived discrepancies between actual and foreshadowed behavior will inevitably erode the faith people place in future central bank statements."

                    Atlanta Federal Reserve President Dennis Lockhart
                    Event: Speech (Topic is productivity, indirect reference to monetary policy), interview
                    Taper?: Close call in September, probably not October, but Lockhart will fall in line with whatever is the FOMC concensus.
                    Notable Quote: “In the short time between now and the October meeting, I don’t think there will be an accumulation of enough evidence to dramatically change the picture” about where the economy now stands, Mr. Lockhart said.

                    Bottom Line: Is that clear yet? My attempt to summarize:

                    1. There is broad support/willingness to start the tapering process as soon as the data allows. In general, even the doves believe that it is the stock, not flow, that matters, and at this point a small taper will have little impact on the stock. Earliest timing is December. If the government shuts down, they might not even have an employment report for the October meeting. That's going to open up a whole Friday on everyone's calendar.
                    2. Financial stability would add to the case for tapering. The Fed does not want tapering to be a signal about interest rate policy. If they believe taper talk has only raised the term premium, but is not affecting the expected path of policy, they will be more likely to taper. Read the Stein speech.
                    3. You see constant reminders that tapering is not tightening, and that more accommodation could be provided via forward guidance. This is the direction the Fed wants to go.
                    4. There is some push to include an even looser inflation threshold than the current 2.5%. I think this is limited to Kocherlakota and Evans. Maybe Yellen, but we will need to wait until her confirmation before we here from her again.
                    5. I think we will see more effort to convince us that the commitment to a long-term low-rate environment is credible. I think this is difficult if they continue to place numeric objectives such as the 6.5% unemployment threshold that suggest the Fed will behave responsibly with respect to their inflation target. In short, the Fed is trying hard to balance stable long-term inflation expectations against the possibility of irresponsible policy in the short-run. This is a difficult message to communicate.

                    Enjoy the weekend.

                      Posted by on Friday, September 27, 2013 at 10:28 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (16) 

                      Have Blog, Will Travel

                      I am here today:

                      Finance and the Wealth of Nations Workshop
                      Federal Reserve Bank of San Francisco
                      & The Institute of New Economic Thinking

                      9:00AM - 9:45AM: David Scharfstein and Robin Greenwood (Harvard Business School), “The Growth of Finance”, Discussant: Bradford DeLong (UC Berkeley)

                      9:45AM-10:30AM: Ariell Reshef (Virginia) and Thomas Philippon (NYU-Stern), “An International Look at the Growth of Modern Finance” , Discussant: Charles Jones (Stanford GSB)

                      10:45AM -11:30AM: Andrea Eisfeldt (UCLA-Anderson), Andrew Atkeson (UCLA) and Pierre-Olivier Weill (UCLA), “The Financial Soundness of U.S. Firms 1926–2011: Financial Frictions and the Business Cycle”, Discussant: Jonathan Rose (Federal Reserve Board) 

                      11:30AM -12:15PM: Ross Levine (UC Berkeley-Haas), Yona Rubenstein (LSE), Liberty for More: Finance and Educational Opportunities”, Discussant: Gregory Clark (UC Davis)

                      1:30PM-2:15PM: Atif Mian (Princeton), Amir Sufi (U. Chicago-Booth), “The Effect Of Interest Rate And Collateral Value Shocks On Household Spending: Evidence from Mortgage Refinancsing”, Discussant: Reuven Glick (SF Fed)

                      2:15PM-3:00PM: Maurice Obstfeld (UC Berkeley), “Finance at Center Stage: Some Lessons of the Euro Crisis”, Discussant: Giovanni dell'Ariccia (IMF)

                      3:00PM-3:45PM: Stephen G. Cecchetti and Enisse Kharroubi (BIS), “Why Does Financial Sector Growth Crowd Out Real Economic Growth?”, Discussant: Barry Eichengreen (UC Berkeley) 

                      4:00PM-4:45PM: Thorsten Beck (Tilburg), “Financial Innoation: The Bright and the Dark Sides”, Discussant: Sylvain Leduc (SF Fed) 

                      4:45PM-5:30PM: Alan M. Taylor (UC Davis), Òscar Jordà (SF Fed/UC Davis), Moritz Schularick (Bonn), “Sovereigns versus Banks: Crises, Causes and Consequences”, Discussant: Aaron Tornell (UCLA)

                      6:15PM: Keynote Speaker, Introduction: John Williams (SF Fed, President), Lord Adair Turner (INET, Senior Fellow; former Chairman of the UK Financial Services Authority), "Credit, Money and Leverage"

                        Posted by on Friday, September 27, 2013 at 05:04 AM in Academic Papers, Conferences, Economics | Permalink  Comments (6) 

                        Paul Krugman: Plutocrats Feeling Persecuted

                        Why is there so much anger and whining from the biggest winners in society?:
                        Plutocrats Feeling Persecuted, by Paul Krugman, Commentary, NY Times: Robert Benmosche, the chief executive of the American International Group, said something stupid the other day. And we should be glad, because his comments help highlight an important but rarely discussed cost of extreme income inequality — namely, the rise of a small but powerful group of what can only be called sociopaths.
                        For those who don’t recall, A.I.G. is a giant insurance company that played a crucial role in creating the global economic crisis... Five years ago, U.S. authorities, fearing that A.I.G.’s collapse might destabilize the whole financial system, stepped in with a huge bailout. ... For a time, A.I.G. was essentially a ward of the federal government, which owned the bulk of its stock, yet it continued paying large executive bonuses. There was, understandably, much public furor.
                        So here’s what Mr. Benmosche did in an interview with The Wall Street Journal: He compared the uproar over bonuses to lynchings in the Deep South ... and declared that the bonus backlash was “just as bad and just as wrong.” ...
                        In 2010..., there was a comparable outburst from Stephen Schwarzman, the chairman of the Blackstone Group, one of the world’s largest private-equity firms...
                        This is important. Sometimes the wealthy talk as if they were characters in “Atlas Shrugged,” demanding nothing more from society than that the moochers leave them alone. But these men were speaking for, not against, redistribution — redistribution from the 99 percent to people like them. This isn’t libertarianism; it’s a demand for special treatment. It’s not Ayn Rand; it’s ancien régime. ...
                        The thing is, by and large, the wealthy have gotten their wish. Wall Street was bailed out, while workers and homeowners weren’t. ...
                        So why the anger? Why the whining? And bear in mind that claims that the wealthy are being persecuted aren’t just coming from a few loudmouths. They’ve been all over the op-ed pages and were, in fact, a central theme of the Romney campaign last year.
                        Well, I have a theory. When you have that much money, what is it you’re trying to buy by making even more? You already have the multiple big houses, the servants, the private jet. What you really want now is adulation; you want the world to bow before your success. And so the thought that people in the media, in Congress, and even in the White House are saying critical things about people like you drives you wild.
                        It is, of course, incredibly petty. But money brings power, and thanks to surging inequality, these petty people have a lot of money. So their whining, their anger that they don’t receive universal deference, can have real political consequences. Fear the wrath of the .01 percent!

                          Posted by on Friday, September 27, 2013 at 12:24 AM in Economics, Income Distribution | Permalink  Comments (83) 

                          Links for 09-27-2013

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                            Thursday, September 26, 2013

                            The New Normal? Slower R&D Spending

                            From the Atlanta Fed's macroblog:

                            The New Normal? Slower R&D Spending: In case you need more to worry about, try this: the pace of research and development (R&D) spending has slowed. The National Science Foundation defines R&D as “creative work undertaken on a systematic basis in order to increase the stock of knowledge” and application of this knowledge toward new applications. ...
                            R&D spending is often cited as an important source of productivity growth within a firm, especially in terms of product innovation. But R&D is also an inherently risky endeavor, since the outcome is quite uncertain. So to the extent that economic and policy uncertainty has helped make businesses more cautious in recent years, a slow pace of R&D spending is not surprising. On top of that, the federal funding of R&D activity remains under significant budget pressure. See, for example, here.
                            So you can add R&D spending to the list of things that seem to be moving more slowly than normal. Or should we think of it as normal?

                              Posted by on Thursday, September 26, 2013 at 09:10 AM in Economics, Productivity, Technology | Permalink  Comments (50) 

                              'Rage of the Privileged'

                              Paul Krugman:

                              Rage of the Privileged: Mark Thoma has an excellent column at the Fiscal Times linking the fight over the debt ceiling to the larger issue of extreme inequality. ... I’d like, however, to suggest that the reality is even worse than Thoma suggests.

                              Here’s how Thoma puts it:

                              Rising inequality and differential exposure to economic risk has caused one group to see themselves as the “makers” in society who provide for the rest and pay most of the bills, and the other group as “takers” who get all the benefits. The upper strata wonders, “Why should we pay for social insurance when we get little or none of the benefits?” and this leads to an attack on these programs.

                              So he links the debt ceiling fight to the influence of the wealthy, who want to dismantle the welfare state because it’s nothing to them, and they want lower taxes. One could add that the very inequality that distances the rich from ordinary concerns gives them increased power, and so makes their anti-welfare-state views far more influential.

                              How, then, are things even worse than he says? Because many of the rich are selective in their opposition to government helping the unlucky. They’re against stuff like food stamps and unemployment benefits; but bailing out Wall Street? Yay!

                              Seriously. Charlie Munger says that we should “thank God” for the bailouts, but that ordinary people fallen on hard times should “suck it in and cope.” AIG’s CEO — the CEO of a bailed out firm! — says that complaints about bonuses to executives at such firms are just as bad as lynchings (I am not making this up.)

                              The point is that the superrich have not gone Galt on us — not really, even if they imagine they have. It’s much closer to pure class warfare, a defense of the right of the privileged to keep and extend their privileges. It’s not Ayn Rand, it’s Ancien Régime.

                                Posted by on Thursday, September 26, 2013 at 07:58 AM in Economics, Income Distribution, Social Insurance | Permalink  Comments (75) 

                                Fed Watch: Resetting Expectations

                                Tim Duy:

                                Resetting Expectations, by Tim Duy: Now that the smoke has cleared somewhat, we see clearly that the taper will be pushed forward to some data-dependent point in the future. But which point? That is tricky given the Fed's predilection for focusing on the last employment reports when setting policy. The Fed appears to want to shift away from asset purchases in favor of forward guidance and is looking for the right time to begin that process. Their modus operandi has been to see six months of good employment data, send up a warning flag that the end of policy accommodation is coming, and then back down when the data turns weaker in the next three months.
                                If they continue that pattern, then we could be looking at mid-2014 before enough evidence of sustainability emerges that the Fed feels confident they can taper. But if they are on a knife edge now, they may only need two or three months of good data to taper, assuming they see little risk that interest rates will get away from them. Which gives a wide range for the taper - no sooner sooner than December, as late as mid-2014 if the data holds. But an end to asset purchases does not mean a solid recovery. The Fed's expectation of a long period of low term rates suggests the healing will remain anything but rapid.
                                Using this week's speech by New York Federal Reserve President William Dudley as a baseline, consider his two tests for meeting the requirement of "stronger and sustainable" labor market activity:
                                To begin to taper, I have two tests that must be passed: (1) evidence that the labor market has shown improvement, and (2) information about the economy’s forward momentum that makes me confident that labor market improvement will continue in the future. So far, I think we have made progress with respect to these metrics, but have not yet achieved success.
                                On the first point, he notes that the unemployment rate overstates the degree of labor market improvement:
                                Other metrics of labor market conditions, such as the hiring, job-openings, job-finding rate, quits rate and the vacancy-to-unemployment ratio, collectively indicate a much more modest improvement in labor market conditions compared to that suggested by the decline in the unemployment rate.
                                It is very unfortunate from a communications perspective that the Fed keeps throwing out markers for the unemployment rate, first the 6.5% threshold for interest rates and the 7% trigger for asset purchases. In the absence of those makers, I think most of us would agree that healing in the labor market is far from complete:


                                It appears pretty evident that the unemployment rate threshold is essentially meaningless as long as inflation remains below 2%. Which seems to imply that the Evans Rule really collapses to an inflation targeting regime.
                                On the second point:
                                ...fiscal uncertainties loom very large right now as Congress considers the issues of funding the government and raising the debt limit ceiling. Assuming no change in my assessment of the efficacy and costs associated with the purchase program, I’d like to see economic news that makes me more confident that we will see continued improvement in the labor market. Then I would feel comfortable that the time had come to cut the pace of asset purchases.
                                The fiscal front is coming to a head in the next few weeks - the drop dead date for hitting the debt ceiling is October 17. So far, market participants have been fairly relaxed about the entire spectacle. The general belief is that, like in the past, the Republicans ultimately choose not to commit political self-destruction and cave in the final hours. We will see.
                                As far as the continued improvement in the labor markets, I find it curious that the Fed seems to be fairly incapable of seeing through the ebb and flow of the data to the underlying trend. In particular, the issue of seasonal distortions is revisited by Matthew O'Brien and Matthew Klein, but you really don't need to know about the seasonal effects to read this chart:


                                Too much focus on the last three months of this data is dangerous - this data has a lot of monthly variability and is subject to significant revisions. I don't think momentum has faded or surged. The economy continues to grind forward at a disappointing pace. You can argue that either the Fed needs to provide more accommodation, or that asset purchases are not a particularly effective form of easing. The Fed is taking a middle ground - saying QE is effective, but shifting to forward guidance which they find to be more effective and more consistent with "normal" monetary policy.
                                Overall, although St. Louis Federal Reserve President James Bullard described the meeting as a close call and said that tapering could begin in October, it is virtually impossible for the data to meet Dudley's requirements by that time. December would be the earliest, and even that is pushing it.
                                With respect to forward guidance, the Federal Reserve is trying to push more accommodation via expectations that rates remain low far, far into the future. Back to Dudley:
                                In addition, it is worth explaining why we anticipate the federal funds rate is still likely to be quite low relative to what Committee participants consider normal over the longer run, even as the Committee gets close to its employment and inflation objectives. For example, in the September Summary of Economic Projections, the median projection for the federal funds rate in the fourth quarter of 2016 is 2 percent, far below the median long-run federal funds rate projection of 4 percent, at the same time that the unemployment rate and inflation are close to the Committee’s long-run objectives.
                                The Fed's unemployment projections:


                                Dudley's first explanation:
                                How does one explain this? As noted by Chairman Bernanke in last week’s press conference, the still low federal funds rate projections for 2016 reflect the fact that economic headwinds—such as tight credit standards and ongoing fiscal consolidation—are likely to take a long time to fully abate. As a result, monetary policy will have to keep short-term interest rates very low for a sustained period in order for the Committee to achieve its objectives.
                                I think this implies that rates would need to rise quickly once those objectives are reached, which makes 2017 interesting. Dudley's view differs:
                                My view is that the neutral federal funds rate consistent with trend growth is currently very low. That’s one reason why the economy is not growing very fast despite the current accommodative stance of monetary policy. Although the neutral rate should gradually normalize over the long-run as economic fundamentals continue to improve and headwinds abate, this process will likely take many years. In the meantime, the federal funds rate level consistent with the Committee’s objectives of maximum sustainable employment in the context of price stability will likely be well below the long-run level.
                                This line of thought seems to have somewhat different implications. First, rates do not need to rise quickly when full employment is reached. Second, though, it somewhat begs the question of why the Fed is not pressing harder to make policy more accommodative now to accelerate the pace of the recovery. I think the answer is that they believe that they they are facing the limits of monetary policy in the face of fiscal restraint.
                                The possibility of a very long period of low rates deserves some additional attention from Fed speakers. It speaks to a period of stagnation which, interestingly, is a road Paul Krugman headed down today:
                                Our current episode of deleveraging will eventually end, which will shift the IS curve back to the right. But if we have effective financial regulation, as we should, it won’t shift all the way back to where it was before the crisis. Or to put it in plainer English, during the good old days demand was supported by an ever-growing burden of private debt, which we neither can nor should expect to resume; as a result, demand is going to be lower even once the crisis fades.
                                And here’s the worrisome thing: what if it turns out that we need ever-growing debt to stay out of a liquidity trap?...
                                ...This is not a new fear: worries about secular stagnation, about a persistent shortfall of demand even at low interest rates, were very widespread just after World War II. At the time, those fears proved unfounded. But they weren’t irrational, and second time could be the charm.
                                Bear in mind that interest rates were actually pretty low even during the era of rising leverage, and got worryingly close to zero after the 2001 recession and even, you might say, after the 90-91 recession (there was talk of a liquidity trap even then). It’s not hard to believe that liquidity traps could become common, if not the norm, in an economy in which prudential action, public and private, has brought the era of rising leverage to an end.
                                Finally, I am a little concerned that forward guidance is being used only in reaction to disappointing outcomes and not proactively to accelerate the pace of improvement. Here I think the conditionality on the policy forecast prevents the Fed from communicating an "irresponsible" policy path. An upper bound of 2.5% on inflation is hardly irresponsible.
                                Bottom Line: Policy expectations have been reset; tapering is not expected at the next meeting. December at the earliest, but even that is questionable. The Fed is looking for an opportunity to transfer accommodation from asset purchases to forward guidance. Somewhat stronger data and obvious signs that bond market response would be muted would help clear the way for tapering. The more we focus on the forward guidance, the easier it will be for the Fed to taper. It is worth thinking about the implications of the Fed's expectation of a very long period of low rates - what it says about the economy and the limits of monetary policy.

                                  Posted by on Thursday, September 26, 2013 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (28) 

                                  Links for 09-26-2013

                                    Posted by on Thursday, September 26, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (79) 

                                    Wednesday, September 25, 2013

                                    Understanding the 'Economic' Arguments Against Dealing with Global Warming

                                    Brad DeLong:

                                    "But We Must Do the Wrong Thing!": Understanding the "Economic" Arguments Against Dealing with Global Warming: The market-based economics that I was brought upon had four principles:

                                    1. It is important to get the distribution of wealth right, or as right as you can, so that household willingness-to-pay properly represent social marginal values.
                                    2. It is important to get aggregate demand right--for the government to create the right amount of safe and of liquid assets to match shifting private sector demand and so make Say's Law true in practice if not in theory--so that the problems economic policy is dealing with are Harberger Triangles and not Okun Gaps.
                                    3. Then you can let the competitive market rip--as long, that is, as...
                                    4. You have also imposed the right Pigovian taxes and bounties to deal with externalities.

                                    "But the Coase Theorem" you say? The Coase Theorem is three things:

                                    1. An injunction to carve property rights at the joints--to bundle powers, rights, obligations so that you have to impose as little in the way of Pigovian taxes and bodies as possible.
                                    2. A powerful way of thinking about whether the proper Pigovian taxes and bounties are best imposed through Article I processes (legislation) or Article III processes (adjudication).
                                    3. A thought experiment that, as Ronald Coase complained until the day he died, was seized by George Stigler for his own purposes and is much more often misinterpreted than applied.

                                    The self-deluded who don't know what they're doing and the vested interests that fear they would be impoverished when we to do the right thing dealing with global warming are still holding on to their first line of defense: that global warming is not happening. They have, however, built a second line of defense: that global warming was happening until 1995, but then something stopped it, and it will not resume. And behind that is the third line of defense that they are now building which we are here to think about today: that we cannot afford to do the right Pigovian tax-and-bounty thing, for dealing with global warming will cost jobs and incomes.

                                    This is the fifth policy-relevant case I have seen in recent years of the political right that claims to love the market system denying and abandoning the basic principles that underpin the technocrat judgment that the market system can and often is a wonderful social economic calculation, allocation, and distribution mechanism. It is almost as if their previous advocacy of the technocratic case for the market system was simply a mask for their vested interests. We have seen this in opposition to doing the right thing in financial regulation; in the management of aggregate demand; in the provision of the right level of social insurance in the long run; and in shifting the policy mix to partially offset the medium-run rapid rise in inequality. Milton Friedman and George Stigler always used to say that you were better off relying on market contestability rather than capture of old regulatory bureaucracies like the interstate commerce commission to deal with the market failures created by private monopoly, but the problems like excessive inequality and poverty on the one hand and pollution on the other required government action--a negative income tax in the first case, and a market-based antipollution policy via Pigovian taxes and bounties in the second. That is now, largely, out the window.

                                    It is important to recognize what is going on here. ...

                                    There's much, much more in the full post.

                                      Posted by on Wednesday, September 25, 2013 at 12:58 PM in Economics, Environment, Regulation | Permalink  Comments (21) 

                                      How Bad Data Warped the Picture of the Jobs Recovery

                                      Matt O'Brien:

                                      How Bad Data Warped Everything We Thought We Knew About the Jobs Recovery: You know something is really boring when economists say it is.
                                      That's what I thought to myself when the economists at the Brookings Institution's Panel on Economic Activity said only the "serious" ones would stick around for the last paper on seasonal adjustmentzzzzzzz...
                                      ... but a funny thing happened on the way to catching up on sleep. It turns out seasonal adjustments are really interesting! They explain why, ever since Lehmangeddon, the economy has looked like it's speeding up in the winter and slowing down in the summer.
                                      In other words, everything you've read about "Recovery Winter" the past few winters has just been a statistical artifact of naïve seasonal adjustments. Oops. ...
                                      The BLS only looks at the past 3 years to figure out what a "typical" September (or October or November, etc.) looks like. So, if there's, say, a once-in-three-generations financial crisis in the fall, it could throw off the seasonal adjustments for quite awhile. Which is, of course, exactly what happened. ...
                                      And that messed things up for years. Because the BLS's model thought the job losses from the financial crisis were just from winter, it thought those kind of job losses would happen every winter. And, like any good seasonal model, it tried to smooth them out. So it added jobs it shouldn't have to future winters to make up for what it expected would be big seasonal job losses. And it subtracted jobs it shouldn't have from the summer to do so. ...
                                      Now, the one bit of good news here is this effect has already faded away for the most part. Remember, the BLS only looks back at the past 3 years of data when it comes up with its seasonal adjustments -- so the Lehman panic has fallen out of the sample.
                                      Here are two words we should retire: Recovery Winter. It was never a thing. The economy wasn't actually accelerating when the days got shorter, nor was it decelerating when the days got longer. ... The BLS can, and should, do better.

                                        Posted by on Wednesday, September 25, 2013 at 10:19 AM in Economics, Methodology, Unemployment | Permalink  Comments (37) 

                                        Links for 09-25-2013

                                          Posted by on Wednesday, September 25, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (103) 

                                          Tuesday, September 24, 2013

                                          'The Absolute Funniest Thing I Have Read This Year'

                                          For a moment, Menzie Chinn thinks he's reading The Onion. Then he realizes it's actually Fox "News":

                                          The Absolute Funniest Thing I Have Read This Year: From Ed (We Are Not in a Recession) Lazear and Keith Hennessey, "Bush ended financial crisis before Obama took office -- three important truths about 2008", FoxNews (9/16)...
                                          [T]he article ... resurrects the "Blame it on Beijing" view of the origins of the crisis. As if all that capital flowing into America came out of nowhere -- that housing boom, deregulation of financial markets, etc. had nothing to do with actual deregulatory actions pushed by the Administration. More on the "Blame it on Beijing" thesis here and here. (Heck, I got seemingly infinite numbers of offers for credit cards in 2007, but I didn't take 'em all, borrow to the max, and then default.) ...
                                          I agree that the measures undertaken in the immediate aftermath of Lehman were extremely important, including the conservatorship of the GSEs, and implementation of TARP. See the discussion by Phill Swagel of crisis management during the height of crisis.
                                          But, Lazear and Hennessey blur the distinction between Fed actions and those of the Administration. To say the Bush Administration ended the crisis overstates the case (to say the least).
                                          Finally, the entire article reminds me of the person who builds a house in the middle of a big area of dry grass, lobbies against putting any regulations that might require tile rooftop, goes on and puts on a wood shingle rooftop, fails to clear away the dry brush surrounding the house, and then -- when the house catches on fire -- claims victory when one room is saved because a lawn hose was trained on that part of the house. ....

                                            Posted by on Tuesday, September 24, 2013 at 04:05 PM in Economics | Permalink  Comments (22) 

                                            What's It All About Then?: The Real Reason for the Fight over the Debt Limit

                                            Two from Paul Krugman. The first echoes the point I make in my column today about the attempt to use fear over the debt (and hence the need for austerity) as an excuse to dismantle the welfare state:

                                            What’s It All About Then: Simon Wren-Lewis writes with feeling about the “austerity deception“; what sets him off is a post that characterizes the whole austerity debate as being about “big-state” versus “small-state” people.
                                            Wren-Lewis’s point is that only one side of the debate saw it that way. Opponents of austerity in a depressed economy opposed it because they believed that this would worsen the depression — and they were right.
                                            Proponents of austerity, however, were lying about their motives. Strong words, but if you look at their recent reactions it becomes clear that all the claims about expansionary austerity, 90 percent cliffs and all that were just excuses for an agenda of dismantling the welfare state. ...

                                            But I think growing inequality is a big driving force behind this effort.

                                            And since I've complained in past columns that fiscal policy has not received enough attention (particularly how bad it's been), it's nice to see this:

                                            The Depressed Economy Is All About Austerity: Right now the official unemployment rate is 7.3 percent. That’s bad, and many people — myself included — think it understates the true badness of the situation. ...
                                            But we’re clearly still well below potential. And we’ve also had exactly the wrong fiscal policy given that reality plus the zero lower bound on interest rates, with unprecedented austerity. So, how much of our depressed economy can be explained by the bad fiscal policy?
                                            To a first approximation, all of it. By that I mean that to have something that would arguably look like full employment, at this point we wouldn’t need a continuation of actual stimulus; all we’d need is for government spending to have grown normally, instead of shrinking. ...[does calculations to show this]...
                                            The austerians have a lot to answer for.

                                              Posted by on Tuesday, September 24, 2013 at 10:35 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (48) 

                                              The Real Reason for the Fight over the Debt Limit

                                              This shameful attempt to make life even harder for the unlucky and the unfortunate:

                                              The Real Reason for the Fight over the Debt Limit

                                              I argue that inequality -- our increasingly two-tiered society -- is one of the driving forces behind the attack on social insurance.

                                                Posted by on Tuesday, September 24, 2013 at 09:07 AM in Economics, Fiscal Policy, Income Distribution, Politics, Social Insurance | Permalink  Comments (26) 

                                                Links for 09-24-2013

                                                  Posted by on Tuesday, September 24, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (63) 

                                                  Monday, September 23, 2013

                                                  'How Austerity Wrecked the American Economy'

                                                  Kevin Drum:

                                                  How Austerity Wrecked the American Economy, by Kevin Drum: With Washington DC's attention focused on the antics of Ted Cruz and the tea partiers, who are threatening to shut down the government unless Obamacare is defunded, it's easy to lose sight of the bigger picture: Aside from Obamacare, the budget battles of the past three years have been exclusively about the Republican obsession with cutting spending while we're trying to recover from the worst recession since World War II.
                                                  This is lunacy, and it's the subject of "Death by a Thousand Cuts," my cover story in the current issue of Mother Jones. ... The ... austerity zealots ... remain obsessed with slashing spending despite the fact that (a) this is unprecedented in recent history and (b) the deficit has already been slashed repeatedly over the past three years ...
                                                  Government spending at all levels is far below the level of any other recent recovery. Sixteen quarters after the end of the recession, spending during past recoveries has been 7-15 percent higher than it was at the start. This time it's 7 percent lower, despite the fact that the 2008-09 recession was the deepest of the bunch. Reagan, Clinton, and Bush all benefited from rising spending during the economic recoveries on their watches. Only Obama has been forced to manage a recovery while government spending has plummeted.
                                                  And there's no end in sight. Ted Cruz will lose his battle to defund Obamacare. But the tea partiers have already won their battle to cripple the American economy and Obama's presidency with it.

                                                    Posted by on Monday, September 23, 2013 at 10:35 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (65) 

                                                    Paul Krugman: Free to Be Hungry

                                                    Why do conservatives want to reduce funding for the food stamp program?:

                                                    Free to Be Hungry, by Paul Krugman, Commentary, NY Times: ...Conservatives ... have just voted to cut sharply ... the food stamp program — or, to use its proper name, the Supplemental Nutritional Assistance Program (SNAP)... Conservatives are deeply committed to the view that the size of government has exploded under President Obama but face the awkward fact that public employment is down sharply, while overall spending has been falling fast as a share of G.D.P. SNAP, however, really has grown a lot,... from 26 million Americans in 2007 to almost 48 million now.
                                                    Conservatives look at this and see what, to their great disappointment, they can’t find elsewhere..., explosive growth in a government program. ...
                                                    The recent growth of SNAP has indeed been unusual, but then so have the times... Multiple careful economic studies have shown that the economic downturn explains the great bulk of the increase in food stamp use. And ... food stamps have at least mitigated the hardship, keeping millions of Americans out of poverty. ...
                                                    But, say the usual suspects, the recession ended in 2009. Why hasn’t recovery brought the SNAP rolls down? The answer is, while ... the income of the top 1 percent rose 31 percent from 2009 to 2012,... the real income of the bottom 40 percent actually fell 6 percent. Why should food stamp usage have gone down?
                                                    Still, is SNAP..., as Paul Ryan ... puts it, an example of turning the safety net into “a hammock that lulls able-bodied people to lives of dependency and complacency.”
                                                    One answer is, some hammock: last year, average food stamp benefits were $4.45 a day. Also, about those “able-bodied people”: almost two-thirds of SNAP beneficiaries are children, the elderly or the disabled, and most of the rest are adults with children.
                                                    Beyond that, however, you might think that ensuring adequate nutrition for children, which is a large part of what SNAP does, actually makes it less, not more likely that those children will be poor and need public assistance when they grow up. And that’s what the evidence shows. ...
                                                    SNAP, in short, is public policy at its best. ... So it tells you something that conservatives have singled out this of all programs for special ire.
                                                    Even some conservative pundits worry that the war on food stamps, especially combined with the vote to increase farm subsidies, is bad for the G.O.P., because it makes Republicans look like meanspirited class warriors. Indeed it does. And that’s because they are.

                                                      Posted by on Monday, September 23, 2013 at 12:24 AM in Economics, Politics, Social Insurance | Permalink  Comments (69) 

                                                      Links for 09-23-2013

                                                        Posted by on Monday, September 23, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (16) 

                                                        Sunday, September 22, 2013

                                                        The Impact of Growing Inequality

                                                        Lane Kenworthy and Timothy Smeeding issued this "Country Report for the United States" on the impact of growing inequality. It's a relatively long report with lots of tables and figures, but let me highlight one paragraph from the executive summary:

                                                        Growing Inequalities and their Impacts in the United States, by Lane Kenworthy Timothy Smeeding, Country Report for the United States: ... We conclude that living standards in the middle of the distribution were and are falling during the Great Recession . Moreover, with faint prospects of a rapid recovery, the losses of the Great Recession increasingly mount. The forecast is that unemployment will not return to 6.5 percent levels for another three years or longer. While the trend in inequality i n the United States has been ever upward, we believe that i t will be politically and socially difficult for U.S. inequality to continue to grow at the top at the expense of the collapsing middle class, the majority of whom believe , perhaps rightly so, that their children will be worse off economically than they are. If so, we might expect some moderation in the growth of United States inequality in the next decade.

                                                        I'm curious what you think about this. Are we on the verge of a populist uprising that result in "some moderation in the growth of United States inequality in the next decade," or will things continue along the present path for quite some time?

                                                          Posted by on Sunday, September 22, 2013 at 11:20 AM in Economics, Income Distribution | Permalink  Comments (40) 

                                                          Bubbles are All in Your Head

                                                          Noah Smith, in a tweet, seemed to think this research is important:

                                                          Drivers of financial boom and bust may be all in the mind, study finds, EurekAlert: Market bubbles that lead to financial crashes may be self-made because of instinctive biological mechanisms in traders' brains that lead them to try and predict how others behave...
                                                          The research offers the first insight into the processes in the brain that underpin financial decisions and behavior leading to the formation of market bubbles. ... Although bubbles have been intensely investigated in economics, the reasons why they arise and crash are not well understood and we know little about the biology of financial decision behavior.
                                                          Researchers at the California Institute of Technology ... found that the formation of bubbles was linked to increased activity in an area of the brain that processes value judgments. People who had greater brain activity in this area were more likely to ride the bubble and lose money by paying more for an asset than its fundamental worth.
                                                          In bubble markets, they also found a strong correlation between activity in the value processing part of the brain and another area that is responsible for computing social signals to infer the intentions of other people and predict their behaviour.
                                                          Dr Benedetto De Martino, a researcher at Royal Holloway University of London who led the study while at the California Institute of Technology, said: "We find that in a bubble situation, people ... shift the brain processes they're using to make financial decisions. They start trying to imagine how the other traders will behave and this leads them to modify their judgment of how valuable the asset is. They become less driven by explicit information, like actual prices, and more focused on how they imagine the market will change. ...
                                                          Professor Peter Bossaerts from the University of Utah, a co-author of the study, explains: "It's group illusion. When participants see inconsistency in the rate of transactions, they think that there are people who know better operating in the marketplace and they make a game out of it. In reality, however, there is nothing to be gained because nobody knows better." ...
                                                          The findings give the first glimpse to the decision-making mechanisms in the brain that drive financial markets. Although they may not help to predict the onset of a bubble, the research could help to design better social and financial interventions to avoid the formation of future bubbles in financial markets.

                                                            Posted by on Sunday, September 22, 2013 at 11:20 AM in Economics, Financial System | Permalink  Comments (29) 

                                                            'Lehman Was Not Alone – Measuring System Risk in the 2008 Crisis'

                                                            Robert Engle at the INET blog:

                                                            Lehman Was Not Alone – Measuring System Risk in the 2008 Crisis, by Robert Engle: On September 15, 2008, Lehman Brothers filed for bankruptcy and ushered in the worst part of the recent financial crisis. Today, we still discuss whether taxpayer money should have been used to rescue Lehman. My colleagues at NYU and I have developed measures of systemic risk, and this fifth anniversary affords us a good opportunity to look at what these measures would have indicated to Treasury Secretary Paulsen if they had been available at that time.
                                                            The answer is quite surprising. ... On the website, you can go back to August 29, 2008, to see the ranking of U.S. firms based on SRISK.  . Was Lehman at the top of the list in 2008? No. In fact, it was Number 11. ...

                                                              Posted by on Sunday, September 22, 2013 at 10:44 AM in Economics, Financial System, Regulation | Permalink  Comments (20) 

                                                              Links for 09-22-2013

                                                                Posted by on Sunday, September 22, 2013 at 12:06 AM in Economics, Links | Permalink  Comments (65) 

                                                                Saturday, September 21, 2013

                                                                The Mental Strain from Being Poor

                                                                Sendhil Mullainatha:

                                                                ... In a paper published last month in Science, with Profs. Anandi Mani at the University of Warwick and Jiaying Zhao at the University of British Columbia, Professor Shafir and I waded into politically charged territory. Some people argue that the poor make terrible choices and do so because they are inherently less capable. But our analysis of scarcity suggests a different perspective: perhaps the poor are just as capable as everyone else. Perhaps the problem is not poor people but the mental strain that poverty imposes on anyone who must endure it. ...

                                                                Much more here.

                                                                  Posted by on Saturday, September 21, 2013 at 06:11 PM in Economics | Permalink  Comments (54) 

                                                                  "A Sign of Weakness"

                                                                  Tyler Cowen:

                                                                  The food stamps program: In an ideal policy world, would food stamps exist as a program separate from cash transfers? Probably not. But as it stands today, they are still one of the more efficient programs of the welfare state and the means-testing seems to work relatively well. And giving people food stamps — since almost everyone buys food — is almost as flexible as giving them cash. It doesn’t make sense to go after food stamps, and you can read the recent GOP push here as a sign of weakness, namely that they, beyond upholding the sequester, are unwilling to tackle the more important and more wasteful targets...
                                                                  See Paul Krugman too.

                                                                    Posted by on Saturday, September 21, 2013 at 01:28 PM in Economics, Politics, Social Insurance | Permalink  Comments (30) 

                                                                    'Loss of Economic Exceptionalism'

                                                                    About that "land of opportunity" thing:

                                                                    Loss of economic exceptionalism, by Claude Fischer: One of the key dimensions of “American Exceptionalism” is the idea that America is the land of opportunity more than any other. We would like to believe that American children who are raised in the meanest conditions are likelier to move up in the world than are children elsewhere. Yet, as of today, the U.S. does not provide more upward mobility than other nations do; if anything, young Americans’ economic fortunes are more tied to those of their parents than is true in other western nations. So, where did this image of exceptional mobility come from?
                                                                    Two economists, Jason Long and Joseph Ferrie, published a study this summer in the American Economic Review that creatively brings together some 19th-century data to argue that there was a time when the U.S. was exceptionally open – or, at least, more open than Britain was. Two pairs of sociologists wrote critical comments on the study (here and here). Yet, even with the controversy, there is a lesson to be learned. ...[discusses controversy]...
                                                                    But it is fair to conclude – at least, I do – that in the 21st century, the U.S. no longer has an exceptionally open and mobile economy. That may be so because the class system has gotten more rigid here or because it has gotten less rigid elsewhere in the West, or both. In any case, the lesson is that our ideology of being the exceptional land of opportunity is a hangover from a time when it was true – but is no more.

                                                                      Posted by on Saturday, September 21, 2013 at 09:46 AM in Economics, Income Distribution | Permalink  Comments (16) 

                                                                      Links for 09-21-2013

                                                                        Posted by on Saturday, September 21, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (83) 

                                                                        Friday, September 20, 2013

                                                                        'The Seven Cardinal Virtues of Equitable Growth'

                                                                        Brad DeLong:

                                                                        The Seven Cardinal Virtues of Equitable Growth:

                                                                        1. Manage the macroeconomy to match aggregate demand to potential supply. Take the dual mandate seriously: maintaining full employment is as important a central bank goal as low and stable inflation--and much more important than preserving healthy margins for the banking sector. Run large deficits--run up the national debt--in times of war, depression, or other national emergency calling for government action. Pay down the debt in other times.
                                                                        2. Invest. Invest in ideas, in equipment capital, in structures capital, in education: we need more of all forms of investment. Boost public and private investment: we need both kinds.
                                                                        3. Over the past generation, America has shifted enormous resources into value-subtracting industries: health-care administration, prisons, finance, carbon energy. We need to reverse those shifts, and focus the American economy on the value-creating sectors rather than the value-subtracting ones.
                                                                        4. We ought to have had a carbon tax 20 years ago. We still need one.
                                                                        5. We need more immigration. It is much easier, worldwide, to move the people to where the institutions are already good than to make good institutions where the people are. More immigration produces a richer country for those already here. More immigration is a mitzvah for immigrants. More immigration is, to a a lesser degree, a mitzvah for those in poor countries outside who see less population pressure on resources. And a U.S. in 2070 that has 600 million people is more of an international superpower than a U.S. in 2070 that has only 400 million people.
                                                                        6. We need more equality. If we want to have equality of opportunity 50 years from now, we need substantial equality of result right now.
                                                                        7. We are going to need a bigger and better government. The private unregulated market does not do well at health-care finance, at pensions, or at education finance. The private unregulated market does not do well at research and early-stage development. The private unregulated market does not do well with commodities that are non-rival. We are moving into a twenty-first century in which these sectors will all be larger slices of what we do, and so a well-functioning economy will need a larger government relative to the private economy than the twentieth century did.

                                                                        I'd add that we need a more balanced representation of interests in the political arena. As it stands, the deck is stacked against the middle class and that leads to economic distortions that work in favor of the privileged class (and come at the expense of the broader economy).

                                                                          Posted by on Friday, September 20, 2013 at 09:59 AM in Economics | Permalink  Comments (61) 

                                                                          Paul Krugman: The Crazy Party

                                                                          Creating "an alternate reality" can backfire:

                                                                          The Crazy Party, by Paul Krugman, Commentary, NY Times: ... In recent months, the G.O.P. seems to have transitioned from being the stupid party to being the crazy party. ...
                                                                          It helps, I think, to understand just how unprecedented today’s political climate really is.
                                                                          Divided government in itself isn’t unusual and is, in fact, more common than not. Since World War II, there have been 35 Congresses, and in only 13 of those cases did the president’s party fully control the legislature.
                                                                          Nonetheless, the United States government continued to function. ... Nobody even considered the possibility that a party might try to achieve its agenda, not through the constitutional process, but through blackmail — by threatening to bring the federal government, and maybe the whole economy, to its knees unless its demands were met.
                                                                          True, there was the government shutdown of 1995. But this was widely recognized after the fact as both an outrage and a mistake. ...
                                                                          Yet, at the moment, it seems highly likely that the Republican Party will refuse to fund the government, forcing a shutdown at the beginning of next month, unless President Obama dismantles the health reform that is the signature achievement of his presidency. Republican leaders realize that this is a bad idea...
                                                                          How did we get here? ...
                                                                          First came the southern strategy, in which the Republican elite cynically exploited racial backlash to promote economic goals, mainly low taxes for rich people and deregulation. Over time, this gradually morphed into what we might call the crazy strategy, in which the elite turned to exploiting the paranoia that has always been a factor in American politics — Hillary killed Vince Foster! Obama was born in Kenya! Death panels! — to promote the same goals.
                                                                          But now we’re in a third stage, where the elite has lost control of the Frankenstein-like monster it created.
                                                                          So now we get to witness the hilarious spectacle of Karl Rove in The Wall Street Journal, pleading with Republicans to recognize the reality that Obamacare can’t be defunded. Why hilarious? Because Mr. Rove and his colleagues have spent decades trying to ensure that the Republican base lives in an alternate reality defined by Rush Limbaugh and Fox News. Can we say “hoist with their own petard”?
                                                                          Of course, the coming confrontations are likely to damage America as a whole, not just the Republican brand. But, you know, this political moment of truth was going to happen sooner or later. We might as well have it now.

                                                                            Posted by on Friday, September 20, 2013 at 12:24 AM in Economics, Politics | Permalink  Comments (110) 

                                                                            Links for 09-20-2013

                                                                              Posted by on Friday, September 20, 2013 at 12:03 AM in Economics, Links | Permalink  Comments (45) 

                                                                              Thursday, September 19, 2013

                                                                              Waste in the Private Sector

                                                                              Antonio Fatás:

                                                                              Does competition get rid of waste in the private sector?: It is very common to hear comments about the waste of resources when referring to governments and the public sector. Paul Krugman does his best to argue against this popular view by showing that most of what government do is related to services that we demand and value as a society (it is not about hiring civil servants that produce no useful service). As he puts it, the government is an "insurance company with an army". But critics will argue that even if this is the case, the functioning of that (public) insurance company is extremely inefficient. In fact, we all have our list of anecdotes on how governments waste resources, build bridges to nowhere and how politicians are driven by their own interest, their ambitions or even worse pure corruption. If only we could bring the private sector to manage these services!
                                                                              In addition to the anecdotal evidence there is something else that matters: we tend to use framework that starts with the assumption that in the private sector competition will get rid of waste. An inefficient company will be driven out of business by an efficient one. An inefficient and corrupt manager will be replaced by one who can get the work done. And we believe that the same does not apply to governments (yes, there are elections but they do not happen often enough plus there is no real competition there).
                                                                              But is competition good enough to get rid of all the waste and inefficiencies in the private sector? I am sure there are many instances where this is the case but I am afraid there are also plenty of cases where competition is not strong enough. And just to be clear, I am not simply talking about large companies that abuse monopoly power, I am thinking of all the instances where the competitive threat is not enough to eliminate inefficiencies. ...

                                                                              He goes on to give two examples of private sector waste and inefficiency resulting from insufficient competetive forces, the large amount of waste, destruction, and inefficiency caused by the financial crisis and the large amount of waste in private sector healthcare markets (he shows one estimate that excess costs are 31% of total spending on health care). He concludes with:

                                                                              But ...[when it comes to].. waste in other sectors, we simply do not know about it, we do not even attempt to measure it (at least at the macro level). And the reason why we do not bother measuring it is because we assume that markets and competition must make this number close enough to zero. Maybe it is time to challenge this assumption.

                                                                                Posted by on Thursday, September 19, 2013 at 11:17 AM in Economics, Fiscal Policy, Market Failure | Permalink  Comments (60) 

                                                                                Fed Watch: Further Post-Mortem

                                                                                Tim Duy:

                                                                                Further Post-Mortem, by Tim Duy: Federal Reserve Chairman Ben Bernanke took many of us to the woodshed today with the unexpected decision to delay tapering until a later date. I am still processing the outcome of the FOMC meeting, and I suspect I will still be processing it a week from now. At the moment, I am wary of overreacting to this meeting, fearing the possibility of being slapped around again at the next meeting. So for the moment I am going to put aside the explanation that the Fed wanted "to send a message" to markets about who dictates monetary policy. Same to for the idea the Fed' s reaction curve has shift measurably. Instead, I think it best to keep it simple - the Fed decided they didn't have enough evidence to expect the current momentum, such as it is, would be sustained and consequently decided to hold pat.

                                                                                Danny Vivik presents his take of this story, concluding that most analysts did not take a sufficiently literal view of the June FOMC statement:

                                                                                The Fed also upgraded its economic forecasts and in the press conference, Bernanke repeatedly emphasized the improvement in the labor market...Interest rates on the 10-year Treasury note skyrocketed while stocks and gold both fell. The market took it all to mean that easy money was coming to an end soon...Except that wasn’t what Bernanke or the Fed was trying to say. They were trying to say that if economic data continues to come in positively, then the Fed will scale back its bond-buying program. But only if the economic data is good.

                                                                                Vivik concludes that the data did not come in positively, and thus we should not have expected tapering in the first place. I think there is a risk in underestimating the Fed's tapering resolve in adopting that view. It depends, I think, in how you interpret this section of the FOMC statement:

                                                                                Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.

                                                                                I think this means that, in general, the data was broadly consistent with the Fed's expectations. That is, we weren't reading the data wrong. They just decided that they could wait until longer before initiating the taper. And why might they want to do so? Two reasons:

                                                                                Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth.

                                                                                The fiscal policy issue is significant. Indeed, it has always somewhat of a mystery why the Fed opened up the possibility of a tapering in September given that there is no way they would have sufficient data to fully assess the impact of fiscal contraction. They seemed to have been content that the private sector was grinding forward despite the contraction. What's different today? It may be simply that this issue suddenly became more important in the last week as the Republican party increasingly looks to be willing to commit political suicide over the Obamacare issue, and willing to take the economy with them. But it also might be the realization that with inflation still low, there is no rush to taper given fiscal policy uncertainty regardless of the budget/debt debate in Congress.

                                                                                The higher mortgage rates, and related financial tightening, are also at play. But I think we can be excused to a certain extent for dismissing this as a relevant issue prior to this meeting. Policy makers did not seem to be particularly concerned about the increase in rates until today. Indeed, Bernanke in his press conference today argued that higher rates both removed froth from the market and reflected expectations of stronger growth.

                                                                                The latter explanation, however, is challenged by the Fed's small downgrade to the GDP forecast. Overall, the forecast has not changed dramatically. Instead, the proximate cause of higher rates was the growing chatter of tapering in the Spring culminating with Bernanke's press conference in June. In short, just talking about tapering was tightening, and that tightening thus eliminated the need by immediate tapering. But then if rates ease back, will the Fed will turn its attention back toward tapering? Nice little circle the Fed has trapped itself in, no?

                                                                                Worse yet, the Fed, or at least Bernanke, does not want to assume any culpability for that tightening. He seemed to imply that it wasn't his communication policy that was wrong, it was just our listening ability that was a problem. On this, I find myself siding with Justin Wolfers:

                                                                                This whole taper debate is one that should never have happened. It’s the result of a failed communication strategy.

                                                                                I am willing to accept that analysts, including myself, didn't sufficiently take the fiscal story or higher rates into account when divining this meeting, although I think the Fed lulled us into submission on the latter issue. But really, if the Fed is being transparent with its communication strategy, should every other meeting result in a 15bp move in Treasuries? Bernanke's "it's not me, it's you" story falls a little flat, in my opinion. They are clearly muddling their message.

                                                                                In short, it seems that if the Fed now sees higher interest rates rates as undermining their forecast, they need to recognize that they dropped the ball; talk of tapering was clearly premature. We thought is was a data dependent policy and the tapering talk began long before any data suggested it was necessary. Once again speaks to their bias against quantitative easing. They want out of the program, but are finding it to be a roach motel.

                                                                                Finally, notice the increasing challenges surrounding the thresholds, particularly the unemployment rate. Bernanke backed off his 7% threshold today for tapering, but he almost had to with that number staring him in the face. And interestingly they held their unemployment forecasts steady even though the unemployment rate has been steadily dropping and is already in their end-of-year average range. The problem, I suspect, is that it is hard to maintain a dovish message given falling unemployment rates in the context of the thresholds. The problem is made worse because they can't decide if falling unemployment rates reflect real improvement in the labor market or cyclical decline in labor force participation. So at this point the unemployment threshold look to be defunct. They need a new, meaningful threshold. Or will the Fed use unemployment when they support the story they want to tell, and put it away when it is inconvenient. It is certainly going to be a communications challenge when you base policy on a variable you don't really understand.

                                                                                Bottom Line: I am wary about reading too much into today's event, fearful that the next batch of Fed speakers is going to emphasize that they are very close to tapering. I will be chewing on this one for some time. Bur for now, if the Fed is staying true to their data story, the six weeks between now and the October meeting look to be too short to fully evaluate the impact of fiscal contraction and higher rates. December looks like the earliest date now, which puts the initial tapering in line with what I think would have been the consensus view had not the FOMC accelerated expectations of tapering earlier this year.

                                                                                  Posted by on Thursday, September 19, 2013 at 12:33 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (30) 

                                                                                  State Inequality Visualizations

                                                                                  One of our graduate students here at the University of Oregon, John Voorheis, put together these animated gifs showing how various measures of inequality have changed state by state from 1977-2012:

                                                                                  Gini Coefficient             
                                                                                  Click on the figure to show the animation.
                                                                                  Red implies lower within-state inequality, green implies higher.          

                                                                                  Theil Coefficient          
                                                                                  State_theilClick on the figure to show the animation.
                                                                                  Red implies lower within-state inequality, green implies higher.           

                                                                                  Top 1% Share             
                                                                                  State_top1Click on the figure to show the animation.
                                                                                  Red implies lower within-state inequality, green implies higher.        

                                                                                  Data in the figures from Voorheis (2013), which corrects for CPS topcoding via Generalized Beta multiple imputation.

                                                                                    Posted by on Thursday, September 19, 2013 at 12:24 AM Permalink  Comments (37) 

                                                                                    Links for 09-19-2013

                                                                                      Posted by on Thursday, September 19, 2013 at 12:06 AM in Economics, Links | Permalink  Comments (41) 

                                                                                      Wednesday, September 18, 2013

                                                                                      Fed Watch: No Taper - Yet

                                                                                      Tim Duy:

                                                                                      No Taper - Yet, by Tim Duy: The FOMC pulled yet another rabbit out of the hat by holding off on the expected taper, slamming down on analysts (including yours truly) who thought the Fed would pull the trigger today. Two significant factors that held the FOMC in check were fiscal policy and higher interest rates. From the statement:

                                                                                      Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth...

                                                                                      ...Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.

                                                                                      Now, why did financial conditions tighten? Oh yes, I recall - because just talking about tapering is the same as tightening. Remember, unless yields head much lower (they are down around 10bp as I write), much of the damage is already done is already done.

                                                                                      Holding off on tapering also achieves two other objectives. The first is to make clear that policy is data dependent:

                                                                                      However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases....Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

                                                                                      The second - assuming we now have an Octaber to look forward to - is that the Fed can prove it can change policy in meetings not followed by a press conference.

                                                                                      The downside is that there has been a clear communication failure on the part of the Federal Reserve, and this should not be overlooked in the hysteria that will surround this announcement. If they are concerned about the impact of higher rates now, the Fed should have worried a little bit more about the impact of talking about tapering two months ago. They should have pushed back harder as the growing expectations for a change in policy. The data never really supported tapering; I think we were mostly tripping over ourselves (again, myself included) to justify the path toward tapering because Federal Reserve speakers were giving little reason to think otherwise.

                                                                                      UPDATE: One take away from the press conference is that Bernanke thinks markets have a listening problem at least as much as I tend to think he has a communications policy. Fair enough.

                                                                                      Bottom Line: The Fed held steady - ultimately, the data appears to have won. Unfortunately, if the Fed is now concerned about the impact of higher rates, the economy already lost when Bernanke opened the tapering door wide open back in June.

                                                                                        Posted by on Wednesday, September 18, 2013 at 12:47 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (16) 

                                                                                        Why Didn't the Fed Begin Tapering?

                                                                                        [Update: There is a revised version of this at CBS MoneyWatch.]

                                                                                        I was supposed to be on Reuters right now discussing the Fed decision, but had technical problems (no sound). Grrr.

                                                                                        I was going to give four reasons for the delay.

                                                                                        But let me say first that I agree with the decision -- as I said yesterday, I didn't think it was time to begin backing off of QE just yet. But I thought that all of the talk about tapering and the predictions of $5-$20 billion change, and the fact that financial markets were expecting something would tip the scales toward beginning the taper.

                                                                                        Here's why I think they delayed:

                                                                                        1. Fiscal policy. The uncertainty over a government shutdown, how much additional austerity there might be, and so on made the Fed nervous about doing anything that might add to the negative shock from fiscal policy. Fiscal policymakers have performed terribly over the course of the crisis, and the Fed is the only game in town. It can't take the risk of adding to the potential problems that fiscal policy might cause.

                                                                                        2. Inflation and unemployment. As I said already, inflation is too low and unemployment is too high. There are no signs of an acceleration in the recovery of unemployment, and no signs that inflation expectations are moving above the Fed's long-run target. Since all signs point to easing, why do anything that might be construed as a negative shock?

                                                                                        3. The Fed is gun shy. The negative shock -- i.e. the rise in long-term interest rates and the corresponding slowdown in housing and investment -- when it first began talking about tapering surprised the Fed. Just talking about tapering led to an unexpected spike in interest rates and although it appears that tapering was priced into financial markets, why risk another surprise? I don't think additional bond purchases are going to do much good for the economy, all that can be done has pretty much been done already, but there is the potential for a negative reaction from markets and with all the less than robust recovery, fiscal policy worries and the like, why take a chance?

                                                                                        4. Capital flight from developing markets. A investors have anticipated rising yields do to the Fed potentially beginning to unwind policy, capital has flowed from developing markets to the US causing problems for these countries. Those problems could feed back into US markets and make a slow recovery even slower, so why take that chance?

                                                                                        Overall, then, while there probably isn't a lot to be gained from continuing QE, there is potentially a lot to lose from miscalculating the markets reaction to the onset of tapering, and the Fed wants to be more sure than it is right now about the strength of the economy before it takes that chance.

                                                                                        I had more to say, e.g. there's an argument to be made that this represents further easing (the rise in long-term rates has slowed mortgage markets, so the Fed is now buying a larger share of the assets issued in these markets, and the same is true for Treasuries -- due to the fall in the deficit and corresponding fall in new debt issues) but I'll leave it that for the moment. Here's the press release:

                                                                                        Press Release, Release Date: September 18, 2013, For immediate release: Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace. Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
                                                                                        Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
                                                                                        Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
                                                                                        The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
                                                                                        To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
                                                                                        Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

                                                                                          Posted by on Wednesday, September 18, 2013 at 12:33 PM in Economics, Monetary Policy | Permalink  Comments (20) 

                                                                                          Against ‘Blackboard Economics’

                                                                                          This is from Vox EU:

                                                                                          Finding his own way: Ronald Coase (1910-2013), by Steven Medema, Vox EU: Ronald Coase’s contributions to economics were much broader than most economists recognize. His work was characterized by a rejection of ‘blackboard economics’ in favor of detailed case studies and a comparative analysis of real-world institutions. This column argues that the ‘Coase theorem’ as commonly understood is in fact antithetical to Coase’s approach to economics.
                                                                                          Against ‘blackboard economics’
                                                                                          Coase’s criticisms of the theory of economic policy were part of a larger critique of what he often referred to as ‘blackboard economics’ – an economics where curves are shifted and equations are manipulated, with little attention to the correspondence between the theory and the real world, or to the institutions that might bear on the analysis. A similar set of concerns led to his skepticism about the application of economic analysis beyond its traditional boundaries. Contrary to popular misperception, Coase had precious little interest in the economic analysis of law. Instead, Coase’s ‘law and economics’ was concerned with how law affected the functioning of the economic system.
                                                                                          It is ironic, then, that the idea most closely associated with Coase, the ‘Coase theorem’, is in many respects the height of ‘blackboard economics’ and a cornerstone of the economic analysis of law. Being misunderstood was something of a hallmark of Coase’s career, as he pointed out on any number of occasions. We should all be so fortunate.

                                                                                            Posted by on Wednesday, September 18, 2013 at 12:33 AM in Economics, Methodology | Permalink  Comments (5) 

                                                                                            'DeLong: The Lehman Disaster was Foreseeable'

                                                                                            Brad DeLong:

                                                                                            ... The uncontrolled bankruptcy of Lehman was a disaster.
                                                                                            Lehman was a systemically-important financial institution, and it was foreseeable that an uncontrolled bankruptcy would be a disaster--the only surprise was that it turned out to be a much bigger disaster than Paulson, Bernanke, Geithner were expecting at the time.
                                                                                            There is a date--April 15, 2008, say--at which Lehman Brothers was "solvent" in the sense that the Bush Treasury and the Bernanke-Geithner Fed would have been willing to lend to it massively as they near-extinguished the claims of its equity holders, closed down the institution, and distributed some of its risk to the Federal Reserve and some of its risk to other financial institutions.
                                                                                            There was a date--September 15, 2008--at which the Bush Treasury and the Bernanke-Geithner Fed were unwilling to do that, and let Lehman go.
                                                                                            By continuity, in between there is a last date at which Lehman can still be resolved in an orderly fashion--a date on which their special assistants walk into Paulson's, Bernanke's, and Geithner's offices, and say: "Today may be our last chance to close down Lehman in an orderly fashion. If things go badly for Lehman on the markets today, by tomorrow it will be so clearly insolvent that we will not be able to lend to it to grease its shutdown."
                                                                                            When Paulson, Bernanke, and Geithner heard that, they should immediately have huddled, and then called Lehman and said: "You need to do a deal today, because tonight we are going to announce that our judgment is that you are on the edge of insolvency."

                                                                                              Posted by on Wednesday, September 18, 2013 at 12:24 AM in Economics, Financial System, Regulation | Permalink  Comments (27) 

                                                                                              Links for 09-18-2013

                                                                                                Posted by on Wednesday, September 18, 2013 at 12:06 AM in Economics, Links | Permalink  Comments (75) 

                                                                                                Tuesday, September 17, 2013

                                                                                                'Is Obama Getting Bad Economic Advice?'

                                                                                                Heidi Moore chronicles the administration's failures in economic policy:

                                                                                                The Larry Summers flop: more proof Obama is getting bad economic advice, by Heidi Moore: Is President Obama the victim of bad economic advice?
                                                                                                The evidence points to "yes". The president's economic initiatives – food stamps, manufacturing, infrastructure, raising the debt ceiling, appointing a new chairman of the Federal Reserve – have mostly ended in either neglect or shambles. After five years, the Obama Administration's stated intentions to improve the fortunes of the middle class, boost manufacturing, reduce income inequality, and promote the recovery of the economy have come up severely short.
                                                                                                Despite this, the president believes he is negotiating his economic agenda with Congress from a position of strength, and almost every speech includes some self-congratulatory note about how far the economy has come. ...
                                                                                                The president could not be more wrong or misleading in the way in which he presents our economic progress. One can perfectly understand economist Dean Baker's horror when he realized, back in August, that Obama's economic team believes it is doing a good job.
                                                                                                It's time to end the delusion that this White House has accomplished even a fraction of what it should be doing to help the economy. It should have been focusing all its efforts on employment, perhaps by boosting job-retraining programs, providing tax incentives for employers or supporting a comprehensive infrastructure effort. Instead, the administration is falling victim to political distractions and lack of follow-through and wasting its meager political capital on the wrong fights.
                                                                                                The latest example is the debacle around Larry Summers. ...
                                                                                                To shut out the opposition to Summers, the president had to have been wearing earplugs. How closed is his economic circle? How well do they fit the profile of honest brokers about our economic situation? Loyalty is a great thing. But that kind of trust is clearly not working for Obama. Maybe he should stop relying on those he knows, and rely instead on those who know what they're doing.

                                                                                                Gridlock in Congress is real, and legislation involving additional fiscal policy measures or job creation would be difficult or impossible. But part of that is due to the administration's failure to lead the conversation, to hammer home at every opportunity how Congress is failing the middle class. The charge that the administration is guilty of "political distractions and lack of follow-through and wasting its meager political capital on the wrong fights" is accurate in my view, particularly the lack of follow through. How many times has the president announced some major effort at job creation, and that's the last we hear about it? I don't think people understand how awful Congress has been where fiscal policy is concerned. I suppose the administration is worried about being blamed for the poor economy, so instead it talks about "how far the economy has come" due to its policies. But why not just tell the truth? Why not point at Congress and call for job creation through infrastructure construction at every opportunity, and let people know that Congress is to blame if it doesn't happen? Yes, the other side will try to blame the administration is if admits the economy is doing poorly, but that will happen anyway and it's a debate the administration ought to be able to win.

                                                                                                  Posted by on Tuesday, September 17, 2013 at 02:27 PM in Economics, Fiscal Policy, Policy, Politics | Permalink  Comments (46) 

                                                                                                  'Low Inflation in August'

                                                                                                  Calculated Risk notes that inflation is still running below the Fed's target:

                                                                                                  Key Measures Show Low Inflation in August: The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning...

                                                                                                  Inflation Measures
                                                                                                  Click on graph for larger image.

                                                                                                  This graph shows the year-over-year change for ... four key measures of inflation. On a year-over-year basis, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.7%, the CPI rose 1.5%, and the CPI less food and energy rose 1.8%. Core PCE is for July and increased just 1.2% year-over-year.
                                                                                                  On a monthly basis, median CPI was at 2.1% annualized, trimmed-mean CPI was at 1.5% annualized, and core CPI increased 1.5% annualized. Also core PCE for July increased 0.9% annualized.
                                                                                                  These measures indicate inflation is below the Fed's target.

                                                                                                  Unemployment is too high and inflation is too low (and inflation expectations are stable). Why are we talking about tapering?

                                                                                                    Posted by on Tuesday, September 17, 2013 at 09:50 AM in Economics, Inflation, Monetary Policy | Permalink  Comments (24) 

                                                                                                    'A Lost Generation'

                                                                                                    The income of the median household is moving in the wrong direction:

                                                                                                    The typical American family makes less than it did in 1989, by Neil Irwin: The Census Bureau is out with the annual report on incomes and poverty. ... For my money, the most depressing fact about the economy is not the fact that household incomes were basically flat in 2012... It wasn't even the fact that 15 percent of the U.S. population was living in poverty, according to the official, flawed definition of the term.
                                                                                                    Nah, the most depressing result comes when you look at the longer view of household incomes in the United States. ...
                                                                                                    Headlines about these numbers tend to focus on how we have now experienced a lost decade for the middle-class American family... But ... it's really worse than that.
                                                                                                    In 1989, the median American household made $51,681 in current dollars (the 2012 number ... was $51,017). That means that 24 years ago, a middle class American family was making more than the a middle class family was making one year ago.
                                                                                                    This isn't a lost decade for economic gains for Americans. It is a lost generation.

                                                                                                      Posted by on Tuesday, September 17, 2013 at 08:33 AM in Economics, Income Distribution | Permalink  Comments (88)