- Heritage: Same As It Ever Was - Paul Krugman
- Game-Changing Investments for the U.S. - Laura Tyson
- Economic uncertainty and the effectiveness of monetary policy - vox
- Lean, Clean, and In-Between- Jeremy Stein
- The China-Debt Syndrome - Paul Krugman
- Why Was the Housing-Price Collapse So Painful? - macroblog
- Tarullo Says Big Bank Failures Still an Issue - WSJ
- Fed’s Evans: Bad Idea to Use Monetary Policy to Burst Bubbles - WSJ
- Bad Government Software - Baseline Scenario
- The Gap Between Schooling and Education - NYTimes.com
- The US wants a fair society, not 'defund Obamacare' crazy - Mark Weisbrot
- The latest from the Oregon Medicaid Experiment - The Incidental Economist
- Historical Echoes: Passbooks and Hand Grenades - Liberty Street Economics
- EZ crisis and historical trilemmas - vox
- OMG! - Uneasy Money
- Polarization - Dan Little
Saturday, October 19, 2013
Friday, October 18, 2013
"The limitation of our paper is that we haven't shown that our circuit has relevance to the stock market":
Market bubbles may be predictable, controllable, EurekAlert: It's an idea financial regulators have dreamed of. Experiments on a simple model of chaos have found that it may be possible not only to predict an extreme event, like a stock market collapse, but to intervene and prevent it from happening.
In a paper appearing October 21 in the journal Physical Review Letters, an international team of chaos researchers say that these extreme events, which they call "dragon kings," are less random than had been thought and that, in a simple experiment at least, they can be anticipated and controlled.
"These dragon kings are predictable, if we knew what to measure," said co-author Dan Gauthier, the Robert C. Richardson professor of physics at Duke University.
The latest finding is an outgrowth of experimental work Gauthier has been doing since the 1990s with simple electrical circuits he calls "chaos generators." ...
During a long run of the experiment, the data reveal that the chaotic behavior visits "hot spots" in which an extreme event, "a bubble," might occur. This is an event in which the circuits suddenly and temporarily loose synch. Sometimes the size of the event is small, like a small change in a financial market, and other times it is gigantic, like a market crash. And the size of most of these disturbances follows a power law distribution, in which one variable changes as a power of the other. The most extreme events, the "dragon kings," are responsible for significant deviations from the curve of the power law.
Extreme events that may be governed by these laws would include sudden population crashes in species or freak waves in the ocean, Gauthier said. Other examples might be epileptic storms of activity in the brain and rolling power outages caused by an initial small disturbance, like a squirrel shorting out one substation on a large grid. Other examples could be found in the occurrence of incipient failure of materials and of engineering structures, in the synchronized behavior of kidney and heart cells in the body, in meteorological front dynamics and in climate change, among many others.
In a series of experiments performed with the coupled chaos circuits by Gauthier's colleague and former post-doctoral research associate, Hugo Cavalcante, who is now at the Federal University of Paraiba in Brazil, it was found that the introduction of a tiny amount of current injected into one of the circuits at just the right time prevented a predicted dragon king from happening. "Maybe tiny nudges can make a big difference," Gauthier said. ...
"The limitation of our paper is that we haven't shown that our circuit has relevance to the stock market," which has many more variables, Gauthier said. "We aren't yet sure where to look, but for this one simple system, we figured out how to find it."
Gauthier said the five-page paper faced a difficult gauntlet of reviewers before being accepted in PRL. ...
One Million Page Views and Round Number Bias: Earlier this week, this Conversable Economist blog reached 1,000,000 pageviews. ... Of course, being me, I can 't commemorate a landmark without worrying about it. Is focusing on 1,000,000 pageviews just another example of round-number bias? Are pageviews a classic example of looking at what is easily measureable, when what matters is not as easily measurable?
Round number bias is the human tendency to pay special attention to numbers that are "round" in some way. For example, in the June 2013 issue of the Journal of Economic Psychology (vol. 36, pp. 96-102) ,Michael Lynn, Sean Masaki Flynn, and Chelsea Helion ask "Do consumers prefer round prices? Evidence from pay-what-you-want decisions and self-pumped gasoline purchases." They find, for example, that at a gas station where you pump your own, 56% of sales ended in .00, and an additional 7% ended in .01--which probably means that the person tried to stop at .00 and missed. They also find evidence of round-number bias in patterns of restaurant tipping and other contexts.
Another set of examples of round number bias come from Devin Pope and Uri Simonsohn in a 2011 paper that appeared in Psychological Science (22: 1, pp. 71-79): "Round Numbers as Goals: Evidence from Baseball, SAT Takers, and the Lab." They find, for example, that if you look at the batting averages of baseball players five days before the end of the season, you will see that the distribution over .298, .299, .300, and .301 is essentially even--as one would expect it to be by chance. However, at the end of the season, the share of players who hit .300 or .301 was more than double the proportion who hit .299 or .298. What happens in those last five days? They argue that batters already hitting .300 or .301 are more likely to get a day off, or to be pinch-hit for, rather than risk dropping below the round number. Conversely, those just below .300 may get some extra at-bats, or be matched against a pitcher where they are more likely to have success. Pope and Simonsohn also find that those who take the SAT test and end up with a score just below a round number--like 990 or 1090 on what used to be a 1600-point scale--are much more likely to retake the test than those who score a round number or just above. They find no evidence that this behavior makes any difference at all in actual college admissions.
Round number bias rears its head in finance, too. In a working paper called "Round Numbers and Security Returns," Edward Johnson, Nicole Bastian Johnson, and Devin Shanthikumar desribe their results this way: "We find, for one-digit, two-digit and three-digit levels, that returns following closing prices just above a round number benchmark are significantly higher than returns following prices just below. For example, returns following “9-ending” prices, which are just below round numbers, such as $25.49, are significantly lower than returns following “1-ending” prices, such as $25.51, which are just above. Our results hold when controlling for bid/ask bounce, and are robust for a wide collection of subsamples based on year, firm size, trading volume, exchange and institutional ownership. While the magnitude of return difference varies depending on the type of round number or the subsample, the magnitude generally amounts to between 5 and 20 basis points per day (roughly 15% to 75% annualized)."
In "Rounding of Analyst Forecasts," in the July 2005 issue of Accounting Review (80: 3, pp. 805-823), Don Herrmann and Wayne B. Thomas write: "We find that analyst forecasts of earnings per share occur in nickel intervals at a much greater frequency than do actual earnings per share. Analysts who round their earnings per share forecasts to nickel intervals exhibit characteristics of analysts that are less informed, exert less effort, and have fewer resources. Rounded forecasts are less accurate and the negative relation between rounding and forecast accuracy increases as the rounding interval goes from nickel to dime, quarter, half-dollar, and dollar intervals."
In short, the research on round-number bias strongly suggests not getting too excited about 1,000,000 in particular. There is very little reason to write this blog post now, as opposed to several months in the past or in the future. However, I hereby acknowledge my own personal round number bias and succumb to it. ...
Republicans have made the economy worse:
The Damage Done, by Paul Krugman, Commentary, NY Times: The government is reopening, and we didn’t default on our debt. Happy days are here again, right?
Well, no. ...Congress has only voted in a temporary fix, and we could find ourselves going through it all over again in a few months. ...
Beyond that,... it’s important to recognize that the economic damage from obstruction and extortion didn’t start when the G.O.P. shut down the government..., it has been an ongoing process, dating back to the Republican takeover of the House in 2010. ...
A useful starting point for assessing the damage done is a ... report by ... Macroeconomic Advisers, which estimated that “crisis driven” fiscal policy ... since 2010 ... has subtracted about 1 percent off the U.S. growth rate for the past three years. This implies cumulative economic losses ... of around $700 billion. The firm also estimated that unemployment is 1.4 percentage points higher...
Yet ... the report doesn’t take into account ... other bad policies that are a more or less direct result of the Republican takeover in 2010. Two big bads stand out: letting payroll taxes rise, and sharply reducing aid to the unemployed... Both actions have reduced the purchasing power of American workers, weakening consumer demand and further reducing growth. ...
But why have Republican demands so consistently had a depressing effect on the economy?
Part of the answer is that the party remains determined to wage top-down class warfare... Slashing benefits to the unemployed because you think they have it too easy is cruel even in normal times, but it has the side effect of destroying jobs when the economy is already depressed. Defending tax cuts for the wealthy while happily scrapping tax cuts for ordinary workers means redistributing money from people likely to spend it to people who are likely to sit on it.
We should also acknowledge the power of bad ideas. Back in 2011, triumphant Republicans eagerly adopted the concept ... of “expansionary austerity” — ...that cutting spending would actually boost the economy by increasing confidence. Experience since then has thoroughly refuted this concept...
Are all the economy’s problems the G.O.P.’s fault? Of course not. .... But most of the blame for the wrong turn we took on economic policy, nonetheless, rests with the extremists and extortionists controlling the House.
Things could have been even worse. This week, we managed to avoid driving off a cliff. But we’re still on the road to nowhere.
- Evidence on the (limited) power of exchange rates - Antonio Fatas
- Unemployment, labour market flexibility and IMF advice - vox
- How not to run fiscal policy: lessons from the Eurozone - mainly macro
- Private and public debt in crises: 1870 to now - vox
- Physics: What We Do and Don’t Know - Steven Weinberg
- Reform Translated Means Dooh Nibor Economics - pgl
- Employment Gaps - MacroMania
- New effort to reform US mortgage banks - FT.com
- The Insufficient Craziness Theory - NYTimes.com
- How Much Longer? (Only the Data Know) - Charlie Evans
- What to Expect During the Cease-Fire - Robert Reich
- Fisher Says Fed Stimulus Won’t Work Amid Fiscal Fog - WSJ
- Adam Smith's Support for Regulatory Financial Firewalls - Tim Taylor
- The cost of racial bias in economic decisions - EurekAlert
- Exortionist Fellow-Travelers - Paul Krugman
- Does flat global trade hurt GDP? - Gavyn Davies
Thursday, October 17, 2013
Teaching, then travel today, so just a few quick ones for now. Let's start with Paul Krugman:
What A Drag: ... The now widely-cited Macroeconomic Advisers report estimated the cost of crisis-driven fiscal policy at 1 percentage point off the growth rate for three years, or roughly 3 percent now. More than half of this estimated cost comes from the “fiscal drag” of falling discretionary spending, with the rest coming from a (shaky) estimate of the impacts of fiscal uncertainty on borrowing costs.
I’ve been looking a bit harder at that report, and while I am in broad agreement with its conclusion, I think it’s missing quite a lot. On balance, I’d argue that the negative effect of the crazies has been even worse than MA says. ...
OK, first thing: I’m not too happy with the report’s reliance on the Bloom et al uncertainty index to measure costs. ... It’s really not something you want to lean on, and if you take it out, MA’s estimates of the Republican drag fall. But we shouldn’t stop there, because there are two important aspects of the story that MA leaves out.
First, part of the fiscal cliff deal involved letting the Obama payroll tax cut — a significant, useful form of economic stimulus — expire. (Republicans only like tax cuts that go to people with high incomes.) This led to a surprisingly large tax hike in 2013, focused on workers...
Second, GOP opposition to unemployment insurance has been the biggest factor in a very rapid decline in unemployment benefits despite continuing weak job markets... This hurts the unemployed a lot, but it also hurts the economy, because the unemployed ... surely must have been forced into spending cuts as benefits expired.
The combination of the payroll take hike and the benefit cuts amounts to about $200 billion of fiscal contraction at an annual rate, or 1.25 percent of GDP, probably with a significant multiplier effect. Add this to the effects of sharp cuts in discretionary spending and the effects of economic uncertainty, however measured, and I don’t think it’s unreasonable to suggest that extortion tactics may have shaved as much as 4 percent off GDP and added 2 points to the unemployment rate.
In other words, we’d be looking at a vastly healthier economy if it weren’t for the GOP takeover of the House in 2010.
Simon Johnson is less than optimistic about the long run prospects for "the current governmental arrangement known as the United States of America":
The Long March of the American Right, by Simon Johnson, Commentary, NY Times: With a last-minute agreement on lifting the debt ceiling, the immediate threat of legal and financial disaster from a default on United States government obligations has been averted. But the last week has provided additional insight into how and why the current governmental arrangement known as the United States of America will end.
The mainstream narrative is that the problem is “dysfunctional government” or “paralysis in Washington.” That’s true, up to a point, but the real problem is the steady decline in legitimacy of the federal government – and the way this is related to what has happened on the right of the political spectrum. ...
In the 1940s, many people believed ... in the ability of the federal government to both organize activities at home and to have a positive impact around the world. This was, perhaps, the most lasting effect of the Great Depression..., on the whole, government was perceived as stepping in to help.
This positive view of an expanded federal government never sat well with people on the right, but the organized pushback was limited through the 1950s. It was only with the turmoil of the Vietnam War and other social pressures in the 1960s that the conservatives got their chance – starting with political direct mailing (American Target Advertising was founded in 1965), the rise of talk radio (particularly from the 1980s), and early anti-tax campaigns (including Proposition 13, which cut property taxes sharply in California in 1978). ...
The ... decline in legitimacy of the United States government is real and lasting... Reinforcing and accelerating this trend is perhaps the greatest damage caused by the financial crisis of 2007-8...
Sooner or later, the American public may elect a group of politicians determined to end the belief that the federal government can be trusted. Their initial steps in that direction will strengthen their showing in opinion polls – and they will be encouraged to go further. At that time, the United States will default on its debts and the world’s financial and fiscal systems will be plunged into chaos.
Chris Blattman (the original is much longer):
Is aid a roadblock to development? Some thoughts on Angus Deaton’s new book, by Chris Blattman: I was talking with a prominent development economist... He expressed surprise that Angus Deaton’s new book on development wasn’t getting more attention. Deaton is one of the three or four intellectual giants of the field...
You have to be careful what you wish for. The NY Times wrote a positive but skeptical review this weekend, and my Twitter feed has been full since then with some support but a great deal more skepticism for the book. ...
The bulk of Deaton’s book is an overview of half of humanity’s climb from abject poverty to health and wealth. ... It is a marvelous overview for the newcomer and the oldcomer. Where he’s enflamed passions, though, is his last chapter: “How to help those left behind”. It’s a tirade against aid, especially naive aid. Overall one message comes through: Aid is a roadblock to development.
I’m half with Deaton and half not. ... Aid isn’t a uniform mass. Deaton knows this, and my guess is he’s talking about a particular kind of aid. I don’t think he means emergency relief for disaster and conflicts. I don’t think he means the money behind peacekeeping forces and post-war assistance. He might exclude child sponsorship. I’m guessing he’s not talking about money spent on vaccine research in the West. He might even exclude support for elections and party-building and other democratization.
I think Deaton has his sights aimed at dollars sent by the West to local governments to supposedly reduce poverty, improve health, and ignite growth. This is a lot (if not the bulk) of money sent to poor countries, and so it’s a fair target.
This makes it easier to see what he means by aid not working. It probably hasn’t produced growth... And it might not be what’s responsible for falling poverty levels. Frankly we don’t know, but I think we can say that if aid did ignite this growth, it certainly has been coy about it.
But I wouldn’t diminish these other kinds of aid. ... Without a doubt, big chunks of the aid machine are broken. I’d prefer to fix them and not throw them away. In large part, this is what Deaton recommends. He also reminds us there are things that are harder to do than give money, like opening our borders, that could help more.
The polemic will sell more books and get people talking about the world’s problems. That’s exactly what polemic is supposed to do. But I would recommend paying the most attention to the concrete suggestions and solutions in the book. I think the promoters and detractors are all closer to sharing the same opinions than we think. ...
- Fallacies of Immaculate Causation - Paul Krugman
- ICC: Justice at the expense of peace? - vox
- Clarifying the issues with Harvard Business Review - Digitopoly
- The Public Square and Economists: Equitable Growth - Brad DeLong
- Housing Finance: A Pragmatic Fix - Seidman, Swagel, Wartell, Zandi
- Eugene Fama explained. Kind of. - Not Quite Noahpinion
- My Supply-Side Senses Are Starting to Tingle - David Beckworth
- A Look at Bank Loan Performance - Liberty Street
- The Aftermath - Econbrowser
- The Backfire Effect - Paul Krugman
- Economics to Guide Science? - Gavin Kennedy
- Network Estimation for Time Series - No Hesitations
- Market Liquidity during the 2013 Selloff - Liberty Street
Wednesday, October 16, 2013
A colleague says "I found this to be very interesting. Maybe your readers would be interested?" (To some extent, this is the point I was trying to get at in the post below this one):
Enemies vs. Adversaries, by Michael Ignatieff, NY Times: For democracies to work, politicians need to respect the difference between an enemy and an adversary.
An adversary is someone you want to defeat. An enemy is someone you have to destroy. With adversaries, compromise is honorable: Today’s adversary could be tomorrow’s ally. With enemies, on the other hand, compromise is appeasement.
Between adversaries, trust is possible. They will beat you if they can, but they will accept the verdict of a fair fight. This, and a willingness to play by the rules, is what good-faith democracy demands.
Between enemies, trust is impossible. They do not play by the rules (or if they do, only as a means to an end) and if they win, they will try to rewrite the rules, so that they can never be beaten again.
Adversaries can easily turn into enemies. If majority parties never let minority parties come away with half a loaf, the losers are bound to conclude they can only win through the utter destruction of the majority.
Once adversaries think of democracy as a zero-sum game, the next step is to conceive of politics as war: no quarter given, no prisoners taken, no mercy shown. ...
More civility and gentility — being nicer — will not cure this. What needs to change are the institutions themselves, and they will only change when the political class in Washington realizes that, just as in American football, there are some hits that are killing the game.
Saving the game means changing the rules. ...
What’s indefensible is a political class that believes nothing better is possible — a class that benefits from enmity without realizing that the damage from it is corrosive, and possibly irreversible.
I am probably one of the few liberals who don’t think the Tea Party caucus is engaged in irresponsible hostage-taking. Sure, I disagree with their policy objectives, and they are risking economic catastrophe by trying to force the government into default. But they are also fighting for a principle, misguided as it may be: Obamacare is evil, and should be stopped. The debt ceiling is an absurdity that should not exist. But since it does exist, it is leverage that conservatives can use to try to achieve their policy goals. The problem is that the debt ceiling exists; given its existence, you can’t blame people for using it for their ends. It’s like the filibuster: you can say that the 60-vote requirement is bad, but you can’t blame people for taking advantage of it. As Norman Ornstein said..., “If you hold one-half of one-third of the reins of power in Washington, and are willing to use and maintain that kind of discipline even if you will bring the entire temple down around your head, there is a pretty good chance that you are going to get your way.”
I don't think that the fact that something is permissible under existing rules necessarily makes it OK. Unlike the public, legislators have the power to change laws/rules that allow behavior that shouldn't be permitted, that's their job, and I don't think threatening the economy with severe harm to get your way ought to be allowed. They aren't operating in a world where the rules are determined exogenously, so they can't just say the rules are the rules and we are simply operating within them -- the rules can (and should) be changed.
John Williams, President of the SF Fed, gives forward guidance on forward guidance:
Forward policy guidance at the Federal Reserve, by John C. Williams, President, FRBSF, Vox EU: In response to the financial crisis, the Federal Open Market Committee (FOMC) lowered the target federal funds rate to essentially zero in December 2008, where it has remained. The economy, however, was still reeling, and it wasn’t possible to create additional monetary stimulus by cutting the federal funds rate further—owing to the inability of nominal interest rates to fall much below that point.
The FOMC therefore turned to “unconventional” monetary policies, including forward policy guidance. Through the use of forward guidance, the FOMC influences business and investor views about where monetary policy in general, and the federal funds rate in particular, is likely headed. This affects longer-term interest rates, as investors adjust their views on future short-term rates. In particular, we have used the Fed’s communications tools—policy statements, FOMC participants’ forecasts, press conferences, and speeches—to convey our expectation that short-term interest rates will remain low for some time.
The FOMC experimented with forward guidance in the past—in 2003 and 2004—and made a renewed effort in December 2008, when the FOMC stated that it expected to keep the funds rate low “for some time.” Although this qualitative forward guidance succeeded in influencing the public’s expectations of future policy, nonetheless, public expectations often remained much tighter than the FOMC’s own views. In fact, from 2009 to mid-2011, expectations from financial markets consistently showed the federal funds rate lifting off from zero within just a few quarters. This view persisted despite the efforts of many FOMC members to communicate the need for a sustained period of highly accommodative monetary policy, necessitated by the severity of the downturn and the slow recovery.
To push back against these excessively tight policy expectations, the FOMC shifted its forward guidance to make it more explicit. This occurred in the summer of 2011, offering a real-world example of the influence more assertive guidance can wield. At the time, many private-sector economists still believed that the federal funds rate would be raised within the year. By amending the language in its August statement—specifically, by writing that economic conditions were “likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013”—the Fed was able to communicate its expectation that liftoff from zero would take at least two years. The communication allowed us to bring public expectations into closer alignment with Fed thinking. As a result, longer-term interest rates fell by 10 to 20 basis points—a significant drop.
In December of 2012, we introduced a new form of forward guidance. Instead of speaking in terms of dates on the calendar, we began to tie the path of monetary policy to economic variables such as the unemployment rate. Specifically, the statement read that the FOMC “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 6½ percent.” This shift was undertaken with the intent of helping the public better understand the Fed’s decision-making process in response to changes in economic conditions. The caveat being, of course, that the public should not infer that reaching the quoted unemployment level would spark an immediate policy change; hence the wording, “at least as long as.” That is, this 6½ percent threshold is not an automatic trigger; it is merely a line of demarcation, after which we will reassess the most fitting course for the federal funds rate. For example, my own current projection—even though I expect the unemployment rate to fall below 6½ percent in early 2015—is that it won’t be appropriate to raise the funds rate until well after that point is reached, likely sometime in the second half of 2015.
This leads me to another form of forward guidance, the FOMC participants’ projections for coming years. Four times a year, FOMC participants submit their views on the appropriate future path of the federal funds rate, along with associated projections for economic growth, unemployment, and inflation. These projections are published on the Federal Reserve Board’s web site. At our most recent meeting in September, a substantial majority of FOMC participants—14 of 17—expected that the first funds rate hike would take place in 2015 or later. After the initial hike, most predicted future rate increases would occur only gradually, with the median projection that the funds rate would rise to just 2 percent by the end of 2016.
Again, these projections improve public understanding of Fed thinking. In addition to helping people better predict how the Fed reacts to changes in economic conditions, establishing this range of projections reinforces that the future path of policy is determined not by a preset course, but by how economic events unfold. This helps reduce the uncertainty and confusion we’ve historically seen as a result of public misperceptions of Federal Reserve monetary policy.
While forward guidance brings with it a number of benefits, it is also necessary to acknowledge both its limitations and some potential drawbacks. First, efficacy depends on credibility. In severe downturns, the likes of which we have recently experienced, appropriate forward guidance can stretch years into the future. Public credulity may be tested by statements relating to events so far off, particularly when policy makers may be different than the ones making assertions today. Second, clearly communicating monetary policy and the associated data dependence is difficult to do well. Asset-price fluctuations over the past several months, sparked by Fed communications, demonstrate how hard it is to effectively convey FOMC policy plans in an evolving economic environment. Just as good communication can reduce confusion and enhance the effectiveness of monetary policy, poor communication can do the opposite. Third, there is a danger of creating an over-reliance on Fed communication. While we want to convey our expectations and intentions, we want to avoid the public substituting independent thought with an attempt to read the Fed tealeaves.
Those issues notwithstanding, I expect that forward guidance will continue to play a central role in Federal Reserve policy in coming years. While the U.S. economy has been improving over the past four years, the unemployment rate stands at 7.3 percent, still substantially above its natural rate, which I estimate to be about 5½ percent. Additionally, inflation has been running persistently well below the Fed’s preferred goal of 2 percent. Under these circumstances, monetary policy is appropriately very accommodative and will continue to be for quite some time. Of course, as the economy continues to strengthen, the unemployment rate drops, and inflation gets closer to our ideal level, the stance of monetary policy will need to be normalized.
Once that occurs, I see a continued role for some aspects of forward guidance. The introduction of FOMC policy projections reflects a shift toward greater transparency about the future of the federal funds rate. Coupled with the new emphasis on providing an economic basis for forward guidance, this should result in greater public understanding of Federal Reserve policy and the reasons driving policy decisions. This, in turn, should reduce households’ and businesses’ uncertainty and help them make better borrowing and investment decisions, ultimately making monetary policy more effective.
Author's note: The views presented in this article are the author’s alone, and do not necessarily reflect those of other members of the Federal Reserve System.
Rudebusch, G D and J C Williams (2008), “Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections”, in J Y Campbell (ed), Asset Prices and Monetary Policy, Chicago: University of Chicago Press, pp. 247–284.
Williams, J C (2013), “Will Unconventional Policy Be the New Normal?” FRBSF Economic Letter 2013-29, 7 October.
- Five On The Floor - Paul Krugman
- Microfoundations and Macro Wars - mainly macro
- Gauging the Momentum of the Labor Recovery - FRBSF Economic Letter
- Okun's Law Says We're Growing Well Below Our Potential - Brookings
- Democracy and Extremism - Daron Acemoglu and James Robinson
- Minneapolis Fed Wants Lower Disc Rate, Three Banks Want Increase - WSJ
- The Terminator, Statistics, Fair Use and Hedge Funds - Normal Deviate
- Imagining the Dollar Without Its Privilege - NYTimes.com
- Tea party Republicans put dollar's reputation at risk - David Cay Johnston
- A conspiracy theory of the debt ceiling - interfluidity
- Getting the Fed to Explain Itself Better - NYTimes.com
- Unconventional Policy and Central Bank Independence - William Dudley
- America's economy: Meh ceiling? - The Economist
- Tax policy for hard times - vox
- Fama and the Other Fama - Underbelly
- Bob Shiller's Nobel - John Cochrane
- Lars Hansen's Nobel - John Cochrane
- If Fama were Newton, would Shiller be Einstein? - Noah Smith
- Sooo…Does This Mean We’re In a Banksy Bubble? - Jodi Beggs
- The Inefficiency of the Market Isn't an Open Question - John Cassidy
- Sveriges Riksbank prize actually, blah blah blah - Crooked Timber
- The 2013 Nobel Prize to Fama, Hanson, and Shiller - Tim Taylor
- Rationality: The Issue Is Not the Issue - Peter Dorman
Tuesday, October 15, 2013
Policy Uncertainty, October 14: Policy uncertainty, as measured by the Baker, Bloom and Davis index, is skyrocketing.
Figure 1: Baker, Bloom and Davis Policy Uncertainty Index (blue), 31 day centered moving average (orange), and observation for 10/14 (red square). Source: Baker, Bloom, and Davis, accessed 10/14/2013.
If one thought that policy uncertainty was slowing the economy, would this be any way of conducting policy?
Just a quick note on the efficient markets hypothesis, rationality, and all that. I view these as important contributions not because they are accurate descriptions of the world (though they may come close in some cases), but rather because they give us an important benchmark to measure departures from an ideal world. It's somewhat like studying the effects of gravity in an idealized system with no wind, etc. -- in a vacuum -- as a first step. If people say, yes, but it's always windy here, then we can account for those effects (though if we are dropping 100 pound weighs from 10 feet accounting for wind may not matter much, but if we are dropping something light from a much higher distance then we would need to incorporate these forces). Same for the efficient markets hypothesis and rationality. If people say, if effect, but it's always windy here -- those models miss important behavioral effects, e.g., -- then the models need to be amended appropriately (though, like dropping heavy weights short distances in the wind, some markets may act close enough to idealized conditions to allow these models to be used). We have not done enough to amend models to account for departures from the ideal, but that doesn't mean the ideal models aren't useful benchmarks.
Anyway, just a quick thought...
The GOP Tax: Macroeconomic Advisers has a new report out about the effects of bad fiscal policy since 2010 — that is, since the GOP takeover of the House. ... They say that combined effects of uncertainty in the bond market and cuts in discretionary spending have subtracted 1% from GDP growth. That’s not 1% off GDP — it’s the annualized rate of growth, so that we’re talking about almost 3% of GDP at this point; cumulatively, the losses come to around $700 billion of wasted economic potential. This is in the same ballpark as my own estimates.
And they also estimate that the current unemployment rate is 1.4 points higher than it would have been without those policies (a number consistent with almost 3% lower GDP); so, we’d have unemployment below 6% if not for these people.
Great work all around, guys.
But the master's of the universe -- the wealthy supporters of the GOP and a driving force behind the push for austerity -- are doing great. If they get lower taxes as a result of all this, that's allthat matter, right? Who cares about all the other people who are struggling as a result of cuts to social services, higher unemployment rates, and the like?
- Do You Know Who I Am? - Paul Krugman
- After the Jobs Disappear - NYTimes.com
- Chastening the Giant Banks - NYTimes.com
- Do student evaluations measure teaching effectiveness? - Berkeley Blog
- What’s an Economist to Do Without Government Data? - WSJ
- Quantum Computers, Machine Learning Will Revolutionize Big Data - Wired
- Josh Barro: Niall Ferguson Uses Twitter Science ... - Brad DeLong
- Help-to-Buy as a macroprudential policy - vox
- The Global Wealth Distribution - Tim Taylor
- Anti-Imitation - Cheap Talk
- In and Out - Capital Ebbs and Flows
- Obamacare Success - Paul Krugman
Monday, October 14, 2013
Dean Baker is not happy with how budget issues are being presented to the public:
Republicans are delusional about US spending and deficits: It is understandable that the public is disgusted with Washington; they have every right to be. At a time when the country continues to suffer from the worst patch of unemployment since the Great Depression, the government is shut down over concerns about the budget deficit.
There is no doubt that the Republicans deserve the blame for the shutdown and the risk of debt default. They decided that it was worth shutting down the government and risking default in order stop Obamacare. That is what they said as loudly and as clearly...
Going to the wall for something that is incredibly important is a reasonable tactic. However, the public apparently did not agree with the Republicans. Polls show that they overwhelmingly oppose their tactic of shutting down the government and risking default over Obamacare. As a result, the Republicans are now claiming that the dispute is actually over spending.
Anywhere outside of Washington DC and totalitarian states, you don't get to rewrite history. However, given the national media's concept of impartiality, they now feel an obligation to accept that the Republicans' claim that this is a dispute over spending levels.
But that is only the beginning of the reason that people should detest budget reporters. The more important reason is that they have spread incredible nonsense about the deficit and spending problems facing the country, causing most of the public to be completely confused on these issues. ...
Yes, the public has every right to be disgusted.
On the run today, a few comments on the Nobel (I'll add more as I find them):
- 3 American Professors Awarded Nobel in Economic Science - NYTimes.com
- Eugene Fama on the Housing Bubble... - Brad DeLong
- Shiller vs Fama? - Chris Dillow
- Congratulations Gene Fama, Lars Hansen and Bob Shiller - John Taylor
- The Nobel - Paul Krugman
- Eugene Fama, Nobel Prize Laureate - Tyler Cowen
- Eugene Fama Nobelist - Alex Tabarrok
- Robert Shiller, Nobel Laureate - Tyler Cowen
- Robert Shiller Nobelist - Alex Tabarrok
- Lars Peter Hansen, Nobel Laureate - Tyler Cowen
- Lars Peter Hansen Nobelist - Alex Tabarrok
- Fama, Hansen, and Shiller Nobel - John Cochrane
- Gene Fama's Nobel - John Cockrane
- The 2014 Nobel Laureates Fama, Hansen, and Shiller - askblog
- A Note on the 2013 Nobel-Like Prize in Economics... - Brad DeLong
- Nobel Laureates Shiller and Fama: The Oddest of Bedfellows - WSJ
- Economics Nobel to Eugene Fama and Lars Peter Hansen - UChicago News
- Interview with Eugene Fama - The New Yorker
- A Nobel for Financial Econometrics - Francis Diebold
- Why the efficient markets hypothesis merited a Nobel - FT.com
- Fama, Hansen and Shiller win Nobel Prize for economics - FT.com
- “For their empirical analysis of asset prices…” - FT Alphaville
- The prize-winning property Shiller - FT Alphaville
- Lars Peter Hansen explained. Kind of. - Not Quite Noahpinion
- Economics: The Nobel prize is a three-way split - The Economist
- Economics ‘Nobel’ 2013: An instinctive reaction - Yanis Varoufakis
- And the Nobel Memorial Prize in Economics… - Crooked Timber
- Nobel Shout Out - Kids Prefer Cheese
- Nobel Shows Both Wisdom and Madness of Crowds - Holden and Wolfers
- Shiller on Boom, Bust and Human Nature - NYTimes.com
- Your Nobel Winners, Econgirl Style… - Jodi Beggs
- Professor Fama’s ‘Nobel’ Prize toxic theory explained - Yanis Varoufakis
- On Robert Shiller's "Animal Spirits" Lecture (2009) - Brad DeLong
- Robert Shiller and Radical Financial Innovation - Not Quite Noahpinion
- A Nobelist's Warning - WSJ.com
- In praise of empiricism: a Nobel prize for everyday economics - Heidi Moore
- Fama and the Other Fama - Underbelly
- Bob Shiller's Nobel - John Cochrane
- Lars Hansen's Nobel - John Cochrane
- If Fama were Newton, would Shiller be Einstein? - Noah Smith
- Sooo…Does This Mean We’re In a Banksy Bubble? - Jodi Beggs
- The Inefficiency of the Market Isn't an Open Question - John Cassidy
- Sveriges Riksbank prize actually, blah blah blah - Crooked Timber
- The 2013 Nobel Prize to Fama, Hanson, and Shiller - Tim Taylor
- Rationality: The Issue Is Not the Issue - Peter Dorman
What's the biggest problem we face right now?:
The Dixiecrat Solution, by Paul Krugman, Commentary, NY Times: ... Stocks surged last Friday in the belief that House Republicans were getting ready to back down on their ransom demands over the government shutdown and the debt ceiling. But what Republicans were actually offering, it seems, was the “compromise” Paul Ryan ... laid out...: rolling back some of the “sequester” budget cuts — which both parties dislike; cuts in Medicare, but with no quid pro quo in the form of higher revenue; and only a temporary fix on the debt ceiling, so that we would soon find ourselves in crisis again. ... Yet even this ludicrously unbalanced offer was too much for conservative activists, who lambasted Mr. Ryan for basically leaving health reform intact. ...
Conservative activists are simply not willing to give up on the idea of ruling through extortion, and the Obama administration has decided, wisely, that it will not give in to extortion. So how does this end? How does America become governable again?
One answer might be ... Dixiecrats in reverse.
Here’s the precedent: For a long time, starting as early as 1938, Democrats generally controlled Congress on paper, but actual control often rested with an alliance between Republicans and conservative Southerners who were Democrats in name only. You may not like what this alliance did... But at least America had a functioning government...
And right now we have all the necessary ingredients for a comparable alliance, with roles reversed. Despite denials from Republican leaders, everyone I talk to believes that it would be easy to pass both a continuing resolution, reopening the government, and an increase in the debt ceiling, averting default, if only such measures were brought to the House floor. How? The answer is, they would get support from just about all Democrats plus some Republicans, mainly relatively moderate non-Southerners. As I said, Dixiecrats in reverse.
The problem is that John Boehner ... won’t allow such votes, because he’s afraid of the backlash from his party’s radicals. Which points to a broader conclusion: The biggest problem we ... face right now is not the extremism of Republican radicals, which is a given, but the cowardice of Republican non-extremists (it would be stretching to call them moderates).
The question for the next few days is whether plunging markets and urgent appeals from big business will stiffen the non-extremists’ spines. For as far as I can tell, the reverse-Dixiecrat solution is the only way out of this mess.
- Inequality Is a Choice - Joseph Stiglitz
- I'm Sorry, Greg Mankiw... - Brad DeLong
- Greg Mankiw’s Misguided Example - EconoSpeak
- Why C.E.O. Pay Keeps Going Up - James Surowiecki
- Richard Lipsey and the Phillips Curve - Uneasy Money
- Shel Silverstein’s estate and publishers - Digitopoly
- Credit, Crises, and Consequences - Carola Binder
- They Have No Idea - Paul Krugman
- An exit strategy for Republicans - Econbrowser
- Blame Europe’s policy makers for lost growth - Wolfgang Münchau
- Wage Flexibility in Doctrine and Policy (Wonkish) - Paul Krugman
- The battle over the US budget is the wrong fight - Lawrence Summers
- Do better economic models lead to better forecasting? - Video - David Hendry
- Flim Flam Forever - Paul Krugman
- The economics of Janet L. Yellen - Gavyn Davies
- Envy, Scorn and Shutdown - Nancy Folbre
- Poll Results on US Fiscal Risks - IGM Forum
Sunday, October 13, 2013
Here's the latest from the "blame the other side for the crappy things we do to people we don't care about" party. This is from Ezra Klein:
The GOP’s latest poison pill, Wonkblog: ...House Republicans are preparing a six-week debt-ceiling extension that includes the Vitter amendment (see here for more on that bit of health-care trolling), strengthened income verification under Obamacare, and Rep. James Lankford's 'Government Shutdown Prevention Act.' Lankford's bill is interesting. Here's the description from his congressional office:
If Congress fails to approve a budget by the end of each fiscal year, the Government Shutdown Prevention Act would ensure that all operations remain running normally .. by automatically triggering a continuing resolution (CR) or short-term, stop-gap spending device. ... After the first 120 days, auto-CR funding would be reduced by one percentage point and would continue to be reduced by that margin every 90 days.By progressively decreasing the amounts provided under the automatic continuing resolution, the bill provides continued incentives for Congress and the President to reach agreement on regular appropriations bills.
Catch the problem? The Lankford bill creates a world in which the failure to fund the government leads to automatic, across-the-board spending cuts. That's not a world in which there are "continued incentives for Congress and the President to reach agreement on regular appropriations bills." It's a world in which Republicans who want spending cuts have a continued incentive to refuse to reach agreement on bills to fund the government.
If Lankford wanted to incentivize both sides to come to a deal he'd propose a bill that paired automatic spending cuts with automatic tax increases. ... It'll die a quick death in the Senate. ...
David Warsh asks why there is no counterpart to Paul Krugman on the center right, and suggests that Larry Summers should play that role for the WSJ (there is quite a bit more in the original):
Wanted: A Straw to Stir the Drink, Economic Principals: “The straw that stirs the drink” is an old newspaper colloquialism, derived from politics, applied to very successful columnists. It means a commentator with a large following, one whom even the opposition reads. ... The drink-stirrer for the last ten years or so in the world of center-left economic policy has been Paul Krugman... He seems to have learned every trick in the columnist’s book.
Why is there no Krugman on the center right?
That a receptive community exists is obvious. ... The Wall Street Journal has ... a tent big enough to accommodate all those who prefer ... an alternative to whatever the Democratic Party was offering...
[But...] Where Krugman writes two pieces a week (which he energetically supplements with daily entries on his Times-sponsored blog), the WSJ’s only writer with an economics background is former George Mason University graduate student Stephen Moore. (In his twice-weekly “Business World” column, Holman Jenkins Jr. dispenses shrewd microeconomic commentary.) Moore is not exactly deeply grounded in the discipline. ...
So what would a center-right counterpart to Krugman look like?
Such a commentator would have to know something about monetary policy – have a feeling for the possibilities for better banking regulation. He or she would have to confront the unpleasant news about income distribution emanating from the University of California at Berkeley, in the work of Emmanuel Saez, and not simply dismiss his epic collaboration with Thomas Piketty as French economists… rock stars of the intellectual Left… special[izing] in “earnings inequality” and “wealth concentration.” Such a person probably would accept that the main features of the safety net, such as the Social Security System, are here to stay, and recognize a government role in formulating the market for health insurance. (Remember, it was GOP presidential candidate Mitt Romney who introduced a version of Obamacare when he was governor of Massachusetts.) A serious economics commentator for the WSJ would take climate change seriously, too...
Come to think of it, a sensible full-time economics columnist who would broaden the audience of the WSJ’s editorial page and give it a realistic claim on the future might look a lot like Lawrence Summers. I know, he’s thought to be something of a liberal. He unquestionably possesses a decent heart. But that is part of the job description I have been writing. It is his famously tough mind, so bothersome to progressives over the years, that is his main attraction. He could cite his having worked in the Reagan administration, for his mentor Martin Feldstein, as a credential! (So did Krugman.)
I know, too, that it’s the Financial Times that put him in the column-writing business. But that audience is too thin, and the paper too precarious a perch for Summers’s ambition... Summers is uniquely qualified to play a part at the WSJ that for many years has gone uncast– the role of loyal opposition. Murdoch and he should think about it. .
Developing countries are unhappy with the IMF:
Impatience With I.M.F. Is Growing, by Reuters: Emerging market countries complained on Saturday about the plodding progress in giving them more power at the International Monetary Fund. The global lender, after its annual meetings this past weekend, failed to meet a deadline originally self-imposed for 2012 to make historic changes meant to give emerging nations a greater say. ...
The delay on changes first agreed to in 2010 also pushes off even more difficult decisions about how to reform the I.M.F., which is still dominated by the nations that founded the organization after World War II.
The 2010 changes have been held up because the United States, the fund’s biggest and most powerful member, has not ratified them and prospects for action before the end of the year are slim due to gridlock in the U.S. Congress. ...
The next round of voting changes may involve even more give and take, as I.M.F. member countries wrangle over the specifics of an elaborate formula that determines the voting power of each country, how much it must contribute to the Fund and what it can borrow. ...
The I.M.F. said it planned to finalize a formula by January... But ... another deadline is likely to slip by. The revision of the formula is intended to further reflect the rise of China, Brazil and other large emerging market economies...
... As the IMF has increasingly lectured others about the importance of governance, problems in its own political legitimacy have increasingly impaired its efficacy. Granting more voting powers to China and a few other countries that are under represented is a step in the right direction. But even the IMF recognizes that it is only the first step. Critics point out that these changes are unlikely to have much effect on its decisions, and they worry that having granted the most powerful of the underrepresented more voting power, the drive for further reform will weaken.
That would be a shame. The U.S. still is the only country with veto power. The choice of the heads of both the IMF and the World Bank make a mockery of legitimate democratic governance. Neither asks who is most qualified, regardless of race, color, nationality. The American president appoints the head of the World Bank and Europe chooses the head of the IMF. The recent selection of the head of the World Bank highlighted the problems.
The IMF’s new focus on global imbalances is also a step in the right direction. ... The IMF should have long been focusing on such issues—its real mandate—rather than on development and the transition from Communism to the market economy, areas that are clearly not within its core competence, and where its policies were often badly misguided. ...
- Sticky Wages and the Macro Wars - Paul Krugman
- Mobility is no answer to dispersion - interfluidity
- Abundance & revolution - Stumbling and Mumbling
- The End of the Nation-State? - NYTimes.com
- The Important Takeaway from Ken Rogoff's Latest - Brad DeLong
- John Stuart Mill on Humans vs. the Lesser Robots - Miles Kimball
- Mind the gap and how structural balances are calculated - Bruegel
- Reciprocity as the Foundation of Financial Economics - Tim Johnson
- From Summer Camp, a Parable for Washington - Greg Mankiw
- Nominal wage rigidity in macro: methodological failure - mainly macro
- Purposive social action - Understanding Society
- Hubbard and Groupthink - Beat the Press
- The end of US exceptionalism - Danny Quah
Saturday, October 12, 2013
Nominal wage rigidity in macro: an example of methodological failure: This post develops a point made by Bryan Caplan (HT MT). I have two stock complaints about the dominance of the microfoundations approach in macro. Neither imply that the microfoundations approach is ‘fundamentally flawed’ or should be abandoned: I still learn useful things from building DSGE models. My first complaint is that too many economists follow what I call the microfoundations purist position: if it cannot be microfounded, it should not be in your model. Perhaps a better way of putting it is that they only model what they can microfound, not what they see. This corresponds to a standard method of rejecting an innovative macro paper: the innovation is ‘ad hoc’.
My second complaint is that the microfoundations used by macroeconomists is so out of date. Behavioural economics just does not get a look in. A good and very important example comes from the reluctance of firms to cut nominal wages. There is overwhelming empirical evidence for this phenomenon (see for example here (HT Timothy Taylor) or the work of Jennifer Smith at Warwick). The behavioral reasons for this are explored in detail in this book by Truman Bewley, which Bryan Caplan discusses here. Both money illusion and the importance of workforce morale are now well accepted ideas in behavioral economics.
Yet debates among macroeconomists about whether and why wages are sticky go on. ...
While we can debate why this is at the level of general methodology, the importance of this particular example to current policy is huge. Many have argued that the failure of inflation to fall further in the recession is evidence that the output gap is not that large. As Paul Krugman in particular has repeatedly suggested, the reluctance of workers or firms to cut nominal wages may mean that inflation could be much more sticky at very low levels, so the current behavior of inflation is not inconsistent with a large output gap. ... Yet this is hardly a new discovery, so why is macro having to rediscover these basic empirical truths? ...
He goes on to give an example of why this matters (failure to incorporate downward nominal wage rigidity caused policymakers to underestimate the size of the output gap by a large margin, and that led to a suboptimal policy response).
Time for me to catch a plane ...
Business and the GOP: Still no resolution on the debt ceiling, and I think people are still too optimistic here. Republicans still aren’t willing to walk away from this without some kind of trophy, so they can claim victory; the whole point of Obama’s position is that you don’t get anything, not even something trivial, as a reward for threatening disaster.
Meanwhile, Republicans are getting a lot of pressure from business, which doesn’t like what’s happening. And some pundits are already speculating about the possibility either of a split within the GOP or a kind of coup in which the business-backed party elders take control back from the crazies.
So I’ve been thinking about this, and have managed to convince myself that it’s wishful thinking.
Now, it’s true that Republicans are bad for business... Ever since Republicans retook the House, federal spending adjusted for inflation and population has been dropping fast...
This is exactly the wrong thing to be doing in a still-depressed economy with interest rates at zero... But here’s the thing: while the modern GOP is bad for business, it’s arguably good for wealthy business leaders. After all, it keeps their taxes low, so that their take-home pay is probably higher than it would be under better economic management. ...
In a way, this is an inversion of the usual argument made by defenders of inequality. They’re always saying that workers should be happy to accept a declining share of national income, because the incentives associated with inequality make the economic pie bigger, and they end up better off in the end. What’s really going on with plutocrats right now, however, is that they’re basically willing to accept lousy economic policies from right-wing politicians as long as they get a bigger share of the shrinking pie.
This may sound very cynical — but then, if you aren’t cynical at this point, you aren’t paying attention. And I suspect that the GOP would have to get a lot crazier before big business bails.
This also speaks to the well known agency issue between the "wealthy business leaders" and the stockholders in the firms they are running.
Barry Eichengreen on Japan:
Japan rising? Shinzo Abe’s Excellent Adventure, by Barry Eichengreen, The Milken Institute Review: “I shot an arrow in the air, it fell to earth, I knew not where.” — Henry Wadsworth Longfellow
Longfellow, the early-19th-century American poet, was obviously not referring to the current Japanese prime minister, Shinzo Abe, but he could have been. What Abe calls his “three-arrows” economic-regeneration plan is a shot in the dark in a country generally not inclined to risk-taking. The first arrow, aggressive monetary easing, is designed to slay the dragon of deflation. The second, a one-time dose of fiscal stimulus, is intended to jump- start economic growth after more than two decades of stagnation. The third, a mix of structural reforms, is designed to boost productive efficiency, attract investment and render faster growth sustainable.
It remains to be seen whether Abe’s arrows will follow the trajectory he anticipates. On the first, the chattering classes seem evenly divided between those who doubt the Bank of Japan will succeed in ending deflation and those who fear that the inflation produced by monetary easing will spiral out of control. On the second, some wonder whether fiscal stimulus is, in fact, gilding the lily, warning that additional deficit spending by an already heavily indebted Japanese government could provoke a crisis of confidence.
Views are less divided when it comes to the third arrow, comprehensive structural reform. Here observers are all but unanimous in their approval – but question whether the weapon will even get off the ground. ...[continue reading]...
The ICT Revolution Isn’t Over: ...I thought I would make one casual observation about technology. Here it is:... the relatively limited impact so far of the much-heralded rise of ICT — information and communication technologies. For a long time these technologies seemed to be doing nothing for the economy; then, finally, they seemed to kick in circa 1995. But the new era of productivity growth, as Bob says, wasn’t a match for the long boom post World War II, and seemed to have petered out by the late 2000s.
What I’d note, however, is that there is almost surely a second wind coming. The 1995-2007 productivity rise was basically a “wired” phenomenon, a lot of it having to do with local area networks rather than the Internet. Wireless data is a whole different thing, and it’s a surprisingly recent thing — the iPhone was introduced in 2007, the iPad in 2010. And we know from repeated experience that it takes quite a while for new technologies to show up in economic growth, a point famously made by Paul David and confirmed by the 25-year lag between the introduction of the microprocessor and the 90s productivity takeoff.
So there’s more coming. How big is another question.
- The War On The Poor Is A War On You-Know-Who - Paul Krugman
- Friday Cartoon Super Chicken Weblogging - Brad DeLong
- On premature deindustrialization - Dani Rodrik
- The Ferg-beast attacks - Noahpinion
- Is AI the Defining Issue for Humanity? - Scientific American
- Welfare Isn’t Too Generous—Wages Are Too Low - EPI
- It's No Longer the Economy, Stupid - NYTimes.com
- Economic history: Who were the physiocrats? - The Economist
- Communications Challenges and Quantitative Easing - Jerome Powell
- Notes on Interregional and International Trade - Paul Krugman
- Throwing Coins into a Fountain—Who Gets Paid? - Liberty Street
- The National Economic Outlook and Monetary Policy - Charles Plosser
- A new mandate for the Federal Reserve - Glenn Hubbard and Justin Muzinich
- Economics’ venerable Theory of Comparative Advantage - Peter Dizikes
- 5 Years After the Crisis: Why the Income Gap Is Widening - Fiscal Times
- U.S. Rethinks How to Release Sensitive Economic Data - WSJ.com
- Why the level of government debt may not matter - FT Alphaville
- The Dubious Case for Professional Licensing - NYTimes.com
- Institutions and ethnicities in Africa - vox
- International Trade in Apples - Tim Taylor
- The ICT Revolution Isn't Over - Paul Krugman
- A Challenge for Anti-Keynesians - Bryan Caplan
Friday, October 11, 2013
Analyzing Emergent Properties of Systems of Decentralized Exchange: Part IIIA of My "The Economist as ?: The Public Square and Economists: Equitable Growth Notes for October 11, 2013: So what do economists have to say when they speak as public intellectuals in the public square? As I see it, economists have five things to teach at the "micro" level--of how individuals act, and of their well-being as they try to make their way in the world. These are: the deep roots of markets in human psychology and society, the extraordinary power of markets as decentralized mechanisms for getting large groups of humans to work broadly together rather than at cross-purposes, the ways in which markets can powerfully reinforce and amplify the harm done by domination and oppression, the manifold other ways in which the market can go wrong because it is somewhat paradoxically so effective, and how the market needs the state to underpin and manage it on the “micro” level.
These five are:
The Deep Roots of Markets...
The Extraordinary Power of Markets...
Market Systems Reinforce and Amplify the Harm of Domination...
Other Ways in Which the Market Can Go Wrong...
[There's a fairly long discussion of each point.]
Don't listen to the default deniers:
Dealing With Default, by Paul Krugman, Commentary, NY Times: So Republicans may have decided to raise the debt ceiling without conditions attached — the details still aren’t clear. Maybe that’s the end of that particular extortion tactic, but maybe not, because, at best, we’re only looking at a very short-term extension. The threat of hitting the ceiling remains...
So what are the choices if we do hit the ceiling? ... What would a general default look like? ...
First, the U.S. government would ... be ... failing to meet its legal obligations to pay. You may say that things like Social Security checks aren’t the same as interest due on bonds... But ... Social Security benefits have the same inviolable legal status as payments to investors.
Second, prioritizing interest payments would reinforce the terrible precedent we set after the 2008 crisis, when Wall Street was bailed out but distressed workers and homeowners got little or nothing. We would, once again, be signaling that the financial industry gets special treatment because it can threaten to shut down the economy if it doesn’t.
Third, the spending cuts would create great hardship if they go on for any length of time. Think Medicare recipients turned away from hospitals...
Finally, while prioritizing might avoid an immediate financial crisis, it would still have devastating economic effects. We’d be looking at an immediate spending cut roughly comparable to the plunge in housing investment after the bubble burst... That by itself would surely be enough to push us into recession.
And it wouldn’t end there. As the U.S. economy went into recession, tax receipts would fall sharply, and the government, unable to borrow, would be forced into a second round of spending cuts, worsening the economic downturn, reducing receipts even more, and so on. So ... we could ... be looking at a slump worse than the Great Recession.
So are there any other choices? Many legal experts think there is another option: One way or another, the president could simply choose to defy Congress and ignore the debt ceiling.
Wouldn’t this be breaking the law? Maybe, maybe not — opinions differ. But not making good on federal obligations is also breaking the law. And if House Republicans are pushing the president into a situation where he must break the law no matter what he does, why not choose the version that hurts America least? ...
So what will happen if and when we hit the debt ceiling? Let’s hope we don’t find out.
- Alan Blinder: The GOP's Flirtation With Disaster - WSJ.com
- Inconvenient Uncertainties - Wagner and Weitzman
- Health Act Embraced in California - NYTimes.com
- The Ravings of Niall Ferguson - Beat the Press
- Baum on Money: Enter Paul Ryan - Bloomberg
- Janet Joy - Paul Krugman
- Are Disasters Lurking in European Banks? Who Knows? - NYTimes.com
- The shadow banking system, crunched one way or another - FT Alphaville
- Measuring competitiveness in a world with global value chains - vox
- The Inconvenienced Economist - Beat the Press
- Gender does matter in central banking - FT.com
- The Debt Ceiling and the Housing Bust - Paul Krugman
- Janet Yellen: Brainy, Brave and Brooklyn Strong - Jackie Leo
- Laboring in Vain to Raise the Level of the Debate... - Brad DeLong
- Beyond MSE - "Optimal" Linear Regression Estimation - Dave Giles
- Monetary policy: Burying the economy to save it - The Economist
- Paul Ryan Echoes Niall Ferguson - EconoSpeak
- Debt deflation and the Riksbank’s policy - Lars E.O. Svensson
- Weekly Initial Unemployment Claims increase sharply - Calculated Risk
- The Salience Today of the Economic - Brad DeLong
- Fiscal consolidation and growth: what's going on? - Jonathan Portes
Thursday, October 10, 2013
I am here for the next two days:
38th Annual Federal Reserve Bank of St. Louis Fall Conference
Thursday, October 10, 2013
8: 45 – 9:00 am Opening Remarks
James Bullard, President, Federal Reserve Bank of St. Louis
Session I - Financial Markets 1
9:00 – 10:15 am "Trade Dynamics in the Market for Federal Funds"
Presenter: Ricardo Lagos, New York University
Coauthor: Gara Afonso, Federal Reserve Bank of New York
Discussant: Huberto Ennis, Federal Reserve Bank of Richmond
10:45 am – 12:00 pm "Banks' Risk Exposures"
Presenter: Martin Schneider , Stanford University
Coauthors: Juliane Begenau, Stanford University and Monika Piazzesi, Stanford University
Discussant: Hanno Lustig, University of California-Los Angeles
Session II: Monetary Policy and Macro Dynamics
1:00 – 2:15 pm "Unemployment and Business Cycles"
Presenter: Martin S. Eichenbaum, Northwestern University
Coauthors: Lawrence J. Christiano, Northwestern University and Mathias Trabandt, Board of Governors of the Federal Reserve System
Discussant: Jaroslav Borovicka, New York University
2:45 – 4:00 pm "Conventional and Unconventional Monetary Policy in a Model with Endogenous Collateral Constraints"
Presenter: Michael Woodford, Columbia University
Coauthors: Aloísio Araújo, Getulio Vargas Foundation and Susan Schommer, Instituto Nacional de Matemática Pura e Aplicada
Discussant: Stephen Williamson, Washington University
4:00 – 5:15 pm "Leverage Restrictions in a Business Cycle Model"
Presenter: Lawrence J. Christiano, Northwestern University
Coauthor: Daisuke Ikeda, Bank of Japan
Discussant: Benjamin Moll, Princeton UniversityFriday, October 11, 2013
Friday, October 11, 2013
Session III: Financial Markets 2
9:00 – 10:15 am "Measuring the Financial Soundness of U.S. Firms, 1926—2012"
Presenter: Andrew G. Atkeson, University of California-Los Angeles
Coauthor: Andrea L. Eisfeldt, University of California-Los Angeles and Pierre-Olivier Weill, University of California-Los Angeles
Discussant: Gian Luca Clementi, New York University
10:45 am – 12:00 pm "The I Theory of Money"
Presenter: Markus K. Brunnermeier, Princeton University
Coauthor: Yuliy Sannikov, Princeton University
Discussant: Ed Nosal, Federal Reserve Bank of Chicago
Session IV: Households Lifecycle Behavior
1:00 – 2:15 pm "Is There 'Too Much' Inequality in Health Spending Across Income Groups?"
Presenter: Larry E. Jones, University of Minnesota
Coauthors: Laurence Ales, Carnegie Mellon University and Roozbeh Hosseini , Arizona State University
Discussant: Selahattin İmrohoroğlu, University of Southern California
2:15 –3:30 pm "Retirement, Home Production and Labor Supply Elasticities"
Presenter: Richard Rogerson, Princeton University
Coauthor: Johanna Wallenius, Stockholm School of Economics
Discussant: Nancy Stokey, University of Chicago
The second of two from Tim Duy:
Kind of a Clown Show, by Tim Duy: Matthew Klein rebuts Ryan Avent (my sympathetic position here), and makes some good points. That said, I still think the FOMC is kind of a clown show right now. A significant problem is that they can't communicate effectively, either internally or externally, that the Fed is now operating under a triple mandate. They are struggling with the resulting trade-offs and while the struggle is public, it is not explicit. Klein does a much better job than the totality of the FOMC in bringing this issue to light.
Klein summarizes his objection to Avent with:
After reading this narrative, the Economist’s Ryan Avent concluded that the U.S. central bank is a “clown show.” While there are plenty of legitimate criticisms one can make about Fed policymaking over the years, Avent’s misses the mark. This sort of simplistic reasoning assumes central bankers only need to manage a single trade-off between the rate of consumer price inflation and the level of joblessness. The real world, however, is far more complex.
Why is it more complex than the dual mandate?
While the precise meanings of “maximum employment” and “stable prices” remain undefined, the biggest source of ambiguity is the time-frame. Certain policies might temporarily suppress the unemployment rate but end up sowing the seeds of trouble down the road.For example, the Fed’s accommodative policies in the 2000s may have mitigated the collapse in business investment after the end of the tech bubble, but this brief reprieve came at the cost of soaring private indebtedness and a financial sector that blew itself up.
What is the specific problem today?
Many Fed policymakers appreciate the complexity of these trade-offs and are trying to grapple with them in the context of today’s environment. High unemployment and sluggish increases in consumer prices would suggest that the Fed should step on the gas. On the other hand, risk-takers in the financial sector may end up overextending themselves and sow the seeds of another crisis.
And there lies the communication problem. The Fed has largely communicated its policy objective on the basis of two variables, inflation and unemployment. The Evan's Rule, from the last FOMC statement:
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.
And note that Yellen's much heralded optimal control strategy explicitly reduces policy to a near-term inflation/unemployment trade-off:
"Financial stability" is not identified here. And it makes only a passing appearance in the statement:
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.
But even that statement is followed up by a return to the dual mandate:
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.
We do of course still have the "costs and benefits" clause of the asset purchase program:
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.
But even here we have precious few explanations of the costs and risks of asset purchases and few on the FOMC willing to say asset purchases are ineffective.
In short, the FOMC's public face is largely focused on the unemployment/inflation trade off. But Klein's correct, something else is brewing under the surface of policy. Take for example today's comments by Vice Chair Janet Yellen. Most focused on:
The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can't find a job and worry how they will pay their bills and provide for their families. The Federal Reserve can help, if it does its job effectively. We can help ensure that everyone has the opportunity to work hard and build a better life.
But read the next two lines:
We can ensure that inflation remains in check and doesn't undermine the benefits of a growing economy. We can and must safeguard the financial system.
Triple mandate - maximum sustainable employment, price stability, and financial stability.
Perhaps if monetary policy could focus solely on the first two, while macroprudential policy takes on the last, then the triple mandate would not pose a major challenge. But, alas, as Klein notes, this is not the case. Federal Reserve Governor Jeremy Stein explicitly identified the issue in February:
Nevertheless, as we move forward, I believe it will be important to keep an open mind and avoid adhering to the decoupling philosophy too rigidly. In spite of the caveats I just described, I can imagine situations where it might make sense to enlist monetary policy tools in the pursuit of financial stability.
Consider the tradeoffs now in play. More so than in the past, the Fed is aware that by promoting maximum employment and price stability, they may be promoting financial instability. So they may need to take action in the near term to promote financial stability at the expense of the first two objectives. Indeed, this is exactly what happened this year with regards to the tapering talk. Consider Stein's September speech:
Having said all of this, I believe we are currently in a pretty good place with respect to the pricing of interest rate risk. The movement in Treasury rates that we have seen since early May has led to somewhat tighter financial conditions in certain sectors--most notably the mortgage market--but has also brought term premiums closer into line with historical norms, and thereby has arguably reduced the risk of a more damaging upward spike at some future date. On net, I believe the adjustment has been a healthy one.
The tighter financial conditions may have slowed progress on the employment/price stability mandates, but improved the financial stability outlook. One instrument, three objectives. Won't be able to make everyone happy all of the time.
The introduction of a third mandate into the policymaking process, however, has not been communicated very well. As a consequence, in my opinion, market participants cannot determine the bar to tapering. And, arguably, it leaves an unaccounted variable floating around in Yellen's optimal control strategy that could influence the path of interest rates. And if low inflation environments breed financial instability, will the Fed sacrifice the inflation target or the employment mandate? There are lots and lots of questions here. Klein is right - it isn't easy.
That said, we should not have to pull this debate out of odd speeches here and there. Leaving this on the back of Stein's infrequent speeches is not enough. It seems clear that financial stability objectives are now part of the Fed's reaction function. Policymakers need to bring this issue to the forefront, the sooner the better.
Bottom Line: Monetary policymakers are viewing financial stability as an important element of sustaining maximum employment and stable prices over the course of a business cycle. The challenge is that this involves a new trade-off in the monetary policy process that they are struggling to understand. Unfortunately, the public debate they are carrying on is somewhat clownish in that it is sending conflicting signals about the path of monetary policy. This is really not surprising. What exactly is the Fed's reaction function if we throw financial stability into the mix? They don't know any better than we do. I don't even think monetary policymakers even share a common framework when it comes to incorporating financial stability into the reaction function. This, I think, is an opportunity for a strong leader to chart a course for the Fed that while encouraging internal discussion works to keep a consistent external message. I am hoping Yellen will serve that role.
The first of two from Tim Duy:
FOMC Minutes Overtaken by Events, by Tim Duy: Out of the contentious meeting evident in the most recent FOMC minutes comes a narrative of the tapering debate, a debate that, for the moment, the hawks lost. The opportunity to take even a baby step to ending asset purchases slipped away. Because after the September meeting, the door closed on tapering for at least three more months, and probably longer.
Back in February Governor Jeremy Stein presented an important speech on the interplay between monetary policy and financial stability. Notably:
The third factor that can lead to overheating is a change in the economic environment that alters the risk-taking incentives of agents making credit decisions. For example, a prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage, in an effort to "reach for yield."
While Stein emphasizes separating monetary policy tools from financial stability tools, he concludes:
Nevertheless, as we move forward, I believe it will be important to keep an open mind and avoid adhering to the decoupling philosophy too rigidly. In spite of the caveats I just described, I can imagine situations where it might make sense to enlist monetary policy tools in the pursuit of financial stability. Let me offer three observations in support of this perspective.
One such reason:
Third, in response to concerns about numbers of instruments, we have seen in recent years that the monetary policy toolkit consists of more than just a single instrument. We can do more than adjust the federal funds rate. By changing the composition of our asset holdings, as in our recently completed maturity extension program (MEP), we can influence not just the expected path of short rates, but also term premiums and the shape of the yield curve. Once we move away from the zero lower bound, this second instrument might continue to be helpful, not simply in providing accommodation, but also as a complement to other efforts on the financial stability front.
Asset purchases are both a financial stability tool and a monetary policy tool. You can quickly see how policy would evolve with this view of asset purchases. If QE is creating financial stability issues, then policymakers would need to exit from QE while finding another tool to hold net accommodation constant. Thus is born an emphasis on forward guidance regarding the path of the Federal Funds rate as a replacement for asset purchases. A change in the policy mix, not the level of accommodation.
Hawkish Federal Reserve regional presidents must have been ecstatic at the potential for this policy shift among the governors. There has also been a group opposed to QE, particularly the open-ended version. Names such as Fisher, Plosser, Lacker and George come to mind. But a critical center of the FOMC, the governors, have tended to favor the program. But with that changing, an opportunity to end QE suddenly came into view.
Indeed, as we now know from Jon Hilsenrath's work, the anti-QE crowd was not limited to Stein, but also included Governors Powell and Duke. And I am guessing Federal Reserve Chair Ben Bernanke did not try to stop the anti-QE train. Did Vice Chair Yellen? Unknown. But by April momentum toward QE was growing enough that San Francisco Federal Reserve President John Williams predicted that tapering could begin as early as June of this year. I said at the time:
Based on William's current forecast, he expects the Fed will begin tapering off asset purchases this summer, perhaps the June FOMC meeting. He is apparently more optimistic than me, as this puts him at least three months ahead of my expectations - I had not anticipated slowing the pace of purchases until late in the year.
By June, the anti-QE momentum had gained further, with the end result that Bernanke turned decidedly hawkish at the post-FOMC press conference, laying out the path to ending asset purchases and even throwing down a 7% unemployment trigger. I have to imagine he wishes he hadn't given a firm number as that part of the Fed's forecast was too pessimistic.
Although Fed speakers tries to hold back expectations on Fed tapering and emphasize the data dependent program, expectations for tapering continued to build. The problem was that while the data was lackluster, it was hard to say that is was not "broadly consistent" with the Fed's forecast. Moreover, few policymakers were willing to step in front of the tapering train, with the exception of Minneapolis Federal Reserve President Narayana Kocherlakota. The lack of obvious doves was noted by Reuters journalist Pedro DaCosta in the wake of Jackson Hole.
Indeed, if New York Federal Reserve President William Dudley had made this speech prior to the September meeting, the tapering expectations train would have ground to a halt. Why didn't he or others? Possibly because they did not know what resistance they would face from anti-QE governors at the meeting. The governors talk infrequently. Could any regional president really know how thought was evolving inside the Board? Best to be quiet than be wrong. But market participants mistook quiet for acquiescence.
Policy hawks likely saw everything moving in their direction at the September FOMC meeting began. To be sure, the data was marginal. But the markets were fully expecting a small taper! The FOMC was getting a free pass for a small taper. They could match the taper with a dovish statement, and market participants would eat it up with a smile. The timing would never be better.
But the dove didn't roll over:
In general, those who preferred to maintain for now the pace of purchases viewed incoming data as having been on the disappointing side and, despite clear improvements in labor market conditions since the purchase program's inception in September 2012, were not yet adequately confident of continued progress. Many of these participants had revised down their forecasts for economic activity or pointed to near-term risks and uncertainties.
The fight must have been, as far as recent FOMC meetings are concerned, bordering on epic. Hawks responded forcefully:
The participants who spoke in favor of moderating the pace of securities purchases at this meeting also cited the incoming data, but viewed those data as broadly consistent with the Committee's outlook for the labor market at the time of the June FOMC meeting when the contingent expectation that the pace of asset purchases would be reduced later in the year was first presented to the public. Moreover, they highlighted what they saw as meaningful cumulative progress in labor market conditions since the purchase program began. Those participants generally were satisfied that investors had come to understand the data-dependent nature of the Committee's thinking about asset purchases, and, because they judged that the conditions laid out in June had been met, they believed that the credibility of the Committee would best be served by announcing a downward adjustment in asset purchases at this meeting. With the markets apparently viewing a cut in purchases as the most likely outcome, it was noted that the postponement of such an announcement to later in the year or beyond could have significant implications for the effectiveness of Committee communications. In particular, concerns were expressed that a delay could potentially undermine the credibility or predictability of monetary policy by, for example, increasing uncertainty about the Committee's reaction function and about its commitment to the forward guidance for the federal funds rate, with the result of an increase in volatility in financial markets. Moreover, maintaining the pace of purchases could be perceived as a sign that the FOMC had turned more pessimistic about the economic outlook.
And, probably most frightening to hawks, they saw that the door was about to close on tapering in the near term:
Finally, it was noted that if the Committee did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties.
It's not just difficult to explain a cut in the coming months. It just isn't going to happen. Stronger data? We no longer have any of the most important data. Swift resolution of fiscal uncertainties? That battle is even bloodier than that within the Fed. Moreover, the impending leadership change also argues for delaying tapering until 2014. Unless the economy lurches upward, what exactly is the reason to pull the trigger on tapering before the March FOMC meeting, after which future Chair Janet Yellen will lead a press conference? None, really.
Bottom Line: Any hawkish overtones in the FOMC minutes have been overtaken by events. The opportunity for even a small taper slipped through the hawks' talons. They should not be so unnerved. They pulled off a piece of flesh as they flew past their prey, triggering a substantial monetary tightening as the term premium jumped in response the tapering talk. Still doves are again ascendant for the moment. Not only does the budget/debt showdown put any tapering on indefinite hold, once again the Fed may be called upon to boost the pace of asset purchases should financial markets crack. And hawks are correct - the bottom range of "broadly consistent" is no longer good enough to justify tapering. Clearly stronger data is needed. And that data is literally almost nowhere to be found.
I'm not much of a haiku kind of guy, but I suppose that shouldn't stand in the way. I received the following from Stephen T. Ziliak, Professor of Economics at Roosevelt University and pioneer of "haiku economics":
Moral sentiment –
Not even Hayek would want
a shuttered White House
Affordable care -
A man in the house dining
on my last food stamp
October sunset –
The debt ceiling turns Boehner
red-orange and pink
Red October sun -
The debt ceiling is burning
Boehner a real tan
When I was in school
quantitative easing was
“O Captain! My Captain!
The ship’s weather’d every rack” –
at the Goodwill store
- The Big-Bank Subsidy - Simon Johnson
- Are Treasuries Terrifying? - Paul Krugman
- Wait a (second) moment... - Antonio Fatas
- World Cup football and game theory - vox
- Stalin and Soviet industrialisation - vox
- Delving into Labor Markets - macroblog
- On weights and coding errors - Econbrowser
- Fed Minutes Show Deepening Divide - NYTimes.com
- Bank deleveraging and productivity - mainly macro
- You Don't Need a Rigorous Microfoundationeer ... - Brad DeLong
- 28 Money Market Funds Could Have Broken the Buck - Liberty Street
- Discouraged Workers and Unemployment - Tim Taylor
- The Old Skills Gap Story - Beat the Press
- They Can't Handle the Truth - Paul Krugman
- FOMC Minutes - FRB
Wednesday, October 09, 2013
A quick one on a moderately long travel day:
Higher Education and the Opportunity Gap, by Isabel V. Sawhill, Brookings: America faces an opportunity gap. Those born in the bottom ranks have difficulty moving up. Although the United States has long thought of itself as a meritocracy, a place where anyone who gets an education and works hard can make it, the facts tell a somewhat different story. Children born into the top fifth of the income distribution have about twice as much of a chance of becoming middle class or better in their adult years as those born into the bottom fifth (Isaacs, Sawhill, & Haskins, 2008). One way that lower-income children can beat the odds is by getting a college degree. Those who complete four-year degrees have a much better chance of becoming middle class than those who don’t — although still not as good of a chance as their more affluent peers. But the even bigger problem is that few actually manage to get the degree. Moreover, the link between parental income and college-going has increased in recent decades (Bailey & Dynarski, 2011). In short, higher education is not the kind of mobility-enhancing vehicle that it could be. ...
When firms are allowed to choose who audits them, it causes "skewed auditing incentives":
An experiment puts auditing under scrutiny, by Peter Dizikes, MIT News: The structure of the auditing business appears problematic: Typically, major companies pay auditors to examine their books under the so-called “third-party” audit system. But when an auditing firm’s revenues come directly from its clients, the auditors have an incentive not to deliver bad news to them.
So: Does this arrangement affect the actual performance of auditors?
In an eye-opening experiment involving roughly 500 industrial plants in the state of Gujarat, in western India, changing the auditing system has indeed produced dramatically different outcomes — reducing pollution, and more generally calling into question the whole practice of letting firms pay the auditors who scrutinize them.
“There is a fundamental conflict of interest in the way auditing markets are set up around the world,” says MIT economist Michael Greenstone, one of the co-authors of the study, whose findings are published today in the Quarterly Journal of Economics. “We suggested some reforms to remove the conflict of interest, officials in Gujarat implemented them, and it produced notable results.”
The two-year experiment was conducted by MIT and Harvard University researchers along with the Gujarat Pollution Control Board (GPCB). It found that randomly assigning auditors to plants, paying auditors from central funds, double-checking their work, and rewarding the auditors for accuracy had large effects. Among other things, the project revealed that 59 percent of the plants were actually violating India’s laws on particulate emissions, but only 7 percent of the plants were cited for this offense when standard audits were used.
Across all types of pollutants, 29 percent of audits, using the standard practice, wrongly reported that emissions were below legal levels.
The study also produced real-world effects: The state used the information to enforce its pollution laws, and within six months, air and water pollution from the plants receiving the new form of audit were significantly lower than at plants assessed using the traditional method.
The co-authors of the paper are Greenstone, the 3M Professor of Environmental Economics at MIT; Esther Duflo, the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics at MIT; Rohini Pande, a professor of public policy at the Harvard Kennedy School; and Nicholas Ryan PhD ’12, now a visiting postdoc at Harvard.
The power of random assignment
The experiment involved 473 industrial plants in two parts of Gujarat, which has a large manufacturing industry. Since 1996 the GPCB has used the third-party audit system, in which auditors check air and water pollution levels three times annually, then submit a yearly report to the GPCB.
To conduct the study, 233 of the plants tried a new arrangement: Instead of auditors being hired by the companies running the power plants, the GPCB randomly assigned them to plants in this group. The auditors were paid fixed fees from a pool of money; 20 percent of their audits were randomly chosen for re-examination. Finally, the auditors received incentive payments for accurate reports.
In comparing the 233 plants using the new method with the 240 using the standard practice, the researchers uncovered that almost 75 percent of traditional audits reported particulate-matter emissions just below the legal limit; using the randomized method, only 19 percent of plants fell in that narrow band.
All told, across several different air- and water-pollution measures, inaccurate reports of plants complying with the law dropped by about 80 percent when the randomized method was employed.
The researchers emphasize that the experiment enabled the real-world follow-up to occur.
“The ultimate hope with the experiment was definitely to see pollution at the firm level drop,” Duflo says. The state’s enforcement was effective, as Pande explains, partly because “it becomes cheaper for some of the more egregious pollution violators to reduce pollution levels than to attempt to persuade auditors to falsify reports.”
According to Ryan, the Gujarat case also dispels myths about the difficulty of enforcing laws, since the experiment “shows the government has credibility and will.”
But how general is the finding?
In the paper, the authors broaden their critique of the audit system, referring to standard corporate financial reports and the global debt-rating system as other areas where auditors have skewed auditing incentives. Still, it is an open question how broadly the current study’s findings can be generalized.
“It would be a mistake to assume that quarterly financial reports for public companies in the U.S. are exactly the same as pollution reports in Gujarat, India,” Greenstone acknowledges. “But one thing I do know is that these markets were all set up with an obvious fundamental flaw — they all have the feature that the auditors are paid by the firms who have a stake in the outcome of the audit.” ...
Greenstone also says he hopes the current finding will spur related experiments, and gain notice among regulators and policymakers.
“No one has really had the political will to do something about this,” Greenstone says. “Now we have some evidence.” ...
Why a war on poor people?, Understanding Society: American conservatives for the past several decades have shown a remarkable hostility to poor people in our country. The recent effort to slash the SNAP food stamp program in the House (link); the astounding refusal of 26 Republican governors to expand Medicaid coverage in their states -- depriving millions of poor people from access to Medicaid health coverage (link); and the general legislative indifference to a rising poverty rate in the United States -- all this suggests something beyond ideology or neglect.
The indifference to low-income and uninsured people in their states of conservative governors and legislators in Texas, Florida, and other states is almost incomprehensible. Here is a piece in Bustle that reviews some of the facts about expanding Medicaid coverage:In total, 26 states have rejected the expansion, including the state of Mississippi, which has the highest rate of uninsured poor people in the country. Sixty-eight percent of uninsured single mothers live in the states that rejected the expansion, as do 60 percent of the nation’s uninsured working poor. (link)
These attitudes and legislative efforts didn't begin yesterday. They extend back at least to the Reagan administration in the early 1980s. Here is Lou Cannon describing the Reagan years and the Reagan administration's attitude towards poverty:Despite the sea of happy children’s faces that graced the “feel-good” commercials, poverty exploded in the inner cities of America during the Reagan years, claiming children as its principal victims. The reason for this suffering was that programs targeted to low-income families, such as AFDC, were cut back far more than programs such as Social Security. As a result of cuts in such targeted programs-including school lunches and subsidized housing-federal benefit programs for households with incomes of less than $10,000 a year declined nearly 8% during the Reagan first term while federal aid for households with more than $40,000 income was almost unchanged. Source: The Role of a Lifetime, by Lou Cannon, p. 516-17, Jul 2, 1991
Most shameful, many would feel, is the attempt to reduce food assistance in a time of rising poverty and deprivation. It's hard to see how a government or party could justify taking food assistance away from hungry adults and children, especially in a time of rising poverty. And yet this is precisely the effort we have witnessed in the past several months in revisions to the farm bill in the House of Representatives. In a recent post Dave Johnson debunks the myths and falsehoods underlying conservative attacks on the food stamp program in the House revision of the farm bill (link).
This tenor of our politics indicates an overt hostility and animus towards poor people. How is it possible to explain this part of contemporary politics on the right? What can account for this persistent and unblinking hostility towards poor people?
One piece of the puzzle seems to come down to ideology and a passionate and unquestioning faith in "the market". If you are poor in a market system, this ideology implies you've done something wrong; you aren't productive; you don't deserve a better quality of life. You are probably a drug addict, a welfare queen, a slacker. (Remember "slackers" from the 2012 Presidential campaign?)
Another element here seems to have something to do with social distance. Segments of society with whom one has not contact may be easier to treat impersonally and cruelly. How many conservative legislators or governors have actually spent time with poor people, with the working poor, and with poor children? But without exposure to one's fellow citizens in many different life circumstances, it is hard to acquire the inner qualities of compassion and caring that make one sensitive to the facts about poverty.
A crucial thread here seems to be a familiar American narrative around race. The language of welfare reform, abuse of food stamps, and the inner city is interwoven with racial assumptions and stereotypes. Joan Walsh's recent column in Salon (link) does a good job of connecting the dots between conservative rhetoric in the past thirty years and racism. She quotes a particularly prophetic passage from Lee Atwater in 1982 that basically lays out the transition from overtly racist language to coded language couched in terms of "big government".
Finally, it seems unavoidable that some of this hostility derives from a fairly straightforward conflict of group interests. In order to create programs and economic opportunities that would significantly reduce poverty, it takes government spending -- on income and food support, on education, on housing allowances, and on public amenities for low-income people. Government spending requires taxation; and taxation reduces the income and wealth of households at the top of the ladder. So there is a fairly obvious connection between an anti-poverty legislative agenda and the material interests of the privileged in our economy.
These are a few hypotheses about where the animus to the poor comes from. But there is an equally important puzzle about the political passivity of the poor. It is puzzling to consider why the millions of people who are the subject of this hostility do not create a potent electoral block that can force significant changes on our political discourse. Why are poor people in Texas, Florida, and other non-adopting states not voicing their opposition to the governors and legislators who are sacrificing their health to a political ideology in the current struggles over Medicaid expansion?
Two factors seem to be relevant in explaining the political powerlessness of the poor. One is the gerrymandering that has reached an exact science in many state legislatures in recent years, with unassailable majorities for the incumbent party. This means that poor people have little chance of defeating conservative candidates in congressional elections. And second are the resurgent efforts that the Supreme Court enabled last summer to create ever-more onerous voting requirements, once again giving every appearance of serving the purpose of limiting voter participation by poor and minority groups. So conservative incumbents feel largely immune from the political interests that they dis-serve.
This topic hasn't gotten the attention it deserves in studies of American politics. One exception is the work of Frances Fox Piven and Richard Cloward. In Poor People's Movements: Why They Succeed, How They Failthey offer a powerful interpretation of the challenge of bringing poverty into politics.
Most poor people are "working poor" and are not homeless. But there are hundreds of thousands of homeless people in the United States, and their living conditions are horrible. Here is a powerful and humanizing album that captures some of the situation of homeless people in America. Give US Your Poor is worth listening to. Here is the title clip of the album:
- Default Deniers - Paul Krugman
- Yellen Is Obama's Choice as Fed Chief - WSJ.com
- The pain of rebalancing global growth - Martin Wolf
- What Passes for Intellectual Argument at Harvard and WSJ - Dean Baker
- What Ended the Thirty Glorious Years? - Brad DeLong
- Economic Confidence Posts Fastest Drop Since 2008 Crisis - WSJ
- Expansionary sovereign creditworthiness shocks - John McHale
- Higher Education and the Opportunity Gap - Brookings Institution
- When the Treasury Runs Out of Cash - NYTimes.com
- The Midterms: Sam Wang Weighs In - Paul Krugman
- Big US data gaps start to unsettle market - FT.com
- System-wide exposures to emerging markets - vox
- Policy rules and borrowing degrees of freedom - Nick Rowe
- How to make Europe's incipient recovery durable - vox
- Stubborn Skills Gap in America’s Work Force - NYTimes.com
- A Fertilizer Oligopoly? - Tim Taylor
- Redistribution - Chris Dillow
- Monetary policy: A Federal Reserve clown show - The Economist
- Advanced Economies Strengthening, Emerging Weakening - Olivier Blanchard
- Monetary Policy and the Inflation Expectations Imp - Brad DeLong
Tuesday, October 08, 2013
A better title might have been "Makers, Takers, and the Real Immoral Behavior," or perhaps "Why are Republicans Putting Working Class Households at Risk?"
Credibility on the Line, by Tim Duy: I was pleased to see this morning that at least one other person was as appalled as me by the Jon Hilsenrath WSJ story this morning. Below I will cover some of the same ground as Ryan Avent, but the story deserves to be told more the once. Simply put, the Hilsenrath piece reveals that monetary policy and communication are in complete disarray and speaks poorly to the ability of the Federal Reserve to smoothly exit this period of extraordinary accommodation.
I have long suspected the Federal Reserve was increasingly biased against QE, suggesting the bar to tapering was much lower than would have been implied by the data flow. This is particularly the case with inflation, which has remained well below the Fed's official target. Moreover, the talk of tapering seemed ill-timed given the calendar. It was basically impossible to believe that the Fed could even begin to have sufficient evidence about the impact of fiscal tightening to justify tapering within the Fed's framework of "stronger and sustainable" before the final quarter of this year. The data flow simply didn't permit it.
Now we know, however, that a cadre of governors was pushing for the end of QE due to financial market concerns. From Hilsenrath:
Privately, Mr. Stein and two other governors, Jerome Powell and Elizabeth Duke , were a driving force behind efforts to limit the program's growth, according to people involved in the deliberations. All three supported Mr. Bernanke's efforts to charge up a weak economy but were uneasy about the program's potential side effects and the growing size of the Fed's holdings.
Mr. Stein, a Harvard finance professor, focused on the risk that the Fed might stoke a new credit bubble. Mr. Powell, a former Wall Street executive, talked at meetings about developing a "stopping rule" for the program to ensure the Fed's portfolio of securities didn't get too big. Ms. Duke, a former banker, was likewise wary of making an unlimited commitment.
So policy was in fact separated from the data flow. Or was it? Arguably, the Fed could be invoking the "costs and benefits" clause of the statement. But they never fully communicated that position. Why not? Perhaps they couldn't admit that the Federal Reserve had reached its policy limits. Or, as is more likely, the group formulating policy is not the same as the group communicating policy:
Twelve outspoken regional bank presidents often disagree publicly on Fed policy. Those based in Dallas, Philadelphia, Kansas City and Richmond have openly opposed the bond-buying program.
Six Washington-based Fed governors, in contrast, rarely speak out publicly against the chairman or dissent at meetings. Mr. Bernanke has regular contact with the these governors, who work down the hall from him. They have voted unanimously to continue the bond-buying program since it started a year ago.
The regional bank presidents are apparently clueless about the evolution of policy between meetings. They are simply not directly involved in the day-to-day evolution of policy. Worse yet, those that are involved choose to remain silent. They do not provide the regular speeches that would serve as a baseline for either market participants or regional bank presidents. Federal Reserve Chairman Ben Bernanke does not want to serve in this role (revealed preference), and Vice Chair Janet Yellen has gone to ground in the nomination process.
The latter opens up other can of worms. Where does Yellen stand on QE and tapering nowadays? Everyone assumes that she is anti-tapering at the moment, but we don't know her bar for tapering. And, as Avent points out, notice that two of these anti-QE governors were Obama appointees. Are more such nominees on the way? Is Yellen secretly such a nominee?
Also, this episode makes clear that the Fed cannot credibly commit to the irresponsible behavior necessary to summon what Brad DeLong calls the "inflation expectations imp." Back to Hilsenrath:
By April more officials, including the governors, were getting worried about terms like "QE-ternity" and "QE-infinity" floating around financial markets, which suggested some investors thought the program was boundless, according to people familiar with Fed discussions. The Fed officials thought the job market had made enough progress to warrant discussing an exit.
If you want to change expectations, you had to convince participants that policy was in fact boundless, that you were prepared to do whatever it takes. The talk of "QE-infinity" was a feature, not a bug of the policy. That's what was holding down the term premium and keeping a lid on interest rates. The instant everyone realized the Federal Reserve was clearly not committed to irresponsible policy, the term premium jumped up, creating a tightening of monetary conditions just as the economy was entering another budget battle.
If he Federal Reserve was genuinely committed to implementing the dual mandate in the context of the actual and forecast data, this should never have happened given the calendar. But it did. Why? Because apparently the Federal Reserve is moving to a triple mandate: Maximum employment, price stability, and financial stability. They just failed to communicate that last part.
Whether you agree with QE or not, several points seem evident at this point:
- Obama is stacking the Federal Reserve Board with anti-QE candidates.
- The anti-QE contingent has been heavily influenced by the asset bubbles of recent years and is concerned about the financial stability implications of monetary policy. The dual mandate is becoming a triple mandate.
- Communication is likely to remain confusing because the regional bank presidents are largely ignorant of what is happening on Constitution Ave. except in the immediate aftermath of an FOMC meeting.
- Points one to three above imply that the Federal Reserve cannot credibly commit to an irresponsible policy path such that inflation expectations even nudge higher. Notice that the Fed's own forecasts still have inflation reaching target from below, not above. They don't even believe they can push inflation higher. Why should you?
- The Fed desperately needs to rethink its communications strategy. They need some central view to anchor expectations. Arguably, this is the job for that guy with the beard. He just doesn't want to do it.
- If monetary policy is moving to a triple mandate, and consequently the Federal Reserve has reached the limits of what it is willing to do to support the economy, the emphasis needs to shift to fiscal stimulus in the near term. To the extent that in the long-run there remain concerns about the cost of social security and, more importantly, health care, such concerns would be much easier to address in the context of an economy operating at full employment.
- If fiscal policy is all we have left to push the economy back to full employment, we are in deep, deep trouble, because nothing but fiscal consolidation is coming out of this Congress or Administration.
Bottom Line: Federal Reserve communications are in disarray in the midst of a lack of internal consensus about either the costs and benefits of QE or the parameters for ending QE. This does not bode well for an institution that increasingly relies on forward guidance to implement policy.
America’s children are the silent victims of the Great Recession: The Great Recession has disrupted the lives of families and their children in an unprecedented way.
It has changed everyday life in some ways that can be measured by money, but in others that cannot, and at the extreme it has even led to a six-fold increase in the risk children will be physically abused.
Lost jobs, falling incomes, and foreclosures will likely compromise the capacity of children to become all that they can be, with the effects of the recession echoing not just across years, but also across generations.
Recessions do not normally figure into the way economists think about the factors determining the adult prospects of children. Unemployment spells are usually short, temporary events. In gauging the capacities of families to invest in and promote the capabilities of their children, it is important to look past the changes in incomes that result, and focus on the long-term, more permanent, resources available to parents. ...[more]...
- Are Austerians Slippery Because They Are Greeced? - Brad DeLong
- Blame the Deficit Scolds - Paul Krugman
- Probability Theory: synthesis of commerce and ethics - Tim Johnson
- Will Unconventional Policy Be the New Normal? - John C. Williams
- What are Conservative Experts Saying About he Debt Ceiling? - Rortybomb
- Borrowing from the Future — Except that We Aren't - Not Quite Noahpinion
- Trends in Interregional and International Trade - Paul Krugman
- Private debt, public debt, and continuity - Nick Rowe
- Should ECB minutes be published? - vox
- What’s News? - Liberty Street Economics
- On Knowing What You Don't Know - Paul Krugman
- Would Eurobonds be Enough? - Gloomy European Economist
- Reification - EconoSpeak
- Niall Ferguson Gets It Wrong Again - EconoSpeak
- A Regression "Estimator" that Minimizes MSE - Dave Giles
- International cooperation and central banks - vox
- Credibility All The Way Down - Paul Krugman
Monday, October 07, 2013
The social safety net for unemployed workers is weakening:
Why Isn't Poverty Falling? Weakening of Unemployment Insurance Is a Pivotal Factor, by Arloc Sherman, CBPP: The poverty rate remained unchanged at a high 15.0 percent in 2012, the third full year of an economic recovery that officially began in June 2009. One key reason why poverty has remained virtually frozen despite continued economic growth is the weakening of unemployment insurance (UI). ...
UI benefits kept 1.7 million ... jobless workers and their families ... above the poverty line in 2012... This was 600,000 fewer than in 2011 and 1.5 million fewer than in 2010... To be sure, the decline partly reflects a positive development: fewer workers are unemployed, so fewer are eligible for UI benefits. But that explains only a small part of the decline. ...
The chief reason for the decline is the dwindling likelihood that an unemployed worker will receive UI. The number of UI recipients for every 100 unemployed workers fell from 67 in 2010 to 57 in 2011 and 48 in 2012.
In fact, while the number of jobless workers has been falling, the number of jobless workers who receive no UI benefits has been rising and is higher now than at the bottom of the recession in 2009. ...
The share of unemployed workers getting UI fell for several reasons. First, the length and depth of the jobs slump has left many workers unable to find work before their UI benefits run out. Second, several states have cut the number of weeks of regular, state-funded UI benefits. A third and critical reason is that in 2012, Congress provided fewer weeks of federal UI benefits, which go to long-term unemployed workers. ...
What’s left of federal UI (the EUC program) is scheduled to expire at the end of December. If Congress does not extend it, all long-term unemployed workers receiving EUC will be cut off at that point, and other workers who qualify for UI will be limited to whatever their state’s regular UI program provides — 26 weeks in most states.
More new research:
Uncertainty Shocks are Aggregate Demand Shocks, by Sylvain Leduc and Zheng Liu: Abstract We present empirical evidence and a theoretical argument that uncertainty shocks act like a negative aggregate demand shock, which raises unemployment and lowers inflation. We measure uncertainty using survey data from the United States and the United Kingdom. We estimate the macroeconomic effects of uncertainty shocks in a vector autoregression (VAR) model, exploiting the relative timing of the surveys and macroeconomic data releases for identification. Our estimation reveals that uncertainty shocks accounted for at least one percentage point increases in unemployment in the Great Recession and recovery, but did not contribute much to the 1981-82 recession. We present a DSGE model to show that, to understand the observed macroeconomic effects of uncertainty shocks, it is essential to have both labor search frictions and nominal rigidities.
This is from Frank Levy at MIT:
I am attaching a paper co-authored with two former students that uses California higher ed data to make stylized calculations of the return and risk of pursuing a BA. The paper makes two main points.
Most studies of the rate of return to college use a best-case scenario in which students earn a degree with certainty in four years. More realistic calculations that account for students who take more than four years and students who drop out without a degree, etc. result in an average rate of return that is lower than it was in 2000 but still exceeds the interest rate on unsubsidized Stafford student loans – i.e. college remains a good investment by the normal criteria.
Most studies present an average rate of return without considering the investment’s risk. Over the last decade, rising tuition and deteriorating earnings for new college graduates (particularly at the bottom of the distribution) have increased the risk of pursuing a BA – e.g. the risk that a graduate at age 30 will have student loan payments that exceed 15% of their income. This growing risk is one explanation for increased skepticism about the value of a college degree despite the apparently high rate of return. It also underlines the importance of students becoming aware of the government’s income contingent loan repayment plans.
Radicalization and incompetence -- a dangerous combination:
The Boehner Bunglers, by Paul Krugman, Commentary, NY Times: The federal government is shut down, we’re about to hit the debt ceiling (with disastrous economic consequences), and no resolution is in sight. How did this happen?
The main answer ... is the radicalization of the Republican Party. ... But there’s one more important piece of the story. Conservative leaders are indeed ideologically extreme, but they’re also deeply incompetent. ...
To see what I’m talking about, consider the report in Sunday’s Times about the origins of the current crisis. Early this year, it turns out, some of the usual suspects — the Koch brothers, the political arm of the Heritage Foundation and others — plotted strategy in the wake of Republican electoral defeat. Did they talk about rethinking ideas that voters had soundly rejected? No, they talked extortion, insisting that the threat of a shutdown would induce President Obama to abandon health reform.
This was crazy talk. After all, health reform is Mr. Obama’s signature domestic achievement. You’d have to be completely clueless to believe that he could be bullied into giving up his entire legacy by a defeated, unpopular G.O.P. — as opposed to responding, as he has, by making resistance to blackmail an issue of principle. But the possibility that their strategy might backfire doesn’t seem to have occurred to the would-be extortionists. ...
Many people seem perplexed by the transformation of the G.O.P. into the political equivalent of the Keystone Kops — the Boehner Bunglers? ... But all of this was predictable.
It has been obvious for years that the modern Republican Party is no longer capable of thinking seriously about policy. Whether the issue is climate change or inflation, party members believe what they want to believe, and any contrary evidence is dismissed as a hoax, the product of vast liberal conspiracies. ...
Remember what happened in the 2012 election — not the fact that Mitt Romney lost, but the fact that all the political experts around him apparently had no inkling that he was likely to lose. ...
Everybody ... realizes that Mr. Obama can’t and won’t negotiate under the threat that the House will blow up the economy if he doesn’t — any concession at all would legitimize extortion as a routine part of politics. Yet Republican leaders are just beginning to get a clue, and so far clearly have no idea how to back down. Meanwhile, the government is shut, and a debt crisis looms. Incompetence can be a terrible thing.