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Friday, February 14, 2014

Links for 02-14-2014

    Posted by on Friday, February 14, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (60) 

    Thursday, February 13, 2014

    Debt and Growth: There is No Magic Threshold

    New paper from the IMF:

    Debt and Growth: Is There a Magic Threshold?, by Andrea Pescatori ; Damiano Sandri ; John Simon [Free Full text]: Summary: Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised. Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as countries with lower debt. Notwithstanding this, we find some evidence that higher debt is associated with a higher degree of output volatility.

    [Via Bruce Bartlett on Twitter.]

      Posted by on Thursday, February 13, 2014 at 02:49 PM in Academic Papers, Economics, Fiscal Policy | Permalink  Comments (9) 

      'The Econometric Evidence More or Less Supports' Ranting Leftists

      Paul Krugman:

      ... So, if you were a ranting leftist, you might say that political attitudes are shaped by class, and that ideological justifications for high inequality are just a veil for class interest. You might also say that “sound” economic policies are really just policies that redistribute income upwards. And it turns out that the econometric evidence more or less supports your rant.

      More here.

        Posted by on Thursday, February 13, 2014 at 11:56 AM in Economics, Income Distribution, Politics | Permalink  Comments (49) 

        "Money Makes People Right-Wing and Inegalitarian'

        Andrew Oswald has an excellent research record:

        Money makes people right-wing and inegalitarian, by Andrew J Oswald, Vox EU: Why are you right-wing, left-wing, or in the middle? You probably believe that you made a genuine, calm, and ethical choice. But what were the deep causal forces upon those political preferences?
        The scientific roots of people’s political views are poorly understood. One possibility (View 1) is that individuals’ attitudes to politics and redistribution are motivated by deeply moral views. Another possibility (View 2) – and this is perhaps some economists’ presumption -- is that voting choices are made out of self-interest and then come to be embroidered in the mind with a form of moral rhetoric. Testing between these two alternative theories is important intellectually. It is also inherently difficult. That is because so many of our attitudes as humans could stem from early in life and are close to being, in the eyes of the researcher, a ‘person fixed-effect’.
        In most data sets, rich people typically lean right. The fact that high income and right-wing views are positively correlated in a cross-section has been repeatedly documented in quantitative social science (recently, for example, by Brooks and Brady 1999 and Gelman et al. 2007 in US data, and by Evans and Tilley 2012 in British data). An analogous result is reported, using quite different kinds of methods, in Karabarbounis (2011). Economists such as Di Tella and MacCulloch (2005) have also studied political views and their implications, and other influences have been examined using causal evidence on political views (such as in Oswald and Powdthavee 2010 and Erikson and Stoker 2011).
        Fine – so the rich favour the right not the left. The difficulty is to know how to interpret this famous correlation of political science. Is it actually cause-and-effect, and if so in what direction? It would be nice to run a real randomised experiment where a treatment group are showered with cash, but that would be too expensive for social-science funding agencies. Hence it is necessary to look elsewhere for inspiration.
        New evidence from the lottery
        Our new study, Powdthavee and Oswald (2014), tries to get to the bottom of the issue. By looking at lottery winners through time, it provides longitudinal evidence consistent with the second, and some might argue more jaundiced, view, namely the View 2 of human beings. We exploit a panel data set in which people’s political attitudes are recorded annually. Our work builds upon an interesting cross-sectional examination by Doherty et al. (2007), which we learned about late in our own research.
        In our data set, many hundreds of individuals serendipitously receive significant lottery windfalls. We find that the larger is their lottery win, the greater is that person’s subsequent tendency, after controlling for other influences, to switch their political views from left to right. We also provide evidence that lottery winners are more sympathetic to the belief that ordinary people ‘already get a fair share of society’s wealth’.
        We are able to observe people before and after a win. Access to longitudinal information gives us advantages denied to most previous researchers on this topic. One reason this is important is because it seems plausible that personality might determine both the number of lottery tickets bought and the political attitudes of the person, and this might thereby lead to a possible spurious association between winning and right-leaning views. We provide, among other kinds of evidence, a simple graphical demonstration that winners disproportionately lean to the right having previously not been right-wing supporters.
        The formal study draws upon a nationally representative sample from the British population. In our regression equations we focus particularly upon a sub-sample of people (a fairly large proportion, given the lottery’s popularity in the UK) who have ever had a lottery win. Within this group, we are especially interested in the observed longitudinal changes in political allegiance of the bigger winners compared to the smaller winners. Our key information stems from 541 observations on lottery wins larger than £500 and up to approximately £200,000. Figure 1 gives a flavour of our results; fixed-effects equations are given in the formal paper and have more tightly defined error bars.

        Figure 1. Evidence on switchers: The percentage of people who switched right (conservative), and previously did not vote conservative, after a lottery win

        Oswald fig1 12 feb

        Notes: There are 48,177 observations of £0 win (or people who did not participate in the lottery); 5,675 observations of small win, i.e., £1-£499; and, in this particular sub-sample, 354 observations of medium-large wins, i.e. £500+. Four standard error bars (2 above and 2 below). These are raw, unadjusted means in the data set. Source: BHPS Data, Waves 7-18.
        The consequences of winning even a modest sum of money are fairly large – certainly a number of percentage points extra on your chances of favouring a Mrs Thatcher or a Ronald Regan. Thus money makes people right-wing and inegalitarian. Perhaps even you.
        Brooks, C and D Brady (1999), "Income, economic voting, and long-term political change in the US, 1952-1996", Social Forces, 77, 1339-1374.
        Di Tella, R and R MacCulloch (2005), "Partisan social happiness", Review of Economic Studies, 72, 367-393.
        Doherty D, A S Gerber and D P Green (2006), "Personal income and attitudes toward redistribution: A study of lottery winners", Political Psychology, 27, 441-458.
        Erikson, R S and L Stoker (2011) "Caught in the draft: The effects of Vietnam draft lottery status on political attitudes", American Political Science Review, 105, 221-237.
        Evans, G and J Tilley (2012), "How parties shape class politics: Explaining the decline of the class basis of political support", British Journal of Political Science, 42, 137-161.
        Gelman A, B Shor, J Bafumi and D Park (2007) Rich state, poor state, red state, blue state: What’s the matter with Connecticut? Quarterly Journal of Political Science, 2, 345-367.
        Karabarbounis, L (2011) "One dollar, one vote", Economic Journal, 121, 621-651.
        Oswald, A J and N Powdthavee (2010), "Daughters and left-wing voting", Review of Economics and Statistics, 92, 213-227.
        Powdthavee, N and A J Oswald (2014), "Does money make people right-wing and inegalitarian: A longitudinal study of lottery winners", Warwick University Economics Working Paper 1039, February.

          Posted by on Thursday, February 13, 2014 at 12:24 AM in Economics, Politics | Permalink  Comments (83) 

          Links for 02-13-2014

            Posted by on Thursday, February 13, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (54) 

            Wednesday, February 12, 2014

            'Is Increased Price Flexibility Stabilizing? Redux'

            I need to read this:

            Is Increased Price Flexibility Stabilizing?, by Redux Saroj Bhattarai, Gauti Eggertsson, and Raphael Schoenle, NBER Working Paper No. 19886 February 2014 [Open Link]: Abstract We study the implications of increased price flexibility on output volatility. In a simple DSGE model, we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained. We estimate a medium-scale DSGE model using post-WWII U.S. data. In a counterfactual experiment we find that if prices and wages are fully flexible, the standard deviation of annualized output growth more than doubles.

              Posted by on Wednesday, February 12, 2014 at 04:08 PM in Academic Papers, Economics, Macroeconomics | Permalink  Comments (18) 

              'The Impact of Unemployment Duration on Compensation Growth'

              Why has the Phillips curve "generally underpredicted compensation growth since 2009"?:

              The Long and Short of It: The Impact of Unemployment Duration on Compensation Growth, by M. Henry Linder, Richard Peach, and Robert Rich:  How tight is the labor market? The unemployment rate is down substantially from its October 2009 peak, but two-thirds of the decline is due to people dropping out of the labor force. In addition, an unusually large share of the unemployed has been out of work for twenty-seven weeks or more—the long-duration unemployed. These statistics suggest that there remains a great deal of slack in U.S. labor markets, which should be putting downward pressure on labor compensation. Instead, compensation growth has moved modestly higher since 2009. A potential explanation is that the long-duration unemployed exert less influence on wages than the short-duration unemployed, a hypothesis we examine here. While preliminary, our findings provide some support for this hypothesis and show that models taking into account unemployment duration produce more accurate forecasts of compensation growth. ...

                Posted by on Wednesday, February 12, 2014 at 08:21 AM in Economics, Unemployment | Permalink  Comments (44) 

                Fed Watch: Yellen's Debut as Chair

                Tim Duy:

                Yellen's Debut as Chair, by Tim Duy: Janet Yellen made her first public comments as Federal Reserve Chair in a grueling, nearly day-long, testimony to the House Financial Services Committee. Her testimony made clear that we should expect a high degree of policy continuity. Indeed, she said so explicitly. The taper is still on, but so too is the expectation of near-zero interest rates into 2015. Data will need to get a lot more interesting in one direction or the other for the Fed to alter from its current path.
                In here testimony, Yellen highlighted recent improvement in the economy, but then turned her attention to ongoing underemployment indicators:
                Nevertheless, the recovery in the labor market is far from complete. The unemployment rate is still well above levels that Federal Open Market Committee (FOMC) participants estimate is consistent with maximum sustainable employment. Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high. These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.
                A visual reminder of the issue:


                This is a straightforward reminder of the Fed's view that the unemployment rate overstates improvement in labor markets and thus should be discounted when setting policy. Consequently, policymakers believe they have room to hold interest rates at rock bottom levels for an extended period. To be sure, there are challenges to this view, both internally and externally. For instance, Philadelphia Federal Reserve President Charles Plosser today reiterated his view that asset purchases should end soon and also fretted that the Fed will be behind the curve with respect to interest rates. Via Bloomberg:
                “I’m worried that we’re going to be too late” to raise rates, Plosser told reporters after a speech at the University of Delaware in Newark. “I don’t want to chase the market, but we may have to end up having to do that” if investors act on anticipation of higher rates.
                That remains a minority view at the Fed. Matthew Boesler at Business Insider points us at UBS economists Drew Matus and Kevin Cummins, who challenge Yellen's belief that the long-term unemployed will keep a lid on inflation:
                We do not view the long-term unemployed as necessarily "ready for work" and therefore believe that their ability to restrain wage pressures is limited. In other words, the unusually high number of long-term unemployed suggests that the natural rate of unemployment has increased. Indeed, when we have tested various unemployment rates' ability to predict inflation we found that the standard unemployment rate outperforms all other broader measures reported by the Bureau of Labor Statistics. Although we disagree with Yellen regarding the long-term unemployed, our research does suggest that, perhaps unsurprisingly, the number of part-timers does have an impact on restraining inflation.
                I tend to think that we will not see clarity on this issue until unemployment approaches even nearer to 6%. That level has traditionally been associated with rising wages pressures in the past: 

                NfpD020714The Fed would likely see a faster pace of wage gains as lending credence to the story that the drop in labor force participation is mostly a structural story. At that point the Fed may begin rethinking the expected path of interest rates, depending on their interest in overshooting. But in the absence of such early signs of inflationary pressures, the Fed will be content to raise rates only gradually.

                With regards to monetary policy, Yellen reminds everyone that she helped design the current policy:
                Turning to monetary policy, let me emphasize that I expect a great deal of continuity in the FOMC's approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability.
                Yellen makes clear that the current pace of tapering is likely to continue:
                If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.
                Later, during the question and answer period, Yellen does however, open the door for a pause in the taper. Via Pedro DaCosta and Victoria McGrane at the Wall Street Journal:
                “I think what would cause the committee to consider a pause is a notable change in the outlook,” Ms. Yellen told lawmakers...
                ...“I was surprised that the jobs reports in December and January, the pace of job creation, was running under what I had anticipated. But we have to be very careful not to jump to conclusions in interpreting what those reports mean,” Ms. Yellen said. Recent bad weather may have been a drag on economic activity, she added, saying it would take some time to get a true sense of the underlying trend.
                The January employment report was something of a mixed bag, with the unemployment rate edging down further to 6.6% while nonfarm payrolls disappointed again (!!!!) with a meager gain of 113k. That said, I still do not believe this should dramatically alter your perception of the underlying pace of activity. Variance in nonfarm payrolls is the norm, not the exception:


                Her disappointment in the numbers raises the possibility - albeit not my central case - that another weak number in the February report could prompt a pause. My baseline case, however, is that even if it was weak, it would not effect the March outcome but instead, if repeated again, the outcome of the subsequent meeting. Remember, the Fed wants to end asset purchases. As long as they believe forward guidance is working, they will hesitate to pause the taper.
                Yellen was not deterred by the recent turmoil in emerging markets:
                We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook. We will, of course, continue to monitor the situation.
                Yellen reiterates the current Evans rule framework for forward guidance, giving no indication that the thresholds are likely to be changed. Jon Hilsenrath at the Wall Street Journal interprets this to mean that when the 6.5% unemployment rate threshold is breached, the Fed will simply switch to qualitative forward guidance. I tend to agree.
                Bottom Line: Circumstances have not change sufficiently to prompt the Federal Reserve deviate from the current path of policy.

                  Posted by on Wednesday, February 12, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (22) 

                  Links for 02-12-2014

                    Posted by on Wednesday, February 12, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (94) 

                    Tuesday, February 11, 2014

                    Keynesian Economics in Abnormally Slow Recoveries

                    We are, as they say, live:

                    Keynesian Economics in Abnormally Slow Recoveries, by Mark Thoma: In theory, Keynesian stabilization policy should “shave the peaks and fill the valleys.” That is, when the economy falls into a recession the government should use deficit spending to lift the economy back towards the full employment level. It should then pay for the policy – increase revenues or reduce spending – during boom periods when the economy is overheated and needs to be slowed down. But what if, like now, there is no boom following the bust? How should we pay for the programs that were put into place during the recession in that case? ...

                      Posted by on Tuesday, February 11, 2014 at 08:19 AM in Economics, Fiscal Policy, Fiscal Times | Permalink  Comments (73) 

                      'Enslave the Robots and Free the Poor'

                      Martin Wolf on the "rise of intelligent machines":

                      Enslave the robots and free the poor, by Martin Wolf, Commentary, FT: ...we must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today’s triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily. What else is the true goal of the vast increases in prosperity we have created?
                      ...we will need to redistribute income and wealth. ... The revenue could come from taxes on bads (pollution, for example) or on rents (including land and, above all, intellectual property). Property rights are a social creation. The idea that a small minority should overwhelming benefit from new technologies should be reconsidered. ...

                        Posted by on Tuesday, February 11, 2014 at 08:10 AM in Economics, Income Distribution, Technology | Permalink  Comments (36) 

                        'Inequality and Indignity'

                        Paul Krugman:

                        Inequality and Indignity: ... Let’s talk ... about dignity.
                        It’s all very well to talk vaguely about the dignity of work; but the idea that all workers can regard themselves as equal in dignity despite huge disparities in income is just foolish. When you’re in a world where 40 money managers make as much as 300,000 high school teachers, it’s just silly to imagine that there will be any sense, on either side, of equal dignity in work. ...
                        Now, one way to enhance the dignity of ordinary workers is through, yes, entitlements: make it part of their birthright, as American citizens, that they get certain basics such as a minimal income in retirement, support in times of unemployment, and essential health care.
                        But the Republican position is that none of these things should be provided, and that if somehow they do get provided, they should come only at the price of massive government intrusion into the recipient’s personal lives — making sure that you don’t take advantage of health reform to work less, requiring that you undergo drug tests to receive unemployment benefits or food stamps, and so on.
                        In short, while conservatives may preach the dignity of work, their actual agenda is to deny lower-income workers as much dignity — and personal freedom — as possible.

                          Posted by on Tuesday, February 11, 2014 at 07:56 AM in Economics, Income Distribution, Social Insurance | Permalink  Comments (50) 

                          Links for 02-11-2014

                            Posted by on Tuesday, February 11, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (75) 

                            Monday, February 10, 2014

                            When Will the Fed End Its Zero Rate Policy?

                            In case you were wondering:

                            When Will the Fed End Its Zero Rate Policy?, by Jens Christensen, FRBSF Economic Letter: The severe shock of the 2007–08 financial crisis prompted the Federal Reserve to quickly lower its target for its primary policy rate, the overnight federal funds rate, near to zero, where it has remained since. Despite this highly stimulatory stance of conventional monetary policy, the economic recovery has been sluggish and inflation has been low. For that reason, the Federal Open Market Committee (FOMC), the Fed’s policy body, has provided additional monetary stimulus by using unconventional measures to push down longer-term interest rates. One element of this unconventional policy has been large-scale asset purchases (LSAPs). Another has been public guidance about how long the FOMC expects to keep its federal funds rate target exceptionally low. The effect of this forward guidance depends on how financial market participants interpret FOMC communications, in particular when they expect the Fed to exit from its near-zero rate policy, a shift often called “liftoff” (see Bauer and Rudebusch 2013).
                            This Economic Letter examines recent research estimating when bond investors expect liftoff to take place (see Christensen 2013). This research suggests that bond investor expectations for the date of exit have moved forward notably in recent months, probably because they anticipated the FOMC’s decision at its December 2013 meeting to cut back large-scale asset purchases. This research suggests that market participants expect the FOMC to start raising rates in the spring of 2015, but the exact timing is highly uncertain.
                            Unconventional monetary policy 
                            Unconventional monetary policy designed to put downward pressure on longer-term interest rates has two aspects: large-scale asset purchases and forward guidance, that is, Fed communications about its expectations for future policy. LSAPs affect longer-term interest rates by shifting the term premium, the higher yield investors demand in exchange for holding a longer-duration debt security (see Gagnon et al. 2011). LSAPs were first announced in late 2008. The most recent program, initiated in September 2012, originally involved purchasing $40 billion in mortgage-backed securities (MBS) every month. It expanded in December 2012 to include $45 billion in monthly Treasury security purchases. The FOMC stated that it intended to continue the program until the outlook for the labor market improved substantially, provided inflation remained stable. Since then, the labor market has improved and the unemployment rate has dropped. As a result, the FOMC decided at its December 2013 meeting to reduce the pace at which it adds to its asset holdings to $75 billion per month.
                            Forward guidance affects longer-term rates by influencing market expectations about the level of short-term interest rates over an extended period. In August 2011, the FOMC stated that it intended to keep its federal funds rate target near zero until mid-2013, the first time it projected a liftoff date. More recently, Fed policymakers have indicated that they anticipate keeping the federal funds rate at that exceptionally low level at least as long as the unemployment rate remains above 6½%, inflation one to two years ahead is projected to be no more than one-half percentage point above the FOMC’s 2% longer-run target, and longer-term inflation expectations remain in check. In December 2013, the FOMC added that, based on current projections, it expects to maintain the zero interest rate policy well past when the unemployment rate falls below 6½%.

                            Figure 1
                            FOMC member projections of appropriate policy rate

                            FOMC member projections of appropriate policy rate
                            FOMC projections versus Treasury market data
                            Forward guidance also includes a set of projections on future federal funds rate levels that each FOMC participant makes four times per year, released in conjunction with the FOMC statement. Based on their views of appropriate monetary policy, these policymakers also forecast overall inflation; core inflation, which excludes volatile food and energy prices; the unemployment rate; and output growth. Figure 1 shows FOMC median, 25th percentile, and 75th percentile federal funds rate projections made in September and December. Only minor changes occurred from September to December.

                            Figure 2
                            Treasury yield curves on three dates in 2013

                            Treasury yield curves on three dates in 2013
                            The relatively stable FOMC projections stand in contrast to changes in the U.S. Treasury bond market over the same period. Figure 2 shows the Treasury yield curve, that is, yields on the full range of Treasury maturities, on the days of the September and December 2013 FOMC meetings as well as the December 27 reading. (The research is based on weekly Treasury yields recorded on Fridays. December 27 was the last Friday in 2013.) Medium- and longer-term Treasury yields increased notably during that period.
                            Other analysis suggests that much of this increase in longer-term Treasuries reflected an increase in the term premium. But did the rise in longer-term rates also involve a shift in the market’s views about expected short-term rates that seems out-of-step with FOMC guidance? To address this question, I use an innovative model of the Treasury yield curve developed in Christensen (2013) that delivers a distribution of estimates derived from Treasury security prices for the exit from the zero interest rate policy.
                            A model of the Treasury yield curve
                            In this model, it is assumed that the economy can be in one of two states: a normal state like that which prevailed before December 2008, and a state like the current one in which the monetary policy rate is stuck at its lower bound near zero. In the normal state, yield curve variation is captured by three factors that are not directly observable, but can be derived from the underlying data: the general level of rates; the slope of the yield curve; and the curvature, or shape, of the yield curve. Furthermore, it is assumed that, in the normal state, investors consider the possibility of the policy rate reaching zero to be negligible. This assumption implies that the transition to the zero-bound state that occurred in December 2008 was a surprise and did not affect bond prices before that, when the economy was in the normal state.
                            The zero-bound state is characterized by two key features. First, the shortest rate in the Treasury bond market is assumed to be constant at zero. Second, the state is viewed by bond investors and monetary policy makers as undesirable and temporary. They believe that the FOMC would like to return to normal as quickly as possible, consistent with the Fed’s price stability and maximum employment mandates. This implies that news about the U.S. economy prompts bond investors to revise their views about when the FOMC is likely to exit from its zero interest rate policy. In the model, that exit defines the transition from the zero-bound state to the normal state of the economy. One component of the variation of Treasury bond yields in the zero-bound state is how probable bond investors believe a return to the normal state to be. However, because bond investors are forward looking and consider the possibility of such a shift when they trade, the three factors that affect the yield curve in the normal state continue to affect it in the zero-bound state.

                            Figure 3
                            Intensity of exit time from the zero interest rate policy

                            Intensity of exit time from the zero interest rate policy
                            To derive estimates of the date of the FOMC’s first federal funds rate increase, I use weekly Treasury yields starting in January 1985 of eight maturities ranging from three months to ten years. The novel feature of the model I use is consideration of the implicit probability bond investors attach to a transition back to the normal state. This allows the entire distribution of probable dates of exit from the zero-bound state to be examined. Figure 3 shows the likelihood of leaving the zero-bound state at any point in time as of December 27, 2013. The exit date distribution is heavily skewed so that very late exit times are significantly probable. Still, the median exit date is in March 2015. In other words, the economy is just as likely to remain in the zero-bound state at that date as to have exited before it. One takeaway is the considerable level of uncertainty about the exit date. The model suggests that there is about a one-in-three chance of remaining in the zero-bound state past 2015.

                            Figure 4
                            Median exit time from the zero interest rate policy

                            Median exit time from the zero interest rate policy
                            Figure 4 shows the variation in the estimated median exit time since December 16, 2008, when the economy shifted to the zero-bound state. Included are five dates from 2009 to 2012 of major FOMC announcements regarding LSAPs or guidance about future monetary policy. The estimated median exit time from the zero-bound state moved notably later in the weeks after each announcement, except when the FOMC extended its forward guidance in January 2012. This suggests that unconventional policies derive part of their effect by sending signals that bond market participants interpret to mean that the federal funds rate will remain at its zero bound longer than previously expected (see Christensen and Rudebusch 2012).
                            Consistent with these observations, Figure 4 also shows that the estimated median exit date from the near-zero federal funds rate moved forward significantly between the September and December 2013 FOMC meetings as market participants began anticipating the Fed’s decision to scale back LSAPs. According to the model, in anticipating the decision to trim LSAPs, the market also thought the first federal funds rate hike might come sooner than previously anticipated. This latter change in expectations held even though the FOMC’s projections of the appropriate future fed funds rate hardly changed from September to December. As of December 27, 2013, the median exit time for the market was estimated at one year and three months, which implies that the odds of keeping the near-zero interest rate policy past March 2015 are identical to the odds of exiting before that date.
                            A novel model of the Treasury yield curve allows an assessment of investor expectations of the exit date from the Fed’s near-zero interest rate policy. The results suggest that, as of the end of 2013, the expected exit date has moved forward notably since September 2013 despite only minor changes between September and December in FOMC participants’ projections of appropriate future monetary policy. However, the estimated distribution of the probable exit date is skewed so that the likelihood of an earlier or later exit is sizable. This finding is consistent with the inherent uncertainty about the outlook for inflation and unemployment, the economic variables that guide FOMC rate decisions.
                            Bauer, Michael, and Glenn Rudebusch. 2013. “Expectations for Monetary Policy Liftoff.” FRBSF Economic Letter 2013-34 (November 18).
                            Christensen, Jens H. E. 2013. “A Regime-Switching Model of the Yield Curve at the Zero Bound.” FRB San Francisco Working Paper 2013-34.
                            Christensen, Jens H. E., and Glenn D. Rudebusch. 2012. “The Response of Interest Rates to U.S. and U.K. Quantitative Easing.” Economic Journal 122, pp. F385–F414.
                            Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack. 2011. “The Financial Market Effects of the Federal Reserve’s Large-Scale Asset Purchases.” International Journal of Central Banking 7(1), pp. 3–43.
                            [Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.]

                              Posted by on Monday, February 10, 2014 at 10:54 AM in Economics, Monetary Policy | Permalink  Comments (14) 

                              'Our Military is Irrationally Large'

                              James Kwak:

                              Why We Have a Debt Problem, Part 23: So, we have eleven aircraft carrier groups. No other country in the world has more than one. Everyone who has looked at the issue has agreed that we could do with fewer than eleven while still achieving our national security goals: Bush/Obama Defense Secretary Robert Gates, Obama Defense Secretary Chuck Hagel, and think tanks on the left and the right.
                              But apparently we can’t retire even one–even though we would save not just the annual operating costs, but most of the $4.7 billion it will cost to refurbish over the next five years. Instead, the Obama Administration has promised the Pentagon that it can simply have more money and not comply with the spending limits set in the 2011 debt ceiling agreement (and modified by Murray-Ryan).
                              Why? Well, legislators from states with Navy bases don’t want to reduce the Navy’s budget. More important, though, few people want to be for a smaller military–even when our military is irrationally large, given our other national priorities (healthcare, education, infrastructure, etc.). Instead of asking whether we need eleven times as many aircraft carriers as any other country, defenders insist that any reduction is a sign of weakness–conveniently overlooking the fact that we used to have fifteen carriers, and the world hasn’t ended.  ...

                                Posted by on Monday, February 10, 2014 at 09:10 AM in Economics, Fiscal Policy | Permalink  Comments (56) 

                                Paul Krugman: Writing Off the Unemployed

                                Why have politicians turned their backs on the unemployed?:

                                Writing Off the Unemployed, by Paul Krugman, Commentary, NY Times: Back in 1987 my Princeton colleague Alan Blinder published a very good book titled “Hard Heads, Soft Hearts.” It was, as you might guess, a call for tough-minded but compassionate economic policy. Unfortunately, what we actually got — especially, although not only, from Republicans — was the opposite. And it’s difficult to find a better example of the hardhearted, softheaded nature of today’s G.O.P. than ... the filibuster to block aid to the long-term unemployed.
                                What do we know about long-term unemployment in America?
                                First, it’s still at near-record levels. ... Yet extended unemployment benefits, which went into effect in 2008, have now been allowed to lapse. As a result, few of the long-term unemployed are receiving any kind of support.
                                Second, if you think the typical long-term unemployed American is one of Those People — nonwhite, poorly educated, etc. — you’re wrong... College graduates ... are actually a bit more likely than others to join the ranks of the long-term unemployed. ...
                                Third, in a weak job market long-term unemployment tends to be self-perpetuating, because employers in effect discriminate against the jobless. ...
                                What all of this suggests is that the long-term unemployed are mainly ... ordinary American workers who had the bad luck to lose their jobs ... at a time of extraordinary labor market weakness...
                                So how can politicians justify cutting off modest financial aid to their unlucky fellow citizens?
                                Some Republicans justified last week’s filibuster with the tired old argument that we can’t afford to increase the deficit. Actually, Democrats paired the benefits extension with measures to increase tax receipts. But in any case this is a bizarre objection at a time when federal deficits are not just falling, but clearly falling too fast, holding back economic recovery.
                                For the most part, however, Republicans justify refusal to help the unemployed by asserting that ... people aren’t trying hard enough to find jobs, and that extended benefits are part of the reason..., a fantasy at odds with all the evidence. ...
                                And this imperviousness to evidence goes along with a stunning lack of compassion. .... Being unemployed is always presented as a choice, as something that only happens to losers who don’t really want to work. ...
                                The result is that millions of Americans have in effect been written off — rejected by potential employers, abandoned by politicians whose fuzzy-mindedness is matched only by the hardness of their hearts.

                                  Posted by on Monday, February 10, 2014 at 12:24 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (56) 

                                  Links for 02-10-2014

                                    Posted by on Monday, February 10, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (46) 

                                    Sunday, February 09, 2014

                                    Who Benefits from Benefits?

                                    Chris Dillow:

                                    Who benefits from benefits?: In the "debate" about welfare benefits, there's one point which is underweighted but so obvious that I'm embarrassed to mention it - that some form of welfare is beneficial not just to its recipients, but to capitalists.
                                    Rightists like to point out - correctly - that the burden of taxes doesn't necessarily fall upon those who nominally pay it: corporation tax, for example, is paid by workers and not just capitalists.
                                    But just as there's tax incidence, so there is benefit incidence; the benefits of benefits don't flow merely to their nominal recipients. ...

                                      Posted by on Sunday, February 9, 2014 at 08:52 AM in Economics, Social Insurance | Permalink  Comments (79) 

                                      Links for 02-09-2014

                                        Posted by on Sunday, February 9, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (87) 

                                        Saturday, February 08, 2014

                                        'The Media's Disastrous Coverage of the CBO Report'

                                          Posted by on Saturday, February 8, 2014 at 12:33 AM in Economics, Health Care, Unemployment, Video | Permalink  Comments (49) 

                                          Job Polarization and Middle-Class Workers’ Wages

                                          The decline of the middle class:

                                          Job polarization and the decline of middle-class workers’ wages, by Michael Boehm, Vox EU: The decline of the middle class has come to the forefront of debate in the US and Europe in recent years. This decline has two important components in the labour market. First, the number of well-paid middle-skill jobs in manufacturing and clerical occupations has decreased substantially since the mid-1980s. Second, the relative earnings for workers around the median of the wage distribution dropped over the same period, leaving them with hardly any real wage gains in nearly 30 years.
                                          Job polarization and its cause
                                          Pioneering research by Autor, Katz, and Kearney (2006), Goos and Manning (2007), and Goos, Manning, and Salomons (2009) found that the share of employment in occupations in the middle of the skill distribution has declined rapidly in the US and Europe. At the same time the share of employment at the upper and lower ends of the occupational skill distribution has increased substantially. Goos and Manning termed this phenomenon “job polarization” and it is depicted for US workers in Figure 1.

                                          Figure 1. Changes in US employment shares by occupations since the end of the 1980s


                                          Notes: The chart depicts the percentage point change in employment in the low-, middle- and high-skilled occupations in the National Longitudinal Survey of Youth (NLSY) and the comparable years and age group in the more standard Current Population Survey (CPS). The high-skill occupations comprise managerial, professional services and technical occupations. The middle-skill occupations comprise sales, office/administrative, production, and operator and laborer occupations. The low-skill occupations include protective, food, cleaning and personal service occupations.
                                          In an influential paper, Autor, Levy, and Murnane (2003) provide a compelling explanation: they found that middle-skilled manufacturing and clerical occupations are characterized by a high intensity of procedural, rule-based activities which they call “routine tasks”. As it happens, these routine tasks can relatively easily be coded into computer programs.
                                          Therefore, the rapid improvements in computer technology over the last few decades have provided employers with ever cheaper machines that can replace humans in many middle-skilled activities such as bookkeeping, clerical work and repetitive production tasks. These improvements in technology also enable employers to offshore some of the routine tasks that cannot be directly replaced by machines (Autor 2010).
                                          Moreover, cheaper routine tasks provided by machines complement the non-routine abstract tasks that are intensively carried out in high-skill occupations. For example, data processing computer programs strongly increased the productivity of highly-skilled professionals. Machines also do not seem to substitute for the non-routine manual tasks that are intensively carried out in low-skill occupations. For example, computers and robots are still much less capable of driving taxis and cleaning offices than humans. Thus, the relative economy-wide demand for middle-skill routine occupations has declined substantially.
                                          This routinization hypothesis, due to Autor, Levy, and Murnance, has been tested in many different settings and it is widely accepted as the main driving force of job polarization.
                                          The effect of job polarization on wages
                                          Around the same time as job polarization gathered steam in the US, the distribution of wages started polarizing as well. That is, real wages for middle-class workers stagnated while earnings of the lowest and the highest percentiles of the wage distribution increased. This is depicted in Figure 2.

                                          Figure 2. Percentage growth of the quantiles of the US wage distribution since the end of the 1980s


                                          Notes: The chart depicts the change in log real wages along the quantiles of the wage distribution between the two cohorts for the NLSY and the comparable years and age group in the CPS.

                                          It thus seems natural to think that the polarization of wages is just another consequence of the declining demand for routine tasks. However, there exists some evidence that is not entirely consistent with this thought: virtually all European countries experienced job polarization as well, yet most of them haven’t seen wage polarization but rather a continued increase in inequality across the board. Moreover, other factors that may have generated wage polarization in the US have been proposed (e.g. an increase in the minimum wage, de-unionization, and ‘classical’ skill-biased technical change).

                                          In my recent paper I try to establish a closer link between job polarization and workers’ wages (Boehm 2013). In particular, I ask three interrelated questions:

                                          • First, have the relative wages of workers in middle-skill occupations declined as should be expected by the routinization hypothesis?
                                          • Second, have the relative wage rates paid per ‘constant unit of skill’ in the middle-skill occupations dropped with polarization?
                                          • Third, can job polarization explain the changes in the overall wage distribution?

                                          I answer these questions by analyzing two waves of a representative survey of teenagers in the US carried out in 1979 and 1997. The survey responses provide detailed and multidimensional characteristics of these young people that influence their occupational choices and wages when they are 27 years old in the end of the 1980s and the end of the 2000s.

                                          Using these characteristics, I compute the probabilities of workers in the 1980s and today choosing middle-skill occupations and then compare the wages associated with these probabilities over time. My empirical strategy relies on predicting the occupations that today’s workers would have chosen had they lived in the 1980s and then comparing their wages to those of workers who actually chose these occupations at that time.

                                          The results from this approach show a substantial negative effect of job polarization on middle-skill workers. The positive wage effect associated with a 1% higher probability of working in high-skill jobs (compared to middle-skill jobs) almost doubled between the 1980s and today. The negative wage effect associated with a 1% higher probability of working in low-skill services jobs compared with middle-skill jobs attenuated by over a third over the same period.

                                          I find similar results when controlling for college education, which is arguably a measure of absolute skill. This suggests that it is indeed the relative advantage in the middle-skill occupations for which the returns in the labor market have declined.

                                          In the next step of my analysis, I estimate the changes in relative market wage rates that are offered for a constant unit of skill in each of the three occupational groups. Again, the position of the middle-skill occupations deteriorates substantially: the wage rates paid in the high-skill occupations increased by 20% compared to the middle while the wage rate in the low-skill occupations rose by 30%. This decline in the relative attractiveness of working in middle-skill occupations is consistent with the massive outflow of workers from these jobs.

                                          Finally, I check what effect the changing prices of labour may have had on the overall wage distribution and whether they can explain the wage polarization that we observe in the US. Figure 3 shows that the change in the wage distribution due to these price effects reproduces the overall distribution reasonably well in the upper half while it fails to match the increase of wages for the lowest earners compared to middle earners.

                                          Figure 3. Actual and counterfactual changes in the US wage distribution


                                          Notes: The chart plots the actual and counterfactual changes in the wage distribution in the NLSY when workers in 1980s are assigned the estimated price changes in their occupations.
                                          At first glance, this is surprising given the strong increase in relative wage rates for low-skill work and the increase in the wages of workers in low-skill occupations. The reason is that these workers now move up in the wage distribution, which lifts not only the (low) quantiles where they started out but also the (middle) quantiles where they end up. The inverse happens for workers in middle-skill occupations but with the same effect on the wage distribution.
                                          Despite the above findings, my paper does not provide the last word about the effect of job polarisation on the bottom of the wage distribution. This is because, for example, my estimates do not take into account potential additional wage effects from workers moving out of the middle-skill occupations into low-skill occupations. Therefore, we cannot yet finally assess the role that job polarisation versus policy factors (such as the raise of the minimum wage) played on the lower part of the wage distribution in the US.
                                          However, what emerges unambiguously from my work is that routinization has not only replaced middle-skill workers’ jobs but also strongly decreased their relative wages. Policymakers who intend to counteract these developments may want to consider the supply side: if there are investments in education and training that help low and middle earners to catch up with high earners in terms of skills, this will also slow down or even reverse the increasing divergence of wages between those groups. In my view, the rising number of programs that try to tackle early inequalities in skill formation are therefore well-motivated from a routinization-perspective.
                                          Acemoglu, D and D H Autor (2011), “Skills, Tasks and Technologies: Implications for Employment and Earnings”, in Handbook of Labor Economics edited by Orley Ashenfelter and David Card, Vol. 4B, Ch. 12, 1043-1171.
                                          Autor, D H (2010), "The polarization of job opportunities in the US labour market: Implications for employment and earnings", Center for American Progress and The Hamilton Project.
                                          Autor, D H and D. Dorn (2013), “The Growth of Low-Skill Service Jobs and the Polarization of the US Labor Market”, The American Economic Review, 103(5), 1553–97.
                                          Autor D H, L F Katz, and M S Kearney (2006), "The Polarization of the US Labor Market", The American Economic Review 96.2, 189-194.
                                          Autor D H, F Levy and R Murnane (2003), ‘The Skill Content of Recent Technological Change: An Empirical Exploration’, Quarterly Journal of Economics 118(4): 1279-1333.
                                          Boehm, M J (2013), “The Wage Effects of Job Polarization: Evidence from the Allocation of Talents”, Working Paper.
                                          Goos, M and A Manning (2007), "Lousy and lovely jobs: The rising polarization of work in Britain", The Review of Economics and Statistics 89.1, 118-133.
                                          Goos M, A Manning and A Salomons (2009), “Explaining Job Polarization in Europe: The Roles of Technology, Globalization and Institutions”, American Economic Review Papers and Proceedings 99(2): 58-63
                                          Michaels G, A Natraj, and J Van Reenen (2013), “Has ICT Polarized Skill Demand? Evidence from Eleven Countries over 25 Years”, forthcoming in Review of Economics and Statistics; earlier version available as CEP Discussion Paper No. 987 (http://cep.lse.ac.uk/pubs/download/dp0987.pdf).
                                          Spitz-Oener, A (2006), "Technical change, job tasks, and rising educational demands: Looking outside the wage structure", Journal of Labor Economics 24.2, 235-270.
                                          1 This figure and the ones below are based on two representative samples for 27 year old males in the United States (the National Longitudinal Survey of Youth (NLSY) and the Current Population Survey (CPS)). For qualitatively similar statistics on all prime age workers, refer to Acemoglu & Autor (2011).
                                          2 Examples of tests of the routinization hypothesis include Michaels et al (2013) who find that industries with faster growth of information and communication technology had greater decreases in the relative demand for middle educated workers; Spitz-Oener (2006) who shows that job tasks have become more complex in occupations that rapidly computerized; and Autor and Dorn (2013) who show that local labour markets that specialised in routine tasks adopted information technology faster and experienced stronger job polarisation.
                                          3 For the details of this estimation, please refer to the paper.

                                            Posted by on Saturday, February 8, 2014 at 12:24 AM in Economics, Income Distribution, Technology | Permalink  Comments (14) 

                                            Links for 02-08-2014

                                              Posted by on Saturday, February 8, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (50) 

                                              Friday, February 07, 2014

                                              'January Employment Report: 113,000 Jobs, 6.6% Unemployment Rate'

                                              Calculated Risk on the employment report:

                                              January Employment Report: 113,000 Jobs, 6.6% Unemployment Rate, by Bill McBride: From the BLS:
                                              Total nonfarm payroll employment rose by 113,000 in January, and the unemployment rate was little changed at 6.6 percent, the U.S. Bureau of Labor Statistics reported today. ...
                                              After accounting for the annual adjustment to the population controls, the civilian labor force rose by 499,000 in January, and the labor force participation rate edged up to 63.0 percent. Total employment, as measured by the household survey, increased by 616,000 over the month, and the employment-population ratio increased by 0.2 percentage point to 58.8 percent....
                                              The headline number was well below expectations of 181,000 payroll jobs added. ...
                                              This was a disappointing employment report, however there were some positives including upward revisions to previous reports, a decline in the unemployment rate, and an increase in the participation rate. ...

                                              If this rate of job creation continues, just 113,000 jobs, it will be a long, long, long time before the labor market normalizes.

                                                Posted by on Friday, February 7, 2014 at 06:32 AM in Economics, Unemployment | Permalink  Comments (66) 

                                                Have Blog, Will Travel

                                                I am here today:

                                                National Bureau of Economic Research, Inc., EF&G Research Meeting
                                                Robert Shimer and Michael Woodford, Organizers
                                                February 7, 2014, Federal Reserve Bank of New York
                                                9:00 am Charles Carlstrom, Federal Reserve Bank of Cleveland Timothy Fuerst, University of Notre Dame Matthias Paustian, Federal Reserve Board Targeting Long Rates in a Model with Segmented Markets Discussant:  Mark Gertler, New York University and NBER
                                                10:00 am Break
                                                10:30 am Fernando Alvarez, University of Chicago and NBER Herve Le Bihan, Banque de France Francesco Lippi, EIEF Small and Large Price Changes and the Propagation of Monetary Shocks Discussant:  Virgiliu Midrigan, New York University and NBER
                                                11:30 am Bill Dupor, Federal Reserve Bank of St. Louis Rong Li, Ohio State University The 2009 Recovery Act and the Expected Inflation Channel of Government Spending Discussant:  Gauti Eggertsson, Brown University and NBER
                                                12:30 pm Lunch - 1st Floor, Liberty Room
                                                1:30 pm Roger Farmer, University of California at Los Angeles and NBER Carine Nourry, University of the Mediterranean Alain Venditti, University of the Mediterranean The Inefficient Markets Hypothesis: Why Financial Markets Do Not Work Well in the Real World Discussant:  Nobuhiro Kiyotaki, Princeton University and NBER
                                                2:30 pm Break
                                                3:00 pm Gabriel Chodorow-Reich, Harvard University Loukas Karabarbounis, University of Chicago and NBER The Cyclicality of the Opportunity Cost of Employment Discussant:  Robert Hall, Stanford University and NBER
                                                4:00 pm Anna Orlik, Federal Reserve Board Laura Veldkamp, New York University and NBER Understanding Uncertainty Shocks and the Role of Black Swans Discussant:  Jennifer La'O, Columbia University and NBER
                                                5:00 pm Adjourn

                                                  Posted by on Friday, February 7, 2014 at 05:42 AM in Conferences, Economics | Permalink  Comments (6) 

                                                  Paul Krugman: Health, Work, Lies

                                                  The CBO's report on Obamacare is --surprise -- being misrepresented:

                                                  Health, Work, Lies, by Paul Krugman, Commentary, NY Times: ... On Tuesday, the budget office released a report on the fiscal and economic ... effects of the Affordable Care Act. ...
                                                  The budget office has now increased its estimate of the size of these effects. It believes that health reform will reduce the number of hours worked in the economy by between 1.5 percent and 2 percent, which it unhelpfully noted “represents a decline in the number of full-time-equivalent workers of about 2.0 million.”
                                                  Why was this unhelpful? Because politicians and, I’m sorry to say, all too many news organizations immediately seized on the 2 million number and utterly misrepresented its meaning. For example, Representative Eric Cantor, the House majority leader, quickly posted this on his Twitter account: “Under Obamacare, millions of hardworking Americans will lose their jobs and those who keep them will see their hours and wages reduced.”
                                                  Not a word of this claim was true. The budget office report didn’t say that people will lose their jobs. It declared explicitly that the predicted fall in hours worked will come “almost entirely because workers will choose to supply less labor”  ... Oh, and because labor supply will be reduced, wages will go up, not down.
                                                  We should add that the budget office believes that health reform will actually reduce unemployment over the next few years. ...
                                                  So was Mr. Cantor being dishonest? Or was he just ignorant of the policy basics...? It doesn’t matter — because even if it was ignorance, it was willful ignorance. Remember, the campaign against health reform has, at every stage, grabbed hold of any and every argument it could find against insuring the uninsured, with truth and logic never entering into the matter.
                                                  Think about it. We had the nonexistent death panels. We had false claims that the Affordable Care Act will cause the deficit to balloon. We had supposed horror stories about ordinary Americans facing huge rate increases, stories that collapsed under scrutiny. And now we have a fairly innocuous technical estimate misrepresented as a tale of massive economic damage.
                                                  Meanwhile, the reality is that American health reform — flawed and incomplete though it is — is making steady progress. No, millions of Americans won’t lose their jobs, but tens of millions will gain the security of knowing that they can get and afford the health care they need.

                                                    Posted by on Friday, February 7, 2014 at 12:33 AM in Economics, Health Care, Politics | Permalink  Comments (71) 

                                                    Latest from the Journal of Economic Perspectives

                                                    A few of the articles from the latest Journal of Economic Perspectives:

                                                    When Ideas Trump Interests: Preferences, Worldviews, and Policy Innovations, by Dani Rodrik: Ideas are strangely absent from modern models of political economy. In most prevailing theories of policy choice, the dominant role is instead played by "vested interests"—elites, lobbies, and rent-seeking groups which get their way at the expense of the general public. Any model of political economy in which organized interests do not figure prominently is likely to remain vacuous and incomplete. But it does not follow from this that interests are the ultimate determinant of political outcomes. Here I will challenge the notion that there is a well-defined mapping from "interests" to outcomes. This mapping depends on many unstated assumptions about the ideas that political agents have about: 1) what they are maximizing, 2) how the world works, and 3) the set of tools they have at their disposal to further their interests. Importantly, these ideas are subject to both manipulation and innovation, making them part of the political game. There is, in fact, a direct parallel, as I will show, between inventive activity in technology, which economists now routinely make endogenous in their models, and investment in persuasion and policy innovation in the political arena. I focus specifically on models professing to explain economic inefficiency and argue that outcomes in such models are determined as much by the ideas that elites are presumed to have on feasible strategies as by vested interests themselves. A corollary is that new ideas about policy—or policy entrepreneurship—can exert an independent effect on equilibrium outcomes even in the absence of changes in the configuration of political power. I conclude by discussing the sources of new ideas. Full-Text Access | Supplementary Materials

                                                    An Economist's Guide to Visualizing Data, by Jonathan A. Schwabish: Once upon a time, a picture was worth a thousand words. But with online news, blogs, and social media, a good picture can now be worth so much more. Economists who want to disseminate their research, both inside and outside the seminar room, should invest some time in thinking about how to construct compelling and effective graphics. Full-Text Access | Supplementary Materials

                                                      Posted by on Friday, February 7, 2014 at 12:06 AM in Academic Papers, Economics | Permalink  Comments (5) 

                                                      Links for 02-07-2014

                                                        Posted by on Friday, February 7, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (36) 

                                                        Thursday, February 06, 2014

                                                        Fed Watch: Another Month, Another Employment Report

                                                        Tim Duy:

                                                        Another Month, Another Employment Report, by Tim Duy: Tomorrow brings the January 2014 employment report. The usual caveats apply:

                                                        • The monthly change in payrolls is a net number and represents only a fraction of the churn in the labor market.
                                                        • The employment data is heavily revised. The preliminary number can greatly understate or overstate actual labor market behavior.
                                                        • Nasty weather might also have impacted the numbers. Robin Harding at the Financial Times identifies other factors - expiration of unemployment benefits and annual revisions - that can also scramble the final numbers in the report.
                                                        • Forecasting the change in payrolls is thus something of a fool's game. A game we all play nonetheless.

                                                        With all that said, I will venture a guess of a 200k gain in nonfarm payrolls for January:


                                                        This is a bit over consensus of 181k, but pretty much right in the middle of the range of estimates (125k-270k). Full disclosure: Last month my forecast was wildly optimistic. Still, I think that report was an outlier. Overall I don't see that the pace of improvement in the labor market has changed dramatically one way or another in the last few months. The economy have been generating 180-200k jobs a month for two years despite the ups and downs in the data. I suspect underlying activity continues to support a similar trend. Any improvements that were evident prior to the December report were likely modest. Indeed, I am skeptical that the pace of activity overall has dramatically improved either.
                                                        As far as monetary policy, it is likely that only a very, very weak report would deter Fed officials from the current tapering agenda. Even that is in question given that we will see another employment report - not to mention a plethora of other data - before the mid-March FOMC meeting. It seems that hawks and doves alike want to wind down the asset purchase program, with the only difference being the pace of tapering. Atlanta Federve Reserve President Dennis Lockhart sums up what I believe is the consensus view:
                                                        Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year...
                                                        ...But given my current views on the economy, I like the current positioning of policy.
                                                        It's in the right place for now, in my opinion. I think we policymakers should be patient—not too quick to respond to zigs and zags in the data.
                                                        Hawks, of course, would like a more rapid pace of tapering. Philadelphia Federal Reserve President Charles Plosser basically said "enough is enough" yesterday:
                                                        Notice that even though we are reducing the pace at which we are purchasing longer-term assets, we are still adding monetary policy accommodation. As I noted earlier, I believe the economy has already met the criteria of substantial improvement in labor market conditions, and the economic outlook has improved as well. So my preference would be that we conclude the purchases sooner rather than later...
                                                        ...If the unemployment rate continues to drop at that pace, we will soon be at the 6.5 percent threshold in our forward guidance for interest rates.
                                                        Although the FOMC has indicated that it doesn't anticipate raising rates when the economy crosses that threshold, I do believe that we will have complicated our communications if we are still purchasing assets at that point. What is the argument for continuing to increase monetary policy accommodation when labor market conditions are improving rapidly, inflation has stabilized, and the outlook is for it to move back to goal?
                                                        Plosser would like to end asset purchases prior to hitting the unemployment threshold. Problem is, that threshold could easily be hit tomorrow if not at the next meeting. So, I guess all I can say to Plosser is "good luck with that."
                                                        Bottom Line: Even a weak employment report may not be immediately pivotal for monetary policy; there is still another report to go before the next FOMC meeting. A solid report, however, will further entrench the Fed's commitment to the current policy path.

                                                          Posted by on Thursday, February 6, 2014 at 02:56 PM in Economics, Fed Watch, Monetary Policy, Unemployment | Permalink  Comments (0) 

                                                          On the Road Again...

                                                          Traveling to the NY Fed today, so just a few quick ones before my plane takes off at 5:40 a.m. (ughhh!!!).

                                                            Posted by on Thursday, February 6, 2014 at 05:04 AM in Economics, Travel | Permalink  Comments (2) 

                                                            'How the New Classicals Drank the Austrians' Milkshake'

                                                            In a tweet, Roger Farmer says "This is a very good summary of Austrian vs classical Econ":

                                                            How the New Classicals drank the Austrians' milkshake: The "Austrian School of Economics" is still a name that is lovingly invoked by goldbugs, Zero Hedgies, Ron Paulians, and various online rightists. But as a program of scholarship it seems mostly dead. There is a group of "Austrians" at George Mason and NYU trying to revive the school by evolving it in the direction of mainstream econ, and then there is the Mises Institute, which contents itself with bathing in the fading glow of the works of the Old Masters. But in the main, "Austrian economics" is an ex-thing. It seems to me that the Austrian School's demise came not because its ideas were rejected and marginalized, but because most of them were co-opted by mainstream macroeconomics. The "New Classical" research program of Robert Lucas and Ed Prescott shares just enough similarities with the Austrian school to basically steal all their thunder. The main points being...

                                                              Posted by on Thursday, February 6, 2014 at 04:23 AM in Economics, Macroeconomics | Permalink  Comments (16) 

                                                              'Why Thomas Jefferson Favored Profit Sharing'

                                                              David Cay Johnston:

                                                              Why Thomas Jefferson Favored Profit Sharing, by David Cay Johnston: President Obama's State of the Union speech last week focused on America's severe and growing inequality, but he stopped short of repeating the Founding Fathers' many warnings that this condition could doom American democracy.
                                                              The founders, despite decades of rancorous disagreements about almost every other aspect of their grand experiment, agreed that America would survive and thrive only if there was widespread ownership of land and businesses. ...

                                                                Posted by on Thursday, February 6, 2014 at 04:05 AM in Economics, Income Distribution | Permalink  Comments (38) 

                                                                'Do Oil Prices Predict Inflation?'

                                                                Apparently not:

                                                                Do Oil Prices Predict Inflation?, by Mehmet Pasaogullari and Patricia Waiwood, FRB Cleveland: Some analysts pay particular attention to oil prices, thinking they might give an advance signal of changes in inflation. However, using a variety of statistical tests, we find that adding oil prices does little to improve forecasts of CPI inflation. Our results suggest that higher oil prices today do not necessarily signal higher CPI inflation next year, although they do help to explain short-term movements in the CPI. ...

                                                                  Posted by on Thursday, February 6, 2014 at 03:51 AM in Economics, Inflation, Oil | Permalink  Comments (5) 

                                                                  Links for 02-06-2014

                                                                    Posted by on Thursday, February 6, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (33) 

                                                                    Wednesday, February 05, 2014

                                                                    'The One Percent'

                                                                    Robert Solow:

                                                                    "Correspondence: The One Percent: Robert Solow, N. Gregory Mankiw, Richard V. Burkhauser, and Jeff Larrimore." Journal of Economic Perspectives, 28(1): 243-248: The cheerful blandness of N. Gregory Mankiw’s “Defending the One Percent” (Summer 2013, p p . 2 1 – 3 4 ) may divert attention from its occasional unstated premises, dubious assumptions, and omitted facts. I have room to point only to a few such weaknesses; but the One Percent are pretty good at defending themselves, so that any assistance they get from the sidelines deserves scrutiny...

                                                                    There is also a response from Mankiw, and additional discussion from Burkhauser and Larrimore.

                                                                      Posted by on Wednesday, February 5, 2014 at 09:55 AM in Economics, Income Distribution | Permalink  Comments (62) 

                                                                      How Much Influence Does the Fed Chair Have Over Monetary Policy?

                                                                      At MoneyWatch:

                                                                      How much does the Fed chair influence monetary policy?, by Mark Thoma: With Janet Yellen taking over as head of the Federal Reserve earlier this week, a natural question to ask is how much power the Fed chair has over monetary policy decisions. ...

                                                                        Posted by on Wednesday, February 5, 2014 at 09:15 AM in Economics, Monetary Policy | Permalink  Comments (2) 

                                                                        Fed Watch: No End To Tapering Yet

                                                                        Tim Duy:

                                                                        No End To Tapering Yet, by Tim Duy: Yesterday I said:
                                                                        Altogether, the desire to end asset purchases suggests to me that what we have seen so far is insufficient to prompt the Fed to change their plans. That is especially the case if the data does not soften further - if, for example, the next employment report shows a rebound in payroll growth and a further decline in the unemployment rate.
                                                                        Today we learn via Bloomberg:
                                                                        “The hurdle ought to remain pretty high for pausing in tapering,” Richmond Fed President Jeffrey Lacker said after a speech today in Winchester, Virginia. Chicago’s Charles Evans said in Detroit that policy makers probably face “a high hurdle to deviate” from $10 billion cuts in monthly bond buying at each of their next several meetings. Evans and Lacker don’t vote on policy this year.
                                                                        One hawk, one dove, both concluding that the bar to stopping the taper is quite high. Things need to get worse. This just won't cut it:


                                                                        Also take note of Jon Hilsenrath's view via the Wall Street Journal:
                                                                        Last summer, as U.S. stock prices and emerging markets wobbled, the Federal Reserve was at the center of the turmoil. This time, the Fed might be just a bystander in the stock market selloff and not the proximate cause...
                                                                        ...The market, in short, is now pricing in a much easier Fed, not a tighter Fed. Movements in 10-year Treasury notes are telling the same story. Last summer, 10-year yields were rising because investors saw a tighter Fed. Now they’re falling. Investors seem to be reading a string of soft economic data – weaker car sales, a manufacturing slowdown, disappointing job growth – and concluding the economic coast is not as clear as it appeared just a few weeks ago.
                                                                        I would suggest that the decline in rates indicates the Fed is too tight, not too easy. Indeed, we would hope that they would only be tapering in the context of a rising interest rate environment as it would suggest that market participants were anticipating higher growth and inflation. But the Fed doesn't see it that way. They see lower rates as a signal that policy is easier. And hence are not inclined to react to ease policy further by stopping the taper.
                                                                        Moreover, I don't think the Fed believes that the end of asset purchases is impacting global markets because they are convinced that tapering is not tightening. If it is tightening, then why should global markets react? And even if it was tightening, the Fed wouldn't see it as their problem in the first place. (To be sure, you may or may not agree, and I suggest you read Izabella Kaminska, Frances Coppola, and Felix Salmon for further insight into the topic.)
                                                                        Bottom Line: The Fed isn't ready to change course. Recent turbulence is enough to peak their curiosity, not enough to suggest that tapering was premature.

                                                                          Posted by on Wednesday, February 5, 2014 at 12:06 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (13) 

                                                                          Links for 02-05-2014

                                                                            Posted by on Wednesday, February 5, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (102) 

                                                                            Tuesday, February 04, 2014

                                                                            'Where is the Land of Opportunity? Intergenerational Mobility in the US'

                                                                            Raj Chetty, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez, the authors of the economic mobility study we've heard so much about lately, explain their findings:

                                                                            Where is the land of opportunity? Intergenerational mobility in the US, by Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, Vox EU: The US is often hailed as the land of opportunity, a society in which a child's chances of success depend little on her family background. Is this reputation warranted? An extensive empirical literature on intergenerational mobility, reviewed by Solon (1999), Grawe and Mulligan (2002), and Black and Devereux (2011), has compared mobility across countries and have found that relative mobility is lower in the US than in other developed countries. In new research (Chetty et al. 2014) we show that this question does not have a clear answer because there is substantial variation in intergenerational mobility across areas within the US. The US is better described as a collection of societies, some of which are `lands of opportunity’ with high rates of mobility across generations, and others in which few children escape poverty.
                                                                            New evidence on intergenerational mobility
                                                                            We present a new portrait of social mobility in the US by compiling statistics from millions of anonymous earnings records. Our core sample consists of all children in the US born between 1980-82, whose income we measure in 2011-12, when they are approximately 30 years old.
                                                                            Using these income data, we calculate two measures of intergenerational mobility. The first, relative mobility, measures the difference in the expected economic outcomes between children from high-income and low-income families. The second, absolute upward mobility, measures the expected economic outcomes of children born to a family earning an income of approximately $30,000 (the 25th percentile of the income distribution).
                                                                            We construct measures of relative and absolute mobility for 741 “commuting zones” in the US. Commuting zones are geographical aggregations of counties that are similar to metro areas but also cover rural areas. Children are assigned to a zone based on their location at age 16 (no matter where they live as adults), so that their location represents where they grew up. When analysing local area variation, we rank both children and parents based on their positions in the national income distribution. Hence, our statistics measure how well children do relative to those in the nation as a whole rather than those in their own particular community.
                                                                            We find substantial variation in mobility across areas (Figure 1). To take one example, children from families at the 25th percentile in Seattle have outcomes comparable to children from families at the median in Atlanta. Some cities – such as Salt Lake City and San Jose – have rates of mobility comparable to countries with the highest rates of relative mobility, such as Denmark. Other cities – such as Atlanta and Milwaukee – have lower rates of mobility than any developed country for which data are currently available.

                                                                            Figure 1. Intergenerational mobility in the US


                                                                            Notes: This map shows the average percentile rank of children who grow up in below-median income families across areas of the US (absolute upward mobility). Lighter colours represent areas where children from low-income families are more likely to move up in the income distribution. To look up statistics for your own city, use the interactive version of this map created by The New York Times.

                                                                            What drives social mobility?
                                                                            Next, we analyse what drives the variation in social mobility across areas. The spatial patterns of the gradients of college attendance and teenage birth rates with respect to parent income across zones are very similar to the pattern in intergenerational income mobility. The fact that much of the spatial variation in children's outcomes emerges before they enter the labour market suggests that the differences in mobility are driven by factors that affect children while they are growing up.
                                                                            We explore such factors by correlating the spatial variation in mobility with observable characteristics. We begin by showing that upward income mobility is significantly lower in areas with larger African-American populations. However, white individuals in areas with large African-American populations also have lower rates of upward mobility, implying that racial shares matter at the community (rather than individual) level. One mechanism for such a community-level effect of race is segregation. Areas with larger black populations tend to be more segregated by income and race, which could affect both white and black low-income individuals adversely. Indeed, we find a strong negative correlation between standard measures of racial and income segregation and upward mobility. Moreover, we also find that upward mobility is higher in cities with less sprawl, as measured by commute times to work. These findings lead us to identify segregation as the first of five major factors that are strongly correlated with mobility.
                                                                            The second factor we explore is inequality. Commuting zones with larger Gini coefficients have less upward mobility, consistent with the “Great Gatsby curve” documented across countries (Krueger 2012, Corak 2013). In contrast, top 1% income shares are not highly correlated with intergenerational mobility both across zones within the US and across countries. Although one cannot draw definitive conclusions from such correlations, they suggest that the factors that erode the middle class hamper intergenerational mobility more than the factors that lead to income growth in the upper tail.
                                                                            Third, proxies for the quality of the K-12 school system are also correlated with mobility. Areas with higher test scores (controlling for income levels), lower dropout rates, and smaller class sizes have higher rates of upward mobility. In addition, areas with higher local tax rates, which are predominantly used to finance public schools, have higher rates of mobility.
                                                                            Fourth, social capital indices (Putnam 1995) – which are proxies for the strength of social networks and community involvement in an area -- are very strongly correlated with mobility. For instance, high upward mobility areas tend to have higher fractions of religious individuals and greater participation in local civic organisations.
                                                                            Finally, the strongest predictors of upward mobility are measures of family structure such as the fraction of single parents in the area. As with race, parents' marital status does not matter purely through its effects at the individual level. Children of married parents also have higher rates of upward mobility if they live in communities with fewer single parents.
                                                                            We find modest correlations between upward mobility and local tax and government expenditure policies and no systematic correlation between mobility and local labour market conditions, rates of migration, or access to higher education.
                                                                            We caution that all of the findings in this study are correlational and cannot be interpreted as causal effects. For instance, areas with high rates of segregation may also have other characteristics that could be the root cause driving the differences in children’s outcomes.
                                                                            What is clear from this research is that there is substantial variation in the US in the prospects for escaping poverty. Understanding the properties of the highest mobility areas – and how we can improve mobility in areas that currently have lower rates of mobility – is an important question for future research that we and other social scientists are exploring.
                                                                            To facilitate this ongoing work, we have posted the mobility statistics by area and the other correlates used in the study on the project website.
                                                                            Black, Sandra E. and Paul J. Devereux (2011), "Recent Developments in Intergenerational Mobility" in O Ashenfelter and D Card (eds.), Handbook of Labor Economics, Vol. 4, Elsevier, chapter 16, pp. 1487-1541.
                                                                            Chetty, Raj, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez (2014), “Where is the Land of Opportunity? The Geography of Intergenerational Mobility in the US”, NBER Working Paper 19843
                                                                            Corak, Miles (2013), Income Inequality, Equality of Opportunity, and Intergenerational Mobility." Journal of Economic Perspectives, 27 (3): 79-102.
                                                                            Grawe, Nathan D and Casey B Mulligan (2002), Economic Interpretations of Intergenerational Correlations", Journal of Economic Perspectives, 16 (3): 45-58.
                                                                            Krueger, Alan (2012), "The Rise and Consequences of Inequality in the US", Speech at the Center for American Progress, Washington D.C. on 12 January.
                                                                            Solon, Gary (1999), "Intergenerational Mobility in the Labor Market" in O Ashenfelter and D Card, (eds.), Handbook of Labor Economics, Vol. 3, Elsevier, pp. 1761-1800.

                                                                              Posted by on Tuesday, February 4, 2014 at 10:26 AM in Economics, Income Distribution | Permalink  Comments (30) 

                                                                              Unemployment is Hellish

                                                                              A follow-up to the post below this on how politicians have turned their backs on the unemployed:

                                                                              New research reveals that unemployment is especially hellish in the U.S., by Kathleen Geier: ...I am one of those long-term unemployed you keep hearing about...
                                                                              I’ve interviewed for some great jobs, and I’ve made it to the final stage several times. A few weeks ago, for my dream job, I was one of the final two people they considered — but then of course, they decided to go with the other person. I always hear, “We really liked you!” “We were so impressed!” But someone else always turns out to be a “better fit.” Always! It’s beyond frustrating. ... “Someone else was a better fit” — story of my life. ...
                                                                              I’ve gone through episodes of deep depression and intense anxiety over this — you have no idea. Some day, somewhere else I will write about it all at length, but the Catch-22 is that I don’t want to do so until I find permanent work. I mean, I don’t want to become the internet’s poster child for unemployment — otherwise I’m afraid the stigma of being unemployed will stick and I’ll never land a job. I survive the horror day to day by keeping myself busy with other things, and by trying not to think about it too much. Denial is a coping strategy, people! Also, “one day at a time” may well be the best life advice anyone has ever given me about anything.
                                                                              But this stretch — going on 18+ months now — of long-term unemployment is by far the most shattering, soul-destroying, traumatic thing I’ve ever experienced in my adult life, and that includes a heartbreaking divorce. I hope, one day, to write more about my personal story and explain just why long-term unemployment is so devastating. But for now, please take my word for it. Most important of all, please understand this is not just about me. There are millions more like me, who are experiencing mind-boggling levels of psychic distress in this labor market, and who are financially just hanging on by a thread. The suffering caused by this economy has been immense. It inflicts deep damage and it leaves scars. You can trust me on that one.

                                                                                Posted by on Tuesday, February 4, 2014 at 10:25 AM in Economics, Unemployment | Permalink  Comments (29) 

                                                                                'Confronting Old Problem May Require a New Deal'

                                                                                Eduardo Porter:

                                                                                Confronting Old Problem May Require a New Deal, by Eduardo Porter, NY Times: ...As he delivered his fifth State of the Union address, President Obama, not unlike President Franklin D. Roosevelt early in his second term, seemed to have given up far too early in the game on trying to stimulate the recovery. ...
                                                                                The Obama administration’s boldest propositions are sensible, from raising the minimum wage to $10.10 to extending emergency unemployment insurance. But they are not quite on the scale of a trillion dollars’ worth of lost gross domestic product.
                                                                                This is not just the president’s doing. The bipartisan cooperation that would be needed to start a jobs program of the scale of what was tried during the New Deal — not to mention the World War II production explosion that finally ended the Depression — is out of the question today.
                                                                                Perhaps more important, however, is that even among Democrats there remains little appetite for the kind of aggressive government action that was popular in F.D.R.’s day.
                                                                                The fear, however, seems overdone. ...
                                                                                There are potentially great benefits to government investments in public works at a time like this. ... And it would not even be very expensive. With the borrowing costs of the federal government below the rate of inflation, investments would actually help reduce the nation’s debt burden. Lenders are, in effect, paying the government to borrow money. ...
                                                                                [T]he path favored by many Republicans in the House..., slash government spending and let the economy run its bedraggled course..., would probably transform our economic emergency from a painful though temporary setback into a permanent feature called stagnation.
                                                                                And yet this is essentially the policy the nation is following.

                                                                                I am not fully sold on the secular stagnation argument (see the article for more, Keynes worried about the same thing), but there's no excuse for turning our backs on the unemployed. We could have, and should have done more. Even now, it's not too late.

                                                                                  Posted by on Tuesday, February 4, 2014 at 09:33 AM in Economics, Fiscal Policy, Unemployment | Permalink  Comments (16) 

                                                                                  Fed Watch: Markets Tumble. How Will the Fed React?

                                                                                  Tim Duy:

                                                                                  Markets Tumble. How Will the Fed React?, by Tim Duy: The financial markets are not being kind to freshly minted Federal Reserve Chair Janet Yellen. The level of scrutiny she will face when she makes what is likely to be her first public appearance as Chair next week was already high, and is rising by the minute. Global markets are faltering, and US equity markets tumbled Monday, with the weak ISM numbers reported to be the proximate cause of the sell-off:


                                                                                  The decline was driven by what can only be described as a jaw-dropping decline in the new order component:


                                                                                  Weather is suspected in the decline, and the ISM report offered some anecdotal support in that direction:

                                                                                  • "Poor weather impacted outbound and inbound shipments." (Fabricated Metal Products)
                                                                                  • "Good finish to 2013, but slow start to 2014, mostly attributed to weather." (Petroleum & Coal Products)
                                                                                  • "We have experienced many late deliveries during the past week due to the weather shutting down truck lines." (Plastics & Rubber Products)

                                                                                  That said, this is arguably more than about just weather, and at least partially should trigger a fresh assessment on the strength of the US economy. To be sure, 2013 finished off with strong GDP numbers, strong enough to give the Fed hope that their 2014 forecast will be realized:


                                                                                  I suspect, however, that it is a bit too early to break out the bubbly. Recent gains have been driven by inventory build-up. Underlying growth still seems a bit tepid, in my view:


                                                                                  Moreover, concerns about the health of the global economy are growing. Indeed, Ambrose Evans-Pritchard sees the threat of a global policy tightening in the making:
                                                                                  We now have a situation where the world's two biggest economies – the US and China – are both winding down stimulus in lockstep. Call it simultaneous G2 tightening if you want. Europe is tightening passively as its balance sheets shrinks, and M3 money fizzles out. So let us call it G3 tightening (even if the Europeans are doing it by mistake)
                                                                                  This amounts to something of a shock to large parts of the emerging market nexus. Is it therefore proper for these EM states to further compound the shock with pro-cyclical monetary (or fiscal) tightening, and to do so on a scale that could ultimately push the global economy closer to a deflation trap?
                                                                                  Sounds very similar to my concerns from last week:
                                                                                  Funny thing is that what the Fed sees as no tightening is evolving into a global tightening now as central banks rush to raise rates. Consequently, money surges into the global safe asset - US Treasuries. And, interestingly, I think that you can argue that this is much, much more disconcerting than last year's taper tantrum. This seems to me to be a pretty clear global disinflationary shock. And it isn't like inflation was on a runaway train to begin with.
                                                                                  To reiterate the last point, the Fed's decision to taper despite the obvious challenge to their inflation target looks increasingly questionable:


                                                                                  Fed policymakers don't even really have any positive near-term trends to hang their hats on:


                                                                                  Across the Curve points us to the Wall Street Journal's anecdotal account of intense pricing pressures (and still weak demand) facing firms:
                                                                                  Executives from companies as varied as General Electric Co. ,Kimberly-Clark Corp. and Royal Caribbean Cruises Ltd. said some prices slipped in the last three months of the year—sometimes significantly—amid intense competition, weaker demand and pressure from cost-conscious customers.
                                                                                  Falling prices for adhesives weighed on Eastman Chemical Co., cheaper packaged coffee dragged on Starbucks Corp. , and “value and discounts” hit McDonald’s Corp. in the fourth quarter in what the fast food chain called a “street fight” for market share. Xerox Corp. is eyeing acquisitions that can “help us be more competitive on price pressure.”
                                                                                  Corporate revenues are showing the strain, whether from lower prices, weak demand or a combination of the two.
                                                                                  Despite the Fed's claim that tapering is not tightening, that it is the stock of assets held, not the flow, that matters, that they could change the policy mix without changing the level of accommodation, market participants are acting as if tapering is indeed tightening. Five year, five year forward inflation expectations have tumbled:


                                                                                  And bond market participants, who had been starting to get optimistic that improving economic conditions would prompt the Fed to tighten sooner than later are now rethinking that scenario:


                                                                                  If this keeps up, it looks like Yellen will face an early test in her first few weeks as Chair. And I would say there is a good chance this does keep up until the Fed changes direction and decides that the US economy may not have reached escape velocity as believed. Of course, the early voice was a hawkish voice which signaled exactly the opposite, as reported by Michael Derby at the Wall Street Journal:
                                                                                  With regard to Fed policy, “I can’t say that things have changed just because of this market action,” Mr. Fisher said in an interview on Fox Business Network after the markets closed Monday.
                                                                                  The hawks fought long and hard for the taper; they will not be easily dissuaded from by a few sloppy days on Wall Street. Remember, the hawks believe asset purchases are fueling a potential asset bubble to begin with. Falling stock prices will only verify their bias and justify the policy.
                                                                                  Of course, the hawks will not be driving a policy shift. That shift would come from the center. But I sense that the center have something in common with the hawks - the center wants out of asset purchases too, which makes me think the bar to holding asset purchases steady at the next meeting is relatively high. Still, a deflationary shock should make them think twice. Then again, already low inflation should have made them think three or four times before tapering in the first place. Altogether, the desire to end asset purchases suggests to me that what we have seen so far is insufficient to prompt the Fed to change their plans. That is especially the case if the data does not soften further - if, for example, the next employment report shows a rebound in payroll growth and a further decline in the unemployment rate.
                                                                                  Another problem we have at the moment is the transition at the Federal Reserve. In many respects, Yellen is still an unknown commodity. Will she live up to her dovish reputation, or will she surprise on the hawkish side? I have to imagine that Yellen is not thrilled by this turn of events. Of course, no one would be, but she is in the unfortunate position of facing the House Financial Services Committee for the first time next week, and her words will carry an extra weight. If she opens the door to tapering the taper, so to speak, odds are she will be credited for a global rally - but then she has to follow through. If she acts as if the Fed is moving full steam ahead, then she will be blamed for the turmoil that ensues - and maybe have to reverse course after all.
                                                                                  Bottom Line: The Fed is once again in a familiar place. They try to pull back on policy, and markets tumble. Tightening has repeatedly proved to come too early; one wonders if the Fed would have had to keep doing more if they didn't keep promising to do less. If history is any guide, they will eventually reverse course. But that same history would suggest that they need to see conditions deteriorate further before they act.

                                                                                    Posted by on Tuesday, February 4, 2014 at 12:06 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (27) 

                                                                                    Links for 02-04-2014



                                                                                      Posted by on Tuesday, February 4, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (73) 

                                                                                      Monday, February 03, 2014

                                                                                      'Keystone: The Pipeline to Disaster'

                                                                                      In case you want to talk about this (I don't have a well-formed opinion on the pipeline itself, I haven't done enough reading about it, so hoping to learn something from the comments):

                                                                                      Keystone: The Pipeline to Disaster, by Jeff Sachs: The new State Department Environmental Impact Statement for the Keystone Pipeline does three things. First, it signals a greater likelihood that the pipeline project will be approved... Second, it vividly illustrates the depth of confusion of US climate change policy. Third, it self-portrays the US Government as a helpless bystander to climate calamity.. ...
                                                                                      The pipeline will ... facilitate the mass extraction and use of Canada's enormous unconventional supplies. Therein lies the problem. ... The economic implications of the climate science are clear. Either we keep some of the world's oil, gas, and coal reserves under the ground..., or we wreck the planet. ... The most important single step is to keep most of the coal from being burned. ...
                                                                                      The Keystone pipeline is crucial to the global carbon budget. If the world deploys massive unconventional oil sources like Canada's oil sands we will exceed the carbon budget,... cheaper, (relatively) cleaner, and lower-CO2 oil is available. ...
                                                                                      Herein lies the tragic, indeed fatal, flaw of the State Department review. The ... State Department simply assumes ... that the oil sands will be developed and used one way or another. ... According to the State Department, in other words, the US Government is just a passive spectator to global climate change. Either the pipeline is built or the oil will be shipped by other means. ...
                                                                                      But do not lose hope. ... The vast majority of Americans want safety for themselves, their children, and the rest of humanity. Our generation can still turn the tide against environmental disaster.

                                                                                        Posted by on Monday, February 3, 2014 at 12:11 PM in Economics, Environment, Oil | Permalink  Comments (106) 

                                                                                        'Silicon Valley Billionaires Believe in the Free Market, as Long as They Benefit'

                                                                                        Dean Baker:

                                                                                        Silicon Valley billionaires believe in the free market, as long as they benefit, by Dean Baker, theguardian.com: Last week, Mark Ames published an article ... on a court case that alleges that Apple, Google, and other Silicon Valley powerhouses actively conspired to keep their workers' wages down. According to documents filed in the case, these companies agreed not to compete for each others' workers dating at least as far back as 2005. ... This means not only that they broke the law, and that they acted to undermine the market, but that they really don't think about the market the way libertarians claim to think about the market. ...

                                                                                        The classic libertarian view of the market is that we have a huge number of people in the market actively competing..., there is so much competition that no individual or company can really hope to have much impact on market outcomes.

                                                                                        This point is central to their argument that the government should not interfere with corporate practices. For example, if we think our local cable company is charging too much..., our libertarian friends will insist that the phone company, satellite television or other competitors will step in to keep prices in line. They would tell the same story if the issue were regulating the airlines, banks, health insurance, or any other sector where there is reason to believe that competition might be limited. ...

                                                                                        The ... Silicon Valley non-compete agreements show that this is not how the tech billionaires believe the market really works. This is just a story they peddle to children and gullible reporters. ... The fact the Silicon Valley honchos took the time to negotiate and presumably enforce these non-compete agreements was because they did not think that there were enough competitors to hire away their workers. They believed that they had enough weight on the buy-side of the market for software engineers ... to ... keep their wages down. ...

                                                                                          Posted by on Monday, February 3, 2014 at 09:36 AM in Economics, Market Failure, Regulation | Permalink  Comments (22) 

                                                                                          Paul Krugman: Delusions of Failure

                                                                                           The price of deceit:

                                                                                          Delusions of Failure, by Paul Krugman, Commentary, NY Times: The Republican response to the State of the Union was delivered by Cathy McMorris Rodgers, Republican representative from Washington — and it was remarkable for its lack of content. ...
                                                                                          The closest she came to substance was when she described a constituent, “Bette in Spokane,” who supposedly faced a $700-a-month premium hike after her policy was canceled. “This law is not working,” intoned Ms. McMorris Rodgers. And right there we see a perfect illustration of just how Republicans are trying to deceive voters — and are, in the process, deceiving themselves. ...
                                                                                          Bette’s tale had policy wonks scratching their heads; it was hard to see, given what we know about premiums and how the health law works, how anyone could face that large a rate increase. Sure enough, when a local newspaper, The Spokesman-Review, contacted Bette Grenier, it discovered that the real story was very different... First of all, she was comparing her previous policy with one of the pricier alternatives her insurance company was offering — and she refused to look for cheaper alternatives on the Washington insurance exchange, declaring, “I wouldn’t go on that Obama website.”
                                                                                          Even more important, all Ms. Grenier and her husband had before was a minimalist insurance plan, with a $10,000 deductible, offering very little financial protection. So yes, the new law requires that they spend more, but they would get far better coverage in return.
                                                                                          So was this the best story Ms. McMorris Rodgers could come up with? The answer, probably, is yes, since just about every tale of health reform horror the G.O.P. has tried to peddle has similarly fallen apart once the details were revealed. The truth is that the campaign against Obamacare relies on misleading stories at best, and often on outright deceit.
                                                                                          Who pays the price for this deceit? In many cases, American families. Although health care enrollment is actually going pretty well at this point, thousands and maybe millions of Americans have failed to sign up for coverage because they believe the false horror stories they keep hearing.
                                                                                          But conservative politicians aren’t just deceiving their constituents; they’re also deceiving themselves. Right now, Republican political strategy seems to be to stall on every issue, and reap the rewards from Obamacare’s inevitable collapse. Well, Obamacare isn’t collapsing — it’s recovering pretty well from a terrible start. And by the time that reality sinks in on the right, health reform will be irreversible.

                                                                                            Posted by on Monday, February 3, 2014 at 12:24 AM Permalink  Comments (72) 

                                                                                            Links for 02-03-2014

                                                                                              Posted by on Monday, February 3, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (60) 

                                                                                              Sunday, February 02, 2014

                                                                                              Why Inequality Matters

                                                                                              Chris Dillow:

                                                                                              Why inequality matters: ...we lefties care about inequality not because we have some idea of what the Gini coefficient or share of the top 1% should be, but because we fear that three things that would make inequalities tolerable are - to some extent - missing.
                                                                                              Firstly, inequalities don't all arise from fair processes. One condition here - set out in Rawls' difference principle - is that inequality should be associated with "fair equality of opportunity". But this condition is obviously lacking...
                                                                                              Also, many inequalities arise not from free market processes but from what Acemoglu and Robinson call extractive institutions - the ability of the rich to use political power to extract wealth for themselves...
                                                                                              Secondly, we fear that inequality has adverse effects. I'm not thinking so much here of its impacts on economic growth, social cohesion (pdf) and other aspects of well-being... Instead, the danger is that inequality is, as Sean McElwee says, an "affront to democracy." ...
                                                                                              Thirdly, we've no great beef with inequality if it is combined with some form of risk-pooling. Even if our first two conditions were met, we'd favour some redistribution to mitigate the effects of bad luck - be it the bad luck of a bad draw in the genetic lottery or of being hurt by a recession. Of course, lefties define luck more widely that righties, but most of the latter should support some redistribution; Hayek, for example, favoured a basic income. ...

                                                                                                Posted by on Sunday, February 2, 2014 at 09:41 AM in Economics, Income Distribution | Permalink  Comments (67) 

                                                                                                Links for 02-02-2014

                                                                                                  Posted by on Sunday, February 2, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (33) 

                                                                                                  Saturday, February 01, 2014

                                                                                                  'Get Some Sleep, and Wake Up the GDP'

                                                                                                  I need a nap:

                                                                                                  Get Some Sleep, and Wake Up the G.D.P., by Sendhil Mullainathan, Commentary, NY Times: ...Many of us need more sleep. ... What does sleep have to do with economics? Doesn’t it sit squarely in the realm of physiology?
                                                                                                  First, the economic consequences of inadequate sleep are surely huge. ... In one month in 2008, a poll showed that 29 percent of workers had fallen asleep or had been very sleepy at work. The effects can add up: one study in Australia calculated the cost of sleeplessness at 0.8 percent of the country’s gross domestic product.
                                                                                                  Yet even that number, which emphasizes the physical and medical consequences of inadequate sleep, omits the biggest potential impact on the G.D.P. Most of today’s workers rely on their mental and social skills. And if those workers don’t get enough sleep, their lethargy, crankiness and poor decision-making will hurt the economy in assorted and significant ways. ...[continue]...

                                                                                                    Posted by on Saturday, February 1, 2014 at 04:27 PM in Economics | Permalink  Comments (13) 

                                                                                                    Links for 02-01-2014

                                                                                                      Posted by on Saturday, February 1, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (80)