- Secular Stagnation: The Book - Paul Krugman
- Secular Stagnation: Facts, Causes and Cures - vox
- Blame the World? - Gloomy European Economist
- What's the Difference Between 2% and 3%? - Tim Taylor
- An Economic Explanation for Putin’s Recklessness - Justin Fox
- Conditional and Unconditional Forecasting - mainly macro
- The wages of fear are policies that risk hurting the poor - FT.com
- How Much U.S. Debt Does China Hold? The U.S. Isn’t Sure - WSJ
- The economy: How long will the expansion last? - The Economist
- Do People Really Dislike the State So Much? - Why Nations Fail
- Abenomics and the Future of Japan - Milken Institute
- All About Zero - Paul Krugman
Saturday, August 16, 2014
Friday, August 15, 2014
Alan Blinder on the inequality Laffer curve (that some of us were writing about in early 2011):
The Supply-Side Case for Government Redistribution, by Alan S. Blinder, Commentary, WSJ: ...Why is high and rising inequality a problem? ... In thinking about the effects of inequality on growth, we should look more at the supply side than the demand side. That's ironic. The clarion call of "supply-side economics" since the 1970s has been to cut taxes on the rich on the hope (not supported by much evidence) that benefits would "trickle down"... But nowadays the best supply-side policies may be those aimed at reducing income inequality. Consider:
Children who grow up poor get inferior K-12 education, and most likely don't go to college. They don't develop their talents as fully as middle- and upper-class kids do. Children who grow up undernourished do not reach their full physical or mental potential... Children who don't have enough access to health care grow up to be less healthy and productive adults. These ... ill-effects of poverty ... aren't limited to poor countries...
The strongest arguments against rampant inequality may nonetheless be political, not economic. ...Americans aren't really created equal. ... Sadly, with our political system so dominated by money, "equal political rights" is a cruel deception. ...
So even if you don't buy the ethical argument for redistribution, and even if you thought 1979 levels of income inequality were just fine, there are good reasons to reconsider the case in 2014. Inequality has risen so much in the past 35 years that it may now be retarding economic growth on the supply side while leaving us with the finest government money can buy.
'Persistently Below-Target Inflation Rate is a Signal That the U.S. Economy is Not Taking Advantage of all of its Available Resources'
Narayana Kocherlakota, President of the Minneapolis Fed:
..I’m a member of the Federal Open Market Committee—the FOMC—and, as a monetary policymaker, my discussion will be framed by the goals of monetary policy. Congress has charged the FOMC with making monetary policy so as to promote price stability and maximum employment. I’ll discuss the state of the macroeconomy in terms of these goals.
Let me start with price stability. The FOMC has translated the price stability objective into an inflation rate goal of 2 percent per year. This inflation rate target refers to the personal consumption expenditures, or PCE, price index. ... That rate currently stands at 1.6 percent, which is below the FOMC’s target of 2 percent. In fact, the inflation rate has averaged 1.6 percent since the start of the recession six and a half years ago, and inflation is expected to remain low for some time. For example, the minutes from the June FOMC meeting reveal that the Federal Reserve Board staff outlook is for inflation to remain below 2 percent over the next few years.
In a similar vein, earlier this year, the Congressional Budget Office (CBO) predicted that inflation will not reach 2 percent until 2018—more than 10 years after the beginning of the Great Recession. I agree with this forecast. This means that the FOMC is still a long way from meeting its targeted goal of price stability.
The second FOMC goal is to promote maximum employment. What, then, is the state of U.S. labor markets? The latest unemployment rate was 6.2 percent for July. This number is representative of the significant improvement in labor market conditions that we’ve seen since October 2009, when the unemployment rate was 10 percent. And I expect this number to fall further through the course of this year, to around 5.7 percent. However, this progress in the decline of the unemployment rate masks continued weakness in labor markets.
There are many ways to see this continued weakness. I’ll mention two that I see as especially significant. First, the fraction of people aged 25 to 54—our prime-aged potential workers—who actually have a job is still at a disturbingly low rate. Second, a historically high percentage of workers would like a full-time job, but can only find part-time work. Bottom line: I see labor markets as remaining some way from meeting the FOMC’s goal of full employment.
So I’ve told you that inflation rates will remain low for a number of years and that labor markets are still weak. It is important, I think, to understand the connection between these two phenomena. As I have discussed in greater detail in recent speeches, a persistently below-target inflation rate is a signal that the U.S. economy is not taking advantage of all of its available resources. If demand were sufficiently high to generate 2 percent inflation, the underutilized resources would be put to work. And the most important of those resources is the American people. There are many people in this country who want to work more hours, and our society is deprived of their production. ...
The risks from tightening policy too soon are much greater than the risks from leaving policy in place too long:
The Forever Slump, by Paul Krugman, Commentary, NY Times: It’s hard to believe, but almost six years have passed since the fall of Lehman Brothers ushered in the worst economic crisis since the 1930s. ... Recovery is far from complete, and the wrong policies could still turn economic weakness into a more or less permanent depression.
In fact, that’s what seems to be happening in Europe as we speak. And the rest of us should learn from Europe’s experience. ...
European officials eagerly embraced now-discredited doctrines that allegedly justified fiscal austerity even in depressed economies (although America has de facto done a lot of austerity, too, thanks to the sequester and cuts at the state and local level). And the European Central Bank, or E.C.B., not only failed to match the Fed’s asset purchases, it actually raised interest rates back in 2011 to head off the imaginary risk of inflation.
The E.C.B. reversed course when Europe slid back into recession, and, as I’ve already mentioned, under Mario Draghi’s leadership, it did a lot to alleviate the European debt crisis. But this wasn’t enough. ...
And now growth has stalled, while inflation has fallen far below the E.C.B.’s target of 2 percent, and prices are actually falling in debtor nations. It’s really a dismal picture. ... Europe will arguably be lucky if all it experiences is one lost decade.
The good news is that things don’t look that dire in America, where job creation seems finally to have picked up and the threat of deflation has receded, at least for now. But all it would take is a few bad shocks and/or policy missteps to send us down the same path.
The good news is that Janet Yellen, the Fed chairwoman, understands the danger; she has made it clear that she would rather take the chance of a temporary rise in the inflation rate than risk hitting the brakes too soon, the way the E.C.B. did in 2011. The bad news is that she and her colleagues are under a lot of pressure to do the wrong thing from [those] who seem to have learned nothing from being wrong year after year, and are still agitating for higher rates.
There’s an old joke about the man who decides to cheer up, because things could be worse — and sure enough, things get worse. That’s more or less what happened to Europe, and we shouldn’t let it happen here.
- The Supply-Side Case for Government Redistribution - Alan Blinder
- US homeowners stay unemployed for longer - Lindau Economics
- Bitcoin versus the Dollar - Haubrich and Orr
- Leaky repo deals present new concerns - FT.com
- The risks to the UK recovery are fiscal not monetary - mainly macro
- Europe’s Greater Depression is worse than the 1930s - The Washington Post
- More on the Welfare Consequences of Stimulus Spending - Orderstatistic
- Are foreign takeovers getting domestic cherries or lemons? - vox
- Peer-to-Peer Lending Is Poised to Grow - Demyanyk and Kolliner
- Is there a ‘taste for discrimination’? - vox
- Is the Division of Labor a Form of Enslavement? - Tim Taylor
- Common Pools and Wage Funds -- A Reply to Wren-Lewis - EconoSpeak
- Weekly Initial Unemployment Claims increase to 311,000 - Calculated Risk
Thursday, August 14, 2014
'A Clear Connection Between the Rise in Incomes at the Very Top and Lower Real Wages for Everyone Else'
...In the US the share of the 1% has increased from about 8% at the end of the 70s to nearly 20% today. If that has had no impact on aggregate GDP but is just a pure redistribution, this means that the average incomes of the 99% are 15% lower as a result. The equivalent 1% numbers for the UK are 6% and 13% (although as the graph shows, that 13% looks like a temporary downward blip from something above 15%), implying a 7.5% decline in the average income of the remaining 99%.
So there is a clear connection between the rise in incomes at the very top and lower real wages for everyone else. Arguments that try and suggest that any particular CEO’s pay increase does no one any harm may be appealing to a common pool type of logic, and are just as fallacious as arguments that some tax break does not leave anyone else worse off. It is an indication of the scale of the rise in incomes of the 1% over the last few decades that this has had a significant effect on the incomes of the remaining 99%.
Jennifer Castle and David Hendry on data mining
‘Data mining’ with more variables than observations: While ‘fool’s gold’ (iron pyrites) can be found by mining, most mining is a productive activity. Similarly, when properly conducted, so-called ‘data mining’ is no exception –despite many claims to the contrary. Early criticisms, such as the review of Tinbergen (1940) by Friedman (1940) for selecting his equations “because they yield high coefficients of correlation”, and by Lovell (1983) and Denton (1985) of data mining based on choosing ‘best fitting’ regressions, were clearly correct. It is also possible to undertake what Gilbert (1986) called ‘strong data mining’, whereby an investigator tries hundreds of empirical estimations, and reports the one she or he ‘prefers’ – even when such results are contradicted by others that were found. As Leamer (1983) expressed the matter: “The econometric art as it is practiced at the computer terminal involves fitting many, perhaps thousands, of statistical models. One or several that the researcher finds pleasing are selected for reporting purposes”. That an activity can be done badly does not entail that all approaches are bad, as stressed by Hoover and Perez (1999), Campos and Ericsson (1999), and Spanos (2000) – driving with your eyes closed is a bad idea, but most car journeys are safe.
Why is ‘data mining’ needed?
Econometric models need to handle many complexities if they are to have any hope of approximating the real world. There are many potentially relevant variables, dynamics, outliers, shifts, and non-linearities that characterise the data generating process. All of these must be modelled jointly to build a coherent empirical economic model, necessitating some form of data mining – see the approach described in Castle et al. (2011) and extensively analysed in Hendry and Doornik (2014).
Any omitted substantive feature will result in erroneous conclusions, as other aspects of the model attempt to proxy the missing information. At first sight, allowing for all these aspects jointly seems intractable, especially with more candidate variables (denoted N) than observations (T denotes the sample size). But help is at hand with the power of a computer. ...[gives technical details]...
Appropriately conducted, data mining can be a productive activity even with more candidate variables than observations. Omitting substantively relevant effects leads to mis-specified models, distorting inference, which large initial specifications should mitigate. Automatic model selection algorithms like Autometrics offer a viable approach to tackling more candidate variables than observations, controlling spurious significance.
Education Alone Is Not the Answer to Income Inequality and Slow Recovery: Our economy is now five years into an economic recovery, yet the wages of most Americans are flat. ... The top one percent has made off with nearly all of the economy’s gains since 2000.
Is there nothing that can be done to improve this picture?
To hear a lot of economists tell the story, the remedy is mostly education. It’s true that better-educated people command higher earnings. But...
If everyone in America got a PhD, the job market would not be transformed. Mainly, we’d have a lot of frustrated, over-educated people.
The current period of widening inequality, after all, is one during which more and more Americans have been going to college. Conversely, the era of broadly distributed prosperity in the three decades after World War II was a time when many in the blue-collar middle class hadn’t graduated from high school.
I’m not disparaging education—it’s good for both the economy and the society to have a well-educated population. But the sources of equality and prosperity mainly lie elsewhere. ...
David Andolfatto of the St. Louis Fed:
The Gold Standard and Price Inflation: Why doesn’t the U.S. return to the gold standard so that the Fed can’t “create money out of thin air”?
The phrase “create money out of thin air” refers to the Fed’s ability to create money at virtually zero resource cost. It is frequently asserted that such an ability necessarily leads to “too much” price inflation. Under a gold standard, the temptation to overinflate is allegedly absent, that is, gold cannot be “created out of thin air.” It would follow that a return to a gold standard would be the only way to guarantee price-level stability.
Unfortunately, a gold standard is not a guarantee of price stability. It is simply a promise made “out of thin air” to keep the supply of money anchored to the supply of gold. To consider how tenuous such a promise can be, consider the following example. On April 5, 1933, President Franklin D. Roosevelt ordered all gold coins and certificates of denominations in excess of $100 turned in for other money by May 1 at a set price of $20.67 per ounce. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the dollar value of gold on the Federal Reserve’s balance sheet by almost 70 percent. This action allowed the Federal Reserve to increase the money supply by a corresponding amount and, subsequently, led to significant price inflation.
This historical example demonstrates that the gold standard is no guarantee of price stability. Moreover, the fact that price inflation in the U.S. has remained low and stable over the past 30 years demonstrates that the gold standard is not necessary for price stability. Price stability evidently depends less on whether money is “created out of thin air” and more on the credibility of the monetary authority to manage the economy’s money supply in a responsible manner.
- Fiscal Flimflam, Revisited - Paul Krugman
- Has the Beveridge Curve Really Shifted? - Jared Bernstein
- Inequality and the common pool problem - mainly macro
- Chris House on stimulus spending - Noahpinion
- The Econinformatrician - Big Data Econometrics
- The Top 10 Myths About Social Security - EPI
- Heterogeneity in the value of life - vox
- Low Inflation Luxury - Lindau Economics
- What's the Matter With Europe? - Paul Krugman
- Do Households Benefit from the Great Moderation? - Cecchetti & Schoenholtz
- Boston Fed Chief Rosengren Calls for Overhaul of Repo Market - NYTimes.com
- Banks Retreat From Repo Market That Keeps Cash Flowing - WSJ
- Characteristics of U.S. Minimum Wage Workers - Tim Taylor
- The Two Amazons: The Disruptor and the Architect - Digitopoly
Wednesday, August 13, 2014
It's okay to help people:
EPI and AEI Agree: Cutting Jobless Benefits Did Not Boost Employment, by Joshua Smith, EPI: Perhaps Hell has not frozen over, but it appears that someone down there may have leaned on the thermostat. That’s right, the Economic Policy Institute and the American Enterprise Institute are in lock-step agreement on an important fiscal policy matter.
During the Great Recession and its aftermath, the federal government acted to help victims of the severe downturn by funding programs that extended unemployment benefits—to up to 99 weeks in some cases, up from the standard 26 weeks. As the economic recovery continued, weak as it was for many in the working class, many lawmakers on the right began to believe that these extended benefits were a drag on employment—the theory being that government checks reduced the incentive for recipients to find a job, and that cutting off this lifeline would compel unemployed workers to look harder for work and perhaps take jobs they may not have accepted if the benefits had continued. Relying on this premise, Congress allowed the federally-funded Emergency Unemployment Compensation program to lapse last December.
Now, more than seven months later, data are available to test this idea. Coming from perspectives that diverge greatly along the ideological spectrum, scholars at both AEI and EPI have come to the conclusion that this “bootstraps” theory is incorrect—curtailing jobless benefits did not boost employment. ...
Do the facts have a Keynesian bias?:
Using product- and labour-market tightness to understand unemployment, by Pascal Michaillat and Emmanuel Saez, Vox EU: For the five years from December 2008 to November 2013, the US unemployment rate remained above 7%, peaking at 10% in October 2009. This period of high unemployment is not well understood. Macroeconomists have proposed a number of explanations for the extent and persistence of unemployment during the period, including:
- High mismatch caused by major shocks to the financial and housing sectors,
- Low search effort from unemployed workers triggered by long extensions of unemployment insurance benefits, and
- Low aggregate demand caused by a sudden need to repay debts or pessimism, but no consensus has been reached.
In our opinion this lack of consensus is due to a gap in macroeconomic theory: we do not have a model that is rich enough to account for the many factors driving unemployment – including aggregate demand – and simple enough to lend itself to pencil-and-paper analysis. ...
In Michaillat and Saez (2014), we develop a new model of unemployment fluctuations to inspect the mechanisms behind unemployment fluctuations. The model can be seen as an equilibrium version of the Barro-Grossman model. It retains the architecture of the Barro-Grossman model but replaces the disequilibrium framework on the product and labour markets with an equilibrium matching framework. ...
Through the lens of our simple model, the empirical evidence suggests that price and real wage are somewhat rigid, and that unemployment fluctuations are mainly driven by aggregate demand shocks.
Heading Into Jackson Hole, by Tim Duy: The Kansas City Federal Reserve's annual Jackson Hole conference is next week, and all eyes are looking for signs that Fed Chair Janet Yellen will continue to chart a dovish path for monetary policy well into next year. Indeed, the conference title itself - "Re-Evaluating Labor Market Dynamics" - points in that direction, as it emphasizes a topic that is near and dear to Yellen's heart. My expectation is that no hawkish surprises emerge next week. Despite continued improvement in labor markets, Yellen will push the Fed to hold back on aggressively tightening monetary policy. And with inflation still below target, wage growth constrained, and inflation expectations locked down, she holds all the leverage to make that happen.
Today we received the June JOLTS report, a lagging, previously second-tier report elevated to mythic status by Yellen's interest in the data. The report revealed another gain in job openings, leading to further speculation that labor slack is quickly diminishing:
Anecdotally, firms are squealing that they can't find qualified workers. Empirically, though, they aren't willing to raise wages. Neil Irwin of the New York Times reports on the trucking industry as a microcosm of the US economy:
Yet the idea that there is a huge shortage of truck drivers flies in the face of a jobless rate of more than 6 percent, not to mention Economics 101. The most basic of economic theories would suggest that when supply isn’t enough to meet demand, it’s because the price — in this case, truckers’ wages — is too low. Raise wages, and an ample supply of workers should follow.But corporate America has become so parsimonious about paying workers outside the executive suite that meaningful wage increases may seem an unacceptable affront. In this environment, it may be easier to say “There is a shortage of skilled workers” than “We aren’t paying our workers enough,” even if, in economic terms, those come down to the same thing.The numbers are revealing: Even as trucking companies and their trade association bemoan the driver shortage, truckers — or as the Bureau of Labor Statistics calls them, heavy and tractor-trailer truck drivers — were paid 6 percent less, on average, in 2013 than a decade earlier, adjusted for inflation. It takes a peculiar form of logic to cut pay steadily and then be shocked that fewer people want to do the job.
A "peculiar form of logic" indeed, but one that appears endemic to US employers nonetheless. Meanwhile, from Business Insider:
Profit margins are still getting wider."With earnings growth (6.7%) rising at a faster rate than revenue growth (3.1%) in Q2 and in future quarters, companies have continued to discuss cost-cutting initiatives to maintain earnings growth rates and profit margins," said FactSet's John Butters on Friday.This comes at a time when profit margins are already at historic highs.Ever since the financial crisis, sales growth has been weak. However, corporations have been able to deliver robust earnings growth by fattening profit margins. Much of this has been done by laying off workers and squeezing more productivity out of those on the payroll.
Margins serve as a line of defense against inflation. In fact, I would imagine that Yellen's ideal world is one in which margins are compressing because stable inflation expectations prevent firms from raising prices while tight labor markets force wage growth higher. A Goldilocks scenario from the Fed's perspective. This is also the scenario that is most likely to foster the tension in the FOMC as Fed's hawks argue for immaculate inflation while doves battle back about actual inflation. In any event, until wage growth actually accelerates, the likelihood of any meaningful, self-sustaining inflation dynamic remains very, very low.
Separately, a second justification for a moderate pace of tightening emerges. Via Reuters:
Approaching a historic turn in U.S. monetary policy, Janet Yellen has staked her tenure as chair of the Federal Reserve on a simple principle: she'd rather fight inflation than another economic downturn.Interviews with current and former Fed officials indicate that Yellen and core decision-makers at the U.S. central bank are determined not to raise interest rates too early and risk hurting the fragile U.S. economy......The nightmare scenario she wants to avoid is hiking rates only to see financial markets and the economy take such a hit that she has to backtrack. Until the Fed has gotten rates up from the current level near zero to more normal levels, it would have little room to respond if the economy threatened to head into another recession.
Gasp! Is the reality of the zero bound finally sinking in at the Fed? The basic argument is that the Fed needs to at least risk overshooting to pull interest rates into a zone that allows for normalized monetary policy during the next recession. And given that the Fed knows how to effectively tame inflation while stimulating the economy at the zero bound in more challenging, the costs of overshooting are less than the costs of undershooting.
(Note that I suspect overshooting in this context is the 2.25-2.5% range, but that still provides more leeway than a 2.25% cap.)
In addition, Yellen can point out that since the disinflation of the early 90's, the Fed has not faced an inflation problem, but instead has struggled with three recessions. This on the surface suggests that monetary policy has erred in being too tight on average.
Bottom Line: Anything other than a dovish message coming from the Jackson Hole conference will be a surprise. Tight labor markets alone will not justify an aggressive pace of tightening. An aggressive pace requires that those tight labor markets manifest themselves into higher wage growth and higher inflation. Yellen seems content to normalize slowly until she sees the white in the eyes of inflation.
- The Failure of Demand Management Policy - Brad DeLong
- ‘Data mining’ with more variables than observations - vox
- The September 2014 recession? - Antonio Fatas
- Money, prices, and coordination failures - Nick Rowe
- I'm With Stupid, and Paul Krugman - Bloomberg View
- The Nonsense on Corporate Tax Reform - Economic Policy Institute
- Lionel McKenzie and General Equilibrium Theory - EconoSpeak
- Has Italy Really “Gone Back Into Recession”? - Jeffrey Frankel
- Are Agent-Based Models the Future of Macro? - Orderstatistic
- Natural disasters, firm activity, and damage to banks - vox
- Why Longer Economics Articles? - Tim Taylor
- The Apocalypse Predicted - Econbrowser
- No more boom and bust? - Roger Farmer
- Policy Based Evidence Making - mainly macro
Tuesday, August 12, 2014
I have a new column:
Why Do Macroeconomists Disagree?, by Mark Thoma, The Fiscal Times: On August 9, 2007, the French Bank BNP Paribus halted redemptions to three investment funds active in US mortgage markets due to severe liquidity problems, an event that many mark as the beginning of the financial crisis. Now, just over seven years later, economists still can’t agree on what caused the crisis, why it was so severe, and why the recovery has been so slow. We can’t even agree on the extent to which modern macroeconomic models failed, or if they failed at all.
The lack of a consensus within the profession on the economics of the Great Recession, one of the most significant economic events in recent memory, provides a window into the state of macroeconomics as a science. ...
Me, at MoneyWatch:
Yes, immigration does help domestic workers: The contentious debate over immigration in both the U.S. and Europe is largely based on the worry that immigration hurts domestic workers, particularly low-skilled workers. But is this actually true? Could this concern over immigration be misplaced? Could it be that immigrants actually help native workers? ...
Bill McBride at Calculated Risk:
There were 4.7 million job openings on the last business day of June, little changed from 4.6 million in May, the U.S. Bureau of Labor Statistics reported today. ...
Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. ... The number of quits (not seasonally adjusted) increased over the 12 months ending in June for total nonfarm and total private. The number of quits was little changed for government.
... Jobs openings increased in June to 4.671 million from 4.577 million in May. This is the highest level since February 2001. The number of job openings ... are up 18% year-over-year compared to June 2013. Quits are up 15% year-over-year. These are voluntary separations. ...
It is a good sign that job openings are over 4 million for the fifth consecutive month, and that quits are increasing.
- The Startling Story behind a Famous Footnote - Economic Principals
- The Great Recession: Moving Ahead - Stan Fischer
- Unemployment, and product and labour-market tightness - vox
- EPI and AEI Agree: Cutting Benefits Did Not Boost Employment - EPI
- Inequality -- a key issue of economic research - Lindau Nobel Meetings
- Lessons from an experiment with referees at the J. Public Economics - vox
- Minimum wages aren't just for lowest wage workers - David Cay Johnston
- Owners’ Equivalent Rent Inflation Is Probably Not a Blip - Cleveland Fed
- Equality lacks relevance if the poor are growing richer - Deirdre McCloskey
- Who is Holding the Large-Denomination Bills? - Tim Taylor
- Realism and methodology - Understanding Society
- Cyclones and Economic Growth - Growth Economics
- The Glory of Math Is to Matter - Scientific American
- Competition amongst cryptocurrencies and exchanges - Digitopoly
- Part-Time Worker Levels Remain a Concern - St. Louis Fed
- Are We There Yet? - macroblog
Monday, August 11, 2014
...The rather boring truth is that it is entirely predictable that forecasters will miss major recessions, just as it is equally predictable that each time this happens we get hundreds of articles written asking what has gone wrong with macro forecasting. The answer is always the same - nothing. Macroeconomic model based forecasts are always bad, but probably no worse than intelligent guesses.
Celebrating Greenspan's Legacy of Failure: On this day in 1987, Alan Greenspan became chairman of the Federal Reserve Board. This anniversary allows us to take a quick look at what followed over the next two decades. As it turned out, it was one of the most interesting and, to be blunt, weirdest tenures ever for a Fed chairman.
This was largely because of the strange ways Greenspan's infatuation with the philosophy of Ayn Rand manifested themselves. He was a free marketer who loved to intervene in the markets, a chief bank regulator who seemingly failed to understand even the most basic premise of bank regulations. ...
The contradictions between Greenspan's philosophy and his actions led to many key events over his career. The ones that stand out the most in my mind are as follows...
Barry concludes with:
It's worth noting that, Greenspan’s intellectual hero, Rand, also turned her back on her own philosophy, living off of Social Security and other government aid before she died of cancer in 1982.
In the end, a central banker cannot be both concerned with asset prices yet comfortable with collapsing bubbles. These are inherently contradictory beliefs. That is why Greenspan’s tenure was both disastrous and fascinating.
Cecchetti & Schoenholtz
How much is our distant future worth?: ...One new report estimates that – on the current path – perhaps $500 billion of U.S. coastal properties will be below sea level by 2100. ... We have plenty of other longer-run worries, too; like surviving a future asteroid hit (an event like the Tunguska blast of 1908 – perhaps 1,000 times more powerful than the Hiroshima bomb – probably occurs every 1,200 years) or managing radioactive waste (which can be toxic for tens of thousands or even millions of years).
How much should we care about such big threats that are potentially far off in time? How much ought we spend now to avoid a $1 worth of damage hundreds of years in the future? ... [explains how long-term discount rates are calculated] ...
Economists have tried several (more sophisticated) ways to measure very long-term discount rates... One well-known report, which applied a relatively low discount rate of 1.4%, called for rapid, large reductions in carbon emissions to limit future losses associated with climate change. A different analysis based on a relatively high 4.3% discount rate called for a carbon tax only about one-tenth the level implied by the low-discount rate analysis. Why? The low discount rate puts a great deal more weight on losses that are predicted to occur hundreds of years in the future.
Of course, it’s not just about discount rates. It’s about the scale of future losses, too. If policy actions today can prevent a calamity that threatens life on earth, then most people (including us) might judge the appropriate discount rate to be quite low because we would not weight the value of future lives any lower than their own. And there’s at least one powerful reason to suspect that ... today’s governments don’t weight those future lives sufficiently: our distant descendants don’t vote.
From the NY Fed's Liberty Street Economics:
Inflation in the Great Recession and New Keynesian Models, by Marco Del Negro, Marc Giannoni, Raiden Hasegawa, and Frank Schorfheide: Since the financial crisis of 2007-08 and the Great Recession, many commentators have been baffled by the “missing deflation” in the face of a large and persistent amount of slack in the economy. Some prominent academics have argued that existing models cannot properly account for the evolution of inflation during and following the crisis. For example, in his American Economic Association presidential address, Robert E. Hall called for a fundamental reconsideration of Phillips curve models and their modern incarnation—so-called dynamic stochastic general equilibrium (DSGE) models—in which inflation depends on a measure of slack in economic activity. The argument is that such theories should have predicted more and more disinflation as long as the unemployment rate remained above a natural rate of, say, 6 percent. Since inflation declined somewhat in 2009, and then remained positive, Hall concludes that such theories based on a concept of slack must be wrong.
In an NBER working paper and a New York Fed staff report (forthcoming in the American Economic Journal: Macroeconomics), we use a standard New Keynesian DSGE model with financial frictions to explain the behavior of output and inflation since the crisis. This model was estimated using data up to 2008. We find that following the increase in financial stress in 2008, the model successfully predicts not only the sharp contraction in economic activity, but also only a modest decline in inflation. ...
Markets are not always magic:
Phosphorus and Freedom, by Paul Krugman, Commentary, NY Times: In the latest Times Magazine, Robert Draper profiled youngish libertarians ... and asked whether we might be heading for a “libertarian moment.” Well, probably not. Polling suggests that young Americans tend, if anything, to be more supportive of the case for a bigger government than their elders. But I’d like to ask a different question: Is libertarian economics at all realistic?
The answer is no. And the reason can be summed up in one word: phosphorus.
As you’ve probably heard,... Toledo recently warned its residents not to drink the water. Why? Contamination from toxic algae blooms in Lake Erie, largely caused by the runoff of phosphorus from farms.
When I read about that, it rang a bell. Last week many Republican heavy hitters spoke at a conference sponsored by the blog Red State... A few years back ... Erick Erickson, the blog’s founder ... suggested that oppressive government regulation had reached the point where citizens might want to “march down to their state legislator’s house, pull him outside, and beat him to a bloody pulp.” And the source of his rage? A ban on phosphates in dishwasher detergent. After all, why would government officials want to do such a thing? ...
Smart libertarians have always realized that there are problems free markets alone can’t solve — but their alternatives to government tend to be implausible. ...
More commonly, self-proclaimed libertarians deal with the problem of market failure both by pretending that it doesn’t happen and by imagining government as much worse than it really is. ...
Libertarians also ... don’t want to believe that there are problems whose solution requires government action, so they tend to assume that others similarly engage in motivated reasoning to serve their political agenda... Paul Ryan ... doesn’t just think we’re living out the plot of “Atlas Shrugged”; he asserts that all the fuss over climate change is just “an excuse to grow government.”
As I said at the beginning, you shouldn’t believe talk of a rising libertarian tide..., real power on the right still rests with the traditional alliance between plutocrats and preachers. But libertarian visions of an unregulated economy do play a significant role in political debate, so it’s important to understand that these visions are mirages. Of course some government interventions are unnecessary and unwise. But the idea that we have a vastly bigger and more intrusive government than we need is a foolish fantasy.
- ECB needs to talk about slack and not structural reforms - Antonio Fatas
- The revolving door and worker flows in banking regulation - vox
- Is pessimism about European debt levels justified? - mainly macro
- Why has the Bank of Canada "done nothing" for 4 years? - Nick Rowe
- The Empiricist Strikes Back - Paul Krugman
- Investment slumps - Econbrowser
- It's The Population, Stupid - Chhota Pegs
- Meanwhile, in Europe - Paul Krugman
- Why is enterprise software so bad? - Frances Woolley
- ‘Wait and See’ as the appropriate response to disruption - Digitopoly
- The Intuition behind Wallace Neutrality, Attempt 3 - Richard Serlin
Sunday, August 10, 2014
According to this research, "the preponderance of net job loss in the US manufacturing sector comes within companies that stay at home and do not invest abroad":
The US manufacturing base is surprisingly strong, by Theodore H. Moran and Lindsay Oldenski, Vox EU: Introduction Recently, a number of studies, descriptive employment statistics, and statements by US politicians have raised concerns about the strength of US manufacturing. For example, in a January 2014 Journal of Economic Perspectives article, Martin Baily and Barry Bosworth expressed concern about the recent absolute decline in US manufacturing employment, as well as the long-recognised decreasing share of manufacturing within overall US employment. They also argued that productivity growth in manufacturing can be attributed solely to the unusual performance of computer production rather than to the accomplishments of the manufacturing sector more broadly. US Senator Bernie Sanders of Vermont states on his website that “The manufacturing sector in Vermont and throughout the United States has eroded significantly in recent years and must be rebuilt to expand the middle class”. President Barack Obama has based his corporate tax reform proposals on the view that US manufacturing firms must be discouraged from “shipping jobs overseas” (State of the Union 2013).
To be sure, the evidence is indisputable that manufacturing employment has been steadily declining as a share of total US employment, and the absolute number of US manufacturing jobs has plummeted by almost 30% just since 2000. But the perennial focus on employment masks important signs of the growing strength of the US manufacturing base. In a recent Peterson Institute for International Economics (PIIE) policy brief (Moran and Oldenski 2014), we analyse the most detailed and up-to-date data on the state of US manufacturing.
- Our research shows that the overall size of the US industrial base – real value-added in manufacturing – has been growing rapidly for more than four decades, and is on track to surpass the all-time 2006-7 high before the end of 2014.
- In contrast to other researchers, we show that US manufacturing growth is broad-based and includes subsectors such as transportation equipment, medical equipment, machinery, semiconductors, communications equipment, and motor vehicles, as well as computers and electronics.
- Moreover, contrary to widespread hand-wringing about weakening competitive performance on the part of US firms and workers, productivity in the manufacturing sector has been growing, both absolutely and relative to other sectors of the US economy.
At the same time, the most recent data show that the productivity growth in US manufacturing is also strong in comparison to other countries.
- Finally, our research shows clearly that increased offshoring of manufacturing operations by US multinationals is associated with increases in the size and strength of their manufacturing activities in the US.
Indeed, the preponderance of net job loss in the US manufacturing sector comes within companies that stay at home and do not invest abroad. Of particular note is the large feedback to US R&D and other high-skilled services from outward investment on the part of US manufacturing multinationals. ...
Conclusions A careful look at the most recent and detailed data shows that despite falling employment, the US manufacturing base is growing larger, more productive, and more competitive. The results of our empirical analysis show that the expansion of operations abroad by US manufacturing multinationals leads to particularly strong increases in economic activity – including creation of greater numbers of high-paying manufacturing jobs – by those same firms in the US domestic economy. The policy implications are clear – any measures that the US might take to hinder or dis-incentivise outward expansion by US firms would lead to less robust economic activity – and fewer good US jobs at home, not more.
- Libertarian Fantasies - Paul Krugman
- When She Talks, Banks Shudder - NYTimes.com
- The Opposite of Stagflation - Paul Krugman
- Basic Income is good because it's basic - Noahpinion
- Why Death Matters for Central Bank Policy - Roger Farmer
- Bayesian consistency - The Leisure of the Theory Class
- WTO trade disputes, big and small - vox
Saturday, August 09, 2014
Quiet day in blogland. Here's something to kick around for those of you who are so inclined:
Shareholder vs. Stakeholder Capitalism: ...We may be witnessing the beginning of a return to a form of capitalism that was taken for granted in America sixty years ago. ...
Are we witnessing the reemergence of "Stakeholder Capitalism"? I'm doubtful.
- Nerds, Elitism and Immigration - mainly macro
- The US manufacturing base is surprisingly strong - vox
- Reagan and the Great Man in history - Crooked Timber
- More Evidence Supporting the House of Debt - House of Debt
- Monetary policy transmission via balance sheets: Evidence from Japan - vox
- Economic Gains Likely to Tighten Job Market, Push Up Wages - Dallas Fed
- Can the Fed set interest rates? - Noahpinion
- Tracking Keynes through King’s - King's Review
- Making Say's Law True in Practice? - EconoSpeak
- The status of women in India - Understanding Society
- What Today's Economic Gloomsayers Are Missing - Joel Mokyr
- What We Mean When We Say Student Debt Is Bad - NYTimes.com
- Dodd-Frank: Unfinished and Unstarted Business - Tim Taylor
- Libertarian Case for a Basic Income Doesn't Add Up - Mike Konczal
- The Hamburg Crisis of 1799 - Liberty Street Economics
- Why Didn’t the Tiv have a State? - Why Nations Fail
Friday, August 08, 2014
David Altig (Research Director at the Atlanta Fed):
Getting There?, by David Altig, Macroblog: To say that last week was somewhat eventful on the macroeconomic data front is probably an exercise in understatement. Relevant numbers on GDP growth (past and present), employment and unemployment, and consumer price inflation came in quick succession.
These data provide some of the context for our local Federal Open Market Committee participant’s comments this week (for example, in the Wall Street Journal’s Real Time Economics blog, with similar remarks made in an interview on CNBC’s Closing Bell). From that Real Time Economics blog post:
Although the economy is clearly growing at a respectable rate, Federal Reserve Bank of Atlanta President Dennis Lockhart said Wednesday it is premature to start planning an early exit from the central bank’s ultra-easy policy stance.“I’m not ruling out” the idea the Fed may need to raise short-term interest rates earlier than many now expect, Mr. Lockhart said in an interview with The Wall Street Journal. But, at the same time, “I’m a little bit cautious” about the policy outlook, and still expect that when the first interest rate hike comes, it will likely happen somewhere in the second half of next year.“I remain one who is looking for further validation that we are on a track that is going to make the path to our mandate objectives pretty irreversible,” Mr. Lockhart said. “It’s premature, even with the good numbers that have come in...to draw the conclusion that we are clearly on that positive path,” he said.
Why so “cautious”? Here’s the Atlanta Fed staff’s take on the state of things, starting with GDP:
With the annual benchmark revision in hand, 2013 looks like the real deal, the year that the early bet on an acceleration of growth to the 3 percent range finally panned out. Notably, fiscal drag (following the late-2012 budget deal), which had been our go-to explanation of why GDP appeared to have fallen short of expectations once again, looks much less consequential on revision.
Is 2014 on track for a repeat (or, more specifically, comparable performance looking through the collection of special factors that weighed on the first quarter)? The second-quarter bounce of real GDP growth to near 4 percent seems encouraging, but we are not yet overly impressed. Final sales—a number that looks through the temporary contribution of changes in inventories—clocked in at a less-than-eye-popping 2.3 percent annual rate.
Furthermore, given the significant surprise in the first-quarter final GDP report when the medical-expenditure-soaked Quarterly Services Survey was finally folded in, we’re inclined to be pretty careful about over-interpreting the second quarter this early. It’s way too early for a victory dance.
Regarding labor markets, here is our favorite type of snapshot, courtesy of the Atlanta Fed’s Labor Market Spider Chart:
There is a lot to like in that picture. Leading indicators, payroll employment, vacancies posted by employers, and small business confidence are fully recovered relative to their levels at the end of the Great Recession.
On the less positive side, the numbers of people who are marginally attached or who are working part-time while desiring full-time hours remain elevated, and the overall job-finding rate is still well below prerecession levels. Even so, these indicators are noticeably better than they were at this time last year.
That year-over-year improvement is an important observation: the period from mid-2012 to mid-2013 showed little progress in the broader measures of labor-market performance that we place in the resource “utilization” category. During the past year, these broad measures have improved at the same relative pace as the standard unemployment statistic.
We have been contending for some time that part-time for economic reasons (PTER) is an important factor in understanding ongoing sluggishness in wage growth, and we are not yet seeing anything much in the way of meaningful wage pressures:
There was, to be sure, a second-quarter spike in the employment cost index (ECI) measure of labor compensation growth, but that increase followed a sharp dip in the first quarter. Maybe the most recent ECI reading is telling us something that hourly earnings are not, but that still seems like a big maybe. Outside of some specific sectors and occupations (in manufacturing, for example), there is not much evidence of accelerating wage pressure in either the data or in anecdotes we get from our District contacts. We continue to believe that wage growth is most consistent with the view that that labor market slack persists, and underlying inflationary pressures (from wage costs, at least) are at bay.
Clearly, it’s dubious to claim that wages help much in the way of making forward predictions on inflation (as shown, for example, in work from the Chicago Fed, confirming earlier research from our colleagues at the Cleveland Fed). And in any event, we are inclined to agree that the inflation outlook has, in fact, firmed up. At this time last year, it was hard to argue that the inflation trend was moving in the direction of the Committee’s objective (let alone that it was not actually declining).
But here again, a declaration that the risks have clearly shifted in the direction of overshooting the FOMC’s inflation goals seems wildly premature. Transitory factors have clearly elevated recent statistics. The year-over-year inflation rate is still only 1.5 percent, and by most cuts of the data, the trend still looks as close to that level as to 2 percent.
We do expect measured inflation trends to continue to move in the direction of 2 percent, but sustained performance toward that objective is still more conjecture than fact. (By the way, if you are bothered by the appeal to a measure of core personal consumption expenditures in that chart above, I direct you to this piece.)
All of this is by way of explaining why we here in Atlanta are “a little bit cautious” about joining any chorus singing from the we’re-moving-on-up songbook. Paraphrasing from President Lockhart’s comments this week, the first steps to policy normalization don’t have to wait until the year-over-year inflation rate is consistently at 2 percent, or until all of the slack in the labor market is eliminated. But it is probably prudent to be fairly convinced that progress to those ends is unlikely to be reversed.
We may be getting there. We’re just not quite there yet.
"It just isn't so":
On Reaganolatry, by Paul Krugman: The truly vile attack on Rick Perlstein’s new book has been revealing in a number of ways. ...
And why this determination to quash Perlstein? It’s all about Reaganolatry, the right’s need to see the man as perfect. ... Everyone on the right knows that Reagan presided over job creation on a scale never seen before or since; but it just isn’t so. In fact, if you look at monthly rates of job creation for the past six administrations, it’s actually startling:
You may have known that Clinton was a better “job creator” than Reagan, but did you know that over the course of the Carter administration — January 1977 to January 1981 — the economy actually added jobs faster than it did under Reagan? Maybe you want to claim that the 1981-82 recession was Carter’s fault (although actually it was the Fed’s doing), so that you start counting from almost two years into Reagan’s term; but in that case why not give Obama the same courtesy? The general point is that the supposed awesomeness of Reagan’s economic record just doesn’t pop out of the data.
But don’t expect the Reaganlators to acknowledge that. Their whole sense of identity is bound up with their faith.
Another one from today's links. This is by Brad DeLong:
Making Sense of Friedrich A. von Hayek: Focus/The Honest Broker for the Week of August 9, 201, by Brad DeLong: One way to conceptualize it all is to think of it as the shape of a river:
The first current is the Adam Smith current, which makes the classical liberal bid: Smith claims that the system of natural liberty; with government restricted to the rule of law, infrastructure, defense, and education; is the best of all social arrangements.
This first current is then joined by the Karl Polanyi current: Polanyi says that, empirically, at least in the Industrial Age, the system of natural liberty fails to produce a good-enough society. The system of natural liberty turns land, labor, and finance into commodities. The market then moves them about the board in its typically disruptive fashion: “all that is solid melts into air”, or perhaps “established and inherited social orders are steamed away”. But land, finance, and labor–these three are not real commodities. They are, rather, “fictitious commodities”, for nobody wants their ability to earn a living, or to live where they grew up, or to start a business to be subject to the disruptive wheel of market fortuna.
The social disruption produced by allowing the prices of these “fictitious commodities” to be set by market forces is too great to be sustained. Politics will not allow it. And so a good society needs to regulate: A good society needs to regulate the market for land so that people are not thrown off of what they have good reason to regard as theirs even if they lack the proper pieces of paper. A good society needs to regulate the market for finance in order to maintain full employment and price stability. A good society needs to regulate the market for labor to ensure that everyone has the opportunity to work at a living wage.
Thus we must move forward from classical liberalism to social democracy.
That is Karl Polanyi’s argument. And it is convincing. Classical liberalism supports and justifies economies that produce a great deal of unnecessary human misery: that seems very, very clear indeed by the time of the Great Depression. As John Maynard Keynes wrote in his 1926 essay, “The End of Laissez Faire”, nineteenth and early twentieth-century history teach one big lesson...
There's quite a bit more after that, including a discussion of "three other channels in the delta besides Polanyi-style social democracy: call them Leninism, Keynesianism, and Hayekism."
This was in today's links. The abstract:
How immigration benefits natives despite labour market imperfections and income redistribution, by Michele Battisti, Gabriel Felbermayr, Giovanni Peri, and Panu Poutvaara, Vox EU: Immigration continues to be a hotly debated topic in most OECD countries. Economic models emphasising the benefits of immigration for natives have typically neglected unemployment and redistribution – precisely the things voters are most concerned about. This column analyses the effects of immigration in a world with labour market rigidities and income redistribution. In two-thirds of the 20 countries analysed, both high-skilled and low-skilled natives would benefit from a small increase in immigration from current levels. The average welfare gains from immigration are 1.25% and 1.00% for high- and low-skilled natives, respectively.
And the conclusion:
Our analysis shows that immigration into imperfectly competitive labour markets need not be worsening labour market outcomes for natives. Instead, it can improve the job creation incentives of firms. Thus, measures that aim at eliminating the immigrant–native wage gap may hurt natives. This positive effect is threatened if immigrants are too often unemployed or if too many of them are unskilled. Policies reducing the rate of job loss for immigrants would therefore help natives. Finally, in contrast to widespread belief, immigrants do not seem to hurt low-skilled natives, even in the more realistic framework developed here. This is because immigration is often balanced between more and less educated, because its job-creation effect can help, and because redistribution towards immigrants is not as large as often suggested in the debate.
Reducing inequality "can make the nation as a whole richer":
Inequality Is a Drag, by Paul Krugman, Commentary, NY Times: For more than three decades, almost everyone who matters in American politics has agreed that higher taxes on the rich and increased aid to the poor have hurt economic growth. ...
But there’s now growing evidence for a new view — namely, that the whole premise of this debate is wrong,... coming from places like the International Monetary Fund, that high inequality is a drag on growth, and that redistribution can be good for the economy. ...
But how is that possible? Doesn’t taxing the rich and helping the poor reduce the incentive to make money? Well, yes, but ... extreme inequality deprives many people of the opportunity to fulfill their potential.
Think about it. Do talented children in low-income American families have the same chance ... to get the right education, to pursue the right career path ... as those born higher up the ladder? Of course not. ... Extreme inequality means a waste of human resources.
And government programs that reduce inequality can make the nation as a whole richer, by reducing that waste.
Consider, for example,... food stamps, perennially targeted by conservatives who claim that they reduce the incentive to work. The historical evidence does indeed suggest that ... food stamps ... somewhat reduces work effort, especially by single mothers. But it also suggests that Americans who had access to food stamps when they were children grew up to be healthier and more productive..., which means that they made a bigger economic contribution. The purpose of the food stamp program was to reduce misery, but it’s a good guess that the program was also good for American economic growth.
The same thing, I’d argue, will end up being true of Obamacare. Subsidized insurance will induce some people to reduce the number of hours they work, but it will also mean higher productivity from Americans who are finally getting the health care they need, not to mention making better use of their skills because they can change jobs without the fear of losing coverage. Over all, health reform will probably make us richer as well as more secure.
Will the new view of inequality change our political debate? It should. Being nice to the wealthy and cruel to the poor is not, it turns out, the key to economic growth. On the contrary, making our economy fairer would also make it richer. Goodbye, trickle-down; hello, trickle-up.
- A recession without a boom? - Antonio Fatas
- How immigration benefits natives - vox
- Inequality and Growth - Jared Bernstein
- The economic impact of beliefs - Lindau Blog
- Making Sense of Friedrich A. von Hayek - Brad DeLong
- Holes in the welfare hammock - Catherine Rampell
- U.S. Labor Force: Where Have All the Workers Gone? - IMF Blog
- Federal Reserve finds US households are unwell - FT Alphaville
- ‘No more bank bailouts’ cannot be an empty slogan - FT.com
- If new money is always paid as interest on old money - Nick Rowe
- Pity the robot drivers snarled in a human moral maze - Tim Harford
- The economy of bitcoins - EurekAlert
- LEVs in HOVs? - Tim Taylor
- The theory of global imbalances - Thomas Palley
- Inheritance flows in Sweden, 1810–2010 - vox
- The Two Lines of Defense Against Too-Big-To-Fail - Next New Deal
- Weekly Initial Unemployment Claims decline - Calculated Risk
- Should I buy or should I sell? - Cecchetti & Schoenholtz
Thursday, August 07, 2014
How the incipient inflation freak-out could wreck the recovery, by Dean Baker and Jared Bernstein: As predictable as August vacations, numerous economists and Federal Reserve watchers are arguing that the nation’s central bank must raise interest rates or risk an outbreak of spiraling inflation. Their campaign has heated up a bit in recent months, as one can cherry pick an indicator or two showing slightly faster growth in prices or wages.
But an objective analysis of the recent data, along with longer-term wage trends, reveals that the stakes of premature tightening are unacceptably high. The vast majority of the population depends on their paychecks, not their stock portfolios. If the Fed were to slam on the breaks by raising interest rates as soon as workers started to see some long-awaited real wage gains, it would be acting to prevent most of the country from seeing improvements in living standards.
To understand why continued support from the Fed is unlikely to be inflationary, consider three factors: the current state of key variables, the mechanics of inflationary pressures and the sharp rise in profits as a share of national income in recent years, along with its corollary, the fall in the compensation share. ...
Will the US inflate away its public debt?, by Ricardo Reis, Vox EU: Should the US Federal Reserve raise the inflation target from its current level of 2%? And will it? One benefit would be to make hitting the zero lower bound less likely, which would lead to less severe recessions, as Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro (2010), Daniel Leigh (2010), and Laurence Ball (2013) have argued on this website. Other benefits of higher inflation that Kenneth Rogoff has been emphasising for a while might include accelerating the fall in real wages during the recession, and deflating away debt overhang (Rogoff 2014).1
One of the most indebted economic agents is the government. The federal debt limit has had to be raised repeatedly in the past few years, and at the end of the 2013 fiscal year the gross federal debt outstanding was 101% of GDP – the highest ratio since 1948. It is therefore natural to imagine – like Aizenman and Marion (2009) –that inflating away the public debt is possible, perhaps effective, and maybe even desirable. Using a simple rule of thumb to estimate the effect of higher inflation on the real value of debt, they venture that US inflation of 6% for four years could reduce the debt-GDP ratio by roughly 20%.
However, in our recent work we show that the probability that US inflation lowers the real value of the debt by even as little as 4.2% of GDP is less than 1% (Hilscher, Raviv and Reis, 2014). Why is this estimate so small? We show that there are two reasons: first, the private sector holds shorter maturity debt; second, high levels of inflation in the next few years are extremely unlikely. ...
One way or another, budget constraints will always hold. This is true as much for a household or a firm as it is for the central bank or the government as a whole. If the US government is to pay its debt, then it must either raise fiscal surpluses or hope for higher economic growth; the former is painful and the latter is hard to depend on. It is therefore tempting to yield to the mystique of central banking and believe in a seemingly feasible and reliable alternative: expansionary monetary policy and higher inflation.3 Crunching through the numbers we find that this alternative is not really there.
- Big Thinking About ObamaCare - Brad DeLong
- How Gender Changes Piketty’s ‘Capital' - The Nation
- What is methodology? - Understanding Society
- Regulators: Banks' Optimism Killed 'Living Wills' - WSJ
- The Quantity Theory and Neutrality with endogenous money - Nick Rowe
- Grade Inflation: Evidence from Two Policies - Tim Taylor
- Trade Deficit decreased in June to $41.5 Billion - Calculated Risk
- Can a British Comedian End Inequality? - Bloomberg View
- Reducing Carbon by Curbing Population - NYTimes.com
Wednesday, August 06, 2014
Fed Hawks Squawk, by Tim Duy: How much leeway does Fed Chair Janet Yellen have in her campaign to hold interest rates low for a considerable period after asset purchases end later this year? If you listen to Fed hawks, you would believe that she is quickly running out of room. Dallas Federal Reserve President Richard Fisher argued that the liftoff date for interest rates is creeping forward. From Reuters:
"I think the committee, as I listen to them and I can only speak for myself around that table during two days of discussion, is coming in my direction, so I didn’t feel the need to dissent,” Dallas Federal Reserve Bank President Richard Fisher said on Fox Business Network."We are going to have to move the date of liftoff further forward than had been projected the last time we issued the 'dots'” he said, referring to the official Fed forecasts for short-term interest rates, last issued in June.
At the time of the June FOMC meeting, the most recent read on the unemployment rate was 6.3% (May), while the July rate was just a nudge lower at 6.2%. The inflation rate (core-PCE) at the time of the June FOMC meeting was 1.43% (April), compared to 1.49% in June. So the Fed is arguably just a little closer to its goals, but enough to dramatically move forward the dots just yet? Not sure about that, but a downward lurch of unemployment in the next report would likely elicit a reaction in the dots. If the dots don't move, Fisher promises a dissent at the next FOMC meeting.
The pace of the tightening, however, is in my opinion more important than the timing of the first rate hike. Richmond Federal Reserve President Jeffrey Lacker argues that the pace of rate hikes will be more aggressive than currently anticipated by market participants. Via Craig Torres at Bloomberg:
Investors may be underestimating the pace at which the Federal Reserve will raise interest rates over the next two years, said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond.Short-term interest-rate markets have for months priced in a slower tempo of increases than policy makers themselves forecast. That’s risky because the misalignment, a bet against a rate path that the central bank alone controls, could lead to volatility if traders have to adjust rapidly, Lacker said.“When there is that kind of gap, it gets your attention,” Lacker, a consistent critic of the Fed’s record easing who votes on policy next year, said in an Aug. 1 interview at his Richmond office overlooking the James River. “It wouldn’t be good for it to be closed with great rapidity.”
How much should we listen to Lacker? Torres notes correctly that Lacker's track record on policy is not exactly the greatest:
Lacker’s forecasts haven’t always been on target, which he’s acknowledged in his speeches. In a March 2012 dissent, he indicated the federal funds rate would have to rise “considerably sooner” than late 2014 “to prevent the emergence of inflationary pressures,” according to minutes of the meeting. The benchmark rate is still close to zero, and inflation is below the Fed’s target.
ISI's Krishna Guha suggests that the market expects that Fed Chair Janet Yellen's forecast will win the day. Via Matthew Boes:
"The market now appears to be tracking a guesstimate of the 'Yellen dot' rather than the median"—ISI's Krishna Guha pic.twitter.com/rhlox9dJe3— Matthew B (@boes_) August 4, 2014
Where to begin? First, it is worth dispensing with the myth of "immaculate inflation." Fed hawks seem to believe that low unemployment is sufficient to send inflation screaming higher. They see the 1970s under ever carpet, behind every closet door. But the relationship between unemployment and inflation is simply very weak:
Generally, inflation has been within a range of 1.0% to 2.5% since the disinflation of the early 1990s. No immaculate inflation. What is missing to generate that immaculate inflation? Inflation expectations. After the decline in inflation expectations in the early 1980's:
inflation expectations have been remarkably stable:
As long as inflation expectations remain anchored, immaculate inflation remains unlikely. Stable inflation expectations thus clearly give Yellen room to pursue a less aggressive normalization strategy. Note that this does not mean waiting until inflation expectations begin to rise before tightening. Remember that the reason that inflation expectations remain anchored is because the Fed does in fact tighten policy in when conditions point toward above-target inflation. The Fed learned in the early 1980s that they do in fact have substantial control over inflation expectations, and they intend to retain that control. But without conditions that argue for a real threat to those expectations - including, notably, actual inflation above the 2.25% in the context of faster wage growth - Yellen will have justification to resist an aggressive pace of tightening.
Moreover, Yellen still has tepid wage growth on her side. And if unemployment dips below 6% as seem inevitable by the end of this year, I suspect we will move into a critical test of the Yellen hypothesis. Consider the relationship between wage growth and unemployment:
The downward slop looks obvious, but becomes even clearer if we isolate some of the movement associated with recessions:
At the moment, wage growth is on the soft side of where we might expect given the unemployment rate, consistent with Yellen's position. If that situation continues, then it follows that Yellen will have a strong hand to play with the FOMC. Lack of wage growth by itself would argue for a very gradual pace of rate hikes even in the face of higher inflation. Yellen - and the majority of the FOMC - will not see a threat to inflation expectations at the current pace of wage growth.
Bottom Line: At the moment, we are focused on wages as the missing part of the higher rate equation. But that is too narrow of an analysis. Also on Yellen's side is low actual inflation and anchored inflation expectations. To be sure, the Fed will be under increasing pressure to begin normalizing policy if unemployment drops below 6%. At that point the Fed will be sufficiently close to their objectives that they will believe the odds of falling behind the curve will rise in the absence of movement toward policy normalization. But without a more pressing threat to inflation expectations from a combination of actual inflation in excess of the Fed's target and wage growth to support that inflation, Yellen has room to normalize policy at a gradual pace. For now, the data is still on her side and the hawks will remain frustrated, much as they have for the past several years.
Via the NY Fed's Liberty Street Economics, one of the problems with balance sheet recessions:
The Slow Recovery in Consumer Spending, by Jonathan McCarthy: One contributor to the subdued pace of economic growth in this expansion has been consumer spending. Even though consumption growth has been somewhat stronger in the past couple of quarters, it has still been weak in this expansion relative to previous expansions. This post concentrates on consumer spending on discretionary and nondiscretionary services, which has been a subject of earlier posts in this blog. (See this post for the definition of discretionary versus nondiscretionary services expenditures and this post for a subsequent update.) Discretionary expenditures have picked up noticeably over recent quarters but, unlike spending on nondiscretionary services, they remain well below their pre-recession peak. Even so, the pace of recovery for both discretionary and nondiscretionary services in this expansion is well below that of previous cycles. One explanation is that weak income expectations continue to constrain household spending. ...
Cecchetti & Schoenholtz:
Has paper money outlived its purpose? : Serious people have been suggesting that we think hard about eliminating paper currency. Paper money facilitates criminality and creates the zero lower bound (ZLB) for nominal interest rates. So, why not just get rid of it and replace it with electronic money? ...
Their bottom line:
All of this leads us to conclude that paper currency is at the heart of how we choose to organize our society. In a free society, criminality may be part of the price we pay for liberty. There are means other than eliminating cash – less effective but also less threatening to personal liberties – to expose the shadow economy. And, as the recent financial crisis has shown, central banks do have policy alternatives when the short-term interest rate hits zero.
- Our Economic Self-Inflicted Wounds - The Big Picture
- The inequality debate avoids asking who is harmed - Adam Posen
- Another Reminder about the Stupidity of Austerity - EPI
- The evolving effectiveness of UK’s monetary policy - vox
- Praising the Bundesbank - Gloomy European Economist
- Central Bank Forecasting During the Recession - Fed in Print
- Sliming Rick Perlstein - Paul Krugman
- Still Failing To Fail - Paul Krugman
- Phosphate Memories - Paul Krugman
- We Are All QE-sians Now - BOJ
- Hedge Funds - John Cochrane
- US-led vs. China-led economic architecture - vox
- Comparing International Bond Yields - St. Louis Fed
- US Monetary Policy and East Asia - Jeffrey Frankel
- The pre-recession UK debt fuelled boom that never was? - mainly macro
- What's Holding the Economy Back: Revised Version - Beat the Press
Tuesday, August 05, 2014
This is from Caroline Freund and Sarah Oliver:
The Missing Women in the Inequality Discussion, by Caroline Freund and Sarah Oliver: Growing inequality of income and wealth has become a major global concern. In many countries inequality has been driven by weak earnings growth not only among the poor but also among groups across much of the income distribution, while earnings of the top 1 percent continue to rise dramatically.
A clear but often overlooked feature of this discussion is that the fantastic gains at the top of the distribution are almost entirely accruing to men. One reason it is overlooked is that income and wealth inequality are measured at the household level. But one person in the household typically earns and controls the money, and that person is almost always a man. The concentration of income and wealth in the hands of men should reinforce the call to undertake greater redistributive policies. ...
The growing concentration of wealth in the hands of a few is itself disturbing. That these few are almost all men makes it even more so.
Someone needs to tell Republicans that you’re not actually supposed to govern according to the rhetoric used to gull the rubes.
The email letting me know about this said "Notorious commie group Standard & Poor’s says inequality hurting economic growth":
How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide: The topic of income inequality and its effects has been the subject of countless analysis stretching back generations and crossing geopolitical boundaries. Despite the tendency to speak about this issue in moral terms, the central questions are economic ones: Would the U.S. economy be better off with a narrower income gap? And, if an unequal distribution of income hinders growth, which solutions could do more harm than good, and which could make the economic pie bigger for all?
Given the decades--indeed, centuries--of debate on this subject, it comes as no surprise that the answers are complex. A degree of inequality is to be expected in any market economy. It can keep the economy functioning effectively, incentivizing investment and expansion--but too much inequality can undermine growth. ...
Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world's biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population. ...
- The Ever-Expanding Government, Revisited - Econbrowser
- Has paper money outlived its purpose? - Cecchetti & Schoenholtz
- Correlation does not even imply correlation - Andrew Gelman
- Paul Krugman has an unanswered question - Robert Waldmann
- Estimation & Accuracy After Model Selection - Dave Giles
- The Real Solution to Wealth Inequality - The Nation
- Financial Stability Monitoring - Liberty Street Economics
- How to Think about Own Rates of Interest, Version 2.0 - Uneasy Money
- The ON RRP Facility and Post-Liftoff Fed Policy - Stephen Williamson
- Long Road to Normal for Bank Business Lending - FRBSF
- The Decline of U.S. Entrepreneurship - Tim Taylor
- Prosecuting bankers would be a start - FT.com
- Economists & the public - Chris Dillow
- What’s Going on with Part-time Work? - Economic Policy Institute
- There's No Defense for Today's Income Inequality - Bloomberg View
- Inflation Hawks: The Job Killers at the Fed - Dean Baker
- Positive Externalities of Social Insurance - NBER
- Cash for Corollas: When Stimulus Reduces Spending - NBER
- Should Economists Be Honest or Civil? - EconoSpeak
- Credit rating agencies must do better - Interpreter
- The Black Swan Spectrum - No Hesitations
- Recent ECB Policy and Inflation Expectations - St. Louis Fed
- The new proposed IMF lending framework - Jérémie Cohen-Setton
- Nerds vs. The Empire - Noahpinion
- Article 123.1 and the ECB - mainly macro
Monday, August 04, 2014
...after every previous recession of the past 40 years, the subsequent recovery was helped along by increased government outlays. In the 2007-08 recession—and only in this recession—the recovery was deliberately hobbled by insisting on declining government outlays. This is despite the fact that it was the worst recession of the bunch.
The result, of course, was that there was no Obama Miracle in 2011. In fact, there was barely even an Obama Recovery. If you think that's just a coincidence, I have a bridge to sell you.
How are things going in Japan?:
Adam Posen on Japan’s Recovery: Going Right, Just Not Going Well, by Jacob M. Schlesinger, WSJ: A year and a half after Prime Minister Shinzo Abe launched his program to end Japan’s long slump, a number of economists are turning skeptical about prospects for success. One remaining optimist — albeit with some caveats — is Adam Posen...
The gist of Mr. Posen’s argument is that despite some short-term setbacks, there are plenty of positive signs Japan is on track to return to steady growth and end deflation. But progress will be slow and unsteady, in part because he believes Japan must balance its growth strategy with a plan to curb its debt.
Current disappointment is partly the fault of the “spin” that higher prices would lead to a self-reinforcing cycle of higher wages, spending, and investment, he said. “It would be nice to have. But it wasn’t virtuous cycle or death spiral. We’re out of the death spiral. That’s good.”
Here are edited excerpts from the interview...
Financial reform is working:
Dodd-Frank Financial Reform Is Working, by Paul Krugman, Commentary, NY Times: ...The Dodd-Frank reform bill ... is working a lot better than anyone listening to the news media would imagine. Let’s talk, in particular, about two important pieces of Dodd-Frank: creation of an agency protecting consumers from misleading or fraudulent financial sales pitches, and efforts to end “too big to fail.”
The decision to create a Consumer Financial Protection Bureau shouldn’t have been controversial, given what happened during the housing boom. ...
Of course, that obvious need didn’t stop the U.S. Chamber of Commerce, financial industry lobbyists and conservative groups from going all out in an effort to prevent the bureau’s creation or at least stop it from doing its job, spending more than $1.3 billion in the process. Republicans in Congress dutifully served the industry’s interests...
At this point, however, all accounts indicate that the bureau is in fact doing its job, and well... But what happens if a crisis occurs anyway?
The answer is that, as in 2008, the government will step in to keep the financial system functioning; nobody wants to take the risk of repeating the Great Depression.
But how do you rescue the banking system without rewarding bad behavior? ...
The answer is that the government should seize troubled institutions when it bails them out, so that they can be kept running without rewarding stockholders or bondholders who don’t need rescue. In 2008 and 2009, however, it wasn’t clear that the Treasury Department had the necessary legal authority to do that. So Dodd-Frank filled that gap, giving regulators Ordinary Liquidation Authority, also known as resolution authority, so that in the next crisis we can save “systemically important” banks and other institutions without bailing out the bankers.
Bankers, of course, hate this idea; and Republican leaders like Mitch McConnell tried to help their friends with the Orwellian claim that resolution authority was actually a gift to Wall Street, a form of corporate welfare, because it would grease the skids for future bailouts. ...
Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.
Sunday, August 03, 2014
Anti-intellectualism: The question in the title of this post - What Are Academics Good For? - was meant to be rhetorical. I took it for granted that as a collective academic economists did know rather more about economic policy than business leaders or city economists, and the point of my post was to ask why this often appeared not to be recognised by some journalists or some politicians. I included some quotes from a journalist suggesting otherwise because I found them rather shocking. It serves me right of course. What I got almost universally in comments was a discussion of all things wrong with academic economists. Even the estimable Chris Dillow joined in. So what I should have done first is establish what academic economists are good for, and then complained about those who do not recognise this. But better to do things in the wrong order than not at all. First a point on scope that I did make but is worth repeating...