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I have a new column:
Rethinking New Economic Thinking: Efforts such as Rethinking Economics and The Institute for New Economic Thinking are noteworthy attempts to, as INET says, “broaden and accelerate the development of new economic thinking that can lead to solutions for the great challenges of the 21st century. The havoc wrought by our recent global financial crisis has vividly demonstrated the deficiencies in our outdated current economic theories, and shown the need for new economic thinking – right now.
It is certainly true that mainstream, modern macroeconomic models failed us prior to and during the Great Recession. The models failed to give any warning at all about the crisis that was about to hit – if anything those using modern macro models resisted the idea that a bubble was inflating in housing markets – and the models failed to give us the guidance we needed to implement effective monetary and fiscal policy responses to our economic problems.
But amid the calls for change in macroeconomics there is far too much attention on the tools and techniques that macroeconomists use to answer questions, and far too little attention on what really matters... ...[continue reading]...
Posted by Mark Thoma on Tuesday, September 16, 2014 at 08:19 AM in Economics, Fiscal Times, Macroeconomics |
Peter Temin and David Vines have a new book:
Making the case for Keynes, by Peter Dizikes, MIT News Office: In 1919, when the victors of World War I were concluding their settlement against Germany — in the form of the Treaty of Versailles — one of the leading British representatives at the negotiations angrily resigned his position, believing the debt imposed on the losers would be too harsh. The official, John Maynard Keynes, argued that because Britain had benefitted from export-driven growth, forcing the Germans to spend their money paying back debt rather than buying British products would be counterproductive for everyone, and slow global growth.
Keynes’ argument, outlined in his popular 1919 book, “The Economic Consequences of the Peace,” proved prescient. But Keynes is not primarily regarded as a theorist of international economics: His most influential work, “The General Theory of Employment, Interest, and Money,” published in 1936, uses the framework of a single country with a closed economy. From that model, Keynes arrived at his famous conclusion that government spending can reduce unemployment by boosting aggregate demand.
But in reality, says Peter Temin, an MIT economic historian, Keynes’ conclusions about demand and employment were long intertwined with his examination of international trade; Keynes was thinking globally, even when modeling locally.
“Keynes was interested in the world economy, not just in a single national economy,” Temin says. Now he is co-author of a new book on the subject, “Keynes: Useful Economics for the World Economy,” written with David Vines, a professor of economics at Oxford University, published this month by MIT Press.
In their book, Temin and Vines make the case that Keynesian deficit spending by governments is necessary to reignite the levels of growth that Europe and the world had come to expect prior to the economic downturn of 2008. But in a historical reversal, they believe that today’s Germany is being unduly harsh toward the debtor states of Europe, forcing other countries to pay off debts made worse by the 2008 crash — and, in turn, preventing them from spending productively, slowing growth and inhibiting a larger continental recovery.
“If you have secular [long-term] stagnation, what you need is expansionary fiscal policy,” says Temin, who is the Elisha Gray II Professor Emeritus of Economics at MIT.
Additional government spending is distinctly not the approach that Europe (and, to a lesser extent, the U.S.) has pursued over the last six years, as political leaders have imposed a wide range of spending cuts — the pursuit of “austerity” as a response to hard times. But Temin thinks it is time for the terms of the spending debate to shift.
“The hope David and I have is that our simple little book might change people’s minds,” Temin says.
“Sticky” wages were the sticking point
In an effort to do so, the authors outline an intellectual trajectory for Keynes in which he was highly concerned with international, trade-based growth from the early stages of his career until his death in 1946, and in which the single-country policy framework of his “General Theory” was a necessary simplification that actually fits neatly with this global vision.
As Temin and Vines see it, Keynes, from early in his career, and certainly by 1919, had developed an explanation of growth in which technical progress leads to greater productive capacity. This leads businesses in advanced countries to search for international markets in which to sell products; encourages foreign lending of capital; and, eventually, produces greater growth by other countries as well.
“Clearly, Keynes knew that domestic prosperity was critically determined by external conditions,” Temin and Vines write.
Yet as they see it, Keynes had to overcome a crucial sticking point in his thought: As late as 1930, when Keynes served on a major British commission investigating the economy, he was still using an older, neoclassical idea in which all markets reached a sort of equilibrium.
This notion implies that when jobs were relatively scarce, wages would decline to the point where more people would be employed. Yet this doesn’t quite seem to happen: As economists now recognize, and as Keynes came to realize, wages could be “sticky,” and remain at set levels, for various psychological or political reasons. In order to arrive at the conclusions of the “General Theory,” then, Keynes had to drop the assumption that wages would fluctuate greatly.
“The issue for Keynes was that he knew that if prices were flexible, then if all prices [including wages] could change, then you eventually get back to full employment,” Temin says. “So in order to avoid that, he assumed away all price changes.”
But if wages will not drop, how can we increase employment? For Keynes, the answer was that the whole economy had to grow: There needed to be an increase in aggregate demand, one of the famous conclusions of the “General Theory.” And if private employers cannot or will not spend more money on workers, Keynes thought, then the government should step in and spend.
“Keynes is very common-sense,” Temin says, in “that if you put people to work building roads and bridges, then those people spend money, and that promotes aggregate demand.”
Today, opponents of Keynes argue that such public spending will offset private-sector spending without changing overall demand. But Temin contends that private-sector spending “won’t be offset if those people were going to be unemployed, and would not be spending anything. Given jobs, he notes, “They would spend money, because now they would have money.”
Keynes’ interest in international trade and international economics never vanished, as Temin and Vines see it. Indeed, in the late stages of World War II, Keynes was busy working out proposals that could spur postwar growth within this same intellectual framework — and the International Monetary Fund is one outgrowth of this effort.
“Keynes: Useful Economics for the World Economy” has received advance praise from some prominent scholars. ... Nonetheless, Temin is guarded about the prospect of changing the contemporary austerity paradigm.
“I can’t predict what policy is going to do in the next couple of years,” Temin says. And in the meantime, he thinks, history may be repeating itself, as debtor countries are unable to make capital investments while paying off debt.
Germany has “decided that they are not willing to take any of the capital loss that happened during the crisis,” Temin adds. “The [other] European countries don’t have the resources to pay off these bonds. They’ve had to cut their spending to get the resources to pay off the bonds. If you read the press, you know this hasn’t been working very well.”
Posted by Mark Thoma on Tuesday, September 16, 2014 at 08:10 AM in Economics, History of Thought, International Finance, Macroeconomics |
Posted by Mark Thoma on Tuesday, September 16, 2014 at 12:06 AM in Economics, Links |
"A key observation of the paper is that journalists and expert commentators overstate the extent of machine substitution for human labor and ignore the strong complementarities":
Polanyi's Paradox and the Shape of Employment Growth, by David Autor, NBER Working Paper No. 20485, September 2014 [open link]: In 1966, the philosopher Michael Polanyi observed, “We can know more than we can tell... The skill of a driver cannot be replaced by a thorough schooling in the theory of the motorcar; the knowledge I have of my own body differs altogether from the knowledge of its physiology.” Polanyi’s observation largely predates the computer era, but the paradox he identified—that our tacit knowledge of how the world works often exceeds our explicit understanding—foretells much of the history of computerization over the past five decades. This paper offers a conceptual and empirical overview of this evolution. I begin by sketching the historical thinking about machine displacement of human labor, and then consider the contemporary incarnation of this displacement—labor market polarization, meaning the simultaneous growth of high-education, high-wage and low-education, low-wages jobs—a manifestation of Polanyi’s paradox. I discuss both the explanatory power of the polarization phenomenon and some key puzzles that confront it. I then reflect on how recent advances in artificial intelligence and robotics should shape our thinking about the likely trajectory of occupational change and employment growth. A key observation of the paper is that journalists and expert commentators overstate the extent of machine substitution for human labor and ignore the strong complementarities. The challenges to substituting machines for workers in tasks requiring adaptability, common sense, and creativity remain immense. Contemporary computer science seeks to overcome Polanyi’s paradox by building machines that learn from human examples, thus inferring the rules that we tacitly apply but do not explicitly understand.
Posted by Mark Thoma on Monday, September 15, 2014 at 09:09 AM in Economics, Income Distribution, Unemployment |
What "accounts for the terrible performance of Western economies since 200"?:
How to Get It Wrong, by Paul Krugman, Commentary, NY Times: Last week I participated in a conference organized by Rethinking Economics... And Mammon knows that economics needs rethinking...
It seems to me, however, that it’s important to realize that the enormous intellectual failure of recent years took place at several levels. Clearly, economics as a discipline went badly astray... But the failings of economics were greatly aggravated by the sins of economists, who far too often let partisanship or personal self-aggrandizement trump their professionalism. Last but not least, economic policy makers systematically chose to hear only what they wanted to hear. And it is this multilevel failure — not the inadequacy of economics alone — that accounts for the terrible performance of Western economies since 2008.
In what sense did economics go astray? Hardly anyone predicted the 2008 crisis... More damning was the widespread conviction among economists that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly. ...
Still, many applied economists retained a more realistic vision of the world, and textbook macroeconomics, while it didn’t predict the crisis, did a pretty good job of predicting how things would play out in the aftermath. ...
But while economic models didn’t perform all that badly..., all too many influential economists did — refusing to acknowledge error, letting naked partisanship trump analysis, or both. ...
But would it have mattered if economists had behaved better? Or would people in power have done the same thing regardless?
If you imagine that policy makers have spent the past five or six years in thrall to economic orthodoxy, you’ve been misled. On the contrary, key decision makers have been highly receptive to innovative, unorthodox economic ideas — ideas that also happen to be wrong but which offered excuses to do what these decision makers wanted to do anyway. ...
I’m not saying either that economics is in good shape or that its flaws don’t matter. It isn’t, they do, and I’m all for rethinking and reforming a field.
The big problem with economic policy is not, however, that conventional economics doesn’t tell us what to do. In fact, the world would be in much better shape than it is if real-world policy had reflected the lessons of Econ 101. If we’ve made a hash of things — and we have — the fault lies not in our textbooks, but in ourselves.
Posted by Mark Thoma on Monday, September 15, 2014 at 12:24 AM
Posted by Mark Thoma on Monday, September 15, 2014 at 12:06 AM in Economics, Links |
Via email, I was asked if this is the "stupidest article ever published?":
The Inflation-Debt Scam
If not, it's certainly in the running.
Posted by Mark Thoma on Sunday, September 14, 2014 at 09:23 AM in Budget Deficit, Econometrics, Inflation |
Posted by Mark Thoma on Sunday, September 14, 2014 at 12:06 AM in Economics, Links |
Taxes and Growth, The Growth Economics blog: William Gale and Andy Samwick have a new Brookings paper out on the relationship of tax rates and economic growth in the U.S. ... Short answer, there is no relationship. They do not identify any change in the trend growth rate of real GDP per capita with changes in marginal income tax rates, capital gains tax rates, or any changes in federal tax rules. ...
One of the first pieces of evidence they show is from a paper by Stokey and Rebelo (1995). ... You can see that the introduction of very high tax rates during WWII, which effectively became permanent features of the economy after that, did not change the trend growth rate of GDP per capita in the slightest. ...
The next piece of evidence is from a paper by Hungerford (2012), who basically looks only at the post-war period, and looks at whether the fluctuations in top marginal tax rates (on either income or capital gains) are related to growth rates. You can see ... that they are not. If anything, higher capital gains rates are associated with faster growth.
The upshot is that there is no evidence that you can change the growth rate of the economy – up or down – by changing tax rates – up or down. Their conclusion is more coherent than anything I could gin up, so here goes:
The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.
The effects of tax cuts on growth are completely uncertain.
Posted by Mark Thoma on Saturday, September 13, 2014 at 09:22 AM in Economics, Taxes |
Posted by Mark Thoma on Saturday, September 13, 2014 at 12:06 AM in Economics, Links |
In defense of social insurance: On Twitter I said: “The basic income movement is an attack on the strongest political pillar of social-democracy: social insurance.” I’ve inveighed against the Universal Basic Income in the past, so here I go again. Another edition of old man yelling at clouds.
Throughout history, in certain communal settings some variant of the Marxian “From each according to his abilities, to each according to his needs,” has applied. In a naive sense, the UBI is not far off from that ideal. What economists call a demogrant* — a fixed, unrestricted, unconditional transfer payment to every individual (to each according to his needs**) — would presumably be financed by some kind of progressive tax (from each according to his abilities). I have no quarrel with the ideal. The problem is that it’s an utter fantasy that beclouds thinking about more plausible social policies. It’s a distraction from the need to defend really-existing social insurance and to attack the devolution of the safety net (about which a bit more below). ...
Posted by Mark Thoma on Friday, September 12, 2014 at 08:54 AM in Economics, Social Insurance |
What accounts for the survival of the inflationistas?:
The Inflation Cult, by Paul Krugman, Commentary, NY Times: Wish I’d said that! Earlier this week, Jesse Eisinger..., writing on The Times’s DealBook blog, compared people who keep predicting runaway inflation to “true believers whose faith in a predicted apocalypse persists even after it fails to materialize.” Indeed. ... And the remarkable thing is that these always-wrong, never-in-doubt pundits continue to have large public and political influence.
There’s something happening here. What it is ain’t exactly clear. ... I’ve written before about how the wealthy tend to oppose easy money, perceiving it as being against their interests. But that doesn’t explain the broad appeal of prophets whose prophecies keep failing.
Part of that appeal is clearly political; there’s a reason why ... Mr. Ryan warns about both a debased currency and a government that redistributes from “makers” to “takers.” Inflation cultists almost always link the Fed’s policies to complaints about government spending. They’re completely wrong about the details — no, the Fed isn’t printing money to cover the budget deficit — but it’s true that governments whose debt is denominated in a currency they can issue have more fiscal flexibility, and hence more ability to maintain aid to those in need...
And anger against “takers” — anger that is very much tied up with ethnic and cultural divisions — runs deep. Many people, therefore, feel an affinity with those who rant about looming inflation... I’d argue, the persistence of the inflation cult is an example of the “affinity fraud” crucial to many swindles, in which investors trust a con man because he seems to be part of their tribe. In this case, the con men may be conning themselves as well as their followers, but that hardly matters.
This tribal interpretation of the inflation cult helps explain the sheer rage you encounter when pointing out that the promised hyperinflation is nowhere to be seen. It’s comparable to the reaction you get when pointing out that Obamacare seems to be working, and probably has the same roots.
But what about the economists who go along with the cult? They’re all conservatives, but aren’t they also professionals who put evidence above political convenience? Apparently not.
The persistence of the inflation cult is, therefore, an indicator of just how polarized our society has become, of how everything is political, even among those who are supposed to rise above such things. And that reality, unlike the supposed risk of runaway inflation, is something that should scare you.
Posted by Mark Thoma on Friday, September 12, 2014 at 12:24 AM in Economics, Inflation |
Posted by Mark Thoma on Friday, September 12, 2014 at 12:06 AM in Economics, Links |
I've been looking for the perfect anti-war screed, but so far haven't found it.
So let me just say, I hate war, and I don't care if it's Bush or Obama giving the orders.
That is all.
Posted by Mark Thoma on Thursday, September 11, 2014 at 04:01 PM in Economics, Iraq and Afghanistan |
The Bank of England examines bitcoin:
Overview Digital currencies represent both innovations in payment systems and a new form of currency. This article examines the economics of digital currencies and presents an initial assessment of the risks that they may, in time, pose to the Bank of England’s objectives for monetary and financial stability. A companion piece provides an introduction to digital currency schemes, including some historical context for their development and an outline of how they work.
From the perspective of economic theory, whether a digital currency may be considered to be money depends on the extent to which it acts as a store of value, a medium of exchange and a unit of account. How far an asset serves these roles can differ, both from person to person and over time. And meeting these economic definitions does not necessarily imply that an asset will be regarded as money for legal or regulatory purposes. At present, digital currencies are used by relatively few people. For these people, data suggest that digital currencies are primarily viewed as stores of value — albeit with significant volatility in their valuations (see summary chart) — and are not typically used as media of exchange. At present, there is little evidence of digital currencies being used as units of account.
This article argues that the incentives embedded in the current design of digital currencies pose impediments to their widespread usage. A key attraction of such schemes at present is their low transaction fees. But these fees may need to rise as usage grows and may eventually be higher than those charged by incumbent payment systems.
Most digital currencies incorporate a pre-determined path towards a fixed eventual supply. In addition to making it extremely unlikely that a digital currency, as currently designed, will achieve widespread usage in the long run, a fixed money supply may also harm the macroeconomy: it could contribute to deflation in the prices of goods and services, and in wages. And importantly, the inability of the money supply to vary in response to demand would likely cause greater volatility in prices and real activity. It is important to note, however, that a fixed eventual supply is not an inherent requirement of digital currency schemes.
Digital currencies do not currently pose a material risk to monetary or financial stability in the United Kingdom, given the small size of such schemes. This could conceivably change, but only if they were to grow significantly. The Bank continues to monitor digital currencies and the risks they pose to its mission.
Posted by Mark Thoma on Thursday, September 11, 2014 at 09:42 AM in Economics, Monetary Policy |
Simon Wren-Lewis on Scottish independence:
Scotland and the SNP: Fooling yourselves and deceiving others: There are many laudable reasons to campaign for Scottish independence. But how far should those who passionately want independence be prepared to go to achieve that goal? Should they, for example, deceive the Scottish people about the basic economics involved? That seems to be what is happening right now. The more I look at the numbers, the clearer it becomes that over the next five or ten years there would more, not less, fiscal austerity under independence. ...
Scotland’s fiscal position would be worse as a result of leaving the UK for two main reasons. First, demographic trends are less favourable. Second, revenues from the North Sea are expected to decline. ...
The SNP do not agree with this analysis. The main reason in the near term is that they have more optimistic projections for North Sea Oil. ... So how do the Scottish government get more optimistic numbers? John McDermott examines the detail here, but perhaps I can paraphrase his findings: whenever there is room for doubt, assume whatever gives you a higher number. ... It is basically fiddling the analysis to get the answer you want. Either wishful thinking or deception. ...
Is this deception deliberate? I suspect it is more the delusions of people who want something so much they cast aside all doubts and problems. This is certainly the impression I get from reading a lot of literature...
When I was reading this literature, I kept thinking I had seen this kind of thing before: being in denial about macroeconomic fundamentals because they interfered with a major institutional change that was driven by politics. Then I realised what it was: the formation of the Euro in 2000. Once again economists were clear and pretty united about what the key macroeconomic problem was (‘asymmetric shocks’), and just like now this was met with wishful thinking that somehow it just wouldn’t happen. It did, and the Eurozone is still living with the consequences.
So maybe that also explains why I feel so strongly this time around. I have no political skin in this game: a certain affection for the concept of the union, but nothing strong enough to make me even tempted to distort my macroeconomics in its favour. If Scotland wants to make a short term economic sacrifice in the hope of longer term gains and political freedom that is their choice. But they should make that choice knowing what it is, and not be deceived into believing that these costs do not exist.
Posted by Mark Thoma on Thursday, September 11, 2014 at 09:04 AM in Economics |
A small part of Brad DeLong's response to Olivier Blanchard. I posted a shortened version of Blanchard's argument a week or two ago:
Where Danger Lurks: Until the 2008 global financial crisis, mainstream U.S. macroeconomics had taken an increasingly benign view of economic fluctuations in output and employment. The crisis has made it clear that this view was wrong and that there is a need for a deep reassessment. ...
That small shocks could sometimes have large effects and, as a result, that things could turn really bad, was not completely ignored by economists. But such an outcome was thought to be a thing of the past that would not happen again, or at least not in advanced economies thanks to their sound economic policies. ... We all knew that there were “dark corners”—situations in which the economy could badly malfunction. But we thought we were far away from those corners, and could for the most part ignore them. ...
The main lesson of the crisis is that we were much closer to those dark corners than we thought—and the corners were even darker than we had thought too. ...
How should we modify our benchmark models—the so-called dynamic stochastic general equilibrium (DSGE) models...? The easy and uncontroversial part of the answer is that the DSGE models should be expanded to better recognize the role of the financial system—and this is happening. But should these models be able to describe how the economy behaves in the dark corners?
Let me offer a pragmatic answer. If macroeconomic policy and financial regulation are set in such a way as to maintain a healthy distance from dark corners, then our models that portray normal times may still be largely appropriate. Another class of economic models, aimed at measuring systemic risk, can be used to give warning signals that we are getting too close to dark corners, and that steps must be taken to reduce risk and increase distance. Trying to create a model that integrates normal times and systemic risks may be beyond the profession’s conceptual and technical reach at this stage.
The crisis has been immensely painful. But one of its silver linings has been to jolt macroeconomics and macroeconomic policy. The main policy lesson is a simple one: Stay away from dark corners.
And I responded:
That may be the best we can do for now (have separate models for normal times and "dark corners"), but an integrated model would be preferable. An integrated model would, for example, be better for conducting "policy and financial regulation ... to maintain a healthy distance from dark corners," and our aspirations ought to include models that can explain both normal and abnormal times. That may mean moving beyond the DSGE class of models, or perhaps the technical reach of DSGE models can be extended to incorporate the kinds of problems that can lead to Great Recessions, but we shouldn't be satisfied with models of normal times that cannot explain and anticipate major economic problems.
Here's part of Brad's response:
But… but… but… Macroeconomic policy and financial regulation are not set in such a way as to maintain a healthy distance from dark corners. We are still in a dark corner now. There is no sign of the 4% per year inflation target, the commitments to do what it takes via quantitative easing and rate guidance to attain it, or a fiscal policy that recognizes how the rules of the game are different for reserve currency printing sovereigns when r < n+g. Thus not only are we still in a dark corner, but there is every reason to believe that should we get out the sub-2% per year effective inflation targets of North Atlantic central banks and the inappropriate rhetoric and groupthink surrounding fiscal policy makes it highly likely that we will soon get back into yet another dark corner. Blanchard’s pragmatic answer is thus the most unpragmatic thing imaginable: the “if” test fails, and so the “then” part of the argument seems to me to be simply inoperative. Perhaps on another planet in which North Atlantic central banks and governments aggressively pursued 6% per year nominal GDP growth targets Blanchard’s answer would be “pragmatic”. But we are not on that planet, are we?
Moreover, even were we on Planet Pragmatic, it still seems to be wrong. Using current or any visible future DSGE models for forecasting and mainstream scenario planning makes no sense: the DSGE framework imposes restrictions on the allowable emergent properties of the aggregate time series that are routinely rejected at whatever level of frequentist statistical confidence that one cares to specify. The right road is that of Christopher Sims: that of forecasting and scenario planning using relatively instructured time-series methods that use rather than ignore the correlations in the recent historical data. And for policy evaluation? One should take the historical correlations and argue why reverse-causation and errors-in-variables lead them to underestimate or overestimate policy effects, and possibly get it right. One should not impose a structural DSGE model that identifies the effects of policies but certainly gets it wrong. Sims won that argument. Why do so few people recognize his victory?
Another class of economic models, aimed at measuring systemic risk, can be used to give warning signals that we are getting too close to dark corners, and that steps must be taken to reduce risk and increase distance. Trying to create a model that integrates normal times and systemic risks may be beyond the profession’s conceptual and technical reach at this stage…
For the second task, the question is: whose models of tail risk based on what traditions get to count in the tail risks discussion?
And missing is the third task: understanding what Paul Krugman calls the “Dark Age of macroeconomics”, that jahiliyyah that descended on so much of the economic research, economic policy analysis, and economic policymaking communities starting in the fall of 2007, and in which the center of gravity of our economic policymakers still dwell.
Posted by Mark Thoma on Thursday, September 11, 2014 at 08:50 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Thursday, September 11, 2014 at 12:06 AM in Economics, Links |
Pro-Growth Liberal (pgl):
Durbin-Schumer Inversion Proposal: Bernie Becker reports on an interesting proposal in the Senate:
Schumer’s bill takes aim at a maneuver known as earnings stripping, a process by which U.S. subsidiaries can take tax deductions on interest stemming from loans from a foreign parent. The measure comes as Democrats continue to criticize companies, like Burger King, that have sought to shift their legal address abroad … Schumer’s bill would cut in half the amount of interest deduction that companies can claim, from 50 percent to 25 percent. It also seeks to limit companies that have already inverted from claiming the deduction in future years, requiring IRS on certain transactions between a foreign parent and U.S. company for a decade.
Had Walgreen decided to move its tax domicile to Switzerland, this proposal would limit the amount of income shifting that might take place after the inversion. But consider companies like Burger King and AbbVie. They are already sourcing the vast majority of their profits overseas. The reason that the effective tax rates are about 20 percent and not in the teens is that they have to pay taxes on repatriated earnings. An inversion would still eliminate the repatriation taxes and alas the horse has left the barn as far these two companies and their aggressive transfer pricing. The proposal is a very good one but Congress should still encourage the IRS to conduct transfer pricing reviews of what companies such as these have done in the past.
Posted by Mark Thoma on Wednesday, September 10, 2014 at 09:46 AM in Economics, Taxes |
A Simple Equation: More Education = More Income, by Eduardo Porter, NY Times: ...the gap between the wages of a family of two college graduates and a family of high school graduates..., between 1979 and 2012...,grew by some $30,000, after inflation. This ... amounts to a powerful counterargument to anybody who doubts the importance of education in the battle against the nation’s entrenched inequality.
But in the American education system, inequality is winning, gumming up the mobility that broad-based prosperity requires. ... Only one in 20 Americans aged 25 to 34 whose parents didn’t finish high school has a college degree. The average across 20 rich countries in the O.E.C.D. analysis is almost one in four. ...
Given the payoff, the fact that many of those who would benefit most are not investing in a college education suggests an epic failure. And the growing cadre of countries that outperform the United States suggests failure is hardly inevitable. ...
Mr. Schleicher told me that, while places like Japan, Singapore and Canada have learned how to educate socially disadvantaged children, in the United States social background plays an outsize role in the educational outcomes. ... “But a lot depends on policy. There is a lot we can do.”
Decimating public education is not to anyone’s advantage...
Posted by Mark Thoma on Wednesday, September 10, 2014 at 09:36 AM in Economics, Income Distribution, Universities |
The Biggest Lie of the New Century: Yesterday, we looked at why bankers weren't busted for crimes committed during the financial crisis. Political corruption, prosecutorial malfeasance, rewritten legislation and cowardice on the part of government officials were among the many reasons.
But I saved the biggest reason so many financial felons escaped justice for today: They dumped the cost of their criminal activities on you, the shareholder (never mind the taxpayer). ... Many of these executives committed crimes; got big bonuses for doing so; and paid huge fines using shareholder assets (i.e., company cash), helping them avoid prosecution.
As for claims, like those of white-collar crime defense attorney Mark F. Pomerantz, that “the executives running companies like Bank of America, Citigroup and JP Morgan were not committing criminal acts,” they simply implausible if not laughable. Consider a brief survey of some of the more egregious acts of wrongdoing: ...
Posted by Mark Thoma on Wednesday, September 10, 2014 at 08:02 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Wednesday, September 10, 2014 at 12:06 AM in Economics, Links |
From the St. Louis Fed:
The Great Recession Casts a Long Shadow on Family Finances, by Ray Boshara, William Emmons, and Bryan Noeth,St. Louis Fed’s Center for Household Financial Stability: The income and wealth of the typical American family declined between 2010 and 2013, according to the Federal Reserve’s latest Survey of Consumer Finances.1 ... These declines reduced the median real (inflation-adjusted) family income and net worth in the U.S. in 2013 to $46,668 (from $49,022 in 2010) and to $81,400 (from $82,521 in 2010), respectively. ...
Combined with significant declines between 2007 and 2010 on both measures, the cumulative decline in median real family income between 2007 and 2013 was 12.1 percent, while median real net worth declined 40.1 percent. The financial impact of the Great Recession was so severe that all the gains achieved during the 1990s and 2000s were wiped out. Median real family income was 1.0 percent lower in 2013 than in 1989, while median real net worth in 2013 was 4.3 percent below its 1989 level.
As discouraging as these declines are, several economically vulnerable groups have fared even worse..., the median real income among families headed by someone under 40 has fallen from 96 percent of the overall median income in 1989 to only 87 percent in 2013. The median income of families headed by an African-American or someone of Hispanic origin (of any race) reached only 67 percent of the overall median in 2013, down from 70 percent in 2007. Among families headed by someone without a high-school degree, the median real income in 2013 was only 48 percent of the overall median, down from 51 percent three years earlier. ...
Those groups typically classified as economically vulnerable have experienced severe balance-sheet stress, too..., the median real net worth of a family headed by someone under 40 declined from 23 percent of the overall median in 1989 to only 18 percent in 2013. The progress made by African-American and Hispanic families in closing the wealth gap with the overall population through 2010 was largely reversed by 2013, leaving the median wealth of these groups at only 16 percent of the overall median. And the median wealth of families headed by someone with less than a high-school education plunged from 51 percent of the overall median wealth in 1989 to just 21 percent in 2013. Reflecting recent research conducted by the St. Louis Fed’s Center for Household Financial Stability, age, race and education continue to be among the strongest predictors of who gained and lost wealth during and after the Great Recession.2
Even in the sixth year of economic recovery, the Great Recession’s impact on American families’ income and wealth continues to be felt widely.3 The most economically vulnerable groups of families generally have suffered even larger setbacks than the typical family in the overall population.
The data now affirm what most Americans have been feeling since the recession ended—that their own recovery is not yet complete. And as many families continue to accumulate new debt at a slower pace or actually “delever” their balance sheets, shedding the debts accumulated in the run-up to the financial crisis, we believe less than robust economic growth will continue. ...
Posted by Mark Thoma on Tuesday, September 9, 2014 at 10:29 AM in Economics |
Posted by Mark Thoma on Tuesday, September 9, 2014 at 12:06 AM in Economics, Links |
Forward Guidance Heading for a Change, by Tim Duy: The lackluster August employment report clearly defied expectations (including my own) for a strong number to round out the generally positive pattern of recent data. That said, one number does not make a trend, and the monthly change in nonfarm payrolls is notoriously volatile. The underlying pattern of improvement remains in tact, and thus the employment report did not alleviate the need to adjust the Fed's forward guidance, allow there is a less pressing need to do so at the next meeting. In any event, the days of the "considerable time" language are numbered.
Nonfarm payrolls gained just 142k in August while the unemployment rate ticked back down to 6.1%. In general, the employment report is consistent with steady progress in the context of data that Fed Chair Janet Yellen has identified in the past:
Arguably the only trend that is markedly different is the more rapid decline in long-term unemployment, a positive cyclical indicator. Labor force participation remains subdued, although the Fed increasing views that as a structural issue. Average wage growth remained flat while wages for production workers accelerated slightly to 2.53% over the past year. A postive development to be sure, but too early to declare a sustained trend.
The notable absence of any bad news in the labor report leaves the door open to changing the forward guidance at the next FOMC meeting. As Robin Harding at the Financial Times notes, many Fed officials, including both doves and hawks, have taken issue with the current language, particularly the seemingly calendar dependent "considerable time" phrase. Officials would like to move toward guidance that is more clearly data dependent.
Is a shift in the language likely at the next meeting? Harding is mixed:
Their remarks could mean a move at the September FOMC meeting in 10 days, although there is little consensus yet on new wording, so a shift might have to wait until next month.
The trick is to change the language without suggesting the timing of the first rate hike is necessarily moving forward. The benefit of the next meeting is that it includes updated projections and a press conference. Stable policy expectations in those projections would create a nice opportunity to change the language. Moreover, Yellen would be able to to further explain any changes at that time. This also helps set the stage for the end of asset purchases in October. A shift in the guidance next week has a lot to offer.
A change in the language would also throw some additional light on Yellen's comments at Jackson Hole. Her typically unabashed defense of labor market slack was missing from her speech, replaced by a much more even-handed evaluation of the data. Was she simply setting the stage for an academic conference, or was she signalling a shift in her convictions? A change in the language at the next meeting would suggest the latter.
Bottom Line: The US economy is moving to a point in the cycle in which monetary policymakers have less certainty about the path of rates. Perhaps they need to be pulled forward, perhaps pushed back. Policymakers will need to be increasingly pragmatic, to use Yellen's term, when assessing the data. The "considerable time" language is inconsistent with such a pragmatic approach. It is hard to see that such language survives more than another FOMC statement. Seems to be data and policy objections are not the impediments preventing a change in the guidance, but instead the roadblock is the ability to reach agreement on new language in the next ten days.
Posted by Mark Thoma on Monday, September 8, 2014 at 09:25 AM in Economics, Fed Watch, Monetary Policy |
At Vox EU:
What were they thinking? The Federal Reserve in the run-up to the 2008 financial crisis, by Stephen Golub, Ayse Kaya, Michael Reay: Since the Global Crisis, critics have questioned why regulatory agencies failed to prevent it. This column argues that the US Federal Reserve was aware of potential problems brewing in the financial system, but was largely unconcerned by them. Both Greenspan and Bernanke subscribed to the view that identifying bubbles is very difficult, pre-emptive bursting may be harmful, and that central banks could limit the damage ex post. The scripted nature of FOMC meetings, the focus on the Greenbook, and a ‘silo’ mentality reduced the impact of dissenting views.
Posted by Mark Thoma on Monday, September 8, 2014 at 09:15 AM in Economics, Financial System, Monetary Policy, Regulation |
Have Economists Been Captured by Business Interests?: To be an economist, you kind of have to believe that people respond to economic incentives. But when anyone suggests that an economist’s views might be shaped by the economic incentives he or she faces,... it’s actually pretty common to hear economists saying things like — this is from the usually no-nonsense John Cochrane of the University of Chicago — “the idea that any of us do what we do because we’re paid off by fancy Wall Street salaries or cushy sabbaticals at Hoover is just ridiculous.” ...
Happily, Luigi Zingales, a colleague of Cochrane’s at Chicago’s Booth School of Business, is trying to correct his discipline’s blind spot by examining the economics of economists’ opinions. ...
Zingales ... subjects his notions to an empirical test: Are there discernible patterns in what kinds of economists think corporate executives are overpaid and what kinds think they’re paid fairly? ... The answer turns out to be yes. ...
What Zingales doesn’t call for is any kind of blanket retreat by economists from consulting and expert witnessing and board memberships. Which is a good thing, I think. One of the reasons why economics rocketed past the other social sciences in influence and prestige over the past 75 years was because so many economists involved themselves in the worlds they studied. That has surely led to some amount of capture by outside interests, but it also seems to have counteracted the natural academic tendency toward insularity and obscurity. Lots of economists study things of direct relevance to business leaders and government policy-makers. We wouldn’t really want to take away their incentive to do that, would we?
Posted by Mark Thoma on Monday, September 8, 2014 at 09:14 AM in Economics, Regulation |
Bold reform is the only answer to secular stagnation, by Lawrence H. Summers: The economy continues to operate way below any estimate of its potential made before the onset of financial crisis in 2007, with a shortfall of gross domestic product relative to previous trend in excess of $1.5tn, or $20,000 per family of four. As disturbing, the average growth rate of the economy of less than 2 per cent since that time has caused output to fall ... further below previous estimates of its potential.
Almost a year ago I invoked the concept of secular stagnation... Secular stagnation in my version ... has emphasised the difficulty of maintaining sufficient demand to permit normal levels of output. ...
To achieve growth of even 2 per cent over the next decade, active support for demand will be necessary but not sufficient. Structural reform is essential to increase the productivity of both workers and capital, and to increase growth in the number of people able and willing to work productively. Infrastructure investment, immigration reform, policies to promote family-friendly work, support for exploitation of energy resources, and business tax reform become ever more important policy imperatives.
Posted by Mark Thoma on Monday, September 8, 2014 at 09:14 AM in Economics |
Summer Institute 2014 Theory and Application of Network Models, July 22, 2014 Daron Acemoglu and Matthew O. Jackson, Organizers:
Matthew O. Jackson, Stanford University Social and Economic Networks: Backgound
Daron Acemoglu, MIT Networks: Games over Networks and Peer Effects
Matthew O. Jackson, Stanford University Diffusion, Identification, Network Formation
Daron Acemoglu, MIT Networks: Propagation of Shocks over Economic Networks
Posted by Mark Thoma on Monday, September 8, 2014 at 08:46 AM in Econometrics, Economics, Video |
Spain provides a "cautionary tale" for the Scots:
Scots, What the Heck?, by Paul Krugman, Commentary, NY Times: Next week Scotland will hold a referendum on whether to leave the United Kingdom. And polling suggests that support for independence has surged..., largely because pro-independence campaigners have managed to reduce the “fear factor” — that is, concern about the economic risks of going it alone. At this point the outcome looks like a tossup.
Well, I have a message for the Scots: Be afraid, be very afraid. The risks of going it alone are huge. You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine.
Comparing Scotland with Canada seems, at first, pretty reasonable. After all, Canada, like Scotland, is a relatively small economy that does most of its trade with a much larger neighbor. ... And what the Canadian example shows is that this can work. ...
But Canada has its own currency... An independent Scotland wouldn’t. ..: The Scottish independence movement has been very clear that it intends to keep the pound as the national currency. And the combination of political independence with a shared currency is a recipe for disaster. Which is where the cautionary tale of Spain comes in.
If Spain and the other countries that gave up their own currencies to adopt the euro were part of a true federal system..., the recent economic history of Spain would have looked a lot like that of Florida. Both economies experienced a huge housing boom between 2000 and 2007. Both saw that boom turn into a spectacular bust. Both suffered a sharp downturn...
Then, however, the paths diverged. In Florida’s case, most of the fiscal burden of the slump fell not on the local government but on Washington... In effect, Florida received large-scale aid in its time of distress.
Spain, by contrast, bore all the costs of the housing bust on its own. The result ... was a horrific depression... And it wasn’t just Spain, it was all of southern Europe and more. ...
In short, everything that has happened in Europe since 2009 or so has demonstrated that sharing a currency without sharing a government is very dangerous...
I find it mind-boggling that Scotland would consider going down this path after all that has happened in the last few years. If Scottish voters really believe that it’s safe to become a country without a currency, they have been badly misled.
Posted by Mark Thoma on Monday, September 8, 2014 at 12:24 AM in Economics, International Finance |
Posted by Mark Thoma on Monday, September 8, 2014 at 12:06 AM in Economics, Links |
What they say is not necessarily the same as what they do:
Few US ‘reshorings’ go ahead, study finds, by Robert Wrigh, FT: “Relatively few” of companies’ announced “reshorings” of manufacturing to the US have actually gone ahead and the trend’s effect on employment has been a “drop in the bucket,” research by a Massachusetts Institute of Technology academic suggests.
The work, by Jim Rice, deputy director of MIT’s Center for Transportation and Logistics, throws into doubt expectations that the US economy might enjoy significant growth in manufacturing employment through job repatriation. ...
Posted by Mark Thoma on Sunday, September 7, 2014 at 12:03 PM in Economics, Unemployment |
Posted by Mark Thoma on Sunday, September 7, 2014 at 12:06 AM in Economics, Links |
Peter Diamond on his new research on the Beveridge curve ("casts doubt on everything I've written on the Beveridge curve," "shifts in the Beveridge curve are not very informative"):
Abstract: Debates about higher structural unemployment occur when unemployment has stayed high. With monthly publication of the US Beveridge curve (the relationship between the unemployment and vacancy rates), the recent debate has focused on the shift in the Beveridge curve and whether the shift will be lasting long enough to move the full-employment point. The curve appears stable through the NBER identified business cycle through in June 2009 or possibly the month of the maximal unemployment rate in October 2009. This shift in the Beveridge curve, with the economy experiencing a higher level of unemployment than before for the same level of the vacancy rate, suggests a deterioration in the matching/hiring process in the economy. It is tempting to interpret this decline as a structural change in the way that the labor market works and thus assume that it is orthogonal to changes in aggregate demand. Indeed, an assumption that a shift in the curve is structural has been a staple of the academic literature since at least 1958. This interpretation has an obvious policy implication: however useful aggregate stabilization policies while unemployment is very high, they are likely to fail in lowering the unemployment rate all the way to the levels that prevailed before the recession, since the labor market is structurally less efficient than before in creating successful matches. This lecture reviews the theory underlying the Beveridge curve and US evidence on the ability to draw an inference of structural change from its shift or a shift in the hiring (matching) function.
His lecture (video) is here. (The discussion of how to interpret shifts in the Beveridge curve starts at around the 12:30 mark. Switching to low quality helps the video to stream better. His view is that there is still substantial slack in the labor market.) My interview with him, which spends quite a bit of time on the Beveridge curve, is here.
Posted by Mark Thoma on Saturday, September 6, 2014 at 10:48 AM in Economics, Unemployment |
Jeff Sachs is unhappy with the editorial page of the WSJ:
The Wall Street Journal Parade of Climate Lies: That Rupert Murdoch governs over a criminal media empire has been made clear enough in the UK courts in recent years. That the Wall Street Journal op-ed pages, the latest victim of Murdoch's lawless greed, are little more than naked propaganda is perhaps less appreciated. The Journal runs one absurd op-ed after another purporting to unmask climate change science, but only succeeds in unmasking the crudeness and ignorance of Murdoch's henchmen. Yesterday's (September 5) op-ed by Matt Ridley is a case in point.
Ridley's "smoking gun" is a paper last week in Science Magazine by two scientists Xianyao Chen and Ka-Kit Tung, which Ridley somehow believes refutes all previous climate science. Ridley quotes a sentence fragment from the press release suggesting that roughly half of the global warming in the last three decades of the past century (1970-2000) was due to global warming and half to a natural Atlantic Ocean cycle. He then states that "the man-made warming of the past 20 years has been so feeble that a shifting current in one ocean was enough to wipe it out altogether," and "That to put the icing on the case of good news, Xianyao Chen and Ka-Kit Tung think the Atlantic Ocean may continue to prevent any warming for the next two decades."
The Wall Street Journal editors don't give a hoot about the nonsense they publish if it serves their cause of fighting measures to limit human-induced climate change. If they had simply gone online to read the actual paper, they would have found that the paper's conclusions are the very opposite of Ridley's. ...
Posted by Mark Thoma on Saturday, September 6, 2014 at 09:27 AM in Economics, Environment, Press |
Posted by Mark Thoma on Saturday, September 6, 2014 at 12:06 AM in Economics, Links |
James Narron, David Skeie, and Don Morgan in the NY Fed's Liberty Street Economics blog:
Crisis Chronicles: The British Export Bubble of 1810 and Pegged versus Floating Exchange Rates: In the early 1800s, Napoleon’s plan to defeat Britain was to destroy its ability to trade. The plan, however, was initially foiled. After Britain helped the Portuguese government flee Napoleon in 1807, the Portuguese returned the favor by opening Brazil to British exports—a move that caused trade to boom. In addition, Britain was able to circumvent Napoleon’s continental blockade by means of a North Sea route through the Baltics, which provided continental Europe with a conduit for commodities from the Americas. But when Britain’s trade via the North Sea was interrupted in 1810, the boom ended in crisis. In this edition of Crisis Chronicles, we explore the British Export Bubble of 1810 and ask whether pegged or floating exchange rates are better for an economy. ...
Posted by Mark Thoma on Friday, September 5, 2014 at 01:36 PM in Economics, International Finance |
The Employment Report for August was released this morning. From the BLS:
Total nonfarm payroll employment increased by 142,000 in August, and the unemployment rate was little changed at 6.1 percent...
The change in total nonfarm payroll employment for June was revised from +298,000 to +267,000, and the change for July was revised from +209,000 to +212,000. With these revisions, employment gains in June and July combined were 28,000 less than previously reported.
Pace of Job Growth Slows Further in August: The pace of growth slowed sharply to 142,000 in August. Coupled with downward revisions to June's data, this brings the average rate of job growth over the last three months to 207,000. The economy had been adding jobs added jobs at a 267,000 monthly rate between March and June.
The falloff was widespread across industries. Manufacturing employment was flat after adding an average of 21,000 jobs a month in the prior three months. Retail employment fell by 8,400 in August after adding an average of 22,700 jobs in the prior three months. Transportation added just 1,200 jobs, down from an average 16,400 in the prior three months. Job growth in professional and technical services (16,800) and restaurants (21,100) was also somewhat weaker than its recent pace.
In percentage terms motion pictures continues to be a big job loser, shedding 6,000 jobs in August, 2.0 percent of total employment. Jobs in the sector have fallen by 18.6 percent over the last two years. On the opposite side, health care added 34,000 jobs, the third biggest rise in the last five years. This is likely an anomaly that will be offset by weaker growth in the months ahead.
There is little evidence that the strengthening labor market is leading to wage pressures. Over the last three months, the average hourly wage has risen at a 2.3 percent annual rate, virtually identical to the 2.1 percent rate over the last year. In fact, almost no sectors show evidence of substantial wage growth. Only three sectors, mining, information, and leisure and hospitality have seen hourly wage growth in excess of 2.5 percent over the last year. A 3.5 percent rate of wage growth is consistent with the Fed’s 2.0 percent inflation target (assuming 1.5 percent productivity growth), only mining at 4.1 percent and information at 3.8 percent cross this threshold.
On the household side there was little new in the August data. The unemployment rate edged down slightly to 6.1 percent, but the employment to population ratio remained stable at 59.0 percent.
By education level, college grads don't seem to be faring well at this point in the recovery. Their unemployment edged up to 3.2 percent, while their EPOP fell 0.2 pp to 72.2 percent. Over the last year their unemployment rate has fallen by just 0.3 pp, while the EPOP of college grads is actually down by 0.6 pp. By comparison, those with some college have seen a drop of 0.7 pp in their unemployment rate and a rise of 0.4 pp in their EPOP.
The unemployment duration measures all declined in August, with the share of long-term unemployed falling to 31.2 percent, the lowest level since June of 2009. By comparison, long-term unemployment accounted for more than 22 percent of unemployment from June 2003 to June 2004. The number of people involuntarily working part-time fell by 197,000 and now stands 562,000 below its year ago level. Voluntary part-time employment is up 271,000 from its year ago level, although down 152,000 from July.
Employment growth continues to be less skewed toward older workers. Workers over age 55 accounted for 108.2 percent of total employment growth in the first four years of the recovery. By contrast they accounted for just 29.4 percent of employment growth over the last year. This is consistent with a scenario in which many older but pre-Medicare age workers no longer feel as much need to work now that they can get health care insurance through the exchanges. Workers in the 25-34 age group appear to be the gainers, accounting for 37.1 percent of employment growth over the last year.
While the slower pace of job growth in this report is a surprise to many analysts, the stronger rate in the first half of this year really was not consistent with the rate of GDP growth that we have been seeing or is generally forecast for the near future. If the economy is growing in a 2.5 percent range then we should expect to see job growth of around 1.0 percent or 1.4 million a year. Unless the economy grows far more rapidly than is general expected, we should expect to see job growth well under 200,000 a month.
Posted by Mark Thoma on Friday, September 5, 2014 at 09:26 AM in Economics, Unemployment |
Why is there so much fear of inflation, particularly on the political right?:
The Deflation Caucus, by Paul Krugman, Commentary, NY Times: On Thursday, the European Central Bank announced a series of new steps it was taking in an effort to boost Europe’s economy. ... But its epiphany may have come too late. It’s far from clear that the measures now on the table will be strong enough to reverse the downward spiral.
And there but for the grace of Bernanke go we. Things ... are far from O.K., but we seem ... to have steered clear of the kind of trap facing Europe. Why? One answer is that the Federal Reserve started doing the right thing years ago, buying trillions of dollars’ worth of bonds in order to avoid the situation its European counterpart now faces.
You can argue ... the Fed should have done even more. But Fed officials have faced fierce attacks... Pundits, politicians and plutocrats have accused them, over and over again, of “debasing” the dollar, and warned that soaring inflation is just around the corner..., but despite being wrong year after year, hardly any of the critics have admitted being wrong, or even changed their tune. And the question I’ve been trying to answer is why. What ... makes a powerful faction in our body politic — ...the deflation caucus — demand tight money even in a depressed, low-inflation economy? ...
One answer is ... truthiness — Stephen Colbert’s justly famed term for things that aren’t true, but feel true to some people. “The Fed is printing money, printing money leads to inflation, and inflation is always a bad thing” is a triply untrue statement, but it feels true to a lot of people. ...
Another answer is class interest. Inflation helps debtors and hurts creditors, deflation does the reverse. And the wealthy are much more likely than workers and the poor to be creditors... So perceived class interest is probably also a key motivation for the deflation caucus. ...
And the important thing to understand is that the dominance of creditor interests on both sides of the Atlantic, supported by false but viscerally appealing economic doctrines, has had tragic consequences. Our economies have been dragged down by the woes of debtors, who have been forced to slash spending. To avoid a deep, prolonged slump, we needed policies to offset this drag. What we got instead was an obsession with the evils of budget deficits and paranoia over inflation — and a slump that has gone on and on.
Posted by Mark Thoma on Friday, September 5, 2014 at 12:15 AM in Economics, Inflation, Politics |
Posted by Mark Thoma on Friday, September 5, 2014 at 12:06 AM in Economics, Links |
August Employment Report Tomorrow, by Tim Duy: Tomorrow morning we will be obsessing over the details of the August employment report with an eye toward the implications for monetary policy. Time for a quick review of some key indicators. First, initial unemployment claims continue to track at pre-recession levels:
The employment components of both ISM reports where solid:
The ADP report, however, was arguably lackluster with a gain of just 204k private sector jobs:
The consensus forecast is for nonfarm payroll growth of 230k with a range of 195k to 279k. I am in general agreement with that forecast:
I am somewhat concerned that I should be downgrading the importance of the ADP number and upgrading the strong claims and ISM data, leading me to conclude that the balance of risks lies to the upside of this forecast.
Of course, the headline nonfarm payrolls report is not necessarily the most important. Per usual, we will be scouring the data for indications that underemployment is lessening and slack being driven out of the labor market. And although Fed Chair Yellen has diverted our attention to those numbers, we should also keep a close eye on the unemployment rate, still the best single indicator of the state of the labor market. Consensus is a slight drop in the rate to 6.1%. I would hazard that a sub-6% rate is not out of the question as we have seen our share of 0.3 percentage point declines or greater in recent years.
A 5 handle on the unemployment rate would increase tensions in the FOMC between those who believe we are straying dangerously far from traditional indicators of appropriate monetary policy:
and those who are willing to risk falling behind the curve by waiting until at least sustained target inflation is reached:
Either way, I suspect any meaningful decline in unemployment will add fire to the communications debate at the Federal Reserve. Newly minted Cleveland Federal Reserve President Loretta Mester said today:
In addition to taking another step to taper asset purchases, in July, the FOMC maintained its forward guidance on interest rates. This guidance indicated that given our assessment of realized and expected progress toward our dual-mandate objectives, it will likely be appropriate to maintain the current 0-to-¼ percentage point range for the federal funds rate for a considerable period after the asset purchase program ends. With the end of the program nearing, I believe it is again time for the Committee to reformulate its forward guidance.
Bottom Line: Any further good news in labor markets will make it increasingly difficult for the Fed to maintain its "considerable period" guidance.
Posted by Mark Thoma on Thursday, September 4, 2014 at 12:28 PM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, September 4, 2014 at 11:23 AM in Economics, Income Distribution, Video |
In case you missed this research from Blinder and Watson:
The US economy performs better under Democratic presidents. Why?, by Alan S. Blinder, Mark Watson: Economists and political scientists – not to mention the political commentariat – have devoted a huge amount of attention to the well-established fact that faster economic growth helps re-elect the incumbent party (see, for example, Fair 2011 for the US). But what about causation in the opposite direction – from election outcomes to economic performance? It turns out that the US economy grows faster – indeed, performs better by almost every metric – when a Democratic president occupies the White House.
This partisan gap has barely been noticed by researchers, but it is wide.1 Since the end of World War II, there have been 16 complete four-year presidential terms - seven Democratic and nine Republican. Growth of real GDP averaged 4.35% per annum under the Democratic presidents but only 2.54% under the Republicans. That partisan growth gap of 1.8 percentage points is large by any standard - it implies that real GDP grew by 18.6% during a typical Democratic four-year term, but only by 10.6% during a typical Republican term - and it is statistically significant despite the relative paucity of data.2 In fact, as Figure 1 shows, growth has always slowed down when a Republican president replaced a Democrat and always sped up when a Democrat replaced a Republican. There are no exceptions.3
Similar partisan gaps favouring Democrats – some larger, some smaller, and not always significant – appear in almost any macroeconomic indicator you can think of: the incidence of NBER recessions, employment growth, business investment growth, stock market returns, the profit share of GDP, and so on.
Figure 1. Average annualised GDP growth, by presidential term
The data hold more surprises. Here are a few:
- Even though the US Constitution assigns power over the budget (and most other economic powers) to Congress, not to the president, there is no difference in growth rates depending on which party controls Congress. It’s the presidency that matters.
- The Democratic growth advantage is concentrated in the first two years of a presidency, especially the first, even though Republicans bequeath much slower-growing economies to Democrats and US GDP growth is positively serially correlated (ρ ≈ 0.40 in quarterly data).
- As indicated both by time series models and by genuine ex ante forecasts, Democrats do not inherit economies that are poised for more rapid growth. Granger-causality runs from party-to-growth not from growth-to-party.
Trying to explain the partisan growth gap
Confronted with such stark partisan differences, a macroeconomist naturally wonders whether the explanation could be that fiscal policy was, on average, more expansionary under Democrats. We assess this possibility in a variety of ways and come up with the same answer: no. What about monetary policy, despite the Federal Reserve’s vaunted independence from politics? The answer here is that, if anything, monetary policy was more pro-growth under Republican presidents.4
If the partisan gap cannot be explained by differential monetary and fiscal policy, what does explain it? And do these explanatory factors suggest it was good luck or good policy? We searched over a wide variety of factors, mostly entered in the form of econometric ‘shocks’, that is, as residuals from regressions that include the variable’s own lags and the current and lagged values of GDP growth. Four showed econometric promise:5
- Oil price shocks;
- Total factor productivity (TFP) shocks, adjusted to remove cyclical influences;
- Foreign (that is, European) growth shocks;
- Shocks to consumer expectations of future economic conditions.
In addition, defence spending shocks mattered in samples that include the Korean War, but not much in samples that do not. Using all five of these variables enables us to explain about half of the partisan gap in GDP growth rates since 1947.
As we peruse the list of explanatory variables, the first (oil shocks) looks to be mainly good luck, although US foreign policy (rather than economic policy) certainly played a role. (Think about George W Bush’s invasion of Iraq, for example.) The second variable (TFP) should in principle measure improvements in technology – and so be mostly driven by luck. But a wide variety of economic policies, ranging from R&D spending to regulation and much else, might influence TFP in multiple, subtle ways. And TFP shocks affect the economy with long lags, so that a portion of the TFP-induced strong growth for Democrats was inherited from previous administrations. The third (real growth in Europe) should not have much to do with US economic policies. And when you couple the fourth variable (consumer expectations) with the observed fact that spending on consumer durables grows much faster under Democrats, you get a tantalising suggestion of a self-fulfilling prophecy – consumers, expecting faster growth under Democratic presidents, buy more durable goods on that belief, which makes the economy grow faster. Did they know something economists didn’t?6
These findings raise a host of questions. Among them:
- Is the basic finding limited to post-World War II data?
We think not. We found a similar (though smaller) partisan growth gap in US data going all the way back to 1875. But the 1875–1947 data are dominated by the administration of Franklin D Roosevelt, during which real GDP grew at a heady 7.4% annual rate.
- Are there similar partisan gaps in other countries?
We looked briefly at four other large democracies with stable two-party systems: Canada, the UK, France, and Germany. The Canadian data display a similar (though not quite as large) GDP growth gap in favour of Liberal over Conservative prime ministers. But that is not true in any of the three European countries.
Our best econometric efforts explained little more than half of the Democratic growth gap - our ‘glass’ wound up literally half full and half empty. What factors explain the rest? Hopefully, further research will cast some light on that question.
Alberto Alesina and Jeffrey Sachs (1988), “Political Parties and the Business Cycle in the United States, 1948–1984”, Journal of Money, Credit, and Banking, 20(1): 63–82.
Larry M Bartels (2008), Unequal Democracy: The Political Economy of the New Gilded Age, New York: Russell Sage Foundation, and Princeton, NJ: Princeton University Press.
Alan S Blinder and Mark W Watson (2014), “Presidents and the U.S. Economy: An Econometric Exploration”, NBER Working Paper 20324, July.
Michael Comiskey and Lawrence C Marsh (2012), “Presidents, Parties, and the Business Cycle, 1949–2009”, Presidential Studies Quarterly, 42(1): 40–59.
Ray C Fair (2011), Predicting Presidential Elections and Other Things, Second Edition, Stanford, CA: Stanford University Press.
1 Alesina and Sachs (1988), Bartels (2008, Chapter 2), and Comiskey and Marsh (2012) are a few exceptions. There are not many.
2 In Blinder and Watson (2014), we compute standard errors in a variety of ways and find that the partisan gap is statistically significant at roughly a 1% significance level.
3 But the Carter-to-Reagan transition exhibits only a small slowdown.
4 This is true even though growth was decidedly faster under Fed chairmen who were first appointed by Democrats.
5 We omit from this list factors that we found help explain why Republican presidents should have shown a growth advantage.
6 The partisan growth gap does not rely on recent data. In fact, the estimate generally increases as we shorten the sample by eliminating more recent data.
Posted by Mark Thoma on Thursday, September 4, 2014 at 09:48 AM in Economics, Politics |
My students worry about this:
Are the Job Prospects of Recent College Graduates Improving?, by Jaison R. Abel and Richard Deitz: This post is the fourth in a series of four Liberty Street Economics posts examining the value of a college degree. The promise of finding a good job upon graduation has always been an important consideration when weighing the value of a college degree. In our final post of this week’s blog series, we take a look at the job prospects of recent college graduates. While unemployment among recent graduates has continued to fall since 2011, underemployment has continued to climb—meaning that fewer graduates are finding jobs that make use of their degrees. Do these trends mean that there has been a decline in the demand for those with college degrees? Using data on online job postings, we show that after falling sharply during the Great Recession, the demand for college graduates rebounded during the early stages of the recovery, but has been flat for the past year and a half, suggesting that the demand for college graduates has leveled off. All in all, while finding a job has become easier for recent college graduates over the past few years, finding a good job has not, and doing so is likely to remain a challenge for some time to come. ...
Posted by Mark Thoma on Thursday, September 4, 2014 at 09:05 AM in Economics, Unemployment |
Posted by Mark Thoma on Thursday, September 4, 2014 at 12:06 AM in Economics, Links |
See also conversations with
Peter Diamond and
Posted by Mark Thoma on Wednesday, September 3, 2014 at 09:00 AM in Econometrics, Economics, Video |
Stephen Ross at Vox EU:
Minority mortgage market experiences leading up to and during the Financial Crisis, by Stephen L. Ross, Vox EU: The subprime lending crisis in the US triggered a broad financial panic that lead to the global recession. Domestically, it meant bankruptcy and disaster for many households. This column analyses racial discrimination in subprime lending. Careful estimation of a detailed dataset reveals across-lender effects to have substantially disadvantaged black and Hispanic borrowers.
The concluding paragraph:
... Minority homebuyers – especially blacks – tend to face a higher cost of mortgage credit and had substantially worse credit market outcomes during the recent downturn than white homebuyers with equivalent mortgage risk factors. In terms of the price of credit, a majority of the unexplained differences are associated with the lender from which the homebuyer obtained credit. These effects are felt most among minority borrowers with the lowest levels of education, and are likely due in part to the concentrated activity of subprime lenders in minority neighborhoods and a lack of knowledge of financial markets among minority borrowers with low levels of education. On the other hand, most of the racial differences in loan performance that are unexplained by traditional credit risk factors cannot be captured by controlling for the lender or other aspects of subprime lending. African-Americans and Hispanics appear to be more vulnerable to an economic downturn and to the associated risks of unemployment and housing price declines than observationally similar white homeowners. This higher vulnerability is most pronounced for borrowers who purchased their homes right before the onset of the financial crisis, even after controlling for the increased risk of negative equity associated with buying at the peak of the market. While the expansion of the subprime sector may have contributed to a higher cost of credit for black homebuyers, their concentration in high cost loans (and in the subprime market more generally) can explain only a small portion of the racial differences in foreclosure. Rather, a broad spectrum of black and Hispanic borrowers appear to be especially vulnerable to the economic downturn and associated shocks to their ability to meet their mortgage commitments.
Posted by Mark Thoma on Wednesday, September 3, 2014 at 08:00 AM in Economics, Financial System, Housing |
I have another article at MoneyWatch:
Sagging job growth: It's not a skills gap, by Mark Thoma: Many economists believe the rise in inequality can be explained by factors that have increasingly rewarded college-educated workers over those without a college degree. This "skills premium" has caused the middle class to shrink and polarized the labor market. The solution to these problems is the often-heard call for improved education and retraining programs that will give workers the skills they need to thrive in modern economies.
Employment in manufacturing industries has been hit particularly hard over the last few decades, and economists have pointed to work by David Autor, an economics professor at MIT, and others suggesting that this has resulted more from technological change than from globalization and declining bargaining power of workers (e.g. due to the power of unions).
According to this view, outsourcing is not the main problem. ... However, new work by Autor and several prominent co-authors calls this into question...
Posted by Mark Thoma on Wednesday, September 3, 2014 at 07:46 AM in Economics, Unemployment |
Posted by Mark Thoma on Wednesday, September 3, 2014 at 12:06 AM in Economics, Links |
Solid Start to September, by Tim Duy: The ISM manufacturing report came in ahead of expectations with the strongest number since 2011:
Moreover, strength was evident throughout the internal components:
Note too that the report is consistent with other manufacturing numbers:
If this is a taste of the data to expect this fall, it is tough to see how the Fed will be able to maintain their "considerable period" language much longer.
Posted by Mark Thoma on Tuesday, September 2, 2014 at 11:49 AM in Economics, Fed Watch, Health Care, Monetary Policy |