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Another Kocherlakota Dissent, by Tim Duy: Minneapolis Federal Reserve President Narayana Kocherlakota released a statement regarding his dissenting vote at this week's FOMC meeting. He does not share his colleagues faith that inflation will return to target anytime soon:
...In my assessment, the medium-term outlook for inflation has shown no overall improvement since last December and, indeed, is arguably worse. Failing to act in response to this subdued inflation outlook increases the downside risk to the credibility of our 2 percent inflation target. Market-based measures of longer-term inflation expectations have fallen recently to unusually low levels, a decline that I believe reflects that kind of increased downside risk...
Today's reading on inflation is supportive of Kocherlakota's concerns:
He reiterated his preferred policy outcomes:
There are a number of possible actions that I would have seen as responsive to the evolution of the data. Let me describe two in particular. First, the Committee could have continued to buy $15 billion of longer-term assets per month. Second, it could have committed to keeping the target range for the federal funds rate at its current level at least until the one- to two-year-ahead inflation outlook has risen back to 2 percent, as long as risks to financial stability remain well-contained.
I find this interesting compared to his preferred language after his dissent in March:
For example, the Committee could have adopted language of the following form: “the Committee anticipates keeping the fed funds rate in its current range at least until the unemployment rate has fallen below 5.5 percent, as long as the one-to-two-year-ahead outlook for PCE inflation remains below 2 1/4 percent, longer-term inflation expectations remain well-anchored, and possible risks to financial stability remain well-contained.”
Notice that earlier this year the best he thought he could get from his colleagues was an allowance for 2.25% inflation. Now the best he could hope for has been downgraded to a 2%, suggesting - you guessed it - that the rest of the FOMC considers 2% a ceiling.
I think the inflation downgrade in Kocherlakota's suggested policy language suggests that low inflation is less of a concern for FOMC members now that unemployment is below 6% and measures of underemployment are improving. I believe that Kocherlakota is hearing from his colleagues that 1.) inflation will almost certainly move toward target as the unemployment rate falls further and that 2.) even if inflation remains below 2%, declining slack in the labor market suggests that less financial accommodation is necessary and failure to reduce accommodation will result in undesirable financial instability.
Bottom Line: Kocherlakota's dissent raises the possibility that labor data will trump inflation data in policy considerations. It also suggests that given the pace of labor market improvement, they are not writing off the possibility of a March rate hike (although that is not my baseline).
Posted by Mark Thoma on Friday, October 31, 2014 at 12:53 PM in Economics, Fed Watch, Monetary Policy |
What are the lessons we should learn from Japan?:
Apologizing to Japan, by Paul Krugman, Commentary, NY Times: For almost two decades, Japan has been held up as ... an object lesson on how not to run an advanced economy. After all, the island nation is the rising superpower that stumbled. One day, it seemed, it was on the road to high-tech domination of the world economy; the next it was suffering from seemingly endless stagnation and deflation. And Western economists were scathing in their criticisms of Japanese policy.
I was one of those critics... And these days, I often find myself thinking that we ought to apologize. ...
The ... West has, in fact, fallen into a slump similar to Japan’s — but worse. And that wasn’t supposed to happen. In the 1990s, we assumed that if the United States or Western Europe found themselves facing anything like Japan’s problems, we would respond much more effectively... But we didn’t, even though we had Japan’s experience to guide us. ... And Western workers have experienced a level of suffering that Japan has managed to avoid.
What policy failures am I talking about? ... Japanese fiscal policy didn’t do enough to help growth; Western fiscal policy actively destroyed growth.
Or consider monetary policy. The Bank of Japan ... has received a lot of criticism for reacting too slowly to the slide into deflation, and then for being too eager to raise interest rates at the first hint of recovery. That criticism is fair, but Japan’s central bank never did anything as wrongheaded as the European Central Bank’s decision to raise rates in 2011, helping to send Europe back into recession. And even that mistake is trivial compared with the awesomely wrongheaded behavior of ... Sweden’s central bank, which raised rates despite below-target inflation and relatively high unemployment, and appears, at this point, to have pushed Sweden into outright deflation. ...
As for why the West has done even worse than Japan, I suspect that it’s about the deep divisions within our societies. In America, conservatives have blocked efforts to fight unemployment out of a general hostility to government, especially a government that does anything to help Those People. ...
I’ll be writing more soon about what’s happening in Japan..., and the new lessons the West should be learning. For now, here’s what you should know: Japan used to be a cautionary tale, but the rest of us have messed up so badly that it almost looks like a role model instead.
Posted by Mark Thoma on Friday, October 31, 2014 at 12:15 AM
Posted by Mark Thoma on Friday, October 31, 2014 at 12:06 AM in Economics, Links |
BEA: Real GDP increased at 3.5% Annualized Rate in Q3: From the BEA: Gross Domestic Product, Third Quarter 2014 (Advance Estimate)
Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 3.5 percent in the third quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.6 percent. ... The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by a negative contribution from private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.
The advance Q3 GDP report, with 3.5% annualized growth, was above expectations of a 2.8% increase.
Personal consumption expenditures (PCE) increased at a 1.8% annualized rate - a slow pace. ...
Overall this was an OK report, however PCE was weak (I expect stronger PCE going forward).
Posted by Mark Thoma on Thursday, October 30, 2014 at 07:22 AM in Economics |
FOMC Recap, by Tim Duy: In broad terms, the FOMC meeting concluded as I had expected. To the extent there were any surprises, they were on the hawkish side. Or, I would say, hawkish mostly if you believed the events of the last few weeks justified a radical revision of the Fed's anticipated policy path. I didn't, but was too busy those same past few weeks to scream into the wind.
As I anticipated, the Fed dismissed the decline in market-based inflation expectations. They clearly believe financial markets over-reacted to the decline in oil prices, and that that decline would ultimately prove to be a one-time price shock rather than the beginning of a sustained disinflationary process.
This is why we watch core-inflation.
And note that the Fed sent a pretty big signal along the way. In contrast to conventional wisdom, they do not hold market-based measures of inflation expectations as the Holy Grail. Especially with unemployment below 6%, pay more attention to survey-based measures. And recognize they will discount even those if they feel they are unduly affected by energy prices in either direction.
Somewhat more hawkish than I anticipated, they did not explicitly hold out the hope of future asset purchases. The statement shifts directly to the issue of rate hikes. On that point, they did as I had expected, emphasize the data-dependent nature of future policy:
However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.
In my opinion, this suggests that they want to retain the baseline expectation of a mid-2014 rate hike with the option for an earlier hike. I don't think they see recent data or market action as by itself justifying the shift to the latter part of 2015. If anything, remember that recent data is pointing to accelerating growth and a rapid decline in unemployment.
And that rapid decline in unemployment is important, as I have trouble imagining a scenario in which the Fed is content to watch unemployment fall below 5.5% without at least beginning the rate hike cycle. Remember that they think that even as they increase rates, they believe that policy will continue to be accommodative. In other words, they do not fear raising rates as necessarily a tightening of policy. They will view it as a necessary adjustment in financial accommodation in response to a decline in labor market slack. Hence the line:
The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
I anticipated at least one dissent. In all honesty, this would have been a more impressive call if I had also indicated the direction of the dissent. I expected a hawk to reject the retention of the considerable time language. No such luck - quite the opposite, with noted-dove Minneapolis Federal Reserve President Narayana Kocherlakota protesting both the considerable time language (wanting a more firm commitment to ZIRP) and the decision to end QE. The hawks, in contrast, were generally comfortable with the direction of the discussion. Expect Dallas Federal Reserve President Richard Fisher to say as much soon.
The acceptance of the hawks with the general tone of the meeting is also important. Clearly hawkish in contrast with the shift in market expectations. Time will tell.
Bottom Line: Despite the market turbulence of recent weeks, the general outlook of monetary policymakers remain generally unchanged. In general, they continue to see the direction of activity pointing to a mid-year rate hike. The actual date is of course data dependent, but they have not seen sufficient data in either direction to change that baseline outlook.
Posted by Mark Thoma on Thursday, October 30, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
In case you just can't get enough of Larry Summers talking about secular stagnation:
Reflections on the new 'Secular Stagnation hypothesis', by Larry Summers, Vox EU: The notion that Europe and other advanced economies are suffering secular stagnation is gaining traction. This column by Larry Summers – first published in the Vox eBook “Secular Stagnation: Facts, Causes and Cures” – explains the idea. It argues that a decline in the full-employment real interest rate coupled with low inflation could indefinitely prevent the attainment of full employment.
Here's the end of a relatively long discussion:
3 Conclusions and Implications
The case made here, if valid, is troubling. It suggests that monetary as currently structured and operated may have difficulty maintaining a posture of full employment and production at potential and that if these goals are attained there is likely to be price paid in terms of financial stability. A number of questions come to mind:
Alvin Hansen proclaimed the risk of secular stagnation at the end of the 1930s only to see the economy boom during the and after World War II. It is certainly possible that either some major exogenous event will occur that raises spending or lowers saving in a way that raises the FERIR in the industrial world and renders the concerns I have expressed irrelevant. Short of war, it is not obvious what such events might be. Moreover, most of the reasons adduced for falling FERIRs are likely to continue for at least the next decade. And there is no evidence that potential output forecasts are being increased even in countries like the US where there is some sign of growth acceleration.
On their own, secular stagnation ideas do not explain the decline in potential output that has been a major feature of the experience throughout the industrial world. The available evidence though is that potential output has declined almost everywhere and in near lockstep with declines in actual output; see Ball (2014) for a summary. This suggests a way in which economies may equilibrate in the face of real rates above the FERIR. As hysteresis theories which emphasize the adverse effects of recessions on subsequent output predict, supply potential may eventually decline to the level of demand when enough investment is discouraged in physical capital, work effort and new product innovation.
Perhaps Say’s dubious law has a more legitimate corollary – “Lack of Demand creates Lack of Supply”. In the long run, as the economy’s supply potential declines, the FERIR rises restoring equilibrium, albeit not a very good one.
- What about global aspects?
There is important work to be done elucidating the idea of secular stagnation in an open economy context. The best way to think about the analysis here is to treat it as referring the aggregate economy of the industrial world where – because of capital mobility – real interest rates tend to converge (though not immediately because of the possibility of expected movements in real exchange rates). If the FERIR for the industrialized economies were low enough one might expect capital outflows to emerging markets which would be associated with a declining real exchange rates for industrial countries, increased competitiveness and increased export demand. The difficulty is that this is something that emerging markets will accept only to a limited extent. Their response is likely to be either resistance to capital inflows or efforts to manage currency values to maintain competitiveness. In either case the result will be further downward pressure on interest rates in industrial countries.
4.What is to be done?
Broadly to the extent that secular stagnation is a problem, there are two possible strategies for addressing its pernicious impacts.
- The first is to find ways to further reduce real interest rates.
These might include operating with a higher inflation rate target so that a zero nominal rate corresponds to a lower real rate. Or it might include finding ways such as quantitative easing that operate to reduce credit or term premiums. These strategies have the difficulty of course that even if they increase the level of output, they are also likely to increase financial stability risks, which in turn may have output consequences.
- The alternative is to raise demand by increasing investment and reducing saving.
This operates to raise the FERIR and so to promote financial stability as well as increased output and employment. How can this be accomplished? Appropriate strategies will vary from country to country and situation to situation. But they should include increased public investment, reduction in structural barriers to private investment and measures to promote business confidence, a commitment to maintain basic social protections so as to maintain spending power and measures to reduce inequality and so redistribute income towards those with a higher propensity to spend.
Posted by Mark Thoma on Thursday, October 30, 2014 at 12:15 AM in Economics |
Posted by Mark Thoma on Thursday, October 30, 2014 at 12:06 AM in Economics, Links |
"In a panel discussion moderated by Dean Rich Lyons, Laura Tyson, professor of business administration and economics at the Haas School of Business, and Emmanuel Saez, economics professor and head of the Center for Equitable Growth at UC Berkeley, focus on income inequality, drawing from ideas central to Thomas Piketty's bestselling book Capital in the Twenty-First Century."
[Note: The discussion is summarized here.]
Posted by Mark Thoma on Wednesday, October 29, 2014 at 10:56 AM in Economics, Income Distribution, Video |
Riksbank and ECB: reverse asymmetry: The Swedish central bank just lowered interest rates to zero because of deflation risks. This action comes after ignoring repeated warnings from Lars Svensson who had joined the bank in 2007 and later resigned because of disagreements with monetary policy decisions. What it is interesting is the parallel between Riksbank decisions and ECB decisions. In both cases, these central banks went through a period of optimism that make them raise interest rates to deal with inflationary pressures. In the case of Sweden interest rates were raised from almost zero to 2% in 2012. In the case of the ECB interest rates were raised from 1% to 1.5% during 2011. Also, in both cases, after a significant expansion in their balance sheets following the 2008 crisis, there was a sharp reduction in the years that followed. ... Their policies stand in contrast with those of the US Federal Reserve and the Bank of England...
The consequences of the policies of the ECB and Riksbank are clear: a continuous fall in their inflation rates that has raised the risk of either a deflationary period or a period of too-low inflation. What is more surprising about their policy actions is their low speed of reaction as the data was clearly signaling that their monetary policy stance was too tight for months or years. ...
What we learned from these two examples is that central banks are much less accountable than what we thought about inflation targets. And they ... use ... a policy that is clearly asymmetric in nature. Taking some time to go from 0% inflation to 2% inflation is ok but if inflation was 4% I am sure that their actions will be much more desperate. In the case of the ECB their argument is that the inflation target is defined as an asymmetric target ("close to but below 2%"). But this asymmetry, which was never an issue before the current crisis, has very clear consequences on the ability of central banks to react to deep crisis with deflationary risks.
What we have learned during the current crisis is that an asymmetric 2% inflation target is too low. Raising the target might be the right thing to do but in the absence of a higher target, at a minimum we should reverse the asymmetry implied by the ECB mandate. Inflation should be close to but above 2% and this should lead to very strong reaction when inflation is persistently below the 2% target.
Posted by Mark Thoma on Wednesday, October 29, 2014 at 10:25 AM in Economics, Inflation, Monetary Policy |
Is (teaching) Economics doing more harm than good?: Every September thousands of students enter into universities and institutes of higher education. A large number of these take some economics courses. ... Economists also typically teach courses such as statistics, or introductory mathematics for social scientists. And yet, we have no idea whether or not this does any good. Much worse, we have no idea whether or not this does harm. Maybe we should find out? ...
He goes through a large body of evidence showing that "Economists are different," and how student attitudes may be changed by taking economics courses.
Posted by Mark Thoma on Wednesday, October 29, 2014 at 10:25 AM in Economics, Universities |
The digital divide:
Digital divide exacerbates US inequality, by David Crow, FT: The majority of families in some of the US’s poorest cities do not have a broadband connection, according to a Financial Times analysis of official data that shows how the “digital divide” is exacerbating inequality in the world’s biggest economy. ...
The OECD ranks the US 30th out of 33 countries for affordability...
There is a very strong correlation with race and income. Just 45 per cent of households with an income of less than $20,000 a year have broadband whereas the rate for those earning $75,000 or more is 91 per cent. About a third of African American and Hispanic households are unconnected compared to 20 per cent for white households and 10 per cent for Asian households.
Posted by Mark Thoma on Wednesday, October 29, 2014 at 10:25 AM in Economics, Income Distribution, Technology |
Posted by Mark Thoma on Wednesday, October 29, 2014 at 12:06 AM in Economics, Links |
Fed Watch: FOMC Meeting, by Tim Duy: I have been buried the past few weeks. So blogging has been, and will be, at least for a little longer, light. That said, I have trouble letting an FOMC meeting pass without at least few words before and after - even if there already exist broad agreement on the outcome.
The general expectation is that the Fed ends its bond buying program at the conclusion of the meeting tomorrow. That alone promises to knock down the FOMC statement to a more manageable size. While St. Louis Federal Reserve President James Bullard offered up the possibility of retaining the program for another meeting, there is little indication that other FOMC members are similarly inclined. They have long wanted to get out of asset purchase business, and see no shift in activity sufficient to delay that objective. Moreover, as Boston Federal Reserve President Eric Rosengren has noted, the remaining $15 billion is effectively a rounding error. If the Fed really wants to do something, they need to go bigger. But that is not on the table.
Regarding the statement, here is what I anticipate:
1. The general description of the economy will remain essentially unchanged, expanding at a "moderate pace." This would be consistent with expectations that the economy is currently on track to post 3%+ growth in the third quarter.
2. That said, they will mention they remain watchful of foreign growth.
3. They will acknowledge the further decline in unemployment rates yet retain the view that labor market indicators still suggest underutilization of resources. I would not be surprised by specific mention of low wage growth as evidence of underutilization.
4. I expect the Fed will acknowledge the decline in market-based measures of inflation expectations, but ultimately dismiss those measures for now in favor of stable of survey based measures. In general, I think they will take the approach of Rosengren in this Washington Post interview:
"Inflation breakevens," Rosengren explained, "are based on the pricing of Treasury securities and Treasury Inflation-Protected Securities (TIPS). So if you think about what the implication of significant financial market turbulence is, particularly about Europe, it's for foreign investors to buy Treasury securities. They disproportionately buy regular Treasury securities, so the flight to safety is going to start changing the relative prices of Treasury securities" and make it look like markets expect less inflation. But "if you look at inflation expectations based more on surveys, there's been a little bit of softening, but certainly nothing consistent with the kind of movements we've seen in the [Treasury] breakevens. So I wouldn't overreact to one or two weeks of sharp movements, because I think there are plenty of other reasons to explain" them.
5. I expect the risks to growth and employment will remain balanced, and the risk of persistently low inflation will continue to be "somewhat diminished."
6. They will announce the end of the asset purchase program, but emphasize continued reinvestment of principle and that the sizable asset holdings will continue to provide support for the recovery.
7. They will note that despite the end of asset purchases, such purchases remain in the monetary toolbox and could be revived if conditions warranted.
8. The "considerable time" language will remain. I don't anticipate any tweaks to the interest rate guidance, but I would expect if there are any such tweaks, they would be to emphasize the data-dependent nature of future policy decisions.
9. I expect at least one dissent.
Bottom Line: I am anticipating a pretty straightforward result from this FOMC meeting.
Posted by Mark Thoma on Tuesday, October 28, 2014 at 01:28 PM in Economics, Fed Watch, Monetary Policy |
I have a new column:
Are Economists Ready for Income Redistribution?: When the Great Recession hit and it became clear that monetary policy alone would not be enough to prevent a severe, prolonged downturn, fiscal policy measures – a combination of tax cuts and new spending – were used to try to limit the damage to the economy. Unfortunately, macroeconomic research on fiscal policy was all but absent from the macroeconomics literature and, for the most part, policymakers were operating in the dark, basing decisions on what they believed to be true rather than on solid theoretical and empirical evidence.
Fiscal policy will be needed again in the future, either in a severe downturn or perhaps to address the problem of growing inequality, and macroeconomists must do a better job of providing the advice that policymakers need to make informed fiscal policy decisions. ...
The question of redistribution is coming, and we need to be ready when it does.
Posted by Mark Thoma on Tuesday, October 28, 2014 at 08:39 AM in Economics, Income Distribution, Macroeconomics |
Has Fed policy made inequality worse?: What effect did Federal Reserve policy during the Great Recession have on inequality? Did quantitative easing and the Fed’s low interest rate policy benefit those at the top of the income distribution the most?
Many people seem to be convinced that is the case. According to this view, the Fed has been captured by the interests of wealthy bankers and its policies therefore benefit this group the most. But what does the evidence actually say about this question? Are Ron Paul and the Austrian economists, among many others on both sides of the political fence, correct to claim that loosening monetary policy to combat recessions makes inequality worse? ...
[The editors changed the intro, this is the original.]
Posted by Mark Thoma on Tuesday, October 28, 2014 at 08:33 AM in Economics, Income Distribution, Monetary Policy |
Emmanuel Saez and Gabriel Zucman:
Exploding wealth inequality in the United States, by Emmanuel Saez and Gabriel Zucman, Vox EU: Wealth inequality in the US has followed a U-shaped evolution over the last century – there was a substantial democratisation of wealth from the Great Depression to the late 1970s, followed by a sharp rise in wealth inequality. This column discusses new evidence on the concentration of wealth in the US. Growing wealth disparity is fuelled by increases in both income and saving rate inequalities between the haves and the have nots.
There is no dispute that income inequality has been on the rise in the US for the past four decades. The share of total income earned by the top 1% of families was less than 10% in the late 1970s, but now exceeds 20% as of the end of 2012 (Piketty and Saez 2003). A large portion of this increase is due to an upsurge in the labour incomes earned by senior company executives and successful entrepreneurs. But is the rise in US economic inequality purely a matter of rising labour compensation at the top, or did wealth inequality rise as well?
Before we answer that question (hint: the answer is a definitive yes, as we will demonstrate below) we need to define what we mean by wealth. Wealth is the stock of all the assets people own, including their homes, pension saving, and bank accounts, minus all debts. Wealth can be self-made out of work and saving, but it can also be inherited. Unfortunately, there is much less data available on wealth in the US than there is on income. Income tax data exists since 1913 – the first year the country collected federal income tax – but there is no comparable tax on wealth to provide information on the distribution of assets. Currently available measures of wealth inequality rely either on surveys (the Survey of Consumer Finances of the Federal Reserve Board), on estate tax return data (Kopczuk and Saez 2004), or on lists of wealthy individuals, such as the Forbes 400 list of wealthiest Americans.
In our new working paper (Saez and Zucman 2014), we try to measure wealth in another way. We use comprehensive data on capital income – such as dividends, interest, rents, and business profits – that is reported on individual income tax returns since 1913. We then capitalise this income so that it matches the amount of wealth recorded in the Federal Reserve’s Flow of Funds, the national balance sheets that measure aggregate wealth of US families. In this way we obtain annual estimates of US wealth inequality stretching back a century.
Wealth inequality, it turns out, has followed a spectacular U-shaped evolution over the past 100 years. From the Great Depression in the 1930s through the late 1970s there was a substantial democratisation of wealth. The trend then inverted, with the share of total household wealth owned by the top 0.1% increasing to 22% in 2012 from 7% in the late 1970s (see Figure 1). The top 0.1% includes 160,000 families with total net assets of more than $20 million in 2012.
Figure 1. The return of the Roaring Twenties
Notes: The figure plots wealth share owned by the top .1% richest families in the US from 1913 to 2012. Wealth is total assets (including real estate and funded pension wealth) net of all debts. Wealth excludes the present value of future government transfers (such as Social Security or Medicare benefits). Source: Saez and Zucman (2014).
Figure 1 shows that wealth inequality has exploded in the US over the past four decades. The share of wealth held by the top 0.1% of families is now almost as high as in the late 1920s, when The Great Gatsby defined an era that rested on the inherited fortunes of the robber barons of the Gilded Age.
In recent decades, only a tiny fraction of the population saw its wealth share grow. While the wealth share of the top 0.1% increased a lot in recent decades, that of the next 0.9% (families between the top 1% and the top 0.1%) did not. And the share of total wealth of the “merely rich” – families who fall in the top 10% but are not wealthy enough to be counted among the top 1% – actually decreased slightly over the past four decades. In other words, family fortunes of $20 million or more grew much faster than those of only a few millions.
The flip side of these trends at the top of the wealth ladder is the erosion of wealth among the middle class and the poor. There is a widespread public view across American society that a key structural change in the US economy since the 1920s is the rise of middle-class wealth, in particular because of the development of pensions and the rise in home ownership rates. But our results show that while the share of wealth of the bottom 90% of families did gradually increase from 15% in the 1920s to a peak of 36% in the mid-1980s, it then dramatically declined. By 2012, the bottom 90% collectively owns only 23% of total US wealth, about as much as in 1940 (see Figure 2).
Figure 2. The rise and fall of middle-class wealth
Notes: The figure plots wealth share owned by the bottom 90% poorest families in the US from 1917 to 2012. Wealth is total assets (including real estate and funded pension wealth) net of all debts. Wealth excludes the present value of future government transfers (such as Social Security or Medicare benefits). Source: Saez and Zucman (2014).
The growing indebtedness of most Americans is the main reason behind the erosion of the wealth share of the bottom 90% of families. Many middle-class families own homes and have pensions, but too many of these families also have much higher mortgages to repay and much higher consumer credit and student loans to service than before (Mian and Sufi 2014). For a time, rising indebtedness was compensated by the increase in the market value of the assets of middle-class families. The average wealth of bottom 90% of families jumped during the stock-market bubble of the late 1990s and the housing bubble of the early 2000s. But it then collapsed during and after the Great Recession of 2007–2009 (see Figure 3).
Figure 3. The new wealth divide in the US
Notes: The figure depicts the average real wealth of bottom 90% of families (right y-axis) and top 1% families (left y-axis) from 1946 to 2012. The scales differ by a factor 100 to reflect the fact that top 1% of families are 100 times richer than the bottom 90% of families. Wealth is expressed in constant 2010 US dollars, using the GDP deflator. Source: Saez and Zucman (2014).
Since the housing and financial crises of the late 2000s there has been no recovery in the wealth of the middle class and the poor. The average wealth of the bottom 90% of families is equal to $80,000 in 2012 – the same level as in 1986. In contrast, the average wealth for the top 1% more than tripled between 1980 and 2012. In 2012, the wealth of the top 1% increased almost back to its peak level of 2007. The Great Recession looks only like a small bump along an upward trajectory.
How can we explain the growing disparity in American wealth? The answer is that the combination of higher income inequality alongside a growing disparity in the ability to save for most Americans is fuelling the explosion in wealth inequality. For the bottom 90% of families, real wage gains (after factoring in inflation) were very limited over the past three decades, but for their counterparts in the top 1% real wages grew fast. In addition, the saving rate of middle-class and lower-class families collapsed over the same period while it remained substantial at the top. Today, the top 1% families save about 35% of their income, while the bottom 90% families save about zero (Saez and Zucman 2014).
The implications of rising wealth inequality and possible remedies
If income inequality stays high and if the saving rate of the bottom 90% of families remains low then wealth disparity will keep increasing. Ten or 20 years from now, all the gains in wealth democratisation achieved during the New Deal and the post-war decades could be lost. While the rich would be extremely rich, ordinary families would own next to nothing, with debts almost as high as their assets. Paris School of Economics professor Thomas Piketty warns that inherited wealth could become the defining line between the haves and the have-nots in the 21st century (Piketty 2014). This provocative prediction hit a nerve in the US this year when Piketty’s book Capital in the 21st Century became a national best seller because it outlined a direct threat to the cherished American ideals of meritocracy and opportunity.
What should be done to avoid this dystopian future? We need policies that reduce the concentration of wealth, prevent the transformation of self-made wealth into inherited fortunes, and encourage savings among the middle class. First, current preferential tax rates on capital income compared to wage income are hard to defend in light of the rise of wealth inequality and the very high savings rate of the wealthy. Second, estate taxation is the most direct tool to prevent self-made fortunes from becoming inherited wealth – the least justifiable form of inequality in the American meritocratic ideal. Progressive estate and income taxation were the key tools that reduced the concentration of wealth after the Great Depression (Piketty and Saez 2003, Kopczuk and Saez 2004). The same proven tools are needed again today.
There are a number of specific policy reforms needed to rebuild middle-class wealth. A combination of prudent financial regulation to rein in predatory lending, incentives to help people save – nudges have been shown to be very effective in the case of 401(k) pensions (Thaler and Sunstein 2008) – and more generally steps to boost the wages of the bottom 90% of workers are needed so that ordinary families can afford to save.
One final reform also needs to be on the policymaking agenda – the collection of better data on wealth in the US. Despite our best efforts to build wealth inequality data, we want to stress that the US is lagging behind in terms of the quality of its wealth and saving data. It would be relatively easy for the US Treasury to collect more information – in particular balances on 401(k) and bank accounts – on top of what it already collects to administer the federal income tax. This information could help enforce the collection of current taxes more effectively and would be invaluable for obtaining more precise estimates of the joint distributions of income, wealth, saving, and consumption. Such information is needed to illuminate the public debate on economic inequality. It is also required to evaluate and implement alternative forms of taxation, such as progressive wealth or consumption taxes, in order to achieve broad-based and sustainable economic growth.
Kopczuk, W and E Saez (2004), “Top Wealth Shares in the United States, 1916–2000: Evidence from Estate Tax Returns”, National Tax Journal 57(2), Part 2, June: 445–487.
Mian, A and A Sufi (2014), House of Debt, University of Chicago Press.
Piketty, T (2014), Capital in the 21st Century, Cambridge: Harvard University Press.
Piketty, T and E Saez (2003), “Income Inequality in the United States, 1913–1998”, Quarterly Journal of Economics 118(1): 1–39, series updated to 2012 online.
Saez, Emmanuel and Gabriel Zucman (2014), “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data”, CEPR Discussion Paper 10227, October.
Thaler, R H and C R Sunstein (2008), Nudge: Improving Decisions about Health, Wealth, and Happiness, New Haven: Yale University Press.
Posted by Mark Thoma on Tuesday, October 28, 2014 at 08:31 AM in Economics, Income Distribution |
Posted by Mark Thoma on Tuesday, October 28, 2014 at 12:06 AM in Economics, Links |
David Hendry at Vox EU:
Climate change: Lessons for our future from the distant past, by David F. Hendry: Summary Climate change has been the main driver of mass extinctions over the last 500 million years. This column argues that current evidence provides a stark warning. Human activity is producing greenhouse gases, and as a consequence global temperatures and ocean heat content are rising. Such trends raise the risk of tipping points. Economic analysis offers a number of ideas, but a key problem is that distributions of climate variables can shift, invalidating stationarity-based analyses, and making action to avoid possible future shifts especially urgent.
Economic analysis offers many insights – externalities need to be either priced or regulated, and climate change is the largest ever worldwide externality. All approaches are affected by the possibility of abrupt changes and the resulting unknown uncertainty when distributions shift, making action more urgent to avoid possible future shifts. Adaptation is not meaningful if food, water, and land resources become inadequate. Conversely, mitigation steps need not be costly, and could stimulate innovation. International negotiations are more likely to succeed if the largest players act first in their own counties or groups – also creating opportunities for their societies as new technologies develop.
Planet Earth will survive whatever humanity is doing – the crucial issue is the effect of climate change on its present inhabitants. It is a risky strategy to do nothing if there are potentially huge costs when the costs of initial actions are small. The obvious time to start is now, and the obvious actions are the many low-cost implementations that mitigate greenhouse gases (see Stern 2008 for a list) – just in case.
[See also "U.N. Climate Change Draft Sees Risks of Irreversible Damage - Scientific American".]
Posted by Mark Thoma on Monday, October 27, 2014 at 10:59 AM in Economics, Environment, Market Failure, Policy |
This is from INET:
The Consequences of Money-Manager Capitalism: In the wake of World War II, much of the western world, particularly the United States, adopted a new form of capitalism called “managerial welfare-state capitalism.”
The system by design constrained financial institutions with significant social welfare reforms and large oligopolistic corporations that financed investment primarily out of retained earnings. Private sector debt was small, but government debt left over from financing the War was large, providing safe assets for households, firms, and banks. The structure of this system was financially robust and unlikely to generate a deep recession. However, the constraints within the system didn’t hold.
The relative stability of the first few decades after WWII encouraged ever-greater risk-taking, and over time the financial system was transformed into our modern overly financialized economy. Today, the dominant financial players are “managed money”—lightly regulated “shadow banks” like pension funds, hedge funds, sovereign wealth funds, and university endowments—with huge pools of capital in search of the highest returns. In turn, innovations by financial engineers have encouraged the growth of private debt relative to income and the increased reliance on volatile short-term finance and massive uses of leverage.
What are the implications of this financialization on the modern global economy? According to Adair Lord Turner, a Senior Fellow at the Institute for New Economic Thinking and a former head of the United Kingdom’s Financial Services Authority, it means that finance has become central to the daily operations of the economic system. More precisely, the private nonfinancial sectors of the economy have become more dependent on the smooth functioning of the financial sector in order to maintain the liquidity and solvency of their balance sheets and to improve and maintain their economic welfare. For example, households have increased their use of debt to fund education, healthcare, housing, transportation, and leisure. And at the same time, they have become more dependent on interest, dividends, and capital gains as a means to maintain and improve their standard of living.
Another major consequence of financialized economies is that they typically generate repeated financial bubbles and major debt overhangs, the aftermath of which tends to exacerbate inequality and retard economic growth. Booms turn to busts, distressed sellers sell their assets to the beneficiaries of the previous bubble, and income inequality expands.
In the view of Lord Turner, we have yet to come up with a sufficiently robust policy response to deal with the consequences of our new “money manager capitalism.” The upshot likely will be years more of economic stagnation and deteriorating living standards for many people around the world.
Posted by Mark Thoma on Monday, October 27, 2014 at 09:43 AM in Economics, Video |
What's really behind the GOP's opposition to infrastructure investment?:
Ideology and Investment, by Paul Krugman, Commentary, NY Times: America used to be a country that built for the future. Sometimes the government built directly: Public projects, from the Erie Canal to the Interstate Highway System, provided the backbone for economic growth. Sometimes it provided incentives to the private sector, like land grants to spur railroad construction. Either way, there was broad support for spending that would make us richer.
But nowadays we simply won’t invest, even when the need is obvious and the timing couldn’t be better. And don’t tell me that the problem is “political dysfunction” or some other weasel phrase that diffuses the blame. Our inability to invest doesn’t reflect something wrong with “Washington”; it reflects the destructive ideology that has taken over the Republican Party.
Some background: More than seven years have passed since the housing bubble burst, and ever since, America has been awash in savings ... with nowhere to go. ...
There’s an obvious policy response to this situation: public investment. We have huge infrastructure needs,... and the federal government can borrow incredibly cheaply... So borrowing to build roads, repair sewers and more seems like a no-brainer. But what has actually happened is the reverse. After briefly rising after the Obama stimulus went into effect, public construction spending has plunged. ...
Yet this didn’t have to happen. ... But once the G.O.P. took control of the House, any chance of ... money for infrastructure vanished. Once in a while Republicans would talk about wanting to spend more, but they blocked every Obama administration initiative.
And it’s all about ideology, an overwhelming hostility to government spending of any kind. This hostility began as an attack on social programs, especially those that aid the poor, but over time it has broadened into opposition to any kind of spending, no matter how necessary and no matter what the state of the economy. ... Never mind the obvious point that the private sector doesn’t and won’t supply most kinds of infrastructure, from local roads to sewer systems; such distinctions have been lost amid the chants of private sector good, government bad.
And the result, as I said, is that America has turned its back on its own history. We need public investment; at a time of very low interest rates, we could easily afford it. But build we won’t.
Posted by Mark Thoma on Monday, October 27, 2014 at 12:24 AM in Economics, Fiscal Policy, Politics |
Posted by Mark Thoma on Monday, October 27, 2014 at 12:06 AM in Economics, Links |
Why the Eurozone suffers from a Germany problem: When, almost a year ago, Paul Krugman wrote six posts within three days laying into the stance of Germany on the Eurozone’s macroeconomic problems, even I thought that maybe this was a bit too strong, although there was nothing in what he wrote that I disagreed with. Yet as Germany’s stance proved unyielding in the face of the Eurozone’s continued woes, I found myself a couple of months ago doing much the same thing (1, 2, 3, 4, 5, 6)...
I’m not going to review the macroeconomics here. I’m going to take it as read that
1) ECB monetary policy has been far too timid since the Great Recession began, in part because of the influence of its German members.
2) This combined with austerity led to the second Eurozone recession, and austerity continues to be a drag on demand. The leading proponent of that austerity is Germany.
3) Pretty well everyone outside Germany agrees that a Eurozone fiscal stimulus in the form of additional public investment, together with Quantitative Easing (QE) in the form of government debt purchases by the ECB, are required to help quickly end this second recession (see, for example, Guntram Wolff), and the main obstacle to both is the German government.
The question I want to raise is why Germany appears so successful in blocking or delaying these measures. ...
The Eurozone’s current problem arises because one country - Germany - allowed nominal wage growth well below the Eurozone average, which undercut everyone else.... Within a currency union, this is a beggar my neighbour policy.
In other words, as Simon Tilford suggests, Germany is viewed by many in the Eurozone as a model to follow, rather than as a source for their current problems. ... Of course ... Germany may well have many features which other countries might well want to emulate, like high levels of productivity, but the reason why it’s national interest is not currently aligned with other union members is because its inflation rate was too low from 2000 to 2007. That in itself was not a virtue...
It may well come down to the position taken by countries like the Netherlands. They have suffered as much as France... As Giulio Mazzolini and Ashoka Mody note, “For the Netherlands …. less austerity would have been unambiguously better.” Yet until now, politicians in the Netherlands (and the central bank) appear to have taken the German line that this medicine is for their own good. If they can eat a bit of humble pie and support a kind of ‘grand bargain’ that would see fiscal expansion rather than contraction in the Eurozone as a whole, and a comprehensive QE programme by the ECB, then maybe some real progress can be made. Ultimately this is not the Eurozone’s Germany problem, but a problem created by the macroeconomic vision that German policymakers espouse.
Posted by Mark Thoma on Sunday, October 26, 2014 at 08:44 AM in Economics, International Finance |
Posted by Mark Thoma on Sunday, October 26, 2014 at 12:06 AM in Economics, Links |
Scale, Profits, and Inequality, Growth Economics: After my post last week on inequality, I got a number of (surprisingly reasonable) responses. I pulled one line out of a recent comment ... because it encapsulates an argument for *not* caring about inequality.
“Gates and the Waltons really did probably add more value to humanity than the janitor at my school.“
The general argument here is about incentives. Without the possibility of massive profits, people like Bill Gates or Sam Walton will not bother to innovate and create Microsoft and Walmart. ... But if we take seriously the incentives behind innovation, then it isn’t simply the genius of the individual that matters for growth. The scale of the economy is equally relevant. ...
People like Gates and the Waltons earn profits on the scale effect of the U.S. economy, which they did not invent, innovate on, or produce. So the “rest of us”, like the janitor mentioned above, have some legitimate reason to ask whether those profits are best used in remunerating Bill Gates and the Walton family, or could be put to better use. ... Investing in health, education, and infrastructure all will raise the aggregate size of the U.S. economy, and make innovation more lucrative. Even straight income transfers can raise the effective scale of the U.S. economy be transferring purchasing power to people who will spend it.
Can we argue about exactly how much of the profits are due to “genius” (the markup) and how much to scale? Sure... But you cannot dismiss the idea of taxing high-income “makers” because their income represents the fruits of their individual genius. It doesn’t. Their incomes derive from a combination of ability and scale. And scale doesn’t belong to individuals.
The value-added of “the Waltons” is particularly relevant here. ... Alice Walton is worth around $33 billion. She never worked for Walmart. She is a billionaire many times over because her dad was smart enough to take advantage of the massive scale of the U.S. economy. I’m not willing to concede that Alice has added more value to humanity than anyone in particular. So, yes, I’ll argue that Alice should pay a lot more in taxes than she does today. And no, I’m not afraid that this will prevent innovation in the future, because those taxes will help expand the scale of the economy and incent a new generation of innovators to get to work.
Posted by Mark Thoma on Saturday, October 25, 2014 at 11:08 AM in Economics, Income Distribution |
Posted by Mark Thoma on Saturday, October 25, 2014 at 12:06 AM in Economics, Links |
What Path for Development in Africa -- and Elsewhere?: As I've pointed out from time to time, the countries of sub-Saharan Africa have been experiencing genuine conomic growth for the last decade or so, and not just in oil- and mineral-exporting countries, creating what is by the standards of developing economies an expanding middle class. But here comes Dani Rodrik to ask some realistic tough questions in his essay, "Why an African Growth Miracle Is Unlikely," written for the Fourth Quarter 2014 issue of the Milken Institute Review. Rodrik also argues this case in "An African Growth Miracle?" given as the Richard Sabot lecture last April at the Center for Global Development.
As Rodrik readily acknowledges, many nations of Africa have seen both sustained growth and positive reform of their economic institutions. ...
But Rodrik's focus is not on whether a per capita growth rate of 3% is sustainable. Given continuing investments in human capital, infrastructure investment and building better trade ties across the continent, Africa's economy's can continue to grow. The question is whether sub-Saharan African can experience a growth "miracle" similar to that of many nations around south and east Asia--Japan, Korea, China, India, and others--where per capita economic growth veers up into the range of 7% per year or more, which is enough to double average living standards in a decade.
Here, Rodrik argues, Africa's prospects are shakier, because that kind of growth miracle requires some manner of structural transformation of the economy--and just how the nations of Africa might transform their economies in this way is quite unclear. How will Africa's jobs of the future be generated? Rodrik writes:
"To generate sustained, rapid growth, Africa has essentially four options. The first is to revive manufacturing and put industrialization back on track, so as to replicate as much as possible the now-traditional route to economic convergence. The second is to generate agriculture-led growth, based on diversification into non-traditional agricultural products. The third is to kindle rapid growth in productivity in services, where most people will end up working in any case. The fourth is growth based on natural resources, in which many African countries are amply endowed."
The problem with the manufacturing approach is that economic through a transformation that involves low-wage manufacturing is getting harder. Rodrik writes:
On the other hand, the obstacles to industrialization in Africa may be deeper, and go beyond specific African circumstances. For various reasons we do not fully understand, industrialization has become really hard for all countries of the world. The advanced countries are, of course, deindustrializing, which is not a big surprise and can be ascribed to both import competition and a shift in demand to services. But middle-income countries in Latin America are doing the same. And industrialization in low-income countries is running out of steam considerably earlier than was the case before. This is the phenomenon that I have called premature deindustrialization.
... Rodrik's bottom line is that while the nations of sub-Saharan Africa can surely continue to experience moderate rates of economic growth, it will need to invent its own path to find a growth miracle: "If African countries do achieve growth rates substantially higher than I have suggested is likely, they will do so by pursuing a growth model that is different from earlier miracles, which were based on industrialization. Perhaps it will be agriculture-led growth. Perhaps it will be services. But it will look quite different than scenarios we have seen before."
I would add that the U.S. economy and the world face their own version of Africa's economic growth problem. In the U.S., the old-style manufacturing jobs have been steadily diminishing. We aren't likely to build the future of the U.S. economy primarily on growth in agriculture. Although the emergence of the U.S. economy as the world's oil and gas production leader should offer real benefits to the U.S. economy in the next couple of decades, it isn't likely to be enough to drive the bulk of the $17 trillion U.S. economy. The core challenge facing the U.S. economy is how to combine its own service-sector workers, especially its low- and middle-skill workers, with the new possibilities of technology in a way that leads to well-paid jobs, as well as to the kind of rising productivity and evolving skills that are behind a satisfying career path.
Posted by Mark Thoma on Friday, October 24, 2014 at 11:11 AM in Economics |
Maybe we'll finally start discussing something I've been writing about for years with little traction, how market power affects the distribution of income (the disconnect between income and the contribution to final product that occurs when market power exists):
The Profits-Investment Disconnect, by Paul Krugman: I caught a bit of CNBC in the locker room this morning, and they were talking about stock buybacks. Oddly — or maybe not that oddly, given my own experiences with the show — nobody brought up what I would have thought was the obvious question. Profits are very high, so why are companies concluding that they should return cash to stockholders rather than use it to expand their businesses?
After all, we normally think of high profits as a signal: a profitable business is one people should be trying to get into. But right now we see a combination of high profits and sluggish investment...
What’s going on? One possibility, I guess, is that business are holding back because Obama is looking at them funny. But more seriously, this kind of divergence — in which high profits don’t signal high returns to investment — is what you’d expect if a lot of those profits reflect monopoly power rather than returns on capital.
More on this in a while.
Posted by Mark Thoma on Friday, October 24, 2014 at 10:02 AM in Economics, Income Distribution, Market Failure |
Redistribution between generations: I ought to start a series on common macroeconomic misunderstandings. (I do not watch zombie films.) ... Here is one that crops up fairly regularly - that government debt does not involve redistribution between generations. The misunderstanding here is obvious once you see that generations overlap. ...
Posted by Mark Thoma on Friday, October 24, 2014 at 09:41 AM in Economics |
"What's a plutocrat to do?":
Plutocrats Against Democracy, by Paul Krugman, Commentary, NY Times: ...The ... political right has always been uncomfortable with democracy..., there is always an undercurrent of fear that the great unwashed will vote in left-wingers who will tax the rich, hand out largess to the poor, and destroy the economy. ...
This is a fantasy. ... All advanced nations have had substantial welfare states since the 1940s... But you don’t, in fact, see countries descending into tax-and-spend death spirals — and no, that’s not what ails Europe.
Still, while the “kind of politics and policies” that responds to the bottom half of the income distribution won’t destroy the economy,... the top 0.1 percent is paying quite a lot more in taxes right now than it would have if Mr. Romney had won. So what’s a plutocrat to do?
One answer is propaganda: tell voters, often and loudly, that taxing the rich and helping the poor will cause economic disaster, while cutting taxes on “job creators” will create prosperity for all. There’s a reason conservative faith in the magic of tax cuts persists no matter how many times such prophecies fail (as is happening right now in Kansas): ...
Another answer, with a long tradition in the United States, is to make the most of racial and ethnic divisions — government aid just goes to Those People, don’t you know. And besides, liberals are snooty elitists who hate America.
A third answer is to make sure government programs fail, or never come into existence, so that voters never learn that things could be different.
But these strategies for protecting plutocrats from the mob are indirect and imperfect. The obvious answer is...: Don’t let the bottom half, or maybe even the bottom 90 percent, vote.
And now you understand why there’s so much furor on the right over the alleged but actually almost nonexistent problem of voter fraud, and so much support for voter ID laws that make it hard for the poor and even the working class to cast ballots. American politicians don’t dare say outright that only the wealthy should have political rights — at least not yet. But if you follow the currents of thought now prevalent on the political right to their logical conclusion, that’s where you end up.
The truth is that a lot of what’s going on in American politics is, at root, a fight between democracy and plutocracy. And it’s by no means clear which side will win.
Posted by Mark Thoma on Friday, October 24, 2014 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Friday, October 24, 2014 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Thursday, October 23, 2014 at 01:01 PM in Economics, Methodology, Video |
After A Few Comments on QE, Bill McBride ends with:
...My view is QE was not a panacea, but overall QE was a success. I was a frequent critic of the Fed prior to the financial crisis - I think the Fed was almost anti-regulation during the housing bubble, and initially the Fed was behind the curve when the crisis was looming - however once Bernanke became aware of the severity of the crisis, the Fed was aggressive and effective. Perhaps they were a little slow in implementing QE3 - and with low inflation an argument could be made now to extend QE - but overall I think QE was a success.
Posted by Mark Thoma on Thursday, October 23, 2014 at 11:04 AM in Economics, Monetary Policy |
The Effects of a Money-Financed Fiscal Stimulus, by Jordi Galí, September 2014: Abstract I analyze the effects of an increase in government purchases financed entirely through seignorage, in both a classical and a New Keynesian framework, and compare them with those resulting from a more conventional debt-financed stimulus. My findings point to the importance of nominal rigidities in shaping those effects. Under a realistic calibration of such rigidities, a money-financed fiscal stimulus is shown to have very strong effects on economic activity, with relatively mild inflationary consequences. If the steady state is sufficiently inefficient, an increase in government purchases may increase welfare even if such spending is wasteful.
Posted by Mark Thoma on Thursday, October 23, 2014 at 09:13 AM in Academic Papers, Economics, Fiscal Policy |
This was in today's links (which were posted later than usual):
Does Raising the Minimum Wage Hurt Employment? Evidence from China, by Prakash Loungani, iMFDirect: ...China accounts for nearly 25 percent of the global labor force...
Our study is the first to use data on minimum wage changes for over 2400 counties in China. We combine the information on minimum wages changes with employment data from the Annual Survey of Industrial Firms, which covers over 70 percent of China’s manufacturing employment. While China instituted a minimum wage system in 1994, enforcement of compliance with the law was significantly tightened only in 2004; the results described below are based on post-2004 data.
So what does the evidence show? On average across all firms, we find that an increase in the minimum wage leads to a small decline in employment: a 10% percent increase in the minimum wage lowers employment by a little over 1% percent.
The impact differs across firms, being greater in low-wage firms than in high-wage firms. ... In the decile of firms with the lowest wages, a 10% increase in minimum wages lowers employment by nearly 1.8%. The impact declines steadily such that for the decile of firms with the highest wages, the impact is 0.6%.
We also find that the impact of the minimum wage on a firm’s wages depends on where the firm stands in the distribution of wages. On average, an increase in the minimum wage raises wages by about 1%. But ... in the lowest decile, the increase is about 2.5%. The effect declines steadily and there is essentially no impact for the highest decile. ...
Posted by Mark Thoma on Thursday, October 23, 2014 at 08:36 AM in Economics, Unemployment |
Posted by Mark Thoma on Thursday, October 23, 2014 at 12:06 AM in Economics, Links |
Everything you ever wanted to know about helicopter money:
Helicopter money, by Simon Wren-Lewis, Mainly Macro: Periodically articles appear advocating, or discussing, helicopter money. Here is a simple guide to this strange sounding concept. I go in descending order of importance, covering the essential ground in points 1-7, and dealing with more esoteric matters after that. ...
Posted by Mark Thoma on Wednesday, October 22, 2014 at 09:17 AM in Economics, Monetary Policy |
Persuasion with statistics: Mark Thoma's point that apparently strong econometric results are often the product of specification mining prompts Lars Syll to remind us that eminent economists have long been wary of what econometrics can achieve.
I doubt if many people have ever thought "Crikey, the t stats are high here. That means I must abandon my long-held beliefs about an important matter." More likely, the reaction is to recall Dave Giles' commandments nine and 10. (Apparently?) impressive econometric findings might be good enough to get you published. But there's a big difference between being published and being read, let alone being persuasive.
This poses a question: how, then, do statistics persuade people to change their general beliefs (as distinct from beliefs about single facts)?
Let me take an example of an issue where I've done just this. I used to believe in the efficient market hypothesis. ...[explains why that changed]...
He concludes with:
The above is not a story about statistical significance (pdf). Single studies are rarely persuasive. Instead, the process of persuading people to change their mind requires diversity - a diversity of data sets, and a diversity of theories. Am I wrong? Feel free to offer counter-examples.
Posted by Mark Thoma on Wednesday, October 22, 2014 at 08:32 AM in Econometrics, Economics |
I am not convinced that telling the kids to be good or else -- when there's a history of not doing much to enforce the request -- will work:
Will the big banks ever clean up their act?, by Mark Thoma: Federal Reserve Bank of New York President William Dudley delivered a stern warning to the largest banks in a speech earlier this week. Either clean up your illegal and unethical behavior through "cultural change" from within, he said, or be broken into smaller, more manageable pieces.
In his conclusion, the warning was direct and explicit:
"...if those of you here today as stewards of these large financial institutions do not do your part in pushing forcefully for change across the industry, then bad behavior will undoubtedly persist. If that were to occur, the inevitable conclusion will be reached that your firms are too big and complex to manage effectively. In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively. It is up to you to address this cultural and ethical challenge."
How can the needed change be accomplished? ...
Will this work? Will large financial firms take the threat that they might be broken up seriously? Will they even bother to implement the many suggestions Dudley made?
Regulators have been reluctant to break up big banks in the past out of fear that it might undercut their ability to finance very large projects and hurt their competitiveness in international markets. And given that this behavior is so pervasive and has endured for so long, regulators haven't been as tough as they could be in stopping it.
Maybe this time is different. Maybe financial firms believe regulators are serious, and they will change the culture that has allowed these problems to exist. Perhaps the threat to break up the banks if they continue to prove they are "too big to manage" is real.
Let's hope so, because the financial instability that can occur when large banks behave unethically or when they fail to comply with existing regulations can be very costly for the nation's economy.
But, again, I doubt asking banks to change their culture will be enough, they will need to be persuaded through other, stronger means. (If it was up to me, I would have broken them into smaller pieces long ago. I do not beleive the minimum efficient scale is anywhere near as large as the largest banks, their political and economic power is too strong, and they pose a risk for the economy when they misbehave or make big mistakes. Smaller banks don't solve all these problems, there can still be widespread, cascading bank failures for example, but it does reduce the risks.)
Posted by Mark Thoma on Wednesday, October 22, 2014 at 08:32 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Wednesday, October 22, 2014 at 12:06 AM in Economics, Links |
This is related to yesterday's post "State 'Income Migration' Claims Are Deeply Flawed":
At the intersection of real estate and urban economics: Albert Saiz uses big data to understand real estate dynamics. As a professor in the Department of Urban Studies and Planning and director of MIT’s Center for Real Estate, his work is at the confluence of urban policy and city-making and the factors that drive real estate markets. An urban economist and director of the MIT Urban Economics Lab, Saiz studies the industrial composition of cities with an eye toward understanding what makes cities successful. He also creates and studies incredibly-detailed information about housing markets and how urban growth impacts real estate markets.
Immigration explains half of city growth
Saiz’s focus is primarily on housing markets, with a particular view on understanding the demographic influences impacting their growth. “Immigration explains 50 percent of the differences in growth between metropolitan areas in the United States,” he says. “If you want to understand real estate markets or housing markets, construction values, etc., you have to understand immigration and immigration trends.”
He also studies several other key drivers of city growth and demand for housing and real estate assets. These include areas of low taxation, high levels of an educated population, and more lifestyle-oriented influences. “As recently as 20 years ago, we tended to believe that people followed jobs,” Saiz explains. “It is still the case that productive areas are becoming more attractive for housing demand, but it is also true that jobs are following people. And people are moving more for lifestyle and amenities.” Today, Saiz’s students are more likely to indicate they want to work in a particular city than for a particular company. That means firms that want to attract young professionals have to locate in these more highly desirable areas. ...
Posted by Mark Thoma on Tuesday, October 21, 2014 at 09:41 AM in Economics, Housing |
Why our happiness and satisfaction should replace GDP in policy making, The Conversation: Since 1990, GDP per person in China has doubled and then redoubled. With average incomes multiplying fourfold in little more than two decades, one might expect many of the Chinese people to be dancing in the streets. Yet, when asked about their satisfaction with life, they are, if anything, less satisfied than in 1990.
The disparity indicated by these two measures of human progress, Gross Domestic Product and Subjective Well Being (SWB), makes pretty plain the issue at hand. GDP, the well-being indicator commonly used in policy circles, signals an outstanding advance in China. SWB, as indicated by self-reports of overall satisfaction with life, suggests, if anything, a worsening of people’s lives. Which measure is a more meaningful index of well-being? Which is a better guide for public policy?
A few decades ago, economists – the most influential social scientists shaping public policy – would have said that the SWB result for China demonstrates the meaninglessness of self-reports of well-being. Economic historian Deirdre McCloskey, writing in 1983, aptly put the typical attitude of economists this way:
Unlike other social scientists, economists are extremely hostile towards questionnaires and other self-descriptions… One can literally get an audience of economists to laugh out loud by proposing ironically to send out a questionnaire on some disputed economic point. Economists… are unthinkingly committed to the notion that only the externally observable behaviour of actors is admissible evidence in arguments concerning economics.
But times have changed. A commission established by the then French president, Nicolas Sarkozy in 2008 and charged with recommending alternatives to GDP as a measure of progress, stated bluntly (my emphasis):
Research has shown that it is possible to collect meaningful and reliable data on subjective as well as objective well-being … The types of questions that have proved their value within small-scale and unofficial surveys should be included in larger-scale surveys undertaken by official statistical offices.
This 25-member commission was comprised almost entirely of economists, five of whom had won the Nobel Prize in economics. Two of the five co-chaired the commission.
These days the tendency with new measures of our well-being – such as life satisfaction and happiness – is to propose that they be used as a complement to GDP. But what is one to do when confronted with such a stark difference between SWB and GDP, as in China? What should one say? People in China are better off than ever before, people are no better off than before, or “it depends”?
To decide this issue, we need to delve deeper into what has happened in China. When we do that, the superiority of SWB becomes apparent: it can capture the multiple dimensions of people’s lives. GDP, in contrast, focuses exclusively on the output of material goods.
People everywhere in the world spend most of their time trying to earn a living and raise a healthy family. The easier it is for them to do this, the happier they are. This is the lesson of a 1965 classic, The Pattern of Human Concerns, by public opinion survey specialist Hadley Cantril. In the 12 countries – rich and poor, communist and non-communist – that Cantril surveyed, the same highly personal concerns dominated determinants of happiness: standard of living, family, health and work. Broad social issues such as inequality, discrimination and international relations, were rarely mentioned.
Urban China in 1990 was essentially a mini-welfare state. Workers had what has been called an “iron rice bowl” – they were assured of jobs, housing, medical services, pensions, childcare and jobs for their grown children.
With the coming of capitalism, and “restructuring” of state enterprises, the iron rice bowl was smashed and these assurances went out the window. Unemployment soared and the social safety net disappeared. The security that workers had enjoyed was gone and the result was that life satisfaction plummeted, especially among the less-educated, lower-income segments of the population.
Although working conditions have improved somewhat in the past decade, the shortfall from the security enjoyed in 1990 remains substantial. The positive effect on well-being of rising incomes has been negated by rapidly rising material aspirations and the emergence of urgent concerns about income and job security, family, and health.
The case to replace
Examples of the disparity between SWB and GDP as measures of well-being could easily be multiplied. Since the early 1970s real GDP per capita in the US has doubled, but SWB has, if anything, declined. In international comparisons, Costa Rica’s per capita GDP is a quarter of that in the US, but Costa Ricans are as happy or happier than Americans when we look at SWB data. Clearly there is more to people’s well-being that the output of goods.
There are some simple, yet powerful arguments to say that we should use SWB in preference to GDP, not just as a complement. For a start, those SWB measures like happiness or life satisfaction are more comprehensive than GDP. They take into account the effect on well-being not just of material living conditions, but of the wide range of concerns in our lives.
It is also key that with SWB, the judgement of well-being is made by the individuals affected. GDP’s reliance on outside statistical “experts” to make inferences based on a measure they themselves construct looks deeply flawed when viewed in comparison. These judgements by outsiders also lie behind the growing number of multiple-item measures being put forth these days. An example is the United Nations’ Human Development Index (HDI) which attempts to combine data on GDP with indexes of education and life expectancy.
But people do not identify with measures like HDI (or GDP, of course) to anywhere near the extent that they do with straightforward questions of happiness and satisfaction with life. And crucially, these SWB measures offer each adult a vote and only one vote, whether they are rich or poor, sick or well, native or foreign-born. This is not to say that, as measures of well-being go, SWB is the last word, but clearly it comes closer to capturing what is actually happening to people’s lives than GDP ever will. The question is whether policy makers actually want to know.
Posted by Mark Thoma on Tuesday, October 21, 2014 at 09:24 AM in Economics, Methodology |
Just in case you haven't had your fill of articles reviewing Thomas Piketty's Capital in the Twenty-First Century:
The problem of riches, by Paul Segal: Capital in the Twenty-First Century is a very important book that is not really about capital, and is not really about the twenty-first century. It is predominantly a work of analytical economic history, focusing on the late nineteenth century to the present – with words of warning for the future, nestled among caveats regarding the pitfalls of economic predictions. And its subjects are the dynamics and distribution of incomes and wealth, where wealth is to capital what an hourly wage is to an hour of work: the market value, not the thing itself.
Inequality is the great challenge of our time. Still, Piketty’s runaway public success was expected by no one – his publisher ran out of copies in the first few weeks – and is due in no small part to generous endorsements from uber-public intellectual Paul Krugman, Nobel Prize-winning economist and New York Times columnist (and who sportingly admitted to ‘sheer, green-eyed professional jealousy’ (Krugman, 2014)). Piketty’s book has spawned countless reviews and commentaries. Yet this text of 577 pages plus endnotes is no easy conquest, and the public sphere is occupied by more opinions of Piketty than readers of Piketty. In addition, the combination of fame and the ideological nature of its subject has given him the status of Big Game to be hunted by ambitious economists and journalists – very publicly in a belligerent and careful-but-not-quite-careful-enough critique by the Financial Times’ Chris Giles that turned out to be badly misguided (Giles and Giugliano, 2014 and Piketty, 2014). (Piketty points out that if Giles were correct it would imply that Britain today had one of the most equal distributions of wealth in modern history, which is risible).
They are the 1 per cent
Given this exposure it is ironic that one of Piketty’s great contributions to the lexicon of public debate is not usually credited to him: through his unearthing of data on the incomes of the richest 1 per cent, he is ultimately responsible for the slogan ‘we are the 99 per cent’, for without him we would not know who does not fall into that category (1). Starting with France, Piketty used income tax data to reveal the incomes of the richest in society, which had previously been inaccessible. Following this work, Piketty and the great British economist of inequality Tony Atkinson led a project of dozens of researchers to collect top income data from around the world, which have been collated into a database that now covers 29 countries (2).
The key finding of this research is that the income share of the richest 1 per cent has risen dramatically in many countries around the world since the 1980s. In the US the richest 1 per cent received about 8 per cent of total income through the 1960s and 1970s. This share started to rise in the mid-1980s, reaching about 18 per cent in recent years. Britain followed a similar pattern, its share rising from a low of only 6 per cent in 1980 to 15 per cent. Famously egalitarian Sweden has become less so, having seen its top 1 per cent income share rising from only 4 per cent in the 1980s to 7 per cent. Still, it is important to note that major increases were not inevitable: in both France and Japan there has been only a modest rise, from about 7 per cent in the 1980s to about 9 per cent now. ...[continue reading]...
Posted by Mark Thoma on Tuesday, October 21, 2014 at 09:24 AM
Posted by Mark Thoma on Tuesday, October 21, 2014 at 12:06 AM in Economics, Links |
Differences in income taxe ratess across states have little impact on migration:
State “Income Migration” Claims Are Deeply Flawed, by Michael Mazerov, CBPP: Some proponents of state income tax cuts are making highly inaccurate claims about the impact of interstate migration patterns on states with relatively high income taxes based on a misleading reading of Internal Revenue Service data.
Those making these arguments claim that many of the people who leave states with relatively robust income taxes do so largely in order to pay little or no income tax in another state, and that they take their incomes with them when they move, harming the economies of the states they left. As a consequence, these “income migration” proponents claim, states with relatively high income taxes are suffering severe damage from the loss of income as “money walks” out of their states to lower-tax states.
The first part of this argument — that interstate differences in tax levels are a major explanation for interstate migration patterns — is not supported by the evidence, as we documented in an earlier paper. People rarely move to lower their state income taxes. Other factors, such as job opportunities, family considerations, climate, and housing costs, are much more decisive.
The second part of the argument — that states with relatively high income taxes are suffering severe economic damage because they are losing the incomes of people who migrate to other states — is also deeply flawed. ...
Posted by Mark Thoma on Monday, October 20, 2014 at 10:17 AM in Economics, Taxes |
I've been harping on the lack of concern about market power since I began blogging almost 10 years ago. Nobody much listened or cared -- so this is very welcome:
Amazon’s Monopsony Is Not O.K., by Paul Krugman, Commentary, NY Times: Amazon.com, the giant online retailer, has too much power, and it uses that power in ways that hurt America. ...
If you haven’t been following the recent Amazon news: Back in May a dispute between Amazon and Hachette, a major publishing house, broke out into open commercial warfare. Amazon had been demanding a larger cut of the price of Hachette books it sells; when Hachette balked, Amazon began delaying their delivery, raising their prices, and/or steering customers to other publishers.
You might be tempted to say that this is just business — no different from Standard Oil, back in the days before it was broken up...
Does Amazon really have robber-baron-type market power? When it comes to books, definitely. Amazon overwhelmingly dominates online book sales...
So far Amazon has not tried to exploit consumers. In fact, it has systematically kept prices low, to reinforce its dominance. What it has done, instead, is use its market power to put a squeeze on publishers, in effect driving down the prices it pays for books — hence the fight with Hachette. In economics jargon, Amazon is not, at least so far, acting like a monopolist, a dominant seller with the power to raise prices. Instead, it is acting as a monopsonist, a dominant buyer with the power to push prices down. ...
So can we trust Amazon not to abuse that power? The Hachette dispute has settled that question: no, we can’t. ...
Specifically, the penalty Amazon is imposing on Hachette books is bad in itself, but there’s also a curious selectivity in the way that penalty has been applied. Last month the Times’s Bits blog documented the case of two Hachette books receiving very different treatment. One is Daniel Schulman’s “Sons of Wichita,” a profile of the Koch brothers; the other is “The Way Forward,” by Paul Ryan, who was Mitt Romney’s running mate and is chairman of the House Budget Committee. Both are listed as eligible for Amazon Prime, and for Mr. Ryan’s book Amazon offers the usual free two-day delivery. What about “Sons of Wichita”? As of Sunday, it “usually ships in 2 to 3 weeks.” Uh-huh.
Which brings us back to the key question. Don’t tell me that Amazon is giving consumers what they want, or that it has earned its position. What matters is whether it has too much power, and is abusing that power. Well, it does, and it is.
Posted by Mark Thoma on Monday, October 20, 2014 at 12:33 AM in Economics, Market Failure |
Posted by Mark Thoma on Monday, October 20, 2014 at 12:06 AM in Economics, Links |
Robert Shiller's narrative:
When a Stock Market Theory Is Contagious: Since Sept. 18, the stock market has fallen more than 6 percent. An abrupt decline last week — after five years of gains — prompted fears that the market may have reached a major turning point. Has a bear market begun? It’s a great question. ...
Fundamentally, stock markets are driven by popular narratives, which don’t need basis in solid fact. True or not, such stories may be described as “thought viruses.” ... They spread by contagion. ... The most prominent story since the September peak seems to be one of a “global slowdown” with associated “deflation.” Underlying this tale are deeper, longer-term fears. There is a name for these concerns too. It is “secular stagnation”...
Why? It’s probably because Lawrence H. Summers ... used the phrase in a talk he gave on Nov. 8... Paul Krugman wrote approvingly about the talk...
There is little talk about secular stagnation in scholarly circles today. The recent chatter has centered in the news media, in conference panel discussions and in the blogosphere. ...
The current secular-stagnation story is ... so vague, the negative feedback loop can’t be resolved ... neatly. The question may be whether this thought virus mutates into a more psychologically powerful version, one with enough narrative force to create a major bear market.
Posted by Mark Thoma on Sunday, October 19, 2014 at 09:34 AM in Economics |
How will Saudi Arabia respond to lower oil prices?: Oil prices (along with prices of many other commodities) have fallen dramatically since last summer. Some observers are waiting to see if Saudi Arabia responds with significant cutbacks in production. I say, don’t hold your breath. ...
Last week I discussed the three main factors in the recent fall in oil prices: (1) signs of a return of Libyan production to historical levels, (2) surging production from the U.S., and (3) growing indications of weakness in the world economy. ...
In terms of surging U.S. production, the key question is how low the price can get before significant numbers of U.S. producers ... move into the red..., it’s in the Saudis’ longer-term interests to let that pain take its toll until some of the newcomers decide to pack up and go home. If U.S. production does decline, prices would quickly move back up. But if that happens after a shake-out, the next time there would be less enthusiasm for everybody to jump into the game...
My guess is that Saudi Arabia would lower prices rather than cut production as long as that’s the name of the game. ...
Posted by Mark Thoma on Sunday, October 19, 2014 at 09:34 AM in Economics, Oil |
Posted by Mark Thoma on Sunday, October 19, 2014 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, October 18, 2014 at 09:28 AM in Economics, Unemployment |