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Wednesday, December 31, 2014

'On the Stupidity of Demand Deficient Stagnation'

Simon Wren-Lewis:

On the Stupidity of Demand Deficient Stagnation: In my last post I wrote about “why recessions caused by demand deficiency when inflation is below target are such a scandalous waste. It is a problem that can be easily solved, with lots of winners and no losers. The only reason that this is not obvious to more people is that we have created an institutional divorce between monetary and fiscal policy that obscures that truth.” I suspect I often write stuff that is meaningful to me as a write it but appears obtuse to readers. So this post spells out what I meant. ...

    Posted by on Wednesday, December 31, 2014 at 09:43 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (45) 

    'Here's What Economics Gets Right'

    I'm pretty sure my dissertation advisor (Greg Duncan, a McFadden student at Berkeley) helped to create the model used to make the BART prediction discussed below (I think they used a program called QUAIL, and precursor to LIMDEP):

    Here's What Economics Gets Right, by  Noah Smith: Criticizing economics for not being scientific enough is a crime of which many of us -- I’ve done it -- are guilty.  But there’s a right way to do it and a wrong way to do it.  Alex Rosenberg and Tyler Curtain, writing in the New York Times, have done it the wrong way.

    Here are Rosenberg and Curtain:

    Over time, the question of why economics has not (yet) qualified as a science has become an obsession among theorists, including philosophers of science like us...The trouble with economics is that it lacks the most important of science’s characteristics — a record of improvement in predictive range and accuracy...In fact, when it comes to economic theory’s track record, there isn’t much predictive success to speak of at all.

    Economics doesn’t have predictive success, eh? This is something a lot of people claim, but once you look beyond the well-publicized fact that economists can’t predict recessions, you can see that the claim just isn’t true. Economics can predict plenty of things.

    My favorite example is the story of Daniel McFadden and the BART...

      Posted by on Wednesday, December 31, 2014 at 09:42 AM in Econometrics, Economics | Permalink  Comments (9) 

      Links for 12-31-14

        Posted by on Wednesday, December 31, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (151) 

        Tuesday, December 30, 2014

        'Musings on 25-54 Employment-to-Population Rates and the Macroeconomy'

        Brad DeLong:

        Musings on 25-54 Employment-to-Population Rates and the Macroeconomy: (1) If the US economy were operating at its productive potential, the share of 25 to 54-year-olds who are employed ought to be what it was at the start of 2000. Back then there were few visible pressures leading to rising inflation in the economy.
        Does anybody disagree with that?
        (2) Right now, 25 to 54-year-olds–both male and female–are employed at a rate lower by 5%-age points then they were at the start of 2000. That’s 6.5%, or 1/15, more 25-54 labor at work than we have today.
        Does anybody disagree with that? ...

        That's just the start (too hard to excerpt effectively -- there are three more points followed by two questions, five more points, then two more questions).

          Posted by on Tuesday, December 30, 2014 at 10:04 AM in Economics, Unemployment | Permalink  Comments (92) 

          'How Morgan Stanley Pushed Risky Subprime Mortgage Lending'

          Danielle Kurtzleben, vox.com:

          Damning court filings show Morgan Stanley pushed risky subprime mortgage lending:
          • Court filings say Morgan Stanley, a major Wall Street bank, pushed subprime lender New Century into making riskier and riskier mortgage loans, the New York Times reports.
          • The filings include damning emails, showing that Morgan Stanley employees knew about and even joked about some borrowers' inability to pay on their mortgages.
          • The Justice Department is now investigating the connection between Morgan Stanley and New Century.
          • The fines further tarnish the reputation of a big bank that, despite its heavy involvement in mortgage-backed securities, until recently had few crisis-related legal troubles.


            Posted by on Tuesday, December 30, 2014 at 10:04 AM in Economics, Housing | Permalink  Comments (13) 

            'Asymmetric Credibility at the Fed and Price-Level Targeting'

            Jared Bernstein:

            Asymmetric Credibility at the Fed and Price-Level Targeting: While we in the US don’t have the disinflation (positive but declining rates of inflation) problem facing the Eurozone, our benchmark inflation rate has consistently undershot its mark. The Federal Reserve target for the core PCE deflator is 2%, year-over-year, and yet it hasn’t hit that growth rate even once since April of 2012. Since then, the average rate of PCE core inflation is 1.5% (Euro area core inflation was last seen growing at 0.6%).
            Note also that the 2% is a target, not a ceiling (though there’s often ambiguity around this), meaning if you’ve been below for a while, it’s consistent with hitting your target rate on average to be above it for a while as well.
            And yet, the question of whether the Fed is adequately meeting the “stable prices” part of its dual mandate (the other part is, of course, full employment) seems almost uniformly to be whether it’s keeping inflation from going above 2%. In other words, the Fed’s inflation credibility is asymmetric: they only lose credibility points for going above 2%.
            As a policy matter for a healthy economy, this is wrong...

              Posted by on Tuesday, December 30, 2014 at 10:04 AM in Economics, Monetary Policy | Permalink  Comments (6) 

              Links for 12-30-14

                Posted by on Tuesday, December 30, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (194) 

                Monday, December 29, 2014

                'The Second Age of Imperialism'

                Branko Milanovic:

                The second age of imperialism: As we enter 2015, it is not useless to look backwards in order to try to guess the trends of the future. I would  argue that the age that we are, to some extent exiting now, and which extended from the early 1980s, can be called the “second age of imperialism”--the first one, in the modern history, having been the age of high imperialism 1870-1914.              I will focus here on some of its key manifestations in the ideological sphere, in the areas I know, history and economics. But it should be obvious that ideology is but a manifestation of the underlying real forces, which were twofold: (i) the failure of most developing countries by 1980 to become economically successful and self-sustaining after decolonization and the end of Communism as an alternative global ideology, and (ii) the relatively solid economic record of Western countries (masked by the expansion of borrowing for the lower classes), and regained self-confidence of the elites in the wake of the Reagan-Thatcher (counter-) revolutions and the fall of Communism.  The violent manifestations of the second age of imperialism were invasions of Afghanistan and Iraq, brutal war in Libya, and the defensive imperialism of Russia in Ukraine and Georgia. But here we are concerned with the superstructure. ...

                  Posted by on Monday, December 29, 2014 at 11:08 AM in Economics | Permalink  Comments (78) 

                  Financial Innovation and Risk Management

                  Cecchetti & Schoenholtz

                  Financial Innovation and Risk Management: “We allow our standards of living to be determined essentially by a game of chance.” -- Robert Shiller, Macro Markets, 1993.
                  In 2013, Robert Shiller shared the Nobel Prize for Economics with Eugene Fama and Lars Peter Hansen for their research on asset pricing. While Shiller is known as a critic of the efficient markets hypothesis and as a proponent of behavioral finance, less appreciated is his work on advancing financial technology to help societies manage fundamental economic risks.
                  At a time when the recent crisis has given financial innovation a bad name, Shiller’s contrarian message is that well-designed financial instruments and markets are an enormous boon to social welfare. We agree.
                  Historical examples supporting Shiller’s view abound. ...

                    Posted by on Monday, December 29, 2014 at 10:53 AM in Economics, Financial System | Permalink  Comments (5) 

                    'Data Insight: Which Growth Rate? It’s a Weighty Subject'

                    Richard Crump, Stefano Eusepi, David Lucca, and Emanuel Moench at the NY Fed's Liberty Street Economics:

                    Data Insight: Which Growth Rate? It’s a Weighty Subject:  The growth rate in real gross domestic product (GDP) is a conventional indicator of the economy’s health. But the two ways of measuring annual GDP growth can give very different answers. In 2013, GDP grew 2.2 percent on a year-over-year basis, but at a faster 3.1 percent rate on a Q4-over-Q4 basis. So, which measure is more meaningful? We show in this post that the Q4/Q4 metric is better since it only considers quarterly growth rates during the current year, while the Year/Year measure depends on quarterly growth rates in both the current and previous year and puts considerable weight on growth around the turn of the year. ...

                      Posted by on Monday, December 29, 2014 at 10:53 AM in Economics | Permalink  Comments (1) 

                      Paul Krugman: The Obama Recovery

                      The economy is doing better. Will it continue?:

                      The Obama Recovery, by Paul Krugman, Commentary, NY Times: ... As you may know, back in 2010 Britain’s newly installed Conservative government declared that a sharp reduction in budget deficits was needed to keep Britain from turning into Greece. Over the next two years growth in the British economy, which had been recovering fairly well from the financial crisis, more or less stalled. In 2013, however, growth picked up again — and the British government claimed vindication for its policies. Was this claim justified?
                      No, not at all. What actually happened was that the Tories stopped tightening the screws — they didn’t reverse the austerity that had already occurred, but they effectively put a hold on further cuts. ... And sure enough, the nation started feeling better.
                      To claim that this bounceback vindicated austerity is silly. ...
                      Meanwhile, back in America we haven’t had an official, declared policy of fiscal austerity — but we’ve nonetheless had plenty of austerity in practice, thanks to the federal sequester and sharp cuts by state and local governments. The good news is that we, too, seem to have stopped tightening the screws: Public spending isn’t surging, but at least it has stopped falling. And the economy is doing much better as a result. ...
                      What’s the important lesson from this late Obama bounce? Mainly, I’d suggest, that everything you’ve heard about President Obama’s economic policies is wrong.
                      You know the spiel: that the U.S. economy is ailing because Obamacare is a job-killer and the president is a redistributionist, that Mr. Obama’s anti-business speeches (he hasn’t actually made any, but never mind) have hurt entrepreneurs’ feelings, inducing them to take their marbles and go home.
                      This story line never made much sense. The truth is that the private sector has done surprisingly well under Mr. Obama... What held us back was unprecedented public-sector austerity... Sure enough, now that this de facto austerity is easing, the economy is perking up.  ...
                      Will this improvement in our condition continue? Britain’s government has declared its intention to ... engage in further austerity, which does not bode well. But here the picture looks brighter. Households are in much better financial shape than they were a few years ago; there’s probably still a lot of pent-up demand, especially for housing. And falling oil prices will be good for most of the country...
                      So I’m fairly optimistic about 2015, and probably beyond, as long as we avoid any more self-inflicted damage. ...

                        Posted by on Monday, December 29, 2014 at 12:24 AM in Economics | Permalink  Comments (69) 

                        Links for 12-29-14

                          Posted by on Monday, December 29, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (118) 

                          Sunday, December 28, 2014

                          'Federal Tax Revenues During the 1980’s'

                          PGL at Econospeak:

                          Federal Tax Revenues During the 1980’s: Paul Krugman takes on another aspect with respect to the latest intellectual garbage from Stephen Moore by commenting on Moore’s claim that Federal tax revenues soared from 1980 to 1989...

                          Paul is debunking a claim that has been made and debunked many times. The usual line is that Federal tax revenues almost doubled from $517.1 billion in 1980 to $1032.0 in 1990. The inflation-adjusted part comes from the fact that the GDP deflator rose by 50.3% over this period so in real terms revenues rose by 32.8% over the entire decade. But there is another serious problem with this that anyone who followed the various tax policy changes during the Reagan years should know. Yes income tax rates were cut in 1981 but there were various tax rate increases that followed including a significant increase in payroll tax rates in 1983. Table B.21 of the Economic Report of the President provides the details on Federal tax revenues. Payroll taxes rose from $157.8 billion in 1980 to $380 billion in 1990. Yes, a 140.8% nominal increase and a 60.3% increase in real terms when this tax rate was increased. All other Federal taxes therefore rose by only 20.8% in real terms over the decade. Since I’m not the first to point this out one would have to believe that Stephen Moore would have seen this often made point before. And yet he can’t be bothered to tell his readers the whole story? ...

                            Posted by on Sunday, December 28, 2014 at 09:03 AM in Economics | Permalink  Comments (41) 

                            'The Obama Bounce'

                            Paul Krugman:

                            The Obama Bounce: Dean Baker is, of course, right: this is not a boom, and comparisons to the 1990s are insane. Still, growth has clearly picked up, and the public seems to be noticing. So what can we say about the Obama non-boom?
                            I’d argue that much of what we’re seeing reflects the tapering off of austerity. ... Spending hasn’t rebounded yet, but at least it has stopped shrinking: ... And it’s important to realize that, despite all the rhetoric about how Obamacare/antibusiness rhetoric/Kenyan Islamic atheism is destroying business, the private sector has actually been relatively strong under Obama. ...
                            The point is that relatively good private sector performance has been masked by public-sector cutbacks; this is the opposite of what you usually hear, but that’s no surprise.
                            What about the prospects looking forward? ... Overall..., the next year and probably the next two years are likely to be pretty good. This doesn’t mean that the overall track record of policy has been good — we’ve wasted trillions in foregone output, damaged the lives of millions if not tens of millions. But it will feel a lot better than the years before.

                              Posted by on Sunday, December 28, 2014 at 09:03 AM in Economics | Permalink  Comments (38) 

                              Links for 12-28-14

                                Posted by on Sunday, December 28, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (80) 

                                Saturday, December 27, 2014

                                Travel Day

                                Have a very long travel day ahead of me, so no more posts until later...

                                  Posted by on Saturday, December 27, 2014 at 11:08 AM in Economics, Travel | Permalink  Comments (4) 

                                  Links for 12-27-14

                                    Posted by on Saturday, December 27, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (129) 

                                    Friday, December 26, 2014

                                    'Underinvesting in the Public Good'

                                    Daniel Little:

                                    Underinvesting in the public good, Understanding Society: There are quite a few investments in social programs that would have spectacular return on investment, but that in fact remain unfunded or underfunded. I am thinking here of things like broadened preschool programs, enhanced dropout prevention programs, regional economic development efforts, and prison re-entry programs. Why are these spectacular opportunities so dramatically under-exploited in the United States and other nations?

                                    One line of answer derives from a public choice perspective: the gains that follow from the investment represent public goods, and public goods are typically under-provided. But that doesn't really answer the question, because it is governments that are underinvesting, not uncoordinated groups of independent agents. And governments are supposed to make investments to promote the public good.

                                    Another plausible answer is that the citizens who are primarily served by most of the examples provided above are poor and disenfranchised; so the fact that they would benefit from the program doesn’t motivate the politically powerful to adopt the policy.

                                    There is also a powerful influence of political ideology at work here. Conservative ideas about what a good society looks like, how social change occurs, and the role of government all militate against substantial public investment in programs and activities like those mentioned above. These conservative political beliefs are undergirded by a white-hot activism against taxes that makes it all but impossible to gain support in legislative bodies for programs like these -- no matter what the return on investment is.

                                    Failure to achieve these kinds of social gains through public investment might seem like a very basic element of injustice within our society. But it also looks like strong evidence of system failure: the political and economic system fail to bring about as much public good as is possible in the circumstances. The polity is stuck somewhere on the low shoulders of the climb towards maximum public benefit for minimum overall investment. It is analogous to the situation in private economic space where there are substantial obstacles to the flow of investment, leaving substantial possible sources of gain untapped. It is s situation of massive collective inefficiency, quite the contrary of Adam Smith's view of the happy outcomes of the hidden hand and the market mechanism.

                                    This last point brings us back to the public goods aspect of the problem. A legislature that designs a policy or program aimed at capturing the gains mentioned here may succeed in its goal and yet find that the gains accrue to someone else -- the public at large or another political party. The gains are separated from the investment, leaving the investment entity with no rational incentive to make the investment after all.

                                    Some policy leaders have recognized this systemic problem and have turned to an innovative possible solution, social impact bonds (link). Here is how the Center for American Progress explains this idea.

                                    A social impact bond, or SIB, is an innovative financial tool that enables government agencies to pay for programs that deliver results. In a SIB agreement, the government sets a specific, measurable outcome that it wants achieved in a population and promises to pay an external organization—sometimes called an intermediary—if and only if the organization accomplishes the outcome. SIBs are one example of what the Obama administration calls “Pay for Success” financing. (link)

                                    Essentially the idea is to try to find a way of privatizing the public gains in question, so that private investors have an incentive to bring them about.

                                    This is an interesting idea, but it doesn't really solve the fundamental problem: society's inability to make rational investment in its own wellbeing. It seems more like a way of shifting risks of program success or failure from the state agency to the private entity. Here is a McKinsey discussion of the concept (link), and here is a more skeptical piece in the Economist (link).

                                      Posted by on Friday, December 26, 2014 at 09:40 AM in Economics, Politics | Permalink  Comments (63) 

                                      Paul Krugman: Tidings of Comfort

                                      Sometimes, government is the best solution to our problems:

                                      Tidings of Comfort, by Paul Krugman, Commentary, NY Times: ... All year Americans have been bombarded with dire news reports portraying a world out of control and a clueless government with no idea what to do.
                                      Yet if you look back at what actually happened over the past year,... a number of major government policies worked just fine — and the biggest successes involved the most derided policies. You’ll never hear this on Fox News, but 2014 was a year in which the federal government, in particular, showed that it can do some important things very well...
                                      Start with Ebola... Judging from news media coverage..., America was on the verge of turning into a real-life version of “The Walking Dead.” And many politicians dismissed the efforts of public health officials... As it turned out, however, the Centers for Disease Control and Prevention ... knew what they were doing..., there was no outbreak here.
                                      Consider next the state of the economy. There’s no question that recovery from the 2008 crisis has been painfully slow and should have been much faster. In particular, the economy has been held back by unprecedented cuts in public spending and employment.
                                      But the story you hear all the time portrays economic policy as an unmitigated disaster... So it comes as something of a shock when you look at the actual record and discover that growth and job creation have been substantially faster during the Obama recovery than they were during the Bush recovery last decade (even ignoring the crisis at the end)...
                                      What’s more, recent data suggest that the economy is gathering strength... Maybe economic management hasn’t been that bad, after all.
                                      Finally, there’s the hidden-in-plain-sight triumph of Obamacare, which is just finishing up its first year of full implementation. ... In fact, Year 1 surpassed expectations on every front. ... And all indications suggest that year two will be marked by further success.
                                      And there’s more. For example, at the end of 2014, the Obama administration’s foreign policy, which tries to contain threats like Vladimir Putin’s Russia or the Islamic State rather than rushing into military confrontation, is looking pretty good.
                                      The common theme here is that, over the past year, a U.S. government subjected to constant bad-mouthing, constantly accused of being ineffectual or worse, has, in fact, managed to accomplish a lot. On multiple fronts, government wasn’t the problem; it was the solution. Nobody knows it, but 2014 was the year of “Yes, we can.”

                                        Posted by on Friday, December 26, 2014 at 12:15 AM in Economics, Policy, Politics | Permalink  Comments (69) 

                                        Links for 12-26-14

                                        Links are a bit thin today (even including one I don't agree with at all):

                                          Posted by on Friday, December 26, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (47) 

                                          Thursday, December 25, 2014

                                          Merry Christmas

                                          I hope everyone has a great day.

                                            Posted by on Thursday, December 25, 2014 at 09:09 AM in Economics, Miscellaneous | Permalink  Comments (3) 

                                            Links for 12-25-14

                                              Posted by on Thursday, December 25, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (179) 

                                              Wednesday, December 24, 2014

                                              Twas the Night Before Christmas

                                              This is a repeat from previous years, something my grandfather read to us each Christmas Eve, Twas The Night Before Christmas:



                                              L2_1 was the night before Christmas, when all through the house
                                              Not a creature was stirring, not even a mouse;
                                              The stockings were hung by the chimney with care
                                              In hopes that St. Nicholas soon would be there;

                                              G26 G4

                                              L3 he children were nestled all snug in their beds,
                                              While visions of sugar-plums danced in their heads;
                                              And mamma in her kerchief, and I in my cap,
                                              Had just settled our brains for a long winter's nap,


                                              L4 hen out on the lawn there arose such a clatter,
                                              I sprang from the bed to see what was the matter.
                                              Away to the window I flew like a flash,
                                              Tore open the shutters and threw up the sash.


                                              L5 he moon on the breast of the new-fallen snow
                                              Gave the lustre of mid-day to objects below,
                                              When, what to my wondering eyes should appear,
                                              But a miniature sleigh, and eight tiny reindeer,

                                              G7 G8   G9

                                              L6 ith a little old driver, so lively and quick,
                                              I knew in a moment it must be St. Nick.
                                              More rapid than eagles his coursers they came,
                                              And he whistled, and shouted, and called them by name:

                                              G10 G11

                                              L7 ow, Dasher! now, Dancer! now, Prancer and Vixen!
                                              On, Comet! on, Cupid! on, Donder and Blitzen!
                                              To the top of the porch! to the top of the wall!
                                              Now dash away! dash away! dash away all!"





                                              G14   G15

                                              L8 s dry leaves that before the wild hurricane fly,
                                              When they meet with an obstacle, mount to the sky;
                                              So up to the house-top the coursers they flew,
                                              With the sleigh full of Toys, and St. Nicholas too.

                                              G16   G17

                                              L9 nd then, in a twinkling, I heard on the roof
                                              The prancing and pawing of each little hoof.
                                              As I drew in my head, and was turning around,
                                              Down the chimney St. Nicholas came with a bound.

                                              L10 e was dressed all in fur, from his head to his foot,
                                              And his clothes were all tarnished with ashes and soot;
                                              A bundle of Toys he had flung on his back,
                                              And he looked like a peddler just opening his pack.


                                              L11 is eyes—how they twinkled! his dimples how merry!
                                              His cheeks were like roses, his nose like a cherry!
                                              His droll little mouth was drawn up like a bow,
                                              And the beard of his chin was as white as the snow;


                                              L12 he stump of a pipe he held tight in his teeth,
                                              And the smoke it encircled his head like a wreath;
                                              He had a broad face and a little round belly,
                                              That shook when he laughed, like a bowlful of jelly.


                                              L13 e was chubby and plump, a right jolly old elf,
                                              And I laughed when I saw him, in spite of myself;
                                              A wink of his eye and a twist of his head,
                                              Soon gave me to know I had nothing to dread;


                                              L14 e spoke not a word, but went straight to his work,
                                              And filled all the stockings; then turned with a jerk,
                                              And laying his finger aside of his nose,
                                              And giving a nod, up the chimney he rose;


                                              L15 e sprang to his sleigh, to his team gave a whistle,
                                              And away they all flew like the down of a thistle.
                                              But I heard him exclaim, ere he drove out of sight,
                                              "Happy Christmas to all, and to all a good-night."

                                              G23 G24

                                                Posted by on Wednesday, December 24, 2014 at 02:56 PM in Economics | Permalink  Comments (6) 

                                                'More Piling On Cochrane'

                                                Barkley Rosser:

                                                More Piling On Cochrane: Why He Cannot Go Back To Being Taken Seriously Even About Asset Pricing: Oh, I cannot resist.  Since his effort to  dump on Keynesians in the WSJ, lots of people have been piling on John Cochrane, showing that nearly all his claims are not only laughingly bogus, but seriously unsupported even in his own column, such as failing even to mention a single supposedly Keynesian economist who forecast a return to recession as a result of budget sequestration, a centerpiece of his embarrassing column.  A sampling can be found Mark Thoma's links for today at economistsview, sort of a Christmas Eve special.
                                                In any case, what caught my attention and is pushing me into  the piling on as well is a remark Brad DeLong made in his post at the link entitled "Cochrane ought to simply say..."  He suggests that Cochrane has made such a big fool of himself out of all this that he should just go back to working on asset pricing.  I am going to argue that even in that arena, he has made a bit of a fool of himself and should also be ignored to some extent, even though he has a long and respectable publication record in the area.
                                                So, what is his problem? ...

                                                  Posted by on Wednesday, December 24, 2014 at 09:52 AM in Economics, Financial System | Permalink  Comments (42) 

                                                  Links for 12-24-14

                                                    Posted by on Wednesday, December 24, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (152) 

                                                    Tuesday, December 23, 2014

                                                    'What 5 Percent Means'

                                                    Via Calculated Risk, from the BEA:

                                                    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 5.0 percent in the third quarter of 2014, according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.6 percent.

                                                    The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 3.9 percent. With the third estimate for the third quarter, both personal consumption expenditures (PCE) and nonresidential fixed investment increased more than previously estimated

                                                    Paul Krugman comments on the report:

                                                    What 5 Percent Means: OK, that was a seriously impressive GDP report — 5 percent growth rate, and it’s all final demand rather than an inventory bounce. But what does it mean?
                                                    It does not necessarily mean that now is the time to tighten; that depends mainly on how far we still are from target employment and inflation, not on how fast we’re growing. ... It’s interesting to note that the bond market seems quite unimpressed, with only a slight uptick in long-term rates.
                                                    What the report should do, however, is further discredit the “Ma, he’s looking at me funny!” theory of the Obama economy. Remember, we were supposed to be having the worst recovery ever because Obama was a Kenyan socialist who scared businessmen. Actually, it’s a better recovery than the alleged Bush boom...


                                                      Posted by on Tuesday, December 23, 2014 at 09:47 AM in Economics | Permalink  Comments (54) 

                                                      Links for 12-23-14

                                                        Posted by on Tuesday, December 23, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (127) 

                                                        Monday, December 22, 2014

                                                        Fed Watch: Looking Backward to See the Future

                                                        Tim Duy:

                                                        Looking Backward to See the Future, by Tim Duy: Is this our future, brought back from the past? A contact referenced the last hike cycle via the FOMC statements from 2003-04 (emphasis added):

                                                        October 28, 2003:

                                                        The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period.

                                                        December 9, 2003:

                                                        The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. However, with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period.

                                                        January 28, 2004:

                                                        The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.

                                                        March 16, 2004:

                                                        The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.

                                                        May 4, 2004:

                                                        The Committee perceives the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. Similarly, the risks to the goal of price stability have moved into balance. At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

                                                        June 30, 2004:

                                                        The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/4 percent.

                                                        "Patient" lasted for two meetings before being replaced by "measured." This is fairly consistent with my expectations. My baseline scenario is that the Fed drops "considerable" entirely in January, retains "patient" in March, drops "patient" in April, and raise rates in June. In her press conference, Federal Reserve Chair Janet Yellen said:

                                                        There certainly has been no decision, you know, decision on the part of the Committee to move at a measured pace or to use language like that. I think quite a few people looking back on the use of that language in the--I can't remember if it was 12 or 16 meetings, where there were 25 basis point moves. We'd probably not like to repeat a sequence in which there was a measured pace and 25 basis point moves at every meeting. So I certainly don't want to encourage you to think that there will be a repeat of that.

                                                        If she really believes this, Yellen will not push to replace "patient" with "measured," but instead some more vague data-dependent type language.

                                                        Bottom Line: Assuming the data holds, maybe history will repeat itself. If it really is this easy, I have no idea what I will be writing about for the next six months.

                                                          Posted by on Monday, December 22, 2014 at 12:45 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (19) 

                                                          Do Safer Banks Mean Less Economic Growth?

                                                          At MoneyWatch:

                                                          Do safer banks mean less economic growth?: One reason the financial crisis was so severe was that banks were highly leveraged. That is, they relied heavily on borrowed funds to acquire risky financial assets. This left them highly vulnerable when those assets' prices collapsed and the banks were unable to raise the funds they needed to pay off their loans.
                                                          In response, regulators have increased the capital requirements for banks. This limits the amount of leverage they can use and provides a safety buffer against losses. But banks protest that these more stringent capital requirements interfere with their ability to provide the financing the economy needs to function optimally, and hence this will slow economic growth.
                                                          However, recent research calls this into question. ...

                                                            Posted by on Monday, December 22, 2014 at 11:32 AM in Economics, Financial System, Regulation | Permalink  Comments (11) 

                                                            Paul Krugman: Conquest Is for Losers

                                                            War. What is it good for?:

                                                            Conquest Is for Losers, by Paul Krugman, Commentary, NY Times: More than a century has passed since Norman Angell, a British journalist and politician, published “The Great Illusion,” a treatise arguing that the age of conquest was or at least should be over. He didn’t predict an end to warfare, but he did argue that aggressive wars no longer made sense — that modern warfare impoverishes the victors as well as the vanquished.
                                                            He was right, but ... Vladimir Putin never got the memo. And neither did our own neocons, whose acute case of Putin envy shows that they learned nothing from the Iraq debacle.
                                                            Angell’s case was simple: Plunder isn’t what it used to be. You can’t treat a modern society the way ancient Rome treated a conquered province without destroying the very wealth you’re trying to seize. And meanwhile, war or the threat of war, by disrupting trade and financial connections, inflicts large costs over and above the direct expense of maintaining and deploying armies. War makes you poorer and weaker, even if you win. ....
                                                            The point is that there is a still-powerful political faction in America committed to the view that conquest pays, and that in general the way to be strong is to act tough and make other people afraid. One suspects, by the way, that this false notion of power was why the architects of war made torture routine — it wasn’t so much about results as about demonstrating a willingness to do whatever it takes.
                                                            Neocon dreams took a beating when the occupation of Iraq turned into a bloody fiasco, but they didn’t learn from experience. (Who does, these days?) And so they viewed Russian adventurism with admiration and envy. ...
                                                            The truth, however, is that war really, really doesn’t pay. The Iraq venture clearly ended up weakening the U.S. position in the world, while costing more than $800 billion in direct spending and much more in indirect ways. America is a true superpower, so we can handle such losses — although one shudders to think of what might have happened if the “real men” had been given a chance to move on to other targets. But a financially fragile petroeconomy like Russia doesn’t have the same ability to roll with its mistakes.
                                                            I have no idea what will become of the Putin regime. But Mr. Putin has offered all of us a valuable lesson. Never mind shock and awe: In the modern world, conquest is for losers.

                                                              Posted by on Monday, December 22, 2014 at 03:05 AM in Economics | Permalink  Comments (170) 

                                                              Fed Watch: Asked and Answered. Mostly.

                                                              Tim Duy:

                                                              Asked and Answered. Mostly, by Tim Duy: Last week I had six questions for Federal Reserve Chair Janet Yellen. Here is my attempt to piece together the answers from her post-FOMC press conference:

                                                              Question 1: If you want to know what the Fed is thinking at this point, a journalist needs to push Yellen on the secular stagnation issue at next week's press conference. Does she or the committee agree with Fischer? And does she see any inconsistency with the SEP implied equilibrium Federal Funds rates and the current level of long bonds?

                                                              Yellen, in answer to Peter Coke of Bloomberg Television: "(The Committee) are optimistic that those conditions will lift. They see the longer-run normal level of interest rates as around 3-3/4 percent. So there's no view in the Committee that there is secular stagnation in the sense we won't eventually get back to pretty historically normal levels of interest rates."

                                                              Yellen, in answer to Robin Harding of the Financial Times: "There are a number of different factors that are bearing on the path of market interest rates. I think including global economic developments. It is often the case that when oil prices move down, and the dollar appreciates, that tends to put downward pressure on inflation compensation and on longer-term rates. We also have safe haven flows that may be affecting longer-term Treasury yields. So I can't tell you exactly what is driving market developments. But what I can say is that we are trying to communicate our thoughts as clearly as we can."

                                                              The Federal Reserve believes that the current level of long rates is an artifact of safe-haven flows, not an indication of secular stagnation. They must anticipate that the yield curve will not flatten further or invert when they begin raising rates.

                                                              Question 2: I would like a journalist to press Yellen on her interpretation of the 5-year, 5-year forward breakeven measure of inflation expectations. Does she see this measure as important or too noisy to be used as a policy metric? What is her preferred metric?

                                                              Yellen, in answer to Greg Ip of the Economist: "Oh, and longer-dated expectations. Well I would say we refer to this in the statement as inflation compensation, rather than inflation expectations. The gap between the nominal yields on 10-year Treasuries for example. And TIPS have declined -- that's inflation compensation, and five-year, five-year forwards, as you've said, have also declined. That could reflect a change in inflation expectations. But it could also reflect changes in assessment of inflation risks. The risk premium that's necessary to compensate for inflation. That might especially have fallen if the probabilities attached to very high inflation have come down. And it can also reflect liquidity effects in markets and for example, it's sometimes the case that -- when there is a flight to safety, that flight tends to be concentrated in nominal Treasuries, and can also serve to compress that spread. So I think the jury is out about exactly how to interpret that downward move in inflation compensation. And we indicated that we are monitoring inflation developments carefully."

                                                              The Federal Reserve does not believe market-based measures of inflation expectations as indicative of actual inflation expectations. Watch surveys, Cleveland Fed-type measures, and actual inflation instead.

                                                              Question 3: Considering that recent updates of your optimal control framework now suggest that the normalization process should already be underway, how useful do you believe such a framework is for the conduct of monetary policy? What specific framework are you now using to dismiss the results of your previously preferred framework?

                                                              Yellen, in answer to Greg Ip of the Economist: "So you -- your first question is why is it that the committee sees unemployment as declining slightly below its estimate of the longer-run, natural rate? And I think in part, the reason for that is that inflation is running below our objective, and the committee wants to see inflation move back toward our objective over time. And a short period of a very slight under shoot of unemployment below the natural rate will facilitate slightly faster return of inflation to our objective. It is, I should say, a very small undershoot in a situation where there is great uncertainty about exactly what constitutes maximum employment, or a longer-run, normal rate of unemployment."

                                                              This is the general story of optimal control - hold unemployment below the natural rate to accelerate return to target inflation. Ignore any overshooting of inflation in such an analysis; Yellen was never really serious about that. Only thing preventing Fed from raising rates now is tweeking the optimal control results to account for still-high unemployment.

                                                              Question 4: St. Louis Federal Reserve President James Bullard has defined a specific metric to assess the Fed's current distance from its goals. What is your specific metric and by that metric how far is the Fed from it's goals? What does this metric tell you about the likely timing of the first rate hike of this cycle?

                                                              Yellen, in answer to Binyamin Appelbaum of the New York Times: "And with respect to inflation -- and our forecast for inflation, and inflation expectations, let me start by saying I think it's important that monetary policy be forward-looking. The lags in monetary policy are long. And therefore the committee has to base its decisions on how to set the federal funds rate looking into the future. Theory is important, and theories that are consistent with historical evidence will be something that governs the thinking of many people around the table. Typically we have seen that as long as inflation expectations are well-anchored, that as the labor market recovers, we'll gradually see upward pressure on both wages and prices. And that inflation will tend to move back toward 2 percent. I think historically we have seen, as the economy strengthens and slack diminishes, that inflation does tend to gradually rise over time. And as long -- you know, I just -- speaking for myself, that I will be looking for evidence that I think strengthens my confidence in that view, and you know, looking at the full range of data that bears on, whether or not that's a reasonable view of how events will unfold. But it's likely to be a decision that's based on forecasts and confidence in the forecast."

                                                              No firm metrics. Raising rates is like pornography - we know it is time when we see it.

                                                              Question 5: Why is the Fed setting the stage for raising interest rates next year while inflation measures remain below target? What is the risk, exactly, of explicitly committing to a zero interest rate policy until inflation reaches at least your target?

                                                              Yellen, in answer to Greg Ip of the Economist: "But it's important to point out that the committee is not anticipating an over-shoot of its 2 percent inflation objective."

                                                              From the Fed's perspective, not an interesting question. Theory says monetary policymakers need to move ahead of seeing inflation at target. If inflation was actually at target, they would be behind the curve in this economic environment. Also refer to San Francisco Federal Reserve President John Williams, via the Wall Street Journal:

                                                              “There’s no question that core inflation will likely be below 2% when liftoff is appropriate,” Mr. Williams said.

                                                              You have to love that statement - only an economist could piece together a sentence with "no question" and "likely" in this context. In short, they have no intention of allowing inflation to drift above 2%. The 2% goal is a ceiling, not a target. They are perfectly happy tolerating modestly below-target inflation as long as unemployment is below 6%. If you thought that any mention of above-target inflation was anything more than an acknowledgement of potential forecast errors, you were wrong. As far as the Fed is concerned, 2% inflation was handed down by God. It's in the Bible. Look it up.

                                                              Question 6: High yield debt markets are currently under pressure from the decline in oil prices. Are you confident that macroprudential tools are sufficient to contain the damage to energy-related debt? If the damage cannot be contained and contagion to other markets spreads, what does this tell you about the ability to use low interest rate policy without engendering dangerous financial instabilities?

                                                              Yellen, in answer to Greg Robb of MarketWatch: "So I mean there is some--you're talking about in the United States exposure? I mean we have seen some impacts of lower oil prices on the spreads for high-yield bonds, where there's exposure to oil companies that may see distress or a decline in their earnings, and we have seen some increase in spreads on high-yield bonds more generally. I think for the banking system as a whole the exposure to oil, I'm not aware of significant issues there. This is the kind of thing that is part of risk management for banking organizations and the kind of thing they look at in stress tests. But the movements in oil prices have been very large, and undoubtedly unexpected.

                                                              We--in terms of leverage, and whether or not levered entities could be badly effected by movements in oil prices, leverage in the financial system in general is way down from the levels before the crisis. So it's not a major concern that there are levered entities that would be badly affected by this, but we'll have to watch carefully. There have been large and unexpected movements in oil prices."

                                                              I honestly think that Yellen was surprised the rest of us were worried about this. Don't worry, be happy -high yield energy debt problems are contained.

                                                              Bottom Line: Final result is data dependent, but nothing at the moment is dissuading the Fed from their intention to hike rates in the middle of 2015.

                                                                Posted by on Monday, December 22, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (11) 

                                                                Links for 12-22-14

                                                                  Posted by on Monday, December 22, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (42) 

                                                                  Sunday, December 21, 2014

                                                                  What is Wrong with Us?

                                                                  I find it incredibly sad that people feel they have to make "The Case Against Torture" (NY Times). What is wrong with us?

                                                                    Posted by on Sunday, December 21, 2014 at 07:47 PM in Economics, Links | Permalink  Comments (23) 

                                                                    'The Net Petroleum Exporter Myth'

                                                                    Bill McBride at Calculated Risk:

                                                                    Katie Couric and the Net Petroleum Exporter Myth: To understand what the general public is hearing about oil, I watched a Yahoo video yesterday with Katie Couric explaining the decline in oil prices.

                                                                    In general the piece was very good. Couric started by explaining that the decline in oil prices could be explained in two words: Supply and Demand.  She discussed reasons for more supply and softening demand. ...

                                                                    But then Couric mentioned a myth I've heard several times recently. She said:

                                                                    In fact, [the U.S.] is now the world’s largest producer of petroleum, and for the last two years, it has been selling more to other countries than it’s been buying. Who knew?

                                                                    "Who knew?"  No one, because it is not true. Yes, the U.S. is the largest producer this year (ahead of Saudi Arabia and Russia), but the U.S. is NOT "selling more to other countries than it's been buying".

                                                                    The source of this error is that the U.S. is a net exporter of refined petroleum products, such as refined gasoline. Here is the EIA data on Weekly Imports & Exports of crude oil and petroleum products.  The U.S. is importing around 9 million barrels per day of crude oil and products, and exporting around 4 million per day (mostly refined products). The U.S. is a large net importer! ...

                                                                      Posted by on Sunday, December 21, 2014 at 11:59 AM in Economics, International Trade, Oil | Permalink  Comments (23) 

                                                                      Links for 12-21-14

                                                                        Posted by on Sunday, December 21, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (105) 

                                                                        Saturday, December 20, 2014

                                                                        Links for 12-20-14

                                                                          Posted by on Saturday, December 20, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (93) 

                                                                          Friday, December 19, 2014

                                                                          Regulation of the Financial Industry

                                                                          Is the financial industry is winning the war over regulation?:

                                                                          Volcker lambasts Wall Street lobbying, FT: Paul Volcker, the former Federal Reserve chairman, has lambasted the "eternal lobbying" of Wall Street after regulators granted the industry more time to comply with a rule designed to prevent them from owning hedge funds.
                                                                          In a withering statement ... Mr Volcker said: “It is striking, that the world's leading investment bankers, noted for their cleverness and agility in advising clients on how to restructure companies and even industries however complicated, apparently can't manage the orderly reorganization of their own activities in more than five years.”
                                                                          “Or, do I understand that lobbying is eternal, and by 2017 or beyond, the expectation can be fostered that the law itself can be changed?”
                                                                          The Fed and its fellow regulators this week gave the banks until 2017 to comply... Banks had been supposed to comply by next year. The law containing the Volcker rule was passed in 2010. ...

                                                                            Posted by on Friday, December 19, 2014 at 12:08 PM in Economics, Financial System, Regulation | Permalink  Comments (41) 

                                                                            Digitized Products: How about just giving up?

                                                                            Joshua Gans:

                                                                            Digitized Products: How about just giving up?: In a very interesting talk, music producer, Steve Albini, reviewed the impact of the internet on the music industry’s woes. ...

                                                                            From my part, I believe the very concept of exclusive intellectual property with respect to recorded music has come to a natural end, or something like an end. Technology has brought to a head a need to embrace the meaning of the word “release”, as in bird or fart. It is no longer possible to maintain control over digitized material and I don’t believe the public good is served by trying to.

                                                                            Basically, he is saying that the whole notion of getting people to pay for music itself that they want to listen to at their leisure is not worth pursuing.

                                                                            What I like about this analysis is that it gets us to fundamentals. In music, there are people who want to supply music and there are people who want to listen to it. The problem is that the competition for listener’s attention is intense. That’s the core of the economics of the industry. If there is a fundamental imbalance in competition — in this case, favoring listeners — you can’t assume that suppliers will get much. Unless, of course, the suppliers can supply something else that is scarce — for instance, connections through online communities or, mostly likely, through concerts. The Eagles — yes, The Eagles from the 1970s — earned $100 million last year. I don’t recall any Number One albums from them. It was all from other stuff.

                                                                            Last time I saw the Eagles live was "A Day on the Green" at the Oakland Coliseum long, long ago (I think it was 1975).

                                                                              Posted by on Friday, December 19, 2014 at 11:20 AM in Economics | Permalink  Comments (13) 

                                                                              Paul Krugman: Putin’s Bubble Bursts

                                                                              The Russian economy is in trouble:

                                                                              Putin’s Bubble Bursts, by Paul Krugman, Commentary, NY Times: If you’re the type who finds macho posturing impressive, Vladimir Putin is your kind of guy. Sure enough, many American conservatives seem to have an embarrassing crush on the swaggering strongman. “That is what you call a leader,” enthused Rudy Giuliani, the former New York mayor, after Mr. Putin invaded Ukraine without debate or deliberation.
                                                                              But Mr. Putin never had the resources to back his swagger. Russia has an economy roughly the same size as Brazil’s. And, as we’re now seeing, it’s highly vulnerable to financial crisis...
                                                                              For those who haven’t been keeping track: The ruble has been sliding gradually since August, when Mr. Putin openly committed Russian troops to the conflict in Ukraine. A few weeks ago, however, the slide turned into a plunge. Extreme measures ... have done no more than stabilize the ruble far below its previous level. And all indications are that the Russian economy is heading for a nasty recession.
                                                                              The proximate cause of Russia’s difficulties is, of course, the global plunge in oil prices... And this was bound to inflict serious damage on an economy that ... doesn’t have much besides oil that the rest of the world wants; the sanctions imposed on Russia over the Ukraine conflict have added to the damage. ...
                                                                              Putin’s Russia is an extreme version of crony capitalism, indeed, a kleptocracy in which loyalists get to skim off vast sums for their personal use. It all looked sustainable as long as oil prices stayed high. But now the bubble has burst, and the very corruption that sustained the Putin regime has left Russia in dire straits.
                                                                              How does it end? The standard response ... is an International Monetary Fund program that includes emergency loans and forbearance from creditors in return for reform. Obviously that’s not going to happen here, and Russia will try to muddle through on its own, among other things with rules to prevent capital from fleeing the country — a classic case of locking the barn door after the oligarch is gone.
                                                                              It’s quite a comedown for Mr. Putin. And his swaggering strongman act helped set the stage for the disaster. A more open, accountable regime — one that wouldn’t have impressed Mr. Giuliani so much — would have been less corrupt, would probably have run up less debt, and would have been better placed to ride out falling oil prices. Macho posturing, it turns out, makes for bad economies.

                                                                                Posted by on Friday, December 19, 2014 at 12:24 AM in Economics, Financial System, International Finance | Permalink  Comments (169) 

                                                                                Links for 12-19-14

                                                                                  Posted by on Friday, December 19, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (29) 

                                                                                  Thursday, December 18, 2014

                                                                                  About Those Cost Push Inflation Fears...

                                                                                  Via Real Time Economics at the WSJ:

                                                                                  No Sign Yet of Labor Cost Inflation in U.S. or U.K., by Paul Hannon: Despite falling unemployment rates, there are few signs that rising wages will soon start to push inflation higher in either the U.S. or the U.K., where central banks are expected to raise their benchmark rates next year and in early 2016 respectively.
                                                                                  In both countries, policy makers expect tightening labor markets to result in a pickup in wages that will translate into higher consumer prices, as businesses act to protect their profit margins...
                                                                                  But an internationally comparable measure of labor costs released Thursday by the Organization for Economic Cooperation and Development showed no sign of a buildup in inflationary pressures from that source in either country.
                                                                                  Indeed, the Paris-based research body recorded a 0.1% drop in unit labor costs in the U.S. during the third quarter, which followed a 0.6% decline in the second quarter. ...

                                                                                    Posted by on Thursday, December 18, 2014 at 10:27 AM in Economics, Inflation | Permalink  Comments (33) 

                                                                                    'Maybe There's No Such Thing as a Business Cycle'

                                                                                    Noah Smith:

                                                                                    Maybe There's No Such Thing as a Business Cycle: ...The word “cycle” conjures up images of waves and seasons, but the business cycle isn’t a regular cycle like that (if it were, it would be easy to predict the next recession). Economists actually think that recessions and booms are random temporary disturbances of a smooth trend of long-term growth. ...
                                                                                    In other words, modern macroeconomic theories all assume that recessions are temporary -- that they don’t permanently damage the economy’s productive potential. If that assumption is wrong, then most modern macroeconomic theories are barking up the wrong tree. ...
                                                                                    In fact, the evidence is now piling up that the 2008 recession did have lasting effects. ... It may simply be time to stop thinking of the business cycle as a cycle.

                                                                                    For more on this issue, I encourage you to read "You’ve Got Potential" at the Growth Economics Blog.

                                                                                      Posted by on Thursday, December 18, 2014 at 10:02 AM in Economics | Permalink  Comments (22) 

                                                                                      'What’s the Matter with Economics?': An Exchange

                                                                                      Arnold Packer and Jeff Madrick respond to Alan Blinder in the NYRB, and he replies:

                                                                                      ‘What’s the Matter with Economics?’: An Exchange: In response to: What’s the Matter with Economics? from the December 18, 2014 issue ...
                                                                                      To the Editors:
                                                                                      Alan Blinder is one of the finest mainstream economists around. But to read his review of my book, you’d think that nothing was wrong with economics in recent decades except as it is practiced by a few right-wingers.
                                                                                      This is of course not the case. ...
                                                                                      Jeff Madrick
                                                                                      New York City
                                                                                      Alan S. Blinder replies:
                                                                                      According to both Jeff Madrick and Arnie Packer, I claim “that except for some right-wingers outside the ‘mainstream’…little is the matter” with economics. (These are Packer’s words; Madrick’s are similar.) But it’s not true. I think there is lots wrong with mainstream economics.
                                                                                      For starters, my review explicitly agreed with Madrick that (a) ideological predispositions infect economists’ conclusions far too much; (b) economics has drifted to the right (along with the American body politic); and (c) some economists got carried away by the allure of the efficient markets hypothesis. I also added a few indictments of my own: that we economists have failed to convey even the most basic economic principles to the public; and that some of our students turned Adam Smith’s invisible hand into Gordon Gekko’s “greed is good.” ...
                                                                                      Yet Madrick still insists that “economists rely on a fairly pure version of the invisible hand most of the time.” Not us mainstreamers. I’m a member of the tribe, I live among these people every day, and—trust me—we really don’t apply the “pure version” to the real world. For example, many of us see reasons for a minimum wage, mandatory Social Security, progressive taxation, carbon taxes, and a whole variety of financial regulations—to name just a few. ...

                                                                                      [Hard to summarize this one with a few excerpts -- I left a lot out...]

                                                                                        Posted by on Thursday, December 18, 2014 at 09:49 AM in Economics, Macroeconomics | Permalink  Comments (31) 

                                                                                        Links for 12-18-14

                                                                                          Posted by on Thursday, December 18, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (166) 

                                                                                          Wednesday, December 17, 2014

                                                                                          Fed Watch: Quick FOMC Recap

                                                                                          Tim Duy:

                                                                                          Quick FOMC Recap, by Tim Duy: Running short on time today....

                                                                                          Today's FOMC statement was a reminder that in normal times the Federal Reserve moves slowly and methodically. Policymakers were apparently concerned that removal of "considerable time" by itself would prove to be disruptive. Instead, they opted to both remove it and retain it:

                                                                                          Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

                                                                                          If you thought they would drop "considerable time," they did. If you thought they would retain "considerable time," they did. Everyone's a winner with this statement.

                                                                                          Federal Reserve Chair Janet Yellen explained the change in language as necessary to shift away from the increasingly dated reference to the end of quantitative easing. In addition to the lower inflation and interest rate expectations in the Summary of Economic Projections, the statement was initially regarded as dovish. The press conference, however, was in my opinion anything but dovish.

                                                                                          During the presser, Yellen explained that "patience" was only likely guaranteed through the next "couple" of meetings, later clarified to be two. Hence, the April meeting is still on the table, although I still suspect that is too early. Yellen also said that a press conference was not required to raise rates; if necessary, they could always opt to have a presser even if one not scheduled. She dismissed falling market-based inflation expectations as reflecting inflation "compensation" rather than expectations. She dismissed the disinflationary impulse from oil, calling it transitory and drawing attention to the expected positive implications for US growth (much as she corrected described "noisy" inflation indicators earlier this year). She indicated that inflation did not need to return to target prior to raising rates, only that the Fed needed to be confident it would continue to trend toward target. She was very obviously unconcerned about the risk of contagion either via Russia or high yield energy debt - I think she almost seemed surprised anyone was worried about the latter.

                                                                                          In short, Yellen dismissed virtually all of the reasons to expect the Federal Reserve to delay rate hikes past its expectation of mid-2015. They have their eyes set firmly on June. My sense is that they see the accelerating economy and combine that with, as Yellen mentioned, the long lags of monetary policy, and worry that it will not be long before they are behind the curve.

                                                                                          To be sure, it is easy to outline a scenario that derails the Fed's plans. The impact of the oil shock on core inflation may be more than expected. Or rising labor force participation stabilizes the unemployment rate and wage growth continues to move sideways. My guess is that if they see an acceleration in wage growth between now and June, a June hike is pretty much in the bag.

                                                                                          Bottom Line: Like it or not, believe it or not, the Fed is seriously looking at mid-2015 to begin the normalization process. And there is no guarantee that it will be a predictable series of modest rate hikes. As much as you think of the possibility that the hike is delayed, think also of the possibility of 1994.

                                                                                            Posted by on Wednesday, December 17, 2014 at 05:39 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (10) 

                                                                                            'Minimal Model Explanations'

                                                                                            Some of you might find this interesting:

                                                                                            “Minimal Model Explanations,” R.W. Batterman & C.C. Rice (2014), A Fine Theorem: I unfortunately was overseas and wasn’t able to attend the recent Stanford conference on Causality in the Social Sciences; a friend organized the event and was able to put together a really incredible set of speakers: Nancy Cartwright, Chuck Manski, Joshua Angrist, Garth Saloner and many others. Coincidentally, a recent issue of the journal Philosophy of Science had an interesting article quite relevant to economists interested in methodology: how is it that we learn anything about the world when we use a model that is based on false assumptions? ...

                                                                                              Posted by on Wednesday, December 17, 2014 at 12:59 PM in Economics, Methodology | Permalink  Comments (1) 

                                                                                              'Wall Street Salivating Over Further Destruction of Financial Reform'

                                                                                              Surprise! Or not (more concerned with this than whether the Fed changed a few words in its Press Release following the FOMC meeting):

                                                                                              Wall Street Salivating Over Further Destruction of Financial Reform, by Kevin Drum: Conventional pundit wisdom suggests that Wall Street may have overreached last week. Yes, they won their battle to repeal the swaps pushout requirement in Dodd-Frank, but in so doing they unleashed Elizabeth Warren and brought far more attention to their shenanigans than they bargained for. They may have won a battle, but ... they're unlikely to keep future efforts to weaken financial reform behind the scenes, where they might have a chance to pass with nobody the wiser.

                                                                                              Then again, maybe not. Maybe it was all just political theater and Wall Street lobbyists know better than to take it seriously. Ed Kilgore points to this article in The Hill today:

                                                                                              Banks and financial institutions are planning an aggressive push to dismantle parts of the Wall Street reform law when Republicans take control of Congress in January. ...

                                                                                              Will Democrats in the Senate manage to stick together and filibuster these efforts to weaken Dodd-Frank? ... I'd like to think that Elizabeth Warren has made unity more likely, but then again, I have an uneasy feeling that Wall Street lobbyists might have a better read on things than she does. Dodd-Frank has already been weakened substantially in the rulemaking process, and this could easily represent a further death by a thousand cuts. ...

                                                                                                Posted by on Wednesday, December 17, 2014 at 12:58 PM in Economics, Financial System, Politics, Regulation | Permalink  Comments (11) 

                                                                                                A Big Safety Net and Strong Job Market Can Co-Exist. Just Ask Scandinavia.

                                                                                                Neil Irwin:

                                                                                                A Big Safety Net and Strong Job Market Can Co-Exist. Just Ask Scandinavia: It is a simple idea supported by both economic theory and most people’s intuition: If welfare benefits are generous and taxes high, fewer people will work. ... Here’s the rub, though: The idea may be backward.
                                                                                                Some of the highest employment rates in the advanced world are in places with the highest taxes and most generous welfare systems, namely Scandinavian countries. The United States and many other nations with relatively low taxes and a smaller social safety net actually have substantially lower rates of employment. ...
                                                                                                In short, more people may work when countries offer public services that directly make working easier, such as subsidized care for children and the old; generous sick leave policies; and cheap and accessible transportation. ...
                                                                                                And this analysis may leave out some other factors... Robert Greenstein, the president of the Center on Budget and Policy Priorities, notes that wages for entry-level work are much higher in the Nordic countries than in the United States, reflecting a higher minimum wage, stronger labor unions and cultural norms that lead to higher pay. ... Perhaps more Americans would enter the labor force if even basic jobs paid that well, regardless of whether the United States provided better child care and other services. ...

                                                                                                  Posted by on Wednesday, December 17, 2014 at 10:17 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (20) 

                                                                                                  Higher capital requirements: The jury is in

                                                                                                  A follow up to this:

                                                                                                  Higher capital requirements: The jury is in, by Stephen Cecchetti, Vox EU: Summary Regulators forced up capital requirements after the Global Crisis – triggering fears in the banking industry of dire effects. This column – by former BIS Chief Economist Steve Cecchetti – introduces a new CEPR Policy Insight that argues that the capital increases had little impact on anything but bank profitability. Lending spreads and interest margins are nearly unchanged, while credit growth remains robust everywhere but in Europe. Perhaps the requirements should be raised further. 

                                                                                                    Posted by on Wednesday, December 17, 2014 at 10:08 AM in Economics, Financial System, Regulation | Permalink  Comments (2) 

                                                                                                    Links for 12-17-14

                                                                                                      Posted by on Wednesday, December 17, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (121)