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| February 2015 »
Bad Tayloring: Since they aren’t currently able to demand a return to the gold standard — and maybe a ban on paper money? — Republicans are pushing to mandate that the Fed follow the so-called Taylor rule, which relates short-term interest rates to unemployment (and/or the output gap) and inflation. John Taylor, not surprisingly, likes this idea. But it’s a really terrible idea, and not just for the reasons Tony Yates describes. ...
The world has turned out to be a much more dangerous place than Taylor-rule enthusiasts imagined, so why impose a rule devised, we know now, by economists who completely misjudged the risks?
Now Taylor himself has an excuse and rationale: he claims that the whole financial crisis thing was because the Fed departed slightly from his version of the rule in the pre-crisis 2000s. But as Yates points out, this assigns an importance to monetary policy that is wildly at odds with the kind of modeling used to justify the rule in the first place. It also, as Yates does not point out, has the distinct whiff of someone inventing ever-more bizarre stories to avoid admitting having been wrong about something. This is not the kind of argument on which to base rules that permanently constrain policy.
Posted by Mark Thoma on Saturday, January 31, 2015 at 10:02 AM in Economics, Monetary Policy, Politics |
Posted by Mark Thoma on Saturday, January 31, 2015 at 12:06 AM in Economics, Links |
Don't Trade Away Our Health: A secretive group met behind closed doors in New York this week. What they decided may lead to higher drug prices for you and hundreds of millions around the world.
Representatives from the United States and 11 other Pacific Rim countries convened to decide the future of their trade relations in the so-called Trans-Pacific Partnership (T.P.P.). Powerful companies appear to have been given influence over the proceedings, even as full access is withheld from many government officials from the partnership countries.
Among the topics negotiators have considered are some of the most contentious T.P.P. provisions — those relating to intellectual property rights. And we’re not talking just about music downloads and pirated DVDs. These rules could help big pharmaceutical companies maintain or increase their monopoly profits on brand-name drugs. ...
Posted by Mark Thoma on Friday, January 30, 2015 at 09:34 AM in Economics, Health Care, International Trade |
Jeffrey Sparshott of the WSJ:
U.S. Workers Still Waiting for Wage Growth: U.S. employers aren’t yet getting squeezed by workers demanding higher wages.
The employment-cost index, a broad gauge of wage and benefit expenditures, rose a seasonally adjusted 0.6% in the fourth quarter last year, the Labor Department said Friday. That’s down from 0.7% in the two earlier quarters and jibes with other data showing only limited wage pressure across the U.S.
Wages and salaries, which account for about 70% of compensation costs, climbed 0.5%, a slowdown from the third quarter’s 0.8% pace. Benefit costs rose 0.6%, matching the prior quarter.
The data is better than recent hourly earnings figures, which showed wages declining in December despite a postrecession low for the unemployment rate. ...
Posted by Mark Thoma on Friday, January 30, 2015 at 09:34 AM in Economics, Income Distribution, Unemployment |
Audit the Fed? Not so fast: Not this again.
Calls to “Audit the Fed” are back. And just as before, they are extraordinarily dangerous to the health of the U.S. economy.
First, a little background. Conspiracy theories about the Federal Reserve’s wacky technical mumbo-jumbo voodoo have a long populist history. Monetary policy is complicated and abstract; entrusting it to a secretive, propeller-headed cabal naturally arouses suspicion. No surprise, then, that libertarian hero and former Texas congressman Ron Paul for years tried to persuade his colleagues to curb the central bank’s power and independence with recurrent calls to “Audit the Fed” (if not kill it entirely). He made Fed audits a centerpiece of his 2008 and 2012 presidential campaigns.
Now, with Republicans controlling both houses of Congress, he might finally get his way.
Sen. Rand Paul (R-Ky.) has picked up his father’s mantle and reintroduced the proposal as the Federal Reserve Transparency Act of 2015. Sen. Ted Cruz (R-Tex.) — like Paul a likely 2016 presidential contender — has also joined the cause, along with 29 other co-sponsors. A companion bill was introduced in the House by Rep. Thomas Massie (R-Ky.). ...
Posted by Mark Thoma on Friday, January 30, 2015 at 09:34 AM in Economics, Monetary Policy |
Bill McBride at Calculated Risk:
BEA: Real GDP increased at 2.6% Annualized Rate in Q4: From the BEA: Gross Domestic Product: Fourth Quarter and Annual 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 2.6 percent in the fourth quarter of 2014, according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 5.0 percent.
The advance Q4 GDP report, with 2.6% annualized growth, was below expectations of a 3.2% increase.
The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP growth in the fourth quarter primarily reflected an upturn in imports, a downturn in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by an upturn in private inventory investment and an acceleration in PCE.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 0.3 percent in the fourth quarter, in contrast to an increase of 1.4 percent in the third. Excluding food and energy prices, the price index for gross domestic purchases increased 0.7 percent, compared with an increase of 1.6 percent.
Personal consumption expenditures (PCE) increased at a 4.3% annualized rate - a strong pace!
The key negatives were trade (subtracted 1.02 percentage point) and Federal government spending (subtracted 0.54 percentage points). ...
Overall this was a solid report with strong PCE and private domestic investment.
Posted by Mark Thoma on Friday, January 30, 2015 at 09:34 AM in Economics |
Will Europe pass its latest test?:
Europe’s Greek Test, by Paul Krugman, Commentary, NY Times: ... Recent events in Greece pose a fundamental challenge for Europe: Can it get past the myths and the moralizing, and deal with reality in a way that respects the Continent’s core values? If not, the whole European project — the attempt to build peace and democracy through shared prosperity — will suffer a terrible, perhaps mortal blow. ...
...to oversimplify things a bit, you can think of European policy as involving a bailout, not of Greece, but of creditor-country banks, with the Greek government simply acting as the middleman — and with the Greek public, which has seen a catastrophic fall in living standards, required to make further sacrifices so that it, too, can contribute funds to that bailout.
One way to think about the demands of the newly elected Greek government is that it wants a reduction in the size of that contribution. ... But doesn’t Greece have an obligation to pay ... debts? That’s where the moralizing comes in.
It’s true that Greece (or more precisely the center-right government that ruled the nation from 2004-9) voluntarily borrowed vast sums. It’s also true, however, that banks in Germany and elsewhere voluntarily lent Greece all that money. We would ordinarily expect both sides of that misjudgment to pay a price. But the private lenders have been largely bailed out... Meanwhile, Greece is expected to keep on paying.
Now,... nobody believes that Greece can fully repay. So why not recognize that reality and reduce the payments to a level that doesn’t impose endless suffering? Is the goal to make Greece an example for other borrowers? If so, how is that consistent with the values of what is supposed to be an association of sovereign, democratic nations? ...
Objectively, resolving this situation shouldn’t be hard. ...Greece has actually made great progress in regaining competitiveness; wages and costs have fallen dramatically, so that, at this point, austerity is the main thing holding the economy back. So what’s needed is simple: Let Greece run smaller but still positive surpluses, which would relieve Greek suffering, and let the new government claim success, defusing the anti-democratic forces waiting in the wings. Meanwhile, the cost to creditor-nation taxpayers — who were never going to get the full value of the debt — would be minimal.
Doing the right thing would, however, require that other Europeans, Germans in particular, abandon self-serving myths and stop substituting moralizing for analysis.
Can they do it? We’ll soon see.
Posted by Mark Thoma on Friday, January 30, 2015 at 09:22 AM in Economics, Politics |
[Had this set to autopost, but accidentally hit p.m. instead of a.m., so it's very late...]
Posted by Mark Thoma on Friday, January 30, 2015 at 12:06 AM in Economics, Links |
[Very busy day today, so for now just three quick excerpts.]
A moral case for bank money: Finance is a skeleton that supports the development of a healthy society, not a utility that plumbs the economy together. The justification for this observation is historical. Richard Seaford has argued that the culture that emerged in Greece some two and a half thousand years ago, creating a unique approach to science and democratic politics, was a consequence of a peculiar Greek invention; money, a token that signifies trust between citizens. The flowering of European culture, and the genesis of modern science, in thirteenth century Europe followed, and some argue was a consequence of, a period of rapid monetisation of society that initiated the end of feudalism. Similarly, western Europe’s development accelerated ahead of the rest of the world in the seventeenth century powered by financial innovations in the Netherlands and Britain.
Charles Mackay in his classic comparison of England’s South Sea Bubble and France’s, almost simultaneous, Mississippi Bubble, emphasises the different reactions in France and Britain to the credit bubbles. In the aftermath of the crises, the French inhibited the development of private banks but maintained the autocratic political system, whereas the British reformed the political system and enabled the development of finance. The results of Britain’s Financial Revolution were Agricultural and Industrial Revolutions along with the eclipse of France as a global power. For France, dependent on taxation to fund the state, there was the ultimate collapse of the political system in bloody revolution.
Getting the structure of our financial system right is not a trivial matter. ...
Posted by Mark Thoma on Thursday, January 29, 2015 at 09:04 AM
More on Greece from Antonio Fatas:
Greece, EMU and democracy: One more post on Greece, possibly not the last one.
Markets are more worried about what is going on and there is more and more talk about the possibility of and exit of Greece from the Euro area. As I have argued in my previous posts, exit will not be the choice of the Greek government, it will be the only solution for Greece as the ECB refuses to provide liquidity to Greek banks as depositors run to avoid capital losses on their Euro deposits in the scenario of Greece leaving the Euro.
Let me start by repeating (as I have expressed many times in this blog) that I find that the economic policies followed in Europe have been a disaster, that the suffering that countries such as Greece had to go through during the last years should not have taken place. And I am convinced that in many of these countries, austerity has produced higher debt-to-GDP ratios, as opposed to lower ones. A real disaster.
But this is not what this negotiation is going to be about. The reality is that the crisis has had an impact on the way we all see the experiment of sharing a single currency, the experiment of EMU. While in the early days we all talked about optimum currency areas, the synchronicity of business cycles, the absence of a fiscal transfer mechanism, what we now realize is that the real issue is how to handle a full-blown crisis that puts governments at the edge of default and creates bank runs among Euro countries (something that many l thought it was impossible). The role that the ECB plays in those circumstances is not the typical role a central bank plays and one cannot ignore the political aspects associated to the difficult decisions they face. ...
Posted by Mark Thoma on Thursday, January 29, 2015 at 09:04 AM in Economics |
Inequalities, National and Global: The publication of Thomas Piketty’s Capital in the Twenty-First Century brought attention to an issue that has been slowly seeping into public discourse. President Obama’s State of the Union address made it clear that we will not need to wait until the 2016 Presidential campaign to hear proposals to rectify the rise in inequality. But the data and trends of global inequality reveal a more complex situation than the national states of affairs that Piketty highlights. ...
Posted by Mark Thoma on Thursday, January 29, 2015 at 09:00 AM in Economics, Income Distribution |
Posted by Mark Thoma on Thursday, January 29, 2015 at 12:06 AM in Economics, Links |
FOMC Decision, by Tim Duy: If you were looking for fireworks from today's FOMC statement, you were disappointed. Indeed, you need to work pretty hard to pull a story out of this statement. It provided little reason to believe that the Fed has shifted its view since December. A June rate hike remains the base case.
The Fed's assessment of the current statement is arguably the best in years:
Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow.
The Fed is simply not seeing any warning signs in recent data. Regarding inflation:
Inflation has declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation have declined substantially in recent months; survey-based measures of longer-term inflation expectations have remained stable.
They continue to dismiss headline inflation, and I think they will continue to do so. And if you continue to insist that the Fed is paralyzed with fear over market based measures of inflation expectations, note that they do not refer to these as "expectations" measures. It is inflation "compensation." From Fed Chair Janet Yellen's most recent press conference:
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 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.
Oh, and longer-dated expectations. Well, what 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 could 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.
They are trying to tell us very clearly that TIPS are not giving a measure of pure inflation expectations. They do not want those measures by themselves to affect market expectations of the path of monetary policy.
Growth risks are balances and low inflation is transitory:
The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.
They make a small nod to international concerns when considering future policy actions:
This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
The Fed remains patient and policy is data dependent:
Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary 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.
June remains on the table. Within the context of the current forecast, I think that June will be difficult to justify in the absence of wage acceleration. A sharp decline in the forecast, or the balance of risks to the forecast, would also prompt a delay. Importantly, at this point they see the current forecast as still the most likely outcome.
Bottom Line: At this point, the Fed does not see market turbulence as an impediment to raising rates. They are willing to hike rates even if stocks are moving sideways (which they probably think is reasonable in the context of expectations for less monetary accommodation). They do not see any data that threatens their baseline forecast. Maybe market participants have written off June, but for the Fed, June remains very much on the table.
Posted by Mark Thoma on Wednesday, January 28, 2015 at 02:12 PM in Economics, Fed Watch, Monetary Policy |
Somebody Is Inside an Echo Chamber. But Who?: Paul Krugman fears that somebody is trapped inside an echo chamber, hearing only things that confirm what they already believe...
But how can we tell which side has lost contact with the reality out there? ...
I do not think we have to decide. I think that even if we are uncertain whether the optimistic “insiders” or the pessimistic “outsiders” are correct, elementary prudent optimal-control theory tells us that we should act as if the “outsiders” are right.
But I have gotten ahead of myself:...
So how would we tell whether, right now, it is the outsiders are overstating the dangers to premature tightening, or it is the insiders who are understating the dangers to premature tightening here in the United States?
To answer this question, I think we need to consider five points–the first about our decision procedure, the second about the level of spending consistent with full employment, the third about the degree of uncertainty and variability, the fourth about the vulnerabilities of the economy to spending deviations above and below the projected current-policy path, and the fifth about the effectiveness of our optimal-control levers in different scenarios.
The first point is that if it turns out that we cannot tell–that we have to split the difference–then the considerations that rule are the asymmetries in the situation.
The second point is that no one right now has a good and convincing read on what, exactly, the level of spending consistent with full employment at the currently-projected price level is. Uncertainty is rife: if there was ever a time for considering not just the central tendency of the forecast but the risks on either side and taking optimal control appropriately valuing these risks seriously, it is right now.
The third point is that we are not just uncertain about what the proper full-employment path for demand is, we have much more than the usual amount of uncertainty about nearly all other dimensions of the structure of the economy. To suppose that any of the emergent properties that are policy multipliers can be estimated from data collected during “normal” times is to make an enormous leap of faith.
The fourth point is that downside risks to the forecast greatly exceed upside opportunities. ...
And the fifth point is that, while the Federal Reserve has powerful levers to restrict demand if spending shoots above the desired policy path, its levers to expand demand if spending falls below have been demonstrated over the past six years to be relatively weak.
Thus, if it turns out that we cannot tell–and we cannot tell–then it is not correct that we should split the difference. The considerations that rule are then the asymmetries in the situation. It is, right now, much worse to undershoot than to overshoot full-employment demand...
These asymmetries mean that, as far as policy is concerned, the “outsiders” win any tie and win any near-tie: the “insiders” should govern what policy should be only if there is not just a preponderance of the but clear and convincing evidence on their side.
Yet the Federal Reserve appears to have decided:
- that those who think that the economy is near full employment and is in a durable recovery have by far the better of the argument as to what the central tendency projected current-policy demand path is.
- that it is appropriate to make policy via certainty-equivalance.
Given the inability of the Federal Reserve to attain traction at the ZLB, its current frame of mind–which appears to be doing certainty-equivalence policy–makes no sense to me. Certainty-equivalence is appropriate only with a symmetric loss function and a symmetric ability to compensate for deviations on either side of the target. We do not have either of those.
Has there been an explanation of why the Federal Reserve’s policy is appropriate, given the uncertainties, given the asymmetry of the loss function, and given the asymmetry of the control levers, that I have missed? If so, where is it?
Posted by Mark Thoma on Wednesday, January 28, 2015 at 10:07 AM in Economics, Monetary Policy |
While We Wait For Yet Another FOMC Statement...: The FOMC will reveal the outcome of this week's meeting later today. I think Calculated Risk hits the high points - "patient" is in, "considerable time" is completely out. Beyond this, we will be looking for clues on how the Fed is interpreting the current economic environment. I suspect little change in the overall tenor of the statement as they will want to leave June open as an option. I reiterate my position: The Fed needs to see an acceleration in wage growth to be confident that inflation will return to trend if they intend to raise rates in June.
Why is the Fed focused on normalizing policy? This is one explanation I see tossed around, from Jeffrey Gunlock via Reuters:
"The Fed seems to want to raise interest rates simply because they don't want to be at zero when the next recession occurs," he said.
A similar statement from the Economic Cycle Research Institute:
In this context, ECRI explains the reasons for the declines in both measures, but also why they may ultimately not be that important to the timing of rates hikes. Above all, the Fed wants to remain relevant in case the economy is hit by recessionary shocks that require interest rates to return to the zero-lower-bound (ZLB). By definition, once on the ZLB, they need to rise before they can fall again.
I don't think these are accurate representations of Fed thinking. The Fed recognizes that hiking rates prematurely to "give them room" in the next recession is of course self-defeating. They are not going to invite a recession simply to prove they have the tools to deal with another recession.
The reasons the Fed wants to normalize policy are, I fear, a bit more mundane:
- They believe the economy is approaching a more normal environment with solid GDP growth and near-NAIRU unemployment. They do not believe such an environment is consistent with zero rates.
- They believe that monetary policy operates with long and variable lags. Consequently, they need to act before inflation hits 2% if they do not want to overshoot their target. And they in fact have no intention of overshooting their target.
- They do not believe in the secular stagnation story. They do not believe that the estimate of the neutral Fed Funds rate should be revised sharply downward. Hence 25bp, or 50bp, or even 100bp still represents loose monetary policy by their definition.
I am currently of the opinion that there is a reasonable chance the Fed is wrong on the third point, and that they have less room to maneuver than they believe. If so, they will find themselves back at the zero bound in the next recession, very quickly I might add. This is not their expectation. They expect to remain relevant in the next recession and do not believe they need to quickly raise rates to achieve relevance. Again, they know this is self-defeating.
Whether or not they can maintain their mid-year target is of course the topic du jour. But the logic of those who believe the Fed will not have what it needs in June and thus expect the first hike much later is more convincing than those who argue that they will raise rates due to some pressing need to prepare for the next recession.
Posted by Mark Thoma on Wednesday, January 28, 2015 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Wednesday, January 28, 2015 at 12:06 AM in Economics, Links |
I have a new column:
Taxing the Wealthy Won't Hurt Economic Growth: I have no idea whether or not Mitt Romney will run for president, and if he does, if he will get the nomination. But many of the issues he ran on when he was a candidate in the last election are likely to reappear this time around no matter whom the candidates turn out to be.
One of the fiercely debated issues in the last presidential election was taxation of the wealthy, and Republican proposals similar to those Romney made when he ran against Obama –– lowering or eliminating the taxes on capital gains, interest, dividends, and inheritances –– will undoubtedly arise again. I expect Republicans will throw a few bones to the middle class in an attempt to get the support of this important constituency, but I also expect the thrust of the proposals to be the same old supply-side policies favoring the wealthy that we have seen in the past.
What I want to focus on, however, is the economic arguments that are made to support the ideological goal of low taxes. ...
Posted by Mark Thoma on Tuesday, January 27, 2015 at 06:12 AM in Economics, Fiscal Times, Income Distribution, Politics, Taxes |
Figure: Althusser's conception of the CMP (RP Resch, Althusser and the Renewal of Marxist Social Theory)
The mode of production as society's structure: Sociologists study social structure and the effects that structures have on individual behavior and life outcomes. But what do they have in mind when they refer to "structure"?
It turns out that there are important ambiguities in the idea of social structure. The word is sometimes used to refer to functioning entities or systems within society. The state is a structure within society; likewise is the system of public education. But the term can also be used to refer to the structure of society. Here we have statements like "the age structure of Egypt is X" and "the occupational structure of Great Britain is Y". In this usage, we are being directed to a descriptive feature of society -- the way that various elements hang together. Income stratification is a structural feature; the state is a structural entity.
There is a third meaning associated with "structure" as well: the idea that society possesses a structure of interconnected parts and sub-systems, and that the parts influence each other in systematic ways. To outline the structure of society is to provide a theory of how it works (in part, anyway).
This usage is illustrated in Marx's extended concept of the capitalist mode of production, in which various large elements -- technology and production, distribution, wage labor, property ownership, political authority, culture and ideology -- hang together in functional ways. Marx describes this system as one consisting of a base (forces and relations of production) and superstructure (state, ideology, culture), with the workings of class interest serving as the engine of stability and change. So Marx looks at capitalism as a system. Consider this statement from the Preface to A Contribution to the Critique of Political Economy:
In the social production of their life, men enter into definite relations that are indispensable and independent of their will, relations of production which correspond to a definite stage of development of their material productive forces. The sum total of these relations of production constitutes the economic structure of society, the real foundation, on which rises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the social, political and intellectual life process in general.
Here and elsewhere Marx picks out the forces of production and relations of production as the basic determinants of social change. The mode of production represents a complex and objective reality to which individuals must adapt in their behaviors.
Now consider how Nicos Poulantzas defines the mode of production as a structural whole in Political Power and Social Classes:
By mode of production we shall designate not what is generally marked out as the economic (i.e. relations of production in the strict sense), but a specific combination of various structures and practices which, in combination, appear as so many instances or levels, i.e. as so many regional structures of this mode. A mode of production, as Engels stated schematically, is composed of different levels or instances, the economic, political, ideological and theoretical: it is understood that this is merely a schematic picture and that a more exhaustive division can be drawn up. The type of unity which characterizes a mode of production is that of a complex whole dominated, in the last instance, by the economic. (13-14)
(Poulantzas goes on to draw a distinction between the mode of production and the social formation (15); essentially his view is that the social formation is the concrete reality of a social order at a time, while the mode of production is a theoretical representation that describes that order.)
These texts serve to illustrate a specific and comprehensive view of the sense in which society has a structure. Each substantive term warrants analysis.
Definite relations of production -- property relations, relations of power and authority, relations defining the terms of economic interaction. The terms of these relations are essentially beyond the control of the individuals who fall within them; they represent a supra-individual reality to which the individual must accommodate. The system of wage labor is a clear example in Marx's theory. In a society in which wage labor is the dominant system of labor control, individuals gain the resources needed to satisfy life needs by selling their labor time which is then directed and managed by the purchaser. This is a structural condition that the worker confronts in the social environment around him or her.
Material productive forces -- the level and implementation of productive technology, including locations of production, tools, machines, materials processing, mines, agriculture, and the forms of knowledge associated with each of these. The ensemble of these items constitutes another fixed aspect of the social environment within which human beings live and subsist.
Economic structure of society -- the system of property relations and material institutions and technology through which society produces goods and conducts the distribution of value and surplus value (income and access to goods).
Legal and political superstructure -- the institutions through which law and political power are exercised and maintained.
Forms of social consciousness -- the cognitive and epistemic frameworks through which ordinary members of society understand the forces that surround them and the roles that they play within those forces and institutions.
Levels or instances of social organization -- the clusters of institutions that make up the "economic, political, ideological, and theoretical "'levels'" of existing society. Factories, department stores, and banks fall in the economic level; the legislature, the police and military forces, and the agencies of the state fall in the political level; and the contents and institutions of transmission of beliefs about the world fall in the ideological and theoretical levels.
Marx and other scholars who work within the framework of historical materialism hold, as a large empirical hypothesis, that there are causal and systemic relations among these items, and the generic mechanism of class interest and class conflict is the transmission belt that conveys causal influence from one sector to another. They believe that the "needs" of the economic structure are secured by the political structure, through the mechanism of class interests; likewise, the ideological and theoretical structure is shaped by the interests of various classes, leading to a high degree of conformance between the content of "social consciousness" and the prerequisites of stability of the economic structure.
The template of historical materialism as a "Gray's Anatomy" for modern capitalism has often been criticized as being mechanistic, over-simplified, and even fictional. But in its heart the scheme is a perfectly intelligible hypothesis about how several aspects of contemporary society fit together. Property relations define individual interests, and the system of wage labor defines the opportunities available to working people. Legislative and governmental policies have effects on the property system, and the class that owns the bulk of this property is perfectly capable of recognizing the consequences of this policy or that. Having the means to influence government, the owning class is able to shape government policy and personnel in ways that are compatible with its interests. Likewise, owners of property are able to recognize the advantage of being in a position to influence public consciousness and the terms of public debate. So the components of the "ideological apparatus" -- think tanks, newspapers, publishing houses, television networks -- are intensely contested, and the power of the owning class to influence the content of these outlets is great. Here again we have a fairly simple empirical argument for the conformance of the organs of social consciousness to the needs of the propertied class. And if it seems far fetched to hold that the owners of wealth are very willing to exert their power in these ways, just look at the recent announcement of the 2016 election-year budget of the political network funded by the Koch brothers -- $889,000,000 (link)!
It is no longer common in sociology to find value in Marx's theory of capitalist society. But really, the structuralist view he arrived at in the 1850s and 1860s seems pretty prosaic today in the context of an economic system that systematically creates astronomical wealth for the one percent and stagnant poverty for the majority of society. Median household income in 2012 in the United States was $51,371, and almost all states showed a decline in median household income between 2000 and 2012 (link). And it is almost tautological to say that the property system explains both facts -- the explosion of the wealth and income of the one percent and the stagnant or declining incomes of the majority of the population.
Or as Marx concludes Chapter Six of Volume I of Capital
On leaving this sphere of simple circulation or of exchange of commodities, which furnishes the “Free-trader Vulgaris” with his views and ideas, and with the standard by which he judges a society based on capital and wages, we think we can perceive a change in the physiognomy of our dramatis personae. He, who before was the money-owner, now strides in front as capitalist; the possessor of labour-power follows as his labourer. The one with an air of importance, smirking, intent on business; the other, timid and holding back, like one who is bringing his own hide to market and has nothing to expect but — a hiding.
Posted by Mark Thoma on Tuesday, January 27, 2015 at 12:15 AM in Economics |
Posted by Mark Thoma on Tuesday, January 27, 2015 at 12:06 AM in Economics, Links |
Does monopoly power cause inflation? (1968 and all that): Here's a question for you: Suppose there is a permanent increase in monopoly power across the economy (either firms having more monopoly power in output markets, or unions having more monopoly power in labour markets). Would that permanent increase in monopoly power cause a permanent increase in the inflation rate?
Most economists today would answer "no" to that question. It might maybe cause a temporary once-and-for-all rise in the price level, but it would not cause a permanent increase in the inflation rate. The question just sounds strange to modern economists' ears. They would much prefer to discuss whether a permanent increase in monopoly power caused a permanent reduction in real output and employment. What has monopoly power got to do with inflation?
To economists 40 or 50 years ago, the question would not have sounded strange at all. Many (maybe most?) economists would have answered "yes" to that question. ...
Posted by Mark Thoma on Monday, January 26, 2015 at 03:32 PM in Economics, Inflation, Macroeconomics |
Techno-neutrality: I’ve had a few posts in the past few months (here and here) about the consequences of mechanization for the future of work. In short, what will we do when the robots take our jobs?
I wouldn’t call myself a techno-optimist. I don’t think the arrival of robots necessarily makes everything better. But I do not buy the strong techno-pessimism that comes up in many places. Richard Serlin has been a frequent commenter on this blog, and he generally has a gloomy take on where we are going to end up once the robots arrive. I’m not bringing up Richard to pick on him. He writes thoughtful comments on this subject (and lots of others), and it is those comments that pushed me to try and be more clear on why I’m “techno-neutral”. ...
Posted by Mark Thoma on Monday, January 26, 2015 at 11:54 AM in Economics, Technology, Unemployment |
"The problem with Syriza’s plans may be that they’re not radical enough":
Ending Greece’s Nightmare, by Paul Krugman, Commentary, NY Times: Alexis Tsipras, leader of the left-wing Syriza coalition, is about to become prime minister of Greece. He will be the first European leader elected on an explicit promise to challenge the austerity policies that have prevailed since 2010. And there will, of course, be many people warning him to abandon that promise, to behave “responsibly.”
So how has that responsibility thing worked out so far?
To understand the political earthquake in Greece, it helps to look at Greece’s May 2010 “standby arrangement” with the International Monetary Fund, under which the so-called troika — the I.M.F., the European Central Bank and the European Commission — extended loans to the country in return for a combination of austerity and reform. It’s a remarkable document, in the worst way. The troika, while pretending to be hardheaded and realistic, was peddling an economic fantasy. And the Greek people have been paying the price for those elite delusions.
You see, the economic projections that accompanied the standby arrangement assumed that Greece could impose harsh austerity with little effect on growth and employment. ... What actually transpired was an economic and human nightmare. Far from ending in 2011, the Greek recession gathered momentum. ...
What went wrong? I fairly often encounter assertions to the effect that Greece didn’t carry through on its promises, that it failed to deliver the promised spending cuts. Nothing could be further from the truth. In reality, Greece imposed savage cuts in public services, wages of government workers and social benefits. ...
Yet Greek debt troubles are if anything worse than before the program started. ...
So now that Mr. Tsipras has won, and won big, European officials would be well advised to skip the lectures calling on him to act responsibly...
If anything, the problem with Syriza’s plans may be that they’re not radical enough. Debt relief and an easing of austerity would reduce the economic pain, but it’s doubtful whether they are sufficient to produce a strong recovery. On the other hand, it’s not clear what more any Greek government can do unless it’s prepared to abandon the euro, and the Greek public isn’t ready for that.
Still, in calling for a major change, Mr. Tsipras is being far more realistic than officials who want the beatings to continue until morale improves. The rest of Europe should give him a chance to end his country’s nightmare.
Posted by Mark Thoma on Monday, January 26, 2015 at 09:06 AM in Economics, Politics |
Posted by Mark Thoma on Monday, January 26, 2015 at 12:06 AM in Economics, Links |
This is from Simon Johnson (I didn't follow the debate over the qualifications of Antonio Weiss, the administration's nominee for Undersecretary for Domestic Finance, as closely as I should have, so I don't have much to say about that part of what is said below. But I very much agree with the need to find someone who will stand up for financial reform):
Nominate A Qualified Undersecretary Of Domestic Finance Now: The Obama administration urgently needs to nominate a qualified individual as Undersecretary for Domestic Finance at the Treasury Department. ...
The ... White House pushed hard for the confirmation of a Wall Street executive, Antonio Weiss, as Undersecretary for Domestic Finance. (In mid-January, in the face of continuing legitimate questions about his qualifications, Mr. Weiss withdrew himself from consideration. ...) ...
The House Republicans show every sign of doing what they can to help Citigroup, JP Morgan Chase, and others remove all effective restrictions on megabanks’ ability to take on large amounts of risk. The big banks want to return to the days of executives getting the upside when things go well and the taxpayer left holding the bag whenever disaster strikes.
The Treasury Department urgently needs to focus intellectual and administrative attention on the substance of defending Dodd-Frank, including shoring up support with Democrats, resisting the political onslaught led by House Republicans, and reaching out to senators of both parties who are willing to help. A key piece of becoming properly organized – intellectually and in terms of liaison with Congress – involves appointing a credible, qualified Undersecretary for Domestic Finance who hits the ground running and really knows what he or she is talking about. ...
Mr. Weiss’s principal problem was simple: he ... did not have the relevant general domain expertise and also lacked a sufficiently convincing grasp of the economic and political details surrounding financial regulation.
The search now should be quite straightforward. Find someone with relevant experience and a good track record – including statements and actions that are on the public record and that demonstrate willingness to challenge the megabanks’ worldview. ...
Nominating a credible Undersecretary for Domestic Finance quickly is an essential step towards helping the Treasury Department most effectively serve the American people – and towards preventing the collapse of financial reform.
Posted by Mark Thoma on Sunday, January 25, 2015 at 02:08 PM in Economics, Financial System, Regulation |
Gloomy European Economist, Francesco Saraceno:
Who are the Radicals in Europe?: As I write the Greek people are voting. I was puzzled in the past weeks by the fear (more in the media than in markets, actually) of a “radical” left win. Puzzled, because the radical and ideological policy makers do not seem to live in Greece, today. On January 20 I wrote a piece for the Greek website Macropolis, where I claimed that we should not expect an Armageddon if Syriza wins, but rather some welcome fresh air. I reproduce the piece here: ...
To give you the flavor of his remarks:
... On closer inspection, it seems far more radical the position of those who, despite having grossly underestimated the negative effects of austerity, ask for more of the same; of those who insist on advocating supply-side reforms to cope with a chronic lack of demand; and of those who boast having achieved a balanced budget one year ahead of forecasts, when Europe would benefit from a recovery of domestic demand in Germany.
What will happen then, if “radical” Syriza will win the election? Actually not much. ...
[In case you missed them, see also an interview with Jamie Galbraith, The Prospects and Consequences of a Possible Syriza Government and Let Us Hope for a Syriza Victory by Simon Wren-Lewis.]
Posted by Mark Thoma on Sunday, January 25, 2015 at 09:55 AM in Economics, Politics |
2013 and all that II: A fairly large number of economists have argued that Keynesians predicted that the fiscal cliff January 2013 and sequestration March 2013 would cause a recession. A fairly large number of Keynesian economists have denied personally making that prediction (including the oversigned). Only following a complaint in comments will I look up all the links at which I just hinted.
I think it is fairly easy to decide if the orthodox Keynesian view was that 2013 fiscal contraction would cause a recession. The reason is that official forecasts are Keynesian. The forecasting models range from new Keynesian with added epicycles for the Bank of England to paleo Keynesian for the Fed.
So I decided to look up forecasts for 2013. The advantage is that official forecasts include a precise guess of the expected value of future variables...
Posted by Mark Thoma on Sunday, January 25, 2015 at 09:54 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Sunday, January 25, 2015 at 12:06 AM in Economics, Links |
“A strong dollar has always been a good thing for the United States,” Treasury Secretary Jacob J. Lew declared not long ago, a position that he has restated frequently.
In 2011, Timothy F. Geithner, then the Treasury secretary, said, “A strong dollar will always be in the interest of the United States.”
But is it really a good thing — for the United States and the global economy?
Posted by Mark Thoma on Saturday, January 24, 2015 at 01:45 PM in Economics, International Finance |
This was retweeted a surprising number of times:
Throw More Money at Education, by Noah Smith: It’s become almost conventional wisdom that throwing more money at public education doesn’t produce results. But what if conventional wisdom is wrong?
A new paper from economists C. Kirabo Jackson, Rucker Johnson and Claudia Persico suggests ... that spending works. Specifically, they find that a 10 percent increase in spending, on average, leads children to complete 0.27 more years of school, to make wages that are 7.25 percent higher and to have a substantially reduced chance of falling into poverty. These are long-term, durable results. Conclusion: throwing money at the problem works.
Here’s the hitch: The authors find that the benefits of increased spending are much stronger for poor kids than for wealthier ones. So if you, like me, are in the upper portion of the U.S. income distribution, you may be reading this and thinking: “Why should I be paying more for some poor kid to be educated?” After all, why should one person pay the cost while another reaps the benefits?
Well, let me try to answer that. There are several good reasons. ...
Posted by Mark Thoma on Saturday, January 24, 2015 at 11:10 AM in Economics |
Did the Keynesians Get It Wrong in Predicting a Recession in 2013?: I have had several readers send me a blogpost from Scott Sumner saying that the Keynesians have been dishonest in not owning up to the fact that they were wrong in predicting a recession in 2013. The argument is that supposedly us Keynesian types all said that the budget cuts and the ending of the payroll tax cut at the start of 2013 would throw the economy back into recession. (Jeffrey Sachs has made similar claims.)
That isn't my memory of what I said at the time, but hey we can check these things. I looked at a few of my columns from the fall of 2012 and they mostly ran in the opposite direction. The Washington insider types were hyping the threat of the "fiscal cliff" in the hope of pressuring President Obama and the Democrats to make big concessions on Social Security and Medicare. They were saying that even the risk of falling off the cliff could have a big impact on growth in the third and fourth quarter of 2012.
My columns and blogposts (e.g. here, here, here, here, and here) were largely devoted to saying this was crap. I certainly agreed that budget cutbacks and the end of the payroll tax cuts would dampen growth, but the number was between 0.5-0.8 percentage points. This left us far from recession. (All my columns and blogposts from this time are at the CEPR website, so folks can verify that I didn't do any cherry picking here.)
I know Paul Krugman is the real target here, not me, but we've been seeing the economy pretty much the same way since the beginning of the recession. If he had a different story at the time I think I would remember it. But his columns and blogposts are archived too. I really don't think anyone will find him predicting a recession in 2013, although I'm sure he also said that budget cuts and tax increases would dampen growth.
Anyhow, I'm generally happy to stand behind the things I've said, and when they are proven wrong I hope I own up to it. But I don't see any apologies in order. No recession happened in 2013 and none was predicted here.
I don't recall predicting a recession either (the "they" intended to tar all Keynesians refers to just a few people), just that it would be a drag on growth (the CBO predicted 0.6%). In any case, not much can be said unless one takes the time to estimate a model, use it as a baseline, and then ask the model how the economy would have done in an alternative world where policy was different. Just because we still had growth after the budget cuts does not prove or disprove anything. Even if growth rises under austerity, you can't say it would not have risen a bit more more without austerity (all else is far from equal) unless you have done the hard work of estimating a defensible model and then asking it these questions. Similarly, you can't say much about the degree of monetary offset unless you have taken the time to do the econometrics to support it. But with changes this small -- the impact was predicted to be much less than one percent of growth by most models -- it is very hard to get statistically significant differences in any case.
The problem is that there is no model that all economists agree is "best" for these purposes, and the answer one gets depends upon the particular choice of models. Choose a model that delivers small fiscal multipliers and you get one answer, use a model with bigger multipliers and the answer changes. But even the models with the largest multipliers did not predict a recession, only a drag on growth (generally less than one percent) so the fact that we still had growth says nothing about the impact of the policy, or the degree of monetary offset.
Posted by Mark Thoma on Saturday, January 24, 2015 at 10:32 AM in Econometrics, Economics, Fiscal Policy, Monetary Policy |
Posted by Mark Thoma on Saturday, January 24, 2015 at 12:06 AM in Economics, Links |
Who is moving out of the U.S. labor force?: Read the recent testimony of Robert E. Hall (pdf):
Most of the decline in participation occurred among teenagers and young adults. The finding that these effects tend to be larger in more prosperous families points strongly away from much of a role for rising influence of benefit programs, because these programs, especially food stamps, are only available to families with incomes well below the median.
So what is going on here? Could it be “culture”? Hall cites, suggestively, time use surveys showing that sleep and personal consumption of video are up strongly.
Posted by Mark Thoma on Friday, January 23, 2015 at 10:03 AM in Economics, Social Insurance, Unemployment |
Jamie Galbraith in interviewed by Roger Strassburg on the upcoming Greek election and the prospects and consequences of a possible Syriza government:
Roger Strassburg: Can you tell us a little about what Syriza has for plans if it were to get elected, what the platform is. You are an advisor of Tsipris currently?
James Galbraith: I'll start out by qualifying my role. I consider that I'm a friend of the movement for a change of government in Greece, and specifically a friend of Alexis Tsipras. I've been a colleague for the last couple of years of Yanis Varoufakis, who is now running for parliament in Athens at the moment on the Syriza ticket. He was preselected by Syriza for what is the largest multi-seat constituency. The night before the vote in Parliament, where the third round of the presidential selection precipitated this election, I sent a personal note of encouragement to Alexis Tsipras, which they released to the Greek press. So my position is known in Greece.
What is the platform of the Syriza movement? Let me just summarize it without going into the details of the various measures that they propose to take. I think the fundamental point is that the Greek nation has been subjected to conditions for the continuing provision of financing, including the restructuring of the debt in 2012. These were the Memorandums, which are manifestly unsuccessful as an economic recovery program. That point is now abundantly clear to the Greek electorate, which is why the party that has rejected those conditions is in the leading position. So the basic provision of the Syriza platform is that those conditions will no longer be agreed to as a position of the Greek government.
Roger Strassburg: Which means?
James Galbraith: Let me carry on for a little bit on how best to think of those provisions.
The superficial presentation one reads in the press is: financial assistance, but in order to qualify for it you have to make certain reforms, and the point of the reforms is to put your economy back into a position of being competitive and on the path of growth. And that's been going on for six years, and the results are what we see: Instead of a growing economy you have an economy and a society stressed to the point of breaking, with massive unemployment and the emigration of substantial parts of the professional class especially, and the weakening of the core social institutions, education, health care, urban services and everything else to the point where they are actually a barrier to investment and economic success. And you have the impoverishment of large sections of the population, especially the elderly population. It's at every level a failure. Then one has to ask, was there a bona fide program for economic recovery in the first place? And I think it's clear that even if those who argued for this program believed it might produce recovery and growth, these objectives were very secondary or even tertiary considerations in their minds. It is clear that the policies that were specified as a condition were at bottom not recuperative, but punitive in character. Punitive in character against the whole Greek nation, and on an improper principle of collective responsibility for the admitted mismanagement of the affairs of the Greek state by previous governments and by the Greek political class.
Roger Strassburg: Schäuble has said as much.
James Galbraith: Yes. If you read Timothy Geithner's memoir, it's clear that he was very struck by this attitude, which reflected a moralizing indifference to the future of Europe.
Roger Strassburg: That's the attitude of most of the German government and the press.
James Galbraith: That fact was not concealed by them. I'm obviously not one of most the unqualified admirers of Secretary Geithner, but on this point, clearly he had recorded an accurate perception and an admirable reaction to that way of conceiving things.
Roger Strassburg: He was rebuffed by the Europeans.
James Galbraith: Yes, sure he was. So we have it on the record in an irrefutable way that it was a punitive rather than a recuperative strategy. I don't think anybody can really argue otherwise. A punitive strategy that was in place partly because of the interests of creditors in getting assets at fire-sale prices. That's basically a debt collector's attitude. And partly because of the internal politics of the German state at that time, in which a moralizing narrative was politically more useful than a more generous one would have been.
Roger Strassburg: I don't think that's really changed.
James Galbraith: Perhaps not, but it is one of the considerations that went into the implementation of the policy in the first place.
Roger Strassburg: Of course now they can't change that because they've essentially given the public...
James Galbraith: Let's get to the question of whether things can change a little bit down the road. I think one negotiates with people you disagree with. You don't negotiate with people you agree with. We'll just establish this as the starting point for the conversation. In that case, having recognized this, that we're no longer playing the games that the incumbent government at the moment has been playing, of pretending that the policies that you're signing on to are growth and recovery and reform policies when you know that they are simply the conditions for the financial policy of “extend and pretend” that has been underway for quite a long time.
That said, what is the leverage that would be applied to the Greek government if it chooses to recognize this reality and take a different path? In fact the leverage available is not zero, but it's limited to some measures that would be fairly extreme in ordinary conditions. On the one hand, there are certain parts of the debt that should ordinarily be rolled over. Since the debt is now almost all – all the significant parts of it are in the hands of public authorities, the question of whether they would roll it over is a policy question for them. In some sense they have the ability, if they were to choose, to place the Greeks in technical default, but one has to ask what happens under those circumstances, and the answer is, I would think, not very much. If I owe you a note, and my ability to pay it depends upon your willingness to roll it over, then if you, say, you don't roll it over, and I don't pay you, well, you still hold the note and it's still accruing interest and it's still an asset. It's not an economic issue between us, except that you don't have the cash. But the European Central Bank and other European authorities are not in need of cash. It's not like a private debt. So that's a bit of an artificial question.
And the other point of leverage is the Emergency Liquidity Authority, which backstops the Greek banking system. To cut the ELA would be to pull the plug on the Greek banking system and effectively to force a crisis in the affairs of the Eurozone. If the attitude of the creditors is “my way or the highway”, that you can have an election, but you may not change your policies, well then the burden of historical responsibility will be on them. We shall see. However my basic view is that Germany, having been one of the central countries at the origin of the European Union and at the origin of the Eurozone, will wisely not take the step of blowing up the European Union and the Eurozone over an argument about the conditionalities attached to past financial bargains.
Roger Strassburg: That depends on how they estimate the risk that that will happen. I'm not sure how they're estimating it.
James Galbraith: That is, of course, the question, but when you go into a poker game, you don't go in showing your cards. Obviously the German government would like the potentially incoming Greek government to fold its hand. I think they can reasonably expect that the incoming Greek government, unlike the previous Greek governments, won't do that. A major difference is that previous Greek governments had large internal factions fundamentally aligned with the policies of the Memorandum and the Troika. This was certainly true of the Papandreou government. George Papandreou was surrounded by neoliberal fellow travelers. And that won't be true of the incoming government, assuming Syriza wins the election. So the European partners can reasonably expect that the poker game will have to be played for a while. We'll see if it can come to some kind of a reasonable agreement. You have two sovereign countries with a difference of view, and one of them has a very strong case in equity for taking a different route after six years of good-faith effort to make the other route work when it was manifestly not a workable route.
Roger Strassburg: I know Yanis Varoufakis made it very clear about that when we talked to him a little over a year ago. He said that he would simply not pay as long as the conditions weren't right.
James Galbraith: If you look at the Greek government debt in accrual accounting terms, if you look at it under the terms of IPSAS, the restructuring in 2012 was already very fundamental. This is a debt which exists on very long terms at low interest rates, but the most important thing is that it's in the hands of public creditors. The stuff that's in the hands of private creditors can be paid without difficulty, so there isn't a risk of a generalized private credit market debacle. The stuff in public hands is an accounting matter, which has to do with the rules of the Eurozone that you can't actually write down the debt because that would make it too easy to escape from the conditionalities.
In any event the conditionalities are going to be essentially a dead letter once the new government gets its policies in place. Let's just take one example I'm a little familiar with. If you go out to the Greek islands, they each have their own electric power generation station, which is in the nature of islands. They're all monopolies. Do you allow those monopolies to be sold off to foreign investors in order to satisfy your debts, in which case you're putting the residents of each of these little islands at the mercy of a tiny little electric power monopoly? That's from a public policy standpoint not a very good idea. It has nothing to do with economic growth. It has to with the capacity of what's equivalent to a local landlord to charge an unlimited amount of rent. It's like the city of Chicago selling its parking meters to a private company. It meant that there are no more street fairs in Chicago because you have to pay the company for its lost parking meter revenue. That's not an economic growth strategy.
Roger Strassburg: That's a typical arrangement, though, that's been happening in Germany, as well – Public-Private Partnerships.
James Galbraith: Yes, but that has material consequences, which have nothing to do with economic growth, but a good deal to do with the viability of community life.
And we're talking also about questions about regulations governing the labor market. There might be some negotiating room there. For instance, there's a provision in Greek law, dating from the time of Andreas Papandreou, which limited the fraction of your labor force that you can lay off at any given time. That provision is hard to maintain when a large fraction of your businesses are going bankrupt. So there's some negotiating room about labor market rules. As you go through these things, you say, okay, is there any merit to the substance of the provision, and if not, what's a better provision?
Parts of the Syriza program are to relieve some of the pressure on the most vulnerable parts of the Greek population, people who don't have access to electric power, people who need food in schools. In Greece today there are significant portions of the population which are in serious distress. Dealing with that is a part of the program. It would be nice for Greece to have some more fiscal room to implement changes, but there are significant changes even if there is no effective or very little effective new fiscal room. Greece has already reduced its trade deficit, it's actually running a primary surplus.
Roger Strassburg: The trade deficits have been reduced because of reduced imports, right?
James Galbraith: Yes, it's primarily due to reduced imports, the point being that at the current level of activity, there's not an immediate need for new fiscal resources in order to just simply carry on. And so a leverage over a change of policy in that respect is not going to be decisive.
So that's the basic scene-setting. Then you have the question of what is it that the European Union could do if it were truly motivated by good will to help not only a partner state in particular, but perhaps more generally, to move from a policy of debt collection and punishment to a policy of stabilization and expansion. That would also, I think, be on the agenda.
Well then we get into the terrain of the Modest Proposal. The Modest Proposal is a proposal for the whole Eurozone, but it would certainly have some applicability to the Greek case. The nature of the proposal has evolved a bit since publication of the last version of the Modest Proposal, thanks to Sr. Draghi and his moves toward Quantitative Easing. A sensible way forward, in which there's been some interest in other governments of Europe, would be to launch a larger investment program through the European Investment Bank and for the ECB to guarantee the price of EIB bonds. Taking account of the fact that the rhetoric of Europe has moved very much in favor of an investment program, and certainly at the rhetorical level Juncker's 315 billion euro program establishes that this is a legitimate need, an important need. But of course Juncker's proposal is not an effective policy.
Roger Strassburg: Is this another matching funds problem?
James Galbraith: It's a leverage problem. In the case of the Juncker program there's only a small amount of public money, and the idea is that this is going to incentivize a large amount of private investment. It's not really very plausible, but let's take the fact that he's acknowledged the need for a program and also has acknowledged at least a fraction of the scale that's actually required. So we've put some large-looking numbers on the table. These are steps in the right direction. Now we can haggle over what it takes to make it work. It's a bit like George Bernard Shaw and Lady Astor. You know that story, right?
Roger Strassburg: No, I don't.
James Galbraith: It's one of the old stories. Shaw turned to Lady Astor at a dinner party and said, “Madame, would you sleep with me for a million pounds?”, and she said, “I'd consider it”. Then he said, “How about ten pounds?”, and she said, “What do you think I am?” Then he said, “Well we've established that, now we're just haggling over the price.” Having established that we need the investment program, we can now talk about how to achieve it.
The other item that would be extremely useful for the European Union to act on quickly would be to get some measures for income stabilization and humanitarian assistance for vulnerable populations.
Roger Strassburg: Transfer programs.
James Galbraith: I wouldn't call them transfer programs. I'd call them social insurance programs. Transfer implies that somebody rich is paying for somebody poor. But when you're taking a resource which is presently out of use and bringing it back into use, that's not what you're doing. You're actually stabilizing the social and economic situation in the recipient country at no real cost to the larger European economy.
Roger Strassburg: You're reinstating the insurance programs.
James Galbraith: Yes, exactly. And doing it on a sustainable basis. Unemployment insurance has been discussed as a potential Europe-wide initiative, but you could also have nutrition assistance. I've over the years proposed a few other things, but those two would be immediately practical, and the discussion of how to fund them is in the Modest Proposal.
So I think what one can expect, and I'm not speaking for Syriza in any sense by saying this, and I do want that to be clear, but I think one can expect a constructive negotiating position to be developed by a new Greek government. And a constructive and reasonable one, one that is based on principles that have been applied at every level in the construction of Europe.
The European Union and German Unification were both brought into being on principles of social solidarity and common progress; the Federal Republic in the first place, German unification and the European Union, all constructed on a language of principles of inclusion and solidarity and mutual support.
Roger Strassburg: The Unification was all Germans.
James Galbraith: That was all Germans, yes. But it's okay, it's a principle that has been articulated in Germany, that is understood in the German political community, and that is, I think, the principle on which progress for Europe, or for that matter, the stability of Europe depends.
Roger Strassburg: That would require a lot of convincing. The Reunification was one thing...
James Galbraith: We're not asking for a referendum, a plebiscite in the German population. This is a question to be decided between governments. We don't need to convince people on the principles of this, one simply needs to have an agreement about an acceptable way to proceed.
Roger Strassburg: It's really not that simple in Germany – or anyplace else, for that matter.
James Galbraith: Nobody claims simplicity. Speaking now, as I have been all along, for myself here, I've always as a general rule felt that one negotiates with people you disagree with, not with people you agree with, and you negotiate in good faith. It's an obligation on both sides that you negotiate in good faith, otherwise there's no point in having the negotiation. And I would always choose as a negotiation partner a political authority that has real authority. Certainly the leader of Germany is a person in that position, I would say the most successful and dominant political personality in modern Europe. When you're negotiating, you negotiate with the top person. That makes you more likely to have a favorable result than if you negotiate with someone who is in a very weak internal position, and not able to make changes in policy.
Roger Strassburg: One of those things that's been kicked around for a while, is there going to be such a thing as a United States of Europe, and that's not going to happen.
James Galbraith: It's certainly not part of the Syriza program. The Syriza program is a pro-European program. It is, and I think Europe and Europeans, people are committed to the European project, can consider it a great stroke of luck that there has arisen in Greece, and consequently, partly consequently and subsequently, in Spain, as well as in the present government of Italy, a pro-European set of parties, whose objective is change, constructive change, to make the European project viable. That's in many ways the last line that will be there. If those movements are not successful, then you have the Five Star movement in Italy, and you have, I suppose, the Golden Dawn in Greece. So good luck to you if you go from where we are now to that. And I'm not saying that the Five Star and the Golden Dawn are equivalent, they're not, but they're anti-European.
Roger Strassburg: A little like AfD in Germany.
James Galbraith: I wouldn't even say that. I think that all three are really quite different, but you're going to move toward politics which is much nastier, much more vicious and anti-European in character rather than constructive and pro-European in character.
Roger Strassburg: You have those trends in the UK, as well.
James Galbraith: Of course. So with that in mind, you have here a chance, at least in principle, to create a window of, let's say, constructive hope in the European case.
Roger Strassburg: Do you think Syriza has a chance of winning? I'm asking for your prophetic powers here...
James Galbraith: It's not necessary to hope in order to persevere. It's the motto of William of Orange, I learned some years ago from my friend Bill Black. I maintain that, let's pursue a line as long as there is some prospect of success.
Roger Strassburg: This is the best chance that they've had in, well, ever.
James Galbraith: Yes. As a small “d” democrat I find the situation in Greece quite inspiring because you have here something really very rare in any country in recent years, which is an election in which the public is making a choice that matters. The outcome is not a question of some manipulation among existing political classes, or even the evolution of a previously existing party system, which was the case in Italy. They have a clear-cut choice, and they're making it. This is what democracy should be about. Often it is some very blurry version of that at best.
Roger Strassburg: It appears at the moment that Syriza won't be able to govern without a coalition.
James Galbraith: Yes, I'd agree with that. If you just look at the math of the polls, my guess is that they'd need somewhere up to twenty seats.
Roger Strassburg: Given the bonus of fifty.
James Galbraith: Yes. They'd get a base of eighty, then a bonus of fifty, and then they need up to twenty more, depending on what the actual margin of victory is. And then what actually happens depends on what happens to the representation of the smaller entities in the Greek system, given the three percent threshold to get into the parliament, so you don't know which of the various other players will be represented and at what numbers. That's all in flux, so we'll see.
Roger Strassburg: It remains interesting.
James Galbraith: Oh, it will remain interesting, but you need to have, say, the acquiescence of twenty members, and if you don't get them, then there's another election. And the typical pattern of a second election is to reaffirm the first, and the electorate can either go forward or backwards. It's generally likely in the second case that you'd get a coalescence of people who say, enough of this nonsense, and move into the Syriza camp.
Roger Strassburg: People will vote for the one more likely to win.
James Galbraith: Yes, exactly. Also, when you have an election, and you have this outcome of where the party which was just a few years ago at very low levels has moved up into the high twenties, and in terms of popular support is the largest single political entity in the country, then the perception of the party and its leader changes. It was just a few years ago, nobody would talk to Alexis Tsipras. He was considered kind of a dangerous figure who should be kept isolated. Then he became the leader of the Greek official opposition, which made him at least a presence on the local scene. And then with the European parliamentary elections he became the largest party, which created a kind of presumptive possibility that he would, that Syriza would win the election. And then there was the question of whether there would be an election, and then it became clear that the government could not muster 180 votes to elect a presidential candidate, and there we are. This is a cumulative, ongoing process.
Roger Strassburg: They now appear to be viable.
James Galbraith: They are, as a political force in Greece, viable.
Roger Strassburg: How is the press treating him. Are they treating him fairly?
James Galbraith: These are tests. I don't begrudge the forces of the status quo their stratagems. I think that there are such things as pariahs in politics. It's not unreasonable to draw distinctions between the mainstream and the fringe, and make it difficult to cross that barrier to become a mainstream political force. Which means, when you have a movement that achieves that, that is something to be taken seriously. It's not a freak phenomenon, it's not something which is achieved easily. It's a process of years. And that's what we've observed in Greece, something which was at one point a minor player of dissidence in a country dominated by New Democracy and PASOK, two very long-established political parties with high dynastic traditions going back to the end of the civil war, and especially to the end of the junta in 1974. And that political order has crumbled, first PASOK, and now you see the relative decline of New Democracy. So something new has emerged.
Roger Strassburg: Isn't PASOK now so low that they may not even make it into the parliament?
James Galbraith: What has happened in PASOK is that George Papandreou has left to form his own formation, and we shall now see what happens there. I'm not actually close enough to be able to judge, but it might be one or the other, Venizelos vs. Papandreou. Or the other two possibilities are that it might be both or it might be neither. We'll see.
Roger Strassburg: Tsipras appears to be somewhat charismatic.
James Galbraith: I've seen him up close on a couple of occasions at important moments where the eyes of the country were clearly on him. I've spoken to him on a number of occasions, he was in Austin at a conference a few years ago, and I have a sense of him as a thoughtful presence in private, and a rather impressive one in public.
Posted by Mark Thoma on Friday, January 23, 2015 at 09:15 AM in Economics, Politics |
Europe’s self-indulgent "archons of austerity" and "doyens of deflation":
Much Too Responsible, by Paul Krugman, Commentary, NY Times: The United States and Europe have a lot in common. Both are multicultural and democratic; both are immensely wealthy; both possess currencies with global reach. Both, unfortunately, experienced giant housing and credit bubbles between 2000 and 2007, and suffered painful slumps when the bubbles burst.
Since then, however, policy on the two sides of the Atlantic has diverged. In one great economy, officials have shown a stern commitment to fiscal and monetary virtue, making strenuous efforts to balance budgets while remaining vigilant against inflation. In the other, not so much.
And the difference in attitudes is the main reason the two economies are now on such different paths. ... No, it’s not morning in America... Recovery could and should have come much faster, and family incomes remain well below their pre-crisis level. Although you’d never know it from the public discussion, there’s overwhelming agreement among economists that the Obama stimulus of 2009-10 helped limit the damage..., but it was too small and faded away far too fast. ...
Europe, on the other hand ... did almost everything wrong. On the fiscal side, Europe never did much stimulus, and quickly turned to austerity ... despite high unemployment. On the monetary side, officials fought the imaginary menace of inflation, and took years to acknowledge that the real threat is deflation. ...
Monetary policy got much better after Mario Draghi became president of the European Central Bank in late 2011. ... But it’s not at all clear that he has the tools to fight off the broader deflationary forces set in motion by years of wrongheaded policy. ...
The terrible thing is that Europe’s economy was wrecked in the name of responsibility. ... In a depressed economy..., a balanced-budget fetish and a hard-money obsession are deeply irresponsible. Not only do they hurt the economy in the short run, they can — and in Europe, have — inflict long-run harm, damaging the economy’s potential and driving it into a deflationary trap that’s very hard to escape.
Nor was this an innocent mistake. The thing that strikes me about Europe’s archons of austerity, its doyens of deflation, is their self-indulgence. They felt comfortable, emotionally and politically, demanding sacrifice (from other people) at a time when the world needed more spending. They were all too eager to ignore the evidence that they were wrong.
And Europe will be paying the price for their self-indulgence for years, perhaps decades, to come.
Posted by Mark Thoma on Friday, January 23, 2015 at 12:24 AM in Economics, Fiscal Policy, Monetary Policy, Politics |
Posted by Mark Thoma on Friday, January 23, 2015 at 12:06 AM in Economics, Links |
From an interview of Donald Kohn by Cecchetti & Schoenholtz:
Interview: Donald Kohn: ... Where should we be looking now for financial stability risks given this experience?
Vice Chairman Kohn: The response of the authorities to the crisis has concentrated on banks, especially large banks, and other systemically important financial institutions, including insurance companies, investment banks, etc. I think those financial institutions that have been the target of the authorities’ attention are in much better shape, and I don’t think they constitute a risk to financial stability today. So I don’t think that what nearly brought the system down before, a Lehman Brothers kind of collapse, is currently a risk.
There could be mispriced bonds. People have pointed to junk bonds and dollar-denominated emerging market bonds and asked whether the risk in those bonds has been accurately valued by the market. With regard to the consequences of a price adjustment, I would contrast the dot-com boom and bust with the housing boom and bust. The difference was the participation of intermediaries. Most price adjustments are fine. There could be quite a bit of volatility in the market as prices adjust. But I don’t see it having the same kind of risk characteristics that the subprime market had in the United States. ... I would look at ... the markets and the pricing of risks, including liquidity risks...
Also, I would look at what remains of the shadow banks. In the tri-party RP [repurchase] markets, the money markets funds and other cases, there have been some fixes. But I do think we need to be careful that – as we put more restrictions on banks and other systemically important institutions – if their activity migrates to other places, it doesn’t do so in a way that has systemic risk associated with it. I don’t see that today, but I think it’s something we have to be careful about in the future.
Tri-party repo (where we saw a run on the shadow banking system during the crisis, a vulnerability that still exists) is what worries me the most.
Posted by Mark Thoma on Thursday, January 22, 2015 at 11:09 AM in Economics, Financial System, Regulation |
Chris Dillow at Stumbling and Mumbling:
Not seeing luck: I claimed the other day that those of us who are in the global 1% are apt to under-estimate our good fortune. There is, in fact, quite robust evidence from other contexts that we tend to under-rate luck and over-rate skill and causality. ...
This is probably because of a self-serving bias... However, other research shows that people also see skill where none in fact exists even in other people. ... This sort of behaviour has been confirmed in laboratory experiments. ...
I suspect that this is part of an older-attested phenomenon - that people under-rate randomness and over-rate causality, which is one reason why we draw overconfident inferences from noisy data. ...
You might see this as an echo of David Hume's claim, that our ideas about causality result merely from custom and habit and so are fallible.
It also, I suspect, helps explain a claim made by Hume's good friend. If we over-rate causality and under-rate luck, we will exaggerate the extent to which the wealthy deserve their fortune. As a result:
We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent...The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness. (Theory of Moral Sentiments, I.III.29)
Posted by Mark Thoma on Thursday, January 22, 2015 at 10:29 AM in Economics |
Policy Divergence, by Tim Duy: Increasingly, the Federal Reserve stands in stark contrast with its global counterparts. While the ECB readys its own foray into quantitative easing, the Bank of England shifted to a more dovish internal position, the central bank of Denmark joined the Swiss in cutting rates, and the Bank of Canada unexpectedly cut rates 25bp this morning. The latter move I found somewhat unsurprising given the likely impact of oil prices on the Canadian economy. The rest of the world is diverging from US monetary policy. How long can the Fed continue to stand against this tide?
Late last week, Reuters reported that the Fed's resolve was stiffening. This week, the Wall Street Journal reported the Fed was staying the course. This morning, Bloomberg says the Fed is getting weak in the knees:
Federal Reserve officials are starting to reassess their outlook for the economy as global weakness and disappointing data on American consumer spending test their resolve to raise interest rates this year.
San Francisco Fed President John Williams last week said he will trim his U.S. estimate because of slower growth abroad. Atlanta’s Dennis Lockhart said Jan. 12 that he advocates a “cautious” approach to rate increases and inflation readings “may be pivotal.” Both are voters on the Federal Open Market Committee in 2015 and repeated that rates could be raised in the middle of the year.
I doubt the Fed will place too much weight on the December retail sales report. It is fairly noisy data and there is no indication that the fundamental upward trend has been broken:
Moreover, I think they would be wary of reading too much into one data point given the upswing in consumer confidence in recent months. That, of course, only builds upon the upswing in employment data. And housing starts finished the year on a strong note - see Calculated Risk for more on that topic.
All that said, the Fed should of course be cautious about the impact of global weakness. But how does the Fed communicate such caution? The challenge I see for the Fed is that they will want to hold the statement fairly steady, with falling oil prices and global weakness as offsetting risks while holding the line on the "low inflation is transitory" story. They want to keep June alive. After all, it's still five months out - a lifetime at the speed of today's financial world. They don't want expectations to fall too far to the back of the year while they are still looking at a June hike.
Such a steady hand, however, may be viewed as hawkish, which is also a message the Fed does not want to send. My expectation is that they highlight the improving US economy, particularly the acceleration in job growth, while offering concerns about the global economy. Remember that the condition of the US job market is very different than during previous bouts of financial instability; the momentum looks more self-sustaining than it has in a long time. They may even point to policy action on the part of foreign central banks to help assuage some global weakness concerns.
Separately, St. Louis Federal Reserve President James Bullard gives no quarter in his argument for rate hike in the first quarter of this year in this Wall Street Journal interview:
I still think we should get off zero (interest rates). The kinds of things we’re observing now, it is not the constellation of data that would be consistent with a zero policy rate. I think it is important to get started and to start normalizing policy. Even once we start to normalize, interest rates would still be extremely low. We’re talking about levels of 50 basis points or 75 basis points. That is still extremely low and that would still be putting upward pressure on inflation even if we did that. So I’d like to get going. I don’t think we can any longer rationalize a zero interest rate policy.
Bullard thinks the data is not consistent with a zero rate policy, while I fear that the data is where it is at because of the zero rate policy. Moreover, I would tend to proceed more cautiously then Bullard given the current flattening of the yield curve. But Bullard is an outlier; the FOMC consensus is in favor of caution, which is why there is no rate hike on the table next week or in March. And it is why June is in no way guaranteed; they need something from wage growth that they just aren't getting. If they want to set up for a June rate hike without wage growth, they need to start telling a compelling alternative story soon.
Somewhat disappointing is that Bullard is flip-flopping. To date he has been a fairly reliable inflation-hawk - his opinions shift consistently with the inflation outlook. Not this week:
I do worry about TIPS-based inflation compensation and it has been down a lot recently and it does concern me. What I want to do with that is wait and see what happens in global oil markets, wait and see what equilibrium turns out to be and then see what happens with breakeven inflation at that point. I want to let the dust settle on the oil market and then go back and check breakeven inflation rates and see what’s happened.
Basically, Bullard wants to ignore the market-based inflation metrics that would have in the past told him to hold off on any tightening. He really, really wants to liftoff from the zero bound, the sooner the better. I don't think this level of immediacy is felt by other FOMC members, but I do think they are hoping and praying the data gives them enough to move by mid-year.
Bottom Line: The Fed finds itself in a familiar place - wanting to change policy but not quite getting the data they need while at the same time global stress in on the rise. Luckily for them, they weren't going to move off the zero-bound next week anyways; they still have months of data to sift through between now and then. And unlike past times of turbulence, the US is coming from a position of strength, eliminating the need for any panicky moves. Next week is mostly then just about communicating how and how not they are responding to overseas developments.
Posted by Mark Thoma on Thursday, January 22, 2015 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, January 22, 2015 at 12:06 AM in Economics, Links |
Rising Fears About Losing and Replacing Jobs: The General Social Survey is a nationally representative survey carried bout by the National Opinion Research Center at the University of Chicago and financially supported by grants from the National Science Foundation. Starting in 1977 and 1978, and intermittently over the years since then, it has included these two questions:
Thinking about the next 12 months, how likely do you think it is that you will lose your job or be laid off—very likely, fairly likely, not too likely, or not at all likely?
About how easy would it be for you to find a job with another employer with approximately the same income and fringe benefits you have now? Would you say it would be very easy, somewhat easy, or not easy at all?
Back in 1980, Charles Weaver wrote an article about the patterns of the answers in the first wave of this data. He updates the results and looks for patterns over time in "Worker’s expectations about losing and replacing their jobs: 35 years of change," in the January 2015 issue of the Monthly Labor Review, published by the US Bureau of Labor Statistics. ...
Both simple comparisons and more sophisticated analyses suggests that fear about losing and replacing jobs has been rising over time. Here's the simple comparison from Weaver: "Compared with workers in 1977 and 1978, workers in 2010 and 2012 expressed significantly less job security. They were more afraid of losing their jobs (11.2 percent versus the earlier 7.7 percent) and were less likely to think that they could find comparable work without much difficulty (48.3 percent versus the earlier 59.2 percent)."
The more detailed breakdown of the data shows which groups have seen their labor market fears increase the most. On the question how likely you are to lose your current job, the answer for the population as a whole rose 3.5 percentage points from 1977-78 to 2010-12. But for blue-collar craft workers the increase was 11.1 percentage points, and for blue collar operatives the rise was 9.7 percentage points. Also, from the early to the most recent survey, those in the age 50-59 age bracket were 8.2 percentage points more likely to think that they were likely to lose their job.
On the issue of whether workers expected to be able to find a comparable job, the answer for the population as a whole dropped 10.9 percentage points from 1977-78 to 2010-12. For those with "some college," but not a college degree, the expectation fell by 23.1 percentage points, and for white collar workers in clerical jobs it fell by 23.9 percentage points. Interestingly, for workers 60 and over the confidence in being able to fine a comparable job was actually 1.7 percentage point greater in the 2010-12 results than in the 1977-78 results.
An obvious question is whether the greater fears about losing jobs and replacing jobs are a relatively recent development--in particular, whether they happened only in the aftermath of the Great Recession--or whether this has been a steady trend over time. Stewart runs through a number of different statistical exercises to consider this point...
Stewart writes: "In 2010 and 2012, more workers feared losing their jobs, and far fewer workers said that it would be easy to find a comparable job, than in 1977 and 1978. ... Some may infer that the lower job security felt by Americans in 2010 and 2012 was an aberration, based upon the unusual conditions presented by the recent recession. But the reality is that the downward trend in feelings of job security has been going on for the last 35 years, apart from the “extra push” it has received from the “`Great Recession,' ..."
As I mentioned in yesterday's blog post, I think the most powerful fear in the current labor market is not about mass unemployment, but instead is a concern that the available alternative jobs may be of lower quality in terms of wages, benefits, work conditions, job security, and the prospect for a future career path.
Posted by Mark Thoma on Wednesday, January 21, 2015 at 11:02 AM in Economics, International Trade, Technology, Unemployment |
Paul Krugman on the independence of central banks from the concerns of "hard-money types":
A Tale of Two Pegs: I’m still in Hong Kong, and ... by the numbers Switzerland’s monetary situation pre-collapse and Hong Kong’s now look remarkably similar. ... So is the Hong Kong dollar at risk of a franc-like event?
No, it isn’t. There’s not a hint of pressure to drop the currency board. Why is Hong Kong different?
The answer, I’d argue, is that the institutional setup and history of Hong Kong plays very differently with hard-money ideologues than the Swiss peg did... Swiss currency intervention looked to the usual suspects like activist monetary policy, runaway expansion of the central bank’s balance sheet, “printing money” to debase the currency even if the goal was to keep it from getting stronger. Meanwhile, Hong Kong has a currency board, which is the next best thing to the gold standard, so maintaining the peg — through the very same mechanisms Switzerland was using! — became a demonstration of stern Victorian monetary virtue. Hence no chorus demanding that the peg be abandoned.
Remember, there was no forcing event in Switzerland; as far as the finances go, the SNB could have maintained the peg forever. It was the nagging from hard-money types that led to the debacle. Meanwhile, Hong Kong has managed to wrap the very same policy in libertarian clothes, and there’s no problem.
Posted by Mark Thoma on Wednesday, January 21, 2015 at 10:41 AM in Economics, International Finance |
Low-income loans didn't cause the financial crisis, by Mark Thoma: What caused the housing bubble and collapse of the financial system? Many fingers have pointed to a lack of regulation, financial innovation that didn't live up to its promises of risk-sharing and risk-reduction, and low interest rates from the Fed, which created an excess of liquidity.
Another cause that's often cited says the financial crisis was the result of government pressure to make subprime home loans to those at the lower end of the income scale. But recent work from the National Bureau of Economic Research provides no support for that claim. ...
Posted by Mark Thoma on Wednesday, January 21, 2015 at 09:35 AM in Economics, Housing, Income Distribution, MoneyWatch |
Posted by Mark Thoma on Wednesday, January 21, 2015 at 12:06 AM in Economics, Links |
Mark Liberman at Language Log tries to set the record straight -- yet again:
Presidential pronouns: This time it's Ron Fournier: Ron Fournier, "Is Obama More Interested in Progress or Politics?", National Journal, 1/20/2015:
Count how many times Obama uses the words "I," "me," and "my." Compare that number to how often he says, "You," "we," "our." If the first number is greater than the second, Obama has failed.
This leads naturally to a different question: "Is Ron Fournier More Interested in Analysis or in Bullshit?"...
If Ron Fournier had spent a minute or two looking into the facts of the matter, he might have discovered... ALL presidents since WWII have used substantially more first-person-plural pronouns than first-person-singular pronouns in the SOTU messages; Adding second-person pronouns makes the disproportion even larger; Obama is pretty much in the middle of the pack on all the relevant measures. ...
Mr. Fournier is reprising a sub-theme of the Great Obama Pronoun Fantasy, variants of which seem to draw pundits like flies to rotting meat. ...
Posted by Mark Thoma on Tuesday, January 20, 2015 at 11:46 AM in Politics |
The 2003 Dividend Tax Cut Did Nothing to Help the Real Economy: President Obama is going big on capital taxation in the State of the Union tonight, including a proposal to raise dividend taxes on the rich to 28 percent. ...Bush’s radical cuts to capital taxes are part of his legacy... And it’s a part that the latest evidence tells us did a lot to help the rich without helping the overall economy at all.
In the response to Obama’s proposal, you are going to hear a lot about how lower dividend rates increase investment and help the real economy. Indeed, lowering capital tax rates has been a consistent goal of conservatives. As a result, one of the biggest capital taxation changes in history happened in 2003, when George W. Bush reduced the dividend tax rate from 38.6 percent to 15 percent... So did the tax cut make a difference?
This is where UC Berkeley economist Danny Yagan’s fantastic new paper, “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut,” (pdf, slides) comes in. ...
Here’s what he finds: ... There’s no difference in either investment or adjusted net investment. There’s also no difference when it comes to employee compensation. The firms that got a massive capital tax cut did not make any different choices about things that boost the real economy. This is true across a crazy-robust number of controls, measures, and coding of outliers. ...
President Obama will likely focus his pitch for the dividend tax increase on the future, when, in his argument, globalization and technology will cause compensation to stagnate while investor payouts skyrocket and the economy becomes more focused on the top 1 percent. But it’s worth noting that while capital taxes are a solution to that problem, that the radical slashing conservatives have brought to them are also partly responsible for our current malaise.
Posted by Mark Thoma on Tuesday, January 20, 2015 at 09:42 AM in Economics, Politics, Taxes |
This seems worth noting:
Poorer parents are just as involved in their children's activities as better-off parents, EurekAlert: Poorer parents are just as involved in education, leisure, and sports activities with their children as better-off parents, a new study has found.
Dr Esther Dermott and Marco Pomati analysed survey data on 1,665 UK households and found that poorer parents were as likely to have helped with homework, attended parents' evenings, and played sports or games with their children in the previous week.
Dr Dermott, of the University of Bristol, and Mr Pomati, Cardiff University, say they found no evidence of a group of poor parents who failed their children.
"Those with lower incomes or who felt poor were as likely to engage in all of the good parent-child activities as everyone else," they say in an article published online in the journal Sociology.
"The findings support the view that associations made between low levels of education, poverty and poor parenting are ideologically driven rather than based on empirical evidence. Claims that families who are poor or are less well educated do not engage in high profile good parenting practices are misplaced." They found no evidence of a group of parents who failed to participate in parent-child activities, they say.
"This is potentially important since recent political discourse has not only promoted the idea that poor parenting exists but also emphasised the existence of a group of parents who persistently fail to engage in parenting activities that are beneficial for their children." ...
Posted by Mark Thoma on Tuesday, January 20, 2015 at 09:16 AM in Economics |
Posted by Mark Thoma on Tuesday, January 20, 2015 at 12:06 AM in Economics, Links |
Seconded, by Tim Duy: I see Jon Hilsenrath at the Wall Street Journal seconds my take from this morning:
Federal Reserve officials are on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation.
This is generally consistent with my view. The Fed is likely reacting more slowly than market participants. Hilsenrath adds something I forgot to mention:
Central to their internal deliberations ahead of the March meeting is a debate about how low the jobless rate can fall before it stirs wage and inflation pressure. Fed officials estimate the “natural rate” of unemployment—meaning the rate below which wage pressures increase—is between 5.2% and 5.5%.
Mr. Rosengren said he was considering revising this estimate down because the jobless rate has fallen to near the 5.2%-5.5% range without triggering any sign of wage pressure. He said he suspected some of his Fed colleagues also were considering moving this estimate down. The lower the estimate goes, the more patient they might be before raising rates.
Just as I think it will be hard for the Fed to raise rates if the unemployment rate continues to fall while wage growth remains subdued, it will also be difficult to justify current estimates of the natural rate of unemployment under those circumstances. Still, I would caution that lowering the estimate of the natural rate would be, I think, an implicit rejection of the "underemployment hypothesis." It would be easier to adjust estimates of the natural rate downward if measures of underemployment were more consistent with their traditional relationships with unemployment. In other words, the natural rate may be consistent with subdued wage growth due to the existence of high levels of underemployment.
My opinion is that the global disinflationary environment would support low inflation at levels of unemployment below the Fed's current estimate of the natural rate, similar to the situation of the late 1990s.
Posted by Mark Thoma on Monday, January 19, 2015 at 02:49 PM in Economics, Fed Watch, Monetary Policy |
Were poor people to blame for the housing crisis?, by Tyler Cowen:
When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007.
...That is from the new NBER working paper by Adelino, Schoar, and Severino. In other words, poor people (or various ethnic groups, in some accounts) were not primarily at fault for the wave of mortgage defaults precipitating the financial crisis. The biggest problems came in zip codes where home prices were having large run-ups. ...
Posted by Mark Thoma on Monday, January 19, 2015 at 11:11 AM in Economics, Financial System, Housing |
Will The Fed Take a Dovish Turn Next Week?, by Tim Duy: As it stands now, we are heading into the next FOMC meeting with the growing expectation that the Fed will take a dovish turn. Is it not obvious that global economic turmoil, collapsing oil prices, weak inflation, and a stronger dollar are clearly pointing to rapidly rising downside risks to the US economy? For financial market participants, they answer is a clear "yes." Expectations of the first rate hike have been pushed out to the end of this year, seemingly in complete defiance of Fed plans for policy normalization. The Fed may get there as well and abandon their carefully crafted mid-year plan, but I suspect they will not move quite as rapidly as financial market participants desire.
As a general rule, the Fed tends to act in a more deliberate fashion. To be sure, this was not evident during the crisis. Indeed, "panicky" might be a better adjective during that period. But note that in comparison to past bouts of tumolt on global markets, the US economy is in a much better place, with accelerating job growth when unemployment is already near traditional mandate-levels. From their point of view, this is a whole different world compared to that of the last round of Euro-induced crisis.
This take from Jonathan Spicer and Ann Saphir at Reuters probably saw less play than it deserved:
Tumbling oil prices have strengthened rather than weakened the Federal Reserve's resolve to start raising interest rates around midyear even as volatile markets and a softening U.S. inflation outlook made investors push back the timing of the "liftoff."
Kind of a "Fed is from Mars, markets are from Venus" situation. It is important to recognize that the Fed sees falling oil prices as a significant, unexpected development that represents the realization of an upside risk to their forecast. They are thinking of an outcome not unlike that revealed in the most recent Bloomberg/UMich read on consumer sentiment:
Through the roof, one might say. So at this point the Fed will view the external threats to the economy as just risks, but the very real move in oil is at a minimum adding upside risk to their forecasts or already pushing their forecasts to the upside. With regards to external threats, they probably think that more aggressive ECB action is in the wings to put their immediate fears to rest. And the downward push on inflation is, from their perspective, a transitory issue and therefore a non-issue.
Consider this also from the Reuters article:
Interviews with senior Fed officials and advisors suggest they remain confident the U.S. economy will be ready for a modest policy tightening in the June-September period, while any subsequent rate hikes will probably be slow and depend on how markets will behave.
in light of this from St. Louis Federal Reserve President James Bullard:
“The level of inflation is not so low that it can alone justify a policy rate of zero,” Mr. Bullard said in material prepared for a speech in Chicago.
and this from San Fransisco Federal Reserve President John Williams:
Placing heavy emphasis on the date of liftoff “suggests that you don’t have any other decisions to make,” Williams said. “We want to be very confident that we’re on the right path, that the data support that first move, but that first move on tightening is only one of many, many policy actions we’ll need to do during the normalization. It’s not the critical component.”
and this from Federal Reserve Chair Janet Yellen:
So, I think you raise a very important point because, although there is a great deal of market focus on the timing of liftoff, what to matter in thinking about the stance of policy is what the entire path of interest rates will look like. And I really don’t have much for you other than to say that they will be data dependent—that, over time, the stance of policy will be adjusted to try to keep the economy on a track where we see continuing progress toward achieving our goals of maximum employment and price stability.
My takeway is that the Fed sees the timing of the first rate hike as less important than everything that comes after that hike. This will leave them less eager to delay the hike. Given where the economy currently stands, I suspect they see little chance of damage from that first hike alone.
This is also interesting:
Some of those interviewed stressed that in the light of last year's strong jobs gains waiting until mid-year represented a cautious approach rather than an aggressive one, allowing the Fed to delay the rate liftoff if needed, particularly if inflation expectations turned sharply down.
The suggestion here is that at least some Fed officials view signaling a mid-year rate hike as the cautious approach because the data increasingly suggests to them that they should be moving sooner than later.
Bottom Line: I reiterate my view that despite the generally positive data flow, and the upward boost from oil, I don't see how they can justify raising rates without some reasonable acceleration in wage growth. That said, perhaps by my own argument above they can justify it on the basis of 25bp won't hurt anyone anyways. But my broader point is this: During normal times the Fed moves methodically if not ponderously. The current state of the economy gives them room to move as such. So I would not be surpised to see a fairly steady hand revealed in the next FOMC statement.
Posted by Mark Thoma on Monday, January 19, 2015 at 08:38 AM in Economics, Fed Watch, Monetary Policy |