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Tuesday, March 31, 2015

'Illegal Discrimination Still Significant and Persistent'

From the RES Conference at the University of Manchester:

Illegal Discrimination Still Significant and Persistent: If you are black, foreign, female, elderly, disabled, gay, obese or not a member of the dominant caste or religion in your community, you may face ‘significant and persistent discrimination’ when you go to apply for a job, rent a house or buy a product. That is the overall conclusion of a new survey by Judith Rich of 70 field studies of discrimination conducted during the last 15 years. Her report will be presented at the Royal Economic Society’s 2015 annual conference.
Field studies of discrimination in markets ensure that group identity is the only difference observed by the decision-maker about an individual. Carefully matched testers, one from the group that may be the victim of discrimination, apply for jobs, rental accommodation or to buy a house or flat, or to purchase goods or services. This can be done in person, over the telephone, (where testers are trained) or, in the majority of studies, in writing, usually by email (where content and style are equivalent).
Among the findings of the 70 experiments in the analysis:
  • An African-American applicant needed to apply to 50% more job vacancies than a white applicant to be offered an interview.
  • Having a higher qualification made virtually no difference for African-Americans but it made a significant improvement in interview offers for whites.
  • White applicants with a criminal record received more interviews than African-Americans with no criminal record.
  • Older workers needed to make between two to three times as many job applications as a young worker to get an offer of interview. 
  • When purchasing products, higher prices were quoted to minority applicants buying used cars in the United State and Israel, drinks in nightclubs and bars in New Orleans, and seeking car repairs in Chicago.
The author notes that discrimination of this type is hard to counteract by developing additional skills: ‘Immigrant groups were discriminated against despite being educated in schools, and proficient in the language, of the country of residence.’
It is illegal in many countries for an employer or estate agent to discriminate, but these studies indicate its continued covert existence. One problem is that it is difficult for a victim of this type of discrimination to find evidence to instigate legal action under current legislation, raising the issue of the adequacy of anti-discrimination laws. ...

    Posted by on Tuesday, March 31, 2015 at 05:52 AM in Economics | Permalink  Comments (13) 

    'Generous Welfare Benefits Make People More Likely To Want to Work, Not Less'

    Not so sure this is conclusive -- it seems like the survey question could have been sharpened:

    Generous welfare benefits make people more likely to want to work, not less: Survey responses from 19,000 people in 18 European countries, including the UK, showed that "the notion that big welfare states are associated with widespread cultures of dependency, or other adverse consequences of poor short term incentives to work, receives little support."
    Sociologists Dr Kjetil van der Wel and Dr Knut Halvorsen examined responses to the statement 'I would enjoy having a paid job even if I did not need the money' put to the interviewees for the European Social Survey in 2010.
    In a paper published in the journal Work, employment and society they compare this response with the amount the country spent on welfare benefits and employment schemes, while taking into account the population differences between states.
    The researchers, of Oslo and Akershus University College, Norway, found that the more a country paid to the unemployed or sick, and invested in employment schemes, the more its likely people were likely to agree with the statement, whether employed or not. ...
    The researchers also found that government programmes that intervene in the labour market to help the unemployed find work made people in general more likely to agree that they wanted work even if they didn't need the money. In the more active countries around 80% agreed with the statement and in the least around 45%. ...
    "This article concludes that there are few signs that groups with traditionally weaker bonds to the labour market are less motivated to work if they live in generous and activating welfare states.
    "The notion that big welfare states are associated with widespread cultures of dependency, or other adverse consequences of poor short term incentives to work, receives little support.
    "On the contrary, employment commitment was much higher in all the studied groups in bigger welfare states. ..."

      Posted by on Tuesday, March 31, 2015 at 03:55 AM in Economics, Social Insurance, Unemployment | Permalink  Comments (54) 

      Thoughts on Yellen's Speech

      Tim Duy:

      Thoughts on Yellen's Speech, by Tim Duy: I came back from Spring Break vacation to find a detailed speech by Fed Chair Janet Yellen that further lays the groundwork for rate hikes to begin later this year. The speech is a remarkably clear elucidation of her views and provides plenty of insight into what we should be looking for as the Fed edges toward policy normalization. A speech like this once a month from a Federal Reserve Governor would, I think, go a long way toward enhancing the the Fed's communication strategy.
      One of the most important takeaways from this speech is the importance of labor market data in the Fed's assessment of the appropriate level of accommodation:
      Although the recovery of the labor market from the deep recession following the financial crisis was frustratingly slow for quite a long time, progress has been more rapid of late...Of course, we still have some way to go to reach our maximum employment goal..But I think we can all agree that the recovery in the labor market has been substantial.
      I am cautiously optimistic that, in the context of moderate growth in aggregate output and spending, labor market conditions are likely to improve further in coming months. In particular, and despite the somewhat disappointing tone of the recent retail sales data, I think consumer spending is likely to expand at a good clip this year given such robust fundamentals as strong employment gains, boosts to real incomes from lower energy prices, continued increases in household wealth, and a relatively high level of consumer confidence.
      Yellen intends to look through any first quarter weakness in GDP data, seeing it as largely an aberration (like arguably the first quarter of last year), as long as the employment data continues to hold up. And even there, I doubt any one weak report would do much to undermine her confidence in the recovery; we should be focusing on the story told by the next three employment reports in aggregate.
      Regarding inflation, she sees little that worries her:
      ...Some of the weakness in inflation likely reflects continuing slack in labor and product markets. However, much of this weakness stems from the sharp decline in the price of oil and other one-time factors that, in the FOMC's judgment, are likely to have only a transitory negative effect on inflation, provided that inflation expectations remain well anchored.
      In this regard, I take comfort from the continued stability of survey measures of longer-run inflation expectations. And although market-based measures of inflation compensation have declined appreciably since last summer and bear close watching, I suspect that these declines are primarily driven by changes in risk premiums and market factors that I expect to prove transitory...
      Same story - as long as the employment data is solid, they will dismiss the inflation data. Regarding expectations for the first rate hike, she makes clear that a hike later this year is not likely just in the FOMC's opinion, but in hers as well:
      Like most of my FOMC colleagues, I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year. 
      A beginning for her story is the implications of zero rates:
      I would first note that the current stance of monetary policy is clearly providing considerable economic stimulus. The near-zero setting for the federal funds rate has facilitated a sizable reduction in labor market slack over the past two years and appears to be consistent with further substantial gains. A modest increase in the federal funds rate would be highly unlikely to halt this progress, although such an increase might slow its pace somewhat.
      Note again that Yellen highlights the importance of labor market gains in assessing the stance of policy. Then she pulls out the long-lags story:
      Second, we need to keep in mind the well-established fact that the full effects of monetary policy are felt only after long lags. This means that policymakers cannot wait until they have achieved their objectives to begin adjusting policy. I would not consider it prudent to postpone the onset of normalization until we have reached, or are on the verge of reaching, our inflation objective. Doing so would create too great a risk of significantly overshooting both our objectives of maximum sustainable employment and 2 percent inflation, potentially undermining economic growth and employment if the FOMC is subsequently forced to tighten policy markedly or abruptly.
      Yellen simply believes that if the Fed waits until inflation is back to target before the Fed acts, policy will be behind the curve, thereby raising the risk that policy will need to tighten dramatically as some point in the future. There is also the secondary concern of financial instabilities. Moreover, Yellen has full faith in the Phillips Curve:
      An important factor working to increase my confidence in the inflation outlook will be continued improvement in the labor market. A substantial body of theory, informed by considerable historical evidence, suggests that inflation will eventually begin to rise as resource utilization continues to tighten.
      And that faith thereby negates the value of the current low readings on inflation:
      It is largely for this reason that a significant pickup in incoming readings on core inflation will not be a precondition for me to judge that an initial increase in the federal funds rate would be warranted.
      And then she completely dismisses the importance of wage growth in her assessment of the path of inflation:
      With respect to wages, I anticipate that real wage gains for American workers are likely to pick up to a rate more in line with trend labor productivity growth as employment settles in at its maximum sustainable level. We could see nominal wage growth eventually running notably higher than the current roughly 2 percent pace. But the outlook for wages is highly uncertain even if price inflation does move back to 2 percent and labor market conditions continue to improve as projected. For example, we cannot be sure about the future pace of productivity growth; nor can we be sure about other factors, such as global competition, the nature of technological change, and trends in unionization, that may also influence the pace of real wage growth over time. These factors, which are outside of the Federal Reserve's control, likely explain why real wages have failed to keep pace with productivity growth for at least the past 15 years. For such reasons, we can never be sure what growth rate of nominal wages is consistent with stable consumer price inflation, and this uncertainty limits the usefulness of wage trends as an indicator of the Fed's progress in achieving its inflation objective.
      An array of nominal wage growth outcomes might be consistent with 2 percent inflation, most of which are outside the purview of the Fed, according to Yellen. Hence:
      I have argued that a pickup in neither wage nor price inflation is indispensable for me to achieve reasonable confidence that inflation will move back to 2 percent over time.
      But she leaves an out:
      That said, I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably.
      She doesn't need to see any of this indicators to head up to justify a rate hike; they just can't head down. In that respect, today's reading on PCE inflation must be something of a comfort to her. The month-over-month number pulled up, although recent trends are in my opinion still weak:


      All that said, she still believes that Taylor-type rules - using the correct equilibrium interest rate, of course - still justify a zero interest rate:
       But the prescription offered by the Taylor rule changes significantly if one instead assumes, as I do, that appreciable slack still remains in the labor market, and that the economy's equilibrium real federal funds rate--that is, the real rate consistent with the economy achieving maximum employment and price stability over the medium term--is currently quite low by historical standards.Under assumptions that I consider more realistic under present circumstances, the same rules call for the federal funds rate to be close to zero.
      And this prepares the listener for what I would argue is the most important part of her speech:
      The FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase
      The Fed very much wants to change the discussion from the timing of the first rate hike to the pace of subsequent rate hikes. On this topic, we need to delve further into the importance of the equilibrium real rate in assessing the path of policy:
      The projected combination of a gradual rise in the nominal federal funds rate coupled with further progress on both legs of the dual mandate is consistent with an implicit assessment by the Committee that the equilibrium real federal funds rate--one measure of the economy's underlying strength--is rising only slowly over time. In the wake of the financial crisis, the equilibrium real rate apparently fell well below zero because of numerous persistent headwinds. These headwinds include tighter underwriting standards and restricted access to some forms of credit; the need for households to reduce their debt burdens; contractionary fiscal policy at all levels of government after the initial effects of the fiscal stimulus package had passed; and elevated uncertainty about the economic outlook that made firms hesitant to invest and hire, and households reluctant to buy houses, cars, and other discretionary goods.
      So what is happening with the real equilibrium rate now:
      Fortunately, the overall force of these headwinds appears to have diminished considerably over the past year or so, allowing employment to accelerate appreciably even as the level of the federal funds rate and the volume of our asset holdings remained nearly unchanged.
      Employment is again the key indicator. The fact that employment growth is accelerating despite no change in monetary policy is, according to Yellen, fairly clear evidence that the equilibrium real rate is rising. In other words, monetary policy accommodation is actually increasing even as the Fed holds steady. She expects the equilibrium rate to continue rising over the next couple of years, thereby justifying the Fed's rate projections. 
      But that forecast is data dependent, of course. And then comes the portion of Yellen's speech as she highlights reasons to believe that the actual rate path may differ from the Fed's expectations. Note that primarily focuses on reasons to expect a more subdued rate path, thus sounding dovish. She begins with the uncertainty of the equilibrium real rate:
      The first, which is closely related to my expectation that the headwinds holding back growth are likely to continue to abate gradually, pertains to the risk that the equilibrium real federal funds rate may not, in fact, recover as much or as quickly as I anticipate...The experience of Japan over the past 20 years, and Sweden more recently, demonstrates that a tightening of policy when the equilibrium real rate remains low can result in appreciable economic costs, delaying the attainment of a central bank's price stability objective.
      The fact that she highlights the errors of the Riksbank is comforting; it speaks to the willingness to learn from others' mistakes. Next is a tacit admission that although they say they can return to quantitative easing, they really think they are pretty much out of bullets:
      A second reason for the Committee to proceed cautiously in removing policy accommodation relates to asymmetries in the effectiveness of monetary policy in the vicinity of the zero lower bound. In the event that growth in employment and overall activity proves unexpectedly robust and inflation moves significantly above our 2 percent objective, the FOMC can and will raise interest rates as needed to rein in inflation. But if growth was to falter and inflation was to fall yet further, the effective lower bound on nominal interest rates could limit the Committee's ability to provide the needed degree of accommodation. With an already large balance sheet, for example, the FOMC might be concerned about potential costs and risks associated with further asset purchases.
      On this point, it is again comforting that she is not ignoring the signals of the bond market:
      That said, it is sobering to note that many market participants appear to assess the risks to the outlook quite differently. For example, respondents to the Survey of Primary Dealers in late January thought there was a 20 percent probability that, after liftoff, the funds rate would fall back to zero sometime at or before late 2017. In addition, both the remarkably low level of long-term government bond yields in advanced economies and the low prevailing level of inflation compensation suggest that financial market participants may hold more pessimistic views than FOMC participants concerning the risks to the global outlook. Since long-term yields reflect the market's probability-weighted average of all possible short-term interest rate paths, along with compensating term and risk premiums, the generally low level of yields in advanced economies suggests that investors place considerable odds on adverse scenarios that would necessitate a lower and flatter trajectory of the federal funds than envisioned in participants' modal SEP projections.
      Finally, she harkens back to her optimal-control policy days:
      A final argument for gradually adjusting policy relates to the desirability of achieving a prompt return of inflation to the FOMC's 2 percent goal, an objective that would be advanced by allowing the unemployment rate to decline for a time somewhat below estimates of its longer-run sustainable level. To a limited degree, such an outcome is envisioned in many participants' most recent SEP projections.
      Still, the gradualist path is not without risks. First, inflation:
      Of course, taking a gradualist approach is not without risks. Proceeding too slowly to tighten policy could have adverse consequences for the attainment of the Committee's inflation objective over time, especially if it were to undermine the FOMC's inflation credibility. Inflation could, for example, exhibit nonlinear dynamics in which high levels of unemployment place relatively little downward pressure on inflation, but tight labor markets generate marked upward pressure. If so, a decline in unemployment below its natural rate could cause inflation to quickly rise to an undesirably high level. Rapid increases in short-term interest rates to arrest such an unwelcome development could, in turn, have adverse effects on financial markets and the broader economy.
      Here you see Yellen's fear of inflation, in particular the concern of nonlinear dynamics. Yellen fears that inflation will jump sharply higher is unemployment sinks too far below its natural rate. This fear I think extends to the Fed's resistance to a different inflation target or a price level target. It is also why the Fed fears falling too far behind the curve.
      Bottom Line: Employment data are key; the rest is for the moment just noise. If that data continues to improve, while monetary policy remains unchanged, it is evidence of growing monetary accommodation which must eventually be constrained. Moreover, the steady fall in the unemployment rate is signaling above trend growth as well. And while you might argue that employment data are a lagging indicator, the Fed would reply that there is no indication from the more leading indicator of initial claims that something troubling is amiss. Somewhat surprisingly, even price data is currently just noise; rising inflation or wage growth are not necessary to begin raising rates. Still, either would justify the acceleration of subsequent rate hikes as they would be evidence of a more normal economy consistent with a higher equilibrium real interest rate. Yellen anticipates that the equilibrium rate will return to more normal levels over the next couple of years, but remains wary that this will not turn out to be the case. This is good news as it raises the odds that she will not cut the expansion short. Her lack of emphasis of wages as a policy signal and continued faith in the Phillips Curve will make her a target of left-leaning critics.

        Posted by on Tuesday, March 31, 2015 at 03:43 AM Permalink  Comments (49) 

        Links for 03-31-15

          Posted by on Tuesday, March 31, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (217) 

          Monday, March 30, 2015

          Economic Journal 125th Anniversary Special Issue

          The Economic Journal was among the first journals to come into existence. This is the first article of the 125th anniversary issue. The remaining articles are from notable economists (e.g. Stiglitz, Heckman, and many more) discussing seminal work that appeared in the Journal (the articles are relatively short):

          Economic Journal 125th Anniversary Special Issue [under Creative Commons]: First published: 29 March 2015 Full publication history, DOI: 10.1111/ecoj.12230 View/save citation.
          It is with great pleasure that we mark the 125th anniversary of the founding of the Economic Journal with this special issue. The EJ has published many seminal articles on a variety of topics over the years; in this issue we have selected some of what we think are the most important and asked leading economic thinkers of today to share their thoughts on the impact that these articles have had. The authors have explored the historic contribution of the articles and possible future ways to advance the subject. It has been an honour for us to work with these economists, whose own research is seminal to the future development of the profession. We thank them sincerely for their contributions to this project.
          The Economic Journal was founded at a meeting convened by Professor Alfred Marshall at University College London, at the behest of Herbert Somerton Foxwell and Robert Harry Inglis Palgrave among others, and chaired by George Viscount Goschen, Chancellor of the Exchequer.1
          The meeting was called to discuss setting up a journal of economics in England, and brought together around 200 people from surprisingly disparate backgrounds. Leading academics included Francis Ysidro Edgeworth, chair at King's College London and first editor of the Economic Journal; Mary Paley Marshall, one of the first female students at Cambridge and co-founder of economics at Bristol University with her husband; Henry Sidgwick, philosopher, economist, founder of Newnham College Cambridge and a supporter of women's education; and John Neville Keynes, renowned economist at Cambridge University. The hall at UCL was also packed with social philanthropists, journalists and businessmen. Notable names from the audience were Charles Booth, philanthropist and social researcher, who influenced the government in the establishment of the old age pension; Millicent Fawcett, radicalist and suffragette, who campaigned for women's rights and the better protection of children; Octavia Hill, social reformer and co-founder of the National Trust; Clara Collet, economist and reformist who sought to improve working conditions for women; Robert Giffen, economist and journalist at The Economist, the Daily News and The Times; and George Bernard Shaw, socialist, playwright and co-founder of the London School of Economics. There were also significant names who pledged their support to the cause in writing, including George Baden-Powell, the conservative politician; Sir Thomas Farrer, 1st Baron Farrer, civil servant and lawyer; Joseph Shield Nicholson, professor of political economy at Edinburgh; and George William Bramwell, judge.
          There was unanimous agreement for the proposed journal of economics. Marshall had laid out the need for a journal to support the development of young economists. The aim of the journal was to encourage debate at the highest academic level and the audience unanimously carried the motion to establish the journal, cheering in support of the idea that the journal should incorporate diverse viewpoints for the benefit of the country at large.
          George Bernard Shaw was the only person to introduce some controversy, by questioning the selection of a politician, Viscount Goschen, to lead the society in its publication aims. Marshall rather honestly confided that he was not a political supporter of Goschen but that they would be hard pressed to find a candidate for presidency who had no political views whatsoever.
          The support for the EJ at its inauguration in 1890 only hinted at the impact the journal would achieve on a national scale. Numerous national newspapers reported on the meeting at UCL and pledged their support to the project. The Times, for example, stated that ‘the propriety of the proposal was unquestionable. Not a dissentient voice was raised'.2 Interest did not stop with the initiation of the Journal but continued with the subjects discussed in each issue.
          In the first edition of the Journal, Editor Francis Ysidro Edgeworth proudly declared that:
          The most opposite doctrines may meet here as on a fair field. Thus the difficulties of Socialism will be considered in the first number; the difficulties of Individualism in the second. Opposing theories of currency will be represented with equal impartiality. Nor will it be attempted to prescribe the method, any more than the result, of scientific investigation.3
          The Standard heralded these aims, saying:
          We want such a publication in this country, where questions of public well-being can be discussed without reference to the party cries of the hour.4
          It went on to discuss the diverse topics published in the issue ranging from ‘The Eight Hour Day in Victoria’ by John Rae, to ‘The Fall of Silver’ by Henry Hucks Gibbs and ‘The Difficulties of Socialism’ by Leonard Courtney, which the newspaper declared ‘is [an article] which no person should miss reading.’ The second issue of the Journal was met with the same interest as the first. The Cape Town Argus said ‘its second number well maintains the high expectations with which it was started’. It picked out Sir Thomas Farrer's article entitled ‘Some English Railway Robberies of the Next Decade’ for particular mention, saying it was ‘admirably clear and succinct’. The Manchester Courier included in-depth description of all articles included in the issue, adding that the Journal was an ‘excellent and instructive publication’.5
          While the subject matter and impact of the Journal has evolved considerably since its first issue, the editors are pleased to uphold the original simple values: to publish the best articles in economics in any field and to disseminate its research as widely as possible.
          A note on 125 years of the Economic Journal would not be complete without mention of the bee motif, which marked its centenary in 2014. The bee was chosen as the seal of the Royal Economic Society when it received its Royal Charter and first appeared on the cover of the EJ in March 1904. There has been some debate as to the meaning and motivation for selection of this motif. It was proposed by Professor Mark Perlman that the bee was a symbol of the investigational method appropriate to the study of economics.6 He suggested that this notion was taken from Francis Bacon's Novum Organon, which was widely read in England in the nineteenth century:
          Those who have handled the sciences have been either Empiricists or Rationalists. Empiricists, like ants, merely collect things and use them. The Rationalists, like spiders, spin webs out of themselves. The middle way is that of the bee, which gathers its material from the flowers of the garden and the field, but then transforms and digests it by a power of its own. And the true business of philosophy is much the same, for it does not rely only or chiefly on the powers of the mind, nor does it store the material supplied by natural history and practical experiments untouched in its memory, but lays it up in the understanding changed and refined. Thus from a closer and purer alliance of the two faculties- the experimental and the rational, such as has never yet been made- we have good reason for hope.7
          Bacon's words seem to work not only as a metaphor for economic science but for the Economic Journal itself, which sought to combine approaches to economics and enable the study of the discipline through embracing different perspectives. However, a more prevalent theory is for the meaning of the bee is that it derived from The Fable of the Bees (1714) by Bernard Mandeville. This paradoxical thesis argued that social welfare, social progress, riches and benefits are all based on the human vices. The idea is said to underlie the theory of ‘the invisible hand’ of economic markets, developed by Adam Smith (1723–90). However, there is no documentary evidence to show categorically that either of these allegories was behind the selection of the bee motif.
          Not all editors of the EJ have been fond of the busy bee. The stamp was removed from the Journal during the editorship of Brian Reddaway in a bid to modernise the cover. The symbol was reintroduced in 1990 by John Hey, as a mark of the centenary of the RES and the EJ. Austin Robinson, one of the longest serving editors of the Journal, applauded this move, admitting that he had ‘a certain affection for it [the bee]’.8 The reintroduction of the bee motif however also marked a re-design, and added further complexity to its possible significance. The quote ‘amor urget habendi’ (acquisitiveness impels) was added to the modernised image, a line taken from Virgil's Georgics:
          ‘ac ueluti lentis Cyclopes fulmina massis
          cum properant, alii taurinis follibus auras
          accipiunt redduntque, alii stridentia tingunt
          aera lacu; gemit impositis incudibus Aetna;
          illi inter sese magna ui bracchia tollunt
          in numerum, uersantque tenaci forcipe ferrum
          non aliter, si parua licet componere magnis
          Cecropias innatus apes amor urget habendi
          munere quamque suo.’9
          ‘As when the Cyclopses forge thunderbolts
          Deftly of ductile metal, some of them
          Pump air from bullhide bellows, others plunge
          The hissing bronze in troughs, while Etna groans
          Under the weight of anvils. Mightily
          They raise their arms in alternating rhythm
          And turn the metal with their gripping tongs.
          Just so (if small may be compared with great)
          Innate acquisitiveness impels the bees
          To ply their several tasks.’10
          Here the bee is related to hard work, industry and the division of labour. As such, the motif may relate to the industry of the Journal and the Royal Economic Society, or to a broader view of economics as a study of the human drive to obtain. There is no record of why this quote was selected for the refashioning of the bee image and it only serves to open up the possibilities of the bee's meaning.
          To celebrate 125 years of the Journal and 100 years of the busy bee, we have, for one issue, reinstated the original bee of which Austin Robinson was so fond and included all of the bees on the back cover. We will leave it to the reader to ponder why it was selected to represent the Journal and the society all those years ago.
          We are pleased as editors to be able to carry on the tradition of the Economic Journal, which has such a vibrant history and has made such an important contribution to the development of the field.
          Joint Managing Editors
          Martin Cripps University College London
          Andrea Galeotti University of Essex
          Rachel Griffith University of Manchester
          Morten Ravn University College London
          Kjell Salvanes Norwegian School of Economics
          Stepahnie Seavers Institute for Fiscal Studies
          Frederic Vermeulen University of Leuven
          Production Editor
          David Mayes University of Auckland
          Publishing Editor
          Stephanie Seavers Institute for Fiscal Studies
          1. For further details of the meeting see ‘The British Economic Association’, Economic Journal, vol. 1 (Mar 1891), pp. 1–14.
          2. The Times, 21 November 1890. RES Archive, London School of Economics RES_1/3/2 p. 3.
          3. ‘The British Economic Association’, Economic Journal, vol. 1 (Mar 1891), p. 1.
          4. The Standard, 9 April 1891. RES Archive, London School of Economics RES_1/3/2 p. 5.
          5. The Cape Town Argus, 12 August 1891. RES Archive, London School of Economics RES_1/3/2 p. 8.
          6. Letter to Economic Journal Editor Professor John Hey on 3rd April, 1990. RES archive.
          7. Francis Bacon, Novum Organum, Peter Urbach and John Gibson (trans. and ed.), Open Court Publishing: Peru, Illinois, 1994, reprinted 1996, paragraph 95, bk.1, p. 105.
          8. Letter to Professor Perlman, University of Pittsburgh, on 20 September 1990. RES archive.
          9. Virgil, Georgics, Richard F. Thomas (ed.), Cambridge Greek and Latin Classics, University of Cambridge Press: 1988, reprinted 2001, vol. 2, Bks 111-1V, bk IV, p. 24, lines 170 to 179.
          10. Virgil, The Georgics, L. P. Wilkinson (trans.), Penguin Classics: London, 1982, pp. 129–30.

            Posted by on Monday, March 30, 2015 at 04:13 AM in Economics | Permalink  Comments (10) 

            Paul Krugman: Imaginary Health Care Horrors

            Why doesn't the public know how successful Obamacare has been?:

            Imaginary Health Care Horrors, by Paul Krugman, Commentary, NY Times: ...Representative Pete Sessions of Texas, the chairman of the House Rules Committee, recently ... declared the cost of Obamacare “unconscionable.” If you do “simple multiplication,” he insisted, you find that the coverage expansion is costing $5 million per recipient. But ... the actual cost per newly insured American is about $4,000.
            Now, everyone makes mistakes. But this wasn’t a forgivable error..., one indisputable fact is that it’s costing taxpayers much less than expected — about 20 percent less...
            But that is, of course, how it’s been all along with Obamacare. Before the law went into effect, opponents predicted disaster on all levels. What has happened instead is that the law is working pretty well. So how have the prophets of disaster responded? By pretending that the bad things they said would happen have, in fact, happened. ...
            Remember, Obamacare was also supposed to be a huge job-killer. ... Well, Obamacare went into effect fully at the beginning of 2014 — and private-sector job growth actually accelerated, to a pace we haven’t seen since the Clinton years. ...
            Finally, there’s the never-ending hunt for ... for ordinary, hard-working Americans who have suffered hardship thanks to health reform. ... Remarkably, however, they haven’t been able to find those stories. ...
            In reality, the only people hurt by health reform are Americans with very high incomes, who have seen their taxes go up, and a relatively small number of people who have seen their premiums rise because they’re young and healthy...
            In short, when it comes to the facts, the attack ... has come up empty-handed. But the public doesn’t know that. ...
            And the favorable experiences of the roughly 16 million Americans who have gained insurance ... have had little effect on public perceptions. Partly that’s because the Affordable Care Act, by design, has had almost no effect on those who already had good health insurance..., they have seen no change in their status.
            At a deeper level, however, what we’re looking at here is the impact of post-truth politics. We live in an era in which politicians and the supposed experts who serve them never feel obliged to acknowledge uncomfortable facts, in which no argument is ever dropped, no matter how overwhelming the evidence that it’s wrong.
            And the result is that imaginary disasters can overshadow real successes. Obamacare isn’t perfect, but it has dramatically improved the lives of millions. Someone should tell the voters.

              Posted by on Monday, March 30, 2015 at 01:38 AM in Economics, Health Care, Politics | Permalink  Comments (38) 

              Have Blog, Will Travel

              I am here today:

              Royal Economic Society Conference 2015
              University of Manchester, United Kingdom
              March 30, 2015

              March 31, 2015

              April 1, 2015

                Posted by on Monday, March 30, 2015 at 01:38 AM in Conferences, Economics, Travel | Permalink  Comments (2) 

                Links for 03-30-15

                  Posted by on Monday, March 30, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (156) 

                  Sunday, March 29, 2015

                  'A Separating Equilibrium in Indiana'

                  Rajiv Sethi:

                  A Separating Equilibrium in Indiana: In the wake of Indiana's passage of the Religious Freedom and Restoration Act, the following stickers have started appearing on storefronts across the state:

                  These signs allow business owners to signal their disapproval of the law, and if they spread sufficiently far and wide, will force those not displaying them to implicitly signal approval of the law. It's worth reflecting on the consequences of this for customer choices, the profitability of firms, and the beliefs of individuals about the preferences of those with whom they occasionally interact.
                  At any given location, the meaning of the symbol will come to depend on the number and characteristics of the nearby firms displaying it. If all businesses were to paste the sticker alongside their Visa and Mastercard logos, it would be devoid of informational content and would not influence customer choices; this is what game theorists quaintly call a babbling equilibrium
                  But it's highly unlikely that such a situation would arise. Some owners will display the sign as a matter of principle, regardless of it's effect on their bottom line, while others will adamantly refuse to do to even if profitability suffers as a result. 
                  Between these extremes lies a large segment of firms for whom the choice involves a trade-off between profit and principle. They may disapprove of the law and yet abstain from taking a public position, or they may approve and cynically pretend to disapprove. What they choose will depend on the distribution of characteristics in their customer base, as well as the choices made by other firms.
                  In more liberal areas, such as college towns, those who display the stickers will likely profit from doing so, and owners concerned primarily with their profitability will be induced to join them. The meaning of the symbol will accordingly be diluted: some of those displaying it will be indifferent to the law or even mildly supportive. By the same token, the meaning of not displaying the symbol will be sharpened. Customers will sort themselves across businesses accordingly, with those opposed to the law actively avoiding businesses without stickers, thus reinforcing the effects on profitability and firm behavior.
                  In more conservative areas, those who display the stickers will likely experience a net loss of customers, and the meaning of the symbol will accordingly be quite different. Only those strongly opposed to the law will publicly exhibit their disapproval, and among those who abstain from displaying the stickers will be some who are privately opposed to the law. In this case customers opposed to the law will be less vigorous in seeking out businesses with stickers, again reinforcing the effects on profitability and firm behavior.
                  Just as customers will come to know more about the private preferences of business owners, the owners will come to know more about the customers they attract and retain. Furthermore, customers in a given store will come to know more about each other. Bars and bakeries will become a bit more like niche bookstores, and casual interactions will become a bit more segregated along ideological lines. None of these are intended consequences of the law, but they are some of its predictable effects, and it's worth giving some thought to whether or not they are desirable.
                  I've heard it said that businesses in Indiana had the authority to deny service to some customers even prior to the passage of the new law, and that it therefore doesn't involve any substantive change in rights. Even so, it's a symbolic gesture that pins upon a group of people a badge of inferiority. Responding to this with a different set of symbols thus seems entirely appropriate.

                    Posted by on Sunday, March 29, 2015 at 04:31 PM in Economics | Permalink  Comments (16) 

                    Links for 03-29-15

                      Posted by on Sunday, March 29, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (123) 

                      Saturday, March 28, 2015

                      'Unreal Keynesians'

                      Paul Krugman:

                      Unreal Keynesians: Brad DeLong points me to Lars Syll declaring that I am not a “real Keynesian”, because I use equilibrium models and don’t emphasize the instability of expectations. ...
                      I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you. What you should ask is whether that approach has proved useful — and whether the critics have something better to offer.
                      And as I have often argued, these past 6 or 7 years have in fact been a triumph for IS-LM. Those of us using IS-LM made predictions about the quiescence of interest rates and inflation that were ridiculed by many on the right, but have been completely borne out in practice. We also predicted much bigger adverse effects from austerity than usual because of the zero lower bound, and that has also come true. ...

                        Posted by on Saturday, March 28, 2015 at 03:31 PM in Economics, Macroeconomics | Permalink  Comments (83) 

                        Links for 03-28-15

                          Posted by on Saturday, March 28, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (189) 

                          Friday, March 27, 2015

                          How Idealism Can Fight Climate Change

                          Robert Shiller:

                          How Idealism, Expressed in Concrete Steps, Can Fight Climate Change: Idealism combined with an intriguing application of economic theory may accomplish what international conferences have not: solve the seemingly intractable problem of global warming.
                          Despite periodic flurries of optimism, diplomacy has been largely disappointing. ... From an economic standpoint, international efforts until now have foundered on a fundamental “free rider problem.” ... Why not just take a “free ride” and let others do the hard work? ...
                          But there are other ways to look at this... In a new book, “Climate Shock: The Economic Consequences of a Hotter Planet” (Princeton 2015), Gernot Wagner of the Environmental Defense Fund and Martin L. Weitzman, a Harvard economist, question that assumption. In a proposal that they call the “Copenhagen Theory of Change,” they say that we should be asking people to volunteer to save our climate by taking many small, individual actions. ...
                          The world is a diverse and complicated place, however. In order to combat global warming, social movements aren’t enough. We also need a concrete framework on a global scale.
                          In his presidential address before the American Economic Association in Boston in January, William D. Nordhaus of Yale proposed what he calls “climate clubs”..., a group of countries that agree to create incentives for people to reduce carbon emissions, while also erecting tariff barriers on imports from countries that are not members of the club. ...
                          To actually solve the extremely challenging problem of climate change, we may want to rely on both theories...

                            Posted by on Friday, March 27, 2015 at 12:06 PM in Economics, Environment, Market Failure | Permalink  Comments (63) 

                            'Microeconomic Origins of Macroeconomic Tail Risks'

                            Microfoundations from Acemogl, Oxdaglar, and Tahbaz-salehi:

                            Microeconomic origins of macroeconomic tail risks, by Daron Acemoglu, Asuman Ozdaglar, and Alireza Tahbaz-Salehi: Understanding large economic downturns is one of macroeconomics’ central goals. This column argues that imbalances in input-output linkages can interact with firm-level shocks to produce output fluctuations that are much larger than the underlying shocks. The result can be large cycles arising from small, firm-level shocks. It is thus important to study the determinants of large economic downturns separately. Macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behavior for moderate deviations.
                            Most empirical studies in macroeconomics approximate the deviations of aggregate economic variables (such as the GDP) from their trends with a normal distribution. Besides analytical convenience, such an approximation has been relatively successful in capturing some of the more salient features of the behavior of aggregate variables in the US and other OECD countries.
                            Macroeconomic tail risks
                            A number of recent studies (see Fagiolo et al. 2008), however, have documented that the distributions of GDP growth rate in the US and many OECD countries do not follow the normal, or bell-shaped distribution. Large negative or positive growth rates are more common than the normal distribution would suggest. That is to say, the distributions exhibit significantly heavier ‘tails’ relative to that of the normal distribution. Using the normal distribution thus severely underpredicts the frequency of large economic downturns.
                            This divergence can be seen clearly in Figure 1. Panel (a) depicts the quantile-quantile plot of post-war US GDP growth rate (1947:QI to 2013:QIII) versus the normal distribution after removing the top and bottom 5% of data points. The close correspondence between this dataset and the normal distribution, shown as the dashed red line, suggests that once large deviations are excluded, the normal distribution is indeed a good candidate for approximating GDP fluctuations. Panel (b) shows the same quantile-quantile plot for the entire US post-war sample. It is easy to notice that this graph exhibits sizeable and systematic deviations from the normal line at both ends. Together, these plots suggest that even though the normal distribution does a fairly good job in approximating the nature of fluctuations during most of the sample, it severely underestimates the most consequential fact about business cycle fluctuations, namely, the frequency of large economic contractions.
                            Figure 1. The quantile-quantile plots of the post-war US GDP growth rate (1947:QI to 2013:QIII) vs. the standard normal distribution (dashed red line)

                            Acemoglu fig1 24 marNote: The horizontal axis shows quantiles of the standard normal distribution; the vertical axis shows quantiles of the sample data.

                            Input-output linkages, micro shocks, and macro risks
                            In recent work (Acemoglu et al. 2014), we have argued that input-output linkages between different firms and sectors within the economy can play a first-order role in determining the depth and frequency of large economic downturns. Building on an earlier framework by Acemoglu et al. (2012), we show that if all firms take roughly symmetric roles as input-suppliers to one another (in what we call a ‘balanced’ economy), not only GDP fluctuations are normally distributed, but also large economic downturns are extremely unlikely. In other words, absent any amplification mechanisms or aggregate shocks, microeconomic firm-level shocks cannot result in macroeconomic tail risks. More interestingly, this result holds regardless of how these firm-level microeconomic shocks are distributed.
                            Our subsequent analyses, however, establish that the irrelevance of microeconomic shocks for generating macroeconomic tail risks would no longer hold if the economy is ‘unbalanced’, in the sense that some firms play a much more important role as input-suppliers than others. More specifically, we argue that:
                            The propagation of microeconomic shocks through input-output linkages can significantly increase the likelihood of large economic downturns.
                            The implications of our theoretical results can be summarized as follows:
                            First, the frequency of large GDP contractions is highly sensitive to the nature of microeconomic shocks.
                            In particular, in an unbalanced economy, micro shocks with slightly thicker tails can lead to a significant increase in the likelihood of large economic downturns. This suggests that unbalanced input-output linkages can lead to the build-up of tail risks in the economy.
                            Second, depending on the distribution of microeconomic shocks, the economy may exhibit significant macroeconomic tail risks even though aggregate fluctuations away from the tails can be well-approximated by a normal distribution.
                            This outcome is consistent with the pattern of US post-war GDP fluctuations documented in Figure 1.
                            This observation underscores the importance of studying the determinants of large recessions, as such macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.
                            Finally, there is a trade-off between the normality of micro-level shocks and imbalances in the input-output linkages.
                            An economy with unbalanced input-output linkages subject to normal microeconomic shocks exhibits deep recessions as frequently as a balanced economy subject to heavy-tailed shocks.
                            Solving the ‘small shocks, large cycles puzzle’
                            In this sense, our results provide a novel solution to what Bernanke et al. (1996) refer to as the ‘small shocks, large cycles puzzle’ by arguing that the interaction between the underlying input-output structure of the economy and the shape of the distribution of microeconomic shocks is of first-order importance in determining the nature of aggregate fluctuations.
                            Understanding the underlying causes of large economic downturns such as the Great Depression has been one of the central questions in macroeconomics. Our results suggest that the frequency and depth of such downturns may depend on the interaction between microeconomic firm-level shocks and the nature of input-output linkages across different firms. This is due to the fact that the propagation of shocks over input-output linkages can lead to the concentration of tail risks in the economy. This observation highlights the importance of separately studying the determinants of large economic downturns, as such macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.
                            Acemoglu, D, V M Carvalho, A Ozdaglar, and Al Tahbaz-Salehi (2012), “The network origins of aggregate fluctuations”, Econometrica, 80, 1977–2016.
                            Acemoglu, D, A Ozdaglar, and A Tahbaz-Salehi (2014), “Microeconomic origins of macroeconomic tail risks”, NBER Working Paper No. 20865.
                            Bernanke, B, M Gertler, and S Gilchrist (1996), “The financial accelerator and the flight to quality”, The Review of Economics and Statistics, 78, 1–15.
                            Fagiolo, G, M Napoletano, and A Roventini (2008), “Are output growth-rate distributions fat-tailed? Some evidence from OECD countries”, Journal of Applied Econometrics, 23, 639–669.

                              Posted by on Friday, March 27, 2015 at 12:06 PM in Economics | Permalink  Comments (12) 

                              Paul Krugman: Mornings in Blue America

                              Conservatives have GNDS (good news derangement syndrome):

                              Mornings in Blue America, by Paul Krugman, Commentary, NY Times: ...remember how Obamacare was supposed to be a gigantic job killer? Well, in the first year of the Affordable Care Act..., the U.S. economy .,, added 3.3 million jobs — the biggest gain since the 1990s. ...
                              But recent job growth ... has big political implications — implications so disturbing to many on the right that they are in frantic denial, claiming that the recovery is somehow bogus. Why can’t they handle the good news? The answer actually comes on three levels: Obama Derangement Syndrome, or O.D.S.; Reaganolatry; and the confidence con.
                              Not much need be said about O.D.S. It is, by now, a fixed idea on the right that this president is both evil and incompetent, that everything touched by the atheist Islamic Marxist Kenyan Democrat — mostly that last item — must go terribly wrong. When good news arrives about the budget, or the economy, or Obamacare ... it must be denied.
                              At a deeper level, modern conservative ideology utterly depends on the proposition that conservatives, and only they, possess the secret key to prosperity. As a result, you often have politicians on the right making claims like this one, from Senator Rand Paul: “When is the last time in our country we created millions of jobs? It was under Ronald Reagan.”
                              Actually, if creating “millions of jobs” means adding two million or more jobs in a given year, we’ve done that ... eight times under Bill Clinton, twice under George W. Bush, and three times, so far, under Barack Obama. ...
                              Which brings us to the last point: the confidence con.
                              One enduring puzzle of political economy is why business interests so often oppose policies to fight unemployment. After all, boosting the economy with expansionary monetary and fiscal policy is good for profits...
                              As a number of observers have pointed out, however, for big businesses to admit that government policies can create jobs would be to devalue one of their favorite political arguments — the claim that to achieve prosperity politicians must preserve business confidence, among other things, by refraining from any criticism of what businesspeople do. ...
                              So, as I said at the beginning, the fact that we’re now seeing mornings in blue America — solid job growth both at the national level and in states that have defied the right’s tax-cutting, deregulatory orthodoxy — is a big problem for conservatives. Although they would never admit it, events have proved their most cherished beliefs wrong.

                                Posted by on Friday, March 27, 2015 at 06:16 AM in Economics, Politics | Permalink  Comments (84) 

                                Links for 03-27-15

                                  Posted by on Friday, March 27, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (132) 

                                  Thursday, March 26, 2015


                                  Very long travel day today, so just a few quick posts before heading to the airport. Will post more as I can.

                                    Posted by on Thursday, March 26, 2015 at 08:28 AM in Economics, Travel | Permalink  Comments (1) 

                                    Social Insurance Makes America More Entrepreneurial

                                    I've made this point several times myself, i.e. that social insurance can promote entrepreneurship, but it's worth making again:

                                    Welfare Makes America More Entrepreneurial: ... Pundits and researchers often note the negative correlation between government spending and entrepreneurship, both within the U.S. and internationally, and conclude that growth requires trimming social welfare programs. Jim Manzi of the National Review, for example, a thoughtful commenter on economic policy, wrote last year that, “we must accept some amount of social dislocation in return for innovation.” But correlations can be misleading. A series of more recent studies challenge the view that larger or more activist government necessarily threatens entrepreneurship. In fact, that may get the relationship precisely backwards.
                                    Entrepreneurs are actually more likely than other Americans to receive public benefits, after accounting for income, as Harvard Business School’s Gareth Olds has documented. And in many cases, expanding benefit programs helps spur new business creation. ...
                                    Take food stamps. ... It seems that expanding the availability of food stamps increased business formation by making it less risky for entrepreneurs to strike out on their own. Simply knowing that they could fall back on food stamps if their venture failed was enough to make them more likely to take risks.
                                    Food stamps are not an isolated case. ...

                                    The mechanism in each case is the same: publicly funded insurance lowers the risk of starting a business, since entrepreneurs needn’t fear financial ruin. ...

                                      Posted by on Thursday, March 26, 2015 at 08:28 AM in Economics, Social Insurance | Permalink  Comments (31) 

                                      'Fiscal policy Procyclicality and Output Forecast Errors: Bad Luck or Bad Decisions?'

                                      Why do developing countries pursue destabilizing, procyclical fiscal policy? This is from Guillermo Vuletin and Leopoldo Avellan at Brookings:

                                      Fiscal policy procyclicality and output forecast errors: Bad luck or bad decisions?: It is well-known that government spending has historically been procyclical in the developing world (Tornell and Lane, 1999; Kaminsky, Reinhart, and Vegh, 2004; Frankel, Vegh, and Vuletin, 2013).[1] Thus, government spending in these regions typically increases during periods of expansion and decreases during periods of recession. Unfortunately, this procyclical fiscal behavior reinforces output fluctuations, exacerbating booms and aggravating busts. Traditional explanations for this undesirable behavior have mostly revolved around the explicit or implicit notion that fiscal procyclicality is the deliberate result of political economy distortions and weak institutions (e.g., policymakers' short-sightedness and political pressure to spend when resources are available in good times, leaving few resources to spend in bad times).
                                      Since the global financial crisis and, more recently, the sudden severe drop in commodity prices, important and frequent revisions in output growth forecasts around the world have become a new norm. This trend, in turn, has triggered heated debates in both policy and academic circles and the media about how governments should handle these frequent reassessments.
                                      As a consequence of this debate, two strands of the fiscal procyclicality literature related to output forecast errors have been increasingly gaining support. While different in origin and nature, both strands put the emphasis (or even blame) on output forecast errors in determining fiscal procyclicality. These strands include:
                                      1. Over-optimism in output forecasts (Frankel, 2011a; Frankel, 2011b; Frankel and Schreger, 2013). ...
                                      2. Real-time data and misinformation literature (Forni and Momigliano, 2004; Golinelli and Momigliano, 2006 and 2008; Bernoth, Hughes Hallett, and Lewis, 2008; Cimadomo, 2012; Croushore and van Norden, 2013). ...
                                      A recent paper by Avellan and Vuletin (2015) takes issue with these views and shows that, in fact, traditional political economy arguments and weak institutions help explain how governments handle unanticipated output fluctuations. ...

                                        Posted by on Thursday, March 26, 2015 at 08:28 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (2) 

                                        'The Confidence Witch'

                                        Gloomy European Economist, Francesco Saraceno:

                                        The Confidence Witch: ...The confidence fairy seems to have turned into a confidence witch. One more victim of the crisis. But this one will not be missed.
                                        It is not shameful to change opinion. Rather the contrary, it is a sign of intellectual courage. Two years ago, the IMF famously surprised commentators worldwide with a rather substantial U-turn on the impact of austerity. Revised calculations on the size of multipliers led them to acknowledge that they had underestimated the impact of austerity on economic activity.
                                        Even at that time it started with a technical paper. But significantly, that paper was coauthored by Olivier Blanchard, IMF Chief Economist. It then served as the basis for a progress report on Greece, in June 2013, that de facto disavowed the first bailout program arguing that austerity had proven to be self-defeating.
                                        Let us just hope that in the ECB new building communication between the research department and the top guys is more effective than in the old one…

                                          Posted by on Thursday, March 26, 2015 at 08:28 AM in Economics | Permalink  Comments (12) 

                                          Links for 03-26-15

                                            Posted by on Thursday, March 26, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (81) 

                                            Wednesday, March 25, 2015

                                            'Fed Should Push Unemployment Well Below 5%, Paper Says'

                                            Larry Ball tells the Fed to be very patient when it comes to satisfying its mandate to pursue full employment:

                                            Fed Should Push Unemployment Well Below 5%, Paper Says: The Federal Reserve should hold short-term interest rates near zero long enough to drive unemployment well below 5%, even if it means letting inflation exceed the central bank’s 2% target. That’s according to Laurence Ball, economics professor and monetary policy expert at Johns Hopkins University...
                                            Mr. Ball says the Fed could create more jobs by letting the unemployment rate fall lower. It should seek to push the rate “well below 5%, at least temporarily,” he writes. That could help bring some discouraged workers to reenter the labor market, as well as help the long-term unemployed find work and involuntary part-time workers find full-time jobs, he said.
                                            “A likely side effect would be a temporary rise in inflation above the Fed’s target, but that outcome is acceptable,” writes Mr. Ball... U.S. inflation has been undershooting the Fed’s target for nearly three years.
                                            Mr. Ball’s view is not shared by many Fed officials...

                                              Posted by on Wednesday, March 25, 2015 at 01:09 PM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  Comments (85) 

                                              The 'Audit' the Fed Crowd

                                              Audit the Fed?:

                                              The "Audit" the Fed Crowd, by David Andolfatto: Alex Pollock says that It's High Time to "Audit" the Federal Reserve. ...just the other day, Senator Rand Paul, a leader in "Audit-the-Fed" movement (a significant step down from his father's "End-the-Fed" movement) was making statements like this one:

                                              “[An] audit of the Fed will finally allow the American people to know exactly how their money is being spent by Washington.”

                                              Of course, the Fed does not control how money is being spent by Washington. The Fed prints money to buy government securities. It sometimes extends loans against high-grade collateral. Everything you want to know about these purchases and loans is publicly available. ...

                                              Let's be honest here. There is nothing new to discover in further auditing. This movement is motivated by what they perceive to be bad monetary policy. It doesn't even make sense to say we want to "audit" the Fed's policy because the policy is already transparent (which is what permits critics to label it "bad").

                                              There is, of course, nothing wrong with critiquing Fed policy. Indeed, there are many economists working inside the Fed that critique various aspects of Fed policy all the time. And, as we all know, members of the FOMC can hold very different opinions ("hawks" and "doves"). Thoughtful critiques of policy should be welcomed. Policymakers and researchers at the Fed do welcome them.

                                              Moreover, I'm all for full accountability. The Fed should be accountable to the American people--it is, after all, a creation of the American people through their representatives in Congress. But as I have said, the issue here is not about accountability. It is about a group of individuals who want to see their preferred monetary policy adopted. That's fair enough. I just ask that they be honest about their motives. It has nothing to do with audits or accountability.

                                                Posted by on Wednesday, March 25, 2015 at 11:24 AM in Economics, Monetary Policy, Politics | Permalink  Comments (38) 

                                                'Anti-Keynesian Delusions'

                                                Paul Krugman continues the discussion on the use of the Keynesian model:

                                                Anti-Keynesian Delusions: I forgot to congratulate Mark Thoma on his tenth blogoversary, so let me do that now. ...
                                                Today Mark includes a link to one of his own columns, a characteristically polite and cool-headed response to the latest salvo from David K. Levine. Brad DeLong has also weighed in, less politely.
                                                I’d like to weigh in with a more general piece of impoliteness, and note a strong empirical regularity in this whole area. Namely, whenever someone steps up to declare that Keynesian economics is logically and empirically flawed, has been proved wrong and refuted, you know what comes next: a series of logical and empirical howlers — crude errors of reasoning, assertions of fact that can be checked and rejected in a minute or two.
                                                Levine doesn’t disappoint. ...

                                                He goes on to explain in detail.

                                                Update: Brad DeLong also comments.

                                                  Posted by on Wednesday, March 25, 2015 at 09:14 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (55) 

                                                  Links for 03-25-15

                                                    Posted by on Wednesday, March 25, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (159) 

                                                    Tuesday, March 24, 2015

                                                    'Macro Wars: The Attack of the Anti-Keynesians'

                                                    I have a new column:

                                                    Macro Wars: The Attack of the Anti-Keynesians, by Mark Thoma: The ongoing war between the Keynesians and the anti-Keynesians appears to be heating up again. The catalyst for this round of fighting is The Keynesian Illusion by David K. Levine, which elicited responses such as this and this from Brad DeLong and Nick Rowe.
                                                    The debate is about the source of economic fluctuations and the government’s ability to counteract them with monetary and fiscal policy. One of the issues is the use of “old fashioned” Keynesian models – models that have supposedly been rejected by macroeconomists in favor of modern macroeconomic models – to explain and understand the Great Recession and to make monetary and fiscal policy recommendations. As Levine says, “Robert Lucas, Edward Prescott, and Thomas Sargent … rejected Keynesianism because it doesn't work… As it happens we have developed much better theories…”
                                                    I believe the use of “old-fashioned” Keynesian models to analyze the Great Recession can be defended. ...

                                                      Posted by on Tuesday, March 24, 2015 at 09:06 AM in Economics, Fiscal Times, Macroeconomics, Methodology | Permalink  Comments (70) 

                                                      'The Assumptions Behind the Federal Reserve’s Choice of 2% per Year Were Erroneous'

                                                      Brad DeLong:

                                                      The Assumptions Behind the Federal Reserve’s Choice of 2% per Year Were Erroneous: Focus: ...The decision by the Federal Reserve in the mid-1990s to settle on a 2% per year target inflation rate depended on three facts — or, rather, on three things that were presumed to be facts back in the mid-1990s:

                                                      1. That the long run Phillips curve was vertical even with an inflation rate averaging 2% per year, so that there was no production or employment cost of such a target.
                                                      2. That the safe real interest rate would be positive and significant, so that a 2% per year inflation target would not entail disturbingly low levels of nominal interest rates that might lead to instabilities in velocity.
                                                      3. That shocks to the economy would be small, so that the Federal Reserve would never seek to compensate with an interest-rate reduction in the range of 5% or more.

                                                      We now know that all three of these were and are false.

                                                      The easiest way to fix this problem would be to revise the Federal Reserve Act — perhaps to add “healthy rate of nominal wage growth” to the list of Federal Reserve monetary policy objectives.

                                                        Posted by on Tuesday, March 24, 2015 at 09:03 AM in Economics, Monetary Policy | Permalink  Comments (26) 

                                                        'The Real Cost of Coal'

                                                        David Hayes and James Stock:

                                                        The Real Cost of Coal, NY Times: Congress long ago established a basic principle governing the extraction of coal from public lands by private companies: American taxpayers should be paid fair value for it. They own the coal, after all.... Studies by the Government Accountability Office, the Interior Department’s inspector general and nonprofit research groups have all concluded that taxpayers are being shortchanged.
                                                        This is no small matter. In 2013, approximately 40 percent of all domestic coal came from federal lands. ... Headwaters Economics estimates that various reforms to the royalty valuation system would have generated $900 million to $5.6 billion more overall between 2008 and 2012.
                                                        This failure by the government to collect fair value for taxpayer coal is made more troubling by the climate-change implications of burning this fossil fuel. ... The price for taxpayer-owned coal should reflect, in some measure, the added costs associated with the impacts of greenhouse gas emissions. ...
                                                        Industry is sure to oppose this, even though coal is the planet’s most carbon-intensive energy source. Others will argue that an across-the-board carbon tax is a more efficient way to account for climate impacts. With no near-term prospects for such legislation, however, the Interior Department should set a royalty that provides fair value to taxpayers by addressing the climate costs of burning coal. ...

                                                          Posted by on Tuesday, March 24, 2015 at 09:00 AM in Economics, Environment, Market Failure, Regulation | Permalink  Comments (15) 

                                                          Links for 03-24-15

                                                            Posted by on Tuesday, March 24, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (209) 

                                                            Monday, March 23, 2015

                                                            'Congressional Budget Plans Get Two-Thirds of Cuts From Programs for People With Low or Moderate Incomes'

                                                            The true goal of Republican's "deficit fetishism":

                                                            Congressional Budget Plans Get Two-Thirds of Cuts From Programs for People With Low or Moderate Incomes, by Richard Kogan and Isaac Shapiro, CBPP: The budgets adopted on March 19 by the House Budget Committee and the Senate Budget Committee each cut more than $3 trillion over ten years (2016-2025) from programs that serve people of limited means. These deep reductions amount to 69 percent of the cuts to non-defense spending in both the House and Senate plans.
                                                            Each budget plan derives more than two-thirds of its non-defense budget cuts from programs for people with low or modest incomes even though these programs constitute less than one-quarter of federal program costs. Moreover, spending on these programs is already scheduled to decline as a share of the economy between now and 2025.[1]
                                                            The bipartisan deficit reduction plan that Alan Simpson and Erskine Bowles (co-chairs of the National Commission on Federal Policy) issued in 2010 adhered to the basic principle that deficit reduction should not increase poverty or widen inequality. The new Congressional plans chart a radically different course, imposing their most severe cuts on people on the lower rungs of the economic ladder. ...

                                                              Posted by on Monday, March 23, 2015 at 09:59 AM in Budget Deficit, Economics, Politics, Social Insurance | Permalink  Comments (20) 

                                                              Paul Krugman: This Snookered Isle


                                                              This Snookered Isle, by Paul Krugman, Commentary, NY Times: The 2016 election is still 19 mind-numbing, soul-killing months away. There is, however, another important election in just six weeks, as Britain goes to the polls. And many of the same issues are on the table.
                                                              Unfortunately, economic discourse in Britain is dominated by a misleading fixation on budget deficits. Worse, this bogus narrative has infected supposedly objective reporting; media organizations routinely present as fact propositions that are contentious if not just plain wrong.
                                                              Needless to say, Britain isn’t the only place where things like this happen. A few years ago, at the height of our own deficit fetishism, the American news media showed some of the same vices. ... Reporters would drop all pretense of neutrality and cheer on proposals for entitlement cuts.
                                                              In the United States, however, we seem to have gotten past that. Britain hasn’t.
                                                              The narrative I’m talking about goes like this: In the years before the financial crisis, the British government borrowed irresponsibly... As a result, by 2010 Britain was at imminent risk of a Greek-style crisis; austerity policies, slashing spending in particular, were essential. And this turn to austerity is vindicated by Britain’s low borrowing costs, coupled with the fact that the economy, after several rough years, is now growing quite quickly.
                                                              Simon Wren-Lewis of Oxford University has dubbed this narrative “mediamacro.” As his coinage suggests, this is what you hear all the time on TV and read in British newspapers, presented not as the view of one side of the political debate but as simple fact.
                                                              Yet none of it is true. ...
                                                              Given all this, you might wonder how mediamacro gained such a hold on British discourse. Don’t blame economists. ... This media orthodoxy has become entrenched despite, not because of, what serious economists had to say.
                                                              Still, you can say the same of Bowles-Simpsonism in the United States... It was all about posturing, about influential people believing that pontificating about the need to make sacrifices — or, actually, for other people to make sacrifices — is how you sound wise and serious. ...
                                                              As I said, in the United States we have mainly gotten past that, for a variety of reasons — among them, I suspect, the rise of analytical journalism, in places like The Times’s The Upshot. But Britain hasn’t; an election that should be about real problems will, all too likely, be dominated by mediamacro fantasies.

                                                                Posted by on Monday, March 23, 2015 at 09:09 AM in Economics, Macroeconomics, Media | Permalink  Comments (73) 

                                                                'When Reasonable Policy Discussions Become Unreasonable Personal Attacks'

                                                                I don't think Robert Stavins is happy about a story challenging his credibility and reputation:

                                                                When Reasonable Policy Discussions Become Unreasonable Personal Attacks: Recently I was reminded of the controversy that erupted late in 2014 about remarks made by the distinguished health economist, Jonathan Gruber... Professor Gruber, one of the country’s leading experts on health policy, had played an important role in the construction of the Obama administration’s Patient Protection and Affordable Care Act, subsequently derided by its political opponents as “Obamacare.”
                                                                A brief but intense political controversy and media feeding-frenzy erupted when videos surfaced in which Professor Gruber – largely in a series of academic seminars and conferences – explained how the Act was crafted and marketed in ways that would make it easier to develop political support. For example, he noted that insurance companies were taxed instead of patients, fundamentally the same thing economically, but vastly more palatable politically. He went on to note that this was possible because of “the lack of economic understanding of the American voter.” His key point was that the program’s “lack of transparency is a huge political advantage.” Is that a controversial or even unique observation?
                                                                A Truism of Political Economy
                                                                Any economist who has worked on the development or analysis of public policy – in areas ranging from health care policy to environmental policy to financial regulation – recognizes the truth of the key insight Gruber was communicating to his audiences. It is inevitably in the interests of the advocates of a policy to make the policy’s benefits transparent and to make its costs vague, even unobservable; just as it is in the interests of the opponents of a policy to make that policy’s benefits obscure and its costs as clear as the light of day.
                                                                The specific construction of hundreds of public policies are explained by this truism. ...
                                                                So, the central lesson Professor Gruber was offering is hardly controversial... He doesn’t need me to defend him, but he was unfairly demonized, simply because people disagreed with him politically regarding the merits of the public policy he had helped develop and support.
                                                                Unfortunately, I was reminded of this recently when I found myself subject to attempted demonization, because someone did not agree with a policy I supported. What happened to me is trivial compared with what Professor Gruber has gone through, but it prompts me to write about it today. ...
                                                                A young and – I’m sure – well-intentioned climate activist and journalist, writing in the Huffington Post, implied that my assessment in the New York Times of the Washington political debates regarding Keystone XL and my support for Harvard’s divestment policy, are because “Stavins has done consulting work for Chevron, Exelon, Duke Energy and the Western States Petroleum Association.”
                                                                The author of the Huffington Post piece selected those three companies and one trade association from a list of 92 “Outside Activities” that I voluntarily provide as a means of public disclosure. The author chose not to note that the vast majority of my outside engagements are with universities, think tanks, environmental advocacy NGOs, foundations, the U.S. Environmental Protection Agency, other federal agencies and departments, international organizations, and environment ministries around the world (not to mention a set of Major League Baseball teams, but that’s another story altogether). ...
                                                                It is nothing less than absurd – and, frankly, quite insulting – for someone to suggest that my views on divestment and my New York Times quote on the politics of Keystone XL are somehow due to my having worked with an oil company, a trade association, and two electric utilities. This was an unfortunate move to question my credibility and damage my reputation in a misguided attempt to demonize me, rather than engage in reasonable discussion and debate. Unfortunately, most of those who have read the activist/journalist’s original commentary and have possibly repeated his claims to others will not see the response you have just read.
                                                                This is surely nothing compared with what Professor Gruber has gone through, but it has certainly increased my empathy for him, as well as my admiration.

                                                                  Posted by on Monday, March 23, 2015 at 12:15 AM in Economics, Environment, Politics | Permalink  Comments (57) 

                                                                  Links for 03-23-15

                                                                    Posted by on Monday, March 23, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (189) 

                                                                    Sunday, March 22, 2015

                                                                    'Student Loan Debt Is the Enemy of Meritocracy'

                                                                    Thomas Piketty on a theme I've been hammering lately, student debt is too damn high!:  

                                                                    Student Loan Debt Is the Enemy of Meritocracy in the US: ...the amount of household debt and even more recently of student debt in the U.S. is something that is really troublesome and it reflects the very large rise in tuition in the U.S. a very large inequality in access to education. I think if we really want to promote more equal opportunity and redistribute chances in access to education we should do something about student debt. And it's not possible to have such a large group of the population entering the labor force with such a big debt behind them. This exemplifies a particular problem with inequality in the United States, which is very high inequality and access to higher education. So in other countries in the developed world you don't have such massive student debt because you have more public support to higher education. I think the plan that was proposed earlier this year in 2015 by President Obama to increase public funding to public universities and community college is exactly justified.
                                                                    This is really the key for higher growth in the future and also for a more equitable growth..., you have the official discourse about meritocracy, equal opportunity and mobility, and then you have the reality. And the gap between the two can be quite troublesome.  So this is like you have a problem like this and there's a lot of hypocrisy about meritocracy in every country, not only in the U.S., but there is evidence suggesting that this has become particularly extreme in the United States. ... So this is a situation that is very troublesome and should rank very highly in the policy agenda in the future in the U.S.

                                                                      Posted by on Sunday, March 22, 2015 at 10:12 AM in Economics, Universities | Permalink  Comments (99) 

                                                                      'Controlling the Past'

                                                                      Simon Wren-Lewis:

                                                                      Controlling the past: In his novel 1984 George Orwell wrote: “Who controls the past controls the future: who controls the present controls the past.” We are not quite in this Orwellian world yet, which means attempts to rewrite history can at least be contested. A few days ago the UK Prime Minister in Brussels said this:
                                                                      “When I first came here as prime minister five years ago, Britain and Greece were virtually in the same boat, we had similar sized budget deficits. The reason we are in a different position is we took long-term difficult decisions and we had all of the hard work and effort of the British people. I am determined we do not go backwards.”
                                                                      In other words if only those lazy Greeks had taken the difficult decisions that the UK took, they too could be like the UK today.
                                                                      This is such as travesty of the truth, as well as a huge insult to the Greek people, that it is difficult to know where to begin. ...
                                                                      The real travesty ... is in the implication that somehow Greece failed to take the ‘difficult decisions’ that the UK took. ‘Difficult decisions’ is code for austerity. A good measure of austerity is the underlying primary balance. According to the OECD, the UK underlying primary balance was -7% in 2009, and it fell to -3.5% in 2014: a fiscal contraction worth 3.5% of GDP. In Greece it was -12.1% in 2009, and was turned into a surplus of 7.6% by 2014: a fiscal contraction worth 19.7% of GDP! So Greece had far more austerity, which is of course why Greek GDP has fallen by 25% over the same period. A far more accurate statement would be that the UK started taking the same ‘difficult decisions’ as Greece took, albeit in a much milder form, but realized the folly of this and stopped. Greece did not get that choice. And I have not even mentioned the small matter of being in or out of a currency union. ...

                                                                        Posted by on Sunday, March 22, 2015 at 10:12 AM in Budget Deficit, Economics, Politics | Permalink  Comments (26) 

                                                                        Links for 03-22-15

                                                                          Posted by on Sunday, March 22, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (156) 

                                                                          Saturday, March 21, 2015

                                                                          The New Brand of Authoritarianism

                                                                          From Vox EU:

                                                                          The new authoritarianism, by Sergei Guriev, Daniel Treisman, Vox EU: The changing dictatorships Dictatorships are not what they used to be. The totalitarian tyrants of the past – such as Hitler, Stalin, Mao, or Pol Pot – employed terror, indoctrination, and isolation to monopolize power. Although less ideological, many 20th-century military regimes also relied on mass violence to intimidate dissidents. Pinochet’s agents, for instance, are thought to have tortured and killed tens of thousands of Chileans (Roht-Arriaza 2005).

                                                                          However, in recent decades new types of authoritarianism have emerged that seem better adapted to a world of open borders, global media, and knowledge-based economies. From the Peru of Alberto Fujimori to the Hungary of Viktor Orban, illiberal regimes have managed to consolidate power without fencing off their countries or resorting to mass murder. Some bloody military regimes and totalitarian states remain – such as Syria and North Korea – but the balance has shifted.

                                                                          The new autocracies often simulate democracy, holding elections that the incumbents almost always win, bribing and censoring the private press rather than abolishing it, and replacing comprehensive political ideologies with an amorphous resentment of the West (Gandhi 2008, Levitsky and Way 2010). Their leaders often enjoy genuine popularity – at least after eliminating any plausible rivals. State propaganda aims not to ‘engineer human souls’ but to boost the dictator’s ratings. Political opponents are harassed and defamed, charged with fabricated crimes, and encouraged to emigrate, rather than being murdered en masse.

                                                                          Dictatorships and information

                                                                          In a recent paper, we argue that the distinctive feature of such new dictatorships is a preoccupation with information (Guriev and Treisman 2015). Although they do use violence at times, they maintain power less by terrorizing victims than by manipulating beliefs. Of course, surveillance and propaganda were important to the old-style dictatorships, too. But violence came first. “Words are fine things, but muskets are even better,” Mussolini quipped. Compare that to the confession of Fujimori’s security chief, Vladimir Montesinos: “The addiction to information is like an addiction to drugs”. Killing members of the elite struck Montesinos as foolish: “Remember why Pinochet had his problems. We will not be so clumsy” (McMillan and Zoido 2004).

                                                                          We study the logic of a dictatorship in which the leader survives by manipulating information. Our key assumption is that citizens care about effective government and economic prosperity; first and foremost, they want to select a competent rather than incompetent ruler. However, the general public does not know the competence of the ruler; only the dictator himself and members of an ‘informed elite’ observe this directly. Ordinary citizens make what inferences they can, based on their living standards – which depend in part on the leader’s competence – and on messages sent by the state and independent media. The latter carry reports on the leader’s quality sent by the informed elite. If a sufficient number of citizens come to believe their ruler is incompetent, they revolt and overthrow him.

                                                                          The challenge for an incompetent dictator is, then, to fool the public into thinking he is competent. He chooses from among a repertoire of tools – propaganda, repression of protests, co-optation of the elite, and censorship of their messages. All such tools cost money, which must come from taxing the citizens, depressing their living standards, and indirectly lowering their estimate of the dictator’s competence. Hence the trade-off.

                                                                          Certain findings emerge from the logic of this game.

                                                                          • First, we show how modern autocracies can survive while employing relatively little violence against the public.

                                                                          Repression is not necessary if mass beliefs can be manipulated sufficiently. Dictators win a confidence game rather than an armed combat. Indeed, since in our model repression is only used if equilibria based on non-violent methods no longer exist, violence can signal to opposition forces that the regime is vulnerable.

                                                                          • Second, since members of the informed elite must coordinate among themselves on whether to sell out to the regime, two alternative equilibria often exist under identical circumstances – one based on a co-opted elite, the other based on a censored private media.

                                                                          Since both bribing the elite and censoring the media are ways of preventing the sending of embarrassing messages, they serve as substitutes. Propaganda, by contrast, complements all the other tools.

                                                                          Propaganda and a leader’s competency

                                                                          Why does anyone believe such propaganda? Given the dictator’s obvious incentive to lie, this is a perennial puzzle of authoritarian regimes. We offer an answer. We think of propaganda as consisting of claims by the ruler that he is competent. Of course, genuinely competent rulers also make such claims. However, backing them up with convincing evidence is costlier for the incompetent dictators – who have to manufacture such evidence – than for their competent counterparts, who can simply reveal their true characteristics. Since faking the evidence is costly, incompetent dictators sometimes choose to spend their resources on other things. It follows that the public, observing credible claims that the ruler is competent, rationally increases its estimate that he really is.

                                                                          Moreover, if incompetent dictators survive, they may over time acquire a reputation for competence, as a result of Bayesian updating by the citizens. Such reputations can withstand temporary economic downturns if these are not too large. This helps to explain why some clearly inept authoritarian leaders nevertheless hold on to power – and even popularity – for extended periods (cf. Hugo Chavez). While a major economic crisis results in their overthrow, more gradual deteriorations may fail to tarnish their reputations significantly.

                                                                          A final implication is that regimes that focus on censorship and propaganda may boost relative spending on these as the economy crashes. As Turkey’s growth rate fell from 7.8% in 2010 to 0.8% in 2012, the number of journalists in jail increased from four to 49. Declines in press freedom were also witnessed after the Global Crisis in countries such as Hungary and Russia. Conversely, although this may be changing now, in both Singapore and China during the recent decades of rapid growth, the regime’s information control strategy shifted from one of more overt intimidation to one that often used economic incentives and legal penalties to encourage self-censorship (Esarey 2005, Rodan 1998).  

                                                                          The kind of information-based dictatorship we identify is more compatible with a modernized setting than with the rural underpinnings of totalitarianism in Asia or the traditional societies in which monarchs retain legitimacy. Yet, modernization ultimately undermines the informational equilibria on which such dictators rely. As education and information spread to broader segments of the population, it becomes harder to control how this informed elite communicates with the masses. This may be a key mechanism explaining the long-noted tendency for richer countries to open up politically.


                                                                          Esarey, A (2005), “Cornering the market: state strategies for controlling China's commercial media”, Asian Perspective 29(4): 37-83.

                                                                          Gandhi, J (2008), Political Institutions under Dictatorship, New York: Cambridge University Press.

                                                                          Guriev, S and D Treisman (2015), “How Modern Dictators Survive: Cooptation, Censorship, Propaganda, and Repression”, CEPR Discussion Paper, DP10454.

                                                                          Levitsky, S, and L A Way (2010), Competitive authoritarianism: hybrid regimes after the cold war, New York: Cambridge University Press.

                                                                          McMillan, J, and P Zoido (2004), “How to subvert democracy: Montesinos in Peru”, Journal of Economic Perspectives 18(4): 69-92.

                                                                          Rodan, G (1998), “The Internet and political control in Singapore”, Political Science Quarterly 113(1): 63-89.

                                                                          Roht-Arriaza, N (2005), The Pinochet Effect: Transnational Justice in the Age of Human Rights, Philadelphia: University of Pennsylvania Press. 

                                                                            Posted by on Saturday, March 21, 2015 at 01:27 PM in Economics, Politics | Permalink  Comments (39) 

                                                                            Links for 03-21-15

                                                                              Posted by on Saturday, March 21, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (241) 

                                                                              Friday, March 20, 2015

                                                                              'We’re Frighteningly in the Dark About Student Debt'

                                                                              Susan Dynarski:

                                                                              We’re Frighteningly in the Dark About Student Debt, NY Times: ...The ... United States government ... has a portfolio of roughly $1 trillion in student loans, many of which appear to be troubled. The Education Department, which oversees the portfolio, is ... neither analyzing the portfolio adequately nor allowing other agencies to do so.
                                                                              These loans are no trivial matter... Student loans are now the second-largest source of consumer debt in the United States, surpassed only by home mortgages. In a major reversal, they now constitute a larger portion of household debt than credit cards or car loans. ...
                                                                              The frightening reality, however, is that we are remarkably ignorant about student debt..., we can’t quantify the risks that student debt places on individual households and the economy as a whole. ...
                                                                              Over at the Federal Reserve and consumer bureau, as well as outside the government, highly trained analysts are eager for data. A sensible solution would be for the Education Department to put it in their hands and let them get to work.
                                                                              An additional longer-term solution is to move the loan program out of the Education Department entirely — either into an existing agency that has the statistical expertise or a new student-loan authority. ...

                                                                              An even better solution would be to stop saddling students with so much debt.

                                                                                Posted by on Friday, March 20, 2015 at 10:30 AM in Economics, Financial System, Regulation, Taxes, Universities | Permalink  Comments (68) 

                                                                                Paul Krugman: Trillion Dollar Fraudsters

                                                                                Why do Republicans use "magic asterisks" in their budget proposals?:

                                                                                Trillion Dollar Fraudsters, by Paul Krugman, Commentary, NY Times: By now it’s a Republican Party tradition: Every year the party produces a budget that allegedly slashes deficits, but which turns out to contain a trillion-dollar “magic asterisk” — a line that promises huge spending cuts and/or revenue increases, but without explaining where the money is supposed to come from.
                                                                                But the just-released budgets from the House and Senate majorities break new ground. Each contains not one but two trillion-dollar magic asterisks: one on spending, one on revenue. And that’s actually an understatement. If either budget were to become law, it would leave the federal government several trillion dollars deeper in debt than claimed, and that’s just in the first decade. ...
                                                                                The modern G.O.P.’s raw fiscal dishonesty is something new in American politics... And the question we should ask is why.
                                                                                One answer you sometimes hear is that what Republicans really believe is that tax cuts for the rich would generate a huge boom and a surge in revenue, but they’re afraid that the public won’t find such claims credible. So magic asterisks are really stand-ins for their belief in the magic of supply-side economics, a belief that remains intact even though proponents in that doctrine have been wrong about everything for decades.
                                                                                But I’m partial to a more cynical explanation. Think about what these budgets would do if you ignore the mysterious trillions in unspecified spending cuts and revenue enhancements. What you’re left with is huge transfers of income from the poor and the working class, who would see severe benefit cuts, to the rich, who would see big tax cuts. And the simplest way to understand these budgets is surely to suppose that they are intended to do what they would, in fact, actually do: make the rich richer and ordinary families poorer.
                                                                                But this is, of course, not a policy direction the public would support... So the budgets must be sold as courageous efforts to eliminate deficits and pay down debt — which means that they must include trillions in imaginary, unexplained savings.
                                                                                Does this mean that all those politicians declaiming about the evils of budget deficits and their determination to end the scourge of debt were never sincere? Yes, it does.
                                                                                Look, I know that it’s hard to keep up the outrage after so many years of fiscal fraudulence. But please try. We’re looking at an enormous, destructive con job, and you should be very, very angry.

                                                                                  Posted by on Friday, March 20, 2015 at 09:10 AM in Budget Deficit, Economics, Income Distribution, Politics, Social Insurance, Taxes | Permalink  Comments (127) 

                                                                                  Links for 03-20-15

                                                                                    Posted by on Friday, March 20, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (147) 

                                                                                    Thursday, March 19, 2015

                                                                                    'Great Britain and Laissez Not-So-Faire Economics'

                                                                                    In case you missed this post by Dietz Vollrath when it was in the daily links:

                                                                                    Great Britain and Laissez Not-so-Faire Economics: I recently finished State, Economy, and the Great Divergence by Peer Vries. It’s a comparison of the activities of the state in Great Britain and China in the period running up to and including the Industrial Revolution, roughly 1650-1850.

                                                                                    Vries critiques the standard view on the role of the state and the divergence between these two places, encapsulating that view in the following:

                                                                                    In the Smithian interpretation of British economic history, that fits in quite neatly with the Whig interpretation of Britains overall history, the primacy of Britain and its industrialization are by and large regarded as the culmination of a long process in which Britains economy increasingly became characterized by free and fair competition and in which government increasingly tended to behave according to Smithian logics.
                                                                                    For those who endorse them, the predicament of imperial China, that it did not industrialize, has always been quite easy to explain. They only need to refer to the fact that China was characterized by some kind of oriental despotism. This notion has a long pedigree whose beginnings can be traced back at least to Marco Polo.

                                                                                    The alternative that Vries proposes is that China is far more “Smithian” than Great Britain in this period, in the sense that it operated a very hands-off government that mainly served to provide some subsistence insurance to its population, while Great Britain had a relatively large, intrusive, and active government managing its economy and actively interfering in the process of industrialization. ...

                                                                                    Vries then spends a good portion of the rest of the book laying out the evidence on government expenditures, taxes, employment, and transfer payments to support the idea that Great Britain had a much more intrusive state than China in this period. ...

                                                                                    Drawing on the excellent War, Wine, and Taxes by John Nye, Vries also talks about the attitude of Britain towards free trade... Compared to Britain, China was much closer to a free trade nation, declining to interfere or promote imports or exports actively. ...

                                                                                    Mercantilism, as practiced throughout this period in Great Britain, was not simply a fascination with collecting gold. The British government actively looked to strengthen manufacturing (of imported raw materials) and used military and naval power to open markets with that purpose in mind. To do this it taxed heavily, borrowed heavily, and spent heavily.

                                                                                    What to make of this? There is no necessary link between strict laissez-faire policies and growth. The first industrial nation in the world was anything but laissez-faire, and it intervened far more deeply into its economy than China, which functioned in some sense as the idealized “night watchman” state of Adam Smith. There is little to no evidence that government “just getting out of the way” leads to development. The interventions Great Britain did make certainly resulted in massive monopoly rents to small groups of people at times. So let’s not go overboard in the other direction and conclude that massive state interventions are necessary or optimal. But it is valuable knowing just how un-laissez-faire Britain was during this period.

                                                                                    Why did Britain take off even with all this government interference? Vries doesn’t say this explicitly, but I think his answer is partly that large-scale industrialization has big fixed costs. I want two things before I undertake big fixed investments: a large market and low risk. The British government used the high taxes to fund a military that could ensure large markets around the world, and could ensure that those markets remained open so I could earn enough to pay off my fixed cost. That military (directly or by proxy) could also actively ensure that other markets did not develop competitive industries, again ensuring that I could earn enough to make the fixed costs worth it. Without the market size and low risk, maybe British capitalists are not willing to create the large-scale industries that drove the IR. In that sense, the large size of government was necessary to the industrialization of Britain.

                                                                                      Posted by on Thursday, March 19, 2015 at 10:16 AM in Economics | Permalink  Comments (69) 

                                                                                      Interview of Summers and Phelps

                                                                                      From a (much longer) interview of Larry Summers and Edmund Phelps:

                                                                                      ... Q: What do you feel is the relationship between capitalism and conflicts (such as the Arab Spring)?
                                                                                      [Prof. Larry H. Summers] It’s very tempting to suggest that terrorism is caused by poverty. I hate terrorism, and I hate poverty, but my reading of the evidence suggests that they are less closely tied together than many suppose.

                                                                                      Those on the planes on 9/11 were highly educated and had cosmopolitan, international experiences. Most of the studies of terrorism find that it has more to do with disillusionment on the part of those who do not feel themselves fully part of progress at moments when rapid progress is underway- rather than it coming from people who are simply frustrated at being poor. The phrase, “revolution of rising expectations…” is often historically apt.

                                                                                      Europe was flourishing in an economic sense, in June 1914, and it was at war by August of that year. There are plenty of good arguments for economic growth, and for markets, but I think it’s somewhat naïve immediate and direct linkages with terrorism!

                                                                                      As my Harvard colleague Steven Pinker has emphasized, deaths due to violence have been on a long-term downward trend for thousands of years, hundreds of years, and for the last several decades. While the causes are complex, the greater sense of human enlightenment, empathy and connection that is present in the modern world, have to be an important part of the story – and that is surely related to what capitalism has brought.
                                                                                      ... Q: What is the future of economics as a discipline?

                                                                                      [Edmund Phelps] Economics is in a tremendous crisis... especially since it doesn't know it's in a crisis.

                                                                                      This may sound funny... but it didn't damage me (personally). I spent most of my career trying to put people back into economics! The day I won the Nobel prize, I was asked at a press-conference to encapsulate my life's research in one sentence. I said, "...in my work, I've tried to put the people back into economic theory..." Some of my earliest work looks at a farmer considering new seeds and fertilizers... contemplating whether or not he can take the risk of trying any of these new things.... and whether he should adopt them. The answer depends on his educational background.... his willingness to bear some uncertainty... and so forth. Later on, when I was working on unemployment and inflation- I asked myself... What would I do if I was a company? I realized I would be worried about what other companies were doing about their wages! In the process of increasing their wages, to the extent that they are, I must increase mine too in anticipation. I then introduced wage-expectations and price-expectations which were not talked about before. Later on, around 2000- I started talking about the visions of entrepreneurs... those are real life people who have visions! People who from any walk of life can have an idea.... A truly modern economy is all about ideas and people!

                                                                                      Economics has contributed to the march away from these principles by reducing economies to 'stochastic steady-state models' in which prices are the entire interest. Prices, in these models, 'vibrate' in some way. I find this incredible.... This thinking began seeping into the financial sector so then the banks started importing French mathematicians to work out how to price various assets as if anyone could possibly know what these assets are worth? We live in an uncertain world... not just a vibrating one! Economics will (and should) always have a scientific side... but it has to remember that no piece of evidence is ever decisive on its own... we have to understand that our subject is human creativity. That will be a very different kind of science from what we have had before. There hardly is any science of creativity yet- yet alone a science of individual or societal creativity which understands the interactions of people- that's the next giant-step.

                                                                                        Posted by on Thursday, March 19, 2015 at 09:11 AM in Economics | Permalink  Comments (13) 

                                                                                        Links for 03-19-15

                                                                                          Posted by on Thursday, March 19, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (118) 

                                                                                          Wednesday, March 18, 2015

                                                                                          Fed Watch: Yellen Strikes a Dovish Tone

                                                                                          Tim Duy:

                                                                                          Yellen Strikes a Dovish Tone, by Tim Duy: The FOMC concluded its two-day meeting today, and the results were largely as I had anticipated. The Fed took note of the recent data, downgrading the pace of activity from "solid" to "moderated." They continue to expect inflation weakness to be transitory. The risks to the outlook are balanced. And "patient" was dropped; April is still off the table for a rate hike, but data dependence rules from that point on.
                                                                                          Growth, inflation and unemployment forecasts all came down. Especially important was the decrease in longer-run unemployment projections. The Fed's estimates of NAIRU are falling, something almost impossible to avoid given the stickiness of wage growth in the face of falling unemployment. The forecast changes yielded a downward revision to the Fed's interest rate projections. In addition, the strong dollar was clearly on the Fed's mind. Federal Reserve Chair Janet Yellen often referred to the dollar and its impact on growth in the press conference, much more than I expected. I think they are probably happy the dollar took a hit today. On net, I think this from last week stood up well:
                                                                                          ...assuming the Federal Reserve takes sufficient note of the rising dollar, and its impact on inflation, by lowering the expected path of short term interest rates. And perhaps this is exactly what is revealed in next week's Summary of Economic Projections. Look for the possibility next week that the Fed is both hawkish - by opening the door for a June hike - and dovish - by lowering the median rate projections in the dot plot.
                                                                                          Note that the Fed is capitulating here. The distance between the bond market and the Fed rate expectations has been something of a conundrum for policymakers. But it is now clear the bond market is not moving toward the Fed; the Fed is moving toward the bond market. Going forward, they still believe that their rate forecast is accommodative. Based on the new estimate of NAIRU and New York Federal Reserve President William Dudley's recent estimate of the equilibrium rate, they are correct:


                                                                                          But if you assume a lower equilibrium interest rate, the Fed's rate forecast has more downside to it if they wish to remain accommodative:


                                                                                          For what it's worth, this is what San Fransisco Federal Reserve President John Williams' research suggests about the current equilibrium rate:


                                                                                          Is June really on the table? Regarding the timing of the first rate hike, the FOMC had this to say:
                                                                                          The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
                                                                                          Yellen was pushed to quantify "reasonably confident" during the press conference, but she declined to give a mechanical answer. Actual inflation, the path of the labor market, wage growth, and measures of inflation expectations were all fair game in the assessment. She did say wage growth was not a precondition for rate hike. I tend to think that unemployment dropping to 5% or an acceleration in wage growth is sufficient to prompt the first rate hike, either of which could still happen by the time of the June meeting. That said, at this point, the inflation and growth data point to a later lift-off, and weighting the expectations for a rate hike at a later date seems appropriate at this juncture.
                                                                                          Bottom Line: Yellen does it again - she moves the Fed both closer to and further from the first rate hike of this cycle. By moving toward the markets on the path of rate hikes, the Fed acknowledges that they are eager to let this recovery run on. Moreover, they proved that they are in fact data dependent by moving policy in the direction of the data. Overall, Yellen has managed the transition away from what the Fed came to see as excessive forward guidance just about as well as could be expected.

                                                                                            Posted by on Wednesday, March 18, 2015 at 01:35 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (31) 

                                                                                            FOMC Press Release

                                                                                            The Fed has lost its patience (i.e. it dropped the word patience from its forward guidance even as it increases its estimate of the amount of slack in the economy by lowering its estimate of the natural rate of unemployment -- that gives it more reason to remain patient -- though the statement does say "This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range"):

                                                                                            Press Release, Release Date: March 18, 2015, For immediate release, FOMC: Information received since the Federal Open Market Committee met in January suggests that economic growth has moderated somewhat. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. A range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately; declines in energy prices have boosted household purchasing power. Business fixed investment is advancing, while the recovery in the housing sector remains slow and export growth has weakened. Inflation has declined further below the Committee's longer-run objective, largely reflecting declines in energy prices. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.
                                                                                            Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level 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 energy price declines and other factors dissipate. The Committee continues to monitor inflation developments closely.
                                                                                            To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. 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. Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range.
                                                                                            The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
                                                                                            When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
                                                                                            Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

                                                                                              Posted by on Wednesday, March 18, 2015 at 11:16 AM in Economics, Monetary Policy | Permalink  Comments (37) 

                                                                                              'Is the Walrasian Auctioneer Microfounded?'

                                                                                              Simon Wren-Lewis (he says this is "For macroeconomists"):

                                                                                              Is the Walrasian Auctioneer microfounded?: I found this broadside against Keynesian economics by David K. Levine interesting. It is clear at the end that he is child of the New Classical revolution. Before this revolution he was far from ignorant of Keynesian ideas. He adds: “Knowledge of Keynesianism and Keynesian models is even deeper for the great Nobel Prize winners who pioneered modern macroeconomics - a macroeconomics with people who buy and sell things, who save and invest - Robert Lucas, Edward Prescott, and Thomas Sargent among others. They also grew up with Keynesian theory as orthodoxy - more so than I. And we rejected Keynesianism because it doesn't work not because of some aesthetic sense that the theory is insufficiently elegant.”
                                                                                              The idea is familiar: New Classical economists do things properly, by founding their analysis in the microeconomics of individual production, savings and investment decisions. [2] It is no surprise therefore that many of today’s exponents of this tradition view their endeavour as a natural extension of the Walrasian General Equilibrium approach associated with Arrow, Debreu and McKenzie. But there is one agent in that tradition that is as far from microfoundations as you can get: the Walrasian auctioneer. It is this auctioneer, and not people, who typically sets prices. ...
                                                                                              Now your basic New Keynesian model contains a huge number of things that remain unrealistic or are just absent. However I have always found it extraordinary that some New Classical economists declare such models as lacking firm microfoundations, when these models at least try to make up for one area where RBC models lack any microfoundations at all, which is price setting. A clear case of the pot calling the kettle black! I have never understood why New Keynesians can be so defensive about their modelling of price setting. Their response every time should be ‘well at least it’s better than assuming an intertemporal auctioneer’.[1] ...
                                                                                              As to the last sentence in the quote from Levine above, I have talked before about the assertion that Keynesian economics did not work, and the implication that RBC models work better. He does not talk about central banks, or monetary policy. If he had, he would have to explain why most of the people working for them seem to believe that New Keynesian type models are helpful in their job of managing the economy. Perhaps these things are not mentioned because it is so much easier to stay living in the 1980s, in those glorious days (for some) when it appeared as if Keynesian economics had been defeated for good.

                                                                                                Posted by on Wednesday, March 18, 2015 at 11:00 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (14) 

                                                                                                'Estimating the Impact of Robots on Productivity and Employment'

                                                                                                Another article about robots:

                                                                                                Estimating the impact of robots on productivity and employment, by Guy Michaels and Georg Graetz, Vox EU: Robots' capacity for autonomous movement and their ability to perform an expanding set of tasks have captured writers' imaginations for almost a century. Recently robots have emerged from the pages of science fiction novels into the real world, and discussions of their possible economic effects have become ubiquitous (see e.g. The Economist 2014, Brynjolfsson and McAfee 2014). But a serious problem inhibits these discussions – there has so far been no systematic empirical analysis of the effects that robots are already having.
                                                                                                In recent work we begin to remedy this problem (Graetz and Michaels 2015). We compile a new dataset spanning 14 industries (mainly manufacturing industries, but also agriculture and utilities) in 17 developed countries (including European countries, Australia, South Korea, and the US). Uniquely, our dataset includes a measure of the use of industrial robots employed in each industry, in each of these countries, and how it has changed from 1993-2007. We obtain information on other economic performance indicators from the EUKLEMS database (Timmer et al. 2007).
                                                                                                We find that industrial robots increase labor productivity, total factor productivity, and wages. At the same time, while industrial robots had no significant effect on total hours worked, there is some evidence that they reduced the employment of low skilled workers, and to a lesser extent also middle skilled workers. ...

                                                                                                They conclude:

                                                                                                Our findings on the aggregate impact of robots are interesting given recent concerns in the macroeconomic literature that productivity gains from technology in general may have slowed down. Gordon (2012, 2014) expresses a particularly pessimistic view, and there are broader worries about secular macroeconomic stagnation (Summers 2014, Krugman 2014), although others remain more optimistic (Brynjolfsson and McAfee 2014). We expect that the beneficial effects of robots will extend into the future as new robot capabilities are developed, and service robots come of age. Our findings do come with a note of caution: there is some evidence of diminishing marginal returns to robot use, or congestion effects, so robots are not a panacea for growth.
                                                                                                Although we do not find evidence of a negative impact of robots on aggregate employment, we see a more nuanced picture when we break down employment (and the wage bill) by skill groups. Robots appear to reduce the hours and the wage bill shares of low-skilled workers, and to a lesser extent also of middle skilled workers. They have no significant effect on the employment of high-skilled workers. This pattern differs from the effect that recent work has found for ICT, which seems to benefit high-skilled workers at the expense of middle-skilled workers (Autor 2014, Michaels et al. 2014).
                                                                                                In further results, we find that industrial robots increased total factor productivity and wages. At the same time, we find no significant effect of these robots on the labor share.
                                                                                                In summary, we find that industrial robots made significant contributions to labor productivity and aggregate growth, and also increased wages and total factor productivity.  While fears that robots destroy jobs at a large scale have not materialized, we find some evidence that robots reduced low- and middle-skilled workers’ employment.

                                                                                                  Posted by on Wednesday, March 18, 2015 at 10:02 AM in Economics, Technology | Permalink  Comments (17) 

                                                                                                  'Arezki, Ramey, and Sheng on News Shocks'

                                                                                                  I was at this conference as well. This paper was very well received (it has been difficult to find evidence that news generates business cycles, in part because it's been difficult to find a "clean" shock):

                                                                                                  Arezki, Ramey, and Sheng on news shocks: I attended the NBER EFG (economic fluctuations and growth) meeting a few weeks ago, and saw a very nice paper by Rabah Arezki, Valerie Ramey, and Liugang Sheng, "News Shocks in Open Economies: Evidence from Giant Oil Discoveries" (There were a lot of nice papers, but this one is more bloggable.)

                                                                                                  They look at what happens to economies that discover they have a lot of oil. ... An oil discovery is a well identified "news shock."

                                                                                                  Standard productivity shocks are a bit nebulous, and alter two things at once: they give greater productivity and hence incentive to work today and also news about more income in the future.

                                                                                                  An oil discovery is well publicized. It incentivizes a small investment in oil drilling, but mostly is pure news of an income flow in the future. It does not affect overall labor productivity or other changes to preferences or technology.
                                                                                                  Rabah,Valerie, and Liugang then construct a straightforward macro model of such an event. ...[describes model and results]...

                                                                                                  Valerie, presenting the paper, was a bit discouraged. This "news shock" doesn't generate a pattern that looks like standard recessions, because GDP and employment go in the opposite direction.

                                                                                                  I am much more encouraged. Here are macroeconomies behaving exactly as they should, in response to a shock where for once we really know what the shock is. And in response to a shock with a nice dynamic pattern, which we also really understand.

                                                                                                  My comment was something to the effect of "this paper is much more important than you think. You match the dynamic response of economies to this large and very well identified shock with a standard, transparent and intuitive neoclassical model. Here's a list of some of the ingredients you didn't need: Sticky prices, sticky wages, money, monetary policy, (i.e. interest rates that respond via a policy rule to output and inflation or zero bounds that stop them from doing so), home bias, segmented financial markets, credit constraints, liquidity constraints, hand-to-mouth consumers, financial intermediation, liquidity spirals, fire sales, leverage, sudden stops, hot money, collateral constraints, incomplete markets, idiosyncratic risks, strange preferences including habits, nonexpected utility, ambiguity aversion, and so forth, behavioral biases, nonexpected utility, or rare disasters. If those ingredients are really there, they ought to matter for explaining the response to your shocks too. After all, there is only one economic structure, which is hit by many shocks. So your paper calls into question just how many of those ingredients are really there at all."

                                                                                                  Thomas Phillipon, whose previous paper had a pretty masterful collection of a lot of those ingredients, quickly pointed out my overstatement. One needs not need every ingredient to understand every shock. Constraint variables are inequalities. A positive news shock may not cause credit constraints etc. to bind, while a negative shock may reveal them.

                                                                                                  Good point. And really, the proof is in the pudding. If those ingredients are not necessary, then I should produce a model without them that produces events like 2008. But we've been debating the ingredients and shock necessary to explain 1932 for 82 years, so that approach, though correct, might take a while.

                                                                                                  In the meantime, we can still cheer successful simple models and well identified shocks on the few occasions that they appear and fit data so nicely. Note to graduate students, this paper is a really nice example to follow for its integration of clear theory and excellent empirical work.

                                                                                                    Posted by on Wednesday, March 18, 2015 at 09:41 AM in Academic Papers, Economics, Macroeconomics, Oil | Permalink  Comments (4) 

                                                                                                    Links for 03-18-15

                                                                                                      Posted by on Wednesday, March 18, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (187)