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Monday, October 19, 2015

'Putting Rents at the Center of U.S. Income Inequality'

Nick Bunker:

Putting rents at the center of U.S. income inequality: The rise of income inequality in the United States since the late 1970s is a well-documented fact, but the reasons for the rise still aren’t well understood. The possible culprits include skill-biased technological change, globalization, the rise of the robots, and an increasingly popular reason: increased “rents” in the U.S. economy.
Rents, in economics parlance, are extra returns above and beyond what we’d expect in a competitive market. A new paper by Jason Furman, chair of the President’s Council of Economic Advisers, and Peter Orszag, former director of the Office of Management and Budget and a current Vice Chairman at Citigroup Inc., presents some evidence that not only have rents increased, but they provide a fundamentally important explanation for rising inequality. ...
While the evidence is far from definitive, increased market power could help explain raising rents as well as decreased labor demand. In conjunction with product, frictions in the labor market generate rents. If a firm has monopsonic power, for example, results in firms hiring fewer workers than is optimal for the entire economy. Increased market power and rents are also potential reasons for the decline in the share of income going to labor.
As Furman and Orszag make clear several times in the paper, the story presented here is far from a slam dunk. The evidence for each individual link in the chain isn’t rock solid yet, and digging into the different research areas is vital. Putting more emphasis on rents in the investigation of income inequality prompts a lot of interesting questions.

    Posted by on Monday, October 19, 2015 at 10:34 AM in Economics, Income Distribution, Market Failure | Permalink  Comments (15) 


    Paul Krugman: Something Not Rotten in Denmark

    The important lessons we can learn from Denmark:

    Something Not Rotten in Denmark, by Paul Krugman, Commentary, NY Times: No doubt surprising many of the people watching the Democratic presidential debate, Bernie Sanders cited Denmark as a role model for how to help working people. Hillary Clinton demurred slightly, declaring that “we are not Denmark,” but agreed that Denmark is an inspiring example. ... But how great are the Danes, really? ...
    Denmark maintains a welfare state ... that is beyond the wildest dreams of American liberals. ... To pay for these programs, Denmark collects a lot of taxes..., almost half of national income, compared with 25 percent in the United States. Describe these policies to any American conservative, and he would predict ruin. Surely those generous benefits must destroy the incentive to work, while those high taxes drive job creators into hiding or exile.
    Strange to say, however, Denmark ...is ... a prosperous nation that does quite well on job creation. ... It’s hard to imagine a better refutation of anti-tax, anti-government economic doctrine...
    But ... is everything copacetic in Copenhagen? Actually, no..., its ... recovery from the global financial crisis has been slow and incomplete. ...
    What explains this poor recent performance? The answer, mainly, is bad monetary and fiscal policy. Denmark hasn’t adopted the euro, but it manages its currency as if it had... And while the country has faced no market pressure to slash spending ... it has adopted fiscal austerity anyway.
    The result is a sharp contrast with neighboring Sweden, which doesn’t shadow the euro (although it has made some mistakes on its own), hasn’t done much austerity, and has seen real G.D.P. per capita rise while Denmark’s falls.
    But Denmark’s monetary and fiscal errors don’t say anything about the sustainability of a strong welfare state. In fact, people who denounce things like universal health coverage and subsidized child care tend also to be people who demand higher interest rates and spending cuts in a depressed economy. (Remember all the talk about “debasing” the dollar?) That is, U.S. conservatives actually approve of some Danish policies — but only the ones that have proved to be badly misguided.
    So yes, we can learn a lot from Denmark, both its successes and its failures. And let me say that it was both a pleasure and a relief to hear people who might become president talk seriously about how we can learn from the experience of other countries, as opposed to just chanting “U.S.A.! U.S.A.! U.S.A.!”

      Posted by on Monday, October 19, 2015 at 01:17 AM in Economics, Fiscal Policy, Monetary Policy, Politics, Social Insurance, Taxes | Permalink  Comments (98) 


      Links for 10-19-15

        Posted by on Monday, October 19, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (55) 


        Sunday, October 18, 2015

        'A Strong Press is the Best Defense Against Crony Capitalism'

        Luigi Zingales:

        A Strong Press is best Defense Against Crony Capitalism: ...the form of capitalism prevailing in most of the world is very distant from the ideal competitive and meritocratic system we economists theorize in our analyses... It is a corrupt form, in which incumbents and special-interest groups shape the rules of the game to their advantage, at the expense of everybody else: it is crony capitalism.
        The reason why a competitive capitalism is so difficult to achieve is that it requires an impartial arbiter to set the rules and enforce them. Markets work well only when the rules of the game are specified beforehand and are designed to level the playing field. But who has the incentives to design the rules in such an impartial way? ...
        This is where the media can play a crucial role. ...
        Inquisitive, daring and influential media outlets willing to take a strong stand against economic power are essential in a competitive capitalist society. They are our defense against crony capitalism. When the media outlets in any country fail to challenge power, not only are they not part of the solution, they become part of the problem.

          Posted by on Sunday, October 18, 2015 at 10:31 AM in Economics, Press | Permalink  Comments (40) 


          'Everything You Need to Know about Laissez-Faire Economics'

          A few excerpts from a much longer interview of Alan Kirman (it was in yesterday's links)

          Everything You Need to Know about Laissez-Faire Economics: ... DSW: I’m so happy to talk with you about the concept of laissez faire, all the way back to its origin, which as I understand it is during the Enlightenment. ...
          AK: I think the basic story that really interests us is that with the Enlightenment and with people like Adam Smith and David Hume, people had this idea that somehow intrinsically people should be left to their own devices and this would lead society to a state that was satisfactory in some sense for everybody, with some limits of course–law and order and so on. That’s the idea that is underlying our whole social and philosophical position ever since. ... I think what happened was on the one hand people became obsessed with proving there was some sort of socially satisfactory situation that corresponded to markets in equilibrium, and on the other hand, there was a lot of effort made, right up to the 1950’s, to try to show that a market or an economy would converge on that. But we gave up on that in the 70’s when there were results that showed that essentially we couldn’t prove it. So the theoreticians gave up but the underlying economic content and all of the ideology behind it has just kept going. We are in a strange situation where on the one hand we say we should leave markets to themselves because if they operate correctly and we get to an equilibrium this will be a socially satisfactory state. On the other hand, since we can’t show that it gets there, we talk about economies that are in equilibrium but that’s a contradiction because the invisible hand suggests that there is a mechanism that gets us there. And that’s what we’re lacking–a mechanism.  ...
          DSW: ...This has been a wonderful conversation, by the way. Nowadays, you hear all the time about how neoliberal ideology and thought is invading European countries and is undoing forms of governance that are actually working quite well. I work a lot in Norway and Scandinavia and there you hear all the time that Nordic model works and at the same time it is being corrupted by the neoliberal ideology, which is being spread in some sort of cancerous fashion. Please comment on that—Current neoliberalism. What justifies it? Is it spreading? Is that a good thing or a bad thing? Anything you would like to say on that topic.
          AK: I think that one obsession that economists have is with efficiency. We’re always, always, worrying about efficiency. People like to say that this is efficient or not efficient. The argument is, we know that if you free up markets you get a more efficient allocation of resources. That obsession with efficiency has led us to say that we must remove some of these restraints and restrictions and this sort of social aid that is built into the Scandinavian model. I think that’s without thinking carefully about the consequences. ...
          I think what has happened is, because of this mythology about totally free markets being efficient, we push for that all the time and in so doing, we started to do things like—for example, we hear all the time that we have to reform labor markets in Europe. Why do we want to reform them? Because then they’ll be more competitive. You can reduce unit labor costs, which usually means reducing wages. But that has all sorts of consequences, which are not perceived. In model that is more complex, that sort of arrangement wouldn’t necessarily be one that in your terms would be selected for. When you do that, you make many people temporary workers. You have complete ease in hiring and firing so that people are shifting jobs all the time. When they do that, we know that employers then invest nothing in their human capital. ... We’re reducing the overall human capital in society by having an arrangement like that. ... Again, the idea that people who are out of work have chosen to be out of work and by giving them a social cushion you induce them to be out of work—that simply doesn’t fit with the facts. I think that all the ramification of these measures—the side effects and external effects—all of that gets left out and we have this very simple framework that says “to be competitive, you just have to free everything up.” That’s what undermining the European system. European and Scandinavian systems work pretty well. ... The last remark I would make is that to say “you’ve got to get rid of all those rules and regulations you have”—in general, those rules and regulations are there for a reason. Again, to use an evolutionary argument, they didn’t just appear, they got selected for. We put them in place because there was some problem, so just to remove them without thinking about why they are there doesn’t make a lot of sense. ...
          DSW: There’s no invisible hand to save the day.
          AK: (laughs). Joe Stiglitz used to say that we also need a visible hand. The visible hand is sometimes pretty useful. For example in the financial sector I think you really need a visible hand and not an invisible hand. ...

            Posted by on Sunday, October 18, 2015 at 10:03 AM in Economics, History of Thought | Permalink  Comments (17) 


            Links for 10-18-15

              Posted by on Sunday, October 18, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (73) 


              Saturday, October 17, 2015

              ''Those Who are Left Out in the Cold''

              Branko Milanovic:

              Disarticulation goes North: ... In a recent piece published in the New York Times, Paul Theroux, after traveling through the American South, was shocked by the depth of poverty there, wrought in his opinion by the destruction of jobs that have all gone to Asia and import of cheap commodities from China. He was even more distraught by the apparent lack  of interest of American political and economic elites who seem to even fail to notice the plight of the Americans in states like Mississippi and most ironically in Arkansas where philanthropists such as the Clinton Foundation have not been much seen even as they proudly boast of  efforts “to save the elephants in Africa”.  
              The key issue raised by Theroux was whether trade, that is, globalization was responsible for this plight. The second issue that was raised was why there is so little empathy with the domestic poor or interest in doing something about their destitution. ...
              One can safely claim, to the extent that these things that be causally proven, that the rapid worldwide progress in poverty alleviation is due to globalization. It is also true that on any income or consumption metric, poverty in parts of Africa is much worse than in Mississippi. But of course none of that may be politically or socially relevant because national populations seldom care about cosmopolitan welfare functions (where happiness of every individual in the world is equally valued).  They work with national welfare functions where a given level of destitution locally is given a much greater weight than the same destitution abroad. There are studies that show the revealed difference in implicit national vs. cosmopolitan weighting of poverty (the ratio for the US is estimated at 2000 to 1); there are arguments for this, going back to Aristotle who in Nicomachean ethics thought that our level of empathy diminishes as in concentric circles as we move further from a very narrow community. And there are also political  philosophy arguments (by Rawls) why co-citizens do care more for each other than for the others.
              But I think that it is insufficient to leave this argument at a very abstract level where one group of Americans would have a more cosmopolitan welfare function and better perception of global benefits of trade and another would be more nativist and ignorant of economics. I do not think that the real difference between the two groups has to do with welfare concerns and economic literacy  but with their interests. Many rich Americans who like to point out to the benefits of globalization worldwide significantly benefited and continue to benefit from the type of globalization that has been unfolding during the past three decades. The numbers, showing their real income gains, are so well known that they need no repeating.  They are large beneficiaries from this type of globalization because of their ability to play off less well-paid and more docile labor from poorer countries against the often too expensive domestic labor. They also benefit through inflows of unskilled foreign labor that keep the costs of the services they consume low. Thus rich Americans are made better off by the key forces of globalization: migration, outsourcing, cheap imports, which have also been responsible for the major reduction of worldwide poverty.  Perhaps in a somewhat crude materialist fashion I think that their sudden interest in reducing worldwide poverty is just an ethical sugar-coating over their economic interests which are perfectly well served by globalization. Like every dominant class, or every beneficiary of an economic or political regime, they feel the need to situate their success within some larger whole and to explain that it is a by-product of a much grander betterment of human condition.
              A new alliance, based on the coincidence of interests, is thus formed between some of the richest people in the world and poor people  of Africa, Asia and Latin America. Those who are left out in the cold are the domestic lower-middle and middle classes squeezed between the competition from foreign labor and indifference of national ruling classes. ...
              The idea that globalization is a force that is good and beneficial for all is an illusion. Tectonic economic changes such as those brought by globalization always have winners and losers. (The first sentence of my forthcoming book “Global inequality”, Harvard University Press, April 2016, says exactly that.) Even if globalization is, as I believe, a positive phenomenon overall, both economically ... and ethically because it allows for the creation of something akin to community of all humankind, it is, and will remain, a deeply contradictory and disruptive force that would leave, at times significant groups of people, worse off. Refusing to see that is possible only if one is blinded by ideology of universal harmonies or by own economic interests.

                Posted by on Saturday, October 17, 2015 at 12:33 AM in Economics, Income Distribution, International Trade | Permalink  Comments (87) 


                'Threats Perceived When There Are None'

                Rajiv Sethi:

                Threats Perceived When There Are None: Sendhil Mullainathan is one of the most thoughtful people in the economics profession, but he has a recent piece in the New York Times with which I really must take issue.

                Citing data on the racial breakdown of arrests and deaths at the hands of law enforcement officers, he argues that "eliminating the biases of all police officers would do little to materially reduce the total number of African-American killings." Here's his reasoning:

                According to the F.B.I.’s Supplementary Homicide Report, 31.8 percent of people shot by the police were African-American, a proportion more than two and a half times the 13.2 percent of African-Americans in the general population... But this data does not prove that biased police officers are more likely to shoot blacks in any given encounter...

                Every police encounter contains a risk: The officer might be poorly trained, might act with malice or simply make a mistake, and civilians might do something that is perceived as a threat. The omnipresence of guns exaggerates all these risks.

                Such risks exist for people of any race — after all, many people killed by police officers were not black. But having more encounters with police officers, even with officers entirely free of racial bias, can create a greater risk of a fatal shooting.

                Arrest data lets us measure this possibility. For the entire country, 28.9 percent of arrestees were African-American. This number is not very different from the 31.8 percent of police-shooting victims who were African-Americans. If police discrimination were a big factor in the actual killings, we would have expected a larger gap between the arrest rate and the police-killing rate.

                This in turn suggests that removing police racial bias will have little effect on the killing rate.

                A key assumption underlying this argument is that encounters involving genuine (as opposed to perceived) threats to officer safety arise with equal frequency across groups. To see why this is a questionable assumption, consider two types of encounters, which I will call safe and risky. A risky encounter is one in which the confronted individual poses a real threat to the officer; a safe encounter is one in which no such threat is present. But a safe encounter might well be perceived as risky, as the following example of a traffic stop for a seat belt violation in South Carolina vividly illustrates:

                Sendhil is implicitly assuming that a white motorist who behaved in exactly the same manner as Levar Jones did in the above video would have been treated in precisely the same manner by the officer in question, or that the incident shown here is too rare to have an impact on the aggregate data. Neither hypothesis seems plausible to me.
                How, then, can once account for the rough parity between arrest rates and the rate of shooting deaths at the hands of law enforcement? If officers frequently behave differently in encounters with black civilians, shouldn't one see a higher rate of killing per encounter? 
                Not necessarily. To see why, think of the encounter involving Henry Louis Gates and Officer James Crowley back in 2009. This was a safe encounter as defined above, but may not have happened in the first place had Gates been white. If the very high incidence of encounters between police and black men is due, in part, to encounters that ought not to have occurred at all, then a disproportionate share of these will be safe, and one ought to expect fewer killings per encounter in the absence of bias. Observing parity would then be suggestive of bias, and eliminating bias would surely result in fewer killings.
                In justifying the termination of the officer in the video above, the director of the South Carolina Department of Public Safety stated that he "reacted to a perceived threat where there was none." Fear is a powerful motivator, and even when there are strong incentives not to shoot, it is still a preferable option to being shot. This is why stand-you-ground laws have resulted in an increased incidence of homicide, despite narrowing the very definition of homicide to exclude certain killings. It is also why homicide is so volatile across time and space, and why staggering racial disparities in both victimization and offending persist.
                None of this should detract from the other points made in Sendhil's piece. There are indeed deep structural problems underlying the high rate of encounters, and these need urgent policy attention. But a careful reading of the data does not support the claim that "removing police racial bias will have little effect on the killing rate." On the contrary, I expect that improved screening and better training, coupled with body and dashboard cameras, will result in fewer officers reacting to a perceived threat when there is none.

                  Posted by on Saturday, October 17, 2015 at 12:24 AM in Economics | Permalink  Comments (20) 


                  Links for 10-17-15

                    Posted by on Saturday, October 17, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (43) 


                    Friday, October 16, 2015

                    'Economics and the Modern Economic Historian'

                    This surprised me. I was under the impression that things are moving in the opposite direction:

                    Economics and the Modern Economic Historian, by Ran Abramitzky, NBER Working Paper No. 21636, October 2015: Abstract I reflect on the role of modern economic history in economics. I document a substantial increase in the percentage of papers devoted to economic history in the top-5 economic journals over the last few decades. I discuss how the study of the past has contributed to economics by providing ground to test economic theory, improve economic policy, understand economic mechanisms, and answer big economic questions. Recent graduates in economic history appear to have roughly similar prospects to those of other economists in the economics job market. I speculate how the increase in availability of high quality micro level historical data, the decline in costs of digitizing data, and the use of computationally intensive methods to convert large-scale qualitative information into quantitative data might transform economic history in the future.

                    From the introduction to the paper:

                    ... This sense that economists “believe history to be of small and diminishing interest” was made clear ... in 1976, when McCloskey wrote in defense of economic history a paper entitled “Does the past have useful economics?”. McCloskey concluded that the average American economist answers “no”. McCloskey showed a sharp decline in the publication of economic history papers in the top economic journals (AER, QJE, JPE). It was clear that “…this older generation of American economists did not persuade many of the younger that history is essential to economics.” ...

                    Today, thirty years later, economic history is far from being marginalized and overlooked by economists. To be sure, economic history remains a small field within economics, but the average economist today would answer a “yes” to the question of whether the past has useful economics. Economists increasingly recognize that historical events shape current economic development, and that current modern economies were once upon a time developing and their experience might be relevant for current developing countries. Recent debates in the US and Europe about immigration policies renewed interest in historical migration episodes. Most notably, the Great Recession of 2007-08 reminded economists of the Great Depression and other historic financial crises. Macroeconomic historian Christina Romer, a Great Depression expert, became the chief advisor of president Obama.3 Indeed, Barry Eichengreen, himself an expert on financial crises in history, started his 2011 presidential address by saying that “this has been a good crisis for economic history.”

                     That economic history today is more respected and appreciated by the average economist is also reflected by an increase in economic history publications in the top-5 economic journals. The decline in economic history in the top-3 journals that McCloskey documented has been reversed...

                      Posted by on Friday, October 16, 2015 at 11:15 AM in Academic Papers, Economics, History of Thought | Permalink  Comments (10) 


                      The Financial Crisis: Lessons for the Next One

                      Alan S. Blinder and Mark Zandi:

                      The Financial Crisis: Lessons for the Next One: The massive and multifaceted policy responses to the financial crisis and Great Recession -- ranging from traditional fiscal stimulus to tools that policymakers invented on the fly -- dramatically reduced the severity and length of the meltdown that began in 2008; its effects on jobs, unemployment, and budget deficits; and its lasting impact on today's economy.

                      Without the policy responses of late 2008 and early 2009, we estimate that:

                      • The peak-to-trough decline in real gross domestic product (GDP), which was barely over 4%, would have been close to a stunning 14%;
                      • The economy would have contracted for more than three years, more than twice as long as it did;
                      • More than 17 million jobs would have been lost, about twice the actual number.
                      • Unemployment would have peaked at just under 16%, rather than the actual 10%;
                      • The budget deficit would have grown to more than 20 percent of GDP, about double its actual peak of 10 percent, topping off at $2.8 trillion in fiscal 2011.
                      • Today's economy might be far weaker than it is -- with real GDP in the second quarter of 2015 about $800 billion lower than its actual level, 3.6 million fewer jobs, and unemployment at a still-dizzying 7.6%.

                      We estimate that, due to the fiscal and financial responses of policymakers (the latter of which includes the Federal Reserve), real GDP was 16.3% higher in 2011 than it would have been. Unemployment was almost seven percentage points lower that year than it would have been, with about 10 million more jobs.

                      To be sure, while some aspects of the policy responses worked splendidly, others fell far short of hopes. Many policy responses were controversial at the time and remain so in retrospect. Indeed, certain financial responses were deeply unpopular, like the bank bailouts in the Troubled Asset Relief Program (TARP). Nevertheless, these unpopular responses had a larger combined impact on growth and jobs than the fiscal interventions. All told, the policy responses -- the 2009 Recovery Act, financial interventions, Federal Reserve initiatives, auto rescue, and more -- were a resounding success.

                      Our findings have important implications for how policymakers should respond to the next financial crisis, which will inevitably occur at some point because crises are an inherent part of our financial system. As explained in greater detail in Section 5:

                      • It is essential that policymakers employ "macroprudential tools" (oversight of financial markets) before the next financial crisis to avoid or minimize asset bubbles and the increased leverage that are the fodder of financial catastrophes.
                      • When financial panics do come, regulators should be as consistent as possible in their responses to troubled financial institutions, ensuring that creditors know where their investments stand and thus don't run to dump them when good times give way to bad.
                      • Policymakers should not respond to every financial event, but they should respond aggressively to potential crises -- and the greater the uncertainty, the more policymakers should err on the side of a bigger response.
                      • Policymakers should recognize that the first step in fighting a crisis is to stabilize the financial system because without credit, the real economy will suffocate regardless of almost any other policy response.
                      • To minimize moral hazard, bailouts of companies should be avoided. If they are unavoidable, shareholders should take whatever losses the market doles out and creditors should be heavily penalized. Furthermore, taxpayers should ultimately be made financially whole and better communication with the public should be considered an integral part of any bailout operation.
                      • Because fiscal and monetary policy interactions are large, policymakers should use a "two-handed" approach (monetary and fiscal) to fight recessions -- and, if possible, they should select specific monetary and fiscal tools that reinforce each other.
                      • Because conventional monetary policy -- e.g., lowering the overnight interest rate -- may be insufficient to forestall or cure a severe recession, policymakers should be open to supplementing conventional monetary policy with unconventional monetary policies, such as the Federal Reserve's quantitative easing (QE) program of large-scale financial asset purchases, especially once short-term nominal interest rates approach zero.
                      • Discretionary fiscal policy, which has been a standard way to fight recessions since the Great Depression, remains an effective way to do so, and the size of the stimulus should be proportionate to the magnitude of the expected decline in economic activity.
                      • Policymakers should not move fiscal policy from stimulus to austerity until the financial system is clearly stable and the economy is enjoying self-sustaining growth.

                      The worldwide financial crisis and global recession of 2007-2009 were the worst since the 1930s. With luck, we will not see their likes again for many decades. But we will see a variety of financial crises and recessions, and we should be better prepared for them than we were in 2007. That's why we examined the policy responses to this most recent crisis closely, and why we wrote this paper.

                      We provide details of the methods we used to generate the findings summarized above....

                        Posted by on Friday, October 16, 2015 at 09:51 AM in Education, Fiscal Policy, Monetary Policy | Permalink  Comments (33) 


                        Paul Krugman: Democrats, Republicans and Wall Street Tycoons

                        Financial tycoons broke up with Democrats. Now they ♥ Republicans (or maybe they are just using them with their money):

                        Democrats, Republicans and Wall Street Tycoons, by Paul Krugman, Commentary, NY Times: Hillary Clinton and Bernie Sanders had an argument about financial regulation during Tuesday’s debate — but it wasn’t about whether to crack down on banks. Instead, it was about whose plan was tougher. The contrast with Republicans like Jeb Bush or Marco Rubio, who have pledged to reverse even the moderate financial reforms enacted in 2010, couldn’t be stronger.
                        For what it’s worth, Mrs. Clinton had the better case. ... But is Mrs. Clinton’s promise to take a tough line on the financial industry credible? Or would she ... return to the finance-friendly, deregulatory policies of the 1990s? ...
                        To understand the politics of financial reform and regulation, we have to start by acknowledging that there was a time when Wall Street and Democrats got on just fine. Robert Rubin of Goldman Sachs became Bill Clinton’s most influential economic official; big banks had plenty of political access; and the industry by and large got what it wanted, including repeal of Glass-Steagall.
                        This cozy relationship was reflected in campaign contributions, with the securities industry splitting its donations more or less evenly between the parties, and hedge funds actually leaning Democratic.
                        But then came the financial crisis of 2008, and everything changed.
                        Many liberals feel that the Obama administration was far too lenient on the financial industry in the aftermath of the crisis. ... But the financiers didn’t feel grateful for getting off so lightly. ... Financial tycoons loom large among the tiny group of wealthy families that is dominating campaign finance this election cycle — a group that overwhelmingly supports Republicans. Hedge funds used to give the majority of their contributions to Democrats, but since 2010 they have flipped almost totally to the G.O.P. ... Wall Street insiders take Democratic pledges to crack down on bankers’ excesses seriously. And it also means that a victorious Democrat wouldn’t owe much to the financial industry.
                        If a Democrat does win, does it matter much which one it is? Probably not. Any Democrat is likely to retain the financial reforms of 2010, and seek to stiffen them where possible. But major new reforms will be blocked until and unless Democrats regain control of both houses of Congress, which isn’t likely to happen for a long time.
                        In other words, while there are some differences in financial policy between Mrs. Clinton and Mr. Sanders, as a practical matter they’re trivial compared with the yawning gulf with Republicans.

                          Posted by on Friday, October 16, 2015 at 01:08 AM in Economics, Financial System, Politics, Regulation | Permalink  Comments (86) 


                          Links for 10-16-15

                            Posted by on Friday, October 16, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (57) 


                            Thursday, October 15, 2015

                            'GDP Growth is Not Exogenous'

                            Antonio Fatás:

                            GDP growth is not exogenous: Ken Rogoff in the Financial Times argues that the world economy is suffering from a debt hangover rather than deficient demand. The argument and the evidence are partly there: financial crises tend to be more persistent. However, there is still an open question whether this is the fundamental reason why growth has been so anemic and whether other potential reasons (deficient demand, secular stagnation,…) matter as much or even more.
                            In the article, Rogoff dismisses calls for policies to stimulate demand as the wrong actions to deal with debt, the ultimate cause of the crisis. ... But there is a perspective that is missing in that logic. The ratio of debt or government spending to GDP depends on GDP and GDP growth cannot be considered as exogenous. ...
                            In a recent paper Olivier Blanchard, Eugenio Cerutti and Larry Summers show that persistence and long-term effects on GDP is a feature of any crisis, regardless of the cause. Even crises that were initiated by tight monetary policy leave permanent effects on trend GDP. Their paper concludes that under this scenario, monetary and fiscal policy need to be more aggressive given the permanent costs of recessions
                            Using the same logic, in an ongoing project with Larry Summers we have explored the extent to which fiscal policy consolidations can be responsible for the persistence and permanent effects on GDP during the Great Recession. Our empirical evidence very much supports this hypothesis: countries that implemented the largest fiscal consolidating have seen a large permanent decrease in GDP. [And this is true taking into account the possibility of reverse causality (i.e. governments that believed that the trend was falling the most could have applied stronger contractionary policy).
                            While we recognize that there is always uncertainty..., the size of the effects that we find are large enough so that they cannot be easily ignored... In fact, using our estimates we calibrate the model of a recent paper by Larry Summers and Brad DeLong to show that fiscal contractions in Europe were very likely self-defeating. In other words, the resulting (permanent) fall in GDP led to a increase in debt to GDP ratios as opposed to a decline, which was the original objective of the fiscal consolidation.
                            The evidence from both of these papers strongly suggests that policy advice cannot ignore this possibility, that crises and monetary and fiscal actions can have permanent effects on GDP. Once we look at the world through this lens what might sound like obvious and solid policy advice can end up producing the opposite outcome of what was desired.

                              Posted by on Thursday, October 15, 2015 at 07:04 PM in Budget Deficit, Economics, Fiscal Policy | Permalink  Comments (44) 


                              'Black Families Lost, on Average, 43 Percent of Their Wealth'

                              Via David Dayen on Twitter:

                              Black Americans Would Have Been Better Off Renting Than Buying: ...white Americans with low net worth who bought during the boom years made out much better than black Americans who had the same timing and similar financial circumstances. Black families who bought in 2005 lost almost $20,000 of net worth by 2007, according to the paper. By 2011 those losses were more like $30,000. White homeowners didn’t have quite the same problem. Those who purchased in 2007 saw their net worth grow by $18,000 in two years, and then those gains eroded, leaving them with an increase of $13,000 by 2011. All told, the black families lost, on average, 43 percent of their wealth.
                              That news is perhaps to be expected given the inequities that exists in the housing market, including the quality of financing people have access to and the prospects of the neighborhoods they are buying into. The researchers note that neighborhood location, predatory loan practices, and how long families were able to hold on to homes all likely played a role in how white and black families fared during the early aughts. ...

                                Posted by on Thursday, October 15, 2015 at 10:26 AM in Economics, Income Distribution | Permalink  Comments (16) 


                                'Monopolies Don't Give Us Nice Things'

                                I've been arguing we need to take a more active approach to reducing market power for many years, without much traction, so it's always nice to see others joining in (it hasn't been enough, but the Obama administration has been better than the Bush administration on this front). This is from Barry Ritholtz:

                                Monopolies Don't Give Us Nice Things: ...There is little intelligent discussion about the costs of too much regulation on the one hand, and the excesses of capitalism on the other. That is a shame, because both sides of those issues create real economic frictions with substantial societal costs. ...
                                I would like to address ... how poor a job the U.S. does in regulating industries to which it grants monopoly or oligopoly status. ...
                                As a nation we do a very poor job of managing competition and adopting the needed standards to improve market efficiency. Television services are just one example. ...
                                It seems impossible, however, to have a serious conversation about this as long as rich companies buy off elected officials who grant special tax breaks, dispensations and exemptions. You can pretty much name any intractable problem in the U.S. and you can trace it back to the money corrupting the political process. ...

                                  Posted by on Thursday, October 15, 2015 at 09:43 AM in Economics, Market Failure, Regulation | Permalink  Comments (39) 


                                  'Fed Debates and the EMU Technocratic Illusion'

                                  Francesco Saraceno:

                                  Fed Debates and the EMU Technocratic Illusion, Gloomy European Economist: ...I have read with lots of interest the speech that newly appointed Federal Reserve Board Member Lael Brainard gave last Monday. The speech is a plea for holding on rate rises, and uses a number of convincing arguments. Much has been said on the issue (give a look at comments by Tim Duy and Paul Krugman). I have little to add, were it not for the point I made a number of times, that the extraordinarily difficult task of central bankers would be made substantially easier if fiscal policy were used more actively.
                                  What I’d like to express here is my jealousy for the discussions (and the confrontation) that we observe in the US. These discussions are a sideproduct, a very positive one if you ask me, of the institutional design of the Fed. I just returned from a series of engaging policy meetings on central bank policy in Costa Rica, facilitated by the local ILO office, where I pleaded for the introduction of a dual mandate.
                                  I wrote a background paper (that can be seen here) in which my main argument is that a central bank following a dual mandate will always be able to take an aggressive stance on inflation, if it deems it necessary to do so. ... No choice of weights, on the other hand, would allow a central bank following an inflation targeting mandate to explicitly target employment as well. Thus, the dual mandate can embed inflation targeting strategies, while the converse is not true. In terms of policy effectiveness, therefore, the dual mandate is a superior institutional arrangement.
                                  I also cited evidence showing, and here we come at my jealousy for the Fed, that inflation targeting central banks, like the ECB, de facto target the output gap, but timidly and without explicitly saying so. This leads to low reactivity and opaque communication, that hamper the capacity of central banks to manage expectations and effectively steer the economy. I am sure that those who followed the EMU policy debate in the past few years will know what I am talking about.
                                  One may argue that the cacophony currently characterizing the Federal Reserve Board is hardly positive for the economy, and that in terms of managing expectations, lately, the Fed did not excel. This is undeniable, and is the result of the Fed groping its way out of unprecedented policy measures. The difference with the ECB is that for the Fed the opacity results from an ongoing debate on how to best attain an objective that is clear and shared. We are not there yet, but the debate will eventually lead to an unambiguous (and hopefully appropriate) policy choice. The ECB opacity, is intrinsically linked to the confusion between its mandate and its actual action, and as such it cannot lead to any meaningful discussion, but just to legalistic disputes on the definition of price stability, of how medium is the medium term and the like.
                                  And I can now come to my final point: a dual mandate has the merit to let the political nature of monetary policy emerge without ambiguities. It is indeed true that monetary policy with a dual mandate requires hard choices, as the ones that are debated these days, and hence is political in nature. The point is, that so is monetary policy with a simple inflation targeting objective. The level of inflation targeted, and the choice of the instruments to attain it, are all but neutral in terms of their consequences on the economy, most notably on the distribution of resources among market participants. Thus, an inflation targeting central bank is as political in its actions as a bank following a dual mandate, the only difference being that in the former case the political nature of monetary policy is concealed behind a technocratic curtain. The deep justification of exclusive focus on price stability can only lie in the acceptance of a neoclassical platonic world in which powerless governments need to make no choice. Once we dismiss that platonic view, monetary policy acquires a political role, regardless of the mandate it is given. A dual mandate has the merit of making this choice explicit, and hence to dispel the technocratic illusion.
                                  I am not saying there would be no issues with the adoption of a dual mandate. The institutional design should be carefully crafted, in order to ensure that independence is maintained, and accountability (currently very low indeed) is enhanced. What I am saying is that after seven years (and counting) of dismal economic performance, and faced with strong arguments in favor of a broader central bank mandate, EMU policy makers should be engaged in discussions at least as lively as the ones of their counterparts in Washington. And yet, all is quiet on this side of the ocean… Circulez y a rien à voir

                                    Posted by on Thursday, October 15, 2015 at 12:15 AM in Economics, Monetary Policy, Politics | Permalink  Comments (24) 


                                    Links for 10-15-15

                                      Posted by on Thursday, October 15, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (95) 


                                      Wednesday, October 14, 2015

                                      'In Search of the Science in Economics'

                                      In case this is something you want to discuss (if not, that's okay too -- I got tired of this debate long, long ago):

                                      In Search of the Science in Economics, by Noah Smith: ...I’d like to discuss the idea that economics is only a social science, and should discard its mathematical pretensions and return to a more literary approach. 
                                      First, let’s talk about the idea that when you put the word “social” in front of “science,” everything changes. The idea here is that you can’t discover hard-and-fast principles that govern human behavior, or the actions of societies, the way physicists derive laws of motion for particles or biologists identify the actions of the body’s various systems. You hear people say this all the time
                                      But is it true? As far as I can tell, it’s just an assertion, with little to back it up. No one has discovered a law of the universe that you can’t discover patterns in human societies. Sure, it’s going to be hard -- a human being is vastly more complicated than an electron. But there is no obvious reason why the task is hopeless. 
                                      To the contrary, there have already been a great many successes. ...
                                      What about math? .... I do think economists would often benefit from closer observation of the real world. ... But that doesn’t mean math needs to go. Math allows quantitative measurement and prediction, which literary treatises do not. ...
                                      So yes, social science can be science. There will always be a place in the world for people who walk around penning long, literary tomes full of vague ideas about how humans and societies function. But thanks to quantitative social science, we now have additional tools at our disposal. Those tools have already improved our world, and to throw them away would be a big mistake.

                                      This is from a post of mine in August, 2009 on the use of mathematics in economics:

                                      Lucas roundtable: Ask the right questions, by Mark Thoma: In his essay, Robert Lucas defends macroeconomics against the charge that it is "valueless, even harmful", and that the tools economists use are "spectacularly useless".

                                      I agree that the analytical tools economists use are not the problem. We cannot fully understand how the economy works without employing models of some sort, and we cannot build coherent models without using analytic tools such as mathematics. Some of these tools are very complex, but there is nothing wrong with sophistication so long as sophistication itself does not become the main goal, and sophistication is not used as a barrier to entry into the theorist's club rather than an analytical device to understand the world.

                                      But all the tools in the world are useless if we lack the imagination needed to build the right models. Models are built to answer specific questions. When a theorist builds a model, it is an attempt to highlight the features of the world the theorist believes are the most important for the question at hand. For example, a map is a model of the real world, and sometimes I want a road map to help me find my way to my destination, but other times I might need a map showing crop production, or a map showing underground pipes and electrical lines. It all depends on the question I want to answer. If we try to make one map that answers every possible question we could ever ask of maps, it would be so cluttered with detail it would be useless. So we necessarily abstract from real world detail in order to highlight the essential elements needed to answer the question we have posed. The same is true for macroeconomic models.

                                      But we have to ask the right questions before we can build the right models.

                                      The problem wasn't the tools that macroeconomists use, it was the questions that we asked. The major debates in macroeconomics had nothing to do with the possibility of bubbles causing a financial system meltdown. That's not to say that there weren't models here and there that touched upon these questions, but the main focus of macroeconomic research was elsewhere. ...

                                      The interesting question to me, then, is why we failed to ask the right questions. ... Was it lack of imagination, was it the sociology within the profession, the concentration of power over what research gets highlighted, the inadequacy of the tools we brought to the problem, the fact that nobody will ever be able to predict these types of events, or something else?

                                      It wasn't the tools, and it wasn't lack of imagination. As Brad DeLong points out, the voices were there—he points to Michael Mussa for one—but those voices were not heard. Nobody listened even though some people did see it coming. So I am more inclined to cite the sociology within the profession or the concentration of power as the main factors that caused us to dismiss these voices. ...

                                      I don't know for sure the extent to which the ability of a small number of people in the field to control the academic discourse led to a concentration of power that stood in the way of alternative lines of investigation, or the extent to which the ideology that markets prices always tend to move toward their long-run equilibrium values and that markets will self-insure, caused us to ignore voices that foresaw the developing bubble and coming crisis. But something caused most of us to ask the wrong questions, and to dismiss the people who got it right, and I think one of our first orders of business is to understand how and why that happened.

                                        Posted by on Wednesday, October 14, 2015 at 12:13 PM in Economics, Methodology | Permalink  Comments (47) 


                                        'The Waaaaah Street Factor'

                                        101415krugman2-tmagArticlePaul Krugman notes the correlation between getting tough on the financial industry and the flow of campaign cash. Some people argue this money doesn't much matter in terms of influencing elections, but the people giving it -- the ones so lauded on the political right for their wisdom on business and financial matters -- sure seem to think it does:

                                        The Waaaaah Street Factor: Following up on my point about how this is looking like a Dodd-Frank election: to understand what’s going on this election cycle, you really need to know about the dramatic shift in Wall Street’s political preferences.
                                        There was a time when Wall Street was quite favorable to Democrats. ...
                                        But that all changed in 2010, when Democrats actually pushed through a significant although far from adequate financial reform, and Barack Obama said the obvious, that some financial types had behaved badly and helped cause the crisis. The result was a great freakout — the coming of “Obama rage”.
                                        Wall Street doesn’t like the regulations, which really do seem to have more or less eliminated the implicit too-big-to-fail subsidy. Beyond that, with great wealth comes great pettiness: financial tycoons are accustomed to constant deference, and they went berserk at even the mild criticism they faced.
                                        You can see the result in the chart: a drastic shift of campaign giving away from Democrats toward Republicans. And this will have consequences: if a Republican wins, he or she will be very much in Wall Street’s pocket. If a Democrat wins, not so much.

                                          Posted by on Wednesday, October 14, 2015 at 11:36 AM in Economics, Politics | Permalink  Comments (24) 


                                          FRBSF: The Current Economy and the Outlook

                                          "Reuven Glick, group vice president at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of October 8, 2015":

                                          GDP growth rebounded to 3.9% in Q2

                                          FRBSF: The Current Economy and the Outlook: Real GDP jumped to 3.9% in the second quarter of 2015, well above first-quarter growth of 0.6%. Personal consumption expenditures, business investment, and residential investment all made positive contributions to growth. In the six years since the Great Recession ended, real GDP growth has averaged 2.2% at an annual rate, near the economy’s long-term trend of 2%.
                                          We expect the U.S. economy to slow modestly in the third quarter because of reduced inventory buildups and weaker net exports. Propelled by solid momentum in consumption spending, moderate growth around the economy’s long-term trend should resume heading into 2016. Ongoing risks to the growth outlook include possible spillovers from economic slowdowns in China and other foreign markets and a further strengthening of the U.S. dollar.

                                          Employment growth continues

                                          Employment growth has slowed somewhat but remains consistent with an improving labor market. Payroll employment increased by 142,000 in September, and the number of jobs added for July and August combined was revised down by 59,000. Significant job losses were recorded in recent months for the industries most exposed to overseas conditions, the energy sector and manufacturing. Still, average gains over the past six months have been around 200,000.

                                          Unemployment near natural rate

                                          The unemployment rate in August remained at 5.1%, which is very close to the 5.0% level that we judge to be the natural rate of unemployment. Other signs of progress include lower unemployment insurance claims and declines in broader measures of unemployment that include discouraged and marginally attached workers. However, some measures of labor market slack, such as the labor force participation rate and employment-to-population ratio, remain well below pre-recession levels. We expect that the ongoing pace of job creation, though slowing, will be sufficient to bring the economy temporarily below the natural rate in 2016.

                                          Inflation remains low

                                          Inflation, as measured by the change in the personal consumption expenditures (PCE) price index, was 0.3% in the 12 months through August. Very low overall inflation is largely attributable to lower prices of energy goods and services, which have fallen by over 16% in the past year. Excluding energy as well as the typically volatile food component of spending, core PCE rose 1.3% over the past 12 months. Inflation has remained below the Federal Open Market Committee’s 2% target since mid-2012. Absent further declines in energy prices or a further strengthening of the U.S. dollar, we expect that stable inflation expectations and diminishing slack will push core and overall PCE inflation up gradually towards 2%.

                                          Personal consumption expenditure components

                                          The PCE is a composite of the price changes of different products and services. Food and energy account for roughly 11% of total consumer spending, while core goods (excluding food and energy) account for 23% of spending, and core services (excluding energy costs of housing) account for the remaining 66%.

                                          Price inflation for goods and services is down

                                          In recent years, core services inflation has tended to be positive, except during the recession and the early recovery. Core goods inflation has tended to be negative, with brief exceptions around 2009–10 because of tobacco tax hikes and 2011–12 because of rising textile and apparel costs. In recent months both core goods and services inflation have slowed, that is, services inflation has been less positive and goods inflation has been more negative.

                                          Lower import prices reduce goods inflation

                                          The decline in core goods inflation can be attributed to declining import costs associated with the appreciating value of the dollar as well as lower costs abroad. Because goods account for most international trade, movements in exchange rates and foreign prices tend to exert more pressure on goods prices than on service prices. Lower prices of imported consumption goods directly affect core goods inflation. They also affect goods prices indirectly through imports of raw materials, such as metals, plastic, and rubber, used in the U.S. production of goods for domestic consumers.

                                          Health care pulling down services inflation

                                          Core service inflation has been pulled down by more subdued increases in health-care service costs, which represent a quarter of core services spending and 19% of overall core spending. Health-care services inflation has been slowing for several years and fell off sharply in 2014, primarily from capping of increases in Medicare payments to physicians.

                                          Inflation higher without certain sectors

                                          The impact of import, energy, and health-care costs on core inflation can be gauged by “what-if” exercises that remove these sectors from the calculation. Excluding relatively import-intensive (for example, apparel and other nondurables) and energy-intensive (for example, transportation) sectors would raise core inflation modestly, by around 0.2%. Removing health-care services spending from the calculations would raise core inflation by an additional 0.3%.
                                          The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System. FedViews generally appears around the middle of the month.

                                            Posted by on Wednesday, October 14, 2015 at 12:24 AM in Economics, Monetary Policy | Permalink  Comments (37) 


                                            Links for 10-14-15

                                              Posted by on Wednesday, October 14, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (168) 


                                              Tuesday, October 13, 2015

                                              Angus Deaton's Letter from America: How to Measure Poverty?

                                              This is a good example of the type of research that interests Angus Deaton (here, though, he is mostly describing the work of others, though his own work paved the way for this type of research):

                                              Letter from America: It's a big country and how to measure it, RES Newsletter, October, 2014t: In this Letter from America, Angus describes recent efforts to record the significant differences in regional price levels across the USA. The task is technically complex and also raises political sensitivities.

                                              One of the first things visitors from Europe confront when they come to America is just how enormous the place is, an enormity that is somehow enhanced by the fact that, after many hours in an airplane, you get off and discover that almost everything looks the same as where you got on, something that is rare in Europe. There may be mountains, palm trees, or a temperature difference that tells you that something has changed, but one thing that you will not find, at least in the official numbers and until very recently, is any difference in the price level. In consequence, the federal poverty line is the same everywhere, independent of the local cost of living, which does not prevent it from feeding into a range of federal and state welfare policies.

                                              The need for regional price indices In 1995, a panel of the National Academy of Sciences thought hard about how poverty ought to be measured; I was fortunate enough to be a member of the group... One of the group’s recommendations was that the poverty line should be adjusted for differences in price levels in different places, something that was not possible in 1995, because the statistical system did not produce such price indices. Contrast this with Eurostat...

                                              There was then, as now, some reluctance, including from the Bureau of Labor Statistics — the agency that produces consumer price indices — to calculate geographical price indices. The then Commissioner was concerned about political pressure from legislators to alter price indices in their favor — to entitle their constituents to greater federal benefits — just as the census counts —which are used for drawing boundaries of congressional districts — have, in the past, been politically contested and were for many years mired in the courts. For whatever reason, no policy change or new data collection took place for many years. ... The BLS produces regional price indices, but those are all indexed to 100 in the base year, and so can only be used to compare rates of inflation, not price levels.

                                              Change came, as it often does, through a combination of analysis, personality, and the passage of time, which allows people to become more senior and more influential. ... Census, under the leadership of David S Johnson, developed a Supplemental Poverty Measure based in large part on the recommendations of the Academy Report. Incorporated into this new measure — which is not the official poverty measure — are spatial price indices...

                                              ‘Regional price parities’ now available...

                                              ...

                                              ...but the official poverty measure remains The Supplemental Poverty Measure has not been adopted as the official poverty line, and indeed, its greater complexity would make it difficult to use for testing for individual eligibility. Yet this means that the official poverty measure, with all its flaws — including the failure to take local prices into account, and its blindness to taxes and official benefits — continues to be used, something that is unlikely to change in the current climate in Washington. Even so, the new measure is widely used in analysis including in official documents, particularly to assess the effects of the Great Recession of which it gave a much superior account than the official measure — not because of spatial price indices — but because the official measure ignored the substantial effects of the safety net on supplementing incomes of the poor. A bad measure can survive for a long time even when its deficiencies are well understood, though perhaps the recent crisis has helped make those deficiencies even more starkly and widely apparent, and may create some of the political momentum that will eventually lead to change.

                                                Posted by on Tuesday, October 13, 2015 at 02:37 PM in Economics | Permalink  Comments (5) 


                                                'Global Dovishness'

                                                Paul Krugman:

                                                Global Dovishness: Tim Duy points us to a striking speech by Lael Brainard, who recently joined the Fed Board of Governors, which takes a notably more dovish line than we’ve been hearing from Yellen and Fischer. Basically, Brainard comes down on the ... precautionary principle side of the debate, arguing that given uncertainty about the path of the natural rate of interest, and great asymmetry in the consequences of moving too soon versus too late, rate hikes should be put on hold until you see the whites of inflation’s eyes.

                                                Why does she sound so different from Fischer and Yellen? Duy argues that it is in part a generational thing...

                                                Maybe, but it’s also worth noting the difference in perspective that comes from having your original intellectual home in international versus domestic macroeconomics. I would say that Brainard’s experience is dominated not so much by the Great Moderation as by the Asian financial crisis and Japan’s stagnation; internationally oriented macro types were aware earlier than most that Depression-type issues never went away. And if you read Brainard’s argument carefully, she devotes a lot of it to the drag America may be facing from weakness abroad and the stronger dollar, which acts as de facto monetary tightening...

                                                So does her speech matter? She is, as I indicated, pretty much saying what some of us on the outside have been saying, although she does it very clearly and well; but does it make a difference that someone on the inside is laying down a marker warning that raising rates could be a big mistake? I guess we’ll see.

                                                  Posted by on Tuesday, October 13, 2015 at 10:03 AM in Economics, Monetary Policy | Permalink  Comments (75) 


                                                  'A Stimulus Junkie's Lament'

                                                  Simon Wren-Lewis:

                                                  One ‘stimulus junkie’ has already had a go at this FT piece by the chief economist of the German finance ministry ...
                                                  German officials need to be very careful before they claim that recent German macro performance justifies their anti-Keynesian views, because it might just prompt people to look at what has actually happened. Germany did undertake a stimulus package in 2009. But more importantly, in the years preceding that, it built up a huge competitive advantage by undercutting its Eurozone neighbors via low wage increases. This is little different in effect from beggar my neighbor devaluation. It is a demand stimulus, but (unlike fiscal stimulus) one that steals demand from other countries. This may or may not have been intended, but it should make German officials think twice before they laud their own performance to their Eurozone neighbors. If these neighbors start getting decent macro advice and some political courage, they might start replying that Germany’s current prosperity is a result of theft. ...

                                                    Posted by on Tuesday, October 13, 2015 at 10:02 AM in Economics, Fiscal Policy | Permalink  Comments (29) 


                                                    Fed Watch: Brainard Drops A Policy Bomb

                                                    Tim Duy:

                                                    Brainard Drops A Policy Bomb, by Tim Duy: What if a Federal Reserve Governor drops a policy bomb in the woods and no one is there to hear it? Did it really make a noise?

                                                    That's what happened today. While the bond market was closed and whatever financial journalists were left focusing their efforts on newly-minted Nobel Prize recipient Angus Deaton, Federal Reserve Governor Lael Brainard dropped a policy bomb with her speech to the National Association of Business Economists. It was nothing short of a direct challenge to Chair Janet Yellen and Vice Chair Stanley Fischer. Is was, as they say, a BFD.

                                                    That, at least, is my opinion. Consider, for example, Brainard's opening salvo:

                                                    The will-they-or-won't-they drumbeat has grown louder of late. To remove the suspense, I do not intend to make any calendar-based statements here today. Rather, I would like to give you a sense of the considerations that weigh on both sides of that debate and lay out the case for watching and waiting.

                                                    Wait, who is making calendar-based statements? Yellen:

                                                    ...these two judgments imply that the real interest rate consistent with achieving and then maintaining full employment in the medium run should rise gradually over time. This expectation, coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.

                                                    and Fischer:

                                                    In the SEP, the Summary of Economic Projections prepared by FOMC participants in advance of the September meeting, most participants, myself included, anticipated that achieving these conditions would entail an initial increase in the federal funds rate later this year.

                                                    After essentially saying that such calendar-based guidance is beneath her, she says what she is going to do: Explain why policymakers should delay further. Note however this stands in sharp contrast with Yellen and Fischer. Their efforts have been spent on explaining why rates need to rise soon. Hers will be spent on why they do not.

                                                    After assessing the quality of the recovery, Brainard asserts:

                                                    In contrast to the considerable progress in the labor market, progress on the second leg of our dual mandate has been elusive. To be clear, I do not view the improvement in the labor market as a sufficient statistic for judging the outlook for inflation. A variety of econometric estimates would suggest that the classic Phillips curve influence of resource utilization on inflation is, at best, very weak at the moment. The fact that wages have not accelerated is significant, but more so as an indicator that labor market slack is still present and that workers' bargaining power likely remains weak.

                                                    Recall that Yellen, in her most recent speech, made the Phillips Curve the primary basis for her case that rates will soon need to rise:

                                                    What, then, determines core inflation? Recalling figure 1, core inflation tends to fluctuate around a longer-term trend that now is essentially stable. Let me first focus on these fluctuations before turning to the trend. Economic theory suggests, and empirical analysis confirms, that such deviations of inflation from trend depend partly on the intensity of resource utilization in the economy--as approximated, for example, by the gap between the actual unemployment rate and its so-called natural rate, or by the shortfall of actual gross domestic product (GDP) from potential output. This relationship--which likely reflects, among other things, a tendency for firms' costs to rise as utilization rates increase--represents an important channel through which monetary policy influences inflation over the medium term, although in practice the influence is modest and gradual. Movements in certain types of input costs, particularly changes in the price of imported goods, also can cause core inflation to deviate noticeably from its trend, sometimes by a marked amount from year to year. Finally, a nontrivial fraction of the quarter-to-quarter, and even the year-to-year, variability of inflation is attributable to idiosyncratic and often unpredictable shocks.

                                                    Yellen concludes, after breaking down the inflation shortfall into its constituent parts, that the resource utilization component is now fairly small and will soon dissipate, having only the temporary components to worry about:

                                                    Although an accounting exercise like this one is always imprecise and will depend on the specific model that is used, I think its basic message--that the current near-zero rate of inflation can mostly be attributed to the temporary effects of falling prices for energy and non-energy imports--is quite plausible. If so, the 12-month change in total PCE prices is likely to rebound to 1-1/2 percent or higher in 2016, barring a further substantial drop in crude oil prices and provided that the dollar does not appreciate noticeably further.

                                                    Brainard, however, is not buying this story. Brainard's focus:

                                                    Although the balance of evidence thus suggests that long-term inflation expectations are likely to have remained fairly steady, the risks to the near-term outlook for inflation appear to be tilted to the downside, given the persistently low level of core inflation and the recent decline in longer-run inflation compensation, as well as the deflationary cross currents emanating from abroad--a subject to which I now turn.

                                                    While Yellen sees the risks weighted toward rebounding inflation, Brainard sees the opposite. Moreover, policymakers have been twiddling their thumbs as the world economy turns against them:

                                                    Over the past 15 months, U.S. monetary policy deliberations have been taking place against a backdrop of progressively gloomier projections of global demand. The International Monetary Fund (IMF) has marked down 2015 emerging market and world growth repeatedly since April 2014.

                                                    While all of you have been arguing about when to raise rates, the case for raising rates has been falling apart! As a consequence:

                                                    Over the past year, a feedback loop has transmitted market expectations of policy divergence between the United States and our major trade partners into financial tightening in the U.S. through exchange rate and financial market channels. Thus, even as liftoff is coming into clearer view ahead, by some estimates, the substantial financial tightening that has already taken place has been comparable in its effect to the equivalent of a couple of rate increases.

                                                    Brainard buys into the view that recent activity in financial markets has already tightened monetary conditions. Later:

                                                    There is a risk that the intensification of international cross currents could weigh more heavily on U.S. demand directly, or that the anticipation of a sharper divergence in U.S. policy could impose restraint through additional tightening of financial conditions. For these reasons, I view the risks to the economic outlook as tilted to the downside. The downside risks make a strong case for continuing to carefully nurture the U.S. recovery--and argue against prematurely taking away the support that has been so critical to its vitality.

                                                    Not balanced, but to the downside. That calls for different risk management:

                                                    These risks matter more than usual because the ability to provide additional accommodation if downside risks materialize is, in practice, more constrained than the ability to remove accommodation more rapidly if upside risks materialize.

                                                    In effect, the Fed can't cut rates quickly, but they can raise rates quickly:

                                                    ...many observers have suggested that the economy will soon begin to strain available resources without some monetary tightening. Because monetary policy acts with a lag, in this scenario, high rates of resource utilization may lead to a large buildup of inflationary pressures, a rise in inflation expectations and persistent inflation in excess of our 2 percent target. However, we have well-tested tools to address such a situation and plenty of policy room in which to use them.

                                                    Brainard is willing to risk a rapid rise in rates. Yellen is not. Indeed, quite the opposite. Yellen desperately wants a very slow pace of rate increases:

                                                    If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.

                                                    The more I think about it, the less I am worried about this issue. Suppose that the Fed needs raise rates at twice the pace they currently anticipate. What does that mean? 25bp at every meeting instead of every other meeting? Is that really an "abrupt tightening?" Not sure that Yellen has a very strong argument here. Or one that would withstand repeated attacks from her peers.

                                                    I feel like I haven't scratched the surface on this speech, but I will cut to the chase: This is an outright challenge to the Yellen/Fischer view.

                                                    I think these three players are all products of their experience. Yellen received her Ph.D in 1971. Fischer in 1969. Both experienced the Great Inflation first hand. Brainard earned her Ph.D in 1989. Her professional experience is dominated by the Great Moderation.

                                                    I think Yellen wants to raise interest rates. I think Fischer wants to raise rates. I think both believe the downward pressure on inflation due to labor market slack is minimal, and the Phillips Curve will soon assert itself. I think both do not find the risks as asymmetric as does Brainard. I think they believe the risk of inflation is actually quite high. Or, probably more accurately, that the risk of destabilizing inflation expectations is quite high.

                                                    I think that Brainard knows this. I think that this speech is a very deliberate action by Brainard to let Yellen and Fischer know that she will not got quietly into the night if they push forward with their plans. I think that she is sending the message that they will not have just one dissent from a soon-to-be-replace regional president (Chicago Federal Reserve President Charles Evans), but a more-difficult-to-ignore Fed governor still voting when January 1 rolls around.

                                                    And now that Brainard has laid down the gauntlet, it will look very, very bad for Yellen and Fischer if their plans go sideways. This is very likely the last big decision of their careers. They know what happened to Greenspan’s legacy. I doubt they want the same treatment. Why risk their reputations when the cost of waiting is a 25bp move every meeting instead of every other meeting? Is it worth it?

                                                    Brad DeLong suggested the Fed commit to one of two policy messages:

                                                    I must say that they are not doing too well at the clear-communication part. I want to see one of following things in Fed statements:

                                                    1. We will begin raising interest rates in December at a pace of basis points per quarter, unless economic growth and inflation fall substantially short of our current forecast expectations.
                                                    2. We will delay raising interest rates until we are confident that it will not be appropriate to return them to the zero lower bound after liftoff.

                                                    If we had one of these, we would know where we stand.

                                                    But Stan Fischer's speech provides us with neither.

                                                    I think that Fischer wants the first option, but knows Brainard’s views, and hence knows that December is not a sure thing if Brainard can build momentum for her position. Hence the muddled message. Brainard could be the force that drives the Fed toward option number two. An option closer to that of Evans and Minneapolis Federal Reserve President Narayana Kocherlakota. That would be a game changer.

                                                    Bottom Line: This is the most exciting speech I have read in forever. Not necessarily for the content. But for the politics. Evans and Kocherlakota are no longer the lunatic fringe. This could be a real game changer that shifts the Fed toward the Evans view of the world, with no rate hike until mid-2016. Brainard muddied further the already murky December waters.

                                                      Posted by on Tuesday, October 13, 2015 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (53) 


                                                      Links for 10-13-15

                                                        Posted by on Tuesday, October 13, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (137) 


                                                        Monday, October 12, 2015

                                                        'Why So Slow? A Gradual Return for Interest Rates'

                                                        This Economic Letter from Vasco Cúrdia of the SF Fed finds that even though interest rates are very low, so is the natural rate of interest, and that implies that monetary policy is "relatively tight."  "The model projections for the natural rate are consistent with the federal funds rate only gradually returning to normal over the next few years, although substantial uncertainty surrounds this forecast":

                                                        Why So Slow? A Gradual Return for Interest Rates: Short-term interest rates in the United States have been very low since the financial crisis. Projections of the natural rate of interest indicate that a gradual return of short-term interest rates to normal over the next five years is consistent with promoting maximum employment and stable inflation. Uncertainty about the natural rate that is most consistent with an economy at its full potential suggests that the pace of normalization may be even more gradual than implied by these projections.
                                                        To boost economic growth during the financial crisis, the Federal Reserve aggressively cut the target for its benchmark short-term interest rate, known as the federal funds rate, to near zero around the beginning of 2009. Since then the time projected for the rate to return to more normal historical levels has been continually postponed.
                                                        To understand the level of the federal funds rate and when it might be normalized it is useful to consider the concept of the natural rate of interest first proposed by Wicksell in 1898 and introduced into modern macroeconomic models by Woodford (2003). The natural rate of interest is the real, or inflation-adjusted, interest rate that is consistent with an economy at full employment and with stable inflation. If the real interest rate is above (below) the natural rate then monetary conditions are tight (loose) and are likely to lead to underutilization (overutilization) of resources and inflation below (above) its target.
                                                        This Economic Letter analyzes the recent behavior of the natural rate using an empirical macroeconomic model. The results suggest that the natural rate is currently very low by historical standards. Because of this, monetary conditions remain relatively tight despite the near-zero federal funds rate, which in turn is keeping economic activity below potential and inflation below target. The model projections for the natural rate are consistent with the federal funds rate only gradually returning to normal over the next few years, although substantial uncertainty surrounds this forecast. ...

                                                        And the conclusion:

                                                        ... This Letter suggests that the natural rate of interest is expected to remain below its long-run level for some time. This implies that low interest rates over the next few years are consistent with the most efficient use of resources and stable inflation. The analysis also finds that the output gap is expected to remain negative even after the natural rate is close to its long-run level. Additionally, there is considerable uncertainty about both the short-run dynamics as well as what level should be expected in the longer run. All these considerations reinforce the possibility that interest rate normalization will be very gradual.

                                                          Posted by on Monday, October 12, 2015 at 01:31 PM in Economics, Monetary Policy | Permalink  Comments (34) 


                                                          Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel Awarded to Angus Deaton

                                                          Busy this morning. Here's the press release on the award of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2015 to Angus Deaton:

                                                          Consumption, great and small: To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices. More than anyone else, Angus Deaton has enhanced this understanding. By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics.
                                                          The work for which Deaton is now being honored revolves around three central questions:
                                                          How do consumers distribute their spending among different goods? Answering this question is not only necessary for explaining and forecasting actual consumption patterns, but also crucial in evaluating how policy reforms, like changes in consumption taxes, affect the welfare of different groups. In his early work around 1980, Deaton developed the Almost Ideal Demand System – a flexible, yet simple, way of estimating how the demand for each good depends on the prices of all goods and on individual incomes. His approach and its later modifications are now standard tools, both in academia and in practical policy evaluation.
                                                          How much of society's income is spent and how much is saved? To explain capital formation and the magnitudes of business cycles, it is necessary to understand the interplay between income and consumption over time. In a few papers around 1990, Deaton showed that the prevailing consumption theory could not explain the actual relationships if the starting point was aggregate income and consumption. Instead, one should sum up how individuals adapt their own consumption to their individual income, which fluctuates in a very different way to aggregate income. This research clearly demonstrated why the analysis of individual data is key to untangling the patterns we see in aggregate data, an approach that has since become widely adopted in modern macroeconomics.
                                                          How do we best measure and analyze welfare and poverty? In his more recent research, Deaton highlights how reliable measures of individual household consumption levels can be used to discern mechanisms behind economic development. His research has uncovered important pitfalls when comparing the extent of poverty across time and place. It has also exemplified how the clever use of household data may shed light on such issues as the relationships between income and calorie intake, and the extent of gender discrimination within the family. Deaton's focus on household surveys has helped transform development economics from a theoretical field based on aggregate data to an empirical field based on detailed individual data.

                                                          More here, here, here, here, and here.

                                                          Update: Here too.

                                                            Posted by on Monday, October 12, 2015 at 10:38 AM in Economics | Permalink  Comments (16) 


                                                            Paul Krugman: The Crazies and the Con Man

                                                            Why is Paul Ryan under so much pressure to become speaker, and why would he be wise to resist?:

                                                            The Crazies and the Con Man, by Paul Krugman, Commentary, NY Times: How will the chaos that the crazies, I mean the Freedom Caucus, have wrought in the House get resolved? I have no idea. But as this column went to press, practically the whole Republican establishment was pleading with Paul Ryan ... to become speaker. ...
                                                            What makes Mr. Ryan so special? ... To understand Mr. Ryan’s role in our political-media ecosystem, you need to know two things. First, the modern Republican Party is a post-policy enterprise, which doesn’t do real solutions to real problems. Second, pundits and the news media really, really don’t want to face up to that awkward reality.
                                                            On the first point, just look at the policy ideas coming from the presidential candidates, even establishment favorites like Marco Rubio... Josh Barro has dubbed Mr. Rubio’s tax proposal the “puppies and rainbows” plan, consisting of trillions in giveaways with not a hint of how to pay for them — just the assertion that growth would somehow make it all good.
                                                            And it’s not just taxes, it’s everything. ... Yet most of the news media, and most pundits, still worship at the church of “balance.” They are committed to portraying the two big parties as equally reasonable. This creates a powerful demand for serious, honest Republicans who can be held up as proof that the party does too include reasonable people making useful proposals. ...
                                                            And Paul Ryan played and in many ways still plays that role... This has been enough to convince political writers who don’t know much about policy, but do know what they want to see, that he’s the real deal. ...
                                                            Which brings us back to the awkward fact that Mr. Ryan isn’t actually a pillar of fiscal rectitude, or anything like the budget expert he pretends to be. And the perception that he is these things is fragile, not likely to survive long if he were to move into the center of political rough and tumble. Indeed, his halo was visibly fraying during the few months of 2012 that he was Mitt Romney’s running mate...
                                                            Predictions aside, however, the Ryan phenomenon tells us a lot about what’s really happening in American politics. In brief, crazies have taken over the Republican Party, but the media don’t want to recognize this reality. The combination of these two facts has created an opportunity, indeed a need, for political con men. And Mr. Ryan has risen to the challenge.

                                                              Posted by on Monday, October 12, 2015 at 01:17 AM in Economics, Politics | Permalink  Comments (92) 


                                                              Fed Watch: Fed Struggles With The High Water Mark

                                                              Tim Duy:

                                                              Fed Struggles With The High Water Mark, by Tim Duy: Gavyn Davies reviews the evidence on the apparent slowing of US economic activity and concludes:

                                                              So is the US slowdown for real? Yes, but it is not yet very severe — and some of it is the result of the temporary inventory correction, and some to the rising dollar. Unless it grows worse in the next few weeks, it is unlikely to dislodge the Fed from the path it has now firmly chosen.

                                                              This I think is broadly consistent with views on the FOMC and explains why many policymakers insist that a rate hike this year remains likely. Vice Chair Stanley Fischer was the latest to reiterate the point. Via his prepared remarks for the IMF:

                                                              In the SEP, the Summary of Economic Projections prepared by FOMC participants in advance of the September meeting, most participants, myself included, anticipated that achieving these conditions would entail an initial increase in the federal funds rate later this year.

                                                              They will want look through any near term GDP volatility, and discount volatility related to inventories. Look then to real final sales rather than GDP. Avoid getting caught up in the headline numbers; watch the underlying trends instead.

                                                              Still, there is a range of views on the FOMC, from Richmond Fed Jeffrey Lacker, who believes the Fed should already have raised rates, to Minneapolis Federal Reserve President Narayana Kocherlakota, who would like the Fed to consider a negative rate. And arguably even the center is not particularly committed to a particular policy path. To be sure, they like to talk tough, but every time they get ready to jump, they walk back from the edge.

                                                              Why the lack of conviction? Essentially, the economy is resting on what is likely its high water mark for growth in this cycle, leaving the Fed perplexed regarding their next move. They want the economy to slow from its current pace and glide into a soft landing. But acting too early will leave their job half finished and sow the seeds of the next recession. Acting too late, however, will yield the inflationary outcome they so fear. And they don't know the exact definitions of "too early" and "too late."

                                                              This chart (modified from Davies' version) illustrates the evolution of US growth since 2012:

                                                              CONTRIB101115

                                                              In broad terms, consumption, investment, and government spending jointly accelerated during 2013. The external side of the economy offset some of this acceleration by first moving from a slightly positive contribution to none and then, beginning in 2014, a substantial negative contribution. The net effect is that overall economy largely normalize around a 2.5% growth rate in 2014 and remained there since.

                                                              That 2.5% growth is what the economy delivers given the combination of long-term factors (labor and productivity growth) and the current set of fiscal, monetary, and external conditions. The actual composition of output will evolve around that 2.5% rate. It is likely the high-water mark, in terms of growth, for this recovery. Faster growth likely requires a net easier combination of monetary and fiscal policy. Slower growth may already be locked in by past policy, or maybe the economy just moves generally sideways from here.

                                                              Most important is to remember that monetary policymakers expect and want the economy to slow as it gently glides down to that mythical soft-landing. They aren't looking for faster growth. The current pace of growth will, in their view, force unemployment further below the natural rate next year than they are willing to tolerate. Hence the most recent employment reports are not necessarily unmitigated bad news from their perspective. New York Federal Reserve President William Dudley, via Bloomberg:

                                                              Dudley said the key to liftoff will be whether the labor market continues to improve, thereby putting more upward pressure on wages and inflation. Last month’s jobs report was “definitely weaker,” but even monthly gains of 120,000 or 150,000 are enough to continue to push the U.S. unemployment rate lower, he said.

                                                              Or, more explicitly, from San Fransisco Federal Reserve President John Williams:

                                                              The pace of employment growth, as well as the decline in the unemployment rate, has slowed a bit recently…but that’s to be expected. When unemployment was at its 10 percent peak during the height of the Great Recession, and as it struggled to come down during the recovery, we needed rapid declines to get the economy back on track. Now that we’re getting closer, the pace must start slowing to more normal levels. Looking to the future, we’re going to need at most 100,000 new jobs each month. In the mindset of the recovery, that sounds like nothing; but in the context of a healthy economy, it’s what’s needed for stable growth. (emphasis added)

                                                              Williams is looking for 2% growth in the second half of this year and next year. He expects the economy to slow, and believes it needs to slow to sustain healthy, long-run growth. But I don't think he knows exactly when and how much the Fed needs to tap the breaks to achieve that healthy growth. And he would not be alone - lack of consensus around the question is exactly why communication appears so muddled. They can't tell you what they don't know.

                                                              Further confusing the issue is the cat that Kocherlakota let out of the bag last week:

                                                              In mid-2013, the FOMC announced its intention to taper its ongoing asset purchase program. We can see that this announcement represented a dramatic change in policy from the sharp upward movements in long-term bond yields that it engendered. Personally, I interpret this policy change back in 2013 as the onset of what the Committee currently intends to be a long, gradual tightening cycle. As I noted earlier, we would typically expect that such a change in monetary policy should affect the economy with a lag of about 18 to 24 months. Viewed through this lens, the slow rate of labor market improvement in 2015 is not all that surprising.

                                                              I believe the FOMC should take actions to facilitate a resumption of the 2014 improvement in the labor market by adopting a more accommodative policy stance...

                                                              As group, monetary policymakers have stuck by the line that "tapering is not tightening." Kocherlakota is not following the party line. He explicitly connects the dots and concludes that the current inflection point in the economy is the result of the tapering debate begun over two years ago. He essentially argues that had it not been for the taper and end of QE3, then financial conditions would be more accommodative today and the economy would not yet be at an inflection point.

                                                              Kocherlakota is an outlier; he is not interested seeing the labor market throttle back just yet, fearing that such an outcome will end improvement in underemployment indicators. This would lock the economy into a suboptimal state of persistent excess slack and impede the return of inflation to the Fed's target. The general consensus on the FOMC is that such a goal can be achieved with more a more moderate pace of improvement in labor markets that holds unemployment modestly below the natural rate for a time. Hence he is alone in his view that more easing is needed at this time. Chicago Federal Reserve President Charles Evans probably comes closest with his explicit calls to hold rates at current levels until the middle of 2016.

                                                              But even if the party line is that "tapering is not tightening," Kocherlakota must have planted the seeds of doubt in the minds of his colleagues. After all, it is a risk management exercise. If they are wrong, and Kocherlakota is right, then they will look like the dropped the ball if they pull the trigger too early. Something of a big risk to take when inflation remains persistently below trend and you lack traditional tools to respond to a renewed slowdown in activity.

                                                              Bottom Line: So where does all of this leave Fed policy? Confused, I think, like September when economists saw the outcome of that meeting as a coin toss. Don't expect communications to become much clearer. October is off the table (despite what Lacker might believe). They first need to decide if the last two months of jobs data were aberrations or signals of slowing job growth. They can't do that before October. And I am not confident they can do so by December. If we get two more reports hovering around 200k a month between now and December, matched with generally consistent data across other indicators, then December is on the table. That would indicate the economy is not coming off its high water mark without some help from the Fed. If jobs growth slows to 100k a month, again with a broad swath of generally consistent data, then we are looking at deep into 2016 before any hike. Around 150k is the gray area. They won't know if the economy is poised to head lower on its own, or if that is sufficient to contain inflationary pressures. They don't know if they should be tapping on the breaks or not. Risk management under the assumption of constrained inflation suggests they push off action until January or March. But they would not send such a clear message. Indeed, I suspect that more numbers like the last two will make the December meeting much like September's. That I fear is my current baseline - another close call in which the Fed concludes to take a pass.

                                                                Posted by on Monday, October 12, 2015 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (12) 


                                                                Links for 10-12-15

                                                                  Posted by on Monday, October 12, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (54) 


                                                                  Sunday, October 11, 2015

                                                                  'One Reason Why Monetary Policy is Preferred by New Keynesians'

                                                                  Simon Wren-Lewis:

                                                                  One reason why monetary policy is preferred by New Keynesians: ...Suppose, for example, individuals decide for some reason that they want to hold more money. They expect to sell their output, but plan to buy less. If everyone does this, aggregate demand will fall, and producers will not sell all their output. If goods cannot be stored, and if producers cannot consume their own good, this could lead to pure waste: some goods remain unsold and rot away. (If all producers immediately cut their prices, then a new equilibrium is possible where producers’ desire to hold more real money balances is achieved by a fall in prices. So we need to rule this possibility out by having some form of price rigidity.)
                                                                  The government could prevent waste in two ways. It could persuade consumers to hold less money and buy more goods, which we can call monetary policy. Or it could buy up all the surplus production and produce more public goods, which we could call fiscal policy. Both solutions eliminate waste, but monetary policy is preferable to fiscal policy because the public/private good mix remains optimal.
                                                                  Three comments on this reason for preferring monetary policy. First, if for some reason monetary policy cannot do this job, clearly using fiscal policy is better than doing nothing. It is better to produce something useful with goods rather than letting them rot. We could extend this further. If for some reason the impact of monetary policy was uncertain, then that could also be a reason to prefer fiscal policy, which in this example is sure to eliminate waste. Second, the cost of using fiscal rather than monetary policy obviously depends on the form of public spending. If the public good was repairing the streets the market was held in one year earlier than originally planned the 'distortion' involved is pretty small. Third, another means of achieving the optimal solution, besides monetary policy, is for the government to give everyone the extra money they desire.

                                                                    Posted by on Sunday, October 11, 2015 at 10:23 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (99) 


                                                                    Links for 10-11-15

                                                                      Posted by on Sunday, October 11, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (132) 


                                                                      Saturday, October 10, 2015

                                                                      Just 158 Families Provided Nearly Half of Campaign Cash

                                                                      In case you were wondering, yes, wealth from the energy and finance industries does dominate campaign spending early in campaigns, and flows mostly to Republicans:

                                                                      Just 158 families have provided nearly half of the early money for efforts to capture the White House, NY Times: They are overwhelmingly white, rich, older and male, in a nation that is being remade by the young, by women, and by black and brown voters..., they reside in ... exclusive neighborhoods dotting a handful of cities and towns. And in an economy that has minted billionaires in a dizzying array of industries, most made their fortunes in just two: finance and energy.
                                                                      Now they are deploying their vast wealth in the political arena, providing almost half of all the seed money raised to support Democratic and Republican presidential candidates. Just 158 families, along with companies they own or control, contributed $176 million in the first phase of the campaign... Not since before Watergate have so few people and businesses provided so much early money in a campaign, most of it through channels legalized by the Supreme Court’s Citizens United decision five years ago. ...
                                                                      ...the families investing the most in presidential politics overwhelmingly lean right ... contributing tens of millions of dollars to support Republican candidates who have pledged to pare regulations; cut taxes on income, capital gains and inheritances; and shrink entitlement programs. While such measures would help protect their own wealth, the donors describe their embrace of them more broadly, as the surest means of promoting economic growth and preserving a system that would allow others to prosper, too. ...
                                                                      Most of the families are clustered around just nine cities. ...
                                                                      Tend to Be Self-Made ...
                                                                      A number of the families are tied to networks of ideological donors ...

                                                                        Posted by on Saturday, October 10, 2015 at 02:10 PM in Economics, Politics | Permalink  Comments (41) 


                                                                        'Is Money Corrupting Research?'

                                                                        Luigi Zingales:

                                                                        Is Money Corrupting Research?: The integrity of research and expert opinions in Washington came into question last week, prompting the resignation of Robert Litan ... from his position as a nonresident fellow at the Brookings Institution.
                                                                        Senator Elizabeth Warren raised the issue of a conflict of interest in Mr. Litan’s testimony before a Senate committee... Senator Warren was herself criticized by economists and pundits, on the left and right. ... But at stake is the integrity of the research process and the trust the nation puts in experts, who advise governments and testify in Congress. Our opinions shape government policy and judicial decisions. Even when we are paid to testify..., integrity is expected from us. ...
                                                                        Yet it is disingenuous for anybody (especially an economist) to believe that reputational incentives do not matter. Had the conclusions not pleased the Capital Group, it would probably have found a more compliant expert. And the reputation of not being “cooperative” would have haunted Mr. Litan’s career as a consultant. ...
                                                                        Reputational ... concerns do not work as well with sealed expert-witness testimony or paid-for policy papers that circulate only in small policy groups. ... A scarier possibility is that reputational incentives do not work because the practice of bending an opinion for money is so widespread as to be the norm. ...

                                                                        He goes on to suggest some steps to strengthen the reputational incentive.

                                                                          Posted by on Saturday, October 10, 2015 at 12:33 AM in Economics | Permalink  Comments (42) 


                                                                          'Don’t Starve the BLS'

                                                                          Katharine Abraham, Steven Davis, and John Haltiwanger:

                                                                          Don’t Starve the BLS: ...why is Congress eyeing further cuts to the Bureau of Labor Statistics budget?Proposed Senate legislation would cut the BLS by another $13 million in 2016, after its real annual spending has already fallen more than 10 percent ($72 million) over the last five years. ...
                                                                          ...we need more and better data to understand our changing economy, not less. Instead of narrowing its data collection, BLS ought to expand it. For starters, it should develop and strengthen programs to help assess the growth of the “gig economy,” how global supply chains affect the US economy, and why wage growth remains sluggish despite job vacancy rates at a 15-year high.
                                                                          Skeptics will ask, why not rely entirely on the private sector to do this work? ... The answer is simple..., no private entity can match government statistical agencies’ ability to collect objective data and aggregate them into usable basic statistics. ... those basic statistics, such as basic scientific research, yield highly diverse applications and valuable benefits across our economy and society.
                                                                          Underfunding the BLS would be a false economy. It would mean basic statistics would be undersupplied, and the quality of economic decision-making would suffer. It may save a few million dollars in the 2016 federal budget, but would ultimately cost us much more.

                                                                            Posted by on Saturday, October 10, 2015 at 12:24 AM in Economics | Permalink  Comments (34) 


                                                                            Links for 10-10-15

                                                                              Posted by on Saturday, October 10, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (83) 


                                                                              Friday, October 09, 2015

                                                                              'Resurrecting the Role of the Product Market Wedge in Recession'

                                                                              Some of you might find this interesting:

                                                                              Resurrecting the Role of the Product Market Wedge in Recessions Mark Bils, Peter J. Klenow, and Benjamin A. Malin: Abstract Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been called “the labor wedge” — a cyclical intratemporal wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The intratemporal wedge can be broken into a product market wedge (price markup) and a labor market wedge (wage markup). Based on the wages of employees, the literature has attributed the intratemporal wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed and intermediate inputs, respectively. Looking at the past quarter century in the United States, we find that price markup movements are at least as important as wage markup movements — including during the Great Recession and its aftermath. Thus, sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.

                                                                              Download Full text.

                                                                                Posted by on Friday, October 9, 2015 at 11:04 AM in Academic Papers, Economics | Permalink  Comments (8) 


                                                                                'The Minimum Wage: How Much is Too Much?'

                                                                                Alan Krueger:

                                                                                The Minimum Wage: How Much is Too Much?: The federal minimum wage has been stuck at $7.25 an hour since 2009. While Congress has refused to take action, Democratic politicians have been engaged in something of a bidding war to propose raising the minimum wage ever higher: first to $10.10, then to $12, and now some are pushing for $15 an hour. ...
                                                                                When I started studying the minimum wage 25 years ago,... research that I and others ... conducted convinced me that if the minimum wage is set at a moderate level it does not necessarily reduce employment. ...
                                                                                Although available research cannot precisely answer these questions, I am confident that a federal minimum wage that rises to around $12 an hour over the next five years or so would not have a meaningful negative effect on United States employment. ...
                                                                                But $15 an hour is beyond international experience, and could well be counterproductive. ...
                                                                                Economics is all about understanding trade-offs and risks. The trade-off is likely to become more severe, and the risk greater, if the minimum wage is set beyond the range studied in past research.

                                                                                  Posted by on Friday, October 9, 2015 at 09:26 AM in Economics | Permalink  Comments (71) 


                                                                                  'Faith in an Unregulated Free Market? Don’t Fall for It'

                                                                                  Robert Shiller continues to phish for book sales:

                                                                                  Faith in an Unregulated Free Market? Don’t Fall for It: Perhaps the most widely admired of all the economic theories taught in our universities is the notion that an unregulated competitive economy is optimal for everyone. ...
                                                                                  The problem is that these ideas are flawed. Along with George A. Akerlof ... I have used behavioral economics to plumb the soundness of these notions. ...
                                                                                  Don’t get us wrong: George and I are certainly free-market advocates. In fact, I have argued for years that we need more such markets, like futures markets for single-family home prices or occupational incomes, or markets that would enable us to trade claims on gross domestic product. I’ve written about these things in this column.
                                                                                  But, at the same time, we both believe that standard economic theory is typically overenthusiastic about unregulated free markets. It usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception. ...
                                                                                  Current economic theory does recognize that if there is an “externality” — say, a business polluting the air in the course of producing the goods it sells — the outcome won’t be optimal, and most economists would agree that in such cases we need government intervention.
                                                                                  But the problem of market-incentivized professional manipulation and deception is fundamental, not an externality...

                                                                                    Posted by on Friday, October 9, 2015 at 09:25 AM in Economics, Market Failure | Permalink  Comments (17) 


                                                                                    Paul Krugman: It’s All Benghazi

                                                                                    Beat the press:

                                                                                    It’s All Benghazi, by Paul Krugman, Commentary, NY Times: So Representative Kevin McCarthy, who was supposed to succeed John Boehner as speaker of the House, won’t be pursuing the job after all. He ... finished off his chances by admitting — boasting, actually — that the endless House hearings on Benghazi had nothing to do with national security, that they were all about inflicting political damage on Hillary Clinton.
                                                                                    But we all knew that, didn’t we?
                                                                                    I often wonder about commentators who write about things like those hearings as if there were some real issue involved... Surely they have to know better... Somehow, though, politicians who ... are obviously just milking those issues for political gain keep getting a free pass. And it’s not just a Clinton story.
                                                                                    Consider the example of an issue ... that dominated much of our political discourse just a few years ago: federal debt.
                                                                                    Many prominent politicians made warnings about the dangers posed by U.S. debt, especially debt owned by China... Paul Ryan ... portrayed himself as a heroic crusader against deficits. Mitt Romney made denunciations of borrowing from China a centerpiece of his campaign... And by and large, commentators treated this posturing as if it were serious. ...
                                                                                    Well, don’t tell anyone, but the much feared event has happened: China is no longer buying our debt, and is in fact selling ... U.S. debt... And what has happened is what serious economic analysis always told us would happen: nothing. It was always a false alarm. ...
                                                                                     People who really worry about government debt don’t propose huge tax cuts for the rich, only partly offset by savage cuts in aid to the poor and middle class, and base all claims of debt reduction on unspecified savings to be announced on some future occasion. ... 
                                                                                    Sometimes I have the impression that many people in the media consider it uncouth to acknowledge, even to themselves, the fraudulence of much political posturing. The done thing, it seems, is to pretend that we’re having real debates...
                                                                                    But turning our eyes away from political fakery, pretending that we’re having a serious discussion when we aren’t, is itself a kind of fraudulence. Mr. McCarthy inadvertently did the nation a big favor with his ill-advised honesty, but telling the public what’s really going on shouldn’t depend on politicians with loose lips.
                                                                                    Sometimes — all too often — there’s no substance under the shouting. And then we need to tell the truth, and say that it’s all Benghazi.

                                                                                      Posted by on Friday, October 9, 2015 at 01:13 AM in Economics, Politics, Press | Permalink  Comments (78) 


                                                                                      Links for 10-09-15

                                                                                        Posted by on Friday, October 9, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (128) 


                                                                                        Thursday, October 08, 2015

                                                                                        'The Slow Rate of Labor Market Improvement in 2015 is Not All That Surprising'

                                                                                        Federal Reserve Bank of Minneapolis president Narayana Kocherlakota:

                                                                                        ...Why has the rate of labor market improvement slowed so much in 2015 relative to 2014? In thinking about this question, I find the timing of monetary policy changes to be highly suggestive.
                                                                                        In mid-2013, the FOMC announced its intention to taper its ongoing asset purchase program. We can see that this announcement represented a dramatic change in policy from the sharp upward movements in long-term bond yields that it engendered. Personally, I interpret this policy change back in 2013 as the onset of what the Committee currently intends to be a long, gradual tightening cycle. As I noted earlier, we would typically expect that such a change in monetary policy should affect the economy with a lag of about 18 to 24 months. Viewed through this lens, the slow rate of labor market improvement in 2015 is not all that surprising.
                                                                                        I believe the FOMC should take actions to facilitate a resumption of the 2014 improvement in the labor market by adopting a more accommodative policy stance. Remember, inflation is low, and is expected to remain low, relative to the FOMC’s target. In particular, I don’t see raising the target range for the fed funds rate above its current low level in 2015 or 2016 as being consistent with the pursuit of the kind of labor market outcomes that we are charged with delivering. Indeed, I would be open to the possibility of reducing the fed funds target funds range even further, as a way of producing better labor market outcomes.
                                                                                        There is, of course, a risk that inflationary pressures could build up more rapidly than I (or others) currently anticipate. But the solution to this scenario is relatively simple: Raise interest rates. Given my current outlook, I believe that it would be appropriate to wait until 2017 to initiate liftoff and then raise the fed funds rate at about 2 percentage points per year. My preferred pace of tightening mirrors the pace of tightening from 2004 to 2006—a pace of tightening that is often seen as gradual. (In fact, some would argue, with the benefit of hindsight, that it was overly gradual.) In response to unanticipated inflationary pressures, the FOMC could simply react as it did in 1994, and raise the fed funds rate more rapidly than this gradual pace.
                                                                                        Conclusions
                                                                                        ... The lesson of 2014 is clear: We can do better. Given 2014, and given how low inflation is expected to be over the next few years, I see no reason why the Committee should not aim to facilitate continued improvement in labor market conditions. Indeed, I currently see no reason why we should not aim for the kind of strong labor market conditions that prevailed at the end of 2006.
                                                                                        But we will get there only if we make the right choices. The FOMC can achieve its congressionally mandated price and employment goals only by being extraordinarily patient in reducing the level of monetary accommodation. Indeed, to best fulfill its congressional mandates, the Committee should be considering reducing the target range for the fed funds rate, not increasing it. ...

                                                                                          Posted by on Thursday, October 8, 2015 at 11:11 AM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  Comments (12) 


                                                                                          Wanted: Independent Evaluations of Government Programs

                                                                                          In case you are feeling Moody:

                                                                                          Timothy Geithner and the Auditors, by Dean Baker: Eduardo Porter had a good piece in the NYT pointing out the importance of having independent evaluations of government programs. The point is that the agencies undertaking a program have a strong incentive to exaggerate its benefits. ...
                                                                                          One of the areas noted by Porter is in the rating of mortgage backed securities (MBS). During the housing bubble years, the bond-rating agencies routinely gave investment grade ratings to MBS that were stuffed with junk mortgages. They ignored the quality of the mortgages because they wanted the business. They knew if they gave honest ratings, the investment banks would take away their business.
                                                                                          While Porter notes this is a problem with the issuer pays model (the banks pay the rating agencies), there actually is a very simple solution. In the debate on Dodd-Frank, Senator Al Franken proposed an amendment which would have the Securities and Exchange Commission pick the rating agency, instead of the issuer. The bank would still pay the fee, but since they were no longer controlling who got the work, it eliminated the conflict of interest problem. The amendment passed the senate 65-34, with considerable bi-partisan support.
                                                                                          Unfortunately, as Geithner indicated in his autobiography, the Obama administration apparently did not like the dismantling of the perfect system we have today. The Franken amendment was removed in the conference committee and the existing structure was left in place. This was possible because the bond-rating agencies and the banks have real lobbies, whereas the folks who like honest evaluations don't. Of course the news media didn't help much, giving the issue very little coverage. And what attention it did get largely reflected the views of the financial industry.
                                                                                          Anyhow, this is a good example of the difficulties in putting in place the sort of independent auditing process that Porter seeks.

                                                                                            Posted by on Thursday, October 8, 2015 at 10:53 AM in Economics, Politics, Regulation | Permalink  Comments (47) 


                                                                                            'The China Debt Fizzle'

                                                                                            Here at the University of Oregon, one of our specialties is developing models where agents in the macroeconomy don't have rational expectations, instead they learn about the economy over time. Of course, these models need to be taken to the data to see if people do actually learn in the way the models predict. But if the data sets contain too many "Very Serious People", the tests will surely fail. They learn nothing from experience:

                                                                                            The China Debt Fizzle, by Paul Krugman: Remember the dire threat posed by our financial dependence on China? A few years ago it was all over the media, generally stated not as a hypothesis but as a fact. Obviously, terrible things would happen if China stopped buying our debt, or worse yet, started to sell off its holdings. Interest rates would soar and the U.S economy would plunge, right? Indeed, that great monetary expert Admiral Mullen was widely quoted as declaring that debt was our biggest security threat. Anyone who suggested that we didn’t actually need to worry about a China selloff was considered weird and irresponsible.
                                                                                            Well, don’t tell anyone, but the much-feared event is happening now. As China tries to prop up the yuan in the face of capital flight, it’s selling lots of U.S. debt; so are other emerging markets. And the effect on U.S. interest rates so far has been … nothing.
                                                                                            Who could have predicted such a thing? Well,... anyone who seriously thought through the economics of the situation ... quickly realized that the whole China-debt scare story was nonsense. But as I said, this wasn’t even reported as a debate; the threat of Chinese debt holdings was reported as fact.
                                                                                            And of course those who got this completely wrong have learned nothing from the experience.

                                                                                              Posted by on Thursday, October 8, 2015 at 09:55 AM in China, Economics, Financial System | Permalink  Comments (9) 


                                                                                              'We All Get ‘Free Stuff’ From the Government'

                                                                                              Bryce Covert:

                                                                                              We All Get ‘Free Stuff’ From the Government: ...Jeb Bush got caught sounding like a Mitt Romney rerun recently: He told a mostly white audience that he could attract black voters because his campaign “isn’t one of ... we’ll take care of you with free stuff.” ...
                                                                                              But the shorthand of “free stuff” also takes an incredibly narrow, and therefore misleading, view of government benefits. There’s a whole treasure trove of government handouts that aren’t dispensed through spending, but rather through the tax code. That doesn’t make them any less “free” than a rent voucher or an Electronic Benefit Transfer card. ...
                                                                                              What the government loses to tax expenditures dwarfs spending on welfare programs. ... These facts are obscured for most people. While those who get government benefits through spending programs are often aware — and too frequently ashamed — of that fact, those who get them through the tax system usually don’t realize they’ve received a handout. ...
                                                                                              Jeb Bush ,,, has saved at least $241,000 since 1981 through the mortgage interest deduction. ... Just days before he vowed not to promise voters more free stuff, he put out a tax plan that would give out a whole lot more of it. ...
                                                                                              Every four years, politicians stigmatize “free stuff” like food stamps and welfare while courting votes — and gloss over tax breaks. ... We turn a blind eye to giving out more and more tax breaks but balk at actually spending enough on welfare to truly help the most vulnerable among us.

                                                                                                Posted by on Thursday, October 8, 2015 at 09:34 AM in Economics, Social Insurance | Permalink  Comments (15) 


                                                                                                Links for 10-08-15

                                                                                                  Posted by on Thursday, October 8, 2015 at 12:06 AM Permalink  Comments (185) 


                                                                                                  Wednesday, October 07, 2015

                                                                                                  Summers: Global Economy: The Case for Expansion

                                                                                                  Larry Summers continues his call for fiscal expansion:

                                                                                                  Global economy: The case for expansion: ...The problem of secular stagnation — the inability of the industrial world to grow at satisfactory rates even with very loose monetary policies — is growing worse in the wake of problems in most big emerging markets, starting with China. ... Industrialised economies that are barely running above stall speed can ill-afford a negative global shock. Policymakers badly underestimate the risks... If a recession were to occur, monetary policymakers lack the tools to respond. ...
                                                                                                  This is no time for complacency. The idea that slow growth is only a temporary consequence of the 2008 financial crisis is absurd. ...
                                                                                                  Long-term low interest rates radically alter how we should think about fiscal policy. Just as homeowners can afford larger mortgages when rates are low, government can also sustain higher deficits. ...
                                                                                                  The case for more expansionary fiscal policy is especially strong when it is spent on investment or maintenance. ... While the problem before 2008 was too much lending, many more of today’s problems have to do with too little lending for productive investment.
                                                                                                  Inevitably, there will be discussion of the need for structural reform... — there always is. ...
                                                                                                  Traditional approaches of focusing on sound government finance, increased supply potential and the avoidance of inflation court disaster. ... It is an irony of today’s secular stagnation that what is conventionally regarded as imprudent offers the only prudent way forward.

                                                                                                  [The full post is much, much longer.]

                                                                                                    Posted by on Wednesday, October 7, 2015 at 12:46 PM in Economics, Fiscal Policy | Permalink  Comments (78) 


                                                                                                    The Welfare State and Economic Growth

                                                                                                    Support for the point I was making in my column yesterday:

                                                                                                    Rethinking Parameters of the US Welfare State, by Tim Taylor: ...The ... question ... was about whether the welfare state undermines productivity and growth. Garfinkel and Smeeding point out that in the big picture, all the high-income and high-productivity nations of the world have large welfare states; indeed, one can argue that growth rates for many high-income nations were higher in the mid- and late 20th century, when the welfare state was comparatively larger, than back in the 19th century when the welfare state was smaller. Indeed, improved levels of education and health are widely recognized as important components of improved productivity. As they write: "Furthermore, by reducing economic insecurity, social insurance and safety nets make people more willing to take economic risks."

                                                                                                    One can make any number of arguments for improving the design of the various aspects of the welfare state, or to point to certain countries where aspects of the welfare state became overbearing or dysfunctional. But from a big-picture viewpoint, it's hard to make the case that a large welfare state has been a drag on growth. Garfinkel and Smeeding write:

                                                                                                    "Of course, many other factors besides social welfare spending have changed in the past 150 years. But, as we have seen, welfare state spending is now very large relative to the total production of goods and services in all advanced industrialized nations. If such spending had large adverse effects, it is doubtful that growth rates would have been so large in the last 30 years. The crude historical relationship suggests, at a minimum, no great ill effects and, more likely, a positive effect. The burden of proof clearly lies on the side of those who claim that welfare state programs are strangling productivity and growth. If they are right, they need to explain not only why all rich nations have large welfare states, but more importantly why growth rates have grown in most rich nations as their welfare states have grown larger."

                                                                                                      Posted by on Wednesday, October 7, 2015 at 09:30 AM in Economics, Productivity, Social Insurance | Permalink  Comments (36)