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Thursday, December 31, 2015

'Beating a Dead Robotic Horse'

Dietz Vollrath:

Beating a Dead Robotic Horse: One of the recurring themes on this blog has been the consequences of robots, AI, or rapid technological change on labor demand. Will humans be put out of work by robots, and will this mean paradise or destitution? I’ve generally argued that we should be optimistic about robots and AI and the like, but others have made coherent arguments for pessimism. I spent a chunk of this week reading over posts, both new and old, and thinking more about these positions.

If there is one distinct difference between the robo-pessimist and robo-optimist view, it is almost exclusively down to timing. The pessimists are worried that the rapid decline of human labor is occurring now, and in many cases has been occurring for a while already. The optimists believe that we have time in front of us to sort things out before human labor is replaced en masse.

Brynjolfsson and McAfee‘s latest is a good example of this robo-optimist view. They concede that human labor is in danger of being replaced... But at the same time they do not think this is imminent...

On the robo-pessimism side, Richard Serlin has a mega-post about the declining prospects for human labor and the possible consequences. What is interesting about Richard’s post is that he essentially makes the case that the replacement of human labor by automation has been occurring for decades; we are already living with it...

I think it is helpful to get beyond the binary viewpoints. ...

I tend to be a weak robo-optimist. I, like Brynjolfsson and McAfee, completely agree that robots/AI will create a drag on the demand for human labor, and in particular unskilled labor. My robo-optimism isn’t a belief about technology. It is a belief that we can figure out how to manage the glide path towards shorter work hours while maintaining living standards for everyone. It’s a good thing that we’ll have to work less.

And there remains a little piece of strong robo-optimism lurking inside of me. I don’t think work less is really well defined. We will likely have to spend less time working for wages to afford the basic material goods in our lives. But that doesn’t mean we won’t spend lots of our time “working” for each other doing other things. Whether that work is paid in wages or not is immaterial.

[There's quite a bit more in the post that I left out.]

    Posted by on Thursday, December 31, 2015 at 10:32 AM in Economics, Productivity, Technology, Unemployment | Permalink  Comments (108) 

    Links for 12-31-15

      Posted by on Thursday, December 31, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (0) 

      Wednesday, December 30, 2015

      'The Neo-Fisherian View and the Macro Learning Approach'

      I asked my colleagues George Evans and Bruce McGough if they would like to respond to a recent post by Simon Wren-Lewis, "Woodford’s reflexive equilibrium" approach to learning:

      The neo-Fisherian view and the macro learning approach
      George W. Evans and Bruce McGough
      Economics Department, University of Oregon
      December 30, 2015

      Cochrane (2015) argues that low interest rates are deflationary — a view that is sometimes called neo-Fisherian. In this paper John Cochrane argues that raising the interest rate and pegging it at a higher level will raise the inflation rate in accordance with the Fisher equation, and works through the details of this in a New Keynesian model.

      Garcia-Schmidt and Woodford (2015) argue that the neo-Fisherian claim is incorrect and that low interest rates are both expansionary and inflationary. In making this argument Mariana Garcia-Schmidt and Michael Woodford use an approach that has a lot of common ground with the macro learning literature, which focuses on how economic agents might come to form expectations, and in particular whether coordination on a particular rational expectations equilibrium (REE) is plausible. This literature examines the stability of an REE under learning and has found that interest-rate pegs of the type discussed by Cochrane lead to REE that are not stable under learning. Garcia-Schmidt and Woodford (2015) obtain an analogous instability result using a new bounded-rationality approach that provides specific predictions for monetary policy. There are novel methodological and policy results in the Garcia-Schmidt and Woodford (2015) paper. However, we will here focus on the common ground with other papers in the learning literature that also argue against the neo-Fisherian claim.

      The macro learning literature posits that agents start with boundedly rational expectations e.g. based on possibly non-RE forecasting rules. These expectations are incorporated into a “temporary equilibrium” (TE) environment that yields the model’s endogenous outcomes. The TE environment has two essential components: a decision-theoretic framework which specifies the decisions made by agents (households, firms etc.) given their states (values of exogenous and pre-determined endogenous state variables) and expectations;1 and a market-clearing framework that coordinates the agents’ decisions and determines the values of the model’s endogenous variables. It is useful to observe that, taken together, the two components of the TE environment yield the “TE-map” that takes expectations and (aggregate and idiosyncratic) states to outcomes.

      The adaptive learning framework, which is the most popular formulation of learning in macro, proceeds recursively. Agents revise their forecast rules in light of the data realized in the previous period, e.g. by updating their forecast rules econometrically. The exogenous shocks are then realized, expectations are formed, and a new temporary equilibrium results. The equilibrium path under learning is defined recursively. One can then study whether the economy under adaptive learning converges over time to the REE of interest.2

      The essential point of the learning literature is that an REE, to be credible, needs an explanation for how economic agents come to coordinate on it. This point is acute in models in which there are multiple RE solutions, as can arise in a wide range of dynamic macro models. This has been an issue in particular in the New Keynesian model, but it also arises, for example, in overlapping generations models and in RBC models with distortions. The macro learning literature provides a theory for how agents might learn over time to forecast rationally, i.e. to come to have RE (rational expectations). The adaptive learning approach found that agents will over time come to have rational expectations (RE) by updating their econometric forecasting models provided the REE satisfies “expectational stability” (E-stability) conditions. If these conditions are not satisfied then convergence to the REE will not occur and hence it is implausible that agents would be able to coordinate on the REE. E-stability then also acts as a selection device in cases in which there are multiple REE.

      The adaptive learning approach has the attractive feature that the degree of rationality of the agents is natural: though agents are boundedly rational, they are still fairly sophisticated, estimating and updating their forecasting models using statistical learning schemes. For a wide range of models this gives plausible results. For example, in the basic Muth cobweb model, the REE is learnable if supply and demand have their usual slopes; however, the REE, though still unique, is not learnable if the demand curve is upward sloping and steeper than the supply curve. In an overlapping generations model, Lucas (1986) used an adaptive learning scheme to show that though the overlapping generations model of money has multiple REE, learning dynamics converge to the monetary steady state, not to the autarky solution. Early analytical adaptive learning results were obtained in Bray and Savin (1986) and the formal framework was greatly extended in Marcet and Sargent (1989). The book by Evans and Honkapohja (2001) develops the E-stability principle and includes many applications. Many more applications of adaptive learning have been published over the last fifteen years.

      There are other approaches to learning in macro that have a related theoretical motivation, e.g. the “eductive” approach of Guesnerie asks whether mental reasoning by hyper-rational agents, with common knowledge of the structure and of the rationality of other agents, will lead to coordination on an REE. A fair amount is known about the connections between the stability conditions of the alternative adaptive and eductive learning approaches.3 The Garcia-Schmidt and Woodford (2015) “reflective equilibrium” concept provides a new approach that draws on both the adaptive and eductive strands as well as on the “calculation equilibrium” learning model of Evans and Ramey (1992, 1995, 1998). These connections are outlined in Section 2 of Garcia-Schmidt and Woodford (2015).4

      The key insight of these various learning approaches is that one cannot simply take RE (which in the nonstochastic case reduces to PF, i.e. perfect foresight) as given. An REE is an equilibrium that begs an explanation for how it can be attained. The various learning approaches rely on a temporary equilibrium framework, outlined above, which goes back to Hicks (1946). A big advantage of the TE framework, when developed at the agent level and aggregated, is that in conjunction with the learning model an explicit causal story can be developed for how the economy evolves over time.

      The lack of a TE or learning framework in Cochrane (2011, 2015) is a critical omission. Cochrane (2009) criticized the Taylor principle in NK models as requiring implausible assumptions on what the Fed would do to enforce its desired equilibrium path; however, this view simply reflects the lack of a learning perspective. McCallum (2009) argued that for a monetary rule satisfying the Taylor principle the usual RE solution used by NK modelers is stable under adaptive learning, while the non-fundamental solution bubble solution is not. Cochrane (2009, 2011) claimed that these results hinged on the observability of shocks. In our paper “Observability and Equilibrium Selection,” Evans and McGough (2015b), we develop the theory of adaptive learning when fundamental shocks are unobservable, and then, as a central application, we consider the flexible-price NK model used by Cochrane and McCallum in their debate. We carefully develop this application using an agent-level temporary equilibrium approach and closing the model under adaptive learning. We find that if the Taylor principle is satisfied, then the usual solution is robustly stable under learning, while the non-fundamental price-level bubble solution is not. Adaptive learning thus operates as a selection criterion and it singles out the usual RE solution adopted by proponents of the NK model. Furthermore, when monetary policy does not obey the Taylor principle then neither of the solutions is robustly stable under learning; an interest-rate peg is an extreme form of such a policy, and the adaptive learning perspective cautions that this will lead to instability. We discuss this further below.

      The agent-level/adaptive learning approach used in Evans and McGough (2015b) allows us to specifically address several points raised by Cochrane. He is concerned that there is no causal mechanism that pins down prices. The TE map provides this, in the usual way, through market clearing given expectations of future variables. Cochrane also states that the lack of a mechanism means that the NK paradigm requires that the policymakers be interpreted as threatening to “blow up” the economy if the standard solution is not selected by agents.5 This is not the case. As we say in our paper (p. 24-5), “inflation is determined in temporary equilibrium, based on expectations that are revised over time in response to observed data. Threats by the Fed are neither made nor needed ... [agents simply] make forecasts the same way that time-series econometricians typically forecast: by estimating least-squares projections of the variables being forecasted on the relevant observables.”

      Let us now return to the issue of interest rate pegs and the impact of changing the level of an interest rate peg. The central adaptive learning result is that interest rate pegs give REE that are unstable under learning. This result was first given in Howitt (1992). A complementary result was given in Evans and Honkapohja (2003) for time-varying interest rate pegs designed to optimally respond to fundamental shocks. As discussed above, Evans and McGough (2015b) show that the instability result also obtains when the fundamental shocks are not observable and the Taylor principle is not satisfied. The economic intuition in the NK model is very strong and is essentially as follows. Suppose we are at an REE (or PFE) at a fixed interest rate and with expected inflation at the level dictated by the Fisher equation. Suppose that there is a small increase in expected inflation. With a fixed nominal interest rate this leads to a lower real interest rate, which increases aggregate demand and output. This in turn leads to higher inflation, which under adaptive learning leads to higher expected inflation, destabilizing the system. (The details of the evolution of expectations and the model dynamics depend, of course, on the precise decision rules and econometric forecasting model used by agents). In an analogous way, expected inflation slightly lower than the REE/PFE level leads to cumulatively lower levels of inflation, output and expected inflation.

      Returning to the NK model, additional insight is obtained by considering a nonlinear NK model with a global Taylor rule that leads to two steady states. This model was studied by Benhabib, Schmidt-Grohe and Uribe in a series of papers, e.g. Benhabib, Schmitt-Grohe, and Uribe (2001), which show that with an interest-rate rule following the Taylor principle at the target inflation rate, the zero-lower bound (ZLB) on interest rates implies the existence of an unintended PFE low inflation or deflation steady state (and indeed a continuum of PFE paths to it) at which the Taylor principle does not hold (a special case of which is a local interest rate peg at the ZLB). From a PF/RE viewpoint these are all valid solutions. From the adaptive learning perspective, however, they differ in terms of stability. Evans, Guse, and Honkapohja (2008) and Benhabib, Evans, and Honkapohja (2014) show that the targeted steady state is locally stable under learning with a large basin of attraction, while the unintended low inflation/deflation steady state is not locally stable under learning: small deviations from it lead either back to the targeted steady state or into a deflation trap, in which inflation and output fall over time. From a learning viewpoint this deflation trap should be a major concern for policy.6,7

      Finally, let us return to Cochrane (2015). Cochrane points out that at the ZLB peg there has been low but relatively steady (or gently declining) inflation in the US, rather than a serious deflationary spiral. This point echoes Jim Bullard’s concern in Bullard (2010) about the adaptive learning instability result: we effectively have an interest rate peg at the ZLB but we seem to have a fairly stable inflation rate, so does this indicate that the learning literature may here be on the wrong track?

      This issue is addressed by Evans, Honkapohja, and Mitra (2015) (EHM2015). They first point out that from a policy viewpoint the major concern at the ZLB has not been low inflation or deflation per se. Instead it is its association with low levels of aggregate output, high levels of unemployment and a more general stagnation. However, the deflation steady state at the ZLB in the NK model has virtually the same level of aggregate output as the targeted steady state. The PFE at the ZLB interest rate peg is not a low level output equilibrium, and if we were in that equilibrium there would not be the concern that policy-makers have shown. (Temporary discount rate or credit market shocks of course can lead to recession at the ZLB but their low output effects vanish as soon as the shocks vanish).

      In EHM2015 steady mild deflation is consistent with low output and stagnation at the ZLB.8 They note that many commentators have remarked that the behavior of the NK Phillips relation is different from standard theory at very low output levels. EHM2015 therefore imposes lower bounds on inflation and consumption, which can become relevant when agents become sufficiently pessimistic. If the inflation lower bound is below the unintended low steady state inflation rate, a third “stagnation” steady state is created at the ZLB. The stagnation steady state, like the targeted steady state is locally stable under learning, and arises under learning if output and inflation expectations are too pessimistic. A large temporary fiscal stimulus can dislodge the economy from the stagnation trap, and a smaller stimulus can be sufficient if applied earlier. Raising interest rates does not help in the stagnation state and at an early stage it can push the economy into the stagnation trap.

      In summary, the learning approach argues forcefully against the neo- Fisherian view.


      1With infinitely-lived agents there are several natural implementations of optimizing decision rules, including short-horizon Euler-equation or shadow-price learning approaches(see, e.g., Evans and Honkapohja (2006) and Evans and McGough (2015a)) and the anticipated utility or infinte-horizon approaches of Preston (2005) and Eusepi and Preston (2010).

      2An additional advantage of using learning is that learning dynamics give expanded scope for fitting the data as well as explaining experimental findings.

      3The TE map is the basis for the map at the core of any specified learning scheme, which in turn determines the associated stability conditions.

      4There are also connections to both the infinite-horizon learning approach to anticipated policy developed in Evans, Honkapohja, and Mitra (2009) and the eductive stability framework in Evans, Guesnerie, and McGough (2015).

      5This point is repeated in Section 6.4 of Cochrane (2015): “The main point: such models presume that the Fed induces instability in an otherwise stable economy, a non-credible off-equilibrium threat to hyperinflate the economy for all but one chosen equilibrium.”

      6And the risk of sinking into deflation clearly has been a major concern for policymakers in the US, during and following both the 2001 recession and the 2007 - 2009 recession. It has remained a concern in Europe and Japan as well as in Japan during the 1990s.

      7Experimnetal work with stylized NK economies has found that entering deflation traps is a real possibility. See Hommes and Salle (2015).

      8See also Evans (2013) for a partial and less general version of this argument.


      Benhabib, J., G. W. Evans, and S. Honkapohja (2014): “Liquidity Traps and Expectation Dynamics: Fiscal Stimulus or Fiscal Austerity?,” Journal of Economic Dynamics and Control, 45, 220—238.

      Benhabib, J., S. Schmitt-Grohe, and M. Uribe (2001): “The Perils of Taylor Rules,” Journal of Economic Theory, 96, 40—69.

      Bray, M., and N. Savin (1986): “Rational Expectations Equilibria, Learning, and Model Specification,” Econometrica, 54, 1129—1160.

      Bullard, J. (2010): “Seven Faces of The Peril,” Federal Reserve Bank of St. Louis Review, 92, 339—352.

      Cochrane, J. H. (2009): “Can Learnability Save New Keynesian Models?,” Journal of Monetary Economics, 56, 1109—1113.

      _______ (2015): “Do Higher Interest Rates Raise or Lower Inflation?, "Working paper, University of Chicago Booth School of Business.

      Dixon, H., and N. Rankin (eds.) (1995): The New Macroeconomics: Imperfect Markets and Policy Effectiveness. Cambridge University Press, Cambridge UK.

      Eusepi, S., and B. Preston (2010): “Central Bank Communication and Expectations Stabilization,” American Economic Journal: Macroeconomics, 2, 235—271.

      Evans, G.W. (2013): “The Stagnation Regime of the New KeynesianModel and Recent US Policy,” in Sargent and Vilmunen (2013), chap. 4.

      Evans, G. W., R. Guesnerie, and B. McGough (2015): “Eductive Stability in Real Business Cycle Models,” mimeo.

      Evans, G. W., E. Guse, and S. Honkapohja (2008): “Liquidity Traps, Learning and Stagnation,” European Economic Review, 52, 1438—1463.

      Evans, G. W., and S. Honkapohja (2001): Learning and Expectations in Macroeconomics. Princeton University Press, Princeton, New Jersey.

      _______ (2003): “Expectations and the Stability Problem for Optimal Monetary Policies,” Review of Economic Studies, 70, 807—824.

      _______ (2006): “Monetary Policy, Expectations and Commitment,” Scandinavian Journal of Economics, 108, 15—38.

      Evans, G. W., S. Honkapohja, and K. Mitra (2009): “Anticipated Fiscal Policy and Learning,” Journal of Monetary Economics, 56, 930— 953

      _______ (2015): “Expectations, Stagnation and Fiscal Policy,” Working paper, University of Oregon.

      Evans, G. W., and B. McGough (2015a): “Learning to Optimize,” mimeo, University of Oregon.

      _______ (2015b): “Observability and Equilibrium Selection,” mimeo, University of Oregon.

      Evans, G. W., and G. Ramey (1992): “Expectation Calculation and Macroeconomic Dynamics,” American Economic Review, 82, 207—224.

      _______ (1995): “Expectation Calculation, Hyperinflation and Currency Collapse,” in Dixon and Rankin (1995), chap. 15, pp. 307—336.

      _______ (1998): “Calculation, Adaptation and Rational Expectations,” Macroeconomic Dynamics, 2, 156—182.

      Garcia-Schmidt, M., and M. Woodford (2015): “Are Low Interest Rates Deflationary? A Paradox of Perfect Foresight Analysis,” Working paper, Columbia University.

      Hicks, J. R. (1946): Value and Capital, Second edition. Oxford University Press, Oxford UK.

      Hommes, Cars H., M. D., and I. Salle (2015): “Monetary and Fiscal Policy Design at the Zero Lower Bound: Evidence from the lab,” mimeo., CeNDEF, University of Amsterdam.

      Howitt, P. (1992): “Interest Rate Control and Nonconvergence to Rational Expectations,” Journal of Political Economy, 100, 776—800.

      Lucas, Jr., R. E. (1986): “Adaptive Behavior and Economic Theory,” Journal of Business, Supplement, 59, S401—S426.

      Marcet, A., and T. J. Sargent (1989): “Convergence of Least-Squares Learning Mechanisms in Self-Referential Linear Stochastic Models,” Journal of Economic Theory, 48, 337—368.

      McCallum, B. T. (2009): “Inflation Determination with Taylor Rules: Is New-Keynesian Analysis Critically Flawed?,” Journal of Monetary Economic Dynamics, 56, 1101—1108.

      Preston, B. (2005): “Learning about Monetary Policy Rules when Long- Horizon Expectations Matter,” International Journal of Central Banking, 1, 81—126.

      Sargent, T. J., and J. Vilmunen (eds.) (2013): Macroeconomics at the Service of Public Policy. Oxford University Press.

        Posted by on Wednesday, December 30, 2015 at 02:34 PM in Economics, Macroeconomics, Methodology | Permalink  Comments (46) 

        On Pareto Optimality

        Part of a post from Roger Farmer (it is in today's links, but it is getting a surprising number of retweets, etc., so thought I'd highlight it further):

        Why a Bottle of Beaujolais is not the same as a Collateralized Debt Obligation: ... Imagine that we dump all of the goods that exist in a big pile in the middle of a very large imaginary room. Now let the social planner allocate them to people. For example, she might give everyone equal amounts of every good. That might sound like a good idea, but some people might not drink wine. They would prefer an extra loaf of bread to a bottle of Beaujolais. That idea suggests that some ways of allocating goods are better than others. If the social planner finds a way of allocating goods among people that can’t be improved on, without making someone in society worse off, we say that that allocation is Pareto Optimal.
        There is not just one Pareto Optimal way of allocating goods. There are many. And some of them are very bad from a moral perspective. For example, if the social planner gives everything to one selfish person: that allocation is Pareto Optimal. Why? Because, in order to give food to starving children we need to take it away from the selfish person. And that, by assumption, makes him worse off. Pareto Optimality is a very weak concept.
        although Pareto Optimality a very weak concept it is an interesting concept because, if an allocation of goods is not Pareto Optimal, it is very bad indeed. Everybody in society, from the very richest to the very poorest person, could agree upon an intervention that would change things for the better.
        Graduate students of economics learn, early in their careers, that markets allocations are Pareto Optimal. Markets may not produce outcomes that you or I judge to be morally acceptable. But they do not leave room for any obvious improvements that we could all agree upon. That idea, with a little reflection, seems to me to be obviously wrong. The ‘Global sunspots…’ paper provides one reason why.
        Ok. That's the background. To understand my ‘Global sunspots paper…’ I need to go a little further by elaborating on the idea of a ‘good’. ...

          Posted by on Wednesday, December 30, 2015 at 08:48 AM in Economics | Permalink  Comments (93) 

          Links for 12-30-15

            Posted by on Wednesday, December 30, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (267) 

            Tuesday, December 29, 2015

            'Mandate Memories'

            Paul Krugman:

            Mandate Memories: Sarah Kliff notes that the individual mandate in Obamacare is turning out to be essential — and it’s working, with the risk pool improving as the penalties kick in. What I wrote back in 2007, when Obama was campaigning against the mandate.
            Fortunately, once in office he was a stronger advocate for health reform than I feared — including for necessary pieces he opposed in the primary; what we actually ended up with was, strictly speaking, Hillarycare.

            Kevin Drum:

            Chart of the Day: The Uninsured Rate in America Just Keeps Dropping:

            I forgot to blog about this when the numbers came out, but the CDC has now updated their survey of the uninsured through the second quarter of 2015. ...
            The number of uninsured adults under 65 continues to decline...

              Posted by on Tuesday, December 29, 2015 at 01:05 PM in Economics, Health Care, Market Failure | Permalink  Comments (91) 

              'The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed'

              This is the beginning of a long response from Larry Summers to an op-ed by Bernie Sanders:

              The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed: Bernie Sanders had an op Ed in the New York Times on Fed reform last week that provides an opportunity to reflect on the Fed and financial reform more generally. I think that Sanders is right in his central point that financial policy is overly influenced by financial interests to its detriment and that it is essential that this be repaired. At the same time, reform requires careful reflection if it is not to be counterproductive. And it is important in approaching issues of reform not to give ammunition to right wing critics of the Fed who would deny it the capacity to engage in the kind of crisis responses that have judged in their totality been successful in responding to the financial crisis.  The most important policy priority with respect to the Fed is protecting it from stone age monetary ideas like a return to the gold standard, or turning policymaking over to a formula, or removing the dual mandate commanding the Fed to worry about unemployment as well as inflation. ...

                Posted by on Tuesday, December 29, 2015 at 08:39 AM in Economics, Monetary Policy, Politics, Regulation | Permalink  Comments (84) 

                Links for 12-29-15

                  Posted by on Tuesday, December 29, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (180) 

                  Monday, December 28, 2015

                  Striving for Balance in Economics: Towards a Theory of the Social Determination of Behavior

                  Karla Hoff and Joe Stiglitz:

                  Striving for Balance in Economics: Towards a Theory of the Social Determination of Behavior, by Karla Hoff, Joseph E. Stiglitz, NBER Working Paper No. 21823,Issued in December 2015: Abstract This paper is an attempt to broaden the standard economic discourse by importing insights into human behavior not just from psychology, but also from sociology and anthropology. Whereas the concept of the decision-maker is the rational actor in standard economics and, in early work in behavioral economics, the quasi-rational actor influenced by the context of the moment of decision-making, in some recent work in behavioral economics the decision-maker could be called the enculturated actor. This actor's preferences and cognition are subject to two deep social influences: (a) the social contexts to which he has become exposed and, especially accustomed; and (b) the cultural mental models—including categories, identities, narratives, and worldviews—that he uses to process information. We trace how these factors shape individual behavior through the endogenous determination of both preferences and the lenses through which individuals see the world—their perception, categorization, and interpretation of situations. We offer a tentative taxonomy of the social determinants of behavior and describe results of controlled and natural experiments that only a broader view of the social determinants of behavior can plausibly explain. The perspective suggests new tools to promote well-being and economic development. [Open Link]

                    Posted by on Monday, December 28, 2015 at 12:46 PM in Economics, Methodology | Permalink  Comments (21) 

                    'ANT-style critique of ABM'

                    Daniel Little:

                    A short recent article in the Journal of Artificial Societies and Social Simulation by Venturini, Jensen, and Latour lays out a critique of the explanatory strategy associated with agent-based modeling of complex social phenomena (link). (Thanks to Mark Carrigan for the reference via Twitter; @mark_carrigan.) Tommaso Venturini is an expert on digital media networks at Sciences Po (link), Pablo Jensen is a physicist who works on social simulations, and Bruno Latour is -- Bruno Latour. Readers who recall recent posts here on the strengths and weaknesses of ABM models as a basis for explaining social conflict will find the article interesting (link). VJ&L argue that agent-based models -- really, all simulations that proceed from the micro to the macro -- are both flawed and unnecessary. They are flawed because they unavoidable resort to assumptions about agents and their environments that reduce the complexity of social interaction to an unacceptable denominator; and they are unnecessary because it is now possible to trace directly the kinds of processes of social interaction that simulations are designed to model. The "big data" available concerning individual-to-individual interactions permits direct observation of most large social processes, they appear to hold.

                    Here are the key criticisms of ABM methodology that the authors advance:

                    • Most of them, however, partake of the same conceptual approach in which individuals are taken as discrete and interchangeable 'social atoms' (Buchanan 2007) out of which social structures emerge as macroscopic characteristics (viscosity, solidity...) emerge from atomic interactions in statistical physics (Bandini et al. 2009). (1.2)
                    • most simulations work only at the price of simplifying the properties of micro-agents, the rules of interaction and the nature of macro-structures so that they conveniently fit each other. (1.4)
                    • micro-macro models assume by construction that agents at the local level are incapable to understand and control the phenomena at the global level. (1.5)

                    And here is their key claim:

                    • Empirical studies show that, contrarily to what most social simulations assume, collective action does not originate at the micro level of individual atoms and does not end up in a macro level of stable structures. Instead, actions distribute in intricate and heterogeneous networks than fold and deploy creating differences but not discontinuities. (1.11) 

                    This final statement could serve as a high-level paraphrase of actor-network theory, as presented by Latour in Reassembling the Social: An Introduction to Actor-Network-Theory. (Here is a brief description of actor-network theory and its minimalist social ontology; link.)

                    These criticisms parallel some of my own misgivings about simulation models, though I am somewhat more sympathetic to their use than VJ&L. Here are some of the concerns raised in earlier posts about the validity of various ABM approaches to social conflict (linklink):

                    • Simulations often produce results that appear to be artifacts rather than genuine social tendencies.
                    • Simulations leave out important features of the social world that are prima facie important to outcomes: for example, quality of leadership, quality and intensity of organization, content of appeals, differential pathways of appeals, and variety of political psychologies across agents.
                    • The factor of the influence of organizations is particularly important and non-local.
                    • Simulations need to incorporate actors at a range of levels, from individual to club to organization.

                    And here is the conclusion I drew in that post:

                    • But it is very important to recognize the limitations of these models as predictors of outcomes in specific periods and locations of unrest. These simulation models probably don't shed much light on particular episodes of contention in Egypt or Tunisia during the Arab Spring. The "qualitative" theories of contention that have been developed probably shed more light on the dynamics of contention than the simulations do at this point in their development.

                    But the confidence expressed by VJ&L in the new observability of social processes through digital tracing seems excessive to me. They offer a few good examples that support their case -- opinion change, for example (1.9). Here they argue that it is possible to map or track opinion change directly through digital footprints of interaction (Twitter, Facebook, blogging), and this is superior to abstract modeling of opinion change through social networks. No doubt we can learn something important about the dynamics of opinion change through this means.

                    But this is a very special case. Can we similarly "map" the spread of new political ideas and slogans during the Arab Spring? No, because the vast majority of those present in Tahrir Square were not tweeting and texting their experiences. Can we map the spread of anti-Muslim attitudes in Gujarat in 2002 leading to massive killings of Muslims in a short period of time? No, for the same reason: activists and nationalist gangs did not do us the historical courtesy of posting their thought processes in their Twitter feeds either. Can we study the institutional realities of the fiscal system of the Indonesian state through its digital traces? No. Can we study the prevalence and causes of official corruption in China through digital traces? Again, no.

                    In other words, there is a huge methodological problem with the idea of digital traceability, deriving from the fact that most social activity leaves no digital traces. There are problem areas where the traces are more accessible and more indicative of the underlying social processes; but this is a far cry from the utopia of total social legibility that appears to underlie the viewpoint expressed here.

                    So I'm not persuaded that the tools of digital tracing provide the full alternative to social simulation that these authors assert. And this implies that social simulation tools remain an important component of the social scientist's toolbox.

                      Posted by on Monday, December 28, 2015 at 12:40 PM in Economics, Methodology | Permalink  Comments (1) 

                      Paul Krugman: Doubling Down on W

                       "There are no moderates in the Republican primary":

                      Doubling Down on W, by Paul Krugman, commentary, NY Times: 2015 was, of course, the year of Donald Trump, whose rise has inspired horror among establishment Republicans and, let’s face it, glee — call it Trumpenfreude — among many Democrats. But Trumpism has in one way worked to the G.O.P. establishment’s advantage: it has distracted pundits and the press from the hard right turn even conventional Republican candidates have taken, a turn whose radicalism would have seemed implausible not long ago.
                      After all, you might have expected the debacle of George W. Bush’s presidency ... to inspire some reconsideration of W-type policies. What we’ve seen instead is a doubling down, a determination to take whatever didn’t work from 2001 to 2008 and do it again, in a more extreme form.
                      Start with the example that’s easiest to quantify, tax cuts..., it’s harder than ever to claim that tax cuts are the key to prosperity. ... In fact, however, establishment candidates like Marco Rubio and Jeb Bush are proposing much bigger tax cuts than W ever did. ...
                      What about other economic policies? The Bush administration’s determination to dismantle any restraints on banks ... looks remarkably bad in retrospect. But conservatives ... have declared their determination to repeal Dodd-Frank...
                      The only real move away from W-era economic ideology has been on monetary policy, and it has been a move toward right-wing fantasyland. ...
                      Last but not least, there’s foreign policy. You might have imagined that the story of the Iraq war ... would inspire some caution about military force as the policy of first resort. Yet swagger-and-bomb posturing is more or less universal among the leading candidates. ...
                      The point is that ... the mainstream contenders ... are frighteningly radical, and that none of them seem to have learned anything from past disasters.
                      Why does this matter? Right now conventional wisdom ... suggests even or better-than-even odds that Mr. Trump or Mr. Cruz will be the nominee, in which case everyone will be aware of the candidate’s extremism. But there’s still a substantial chance that the outsiders will falter and someone less obviously out there — probably Mr. Rubio — will end up on top.
                      And if this happens, it will be important to realize that not being Donald Trump doesn’t make someone a moderate, or even halfway reasonable. The truth is that there are no moderates in the Republican primary, and being reasonable appears to be a disqualifying characteristic for anyone seeking the party’s nod.

                        Posted by on Monday, December 28, 2015 at 09:30 AM in Economics, Politics | Permalink  Comments (53) 

                        Links for 12-28-15

                          Posted by on Monday, December 28, 2015 at 01:02 AM in Economics, Links | Permalink  Comments (156) 

                          Sunday, December 27, 2015

                          A Powerful Intellectual Stumbling Block: The Belief that the Market Can Only Be Failed

                          Brad DeLong:

                          A Powerful Intellectual Stumbling Block: The Belief that the Market Can Only Be Failed: Of all the strange and novel economic doctrines propounded since 2007, Stanford's John Taylor has a good claim to [propounding the strangest][1]: In his view, the low interest-rate, quantitative-easing, and forward-guidance policies of North Atlantic and Japanese central banks are like:

                          imposing an interest-rate ceiling on the longer-term market... much like the effect of a price ceiling in a [housing] rental market.... [This] decline in credit availability, reduces aggregate demand, which tends to increase unemployment, a classic unintended consequence..."

                          When you think about it, this analogy makes no sense at all. ...

                            Posted by on Sunday, December 27, 2015 at 10:05 AM in Economics | Permalink  Comments (28) 

                            Links for 12-27-15


                              Posted by on Sunday, December 27, 2015 at 01:17 AM in Economics, Links | Permalink  Comments (95) 

                              Saturday, December 26, 2015

                              'Doubling Down On W'


                              Doubling Down On W: As I’ve said, it’s hard these days for liberals to look at the state of the Republican primary without feeling a lot of Trumpenfreude. But one downside of The Donald’s turn in the spotlight is that the policy positions of the tonsorially conventional candidates are going largely unscrutinized, which is bad. For the fact is that the whole field has taken a hard right turn into fantasyland.
                              Take, for example, tax policy. Big tax cuts tilted toward the 1 percent were George W. Bush’s signature domestic achievement. But they failed to deliver the promised prosperity — and given the changes in the environment since then, any repeat of his push should seem unattractive. After all, W pretended simply to be handing back a budget surplus; today’s GOP has spent years hyperventilating about deficits. Inequality is a big issue, too, in a way it wasn’t at the end of the Clinton boom. So you might think that the current crop of candidates would be proposing something different.
                              Instead, what we’ve gotten is a doubling down. ...
                              It’s pretty amazing. The next thing you know, they’ll be bringing back the architects of the Iraq disaster to do it all over again. Oh, wait.

                                Posted by on Saturday, December 26, 2015 at 05:36 PM Permalink  Comments (21) 

                                Links for 12-26-15

                                  Posted by on Saturday, December 26, 2015 at 03:04 AM in Economics, Links | Permalink  Comments (47) 

                                  Friday, December 25, 2015

                                  Paul Krugman: Things to Celebrate, Like Dreams of Flying Cars

                                  Merry Christmas!:

                                  Things to Celebrate, Like Dreams of Flying Cars, By Paul Krugman, Commentary, NY Times: ...We’re still a very long way from space colonies and zero-gravity hotels, let alone galactic empires. But space technology is moving forward after decades of stagnation.
                                  And to my amateur eye, this seems to be part of a broader trend, which is making me more hopeful for the future than I’ve been in a while.
                                  You see, I got my Ph.D. in 1977, the year of the first Star Wars movie, which means that I have basically spent my whole professional life in an era of technological disappointment.
                                  Until the 1970s, almost everyone believed that advancing technology would do in the future what it had done in the past: produce rapid, unmistakable improvement in just about every aspect of life. But it didn’t. ...
                                  Now, there has been striking progress in our ability to process and transmit information. But while I like cat and concert videos as much as anyone, we’re still talking about a limited slice of life: ...
                                  Over the past five or six years, however — or at least this is how it seems to me — technology has been getting physical again; once again, we’re making progress in the world of things, not just information. And that’s important.
                                  Progress in rocketry is fun to watch, but the really big news is on energy, a field of truly immense disappointment until recently. ... The biggest effects so far have come from fracking, which has ended fears about peak oil and could, if properly regulated, be some help on climate change: Fracked gas is still fossil fuel, but burning it generates a lot less greenhouse emissions than burning coal. The bigger revolution looking forward, however, is in renewable energy, where costs of wind and especially solar have dropped incredibly fast.
                                  Why does this matter? ... Well, you still hear claims, mostly from the right but also from a few people on the left, that we can’t take effective action on climate without bringing an end to economic growth. ...
                                  But now we can see the shape of a sustainable, low-emission future quite clearly... Of course, it doesn’t have to happen. But if it doesn’t, the problem will be politics, not technology.
                                  True, I’m still waiting for flying cars, not to mention hyperdrive. But we have made enough progress in the technology of things that saving the world has suddenly become much more plausible. And that’s reason to celebrate.

                                    Posted by on Friday, December 25, 2015 at 12:42 AM in Economics | Permalink  Comments (75) 

                                    Links for 12-25-15

                                      Posted by on Friday, December 25, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (46) 

                                      Thursday, December 24, 2015

                                      How to Generate a Golden Age: TV Edition

                                      Joshua Gans at Digitopoly:

                                      How to generate a Golden Age: TV Edition: When we think of Golden Ages it is looking back and realising that things were better during some period of time; we just never realised it at the time. But we are currently living in a Golden Age of Television. It is better than at any point in its history. And what is more, we know it. That is simply a remarkable state of affairs.
                                      When did the Golden Age begin? Many will mark 2008 as a turning point with Breaking Bad (or maybe a year earlier with Mad Men). Others will go back to 2002 and 2003 with The Wire, Battlestar Galactica and Lost. In reality, the Golden Age, as we know it, is really a phenomenon of the last five or six years as knowledge of great alternative programming became widespread. And there is no end in sight.
                                      What is remarkable about it is that at the beginning of the Golden Age, industry insiders were proclaiming doom for the industry. The Internet and YouTube, in particular, not to mention piracy were destroying all and sundry (supposedly) and with them any incentives to create good content. ...
                                      To get into this, it is useful to remind ourselves of the basic economics of product design when the designer has a certain degree of market power. As Michael Spence showed, such suppliers will tend to design products to target marginal customers rather than average customers. ...
                                      Let’s start with the marginal customer. In the old, pre-2002, days, the marginal customer was the customer who ... would plonk themselves down in front of the TV every night for a few hours a night. Their product design was focused on marginal customers whom they could attract in a routine way. ...TV seasons were year long and the prime time stuff grabbed attention so that programming around it could be even more routine and comforting.
                                      The current Golden Age content does not fit this mould. It is rarely year long. It is irregular. It is sometimes intense. And it often requires investment by the consumer — miss some episodes and you are lost. Moreover, consumers have to decide what they ‘feel like’ watching. ...
                                      But how does the Internet (broadly) change all of that? The Internet has taken away the routine for many people but, importantly, allows people to still fill their attention with television content. So they can still plonk themselves down for a night of entertainment. What they do now is choose what that will be. ...
                                      Option demand is very different to immediate consumption demand. What will drive an incentive to be a regular subscriber is not purely access but whether they believe they will want to have that access on a random day. ... Critically that does not mean that you need to serve up options at 9pm that will appeal to most people on that night. Instead, you can have content that is demanded by a consumer at some point — that they feel they might want to watch. ...
                                      How do you do that? You need to produce content that people decide they will want to watch at some point. And as I talked about in Information Wants to be Shared, the content that best does that is content that other people — your friends etc — refer you to. In other words, traditional marketing of television is replaced by social marketing. A completely different ball game as you must please the average consumer in order to attract more consumers at the margin. ...
                                      As a final note: I have made lots of speculative assumptions here but I am confident that looking at changed incentives to attract marginal consumers and who those consumers are is the place to look to understand how the television industry has evolved.

                                        Posted by on Thursday, December 24, 2015 at 10:19 AM in Economics | Permalink  Comments (17) 

                                        Links for 12-24-15

                                          Posted by on Thursday, December 24, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (185) 

                                          Wednesday, December 23, 2015

                                          'The Six Major Adverse Shocks that Have Hit the U.S. Macroeconomy since 2005'

                                          Brad DeLong:

                                          The Six Major Adverse Shocks that Have Hit the U.S. Macroeconomy since 2005: Talk to people at the Federal Reserve these days about how they feel about the institution’s performance during the seven very lean years from late 2008 to late 2015, and they tend to be relatively proud of how the institution performed. Almost smug.

                                          Why? Well, let me pull out my old workhorse-graph of the four salient components of U.S. aggregate demand since 1999:

                                          FRED Graph FRED St Louis Fed

                                          And let me run through the six major adverse shocks to the U.S. macroeconomy since 2005...

                                            Posted by on Wednesday, December 23, 2015 at 07:53 AM in Economics | Permalink  Comments (108) 

                                            'An Aging Society Is No Problem When Wages Rise'

                                            Dean Baker:

                                            An Aging Society Is No Problem When Wages Rise: Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.
                                            While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.
                                            We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)
                                            The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.
                                            For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.

                                              Posted by on Wednesday, December 23, 2015 at 06:48 AM in Economics, Income Distribution, Social Insurance, Social Security, Taxes | Permalink  Comments (32) 

                                              Links for 12-23-15

                                                Posted by on Wednesday, December 23, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (154) 

                                                Tuesday, December 22, 2015

                                                Krugman and Blanchard (Video): Saving The World Economy

                                                  Posted by on Tuesday, December 22, 2015 at 10:46 AM in Economics, Video | Permalink  Comments (6) 

                                                  Summers: My Views and the Fed’s Views on Secular Stagnation

                                                  Larry Summers:

                                                  My views and the Fed’s views on secular stagnation: It has been two years since I resurrected Alvin Hansen’s secular stagnation idea and suggested its relevance to current conditions in the industrial world. Unfortunately experience since that time has tended to confirm the secular stagnation hypothesis. Secular stagnation is a possibility. It is not an inevitability and it can be avoided with strong policy. Unfortunately, the Fed and other policy setters remain committed to traditional paradigms and so are acting in ways that make secular stagnation more likely. ... Indeed I would judge that there is at least a two-thirds chance that we will experience zero or negative rates again in the next five years. ...

                                                  I believe its decision to raise rates last week reflected four consequential misjudgments.
                                                  First, the Fed assigns a much greater chance that we will reach 2 percent core inflation than is suggested by most available data. ...
                                                  Second, the Fed seems to mistakenly regard 2 percent inflation as a ceiling not a target. ...
                                                  Third... It is suggested that by raising rates the Fed gives itself room to lower them. ... I would say the argument that the Fed should raise rates so as to have room to lower them is in the category with the argument that I should starve myself in order to have the pleasure of relieving my hunger pangs.
                                                  Fourth, the Fed is likely underestimating secular stagnation. It is ... overestimating the neutral rate. ...
                                                  Why is the Fed making these mistakes if indeed they are mistakes? It is not because its leaders are not thoughtful or open minded or concerned with growth and employment. Rather I suspect it is because of an excessive commitment to existing models and modes of thought. Usually it takes disaster to shatter orthodoxy. We can all hope that either my worries prove misplaced or the Fed shows itself to be less in the thrall of orthodoxy than it has been of late.

                                                  The Fed's job would have been, and will be a lot easier if fiscal policy makers would help. I disagree with Charles Plosser's view on monetary policy, but I have some sympathy for the view that many people have come to expect too much from monetary policy:

                                                  ... On the monetary policy side central banks have clearly pushed the envelope in an effort to stabilize and then promote real economic growth.  The pressure to do so has come from inside and outside the central banks.  These actions have raised expectations of what the central bank can do.  For the last three or four decades, it has been widely accepted among academics and central bankers that monetary policy is primarily responsible for anchoring inflation and inflation expectations at some low level.  In the United States, where the Fed operates under the so-called dual mandate to promote both price stability and maximum employment, monetary policy has also attempted to stabilize economic growth and employment.  Yet it has also been widely accepted that monetary policy’s impact on real variables was limited and temporary, thus in the long-run changes in money were neutral for real variables.

                                                  The behavior of central banks during the crisis and subsequent recession has turned much of this conventional wisdom on its head.  It is not clear that this is wise or prudent.  Many have come to fear that without substantial support from monetary policy our economies will slump into stagnation. This would seem to fly in the face of nearly two centuries of economic thinking. ...

                                                  If secular stagnation is real, the Fed cannot overcome it by itself. Fiscal policy will have to be part of the solution. (I do think one statement above is wrong, and it gets at the heart of Summer's recent work reviving hysteresis and his statement above about commitment to orthodoxy. When Plosser says "monetary policy’s impact on real variables was limited and temporary, thus in the long-run changes in money were neutral for real variables," he is ignoring recent work by Summers, Blanchard, and Fatas showing that recessions can permanently  lower our productive capacity, and it is worse when the recession lasts longer. This means that monetary policy -- and fiscal policy too -- can have a permanent impact on the natural rate of output by helping the economy to recover faster. The faster the recovery, the less the natural rate is lowered. So I agree with Summers that monetary policy needs to take the possibility of secular stagnation into account, I just wish he'd put more emphasis on the essential role of fiscal policy -- something he has certainly done in the past, e.g., "I believe that it is appropriate that we go back to an earlier tradition that has largely passed out of macroeconomics of thinking about fiscal policy as having a major role in economic stabilization.")

                                                    Posted by on Tuesday, December 22, 2015 at 10:08 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (50) 

                                                    'The Effects of Minimum Wages on Employment'

                                                    I believe the evidence, overall, suggests that moderate increases in the minimum wage have negligible effects on employment. But, to be fair, David Neumark is a credible researcher and I will let him make the case that an an increase in the minimum wage may not be benign:

                                                    The Effects of Minimum Wages on Employment, by David Neumark: It is easy to be confused about what effects minimum wages have on jobs for low-skilled workers. Researchers offer conflicting evidence on whether or not raising the minimum wage means fewer jobs for these workers. Some recent studies even suggest overall employment could be harmed. This Letter sheds light on the range of estimates and the different approaches in the research that might explain some of the conflicting results. It also presents some midrange estimates of the aggregate employment effects from recent minimum wage increases based on the research literature.
                                                    The controversy begins with the theory
                                                    The standard model of competitive labor markets predicts that a higher minimum wage will lead to job loss among low-skilled workers. The simplest scenario considers a competitive labor market for a single type of labor. A “binding” minimum wage that is set higher than the competitive equilibrium wage reduces employment for two reasons. First, employers will substitute away from the low-skilled labor that is now more expensive towards other inputs, such as equipment or other capital. Second, the higher wage and new input mix implies higher prices, in turn reducing product and labor demand.
                                                    Of course, the labor market is more complicated. Most important, workers have varying skill levels, and a higher minimum wage will lead employers to hire fewer low-skilled workers and more high-skilled workers. This “labor-labor” substitution may not show up as job losses unless researchers focus on the least-skilled workers whose wages are directly pushed up by the minimum wage. Moreover, fewer jobs for the least-skilled are most important from a policy perspective, since they are the ones the minimum wage is intended to help.
                                                    In some alternative labor market models, worker mobility is limited and individual employers therefore have some discretion in setting wages. In such “monopsony” models, the effect of increasing the minimum wage becomes ambiguous. However, such models may be less applicable to labor markets for unskilled workers most affected by the minimum wage; these markets typically have many similar employers in close proximity to each other (think of a shopping mall) and high worker turnover. Nonetheless, the ultimate test is not theoretical conjecture, but evidence.
                                                    Recent research on employment effects of minimum wages
                                                    The earliest studies of the employment effects of minimum wages used only national variation in the U.S. minimum wage. They found elasticities between −0.1 and −0.3 for teens ages 16–19, and between −0.1 and −0.2 for young adults ages 16–24. An elasticity of −0.1 for teens, for example, means that a 10% increase in the wage floor reduces teen employment by 1%. Newer research used data from an increasing number of states raising their minimum wages above the federal minimum. The across-state variation allowed comparisons of changes in youth employment between states that did and did not raise their minimum wage. This made it easier to distinguish the effects of minimum wages from those of business cycle and other influences on aggregate low-skill employment. An extensive survey by Neumark and Wascher (2007) concluded that nearly two-thirds of the more than 100 newer minimum wage studies, and 85% of the most convincing ones, found consistent evidence of job loss effects on low-skilled workers.
                                                    Research since 2007, however, has reported conflicting findings. Some studies use “meta-analysis,” averaging across a set of studies to draw conclusions. For example, Doucouliagos and Stanley (2009) report an average elasticity across studies of −0.19, consistent with earlier conclusions, but argue that the true effect is closer to zero; they suggest that the biases of authors and journal editors make it more likely that studies with negative estimates will be published. However, without strong assumptions it is impossible to rule out an alternative interpretation—that peer review and publication lead to more evidence of negative estimates because the true effect is negative. In addition, meta-analyses do not assign more weight to the most compelling evidence. Indeed, they often downweight less precise estimates, even though the lower precision may be attributable to more compelling research strategies that ask more of the data. In short, meta-analysis is no substitute for critical evaluation of alternative studies.
                                                    A second strand of recent research that conflicts with earlier conclusions argues that geography matters. In other words, the only valid conclusions come from studies that compare changes among close or contiguous states or subareas of states (for example, Dube, Lester, and Reich 2010). A number of studies using narrow geographic comparisons find employment effects that are closer to zero and not statistically significant for both teenagers and restaurant workers. The studies argue that their results differ because comparisons between distant states confound actual minimum wage effects with other associated negative shocks to low-skill labor markets.
                                                    Some follow-up studies, however, suggest that limiting comparisons to geographically proximate areas generates misleading evidence of no job loss effects from minimum wages. Pointing to evidence that minimum wages tend to be raised when labor markets are tight, this research suggests that, among nearby states that are similar in other respects, minimum wage increases are more likely to be associated with positive shocks, obscuring the actual negative effects of minimum wages. Using better methods to pick appropriate comparison states, this research finds negative elasticities in the range of −0.1 to −0.2 for teenagers, and smaller elasticities for restaurant workers (see Neumark, Salas, and Wascher 2014a,b, and Allegretto et al. 2015 for a rebuttal). Other analyses that try to choose valid geographic comparisons estimate employment responses from as low as zero to as high as −0.50 (Baskaya and Rubinstein 2012; Liu, Hyclak, and Regmi 2015; Powell 2015; Totty 2015).
                                                    Some new strategies in recent studies have also found generally stronger evidence of job loss for low-skilled workers. For example, Clemens and Wither (2014) compare job changes within states between workers who received federal minimum wage increases because of lower state minimums and others whose wages were low but not low enough to be directly affected. Meer and West (2015) found longer-term dynamic effects of minimum wages on job growth; they suggest these longer-term effects arise because new firms are more able to choose labor-saving technology after a minimum wage increase than existing firms whose capital was “baked in.”
                                                    How do we summarize this evidence? Many studies over the years find that higher minimum wages reduce employment of teens and low-skilled workers more generally. Recent exceptions that find no employment effects typically use a particular version of estimation methods with close geographic controls that may obscure job losses. Recent research using a wider variety of methods to address the problem of comparison states tends to confirm earlier findings of job loss. Coupled with critiques of the methods that generate little evidence of job loss, the overall body of recent evidence suggests that the most credible conclusion is a higher minimum wage results in some job loss for the least-skilled workers—with possibly larger adverse effects than earlier research suggested.
                                                    Recent minimum wage increases and implications
                                                    Despite the evidence of job loss, policymakers and the voting public have raised minimum wages frequently and sometimes substantially in recent years. Since the last federal increase in 2009, 23 states have raised their minimum wage. In these states, minimum wages in 2014 averaged 11.5% higher than the federal minimum (Figure 1). If these higher minimum wages have in fact lowered employment opportunities, this could have implications for changes in aggregate employment over this period.

                                                    Figure 1


                                                    Percent difference between state and federal minimum wages, June 2014

                                                    Note that more states (31) had minimums above the federal level just before the Great Recession than do now (Figure 2). The average relative to the federal minimum was nearly three times as high at 32.3%. However, this is in part because the federal minimum wage has increased 41% since the beginning of 2007. To compare the average change across states between 2007 and 2014, I account for the smaller number of states with higher minimums in 2014 and their lower levels, and weight the states by their working-age population. I find that minimum wages were roughly 20.6% higher in 2014 than in 2007, compared with a 16.5% increase in average hourly earnings over the same period. Thus, between the federal increases in 2007–09 and recent state increases, the minimum wage has grown only slightly faster than average wages in the economy—around 4.1% over the entire seven-year period.

                                                    Figure 2


                                                    Percent difference between state and federal minimum wages, June 2007

                                                    From the research findings cited earlier, one can roughly translate these minimum wage increases into the overall job count. Among the studies that find job loss effects, estimated employment elasticities of −0.1 to −0.2 are at the lower range but are more defensible than the estimates of no employment effects. Some of the larger estimates are from studies that are likely to receive more scrutiny in the future.
                                                    Using a −0.1 elasticity and applying it only to teenagers implies that higher minimum wages have reduced employment opportunities by about 18,600 jobs. An elasticity of −0.2 doubles this number to around 37,300. If we instead use the larger 16–24 age group and apply the smaller elasticity to reflect that a smaller share of this group is affected, the crude estimate of missing jobs rises to about 75,600. Moreover, if some very low-skilled older adults also are affected (as suggested by Clemens and Wither 2014), the number could easily be twice as high, although there is much less evidence on older workers.
                                                    Thus, allowing for the possibility of larger job loss effects, based on other studies, and possible job losses among older low-skilled adults, a reasonable estimate based on the evidence is that current minimum wages have directly reduced the number of jobs nationally by about 100,000 to 200,000, relative to the period just before the Great Recession. This is a small drop in aggregate employment that should be weighed against increased earnings for still-employed workers because of higher minimum wages. Moreover, weighing employment losses against wage gains raises the broader question of how the minimum wage affects income inequality and poverty. This issue will be addressed in the next Economic Letter.
                                                    David Neumark is Chancellor’s Professor of Economics and Director of the Center for Economics & Public Policy at the University of California, Irvine, and a visiting scholar at the Federal Reserve Bank of San Francisco.
                                                    Allegretto, Sylvia, Arindrajit Dube, Michael Reich, and Ben Zipperer. 2015. “Credible Research Designs for Minimum Wage Studies: A Response to Neumark, Salas, and Wascher.” Unpublished manuscript.
                                                    Baskaya, Yusuf Soner, and Yona Rubinstein. 2012. “Using Federal Minimum Wage Effects to Identify the Impact of Minimum Wages on Employment and Earnings across U.S. States.” Unpublished paper, Central Bank of Turkey.
                                                    Clemens, Jeffrey, and Michael Wither. 2014. “The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers.” NBER Working Paper 20724.
                                                    Doucouliagos, Hristos, and T.D. Stanley. 2009. “Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis.” British Journal of Industrial Relations 47(2), pp. 406–428.
                                                    Dube, Arindrajit, T. William Lester, and Michael Reich. 2010. “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties.” Review of Economics and Statistics 92(4), pp. 945–964.
                                                    Liu, Shanshan, Thomas J. Hyclak, and Krishna Regmi. 2015. “Impact of the Minimum Wage on Youth Labor Markets.” Labour, early publication online.
                                                    Meer, Jonathan, and Jeremy West. 2015. “Effects of the Minimum Wage on Employment Dynamics.” Journal of Human Resources, early publication online.
                                                    Neumark, David, J.M. Ian Salas, and William Wascher. 2014a. “More on Recent Evidence on the Effects of Minimum Wages in the United States.” IZA Journal of Labor Policy 3(1).
                                                    Neumark, David, J.M. Ian Salas, and William Wascher. 2014b. “Revisiting the Minimum Wage-Employment Debate: Throwing Out the Baby with the Bathwater?” Industrial and Labor Relations Review 67(Supplement), pp. 608–648.
                                                    Neumark, David, and William Wascher. 2007. “Minimum Wages and Employment.” Foundations and Trends in Microeconomics 3(1–2), pp. 1–182.
                                                    Powell, David. 2015. “Synthetic Control Estimation beyond Case Studies: Does the Minimum Wage Decrease Teen Employment?” Unpublished manuscript.
                                                    Totty, Evan. 2015. “The Effect of Minimum Wages on Employment: A Factor Model Approach.” Unpublished manuscript.

                                                      Posted by on Tuesday, December 22, 2015 at 12:15 AM in Economics, Unemployment | Permalink  Comments (69) 

                                                      Links for 12-22-15

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

                                                        Monday, December 21, 2015

                                                        'What are the Factors Behind High Economic Rents?'

                                                        Nick Bunker:

                                                        What are the factors behind high economic rents?: In research and debates about economic inequality in the United States, there’s been a resurgence this year in explanations for rising inequality that emphasize market power and market imperfections. In a recent piece for the New York Review of Books, Paul Krugman details how increasing market power seems to be a more attractive story of how inequality became so large in the United States. A paper that Krugman cites—by Jason Furman, Chairman of the Council of Economic Advisers, and Peter Orszag of Citigroup—emphasizes the role of “rents” in contributing to inequality and suggests increasing market power could be the reason for this trend. But an interesting new paper from Dean Baker, economist and co-director of the Center for Economic and Policy Research, proposes a very different reason for why those rents came about. ...
                                                        First, let’s define economic rents. ...
                                                        Baker points to four areas where rents are pervasive in the U.S. economy: patents and copyrights, the financial sector, high pay for CEOs and executives, and high pay for professionals more broadly. What brings these areas together is that the institutional arrangements in these portions of the economy have not only created rents, but that these rents disproportionately go to those at the top of the income ladder. Getting rid of these rents would stop the “upward redistribution of income.” ...
                                                        Altogether, these factors could have a big impact on the level of inequality. According to Baker’s calculations, the combined amount of rents from these four areas would be equal to between 6 percent and 8.5 percent of U.S. gross domestic product in 2014. That’s about the same size as the increase in the share of income going to the top 1 percent of income earners in the United States from 1979 to 2012.
                                                        What differentiates Baker’s argument from similar ones is that he is less persuaded that decreased competition among firms and firm consolidation is a major factor. Furman and Orszag mention patents as a potential cause of excess returns, but the emphasis seems to be more on market power...
                                                        In short, Baker sees the story of rents less as capital versus labor and more about a fight within labor. ...[W]hile rents might have broken through as a compelling story for why inequality has risen in the United States, the reason for high rents is still very much up for debate.

                                                          Posted by on Monday, December 21, 2015 at 09:43 AM Permalink  Comments (57) 

                                                          Fed Watch: What Is The Fed's Expectation For Financial Markets?

                                                          Tim Duy:

                                                          What Is The Fed's Expectation For Financial Markets?, by Tim Duy: David Keohnae at FT Alphaville points us toward a JPM research note raising the prospect of a reappearance of Former Federal Reserve Chair Alan Greenspan’s “conundrum.” From the note:
                                                          If long-term interest rates matter more than short-term interest rates, will Fed’s current and prospective rate hikes matter much? The answer is yes if long-term interest rates respond to these short-term rate hikes. But this transmission is far from given, especially given the Fed’s decision that reinvestments would not be halted until the normalization of the funds rate is “well under way”
                                                          The previous hiking cycle of 2004-2006 is a reminder of how problematic the transmission from short rates to long-term interest rates can be. At the time, the 10y real UST yield rose by only 25bp between June 2004 and June 2006 despite the Fed lifting its target rate by 425bp (Figure 1). We depict the real rather than nominal UST yield in the chart to capture the potential impact of monetary policy actions on inflation expectations. This lack of transmission or “bond conundrum” at the time was attributed to global saving forces emanating from DM corporates and EM economies. Could these saving forces prevent once again rate hikes from transmitting to longer-term interest rates?
                                                          Keohane links to fellow Alphaville write Matthew Klein, who describes the “conundrum” as bogus. Klein draws attention to the shape of the yield curve:
                                                          In addition to forgetting his own experience at the Fed, Greenspan’s confusion can also be blamed on an unusual belief in the “normal” behaviour of forward short rates.
                                                          Short rates tend to go up and down with the business cycle, which typically lasts a lot less than ten years…
                                                          When the economy is weak and the Fed is stepping on the gas, short rates should be lower than your reasonable expectation of the average for the next ten years. (Like now.) Other times, of course, short rates are higher than your reasonable expectation of the average for the next ten years because the economy is running hot and the Fed is stepping on the brakes. Longer-term yields therefore shouldn’t always move with short-term rates.
                                                          This is why people think the slope of the yield curve is a decent signal of where the economy is going.
                                                          When the economy is peaking and poised to go into recession, short rates end up higher than long rates because traders are betting that short rates will fall significantly. To use the jargon, the curve is inverted. After the economy has hit bottom and is ready to grow, the yield curve gets nice and steep, reflecting the expectation of future increases in the short rate to match the expected acceleration in nominal spending.
                                                          What happens to the yield curve, and how the Federal Reserve responds, is one of my big questions for 2016. Almost always, the yield curve flattens after the Fed begins a tightening cycle. Within a year, the spread between the 10- and 2-year treasuries is a mere 50bp or so:


                                                          An analogous situation today would be if the Fed raises the fed funds target range over the next year but longer-term yields don’t budge. How might the Fed respond? New York Federal Reserve President William Dudley often comments on this prospect. From November 2015:
                                                          Several examples will help me make these points. During 2004 to 2007, the FOMC raised the federal funds rate target 17 meetings in a row, lifting the federal funds to 5.25 percent from 1.0 percent. Yet, during this period, financial conditions eased, as evidenced by the fact that the stock market rose, bond yields fell and credit availability—especially to housing—eased substantially. In hindsight, perhaps monetary policy should have been tightened more aggressively…
                                                          …In contrast, if financial conditions did not respond at all, or eased, then I suspect we would go more quickly, all else equal.
                                                          This raises some red flags for me. While much attention is placed on the Fed’s failure to respond more aggressively to slowing activity and deteriorating financial conditions in 2008, I lean toward thinking the more grievous policy error was in the first half of 2006 when the Federal Reserve kept raising short rates after the yield curve first inverted in February of that year:


                                                          and despite clear evidence of slowing economic activity and increasing financial stress.
                                                          So how will the Fed respond if long rates do not respond in concert with short rates? How will the Fed interpret a flattening yield curve? Do they accelerate the pace of rate increases? Do they initiate asset sales? The truth is I don’t know (or the answer is “it depends”), but I find this exchange between Federal Reserve Chair Janet Yellen and New York Times reporter Binyamin Appelbaum a bit disconcerting:
                                                          BINYAMIN APPELBAUM. Binyamin Appelbaum, the New York Times. Bill Dudley has talked about the need for the Fed to adjust policy based on the responsiveness of financial markets as you begin to increase rates. You didn't talk about that today. Is it a point that you agree with? And if so, what is it that you're looking for? How will you judge whether financial markets are accepting and transmitting these changes?
                                                          CHAIR YELLEN. Well, there are number of different channels through which monetary policy is transmitted to spending decisions, the behavior of longer term, longer term interest rates, short term interest rates matter. The value of asset prices and the exchange rate, also, these are transmission channels. We wouldn't be focused on short-term financial volatility, but were there unanticipated changes in financial conditions that were persistent and we judged to affect the outlook. We would of course have to take those into account. So, we will watch financial developments, but what we're looking at here is the longer term economic outlook, are we seeing persistent changes in financial market conditions that would have a bearing, a significant bearing, on the outlook that we would need to take account in formulating appropriate policy. Yes we would, but it's not short-term volatility in markets.
                                                          BINYAMIN APPELBAUM. The part [inaudible], you didn't see changes, you would be concerned and have to move more quickly. Are you concerned that if markets don't tighten sufficiently you may need to do more?
                                                          CHAIR YELLEN. Well, look. You know, we-- this is not an unanticipated policy move. And we have been trying to explain what our policy strategy is. So it's not as though I'm expecting to see marked immediate reaction in financial markets, expectations about Fed policy have been built into the structure of financial market prices. But we obviously will track carefully the behavior of both short and longer term interest rates, the dollar, and asset prices, and if they move in persistent and significant ways that are out of line with the expectations that we have, then of course we will take those in to account.
                                                          I don’t know that Yellen understood the question. But she should have. Dudley has been telling this story for a long, long time. Does she and/or the Committee share his expectations? Why or why not? In my opinion, this is an important question, and it looks to me like Yellen fumbled it.
                                                          Bottom Line: We have a fairly good idea of the Fed’s reaction function with respect inflation and unemployment. Not so much with respect to financial market conditions. Who shares Dudley’s views? That is a space I am watching this year.

                                                            Posted by on Monday, December 21, 2015 at 08:45 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (32) 

                                                            Paul Krugman: The Donald and the Decider

                                                            Nothing comes from nowhere:

                                                            The Donald and the Decider, by Paul Krugman, Commentary, NY Times: Almost six months have passed since Donald Trump overtook Jeb Bush in polls of Republican voters. At the time, most pundits dismissed the Trump phenomenon as a blip... Instead, however, his lead just kept widening. Even more striking, the triumvirate of trash-talk — Mr. Trump, Ben Carson, and Ted Cruz — now commands the support of roughly 60 percent of the primary electorate.
                                                            But how can this be happening? After all, the antiestablishment candidates now dominating the field, aside from being deeply ignorant about policy, have a habit of making false claims, then refusing to acknowledge error. Why don’t Republican voters seem to care?
                                                            Well, part of the answer has to be that the party taught them not to care. Bluster and belligerence as substitutes for analysis, disdain for any kind of measured response, dismissal of inconvenient facts reported by the “liberal media” didn’t suddenly arrive on the Republican scene last summer. On the contrary, they have long been key elements of the party brand. So how are voters supposed to know where to draw the line?. ...
                                                            Donald Trump as a political phenomenon is very much in a line of succession that runs from W. through Mrs. Palin, and in many ways he’s entirely representative of the Republican mainstream. For example, were you shocked when Mr. Trump revealed his admiration for Vladimir Putin? He was only articulating a feeling that was already widespread in his party.
                                                            Meanwhile, what do the establishment candidates have to offer as an alternative? On policy substance, not much. Remember, back when he was the presumed front-runner, Jeb Bush assembled a team of foreign-policy “experts,” ... dominated by neoconservative hard-liners, people committed, despite past failures, to the belief that shock and awe solve all problems.
                                                            In other words, Mr. Bush wasn’t articulating a notably different policy than what we’re now hearing from Trump et al...
                                                            In case you’re wondering, nothing like this process has happened on the Democratic side. When Hillary Clinton and Bernie Sanders debate..., it’s a real discussion... American political discourse as a whole hasn’t been dumbed down, just its conservative wing.
                                                            Going back to Republicans, does this mean that Mr. Trump will actually be the nominee? I have no idea. But it’s important to realize that he isn’t someone who suddenly intruded into Republican politics from an alternative universe. He, or someone like him, is where the party has been headed for a long time.

                                                              Posted by on Monday, December 21, 2015 at 01:08 AM in Economics, Politics | Permalink  Comments (120) 

                                                              Links for 12-21-15

                                                                Posted by on Monday, December 21, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (74) 

                                                                Sunday, December 20, 2015

                                                                'The FTPL Version of the Neo-Fisherian Proposition'

                                                                I've never paid much attention to the fiscal theory of the price level:

                                                                The FTPL version of the Neo-Fisherian proposition: The Neo-Fisherian doctrine is the idea that a permanent increase in a flat nominal interest rate path will (eventually) raise the inflation rate. It is then suggested that current below target inflation is a consequence of fixing rates at their lower bound, and rates should be raised to increase inflation. David Andolfatto says there are two versions of this doctrine. The first he associates with the work of Stephanie Schmitt-Grohe and Martin Uribe, which I discussed here. He like me is not sold on this interpretation, for I think much the same reason. ... But he favours a different interpretation, based on the Fiscal Theory of the Price Level (FTPL).

                                                                Let me first briefly outline my own interpretation of the FTPL. This looks at the possibility of a fiscal regime where there is no attempt to stabilize debt. Government spending and taxes are set independently of the level or sustainability of government debt. The conventional and quite natural response to the possibility of that regime is to say it is unstable. But there is another possibility, which is that monetary policy stabilizes debt. Again a natural response would be to say that such a monetary policy regime is bound to be inconsistent with hitting an inflation target in the long run, but that is incorrect. ...

                                                                A constant nominal interest rate policy is normally thought to be indeterminate because the price level is not pinned down, even though the expected level of inflation is. In the FTPL, the price level is pinned down by the need for the government budget to balance at arbitrary and constant levels for taxes and spending. ...

                                                                I have a ... serious problem with this FTPL interpretation in the current environment. The belief that people would need to have for the FTPL to be relevant - that the government would not react to higher deficits by reducing government spending or raising taxes - does not seem to be credible, given that austerity is all about them doing exactly this despite being in a recession. As a result, I still find the Neo-Fisherian proposition, with either interpretation, somewhat unrealistic.

                                                                  Posted by on Sunday, December 20, 2015 at 07:54 AM in Economics, Fiscal Policy, Inflation, Macroeconomics, Monetary Policy | Permalink  Comments (98) 

                                                                  Links for 12-20-15

                                                                    Posted by on Sunday, December 20, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (104) 

                                                                    'The Ambivalent Role of China in Global Income Distribution'

                                                                    Branko Milanovic:

                                                                    The ambivalent role of China in global income distribution: It is well known that China’s role in reductions of global poverty and global inequality was crucial. For example, according to Chen and Ravallion, between 1981 and 2005, 98 percent (yes, ninety-eight percent) of reduction of global poverty, calculated using the poverty line $1 per person per day, was due to China. China’s role was similarly impressive when it comes to  reduction of global inequality (income inequality between all individuals in the world). ....      
                                                                    But the question can be asked next, what happens if China continues growing fast? Will its inequality reducing effects wane, and eventually reverse? ...

                                                                      Posted by on Sunday, December 20, 2015 at 12:03 AM in China, Economics, Income Distribution | Permalink  Comments (15) 

                                                                      Saturday, December 19, 2015

                                                                      Links for 12-19-15

                                                                        Posted by on Saturday, December 19, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (210) 

                                                                        Friday, December 18, 2015

                                                                        Working Paper: The Upward Redistribution of Income: Are Rents the Story?

                                                                        Dean Baker:

                                                                        Working Paper: The Upward Redistribution of Income: Are Rents the Story?: In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period.

                                                                        This paper argues that the bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.
                                                                        PDF  |  Flash 

                                                                          Posted by on Friday, December 18, 2015 at 09:43 AM in Economics, Income Distribution, Market Failure | Permalink  Comments (89) 

                                                                          Paul Krugman: 'The Big Short,' Housing Bubbles and Retold Lies

                                                                          Why are Murdoch-controlled newspapers attacking "The Big Short?"

                                                                          ‘The Big Short,’ Housing Bubbles and Retold Lies, by Paul krugman, Commentary, NY Times: In May 2009 Congress created a special commission to examine the causes of the financial crisis. The idea was to emulate the celebrated Pecora Commission of the 1930s, which used careful historical analysis to help craft regulations that gave America two generations of financial stability.
                                                                          But some members of the new commission had a different goal. ... Peter Wallison of the American Enterprise Institute, wrote to a fellow Republican on the commission ... it was important that what they said “not undermine the ability of the new House G.O.P. to modify or repeal Dodd-Frank”...; the party line, literally, required telling stories that would help Wall Street do it all over again.
                                                                          Which brings me to a new movie the enemies of financial regulation really, really don’t want you to see.
                                                                          The Big Short” ... does a terrific job of making Wall Street skulduggery entertaining, of exploiting the inherent black humor of how it went down. ... But you don’t want me to play film critic; you want to know whether the movie got the underlying ... story right. And the answer is yes, in all the ways that matter. ...
                                                                          The ...housing ... bubble ... was inflated largely via opaque financial schemes that in many cases amounted to outright fraud — and it is an outrage that basically nobody ended up being punished ... aside from innocent bystanders, namely the millions of workers who lost their jobs and the millions of families that lost their homes.
                                                                          While the movie gets the essentials of the financial crisis right, the true story ... is deeply inconvenient to some very rich and powerful people. They and their intellectual hired guns have therefore spent years disseminating an alternative view ... that places all the blame ... on ... too much government, especially government-sponsored agencies supposedly pushing too many loans on the poor.
                                                                          Never mind that the supposed evidence for this view has been thoroughly debunked..., constant repetition, especially in captive media, keeps this imaginary history in circulation no matter how often it is shown to be false.
                                                                          Sure enough, “The Big Short” has already been the subject of vitriolic attacks in Murdoch-controlled newspapers...
                                                                          The ... people who made “The Big Short” should consider the attacks a kind of compliment: The attackers obviously worry that the film is entertaining enough that it will expose a large audience to the truth. Let’s hope that their fears are justified.

                                                                            Posted by on Friday, December 18, 2015 at 12:51 AM in Economics, Housing, Politics, Regulation | Permalink  Comments (119) 

                                                                            Links for 12-18-15

                                                                              Posted by on Friday, December 18, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (124) 

                                                                              Thursday, December 17, 2015

                                                                              'Sticky' Sales'

                                                                              Are prices sticky?:

                                                                              “Sticky” sales, by Phil Davies,The Region, FRG Minneapolis: Sales are ubiquitous in the U.S. economy. Black Friday, President’s Day, Mother’s Day, the Fourth of July; almost any occasion is cause for price cutting, accompanied by prominent signage, balloons and ads in traditional and social media to make the savings known far and wide. Retailers also put on sales ostensibly to clear out inventory, celebrate being on the sidewalk and go out of business.
                                                                              Economists are interested in sales, not because they want cheap stuff (well, maybe they’re as partial to a deal as anyone), but because the role of sales has a bearing on a question central to macroeconomics: How flexible are prices? Price flexibility—how quickly prices adjust to changes in costs or demand—is crucial to understanding how shocks of any kind, including fiscal and monetary policy, affect economic performance.
                                                                              Retail prices rise and fall frequently as merchants put items on sale and then restore the regular, or shelf, price. Indeed, the bulk of weekly and monthly variance in individual prices is due to sales promotions, not changes in regular prices. But there’s a lively debate in economics about the true flexibility of sale prices, from a macro perspective; for all their seeming fluidity, how readily do sales respond to changes in underlying costs and unexpected events that alter economic conditions?
                                                                              How sale prices respond to wholesale cost shocks and broader macroeconomic shocks such as an increase in government spending or monetary policy stimulus, or a decrease in global aggregate demand, affects the flexibility of aggregate retail prices, with profound implications for monetary policy and the accuracy of macroeconomic models that guide policymaking.
                                                                              Monetary policy as a tool for influencing the economy depends on sticky prices—the idea that prices don’t adjust instantly to shifts in demand caused by changes in money supply. If they did, an increase in demand for goods and services due to monetary easing would trigger an immediate price rise, suppressing demand and leaving economic output and employment unchanged. Thus, the stickier are prices, the more effective is monetary policy in modulating economic growth in the short and medium run. (Economists generally agree that money is neutral in the long run; that is, over a long enough period of time, prices are actually quite flexible, so monetary policy has no long-run effect on the real economy.)
                                                                              Recent work by Ben Malin, a senior research economist at the Minneapolis Fed, provides insight into the import of temporary sales for price stickiness and thus monetary policy. In “Informational Rigidities and the Stickiness of Temporary Sales” (Minneapolis Fed Staff Report 513), Malin uses a rich data set of prices from a U.S. retail chain to investigate how retail prices adjust in response to wholesale price increases and other economic shocks. Joining Malin in the research are economists Emi Nakamura and Jón Steinsson of Columbia University, and marketing professors Eric Anderson and Duncan Simester of Northwestern University and MIT, respectively.
                                                                              Surprisingly, the authors find no change in the frequency and depth of price cuts in response to shocks. Their analysis, which also taps micro price data underlying the consumer price index to look at how sales at a representative sample of U.S. retailers respond to booms and downturns, shows that merchants rely exclusively on regular prices to adapt to cost changes and evolving economic conditions. The research “supports the view that the behavior of regular prices is what matters for aggregate price flexibility,” Malin said in interview. ...

                                                                                Posted by on Thursday, December 17, 2015 at 10:40 AM in Economics, Macroeconomics | Permalink  Comments (16) 

                                                                                'How Socioeconomic Status Impacts Online Learning'

                                                                                 Are MOOCs the answer to educational inequality?:

                                                                                How Socioeconomic Status Impacts Online Learning: The driving force behind the increasing popularity of massive open online courses (MOOCs) is that they provide — as the term defines it — open access to a massive online audience. Anyone with an Internet connection who wants to learn, can. Whether you’re rich or poor, living in a New York City high-rise or a remote Nepalese village, MOOCs promise to level the higher education playing field. The question is: Does reality reflect this ideal?
                                                                                A new research study by MIT education researcher Justin Reich and Harvard University’s John Hansen seeks the answer. “Democratizing Education? Examining Access and Usage Patterns in Massive Open Online Courses” takes a close look at how socioeconomic resources influence MOOC enrollment and course completion — and whether online learning is truly opening as many doors as anticipated.
                                                                                “One way we might democratize education would be to provide more widespread access to academic experiences previously reserved for the elite,” explains Reich, who is the executive director of MIT's PK-12 Initiative. “But historically, emerging learning technologies — even free ones — have often benefited people with the social, technical, and financial capital to take advantage of new innovations. As we try to bridge the digital divide, we need to carefully examine how new tools are used by learners from different walks of life.” ...
                                                                                Reich’s study uses three indicators: parental educational attainment, neighborhood average educational attainment, and neighborhood median income.
                                                                                The research finds that these indicators are correlated with student enrollment and success in MOOCs, especially among younger students. Young students enrolling in HarvardX and MITx on edX live in neighborhoods where the median income is 38 percent higher than typical American neighborhoods. Among teenagers who register for a HarvardX course, those with a college-educated parent have nearly twice the odds of finishing the course compared to students whose parents did not complete college. At exactly the ages where online learning could offer a new pathway into higher education, already affluent students are more likely to enroll in a course and succeed.
                                                                                The takeaway is that MOOCs have not yet solved SES-related disparities in educational outcomes, and Reich believes it’s critical to turn these learnings into actions in order to narrow the gaps between MOOC perception and reality.
                                                                                “MOOCs and other forms of online learning don’t yet live up to their promise to democratize education,” he says. “Closing this digital divide is exactly the kind of grand challenge that the world’s greatest universities should be tackling head on.”

                                                                                  Posted by on Thursday, December 17, 2015 at 09:30 AM in Economics, Income Distribution, Technology, Universities | Permalink  Comments (14) 

                                                                                  Links for 12-17-15

                                                                                    Posted by on Thursday, December 17, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (208) 

                                                                                    Wednesday, December 16, 2015

                                                                                    Fed Watch: As Expected

                                                                                    Tim Duy:

                                                                                    As Expected, by Tim Duy: Today, the FOMC voted to raise the target range on the federal funds rate by 25bp. The accompanying statement and the Summary of Economic Projections offered no surprises. That very lack of surprise should be counted as a "win" for the Fed's communication strategy. A little bit of extra direction since September went a long way.

                                                                                    The statement again described the economic growth as "moderate." Although there is some external weakness, the domestic economy is solid, hence "the Committee sees the risks to the outlook for both economic activity and the labor market as balanced." The Fed continues to expect that inflation will return to target. On the basis of that forecast and lags in the policy policy process:

                                                                                    Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent.

                                                                                    Importantly, the Fed does not believe policy is tight:

                                                                                    The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

                                                                                    The Fed currently expect future hikes to occur only gradually:

                                                                                    The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.

                                                                                    But, this is a forecast not a promise:

                                                                                    However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

                                                                                    Note that the Fed highlights the importance of actual inflation outcomes with respect to future hikes:

                                                                                    In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal.

                                                                                    The Fed will proceed cautiously if evidence suggests inflation is not behaving as expected. This doesn't mean they need to see more inflation to hike rates further. But it would be nice.

                                                                                    No dissents; none of the possible dissenters thought their objections were sufficient to deny Federal Reserve Chair Janet Yellen a unanimous decision on this first hike.

                                                                                    The median forecasts for growth, employment, and inflation were virtually unchanged. Note that the central tendency range for longer run unemployment shifted down; participants continue to shave down their estimates of the natural rate of unemployment. The median rate projection for 2017 and 2018 edged down. This understates somewhat the decline in the range of the central tendency.

                                                                                    As I am running short of time today, I will leave any analysis of the press conference for a later time. Gradual, data dependent, not mechanical (not equally spaced or sized hikes), etc.

                                                                                    Bottom Line: Almost as exactly as should have been expected.

                                                                                      Posted by on Wednesday, December 16, 2015 at 12:46 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (47) 

                                                                                      Blogging Note

                                                                                      Travel day. Will post as I can.

                                                                                        Posted by on Wednesday, December 16, 2015 at 08:18 AM in Economics, Travel | Permalink  Comments (9) 

                                                                                        'The Methodology of Empirical Macroeconomics'

                                                                                        Brad DeLong:

                                                                                        Must-Read: Kevin Hoover: The Methodology of Empirical Macroeconomics: The combination of representative-agent modeling and utility-based “microfoundations” was always a game of intellectual Three-Card Monte. Why do you ask? Why don’t we fund sociologists to investigate for what reasons–other than being almost guaranteed to produce conclusions ideologically-pleasing to some–it has flourished for a generation in spite of having no empirical support and no theoretical coherence?
                                                                                        Kevin Hoover: The Methodology of Empirical Macroeconomics: “Given what we know about representative-agent models…
                                                                                        …there is not the slightest reason for us to think that the conditions under which they should work are fulfilled. The claim that representative-agent models provide microfundations succeeds only when we steadfastly avoid the fact that representative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models. They do not solve the problem of aggregation; rather they assume that it can be ignored. ...

                                                                                          Posted by on Wednesday, December 16, 2015 at 12:15 AM in Economics, Macroeconomics, Methodology | Permalink  Comments (6) 

                                                                                          'The Real Issue with Fannie and Freddie'

                                                                                          Dean Baker:

                                                                                          Private Profit with Public Guarantee: The Real Issue with Fannie and Freddie: The NYT had a column by Jim Parrot and Mark Zandi on reforming Fannie Mae and Freddie Mac. ... The article argues that the problem with Fannie Mae and Freddie Mac was that they were considered too big to fail. It therefore puts forward the case for ending their monopoly on issuing government guaranteed mortgage-backed securities (MBS).
                                                                                          This argument seriously misrepresents the issues with Fannie Mae and Freddie Mac. The real problem was that they issued trillions of dollars in MBS that were implicitly backed up by the government. At the time they failed in the summer of 2008, the generally held view in financial circles was that the government would be obligated to honor their MBS regardless of whether or not it kept Fannie Mae and Freddie Mac in business. ...
                                                                                          This was a direct result of the perverse incentives created by a system where private shareholders and top executives stood to profit by passing risk off to the government. This incentive does not exist today. ... As long as Fannie and Freddie are essentially public companies, that do not offer high returns to shareholders and pay outlandish salaries to CEOs, no one has incentive to take excessive risks.
                                                                                          This changes if we allow private banks to issue mortgage backed securities with the guarantee of the government. This would mean that Goldman Sachs, Citigroup and the rest would be able to issue the same sort of subprime MBS they did in the bubble years with assurance that even in a worst case scenario the government would reimbursement investors for almost the full value of their investment. This is a great recipe for pumping up financial sector profits and another housing bubble. It does not make sense as public policy.

                                                                                            Posted by on Wednesday, December 16, 2015 at 12:09 AM in Economics, Financial System, Housing, Market Failure | Permalink  Comments (19) 

                                                                                            Links for 12-16-15

                                                                                              Posted by on Wednesday, December 16, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (165) 

                                                                                              Tuesday, December 15, 2015

                                                                                              Donald Trump’s Divisiveness Is Bad for the Economy

                                                                                              My latest column:

                                                                                              Donald Trump’s Divisiveness Is Bad for the Economy: White House spokesperson Josh Earnest described Donald Trump as “offensive and toxic,” though that only begins to describe the corrosive effect his bigotry, divisiveness, and xenophobia have on our society. It is at odds with our values as a nation.
                                                                                              It’s also bad for the economy. ...

                                                                                                Posted by on Tuesday, December 15, 2015 at 09:09 AM in Economics, Politics | Permalink  Comments (61) 

                                                                                                The Economic Hurdles for Beating Global Warming

                                                                                                At MoneyWatch:

                                                                                                The economic hurdles for beating global warming, by Mark Thoma: The Paris agreement on climate change is an important step forward in the battle to reduce greenhouse gas emissions. As the deal's negotiators acknowledged, the agreement won't not stop climate change by itself, but it provides an important framework for moving forward toward that goal. ...

                                                                                                  Posted by on Tuesday, December 15, 2015 at 09:07 AM in Economics, Environment | Permalink  Comments (72) 

                                                                                                  FOMC Preview - Watch the Dollar and Oil

                                                                                                  Tim Duy:

                                                                                                  The Federal Reserve is set to raise interest rates this week for the first time since 2006.

                                                                                                  The final days of the zero interest-rate policy known as ZIRP are upon us; the end is here.

                                                                                                  But the end of ZIRP is the beginning of a new chapter of monetary policy. This chapter will tell the story of the Federal Reserve’s efforts to normalize policy, and that particular tale has yet to be written. You can, however, expect Fed Chair Janet Yellen to emphasize “gradually” and “data dependent” as she pens the first few lines of the narrative at this week’s press conference....

                                                                                                  Continue reading on Bloomberg...

                                                                                                    Posted by on Tuesday, December 15, 2015 at 09:06 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (20) 

                                                                                                    Links for 12-15-15

                                                                                                      Posted by on Tuesday, December 15, 2015 at 12:06 AM in Economics, Links | Permalink  Comments (180)