- The New Inequality Debate - Robert Kuttner
- Monetary Economics at the GOP Debate - Paul Krugman
- Can economics change your mind? - Tyler Cowen
- Lunch with the FT: Roland Fryer - FT.com
- Low Real Interest Rates - Steven Williamson
- 2016 Starts with a Bang–Or was that a Pop? - CFE
- Insiders, Outsiders, and an Existentialist - Digitopoly
- Heterodox economists and mainstream eclecticism - mainly macro
- The Gold Panic of 1869, America’s First Black Friday - Liberty Street
- Productivity Slowdown: Mismeasurement or misallocation? - Jared Bernstein
- Do You Need More Money for Growth to Occur? - Growth Economics
- The Quest for Discretionary Fiscal Policy - Gloomy European Economist
- How to Bridge That Stubborn Pay Gap - The New York Times
- Old blaggers & secular stagnation - Stumbling and Mumbling
- Economic Outlook and Implications for Monetary Policy - William Dudley
- Neil Cavuto and the Dynamics of Misinformation - Paul Krugman
- How reliable are risk model backtesting results? - Bank Underground
- Franchise the National Parks? - Tim Taylor
Saturday, January 16, 2016
Friday, January 15, 2016
From the Atlanta Fed's Macroblog:
"Convincing evidence that longer-term inflation expectations have moved lower would be a concern because declines in consumer and business expectations about inflation could put downward pressure on actual inflation, making the attainment of our 2 percent inflation goal more difficult."
—Fed Chair Janet Yellen, in a December 2, 2015, speech to the Economic Club of Washington
To be sure, Chair Yellen's claim is not controversial. Modern macroeconomics gives inflation expectations a central role in the evolution of actual inflation, and the stability of those expectations is crucial to the Fed's ability to achieve its price stability mandate.
The real question on everyone's mind is, of course, what might constitute "convincing evidence" of changes in inflation expectations. Recently, several economists, including former Treasury Secretary Larry Summers and St. Louis Fed President James Bullard, have weighed in on this issue. Yesterday, President Bullard cited downward movements in the five-year/five-year forward breakeven rates from the five- and 10-year nominal and inflation-protected Treasury bond yields. In November, Summers appealed to measures based on inflation swap contracts. The view that inflation expectations are declining has also been echoed by the New York Fed President William Dudley and former Minneapolis Fed President Narayana Kocherlakota.
Broadly speaking, there seems to be a growing view that market-based long-run inflation expectations are declining and drifting significantly away from the Fed's 2 percent target and that this decline is troublingly correlated with oil prices.
A problem with this line of argument is that the breakeven and swap rates are not necessarily clean measures of inflation expectations. They are really better referred to as measures of inflation compensation because, in addition to inflation expectations, these measures also include factors related to liquidity conditions in the markets for these securities, technical features of the inflation protection in each security, and inflation risk premia. Here at the Atlanta Fed, we've built a model to separate these different components and isolate a better measure of true inflation expectations (IE).
In technical terms, we estimate an affine term structure model—similar to that of D'Amico, Kim and Wei (2014)—that incorporates information from the markets for U.S. Treasuries, Treasury Inflation-Protected Securities (TIPS), inflation swaps, and inflation options (caps and floors). Details are provided in "Forecasts of Inflation and Interest Rates in No-Arbitrage Affine Models," a forthcoming Atlanta Fed working paper by Nikolay Gospodinov and Bin Wei. (You can also see Gospodinov and Wei (2015) for further analysis.) Essentially, we ask: what level of inflation expectations is consistent with this entire set of financial market data? And we then follow this measure over time.
As chart 1 illustrates, we draw a very different conclusion about the behavior of long-term inflation expectations. The chart plots the five-year/five-year forward TIPS breakeven inflation (BEI) and the model-implied inflation expectations (IE) for the period January 1999–November 2015 at a weekly frequency. Unlike the raw BEI, our measure is quite smooth, suggesting that long-term inflation expectations have been, and still are, well anchored.
After making an adjustment for the inflation risk premium, we term the difference between BEI and IEs a "liquidity premium," but it really includes a variety of other factors. Our more careful look at the liquidity premium reveals that it is partly made up of factors specific to the structure of inflation-indexed TIPS bonds. For example, since TIPS are based on the non-seasonally adjusted consumer price index (CPI) of all items, TIPS yields incorporate a large positive seasonal carry yield in the first half of the year and a large negative seasonal carry yield in the second half. Chart 2 illustrates this point by plotting CPI seasonality (computed as the accumulated difference between non-seasonally adjusted and seasonally adjusted CPI) and the five-year breakeven inflation.
Redemptions, reallocations, and hedging in the TIPS market after oil price drops and global financial market turbulence can further exacerbate this seasonal pattern. Taken together, these factors are the source of correlation between the BEI measures and oil prices. To confirm this, chart 3 plots (the negative of) our liquidity premium estimate and the log oil price (proxied by the nearest futures price).
Our measure of long-term inflation expectations is also consistent with long-term measures from surveys. Chart 4 presents the median along with the 10th and 90th percentiles of the five-year/five-year forward CPI inflation expectations from the Philadelphia Fed's Survey of Professional Forecasters (SPF) at quarterly frequency. This measure can be compared directly with our IE measure. Both the level and the dynamics of the median SPF inflation expectation are remarkably close to that for our market-based IE. It is also interesting to observe that the level of inflation "disagreement" (measured as the difference between the 10th and 90th percentiles) is at a level similar to the level seen before the financial crisis.
Finally, we note that TIPS and SPF are based on CPI rather than the Fed's preferred personal consumption expenditure (PCE) measure. CPI inflation has historically run above PCE inflation by about 30 basis points. Accounting for this difference brings our measure of the level of long-term inflation expectations close to the Fed's 2 percent target.
To summarize, our analysis suggests that (1) long-run inflation expectations remain stable and anchored, (2) the seemingly large correlation of market-implied inflation compensation with oil prices arises mainly from the dynamics of the TIPS liquidity premium, and (3) long-run market- and survey-based inflation expectations are remarkably close in terms of level and dynamics over time. Of course, further softness in the global economy and commodity markets may eventually drag down long-term expectations. We will continue to monitor the pure measure of inflation expectations for such developments.
Time to put the Gini back in the bottle:
Is Vast Inequality Necessary?, by Paul Krugman, Commentary, NY Times: How rich do we need the rich to be?
That’s not an idle question. It is, arguably, what U.S. politics are substantively about. Liberals want to raise taxes on high incomes and use the proceeds to strengthen the social safety net; conservatives want to do the reverse, claiming that tax-the-rich policies hurt everyone by reducing the incentives to create wealth.
Now, recent experience has not been kind to the conservative position. ... Is there, however, a longer-term case in favor of vast inequality? ...
I find it helpful to think in terms of three stylized models of where extreme inequality might come from, with the real economy involving elements from all three.
First, we could have huge inequality because individuals vary hugely in their productivity..
Second, we could have huge inequality based largely on luck..., those who hit the jackpot ... just happen to be in the right place at the right time.
Third, we could have huge inequality based on power: executives at large corporations who get to set their own compensation, financial wheeler-dealers who get rich on inside information or by collecting undeserved fees from naïve investors.
As I said, the real economy contains elements of all three stories. ...
But the real question, in any case, is whether we can redistribute some of the income currently going to the elite few to other purposes without crippling economic progress.
Don’t say that redistribution is inherently wrong. Even if high incomes perfectly reflected productivity, market outcomes aren’t the same as moral justification. And given the reality that wealth often reflects either luck or power, there’s a strong case to be made for collecting some of that wealth in taxes and using it to make society as a whole stronger, as long as it doesn’t destroy the incentive to keep creating more wealth.
And there’s no reason to believe that it would. Historically, America achieved its most rapid growth and technological progress ever during the 1950s and 1960s, despite much higher top tax rates and much lower inequality than it has today.
In today’s world, high-tax, low-inequality countries like Sweden are also both highly innovative and home to many business start-ups. This may in part be because a strong safety net encourages risk-taking...
So coming back to my original question, no, the rich don’t have to be as rich as they are. Inequality is inevitable; the vast inequality of America today isn’t.
- Strangely Self-Confident Permahawks - Paul Krugman
- Martin Feldstein Just Won’t Stop - Uneasy Money
- The Great Recession and the health of mothers - Vox EU
- A Small Step Toward Better Fed Policy - David Beckworth
- Towards a global narrative on long-term real interest rates - Vox EU
- Which Republican Candidate Will Lower Your Tax Bill the Most? - TheStreet
- Like grandmother, like granddaughter: - Equitable Growth
- Interest Rate Pegs with a Finite Horizon Omega Point - Nick Rowe
- Rockefeller Price Gouging in Petroleum Industry - David Cay Johnston
- Competitiveness Revisited - Berlin Policy Journal
- Outrage - Paul Krugman
- Dating financial stress events: A new approach - Vox EU
- Global value chains and measuring national competitiveness - Vox EU
Thursday, January 14, 2016
So You Think A Recession Is Imminent, Yield Curve Edition, by Tim Duy: If I had to rely on only two leading indicators of recessions, they would be initial unemployment claims and the yield curve (next in line would be housing). I talked about initial claims in the context of employment data in my last post. This post is about the yield curve.
An inversion of the yield curve has typically given a 12 month or better signal ahead of recessions:
Note also that it is the inversion that is important. The yield curve was fairly flat in the late-90's, a period of supercharged growth in the US economy. So when the Financial Times fueled the recession fears last week with this:
The US government bond market is blowing raspberries at the Federal Reserve. This could indicate trouble ahead for the American economy.Last month, the Fed lifted interest rates for the first time in nine years, and short-term bond yields have duly climbed higher. But longer-term Treasury bonds have shrugged, with yields actually falling since the US central bank tightened monetary policy.
I was less concerned. In fact, I don't think the flattening yield curve should be any surprise as that is almost always the case after the Fed tightens policy:
The yield curve typically flattens to a 50bp spread between 10 and 2 year rates within a year of the initial Fed rate hike. Only the 1986 episode is unusual. Not only that, but the flattening begins immediately:
Even after the 1986 tightening the yield curve was flatter after the first 60 days.
Currently, the flattening of the yield curve - and the lack of any upward movement in 10 year yields at all - is consistent with my long-standing concern that the Federal Reserve's long-run projection of the federal funds rate - 3.5% as of December - is a pipe dream. Also why I was wary about the Fed's determination to raise rates. My preference was the Fed to wait until they were absolutely sure rates could be "normalized."
Optimally, my concerns will prove to be unwarranted. The economy may progress better than expected, productivity rises, the Fed pares down its stock of fixed income assets, the term premium rises, and the entire yield curve shifts up and the secular stagnation story dies. We are back in Kansas. No more flying monkeys. That is a perfectly acceptable, well-reasoned forecast and one I am sympathetic to, but I am not yet seeing it realized. What I am seeing at the moment is that the global pull of zero interest rates is sufficient to limit the ability of the Federal Reserve to "normalize" policy. We are stuck in Oz.
There is a school of thought that the yield curve is irrelevant now that we are near the zero bound. After all, you can't invert the yield curve very easily! And just look at Japan. Clearly the Japanese economy still experiences recession. If we are heading down the Japanese path, then I would expect longer term yield US yields to plunge below 1%. That is not my baseline, I don't think it is very likely, but I can't discount the possibility entirely.
Bottom Line: Don't discount the yield curve just yet. I think it is signaling something important about the limits of monetary policy "normalization." But it is also a signal that recession concerns are overblown. Even in a zero short rate world, the long end needs to plunge much deeper before the yield curve becomes a concern.
More on the "risk" of inflation. This is from Narayana Kocherlakota:
Information in Inflation Breakevens about Fed Credibility: The Federal Open Market Committee has been gradually tightening monetary policy since mid-2013. Concurrent with the Fed’s actions, five year-five year forward inflation breakevens have declined by almost a full percentage point since mid-2014. I’ve been concerned about this decline for some time (as an FOMC member, I dissented from Committee actions in October and December 2014 exactly because of this concern). In this post, I explain why I see a decline in inflation breakevens as being a very worrisome signal about the FOMC”s credibility (which I define to be investor/public confidence in the Fed’s ability and/or willingness to achieve its mandated objectives over an extended period of time).
First, terminology. ...
Conceptually, the five-year five-year forward breakeven can be thought of as the sum of two components:
1. investors’ best forecast about what inflation will average 5 to 10 years from now
2. the inflation risk premium over a horizon five to ten years from now - that is, the extra yield over that horizon that investors demand for bearing the inflation risk embedded in standard Treasuries.
(There’s also a liquidity premium component, but movements in this component have not been all that important in the past two years.)
There is often a lot of discussion about how to divide a given change in breakevens in these two components. My own assessment is that both components have declined. But my main point will be a decline in either component is a troubling signal about FOMC credibility.
It is well-understood why a decline in the first component should be seen as problematic for FOMC credibility. The FOMC has pledged to deliver 2% inflation over the long run. If investors see this pledge as credible, their best forecast of inflation over five to ten year horizon should also be 2%. A decline in the first component of breakevens signals a decline in this form of credibility.
Let me turn then to the inflation risk premium (which is generally thought to move around a lot more than inflation forecasts). A decline in the inflation risk premium means that investors are demanding less compensation (in terms of yield) for bearing inflation risk. In other words, they increasingly see standard Treasuries as being a better hedge against macroeconomic risks than TIPs.
But Treasuries are only a better hedge than TIPs against macroeconomic risk if inflation turns out to be low when economic activity turns out to be low. This observation is why a decline in the inflation risk premium has information about FOMC credibility. The decline reflects investors’ assigning increasing probability to a scenario in which inflation is low over an extended period at the same time that employment is low - that is, increasing probability to a scenario in which both employment and prices are too low relative to the FOMC’s goals.
Should we see such a change in investor beliefs since mid-2014 as being “crazy” or “irrational”? The FOMC is continuing to tighten monetary policy in the face of marked disinflationary pressures, including those from commodity price declines. Through these actions, the Committee is communicating an aversion to the use of its primary monetary policy tools: extraordinarily low interest rates and large assetholdings. Isn’t it natural, given this communication, that investors would increasingly put weight on the possibility of an extended period in which prices and employment are too low relative to the FOMC’s goals?
To sum up: we’ve seen a marked decline in the five year-five year forward inflation breakevens since mid-2014. This decline is likely attributable to a simultaneous fall in investors’ forecasts of future inflation and to a fall in the inflation risk premium. My main point is that both of these changes suggest that there has been a decline in the FOMC’s credibility.
To be clear: as I well know, in the world of policymaking, no signal comes without noise. But the risks for monetary policymakers associated with a slippage in the inflation anchor are considerable. Given these risks, I do believe that it would be wise for the Committee to be responsive to the ongoing decline in inflation breakevens by reversing course on its current tightening path.
Paul Krugman in April 2014:
Permahawkery: Martin Feldstein warns us that the Fed isn’t taking the risk of rapidly rising inflation seriously enough. Certainly nobody can accuse him of that failing: he’s been warning about looming inflation for four years, eleven months, and two weeks, and hasn’t let the fact that inflation has kept falling below target alter his concerns in the slightest.
In fact, Marty’s new column is almost identical in its argument to what he wrote in April 2009: he warns that the Fed won’t pull back the liquidity it created when the economy recovers, and inflation will soar. ...
But being an inflation hawk means never having to say you’re sorry.
Paul Krugman in June of 2015:
The Inflationista Puzzle: Martin Feldstein has a new column on what he calls the “inflation puzzle” — the failure of inflation to soar despite the Fed’s large asset purchases, which led to a very large rise in the monetary base. As Tony Yates points out, however, there’s nothing puzzling at all about what happened; it’s exactly what you should expect when interest rates are near zero. ...
Anyway, inflation is just around the corner, the same way it has been all these years.
Martin Feldstein yesterday:
...the Fed is planning a path for short-term interest rates that is likely to raise the rate of inflation too rapidly in the next two years. The December FOMC minutes show that members expect to have a negative real federal-funds interest rate until sometime in 2017, much too low for an economy already at full employment. The danger is that very low interest rates in this environment would lead to a higher rate of inflation and higher long-term rates. The Fed could prevent that faster rise in inflation by increasing the federal-funds rate more rapidly this year and next. ...
So You Think A Recession Is Imminent, Employment Edition, by Tim Duy: The recession drumbeat grows louder. This is not unexpected. Most forecasters have an asymmetric loss function; the cost of being wrong by missing a recession exceeds the cost of being wrong on a recession call. Hence economists tend to over-predict recessions. Eight of the last four recessions or so the joke goes. And while I don't believe a recession is imminent, there are perfectly good reasons to be wary that a recession will bear down on the economy in the not-so-distant future. Historically, when the Fed begins a tightening cycle, the clock is ticking for the expansion. By that time, the economy is typically in a late-mid to late-stage expansion, and you are looking at two to three years before the cycle turns, four at the outside.
Of course there are some not so good reasons for worrying about a recession. Like listening to an investor talking their book. Or someone who needs to whip up a never ending stream of apocalyptic visions to hawk gold.
So what I am looking for when it comes to a recession? It's not a recession until you see it economy wide in the labor markets. When it's there, you will see it everywhere. Clearly, we weren't seeing it in the final quarter of last year. But, you say, employment is a lagging indicator, so last quarter tells you nothing. Not nothing, I would say, but a fair point nonetheless. One would need to look for the leading indicators within the employment data.
First, since the manufacturing sector is the proximate cause of these recession concerns, we would look to leading indicators in that sector. One I watch is hours worked:
Hours worked are off their peak, just as prior to the 1900 and 2001 recessions, but not the 2007 recession (lagging indicator that time). But hours also dropped in 1994, 1998, 2002, and 2005. And that would be an extra four recessions that didn't happen. To add a bit more confusion, hours works are coming off a peak not seen since, sit down for this, World War II:
That caught me by surprise; I am thinking the surge in hours worked was not sustainable in any event. Overtime hours worked holds a bit more promise:
OK, not much more promise. Best as a leading indicator ahead of 2001, not counting 1994 and and 1998. Not particularly useful for 1990 and somewhat useful ahead of 2007. On balance, I would say manufacturing hours worked data is necessary but not sufficient for a recession call.
Perhaps the JOLTS data offers something more:
Unfortunately we a working with only two cycles here, and then only barely so. But it seems reasonable that manufacturing hires might be a coincident indicator (maybe leading by the few data points ahead of the 2001 recession) and layoffs/discharges a lagging indicator. But if a manufacturing "recession" were underway, then we would expect hiring to drop off quickly here.
Quits, however looks like a leading indicator:
Looks like quits in manufacturing dropped sharply ahead of 2001, modestly during 2007, but were still rising at the end of 2015. If quit rates aren't dropping among those at the front lines, the pain can't be reaching recessionary levels just yet.
But manufacturing is just one sector of the economy - just 8.8% of employment. The real hypothesis the recessionists are proposing is that manufacturing is an indicator of an economy wide shock. Here I would say the JOLTS data is less supportive:
If we are entering a recession, firms are a minimum should be pulling back on the pace of hiring. We are not seeing that yet. And workers should be wary of quitting:
Again, the workers are on the front lines of the economy. If the economy is in trouble, they know it, and quit rates start declining. Not there yet.
I also have a soft spot for the temporary help series as it as rolled over twelve months or more ahead of the last two recessions:
So if we were to see temporary help roll over now, we would still not see recession until 2017.
And finally, there is initial jobless claims, which typically lead a recession by six to twelve months:
Not seeing it. If claims started rising now, and continued rising for six months, then the probability of recession would rise sharply, and if they rose continuously for twelve months, the probability of recession would approach 1. But now? Nothing to fear.
Bottom Line: From a labor market perspective, I am not seeing conclusive evidence of an impending recession in manufacturing, let alone the overall economy. Might be at the tip of one, but even that will take a year to evolve. I have more sympathy for the view that the economy has evolved into a mid-late to late stage of the cycle, and the transition and associated uncertainty results in some not-surprising volatility in financial markets.
- Paul Ryan Dada - Paul Krugman
- Are We in a Recession Now? - Econbrowser
- Spreads and Recession Watch - Econbrowser
- The Return of Public Investment - Dani Rodrik
- Mind-Altering Economics - Paul Krugman
- Zoning Transfers Wealth in the Wrong Direction - Noah Smith
- City and metropolitan inequality on the rise - Brookings
- Fundamental Disagreement: How Much and Why? - Liberty Street
- Why Do People Say They Aren't In the Labor Force? - Tim Taylor
- What are the hidden effects of tax-credits? - OUPblog
- Graduating during bad economic times - Vox EU
- Yes He Did - Paul Krugman
- Why firms differ so much - Vox EU
Wednesday, January 13, 2016
TPP not equal to 'free trade': I have written extensively/a> on this point: there’s a big difference between those magical words “free trade” that everyone invokes in this town whenever the topic comes up, and actual trade deals. But I think Rep. Sandy Levin thoroughly nailed this distinction in testimony before the International Trade Commission this morning:
We all recognize that trade can be beneficial. The issue is not whether Members of Congress such as myself could pass an Econ 101 class, as President George W. Bush’s Chair of the Council of Economic Advisers, Gregory Mankiw, recently put it. Instead, the issue is whether we are going to face up to the fact that our trading system today is much more complex than the simplistic trade model presented in an Econ 101 class.
What do David Ricardo and Adam Smith have to say about the inclusion of investor-state dispute settlement in our trade agreements? What do they have to say about providing a five-year or an eight-year monopoly for the sale of biologic medicines? About the need to ensure that our trading partners meet basic labor and environmental standards? How about the issue of currency manipulation? And what about trade in services on the internet or the offshoring of jobs that result from greater capital mobility? Does the theory of comparative advantage address these new issues? No – and yet those are the kinds of issues at the crux of the debate over the TPP Agreement today.
Levin’s full testimony is here and looks very thoughtful.
He points to a new World Bank report that models the growth impact of the TPP by 2030 on both member and non-member countries. The magnitude of the US impact–maybe 0.3-0.4 percent–belies a lot of the noise you hear about this sort of thing, and is surely statistically indistinguishable from no change at all.
But if such modelling is in the ball park at all, the benefits of the deal are substantial to some emerging economies. The Bank predicts that the TPP will boost Vietnam’s exports by 30%. However, to their credit, they also simulated the impact of non-member countries, which lose export share to TPP members, showing that once again, the punchline is that “free trade” is a misnomer, a mixed bag with winners and losers.
Is mainstream academic macroeconomics eclectic?: For economists, and those interested in macroeconomics as a discipline
Eric Lonergan has a short little post that is well worth reading..., it makes an important point in a clear and simple way that cuts through a lot of the nonsense written on macroeconomics nowadays. The big models/schools of thought are not right or wrong, they are just more or less applicable to different situations. You need New Keynesian models in recessions, but Real Business Cycle models may describe some inflation free booms. You need Minsky in a financial crisis, and in order to prevent the next one. As Dani Rodrik says, there are many models, and the key questions are about their applicability.
If we take that as given, the question I want to ask is whether current mainstream academic macroeconomics is also eclectic. ... My answer is yes and no.
Let’s take the five ‘schools’ that Eric talks about. ... Indeed the variety of models that academic macro currently uses is far wider than this.
Does this mean academic macroeconomics is fragmented into lots of cliques, some big and some small? Not really... This is because these models (unlike those of 40+ years ago) use a common language. ...
It means that the range of assumptions that models (DSGE models if you like) can make is huge. There is nothing formally that says every model must contain perfectly competitive labour markets where the simple marginal product theory of distribution holds, or even where there is no involuntary unemployment, as some heterodox economists sometimes assert. Most of the time individuals in these models are optimising, but I know of papers in the top journals that incorporate some non-optimising agents into DSGE models. So there is no reason in principle why behavioural economics could not be incorporated. If too many academic models do appear otherwise, I think this reflects the sociology of macroeconomics and the history of macroeconomic thought more than anything (see below).
It also means that the range of issues that models (DSGE models) can address is also huge. ...
The common theme of the work I have talked about so far is that it is microfounded. Models are built up from individual behaviour.
You may have noted that I have so far missed out one of Eric’s schools: Marxian theory. What Eric want to point out here is clear in his first sentence. “Although economists are notorious for modelling individuals as self-interested, most macroeconomists ignore the likelihood that groups also act in their self-interest.” Here I think we do have to say that mainstream macro is not eclectic. Microfoundations is all about grounding macro behaviour in the aggregate of individual behaviour.
I have many posts where I argue that this non-eclecticism in terms of excluding non-microfounded work is deeply problematic. Not so much for an inability to handle Marxian theory (I plead agnosticism on that), but in excluding the investigation of other parts of the real macroeconomic world. ...
The confusion goes right back, as I will argue in a forthcoming paper, to the New Classical Counter Revolution of the 1970s and 1980s. That revolution, like most revolutions, was not eclectic! It was primarily a revolution about methodology, about arguing that all models should be microfounded, and in terms of mainstream macro it was completely successful. It also tried to link this to a revolution about policy, about overthrowing Keynesian economics, and this ultimately failed. But perhaps as a result, methodology and policy get confused. Mainstream academic macro is very eclectic in the range of policy questions it can address, and conclusions it can arrive at, but in terms of methodology it is quite the opposite.
Validity of the Neo-Fisherian Hypothesis: Warning: Super-Technical Material Follows
The neo-Fisherian hypothesis is as follows: If the central bank commits to peg the nominal interest rate at R, then the long-run level of inflation in the economy is increasing in R. Using finite horizon models, I show that the neo-Fisherian hypothesis is only valid if long-run inflation expectations rise at least one for one with the peg R. However, in an infinite horizon model, the neo-Fisherian hypothesis is always true. I argue that this result indicates why macroeconomists should use finite horizon models, not infinite horizon models. See this linked note and my recent NBER working paper for technical details.
In any finite horizon economy, the validity of the neo-Fisherian hypothesis depends on how sensitive long-run inflation expectations are to the specification of the interest rate peg.
- If long-run inflation expectations rise less than one-for-one (or fall) with the interest rate peg, then the neo-Fisherian hypothesis is false.
- If long-run inflation expectations rise at least one-for-one with the interest rate peg, then the neo-Fisherian hypothesis is true.
Intuitively, when the peg R is high, people anticipate tight future monetary policy. The future tightness of monetary policy pushes down on current inflation. The only way to offset this effect is for long-run inflation expectations to rise sufficiently in response to the peg.
In contrast, in an infinite horizon model, the neo-Fisherian hypothesis is valid - but only because of an odd discontinuity. As the horizon length converges to infinity, the level of inflation becomes infinitely sensitive to long-run inflation expectations. This means that, for almost all specifications of long-run inflation expectations, inflation converges to infinity or negative infinity as the horizon converges to infinity. Users of infinite horizon models typically discard all of these limiting “infinity” equilibria by setting the long-run expected inflation rate to be equal to the difference between R and r*. In this way, the use of an infinite horizon - as opposed to a long but finite horizon - creates a tight implicit restriction on the dependence of long-run inflation expectations on the interest rate peg
To summarize: The validity of the neo-Fisherian hypothesis depends on an empirical question: how do long-run inflation expectations depend on the central bank's peg? This empirical question is eliminated when we use infinite horizon models - but this is a reason not to use infinite horizon models.
In case you missed this from George Evans and Bruce McGough over the holidays (on learning models and the validity of the Neo-Fisherian Hyposthesis, also "super-technical"):
I've been surprised that none of the Neo-Fisherians have responded.
- "Silicon Valley Doesn’t Believe Productivity Is Down" - Equitable Growth
- The Dubious Logic of Stock-Market Circuit Breakers - Paul Kedrosky
- A Progressive Way to Replace Corporate Taxes - Dean Baker
- Gender Discrimination in Scientific Credit - Digitopoly
- Calculating Growth Rates - Growth Economics Blog
- Long-Run Monetary Policy and Inequality - Carola Binder
- Reforming or Deforming the Fed? - Barry Eichengreen
- Sticking With the Same Job Isn't Out of Style - Justin Fox
- The minimum-wage and the flow of firms - Equitable Growth
- Innovation & well-being - Stumbling and Mumbling
- Gerard Macdonnell on QE - longandvariable
- Bully for Neurotoxins - Paul Krugman
Tuesday, January 12, 2016
Republican Candidates Turn to a Touchy Topic: Poverty: On Saturday ... six Republican hopefuls gathered at a convention center here to talk about poverty. Donald Trump and Ted Cruz, the top two, weren’t there. But still, poverty?
Not even Democrats, who by Republicans’ own admission pretty much own the subject, have dedicated this kind of campaign time to those at the very bottom of the ladder. The votes simply aren’t there. And that’s especially true for Republicans.
What’s going on? ...Republicans ... have a coherent theory about the causes of America’s entrenched poverty that fits well with their underlying worldview: it’s largely the government’s fault. ...
“From the government standpoint, we have actually been building a trap,” Mr. Ryan said.
Trouble is, the evidence doesn’t much mesh with this view. ...
... Consider the huge tax cuts offered up by most Republican candidates. ... All of them provide most of their benefits to the rich.
Meanwhile, the House Republicans’ 2016 budget plan, drafted largely by Mr. Ryan, includes some $3 trillion, over 10 years, in cuts to programs that serve people of limited means.
As an antipoverty strategy, it’s impossible to square the circle of the largess of Republican tax plans and military spending plans with their parsimony everywhere else. As Senator Rubio of Florida noted: “What the other side is going to say is the Republicans, the conservatives, they are just looking to gut the antipoverty programs.”
Yes, they will. And Republicans’ priorities are helping the other side make its case.
I have a new column:
Three Ways to Help the Working Class: ... In graduate school, I was once told that “people don’t have marginal products, jobs do.” What does this mean? ...
I wish I would have connected the last part to the Supreme Court case on public unions.
- Fragility of Purely Real Macroeconomic Models - Narayana Kocherlakota
- “Audit the Fed” is not about auditing the Fed - Ben Bernanke
- Cost-benefit analysis of ‘leaning against the wind’ - Lars Svensson
- Early childhood education and social mobility - Vox EU
- The Fed Is Finally Going After Leverage - Kevin Drum
- IQ and Economic Growth - Growth Economics Blog
- Multipolarity: The Next Step After Globalization? - Tim Taylor
- After the First Rate Hike - John Williams
- Thinking about wealth taxes - Equitable Growth
- Balancing Fairness and Efficiency - Noah Smith
- Interactive: A new look at who earns what in the US - Equitable Growth
- Jeb’s welfare reform plan would worsen life for the poor - Washington Post
- Working as a Barista After College Not as Common as You Think - Liberty Street
- Thanks To Women, Some Good News For Workers - Shosana Grossbard
- Monetary dimensions of comparative advantage - Vox EU
- Labour market policy: Parts of the picture are missing - Vox EU
- There Is More than One Source of Endogeneity - Marc Bellemare
- Extracting insight from complexity - Bank Underground
- Personal debt - mainly macro
Monday, January 11, 2016
"The conservative economic orthodoxy dominating the Republican Party is very, very wrong":
The Obama Boom, by Paul Krugman, Commentary, NY Times: Do you remember the “Bush boom”? Probably not. Anyway, the administration of George W. Bush began its tenure with a recession, followed by an extended “jobless recovery.” By the summer of 2003, however, the economy began adding jobs again. The pace of job creation wasn’t anything special..., but conservatives insisted that the job gains ... represented a huge triumph, a vindication of the Bush tax cuts.
So what should we say about the Obama job record? Private-sector employment ... hit its low point in February 2010. Since then we’ve gained 14 million jobs,... roughly double the number of jobs added during the supposed Bush boom...
The point ... is that ... Mr. Obama ... has been attacked at every stage of his presidency for policies that his critics allege are “job-killing”...
What did Mr. Obama do that was supposed to kill jobs? ... He signed the 2010 Dodd-Frank financial reform... He raised taxes on high incomes... And he enacted a health reform...
Yet none of the dire predicted consequences of these policies have materialized. ...
So what do we learn from this impressive failure to fail? That the conservative economic orthodoxy dominating the Republican Party is very, very wrong. In a way, that should have been obvious. ...
On one side, this elite is presumed to be a bunch of economic superheroes, able to deliver universal prosperity by summoning the magic of the marketplace. On the other side, they’re depicted as incredibly sensitive flowers who wilt in the face of adversity — raise their taxes a bit, subject them to a few regulations, or for that matter hurt their feelings in a speech or two, and they’ll stop creating jobs and go sulk in their tents, or more likely their mansions.
It’s a doctrine that doesn’t make much sense, but it ... turns out to be very convenient for the elite: namely, that injustice is a law of nature, that we’d better not do anything to make our society less unequal or protect ordinary families from financial risks. Because if we do ... we’ll be severely punished by the invisible hand, which will collapse the economy. ...
The ... Obama economy offers a powerful lesson... From a conservative point of view, Mr. Obama did everything wrong, afflicting the comfortable (slightly) and comforting the afflicted (a lot), and nothing bad happened. We can, it turns out, make our society better after all.
I missed this from Narayana Kocherlakota a little over a week ago:
Overly Tight Macroeconomic Policy: The level of public debt is high by historical standards in many countries. Central banks have set their nominal interest rate targets to extraordinarily low - sometimes negative - levels. Despite these historical comparisons, though, macroeconomic outcomes tell a clear story: Macroeconomic policy remains much too tight in the US and around the world.
In terms of monetary policy, inflation remains low, and is expected to remain low for years. Indeed, financial market participants are betting that most major central banks will fall short of their inflation targets over the next decade or two. Nonetheless, those same central banks (including the Federal Reserve) continue to communicate a strong desire to "normalize" - that is, tighten - monetary policy over the medium term.
In terms of fiscal policy, many governments are able to borrow long-term at unusually low real interest rates. They could invest those funds in needed physical and human infrastructure. Or they could return the funds to their citizens through tax cuts - tax cuts that could be tailored to incentivize physical investment or R&D. But the relevant governments instead continue to emphasize the need to further restrict the level of public debt.
Economic policymakers can do better. The key is to focus a lot more on the question of how to use available policy tools to achieve desirable macroeconomic outcomes, and a lot less on historical empirical regularities. Just because debt is high by historical standards doesn't mean that governments cannot make their citizens better off by issuing more debt Just because nominal interest rates are low by historical standards doesn't mean that central banks can't achieve their objectives more rapidly by lowering them still further.
We are only beginning to see the impact of tight policy choices on our economies. We all know what has been happening in Spanish and Greek labor markets. But even in the US - which supposedly has a near-normal labor market - the fraction of men aged 25-34 who do not have a job is over 50%(!) higher than it was in 2007. Given these kinds of macroeconomic outcomes, it should not be surprising that we see increasing signs of social fracturing and disengagement in many developed countries.
I've said that economic policymakers can do better. Indeed, I increasingly believe that they must do better.
See here for more of his thoughts on macroeconomic policy.
College Sports and Deadweight Loss: The amount of money generated by college sports is staggering: broadcast rights alone are worth over a billion dollars annually, and this doesn't include tickets sales for live events, revenue from merchandise, or fees from licensing. But the athletes on whose talent and effort the entire enterprise is built get very little in return. As Donald Yee points out in a recent article, these athletes are "making enormous sums of money for everyone but themselves." Even the educational benefits are limited, with "contrived majors" built around athletic schedules and terribly low graduation rates.
Since colleges cannot compete for athletes by bidding up salaries, they compete in absurd and enormously wasteful ways:Clemson’s new football facility will have a miniature-golf course, a sand volleyball pit and laser tag, as well as a barber shop, a movie theater and bowling lanes. The University of Oregon had so much money to spend on its football facility that it resorted to sourcing exotic building materials from all over the world.
The benefit that athletes (or anyone else for that matter) derives from exotic building materials used for this purpose are negligible in relation to the cost. Only slightly less wasteful are the bowling lanes and other frills at the Clemson facility. The intended beneficiaries would be much better off if they were to receive the amounts spent on these excesses in the form of direct cash payments. This is what economists refer to as deadweight loss.
But are competitive salaries really the best alternative to the current system? I think it's worth thinking creatively about compensation schemes that could provide greater monetary benefits to athletes while also improving academic preparation more broadly. Here's an idea. Suppose that athletes are paid competitive salaries but (with the exception of an allowance to cover living expenses) these are held in escrow until successful graduation. Upon graduation the funds are divided, with one-half going to the athlete as taxable income, and the rest distributed on a pro-rata basis to each primary and secondary school attended by the athlete prior to college. A failure to graduate would result in no payments to schools, and a reduced payment to the athlete.
This would provide both resources and incentives to improve academic preparation as well as athletic development at grade schools. Those talented few who make it to the highest competitive levels in college sports would clearly benefit, since their compensation would be in cash rather than exotic building materials. But the benefits would extend to entire communities, and link academic and athletic performance in a manner both healthy and enduring. It's admittedly a more paternalistic approach than pure cash payments, but surely less paternalistic than the status quo.
BIS redefines inflation (again): An interview with Hyun Song Shin, economic adviser and head of research at the BIS, reposted in the BIS web site reminds us of the strange and heterodox views that the BIS (and others) have about the behavior of inflation. The views run contrary to most of what we all teach about inflation. They can only be understood if one has a very special and radical view on what determines inflation and are supported by a unique reading of the data. You probably need to read the whole interview to understand what I mean but here is a summary of the new BIS theory of inflation:
1. Inflation is a global phenomenon, not a national one. Monetary policy has very little influence on inflation, demographics and globalization are much more relevant factors.
2. The idea that monetary policy affects demand and possibly inflation is a "short-term" story that is too simple to understand the recent behavior of inflation.
3. Deflation is not that bad. The Great Depression is a special historical event that holds no lessons for what we have witnessed during the Great Recession.
4. While central banks are powerless at controlling domestic inflation, they are very powerful at distorting interest rates and rates of returns for long periods of time (decades).
5. Central banks have a problem when inflation is the only goal (they end up creating distortions in financial markets).
6. Monetary policy is a cause of all China's problems (he admits that there are other causes as well).
In summary, central banks are evil. Their only goal is to control inflation but they cannot really control it and because of their superpowers to distort all interest rates they only end up causing volatility and crises. And this is coming from an organization whose members are central banks and its mission is "to serve central banks". Surreal.
- Why the Fed needs to prepare for the worst right now - Larry Summers
- Schadenfreude squared: why I am against economic sanctions - globalinequality
- “The Closed Marketplace of Economic Ideas,” a Rebuttal - RePEc Blog
- Are stocks and housing off on another bubble? - Econbrowser
- The TPP as a set of international economic rules - Vox EU
- NAIRU V Estimation - Robert's Stochastic Thoughts
- Household Inflation Uncertainty Update - Carola Binder
- Free capital flows can put economies in a bind - FT.com
- The Rise and Fall of Growth - Economic Principals
- So much for QE (guest post) - Noahpinion
- Not connecting - Stumbling and Mumbling
Sunday, January 10, 2016
I wonder if conditioning on the type of bubble (e.g. driven by housing) would make a difference (though not sure it would be possible to fit them into tidy categories). I guess another way to ask the question is whether the cases of a "dramatic market rise followed by an equally spectacular fall" have anything in common:
Market Bubbles: What Goes Up Doesn't Always Come Down, by Matt Nesvisky, NBER Digest: The great majority of booms during which market values doubled in a single year were not followed by crashes wiping out those gains.
Do market booms inevitably result in busts? History suggests not, according to William N. Goetzmann in Bubble Investing: Learning from History (NBER Working Paper No. 21693).
A dramatic market rise followed by an equally spectacular fall, such as a doubling in prices that is followed by a halving in value, is often regarded as a bubble followed by a bust. Seeking out such events, Goetzmann analyzes returns for 42 stock markets around the world from 1900 through 2014. He finds that bubble-and-bust episodes are uncommon, and urges caution in drawing conclusions from the widely-reported and discussed great bubbles of history.
Conditional upon a market boom amounting to a stock price increase of 100 percent or more in a three-year period, crashes gave back prior gains only 10 percent of the time. Market prices were more likely to double again following a 100 percent price boom. The frequency of a market crash over a five-year period is significantly higher when that market has just experienced a boom, but the frequency of doubling over the next five years is not much affected by whether a market has recently boomed. Thus a boom does raise the probability of a crash, but the probability of a crash remains low. Probabilities of a crash following a boom in which prices doubled in a single calendar year were also higher, however the great majority of such extreme events were not followed by crashes that wiped out those gains.
Goetzmann suggests that his findings are relevant for regulators who are considering the desirability of deflating bubbles. If bubbles are often associated with investment in promising, albeit risky, new technologies, then when considering policies that may deflate them, policy-makers may face a tradeoff between staving off a financial crisis and encouraging fruitful investment. They may evaluate this trade-off differently if the probability of a crash following a boom is low rather than high.
Saturday, January 09, 2016
From the NBER Digest
'Who Owns U.S. Business? How Much Tax Do They Pay?', by Laurent Belsie, NBER Digest: In 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent.
The importance of pass-through business entities has soared in the past three decades. Over the same period, the amount of pass-through business income flowing to the top 1 percent of income earners has increased sharply, according to Business in the United States: Who Owns It and How Much Tax Do They Pay? (NBER Working Paper No. 21651).
"Despite this profound change in the organization of U.S. business activity, we lack clean, clear facts about the consequences of this change for the distribution and taxation of business income," write Michael Cooper, John McClelland, James Pearce, Richard Prisinzano, Joseph Sullivan, Danny Yagan, Owen Zidar, and Eric Zwick. "This problem is especially severe for partnerships, which constitute the largest, most opaque, and fastest growing type of pass-through."
Pass-through entities — partnerships, tax code subchapter S corporations, and sole proprietorships — are not subject to corporate income tax. Their income passes directly to their owners and is taxed under whatever tax rules those owners face. In contrast, the income of traditional corporations, more specifically subchapter C corporations, is subject to corporate income taxes, and after-tax income distributed from the corporation to its owners is also taxable.
In 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent. Over roughly the same period, the income share of the top 1 percent of income earners doubled. Previous research has shown that the two phenomena are linked: The growth of income from pass-through entities accounted for 41 percent of the rise in the income of the top 1 percent. By linking 2011 partnership and S corporation tax returns with federal individual income tax returns, in particular Form 1065 and Form 1120S K-1 returns, the researchers find that over 66 percent of pass-through business income received by individuals goes to the top 1 percent. The concentration of partnership and S corporation income is much greater than the concentration of dividend income (45 percent to the top 1 percent) which proxies for income from C corporations (traditional corporations). While taxpayers in the top 1 percent are eight times as likely to receive dividends as taxpayers in the bottom 50 percent, the ratio for partnerships is more than 50 to 1.
Many partnerships are opaque. A fifth of partnership income was earned by partners that the study's authors were not able to classify into one of several categories, such as a domestic individual or a foreign corporation. In addition, some partnerships are circular, in the sense that they are owned by other partnerships, which could in turn be owned by yet other partnerships.
Pass-through business income faces lower tax rates than traditional corporate income. The tax rate on the income earned by pass-through partnerships is a relatively low 15.9 percent, excluding interest payments and unrepatriated foreign income. That compares with a 31.6 percent rate for C corporations and a 24.9 percent rate for S corporations. Only sole proprietorships have a lower average rate, 13.6 percent. Combining both taxes on corporations and taxes on investors, the researchers calculate that the U.S. business sector as a whole pays an average tax rate of 24.3 percent.
The lower average tax rate for pass-through entities than for traditional corporations translates into reduced federal revenues, the researchers conclude. They estimate that in 2011, if the share of pass-through tax returns had been at its 1980 level, when traditional C corporations and sole proprietorships dominated, the average rate would have been 3.8 percentage points higher and the Treasury would have collected $100 billion more in tax revenue.
One reason partnerships pay such a low average tax rate is that nearly half their income (45 percent) is classified as capital gains and dividend income, which is taxed at preferential rates. Another 15 percent of their income is earned by tax-exempt and foreign entities, for which the effective tax rate is less than five percent. The roughly 30 percent of partnership income that is earned by unidentifiable and circular partnerships is taxed at an estimated 14.7 percent rate.
"A long-standing rationale for the entity-level corporate income tax is that it can serve as a backstop to the personal income tax system," the researchers conclude. "Our inability to unambiguously trace 30 percent of partnership income to either the ultimate owner or the originating partnership underscores the concern that the current U.S. tax code encourages firms to organize opaquely in partnership form in order to minimize tax burdens."
- Economists and Inequality - Paul Krugman
- The New Geo-Economics - Joseph E. Stiglitz
- When Teamwork Doesn’t Work for Women - The New York Times
- Jobs: Carter, Reagan, Bush, Clinton, Bush, Obama - Calculated Risk
- The Myths of China’s Currency ‘Manipulation’ - Mathew Slaughter
- Comments: Another Strong Employment Report - Calculated Risk
- Solid jobs report raises as many questions as it answers - Washington Post
- You can’t fix poverty by breaking the safety net - Jared Bernstein
- Risk taking across life span: The effects of hardship - EurekAlert!
- Bank pass-through of credit expansions and household borrowing - Vox EU
- Revisiting international currency competition - Vox EU
- Household debt and crises of confidence - Vox EU
- Will Trident be Corbyn’s undoing? - mainly macro
Friday, January 08, 2016
Will China be 2008 all over again? Maybe, but maybe not:
When China Stumbles, by Paul Krugman, Commentary, NY Times: So, will China’s problems cause a global crisis? The good news is that the numbers, as I read them, don’t seem big enough. The bad news is that I could be wrong...
China’s economic model, which involves very high saving and very low consumption, was ... possible when China had vast reserves of underemployed rural labor. But that’s no longer true, and China now faces the tricky task of transitioning to much lower growth without stumbling into recession.
A reasonable strategy would have been to buy time with credit expansion and infrastructure spending while reforming the economy in ways that put more purchasing power into families’ hands. Unfortunately, China pursued only the first half of that strategy... The result has been rapidly rising debt, much of it owed to poorly regulated “shadow banks,” and a threat of financial meltdown.
So the Chinese situation looks fairly grim...
As I suggested..., however, I have a hard time making the numbers for ... catastrophe work. ...China buys more than $2 trillion ... from the rest of the world each year. But it’s a big world, with a total gross domestic product excluding China of more than $60 trillion. Even a drastic fall in Chinese imports would be only a modest hit to world spending.
What about financial linkages? ... China has capital controls ... so there’s very little direct spillover from plunging stocks or even domestic debt defaults...
But I have to admit that I’m not as relaxed about this as ... I should be. ... And if my worries come true, we are woefully unready to deal with the shock. ...
Monetary policy would probably be of little help. With interest rates still close to zero and inflation still below target, the Fed would have limited ability to fight an economic downdraft... Meanwhile, the European Central Bank is already pushing to the limits of its political mandate in its own so far unsuccessful effort to raise inflation.
And while fiscal policy ... would surely work, how many people believe that Republicans would be receptive to a new Obama stimulus plan, or that German politicians would look kindly on a proposal for bigger deficits in Europe?
Now, my best guess is still that things won’t be that bad — nasty in China, but just a bit of turbulence elsewhere. And I really, really hope that guess is right, because we don’t seem to have a plan B anywhere in sight.
Why has this happened? Because for the past couple of years T-Mobile has been competing ferociously with cheaper, more consumer-friendly plans, and the rest of the industry has had to keep up. But what prompted T-Mobile to become the UnCarrier in the first place?
Back in 2011, AT&T was on the verge of gobbling up T-Mobile, which would have turned the industry's Big Four into the Big Three and eliminated the industry's most unpredictable company....But then the Obama administration intervened to block the merger. With a merger off the table, T-Mobile decided to become a thorn in the side of its larger rivals, cutting prices and offering more attractive service plans. The result, says Mark Cooper, a researcher at the Consumer Federation of America, has been an "outbreak of competition" that's resulted in tens of billions of dollars in consumer savings. ...
Antitrust law in America has been off track for decades, and it's time to get back on. The ... feds should concentrate on one simple thing: making sure there's real competition in every industry. Then let the market figure things out. There are exceptions here and there to this rule, but not many.
Competition is good. Corporations may not like it, and they'll fight tooth and nail for their rents. But it's good for everyone else.
- Defunding Public Sector Unions Will Diminish Democracy - Richard Kahlenberg
- Intellectual property and the decline of the U.S. labor share - Nick Bunker
- As States Cut Funding, Tuition at Public Colleges Soars - The Fiscal Times
- The trouble with student loans? Low earnings, not high debt - Susan Dynarski
- Three Questions to Judy Klein - Institute for New Economic Thinking
- The paradox of plenty - Stumbling and Mumbling
- The dollar’s international role: An “exorbitant privilege”? - Ben Bernanke
- Patent rights and innovation by small and large firms - Vox EU
- What Occupational Projections Say about Entry-Level Skill Demand - macroblog
- On models and forecasts, and how one implies the other. - longandvariable
- How important are interest rates for exchange rates? - Bank Underground
Thursday, January 07, 2016
I tried to construct a simple example to explain secular stagnation. I'd be interested to hear thoughts on what I might have gotten wrong (and right) in the explanation:
How to escape from the slow-growth doldrums, by Mark Thoma: More than six years after the Great Recession's end, economic growth in the U.S. remains lackluster. That's raising concerns among economists that the U.S. is entering a period known as "secular stagnation," an idea first proposed by Alvin Hansen in 1938 and recently revived by Larry Summers.
When an economy enters such a period, it's caught in an extended period of low economic growth. Summers believes the U.S. and other economies may be suffering from this ailment, though it's too soon to know for sure.
To understand the nature and cause of secular stagnation -- and solutions to it -- a simple example might help. ...
Despite Inflation Unease, Fed Still Talks Big On Rates, by Time Duy: The minutes of the December FOMC meeting were released today. The minutes were considered to have a dovish tone, although I would be wary of thinking there is much new information to be found. Labor market conditions had improved sufficiently to justify a certain degree of confidence in the inflation outlook:
Regarding the medium-term outlook, inflation was projected to increase gradually as energy prices and prices of non-energy imports stabilized and the labor market strengthened. Overall, taking into account economic developments and the outlook for economic activity and the labor market, the Committee was now reasonably confident in its expectation that inflation would rise, over the medium term, to its 2 percent objective.
but many members retained concerns about the downside risks:
However, for some members, the risks attending their inflation forecasts remained considerable. Among those risks was the possibility that additional downward shocks to prices of oil and other commodities or a sustained rise in the exchange value of the dollar could delay or diminish the expected upturn in inflation. A couple also worried that a further strengthening of the labor market might not prove sufficient to offset the downward pressures from global disinflationary forces. And several expressed unease with indications that inflation expectations may have moved down slightly. In view of these risks and the shortfall of inflation from 2 percent, members expressed their intention to carefully monitor actual and expected progress toward the Committee's inflation goal.
Why hike rates? It is all about setting the stage for a gradual path of subsequent rates hikes:
If the Committee waited to begin removing accommodation until it was closer to achieving its dual-mandate objectives, it might need to tighten policy abruptly, which could risk disrupting economic activity.
And while they ultimately pulled the trigger on higher rates in an unanimous vote, the doves were left with a bitter taste in their mouths:
However, some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely.
They intend to hold true to their "gradualist" scripture:
Based on their current forecasts for economic activity, the labor market, and inflation, as well as their expectation that the neutral short-term real interest rate will rise slowly over the next few years, members expected economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate.
Actual outcomes are of course data dependent, but the Fed called out one piece of data as especially important:
In the current situation, because of their significant concern about still-low readings on actual inflation and the uncertainty and risks present in the inflation outlook, they agreed to indicate that the Committee would carefully monitor actual and expected progress toward its inflation goal. In determining the size and timing of further adjustments to monetary policy, some members emphasized the importance of confirming that inflation would rise as projected and of maintaining the credibility of the Committee's inflation objective. Based on their current economic outlook, they continued to anticipate that the federal funds rate was likely to remain, for some time, below levels that the Committee expected to prevail in the longer run.
Yes, this line from the December statement was not to be ignored:
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal.
So we now know pretty much what we did going into the minutes: The inflation situation is making FOMC members nervous and thus holding them back from a more aggressive path of rate hikes. Hence progress on the inflation mandate is necessary to accelerate the pace of rate increases. Note too the emphasis on not just actual, but expected progress. That is where the labor report comes in. If jobs keep growing at 200k a month in the first part of the year, the unemployment rate pushes toward 4.5%, and wage growth accelerates, they will will compelled to raise rates further. Actual progress on inflation would accelerate that timeline.
And that is how you get to Vice Chair Stanley Fischer's CNBC comments today:
"We watch what the market thinks, but we can't be led by what the market thinks," Fischer told CNBC's "Squawk Box." He added that market expectations of the number of future rate hikes are "too low."
Fischer expects four rate hikes this year. But that is a data dependent forecast. Financial markets have a different forecast. It is worth recognizing that when it comes to forecasting the path of short rates, financial markets have had something of an upper hand of late.
Separately, ISM services came in below consensus but remains within a solid range. Internals pointed to rising orders and employment as well. It remains a story of two economies:
The trade deficit narrowed slightly in November, modestly boosting tracking indicators for fourth quarter GDP. And the ADP numbers game in at a solid 257k December increase in private payrolls, raising expectations for the actual employment release Friday. Consensus is 200k for nonfarm payrolls. I am taking the over.
Bottom Line: Financial markets are stumbling into the new year. The Fed is sticking to its story. Given that January is off the table for a rate hike, we have two and a half months of data - including three employment reports! - to see if the Fed has it right this time.
Confidence as a political device: This is a contribution to the discussion about models started by Krugman, DeLong and Summers, and in particular to the use of confidence. (Martin Sandbu has an excellent summary, although as you will see I think he is missing something.) The idea that confidence can on occasion be important, and that it can be modeled, is not (in my view) in dispute. For example the very existence of banks depends on confidence (that depositors can withdraw their money when they wish), and when that confidence disappears you get a bank run.
But the leap from the statement that ‘in some circumstances confidence matters’ to ‘we should worry about bond market confidence in an economy with its own central bank in the middle of a depression’ is a huge one...
When people invoke the idea of confidence, other people (particularly economists) should be automatically suspicious. The reason is that it frequently allows those who represent the group whose confidence is being invoked to further their own self interest. The financial markets are represented by City or Wall Street economists, and you invariably see market confidence being invoked to support a policy position they have some economic or political interest in. Bond market economists never saw a fiscal consolidation they did not like, so the saying goes, so of course market confidence is used to argue against fiscal expansion. Employers drum up the importance of maintaining their confidence whenever taxes on profits (or high incomes) are involved. As I argue in this paper, there is a generic reason why financial market economists play up the importance of market confidence, so they can act as high priests. (Did these same economists go on about the dangers of rising leverage when confidence really mattered, before the global financial crisis?)
The general lesson I would draw is this. If the economics point towards a conclusion, and people argue against it based on ‘confidence’, you should be very, very suspicious. You should ask where is the model (or at least a mutually consistent set of arguments), and where is the evidence that this model or set of arguments is applicable to this case? Policy makers who go with confidence based arguments that fail these tests because it accords with their instincts are, perhaps knowingly, following the political agenda of someone else.
Couldn't resist a few quick posts. This is from Dean Baker:
Less Work, More Leisure: The next Administration should make reducing work time a major focus. In addition to mandated paid sick days and paid family leave—proposals that have received some welcome attention thus far on the presidential campaign trail—policymakers should go much further and enact measures aimed at shortening workweeks and work years. Reducing our workweek and work years will lead to a whole host of benefits, including reduced stress and higher levels of employment. ...
- How Economics Went From Theory to Data - Justin Fox
- The Path Ahead for Economic Theory - Becker Friedman Institute
- 'Big Short' Hero Is Wrong This Time - Noah Smith
- Universities Are Pretty Liberal Places - Kevin Drum
- We're not ready for another recession - Jared Bernstein
- How does Fed policy affect global financial stability? - Ben Bernanke
- When and Why Might a "Confidence" Shock Be Contractionary? - Brad DeLong
- Understanding the New Liquidity Coverage Ratio Requirements - FRB Richmond
- “Refried confusion” on automation and jobs in manufacturing - Jared Bernstein
- What is Getting Too Little Attention from Financial Regulators? - Tim Taylor
- Hedging Income Fluctuations with Foreign Currency Assets - Liberty Street
- A fresh approach to life plans - Understanding Society
- Re-thinking education: Alternative policy lessons - Vox EU
- Impact of regional tax harmonisation - Vox EU
- A New Morrill Act - Austin Goolsbee
Wednesday, January 06, 2016
My apologies for the lack of posts today, and for less than the usual number over the last few days. I am in Costa Rica taking a bit of a needed break -- I need some time away from my computer. I'll keep up as I can.
- Deadly Snits - Paul Krugman
- Secret Data Encore - John Cochrane
- Racial Identity, and Its Hostilities, Return Politics - NYTimes
- U.S Climate Politics: An Economist's Perspective - Mathew Kahn
- The Chinese devaluation threat — again - Gavyn Davies
- The simple macroeconomics of monopsony power - Nick Rowe
- Academic Publishing Is All About Status - Justin Fox
- Your Tax Dollars Subsidizing Methane Gas Emissions - EconoSpeak
- Kocherlakota and the credibility of raising the inflation target - longandvariable
- Who is Driving the Decline in Consumer Inflation Expectations? - Liberty Street
- Can Systemic Financial Risk Be Contained? - Capital Ebbs and Flows
- Bilateral tech gaps: The US vs China and India - Vox EU
- Designing tax policy in high-evasion economies - Vox EU
- Public investment efficiency and growth - Vox EU
- The Krugtron, confidence and models - longandvariable
- Summarizing the Trialogue - Paul Krugman
- The cost of overconfidence - Tim Harford
- The Order Protection Rule - Rajiv Sethi
Tuesday, January 05, 2016
I recently gave a talk in Honolulu hosted by the Korean Institute of Economic Policy, and this was a heated topic of discussion. Koreas was criticized in the Treasury's semi-annual report on currency manipulation (though not formally identified a a manipulator), and I had the impression their criticism of US monetary policy was an attempt to say "see, you do it too." My defense of the US was not popular:
What did you do in the currency war, Daddy?: The financial crisis and its immediate aftermath saw close cooperation among the world’s policymakers, especially central bankers. For example, in October 2008, the Federal Reserve coordinated simultaneous interest-rate cuts with five other major central banks. It also established currency swap arrangements—in which the Fed provided dollars in exchange for foreign currencies—with fourteen foreign central banks, including four from emerging markets. However, once the crisis had passed and recovery begun, national economic interests began to diverge. In particular, some foreign policymakers argued that the Fed’s aggressive monetary policies, undertaken to support the U.S. economic recovery, were damaging their own economies.
Two criticisms were prominent, and a third perennial issue also reared its head. First, several foreign policymakers accused the Fed of engaging in “currency wars”—deliberately weakening the dollar to gain an advantage in trade. (The phrase is most closely associated with Brazilian finance minister Guido Mantega, who leveled the charge when the Fed began a second round of quantitative easing in November 2010.) A second complaint, raised prominently by Reserve Bank of India governor Raghuram Rajan, among others, was that shifts in Fed policy (toward either greater tightness or greater ease) were creating spillovers—sharp swings in capital flows and increased market volatility—that destabilized financial markets in emerging-market countries. This concern has surfaced again recently, as the Fed has initiated what may prove to be a series of interest-rate increases. ...
Skipping to the bottom line (after a long, detailed discussion):
Overall, I find little support for the claims that the Fed has engaged in currency wars. Although the Fed’s monetary policies of recent years likely put downward pressure on the dollar, the effect of the weaker dollar on US net exports was largely offset by the effects of higher US incomes on Americans’ demand for imported goods and services. Indeed, recent years have seen neither an increase in US net exports nor any sustained depreciation of the dollar.
Ben Ho, a member of the Council of Economic Advisers under George W. Bush:
The Conservative Case for Solar Subsidies: To many skeptics, particularly on the right, the spectacular failure of the solar-panel manufacturer Solyndra ... demonstrated the industry’s shaky future and the danger of government efforts to subsidize it to success.
Fast forward to today. Solar energy prices have continued to fall rapidly, twice as many Americans work in the solar industry as in coal mining, and last year one-third of new electricity generation came from solar power. ...
Conservatives ... need to take another look at solar. The case for solar isn’t limited to prices and jobs. Consumers want choice..., electricity is still one of the few areas where we have virtually no choice over our supplier. ...
Solar also solves an efficiency challenge..., demand peaks during the daytime... To meet demand, we have invested in a great deal of spare capacity. ... Fortunately, we need energy most during the daytime — making rooftop solar a smart choice...
And there’s nothing in free-market economic theory that precludes government support. Markets tend to underproduce what economists call positive externalities... Solar panels ... are replete with such benefits...
The kerfuffle over the Solyndra collapse aside, many conservatives already agree, and have for years. When I was at the Council of Economic Advisers under President George W. Bush, we believed that an across-the-board energy policy was by far the best approach — and that included solar. From both a market and an environmental point of view, supporting the solar industry should make sense, no matter which side of the aisle you come from.
- Academics And Politics - Paul Krugman
- Capital, Predistribution and Redistribution - Thomas Piketty
- The World Economy’s Labor Pains - Kaushik Basu
- Creative Destruction and Inequality - Digitopoly
- Rational life plans - Understanding Society
- Confidence Games - Paul Krugman
- The Closed Marketplace of Economic Ideas - Federico Fubini
- Jobs Involving Routine Tasks Aren't Growing - St. Louis Fed
- ‘Metrics Monday: Why You Should Show a Regression of Y on Z - Marc Bellemare
- How Is the Economy Doing? It May Depend on Your Party, and $1 - NYTimes
- A Bailout for Volkswagen? Congress Wants to Do Something Crazy - David Dayen
- The Effect of Minimum Wages on Employment - Evan Totty
- The Minimum Wage and the Great Recession - Jeffrey Clemens
- Variability in Health Care Prices and Malfunctioning Markets - Tim Taylor
- Scientific Misconduct: Published Research Papers - Stephen Ziliak
- How to end the stock buyback deluge - Harold Myerson
Monday, January 04, 2016
I guess we have to keep making this point, hoping against hope that Congress will hear it. This is from Cecchetti & Schoenholtz:
Falling Interest Rates and Government Investment: Switzerland is an amazing place, not least the skiing, the chocolate, and the punctual trains. The latter is part of the country’s exquisitely maintained infrastructure: there are no potholes, and no deferred maintenance of train tracks, tunnels, airports, or public buildings. Few countries go so far, but many can take a lesson: it pays to maintain infrastructure at least so that it doesn’t fail.
We bring this up now because financial markets are telling us that it’s a very good time to build and repair infrastructure: real (inflation-adjusted) interest rates have fallen so low that it has become exceptionally cheap to finance the improvement and repair of neglected roads, bridges, transport hubs, and public utilities. Yet, in the United States, we are doing less public investment than ever: net government investment has fallen to what is probably a record low. ...
Net Government Investment as a percentage of Net Domestic Product (annual data), 1959-2014
Fixing the problem would be straightforward, and cheap in terms of finance. ...
To be clear, this argument need not be seen as one for a larger government, but for an efficient one that provides the public goods necessary for sustained economic growth at the lowest cost. For a country to remain prosperous, it needs an infrastructure that is constantly being renewed and improved. The alternative of postponing maintenance probably leads to higher costs—both from the direct impact on the economy from the deterioration of physical capital and from the need to finance future (larger) repair projects at potentially higher interest rates. Put differently, when fiscal policymakers choose to tighten the nation’s belt, they should not do so at the expense of future national income. ...
There is no need to be as obsessive as the Swiss; their outlays for public goods are surely greater than most Americans would wish to pay. But given today’s low hurdle rate of return, it is difficult to see how spending an extra 1% of NDP each year now to maintain and improve roads, bridges, airports, and buildings would be economically unsound. Even if the additional outlays are not self-financing, the social return is likely to be far greater than the cost. As monetary economists, we include as a valuable social benefit the reduced probability of hitting the zero lower bound in a world with a 2% inflation target.
As the title says, elections matter:
Elections Have Consequences, by Paul Krugman, Commentary, NY Times: ...I’m a big geek... I was eagerly awaiting the I.R.S.’s tax tables for 2013... And what these tables show is that elections really do have consequences.
You might think that this is obvious. But on the left, in particular, there are some people who, disappointed by the limits of what President Obama has accomplished, minimize the differences between the parties. Whoever the next president is, they assert — or at least ... if it’s not Bernie Sanders — things will remain pretty much the same, with the wealthy continuing to dominate the scene. ...
But the truth is that Mr. Obama’s election ... had some real, quantifiable consequences. ...
If Mitt Romney had won, we can be sure that Republicans would have found a way to prevent these tax hikes. ...
Mr. Obama has effectively rolled back not just the Bush tax cuts but Ronald Reagan’s as well..., about $70 billion a year in revenue. This happens to be in the same ballpark as both food stamps and ... this year’s net outlays on Obamacare. So we’re not talking about something trivial.
Speaking of Obamacare, that’s another thing Republicans would surely have killed if 2012 had gone the other way. ... And the effect on health care has been huge...
Now, to be fair, some widely predicted consequences of Mr. Obama’s re-election — predicted by his opponents — didn’t happen. Gasoline prices didn’t soar. Stocks didn’t plunge. The economy didn’t collapse..., and the unemployment rate is a full point lower than the rate Mr. Romney promised to achieve by the end of 2016.
In other words, the 2012 election didn’t just allow progressives to achieve some important goals. It also gave them an opportunity to show that achieving these goals is feasible. No, asking the rich to pay somewhat more in taxes while helping the less fortunate won’t destroy the economy.
So now we’re heading for another presidential election. And once again the stakes are high. Whoever the Republicans nominate will be committed to destroying Obamacare and slashing taxes on the wealthy — in fact, the current G.O.P. tax-cut plans make the Bush cuts look puny. Whoever the Democrats nominate will, first and foremost, be committed to defending the achievements of the past seven years.
The bottom line is that presidential elections matter, a lot, even if the people on the ballot aren’t as fiery as you might like. Don’t let anyone tell you otherwise.
A Look Ahead Into 2016, by Tim Duy: What do I expect to see in 2016? Briefly, here are my baseline expectations for the year:
1.) No recession. I think that fears of recession in 2016 are overblown. Softness in the manufacturing sector is the primary motivation for such fears, but this ignores the declining economic importance of manufacturing in the US economy. Manufacturing now accounts for just 8.6% of jobs. I think people are falling into a trap of overemphasizing the importance of manufacturing as a cyclical indicator. A broader perspective indicates little reason to be worried of recession in 2016:
Also note that initial unemployment claims, one of our better leading indicators, shows no indication of a recession brewing:
I expect manufacturing indicators will look better by the end of the year as the energy sector and external economy stabilize.
2.) Economic growth will soften. Overall growth will slow toward trend growth, around 2%, this year. Growth accelerated in 2013 as the economy normalized:
Overall GDP growth hit a high point for this cycle in 2014 and began to taper off in 2015. Still, looking through the data further, we see that recent softness in top-line numbers are primarily related to the external sector and inventory correction. The external sector has been particularly important in moderating the pace of US growth. Note that the underlying domestic economy remains solid:
Recent growth has relied on upward trends in technology, automobile production, and multifamily housing. With at least the last two reaching their peak (I suspect), expect some moderation in overall growth in 2016. The Fed will see such moderation as necessary to contain inflationary pressures.
3.) The pace of job growth will decelerate. The underlying trend in job growth appears to have peaked in 2014, and is slowing trending down.
Moreover, the Federal Reserve will become increasingly uncomfortable as the unemployment rate pushes toward 4.5 percent. We are already near their expectations of full employment:
Monetary policymakers would like unemployment to stabilize somewhat below the natural rate for some time in order to support further reduction in underemployment. Such stabilization will require that job growth moderates to the pace of labor force growth. The Fed tends to thinks this is the 100-150k range. This expectation assumes that labor force participation rates remain fairly stagnate. Faster employment growth would be supported if a tighter labor market and higher wages succeed in drawing more workers into the labor market.
4.) Wage growth will accelerate. As the unemployment rate falls below 5%, age growth will accelerate further. I think the Atlanta Federal Reserve wage tracker indicates that the forces of supply and demand still apply in the labor market:
5.) Inflation will accelerate. I think 2016 will be the year that economic resources become sufficiently scarce to push inflation back to the Fed's target. I know this may seem like a wildly optimistic call given the persistence of low inflation during this cycle:
I simply don't think that economic slack had yet to diminish sufficiently to force greater price pressures. But I think we will be at that point this year.
6.) Oil will end the year higher than it began. Oil prices have been all over the place during the past ten years, hence any forecast is subject to great uncertainty. Given that producers are already giving the stuff away, I suspect we are close to the point that production will moderate sufficiently to stabilize prices and lead them higher this year.
7.) Stocks up, yield curve flattens, and the dollar is flat to declining. These baseline expectations are based entirely on past behavior of financial markets in the first year following a Federal Reserve rate hike:
I am most confident that the yield curve expectation, and least confident in the dollar expectation. I would expect any equity gains to be fairly modest.
8.) Single family housing will take center stage. Multifamily housing accelerated to a fairly high pace of activity between 2009 and 2015 while gains in single family housing have been less impressive:
I anticipate that the next stage in the normalization of housing activity will take the form of single family growth, supported by a solid job market and higher wages.
9.) The Federal Reserve will continue to hike rates, slowly. I expect that economic conditions will be sufficient for the Federal Reserve to justify 100bp of rate hikes in 2016. Although the Fed will not want to appear mechanical in its normalization process, they will likely find themselves hiking every other meeting beginning in January. They will be slow to begin the process of "normalizing" the balance sheet, although I expect that they will be fully engaged in that conversation by the middle of the year. That conversation will take on more urgency if they have difficulty controlling short rates with their new tools.
10.) Productivity is a wildcard. Declining productivity growth, combined with slow labor force growth, drives down estimates of potential growth. Might this story change this year? Perhaps, if tighter labor markets and higher wages forces firms to identify additional labor saving technology. Such an outcome would support stronger than expected growth, higher real wages, and still low inflation.
Bottom Line: By recent standards, a fairly optimistic baseline expectation for 2016. That said, nothing spectacular either, just a continued normalization of economy around trend growth. Expectations of recession remain premature. The most likely cause of the next recession will be a monetary mistake. The still-patient Fed hence argues against a recession in the foreseeable future.
- The Entrepreneurship/Inequality Myth - Digitopoly
- Pfizer and America’s Corporate Exodus - James Surowiecki
- Economists Take Aim at Wealth Inequality - The New York Times
- The bizarre politics of child care policy - Fresh economic thinking
- Secular Stagnation, Asymmetric Risks, Fed Policy, and Models - Brad DeLong
- Social engagement and cooperative behaviour: Experimental evidence - Vox EU
- International coordination and precautionary policies - Vox EU
- Fiscal stimulus via ‘helicopter tax credits’ - Vox EU
- Geographical differences in working hours - Vox EU
- The End of Lawyers? Not So Fast. - The New York Times
Sunday, January 03, 2016
Travel day today. Not sure when I will have Internet access again.
Musings on Whether We Consciously Know More or Less than What Is in Our Models…: Larry Summers presents as an example of his contention that we know more than is in our models–that our models are more a filing system, and more a way of efficiently conveying part of what we know, than they are an idea-generating mechanism–Paul Krugman’s Mundell-Fleming lecture, and its contention that floating exchange-rate countries that can borrow in their own currency should not fear capital flight in a utility trap. He points to Olivier Blanchard et al.’s empirical finding that capital outflows do indeed appear to be not expansionary but contractionary ...
[There's quite a bit more in Brad's post.]
Saturday, January 02, 2016
Making And Using Models: Larry Summers, Brad DeLong, and yours truly are having a bit of a three-cornered dialogue about the role of models in policy, set off by Larry’s initial post about why he believes the Fed is making a mistake in raising rates. We’re now in round two – and before I get to the specifics, let me ask: Don’t you wish real life were like this? (Let me pull Marshall McLuhan John Maynard Keynes out from behind this sign.)
I mean, we’re having a serious discussion by people who have thought hard about these topics, and more than that, have a long history of hard thinking about economics. To the extent that the three of us differ, it’s not based on knee-jerk ideology, or simplistic slogans. Oh, and on the immediate question of whether the Fed should raise rates, we’re all agreed that it should not.
Compare this with what mainly happens in economic debate. Oh well.
Anyway, Larry now comes back with an assertion that his case against a rate hike rests largely on supply-side uncertainty, where I think textbook demand-side economics is already enough; and also with a statement that he’s OK in principle with policy judgments that aren’t based on models, and a critique of my Mundell-Fleming lecture arguing that policymakers’ fears that deficits can cause a disastrous loss of confidence don’t make sense. Brad responds by wondering exactly how the policymakers could be right in this case.
And that really gets at my point, which is not that existing models are always the right guide for policy, but that policy preferences should be disciplined by models. If you don’t believe the implications of the standard model in any area, OK; but then give me a model, or at least a sketch of a model, to justify your instincts. ... [he goes on to explain further] ...
- Thoughts on Delong and Krugman blogs - Larry Summers
- Summers: We Know More than What's in our Models - Brad DeLong
- The Rise and Fall of American Growth - Enlightened Economist
- A Swan Song for the Fed Dove Who Once Was a Hawk - WSJ
- Ireland still isn't back - Kenneth Thomas
- Macro themes and risks for 2016 - Gavyn Davies
- Money from the Sky - The Awl
Friday, January 01, 2016
Privilege, Pathology and Power, by Paul Krugman: Wealth can be bad for your soul. That’s ... a conclusion from serious social science... The affluent are, on average, less likely to exhibit empathy, less likely to respect norms and even laws, more likely to cheat, than those occupying lower rungs on the economic ladder. ...
America is a society in which a growing share of income and wealth is concentrated in the hands of a small number of people,... these people have huge political influence.., and that is surely the biggest problem.
But ... those empowered by money-driven politics include a disproportionate number of spoiled egomaniacs. ...
Donald Trump would probably have been a blowhard and a bully whatever his social station. But his billions have insulated him from the external checks that limit most people’s ability to act out their narcissistic tendencies; nobody has ever been in a position to tell him, “You’re fired!” ...
But Mr. Trump isn’t the only awesomely self-centered billionaire playing an outsized role in the 2016 campaign.
There have been ... reports lately about Sheldon Adelson, the Las Vegas gambling magnate. Mr. Adelson has been involved in ... court proceedings ... around claims of misconduct in his operations in Macau, including links to organized crime and prostitution. ... What was surprising was his behavior in court, ... he refused to answer routine questions and argued with the judge, Elizabeth Gonzales. That, as she rightly pointed out, isn’t something witnesses get to do.
Then Mr. Adelson bought Nevada’s largest newspaper..., reporters ... were told to drop everything and start monitoring ... Ms. Gonzales. And while the paper never published any results..., an attack on Judge Gonzales, with what looks like a fictitious byline, did appear in a small Connecticut newspaper owned by one of Mr. Adelson’s associates.
O.K., but why do we care? Because Mr. Adelson’s political spending has made him a huge player in Republican politics...
Are there other cases? Yes indeed...
Just to be clear, the biggest reason to oppose the power of money in politics is the way it lets the wealthy rig the system and distort policy priorities. ... The fact that some of those buying influence are also horrible people is secondary.
But it’s not trivial. Oligarchy, rule by the few, also tends to become rule by the monstrously self-centered. Narcisstocracy? Jerkigarchy? Anyway, it’s an ugly spectacle, and it’s probably going to get even uglier over the course of the year ahead.