- The Fed's Hidden Message - Narayana Kocherlakota
- The New Generation Gap - Joseph E. Stiglitz
- Automation and Job Loss: The Fears of 1927 - Tim Taylor
- Crowdfunding for the Public Good Is Evil - Wired
- Refugees and The Economy: Lessons from History - INET
- Moral suasion and bond buying in the Eurozone Crisis - VoxEU
- Forms and sources of inequality in the United States - Jason Furman
- Infrastructure cannot be built on empty purses and big promises - FT.com
- Appreciating the new economics of the minimum wage - Equitable Growth
- Automating the Professions - Los Angeles Review of Books
- The perverse effect of preferential rules of origins - VoxEU
- ABM fundamentalism - Understanding Society
- What Trump and Sanders Get Wrong About Free Trade - NYTimes
- Why Trade Is An Important Issue In the Presidential Campaign - NPR
- Making the Case for Trade - WSJ
Thursday, March 17, 2016
Wednesday, March 16, 2016
The FOMC decided to "maintain the target range for the federal funds rate at 1/4 to 1/2 percent":
Press Release, Release Date: March 16, 2016: Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee's 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation. ...
I'll have more to say about this tomorrow at CBS MoneyWatch.
I hope you already know this, but just in case:
Balanced Budget Amendment “Very Unsound Policy,” Leading Economists Warn: A balanced budget amendment to the Constitution would be “very unsound policy” that would adversely affect the economy, a group of leading economists including four Nobel laureates explain in a letter today to President Obama and Congress, which the Economic Policy Institute and the Center on Budget and Policy Priorities spearheaded. Several constitutional amendments requiring a balanced budget have been introduced in Congress, and the Senate Judiciary Committee is holding a hearing today on the issue.
“A balanced budget amendment would mandate perverse actions in the face of recessions,” the letter notes:
In economic downturns, tax revenues fall and some outlays, such as unemployment benefits, rise. These built-in stabilizers increase the deficit but limit declines in after-tax income and purchasing power. To keep the budget balanced every year would aggravate recessions.
A balanced budget amendment also would prevent federal borrowing to finance infrastructure, education, research and development, environmental protection, and other vital investments. Adding arbitrary caps on federal spending — which some balanced budget proposals include — would make the amendment even more problematic, the letter says.
The signatories include Nobel laureates Peter Diamond, Eric Maskin, Christopher Sims, and Robert Solow...
- MMT seems obsessed with the accounting detail of government transactions
- This seemed to lead to ideas that I thought were standard bits of macroeconomics
Occasionally I would out of curiosity try and read something by MMT’s leading lights, which reinforced these impressions. For example MMTers seemed to think that they had discovered that a government with its own central bank need never default on its debt, but as far as I was concerned that was a standard and rather trivial implication of the government’s consolidated budget constraint. MMTers also seem curiously averse to equations.
Lately these MMT comments have been getting rather annoying, so I thought I would write all this down. Luckily I do not have to, as Thomas Palley has already done it for me (here and here). I have absolutely nothing to add, except to note that the upshot is not that what MMT says about this budget constraint is wrong, but that it was well known long before MMT and that it is hardly a complete macro theory.
Let me give an illustration of this last point. ...
Finally a request. I am bound to get comments on this post disputing what I say, which is fine. But please, for the sake of those people who may still have an open mind, keep these short and to the point. If you accept that a government’s deficit must equal new borrowing plus the creation of new (base) money, there is no need to go into the accounting or transaction details therein.
- Economists of the World, Unite! - Democracy Journal
- Fischer and Brainard Are Battling for Yellen’s Soul - Tim Duy
- The Chilling Math of Inequality - Bloomberg View
- On Trade, Angry Voters Have a Point - The New York Times
- The Money Problem: Rethinking Financial Regulation - Morgan Ricks
- Our Four-Decade Antitrust Experiment Has Failed - Kevin Drum
- Understanding declining fluidity in the U.S. labor market - Brookings
- A Cheaper Way to Battle Recession - Bloomberg View
- What is anchor individualism? - Understanding Society
- Remembering Lloyd Shapley - Tim Taylor
- Home economics - Equitable Growth
Tuesday, March 15, 2016
Part of an interview with Kenneth Arrow:
“There Is Regulatory Capture, But It Is By No Means Complete”: ... Q: George Stigler and the public choice school predicted that regulation will inevitably be captured by special interests, and used as a tool to prevent competition. Some people see that as a reason for deregulation, or even no regulation. Perhaps we need to construct different market structures, so that regulation won’t be captured?
There’s a famous Churchill quote: “democracy is the worst form of government, except for all the others.” That applies to regulation as well. In the late 1800s, we had a natural monopoly: railroads. The government created a regulatory enterprise – the Interstate Commerce Commission – and of course it was captured. But it still made a difference.
I think we just have to accept that capture does occur, but it’s limited. The Federal Trade Commission, for example, is a pretty active body. Monopolies have been broken up. The AT&T telephone monopoly was broken up in 1982 – Stigler was still writing about regulatory capture then. AT&T was a classic monopoly, but a pretty benevolent one. ...
So there is regulatory capture, but it is by no means complete. Regulations do play a role.
One example of non-regulatory capture fighting against effective regulation was during the run-up to the 2008 crash, when several officials argued for CDOs to be regulated, which means they would have had to meet certain requirements of transparency. This was not accepted. I’m not saying the crash could have been avoided if that happened, but that would have made a big difference.
Q: Regarding the financial industry, in recent years Luigi Zingales and other scholars have questioned its size. Some argue that most of its business today is in fact rent-seeking, while only half or a third of it is allocating resources efficiently. Do you agree with this sentiment?
I don’t consider myself an expert on the financial industry, but the fact that the financial industry is responsible for something like 30 percent of all profits seems rather remarkable. I am startled by the size of the financial industry and what it means. I can’t believe this is really needed for the allocation of resources. A lot of it is going to be rent-seeking. It creates a diversion of resources, especially human capital, and not only does it create problems for the legitimacy of income distribution, but that also means resources diverted for this purpose [rent-seeking] can’t be used elsewhere. ...
Q: A large number of industries in the U.S. today are highly concentrated. Does concentration lead to declines in innovation?
Monopolies don’t feel a need to innovate, because they’re already making money off their existing products. However, there’s an argument to be made that the incentive for innovation is the prospect for monopoly. The award for innovation is that, at least for a period of time, you have a first-mover advantage until other people catch on. Existing monopolies are bad for innovation, but the prospect of monopolies is good for innovation. That’s the paradox. ...
He also talks quite a bit about health care at the beginning of the interview.
Rising insecurity and the rise of Trump and Sanders, by Mark Thoma: Capitalism is the best economic system yet invented for producing economic growth and satisfying the diverse desires of millions and millions of people. The key to its success is the ability to respond quickly to changes in economic conditions.
But this comes with a cost that has been magnified by the failure of our political system to protect the people who pay the price of capitalism's dynamism, a failure that has fueled the economic insecurity that's helping the rise of Donald Trump and Bernie Sanders. ...
Return of the Undeserving Poor: When I was growing up, income inequality wasn’t yet a big issue, because the middle class was strong and the plutocracy fairly marginal. But there was a great deal of alarm over the troubles of the African-American community, where social disorder was on the rise even as explicit legal discrimination (although not de facto discrimination) was coming to an end. What was going on?
There were all kinds of theories, ranging from cultural hand-waving to claims that it was all because of welfare. But some people, notably William Julius Wilson, argued that the underlying cause was economic: good jobs, while still fairly plentiful in America as a whole, were disappearing from the urban centers where the A-A population was concentrated. And the social collapse, while real, followed from that underlying cause.
This story contained a clear prediction — namely, that if whites were to face a similar disappearance of opportunity, they would develop similar behavior patterns. And sure enough, with the hollowing out of the middle class, we saw (via Mark Thoma) what Kevin Williamson at National Review describes as
the welfare dependency, the drug and alcohol addiction, the family anarchy
And what is the lesson? Why, that poor whites are moral failures, and they should move to where there are opportunities (where?). It’s really extraordinary.
Oh, and lots of swipes at food stamps, welfare programs, disability insurance (which conservatives insist is riddled with fraud, despite lots of evidence to the contrary.)
It’s surely worth noting that other advanced countries, with much more generous welfare states, aren’t showing anything like the kind of social collapse we’re seeing in the U.S. heartland. ...
Why, it’s almost as if having a strong safety net leads to better, not worse, social health. Culture still matters: US Hispanics do a lot better than one might have expected. But the idea that somehow food stamps are why we’re breaking bad is utterly at odds with the evidence. (Just as an aside, since someone will bring it up: all of those other advanced economies are just as open to trade as we are — so whatever you think of free trade, it doesn’t necessarily cause social collapse.)
Anyway, the right’s inability to face up to the evidence on this front is … just like its inability to face up to evidence on any other front.
Let me add:
- Few Disability Insurance Beneficiaries Could Support Themselves by Working - Center on Budget and Policy Priorities
- Contrary to "Entitlement Society" Rhetoric, Over Nine-Tenths of Entitlement Benefits Go to Elderly, Disabled, or Working Households - Center on Budget and Policy Priorities
- TANF Continues to Weaken as a Safety Net - Center on Budget and Policy Priorities
The NRO is not happy that, as Paul Krugman says, the con is being exposed:
the establishment’s problem with Mr. Trump isn’t the con he brings; it’s the cons he disrupts.
...the Trump phenomenon threatens the con the G.O.P. establishment has been playing on its own base. I’m talking about the bait and switch in which white voters are induced to hate big government by dog whistles about Those People, but actual policies are all about rewarding the donor class.
So they are going on attack:
This weekend, my colleague Kevin Williamson kicked up quite the hornet’s nest with his magazine piece (subscription required) that strikes directly at the idea that the white working-class (the heart of Trump’s support) is a victim class. Citizens of the world’s most prosperous nation, they face challenges — of course — but no true calamities. Here’s the passage that’s gaining the most attention:
It is immoral because it perpetuates a lie: that the white working class that finds itself attracted to Trump has been victimized by outside forces. It hasn’t. The white middle class may like the idea of Trump as a giant pulsing humanoid middle finger held up in the face of the Cathedral, they may sing hymns to Trump the destroyer and whisper darkly about “globalists” and — odious, stupid term — “the Establishment,” but nobody did this to them. They failed themselves.
If you spend time in hardscrabble, white upstate New York, or eastern Kentucky, or my own native West Texas, and you take an honest look at the welfare dependency, the drug and alcohol addiction, the family anarchy — which is to say, the whelping of human children with all the respect and wisdom of a stray dog — you will come to an awful realization. It wasn’t Beijing. It wasn’t even Washington, as bad as Washington can be. It wasn’t immigrants from Mexico, excessive and problematic as our current immigration levels are. It wasn’t any of that.
Nothing happened to them. There wasn’t some awful disaster. There wasn’t a war or a famine or a plague or a foreign occupation. Even the economic changes of the past few decades do very little to explain the dysfunction and negligence — and the incomprehensible malice — of poor white America. So the gypsum business in Garbutt ain’t what it used to be. ...
The truth about these dysfunctional, downscale communities is that they deserve to die. Economically, they are negative assets. Morally, they are indefensible. Forget all your cheap theatrical Bruce Springsteen crap. Forget your sanctimony about struggling Rust Belt factory towns and your conspiracy theories about the wily Orientals stealing our jobs. ... The white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles. Donald Trump’s speeches make them feel good. So does OxyContin. What they need isn’t analgesics, literal or political. They need real opportunity, which means that they need real change, which means that they need U-Haul.
These are strong words, but they are fundamentally true and important to say ...
The economy isn’t putting a bottle in their hand. Immigrants aren’t making them cheat on their wives or snort OxyContin. Obama isn’t walking them into the lawyer’s office to force them to file a bogus disability claim. ...
Kevin is right. If getting a job means renting a U-Haul, rent the U-Haul. You have nothing to lose but your government check.
- Voter anger explained—in one chart - Brookings Institution
- Globalization and Growth - Paul Krugman
- The Era of Free Trade Might Be Over - Jared Bernstein
- Free Trade Doesn't Have to Devastate Workers - Justin Fox
- Far Left-Far Right Protectionist Dreams - Econbrowser
- The Great Bipartisan War on Free Trade - Ed Dolan
- A Note on Globalization and Labor - Paul Krugman
- The Regulatory Game in the Pharma Industry - ProMarket
- Worst-Case Scenarios and Asset Prices - FRBSF
- Environmental Policies and Economic Performance - OECD Insights
- The Regulatory Counterintelligence Agency - Cecchetti & Schoenholtz
- Does public investment have to pay for itself? - mainly macro
Monday, March 14, 2016
The Real Reason to Worry About China: The world's largest currency union contains about 1.7 billion people and accounts for more than a third of global economic output. It also may be headed for a breakup...
I’m talking, of course, about the U.S. and China. For more than 20 years, China has kept the yuan's value against the dollar in a very tight range. ...
Over the past couple decades, China has been able to offset the effects of Fed policy by varying its relatively large level of public investment. It has always been clear, though, that China would no longer want to use fiscal policy in this way once its economy was sufficiently developed. The country's currency moves over the past few months suggest that it might have reached this point. ...
Any such breakup presents a big problem: Many businesses and financial institutions have entered into contracts that make sense only under the premise that the exchange rate is not going to vary much over time....
As far as I can tell, U.S. economic policymakers aren’t putting much emphasis on the potential repercussions of a break-up of the China-US currency union. ... There's a significant risk that if the Fed keeps tightening in 2016, it could force an abrupt break-up. The resultant disorder in the world economy would not serve Americans well.
Establishment Republicans "had it coming":
Trump Is No Accident, by Paul Krugman, Commentary, NY Times: Establishment Republicans who are horrified by the rise of Donald Trump...
The truth is that the road to Trumpism began long ago, when movement conservatives — ideological warriors of the right — took over the G.O.P. And it really was a complete takeover. Nobody seeking a career within the party dares to question any aspect of the dominating ideology, for fear of facing not just primary challenges but excommunication.
You can see the continuing power of the orthodoxy in the way all of the surviving contenders for the Republican nomination, Mr. Trump included, have dutifully proposed huge tax cuts for the wealthy, even though a large majority of voters, including many Republicans, want to see taxes on the rich increased instead.
But how does a party in thrall to a basically unpopular ideology — or at any rate an ideology voters would dislike if they knew more about it — win elections? Obfuscation helps. But demagogy and appeals to tribalism help more. Racial dog whistles and suggestions that Democrats are un-American if not active traitors aren’t things that happen now and then, they’re an integral part of Republican political strategy.
During the Obama years Republican leaders cranked the volume on that strategy up to 11 (although it was pretty bad during the Clinton years too.) Establishment Republicans generally avoided saying in so many words that the president was a Kenyan Islamic atheist socialist friend of terrorists ... but they tacitly encouraged those who did, and accepted their endorsements. And now they’re paying the price.
For the underlying assumption behind the establishment strategy was that voters could be fooled again and again: persuaded to vote Republican out of rage against Those People, then ignored after the election while the party pursued its true, plutocrat-friendly priorities. Now comes Mr. Trump, turning the dog whistles into fully audible shouting, and telling the base that it can have the bait without the switch. And the establishment is being destroyed by the monster it created. ...
Let’s dispel with this fiction that the Trump phenomenon represents some kind of unpredictable intrusion into the normal course of Republican politics. On the contrary, the G.O.P. has spent decades encouraging and exploiting the very rage that is now carrying Mr. Trump to the nomination. That rage was bound to spin out of the establishment’s control sooner or later.
Donald Trump is not an accident. His party had it coming.
A Fundamental Shift in the Nature of Trade Agreements: Controversy over agreements that seek to encourage free trade has been going on for decades. But the nature of the underlying trade agreements has fundamentally shifted. The old trade agenda under first the GATT and then its successor the World Trade Organization was focused on reducing tariffs and other trade barriers. The new generation of trade agreements are about assuring that interlocking webs of production that cross international borders will be enabled to function. Richard Baldwin explores the change in "The World Trade Organization and the Future of Multilateralism," published in the Winter 2016 issue of the Journal of Economic Perspectives. Here's a taste of his theme:
"[T]he rules and procedures of the WTO were designed for a global economy in which made-here–sold-there goods moved across national borders. But the rapid rising of offshoring from high-technology nations to low-wage nations has created a new type of international commerce. In essence, the flows of goods, services, investment, training, and know-how that used to move inside or between advanced-nation factories have now become part of international commerce. For this sort of offshoring-linked international commerce, the trade rules that matter are less about tariffs and more about protection of investments and intellectual property, along with legal and regulatory steps to assure that the two-way flows of goods, services, investment, and people will not be impeded. It’s possible to imagine a hypothetical WTO that would incorporate these rules. But in practice, the rules are being written in a series of regional and megaregional agreements like the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union. The most likely outcome for the future governance of international trade is a two-pillar structure in which the WTO continues to govern with its 1994-era rules while the new rules for international production networks, or “global value chains,” are set by a decentralized process of sometimes overlapping and inconsistent megaregional agreements."
Let's unpack these dynamics a bit. Baldwin argues that the rounds of international trade talks starting with the GATT in 1946 displayed what he calls "juggernaut" dynamics. Before the multilateral trade talks, there wasn't much reason for exporters in a country to care about whether the country imposed tariffs on imports. But the multilateral trade talks shifted the political balance, because exporters realized that in order to get lower tariffs in their foreign markets, their own country would need to reduce its tariffs, too. Moreover, each time tariffs were reduced, it tended to weaken firms and industries that faced tough import competition, while benefiting export-oriented firms. Thus, export-oriented firms were in a stronger position to advocate for future tariff cuts as well.
But by the 1990s, there was a rise in global supply chains that crossed international borders. Many emerging markets figured out pretty quickly that if they wanted to be part of global supply chains, they not only needed to reduce their tariffs, but they also needed to implement rules about protection of investment and intellectual property, as well as pursuing the "trade facilitation" agenda of making it easier for goods to move across borders. Literally hundreds of these regional trade agreements hae already been signed, and these were not "shallow" agreements focused on reducing tariffs a bit, but "deep" agreements that got way down into the nitty-gritty of facilitating cross-border trade.
Here are a couple of figures from Baldwin to illustrate the point. The bars in the left-hand figure show the number new regional trade agreements signed each year, and the blue line show the typicaly number of "deep" provisions in these treaties. The right-hand figure shows the number of bilateral investment treaties signed each year--there was clearly a boom in such treaties from the late 1990s into the early 2000s.
The controversial megaregional trade agreements now in the news are mostly about combining and standardizing provisions that are pretty much already incorporated in these hundreds of regional agreements. As Baldwin writes; "The thousands of bilateral investment treaties, for instance, are not all that different, and so network externalities could be realized by melding them together. The emergence of so-called megaregionals like the Trans-Pacific Partnership and Trans-Atlantic Trade and Investment Partnership should be thought of as partial multilateralization of existing deep disciplines by sub-groups of WTO members who are deeply involved in offshoring and global value chains."
My sense is that this fundamental shift in trade agreements from "shallow" to "deep" is part of what drives the controversy surrounding them. The new generation of trade agreements aren't just about reducing tariffs or trade barriers as traditionally understood; instead, they are full of very specific rules that seek to harmonize and facilitate business flows across international borders. There is an uncomfortable sense that in the process of negotiating the details, there are too many times when juicy little plums are included for favored special interests. The fundamental economic arguments for the overall benefits of free trade, even though it is a disruptive force, have to be re-interpreted through a haze of fine print in such cases.
Baldwin sees some difficult issues emerging with a two-track system of wold trade agreements. He writes:
"The megaregionals like the Trans-Pacific Partnership and Trans-Atlantic Trade and Investment Partnership, however, are not a good substitute for multilateralization inside the WTO. They will create an international trading system marked by fragmentation (because they are not harmonized among themselves) and exclusion (because emerging trade giants like China and India are not members now and may never be). Whatever the conceptual merits of moving the megaregionals into the WTO, I have argued elsewhere that the actual WTO does not seem well-suited to the task. ...
"What all this suggests is that world trade governance is heading towards a two-pillar system. The first pillar, the WTO, continues to govern traditional trade as it has done since it was founded in 1995. The second pillar is a system where disciplines on trade in intermediate goods and services, investment and intellectual property protection, capital flows, and the movement of key personnel are multilateralised in megaregionals. China and certain other large emerging markets may have enough economic clout to counter their exclusion from the current megaregionals. Live and let live within this two-pillar system is a very likely outcome."
- The Challenger (Profile of David Card) - IMF
- The Campaign of Magical Thinking - James Surowiecki
- Wage inequality continued its 35-year rise in 2015 - EPI
- Pay Is Stagnant for Vast Majority, Even When You Include Benefits - EPI
- The end of negative rates, but not central bank alchemy - Gavyn Davies
- Inequality Didn’t Just Happen. It Was Created. - Evonomics
- Measuring CEO Compensation - Richmond Fed
- The China Shock and the Japan Shock - Economic Principals
- Unreported assets held abroad and tax evasion - VoxEU
Sunday, March 13, 2016
Thank you Donald Trump: People, I believe that Donald Trump is teaching many of us a valuable lesson. He's performing an important public service, and I for one am grateful.
I'm one of those guys who thought, hey we really don't need affirmative action anymore, women are treated with respect and dignity now, facism is a relic of a bygone age.
But Trump is showing me/us that a large chunk of US adults (what like 25-30% or so?) are racist, sexist, xenophobic, economically illiterate morons.
I guess even in a red state like Oklahoma, living in a University town helps to insulate you from the "common man" (thank god).
But Trump's campaign has made it clear to me that we still have serious human rights / equality / logical reasoning issues in our country.
So I say to all you SJWs out there, live long and prosper. You have a lot of work left to do.
And to my libertarian friends I say, continued affirmative action and gender equity programs are needed and important.
We still have a very long way to go in this country. Trump is showing me/us just how far.
- A capital market union for Europe - VoxEU
- Varieties Of Neoliberalism - Barkley Rosser
- Ordoliberalismus and Ordovolkismus - Brad DeLong
- Quantum biology? - Understanding Society
- Wendt's strong claims about quantum consciousness - Understanding Society
- Making ECB corporate bond buying ‘fairer’ and targeted - longandvariable
Saturday, March 12, 2016
The Benefits of Free Trade: Time to Fly My Neoliberal Freak Flag High!: I think Paul Krugman is wrong today on international trade. For we find him in “plague on both your houses” mode. ... [see here and here]
So I guess it is time to ... fly my neoliberal freak flag high...
On the analytics, the standard HOV models do indeed produce gains from trade by sorting production in countries to the industries in which they have comparative advantages. That leads to very large shifts in incomes toward those who owned the factors of production used intensively in the industries of comparative advantage: Big winners and big losers within a nation, with relatively small net gains.
But the map is not the territory. The model is not the reality. An older increasing-returns tradition sees productivity depend on the division of labor, the division of labor depends on the extent of the market, and free-trade greatly widens the market. Such factors can plausibly quadruple the net gains from trade over those from HOV models alone, and so create many more winners.
Moreover, looking around the world we see a world in which income differentials across high civilizations were twofold three centuries ago and are tenfold today. The biggest factor in global economics behind the some twentyfold or more explosion of Global North productivity over the past three centuries has been the failure of the rest of the globe to keep pace with the Global North. And what are the best ways to diffuse Global North technology to the rest of the world? Free trade: both to maximize economic contact and opportunities for learning and imitation, and to make possible the export-led growth and industrialization strategy that is the royal and indeed the only reliable road to anything like convergence.
So I figure that, all in all, not 5% but more like 30% of net global prosperity--and considerable reduction in cross-national inequality--is due to globalization. That is a very big number indeed. But, remember, even the 5% number cited by Krugman is a big deal: $4 trillion a year, and perhaps $130 trillion in present value.
As for the TPP, the real trade liberalization parts are small net goods. The economic question is whether the dispute-resolution and intellectual-property protection pieces are net goods. And on that issue I am agnostic leaning negative. The political question is: Since this is a Republican priority, why is Obama supporting it without requiring Republican support for a sensible Democratic priority as a quid pro quo?
That said, let me wholeheartedly endorse what Paul (and Mark) say here:
as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins—but we now have an ideology utterly opposed to such redistribution in full control of one party…. So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking….
- No, Social Security is not ‘going broke.’ - Washington Post
- Starving Public Education - Paul Krugman
- Confronting the Fiscal Bogeyman - Barry Eichengreen
- Ricardo and the absence of the equity-efficiency trade-off - globalinequality
- More on the political trilemma of the global economy - Dani Rodrik
- Whatever it Takes Cannot be in Frankfurt - Gloomy European Economist
- A (much) better fiscal rule - mainly macro
- A brief history of human time - VoxEU
- Skill vs morality - Stumbling and Mumbling
- Insights on Infrastructure - Tim Taylor
- High-Skill Immigration: The H-1B Program - LaborEcon
- Capital Control Measures: A New Dataset - Econbrowser
Friday, March 11, 2016
How Wage Insurance Could Ease Economic Inequality: Wage insurance may not be on your radar, but it should be. It helps people who have lost their jobs and cannot find new ones that pay as well. That assistance can reduce economic inequality while providing incentives for unemployed people to go back to work quickly.
What’s more, wage insurance has bipartisan support, at least in its current limited form. We ought to expand it, both through government and in the private sector. ...
The role of government is important in this case because for social insurance, governments have a significant advantage in putting into place big ideas that are difficult to market. That was true for federal Old-Age, Survivors and Disability Insurance in the Social Security system starting in 1935, which was followed by an explosion of additional private pension, life insurance and disability plans. Government is needed again now.
But ultimately, there should be two insurance systems, a government one that is limited to assisting lower-income workers and a private one that allows everyone — including those with higher incomes — to buy insurance against wage loss. ...
"Politicians should be honest and realistic about trade":
Trade and Tribulation, by Paul Krugman, Commentary NY Times: Why did Bernie Sanders win a narrow victory in Michigan, when polls showed Hillary Clinton with a huge lead? Nobody really knows, but there’s a lot of speculation that Mr. Sanders may have gained traction by hammering on the evils of trade agreements. Meanwhile, Donald Trump, while directing most of his fire against immigrants, has also been bashing the supposedly unfair trading practices of China and other nations.
So, has the protectionist moment finally arrived? Maybe, maybe not...
To make sense of the debate over trade, there are three things you need to know.
The first is that we have gotten to where we are — a largely free-trade world — through ... diplomacy, going all the way back to F.D.R. This process combines a series of quid pro quos — I’ll open my markets if you open yours — with rules to prevent backsliding.
The second is that protectionists almost always exaggerate the adverse effects of trade liberalization. Globalization is only one of several factors behind rising income inequality, and trade agreements are, in turn, only one factor in globalization. ...
And yes, Mr. Sanders is demagoguing the issue...
That said, not all free-trade advocates are paragons of intellectual honesty. In fact, the elite case for ever-freer trade ... is largely a scam..., in general, agreements that lead to more trade neither create nor destroy jobs; that they usually make countries more efficient and richer, but that the numbers aren’t huge; and that they can easily produce losers as well as winners. In principle ... the winners could compensate the losers, so that everyone gains. In practice, especially given the scorched-earth obstructionism of the G.O.P., that’s not going to happen.
Why, then, did we ever pursue these agreements? A large part of the answer is foreign policy... And anyone ragging on about those past deals, like Mr. Trump or Mr. Sanders, should be asked what, exactly, he proposes doing now. Are they saying that we should rip up America’s international agreements? Have they thought about what that would do to our credibility and standing in the world? ...
The larger point in this election season is, however, that politicians should be honest and realistic about trade, rather than taking cheap shots. Striking poses is easy; figuring out what we can and should do is a lot harder. But you know, that’s a would-be president’s job.
Whether or not the estimates are precise or directly applicable to other states, the broader point is noteworthy:
Spending on public higher education overlooks net benefits as investment in state's future, Eurekalert!: ... the state of Illinois continues to underinvest in public higher education. But considering higher education funding as an investment that lowers state welfare and prison costs, generates tax revenues and leads to economic growth in the future -- and not as mere consumption spending -- could reframe the debate, according to an article by ... Walter W. McMahon, an emeritus professor of economics and of educational organization and leadership at the University of Illinois. ...
Published in the Journal of Education Finance, the article develops the total return of public education relative to the full costs to the state of Illinois, the key criteria for determining whether there is under- or over-investment for the most efficient statewide development.
McMahon concluded that public education in Illinois contributes to investment returns of 9.5 percent for K-12; 15.3 percent for community college; and 13.4 percent for university, respectively, for every dollar that's spent -- returns that are well above the 7.2 percent the money would have earned if invested in an index fund that tracked returns of the S&P 500, McMahon noted.
(Updated calculations based on the newest earnings data at each education level, corrected for dropouts and other factors, show returns relative to costs of 12.9 percent at two-year institutions and 12.3 percent at the four-year institutions.)
"These earnings-based and total social rates of return both show that higher education is economically very efficient - in fact, more efficient than the average corporation in the S&P 500," McMahon said.
This measure of efficiency trumps any possible overspending on administrative costs cited by critics...
"All told, the state of Illinois' education investment pays for itself every 2.3 years in state budget savings alone."
The return to the state is considerably larger if nonmonetary outcomes are considered.
"A major opportunity being missed is estimating the effects of higher education on state tax revenues and on budgeted state tax costs for health care, welfare, child support and the criminal justice system," McMahon said. "Beyond these state budget savings, I also found about a 30 percent total return that includes these wider health and other benefits to statewide development." ...
- Social Credit Is the Answer!! - Brad DeLong
- Fundamentals, Polls, and the Primary - Paul Krugman
- No more Berning of fossil fuels- The Berkeley Blog
- The Fear Factor in Global Markets - Kenneth Rogoff
- ECB: I cannot do whatever it takes - Antonio Fatas
- Channeling Krugman - George Borjas
- Game Theory for Parents - Scientific American
- Trade agreements and profits: New evidence - VoxEU
- Why is labor mobility in India so low? - Microeconomic Insights
- How low-cost labour market information benefits job seekers - VoxEU
- The positive impact of raising NY's minimum wage to $15 - Berkeley News
- Is weak wage growth all because of who’s getting jobs? - Equitable Growth
- ECB Stimulus in Perspective - David Beckworth
- Austerity past and future - mainly macro
- Big data, meet behavioral science - Brookings Institution
- Houses: who has stopped buying them? - Bank Underground
Thursday, March 10, 2016
Future Economists Will Probably Call This Decade the 'Longest Depression': ... Back before 2008, I used to teach my students that during a disturbance in the business cycle, we'd be 40 percent of the way back to normal in a year. The long-run trend of economic growth, I would say, was barely affected by short-run business cycle disturbances. There would always be short-run bubbles and panics and inflations and recessions. They would press production and employment away from its long-run trend -- perhaps by as much as 5 percent. But they would be transitory.
After the shock hit, the economy would rapidly head back to normal. The equilibrium-restoring logic and magic of supply and demand would push the economy to close two-fifths of the gap to normal each year. After four years, only a seventh of the peak disturbance would remain.
In the aftermath of 2008, Stiglitz was indeed one of those warning that I and economists like me were wrong. Without extraordinary, sustained and aggressive policies to rebalance the economy, he said, we would never get back to what before 2008 we had thought was normal.
I was wrong. He was right. ...
Just say no to monetary policy:
China’s trilemma—and a possible solution, by Ben Bernanke, Brookings Institution: China’s central banker, Zhou Xiaochuan of the People’s Bank of China (PBOC), and other top Chinese officials recently launched a communications offensive to persuade markets and foreign policymakers that no significant devaluation of the Chinese currency is planned. Is the no-devaluation strategy a good one for China? If it is, what does China need to do to make its exchange-rate commitments credible? ...
China faces the classic policy trilemma of international economics, that a country cannot simultaneously have more than two of the following three: (1) a fixed exchange rate; (2) independent monetary policy; and (3) free international capital flows. Accordingly, China’s ability to manage its exchange rate may depend, among other factors, on its willingness and ability to adjust on other policy margins.
...[discussion of the costs and benefits of various options] ...
So what to do? An alternative worth exploring is targeted fiscal policy, by which I mean government spending and tax measures aimed specifically at aiding the transition in China’s growth model. (Spending on traditional infrastructure like roads and bridges is not what I have in mind; in the Chinese context, that’s part of the old growth model.) For example, as China observers have noted, the lack of a strong social safety net—the fact that Chinese citizens are mostly on their own when it comes to covering costs of health care, education, and retirement—is an important motivation for China’s extraordinarily high household saving rate. Fiscal policies aimed at increasing income security, such as strengthening the pension system, would help to promote consumer confidence and consumer spending. Likewise, tax cuts or credits could be used to enhance households’ disposable income, and government-financed training and relocation programs could help workers transition from slowing to expanding sectors. Whether subsidies to services industries are appropriate would need to be studied; but certainly, unwinding existing subsidies to heavy industry and state-owned enterprises, together with efforts to promote entrepreneurship and a more-level playing field, would be constructive.
There are recent indications China might be moving this direction. ...
Targeted fiscal action has a lot to recommend it, given China’s trilemma. Unlike monetary easing, which works by lowering domestic interest rates, fiscal policy can support aggregate demand and near-term growth without creating an incentive for capital to flow out of the country. At the same time, killing two birds with one stone, a targeted fiscal approach would also serve the goals of reform and rebalancing the economy in the longer term. Thus, in this way China could effectively pursue both its short-term and longer-term objectives without placing downward pressure on the currency and without new restrictions on capital flows. It’s an approach that China should consider.
A Protectionist Moment?: ... if Sanders were to make it to the White House, he would find it very hard to do anything much about globalization — not because it’s technically or economically impossible, but because the moment he looked into actually tearing up existing trade agreements the diplomatic, foreign-policy costs would be overwhelmingly obvious. ...
But it’s also true that much of the elite defense of globalization is basically dishonest: false claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization and the costs of protection, hand-waving away the large distributional effects that are what standard models actually predict. I hope, by the way, that I haven’t done any of that...
Furthermore, as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins — but we now have an ideology utterly opposed to such redistribution in full control of one party, and with blocking power against anything but a minor move in that direction by the other.
So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking.
Ripping up the trade agreements we already have would, again, be a mess, and I would say that Sanders is engaged in a bit of a scam himself in even hinting that he could do such a thing. Trump might actually do it, but only as part of a reign of destruction on many fronts.
But it is fair to say that the case for more trade agreements — including TPP, which hasn’t happened yet — is very, very weak. And if a progressive makes it to the White House, she should devote no political capital whatsoever to such things.
- The Politics of Anger - Dani Rodrik
- Multipliers from Eurozone periphery austerity - mainly macro
- Picking Up Where Abenomics Left Off - Noah Smith
- The real Trump tax scandal - David Cay Johnston
- Is Passive Investment Actively Hurting the Economy? - James Ledbetter
- On the Distributional Consequences of Protectionism - EconoSpeak
- Different Models, Different Politics - Gerald Friedman
Wednesday, March 09, 2016
Ben Bernanke and Peter Olson:
China’s transparency challenges: At the recent G20 gathering in Shanghai, three Chinese leaders—Premier Li Keqiang, People’s Bank of China Governor Zhou Xiaochuan, and Finance Minister Lou Jiwei—reassured attendees that the Chinese government had the monetary and fiscal tools as well as the know-how to guide the economy through its current challenges. The success of the communications offensive, which seems to have calmed investor concerns for the moment, stands in strong contrast to the communications missteps that exacerbated adverse market reactions to the Chinese government’s stock market and currency interventions over the past year.
These statements at the G20 suggest that Chinese officials are better understanding the need to clearly explain major policy initiatives—a difficult transition for a government accustomed to secrecy. However, communication of this sort represents only one form of transparency. In this post we discuss two other important forms that complement clear explanations by policymakers: data transparency (producing believable numbers), and transparency about the rules of the game (being clear about rules and policies that affect participants in commerce, the markets, etc.). For China to fulfill its potential as a global financial and economic leader, it needs to make further progress on these dimensions as well. ...
Why is U.S. labor market fluidity drying up?: The U.S. labor market is a far less dynamic place than it was 30 years ago. Workers today are less likely to get a job while unemployed, move into unemployment, switch jobs, or move across state lines. You’d think just the opposite would be true given some of the discussion about our rapidly changing digital economy, but the data show what the data show. Even still, the reason—or reasons—for the decline in fluidity aren’t known.
A new working paper—by economists Raven Molloy, Christopher L. Smith, and Riccardo Trezzi of the Federal Reserve and Abigail Wozniak of the University of Notre Dame—takes a closer look at the decline in labor market fluidity and tries to find the causes. While the authors find nothing close to a smoking gun, they point to interesting avenues of future research. ...
- The Geometry of Progressive Trumpism - Paul Krugman
- A Few Solutions to the Working Class Revolt - New York Times
- Replication vs Duplication: What's the difference? - Tim Haab
- Are Central Banks Really Out of Ammunition? - Adair Turner
- In defence of (some) economics - Stumbling and Mumbling
- Do founders insure against disruption? - Digitopoly
- Reduction and generativeness - Understanding Society
- Mundell-Fleming and Republican Economics - EconoSpeak
- The IMF and the Next Crisis - Capital Ebbs and Flows
Tuesday, March 08, 2016
I have a new column:
Why We Need to Raise the Minimum Wage, by Mark Thoma: It would be nice if labor markets worked the way they do in economics textbooks. Market forces would cause workers to be paid an amount equal to the value of what they produce – what economists call the value of their marginal product – and wages would rise one to one with both changes in inflation and changes in productivity.
Of course, the real world doesn’t always work this way. ...
Worried my example is too simplistic.
Simon Wren-Lewis has a follow-up to his recent post on central bank independence:
The 'strong case' critically examined: Perhaps it was too unconventional setting out an argument (against independent central banks, ICBs) that I did not agree with, even though I made it abundantly clear that was what I was doing. It was too much for one blogger, who reacted by deciding that I did agree with the argument, and sent a series of tweets that are best forgotten. But my reason for doing it was also clear enough from the final paragraph. The problem it addresses is real enough, and the problem appears to be linked to the creation of ICBs.
The deficit obsession that governments have shown since 2010 has helped produce a recovery that has been far too slow, even in the US. It would be nice if we could treat that obsession as some kind of aberration, never to be repeated, but unfortunately that looks way too optimistic. The Zero Lower Bound (ZLB) raises an acute problem for what I call the consensus assignment (leaving macroeconomic stabilisation to an independent, inflation targeting central bank), but add in austerity and you get major macroeconomic costs. ICBs appear to rule out the one policy (money financed fiscal expansion) that could combat both the ZLB and deficit obsession. I wanted to put that point as strongly as I could. Miles Kimball does something similar here, although without the fiscal policy perspective ...
Skipping ahead (and omitting quite a bit of the argument):
... The basic flaw with my strong argument against ICBs is that the ultimate problem (in terms of not ending recessions quickly) lies with governments. There would be no problem if governments could only wait until the recession was over (and interest rates were safely above the ZLB) before tackling their deficit, but the recession was not over in 2010. Given this failure by governments, it seems odd to then suggest that the solution to this problem is to give governments back some of the power they have lost. Or to put the same point another way, imagine the Republican Congress in charge of US monetary policy.
But if abolishing ICBs is not the answer to the very real problem I set out, does that mean we have to be satisfied with the workarounds? One possibility that a few economists like Miles Kimball have argued for is to effectively abolish paper money as we know it, so central banks can set negative interest rates. Another possibility is that the government (in its saner moments) gives ICBs the power to undertake helicopter money. Both are complete solutions to the ZLB problem rather than workarounds. Both can be accused of endangering the value of money. But note also that both proposals gain strength from the existence of ICBs: governments are highly unlikely to ever have the courage to set negative rates, and ICBs stop the flight times of helicopters being linked to elections.
These are big (important and complex) issues. There should be no taboos that mean certain issues cannot be raised in polite company. I still think blog posts are the best medium we have to discuss these issues, hopefully free from distractions like partisan politics.
The introduction and conclusion to an FRBSF Economic Letter by Mary C. Daly, Bart Hobijn, and Benjamin Pyle:
What's Up with Wage Growth?: Improvements in labor market indicators such as job growth and the unemployment rate are strong signals that the U.S. economy is returning to health. One puzzling exception has been the sluggish rise in wages. While wage growth typically rises as unemployment falls, this relationship has been muted in the current recovery. In this Economic Letter, we show that changes in the composition of the workforce propped up wages during the recession, despite a significant increase in labor market slack. As the labor market has recovered, this pattern has reversed. We find that cyclical components, such as the entry of low-wage workers to full-time jobs, have combined with secular components, specifically the exit of higher-wage retirees, to hold down recent measures of overall wage growth. ...
So what are the implications of these insights? The main one is that sluggish wage growth may be a poor indicator of labor market slack. In fact, correcting for worker composition changes, wages are consistent with a strong labor market that is drawing low-wage workers into full-time employment.
In this context, wage growth measures that focus on the continuously full-time employed are likely to do a better job of gauging labor market strength, since they are constructed to more clearly capture the wage dynamics associated with improving labor market conditions. The Federal Reserve Bank of Atlanta’s Wage Growth Tracker is an example.
How to best gauge the impact of wage growth on overall inflation is less clear. As long as employers can keep their wage bills low by replacing or expanding staff with lower-paid workers, labor cost pressures for higher price inflation could remain muted for some time. If, however, these lower-wage workers are less productive, continued increases in unit labor costs could be hiding behind low readings on measures of aggregate wage growth.
- Economists Go Negative on Negative Interest Rates - New York Times
- Systematic Biases in Prediction Market Forecasts - Rajiv Sethi
- Coordination Failure in Work and Leisure - Marginal Revolution
- A Free Econ 101 Text - Environmental and Urban Economics
- Emerald City Minimum Wage Shenanigans - The Big Picture
- Banking Deserts, Branch Closings, and Soft Information - Liberty Street
- Elegant Economic Theories Get Shoved Aside by Data - Noah Smith
- Interview with Emi Nakamura: Price Stickiness and Shocks - Tim Taylor
- Environmental Action as Conversion: The Projection Hypothesis - EconoSpeak
- International business cycle synchronisation - VoxEU
- Solutions to the digital trade imbalance - VoxEU
- Resilience of Economies to Exogenous Shocks - OECD Insights
- ‘Metrics Monday: Interpreting Coefficients II - Marc Bellemare
- A Financial-Fiscal Trilemma - Carola Binder
- Tucker's Infallible Maxim - EconoSpeak
- Connect the Dots - Cecchetti & Schoenholtz
Monday, March 07, 2016
Does protectionism cause recessions?:
When Fallacies Collide, by Paul Krugman, Commentary, NY Times: The formal debates among the Republicans who would be president have exceeded all expectations. Even the most hardened cynics couldn’t have imagined that the candidates would sink so low, and stay so focused on personal insults. Yet last week, offstage, there was in effect a real debate about economic policy between Donald Trump and Mitt Romney, who is trying to block his nomination.
Unfortunately, both men are talking nonsense. Are you surprised?
The starting point for this debate is Mr. Trump’s deviation from free-market orthodoxy on international trade. Attacks on immigrants are still the central theme of the Republican front-runner’s campaign, but he has opened a second front on trade deficits, which he asserts are being caused by the currency manipulation of other countries, especially China. This manipulation, he says, is “robbing Americans of billions of dollars of capital and millions of jobs.”
His solution is “countervailing duties” — basically tariffs — similar to those we routinely impose when foreign countries are found to be subsidizing exports in violation of trade agreements.
Mr. Romney claims to be aghast. In his stop-Trump speech last week he warned that if The Donald became president America would “sink into prolonged recession.” Why? The only specific reason he gave was that those duties would “instigate a trade war and that would raise prices for consumers, kill our export jobs and lead entrepreneurs and businesses of all stripes to flee America.”
This is pretty funny if you remember anything about the 2012 campaign. ... Mr. Romney was saying almost exactly the same things Mr. Trump is saying now. ...
More important than Mr. Romney’s awkward history here, however, is the fact that his economic analysis is all wrong. Protectionism can do real harm, making economies less efficient and reducing long-run growth. But it doesn’t cause recessions.
Why not? ... In fact, a worldwide trade war would, by definition, reduce imports by exactly the same amount that it reduces exports. There’s no reason to assume that the net effect on employment would be strongly negative.
But didn’t protectionism cause the Great Depression? No, it didn’t — protectionism was a result of the Depression, not its cause. ...
So there you have it. The good news is that there was a real policy debate going on within the G.O.P. last week. The bad news is that it was junk economics on both sides.
State of Play: We are heading into the March FOMC meeting next week. The recessionistas are on the sidelines, waiting for data to turn in their favor. I suspect they have a long wait. In the meantime, FOMC participants will hone their arguments as they prepare for what is likely to be a contentious meeting. At stake is not a decision of rates; they will hold steady. At stake is a decision on the balance of risks. Do they want to send a dovish, neutral, or hawkish signal for the April and June meetings? I expect them to default to the neutral/dovish side. I don’t think there is sufficient weight on the hawkish side of the FOMC to drive an aggressive rate signal at this juncture.
Labor markets shook off the January “slowdown” with nonfarm payrolls rising an above-consensus 242k. The twelve-month trend is slowing, but ever-so-gradually:
The unemployment rate held constant near the Fed’s estimate of the natural rate:
This is actually good news, as it reflects a faster pace of labor force growth:
The labor force participation rate is now 0.5 percentage points above its September low. Assuming this trend will continue, the US economy can sustain fairly strong job growth while unemployment rates drift lower very gradual, in line with the Fed’s expectations. It would also give the Fed a bit more breathing room with regards to raising rates. And it would help boost potential GDP growth as it helps offset weakness in productivity growth.
Incoming data, including the inflation uptick, will solidify the positions of those FOMC participants opposed to an extended pause. A fairly clear split emerged in recent weeks. David Harrison at the Wall Street Journal:
The report likely will accentuate a growing split among Fed officials. On one side are regional Fed bank presidents such as San Francisco’s John Williams, Richmond’s Jeffrey Lacker and Kansas City’s Esther George who continue to press for rate increases this year. In the other camp are policy makers who prefer to take a more cautious approach and wait until the effects of the global financial turmoil and the fall in oil prices have played themselves out. Count the Dallas Fed’s Robert Steven Kaplan, Boston’s Eric Rosengren and Philadelphia’s Patrick Harker among them.
And to be sure, the Fed will have its external critics as well. Drew Matus, chief US economist at UBS, told Bloomberg Surveillance that the Fed will “take the cowards way out” by not raising interest rates in the first half of this year.
I don’t find this a compelling interpretation. If you are a “coward” by definition you are not “brave.” And one should remember there is a fine line between “brave” and “foolhardy.” I suspect that Federal Reserve Chair Janet Yellen will wisely follow Falstaff’s advice and recognize that discretion is the better part of valor. True, one can argue that some financial indicators have stabilized since the January FOMC meeting:
To be sure stocks and oil are off their lows, while the dollar is off its highs. Even market-based inflation expectations are heading back up. Panic has subsided. On the surface, that may add weight to the argument that the Fed should “just follow the data.” But corporate bond spreads, although narrowing, still indicate fairly tight credit conditions:
This is on top of a very cold IPO market. So while incoming data points toward solid growth in Q1, the Fed still needs to stand down while the lagged impacts of this winter’s financial tightening pass through to the real economy. Discretion. Yes, this does put the Fed at risk of falling behind the curve. A dovish Fed now on the back of an improving economy suggests that the yield curve will steepen in the near term. If necessary, the Fed can chase that with a higher fed funds rate in the back half of the year.
Also suggesting caution on the part of the Fed is a renewed awareness of the sensitivity of global financial flows to the Fed’s policy stance. Federal Reserve Governor Lael Brainard:
Financial tightening associated with cross-border spillovers may be limiting the extent to which U.S. policy diverges from major economies. As policy adjusts to the evolution of the data, the combination of heightened spillovers from weaker foreign economies, along with a lower neutral rate, could result in a lower policy path in the United States relative to what many had predicted…
And New York Federal Reserve President William Dudley:
Our monetary policy actions, however, often have global consequences that, in turn, influence the U.S. economy and financial markets. At the same time, external factors can impact the monetary policy transmission mechanism in the U.S. and influence the effectiveness of our monetary policy in achieving our objectives. We cannot appropriately calibrate policy without keeping these spillover and feedback effects in mind.
The degree to which the Federal Reserve can tighten short-term rates is limited by the extent of global feedback effects. In short, the Fed has limited capacity to defy the pattern of zero (or negative) rates abroad.
Overall, I don’t believe a Federal Reserve pause is inconsistent with the data. All it takes is the realization that financial market outcomes are in fact data. Ultimately just prices and quantities of bonds and stocks and other assets – data just like any other data that measure prices and quantities of labor or goods. Data that provides insight into the direction of the economy. Or, as Dudley explained:
The federal funds rate is only one element of the broader set of financial conditions affecting the U.S. growth and inflation outlook. Tighter financial conditions abroad do spill back into the U.S. economy, and policymakers must take this into account in their assessment of appropriate monetary policy. Of course, this does not mean that we will let market volatility dictate our policy stance. There is no such a thing as a “Fed put.” What we care about is the country’s growth and inflation prospects, and we take financial market developments into consideration only to the extent that they affect the economic outlook.
Still, I am sympathetic to complaints of communication confusion. Harrison concludes his article:
Fed officials, chief among them Ms. Yellen, have repeated for months that their interest-rate decisions will depend on the economic data. It could be harder to make that case if it appears the central bank is acting contrary to increasingly strong data.
The Summary of Economic Projections is a woefully incomplete description of the Fed’s reaction function. It attempts to distill the Fed’s reaction function into a simple Taylor rule that abstracts away from financial sector. In other words, it does not capture the role of the financial sector in the Fed’s reaction function. And I think it fails to do so because of complex endogeneities involved (the Fed is in integral part of the financial sector) and, as a consequence, a lack of consensus about the implications for the Fed’s reaction function.
Indeed, Cleveland Federal Reserve President Loretta Mester, Kansas City Federal Reserve President Esther George, San Francisco Federal Reserve President John Williams, and Board of Governors Vice Chair Stanley Fischer all appear to discount the importance of the Fed’s financial reaction function (see here and here for example). Brainard and Dudley clearly see a more complex relationship.
Where does Yellen stand? My sense is that six month ago Yellen’s position would align close to Fischer. But I think she would now find Brainard’s position more persuasive, especially with Dudley’s support. That suggests that the Yellen will work to pull the Fed toward a neutral/dovish statement.
Bottom Line: Fed will hold steady next week. Key FOMC participants are shifting in a dovish direction. The financial market volatility, which induced clear tightening in financial conditions, bolstered the Brainard’s arguments. Despite solid incoming data, the Fed will find it necessary to tread cautiously in the months ahead.
- Republicans and Trade Wars - Paul Krugman
- Economic policymakers are at sea on inflation - Larry Summers
- Alvin Hansen's Secular Stagnation Hypothesis - MacroMania
- Senator Sanders and Financial Regulation - Econbrowser
- Hey, Bernie Sanders, Trade Isn't All Bad - Noah Smith
- Spreads and Recession Watch, March 2016 - Econbrowser
- Critical realism meets peasant studies - Understanding Society
- Remembering Ross Perot - Economic Principals
- Trade War! - Modeled Behavior
- Trump, & not seeing luck - Stumbling and Mumbling
- Is US inflation (finally) rising? - Gavyn Davies
- You Saved What? - Dietrich Vollrath
Sunday, March 06, 2016
Via Brad DeLong:
It Pays to Work: Work Incentives and the Safety Net: Isaac Shapiro, Robert Greenstein, Danilo Trisi, and Bryann DaSilva, CBPP: Some critics of various low-income assistance programs argue that the safety net discourages work. In particular, they contend that people receiving assistance from these programs can receive more, or nearly as much, from not working — and receiving government aid — than from working. Or they argue that low-paid workers have little incentive to work more hours or seek higher wages because losses in government aid will cancel out the earnings gains.
Careful analysis of the data and research demonstrates, however, that such charges are largely incorrect and that it pays to work. In the overwhelming majority of cases, in fact, adults in poverty are significantly better off if they get a job, work more hours, or receive a wage hike. Various changes in the safety net over the past two decades have transformed it into more of what analysts call a “work-based safety net” and substantially increased incentives to work for people in poverty. ...
- The Kasich Con - Paul Krugman
- Slumps - New Monetarist Economics
- Who's afraid of John Maynard Keynes? - Ryan Cooper
- The strong case against independent central banks - mainly macro
- High-Skill Immigration: Experimental Evidence – George Borjas
- Against Independent Central Banks: The Short Version - EconoSpeak
Saturday, March 05, 2016
Rajiv Sethi has been assessing the performance of prediction markets:
Forecasting Elections: This wild and crazy election cycle is generating an enormous amount of data that social scientists will be pondering for years to come. We are learning about the beliefs, preferences, and loyalties of the American electorate, and possibly witnessing a political realignment of historic proportions. Several prominent republicans have vowed not to support their nominee if it it happens to be Trump, while a recent candidate for the Democratic nomination has declared a preference for Trump over his own party's likely nominee. Crossover voting will be rampant come November, but the flows will be in both directions and the outcome remains quite uncertain.
Among the issues that the emerging data will be called upon to address is the accuracy of prediction markets relative to more conventional poll and model based forecasts.
... The results are in, with Cruz taking Kansas and Maine and Trump holding on to Kentucky and Louisiana. The only missed call by the prediction markets was therefore Maine. Still, the significant margins of victory for Cruz in Kansas and Maine suggest to me that traders in the aggregate continue to have somewhat inflated expectations regarding Trump's prospects. And I'm even more confident than I was early this morning that Rubio faces a humbling and humiliating loss in his home state of Florida, though he may have no option now but to soldier on.
- The Mitt-Hawley Fallacy - Paul Krugman
- Safe Asset Scarcity and Aggregate Demand - NBER
- Tax Plan Showdown: Hillary Clinton vs. the Republicans - Kevin Drum
- Restaurant industry unharmed by minimum wage hikes - Cornell Chronicle
- Raising the local minimum wage doesn’t hurt local businesses - Jared Bernstein
- Does the US have a productivity or a measurement problem? - Brookings
- Does the US Have a Productivity or a Measurement Problem? - Brad DeLong
- Silicon Valley Has Not Saved Us From a Productivity Slowdown - Tyler Cowen
- What’s Happening with U.S. Productivity Growth? - Third Way
- It’s Time To Start Planning For The Next Recession - FiveThirtyEight
- Stock markets, wisdom of crowds, and corporate strategy - VoxEU
- What Is the Economy's Speed Limit? - Brad DeLong
- Why Aren't More Americans Working? - Justin Fox
- Sanders is Right on Healthcare - Ed Dolan
- The Great American Slump - MacroMania
- Global Demography: Tectonic Shifts - Tim Taylor
- A Strong Employment Report - Calculated Risk
- Overall fluidity of US labor market has been declining - EurekAlert!
- Weather Slows Job Growth in February, Unemployment Stays Flat - Dean Baker
- Visualizing the Friedman Analysis of the Sanders Economic Plan - Econbrowser
- Improving Monetary Policy with (Possibly Better) Goals - Narayana Kocherlakota
- Negative rates, abolishing cash, and nominal illusion - longandvariable
- Hey, Economist! How Well Do We Weather Snowstorms? - Liberty Street
- The impact of the extension of ECB QE on asset prices - Bank Underground
Friday, March 04, 2016
This is from Mark Kleiman (via Brad DeLong):
Trade, Trump, and Downward Class Warfare, by Mark Kleiman: A conversation with my Marron Institute colleague Paul Romer yesterday crystallized an idea I’d been toying with for some time. In a nutshell: opponents of taxing the rich have destroyed, on a practical level, the theoretical basis for believing that free trade benefits everyone.
The Econ-101 case for free trade is straightforward: Trade benefits those who produce exports and those who consume imports (including producers who use imported goods as inputs). It hurts the producers of goods which can be made better or more cheaply abroad. But the gains to the winners exceed the gains to the losers: that is, the winners could make the losers whole and still come out ahead themselves. Therefore, trade passes the Pareto test.
[Yes, this elides a number of issues, including path-dependency in increasing-returns and learning-by-doing markets on the pure-economics side and the salting of actual agreements with provisions that create or protect economic rents on the political-economy side. It also ignores the biggest gainers from trade: workers in low-wage countries, most notably the Chinese factory workers whose parents were barefoot peasants.]
So when the modern Republican Party (R.I.P), in the name of “small government” and opposition to “class warfare,” set its face against policies to redistribute the gains from economic growth, it destroyed the theoretical basis for thinking that a rising tide would lift all the boats, rather than lifting the yachts and swamping the trawlers. Free trade without redistribution (especially the corrupt version of “free trade” with corporate rent-seeking written into it) is basically class warfare waged downwards. ...
"Why, exactly, the Republican establishment is really so horrified by Mr. Trump?":
Clash of Republican Con Artists, by Paul Krugman, Commentary, NY Times: So Republicans are going to nominate a candidate who talks complete nonsense on domestic policy; who believes that foreign policy can be conducted via bullying and belligerence; who cynically exploits racial and ethnic hatred for political gain.
But that was always going to happen, however the primary season turned out. The only news is that the candidate in question is probably going to be Donald Trump.
Establishment Republicans denounce Mr. Trump as a fraud... In fact, you have to wonder why, exactly, the Republican establishment is really so horrified by Mr. Trump. Yes, he’s a con man, but they all are. ...
The answer, I’d suggest, is that the establishment’s problem with Mr. Trump isn’t the con he brings; it’s the cons he disrupts.
First, there’s the con Republicans usually manage to pull off in national elections ... where they pose as a serious, grown-up party honestly trying to grapple with America’s problems. The truth is that that party died a long time ago, that these days it’s voodoo economics and neocon fantasies all the way down. But the establishment wants to preserve the facade, which will be hard if the nominee is someone who refuses to play his part. ...
Equally important, the Trump phenomenon threatens the con the G.O.P. establishment has been playing on its own base..., the bait and switch in which white voters are induced to hate big government by dog whistles about Those People, but actual policies are all about rewarding the donor class.
What Donald Trump has done is tell the base that it doesn’t have to accept the whole package. He promises to make America white again — surely everyone knows that’s the real slogan, right? — while simultaneously promising to protect Social Security and Medicare, and hinting at (though not actually proposing) higher taxes on the rich. Outraged establishment Republicans splutter that he’s not a real conservative, but neither, it turns out, are many of their own voters.
Just to be clear, I find the prospect of a Trump administration terrifying... But you should also be terrified by the prospect of a President Rubio, sitting in the White House with his circle of warmongers, or a President Cruz, whom one suspects would love to bring back the Spanish Inquisition.
As I see it, then, we should actually welcome Mr. Trump’s ascent. Yes, he’s a con man, but he is also effectively acting as a whistle-blower on other people’s cons. That is, believe it or not, a step forward in these weird, troubled times.
- Why Adam Smith Was a Realist, Not an Ideologue" – Simply Charly
- Hillary Clinton’s tax proposals - Vox
- The Real Interest Rate - Richmond Fed
- What's Going on with Inflation? - Stephen Williamson
- Osborne’s desire to further cut spending makes little sense - Martin Wolf
- Life after Brexit: The UK’s options outside the EU - VoxEU
- Ending the privileges for sovereign exposures in banking regulation - VoxEU
- Trump Has a Point About American Decline - Noah Smith
- Business investment and productivity growth? - Nick Bunker
- More on replication crisis - Andrew Gelman
- Time for helicopter money? - Brookings Institution
Thursday, March 03, 2016
Barriers to productivity growth: “The limits to productivity growth are set only by the limits to human inventiveness” says John Kay. This understates the problem. There are other limits. I’d mention two which I think are under-rated.
One is competition. Of course, this tends to increase productivity in many ways. But it has a downside. The fear of competition from future new technologies can inhibit investment today: no firm will spend £10m on robots if they fear a rival will buy better ones for £5m soon afterwards. ...
The second is that, as Brynjolfsson and MacAfee say, "significant organizational innovation is required to capture the full benefit of…technologies."
For example, Paul David has described (pdf) how the introduction of electricity into American factories did not immediately raise productivity much, simply because it merely replaced steam engines. It was only when bosses realized that electric motors allowed factories to be reorganized – dispensing with the need for machines to be close to a central power source – that productivity soared, as workflow improved and new cheaper buildings could be used. This took many years.
It's not just organizational change that's needed, though..., I suspect that if IT is to have (further?) productivity-enhancing effects, they require socio-organizational change. ...
However, there are always obstacles to the social and organizational change necessary for technical change to lead to productivity gains. These might be cognitive – such as the Frankenstein syndrome or “not invented here” mentality. Or they can be material. Socio-technical change is a process of creative destruction, the losers from which kick up a stink; think of taxi-drivers protesting against Uber.
Worse still, these losers aren’t always politically weak Ludditites. They can be well-connected bosses of incumbent firms, or managers seeking to maintain their power base. ...
The big question facing us is, therefore: do we have the right set of institutions to foster the socio-organizational change that beget productivity growth? These require a mix of healthy markets, to maximize ecological diversity; a financial system which backs risky new-comers; property rights which incentivise innovation; and state intervention that facilitates all these whilst not being captured by Luddites. If our politics weren’t so imbecilic, this question would be getting a lot more attention than it is.
Cameron’s chickens: As many have written, although Donald Trump is despised by the Republican party establishment, he is an unintended and unfortunate creation of that party. They built up a system where you needed money to enter politics, because they controlled the money. (It is to Sanders’ credit, and the popular will behind his campaign, that he has overcome this hurdle.) But that allowed someone very rich to highjack the system. The Republicans have exploited prejudice to win votes, which allowed someone to throw away the dog whistle and openly attack those from other religions.  And so on. In these ways, Trump represents the Republican’s chickens coming home to roost. As Matt Taibbi writes (sorry about ad in link), Trump is a rather good con man and so for him the US political system is an easy mark.
Will the EU referendum be the moment David Cameron’s chickens come home? Although economic arguments are central, and the case for staying is strong and the case for leaving weak, how much will voters without any economics background be able to come to that conclusion? Most newspapers will push the weak arguments, or more generally just try and muddy the waters as they do all the time on climate change. The visual media’s natural format is to set this up as a two-sided debate, and if the leave campaign can find enough credible advocates to put the economic case for leaving the main outcome might be confusion.  ...
The EU referendum is therefore another test of how much economic expertise can influence public opinion. As regular readers will know, we have been here before, and not just on austerity. The overwhelming evidence was that independence would initially leave Scottish people worse off, but for many this evidence was successfully counteracted by the SNP’s wishful thinking projections. From recent experience, therefore, I am not too optimistic that the economic evidence will prevail.  For a Prime Minister who has preferred the economics of the Swabian housewife to anything taught in universities, this too is a chicken come home to roost.
- Deriving Their Just Powers from the Consent of the Governed... - Brad DeLong
- UMass economists find a place during the year of the outsider - Boston Globe
- Would Monetary Tightening Increase Bank Wholesale Funding? - Liberty Street
- Explaining Inequality - Becker Friedman Institute
- Brexit, ‘euro-ins’, and ‘euro-outs’ - VoxEU
- Seeing Economic Patterns That Don't Exist - Noah Smith
- Why Do Oil Prices Keep Astonishing Us? - Tim Taylor
- Understanding the austerity obsession - mainly macro
- The implications of Brexit for the rest of the EU - VoxEU
Wednesday, March 02, 2016
"Millions of children are living in families still struggling to make ends meet in our low-growth, low-wage economy":
Nearly half of American children living near poverty line, Eurekalert!: Nearly half of children in the United States live dangerously close to the poverty line, according to new research from the National Center for Children in Poverty (NCCP) at Columbia University's Mailman School of Public Health. Basic Facts about Low-Income Children, the center's annual series of profiles on child poverty in America, illustrates the severity of economic instability and poverty conditions faced by more than 31 million children throughout the United States. Using the latest data from the American Community Survey, NCCP researchers found that while the total number of children in the U.S. has remained about the same since 2008, more children today are likely to live in families barely able to afford their most basic needs.
"These data challenge the prevailing beliefs that many still hold about what poverty looks like and which children in this country are most likely to be at risk," said Renée Wilson-Simmons, DrPH, NCCP director. "The fact is, despite the significant gains we've made in expanding nutrition and health insurance programs to reach the children most in need, millions of children are living in families still struggling to make ends meet in our low-growth, low-wage economy."
According to NCCP researchers, the number of poor children in the U.S. grew by 18 percent from 2008 to 2014 (the latest available data), and the number of children living in low-income households grew by 10 percent. ...
Four common-sense ideas for economic growth: Let me begin with two facts that I think should be cause for concern. First, since the summer of 2009, the US economy has grown at about 2 percent. Two percent isn't a very good growth rate. Second, the 10-year interest rate at the end of trading today ... was just a bit below 1.8 percent. ...
What’s the way to think about these two facts together? I believe that we are dealing with a situation that goes beyond the usual cyclical issues associated with recession—and for many years the policy debate has been confounded by that. The Fed has been substantially too optimistic in its one-year-ahead forecast every year for the last six, and its forecasts are pretty close to the consensus forecasts. The prevailing expectation in markets has always been that significant tightening will take place in nine months. That’s been true for the last six years. It has not happened yet.
If you accept all of this, what should be done? I would suggest four things at a minimum. First, there is an overwhelming case in the United States for expanded public infrastructure investment. ... It’s hard to imagine a better time for expanded infrastructure investment, yet the rate of infrastructure investment is lower now than it’s been anytime since 1947. ...
Second, we should increase support for private investment in infrastructure. ...
Third, we should grow our effective labor force. ...
Fourth, our financial system requires continuing attention. ...
I would say to you that whatever you care about, if all you care about is that we’ve got an excessive federal debt, the most important determinant of the debt-to-GDP ratio in 2030 is how rapidly the economy grows between now and then. If what you care about is American national security, the most important determinant of how much we are respected and how much influence we have in the world is how well our economy performs. If what you care about is inequality and poverty, the most important determinant of the employment prospects of the poor is how rapidly the economy is growing.
I would suggest to you that there is no more important question for the American prospect than accelerating the rate of economic growth. It seems to me, whether you’re a demand sider or a supply sider, a Democrat or a Republican, there’s a great deal of common sense that should lead you to support increased economic growth.
[There is quite a bit of discussion of each point in the full post.]
Dudley the Dove, by Tim Duy: The beleaguered manufacturing sector saw an uptick in February, at least according to the ISM report:
This information builds on the stronger consumer spending and inflation numbers we saw last week. Not to mention solid auto sales for February. The news is sufficiently good that Torsten Sløk of Deutsche Bank argues (via Business Insider) that the Fed should raise rates:
Today we got more confirmation that the negative effects of dollar appreciation on the US economy are starting to fade, see the first chart below. Specifically, we have in recent months seen a solid turnaround in the employment data for the manufacturing sector and in the manufacturing ISM. Combined with the acceleration we are seeing in consumer spending and inflation I would argue that if the Fed is truly data dependent then they should be raising rates at their next meeting...
I don't think the Fed will raise in March, nor do I think they should raise in March. I think the financial markets signaled fairly clear that further tightening now would be a mistake. The Fed would be wise to heed that call.
And, if New York Federal Reserve President William Dudley is any indication, they will heed that call. Indeed, he goes even further than me. Whereas yesterday I raised the possibility of a "hawkish pause" at the March meeting where the Fed revives the balance of risks with an upside bias, he opens the door to the opposite.
First, note that Dudley appears unmoved by the uptick in core inflation:
Turning to the outlook for inflation, headline inflation on a year-over-year basis has begun to rise as the sharp falls in energy prices in late 2014 and early 2015 are removed from the calculations. However, inflation still remains well below the Federal Reserve’s 2 percent objective. As the FOMC has noted in its statements, this continued low inflation is partly due to recent further declines in energy prices and ongoing impacts of a stronger dollar on non-energy import prices. Although energy prices will eventually stop falling and the dollar will stop appreciating, these factors appear to have had a more persistent depressing influence on inflation than previously anticipated.
This is actually quite dovish. If core inflation is a good signal for the direction of overall inflation, then the latter will leap sharply when the "transitory" impacts fades. This suggests to me that the forecast of a gradual return to target is almost certainly wrong. When (and if) inflation turns, it will turn quickly. Dudley is discounting that possibility.
I suspect he is discounting inflation concerns because he is focussed on inflation expectations:
This continued period of low headline inflation is a concern, in part, because it could lead to significantly lower inflation expectations. If this drop in inflation expectations were to occur, it would, in turn, tend to depress future inflation. Evidence on the inflation expectations front suggests some cause for concern......With respect to the market-based measures, there are some reasons to discount the decline...Still, given the extent to which inflation compensation has fallen since mid-2014, I believe that it is prudent to consider the possibility that longer-term inflation expectations of market participants may have declined somewhat.What I find more concerning is the decline in some household survey measures of longer-term inflation expectations....To date, these declines have not been sufficiently large for me to conclude that inflation expectations have become unanchored. However, these developments merit close scrutiny, as past experience shows that it is difficult to push inflation back up to the central bank’s objective if inflation expectations fall meaningfully below that objective. Japan’s experience is cautionary in this regard.
Asymmetric risk surrounds inflation expectations. Difficult to raise up, but easy to push down. Hence, it is important to guard against falling expectations. This is especially the case as he sees risks to the outlook as now tilted to the downside:
Now, putting these inputs and my judgment together, I see the uncertainties around my forecast to be greater than the typical levels of the past. This assessment reflects the divergent economic signals I highlighted earlier, and is consistent with the turbulence we have seen in global financial markets. At this moment, I judge that the balance of risks to my growth and inflation outlooks may be starting to tilt slightly to the downside. The recent tightening of financial market conditions could have a greater negative impact on the U.S. economy should this tightening prove persistent and the continuing decline in energy and commodity prices may signal greater and more persistent disinflationary pressures in the global economy than I currently anticipate. I am closely monitoring global economic and financial market developments to assess their implications for my outlook and the balance of risks.
Hence Dudley is likely to stand as a bulwark against FOMC participants who think the Fed should hike in March and those who would like a more optimistic balance of risks. Moreover, this is a pretty clear signal of his expectations for March:
The federal funds rate is only one element of the broader set of financial conditions affecting the U.S. growth and inflation outlook. Tighter financial conditions abroad do spill back into the U.S. economy, and policymakers must take this into account in their assessment of appropriate monetary policy. Of course, this does not mean that we will let market volatility dictate our policy stance. There is no such a thing as a “Fed put.” What we care about is the country’s growth and inflation prospects, and we take financial market developments into consideration only to the extent that they affect the economic outlook.
In other words, when we don't hike in March, it's not because of a Fed "put" on the stock market. It is more accurately a Fed "put" on the economy. Financial market weakness signals tighter financial conditions, and to prevent those conditions from spilling into the rest of the economy, the Fed needs to respond with a more accommodative policy stance. The Fed then is not saving Wall Street. It is saving Main Street from Wall Street.
The upshot is that if the economy remains on firm ground (the "no recession" camp), inflation is heating up, and the Fed goes solidly dovish, we should see the yield curve steepen in the near term, at least until the Fed turns hawkish again. If we are really lucky, the secular stagnation story is wrong and the entire yield curve lifts up as the Fed chases higher rates. Then we could really imagine the "short treasuries" bet to be a no-brainer. If secular stagnation remains the order of the day, then the long end quits rising soon after the Fed sends out hawksh signals, setting the stage for a renewed flattening.
An interesting possibility is that in the back half of 2016, inflation pops above trend and one of the Fed's fears is realized. That fear is that they fall behind the curve and need to raise rates quickly to counteract rising inflation. They seem to think that they have no choice at that point but to murder the expansion. I disagree with that conclusion. I think they tend to forget about the long and variable lags of policy at the end of the cycle and consequently rush raising rates needlessly. In any event, how they respond to (potentially) higher inflation later this year will shape the 2017 and 2018 economic environment. So, obviously it is something to keep an eye on.
Bottom Line: The Fed will take a pass on the March meeting. Whether the statement is dovish, neutral, hawkish is the key question. Dudley opens up the possibility of a not just a neutral statement, but a dovish one. My sense is that this is shaping up to be a very contentious meeting as participants struggle with the question of exactly which data are they dependent upon.