Economist's View

Imports Normally Would Have Subtracted More From 2016 U.S. Growth

Brad Setser:

Imports Normally Would Have Subtracted More From 2016 U.S. Growth: ...I ... think in some ways the U.S. was lucky not to have slowed more in 2016.

Why? Because import growth stalled, and imports did not subtract as much from U.S. growth as normally would be expected (and yes, that obviously wasn’t the dominant narrative of the 2016 election).

Plus the U.S. essentially got a small GDP boost as a result of a bad harvest in Brazil that raised U.S. soybeans exports in q3 (a rise that was only partially reversed in q4). The U.S. isn’t (yet) a commodity-driven economy, but it also isn’t (yet) a robot-based intellectual property rights (IPR) royalty-driven economy totally divorced from natural sources of economic volatility. ...

Based on normal historical relationships, the expected drag from imports at various points over the last year should have been 35 to 50 basis points of GDP (using the trailing 4q average of contributions as the measure). Even if you believe the elasticity of imports to growth has now fallen and it should track the share of imports in the economy, imports should have increased by about 15 percent of demand growth, so the drag from imports mechanically should have been 20 to 30 basis points of GDP.

And generally speaking, the dollar’s strength over this period should have led imports to over-perform domestic demand in a standard model. That obviously did not happen.

No wonder the Fed’s trade model was puzzled. ...

So the odds are that—absent a big shift in trade policy (and well the odds now favor a big shift in trade policy)—imports will subtract a bit more from growth going forward. And exports—which tend to respond to the exchange rate—are likely to remain weak (and odds are that they will get weaker thanks to the global response to the expected change in U.S. trade policy). ...

CNN Hires Hack Trump Adviser to Spout Gibberish About Economics

Jordan Weissmann:

CNN Hires Hack Trump Adviser to Spout Gibberish About Economics: ...I would like to pause for a brief moment to commemorate the act of journalistic malpractice CNN has just committed by hiring conservative scribbler and Trump adviser Stephen Moore as an economics analyst. It is a doozy. ...

In economics circles, Moore is looked at as a sort of tragicomic figure, the supply-side gang leader who can't count straight. ...

CNN has a habit of veering wildly from serious journalism from its Washington bureau or its online KFile investigative team to vomit-worthy infotainment in which toadies like Jeffrey Lord or—previously—Corey Lewandowski defend whatever the heck Donald Trump has just said. (The network has a lot of airtime to fill, and it fills it with mostly useless discussion panels.) You can guess which side the pendulum just swung to with Moore's hire.

A network that is serious about delivering factual information instead of propaganda to viewers would not have made these hires.

In the Trump Administration, Credibility May be a Problem

Here's my latest column:

In the Trump Administration, Credibility May be a Problem, by Mark Thoma: ...politicians have an additional credibility problem over and above their inability to make long-run commitments. Little of what politicians say can be trusted even during the years they are in office. And with Trump saying whatever comes to his mind, or whatever a particular audience wants to hear, his erratic behavior, and his tendency to contradict himself, who knows what to believe? Nothing is credible until it happens, and even then it might be reversed. ...

Links for 01-31-17

• Competitiveness Games - Paul Krugman
• Alarm Over the Fed's $4.45 Trillion Balance Sheet Is Silly - Tim Duy
• A Model of Secular Stagnation (NBER) - Eggertsson, Mehrotra, Robbins
• Winter 2017 Journal of Economic Perspectives Available Online - Tim Taylor
• Post Keynesian Dynamic Stochastic General Equilibrium Theory - Roger Farmer
• Could the Fed Have Rescued Lehman Brothers? Q&A with Larry Ball - ProMarket
• Economic Implications of the Immigration Order - Twenty-Cent Paradigms
• Right-Sizing a Financial Safety Net - Federal Reserve Bank of Minneapolis
• Study reveals substantial evidence of holographic universe - EurekAlert
• The Growing Burden of the 'Trump Tax' - Justin Fox
• An Unstable Economic Order? - Mohamed A. El-Erian
• “Alternative Facts” and US Economic Policy - Simon Johnson
• A new narrative for a complex age - OECD Insights
• Heteroskedasticity and Its Content - Marc Bellemare

How to Write an Effective Referee Report and Improve the Scientific Review Process

From the Journal of Economic Perspectives:

"How to Write an Effective Referee Report and Improve the Scientific Review Process," by Jonathan B. Berk, Campbell R. Harvey and David Hirshleifer [Full-Text Access | Supplementary Materials]: The review process for academic journals in economics has grown vastly more extensive over time. Journals demand more revisions, and papers have become bloated with numerous robustness checks and extensions. Even if the extra resulting revisions do on average lead to improved papers--a claim that is debatable--the cost is enormous. We argue that much of the time involved in these revisions is a waste of research effort. Another cause for concern is the level of disagreement amongst referees, a pattern that suggests a high level of arbitrariness in the review process. To identify and highlight what is going right and what is going wrong in the reviewing process, we wrote to a sample of former editors of the American Economic Review, the Journal of Political Economy, the Quarterly Journal of Economics, Econometrica, the Review of Economic Studies, and the Journal of Financial Economics, and asked them for their thoughts about what might improve the process. We found a rough consensus that referees for top journals in economics tend to make similar, correctable mistakes. The italicized quotations throughout this paper are drawn from our correspondence with these editors and our own experience. Their insights are consistent with our own experiences as editors at the Journal of Finance and the Review of Financial Studies. Our objective is to highlight these mistakes and provide a roadmap for how to avoid them.

When Government Misguides

Cecchetti & Schoenholtz:

When Government Misguides: "That [comparative advantage] is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them." Paul Samuelson

Governments play favorites. They promote residential construction by making mortgages tax deductible. They encourage ethanol production by subsidizing corn. They boost sales of electric cars by offering tax rebates. These political favors usually diminish, rather than increase, aggregate income. They’re about distribution, not production.

With the ascendance of Donald Trump to the presidency, U.S. government intervention has taken a particularly troubling turn. Not only has he threatened companies planning to produce their products outside of the United States, but he has appointed strident free-trade opponents (ranging from China-bashing Peter Navarro to trade-litigator Robert Lighthizer) to key positions in his administration. In his first week in office, President Trump has pulled the United States out of the Trans-Pacific Partnership (TPP) and moved to renegotiate the North American Free Trade Agreement (NAFTA). His representatives also have threatened to impose tariffs on Mexico (and other countries). In what seems like the blink of an eye, these actions have sacrificed the valuable U.S. reputation–earned over seven decades since President Truman—as a trustworthy leader in the global fight for open, competitive markets. ...

Paul Krugman: Building a Wall of Ignorance

"The story seems, like so much that’s happened lately, to have started with President Trump’s insecure ego":

Building a Wall of Ignorance, by Paul Krugman, NY Times: We’re just over a week into the Trump-Putin regime, and it’s already getting hard to keep track of the disasters. ...

But I want to hold on, just for a minute, to the story that dominated the news on Thursday, before it was, er, trumped by the uproar over the refugee ban. As you may recall ... the White House first seemed to say that it would impose a 20 percent tariff on Mexico, but may have been talking about a tax plan, proposed by Republicans in the House, that would do no such thing; then said that it was just an idea; then dropped the subject, at least for now. ...

The story seems, like so much that’s happened lately, to have started with President Trump’s insecure ego: People were making fun of him because Mexico will not, as he promised during the campaign, pay for that useless wall along the border. So his spokesman, Sean Spicer, went out and declared that a border tax on Mexican products would, in fact, pay for the wall. So there!

As economists quickly pointed out, however, tariffs aren’t paid by the exporter..., they’re paid for by ... consumers. America, not Mexico, would therefore end up paying for the wall.

Oops. But that wasn’t the only problem. America is part of a system of agreements — a system we built — that sets rules for trade policy, and one of the key rules is that you can’t just unilaterally hike tariffs that were reduced in previous negotiations.

If America were to casually break that rule, the consequences would be severe. ... If we treat the rules with contempt, so will everyone else. The whole trading system would start to unravel, with hugely disruptive effects everywhere, very much including U.S. manufacturing. ...

All of this should be placed in the larger context of America’s quickly collapsing credibility.

Our government hasn’t always done the right thing. But it has kept its promises, to nations and individuals alike.

Now all of that is in question. Everyone, from small nations who thought they were protected against Russian aggression, to Mexican entrepreneurs who thought they had guaranteed access to our markets, to Iraqi interpreters who thought their service with the U.S. meant an assurance of sanctuary, now has to wonder whether they’ll be treated like stiffed contractors at a Trump hotel.

That’s a very big loss. And it’s probably irreversible.

Links for 01-30-17

• Is liberalism to blame? - Branko Milanovic
• Explained: Greenhouse gases - MIT News
• The Macroeconomics of Reality-TV Populism - Paul Krugman
• The Future of Occupational Licensing Reform - RegBlog
•  The working clasmay be hard hit by a Border Adjustment Tax - Econbrowser
• Trumpism - Understanding Society

Fed Watch: FOMC Preview

Tim Duy:

FOMC Preview, by Tim Duy: The Fed will take a pass at this week’s FOMC meeting. The median policy participant forecasts just three 25bp rate hikes this year and incoming data offers no surprises to force one of those this month. March, however, remains in play.

The three forecasted rate hikes is not a promise. It could be one hike or could be four or more. The actual outcome will depend on the path of actual economic outcomes and what those outcomes imply for the forecast.

The Fed is aware that crosscurrents in the economy – such as potentially significant changes to fiscal and economic policy – create substantial uncertainties about the course of monetary policy this year. From the most recent minutes:

…many participants emphasized that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate.

Translation: The Fed’s crystal ball is as cloudy as everyone else’s, but that’s hard to explain. For example, the potential positive demand shock from expected deficit spending could be overwhelmed by a potential negative supply shock from an increasingly xenophobic Trump Administration.

What does this mean for March? Currently, market participants place low odds of a March rate hike. The underlying bet is that if the Fed moves three times this year, the most likely timing will be June, September, and December. I think this is reasonable; bringing March into that mix requires a change in the tone of the data.

Specifically, to pull a rate hike forward, the Fed needs evidence that either inflation is firming more than anticipated or that unemployment is more significantly undershooting its natural rate. Both would be cause for concern for policymakers. But, in practice, given the inflation inertia evident in recent years, the labor market would most likely be the driving force of behind a March rate hike. From the minutes:

Several members noted that if the labor market appeared to be tightening significantly more than expected, it might become necessary to adjust the Committee's communications about the expected path of the federal funds rate, consistent with the possibility that a less gradual pace of increases could become appropriate.

The December labor report was largely consistent with the Fed’s forecasts, and thus will have little impact on the March meeting. The same is true for the GDP report for the final quarter of 2016. Notable is that domestic demand has held up well the last three quarters:

They will also be heartened that equipment investment, broke a string of four consecutive negative quarters with a 3.1 percent gain. Also, note that core durable goods orders are finally back to making year over year gains:

This too is consistent with the small uptick in growth anticipated by the Fed for 2017.

But we still have plenty of data between now and March. In particular, watch incoming data and how they impact the forecast of key variables such as unemployment and inflation. The Fed will pay close attention to:

• Nonfarm payrolls. They expect payroll growth to continue slowing to something close to 100k a month. A re-acceleration would raise eyebrows on Constitution Ave.

• The unemployment rate. The Fed’s estimate of the natural rate of unemployment firmed over the past year. Hesitation to drop it lower means that surprise falls in unemployment would prompt more aggressive Fed action.

• Faster wage growth. Some policy makers argued in December that subdued wage growth gave them more time to respond to an unemployment overshoot. But wage growth accelerated in December to 2.9% annually, the highest pace since 2009. Watch this space (and see this from Bloomberg on competition for workers in the fast food industry).

• Inflation numbers. Although, as noted earlier, inflation has been fairly inertial, that could change at the economy settles further into full employment/potential output.

• Acceleration? The Fed is not anticipating a large acceleration in activity this year, so any indication that activity is picking up more than expected will be watched with wary eyes.

At this point I still do not anticipate a March hike. And note that a March move doesn’t guarantee a faster pace of rate hikes; it could be largely pre-emptive, just displacing a subsequent rate hike. But if they could justify a March move and you were anticipating two to three rate hikes this year, you should probably be thinking of three to four. Not to mention some action on the balance sheet added to the mix.

Links for 01-29-17

• The slowdown in U.S. economic growth - Econbrowser
• Keynesian Economics Without the Consumption Function - Roger Farmer
• Hypothesis Testing Using (Non-) Overlapping Confidence Intervals - Dave Giles
• It's time for Texas leaders to defend NAFTA - Tyler Morning Telegraph
• These are Not Normal Times - Calculated Risk
• Self-control and peer groups - VoxEU

Links for 01-28-17

• Border Tax Two-Step (Wonkish) - Paul Krugman
• LaTeX reduces writing productivity - The .Plan
• DeLong on Rodrik on Delong on NAFTA - Equitable Growth
• The Price of U.S. Imports From China Keeps Falling - Brad Setser
• Do Political Institutions Still Rule? On Acemoglu and Trump - Jared Rubin
• Why currency devaluations are losing power - Microeconomic Insights
• Trump May Delay a Factory’s Exit, but He Won’t Stop It - Justin Wolfers
• Financial Trust Index: Low-Income Whites are Angry - ProMarket
• How Should Regulators Deal with Uncertainty? - Bank Underground
• he UK’s 1976 IMF crisis in the light of modern theory - mainly macro
• Why Latin America and Africa Struggle to Grow - Noah Smith

Real GDP increased at 1.9% Annualized Rate in Q4

Calculated Risk:

From the BEA: Gross Domestic Product: Fourth Quarter and Annual 2016 (Advance Estimate)

Real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the fourth quarter of 2016, according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.5 percent.
...
The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by negative contributions from exports and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the fourth quarter reflected a downturn in exports, an acceleration in imports, a deceleration in PCE, and a downturn in federal government spending that were partly offset by an upturn in residential fixed investment, an acceleration in private inventory investment, an upturn in state and local government spending, and an acceleration in nonresidential fixed investment.

The advance Q4 GDP report, with 1.9% annualized growth, was below expectations of a 2.2% increase. ...

Paul Krugman: Making the Rust Belt Rustier

Will Trump Repeat Reagan's mistake?:

Making the Rust Belt Rustier: Donald Trump ... appears serious about his eagerness to reverse America’s 80-year-long commitment to expanding world trade. On Thursday the White House said it was considering a 20 percent tariff on all imports from Mexico; doing so wouldn’t just pull the U.S. out of NAFTA, it would violate all our trading agreements. ...

Taken together, the new regime’s policies will probably lead to a faster, not slower, decline in American manufacturing.

How do we know this? We can look at the underlying economic logic, and we can also look at what happened during the Reagan years, which in some ways represent a dress rehearsal for what’s coming. ...

What Reagan did ... was blow up the budget deficit with military spending and tax cuts. This drove up interest rates, which drew in foreign capital. The inflow of capital, in turn, led to a stronger dollar, which made U.S. manufacturing uncompetitive. The trade deficit soared — and the long-term decline in the share of manufacturing in overall employment accelerated sharply.

Notably, it was under Reagan that talk of “deindustrialization” and the use of the term “Rust Belt” first became widespread.

It’s also worth pointing out that the Reagan-era manufacturing decline took place despite a significant amount of protectionism, especially a quota on Japanese car exports ... that ended up costing consumers more than $30 billion in today’s prices.

Will we repeat this story? The Trump regime will clearly blow up the deficit, mainly through tax cuts for the rich. (Funny, isn’t it, how all the deficit scolds have gone quiet?)..., interest rates have already risen in anticipation of the borrowing surge, and so has the dollar. So we do seem to be following the Reagan playbook for shrinking manufacturing. ...

And there’s a further factor to consider: ... Manufacturing is a global enterprise, in which cars, planes and so on are assembled from components produced in multiple countries. ... There will, inevitably, be huge dislocation: Some U.S. factories and communities will benefit, but others will be hurt, bigly, by the loss of markets, crucial components or both.

Economists talk about the “China shock,” the disruption of some communities by surging Chinese exports in the 2000s. Well, the coming Trump shock will be at least as disruptive.

And the biggest losers, as with health care, will be white working-class voters who were foolish enough to believe that Donald Trump was on their side.

Links for 01-27-17

• Shrinking the Fed’s balance sheet - Ben Bernanke
• Are great teachers poor scholars? - Brookings Institution
• The continuing slide in U.S. unionization rates - Equitable Growth
• Assessing the threat to central bank independence - VoxEU
• Evidence on which aspects of central bank transparency matter - VoxEU
• Corporate Tax - John Cochrane

What Did NAFTA Really Do?

Dani Rodrik:

What did NAFTA really do?: Brad De Long has written a lengthy essay that defends NAFTA (and other trade deals) from the charge that they are responsible for the loss of manufacturing jobs in the U.S. I agree with much that he says – in particular with the points that the decline in manufacturing employment has been a long-term process that predates NAFTA and the China shock and that it is driven mainly by the secular trend of labor-saving technological progress. There is no way you can hold NAFTA responsible for employment de-industrialization in the U.S. or expect that a “better” deal with Mexico will bring those jobs back.

At the same time, the essay leaves me frustrated and uneasy. It seems to gloss over the distributional pain of NAFTA and overstate the overall gains.  

So what does the evidence say on these issues? ...

A recently published academic study by Lorenzo Caliendo and Fernando Parro uses all the bells-and-whistles of modern trade theory to produce the estimate that these overall gains amount to a “welfare” gain of 0.08% for the U.S. That is, eight-hundredth of 1 percent! ... Trade volume impacts were much larger: a doubling of U.S. imports from Mexico.

What is equally interesting is that fully half of the miniscule 0.08% gain for US is not an efficiency gain, but actually a benefit due to terms-of-trade improvement. That is, Caliendo and Parro estimate that the world prices of what the U.S. imports fell relative to what it exports. These are not efficiency gains, but income transfers from other countries (here principally Mexico and Canada). These gains came at the expense of other countries.

A gain, no matter how small, is still a gain. What about the distributional impacts?

The most detailed empirical analysis of the labor-market effects of NAFTA is contained in a paper by John McLaren and Shushanik Hakobyan. They find that the aggregate effects were rather small (in line with other work), but that impacts on directly affected communities were quite severe. It is worth quoting John McLaren at length, from an interview: ...

In other words, those high school dropouts who worked in industries protected by tariffs prior to NAFTA experienced reductions in wage growth by as much as 17 percentage points relative to wage growth in unaffected industries. I don’t think anyone can argue that a 17 percentage drop is small. As McLaren and Hakobyan emphasize, these losses were then propagated throughout the localities in which these workers lived.

So here is the overall picture that these academic studies paint for the U.S.: NAFTA produced large changes in trade volumes, tiny efficiency gains overall, and some very significant impacts on adversely affected communities.

The consequences of NAFTA for Mexico are another topic which would require a separate post. Let me just say that the great expectations the country’s policy makers had for NAFTA have not been fulfilled. ...

So is Trump deluded on NAFTA’s overall impact on manufacturing jobs? Absolutely, yes.

Was he able to capitalize on the very real losses that this and other trade agreements produced in certain parts of the country in a way that Democrats were unable to? Again, yes.

We Are the Last Defense Against Trump

Daron Acemoglu

We Are the Last Defense Against Trump: In the second half of the 20th century, the main threat to democracy came from the men in uniform. Fledgling democracies such as Argentina, Brazil, Chile, Thailand, and Turkey were set back by dozens of military coups. For emerging democracies hoping to ward off such military interventions into domestic politics, Western European and American institutions ... were offered as the model to follow. They were the best way to ensure that democracy, as Juan Linz and Alfred Stepan famously put it, became “the only game in town.” ...

Yet today we are coming to discover that contemporary democracy has its own soft underbelly — not so much a weakness against a cabal of colonels conspiring a violent takeover of government, but the gutting of state institutions and the incipient establishment of a variant of personal rule. Examples of personal rule include Venezuela under Hugo Chavez, Russia under Vladimir Putin, and Turkey under Recep Tayyip Erdogan. These differ from the Mobutus, arap Mois and the Abachas of the world, because they are engineered by democratically elected leaders and maintain a much higher degree of legitimacy among some segments of the population But they still showcase how this process can irreparably damage institutions and hollow out democracy. Now, these examples are poised to include America under Donald Trump.

Trump appears to share several political goals and strategies with Chavez, Putin, and Erdogan. Like them, he seems to have little respect for the rule of law or the independence of state institutions, which he has tended to treat as impediments to his ability to exercise power. Like them, he has a blurred vision of national and personal interests. Like them, he has little patience with criticism and a long-established strategy of rewarding loyalty, which can be seen in his high-level appointments to date. This is all topped by an unwavering belief in his abilities.

What makes America vulnerable to being blindsided by such a threat is our unwavering — and outdated — belief in the famed strength of our institutions. ...

How Pro-competition Rules Can Benefit Consumers: A Look at the Wireless Industry

From Guy Rolnik at ProMarket:

How Pro-competition Rules Can Benefit Consumers: A Look at the Wireless Industry: During the summer of 2014, SoftBank-controlled Sprint abandoned its plans to merge with T-Mobile. The alleged reason was antitrust regulators who “would block a deal in an industry that is dominated by just a few large players.”

Following a meeting of SoftBank’s CEO Masayoshi Son with Donald Trump last December, both Sprint and T-Mobile signaled that the merger might still happen. ...

How would a T-Mobile-Sprint merger affect U.S. consumers?” A new Stigler Center working paper, “Political Determinants of Competition in the Mobile Telecommunication Industry,” by Mara Faccio and Luigi Zingales may help to answer this question. ...

The takeaway

... A lax antitrust enforcement can cost American consumers billions of dollars every year.

Links for 01-26-17

• Beware of Hard-Money Advocates Filling Fed Positions - Tim Duy
• Market oriented proposals that reduce income inequality - Dean Baker
• The dollar is exciting economic to watch these days - Jared Bernstein
• Behavioral Economics Isn't Dead Yet - Noah Smith
• The Administrative Hurdles of Traveling to Cuba - RegBlog

Reagan, Trump, and Manufacturing

Paul Krugman:

Reagan, Trump, and Manufacturing: It’s hard to focus on ordinary economic analysis amidst this political apocalypse. But ... like it or not the progress of CASE NIGHTMARE ORANGE may depend on how the economy does. So, what is actually likely to happen to trade and manufacturing over the next few years?

As it happens, we have what looks like an unusually good model in the Reagan years... — it’s not part of the Reagan legend, but the import quota on Japanese automobiles was one of the biggest protectionist moves of the postwar era.

I’m a bit uncertain about the actual fiscal stance of Trumponomics: deficits will surely blow up, but I won’t believe in the infrastructure push until I see it, and given savage cuts in aid to the poor it’s not entirely clear that there will be net stimulus. But suppose there is. Then what?

Well, what happened in the Reagan years was “twin deficits”: the budget deficit pushed up interest rates, which caused a strong dollar, which caused a bigger trade deficit, mainly in manufactured goods (which are still most of what’s tradable.) This led to an accelerated decline in the industrial orientation of the U.S. economy:

And people did notice. ...

Again, this happened despite substantial protectionism.

So Trumpism will probably follow a similar course; it will actually shrink manufacturing despite the big noise made about saving a few hundred jobs here and there.

On the other hand, by then the BLS may be thoroughly politicized, commanded to report good news whatever happens.

Better Wisdom from Crowds

From MIT News:

Better wisdom from crowds, by Peter Dizikes: The wisdom of crowds is not always perfect. But two scholars at MIT’s Sloan Neuroeconomics Lab, along with a colleague at Princeton University, have found a way to make it better.

Their method, explained in a newly published paper, uses a technique the researchers call the “surprisingly popular” algorithm to better extract correct answers from large groups of people. As such, it could refine wisdom-of-crowds surveys, which are used in political and economic forecasting, as well as many other collective activities, from pricing artworks to grading scientific research proposals.

The new method is simple. For a given question, people are asked two things: What they think the right answer is, and what they think popular opinion will be. The variation between the two aggregate responses indicates the correct answer.

“In situations where there is enough information in the crowd to determine the correct answer to a question, that answer will be the one [that] most outperforms expectations,” says paper co-author Drazen Prelec, a professor at the MIT Sloan School of Management as well as the Department of Economics and the Department of Brain and Cognitive Sciences.

The paper is built on both theoretical and empirical work. The researchers first derived their result mathematically, then assessed how it works in practice...

Across all these areas, the researchers found that the “surprisingly popular” algorithm reduced errors by 21.3 percent compared to simple majority votes, and by 24.2 percent compared to basic confidence-weighted votes (where people express how confident they are in their answers). And it reduced errors by 22.2 percent compared to another kind of confidence-weighted votes, those taking the answers with the highest average confidence levels.

The paper, “A solution to the single-question crowd wisdom problem,” is being published today in Nature. The authors are Prelec; John McCoy, a doctoral student in the MIT Department of Brain and Cognitive Sciences; and H. Sebastian Seung, a professor of neuroscience and computer science at Princeton University and a former MIT faculty member. ...

To see how the algorithm works in practice, consider a case the researchers tested. A group of people were asked a yes-or-no question: Is Philadelphia the capital of Pennsylvania? They were also asked to predict the prevalence of “yes” votes. 

Philadelphia is not the capital of Pennsylvania; the correct answer is Harrisburg. But most people believe Philadelphia is the capital because it is a “large, historically significant city.” Moreover, the people who mistakenly thought Philadelphia is the state capital largely thought other people would answer the same way. So they predicted that a very high percentage of people would answer “yes.”

Meanwhile, a certain number of respondents knew that Harrisburg is the correct answer. However, a large portion of those people also anticipated that many other people would incorrectly think the capital is Philadelphia. So the people who themselves answered “no” still expected a very high percentage of “yes” answers.

That means the answer to the two questions — Is Philadelphia the capital? Will other people think so? — diverged. Almost everyone expected other people to answer “yes.” But the actual percentage of people who answered “yes” was significantly lower. For this reason, the “no” answer was the “surprisingly popular” one, since it deviated from expectations of what the answer would be.

And since the “surprisingly popular” answer differed in the “no” direction, that tells us the correct answer: No, Philadelphia is not the capital.

The same principle applies no matter which direction responses deviate from expectations. When people were asked if Columbia is the capital of South Carolina, the opposite happened: More people answered “yes,” compared to their expectations of how many people would say “yes.” So the surprisingly popular answer was, correctly: Yes, Columbia is the capital.

In this sense, the “surprisingly popular” principle is not simply derived from the wisdom of crowds. Instead, it uses the knowledge of a well-informed subgroup of people within the larger crowd as a diagnostically powerful tool that points to the right answer.

“A lot of crowd wisdom weights people equally,” McCoy explains. “But some people have more specialized knowledge.” And those people — if they have both correct information and a correct sense of public perception — make a big difference. ...

The scholars recognize that the “surprisingly popular” algorithm is not theoretically foolproof in practice. It is at least conceivable that people could anticipate a “surprisingly popular” opinion and try to subvert it, although that would be very hard to execute. It is also the case, as they write in the Nature paper, that “These claims are theoretical and do not guarantee success in practice, as actual respondents will fall short of ideal.”

Other scholars who have studied collective-wisdom problems believe the method is valuable. Aurelien Baillon, a professor of economics at Erasmus University in Rotterdam, who has read the paper, calls it an “exciting” result that “opens up completely new ways to think about an old problem.” ...

Baillon does note that the question of how people reach conclusions about the beliefs of others “can still be further explored” theoretically. And he observes one potential practical pitfall in the method: the possibility that all participants in a survey do not have useful knowledge about what others think, and make a random choice if given two options. Such a 50/50 split, Baillon observes, means the “surprisingly popular” answer would simply be the majority result.

Still, the researchers themselves hope their work will be tested in a variety of settings. In the paper they express confidence that the “surprisingly popular” principle will prove durable, asserting: “Such knowledge can be exploited to recover truth even when traditional voting methods fail.”

Why the Surge in Income Inequality?

Lane Kenworthy in Contemporary Sociology: A Journal of Reviews:

Why the Surge in Income Inequality?: Income inequality is more severe in the United States than in any other affluent longstanding-democratic country, and it has increased sharply in the past generation. ...

What has caused the surge in top-end income inequality? Is it a product of changes in the economy? Or, as Paul Krugman’s The Conscience of a Liberal and Jacob Hacker and Paul Pierson’s Winner-Take-All Politics contend, have the key shifts been in America’s politics and policies? ...

Researchers tend to search for a dominant cause. We want to identify the most important determinant, partly because finding one reduces complexity and partly because it implies a straightforward solution to the problem. Much of the research on the rise of top-end income inequality has proceeded in this vein, with analysts focusing on one or another hypothesized cause and frequently concluding that it is indeed the key contributor. I don’t think any such conclusion is justified. The rise in the top 1 percent’s income share since the late 1970s is a product of multiple developments—growth in product market size, shifts in corporate governance, increases in the market power of some large firms, financialization, soaring stock values, union decline, and reductions in top tax rates—no one or two or even three of which look to have been dominant or decisive.

To some degree it’s pure historical coincidence that these developments occurred around the same time. But they also reinforced and accentuated one another.

Is the origin of these developments mostly economic or mostly political? Are they, in other words, a product of markets or a product of policy? My answer is: both. ...

Just as there is no single dominant cause of the rise in top-end income inequality, there is unlikely to be a silver bullet when it comes to solutions. ...

Links for 01-25-17

• Trade deals have not gutted American manufacturing - Brad DeLong
• Yes, ideas are harder to find. Don't panic yet. - Dietrich Vollrath
• Time for business leaders to wake up - Larry Summers
• The Trade Deficit and Economic Growth - Econbrowser
• Chicken Feet And China: Back to the Future - Brad Setser
• Macro Musings Podcast: Gauti Eggertsson - David Beckworth
• Electronic money as an enhancement or replacement - VoxEU
• Inclusive Growth and the IMF - iMFdirect
• Brexit: the right's consistent error - Chris Dillow
• The Rise in Global Per Capita GDP - Tim Taylor

Trump's Alternative Facts about the Economy

Me, at MoneyWatch:

What if “alternative facts” spread to economic data?: Donald Trump’s inability to accept news that disagrees with the view he has of himself and what his administration can accomplish was on display on his first two days as president. He, and those speaking on his behalf, claimed falsely that “This was the largest audience ever to witness an inauguration, period, both in person and around the globe,” and then doubled down even when presented with solid evidence it wasn’t true. 

Americans were told the new administration relies on “alternative facts,” which seems to mean whatever numbers it can come up with to support Mr. Trump’s claims.

What worries me, among other things, is how the president will react to bad news about the economy. ...

Fed Watch: Quantifying The Changing Rate Forecast

Tim Duy:

Quantifying The Changing Rate Forecast, by Tim Duy: In my last post, I asserted:

The actual amount of tightening will ultimately depend on the evolution of the forecasts for unemployment and inflation. If the expectation for unemployment drifts lower for this year, for instance, the median dots are likely to shift higher to ensure that the Fed continues to meet its mandate.

Can we quantify the impact of a changing economic forecast on the projected amount of tightening this year? Yes, using the methodology of Federal Reserve Bank of San Francisco economists Fernanda Nechio and Glenn Rudebusch. In a recent article, they argue the change in the Federal Reserve’s 2016 projected rate increase from 100bp to 25bp was consistent with a simple extension of a Taylor-type policy rule, specifically:

Funds rate revision = neutral rate revision + (1.5 × inflation revision) – (2 × unemployment gap revision).

Recall that the interest rate projections contained in the Fed’s Summary of Economic Projections (SEP) are not policy commitments. They are forecasts that we should expect to change with evolving forecasts of key variables, notably inflation and unemployment. The Fed’s credibility should not be judged on the accuracy of its rate forecast. It should be judged on its ability to meet its mandate. Actual policy should shift relative to the rate forecast as economic conditions change.

We can look to the December 2016 SEP as an example of the Nechio-Rudebusch approach. The Fed’s median rate forecast for 2017 rose 0.3 percentage points relative to the September SEP (Note: There is a rounding issue here. Effectively, the forecast changed from two to three 25bp hikes). The median neutral rate estimate (the longer run forecast of the funds rate) rose 0.1 percentage points. The inflation forecast (Nechio-Rudebusch use core inflation) was unchanged. The unemployment forecast fell 0.1 percentage points while the estimate of the natural rate of unemployment (the longer run forecast of the unemployment rate) remained unchanged. Thus the Fed revised down the unemployment gap estimate by 0.1 percentage points.

Applying the Nechio-Rudebusch policy rule:

0.3 percentage points = 0.1 percentage points + (1.5 x 0.0 percentage points) – (2 x (-0.1 percentage points)

In other words, the changing economic forecast for 2017 explains the magnitude of the change in the 2017 rate projection. Thus, we should watch incoming data for its impact on the forecasts for key variables to estimate its impact on policy.

In practice, we might expect minimal revisions of the longer run rates of interest and unemployment over the course of 2017. The estimate of the neutral interest rate declined substantially in 2015 and early 2016, but I suspect that pattern will not repeat in 2017. The estimate has already held fairly steady since the June 2016 SEP. Also note that the Laubach-Williams estimates of the natural rate of interest are now edging upward:

The era of declining estimates of the natural rate of interest may be over. Likewise, the estimate of the natural rate of unemployment remains at the March 2016 SEP. Assuming these parameters remain constant in 2017, the variation in the fed funds rate projection will depend on the unemployment and inflation and inflation forecasts.

As a practical example, I view the December employment report as consistent with the December SEP economic forecasts. The pace of underlying job growth continues to slow toward a range that is likely consistent with a steady unemployment rate after the demographic impacts on labor participation reassert themselves. This suggests the Fed’s forecast for a fairly small (0.2 percentage points) fall in the unemployment rate is largely unchanged. Hence, the employment report should not impact the median rate forecast for 2017.

Bottom Line: The Fed’s policy stance shifts in consistent manner. Important to understanding these shifts is estimating the impacts of incoming data on the Fed’s medium term forecast. In my opinion, the policymakers spend too little time discussing the impact of incoming data on their forecasts, leading to the perception that policy is more backward than forward looking. The above example illustrates, however, the importance of the latter for monetary policy.

Ditching TPP Won’t Solve the Trade Deficit

Jared Bernstein:

Ditching TPP Won’t Solve the Trade Deficit: President Trump wasted no time tackling his campaign promise to reverse America’s trade deficit: On Monday he signed a memorandum withdrawing from the Trans-Pacific Partnership, a move he promised would be a “great thing for the American worker.” The withdrawal dovetails with promises to impose tariffs on imports and crack down on American companies that manufacture overseas.

These steps make for great optics. But in economic terms, they’re unlikely to move the needle. For the country to improve its trade balance, the president’s going to have to do a lot more.

Ripping up trade deals won’t achieve much. ...

And it’s hard to imagine much good emanating from Twitter-shaming China, or writing a check to the occasional factory to prevent it from outsourcing some of its jobs. Such measures are far too ad hoc to make a systemic difference.

So what would work?...

After explaining five possible ways to improve the trade balance (duties on imports from countries that manipulate their currency, countervailing currency intervention to neutralize attempts to manipulate a currency, capital controls, import certificates equal to the value of a countries exports, and enforceable rules on things like currency manipulation and rules of origin), he concludes with:

... In the 1970s and ’80s, as trade deficits became persistent, politicians did not hesitate to respond through these sorts of interventions. Our obsession with unfettered markets has since precluded such efforts, even though our trading partners have not been nearly so constrained. President Trump’s ascendancy may change that equation. The question is whether his administration will get it right.

Links for 01-24-17

• Did centrism beget populism? - mainly macro
• Re-evaluating Leaning against the wind - Lars Svensson
• What Bitcoin Has Become - Cecchetti & Schoenholtz
• Trade: Engine or Handmaiden of Growth? - Tim Taylor
• Agent-based models to help economics do a better job - OECD
• On Sugary Drinks, Taxes and Demand Curves - Notes On Liberty
• The Election's Effect on Expected Inflation - St. Louis Fed
• Too little Churning of Big Corporations Leads to Stagnation - ProMarket
• Structural change during the growth boom in developing countries - Dani Rodrik
• Measuring Americans’ Expectations Following the 2016 Election - Liberty Street
• Why the U.S. Has a Monopoly on Jobless Recoveries - Noah Smith
• Hume's Sailing Ships correcting Samuelson's Icebergs - Nick Rowe
• Dealing with Imperfect Instruments II - Marc Bellemare
• Paul Ryan’s Two-Faced Comments on Auerbach’s Tax - EconoSpeak
• Bayes Stifling Creativity? - No Hesitations

Paul Krugman: Things Can Only Get Worse

How will Trump handle bad news?:

Things Can Only Get Worse: ...Donald Trump ... spent his first full day in office having a temper tantrum, railing against accurate reports of small crowds at his inauguration..., how is he going to react to disappointing numbers about things that actually matter? ... How will a man who evidently can’t handle even the smallest blow to his ego deal with it?

Let’s talk about the predictable bad news.

First, the economy..., unemployment probably can’t fall much from here... And since bad stuff does happen, there’s a strong likelihood that unemployment will be higher four years from now than it is today.

Oh, and Trumpist budget deficits will probably widen the trade deficit, so that manufacturing employment in particular is likely to fall, not rise.

A second front on which things will almost surely get worse is health care. ...

On a third front, crime, the future direction is unclear. ... Violent crime is, in fact, way down... Crime could, I suppose, fall further, but it could also rise. What we do know is that the Trump administration can’t pacify America’s urban war zones, because those zones don’t exist.

So how will Mr. Trump handle the bad news...? That’s obvious: He’ll deny reality, the way he always does when it threatens his narcissism. But will his supporters go along with his fantasy?

They might. After all, they blocked out the good news from the Obama era. Two-thirds of Trump voters believe, falsely, that the unemployment rate rose under Obama. (Three-quarters believe George Soros is paying people to protest Mr. Trump.) Only 17 percent of self-identified Republicans are aware that the number of uninsured is at a historic low. Most people thought crime was rising even when it was falling. So maybe they will block out bad news in the Trump years. ...

On top of that, Mr. Trump made big promises during the campaign, so the risk of disillusionment is especially high.

Will he respond to bad news by accepting responsibility and trying to do better? Will he renounce his fortune and enter a monastery? That seems equally likely.

No, the insecure egomaniac-in-chief will almost surely deny awkward truths, and berate the media for reporting them. And — this is what worries me — it’s very likely that he’ll try to use his power to shoot the messengers. ...

You may have thought that last weekend’s temper tantrum was bad. But there’s much, much worse to come.

The Tip of the Iceberg: The Implications of Climate Change on Financial Markets

Yuliya Baranova, Carsten Jung, and Joseph Noss at Bank Underground:

The tip of the iceberg: the implications of climate change on financial markets: There has been a recent increase in awareness of investors that limiting emissions to prevent climate change might leave a substantial proportion of the world’s carbon reserves unusable, and that this could lead to revaluations across a range of financial assets. If risks are left unaddressed, this could result in large losses for some investors. But is this adjustment in financial market prices likely to be abrupt?  And – even if it is – is it likely to pose risks to financial stability?  We argue that the answer to both these questions could be yes:  financial valuations can move sharply even if the transition to sustainable energy were smooth.  And exposures are sufficiently large to warrant attention from both investors and policymakers. ...

Links for 01-23-17

• In praise of dullness - Stumbling and Mumbling
• Risk sharing across the US and Eurozone - VoxEU
• Further Thoughts on Bitcoins, Fiat Moneys, and Network Effects - Uneasy Money
• It's Policy Divergence, Not China, Driving the Dollar - David Beckworth
• Summers vs. Glaeser on Infrastructure Investment - Matt Kahn
• Pay attention to Dale Jorgenson instead of Donald Trump - Economic Principals

Is Global Equality the Enemy of National Equality?

Dani Rodrik:

Is Global Equality the Enemy of National Equality?: The question in the title is perhaps the most important question we confront, and will continue to confront in the years ahead. I discuss my take in this paper.

Many economists tend to be global-egalitarians and believe borders have little significance in evaluations of justice and equity. From this perspective, policies must focus on enhancing income opportunities for the global poor. Political systems, however, are organized around nation states, and create a bias towards domestic-egalitarianism. 

How significant is the tension between these two perspectives? Consider the China "trade shock." Expanding trade with China has aggravated inequality in the United States, while ameliorating global inequality. This is the consequence of the fact that the bulk of global inequality is accounted for by income differences across countries rather than within countries. 

But the China shock is receding and other low-income countries are unlikely to replicate China’s export-oriented industrialization experience. So perhaps the tension is going away?

Not so fast. The tension is even greater somewhere else: Relaxing restrictions on cross-border labor mobility would have an even stronger positive effect on global inequality, at the cost of adverse effects at the lower end of labor markets in rich economies. On the other hand, international labor mobility has some advantages compared to further liberalizing international trade in goods.

I discuss these issues and more here.

Links for 01-22-17

• The Opposite of Carnage - Paul Krugman
• Thomas Schelling: A personal tribute - Glenn Loury
• Thomas Schelling, methodological subversive - Rajiv Sethi
• Shareholder value & innovation - Stumbling and Mumbling
• Acquired knowledge of managers and firm performance - VoxEU
• EconoFact: Bringing Facts and Data to Policy Debates - Econbrowser

Attacking Economics is a Diversionary Tactic

Simon Wren-Lewis:

6.  ... In terms of conventional monetary and fiscal policy, academic economists got the response to the crisis right, and policymakers got it very wrong. Central banks, full of economists, relaxed monetary policy to its full extent. They created additional money, rightly ignoring those who said it would bring rapid inflation. Many economists, almost certainly a majority, supported fiscal stimulus for as long as interest rates were stuck at their lower bound, were ignored by policymakers in 2010, and have again been proved right.

7.  So given all this, why do some continue to attack economists? On the left there are heterodox economists who want nothing less than revolution, the overthrow of mainstream economics. It is the same revolution that their counterparts were saying was about to happen in the early 1970s when I learnt my first economics. They want people to believe that the bowdlerised version of economics used by neoliberals to support their ideology is in fact mainstream economics.

8.  The right on the other hand is uncomfortable when evidence based economics conflicts with their politics. Their response is to attack economists. This is not a new phenomenon, as I showed in connection with the famous letter from 364 economists. With austerity they cherry picked the minority of economists who supported it, and then implemented a policy that even some of them would have disagreed with. (Rogoff did not support the cuts in public investment in 2010/11 which did most of the damage to the UK economy.) The media did the rest of the job for them by hardly ever talking about the majority of economists who did not support austerity.

9.  The economic costs of Brexit is just the latest example. Critics have focused on the most uncertain and least important predictions about Brexit, made only by a few, to attack all Brexit analysis. The fact that this prediction involved an unconditional macro forecast, while the assessment made by a number of groups about the long term cost involves a conditional projection based largely on trade equations, seems to have completely escaped the critics. More important, the fact that the predicted depreciation in sterling happened, and is in the process of already causing a large drop in living standards, is completely ignored by these critics.

10.  Attacking economists over Brexit is designed to discredit those who point out awkward and uncomfortable truths. Continuing to attack economists over not predicting the financial crisis, but failing to ignore their successes, has the effect of distracting people from the group who actually caused this crisis, and the fact that very little has been done to prevent a similar crisis happening in the future.

Links for 01-21-17

• Macro Musings Podcast: Anat Admati - David Beckworth
• What if Trump Skeptics, Like Me, Turn Out To Be Wrong? - Tim Taylor
• Federal Policy Will Shift. Not All States Will Shift With It. - Robert Frank
• Trump wants to manage the economy by running every business - Heidi Moore
• Historical Echoes: Are There Any Banks on Bank Street? - Liberty Street
• Health Care and John D. Rockefeller’s Dog - Econbrowser
• The American Debt Trap - Noah Smith
• History dependence in the housing market - Bank Underground
• The Trump Administration’s Regulatory Reform Options - RegBlog

Disillusioned in Davos

Larry Summers:

Disillusioned in Davos: Edmund Burke famously cautioned that “the only thing necessary for the triumph of evil is for good men to do nothing.” I have been reminded of Burke’s words as I have observed the behavior of US business leaders in Davos over the last few days. They know better but in their public rhetoric they have embraced and enabled our new President and his policies.

I understand and sympathize with the pressures they feel. ... Businesses who get on the wrong side of the new President have lost billions of dollars of value in sixty seconds because of a tweet. ...

Yet I am disturbed by (i) the spectacle of financiers who three months ago were telling anyone who would listen that they would never do business with a Trump company rushing to praise the new Administration (ii) the unwillingness of business leaders who rightly take pride in their corporate efforts to promote women and minorities to say anything about Presidentially sanctioned intolerance (iii) the failure of the leaders of global companies to say a critical word about US efforts to encourage the breakup of European unity and more generally to step away from underwriting an open global system (iv) the reluctance of business leaders who have a huge stake in the current global order to criticize provocative rhetoric with regard to China, Mexico or the Middle East (v) the willingness of too many to praise Trump nominees who advocate blatant protection merely because they have a business background.

I have my differences with the new Administration’s economic policies and suspect the recent market rally and run of economic statistics is a sugar high. Reasonable people who I respect differ and time will tell. My objection is not to disagreements over economic policy. It is to enabling if not encouraging immoral and reckless policies in other spheres that ultimately bear on our prosperity. Burke was right. It is a lesson of human experience whether the issue is playground bullying, Enron or Europe in the 1930s that the worst outcomes occur when good people find reasons to accommodate themselves to what they know is wrong. That is what I think happened much too often in Davos this week.

Nobel Laureates Give Advice to President Donald Trump

Paul Krugman: Donald the Unready

The Trump administration's readiness and fitness for office:

Donald the Unready, by Paul Krugman, NY Times: Betsy DeVos, whom Donald Trump has nominated as education secretary, doesn’t know basic education terms, doesn’t know about federal statutes governing special education, but thinks school officials should carry guns to defend against grizzly bears.

Monica Crowley, selected as deputy national security adviser, withdrew after it was revealed that much of her past writing was plagiarized. ...

Meanwhile Rex Tillerson, selected as secretary of state, casually declared that America would block Chinese access to bases in the South China Sea, apparently unaware that he was in effect threatening to go to war if China called his bluff.

Do you see a pattern here?...

The ... typical Trump nominee, in everything from economics to diplomacy to national security, is ethically challenged, ignorant about the area of policy he or she is supposed to manage and deeply incurious. Some, like Michael Flynn, Mr. Trump’s choice as national security adviser, are even as addicted as their boss to internet conspiracy theories. This isn’t a team that will compensate for the commander in chief’s weaknesses..., it’s a team that will amplify them. ...

If you want a model for how the Trump-Putin administration is likely to function (or malfunction), it’s helpful to recall what happened during the Bush-Cheney years.

People tend to forget the extent to which the last Republican administration was also characterized by cronyism, the appointment of unqualified but well-connected people to key positions. ... Remember “Brownie, you’re doing a heck of a job”? And it caused very real damage..., Katrina was the event that finally revealed the costs of Bush-era cronyism to all.

Crises of some kind are bound to occur on any president’s watch. They appear especially likely given the crew that’s coming in and their allies in Congress...

Real crises need real solutions. They can’t be resolved with a killer tweet, or by having your friends in the F.B.I. or the Kremlin feed the media stories that take your problems off the front page. What the situation demands are knowledgeable, levelheaded people in positions of authority.

But as far as we know, almost no people meeting that description will be in the new administration, except possibly the nominee for defense secretary — whose nickname just happens to be “Mad Dog.”

So there you have it: an administration unprecedented in its corruption, but also completely unprepared to govern. It’s going to be terrific, let me tell you.

Links for 01-20-17

• The innovation network - Acemoglu, Akcigit, Kerr
• How risk averse are you? - Jayson Lusk
• AD/AS: a suggested interpretation - Nick Rowe
• Business cycle desynchronisation - VoxEU
• Budget Cuts That Are Un-American - The New York Times
• America’s Great Working-Class Colleges - The New York Times
• In praise of tribalism - Stumbling and Mumbling
• Populism and the Future of Central Banking - Lucrezia Reichlin
• Submitting to demonetization, or not - longandvariable
• Tony Atkinson: the Architect of Modern Public Economics - INET
• The Ways That Pop Economics Hurt America - Noah Smith
• Border Adjustment vs. Dollar Depreciation - Miles Kimball

Economy under Trump: Plan for the Worst

Larry Summers:

Economy under Trump: Plan for the worst: ...There has not been so much anxiety about U.S. global leadership or about the sustainability of market-oriented democracy at any time in the past half-century. Yet with markets not only failing to swoon as predicted, but actually rallying strongly after both the Brexit vote and Trump’s victory, the animal spirits of business are running hot.

Many chief executives are coming to believe that, whatever the president-elect’s infirmities, the strongly pro-business attitude of his administration, combined with Republican control of Congress, will lead to a new era of support for business, along with much lower taxes and regulatory burdens. This in turn, it is argued, will drive major increases in investment and hiring, setting off a virtuous circle of economic growth and rising confidence.

While it has to be admitted that such a scenario looks more plausible today than it did on Election Day, I believe that it is very much odds-off. More likely is that the current run of happy markets and favorable sentiment will be seen, with the benefit of hindsight, as a sugar high. John Maynard Keynes was right to emphasize the great importance of animal spirits, but other economists have also been right to emphasize that it is political and economic fundamentals that dominate in the medium and long terms. History is replete with examples of populist authoritarian policies that produced short-run benefits but poor long-run outcomes. ...

Potential Biases of Ride-Sharing Drivers

From the NBER Digest:

Potential Biases of Ride-Sharing Drivers: The advent of the ride-sharing industry is rapidly changing the marketplace for transportation. New services are crowding the traditional taxi industry, which is subject to an array of local regulations, including strict anti-discrimination laws designed to prevent taxi drivers from offering differential services to potential passengers from different age, racial, or other groups. A new study explores whether drivers in the ride-sharing industry differentiate among potential customers.

In Racial and Gender Discrimination in Transportation Network Companies (NBER Working Paper No. 22776), Yanbo Ge, Christopher R. Knittel, Don MacKenzie, and Stephen Zoepf report the findings of field experiments in two cities, Seattle and Boston. Their results suggest that drivers for ride-sharing services are prone to discriminate against African Americans, making blacks wait longer for rides when they can identify the race of the ride-hailer and frequently cancelling rides when alerted to African American-sounding names. The disparities are particularly pronounced for black males. The researchers also find that ride-sharing drivers take female passengers on longer rides.

In each of the cities in which they fielded their experiment, the researchers measured the performance of ride-sharing services via field experiments in which research assistants—whites and blacks, males and females—were randomly dispatched into the field, at varying times of the day and to varying locations, to order, wait for, and ride in transportation network companies' vehicles. The research assistants carefully monitored and recorded pre-determined performance metrics for every ride they took, including how long it took drivers to accept ride assignments, how long passengers had to wait until drivers arrived, and how long and expensive rides were for each passenger. In all, research assistants conducted nearly 1,500 individual rides in Seattle and Boston. In each city, the research assistants summoned rides from several ride-sharing firms.

In Seattle, the main finding was that African Americans had considerably longer waiting times for rides—as much as 35 percent more. In Boston, the researchers could measure the cancellation rates of the drivers from some services after they had preliminarily accepted ride assignments. They modified their experiments so that some students hailing rides used "white-sounding" names while others used "African-American-sounding" names. They found more frequent cancellations—roughly twice the level for white-sounding names—when the students used African American-sounding names. Male passengers requesting a ride in low-density areas, such as in the country or suburbs, were nearly four times more likely to have their trips canceled when they used an African American-sounding name than when they used a white-sounding name.

The researchers note in conclusion that changing the information about potential customers which ride-sharing services provide to their drivers might affect some of the patterns that they observed.

What the Davos Crowd Needs to Understand

Me, at MoneyWatch with what turns into a mini-rant towards the end:

What the Davos crowd needs to understand: One of the themes of this year’s World Economic Forum in Davos this year is “Preparing for the Fourth Industrial Revolution.” How will digital technology and the rise of robots affect job opportunities in the future? Also on the agenda are discussions about globalization -- how it has altered the political and economic landscape, and fueled resentment among workers who feel overlooked and cast aside while those at the top get immensely rich.

This is reminiscent of a debate within economics: Are wage stagnation, high levels of displacement and unemployment in areas like the industrial Midwest and the bleak outlook for the future many people have due to globalization or technological change? ...

What’s important is not what caused so many people to lose their jobs or to find a job (if they could at all) that’s not as good as the one they lost. It’s that the “global elite” begin to fully comprehend how much resentment people feel over what has happened to their lives, to their communities and to their children’s futures. ...

So far, those who have benefited so much from globalization and technological change -- the type of people who attend Davos -- have managed to find scapegoats that deflect blame from themselves. ...

The working class is told, for example, that immigration is to blame and a wall is the answer, or that their troubles arise from a government that devotes all of its attention to the “undeserving” poor while ignoring them -- and with Donald Trump in power all that will change. Workers are told it’s because of taxes or regulation: Take care of those and the economy will boom -- America will be great again!

But take a look at what has happened to the share of income since the 1970s. ...

Links for 01-19-17

• The Illusions Driving Up US Asset Prices - Robert Shiller
• Health Care Fundamentals - Paul Krugman
• Key Measures Show Inflation close to 2% in December - Calculated Risk
• Revolving Doors in the Private Sector - ProMarket
• The Single Market was Mrs Thatcher’s great achievement - mainly macro

China’s WTO Entry, 15 Years On

Brad Setser

China’s WTO Entry, 15 Years On: Late last year Tim Duy asked for an assessment of the decision to allow China’s entry into the WTO 15 years on.

Greg Ip met the call well before I did, in a remarkable essay.

But I will give my own two cents. Be warned, this isn’t a short post. Frankly it is an article disguised as a post. I added the subheadings to make it a bit easier on the eye. ...

The Goals of Monetary Policy and How We Pursue Them

Janet Yellen:

The Goals of Monetary Policy and How We Pursue Them: ...it's fair to say, the economy is near maximum employment and inflation is moving toward our goal. The unemployment rate is less than 5 percent, roughly back to where it was before the recession. And, over the past seven years, the economy has added about 15-1/2 million net new jobs. Although inflation has been running below our 2 percent objective for quite some time, we have seen it start inching back toward 2 percent last year as the job market continued to improve and as the effects of a big drop in oil prices faded. Last month, at our most recent meeting, we took account of the considerable progress the economy has made by modestly increasing our short-term interest rate target by 1/4 percentage point to a range of 1/2 to 3/4 percent. It was the second such step--the first came a year earlier--and reflects our confidence the economy will continue to improve.

Now, many of you would love to know exactly when the next rate increase is coming and how high rates will rise. The simple truth is, I can't tell you because it will depend on how the economy actually evolves over coming months. The economy is vast and vastly complex, and its path can take surprising twists and turns. What I can tell you is what we expect--along with a very large caveat that our interest rate expectations will change as our outlook for the economy changes. That said, as of last month, I and most of my colleagues--the other members of the Fed Board in Washington and the presidents of the 12 regional Federal Reserve Banks--were expecting to increase our federal funds rate target a few times a year until, by the end of 2019, it is close to our estimate of its longer-run neutral rate of 3 percent. ...

FRBSF: The Current Economy and the Outlook

FRBSF FedViews:

John Fernald, senior research advisor at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of January 12, 2017.

Recent data confirm that the economy has picked up from its modest pace of the first half of 2016. Indeed, in the third quarter of 2016 GDP growth was revised up from an annualized rate of 3.2% to 3.5%. This rapid pace in part reflected transitory factors such as inventory accumulation and agricultural exports. Going forward, GDP growth is likely to remain for some time a bit above its long-run trend of 1½% to 1¾%. The fundamentals of consumer spending remain healthy, including solid income growth and strong household balance sheets. And business capital spending is poised to rebound from its weak pace of the past several years.

Employment gains remain solid. Nonfarm payroll employment rose by 156,000 jobs in December. Unusually cold weather in many parts of the country appear to have held down those job gains somewhat. However, even without controlling for weather, the pace of gains remains well above the “breakeven” level needed to absorb new entrants to the labor force, which we estimate at roughly 80,000 new jobs on average per month.

The labor market remains near its sustainable, full employment level. The unemployment rate in December ticked up to 4.7%, a touch below our estimate of the natural rate of unemployment of 5%. The December unemployment rate was the lowest end-of-year rate since 2006.

Inflation remains below the Federal Reserve’s 2% objective, but has been gradually increasing towards the target rate since early 2016. Overall consumer prices, as measured by the price index for personal consumer expenditures, were 1.4% higher in November than a year earlier. Core consumer prices, which strip out volatile movements in energy and food prices, were 1.6% higher. With a tight labor market and the waning effects of past energy price declines, we expect overall and core consumer price inflation to run just a shade below 2% this year.

Interest rates have risen sharply since the election in early November. In addition, the Federal Open Market Committee as widely expected raised its target for the federal funds rate at its December meeting. At the post-meeting press conference, Federal Reserve Chair Yellen noted that the decision to raise the fed funds target was “a reflection of the confidence we have in the progress the economy has made and our judgment that progress will continue.”

There is considerable uncertainty about the scope of policy changes that might be implemented under the incoming administration and about their effects on the Federal Reserve’s dual-mandate objectives of maximum employment and price stability. Of particular focus are possible changes in Federal tax and spending policy.

Federal revenues fell short of federal outlays in 2015, leaving a deficit of about 2½% of GDP. There are conflicting political pressures that could influence the path of future government spending. On the one hand, there is some desire to restrain spending in order to keep the budget deficit down. On the other hand, there is some desire to increase military and infrastructure spending, while an aging population will put upward pressure on Social Security and Medicare spending.

Federal spending as a share of GDP typically goes up in recessions and stabilizes or falls in expansions. That was particularly true in the past decade. The Great Recession of 2007-09 lowered GDP deeply, and, to help cushion the downturn, the government increased spending under the 2009 American Recovery and Reinvestment Act. Since 2010, the spending share has fallen as the economy has grown and the temporary stimulus package ended. In addition, budget caps implemented in 2011 have constrained spending. Given the competing political pressures, our forecast assumes that the path of overall federal spending remains unchanged although there may be shifts in composition.

Federal revenue as a share of GDP typically goes down in recessions and rises in expansions. For example, with a progressive tax system, the average tax rate falls when income falls. As with spending, this pattern was especially pronounced in the Great Recession. Revenues as a share of GDP are currently close to their average levels over the past few decades. Our forecast assumes that there will be reductions in individual and corporate taxes amounting to about 1 percent of GDP.

All else equal, tax cuts boost household and business income. Although the details of the tax cut matter, a plausible estimate is that desired spending may rise by perhaps 0.6 percent of GDP. (Households and businesses will try to save the rest.) However, because the economy already is near full employment, this increase in desired spending likely will be dampened somewhat by higher interest rates and a stronger dollar. On balance, we expect that tax cuts will raise the level of GDP by a total of about 0.4%. Since it is likely to take time for the legislation to be passed and for the increase in spending to occur, we expect that tax changes will boost our growth forecast by 0.1% to 0.2% for the next few years.

The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.

Links for 01-18-17

• Long live populism! - Thomas Piketty
• Fake Economics and the media - mainly macro
• The Discount Rate for the Social Cost of Carbon - RegBlog
• Monetary Policy in a Time of Uncertainty - Lael Brainard
• Evolving Consumer Behavior - Bill Dudley
• Shilling for Bitcoins - Uneasy Money
• Ending too big to fail - VoxEU
• Finance and growth: The direction of causality - VoxEU
• Royal Economic Society Webcasts on Econometrics - Dave Giles
• China’s Reserves Fell by Around $45 Billion in December - Brad Setser
• Signals intelligence and the management of military competition - Understanding Society
• The Evolution of Medicaid and Health Financing Reform - Tim Taylor
• On Brexit over-optimism - Stumbling and Mumbling

The Economics of the Affordable Care Act

Dean Baker at INET:

The Economics of the Affordable Care Act: The Affordable Care Act (ACA), which President-elect Donald Trump and the Republican-controlled Congress have vowed to repeal, was crafted to overcome two basic problems in the provision of health care... First, the costs are incredibly skewed, with just 10 percent of patients accounting for almost two thirds of the nation’s healthcare spending. The other problem is asymmetric information: Patients have far more knowledge about the state of their own health than insurers do. This means that the people with the largest costs are the ones most likely to sign up for insurance. These two problems make it impossible to get to universal coverage under a purely market-based system. ...

Covering the least costly 90 percent of patients is manageable, but the cost of covering the least healthy 10 percent is exorbitant. ...

The ACA gets around this problem by requiring that everyone buy insurance — a mandate that allows people with serious health problems to get insurance at a reasonably affordable price. Since many people cannot afford an insurance policy even if it’s based on average costs, the ACA also provided subsidies to low and moderate income people. It pays for the subsidies primarily through a tax on the wealthiest households, those with incomes over $200,000.

Thus far, the ACA has actually worked better than expected in most respects. ...

Insofar as the ACA has run into problems, those have been attributable to too few healthy people in the health care exchanges, and too little competition among insurers. Many commentators have wrongly blamed the problem in the exchanges on a failure of young healthy people to sign up for insurance. This is not the cause of the problem, since more people are getting insured than had been projected. The reason fewer healthy people are showing up on the exchanges is that fewer employers dropped insurance than had been projected. ... By continuing to provide insurance for their workers despite the ACA, employers are effectively keeping healthy people out of the exchanges.

The other problem with the exchanges has been limited competition, as many insurers have dropped out after the first few years. The loss of competition has meant higher prices. ...

One way to make insurance more affordable would be to reduce the costs of the health care system as a whole. Americans pay twice as much per person as people in other wealthy countries, with few obvious benefits in terms of outcomes. But such cost cutting would mean reducing the incomes of drug companies, doctors, and insurance companies — the big winners under the current system. It seems unlikely the Republicans will go this route. They are more likely to restore a version of the pre-ACA situation, in which many more people are uninsured and most workers know that their insurance is only as secure as their job.

No Agricultural Economist Was Harmed–Let Alone Interviewed–During the Making of this Article

Marc Bellemare:

No Agricultural Economist Was Harmed–Let Alone Interviewed–During the Making of this Article: This past weekend, the New York Times ran an article about the kinds of food SNAP recipients purchase, based on a new USDA report.

Here is how the NYT article began:

What do households on food stamps buy at the grocery store?
The answer was largely a mystery until now. The United States Department of Agriculture, which oversees the $74 billion food stamp program called SNAP, has published a detailed report that provides a glimpse into the shopping cart of the typical household that receives food stamps.

The findings show that the No. 1 purchases by SNAP households are soft drinks, which accounted for 5 percent of the dollars they spent on food. The category of “sweetened beverages,” which includes fruit juices, energy drinks and sweetened teas, accounted for almost 10 percent of the dollars they spent on food.

Had the NYT’s intention been to provide arguments to those who wish to dismantle SNAP–a program which, in 2014, provided an average of $125 to spend on food to 46.5 million Americans with low or no income; that’s one in seven Americans–it wouldn’t have done a better job. This is especially given that title: “In the Shopping Cart of a Food Stamp Household: Lots of Soda.”

My Twitter feed came alive with (justified) criticism of the article. My University of Minnesota colleague Joe Soss wrote a long response on his Facebook page which should be read in full to appreciate just how bad the NYT reporting was, part of which reads as follows:

The story hammers away at the idea that “the No.1 purchases by SNAP households are soft drinks, which account for about 10 percent of the dollars they spend on food.” Milk is No. 1 among non-SNAP households, we’re told, not soft drinks. At the start of the article, [NYT reporter Anahad] O’Connor frames these and other alleged facts with a quote that tells readers what SNAP really is: “SNAP is a multibillion-dollar taxpayer subsidy of the soda industry.” The story doubles down on this misleading image of the program by ending with a discussion of how the big soda companies lobby to keep the SNAP funds flowing — and with a quote asserting, “This is the first time we’ve had confirmation that this massive taxpayer program is promoting all the wrong kinds of foods.”

I want to be clear here: This is bullshit. It’s a political hack job on a program that helps millions of Americans feed themselves, and we should all be outraged that the NYT has disguised it as a piece of factual news reporting on its front page …

But what does the USDA report actually say? … Spoiler Alert: The report does not say that SNAP changes what people buy at the grocery–and that includes encouraging them to buy soda–and the report’s findings differ considerably from the portrayal Anahad O’Connor presents in the NYT … Here are the top three items in the report’s own summary of its major findings, reported in an attention-grabbing, color-shaded box:

1. There were no major differences in the expenditure patterns of SNAP and non-SNAP households, no matter how the data were categorized. Similar to most American households: ...

Later, the report adds these bullet points to its summary, in a separate “pay attention” box:

4. Overall, there were few differences between SNAP and non-SNAP household expenditures by USDA Food Pattern categories. Expenditure shares for each of the USDA Food Patter categories (dairy, fruits, grains, oils, protein foods, solid fats and added sugars (SoFAS), and vegetables) varied by no more than 3 cents per dollar when comparing SNAP and non-SNAP households.

...Most of the other comments I read regarding the NYT article were to the effect of: “Who is the NYT to tell poor people what they can and cannot spend their money on?,” as though one being poor necessarily implies that one is morally inferior, and so one needs to get told by Wealthy, Educated White Liberals (WEWLs) what one can and cannot buy. ...

I also find paternalism appalling,* no matter which side it comes from. It is especially appalling when said paternalism strongly hints at the idea that the poor are somehow morally deficient. The left gets up in arms when the right talks about mandatory drug tests for welfare recipients; this is no different. ...

And here is another thing about that NYT article: There are many, many agricultural economists who have done high-quality work on SNAP that steers clear from cheap advocacy. In no particular order: Parke Wilde at Tufts; Shelly Ver Ploeg at USDA’s Economic Research Service; my grad-school colleague Chad Meyerhoefer at Lehigh; Minnesota alum Travis Smith, now at UGA; my erstwhile colleague Tim Beatty; Craig Gundersen at Illinois; and so on, and so forth.

Were any of them interviewed in the article? Of course not. I mean, why would you talk to anyone over in icky flyover country? Why would you slum it at state schools? Instead, the reporter chose to go full TED Talk on the reader, remain comfortably ensconced in area code 212, and go with… Marion Nestle who, faisant flèche de tout bois, chose to use the report’s finding to attack her favorite bête noire: Big Bad Ag. Quoth Nestle:

“… SNAP is a multibillion-dollar taxpayer subsidy of the soda industry,” said Marion Nestle, a professor of nutrition, food studies and public health at New York University. “It’s pretty shocking.”

No. What is shocking is that an article which I would not have published when I was editor of my college’s newspaper not only gets published in but makes the front page of the New York Times, supposedly one of the last bastions of Real Journalism in this era of fake news and filter bubbles. ...

Links for 01-17-17

• Public Infrastructure Investment in the National Interest - Larry Summers
• Some Economics for Martin Luther King Jr. Day - Tim Taylor
• Inequality as feudalism - Stumbling and Mumbling
• Trump and Gorbachev - Branko Milanovic
• The Trump Deficit - Kenneth Rogoff
• How Geographic Boundaries Determine the Social Cost of Carbon - RegBlog
• The wisdom of the crowds and the consensus forecast - OECD Insights
• Dealing with Imperfect Instruments - Marc Bellemare
• Getting Past the Globalization Bogeyman - Angus Deaton
• Exit, Tweets and Loyalty - Digitopoly
• GDP-linked Bonds: A Primer - Cecchetti & Schoenholtz

Paul Krugman: With All Due Disrespect

People are saying that Donald Trump is an illegitimate president:

With All Due Disrespect, by Paul Krugman, NY Times: As a young man, Congressman John Lewis, who represents most of Atlanta, literally put his life on the line in pursuit of justice. As a key civil rights leader, he endured multiple beatings. Most famously, he led the demonstration that came to be known as Bloody Sunday, suffering a fractured skull at the hands of state troopers. Public outrage over that day’s violence helped lead to the enactment of the Voting Rights Act.

Now Mr. Lewis says that he won’t attend the inauguration of Donald Trump, whom he regards as an illegitimate president.

As you might expect, this statement provoked a hysterical, slanderous reaction from the president-elect – who, of course, got his start in national politics by repeatedly, falsely questioning President Obama’s right to hold office. ...

But let’s not talk about Mr. Trump’s ravings. Instead, let’s ask... Is it O.K., morally and politically, to declare the man about to move into the White House illegitimate?

Yes, it is. In fact, it’s an act of patriotism.

By any reasonable standard, the 2016 election was deeply tainted. It wasn’t just the effects of Russian intervention...; Hillary Clinton would almost surely have won if the F.B.I. hadn’t conveyed the false impression that it had damaging new information about her, just days before the vote. This was grotesque, delegitimizing malfeasance, especially in contrast with the agency’s refusal to discuss the Russia connection.

Was there even more to it? Did the Trump campaign actively coordinate with a foreign power? Did a cabal within the F.B.I. deliberately slow-walk investigations into that possibility? Are the lurid tales about adventures in Moscow true? We don’t know... Even given what we do know, however, no previous U.S. president-elect has had less right to the title. So why shouldn’t we question his legitimacy? ...

Now, anyone questioning Mr. Trump’s legitimacy will be accused of being unpatriotic — because that’s what people on the right always say about anyone who criticizes a Republican president. (Strangely, they don’t say this about attacks on Democratic presidents.) But patriotism means standing up for your country’s values, not pledging personal allegiance to Dear Leader.

No, we shouldn’t get into the habit of delegitimizing election results we don’t like. But this time really is exceptional...

So let’s be thankful that John Lewis had the courage to speak out. It was the patriotic, heroic thing to do. And America needs that kind of heroism, now more than ever.

Blind Trust in Donald Trump Could Be Costly

I have a new column:

Blind Trust in Donald Trump Could Be Costly: Donald Trump has refused to divest himself of his business interests before being inaugurated as president and has instead said he would hand control over to his sons. However, as the director of the Office of Government Ethics, Walter Shaub, Jr., said in a letter last December, a point he reiterated after Trump announced his plan to turn control over to his sons last week, “Transferring operational control of a company to one's children would not constitute the establishment of a qualified blind trust, nor would it eliminate conflicts of interest."

In response, Trump argues that his numerous conflicts of interest won’t affect his decisions as president. But there have already been instances where meetings with foreign leaders had a clear connection to his business pursuits, his nominations for important government positions show a strong bias toward favoring business interests, and his proposed legislative agenda, while touted as a populist, contains the standard Republican pro-business slate of policies. The stage is set for those coming into power to use their government offices to enrich themselves, and if they do, it has the potential to undermine US competitiveness and reduce long-term economic growth. ...