Things have been really slow here lately -- have been traveling. Have a really long travel day today (to Dubai via London and Frankfurt), but will start posting regularly again as soon as I can.
Friday, March 31, 2017
- Does productivity drive wages? Evidence from sectoral data - Bank Underground
- Raise Rates to Raise Inflation - Douglas L. Campbell
- How Trump Could Still Undermine Obamacare - The New Yorker
- Happiness and wellbeing as objectives of macroeconomic policy - VoxEU
- How Between-Firm Inequality Drives Economic Inequality - Tim Taylor
- Bad Debt Is Bad for Your Health - macroblog
- Lessons from Brexit - mainly macro
- More covered interest parity - John Cochrane
- Bank Panics and Scale Economies - Fed in Print
Thursday, March 30, 2017
- “In Order That They Might Rest Their Arguments on Facts” - Tim Taylor
- The Jobs Statistics Trump Should Be Worried About - Justin Fox
- Information changes attitudes towards immigrants - VoxEU
- A tao of politics - interfluidity
- Newt troubles - Stumbling and Mumbling
- The Misguided Regulatory Accountability Act - RegBlog
- Spillovers from Participation in Agricultural Value Chains? Marc Belllemare
- Low Real Interest Rates and Monetary Policy - Stephen Williamson
- QE Frictions: Refinancing or New Purchases? - Liberty Street
- When Consumers Don't Want to Know - Jayson Lusk
- Two Things That Keep Central Banks’ Awake at Night - iMFdirect
Wednesday, March 29, 2017
Thomas Piketty, Emmanuel Saez, and Gabriel Zucman at VoxEU:
Economic growth in the US: A tale of two countries: The rise of economic inequality is one of the most hotly debated issues today in the US (Furman 2016) and indeed in the world. Yet economists and policymakers alike face important limitations when trying to measure and understand the rise of inequality.
One major problem is the disconnect between macroeconomics and the study of economic inequality. Macroeconomics relies on national accounts data to study the growth of national income, while the study of inequality relies on individual or household income, survey, and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60% of the national income recorded in the national accounts, with this gap increasing over the past several decades.1
This disconnect between the different data sets makes it hard to address important economic and policy questions, such as:
- What fraction of economic growth accrues to those in the bottom 50%, the middle 40%, and the top 10% of the income distribution?
- What part of the rise in inequality is due to changes in the share of national income that goes to workers (labor income) and owners (capital income) versus changes in how these labour and capital incomes are distributed among individuals?
A second major issue is that economists and policymakers do not have a comprehensive view of how government programs designed to ameliorate the worst effects of economic inequality actually affect inequality. Americans share almost one-third of the fruits of economic output (via taxes that help pay for an array of social services) through their federal, state, and local governments. These taxes collectively add up to about 30% of national income, and are used to fund transfers and public goods that ultimately benefit all US families. Yet we do not have a clear measure of how the distribution of pre-tax income differs from the distribution of income after taxes are levied and after government spending is taken into account. This makes it hard to assess the extent to which governments make income growth more equal.2
In a recent paper, we attempt to create inequality statistics for the US that overcome the limitations of existing data by creating distributional national accounts (Piketty et al. 2016). We combine tax, survey, and national accounts data to build a new series on the distribution of national income. National income is the broadest measure of income published in the national accounts and is conceptually close to gross domestic product, the broadest measure of economic growth.3 Our distributional national accounts enable us to provide decompositions of growth by income groups consistent with macroeconomic growth.
In our paper, we calculate the distribution of both pre-tax and post-tax income. The post-tax series deducts all taxes and then adds back all transfers and public spending so that both pre-tax and post-tax incomes add up to national income. This allows us to provide the first comprehensive view of how government redistribution in the US affects inequality. Our benchmark series use the adult individual as the unit of observation and split income equally among spouses in married couples. But we also produce series where each spouse is assigned their own labour income, allowing us to study gender inequality and its impact on overall income inequality. In this column, we would like to highlight three striking findings.
Our first finding: A surge in income inequality...
Our second finding: Policies to ameliorate income inequality fall woefully short ...
Our third finding: Comparing income inequality among countries is enlightening ...
- The robots are coming,... - Larry Summers
- Is Academia Biased Against Stars? - Douglas L. Campbell
- The Real Corruption Is the Ownership of Congress by the Rich - ProMarket
- European parliamentary sovereignty -Thomas Piketty
- Republicans for Single-Payer Health Care - The New York Times
- What do Americans know about retirement and what do they expect? -| OECD
- Global Investment Spending: A Piece of the Puzzle - Tim Taylor
- Achieving Climate Change Goals Without the Clean Power Plan - RegBlog
- Why the West Got Rich, part 1/N: War - Jared Rubin
- Keynes' flaws - Stumbling and Mumbling
Tuesday, March 28, 2017
- How the Federal Reserve controls interest rates - James Hamilton
- The welfare state in the age of globalization - Branko Milanovic
- Trump’s Abuse of Government Data - Adam Davidson
- The Fed's successful tightening - Cecchetti & Schoenholtz
- China’s Estimated Intervention in February - Brad Setser
- Old Keynesian Multipliers: Cross-Section and Time-Series - Nick Rowe
- Hysteresis with a financial twist - Bayoumi and Eichengreen
- The productivity slowdown’s dirty secret: A growing performance gap - VoxEU
- What Is the Role of Antitrust in a Free-Market Economy? - Luigi Zingales
- How Should Econometrics Be Taught? - Marc Bellemare
- The FHA’s Up-Front Mortgage Insurance Premiums - Liberty Street
- Money that Poured in from Russia - Economic Principals
- Economics: Part of the Rot, Treatment, or Some of Each? - Peter Dorman
Monday, March 27, 2017
"If Mr. Trump really wanted to honor his campaign promises about improving health coverage..., there’s a lot he could do":
How to Build on Obamacare, by Paul Krugman, NY Times: “Nobody knew that health care could be so complicated.” So declared Donald Trump three weeks before wimping out on his promise to repeal Obamacare. ...
Actually, though, health care isn’t all that complicated. Basically, you need to induce people who don’t currently need medical treatment to pay the bills for those who do, with the promise that the favor will be returned if necessary.
Unfortunately, Republicans have spent eight years angrily denying that simple proposition. ... But put politics aside..., what could be done to make health care work better...?
The Affordable Care Act deals with the fundamental issue of health care provision in two ways. More than half of the gains in coverage have come from expanding Medicaid... And that part of the program is working fine, except in Republican-controlled states that won’t let the federal government aid their residents.
But Medicaid only covers the lowest-income families. Above that level, the A.C.A. relies on private insurance companies, using a combination of regulations and subsidies to keep policies affordable. This has worked well in some places. ...
Overall, however, too few healthy people have purchased insurance, despite the penalty for failing to sign up... As a result, some companies have pulled out of the market. And this has left some areas, especially rural counties in small states, with few or no insurers.
No, it’s not a “death spiral”... But the system could and should be improved. ...
What about the problem of inadequate insurance industry competition? ... At the very least, there ought to be public plans available in areas no private insurer wants to serve. There are other more technical things we should do too...
So if Mr. Trump really wanted to honor his campaign promises about improving health coverage..., there’s a lot he could do... And he would get plenty of cooperation from Democrats along the way.
Needless to say, I don’t expect to see that happen. ...
And the tweeter-in-chief’s initial reaction to health care humiliation was, predictably, vindictive. He blamed Democrats, whom he never consulted, for Trumpcare’s political failure, predicted that “ObamaCare will explode,” and that when it does Democrats will “own it.” Since his own administration is responsible for administering the law, that sounds a lot like a promise to sabotage Americans’ health care and blame other people for the disaster.
The point, however, is that building on Obamacare wouldn’t be hard, and wouldn’t even be all that complicated.
Tim Duy at Bloomberg:
Markets Are Witnessing a Yellen Fed at Its Humblest: It finally looks like when Federal Reserve officials say markets can expect multiple interest-rate increases this year, they really mean it. Even noted dove Chicago Federal Reserve President Charles Evans believes that another two hikes in 2017 is possible following last week's boost. Going one further, Philadelphia Federal Reserve President Patrick Harker left open the possibility of more than three total this year.
And yet the Fed has set the stage to be deep into the policy normalization process by the end of the year despite an inflation forecast that not only never cracks 2 percent but has repeatedly fallen short of its mark for years. The threat of inflation, not inflation itself, is what motivates the Fed after deciding long ago in favor of preemptive policy action to stay ahead of the curve. ...
I have a new column (my title was "Some of These Markets are Not Like the Others"):
It’s a Ruse: Tax Cuts Can’t be Financed by Reducing Government Waste: The Republicans suffered a humiliating defeat on their proposal to cut taxes for the wealthy disguised as healthcare reform. But as the Trump administration has made clear, they are not about to give up on their tax cut plans.
But how will those tax cuts be financed? The Republican’s health care reform plan would have delivered $600 billion in tax cuts, but with that option gone where will the money come from? ...
- "There Is No Indication That Trump Is Pro-Competition" - ProMarket
- Corporations in the Age of Inequality: A Skeptic's Take - Doug Campbell
- Netanyahu, Trump, Nixon and Using Antitrust to Tame the Media - ProMarket
- On criticising the existence of mainstream economics - mainly macro
- In Praise of Two Giants of Econometrics - Dave Giles
- The end of global QE is fast approaching - Gavyn Davies
- Accounting for the new gains from trade liberalisation - VoxEU
- Mnuchin, Money Manipulation, and Message Mayhem - Econbrowser
- How exporters grow - VoxEU
Sunday, March 26, 2017
The Need for a Reformation of Authority and Hierarchy Among Economists in the Public Sphere: I find that I have much more to say (or, rather, largely, republish) relevant to the current debate between Simon Wren-Lewis and Unlearning Economics.
Let me start by saying that I think Unlearning Economics is almost entirely wrong in his proposed solutions.
the trashing of the Grameen Bank is undeserved;
the blanket denunciation of RCTs as having "benefited global and local elites at the expensive of the poorest" is just bonkers;
Merton and Scholes's financial math was correct, and the crash of their hedge fund did not require any public-money bailout;
Janine Wedel is not a reliable source on Russian privatization, which I saw and see as the only practical chance to try to head off the oligarchic plutocracy that has grown up in Russia under Yeltsin and Putin (and, no, my freshman roommate Andrei was not prosecuted for "fraud in Russia", but rather the Boston U.S. Attorney's office overreached and was unwilling to admit it);
Unlearning Economics confuses the more-sinister Friedrich von Hayek (who welcomed Pinochet's political "excesses" as a necessary Lykurgan moment) with the truly-libertarian Milton Friedman, who throughout his whole life was dedicated to not telling people what to do, and who saw Pinochet as another oppressive authoritarian who might be induced to choose better rather than worse economic policies;
and then there is Reinhart and Rogoff, where I think Unlearning Economics is right.
So Unlearning Economics is batting 0.170 in their examples of "mainstream economics considered harmful". But there is that one case. And I do not think that Simon Wren-Lewis handles that one case well. And he needs to--I need to. And, since neither he nor I have, this is a big problem.
Let me put it this way: Carmen Reinhart and Ken Rogoff are mainstream economists.
The fact is that Carmen Reinhart and Ken Rogoff were wrong in 2009-2013. Yet they had much more influence on economic policy in 2009-2013 than did Simon Wren-Lewis and me. They had influence. And their influence was aggressively pro-austerity. And their influence almost entirely destructive.
Simon needs to face that fact squarely, rather than to dodge it. The fact is that the "mainstream economists, and most mainstream economists" who were heard in the public sphere were not against austerity, but rather split, with, if anything, louder and larger voices on the pro-austerity side. (IMHO, Simon Wren-Lewis half admits this with his denunciations of "City economists".) When Unlearning Economics seeks the destruction of "mainstream economics", he seeks the end of an intellectual hegemony that gives Reinhart and Rogoff's very shaky arguments a much more powerful institutional intellectual voice by virtue of their authors' tenured posts at Harvard than the arguments in fact deserve. Simon Wren-Lewis, in response, wants to claim that strengthening the "mainstream" would somehow diminish the influence of future Reinharts and Rogoffs in analogous situations. But the arguments for austerity that turned out to be powerful and persuasive in the public sphere came from inside the house! ...[continue]...
Saturday, March 25, 2017
- Loss Aversion, Trump and the New Opening for Medicare for All - Robert Frank
- Behind Blue Eyes after the Bill was Killed - Robert Waldmann
- Is Housing Driving the Rise in Profits? - Dietrich Vollrath
- Global Productivity Growth: Diminishing Convergence - Tim Taylor
- Interview: Prof. Paul De Grauwe - AceMaxx Analytics
- More good finance articles - John Cochrane
Friday, March 24, 2017
Why scrapping NAFTA would be Trump’s big gift to China: I was in Mexico Thursday seeing the Mexican president, foreign minister and finance minister and addressing a convention of bankers. The only subjects anyone is interested is the future of NAFTA and U.S. Mexican relations.
I came to Mexico from Beijing, and so I was able to report that there was no greater strategic gift the United States could give China than to abrogate NAFTA and rupture the North American community. ... China apart, NAFTA strengthens the U.S. economy. ...
There is a silver lining in all the fuss over NAFTA — it needs updating. Digital trade didn’t exist in 1993. Thinking has shifted on the need to assure that trade agreements are in worker interests. This means more emphasis on labor standards and more need to ensure that dispute settlement systems do not overly empower corporate interests. Most important, with more competition from Asia and with the increased sophistication of the Mexican economy, there is a strong case for strengthened rules of origin that enhance North American manufacturing.
Changes along these lines may have an “America first” aspect but they are also in Mexico’s interest. They are the right way forward.
It is also essential that the United States and Mexico find a way forward on immigration. A wall is a 19th-century response to a 21st-century concern. I’m told that most illegal immigration does not take place through people crossing open borders in the desert — the only thing a wall could address. Rather it takes place through illegal entry at legal checkpoints as people are smuggled in in freight containers and the like. This will be unaffected by a wall. Technology, data science, enhanced collaboration, and cooperation with respect to Central America are much better ways to resist illegal immigration flows. They are also much more likely to strengthen our alliance with our most populous neighbor.
The Saga of Currency Unions and Trade: One of the first full papers I wrote was on currency unions and trade. I was taking Alan Taylor's field course at UC Davis, which was essentially and Open-Economy Macro History course, and the famous Glick/Rose findings that currency unions double trade was on the syllabus. Not to be outdone, Robert Barro and coauthors then found that currency unions increase trade on a 7-fold and 14-fold basis! This raised the prospect that Frenchman may suddenly go out and buy a dozen or more Volkswagens instead of settling for just one after the adoption of the Euro. Another paper, published in the QJE, found that currency unions even raise growth, via trade. In that case, one can only imagine what the Greek economy would look like if they hadn't joined the Euro. No result, it seems, can be too fanciful.
Always a doubting Thomas, I was instantly skeptical. ...
So, I fired up Stata, and after a solid 30 minutess, I discovered part of what was driving the seemingly magical effect. Roughly one-quarter of the CU changes were of countries that had former colonial relationships... It turns out that the impact of the "former colony" dummy in the gravity equation has been decaying slowly over time. This led to a more interesting insight -- that history matters for trade... For other country pairs aside from colonies, there were other problems. ...
In any case, in 2015, I deleted this paper and my regression and code from my webpage, and assigned the paper to my brilliant undergraduate students. They alerted me to the fact that Glick and Rose had recently written a mea culpa, where the authors declared that they could no longer have confidence in the results. ... However, Glick and Rose changed their minds, and decided instead to double-down on a positive, measurable impact of currency unions on trade. This time, they concluded that the Euro has increased trade by a smaller, but still magical, 50%. ...
In any case, Jeff Frankel at Harvard apparently used to assign his Ph.D.'s students a "search-and-destroy" mission on the original CU effect. Thus, thanks to the fact that Andrew Rose still provides his data online -- for which I'm grateful -- I've just assigned my students a similar mission on the new EMU result. Thus, we get to see if they can overturn anything that the good referees at the European Economic Review may have overlooked. If I were a gambling man, and I am, I would put my money on my sharp undergraduates at the New Economic School over the academic publication process. If I were Croatia, or Greece, contemplating the relative merits of joining/staying in the Euro, I would write off the academic literature on this topic completely.
"The destructive effects of false symmetry in reporting":
The Scammers, the Scammed and America’s Fate, by Paul Krugman, NY Times: ...Mr. Ryan’s proposed Obamacare replacement ... is one of the worst bills ever presented to Congress.
It would deprive tens of millions of health insurance — the decline in the number of insured Americans would be larger than ... simple repeal of Obamacare! — while sharply raising expenses for many of those who remain. It would be especially punitive for lower-income, older, rural voters.
In return, we would get a small reduction in the budget deficit. Oh, and a tax cut, perhaps as much as $1 trillion, for the wealthy.
This is terrible stuff. It’s made worse by the lies Mr. Ryan has been telling about his plan. ...
Some people seem startled both by the awfulness of Mr. Ryan’s plan and by the raw dishonesty of his sales pitch. But why..., he’s still the same guy I wrote about back in 2010, in a column titled “The Flimflam Man.”
I wrote that column in response to what turned out to be the first of a series of high-profile Ryan budget proposals. ... It was a con job all the way.
So how did Mr. Ryan reach a position where his actions may reshape the lives of so many ... for the worse? The answer lies in the ... news media, who made him what he is.
You see, until very recently both news coverage and political punditry were dominated by the convention of “balance.” ... And this ... meant that it was necessary to point to serious, honest, knowledgeable proponents of conservative positions.
Enter Mr. Ryan, who isn’t actually a serious, honest policy expert, but plays one on TV. He rolls up his sleeves! He uses PowerPoint! He must be the real deal! So that became the media’s narrative. And media adulation, more than anything else, propelled him to his current position.
Now, however, the flimflam has hit a wall. ... The C.B.O. told the devastating truth about his plan, and his evasions and lies were too obvious to ignore.
There’s an important lesson here, and it’s not just about health care or Mr. Ryan; it’s about the destructive effects of false symmetry in reporting at a time of vast asymmetry in reality.
This false symmetry — downplaying the awfulness of some candidates, vastly exaggerating the flaws of their opponents — isn’t the only reason America is in the mess it’s in. But it’s an important part of the story. And now we’re all about to pay the price.
- When Britain turned inward - VoxEU
- Evidence That Regulators Value Profits Over Consumer Welfare - ProMarket
- Can market based regulation reduce greenhouse gas emissions? - Micro Insights
- What kind of fiscal policy works best at the ZLB? - Equitable Growth
- Interview: Prof. Jonathan Portes - AceMaxx Analytics
- Facts or EconoFacts? - Noahpinion
Thursday, March 23, 2017
From Adrian Penalver at the Bank of France's Eco Notepad:
A follow-up to "Inequality and the Lake Wobegon Effect":
Compensation Benchmarking, Leapfrogs, and the Surge in Executive Pay, by Thomas A. DiPrete; Gregory M. Eirich; Matthew Pittinsky, American Journal of Sociology: Abstract: Scholars frequently argue whether the sharp rise in chief executive officer (CEO) pay in recent years is "efficient" or is a consequence of "rent extraction" because of the failure of corporate governance in individual firms. This article argues that governance failure must be conceptualized at the market rather than the firm level because excessive pay increases for even relatively few CEOs a year spread to other firms through the cognitively and rhetorically constructed compensation networks of "peer groups," which are used in the benchmarking process to negotiate the compensation of CEOs. Counterfactual simulation based on Standard and Poor's ExecuComp data demonstrates that the effects of CEO "leapfrogging" potentially explain a considerable fraction of the overall upward movement of executive compensation since the early 1990s. [download]
- Are There Benefits from Free Trade? - Brad DeLong
- Review for "Nature" of "A Culture of Growth", by Joel Mokyr - Brad DeLong
- What Does President Donald Trump Mean for the US Economy? - Brad DeLong
- Why Medicaid Work Requirements Won’t Work - New York Times
- Robotization Without Taxation? - Robert J. Shiller
- Cyclical forces in the global trade slowdown - VoxEU
- The Need for Very Low Interest Rates - Liberty Street
- Economic growth and reductions in carbon emissions - VoxEU
- Does Manufacturing Have the Largest Employment "Multiplier? - PIIE
- Economists believe that the CBO makes credible forecasts - John Whitehead
- Trumponomics: causes and consequences – RWER issue no. 78
- What would a democratic Euro Zone Assembly look like? - Thomas Piketty
- India: What's Needed for Sustained Growth? - Tim Taylor
- Exchange rate implications of border tax adjustment neutrality - Willem Buiter
Wednesday, March 22, 2017
Is Bank Lending A Concern?, by Tim Duy: I have seen some angst recently over declining growth in commercial bank lending. See, for example, the Wall Street Journal:
Bank loans across all categories are increasing 4.6% annually, the slowest pace since 2014, according to weekly Fed lending data from March 1. The trend is particularly marked in business loans, which are increasing 3.9% annually, a rate that is a nearly six-year low.A number of factors are at play, including rising interest rates; bankers also said some business clients put borrowing on hold before the U.S. election and aren't confident enough to jump back in.The slowdown is noteworthy because it is occurring when many metrics show the U.S. economy strengthening.
Looking at the weekly data, there does on the surface look to be some reason for concern:
These low rates of growth are rarely seen outside of recessions. Still, optical econometrics suggests this is more of a lagging than leading indicator. Moreover, we have another indicator that also exhibited behavior only seen in recessions. Spot the odd man out:
Recall a year ago when weak industrial production numbers raised recession concerns that proved unfounded. We could be seeing something similar in bank lending. Consider that industrial production might be a leading indicator for bank loans:
Here I focus on the post-1984 period (the Great Moderation). Optical econometrics again suggests to me that lending lags industrial production. To quantify that a bit more, I converted the data to log differences (multiplied by 100), and ran it through a 13 lag vector autoregression. Granger causality tests (the f-tests here) indicate that loans (DLOANS) do not cause (or are predictive of) industrial production (DIND):
Impulse response functions (in this case, the responses are converted to impacts on the levels of the variables) illustrate the dynamics of the system:
The impact of a shock to industrial production on commercial lending (lower left chart) is delayed six months and then builds gradually over the next 18 months. The impact of a shock to lending on industrial production (upper right chart) is negligible. Ordering of the variables does not affect these results. If I use the full sample (data begin 1947:1), both variables Granger cause each other, but the impact of loans on industrial production in the short-run is minimal and dies out in the long-run:
Bottom Line: The fall in commercial lending growth looks more consistent with a lagged impact from the industrial slowdown that weighed on the US economy last year than with a warning about future activity. Something to keep an eye on, to be sure, but if past history is a guide, it is more likely than not that lending will pick up over the next year.
Caterina Lepore, Caspar Siegert, and Quynh-Anh Vo at Bank Underground:
What can Nobel-winning contract theory teach us about regulating banks?: The 2016 Nobel Prize in economics has been awarded to Professors Oliver Hart and Bengt Holmström for their contributions to contract theory. The theory offers a wide range of real-life applications, from corporate governance to constitutional laws. And, as the post will hopefully convince you, contract theory is also helpful in regulating banks! To this end, we will unpack the outline of the theory and apply it to a number of real-world conundrums: How to pay banks’ chief executives and traders? How to fund a bank’s balance sheet? How to regulate banks?
What is Contract Theory? ...
From an interview of F. M. Scherer (Professor Emeritus in the John F. Kennedy School of Government at Harvard, and former chief economist at the Federal Trade Commission) at ProMarket:
“Our Efforts to Deal With Tech Firms’ Market Dominance in the U.S. Have Been an Abject Failure”: ...Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?
Our efforts to deal with the problems in the United States have been an abject failure. ...I might note that Facebook’s dominant position in the market is due in part to its role as an innovator and partly to “network externalities”... Microsoft’s dominant position is also attributable in part to network externalities...
But the antitrust agencies have not taken sufficient measures to remedy abuses of this advantage.
Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?
I believe there is. The evidence of rising wealth inequality, especially through the work of Piketty and co-authors, is compelling. Less well known is evidence compiled at M.I.T. of strongly rising inequality of compensation, especially at the top executive levels. The nexus has not to my knowledge been fully articulated.
Here’s my hypothesis: In recent decades, most publicly-traded corporations, at least in the United States, have embraced executive compensation consultants to advise the board of directors on executive compensation levels. Those consultants provide data on compensation averages and distributions for companies in peer industries. But then the Lake Wobegon effect goes to work. The boards say, “Surely, our guy isn’t below average,” to the average reported by the compensation consultants becomes the minimum standard for compensation. If each top executive receives at least the minimum reported pay and often more, the average rises steadily.
Indeed, and here I tread on weaker ground, those compensation costs are built into the costs considered by companies in their product pricing decisions (in a kind of rent-seeking model), and so price levels rise to accommodate rising compensation. I might note that this dynamic applies not only for chief executives, but trickles down to embrace most of companies’ management personnel. ...
- An interview with William A. Darity Jr. - Equitable Growth
- Some things are best left to the technocrats - Tim Harford
- A Growth Rate Greater Than 2 Percent Is Implausibe - Jason Furman
- How to Give a Cool Appraisal to Hot Economics Studies - Noah Smith
- Making better decisions when outcomes are uncertain - MIT News
- What’s at Stake in a Health Bill That Slashes the Safety Net - NYTimes
- Fifty Shades of Yellow? Post-Truth Then and Now - EconoSpeak
- The soft side of critical realism - Understanding Society
- Incentivizing politicians - Stumbling and Mumbling
- Post-truth and propaganda - mainly macro
- Covered Interest Parity - John Cochrane
Tuesday, March 21, 2017
In case you were wondering (any your probably weren't), from Kevin Drum:
Well, This Was the World's Easiest Chart to Make: CBPP has calculated how much tax money you'll save if Obamacare is repealed. Behold:
You know what really gets me? Even among the millionaires, repeal will only net them about $50,000. That's like finding spare change in the sofa cushions for this crowd. Is clawing back a few nickels and dimes really worth immiserating 20 million people?
Patrick Kiger at National Geographic:
How Money Made Us Modern: About 9,500 years ago in the Mesopotamian region of Sumer, ancient accountants kept track of farmers’ crops and livestock by stacking small pieces of baked clay, almost like the tokens used in board games today. One piece might signify a bushel of grain, while another with a different shape might represent a farm animal or a jar of olive oil.
Those humble little ceramic shapes might not seem have much in common with today’s $100 bill, whose high-tech anti-counterfeiting features include a special security thread designed to turn pink when illuminated by ultraviolet light, let alone with credit-card swipes and online transactions that for many Americans are rapidly taking the place of cash.
But the roots of those modern modes of payment may lie in the Sumerians’ tokens. ...
- Robot Geometry (Very Wonkish) - Paul Krugman
- Market Power Probably Contributes to Inequality - ProMarket
- 1965: The Year the Fed and LBJ Clashed - FRBRichmond
- Is the Internet Causing Political Polarization? - NBER
- The Mechanical Turn in Economics and Its Consequences - INET
- Inequality and the Decline in Labor Share of Income - iMFdirect
- Working for Yourself, Some of the Time - macroblog
- What's the Value of US Household Production? - Tim Taylor
- America’s Confidence Economy - Mohamed A. El-Erian
- The Financial CHOICE Act and Systemic Risk - Cecchetti & Schoenholtz
- Money Market Funds and the New SEC Regulation - Liberty Street
- Of Goosebumps and CCP default funds - Bank Underground
- ML and Metrics : The New Predictive Econometric Modeling - No Hesitations
- What is full employment anyway? - Stephen Williamson
- “To Defend the World…" - Economic Principals
Monday, March 20, 2017
Robots and Inequality: A Skeptic's Take: Paul Krugman presents "Robot Geometry" based on Ryan Avent's "Productivity Paradox". It's more-or-less the skill-biased technological change hypothesis, repackaged. Technology makes workers more productive, which reduces demand for workers, as their effective supply increases. Workers still need to work, with a bad safety net, so they end up moving to low-productivity sectors with lower wages. Meanwhile, the low wages in these sectors makes it inefficient to invest in new technology.
My question: Are Reagan-Thatcher countries the only ones with robots? My image, perhaps it is wrong, is that plenty of robots operate in Japan and Germany too, and both countries are roughly just as technologically advanced as the US. But Japan and Germany haven't seen the same increase in inequality as the US and other Anglo countries after 1980 (graphs below). What can explain the dramatic differences in inequality across countries? Fairly blunt changes in labor market institutions, that's what. This goes back to Peter Temin's "Treaty of Detroit" paper and the oddly ignored series of papers by Piketty, Saez and coauthors which argues that changes in top marginal tax rates can largely explain the evolution of the Top 1% share of income across countries. (Actually, it goes back further -- people who work in Public Economics had "always" known that pre-tax income is sensitive to tax rates...) They also show that the story of inequality is really a story of incomes at the very top -- changes in other parts of the income distribution are far less dramatic. This evidence also is not suggestive of a story in which inequality is about the returns to skills, or computer usage, or the rise of trade with China. ...
One of the most rewarding parts of deciding to go online 12 years ago has little to do with the things I post here (the blog’s 12 year anniversary passed earlier this month, but I forgot until a day or two ago).
Amazingly, my YouTube class videos have had over 1,200,000 views. Even more surprising, the most popular are – by far, not even close – econometrics videos (just started a new series that will cover time series – something I’ve had a lot of requests for over the years, plus other things such as quasi-experimental techniques).
One time, at the AEA’s in Chicago, I was on my way to meet Noah Smith for the first time (at a Starbucks). As I was walking across a bridge to meet him I noticed someone running up behind me. It was a student on the market that year, and she had chased me down to tell me that the econometrics videos really helped her. I was quite amazed. I had no idea. I just posted the videos for my classes never thinking anyone else would watch.. She insisted on a picture together – I was embarrassed, but happy to comply at the same time.
At the same meeting, it happened again – another person in an elevator with the same story, and also wanted a picture. I have heard similar things many times over the years. Email about the videos from developing countries – where educational access is limited – has been especially nice. They come several times a week.
My videos are nothing special, they are just there. There is a huge, unmet demand for education, and not just the basics, technical things like econometrics. That’s what I have concluded.
From an interview of Jonathn Parker (the Robert C. Merton Professor of Finance at the Massachusetts Institute of Technology's Sloan School of Management) by the Richmond Fed:
...EF: In the paper, you consider some evolutionary arguments related to optimal expectations.
Parker: We were asked in the review process to think about why this might occur or how people might come to have these beliefs. In the paper, we have a couple of paragraphs that I think I'm still a little uncomfortable with, but the arguments run something like this: How might you get to optimal beliefs? You start out with an optimistic assessment of how easy something will be, and then you kind of think about it a little bit and if the costs of being wrong are significant, you start to downgrade your optimism. However, if you don't see any big costs, then you don't. So it suggests you approach decisions with natural optimism and then consider the consequences, and you bring beliefs back toward reality if you need to. In terms of evolution, people do lots of matching with friends, with colleagues, with potential spouses in which they project confidence about the value of matching with them, of working with them, of marrying them — and a credible, stronger belief in themselves may be useful in that process. That's not in the theory, per se, but these are stories that might help us (or a referee) believe that there's something there.
I think it's worth noting that one of the reasons I think this paper has been controversial (at least relative to our belief in the theory!) — it has gotten good citations, but it hasn't led to a lot of subsequent literature — is that it is a behavioral paper that contradicts a common belief among behavioral economists that the mistakes people make are potentially very large. Our model delivers exactly the reverse, which is that the mistakes people make are the ones that satisfy or generate these biases but do not cause or risk large negative payoffs. So it's behavioral economics that the behavioral economists don't like.
I don't think that every theory has to explain every behavior, but I also think our theory can incorporate situations in which there's an awfully large belief bias or in which things are extreme if one moves away from the particular frictionless, stationary, full-information environment that we studied for biases. It might be that there are explicit costs associated with moving beliefs away from rationality. This approach might also make the model more, not less, empirically useful. And the way we worked with optimal expectations theory, people are meta-smart — they know the true probabilities and work from those to these biased probabilities. There are situations where people may really not understand the truth at all.
Let me come at this a slightly different way. There's a set of behavioral models in which there is a belief bias and it is invariant to the costs and payoffs. And you see that pretty clearly rejected, I think, in the world and in labs. So our paper gets something right in terms of biases being disciplined by costs. The models in which biases are fixed and not responsive have the problem that people can be turned into money pumps and can make very severe errors in certain, regularly occurring states of the world. Some economists are very comfortable with the idea that people do regularly make major mistakes. Our paper lets people optimally tone down their optimistic bias and so rules out regular, really costly mistakes. But some people find that a bug and not a feature. ...
Jonathan B. Baker at Equitable Growth:
Overview The U.S. economy has a “market power” problem, notwithstanding our strong and extensive antitrust institutions. The surprising conjunction of the exercise of market power with well-established antitrust norms, precedents, and enforcement institutions is the central paradox of U.S. competition policy today.
Market power in the U.S. economy today: As this policy brief explains, the harms from the exercise of firms’ market power may extend beyond individual markets affected to include slower overall economic growth and increased economic inequality. The implications for future economic productivity and welfare are troubling, but before detailing these consequences, it is necessary to understand why market power is a major issue despite well-established antitrust enforcement institutions and legal precedents. ...
"...inability to engage in reflection and self-criticism is the mark of a tiny, shriveled soul...":
America’s Epidemic of Infallibility, by Paul Krugman, NY Times: ...American politics — at least on one side of the aisle — is suffering from an epidemic of infallibility, of powerful people who never, ever admit to making a mistake.
More than a decade ago I wrote that the Bush administration was suffering from a “mensch gap.” ... Nobody ... ever seemed willing to accept responsibility for policy failures...
Later, in the aftermath of the financial crisis, a similar inability to admit error was on display among many economic commentators.
Take, for example, the open letter a who’s who of conservatives sent to Ben Bernanke in 2010, warning that his policies could lead to “currency debasement and inflation.” They didn’t. But four years later, when ... contacted..., not one was willing to admit having been wrong.
By the way, press reports say that one of those signatories, Kevin Hassett — co-author of the 1999 book “Dow 36,000” — will be nominated as chairman of Mr. Trump’s Council of Economic Advisers. Another, David Malpass — the former chief economist at Bear Stearns, who declared on the eve of the financial crisis that “the economy is sturdy” — has been nominated as undersecretary of the Treasury for international affairs. They should fit right in. ...
What happened to us? Some of it surely has to do with ideology: When you’re committed to a fundamentally false narrative about government and the economy, as almost the whole Republican Party now is, facing up to facts becomes an act of political disloyalty. ...
But what’s going on with Mr. Trump and his inner circle seems to have less to do with ideology than with fragile egos. To admit having been wrong about anything, they seem to imagine, would brand them as losers and make them look small.
In reality, of course, inability to engage in reflection and self-criticism is the mark of a tiny, shriveled soul — but they’re not big enough to see that. ...
Many Americans no longer seem to understand what a leader is supposed to sound like, mistaking bombast and belligerence for real toughness.
Why? Is it celebrity culture? Is it working-class despair, channeled into a desire for people who spout easy slogans?
The truth is that I don’t know. But we can at least hope that watching Mr. Trump in action will be a learning experience — not for him, because he never learns anything, but for the body politic. And maybe, just maybe, we’ll eventually put a responsible adult back in the White House.
- "There Is Convincing Evidence That Concentration Has Been Rising" - ProMarket
- Competition from China reduced innovation in the US - Autor, Dorn, Pisano, Shu
- U.S. Has Worst Wealth Inequality of Any Rich Nation - Kenneth Thomas
- Three ways the economic and financial cycle could end - Gavyn Davies
- Two Short Essays on Monetary Policy, One Good, One Bad - Douglas Campbell
- A response to Gudgin, Coutts & Gibson - mainly macro
- American Leisure: TV and a Bit of Socializing - Tim Taylor
- Real Interest on Reserves - Nick Rowe
Sunday, March 19, 2017
Steven Durlauf (Willam F. Vilas Research Professor and Kenneth J. Arrow Professor of Economics at UW-Madison):
Why I Take Attacks on Muslims and Hispanics Very Personally: My paternal grandmother Sophia Ruderman Durlauf, was born in Dniepropetrovsk (then Ekaterinislav) Ukraine (then Russia), in 1899. When she was a little girl, she survived a pogrom in the now-forgotten village in which she was growing up. It was a close call; she was trampled by a Cossack’s horse and badly injured after disobeying her parents and somehow leaving the cubbyhole in which they had hidden her. Her family travelled to Minsk, from which her father left for America and sent for my grandmother and the rest of her family, arriving in 1906. Had her family stayed in Ukraine, it is very possible they would have died in the Holocaust.
My grandmother spoke perfect, accent free English. She told me, in her late 60’s, of her still vivid memories of being taunted for lack of English, and shared her recollections of all the anti-Semitic epithets she heard growing up in poverty in Manhattan. She was apparently a terrific student. But in her senior year of high school, she was told by her principal that she was too poor to go to college and that her responsibility was to get a job and support her family. These barriers did not stop her from having a rich and fascinating life, including taking night courses from Will Durant at the New School for Social Research (as it was then called) and working as a close secretary to Margaret Sanger, so she was present at the beginning of Planned Parenthood. And her grandchildren (my sister and me) have lived extraordinarily privileged lives and my father grew up in middle class comfort.
When my grandmother died, I helped my father clean out her house. I found hundreds of cancelled checks she had written over the years, carefully organized by type of bill. For checks made out to the government, she routinely wrote “Thank You” as the memo. When I asked my father why she did this, his answer was that she was saying “Thank you for asking me to pay my bill rather than smashing down the door to my home and taking anything you wanted.” For me, this lover of the United Nations and for that matter all other pieties of post WWII liberalism, was also the most patriotic person I have ever known.
Saturday, March 18, 2017
- What if Sociologists Had as Much Influence as Economists? - NYTimes
- How globalisation affected manufacturing around the world - VoxEU
- Macro Musings Podcast: Jason Furman - David Beckworth
- Africa's Cities: The Low Development Trap - Tim Taylor
- Mechanisms according to analytical sociology - Understanding Society
- How Much Money Will the Border-Adjusted Tax Raise? - Brad Setser
- Why Banking Leverage Requirements Are Not Enough - Mike Konczal
- You Say ‘Immigrant’ and I Say ‘Emigrant’ - Liberty Street Economics
- The Problem With Facts - Tim Harford
Friday, March 17, 2017
From the FRBSF:
FRBSF FedViews: Fernanda Nechio, research advisor at the Federal Reserve Bank of San Francisco, stated her views on the current economy and the outlook as of March 9, 2017.
Real GDP grew at an annual pace of 1.9% in the fourth quarter of 2016, consistent with an ongoing moderate expansion. Going forward, we expect GDP growth to continue at a similar rate, between 1½% and 2% over the next couple of years.
Recent employment gains remain solid. Nonfarm payroll employment in January rose by 227,000 jobs, partly due to a mild winter which boosted construction. Over the past six months, payroll gains have averaged around 190,000 jobs per month.
The labor market remains near its sustainable, full employment level. January’s unemployment rate of 4.8% is close to 5%, our estimate of the natural rate of unemployment. If economic growth continues at its projected pace and monetary policy continues to normalize over the next 2 to 3 years, we expect unemployment to move gradually toward 5% over this period.
Inflation has remained below the Federal Reserve’s 2% objective for several years, but has been gradually increasing towards the target rate since early 2016. Overall inflation in the twelve months through January, as measured by the price index for personal consumption expenditures was 1.9%, up from 1.6% in December, as energy prices accelerated. Core inflation, which excludes changes in food and energy prices, rose more gradually. The price index of core personal consumption expenditures was 1.7% higher than a year ago. Given the robust labor market conditions, we expect overall and core consumer price inflation to rise gradually to 2% over the next couple of years.
Interest rates rose sharply in the weeks after the November 2016 election, but have stabilized in recent months. The Federal Reserve raised its Federal funds target rate by ¼ percentage point in December. Based on futures markets, financial market participants expect two or three more quarter-point increases in the target rate in 2017.
U.S. trade policy is an important factor for our near-term outlook. New policies under consideration include the introduction of border adjustment taxes, changes to import tariffs, and renegotiations of existing trade agreements. These measures are intended to boost both U.S. exports and employment.
Exports of goods and services help support jobs in the United States. According to the Department of Commerce’s International Trade Administration, exports accounted for an estimated 11.5 million jobs in 2015. The relative importance of the export sector, however, varies substantially across states, with jobs related to exports of goods ranging from about 10% of total employment in Washington and Texas to near 0% in Colorado and New Mexico.
The share of jobs related to exports also varies across industries. As of 2014, jobs related to exports accounted for 26% of jobs in the manufacturing sector, but only about 8% in the service sector.
Few goods or services can be classified as purely export- or import-related because of the role of global supply chains. For example, many domestically manufactured goods, such as airplanes, may be exported or sold domestically but also have an import content through their use of foreign-made materials and intermediate goods.
Imports are also important for supporting jobs. For example, the apparel and computer equipment sectors rely heavily on imported goods, but generate domestic jobs in transportation, retail, advertising, and financial and insurance services. To add further complexity, many U.S. imports start their product lives as American intellectual property, which are then modified and produced abroad, before being imported back into the United States. As these goods move through their different stages of production, they add U.S. jobs all along the product cycle.
The variation in the relative importance of imports and exports across states and industries poses a challenge in assessing the effects of trade policy changes on the overall U.S. economy. Possible changes in the value of the dollar and trade prices associated with these policy changes also complicate the outlook.
Some sectors, such as manufacturing, have increasingly relied on technology to increase production, at the cost of reducing the number of employed workers. Trade policy changes are unlikely to affect the long-run trend of a declining number of jobs in this sector.
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.
Talk is cheap:
Conservative Fantasies, Colliding With Reality, by Paul Krugman, NY Times: This week the Trump administration put out a budget blueprint — or more accurately, a “budget” blueprint. After all, real budgets detail where the money comes from and where it goes; this proclamation covers only around a third of federal spending, while saying nothing about revenues or projected deficits. ...
So what’s the point of the document? The administration presumably hopes that it will distract the public and the press from the ongoing debacle over health care. But it probably won’t. And in any case, this pseudo-budget embodies the same combination of meanspiritedness and fiscal fantasy that has turned the Republican effort to replace Obamacare into a train wreck.
Think ... about the vision of government ... that the right has been peddling for decades.
In this vision, much if not most government spending is a complete waste, doing nobody any good. The same is true of government regulations. And to the extent ... spending does help anyone, it’s Those People — lazy, undeserving types who just so happen to be a bit, well, darker than Real Americans.
This was the kind of thinking — or, perhaps, “thinking” — that underlay President Trump’s promise to replace Obamacare with something “far less expensive and far better.” After all, it’s a government program, so he assumed that it must be full of waste that a tough leader like him could eliminate.
Strange to say, however, Republicans turn out to have no ideas about how to make the program cheaper other than eliminating health insurance for 24 million people (and making coverage worse, with higher out-of-pocket spending, for those who remain).
And basically the same story applies at a broader level. Consider federal spending...: Outside defense it’s dominated by Social Security, Medicare and Medicaid — all programs that are crucial to tens of millions of Americans, many of them the white working-class voters who are the core of Trump support. Furthermore, most other government spending also serves purposes that are popular, important or (usually) both.
Given this reality..., what will happen if anti-big-government politicians ... put their agenda into practice? Voters will quickly get a lesson in what slashing spending really means — and they won’t be happy.
That’s basically the wall Obamacare repeal has just smashed into. ...
Republicans’ budget promises, like their health care promises, have been based on an essentially fraudulent picture of what’s really going on. And now the bill for these lies is coming due.
- America’s employment problem - Lane Kenworthy
- You'll get nothing and like it - Environmental Economics
- The Rise and Fall of Personal Interest Income - Tim Taylor
- The Man Who Made Us See That Trade Isn't Always Free - Noah Smith
- Economic Ideas You Should Forget (I'm on pgs 147-148) - Springer
- My favorite remaining institutions: the justice system and the Fed - Jared Bernstein
- Dutch elections: What economy will the new government inherit? - Caroline Gray
- Why Federal Workers Get Paid More - Justin Fox
- The more we mix, the better - VoxEU
Thursday, March 16, 2017
Peter Dizikes at the MIT News Office:
America’s two-track economy: For many people in America, being middle class isn’t what it used to be.
Consider: In 1971, the U.S. middle class — with household incomes ranging from two-thirds to double the national median — accounted for almost 60 percent of total U.S. earnings. But in 2014, middle-class households earned just about 40 percent of the total national income. And, adjusted for inflation, the incomes of goods-producing workers have been flat since the mid-1970s.
“We have a fractured society,” says MIT economist Peter Temin. “The middle class is vanishing.”
Now Temin, the Elisha Gray II Professor Emeritus of Economics in MIT’s Department of Economics, has written a book exploring the topic. “The Vanishing Middle Class: Prejudice and Power in a Dual Economy,” published this month by MIT Press, examines the plight of middle-income earners and offers some prescriptions for changing our current state of affairs.
The “dual economy” in the book’s title also represents a bracing reflection of America’s class schism. Temin, a leading economic historian, draws the term from the work of Nobel Prize winner W. Arthur Lewis, who in the 1950s applied the model of a dual economy to developing countries. In many of those nations, Lewis contended, there was not a single economy but a two-track economy, with one part containing upwardly-mobile, skilled workers and the other part inhabited by subsistence workers.
Applied to the U.S. today, “The Lewis model actually works,” Temin says. “The economy can grow, but it detaches from the [subsistence] sector. Simple as it is, the Lewis model offers the benefit that a good economic model does, which is to clarify your thinking.”
In Temin’s terms, updated, America now features what he calls the “FTE sector” — people who work in finance, technology, and electronics — and “the low-wage sector.” Workers in the first sector tend to thrive; workers in the second sector usually struggle. Much of the book delves into how the U.S. has developed this way over the last 40 years, and how it might transform itself back into a country with one economy for all.
Headwinds for workers
As Temin sees it, there are multiple reasons for the decline in middle-class earning power. To cite one: The decline of unionization, he contends, has reduced the bargaining power available to middle class workers.
“In the [political and economic] turmoil of the ’70s and ’80s, the unions declined, and the institutions that had been keeping labor going along with rising productivity were destroyed,” Temin says. “It’s partly [due to] new technology, globalization, and public policy — it’s all of these things. What it did was disconnect wages from the growth in productivity.”
Indeed, from about 1945 until 1975, as Temin documents in the book, U.S. productivity gains and the wage gains of goods-producing workers tracked each other closely. But since 1975, productivity has roughly doubled, while those wages have stayed flat.
Where “The Vanishing Middle Class” moves well beyond a discussion of basic economic relations, however, is in Temin’s insistence that readers consider the interaction of racial politics and economics. As he puts it in the book, “Race plays an important part in discussions of politics related to inequality in the United States.”
To take one example: Again starting in the 1970s, incarceration policies led to an increasing proportion of African-Americans being jailed. Today, Temin notes, about one in three African-American men will serve jail time, which he calls “a very striking figure. You can see how that would just destroy the fabric of a community.” After all, those who become imprisoned see a significant reduction in their ability to obtain healthy incomes over their lifetimes.
For that matter, Temin observes, incarceration has expanded so dramatically it has affected the ability of society to pay for prisons, which may be a factor that limits their further growth. At the moment, he notes in the book, the U.S. states pay roughly $50 billion a year for prisons and roughly $75 billion annually to support higher education.
Temin contends in the book that a renewed focus on education is a principal way to distribute opportunities better throughout society.
“The link between the two parts of the modern dual economy is education, which provides a possible path that children of low-wage workers can take to move into the FTE sector,” Temin writes.
That begins with early-childhood education, which Temin calls “critically important” — although, he says, “in order to continue those benefits, [students] have to build on that foundation. That goes all the way up to college.”
And for students in challenging social and economic circumstances, Temin adds, what matters is not just the simple acquisition of knowledge but the classroom experiences that lead to, as he puts it, “Knowing how to think, how to get on with people, how to cooperate. All the social skills and social capital … [are] going to be critically important for kids in this environment.”
In the book Temin bluntly advocates for greater investment in public schools as well as public universities, saying that America’s “educational system was the wonder of the 20th century.” It still works very well, he notes, for kids at good public schools and for those college students who graduate without burdensome debt.
But for others, he notes, “We don’t have a path for the next generation to have what we expect for a middle-class life … [and] not everyone wants to finance it.”
“The Vanishing Middle Class” comes amid increasing scrutiny of class relations in the U.S., but at a time when the public discussion of the topic is still very much evolving. Gerald Jaynes, a professor in the departments of Economics and African American Studies at Yale University, calls Temin’s new book “a significant addition to the existing literature on inequality.”
Temin, for his part, hopes that by the end of “The Vanishing Middle Class,” readers will agree that a society paying for more education will have made a worthy investment.
“The people in this country are the resource we have,” Temin says. “If we maintain the character of our fellow citizens, that is really our national strength.”
New research on the Fed's bank bailout during the financial crisis:
The fed's bank bailout, EurekAlert!:...While many Americans know the Fed for its role in making monetary policy, it serves another lesser-known but hugely important purpose: providing temporary, short-term funds to banks as a "lender of last resort."
During the financial crisis from 2007-09, the Fed took drastic steps to ensure that banks had access to liquidity so they could continue lending. ...
For the first time, new research from Washington University in St. Louis examines data from the crisis to show how the Fed can effectively assist banks in times of financial uncertainty. No matter the program or the bank size, this infusion of liquidity spurred lending that ultimately reached homes and businesses, thereby benefiting the economy, the researchers found in their analysis.
"Perhaps contrary to popular beliefs, our research shows that the Fed's actions were effective in encouraging banks to lend. This suggests that the credit crunch we witnessed could have been a lot worse in the absence of these facilities," said Jennifer Dlugosz, assistant professor of finance at Olin Business School, and a former economist at the Board of Governors of the Federal Reserve System. ...
During the course of their research, Dlugosz and her co-authors [Allen Berger, professor of banking and finance at the University of South Carolina, Lamont Black, assistant professor of finance at DePaul University, and Christa Bouwman, associate professor of finance at Texas A&M University] found a total of 20 percent of small U.S. banks and 62 percent of bigger U.S. banks -- more than 2,000 in all -- used the Discount Window or the Term Auction Facility at some point during the crisis. The access to liquidity increased bank lending of almost all types. Meanwhile, they found no evidence that banks were making riskier loans.
"We examined whether or not the Discount Window and the Term Auction Facility helped encourage banks to lend during the crisis," Dlugosz said. "We find that it did. It looks like one extra dollar in liquidity support from the Fed to a bank results in somewhere between 30 to 60 cents in additional lending by the bank, depending on its size.
"It wasn't obvious at the time whether this was going to work. ..."
What’s the role of experts in the public debate?: What’s the role of experts in the public debate? And how should the media (and politicians) use them? I’m assuming we’re talking here primarily about economists and other social scientists, not physicists or biotechnologists – although they shouldn’t assume they’re immune either, as some of the debates around climate change or vaccines show..
I think we have three really important functions. ...
First, to explain our basic concepts and most important insights in plain English. ...
Second is to call bullshit. [gives example] ... For better or worse, a large part of my job is in fact intellectual garbage disposal.
Third, perhaps most difficult and where the element of judgement comes in, is in synthesising the consensus of other experts on a difficult topic, where there may not be one right answer, on topics from the minimum wage to the pros and cons of grammar schools, putting it in context, and explaining why it does, or doesn’t, matter. And this is perhaps where politicians and the public need us most.
I’m going to give a specific example...
That doesn’t mean experts – and economists in particular – don’t need to do much better. We need not to present forecasts as fact, and call out politicians – and yes, I’m thinking of George Osborne here – who present them as such. We need to explain what we know and what we don’t know. Experts shouldn’t make political choices. But you can’t – or at least you shouldn’t – make political choices without experts.
Adam M. Finkel at RegBlog:
It Takes “Alternative Math” to Claim That Redistribution Is Futile: The unequal distribution of costs and benefits across society is one of the hottest topics in the regulatory arena—and one that, regretfully, has sparked fundamentally flawed arguments, threatening to distort and obscure much-needed discussion about redistributive policies. ...
Although all policies have redistributive effects, some ideologies are viscerally, even militantly, opposed to government interventions that benefit the poor, whether by intention or even as a side effect of an otherwise sound policy. ...
In a recent New York Times op-ed, University of Illinois at Chicago Professor Deirdre McCloskey exemplifies this type of argument, in conspicuously misguided fashion. In her column, McCloskey offers a litany of reasons as to why progressive taxation and other policies aimed at redistributing benefits to the poor are ill-advised. At the core of the essay, McCloskey makes the empirical assertion that such policies cannot actually make much of a difference in any event.
Unfortunately, the basic mathematics of McCloskey’s claim are mangled. She may not prefer that we seek progressive tax and regulatory policies, but her claim that these policies do not “uplift the poor very much” is erroneous. That the Times has decided not to correct her error—even in the face of an email exchange in which the author herself acknowledged her mistake—may be an example of how tempting it is to ascribe black-and-white factual issues to the realm of “healthy controversy.” ...
As with many of the toxic myths about regulation—that, for example, it is responsible for destroying countless jobs while failing to create any new ones in the process, or that it relies on gross exaggerations of risk and plays to irrational public fears—we are lost without the ability to distinguish between ideological responses to facts and ideological twisting of facts into nonsense. ...
- What Happaned to Trump Infrastructure Push? - Brad DeLong
- Capital Is No Longer Flowing Uphill - Brad Setser
- Understanding US productivity trends from the bottom-up - Brookings Institution
- A Policy Proposal for US Manufacturing, and the Economy - Douglas Campbell
- The Peso has recovered. Good news for NAFTA... - Douglas Campbell
- Super-easy monetary policy and reflating Japan’s economy - VoxEU
- How We Choose Determines Who We Choose - Justin Fox
- How to Restore Faith in Economics - Noah Smith
- Misuses of empirical econ - Noahpinion
- Economic Empiricism on the Hubris-Humility Spectrum? - EconoSpeak
- The Real Fed Issues - John Cochrane
- Changing sources of inflationary pressures in the United States - Nick Bunker
- An intuitive interpretation of factor models - Bank Underground
- US Health Care: The Case For Going Upstream - Tim Taylor
Wednesday, March 15, 2017
we must begin by deregulating the labour market. Political objections must be overridden. It is too difficult to hire and fire and too expensive to take on new employees.
It does, however run into a problem – that there’s no obvious benefit to deregulation. ... You might think this is counter-intuitive. Common sense says that if firms can easily fire people then workers’ incentives to work hard are sharpened by a greater fear of the sack, whilst companies can more easily adjust their workforce to changes in market conditions. These mechanisms, however, are offset by others, for example:
- If people fear the sack, they’ll not invest in job-specific skills but rather in general ones that make them attractive to future employers. They might also spend less time working and more time looking for a new job.
- A lack of protection will encourage people to change jobs more often, as it’s better to jump than be pushed. This can reduce productivity, simply because new workers often take time to adapt to their new company’s clients, IT systems and to new colleagues.
- If firms know they can fire at will they’ll devote less effort to screening or training, and so there might be worse matches between jobs and workers.
Deregulation might be good for bad employers who want to be petty tyrants, but it has no obvious aggregate benefit. I don’t say this in the hope of changing anybody’s mind. As Jonathan Swift said, “it is useless to attempt to reason a man out of a thing he was never reasoned into.” And as Nick points out, Brexiters are a cult that’s immune to reason. But things are true whether or not you believe them.
Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big of an omission do you think this is?
The problems in expanding the theory of the firm to consider political engagements are considerable. Of course, political engagement by firms can be viewed as merely rent-seeking. Unavoidably, this produces waste... (and possibly also corrupt[s] the political system).
But before one jumps to the conclusion that therefore corporations should be denied the right to influence political decisions in the interests of efficiency, more must be considered. For example, this week, over one hundred public corporations, most of them high-tech firms, filed a brief opposing the legality of the executive order signed by President Trump barring various immigrants.1) This can be viewed as collective action by firms in defense of capitalism and the free flow of goods and services. Those opposed to firms lobbying regulatory agencies would probably approve this defense by corporations of human rights. Nor was this case unique. Corporations, like Apple, Facebook, and Google, have regularly defended human rights.
What this implies is that any absolute, prophylactic rule against political engagement may be undesirable. How then should we distinguish between “good” and “bad” political engagements by corporations? One approach might be to refine the rules of corporate governance and give shareholders greater rights in the process. To the extent that shareholders are diversified, they should rationally oppose rent-seeking by competing firms, as such activity just raises the costs for both sides.
Conversely, however, in concentrated industries where collusion is more likely than competition, diversified shareholders might rationally support rent-seeking (and even reduced competition) by the firms in which they invest. Some empirical evidence suggests that investors in the highly concentrated airline industry have behaved this way. Hence, stronger corporate governance may supply a partial answer sometimes, but hardly always. At best, it can add transparency to the process, thereby making rent-seeking less feasible.
Theorists of the firm who wish to restrict political engagements by firms face a serious problem that they have not yet recognized: at least in the United States, corporate political engagement may be protected by the First Amendment. This means that reforms such as disclosure are possible (and, I think, desirable), but stricter, prophylactic rules are probably not. ...
No surprises, except perhaps the dissent by Neel Kashkari -- the Fed "decided to raise the target range for the federal funds rate to 3/4 to 1 percent," with indications of more rate increases to come:
Press Release, Release Date: March 15, 2017: Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee's 2 percent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
- The Original Lie About Obamacare - The New York Times
- Nowcasting with OMB Director Mick Mulvaney - Econbrowser
- The Real Exchange Rate and China's Savings - Douglas Campbell
- Fed’s Challenge, After Raising Rates, May Be Existential - NYTimes
- Democracy Over Sovereignty in Europe - Lucrezia Reichlin
- How Much Europe Can Europe Tolerate? - Dani Rodrik
- Inflation inequality in the United States - Equitable Growth
- The great Chinese inequality turnaround - VoxEU
- Pigouvian Taxes and Bounties - Tim Taylor
- Capital Illogic - John Cochrane
- Focus on Bank Culture Is an Odd Regulatory Strategy - NYTimes
- Coping with the backfire effect - Stumbling and Mumbling
- Brexit Scottish independence much more attractive - mainly macro
- "Economic Ideas You Should Forget" (I have an entry in this book - MT) - Environmental Economics
Tuesday, March 14, 2017
Populism and the Politics of Health: What’s next on health care? Truly, I have no idea. The AHCA is a real stinker... But ... starting off the Trump legislative era with the crashing and burning of Obamacare repeal would deeply damage Trump... So they will pull out all the stops.
But why are Republicans having so much trouble? Health reform is hard... But there’s a more fundamental issue: who is being served?
Obamacare helped a large number of people at the expense of a small, affluent minority: basically, taxes on 2% of the population to cover a lot of people and assure coverage to many more. Trumpcare would reverse that, hurting a lot of people (many of whom voted Trump) so as to cut taxes for a handful of wealthy people. That’s a difference that goes beyond political strategy. ...
And yet, and yet: Trump did in fact win over white working-class voters, who thought they were voting for a populist...
This ties in with an important recent piece by Zack Beauchamp on the striking degree to which left-wing economics fails, in practice, to counter right-wing populism... Why?
The answer, presumably, is that what we call populism is really in large degree white identity politics, which can’t be addressed by promising universal benefits. Among other things, these “populist” voters now live in a media bubble, getting their news from sources that play to their identity-politics desires, which means that even if you offer them a better deal, they won’t hear about it or believe it if told. For sure many if not most of those who gained health coverage thanks to Obamacare have no idea that’s what happened.
That said, taking the benefits away would probably get their attention, and maybe even open their eyes to the extent to which they are suffering to provide tax cuts to the rich. ...
... Trumpism is faux populism that appeals to white identity but actually serves plutocrats. That fundamental contradiction is now out in the open.
Public capital, private capital: The present economic debate is over-determined by two realities which, moreover, are connected as we sometimes tend to forget. On one hand we have the steady rise in public debt and, on the other, the prosperity of privately owned wealth. The figures for the level of public debt are well known; almost everywhere the level approaches or exceeds 100% of national income ... as compared with barely 30% in the 1970s. ...
During the post-war boom (the Trente Glorieuses) public assets were very considerable (approximately 100-150% of national income, as a result of a very large public sector, a consequence of post-war nationalisations), and significantly higher than public debt...
The most recent data available for 2015-2016 shows that net public capital has become negative in the United States, Japan and the United Kingdom. In all these countries, the sale of the total public assets would not be sufficient to repay the debt. In France and in Germany net public capital is only just positive.
But this does not mean that rich countries have become poor: it is their governments which have become poor, which is very different. ... The fact remains that private capital grew much faster than the decline in public capital, and that rich countries themselves hold even a little more...
Why be so pessimistic in the face of such prosperity? Simply because the ideological and political balance of power is such that public authorities are not able to make the main beneficiaries of globalisation contribute their fair share. The perception of this impossibility of a fair tax sustains the flight towards the debt. ...
Historically, major changes in the structure of property ownership often come together with profound political changes. We see this with the French Revolution, the American Civil War, the Euro-World Wars in the 20th century and the Libération in France. The nationalist forces at work today could lead to a return to national currencies and inflation, which would promote a chaotic redistribution of resources, at the expense of severe social stress and an ethnicisation of political conflicts. In the face of this fatal risk to which the present status quo could lead, there is only one solution. We must chart a democratic pathway out of the impasse and organise the necessary redistribution of resources within the framework of the rule of law.
Shifting Dots, bt Tim Duy: The Federal Reserve begins its two-day meeting today. The outcome of the meeting is no longer in debate. A 25bp rate hike is widely expected after a round of Fedspeak in the week prior to the blackout period and the February employment report. More important now is what signal the Fed sends with the statement, the press conference, and the dots. I anticipate the overall message to signal general confidence in the economic outlook while reinforcing the idea that the Fed is neither behind the curve nor intends to fall behind the curve. The combination will give the Fed room to tighten policy at a gradual pace. I think that four hikes this year would still be considered gradual from the Fed's perspective. After all, the expectation of four hikes a year was considered gradual at the beginning of 2016. Not sure why it shouldn't be considered gradual now.
At the end of last year, the Fed's median interest rate projection anticipated 75bp of rate hikes in each of 2017 and 2018. That translated into my 2017 baseline of two rate hikes with an option on a third, basically including a bias to account for the fact that the Fed's forecast has fallen short in recent years. If economic conditions were such, however, that the Fed pulled forward the first hike to March, I said that my expectation would shift to a baseline of three with an option on four. What that means, in effect, that I expect the dots to shift upward to reflect an anticipation of four rate hikes in 2017.
With March likely, will the dots move as I expect? Not everyone thinks so. Morgan Stanley, for instance, expects the dots will show higher rates in 2018 and 2019 instead. Via Business Insider:
So why do I think it is more likely than not that the Fed raise the dots for 2017? Consider first the projections for output growth, unemployment, and inflation. Those should play directly into the rate hike forecast in a systematic fashion. So it you think the odds favor some combination of a higher expect growth gap (the difference between actual and longer run output growth), a lower than anticipated unemployment gap (the difference between actual and longer run unemployment), and a higher inflation forecast, then you should anticipate the dots will shift upward.
In practice, of course, these estimates depend in part on the Fed's estimate of potential growth and the natural rate of unemployment. I don't think either has likely change, so the relevant factors should be the forecasts of the actual variables. Overall, I think it reasonable to believe that at least one, and likely two factors will point to higher rates.
Second, the Fed clearly believes that the balance of risks has tilted at least to completely balanced if not toward the upside. External risks have waned, incoming data both soft and now, with the employment report, hard have been solid, and Fed officials are captured by the allure of fiscal stimulus. FOMC participants whose rate forecasts incorporated a heavy downside risk (reasonable given what happened in 2016) will likely pull their rate forecasts up in a sigh of relief. In essence, these members will believe that without pulling forward rate hikes, they will be in danger of overshooting their targets.
Third, the financial markets were particularly buoyant in recent months even as expectations of tighter policy intensified. I think some FOMC members - yes, New York Federal Reserve President William Dudley, I am looking at you - will want to push back on those easier conditions in the name of financial stability. So that argues for pulling rate hikes forward.
Fourth, estimates of the longer-run natural rate could rise. I don't anticipate this, as I don't see they have evidence to suggest this is the case, but I did not anticipate the small bump upward in the neutral rate estimates in the December Summary of Economic Projections.
Altogether then I see more reasons likely to raise the 2017 rate projections than to hold them steady. Hence my expectations for the dots to nudge upward. Basically, it just puts the Fed back to where they started in 2016, expect with more cause to believe it will actually work out this time.
Of course, the rate projection is not a promise, and given recent history I tend to shade down my expectation from what the Fed projects. Hence my three with an option on four. I also am not entirely sure how they will integrate balance sheet reduction with rate hikes? Do they announce a balance sheet reduction at the same meeting they raise rates? Or do they pass on a rate hike to announce a balance sheet reduction? It seems like they would what to avoid the latter because it would equate the balance sheet tool with a rate hike a little too directly. Instead, I expect they would want everyone to think the balance sheet reduction is no big deal. So that argues for both at say the September meeting and that then places an option on the December meeting. If would be nice to have better guidance on this issue.
I tend to think the balance sheet issue is another reason to front load hikes in 2017 if possible. Then they have room to pause in 2018 if balance sheet reduction is a bit sloppier than anticipated.
Bottom Line: I see more reasons that not that the Fed will push up its 2017 rate hike projections. Lots of different factors - external, data flow, fiscal stimulus, and financial conditions - to say that with the economy hovering near potential output, the time is right to make a slightly faster move toward the neutral rate. Indeed, I have a hard time seeing why they would pull forward a rate hike if they weren't trying to create room for an additional hike this year. Note that this would really be just moving the ball down the field a bit quicker, not changing the goal posts - the estimate of the neutral rate. A higher estimate of the neutral rate would be much more hawkish than just quickening the pace slightly to that rate.