- Robo-Apocalypse? Not in Your Lifetime - J. Bradford DeLong Not a week goes by without some new report, book, or commentary sounding the alarm about technological unemployment and the "future of work." Yet in considering the threat posed by automation at most levels of the value chain, we should remember that robots cannot do what humans cannot tell them to do.
- The Economy Is Strong. So Why Do So Many Americans Still Feel at Risk? - Jacob Hacker President Trump is running for re-election on the strength of the economy, and why not? The unemployment rate is lower than it’s been in five decades. The stock market is booming. Overall economic growth has been steady. There’s just one problem: Voters are not particularly enthused about it. Recent polls suggest a substantial majority of Americans feel the economy is working only for “those in power.” A big reason for this disconnect is that many Americans feel insecure.
- Origins of "Microeconomics" and "Macroeconomics" - Timothy Taylor Economists have written about topics that we would now classify under the headings of "microeocnomics" or "macroeconomics" for centuries. But the terms themselves are much more recent, emerging only in the early 1940s. For background, I turn to the entry on "Microeconomics" by Hal R. Varian published in The New Palgrave: A Dictionary of Economics, dating back to the first edition in 1987.
- Yet More Scary Graphs of Manufacturing: Midwest Edition - Econbrowser In every single state in the Great Lakes region, save Michigan, manufacturing employment has either peaked or (charitably) gone on a growth hiatus.
- The rise of corporate market power - Brookings The rise of corporate market power is receiving increasing attention in research and public discourse—including the current U.S. presidential election debate—with good reason. The IMF’s April 2019 World Economic Outlook (WEO) has a chapter on the topic, which I had the opportunity to discuss at a recent conference. Author Zia Qureshi Visiting Fellow - Global Economy and Development Increased interest in market power is motivated by some mega trends or puzzles. The “productivity puzzle”: Productivity growth has slowed even as new technologies, led by the digital revolution, have boomed. The “investment puzzle”: Investment has slowed even as the cost of borrowing has been low and corporate profits high. Sluggish productivity and investment have contributed to slower economic growth. Income and wealth inequalities have risen, sharply in some countries, such as the U.S. Income has shifted from labor to capital, and the distribution of both labor and capital income has become more unequal. Wealth has soared, even though investment in productive capital has slowed. These trends have stoked social discontent and political tumult. What explains these puzzles and trends?
- Strengthening Automatic Stabilizers - Timothy Taylor For economists, "automatic stabilizers" refers to how tax and spending policies adjust without any additional legislative policy or change during economic upturns and downturns--and do so in a way that tends to stabilize the economy. For example, in an economic downturn, a standard macroeconomic prescription is to stimulate the economy with lower taxes and higher spending. But in an economic downturn, taxes fall to some extent automatically, as a result of lower incomes. Government spending rises to some extent automatically, as a result of more people becoming eligible for unemployment insurance, Medicaid, food stamps, and so on. Thus, even before the government undertakes additional discretionary stimulus legislation, the automatic stabilizers are kicking in. Might it be possible to redesign the automatic stabilizers of tax and spending policy in advance so that they would offer a quicker and stronger counterbalance when (not if) the next recession comes?
- Trump Team Vets Fed Critic for Board Seat - The New York Times The Trump administration is vetting Judy Shelton, a conservative economist and former Trump campaign adviser, for a seat on the Federal Reserve Board, according to people familiar with the matter, putting the longtime Fed critic one step closer to a leadership role at an institution she would like to drastically change.
- Audits of Highest-Income Taxpayers Fall Again - Center on Budget and Policy Priorities The IRS reported yesterday that it audited fewer millionaires and large corporations in fiscal year 2018 than the previous year, continuing a multi-year decline. Since 2010, the President and Congress have cut IRS funding substantially, causing workforce reductions and shortages of top auditors who have the expertise to review millionaires’ and corporations’ complex returns. These budget cuts pose a risk to a basic government function — i.e., collecting the revenue needed to fund public services — because the federal government relies largely on voluntary compliance with the tax code and, for such compliance to continue, taxpayers must trust that the IRS is enforcing the law fairly and people are paying the taxes they owe. As a result, policymakers must reverse their deep IRS funding cuts of recent years and commit to a multi-year effort to rebuild the agency.
- The Economy Is Strong and Inflation Is Low. That’s What Worries the Fed. - The New York Times America’s job market is booming and the economy is strong, but that combination is not raising prices the way it used to.
- Unconventional monetary policy: A tale of heterogeneity - VoxEU The ECB's unconventional monetary policy package implemented in February 2012 changed collateral requirements. This column examines the effects in the French credit market, using data on corporate loans. Credit indeed increased after the liquidity injection, exclusively driven by supply. There was also strategic risk-taking by a group of banks, an unintentional implication of the policy.
Posted by Mark Thoma on Wednesday, May 22, 2019 at 01:39 PM in Economics, Links |
- Don’t Give Trump Too Much Credit for the Soaring Economy - Alan Blinder In recent weeks, any number of commentators have taken note of what might be called the “paradox of polling” under President Donald Trump. Specifically, the president gets high marks from the public for his handling of the economy but low approval ratings overall. That disjunction is unusual. Presidents normally get high approval ratings when the economy does well (think Bill Clinton’s second term) and low approval ratings when it does poorly (think George W. Bush’s second term). Yet in this, as in seemingly everything else, Mr. Trump is abnormal. The reasons are manifold and simple: He lies about almost everything, defies the law, violates the Constitution, disparages our foreign allies, stokes fear of immigrants, disses every American who is not in his base, carries on embarrassing bromances with murderous dictators like Vladimir Putin and Kim Jong Un, and places an incredible array of crooks and grifters in high positions. I could go on. One of the few things Mr. Trump doesn’t lie about, however, is the economy. It really is in great shape. Does he deserve credit?
- Is the Hot Economy Pulling New Workers into the Labor Force? - FRBSF Labor force participation among prime-age workers has climbed over the past few years, reversing from the substantial drop during and after the last recession. These gains might suggest that the strength of the job market is pulling people from the sidelines into the labor force. However, analysis that accounts for underlying flows between labor force states shows that, rather than drawing new people in, the hot labor market has instead reduced the number of individuals who are dropping out.
- Dr. Popper: Or How I Learned to Stop Worrying and Love Metaphysics - Uneasy Money Introduction to Falsificationism Although his reputation among philosophers was never quite as exalted as it was among non-philosophers, Karl Popper was a pre-eminent figure in 20th century philosophy. As a non-philosopher, I won’t attempt to adjudicate which take on Popper is the more astute, but I think I can at least sympathize, if not fully agree, with philosophers who believe that Popper is overrated by non-philosophers. In an excellent blog post, Phillipe Lemoine gives a good explanation of why philosophers look askance at falsificationism, Popper’s most important contribution to philosophy.
- Climate Change Heterogeneity - No Hesitations One can only go so far in climate econometrics studying time series like the proverbial "global average temperature", just as one can only go so far in macroeconomics with the proverbial "representative agent". Disaggregation will be key to additional progress, as different people in different places experience different climate "treatments" and different economic outcomes. The impressive new paper below begins to confront the massive tasks of data collection, manipulation, analysis, and visualization, in the context of a disaggregated analysis of the effects of temperature change on aggregate output. "Climatic Constraints on Aggregate Economic Output", by Marshall Burke and Vincent Tanutama, NBER Working Paper No. 25779, 2019. Abstract: Efficient responses to climate change require accurate estimates of both aggregate damages and where and to whom they occur. While specific case studies and simulations have suggested that climate change disproportionately affects the poor, large-scale direct evidence of the magnitude and origins of this disparity is lacking. Similarly, evidence on aggregate damages, which is a central input into the evaluation of mitigation policy, often relies on country-level data whose accuracy has been questioned. Here we assemble longitudinal data on economic output from over 11,000 districts across 37 countries, including previously nondigitized sources in multiple languages, to assess both the aggregate and distributional impacts of warming temperatures. We find that local-level growth in aggregate output responds non-linearly to temperature across all regions, with output peaking at cooler temperatures (<10°C) than estimated in earlier country analyses and declining steeply thereafter. Long difference estimates of the impact of longer-term (decadal) trends in temperature on income are larger than estimates from an annual panel model, providing additional evidence for growth effects. Impacts of a given temperature exposure do not vary meaningfully between rich and poor regions, but exposure to damaging temperatures is much more common in poor regions. These results indicate that additional warming will exacerbate inequality, particularly across countries, and that economic development alone will be unlikely to reduce damages, as commonly hypothesized. We estimate that since 2000, warming has already cost both the US and the EU at least $4 trillion in lost output, and tropical countries are >5% poorer than they would have been without this warming.
- The Phillips curve is alive and well - Greg Mankiw Click on graphic to enlarge.
- International evidence for Keynesian economics without the Phillips curve - VoxEU The economies of many countries are operating close to full capacity, but unemployment and inflation are both low. Using data from the US, UK and Canada, this column compares diﬀerences in the macroeconomic behaviour of real GDP, the inﬂation rate and the yields on three-month Treasury securities in the three countries. It shows that the Farmer monetary model, closed with a belief function, outperforms the New Keynesian model, closed with the New Keynesian Phillips curve. The data fit the multiple equilibria emphasised in the Farmer model well, rather than the mean-reverting processes assumed by the New Keynesian model.
- How inequality makes us poorer - Stumbling and Mumbling I welcome the Deaton report into inequality. I especially like its emphasis (pdf) upon the causes of inequality: To understand whether inequality is a problem, we need to understand the sources of inequality, views of what is fair and the implications of inequality as well as the levels of inequality. Are present levels of inequalities due to well-deserved rewards or to unfair bargaining power, regulatory failure or political capture? I fear, however, that there might be something missing here – the impact that inequality has upon economic performance.
- Those revenue-raising early central banks - Notes On Liberty In a piece on a rather different topic, George Selgin, director for the Center for Monetary and Financial Alternatives and editor-in-chief of the monetary blog Alt-M, gave a somewhat offhand comment about the origins of central banks: For revenue-hungry governments to get central banks to fund their debts is itself nothing new, of course. The first central banks were set up with little else in mind. (emphasis added) Writing about little else than (central) banks in history, you can imagine my surprise: Reasoned response: Selgin ought to know better than buying into this simplified argument. Less reasoned response, paraphrasing one of recent year’s most epic tweets: you come into MY house?! Alright, let’s make a quick run-through, then. Clearly, some simplification and lack of attention to nuances is permissible under the punchy poetic licenses of the economic blogosphere – especially so when the core of an argument lies elsewhere. But the conviction that early central banks (a) were created as revenue-raising devices for their governments, or (b) all central banks provided their governments with direct fiscal benefits, is a gross simplification of a much broader and much more diverse history of early public banks.
- How to write - The Enlightened Economist I’ve been on my travels so have a stack of things to post about, but it will have to wait until I’ve waded through the backlog of emails. Meanwhile, though, I polished off Deirdre McCloskey’s Economical Writing: Thirty-five rules for clear and persuasive prose. You don’t have to be an economist to benefit from the book, but it will certainly help many economists – we are not famed for clarity and elegance of expression. I’m a big fan of McCloskey’s writing, although she is something of an acquired taste. But, importantly, she is always a model of clarity.
- Update on the "Series of Unsurprising Results in Economics" - Dave Giles In June of last year I had a post about a new journal, Series of Unsurprising Results in Economics (SURE). If you didn't get to read that post, I urge you to do so. More importantly, you should definitely take a look at this piece by Kelsey Piper, from a couple of days ago, and titled, "This economics journal only publishes results that are no big deal - Here’s how that might save science". Kelsey really understands the rationale for SURE, and the important role that it can play in terms of reducing publication bias, and assisting with replicating results. You can get a feel for what SURE has to offer by checking out this paper by Nick Huntington-Klein and Andrew Gill that they are publishing. We'll all be looking forward to more excellent papers like this!
- The new globalisation and income inequality - VoxEU Trade in intermediates (or ‘unbundling of production') and trade in capital have become increasingly important in last 25 years. This column shows that trade in intermediates generates a reallocation of capital across countries that exacerbates world inequality in both income and welfare. Unbundling of production hurts middle-income countries but helps those with high productivity. Trade in intermediates also increases within-country inequality, and this increase is U-shaped in the aggregate productivity level of the country.
- Long-term and intergenerational effects of education - VoxEU Does investment in schools promote higher educational attainment—and do the effects improve students’ later lives and those of the next generation? This column examines the impact of over 61,000 primary schools built by the Indonesian government between 1973 and 1979, almost doubling the number in the country. The evidence shows that the men and women who accessed education provided by the construction programme benefited from significant improvements in their educational and later life outcomes. So too did their children.
- Time for a Return of Large Corporation Research Labs? - Timothy Taylor It often takes a number of intermediate steps to move from a scientific discovery to a consumer product. A few decades ago, many larger and even mid-sized corporations spent a lot of money on research and development laboratories, which focused on all of these steps. Some of these corporate laboratories like those at AT&T, Du Pont, IBM, and Xerox were nationally and globally famous. But the R&D ecosystem has shifted, and firms are now much more likely to rely on outside research done by universities or small start-up firms. These issues are discussed in "The changing structure of American innovation: Cautionary remarks for economic growth," by Ashish Arora, Sharon Belenzon, Andrea Patacconi, and Jungkyu Suh, presented at conference on "Innovation Policy and the Economy 2019," held on on on April 16, 2019, hosted by the National Bureau of Economic Research, and sponsored by the Ewing Marion Kauffman Foundation.
- Antitrust Alone Is Not Enough to Combat the Problems Associated With Digital Platforms - When it comes to digital platforms, antitrust enforcement is rife with difficulties. Digital platform market structures tend to be concentrated due to network effects and very strong economies of scale and scope, made even stronger than in the past by the role of data. This challenge to enforcement—a challenge that requires all the resources and commitment of both agencies and courts—arises after 40 years of the United States effectively walking backwards on antitrust enforcement. The share of GDP spent on enforcement has been declining steadily; agency activity has been falling; the ideology that less enforcement is better has been marketed to the judiciary as good; measured markups charged by companies have been rising; the share of profits in GDP has been rising, while the labor share has been falling. So even before the rise of digital platforms, we already had a competition problem in ordinary industries where enforcement tools are well developed. Now, in order to catch up with our own economy, we need to develop tools and standards for a new area while we are on the back foot. The white paper by the market structure subcommittee of the Stigler Center’s Digital Platforms Project contains specific changes to both antitrust tools and standards that would help with effective enforcement.
Posted by Mark Thoma on Monday, May 20, 2019 at 12:20 PM in Economics, Links |
- There’s a revealing puzzle in the China tariffs - Larry Summers On Monday, China announced new tariffs on $60 billion of U.S. exports, and the United States threatened new tariffs on up to $300 billion of Chinese goods. These actions were cited as the principle reason for a decline of more than 600 points in the Dow Jones industrial average, or about 2.4 percent in broader measures of the stock market. With the total value of U.S. stocks around $30 trillion, this decline represents more than $700 billion in lost wealth. This was not an isolated event. Again and again in the past year, markets have gyrated in response to the state of trade negotiations between the United States and China. The market sensitivity to threats and counter-threats in the trade war is quite remarkable. Monday’s announcement by the Chinese, for example, would be expected to raise China’s tariffs by about $10 billion. Much of this will show up as higher prices for Chinese importers, and some of it will be avoided by diverting exports of goods such as liquid natural gas to other markets, so the impact on U.S. corporate profits will be far less than $10 billion. Meanwhile, U.S. tariffs are likely to raise corporate profits as higher import costs push some business to domestic producers. There is the further consideration that reasonable market participants should not have entirely discounted the possibility of tariff increases Monday and that there surely remains some chance a trade deal will be reached. So, in fact, the market should not even have moved in full proportion to the change in corporate profitability associated with new tariffs. There is a revealing puzzle here.
- Europe and the class cleavage - Thomas Piketty Three years after the referendum on Brexit and on the eve of the new European elections, the scepticism about Europe is still as strong, particularly amongst the most disadvantaged sections of society. The problem is deep and long-standing. In all the referendums for the last 25 years the working classes have systematically expressed their disagreement with the Europe presented to them, whereas the richest and the most privileged classes supported it. During the French referendum on the Treaty of Maastricht in 1992, we observed that 60% of the voters with the lowest incomes, personal wealth or qualifications voted against, whereas the 40% of the electorate with higher incomes voted in favour; the gap was big enough for the yes vote to win with a small majority (51%). The same thing happened with the Constitutional Treaty in 2005, except that this time only the top 20% were in favour of the yes vote, whereas the lower 80% preferred to vote no, whence a clear victory for the latter (55%). Likewise for the referendum on Brexit in the UK in 2016: this time it was the top 30% who voted enthusiastically to remain in the EU. But, as the bottom 70% preferred to leave, the leave vote won with 52% of the votes. What is the explanation?
- The Increasing Benefits and Diminished Costs of Running a High-Pressure Labor Market - Bernstein and Bentele Since at least the days of Arthur Okun’s work on the “upgrading of workers into more productive jobs in a higher-pressure economy,” economists have recognized the benefits of tight labor markets, both to the macroeconomy and to disadvantaged groups. Much literature, briefly reviewed below, shows persistent, low unemployment associated with nominal and real wage gains, most notably to lower- and middle-wage workers. Other work shows that groups with higher than average jobless rates, such as African Americans, benefit disproportionately from lower overall unemployment, and evidence presented in this paper shows these gains to be economically significant when looking at the impact of high-pressure labor markets not just on real earnings, but on labor supply as well. From the perspective of the Federal Reserve, however, these outsized gains can come at the cost of inflationary pressures. In theory, such risks are heightened when the Fed allows the jobless rate to remain below estimates of the natural rate. But what if, as much analysis has shown, the correlation between inflation and labor market slack is diminished? Should the combination of the flatter Phillips Curve (PC) and the benefits of high-pressure labor markets — benefits that are particularly important in periods of high inequality and weak worker bargaining power — change the Fed’s weighting of the two sides of the tradeoff? Our case thus begins by highlighting the structural decline in the slope of the Phillips Price Curve (PC) and the persistence of well-anchored inflationary expectations. This flattening introduces an asymmetry into the classic tradeoff: the inflationary costs of running a high-pressure labor market have come down relative to the labor market benefits. This asymmetry is partly a function of the weaker correlation between economic conditions and changes in inflation. But it is also a function of the equalizing nature of the benefits of maintaining full employment. At the core of our argument is the idea that changing inflation dynamics, in tandem with higher wage, income, and wealth inequality, should create an asymmetry in the Fed’s reaction function ...
- The Risk of Returning to the Zero Lower Bound - FRBSF Following the global financial crisis, U.S. monetary policy was constrained by the zero lower bound for short-term interest rates for many years. It has since lifted off and rates have gradually climbed. However, in light of the continuing economic expansion, it is relevant to ask how likely it is for the lower bound on interest rates to again become a constraint on monetary policy. Analysis using several different approaches suggests that there currently appears to be a low risk of the economy returning to the zero lower bound for at least the next several years.
- Does the Federal Reserve Talk Too Much? - Tim Taylor For a long time, the Federal Reserve (and other central banks) carried out monetary policy with little or no explanation. The idea was that the market would figure it out. But in the last few decades, there has been an explosions of communication and transparency from the Fed (and other central banks), consisting both of official statements and an array of public speeches and articles by central bank officials. On one side, a greater awareness has grown up that economic activity isn't just influenced by what the central bank did in the past, but on what it is expected to do in the future. But does the this "open mouth" approach clarify and strengthening monetary policy, or just muddle it?
- The Disconnect between Inflation and Employment in the New Normal - Lael Brainard It is a pleasure to be here at the National Tax Association Annual Spring Symposium. Just as it may take the tax experts and practitioners here today some time to disentangle the longer-term implications of recent major changes to tax policy, so, too, we are in the process of analyzing the lessons for monetary policy of apparent post-crisis changes in the relationships among employment, inflation, and interest rates.1 The Congress has assigned the Federal Reserve the job of using monetary policy to achieve maximum employment and price stability. Price stability means moderate and stable inflation, which the Federal Reserve has defined to be 2 percent inflation. Maximum employment is understood as the highest level of employment consistent with price stability. In the aftermath of the Great Recession, which had deep and persistent effects, it is important to understand whether there have been long-lasting changes in the relationships among employment, inflation, and interest rates in order to ensure our policy framework remains effective.
- Nature versus nurture in economic outcomes and behaviours - VoxEU The wealth of parents and that of their children is highly correlated, but little is known about the different roles genetic and environmental factors play in this. This column compares outcomes for adopted children in Sweden and those of their adoptive and biological parents and finds there is a substantial role for environment in the transmission of wealth and a much smaller role for pre-birth factors. And while human capital linkages between parents and children appear to have stronger biological than environmental roots, earnings and income are, if anything, more environmental.
- Did Changes in Economic Expectations Foreshadow Swings in the 2018 Elections? - Liberty Street Economics In the months leading up to the 2018 midterm elections, were economic expectations in congressional districts about to elect a Republican similar to those in districts about to elect a Democrat? How did economic expectations evolve in districts where the party holding the House seat would switch? After examining the persistence of polarization in expectations using voting patterns from the presidential election in our previous post, we explore here how divergence in expectations may have foreshadowed the results of the midterm elections. Using the Survey of Consumer Expectations, we show that economic expectations deteriorated between 2016 and 2018 in districts that switched from Republican to Democratic control compared to districts that remained Republican.
- America’s Illusions of Growth - Jeffrey D. Sachs Many commentators have interpreted buoyant GDP and unemployment data in the United States as vindicating President Donald Trump’s economic policies, and some suggest that his re-election chances have improved as a result. But these indicators fail to measure what really counts for the public.
- Why We Need New Measures of Potential Output—and What They Tell Us - Institute for New Economic Thinking Potential output, generally understood as the highest level of output that may be attained without putting inflationary pressures upon the economy, is a crucial notion in the current design and management of macroeconomic policies. Empirical measures of this notion and of the distance between it and actual output—the so-called output gap—play a fundamental role in determining the expansionary or contractionary stance of both monetary and fiscal policy, and the margins for their use. Mainstream economic theory sees potential output as determined exclusively by supply forces (essentially, resources and productivity), leaving to aggregate demand only the role of causing temporary deviations from it—precisely, the output gaps. When the economy is believed to be already operating at potential or slightly above, any increase in demand is regarded as dangerous for its dreaded inflationary consequences, and restrictive measures—such as the central bank raising interest rates—are taken.
- When American Capitalism Meant Equality - ProMarket Americans used to have a relatively egalitarian view of markets. How did they come to accept extreme inequality as an innate part of their economic system? At the heart of this change is a radical shift in the meaning of American capitalism itself.
- Fed Appointments - IGM Forum Selecting candidates for membership of the Federal Open Market Committee (FOMC) based primarily on their political views would lead to worse monetary policy outcomes than has been the case over the last 15 years. Agree or disagree?
Posted by Mark Thoma on Thursday, May 16, 2019 at 02:13 PM in Economics, Links |
- Evolution or revolution: An afterword - Blanchard and Summers The changes in macroeconomic thinking prompted by the Great Depression and the Great Inflation of the 1970s were much more dramatic than have yet occurred in response to the events of the last decade. This column argues that this gap is likely to close in the next few years as a combination of low neutral rates, the re-emergence of fiscal policy as a primary stabilisation tool, difficulties in hitting inflation targets, and the financial ramifications of a low-rate environment lead to important changes in our understanding of the macroeconomy and in policy judgements about how to achieve the best performance.
- Killing the Pax Americana - Paul Krugman O.K., they weren’t supposed to start the trade war until I got back from vacation. And I really have too many kilometers to cover and hills to climb to weigh in on a regular basis or at great length. But since I’m currently sitting in an outdoor café with my coffee and croissant, I thought I might take a few minutes to address two misconceptions that, I believe, are coloring discussion of the trade conflict. By the way, I don’t mean Trump’s misconceptions. As far as I can tell, he isn’t getting a single thing about trade policy right. He doesn’t know how tariffs work, or who pays them. He doesn’t understand what bilateral trade imbalances mean, or what causes them. He has a zero-sum view of trade that flies in the face of everything we’ve learned over the past two centuries. And to the (small) extent that he is making any coherent demands on China, they’re demands China can’t/won’t meet. But Trump’s critics, while vastly more accurate than he is, also, I think, get a few things wrong, or at least overstate some risks while understating others.
- The Fault in R-Star- Federal Reserve Bank of Richmond In a 2018 speech at the annual Economic Policy Symposium in Jackson Hole, Wyo., Fed Chairman Jerome Powell compared monetary policymakers to sailors. Like sailors before the advent of radio and satellite navigation, Powell said, policymakers should navigate by the stars when plotting a course for the economy. Powell wasn't referring to stars in the sky, however. He was talking about economic concepts such as the natural rate of unemployment and the natural real interest rate. In economic models, these variables are often denoted by an asterisk, or star. The natural rate of interest in particular sounds like the perfect star to guide monetary policy. The real, adjusted-for-inflation interest rate is typically represented in economic models by a lowercase "r." The natural rate of interest, or the real interest rate that would prevail when the economy is operating at its potential and is in some form of an equilibrium, is known as r* (pronounced "r-star"). It is the rate consistent with the absence of any inflationary or deflationary pressures when the Fed is achieving its policy goals of maximum employment and stable prices. Since the financial crisis of 2007-2008, Fed officials have often invoked r-star to help describe the stance of monetary policy. But lately, r-star seems to have lost some of its luster. "Navigating by the stars can sound straightforward," Powell said in his Jackson Hole address. "Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly." Even New York Fed President John Williams, who helped pioneer estimating r-star, recently bemoaned the challenges of using the natural rate as a guide for policy. "As we have gotten closer to the range of estimates of neutral, what appeared to be a bright point of light is really a fuzzy blur," he said in September 2018. Why did r-star become so prominent in monetary policy discussions following the Great Recession, and why have its fortunes seem to have waned?
- Is There a Connection Between Undocumented Immigrants and Crime? - The New York Times A lot of research has shown that there’s no causal connection between immigration and crime in the United States. But after one such study was reported on jointly by The Marshall Project and The Upshot last year, readers had one major complaint: Many argued it was unauthorized immigrants who increase crime, not immigrants over all. An analysis derived from new data is now able to help address this question, suggesting that growth in illegal immigration does not lead to higher local crime rates.
- The Return of Fiscal Policy - Barry Eichengreen Public debt is not a free lunch in an economy close to full employment. But when investment demand tends to fall short of saving, as it does when monetary policymakers are unable to push inflation higher to reduce real interest rates, there is a risk of chronic underemployment – and a stronger argument for deficit spending.
- The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices - Richard Clarida I am pleased to attend this Fed Listens event providing a New England perspective for the Federal Reserve's review of our monetary policy strategy, tools, and communication practices.1 We are bringing open minds to our review and are seeking a broad range of perspectives. To us, it simply seems like good institutional practice to engage with a wide range of interested individuals and groups as part of a comprehensive approach to enhanced transparency and accountability.2 Motivation for the Review The Congress charged the Federal Reserve with achieving a dual mandate—maximum employment and price stability—and this review will take this mandate as given. We will also take as given that a 2 percent rate of inflation in the price index for personal consumption expenditures is the operational goal most consistent with our price-stability mandate. While we believe that our existing strategy, tools, and communications practices have generally served the public well, we are eager to evaluate ways they might be improved. That said, based on the experience of other central banks that have undertaken similar reviews, our review is more likely to produce evolution, not a revolution, in the way we conduct monetary policy.
- Joseph Schumpeter (1927): The Explanation of the Business Cycle - Brad DeLong The childhood of every science is characterised by the prevalence of "schools," of bodies of men, that is, who swear by bodies of doctrine, which differ toto caelo from each other as to philosophic background and fundamentals of methods, and aim at preaching different "systems" and, if possible, different results in every particular—each claiming to be in exclusive possession of Truth and to fight for absolute light against absolute darkness. But when a science has "gained man's estate," these things, whilst never ceasing to exist, tend to lose importance: the common ground expands, merits and ranges of "standpoints" and "methods " become matter of communis opinio doctorum, fundamental differences shade off into each other; and what differences remain are confined within clear-cut questions of fact and of analytic machinery, and capable of being settled by exact proof...
- Understanding the Bad News for IV Estimation - No Hesitations In an earlier post I discussed Alwyn Young's bad news for IV estimation, obtained by Monte Carlo. Immediately thereafter, Narayana Kocherlakota sent his new paper, "A Near-Exact Finite Sample Theory for an Instrumental Variable Estimator", which provides complementary analytic insights. Really nice stuff.
- On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint - NBER The zero lower bound (ZLB) irrelevance hypothesis implies that the economy's performance is not affected by a binding ZLB constraint. We evaluate that hypothesis for the recent ZLB episode experienced by the U.S. economy (2009Q1-2015Q4). We focus on two dimensions of performance that were likely to have experienced the impact of a binding ZLB: (i) the volatility of macro variables and (ii) the economy's response to shocks. Using a variety of empirical methods, we find little evidence against the irrelevance hypothesis, with our estimates suggesting that the responses of output, inflation and the long-term interest rate were hardly affected by the binding ZLB constraint, possibly as a result of the adoption and fine-tuning of unconventional monetary policies. We can reconcile our empirical findings with the predictions of a simple New Keynesian model under the assumption of a shadow interest rate rule.
- How to design a stimulus package - VoxEU Academics and policymakers alike have debated how to structure an optimal stimulus package since the Great Recession. This column revisits the arguments related to the size of the multiplier and the usefulness of public spending, and offers a blueprint for future stimulus packages. It finds that the relationship between the multiplier and stimulus spending is hump-shaped, and that a well-designed stimulus package should depend on the usefulness of public expenditure. The output multiplier is not a robust statistic to use, and instead the ‘unemployment multiplier’ should be used.
Posted by Mark Thoma on Monday, May 13, 2019 at 01:10 PM in Economics, Links |
- Trump Is Terrible for Rural America - Paul Krugman Economists, reports Politico, are fleeing the Agriculture Department’s Economic Research Service. Six of them resigned on a single day last month. The reason? They are feeling persecuted for publishing reports that shed an unflattering light on Trump policies. But these reports are just reflecting reality (which has a well-known anti-Trump bias). Rural America is a key part of Donald Trump’s base. In fact, rural areas are the only parts of the country in which Trump has a net positive approval rating. But they’re also the biggest losers under his policies. What, after all, is Trumpism? ...
- No Moore golden era for US monetary policy - VoxEU Stephen Moore, President Trump’s pick for the Federal Reserve Board, has been pro-cyclical in his recommendations for monetary policy, opposing stimulus when the economy needed it and favouring stimulus when the economy did not. This column argues that Moore’s switch to urging monetary stimulus when Trump took officefits into a wider pattern among of pro-cyclicalpositions among leading Republicans, not just in monetary policy, but alsofiscaland regulatory policy.
- Unemployment Isn’t What It Used to Be - WSJ The U.S. economy, fresh off another strong report, has created an average of 205,000 new jobs a month in 2019, far more than the roughly 100,000 needed to keep up with population growth. The official unemployment rate has fallen to 3.6%, the lowest in 50 years. Historically, such low unemployment has signaled that the economy is at full capacity, which causes wages and inflation to accelerate as employers compete for scare workers. Yet wage growth has increased modestly, to about 3% a year, and inflation is still running at 1.5%, below the Fed’s 2% target. What’s going on? Maybe we’re looking at the wrong indicators. ...
- Journal Reporting Times, EJMR vs. Self-Reported Stats from Journals - Douglas L. Campbell Methodology: I took the self-reported data I collected here (which come from from ejmr here), and compared to the official journal stats collected by Juan Carlos Suárez here. Overall, the data line up fairly well. ... Here is the correlation in journal first-response times, conditional on being sent out for review.
- How the Failure of “Prestige Markets” Fuels Populism - Ricardo Hausmann Given the requirements of today’s technology, dismissing expertise as privilege is dangerous. That's why a well-functioning prestige market is essential to reconciling technological progress and the maintenance of a healthy polity.
- Tools of monetary policy - Econbrowser The Federal Reserve characterizes its current policy decisions in terms of targets for the fed funds rate and the size of its balance sheet. The fed funds rate today is essentially an administered rate that is heavily influenced by regulatory arbitrage and divorced from its traditional role as a signal of liquidity in the banking system. The size of the Fed’s balance sheet is at best a very blunt instrument for influencing interest rates. In this paper I compare the current operating system with the historical U.S. system and the procedures of other central banks. I then examine strategies for transitioning from the current system to one that would give the Federal Reserve better tools with which to achieve its strategic objective of influencing inflation and output.
- Cleaning Up After Burns’s Mess - Uneasy Money In my two recent posts (here and here) about Arthur Burns’s lamentable tenure as Chairman of the Federal Reserve System from 1970 to 1978, my main criticism of Burns has been that, apart from his willingness to subordinate monetary policy to the political interests of he who appointed him, Burns failed to understand that an incomes policy to restrain wages, thereby minimizing the tendency of disinflation to reduce employment, could not, in principle, reduce inflation if monetary restraint did not correspondingly reduce the growth of total spending and income. Inflationary (or employment-reducing) wage increases can’t be prevented by an incomes policy if the rate of increase in total spending, and hence total income, isn’t controlled. King Canute couldn’t prevent the tide from coming in, and neither Arthur Burns nor the Wage and Price Council could slow the increase in wages when total spending was increasing at rate faster than was consistent with the 3% inflation rate that Burns was aiming for. ...
- How our low inflation world was made - Financial Times If we are to make sense of where the world economy is today and might be tomorrow, we need a story about how we got here. By “here”, I mean today’s world of ultra-low real and nominal interest rates, populist politics and hostility to the global market economy. The best story is one about the interaction between real demand and the ups and then downs of global credit. Crucially, this story is not over. ...
Posted by Mark Thoma on Friday, May 10, 2019 at 01:53 PM in Economics, Links |
- An Industrial Policy for Good Jobs - Dani Rodrik & Charles Sabel So-called productive dualism is driving many contemporary ills in developed and developing countries alike: rising inequality and exclusion, loss of trust in governing elites, and growing electoral support for authoritarian populists. But much of the policy discussion today focuses on solutions that miss the true source of the problem.
- Competitive Edge: Principles and presumptions for U.S. vertical merger enforcement policy - Equitable Growth Antitrust and competition issues are receiving renewed interest, and for good reason. So far, the discussion has occurred at a high level of generality. To address important specific antitrust enforcement and competition issues, the Washington Center for Equitable Growth has launched this blog, which we call “Competitive Edge.” This series features leading experts in antitrust enforcement on a broad range of topics: potential areas for antitrust enforcement, concerns about existing doctrine, practical realities enforcers face, proposals for reform, and broader policies to promote competition. Jonathan B. Baker, Nancy L. Rose, Steven C. Salop, and Fiona Scott Morton have authored this month’s contribution.
- Alberto Giovannini 1955-2019 - VoxEU Alberto Giovannini was an influential macroeconomist and financial economist who thought about financial markets with a unique combination of sound theory and deep practical experience. He was also an early CEPR Research Fellow appointment and had great enthusiasm for the mission of CEPR. This column pays tribute to a much-loved man who combined intellectual gravity with great energy and a positive outlook that he communicated to all.
- Lifetime Medical Spending of Retirees - Federal Reserve Bank of Richmond Retirees face considerable medical expenses during their remaining lives. Model simulations suggest that although a large amount of that spending can be predicted — based on attributes such as income, health, and marital status — there remains significant dispersion. Households with heads who turned seventy in 1992 will incur $122,000 in medical spending on average, including out-of-pocket expenditures and Medicaid payments. But the top 5 percent of households will incur more than $300,000 in such spending. The level and dispersion of this spending diminish only slowly with age.
- Snapshots of US Income Taxation Over Time - Tim Taylor As Americans recover from our annual April 15 deadline for filing income taxes, here are a series of figures about longer-term patterns of taxes in the US economy. They are drawn from a series of blog posts by the Tax Foundation over the last few months. The Tax Foundation is a nonpartisan group whose analysis typically leans toward side that taxes on those with high incomes are already high enough. However, the figures that follow are compiled from fairly standard data sources: IRS data, the Congressional Budget Office, and the like.
- Ten Years Later—Did QE Work? - Liberty Street Economics By November 2008, the Global Financial Crisis, which originated in the residential housing market and the shadow banking system, had begun to turn into a major recession, spurring the Federal Open Market Committee (FOMC) to initiate what we now refer to as quantitative easing (QE). In this blog post, we draw upon the empirical findings of post-crisis academic research–including our own work–to shed light on the question: Did QE work?
- Two Financial Instruments that made the Modern World - Notes On Liberty Following my Mr. Darcy piece that outlined the use and convenience of British government debt instruments in the eighteenth (and predominantly the nineteenth) century, I thought to extend the discussion to two particular financial instruments. In addition to the Consols (homogenous, tradeable perpetual government debt) that formed the center of public finance – and whose active secondary market that made them so popular as savings devices – the Bill of Exchange was the prime instrument used by merchants for financing trade and settling debts.
- A tax on targeted ads? – Digitopoly When Paul Romer expresses an opinion, it is always worthwhile to listen because it is always well-considered. In an opinion piece in the New York Times, he puts forward a proposal to restore what he terms is the “public commons” of the provision of information in support of democracy. He actually puts forward two linked proposals: one for a target on targeted ads by digital platform companies and a proposal that the tax is progressive (which may be a check on dominance). The latter is interesting but I will just focus on the former here. Romer opines that it is the ad-based business model that is at the heart of problems of misinformation on Google and Facebook and that we would be better off with a subscription-based model. By taxing ads (or ad revenue), you would cause these platforms to shift towards subscriptions. There are lots of issues here so let me try to disentangle them.
- Explaining Inflation Inertia - Carmen M. Reinhart Despite central bankers' concerted efforts, credible price-stability targets have proved elusive in countries like Argentina, where inflation is soaring, and Japan, which can't shake the specter of deflation. What can governments do to influence inflation expectations when central banks’ policies prove insufficient to the task?
Posted by Mark Thoma on Wednesday, May 8, 2019 at 03:20 PM in Economics, Links |
- The economics of mobile money - VoxEU Mobile money has transformed the landscape of financial inclusion in developing and emerging market countries, leapfrogging the provision of formal banking services. This column explains how mobile money potentially helps ameliorate several areas of market failure in developing economies, including saving, insurance, and the empowerment of women. It illustrates these effects using examples from aburgeoning empirical literature and concludes that the system-wide effects of mobile money may be even greater than current studies suggest.
- A Tax That Could Fix Big Tech - Paul Romer It is the job of government to prevent a tragedy of the commons. That includes the commons of shared values and norms on which democracy depends. The dominant digital platform companies, including Facebook and Google, make their profits using business models that erode this commons. They have created a haven for dangerous misinformation and hate speech that has undermined trust in democratic institutions. And it is troubling when so much information is controlled by so few companies. What is the best way to protect and restore this public commons? Most of the proposals to change platform companies rely on either antitrust law or regulatory action. I propose a different solution. Instead of banning the current business model — in which platform companies harvest user information to sell targeted digital ads — new legislation could establish a tax that would encourage platform companies to shift toward a healthier, more traditional model. ...
- The Economics of Donald J. Keynes - Paul Krugman I made a bad economic call on election night 2016, predicting a Trump recession. But I quickly realized that political dismay had clouded my judgment, and retracted the call three days later. “It’s at least possible,” I wrote on Nov. 11, 2016, “that bigger budget deficits will, if anything, strengthen the economy briefly.” What I didn’t realize at the time was just how much bigger the deficits would get. Since 2016, the Trump administration has, in practice, implemented the kind of huge fiscal stimulus followers of John Maynard Keynes pleaded for when unemployment was high — but Republicans blocked. Contrary to what Donald Trump and his supporters claim, we are not seeing an unprecedented boom. ...
- Improving the Phillips Curve with an Interaction Variable - FRBSF A key challenge for monetary policymakers is to predict where inflation is headed. One promising approach involves modifying a typical Phillips curve predictive regression to include an interaction variable, defined as the multiplicative combination of lagged inflation and the lagged output gap. This variable appears better able to capture the true underlying inflationary pressure associated with the output gap itself. Including the interaction variable helps improve the accuracy of Phillips curve inflation forecasts over various sample periods.
- Improving Labor Force Participation - macroblog Without question, the U.S. labor market has tightened a lot over the last few years. But a shifting trend in labor force participation—and especially a rise in the propensity to seek employment by those in their prime working years—seems to be relieving some labor market pressure. From the first quarter of 2015 to the first quarter of 2019, the labor force participation (LFP) rate among prime-age workers (those between 25 and 54 years old) increased by about 1.5 percentage points (see the chart below), adding about 2 million workers more than if the participation rate had not increased. ...
- Two Measures of Core Inflation: A Comparison - Dallasfed.org Abstract: Trimmed-mean Personal Consumption Expenditure (PCE) inflation does not clearly dominate ex-food-and-energy PCE inflation in real-time forecasting of headline PCE inflation. However, trimmed-mean inflation is the superior communications and policy tool because it is a less-biased real-time estimator of headline inflation and because it more successfully filters out headline inflation’s transitory variation, leaving only cyclical and trend components.
- Smith, MMT, and science in economics - John Cochrane Many blog readers have asked for my opinions of "Modern Monetary Theory." I haven't written yet, because I try to read about things in some detail, ideally from original sources, before reviewing them, which I have not done. Life is short. From the summaries I have read, some of the central propositions of MMT draw a false conclusion from two sensible premises. 1) Countries that print their own currencies do not have to default on excessive debts. They can always print money to pay off debts. True. 2) Inflation in the end can and must be controlled by raising taxes or cutting spending, sufficiently to soak up such printed (non-interest-bearing) money. True. The latter proposition is the heart of the fiscal theory of the price level, so I would have an especially tough time objecting. It does not follow that the US need not worry about deficits, and may happily borrow tens of trillions to finance all sorts of spending. ...
- Housing market and bank lending effects on young firms and local economies - VoxEU Young firms live a financially precarious life, often dependent on self-funding tied to the value of the business owners’ homes. This column uses data from the US to show that housing market fluctuations play a major role in driving medium-term changes in young firm employment shares. As young firms hire a disproportionate number of younger and less-educated workers, these groups are disproportionately affected by house price fluctuations.
- The economy isn't getting better for most Americans. But there is a fix - Heather Boushey The economy is getting bigger, but not better. Not for most Americans, anyway. In the United States, additional income from productivity and growth has been going mostly to those at the top of the income and wealth ladder. Between 1979 and 2016, the US national income grew by nearly 60%, but after accounting for taxes and transfers, the bottom half of the income distribution experienced incomes rising by 22%, while those in the top 10% had income gains that were almost five times as much – 100%. As income inequality widens, it’s calcified into some at the top accumulating larger and larger stocks of assets – money, but also property, stocks, bonds and other kinds of capital. In the United States, the distribution of wealth is even more severely unequal than income. Since 1979, wealth gains at the top have grown even faster than income; those in the top 1% now control about 40% of all wealth in the US economy, and the top 0.1% control more than 20% – three times as much as the late 1970s. ...
- The Great Depression: An Intake from "Slouching Towards Utopia?: An Economic History of the Long Twentieth Century 1870-2016" - Brad DeLong This is the current draft of chapter 10 of Slouching Towards Utopia?. I am, again, of several minds with respect to it. I think it says what really needs to be said. I am not sure it says it in the right length. And I am not sure that I have successfully assembled the puzzle pieces in the right way... So tell me what you think of it:
- The Sabotage Years - Paul Krugman Do you remember the great inflation scare of 2010-2011? The U.S. economy remained deeply depressed from the aftereffects of the burst housing bubble and the 2008 financial crisis. Unemployment was still above 9 percent; wage growth had slowed to a crawl, and measures of underlying inflation were well below the Federal Reserve’s targets. So the Fed was doing what it could to boost the economy — keeping short-term interest rates as low as possible, and buying long-term bonds in the hope of getting some extra traction. But Republicans were up in arms, warning that the Fed’s policies would lead to runaway inflation. ...
Posted by Mark Thoma on Monday, May 6, 2019 at 08:30 PM in Economics, Links |