Economist's View

Links (5/31/19)

• After Neoliberalism - Joseph E. Stiglitz For the past 40 years, the United States and other advanced economies have been pursuing a free-market agenda of low taxes, deregulation, and cuts to social programs. There can no longer be any doubt that this approach has failed spectacularly; the only question is what will – and should – come next.
• China-US Trade War - IGM Forum Question A: The incidence of the latest round of US import tariffs is likely to fall primarily on American households.
  Question B: The impact of the tariffs – and any Chinese countermeasures – on US prices and employment is likely to be felt most heavily by lower income groups and regions.
• Does Trade Reform Promote Economic Growth? A Review of Recent Evidence - Douglas Irwin Do trade reforms that significantly reduce import barriers lead to faster economic growth? In the two decades since the critical survey of empirical work on this question by Francesco Rodriguez and Dani Rodrik in 2000, new research has tried to overcome the various methodological problems that have plagued previous attempts to provide a convincing answer. This paper examines three strands of recent work on this issue: cross-country regressions focusing on within-country growth, synthetic control methods on specific reform episodes, and empirical country studies looking at the channels through which lower trade barriers may increase productivity. A consistent finding is that trade reforms that significantly reduce import barriers have a positive impact on economic growth, on average, although the effect differs across countries. Overall, these research findings should temper some of the previous agnosticism about the empirical link between trade reform and economic performance.
• Does That Word Mean What You Think It Means? - Tim Duy Prologue In an earlier piece I documented the Federal Reserve’s failure to consistently hit their 2 percent inflation target and suggest a corrective policy change. Here I explore some of the confusion around the current framework and consider how the Fed can be pursuing a symmetric inflation target yet not see symmetric policy outcomes. Click here for newsletter version! Introduction The Federal Reserve’s much anticipated conference on strategy, tools, and communication will soon be upon us. Will the conference yield any groundbreaking changes in the Fed’s policy approach? Probably not. Federal Reserve Chair Jerome Powell set a low barfor the outcomes of this year’s strategy review, stressing the likely results would be “evolution not revolution.” ...
• How Central-Bank Independence Dies - Kenneth Rogoff Since the world’s major central banks came to the global economy’s rescue in 2008, they have had more and more tasks foisted upon them, even as some politicians question their expanded role and others seek to undermine their policymaking autonomy. To escape this dilemma, monetary authorities must get back to doing what they do best.
• Why There Has Been a Surge in Single Mothers Who Work - The New York Times ...they seem to be responding to a patchwork of policies, both carrots and sticks. At the federal level, the safety net has become less reliable, so working for pay is increasingly their only option. But at the local one, new policies like paid leave and minimum wage increases have made it more feasible for single mothers to work. Together, these appear to have primed them to take advantage of the biggest driver of all: a highly competitive labor market. ...
• How Economic Statistics Are Being Transformed - Tim Taylor Economic statistics are invisible infrastructure, supporting better decisions by government, business, and individuals. But the fundamentals survey-based methods of US government statistics have substantially eroded, because people and firms have become less willing to fill out surveys in a timely and accurate way. There are active discussions underway about how to replace or supplement existing statistics with either administrative data from government programs or private-sector data. But these approaches have problems of their own. ...
• The Research-Policy Nexus: ZLB, JMCB and FOMC - John Williams John Maynard Keynes quipped, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” I wonder whether Keynes would see this as a feature rather than a bug in light of his enduring influence on the profession more than 70 years after his death. The theme of my talk today is that during my quarter century as a researcher and policymaker at the Fed, we have not been overly beholden to defunct economists. Quite the contrary. A quick scan of FOMC memos, briefings, and meeting minutes provides ample evidence that a wide range of economic research—new and old, conventional and outside the box—regularly enters into our debates and influences our decisions. This represents a rich two-way dialogue between researchers and policymakers, with both sides probing for new answers to old questions. ...
• A new one for price discrimination: taxing the late – Digitopoly
• ... I found out yesterday that, if you book, the lowest, Basic fare and you check in on the web, you are not given a mobile boarding pass or one you can print out. Instead, you *have* to queue up and get the pass from a gate agent. (And no they don’t have any electronic check-in terminals at the airport). In other words, it is inconvenient and, critically, creates a ton of risk in terms of leaving to go to the airport later as you might find the queue lengthy and long with people who need to change a flight or check bags or something. This is what economists have termed, a damaged good. It is where a firm actually incurs more costs to supply a lower quality product. It doesn’t occur often but, as Preston McAfee showed years ago, it is theoretically profitable because it allows for third-degree price discrimination or versioning. That makes it also fun for teaching as it seems so outrageous. ...
• Trade Wars Heats Up With New Assault on Mexico - Tim Duy One way or another, President Trump is going to drag the Fed into his trade wars. Tonight Trump announced via Twitter that imports from Mexico would face a 5% beginning June 10. The tariff could rise as high as 25% unless Mexico acts to stem the flow of refugees from Central America. It’s not clear that the legal authority exists to take such action, but, you know, details, details. And the White House is trying to argue that these tariff threats are separate from the USMCA trade deal that is currently a legislative priority. I guess this is like telling your wife that your mistress doesn’t have anything to do with your marriage. You really can’t make this stuff up anymore. A couple of points jump to mind here. ...
• Protecting the Independence and Integrity of Research - ProMarket Inappropriate financial donor influence at institutions of higher education appears to be on the rise and risks eroding public trust in academic research. In order to defend academic freedom and institutional independence, we have decided to create a new database to document clear violations of well-accepted norms involving financial donations.
• Sustaining Maximum Employment and Price Stability - Richard Clarida In July, the current U.S. economic expansion will become the longest on record—or at least the record since the 1850s, which is as far back as the National Bureau of Economic Research tracks U.S. business cycles.2 In anticipation of that milestone, I would like to take stock of where the U.S. economy is today, to assess its future trajectory, to review some important structural changes in the economy that have occurred over the past decade, and to explore what all of this might mean for U.S. monetary policy. ---
• Monetary Policy and Financial Stability - Randal Quarles I would like to use my time here to talk about a topic of interest to many central bankers and macroeconomists: the interaction of monetary policy and financial stability. As you well know, monetary policy has powerful effects on financial markets, the financial system, and the broader economy. Conversely, financial instability, by impairing the provision of credit and other financial services, can depress economic growth, cause job losses, and push inflation too low. Accordingly, financial stability, through its effects on the Federal Reserve's dual-mandate goals of maximum employment and stable prices, must be a consideration in the setting of monetary policy. ...
• What is “average inflation targeting”? - Brookings The Federal Reserve is charged by Congress with maintaining price stability and maximum sustainable employment. The Fed defines “price stability” as inflation at 2 percent. In its last annual statement on its goals and monetary policy strategy, the Federal Open Market Committee—the Fed’s policy-making body—said: “Inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. The Committee would be concerned if inflation were running persistently above or below this objective.” ...
• Why Call it "Socialism"? - Tim Taylor I've been coming around to the belief that most modern arguments over "socialism" are a waste of time, because the content of the term has become so nebulous. When you drill down a bit, a lot of "socialists" are really just saying that they would like to have government play a more active role in providing various benefits to workers and the poor, along with additional environmental protection. ...
• The costs and benefits of performance fees in mutual funds - VoxEU Performance fee-based contracts, which aim to align the interests of the fund manager with that of the investor, have been controversial in mutual funds markets, and are once again under review in Europe. This column presents empirical evidence showing that performance fee contracts do not improve fund performance, particularly in instances where contracts fail to specify a benchmark for results.

Links (5/28/19)

• Trump Tantrums the Dems Out of a Trap - Paul Krugman I gotta say, it was very clever of Nancy Pelosi to steal Donald Trump’s strawberries, pushing him over the edge into self-evident lunacy. As everyone knows, Trump stormed out of a meeting on infrastructure, apparently out of uncontrollable rage over Pelosi’s remarks pointing out that the administration’s stonewalling on all fronts, including raw defiance of the law requiring that it provide the president’s tax returns, obviously amount to a coverup of something (and maybe multiple things.) And Democrats should be grateful. ...
• Advertising as a major source of human dissatisfaction - VoxEU Although the negative impact of conspicuous consumption has been discussed for more than a century, the link between advertising and individual is not well understood. This column uses longitudinal data for 27 countries in Europe linking change in life satisfaction to variation in advertising spend. The results show a large negative correlation that cannot be attributed to the business cycle or individual characteristics.
• Vietnam Looks To Be Winning Trump's Trade War - Brad Setser Vietnam's exports to the U.S. are growing fast. It also runs an overall current account surplus. If it has resumed purchasing dollars in the foreign exchange market to keep its currency from appreciating, it may soon be a test case for Trump's policy toward countries that intervene to maintain an undervalued currency.
• Robert Heilbroner (1996): The Embarrassment of Economics - Brad DeLong I am approaching an age that can be called venerable, a process over which I have no control but which allows me certain privileges, among them saying outrageous things. This, I must warn you, is an outrageous speech, all the more so because it is delivered in dead earnest, despite a certain flippancy that may intrude from time to time. The subject is the degeneration—I am tempted to say "degeneracy"—of economics, a social discipline I hold, or rather wish I could hold, in the highest regard. Let me describe my own introduction to economics.
• Which Core to Believe? Trimmed Mean Versus Ex-Food-and-Energy Inflation - Dallasfed.org Twice since 2014, core personal consumption expenditures (PCE) inflation—inflation excluding food and energy—decelerated sharply, only to ultimately reverse course. The Dallas Fed’s Trimmed Mean PCE inflation rate correctly identified the downward moves as transitory, and looked through them (Chart 1). Chart 1: Sperate Measures Depict Two Very Different Pictures of Inflation Downloadable chart | Chart data Giving more weight to one or the other of these inflation measures would have led to rather different assessments of appropriate policy. Recent data suggest that another divergence is emerging, and the conflicting signals have brought renewed attention to the trimmed mean. We argue here that the trimmed mean, which excludes the most extreme price changes in consumer goods and services each month, provides better real-time signals of the trend in all-items (headline) inflation than does the usual ex-food-and-energy measure. Along the way, we discuss the “why” and “how” of the trimmed mean’s construction. In a follow-up piece drawing on some of our recent research, we’ll explore another trimmed mean advantage over ex-food-and-energy inflation: its stronger, more stable response to cyclical conditions. ...
• Is the U.S. budget deficit sustainable? - MacroMania The U.S. federal budget deficit for 2018 came in just shy of $800 billion, or about 4% of the gross domestic product (the primary deficit, which excludes the interest expense of the debt, was about 3% of GDP). As the figure above shows, the present level of deficit spending (as a ratio of GDP) is not too far off from where it was in the late 1970s and early 1980s. It's also not too far off from where it was in the early 2000s. Of course, the question people are asking is whether deficits of this magnitude can be sustained into the foreseeable future without economic consequences (like higher inflation). In this post, I suggest that the answer to this question is yes, but just barely. ...
• An old result on automation and wages – Digitopoly The first issue of AER Insights is out and the very first article is one by Francesco Caselli and Alan Manning on “Robot Arithmetic: New Technologies and Wages.” Here is the abstract: Existing economic models show how new technology can cause large changes in relative wages and inequality. But there are also claims, based largely on verbal expositions, that new technology can harm workers on average or even all workers. This paper shows—under plausible assumptions—that new technology is unlikely to cause wages for all workers to fall and will cause average wages to rise if the prices of investment goods fall relative to consumer goods (a condition supported by the data). We outline how results may change with different assumptions. The key result is that new technology will not cause wages for all workers to fall and, indeed, should increase average wages if the price of capital falls relative to consumer goods. This is a good, clean theoretical result that is far from appreciated by people who discuss things like automation in the popular press and even by those who study the impact of automation on labour markets. ...
• Why Did the US Labor Share of Income Fall So Quickly? - Tim Taylor The share of US national income going to labor was sagging through the second half of the century, but then plunged starting around 2000. The McKinsey Global Institute takes "A new look at the declining labor share of income in the United States" in a report by James Manyika, Jan Mischke, Jacques Bughin, Jonathan Woetzel, Mekala Krishnan, and Samuel Cudre (May 2019). Here's a figure showing basic background. From 1947-2000, the labor share of income fell from 65.4% to 62.3%. There already seemed to be a pattern of decline in the 1980s and 1990s in particular, which was then reversed for a short time at the tail end of the dot-com boom. But since 2000, the labor share has sunk to 56.7% in 2016. Why did this happen?
• Beyond Unemployment - Michael Spence In modern economies, people may have jobs, but they still harbor major concerns in a wide range of areas, including security, health and work-life balance, income and distribution, training, mobility, and opportunity. By focusing solely on the unemployment rate, policymakers are ignoring the many dimensions of employment that affect welfare.
• Fed Sticking With "Patient" Policy Stance - Tim Duy Bottom Line: Market expectations of a rate cut are well founded. Despite the Fed’s resistance, I still think the odds favor a rate cut over a hike. I think the situation is less equally weighted than the Fed believes. This is a fairly challenging time in the cycle. The yield curve suggests that the path of activity will require a rate cut sooner than later, but the yield curve is a long leading indicator. It’s typically well ahead of the data. At the current time, the data itself has yet to give the Fed much room to shift to a more dovish stance. For now, the Fed requires greater evidence of slowing activity, particularly in the employment data, to cut rates. Remember, the Fed’s typical pattern ahead of a rate cut is to resist, resist, resist, and then move quickly. And note that we don’t need to see a recession in the data to justify a rate cut; given the lack of inflation, the Fed only needs to see a substantial risk that growth will fall below estimate of the longer-run sustainable rate.
• Measuring the welfare effects of AI and automation - VoxEU AI promises economic growth as well as creating fear for those whose jobs it may replace. This column takes a wider approach to examining how AI and other technologies will affect citizens’ welfare beyond just their income. It argues that the new technologies are intrinsically neither good or bad, it is how they are deployed and how the transition is crafted that conditions the welfare dynamics of societies.
• On the use, or not, of expertise by government - mainly macro In a recent post I ask why we were governed by incompetents, and I related that to ideology, which in recent times means neoliberalism. But I think it is a little more than working in a neoliberal context, because I say that the Labour government often did try and do evidence based policy. Not always. I mentioned Iraq but there are other examples, but in comparison to Conservative governments they did evidence based policy a lot. The difference is while the Conservatives had neoliberal zeal, Labour were prepared to intervene in the market, particularly to help the poor. A good example was the minimum wage, which was set by a specific body who aimed to keep it at a level that did not cause significant employment loss. ...
• The macroeconomic consequences of impaired money markets - VoxEU Money markets are an important source of short-term funding for banks, which rely heavily on them to cover their liquidity needs. But as this column shows, when money markets do not function smoothly, banks may have to deleverage or increase their holdings of liquid assets, leading to a decline in lending and output. This decline can be mitigated by central banks if they increase the size of their balance sheets.
• Lessons from the Age of Mass Migration - VoxEU Recent waves of immigration in the US and Europe have triggered debate around the economic and political impact. This column uses evidence from migration of Europeans to the US in the first half of the 20th century to show that large cultural differences can incite anti-immigrant sentiment despite their positive economic impact. Therefore, policymakers should give due attention to cultural assimilation and cohesion policies.

Links (5/24/19)

• Raj Chetty’s plan to change how Harvard teaches economics - Vox
  Raj Chetty, a prominent faculty member whom Harvard recently poached back from Stanford, this spring unveiled “Economics 1152: Using Big Data to Solve Economic and Social Problems.” Taught with the help of lecturer Greg Bruich, the class garnered 375 students, including 363 undergrads, in its first term. That’s still behind the 461 in Ec 10 — but not by much.
• Fiscal Policy Options for Japan - Blanchard and Tashiro
  For many years, the Japanese government has promised an eventual return to primary budget surpluses, but it has not delivered on these promises. Its latest goal is to return to primary balance by 2025. Blanchard and Tashiro, however, argue that, in the current economic environment in Japan, primary deficits may be needed for a long time, because they may be the best tool to sustain demand and output, alleviate the burden on monetary policy, and increase future output. What primary deficits are used for, however, is equally important, and the Japanese government should put them to better use. The authors recommend that, given Japan’s aging population, the government should spend on measures aimed at increasing fertility—and by implication population and output growth—which are likely to more than pay for themselves. ...
• The Wealth Detective Who Finds the Hidden Money of the Super Rich - Bloomberg
  ... Zucman, 32, is an assistant professor at the University of California at Berkeley and the world’s foremost expert on where the wealthy hide their money. His doctoral thesis, advised by Piketty, exposed trillions of dollars’ worth of tax evasion by the global rich. For his most influential work, he teamed up with his Berkeley colleague Emmanuel Saez, a fellow Frenchman and Piketty collaborator. Their 2016 paper, “Wealth Inequality in the United States Since 1913,” distilled a century of data to answer one of modern capitalism’s murkiest mysteries: How rich are the rich in the world’s wealthiest nation? The answer—far richer than previously imagined—thrust the pair deep into the American debate over inequality. ...
• Who's paying for the US-China trade war? - FT Alphaville
  President Trump has long said it is China, not the US, who will pay for the ongoing trade war. But as tensions flare-up, it has become increasingly clear that much of the burden is falling on consumers stateside. ... Of the $200bn worth of Chinese imports now subject to 25 per cent tariffs as of May 10, roughly 40 per cent of those products are consumer goods like furniture, electrical equipment and apparel, according to the USTR. Chinese officials have threatened another round of their own
• New China Tariffs Increase Costs to U.S. Households - Liberty Street Economics
  Tariffs on $200 billion of U.S. imports from China subject to earlier 10 percent levies increased to 25 percent beginning May 10, 2019, after a breakdown in trade negotiations. In this post, we consider the cost of these higher tariffs to the typical U.S. household. One way to estimate the effect of these higher tariffs is to draw on the recent experience of the 2018 U.S. tariffs. Our recent study found that the 2018 tariffs imposed an annual cost of $419 for the typical household. This cost comprises two components: the first, an added tax burden faced by consumers, and the second, a deadweight or efficiency loss. The magnitude of these costs depends on how a tariff affects the prices charged by foreign exporters and the U.S. demand for imported goods. Studies, including our own, have found that the tariffs that the United States imposed in 2018 have had complete passthrough into domestic prices of imports, which means that Chinese exporters did not reduce their prices. Hence, U.S. domestic prices at the border have risen one‑for-one with the tariffs levied in that year. Our study also found that a 10 percent tariff reduced import demand by 43 percent.
• The Real Cost of Trump’s Tariffs - Jeffrey Frankel
  Whereas winners tend to outnumber losers when trade is liberalized, raising tariffs normally has the opposite result. US President Donald Trump appears to have engineered a spectacular example of this: his trade war with China has hurt almost every segment of the US economy, and created very few winners.
• Trade slowdown is more dangerous than in the past - Financial Times
  ...the OECD reports that the economic growth rate across the block doubled in the first quarter from the previous one. But a quick growth spurt does not undermine the reasons for the OECD to sound the alarm. Angel Gurría, its secretary-general, is correct when he says: “The world economy is in a dangerous place.” And the main danger is the threat to international trade, which has slowed abruptly, as the chart below shows. Its rate of increase has fallen from 5.5 per cent in 2017 to what the OECD thinks will be 2.1 per cent and 3.1 per cent this year and next respectively. That is lower than projected economic growth, meaning trade is shrinking as a share of global economic activity. ...
• Federal Reserve Board issues Report on the Economic Well-Being of U.S. Households - FRB
  The Federal Reserve Board's latest Report on the Economic Well-Being of U.S. Households found that most measures of economic well-being and financial resilience in 2018 were similar to, or slightly better than, those in 2017. Overall, the financial experiences reported by the 11,000 adults surveyed in 2018 were largely positive, and many families have experienced substantial gains since the survey began in 2013, in line with the nation's ongoing economic expansion. When asked about their overall economic well-being, 75 percent of U.S. adults said they were "doing okay" or "living comfortably"—up 12 percentage points from 2013. The survey also asked how they would pay for a hypothetical unexpected expense of $400. Sixty-one percent said they would pay the expense with cash, savings, or a credit card paid off at the next statement; 27 percent would borrow or sell something; and 12 percent would not be able to cover it. In 2013, only half of adults said they would pay with cash or its equivalent. Despite the improved finances of many adults, the survey continued to detect areas of financial distress as well as persistent differences by race, education level, and, in some cases, geography...
• Opening the machine learning black box – Bank Underground
  Machine learning models are at the forefront of current advances in artificial intelligence (AI) and automation. However, they are routinely, and rightly, criticised for being black boxes. In this post, I present a novel approach to evaluate machine learning models similar to a linear regression – one of the most transparent and widely used modelling techniques. The framework rests on an analogy between game theory and statistical models. A machine learning model is rewritten as a regression model using its Shapley values, a payoff concept for cooperative games. The model output can then be conveniently communicated, eg using a standard regression table. This strengthens the case for the use of machine learning to inform decisions where accuracy and transparency are crucial.
• Leisure-enhancing technological change - VoxEU
  How we spend our time is changing rapidly. This column argues that an important driver is leisure-enhancing innovation, aimed at capturing our time, attention, and data. Leisure-enhancing technologies can help account for both the rise in leisure hours and the decline in productivity observed across the industrialised world. Their nature carries important implications for the long-run viability of the platforms’ business models, for measurement of economic activity, and for welfare.
• Is Cryptocurrency What Makes Ransomware Possible? - Credit Slips
  The story about Baltimore's entire municipal IT system being held hostage by ransomware has two angles that might be of interest...
  The dozen things experimental economists should do (more of) - VoxEU
  Experimental economists must tackle the generalisability and applicability of the evidence they produce. This column discusses principles to enhance these when designing and conducting experiments or reporting findings. Good practice is especially important when policy recommendations are made based on experimental results.

Links (5/22/19)

• 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.

Links (5/20/19)

• 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.

Links (5/16/19)

• 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.[2] 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?

Links (5/13/19)

• 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.

Links (5/10/19)

• 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. ...

Links (5/8/19)

• 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?

Links (5/6/19)

• 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. ...

Links (5/3/19)

• Spring 2019 Journal of Economic Perspectives Available Online - Tim Taylor
• The Economy We Need - Joseph E. Stiglitz
• Leave the Renminbi Out of US-China Trade Talks - Kenneth Rogoff
• The Zombie Style in American Politics - Paul Krugman
• U.S. Consumers Have Borne the Brunt of the Current Trade War - NBER Digest
• How climate change affects economies around the world - University of Chicago News
• The Price of Everything, the Value of the Economy: A Clark Medal for Emi Nakamura! - A Fine Theorem
• The effects of trade policy might be more diverse than most economists think - VoxEU
• Rising income inequality exacerbates downward economic mobility - Equitable Growth
• Can the Fed Control Overnight Rates? - Stephen Williamson
• Fiat Bling - Nick Rowe
• Theorizing about organizations - Understanding Society
• Buses are about redistribution, productivity and a greener future - mainly macro
• Evidence that tight labor markets really will increase labor’s share of income - EPI
• Recursions for the Moments of Some Continuous Distributions - Dave Giles
• Are Financial Crises Demand or Supply Shocks? Evidence from International Trade - NBER
• Can Economic Policies Reduce Deaths of Despair? - NBER
• Did Disability Insurance Just Fix Itself? - Tim Taylor
• Wealth inequality in America: A Race between the Stock and the Housing Market - ProMarket
• House Prices at Risk - Cecchetti & Schoenholtz
• Increasing minimum wage, tax credits could stop over 1,200 suicides a year - Berkeley News
• Geography, competition, and optimal multilateral trade policy - VoxEU