Economist's View

Links (7/22/19)

• Why Critics of a More Relaxed Attitude on Public Debt Are Wrong - Blanchard and Ubide
  Both of us have recently developed arguments for a more relaxed attitude toward public debt and deficits (for example, this address by Blanchard at the European Central Bank Policy Forum, this joint discussion at PIIE, and this essay by Ubide on Vox). Not surprisingly, several counterarguments have arisen, some of which we accept, some of which we don’t. This blog addresses two arguments that we reject.
• Acknowledging and pricing macroeconomic uncertainties - Hansen and Sargent
  False pretences of knowledge about complicated economic situations have become all too common in public policy debates. This column argues that policymakers should take into account what they don’t know in their decision making. It describes a tractable approach for acknowledging, characterising, and responding to different forms of uncertainty, by using theories and statistical methods available at any particular moment.
• Costs of recession - Stumbling and Mumbling
  The Resolution Foundation’s James Smith has written a nice paper on the likelihood of recession and the fact that, with monetary less able to support the economy, we need to think about alternative ways of tackling recessions. I just want to amplify what he says in two ways.
• State and Local Taxes Are Worsening Inequality - The New York Times
  Most states lean heavily on lower-income families. An Illinois referendum is a step toward correcting the problem.
• The Great Crypto Heist - Nouriel Roubini
  Cryptocurrencies have given rise to an entire new criminal industry, comprising unregulated offshore exchanges, paid propagandists, and an army of scammers looking to fleece retail investors. Yet, despite the overwhelming evidence of rampant fraud and abuse, financial regulators and law-enforcement agencies remain asleep at the wheel.
• Trade wars may ‘bloc up’ world trade - VoxEU
  Against the backdrop of new tariffs imposed by the Trump administration and retaliation from targeted countries, notably China, the trade wars of the 1930s have received renewed attention. This column argues that they mainly served to intensify a pre-existing trend towards the formation of trade blocs. The trade wars of the present day may therefore serve a similar purpose as those in the 1930s, that is, the intensification of China- and US-centric trade blocs.
• Paid family leave and breastfeeding - VoxEU
  Mothers in the US breastfeed their infants at higher rates today than at any point in documented history, but low-income mothers have become less likely to do so. A leading reason for mothers to stop breastfeeding is the need to return to work. This column uses data on over 270,000 mother-child pairs in California, which implemented paid family leave in 2004, to examine the relationship between paid family leave and breastfeeding. It finds that paid family leave significantly increases overall breastfeeding duration, suggesting that paid family leave may lead to longer-term health improvements for children and mothers, particularly among disadvantaged families.
• Modern money theory and its challenges - VoxEU
  Modern monetary theory (MMT) has recently gained prominence in light of doubts about the effectiveness of monetary policy in addressing economic shortfalls. This column assesses the implications of implementing the theory’s policy prescriptions, and the challenges it presents in the case of Japan – an economy that some have argued has already been subject to such policy. Japan’s labour shortages and low inflation mean modern monetary theory’s fiscal stimulus suggestions may be harder to implement than they initially seem.
• Win or lose: Rigged card game sheds light on inequality, fairness - EurekAlert
  After noticing that card game winners attributed the game's outcome to skill and losers blamed their defeat on the rules, doctoral students Mario Molina and Mauricio Bucca decided to conduct an experiment. Working with Michael Macy, the Goldwin Smith Professor of Arts and Sciences and director of the Social Dynamics Laboratory, they adapted their idea into the Swap Game, a simple card game they rigged to favor either winners or losers, in a study designed to measure perceptions of inequality. They found that winners were far more likely to believe the game's outcome was fair, even when it was heavily tilted in their favor
• Understanding the Average Impact of Microcredit - Microeconomic Insights
  The global microloan portfolio is now worth over 102 billion dollars and is growing yearly. This research estimates the impact of the policy and the extent to which this impact is different across different contexts. It finds that overall, the best existing evidence suggests that the average impact of these loans is small and that in the future, it may be beneficial to seek alternative approaches to improve the lives of poor households in the developing world.
• Interview: Enrico Moretti - Federal Reserve Bank of Richmond
  Moretti's interest in American geographical sorting began during his days as a Ph.D. student at Berkeley, where he arrived after his undergraduate education in his native Milan. At first, he just wanted to fill in some blanks in his knowledge of America. "I started looking at data from the U.S. census," he says. "Just out of curiosity, wanting to know more about this country, I started looking at the different city averages of whatever the census could measure — earnings, level of education of the workforce, the type of industry. I suspected there were big differences, but I didn't know how large the differences were." He went on to write his Ph.D. dissertation on the benefits in terms of higher earnings that less-educated workers obtain from being in a city with a large share of workers with college degrees.
• Global Perspective on Markets for Sand - Tim Taylor
  Trivia question: If measuring by volume, what mined product is the largest? The answer is "sand and gravel," sometimes known in the geology business as "aggregates." In particular, aggregates are used for concrete and asphalt, and demand for these products from China and other emerging markets has skyrocketed. Sand is also used as part of hydraulic fracturing, so in the United States demand from that source has surged as well. And sand and gravel are also widely used for purposes ranging from land reclamation and water treatment to industrial production of electronics, cosmetics and glass.

Summer is Here

My one month old granddaughter Summer.

Both of her parents were economics majors, as were all four of her grandparents.

Links (7/15/19)

• Why Is Inflation Low Globally? - FRBSF A hot economy eventually boosts inflation. Such is the simple wisdom of the Phillips curve. Yet inflation across developed countries has been remarkably weak since the 2008 global financial crisis, even though unemployment rates are near historical lows. What is behind this recent disconnect between inflation and unemployment? Contrasting the experiences of developed and developing economies before and after the financial crisis shows that broader factors than monetary policy are at play. Inflation has declined globally, and this trend preceded the financial crisis.
• Libra's dramatic call to regulatory action - Cecchetti & Schoenholtz The stated objectives of creating Libra are to improve the efficiency of payments, reducing costs and speeding transfers; and to improve financial access. While these are laudable goals, it is essential that we achieve them without facilitating criminal exploitation of the payments system or reducing the ability of authorities to monitor and mitigate systemic risk. In addition, any broad-based financial innovation should facilitate the stabilization of consumption. On all of these criteria, we see Libra as doing more harm than good.
• Taking Malthus seriously - VoxEU The econometric evidence for the Malthusian trap in pre-industrial Europe has been weak. The column presents a new Malthusian model that, combined with new historical data for 17 countries, provides evidence of a much stronger Malthusian trap than the one found by previous research. This helps to explain the economic stagnation from the dark ages to the industrial revolution.
• Goldbugs for Trump - Paul Krugman It’s not surprising, then, that Trump is also trying to stuff the Federal Reserve Board with political allies. What may seem surprising is that many of his would-be appointees, like Stephen Moore and now Judy Shelton, have long records of supporting the gold standard or something like it. This should put them at odds with his efforts to politicize the Fed. After all, one of the supposed points of a gold standard is to remove any hint of politics from monetary policy. And with gold prices rising lately, gold standard advocates should be calling for the Fed to raise rates, not lower them. But of course both Moore and Shelton have endorsed Trump’s demand for rate cuts. This creates a dual puzzle: Why does Trump want these people, and why are they so willing to cater to his wishes?
• The Flattening of the Phillips Curve: Policy Implications Depend on the Cause - FRB Cleveland According to the historical relationship known as the Phillips curve, strengthening of the economy is commonly associated with increasing inflation. With inflation having only modestly picked up in the past few years as the economy has become more robust, many believe the Phillips curve relationship has weakened, with the curve becoming flatter. I show that the flattening can be due to very different types of structural changes and that knowing the type of change that has occurred is crucial for choosing the appropriate monetary policy.
• Dr. Shelton Remains Outspoken: She Should Have Known Better - Uneasy Money I started blogging in July 2011, and in one of my first blogposts I discussed an article in the now defunct Weekly Standard by Dr. Judy Shelton entitled “Gold Standard or Bust.” I wrote then:
• Is Plutocracy Really the Problem? - J. Bradford DeLong After the 2008 financial crisis, economic policymakers in the United States did enough to avert another Great Depression, but fell far short of what was needed to ensure a strong recovery. Attributing that failure to the malign influence of the plutocracy is tempting, but it misses the root of the problem.
• What’s Driving Populism? - Dani Rodrik If authoritarian populism is rooted in economics, then the appropriate remedy is a populism of another kind – targeting economic injustice and inclusion, but pluralist in its politics and not necessarily damaging to democracy. If it is rooted in culture and values, however, there are fewer options.
• Is AI Just Recycled Intelligence, Which Needs Economics to Help It Along? - Tim Taylor The Harvard Data Science Review has just published its first issue. Many of us in economics are cousins of burgeoning data science field, and will find it of interest. As one example, Harvard provost (and economist) Alan Garber offers a broad-based essay on "Data Science: What the Educated Citizen Needs to Know." Others may be more intrigued by the efforts of Mark Glickman, Jason Brown, and Ryan Song to use a machine learning approach to figure out whether Lennon or McCartney is more likely to have authored certain songs by the Beatles that are officially attributed to both, in "(A) Data in the Life: Authorship Attribution in Lennon-McCartney Songs." But my attention was especially caught by an essay by Michael I. Jordan called "Artificial Intelligence—The Revolution Hasn’t Happened Yet,"
• The New Fama Puzzle Persists - Econbrowser In previous posts [1] [2], I described how in data up to the beginning of 2016, the Fama puzzle was overturned for major currencies. One question was whether the change would persist post-crisis and post-Zero Lower Bound (ZLB) exit. The short answer is, so far, yes.
• ABM fundamentalism - Understanding Society One element of our conversation was especially enlightening to me. I have written a number of times in Understanding Society and elsewhere about the utility of ABM models, and one line of thought I have developed is a critique of what I have labeled "ABM fundamentalism" -- the view that ABM models are the best possible technique for constructing social explanations for every possible subject in the social sciences (link). This view is expressed in Joshua Epstein's slogan, "If you didn't grow it, you didn't explain it." I maintain that ABM is a useful technique, but only one of many methods appropriate to the problem of constructing explanations of interesting sociological outcomes (link). So I advocate for theoretical and methodological pluralism when it comes to the ABM program. I asked Gianluca whether he would agree that ABM fundamentalism is incorrect, and was surprised to find that he defends the universal applicability of ABM as a tool to implement any sociological theory.
• Trump and the Merchants of Detention - Paul Krugman Is it cruelty, or is it corruption? That’s a question that comes up whenever we learn about some new, extraordinary abuse by the Trump administration — something that seems to happen just about every week. And the answer, usually, is “both.”
• From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market - Liberty Street Economics How do changes in the rate that the Federal Reserve pays on reserves held by depository institutions affect rates in money markets in which the Fed does not participate? Through which channels do changes in the so-called administered rates reach rates in onshore and offshore U.S. dollar money markets? In this post, we answer these questions with the help of an interactive map that guides us through the web of interconnected relationships between the Fed, key market players, and the various instruments in the U.S. dollar funding market, highlighting the linkages across the short-term financial products that form this market.
• Protecting the Federal Reserve - Cecchetti & Schoenholtz Last week, President Trump tweeted his intention to nominate Dr. Judy Shelton to the Board of Governors of the Federal Reserve System. In our view, Dr. Shelton fails to meet the criteria that we previously articulated for membership on the Board. We hope that the Senate will block her nomination.
• Interregional mobility and monetary policy – Bank Underground According to conventional wisdom, a currency area benefits from internal labour mobility. If independent stabilisation policies are unavailable, the argument goes, factor mobility helps regions respond to shocks. Reasonable as it sounds, few attempts have been made to test this intuition in state-of-the-art macroeconomic models. In a recent Staff Working Paper (also available here), we build a DSGE model of a currency area with internal migration to go through the maths. So does the old intuition hold up? The short answer, we think, is yes. Internal labour mobility eases the burden on monetary policy by reducing regional labour markets imbalances. But policymakers can improve welfare by putting greater weight on unemployment.
• Global Dimensions of U.S. Monetary Policy - NBER This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that U.S. monetary policy faces. It considers three main channels. The first is the determination of domestic inflation in a context where international prices and global competition play a role, alongside domestic slack and inflation expectations. The second channel is the determination of asset returns (including the natural real safe rate of interest, r*) and financial conditions, given integration with global financial markets. The third channel, which is particular to the United States, is the potential spillback onto the U.S. economy from the disproportionate impact of U.S. monetary policy on the outside world. In themselves, global factors need not undermine a central bank's ability to control the price level over the long term -- after all, it is the monopoly issuer of the numeraire in which domestic prices are measured. Over shorter horizons, however, global factors do change the tradeoff between price-level control and other goals such as low unemployment and financial stability, thereby affecting the policy cost of attaining a given price path.

Links (7/9/19)

• Thumbs Down to Facebook’s Cryptocurrency - Joseph E. Stiglitz
  Only a fool would trust Facebook with his or her financial wellbeing. But maybe that’s the point: with so much personal data on some 2.4 billion monthly active users, who knows better than Facebook just how many suckers are born every minute?
• Trump Is Losing His Trade Wars - Paul Krugman
  Donald Trump’s declaration that “trade wars are good, and easy to win” will surely go down in the history books as a classic utterance — but not in a good way. Instead it will go alongside Dick Cheney’s prediction, on the eve of the Iraq war, that “we will, in fact, be welcomed as liberators.” That is, it will be used to illustrate the arrogance and ignorance that so often drives crucial policy decisions. For the reality is that Trump isn’t winning his trade wars.
• Mysteries of Monetary Policy - Robert J. Barro
  Since the federal funds rate peaked at 22% in the early 1980s, inflation in the United States has remained low and stable, leading many to believe that the mere threat of renewed interest-rate hikes has kept it in check. But no one really knows why inflation has been subdued for so long.
• The gender promotion gap: Evidence from the ECB - VoxEU
  The underrepresentation of women in economics is perhaps nowhere as visible as in central banks. This column uses anonymised personnel data to analyse the career progression of men and women at the ECB. A wage gap in favour of men emerges within a few years of hiring, with one important driver being the presence of children. Women were also less likely to be promoted to a higher salary band up until 2010, when the ECB issued a statement supporting diversity and took measures to support gender balance. Following this change, the promotion gap disappears.
• Age of the expert as policymaker is coming to an end - Financial Times
  One of the phenomena of the latter period of western capitalism has been the expert as policymaker: the academic economist as a central bank governor or the scientist as a minister. It did not use to be this way. Now that period is ending, with some profound consequences. ...
• Economic policies can reduce deaths of despair - VoxEU
  Policymakers and researchers have sought to understand the causes of and effective policy responses to recent increases in mortality due to alcohol, drugs, and suicide in the US. This column examines the role of the minimum wage and the earned income tax credit – the two most important policy levers for raising incomes for low-wage workers – as tools to combat these trends. It finds that both policies significantly reduce non-drug suicides among adults without a college degree, and that the effect is stronger among women. The findings point to the role of economic policies as important determinants of health.
• Intergenerational mobility in Africa - VoxEU
  Over the last few decades, education in Africa has been rising and living standards have been improving. Yet certain countries and regions face rampant conflict and persistent poverty. This column we uses individual-level data covering more than 20 million people spanning 26 African countries since the late 1960s to study intergenerational mobility in education across the continent. It uncovers large variation in upward and downward mobility both across and within countries.
• Redefining money in a digital age ~ Antonio Fatas
  Economic textbooks use a definition of money as an asset that can be used as a means of payment, that constitutes a unit of account and serves as a store of value. This definition is being used often in debates about new forms of digital money and payments (including cryptocurrencies). I would like to argue that this characterization of money is a) not a definition b) not a very useful one to compare alternative forms of payment c) fails to understand how digital payments and new technologies have changed the nature of money Let's deconstruct the "definition" to see what is wrong with it. ...
• US Multinationals Expand their Foreign-based Research and Development - Tim Taylor
  "For decades, US multinational corporations (MNCs) conducted nearly all their research and development (R&D) within the United States. Their focus on R&D at home helped establish the United States as the unrivaled leader of innovation and technology advances in the world economy. Since the late 1990s, however, the amount of R&D conducted overseas by US MNCs has grown nearly fourfold and its geographic distribution has expanded from a few advanced industrial countries (such as Germany, Japan, and Canada) to many parts of the developing world ..."
• The long-run effects of uncertainty shocks – Bank Underground
  Is uncertainty a significant drag for investment and consumption? Since the global financial crisis heightened uncertainty has been considered to be one of the main factors behind the depth of the great recession and the subdued recovery. Understanding the channels through which uncertainty affects economic activity is therefore of primary interest for policymakers in order to design appropriate policy responses. In our recent working paper, we show that shocks increasing macroeconomic uncertainty can lead to very persistent negative effects on economic activity that last well beyond the business cycle frequency. In a theoretical framework, we argue that the presence of long-term risks about the economic outlook can exacerbate the households’ precautionary savings motive and the overall effects of uncertainty shock.
• The decline of US business dynamism - VoxEU
  The US economy has witnessed a number of striking trends that indicate rising market concentration and a slowdown in business dynamism in recent decades. This column uses a micro-founded model of endogenous firm dynamics to show that a decline in the intensity of knowledge diffusion from frontier firms to laggard ones plays a key role in the observed shifts. It presents new evidence on higher concentration of patenting in the hands of firms with the largest stock that corroborates declining knowledge diffusion in the economy.
• The Trump Tax Reform, As Seen in the U.S. Balance of Payments Data - Brad Setser
  The international side of the Tax Cuts and Jobs Act was a real reform, not just a straight-forward cut in the rate. It ended deferral, and shifted to a (mostly) territorial tax system. Yet, judging from the balance of payments data, it didn't get rid of the incentive for firms to offshore profits to low-tax jurisdictions. The global minimum is too low—and there are too many incentives to shift tangible assets abroad.
• Digital currency areas - VoxEU
  Thanks to digitalisation, we now can hold money on our mobile phones and transfer wealth in real time to almost every corner of the world. Currencies can be swapped within milliseconds on smart phones and people can hold many currencies simultaneously in digital wallets. This column considers how digitalisation will affect the international monetary system, arguing that a new kind of currency area will emerge, held together by digital interconnectedness. These digital currency areas will cut across borders, increase currency competition and, in the process, may redefine the international monetary system.
• Lots of folks over 65 are spending a lot on housing - Richard Green
  The Census has a nice tool that allows one to map American Community Survey data by counties (at least counties with sufficient population to develop estimates based on samples). I drew two today. This first one is the share of those renters over the age of 65 who pay more than 30 percent of their income on rent.
• Can 'Forward Guidance' Work for Fiscal Policy? - NBER Digest
  Announcing sales tax increases before they take effect substantially spurs auto purchases in the month before the tax increase kicks in.
• Why Some Regions Rebounded Faster after the Great Recession - NBER Digest
  Frictions in financial intermediation in some regions may have slowed recovery by limiting consumer access to lower interest rates and refinancing opportunities.
• Analyzing Efforts to Rein in Misinformation on Social Media - NBER Digest
  Interactions with fake news sites by users of both Facebook and Twitter rose steadily in 2015 and 2016, but have fallen more than 60% since then on Facebook.
• Why Does the Debt-to-GDP Ratio Constrain Crisis Response? - NBER Digest
  When a financial crisis hits, countries with a high debt-to-GDP ratio are less likely to pursue expansionary policy. Debt-related limits on market access are only part of the story.
• Labour market shocks and demand for trade protection - VoxEU
  Economists have traditionally emphasised the benefits of openness to trade, but populists resist it. How generalised is the demand for trade protection? And how does it compare with other disruptions in the labour market? This column suggests that people often react by demanding trade protection when faced with shocks that generate unemployment, with the largest effects observed when it is caused by imports arriving from a poor country.
• Police-monitored cameras and crime - VoxEU
  An increasing number of cities worldwide use surveillance cameras to prevent crime, but little is known about whether these cameras reduce crime or simply move it to other locations. This column studies the impact of a large-scale introduction of police-monitored cameras in Montevideo, Uruguay. The findings indicate a 20% reduction in crime in areas of the city where the cameras are located, with no evidence of a displacement effect. The programme also appears to offer value for money compared with other security and crime prevention measures.
• The Moochers of Middle America - Paul Krugman
  ... The point is that while you can criticize particular Democratic proposals, you can only portray progressives as radical or irresponsible, especially as compared with the modern G.O.P., by ignoring or suppressing a lot of facts. I guess facts really do have a liberal bias.
• Robots and firms - VoxEU
  The rise of robots has sparked an intense debate about the labour market effects of their adoption. This column explores differences in robot adoption across firms and analyses the labour market effects of robot adoption at the firm level. It reveals a productivity-enhancing reallocation of labour and market shares across firms, with robot-adopting firms creating new job opportunities and expanding their scale of operations, while non-adopters experience negative output and employment effects in the face of tougher competition.
• Seasonal Unit Roots - Background Information - Dave Giles
  A recent email query about the language that we use in the context of non-stationary seasonal data, and how we should respond to the presence of "seasonal nit roots", suggested to me that a short background post about some of this might be in order.
• Alexander Hamilton: the Books - Economic Principals
  President Trump has appointed four of the five serving governors to the seven-member Board of the Federal Reserve System. Last week he bruited his plans to make another attempt to nominate two more, Judy Shelton and Christopher Waller. (Four previous proposals have gone nowhere this year:: Herman Cain and Steven Moore, and, before that, Marvin Goodfriend and Nellie Liang. So I spent the better part of the Fourth of July perusing the stack of books on the history of the Fed that have appeared since the financial crisis.