Thursday, April 24, 2014

Video: Piketty, Krugman, Stiglitz, and Durlauf on 'Capital in the Twenty-First Century'

"The French economist Thomas Piketty discussed his new book, Capital in the Twenty-First Century at the Graduate Center. In this landmark work, Piketty argues that the main driver of inequality—the tendency of returns on capital to exceed the rate of economic growth—threatens to generate extreme inequalities that stir discontent and undermine democratic values. He calls for political action and policy intervention. Joseph Stiglitz, Paul Krugman, and Steven Durlauf participated in a panel moderated by Branko Milanovic."

    Posted by on Thursday, April 24, 2014 at 12:42 AM in Economics, Income Distribution, Video | Permalink  Comments (0)

    'Gasoline Tax, Unchanged Since 1993, is Due for an Increase'

    Barry Ritholtz:

    U.S. on Highway to Flunking Out, by Barry Ritholtz: Roads are crumbling, bridges are collapsing, and what was once considered one of the greatest achievements of any government anywhere has fallen into embarrassing disrepair. I am of course discussing our nation’s infrastructure. ... How did this happen? Credit a combination of benign neglect and anti-tax ideology run amok. ...
    Since 1993, the U.S. federal gasoline tax has been 18.4 cents a gallon, which finances the Highway Trust Fund. Adjusted for inflation, the tax is now about 10 cents a gallon. ...
    The U.S. interstate highway system, once the envy of the world, is in mediocre and deteriorating condition today ... putting the U.S at a competitive disadvantage. ...
    The solution is simple. Raise the federal gasoline tax five cents a year for the next five years. Index it to inflation starting in the fifth year. It's the least the U.S. can do to keep up.

      Posted by on Thursday, April 24, 2014 at 12:24 AM in Economics, Fiscal Policy | Permalink  Comments (0)

      Links for 4-24-14

        Posted by on Thursday, April 24, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (0)

        Wednesday, April 23, 2014

        'Ukraine’s Path to Oligarchy: Lessons for the U.S.?'

        After explaining why he believes Ukraine is an oligarchy, Berkeley's Yuriy Gorodnichenko says:

        ...One may draw parallels between the U.S and Ukraine but frankly, relative to Ukraine, the U.S. seems far from an oligarchy. However, certain recent developments do make me somewhat concerned. For example, income inequality has been rising rapidly over the last three decades, the influence of the rich and of corporations on electoral outcomes appears to be increasing, and the political process strikes me as increasingly dysfunctional. But the U.S.’s history of fighting corruption and the tradition of a free and oppositional press are powerful counterforces to oligarchy. Or so I hope.

          Posted by on Wednesday, April 23, 2014 at 05:27 PM in Economics, Politics | Permalink  Comments (6)

          'Inequality in Well-Being'

          From the House of Debt:

          Inequality in Well-Being, by Atif Mian and Amir Sufi: As we mentioned in our post yesterday, economists care much more about inequality in well-being rather than inequality in income or wealth. Data on well-being are more difficult to gather, but we discussed some evidence that inequality in consumption also increased from 1980 to 2010. Consumption directly affects the utility of an individual in most economic models. Income does not.
          Here is some more evidence, with a particular focus on the last few years ...
          Another strategy in measuring well-being is to look beyond spending and toward measures of health. Life expectancy data are available, and they seem to tell a similar story...: the rise in life expectancy from 1980 to 2010 for people already 65 is driven almost entirely by the rich.
          There has been a lot of attention on income and wealth inequality, and for good reason. But inequality in outcomes such as consumption and health are far more important. We’ve gathered some evidence here, but more is needed. The evidence so far suggests that inequality in well-being has tracked inequality in wealth and income closely. ...

            Posted by on Wednesday, April 23, 2014 at 05:21 PM in Economics, Income Distribution | Permalink  Comments (4)

            'Thomas Piketty Is Right'

            Solow on Piketty:

            Thomas Piketty Is Right: Everything you need to know about 'Capital in the Twenty-First Century', by Robert Solow: Income inequality in the United States and elsewhere has been worsening since the 1970s. The most striking aspect has been the widening gap between the rich and the rest. This ominous anti-democratic trend has finally found its way into public consciousness and political rhetoric. A rational and effective policy for dealing with it—if there is to be one—will have to rest on an understanding of the causes of increasing inequality. The discussion so far has turned up a number of causal factors: the erosion of the real minimum wage; the decay of labor unions and collective bargaining; globalization and intensified competition from low-wage workers in poor countries; technological changes and shifts in demand that eliminate mid-level jobs and leave the labor market polarized between the highly educated and skilled at the top and the mass of poorly educated and unskilled at the bottom.
            Each of these candidate causes seems to capture a bit of the truth. But even taken together they do not seem to provide a thoroughly satisfactory picture. They have at least two deficiencies. First, they do not speak to the really dramatic issue: the tendency for the very top incomes—the “1 percent”—to pull away from the rest of society. Second, they seem a little adventitious, accidental; whereas a forty-year trend common to the advanced economies of the United States, Europe, and Japan would be more likely to rest on some deeper forces within modern industrial capitalism. Now along comes Thomas Piketty, a forty-two-year-old French economist, to fill those gaps and then some. I had a friend, a distinguished algebraist, whose preferred adjective of praise was “serious.” “Z is a serious mathematician,” he would say, or “Now that is a serious painting.” Well, this is a serious book. ...

              Posted by on Wednesday, April 23, 2014 at 12:33 AM in Economics, Income Distribution | Permalink  Comments (63)

              Links for 4-23-14

                Posted by on Wednesday, April 23, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (60)

                Tuesday, April 22, 2014

                Assessing Fed Policy During the Great Recession

                On the road again, will blog as I can; For now, I have a new column:

                Report Card on Fed Policy During the Great Recession, by Mark Thoma: If the economy evolves according to the Federal Reserve’s forecast, quantitative easing is on track to come to a close by the end of this year. Increases in the federal funds rate are likely to follow. Thus, as the Fed’s policies to combat the Great Recession are coming to an end, it’s time to ask: Did these policies work? ...

                  Posted by on Tuesday, April 22, 2014 at 10:33 AM in Economics, Monetary Policy | Permalink  Comments (16)

                  Links for 4-22-14

                    Posted by on Tuesday, April 22, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (50)

                    Monday, April 21, 2014

                    'House Prices and Secular Stagnation'

                    Simon Wren-Lewis:

                    House prices and secular stagnation: This post starts off talking about the UK, but then goes global
                     ...Housing is becoming more and more unaffordable for first time buyers. Yet prices are currently booming (at least in London), and demand is so high estate agents are apparently now holding mass viewings to cope. In the UK the media now routinely call this a bubble, and the term ‘super bubble’ is now being used. ...
                    Bubbles are where prices move further and further away from their fundamental value, simply because everyone expects prices to continue to rise. ...
                    If we think of housing as an asset, then the total return to this asset if you held it forever is the weighted sum of all future rents, where you value rents today more than rents in the future. Economists call this the discounted sum of rents. (If you are a homeowner, it is the rent that you are avoiding paying.) So why would house prices go up, if rents were roughly constant and were expected to remain so? The answer is that prices would go up if the rate at which you discounted the future fell. The relevant discount rate here is the real interest rate on alternative assets. That interest rate has indeed fallen over much the same time period as house prices have increased, as Chapter 3 of the IMF’s World Economic Outlook for March 2014 documents. ...
                    It is the expected return on other assets that matters here. The fact that actual real interest rates have fallen in the past would not matter much if they were expected to recover quickly. A key idea behind today’s discussion of secular stagnation is that real interest rates might stay pretty low for a long period of time. That in turn implies that house prices will be much higher relative to incomes than they were when real interest rates were higher.
                    So what appears to be a bubble may instead be a symptom of secular stagnation. ...
                    Does this mean we should stop calling what is happening in the UK a bubble? The first point is that secular stagnation is just an idea, and it may prove wrong, and if it does house prices may come tumbling down. Second, even if it is not wrong, it is still possible to have a bubble on top of the increase implied by lower interest rates. Indeed one of the concerns about the lower real interest rates associated with secular stagnation is that, by raising asset prices not just in housing but elsewhere, it may encourage bubbles to develop on top. So all we can say with certainty, for the UK at least, is that the Financial Policy Committee will have their work cut out when they next meet in June.

                      Posted by on Monday, April 21, 2014 at 10:02 AM in Economics, Housing, Market Failure | Permalink  Comments (43)

                      Paul Krugman: Sweden Turns Japanese

                      Can you say, "sadomonetarist"?:

                      Sweden Turns Japanese, by Paul Krugman, Commentary, NY Times: Three years ago Sweden was widely regarded as a role model in how to deal with a global crisis. ... Sweden, declared The Washington Post, was “the rock star of the recovery.”
                      Then the sadomonetarists moved in..., the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates. ...
                      Lars Svensson, a deputy governor at the time ... vociferously opposed the rate hikes. Mr. Svensson, one of the world’s leading experts on Japanese-style deflationary traps, warned that raising interest rates in a still-depressed economy put Sweden at risk of a similar outcome. But he found himself isolated, and left the Riksbank in 2013.
                      Sure enough, Swedish unemployment stopped falling soon after the rate hikes began. Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan.
                      So why did the Riksbank make such a terrible mistake? ... At first the bank’s governor declared that it was all about heading off inflation... But as inflation slid toward zero..., the Riksbank offered a new rationale: tight money was about curbing a housing bubble... In short, this was a classic case of sadomonetarism in action. ...
                      At least as I define it, sadomonetarism ... involves a visceral dislike for low interest rates and easy money, even when unemployment is high and inflation is low..., they don’t change their policy views in response to changing conditions — they just invent new rationales. This strongly suggests that what we’re looking at here is a gut feeling rather than a thought-out position. ...
                      Where does this gut dislike for low rates come from? At some level it has to reflect an instinctive identification with the interests of wealthy creditors as opposed to usually poorer debtors. But it’s also driven, I believe, by the desire of many monetary officials to pose as serious, tough-minded people — and to demonstrate how tough they are by inflicting pain.
                      Whatever their motives, sadomonetarists have already done a lot of damage. ...
                      And they could do much more damage... Financial markets have been fairly calm lately... But it would be wrong and dangerous to assume that recovery is assured: bad policies could all too easily undermine our still-sluggish economic progress. So when serious-sounding men in dark suits tell you that it’s time to stop all this easy money and raise rates, beware: Look at what such people have done to Sweden.

                        Posted by on Monday, April 21, 2014 at 12:33 AM in Economics, Monetary Policy | Permalink  Comments (22)

                        Links for 4-21-14

                          Posted by on Monday, April 21, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (58)

                          Sunday, April 20, 2014

                          'Treat Wage Theft as a Criminal Offense'

                          This was in yesterday's links, but it's worth highlighting:

                          Treat wage theft as a criminal offense, by Catherine Rampell, Washington Post: Forget raising the minimum wage. How about enforcing the meager minimum already on the books?
                          Over the past year, low-wage workers and their supporters have protested, struck and polemicized for a raise of some kind, a proposition that has support from the White House and most Americans, if not Republican politicians. But low-wage workers face an even more upsetting affliction that both parties should feel comfortable condemning: Employers are stealing from their employees, often with impunity.
                          “Wage theft” is an old problem. It can take many forms, including paying less than the minimum hourly wage, working employees off the clock, not paying required overtime rates and shifting hours into the next pay period so that overtime isn’t incurred. ...
                          Harsher penalties, including prison time, should be on the table more often when willful wrongdoing is proved. Thieves caught stealing thousands of dollars from someone’s home can go to jail; the same should be true for thieves caught stealing thousands of dollars from someone’s paycheck.

                            Posted by on Sunday, April 20, 2014 at 01:41 PM in Economics | Permalink  Comments (20)

                            Links for 4-20-14

                              Posted by on Sunday, April 20, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (38)

                              Saturday, April 19, 2014

                              The Near Future

                              Dan Little:

                              The near future: There is a lot going on in America and the world today: climate change, increasing separation between the rich and the non-rich, entrenched poverty in cities, continuing effects of racism in American life, and a rising level of political extremism in this country and elsewhere, for starters. Add to this politico-military instability in Europe, continuing social conflict over austerity in many countries, and a rising number of extreme-right movements in a number of countries, and you have a pretty grim set of indications of what tomorrow may look like for our children and grandchildren.
                              How should we think about what our country will look like in twenty or thirty years? And how can we find ways of acting today that make the prospects for tomorrow as good as they can be?
                              This is partly a problem for politicians and legislators. But it is also a problem for social scientists and historians, because the limits of our ability to predict the future are as narrow as they have ever been. (I wonder if the good citizens of Rome in the year 400 had any notion that Alaric was coming and that their way of life was already about to change?) The pace of change in the contemporary world is rapid, but even more, the magnitude of the changes we face is unprecedented. Will climate change and severe weather continue to worsen? Will the extreme right gain even more influence in determining American law and policy? Will economic crises of the magnitude of the 2008 recession recur with even more disastrous consequences? Will war and terrorism become even harsher realities in the coming decades with loose nukes and biological weapons in the hands of ruthless fanatics?
                              All these catastrophes are possible. So how should intelligent democracies attempt to avoid them? One possible approach is to attempt to design our way out of each of those pathways to catastrophe: create better arms control regimes, improve intelligence abilities against threats of terrorism, reach effective climate agreements, try to guide the economy away from meltdowns, create better protections for rights of participation so narrow minorities can't enact restrictions on basic health rights. In other words, engage in piecemeal engineering to solve the problems we face.
                              Another approach is the one advocated by Charles Perrow in The Next Catastrophe: acknowledge that we cannot anticipate, let alone solve, all these problems, and design for soft landings when harm comes knocking at our door. Risky processes (chemical plants, railways, LNG storage facilities) will inevitably fail once in a while; how can we design them and the system in which they operate so as to minimize the damage that occurs when they do? Perrow takes the example of increasingly severe hurricanes and flooding and their potential for decimating coastal communities, and he argues that the protective strategy isn't likely to succeed. A better strategy is to reduce population density around the highest risk locations, in order to reduce the impact of disasters that are ultimately impossible to prevent.
                              This approach would require quite a bit of change to very basic parts of our contemporary order: decentralize infrastructures like energy, information, and transportation; reduce our reliance on global-scale food systems by encouraging more local production; reduce population density where we can. These kinds of changes would make for a substantially safer world -- less concentrated risk, fewer tightly linked systems to go wrong. But achieving changes like these seems almost impossible because these outcomes are not likely to be the result of the uncoordinated actions of independent decision-makers. Rather, the state would need to legislate these kinds of outcomes, and it is hard to see how they might come about through normal electoral processes.
                              So we seem to be a little bit in the situation of myopic actors climbing Mount Improbable: our choices are likely to strand us in isolated local maxima, making it impossible for us to reach feasible outcomes on a more distant hilltop. And because of limitations on our ability to project future social outcomes, we often can't even see the alternative hilltops through the fog. Somehow we need to get to a more resilient form of risk assessment and planning that doesn't make excessive assumptions about our ability to foresee the near future.

                                Posted by on Saturday, April 19, 2014 at 08:58 AM in Economics | Permalink  Comments (32)

                                Links for 4-19-14

                                  Posted by on Saturday, April 19, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (72)

                                  Friday, April 18, 2014

                                  Debate at KSU: Thoma vs. Williamson

                                  [It starts around the 7:00 minute mark]

                                    Posted by on Friday, April 18, 2014 at 03:05 PM in Economics, Monetary Policy, Video | Permalink  Comments (18)

                                    Paul Krugman: Salvation Gets Cheap

                                    The "price of solar panels has fallen more than 75 percent just since 2008":

                                    Salvation Gets Cheap, by Paul Krugman, Commentary, NY Times: The Intergovernmental Panel on Climate Change ... has begun releasing draft chapters from its latest assessment, and ... the reading is as grim as you might expect. ...
                                    But there is one piece of the assessment that is surprisingly, if conditionally, upbeat: Its ... the incredible recent decline in the cost of renewable energy, solar power...
                                    Before I get to that..., however, let’s talk for a minute about the overall relationship between economic growth and the environment.
                                    Other things equal, more G.D.P. tends to mean more pollution. ... But other things don’t have to be equal. There’s no necessary one-to-one relationship between growth and pollution.
                                    People on both the left and the right often fail to understand this point. ... On the left, you sometimes find environmentalists asserting that to save the planet we must give up on the idea of an ever-growing economy; on the right, you often find assertions that any attempt to limit pollution will have devastating impacts on growth. But there’s no reason we can’t become richer while reducing our impact on the environment. ...
                                    The sensible position ... has always been that ... if we give corporations and individuals an incentive to reduce greenhouse gas emissions, they will respond.

                                    What form would that response take? ... One front many people didn’t take too seriously ... was renewable energy. ... And I have to admit that I shared that skepticism. ...
                                    The climate change panel ... notes that “many RE [renewable energy] technologies have demonstrated substantial performance improvements and cost reductions”... The Department of Energy is willing to display a bit more open enthusiasm; it titled a report on clean energy released last year “Revolution Now.” That sounds like hyperbole, but you realize that it isn’t when you learn that the price of solar panels has fallen more than 75 percent just since 2008.
                                    Thanks to this technological leap forward, the climate panel can talk about “decarbonizing” electricity generation as a realistic goal — and since coal-fired power plants are a very large part of the climate problem, that’s a big part of the solution right there. ...
                                    So is the climate threat solved? Well, it should be. The science is solid; the technology is there; the economics look far more favorable than anyone expected. All that stands in the way of saving the planet is a combination of ignorance, prejudice and vested interests. What could go wrong? Oh, wait.

                                      Posted by on Friday, April 18, 2014 at 01:52 PM in Economics, Environment | Permalink  Comments (61)

                                      Links for 4-18-14

                                        Posted by on Friday, April 18, 2014 at 02:44 AM Permalink  Comments (45)

                                        Thursday, April 17, 2014

                                        'Not Just the Long-Term Unemployed: Those Unemployed Zero Weeks Are Struggling to Find Jobs'

                                        Mike Konczal:

                                        Not Just the Long-Term Unemployed: Those Unemployed Zero Weeks Are Struggling to Find Jobs: Leave aside for a moment the difficulty that the long-term unemployed, those who were unlucky and have been looking for a job for more than 52 weeks, have in finding a job. Even those who have been unemployed zero weeks are having trouble finding jobs in this economy. And this is important evidence against the idea that the labor market is doing better than people realize if you just ignore the long-term unemployed. ...

                                          Posted by on Thursday, April 17, 2014 at 03:02 PM in Economics, Unemployment | Permalink  Comments (6)

                                          'Secular Stagnation or Secular Boom?'

                                          Antonio Fatás:

                                          Secular stagnation or secular boom?: The notion that some countries are caught in a long and protracted period of low growth ... has been labeled "secular stagnation". The pessimism that the idea of secular stagnation has created has been reinforced by the notion the potential for emerging markets to grow is becoming weaker. ...
                                          Let's start with a simple chart that summarizes the pattern of annual growth in ... advanced and emerging markets...

                                          ... So stagnation might be the right label for 50% of the world, but accelerating growth is the right label for the other half.
                                          And if we look at the engines of growth, in particular investment rates (in physical capital) we can see again the divergence in performance.

                                          ... Looking at the above charts... Could it be that investment opportunities in emerging markets moved capital away from advanced economies? Not obvious because we know that the explosion in investment rates in emerging markets came in many cases with even larger increases in saving rates and (financial) capital flew away from these countries. In fact, interest rates in the world were trending downwards during this period. And this makes the performance of advanced economies even more surprising: despite a favorable environment in terms of low interest rates, investment and growth declined.

                                            Posted by on Thursday, April 17, 2014 at 12:33 AM in Development, Economics | Permalink  Comments (46)

                                            'Antitrust in the New Gilded Age'

                                            Robert Reich:

                                            Antitrust in the New Gilded Age, by Robert Reich: We’re in a new gilded age of wealth and power similar to the first gilded age when the nation’s antitrust laws were enacted. Those laws should prevent or bust up concentrations of economic power that not only harm consumers but also undermine our democracy — such as the pending Comcast acquisition of Time-Warner. ...
                                            In many respects America is back to the same giant concentrations of wealth and economic power that endangered democracy a century ago. The floodgates of big money have been opened...
                                            Remember, this is occurring in America’s new gilded age — similar to the first one in which a young Teddy Roosevelt castigated the “malefactors of great wealth, who were “equally careless of the working men, whom they oppress, and of the State, whose existence they imperil.”
                                            It’s that same equal carelessness toward average Americans and toward our democracy that ought to be of primary concern to us now. Big money that engulfs government makes government incapable of protecting the rest of us against the further depredations of big money.
                                            After becoming President in 1901, Roosevelt used the Sherman Act against forty-five giant companies, including the giant Northern Securities Company that threatened to dominate transportation in the Northwest. William Howard Taft continued to use it, busting up the Standard Oil Trust in 1911. 
                                            In this new gilded age, we should remind ourselves of a central guiding purpose of America’s original antitrust law, and use it no less boldly. 

                                              Posted by on Thursday, April 17, 2014 at 12:24 AM in Economics, Income Distribution, Market Failure, Politics, Regulation | Permalink  Comments (9)

                                              Links for 4-17-14

                                                Posted by on Thursday, April 17, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (72)

                                                Wednesday, April 16, 2014

                                                'Supply, Demand, and Unemployment Benefits'

                                                When in need of a quick post, Paul Krugman is always a good source:

                                                Supply, Demand, and Unemployment Benefits: Ben Casselman points out that we’ve had a sort of natural experiment in the alleged effects of unemployment benefits in reducing employment. Extended benefits were cancelled at the beginning of this year; have the long-term unemployed shown any tendency to find jobs faster? And the answer is no.
                                                Let me ... ask, how was it, exactly, that reduced benefits were supposed to encourage employment in the first place?
                                                Making the unemployed miserable arguably increases labor supply, as workers become ... more willing to take whatever job they can find. But the US labor market in 2014 isn’t constrained by supply, it’s constrained by demand: ...firms ... have no need for as many hours of work as workers are willing to give.
                                                So make the long-term unemployed more desperate; so what? They can’t do anything to increase the amount of work demanded, and in fact their reduced purchasing power reduces labor demand.
                                                You might imagine that the long-term unemployed, through their desperation, might take jobs away from existing workers — but ... there’s no evidence that this is happening. ...

                                                  Posted by on Wednesday, April 16, 2014 at 10:42 AM in Economics, Politics, Social Insurance, Unemployment | Permalink  Comments (22)

                                                  Yellen: Monetary Policy and the Economic Recovery

                                                  Travel day today, so for now a quick repost of Janet Yellen's speech today, more later as I can:

                                                  Monetary Policy and the Economic Recovery, by Janet Yellen, FRB: Nearly five years into the expansion that began after the financial crisis and the Great Recession, the recovery has come a long way. More than 8 million jobs have been added to nonfarm payrolls since 2009, almost the same number lost as a result of the recession. Led by a resurgent auto industry, manufacturing output has also nearly returned to its pre-recession peak. While the housing market still has far to go, it seems to have turned a corner.
                                                  It is a sign of how far the economy has come that a return to full employment is, for the first time since the crisis, in the medium-term outlooks of many forecasters. It is a reminder of how far we have to go, however, that this long-awaited outcome is projected to be more than two years away.
                                                  Today I will discuss how my colleagues on the Federal Open Market Committee (FOMC) and I view the state of the economy and how this view is likely to shape our efforts to promote a return to maximum employment in a context of price stability. I will start with the FOMC's outlook, which foresees a gradual return over the next two to three years of economic conditions consistent with its mandate.
                                                  While monetary policy discussions naturally begin with a baseline outlook, the path of the economy is uncertain, and effective policy must respond to significant unexpected twists and turns the economy may take. My primary focus today will be on how the FOMC's monetary policy framework has evolved to best support the recovery through those twists and turns, and what this framework is likely to imply as the recovery progresses.
                                                  The Current Economic Outlook
                                                  The FOMC's current outlook for continued, moderate growth is little changed from last fall. In recent months, some indicators have been notably weak, requiring us to judge whether the data are signaling a material change in the outlook. The unusually harsh winter weather in much of the nation has complicated this judgment, but my FOMC colleagues and I generally believe that a significant part of the recent softness was weather related.
                                                  The continued improvement in labor market conditions has been important in this judgment. The unemployment rate, at 6.7 percent, has fallen three-tenths of 1 percentage point since late last year. Broader measures of unemployment that include workers marginally attached to the labor force and those working part time for economic reasons have fallen a bit more than the headline unemployment rate, and labor force participation, which had been falling, has ticked up this year.
                                                  Inflation, as measured by the price index for personal consumption expenditures, has slowed from an annual rate of about 2-1/2 percent in early 2012 to less than 1 percent in February of this year.1 This rate is well below the Committee's 2 percent longer-run objective. Many advanced economies are observing a similar softness in inflation.
                                                  To some extent, the low rate of inflation seems due to influences that are likely to be temporary, including a deceleration in consumer energy prices and outright declines in core import prices in recent quarters. Longer-run inflation expectations have remained remarkably steady, however. We anticipate that, as the effects of transitory factors subside and as labor market gains continue, inflation will gradually move back toward 2 percent.
                                                  In sum, the central tendency of FOMC participant projections for the unemployment rate at the end of 2016 is 5.2 to 5.6 percent, and for inflation the central tendency is 1.7 to 2 percent.2 If this forecast was to become reality, the economy would be approaching what my colleagues and I view as maximum employment and price stability for the first time in nearly a decade. I find this baseline outlook quite plausible.
                                                  Of course, if the economy obediently followed our forecasts, the job of central bankers would be a lot easier and their speeches would be a lot shorter. Alas, the economy is often not so compliant, so I will ask your indulgence for a few more minutes.
                                                  Three Big Questions for the FOMC
                                                  Because the course of the economy is uncertain, monetary policymakers need to carefully watch for signs that it is diverging from the baseline outlook and then respond in a systematic way. Let me turn first to monitoring and discuss three questions I believe are likely to loom large in the FOMC's ongoing assessment of where we are on the path back to maximum employment and price stability.

                                                  » Continue reading "Yellen: Monetary Policy and the Economic Recovery"

                                                    Posted by on Wednesday, April 16, 2014 at 10:08 AM in Economics, Monetary Policy | Permalink  Comments (17)

                                                    Links for 4-16-14

                                                      Posted by on Wednesday, April 16, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (98)

                                                      Tuesday, April 15, 2014

                                                      'Rising Sun'

                                                      Paul Krugman:

                                                      Rising Sun: Joe Romm draws our attention to the third slice of the latest IPCC report on climate change, on the costs of mitigation; the panel finds that these costs aren’t that big — a few percent of GDP even by the end of the century, which means only a trivial hit to the growth rate. ...
                                                      In fact, you should be optimistic...: the technological prospects for a low-emission economy have gotten dramatically better.
                                                      It’s kind of odd how little attention the media give to the solar revolution, but this is really huge stuff:
                                                      In fact, it’s possible that solar will displace coal even without special incentives. But we can’t count on that. What we do know is that it’s no longer remotely true that we need to keep burning coal to satisfy electricity demand. The way is open to a drastic reduction in emissions, at not very high cost.
                                                      And that should make us optimistic about the future, right? I mean, all that stands in our way is prejudice, ignorance, and vested interests. Oh, wait.

                                                        Posted by on Tuesday, April 15, 2014 at 01:29 PM in Economics, Environment, Politics | Permalink  Comments (32)

                                                        Secular Stagnation? The Future Challenge for Economic Policy

                                                        This is worth watching:

                                                          Posted by on Tuesday, April 15, 2014 at 10:02 AM in Conferences, Economics, Video | Permalink  Comments (23)

                                                          Links for 4-15-14

                                                            Posted by on Tuesday, April 15, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (44)

                                                            Monday, April 14, 2014

                                                            FRBSF Economic Letter: How Important Are Hedge Funds in a Crisis?

                                                            Another one that may be of interest:

                                                            How Important Are Hedge Funds in a Crisis?, by Reint Gropp, FRBSF Economic Letter: Before the 2007–09 crisis, standard risk measurement methods substantially underestimated the threat to the financial system. One reason was that these methods didn’t account for how closely commercial banks, investment banks, hedge funds, and insurance companies were linked. As financial conditions worsened in one type of institution, the effects spread to others. A new method that more accurately accounts for these spillover effects suggests that hedge funds may have been central in generating systemic risk during the crisis.

                                                              Posted by on Monday, April 14, 2014 at 10:19 AM in Economics, Financial System | Permalink  Comments (19)

                                                              How Well Do Economists Predict Turning Points?

                                                              This may be of interest:

                                                              “There will be growth in the spring”: How well do economists predict turning points?, by Hites Ahir and Prakash Loungani: Forecasters have a poor reputation for predicting recessions. This column quantifies their ability to do so, and explores several reasons why both official and private forecasters may fail to call a recession before it happens.

                                                                Posted by on Monday, April 14, 2014 at 10:06 AM in Econometrics, Economics | Permalink  Comments (8)

                                                                Paul Krugman: Three Expensive Milliseconds

                                                                 What is the "true cost of our bloated financial industry"?:

                                                                Three Expensive Milliseconds, by Paul Krugman, Commentary, NY Times: Four years ago ... Spread Networks finished boring its way through the Allegheny Mountains of Pennsylvania. Spread’s tunnel was ... a fiber-optic cable that would shave three milliseconds — three-thousandths of a second — off communication time between the futures markets of Chicago and the stock markets of New York. ...
                                                                Who cares about three milliseconds? The answer is, high-frequency traders, who make money by buying or selling stock a tiny fraction of a second faster than other players. ...
                                                                Think about it..., spending hundreds of millions of dollars to save three milliseconds looks like a huge waste. And that’s part of a much broader picture, in which society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.
                                                                How much waste are we talking about? A paper by Thomas Philippon of New York University puts it at several hundred billion dollars a year. ...
                                                                What are we getting in return for all that money? Not much, as far as anyone can tell. ...
                                                                But if our supersized financial sector isn’t making us either safer or more productive, what is it doing? One answer is that it’s playing small investors for suckers, causing them to waste huge sums in a vain effort to beat the market. Don’t take my word for it — that’s what the president of the American Finance Association declared in 2008. Another answer is that a lot of money is going to speculative activities that are privately profitable but socially unproductive. ...
                                                                 It’s ... hard ... to see how the three-millisecond advantage conveyed by the Spread Networks tunnel makes modern America richer; yet that advantage was clearly worth it to the speculators.
                                                                In short, we’re giving huge sums to the financial industry while receiving little or nothing — maybe less than nothing — in return. Mr. Philippon puts the waste at 2 percent of G.D.P. Yet even that figure, I’d argue, understates the true cost of our bloated financial industry. For there is a clear correlation between the rise of modern finance and America’s return to Gilded Age levels of inequality.
                                                                So never mind the debate about exactly how much damage high-frequency trading does. It’s the whole financial industry, not just that piece, that’s undermining our economy and our society.

                                                                  Posted by on Monday, April 14, 2014 at 01:36 AM in Economics, Financial System, Regulation | Permalink  Comments (115)

                                                                  Links for 4-14-14

                                                                    Posted by on Monday, April 14, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (62)

                                                                    Sunday, April 13, 2014

                                                                    'The Social and Moral Philosophy of the Minimum Wage'

                                                                    More Delong -- Brad makes this point about value neutrality every once in awhile, it's one I sometimes forget in these discussions, so it's a nice reminder:

                                                                    The Social and Moral Philosophy of the Minimum Wage: Matthew Yglesias is surprised that most economists favor raising the minimum wage: ...
                                                           the University of Chicago's Booth School of Business found they supported a minimum-wage increase. They weren't sure, however, whether increases would create unemployment. Most said that, on balance, the benefits exceeded the costs...
                                                                    But why should he be surprised? ...

                                                                    One possibility is that Matthew has spent too much time listening to bad right-wing economists who are even worse philosophers--people who say things like: "We are economists, We talk only about efficiency, and so we talk about what maximizes real income per capita. If you want to introduce some other consideration and maximize something other than real income per capita, well then you are introducing interpersonal value comparisons into the problem and you should consult the philosopher or theologian. But we should agree at the start that it is maximizing real income per capita that is the efficient outcome."
                                                                    The problem with this, of course, is that maximizing real income per capita does take a stand, and a very fictional your stand, on interpersonal value comparisons. To maximize real income per capita is to assert that each dollar at the margin--no matter how rich is the person that goes to--has the same effect on marginal utility, has the same effect on the greatest good of the greatest number. If we were, instead of maximizing real income per capita, to go about maximizing the geometric mean of real income we would be taking another stand: that utility was logarithmic in real income, so that each doubling of real income had the same effect on the greatest good of the greatest number no matter who that doubling went to or how rich they already were.
                                                                    Both maximizing real income per capita and maximizing the geometric mean of real income are wrong, are not what we really want to do. ...
                                                                    But if one wants a neutral place to start, it is surely less obnoxious to start from maximizing the geometric mean of real income than from maximizing real income per capita. And once one starts from there you need a very large disemployment effect--one that we simply see strong evidence against at the current level of the minimum wage--for an increase in the minimum wage to flunk any sensible benefit-cost calculation.

                                                                      Posted by on Sunday, April 13, 2014 at 12:52 PM in Economics, Income Distribution | Permalink  Comments (72)

                                                                      Notes and Finger Exercises on Thomas Piketty's "Capital in the Twenty-First Century"

                                                                      Brad DeLong attempts to answer a question many people have been asking. Can the Summers claim of secular stagnation due to the real interest rate being too low be reconciled with Piketty's argument that the real interest rate is too high, high enough to generate rising inequality (larger than the growth rate of the economy)?:

                                                                      Notes and Finger Exercises on Thomas Piketty's "Capital in the Twenty-First Century": When I look at Thomas Piketty's big book, I see one thing that he failed to do that I think he really should have done. A large part of the book is about the contrast between "r", the rate of return on wealth, and "g" the growth rate of the economy. However, there are four different r's. And in his book he failed to distinguish between them.

                                                                      The four different r's are:

                                                                      1. The real interest rate at which metropolitan governments can borrow: call this r1.
                                                                      2. The real interest rate that is the actual average return on wealth in the society and economy: call this r2.
                                                                      3. The real interest rate that is the average risky net rate of accumulation--what capital receives, minus the risk of confiscation or destruction or taxation, plus appreciation in valuation multiples, minus what is spent in order to keep the world in the appropriate social position: call this r3.
                                                                      4. A measure of the extent to which capital and wealth serve as an effective claim on income independent of how much capital there is--a standardized measure of what the society and economy's return on wealth would be at some standardized ratio of wealth to annual income: say, 4: call this ρ.

                                                                      These four r's are very different animals.

                                                                      The first r, r1, is what Larry Summers is talking about when he talks about secular stagnation. When that r1 falls to a level equal to minus the rate of inflation, the economy is in big trouble. At that point, wealthholders would rather become coupon-clipping rentiers holding government bonds then invest in industry of any sort. Full employment can then be attained only via:

                                                                      1. A bubble that produces unrealistic and unsustainable expectations of the profits from investing in industry.
                                                                      2. The government borrowing money and buying stuff on a large scale.
                                                                      3. A higher rate of trend inflation that relaxes the zero lower bound constraint on safe government debt interest rates. .

                                                                      Larry Summers is worried that this is the dilemma we face: that we are in a world in which r1 is too low...

                                                                      Thomas Piketty, by contrast, says that he is worried about the world in which r2 is too high.

                                                                      But it is not r2 but rather r3 that he should be talking about. And r3--the average rate of accumulation--is r2 to which there are a good number of sociopolitical factors plus and minus.

                                                                      Are Piketty and Summers Reconcilable?

                                                                      We have a world in which some eminent economists (Larry Summers) say r1 is too low, and other eminent economists (Thomas Piketty) say r2 is too high. Can this compute?


                                                                      The difference between r1 and r2 is the risk premium. In a well-functioning market economy with well-functioning financial markets, there are powerful reasons to believe that this risk premium should be small: less than 1%-point per year. The fact the risk premium appears to me to be 7%-points per year today is a powerful evidence of the profound dysfunctionality of our financial markets, and of their failure to do their proper catallactic job. But that is a separate and largely independent discussion: that is a dysfunction of our modern market economy which is different from either the dysfunction feared by Summers or the dysfunction feared by Piketty. For the moment, simply note that it is perfectly possible for all three of these major dysfunctions to occur together.

                                                                      What Does This Neoclassical Economist Say? Build a Mathematical Model

                                                                      When a conventional American post-World War II neoclassical economist--somebody, that is, like me--tries to make analytical sense of Piketty's big book, he says:


                                                                      No, that's not it... He says something like:

                                                                      Piketty talks a lot about eras, and about times when r--his r, r2--r2 > g, and wealth concentration and the wealth-to-annual income ratio is rising, and times when r2 < g, and wealth concentration and the wealth-to-annual-income ratio is falling. But how much? And in what periods, exactly? Let's see if we can do some finger exercise to figure it out. ...

                                                                        Posted by on Sunday, April 13, 2014 at 10:51 AM in Economics, Income Distribution | Permalink  Comments (7)

                                                                        Cyber War, Cyber Space: National Security and Privacy in the Global Economy

                                                                        Information technologies and infrastructure play an increasingly important role in daily life. But at the same time, cyber security is becoming increasingly threatened. How does society deal with these conflicting challenges.

                                                                        This keynote INET panel features speakers Steven Bellovin, Yvo Desmedt, Amir Hertzberg, and Bart Preneel, moderated by Thomas Ferguson.

                                                                          Posted by on Sunday, April 13, 2014 at 08:19 AM in Conferences, Economics, Video | Permalink  Comments (0)

                                                                          Links for 4-13-14

                                                                            Posted by on Sunday, April 13, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (56)

                                                                            Saturday, April 12, 2014

                                                                            'Better Insurance Against Inequality'

                                                                            Robert Shiller:

                                                                            Better Insurance Against Inequality: Paying taxes is rarely pleasant, but as April 15 approaches it’s worth remembering that our tax system is a progressive one and serves a little-noticed but crucial purpose: It mitigates some of the worst consequences of income inequality. ...
                                                                            But it’s also clear that ... what we have isn’t nearly enough. It’s time — past time, actually — to tweak the system so that it can respond effectively if income inequality becomes more extreme. ...
                                                                            In testimony before the Senate Finance Committee last month, [Leonard] Burman proposed a version of inequality indexing that might be politically acceptable... His idea was to integrate inequality indexing with inflation indexing: Instead of just linking tax brackets to inflation..., he proposed that ... if inequality worsened, higher tax brackets would bear a bit more of the burden, and people at the bottom would bear less.
                                                                            A relatively minor change like this should be politically acceptable. It is a reframing of inflation indexing, which is already a sacrosanct principle, and would be revenue-neutral. ... Such a plan would be a nice first step toward making our tax system manage the risk of future increases in inequality.

                                                                            I'm a bit more doubtful than he is about the political acceptability of this proposal so long as the GOP is in a position to block any movement in this direction.

                                                                              Posted by on Saturday, April 12, 2014 at 10:56 AM in Economics, Income Distribution, Politics, Taxes | Permalink  Comments (82)

                                                                              'What Money Can't Buy'

                                                                              I liked this session:

                                                                              "In recent decades, market values have crowded out non- market norms in almost every aspect of life—medicine, education, government, law, art, sports, even family life and personal relations. Without quite realizing it, we have drifted from having a market economy to being a market society. Is this where we want to be? Should we pay children to read books or to get good grades? Should we allow corporations to pay for the right to pollute the atmosphere? Is it ethical to pay people to test risky new drugs or to donate their organs? What about hiring mercenaries to fight our wars? Auctioning admission to elite universities? Selling citizenship to immi- grants willing to pay? This discussion takes on one of the biggest ethical questions of our time: Is there something wrong with a world in which everything is for sale? And if so, how can we prevent market values from reaching into spheres of life where they don't belong? What are the moral limits of markets?"

                                                                              • Introduction: Robert Johnson President, Institute of New Economic Thinking
                                                                              • Presenter: Michael Sandel Professor of Government, Harvard University
                                                                              • Discussant: Chrystia Freeland Member of the Parliament of Canada, Toronto Centre

                                                                                Posted by on Saturday, April 12, 2014 at 10:08 AM Permalink  Comments (16)

                                                                                Have We Repaired Financial Regulations Since Lehman?

                                                                                "The 2008 financial crisis led to the worst recession in the developed world since the Great Depression. Governments had to respond decisively on a large scale to contain the destructive impact of massive debt deflation. Still, several large financial institutions and thousands of small-to-medium-sized institutions collapsed or had to be rescued, numerous non-financial businesses closed, and millions of households lost their savings, jobs, and homes. Five years later, we are still feeling these effects. Will the financial reforms introduced since the onset of the crisis prevent another catastrophe? This keynote panel titled 'Have We Repaired Financial Regulation Since Lehman' at the Institute for New Economic Thinking's "Human After All" conference in Toronto."

                                                                                Featured speakers: Anat Admati, Richard Bookstaber, Andy Haldane, and Edward Kane, moderated by Martin Wolf.

                                                                                  Posted by on Saturday, April 12, 2014 at 05:03 AM in Economics, Financial System, Regulation | Permalink  Comments (4)

                                                                                  Links for 4-12-14

                                                                                    Posted by on Saturday, April 12, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (94)

                                                                                    Friday, April 11, 2014

                                                                                    'What Do Average Americans Think About Inequality?'

                                                                                    Sociologist Claude Fischer:

                                                                                    What do average Americans think about inequality?: ... In her 2013 book, The Undeserving Rich: American Beliefs about Inequality, Opportunity, and Redistribution, sociologist Leslie McCall methodically tries to figure out Americans’ thinking about inequality. ... Here is what McCall found (updated a bit with new surveys):
                                                                                    • First, surveys show that Americans are aware that inequality has grown...
                                                                                    • Second, Americans do not like high income inequality. ...
                                                                                    • Third, most Americans find widening inequality objectionable because it seems to undercut opportunities for economic advancement. ...
                                                                                    • Fourth, a growing percentage of Americans want something done about inequality. ...
                                                                                    • Fifth, what Americans have not increasingly endorsed is having the government redistribute income. ...
                                                                                    • Sixth, what Americans do want the government to do – and there is increasing support for this – is to increase opportunity, notably by funding more education. ...
                                                                                    ...I am struck that, in her data and analysis, Americans generally do not object to economic inequality on grounds that perhaps other westerners might: not that it is morally, religiously offensive – Pope Francis speaks of “moral destitution”; nor on the grounds that everyone has a human right to a decent standard of living;  nor because inequality might have damaging psychological consequences or social consequences; nor even because inequality slows economic growth. Generally, Americans object to inequality, it seems, because they think that it undermines the chances that  individual ambition and hard work will succeed.

                                                                                      Posted by on Friday, April 11, 2014 at 01:04 PM in Economics, Equity, Income Distribution | Permalink  Comments (46)

                                                                                      'The Great Moderation Is Back'

                                                                                      Is the Great Moderation "still in progress"? Jason Furman says it is:

                                                                                      The Great Moderation Is Back, by Binyamin Appelbaum, NY Times: Perhaps you remember the Great Moderation, the comforting term economists pinned on the period of relatively steady growth that began in the early 1980s.
                                                                                      Perhaps you’ve even looked back and laughed at the very idea.
                                                                                      Jason Furman has a more complicated view. The head of the president’s Council of Economic Advisers argued in an interesting speech on Thursday that the Great Moderation is still in progress. The growth of jobs and economic activity over the last five years has snapped back into the same kind of steady pattern that prevailed before the recession...

                                                                                        Posted by on Friday, April 11, 2014 at 12:33 PM in Economics | Permalink  Comments (32)

                                                                                        Paul Krugman: Health Care Nightmares

                                                                                        Dreaming of politicians on the right who actually care about the unemployed, the uninsured, and the unfortunate. But it's just a dream:

                                                                                        Health Care Nightmares, by Paul Krugman, Commentary, NY Times: When it comes to health reform, Republicans suffer from delusions of disaster. They know, just know, that the Affordable Care Act is doomed to utter failure, so failure is what they see, never mind the facts on the ground.
                                                                                        Thus, on Tuesday, Mitch McConnell, the Senate minority leader, dismissed the push for pay equity as an attempt to “change the subject from the nightmare of Obamacare”; on the same day, the nonpartisan RAND Corporation released a study estimating “a net gain of 9.3 million in the number of American adults with health insurance coverage...” Some nightmare. And the overall gain ... must be considerably larger.
                                                                                        But ... Obamacare is looking like anything but a nightmare... It will be months before we have a full picture, but it’s clear that the number of uninsured Americans has already dropped significantly...
                                                                                        Republicans clearly have no idea how to respond... At the state level, however, Republican governors and legislators are still in a position to block the act’s expansion of Medicaid, denying health care to millions of vulnerable Americans. And they have seized that opportunity with gusto: Most Republican-controlled states, totaling half the nation, have rejected Medicaid expansion. ...
                                                                                        What’s amazing about this wave of rejection is that it appears to be motivated by pure spite. The federal government is prepared to pay for Medicaid expansion, so it would cost the states nothing, and would, in fact, provide an inflow of dollars. ...Jonathan Gruber ... recently summed it up: The Medicaid-rejection states “are willing to sacrifice billions of dollars of injections into their economy in order to punish poor people. It really is just almost awesome in its evilness.” Indeed.
                                                                                        And while supposed Obamacare horror stories keep on turning out to be false, it’s already quite easy to find examples of people who died because their states refused to expand Medicaid. According to one recent study, the death toll from Medicaid rejection is likely to run between 7,000 and 17,000 Americans each year.
                                                                                        But nobody expects to see a lot of prominent Republicans declaring that rejecting Medicaid expansion is wrong, that caring for Americans in need is more important than scoring political points against the Obama administration. As I said, there’s an extraordinary ugliness of spirit abroad in today’s America, which health reform has brought out into the open.
                                                                                        And that revelation, not reform itself — which is going pretty well — is the real Obamacare nightmare.

                                                                                          Posted by on Friday, April 11, 2014 at 07:06 AM in Economics, Health Care, Politics | Permalink  Comments (84)

                                                                                          Links for 4-11-14

                                                                                            Posted by on Friday, April 11, 2014 at 06:05 AM in Economics, Links | Permalink  Comments (39)

                                                                                            Thursday, April 10, 2014

                                                                                            'Pseudo-Mathematics and Financial Charlatanism'

                                                                                            "Past performance is not an indicator of future results":

                                                                                            Pseudo-mathematics and financial charlatanism, EurekAlert: Your financial advisor calls you up to suggest a new investment scheme. Drawing on 20 years of data, he has set his computer to work on this question: If you had invested according to this scheme in the past, which portfolio would have been the best? His computer assembled thousands of such simulated portfolios and calculated for each one an industry-standard measure of return on risk. Out of this gargantuan calculation, your advisor has chosen the optimal portfolio. After briefly reminding you of the oft-repeated slogan that "past performance is not an indicator of future results", the advisor enthusiastically recommends the portfolio, noting that it is based on sound mathematical methods. Should you invest?
                                                                                            The somewhat surprising answer is, probably not. Examining a huge number of sample past portfolios---known as "backtesting"---might seem like a good way to zero in on the best future portfolio. But if the number of portfolios in the backtest is so large as to be out of balance with the number of years of data in the backtest, the portfolios that look best are actually just those that target extremes in the dataset. When an investment strategy "overfits" a backtest in this way, the strategy is not capitalizing on any general financial structure but is simply highlighting vagaries in the data. ...
                                                                                            Unfortunately, the overfitting of backtests is commonplace not only in the offerings of financial advisors but also in research papers in mathematical finance. One way to lessen the problems of backtest overfitting is to test how well the investment strategy performs on data outside of the original dataset on which the strategy is based; this is called "out-of-sample" testing. However, few investment companies and researchers do out-of-sample testing. ...

                                                                                              Posted by on Thursday, April 10, 2014 at 01:56 PM in Econometrics, Economics, Financial System | Permalink  Comments (19)

                                                                                              Fed Watch: When Will The Fed Change Its Reaction Function?

                                                                                              Tim Duy:

                                                                                              When Will The Fed Change Its Reaction Function?, by Tim Duy: The March FOMC minutes were generally interpretted as having a dovish tenor, contrasting with the generally hawkish reception for the statement and ensuing press conference. Overall, the Fed appears committed to a long period of low interest rates and I continue to think this should be the baseline view. But actually policy seems to remain hawkish relative to the Fed's rhetoric. By its own admission, the Fed is missing badly on both its mandates. Why then the push to reduce accommodation by ending asset purchases and laying the groundwork for the first rate hike? This leaves me wary the Fed could turn dramatically more hawkish with little provocation from the data. At the same time, one can imagine the Fed realizes that the current reaction function remains inconsistent its desired goals, and policy consequently shifts in a dovish direction.

                                                                                              Consider the Fed's take on labor markets:

                                                                                              In their discussion of labor market developments, participants noted further improvement, on balance, in labor market conditions.

                                                                                              Fair enough. But where is the majority of policymakers on the issue of slack?

                                                                                              While there was general agreement that slack remains in the labor market, participants expressed a range of views regarding the amount of slack and how well the unemployment rate performs as a summary indicator of labor market conditions. Several participants pointed to a number of factors--including the low labor force participation rate and the still-high rates of longer-duration unemployment and of workers employed part time for economic reasons--as suggesting that there might be considerably more labor market slack than indicated by the unemployment rate alone.

                                                                                              The opposing view was held by just a "couple" of participants. The "high slack" contingent holds of the upper hand, in my view, given the limited wage pressure to date:

                                                                                              Several participants cited low nominal wage growth as pointing to the existence of continued labor market slack. Participants also noted the debate in the research literature and elsewhere concerning whether long-term unemployment differs materially from short-term unemployment in its implications for wage and price pressures.

                                                                                              It seems fairly clear that the dominant view on the Fed is that labor markets contain more than sufficient slack to contain wage and inflation pressures. And inflation pressures are, by their own admission, nonexistent. But this concern is not as widespread:

                                                                                              Inflation continued to run below the Committee's 2 percent longer-run objective over the intermeeting period. A couple of participants expressed concern that inflation might not return to 2 percent in the next few years and suggested that a protracted period of inflation below 2 percent raised questions about whether the Committee was providing an appropriate degree of monetary accommodation.

                                                                                              Why is the majority not concerned? Because even as they use low wages to justify claims of sufficient slack in the labor market, they use a forecast of higher wages to dismiss the inflation numbers:

                                                                                              A number of participants noted that a pickup in nominal wage growth would be consistent with labor market conditions moving closer to normal and would support the return of consumer price inflation to the Committee's 2 percent longer-run goal.

                                                                                              But how long will the process take? A long time:

                                                                                              Most participants expected inflation to return to 2 percent over the next few years, supported by stable inflation expectations and the continued gradual recovery in economic activity.

                                                                                              The Federal Reserve is clearing communicating the willingness to endure a sustained period of suboptimal outcomes on both the employment and price stability metrics. This suggest that actual policy - entirely directed at reducing accommodation - is considerably more hawkish than dictated by data. It sounds like policy fatigue. The Fed wants out of asset purchases and zero rates and are willing to dismiss the dual mandate to move in this direction. No wonder then that Chicago Federal Reserve President Charles Evans is worried that policymakers will push too hard to normalize rates too early. Via the Wall Street Journal:

                                                                                              “One of the big risks is that we withdraw our accommodative policies prematurely,” Mr. Evans said during a panel discussion at the International Monetary Fund’s spring meetings. “I think it’s just human nature to start thinking we’ve been doing this for a long time.”

                                                                                              The Fed’s benchmark short-term interest rate has been pinned near zero since late 2008, which could prompt some policy-makers to think “that must have been long enough. Maybe it’s time to start the process of renormalizing,” Mr. Evans said. Most Fed officials indicated last month they expect to start raising rates next year.

                                                                                              Consider also the Fed's willingness to continue the taper despite persistent low inflation in the context of this from Federal Reserve Governor Daniel Tarullo:

                                                                                              Last week Chair Yellen explained why substantial slack very likely remains. I would add to her explanation only the observation that, in the face of some uncertainty as to how best to measure slack, we are well advised to proceed pragmatically. We should remain attentive to evidence that labor markets have actually tightened to the point that there is demonstrable inflationary pressure that would place at risk maintenance of the FOMC's stated inflation target (which, of course, we are currently not meeting on the downside). But we should not rush to act preemptively in anticipation of such pressures based on arguments about the potential increase in structural unemployment in recent years.

                                                                                              Arguably, tapering implies that are already acting prematurely. Combine with this commentary by David Zeros via Business Insider:

                                                                                              "As the market prices in higher short-term yields and lower long-term yields, it is really making a bet that the Fed, by tapering our punchbowl drip, is increasing the risk of deflation," says Zervos.

                                                                                              "And at this stage of the game, with inflation BELOW target and plenty of slack in labor markets, that could very well be a mistake. The most important point here is to recognize that low long-term yields are not a sign of a healthy economy."

                                                                                              Indeed, it is reasonable to believe the Fed will make a mistake in the hawkish direction (or already has) given that policy already seems inconsistent with the dual mandate. In other words, the Fed has a hawkish reaction function.

                                                                                              Regarding that reaction function, the now infamous dots were also a topic of discussion. Policymakers knew exactly the implications of the dots:

                                                                                              A number of participants noted the overall upward shift since December in participants' projections of the federal funds rate included in the March SEP, with some expressing concern that this component of the SEP could be misconstrued as indicating a move by the Committee to a less accommodative reaction function.

                                                                                              The next line, however, is not particularly helpful:

                                                                                              However, several participants noted that the increase in the median projection overstated the shift in the projections.

                                                                                              This begs the question of "why?" Some dots moved forward. Why does that overstate the shift? That said, some participants noted that the shift should not be cause to worry:

                                                                                              In addition, a number of participants observed that an upward shift was arguably warranted by the improvement in participants' outlooks for the labor market since December and therefore need not be viewed as signifying a less accommodative reaction function.

                                                                                              This was my interpretation - the upward shift of the dots were consistent with a change in the unemployment projections given the Fed's reaction function. But that doesn't quite explain why the reaction function is so tight to begin with. This is I think the best explanation:

                                                                                              In their discussion of recent financial developments, participants saw financial conditions as generally consistent with the Committee's policy intentions. However, several participants mentioned trends that, if continued, could become a concern from the perspective of financial stability. A couple of participants pointed to the decline in credit spreads to relatively low levels by historical standards; one of these participants noted the risk of either a sharp rise in spreads, which could have negative repercussions for aggregate demand, or a continuation of the decline in spreads, which could undermine financial stability over time. One participant voiced concern about high levels of margin debt and of equity market valuations as well as a notable shift into commodity investments. Another participant stressed the growth in consumer credit to less creditworthy households.

                                                                                              I think the Fed's reaction function now includes some financial stability variable, but the Fed is loath to discuss that variable and the related parameters impacting policy. That said, we are fairly confident that the push to end asset purchases and plan the exit from zero rates were a response to bubbling financial stability concerns at the Fed. They simply hid that behind the "progress toward goals" language.

                                                                                              More surprisingly is that not only did they begin the exit from extraordinary stimulus in the face of clearly suboptimal labor outcomes, they did so in the face of clearly suboptimal inflation outcomes. Now, though, they may be realizing the error of their ways. Via Jon Hilsenrath at the Wall Street Journal:

                                                                                              Federal Reserve officials are growing concerned the U.S. inflation rate won't budge from low levels, the latest sign of angst among central bankers about weakness in the global economy.

                                                                                              So what comes next? To answer that, we again need to divide policy into movements along the reaction function and shifts of the reaction function. We should recognize that the SEP dots will shift in response to the data. If data comes in stronger than anticipated, then the dots will move forward. If weaker, then backward.

                                                                                              A more hawkish reaction function - the dots moving up and forward independent of the forecast - would most likely occur due to heightened financial stability concerns. A less likely cause is that inflation expectations suddenly jump.

                                                                                              What about a more dovish reaction function? I think it was expected that new Federal Reserve Chair Janet Yellen would have already pushed forward a more dovish reaction function given her expressed concerned for the unemployed. So far, she has disappointed such expectations. Factors that could still trigger a downward shift include 1.) a desire to accelerate the pace of improvement in labor markets, 2.) a lessening of financial stability concerns, 3.) a heightened concern about the negative impacts of persistently low inflation.

                                                                                              The inflation concern is my leading candidate at the moment. Still, I would not want to overestimate the chance of such a shift. It is easy to see that ongoing improvements in labor markets could be sufficient to contain inflation concerns to low rumblings.

                                                                                              Bottom Line: Fed policy - dovish those it seems - is maddenly disconnected from their actual forecasts. What does that mean for future policy? Given the relatively dovish forecast, I am concerned that the balance of risk lies on the upside, which implies tighter policy along the existing reaction function. But at the same time I remain open to the possibility that even if the economy evolves as expected, the Fed could extend the low interest rate horizon via shifting the reaction function down. That said, I suspect there is a fairly high bar to such a shift. As unemployment drops further, they will become increasingly concerned about being caught behind the curve given the level of financial accommodation already in place.

                                                                                                Posted by on Thursday, April 10, 2014 at 09:32 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (30)

                                                                                                Have Blog, Will Travel

                                                                                                I am here today:

                                                                                                INET: Human After All - April 10-12: The Institute for New Economic Thinking is hosting its fifth annual conference with its partner the Centre for International Governance Innovation (CIGI) at the Fairmont Royal York Hotel in Toronto. The conference topic is the economics of innovation and the impact of innovation on society. Speakers will include a roster of newsmakers, including former U.S. Treasury Secretary Larry Summers, Nobel laureates Joseph Stiglitz and James Heckman, former co-CEO of Research In Motion Jim Balsillie, Bank of England Chief Economist Andy Haldane, former head of the U.K. Financial Services Authority Adair Lord Turner, Harvard University professor and best-selling author Michael Sandel, and author, essayist and President of PEN International, John Ralston Saul. Watch Live beginning at noon EST.

                                                                                                 I will post the conference schedule as soon as I can -- for some reason it's not yet available

                                                                                                Update: Today's schedule (I'll post Friday and Saturday later):

                                                                                                CANADIAN ROOM 1:00–2:45 PM LUNCH KEYNOTE ( OPENING ) Is Innovation Always A Good Thing? Technology and innovation create “disruption.” That basically means creating new markets or value networks, which eventually disrupts earlier technologies. New products, new inventions, new sources of demand are all possible. Yet, the very innovation that creates these opportunities also can create job losses as well as having significant distributional consequences for society as a whole.

                                                                                                The panel seeks to explore this duality.

                                                                                                • James Balsillie Chair, Centre for International Governance Innovation
                                                                                                • Lisa Cook Professor, Department of Economics, Michigan State University
                                                                                                • Robert Johnson President, Institute for New Economic Thinking
                                                                                                • Richard Nelson Professor of Economics, Columbia University
                                                                                                • Moderator Richard Waters Financial Times

                                                                                                CANADIAN ROOM 3:00–4:30 PM PLENARY PANEL
                                                                                                Innovation: Do Private Returns Produce the Social Returns We Need? The machines of the frst age replaced and multiplied the physical labor of humans and animals. The machines of the second age will replace and multiply our intelligence. The driving force behind this revolution will, argue the “techno-positivists,” exponentially increase the power (or exponentially reduce the cost) of computing. The celebrated example is Moore’s Law, named after Gordon Moore, a founder of Intel. For half a century, the number of transistors on a semiconductor chip has doubled at least every two years. But the information age has coincided with—and must, to some extent, have caused—adverse economic trends: stagnation of median real incomes; rising inequality of labor income and of the distribution of income between labor and capital; and growing long- term unemployment. Are the great gains in wealth and material prosperity created by our entrepreneurs in and of themselves sufficient to produce desired social returns demanded in today’s world?

                                                                                                • Simon Head Fellow, Institute for Public Knowledge, New York University, and Director of Programs, The New York Review of Books Foundation
                                                                                                • Mariana Mazzucato R.M. Phillips Professor in the Economics of Innovation, SPRU, University of Sussex
                                                                                                • Stian Westlake Executive Director, National Endowment for Science Technology and the Arts
                                                                                                • Dr. Joon Yun Partner and President, Palo Alto, LLC Moderator Quentin Hardy Deputy Tech Editor, The New York Times
                                                                                                • Moderator Quentin Hardy Deputy Tech Editor, The New York Time

                                                                                                CANADIAN ROOM 4:45–6:15 PM PLENARY PANEL
                                                                                                Have we Repaired Financial Regulations since Lehman? The 2008 global financial crisis led to the worst recession in the developed world since the Great Depression. Governments had to respond decisively on a large scale to contain the destructive impact of massive debt deflation, (although there is some question as to the degree to which this represented support for the financial ser - vices industry vs the needs of the real economy). Still, large financial institutions such as American International Group, Bear Stearns, Lehman Brothers, Countrywide Financial, Washington Mutual, Wachovia, Northern Rock, and Landsbanki collapsed; thousands of small-to-medium- sized financial institutions failed or needed to be rescued; millions of households lost their retirement savings, jobs, homes, and communities; and numerous non- financial businesses closed. Five years later, we are still experiencing the effects of the crisis. Are the financial reforms and regulations introduced since the onset of the crisis likely to be effective in preventing another catastrophe?

                                                                                                • Anat Admati Professor, Stanford Graduate School of Business
                                                                                                • Richard Bookstaber U.S. Treasury with the Office of Financial Research and FSOC
                                                                                                • Andrew Haldane Executive Director of Financial Stability, Bank of England
                                                                                                • Edward Kane Professor of Finance, Boston College
                                                                                                • Moderator Martin Wolf Financial Times

                                                                                                CANADIAN ROOM FOYER 6:15–7:15 PM Cocktail Reception

                                                                                                CANADIAN ROOM 7:15–9:00 PM KEYNOTE DINNER
                                                                                                Innovation: To What Purpose? Innovation is said to be essential for survival in most industries. Yet, innovation can be very risky—some inno - vations can even destroy value. How can managers and entrepreneurs know what to do, and how should this trade-o ff between innovation and risk be treated? What are the broader social goals that ought to be achieved via innovation?

                                                                                                • Presenter John Ralston Saul Novelist, Essayist and President, PEN International
                                                                                                • Moderator Rohinton Medhora President, Centre for International Governance Innovation

                                                                                                  Posted by on Thursday, April 10, 2014 at 08:53 AM in Conferences, Economics, Travel | Permalink  Comments (3)