Wednesday, April 26, 2017

Minimum Wages and the Distribution of Family Incomes in the United States

Arindrajit Dube  a Equitable Growth: 

Minimum wages and the distribution of family incomes in the United States: Introduction The ability of minimum-wage policies in the United States to aid lower-income families depends on how they affect wage gains, potential job losses, and other sources of family income, including public assistance. In contrast to a large body of research on the effects of minimum wages on employment,1 there are relatively fewer studies that empirically estimate the impact of minimum wage policies on family incomes. 
In my new paper, I use individual-level data between 1984 and 2013 from the Current Population Survey by the U.S. Census Bureau to provide a thorough assessment of how U.S. minimum wage policies have affected the distribution of family incomes.2 Similar to existing work, I consider how minimum wages influence the poverty rate. Going beyond most existing research, however, I also calculate the effect of the policies for each income percentile, adjusting for family size. This highlights the types of families that are helped or hurt by wage increases. I also calculate the effect on a broader measure of income that includes tax credits and noncash transfers. I quantify the offset effect of higher wages on the use of transfer programs and the gains net of the offsets by income percentiles, painting a fuller picture of how minimum-wage policies affect the U.S. income distribution and the overall well-being of U.S. families.
Overall, I find robust evidence that higher minimum wages lead to increases in incomes among families at the bottom of the income distribution and that these wages reduce the poverty rate. A 10 percent increase in the minimum wage reduces the nonelderly poverty rate by about 5 percent. At the same time, I find evidence for some substitution of government transfers with earnings, as evidenced by the somewhat smaller income increases after accounting for tax credits such as the Earned Income Tax Credit and noncash transfers such as the Supplemental Nutrition Assistance Program. The overall increase in post-tax income is about 70 percent as large as the increase in pretax income. ...

    Posted by on Wednesday, April 26, 2017 at 08:39 AM in Economics, Income Distribution | Permalink  Comments (54) 


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      Posted by on Wednesday, April 26, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (130) 


      Tuesday, April 25, 2017

      What Can Be Done to Improve the Episteme of Economics?

      Brad DeLong:

      What Can Be Done to Improve the Episteme of Economics?: I think this is needed:
      INET: Education Initiative: "We are thrilled that you are joining us at the Berkeley Spring 2017 Education Convening, Friday, April 28th 9am-5pm Blum Hall, B100 #5570, Berkeley, CA 94720-5570... https://www.ineteconomics.org/education/curricula-modules/education-initiative
      ...Sign up here: https://fs24.formsite.com/inet/form97/index.html or email aoe@ineteconomics.org...
      I strongly share INET's view that things have gone horribly wrong, and that it is important to listen, learn, and brainstorm about how to improve economics education.
      Let me just note six straws in the wind:
      The macro-modeling discussion is wrong: The brilliant Olivier Blanchard https://piie.com/blogs/realtime-economic-issues-watch/need-least-five-classes-macro-models: "The current core... RBC (real business cycle) structure [model] with one main distortion, nominal rigidities, seems too much at odds with reality.... Both the Euler equation for consumers and the pricing equation for price-setters seem to imply, in combination with rational expectations, much too forward-lookingness.... The core model must have nominal rigidities, bounded rationality and limited horizons, incomplete markets and the role of debt..."
      The macro-finance discussion is wrong: The efficient market hypothesis (EMH) claimed that movements in stock indexes were driven either by (a) changing rational expectations of future cash flows or by (b) changing rational expectations of interest rates on investment-grade bonds, so that expected returns were either (a) unchanged or (b) moved roughly one-for-one with returns on investment grade bonds. That claim lies in total shreds. Movements in stock indexes have either no utility-theoretic rationale at all or must be ascribed to huge and rapid changes in the curvature of investors' utility functions. Yet Robert Lucas claims that the EMH is perfect, perfect he tells us http://www.economist.com/node/14165405: "Fama tested the predictions of the EMH.... These tests could have come out either way, but they came out very favourably.... A flood of criticism which has served mainly to confirm the accuracy of the hypothesis.... Exceptions and 'anomalies' [are]... for the purposes of macroeconomic analysis and forecasting... too small to matter..."
      The challenge posed by the 2007-9 financial crisis is too-often ignored: Tom Sargent https://www.minneapolisfed.org/publications/the-region/interview-with-thomas-sargent: "I was at Princeton then.... There were interesting discussions of many aspects of the financial crisis. But the sense was surely not that modern macro needed to be reconstructed.... Seminar participants were in the business of using the tools of modern macro, especially rational expectations theorizing, to shed light on the financial crisis..."
      What smart economists have to say about policy is too-often dismissed: Then-Treasury Secretary Tim Geithner, according to Zach Goldfarb https://www.washingtonpost.com/blogs/wonkblog/post/geithner-stimulus-is-sugar-for-the-economy/2011/05/19/AGz9JvLH_blog.html: "The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as [Christina] Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was 'sugar', and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.... In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration..."
      The competitive model has too great a hold: "Brad, you're the only person I've ever heard say that Card-Krueger changed their mind on how much market power there is in the labor market..."
      The problem is of very long standing indeed: John Maynard Keynes (1926) https://www.panarchy.org/keynes/laissezfaire.1926.html: "Some of the most important work of Alfred Marshall-to take one instance-was directed to the elucidation of the leading cases in which private interest and social interest are not harmonious. Nevertheless, the guarded and undogmatic attitude of the best economists has not prevailed against the general opinion that an individualistic laissez-faire is both what they ought to teach and what in fact they do teach..."

        Posted by on Tuesday, April 25, 2017 at 08:56 AM in Economics, Macroeconomics, Methodology, Universities | Permalink  Comments (34) 


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          Monday, April 24, 2017

          Paul Krugman: Zombies of Voodoo Economics

           "Because it offers a rationale for lower taxes on the wealthy":

          Zombies of Voodoo Economics, by Paul Krugman, NY Times: According to many reports, Donald Trump is getting frantic as his administration nears the 100-day mark. It’s an arbitrary line in the sand, but one he himself touted in many pre-inauguration boasts. And it will be an occasion for numerous articles detailing how little of substance he has actually accomplished. ...
          Mr. Trump sold himself to voters as unorthodox as well as effective. He was going to be a different kind of president, a consummate deal-maker who would transcend the usual ideological divide. His supporters should therefore be dismayed, not just by his failure to actually close any deals, but by the fact that he evidently has no new ideas to offer, just the same old snake oil the right has been peddling for decades.
          We saw that on Trumpcare... And now we’re seeing it on taxes. ... Whatever the details, Trumptax will be a big exercise in fantasy economics.
          How do we know this? Last week Stephen Mnuchin, the Treasury secretary, told a financial industry audience that “the plan will pay for itself with growth.” And we all know what that means..., history offers not a shred of support for faith in the pro-growth effects of tax cuts..., supply-side economics is a classic example of a zombie doctrine: a view that should have been killed by the evidence long ago... Why, then, does it persist? Because it offers a rationale for lower taxes on the wealthy...
          Still, Donald Trump was supposed to be different. Guess what: he isn’t.
          To be fair, it’s not clear whether Mr. Trump really believes in right-wing economic orthodoxy. He may just be looking for something, anything, he can call a win — and it’s a lot easier to come up with a tax reform plan if you don’t try to make things add up, if you just assume that extra growth and the revenue it brings will materialize out of thin air.
          We might also note that a man who insists that he won the popular vote he lost, who insists that crime is at a record high when it’s at a record low, doesn’t need a fancy doctrine to claim that his budget adds up when it doesn’t.
          Still, the fact is that the Trump agenda so far is absolutely indistinguishable from what one might have expected from, say, Ted Cruz. It’s just voodoo with extra bad math. Was that what his supporters expected?

            Posted by on Monday, April 24, 2017 at 07:32 AM in Economics, Politics, Taxes | Permalink  Comments (244) 


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              Saturday, April 22, 2017

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                Friday, April 21, 2017

                Do Changes in the Economic Landscape Require a New Policy Framework?

                I am here today:

                AGENDA
                8:45 a.m. Welcoming Remarks and Introduction: John C. Williams, President, Federal Reserve Bank of San Francisco
                9:00 a.m. Speaker: Lawrence H. Summers, Harvard University
                Interviewer: David Wessel, Brookings Institution
                10:30 a.m. Robert E. Hall, Stanford UniversitUnderstanding the Decline in the Safe Real Interest Rate
                Discussant: Martin S. Eichenbaum, Northwestern University
                11:30 a.m. Pierre Olivier Gourinchas, University of California, Berkeley, Hélène Rey, London Business School Global Real Rates: a long-run approach
                Discussant: Linda L. Tesar, University of Michigan
                1:30 p.m. Gauti B. Eggertsson, Brown University, Neil R. Mehrotra, Brown University, Jacob A. Robbins, Brown University, A Quantitative Model of Secular Stagnation
                Discussant: Andrea Ferrero, Oxford University
                2:30 p.m. Noëmie Lisack, Bank of England, Rana Sajedi, Bank of England, Gregory Thwaites, Bank of England, Why Are Real Interest Rates So Low? The role of demographics
                Discussant: Ṣebnem Kalemli-Özcan, University of Maryland
                4:00 p.m. Moderator: Alan M. Taylor, University of California, Davis, Donald L. Kohn, Brookings Institution, Lawrence Schrembi, Bank of Canada, Sayuri Shirai, Asian Development Bank Institute
                Monetary Policy in the 21st century: Lessons from Asia, Europe, and America. A panel discussion

                 

                  Posted by on Friday, April 21, 2017 at 09:08 AM Permalink  Comments (85) 


                  Trump's Tax Cut Plan Will... Pay... For... Itself!

                  Kevin Drum:

                  Trump's Tax Cut Plan Will... Pay... For... Itself!: ...Treasury Secretary Steven Mnuchin said ... tax cuts ... would come close to recouping all of the lost revenue from the dramatic rate reductions.... “The plan will pay for itself with growth,” Mnuchin said at an event hosted by the Institute of International Finance.
                  ...here's a chart showing income tax receipts following the five most recent big changes to tax rates. You can decide for yourself if tax cuts pay for themselves or if tax increases tank the economy.

                  Blog_tax_cuts_1981_2016_3

                    Posted by on Friday, April 21, 2017 at 07:41 AM Permalink  Comments (42) 


                    Paul Krugman: The Balloon, the Box and Health Care

                    If they persist in trying to fit the balloon in the box, eventually it will pop:

                    The Balloon, the Box and Health Care, by Paul Krugman, NY Times: Imagine a man who for some reason is determined to stuff a balloon into a box — a box that, aside from being the wrong shape, just isn’t big enough. He starts working at one corner, pushing the balloon into position. But then he realizes that the air he’s squeezed out at one end has caused the balloon to expand elsewhere. So he tries at the opposite corner, but this undoes his original work.
                    If he’s stupid or obsessive enough, he can spend a long time at this exercise, trying it from various different angles, and maybe even briefly convince himself that he’s making progress. But he’s kidding himself: No matter what he does, the balloon isn’t going to fit in that box.
                    Now you understand what’s happening to G.O.P. efforts to repeal and replace the Affordable Care Act.
                    Republicans have spent many years denouncing Obamacare as a terrible, horrible, no good law and insisting that they can do much better. They successfully convinced many voters that they could preserve the good stuff — the dramatic expansion of coverage that has brought the percentage of Americans without health insurance to a record low — while reducing premiums, shrinking deductibles and, of course, doing away with the taxes on high incomes that pay for the program.
                    Those promises basically define the box into which they’re trying to stuff health care. ...
                    Again and again, we read news reports to the effect that Republicans are closing in on a plan that will break the political deadlock..., the latest idea being floated, they’ll let insurance companies raise premiums on people with pre-existing conditions and compensate by creating special high-risk pools! ...
                    And because the task Republicans have set for themselves is basically impossible, their ongoing debacle over health care isn’t about political tactics or leadership..., this thing just can’t work. ...
                    All of this raises the obvious question: If Republicans never had a plausible alternative to Obamacare, if this debacle was so inevitable, what was the constant refrain of “repeal and replace” all about?
                    The answer, surely, is that it began as a cynical ploy; at first, the Republicans hoped to kill health reform before it really got started. And now they’ve trapped themselves: They can’t admit that they have no ideas without, in effect, admitting that they were lying all along.
                    And the result is that they just keep trying to stuff the balloon into that box.

                      Posted by on Friday, April 21, 2017 at 07:23 AM in Economics, Health Care, Politics | Permalink  Comments (262) 


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                        Thursday, April 20, 2017

                        GE2017: Why Economic Facts will be Ignored Once Again

                        Simon Wren-Lewis:

                        GE2017: Why economic facts will be ignored once again: In 2015, the Conservatives spun the line that Labour profligacy had messed up the economy, and they had no choice but to clear up the mess. In short, austerity was Labour’s fault. As Labour chose not to challenge this narrative, almost all the media and half the voters assumed it must be true. The reality was the complete opposite. The rising deficit was a consequence of the global financial crisis, not Labour profligacy. Doing something about it should and could have been delayed until the recovery was underway. By acting prematurely, Osborne delayed the recovery and lost the average UK household resources worth thousands of pounds. The story that we had to cut now because of the markets was completely false. ...
                        The 2015 General Election was the first recent occasion that the economic facts were ignored. The second was of course the EU referendum. ...
                        A critical issue during the referendum was a belief that immigration had reduced the access of UK natives to public services. Economists know that is simply wrong for the economy as a whole, and if it happens locally it is because the government has pocketed the taxes immigrants pay. But the media did little to inform voters of why it is wrong, and I suspect this is why most of those voting Leave believed they would be no worse off in the long run outside the EU. ...
                        Brexit may not have led to the immediate economic downturn that some expected, but the Brexit depreciation has brought to a halt the short period during of rising real wages. The economic pain that economists said would follow any vote to leave is starting to happen. ...
                        As far as economics is concerned GE2017 is likely to be nothing more than a combination of GE2015 and the EU referendum. The economy has not got any better than in 2015, and is about to get worse, but mediamacro will let Conservatives insist that the economy is strong. ... The exchange rate has fallen and real wages have stopped rising, but we will still be told this is just Project Fear and the consensus among economists will get ignored once again. So, for the third time, we will have a vote where economics is critical but economic facts will be largely ignored. ...
                        As inflation rises and real wages fall the facts may be changing, but the narrative survives.
                        Narratives are a way people can try to understand things they know little about, and most people know little about economics or politics. Mediamacro is a set of narratives. Project fear is a narrative. The right and the ideologues are very good at selling narratives, and they have a media machine to invent them, road test them and spread them. The left and the realists have none of those things, and are hopeless at it anyway because they know reality is more complex than most narratives. That is why they have lost two elections, and look like losing a third big time.

                          Posted by on Thursday, April 20, 2017 at 09:25 AM in Economics, Politics | Permalink  Comments (53) 


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                            Wednesday, April 19, 2017

                            The Fed’s Inflation Goal: What Does the Public Know?

                            "Lately, various Committee members ... and Chair Yellen ... have discussed the symmetry about the Committee's inflation target. Our evidence suggests that the message may not have quite sunk in yet."

                            Or perhaps the message did sink in, but wasn't believed.

                            This is from Dave Altig, Nicholas Parker, and Brent Meyer at the Altlanta Fed's macroblog:

                            The Fed’s Inflation Goal: What Does the Public Know?: The Federal Open Market Committee (FOMC) has had an explicit inflation target of 2 percent since January 25, 2012. In its statement announcing the target, the FOMC said, "Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances."
                            If communicating this goal to the public enhances the effectiveness of monetary policy, one natural question is whether the public is aware of this 2 percent target. We've posed this question a few times to our Business Inflation Expectations Panel, which is a set of roughly 450 private, nonfarm firms in the Southeast. These firms range in size from large corporations to owner operators.
                            Last week, we asked them again. Specifically, the question is:
                            What annual rate of inflation do you think the Federal Reserve is aiming for over the long run?
                            Unsurprisingly, to us at least—and maybe to you if you're a regular macroblog reader—the typical respondent answered 2 percent (the same answer our panel gave us in 2015 and back in 2011). At a minimum, southeastern firms appear to have gotten and retained the message.
                            So, why the blog post? Careful Fed watchers noticed the inclusion of a modifier to describe the 2 percent objective in the March 2017 FOMC statement (emphasis added): "The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal." And especially eagle-eyed Fed watchers will remember that the Committee amended its statement of longer-run goals in January 2016, clarifying that its inflation objective is indeed symmetric.
                            The idea behind a symmetric inflation target is that the central bank views both overshooting and falling short of the 2 percent target as equally bad. As then Minneapolis Fed President Kocherlakota stated in 2014, "Without symmetry, inflation might spend considerably more time below 2 percent than above 2 percent. Inflation persistently below the 2 percent target could create doubts in households and businesses about whether the FOMC is truly aiming for 2 percent inflation, or some lower number."
                            Do such doubts actually exist? In a follow-up to our question about the numerical target, in the latest survey we asked our panel whether they thought the Fed was more, less, or equally likely to tolerate inflation below or above its target. The following chart depicts the responses.

                            One in five respondents believes the Federal Reserve is more likely to accept inflation above its target, while nearly 40 percent believe it is more likely to accept inflation below its target. Twenty-five percent of firms believe the Federal Reserve is equally likely to accept inflation above or below its target. The remainder of respondents were unsure. This pattern was similar across firm sizes and industries.
                            In other words, more firms see the inflation target as a threshold (or ceiling) that the Fed is averse to crossing than see it as a symmetric target.
                            Lately, various Committee members (here, here, and in Chair Yellen's latest press conference at the 42-minute mark) have discussed the symmetry about the Committee's inflation target. Our evidence suggests that the message may not have quite sunk in yet.

                              Posted by on Wednesday, April 19, 2017 at 11:35 AM Permalink  Comments (11) 


                              Krugman: Elizabeth Warren Lays Out the Reasons Democrats Should Keep Fighting

                              Paul Krugman reviews This is Our Fight: The Battle to Save America’s Middle Class, By Elizabeth Warren, Metropolitan Books/Henry Holt & Company:

                              Elizabeth Warren Lays Out the Reasons Democrats Should Keep Fighting: ...Elizabeth Warren ... brings an edge to her advocacy that many Democrats have shied away from... Even the Obama administration, while doing much more to fight inequality than many realize, balked at making inequality reduction an explicit goal.
                              Furthermore, Warren comes down forcefully on the left side of an ongoing debate over both the causes of inequality and the ways it can be reduced.
                              One view, which was dominant even among Democratic-leaning economists in the 1990s, saw rising inequality mainly as a result of ineluctable market forces. Technology, in particular... Given this view, even liberals generally favored free-market policies. ...
                              The alternative view, which Warren clearly endorses, is all for taxing the rich and strengthening the safety net, but it also argues that public policy can do a lot to increase workers’ bargaining power — and that inequality has soared in large part because policy has, in fact, gone the other way.
                              This view has gained much more prominence over the past couple of decades, mainly because it’s now backed by a lot of evidence...
                              But why has actual policy gone the other way? ...
                              Consider ... West Virginia, where Obamacare cut the number of uninsured by about 60 percent, where minimum wage hikes and revived unions could do wonders for workers in health care and social services, the state’s largest industry. That is, it’s a perfect example of a state that would benefit hugely from an enlightened-populist agenda.
                              But last November West Virginia went almost three-to-one for a very unenlightened populist...
                              But maybe it’s a matter of time, and what Democrats need right now is a reason to keep fighting. And that’s something Warren’s muscular, unapologetic book definitely offers. It’s an important contribution, even if it isn’t the last word.

                                Posted by on Wednesday, April 19, 2017 at 09:09 AM in Economics, Politics | Permalink  Comments (104) 


                                Supply-side, trickle-down nonsense on the NYT oped page

                                Jared Bernstein:

                                Supply-side, trickle-down nonsense on the NYT oped page: There’s a robust debate to be had as to why the NYT published this op-ed on the alleged economic benefits of trickle-down tax cuts, as virtually every paragraph touts an alternative fact. It is the opinion page, I guess, and the authors advise (or at least advised) the president, so I can see why it’s there. But it does require debunking, so thanks NYT, for some make work.
                                Here’s much of the article’s text, followed by my comments in italics:

                                A few of the comments:

                                ... Here we have the first in a series of trickle-down claims. The alleged sequencing is: cut taxes of business and the wealthy, they invest more, that raises profits and productivity, and the benefits trickle down to the middle class. Every link in that chain is broken: tax cuts, even on investment income, do not correlate with greater investment, and they certainly are uncorrelated with faster productivity growth. Businesses already receive very favorable tax treatment on their investments; in fact, their tax burden on debt-financed investments can be negative. No question, tax cuts raise after-tax profitability, but absent much more worker bargaining power, those profits stay in the pockets of those at the top of the income scale. ...
                                Here we have the “money” ‘graf: the straight-up claim that trickle down tax cuts will boost the earnings of the working class, which will help offset their cost—the Laffer curve in action. I guess I should give the authors credit for adding “if we are right,” though I’ll give you very long odds that the editors insisted on this addition. Because there’s no reason to ask if they’re right. They’re not, with the latest exhibit being the state of Kansas, an “experiment” derived by some of these very authors.
                                BTW, I’ve endorsed my friend Kevin Hassett for his new job as a voice of economic reason in this administration. But I’ve been careful to note this flaw in his work and his thinking. In fact, the study they reference here has been thoroughly debunked in various places. ...
                                Again with the urgency, and “trust us, folks, it’s not the zillionaires for whom our hearts bleed—it’s ‘jobs and the economy.’” Not to mention the stock market, which is getting “jittery” over the possibility that Trump won’t deliver a tax plan like the one these guys wrote, which delivers fully half of its goodies to the top 1 percent (or even better, the Ryan plan, which, once fully phased in, delivers 99 percent of its cuts to the top 1 percent).
                                Puh-lease. How stupid do these people think we are (rhetorical question!)? Their simple scheme—Trump wins, the rich get big tax cut—has turned out to be harder to pull off than they’d hoped. That’s a feature, not a bug, of our current political moment, even if it means we have to read a WSJ oped in the NYT.

                                  Posted by on Wednesday, April 19, 2017 at 07:57 AM in Economics, Taxes | Permalink  Comments (40) 


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                                    Tuesday, April 18, 2017

                                    Fed Watch: Autos Drag Down Industrial Production, Housing Solid

                                    Tim Duy:

                                    Autos Drag Down Industrial Production, Housing Solid, by Tim Duy: The Federal Reserve released March industrial production data today. Overall production was up 0.5% supported by a big jump in utilities. Despite the headline gains, it was something of a mixed message. First, the dispersion of weakness was the lowest since 2014:

                                    Ipsector0317

                                    It looks like with the rebound in energy prices and related production activity, the industrial side of the economy has turned a corner. On a softer note, manufacturing activity tumbled:

                                    Ipman0317

                                    This was fairly disappointing considering the long run of solid growth beginning in the second half of last year. Slowing motor vehicle production took a bite out of the numbers. Specifically, autos, not trucks:

                                    Ipmotors0317

                                    That chart makes it fairly clear that Americans prefer big vehicles to small ones. Overall motor vehicle sales are probably past their peak, and we can expect this source of weakness in industrial production to persist until sales settle into a new level. Note that motor vehicle output contributed 0.14 and 0.06 percentage points to overall growth in 2015 and 2016 respectively. That gives some sense of the magnitude of the opposite effect on growth this year - noticeable, but small.
                                    Housing starts were below expectations, but February was revised upwards. Overall, a solid start to the year:

                                    Starts0317

                                    I don't see any reason to believe the uptrend in single family has broken, but multifamily is likely near cycle highs. For more on housing see Calculated Risk here and here.
                                    Yesterday Federal Reserve Governor Stanley Fisher gave remarks on central bank communication. Of more immediate relevancy were his comments on balance sheet adjustment. Specifically, he doesn't see it as having a disruptive impact:
                                    My tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum. But, of course, as we continue to discuss and eventually implement policies to reduce our balance sheet, we will have to continue to monitor market developments and expectations carefully.
                                    Separately, Kansas City Federal Reserve President Esther George argued for continued rate hikes despite choppy data:
                                    Overall, I am encouraged by the start of the normalization process and want to see it continue. Resisting the temptation to react to near-term fluctuations in the data will be necessary. Looking ahead, we should expect inflation to move up and down around 2 percent. A modest decline in inflation or an overshoot may not necessarily warrant the monetary policy normalization process to slow or accelerate. Such attempts at monetary fine-tuning can easily backfire, so a more forward looking view of inflation is needed.
                                    And as part of that process she would like to see balance sheet reduction placed on auto pilot mode:
                                    Balance sheet adjustments will need to be gradual and smooth, which is an approach that carries the least risk in terms of a strategy to normalize its size. Importantly, once the process begins, it should continue without reconsideration at each subsequent FOMC meeting. In other words, the process should be on autopilot and not necessarily vary with moderate movements in the economic data. To do otherwise would amount to using the balance sheet as an active tool of policy outside of periods of severe financial or economic stress, and would increase uncertainty rather than reduce it.
                                    She also argues against deliberately overshooting the inflation rate. Her key reason is an often forgotten point. Not all goods and services have the same inflation rate, and a higher overall inflation rate may exacerbate inflation differences across the economy. Those differences would be expected to force a restructuring of the economy that could be costly. Her example is that housing costs may accelerate even faster if the Fed were to push for above target inflation:
                                    Such concentration and persistently rising prices in one area suggests the economy is struggling to reallocate resources. For housing, it could reflect several factors such as tight lending standards faced by home builders and scarcity of skilled craftsmen needed to construct homes. I expect the market to eventually solve for, or at least adapt to, such factors. Using monetary policy however to compensate for them could easily end up hurting the population the policy is intended to help.
                                    So count George as a "no" when it comes to any discussion of raising the Fed's inflation target.
                                    Meanwhile, the Trump trade in bonds is reversing course; ten year yields are below 2.2 percent as I write. Also, odds of a Fed rate hike in June have fallen below 50 percent. Market participants are reasonably starting to think that the normalization process may take a bit longer than the Fed anticipates. It will be interesting to see if the Fed agrees. I expect that on average Fedspeak will stick with a fairly hawkish story as policymakers largely dismiss the choppy data of late. We will see if any of George's colleagues share her conviction that policy should not react to recent noise. I tend to think it is a small group, but I argued that Federal Reserve Chair Yellen sounded fairly complacent about the economy last week. Given that the Fed doesn't like to surprise, expect policymakers to speak out forcefully if they feel market participants just don't get it.

                                      Posted by on Tuesday, April 18, 2017 at 11:59 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (10) 


                                      Monetary Policy Medicine: Large Effects from Small Doses?

                                      An FRBSF Economic Letter from  ÒscarJordà, Moritz Schularick, and Alan M. Taylor:

                                      Monetary Policy Medicine: Large Effects from Small Doses?: Making sure the economy operates at full employment without triggering inflation is tricky. Price stability can conflict with supporting a thriving economy. Choosing the right dose of monetary policy thus requires understanding how interest rates affect general economic activity and prices separately. Not surprisingly, few questions in economics have received as much attention.
                                      Medical researchers consider randomized trials the gold standard in testing alternative treatments. In this Economic Letter, we adapt this approach to measure the efficacy of interest rates in achieving economic goals. Using historical economic data, we extend a traditional economic approach of controlling for domestic factors with a novel strategy that compares data from different external institutional arrangements, our randomized trials. Our findings suggest that interest rate effects may have been previously undermeasured. This has important implications now that some central banks are preparing for a sustained tightening of monetary policy after years of near-zero interest rates.
                                      Randomized trials in practice
                                      When the central bank raises interest rates, inflation and economic activity usually slow down—aggregate demand is being reined in. While researchers have come up with numerous theories to explain why this might happen, precisely measuring this tradeoff is considerably more difficult. Unlike the natural sciences, economics must rely on observational rather than experimental data.
                                      Sinclair Lewis explained experimental data eloquently:
                                      When a physician boasted of his success with this drug or that electric cabinet, Gottlieb always snorted, “Where was your control? How many cases did you have under identical conditions, and how many of them did not get the treatment?” – Arrowsmith, 1925
                                      Central banks do not have the luxury of running such randomized experiments—they do not roll the dice when conducting monetary policy. Inflation and output reflect monetary policy as well as the factors that determined that policy to begin with. Just as umbrellas do not make it rain, if central banks cut interest rates when the economy slows it does not mean that accommodative monetary policy causes recessions.
                                      Economists typically measure the effects of monetary policy with a variety of statistical methods that share a common thread: They control as much as possible for the information that the central bank might have used in choosing interest rates. Any remaining variation in interest rates is considered random. That is, interest rate adjustments that differ from predictions based on available information are like quasi-random experiments. We call this leftover variation in interest rates controlled variation.
                                      The correlation of inflation and output over time with this quasi-random controlled variation in interest rates can provide a measure of the causal effect of monetary policy. For this empirical strategy to succeed, however, one has to make sure that no relevant information is left out, which is a tall order. Unobserved factors can make this type of measurement fraught, justifying the popularity of the randomized controlled trial in the sciences.
                                      In experimental settings, random assignment into treated and control groups forms the basis of randomized controlled trials such as those described by Sinclair Lewis. While advanced economies have not randomly entered into various monetary and trade arrangements, some of these arrangements, like the euro zone, can provide a setting for an alternative type of monetary experiment. Economies that fix their exchange rate but allow capital to move freely across borders effectively relinquish control of domestic monetary policy. In such situations, monetary policy may not respond to domestic conditions and hence may produce quasi-random variation in interest rates that is less sensitive to unobserved factors.
                                      We take advantage of this observation, extending the traditional approach of controlling for domestic factors with a novel strategy that explores what happens to economies that have historically pegged exchange rates while allowing unfettered capital movement. While the United States does not have a pegged exchange rate, we discuss direct implications for U.S. monetary policy later.
                                      Quasi-random monetary experiments
                                      Over the history of modern finance, advanced economies have managed exchange rate policies in a variety of ways. Sometimes they have allowed market forces to determine the exchange rate, generally called floating exchange rate regimes—or “floats” for brevity. At other times, countries we will call “pegs” have pegged the exchange rate to another currency. Examples of peg arrangements include the classical gold standard era that ended with World War I; the Bretton Woods era that began after World War II and ended around 1973; and, the European Monetary System in the 1970s up to when the euro was rolled out in 1999.
                                      Two countries that peg the exchange rate and allow capital to move freely must have the same short-term safe interest rate. Otherwise an investor could borrow funds in one country for less than the return offered by the other without bearing any risk—a sure way to make unlimited profit. The absence of such risk-free arbitrage essentially robs local central banks of their autonomy by forcing interest rates to equalize across borders with those set by the center country’s central bank. The mechanism just described is often referred to as the trilemma in international finance (see, for example, Obstfeld, Shambaugh, and Taylor 2005).
                                      In a recent paper (Jordà, Schularick, and Taylor 2017), we take advantage of this phenomenon to single out episodes in which interest rates fluctuated for reasons unrelated to the domestic outlook and direct decisions by the home-country central bank. We use such episodes to calculate how interest rates affect output and inflation. These episodes are our quasi-random monetary trials. We call variation in interest rates due to these episodes peg variation.
                                      In particular, we rely on annual data for 17 advanced economies including the United States since 1870. In our sample, countries have moved in and out of exchange rate arrangements over time. We start by focusing on the sample for country-year pairs for pegs. We find that there is a difference between controls that use only observable information and those that add information on the variation in interest rates caused by the peg. This finding can improve our understanding of the effects of monetary policy.
                                      Interest rates are a powerful lever
                                      If using observables for the control is sufficient, the measured response of output and inflation to interest rates using either controlled variation or peg variation should be equivalent. If there are omitted factors, any differences will arise when using controlled variation. And in that case, variation due to the peg offers a more reliable guide. Just to be sure, we also include as controls information on GDP, inflation, and several other macroeconomic conditions.
                                      Figures 1 and 2 suggest there is cause for concern when focusing on measures based on controlled-variation. Using post-World War II data, Figure 1 shows the response of inflation-adjusted GDP per capita in response to a 1 percentage point increase in short-term interest rates in year 0 calculated two different ways. The green line uses the traditional controlled variation approach, while the red line uses the peg variation approach surrounded by a gray 90% confidence band. There is a stark difference between the two approaches. In the first case, interest rates barely cause a ripple, whereas in the second, real GDP per capita is about 2% lower in year 4 than it was at the start.

                                      Figure 1
                                      Cumulative response of real GDP per capita

                                      G12017-09-1

                                      Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.

                                      A similar picture emerges in Figure 2. The measured response of prices using controlled variation in interest rates is muted—prices are about 0.5% lower by year 4 relative to year 0. The same response calculated with peg variation is estimated to be nearly 2%. In other words, assuming a constant rate of price decline, inflation is about 0.4 percentage point per year lower.

                                      Figure 2
                                      Cumulative response of consumer price index level

                                      G22017-09-2

                                      Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.
                                      The different paths in the figures suggest that the traditional controlled variation approach undermeasures the macroeconomic impact of changes in interest rates. One possible explanation is that interest rates follow different paths after year 0 under each type of measurement approach.
                                      Figure 3 shows that interest rate paths clearly differ somewhat between the two approaches. Measures based on peg variation indicate that interest rates go up further in year 1 but then come down very quickly. The path using controlled variation is more persistent and would tend to have a longer-lasting effect on output and prices, which clearly contradicts the actual pattern seen in Figures 1 and 2.

                                      Figure 3
                                      Cumulative response of short-term interest rates

                                      G32017-09-3

                                      Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.
                                      Checking the reliability of the results
                                      What else could explain the stark differences in the figures? The first thing to check is whether there are differences between peg and float economies that would make their responses to interest rates fundamentally different. Although measures of peg variation are unavailable for floats, Jordà, Schularick, and Taylor (2017) find that controlled variation measures for both pegs and floats are, in fact, very similar, so the explanation must lie elsewhere.
                                      Peg variation may reflect spillover effects from trade channels or other mechanisms that distort measures of the response to interest rates. Jordà, Schularick, and Taylor (2017) find that, if anything, spillover effects would tend to increase the differences.
                                      Finally, our estimates are very similar to those reported in other research, including Romer and Romer (2004) and Cloyne and Hürtgen (2016). This line of research tries to avoid the pitfalls of the controlled variation approach using staff forecast errors from the Federal Reserve and the Bank of England, respectively, to identify exogenous changes in policy rates.
                                      Conclusion
                                      We do not have a definitive measure of how interest rates affect economic activity and inflation. However, along with other recent research, we find that interest rates have stronger effects on the macroeconomy than previously understood. Although the monetary experiments we use to calculate the response to interest rate changes rely on countries that peg—by contrast, the United States allows its exchange rate to freely float—there are good reasons to think that the U.S. economy responds to interest rate changes no differently. Our sample is made up of advanced economies that have institutional characteristics similar to the United States and whose economies respond much the same way as ours when using controlled variation. Without delving into the timing or path of monetary strategy more deeply, our research suggests that even a modest tightening cycle can have a substantial restraining effect on both inflation and economic activity.
                                      References
                                      Cloyne, James S., and Patrick Hürtgen. 2016. “The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom.” American Economic Journal: Macroeconomics 8(4), pp. 75–102.
                                      Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2017. “Large and State-Dependent Effects of Quasi-Random Monetary Experiments.” FRB San Francisco Working Paper 2017-02.
                                      Lewis, Sinclair. 1925. Arrowsmith. New York: Harcourt, Brace & Company.
                                      Obstfeld, Maurice, Jay C. Shambaugh, and Alan M. Taylor. 2005. “The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility.” Review of Economics and Statistics 87(3), pp. 423–438.
                                      Romer, Christina D., and David H. Romer. 2004. “A New Measure of Monetary Shocks: Derivation and Implications.” American Economic Review 94(4), pp. 1,055–1,084.
                                      Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

                                        Posted by on Tuesday, April 18, 2017 at 12:15 AM in Economics, Monetary Policy | Permalink  Comments (39) 


                                        Links for 04-18-17

                                          Posted by on Tuesday, April 18, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (176) 


                                          Monday, April 17, 2017

                                          Fed Watch: Fed Looking Forward to the Second Quarter

                                          Tim Duy:

                                          Fed Looking Forward to the Second Quarter, by Tim Duy: First quarter growth is likely to fall flat - at least that is the signal from numerous forecasters and the Atlanta Fed. But what does it mean for Fed policy? Probably not much for now. It will leave policymakers a little cautious as we head toward the June FOMC meeting (May seems most likely a off the table for policy action). But mostly the Fed will be watching incoming data from the end of the first quarter and the beginning of the second. If the data flow picks up over the next couple of months, they will likely move forward with a June hike. They seem to be in a "what, me worry?" frame of mind.
                                          Retail sales stumbled in March, following up on a revised decline in February as well. Motor vehicle sales are partly to blame; we have likely seen the peak in car sales for this cycle and are settling into a lower pace of activity going forward. Lower gas prices and sluggish sales at building supply stores contributed to the fall as well. Stripping out the more volatile components, however, suggests a bit more stability in sales than suggested by the headline numbers:

                                          Retailsales0317

                                          March inflation came in lower than expected, with a surprise hit to core:

                                          Corecpi0317

                                          Ocular econometrics suggests the March print is something of an outlier - the first monthly decrease since 2010. A big 7 percent decline in cellular service prices played a roll, as did falling used car and apparel prices. While I anticipate a rebound in April, this kind of print will help keep the Fed's inflation forecast intact thus preventing them from stepping up the pace of tightening. Watch how this plays through to core-PCE inflation. As a reminder, that was running hot in the first two months of the year:

                                          PCEb033117

                                          In another sign that the Fed's inflation metrics will remain contained, the PPI for health services remained subdued in March:

                                          Ppihealth0317

                                          The New York Federal Reserve issued its survey of inflation expectations for February. Interesting split between the high and low numeracy groups:

                                          Infexp0317

                                          The low numeracy group tends to be more volatile, so I anticipate it will revert back in the next month.
                                          How will any of this matter for the Fed? First, remember that the Fed started dismissing first quarter data at the March FOMC meeting. From the minutes:
                                          Participants generally saw the incoming economic information as consistent, overall, with their expectations and indicated that their views about the economic outlook had changed little since the January-February FOMC meeting. Al­though GDP appeared to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality.
                                          Hence I don't think they will be surprised by a weak GDP number; they will be surprised if that weakness looks to be carrying forward into the second quarter.
                                          Second, I think the same goes for inflation. For the moment, I think that the decline in unemployment to 4.5% will weigh more heavily on their decisions than a weak inflation number. Still, I believe that if inflation looks to be tracking below their forecasts, they will eventually reduce their estimate of the natural rate. Just not right away.
                                          Third, I think this take on Federal Reserve Chair Janet Yellen's talk last week from Marc Chandler is accurate:
                                          We had detected a shift in the Fed’s stance that we characterized as looking for data to confirm the recovery to now looking for opportunities to normalize conditions. Yellen sees similarly. She said the Fed has shifted from “a post-crisis exercise of healing” to now trying to sustain the economic progress.
                                          The Fed is not living in the crisis anymore. Policymakers no longer worry about trying to boost the pace of activity. The economy is, by their estimates, near full employment with growth is near potential growth. In this framework, a normal economy demands a more normal monetary policy. Policymakers are thinking that the expansion will be eight years old this summer with a good chance that this could turn into the longest running US economic expansion on record. They generally believe that preemptive but gradual rate hikes offer the best chance of expanding the expansion to ten years and beyond. Hence I tend to think their bias is to continue along the current policy path, which suggests they will continue to sound hawkish relative to what recent data would suggest.
                                          Bottom Line: Fed likely to dismiss recent data as unrepresentative of underlying economic trends.

                                            Posted by on Monday, April 17, 2017 at 10:57 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (29) 


                                            U.S. Exporters Could Face High Tariffs without NAFTA

                                            Mary Amiti and Caroline Freund atthe NY Fed's Liberty Street Economics:

                                            U.S. Exporters Could Face High Tariffs without NAFTA: An underappreciated benefit of the North American Free Trade Agreement (NAFTA) is the protection it offers U.S. exporters from extreme tariff uncertainty in Mexico. U.S. exporters have not only gained greater tariff preferences under NAFTA than Mexican exporters gained in the United States, they have also been exempt from potential tariff hikes facing other exporters. Mexico’s bound tariff rates—the maximum tariff rate a World Trade Organization (WTO) member can impose—are very high and far exceed U.S. bound rates. Without NAFTA, there is a risk that tariffs on U.S. exports to Mexico could reach their bound rates, which average 35 percent. In contrast, U.S. bound rates average only 4 percent. At the very least, U.S. exporters would be subject to a higher level of policy uncertainty without the trade agreement. ...

                                              Posted by on Monday, April 17, 2017 at 05:59 AM in Economics, International Trade | Permalink  Comments (20) 


                                              Paul Krugman: Why Don’t All Jobs Matter?

                                              "Why aren’t promises to save service jobs as much a staple of political posturing as promises to save mining and manufacturing jobs?":

                                              Why Don’t All Jobs Matter?, by Paul Krugman, NY Times: President Trump is still promising to bring back coal jobs. But the underlying reasons for coal employment’s decline — automation, falling electricity demand, cheap natural gas, technological progress in wind and solar — won’t go away. ...
                                              Why does public discussion of job loss focus so intensely on mining and manufacturing, while virtually ignoring the big declines in some service sectors ... in the face of internet competition...?
                                              Overall, department stores employ a third fewer people now than they did in 2001. That’s half a million traditional jobs gone — about eighteen times as many jobs as were lost in coal mining over the same period. And retailing isn’t the only service industry that has been hit hard by changing technology. ...
                                              So why aren’t promises to save service jobs as much a staple of political posturing as promises to save mining and manufacturing jobs?
                                              One answer might be that mines and factories sometimes act as anchors of local economies, so that their closing can devastate a community... And there’s something to that...
                                              A different ... reason ... involves the need for villains. Demagogues can tell coal miners that liberals took away their jobs with environmental regulations. They can tell industrial workers that their jobs were taken away by nasty foreigners. And they can promise to bring the jobs back by making America polluted again, by getting tough on trade, and so on. These are false promises, but they play well with some audiences.
                                              By contrast, it’s really hard to blame either liberals or foreigners for, say, the decline of Sears. ...
                                              Finally, it’s hard to escape the sense that manufacturing and especially mining get special consideration because ... their workers are a lot more likely to be male and significantly whiter...
                                              While we can’t stop job losses from happening..., we can limit the human damage when they do happen. We can guarantee health care and adequate retirement income... We can provide aid to the newly unemployed. And we can act to keep the overall economy strong — which means doing things like investing in infrastructure and education, not cutting taxes on rich people and hoping the benefits trickle down.
                                              I don’t want to sound unsympathetic to miners and industrial workers. Yes, their jobs matter. But all jobs matter. And while we can’t ensure that any particular job endures, we can and should ensure that a decent life endures even when a job doesn’t.

                                                Posted by on Monday, April 17, 2017 at 05:41 AM Permalink  Comments (185) 


                                                Sunday, April 16, 2017

                                                Links for 04-16-17

                                                  Posted by on Sunday, April 16, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (144) 


                                                  Saturday, April 15, 2017

                                                  "The Sense That the System Is Rigged Relates Directly to Governments’ Failure to Address Inequality and Concentration"

                                                  From a ProMarket interview with Anat Admati:

                                                  ... Q: The World Economic Forum has called for “reimagining” and “reforming” capitalism. To what extent is this need for reform the result of disruption brought by technological change, globalization, and immigration and to what extent is it the effect of rent-seeking and regulatory capture?
                                                  The impact of technological change, globalization, and immigration on society depends on how the relevant institutions manage these developments. Capitalism has worked poorly in recent years because governments mishandled the challenges of technological change and globalization, and that failure is related to rent-seeking and regulatory capture. The elites who engage with each other through the World Economic Forum and elsewhere can become out of touch and blind to reality; you can see the problem from Steve Schwarzman of Blackstone saying in Davos in 2016 that he found public anger “astonishing.”
                                                  Acemoglu and Robinson argued in Why Nations Fail: The Origins of Power, Prosperity, and Poverty that “man-made political and economic institutions… underlie economic success (or lack of it).” Technological developments have highlighted the immense power associated with controlling information. The business of investigative reporting is in a crisis. Corporations often play off governments, shopping jurisdictions and making bargains. For capitalism to work, the relevant institutions must work effectively and avoid excessive rent extraction. The governance challenge of the global economy is daunting.
                                                  Here are a few examples...
                                                  Q: Some people describe Donald Trump’s economic policies as “corporatism.” Are you more worried by Trump’s interference in the market economy or by companies’ ability to subvert markets’ rules? ...

                                                    Posted by on Saturday, April 15, 2017 at 05:14 AM in Economics | Permalink  Comments (40) 


                                                    Links for 04-15-17

                                                      Posted by on Saturday, April 15, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (98) 


                                                      Friday, April 14, 2017

                                                      Paul Krugman: Can Trump Take Health Care Hostage?

                                                      With the extent to which Trump is cashing in on his presidency, I suppose we could say the buck stops at the White House. Trump doesn't seem to understand that's true more broadly:

                                                      Can Trump Take Health Care Hostage?, by Paul Krugman, NY Times: Three weeks have passed since the Trumpcare debacle. After eight years spent denouncing the Affordable Care Act, the G.O.P. finally found itself in a position to do what it had promised, and deliver something better. But it couldn’t.
                                                      And Republicans, President Trump very much included, had nobody but themselves to blame. ...
                                                      But Mr. Trump, as you may have noticed, isn’t big on accepting responsibility for his failures. Instead, he has decided to blame Democrats for not cooperating in the destruction of their proudest achievement in decades. And on Wednesday, in an interview with The Wall Street Journal, he openly threatened to sabotage health care for millions if the opposition party doesn’t give him what he wants. ...
                                                      It’s a nasty political tactic. It’s also remarkably stupid.
                                                      The nastiness should be obvious, but let’s spell it out. Mr. Trump is trying to bully Democrats by threatening to hurt millions of innocent bystanders — ordinary American families who have gained coverage thanks to health reform. ...
                                                      Why does Mr. Trump even imagine that this threat might work? Implicitly, he’s saying that hurting innocent people doesn’t bother him as much as it bothers his opponents. Actually, this is probably true...
                                                      What makes Mr. Trump’s tactic stupid as well as nasty is the reality that Democrats have no incentive whatsoever to give in. ...
                                                      Maybe Mr. Trump believes that he could somehow shift the blame for the devastation he has threatened to wreak onto Democrats. “See, there’s the death spiral I predicted!” But that probably wouldn’t work even if he hadn’t effectively proclaimed his own guilt in advance. Voters tend to blame whoever holds the White House for bad things, and in this case they’d be right: ...
                                                      So the Trump health care threat is, as I said, stupid as well as nasty. And it’s hard to believe that it will be carried out.
                                                      But here’s the thing: Even if Mr. Trump wimps out, as he is doing on so many other issues, he may already have done much of the threatened damage. Insurers are deciding right now whether to participate in the 2018 Obamacare exchanges. Mr. Trump’s tough talk is creating a lot of uncertainty, which in itself may undermine coverage for many Americans.
                                                      There is, of course, a good chance that Mr. Trump doesn’t understand any of this. Unfortunately, when you’re in the White House, what you don’t know can hurt a lot of people.

                                                        Posted by on Friday, April 14, 2017 at 04:05 AM in Economics, Health Care, Politics | Permalink  Comments (138) 


                                                        Links for 04-14-17

                                                          Posted by on Friday, April 14, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (140) 


                                                          Thursday, April 13, 2017

                                                          The Zero Lower Bound on Interest Rates: How Should the Fed Respond?

                                                          Ben Bernanke:

                                                          ...the Fed and other central banks cannot ignore the risks created by a low level of “normal” interest rates, which in turn limit the scope for interest-rate cuts. A wide-ranging discussion of alternative policy approaches would thus be welcome. Although raising the inflation target is one of the options that should be considered, that approach has significant drawbacks. Fortunately, there are promising policy options that may be able to mitigate the effects of the zero lower bound on interest rates without forcing the public to accept a permanently higher rate of inflation. Two such options (which are related, and could be combined) are price-level targeting and a “make-up” approach, under which the central bank commits to compensating for “missing” monetary ease after the economy leaves the zero lower bound.

                                                          Much more here: The zero lower bound on interest rates: How should the Fed respond? (link fixed).

                                                            Posted by on Thursday, April 13, 2017 at 06:59 AM in Economics, Monetary Policy | Permalink  Comments (68) 


                                                            Tax Reforms and Top Incomes

                                                            Enrico Rubolino and Daniel Waldenström at VoxEU:

                                                            Tax reforms and top incomes: The link between tax progressivity and the income distribution is the subject of intense debate. This column presents new evidence from tax reforms during the 1980s and 1990s to examine how reduced progressivity affects top income shares. Reduced progressivity boosted top incomes, particularly for those in the top 0.1% of earners. Income tax changes are a plausible candidate for explaining the recent surge in income inequality. ...
                                                            Tax reforms did not increase the size of the cake
                                                            Tax progressivity was reduced in the 1980s on the argument that there would be a positive impact on economic activity and efficiency (Auerbach and Slemrod 1997, Gale and Samswick 2014). Therefore it could be that the estimated boost in top shares reflects new resources created in top groups, rather than a redistribution of incomes away from the bottom and middle. We evaluate this hypothesis..., this analysis does not show large real income responses to reductions in progressivity. ...
                                                            Taxation and inequality
                                                            Our findings suggest that tax progressivity changes influence pre-tax income inequality. Focusing on large, progressivity-reducing tax reforms in the 1980s and 1990s, we show that they had a positive, increasing effect on top income shares in all the countries we studied. ...

                                                              Posted by on Thursday, April 13, 2017 at 12:15 AM in Economics, Income Distribution, Taxes | Permalink  Comments (29) 


                                                              Links for 04-13-17

                                                                Posted by on Thursday, April 13, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (119) 


                                                                Wednesday, April 12, 2017

                                                                The End of China’s Export Juggernaut

                                                                Thomas Klitgaard and Harry Wheeler at the NY Fed's Liberty Street Economics blog:

                                                                The End of China’s Export Juggernaut: China has been an exporting juggernaut for decades. In the United States, this has meant a dramatic increase in China’s share of imports and a ballooning bilateral trade deficit. Gaining sales in the United States at the expense of other countries, Chinese goods rose from only 2 percent of U.S. non-oil imports in 1990 to 8 percent in 2000 and 17 percent in 2010. But these steady gains in U.S. import share have stopped in recent years, with China even losing ground to other countries in some categories of goods. One explanation for this shift is that Chinese firms now have to directly compete against manufacturers in high-skill developed countries while also fending off competition from lower-wage countries, such as Vietnam. This inability to make additional gains at the expense of other countries means that exports don’t contribute as much to China’s overall growth as they used to.
                                                                Taking the U.S. Market by Storm—And Then, Not so Much
                                                                The United States had a merchandise trade deficit of $350 billion with China in 2016, accounting for roughly half of the overall U.S. trade deficit. The import growth of goods from China has been impressive, with imports from China growing at an annual rate of 14 percent since 1990, while total U.S. imports were growing at an annual rate of only 6 percent. That is, China has had great success in selling to the United States by taking market share away from other countries.
                                                                A breakdown of U.S. imports into the four largest categories, accounting for roughly two-thirds of the total, demonstrates the source of this success. As seen in the chart below, China’s import shares for apparel, electronics, electric machinery, and non-electric machinery were all fairly high in 2002, the beginning of the data series used here, and continued to increase. In 2002, China accounted for 25 percent of all U.S. apparel imports and 15 percent of all electronics imports. By 2010, these shares were up to 50 percent and 40 percent, respectively. Market-share increases in general machinery and electrical machinery were less dramatic but still substantial over this period, rising by 8 percentage points (to 15 percent) and 11 percentage points (to 35 percent), respectively.

                                                                China's Share of U.S. Imports

                                                                 

                                                                So which countries were losing market share during this period? In apparel, Mexico’s share of U.S. imports dropped by 7 percentage points and Hong Kong’s slipped by 6 percentage points from 2002 to 2010. South Korea and Taiwan had smaller losses in market share over the same horizon. Japan was the main loser of U.S. import share for other major manufactured goods. For electronics, Japan’s U.S. share fell by 7 percentage points, while 2-percentage-point share declines were reported for South Korea, Singapore, Taiwan, and Canada. For electrical equipment, Japan lost 7 percentage points of the U.S. market, with Germany, the United Kingdom, and Taiwan also losing market share. For non-electric machinery, China’s gains were largely at the expense of goods produced in Japan.
                                                                Around 2010, China’s ability to gain market share from other imports faltered. The import share for Chinese apparel has dropped over the past five years, while the share for electronics, by far the largest of the four categories, declined last year. China’s share of the U.S. electric machinery market is showing tentative signs of falling and its gains in the non-electric machinery category have ended.
                                                                Limits to China Increasing Its Market Share
                                                                It is not a complete surprise that Chinese goods would eventually peak as a share of U.S. imports. To keep increasing their share of the U.S. import market, Chinese firms would need to gain sales by competing more directly against manufacturers in Europe, Japan, and other advanced economies. China would also need to successfully compete against other developing countries with lower labor costs. Indeed, China has been ceding market share to Vietnam for electronics and electrical machinery, while India and Bangladesh have been making gains in apparel. It may be the case that assembly operations are moving from China to lower-wage countries, repeating the process that previously benefited China.
                                                                The challenge for China is that its exports to the United States are now only growing as fast as total U.S. imports since its goods are no longer displacing those from other countries. From 2000 to 2010, U.S. imports from China grew at a 20 percent annualized rate. From 2010 to 2016, the rate of growth dropped to 4 percent. This slowdown has also hit China’s exports (in U.S. dollars) to the rest of the world, which slowed from a 21 percent annual growth rate in the 2000-10 period to 5 percent since 2010.
                                                                Measuring the Impact of Slower Export Growth Is a Challenge
                                                                When evaluating the slowdown in China’s exports, it is important to recognize that trade data measure the value of goods that arrive from a particular country, not that country’s contribution to the item’s value. For example, if a U.S. import from China is largely made of components produced in Japan and assembled in China, then the import data would significantly overstate the revenue that ended up in China from that sale. Cross-border supply chains are motivated, in part, by differences in labor costs, with components manufactured using high-wage labor and the assembly of these parts done in low-wage countries. This processing of components into final goods has been an important attribute of Chinese exports. The chart below shows that exports of such goods peaked in 2000 at almost 60 percent of China’s total exports. So, to the extent that China’s export growth figures reflect trade in processed goods, they overstate the domestic gains China has realized from these export sales when taken at face value.

                                                                 

                                                                China: Processing Exports Share of Total Exports

                                                                 

                                                                More recently, however, the data show a significant decrease in China’s processing trade amid an overall slowdown in export growth. Processing exports fell to 50 percent of China’s total exports in 2010 and then declined rapidly, hitting 35 percent in early 2017. This transformation partly reflects rising wages in China (as the skill level of its workers increases) and the related migration of assembly operations from China to lower-wage countries. A positive take on these developments is that each dollar of exports now has a larger positive impact on domestic income. The negative take is that China’s much more modest export performance is, in part, due to the loss of processing exports that would have otherwise been a source of income.
                                                                Challenge for China
                                                                Exports have been a great boost to China’s economic development, with rapid increases in foreign sales helping to transform the economy into a major producer of the world’s manufactured goods. The slowdown in export growth in recent years has been substantial and highlights the difficulties of trying to compete in foreign markets against both high- and low-wage countries. One of the consequences of the end of China’s export boom is that it puts more pressure on domestic demand to sustain the country’s rate of growth.

                                                                Disclaimer
                                                                The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

                                                                  Posted by on Wednesday, April 12, 2017 at 09:29 AM in China, Economics, International Trade | Permalink  Comments (42)