Friday, October 24, 2014

Paul Krugman: Plutocrats Against Democracy

"What's a plutocrat to do?":

Plutocrats Against Democracy, by Paul Krugman, Commentary, NY Times: ...The ... political right has always been uncomfortable with democracy..., there is always an undercurrent of fear that the great unwashed will vote in left-wingers who will tax the rich, hand out largess to the poor, and destroy the economy. ...
This is a fantasy. ... All advanced nations have had substantial welfare states since the 1940s... But you don’t, in fact, see countries descending into tax-and-spend death spirals — and no, that’s not what ails Europe.
Still, while the “kind of politics and policies” that responds to the bottom half of the income distribution won’t destroy the economy,... the top 0.1 percent is paying quite a lot more in taxes right now than it would have if Mr. Romney had won. So what’s a plutocrat to do?
One answer is propaganda: tell voters, often and loudly, that taxing the rich and helping the poor will cause economic disaster, while cutting taxes on “job creators” will create prosperity for all. There’s a reason conservative faith in the magic of tax cuts persists no matter how many times such prophecies fail (as is happening right now in Kansas): ...
Another answer, with a long tradition in the United States, is to make the most of racial and ethnic divisions — government aid just goes to Those People, don’t you know. And besides, liberals are snooty elitists who hate America.
A third answer is to make sure government programs fail, or never come into existence, so that voters never learn that things could be different.
But these strategies for protecting plutocrats from the mob are indirect and imperfect. The obvious answer is...: Don’t let the bottom half, or maybe even the bottom 90 percent, vote.
And now you understand why there’s so much furor on the right over the alleged but actually almost nonexistent problem of voter fraud, and so much support for voter ID laws that make it hard for the poor and even the working class to cast ballots. American politicians don’t dare say outright that only the wealthy should have political rights — at least not yet. But if you follow the currents of thought now prevalent on the political right to their logical conclusion, that’s where you end up.
The truth is that a lot of what’s going on in American politics is, at root, a fight between democracy and plutocracy. And it’s by no means clear which side will win.

    Posted by on Friday, October 24, 2014 at 12:24 AM in Economics, Politics | Permalink  Comments (2)


    Links for 10-24-14

      Posted by on Friday, October 24, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (0)


      Thursday, October 23, 2014

      'How Mainstream Economic Thinking Imperils America'

        Posted by on Thursday, October 23, 2014 at 01:01 PM in Economics, Methodology, Video | Permalink  Comments (5)


        ''A Few Comments on QE''

        After A Few Comments on QE, Bill McBride ends with:

        ...My view is QE was not a panacea, but overall QE was a success.  I was a frequent critic of the Fed prior to the financial crisis - I think the Fed was almost anti-regulation during the housing bubble, and initially the Fed was behind the curve when the crisis was looming - however once Bernanke became aware of the severity of the crisis, the Fed was aggressive and effective. Perhaps they were a little slow in implementing QE3 - and with low inflation an argument could be made now to extend QE - but overall I think QE was a success.

          Posted by on Thursday, October 23, 2014 at 11:04 AM in Economics, Monetary Policy | Permalink  Comments (32)


          'The Effects of a Money-Financed Fiscal Stimulus'

          Jordi Galí:

          The Effects of a Money-Financed Fiscal Stimulus, by Jordi Galí, September 2014: Abstract I analyze the effects of an increase in government purchases financed entirely through seignorage, in both a classical and a New Keynesian framework, and compare them with those resulting from a more conventional debt-financed stimulus. My findings point to the importance of nominal rigidities in shaping those effects. Under a realistic calibration of such rigidities, a money-financed fiscal stimulus is shown to have very strong effects on economic activity, with relatively mild inflationary consequences. If the steady state is sufficiently inefficient, an increase in government purchases may increase welfare even if such spending is wasteful.

            Posted by on Thursday, October 23, 2014 at 09:13 AM in Academic Papers, Economics, Fiscal Policy | Permalink  Comments (4)


            'Does Raising the Minimum Wage Hurt Employment? Evidence from China'

            This was in today's links (which were posted later than usual):

            Does Raising the Minimum Wage Hurt Employment? Evidence from China, by Prakash Loungani, iMFDirect: ...China accounts for nearly 25 percent of the global labor force...
            Our study is the first to use data on minimum wage changes for over 2400 counties in China. We combine the information on minimum wages changes with employment data from the Annual Survey of Industrial Firms, which covers over 70 percent of China’s manufacturing employment. While China instituted a minimum wage system in 1994, enforcement of compliance with the law was significantly tightened only in 2004; the results described below are based on post-2004 data.
            So what does the evidence show? On average across all firms, we find that an increase in the minimum wage leads to a small decline in employment: a 10% percent increase in the minimum wage lowers employment by a little over 1% percent.
            The impact differs across firms, being greater in low-wage firms than in high-wage firms. ... In the decile of firms with the lowest wages, a 10% increase in minimum wages lowers employment by nearly 1.8%. The impact declines steadily such that for the decile of firms with the highest wages, the impact is 0.6%.
            We also find that the impact of the minimum wage on a firm’s wages depends on where the firm stands in the distribution of wages. On average, an increase in the minimum wage raises wages by about 1%. But ... in the lowest decile, the increase is about 2.5%. The effect declines steadily and there is essentially no impact for the highest decile. ...

              Posted by on Thursday, October 23, 2014 at 08:36 AM in Economics, Unemployment | Permalink  Comments (14)


              Links for 10-23-14

                Posted by on Thursday, October 23, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (94)


                Wednesday, October 22, 2014

                'Helicopter Money'

                Everything you ever wanted to know about helicopter money:

                Helicopter money, by Simon Wren-Lewis, Mainly Macro: Periodically articles appear advocating, or discussing, helicopter money. Here is a simple guide to this strange sounding concept. I go in descending order of importance, covering the essential ground in points 1-7, and dealing with more esoteric matters after that. ...

                  Posted by on Wednesday, October 22, 2014 at 09:17 AM in Economics, Monetary Policy | Permalink  Comments (127)


                  'Persuasion with Statistics'

                  Chris Dillow:

                  Persuasion with statistics: Mark Thoma's point that apparently strong econometric results are often the product of specification mining prompts Lars Syll to remind us that eminent economists have long been wary of what econometrics can achieve.
                  I doubt if many people have ever thought "Crikey, the t stats are high here. That means I must abandon my long-held beliefs about an important matter." More likely, the reaction is to recall Dave Giles' commandments nine and 10. (Apparently?) impressive econometric findings might be good enough to get you published. But there's a big difference between being published and being read, let alone being persuasive.
                  This poses a question: how, then, do statistics persuade people to change their general beliefs (as distinct from beliefs about single facts)?
                  Let me take an example of an issue where I've done just this. I used to believe in the efficient market hypothesis. ...[explains why that changed]...

                  He concludes with:

                  The above is not a story about statistical significance (pdf). Single studies are rarely persuasive. Instead, the process of persuading people to change their mind requires diversity - a diversity of data sets, and a diversity of theories.  Am I wrong? Feel free to offer counter-examples.

                    Posted by on Wednesday, October 22, 2014 at 08:32 AM in Econometrics, Economics | Permalink  Comments (15)


                    'Will the Big Banks Ever Clean Up Their Act?'

                    I am not convinced that telling the kids to be good or else -- when there's a history of not doing much to enforce the request -- will work:

                    Will the big banks ever clean up their act?, by Mark Thoma: Federal Reserve Bank of New York President William Dudley delivered a stern warning to the largest banks in a speech earlier this week. Either clean up your illegal and unethical behavior through "cultural change" from within, he said, or be broken into smaller, more manageable pieces.

                    In his conclusion, the warning was direct and explicit:

                    "...if those of you here today as stewards of these large financial institutions do not do your part in pushing forcefully for change across the industry, then bad behavior will undoubtedly persist. If that were to occur, the inevitable conclusion will be reached that your firms are too big and complex to manage effectively. In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively. It is up to you to address this cultural and ethical challenge."

                    How can the needed change be accomplished? ...

                    Will this work? Will large financial firms take the threat that they might be broken up seriously? Will they even bother to implement the many suggestions Dudley made?

                    Regulators have been reluctant to break up big banks in the past out of fear that it might undercut their ability to finance very large projects and hurt their competitiveness in international markets. And given that this behavior is so pervasive and has endured for so long, regulators haven't been as tough as they could be in stopping it.

                    Maybe this time is different. Maybe financial firms believe regulators are serious, and they will change the culture that has allowed these problems to exist. Perhaps the threat to break up the banks if they continue to prove they are "too big to manage" is real.

                    Let's hope so, because the financial instability that can occur when large banks behave unethically or when they fail to comply with existing regulations can be very costly for the nation's economy.

                    But, again, I doubt asking banks to change their culture will be enough, they will need to be persuaded through other, stronger means. (If it was up to me, I would have broken them into smaller pieces long ago. I do not beleive the minimum efficient scale is anywhere near as large as the largest banks, their political and economic power is too strong, and they pose a risk for the economy when they misbehave or make big mistakes. Smaller banks don't solve all these problems, there can still be widespread, cascading bank failures for example, but it does reduce the risks.)

                      Posted by on Wednesday, October 22, 2014 at 08:32 AM in Economics, Financial System, Regulation | Permalink  Comments (19)


                      Links for 10-22-14

                        Posted by on Wednesday, October 22, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (80)


                        Tuesday, October 21, 2014

                        What Makes Cities Successful?

                        This is related to yesterday's post "State 'Income Migration' Claims Are Deeply Flawed":

                        At the intersection of real estate and urban economics: Albert Saiz uses big data to understand real estate dynamics. As a professor in the Department of Urban Studies and Planning and director of MIT’s Center for Real Estate, his work is at the confluence of urban policy and city-making and the factors that drive real estate markets. An urban economist and director of the MIT Urban Economics Lab, Saiz studies the industrial composition of cities with an eye toward understanding what makes cities successful. He also creates and studies incredibly-detailed information about housing markets and how urban growth impacts real estate markets.
                        Immigration explains half of city growth
                        Saiz’s focus is primarily on housing markets, with a particular view on understanding the demographic influences impacting their growth. “Immigration explains 50 percent of the differences in growth between metropolitan areas in the United States,” he says. “If you want to understand real estate markets or housing markets, construction values, etc., you have to understand immigration and immigration trends.”
                        He also studies several other key drivers of city growth and demand for housing and real estate assets. These include areas of low taxation, high levels of an educated population, and more lifestyle-oriented influences. “As recently as 20 years ago, we tended to believe that people followed jobs,” Saiz explains. “It is still the case that productive areas are becoming more attractive for housing demand, but it is also true that jobs are following people. And people are moving more for lifestyle and amenities.” Today, Saiz’s students are more likely to indicate they want to work in a particular city than for a particular company. That means firms that want to attract young professionals have to locate in these more highly desirable areas. ...

                          Posted by on Tuesday, October 21, 2014 at 09:41 AM in Economics, Housing | Permalink  Comments (15)


                          'Why our Happiness and Satisfaction Should Replace GDP in Policy Making'

                          Richard Easterlin:

                          Why our happiness and satisfaction should replace GDP in policy making, The Conversation: Since 1990, GDP per person in China has doubled and then redoubled. With average incomes multiplying fourfold in little more than two decades, one might expect many of the Chinese people to be dancing in the streets. Yet, when asked about their satisfaction with life, they are, if anything, less satisfied than in 1990.
                          The disparity indicated by these two measures of human progress, Gross Domestic Product and Subjective Well Being (SWB), makes pretty plain the issue at hand. GDP, the well-being indicator commonly used in policy circles, signals an outstanding advance in China. SWB, as indicated by self-reports of overall satisfaction with life, suggests, if anything, a worsening of people’s lives. Which measure is a more meaningful index of well-being? Which is a better guide for public policy?
                          A few decades ago, economists – the most influential social scientists shaping public policy – would have said that the SWB result for China demonstrates the meaninglessness of self-reports of well-being. Economic historian Deirdre McCloskey, writing in 1983, aptly put the typical attitude of economists this way:
                          Unlike other social scientists, economists are extremely hostile towards questionnaires and other self-descriptions… One can literally get an audience of economists to laugh out loud by proposing ironically to send out a questionnaire on some disputed economic point. Economists… are unthinkingly committed to the notion that only the externally observable behaviour of actors is admissible evidence in arguments concerning economics.
                          Culture clash
                          But times have changed. A commission established by the then French president, Nicolas Sarkozy in 2008 and charged with recommending alternatives to GDP as a measure of progress, stated bluntly (my emphasis):
                          Research has shown that it is possible to collect meaningful and reliable data on subjective as well as objective well-being … The types of questions that have proved their value within small-scale and unofficial surveys should be included in larger-scale surveys undertaken by official statistical offices.
                          This 25-member commission was comprised almost entirely of economists, five of whom had won the Nobel Prize in economics. Two of the five co-chaired the commission.
                          These days the tendency with new measures of our well-being – such as life satisfaction and happiness – is to propose that they be used as a complement to GDP. But what is one to do when confronted with such a stark difference between SWB and GDP, as in China? What should one say? People in China are better off than ever before, people are no better off than before, or “it depends”?
                          Commonalities
                          To decide this issue, we need to delve deeper into what has happened in China. When we do that, the superiority of SWB becomes apparent: it can capture the multiple dimensions of people’s lives. GDP, in contrast, focuses exclusively on the output of material goods.
                          People everywhere in the world spend most of their time trying to earn a living and raise a healthy family. The easier it is for them to do this, the happier they are. This is the lesson of a 1965 classic, The Pattern of Human Concerns, by public opinion survey specialist Hadley Cantril. In the 12 countries – rich and poor, communist and non-communist – that Cantril surveyed, the same highly personal concerns dominated determinants of happiness: standard of living, family, health and work. Broad social issues such as inequality, discrimination and international relations, were rarely mentioned.
                          Urban China in 1990 was essentially a mini-welfare state. Workers had what has been called an “iron rice bowl” – they were assured of jobs, housing, medical services, pensions, childcare and jobs for their grown children.
                          With the coming of capitalism, and “restructuring” of state enterprises, the iron rice bowl was smashed and these assurances went out the window. Unemployment soared and the social safety net disappeared. The security that workers had enjoyed was gone and the result was that life satisfaction plummeted, especially among the less-educated, lower-income segments of the population.
                          Although working conditions have improved somewhat in the past decade, the shortfall from the security enjoyed in 1990 remains substantial. The positive effect on well-being of rising incomes has been negated by rapidly rising material aspirations and the emergence of urgent concerns about income and job security, family, and health.
                          The case to replace
                          Examples of the disparity between SWB and GDP as measures of well-being could easily be multiplied. Since the early 1970s real GDP per capita in the US has doubled, but SWB has, if anything, declined. In international comparisons, Costa Rica’s per capita GDP is a quarter of that in the US, but Costa Ricans are as happy or happier than Americans when we look at SWB data. Clearly there is more to people’s well-being that the output of goods.
                          There are some simple, yet powerful arguments to say that we should use SWB in preference to GDP, not just as a complement. For a start, those SWB measures like happiness or life satisfaction are more comprehensive than GDP. They take into account the effect on well-being not just of material living conditions, but of the wide range of concerns in our lives.
                          It is also key that with SWB, the judgement of well-being is made by the individuals affected. GDP’s reliance on outside statistical “experts” to make inferences based on a measure they themselves construct looks deeply flawed when viewed in comparison. These judgements by outsiders also lie behind the growing number of multiple-item measures being put forth these days. An example is the United Nations’ Human Development Index (HDI) which attempts to combine data on GDP with indexes of education and life expectancy.
                          But people do not identify with measures like HDI (or GDP, of course) to anywhere near the extent that they do with straightforward questions of happiness and satisfaction with life. And crucially, these SWB measures offer each adult a vote and only one vote, whether they are rich or poor, sick or well, native or foreign-born. This is not to say that, as measures of well-being go, SWB is the last word, but clearly it comes closer to capturing what is actually happening to people’s lives than GDP ever will. The question is whether policy makers actually want to know.

                            Posted by on Tuesday, October 21, 2014 at 09:24 AM in Economics, Methodology | Permalink  Comments (93)


                            'The Problem of Riches'

                            Just in case you haven't had your fill of articles reviewing Thomas Piketty's Capital in the Twenty-First Century:

                            The problem of riches, by Paul Segal: Capital in the Twenty-First Century is a very important book that is not really about capital, and is not really about the twenty-first century. It is predominantly a work of analytical economic history, focusing on the late nineteenth century to the present – with words of warning for the future, nestled among caveats regarding the pitfalls of economic predictions. And its subjects are the dynamics and distribution of incomes and wealth, where wealth is to capital what an hourly wage is to an hour of work: the market value, not the thing itself.
                            Inequality is the great challenge of our time. Still, Piketty’s runaway public success was expected by no one – his publisher ran out of copies in the first few weeks – and is due in no small part to generous endorsements from uber-public intellectual Paul Krugman, Nobel Prize-winning economist and New York Times columnist (and who sportingly admitted to ‘sheer, green-eyed professional jealousy’ (Krugman, 2014)). Piketty’s book has spawned countless reviews and commentaries. Yet this text of 577 pages plus endnotes is no easy conquest, and the public sphere is occupied by more opinions of Piketty than readers of Piketty. In addition, the combination of fame and the ideological nature of its subject has given him the status of Big Game to be hunted by ambitious economists and journalists – very publicly in a belligerent and careful-but-not-quite-careful-enough critique by the Financial Times’ Chris Giles that turned out to be badly misguided (Giles and Giugliano, 2014 and Piketty, 2014). (Piketty points out that if Giles were correct it would imply that Britain today had one of the most equal distributions of wealth in modern history, which is risible).
                            They are the 1 per cent
                            Given this exposure it is ironic that one of Piketty’s great contributions to the lexicon of public debate is not usually credited to him: through his unearthing of data on the incomes of the richest 1 per cent, he is ultimately responsible for the slogan ‘we are the 99 per cent’, for without him we would not know who does not fall into that category (1). Starting with France, Piketty used income tax data to reveal the incomes of the richest in society, which had previously been inaccessible. Following this work, Piketty and the great British economist of inequality Tony Atkinson led a project of dozens of researchers to collect top income data from around the world, which have been collated into a database that now covers 29 countries (2).
                            The key finding of this research is that the income share of the richest 1 per cent has risen dramatically in many countries around the world since the 1980s. In the US the richest 1 per cent received about 8 per cent of total income through the 1960s and 1970s. This share started to rise in the mid-1980s, reaching about 18 per cent in recent years. Britain followed a similar pattern, its share rising from a low of only 6 per cent in 1980 to 15 per cent. Famously egalitarian Sweden has become less so, having seen its top 1 per cent income share rising from only 4 per cent in the 1980s to 7 per cent. Still, it is important to note that major increases were not inevitable: in both France and Japan there has been only a modest rise, from about 7 per cent in the 1980s to about 9 per cent now. ...[continue reading]...

                              Posted by on Tuesday, October 21, 2014 at 09:24 AM Permalink  Comments (31)


                              Links for 10-21-14

                                Posted by on Tuesday, October 21, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (109)


                                Monday, October 20, 2014

                                ''State 'Income Migration' Claims Are Deeply Flawed''

                                Differences in income taxe ratess across states have little impact on migration:

                                State “Income Migration” Claims Are Deeply Flawed, by Michael Mazerov, CBPP: Some proponents of state income tax cuts are making highly inaccurate claims about the impact of interstate migration patterns on states with relatively high income taxes based on a misleading reading of Internal Revenue Service data.
                                Those making these arguments claim that many of the people who leave states with relatively robust income taxes do so largely in order to pay little or no income tax in another state, and that they take their incomes with them when they move, harming the economies of the states they left.  As a consequence, these “income migration” proponents claim, states with relatively high income taxes are suffering severe damage from the loss of income as “money walks” out of their states to lower-tax states.[1]
                                The first part of this argument — that interstate differences in tax levels are a major explanation for interstate migration patterns — is not supported by the evidence, as we documented in an earlier paper.[2]  People rarely move to lower their state income taxes.  Other factors, such as job opportunities, family considerations, climate, and housing costs, are much more decisive. 
                                The second part of the argument — that states with relatively high income taxes are suffering severe economic damage because they are losing the incomes of people who migrate to other states — is also deeply flawed. ...

                                  Posted by on Monday, October 20, 2014 at 10:17 AM in Economics, Taxes | Permalink  Comments (23)


                                  Paul Krugman: Amazon’s Monopsony Is Not O.K.

                                  I've been harping on the lack of concern about market power since I began blogging almost 10 years ago. Nobody much listened or cared -- so this is very welcome:

                                  Amazon’s Monopsony Is Not O.K., by Paul Krugman, Commentary, NY Times: Amazon.com, the giant online retailer, has too much power, and it uses that power in ways that hurt America. ...
                                  If you haven’t been following the recent Amazon news: Back in May a dispute between Amazon and Hachette, a major publishing house, broke out into open commercial warfare. Amazon had been demanding a larger cut of the price of Hachette books it sells; when Hachette balked, Amazon began delaying their delivery, raising their prices, and/or steering customers to other publishers.
                                  You might be tempted to say that this is just business — no different from Standard Oil, back in the days before it was broken up...
                                  Does Amazon really have robber-baron-type market power? When it comes to books, definitely. Amazon overwhelmingly dominates online book sales...
                                  So far Amazon has not tried to exploit consumers. In fact, it has systematically kept prices low, to reinforce its dominance. What it has done, instead, is use its market power to put a squeeze on publishers, in effect driving down the prices it pays for books — hence the fight with Hachette. In economics jargon, Amazon is not, at least so far, acting like a monopolist, a dominant seller with the power to raise prices. Instead, it is acting as a monopsonist, a dominant buyer with the power to push prices down. ...
                                  So can we trust Amazon not to abuse that power? The Hachette dispute has settled that question: no, we can’t. ...
                                  Specifically, the penalty Amazon is imposing on Hachette books is bad in itself, but there’s also a curious selectivity in the way that penalty has been applied. Last month the Times’s Bits blog documented the case of two Hachette books receiving very different treatment. One is Daniel Schulman’s “Sons of Wichita,” a profile of the Koch brothers; the other is “The Way Forward,” by Paul Ryan, who was Mitt Romney’s running mate and is chairman of the House Budget Committee. Both are listed as eligible for Amazon Prime, and for Mr. Ryan’s book Amazon offers the usual free two-day delivery. What about “Sons of Wichita”? As of Sunday, it “usually ships in 2 to 3 weeks.” Uh-huh.
                                  Which brings us back to the key question. Don’t tell me that Amazon is giving consumers what they want, or that it has earned its position. What matters is whether it has too much power, and is abusing that power. Well, it does, and it is.

                                    Posted by on Monday, October 20, 2014 at 12:33 AM in Economics, Market Failure | Permalink  Comments (105)


                                    Links for 10-20-14

                                      Posted by on Monday, October 20, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (57)


                                      Sunday, October 19, 2014

                                      'When a Stock Market Theory Is Contagious'

                                      Robert Shiller's narrative:

                                      When a Stock Market Theory Is Contagious: Since Sept. 18, the stock market has fallen more than 6 percent. An abrupt decline last week — after five years of gains — prompted fears that the market may have reached a major turning point. Has a bear market begun? It’s a great question. ...
                                      Fundamentally, stock markets are driven by popular narratives, which don’t need basis in solid fact. True or not, such stories may be described as “thought viruses.” ... They spread by contagion. ... The most prominent story since the September peak seems to be one of a “global slowdown” with associated “deflation.” Underlying this tale are deeper, longer-term fears. There is a name for these concerns too. It is “secular stagnation”...
                                      Why? It’s probably because Lawrence H. Summers ... used the phrase in a talk he gave on Nov. 8... Paul Krugman wrote approvingly about the talk...
                                      There is little talk about secular stagnation in scholarly circles today. The recent chatter has centered in the news media, in conference panel discussions and in the blogosphere. ...
                                      The current secular-stagnation story is ... so vague, the negative feedback loop can’t be resolved ... neatly. The question may be whether this thought virus mutates into a more psychologically powerful version, one with enough narrative force to create a major bear market.

                                        Posted by on Sunday, October 19, 2014 at 09:34 AM in Economics | Permalink  Comments (37)


                                        'How will Saudi Arabia Respond to Lower Oil Prices?'

                                        Jim Hamilton:

                                        How will Saudi Arabia respond to lower oil prices?: Oil prices (along with prices of many other commodities) have fallen dramatically since last summer. Some observers are waiting to see if Saudi Arabia responds with significant cutbacks in production. I say, don’t hold your breath. ...
                                        Last week I discussed the three main factors in the recent fall in oil prices: (1) signs of a return of Libyan production to historical levels, (2) surging production from the U.S., and (3) growing indications of weakness in the world economy. ...
                                        In terms of surging U.S. production, the key question is how low the price can get before significant numbers of U.S. producers ... move into the red..., it’s in the Saudis’ longer-term interests to let that pain take its toll until some of the newcomers decide to pack up and go home. If U.S. production does decline, prices would quickly move back up. But if that happens after a shake-out, the next time there would be less enthusiasm for everybody to jump into the game...
                                        My guess is that Saudi Arabia would lower prices rather than cut production as long as that’s the name of the game. ...

                                          Posted by on Sunday, October 19, 2014 at 09:34 AM in Economics, Oil | Permalink  Comments (21)


                                          Links for 10-19-14

                                            Posted by on Sunday, October 19, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (76)


                                            Saturday, October 18, 2014

                                            Changes in Labor Force Participation

                                            LF-Part
                                            [more here]

                                              Posted by on Saturday, October 18, 2014 at 09:28 AM in Economics, Unemployment | Permalink  Comments (46)


                                              Not So Creative Destruction

                                              Dietz Vollrath:

                                              The Slowdown in Reallocation in the U.S.: One of the components of productivity growth is reallocation. From one perspective, we can think about the reallocation of homogenous factors (labor, capital) from low-productivity firms to high-productivity firms, which includes low-productivity firms going out of business, and new firms getting started. A different perspective is to look more closely at the shuffling of heterogenous workers between (relatively) homogenous firms, with the idea being that workers may be more productive in one particular environment than in another (i.e. we want people good at doctoring to be doctors, not lawyers). Regardless of how exactly we think about reallocation, the more rapidly that we can shuffle factors into more productive uses, the better for aggregate productivity, and the higher will be GDP. However, evidence suggests that both types of reallocation have slowed down recently.
                                              Foster, Grim, and Haltiwanger have a recent NBER working paper on the “cleansing effect of recessions”. This is the idea that in recessions, businesses fail. But it’s the really crappy, low-productivity businesses that fail, so we come out of the recession with higher productivity. The authors document that in recessions prior to the Great Recession, downturns tend to be “cleansing”. Job destruction rates rise appreciably, but job creation rates remain about the same. Unemployment occurs because it takes some time for those people whose jobs were destroyed to find newly created jobs. But the reallocation implied by this churn enhances productivity – workers are leaving low productivity jobs (generally) and then getting high productivity jobs (generally).
                                              But the Great Recession was different. In the GR, job destruction rose by a little, but much less than in prior recessions. Job creation in the GR fell demonstrably, much more than in prior recessions. So again, we have unemployment as the people who have jobs destroyed are not able to pick up newly created jobs. But because of the pattern to job creation and destruction, there is little of the positive reallocation going on. People are not losing low productivity jobs, becoming unemployed, and then getting high productivity jobs. People are staying in low productivity jobs, and new high productivity jobs are not being created. So the GR is not “cleansing”. It is, in some ways, “sullying”. The GR is pinning people into *low* productivity jobs.
                                              This holds for firm-level reallocation well. ...
                                              [An aside: For the record, there is no reason that we need to have a recession for this kind of reallocation to occur. ... So don't take Foster, Grim, and Haltiwanger's work as some kind of evidence that we "need" recessions. ...] ...

                                                Posted by on Saturday, October 18, 2014 at 09:23 AM in Economics | Permalink  Comments (26)


                                                'Deficit Fetishists'

                                                Yep:

                                                ... Interestingly enough..., now that the deficit is shrinking in large part due to a growing economy—not the other way around—the deficit fetishists seem to have grown silent. Simpson and Bowles are suddenly quiet, and John Boehner is riding other hobbyhorses.
                                                It’s almost as if crying over the deficit weren’t about the deficit at all, but rather a cover for ideological maneuvering. ...

                                                  Posted by on Saturday, October 18, 2014 at 08:48 AM in Budget Deficit, Economics | Permalink  Comments (16)


                                                  Links for 10-18-14

                                                    Posted by on Saturday, October 18, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (104)


                                                    Friday, October 17, 2014

                                                    Schools Remain in a Deep Hole from the Recession

                                                    10-17-14sfp
                                                    [via]

                                                      Posted by on Friday, October 17, 2014 at 05:01 PM in Economics | Permalink  Comments (9)


                                                      'Perspectives on Inequality and Opportunity'

                                                      Janet Yellen at the Conference on Economic Opportunity and Inequality, FRB Boston, Boston:

                                                      Perspectives on Inequality and Opportunity from the Survey of Consumer Finances, by Janet Yellen, Chair, FRB: The distribution of income and wealth in the United States has been widening more or less steadily for several decades, to a greater extent than in most advanced countries.1 This trend paused during the Great Recession because of larger wealth losses for those at the top of the distribution and because increased safety-net spending helped offset some income losses for those below the top. But widening inequality resumed in the recovery, as the stock market rebounded, wage growth and the healing of the labor market have been slow, and the increase in home prices has not fully restored the housing wealth lost by the large majority of households for which it is their primary asset.
                                                      The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then.2 It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity.
                                                      Some degree of inequality in income and wealth, of course, would occur even with completely equal opportunity because variations in effort, skill, and luck will produce variations in outcomes. Indeed, some variation in outcomes arguably contributes to economic growth because it creates incentives to work hard, get an education, save, invest, and undertake risk. However, to the extent that opportunity itself is enhanced by access to economic resources, inequality of outcomes can exacerbate inequality of opportunity, thereby perpetuating a trend of increasing inequality. Such a link is suggested by the "Great Gatsby Curve," the finding that, among advanced economies, greater income inequality is associated with diminished intergenerational mobility.3 In such circumstances, society faces difficult questions of how best to fairly and justly promote equal opportunity. My purpose today is not to provide answers to these contentious questions, but rather to provide a factual basis for further discussion. I am pleased that this conference will focus on equality of economic opportunity and on ways to better promote it.
                                                      In my remarks, I will review trends in income and wealth inequality over the past several decades, then identify and discuss four sources of economic opportunity in America--think of them as "building blocks" for the gains in income and wealth that most Americans hope are within reach of those who strive for them. The first two are widely recognized as important sources of opportunity: resources available for children and affordable higher education. The second two may come as more of a surprise: business ownership and inheritances. Like most sources of wealth, family ownership of businesses and inheritances are concentrated among households at the top of the distribution. But both of these are less concentrated and more broadly distributed than other forms of wealth, and there is some basis for thinking that they may also play a role in providing economic opportunities to a considerable number of families below the top.
                                                      In focusing on these four building blocks, I do not mean to suggest that they account for all economic opportunity, but I do believe they are all significant sources of opportunity for individuals and their families to improve their economic circumstances. ...[continue]...

                                                      See also Neil Irwin, "What Janet Yellen Said, and Didn’t Say, About Inequality," who says:

                                                      If there was any doubt that Janet Yellen would be a different type of Federal Reserve chair, her speech Friday in Boston removed it. ...
                                                      Ms. Yellen’s speech is a thorough airing of some of the latest research on how much inequality has widened in recent years and why. ...
                                                      It seems like Ms. Yellen offered this speech as a way to use her bully pulpit to cast public attention on an issue she cares about deeply, deliberately avoiding areas where inequality intersects with the policy areas under which she has direct control. And it is true that the future of inequality in the United States is surely shaped more by decisions on the levels of certain taxes and the size of the social welfare state more than by anything that the Fed does.
                                                      Perhaps in future appearances, Ms. Yellen will give us a sense not just of what is wrong with inequality, but what it might mean for the policies over which she has some control.

                                                        Posted by on Friday, October 17, 2014 at 09:10 AM in Economics, Fed Speeches, Income Distribution, Monetary Policy | Permalink  Comments (56)


                                                        Paul Krugman: What Markets Will

                                                        Market fundamentalists should listen to what markets are saying:

                                                        What Markets Will, by Paul Krugman, Commentary, NY Times: ... We have been told repeatedly that governments must cease and desist from their efforts to mitigate economic pain, lest their excessive compassion be punished by the financial gods, but the markets themselves have never seemed to agree that these human sacrifices are actually necessary. ...
                                                        How have policy crusaders responded to the failure of their dire predictions? Mainly with denial, occasionally with exasperation. For example, Alan Greenspan once declared the failure of interest rates and inflation to spike “regrettable, because it is fostering a false sense of complacency.” But that was more than four years ago; maybe the sense of complacency wasn’t all that false? ...
                                                        In fact, if you look closely, the real message from the market seems to be that we should be running bigger deficits and printing more money. And that message has gotten a lot stronger in the past few days. .. I’m talking about interest rates, which are flashing warnings, not of fiscal crisis and inflation, but of depression and deflation.
                                                        Most obviously, interest rates on long-term U.S. government debt — the rates that the usual suspects keep telling us will shoot up any day now unless we slash spending — have fallen sharply. This tells us that markets aren’t worried about default, but that they are worried about persistent economic weakness, which will keep the Fed from raising the short-term interest rates it controls. ...
                                                        It’s also instructive to look at interest rates on “inflation-protected” or “index” bonds, which are telling us two things. First, markets are practically begging governments to borrow and spend, say on infrastructure; interest rates on index bonds are barely above zero, so that financing for roads, bridges, and sewers would be almost free. Second, the difference between interest rates on index and ordinary bonds tells us how much inflation the market expects, and it turns out that expected inflation has fallen sharply over the past few months, so that it’s now far below the Fed’s target. In effect, the market is saying that the Fed isn’t printing nearly enough money. ...
                                                        In any case, the next time you hear some talking head opining on what we must do to satisfy the markets, ask yourself, “How does he know?” For the truth is that when people talk about what markets demand, what they’re really doing is trying to bully us into doing what they themselves want.

                                                          Posted by on Friday, October 17, 2014 at 12:24 AM in Economics | Permalink  Comments (58)


                                                          Links for 10-17-14

                                                            Posted by on Friday, October 17, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (84)


                                                            Thursday, October 16, 2014

                                                            'Thoughts on High-Priced Textbooks'

                                                            Tim Taylor on why textbooks cost so much:

                                                            Thoughts on High-Priced Textbooks: High textbook prices are a pebble in the shoe of many college students. Sure, it's not the biggest financial issue they face, But it's a real and nagging annoyance that for hinders performance for many students. ...
                                                            David Kestenbaum and Jacob Goldstein at National Public Radio took up this question recently on one of their "Planet Money" podcasts. ... For economists, a highlight is that they converse with Greg Mankiw, author of what is currently the best-selling introductory economics textbook, which as they point out is selling for $286 on Amazon. Maybe this is a good place to point out that I am not a neutral observer in this argument: The third edition of my own Principles of Economics textbook is available through Textbook Media. The pricing varies from $25 for online access to the book, up through $60 for both a paper copy (soft-cover, black and white) and online access.

                                                            Several explanations for high textbook prices are on offer. The standard arguments are that textbook companies are marketing selling to professors, not to students, and professors are not necessarily very sensitive to textbook prices. (Indeed, one can argue that before the rapid rise in textbook prices in the last couple of decades, it made sense for professors not to focus too much on textbook prices.) Competition in the textbook market is limited, and the big publishers load up their books with features that might appeal to professors: multi-colored hardcover books, with DVDs and online access, together with test banks that allow professors to give quizzes and tests that can be machine-graded. At many colleges and universities, the intro econ class is taught in a large lecture format, which can include hundreds or even several thousand students, as well as a flock of teaching assistants, so some form of computerized grading and feedback is almost a necessity. Some of the marketing by textbook companies involves paying professors for reviewing chapters--of course in the hope that such reviewers will adopt the book.

                                                            The NPR show casts much of this dynamic as a "principal-agent problem," the name for a situation in which one person (the "principal") wants another person (the "agent") to act on their behalf, but lacks the ability to observe or evaluate the actions of the agent in a complete way. Principal-agent analysis is often used, for example, to think about the problem of a manager motivating employees. But it can also be used to consider the issue of students (the "principals") wanting the professor (the "agent") to choose the book that will best suit the needs of the students, with all factors of price and quality duly taken into account.  The NPR reporters quote one expert saying that the profit margin for high school textbooks is 5-10%, because those books decisions are made by school districts and states that negotiate hard. However, profit margins on college textbooks--where the textbook choice is often made by a professor who may not even know the price that students will pay--are more like 20%.

                                                            The NPR report suggests this principal-agent framework to Greg Mankiw, author of the top-selling $286 economic textbook. Mankiw points out that principal-agent problems are in no way nefarious, but come up in many contexts. For example, when you get an operation, you rely on the doctor to make choices that involve costs; when you get your car fixed, you rely on a mechanic to make choices that involve costs; when you are having home repairs done, you rely on a repair person or a contractor to make choices that involve costs. Mankiw argues that professors, acting as the agents of students, have legitimate reason to be concerned about tradeoffs of time and money. As he notes, a high quality book is more important "than saving them a few dollars"--and he suggests that saving $30 isn't worth it for a low-quality book.

                                                            But of course, in the real world there are more choices than a high-quality $286 book and a low-quality $256 book. The PIRG student surveys suggest that up to two-thirds of students are avoiding buying textbooks at all, even though they fear it will hurt their grade, or are shifting to other classes with lower textbook costs. If a student is working 10 hours a week at a part-time job, making $8/hour after taxes, then the difference between $286 book and a $60 book is 28.25 hours--nearly three weeks of part-time work. I am unaware of any evidence in which students were randomly assigned different textbooks but otherwise taught and evaluated in the same way, and kept time diaries, which would show that higher-priced books save time or improve academic performance. It is by no means obvious that a lower-cost book (yes, like my own) works less well for students than a higher-cost book from a big publisher. Some would put that point more strongly.

                                                            A final dynamic that may be contributing to higher-prices textbooks is a sort of vicious circle related to the textbook resale market. The NPR report says that when selling a textbook over a three-year edition, a typical pattern was that sales fell by half after the first year and again by half after the second year, as students who had bought the first edition resold the book to later students. Of course, this dynamic also means that many students who bought the book new are not really paying full-price, but instead paying the original price minus the resale price. The argument is that as textbooks have increased in price, the resale market has become ever-more active, so that sales of a textbook in later years have dwindled much more quickly. Textbook companies react to this process by charging more for the new textbook, which of course only spurs more activity in the resale market.

                                                            A big question for the future of textbooks is how and in what ways they migrate to electronic forms. On one side, the hope is that electronic textbooks will offer expanded functionality, as well as being cheaper. But this future is not foreordained. At least at present, my sense is that the functionality of reading and taking notes in online textbooks hasn't yet caught up to the ease of reading on paper. Technology and better screens may well shift this balance over time. But even setting aside questions of reading for long periods of time on screen, or taking notes on screen, at present it remains harder to skip around in a computerized text between what you are currently reading and the earlier text that you need to be checking, as well as skipping to various graphs, tables, and definitions. To say it more simply, in a number of subjects it may still be harder to study an on-line text than to study a paper text.

                                                            Moreover, as textbook manufacturers shift to an on-line world, they will bring with them their full bag of tricks for getting paid. The Senack report notes:
                                                            Today’s marketplace offers more digital textbook options to the student consumer than ever. “Etextbooks” are digitized texts that students read on a laptop or tablet. Similar to PDF documents, e-textbooks enable students to annotate, highlight and search. The cost may be 40-50 percent of the print retail price, and access expires after 180 days. Publishers have introduced e-textbooks for nearly all their traditional textbook offerings. In addition, the emergence of the ereader like the Kindle and iPad, as well as the emergence of many e-textbook rental programs, all seemed to indicate that the e-textbook will alter the college textbook landscape for the better. However, despite this shift, users of e-textbooks are subject to expiration dates, on-line codes that only work once, page printing limits, and other tactics that only serve to restrict use and increase cost. Unfortunately for students, the publishing companies’ venture into e-textbooks is a continuation of the practices they use to monopolize the print market.

                                                              Posted by on Thursday, October 16, 2014 at 11:29 AM in Economics, Universities | Permalink  Comments (49)


                                                              'Regret and Economic Decision-Making'

                                                              Here are the conclusions to Regret and economic decision-making:

                                                              Conclusions We are clearly a long way from fully understanding how people behave in dynamic contexts. But our experimental data and that of earlier studies (Lohrenz 2007) suggest that regret is a part of the decision process and should not be overlooked. From a theoretical perspective, our work shows that regret aversion and counterfactual thinking make subtle predictions about behaviour in settings where past events serve as benchmarks. They are most vividly illustrated in the investment context.
                                                              Our theoretical findings show that if regret is anticipated, investors may keep their hands off risky investments, such as stocks, and not enter the market in the first place. Thus, anticipated regret aversion acts like a surrogate for higher risk aversion.
                                                              In contrast, once people have invested, they become very attached to their investment. Moreover, the better past performance was, the higher their commitment, because losses loom larger. This leads the investor to ‘gamble for resurrection’. In our experimental data, we very often observe exactly this pattern.
                                                              This dichotomy between ex ante and ex post risk appetites can be harmful for investors. It leads investors and businesses to escalate their commitment because of the sunk costs in their investments. For example, many investors missed out on the 2009 stock market rally while buckling down in the crash in 2007/2008, reluctant to sell early. Similarly, people who quit their jobs and invested their savings into their own business, often cannot with a cold, clear eye cut their losses and admit their business has failed.
                                                              Therefore, a better understanding of what motivates people to save and invest could enable us to help them avoid such mistakes, e.g. through educating people to set up clear budgets a priori or to impose a drop dead level for their losses. Such simple measures may help mitigate the effects of harmful emotional attachment and support individuals in making better decisions.

                                                              [This ("once people have invested, they become very attached to their investment" and cannot admit failure) includes investment in economic models and research (see previous post).]

                                                                Posted by on Thursday, October 16, 2014 at 08:34 AM in Economics, Methodology | Permalink  Comments (4)


                                                                'Those Whom a God Wishes to Destroy He First Drives Mad'

                                                                Brad DeLong wonders why Cliff Asness in clinging to a theoretical model that has clearly been rejected by the data:

                                                                ... What is not normal is to claim that your analysis back in 2010 that quantitative easing was generating major risks of inflation was dead-on.
                                                                What is not normal is to adopt the mental pose that your version of classical austerian economics cannot fail--that it can only be failed by an uncooperative and misbehaving world.
                                                                What is not normal is, after 4 1/2 years, in a week, a month, a six-month period in which market expectations of long-run future inflation continue on a downward trajectory, to refuse to mark your beliefs to market and demand that the market mark its beliefs to you. To still refuse to bring your mind into agreement with reality and demand that reality bring itself into agreement with your mind. To still refuse to say: "my intellectual adversaries back in 2010 had a definite point" and to say only: "IT'S NOT OVER YET!!!!"

                                                                There's a version of this in econometrics, i.e. you know the model is correct, you are just having trouble finding evidence for it. It goes as follows. You are testing a theory you came up with, but the data are uncooperative and say you are wrong. But instead of accepting that, you tell yourself "My theory is right, I just haven't found the right econometric specification yet. I need to add variables, remove variables, take a log, add an interaction, square a term, do a different correction for misspecification, try a different sample period, etc., etc., etc." Then, after finally digging out that one specification of the econometric model that confirms your hypothesis, you declare victory, write it up, and send it off (somehow never mentioning the intense specification mining that produced the result).

                                                                Too much econometric work proceeds along these lines. Not quite this blatantly, but that is, in effect, what happens in too many cases. I think it is often best to think of econometric results as the best case the researcher could make for a particular theory rather than a true test of the model.

                                                                  Posted by on Thursday, October 16, 2014 at 07:50 AM in Econometrics, Economics, Inflation | Permalink  Comments (40)


                                                                  Links for 10-16-14

                                                                    Posted by on Thursday, October 16, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (42)


                                                                    Wednesday, October 15, 2014

                                                                    'Understanding Economic Inequality and Growth at the Top of the Income Ladder'

                                                                    A nice collection of essays on inequality and what can be done about it by Heather Boushey, Emmanuel Saez, Michael Ettlinger, and Fiona Chin:

                                                                    Understanding economic inequality and growth at the top of the income ladder

                                                                    For example, from Saez:

                                                                    ... Zucman and I show in our new working paper that the surge in wealth concentration and the erosion of middle class wealth can be explained by two factors. First, differences in the ability to save by the middle class and the wealthy means that more income inequality will translate into more inequality in savings. Upper earners will naturally save relatively more and accumulate more wealth as income inequality widens.
                                                                    Second, the saving rate among the middle class has plummeted since the 1980s, in large part due to a surge in debt, in particular mortgage debt and student loans. With such low savings rates, middle class wealth formation is bound to stall. In contrast, the savings rate of the rich has remained substantial.
                                                                    If such trends of growing income inequality and growing disparity in savings rates between the middle class and rich persist, then U.S. wealth inequality will continue to increase. The rich will be able to leave large estates to their heirs and the United States could find itself becoming a patrimonial society where inheritors dominate the top of the income and wealth distribution as famously pointed out by Piketty in his new book “Capital in the 21st Century.”
                                                                    What should be done about the rise of income and wealth concentration in the United States? More progressive taxation would help on several fronts. Increasing the tax rate as incomes rise helps curb excessive and wasteful compensation of top income earners. Progressive taxation of capital income also reduces the rate of return on wealth, making it more difficult for large family fortunes to perpetuate themselves over generations. Progressive estate taxation is the most natural tool to prevent self-made wealth from becoming inherited wealth. At the same time, complementary policies are needed to encourage middle class wealth formation. Recent work in behavioral economics by Richard Thaler at the University of Chicago and Cass Sunstein at Harvard University shows that it is possible to encourage savings and wealth formation through well-designed programs that nudge people into savings.

                                                                    Maybe if they had more income to save??? Another part of the essay gets at this (what I've called the mal-distribution of income, i.e. workers receiving less than the value of what they produce, and those at the top receiving more through rent-seeking and other means):

                                                                    ...while standard economic models assume that pay reflects productivity, there are strong reasons to be skeptical, especially at the top of the income ladder where the actual economic contribution of managers working in complex organizations is particularly difficult to measure. In this scenario, top earners might be able partly to set their own pay by bargaining harder or influencing executive compensation com­mittees. Naturally, the incentives for such “rent-seeking” are much stronger when top tax rates are low.

                                                                    In this scenario, cuts in top tax rates can still increase the share of total household income going to the top 1 percent at the expense of the remaining 99 percent. In other words, tax cuts for the wealthiest stimulate rent-seeking at the top but not overall economic growth—the key difference from the supply-side scenario that justified tax cuts for high income earners in the first place.

                                                                    [I talked what I think should be done to curb rising inequality here and tried to make the point that one of the first things we can do is to claw back some of the income from high income earners and return it to those who actually deserve it. In the short-run, this can be done through progressive taxation and the redistribution of income to where it belongs, but in the longer run I'd like to see the distribution mechanism fixed, at least in part, through measures that increase the bargaining power of workers so that the playing filed is a bit more level. In addition, I'd also like to see measures/policies that will produce better jobs for working class households.]

                                                                      Posted by on Wednesday, October 15, 2014 at 10:38 AM in Economics, Income Distribution | Permalink  Comments (93)


                                                                      ''The Long-Term Unemployment Rate is NOT 'Sticky' or 'Stubborn'''

                                                                      Josh Bivens has an adjective quibble:

                                                                      Adjective Quibble: The Long-Term Unemployment Rate is NOT “Sticky” or “Stubborn”: A Wall Street Journal blog post this morning describes an Obama administration initiative to combat long-term unemployment. In the opening sentence, the author follows a too-common convention in describing the long-term unemployment rate as “sticky.” Sometimes the adjective is “stubborn.”
                                                                      I know that this will sound like quibbling, but in this case adjectives really matter for understanding the problem. As a paper I co-wrote shows pretty clearly, the long-term unemployment rate (LTUR) has not been sticky or stubborn for years. In fact, the LTUR has fallen faster than one would expect given the overall pace of labor market improvement. It is true that the LTUR remains too high, but that is because it skyrocketed during the Great Recession and in the six months after its official end. But the LTUR has since then not become resistant to wider labor market improvement.
                                                                      The concrete policy implication of recognizing this is that by far the most important thing that can be done to lower the still too-high LTUR is to maintain support for economic recovery more broadly. In today’s far too narrow macroeconomic policy debate, this simply means the Fed should not boost short-term interest rates until the labor market is much, much healthier (including a much lower LTUR). ...

                                                                      And it's still far from too late for fiscal policy -- infrastructure spending for example -- to make a difference. But don't get your hopes up...

                                                                        Posted by on Wednesday, October 15, 2014 at 10:02 AM in Economics, Fiscal Policy, Monetary Policy, Unemployment | Permalink  Comments (41)


                                                                        'Urgent Need to Boost Demand in the Eurozone'

                                                                        Biagio Bossone and Richard Wood

                                                                        To G-20 Leaders: Urgent Need to Boost Demand in the Eurozone: The economies in the Eurozone are continuing to slide into recession and depression.  Senior officials of G-20 countries (including those in Australia, the host government) have not understood, or anticipated, that the Eurozone crisis is a major threat to global recovery. The officials have provided sub-standard advice to their leaders.  The deepening crisis must be addressed.  This article identifies a strong monetary/fiscal policy combination that could boost consumer and aggregate demand, and simultaneously address high public debt burdens and deflation.

                                                                        Paul Krugman:

                                                                        1937: From the beginning, economists who had studied the Great Depression warned that policy makers needed, above all, to be careful not to pull another 1937 — a reference to the fateful year when FDR prematurely tried to balance the budget and the Fed prematurely tried to normalize monetary policy, aborting the recovery of the previous four years and sending the economy on another big downward slope.
                                                                        Unfortunately, these warnings were ignored. ... And now things are sliding everywhere. Actually, Europe already had one 1937, with its slide into a double-dip recession; but now it’s very much looking like another. And the world economy as a whole is weakening fast. ...
                                                                        I hope that the Fed will stop talking about exit strategies for a while. We are by no means out of the Lesser Depression.

                                                                        Update: See also The Depressing Signals the Markets Are Sending About the Global Economy - NYTimes.com

                                                                          Posted by on Wednesday, October 15, 2014 at 10:01 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (15)


                                                                          'Three Hours of Life per Euro'

                                                                          Public spending increased life expectancy in eastern Germany:

                                                                          Three hours of life per euro, EurekAlert: Public spending appears to have contributed substantially to the fact that life expectancy in eastern Germany has not only increased, but is now almost equivalent to life expectancy in the west. While the possible connection of public spending and life expectancy has been a matter of debate, scientists at the Max Planck Institute for Demographic Research (MPIDR) have now for the first time quantified the effect. They found that for each additional euro the eastern Germans received in benefits from pensions and public health insurance after reunification, they gained on average three hours of life expectancy per person per year.
                                                                          These are the conclusions of an analysis based on a newly developed set of age-specific data on public expenditures through the year 2000. MPIDR demographer Tobias Vogt published the results of the analysis recently in the scientific journal Journal of the Economics of Ageing. ...
                                                                          "What has often been called an explosion in social spending in the wake of reunification has, however, led to a gratifying jump in life expectancy," says Tobias Vogt. ...
                                                                          Additional expenditures by the health care system were found to have had a greater impact on life expectancy than higher pensions... However, Vogt observed, "without the pension payments of citizens in east and west converging to equivalent levels, the gap in life expectancy could not have been closed." This is because when there are no differences in the quality and level of medical care, the standard of living becomes the decisive factor in life expectancy. And the standard of living of older people is determined to a large extent by the size of their pensions. ...

                                                                            Posted by on Wednesday, October 15, 2014 at 10:00 AM in Economics, Fiscal Policy | Permalink  Comments (8)


                                                                            'No, Mainstream Economists Did Not Just Reject Thomas Piketty’s Big Theory'

                                                                            Jordan Weissmann asks Piketty about the IGM poll:

                                                                            No, Mainstream Economists Did Not Just Reject Thomas Piketty’s Big Theory, by Jordan Weissmann: ...the University of Chicago’s Initiative on Global Markets ... asked economists whether they agreed or disagreed with the following statement: "The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate.” ... Overwhelmingly, the panel’s answer was no, with only one out 36 panelists agreeing with the statement.
                                                                            Afterwards, a number of journalists, economists, and other wags took to Twitter and blogs to talk about how Piketty had just gotten a black eye. ... Except ... Piketty ... never suggests r>g is the main reason behind the recent rise of inequality. Rather, [he] theorizes that, in the absence of government intervention, r>g ensures the future concentration of income and wealth. ... Ultimately,... IGM was asking economists to opine on an argument that nobody was making in the first place.
                                                                            I found myself wondering: How would Piketty himself weigh in? “Well,” he told me in an email this morning, “I think the book makes pretty clear that the powerful force behind rising income and wealth inequality in the US since the 1970s is the rise of the inequality of labor earnings, itself due to a mixture of rising inequality in access to skills and higher education, and of exploding top managerial compensation (itself probably stimulated by large cuts in top tax rates), So this indeed has little to do with r>g.”
                                                                            In short, you can add Piketty to the "Disagree" column, too.

                                                                            The caption under the picture of Piketty in the article says it well:

                                                                            He's probably thinking how it would be nice if people read his book before arguing with it.

                                                                            See also Brad DeLong, Nick Bunker, and Matt O'Brien.

                                                                              Posted by on Wednesday, October 15, 2014 at 09:54 AM in Economics, Income Distribution | Permalink  Comments (3)


                                                                              Links for 10-15-14

                                                                                Posted by on Wednesday, October 15, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (124)


                                                                                Tuesday, October 14, 2014

                                                                                What’s the Best Way to Overcome Rising Economic Inequality?

                                                                                I have a new column:

                                                                                What’s the Best Way to Overcome Rising Economic Inequality?: A debate over the use of progressive taxation and redistribution as a means of solving the problem of rising inequality erupted in the last week or so. The debate began with three publications, one from Edward Kleinbard, one from Nezih Guner, Martin Lopez-Daneri, and Gustavo Ventura, and one from Cathie Jo Martin and Alexander Hertel-Fernandez. They argue in turn that “progressive fiscal outcomes do not require particularly progressive tax systems,” “making taxes more progressive taxes won’t raise much revenue,” and “The way a tax system fights inequality isn't just redistribution. It's by generating enough revenue to fund programs and benefits that help middle class, working class, and poor people participate and succeed in the economy. While talk of taxing top earners may make for good political rhetoric on the left, relying on such taxes cannot pay the bills.” This brought responses from Jared Bernstein, Matt Bruenig, and Mike Konczal the three of whom, as Steve Waldman says in a nice summary of this debate, “offer responses that examine what ‘progressivity’ really means and offer support for taxing the rich more heavily than the poor.”
                                                                                This debate brings up an important question: what is the best way to fight economic inequality? ...[continue]...

                                                                                  Posted by on Tuesday, October 14, 2014 at 07:56 AM in Economics, Fiscal Times, Income Distribution | Permalink  Comments (109)


                                                                                  Economics is Both Positive and Normative

                                                                                  Jean Tirole in the latest TSE Magazine:

                                                                                  Economics is a positive discipline as it aims to document and analyse individual and collective behaviours. It is also, and more importantly, a normative discipline as its main goal is to better the world through economic policies and recommendations.

                                                                                    Posted by on Tuesday, October 14, 2014 at 07:55 AM in Economics, Methodology | Permalink  Comments (12)


                                                                                    'The Mythical Phillips Curve?'

                                                                                    An entry in the ongoing debate over the Phillips curve:

                                                                                    The mythical Phillips curve?, by Simon Wren-Lewis, mainly macro: Suppose you had just an hour to teach the basics of macroeconomics, what relationship would you be sure to include? My answer would be the Phillips curve. With the Phillips curve you can go a long way to understanding what monetary policy is all about.
                                                                                    My faith in the Phillips curve comes from simple but highly plausible ideas. In a boom, demand is strong relative to the economy’s capacity to produce, so prices and wages tend to rise faster than in an economic downturn. However workers do not normally suffer from money illusion: in a boom they want higher real wages to go with increasing labour supply. Equally firms are interested in profit margins, so if costs rise, so will prices. As firms do not change prices every day, they will think about future as well as current costs. That means that inflation depends on expected inflation as well as some indicator of excess demand, like unemployment.
                                                                                    Microfoundations confirm this logic, but add a crucial point that is not immediately obvious. Inflation today will depend on expectations about inflation in the future, not expectations about current inflation. That is the major contribution of New Keynesian theory to macroeconomics. ...[turns to evidence]...

                                                                                    Is it this data which makes me believe in the Phillips curve? To be honest, no. Instead it is the basic theory that I discussed at the beginning of this post. It may also be because I’m old enough to remember the 1970s when there were still economists around who denied that lower unemployment would lead to higher inflation, or who thought that the influence of expectations on inflation was weak, or who thought any relationship could be negated by direct controls on wages and prices, with disastrous results. But given how ‘noisy’ macro data normally is, I find the data I have shown here pretty consistent with my beliefs.

                                                                                      Posted by on Tuesday, October 14, 2014 at 07:54 AM in Economics, Inflation, Macroeconomics, Unemployment | Permalink  Comments (3)


                                                                                      Links for 10-14-14

                                                                                        Posted by on Tuesday, October 14, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (132)


                                                                                        Monday, October 13, 2014

                                                                                        Jean Tirole Wins Nobel Prize in Economic Sciences

                                                                                        This is not my area, so I'll turn the discussion over to others:

                                                                                        10/14 Update:

                                                                                        Alumnus Jean Tirole wins Nobel Prize in economic sciences, by Peter Dizikes, MIT News: Jean Tirole PhD ’81, a scholar whose longstanding ties to MIT include service on the economics faculty from 1984 to 1991, has been award the 2014 Nobel Prize in economic sciences for his work on the behavior and regulation of powerful firms.
                                                                                        Research by Tirole, 61, now a professor of economics at the University of Toulouse in his native France, has highlighted the need for regulation to be tailored to individual industries, while creating a general framework for understanding the nuances of regulation across industries.
                                                                                        Tirole received his PhD in economics from MIT in 1981 under the supervision of Eric Maskin, a former MIT professor (now at Harvard University) who was himself a winner of the Nobel Prize in economic sciences in 2007.
                                                                                        Tirole remains an MIT faculty affiliate as the Annual Visiting Professor of Economics in MIT’s Department of Economics. He has co-authored papers with a number of members of the MIT economics faculty, including Olivier Blanchard, Jerry Hausman, Bengt Holmstrom, and Paul Joskow. Tirole and Holmstrom co-authored a 2011 book about liquidity in markets, “Inside and Outside Liquidity.” 
                                                                                        Focus on oligopoly
                                                                                        Many of Tirole’s research advances have involved cases of oligopoly, where a few firms dominate a given industry, controlling the quantity and quality of goods being produced, as well as prices.
                                                                                        “From the mid-1980s and onwards, Jean Tirole has breathed new life into research on such market failures,” the Royal Swedish Academy of Science, which grants the Nobel awards, stated on Monday. “His analysis of firms with market power provides a unified theory with a strong bearing on central policy questions: how should the government deal with mergers or cartels, and how should it regulate monopolies?”
                                                                                        The academy emphasized that its award to Tirole also recognizes many of his findings on regulatory policy, some of which employ game theory and contract theory to describe the dynamics of regulating markets. For instance, regulators may know less than they wish about a firm’s costs and strategic options, so regulators can offer firms a series of options, in essence, regarding the regulatory contract the firm will enter into. It may also make sense, Tirole has concluded, for regulations to be drawn up in recognition of the fact that firms may hide information from regulators.
                                                                                        As the Nobel citation also noted, Tirole observed the potential for phenomena such as the “ratchet effect,” which relates to the timeframe of regulations: If a company does well in a short-term regulatory time frame, regulations may be ratcheted up, lowering the incentives for the firm to perform as well. Alternately, Tirole has suggested, regulators might impose lesser conditions and study their effects. ...

                                                                                          Posted by on Monday, October 13, 2014 at 08:52 AM in Economics | Permalink  Comments (24)


                                                                                          Paul Krugman: Revenge of the Unforgiven

                                                                                          Why didn't homeowners, unlike banks, get the debt relief they needed?:

                                                                                          Revenge of the Unforgiven, by Paul Krugman, Commentary, NY Times: Stop me if you’ve heard this before: The world economy appears to be stumbling. For a while, things seemed to be looking up, and there was talk about green shoots of recovery. But now growth is stalling, and the specter of deflation looms.
                                                                                          If this story sounds familiar, it should; it has played out repeatedly since 2008. ... Why does this keep happening? ... The answer, I’d suggest, is an excess of virtue. Righteousness is killing the world economy.
                                                                                          What, after all, is our fundamental economic problem? ... In the years leading up to the Great Recession, we had an explosion of credit..., debt levels that would once have been considered deeply unsound became the norm.
                                                                                          Then the music stopped, the money stopped flowing, and everyone began trying to “deleverage,” to reduce the level of debt. For each individual, this was prudent. But ... when everyone tries to pay down debt at the same time, you get a depressed economy.
                                                                                          So what can be done? Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. ...
                                                                                          What’s striking about the past few years, however, is how little debt relief has actually taken place. ...
                                                                                          Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.
                                                                                          So the policy response to a crisis of excessive debt has, in effect, been a demand that debtors pay off their debts in full. What does history say about that strategy? That’s easy: It doesn’t work. ...
                                                                                          But it has been very hard to get either the policy elite or the public to understand that sometimes debt relief is in everyone’s interest. Instead, the response to poor economic performance has essentially been that the beatings will continue until morale improves.
                                                                                          Maybe, just maybe, bad news — say, a recession in Germany — will finally bring an end to this destructive reign of virtue. But don’t count on it.

                                                                                            Posted by on Monday, October 13, 2014 at 12:24 AM in Economics, Policy | Permalink  Comments (158)


                                                                                            Fed Watch: The Methodical Fed

                                                                                            Tim Duy:

                                                                                            The Methodical Fed, by Tim Duy: Just a few months ago the specter of inflation dominated Wall Street. Now the tables have turned and low inflation is again the worry du jour as a deflationary wave propagates from the rest of the world - think Europe, China, oil prices. How quickly sentiment changes.

                                                                                            And given how quickly sentiment changes, I am loath to make any predictions on the implications for Fed policy. The very earliest one could even imagine a possible rate hike would be March of next year, still five months away. But since that month is the preference of Fed hawks, better to think that the earliest is the June meeting, still eight months away.

                                                                                            Eight months is a long time. We could pass through two more of these sentiment cycles between now and then. Or maybe the story breaks decisively one direction or the other. Given the uncertainty of economy activity, it is clearly dangerous to become too wedded to a particular date for liftoff. At best we can describe probabilities.

                                                                                            But what I think is often missing is a recognition that through all of the ups and downs of last year, the Fed has sent a very consistent signal: The ongoing improvement in the US economy justifies the steady removal of monetary accommodation. To be sure, we can quibble over the timing of the first move, but consider the path since last May:

                                                                                            1. In May of 2013, then-Federal Reserve Chair Ben Bernanke opens the door for tapering of asset purchases.
                                                                                            2. The actual tapering begins in December of that year, two meetings later than expected. I think it is heroic to believe those 12 weeks were materially important. By that point, the underlying expectation was well established.
                                                                                            3. Although they claimed that the pace of tapering was data dependent, they proceeded on a very methodical path of $10 billion cuts at each meeting. They proceeded on this path despite persistent below target inflation.
                                                                                            4. They clearly established that this month's meeting is very, very likely to be the end of the asset purchase program. Again, they stated this expectation despite low inflation.
                                                                                            5. Despite the current turmoil, I still expect the asset purchase program to end. I think hawks and doves alike want out of that program. They want to return to interest rate-based policy.
                                                                                            6. Even as inflation bounces along below target, they formulated and announced the path of policy normalization. That normalization includes the expectation that the expansion of the balance sheet was temporary and thus will be reversed.
                                                                                            7. Even as inflation has bounced along below trend, they have repeatedly warned via the Summary of Economic Projections that rate hikes are just around the corner, and that market participants should plan accordingly.
                                                                                            8. And while New York Federal Reserve President William Dudley foreshadowed the minutes and a week of Fedspeak that was generally interpreted dovishly, the key takeaway was although the US economy was not expected to accelerate further, the current path was sufficient to believe in the "consensus view is that lift-off will take place around the middle of next year. That seems like a reasonable view to me" even "if it were to cause a bump or two in financial markets." Those remarks were seconded by San Francisco Federal Reserve President John Williams. So the moderates and hawks both continue to send signal rates hikes by the middle of next year, leaving the voices of doves Minneapolis Federal Reserve President Narayana Kocherlakota and Chicago Federal Reserve President Charles Evans sounding very lonely. Fed Chair Janet Yellen has been somewhat absent from the current debate, although we suppose she sympathizes more with the dovish position.

                                                                                            Given the consistent, methodological approach to policy normalization witnessed over the past year, is it wonder that inflation signals all look soft? For example:

                                                                                            PCE101214

                                                                                            INFXa101214

                                                                                            INFXb101214

                                                                                            Fed signaling resulted in consistent, downward pressure on inflation expectations. Hence what they view as a dovish policy stance, I view as a hawkish policy stance. And most remarkable to me is that they never realized what I always thought was obvious - that they were setting the stage for a return trip to the zero bound in the next recession. Matthew C Klein at the Financial Times points us to this from the Fed minutes:
                                                                                            For example, respondents to the recent Survey of Primary Dealers placed considerable odds on the federal funds rate returning to the zero lower bound during the two years following the initial increase in that rate. The probability that investors attach to such low interest rate scenarios could pull the expected path of the federal funds rate computed from market quotes below most Committee participants’ assessments of appropriate policy.
                                                                                            The most hawkish projection for the long-term Federal Funds rate is 4.25%. During the downside, cutting cycles are generally in excess of 500bp. The math here is not that complicated. I struggle to find the scenario by which policy does not revert to the zero lower bound. That would imply that the Fed allows conditions to evolve such that the appropriate Fed Funds rate is well in excess of 6%. But given the Fed thinks that the equilibrium real rate has fallen, this implies a willingness to support higher inflation expectations, which is something I just don't see at this point.
                                                                                            And I don't think it is just me. I don't think Wall Street sees the path out. Hence the high probability assigned to a return to the zero bound. Hence also the flattening of the yield curve since tapering began:

                                                                                            SPREAD101214

                                                                                            I think the Fed should very much change its messaging if policymakers want to lift us from the zero bound for more than a couple of years. I think they should drop the calendar-based guidance they are all now giving. I think they should drop the SEP dot plot, because that clearly sends a hawkish message. I think they should drop reference to the labor market outcomes in terms of quantities in favor of price signals (wages, a direction they seem to be moving). I think they should define their policy strategy to make clear they intend to lift the economy off the zero bound permanently, but that I believe requires them to abandon their 2% inflation fetish (and note that on this I believe their behavior is clearly more consistent with a 2% ceiling then a symmetrical target). They also need to adandon their claim that the balance sheet will be reversed. The size of the balance sheet should not be a policy objective, only the economic outcomes yielded by the size of the balance sheet.
                                                                                            That said, I am also beginning to expect that a return to the zero bound is almost guaranteed. I fear the time has passed for the appropriate mix of fiscal and monetary policy that leaps the economy to a higher equilibrium. But that is a topic for another post.
                                                                                            Bottom Line: Fed policy might sound dovish this week, but take note the the underlying tone has been methodically hawkish for a long, long time. And markets have responded accordingly, including anticipating a return to the zero bound when the next recession hits. Nor should this be unexpected. Monetary policymakers have yet to set clear objectives that includes a high probability that the zero bound is left behind for good.

                                                                                              Posted by on Monday, October 13, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (21)


                                                                                              Links for 10-13-14

                                                                                                Posted by on Monday, October 13, 2014 at 12:06 AM in Economics, Links | Permalink  Comments (76)


                                                                                                Sunday, October 12, 2014

                                                                                                'In Defense of Obama'

                                                                                                In case you missed this from Paul Krugman:

                                                                                                In Defense of Obama, by Paul Krugman, Rolling Stone: When it comes to Barack Obama, I've always been out of sync. Back in 2008, when many liberals were wildly enthusiastic about his candidacy and his press was strongly favorable, I was skeptical. I worried that he was naive, that his talk about transcending the political divide was a dangerous illusion given the unyielding extremism of the modern American right. Furthermore, it seemed clear to me that, far from being the transformational figure his supporters imagined, he was rather conventional-minded: Even before taking office, he showed signs of paying far too much attention to what some of us would later take to calling Very Serious People, people who regarded cutting budget deficits and a willingness to slash Social Security as the very essence of political virtue.
                                                                                                And I wasn't wrong. Obama was indeed naive: He faced scorched-earth Republican opposition from Day One, and it took him years to start dealing with that opposition realistically. Furthermore, he came perilously close to doing terrible things to the U.S. safety net in pursuit of a budget Grand Bargain; we were saved from significant cuts to Social Security and a rise in the Medicare age only by Republican greed, the GOP's unwillingness to make even token concessions.
                                                                                                But now the shoe is on the other foot: Obama faces trash talk left, right and center – literally – and doesn't deserve it. Despite bitter opposition, despite having come close to self-inflicted disaster, Obama has emerged as one of the most consequential and, yes, successful presidents in American history. His health reform is imperfect but still a huge step forward – and it's working better than anyone expected. Financial reform fell far short of what should have happened, but it's much more effective than you'd think. Economic management has been half-crippled by Republican obstruction, but has nonetheless been much better than in other advanced countries. And environmental policy is starting to look like it could be a major legacy.
                                                                                                I'll go through those achievements shortly. First, however, let's take a moment to talk about the current wave of Obama-bashing. ...

                                                                                                  Posted by on Sunday, October 12, 2014 at 09:35 AM in Economics, Politics | Permalink  Comments (85)


                                                                                                  Factors Behind Lower Oil Prices

                                                                                                  Jim Hamilton:

                                                                                                  Lower oil prices: For the last 3 years, European Brent has mostly traded in a range of $100-$120 with West Texas intermediate selling at a $5 to $20 discount. But in September Brent started moving below $100 and now stands at $90 a barrel, and the spread over U.S. domestic crude has narrowed. Here I take a look at some of the factors behind these developments. ...

                                                                                                  One factor has been weakness in Europe and Japan, which means lower demand for commodities as well as a strengthening dollar. ...

                                                                                                  In terms of factors specific to the oil market, one important development has been the recovery of oil production from Libya. ...

                                                                                                  But the biggest story is still the United States. Thanks to horizontal drilling to get oil out of tight underground formations... Just how low the price can go before some of the frackers start to drop out is subject to some debate. ...

                                                                                                    Posted by on Sunday, October 12, 2014 at 08:51 AM in Economics, Oil | Permalink  Comments (21)


                                                                                                    'The Great Mortgaging'

                                                                                                    "This column turns to economic history to investigate whether the financial sector is too big":

                                                                                                    The great mortgaging, by Òscar Jordà, Alan Taylor, Moritz Schularick, Vox EU: Understanding the causes and consequences of the rise of finance is a first order concern for macroeconomists and policymakers. The increasing size and leverage of the financial sector has been interpreted as an indicator of excessive risk taking1 and has been linked to the increase in income inequality in advanced economies,2 as well as to the growing political influence of the financial industry (Johnson and Kwak 2010). Yet surprisingly little is known about the driving forces behind these trends.
                                                                                                    In our recent research we turn to economic history. We build on our earlier work that first demonstrated the dramatic growth of the balance sheets of financial intermediaries in the second half of the 20th century and how periods of rapid credit growth were often followed by systemic financial crises and severe recessions (Schularick and Taylor 2012, Jordà, Schularick, and Taylor 2013).
                                                                                                    We unveil a new long-run dataset covering disaggregated bank credit for 17 advanced economies from 1870 to today (Jordà, Schularick, and Taylor 2014). The new data allow us to delve much deeper than has been previously possible into the forces driving the growth of finance. For the first time we can construct the share of mortgage loans in total bank lending for most countries back to the 19th century. In addition, we can calculate the share of bank credit to business and households for most countries for the decades after WW2, and back to the 19th century for a handful of countries. ...
                                                                                                    In the second half of the 20th century, banks and households have been heavily leveraging up through mortgages. Mortgage credit on the balance sheets of banks has been the driving force behind the increasing financialisation of advanced economies. Our research shows that this great mortgaging has been a major influence on financial fragility in advanced economies, and has also increasingly left its mark on business cycle dynamics.

                                                                                                    [There is quite a bit more discussion and evidence in the article.]

                                                                                                      Posted by on Sunday, October 12, 2014 at 08:34 AM Permalink  Comments (13)