- Can Investigative Journalism Overcome the Rational Ignorance? - ProMarket
- The difficult school-to-work transition for high-school dropouts - VoxEU
- What’s Wrong with the Price-Specie-Flow Mechanism? Part I - Uneasy Money
- Sibling spillovers - VoxEU
- A Legal Setback for the Fed - George Selgin
- The spanning hypothesis and risk premia in long-term bonds - VoxEU
- Capital inflows: The good, the bad, and the bubbly - VoxEU
- Risk, return, and skill in the portfolios of the wealthy - VoxEU
- Government Policy and Labor Productivity - Stanley Fischer
Saturday, July 08, 2017
Friday, July 07, 2017
A Solid Employment Report: The headline jobs number was above expectations, and there were combined upward revisions to the previous two months. And the unemployment increased slightly.
In June, the year-over-year change was 2.24 million jobs. This is decent year-over-year job growth.
Note that June has been the strongest month for job growth over the three previous years, followed by July and November. This is the 4th consecutive solid job gain in June: 304 thousand in June 2014, 206 in June 2015, 297 thousand in June 2016, and now 222 thousand in June 2017. ...
Conservatives "keep scaling new heights of dishonesty in their attempt to sell their reverse-Robin Hood agenda":
Attack of the Republican Decepticons, by Paul Krugman, NY Times: Does anyone remember the “reformicons”? A couple of years back there was much talk about a new generation of Republicans who would ... move their party off its cruel and mindless agenda of tax cuts for the rich and pain for the poor, bringing back the intellectual seriousness that supposedly used to characterize the conservative movement.
But the rise of the reformicons never happened. What we got instead was the (further) rise of the decepticons..., conservatives who keep scaling new heights of dishonesty in their attempt to sell their reverse-Robin Hood agenda.
Consider ... Republican leaders’ strategy on health care..., here are a few low points. ...
Despite encountering some significant problems, the Affordable Care Act has ... extended health insurance to millions of Americans... And these numbers translate into dramatic positive impacts on real lives. ...
How do Republicans argue against this success? You can get a good overview by looking at the Twitter feed of Tom Price,... secretary of health and human services...
First, he points to the fact that fewer people than expected have signed up on the exchanges ... and portrays this as a sign of dire failure. But a lot of this shortfall is the result of good news: Fewer employers than predicted chose to drop coverage and shift their workers onto exchange plans. ...
Second, he points to the 28 million U.S. residents who remain uninsured... But nobody expected Obamacare to cover everyone... And you have to wonder how Price can look himself in the mirror ... when his own party’s plans would vastly increase the number of uninsured.
Which brings us to Republicans’ efforts to obscure the nature of their own plans. ...
On one side, they claim that a cut is not a cut, because dollar spending on Medicaid would still rise over time. ...
On the other side ... senior Republicans ... dismiss declines in the number of people with coverage as no big deal, because they would represent voluntary choices not to buy insurance.
How is this supposed to apply to the 15 million people the C.B.O. predicts would lose Medicaid? ...
Political spin used to have its limits: Politicians who wanted to be taken seriously wouldn’t go around claiming that up is down and black is white.
Yet today’s Republicans hardly ever do anything else. It’s not just Donald Trump: The whole G.O.P. has become a post-truth party. And I see no sign that it will ever improve.
Thursday, July 06, 2017
Employment Report Coming Up, by Tim Duy: The BLS will release the June employment report tomorrow. Wall Street is looking for an NFP gain of 170k. That sounds about right to me:
There may be an upside surprise if the May number was low due to new college graduates not yet on the payroll during the survey week.
The Fed believes this pace of job growth would be consistent with further downward pressure on the unemployment rate, keeping them stuck between concerns they will overheat the economy by undershooting the natural rate of unemployment and that pesky low inflation number. With that in mind, Wall Street anticipates the unemployment rate holds steady at 4.3%, which would likely only provide temporary relief for the Fed. They would be more willing to slow the pace of rate hikes if the unemployment rate held steady and the pace of job growth slowed to something closer to 100k per month. If that happens by the end of the year and inflation remains tepid, I anticipate the Fed would pull back on rate hike expectations for 2018.
That said, my baseline expectation is that economic growth proves sufficient to place further downward pressure on unemployment, leaving the Fed stuck in their current conundrum.
Last but not least, the Fed will be carefully watching measures of wage growth. Wage growth softened in recent months, suggesting that the goal of full employment remains elusive. That said, some of that weakness might be the delayed impact of flattening unemployment in 2016. Hence, the impact of lower unemployment this year on unemployment might still lie ahead. Firming to accelerating wage growth would signal to the Fed that the economy is indeed at full employment as many policymakers suspect. Such confirmation would enable them to dig in their heels on expected rate hikes.
- Voter Data Request Is Illegal, not Just Controversial - Regulatory Review
- Someday Congress Won't Raise the Debt Ceiling - Narayana Kocherlakota
- The Case for Housing Finance Reform - Jerome Powell
- Austerity Confusion, or why the Tories are trapped by austerity - mainly macro
- A review of labor market conditions - FRED Blog
- Who fears losing their job to AI and robots: Japanese survey data - VoxEU
- Foreign banks and the international transmission of monetary policy - VoxEU
- Never mind the flatness of the observed Phillips Curve - Nick Rowe
- A New Deal for the 21st Century - Yanis Varoufakis
- Money tree economics - Stumbling and Mumbling
- Fed Officials Are Divided Over When to Reduce Its Debt Holdings - NYTimes
- Freedom of Information Request - Jayson Lusk
- Transition to clean technology - VoxEU
- Growing, shrinking, and long-run economic performance - VoxEU
Wednesday, July 05, 2017
People sometimes post their reading lists. So, well, -- hesitant -- but these are the books I read in the last year or so. My favorite was A First Course in String Theory. Ha. That one took me a few months, but it was cool to learn. Last one I read was "Salt." How did I now know how important salt was in history? One before that was Stuff and Money in the Time of the French Revolution -- didn't agree with everything, but fascinating.
- Salt: A World History
- Stuff and Money in the Time of the French Revolution
- Destiny of the Republic: A Tale of Madness, Medicine and the Murder of a President
- King Leopold's Ghost: A Story of Greed, Terror, and Heroism in Colonial Africa
- The Norman Conquest: The Battle of Hastings and the Fall of Anglo-Saxon England
- Children of Paradise: The Struggle for the Soul of Iran
- Red Plenty
- Cadillac Desert
- Spain in Our Hearts: Americans in the Spanish Civil War, 1936–1939
- Golden Hill
- Sapiens: A Brief History of Humankind
- Hittites: A Powerful Ancient Civilization
- 1493: Uncovering the New World Columbus Created
- American Heiress: The Wild Saga of the Kidnapping, Crimes and Trial of Patty Hearst
- To End All Wars: A Story of Loyalty and Rebellion, 1914-1918
- The Warmth of Other Suns: The Epic Story of America's Great Migration
- The Power and Independence of the Federal Reserve
- Too Like the Lightning: A Novel (Terra Ignota)
- Seven Surrenders: A Novel (Terra Ignota)
- The Curious Incident of the Dog in the Night-Time
- A Short History of Nearly Everything
- Deep Down Things: The Breathtaking Beauty of Particle Physics
- The Fabric of the Cosmos: Space, Time, and the Texture of Reality
- A First Course in String Theory
- From Eternity to Here: The Quest for the Ultimate Theory of Time
- The Grand Design
- The Hidden Reality: Parallel Universes and the Deep Laws of the Cosmos
- How the Hunt for the Higgs Boson Leads Us to the Edge of a New World
- The Standard Model, the Unsung Triumph of Modern Physics
- Public Spheres for the Trump Age - J. Bradford DeLong
- The Global Growth Slump: Causes and Consequences - FRBSF
- The IMF’s Flexible Credit Line - Capital Ebbs and Flows
- Why Not Taxation and Representation? - Tim Taylor
- Morphogenesis and social norms - Understanding Society
- On the joint evolution of institutions and culture - VoxEU
Tuesday, July 04, 2017
- Economics of the populist backlash - Dani Rodrik
- Kansas or California? - Laura Tyson and Lenny Mendonca
- Is social graph portability workable? - Digitopoly
- Regulating the Credit Rating Agencies? - Cecchetti & Schoenholtz
- New data on global earnings inequality - VoxEU
- Was Neoliberal Overreach Inevitable? - mainly macro
- Central Bank Balance Sheets: Past, Present and Future - Bank Underground
- Occupational licensing in the Japanese labour market - VoxEU
- Literature of Disillusionment - Economic Principals
Monday, July 03, 2017
"If we start breaking those rules, others will too":
Oh! What a Lovely Trade War, by Paul Krugmn, NYTimes: ...Axios reports that the White House believes that Trump’s base “likes the idea” of a trade war, and “will love the fight.”
Yep, that’s a great way to make policy.
O.K., so what’s complicated about trade policy?
First, a lot of modern trade is in intermediate goods — stuff that is used to make other stuff. A tariff on steel helps steel producers, but it hurts downstream steel consumers like the auto industry. So even the direct impact of protectionism on jobs is unclear.
Then there are the indirect effects, which mean that any job gains in an industry protected by tariffs must be compared with job losses elsewhere. Normally, in fact, trade and trade policy have little if any effect on total employment. They affect what kinds of jobs we have; but the total number, not so much. ...
Then there’s the response of other countries. International trade is governed by rules — rules America helped put in place. If we start breaking those rules, others will too...
And it’s foolish to imagine that America would “win” such a war. ... Anyway, trade isn’t about winning and losing: it generally makes both sides of the deal richer, and a trade war usually hurts all the countries involved.
I’m not making a purist case for free trade here. Rapid growth in globalization has hurt some American workers, and an import surge after 2000 disrupted industries and communities. But a Trumpist trade war would only exacerbate the damage, for a couple of reasons.
One is that globalization has already happened, and U.S. industries are now embedded in a web of international transactions. So a trade war would disrupt communities the same way that rising trade did in the past. There’s an old joke about a motorist who runs over a pedestrian, then tries to fix the damage by backing up — running over the victim a second time. Trumpist trade policy would be like that.
Also, the tariffs now being proposed would boost capital-intensive industries that employ relatively few workers per dollar of sales; these tariffs would, if anything, further tilt the distribution of income against labor.
So will Trump actually go through with this? He might. ...
Trump’s promises on trade, while unorthodox, were just as fraudulent as his promises on health care. In this area, as in, well, everything, he has no idea what he’s talking about. And his ignorance-based policy won’t end well.
I am here today and tomorrow:
Applications of Behavioural Economics, and Multiple Equilibrium Models to Macroeconomic Policy
Conference 3-4 July 2017 at the Bank of England
Monday 03 July
09:00 - 09:35 Introduction and Welcome
Victoria Saporta, Executive Director, Bank of England
09:35 - 10:30: Keynote Address: Do Low Interest Rates Punish Savers’?
James Bullard, President, FRB of St. Louis
10:30 - 11:25 Endogenous Regime Shifts in a New Keynesian Model with a Time varying Natural Rate of Interest
Kevin Lansing, FRB of San Francisco
Discussant: Giovanni Ricco, University of Warwick
11:25 - 11:55 Tea Break
11:55 - 12:50 Animal spirits in a monetary model
Konstantin Platonov, University of California Los Angeles
Discussant: Stephanie Schmitt-Grohé, Columbia University
12:50 - 14:00 Lunch
14:00 - 14:55 A Behavioral New Keynesian Model
Xavier Gabaix, Harvard University
Discussant: Martin Ellison, University of Oxford
14:55 - 15:50 Informative social interactions
Hector Calvo, Pardo University of Southampton
Discussant: Nora Wegner, Bank of England
15:50 - 16:20 Tea Break
16:20 - 17:15 History Dependence in UK Housing Market
Philippe Bracke, Bank of England
Discussant: Alan Taylor, University of California
17:15 - 18:10 Macroprudential policy in an agent based model of the UK housing market
Arzu Uluc, Bank of England
Discussant: Paolo Gelain, Norges Bank
18:30 Networking Reception
19:30 Dinner (By Invitation Only)
Speaker: Andy Haldane, Chief Economist, Bank of England
Tuesday 04 July
09:30 - 10:25 U.S. Monetary Policy in the Post-war Period
Giovanni Nicoló, University of California Los Angeles
Discussant: Ana Galvao, University of Warwick
10:25 - 11:20 The Inverted Leading Indicator Property and Redistribution Effect of the Interest Rate, Patrick Pintus, University of Aix-Marseile and Banque de France
Discussant: Kaushik Mitra, University of Birmingham
11:20 - 11:50 Tea Break
11:50 - 12:45 Systemic Bank Panics in Financial Networks
Zhen Zhou, Tsinghua University
Discussant: Sujit Kapadia, Bank of England
12:45 - 13:45 Lunch
13:45 - 14:40 Divergent Risk Attitudes and Endogenous Collateral Constraints
Ester Faia, University of Frankfurt
Discussant: Daisuke Ikeda, Bank of England
14:40 - 15:35 Expectations, Stagnation and Fiscal Policy
George Evans, University of Oregon
Discussant: Thomas Hintermaier, University of Bonn
15:35 - 16:05 Tea Break
16:05 - 17:00 Inflation targets and the zero lower bound in a behavioural macroeconomic model
Paul De Grauwe, London School of Economics
Discussant: Laura Povoledo, University of the West of England
17:00 - 17:05 Introduction
Roger Farmer, University of Warwick and Research Director: NIESR
17:05 - 18:00 Keynote Address: Forward Guidance when Planning Horizons are Finite
Michael Woodford, Columbia University
18:00 Conference Closes
Sunday, July 02, 2017
- Trump and the Truth About Climate Change- Joseph Stiglitz
- Are we in a new inflation regime? - Econbrowser
- The simplicity of views regarding civil conflicts - Branko Milanovic
- The future of the techno-market economy - Understanding Society
- The deterrence effect of whistleblowing - VoxEU
- Automation and jobs - John Cochrane
- Monopoly/monopsony power and hungriness for sales/purchases - Nick Rowe
- A completely pointless amendment - mainly macro
- On the measuring and mis-measuring of Chinese growth - VoxEU
- The Return of Peasant Mentality? - Dietrich Vollrath
- "Information Is a Public Good" - ProMarket
- The Role of Central Bank Lending Facilities in Monetary Policy - Liberty Street
Friday, June 30, 2017
What's the driving force behind the Republican's "ugly health plan":
Understanding Republican Cruelty, by Paul Krugman, NY Times: The basics of Republican health legislation ... are easy to describe: Take health insurance away from tens of millions, make it much worse and far more expensive for millions more, and use the money thus saved to cut taxes on the wealthy. ...
The puzzle ... is why the party is pushing this harsh, morally indefensible agenda.
Think about it. Losing health coverage is a nightmare, especially if you’re older, have health problems and/or lack the financial resources to cope if illness strikes. ...
Meanwhile, taxes that fall mainly on a tiny, wealthy minority would be reduced or eliminated. These cuts would be big in dollar terms, but because the rich are already so rich, the savings would make very little difference to their lives. ...
Which brings me back to my question: Why would anyone want to do this?
I won’t pretend to have a full answer, but I think there are two big drivers — actually, two big lies — behind Republican cruelty on health care and beyond.
First..., Republicans spent almost the entire Obama administration railing against the imaginary horrors of the Affordable Care Act — death panels! — repealing Obamacare was bound to be their first priority.
Once the prospect of repeal became real, however, Republicans had to face the fact that Obamacare, far from being the failure they portrayed, has done what it was supposed to do...
So one way to understand this ugly health plan is that Republicans, through their political opportunism and dishonesty, boxed themselves into a position that makes them seem cruel and immoral — because they are.
Yet that’s surely not the whole story, because Obamacare isn’t the only social insurance program that does great good yet faces incessant right-wing attack. Food stamps, unemployment insurance, disability benefits all get the same treatment. Why?
As with Obamacare, this story began with a politically convenient lie — the pretense ... that social safety net programs just reward lazy people who don’t want to work. And we all know which people in particular were supposed to be on the take.
Now, this was never true..., some of the biggest beneficiaries of these safety net programs are members of the Trump-supporting white working class. ...
So what will happen to this monstrous bill? I have no idea. Whether it passes or not, however, remember this moment. For this is what modern Republicans do; this is who they are.
- Thoughts on Improving Academic Journals - Douglas Campbell
- Selecting for groupthink - Stumbling and Mumbling
- Economists and the Euro: for the record - mainly macro
- The hype, reality, and causes of the global trade slowdown - VoxEU
- Macro Model Comparison Research Takes Off - John Taylor
- Markups in a monopolistically competitive macroeconomy - Nick Rowe
- The Future of Countercyclical Regulation - The Regulatory Review
- Monetary policy, credit, and economic activity in developing countries - VoxEU
- The E.U.’s Antitrust Fine Against Google - Adam Davidson
Thursday, June 29, 2017
- Incomplete Contracts (Video) - Oliver Hart
- Political Interests Play a Major Role in Bank Bailouts- ProMarket
- Who Does Business Represent? - Ricardo Hausmann
- Wind Power a Growing Force in Oil Country - Dallas Fed
- A “dark side” to the commodity boom in Africa - AEA
- Comments on Profit and Capital - EconoSpeak
- Market Liquidity after the Financial Crisis - Liberty Street Economics
- Spillovers of Fiscal Consolidations in the Euro Area - Unassuming Economist
Wednesday, June 28, 2017
Daniel Carroll and Nick Hoffman of the Cleveland Fed:
New Data on Wealth Mobility and Their Impact on Models of Inequality: Wealth inequality, the unequal distribution of assets across households, has been rising for decades. However, this statistic alone gives an incomplete picture of the inequality of households’ economic experiences and opportunities. A fuller understanding comes from also knowing how much movement within the distribution households experience over time. For instance, is it likely that someone with low wealth today will be a wealthy person at some point in the future, or are they rigidly stuck at the bottom? In other words, a fuller understanding of households’ economic opportunity comes from a combination of data on both wealth inequality and wealth mobility.
This Commentary explores the topic of wealth mobility in the United States during the past three decades (see Carroll and Chen 2016 for similar work on income inequality and mobility). Examining supplemental data from the Panel Study of Income Dynamics (PSID), which track families’ wealth over time, we calculate changes in relative wealth mobility; that is, how likely families are to move up or down the wealth distribution, relative to one another. We find that wealth mobility has declined since the 1980s, a trend that is robust to a wide range of measures. Finally, we identify savings behaviors that are associated with more mobile families. Such behaviors may explain the disparity between observed levels of mobility and the levels predicted by the standard model used to study inequality. ...
Conclusion Wealth mobility depends on luck and household choices. It is a reflection of households’ opportunities as well as their responses to those opportunities. Panel data from the past 30 years show a decline in wealth mobility across several measures. It appears that families are less likely to change wealth quintiles over time, while those that do move are less likely to move very far. The reasons for these trends are not fully known, but increasing wealth inequality has contributed to the decline. Families that do make large movements through the wealth distribution appear to be more likely to own some form of a risky asset, as compared to families that do not make large movements.
Why libertarians should read Marx: Kristian Niemietz says he can’t be bothered to read Marx. Can I try and convince him otherwise?
For one thing, I suspect libertarians like him would be surprised by a lot of Marx. There’s astonishingly little in Marx about a centrally planned economy: if you want an argument for central planning, you should read that hero of the right, Ronald Coase instead (pdf). Marx was admiring of capitalism in some respects. It has, he wrote, given “an immense development to commerce” and has “accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals.” And I think you’d be surprised by just how much attention Marx paid to the facts: once you get past the first few chapters, there’s massive empirical work in Capital volume I*. And there are many differences between Marx and social democrats – not least of them being that Marx was no statist.
What’s more, many of the ideas associated with Marx were largely elaborations of his predecessors: Paul Samuelson called him a “minor post-Ricardian”. The labour theory of value, the interest in the division of income between classes and the idea of a falling rate of profit are all as Ricardian as Marxian. (The falling rate of profit (pdf) might be a good explanation for our recent slow growth and lack of capital spending, but let that pass).
I reckon there are three reasons libertarians should read Marx.
One is that Marx saw economics as a historical process. For him, one of the big questions was: “where did that come from?” ...
A second reason for libertarians to read Marx lies in his view of the relationship between property rights and technical progress...
A third reason to read Marx lies in his attitudes to freedom. ...
In short, then, libertarians should read Marx because he poses them some questions which should sharpen their thinking. How can we defend property rights at the same time as defending a system which came into being by denying those rights? What material conditions are necessary for people to support freedom? How will new technologies shape our beliefs? Do current market structures (which are of course determined by the state) really maximize development? If not, how can they change? Do actually-existing markets merely enhance formal freedom, or are they conducive to the substantive freedom that Marx wanted? Can they be made more conducive? Are markets really a realm of freedom, or a means through which some exploit and oppress others? And so on.
If you look past tribal caricatures, perhaps libertarian thinking will be enriched by a consideration of Marx’s work.
* You should start Capital vol I at chapter 10, and read the first nine chapters last.
- An Assessment of Financial Stability in the United States - Stanley Fischer
- China’s WTO entry benefits US consumers - VoxEU
- Sociology of life expectations - Understanding Society
- When Cutting Access to Health Care, There’s a Price to Pay - NYTimes
- When capturing the middle ground works or fails - mainly macro
Tuesday, June 27, 2017
- When Growth is not Enough - Ben S. Bernanke
- Unemployment insurance and reservation wages - VoxEU
- Has the Dollar Become More Sensitive to Interest Rates? - FRBSF
- CBO: Senate Bill Would Raise Premiums, Deductibles, or Both for Most - CBPP
- Assessing Global Imbalances: The Nuts and Bolts – Maurice Obstfeld
Monday, June 26, 2017
From the AEA research highlights:
An empirical turn in economics research: Over the past few decades, economists have increasingly been cited in the press and sought by Congress to give testimony on the issues of the day. This could be due in part to the increasingly empirical nature of economics research.
Aided by internet connections that allow datasets to be assembled from disparate sources and cheap computing power to crunch the numbers, economists are more and more often turning to real-world data to complement and test theoretical models.
This trend was documented in a 2013 article from the Journal of Economic Literature...
In the spirit of empirical inquiry, the authors of a study appearing in the May issue of the American Economic Review: Papers & Proceedings used machine learning techniques to expand this analysis to a much larger set of 135,000 papers published across 80 academic journals cited frequently in the American Economic Review. ...
The ... prevalence of empirical work as determined by the authors’ model has been rising across fields since 1980. The authors note that the empirical turn is not a result of certain more empirical fields overtaking other more theoretical ones, but instead every field becoming more empirically-minded.
Will Macron’s Marchers take power?: With over 350 seats, the MPs elected on the « La république en marche » (LREM) ticket will have an overwhelming majority in the Assemblée Nationale (Parliament). Will they use it to be in the forefront of reform and renewal of French politics? Or will they simply play a passive role, rubber stamping and obediently voting the texts that the government sends them?
It happens that they will shortly be faced with their first real-life test with the question of deduction of income tax at source. The government wishes to postpone the implementation until 2019, perhaps forever, for reasons which are totally opportunist and unjustified. This big step backwards is bad news for the alleged intention to reform and modernise the French fiscal and social system proclaimed by the new government (a general intention that is unfortunately rather vague once we enter into the details: see What reforms for France), and leads us to fear the worst for what is to come. Now, contrary to what has been stated, the government cannot take this sort of decision without a vote in Parliament which should therefore take place in the coming days or weeks.
There are two possibilities. Either the LREM MP’s force the government to maintain this crucial reform and its application as from January 2018, as was already voted by the outgoing Parliament in the autumn of 2016 in the context of the 2017 Finance Act. It will then be clear that the new MP’s are ready to play their role fully in future reforms and oppose the executive when necessary. The other option is to follow in the steps of the conservatism of the government, which, unfortunately, seems to be the most likely outcome. This would alert us to the fact that with this new majority and this new authority we are dealing with reformers who are mere paper tigers. ...
Alex Haberis, Richard Harrison and Matt Waldron at Bank Underground:
The Forward Guidance Paradox: In textbook models of monetary policy, a promise to hold interest rates lower in the future has very powerful effects on economic activity and inflation today. This result relies on: a) a strong link between expected future policy rates and current activity; b) a belief that the policymaker will make good on the promise. We draw on analysis from our Staff Working Paper and show that there is a tension between (a) and (b) that creates a paradox: the stronger the expectations channel, the less likely it is that people will believe the promise in the first place. As a result, forward guidance promises in these models are much less powerful than standard analysis suggests. ...
- What Was the Industrial Revolution? - NBER
- Recent Developments in Cointegration - Dave Giles
- The falling elasticity of global trade to economic activity - VoxEU
- Low Productivity Growth: The Capital Formation Link - Liberty Street Economics
- Understanding Income Risk: New Insights from Big Data - FRB Minneapolis
- How to Ensure the Crisis Provision of Safe Assets - Cecchetti & Schoenholtz
- The Disappointing Recovery of Output after 2009 - NBER
- The Challenge of Electrifying Africa - Tim Taylor
- On political salience - Stumbling and Mumbling
- The Positive Side of More Jobs Regulation - Justin Fox
- Composition effect in Canadian earnings and education - Stephen Gordon
Sunday, June 25, 2017
From Vox EU:
W. Arthur Lewis and the tradeoffs of economics and economists, by Ravi Kanbur, VoxEU: There is nothing new under the sun. The passionate political economy discourses of today consume us entirely. But they are in fact perennials, broaching the fundamental questions of economic policy that have ruled supreme since economics gained an independence of sorts from moral philosophy 250 years ago.1 The nature of market failure, the case for government intervention on grounds of efficiency and equity, and the interplay between economic and political forces are some of the tracks on which discourses have run for generations. The life and work of W. Arthur Lewis, winner of the 1979 Nobel Prize in economics, is a testament to the tradeoffs of economics, and of economists.
Arthur Lewis was born in the British West Indies in 1915. He won a scholarship to study at the London School of Economics, graduating with first class honours in 1937.2 And yet Lewis’s path was not entirely smooth. Even at the LSE, an institution founded by Fabian socialists, he faced the racism that he also met in the streets of London. When he was considered for a temporary one year appointment at the LSE in 1938, the Director of the LSE wrote to the Board of Governors that: “The appointments committee is, as I said, quite unanimous but recognise that the appointment of a coloured man may possibly be open to some criticism. Normally, such appointments do not require confirmation of the Governors but on this occasion I said that I should before taking action submit the matter to you” (Tignor 2006: 21).3
Lewis became involved with the burgeoning decolonisation movement in Britain, and consorted with the likes of C L R James, George Padmore, Eric Williams, and Paul Robeson. The 1930s and 1940s were a period of ferment not just on the decolonisation front. Economic policy in general was under discussion and dispute. From Cambridge, John Maynard Keynes had excited a generation of students with his critiques of ‘the Treasury View’ in the face of massive and persistent unemployment. Arthur Lewis was Keynesian in macroeconomic matters, but also more interventionist in microeconomic and structural policy. This set him against Sydney Caine, an influential official in the Colonial Office, in the work of the Colonial Economic Advisory Committee, on which Lewis served. Lewis described Caine as “a religious devotee of laissez-faire, and his headship of the Economic Department at this juncture is fatal” (Mine 2006).
In 1951, Kwame Nkrumah won a sweeping victory in the elections in the British colony of the Gold Coast (soon to become the independent country of Ghana) and in 1952 Lewis was invited by Nkrumah to write a report on industrialisation (Lewis 1953).4 At this very time, Lewis was fashioning his Nobel Prize winning argument on ‘surplus labour’, which he argued was the state of affairs in the West Indies, in Egypt, and in India (Lewis 1954). In these situations, the main brake on development was inadequate investment in manufacturing, and to the extent that this investment was held back by market failures in the manufacturing sector, the government should intervene to address them.
However, Lewis’s thrust in his report was that the Gold Coast, unlike India, did not present a situation of surplus labour. Rather, it was one of labour shortages given the large amount of land available in agriculture. In this situation the way of releasing labour for manufacturing, without pushing up wages so much that investment would be choked off, was to increase agricultural productivity. In labour shortage economies, that would have been priority number one. The Gold Coast industrialisation report revealed the evolving balance of Arthur Lewis as the economist. Identify the nature of the market failure first, then design the intervention.
Arthur Lewis was present in Accra for the celebrations when the Gold Coast became Ghana on 6 March 1957.5 But he was to return in October of 1957 for a fateful stint as the government’s chief economic adviser, at the invitation of Kwame Nkrumah. His 15 months as resident adviser in Ghana were tumultuous. There were some policy areas in which he sided with the government and Nkrumah. Perhaps the most famous of these is his general agreement that the surpluses from the cocoa price boom should be collected by the government and used for development purposes rather than passed through to cocoa farmers, a view very different from positions being advanced by Bauer (1954) at that time. However, in the main Lewis clashed with Nkrumah, especially on various ‘white elephant’ projects that were being considered and approved, many of them in the name of industrialisation.
The letters of this time provide a real insight into the clash between the economist and the politician. After a series of attempts by Lewis to intervene in the drafting on the Five Year Plan, his verdict on the plan was that it made “inadequate provision for some essential services while according the highest priority to a number of second importance….Alas, the main reason for this lack of balance is that the plan contains too many schemes on which the Prime Minister is insisting for ‘political reasons’” (Tignore 2006: 167). Nkrumah’s responses to Lewis were to be expected from a man who had famously said “seek ye the political kingdom first”. In an exchange that brought to a head Lewis’s decision to leave his post as economic adviser, Nkrumah emphasised “political decisions which I consider I must take. The advice you have given me, sound though it may be, is essentially from the economic point of view, and I have told you, on many occasions, that I cannot always follow this advice as I am a politician and must gamble on the future” (Tignor 2006: 173).
How can one explain the seeming contradictions in Lewis? On the one hand was the critic of laissez-faire economic policies, whom the radical anti-colonialists expected to be on their side. On the other was the economist who acted as a check on the extreme statist interventions proposed by this same tendency in economic policy discourse, arguing against heavy state subsidy to industry on purely economic grounds, even leaving aside its propensity for corruption and use as political patronage.
As a student, Lewis must have read John Maynard Keynes’s clarion call in his essay “The End of Laissez Faire” (Keynes 1926).6 This was, seemingly, a call to abandon the tenets of 19th century economic liberalism in favour of a more interventionist credo – “let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded” (Keynes 1926: 287-8). This is Keynes presaging the Lewis of the 1930s and 1940s railing against Sydney Caine and his laissez-fair policies for the colonies. And yet in the same essay Keynes hints at a different world view, a more nuanced perspective on state intervention:
“We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed ʹone of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion’” (p. 288-91).
How like Lewis, or rather how like the economist Lewis became in Ghana.7 I have argued elsewhere that Edmund Burke’s question is the eternal question of political economy and accounts for the cycles of thought in economics (Kanbur 2016). This is what allowed Lewis to support some industrial intervention in his first report on the Gold Coast, while at the same time asserting the primacy of agricultural development. It is what allowed him to support substantial taxation of cocoa while at the same time railing at the (economic and political) misuse of the funds so raised. That was Arthur Lewis in Ghana, but it was Arthur Lewis all along. It has also been political economy all along, and will continue to be so.
Aryeetey, E, and R Kanbur (eds.), The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.
Bauer, P (1954), West African Trade: A Study of Competition, Oligarchy, and Monopoly in a Changing Economy, Cambridge University Press.
Kanbur, R (2016), “The End of Laissez Faire, The End of History and The Structure of Scientific Revolutions”, Challenge, 59 (1), 35-46.
Kanbur, R (2017), “W. Arthur Lewis and the Roots of Ghanaian Economic Policy”, In E Aryeetey and R Kanbur (eds.) The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.
Keynes, J M (1926), “The End of Laissez-Faire”, in The Collected Writings of John Maynard Keynes, Volume IX, Essays in Persuasion, Royal Economic Society, Palgrave MacMillan, 1972.
Lewis, W A (1953), Report on Industrialization of the Gold Coast, Accra.
Lewis, W A (1954), “Economic Development with Unlimited Supplies of Labour”, Manchester School, 22 (2), 139-191.
Mine, Y (2006), “The Political Element in the Works of W. Arthur Lewis: The 1954 Lewis Model and African Development”, The Developing Economies, XLVI-3, 329-355.
Tignor, R L (2006), W. Arthur Lewis and the Birth of Development Economics, Princeton University Press.
 The conventional dating for this is of course the publication of Adam Smith’s Wealth of Nations in 1776.
 I draw liberally on the comprehensive and excellent biography by Tignor (2006).
 Tignor (2006: 37) also recounts the story of how, despite his by then brilliant academic qualifications, his appointment to a Chair at Liverpool was blocked for reasons of “other considerations than high academic standing.” Finally, however, he did get his Chair, the Stanley Jevons Chair at the University of Manchester in 1948.
 Lewis’s transmittal letter on the report, written to Minister of Commerce and Industry K A Gbedemah and dated 5th June, 1953, notes the details of the assignment: “I have the honour to transmit herewith my Report on industrialization and economic policy, which I was commissioned to write by letter No. MCI/C,16/SF.3/18 from your Ministry, dated November 29, 1952. I visited the Gold Coast from December 15th, 1952, to January 4th, 1953, and travelled extensively in the country, covering about 1,800 miles by road and by air. I had the opportunity of visiting many industrial establishments, and I discussed the subject with as many persons as possible in the time available.” (Lewis, 1953, p. i).
 For an assessment of Ghana’s economy in the sixty years since independence, see Aryeetey and Kanbur (2017).
 For an assessment of this essay in the broader context of the evolution of economic thought, see Kanbur (2016).
 Tignor (2006) and Kanbur (2017) further discuss Lewis’s post-Ghana life and work.
- Working but poor - Lane Kenworthy
- 'Magical' warfare technologies and the persistence of false beliefs - VoxEU
- A case against austerity - Stumbling and Mumbling
- Brexiteers versus Economists one year on - mainly macro
- Financial constraints and nominal rigidities - VoxEU
- Central Clearing and Liquidity - Jerome H. Powell
- Unit Roots & Structural Breaks - Dave Giles
- The Credit Crisis and the crisis in UK politics - Tim Johnson
- Tobacco Taxes in Low- and Middle-Income Countries - Tim Taylor
Friday, June 23, 2017
Pure Class Warfare, With Extra Contempt: The Senate version of Trumpcare – the Better Care Reconciliation Act – is out. The substance is terrible: tens of millions of people will experience financial distress if this passes, and tens if not hundreds of thousands will die premature deaths, all for the sake of tax cuts for a handful of wealthy people. What’s even more amazing is that Republicans are making almost no effort to justify this massive upward redistribution of income. They’re doing it because they can, because they believe that the tribalism of their voters is strong enough that they will continue to support politicians who are ruining their lives.
In this sense – and in only this sense – what we’re seeing now is a departure from previous Republican practice.
In the past, laws that would take from the poor and working class while giving to the rich came with excuses. Tax cuts, their sponsors declared, would unleash market dynamism and make everyone more prosperous. Deregulation would increase efficiency and lower prices. It was all voodoo; the promises never came true. But at least there was some pretense of working for the common good.
Now we have none of this. This bill does nothing to reduce health care costs. It does nothing to improve the functioning of health insurance markets – in fact, it will send them into death spirals by reducing subsidies and eliminating the individual mandate. There is nothing at all in the bill that will make health care more affordable for those currently having trouble paying for it. And it will gradually squeeze Medicaid, eventually destroying any possibility of insurance for millions. ...
But Republican leaders believe that their voters are tribal enough, sufficiently walled off from information, that they’ll ignore the attack on their lives and keep voting R – indeed, that as they lose health care, get hit with crushing out-of-pocket bills, see their friends and neighbors face ruin, they’ll blame it on Democrats.
I wish I were sure that this belief was false.
In Long Run, There’s No Such Thing as an Einstein Investor, NY Times: There are no easy answers in investing. It is tempting to replicate a successful strategy — one created by an outstanding investor, like Warren Buffett, or through in-depth statistical analysis of the wisdom of crowds — and such approaches can actually work for long periods.
But paint-by-number portfolios won’t succeed forever. And without deep expertise, it makes little sense to veer much from a simple market portfolio — one that seeks to match the overall performance of the market, and not beat it.
These reflections are prompted by the television series “Genius” (based on the Walter Isaacson biography “Einstein: His Life and Universe”)... The series also inspired me to reread Einstein’s own popularization of his theories, in the book “Relativity: The Special and General Theory.”...
- Conversation: David Weil - Equitable Growth
- Development Effects of the Extractive Colonial Economy - A Fine Theorem
- Shedding (night-time) light on the local resource curse - VoxEU
- Cyber attacks: An economic policy challenge - VoxEU
- The Story of Robert Keayne, Protocapitalist - Tim Taylor
- The lack of demand for equality - Stumbling and Mumbling
- Capitalism Can Thrive Without Cooking the Planet - Bloomberg
- Health insurance competition - Microeconomic Insights
- The rise (and fall?) of the cost of education - FRED Blog
- Explanation and critical realism - Understanding Society
Thursday, June 22, 2017
Fed's Labor Market Forecasts Don't Make Sense, by Tim Duy: The Federal Reserve’s unemployment forecast doesn’t add up. It is neither consistent with the median of policy makers’ growth forecasts nor consistent with Chair Janet Yellen’s description of labor market strength. Hence, central bankers will likely find unemployment undershooting their forecast in the second half of 2017. That will keep the central bank in a hawkish mood even if lackluster inflation continues. ...Continued at Bloomberg Prophets...
- Why you should never use the Hodrick-Prescott filter - VoxEU
- Is the Fed being misguided by the Phillips curve? - Equitable Growth
- Intergenerational mobility and preferences for redistribution - VoxEU
- Low Interest Rates and Bank Profits - Liberty Street Economics
- Price manipulation in the Bitcoin ecosystem - VoxEU
- Free markets need equality - Stumbling and Mumbling
- The Wrong Kind of Entrepreneurs Flourish in America - Bloomberg
- UK monetary policy: you cannot be serious? - mainly macro
- Deficits - IGM Forum
Wednesday, June 21, 2017
From the Federal Reserve Bank of Richmond:
Does the Fed Have a Financial Stability Mandate?, by Renee Haltom and John A. Weinberg, FRB Richmond: The 2007–08 financial crisis and the Fed's unprecedented response raised new questions about the Fed's role in maintaining the stability of the U.S. financial system.
Central banks have a natural role in financial stability for several reasons. First, monetary policy affects financial conditions in ways that can contribute to either stability or instability; erratic policy or volatile inflation could be destabilizing, for instance. Second, they obtain and develop insights useful for financial stability policy through the course of their other functions. Third, financial conditions are among the broad set of factors considered by central banks in assessing the state of the economy and the appropriate stance of monetary policy.
But for many central banks, the full scope of what they're expected to do in support of financial stability — the extent to which they have an explicit or implicit financial stability mandate — is ambiguous. This is important because a central bank's policy actions and its responses to developments in the economy and financial markets are shaped by its understanding of its mandate. So the nature of the mandate matters for economic outcomes, market expectations (the ex ante "rules of the game"), and accountability.
One reason this issue is inherently challenging is that there is no single definition of "financial stability." Most recent discussions focus on banking crises like the 2007–08 financial crisis, which tend to feature failures of large or many financial institutions, cascading losses, and government interventions. But central banks also have played a role in other types of financial market disturbances, for example, sharp asset price declines (like the Fed's liquidity assurances after the 1987 stock market crash), sovereign debt crises (like the European Central Bank's role in the recent eurozone crisis), and currency crises (like the Fed's role in Mexico's 1994 bailout).
This challenge is clear in the breadth of a definition for financial stability offered in the latest Purposes and Functions publication from the Board of Governors of the Federal Reserve System: "A financial system is considered stable when financial institutions — banks, savings and loans, and other financial product and service providers — and financial markets are able to provide households, communities, and businesses with the resources, services, and products they need to invest, grow, and participate in a well-functioning economy." The publication further states that a financial system ought to have the ability to do so "even in an otherwise stressed economic environment."1
This Economic Brief takes a descriptive look at the Fed's role in financial stability, including how that role has changed over time, and raises some fundamental questions. ...
(Starts at 7:00 min. The sound is a bit buzzy.)
Tuesday, June 20, 2017
Unions in Decline: Some International Comparisons: Union membership and clout has been dropping in the US economy for decades. But it's not just a US phenomenon: a similar drop is happening in many high-income countries. The OECD Employment Outlook 2017 discussed the evidence in "Chapter 4: Collective Bargaining in a Changing World of Work."
Here are a couple of illustrative figures. ...
The OECD chapter provides a more detailed discussion... But several overall patterns seem clear.
1) Labor union power is weaker just about everywhere.
2) The extent of labor union power varies considerably across countries, many of which have roughly similar income levels. This pattern suggests that existence of unions, one way or another, may be less important for economic outcomes than the way in which those unions function. The chapter notes the importance of "peaceful and cooperative industrial relations," which can emerge--or not--from varying patterns of unionization.
3) In the next few decades, the big-picture question for union workers, and indeed for all workers, is how to adjust their workplace skills and tasks so that they remain valued contributors in an economy characterized by new technologies and global ties. Workers need political representation--whether in the form of unions or in some other form--that goes beyond arguing for near-term pay raises, and considers the difficult problem of how to raise the chances for sustained pay raises and secure jobs into the future.
This is an FRBSF Economic Letter by Jens H.E. Christensen and Glenn D. Rudebusch:
New Evidence for a Lower New Normal in Interest Rates: The general level of U.S. interest rates has gradually fallen over the past few decades. In the 1980s and 1990s, lower inflation expectations played a key role in this decline. But more recently, actual inflation as well as survey-based measures of longer-run inflation expectations have both stabilized close to 2%. Therefore, some researchers have argued that the decline in interest rates since 2000 reflects a variety of persistent economic factors other than inflation. These longer-run real factors—such as slower productivity growth and an aging population—affect global saving and investment and can push down yields by lowering the steady-state level of the short-term inflation-adjusted interest rate (Bauer and Rudebusch 2016 and Williams 2016). This normal real rate is often called the equilibrium or natural or neutral rate of interest—or simply “r-star.”
However, other observers have dismissed the evidence for a new lower equilibrium real rate and downplayed the role of persistent factors. They argue that yields have been held down recently by temporary factors such as the headwinds from credit deleveraging in the aftermath of the financial crisis. So far, this ongoing debate about a possible lower new normal for interest rates has focused on estimates drawn from macroeconomic models and data. In this Economic Letter, we describe new analysis that uses financial models and data to provide an alternative perspective (see Christensen and Rudebusch 2017). This analysis uses a dynamic model of the term structure of interest rates that is estimated on prices of U.S. Treasury Inflation-Protected Securities (TIPS). The resulting finance-based measure provides new evidence that the equilibrium interest rate has gradually declined over the past two decades.
Macro-based estimates of the equilibrium interest rate
The issue of whether there has been a persistent shift in the equilibrium interest rate is quite important. For investors, this short-term real rate of return that would prevail in the absence of transitory disturbances serves as a key foundation for valuing financial assets. For policymakers and researchers, the equilibrium interest rate provides a neutral benchmark to calibrate the stance of monetary policy: Monetary policy is expansionary if the short-term real interest rate lies below the equilibrium rate and contractionary if it lies above. Therefore, determining a good estimate of the equilibrium real rate has been at the center of recent policy debates (Nechio and Rudebusch 2016 and Williams 2017).
Given the significance of the equilibrium interest rate, many researchers have used macroeconomic models and data to try to pin it down. As Laubach and Williams (2016, p. 57) define it, the equilibrium interest rate is based on “a ‘longer-run’ perspective, in that it refers to the level of the real interest rate expected to prevail, say, five to 10 years in the future, after the economy has emerged from any cyclical fluctuations and is expanding at its trend rate.” Laubach and Williams (2003, 2016) estimate this equilibrium interest rate using a simple macroeconomic model and data on a nominal short-term interest rate, consumer price inflation, and the output gap. Similarly, Johannsen and Mertens (2016) and Lubik and Matthes (2015) provide closely related estimates also by using macroeconomic models and data.
The blue line in Figure 1 summarizes the results of these three fairly similar studies. It shows the average of their three estimated equilibrium real interest rates, which smooths across specific modeling assumptions in each study. In the 1980s and 1990s, this simple macro-based summary measure remained around 2½%. This effectively constant equilibrium interest rate is consistent with the conventional wisdom of that time. It is only in the late 1990s that a decided downtrend begins, and the macro-based measure falls to almost zero by the end of the sample.
However, the various macro-based approaches for identifying a new lower equilibrium interest rate have several potential shortcomings. First, these estimates depend on having the correct specification of the complete model, including the output and inflation dynamics. One difficulty in this regard is how to account for the period after the Great Recession when nominal interest rates were constrained by the zero lower bound. During that episode, the link between interest rates and other elements in the economy was altered in ways that are difficult to model. Finally, these estimates use extensively revised macroeconomic data to create historical equilibrium interest rate estimates that would not have been available in real time.
A new finance-based estimate of the equilibrium interest rate
Given the possible limitations of the macro-based estimates, we turn to financial models and data to provide a complementary estimate of the equilibrium interest rate. As detailed in Christensen and Rudebusch (2017), we use the market prices of TIPS, which have coupon and principal payments adjusted for changes in the consumer price index (CPI). These securities compensate investors for the erosion of purchasing power due to price inflation, so they provide a fairly direct reading on real interest rates. We assume that the longer-term expectations embedded in TIPS prices reflect financial market participants’ views about the steady state of the economy including the equilibrium interest rate. Unlike the macro-based estimates, one advantage of this market-based measure is that it can be obtained in real time at a high frequency—even daily. In addition, it doesn’t depend on an uncertain specification of the dynamics of output and inflation. Furthermore, because real TIPS yields are not subject to a lower bound, we avoid complications associated with zero nominal interest rates altogether.
Our analysis focuses on a term structure model that is based only on the prices of TIPS. This choice contrasts with previous TIPS research that has jointly modeled inflation-indexed and standard nominal U.S. Treasury yields (for example, Christensen, Lopez, and Rudebusch 2010). Such joint specifications can also be used to estimate the steady-state real rate—though earlier work has emphasized only the measurement of inflation expectations and risk. However, a joint specification requires additional modeling structure—including specifying an inflation risk premium and inflation expectations. The greater number of modeling elements—along with the requirement that this more elaborate structure remain stable over the sample—raise the risk of model misspecification, which can contaminate estimates of the equilibrium interest rate. By relying solely on TIPS yields, we avoid these complications as well as problems associated with the lower bound on nominal rates.
Still, the use of TIPS for measuring the steady-state short-term real interest rate poses its own empirical challenges. One difficulty is that inflation-indexed bond prices include a real term premium. In addition, despite the fairly large amount of outstanding TIPS, these securities face appreciable liquidity risk resulting in wider bid-ask spreads than nominal Treasury bonds. To estimate the equilibrium rate of interest from TIPS in the presence of liquidity and real term premiums, we use an arbitrage-free dynamic term structure model of real yields augmented with a liquidity risk factor as described in Andreasen, Christensen, and Riddell (2017). The identification of the liquidity risk factor comes from its unique loading for each individual TIPS. This loading assumes that, over time, an increasing proportion of any bond’s outstanding inventory is locked up in buy-and-hold investors’ portfolios. Given forward-looking investor behavior, this lock-up effect implies that a particular bond’s sensitivity to the market-wide liquidity factor will vary depending on how seasoned the bond is and how close to maturity it is. Our analysis uses prices of the individual TIPS rather than the more usual input of yields from fitted synthetic curves. By observing prices from a cross section of TIPS that have different age characteristics, we can identify the liquidity factor. With estimates of both the liquidity premium and real term premium, we calculate the equilibrium interest rate as the average expected real short rate over a five-year period starting five years ahead.
Our finance-based estimate of the natural rate of interest is shown as the green line in Figure 1. These estimates are adjusted slightly upward to account for a persistent 0.23 percentage point measurement bias in CPI inflation. The model uses data back to the late 1990s around the time when the TIPS program was launched. Fortuitously, TIPS were introduced about the same time as the macro-based estimates started to decline, so the available sample is particularly relevant for discerning shifts in the equilibrium real rate. During their shared sample, the macro- and finance-based estimates exhibit a similar general trend—starting from just above 2% in the late 1990s and ending the sample near zero. Most importantly, both methodologies imply that the equilibrium rate is currently near its historical low. The finance- and macro-based estimates of the equilibrium rate rely on different assumptions about the structure of the economy and different data sources. Thus, they have different pros and cons, so their broad agreement about the level of the equilibrium rate is mutually reinforcing.
There are differences between the precise trajectories over time of the two estimates. The macro-based estimate of the natural rate shows only a modest decline from the late 1990s until the financial crisis and the start of the Great Recession. Then, it drops precipitously to less than 1% and edges only slightly lower thereafter. Arguably, the timing of the macro-based path leaves open the possibility that the recession played a key role in causing the decline in the equilibrium rate. This suggests that the drop could be at least partly reversed by a cyclical boom. In contrast, the finance-based estimate falls in the early 2000s, levels off a bit above 1%, and then declines more in 2012. Therefore, the drop in the finance-based estimate does not coincide with the Great Recession, which is consistent with more secular drivers such as demographics or a productivity slowdown.
Finally, we should note that the model dynamics of fluctuations in the equilibrium rate are estimated to be very persistent. Thus, looking ahead, our model also suggests that the natural rate is more likely than not to remain near its current low for at least the next several years.
Given the historic downtrend in yields in recent decades, many researchers have investigated the factors pushing down the steady-state level of the short-term real interest rate. To complement earlier empirical work based on macroeconomic models and data, we estimate the equilibrium real rate using only prices of inflation-indexed bonds. From 1998 to the end of 2016, we estimate that the equilibrium real rate fell from just over 2% to just above zero. Accordingly, our results show that about half of the 4 percentage point decline in longer-term Treasury yields during this period represents a reduction in the natural rate of interest.
Jens H.E. Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Glenn D. Rudebusch is senior policy advisor and executive vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Andreasen, Martin M., Jens H.E. Christensen, and Simon Riddell. 2017. “The TIPS Liquidity Premium.” FRB San Francisco Working Paper 2017-11.
Bauer, Michael D., and Glenn D. Rudebusch. 2016. “Why Are Long-Term Interest Rates So Low?” FRBSF Economic Letter 2016-36 (December 5).
Christensen, Jens H.E., Jose A. Lopez, and Glenn D. Rudebusch. 2010. “Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields.” Journal of Money, Credit, and Banking 42(6), pp. 143–178.
Christensen, Jens H.E., and Glenn D. Rudebusch. 2017. “A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt.” FRB San Francisco Working Paper 2017-07.
Johannsen, Benjamin K., and Elmar Mertens. 2016. “The Expected Real Interest Rate in the Long Run: Time Series Evidence with the Effective Lower Bound.” FEDS Notes, Board of Governors of the Federal Reserve System, February 9.
Laubach, Thomas, and John C. Williams. 2003. “Measuring the Natural Rate of Interest.” Review of Economics and Statistics 85(4, November), pp. 1,063–1,070.
Laubach, Thomas, and John C. Williams. 2016. “Measuring the Natural Rate of Interest Redux.” Business Economics 51(2), pp. 57–67.
Lubik, Thomas, and Christian Matthes. 2015. “Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches.” FRB Richmond Economic Brief 15-10 (October 15).
Nechio, Fernanda, and Glenn D. Rudebusch. 2016. “Has the Fed Fallen behind the Curve This Year?” FRBSF Economic Letter 2016-33 (November 7).
Williams, John C. 2016. “Monetary Policy in a Low R-star World.” FRBSF Economic Letter 2016-23 (August 15).
Williams, John C. 2017. “Three Questions on R-star.” FRBSF Economic Letter 2017-05 (February 21).
Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.
- Congress can’t pretend tax cuts pay for themselves - Brookings Institution
- Unions, Workers, and Wages at the Peak of the Labor Movement - NBER
- The Blockchain Is Going to Revolutionize Central Banking - ProMarket
- Congress can’t pretend tax cuts pay for themselves - Brookings Institution
- Congress wants to micromanage the Federal Reserve - Jared Bernstein
- Public attitudes to immigration: Salience matters - VoxEU
- Food insecurity among children in 2015 - Brookings Institution
- The Treasury's Missed Opportunity - Cecchetti & Schoenholtz
- Austerity will only end when our leaders start being honest - mainly macro
- The border adjustment tax - VoxEU
Monday, June 19, 2017
I have a new column:
Trump’s Apprenticeships are Based upon a Problem That Doesn’t Exist: Last week the Trump administration announced “a workforce training initiative focused on skill-based apprenticeship education” with a goal of creating one million apprenticeships over the next two years. The motivation behind the initiative was explained by Ivanka Trump: “The reality is that there are still Americans seeking employment despite low unemployment rates, and companies are struggling to fill vacancies for positions that require varying levels of skills and training. So the Trump administration is committed to working very closely to close the skills gap."
But is a “skills gap” really a problem in the US? ...
"The one obvious payoff to taking health care away from millions: a big tax cut for the wealthy":
Zombies, Vampires and Republicans, by Paul Krugman, NY Times: Zombies have long ruled the Republican Party. ... What are these zombies of which I speak? Among wonks, the term refers to policy ideas that should have been abandoned long ago in the face of evidence and experience, but just keep shambling along.
The right’s zombie-in-chief is the insistence that low taxes on the rich are the key to prosperity. This doctrine should have died...
Despite the consistent wrongness of their predictions, however, tax-cut fanatics just kept gaining influence in the G.O.P. — until the disaster in Kansas...
Will this banish the tax-cut zombie? Maybe — although the economists behind the Kansas debacle, who have of course learned nothing, appear to be the principal movers behind the Trump tax plan, such as it is.
But even as the zombies move offstage, vampire policies — so-called not so much because of their bloodsucking nature, although that too, as because they can’t survive daylight — have taken their place.
Consider what’s happening right now on health care.
Last month House Republicans rammed through one of the worst, cruelest pieces of legislation in history. ...
This bill is, as it should be, wildly unpopular. Nonetheless, Republican Senate leaders are now trying to ram through their own version of the A.H.C.A., one that, all reports suggest, will differ only in minor, cosmetic ways. And they’re trying to do it in total secrecy. ...
Clearly, the goal is to pass legislation that will have devastating effects on tens of millions of Americans without giving those expected to pass it, let alone the general public, any real chance to understand what they’re voting for. ...
This is unprecedented...
Of course..., the one obvious payoff to taking health care away from millions: a big tax cut for the wealthy. As I said, while bloodsucking isn’t the main reason to call this a vampire policy, it’s part of the picture....
You can blame Donald Trump for many things, including the fact that he will surely sign whatever bad bill is put in front of him. But as far as health care is concerned, he’s just an ignorant bystander...
So this isn’t a Trump story; it’s about the cynicism and corruption of the whole congressional G.O.P. Remember, it would take just a few conservatives with conscience — specifically, three Republican senators — to stop this outrage in its tracks. But right now, it looks as if those principled Republicans don’t exist.
Saturday, June 17, 2017
- FedViews - FRBSF
- Raising the inflation target - mainly macro
- Politicians Vote Against the Will of Constituents 35% of the Time - ProMarket
- How Do You Forecast the Present? - Liberty Street Economics
- The landlords' party - Stumbling and Mumbling
- Cacophony of the social - Understanding Society
- An Update on Foreign Direct Investment - Tim Taylor
- Eliminating high denomination notes and the mob - Bank Underground
- Japan's entry into world markets during the first age of globalisation - VoxEU
- Trends in artificial intelligence technology invention - VoxEU
Friday, June 16, 2017
Janet Yellen Is Her Own Best Successor: President Donald Trump has reportedly begun the process of deciding who will lead the U.S. Federal Reserve after Janet Yellen's term ends early next year. If he wants the best outcome for the economy, he can't do better than Janet Yellen. ...
Yellen's policies have contributed to a surprisingly strong labor market recovery, yet also been sufficiently cautious to keep inflation below target. Some would see this as an all-around success, though the Fed's caution does have a downside: Markets appear to believe that the central bank is unwilling or unable to hit its inflation target with consistency. ... If it persists, this loss of credibility means that the Fed will have less ammunition to fight the next recession.
So could any of the other potential appointees do better? ...
Warsh, Taylor, and Hubbard all reportedly see Yellen’s Fed as having been too dovish, suggesting that that they would have done less to support the economic recovery. This approach would have led to higher unemployment and lower inflation -- an inferior fulfilment of the Fed's dual mandate that marks them as worse candidates than Yellen. It's also important to remember that Taylor and Warsh argued publicly against additional monetary stimulus in November 2010, when the unemployment rate was almost 10 percent and the inflation rate had fallen nearly to 1 percent. Their concerns about excessive inflation proved to be completely unjustified. Yellen, by contrast, supported stimulus.
Yellen has a proven track record that's hard to beat. ... The president should reappoint her to the position of Fed chair.
The Silence of the Hacks: The actual text of the Senate version of Trumpcare is still a secret, even from almost all the Senators who are expected to vote for it. But that’s actually a secondary issue: never mind the precise details, what’s the organizing idea? What is the bill supposed to do, and how is it supposed to do it?
The answer — which I’ve been suggesting for a while — is that they have no idea, and more broadly, no ideas in general. Now Vox confirms this...
Time was when even the worst legislation came with some kind of justification, when you could count on the hacks at Heritage to explain why eating children will encourage entrepreneurship, or something. ...
But now we have legislation that will change the lives of millions, and they haven’t even summoned the usual suspects to explain what a great idea it is. If hypocrisy is the tribute vice pays to virtue, Republicans have decided that even that’s too much; they’re going to try to pass legislation that takes from the poor and gives to the rich without even trying to offer a justification.
And they’ll try to do it by dead of night, of course.
This has nothing to do with Trump, who is, as I’ve been saying, an ignorant bystander — yes, he’s betraying every promise he made, but what else is new? It’s about Congressional Republicans.
Which Congressional Republicans? All of them. Remember, three senators who cared even a bit about substance, legislative process, and just plain honesty with the public, could stop this. So far, it doesn’t look as if there are those three senators.
This is a level of corruption that’s hard to fathom. Yet it’s the reality of one of our two parties.
Thursday, June 15, 2017
- A Finger Exercise On Hyperglobalization - Paul Krugman
- College attendance drops after widespread job loss - EurekAlert
- The Controversy Over Inflation - Annie Lowrey
- Five reasons to doubt Yellen and the Fed’s wisdom - Larry Summers
- Musings on June's FOMC Meeting - David Beckworth
- Can Trump’s “Apprentice” model fix infrastructure and create jobs? - Brookings
- Trump Move on Job Training Brings ‘Skills Gap’ Debate to the Fore - NYTimes
- Political pundits' biases - Stumbling and Mumbling
- The Robot Takeover Is Greatly Exaggerated - Bloomberg
- The Treasury Portfolio - John Cochrane
- Lousy Pay Raise? That May Be as Good as It Gets - WSJ
- Services as a growth escalator in low-income countries - VoxEU
- Two to Tango—Inflation Management in Unusual Times – IMF Blog
I’ve covered Obamacare since day one. I’ve never seen lying and obstruction like this, Vox.com: Republicans do not want the country to know what is in their health care bill.
This has become more evident each day, as the Senate plots out a secretive path toward Obamacare repeal — and top White House officials (including the president) consistently lie about what the House bill actually does. ...
My biggest concern isn’t the hypocrisy; there is plenty of that in Washington. It’s that the process will lead to devastating results for millions of Americans who won’t know to speak up until the damage is done. So far, the few details that have leaked out paint a picture of a bill sure to cover millions fewer people and raise costs on those with preexisting conditions.
The plan is expected to be far-reaching, potentially bringing lifetime limits back to employer-sponsored coverage, which could mean a death sentence for some chronically ill patients who exhaust their insurance benefits. ...
Wednesday, June 14, 2017
- Mobile Phones and Monetary Policy - Joseph Gagnon
- Fed balance-sheet reduction not scaring anyone - Econbrowser
- Removing the Tax Consequences of Student Loan Discharge - Regulatory Review
- Why do mothers earn less? - American Economic Association
- Offshore profits and domestic productivity - VoxEU
- Economic impact of US immigration policies in the Age of Trump - VoxEU
- Organizational learning - Understanding Society
- Living Trusts for Banking - John Cochrane
- Is America Encouraging the Wrong Kind of Entrepreneurship? - HBR
From the NBER Digest:
The Long-Run Effects of Immigration during the Age of Mass Migration, by Jay Fitzgerald:Studying immigrant flows during the period of highest immigration in U.S. history, Sandra Sequeira, Nathan Nunn, and Nancy Qian find that counties that received large influxes of immigrants experienced both short- and long-term economic benefits compared with other regions. In Migrants and the Making of America: The Short- and Long-Run Effects of Immigration during the Age of Mass Migration (NBER Working Paper No. 23289), they report that these benefits were realized without loss of social and civic cohesion and the long-term benefits persisted to the dawn of the 21st century.
The researchers recognize that immigrants may have been drawn to locations with particular attributes, and that these attributes may also have contributed to those locations' subsequent growth. They therefore focus on differences in the dates on which counties became connected to the railway network, which made it much easier for immigrants to reach a particular location, as a source of quasi-random variation in immigrant inflows.
Using census data along with historical railway maps and other source information, the researchers track county-level immigration, along with the decade-by-decade fluctuations in immigrant flows to the United States. The gradual expansion of railway networks, which connected only 20 percent of the nation in 1850 but 90 percent by 1920, together with the timing of waves of immigration, provide variation in how accessible different locations were to immigrants from 1850 to 1920.
A central finding is that the economic benefits of immigration were significant and long-lasting: In 2000, average incomes were 20 percent higher in counties with median immigrant inflows relative to counties with no immigrant inflows, the proportion of people living in poverty was 3 percentage points lower, the unemployment rate was 3 percentage points lower, the urbanization rate was 31 percentage points higher, and education attainment was higher as well. The researchers do not find any cost of immigration in terms of social cohesion. Counties with more immigrant settlement during the Age of Mass Migration today have levels of social capital, civic participation, and crime that are similar to those of regions that received fewer immigrants.
Measuring the short-term impacts of immigration from 1850 to 1920, the researchers find a 57 percent average increase by 1930 in manufacturing output per capita and a 39 to 58 percent increase in agricultural farm values in places that received the median number of immigrants relative to those that received none. Though some of the counties studied show a lower rate of literacy due to the influx of immigrants, many of whom did not speak English, the researchers find that illiteracy declined steadily over the years and that there was an increase in innovation activity, as measured by patents per capita, in counties with large immigrant populations.
The long-run positive effects of immigration in counties connected to rail lines appear to have arisen from the persistence of the short-run benefits, particularly greater industrialization, agricultural productivity, and innovation.
"Taken as a whole, our estimates provide evidence consistent with a historical narrative that is commonly told of how immigration facilitated economic growth," the researchers conclude. "Despite the unique conditions under which the largest episode of immigration in U.S. history took place, our estimates of the long-run effects of immigration may still be relevant for assessing the long-run effects of immigrants today."
Tuesday, June 13, 2017
- Their Own Private Pyongyang - Paul Krugman
- Reagan to the power of ten - Thomas Piketty
- A President at War With His Fed Chief, 5 Decades Before Trump - NYTimes
- Can US States Right Trump’s Wrongs? - Barry Eichengreen
- The World Bank in the Era of Trump - VoxEU
- Containers and globalisation - VoxEU
- The problem with privatization - Larry Summers
- The Hidden Cost of Privatization - INET
- The Fed's Unspoken Mandate - Bloomberg
- Macroeconomics: The Simple and the Fancy - Paul Krugman
- We're Not Even In Kansas Anymore - Paul Krugman
- Yes: The ZLB Is a Big Deal, or, Brad Goes Down a Rabbit Hole... - Brad DeLong
- It Is Not Harder to Make the Case for Free Trade These Days... - Brad DeLong
Things have been a bit slow here lately. Sorry about that. With Trump, economic commentary has waned considerably. Guess you can only say this policy is stupid so many times. Plus, it's all hidden behind closed doors so we can't comment. Can't imagine why...
The recent inflation data doesn't exactly support the Federal Reserve’s monetary tightening plans. Chair Janet Yellen and her colleagues will surely take note of the weakness at this week’s Federal Open Market Committee meeting, but they will downplay any such concerns as transitory. At the moment, low unemployment remains the focus. Add to that loosening financial conditions and you get a central bank that is more likely than not to stay the course on its plan to hike interest rates. [...Continued at Bloomberg Prophets...]
Monday, June 12, 2017
- The resource curse in action - American Economic Association
- Hayek and Temporary Equilibrium - Uneasy Money
- Don’t be fooled, Trump’s budget proposal is very much ‘undead’ - Brookings
- The Importance of Exploring the Black/White Wealth Gap - FRB St. Louis
- Tightening by stealth - VoxEU
- Egyptian and Mesopotamian approaches in economics - Tim Johnson
- Imports and the composition of expenditure - Bank Underground
- Fintech, Central Banking and Digital Currency - Cecchetti & Schoenholtz
- Who loses disability insurance when it’s harder to apply? - Equitable Growth
- They Don't Need No Information - Paul Krugman
- Health reform in the Age of Trump - VoxEU
- The Value of Free in GDP - Digitopoly
- The changing class divide - Stumbling and Mumbling
- Treasury debt held by the public - Econbrowser
- Child-related transfers, labour supply, and welfare - VoxEU
- The lifecycle of research citations - VoxEU
Friday, June 09, 2017
- Rethink 2% - Brad DeLong
- The Fed Needs a Better Inflation Target - Narayana Kocherlakota
- Why the Fed Should Rethink Its 2% Inflation Target - Brad DeLong
- Bitcoin and the conditions for a takeover of fiat money - longandvariable
- Environmental Protection and Africa's Cities - Tim Taylor
- The G.O.P. Plan to Unleash Wall Street - The New York Times
- Globalisation and executive compensation - VoxEU
- Labour and its Left - mainly macro
- Countering the mining curse - VoxEU
"Trump is neither up to the job of being president nor willing to step aside and let others do the work right":
Wrecking the Ship of State, by Paul Krugman, NY Times: After Donald Trump’s surprise election victory, many people on the right and even in the center tried to make the case that he wouldn’t really be that bad. Every time he showed a hint of self-restraint — even if it amounted to nothing more than reading his lines without ad-libbing and laying off Twitter for a day or two — pundits rushed to declare that he had just “become president.”
But can we now admit that he really is as bad as — or worse than — his harshest critics predicted he would be? And it’s not just his contempt for the rule of law, which came through so clearly in the James Comey testimony: As the legal scholar Jeffrey Toobin says, if this isn’t obstruction of justice, what is? There’s also the way Trump’s character, his combination of petty vindictiveness with sheer laziness, leaves him clearly not up to doing the job.
And that’s a huge problem. Think, for a minute, of just how much damage this man has done on multiple fronts in just five months.
Take health care. ...
Or take the remarkable decision to take Saudi Arabia’s side in its dispute with Qatar...
And consider his refusal to endorse the central principle of NATO, the obligation to come to our allies’ defense... What was that about? Nobody knows...
The point, again, is that everything suggests that Trump is neither up to the job of being president nor willing to step aside and let others do the work right. And this is already starting to have real consequences, from disrupted health coverage to ruined alliances to lost credibility on the world stage.
But, you say, stocks are up, so how bad can it be? And it’s true that while Wall Street has lost some of its initial enthusiasm for Trumponomics — the dollar is back down to pre-election levels — investors and businesses don’t seem to be pricing in the risk of really disastrous policy.
That risk is, however, all too real — and one suspects that the big money, which tends to equate wealth with virtue, will be the last to realize just how big that risk really is. The American presidency is, in many ways, sort of an elected monarchy, in which a temperamentally and intellectually unqualified leader can do immense damage.
That’s what’s happening now. And we’re barely one-tenth of the way through Trump’s first term. The worst, almost surely, is yet to come.