"almost an entire party appears to have decided that potential treason in the cause of tax cuts for the wealthy is no vice":
Judas, Tax Cuts and the Great Betrayal, by Paul Krugman, NY Times: The denarius, ancient Rome’s silver coin, was supposedly the daily wage of a manual worker. If so, the tax cuts that the richest 1 percent of Americans will receive if the Affordable Care Act is repealed — tax cuts that are, obviously, the real reason for repeal — would amount to the equivalent of around 500 pieces of silver each year.
What inspired this calculation? The spectacle of Mitch McConnell, the Senate majority leader, and Paul Ryan, the speaker of the House, defending Donald Trump’s firing of James Comey.
Everyone understands that Mr. Comey was fired ... because his probe of Russian connections with the Trump campaign was accelerating and, presumably, getting too close to home. So this looks very much like the use of presidential power to cover up possible foreign subversion of the U.S. government.
And the two leading Republicans in Congress are apparently O.K. with that cover-up, because the Trump ascendancy is giving them the chance to do what they always wanted, namely, take health insurance away from millions of Americans while slashing taxes on the wealthy.
So you can see why I find myself thinking of Judas.
For generations, Republicans have impugned their opponents’ patriotism. ...
But now we have what may be the real thing: circumstantial evidence that a hostile foreign power may have colluded with a U.S. presidential campaign, and may retain undue influence at the highest levels of our government. And all those self-proclaimed patriots have gone silent, or worse. ...
And we know how to resolve the remaining uncertainty: independent investigations...
At this point ... almost an entire party appears to have decided that potential treason in the cause of tax cuts for the wealthy is no vice. And that’s barely hyperbole. ...
So it’s naïve to expect Republicans to join forces with Democrats to get to the bottom of the Russia scandal — even if that scandal may strike at the very roots of our national security. Today’s Republicans just don’t cooperate with Democrats, period. They’d rather work with Vladimir Putin.
In fact, some of them probably did.
Now, maybe I’m being too pessimistic. Maybe there are enough Republicans with a conscience — or, failing that, sufficiently frightened of an electoral backlash — that the attempt to kill the Russia probe will fail. One can only hope so.
But it’s time to face up to the scary reality here. Most people now realize, I think, that Donald Trump holds basic American political values in contempt. What we need to realize is that much of his party shares that contempt.
Posted by Mark Thoma on Friday, May 12, 2017 at 05:26 AM in Economics, Politics |
Posted by Mark Thoma on Friday, May 12, 2017 at 12:06 AM in Economics, Links |
Brynne Keith-Jennings at the CBPP:
SNAP Helps Low-Wage Workers: For millions of Americans, work doesn’t provide enough income for them to feed their families. Our major new report explains that SNAP (formerly food stamps) provides workers with low pay and often fluctuating incomes with crucial additional monthly income to help put food on the table. It also helps workers get by while they’re between jobs.
Up to 30 percent of Americans earn pay that would barely lift a family above the poverty line for full-time, year-round work. And, in many cases, workers who want a full-time job can only get part-time work or have irregular schedules that can change from week to week, with little advance notice or worker input.
Also, low-wage jobs tend to lack crucial supports such as paid sick leave, which can cost workers their jobs when they get sick or must care for an ill family member. In addition, low-wage workers are less likely than other workers to qualify for unemployment insurance.
SNAP benefits support work. The benefit formula phases out benefits slowly as earnings rise and includes a 20 percent deduction for earned income to reflect work-related expenses. As a result, SNAP benefits fall by only 24 to 36 cents for each additional $1 of earnings for most households. SNAP benefits can help smooth out volatile income and provide much-needed food assistance when workers’ hours are cut or they lose their jobs.
SNAP participants work in a wide range of jobs but, compared to all workers, a greater share of them are in service occupations (see graph) and industries such as retail and hospitality — jobs likelier to have low wages and other disadvantages. In some occupations, such as dishwashers, food preparation workers, and nursing, psychiatric, and home health aides, at least one-quarter of workers participate in SNAP. For them and millions of others whose jobs don’t provide enough or steady income to provide for their families, SNAP provides essential support.
Posted by Mark Thoma on Thursday, May 11, 2017 at 09:10 AM in Economics, Social Insurance |
From the IMFBlog:
The Economics of Trust: Trust in other people – the glue that holds society together – is increasingly in short supply in the United States and Europe, and inequality may be the culprit.
In surveys over the past 40 years, the share of Americans who say that most people can be trusted has fallen to 33 percent from about 50 percent. The erosion of trust coincides with widening disparities in incomes.
But does inequality reduce trust? There is evidence that it does, according to research by Eric D. Gould, a professor of economics at Hebrew University, and Alexander Hijzen, a senior economist at the Organisation for Economic Cooperation and Development. They analyzed data from the American National Election Survey from 1980 to 2010. The results show that wider income inequality explains 44 percent of the drop in trust. The authors, who reported their findings in an IMF working paper, found similar results in Europe...
Posted by Mark Thoma on Thursday, May 11, 2017 at 09:10 AM in Economics |
Posted by Mark Thoma on Thursday, May 11, 2017 at 12:06 AM in Economics, Links |
Will Falling Unemployment Pressure The Fed?, by Tim Duy: The unemployment rate continues to slide, hitting 4.4 percent in April. The Federal Reserve’s median forecast for joblessness -- 4.5 percent from the end of 2017 through 2019 -- has once again proved optimistic. But does this mean that Fed officials will hike their interest rate projections at the next Open Market Committee meeting? ... Continued at Bloomberg Prophets...
Posted by Mark Thoma on Wednesday, May 10, 2017 at 09:25 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Wednesday, May 10, 2017 at 12:06 AM in Economics, Links |
The Fed Is on the Right Side of Its 'Transitory' Bet: The Federal Reserve receives a lot of criticism for the way it conducts monetary policy, but it shouldn’t be faulted for delivering a hawkish message at last week’s policy meeting in the face of data showing a marked slowdown in first-quarter growth. The May meeting came off largely as expected, with policy makers leaving interest rates unchanged and the post-meeting statement containing a clear message that policy makers remained set on a June rate hike... Continued at Bloomberg Prophets...
Posted by Mark Thoma on Tuesday, May 9, 2017 at 10:27 AM in Economics, Monetary Policy |
William Emmons and Lowell Ricketts of the St. Louis Fed:
The Link between Family Structure and Wealth Is Weaker Than You Might Think: ...While there is an overall correlation between, say, two-parent families and higher wealth, research presented at the symposium found that this link actually is inconsistent across racial and ethnic groups and quite weak in a causal sense.
In a nutshell, when we focus on family-structure differences within racial or ethnic groups, rather than between groups, there is essentially no relationship at all. Our interpretation is that any correlation between family structure and wealth that exists in aggregate data is largely spurious. That is, it reflects deeply rooted structural, systemic or other unobservable factors that differ across races and ethnicities.
These “deep” causes of differences in both family structure and wealth accumulation could include:
- The continuing effects of past discrimination
- Segregation in housing, health care and education
- Environmental, epigenetic (that is, suppressed expression of true genetic abilities) or cultural factors that differentially affect early-childhood development
We concluded that family-structure differences are a symptom of deeper driving forces, not an important cause per se of wealth differences. One implication is that, even if we could change patterns of marriage and child-bearing among many people, this alone would be unlikely to affect racial and ethnic wealth gaps very much, if at all. ...
Posted by Mark Thoma on Tuesday, May 9, 2017 at 10:24 AM in Economics, Income Distribution |
Posted by Mark Thoma on Tuesday, May 9, 2017 at 12:06 AM in Economics, Links |
I have a new column:
Killing Banking Rules Will Invite a Whopper of a Recession: The vote in the House of Representatives to dismantle Obamacare was not the only attempt to undo key legislation from the Obama years that occurred last Thursday. Though it mostly went unnoticed, the House Financial Services Committee voted in favor of the Financial Choice Act. This legislation would substantially weaken the Dodd-Frank financial reforms.
If the Republicans are successful, and that is not assured at this point for either piece of legislation, it will increase economic insecurity for most households. ...
Posted by Mark Thoma on Monday, May 8, 2017 at 10:09 AM in Economics, Politics, Social Insurance |
"This is an act of deliberate betrayal":
Republicans Party Like It’s 1984, by Paul Krugman, NY Times: There have been many bad laws in U.S. history. ... But has there ever been anything like Trumpcare...? It’s a miserably designed law, full of unintended consequences. It’s a moral disaster, snatching health care from tens of millions mainly to give the very wealthy a near-trillion-dollar tax cut.
What really stands out, however, is the Orwell-level dishonesty of the whole effort. As far as I can tell, every word Republicans, from Trump on down, have said about their bill — about why they want to replace Obamacare, about what their replacement would do, and about how it would work — is a lie, including “a,” “and” and “the.”
And what does it say about the state of American politics that a majority of the representatives of one of our major political parties have gone along with this nightmarish process? ... Trumpcare breaks every promise Republicans ever made about health ... and ... they are doing so with intent. ... This is an act of deliberate betrayal.
...Why are they doing this, and why do they think they can get away with it?
Part of the answer to the first question is, presumably, simple greed. Tens of millions would lose access to health coverage, but ... people with incomes over $1 million would save an average of more than $50,000 a year.
And there is a powerful faction within the G.O.P. for whom cutting taxes on the rich is more or less the only thing that matters. ...
As for why they think they can get away with it: Well, isn’t recent history on their side? The general shape of what the G.O.P. would do to health care, for the white working class in particular, has long been obvious, yet many people who were sure to lose, bigly, voted Trump anyway.Why shouldn’t Republicans believe they can convince those same voters that the terrible things that will happen if Trumpcare becomes law are somehow liberals’ fault?
And for that matter, how confident are you that mainstream media will resist the temptation of both-sides-ism, the urge to produce “balanced” reporting that blurs the awful reality of what Trumpcare will do if enacted?
In any case, let’s be clear: What just happened on health care shouldn’t be treated as just another case of cynical political deal making. This was a Freedom is Slavery, Ignorance is Strength moment. And it may be the shape of things to come.
Posted by Mark Thoma on Monday, May 8, 2017 at 01:50 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Monday, May 8, 2017 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Friday, May 5, 2017 at 10:58 AM in Economics, Links |
Prime-Age Employment Rate Hits New High for Recovery: College grads see little gain from last year of employment growth.
The overall unemployment rate fell to 4.4 percent in April, tying the lowest level reached since May of 2001 as the establishment survey reported the economy added 211,000 jobs. With roughly offsetting revisions to the prior two months' job growth, this brings the average for the last three months to 174,000.
While the report on the whole is quite positive, one item especially worth noting is the increase in the employment-to-population ratio (EPOP) among prime-age men. The employment rate for prime-age workers edged up to 78.6 percent. This is a new high for the recovery, although it is still 1.7 percentage points below the pre-recession peak and 3.3 percentage points below the 2000 peak.
In April, the EPOP for prime-age women edged down to 71.9 percent, 0.9 percentage points below its pre-recession peak and 3.0 percentage points below its 2000 peak. However, the EPOP for prime-age men rose 0.2 percentage points to 85.4 percent. This is still 2.6 percentage points below its pre-recession peak and 4.1 percentage points below its 2000 peak, but the rise does suggest that there is still more room for EPOPs among prime-age men to increase. The fact that EPOP for both prime-age men and women remain below pre-recession levels and far below 2000 levels strongly suggests that the issue is a lack of demand in the economy and not a decrease in the ability or desire of people to work.
Interestingly, employment patterns do not appear to be following the story where benefits are going disproportionately to the most educated. Over the last year, the unemployment rate for college grads has not changed, while the EPOP is actually down by 0.3 percentage points from its year-ago level. At 2.4 percent the unemployment rate for college grads is much lower than for those with less education, but it is still 0.6 percentage points above its pre-recession low. By comparison, the unemployment rate for those with just a high school degree has fallen by 0.8 percentage points over the last year to 4.6 percent, while the EPOP for this group has risen by 0.8 percentage points.
The number of people involuntarily working part-time fell sharply to 5,272,000. This is a new low for the recovery, but still more than 800,000 above pre-recession levels. While the number of people involuntarily working part-time has fallen sharply since the implementation of the Affordable Care Act, the number of people choosing to work part-time is up by more than 1.8 million. In this vein it is worth noting that the number of incorporated self-employed is up by 8.2 percent in the first four months of 2017 compared with 2013.
If minimum wage hikes in many states and cities are leading to preventing teens from getting jobs, it is not showing up in the national data. Teen employment is up by 3.4 percent over the last year.
While the duration measures for unemployment all edged down, one discouraging area is the relatively low quit rate. At 11.2 percent it is roughly a percentage point below pre-recession levels and is 4.0 percentage points below the peak reached in 2000. Workers are still reluctant to give up jobs.
The big job gainers in April were restaurants (26,200 jobs), professional and technical services (23,100 jobs), local government (23,000 jobs), and health care (19,500 jobs). While the growth in restaurant and professional services were roughly in line with their longer-term trend, the jump in local government jobs is clearly an anomaly. Employment growth in health care has been somewhat slow the last four months, averaging 19,500 a month. This is down from 31,700 in the year up to December.
Retail added only 6,300 jobs after losing 27,400 in March. The sector is likely to remain weak for the near future. Construction employment has been virtually flat the last two months, after jumping by 88,000 in the prior two months. This fits the warm winter story.
There continues to be little evidence of accelerating wage growth. Year-over-year wages are up 2.5 percent, while they are rising at a 2.6 percent annual rate taking the average of the most recent three months with the prior three months.
On the whole, this is very positive report, but one that provides little evidence of the labor market overheating. The EPOPs suggest and quit rates indicate there is still considerable slack.
See also Calculate Risk: Comment: A Solid Employment Report.
Posted by Mark Thoma on Friday, May 5, 2017 at 10:41 AM in Economics, Unemployment |
If Macron wins, will the European elite learn the wrong lesson?:
What’s the Matter With Europe?, by Paul Krugman, NY Times: On Sunday France will hold its presidential runoff. Most observers expect Emmanuel Macron, a centrist, to defeat Marine Le Pen, the white nationalist — please, let’s stop dignifying this stuff by calling it “populism.” ... A Le Pen victory would be a disaster for Europe and the world.
Yet I also think it’s fair to ask a couple of questions... First, how did things get to this point? Second, would a Le Pen defeat be anything more than a temporary reprieve from the ongoing European crisis? ...
To begin, while France gets an amazing amount of bad press — much of it coming from ideologues who insist that generous welfare states must have disastrous effects — it’s actually a fairly successful economy. ...
Meanwhile..., France offers a social safety net beyond the wildest dreams of U.S. progressives... So why are so many willing to vote for — again, let’s not use euphemisms — a racist extremist?
There are, no doubt, multiple reasons, especially cultural anxiety over Islamic immigrants. But it seems clear that votes for Le Pen will in part be votes of protest against what are perceived as the highhanded, out-of-touch officials running the European Union. And that perception unfortunately has an element of truth.
Those of us who watched European institutions deal with the debt crisis ... were shocked at the ... callousness and arrogance that prevailed throughout. ...
Politically, Eurocrats got away with this behavior because small nations were easy to bully... But Europe’s elite will be making a terrible mistake if it believes it can behave the same way to bigger players.
Indeed, there are already intimations of disaster in the negotiations now taking place between the European Union and Britain. ... E.U. officials are sounding more and more like a jilted spouse determined to extract maximum damages in a divorce settlement. ...Greece-style bullying just isn’t going to work on a nation as big, rich and proud as the U.K.
Which brings me back to the French election. We should be terrified at the possibility of a Le Pen victory. But we should also be worried that a Macron victory will be taken by Brussels and Berlin to mean that Brexit was an aberration, that European voters can always be intimidated into going along with what their betters say is necessary.
So let’s be clear: Even if the worst is avoided this Sunday, all the European elite will get is a time-limited chance to mend its ways.
Posted by Mark Thoma on Friday, May 5, 2017 at 09:02 AM in Economics, Politics |
Employment Day Ahead, by Tim Duy: Tomorrow the Bureau of Labor Statistics releases the employment report for April. The Fed has their eyes set on a June rate hike on the expectation that first quarter weakness was largely temporary. The April and May employment reports will be crucial to evaluating the call. But note they do not have to be blowout reports to justify a rate hike. They just need to show solid job growth reasonably north of 100k a month. At that pace, the Fed would anticipate, in the absence of additional rate hikes, further declines in the unemployment rate and excessive inflationary pressure. I expect the April report will deliver something like that, with a bump from last month but not so much strength that it would prompt the Fed to pursue a faster pace of hikes than currently anticipated.
If you were concerned about the first quarter GDP number (you shouldn't), you should take comfort in the still low levels of initial unemployment claims:
The lack of any upturn is a strong indication that underlying growth remains solid (albeit "solid" is less solid that we came to expect 10 or 20 years ago). ADP estimates private sector job growth of 177k in April, which is solid but not spectacular. But the ISM non-manufacturing employment index continues to hover just above in a lackluster range. The latter pulls down my estimate of April job growth to 148k:
This is weaker than the consensus forecast of 185k and just below the forecast range of 150k to 225k. So I am expecting something less than consensus tomorrow morning. That said, I think that an average of 150k over the next two months would likely be easily sufficient for the Fed to justify hiking rates in June. They will say that such a number remains above longer run expectations for labor force growth and thus slower job growth is eventually needed to settle the economy into a stable, noninflationary path.
Stronger numbers, particularly in the context of further declines in unemployment and/or accelerating wage growth, would certainly lock down the June hike and raise the odds of at least another in the second half of the year. But if job growth falls to a 100k or below average for the next couple of months and unemployment holds steady, the Fed will have trouble justifying further hikes, particularly if such a situation were to continue past June.
Bottom Line: As always, actual policy outcomes are data dependent. That said, expectations for this job report are generally consistent with the Fed's forecast and thus supportive of additional rate hikes.
Posted by Mark Thoma on Thursday, May 4, 2017 at 12:54 PM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, May 4, 2017 at 11:59 AM in Economics, Links |
Posted by Mark Thoma on Tuesday, May 2, 2017 at 12:06 AM in Economics, Links |
At the Milken Global Conference. This is what wealth buys:
This annual gathering of government and business leaders at the Global Conference will examine policy priorities and investments that will enhance American competitiveness and drive economic growth. This off-the-record session allows participants including members of Congress, administration officials, and CEOs of leading corporations and financial institutions to engage in an informative, candid dialogue.
It's not okay for the wealthy to have this kind of access and influence over government.
Posted by Mark Thoma on Monday, May 1, 2017 at 02:45 PM in Economics |
"What will Trump’s Katrina moment look like?":
On the Power of Being Awful, by Paul Krugman, NY Times: The 100-day reviews are in, and they’re terrible. The... faceplants just keep coming... The gap between big boasts and tiny achievements has never been wider.
Yet there have, by my count, been seven thousand news articles — O.K., it’s a rough estimate — about how Trump supporters are standing by their man, are angry at those meanies in the news media, and would gladly vote for him all over again. What’s going on? ...
One basic principle I’ve learned in my years at The Times is that almost nobody ever admits being wrong about anything — and the wronger they were, the less willing they are to concede error. ...
Now think about what it means to have voted for Trump. The news media spent much of the campaign indulging in an orgy of false equivalence; nonetheless, most voters probably got the message that the political/media establishment considered Trump ignorant and temperamentally unqualified to be president. So the Trump vote had a strong element of: “Ha! You elites think you’re so smart? We’ll show you!”
Now, sure enough, it turns out that Trump is ignorant and temperamentally unqualified to be president. But if you think his supporters will accept this reality any time soon, you must not know much about human nature. In a perverse way, Trump’s sheer awfulness offers him some political protection: His supporters aren’t ready, at least so far, to admit that they made that big a mistake. ...
Sooner or later, however, this levee is going to break. ...
I’m old enough to remember when George W. Bush was wildly popular — and while his numbers gradually deflated from their post 9/11 high, it was a slow process. What really pushed his former supporters to reconsider, as I perceived it — and this perception is borne out by polling — was the Katrina debacle, in which everyone could see the Bush administration’s callousness and incompetence playing out live on TV.
What will Trump’s Katrina moment look like? Will it be the collapse of health insurance due to administration sabotage? A recession this White House has no idea how to handle? A natural disaster or public health crisis? One way or another, it’s coming.
Oh, and one more note: By 2006, a majority of those polled claimed to have voted for John Kerry in 2004. It will be interesting, a couple of years from now, to see how many people say they voted for Donald Trump.
Posted by Mark Thoma on Monday, May 1, 2017 at 10:52 AM
Posted by Mark Thoma on Sunday, April 30, 2017 at 04:30 AM in Economics, Links |
Posted by Mark Thoma on Saturday, April 29, 2017 at 12:06 AM in Economics, Links |
"Don’t pretend that this is normal":
Living in the Trump Zone, by Paul Krugman, NY Times: Fans of old TV series may remember a classic “Twilight Zone” episode titled “It’s a Good Life.” It featured a small town terrorized by a 6-year-old who for some reason had monstrous superpowers, coupled with complete emotional immaturity. Everyone lived in constant fear, made worse by the need to pretend that everything was fine. After all, any hint of discontent could bring terrible retribution.
And now you know what it must be like working in the Trump administration. ...
What set me off on this chain of association? The answer may surprise you; it was the tax “plan” the administration released on Wednesday..., the single-page document ... bore no resemblance to what people normally mean when they talk about a tax plan. ...
So why would the White House release such an embarrassing document? Why would the Treasury Department go along with this clown show?...
Every report from inside the White House conveys the impression that Trump is like a temperamental child, bored by details and easily frustrated when things don’t go his way... If he says he wants something, no matter how ridiculous, you say, “Yes, Mr. President!”; at most, you try to minimize the damage.
Right now, by all accounts, the child-man in chief is in a snit over the prospect of news stories that review his first 100 days and conclude that he hasn’t achieved much if anything (because he hasn’t). So last week he announced the imminent release of something he could call a tax plan. ... But nobody dared tell him it couldn’t be done. Instead, they released … something, with nobody sure what it means.
And the absence of a real tax plan isn’t the only thing the inner circle apparently doesn’t dare tell him. ...
...I’d like to make a plea to my colleagues in the news media: Don’t pretend that this is normal. Let’s not act as if that thing released on Wednesday, whatever it was, was something like, say, the 2001 Bush tax cut; I strongly disapproved of that cut, but at least it was comprehensible. Let’s not pretend that we’re having a real discussion of, say, the growth effects of changes in business tax rates.
No, what we’re looking at here isn’t policy; it’s pieces of paper whose goal is to soothe the big man’s temper tantrums. Unfortunately, we may all pay the price of his therapy.
Posted by Mark Thoma on Friday, April 28, 2017 at 10:19 AM in Economics, Politics |
Asher Schechter at ProMarket:
Is There a Case to be Made for Political Antitrust?: After decades of approaching antitrust through purely economic analyses, are economists once again willing to take into account political considerations as well?Should political considerations play a role in antitrust? In the last four decades, the predominant approach was that antitrust enforcement should only be guided by economic considerations such as efficiency and consumer welfare. Now, if a panel at the recent Stigler Center conference on concentration in America is any indication, it seems that some economists are once again willing to take into account the political dimensions of antitrust.
In 1979, former FTC chairman Robert Pitofsky published a seminal paper on what he termed the “political content” of antitrust. Contrary to the view that antitrust should be concerned exclusively with economic questions, Pitofsky argued that “political values” should be incorporated into the enforcement of antitrust laws.
Among those values, Pitofsky listed “the fear that excessive concentration of economic power will foster anti-democratic political pressures, the desire to reduce the range of private discretion by a few in order to enhance individual freedom, and the fear that increased governmental intrusion will become necessary if the economy is dominated by the few.” Ignoring those concerns, Pitofsky asserted, would be tantamount to ignoring “the bases of antitrust” and the “rough political consensus that has supported antitrust enforcement for almost a century.”
The notion that economic power can be politically dangerous has played an integral part in American political culture since the founding of the republic. While in Paris in 1787, Thomas Jefferson famously supported the inclusion of a “restriction against monopolies” in the Bill of Rights. Since then, the fear that concentration of economic power engenders political power has been taken up as a cause by many, most notably by Supreme Court Justice Louis Brandeis in the early 20th century. In the 1930s, University of Chicago economist Henry Simons discussed the anti-democratic nature of monopoly power. “Political liberty can survive only within an effectively competitive economic system,” he wrote. “Thus, the great enemy of democracy is monopoly, in all its forms.” ...
Posted by Mark Thoma on Friday, April 28, 2017 at 12:15 AM in Economics, Market Failure |
Posted by Mark Thoma on Friday, April 28, 2017 at 12:06 AM in Economics, Links |
Paul Krugman, Nobel Prize-winning economist, New York Times columnist, and distinguished professor at the Graduate Center.
David Autor, leading labor economist; professor at MIT, where he directs the School Effectiveness and Inequality Initiative; and editor in chief of the Journal of Economic Perspectives.
Brad DeLong, economics professor at U.C. Berkeley; weblogger for the Washington Center for Equitable Growth; and former U.S. deputy assistant secretary of the treasury, in the Clinton administration.
Anne Harrison, professor at the Wharton School, University of Pennsylvania; former director of development policy at the World Bank; and author of Globalization and Poverty.
Posted by Mark Thoma on Thursday, April 27, 2017 at 01:25 PM in Economics, International Trade, Technology, Unemployment, Unions, Video |
Christopher Blattman and Stefan Dercon:
Do Sweatshops Lift Workers Out of Poverty?: In the 1990s, Americans learned more about the appalling conditions at the factories where our sneakers and T-shirts were made, and opposition to sweatshops surged. But some economists pushed back. For them, the wages and conditions in sweatshops might be appalling, but they are an improvement on people’s less visible rural poverty.
As the economist Joan Robinson said, “The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.”
Textbook economics offers two reasons factory jobs can be “an escalator out of poverty.” ...
Expecting to prove the experts right, we went to Ethiopia and — working with the Innovations for Poverty Action and the Ethiopian Development Research Institute — performed the first randomized trial of industrial employment on workers. Little did we anticipate that everything we believed would turn out to be wrong. ...
Posted by Mark Thoma on Thursday, April 27, 2017 at 09:10 AM in Economics |
Yes, the Stock and Bond Markets Can Both Be Right: Equities have renewed their rally -- and so have bonds, and that is creating much alarm among some investors. Whereas the former suggests the stage is set for solid growth, the latter and the accompanying narrowing of the yield curve raises red flags about the health of the economy. I am not sure there is much of a puzzle here. This dichotomy is fairly typical of a monetary tightening cycle and can exist for a long time. How long? Until the Federal Reserve finally snuffs out the expansion with excessively tight monetary policy ...Continued at Bloomberg View ...
Posted by Mark Thoma on Thursday, April 27, 2017 at 09:03 AM in Economics |
Posted by Mark Thoma on Thursday, April 27, 2017 at 12:06 AM in Economics, Links |
Arindrajit Dube at Equitable Growth:
Minimum wages and the distribution of family incomes in the United States: Introduction The ability of minimum-wage policies in the United States to aid lower-income families depends on how they affect wage gains, potential job losses, and other sources of family income, including public assistance. In contrast to a large body of research on the effects of minimum wages on employment,1 there are relatively fewer studies that empirically estimate the impact of minimum wage policies on family incomes.
In my new paper, I use individual-level data between 1984 and 2013 from the Current Population Survey by the U.S. Census Bureau to provide a thorough assessment of how U.S. minimum wage policies have affected the distribution of family incomes.2 Similar to existing work, I consider how minimum wages influence the poverty rate. Going beyond most existing research, however, I also calculate the effect of the policies for each income percentile, adjusting for family size. This highlights the types of families that are helped or hurt by wage increases. I also calculate the effect on a broader measure of income that includes tax credits and noncash transfers. I quantify the offset effect of higher wages on the use of transfer programs and the gains net of the offsets by income percentiles, painting a fuller picture of how minimum-wage policies affect the U.S. income distribution and the overall well-being of U.S. families.
Overall, I find robust evidence that higher minimum wages lead to increases in incomes among families at the bottom of the income distribution and that these wages reduce the poverty rate. A 10 percent increase in the minimum wage reduces the nonelderly poverty rate by about 5 percent. At the same time, I find evidence for some substitution of government transfers with earnings, as evidenced by the somewhat smaller income increases after accounting for tax credits such as the Earned Income Tax Credit and noncash transfers such as the Supplemental Nutrition Assistance Program. The overall increase in post-tax income is about 70 percent as large as the increase in pretax income. ...
Posted by Mark Thoma on Wednesday, April 26, 2017 at 08:39 AM in Economics, Income Distribution |
Posted by Mark Thoma on Wednesday, April 26, 2017 at 12:06 AM in Economics, Links |
What Can Be Done to Improve the Episteme of Economics?: I think this is needed:
INET: Education Initiative: "We are thrilled that you are joining us at the Berkeley Spring 2017 Education Convening, Friday, April 28th 9am-5pm Blum Hall, B100 #5570, Berkeley, CA 94720-5570... https://www.ineteconomics.org/education/curricula-modules/education-initiative
...Sign up here: https://fs24.formsite.com/inet/form97/index.html or email firstname.lastname@example.org...
I strongly share INET's view that things have gone horribly wrong, and that it is important to listen, learn, and brainstorm about how to improve economics education.
Let me just note six straws in the wind:
The macro-modeling discussion is wrong: The brilliant Olivier Blanchard https://piie.com/blogs/realtime-economic-issues-watch/need-least-five-classes-macro-models: "The current core... RBC (real business cycle) structure [model] with one main distortion, nominal rigidities, seems too much at odds with reality.... Both the Euler equation for consumers and the pricing equation for price-setters seem to imply, in combination with rational expectations, much too forward-lookingness.... The core model must have nominal rigidities, bounded rationality and limited horizons, incomplete markets and the role of debt..."
The macro-finance discussion is wrong: The efficient market hypothesis (EMH) claimed that movements in stock indexes were driven either by (a) changing rational expectations of future cash flows or by (b) changing rational expectations of interest rates on investment-grade bonds, so that expected returns were either (a) unchanged or (b) moved roughly one-for-one with returns on investment grade bonds. That claim lies in total shreds. Movements in stock indexes have either no utility-theoretic rationale at all or must be ascribed to huge and rapid changes in the curvature of investors' utility functions. Yet Robert Lucas claims that the EMH is perfect, perfect he tells us http://www.economist.com/node/14165405: "Fama tested the predictions of the EMH.... These tests could have come out either way, but they came out very favourably.... A flood of criticism which has served mainly to confirm the accuracy of the hypothesis.... Exceptions and 'anomalies' [are]... for the purposes of macroeconomic analysis and forecasting... too small to matter..."
The challenge posed by the 2007-9 financial crisis is too-often ignored: Tom Sargent https://www.minneapolisfed.org/publications/the-region/interview-with-thomas-sargent: "I was at Princeton then.... There were interesting discussions of many aspects of the financial crisis. But the sense was surely not that modern macro needed to be reconstructed.... Seminar participants were in the business of using the tools of modern macro, especially rational expectations theorizing, to shed light on the financial crisis..."
What smart economists have to say about policy is too-often dismissed: Then-Treasury Secretary Tim Geithner, according to Zach Goldfarb https://www.washingtonpost.com/blogs/wonkblog/post/geithner-stimulus-is-sugar-for-the-economy/2011/05/19/AGz9JvLH_blog.html: "The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as [Christina] Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was 'sugar', and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.... In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration..."
The competitive model has too great a hold: "Brad, you're the only person I've ever heard say that Card-Krueger changed their mind on how much market power there is in the labor market..."
The problem is of very long standing indeed: John Maynard Keynes (1926) https://www.panarchy.org/keynes/laissezfaire.1926.html: "Some of the most important work of Alfred Marshall-to take one instance-was directed to the elucidation of the leading cases in which private interest and social interest are not harmonious. Nevertheless, the guarded and undogmatic attitude of the best economists has not prevailed against the general opinion that an individualistic laissez-faire is both what they ought to teach and what in fact they do teach..."
Posted by Mark Thoma on Tuesday, April 25, 2017 at 08:56 AM in Economics, Macroeconomics, Methodology, Universities |
Posted by Mark Thoma on Tuesday, April 25, 2017 at 12:06 AM
"Because it offers a rationale for lower taxes on the wealthy":
Zombies of Voodoo Economics, by Paul Krugman, NY Times: According to many reports, Donald Trump is getting frantic as his administration nears the 100-day mark. It’s an arbitrary line in the sand, but one he himself touted in many pre-inauguration boasts. And it will be an occasion for numerous articles detailing how little of substance he has actually accomplished. ...
Mr. Trump sold himself to voters as unorthodox as well as effective. He was going to be a different kind of president, a consummate deal-maker who would transcend the usual ideological divide. His supporters should therefore be dismayed, not just by his failure to actually close any deals, but by the fact that he evidently has no new ideas to offer, just the same old snake oil the right has been peddling for decades.
We saw that on Trumpcare... And now we’re seeing it on taxes. ... Whatever the details, Trumptax will be a big exercise in fantasy economics.
How do we know this? Last week Stephen Mnuchin, the Treasury secretary, told a financial industry audience that “the plan will pay for itself with growth.” And we all know what that means..., history offers not a shred of support for faith in the pro-growth effects of tax cuts..., supply-side economics is a classic example of a zombie doctrine: a view that should have been killed by the evidence long ago... Why, then, does it persist? Because it offers a rationale for lower taxes on the wealthy...
Still, Donald Trump was supposed to be different. Guess what: he isn’t.
To be fair, it’s not clear whether Mr. Trump really believes in right-wing economic orthodoxy. He may just be looking for something, anything, he can call a win — and it’s a lot easier to come up with a tax reform plan if you don’t try to make things add up, if you just assume that extra growth and the revenue it brings will materialize out of thin air.
We might also note that a man who insists that he won the popular vote he lost, who insists that crime is at a record high when it’s at a record low, doesn’t need a fancy doctrine to claim that his budget adds up when it doesn’t.
Still, the fact is that the Trump agenda so far is absolutely indistinguishable from what one might have expected from, say, Ted Cruz. It’s just voodoo with extra bad math. Was that what his supporters expected?
Posted by Mark Thoma on Monday, April 24, 2017 at 07:32 AM in Economics, Politics, Taxes |
Posted by Mark Thoma on Monday, April 24, 2017 at 12:06 AM
Posted by Mark Thoma on Saturday, April 22, 2017 at 12:06 AM
I am here today:
8:45 a.m. Welcoming Remarks and Introduction: John C. Williams, President, Federal Reserve Bank of San Francisco
9:00 a.m. Speaker: Lawrence H. Summers, Harvard University
Interviewer: David Wessel, Brookings Institution
10:30 a.m. Robert E. Hall, Stanford UniversitUnderstanding the Decline in the Safe Real Interest Rate
Discussant: Martin S. Eichenbaum, Northwestern University
11:30 a.m. Pierre Olivier Gourinchas, University of California, Berkeley, Hélène Rey, London Business School Global Real Rates: a long-run approach
Discussant: Linda L. Tesar, University of Michigan
1:30 p.m. Gauti B. Eggertsson, Brown University, Neil R. Mehrotra, Brown University, Jacob A. Robbins, Brown University, A Quantitative Model of Secular Stagnation
Discussant: Andrea Ferrero, Oxford University
2:30 p.m. Noëmie Lisack, Bank of England, Rana Sajedi, Bank of England, Gregory Thwaites, Bank of England, Why Are Real Interest Rates So Low? The role of demographics
Discussant: Ṣebnem Kalemli-Özcan, University of Maryland
4:00 p.m. Moderator: Alan M. Taylor, University of California, Davis, Donald L. Kohn, Brookings Institution, Lawrence Schrembi, Bank of Canada, Sayuri Shirai, Asian Development Bank Institute
Monetary Policy in the 21st century: Lessons from Asia, Europe, and America. A panel discussion
Posted by Mark Thoma on Friday, April 21, 2017 at 09:08 AM
Trump's Tax Cut Plan Will... Pay... For... Itself!: ...Treasury Secretary Steven Mnuchin said ... tax cuts ... would come close to recouping all of the lost revenue from the dramatic rate reductions.... “The plan will pay for itself with growth,” Mnuchin said at an event hosted by the Institute of International Finance.
...here's a chart showing income tax receipts following the five most recent big changes to tax rates. You can decide for yourself if tax cuts pay for themselves or if tax increases tank the economy.
Posted by Mark Thoma on Friday, April 21, 2017 at 07:41 AM
If they persist in trying to fit the balloon in the box, eventually it will pop:
The Balloon, the Box and Health Care, by Paul Krugman, NY Times: Imagine a man who for some reason is determined to stuff a balloon into a box — a box that, aside from being the wrong shape, just isn’t big enough. He starts working at one corner, pushing the balloon into position. But then he realizes that the air he’s squeezed out at one end has caused the balloon to expand elsewhere. So he tries at the opposite corner, but this undoes his original work.
If he’s stupid or obsessive enough, he can spend a long time at this exercise, trying it from various different angles, and maybe even briefly convince himself that he’s making progress. But he’s kidding himself: No matter what he does, the balloon isn’t going to fit in that box.
Now you understand what’s happening to G.O.P. efforts to repeal and replace the Affordable Care Act.
Republicans have spent many years denouncing Obamacare as a terrible, horrible, no good law and insisting that they can do much better. They successfully convinced many voters that they could preserve the good stuff — the dramatic expansion of coverage that has brought the percentage of Americans without health insurance to a record low — while reducing premiums, shrinking deductibles and, of course, doing away with the taxes on high incomes that pay for the program.
Those promises basically define the box into which they’re trying to stuff health care. ...
Again and again, we read news reports to the effect that Republicans are closing in on a plan that will break the political deadlock..., the latest idea being floated, they’ll let insurance companies raise premiums on people with pre-existing conditions and compensate by creating special high-risk pools! ...
And because the task Republicans have set for themselves is basically impossible, their ongoing debacle over health care isn’t about political tactics or leadership..., this thing just can’t work. ...
All of this raises the obvious question: If Republicans never had a plausible alternative to Obamacare, if this debacle was so inevitable, what was the constant refrain of “repeal and replace” all about?
The answer, surely, is that it began as a cynical ploy; at first, the Republicans hoped to kill health reform before it really got started. And now they’ve trapped themselves: They can’t admit that they have no ideas without, in effect, admitting that they were lying all along.
And the result is that they just keep trying to stuff the balloon into that box.
Posted by Mark Thoma on Friday, April 21, 2017 at 07:23 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Friday, April 21, 2017 at 12:06 AM
GE2017: Why economic facts will be ignored once again: In 2015, the Conservatives spun the line that Labour profligacy had messed up the economy, and they had no choice but to clear up the mess. In short, austerity was Labour’s fault. As Labour chose not to challenge this narrative, almost all the media and half the voters assumed it must be true. The reality was the complete opposite. The rising deficit was a consequence of the global financial crisis, not Labour profligacy. Doing something about it should and could have been delayed until the recovery was underway. By acting prematurely, Osborne delayed the recovery and lost the average UK household resources worth thousands of pounds. The story that we had to cut now because of the markets was completely false. ...
The 2015 General Election was the first recent occasion that the economic facts were ignored. The second was of course the EU referendum. ...
A critical issue during the referendum was a belief that immigration had reduced the access of UK natives to public services. Economists know that is simply wrong for the economy as a whole, and if it happens locally it is because the government has pocketed the taxes immigrants pay. But the media did little to inform voters of why it is wrong, and I suspect this is why most of those voting Leave believed they would be no worse off in the long run outside the EU. ...
Brexit may not have led to the immediate economic downturn that some expected, but the Brexit depreciation has brought to a halt the short period during of rising real wages. The economic pain that economists said would follow any vote to leave is starting to happen. ...
As far as economics is concerned GE2017 is likely to be nothing more than a combination of GE2015 and the EU referendum. The economy has not got any better than in 2015, and is about to get worse, but mediamacro will let Conservatives insist that the economy is strong. ... The exchange rate has fallen and real wages have stopped rising, but we will still be told this is just Project Fear and the consensus among economists will get ignored once again. So, for the third time, we will have a vote where economics is critical but economic facts will be largely ignored. ...
As inflation rises and real wages fall the facts may be changing, but the narrative survives.
Narratives are a way people can try to understand things they know little about, and most people know little about economics or politics. Mediamacro is a set of narratives. Project fear is a narrative. The right and the ideologues are very good at selling narratives, and they have a media machine to invent them, road test them and spread them. The left and the realists have none of those things, and are hopeless at it anyway because they know reality is more complex than most narratives. That is why they have lost two elections, and look like losing a third big time.
Posted by Mark Thoma on Thursday, April 20, 2017 at 09:25 AM in Economics, Politics |
Posted by Mark Thoma on Thursday, April 20, 2017 at 12:06 AM in Economics, Links |
"Lately, various Committee members ... and Chair Yellen ... have discussed the symmetry about the Committee's inflation target. Our evidence suggests that the message may not have quite sunk in yet."
Or perhaps the message did sink in, but wasn't believed.
This is from Dave Altig, Nicholas Parker, and Brent Meyer at the Altlanta Fed's macroblog:
The Fed’s Inflation Goal: What Does the Public Know?: The Federal Open Market Committee (FOMC) has had an explicit inflation target of 2 percent since January 25, 2012. In its statement announcing the target, the FOMC said, "Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances."
If communicating this goal to the public enhances the effectiveness of monetary policy, one natural question is whether the public is aware of this 2 percent target. We've posed this question a few times to our Business Inflation Expectations Panel, which is a set of roughly 450 private, nonfarm firms in the Southeast. These firms range in size from large corporations to owner operators.
Last week, we asked them again. Specifically, the question is:
What annual rate of inflation do you think the Federal Reserve is aiming for over the long run?
Unsurprisingly, to us at least—and maybe to you if you're a regular macroblog reader—the typical respondent answered 2 percent (the same answer our panel gave us in 2015 and back in 2011). At a minimum, southeastern firms appear to have gotten and retained the message.
So, why the blog post? Careful Fed watchers noticed the inclusion of a modifier to describe the 2 percent objective in the March 2017 FOMC statement (emphasis added): "The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal." And especially eagle-eyed Fed watchers will remember that the Committee amended its statement of longer-run goals in January 2016, clarifying that its inflation objective is indeed symmetric.
The idea behind a symmetric inflation target is that the central bank views both overshooting and falling short of the 2 percent target as equally bad. As then Minneapolis Fed President Kocherlakota stated in 2014, "Without symmetry, inflation might spend considerably more time below 2 percent than above 2 percent. Inflation persistently below the 2 percent target could create doubts in households and businesses about whether the FOMC is truly aiming for 2 percent inflation, or some lower number."
Do such doubts actually exist? In a follow-up to our question about the numerical target, in the latest survey we asked our panel whether they thought the Fed was more, less, or equally likely to tolerate inflation below or above its target. The following chart depicts the responses.
One in five respondents believes the Federal Reserve is more likely to accept inflation above its target, while nearly 40 percent believe it is more likely to accept inflation below its target. Twenty-five percent of firms believe the Federal Reserve is equally likely to accept inflation above or below its target. The remainder of respondents were unsure. This pattern was similar across firm sizes and industries.
In other words, more firms see the inflation target as a threshold (or ceiling) that the Fed is averse to crossing than see it as a symmetric target.
Lately, various Committee members (here, here, and in Chair Yellen's latest press conference at the 42-minute mark) have discussed the symmetry about the Committee's inflation target. Our evidence suggests that the message may not have quite sunk in yet.
Posted by Mark Thoma on Wednesday, April 19, 2017 at 11:35 AM
Paul Krugman reviews This is Our Fight: The Battle to Save America’s Middle Class, By Elizabeth Warren, Metropolitan Books/Henry Holt & Company:
Elizabeth Warren Lays Out the Reasons Democrats Should Keep Fighting: ...Elizabeth Warren ... brings an edge to her advocacy that many Democrats have shied away from... Even the Obama administration, while doing much more to fight inequality than many realize, balked at making inequality reduction an explicit goal.
Furthermore, Warren comes down forcefully on the left side of an ongoing debate over both the causes of inequality and the ways it can be reduced.
One view, which was dominant even among Democratic-leaning economists in the 1990s, saw rising inequality mainly as a result of ineluctable market forces. Technology, in particular... Given this view, even liberals generally favored free-market policies. ...
The alternative view, which Warren clearly endorses, is all for taxing the rich and strengthening the safety net, but it also argues that public policy can do a lot to increase workers’ bargaining power — and that inequality has soared in large part because policy has, in fact, gone the other way.
This view has gained much more prominence over the past couple of decades, mainly because it’s now backed by a lot of evidence...
But why has actual policy gone the other way? ...
Consider ... West Virginia, where Obamacare cut the number of uninsured by about 60 percent, where minimum wage hikes and revived unions could do wonders for workers in health care and social services, the state’s largest industry. That is, it’s a perfect example of a state that would benefit hugely from an enlightened-populist agenda.
But last November West Virginia went almost three-to-one for a very unenlightened populist...
But maybe it’s a matter of time, and what Democrats need right now is a reason to keep fighting. And that’s something Warren’s muscular, unapologetic book definitely offers. It’s an important contribution, even if it isn’t the last word.
Posted by Mark Thoma on Wednesday, April 19, 2017 at 09:09 AM in Economics, Politics |
Supply-side, trickle-down nonsense on the NYT oped page: There’s a robust debate to be had as to why the NYT published this op-ed on the alleged economic benefits of trickle-down tax cuts, as virtually every paragraph touts an alternative fact. It is the opinion page, I guess, and the authors advise (or at least advised) the president, so I can see why it’s there. But it does require debunking, so thanks NYT, for some make work.
Here’s much of the article’s text, followed by my comments in italics:
A few of the comments:
... Here we have the first in a series of trickle-down claims. The alleged sequencing is: cut taxes of business and the wealthy, they invest more, that raises profits and productivity, and the benefits trickle down to the middle class. Every link in that chain is broken: tax cuts, even on investment income, do not correlate with greater investment, and they certainly are uncorrelated with faster productivity growth. Businesses already receive very favorable tax treatment on their investments; in fact, their tax burden on debt-financed investments can be negative. No question, tax cuts raise after-tax profitability, but absent much more worker bargaining power, those profits stay in the pockets of those at the top of the income scale. ...
Here we have the “money” ‘graf: the straight-up claim that trickle down tax cuts will boost the earnings of the working class, which will help offset their cost—the Laffer curve in action. I guess I should give the authors credit for adding “if we are right,” though I’ll give you very long odds that the editors insisted on this addition. Because there’s no reason to ask if they’re right. They’re not, with the latest exhibit being the state of Kansas, an “experiment” derived by some of these very authors.
BTW, I’ve endorsed my friend Kevin Hassett for his new job as a voice of economic reason in this administration. But I’ve been careful to note this flaw in his work and his thinking. In fact, the study they reference here has been thoroughly debunked in various places. ...
Again with the urgency, and “trust us, folks, it’s not the zillionaires for whom our hearts bleed—it’s ‘jobs and the economy.’” Not to mention the stock market, which is getting “jittery” over the possibility that Trump won’t deliver a tax plan like the one these guys wrote, which delivers fully half of its goodies to the top 1 percent (or even better, the Ryan plan, which, once fully phased in, delivers 99 percent of its cuts to the top 1 percent).
Puh-lease. How stupid do these people think we are (rhetorical question!)? Their simple scheme—Trump wins, the rich get big tax cut—has turned out to be harder to pull off than they’d hoped. That’s a feature, not a bug, of our current political moment, even if it means we have to read a WSJ oped in the NYT.
Posted by Mark Thoma on Wednesday, April 19, 2017 at 07:57 AM in Economics, Taxes |
Posted by Mark Thoma on Wednesday, April 19, 2017 at 12:06 AM in Economics, Links |
Autos Drag Down Industrial Production, Housing Solid, by Tim Duy: The Federal Reserve released March industrial production data today. Overall production was up 0.5% supported by a big jump in utilities. Despite the headline gains, it was something of a mixed message. First, the dispersion of weakness was the lowest since 2014:
It looks like with the rebound in energy prices and related production activity, the industrial side of the economy has turned a corner. On a softer note, manufacturing activity tumbled:
This was fairly disappointing considering the long run of solid growth beginning in the second half of last year. Slowing motor vehicle production took a bite out of the numbers. Specifically, autos, not trucks:
That chart makes it fairly clear that Americans prefer big vehicles to small ones. Overall motor vehicle sales are probably past their peak, and we can expect this source of weakness in industrial production to persist until sales settle into a new level. Note that motor vehicle output contributed 0.14 and 0.06 percentage points to overall growth in 2015 and 2016 respectively. That gives some sense of the magnitude of the opposite effect on growth this year - noticeable, but small.
Housing starts were below expectations, but February was revised upwards. Overall, a solid start to the year:
I don't see any reason to believe the uptrend in single family has broken, but multifamily is likely near cycle highs. For more on housing see Calculated Risk here and here.
Yesterday Federal Reserve Governor Stanley Fisher gave remarks on central bank communication. Of more immediate relevancy were his comments on balance sheet adjustment. Specifically, he doesn't see it as having a disruptive impact:
My tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum. But, of course, as we continue to discuss and eventually implement policies to reduce our balance sheet, we will have to continue to monitor market developments and expectations carefully.
Separately, Kansas City Federal Reserve President Esther George argued for continued rate hikes despite choppy data:
Overall, I am encouraged by the start of the normalization process and want to see it continue. Resisting the temptation to react to near-term fluctuations in the data will be necessary. Looking ahead, we should expect inflation to move up and down around 2 percent. A modest decline in inflation or an overshoot may not necessarily warrant the monetary policy normalization process to slow or accelerate. Such attempts at monetary fine-tuning can easily backfire, so a more forward looking view of inflation is needed.
And as part of that process she would like to see balance sheet reduction placed on auto pilot mode:
Balance sheet adjustments will need to be gradual and smooth, which is an approach that carries the least risk in terms of a strategy to normalize its size. Importantly, once the process begins, it should continue without reconsideration at each subsequent FOMC meeting. In other words, the process should be on autopilot and not necessarily vary with moderate movements in the economic data. To do otherwise would amount to using the balance sheet as an active tool of policy outside of periods of severe financial or economic stress, and would increase uncertainty rather than reduce it.
She also argues against deliberately overshooting the inflation rate. Her key reason is an often forgotten point. Not all goods and services have the same inflation rate, and a higher overall inflation rate may exacerbate inflation differences across the economy. Those differences would be expected to force a restructuring of the economy that could be costly. Her example is that housing costs may accelerate even faster if the Fed were to push for above target inflation:
Such concentration and persistently rising prices in one area suggests the economy is struggling to reallocate resources. For housing, it could reflect several factors such as tight lending standards faced by home builders and scarcity of skilled craftsmen needed to construct homes. I expect the market to eventually solve for, or at least adapt to, such factors. Using monetary policy however to compensate for them could easily end up hurting the population the policy is intended to help.
So count George as a "no" when it comes to any discussion of raising the Fed's inflation target.
Meanwhile, the Trump trade in bonds is reversing course; ten year yields are below 2.2 percent as I write. Also, odds of a Fed rate hike in June have fallen below 50 percent. Market participants are reasonably starting to think that the normalization process may take a bit longer than the Fed anticipates. It will be interesting to see if the Fed agrees. I expect that on average Fedspeak will stick with a fairly hawkish story as policymakers largely dismiss the choppy data of late. We will see if any of George's colleagues share her conviction that policy should not react to recent noise. I tend to think it is a small group, but I argued that Federal Reserve Chair Yellen sounded fairly complacent about the economy last week. Given that the Fed doesn't like to surprise, expect policymakers to speak out forcefully if they feel market participants just don't get it.
Posted by Mark Thoma on Tuesday, April 18, 2017 at 11:59 AM in Economics, Fed Watch, Monetary Policy |
An FRBSF Economic Letter from ÒscarJordà, Moritz Schularick, and Alan M. Taylor:
Monetary Policy Medicine: Large Effects from Small Doses?: Making sure the economy operates at full employment without triggering inflation is tricky. Price stability can conflict with supporting a thriving economy. Choosing the right dose of monetary policy thus requires understanding how interest rates affect general economic activity and prices separately. Not surprisingly, few questions in economics have received as much attention.
Medical researchers consider randomized trials the gold standard in testing alternative treatments. In this Economic Letter, we adapt this approach to measure the efficacy of interest rates in achieving economic goals. Using historical economic data, we extend a traditional economic approach of controlling for domestic factors with a novel strategy that compares data from different external institutional arrangements, our randomized trials. Our findings suggest that interest rate effects may have been previously undermeasured. This has important implications now that some central banks are preparing for a sustained tightening of monetary policy after years of near-zero interest rates.
Randomized trials in practice
When the central bank raises interest rates, inflation and economic activity usually slow down—aggregate demand is being reined in. While researchers have come up with numerous theories to explain why this might happen, precisely measuring this tradeoff is considerably more difficult. Unlike the natural sciences, economics must rely on observational rather than experimental data.
Sinclair Lewis explained experimental data eloquently:
When a physician boasted of his success with this drug or that electric cabinet, Gottlieb always snorted, “Where was your control? How many cases did you have under identical conditions, and how many of them did not get the treatment?” – Arrowsmith, 1925
Central banks do not have the luxury of running such randomized experiments—they do not roll the dice when conducting monetary policy. Inflation and output reflect monetary policy as well as the factors that determined that policy to begin with. Just as umbrellas do not make it rain, if central banks cut interest rates when the economy slows it does not mean that accommodative monetary policy causes recessions.
Economists typically measure the effects of monetary policy with a variety of statistical methods that share a common thread: They control as much as possible for the information that the central bank might have used in choosing interest rates. Any remaining variation in interest rates is considered random. That is, interest rate adjustments that differ from predictions based on available information are like quasi-random experiments. We call this leftover variation in interest rates controlled variation.
The correlation of inflation and output over time with this quasi-random controlled variation in interest rates can provide a measure of the causal effect of monetary policy. For this empirical strategy to succeed, however, one has to make sure that no relevant information is left out, which is a tall order. Unobserved factors can make this type of measurement fraught, justifying the popularity of the randomized controlled trial in the sciences.
In experimental settings, random assignment into treated and control groups forms the basis of randomized controlled trials such as those described by Sinclair Lewis. While advanced economies have not randomly entered into various monetary and trade arrangements, some of these arrangements, like the euro zone, can provide a setting for an alternative type of monetary experiment. Economies that fix their exchange rate but allow capital to move freely across borders effectively relinquish control of domestic monetary policy. In such situations, monetary policy may not respond to domestic conditions and hence may produce quasi-random variation in interest rates that is less sensitive to unobserved factors.
We take advantage of this observation, extending the traditional approach of controlling for domestic factors with a novel strategy that explores what happens to economies that have historically pegged exchange rates while allowing unfettered capital movement. While the United States does not have a pegged exchange rate, we discuss direct implications for U.S. monetary policy later.
Quasi-random monetary experiments
Over the history of modern finance, advanced economies have managed exchange rate policies in a variety of ways. Sometimes they have allowed market forces to determine the exchange rate, generally called floating exchange rate regimes—or “floats” for brevity. At other times, countries we will call “pegs” have pegged the exchange rate to another currency. Examples of peg arrangements include the classical gold standard era that ended with World War I; the Bretton Woods era that began after World War II and ended around 1973; and, the European Monetary System in the 1970s up to when the euro was rolled out in 1999.
Two countries that peg the exchange rate and allow capital to move freely must have the same short-term safe interest rate. Otherwise an investor could borrow funds in one country for less than the return offered by the other without bearing any risk—a sure way to make unlimited profit. The absence of such risk-free arbitrage essentially robs local central banks of their autonomy by forcing interest rates to equalize across borders with those set by the center country’s central bank. The mechanism just described is often referred to as the trilemma in international finance (see, for example, Obstfeld, Shambaugh, and Taylor 2005).
In a recent paper (Jordà, Schularick, and Taylor 2017), we take advantage of this phenomenon to single out episodes in which interest rates fluctuated for reasons unrelated to the domestic outlook and direct decisions by the home-country central bank. We use such episodes to calculate how interest rates affect output and inflation. These episodes are our quasi-random monetary trials. We call variation in interest rates due to these episodes peg variation.
In particular, we rely on annual data for 17 advanced economies including the United States since 1870. In our sample, countries have moved in and out of exchange rate arrangements over time. We start by focusing on the sample for country-year pairs for pegs. We find that there is a difference between controls that use only observable information and those that add information on the variation in interest rates caused by the peg. This finding can improve our understanding of the effects of monetary policy.
Interest rates are a powerful lever
If using observables for the control is sufficient, the measured response of output and inflation to interest rates using either controlled variation or peg variation should be equivalent. If there are omitted factors, any differences will arise when using controlled variation. And in that case, variation due to the peg offers a more reliable guide. Just to be sure, we also include as controls information on GDP, inflation, and several other macroeconomic conditions.
Figures 1 and 2 suggest there is cause for concern when focusing on measures based on controlled-variation. Using post-World War II data, Figure 1 shows the response of inflation-adjusted GDP per capita in response to a 1 percentage point increase in short-term interest rates in year 0 calculated two different ways. The green line uses the traditional controlled variation approach, while the red line uses the peg variation approach surrounded by a gray 90% confidence band. There is a stark difference between the two approaches. In the first case, interest rates barely cause a ripple, whereas in the second, real GDP per capita is about 2% lower in year 4 than it was at the start.
Cumulative response of real GDP per capita
A similar picture emerges in Figure 2. The measured response of prices using controlled variation in interest rates is muted—prices are about 0.5% lower by year 4 relative to year 0. The same response calculated with peg variation is estimated to be nearly 2%. In other words, assuming a constant rate of price decline, inflation is about 0.4 percentage point per year lower.
Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.
Cumulative response of consumer price index level
Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.
The different paths in the figures suggest that the traditional controlled variation approach undermeasures the macroeconomic impact of changes in interest rates. One possible explanation is that interest rates follow different paths after year 0 under each type of measurement approach.
Figure 3 shows that interest rate paths clearly differ somewhat between the two approaches. Measures based on peg variation indicate that interest rates go up further in year 1 but then come down very quickly. The path using controlled variation is more persistent and would tend to have a longer-lasting effect on output and prices, which clearly contradicts the actual pattern seen in Figures 1 and 2.
Cumulative response of short-term interest rates
Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.
Checking the reliability of the results
What else could explain the stark differences in the figures? The first thing to check is whether there are differences between peg and float economies that would make their responses to interest rates fundamentally different. Although measures of peg variation are unavailable for floats, Jordà, Schularick, and Taylor (2017) find that controlled variation measures for both pegs and floats are, in fact, very similar, so the explanation must lie elsewhere.
Peg variation may reflect spillover effects from trade channels or other mechanisms that distort measures of the response to interest rates. Jordà, Schularick, and Taylor (2017) find that, if anything, spillover effects would tend to increase the differences.
Finally, our estimates are very similar to those reported in other research, including Romer and Romer (2004) and Cloyne and Hürtgen (2016). This line of research tries to avoid the pitfalls of the controlled variation approach using staff forecast errors from the Federal Reserve and the Bank of England, respectively, to identify exogenous changes in policy rates.
We do not have a definitive measure of how interest rates affect economic activity and inflation. However, along with other recent research, we find that interest rates have stronger effects on the macroeconomy than previously understood. Although the monetary experiments we use to calculate the response to interest rate changes rely on countries that peg—by contrast, the United States allows its exchange rate to freely float—there are good reasons to think that the U.S. economy responds to interest rate changes no differently. Our sample is made up of advanced economies that have institutional characteristics similar to the United States and whose economies respond much the same way as ours when using controlled variation. Without delving into the timing or path of monetary strategy more deeply, our research suggests that even a modest tightening cycle can have a substantial restraining effect on both inflation and economic activity.
Cloyne, James S., and Patrick Hürtgen. 2016. “The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom.” American Economic Journal: Macroeconomics 8(4), pp. 75–102.
Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2017. “Large and State-Dependent Effects of Quasi-Random Monetary Experiments.” FRB San Francisco Working Paper 2017-02.
Lewis, Sinclair. 1925. Arrowsmith. New York: Harcourt, Brace & Company.
Obstfeld, Maurice, Jay C. Shambaugh, and Alan M. Taylor. 2005. “The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility.” Review of Economics and Statistics 87(3), pp. 423–438.
Romer, Christina D., and David H. Romer. 2004. “A New Measure of Monetary Shocks: Derivation and Implications.” American Economic Review 94(4), pp. 1,055–1,084.
Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.
Posted by Mark Thoma on Tuesday, April 18, 2017 at 12:15 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Tuesday, April 18, 2017 at 12:06 AM in Economics, Links |