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Must-Read: Robert Skidelsky: The Conservative Election Manifesto - Washington Center for Equitable Growth
The Conservatives have continued to spin their familiar yarn of having rescued Britain from ‘Labour’s Great Recession’…
… the mother of all lies. The Great Recession was caused by the banks. Governments, the Labour government included, by bailing out the banks and continuing to spend, stopped the Great Recession from turning into a Great Depression. Yet practically everyone seems to believe that the Great Recession was manufactured by Gordon Brown. The Conservatives claim that ‘by halving the deficit we have restored confidence to the economy’. This cheerfully ignores the near academic consensus that their deficit-reduction policies over the last 5 years have made the British economy between 5 and 10% smaller than it would have been with more sensible policies…. The Conservative narrative has become the Overton Window of our day, outside of which policies are unthinkable. But sooner or later reality will break in, and what is now unthinkable will become sensible again. But not in this election.
Must-Read: Adam Hale Shapiro: Did Massachusetts Health-Care Reform Affect Prices? - Washington Center for Equitable Growth
The 2006 health-care reform in Massachusetts relied heavily on the private insurance market…
…Recent evidence shows that the reform boosted payments to physicians from private insurers by 13% relative to other areas. This increase began immediately before the reform became law, suggesting that insurers raised payments in anticipation of the change. The reform may have also caused the state’s insurance premiums to fall. Overall, evidence suggests that the Massachusetts health-care reform shifted dollars away from insurers and towards providers and consumers.
Today's Must-Must-Read: David G. Blanchflower and Andrew T. Levin: Labor Market Slack and Monetary Policy - Washington Center for Equitable Growth
In the wake of a severe recession and a sluggish recovery…
…labor market slack cannot be gauged solely in terms of the conventional measure of the unemployment rate (that is, the number of individuals who are not working at all and actively searching for a job). Rather, assessments of the employment gap should reflect the incidence of underemployment (that is, people working part time who want a full-time job) and the extent of hidden unemployment (that is, people who are not actively searching but who would rejoin the workforce if the job market were stronger). In this paper, we examine the evolution of U.S. labor market slack and show that underemployment and hidden unemployment currently account for the bulk of the U.S. employment gap. Next, using state-level data, we find strong statistical evidence that each of these forms of labor market slack exerts significant downward pressure on nominal wages. Finally, we consider the monetary policy implications of the employment gap in light of prescriptions from Taylor-style benchmark rules.
Must-Read: Guntram B. Wolff and André Sapir: Euro-Area Governance: What to Reform and How - Washington Center for Equitable Growth
Pre-crisis, the euro area suffered from the built-up of financial imbalances…
…price and wage divergence and an insufficient focus on debt sustainability. During the crisis, the main problems were slow resolution of banking problems, an inadequate fiscal policy stance in 2011-13 for the area as a whole, insufficient domestic demand in surplus countries and slow progress with structural reforms to overcome past divergences…. Euro-area governance… should establish institutions to prevent divergences of wages from productivity… a European Competitiveness Council… and the creation of a Eurosystem of Fiscal Policy (EFP) with two goals: fiscal debt sustainability and an adequate area-wide fiscal position. The EFP should have the right in exceptional circumstances to declare national deficits unlawful and to be able to force parliaments to borrow more so that the euro-area fiscal stance is appropriate…. In the short term, domestic demand needs to be increased in surplus countries, while in deficit countries, structural reform needs to reduce past divergences.
Must-Read: Chris Blattman: The Mistakes Made by Most Development Reformers - Washington Center for Equitable Growth
I’d make a different point: the way I’ve learned how things operate is to work with a government or organization to try out a policy and succeed or fail. This kind of trial and error seems crucial to me. Karl Popper called this the piecemeal social engineer. Deng Xiaoping called it crossing the river by feeling each stone…. A lot of people would say this is China’s secret to success: informal experimentation on a grand scale. The problem, as I see it, is that most governments and aid organizations I’ve worked with are really, really bad at this. They don’t use the lessons from past failures to try again a different, better way. They don’t throw out bad programs…. The important question is not ‘what is the right policy?’, but ‘what is the process for generating good policies over time?’, and more importantly ‘how to get governments and aid organizations to adapt to the good and throw out the bad?’…
Must-Read: David Beckworth: It Takes A Regime Shift to Raise an Economy - Washington Center for Equitable Growth
So Bernanke wants the Fed to keep its inflation target of 2% and complement it with more aggressive use of fiscal policy…. What could possibly go wrong? A lot, actually…. Fiscal policy would [only] have had 60 basis points [of inflation] on average with which to work over the past six years in closing the output gap. Do we really think that would be enough for the level of aggregate demand shortfall experienced over this time? What was needed was a monetary policy regime shift… a permanent increases in the non-sterilized portion of the monetary base to spur rapid growth in total dollar spending. It was never going to happen with a 2% inflation target…. To get the kind of robust aggregate demand growth needed to close the output gap back in 2010, there needed to be a sustained (but ultimately temporary) period of higher-than-normal inflation…
Keynesian Multipliers, Investment Accelerators, and Crowding-in - Washington Center for Equitable Growth
I, however, read this as not quite the “paradox of thrift”, however, but rather as the investment accelerator. As I read the IMF’s *World Economic Outlook* chapter 4 section on “How Much [Investment Weakness] Is Explained by Output? Insights Based on Instrumental Variables”, they are saying that *if* the government undertakes fiscal austerity and *if* there is not full monetary offset in order to hold real GDP to its pre-austerity path, *then* investment will be relatively weak. The absence of full monetary policy offset seems to me to be key–at least when I teach “crowding out”, it is something that happens as a consequence of full monetary offset, and thus of a stable real GDP path, in the event of a shift in government spending and taxes.
Nevertheless, the strong accelerator effects that the IMF team finds are very interesting–and are yet another reason why I find that I keep raising my estimate of what the simple Keynesian multiplier is.
Recession in Oil Patch Red States This Year? - Washington Center for Equitable Growth
After accounting for the multiplier, the absence of the Medicaid expansion and other ObamaCare nullification efforts is putting a downward drag on economic growth in Red States of about 0.5% this year: a 2%-point growth in the non-insurance gap times 1/6 of the economy times a 1/2 insurance-spending attenuation factor times a Keynesian multiplier of 3:
Add to that the effect of the oil price declines like 1986 and 1998 on the oil patch:
And I do not see how the Dallas Fed can still forecast:
This year Texas job growth likely to moderate to 2.0-2.5%, about 259,000 jobs–149,000 fewer than 2014–and close to US job growth…
Must-Read: Ricardo J. Caballero and Emmanuel Farhi: The Safety Trap - Washington Center for Equitable Growth
In this paper we provide a model of the macroeconomic consequences of a shortage of safe assets…
In particular, we discuss the emergence of a deflationary safety trap equilibrium which is an acute form of a liquidity trap. In this context, issuing public debt, swapping private risky assets for public debt, or increasing the inflation target, stimulate aggregate demand and output, while forward guidance is ineffective. The safety trap can be arbitrarily persistent, as in the secular stagnation hypothesis, despite the existence of infinitely lived assets. When we endogenize the private securitization capacity, we show that in a safety trap there is a securitization externality that leads to underprovision of safe assets.
Must-Read: Frances Coppola: Colds, Strokes and Brad Delong - Washington Center for Equitable Growth
Herein lies my beef with Blanchard. Hot toddies and antibiotics are not the right treatment for strokes. Nor is deep cleaning of hospitals, important though this is. But the economics profession’s toolkit seems to be limited to hot toddies, antibiotics and cleaning ladies…. And it justifies its limited diagnostic skills and inadequate toolkit by arguing that if only we keep warm and dry and eat well, we won’t catch colds or suffer strokes anyway…. I confess I find it difficult to see how a system that is normally far from equilibrium can be adequately represented by a general equilibrium model, but then I am not a mathematician. I am encouraged therefore to see that Borio seems to share my concerns (my emphasis)
Must-Read: Eric Lonergan: Bond bubbles, MMT, and the Limits to Fiscal Policy - Washington Center for Equitable Growth
Most of what [MMTers] say about fiscal policy seems broadly correct…
…The constraints on fiscal policy are determined by two factors: 1) can you print your own money, and 2) is unemployment already so low that fiscal stimulus is inflationary…. One of the things I dislike about the unthinking obsession with “expectations” in today’s monetary policy discourse is the suggestion that “inflation expectations” can suddenly–out of nowhere–go haywire. This a bit like the idea of bond panic. One day–for some unknown reason–the bond market is going to think that the government won’t raise future taxes, and panic…. But if the central bank can do QE, there cannot be sustained bond panic in the absence of a genuine inflation problem. Why? Because, as the BoJ is showing, faced with no inflation risk, the central bank can buy all the bonds.
All that matters then is what causes a sustained rise in inflation. The idea that the population wakes up one day and decides that because the national debt has gone through the Reinhart and Rogoff limit, or because a check from the Fed has arrived in the post, there is going to be a wild outbreak of inflation, is unconvincing…
Must-Read: Noah Smith: Fixed Mindsets - Washington Center for Equitable Growth
Carol Dweck is one of America’s most important public intellectuals, and I believe that her idea, the Growth Mindset, is one of the most good and useful in America today…
…She’s also a hedgehog. Meaning, of course, that she applies her One Big Idea to everything and anything, and tends to exaggerate its power and the evidence in favor of it. That’s OK. Most promoters of big good ideas are hedgehogs…. I think that as a society we’ve gotten good at recognizing hedgehogs and mentally correcting for the hedgehogginess…. Dweck makes it clear many times that natural ability does, in fact, matter. She states that among people of similar natural ability, having a growth mindset makes a big difference. What she is saying is that the marginal effect of the growth mindset on performance is large for most people, even though natural ability matters a lot in the average…
Must-Read: Marshall Steinbaum: Hottest Tax Idea in Washington Actually Terrible - Washington Center for Equitable Growth
The ‘consumption tax’… transcends political divides in Washington…
…instead of taxing wealth or income, the government should encourage people to save by taxing only their spending… Rubio… Lee… Cardin…. Too bad they’re all wrong…. The theoretical arguments in favor of consumption taxes are typically based on the injustice of penalizing thrift by the poor. But those are just fables: Saving is overwhelmingly a pastime of the rich…. [It] might sound great in theory, but one that would be revenue and distributionally neutral would create tremendous smuggling opportunities and thus be impossible to enforce…
Today's Must-Must-Read: Alan Blinder: The Fed Can Be Patient About Raising Interest Rates - Washington Center for Equitable Growth
The impatience crowd once worried loudly and frequently about a different set of problems. Specifically, that near-zero interest rates and/or quantitative easing were allegedly causing financial-market “distortions” and “bubbles.”… The federal-funds rate has been near zero for over six years now, and the Fed’s balance sheet is roughly five times as large as when Lehman Brothers failed. Yet none of the hypothesized financial hazards have surfaced. So you don’t hear the scare stories much anymore. Here, too, the evidence suggests that patience is the right policy. To be sure, the Federal Reserve will not maintain near-zero interest rates and a $4.5 trillion balance sheet forever. Monetary policy will eventually begin to normalize. But not in June, and maybe not in September. Timing, they say, is everything. This is a time for patience.
Must-Read: Chris Meissner: Research Summary - Washington Center for Equitable Growth
The first ‘Great Wave of Globalization,’ during the late 19th and early 20th centuries witnessed a historically unprecedented rise in spatial economic integration…
…Previous work in economic history has emphasized the rapid decline in transportation costs and the fall in tariffs. However, a number of other trade costs mattered over this period, and not all of them followed the same path as real transportation costs…. When two nations adopted the gold standard, trade was higher by 15 percent, on average, relative to non-adopters. Monetary unions, political alliances, language, and trade treaties also affected the direction of trade…. Our data for the U.S., U.K., and France and their major trading partners between 1870 and 1913 show that trade costs fell at a rate of about 0.3 percent per year, which is significantly slower than the decline in average maritime freight rates of 2 percent per year. Our explanation for this is, first, that our all-encompassing trade-cost measure captures many other frictions….
Globalization in the 19th century had a very important ‘extensive margin.’ While the existing literature on pre-1914 globalization has emphasized a ‘great specialization,’ this characterization fails to take into account that a significant fraction of the growth of trade was due to the export of new goods and the opening up of new markets. Significant amounts of the observed trade flows were also in fact already intra-industry. This observation leads us to believe that then, as now, firm-level heterogeneity and trade costs mattered…. As fixed costs fell and presumably as new firms found it profitable to enter export markets, many industries experienced relatively slow productivity growth as low-productivity entrants were now able to survive…. Overall productivity growth between 1870 and 1910 was much slower than we would expect in the midst of such an unprecedented trade boom, and it was much lower than productivity growth in the new-goods sectors….
Observe that, from the middle of the 19th century, many countries dramatically extended the franchise, thereby increasing the level of ostensible democracy. A similar trend coincided with the more-recent wave of globalization, as the number and share of democracies in the world rose dramatically from the 1960s…. We use an instrumental-variables strategy inspired by Jeffrey Frankel and David Romer to see whether, in the first wave of globalization in particular, exposure to trade flows might have had a causal impact on democracy. There is little evidence that it did…
Things I Probably Will Have Time to Say: Rethinking Macro Policy III Conference, Washington D.C., April 15-16 - Washington Center for Equitable Growth
What is the elementary macroeconomics of dynamic inefficiency? If a class of investment–in this case, investment by taxpayers in the form of wealth held by the government via amortizing the debt–is dynamically inefficient, do less of it. Do less of it until you get to the Golden Rule, and do even less if you are impatient. How do taxpayers move away from dynamic inefficiency toward the Golden Rule? By not amortizing the debt, but rather by borrowing more.
Now we resist this logic. I resist this logic. I tend to say that we have a huge underlying market failure here that we see in the form of the equity return premium–a failure of financial markets to mobilize society’s risk-bearing capacity, and that pushes down the value of risky investments and pushes up the value of assets perceived as safe, in this case the debt of sovereigns possessing exorbitant privilege.
Things I Won't Have Time to Say III: Rethinking Macro Policy III Conference, Washington D.C., April 15-16 - Washington Center for Equitable Growth
Can, in a political-economy sense, central banks be trusted with the full-employment-and-price-stability stabilization-policy mission? Are they not captured, to too great an extent, by the commercial-banking sector that, myopically, favors higher nominal interest rates to directly improve bank cash flows and indirectly dampen inflation and so redistribute wealth to nominal creditors–like banks?
No, they cannot be trusted. Yes, they are captured to too great an extent by the commercial-banking sector. Yes, the commercial banking sector is very myopic in its conventional wisdom.
Things I Won't Have Time to Say II: Rethinking Macro Policy III Conference, Washington D.C., April 15-16 - Washington Center for Equitable Growth
Take the mechanics of demand stabilization and management off the table. Move, in our imagination at least, into a world in which short-term safe nominal interest rates rarely if ever hit the zero nominal bound. In that world, as a result, the full employment and price stability stabilization-policy mission could be left to central banks and monetary policy. Furthermore, confine our thinking to the North Atlantic, possibly plus Japan.
It seems to me then that there are four big remaining questions:
Can, in a political-economy sense, central banks be trusted with this mission? Are they not captured, to too great an extent, by the commercial-banking sector that, myopically, favors higher nominal interest rates to directly improve bank cash flows and indirectly dampen inflation and so redistribute wealth to nominal creditors–like banks?
What is the proper size of the twenty-first century public sector?
What is the proper size of the public debt for (a) countries that do possess exorbitant privilege because they do issue reserve currencies, and (b) countries that do not?
What are the real risks associated with the public debt in the context of historically-low present and anticipated future interest rates?
Things I Won't Have Time to Say: Rethinking Macro Policy III Conference, Washington D.C., April 15-16 - Washington Center for Equitable Growth
It could have turned out very differently.
It could have been–as those of us who more-or-less hooted Raghu Rajan down at Jackson Hole in August 2005 wrongly thought—-that the money-center universal banks did understand their derivatives books; that asset-price innovation variances did drift up or down with time relatively slowly; that the weak point in the global economy in the mid 2000s was the global imbalance of the US trade deficit, and the possibility that some large bad actor had been selling unhedged dollar puts on a very large scale–not the subprime mortgages on houses built in the desert between Los Angeles and Albuquerque, and the use of securities based on those subprime mortgages as core banking reserves.
Must-Read: Adam Ozimek: The New Liberal Consensus Is a Force to Be Reckoned with - Washington Center for Equitable Growth
Paul Krugman… provides what I think amounts to the basic case…
Low wages… are not the product of inscrutable market forces, but rather choices… connecting rising income inequality with the decline in workers’ bargaining power.
It’s not just Paul Krugman and liberal politicians like Barack Obama and labor secretary Tom Perez embracing this ‘new consensus’ either. Even some centrist economists like Larry Summers and Robert Rubin have been making similar arguments…. This is… a conclusion that is drawn from recent trends in empirical research… Arin Dube and coathors… Justin Wolfers, Adam Posen, Jacob Funk Kirkegaard and others…. An increasing number of pundits and economists who look at the literature on minimum wages and other research on labor markets and conclude that the stronger unions, higher wages, and more labor market regulations are a good idea…. Those who don’t buy the ‘new consensus’, again including myself, have a lot to worry about…. Rebuttals are piecemeal, attacking the minimum wage or unions alone, while the new consensus provides a whole story. Just as importantly, those voicing dissent are outnumbered…. Nobody else has a very easy-to-tell story right now, or at least those that do have good stories aren’t addressing the recent trends in empirical evidence…. Right now, new liberal consensus proponents have the upper hand in this argument, at the very least rhetorically and certainly in terms of sheer quantity of output and controlling the conversation. Libertarians, conservatives, old fashioned neoliberals, and other liberals who disagree need to do a better job. I suspect there are actually a lot of liberal economists who don’t embrace this new consensus, but we aren’t hearing much from them. This consensus appears to be a big part of Hillary Clinton’s economic agenda, so if there are going to be alternatives now is the time to speak up.
Must-Read: Simon Wren-Lewis: Macro Teaching and the Financial Crisis - Washington Center for Equitable Growth
We end up with textbooks that still have the completely out of date LM curve at their heart (and associated AD curves, plus Mundell Fleming, and even money multipliers)…
…but additional chapters where the AS curve becomes a Phillips curve, and money targeting gives way to Taylor rules. The student ends up totally confused, if they ever get to those later chapters. And after the financial crisis, a new edition will have a chapter devoted to that crisis, but not much in earlier chapters will change. This is not the case with the third textbook by Wendy Carlin and David Soskice… a complete rewrite of their earlier ‘Macroeconomics: Imperfections, Institutions, and Policies’. Luckily all the features of that earlier book that I really liked are retained… a supply side based on imperfect competition… a core model (the 3 equation model) which dispenses with the LM curve, and replaces it with a ‘monetary rule’ curve… open economy analysis is now fully integrated with the 3 equation model…. But by far the most important change… [is] three chapters on the financial sector… banking… a wedge between the ‘policy’ interest rate and the interest rate relevant for the IS curve…. how the financial system can be a source of instability… the financial crisis of 2008…. Mark Gertler on the back cover writes: ‘This is an exciting new textbook. Overall, it confirms my belief that macroeconomics is alive and well’. That pretty well sums up my reaction.
Today's Must-Must-Read: Matthew Yglesias: A Chart Obamacare's Critics Have a Hard Time Explaining - Washington Center for Equitable Growth
A decline in the uninsured rate is, in part, a reflection of the growing strength of the economy and the accelerating pace of job creation…. [But] conservatives also predicted that Obamacare would destroy the economy. In a 2011 press conference, John Boehner used the phrase ‘job killing’ once every two minutes. Then in 2012 we had the best year of job creation since 2005. In 2013 we had an even better year of job creation. Then in 2014, we had an even better year, the best since 1999.
Ezra Klein of Vox.com vs. Tom Standage of The Economist - Washington Center for Equitable Growth
Basically, however much money http://vox.com asks me for, I will pay it gladly. Not so with http://economist.com.
Here’s why:
Ezra Klein: How Vox Aggregates: “I started as a blogger in the pre-social web, when the only way to build an audience was to have other sites quote or link…
…Everything I wrote, I wrote in the hopes that someone else would take it and try to use it on their site, with a link back to my site. The lesson of that, to me, was that writing on the internet is a positive-sum endeavor: I was creating content that helped other people make their sites better, and in using that content, they were helping me grow my site. Vox’s approach to aggregation–which Nate Silver criticized today on Twitter–is informed by that. Our policy, to our staff, is simple: any time we use work created by someone else, we need clear attribution to the original author and a link back to the source. When appropriate, we should do more than that: we should add to the conversation with new facts, ideas, or reporting.
The problem comes when we do it poorly–and in those cases, we deserve to get called out. Take the post that frustrated Silver. The attribution there was clear…. The post went on to argue with Silver…. This wasn’t just aggregation…. The graphic itself included a FiveThirtyEight watermark…. But the post didn’t include a link. This was carelessness, not malice, but it’s a violation of Vox’s internal standards…. Silver’s right to be upset… He has my apologies….
Must-Read: Max Sawicky: Work Makes Fritos - Washington Center for Equitable Growth
Matthews’ thrust is actually more radical than that. He is throwing shade on the moral obligation and axiomatic economic imperative of work itself, in particular employed work…. Let’s desacralize work. Dignity of work, my fanny. Work that is truly voluntary would be nice. Work that is compelled as an alternative to destitution does not comport with any reasonable concept of dignity. It’s like the dignity of kicking back to Tony Soprano…
Must-Read: Pro-Growth Liberal: Jeffrey Sachs’ Feeble Defense of David Cameron - Washington Center for Equitable Growth
In the United Kingdom, the Prime Minister who possesses a majority of the House of Commons is the government: Cameron rules fiscal policy, regulatory policy, and monetary policy. Cameron bears responsibility. In the United States, since the second quarter of 2010 Obama has had no power to pass additional fiscal stimulus and no power to reshape the FOMC. Only housing regulatory policy was under his control. Obama gets to claim nearly-full responsibility for the relatively good things. But Obama has to share only a portion of the blame for the bad things.
Today's Must-Must Read: Gavyn Davies: Who Is Right About the Equilibrium Interest Rate? - Washington Center for Equitable Growth
The FOMC… are certainly willing to publish the dots, and to spell out their views on the most likely path for the equilibrium real rate. But they are far from ready to risk a major disruption in the markets by telling investors explicitly that they have misjudged the hawkishness of the Fed. Why is this? Presumably it is because the Yellen camp concedes that there is great uncertainty about the equilibrium real rate…. The Bernanke/Yellen belief that the equilibrium rate will rise in the next 3 years as headwinds diminish is at best conjectural….
J. Bradford DeLong