Running late -- have a dissertation proposal defense to get to, then a final to give to my Ph.D. students -- so a quick
one:
A Counter Example to the "Tragedy of the Commons", by Matthew Kahn: ...This
OP-ED by Andrew Kahrl is actually quite interesting. ... For at least 20
years, I have lectured on the "tragedy of the commons" that takes place both in
cities and in the oceans. Consider a smoker in a city...[numerical example]. This is a simple example of the tragedy of the commons ---
this smoker unintentionally degraded the commons as he pursued his privately
optimal action. The same logic applies to over-fishing in common oceans. One
"solution" to this property rights issue is to privatize the commons and the
owner would charge a price to allow the smoker to smoke and the smoker would
only smoke if he is willing to pay this fee.
We can now evaluate Professor Kahrl's claims. He argues that the privatization
of beaches in the Northeast is the reason that Hurricane Sandy caused so much
damage.
He writes; "By increasing the value of shoreline property and encouraging
rampant development, the trend toward privatizing formerly public space has
contributed in no small measure to the damage storms like Hurricane Sandy
inflict. Tidal lands that soaked up floodwaters were drained and developed.
Jetties, bulkheads and sea walls were erected, hastening erosion. And sand dunes
— which
block
rising waters but also profitable ocean views —
were bulldozed." ...
Kahrl is saying that capitalism and the pursuit of
aesthetic beauty nudged us to drop our guard and destroy Mother Nature's coastal
defense system. .... For this claim to be true, he must assume that the tragedy of
the commons would not have degraded such natural capital. This may be true.
Mother Nature is now engaging in a takings as she tries to seize coastal
property from incumbent owners. I say let her win. These place based
stakeholders want to use your tax dollars as funds to build a wall around them.
A compromise would be for the state government to buy these properties and
knock them down and revitalize the natural capital adaptation strategies that
the author lists. ...
Posted by Mark Thoma on Wednesday, December 5, 2012 at 10:24 AM in Economics, Environment, Market Failure, Regulation |
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Antonio Fatas reacts to the Republican counterproposal on the budget:
Planning for (fiscal) miracles, by Antonio Fatas: The debate in the US about
how to deal with the "fiscal cliff" has produced a counterproposal by the
Republicans on how to avert a crisis. The proposal is criticized by many because
of its lack of details (see
here,
here,
here and
here). The way the proposal avoids dealing with the real issues and suggests
solutions that do not impose a cost on anyone reminds me of some of the debates
in Europe about finding a plan to deal with Greek government debt or the
capitalization of Spanish banks. In all these cases you hear proposals that seem
to generate resources without anyone having to pay for them. Republicans in the
US want to raise revenues without increasing tax rates, cutting spending without
really cutting it. And the Spanish government will bailout banks without
imposing any cost on taxpayers. In some cases these proposal have no logic in
others there is some logic but a lot of wishful thinking that generates economic
miracles. ...
Posted by Mark Thoma on Wednesday, December 5, 2012 at 12:33 AM in Budget Deficit, Economics, Politics |
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Tim Duy:
Monetary Policy to Become Easier Next Week?, by Tim Duy: There are two important issues to be discussed at next week's FOMC meeting. One is the issue of specific thresholds as future policy guides. The second is the replacement for Operation Twist. Clearly, support is building for specific thresholds, and I believe policymakers will work out the details within the next meeting or two. Also, I think the general sense is that the Fed will continue to purchase long-term Treasuries after Operation Twist is complete. But will they continue to purchase the full $45 billion a month? That seems like it should be an open question, but it looks like momentum is building in that direction.
St. Louis Federal Reserve President James Bullard offered his thoughts on both these topics yesterday. On the first point, he offers support for replacing the forward guidance with a set of thresholds. I don't find this to be surprising. Bullard has never been a huge fan of the time commitment implied in the current statement. Not only does it send a pessimistic signal about the economy, in theory it should respond more flexibly to evolving economic events. But in practice, the Fed is only willing to alter the date in the event of a substantial shift in the economic outlook.
Bullard cites the 6.5/2.5 unemployment/inflation thresholds recently described by Chicago Federal Reserve President Charles Evans. I am not sure that Bullard specifically endorses these figures, but he may sense the political wind is blowing in that direction. He nicely describes six challenges to a threshold regime:
- The Fed needs to make clear that in the long-run the Fed cannot target unemployment.
- He believes the threshold should be on actual outcomes, not forecasts.
- The Fed needs to communicate that policy is about more than just two variables. For example, he suggests the possibility of raising interest rates to limit asset price bubbles.
- Unemployment is not the only measure of the labor market. The Fed takes a broader view of labor markets into consideration.
- Unemployment can remain high, such as in Europe (I think this is really just a restatement of point one).
- Beware that thresholds will be viewed as triggers, which they are not.
I think these are valid concerns the Fed needs to address as the communication strategy evolves. Bullard then shifts gears to Operation Twist. Currently, large scale asset purchases come in two flavors. One is $40 billion a month in outright mortgage purchases (QE3), the other a monthly swap of $45 billion in short-term Treasuries for an equal amount of long-term Treasuries (Operation Twist). The former is open-ended, the latter concludes this month. Should it be fully converted to an outright asset purchase program? San Francisco Federal Reserve President John Williams gave his opinion last month:
Meeting with reporters following a speech at the University of San Francisco, MNI asked Williams whether he thinks the FOMC should replace the Operation Twist Treasury purchases dollar for dollar upon their expiration Dec. 31. He answered strongly in the affirmative.
"My view is based on the expectation that we won't see substantial improvement in the labor market" for awhile, Williams said, adding that therefore "my view is that we should continue with purchases of long-term Treasuries after December into next year."
Williams said he favors "just purely buying long-term Treasuries at the rate we're buying."
Asked to clarify, Williams said he favors buying MBS and Treasuries "at the same rate we're doing now" -- $85 billion per month.
Boston Federal Reserve President Eric Rosengren agreed yesterday. Operation Twist changes the composition of the balance sheet, not its size. If the Fed converts to an outright asset purchase program, they will more than double the pace of net purchases. In my opinion, this appears to be a substantial easing of policy. Bullard feels similarly:
...on balance I think it is reasonable to think that an outright purchase program has more impact on inflation and inflation expectations than a twist program....
...Replacing the expiring twist program one-for-one with outright purchases of longer-dated Treasuries is likely more dovish than current policy.
I think that is correct; the conversion of Operation Twist should be considered a more aggressive policy. Yet inflation expectations (with the usual caveats about TIPS based expectations) continue to wane:
Perhaps financial market participants do not expect the Fed to commit to the full $85 billion in purchases. But this does not seem to be the case. There has been more than enough Fedspeak to suggest that additional easing is coming. Which leads me again to wonder if monetary policy is now at full throttle? $40, $50, or $85 billion a month. Does it make a difference? Or is the expectation of additional easing simply offsetting expectations of tighter fiscal policy?
Bottom Line: The Fed is gearing up to convert Operation Twist to an outright purchase program. A complete conversion should be considered a more aggressive policy stance. If the Fed wants to hold policy constant, then we would expect a less than one-for-one conversion. There are reasons to expect the Fed would go the full monty. Notably, the fiscal cliff drama already appears to be affecting the economy, even though it is more risk than reality. But why are inflation expectations sliding? And what does that imply about the effectiveness of additional easing at this juncture? Important but as of yet unanswered questions.
Posted by Mark Thoma on Wednesday, December 5, 2012 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
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Posted by Mark Thoma on Wednesday, December 5, 2012 at 12:06 AM in Economics, Links |
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Kenneth Rogoff says our troubles may last awhile but thye aren't permanent:
Innovation Crisis or Financial Crisis?, by Kenneth Rogoff, Commentary,
Project Syndicate: As one year of sluggish growth spills into the next,
there is growing debate about what to expect over the coming decades. Was
the global financial crisis a harsh but transitory setback to
advanced-country growth, or did it expose a deeper long-term malaise?
Recently, a few writers, including internet entrepreneur Peter Thiel and
political activist and former world chess champion Garry Kasparov, have
espoused a fairly radical interpretation of the slowdown. In a forthcoming
book, they argue that the collapse of advanced-country growth is not merely
a result of the financial crisis; at its root, they argue, these countries’
weakness reflects secular stagnation in technology and innovation. As such,
they are unlikely to see any sustained pickup in productivity growth without
radical changes in innovation policy.
Economist Robert Gordon takes this idea even further. ...
These are very interesting ideas, but the evidence still seems overwhelming
that the drag on the global economy mainly reflects the aftermath of a deep
systemic financial crisis, not a long-term secular innovation crisis. ...
Attributing the ongoing slowdown to the financial crisis does not imply the
absence of long-term secular effects, some of which are rooted in the crisis
itself. ... Taken together, these factors make it easy to imagine trend GDP
growth being one percentage point below normal for another decade, possibly
even longer. ..
So, is the main cause of the recent slowdown an innovation crisis or a
financial crisis? Perhaps some of both, but surely the economic trauma of
the last few years reflects, first and foremost, a financial meltdown...
Posted by Mark Thoma on Tuesday, December 4, 2012 at 12:36 PM in Economics, Productivity, Technology |
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Comments (45)
pgl highlights the Heritage Foundation's response to the Republican budget
proposal (though I fear calling it a proposal gives it more credit than it
deserves:
Heritage Foundation on the Republican Offer on the Fiscal Cliff: ...let’s turn to
Alison Acosta Fraser and J.D. Foster of the Heritage Foundation:
To be fair, the details of the Republican proposal are extraordinarily vague.
Nor is much clarity or comfort gained from the three-page accompanying letter
sent to the President and signed by Speaker John Boehner (R-OH), Majority Leader
Eric Cantor (R-VA), House Budget Committee Chairman Paul Ryan (R-WI), and three
other senior members of the House Republican leadership.
...notice that the folks at the Heritage Foundation fear that the Republicans are
engaged in “categorical, pre-emptive capitulation”. After all, they prefer that
we slash and burn Social Security, Medicare, and Medicaid so as to avoid raising
taxes on the very well to do. Not that I agree with their agenda in the
slightest – but at least the folks at the Heritage Foundation are a lot clearer
about the Republican agenda than is the Speaker of the House.
[On another note, reinforcing the message in my column today on
why republicans won't admit supply-side economics has failed, here's the
title of a column by Diana Furchtgott-Roth of the Manhattan Institute: Cut Tax
Rates, Boost Tax Revenues. It says "Republicans ... want lower tax rates,
which, they predict, will lead eventually to higher revenues." They just can't
give this up.]
Posted by Mark Thoma on Tuesday, December 4, 2012 at 10:12 AM in Budget Deficit, Economics, Politics |
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The Bush tax cuts have not delivered the economic growth and widely shared
prosperity that were promised, and if the Republican Party was really the party
of business it would end our bad investment in supply-side economics:
Why the GOP Won't Admit That Supply-Side Economics Has Failed - Mark Thoma
But maybe the tax cuts were about something else?
Posted by Mark Thoma on Tuesday, December 4, 2012 at 12:33 AM in Economics, Fiscal Policy, Fiscal Times |
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Posted by Mark Thoma on Tuesday, December 4, 2012 at 12:06 AM in Economics, Links |
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Comments (81)
One more from Tim Duy:
Apples and Oranges in the Manufacturing Data?, by Tim Duy: Reporting on today's spate of manufacturing numbers, Neil Irwin at the
Washington Post
writes:
Just a few months ago, the global economy seemed to be stuck in a precarious
state. Huge swaths of the world economy were either slowing down or contracting
outright, and it wasn’t at all clear whether global economic policymakers would
have enough gas left in their stimulus tanks to stop things from spiraling into
a bad place.
But the latest data in a wave of reports on the manufacturing sectors in
nations around the world overnight and Monday morning suggest that the world has
avoided that fate. The same cannot be said of the United States, however.
I appreciate Irwin's point - many of the global manufacturing reports were
better than expected, although I would say only marginally so. And I think this
is accurate:
But put it all together, and the portrait painted by the manufacturing
reports is of a world economy that isn’t going off the rails. China’s slowdown
over the summer was not, so far at least, the start of any broader economic
collapse. Europe’s recession is bad, but major European economies aren’t in
free-fall. Mario Draghi, president of the European Central Bank, said in an
interview with Europe 1 radio Friday that a euro-zone recovery “would start
probably in the second half of 2013.” The new numbers Monday seem to fit that
forecast; contraction remains underway for now, but the pace of that contraction
is slowing.
The European Central Bank has so far prevented a free fall on the continent;
whether or not recovery is at hand or the region is faced with a long, grinding
period of zero growth remains a subject of debate. Europe's fate will be
decided, I suspect, by a lack of fiscal stimulus. As far as the persistence of
the recent uptick is concerned, take quick look at the
Markit Eurozone PMI:
Notice the upswing in 2011 that was subsequently reversed. Perhaps the same
dynamic will happen this time as well?
Where Irwin trips me up is here:
All of which brings us to the United States. The Institute for Supply
Management’s purchasing managers’ index fell sharply, to 49.5, from 51.7 in
October. The details of the number were simply terrible. The actual level of
production activity at American factories actually rose, but new orders fell 3.9
percent, which bodes ill for the future. The employment component of the survey
fell to its lowest level since September 2009, which is hardly an optimistic
sign for the November jobs numbers due out on Friday.
This is all true,
in my opinion, but I am wondering if this is an apples to oranges
comparison? Irwin shifts from the Markit PMIs to the ISM PMI data. What was
the Markit PMI for US manufacturing? Up, not down as the ISM reported:
What about the underlying details?
In many ways this is almost the mirror image of the ISM report! What's down is
up! Headline, new orders, new export orders, and employment all move in
opposite directions. Which leads one to wonder which is correct, the ISM or
Markit PMI? If ISM is correct, then is Markit also overestimating the strength
of manufacturing elsewhere? Honestly, I don't know, but it makes me hesitant to
compare the Eurozone Markit PMI to the ISM US PMI to argue that the US is
deteriorating relative to Europe.
Bottom Line: The ISM report on manufacturing is widely followed in the US.
It is a natural starting point to understand current trends in US
manufacturing. It's what I would do. But should we compare it to the Markit
PMI reports of other nations? Yes, but with an important caveat - we shouldn't
ignore the Markit US PMI data when making such comparisons, especially when it
stands at odds with the ISM data.
Posted by Mark Thoma on Monday, December 3, 2012 at 09:36 PM in Economics, Fed Watch, Monetary Policy |
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Tim Duy:
Struggling to Gain Traction in Manufacturing, by Tim Duy: The US manufacturing sector is not collapsing. But it is struggling to gain traction, and in doing so throwing up a number of signals that, in the past, have been consistent with recession. I don't think they are telling that story this time, at least not yet. But the end of the year is looking a little more fragile than we would like it to be - and while a good part of that fragility is a consequence of the international sector, it is hard to ignore the role of fiscal policy uncertainty as a depressing force on economic activity.
Last week's advanced manufacturing report was hardly inspiring despite the ever so slight rise in core manufacturing orders:
Compared to a year ago, this data still has a recessionary feeling:
The same holds for shipments as well, although to a lesser extent:
Today's ISM release confirms the softness across the manufacturing sector, with the headline number dipping below the expansion/contraction line:
While the production component rose, new orders fell, only part of which can be attributed to the international situation:
Somewhat disconcerting is the ongoing weakness in import orders, a sign of weak domestic demand:
And, of course, the employment component was soft as well:
Let's hope the employment weakness is not spreading far beyond manufacturing. Note also that the softness in recent manufacturing data is carrying forward from broader third quarter trends, notably the decline in the equipment and software component of GDP:
So while the international sector is clearly a drag, the same is increasingly true of the domestic side of the equation. This seems to be confirmed by some of the anecdotal evidence in the ISM survey, for example:
"The principle
business conditions that will affect the company over the next three or four
quarters will be the U.S. federal government tax and budgetary policies; the
impact of those policies is not yet clear." (Petroleum & Coal
Products)
"The fiscal cliff is
the big worry right now. We will not look toward any type of expansion until
this is addressed; if the program that is put in place is more taxes and big
spending cuts — which will push us toward recession — forget it." (Fabricated
Metal Products)
The fiscal drama playing out in Washington is clearly impacting decision makers. When will this uncertainty be lifted? Calculated Risk is looking for a deal early next year, but that still leaves firms sitting on the sidelines for at least another six weeks. And note that "compromise" certainly means additional austerity. We are talking about the degree of austerity. In other words, fiscal policy will continue to be a drag into 2013. Also, Bruce Bartlett points out that the fiscal cliff is a fake problem while the real threat is the debt ceiling - read his latest on the topic and some thoughts about the implications for the president. Recall that it was the debt ceiling debate that roiled markets in the summer of 2011.
Altogether, the US economy is ending the year on a weak note, with the externally-derived weakness being compounded by expectations of further fiscal austerity and fears of severe fiscal austerity. These factors are taking the wind out of the sails of the momentum provided by improvement in the housing market:
Also note that car sales bounced back strongly in November (See Calculated Risk), a sign that the negative household spending impact of Hurricane Sandy was temporary. Unlike businesses, households have been resilient to the fiscal cliff drama; I doubt that will change unless the fears became reality and the job market turns south.
Bottom Line: 2013 is shaping up to be another slow year for the US economy. The manufacturing slowdown is real, and is being compounded by fiscal policy concerns, both real and imagined. This, of course, should be no surprise. When at the zero bound, austerity is always and everywhere an economic drag. However, it would be unusual for the US economy to slip into a recession in the midst of a housing recovery. I think the path to recession in 2013 is through the unlikely event that the worst fiscal cliff nightmares are indeed realized. That said, continuing slow growth itself would make 2013 yet another disappointing year in the recovery.
Posted by Mark Thoma on Monday, December 3, 2012 at 05:31 PM in Economics, Fed Watch, Monetary Policy |
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Owen Zidar:
... I find that heterogeneity is quite important, that almost all of the
stimulative effect of tax cuts results from tax cuts for the bottom 90%, and
that there is no substantial link between tax cuts for the top 10% and
subsequent job creation. The notion that raising top rates slightly leads to
substantially lower job creation and economic growth has no empirical support
from the last half century...
If only evidence mattered. He also has an interesting chart:
Negative entries are tax cuts, and positive entries are tax increases (as he notes, this is federal income tax only, payroll tax changes follow a different pattern). The
light blue line is the top 20%.
Posted by Mark Thoma on Monday, December 3, 2012 at 11:10 AM
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Comments (9)
Michael Froomkin
on debt
negotiations:
both sides have taken the Pentagon’s budget off the table even though that
is where most cuts should be coming from
Robert Reich:
You want to cut, cut spending on the military — which now exceeds the military
spending of the next 13 largest military spenders in the world combined.
Works for me.
Posted by Mark Thoma on Monday, December 3, 2012 at 10:13 AM in Budget Deficit, Economics |
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Comments (53)
Exposing the Republican con game on the deficit:
The Big Budget Mumble, by Paul Krugman:, Commentary, NY Times: In the
ongoing battle of the budget, President Obama has done something very cruel.
Declaring that this time he won’t negotiate with himself, he has refused to lay
out a proposal reflecting what he thinks Republicans want. Instead, he has
demanded that Republicans themselves say, explicitly, what they want. And guess
what: They can’t or won’t do it.
No, really. While there has been a lot of bluster from the G.O.P. about how we
should reduce the deficit with spending cuts, not tax increases, no leading
figures on the Republican side have been able or willing to specify what,
exactly, they want to cut.
And there’s a reason for this reticence. ...Republican posturing on the deficit
has always been a con game, a play on the innumeracy of voters and reporters.
Now Mr. Obama has demanded that the G.O.P. put up or shut up — and the response
is an aggrieved mumble.
Here’s where we are right now: As his opening bid in negotiations, Mr. Obama
has proposed raising about $1.6 trillion in additional revenue over the next
decade, with the majority coming from letting the high-end Bush tax cuts expire
and the rest from measures to limit tax deductions. He would also cut spending
by about $400 billion...
Republicans have howled in outrage. ... They say they want to rely mainly on
spending cuts instead. Which spending cuts? Ah, that’s a mystery..., when you
put Republicans on the spot and demand specifics about how they’re going to make
good on their posturing about spending and deficits, they come up empty. There’s
no there there.
And there never was. ... Now Republicans find themselves boxed in. With taxes
scheduled to rise on Jan. 1 in the absence of an agreement, they can’t play
their usual game of just saying no to tax increases and pretending that they
have a deficit reduction plan. And the president, by refusing to help them out
by proposing G.O.P.-friendly spending cuts, has deprived them of political
cover. If Republicans really want to slash popular programs, they will have to
propose those cuts themselves.
So while the fiscal cliff — still a bad name for the looming austerity bomb, but
I guess we’re stuck with it — is a bad thing from an economic point of view, it
has had at least one salutary political effect. For it has finally laid bare the
con that has always been at the core of the G.O.P.’s political strategy.
Posted by Mark Thoma on Monday, December 3, 2012 at 12:24 AM in Budget Deficit, Economics, Politics, Taxes |
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Posted by Mark Thoma on Monday, December 3, 2012 at 12:06 AM in Economics, Links |
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Jamie Galbraith's view on wage stagnation might surprise you:
Muddling Towards
the Next Crisis: I think there is a tendency on the left to underestimate
the success of the programs that created and sustained the middle class and the
middle class mentality. There’s a tendency to focus on some statistical aspects
of what’s happened to wages—median wages in particular—and to focus less on the
role played by Medicaid, Medicare, Social Security, the housing programs, public
education, and support for higher education, all of which gave us a population
that had the attributes of a middle class society.
The story that is often told about what’s happened to factory jobs, and what’s
happened to wage rates, is not a good way of getting at the threat to that
existence. The typical story is that median wages peaked in 1972 and have been
stagnant and falling since then. As a result, it must be the case that people
who are working now are much worse off than they were ten, fifteen, twenty years
ago. That’s not an accurate story—at least not up until the crisis in
2008—because over that period the labor force became younger, more female, more
minority, and more immigrant. All of these groups start at relatively low wages,
and they all then tend to have upward trajectories. So there’s no reason to
believe that life was getting worse for members of the workforce in general. On
the contrary, for most members of the workforce it was still getting better.
Plus they had the benefit of technical change and improvement in the other
conditions of life.
The real threat to the middle class is not there, it’s in the erosion of the
programs I just mentioned. That is to say, it’s in the attack on the public
schools, it’s in the squeeze on higher education, it’s in the threat to Social
Security. When you look at housing, you have a very large unambiguous loss.
Millions of people have been displaced, but many, many more have lost the
capital value of their homes. They won’t be able to sell and retire on the
proceeds.
So I think there is a threat to the middle class, but if I were talking about it
in political terms, I wouldn’t be giving an abstract statistical picture of
wages. This doesn’t connect to people’s experiences. If I were designing the
boilerplate rhetoric of a popular movement, I would take a blue pencil to these
statistical formulations. I don’t like the stagnant median wage argument—I think
it obscures what actually happened. And I don’t particularly care for the “one
percent” argument. I understand it has a certain power, but one can be much more
precise about what it is you want to attack, and what it is you want to preserve
and to build. I would cut to the chase: we need to tear down the financial
sector and rebuild it from scratch in a very different way. ...
Posted by Mark Thoma on Sunday, December 2, 2012 at 02:20 PM in Economics, Income Distribution, Social Insurance |
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Jonathan Weiler:
The Republican Party Should Have Zero Credibility on Deficits, by Jonathan
Weiler: Speaker Boehner's angry response to the White House's opening gambit
in the budget negotiations related to the so-called fiscal cliff provides a
useful opportunity to remind folks that the GOP should have zero credibility on
deficit reduction. Boehner claims that the Democrats proposal is not serious and
is a bad-faith offer. Coming from him, that's rich. We have a three-decades long
record to
prove definitively that Republicans are themselves unserious about deficits.
That has been evident during periods in which they've controlled the presidency,
as both Reagan and W. presided over explosions in our national debt. And we have
the account of GOP insider after GOP insider revealing the true motives behind
GOP fiscal policy. As far back as 1981, Reagan budget director David Stockman
admitted that Republicans' professed concern with the impact of deficits and
debts on our children and grandchildren was just a ruse to allow Republicans to
avoid responsibility for the adverse consequences of lowering taxes on the rich.
Bruce Bartlett, a former Reagan treasury official has
explained in detail that the right-wing's rhetorical push against deficits
over the past thirty years was not the product of a sincere commitment to fiscal
prudence. Rather, Bartlett has shown, the goal was to reduce taxes on the rich,
which would starve the government of funds, which would require government to
cut spending for the less well off. In other words, the concern was never
deficits. The desire was to reduce social spending for those deemed undeserving
by the Republicans, including poor children, the struggling elderly and other
disfavored groups. Deficits were merely the excuse for doing so. And Vice
President Dick Cheney stated as emphatically as he could that, when Republicans
hold power,
"deficits don't matter." ...
He says "Boehner claims that the Democrats proposal is not serious." Paul
Krugman explains:
What Defines A Serious Deficit Proposal?, by Paul Krugman: Just a thought:
if you follow the pundit discussion of matters fiscal, you get the definite
impression that some kinds of deficit reduction are considered “serious”, while
others are not. In particular, the Obama administration’s call for higher
revenue through increased taxes on high incomes — which actually
goes considerably beyond just letting the Bush tax cuts for the top end
expire — gets treated with an unmistakable sneer in much political discussion,
as if it were a trivial thing, more about staking out a populist position than
it is about getting real on red ink.
On the other hand, the idea of raising the age of Medicare eligibility gets very
respectful treatment — now that’s serious. So I thought I’d look at the dollars
and cents — and even I am somewhat shocked. Those tax hikes would raise $1.6
trillion over the next decade;
according to the CBO, raising the Medicare age would save $113 billion in
federal funds over the next decade.
So, the non-serious proposal would reduce the deficit 14 times as much as the
serious proposal.
I guess we have to understand the definition of serious: a proposal is only
serious if it punishes the poor and the middle class.
Here's an example:
On Sunday, during an appearance on Meet the Press, Sen. Bob Corker (R-TN)
reiterated his call for restructuring entitlement programs like Medicare,
highlighting the “very painful cuts” he has proposed as part of a package to
avert the fiscal cliff. ...
Host David Gregory seemed to agree with Corker’s characterization and pressed
fellow panelist Sen. Claire McCaskill (D-MO) to accept reforms that will shift
health care costs to seniors in order to show that Democrats are “serious” about
entitlements:
CORKER: Look, I laid out in great detail very painful cuts to Medicare. ...
GREGORY: Name some specific programs that ought to be cut that would cause
pain in terms of the role of our government that Democrats are prepared to
support.
McCASKILL: Well,... a lot of us voted for more cuts in the farm program…and
defense. I spent a lot of times in the wings of the Pentagon. if you don’t think
there’s more money to be cut in contracting at the pentagon, you don’t
understand what has happened at the Pentagon. [...]
CORKER: David, as much as I love Claire, those are not the painful cuts that
have to happen. We really have to look at much deeper reforms to the
entitlements …
Note the "those are not the painful cuts that have to happen." It's not
enough that the cuts be "painful." To actually count and be endorsed, the cuts
have to be targeted at particular people and programs.
Posted by Mark Thoma on Sunday, December 2, 2012 at 09:54 AM in Budget Deficit, Economics, Fiscal Policy, Politics |
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Posted by Mark Thoma on Sunday, December 2, 2012 at 12:06 AM in Economics, Links |
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Tyler Cowen
on Europe:
... Until a broad solution is enacted, the system remains within the danger zone
for a broader crash. ... Unfortunately, the relevant governments — and their
citizens — still don’t seem close to accepting the onerous financial burdens
they need to face. And when those burdens are unjust to mostly innocent voters,
no matter whose particular story you endorse, acceptance becomes that much
tougher.
Still, we shouldn’t forget that a solution exists. In essence, the required debt
write-down is a large check lying on the table waiting to be picked up. No one
knows how costly it is, but estimates have ranged from the hundreds of billions
to the trillions of dollars. It need only be decided how to divide the bill. The
reality is this: The longer that the major players wait, the larger that bill
will grow. That they’ve yet to split the check is the worst news of all.
Posted by Mark Thoma on Saturday, December 1, 2012 at 01:36 PM in Economics, Financial System, International Finance |
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Comments (90)
Jared Bernstein says we should renew the payroll tax cut:
When You’re Trying to Decide if We Need to Renew the Payroll Tax Break, Picture
This. by Jared Bernstein: It’s just a slide…in both senses of the word…of
the real earnings—pretax, which is important—of middle-wage workers: blue collar
workers in manufacturing and non-managers in services, adjusted for inflation. And it’s not inflation holding back these wage rates—it’s the weak economy. This series starts in 1964, and in nominal terms, it’s never grown more slowly
than it has this year.
Source: BLS
So it is to his great credit that the President proposed another round of the
payroll tax break, or something like it, as part of his opening bid for the
cliff negotiations... With unemployment still way too high, we need to continue to support workers’
paychecks and temporarily offset some of the fiscal contraction from the tax
increases and spending cuts that are likely to come out of the cliff
negotiations.
I know that adding a spending program to a deficit reduction package may sound
counterintuitive, but it’s really countercyclical. And by dint of being
temporary—we could even write in the legislation that it expires when
unemployment goes (and stays) below 7%–it won’t affect the
medium-term deficit. ...
I think the payroll tax should be extended, but
as I noted when this first came up, I'd prefer the "optics" to be different:
I see the payroll tax reduction as potentially troublesome... Though the
revenue the Social Security system loses due to the tax cut will be backfilled
from general revenues, the worry is that the tax cut will not expire as
scheduled -- temporary tax cuts have a way of turning permanent. That's
especially true in this case since labor markets are very unlikely to recover
within the next year and it will be easy to argue against the scheduled "tax
increase" for workers. In fact, it will never be a good time to increase taxes
on workers and if the tax cut is extended once, as it's likely to be, it will be
hard to ever increase it back to where it was. That endangers Social Security
funding -- relying on general revenue transfers sets the system up for cuts down
the road -- and for that reason I would have preferred that this be enacted in a
way that produces the same outcome, but has different political optics. That is,
leave the payroll tax at 6% on the books and keep sending the money to Social
Security, and fund a 2% tax "rebate" out of general revenues. The rebate would
come, technically, as a payment from general revenues rather than through a cut
in the payroll tax, but in the end the effect would be identical. But the
technicality is important since it preserves the existing funding mechanism for
Social Security even if the taxes are permanently extended.
[On the connection between the payroll tax and support for Social Security,
see
here. As Bruce Bartlett notes while expressing similar worries, "Arch
Social Security hater Peter Ferrara once told me that funding it with general
revenues was part of his plan to destroy it by converting Social Security into a
welfare program, rather than an earned benefit. He was right."]
Posted by Mark Thoma on Saturday, December 1, 2012 at 10:14 AM in Economics, Fiscal Policy, Social Security, Taxes |
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Comments (28)
Posted by Mark Thoma on Saturday, December 1, 2012 at 12:06 AM in Economics, Links |
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Comments (70)
Laura D’Andrea Tyson:
... The single most important factor behind the projected growth in federal
spending is the growth in health care spending, driven primarily by the growth
in Medicare spending per beneficiary.
The outlook has already improved as a result of significant changes in the
delivery and payment of health care services in the Affordable Care Act. As
a result of these changes, growth in Medicare spending per enrollee is
projected to slow to 3.1 percent a year during the next decade, about the same
as the annual growth of nominal G.D.P. per capita and about two percentage
points slower than the annual growth of private insurance premiums per
beneficiary.
Speeding up the pace of the Affordable Care Act changes along with others, such
as reducing subsidies for high-income beneficiaries and drug benefits and
introducing small co-pays on home health-care services, would mean even larger
Medicare savings.
A “structural reform” popular among Republican deficit hawks like Representative
Paul Ryan of Wisconsin to convert Medicare to a premium-support or voucher
system would be
counterproductive and would
drive up both spending per beneficiary and overall costs in the health care
system.
The goal of a “go big” plan for deficit reduction should be to ensure the
economy’s long-term growth and competitiveness. Yet the debate over spending in
Washington is fixated on cutting entitlement spending. Very little is heard
about the need to increase federal spending in education and training, research
and development and infrastructure, three areas with proven track records in
rate of return, job creation, opportunity and growth. ...
Posted by Mark Thoma on Friday, November 30, 2012 at 06:31 PM in Economics, Fiscal Policy |
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Comments (29)
Kevin Drum explains that the surplus in the Social Security Trust fund
allowed taxes on the wealthy to be cut, and that it's only fair that taxes on
the wealthy should go back up to repay the money in the Trust Fund that was used
to finance lower taxes. If it's not paid back, then it is, plainly and simply, a
raid by the wealthy (through tax cuts) on the funds working class
households are relying upon, and are counting on -- they held their end of the
bargain and paid more into the system that it needed for decades -- for their
retirements:
No, the Social Security Trust Fund Isn't a Fiction, by Kevin Drum: Charles
Krauthammer is upset that Dick Durbin says Social Security is off the table in
the fiscal cliff negotiations
because it doesn't add to the deficit...
What Krauthammer means is that as Social Security draws down its trust fund, it
sells bonds back to the Treasury. The money it gets for those bonds comes from
the general fund, which means that it does indeed have an effect on the deficit. That much is true. But the idea that the trust fund is a "fiction" is absolutely
wrong. ...
Starting in 1983, the payroll tax was deliberately set higher than it needed to
be to cover payments to retirees. For the next 30 years, this extra money was
sent to the Treasury, and this windfall allowed income tax rates to be lower
than they otherwise would have been. During this period, people who paid payroll
taxes suffered from this arrangement, while people who paid income taxes
benefited.
Now things have turned around. As the baby boomers have started to retire,
payroll taxes are less than they need to be to cover payments to retirees. To
make up this shortfall, the Treasury is paying back the money it got over the
past 30 years, and this means that income taxes need to be higher than they
otherwise would be. For the next few decades, people who pay payroll taxes will
benefit from this arrangement, while people who pay income taxes will suffer.
If payroll taxpayers and income taxpayers were the same people, none of this
would matter. The trust fund really would be a fiction. But they aren't. Payroll
taxpayers tend to be the poor and the middle class. Income taxpayers tend to be
the upper middle class and the rich. ... When wealthy
pundits like Krauthammer claim that the trust fund is a fiction, they're trying
to renege on a deal halfway through because they don't want to pay back the
loans they got.
As it happens, I think this was a dumb deal. But that doesn't matter. It's the
deal we made, and the poor and the middle class kept up their end of it for 30
years. Now it's time for the rich to keep up their end of the deal. Unless you
think that promises are just so much wastepaper, this is the farthest thing
imaginable from fiction. It's as real as taxes.
Posted by Mark Thoma on Friday, November 30, 2012 at 09:47 AM in Economics, Social Security |
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Comments (98)
The class war isn't over:
Class Wars of 2012, by Paul Krugman, Commentary, NY Times: On Election Day
... Logan International Airport in Boston was running short of parking spaces.
Not for cars — for private jets. Big donors were flooding into the city to
attend Mitt Romney’s victory party.
They were, it turned out, misinformed about political reality. But the
disappointed plutocrats weren’t wrong about who was on their side. This was very
much an election pitting the interests of the very rich against those of the
middle class and the poor.
And the Obama campaign won largely by disregarding the warnings of squeamish
“centrists” and ... stressing the class-war aspect of the confrontation. This
ensured not only that President Obama won by huge margins among lower-income
voters, but that those voters turned out in large numbers, sealing his victory.
The important thing to understand now is that while the election is over, the
class war isn’t. The same people who bet big on Mr. Romney, and lost, are now
trying to win by stealth — in the name of fiscal responsibility — the ground
they failed to gain in an open election. ...
Consider, as a prime example, the push to raise the retirement age, the age of
eligibility for Medicare, or both. This is only reasonable, we’re told — after
all, life expectancy has risen... In reality,... it would be a hugely regressive
policy change...
Or take a subtler example, the insistence that any revenue increases should come
from limiting deductions rather than from higher tax rates. The key thing to
realize here is that the math just doesn’t work... So any proposal to avoid a
rate increase is, whatever its proponents may say, a proposal that we let the 1
percent off the hook and shift the burden, one way or another, to the middle
class or the poor.
The point is that the class war is still on, this time with an added dose of
deception. And this, in turn, means that you need to look very closely at any
proposals coming from the usual suspects, even — or rather especially — if the
proposal is being represented as a bipartisan, common-sense solution. ...
So keep your eyes open as the fiscal game of chicken continues. It’s an
uncomfortable but real truth that we are not all in this together; America’s
top-down class warriors lost big in the election, but now they’re trying to use
the pretense of concern about the deficit to snatch victory from the jaws of
defeat. Let’s not let them pull it off.
Posted by Mark Thoma on Friday, November 30, 2012 at 01:08 AM in Economics, Income Distribution, Politics |
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Comments (66)
Posted by Mark Thoma on Friday, November 30, 2012 at 12:06 AM in Economics, Links |
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Comments (90)
Have to teach classes in a bit, and running late, so just have time for a quick post -- this is from
Ricardo Fernholz, a professor of economics at Claremont McKenna College:
High-Frequency Trading and High Returns, The Baseline Scenario: The rise of
high-frequency trading (HFT) in the U.S. and around the world has been rapid and
well-documented in the media. According to a report by the
Bank of England, by 2010 HFT accounted for 70% of all trading volume in US
equities and 30-40% of all trading volume in European equities. This rapid rise
in volume has been accompanied by extraordinary performance among some prominent
hedge funds that use these trading techniques. A 2010 report from
Barron’s, for example, estimates that Renaissance Technology’s Medallion
hedge fund – a quantitative HFT fund – achieved a 62.8% annual compound return
in the three years prior to the report.
Despite the growing presence of HFT, little is known about how such trading
strategies work and why some appear to consistently achieve high returns. The
purpose of this post is to shed some light on these questions and discuss some
of the possible implications of the rapid spread of HFT. ...
Posted by Mark Thoma on Thursday, November 29, 2012 at 11:51 AM in Economics, Financial System, Technology |
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Comments (37)
Since Brad DeLong is such a shy, wallflower type, I'll take it upon myself to
highlight his latest column:
America’s Political Recession, by Brad DeLong, Commentary, Project Syndicate:
The odds are now about 36% that the United States will be in a recession next
year. The reason is entirely political: partisan polarization has reached levels
never before seen, threatening to send the US economy tumbling over the “fiscal
cliff”...
Obama broadly follows Ronald Reagan’s (second-term) security policy, George H.W.
Bush’s spending policy, Bill Clinton’s tax policy, the bipartisan Squam Lake
Group’s financial-regulatory policy, Perry’s immigration policy, John McCain’s
climate-change policy, and Mitt Romney’s health-care policy... And yet he has gotten next to no
Republicans to support their own policies. ...
There are obvious reasons for this. A large chunk of the Republican base,
including many of the party’s largest donors, believes that any Democratic
president is an illegitimate enemy of America, so that whatever such an
incumbent proposes must be wrong and thus should be thwarted. ... Moreover, ever
since Clinton’s election in 1992, those at the head of the Republican Party have
believed that creating gridlock whenever a Democrat is in the White House ... is their best path to
electoral success.
That was the Republicans’ calculation in 2011-2012. And November’s election did
not change the balance of power anywhere in the American government...
Now, it is possible that Republican legislators may rebel against their
leaders... It is possible that Republican leaders like Representatives John
Boehner and Eric Cantor and Senator Mitch McConnell will conclude that their
policy of obstruction has been a failure. ... But don’t count on it. ...
It seems to me that the odds are around 60% that real negotiation will not begin
until tax rates go up on January 1. And it seems to me that, if gridlock
continues into 2013, the odds are 60% that it will tip the US back into
recession. Let us hope that it will be short and shallow.
Nah, the press will do its job,
expose
the fraud that underlies the Republican's budget and tactics, and they will
be forced to fold their hand (are you laughing yet -- that's supposed to be a
joke).
Posted by Mark Thoma on Thursday, November 29, 2012 at 09:49 AM in Economics, Politics |
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Comments (34)
Are you tired of paying too much for low-quality cable, internet, and phone
services?:
Bad Connections, by David Cay Johnston, Commentary, NY Times: Since 1974,
when the Justice Department sued to break up the Ma Bell phone monopoly,
Americans have been told that competition in telecommunications would produce
innovation, better service and lower prices.
What we’ve witnessed instead is low-quality service and prices that are higher
than a truly competitive market would bring.
After a brief fling with competition, ownership has reconcentrated into a stodgy
duopoly of Bell Twins — AT&T and Verizon. ...
The AT&T-DirectTV and Verizon-Bright House-Cox-Comcast-TimeWarner behemoths
market what are known as “quad plays”: the phone companies sell mobile services
jointly with the “triple play” of Internet, telephone and television
connections, which are often provided by supposedly competing cable and
satellite companies. And because AT&T’s and Verizon’s own land-based services
operate mostly in discrete geographic markets, each cartel rules its domain as a
near monopoly.
The result of having such sweeping control of the communications terrain,
naturally, is that there is little incentive for either player to lower prices,
make improvements to service or significantly invest in new technologies and
infrastructure. And that, in turn, leaves American consumers with a major
disadvantage compared with their counterparts in the rest of the world. ...
The remedy ... is straightforward: bring back real competition to the telecom
industry. The Federal Communications Commission, the Justice Department and
lawmakers have long said this is their goal. But absent new rules that promote
vigorous competition among telecom companies, it simply won’t happen.
Just as canals and railroads let America grow in the 19th century, and highways
and airports did so in the 20th century, the information superhighway is vital
for the nation’s economic growth in the 21st. The nation can’t afford to leave
its future in the hands of the cartels.
Posted by Mark Thoma on Thursday, November 29, 2012 at 12:24 AM in Economics, Regulation, Web/Tech |
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Comments (52)
Posted by Mark Thoma on Thursday, November 29, 2012 at 12:06 AM in Economics, Links |
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Comments (54)
This is from a much longer Ezra Klein interview of Chrystia Freeland:
‘Romney is Wall Street’s worst bet since the bet on subprime’, by Ezra Klein:
Ezra Klein: You’ve written about the revolt of the very rich against
President Obama, and all the money they spent and time they dedicated to
defeating him. So what’s the mood in those circles now that they’ve lost?
Chrystia Freeland: There’s a great joke on Wall Street which is that the bet
on Romney is Wall Street’s worst bet since the bet on subprime. But I found
the hostility towards Obama astonishing. ... On that Tuesday, the big Romney
backers I was talking to were sure he was going to win. They were all flying
into Logan Airport for the victory party. There’s this stunned feeling of
how could we be so wrong, and a feeling of alienation.
The Romney comments to his donors,... I think they accurately reflected the
view of a lot of these money guys. It’s the continuation of this 47 percent
idea. They believe that Obama has been shoring up the entitlement society,
and if you give enough entitlements to enough people, they’ll vote for you.
EK: Here’s my question about those comments. Romney was promising the very
rich either a huge tax cut or, if you believe he would’ve paid for every
dime and dollar of his cut, protection from any tax increases. He was
promising financiers that he would roll back Dodd-Frank and Sarbanex-Oxley.
He was promising current seniors that he wouldn’t touch their benefit. How
are these not “gifts”?
CF: Let me be clear that I’m not defending any of them. But I think the way
it works — and I think Romney’s comments were very telling in this regard — ...they’re
absolutely convinced that they’re not asking for special privileges for
themselves. They’re convinced that it just so happens that their
self-interest coincides perfectly with the collective interest. That’s where
you get this idea of the “job creators”. ... If you’ve developed an ideology
that what’s good for you personally also happens to be good for everyone
else, that’s quite wonderful because there’s no moral tension. ...
EK: ... From my reporting with the White House, I think the president’s view
of the economy is that globalization is here and it’s not going away. The
economy rewards high skills more than ever. Automatic and computerization
and foreign competition are wiping out many middle class jobs, and while
some new ones are created, it’s not at all clear that enough are being
created. But in his view, he sees more redistribution as very necessary in
this context. He thinks that if the economy is going to grow but the gains
won’t be broadly shared, then it’s the government’s role to try and
redistribute some, though of course not all, or even most, of those gains.
My experience is that the very rich are open to higher taxes in the context
of a deficit deal. ... But they don’t like the idea that their money should
be redistributed simply because they have too much of it. They don’t like
the idea that, so to speak, they didn’t build all of this, and as such, they
need to give back in order to make sure it continues. ... They see it as
punishing their success.
CF: I completely agree. ...
Posted by Mark Thoma on Wednesday, November 28, 2012 at 02:59 PM in Economics, Income Distribution, Politics |
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Comments (67)
Tim Duy:
A Little Less Dovish..., by Tim Duy: In the midst of an internal debate over
policy communication, Chicago Federal Reserve President Charles Evans pulled
back on his 3 percent inflation threshold
in a speech yesterday. Arguably, as the only policymaker suggesting
guidance well above the Fed's stated 2 percent target, Evans was
the last true dove at the Fed. With Evan's falling in line with his
colleagues, it looks like the last sliver of hope that the Fed would tolerate
slightly higher inflation to accelerate the reduction of real burden has now
been dashed.
There is a lot of interesting material in Evan's speech, but here I focus
only on his basic outlook and the implications for policy. Regarding growth:
That said, monetary policymakers must formulate policy for today. In the
United States, forecasts by both private analysts and FOMC participants see real
GDP growth in 2012 coming in at a bit under 2 percent. Growth is expected to
move moderately higher in 2013, but only to a pace that is just somewhat above
potential. Such growth would likely generate only a small decline in the
unemployment rate.
Of course, he added earlier that this forecast is vulnerable to the possible
of an austerity bomb in 2013, but for the moment assume that issue is resolved:
Having said all that, most forecasters are predicting that the pace of growth
will pick up as we move through next year and into 2014. Underlying these
projections is an assumption that fiscal disaster will be avoided—and with this,
that some important uncertainties restraining growth should come off the table.
Also, deleveraging will run its course, and as it does, the economy’s
more-typical cyclical recovery dynamics will take over. As the FOMC indicated in
its policy moves last September, the current highly accommodative stance for
monetary policy will be kept in place for some time to come.
He then praises recent policy actions:
Tying the length of time over which our purchases will be made to economic
conditions is an important step. Because it clarifies how our policy decisions
are conditional on progress made toward our dual mandate goals, markets can be
more confident that we will provide the monetary accommodation necessary to
close the large resource gaps that currently exist; additionally, markets can be
more certain that we will not wait too long to tighten if inflation were to
become an important concern.
And then tackles a big question:
The natural question at this point is to ask: What constitutes substantial
improvement in labor markets? Personally, I think we would need to see several
things. The first would be increases in payrolls of at least 200,000 per month
for a period of around six months. We also would need to see a faster pace of
GDP growth than we have now — something noticeably above the economy’s potential
rate of growth.
From Evan's perspective, these conditions would be sufficient to end the
expansion of the balance sheet, although interest rates will remain near zero
beyond that point. When should rates rise?
Of course, we will not maintain low rates indefinitely. For some time, I have
advocated the use of specific, numerical thresholds to describe the economic
conditions that would have to occur before it might be appropriate to begin
raising rates.
On the employment mandate:
In the past, I have said we should hold the fed funds rate near zero at least
as long as the unemployment rate is above 7 percent and as long as inflation is
below 3 percent. I now think the 7 percent threshold is too conservative....This
logic is supported by a number of macro-model simulations I have seen, which
indicate that we can keep the funds rate near zero until the unemployment rate
hits at least 6-1/2 percent and still generate only minimal inflation risks.
So he shifts to a 6.5 percent threshold for unemployment, and later argues
that even this might be a bit conservative as his models don't foresee much
inflation pressure before 6 percent. See also Federal reserve Janet Yellen's
recent speech; Evans' view is consistent with the optimal path forecasts. On
one hand this is somewhat of a shift to the dovish side on the inflation
forecast, suggesting that inflation will not accelerate as quickly as some might
expect. What about the threshold for the rate of inflation itself?
With regard to the inflation safeguard, I have previously discussed how the 3
percent threshold is a symmetric and reasonable treatment of our 2 percent
target. This is consistent with the usual fluctuations in inflation and the
range of uncertainty over its forecasts. But I am aware that the 3 percent
threshold makes many people anxious. The simulations I mentioned earlier suggest
that setting a lower inflation safeguard is not likely to impinge too much on
the policy stimulus generated by a 6-1/2 percent unemployment rate threshold.
Indeed, we’re much more likely to reach the 6-1/2 percent unemployment threshold
before inflation begins to approach even a modest number like 2-1/2 percent.
So, given the recent policy actions and analyses I mentioned, I have
reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent
for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured
in terms of the outlook for total PCE (Personal Consumption Expenditures Pride
Index) inflation over the next two to three years, would be appropriate.
Notice that he really doesn't have a reason to shift his threshold; he
doesn't even expect to hit the inflation threshold before hitting the employment
threshold. His reason for essentially is that the 3 percent threshold makes
people "anxious." Anxious about what? Anything that is perceived to be a
threat to the Fed's credibility.
Does this shift on Evans' part really change anything? Probably not. He was
always an outlier among Fed policymakers, with a tolerance for inflation as high
as 3 percent making him a true dove. But he was never going to get any
additional traction on that front from his colleagues. The 2 percent target is
set in stone, and it is too much to expect the Fed will tolerate any meaningful
deviations from that target. Of course, it is questionable that 3 percent is a
meaningful deviation to begin with, but that is question is almost irrelevant at
this point.
Bottom Line: By shifting his threshold on inflation, Evan's concedes to the
political realities within the Fed. There was never much support for anything
like tolerance for 3 percent inflation; for most policymakers, I suspect
anything above 2.25 percent would be considered a threat to credibility. By
falling in line with the rest of the FOMC, Evan abandons his role as a true
dove, someone willing to tolerate substantially higher inflation. He is a dove
now in the modern sense - a policymaker with a lower inflation forecast that
allows for a longer period of easier policy.
Posted by Mark Thoma on Wednesday, November 28, 2012 at 10:49 AM in Economics, Fed Watch, Monetary Policy |
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Comments (23)
I thought I'd note this column from several weeks ago for two reasons. First,
it was widely misinterpreted as supporting laws against price-gouging, but I
didn't mean to disavow the price-system. The point was that there is a lesson in
the public's reaction to price-gouging: When the public believes the
price-allocation mechanism results in unfairness, they won't support it. Market
fundamentalists, and those who support capitalism more generally, should worry
more than they do about how increasing inequality or the increasing market and
political power of those at the top will affect the public's perception of the
fairness of the capitalist system. If the belief that the system is unfair
crosses the tipping point, who knows what type of system could be adopted in its
place. Second, and more to the point, I haven't had much luck finding things to
post today, and no time to write something myself (so this is filler):
Hurricane Sandy’s Lesson on Preserving Capitalism: With long gas lines and
other shortages putting people on edge in the wake of Hurricane Sandy, the usual
post-disaster debate over the economics and ethics of
price-gouging is
underway. However, while the question of whether it is okay, even desirable,
for businesses to raise prices after natural disasters is certainly important,
there are larger lessons that can be drawn from this debate.
Economists do not like the term “price-gouging.” They believe that price
increases are the best way to allocate scarce goods and services after a natural
disaster and, importantly, to encourage additional supply. When people can make
a large profit by supplying goods and services to a market, they will work
extraordinarily hard to meet the demand.
But if there is such an advantage to allowing the price system to work after an
event like Hurricane Sandy, why did producers often choose to stick with
pre-disaster prices? Why would they leave profits on the table by maintaining
pre-disaster prices and allocating goods through other mechanisms such as
first-come, first-serve until supplies run out? One answer is that price-gouging
after a natural disaster is illegal in many places. But this just begs the
question. Why do so many places choose to prohibit large price increases in
response to disaster induced shortages?
Most of the explanations economists have come up with rely upon the idea of
fairness. ...[continue]...
Let me add one reference to a study by Daniel Kahneman I didn't know about when I wrote this supporting the notion that perceptions of unfairness undermine support for the price-allocation system:
As far as
most economists are concerned, it would be totally reasonable for a grocery
store to raise prices the day be for a hurricane. In fact, that's what's
supposed to happen. If prices don't go up when demand increases, you wind up
with shortages. To an economist, empty shelves at grocery stores are evidence
that prices were too low.
In a famous
study, the Nobel laureate Daniel Kahneman and his co-authors asked ordinary
people lots of questions about pricing and fairness. In one question, a hardware
store raised the price of snow shovels from $15 to $20 the morning after a
snowstorm.
The higher price sends a signal to the world that says: Send more snow
shovels! Someone who runs a hardware store an hour away might be inspired by to
put a bunch of shovels in the back of a truck and bring them to town, easing a
potential shortage and, perhaps, driving prices back down.
But, not surprisingly, eighty percent of people surveyed said raising the
price of snow shovels after a storm would be unfair. Presumably, those people
would also say it's unfair for a store to double prices on canned food the day
before a hurricane.
People feel so strongly about this that they've passed price-gouging laws in
many states, banning merchants from raising prices during hurricanes or other
natural disasters.
Posted by Mark Thoma on Wednesday, November 28, 2012 at 10:29 AM in Economics, Regulation |
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Comments (27)
Rajiv Sethi on the "death of a prediction market":
Death of a Prediction Market: A couple of days ago Intrade
announced that it was closing
its doors to US residents in response to "legal and regulatory pressures."
American traders are required to close out their positions by December 23rd, and
withdraw all remaining funds by the 31st. Liquidity has dried up and spreads
have widened considerably since the announcement. There have even been sharp
price movements in some markets with no significant news, reflecting a skewed
geographic distribution of beliefs regarding the likelihood of certain events.
The company will survive, maybe even thrive, as it adds new contracts on
sporting events to cater to it's customers in Europe and elsewhere. But the
contracts that made it famous - the US election markets - will dwindle and
perhaps even disappear. Even a cursory glance at the Intrade forum reveals the
importance of its US customers to these markets. Individuals from all corners of
the country with views spanning the ideological spectrum, and detailed knowledge
of their own political subcultures, will no longer be able to participate. There
will be a rebirth at some point, perhaps launched by a new entrant with
regulatory approval, but for the moment there is a vacuum in a once vibrant
corner of the political landscape.
The closure was precipitated by a CFTC
suit
alleging that the company "solicited and permitted" US persons to buy and sell
commodity options without being a registered exchange, in violation of US law.
But it
appears that hostility to prediction markets among regulators runs deeper
than that, since an attempt by Nadex to register and offer binary options
contracts on political events was previously denied on
the grounds that "the contracts involve gaming and are contrary to the public
interest."
The CFTC did not specify why exactly such markets are contrary to the public
interest, and it's worth
asking what
the basis for such a position might be.
I can think of two reasons, neither of which are particularly compelling in this
context. First, all traders have to post margin equal to their worst-case loss,
even though in the aggregate the payouts from all bets will net to zero. This
means that cash is tied up as collateral to support speculative bets, when it
could be put to more productive uses such as the financing of investment. This
is a
capital diversion effect. Second, even though the exchange claims to
keep this margin in segregated accounts, separate from company funds, there is
always the possibility that its deposits are not fully insured and could be lost
if the Irish banking system were to collapse. These losses would ultimately be
incurred by traders, who would then have very limited legal recourse.
These arguments are not without merit. But if one really wanted to restrain the
diversion of capital to support speculative positions, Intrade is hardly the
place to start. Vastly greater amounts of collateral are tied up in support of
speculation using interest rate and currency swaps, credit derivatives, options,
and futures contracts. It is true that such contracts can also be used to reduce
risk exposures, but so
can prediction markets. Furthermore, the volume of derivatives trading has far
exceeded levels needed to accommodate hedging demands for at least a
decade. Sheila Bair recently described synthetic
CDOs and naked CDSs as "a game of fantasy football" with unbounded stakes. In
comparison with the scale of betting in licensed exchanges and over-the-counter
swaps, Intrade's capital diversion effect is truly negligible.
The second argument, concerning the segregation and safety of funds, is more
relevant. Even if the exchange maintains a strict separation of company funds
from posted margin despite the absence of regulatory oversight, there's always
the possibility that it's
deposits in the Irish banking system are not fully secure. Sophisticated
traders are well
aware of this risk, which could be substantially mitigated (though clearly
not eliminated entirely) by licensing and regulation.
In judging the wisdom of the CFTC action, it's also worth considering the
benefits that prediction
markets provide. Attempts at
manipulation notwithstanding, it's hard to imagine a major election in the
US without the prognostications of pundits and pollsters being measured against
the markets. They have become part of the fabric of social interaction and
conversation around political events.
But from my perspective, the primary benefit of prediction markets has been
pedagogical. I've used them frequently in my financial economics course to
illustrate basic concepts such as expected return, risk, skewness, margin, short
sales, trading algorithms, and arbitrage. Intrade has been generous with its
data, allowing public access to order books, charts and spreadsheets, and this
information has found its way over the years into slides, problem sets, and
exams. All of this could have been done using other sources and methods, but the
canonical prediction market contract - a binary option on a visible and familiar
public event - is particularly well suited for these purposes.
The first time I
wrote about prediction markets on this blog was back in August 2003. Intrade
didn't exist at the time but its precursor, Tradesports, was up and running, and
the Iowa Electronic Markets had already been active for over a decade. Over the
nine years since that early post, I've used data from prediction markets to
discuss arbitrage, overreaction, manipulation, self-fulfilling
prophecies, algorithmic
trading, and the interpretation of
prices and
order books. Many of these posts have been about broader issues that also
arise in more economically significant markets, but can be seen with great
clarity in the Intrade laboratory.
It seems to me that the energies of regulators would be better directed
elsewhere, at real and significant threats to financial stability, instead of
being targeted at a small scale exchange which has become culturally significant
and serves an educational purpose. The CFTC action just reinforces the
perception that financial sector enforcement in the United States is a random,
arbitrary process and that regulators keep on missing the wood for the trees.
Posted by Mark Thoma on Wednesday, November 28, 2012 at 09:30 AM in Economics, Regulation |
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Comments (8)
Posted by Mark Thoma on Wednesday, November 28, 2012 at 12:06 AM in Economics, Links |
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Comments (69)
Robert Reich is worried:
Will Tim Geithner Lead Us Over or Around the Fiscal Cliff?, by Robert Reich:
I’m trying to remain optimistic that the President and congressional Democrats
will hold their ground over the next month as we approach the so-called “fiscal
cliff.”
But leading those negotiations for the White House is outgoing Secretary of
Treasury Tim Geithner, whom Monday’s Wall Street Journal
described as a “pragmatic deal maker” because of “his long relationship with
former Treasury Secretary Robert Rubin, for whom balancing the budget was a
priority over other Democratic touchstones.” ...
Both Rubin and Geithner are hardworking and decent. But both see the world
through the eyes of Wall Street rather than Main Street. I battled Rubin for
years in the Clinton administration because of his hawkishness on the budget
deficit and his narrow Wall Street view of the world.
During his tenure as Treasury Secretary, Geithner has followed in Rubin’s path —
engineering a no-strings Wall Street bailout that didn’t require the Street to
help stranded homeowners, didn’t demand the Street agree to a resurrection of
the Glass-Steagall Act, and didn’t seek to cap the size of the biggest bank,
which in the wake of the bailout have become much bigger. In an
interview with the Journal, Geithner repeats the President’s stated
principle that tax rates must rise on the wealthy, but doesn’t rule out changes
to Social Security or Medicare. And he notes that in the president’s budget
(drawn up before the election), spending on non-defense discretionary items —
mostly programs for the poor, and investments in education and infrastructure —
are “very low as a share of the economy relative to Clinton.” If “pragmatic deal
maker,” as the Journal describes Geithner, means someone who believes any deal
with Republicans is better than no deal, and deficit reduction is more important
than job creation, we could be in for a difficult December.
Not sure if this will make you feel more confident, but a recent post on the
Treasury's blog from Jason Furman asserted that "Increasing
Taxes on Middle-Class Families Will Hurt Consumer Spending." Unfortunately,
it didn't say much about Social Security and Medicare. I am worried too.
Posted by Mark Thoma on Tuesday, November 27, 2012 at 10:44 AM in Budget Deficit, Economics, Politics, Social Insurance, Taxes |
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Comments (46)
President of the Atlanta Fed,
Dennis
Lockhart:
...A real financial stabiliy concern ... is the potential for malicious
disruptions to the payments system in the form of broadly targeted cyberattacks.
Just in the last few months, the United States has experienced an escalating
incidence of distributed denial of service attacks aimed at our largest banks.
The attacks came simultaneously or in rapid succession. They appear to have been
executed by sophisticated, well-organized hacking groups who flood bank web
servers with junk data, allowing the hackers to target certain web applications
and disrupt online services. Nearly all the perpetrators are external to the
targeted organizations, and they appear to be operating from all over the globe.
Their motives are not always clear. Some are in it for money, while others are
in it for what you might call ideological or political reasons.
Unlike other cybercrime activity, which aims to steal customer data for the
purpose of unauthorized transactions, distributed denial of service attacks do
not necessarily result in stolen data. Rather, the intent appears to be to
disable essential systems of financial institutions and cause them financial
loss and reputational damage. The intent may be mischief on a grand scale, but
also retaliation for matters not directly associated with the financial sector.
Banks have been defending themselves against cyberattacks for a while, but the
recent attacks involved unprecedented volumes of traffic—up to 20 times more
than in previous attacks. Banks and other participants in the payments system
will need to reevaluate defense strategies. The increasing incidence and
heightened magnitude of attacks suggests to me the need to update our thinking.
What was previously classified as an unlikely but very damaging event affecting
one or a few institutions should now probably be thought of as a persistent
threat with potential systemic implications.
I'm drawing your attention to this area of risk... But I feel the need to be
measured about the potential for severe financial instability from this source.
In my judgment, cyberattacks on payments systems are not likely to have as deep
or long lasting an impact on financial system stability as fiscal crises or bank
runs, for example. Nonetheless, there is real justification for a call to
action. ...
Even broad adoption of preventive measures may not thwart all attacks.
Collaborative efforts should be oriented to building industry resilience.
Resilience measures would be similar to those put in place in the banking
industry to maintain operations in a natural disaster—multiple backup sites and
redundant computer systems, for example.
Posted by Mark Thoma on Tuesday, November 27, 2012 at 10:16 AM in Economics, Fed Speeches, Regulation |
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Comments (4)
Fatih Birol, chief economist of the International Energy Agency and chair of
the World Economic Forum’s Energy Advisory Board,
discusses his projection that "the United States will become the world’s
leading oil producer within a few decades":
Q. The new report has attracted great press attention for its
projection that the United States may soon become the world’s leading oil
producer. Can you discuss what you see as the greatest implications of this
change, in terms of energy security, geopolitics and carbon emissions?
A. The most striking implications concern U.S. oil imports and
international oil-trade patterns. The upward trend in production is partly
responsible for a sharp fall in U.S. oil imports. By 2035, we project oil
imports into the United States of only 3.4 million barrels a day, which implies
a substantial (60 percent) reduction in oil-import bills. North America as a
whole actually becomes a net oil exporter. In international oil markets, this
accelerates the shift in trade patterns toward Asia, raising the geostrategic
importance of trade routes between Middle East producers and Asian consumers.
But what should attract equal attention … is the essential role played by energy
efficiency. I believe that energy efficiency has been an epic failure by
policymakers in almost all countries. Its potential is huge but much of it
remains untapped. Compared with today, savings from more rigorous vehicle
fuel-economy standards could prompt a 30 percent fall in U.S. oil demand by
2035.
Posted by Mark Thoma on Tuesday, November 27, 2012 at 10:16 AM in Economics, Oil |
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Comments (20)
Tim Duy:
Meanwhile, in Japan..., by Tim Duy: Back in September, I
wrote:
What I expect to happen is this: The Bank of Japan will be forced into
outright monetization at some point; a soft default in the form of higher
inflation will occur. And dramatically higher inflation, I fear. Japan has not
had inflation for two decades. I suspect they will experience all that pent-up
inflation in the scope of a couple of years.
Sure enough, the battle begins. Almost lost in the holiday weekend, from
Reuters
last week:
Japan's main opposition Liberal Democratic Party (LDP) said on Wednesday that
on its return to power it would set a 2 percent inflation target with an eye to
revising the law governing the Bank of Japan so as to boost cooperation between
the government and the central bank...
...In its campaign platform unveiled on Wednesday, the LDP called for bold
monetary easing through cooperation between the government and the central bank
on debt management, but it made no mention of Abe's calls for the BOJ to buy
debt to finance infrastructure projects.
The response from the Bank of Japan
was swift:
But BOJ Governor Masaaki Shirakawa dismissed many of Abe's proposals,
including the possible revision of the Bank of Japan law, a step critics say is
aimed at clipping the central bank's independence and forcing it to print money
to finance public debt that is already double the size of Japan's economy.
"Central bank independence is a system created upon bitter lessons learned
from the long economic and financial history in Japan and overseas countries,"
Shirakawa told a news conference....
...Shirakawa was adamant the central bank would not directly underwrite
government debt because bond yields would spike and hurt the economy.
"No advanced country has adopted such a policy," he said.
Shirakawa is correct. Modern central banks may have lost some control over
inflation at times, but I don't think any has engaged in outright monetization
of government debt. Yet despite Shirakawa's insistence to the contrary, I still
think that is exactly where Japan is headed. More central bank history in the
making.
Posted by Mark Thoma on Tuesday, November 27, 2012 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
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Comments (98)
Posted by Mark Thoma on Tuesday, November 27, 2012 at 12:06 AM in Economics, Links |
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Comments (84)
For infrastructure spending, in particular spending on roads and highways, Sylvain Leduc
and Daniel Wilson
"find that the multiplier is at least two":
Highway Grants: Roads to Prosperity?, by Sylvain Leduc
and Daniel Wilson, FRBSF Economic Letter: Increasing government spending during periods of economic weakness to offset
slower private-sector spending has long been an important policy tool. In
particular, during the recent recession and slow recovery, federal officials
put in place fiscal measures, including increased government spending, to
boost economic growth and lower unemployment. One form of government
spending that has received a lot of attention is public investment in
infrastructure projects. The 2009 American Recovery and Reinvestment Act
(ARRA) allocated $40 billion to the Department of Transportation for
spending on the nation’s roads and other public infrastructure. Such public
infrastructure investment harks back to the Great Depression, when programs
such as the Works Progress Administration and the Tennessee Valley Authority
were inaugurated.
One criticism of public infrastructure programs is that they take a long
time to put in place and therefore are unlikely to be effective quickly
enough to alleviate economic downturns. The fact is, though, that
surprisingly little empirical information is available about the effect of
public infrastructure investment on economic activity over the short and
medium term.
This Economic Letter examines new research (Leduc and Wilson,
forthcoming) on the dynamic effects of public investment in roads and
highways on gross state product (GSP), the total economic output of a state.
This research focuses on investment in roads and highways in part because it
is the largest component of public infrastructure in the United States.
Moreover, the procedures by which federal highway grants are distributed to
states help us identify more precisely how transportation spending affects
economic activity.
We find that unanticipated increases in highway spending have positive but
temporary effects on GSP, both in the short and medium run. The short-run
effect is consistent with a traditional Keynesian channel in which output
increases because of a rise in aggregate demand, combined with
slow-to-adjust prices. In contrast, the positive response of GSP over the
medium run is in line with a supply-side effect due to an increase in the
economy’s productive capacity.
We also assess how much bang each additional buck of highway spending
creates by calculating the multiplier, that is, the magnitude of the effect
of each dollar of infrastructure spending on economic activity. We find that
the multiplier is at least two. In other words, for each dollar of federal
highway grants received by a state, that state’s GSP rises by at least two
dollars.
The Federal-Aid Highway Program
The federal government’s involvement in financing road construction goes
back to the early part of the past century. Although initially small, this
involvement became much more significant in 1956 with the enactment of the
Federal-Aid Highway Act, which authorized almost $34 billion in 1956 dollars
over 13 years for the construction of the Interstate Highway System. At the
time, The New York Times noted that “the highway program will constitute a
growing and ever-more-important share of the gross national product …
(affecting) every phase of economic life in this country.”
The Interstate Highway System was completed in 1992. Since then, the federal
government has continued to provide funding to states mostly through a
series of grant programs collectively known as the Federal-Aid Highway
Program (FAHP). The FAHP helps fund construction, maintenance, and other
improvements on a wide range of public roads beyond the interstate highways.
Local roads are often considered federal-aid highways and are eligible for
federal funding, depending on how important the federal government judges
them to be.
Because road projects typically take a long time to complete, advance
knowledge of future funding sources can help smooth planning. Congress
designs transportation legislation to minimize uncertainty. First, it enacts
legislation that typically extends five to six years. Second, it apportions
funds to states according to set formulas. Thus, a typical highway bill will
specify an annual national amount for each highway program over the life of
the legislation and spell out the formula by which that program’s national
amount will be apportioned to states. Importantly, these formulas are based
on road-related metrics measured several years earlier. That means that
changes to current and future highway funding are not driven by current
economic conditions.
Highway bills generally include information that helps states forecast
relatively accurately the amount of grants they are likely to receive while
the legislation is in effect. For the past two highway bills, the Federal
Highway Administration (FHWA) published forecasts of each state’s annual
future grants under each program.
Estimating the effects of road spending
We conduct a statistical analysis to estimate the effects of federal highway
spending on state economic activity. Specifically, we construct a variable
that captures revisions to forecasts of current and future highway grants to
the states, based on information from highway bills since 1991. We closely
follow, but also expand on, the FHWA’s methodology for forecasting each
state’s future grants.
These forecast revisions serve as proxies for changes in expectations about
current and future highway spending in a given state. In economic terms,
these changes can be regarded as shocks, that is, unanticipated events that
affect economic activity.
We study forecast revisions rather than changes in actual highway spending
for two reasons. First, actual spending may both affect and be affected by
current economic conditions, making it difficult to sort out the true causal
effects of the spending.
Second, changes in actual spending are most likely to be anticipated years
in advance. For that reason, some of their economic effects may be felt
before the spending changes actually take place. For instance, a state
government and other important players, such as construction and engineering
firms, may decide to spend more today if they expect the state to receive
more highway grants in the future. In this way, changes in expectations
regarding future grants to the states may be important for current economic
activity. Failing to account for changes in expectations may lead to
incorrect conclusions about how government spending affects economic
activity (see Ramey 2011a).
Figure 1
Average response of state GDPs to unexpected grants
In our analysis of how changes in forecasts of highway grants to the states
affect state GSP, we control for lags in state GSP, lags in receipt of
highway grants, average state GSP levels, and national movements of gross
domestic product (GDP) over the sample period from 1990 to 2010.
In Figure 1, the solid line shows the average percentage change in a state’s
GSP following a 1% increase in forecasted future highway grants to the
states. The shaded area around the line represents a 90% probability range.
The horizontal axis indicates the number of years after the unanticipated
change in forecasted highway grants to the states. The figure shows that
changes in the forecasts have a significant short-term effect on state
output in the first one to two years. This effect fades, but then increases
sharply six to eight years after the forecast revisions, before declining
again. This pattern holds up well with alternative estimation techniques,
the inclusion of different control variables, and with different data
samples.
This pattern is consistent with New Keynesian theoretical models in which
public infrastructure, such as roads, are used by the private sector in the
production of goods and services and take time to be built (see Leduc and
Wilson, forthcoming). In this framework, the initial impact is due to a
traditional Keynesian effect of an increase in aggregate demand. The
medium-term effect on output arises once the public infrastructure is built,
thus increasing the economy’s productive capacity.
The highway grant multiplier
One concept often used to assess the effectiveness of government spending is
the multiplier. The fiscal multiplier represents the dollar change in
economic output for each additional dollar of government spending. Thus, a
multiplier of two implies that, when government spending increases by one
dollar, output rises by two dollars.
Based on the results shown in Figure 1, we find that multipliers for federal
highway spending are large. On initial impact, the multipliers range from
1.5 to 3, depending on the method for calculating the multiplier. In the
medium run, the multipliers can be as high as eight. Over a 10-year horizon,
our results imply an average highway grants multiplier of about two.
Our estimated multipliers are noticeably larger than those typically found
in the literature on the effects of government spending. For instance, in a
recent survey, Valerie Ramey reports multipliers between 0.5 and 1.5 (see
Ramey 2011b). One possible reason for the wide differences is that we
consider a very different form of government spending. Most of the
literature concentrates on the multiplier effect of military spending. But
such spending is arguably nonproductive in an economic sense. By contrast,
government investment in infrastructure, such as roads, can raise the
economy’s productive capacity. In that respect, it can have a higher fiscal
multiplier. Another difference is that we concentrate on the multiplier
effect on GSP, while the literature typically studies the effect on U.S. GDP
as a whole.
The American Recovery and Reinvestment Act
The deep recession of 2007–09 led to the enactment of ARRA, which included a
large one-time increase of $27.5 billion in federal highway grants to
states. ARRA was designed to have strong short-term effects. In general,
infrastructure projects are not viewed as effective forms of short-term
stimulus because of the long lags between authorization, planning, and
implementation. By the time the projects get under way, a recession may be
over. The extra spending could ultimately end up feeding an already booming
economy. To address this problem, ARRA stipulated that state governments had
to fully use their share of federal highway grants by March 2010.
It is conceivable that highway spending during a major downturn, when
productive capacity is underutilized, may affect output in a substantially
different way than spending during more normal times. To test this, we
examined whether unanticipated changes in highway spending in 2009 and 2010
had a different effect on GSP than in other years in our sample. We found
that spending in 2009 and 2010 was roughly four times as large as the peak
response shown in Figure 1. This suggests that highway spending can be
effective during periods of very high economic slack, particularly when
spending is structured to reduce the usual implementation lags.
Conclusion
Surprise increases in federal investment in roads and highways appear to
have had positive effects on gross state product in both the short and
medium run. The short-run impact is akin to the traditional Keynesian effect
that stems from an increase in aggregate demand. By contrast, the positive
impact on GSP in the medium run is probably due to supply-side effects that
boost the economy’s productive capacity. Infrastructure investment gets a
good bang for the buck in the sense that fiscal multipliers—the dollar of
increased output for each dollar of spending—are large.
References
Leduc, Sylvain, and Daniel J. Wilson. Forthcoming.
“Roads to Prosperity or
Bridges to Nowhere? Theory and Evidence on the Impact of Public
Infrastructure Investment.” NBER Macroeconomics Annual 2012.
Ramey, Valerie A. 2011a.
“Identifying Government Spending Shocks: It’s all in the Timing.”
Quarterly Journal of Economics 126(1), pp. 1–50.
Ramey, Valerie A. 2011b.
“Can Government Purchases Stimulate the Economy?” Journal of
Economic Literature 49(3), pp. 673–685.
Posted by Mark Thoma on Monday, November 26, 2012 at 03:47 PM in Economics, Fiscal Policy |
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Comments (32)
Here's a graph of spending on discretionary services from Jonathan McCarthy
of the NY Fed:
Household Services Expenditures: An Update, by Jonathan McCarthy, Liberty
Street:
This post updates and extends
my July 2011 blog piece on household discretionary services expenditures. I
examine the most recent data to see what they reveal about the depth of decline
in expenditures in the last recession and the extent of the recovery, and find
that the expenditures appear to be further below the peak identified earlier. I
then compare the pace of recovery for discretionary and nondiscretionary
services in this expansion with that of previous expansions, finding that the
pace in both cases is well below that of previous cycles. In summary, household
spending continues to be constrained by a combination of credit conditions and
weak income expectations. ...
The author also looks at the pace of the recovery of spending on both
discretionary and non-discretionary services, and finds both to be subpar (see
the last two graphs). The conclusion:
The pattern of a similarly sluggish pace of recovery for discretionary
and nondiscretionary services expenditures suggests that the fundamentals for
consumer spending remain soft. In particular, it appears that households—more
than three years after the end of the recession—remain wary about their future
income growth and employment prospects even though consumer confidence measures
have improved in recent months. In addition, households may still see the need
to repair their balance sheets from the damage incurred during the recession,
especially if they expect that increases in asset prices will be subdued at best
and that credit will continue to be constrained. Consequently, a positive
resolution of these issues is likely necessary before a stronger services and
overall consumer spending recovery can be sustained.
If households had gotten as much help with their balance sheet problems as banks got, the recovery would be a lot further along.
Posted by Mark Thoma on Monday, November 26, 2012 at 11:34 AM in Economics |
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Jeff Sachs says "polluters must pay":
Polluters Must Pay: When BP and its drilling partners caused the Deepwater
Horizon oil spill in the Gulf of Mexico in 2010, the United States government
demanded that BP finance the cleanup, compensate those who suffered damages, and
pay criminal penalties for the violations that led to the disaster. BP has
already committed more than $20 billion in remediation and penalties. Based on a
settlement last week, BP will now pay the largest criminal penalty in US history
–
$4.5 billion.
The same standards for environmental cleanup need to be applied to global
companies operating in poorer countries, where their power has typically been so
great relative to that of governments that many act with impunity, wreaking
havoc on the environment with little or no accountability. As we enter a new era
of sustainable development, impunity must turn to responsibility. Polluters must
pay, whether in rich or poor countries. Major companies need to accept
responsibility for their actions. ...
I can't see the companies doing this voluntarily.
Posted by Mark Thoma on Monday, November 26, 2012 at 11:34 AM in Economics, Environment, Politics, Regulation |
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Comments (10)
Stephen Williamson notes an interview of Robert Lucas:
SED Newsletter: Lucas Interview: The
November 2012 SED
Newsletter has ... an interview with Robert Lucas, which is a gem. Some
excerpts:
... Microfoundations:
ED: If the economy is currently in an unusual state, do micro-foundations still
have a role to play?
RL: "Micro-foundations"? We know we can write down internally consistent
equilibrium models where people have risk aversion parameters of 200 or where a
20% decrease in the monetary base results in a 20% decline in all prices and has
no other effects. The "foundations" of these models don't guarantee empirical
success or policy usefulness.
What is important---and this is straight out of Kydland and Prescott---is that
if a model is formulated so that its parameters are economically-interpretable
they will have implications for many different data sets. An aggregate theory of
consumption and income movements over time should be consistent with
cross-section and panel evidence (Friedman and Modigliani). An estimate of risk
aversion should fit the wide variety of situations involving uncertainty that we
can observe (Mehra and Prescott). Estimates of labor supply should be consistent
aggregate employment movements over time as well as cross-section, panel, and
lifecycle evidence (Rogerson). This kind of cross-validation (or invalidation!)
is only possible with models that have clear underlying economics:
micro-foundations, if you like.
This is bread-and-butter stuff in the hard sciences. You try to estimate a given
parameter in as many ways as you can, consistent with the same theory. If you
can reduce a 3 orders of magnitude discrepancy to 1 order of magnitude you are
making progress. Real science is hard work and you take what you can get.
"Unusual state"? Is that what we call it when our favorite models don't deliver
what we had hoped? I would call that our usual state.
Posted by Mark Thoma on Monday, November 26, 2012 at 10:37 AM in Economics, Macroeconomics, Methodology |
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The deficit scolds have been wrong again and again:
Fighting Fiscal Phantoms, by Paul Krugman, Commentary, NY Times: These are
difficult times for the deficit scolds who have dominated policy discussion for
almost three years. One could almost feel sorry for them, if it weren’t for
their role in diverting attention from the ongoing problem of inadequate
recovery, and thereby helping to perpetuate catastrophically high unemployment.
What has changed? For one thing, the crisis they predicted keeps not happening.
Far from fleeing U.S. debt, investors have continued to pile in, driving
interest rates to historical lows. Beyond that, suddenly the clear and
present danger to the American economy isn’t that we’ll fail to reduce the
deficit enough; it is, instead, that we’ll reduce the deficit too much. ...
Given these realities, the deficit-scold movement has lost some of its clout.
... But the deficit scolds aren’t giving up. Now yet another organization,
Fix the Debt, is
campaigning for cuts to Social Security and Medicare, even while making lower
tax rates a “core principle.” That last part makes no sense in terms of the
group’s ostensible mission, but makes perfect sense if you look at the array of
big corporations, from
Goldman Sachs to the UnitedHealth Group, that are involved in the effort and
would benefit from tax cuts. Hey, sacrifice is for the little people.
So should we take this latest push seriously? No... As far as I can tell, every
example supposedly illustrating the dangers of debt involves either a country
that, like Greece today, lacked its own currency, or a country that, like Asian
economies in the 1990s, had large debts in foreign currencies. Countries with
large debts in their own currency, like
France after World War I, have sometimes experienced big loss-of-confidence
drops in the value of their currency — but nothing like the debt-induced
recession we’re being told to fear.
So let’s step back for a minute, and consider what’s going on here. For years,
deficit scolds have held Washington in thrall with warnings of an imminent debt
crisis, even though investors, who continue to buy U.S. bonds, clearly believe
that such a crisis won’t happen; economic analysis says that such a crisis can’t
happen; and the historical record shows no examples bearing any resemblance to
our current situation in which such a crisis actually did happen.
If you ask me, it’s time for Washington to stop worrying about this phantom
menace — and to stop listening to the people who have been peddling this scare
story in an attempt to get their way.
Posted by Mark Thoma on Monday, November 26, 2012 at 12:24 AM in Budget Deficit, Economics, Politics |
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Comments (223)
Posted by Mark Thoma on Monday, November 26, 2012 at 12:06 AM in Economics, Links |
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Comments (58)
I agree with Gary Gorton:
Banking must not be left in the shadows, by Gary Gorton, Commentary, Financial
Times: ... Addressing the details of the recent financial crisis leaves open
the larger question of how it could have happened in the first place. ... One of
the findings of the Financial Stability Board report is that the global shadow
banking system grew to $62tn in 2007, just before the crisis. Yet we are only
now measuring the shadow banking system. ...
Measurement is the root of science. Our measurement systems, national income
accounting, regulatory filings and accounting systems are useful but limited.
... Now we need to build a national risk accounting system. The financial crisis
occurred because the financial system has changed in very significant ways. The
measurement system needs to change in equally significant ways. The efforts made
to date focus mostly on “better data collection” or “better use of existing
data” – phrases that, at best, suggest feeble efforts. A new measurement system
is potentially forward-looking in detecting possible risks.
Another problem is conceptual. Why weren’t we looking for the possibility of
bank runs before the crisis? The answer is that we did not believe a bank run
could happen in a developed economy. ... Why did we think that? For no good
reason. But, when an economic phenomenon occurs over and over again, it suggests
something fundamental... Another law, we now know, is that privately created
bank money is subject to runs in the absence of government regulation.
I'll just add the periodic reminder that we do not yet have the regulation in place that is needed to address the problem of bank runs of "privately created
bank money." Gary Gorton is skeptical that we can ever solve this problem, that's one of the pointsof th ecolumn, but if that's the case then we should be doing all we can to ensure that the consequences of a shadow bank run are minimized, and there is much more we can do along these lines.
Posted by Mark Thoma on Sunday, November 25, 2012 at 12:37 PM in Economics, Financial System, Regulation |
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This got more attention than I expected on Twitter, Facebook, etc., so thought I'd highlight
it here:
Still think you can beat the market?, by Tim Harford: One of the most
maligned ideas in economics is the efficient market hypothesis... The EMH has
various forms, but in brief its message is very simple: an individual investor
cannot reliably outperform financial markets. The reasoning is equally simple...
Anything that could reasonably be anticipated already has been anticipated, and
so markets instead respond only to genuinely unexpected news.
But the EMH has a problem: researchers keep discovering predictable patterns in
the data... That is a minor embarrassment for the EMH; and it becomes a major
one if the anomalies persist after they have been discovered. Yet this seems
doubtful. ...
A new research paper by David McLean and Jeffrey Pontiff explicitly examines the
idea that academic research into anomalies is a self-denying endeavor. They find
some evidence of spurious patterns... But what is really striking is that after
an anomaly has been published, it quickly shrinks – although it does not
disappear.
The anomalies are most likely to persist when they apply to small, illiquid
markets – as one might expect, because there it is harder to profit from the
anomaly.
The efficient markets hypothesis is surely false. What is striking is that it is
very close to being true. For the Warren Buffetts of the world, “almost true” is
not true at all. For the rest of us, beating the market remains an elusive
dream.
Posted by Mark Thoma on Sunday, November 25, 2012 at 11:08 AM in Economics |
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