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September 29, 2015

Latest Posts from Economist's View

Posted: 29 Sep 2015 01:05 AM PDT
Sharun Mukand and Dani Rodrik at Vox EU:
The political economy of liberal democracy, Vox EU: There are more democracies in the world today than non-democracies, according to data from Polity IV.1 Yet, few of those are what we would call liberal democracies – regimes that go beyond electoral competition and protect the rights of minorities, the rule of law, and free speech and practice non-discrimination in the provision of public goods.
Hungary, Ecuador, Mexico, Turkey, and Pakistan, for example, are all classified as electoral democracies by the Freedom House.2 But in these and many other countries, harassment of political opponents, censorship or self-censorship in the media, and discrimination against minority ethnic/religious groups run rampant. Fareed Zakaria coined the term 'illiberal democracy' for political regimes such as these that hold regular elections but routinely violate rights (Zakaria 1997). More recently, political scientists Steve Levitsky and Lucan Way (2010) have used the term 'competitive authoritarianism' to describe what they view as hybrid regimes between democracy and autocracy.
Democracy developed in Western Europe out of a liberal tradition that emphasized individual rights and placed limits on state coercion (Ryan 2012, Fawcett 2014, Fukuyama 2014). In Britain, France, Germany, and even the US, mass enfranchisement arrived only after liberal thought had become entrenched. Most of the world's new democracies, by contrast, emerged in the absence of a liberal tradition and did little to foster one. As the shortcomings of these democracies have become more evident, it has become commonplace to talk about a 'democratic recession' (Diamond 2015). ...
Circumstances supporting civil rights But liberal democracies do exist, and the question is how they can ever be sustained in equilibrium. We discuss several circumstances that can mitigate the bias against civil rights in democracies.
  • First, there may not be a clear, identifiable cleavage – ethnic, religious, or otherwise – that divides the majority from the minority.
In highly homogenous societies, the 'majority' derives few benefits from excluding the 'minority' from public goods and suffers few costs from providing equal access. This may account for the emergence of liberal democracy in Sweden during the early part of the 20th century or in Japan and South Korea more recently.
  • Second, the two cleavages that distinguish the majority from the minority and the elite from the non-elite may be in close alignment.
In such a case, the elite will seek both property and civil rights as part of the political settlement with the majority. Think, for example, of the position of the white minority government in South Africa prior to the transition to democracy in 1994.
  • Third, the majority may be slender and need the support of the minority to mount a serious challenge to the elite.
Or there may be no clear-cut majority, with society characterized by a preponderance of cross-cutting cleavages. In these cases, repeated game incentives may ensure that each group recognizes the rights of others in return for its rights being protected by them. Lebanon's 'consociational' democracy may have been an example of this, before differential population growth and outside intervention upset the pre-existing balance of power among different religious denominations.
The role of societal cleavages As these examples make clear, two societal cleavages play a crucial role in our story.
  • First, there is the divide between the propertied elite and the poor masses.
This is largely an economic divide and is determined by the division of land, capital and other assets in society, as well as access to the opportunities for accumulating those assets. Standard class-based accounts of the dynamics of political regimes emphasize primarily this cleavage.
  • Second, there is a cleavage between what we call a majority and a minority.
This particular divide may be identity based, deriving from ethnic, religious, linguistic, or regional affiliations. Or it may be ideological – as with secular modernizers versus religious conservatives in Turkey, and Western-oriented liberals versus traditionalists in Russia. (We will call this second cleavage an 'identity' cleavage for short, but it should be kept in mind that the relevant majority-minority cleavage will run often on ideological lines.) These two cleavages may align, as they did in South Africa, but more often than not, they will not. Their divergence is what allows us to make an analytical and substantive distinction between electoral and liberal democracy.
In our formal model, the majority-minority split exerts a variety of influences on the prospects for liberal democracy. First, and most crucially, it makes the majority favor electoral over liberal democracy. By discriminating against the minority, the majority can enjoy more public goods for itself. But there are effects that go in the opposite direction too. Under some circumstances, the split can make the elite favor liberal democracy. We identify two such consequences. First, the rate of taxation is generally lower under liberal democracy as the majority reap fewer benefits from redistributive taxation when they have to share public goods with the minority. So the elite may support liberal democracy when the income/class cleavage is very deep. Second, when the elite's identity aligns with that of the minority, the elite have a direct stake in civil rights too. These channels can produce a rich mix of results.
Concluding remarks We suggest that the differential fortunes of liberal democracy in Western Europe and the developing world are related to the nature of dominant cleavages at the time of the social mobilization that ushered in democracy. In the West, the transition to democracy occurred as a consequence of industrialization at a time when the major division in society was the one between capitalists and workers. In most developing nations, on the other hand, mass politics was the product of decolonization and wars of national liberation, with identity cleavages as the main fault line. Our framework suggests that the second kind of transition is particularly inimical to liberal democracy. ...
Posted: 29 Sep 2015 12:06 AM PDT
Posted: 28 Sep 2015 05:54 PM PDT
Advice about selling goods on eBay from the NBER Digest:
Cheap Talk, Round Numbers, and Signaling Behavior: In the marketplace for ordinary goods, buyers and sellers have many characteristics that are hidden from each other. From the seller's perspective, it may be beneficial to reveal some of these characteristics. For example, a patient seller may want to signal unending willingness to wait in order to secure a good deal. At the same time, an impatient seller may want to signal a desire to sell a good quickly, albeit at a lower price.

This insight is at the heart of Cheap Talk, Round Numbers, and the Economics of Negotiation (NBER Working Paper No. 21285) by Matthew Backus, Thomas Blake, and Steven Tadelis. The authors show that sellers on eBay behave in a fashion that is consistent with using round numbers as signals of impatience.
The authors analyze data from eBay's bargaining platform using its collectibles category—coins, antiques, toys, memorabilia, and the like. The process is one of sequential offers not unlike haggling in an open-air market. A seller lists an initial price, to which buyers may make counteroffers, to which sellers may make counteroffers, and so on. If a price is agreed upon, the good sells. The authors analyze 10.5 million listed items, out of which 2.8 million received offers and 2.1 million ultimately sold. Their key finding is that items listed at multiples of $100 receive lower offers on average than items listed at nearby prices, ultimately selling for 5 to 8 percent less.
It is tempting to label such behavior a mistake. However, items listed at these round numbers receive offers 6 to 11 days sooner and are 3 to 5 percent more likely to sell than items listed at "precise" numbers. Furthermore, even experienced sellers frequently list items at round numbers, suggesting it is an equilibrium behavior best modeled by rationality rather than seller error. It appears that impatient sellers are able to signal their impatience and are happy to do it, even though it nets them a lower price.
One concern with the analysis is that round-number pricing might provide a signal about the good being sold, rather than the person or firm selling it. To address this issue, the authors use data on goods originally posted with prices in British pounds. These prices are automatically translated to U.S. dollars for the American market. Hence, the authors can test what happens when goods intended to be sold at round numbers are, in fact, sold at non-round numbers. This removes the round-number signal while holding the good's features constant. In this setting, they find that buyers of goods priced in non-round dollar amounts systematically realize higher prices, though the effect is not as strong as that in their primary sample. This evidence indicates the round numbers themselves have a significant effect on bargaining outcomes.
The authors find additional evidence on the round-number phenomenon in the real estate market in Illinois from 1992 to 2002. This is a wholly different market than that for eBay collectibles, with much higher prices and with sellers typically receiving advice from professional listing agents. But here, too, there is evidence that round-number listings lead to lower sales prices. On average, homes listed at multiples of $50,000 sold for $600 less.
Posted: 28 Sep 2015 04:42 PM PDT
Kevin Williamson at the National Review Online tells Republican candidates to get real:
The Thing about Tax Cut, by Kevin D. Williamson: Every Republican tax-reform plan should be rooted in this reality: If you are going to have federal spending that is 21 percent of GDP, then you can have a.) taxes that are 21 percent of GDP; b.) deficits. There is no c.
If, on the other hand, you have a credible program for reducing spending to 17 or 18 percent of GDP, which is where taxes have been coming in, please do share it.
The problem with the Growth Fairy model of balancing budgets is that while economic growth would certainly reduce federal spending as a share of GDP if spending were kept constant, there is zero evidence that the government of these United States has the will or the inclination to enact serious spending controls when times are good (Uncork the champagne!) or when times are bad (Wicked austerity! We must have stimulus!). So even if we buy Jeb Bush's happy talk about growth, or Donald Trump's, the idea that spending is just going to magically sit there, inert, while the economy zips forward and the tax coffers fill up, is delusional.
There are no tax cuts when the government is running deficits, only tax deferrals.
Remembering that the "math simply does not add up" for Republicans -- partly that's Williamson's point -- let's take a look at the evidence on government spending as a share of potential GDP. This is from Paul Krugman in 2013, but the underlying trends do not change. He explains why this is the best measure to use when looking at this question:
The Non-Surge in Government Spending: The fiscal debate in Washington is dominated by things everyone knows that happen not to be true. One of those things is the notion that we have a fiscal crisis... The crucial thing to understand here is that you do need to take the state of the business cycle into account; it's not enough simply to do what Nate Silver, for example, does, and look at spending as a share of GDP — a calculation that can be deeply misleading in the aftermath of a severe recession followed by a slow recovery.
Why does this matter? First, if the economy is depressed — if GDP is low relative to potential — the share of spending in GDP will correspondingly look high. ...
Second, there are some programs — unemployment benefits, food stamps, to some extent Medicaid — that tend to spend more when the economy is depressed and more people are in distress. And rightly so! You don't want to take a temporary spike in UI payments after a deep slump as a sign of runaway spending.
So how can we get a better picture? First, express spending as a share of potential rather than actual GDP; we can use the CBO estimates of potential for that purpose. Second, keep your eye on the business cycle — and, in particular, on how spending is evolving now that a gradual recovery is underway.
So, let's look first at a longish time series of total government spending as a share of potential GDP:
Ratio of government spending to potential GDP.
Ratio of government spending to potential GDP
What you see is not a sustained upward trend: there's actually a considerable fall during the Clinton years, reflecting in part falling defense spending, then a more modest rise in the Bush years, mainly reflecting spending on the War on Terror (TM), and finally a temporary surge associated with the financial crisis — but much of that surge has already been reversed.
Here's a closeup on Bush's last two years and Obama's first four:
That was the spending surge that was. ...
The claim is that "the idea that spending is just going to magically sit there, inert, while the economy zips forward and the tax coffers fill up, is delusional." Here's an updated graph using the latest data:
Taking away the surge from the crisis, which has been reversed, the trend in the last few decades looks pretty flat to me. To the extent that there is a tendency for the ratio to move upward in recent years, it's hardly the fault of Democrats. There is something delusional here, but it's not that spending as a share of potential GDP -- the right way to look at this question -- always rises when times are good or bad, or that Democratic administrations cannot keep spending under control.
Posted: 28 Sep 2015 12:11 PM PDT
No sense hiding from evidence that works against my support of immigration. This is from George Borjas (if you are unfamiliar with the Mariel boatlift, see here):
The Wage Impact of the Marielitos: A Reappraisal, by George J. Borjas, NBER Working Paper No. 21588 [open link]: This paper brings a new perspective to the analysis of the Mariel supply shock, revisiting the question and the data armed with the accumulated insights from the vast literature on the economic impact of immigration. A crucial lesson from this literature is that any credible attempt to measure the wage impact of immigration must carefully match the skills of the immigrants with those of the pre-existing workforce. The Marielitos were disproportionately low-skill; at least 60 percent were high school dropouts. A reappraisal of the Mariel evidence, specifically examining the evolution of wages in the low-skill group most likely to be affected, quickly overturns the finding that Mariel did not affect Miami's wage structure. The absolute wage of high school dropouts in Miami dropped dramatically, as did the wage of high school dropouts relative to that of either high school graduates or college graduates. The drop in the relative wage of the least educated Miamians was substantial (10 to 30 percent), implying an elasticity of wages with respect to the number of workers between -0.5 and -1.5. In fact, comparing the magnitude of the steep post-Mariel drop in the low-skill wage in Miami with that observed in all other metropolitan areas over an equivalent time span between 1977 and 2001 reveals that the change in the Miami wage structure was a very unusual event. The analysis also documents the sensitivity of the estimated wage impact to the choice of a placebo. The measured impact is much smaller when the placebo consists of cities where pre-Mariel employment growth was weak relative to Miami.
Posted: 28 Sep 2015 11:06 AM PDT
Josh Barro:
Trump Plan Is Tax Cut for the Rich, Even Hedge Fund Managers: Donald Trump's tax plan, released Monday, does not live up to the populist language he has offered on taxes all summer.
When talking about taxes in this campaign, Donald Trump has often sounded like a different kind of Republican. He says he will take on "the hedge fund guys" and their carried interest loophole. He thinks it's "outrageous" how little tax some multimillionaires pay. But his plan calls for major tax cuts not just for the middle class but also for the richest Americans — even the dreaded hedge fund managers. And despite his campaign's assurances that the plan is "fiscally responsible," it would grow budget deficits by trillions of dollars over a decade.
You could call Mr. Trump's plan a higher-energy version of the tax plan Jeb Bush announced earlier this month: similar in structure, but with lower rates and wider tax brackets, meaning individual taxpayers would pay even less than under Mr. Bush, and the government would lose even more tax revenue. ...
A document from the Trump campaign says all these tax cuts would be "fully paid for" by the elimination of deductions and by a one-time tax on foreign profits of American firms held abroad. That math simply does not add up: As discussed above, rich people do not currently take enough tax deductions to offset the tax rate cuts Mr. Trump proposes, and the one-time foreign profits tax might raise $250 billion, not close to the trillions of revenue that would be lost through tax rate cuts.
At a news conference Monday, Mr. Trump offered another way his tax plan would pay for itself: economic growth, perhaps as fast as 6 percent a year, again a higher-energy estimate than the 4 percent Mr. Bush has proposed. But there is no evidence to support the idea that such rapid growth can be produced through tax cuts.
"That math simply does not add up" could be applied to Republican tax plans in general. There's always some sort of magical thinking that makes their plans work (or, perhaps, better described as cunning deception that relies upon the press remaining effectively silent, or playing the "he said she said" game that gives people little information about truth, in the face of absurd claims). Talk like a populist, act like a plutocrat seems to be a winning formula -- somehow many who have been disaffected by the economic system believe Republicans are on their side, and have their best interests at heart, that all the unfairness they see around them (which is not always real, but rather stoked by the closed loop news system they adhere to) will be addressed by a Republican administration. Not gonna happen.

Latest Posts from Economist's View

Posted: 28 Sep 2015 12:42 AM PDT
Why is Boehner quitting?:
The Blackmail Caucus, a.k.a. the Republican Party, by Paul Krugman, Commentary, NY Times: John Boehner was a terrible, very bad, no good speaker of the House. Under his leadership, Republicans pursued an unprecedented strategy of scorched-earth obstructionism, which did immense damage to the economy and undermined America's credibility around the world. ...
For me, Mr. Boehner's defining moment remains what he said and did ... when a newly inaugurated President Obama was trying to cope with the disastrous recession that began under his predecessor. ...
In 2008 a stimulus plan passed Congress with bipartisan support, and the case for a further stimulus in 2009 was overwhelming. But with a Democrat in the White House, Mr. Boehner demanded that policy go in the opposite direction, declaring that "American families are tightening their belts. But they don't see government tightening its belt." And he called for government to "go on a diet." This was know-nothing economics, and incredibly irresponsible at a time of crisis...
The Boehner era has been one in which Republicans have accepted no responsibility for helping to govern the country, in which they have opposed anything and everything the president proposes.
What's more, it has been an era of budget blackmail, in which threats that Republicans will shut down the government or push it into default unless they get their way have become standard operating procedure. ...
So why is he out? Basically because the obstructionism failed..., despite all Mr. Boehner's efforts to bring him down, Mr. Obama is looking more and more like a highly successful president. For the base,..., this is a nightmare. And all too many ambitious Republican politicians are willing to tell the base that it's Mr. Boehner's fault, that he just didn't try blackmail hard enough.
This is nonsense, of course. In fact, the controversy over Planned Parenthood that probably triggered the Boehner exit — shut down the government in response to obviously doctored videos? — might have been custom-designed to illustrate just how crazy the G.O.P.'s extremists have become, how unrealistic they are about what confrontational politics can accomplish.
But Republican leaders who have encouraged the base to believe all kinds of untrue things are in no position to start preaching political rationality.
Mr. Boehner is quitting because he found himself caught between the limits of the politically possible and a base that lives in its own reality. But don't cry for (or with) Mr. Boehner; cry for America, which must find a way to live with a G.O.P. gone mad.
Posted: 28 Sep 2015 12:15 AM PDT
Robert Reich:
Why We Must End Upward Pre-Distribution to the Rich: You often hear inequality has widened because globalization and technological change have made most people less competitive, while making the best educated more competitive.
There's some truth to this. The tasks most people used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.
But this common explanation overlooks a critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs.
As I argue in my new book, "Saving Capitalism: For the Many, Not the Few" (out this week), this transformation has amounted to a pre-distribution upward. ...
After a large number of examples illustrating how changes in the rules of the game driven by political influence have worked against the economic interests of the working class, he concludes
... The underlying problem, then, is not just globalization and technological changes that have made most American workers less competitive. Nor is it that they lack enough education to be sufficiently productive.
The more basic problem is that the market itself has become tilted ever more in the direction of moneyed interests that have exerted disproportionate influence over it, while average workers have steadily lost bargaining power—both economic and political—to receive as large a portion of the economy's gains as they commanded in the first three decades after World War II.
Reversing the scourge of widening inequality requires reversing the upward pre-distributions within the rules of the market, and giving average people the bargaining power they need to get a larger share of the gains from growth.
The answer to this problem is not found in economics. It is found in politics. Ultimately, the trend toward widening inequality in America, as elsewhere, can be reversed only if the vast majority join together to demand fundamental change.
The most important political competition over the next decades will not be between the right and left, or between Republicans and Democrats. It will be between a majority of Americans who have been losing ground, and an economic elite that refuses to recognize or respond to its growing distress.
Posted: 28 Sep 2015 12:06 AM PDT
Posted: 27 Sep 2015 01:54 PM PDT
The end of an essay by David Warsh:
... Many regulators and bankers contend that the thousand-page Dodd Frank Act complicated the task of a future panic rescue by compromising the independence of the Fed. Next time the Treasury Secretary will be required to sign off on emergency lending.
Bank Regulators?  Some economists, including Gorton, worry that by focusing on its new "liquidity coverage ratio" the Bank for International Settlements, by now the chief regulator of global banking, will have rendered the international system more fragile rather than less by immobilizing collateral.
Bankers?  You know that the young ones among them are already looking for the Next New Thing.
Meanwhile, critics left and right in the US Congress are seeking legislation that would curb the power of the Fed to respond to future crises.
So there is plenty to worry about in the years ahead. Based on the experience of 2008, when a disastrous meltdown was avoided, there is also reason to hope that central bankers will once again cope. Remember, though, as the Duke of Wellington said of the Battle of Waterloo, it was a close-run thing.
Update: See Brad Delong's reply.
Posted: 27 Sep 2015 12:13 PM PDT
Jim Hamilton:
Economic importance of China: How important would an economic downturn in China be for the United States? Paul Krugman reviews some of the reasons why the United States perhaps shouldn't worry too much...
I've long believed that to understand business cycles we need to consider not just net flows but also gross interdependencies. A downturn in China will affect some businesses much more than others. If specialized labor and capital do not easily move to other sectors, that can end up having significant multiplier effects.
For example, while China may only account for 15% of world GDP, it has been a huge factor in commodity markets over the last decade. ... Of course, lower commodity prices [from the slowdown in China] will force layoffs for oil companies and miners but leave more money in the hands of consumers. However, additional spending from that channel has been more modest than many of us were anticipating.
Another concern comes from financial linkages. A Chinese downturn will unquestionably be a big hit for certain financial institutions. Exactly who those will be and what it means for the rest of us, I don't know. As Warren Buffett observed, "you only find out who is swimming naked when the tide goes out."
The bottom line is that an economic slowdown in China already is a very big deal for some U.S. workers and businesses. I don't know what the ultimate implications for the U.S. of a significant recession in China would be.
But things I don't know cause me to worry.
Posted: 27 Sep 2015 10:21 AM PDT
Inequality goes beyond income and wealth, it extends to the political arena:
The Soaring Price of Political Access, Editorial, NY Times: ... This year,... the two national parties reported to be planning tenfold increases in the rates V.I.P. donors will be charged to secure the right to attend exclusive dinners and presidential convention forums with candidates and party leaders.
This means that top-tier Republican donors will pay $1.34 million per couple for the privilege of being treated as party insiders, while the Democratic Party will charge about $1.6 million, according to The Washington Post. Four years ago the most an individual could give to a national party was $30,800. This time, that top $1.34 million ticket for a couple in the Republican National Committee's Presidential Trust tier, reserved for the "most elite R.N.C. investors," promises "influence messaging and strategy" opportunities at exclusive party dinners and retreats...
The prices for getting into the inner sanctum are rising because of loosened restrictions on political money from the courts and Congress. ...
The Republicans have rendered the election commission completely dysfunctional by blocking regulatory decisions and refusing to take action against improper practices. And now the Democrats are trying to get official approval of the very practices that eviscerate the law.
While Democrats led by Hillary Rodham Clinton have called for broad reforms of campaign fund-raising, Mrs. Clinton and party leaders say they will emulate Republican tactics in going after big money if that's what it takes to compete. At what cost to democracy is the looming question for voters.
There was a time when unions provided a bit of countervailing influence over politicians, and hence provided a way to consolidate the political power of individual workers. That influence has faded over time, in no small part due to the very imbalances in political power that unions helped to overcome. Unfortunately, no new institutions have risen to take their place. Until that happens, until the power of individuals is magnified through collective coordination, if ever, it's hard for me to see how the problem of inequality of income, and the problem of inequality of political influence will be overcome.

Latest Posts from Economist's View

Posted: 27 Sep 2015 12:06 AM PDT
Posted: 26 Sep 2015 01:12 PM PDT
From an interview with Olivier Blanchard:
...IMF Survey: In pushing the envelope, you also hosted three major Rethinking Macroeconomics conferences. What were the key insights and what are the key concerns on the macroeconomic front? 
Blanchard: Let me start with the obvious answer: That mainstream macroeconomics had taken the financial system for granted. The typical macro treatment of finance was a set of arbitrage equations, under the assumption that we did not need to look at who was doing what on Wall Street. That turned out to be badly wrong.
But let me give you a few less obvious answers:
The financial crisis raises a potentially existential crisis for macroeconomics. Practical macro is based on the assumption that there are fairly stable aggregate relations, so we do not need to keep track of each individual, firm, or financial institution—that we do not need to understand the details of the micro plumbing. We have learned that the plumbing, especially the financial plumbing, matters: the same aggregates can hide serious macro problems. How do we do macro then?
As a result of the crisis, a hundred intellectual flowers are blooming. Some are very old flowers: Hyman Minsky's financial instability hypothesis. Kaldorian models of growth and inequality. Some propositions that would have been considered anathema in the past are being proposed by "serious" economists: For example, monetary financing of the fiscal deficit. Some fundamental assumptions are being challenged, for example the clean separation between cycles and trends: Hysteresis is making a comeback. Some of the econometric tools, based on a vision of the world as being stationary around a trend, are being challenged. This is all for the best.
Finally, there is a clear swing of the pendulum away from markets towards government intervention, be it macro prudential tools, capital controls, etc. Most macroeconomists are now solidly in a second best world. But this shift is happening with a twist—that is, with much skepticism about the efficiency of government intervention. ...
Posted: 26 Sep 2015 12:47 PM PDT
Paul Krugman returns to a familiar theme:
Economics: What Went Right: ...I'm at EconEd; here are my slides for later today. The theme of my talk is something I've emphasized a lot over the past few years: basic macroeconomics has actually worked remarkably well in the post-crisis world, with those of us who took our Hicks seriously calling the big stuff — the effects of monetary and fiscal policy — right, and those who went with their gut getting it all wrong. ...
One thing I do try is to concede that one piece of the conventional story hasn't worked that well, namely the Phillips curve, where the "clockwise spirals" of previous protracted large output gaps haven't materialized. Maybe it's about what happens at very low inflation rates.
What's notable about the Fed's urge to raise rates, however, is that Fed officials, including Janet Yellen, are acting as if they have high confidence in their models of inflation dynamics –which is the one thing we really haven't done well at recently. I really fear that we're looking at incestuous amplification here.
Agree about the uncertainty about inflation dynamics, but fear Fed officials will interpret it as risks on the upside that must be nullified through interest rate hikes. As for the Phillips curve, here's a graph from his talk:
As Krugman says, "Maybe it's about what happens at very low inflation rates." I would add that the combination of the zero bound, low inflation, and downward wage rigidity may be able to explain the change in the Phillips curve -- I'm not quite ready to give up yet.
More generally, estimating inflation dynamics has been far from successful. For example, in many VAR models (a widely used empirical specification for establishing relationships among macroeconomic series), a shock to the federal funds rate often causes prices to go up (theory says they should go down). This can be overcome somewhat by including commodity prices in the model. The idea is that when the Fed expects inflation to go up it raises the federal funds rate, and since the policy does not complete eliminate the inflation, the data will show a positive correlation between the federal funds rate and inflation. Commodity prices are thought to embody and be sensitive to future expected inflation, so including this variable helps to solve the "price puzzle" as it is known. Even so, the results are highly sensitive to specification, and when you work with these models regularly you come away believing that the estimated price dynamics are not very good at all.
But the Fed must forecast in order to do policy. There are lags (though I've argued they are likely shorter than common wisdom suggests), and the Fed must act before a clear picture emerges. The question is how the Fed should react to such uncertainty about its inflation forecasts, and to me -- given the corresponding uncertainties about the state of the labor market and the asymmetric nature of the costs of mistakes about inflation and unemployment (plus the distributional issues -- who gets hurt by each mistake?), it counsels patience rather than urgency on the inflation front.
Posted: 26 Sep 2015 12:05 PM PDT
Matthew Yglesias takes up a quote from Bush (I highlighted this yesterday):
Jeb Bush can't explain the cost of his tax cuts correctly: ...Jeb Bush ... talking to CNBC's John Harwood about the impact of his plan on the deficit:
Everybody freaks out about the deficit. And I worry about the structural deficit for sure. But if we grow our economy at a faster rate, the dynamic nature of tax policy will kick in. And so we'll be in the hole around $1.2 trillion over 10 years. And these are moderate growth effects. I'm not using the ones that I believe. I'm more optimistic.
There's never been a time where there hasn't been a dynamic effect of taxation. That's not a risk at all. That's just a simple fact. Take the contrary argument here for a second: If tax policy doesn't matter, why don't we just tax everything?
Bush is referring to an estimate prepared for media consumption by John Cogan, Martin Feldstein, Glenn Hubbard, and Kevin Warsh — four men who are smart economists in good standing but who are also very much partisan Republicans. The right way to think about an estimate they put together is that it represents the outer limit of what a person is willing to claim on behalf of the growth impacts of Bush's tax cut and feel like he can still look at his graduate students with a straight face.
And guess what? The paper doesn't say what Bush says it says. ...
Obviously even if Bush were able to get his basic facts right, the underlying claim about the growth-boosting impact of the tax cuts is disputable. Jeb's brother claimed that the growth-boosting power of his tax cuts would avoid increasing the deficit, and we got eight years of fairly dismal economic performance.
The argument Republicans can make is that growth would have been even faster without the drag from Obama's policies.. But that's where comparisons to the past are useful. These comparisons establish a baseline on what we should expect. So let's take a look. This is from Calculated Risk. It shows private sector employment under recent past presidents:

So Obama's job growth is all but tied with Reagan's, he beats both Bushes, G.W. by a considerable margin, but loses to Clinton and Carter. The most relevant comparison here is to G.W. Bush since Jeb promises to follow his policies for the most part, and by that comparison Obama wins soundly.
What about public sector jobs? Government has expanded under Obama correct? So if you add private sector jobs to public sector jobs, or course Obama looks even better than for private sector jobs alone and wins handily -- it's the undue influence of government expansion that is driving the overall job numbers, not his economic policies.
That story falls apart when the data are examined:

Obama is the big "loser" here in terms of public sector job creation, a source of annoyance for me (that's not what you do in a recession, instead wait until the economy improves to make these kinds of cuts -- it's stimulative, it avoids sending people to unemployment and a dismal job market and compounding our problems, and it avoids the need to increase social services to help the unemployed during their struggle to find new employment). But to Republicans, Obama ought to be a hero.
Okay, but surely Obamacare has been a job-killer, right? Republicans are noted for their forecasting ability, that runaway inflation we've had, the spike in interest rates, the stimulative effects of austerity (well, they are noted for how bad their forecasts have been), so surely they are right about this too. Obamacare has killed jobs and caused employers to shift people to part-time work, right?
That story falls apart when the data are examined (this should be the first thing to think when Republicans start spouting claims about economics). This is from Jared Bernstein:
Smell Something, Say Something: Obamacare, O'Reilly, and full-time jobs: ...I heard Fox's Bill O'Reilly claim that the Affordable Care Act "has made it more difficult to create full-time jobs in America," (around 2:30 in the video). The figure below, which indexes both full-time and part-time jobs to 100 in 2010, belies his claim. As ACA measures have been introduced, most notably the arrival of the subsidized exchanges and the Medicaid expansion in 2014, there's been no noticeable change and certainly no Obamacare-induced shift to part-time work. Other data show that the number of involuntary part-time workers is down 18 percent—1.4 million fewer workers—since 2013.
Source: BLS, my analysis
No one's claiming that the ACA is having miraculous effects on job growth, or even that it's responsible for the full-time job growth you see above. ... My point is that while Obamacare is having its intended effect of making coverage more affordable and thereby lowering the uninsured rate, I've not seen any data that would lead an objective person to conclude it's having a meaningful impact on the job market one way or the other.
In other words, those who still want to repeal Obamacare need a new rationale besides "it's not working" or "it's a job killer." It is working and it's not killing jobs. Those who claim otherwise are, in fact, fact-killers. ...
If you want slow growth, poor job creation, tax cuts for the wealthy, harder times for everyone else as social programs are cut on the false pretenses of ending dependency and building character (we know what the true goals are for most Republicans), if you want health care to be harder to get for those "others", environmental policies to be rolled back in the name of "business interests", if you want all of this and more -- we haven't even touched on issues like the supreme court, war, and Federal Reserve appointments -- Jeb is the man for you.

September 26, 2015

Latest Posts from Economist's View

Posted: 26 Sep 2015 12:06 AM PDT
Posted: 25 Sep 2015 12:34 PM PDT
The politics in the UK is so much better than here. Politicians in the UK would never think of using smokescreens like concern over the deficit to conceal their true intentions:
The path from deficit concern to deficit deceit, by Simon Wren-Lewis: ...A few days ago Lord Turnbull had the opportunity to question the Chancellor on his drive for further austerity. This is a part of what he said.
"I think what you are doing actually, is, the real argument is you want a smaller state and there are good arguments for that and some people don't agree but you don't tell people you are doing that. What you tell people is this story about the impoverishment of debt which is a smokescreen. The urgency of reducing debt, the extent, I just can't see the justification for it."
A former head of the civil service, who had initially supported Osborne on the deficit, was now accusing him of deliberate deceit. Big news you might have thought. And quite a turnaround in just 5 years.
Yet it is not surprising. Osborne's fiscal plans really have no basis in economics. That leaves two alternatives. Either Osborne is just stupid and cannot take advice, or he has other motives. George Osborne is clearly not stupid, which leaves only the second possibility. It is therefore entirely logical that Lord Turnbull should come to agree with what some of us were saying some time ago.
What a strange world we are now in. The government goes for rapid deficit reduction as a smokescreen for reducing the size of the state. No less than a former cabinet secretary accuses the Chancellor of this deceit. Yet when a Labour leadership contender adopts an anti-austerity policy he is told it is extreme and committing electoral suicide. Is it any wonder that a quarter of a million Labour party members voted for change.
Posted: 25 Sep 2015 12:06 PM PDT
This worked so well for Romney:
Our message is one of hope and aspiration," he said at the East Cooper Republican Women's Club annual Shrimp Dinner. "It isn't one of division and get in line and we'll take care of you with free stuff. Our message is one that is uplifting -- that says you can achieve earned success.
Bush says this is how he will win back black voters, but I have a feeling his message of "hope and inspiration" and the reference to "free stuff" is for another group of voters.
If the pope was a scientist, Bush would listen?:
"I oppose the president's policy as it relates to climate change because it will destroy the ability to re-industrialize the country, to allow for people to get higher wage jobs, for people to rise up," Bush said, according to the Huffington Post.
This is not the first time Bush has rejected the pope's teachings on climate, but it may be the first time he has given the "not a scientist" reason.
"He's not a scientist, he's a religious leader," Bush says
In fact, the pope studied chemistry and worked as a chemist. ...
He couldn't possibly be using concern about people's ability to "rise up" as a cover for supporting business interests, could he?
Tax cuts work, ignore the evidence:
HARWOOD: Do you regard your brother's economic tenure—which pursued a broadly similar strategy to what you're proposing—as a proof point that this strategy works?
BUSH: Well, look, he was impacted by some big secular events. The tech bubble, 9/11—those had huge impacts. There was growth. And there was some job growth.
Wage growth has been flat for a long time in our country. We have this big challenge that we have to fix. And that's part of the mission I'm on—growth by itself isn't going to create higher wages. But higher growth will generate more wage growth than no growth. And if you do it in the right way, where you're putting money in people's pockets, you can create economic activity.
The tax cuts will trickle down and let people "rise up" just like they did before. Oh wait. This is the "earned success" he talks so much about. It has nothing to do with supporting wealthy interests, it's all about economic growth and helping the disadvantaged. On the "earned success" point, it's hard not to recall Molly Ivins on George Bush:
Jim Hightower's great line about [George] Bush, "Born on third and thinks he hit a triple," is still painfully true. Bush has simply never acknowledged that not only was he born with a silver spoon in his mouth -- he's been eating off it ever since..., he doesn't admit to himself or anyone else that he owes his entire life to being named George W. Bush. He didn't just get a head start by being his father's son -- it remained the single most salient fact about him for most of his life. He got into Andover as a legacy. He got into Yale as a legacy. He got into Harvard Business School as a courtesy (he was turned down by the University of Texas Law School). He got into the Texas Air National Guard -- and sat out Vietnam -- through Daddy's influence. (I would like to point out that that particular unit of FANGers, as regular Air Force referred to the "Fucking Air National Guard," included not only the sons of Governor John Connally and Senator Lloyd Bentsen, but some actual black members as well -- they just happened to play football for the Dallas Cowboys.) Bush was set up in the oil business by friends of his father. He went broke and was bailed out by friends of his father. He went broke again and was bailed out again by friends of his father; he went broke yet again and was bailed out by some fellow Yalies.
That Bush's administration is salted with the sons of somebody-or-other should come as no surprise. I doubt it has ever even occurred to Bush that there is anything wrong with a class-driven good-ol'-boy system. ...
But of course, nothing like that could possibly be true of self-made, I did it all by myself Jeb! Bush success (he "made it!" himself).
Finally, surprise of surprises, when asked about the impact of his tax cut policies on the deficit, he gives the standard response, economic growth, like that his brother would have gotten if he wasn't so darn unlucky, will nullify much of the impact that tax cuts have on the deficit:
Everybody freaks out about the deficit. And I worry about the structural deficit for sure. But if we grow our economy at a faster rate, the dynamic nature of tax policy will kick in. ... There's never been a time where there hasn't been a dynamic effect of taxation. That's not a risk at all. That's just a simple fact.
It's also a "simple fact" (he hasn't moved on to "complicated facts" yet, apparently) that the Bush tax cuts did not trickle down, inequality was made worse by the Bush policies, and those in the lower parts of the income distribution had a harder time "rising up" because of these policies, and other policies that stripped away social support.
Jeb's I will do what my brother did, except this time it will work for those who are not in the top of the income distribution, is not exactly inspiring. Unless, of course, you are used to eating with silver spoons.

Latest Posts from Economist's View

Posted: 25 Sep 2015 12:33 AM PDT
Republicans can't help but side with business, but there are very good reasons for the recent increase in regulatory oversight:
Dewey, Cheatem & Howe, by Paul Krugman, Commentary, NY Times: Item: The C.E.O. of Volkswagen has resigned after revelations that his company committed fraud on an epic scale, installing software on its diesel cars that detected when their emissions were being tested, and produced deceptively low results.
Item: The former president of a peanut company has been sentenced to 28 years in prison for knowingly shipping tainted products that later killed nine people and sickened 700.
Item: Rights to a drug used to treat parasitic infections were acquired by Turing Pharmaceuticals, which specializes not in developing new drugs but in buying existing drugs and jacking up their prices. In this case, the price went from $13.50 a tablet to $750. ...
There are, it turns out, people in the corporate world who will do whatever it takes, including fraud that kills people, in order to make a buck. And we need effective regulation to police that kind of bad behavior... But we knew that, right?
Well, we used to know it... But ... an important part of America's political class has declared war on even the most obviously necessary regulations. ...
A case in point: This week Jeb Bush, who has an uncanny talent for bad timing, chose to publish an op-ed article in The Wall Street Journal denouncing the Obama administration for issuing "a flood of creativity-crushing and job-killing rules." Never mind his misuse of cherry-picked statistics, or the fact that private-sector employment has grown much faster under President Obama's "job killing" policies than it did under Mr. Bush's brother's administration. ...
The thing is, Mr. Bush isn't wrong to suggest that there has been a move back toward more regulation under Mr. Obama, a move that will probably continue if a Democrat wins next year. After all, Hillary Clinton released a plan to limit drug prices at the same time Mr. Bush was unleashing his anti-regulation diatribe.
But the regulatory rebound is taking place for a reason. Maybe we had too much regulation in the 1970s, but we've now spent 35 years trusting business to do the right thing with minimal oversight — and it hasn't worked.
So what has been happening lately is an attempt to redress that imbalance, to replace knee-jerk opposition to regulation with the judicious use of regulation where there is good reason to believe that businesses might act in destructive ways. Will we see this effort continue? Next year's election will tell.
Posted: 25 Sep 2015 12:24 AM PDT
Brad DeLong:
Technological Progress Anxiety: Thinking About "Peak Horse" and the Possibility of "Peak Human", by by Brad DeLong: Another well-written piece by an authorial team led by the very sharp Joel Mokyr–The History of Technological Anxiety and the Future of Economic Growth: Is This Time Different?–that in my mind fails to wrestle with the major question, and so leaves me unsatisfied.
Hitherto,... every form of non-human power that substitutes and thus tends to reduce the value of human backs and thighs...–from the horse to the watermill to the steam engine to the diesel to the jet engine–and every single source of manipulation–from the potter's wheel to the loom to the spinning jenny to the assembly line to the mechanized factory–has required a cybernetic control mechanism. Without such a mechanism, machines are useless. They cannot keep themselves on course and on track. ... And as cybernetic control mechanisms human brains had an overwhelming productivity edge.
The fear is that this time things really are different. The fear is that, this time, technological anxiety is not misguided... For the first time, we find our machines substituting not for human backs, things, eyes, and hands, but for human brains. ... And this factor is offset only by the hope that our machines will reduce the market value of commodities faster than they reduce the value of the median worker's labor...
I must say that I really do wish that Mokyr et al. had included, in their paper, a discussion of "peak horse".
A standard economists' argument goes roughly like this: Technology is introduced only when it is profitable, and lowers the costs of production. Thus the prices of the goods and services produced must go down, leaving consumers with more money to spend on other products, and this creates demand for any workers who are displaced. Thus there will always be new industries growing up to employ any workers displaced by technological change in existing industries.
But that argument applies just as well to the oats, apples, and grooming needed for horses to subsist as for the wages of humans, no? One could ... just as easily have said, a century ago, that: "Fundamental economic principles will continue to operate. Scarcities will still be with us…. Most horses will still have useful tasks to perform, even in an economy where the capacities of power sources and automation have increased considerably…"
Yet ... "Peak horse" in the U.S. came in the 1910s, I believe. After that there was no economic incentive to keep the horse population of America from declining sharply, as at the margin the horse was not worth its feed and care. And in a marginal-cost pricing world, in which humans are no longer the only plausible source of Turing-level cybernetic control mechanisms, what will happen to those who do not own property should the same come to be true, at the margin, of the human? What would "peak human" look like? Or–a related but somewhat different possibility–even "peak male"?
Posted: 25 Sep 2015 12:06 AM PDT
Posted: 24 Sep 2015 02:43 PM PDT
Federal Reserve Chair Janet L. Yellen:
Inflation Dynamics and Monetary Policy, by Chair Janet L. Yellen: ... In my remarks today, I will discuss inflation and its role in the Federal Reserve's conduct of monetary policy. I will begin by reviewing the history of inflation in the United States since the 1960s, highlighting two key points: that inflation is now much more stable than it used to be, and that it is currently running at a very low level. I will then consider the costs associated with inflation, and why these costs suggest that the Federal Reserve should try to keep inflation close to 2 percent. After briefly reviewing our policy actions since the financial crisis, I will discuss the dynamics of inflation and their implications for the outlook and monetary policy. ...
It's a relatively long speech. Skipping ahead:
Policy Implications
Assuming that my reading of the data is correct and long-run inflation expectations are in fact anchored near their pre-recession levels, what implications does the preceding description of inflation dynamics have for the inflation outlook and for monetary policy?
This framework suggests, first, that much of the recent shortfall of inflation from our 2 percent objective is attributable to special factors whose effects are likely to prove transitory. ...
To be reasonably confident that inflation will return to 2 percent over the next few years, we need, in turn, to be reasonably confident that we will see continued solid economic growth and further gains in resource utilization, with longer-term inflation expectations remaining near their pre-recession level. Fortunately, prospects for the U.S. economy generally appear solid. ... My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016.
The labor market has achieved considerable progress over the past several years. Even so, further improvement in labor market conditions would be welcome because we are probably not yet all the way back to full employment ... which most FOMC participants now estimate is around 4.9 percent...  
Reducing slack ... may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent, in the longer run, with inflation stabilizing at 2 percent. For example, attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring. Similarly, firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions. Beyond these considerations, a modest decline in the unemployment rate below its long-run level for a time would, by increasing resource utilization, also have the benefit of speeding the return to 2 percent inflation. Finally, albeit more speculatively, such an environment might help reverse some of the significant supply-side damage that appears to have occurred in recent years, thereby improving Americans' standard of living.33
Consistent with the inflation framework I have outlined, the medians of the projections provided by FOMC participants at our recent meeting show inflation gradually moving back to 2 percent, accompanied by a temporary decline in unemployment slightly below the median estimate of the rate expected to prevail in the longer run. ... This expectation, coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.
By itself, the precise timing of the first increase in our target for the federal funds rate should have only minor implications for financial conditions and the general economy. What matters for overall financial conditions is the entire trajectory of short-term interest rates that is anticipated by markets and the public. As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short-term interest rates at a quite gradual pace over the next few years....
The economic outlook, of course, is highly uncertain... Given the highly uncertain nature of the outlook, one might ask: Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.
To conclude, let me emphasize that, following the dual mandate established by the Congress, the Federal Reserve is committed to the achievement of maximum employment and price stability. To this end, we have maintained a highly accommodative monetary policy since the financial crisis; that policy has fostered a marked improvement in labor market conditions and helped check undesirable disinflationary pressures. However, we have not yet fully attained our objectives under the dual mandate: Some slack remains in labor markets, and the effects of this slack and the influence of lower energy prices and past dollar appreciation have been significant factors keeping inflation below our goal. But I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored. Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.
Posted: 24 Sep 2015 10:42 AM PDT
Should we rationally expect rational drug pricing?:
Rational Drug Pricing, by Jeff Sachs: Drug pricing has taken center stage in U.S. politics, and it's high time that it should. ...
Drug pricing is not like the pricing of apples and oranges, clothing, or furniture that well and good should be left to the marketplace. There are two major reasons. First, the main cost of drug production is not the cost of manufacturing the tablet but the cost of producing the knowledge embedded in the tablet. Second, there is often a life-and-death stake in access to the drug, so society should take steps to ensure that the drug is affordable and accessible.
To ensure that financial resources flow to scientists to produce the knowledge embedded in the tablet, the government does two things. First, the government pays directly for a substantial part of the research and development (R&D). ... Second, the government grants patent rights for drug discovery. ...
It's a basic insight of economics that patent rights are a "second-best" solution to drug pricing, not an optimal solution. A patent creates an artificial monopoly to incentivize R&D. Yet it also reduces access to the product, perhaps with unacceptable and immoral life-and-death consequences. Rational drug pricing would get the best of the patent system but ensure that it is compatible with access to the life-saving drugs.
Unfortunately, the current rules of the game in the U.S. pharmaceutical sector do not compensate for the weaknesses of patents. They amplify them. ... What should be done? Here are three key principles.
First, private R&D should certainly be protected by patents but only enough to elicit the needed R&D, not to produce outlandish profits. ...
Second, when the U.S. government pays for much of the R&D, it should share in the property rights. This should be a no-brainer, but in fact the NIH simply gives away most or all the intellectual property that it has financed, so the taxpayer pays part of the R&D bills but the returns are fully captured by private companies.
Third, when companies ... make profits from their U.S.-based research and U.S.-based production and sales, they should certainly pay U.S. taxes on their profits. The fact that the IRS lets them hide their profits in overseas tax havens is scandalous and without any logical justification whatsoever.
Posted: 24 Sep 2015 10:18 AM PDT
Robert Kuttner:
America's Collapsing Trade Initiatives: ...Obama's trade policy is in tatters. The grand design, created by Obama's old friend and former Wall Street deal-maker, trade chief Mike Froman, comes in two parts: a grand bargain with Pacific nations aimed at building a U.S.-led trading bloc to contain the influence of China, and an Atlantic agreement to cement economic relations with the European Union.
Both are on the verge of collapse from their own contradictory goals and incoherent logic.
This past June, the president, using every ounce of his political capital, managed to get Congress to vote him negotiating authority (by the barest of margins) for these deals. Under the so-called fast-track procedure, there is a quick up-or-down vote on a trade agreement that can't be amended.
The assumption was that the administration could deliver a deal backed by major trading partners. But our partners are not playing. ...
The U.S. negotiators, increasingly, are prepared to give away the store, to get a deal. ...
It is a bit premature to write the obituaries for these deals. Never underestimate the power of corporate elites. But one has to ask, what was Obama thinking? The U.S. faces serious economic challenges from an economy that is still stagnant for regular people. And we face complex national security challenges from China. These trade deals address neither challenge, much less the even more daunting economic woes in Europe. ...
In general, I support lowering trade restrictions, but the details of trade agreements are important. Just because a deal is proposed does not necessarily mean it's a good one. I haven't kept up with the details of the current negotiations, but for the most part those that have appear less than impressed.