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August 27, 2011

Latest Posts from Economist's View

Latest Posts from Economist's View

How Long Will It Take for the Economy to Recover?

Posted: 27 Aug 2011 02:25 AM PDT

I don't think we'll attain the growth rates the CBO is forecasting -- an average of 3.6% from 2013 to 2016 is a lot to ask for (especially if there is substantial deficit reduction over that time period). But even the CBO's optimistic estimates imply we won't fully recover until 2017. And if growth is a bit slower, well, yikes!:

Lots of ground to cover: An update, David Altig: ...There are two pieces of information that emphasize the economy's recent weakness and potential slow growth going forward. The first is this week's revised forecasts and potential for gross domestic product (GDP) from the Congressional Budget Office (CBO), and the second is today's revision of second quarter GDP from the U.S. Bureau of Economic Analysis (BEA). Though estimates of potential GDP have not greatly changed, the CBO's downgrade in forecasts and BEA's report of much lower than potential growth in the second quarter have the current and prospective rates of resource utilization lower than when macroblog covered the issue just about a month ago.

Key to the CBO's estimates is a reasonably good outlook for GDP growth after we get past 2012:

"For the 2013–2016 period, CBO projects that real GDP will grow by an average of 3.6 percent a year, considerably faster than potential output. That growth will bring the economy to a high rate of resource use (that is, completely close the gap between the economy's actual and potential output) by 2017."

The margin for slippage, though, is not great. Assuming that GDP ends 2011 having grown by about 2.3 percent—as projected by the CBO—here's a look at gaps between actual and potential GDP for different, seemingly plausible growth rates:

Attaining 3.5 percent growth by next year moves the CBO's date for closing the output gap up by about a year. On the other hand, a fall in output growth to an average of 3 percent per year moves the date for eliminating resource slack back to 2020. If growth remains below that—well, let's hope it doesn't.

Maybe policymakers should do something to try and improve the odds?

How Should We Measure the Poverty Rate?

Posted: 27 Aug 2011 02:07 AM PDT

Lane Kenworthy:

How should we measure the poverty rate?, Consider the Evidence: Perhaps we shouldn't.
The idea behind a poverty rate is that we set an income line below which people's resources are deemed insufficient for a minimally decent standard of living. The poverty rate is the share of people in households with income below that line.
Because it's a binary measure, it's a crude one. Suppose a lot of the poor at time 1 have incomes just below the poverty line. The economy then improves, or the benefit amount for a government transfer program is increased, so at time 2 a number of those people have moved above the line. It will appear that poverty has been sharply reduced, even though the amount of genuine progress is small. Similarly, suppose a number of people who formerly had very low incomes move into the work force and experience an income rise, but that rise doesn't quite get them above the poverty line. This is a significant improvement, but it won't show up at all in the poverty rate.
This problem is well known among social scientists. Some therefore also calculate the "poverty gap" — the distance between the poverty line and the average income of those below the line. To that we can add inequality among the poor. Measures exist to incorporate either or both of these. But they are complicated and thus difficult to communicate to a nontechnical audience. One common measure, for instance, is the poverty rate multiplied by the poverty gap. This is better than the poverty rate by itself, but the numbers yielded by the measure don't have an intuitive feel.
Another problem with poverty rates is that much hinges on where the line is drawn, so we end up mired in interminable debates about exactly where that should be (here, here).
Is there a useful alternative? I think so.
Instead of a relative poverty rate, such as the official measure used by the European Union, I recommend the p50/p10 income ratio. Relative poverty is essentially a measure of inequality within the lower half of the distribution, so why not use a measure that more clearly conveys that? The 50/10 ratio is an inequality measure already familiar to social scientists, and it's fairly simple to explain and understand. And as the first of the following two charts shows, the 50/10 ratio is very similar to the poverty rate multiplied by the poverty gap (the correlation is .96). The second chart shows that the poverty rate is a less effective proxy for the rate x gap.

Instead of an absolute poverty rate, such as the official poverty measure in the United States, we can use absolute household income at the tenth percentile (p10) of the distribution. Across countries and over time, this measure is very similar to the absolute poverty rate multiplied by the absolute poverty gap. But it's much simpler and easier to comprehend. Also, it's a low-end analogue to median (p50) household income, a common indicator of the living standards of the middle class.
Why the tenth percentile rather than the fifth or the fifteenth? Actually, I'd prefer the fifth, but there sometimes is reason to worry about data quality as we get close to the very bottom of the distribution. The tenth is reasonably close but not too close to the bottom, it's a nice round number, and it already is commonly used in inequality measures such as the 50/10 ratio and the 90/10 ratio. But in truth, the choice of the tenth is arbitrary; it's no more representative than the seventh or the twelfth or any other point at the low end of the distribution.
So we have good alternatives to the two most common poverty rate measures. But what about political impact? Isn't the poverty rate a helpful tool in pressing policy makers to keep their eye on the least well-off? Maybe. Yet hardly any of Europe's rich nations had an official poverty rate measure prior to the EU's introduction of one a decade ago, while here in the U.S. we've had an official poverty rate for nearly half a century. The absence of an official poverty rate doesn't seem to have impeded government commitment to the poor in Europe. And I'm not sure the presence of one has helped a whole lot here.
I don't expect policy makers or social scientists to stop using poverty rates any time soon. And it won't be disastrous if they don't. But we could do better.

Money Creation

Posted: 27 Aug 2011 01:17 AM PDT

From the NY Fed's Liberty Street Economics blog:

These "Clams" Really Were Money, New York Fed Research Library: While money has taken all forms—precious commodities, beads, wampum, the large stones of Yap—we tend to think of those forms of money as archaic. Yet shells were used as money in California as late as 1933!
Here is what happened. In 1933, during the Depression, the nation experienced a banking panic as people scrambled to withdraw their savings before their bank failed. In March of that year, President Roosevelt ordered a four-day bank holiday to curtail the run on banks. The closing of the banks prompted many people to hoard their money. With less cash in circulation, communities created emergency money, or "scrip," so that they could continue doing business. For example, Leiter's Pharmacy in Pismo Beach, California, issued this clamshell as emergency money. As the clamshell went from person to person, it was signed, and when cash became available again, the clamshell could finally be redeemed. Other forms of emergency money were also fashioned.

links for 2011-08-26

Posted: 26 Aug 2011 10:01 PM PDT

Bernanke: We'll Wait and See

Posted: 26 Aug 2011 07:56 AM PDT

Here's a quick response to Bernanke's speech:

Bernanke: We'll Wait and See, but No Changes in Policy for Now

Video: Akerlof's Identity Economics and Stiglitz on Macro Models

Posted: 26 Aug 2011 07:02 AM PDT

I enjoyed this talk:

George Akerlof: Identity Economics

Abstract: Identity economics constitutes the first sustained effort to incorporate the effects of social context into our understanding of why people make the economic decisions they do, and why certain people, given different identities, make markedly different decisions in the same situations. It yields a more realistic and deeper account of behavior, and thereby a better basis for shaping organizations and public policies. The lecture will give a brief introduction to the book Identity Economics by George Akerlof and Rachel Kranton. It will give a motivation for identity economics and why it matters.

This one too:

Joseph Stiglitz: Imagining an Economics tthat Works: Crisis, Contagion and the Need for a New Paradigm

Abstract: The standard macroeconomic models have failed, by all the most important tests of scientific theory. They did not predict that the financial crisis would happen; and when it did, they understated its effects. Monetary authorities allowed bubbles to grow and focused on keeping inflation low, partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth. Advocates of capital market liberalization argued that it would lead to greater stability: countries faced with a negative shock borrow from the rest of the world, allowing cross-country smoothing. The crisis showed the deep flaws in this thinking, but policymakers have been slow to rethink the paradigms they relied on. There is a need for a fundamental re-examination of the models. This lecture first describes the failures of the standard models in broad terms, and then develops the economics of deep downturns, and shows that such downturns are endogenous. Further, the lecture will argue that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis, contrary to what the standard models argued. In particular, the lecture will explore how integration can exacerbate contagion; and how a failure in one country can more easily spread to others. There are conditions under which such adverse effects overwhelm the putative positive effects. Finally, the lecture will contrast the policy implications of our framework with those of the standard models; for instance, how capital controls can be welfare enhancing, reducing the risk of adverse effects from contagion.

GDP Growth Revised Downward, but GDI Growth Revised Upward

Posted: 26 Aug 2011 06:21 AM PDT

The estimate of GDP grwoth for the second quarter of the year was revised downward today:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.0 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.
The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 1.3 percent (see "Revisions" on page 3).

Thus, once again the situation is worse than we initially thought. However, Justin Wolfers finds reason to upgrade his forecast:

There's more news in the first GDI estimates than in the revision to GDP. And it's good news.
Given the track record of GDP v. GDI, I'm actually revising upward my views based on this report. Oh, BEA, why bury the lede in Appendix A?

He is basing this on GDI rather than GDP (which in theory ought to be equal, but practically are not, and GDI is often more reliable) which grew at 2.5% the first quarter (GDP growth was .4%), and in the second quarter it was 1.5% (GDP was 1.0%). That's still not great, or even good, but it is better than the GDP numbers (see here for a comparison of the two measures).

My own view is that whichever set of numbers you look at, they cry out for more aggressive policy.

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