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March 31, 2011

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Credit Card Transactions Fees

Posted: 31 Mar 2011 12:42 AM PDT

I haven't given this issue enough attention:

How credit card companies want to debit you, by Dean Baker: Would you like to increase the sales tax in order to pay the banks another $12bn a year in profits? That is the issue that is being debated in Washington, these days. In case you missed it, this is because the issue is usually not discussed in these terms. The immediate issue is the fee that credit card companies are allowed to charge on debit card transactions.
We have two credit companies, Visa and MasterCard, who comprise almost the entire market. This gives them substantial bargaining power. ... Visa and MasterCard have taken advantage of their position to mark up their fees far above their costs. This is true with both their debit and their credit cards, but the issue is much simpler with a debit card. ... While ... costs are quite small, the credit companies take advantage of their bargaining power to charge debit cards fees in the range of 1-2% of the sale price. They share this money with the banks that are part of their networks.
This fee is, in effect, a sales tax. Since the credit companies generally do not allow retailers to offer cash discounts, they must mark up the sales price for all customers by enough to cover the cost of the fee. This seems especially unfair to the cash customers... Those paying in cash ... tend to be poorer than customers with debit or credit cards, which means that this is a transfer from low- and moderate-income customers to the banks.
This is where financial reform comes in. One of the provisions of the Dodd-Frank bill passed last year instructed the Federal Reserve Board to determine the actual cost of carrying through a debit card transfer and to regulate fees accordingly. The Fed determined that a fee of 10-12 cents per transaction should be sufficient to cover the industry's costs and provide a normal profit. The Fed plans to limit the amount that the credit card companies can charge retailers to this level.
This would save retailers approximately $12bn a year... The prospect of losing $12bn in annual profits has sent the industry lobbyists into high gear. They have developed a range of bad things that will happen...
The credit card industry and the banks really don't have a case here; they are just hoping that they can rely on their enormous political power to overturn this part of the financial reform bill. ... Brushing away their rationalizations, their argument here is that they want larger profits and they have political power to get them. That may turn out to be true.

Number of Establishments and Employees per Establishment

Posted: 31 Mar 2011 12:33 AM PDT

Will They Feel Betrayed?

Posted: 31 Mar 2011 12:24 AM PDT

I wonder what will happen politically when, after having a huge fight over Social Security and finally "saving" the program through some ill-advised bipartisan compromise, people realize that they've given up quite a bit, but the budget picture has hardly changed at all.

Why Do Central Banks Have Discount Windows?

Posted: 31 Mar 2011 12:15 AM PDT

The names of the banks that borrowed from the Fed during the financial crisis will be released today by court order. It's probably just a coincidence that this post on the history of the discount window and the stigma of being identified as needing to use it appeared on the new blog from the NY Fed:

Why Do Central Banks Have Discount Windows?, by João Santos and Stavros Peristiani, Liberty Blog: Though not literally a window any longer, the "discount window" refers to the facilities that central banks, acting as lender of last resort, use to provide liquidity to commercial banks. While the need for a discount window and lender of last resort has been debated, the basic rationale for their existence is that circumstances can arise, such as bank runs and panics, when even fundamentally sound banks cannot raise liquidity on short notice. ... In this post, we discuss the classical rationale for the discount window, some debate surrounding it, and the challenges that the "stigma" associated with borrowing at the discount window poses for the effectiveness of the discount window. ...
Stigma

While the discount window is an important tool for central banks dealing with liquidity problems that may threaten financial stability, its effectiveness depends critically on the willingness of banks to borrow from central banks. Banks are often reluctant to borrow from central banks not only because this source of liquidity tends to be expensive but also because of the "stigma" that is associated with discount window borrowing. ...
If a bank worries that borrowing from the discount window will lead other banks to doubt its fundamental solvency, it may avoid the discount window even if the discount window provides the cheapest funds available.  Instead, the bank may liquidate marketable assets or try to borrow in the interbank market at onerous terms, further straining these markets and making it even more difficult for other banks to obtain funding or sell assets.  Thus, central banks typically disclose only a limited amount of information about discount window activity to avoid branding healthy (but illiquid) banks as weak.  The Federal Reserve, for example, has historically published the total amount of borrowing from the discount window on a weekly basis, but not information on individual loans.[1]  By allowing banks to borrow confidentially, this policy aims to make healthy institutions more willing to use the discount window during periods of market stress. It should be emphasized that confidentiality is not meant to protect the identities of individual banks per se, but rather to make the discount window more effective in dealing with market disturbances.
Central banks have long recognized the challenges that stigma creates for the effective operation of the discount window during crisis. Donald Kohn, former Vice Chairman of the Fed, has discussed the stigma problem in past speeches. "The problem of discount window stigma is real and serious. The intense caution that banks displayed in managing their liquidity beginning in early August 2007 was partly a result of their extreme reluctance to rely on standard discount mechanisms," Kohn noted in a 2010 speech.  In fact, the need to mitigate stigma influenced the design of some of the lending facilities, such as the Term Auction Facility, created by the Fed during the financial crises.[2]
In sum, the discount window is a vital tool to maintain the uninterrupted functioning of the banking system, but its effectiveness may be limited by the stigma associated with using it. This explains why policies that aim at dealing with the stigma of discount window borrowing are so important. Admittedly, the existence of the discount window may create some moral hazard, but of course, the Federal Reserve limits moral hazard by restricting discount window access to depository institutions that are closely regulated and supervised by federal banking authorities.

links for 2011-03-30

Posted: 30 Mar 2011 10:01 PM PDT

About That Striking Graph from John Taylor

Posted: 30 Mar 2011 12:42 PM PDT

Since I posted this graph, I should post the follow-up from Justin Wolfers:

How to Spot Advocacy Science: John Taylor Edition, by Justin Wolfers: Sometimes you see the perfect piece of evidence. The scatter plot that is just so. The data line up perfectly. And then you realize, perhaps they're just too perfect. What you are seeing is advocacy, dressed up as science. Here's an example, provided by John Taylor (via Greg Mankiw):

Taylor's conclusion: the data on spending shares show that the most effective way to reduce unemployment is to raise investment as a share of GDP. But why begin the scatter plot in 1990? There's no good reason. In fact, most folks typically download the entire history of available macro data. So let's see what happens if we extend it back to, say, 1970:

Hmm… What conclusions should we draw about this relationship? And now why do you think Taylor began his sample in 1990?

Actually, we should use all the available data. The chart below goes back to 1948, when these series—in their current form—began:

Now what's your conclusion?

Here's Mankiw's assessment of Taylor's claim: There's no doubt that the strength of the correlation is impressive.

But when you look beyond the cherry-picked sample, the correlation is a decidedly unimpressive -0.14.

Here's my conclusion: On balance, times in which the investment share is higher, are slightly more likely to be good times. But I'm not sure why. Is it—as Taylor asserts—that high investment shares create good times? Or is it that good times encourage investment? Or is it a third factor—perhaps in good times the government doesn't need to prime the fiscal pump, and so the investment share is higher? Or is it something else?

Be wary of economists wielding short samples.

Paul Krugman on Taylor:

What's Behind Low Investment?, by Paul Krugman: This post by John Taylor is getting a lot of attention, because it does show a striking correlation between investment and unemployment
But when Taylor leaps from that correlation to saying that what we need for economic recovery is to "lighten up on the anti-business sentiment coming out of Washington," I wonder what is going on in his head.
I mean, Taylor presents another graph, showing a plunge in fixed investment since 2006:

DESCRIPTION

But that's overall fixed investment. Let's decompose it:

DESCRIPTIONBEA

It's mostly the housing bust! Yes, business investment is low — but no lower than you might expect given the depressed state of the economy. In fact, business investment is roughly the same percentage of GDP now that it was at the same stage of the much milder 2001 recession.
What the data actually say is that we had a catastrophic housing bust and consumer pullback, and that businesses have, predictably, cut back on investment in the face of excess capacity. The rest is just politically motivated mythology.

More People Covered, the Deficit Falls

Posted: 30 Mar 2011 11:07 AM PDT

Quick post before heading to the airport.

Testimony on Last Year's Major Health Care Legislation, CBO Director's Blog: This morning I testified before the House Energy and Commerce's Subcommittee on Health on CBO's analysis of the Patient Protection and Affordable Care Act (PPACA) and the health care provisions of last year's Reconciliation Act. With the staff of the Joint Committee on Taxation (JCT), we have provided the Congress with extensive analyses of the legislation, and my written statement summarizes that work.

Effects of the Legislation on Insurance Coverage and on the Federal Budget

  • Number of People with Insurance Coverage: We estimate that the legislation will increase the number of nonelderly Americans with health insurance by roughly 34 million in 2021. About 95 percent of legal nonelderly residents will have insurance coverage in that year, compared with a projected share of 82 percent in the absence of that legislation and 83 percent currently. The legislation will generate this increase through a combination of a mandate for nearly all legal residents to obtain health insurance; the creation of insurance exchanges through which certain people will receive federal subsidies; and a significant expansion of Medicaid. ...
  • Net Budgetary Impact of the Legislation: PPACA and the Reconciliation Act also reduced the growth of Medicare's payment rates for most services; imposed certain taxes on people with relatively high income; and made various other changes to the tax code, Medicare, Medicaid, and other programs. As you can see in the figure below, those provisions will reduce direct spending and increase revenues, providing an offset to the cost of the coverage provisions. According to our latest comprehensive estimate of the legislation, the net effect of changes in direct spending and revenues is a reduction in budget deficits of $210 billion over the 2012-2021period. In addition to those budgetary effects, the legislation will affect spending that is subject to future appropriation action. CBO has estimated that the Internal Revenue Service and the Department of Health and Human Services will each incur costs of between $5 billion and $10 billion over the next 10 years to implement the legislation. The laws also authorized other appropriations, most of which were for activities that were already being carried out under prior law or that had been previously authorized.

 Estimated Effects of PPACA and the Health Care Provisions of the Reconciliation Act on the Federal Budget

(Billions of dollars, by fiscal year)

My written statement describes this estimate in more detail and touches on other effects that we have estimated—including the budgetary impact in the second decade and the laws' impact on health insurance premiums and employment. ...

March 30, 2011

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"Where the Bailout Went Wrong"

Posted: 30 Mar 2011 01:17 AM PDT

The special inspector general for the Troubled Asset Relief Program delivers his verdict:

Where the Bailout Went Wrong, by Neil Barofsky, Commentary, NY Times: ... Though there is no question that the country benefited by avoiding a meltdown of the financial system, this cannot be the only yardstick by which TARP's legacy is measured. The legislation that created TARP, the Emergency Economic Stabilization Act, had far broader goals... These Main Street-oriented goals were ... a central part of the compromise with reluctant members of Congress to cast a vote that in many cases proved to be political suicide. ...
But it has done little to abide by this legislative bargain. Almost immediately,... Treasury's plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nation's largest financial institutions...
In the final analysis,... Treasury's broken promises ... have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives. ...
Treasury's mismanagement of TARP and its disregard for TARP's Main Street goals ... may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises. This avoidable political reality might just be TARP's most lasting, and unfortunate, legacy.

This is from back in October:

The false belief that free markets will always magically transform into ideal competitive markets was one of the problems that led to the financial crisis. Markets that should have been regulated due to the presence of asymmetric information, monopoly power, moral hazard, fraud, political influence, and other problems were left to regulate themselves with disastrous consequences. ...

With a financial system teetering on the edge of collapse, there was no choice but to bailout systemically important banks that were in trouble. However, the manner in which the bailout was executed has caused a public backlash. The problem is that the people who had a hand in creating the crisis, and profited so much as the housing bubble inflated, were rewarded handsomely when too-big-to-fail financial firms were bailed out. ... The understandable lack of public support for such policies will make it very difficult for Congress to act ... the next time it's needed, and it very well could, the result could be disastrous

The crisis should have taught us that government has an essential role to play in preventing problems from occurring in the economy, and in correcting problems when they occur despite our attempts to prevent them. But, unfortunately, due to poorly executed policy, political posturing, obstructionism in Congress, and ineffective rebuttal from the administration, that's not the lesson that has been learned.

And, back in the present, Yves Smith is incredulous about a voice from the past, Alan Greenspan, who has an op-ed warning about the dangers or financial regulation.

Fed Watch: Running the Fed Like an Economics Department

Posted: 30 Mar 2011 12:33 AM PDT

Tim Duy:

Running the Fed Like an Economics Department, by Tim Duy: My central complaint with Federal Reserve Chairman Ben Bernanke is his penchant for what is often described as running the Fed like a university economics department. Internally, I do not see this as a challenge, and for the Fed's culture may be an effective management style. Externally, I see this a potential communications disaster always in the making. The recent uptick in inflation heightens my unease at this approach, and I think Ryan Avent hits the nail squarely on the head:

…An increase in inflation is only worrying to the extent that it undermines the Fed's efforts to satisfy those mandates, and the above clearly doesn't count. Yet the simple fact of increasing inflation sends writers running to speculate on and, in many cases, demand central bank action.

And central bankers often play along. You have a number of regional Fed presidents warning that they may be ready to end the latest round of asset purchases ahead of schedule. I don't know whether there's any communications strategy within the Fed—whether Ben Bernanke is tacitly approving of these comments or upset by them—but it's fairly certain that the comments themselves represent a tightening of monetary to the extent that they shape actual market expectations (and there does seem to have been some impact).

That's no way to make policy. It's a poor means of communication and a poor decision to tighten. And these poor choices are encouraged by writing that misrepresents the extent of current inflation and its consistency with Fed mandates.

It seems to me that the Fed lacks a coherent communication strategy – there is no willingness on the part of the leadership to enforce talking points. As a consequence, there is enormous pointless chatter from Fed officials that might be interesting in some sense, but provide misleading guidance about policy direction. Recent talk about scaling back the size of the large scale asset program, for instance. Almost certainly not going to happen – so why talk about it? Sadly, it appears to be an almost deliberate effort to create uncertainty among market participants at a time when the opposite is so important.

Of the frequent Fed speakers, I think Chicago Fed President Charles Evans and Atlanta Fed President Dennis Lockhart are particularly good. And not because they tend to say things that I agree with, but because they say things that I think reflects the majority view of the monetary policymakers. I suspect incoming San Francisco Fed President John Williams will fall into that same category. The so-called hawks Philadelphia Fed President Charles Plosser and Richmond Fed President Jeffrey Lockhart are interesting, but one needs to discount their tendency toward inflation/balance sheet concerns. And, I hate to say it about a Fed official, but I wouldn't take much stock in the words of Dallas Federal Reserve President Richard Fisher. He may talk tough, but I believe he would always fall in line with the majority decision of the FOMC.

Hopefully, regular press conferences by Bernanke will foster a more consistent voice among Fed officials, or at least a guidepost by which market participants can more easily identify and dismiss the loose talk of policymakers and the fringes of policy.

links for 2011-03-29

Posted: 29 Mar 2011 10:01 PM PDT

Farmer on Williamson on Farmer and Kocherlakota

Posted: 29 Mar 2011 03:33 PM PDT

I asked Roger Farmer if he'd like to respond to a recent post from Stephen Williamson: (it will be helpful to read Williamson's post first):

Farmer on Williamson on Farmer and Kocherlakota: Thanks to Stephen Williamson for publicizing my work and to Mark Thoma for providing a link and invitation to respond. Stephen: in addition to the paper you cited, I just finished an empirical paper on how to explain data without the Phillips Curve, two theoretical papers on why fiscal policy works in the short run (but shouldn't be used) two papers on rational expectations with Markov switching and a piece on stochastic overlapping generations models.
The papers you mention in your blog, by Narayana and me, were both presented at a conference in Marseilles last week with not one but two Fed Presidents in attendance: Jim Bullard also gave a paper. Jim presented work that draws on the Benhabib-Schmitt-Grohé-Uribe paper on the perils of Taylor Rules. He sees a real danger of a Japan style deflation trap happening in the U.S.. Narayana gave a paper that combines a liquidity trap model of bubbles in an overlapping generations framework with a labor market based on the idea from my 2010 book, Expectations Employment and Prices. This book provides a new paradigm that drops the wage bargaining equation from a labor contracting model and replaces it with the assumption that employment is demand determined. This is the same assumption taken up by Narayana in the paper he presented in Marseilles.
The main idea is explained very nicely by one of the anonymous commentators on Stephen's blog , who said:
"Think of it this way. With a centralized labor market, the real wage is pinned down by the intersection of labor demand and supply. With search, the labor market need not clear: the labor supply FOC is missing, and we need to add something else to close the model. One thing to add is an explicit bargaining model that effectively pins down the wage. An alternative is to say that output is demand-determined, and that the wage is the marginal product of labor at the demand determined level of output. Then firms are on their labor demand curve, but workers are not on their labor supply curve (but the beauty of search - unemployed workers will take a job at any positive wage)."
That's exactly right. And once there are many possible labor market equilibria, there is room to close the model by bringing back the role of market psychology. That's what I do in my work which has room for both involuntary unemployment and animal spirits; the two cornerstones of Keynes' General Theory that are missing from the macroeconomics that emerged from Samuelson's interpretation of Keynes.
Stephen professes not to understand the language of aggregate demand and supply. That's not surprising given how many different ways it's used. My own preferred interpretation is explained in a piece I wrote for the International Journal of Economic Theory in 2008.
The idea of aggregate demand and supply makes just as much sense as the notion of a microeconomic demand and supply curve as long as one works within a framework where the variables that shift one of the curves do not simultaneously shift the other. That is clearly not true in post-Lucas rational expectations models which is why the language went out of fashion. It is true in my work.

Striking Scatterplot: Unemployment and Investment

Posted: 29 Mar 2011 12:42 PM PDT

Via Greg Mankiw:

A Striking Scatterplot:
This graphic is from John Taylor, who plots it using quarterly seasonally adjusted data from 1990Q1 to 2010Q3. Investment here is fixed investment. 
Of course, causality goes in both directions: Strong investment demand leads to lower unemployment, and a stronger economy, reflected in lower unemployment, encourages investment spending. As a result, the interpretation of this scatterplot can be debated. But there is no doubt that the strength of the correlation is impressive.

Inflation vs. Jobs: Fed’s Move Can Seal Its Fate

Posted: 29 Mar 2011 09:36 AM PDT

Haven't had a chance to write much the last few days, but here's something you can yell at me about in comments (or not):

Inflation vs. Jobs: Fed's Move Can Seal Its Fate

Update: I forgot to mention that CBS MoneyWatch asked me to write about a similar topic yesterday (I tried to say something different, but there's still a bit of repetition):

Bernanke's New Quarterly Press Conferences

March 29, 2011

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Republicans and Environmental Progress

Posted: 29 Mar 2011 12:33 AM PDT

J.S. at Environmental Economics is astounded at "the current Republican assault on the environment":

Republicans for Environmental Progress: An Endangered Species, by J.S.: For most of modern American history, the two major political parties in America have largely agreed on the desired long-term environmental outcomes for the country: there was a consensus among Republicans and Democrats that it was a good thing to press for cleaner air and water, less toxins in the environment, biodiversity preservation, and mitigation strategies for clean energy and, mostly recently, climate change.
The disagreements were largely centered around how to achieve these outcomes, and to some extent the pace of change and the absolute targets. Democrats by and large preferred a heavier regulatory approach (i.e. "command and control") that set specific firm-level emissions limits, prescribed permissible technologies, and set industry-wide energy and fuel efficiency standards. Republicans tended to support more market-oriented policies, with cap and trade foremost among them.
Nowadays, the arguments are no longer over the methods to achieve environmental progress, but whether we should support such progress in the first place. This situation is unprecedented. Those who believed that divided government would lead Republicans to take a more moderate and constructive role have so far been proven wrong. It is hard to imagine the situation being much worse for America's environmental quality, which is directly linked to the quality of life for all Americans.
The modern Republican Party has absolutely no affirmative environmental agenda whatsoever, and goes so far as to contest the entire rationale for continued environmental progress. Ironically, this extremely reactionary environmental agenda is coming at a time when the ideas that Republicans once championed are now widely accepted as the best ways to structure environmental policy. ...
I have been involved in environmental policy for almost 20 years and have never seen anything like the current Republican assault on the environment. It is truly astounding. To be clear, the Republicans leading this charge against environmental progress are in no way following conservative principles―they are doing the exact opposite. ...
There is absolutely nothing "free market" about letting polluters trash the environment for free. In fact, this fits the definition of a market failure, not a well-functioning capitalist system. What the Republicans are currently practicing is crony capitalism of the worst kind: rewarding industry at the expense of the public interest and future generations.
It is the Republican rank and file who should be the most offended by these policies. Public opinion polls consistently show that both Democrats and Republicans care deeply about the environment, and support clean energy policies and strong environmental safeguards. Unfortunately, the once proud environmental ethic of the Republican Party has been snuffed out by a small group of radical Tea Party extremists who are deeply confused both about true conservative principles and the proper role of government in society. And once moderate Republicans who supported sensible environmental policies are nowhere to be seen. Until true conservatives retake the Republican Party we will be left doing little more than damage control, and the chances of a new comprehensive affirmative environmental agenda are slim to none.

Yep.

Fed Watch: Quick PCE Notes

Posted: 29 Mar 2011 12:15 AM PDT

Tim Duy:

Quick PCE Notes, by Tim Duy: The February Personal Income and Outlays report revealed the drag of higher food and energy costs as a 0.3 percent gain in nominal disposable personal income was knocked back to a 0.1 percent loss in real terms. Similarly, the 0.7 percent gain in nominal spending turned into a just 0.3 percent real gain. While better than the flat reading in January, the relatively weak performance of PCE this quarter will lead analysyst to knock down Q1 growth forecasts. I try not to read too much into any one quarter, and tend to view the consumer slowdown in light of the acceleration at the end of last year. Overall, the trend in PCE growth since the middle of last year is consistent with annual gains of around 3% a year. The footing is firming, and it is sustainable, but it is still far short of what is needed to rapidly return consumption to its pre-recession trend.
Since the recession ended, real PCE gained at a rate of 0.18 percent per month:

By a year into the recovery, household spending accelerated, and since July of 2010 has grown at 0.23 percent per month, just about the prerecession trend:
The new normal, it seems. On one hand, I have a preference for steady growth over recession and stagnation. On the other, the gap between the new trend and old shown by the green and red lines at least partially reflects the lack of job opportunities for the nation's unemployed – and few are expecting that situation to change dramatically this year. Even an "optimistic" outlook of 200k jobs a month yields only a small improvement in the unemployment rate. Also note that some of the gains for net new hiring would be offset by a reduction in spending power as people fall off the unemployment rolls. And finally, some of the gains in spending are driven by a rebound on auto sales, which will not continue forever. In short, without a force that greatly accelerates job growth and drops unemployment rates quickly, it is difficult to see consumption returning to its pre-recession trend.
Given that spending accelerated faster than income, the saving rate by definition fell, although it continues to hover around the 6% mark. The higher saving rate provides some cushion for higher food and energy prices, allowing households to absorb and adapt to these price gains without an abrupt change in behavior. It is worth noting that although the recent increases appear dramatic, they are consistent with a return to the prerecession trend:

For much of that period, the economy managed to weather commodity price inflation. It was only the superspike in prices coupled with the evolving US financial crisis that brought spending to a standstill in 2008. Hence, I tend to think the economy can withstand the gains already experienced, but continued gains at recent rates would be increasingly worrisome. Remember, in comparison the previous energy shocks, prices have not yet gone to new highs. Psychologically, we have yet to see new territory.
Finally, note that recent core inflation numbers have been ticking up:

This should not have been unexpected as some of the pass-through from higher commodity prices would undoubtedly show up as temporary gains in core inflation. From the most recent FOMC statement:

The recent increases in the prices of energy and other commodities are currently putting upward pressure on inflation. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.

Again, see the commodity chart above. Core inflation has remained remarkably stable during the past decade despite the instability of commodity prices. This suggests that overall monetary policy has not been far off the mark.

The real fireworks will ensue if core-inflation accelerates above 2% on a year-over-year basis. I believe that, assuming ongoing high levels of unemployment, Federal Reserve Chairman Ben Bernanke will tolerate somewhat higher inflation to compensate for the recent period of low inflation. Be forewarned: This will leave inflation hawks, notably Dallas Fed President Richard Fisher, foaming at the mouth.

The steady but uninspiring gains in US economic activity continue to argue for a steady hand on monetary policy. From today's speech by Chicago Fed President Charles Evans:

With regard to policy today, slow progress in closing resource gaps and underlying inflation trends that are too low lead me to conclude that substantial policy accommodation continues to be appropriate. This accommodative policy will foster a return of economic conditions consistent with our dual mandate.

Please read Evan's speech for his patient explanation of inflation dynamics. An excerpt:

Monetary policy cannot affect the scarcity of resources. Indeed, think about what happens when the price of a commodity rises but other prices do not change. We call this a change in the relative price of the commodity. Changes in relative prices provide an important signal to market participants, encouraging consumers to find ways to economize and giving suppliers an incentive to increase production. Changes in relative prices are not inflation. Inflation, by definition, is a continuing increase in the general level of prices of all goods and services in the economy.

There is much more in the speech as Evans is doing what all Fed officials should be doing at this point – clearly elucidating the near for policymakers to focus on core, not headline inflation. See also David Altig.

Bottom Line: Try to look through the data to spot underlying trends; this is what the Fed is doing, and it will lead them to complete the current round of asset purchases. Watch energy prices closely, keep an eye on the other risks (Europe, Japan, etc) while awaiting the next big test - the exit of the Fed from large scale asset purchases. The economy stumbled last year when the Fed shifted to neutral. Coincidence, or should have been expected given that housing would not rebound and fiscal stimulus would fade? We will have another test of the importance of the Fed lifeline in the second half of this year.

Jobs?

Posted: 29 Mar 2011 12:06 AM PDT

David Cay Johnston:

Remember how the Republicans, when they took control of the House last fall, said it would be all about jobs?
Nearly three months have passed, but no action on jobs except for spending cuts that Goldman Sachs, Moody's, and others ... say will destroy jobs and damage the whole economy. We did, however, get a proposal that would require anyone audited by the IRS to tell if she had an abortion. So much for the Republican promise of less government intrusion into our lives.
When will we get to jobs?

links for 2011-03-28

Posted: 28 Mar 2011 10:01 PM PDT

Obama's Speech

Posted: 28 Mar 2011 05:32 PM PDT

I didn't see the speech. Comments?

Stiglitz: Why I Didn't Sign the Deficit Letter

Posted: 28 Mar 2011 11:43 AM PDT

Joe Stiglitz refused to sign the letter from former members of the CEA calling for deficit reduction:

Why I didn't sign deficit letter, by Joseph E. Stiglitz: I was asked to sign the letter from a bipartisan group of former chairmen and chairwomen of the Council of Economic Advisers that stresses the importance of deficit reduction and urges the use of the Bowles Simpson Deficit Commission's recommendations as the basis for compromise. ... I did not sign.
I believe the Bowles Simpson recommendations represent, to too large an extent, a set of unprincipled political compromises that would lead to a weaker America — with slower growth and a more divided society.

Deficit reduction is important. But it is a means to an end — not an end in itself. We need to think about what kind of economy, and what kind of society, we want to create; and how tax and expenditure programs can help achieve those goals.

Bowles-Simpson confuses means with ends, and would take us off in directions which would likely be counterproductive. Fortunately, there are alternatives that could do more for deficit reduction, more for putting America back to work now and more for creating the kind of economy and society we should be striving for in the future.

There's quite a bit more in the link.

The Corporate Tax Race to the Bottom

Posted: 28 Mar 2011 10:53 AM PDT

Jeff Sachs calls for an end to cross-country tax competition:

Stop this race to the bottom on corporate tax, by Jeffrey Sachs, Commentary, Financial Times: ...With capital globally mobile, moreover, governments are now in a race to the bottom with regard to corporate taxation and loopholes for personal taxation of high incomes. Each government aims to attract mobile capital by cutting taxes relative to others. ...
The end result is that both the US and UK are battling deficits of about 10 per cent of gross domestic product. ...We surely need to reduce the deficits but in a fair, efficient, and sustainable manner, by levying higher taxation on the rich, who are enjoying a boom in living standards and a share of the national income unprecedented in modern history.
Yet to get to the right place, countries cannot act by themselves. ... Multinational companies and their disproportionately wealthy owners are successfully playing governments against each other. The game is clear, and it is working fiercely well.
As a starting point, the Organisation for Economic Co-operation and Development countries should urgently convene a meeting of finance ministers to enunciate ... that tax and regulatory co-ordination across countries are vital to prevent a ruinous fiscal race to the bottom.

Without some sort of enforcement mechanism, I'm not sure that agreements like this will do a log of good.

March 28, 2011

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Paul Krugman: American Thought Police

Posted: 28 Mar 2011 12:33 AM PDT

What happens to people who express views that the GOP's hard right doesn't like?:

American Thought Police, by Paul Krugman, Commentary, NY Times: Recently William Cronon, a historian who teaches at the University of Wisconsin, decided to weigh in on his state's political turmoil. He started a blog... Then he published an opinion piece in The Times, suggesting that Wisconsin's Republican governor has turned his back on the state's long tradition of "neighborliness, decency and mutual respect."
So what was the G.O.P.'s response? A demand for copies of all e-mails sent to or from Mr. Cronon's university mail account containing any of a wide range of terms, including the word "Republican" and the names of a number of Republican politicians ...

The Cronon affair, then, is one more indicator of just how reflexively vindictive, how un-American, one of our two great political parties has become.
The demand for Mr. Cronon's correspondence has obvious parallels with the ongoing smear campaign against climate science and climate scientists, which has lately relied heavily on supposedly damaging quotations found in e-mail records. ...
Nothing in the correspondence suggested any kind of scientific impropriety... But ... this fake scandal gives an indication of what the Wisconsin G.O.P. presumably hopes to do to Mr. Cronon. ...
Now,... Mr. Cronon ... has been careful never to use his university e-mail for personal business... Beyond that, Mr. Cronon ... has a secure reputation as a towering figure in his field. ...
So we don't need to worry about Mr. Cronon... But there's a clear chilling effect when scholars know that they may face witch-hunts whenever they say things the G.O.P. doesn't like.
Someone like Mr. Cronon can stand up to the pressure. But less eminent and established researchers won't just become reluctant to act as concerned citizens, weighing in on current debates; they'll be deterred from even doing research on topics that might get them in trouble.
What's at stake here, in other words, is whether we're going to have an open national discourse in which scholars feel free to go wherever the evidence takes them, and to contribute to public understanding. Republicans, in Wisconsin and elsewhere, are trying to shut that kind of discourse down. It's up to the rest of us to see that they don't succeed.

Not Only the Fittest Survive

Posted: 28 Mar 2011 12:24 AM PDT

I wonder if this applies to market as well (not sure if this is the same):

Research shows not only the fittest survive, EurekAlert: Darwin's notion that only the fittest survive has been called into question by new research published in Nature.
A collaboration between the Universities of Exeter and Bath in the UK, with a group from San Diego State University in the US, challenges our current understanding of evolution by showing that biodiversity may evolve where previously thought impossible.
The work represents a new approach to studying evolution that may eventually lead to a better understanding of the diversity of bacteria that cause human diseases.
Conventional wisdom has it that for any given niche there should be a best species, the fittest, that will eventually dominate to exclude all others.
This is the principle of survival of the fittest. Ecologists often call this idea the `competitive exclusion principle' and it predicts that complex environments are needed to support complex, diverse populations.
Professor Robert Beardmore, from the University of Exeter, said: "Microbiologists have tested this principle by constructing very simple environments in the lab to see what happens after hundreds of generations of bacterial evolution, about 3,000 years in human terms. It had been believed that the genome of only the fittest bacteria would be left, but that wasn't their finding. The experiments generated lots of unexpected genetic diversity."
This test tube biodiversity proved controversial when first observed and had been explained away with claims that insufficient time had been allowed to pass for a clear winner to emerge.
The new research shows the experiments were not anomalies.
Professor Laurence Hurst, of the University of Bath, said: "Key to the new understanding is the realization that the amount of energy organisms squeeze out of their food depends on how much food they have. Give them abundant food and they use it inefficiently. When we combine this with the notion that organisms with different food-utilizing strategies are also affected in different ways by genetic mutations, then we discover a new principle, one in which both the fit and the unfit coexist indefinitely."
Dr Ivana Gudelj, also from the University of Exeter, said: "The fit use food well but they aren't resilient to mutations, whereas the less efficient, unfit consumers are maintained by their resilience to mutation. If there's a low mutation rate, survival of the fittest rules, but if not, lots of diversity can be maintained.
"Rather nicely, the numbers needed for the principle to work accord with those enigmatic experiments on bacteria. Their mutation rate seems to be high enough for both fit and unfit to be maintained."
Dr. David Lipson of San Diego State University, concluded: "Earlier work showed that opposing food utilization strategies could coexist in complex environments, but this is the first explanation of how trade-offs, like the one we studied between growth rate and efficiency, can lead to stable diversity in the simplest possible of environments."

links for 2011-03-27

Posted: 27 Mar 2011 10:01 PM PDT

Stuck at the Bottom

Posted: 27 Mar 2011 12:42 AM PDT

Brad DeLong wonders when the employment to population ratio will finally start increasing:Emp-pop-stalled