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August 19, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 19 Aug 2012 12:06 AM PDT
Posted: 18 Aug 2012 12:06 PM PDT
Tim Duy:
Self-Fulfilling Prophecies, by Tim Duy: Is the Federal Reserve doing enough? Joe Gagnon says no:
For more than two years, the Fed has dragged its feet and resisted the obvious need for more aggressive action...
...A large majority of the committee projects [pdf] that inflation will be below target over the next two and a half years. If they assign any weight to their employment objective, they should be willing to accept inflation at least modestly above target in order to get a better outcome on employment.
Considering that more aggressive action has not been taken, monetary policymakers appear to disagree. The willingness to accept the current state of affairs suggests that fear of the 1970's remains alive and well on Constitution Ave. The risks of inflation simply outweigh the expected benefits of additional easing, at least from the point of view of Federal Reserve Chairman Ben Bernanke. Earlier this spring, Brad DeLong made an insightful observation about the real parallels with the 1970s:
In my view, there is an odd symmetry between the Federal Reserve of today and the Federal Reserve of the 1970s. The Federal Reserve of today does not take effective steps to reduce unemployment because it thinks any risk of sustained inflation above 2%/year is unacceptable. The Federal Reserve of the 1970s did not take effective steps to control inflation because it thought sustained unemployment above 7% was unacceptable. Since then, the Federal Reserve of the 1970s--Arthur Burns and G. William Miller--have been censured, condemned, scorned, and damned for their failure to understand the situation they were in and their proper objective function.
The Fed is really making the same mistake as they did in the 1970s. Not so says David Altig, who does not see so much of a conflict between the Fed's objective and the actual outcomes:
That complaint is not really about the inflation part of the mandate, but the employment/growth part of it. But if you are willing to accept that employment growth remains on a pace of 150,000 jobs per month—and I see no clear evidence to the contrary—it is not at all obvious that the pace of the recovery is inconsistent with the FOMC's view of achieving its dual mandate...
...And I am certainly begging the important issues. Would the economy have achieved even the somewhat unspectacular pace of 2 percent GDP growth, 150,000 jobs per month, and average inflation near the long-run objective absent large-scale asset purchases ("QE2"), forward guidance (statements indicating that policy rates are expected to be exceptionally low through at least late 2014), and maturity extension programs ("Operation Twist")? Does "appropriate policy" imply that more must be done to achieve even the modest progress in the unemployment rate implied in my calculations above?
Mark Thoma replies:
It sounds as though the Fed has given up -- we've done all that we can, there's nothing more we can do, so we won't even try -- and we're not about to risk even the tiniest bit of inflation to find out if we are wrong...
Mark's idea that the Fed has "given up" is not sufficiently appreciated. Altig's calculations make the important assumption that the labor force participation rate holds at 63.7%. This effectively assumes that none of the decline in the labor force participation is cyclical. Instead, it is all structural:
Should the Fed take the labor force participation rate as exogenous or endogenous? If they take it as exogenous, then policymakers have effectively "given up" on the recovery. Any cyclical decline in the labor force participation rate becomes structural over time as skill loss increasingly excludes those displaced by the recession from reentering the labor force.
This is similar to the debate over the current level of potential GDP. Once policymakers started to believe (on the basis of an HP filter, of all things) that the economy is operating at potential, rather than well-below potential, then they would start behaving as if the economy was in fact at potential, setting policy and managing the economy along the suboptimal level. This sends signals to economic agents about the expected growth in output (or nominal GDP), who adjust their behavior accordingly. The cyclical declines becomes structural. In other words, a shift in potential GDP becomes a self-fulfilling prophecy.
Should the Fed take all "structural variables" as exogenous? For all the derision heaped upon former Federal Reserve Chairman Alan Greenspan, consider the long-gone 1990s. Greenspan believed that accelerating productivity growth meant the economy could run at a higher growth rate than previously believed. Suppose Greenspan had not reached this conclusion. Would unemployment have fallen as low as it did? More importantly, we told a story back then, and it went like this: Low unemployment was forcing firms to reach deeper and deeper into the labor pool to the point where they had to start actively training new employees. They no longer had the luxury of cherry-picking only the obviously skilled employees; they had to bring unskilled labor up to speed. This process is human capital deepening, which should have a positive impact on potential GDP growth. A benefit that would have been lost if Greenspan pulled the plug on economy sooner (the same holds true of the physical capital deepening of the time).
And did that process of capital deepening make any difference? Running the economy red hot had the benefit of shifting the share of output in favor of labor during the 1990s:
Of course, inflation did accelerate to something closer to 2.5% over that period. Was that such a high price to pay to lift up those at the lower end of the socioeconomic ladder? Maybe, just maybe, the Fed's newly minted 2% target is simply too low. Maybe, just maybe, if we run the economy a little on the red side of hot the supply response will be stronger than the Fed believes - that the long-run path of the economy will prove to be just a little more endogenous than the Fed is willing to accept. Maybe, just maybe, the Fed's obsession with disinflation (and don't let the Fed fool you - they used the most recent recession to achieve another round of opportunistic disinflation) is contributing to stagnant to falling standards of living for much of the country.
Note that I am not suggesting the Fed should take all structural variables as endogenous, just that we don't necessarily have a complete understanding of what is endogenous. In essence, if the Fed bases policy on 63.7% labor force participation as an exogenous variable, ignoring any endogenous response, the economy will proceed on a path that is very well suboptimal. But downward nominal wage rigidities and fear of inflation above 2% will prevent the Fed from exploring any other possibilities.
Bottom Line: Monetary policy might have a bigger impact on shaping the underlying growth rate of the economy than policymakers believe. Some of what they think is exogenous may be at least in part endogenous. Ultimately, within a certain margin, we will get the economy the Fed wants us to get. And right now we are getting the economy that is defined by central bankers living in mortal fear of any inflation rate greater than 2%. With the exception of a few policymakers, the cost of 2.5% inflation far exceeds the possibility of learning to what degree the underlying structure of the economy is exogenous or endogenous.
I increasingly believe that the Fed made a massive policy error in defining their mandate as 2% inflation. I think they believed it would give them more freedom to use new tools by solidifying inflation expectations. Instead, the target has placed policymakers in a straitjacket. It is Bernanke's cross of gold.
Posted: 18 Aug 2012 11:07 AM PDT
There's a controversy over what Paul Ryan knew about requests for stimulus from his office, and when he knew it:
Paul Ryan Claims He Didn't Know He Signed Letters Asking For Stimulus Funds, Think Progress: During an interview with Fox News' Carl Cameron on Saturday, Paul Ryan tried to explain why he denied requesting stimulus funds for a local energy company in 2009 after voting against and demagoguing the Recovery Act. "My office sends tens of thousands of letters to various federal agencies. This went through what we call my case work system, where it was treated as a case work request for a constituent," Ryan said. "It wasn't my intention to send letters supporting the stimulus" ...
But the letters — at least five in total — are all signed by Ryan in different ways, suggesting that he or an aide hand-signed the documents. "Recovery Act" is also prominently written in the very first line...
I just want to note that this isn't the first time this controversy has come up, and there's no doubt that Romney's office knew about the letters requesting stimulus. And in the past, unlike now, Ryan's office said the intention was, in fact, to send the letters because Ryan "does not believe flawed policy should get in the way of doing his job and providing a legitimate constituent service to his employers."
This is from February 16, 2010:
Ryan supported some stimulus spending, by Don Walker, Journal Sentinel: Republicans in Congress have attacked the Democratic-sponsored $787 million economic-stimulus plan, but that hasn't stopped them from trying to get a piece of the action.
Today's Wall Street Journal has a story about a dozen or so Republicans who supported stimulus-funding requests submitted to various federal agencies.
One of those Republicans is U.S. Rep. Paul Ryan (R-Wis.), who has labeled the stimulus a "wasteful spending spree."
Using the Freedom of Information Act, the Wall Street Journal obtained letters from some Republicans supporting funding proposals.
In Ryan's case, he wrote a letter to the Department of Labor in support for a grant application that was submitted for an Energy Training Partnership Grant.
Ryan, who is traveling in the Middle East, could not be reached for comment. But a spokesman provided this statement: "If Congressman Ryan is asked to help a Wisconsin entity applying for existing Federal grant funds, he does not believe flawed policy should get in the way of doing his job and providing a legitimate constituent service to his employers."
As it happens, the grant application was rejected, the spokesman said.
So it wasn't a mistake as he claims, the spokesman from his office says it was an attempt to get a piece of the pie.
I find it hard to believe that nobody from his office mentioned this to Ryan, nobody asked him about it, etc.
Posted: 18 Aug 2012 10:14 AM PDT
Jeff Sachs says that we need a third party to save us:
America has lost the battle over government, by Jeffrey Sachs, Commentary, Financial Times: ...There is considerable controversy about Mr Ryan's budget plan... Still, American liberals ... who are now vehemently blasting Mr Ryan's budget should take note. Their candidate has also already accepted a brutal shrinkage of government programs in coming years. ... Whether Mr Obama or Mr Romney wins, the "non-security" discretionary budget – for education, job skills, infrastructure, science and technology, space, environmental protection, alternative energy and climate change adaptation – is on the chopping block. Mr Obama's budget would shrink non-security discretionary programs from an already insufficient 3.1 per cent of GDP in 2011 to 1.8 per cent in 2020. That is the "liberal" alternative.
In bemoaning Mr Obama's budget, I do not mean to equate it with Mr Ryan's. Mr Ryan's budget is nothing short of heartless in the face of the dire crisis facing America's poor. It is also reckless... Yet the sad truth is that the Democrats offer no progressive alternative. Both parties are accomplices to the premeditated asphyxiation of the state. ...
Many Americans will say that they are dodging the European curse by keeping taxation so low but they should look again. Northern Europe (Germany, the Netherlands, Denmark, Finland, Norway and Sweden) gets great value for its tax revenues: lower budget deficits, lower unemployment rates, lower public debt-to-GDP ratios, lower poverty rates, greater social mobility, better job training, longer life expectancy, lower greenhouse gas emissions, higher reported life satisfaction and greater macroeconomic stability.
America's two political parties depend on wealthy contributors to finance their presidential campaigns. These donors want and expect their taxes to stay low. As a result, social divisions, broken infrastructure, laggard educational attainments, high carbon emissions and chronic budget deficits are likely to continue no matter who is elected, even though the public supports higher taxes on corporations and the rich.
Only a big political realignment, perhaps spurred by a third party bold enough to campaign on free social media rather than expensive television advertising, is likely to break the status quo. Until then, the demise of public goods and services will continue apace.
And the thing is, after going against his party's interests, Obama gets no credit at all from the Very Serious People pushing for this approach to deficit reduction.
I hate having to choose the candidate who will do the least harm instead of a candidate that I can support enthusiastically.
Posted: 18 Aug 2012 09:09 AM PDT
Where's George W. Bush been during the campaign?:
Erasing W, by Robert Reich: ...Romney has gone out of his way not to mention the name of the president who came after Clinton and before Obama.
Clinton will have a starring role at the Democratic National Convention. George W. Bush won't even be at the Republican one – the first time a national party has not given the stage at its convention to its most recent occupant of the Oval Office who successfully ran for reelection.
The GOP is counting on America's notoriously short-term memory to blot out the last time the nation put a Republican into the Oval Office... Republicans want to obliterate any trace of the administration that told America there were weapons of mass destruction in Iraq and led us into a devastating war; turned a $5 trillion projected budget surplus into a $6 trillion deficit; gave the largest tax cut in a generation to the richest Americans in history; handed out a mountain of corporate welfare to the oil and gas industry, pharmaceutical companies, and military contractors like Halliburton (uniquely benefiting the vice president); whose officials turned a blind eye to Wall Street shenanigans that led to the worst financial calamity since the Great Crash of 1929 and then persuaded Congress to bail out the Street with the largest taxpayer-funded giveaway of all time.
Besides, the resemblances between George W. Bush and Mitt Romney are too close for comfort. Both were born into wealth, sons of prominent politicians who themselves ran for president; both are closely tied to the nation's corporate and financial elites, and eager to do their bidding... They are both ... unusually shallow, uncurious, two-dimensional men who ran or are running for the presidency for no clear reason other than to surpass their fathers or achieve the aims and ambitions of their wealthy patrons.
Small wonder the Republican Party wants us to forget our last Republican president and his administration. By contrast, the Democrats have every reason for America to recall and celebrate the Clinton years.

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