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August 7, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 07 Aug 2012 12:33 AM PDT
Tim Duy:
Is the Election Holding Back the Fed?, by Tm Duy: Boston Federal Reserve President Eric Rosengren is stepping up his call for additional policy action at the next meeting. Via the Boston Globe:
Eric Rosengren, the head of the Federal Reserve Bank of Boston, is issuing an unusual public plea to his colleagues in Washington, urging the nation's central bankers to ignore election-year pressures and do more to jump-start the muddling economy.
Less than a week after Federal Reserve policy makers elected not to take new steps to stimulate the economy, Rosengren in an interview added his voice to a handful of dissenters, saying the central bank has to act at its next meeting in September to revitalize the economy. The Fed should not worry, he said, if the move is seen as influencing the presidential election.
"We don't get to pick the timing of a global slowdown," Rosengren said. "If there's a slowdown and you have an independent central bank, the appropriate response is to act. I think that's exactly what we should do."
I have to admit that I was caught off-guard by the direct reference to the presidential election. I have seen speculation that the Fed is avoiding action until after the election, and this seems almost like an admission of such hesitation. Is this comment directed at the public, or at his colleagues? My response:
Some Fed specialists said the remarks from Rosengren are unusually pointed in a world where even the simplest statements are carefully worded. Tim Duy, an economics professor at the University of Oregon who writes a column called Fedwatch on the website Economist's View, said he was struck, in particular, by Rosengren's publicly urging the central bank to ignore the political situation.
"That would be fine to say internally. But to say that externally, to pull back the curtain and say, 'They're doing this for the election,' I think is a shift and reflects his level of frustration," Duy said.
Rosengren then goes further and calls for very aggressive policy:
Rosengren said the economy is just "treading water" and among the actions the Fed committee should consider is a repeat of what the central bank did during the recession when it spent trillions of dollars buying securities. The bond-buying program was controversial, and critics complained it did not help much. But Rosengren said anything more modest than that would probably not be enough. "It would be hard to come up with a program with a big enough impact" without big purchases of securities, he said....
..."Facing a world that's going to be treading water, monetary policy shouldn't just stand there and watch it happen," Rosengren said. "We should start talking about more aggressive policy to make sure we get the kind of growth that's consistent with improvement in the labor markets."
Rosengren has been moving in this direction for a few months, but these sound like very pointed remarks, the remarks of someone who is very frustrated with the current stance of policy. Interestingly, such level of frustration could also be indicative of the strength of opposition to additional quantitative easing within the FOMC. Indeed, I have long-hypothesized that Federal Reserve Chairman Ben Bernanke could move the middle ground of the FOMC to the doves if he desired, and the fact that he hasn't done so reveals his preference for inaction. Consequently, the bar to further easing has been higher than believed. That continued inaction in the face of ongoing lackluster economic growth and the persistent failure to meet not just one but both parts of the dual mandate could finally be trying the patience of the FOMC doves.
Bottom Line: Who is Rosengren talking to here? It doesn't sound like he is making a case to the public when he says "[w]e should start talking about more aggressive policy." It sounds like he is making a case to the rest of the FOMC. Same with his comments on the election. At a minimum, he is another voice for aggressive easing. But such comments sound like he is frustrated with the path of policy, which would signal the strength of the resistance to further easing. Overcoming that resistance is critical to clearing the path to that easing.
Now we await Bernanke's comments, to see if he gives any ground.
Posted: 07 Aug 2012 12:06 AM PDT
Posted: 06 Aug 2012 02:08 PM PDT
Joseph Stiglitz on how African countries can (and should) use their newfound resource wealth to shape their long-run comparative advantage:
From Resource Curse to Blessing, by Joseph Stiglitz, Commentary, Project Syndicate: New discoveries of natural resources in several African countries ... raise an important question: Will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries? ...
[T]hese countries must do more to ensure that their citizens get the full value of the resources..., the money gained through natural resources must be used to promote development. The old colonial powers regarded Africa simply as a place from which to extract resources. Some of the new purchasers have a similar attitude.
Infrastructure (roads, railroads, and ports) has been built with one goal in mind: getting the resources out of the country at as low a price as possible, with no effort to process the resources in the country, let alone to develop local industries based on them.
Real development requires exploring all possible linkages: training local workers, developing small and medium-size enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country's economic structure. Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. From this perspective, these countries' comparative advantage is having other countries exploit their resources.
That is wrong. What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant that it is today. It might be the world's most efficient rice grower, but it would still be poor. ...
Posted: 06 Aug 2012 10:49 AM PDT
Ben Bernanke earlier today:
...aggregate statistics can sometimes mask important information.  For example, even though some key aggregate metrics--including consumer spending, disposable income, household net worth, and debt service payments--have moved in the direction of recovery, it is clear that many individuals and households continue to struggle with difficult economic and financial conditions. Exclusive attention to aggregate numbers is likely to paint an incomplete picture of what many individuals are experiencing. One implication is that we should increase the attention paid to microeconomic data, which better capture the diversity of experience across households and firms. ...
Another implication is that policymakers such as Ben Bernanke should do more to help individuals and households who "continue to struggle with difficult economic and financial conditions." So why isn't he pushing the Fed to do more at every opportunity?
Posted: 06 Aug 2012 10:32 AM PDT
You will be shocked by this. Greg Mankiw, in an attempt to serve his political interests, said something misleading on his blog:
Measuring Mooching, by Nancy Folbre, Commentary, NY Times: ...Gregory Mankiw .... called attention to a recent Congressional Budget Office report showing that government transfers, net of federal taxes, were greater than market income for the bottom three quintiles of all households ranked by market income in 2009.
Professor Mankiw concluded that the lowest 20 percent of families were receiving $3 in government benefits for every dollar they earned and that the middle quintile "having long been a net contributor to the funding of government, is now a net recipient of government largess."
This is not the same as calling the middle class moochers, but some might interpret it that way. Here are some important reasons to challenge Professor Mankiw...:
First, a ranking of households by market income puts households with retirees, young children, the sick and disabled at the bottom. We shouldn't be surprised that net government transfers to these groups exceed their market income. As the C.B.O. report points out, almost two-thirds of the benefits received by the bottom quintile came from Social Security and Medicare. ... Calculations of "government largess" should be based on what people receive over their lifetimes. Retirees receiving Social Security and Medicare have paid taxes into the system in previous years. ...
Second, earnings were low in the bottom quintiles largely as a result of involuntary joblessness. ... People shouldn't be faulted for unemployment when no jobs are to be had. ...
Third, the C.B.O. estimates do not provide entirely accurate measures of net government transfers. They are based on calculations of the difference between total transfers (including those from state and local government), and federal, but not state and local, taxes.
Indeed, an estimate of state and local taxes paid by the middle quintile in 2009 ... comes to $2,858 — enough to nudge their average total taxes paid ($10,558) above the value of the government transfers they received ($10,400).
In response to a reader's comment..., Professor Mankiw posted a correction...
This captures an essential point (see here too):
Stepping back from these particulars, the larger point is that most government transfers take the form of social insurance against risks related to health, unemployment and poverty. As with private insurance, people shouldn't expect the premiums they pay to equal the benefits they receive. What they should expect — and appreciate — is reduced risk of an economic shock that could turn their lives upside down.

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