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August 17, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 16 Aug 2012 02:34 AM PDT
I have an op-ed at the New York Daily News:
Paul Ryan's imaginary expertise, by Mark Thoma: When Mitt Romney introduced Representative Paul Ryan of Wisconsin as his running mate in the presidential election, he emphasized that Ryan "has become an intellectual leader of the Republican Party" on economic policy. But a close examination of Ryan's monetary and fiscal policy proposals makes it hard to understand why he is held in such high regard.
Ryan's views on monetary policy are, by his own admission, heavily influenced by Ayn Rand's Atlas Shrugged. Concerns about inflation – currency debasement – are prominent in Rand's novel, and those concerns drive Ryan's monetary policy proposals. For example, Ryan introduced legislation in 2008 to replace the Fed's dual mandate to stabilize both inflation and employment with a single mandate to stabilize inflation. Under Ryan's proposal, the Fed would ignore employment when making policy decisions.
Ryan's lack of concern over employment is disconcerting, but it's at least possible to find economists who support a single inflation mandate for the Fed. It's much harder to find anyone who will support another inflation prevention policy Ryan has proposed, a policy similar to a gold standard.
Despite decades of stable inflation, and criticism from many people that the Fed is too worried about inflation and not worried enough about unemployment, Ryan does not trust the Fed to keep inflation under control. Instead, he has proposed tying the value of the dollar to a basket of commodities. The Fed's only job under this policy is to keep the value of the dollar in line with the value of the commodities in the basket. The pursuit of any other goal, such as stable employment, would interfere with this mission.
But this is not a recipe for price stability as Ryan claims. Every time the price of oil, corn, or other commodities in the basket change due to ordinary fluctuations in supply and demand, which is often, the value of the dollar would change as well. This would make the value of the dollar even more unstable and uncertain than it is now, and we'd also lose an important tool in the fight against unemployment.
And that's not even his worst proposal for monetary policy. That title goes to his call to raise interest rates to cure the recession because "there's a lot of capital parked out there, and we need to coax it out into the markets." This shows a serious misunderstanding of what's holding the economy back. If interest rates are increased, the higher return on financial assets will cause more people to provide funds to financial markets, but the supply of funds isn't the problem. As the vast amount of "parked capital" highlights, there's ample supply already. The problem is insufficient demand, and Ryan's policy of raising interest rates makes it more expensive for firms to invest, and more expensive for consumers to purchase durables like cars and houses. The result would be a further decline in demand, a fall in output and employment, and even more parked capital than before.
Okay, so Ryan is no genius when it comes to monetary policy. But what about fiscal policy and the budget? Isn't that where he shines? Not really. The individual elements in his budget proposal are attractive to various constituencies, and telling people what they want to hear is a sure way to get anointed as a budget wizard. But when all the individual pieces are put together, the proposal simply doesn't add up. As an analysis by the non-partisan Tax Policy Center shows, revenues would be far lower than Ryan claims, and that would lead to large deficits. The problem is that Ryan relies upon unrealistic assumptions about the revenue that can be gained from closing tax loopholes, and about the degree to which tax cuts pay for themselves. To give you some idea of just how outlandish his assumptions are, his original projections assumed that the unemployment rate would fall to 2.8 percent under his policies. When challenged on this assumption, it was dropped, but amazingly none of the other numbers changed. And to top it off, the policies that he proposes aren't even novel. For example, his proposal for Medicare vouchers, a centerpiece of his budget policy, was made by Newt Gingrich in 1995.
This is not a serious, well thought out, creative proposal from someone thoroughly familiar with the numbers. This is what you'd expect from a flimflam man who hopes you don't ask too many questions.
Paul Ryan is a slick salesman, no doubt about that, but his reputation as a policy wonk is undeserved.
Posted: 16 Aug 2012 12:06 AM PDT
Posted: 15 Aug 2012 10:44 AM PDT
Tim Duy:
Data Dump, by Tim Duy: We have seen a steady flow of data the past week, but I can't say that in sum it moves me much from my baseline as described in my last post. Starting with today's CPI release, Reuters has this to say:
Consumer prices were flat in July for a second straight month and the year-over-year increase was the smallest in more than 1-1/2 years, giving the Federal Reserve room for further monetary easing to tackle stubbornly high unemployment.
I would be a little nervous about reading too much into the drop in headline inflation. True enough, core edged up just 0.1%, but looking at the year-over-year trends is important at this juncture:
I think the Fed will see the flattening out of core inflation as a sign that the hawk's obsessive fear of exploding inflation was once again proved incorrect. That said, the opposite is true - even the doves will have a hard time fearing falling inflation unless the shift in headline is confirmed by additional declines in the core. Yes, you can make the argument that in sum this confirms the Fed's forecast that inflation will remain at or below the 2% target, which in turn justifies additional easing. If I was on the FOMC, I would make that argument. But that argument has consistently fallen on the deaf ears of Federal Reserve Chairman Ben Bernanke, who has seen the costs of further easing as outweighing the benefits. Also note that gasoline prices are headed back up, which will reverse some of the recent decline in headline inflation:
While normally I would say the rise in oil/gas costs is a signal of improving demand, in this case I worry that we are seeing a potential supply shock from fears of war in the Middle East. That said, this is a perpetual fear.
As for the path of inflation overall, I tend to think the cost/risks that Bernanke worries about are overstated, a story that continues to be told in the productivity data:
I just can't get bent out of shape over inflation with unit labor costs growing at anything below 4% a year, and we are well below 4%. Speaking of the productivity report, remember the 1990's? Good, hold those memories tight, because it continues to look like they will remain a think of the past:
With the cycle-induced productivity gyrations in the rear-view mirror, it looks like productivity growth is settling into a disappointing rate. The days of thinking that long-term growth in the US might be 4% in higher are long gone; now we are looking at 2-2.5%.
Despite the generally soft tone of manufacturing surveys - see this morning's Empire Business Report - industrial productive continues to climb:
The surveys tend to be diffusion measures - they don't capture the magnitude of any individual firm declines. Even if those reporting slower orders exceed those reporting accelerating orders, the latter might still outweigh the former in magnitude. Thus, overall activity could still climb. In short, the survey data provides a warning - a warning the Fed has traditionally acted upon - but do not guarantee a broader manufacturing slowdown.
Jobless claims are showing the same pattern as last summer, with an increase beginning in April largely peaking and reversing by August:
This would be evidence in favor of Bernanke's stated concerns that the weakness we saw over the summer was at least in part a consequence of seasonal/temporary issues. In favor of the opposite story is a rise in the inventory to sales ratio:
Looks like firms were caught with a little extra inventory this summer. To be sure, I would not raise too many red flags just yet. Notice the similar rise in 2006 that was largely reversed ahead of the recession. But it is certainly something worth watching.
Finally, retail sales rebounded in July:
Enough to convince me that the consumer isn't going to plunge us into recession this quarter, but not enough to convince me that the general deceleration in spending is soon to be reversed:
Bottom Line: The sum total of the data suggests that the Fed's much hoped-for acceleration in growth remains just hope, but that the worst downside fears have yet to be realized. Inflation continues to remain contained at rates below the Fed's mandate, but will not decline precariously (nor would I expect them to given downward nominal wage rigidities). There are some warning signs in the data flow, such as manufacturing surveys and inventories, but nothing conclusive. I want to argue that the failure of the economy to accelerate and below-target inflation, combined with more negative than positive warning signals, argue for additional Fed easing in September. That, however, has been the case for months, and during that period Bernanke has not moved the Fed to that easing (I tend to see the continuation of Operation Twist as holding the status quo, not additional easing). And I suspect signs that some of the weakness in the data was temporary will push Bernanke further away from additional easing, especially given his cost/benefit analysis. On net, I think the outcome of the September FOMC meeting remains a toss-up. The wild card here is that Bernanke comes up with a new tool. I think that if he had a mechanism to shift his cost/benefit analysis in favor of further easing, he would jump in that direction. I just don't think he sees that mechanism yet, and has little faith that additional quantitative easing has more to offer.
Posted: 15 Aug 2012 10:33 AM PDT
Paul Krugman says all the reasonable Republicans have been excommunicated from the movement:
Reasonable Republicans?: Several commenters have asked that I provide examples of Republicans making reasonable economic arguments; some of them seem to be saying that I'm proving my bias if I don't provide such examples.
But it doesn't work that way: if all Republicans are saying unreasonable things, then it's a distortion — indeed, a form of bias — to insist that there must be reasonable Republicans.
Now, what you can quite easily find are examples of people who used to be Republicans, or even still consider themselves Republicans, saying reasonable things — say, Bruce Bartlett or David Frum. But the very fact that they're reasonable has led to their excommunication from the movement!
It's kind of the "treason never prospers" argument ("for if it prospers, none dare call it treason"); if someone declares that tax cuts don't pay for themselves, or that printing money when you're in a liquidity trap isn't deeply inflationary, or that fear of Obamacare isn't holding the economy back, he ceases to be considered a member in good standing of the GOP. There are, therefore, no reasonable Republicans on these issues.

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