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September 13, 2012

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Latest Posts from Economist's View

'U.S. Income Gap Rose'

Posted: 13 Sep 2012 12:29 AM PDT

This probably won't be a surprise:

U.S. Income Gap Rose, Sign of Uneven Recovery, by Sabrina Tavernise, NY Times: The income gap between the wealthiest 20 percent of American households and the rest of the country grew sharply in 2011, the Census Bureau reported, as an overwhelming majority of Americans saw no gains from a weak economic recovery in its second full year.
Income for the top fifth of American households rose by 1.6 percent last year, driven by even larger increases for the top 5 percent of households... All households in the middle of the scale saw declines, while those at the very bottom stagnated.
"You're really struck by the unevenness of the recovery," said Lawrence Katz, an economics professor at Harvard. "The top end took a whack in the recession, but they've gotten back on their feet. Everyone else is still down for the count."
The numbers helped drive an overall decline in income for the typical American family. Median household income after inflation fell to $50,054, a level that was 8 percent lower than in 2007, the year before the recession took hold. ...
The Census Bureau reported that a standard measure of income inequality, the Gini index, registered the first year-on-year increase since 1993, a surprise for economists who say the measure, which has been rising for some time, usually changes so slowly that a statistically significant rise over the course of one calendar year is rare. ...
Inflation-adjusted median household income fell by 1.5 percent in 2011. During the recovery, about 3 in 5 of the new jobs created have been low-skill and low-wage — taking people off the unemployment rolls and pulling some families out of poverty, but not providing a clear route to the middle class. ...

Links for 09-13-2012

Posted: 13 Sep 2012 12:06 AM PDT

Fed Watch: The Wait Should Finally be Over

Posted: 12 Sep 2012 04:39 PM PDT

Tim Duy:

The Wait Should Finally be Over, by Tim Duy: Tomorrow should bring QE3 from the Federal Reserve. I am reminded on the length of this debate from a piece I wrote in February:

Calculated Risk reads this passage in a recent speech by San Francisco Federal Reserve President John Williams:

This is a situation in which there's no conflict between maximum employment and price stability. With regard to both of the Fed's mandates, it's vital that we keep the monetary policy throttle wide open.

and concludes:

QE3 is coming.

Dallas Federal Reserve President Richard Fisher states:

"In my view, it's not going to happen," he said. "It's a fantasy. Wall Street keeps dangling QE3 out there [but] I just don't see it happening."

I guess we are going to see who knows more about monetary policy - CR or Fisher. My instinct tells me CR, but Fisher seems just a little too certain to dismiss entirely.

Not dismissing Fisher entirely meant expecting QE later than sooner. But, ultimately, barring a massive surprise, I think we will learn tomorrow that CR does in fact know more about monetary policy than Fisher. Then again, who doesn't?

I have been a bit busy this week, so I have been a little under the radar. With respect to the meeting tomorrow, I agree with Robin Harding at the FT on this point:

For me, the question of what the Fed will do is far less interesting – and far less in doubt – than how the Fed will do it. This will not be a pro forma repeat of previous actions. As Mr Bernanke's speech shows, the Fed is trying to address grave concerns about the labour market. The crucial issue is whether and how they tie any action to the state of the economy.

I don't anticipate a lump sum QE announcement. I anticipate an open-ended commitment to regular purchases of securities, Treasuries and/or MBS, that can be scaled up or down in response to the economy. Wall Street may be initially disappointed by the lack of a big number, but over time I think markets will come to appreciate the greater impact offered by a regular commitment based upon economic outcomes rather than the arbitrary amounts and time lines of previous QE efforts.

As Harding says, how they tie the policy to the economy is key. It is probably too much to expect an explicit nominal GDP target. Nor do I think we will get Chicago Federal Reserve President Paul Evan's suggestion of an explicit unemployment target coupled with higher inflation tolerance. Harding suggests:

"The committee intends to purchase a further $xbn of Treasury and agency mortgage-backed securities per quarter until incoming information points to a substantial and sustainable strengthening in the pace of the economic recovery."

Sounds good, although as I have trouble expecting the Fed to undertake open ended QE in the absence of direct reference to both parts of the dual mandate, a possible variant :

"The committee intends to purchase a further $xbn of Treasury and agency mortgage-backed securities per quarter until incoming information points to a substantial improvement in labor utilization rates in the context of price stability."

You get the idea.

Bottom Line: QE3 is expected, but more important is the message that comes with it. To be most effective, the Fed needs to link open-ended policy explicitly to the economy, thereby removing the uncertainty associated with the previous arbitrary programs. I think anything less should be viewed as a dissappointment.

Gagnon: Michael Woodford’s Unjustified Skepticism

Posted: 12 Sep 2012 11:44 AM PDT

I'm not as skeptical as Michael Woodford about the ability of monetary policy to stimulate the economy, but I'm not as optimistic as many others. I think it can help some, and that the expected benefits exceed the expected costs, but it's not going to make a dramatic difference in the recovery (hence my continued calls for additional fiscal policy to provide an additional boost). One of the people who is more optimistic than I am is Joe Gagnon, and he takes on Woodford's "unjustified skepticism" about the ability of monetary policy to provide economic stimulus:

Michael Woodford's Unjustified Skepticism on Portfolio Balance (A Seriously Wonky Rebuttal), by Joseph E. Gagnon: In his recent speech at the Federal Reserve's annual Jackson Hole conference, Professor Michael Woodford of Columbia University attempted to pour cold water on the idea that the Fed's purchases of long-term bonds (also known as quantitative easing) could lower bond yields.1 His contention was that the portfolio balance effect of such purchases would be minimal at best. I disagree, as do the bulk of central bankers. This debate matters because, if Woodford is right, the Fed's only tool for delivering more stimulus now is to commit to future policy actions that may be viewed as undesirable when they occur—such as promising not to raise interest rates when inflation returns. If the market were to doubt such a commitment from the Fed, the Fed would lose its ability to steer the economy. In reality, the portfolio balance channel gives the Fed a tool to guide the economy without unduly restricting future policy choices. This is not to deny, however, that Fed statements about future policy intentions may have important effects.
Woodford devotes several pages in his Jackson Hole remarks to discussing a paper I wrote two years ago with former Fed colleagues Matthew Raskin, Julie Remache, and Brian Sack. We showed that Fed purchases of long-term agency and government bonds in 2008 and 2009 lowered a range of long-term interest rates. We argued that most of those declines appeared to reflect a reduction in term premiums rather than a reduction in expected future short-term interest rates. We posited that those reductions in term premiums were required to induce investors to accept the shift in their portfolios engendered by the Fed's purchases; this is what Nobel Laureate James Tobin and others have long referred to as the portfolio balance effect. Woodford asserts instead that most or perhaps all of the declines in bond yields might have been caused by the market's interpretation of the Fed's statements and actions as indicating that the path of future short-term interest rates would be lower than previously expected.
Our paper, and more recent papers, presented evidence that counters most of Woodford's empirical claims (D'Amico and King 2010, Neely 2010, D'Amico, English, Lopez-Salido, and Nelson 2011, Hamilton and Wu 2012, and Li and Wei 2012).1 The evidence shows that Fed purchases affected the prices of a broad range of assets at once, not just the prices of those bonds being purchased directly. Some Fed statements and actions clearly had no implications for the path of future short-term rates, and yet they still affected some asset prices. This evidence comes from a range of investigations, not solely from event studies, and the conclusion is not sensitive to changes in the underlying model used to identify movements in the term premium. These effects of Fed asset purchases are fully consistent with what would have been expected based on data from before the financial crisis, and with the portfolio balance view.
Readers are encouraged to check out the above papers for more on the empirical case for a portfolio balance effect as well as an Econbrowser post in response to Woodford by Jim Hamilton. In the remainder of this post, I focus on Woodford's theoretical arguments against portfolio balance. I find them unpersuasive. For more theoretical arguments for and against portfolio balance, see a post by Cohen-Selton and Monnet on the Bruegel blog. ... [makes theoretical points] ...

'Romney’s Egypt Response Backfires'

Posted: 12 Sep 2012 11:12 AM PDT

In case you want to talk about this:

Romney's Egypt response backfires, Financial Times: Mitt Romney's attempt to make political capital from the attacks on US missions in Libya and Egypt appeared to backfire on Wednesday when even members of his own party criticised his intervention. ...
Yes, there has been some criticism from hi sown party, but imagine the outrage from the right we'd be hearing if the roles were reversed.

'Romney Relies On Race To Attack Obama On Welfare'

Posted: 12 Sep 2012 10:36 AM PDT

Ryan Enos, an Assistant Professor of Government at Harvard University who specializes in the politics of race & identity and voting behavior studies Romney's deceptive welfare ads (see the post for the evidence backing the conclusions below):

Romney Relies On Race To Attack Obama On Welfare, by Ryan D. Enos: Mitt Romney has stuck with his theme of attacking President Obama over "gutting" the work requirement for welfare. In an often-aired television commercial, Romney's claims that Obama "quietly" dropped the requirement that welfare recipients find work and instead they "just send you a check". ...
Of course, Romney's claim is false. But are these ads effective politics? The answer appears to be yes – at least, if we just look at whether people believe the ads to be true. ...
However, once we look a little closer at these survey responses, we can see that if these ads are effective, it is most likely not because the ads are changing opinion, but rather because they are tapping into opinions that voters already hold - in this case opinions that are squarely rooted in attitudes about race. ...
These attitude associations should come as little surprise to those that are familiar with scholarship on racial politics in the United States, such as that of Martin Gilens, who demonstrates that Americans tend to have negative attitudes about welfare because of its association with African Americans. At the same time, Michael Tesler and David Sears, have shown that attitudes about Obama are powerfully predicted by resentment towards African Americans. It is this resentment that likely ties together attitudes about welfare and Obama.
Like most questions of complex public policy, Americans do not have the inclination or ability to pay careful attention to the nuance of the issue – instead they rely on shortcuts, which psychologists call heuristics, to guide their attitudes about the policy. Here people likely rely on the heuristic provided by their pre-existing feelings towards African Americans: they don't like welfare, they especially don't like welfare without a work requirement, they don't like Obama, and they associate African Americans with all these things – making it easy to simultaneously hold negative attitudes about all of them.
With their ads, the Romney campaign is simply "priming" the easy association some voters have between welfare and Obama and the negative feelings associated with both – unfortunately, to do this, Romney must cynically rely on the connecting thread of racism that makes this association possible.

Romney's dishonest campaign tells me two things, he has nothing of his own to sell so he has no choice but to attack the other side instead, and when he does attack he has little to criticize except misrepresentations of Obama's policies and statements. It's also clear that he is willing to use deceptive presentations of facts, or outright falsehoods, to justify goals he believes are worthy, a trait that reminds me of George Bush.

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