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September 22, 2012

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Latest Posts from Economist's View


Frankel: Mitt Romney Rejects His Natural Voters

Posted: 19 Sep 2012 12:33 AM PDT

Jeff Frankel:

Mitt Romney Rejects His Natural Voters, by Jeff Frankel, Commentary, Project Syndicate: ...Mitt Romney's characterization of 47% of the American electorate as "victims" who are "dependent on government" and refuse to take "personal responsibility" for their lives ... appears to have categorized a large segment of his party's own voters as supporters of President Barack Obama. ...
The unspoken truth is that, compared to "blue-staters," those who live in red states exhibit less responsibility, on average, in their personal behavior: they are less physically fit, less careful in their sexual behavior, more prone to inflict harm on themselves and others through smoking and drinking, and more likely to receive federal subsidies.
Statistical analysis shows that ... the ... average score of the five "reddest" states ... is worse on each of six measures of irresponsibility than the average score of the five "bluest"...: more obesity, smoking, chlamydia, teenage pregnancy, drunk-driving fatalities, and firearms assaults. In the latter three measures, the "reckless" share of the population is almost twice as high among the reddest states as it is among the bluest.
The states that score worst on these measures are also the states whose congressional representatives voted against Obama's Affordable Care Act (Obamacare) in 2010, though many of these unhealthy people free-ride on their fellow citizens...
Policy wonks have long known that one gets similar results when looking at which states receive more federal subsidies: Despite all the rhetoric about "getting the government off our backs," the red states receive the most federal transfers... Democratic-leaning states ... are net contributors to the federal budget, and thus subsidize everyone else. Those who claim to be most fiscally conservative in fact tend to feed most voraciously at the public trough.
Blue-state residents, who tend to be more educated and have higher incomes than residents of red states, have refrained from suggesting that their red-states compatriots exhibit behavior that falls short of the conservative rhetoric of personal responsibility. It would be unseemly and perhaps "elitist" to point fingers at fellow Americans and imply that they are promiscuous, fat, gluttonous, lazy, uneducated, or that they are more prone to divorce, drunkeness, and gun-related deaths. ...
 What about the millions of red-state Americans who have been preaching hard work, family values, self-reliance, and small government, while practicing the opposite? Surely this is the more objectionable stance. Yet, for red-state politicians, this hypocrisy has been a winning electoral strategy for three decades.

Alan Greenspan's 'Gold and Economic Freedom'

Posted: 19 Sep 2012 12:24 AM PDT

Stephen Williamson discovers Alan Greespan's Randian roots:

Alan Greenspan and the Gold Standard, by Stephen Williamson: Speaking of weird monetary economics. Maybe everyone knows this, but a commenter on the last post led me to some details about Alan Greenspan's past that I did not know about.

First, Greenspan puts Paul Ryan to shame in the Ayn Rand department. Greenspan was not just a casual reader of Rand, but was in her inner circle while she was writing Atlas Shrugged. Greenspan was, or is, a committed Objectivist and wrote an essay, "Gold and Economic Freedom," for Rand's book Capitalism, the Unknown Ideal. That essay is described in the link as being influenced by the ideas of Murray Rothbard, whose ideas also have a bearing on what Ron Paul thinks. Like Rothbard, Greenspan thinks ... that the "golden" age of monetary arrangements existed prior to the existence of the Federal Reserve System. Most monetary historians think of the National Banking era (1863-1913) as a period when the financial system of the United States was fatally flawed, as it produced repeated banking panics. Not Greenspan apparently.

Here's an excerpt from "Gold and Economic Freedom":

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

You could put those two paragraphs in Ron Paul's "End the Fed," and no one would notice. The use of "insidious" is interesting. That's the same word that Paul Ryan used to describe QE3.

The amazing part of this story is that Greenspan served as Chair of the Fed for a long time, and didn't seem to screw up (though some people lay some of the blame for the financial crisis at his doorstep, I'm inclined not to). If I had read "Gold and Economic Freedom" before his appointment I would have been in a panic. Maybe this means we could appoint Ron Paul to replace Bernanke, and everything would be fine. No, never mind.

For your entertainment, here's a 2007 interview with Greenspan on the gold standard. Apparently his views have not changed much.

The Case for More Monetary Accommodation

Posted: 19 Sep 2012 12:15 AM PDT

Charles Evans, president of the Chicago Fed, explains the Fed's recent decision to provide more accommodative monetary policy at the end of a speech he gave on Monday:

... The Case for More Accommodation ... Given the slow and fragile recovery, the large resource gaps that still exist, and the large risks we face, it remains clear that we needed a more resilient economy that can withstand the headwinds that might come its way. Last week the FOMC provided a more accommodative monetary policy that can help us achieve such resilience. I strongly supported the Committee's policy actions. These actions, along with Chairman Bernanke's powerful commentary that the employment situation remained a "grave concern," moved quite a ways toward my preference for providing more explicit forward guidance with respect to monetary policy reactions to changes in labor market conditions.
In many venues over the past couple years I have laid out my preferred way to provide additional accommodation.[8] Specifically, I believe we should adopt an explicit state-contingent policy rule that commits the Fed to providing accommodation at least as long as the unemployment rate remains above 7 percent and the outlook for inflation over the medium term is under 3 percent. If our progress toward this unemployment marker falters, then we should expand our balance sheet to increase the degree of monetary support. Indeed, we took such an action last week. Note the importance of the inflation trigger — it is a safeguard against unacceptable outcomes with regard to price stability. I also believe we should be more explicit about what it means for the inflation target to be symmetric... Namely, symmetry means that the costs of an inflation rate above our 2 percent goal are the same as the costs of equal-sized miss in inflation below 2 percent. Its implication is that we should not be resistant to policies that could move the unemployment rate closer its longer-run level, but run the risk of inflation running only a few tenths above our 2 percent goal. Such accommodative polices could further improve the employment picture, even beyond our recent highly beneficial actions.
While our policy actions last week don't exactly match my preferred policy structure, I support them wholeheartedly. Tying the period of time over which we will purchase assets to the achievement of significant improvement in the labor market is a strong step towards economic conditionality — that is, it conditions our actions to the economy's performance instead of a calendar date. And stating that we expect to keep a highly accommodative stance for policy for a considerable time after the recovery strengthens is an important reassurance to households and businesses that Fed policy will not tighten prematurely. A large body of economic research says that committing to such a delay is a key feature of optimal policies during periods when policy rates are constrained to be zero, such as we have experienced in the U.S. since late 2008.
Conclusion
Let me be clear. This was the time to act. With the problems we face and the potential dangers lying ahead, it is essential to do as much as we can now to bolster the resiliency and vibrancy of the economy. We cannot be complacent and assume that the economy is not being damaged if no action is taken. I am optimistic that we can achieve better outcomes through more monetary policy accommodation.
Some have argued that the circumstances we find ourselves in today are so different from the way in which monetary policy normally operates that we must tread cautiously. They argue that more monetary policy accommodation may lead to unintended consequences. Yet, being timid and unduly passive can also lead to unintended consequences. If we continue to take only modest, cautious, safe policy actions, we risk suffering a lost decade similar to that which Japan experienced in the 1990s. Underestimating the enormity of our problems and the negative forces holding back growth itself exposes the economy to other potentially more serious unintended consequences. That type of passivity is a gamble that is not worth taking. Thank you.

Links for 09-19-2012

Posted: 19 Sep 2012 12:06 AM PDT

Who Receives 'the Disproportionate Share of Government Spending'?

Posted: 18 Sep 2012 04:34 PM PDT

David Brooks:

The people who receive the disproportionate share of government spending are not big-government lovers. They are Republicans. They are senior citizens. They are white men with high school degrees.

But ask them if they deserve the benefits they receive, even those who pay no taxes. They'll say they do, especially the elderly who paid taxes their entire working lives. Many of them will not recognize that they are, in fact, among the 47 percent (or nearly so), or that if they pay taxes, they still receive more than they ever gave. It's those other people, the ones who voted for Obama, they're the problem.

The worry, based upon a misunderstanding of who the beneficiaries of government spending actually are, is that Obama supporters will use their voting power to divert their hard-earned taxes to other people -- the moochers -- denying them of what they deserve. This group won't find Romney's remarks frightening at all, at least not until they begin to feel a Romney presidency puts their benefits in danger. It's the (false) fear of not getting what they deserve that drives this group -- they paid their dues and want into the club with the benefits they were promised. Romney's problem, I think, or one of them anyway, is that many of them thought they were in Romney's secret club, that Romney would protect them from "the others" no matter what he might actually say on the campaign trail. In doing so -- by Romney denying the moochers -- they'd be protected. But they are starting to realize that they may not be in the club -- the one with $50,000 plates -- after all.

'How to Cut the US Deficit'

Posted: 18 Sep 2012 08:01 AM PDT

I really do need to get to jury duty, but one more quick one. Curious to hear what you think about this idea:

How to cut the US deficit by fixing taxes, by Laura Tyson, Commentary, Financial Times: One of the few issues on which Barack Obama and Mitt Romney agree is the need for tax reform. ... But tax reform should not come at the expense of progressivity. Income inequality is greater in the US than in the other developed countries of the OECD. ...
Proponents of greater progressivity often call for an increase in corporate taxes but this would lead to slower growth and fewer jobs. The US ... effective marginal corporate tax rate is one of the highest in the world. ... Of all taxes, corporate income taxes do the most harm to economic growth.
Both Mr Obama and Mr Romney advocate corporate tax reform that lowers the rate and broadens the base. The economic benefits could be significant. ...
A lower rate would stimulate investment, narrow the tax preference for debt over equity financing and weaken the incentives for international companies to move production to lower-tax locations. But lowering the corporate tax rate is expensive – each percentage point reduction would cut revenues by about $120bn over 10 years. ...
A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains. This would shift more of the burden towards capital owners and away from labor, which bears the burden in the form of fewer jobs and lower wages. ...
The US economy needs efficient and progressive tax reform and it needs more revenues for deficit reduction. Revenue increases have been a significant component of all major deficit-reduction packages enacted over the past 30 years. ...

FRBSF Economic Letter: Uncertainty, Unemployment, and Inflation

Posted: 18 Sep 2012 07:47 AM PDT

Sylvain Leduc and Zheng Liu of the San Francisco Fed examine how changes in uncertainty impact the economy (As I rush off to jury duty -- can hardly wait -- I'll just note that I wish we knew more about what is driving the changes in uncertainty they use in their empirical work.)

Uncertainty, Unemployment, and Inflation, by Sylvain Leduc and Zheng Liu, Economic Letter, FRBSF: Heightened uncertainty acts like a decline in aggregate demand because it depresses economic activity and holds down inflation. Policymakers typically try to counter uncertainty's economic effects by easing the stance of monetary policy. But, in the recent recession and recovery, nominal interest rates have been near zero and couldn't be lowered further. Consequently, uncertainty has reduced economic activity more than in previous recessions. Higher uncertainty is estimated to have lifted the U.S. unemployment rate by at least one percentage point since early 2008.

The U.S. economy has slowed substantially in recent months. Many commentators argue that uncertainty about future economic conditions has been an important factor behind the tepid recovery. According to a recent New York Times article, "A rising number of manufacturers are canceling new investments and putting off new hires because they fear paralysis in Washington will force hundreds of billions in tax increases and budget cuts in January, undermining economic growth." However, evidence supporting this view is scant. In a 2011 Wall Street Journal interview, University of Chicago economist Robert E. Lucas, Jr., said he had "plenty of suspicion, but little evidence" that uncertainty was holding back the recovery.

In this Economic Letter, we examine the economic effects of uncertainty using a statistical approach. We provide evidence that uncertainty harms economic activity, with effects similar to a decline in aggregate demand. The private sector responds to rising uncertainty by cutting back spending, leading to a rise in unemployment and reductions in both output and inflation. We also show that monetary policymakers typically try to mitigate uncertainty's adverse effects the same way they respond to a fall in aggregate demand, by lowering nominal short-term interest rates.

Our statistical model suggests that uncertainty has pushed the unemployment rate up at least one percentage point in the past three years. By contrast, uncertainty was not an important factor in the unemployment surge during the deep downturn of 1981–82. One possible reason why uncertainty has weighed more heavily on the economy in the recent recession and recovery is that monetary policy has been limited by the zero lower bound on nominal interest rates. Because nominal rates cannot go significantly lower than their current near-zero level, policy is less able to counteract uncertainty's negative economic effects.

The demand effects of uncertainty

We use data from the Thomson Reuters/University of Michigan Surveys of Consumers in the United States and the Confederation of British Industry (CBI) Industrial Trends Survey in the United Kingdom to measure the perceived uncertainty of consumers and businesses. Since 1978, the Michigan survey has polled respondents each month on whether they expect an "uncertain future" to affect their spending on durable goods, such as motor vehicles, over the coming year. Figure 1 plots the percentage of consumers who say they expect uncertainty to affect their spending. The figure also tracks the VIX index, a measure of the volatility of the Standard & Poor's 500 Index. The VIX index is a standard gauge of uncertainty in the economics literature (see Bloom 2009). The consumer uncertainty sample goes from January 1978 to November 2011, the latest month for which we have data. The VIX sample begins in January 1990 and ends in June 2012.

Figure 1
Consumers' perceived uncertainty and the VIX index

Consumers' perceived uncertainty and the VIX index

Sources: Thomson Reuters/University of Michigan Surveys of Consumers and Bloomberg.

Figure 1 shows that both the VIX index and consumer uncertainty are countercyclical, rising in recessions and falling in expansions. For example, both measures of uncertainty surged in 2008 and 2009 at the height of the global financial crisis. However, they do not always track each other. The 1997 East Asian financial crisis and the 1998 Russian debt crisis led to large spikes in the VIX, but did not have much impact on consumers' perceived uncertainty. It is possible that U.S. consumers paid less attention to financial developments in emerging markets during that period.

To study the macroeconomic effects of changes in uncertainty, we use a statistical model that includes consumers' perceived uncertainty, the unemployment rate, the inflation rate, and the three-month Treasury bill rate. We measure inflation as the 12-month percentage change in the consumer price index. All macroeconomic data are seasonally adjusted. The sample goes from January 1978 to November 2011, matching the Michigan survey sample.

Isolating the effects of uncertainty on the economy is difficult. As Figure 1 shows, uncertainty fluctuates with the business cycle, typically falling in expansions and rising in recessions. To identify the effects of uncertainty, we take advantage of the timing of the survey interviews relative to the timing of macroeconomic data releases (see Leduc and Sill 2010 and Leduc, Sill, and Stark 2007). For example, in the Michigan survey, telephone interviews in a given month are typically conducted before that month's macroeconomic data are released. Survey respondents do not have information about current macroeconomic conditions when they participate in the interviews. Therefore, movements in perceived uncertainty are probably not driven by concurrent economic conditions (see Leduc and Liu 2012).

We use the timing difference between the survey and data releases to build what might be thought of as a small statistical laboratory. This allows us to measure how, all else equal, an unexpected increase in uncertainty would affect unemployment, inflation, and the nominal interest rate. We compare the result with the situation in which there is no disturbance to uncertainty. As the effects of the unexpected increase in uncertainty propagate over time, we can measure how the three macroeconomic variables fare relative to the situation with no disturbance.

The three panels of Figure 2 show how an unexpected increase in the percentage of Michigan survey respondents reporting they expect uncertainty to alter their spending on durable goods affects the unemployment rate, the inflation rate, and the nominal interest rate. The solid lines represent the median responses of these variables to the increase in uncertainty. The shaded area in each panel represents a 90% probability range for the variable in question. The horizontal axes indicate the number of months after the initial increase in uncertainty. The vertical axes indicate percentage-point changes in the three variables compared with the situation with no disturbance.

Figure 2
Responses to a rise in uncertainty

A. Unemployment

A. Unemployment

B. Inflation

B. Inflation

C. Interest rate

C. Interest rate

Note: Effects to a one-standard-deviation unanticipated change in uncertainty, as measured from the Michigan survey.

Figure 2 reveals that an unexpected increase in consumers' perceived uncertainty raises the unemployment rate and pushes down the inflation rate. The unemployment rate reaches a peak in about 15 months and returns to its trend very slowly. It remains above the level with no disturbance for at least three years. Similarly, inflation reaches a trough in about 12 months. However, the effects on inflation appear to be less persistent. Meanwhile, the bottom panel of Figure 2 shows that the nominal Treasury bill rate falls persistently.

Overall, our statistical model suggests that an increase in uncertainty has effects similar to a fall in aggregate demand. The economy slows and inflation falls. Moreover, the decline in short-term interest rates is consistent with the easing of the stance of monetary policy that would prevail if policymakers try to mitigate the negative economic effects of increased uncertainty.

These effects of uncertainty are not unique to the United States. A similar dynamic is evident in the United Kingdom. In Britain, each quarter the CBI surveys roughly 1,000 businesses on whether uncertainty about demand for their products is limiting their capital expenditures. We measure the perceived uncertainty of these businesses by the fraction of survey respondents reporting that uncertainty is a limiting factor. The sample ranges from the fourth quarter of 1979 to the second quarter of 2011.

Although our U.S. measure of uncertainty is based on a consumer survey and our British measure on a business survey, the results are similar. In both cases, perceptions of uncertainty tend to rise in recessions and fall in expansions. Applying our statistical analysis to the CBI data, we see a similar pattern to that observed in the United States: higher perceived uncertainty is associated with higher unemployment, falling inflation, and lower short-term interest rates (see Leduc and Liu 2012 for details).

The finding that an unexpected increase in uncertainty acts like a decline in aggregate demand rather than a decline in aggregate supply has important policy implications. A fall in aggregate supply depresses economic activity and puts upward pressure on inflation. If the effects of an increase in uncertainty were similar to a fall in aggregate supply, policymakers would face a tradeoff between the goals of maximum employment and price stability. By contrast, if uncertainty acts like a fall in aggregate demand, policymakers face no such tradeoff. Easier monetary policy would mitigate the decline in output and restore price stability. Our findings suggest that monetary authorities in both the United States and Britain do in fact accommodate increased uncertainty by lowering nominal interest rates.

Uncertainty during the Great Recession and recovery

Major economic downturns usually involve important economic disruptions and generate far-reaching proposals for economic policy changes, which can increase uncertainty (see Baker, Bloom, and Davis 2012). The shifts in unemployment, inflation, and interest rates shown in Figure 2 are the consequences of a modest increase in consumers' perceived uncertainty. During the Great Recession, the increase in uncertainty appears to have been much greater in magnitude. To examine how much the increase in unemployment during the recession and recovery has been due to increased uncertainty, we extend our statistical approach. We calculate what would have happened to the unemployment rate if the economy had been buffeted by higher uncertainty alone, with no other disturbances. Our model estimates that uncertainty has pushed up the U.S. unemployment rate by between one and two percentage points since the start of the financial crisis in 2008. To put this in perspective, had there been no increase in uncertainty in the past four years, the unemployment rate would have been closer to 6% or 7% than to the 8% to 9% actually registered.

While uncertainty tends to rise in recessions, it's not the case that it always plays a major role in economic downturns. For instance, our statistical model suggests that uncertainty played essentially no role during the deep U.S. recession of 1981–82 and its following recovery. This is consistent with the view that monetary policy tightening played a more important role in that recession. By contrast, uncertainty may have deepened the recent recession and slowed the recovery because monetary policy has been constrained by the Fed's inability to lower nominal interest rates below zero (see Basu and Bundick 2011).

Conclusion

Heightened uncertainty lowers economic activity and inflation, and thus operates like a fall in aggregate demand. During the Great Recession and recovery, we estimate that higher uncertainty has boosted the unemployment rate by at least one percentage point. Policymakers typically try to mitigate uncertainty's adverse economic effects by lowering nominal interest rates. However, in the recession and recovery, nominal interest rates have been near zero and couldn't be lowered further. As a consequence, high uncertainty has been a greater drag on economic activity in the Great Recession and recovery than in previous recessions.


References

Baker, Scott. R., Nicholas Bloom, and Steven J. Davis. 2012. "Measuring Economic Policy Uncertainty." Stanford University working paper.

Basu,Susanto, and Brent Bundick. 2011. "Uncertainty Shocks in a Model of Effective Demand." Boston College working paper.

Bloom, Nicholas. 2009. "The Impact of Uncertainty Shocks." Econometrica 77(3), pp. 623–685.

Leduc, Sylvain, and Zheng Liu. 2012. "Uncertainty Shocks Are Aggregate Demand Shocks." FRB San Francisco Working Paper 2012-10.

Leduc, Sylvain, and Keith Sill.  2010. "Expectations and Economic Fluctuations: An Analysis Using Survey Data." FRB San Francisco Working Paper 2010-09, forthcoming in Review of Economics and Statistics.

Leduc, Sylvain, Keith Sill, and Tom Stark. 2007. "Self-Fulfilling Expectations and the Inflation of the 1970s: Evidence from the Livingston Survey." Journal of Monetary Economics 54(2), pp. 433–459.

Competition Will Not Reduce The Price Of Medicare

Posted: 18 Sep 2012 06:30 AM PDT

It wouldn't hurt to emphasize this point once again. Competition "won't give us cheap healthcare":

Why Competition Will Not Reduce The Price Of Medicare, Cheap Talk: Mitt Romney and Paul Ryan have proposed a plan to allow private firms to compete with Medicare to provide healthcare to retirees. Beginning in 2023, all retirees would get a payment from the federal government to choose either Medicare or a private plan. The contribution would be set at the second lowest bid made by any approved plan.
Competition has brought us cheap high definition TVs, personal computers and other electronic goods but it won't give us cheap healthcare. The healthcare market is complex because some individuals are more likely to require healthcare than others. The first point is that as firms target their plans to the healthy, competition is more likely to increase costs than lower them. David Cutler and Peter Orzag have made this argument. But there is a second point: the same factors that lead to higher healthcare costs also work against competition between Medicare and private plans. Unlike producers of HDTVs, private plans will not cut prices to attract more consumers so competition will not reduce the price of Medicare. A simple example exposes the logic of these two arguments. ...[gives example]...
But there is an additional effect. Traditional competitive analysis would predict that one private plan or another will undercut the other plans to get more sales and make more profits. This is the process that gives us cheap HDTVs. The hope is that similar price competition should reduce the costs of healthcare. Unfortunately, competition will not work in this way in the healthcare market because of adverse selection. ...[continues example]...
So, adverse selection prevents the kind of competition that lowers prices. The invisible hand of the market cannot reduce costs of provision by replacing the visible hand of the government.

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