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October 1, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

Romney's Misleading Attack on Social Insurance

Posted: 25 Sep 2012 03:33 AM PDT

I have a new column I hope you'll want to read:

Romney's Misleading Attack on Social Insurance

[I shoul dnote that the embedded links are, for the most part, added by the editors.]

'Kim Clausing on Signaling, Tax Return Disclosure, and Toads'

Posted: 25 Sep 2012 12:24 AM PDT

From the perspective of the economics of signaling, Mitt Romney is behaving like "an awfully small toad":

Romney's Tax Returns and The Economics of Signaling : Why Small Toads Still Croak, by Kimberly Clausing, Reed College: When toads compete for mates, they face important strategic decisions regarding whether to fight over mates or continue searching. Wanting to take on smaller rivals and avoid larger ones, toads gauge the wisdom of fighting each other in part by hearing each others' croaks. Deep croaks belong to larger toads since toad vocal cord length is associated with toad size. This raises a puzzle, though, for one might think larger toads would croak and smaller toads would stay quiet, yet most toads tend to croak, whether or not their voice is deep.

The economics of signaling can help explain this puzzle. As soon as the largest toads croak, that gives the next largest toads an incentive to croak since otherwise they'd be assumed to be the average size of the remaining pool of toads. Once somewhat large toads croak, medium sized toads have an incentive to croak lest they be assumed smallish, and the situation unravels until nearly all toads are croaking.

This situation is a useful example of the full disclosure principle at work. As long as some individuals benefit from revealing beneficial characteristics of themselves, others are forced to disclose their less stellar characteristics, lest they be assumed to be a representative member of the remaining pool. ...

Candidates for office have long shared many years of tax returns in order to allay citizen concerns... Yet Mitt Romney steadfastly refuses to provide the public with more than two years of tax returns.

How are we to understand this refusal? Does Romney think that his tax returns are so bad that disclosure is really worse than nondisclosure, even knowing that the public must be assuming that there is something unpleasant in there? ...
 If Romney is a rational strategist, surely he would release the returns unless he thought there was something in there that was genuinely worse than what we are already assuming. In the case of animal behavior, that would make Romney an awfully small toad.

Links for 09-25-2012

Posted: 25 Sep 2012 12:06 AM PDT

What's Romney's Problem?

Posted: 24 Sep 2012 07:11 PM PDT

Reminiscent of the signal extraction problem in the Lucas Island model, how much of the difficulty Romney is having is due to Mitt in particular, and how much is due to dislike of the GOP more generally? Robert Reich says it's mostly that people are "beginning to see how radical the GOP has become," but personally, I'd have to give at least partial credit to Mitt Gaffe-a-Day Romney and his sidekick Paul Marathon-Man Ryan:

The Two Major Views About Why Romney is Losing, and Why the Second is More Convincing, by Robert Reich: ... There are two major theories about why Romney is dropping in the polls. One is Romney is a lousy candidate, unable to connect with people or make his case. The second is that Americans are finally beginning to see how radical the GOP has become, and are repudiating it.
Many Republicans ... hold to the first view, for obvious reasons. If Romney fails to make a comeback this week, I expect even more complaints from this crowd about Romney's personal failings, as well as the inadequacies of his campaign staff. 
But the second explanation strikes me as more compelling. The Republican primaries, and then the Republican convention, have shown America a party far removed from the "compassionate conservatism" the GOP tried to sell in 2000. Instead, we have a party that's been taken over by Tea Partiers, nativists, social Darwinists, homophobes, right-wing evangelicals, and a few rich people whose only interest is to become even wealthier. ...
The second view about Romney's decline also explains the "negative coat-tail" effect — why so many Republicans around the country in Senate and House races are falling behind. ...
Romney's failing isn't that he's a bad candidate. To the contrary, he's giving this GOP exactly what it wants in a candidate. And that's exactly the problem for Romney — as it is for every other Republican candidate — because what the GOP wants is not at all what the rest of America wants.

Fed Watch: Excuses Not To Do More

Posted: 24 Sep 2012 12:03 PM PDT

Tim Duy:

Excuses Not To Do More, by Tim Duy: Josh Lehner (via CR) reviews some of his earlier work on the Reinhart and Rogoff results and concludes:

...when the Great Recession is compared not to other U.S. cycles but to the Big 5 financial crises and the U.S. Great Depression (thanks to U.S. Treasury for adding that to the graph), the current cycle actually compares pretty favorably. This is likely due to the coordinated global response to the immediate crises in late 2008 and early 2009. While the initial path of both the global and U.S. economies in 2008 and 2009 effectively matched the early years of the Great Depression – or worse – the strong policy response employed by nearly all major economies – both monetary and fiscal – helped stop the economic free fall.

This is worth highlighting because of the eagerness of policymakers to embrace Reinhart and Rogoff as an excuse to avoid fiscal and monetary policy. For instance, see St. Louis Federal Reserve President James Bullard in the Financial Times:

Some may argue that real output and employment in the US have not returned to the pre-crisis, bubble-induced path that seemed to prevail in the mid-2000s. Indeed, US employment is about 4.7m lower than at its peak in January 2008. But this is to be expected. Recoveries in the aftermath of financial crises tend to be especially protracted, as the work of Carmen Reinhart and Kenneth Rogoff has documented.

Bullard sees Reinhart and Rogoff as an excuse to do nothing. After all, why even try when history has proved the long-lasting impact of financial crises? Bullard completely misses the alternative argument - that if financial crises are long-lasting, then the policy response needs to be more aggressive. As Lehner points out, aggressive policy response can mitigate the impact of the crisis. Bullard should read Reinhart and Rogoff as a demand to do more, not an excuse to do less.

Indeed, Reinhart and Rogoff have said as much. Via Ezra Klein:

...if you look at the leaked memo that the Obama administration was using when they constructed their stimulus, you'll find, on page 10 and 11, a list of prominent economists the administration consulted as to the proper size for the stimulus package. And there, on page 11, is Rogoff, with a recommendation of "$1 trillion over two years" — which is actually larger than the American Recovery and Reinvestment Act. So if they'd been following Rogoff's advice, the initial stimulus would have been even bigger — not nonexistent.

As for Reinhart, I asked her about this for a retrospective I did on the Obama administration's economic policy. "The initial policy of monetary and fiscal stimulus really made a huge difference," she told me. "I would tattoo that on my forehead. The output decline we had was peanuts compared to the output decline we would otherwise have had in a crisis like this. That isn't fully appreciated."

Bullard also argues against a higher inflation target:

To argue against monotonic convergence now would imply that when unemployment is above the natural rate, monetary policy should aim for inflation above the Fed's 2 per cent target. On the face of it, this does not make sense: the US has experienced periods when both inflation and unemployment have been above desirable levels. In the 1970s this phenomenon was labelled stagflation. Monetary policy has been regarded as poor during that period.

Scott Sumner already identified the sad mistake Bullard makes here. Essentially, Bullard has a limited sense of history - he knows of only two possible monetary equilibriums, one with 2% inflation and low unemployment, the other with infinite inflation and high unemployment. What about the Great Recession? Couldn't current monetary policy, with below target inflation and above target unemployment, also be regarded as poor? And isn't that the situation we are in now, as Bullard himself admits?

What does Rogoff have to say about the 2% inflation target? From the FT last year:

If direct approaches to debt reduction are ruled out by political obstacles, there is still the option of trying to achieve some modest deleveraging through moderate inflation of, say, 4 to 6 per cent for several years. Any inflation above 2 per cent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures.

And more recently:

...many (if not necessarily all) central banks will eventually figure out how to generate higher inflation expectations. They will be driven to tolerate higher inflation as a means of forcing investors into real assets, to accelerate deleveraging, and as a mechanism for facilitating downward adjustment in real wages and home prices.

Rogoff apparently does not take his research to imply that policymakers should give up. And he explicitly identifies higher inflation targets as a potential tool. Yet Bullard (like most of the Fed) is married to the 2% target without any consideration that the appropriate inflation target may vary across time and economies, and he essentially cites Rogoff as a reason to justify this position. You can't do more, so why try?

Bottom Line: Policy is effective even in the aftermath of a financial crisis. Don't let policymakers fool you into believing otherwise.

Update: I notice some Twitter chatter of surprise that Rogoff was not completely opposed to fiscal stimulus (I thought everyone read Ezra Klein). Some additional quotes from the FT would be helpful:

At the root of today's credibility deficit is a failure to come to grips with the long, slow growth period that is typical of post-financial crisis recovery...By far the main problem is a huge overhang of debt that creates headwinds to faster normalisation of post-crisis growth – that is why post-financial crisis growth is typically very slow...It is far from clear that any huge temporary fiscal stimulus will rev up the engine enough to achieve self-sustaining growth...The most direct remedy, of course, would be to find expeditious approaches to cleaning up balance sheets whilst maintaining the integrity of the financial system...If direct approaches to debt reduction are ruled out by political obstacles, there is still the option of trying to achieve some modest deleveraging through moderate inflation of, say, 4 to 6 per cent for several years.

I think the story here is that fiscal stimulus is only a temporary measure, not a long-run solution. The long-run solution is dealing with the debt overhang, which can be addressed with more aggressive monetary policy.

Nobody Pays Attention to the Working Class

Posted: 24 Sep 2012 11:34 AM PDT

Not having much luck finding new things to post or talk about -- while I continue to look here's an echo of a Brad DeLong echo of John Sides:

John Sides: There Is No White Working Class. There Is a Southern White Working Class and a Rest-of-the-Country White Working Class, and Nobody Pays Attention to Either: John Sides on the centrality of race in this sliver of the electorate:

Puncturing Myths about the White Working Class: A new survey… is a valuable corrective…. For example, consider this:

In mid-August, Romney held a commanding 40-point lead over Obama among white working-class voters in the South (62% vs. 22%). However, neither candidate held a statistically significant lead among white working-class voters in the West (46% Romney vs. 41% Obama), Northeast (42% Romney vs. 38% Obama), or the Midwest (36% Romney vs. 44% Obama)….

In my experience, the white working class gets a ton of attention, especially when elections come around…. But when we discuss the white working class during elections, another fact rarely raises its head: the enormous inequalities in political voice that arguably marginalize the white working class when it comes to policy-making…. [O]nly the views of the upper class appear to affect whether policies are enacted in law. So the problem isn't that the white working class is trending Republican or that it votes against its economic interests or that it's being hoodwinked by social issues.  The the problem is that no matter what the white working class thinks, no one is listening.

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