Posted: 23 Sep 2012 12:06 AM PDT
Posted: 22 Sep 2012 11:24 AM PDT
Time to Japanic?, by Noah Smith: The Atlantic has a big story on the impending Japanese crash; one of the authors is the brilliant Simon Johnson. ...
This prophecy is hardly unique; I have beaten this drum myself. If Japan doesn't change course, it will have a major crisis within the next decade.
If. But what people need to understand is, the Japanese government does have the power to avert a crisis. It is not inevitable.
There is one way that the crisis can definitely be averted: Raise taxes. Japan's fiscal woes can be boiled down to one sentence: Japan has European levels social spending and European levels of aging with American levels of taxation. But this could change; if Japan raised taxes to European levels, crisis would be instantly averted. According to analyses I've seen, this would require raising Japan's taxes from their current level of 32.5% of GDP to somewhere between 40% and 50% of GDP. That's comparable to France or Sweden. Painful, but not impossible.
Now for the rumor (rumor always being a large component in Western analyses of Japan). My sources at the Bank of Japan and Ministry of Finance tell me that domestic Japanese investors are betting that, after all the grumbling and fighting and ending of political careers, Japan's government will suck it up and raise taxes. This, my shadowy sources say, is why pension funds are still willing to put the Japanese people's money into JGBs.
But this story is not really outlandish. It's similar to what we're observing in America right now. U.S. borrowing is at all-time highs, but demand for Treasuries shows no sign of flagging, and most of that demand - more than in the past - is from domestic U.S. investors. Yes, we have shown a reluctance to raise taxes - witness the apocalyptic debt ceiling fight from last year. But if the public really thought the U.S. government was willing to default, domestic Treasury buyers would be heading for the exits. That they are not heading for the exits probably indicates that they believe that when push comes to shove, the U.S. government will suck it up and raise taxes. There are signs that the Republicans are quietly recognizing the necessity of this. At this point, it's just a fight between Democrats and Republicans to see who takes the fall for raising taxes - that's what the "fiscal cliff" is really all about.
Japan seems to be in a similar situation. It is not really unusual or outlandish at all. Everyone in the country still seems to believe that the government will continue to function. The day that that that belief falters - or is proven wrong by main force, when interest payments swamp the primary budget - is the day that Japan collapses (the same goes for the U.S.). But if Japan's government is less dysfunctional than the often skittish Western press believes, that day will never come.
(Anyway...oh yeah, I did mention that there might be two ways out of Japan's fiscal trap, didn't I? The other way is to use monetary policy to create negative interest rates. If that can be done in a stable way (without accelerating inflation) and if stable growth persists, then Japan can use an "inflation tax" to erode the value of its government debt instead of an actual tax. Econ bloggers (and commenters), who tend to believe that central banks can hit any NGDP target they want, will probably advocate this "solution"...)
Posted: 22 Sep 2012 09:25 AM PDT
In macroeconomic models, if everything works perfectly -- if all markets clear at all points in time, prices are fully and instantaneously flexible, people have the information they need, and so on -- then monetary policy will have no affect on real variables such as output and employment. Only nominal variables such as the price level will change. This is known as monetary neutrality.
In order to get non-neutrality, i.e. in order to make it so that changes in the money supply can change real output and employment in a theoretical model, there must be a friction of some sort. One popular friction is price/wage rigidity, but it is not the only type of friction that can generate non-neutralities. Any friction that prevents optimal and instantaneous response to a shock will overcome neutrality and restore the ability of the Fed to affect the course of the real economy.
The point I want to emphasize is that the optimal monetary policy rule depends upon the underlying friction that is being used to generate non-neutralities in the theoretical model. For example, Calvo type price rigidity combined with some sort of social objective function such as maximizing the welfare of the representative household often gives you something that resembles the standard Taylor rule (though whether the level and/or the growth rates of price and output belong on the right-hand side of the Taylor rule depends upon the nature of the friction, i.e. even in this case the standard Taylor rule may not be the optimal rule).
I am willing to believe that during the Great Moderation the standard Taylor rule may have at least been close to the optimal rule. If you believe price frictions were the source of the mild fluctuations we had during that time, then theory tells us that's possible. What puzzles me is why people think the same rule should work now. I don't think that Calvo type price rigidities are the reason for the problems we are having right now, and hence this does not give us much insight and explanatory power for the Great Recession. Mild price sluggishness is plainly and simply not the dominant friction at work right now, and if that is the case, why would we think the same monetary policy rule should be optimal? If, in fact, there has been a switch in the dominant type of friction affecting the economy -- and I would argue there has been -- it would be quite remarkable for the same monetary policy rule to be optimal in both situations.
So, I have to agree with Paul Krugman:
Self-contradictory Fed Bashing: David Glasner continues to be unhappy with the Bernanke/QE bashers, this time going after claims that the Fed's monetary policy was too easy before the crisis.
Much of this discussion is couched in terms of the Taylor Rule, which John Taylor originally suggested — a rule that sets the Fed funds rate based on inflation and either unemployment or some measure of the output gap. This was a clever idea, and has proved useful as a rule of thumb for both description and prediction. But a funny thing happened on the way to the crisis: Taylor and others have elevated this rule to sacred status — and not only that: they have insisted that the original coefficients Taylor suggested, which he basically pulled out of, um, thin air, are sacrosanct.
Surely this is silly. ...
Krugman is not making the argument that the nature of the friction has changed and therefore the optimal rule should change as well. That's my argument so blame me, not him. But the idea that the Taylor rule should have "sacred status" is "silly," and I don't understand why Taylor and others insist that the coefficients of the rule -- let alone the rule itself -- are optimal always and everywhere (there may be a robustness argument -- this is the best possible rule in the face of model uncertainty -- but that's not the argument being made).
September 23, 2012
September 22, 2012
- Paul Krugman: Disdain for Workers
- Links for 09-21-2012
- Is Europe Saved?
- Fed Watch: Getting Lonely to be a Hawk
- Kocherlakota: Planning for Liftoff
- 'Mitt and the Moochers'
Posted: 21 Sep 2012 12:33 AM PDT
Today's GOP doesn't have much respect for workers:
Disdain for Workers, by Paul Krugman, Commentary, NY Times: By now everyone knows how Mitt Romney, speaking to donors in Boca Raton, washed his hands of almost half the country — the 47 percent who don't pay income taxes... By now, also, many people are aware that the great bulk of the 47 percent are hardly moochers; most are working families who pay payroll taxes, and elderly or disabled Americans make up a majority of the rest.
But here's the question: Should we imagine that Mr. Romney and his party would think better of the 47 percent on learning that the great majority of them actually are or were hard workers, who very much have taken personal responsibility for their lives? And the answer is no.
For ... the modern Republican Party just doesn't have much respect for people who work for other people... All the party's affection is reserved for "job creators," a k a employers and investors. ...
Am I exaggerating? Consider the Twitter message sent out by Eric Cantor, the Republican House majority leader, on Labor Day...: "Today, we celebrate those who have taken a risk, worked hard, built a business and earned their own success." Yes, on a day set aside to honor workers, all Mr. Cantor could bring himself to do was praise their bosses.
Lest you think that this was just a personal slip, consider Mr. Romney's acceptance speech at the Republican National Convention. What did he have to say about American workers? Actually, nothing...
Where does this disdain for workers come from? Some of it, obviously, reflects the influence of money in politics... But it also reflects the extent to which the G.O.P. has been taken over by an Ayn Rand-type vision of society, in which a handful of heroic businessmen are responsible for all economic good, while the rest of us are just along for the ride.
In the eyes of those who share this vision, the wealthy deserve special treatment, and not just in the form of low taxes. They must also receive respect, indeed deference, at all times. That's why even the slightest hint from the president that the rich might not be all that — that, say, some bankers may have behaved badly, or that even "job creators" depend on government-built infrastructure — elicits frantic cries that Mr. Obama is a socialist. ...
The point is that ... the Boca Moment wasn't some trivial gaffe. It was a window into the true attitudes of what has become a party of the wealthy, by the wealthy, and for the wealthy, a party that considers the rest of us unworthy of even a pretense of respect.
Posted: 21 Sep 2012 12:06 AM PDT
Posted: 20 Sep 2012 07:14 PM PDT
Acemoglu and Robinson argue Europe's troubles aren't over yet:
Is Europe Saved?, by Daron Acemoglu and James Robinson: September has been a good month for the euro-zone. ... So is Europe saved?
We think not. The problems underlying the European crisis were institutional. What we are seeing now are mostly short-term fixes, not true solutions to these institutional problems.
The roots of the crisis lie in the difficulty of operating a currency union without centralized fiscal authority. ... For the euro to survive and contribute to European economic prosperity in the medium term, Europe needs to follow the example of the United States as it transitioned from the Articles of Confederation of 1781 to the U.S. Constitution, which entailed strengthening the currency union with debt renegotiation (with the federal government assuming state liabilities) and more importantly, meaningful fiscal centralization.
And yet, there is no realistic plan for true fiscal centralization in Europe..., [which] means a European organization with the power to set taxes and harmonize labor, product and credit market institutions. But this is not possible without some centralization of political and military power. It was crucial that with the U.S. Constitution, political and military power shifted to the federal government.
This is not on the cards for Europe... So for the time being, we have to make do with short-term fixes, and in all likelihood, Europe isn't saved just yet.
Posted: 20 Sep 2012 05:24 PM PDT
Posted: 20 Sep 2012 01:08 PM PDT
[This is a pretend interview with Narayana Kocherlakota based on his speech today, Planning for Liftoff, laying out an exit strategy for the Fed.]
Hi. Good to see you again. What are you going to say in your speech?
In my remarks today, I'll briefly discuss the objectives of the Federal Open Market Committee, or FOMC, which is the monetary policymaking arm of the Federal Reserve. Next, I'll present a pictorial review of the evolution of macroeconomic data over the past five years.
With that background, I will then turn to a discussion of monetary policy. My jumping-off point is a phrase in the FOMC statement issued last Thursday. In that statement, the Committee said that it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens." My main message today is that the FOMC can provide additional monetary stimulus by making this sentence more precise in the form of what I'm going to call a liftoff plan: a description of the economic conditions that would lead the Committee to contemplate the initial increase in the fed funds rate above its currently extraordinarily low level.2
So if I understand correctly, now that the Fed has eased further -- something I would not have expected you to support given your past remarks -- your main goal is to be clear about how soon the Fed can begin reversing policy? Your goal is to clarify the exit strategy?
The price stability part seems to be a bit of a catch. This appears to say that the Fed will only continue with stimulative policy so long as it is not worried about inflation. That doesn't seem much different from current policy, except it's dressed up with a few numbers and some bolded text. What's new here?
I'll be much more precise later about the meaning of the phrase "satisfies its price stability mandate." Briefly, though, I mean that longer-term inflation expectations are stable and that the Committee's medium-term outlook for the annual inflation rate is within a quarter of a percentage point of its target of 2 percent. The substance of this liftoff plan is that, as long as longer-term inflation expectations remain stable, the Committee will not raise the fed funds rate unless the medium-term outlook for the inflation rate exceeds a threshold value of 2 1/4 percent or the unemployment rate falls below a threshold value of 5.5 percent.
Wait a minute. I asked you very specifically last spring why the Fed had an asymmetric aversion to inflation -- there seems to be much more tolerance of inflation below target than inflation above target. In fact, 2 percent inflation looks more like a hard ceiling for than a central value. At that time, you insisted that the Fed had a symmetric tolerance -- it was just as willing to tolerate inflation above target as below. Now you're telling us a hard ceiling of 2.25 percent is needed? How is that consistent with the symmetry you claimed in the past?
Note that neither of these thresholds should be viewed as triggers—that is, once the relevant cutoffs are crossed, the Committee retains the option of either keeping the fed funds rate extraordinarily low or raising the fed funds rate.
Thus, my proposed liftoff plan contains a specific definition of the phrase "a considerable time after the economic recovery strengthens." In my talk, I will argue that this specificity—about an event that may not take place for four or more years—will provide needed current stimulus to the economy.I'll listen closely when you get to that part. But can you explain a bit more now?
A key question is: How much leeway around 2 percent is appropriate?
The Committee has made no formal decision about this issue, and my own thinking continues to evolve. But I currently believe that allowing the medium-term outlook for inflation to deviate from 2 percent by a quarter of a percentage point in either direction would provide sufficient flexibility to the Committee, while posing no threat to the credibility of the long-run target. I'll provide more details on my thinking about this issue later in the talk.
To sum up, the FOMC defines its price stability mandate as a 2 percent inflation target over the longer run. When operationalizing this definition, though, it is necessary to take into account the lags associated with monetary policy and to allow for some medium-term flexibility around the long-run target. Given these considerations, in my view, the FOMC can be said to be satisfying its price stability mandate as long as its medium-term outlook for inflation is between 1 3/4 percent and 2 1/4 percent, and longer-term inflation expectations remain stable.
So you basically have a hard 2 percent target, and only allow tolerance around that due to technical constraints that prevent tighter bounds? I suspect some people are going to think you have increased your tolerance for inflation, but you really haven't, have you?
Let's talk a bit more about your "liftoff" plan. Can you summarize how it works?
I think that it is safe to say that, relative to historical norms, the current stance of monetary policy is quite unusual. In June 2011, the FOMC released a statement describing its exit strategy—that is, the sequence of steps involved in returning monetary policy to a more normal stance. However, that 2011 statement said nothing about the conditions that would trigger the initiation of this exit strategy. This omission is problematic. The current economic impact of both forms of accommodation—low interest rates and asset purchases—depends on when the public believes that accommodation will be removed.
To understand this critical point, consider two possible scenarios. In the first, the public believes that the FOMC will initiate liftoff once the unemployment rate hits 7 percent. In the second, the public believes that the FOMC will defer initiation of liftoff until the unemployment rate hits 6 percent. The higher unemployment rate in the first scenario means that monetary policy will be tightened sooner, which, in turn, will lead to the unemployment rate being higher for longer. Foreseeing that, people will save more in the first scenario than in the second, to protect themselves against these higher unemployment risks. Because they save more, they spend less, and there is less economic activity. In other words, the FOMC can provide more current stimulus if people believe that liftoff will be triggered by a lower unemployment rate.
So what is the specific plan?
The proposed plan is the following:
As long as the FOMC is continuing to satisfy its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent.
As discussed earlier, by "satisfy its price stability mandate," I mean that longer-term inflation expectations are stable, and the Committee's outlook is that the annual inflation rate in two years will be within a quarter of a percentage point of the target inflation rate of 2 percent.
Why so much sensitivity to inflation? Why not, say, a 3 percent threshold instead?
Why is this liftoff plan an appropriate one? I argued earlier that the FOMC can provide more current stimulus by using a lower unemployment rate threshold for liftoff. Of course, additional monetary stimulus will give rise to more inflationary pressures, and those pressures are problematic because they could lead the FOMC to violate its price stability mandate. However, in my view, the Committee should choose the lowest unemployment rate threshold that it sees as unlikely to generate a violation of the price stability mandate.
This seems far too sensitive to inflation to me. Why such a low tolerance?
The proposed liftoff plan does allow the FOMC to contemplate raising the fed funds rate if the Committee's medium-term inflation outlook rises above 2 1/4 percent. However, the following chart shows that recent historical evidence suggests that this possibility is unlikely to occur. It documents that the medium-term inflation outlook has not risen above 2 1/4 percent in the last 15 years.6 Thus, this historical evidence suggests that, as long as the unemployment rate remains above 5.5 percent, it seems unlikely that the price stability mandate would be violated.
I'm not asking about the likelihood of inflation rising above 2.25 percent, I'm asking why you have such intolerant bonds on the inflation rate.
The liftoff plan does not say that the Committee will raise the fed funds rate when the medium-term inflation outlook exceeds 2 1/4 percent—only that it could. The Committee's decision in this context would hinge on a delicate cost-benefit calculation that would weigh the inflation increases against the employment gains. That policy conversation would, I conjecture, be a challenging one. Among other issues, it could well involve a reassessment of the long-run unemployment rate that is consistent with 2 percent inflation.7
So your policy, in a nutshell, is that the Fed should be accommodative, but if inflation rises above 2.25 percent, or threatens to do so, the Fed should have a serious talk?
In the same vein, the unemployment rate of 5.5 percent should be viewed as only a threshold to initiate a policy conversation, not as a trigger for action. For example, it is possible that macroeconomic shocks could lead the Committee's medium-term outlook for inflation to be below 2 percent when the unemployment rate falls below 5.5 percent. At that point, the Committee might want to defer initiating exit, and the liftoff plan allows the Committee to consider doing so.
One thing I don't understand, how is this supposed to work if you won't allow inflation to rise above 2.25 percent -- basically the minimum technical tolerance associated with a hard 2 percent medium run target?
I want to be clear about the economic mechanism by which the proposed liftoff plan generates stimulus. First, it does not generate stimulus by having the FOMC tolerate higher rates of inflation, as has been espoused by many observers. I am doubtful about the efficacy of the inflation-based approach. I suspect that many households would believe that their wage increases would not keep up with the higher anticipated inflation rates. Those households would save more and spend less—exactly the opposite of the policy's aim. In any event, I think that this approach is a risky one for central banks to use, because it requires them to raise inflation expectations—but not too much.
Thus, the liftoff plan that I've discussed only applies when the FOMC satisfies its price stability mandate. How then does the proposed liftoff plan generate stimulus? The plan recommends that the FOMC clearly communicate its intention to pursue policies that are fully supportive of much higher levels of economic activity. Thus, the plan commits to keeping the fed funds rate extraordinarily low until the unemployment rate is much nearer historical norms, as long as inflation remains under control. With that commitment, households can anticipate a lower path for unemployment, and they can save less to guard against the risk of job loss. People will spend more today, and that will drive up economic activity.8
So because it might end up as too much inflation, your answer is none at all? You're saying that some inflation would, in fact be useful, but one is too many and a hundred not enough? One taste of inflation, and it rips out of control? I have more faith in you and your colleagues than that. The Fed can allow inflation to, say, go to three percent without risking that it spirals out of control, I think, but you don't seem to have much faith in your colleagues.
You are likely to get a lot of credit for dropping your inflation hawkery, but I don't see it. The target is still 2% + min possible error of .25 percent, so I don't see that you've loosened much at all relative to the past (and even if the "min possible error" interpretation is incorrect, plus or minus .25 percent is hardly the definition of tolerant). You certainly have not embraced a transmission mechanism for policy that runs through elevated inflation expectations, the way most economists think these policies work. How would you respond to that?
I've spent much of my time describing what I see as an appropriate liftoff plan. I've proposed that, given current Committee thinking about the economy's productive capacity, the Committee should plan on deferring exit until the unemployment rate falls below 5.5 percent. Critically, there are important inflation safeguards embedded in the plan: The Committee could consider initiating liftoff if its medium-term inflation outlook ever exceeds 2 1/4 percent. The evidence from the past 15 years suggests that this event is unlikely to occur.
President Charles Evans of the Federal Reserve Bank of Chicago has also proposed what I'm calling a liftoff plan. As I said last year in answer to a media query, I very much liked his approach to thinking about the problem. Those familiar with his plan will see that my thinking has been greatly influenced by his. This is perhaps hardly surprising, since he sits next to me at every FOMC meeting!
My building on President Evans' creative proposal in this fashion is, I think, indicative of how the Federal Open Market Committee operates. The making of monetary policy under Chairman Ben Bernanke's leadership is a distinctly collaborative process. Obviously, we don't always agree with one another. It would be surprising if we did in such unusual economic conditions. But we learn continually from each other's points of view. In that way, I believe that we can start to make progress on the challenging economic problems we face.
I hope you continue to sit by Evans, I sat by him not too long ago at a conference and I learned from him as well. You are still a ways from him -- you remain far more hawkish than he is, at least in my assessment -- but maybe, just maybe your views will continue to evolve towards his. One last thing. I know Jim Bullard respects you a lot, can you bring him along as well?
Perhaps not, but in any case, thanks for allowing me pretend I'm interviewing you.
Update: After posting this, I tweeted:
Pushback on previous post: Significance of Kockerlakota's speech is his changed view of structural vs. cyclical unemployment, not inflation.
Couldn't ask about that in pretend interview since he didn't say much about it in his speech.
But not so sure he's changed his mind, though he has allowed for the chance he's wrong. If it is structural, inflation will rise above 2.25 ... as QE proceeds, and he'll favor tightening even if unemployment > 5.5%. Only difference I see is that he isn't insisting it's structural ... as he was before. Perhaps the paper by Lazear at Jackson Hole raised some doubt.
Posted: 20 Sep 2012 08:21 AM PDT
A quick one as I run off to a meeting. This is Simon Johnson taking on big banks once again:
Mitt and the Moochers, by Simon Johnson, Project Syndicate: The Republican Party has some potentially winning themes for America's presidential and congressional elections in November. Americans have long been skeptical of government...
But Republican presidential candidate Mitt Romney and other leading members of his party have played these cards completely wrong in this election cycle. Romney is apparently taken with the idea that many Americans, the so-called 47%, do not pay federal income tax. He believes that they view themselves as "victims" and have become "dependent" on the government.
But this misses two obvious points. First, most of the 47% pay a great deal of tax on their earnings, property, and goods purchased. They also work hard to make a living in a country where median household income has declined to a level last seen in the mid-1990's.
Second, the really big subsidies in modern America flow to a part of its financial elite – the privileged few who are in charge of the biggest firms on Wall Street. ...
Former Utah Governor and Republican presidential candidate Jon Huntsman addressed this issue clearly and repeatedly as he sought – unsuccessfully – to win his party's nomination to challenge President Barack Obama. Force the banks to break up, he argued, in order to cut off their subsidies. Make these financial institutions small enough and simple enough to fail – then let the market decide which of them should sink or swim.
That is an argument around which all conservatives should be able to rally. After all, the emergence of global megabanks was not a market outcome; these banks are government-sponsored and subsidized enterprises, propped up by taxpayers. (This is as true in Europe today as it is in the US.)
Romney is right to raise the issue of subsidies, but he badly misstates what has happened in the US during the last four years. The big, nontransparent, and dangerous subsidies are off-budget, contingent liabilities generated by government support for too-big-to-fail financial institutions. These subsidies do not appear in any annual appropriation, and they are not well measured by the government – which is part of what makes them so appealing to the big banks and so damaging to everyone else.
If only Romney had turned popular disdain for subsidies against the global megabanks, he would now be coasting into the White House. Instead, by going after the hard-pressed 47% of America – the very people who have been hurt the most by reckless bank behavior – his prospect of victory in November has been severely damaged.
- On the 'Austrian' Hatred of Fractional Reserve Banking
- Links for 09-20-2012
- Fed Watch: Fisher Turns to Fear Mongering
- Fed Watch: Hawks Are Marginalized
Posted: 20 Sep 2012 12:10 AM PDT
Brad Delong on Ludwig von Mises:
Posted: 20 Sep 2012 12:06 AM PDT
Posted: 19 Sep 2012 05:17 PM PDT
Another one from Tim Duy:
Posted: 19 Sep 2012 10:39 AM PDT
The hawks are all bark, no bite. They are more than overwhelmed by dovish-leaning policymakers, even if Bullard joins Kansas City Federal Reserve President Esther George in hawkish dissent. What remains important heading into 2013 (aside from the data, of course), is Federal Reserve Chairman Ben Bernanke. He can pull the moderates where he wants to go. And it obviously is not in a hawkish direction.
- Links for 09-22-2012
- 'Primetime Fox News And WSJ Editorial Climate Coverage Mostly Wrong'
- 'This Dynamic All But Guarantees a Permanent Underclass'
Posted: 22 Sep 2012 12:06 AM PDT
Posted: 21 Sep 2012 05:27 PM PDT
Climate scientists document News Corporation's distortions on climate change:
Brenda Ekwurzel is a climate scientist with the Union of Concerned Scientists. She announced in New York City on September 21st the results of an analysis of climate change coverage at two major properties of the News Corporation, the Fox News Channel and the Wall Street Journal.
"What we found in our analysis was that a staggering 93 percent of all occurrences in the last six months in the prime time news of Fox News were misleading occurrences of climate science. Okay, for the Wall Street Journal opinion section in the last year, we found a surprising 81 percent of the occurrences were misleading. And of the accurate ones, these were all letters to the editor that were submitted in response to misrepresentations in editorials or other letters. So, a broad swath of News Corporation viewers and readership are being misled about the science."
Posted: 21 Sep 2012 12:06 PM PDT
Posted: 21 Sep 2012 10:08 AM PDT
- Frankel: Mitt Romney Rejects His Natural Voters
- Alan Greenspan's 'Gold and Economic Freedom'
- The Case for More Monetary Accommodation
- Links for 09-19-2012
- Who Receives 'the Disproportionate Share of Government Spending'?
- 'How to Cut the US Deficit'
- FRBSF Economic Letter: Uncertainty, Unemployment, and Inflation
- Competition Will Not Reduce The Price Of Medicare
Posted: 19 Sep 2012 12:33 AM PDT
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.
Posted: 19 Sep 2012 12:24 AM PDT
Stephen Williamson discovers Alan Greespan's Randian roots:
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. 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.
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.
Posted: 19 Sep 2012 12:06 AM PDT
Posted: 18 Sep 2012 04:34 PM PDT
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.
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. ...
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.)
Sources: Thomson Reuters/University of Michigan Surveys of Consumers and Bloomberg.
C. Interest rate
Note: Effects to a one-standard-deviation unanticipated change in uncertainty, as measured from the Michigan survey.
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.