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October 21, 2012

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Posted: 21 Oct 2012 12:06 AM PDT

Romer: The Fiscal Stimulus, Flawed but Valuable

Posted: 20 Oct 2012 02:58 PM PDT

Christina Romer:

The Fiscal Stimulus, Flawed but Valuable, by Christina Romer, Commentary, NY Times: As a former member of President Obama's economic team, I have a soft spot for the fiscal stimulus legislation... But I'm also an empirical economist who's spent a career trying to estimate the effects of monetary and fiscal policy. So let me put on my empiricist's hat and evaluate what we know about the legislation's effects. ...

After going through the considerable historical and empirical evidence that the fiscal stimulus worked, she concludes:

Though the Recovery Act appears to have had many benefits, it could have been more effective. Most obviously, it was too small. When we were designing it, most forecasters estimated that the United States would lose around six million jobs... Compared with this baseline, creating three million jobs would have filled roughly half of the employment hole. As it turned out,... the correct no-stimulus baseline was a total employment fall of nearly 12 million. With a loss that big, creating three million jobs was helpful, but not nearly enough.

A different mix of spending increases and tax cuts might also have been desirable. ... And I desperately wish we'd been able to design a public employment program that could have directly hired many unemployed workers, especially young people.

Finally, there's little question that policy makers — myself included — should have worked harder to earn the public's support... One frustrating anomaly is that many of its individual components routinely received favorable reactions in polls, while the overall act was viewed negatively. ...

Recovery measures work better when they raise confidence — as Franklin D. Roosevelt understood. ... Recent research suggests that New Deal programs may actually have had their primary impact on the economy by influencing consumer and business expectations of future growth and inflation.

Partly because of fierce political opposition, and partly because of ineffective communication and imperfect design, the Recovery Act generated little such rebound in confidence. As a result, it didn't have that extra, Rooseveltian kick. ...

I believe that as more research occurs and the political rancor fades, the fiscal stimulus will be viewed as an important step at a bleak moment in our history. Not the knockout punch the administration had hoped for, but a valuable effort that improved the lives of many.

That seems to come dangerously close to saying that a "Mr. Awesome" as president might have made the recovery much better. But not quite, at least not if one has Romney's claims about himself in mind. As Paul Krugman noted in his last column, Mr. Romney "doesn't have a plan. ... Mr. Romney himself asserted that he would give a big boost to the economy simply by being elected, 'without actually doing anything'..., the true Romney plan is to create an economic boom through the sheer power of Mr. Romney's personal awesomeness."

To put it another way, Romney would cure the economy by relying upon a placebo effect, an effect that somehow works through the powers of his personality. The Obama cure provided too little medicine, and there was not enough communication with the patient -- both could have been improved -- but the medicine it did provide was real, not a placebo, and it did have positive effects.

Robber Barons

Posted: 20 Oct 2012 11:00 AM PDT

The entry below this one reminded me of this old post featuring Brad DeLong on the Robber Barons (he wrote this in 1998, the actual essay is much, much longer):

Robber Barons, by J. Bradford DeLong, 1998: I. Introduction "Robber Barons": that was what U.S. political and economic commentator Matthew Josephson (1934) called the economic princes of his own day. Today we call them "billionaires." Our capitalist economy--any capitalist economy--throws up such enormous concentrations of wealth: those lucky enough to be in the right place at the right time, driven and smart enough to see particular economic opportunities and seize them, foresighted enough to have gathered a large share of the equity of a highly-profitable enterprise into their hands, and well-connected enough to fend off political attempts to curb their wealth (or well-connected enough to make political favors the foundation of their wealth).

Matthew Josephson called them "Robber Barons". He wanted readers to think back to their European history classes, back to thugs with spears on horses who did nothing save fight each other and loot merchant caravans that passed under the walls of their castles. He judged that their wealth was in no sense of their own creation, but was like a tax levied upon the productive workers and craftsmen of the American economy. Many others agreed: President Theodore Roosevelt--the Republican Roosevelt, president in the first decade of this century--spoke of the "malefactors of great wealth" and embraced a public, political role for the government in "anti-trust": controlling, curbing, and breaking up large private concentrations of economic power.

Their defenders--many bought and paid for, a few not--painted a different picture: the billionaires were examples of how America was a society of untrammeled opportunity, where people could rise to great heights of wealth and achievement on their industry and skill alone; they were public benefactors who built up their profitable enterprises out of a sense of obligation to the consumer; they were well-loved philanthropists; they were "industrial statesmen."

Over the past century and a half the American economy has been at times relatively open to, and at times closed to the ascension of "billionaires." Becoming a "billionaire" has never been "easy." But it was next to impossible before 1870, or between 1929 and 1980. And at other times--between 1870 and 1929, or since 1980--there has been something about the American economy that opened roads to the accumulation of great wealth that were at other times closed.

Does it matter whether an economy is open to the accumulation of extraordinary amounts of private wealth? When the economy is more friendly to the creation of billionaires, is economic growth faster? Or slower? And what role does politics play? Are political forces generally hostile to great fortunes, or are they generally in partnership? And when the political system turns out to be corrupt--to serve as a committee for extracting wealth from the people and putting it into the pockets of the politically well-connected super-rich--what is to be done about it? What can be done to curb explicit and implicit corruption without also reducing the pressure in the engine of capital accumulation and economic growth?

These are big questions. This essay makes only a start at answering them.

Here's an interesting note:

And this is the third thing ... about the turn of the century robber barons: even though the base of their fortunes was the railroad industry, they were for the most part more manipulators of finance than builders of new track. Fortune came from the ability to acquire ownership of a profitable railroad and then to capitalize those profits by selling securities to the public. Fortune came from profiting from a shift--either upward or downward--in investors' perceptions of the railroad's future profits. It was the tight integration of industry with finance that made the turn of the twentieth century fortunes possible. ...

The jump in wealth of the founders of these lines of business was intimately tied up with the creation of a thick, well-functioning market for industrial securities. And that would turn out to be a source of weakness when Wall Street came under fire during the Great Depression. ...

And:

Progressives did not believe that the billionaires were just the helpless puppets of market forces. In 1896 Democratic presidential candidate William Jennings Bryan called for the end to the crucifixion of the farmer by a gold standard working in the interests of Morgan and his fellow plutocrats. Fifteen years later Louis Brandeis warned Morgan partner Thomas Lamont--after whom Harvard University's main undergraduate library is named-that it was in fact in Morgan's interest to support the Progressive reform program. If Morgan's partners did not do so, Brandeis warned, the Progressives would recede. Their successors on the left wing of American politics would be real anarchists and real socialists (DeLong, 1991).

Louis Brandeis and company did not much care whether the billionaires of what they called the "money trust" were in any sense economically efficient. In Brandeis's mind, they're evil because their interests were large..., size alone made a billionaire's fortune "dangerous, highly dangerous." ...

Populists from the American midwest found this set of issues a reliable one, and their senators took turns calling for political and economic changes to reduce the power exercised by the super-rich. ...

The political debate was resolved only by the Great Depression. The presumed link between the stock market crash and the Depression left the securities industry without political defenders. The old guard of Progressives won during the 1930s what they had not been able to win in the three earlier decades.

Ironically, it was Republican president Herbert Hoover who triggered the process. Hoover thought that Wall Street speculators were prolonging the Depression and refusing to take steps to restore prosperity. He threatened investigations to persuade New York financiers to turn the corner around which he was sure prosperity waited. Thus, as Franklin D. Roosevelt put it, "the money changers were cast down from their high place in the temple of our civilization." The Depression's financial market reforms act broke the links between board membership, investment banking, and commercial banking-based management of asset portfolios that had marked American finance before 1930. Investment bankers could no longer be commercial bankers. Depositors' money could not be directly used to support the prices of newly-issued securities. Directorates could not be interlocked: that bankers could not be on the boards of directors of firms that were their clients.

D. The Drying-Up of the Flow of Billionaires

Whatever else Depression-era financial reforms did (and there are those who think it crippled the ability of Wall Street to channel finance to new corporations) and whatever else the New Deal did (and it did a lot to bring social democracy to the United States and to level the income distribution), one important--and intended--consequence was that thereafter it was next to impossible to become a billionaire.

Not that it was ever easy to become a billionaire, mind you, but the channels through which lucky, skilled, dedicated, and ruthless entrepreneurs had ascended were largely closed off. ...

The hostility of Roosevelt's New Deal to massive private concentrations of economic power was effective: the flow of new billionaires dried up, as the links between finance and industry that they had used to climb to the heights of fortune were cut.

This is the important question:

Did the hostility of America's political and economic environment to billionaires between 1930 and 1980 harm the American economy? Did it slow the rate of economic growth by discouraging entrepreneurship? As an economist--someone who believes that there are always tradeoffs--I would think "yes." I would think that there must have been a price paid by the closing off of the channels of financing for entrepreneurship through which E.H. Harriman, James J. Hill, George F. Baker, Louis Swift, George Eastman, and others had made their fortunes.

But if so, there are no signs of it in aggregate growth data. ...

V. Tentative Conclusions

So what can Americans expect from their current crop of billionaires? Or rather what can they expect from the processes that have allowed their creation?

They should be extremely dubious about billionaires' social utility. Their relative absence from the 1930s to the 1970s did not seem to harm economic growth in the United States. Their predecessors' claim to much of their wealth is, to see the least, dubious. And their large-scale presence was associated with the serious corruption of American politics.

Perhaps those who are going to be industrial statesmen have as reasonable a chance of truly being industrial statesmen in an environment hostile to billionaires, as in an environment friendly to their creation: at that level of operations, after all, money is just how people keep the score in their competitions against nature and against each other. ...

On the other hand, their personal consumption is only an infinitesimal proportion of their total wealth. Much less of Andrew Carnegie's fortune from his steel mills went to his own personal consumption than has gone to his attempts to promote international peace, or to build libraries to increase literacy.

The child who in mid-nineteenth century Scotland painfully learned to read from the handful of books he had access to in his family's two-room cottage as they fell closer and closer to the edge of starvation--that child is visible in the Carnegie libraries that still stand in several hundred cities and towns in the United States, and is visible around us now. ...

So if there is a lesson, it is roughly as follows: Politics can put curbs on the accumulation of extraordinary amounts of wealth. And there is a very strong sense in which an unequal society is an ugly society. I like the distribution of wealth in the United States as it stood in 1975 much more than I like the relative contribution of wealth today. But would breaking up Microsoft five years ago have increased the pace of technological development in software? Probably not. And diminishing subsidies for railroad construction would not have given the United States a nation-spanning railroad network more quickly.

So there are still a lot of questions and few answers. At what level does corruption become intolerable and undermine the legitimacy of democracy? How large are the entrepreneurial benefits from the finance-industrial development nexus through which the truly astonishing fortunes are developed? To what extent are the Jay Goulds and Leland Stanfords embarrassing but tolerable side-effects of successful and broad economic development?

I know what the issues are. But I do not yet--not even for the late nineteenth- and early twentieth-century United States--feel like I have even a firm belief on what the answers will turn out to be.

He's a bit reluctant to take a strong position against the robber barons, they are, perhaps, "tolerable side-effects of successful and broad economic development." I see more costs and fewer benefits than Brad, so I wouldn't give as much ground here as he does. But this was written before the Great Recession, and I'd be curious to hear if his view of "the entrepreneurial benefits from the finance-industrial development," and the necessity of tolerating these "side-effects" has changed in light of recent events.

'The Moral Benefits of Economic Growth'

Posted: 20 Oct 2012 09:59 AM PDT

Just a quick reminder of what can happen "if the majority of the people do not see an improving future":

Is the Financial Sector Worth What We Pay It?, Somewhat Logically: ...Benjamin Friedman holds, in The Moral Consequences of Economic Growth, that "greater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy" derive directly from economic growth. He shows that even during stagnation–let alone recession and depression–those values can vanish easily. Brad Delong observes, in reviewing Friedman, that if the majority of the people do not see an improving future, these values are at risk even in countries where absolute material prosperity remains high. Given rising political intransigence and loss of common social purpose in the U.S., and the rise of nationalistic political sentiments in Europe, the effects of increasing stagnation and inequality are becoming more evident... All the data seem to affirm Friedman's assertion that all societal strata should participate to maximize the moral benefits of economic growth. ...
The idea that the key to future stability and prosperity is to tilt the advantages even more toward the wealthy -- more tax cuts at the top and so on -- is crazy. We've had a boatload of tax cuts at the top already and the benefits have not trickled down as promised -- the benefits were anything but widely shared -- and it would be hard to describe the last few years as prosperous. As a consequence, I think we are already seeing a decline in faith that democracy as an institution that works for all of us rather than an institution that gets captured by powerful, wealthy interests. My eyes have certainly been opened the last few years.

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Posted: 20 Oct 2012 12:03 AM PDT

Do Tax Cuts Stimulate the Economy?

Posted: 19 Oct 2012 10:04 AM PDT

Laura Tyson and Owen Zidar report on some recent research showing that tax cuts for high income households do little to stimulate economic activity, but tax cuts to lower income households are a different story -- they appear to be effective at stimulating both consumption and investment:

Tax Cuts for Job Creators, by Laura D'Andrea Tyson and Owen Zidar, Commentary, NY Times: The centerpiece of Mitt Romney's tax plan is an across-the-board 20 percent cut in marginal tax rates. ... His plan rests on the assertion that lower taxes for high-income taxpayers will increase economic activity and employment... This assertion ... is not supported by the evidence.

If tax cuts for high-income earners generate substantial real economic activity and job creation, then we should expect to see two things in the data. First, employment growth should be stronger in the years after tax cuts for these earners. Second, parts of the country with a larger share of high-income earners should experience stronger employment growth after national tax cuts for these taxpayers, because the places where they live receive a larger share of the national tax cuts.
What do we actually see after combing through a half-century of economic data? Neither of these predictions is borne out. ...[presents evidence, along with supporting graphs]..., we have found no evidence that such cuts lead to substantially faster employment growth at the national, state or even ZIP-code level.
Tax cuts for everyone else are a much more effective path to job creation. Our research found a statistically significant and positive relationship between tax cuts for the bottom 95 percent and job growth at both the national and state levels. ... Lower-income taxpayers spend a higher share of their tax cuts. ... Investment also increases after tax cuts for the bottom 95 percent...
Over all, our research shows that tax cuts for the bottom 95 percent are much more effective than tax cuts for the top 5 percent at increasing job creation in the subsequent two years. Other analysts reach similar conclusions. ... [summarizes other evidence] ...
[I]f the priority is to create a substantial number of jobs over the next presidential term, evidence from the last half-century strongly suggests that tax cuts for the top 5 percent won't work. Tax cuts for working families, tax cuts directly aimed at expanded hiring or increases in infrastructure investment would have much more bang for the buck and would cost much less in terms of forgone revenue and deficit reduction...
[Still under the weather, so I'll take the easy route and link to an old post of mine on tax cuts and (lack of) subsequent economic growth.]

October 19, 2012

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Paul Krugman: Snow Job on Jobs

Posted: 19 Oct 2012 01:11 AM PDT

There is no Romney jobs plan:

Snow Job on Jobs, by Paul Krugman, Commentary, NY Times: Mitt Romney talks a lot about jobs. ... But Mr. Romney, it turns out, doesn't have a plan; he's just ... telling lies: claiming that ... independent studies support its position when those studies do no such thing. ...
Mr. Romney's ... jobs plan ... has five points but contains no specifics. ... Mr. Romney says that the plan would create 12 million jobs over the next four years.
Where does that number come from? When pressed, the campaign cited three studies that it claimed supported its assertions. In fact, however, those studies did no such thing.
Just for the record, one study concluded that America might gain two million jobs if China stopped infringing on U.S. patents and other intellectual property..., but Mr. Romney hasn't proposed anything that would bring about that outcome. Another study suggested that growth in the energy sector might add three million jobs... — but these were predicted gains under current policy,... not as a consequence of the Romney plan.
Finally, a third study examined the effects of the Romney tax plan and argued (implausibly...) that it would lead to a large increase in the number of Americans who want to work. But how does that help cure a situation in which there are already millions more Americans seeking work than there are jobs available? It's irrelevant to Mr. Romney's claims.
So when the campaign says that these three studies support its claims about jobs, it is, to use the technical term, lying — just as it is when it says that six independent studies support its claims about taxes (they don't).
What do Mr. Romney's economic advisers actually believe? As best as I can tell, they're placing their faith in the confidence fairy, in the belief that their candidate's victory would inspire an employment boom without the need for any real change in policy. In fact, in his infamous Boca Raton "47 percent" remarks, Mr. Romney himself asserted that he would give a big boost to the economy simply by being elected, "without actually doing anything." ...
To summarize, then, the true Romney plan is to create an economic boom through the sheer power of Mr. Romney's personal awesomeness. But the campaign doesn't dare say that, for fear that voters would (rightly) consider it ridiculous. So what we're getting instead is an attempt to brazen it out with nakedly false claims. There's no jobs plan; just a plan for a snow job on the American people.

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Posted: 19 Oct 2012 12:06 AM PDT

Will an FTC Prize End Robocalls?

Posted: 18 Oct 2012 06:37 PM PDT

I like this too:

FTC Offers $50,000 Prize to End Robocalls, by Kevin Drum: Economists have long touted the value of prizes to motivate innovation. ... Today, the FTC announced a prize for a ... worthy cause:

After years of using traditional regulatory tools to block billions of illegal marketing calls, the FTC says, the agency is launching a public contest in search of new technical solutions.

The prize: $50,000.

....The agency will be taking entries between Oct. 25 and Jan. 17. Judges will score proposals based on workability (worth 50 percent), ease of use (worth 25 percent) and the idea's potential for a wide rollout (worth 25 percent). Applicants can submit ideas to block pre-recorded marketing calls on landlines, cellphones or both.

Hooray! Seriously. I don't know if this will work, and I don't know if $50,000 is enough, but this is a great idea. It's exactly the kind of thing that might prompt some unappreciated genius to come up with a harebrained idea that's just crazy enough to work. We should do more stuff like this.

'U.S. Labor Unions: Fewer and Bigger'

Posted: 18 Oct 2012 11:05 AM PDT

(I've been under the weather the last few days, so apologies for not doing more, particularly the lack of any comments -- even brief statements at the beginning or end of posts -- from me.)

This is from Tim Taylor:

U.S. Labor Unions: Fewer and Bigger, by Tim Taylor: John Pencavel offers an angle on the evolution of American unions that I haven't seen recently by looking at the number of unions and their size. Short story: the number of American unions has declined, but the biggest unions have many more members than their precedessors. Pencavel has a nice summary of this work in "Public-Sector Unions and the Changing Structure of U.S. Unionism," written as a "Policy Brief" for the Stanford Institute for Economic Policy Research.
As a starting point,... back in 1974, most of the biggest unions--except for the National Education Association--were private-sector unions. However, by 2007, most of the biggest unions were public-sector union. Second, both the biggest union in 2007 (the NEA) and the fifth-biggest union in 2007 (the UFCW) were substantially larger than the first- and fifth-biggest unions in 1974. ...
Pencavel compiles evidence that from 1974 to 2007, the total number of unions declined by 101, much of that due to unions consolidating with others. Unions with more than 1 million members actually had 2.7 million more total members in 2007 than back in 1974; conversely, unions with fewer than 1 million total members had 6.8 million fewer total members in 2007 than in 1974. In other words, union members are much more likely to belong to a very large unions now than a few decades ago. ...
I suppose that one response to all this is "so what"? Well, if the largest companies in the U.S. economy in any given industry gain a dramatically larger share of the U.S. economy, it gives rise to comment. When the largest unions gain a dramatically larger share of the union sector, it's worth some introspection, too.
Pencavel draws his conclusions cautiously. "[A] union movement concentrated in a smaller number of large unions implies a union movement in which much of its wealth is allocated by a smaller number of decision-makers. ...  A serious concern is that a more concentrated union movement dominated by public sector unions may politicize unionism: That is, the focus of union activity will be less on attending to grievances and to the conditions of members at their place of work and more on issues that are the province of politics. ... Unions have always been involved in politics so this would be a change of degree, not of kind, but it is an important change because, ultimately, more politicized unionism will not help the typical union worker." ...
The central question about large public sector unions, of course, is whether in their ability to act as an powerful interested group that influences the results of state and local elections and then to have their conditions of employment determined in negotiations with officials of those same state and local governments, they have exploited the freedom of association in a way that creates what Pencavel calls a "mischievous organization." Pencavel ends on a questioning note: "This is not a prediction; it is a concern." ...

Partisanship and Charitable Giving

Posted: 18 Oct 2012 09:46 AM PDT

Do conservatives give more to charity than liberals? Nope:

Who Really Gives? Partisanship and Charitable Giving in the United States, by Andrew Gelman: Michele Margolis and Michael Sances write:

Conservatives and liberals are equally generous in their donation habits. This pattern holds at both the individual and state level, and contradicts the conventional wisdom that partisans differ in their generosity.

What about the claim by Arthur Brooks that conservatives give more? Margolis and Sances write:

We are not the first to ask whether partisanship affects giving. In 2006, Arthur Brooks made headlines with a provocative finding from his book Who Really Cares: despite stereotypes of liberals caring more about the poor, conservatives were purported to be more generous when it comes to giving to charities. These results stirred the political pot by taking "bleeding heart liberals" to task for their stinginess when it comes to their own money. . . . we demonstrate that these results are not robust, and appear to be driven by a non-traditional question wording for identifying liberals and conservatives. After correcting for this problem, there is no statistical difference between conservative and liberal giving, conditional on observable characteristics. Further, when we use partisanship rather than ideology to measure liberalism, there is no statistical difference in giving, regardless of whether we adjust for observable characteristics. ...

Where do liberals and conservatives give their money?

While levels of giving are roughly equivalent, liberals are much more likely to donate to secular organizations, and conservatives are more likely to donate to religious causes, especially their own congregation. ...

I'm impressed by this work, partly because a few years ago when I saw Brooks's claim, I contacted him and asked for details on what he did, and then I threw the problem to some students to replicate it. They got tired and never did it.

P.S. Recently, Arthur Brooks has been having some trouble with the General Social Survey. Working with data can be difficult!

October 18, 2012

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Posted: 18 Oct 2012 12:06 AM PDT

Fed Watch: Buyer's Remorse?

Posted: 17 Oct 2012 05:29 PM PDT

Tim Duy:

Buyer's Remorse?, by Tim Duy: Unavoidable work obligations took priority over blogging during the past week. Of course, blogging or not, the data flow continues uninterrupted. And the tenor of that data has been generally positive. In the near-term, the upbeat news will have limited impact on monetary policy. The Fed will remain committed to the path laid out at the last FOMC meeting. That said, I have to imagine some of the moderates on the FOMC - those pulled into Federal Reserve Chairman Ben Bernanke's gravity with the softening of data this summer - will be starting to feel a little bit of buyer's remorse, thinking that maybe, just maybe, they pulled the trigger a little too soon. The doves, of course, should be ecstatic that the FOMC locked in an easier policy at beginning of an upswing. Rather than threatening to withdraw stimulus at the slightest sign of recovery, now we have a commitment to keep monetary momentum until the economy is clearly on firmer ground. This will be supportive of the upswing in activity.

The death of the consumer continues to be more myth than reality. The retail sales report revealed that households have shaken off the summer doldrums:

Retail

While the year over year trend is not particularly strong:

Retail3

the last three months have packed a bit of a punch:

Retail2

While industrial production was up somewhat, the trend over the past year is basically flat:

Ip

The underlying story, I think, remains two-fold. First, some investment was likely pulled forward into 2011 by now-expired tax credits. Second, the global slowdown is also weighing on manufacturing growth. That said, note that the current scenario continues to look more like 1998 than 2008:

Ipno

To be sure, core new orders have been a little unnerving of late, and certainly something to watch. But this would not be the first time that an external shock failed to deliver a US recession. For now, I expect that to continue to be the case.
And one reason to believe that the US will escape recession is the obviously improving housing market. Starts exceeded expectations in September:

House1

And while the gains in multi-family relative to past trends look more pronounced, single-family homes are trending up as well:

House2

Can we attribute September's strength to QE3? I think it is somewhat of a stretch to believe that builders were sitting around waiting for the go-ahead from the Fed; this is especially true of multi-family housing, a category that requires a bit of lead time before shovels break earth. Still, I think that you can argue that the build-up to QE3 supported expectations that monetary policy would tend toward easier rather than tighter, reducing uncertainty that the Fed would pull the plug just as new projects were taking off.

What else can we say about housing? The Wall Street Journal offered up three views of the data. First:

This move forward from the bottom was inevitable, says Patrick Newport of IHS Global Insight. "Housing has a self-correcting mechanism — it's called population growth. Every year, the U.S. population increases by about 3 million, and the number of households increases by 1.1-1.3 million. New homes have to be built to meet demand from this segment. In recent years, housing construction has been depressed, first because of overbuilding during the boom years, then, because the Great Recession forced many Americans to move in with friends and family," he said.

I agree; the long period of bouncing along the bottom was starting to look excessive. It couldn't last forever. Second:

But that correction doesn't mean that housing is going to lead a broader recovery. "The sector is much less important than it used to be," said economist Jim O'Sullivan atHigh Frequency Economics, Ltd. "Total residential investment directly accounts for 2.4% of GDP now, down from a 6.3% peak in 2005. Within that, new home construction, the part tracked by housing starts, accounts for 0.9% of GDP now, vs. a peak of 3.9% in 2005."

True, housing is a relatively small part of the economy. And I can argue that the emphasis on multi-family units will be yield less of an economic boost compared to single-family housing. Moreover, I have yet to be convinced that we are on the verge of another price bubble that will swell net worth and trigger a jump in mortgage equity withdrawal. But, even an additional 0.5 percentage point contribution from residential housing is meaningful when the economy is bouncing along at 2% growth. I am not expecting miracles, but a recovering housing sector is certainly a step in the right direction. Finally, we have this:

The housing recovery has materialized, but the strength of that recovery is an open question. "How far can the rebound go with unemployment where it is? From our perspective, not much farther," said economist Steve Blitz at ITG Investment Research, Inc. "The notion housing will now lead rather than reflect the overall economy is a bit too optimistic. The demographics lean against a national boom in home construction as does the limited availability of mortgage credit."

Traditionally, housing has led the economy. I wouldn't bet against it. Moreover, this analysis appears to assume that unemployment rates stay constant, which seems like something of a heroic assumption given the steady decline in the unemployment rate experienced over the last three years:

Emp5

Moreover, mortgage credit will loosen up as the housing recovery broadens and deepens. Lender confidence will improve as prices stabilize. Ultimately, they want to lend money; it's how they make more money.

I am not sure that the FOMC would have moved on QE3 if the data then was what we are seeing now. If this data flow continuous - a big "if" considering the propensity of the data to swing from optimistic to pessimistic throughout the course of the year - some moderates will likely question their decision. But the die has been cast, and will not be shattered easily. New York Federal Reserve President William Dudley reminds us:

Even over the next few years, while there are significant downside risks relating to the fiscal cliff and the eurozone, it is possible that the recovery could turn out stronger than expected. The underlying process of balance sheet repair is considerably advanced, housing is recovering and, as that occurs, our newly recalibrated monetary policy could gain additional traction. Thus, if uncertainties about the U.S. fiscal path and the future of the eurozone were resolved in a constructive manner, growth could pick up more vigorously than anticipated.

This would be a wonderful outcome. The September FOMC statement noted: the Committee expects "that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the recovery strengthens". Consistent with this, if we were to see some good news on growth I would not expect us to respond in a hasty manner. Only as we became confident that the recovery was securely established, would I expect our monetary policy stance to evolve to ensure that it remained appropriate to achievement of our objective: maximum sustainable employment in the context of price stability.

For now, price stability is on the side of the Federal Reserve, allowing for policymakers to keep pressure on the gas pedal despite improving data. While the headline CPI jumped 0.6%, core gained just 0.1% in September, suggesting that the headline gains remain a transitory artifact of higher gas prices. The year-over-year trends are not worrisome:

Cpi1015

Remember that CPI inflation tends to run a bit above the Fed's PCE target. Moreover, note that wage growth remains constrained, limiting the ability of inflationary pressures to spread. The recovery has room to run before we see sufficient pressure on wage growth to raise the specter of tighter policy. Note that the Fed's commitment to supportive policy stands in stark contrast to their almost eager desire to shift to tighter policy after previous upswings in activity. In short, Fed policy is ramping up in line with the housing market and the broader economy, hopefully providing the boost that is capable of breaking the economy free of the zero bound. This bodes well for growth in 2013.
That is, unless Congress lets the economy fall off the fiscal cliff. No, nothing is written in stone at the moment. Plenty of things can go wrong with fiscal policy, Europe, war in the Middle East, etc. The usual suspects. But for now these are risks, not reality. I think the reality is that the economy looks a little brighter than just three months ago.
Bottom Line: I fear becoming too optimistic. During the recovery, excessive optimism has tend to result in disappointment. A month of data, after all, is just a month of data. At the same time, however, the pessimistic story is fading further into the distance. So far that some monetary policymakers might be having second thoughts about QE3. But even if they have such thoughts, and even if the hawks start chirping louder, the Fed is now committed to this path. Assuming inflation remains contained, at this point I suspect that we would need to see sustainable growth well above 3 percent in 2013 (the Fed's central forecast is 2.5-3%) before policymakers are willing to consider pulling their foot off the gas anytime soon.

'The Power of Concerted Lobbying'

Posted: 17 Oct 2012 10:44 AM PDT

Mark Roe:

The United States Securities and Exchange Commission (SEC) recently rejected proposed rules aimed at making money-market funds safer in a financial crisis – a rejection that has caused consternation among observers and other regulators. Given the risks that money market funds can pose to the global financial system, as shown by their destabilizing role in the 2008 financial crisis, it is not hard to see why they are worried.

What happened? It won't surprise you:

A majority of the commissioners turned down the proposals after substantial lobbying from the mutual-fund industry. ...
The SEC's rejection of the proposed rules demonstrates the power of concerted lobbying – and that concentrated interests often trump diffuse benefits. Typically, an interest group lobbies Congress, blandishing persuasive arguments, campaign contributions, and other support; often enough members – or enough key members – come to see the merit of the group's point of view (or at least vote as if they do). Meanwhile, ordinary citizens do not notice unless the issue receives significant media attention. Often no one lobbies the other side of the issue. ...
With no one having a direct financial interest in the outcome pressing an alternative view, the SEC's initial decision was as predictable as it was bad.

I'm not sure people appreciate the degree to which the problems that caused the financial meltdown are still present in the fianncial industry (or, if the word "caused" is objectionable, there was certainly a failure to provide the safety relief valves that would have greatly reduced the severity of the problems).

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Latest Posts from Economist's View


'Ultimately Everything is Attributable to Luck'

Posted: 17 Oct 2012 12:33 AM PDT

James Kwak and Richard Posner argue that it's all due to luck:

Luck, Wealth, and Richard Posner, by James Kwak: I disagree with Richard Posner ... on so many things that I always worry when he seems to agree with me. Did I write something stupid? I wonder.
A friend forwarded me Posner's latest blog post, "Luck, Wealth, and Implications for Policy," parts of which sound vaguely like a post I wrote three years ago, "Do Smart, Hard-Working People Deserve To Make More Money?" ... In that post, I argued that even if differences in incomes are due to things that people ordinarily think of as "merit," like intelligence and hard work, that doesn't mean that rich people have a moral entitlement to their wealth, because they didn't do anything to deserve their intelligence or their propensity to work hard. In summary, "I have little patience for the idea that rich people deserve what they have because they worked for it. It's just a question of how far back you are willing to acknowledge that chance enters the equation."
Posner now goes even further than I did: "I think that ultimately everything is attributable to luck, good or bad," he writes, including the propensity for working hard, a low discount rate, and so on. "In short, I do not believe in free will. I think that everything that a person does is caused by something. . . . If this is right, a brilliant wealthy person like Bill Gates is not 'entitled' to his wealth in some moral, Ayn Randian sense."
He goes on—he is still Richard Posner, after all—to argue that tax policy should be concerned solely with incentive effects. ...
little patience for the idea that rich people deserve what they have because they worked for it

'We Have to Take Issue with Gross Misinterpretations of the Facts'

Posted: 17 Oct 2012 12:24 AM PDT

Via Calculated Risk:

An update from economists Carmen Reinhart and Kenneth Rogoff at Bloomberg: Sorry, U.S. Recoveries Really Aren't Different

Five years after the onset of the 2007 subprime financial crisis, U.S. gross domestic product per capita remains below its initial level. Unemployment, though down from its peak, is still about 8 percent. Rather than the V- shaped recovery that is typical of most postwar recessions, this one has exhibited slow and halting growth.

This disappointing performance shouldn't be surprising. We have presented evidence that recessions associated with systemic banking crises tend to be deep and protracted...
...
Recently, however, a few op-ed writers have argued that, in fact, the U.S. is "different" and that international comparisons aren't relevant because of profound institutional differences from one country to another. ... We well appreciate that during elections, academic economists sometimes become advocates. It is entirely reasonable for a scholar, in that role, to try to argue that a candidate has a better economic program that will benefit the country in the future. But when it comes to assessing U.S. financial history, the license for advocacy becomes more limited, and we have to take issue with gross misinterpretations of the facts.

Ouch!

And their conclusion:

The most recent U.S. crisis appears to fit the more general pattern of a recovery from severe financial crisis... Indeed, if one compares U.S. output per capita and employment performance with those of other countries that suffered systemic financial crises in 2007-08, the U.S. performance is better than average.

[See here too.]

Links for 10-17-2012

Posted: 17 Oct 2012 12:06 AM PDT

A Nobel Prize for Work that Matters in Our Everyday Lives

Posted: 16 Oct 2012 09:36 AM PDT

A few comments on yesterday's Nobel Prize in Economics (no link -- still stuck in editing at MoneyWatch link now active):

A Nobel Prize for Work that Matters in Our Everyday Lives: (MarketWatch) The Nobel Prize in Economics was awarded to Alvin Roth and Lloyd Shapley for their work on matching markets and mechanism design. What exactly do those terms mean, and why is their work important to people outside of economics?

In the textbook case when markets are perfectly competitive and prices are free to vary, the price-system produces an outcome that cannot be improved upon. But when substantial market failures are present, or when prices are restricted, missing, or otherwise prevented from responding to changes in market conditions, markets can break down.

In matching markets -- any market where both sides care about who they are matched with -- an important market failure is "jumping the gun." To illustrate this failure, consider the problem of matching graduate students to graduate programs. In an unconstrained market, a common strategy is to try to make offers to the best candidates earlier than competitors, and then give each candidates a short time until their offer expires. This forces the candidate to choose between taking the offer, or holding out for a better offer which may or may not come. In this situation, many applicants will end up taking offers they would have rejected if they had full information about the offers they'd receive in the future. The result is that some of the best candidates end up at less than the best schools, and the best schools end up with less than the best candidates. This is inefficient since there are applicants and programs that would prefer to be matched to each other, but aren't.

And that's not the end of the problems. Each competitor will have an incentive to make offers before anyone else to try to be the first to grab the best applicants, and this leads to offers being made earlier and earlier over time. For example, as Alex Tabarrok notes, "Prior to the currently used National Residency Matching Program,... hospitals were making offers to residents up to two years in advance!"

This "jumping the gun" behavior eventually causes the markets to break down, and in response participants usually agree to a centralized set of rules with penalties for non-compliance, or a centralized allocation system. At research universities, for example, by common agreement graduate students cannot be required to accept teaching or research assistant offers prior to April 15.

This can prevent the "jumping the gun" problem if the penalty for non-compliance is a sufficient deterrent, but unfortunately the resulting matches are not generally efficient -- better matches are possible.

"Jumping the gun" is not the only reason matching markets can fail. For example, the problem of matching kidney donors to recipients could be guided by a price system, and that would produce an efficient outcome under the proper market conditions, but the buying and selling of organs is prohibited. One solution is a centralized allocation system that tries to match donors with patients, but once again this is not generally efficient.

Lloyd Shapley's work, the Gale-Shapley algorithm in particular, is important because it overcomes these and other problems in matching markets. The algorithm uses a series of offers and rejections (which reveal valuations even when prices are absent from markets) to find a stable, efficient set of pairings -- there is no way to improve the outcome by changing the matches. In addition, the algorithm limits the ability of participants to manipulate the matching process in their favor.

Shapley's contribution was to provide the theoretical results. Alvin Roth recognized the importance of these results, and found ways to apply them to the real world. This is the "mechanism design" part of the process. In particular, Roth found ways to use the Gale-Shapely algorithm, suitably adjusted for the particulars of each application, for problems such as matching doctors and hospitals, matching organ donors with patients in need, and his work has also been used to match students to schools. Thus, in contrast to much of the work in economics, this work has had important impacts in the real world (and others have applied these results even more broadly, so this is only a small sample of the total impact of this work).

One final note. Economics is divided into two parts, macroeconomics and microeconomics. Macroeconomics is the study of entire economies, while microeconomics is the study of the individual decision making units within the economy.

Macroeconomic theory has come under considerable criticism lately, much of it deserved, and economics more generally has been tainted by the performance of macroeconomists and their theories prior to and during the crisis. Some aspects of the criticism apply to both macro and micro, e.g. the validity of the assumption that agents are rational, but for the most part this has not been fair to microeconomists.

As this award shows, microeconomists have made many useful contributions to the world, and they have also had success in other real world applications such as auction theory. Hopefully this award will help those outside the profession understand that the world of economics is more than macro, and highlight the important contributions from the microeconomics side of the profession that matter in our everyday lives.

[See also Prize for Stability and Market Design at Theory of the Leisure Class.]