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February 4, 2013

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Latest Posts from Economist's View


Posted: 13 Dec 2012 12:06 AM PST
Posted: 12 Dec 2012 06:34 PM PST
Posted: 12 Dec 2012 05:06 PM PST
Tim Haab:
Just sayin': I was thinking of writing a lengthy post about climate change denial being completely unscientific nonsense, but then geochemist and National Science Board member James Lawrence Powell wrote a post that is basically a slam-dunk of debunking. His premise was simple: If global warming isn't real and there's an actual scientific debate about it, that should be reflected in the scientific journals.
He looked up how many peer-reviewed scientific papers were published in professional journals about global warming, and compared the ones supporting the idea that we're heating up compared to those that don't. What did he find? This:
Powell-Science-Pie-Chart[1]The thin red wedge.   Image credit: James Lawrence Powell
Maximillian Auffhammer at the Berkeley blog:
Doha schmoha: On Saturday (Dec. 8) another wildly unsuccessful round of climate negotiations, in Doha, Qatar, concluded with applying a band aid to solve the rapidly accelerating climate problem. The 1997 Kyoto accord was extended to 2020. If you think this is a good thing, you are severely mistaken. China, the US and the other usual suspects made no significant concessions. Further,  the climate leader — the EU — is internally in disagreement over what reductions should be agreed to. ...
While academics have proposed a number of interesting avenues for further studies of so called architectures for future agreements, time is slowly running out. It is simply too difficult to get 200+ countries to agree and then stick to a binding agreement. So what to do?
I think a simple handshake between the U.S. and China would be a good start. Each agrees to a carbon tax which is collected fairly far upstream. Any country wanting to sell its goods into the U.S. or Chinese markets could either pay a carbon tariff at the border or start charging its own equivalent carbon tax and be exempt from the tariff.
Is this going to happen? Maybe not...
But one thing is for sure: We are becoming richer as a species and we will want to consume more energy services. Unless we start pricing carbon, that energy will largely come from coal. And if that happens, limiting warming to 2 degrees is a pipe dream. In fact, it may already be too late.
Posted: 12 Dec 2012 01:35 PM PST
Two more from Tim Duy on the Fed's decision today:
FOMC Projections
The Press Conference
Posted: 12 Dec 2012 11:40 AM PST
Here's my reaction to today's announcement from the Fed:
The Fed Adopts Numerical Thresholds for Inflation and Unemployment
One point is that the Fed adopted thresholds, not triggers, and that matters.
Posted: 12 Dec 2012 10:47 AM PST
I'll have a post up soon at MoneyWatch on today's announcement from the Fed. I'll link as soon as it leaves editing and is posted. While I wait, here's Tim Duy's response:
More Bond Buying and Thresholds, by Tim Duy: The FOMC statement was released this morning. Key points are that Operation Twist will be converted one-for-one to an outright purchase program and the long-debated issue of thresholds became a reality. First thoughts:
On the current situation:
Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Although the unemployment rate has declined somewhat since the summer, it remains elevated. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.
Slow and steady, taking into account Hurricane Sandy, with a special nod to weak investment numbers. Inflation both low in near-term and longer-term inflation expectations remain anchored. Nothing too surprising here as it seems broadly consistent with the tenor of recent speeches by Fed speakers.
Next, the outlook:
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.
Slow and steady is not enough to generate the improvement in labor market the Fed believes is necessary within the context of the dual mandate. They continue to see strains in global financial markets...although this seems odd, as it seems that financial markets have calmed considerably in recent months. The FOMC reaffirms its commitment to long-term price stability.
Bond buying, key addition:
The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month.
I am not surprised, but I was cautious that the Fed would choose to pull the trigger on a complete conversion of Operation Twist to an outright purchase program. I think the St. Louis Federal Reserve President James Bullard is right when he notes that this is a more dovish policy. The Fed has more than doubled the pace of the balance sheet expansion, a much more stimulative stance - unless, of course, we are deep into the territory of diminishing marginal returns.
We all knew thresholds were coming, but in general did not expect it this meeting:
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
The expiration date of low-interest rate policy is replaced with economic thresholds, which I believe is a more appropriate communications strategy. The baseline expectation is that as long as unemployment remains above 6.5%, the Fed will tolerate an inflation forecast as high as 2.5% in the near term, assuming that long-term expectations remain anchored, before considering to raise rates. In other words, all bets are off if the Fed judges that long-term expectations are accelerating even if unemployment and near-term inflation forecasts remain within their respective bounds. The Fed is also taking pains to explain that policy depends on more than just two variables, and may act on the basis of that additional information. Also, the Fed does not believe the move to thresholds changes policy relative to the date-based guidance; it only changes the communications strategy.
Finally, a dissent:
Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.
Not surprising in the least.
Bottom Line: The Fed delivered an early Christmas present to the economy by acting above expectations with not only a one-for-one conversion of Operation Twist to outright asset purchases, more than doubling the pace of balance sheet expansion, but also shifting the communications strategy to thresholds. The latter ties policy explicitly to outcomes rather than dates, which I think is the appropriate direction for policy.
Posted: 12 Dec 2012 09:07 AM PST
Awhile back I asked Tim Taylor if it would be okay to reprint a post occasionally in full or in part, and he quickly and graciously said I could. As he notes, this is an important addendum to the standard story on manufacturing, productivity, and employment. The bottom line is that "the condition of U.S. manufacturing looks more ominous than the standard story" would have us believe:
Cautionary Details on U.S. Manufacturing Productivity: Susan Houseman, by Tim Taylor: There's a basic and often-told story about output and employment in the U.S. manufacturing sector: I'm sure I've told it a time or two myself. The story begins by pointing out that the total quantity of U.S. manufacturing output has actually held up fairly well over recent decades, although it hasn't grown as quickly as the services sector. However, productivity growth in manufacturing has been rising quickly enough that productivity growth. However, manufacturing productivity has been rising quickly enough that, even though manufacturing output has remained fairly strong, the number of jobs has been falling. The standard historical analogy is that just as rising agricultural productivity meant that fewer U.S. farmers were needed, now rising manufacturing productivity means that fewer manufacturing workers are needed.

That story isn't exactly wrong, at least not over the long-run, but Susan Houseman has been digging down into the details and finding arguments which suggests that it is a seriously incomplete version of what's happening in the U.S. manufacturing sector. Houseman presented some of these arguments in a paper written with Christopher Kurz, Paul Lengermann, and Benjamin Mandel, called  "Offshoring Bias in U.S. Manufacturing," which appeared in the Spring 2011 issue of my own Journal of Economic Perspectives. (Like all articles in JEP back to the first issue in 1987, it is freely available courtesy of the American Economic Association.) In turn, their JEP paper was a revision of a more detailed Federal Reserve working paper in 2010, available here. However, Houseman offers a nice overview of her arguments in an interview recently published in fedgazette, a publication of the Federal Reserve Bank of Minneapolis. ...
After reading Houseman, when you hear the standard story about how high productivity in manufacturing is leading to reduced employment, the following thoughts should rattle through your head:

1)  Most of the productivity growth in manufacturing is computers. Houseman: "First, a very important fact, but one I find most people don't know—including some people who write a lot about the manufacturing sector—is that manufacturing growth in real [price-adjusted] value added and productivity wasn't that strong without the computer and electronics industry. The computer industry is small—it only accounts for about 12 percent of manufacturing's value added....  But we find that without the computer industry, growth in manufacturing real value added falls by two-thirds and productivity growth falls by almost half. It doesn't look like a strong sector without computers."

2) Most of the productivity growth in manufacturing computers is because computers are becoming so much faster and better over time, and government statistics count that a productivity growth, not because an average worker is producing a dramatically greater quantity of computers. Houseman: "The standard argument is that the rapid productivity growth in computers is coming from product innovation. This year's computers and semiconductors are faster and do more than last year's models. And that product innovation essentially gets captured in the price indexes the government uses to deflate computer and semiconductor shipments. The price indexes for most products increase over time—that's inflation. But, for example, the price indexes used to deflate computer shipments have actually fallen by a whopping 21 percent per year since the late 1990s. Those rapid price declines largely reflect adjustments for the growing power of computers. And that extraordinary decline in computer price indexes translates into extraordinary growth in real value added and productivity in the computer industry as measured in government statistics. So, in some statistical sense, today's computer may be the equivalent of, say, 13 computers in 1998. ... The reason jobs in computers have been lost is not because productivity growth has crowded them out; not at all. It's because much of the production has gone overseas...."

3)  A sizeable share of what looks like growth in manufacturing productivity is actually from importing less expensive inputs to production. Houseman: "[T]here's been a lot of growth in manufacturers' use of foreign intermediate inputs since the 1990s, and most of those inputs come from developing and low-wage countries where costs are lower. We point out that those lower costs aren't being captured by statistical agencies, and so, as a result, the growth of those imported inputs is being undercounted. ...  Suppose an auto manufacturer used to buy tires from a domestic tire manufacturer. Then it outsources the purchase of its tires to, say, Mexico, and the Mexicans sell the tires for half the price. That price drop—when the auto manufacturer switches to the low-cost Mexican supplier—isn't caught in our statistics. And if you don't capture that price drop, it's going to look like, in some statistical sense, the manufacturer can make the same car but only needs two tires. ... Our statistical agencies try to measure price changes, but they miss them when the price drops because companies have shifted to a low-cost supplier. So because we don't catch the price drop associated with offshoring, it looks like we can produce the same thing with fewer inputs—productivity growth. It also looks like we are creating more value here in the United States than we really are."

4) If productivity in manufacturing rises because of automation, then those gains in productivity may benefit the owners of the machines--that is, benefit capital rather than labor. Houseman: "And then another standard story has to do with automation. Basically, capital is substituting for labor. Automation can lead to job losses. And the returns from automation, or higher capital use, won't necessarily be shared with workers."

5) If low-wage labor-intensive manufacturing tasks are now more likely happen overseas, an higher-wage tasks remain in the U.S., then it may appear as if the productivity of an average U.S. manufacturing worker is higher--but it's just a shift in the composition of U.S. manufacturing workers. Houseman: "Then, finally, there's probably been some shifting in the sorts of production that occur here. In particular, less of the labor-intensive production is done in the United States, and that would result in job losses and higher labor productivity. Again, the gains from that productivity growth aren't necessarily going to be shared with remaining workers. So part of the answer to the puzzle is that even if productivity gains are real, there's really nothing that guarantees those gains will be broadly shared by workers."

Add all these factors up, and the condition of U.S. manufacturing looks more ominous than the standard story of high productivity and resulting job losses. For more on the future of global and U.S. manufacturing, see this November 30 post on "Global Manufacturing: A McKinsey View."
Posted: 12 Dec 2012 08:10 AM PST
What's the value of a lobbyist?:
Economists calculate true value of 'who' you know, rather than 'what' in US politics, EurekAlert: Economists at the University of Warwick have calculated the true value of US political lobbyists, proving the old adage 'it is not what you know, but who you know'.
In a paper published this month in the American Economic Review Mirko Draca, from the University of Warwick's Department of Economics, looked at the role of lobbyists in the US. He found their revenue falls by 24% when their former employer leaves government office.
The study examined the so-called 'revolving door' of politics, which refers to the movement of people from government service into lobbying positions.
Mr Draca said: "We investigated how the revenues of lobbyists who had previously worked in the offices of a member of US Congress were affected when their former employers left office. This allowed us to look at the value of 'what' and 'who' because we evaluated situations in which knowledge did not change, but connections did."
The paper, co-authored by Jordi Blanes i Vidal, London School of Economics, and Christian Fons-Rosen from Universitat Pompeu Fabra, found the24% fall in revenue was immediate and long-lasting. The relative pay of lobbyists depends on the seniority and committee assignments of the congressional politicians they have worked for in the past.
Mr Draca said: "Our work quantifies, I believe for the first time, the value of personal connections to elected officials for lobbyists in Washington, rather than relying on anecdotal evidence." ...

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