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February 4, 2013

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 16 Jan 2013 12:24 AM PST
Jonathan Portes (he also provides discussion of each of these points):
European labor markets: six key lessons from the Commission report, by Jonathan Portes: I haven't always been complimentary about the European Commission - either its economic analysis or its policy advice. So it's nice to be able to be wholeheartedly positive about the excellent report "Employment and Social Developments in Europe 2012"...
The report is really worth reading. But it's close to 500 pages, and the main messages deserve as wide an audience as possible, so I thought I'd try to highlight them with some commentary. To my mind, the key ones are the following:
1. Economic weakness in Europe, and the consequent rise in unemployment, are mostly to do with a lack of aggregate demand, which in turn is the result of mistaken macroeconomic policies - especially aggressive fiscal consolidation...
2. Although financial markets may have stabilized - who knows for how long - things are getting worse, not better, in the real economy of the crisis countries...
3. Countries with more generous welfare states, but also more flexible labor markets, have fared best...
4. Following on from this, structural reforms in labor markets are required in many countries - but they need to be based on evidence! Segmented labor markets are a problem and raise youth unemployment...
..and even in recession, minimum wages at a sensible level do more good than harm. ...
5. Where they were allowed to operate, the "automatic stabilizers" worked...(in both macroeconomic and social terms)...
...while where they were overridden, in the pursuit of "self-defeating austerity", things have got worse...
6. Latvia, Ireland (and even Estonia) may look like "success stories" to some in the Commission, and perhaps to the financial markets (at present) but the reality in terms of jobs and incomes is rather different. ...
Too bad fiscal policymakers didn't do their homework and learn these lessons about austerity, social insurance, automatic stabilizers, and so on before putting harmful or ineffective policy in place (or failing to implement policy when action is called for, e.g. to reduce unemployment). Wish I thought they were doing their homework now.
Posted: 16 Jan 2013 12:06 AM PST
Posted: 15 Jan 2013 04:57 PM PST
Tim Duy:
Money and Debt, Continued, by Tim Duy: Paul Krugman responds to Steve Randy Waldman, noting that perhaps they are having a failure to communicate. I hope I can bridge that gap (I suppose we can't discount the risk that I make it wider).
Krugman begins:
What Waldman is now saying is that in the future the Fed will manage monetary policy by varying the interest rate it pays on reserves rather than the size of the conventionally measured monetary base. That's possible, although I don't quite see why.
Correct, a key point in this discussion is that the Fed can manage policy by interest on reserves. Indeed, as Waldman notes, now that they have this tool, they are not likely to give it up. I would say that the issue of "I don't quite see why" is irrelevant. The basis of Waldman's argument is that they can, not that they will. This isn't an argument about existing institutional arrangements, but potential institutional arrangements. Krugman continues:
But in his original post he argued that under such a regime "Cash and (short-term) government debt will continue to be near-perfect substitutes".
Well, no — not if by "cash" you mean, or at least include, currency — which is the great bulk of the monetary base in normal times.
I don't think Waldman means "cash" as currency, but both currency and reserves. Such that reserves and government debt are essentially the same (more on this later). At least, I think this is what Waldman is driving at, but clarification is needed (I find myself getting sloppy on the term "cash," so I can't really throw stones). Back to Krugman:
But this could come across as word games. I think the way to get at the substance is to ask the question that set this discussion off: what happens if the US government issues a trillion-dollar coin to pay its bills?...
...But what happens if and when the economy recovers, and market interest rates rise off the floor?
There are several possibilities:
1. The Treasury redeems the coin, which it does by borrowing a trillion dollars.
2. The coin stays at the Fed, but the Fed sterilizes any impact on the economy, either by (a) selling off assets or (b) raising the interest rate it pays on bank reserves
3. The Fed simply expands the monetary base to match the value of the coin, an expansion that mainly ends up in the form of currency, without taking offsetting measures to sterilize the effect.
What Waldman is saying is that he believes that the actual outcome would be 2(b). And I think he's implying that there's really no difference between 2(b) and 3.
I think that Waldman is saying the outcome could be 2(b), but that depends on the relationship between the Treasury and the Fed. But I do not believe he is saying it will be the same as option 3 because, as Krugman notes:
Option 3 would be inflationary; on the other hand, it would not lead to any increase in government debt.
and Waldman is looking for a noninflationary outcome. Krugman continues:
Option 2(b) would not be inflationary — but it would affect the federal budget. Why? Because the Fed's additional interest payments would reduce the amount it can remit to the Treasury.
I don't think that Waldman ever said that the Fed's use of the required reserve tool would be costless to the Treasury. This is an important point - that cost is what prevents the platinum coin from being simple debt monetization. The platinum coin is not a free lunch. Krugman is on the right path when he continues:
In fact, the effects of option 2(b) would be identical, both for the economy and for the federal government's cash flow, to option 1. Either way, the budget deficit would be enlarged by the payment of interest on $1 trillion of borrowing. In that sense, the Treasury will have redeemed the coin, for practical purposes, even if it never redeems the coin.
Compare this to what I said:
The Fed has a portfolio of bonds which is a indirect transfer from Treasury which in turns allows it to pay interest on reserves. Lacking such a portfolio, the Fed would need to receive a direct transfer from the Treasury to pay interest on reserves. Operationally, these are the same. As long as both have the same objective function, it makes no difference if the Treasury's transfer goes through the middleman of a bond or just directly to the Fed.
As Krugman correctly notes, in this world the Treasury, not the Fed, is effectively paying the interest on reserves. Thus, we really shouldn't consider the excess reserves as monetary base (with the connotation that these reserves are simply cash ready to be lent out), but as psuedo-government debt (and I thank Gavyn Davies for pointing this out to me, so I hope I got his meaning correct).
In the old world, the banks held an asset called government debt that paid interest. In the new world, they hold an an asset called excess reserves that pay interest. And in both cases the entity paying the interest is the Treasury, either directly or indirectly. Both cases are noninflationary, but one relies on pieces of metal with a number on them (platinum coins), while the other relies on pieces of paper with a number on them (government debt).
Now, back to Krugman's statement: "That's possible, although I don't quite see why." Which is to say, why should we believe it would be institutionally possible to issue platinum coins rather than debt? This gets to my point:
But what if the Treasury does not have the same objective function, does not want higher interest rates, and thus does not want to transfer the resources to the Fed? What claim does the Fed have on the Treasury to force it to act?
Somewhere in this space is why we have come to accept the importance of an independent central bank.
I think if Krugman and Waldman have a failure to communicate, it is because the latter is not shackled to the current institutional structure. Waldman is describing a system in which the relationship between the fiscal and monetary authorities is fundamentally different than that of the current system. This is evident when Waldman says:
What used to be "monetary policy" is necessarily a joint venture of the central bank and the treasury.
My takeaway from Waldman is that under some institutional structures, there is little difference between platinum coins and government debt (or because we have debt we have a particular institutional structure?) In effect, the the zero-bound issue and platinum coin debate have forced us to think down paths that blur the lines between fiscal and monetary policy. The longer we are in at the zero-bound, the more we will challenge the existing status-quo.
Alternatively, this can also be simply a misunderstanding on Krugman's part if he believes that Waldman is saying that we can use platinum coins to literally monetize deficit spending with neither budgetary nor inflationary implications. I don't think Waldman is thinking this, and if he is, then I think he would be wrong.
Perhaps this clears up this issue, at least a little bit. Or perhaps not (see Stephen Williamson for another take). In any case, I hope I have not mangled either author's thoughts too badly.
Posted: 15 Jan 2013 04:20 PM PST
Jeff Sachs is unhappy with the WSJ's editorial page (and not for the first time):
Wall Street Journal: Get a Fact Checker, by Jeffrey Sachs: ...I ... want to talk about fact checking. The [Wall Street] Journal editorial board is egregious in its misuse of data. It writes what it wants without fact checking. Where is the journalistic profession to call them out?
There are two editorial pieces this weekend of note. The story on "Europe's Bankrupt Welfare State" asserts that, "the European way of welfare is bankrupt." This is easy to check. Look at European countries with large welfare states, and see how they are doing in terms of debt, deficits, unemployment, and other indicators of "bankruptcy." I do this in Table 1 here comparing the US with Europe's five leading welfare states: the Netherlands, Denmark, Norway, Sweden, and Germany. ...
Looking at Table 1..., the conclusion is simple. The European welfare states tax and spend more than the US as a percent of GDP, yet also have lower budget deficits as a share of GDP, lower debt-GDP ratios, and lower unemployment rates. Note that the government sectors of Norway and Sweden have net assets rather than net debt. Some bankruptcy!
The second comment is by editorial board member Holman Jenkins, Jr. Mr. Jenkins tries to debunk global warming by writing that "the warmest year on record globally is still 1998 and no trend has been apparent globally since then."
His claim is both false and irrelevant. It is false because most data point to more recent years as being warmer than 1998. ... The claim is also irrelevant, since 1998 was an exceptionally strong El Nino (essentially, a tilt of Pacific warm water towards the west coast of Latin America). ... Comparing subsequent years to a very strong El Nino year mixes up trends and inter-annual variability. ...
The Wall Street Journal editors have failed to notice that even the climate skeptics have come around. ...
The Wall Street Journal editorial board needs a fact checker plain and simple. It's a major paper, with excellent news coverage, and should not destroy its integrity by an editorial board that flouts the basic process of checking the facts.
Posted: 15 Jan 2013 10:05 AM PST
Via a speech by Minnesota Fed president Narayana Kocherlakota, something that is too often forgotten in discussions of monetary policy, the long (and variable) lags between policy changes and the impact on the economy:
...The FOMC acts to achieve its two mandates—maximum employment and price stability—by influencing interest rates through the purchase and sale of financial assets. When the FOMC raises interest rates, households and firms tend to spend less and save more. The fall in spending puts downward pressure on both employment and prices. Similarly, when the FOMC lowers interest rates, households and firms tend to spend more and save less. This puts upward pressure on employment and prices.
However, these pressures on employment and prices from lower interest rates are not felt immediately. Instead, it typically takes a year or two for the effects of monetary policy adjustments to manifest themselves in inflation and unemployment. Hence, the FOMC's decisions about appropriate monetary policy necessarily hinge on the members' forecasts of the evolution of prices and employment over the next year or two—what we typically call our medium-term outlooks for inflation and unemployment. ...
Given these lags, and the forecast for recovery, is policy too tight or too easy?:
I've described the Fed's current monetary policy stance in some detail, and I've emphasized that the Fed's stance is much more accommodative than it was five years ago. That observation alone might suggest that the Fed's policy is too accommodative. But there have been big changes in the economy since 2007. ...
As you will hear, my main conclusion is that my outlook implies that monetary policy is currently not accommodative enough. ...
He concludes his speech with:
Monetary policy affects the economy with a lag of one or two years. Hence, a policymaker's views about the appropriate level of monetary policy accommodation depend on his or her forecast for how the economy will evolve over the next year or two. My own outlook is that growth will remain moderate over the next two years. As a result, under current policy, my outlook for inflation is that it will run below the Fed's target of 2 percent over the next two years and that the unemployment rate will be above 7 percent over that same period. Hence, the FOMC can better promote price stability and promote maximum employment, as mandated by Congress, by adopting a more accommodative policy stance. It can provide that extra accommodation by lowering the unemployment rate threshold in its forward guidance to 5.5 percent from the current setting of 6.5 percent. ...
I was highly critical of Narayana Kocherlakota in the past, especially over his view that the unemployment problem is largely structural and hence out of the reach of Fed policy. But he deserves credit for changing his views in light of the evidence, and his call for even more accommodative policy makes him one of the more dovish policymakers at the Fed. If only other policymakers were as open-minded.
Posted: 15 Jan 2013 09:24 AM PST
Lots of discussion recently about whether technological change is the primary source of wage inequality in recent decades (as opposed to policy and institutions). According to this, there are many "problems and puzzles for the skill biased technical change story":
Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles, by Owen Sidar: Dylan Matthews has a nice post on the inequality & skill biased technical change debate between David Autor, who is one of my favorite labor economists, and some folks at EPI.
I wanted to highlight this paper by David Card and John DiNardo that goes through some problems and puzzles for the skill biased technical change story. Here's how they conclude:
Our main conclusion is that, contrary to the impression conveyed by most of the recent literature, the SBTC hypothesis falls short as a unicausal explanation for the evolution of the U.S. wage structure in the 1980s and 1990s. Indeed, we find puzzles and problems for the theory in nearly every dimension of the wage structure. This is not to say that we believe technology was fixed over the past 30 years or that recent technological changes have had no effect on the structure of wages. There were many technological innovations in the 1970s, 1980s, and 1990s, and it seems likely that these changes had some effect on relative wages. Rather, we argue that the SBTC hypothesis by itself is not particularly helpful in organizing or understanding the shifts in the structure of wages that have occurred in the U.S. labor market. Based on our reading of the evidence, we believe it is time to reevaluate the case that SBTC offers a satisfactory explanation for the rise in U.S. wage inequality in the last quarter of the twentieth century. 
I think that skill-biased technical change is part of the explanation for rising inequality, but it's far from the entire story.

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