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February 4, 2013

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 18 Dec 2012 12:34 AM PST
New column:
What have monetary and fiscal policymakers learned from the Great Recession?
Not enough, particularly fiscal policymakers, but maybe there's a way to do better.
Posted: 18 Dec 2012 12:06 AM PST
Posted: 17 Dec 2012 01:21 PM PST
One more from Brad DeLong, a comment on the negotiations over the fiscal cliff, and it's not good news:
Can't Obama Play This Game?: This Is a Lousy Fiscal Cliff Deal Weblogging: "Chained-CPI" is code for "let's really impoverish some women in their 90s!" It's a bad policy. It should be off the table. Failing to extend the payroll tax cut is bad policy. It should be off the table. Failing to boost infrastructure spending is bad policy. It should be off the table.
This deal would still be on the table in January. And odds are Obama could get a much better deal than this come January...
Grrr.
Posted: 17 Dec 2012 01:10 PM PST
Brad DeLong answers the question: Are Your Wages Set in Beijing?
This is I think an argument from my old teacher Richard Freeman, about how in the eighties and nineties effectively 2 billion workers were added to the potential global manufacturing work force. Developments in communication and trade, the coming of the container, the coming of the Deng Xiaoping policy reforms in China, reform in India, confidence these policy changes would persist--all these meant that businesses all around the world wondering where to locate manufacturing could be confident that they could if they wanted to, if it made sense, draw on a labor force that was 2 billion bigger than it had been in the 1970s.
In that context, the fact that the United States had a lot of highly-skilled manufacturing workers who had an immense productivity edge was no longer an effective factor in world production. Thus the claim is that an awful lot of the rise in inequality in the United States between 1980 and today is the result of this global pressure on the American economy.
Back in the mid 1990s when I was working for the Clinton Administration, I wrote a bunch of memos about how this was then nonsense--that is, it was simply too small to matter.
Since the mid 1990s, this factor has become significantly larger.
But I'd say it's still in fourth place as far as the increase in U.S. inequality is concerned.
First place has been the education factor--the fact the United States is no longer clearly the most educated country in the world, and the education system is no longer is putting downward pressure on wage inequality.
Second place is the shift in the tax and transfer system--the fact that our tax and transfer system as a whole is less progressive than it was a generation ago, and that in fact it's regarded as Kenyan Muslim socialism to even return taxes on the rich back to their levels of the Clinton Administration. ...
Third are the social structural and economic changes that allow the princes of Wall Street and the plutocrat CEOs to successfully charge what they do charge. ...
Global pressures are fourth. They are there, but they are ... more like ten percent of the process.
And with that ten percent we should in fact be willing to deal. We still are the most favored nation by luck in history. We thus have responsibility to manage the international system as a whole. We have a responsibility to be the importer of last resort for countries that are trying to develop by building up their own industries.
I place more weight on "social structural and economic changes" than he does (with the words "economic and political power" tossed into the mix somewhere).
Posted: 17 Dec 2012 11:53 AM PST
I can't resist this one (via Boing Boing):
Master computer controls universe?, The Times of India: Scientists are conducting experiments to discover whether the universe exists within a Matrixstyle computer simulation created by super computers of the future.
The experiments being conducted by University of Washington could prove that we are merely pawns in some kind of larger computer game. However, it is unclear who created these super computers that may hypothetically power our existence.
"Imagine the situation where we get a big enough computer to simulate our universe, and we start such a simulation on our computers," said professor Martin Savage, a physicists working on the project. "If that simulation runs long enough, and have same laws as our universe, then something like our universe will emerge within that simulations, and the situation will repeat itself within each simulation," he said. ...
Explaining how the experiment works, physicists claim that finite computer resources mean that space time is not continuous but set on a grid with a finite volume, designed to create maximum energy subatomic particles. The direction these particles flow in will depend on how they are ordered on the grid. They will be looking at the distribution of the highest energy cosmic rays in order to detect patterns that could suggest that universe is the creation of some futuristic computer technology. And if it does turns out that we are mere players in some sort of computer program, they suggested that there may be a way to mess with the program, and play with the minds of our creators. "One could imagine trying to figure out how to manipulate the code, communicate with the code and questions that appear weird to consider today," he said.
If you like this stuff, you might enjoy The hidden reality: parallel universes and the deep laws of the cosmos by Brian Greene. One of the chapters (which explore different ways a multiverse might arise) is on this topic. A big problem in this literature is finding ways to test these various theories empirically, so this is interesting from that perspective as well.
Posted: 17 Dec 2012 10:59 AM PST
An Economic Letter from the SF Fed warns that, as discouraged workers return to the workforce with improving economic conditions:
...the unemployment rate could stay around 8% as late as mid-2014, despite continued job growth. Progress in reducing the unemployment rate is a key factor in keeping consumer confidence and spending high enough to sustain recovery. And policymakers use the unemployment rate as a gauge of economic progress. A stall in reducing the unemployment rate would undoubtedly be viewed as a significant disappointment.
Posted: 17 Dec 2012 09:51 AM PST
Robert Samuelson:
The Fed rolls the dice, by Robert J. Samuelson, Commentary, Washington Post: It was big news last week when the Federal Reserve announced that it wants to maintain its current low-interest rate policy until unemployment, now 7.7 percent, drops to at least 6.5 percent. The Fed was correctly portrayed as favoring job creation over fighting inflation, though it also set an inflation target of 2.5 percent. What was missing from commentary was caution based on history: the Fed has tried this before and failed — with disastrous consequences.
By "this," I mean a twin targeting of unemployment and inflation. In the 1970s, that's what the Fed did. Targets weren't announced but were implicit. The Fed pursed the then-popular goal of "full employment," defined as a 4 percent unemployment rate; annual inflation of 3 percent to 4 percent was deemed acceptable. The result was economic schizophrenia. Episodes of easy credit to cut unemployment spurred inflation... By 1980, inflation was 13 percent and unemployment, 7 percent. ...
Today's problem is similar. Although the Fed has learned much since the 1970s ... its economic understanding and powers are still limited. It can't predictably hit a given mix of unemployment and inflation. Striving to do so risks dangerous side effects, including a future financial crisis. ...
It's seductive to think the Fed can engineer the desired mix of unemployment and inflation. And the motivation is powerful. About 5 million Americans have been jobless for six months or more. The present job market represents, as Bernanke said, "an enormous waste of human and economic potential." But the Fed is bumping against the limits of its powers. Are potential short-term benefits worth the long-term risks? It's a close call.
What does he think a dual mandate means if not the "twin targeting of unemployment and inflation"? That's not unique to the 1970s, it's essentially the Taylor rule (the Taylor principle comes into play as well, but I want to focus on something else). Anyway, he is trying to tell the story about shifting Phillips curve due to rising inflationary expectations, but he misses a key part of the story. A popular explanation for problems in the 1970s, one I think has a lot of veracity, is that the Fed was shooting at the wrong unemployment target (you can find this story in most textbooks, e.g. see Mishkin's text on demand-pull inflation). The Fed was shooting at a 4 percent unemployment target, but because of a large influx of new workers from the baby boom and women entering the workforce, the natural rate of unemployment was actually much higher than 4 percent (new workers tend to have high frictional unemployment rates, and there were also structural changes going on within the economy that led to a higher natural rate of unemployment as well). All told, it's not unreasonable to think of the natural rate had drifted as high as 7 percent, maybe even higher. It eventually came down to closer to 4 percent as the surge of new workers ended and structural change abated somewhat, but for awhile it was elevated above the Fed's 4 percent target. Unfortunately, the Fed didn't not realize this.
Here's how the story goes. The Fed, seeing unemployment drifting toward its natural rate of, say, 7 percent responded to its full employment mandate by using more aggressive policy to create inflation. In the short-run, the policy worked, unemployment did fall due to the inflationary surprise, but as soon as people adjusted their inflationary expectations (and demanded higher wages, etc.), the Phillips curve shifted and we ended up with the inflation we wanted, but the employment gains were lost as the unemployment rate moved toward its natural rate of 7 percent. At that point the Fed says to itself, we must not have been aggressive enough, we need a second round of stimulus and it pumps up the inflation rate even further. Again, this works so long as the inflation is a surprise, unemployment falls in the short-run, but as soon as inflationary expectations adjust once again the employment gains are eliminated, but the inflation remains. As this continues, inflation continues to drift upward until eventually we end up with double-digit inflation and nothing whatsoever to show for it in terms of employment gains.
The fundamental problem here is a miscalculation of the natural rate of the natural rate of unemployment. So the question is, has the Fed made this mistake again? Is the natural rate of unemployment a lot higher than 6.5 percent so that shooting for this target is likely to end up with double-digit, 1970s type inflation?
No for several reasons. First, the Fed is fully aware of this past mistake, and many opposed more stimulus for precisely this reason (e.g. Narayana Kockerlakoata would not support more stimulus until Bernanke convinced him in a series of phone calls that the employment problem was largely cyclical, not structural). If they are shooting at the wrong target, then the policy will not work and they will not continue doing so as they did in the 1970s. They are much more aware of the signs to look for that indicate they've made this mistake. Second, there has been considerable effort to measure the structural/cyclical/frictional unemployment mix for precisely this reason, and the estimates, for the most part, point to a mostly cyclical problem. We didn't have this type of information in the 1970s, in fact we weren't even asking this question. We simply assumed that full employment meant 4 percent and set policy accordingly. Finally, there is an inflation threshold of 2.5 percent, a relatively low level of tolerance for mistakes of this type. If the Fed is wrong about the structural rate, we'll see inflation, and if it the projected inflation rate drifts above 2.5 percent, the program will be reversed. I have no doubt that the Fed is serious abut pulling the plug if inflation rises above 2.5 percent. That's true even if unemployment is still above 6.5 percent.
Samuelson can worry all he wants, he's good at playing the Very Serious Person role (inflation is coming!, the debt will cause interest rates to spike!, there could even be "dangerous side effects, including a future financial crisis"!), but the Fed is not risking a repeat of the 1970s, not even close.
Update: Dean Baker comments on the Samuelson article.

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