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February 17, 2013

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 12 Feb 2013 12:33 AM PST
My latest column begins with Eric Cantor's call for Republicans to talk about "helping folks":
For Obama, State of the Union Means State of the People, by Mark Thoma: House Majority Leader Eric Cantor believes that Republicans must show their concern for those struggling in this economy if they want to regain their political footing. "We've got to be talking about helping folks," he said Sunday on Meet the Press, "You've got so many millions of Americans who feel that they have become an afterthought."
There's a reason people feel that way. Republicans have refused to support any of the jobs proposals president Obama has put forward...
What do Republicans really want?:
Pretending to be on the side of the middle class while enacting policies that help businesses and the wealthy has worked well in the past, so it shouldn't be surprising to see Republicans try this again. Remember the failed promises of trickle-down economics?
But if Republicans -- and Obama -- want to steer the conversation away from the debt, I'm all for that:
President Obama also wants to change the conversation toward the needs of the millions of Americans who feel abandoned by politicians, and he intends to emphasize jobs and the economy in his State of the Union address. This is a welcome change. Instead of focusing on the debt, we should be discussing what we want the government to do. What are our priorities, what will they cost, and what can we, as a nation, afford? In the short-run, is there room for us to do more to help the unemployed? In the longer run, should government be bigger or smaller...? Can the composition of spending and taxes be improved? How fast does the debt need to be reduced, and should it be reduced through tax increase or spending cuts? As we get richer as a society – income doubles every thirty years or so – should the share of GDP devoted to helping people increase, or should government's share of output be limited to historical averages as many conservatives argue?
As we discuss these important questions about the size and role of government, we need to remember something that has been forgotten too often amid Republican attempts limit government intervention into the economy. The government has an important role to play in overcoming market failures... The private sector, on its own, will not provide the correct amounts of infrastructure, retirement security, health care spending, protection against monopoly and corruption, unemployment insurance, national defense, environmental regulation, education, food and drug safety, bank regulation, innovation, anti-trust action, safe working conditions, support of basic research, stabilization policy, and so on. Fixing these market failures through government action does not distort private sector economic activity away from the optimal outcome as many on the right would have us believe, it moves us closer to the ideal textbook economy. ...
Full column here.
Posted: 12 Feb 2013 12:24 AM PST
This graph in this post showing real per capita growth in government expenditures under recent presidents got more attention than I expected (e.g.), probably because for many people the growth under Obama was unexpectedly low. Here's the updated version of the graph (as before, this came to me via email):
Here are the notes that came with the older version of the graph:
Seeing the Krugman commentary comparing real government spending under Obama and Reagan made me curious about what it looks like if you express it in per capita terms? In particular, how does the Obama period compare with other presidencies in terms of penury/austerity versus spendthriftness?
To compare presidencies, I did the calculation two ways. One starts in the quarter before the president was elected (e.g., 2008Q4), the other starts in the first quarter of the presidency (e.g., 2009Q1). (The ARRA probably had some effect in Q1, but most of the change was simply economic conditions that the incoming president had nothing to do with, so I think I prefer the Q1 to Q1 method). ...
Posted: 12 Feb 2013 12:03 AM PST
Posted: 11 Feb 2013 01:27 PM PST
Remember the debate about whether the slow recovery was due to lack of demand, regulation, or taxes?:
Aggregate Demand and State-Level Employment, by Atif Mian and Amir Sufi, FRBSF Economic Letter: What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors. ...
Posted: 11 Feb 2013 10:44 AM PST
Ed Phelps does not like rational expectations:
Expecting the Unexpected: An Interview With Edmund Phelps, by Caroline Baum, Commentary, Bloomberg: ...I talked with [Edmund Phelps] ... about his views on rational expectations...
Q: So how did adaptive expectations morph into rational expectations?
A: The "scientists" from Chicago and MIT came along to say, we have a well-established theory of how prices and wages work. Before, we used a rule of thumb to explain or predict expectations: Such a rule is picked out of the air. They said, let's be scientific. In their mind, the scientific way is to suppose price and wage setters form their expectations with every bit as much understanding of markets as the expert economist seeking to model, or predict, their behavior. ...
Q: And what's the consequence of this putsch?
A: Craziness for one thing. You're not supposed to ask what to do if one economist has one model of the market and another economist a different model. The people in the market cannot follow both economists at the same time. One, if not both, of the economists must be wrong. ... Roman Frydman has made his career uncovering the impossibility of rational expectations in several contexts. ...
When I was getting into economics in the 1950s, we understood there could be times when a craze would drive stock prices very high. Or the reverse... But now that way of thinking is regarded by the rational expectations advocates as unscientific.
By the early 2000s, Chicago and MIT were saying we've licked inflation and put an end to unhealthy fluctuations –- only the healthy "vibrations" in rational expectations models remained. Prices are scientifically determined, they said. Expectations are right and therefore can't cause any mischief.
At a celebration in Boston for Paul Samuelson in 2004 or so, I had to listen to Ben Bernanke and Oliver Blanchard ... crowing that they had conquered the business cycle of old by introducing predictability in monetary policy making, which made it possible for the public to stop generating baseless swings in their expectations and adopt rational expectations...
Q: And how has that worked out?
A: Not well! ...
[There's more in the full interview.]

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