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March 8, 2013

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 05 Mar 2013 12:24 AM PST
Simon Wren-Lewis:
... So why are politicians, in the Netherlands and elsewhere, pursuing a policy that most economists regard as an elementary error? This was a question raised by Coen Teulings, who is the director of the CPB, the Dutch fiscal council. He was commenting on an IMF sponsored conference in Sweden, at which most economists argued against short run austerity when the economy was weak, and instead advocated dealing with budgetary problems through long term structural reform. The politicians in the audience, led by the Swedish finance minister Anders Borg, disagreed. He summarizes their view as follows: "Politicians lack the ability to commit today to austerity measures to be implemented tomorrow. Hence, the only option is to take action straightaway." ...
Tuelings does not take this argument seriously, for good reasons. Instead he provides three suggestions as to why politicians are ignoring the economists. The first is a memory of the 1970s, when Keynesian policies were pursued because many failed to see the structural impact of the oil crisis. Politicians do not want to make the same mistake again. The second is that economists neglected countercyclical fiscal policy for too long, and therefore have failed to provide politicians with a clear guide to what policy should be, like perhaps an equivalent to the Taylor rule for monetary policy. Third, while both structural reform and short term austerity have political costs, politicians can sell the latter more easily, and success can be demonstrated more quickly. ...
Why do politicians ignore economists? It's a chance to implement ideological goals. Make an argument that sounds good -- if we don't get the debt under control bad things will happen! -- and use it to argue for spending cuts, smaller government, and ultimately lower taxes on wealthy contributors to reelection campaigns.
In good times or bad, conservatives will find a way to argue that tax cuts for the wealthy are the key to economic success.
Posted: 05 Mar 2013 12:03 AM PST
Posted: 04 Mar 2013 10:33 AM PST
Leila Bengali and Mary Daly on economic mobility:
U.S. Economic Mobility: The Dream and the Data, by Leila Bengali and Mary Daly, Economic Letter, FRBSF: Economic mobility, or the ability of individuals to move up or down the income distribution, is a fundamental value in the United States, one that defines the American Dream. According to a recent study by the Pew Charitable Trusts, over 40% of Americans consider hard work, ambition, and drive to be among the most important factors for economic advancement (Pew 2011). In contrast, just over 10% believe that coming from a wealthy family is one of the most important determinants of success. International surveys suggest that Americans stand out in their belief that individual effort is the key determinant of success (International Social Survey Programme 2009).
This Economic Letter examines whether the reality of mobility in the United States matches the dream. U.S. mobility data suggest that the answer is mixed, depending importantly on exactly how mobility is measured. The United States scores well on the percentage of individuals who are able to surpass the absolute level of income of their parents. But when the metric is relative economic mobility, the picture is less clear. The data show that when the population is divided in fifths, the middle three groups of the income distribution are fairly mobile. For this middle group, where one is born in the distribution does not determine where one will end up. But for those born in the bottom or the top fifth, mobility is much more constricted, suggesting that birth circumstances play more of a role in lifetime outcomes. ...[continue]...
Posted: 04 Mar 2013 10:14 AM PST
While watching Ben Bernanke's speech on Friday night, I wrote two notes to myself. The first was "regulation versus interest rates (debate with Stein)" and the second was "interest rate on reserves."
Bernanke's comments on the interest rate the Fed pays on bank reserves came in response to a question after the speech. He was asked why the Fed hasn't lowered interest on reserves to zero, or even made it negative to promote bank lending. As in the past when asked this question, Bernanke emphasized that the Fed was worried about the effect this might have on money markets -- an objection that has never been adequately explained in my view -- but it was clear this is not and will not be on the Fed's agenda. The Fed might raise the IOR to address inflation worries, but lowering it further isn't going to happen.
The other (more) notable part of the speech was about how the Fed should respond to asset price bubbles. Should the Fed use regulatory/supervisory authority to target individual asset markets that appear to be overheated (the Bernanke approach), or does the difficulty of detecting bubbles in individual markets mean the Fed should use interest rate increases that calm markets across the board (as Fed governor Stein has suggested)? Bernanke made it clear that he preferred the approach of targeting individual markets, and that he anticipated interest rates would remain low well into the recovery (and Janet Yellen echoed this today).
Neil Irwin has a nice summary of this debate:
Jeremy Stein, a Fed governor since last May ... argued in a Feb. 7 speech that there are already signs of overheating in the markets for certain kinds of securities, including junk bonds and real estate investment trusts that invest in mortgages. And if those or other potential bubbles get so large that if they popped the whole U.S. economy could be in danger, he argued, there is a case for using the Fed's most blunt tool to combat them—raising interest rates across the economy.
Stein isn't ready to do that just yet ... but some of his colleagues are... The nub of the argument ... is that when financial bubbles arise, it's hard to know with certainty where they are and how big a risk they pose, so it's not enough for regulators to try to stamp them out. Higher interest rates may be a blunt tool, but at least you know they will be effective. If the last 15 years have taught us anything, it is that financial bubbles can wreak huge damage to the economy, so it's worth it to try to nip them in the bud.
The two most powerful Fed officials have offered, in speeches Friday night and Monday morning, what amounts to a riposte to these arguments. "Long-term interest rates in the major industrial countries are low for good reason," Chairman Ben Bernanke said Friday evening... "Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading–ironically enough–to an even longer period of low long-term rates."
Vice-chair Janet Yellen chimed in Monday morning... "At this stage," she said, "there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability."
So the Bernanke-Yellen response to the Stein-George argument boils down to a polite version of this: Are you crazy? Unemployment is really high! Inflation does not appear to be much of a threat! Why should we cripple the prospects of economic recovery just because investors may be paying too much for certain types of corporate bonds and end up losing money. ...

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