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March 8, 2013

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Latest Posts from Economist's View


Posted: 22 Feb 2013 04:52 AM PST
I don't do this often, but two days ago I decided to ban two people from comments. One, Anthony Juan Bautista, is now attempting to "tattle" on me in comments and he is also impersonating many of you in an attempt to get his comments through (when people are banned -- I think there are five people in total who are -- they always think it's what they say, i.e. that it's political, etc., rather than how they say it, i.e. their behavior).
When he impersonates regular commentors, he says things you surely wouldn't appreciate. I was having second thoughts about banning him -- the other person was much worse, a no-brainer ban, and I was worried I might have made a mistake in my irritation at the time -- but his behavior since, the impersonation of regular commetors in particular, has convinced me the decision to ban him was correct (this post can serve as a character reference when he is Googled). If he impersonates you and I miss it when I clean his comments out, please let me know (so far, it's been cm, bakho, ilsm, paine, Emichael, Lafayette, and DrDick).
Thanks.
Posted: 22 Feb 2013 12:33 AM PST
 Take a sad song, and make it worse:
Sequester of Fools, by Paul Krugman, Commentary, NY Times: ... The ... "sequester" [is] one of the worst policy ideas in our nation's history. Here's how it happened: Republicans engaged in unprecedented hostage-taking, threatening to push America into default by refusing to raise the debt ceiling unless President Obama agreed to a grand bargain on their terms. Mr. Obama, alas, didn't stand firm; instead, he tried to buy time. And, somehow, both sides decided that the way to buy time was to create a fiscal doomsday machine that would inflict gratuitous damage on the nation through spending cuts unless a grand bargain was reached. Sure enough, there is no bargain, and the doomsday machine will go off at the end of next week. ...
But that's water under the bridge. The question ... is who has a better plan for dealing with the aftermath of that shared mistake. ...
Unfortunately, neither party is proposing that we just call the whole thing off. But the proposal from Senate Democrats at least moves in the right direction, replacing the most destructive spending cuts — those that fall on the most vulnerable... — with tax increases on the wealthy, and delaying austerity in a way that would protect the economy.
House Republicans, on the other hand, want to take everything that's bad about the sequester and make it worse: canceling cuts in the defense budget, which actually does contain a lot of waste and fraud, and replacing them with severe cuts in aid to America's neediest. This would hit the nation with a double whammy, reducing growth while increasing injustice.
As always, many pundits want to portray the deadlock ... as a situation in which both sides are at fault, and in which both should give ground. But there's really no symmetry here. A middle-of-the-road solution would presumably involve a mix of spending cuts and tax increases; well, that's what Democrats are proposing, while Republicans are adamant that it should be cuts only. And given that the proposed Republican cuts would be even worse than ... under the sequester, it's hard to see why Democrats should negotiate at all, as opposed to just letting the sequester happen.
So here we go. The good news is that compared with our last two self-inflicted crises, the sequester is relatively small potatoes. ... But the looming mess remains a monument to the power of truly bad ideas — ideas that the entire Washington establishment was somehow convinced represented deep wisdom.
Posted: 22 Feb 2013 12:03 AM PST
Posted: 21 Feb 2013 06:34 PM PST
Bill C:
The 'Woodford Period': A Bourbon for Bernanke?, Twenty Cent Paradigms: The news release summarizing St. Louis Fed President's James Bullard's recent speech on the "current stance of monetary policy" includes the following:
He stated that "the current St. Louis Fed forecast for the unemployment rate implies that the 6.5 percent threshold will be crossed in June 2014." However, he noted, the policy rate implied jointly by the Taylor (1999) rule and the St. Louis Fed forecasts should increase in August 2013. Thus, "The Committee's thresholds imply a 'Woodford period' since the policy rate would be held at zero past the point where ordinary FOMC behavior would indicate an increase," Bullard said.
William McChesney Martin, who chaired the Fed in the 1950's and 60's once said it was the Fed's job "to take the punch bowl away just as the party gets going." It sounds like the Fed's new corollary to Martin's rule involves leisurely sipping bourbon for a while when the economic slump is ending. If the slump is the hangover from a financial crisis, maybe its kind of a "hair of the (monetary) dog" thing.
The release continues:
The period from August 2013 to June 2014 would be the "Woodford period," which refers to Michael Woodford of Columbia University. "According to received theory, this is a more stimulative monetary policy and possibly even an optimal monetary policy when the zero lower bound is constraining," Bullard added.
Oh, "Woodford" is the author of Interest and Prices, not Woodford Reserve bourbon whiskey. ...
Posted: 21 Feb 2013 03:10 PM PST
Tim Duy:
Don't Dismiss the Communications Value of QE, by Tim Duy: The minutes of the last FOMC meeting indicated that one group of policymakers was getting anxious about the size and pace of QE:
Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved....A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.
Another group saw a different side of the coin:
Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred.
Unsurprisingly, San Francisco Fed President John Williams falls in the latter group. In a speech today, Williams reiterates the labor market objective in setting asset purchase policy:
Critically, we indicated we will continue these purchases until the outlook for the job market improves substantially, in the context of stable prices. I anticipate that purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of this year.
Clear commitment with no discussion of imaginary risks, except to dismiss inflation concerns:
Some analysts have argued that our policy initiatives have increased the risk of an undesirable rise in inflation. I want to assure you that in no way have we relaxed our commitment to our price stability mandate. We constantly monitor inflation trends and inflation expectations. And we will not hesitate to act if necessary. In this regard, I want to emphasize that we remain committed to our 2 percent inflation target. The 2½ percent inflation threshold in our forward guidance is not a weakening of that commitment.
For now, our default should be that Federal Reserve Chairman Ben Bernanke shares the view that the real benefits of QE outweigh the imaginary costs. As long is that is true, then Williams will be correct - expect asset purchases to continue at the current pace deep into this year. What we are looking for, then, are signs that Bernanke's commitment is wavering as much as that of some of his colleagues.
I do have one quibble with John Williams. In his description of Fed policy, he states:
We've relied on two primary tools. The first is forward policy guidance, that is, public communications aimed at guiding expectations about the future path of the federal funds rate. The second is large-scale asset purchases, which also go by the name quantitative easing. As I'll explain, both of these tools stimulate the economy by lowering longer-term interest rates.
I would argue that quantitative easing also acts as a communications device that guides expectations; asset purchases are a signal about the Fed's commitment to accomodative policy. Indeed, it is the only positive action they can take to signal policy intent; otherwise, due to the zero bound, policy amounts to doing exactly nothing at this point. Hence why altering the pace of purchases changes expectations about the timing of rate hikes. I see Ryan Avent has the same idea:
But the discussion alone was enough to influence market expectations. And a change in expectations is a change in policy.
This is something the Fed is only slowly grasping, or at least only slowly building into its policymaking. The Fed initiated asset purchases with the primary goal of having a positive and mechanical effect on the economy: purchases were begun to ease funding conditions in distressed markets, hold down interest rates, and boost asset prices. As a matter of course, it acknowledged that purchases could also operate through an expectations channel, but it did not behave as though this were a significant or justifying benefit of purchase plans.
The reaction of financial market participants to what policymakers might have viewed as a relatively innocuous debate should be a red flag that they need to tread very carefully in changing the pace of asset purchases prior to achieving a substantially stronger labor market.
Bottom Line: Williams is committed to the current pace of asset purchases. He does not, however appear to place much weight on the communications value of the asset purchases. Instead, asset purchases work only "by increasing demand for longer-term Treasury and mortgage-related securities." I think they have communications value as well, something illustrated after the release of the January minutes. Rather than the current nebulous language surrounding asset purchases, the Fed would be better served by communicating a version of the Evan's rule to tie changes in the asset purchase program to specific economic objectives, presumably some point on the way to the Evan's rule thresholds.
Posted: 21 Feb 2013 10:59 AM PST
The other day I asked why anyone listens to Bowles/Simpson. After all:
Simpson is, demonstrably, grossly ignorant on precisely the subjects on which he is treated as a guru, not understanding the finances of Social Security, the truth about life expectancy, and much more. He is also a reliably terrible forecaster, having predicted an imminent fiscal crisis — within two years — um, two years ago.
In addition, he is:
cantankerous, potty-mouthed individual, who evidently feels not a bit of empathy for those less fortunate.
He's also partisan, and has a clear agenda. Yet "he's lionized" by the media. Paul Krugman tries to explain the attraction, and what it says about those who hold him in such high regard.
Posted: 21 Feb 2013 10:14 AM PST
Have distractions this morning, so a quick one. Thoughts on this? (I don't like all of these proposals, but do like the ones that offer a positive incentive, e.g. a bonus, for finding work sooner rather than later):
Rebuilding Unemployment Insurance, by Tim Taylor: In theory, the federal government sets minimum guidelines for each state's unemployment insurance system, and then each state sets its own rules for what is paid in and and what benefits are offered. Each state has its own unemployment trust fund. The idea is that the the trust fund will build up in good economic times, and then be drawn down in recessions. But it hasn't actually worked that way for a long time, and the problem is getting worse.  Christopher J. O'Leary lays out the issue and possible solutions in "A Changing Federal-State Balance in Unemployment Insurance?" written for the January 2013 Employment Research Newsletter published by the Upjohn Institute.

When a recession hits, the federal government has developed a habit of stepping in with extra unemployment insurance funds. For example, the feds stepped in with additional funding ... in 1958, 1961, 1971, 1974, 1982, 1991 and 2002--as well as during the most recent recession. With the feds stepping up, it has been easier and easier for the states to keep their unemployment taxes as low as possible. For example, average unemployment insurance taxes (adjusted for inflation) were $274/employee in 2008, lower than the $350/employee in 1994 and the $515/employee in 1984, according to Ronald Wilus of the U.S. Department of Labor.

As a result, over time the feds are paying for a larger share of unemployment insurance during recessions. ... What would be needed to get back to a system where states save up funds for unemployment insurance money in trust funds--even if some federal help might occasionally be needed?

One step suggested by O'Leary is to raise the "tax base." At present, the minimum federal standard requires that states collect unemployment insurance taxes on the first $7000 of taxable wages--a level that was established back in 1983. Just adjusting that $7,000 base for inflation would mean increasing it to about $16,000. O'Leary notes that 35 states currently have a taxable wage base at or below $15,000.

A second step would be to have a rule that unemployment insurance benefits would not kick in until after a waiting period. O'Leary writes: "A much neglected potential reform on the benefit side would be to institute waiting periods of 2–4 weeks, with the duration of the wait depending inversely on the aggregate level of unemployment. ... A somewhat longer waiting period will reduce program entry by those with ready reemployment options, and help to preserve the income security strength of the system for those who are involuntarily jobless for 4, 5, or 6 months."

Yet another step would be to use federal rules to discourage states from lowballing the funding of their unemployment insurance and relying on an influx of federal funding. ...

It's worth pointing out that unemployment insurance has a number of problems other than whether it is pre-funded. You need to meet certain qualification tests for unemployment insurance, typically based on earnings in the previous year or so, and as a result, many of the unemployed do not receive unemployment insurance. In January 2013, about 3.5 million people were receiving unemployment insurance benefits, but about 12.3 million people were unemployed.

There are also a number of proposals that seek to adjust the incentives so that unemployment insurance can better co-exist with incentives to find a new job. Some proposals are that unemployment benefits should be larger, so as to soften the economic blow of unemployment, but for a shorter time, to hasten the incentive to find a new job. Some proposals would require or allow people to set up individual unemployment accounts, which they could keep at retirement, so that people would tap their own money before turning to the government fund. One proposal would offer a bonus to those receiving unemployment insurance if they found a job quickly, because it could be less costly for the unemployment insurance trust fund if they find a job faster rather than linger on receiving benefits.

The Great Recession and its aftermath have wrecked the premises of the existing unemployment insurance system. It's time to rebuild.

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