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March 31, 2013

'David Stockman Goes Way, Way Over the Top'

The wingnut of the day award is easy to pick, it's David Stockman:
Cranky Old Men, by Paul Krugman: ... Actually, I was disappointed in Stockman’s piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant. It’s cranky old man stuff, the kind of thing you get from people who read Investors Business Daily, listen to Rush Limbaugh, and maybe, if they’re unusually teched up, get investment advice from Zero Hedge. Sad.
David Stockman Goes Way, Way Over the Top, by Jared Bernstein:  He has a featured piece in today’s NYT which, while about 11.8% absolutely and totally on target, is mostly a horrific screed, an ahistorical, dystopic, Hunger-Games vision of America based on debt obsession and willful ignorance of macroeconomics and the impact of market failure. ...
David Stockman wants to pee in your cornflakes, Kids Prefer Cheese: Wow. David Stockman confuses cause and effect, goes all gold-buggy, slanders Milton Friedman, and just generally comes unhinged in a massive hissy fit in today's NYT. ...
Update: See also David Henderson's "David Stockman Screeches."

'Reactions to Mankiw on the Long Run Budget Path'

Greg Mankiw says the goal for the budget should not be a stable debt-to-GDP ratio as the president has called for, instead the ratio should be falling. But there are a few important qualifiers to this statement that are easy to miss.

Even if you agree with Mankiw that the debt to GDP ratio should be falling rather than stable, he never answers falling to what? (Does it fall forever until it hits zero, then a surplus which gets larger and larger until spending is zero and taxes take everything? I doubt that's what he has in mind.) How fast it should fall? (Do we balance the budget this year or over 100 years?). Should the debt to GDP ratio vary over the business cycle (i.e. can we do countercyclical fiscal policy?). On the latter point, Owen Zidar:
Reactions to Mankiw on the Long Run Budget Path: I agree with most of Greg Mankiw NYTimes piece on long-term debt to GDP but can’t overlook a fairly glaring omission –  he seems to ignore the fact that we are currently experiencing a major economic catastrophe. ...
While I completely agree that we should save in good times (i.e. have a falling debt to GDP ratio), we are not in good times and it’s quite likely that trying to save too much in bad times will be counterproductive. A primary reason why we want to be creditworthy is to have the ability to borrow for times like this. I simply have a hard time understanding why preparing for the next crisis should supersede adequately dealing with the current one.
It's easy to miss, but Mankiw actually covers this when he says " In normal times, when we are lucky enough to enjoy peace and prosperity, the debt-to-G.D.P. ratio shouldn’t just be stable; it should be falling." Notice the key words "normal" and "prosperity". That's what Owen is saying too, we should a surplus in good (normal, prosperous) times. But we should also run deficits in bad times so that on balance the debt load is stable (or hits some target). Mankiw slips in the part about a surplus in good times, though the qualifiers are easy to miss, but fails to address what to do in a recession (these are not the normal, prosperous times he cites as a condition for a falling ratio). That's a big omission because many people are going to conclude he is pushing austerity, i.e. reducing the debt during a severe recession. If he's really saying that (and I don't think he is), he should make it clear. If he's not saying that, if he believes in countercyclical fiscal policy, he should say that as well. Leaving it vague, as he does, is not helpful at all.
PGL comments:
Mankiw’s Mistakes on the Long-Run Debt Issue: Greg Mankiw wants to lecture the President on fiscal sustainability. Alas, his op-ed is full of errors starting with:
Representative Paul D. Ryan, chairman of the House Budget Committee, has a plan to balance the federal budget in 10 years.
Should we just fall out of our chairs laughing at such an incredibly absurd statement? Ryan wants to cut tax rates but assume a level of tax revenues that is over $500 billion a year above what many analysts suggest. And I have a plan to replace Tim Duncan as the center for the Spurs even though I’m only 5 feet 6 inches. And then we get these canards:
With the exception of a few years starting in the late 1990s, when the Internet bubble fueled an economic boom, goosed tax revenue and made President Clinton look like a miracle worker, the federal government has run a budget deficit consistently for the last 40 years.
Internet bubble? Mankiw really seems to hate that the Clinton years, which started with the 1993 tax rates increases, had better economic performance that either the Reagan-Bush41 years or the Bush43 years. As far as the deficit being positive for all these other years, he should read what both Milton Friedman and Robert Barro were writing on the deficit back in 1979 and 1980 – that the debt in inflation adjusted terms was falling. Hey – I don’t mind a conservative economists lecturing the President on fiscal policy if he gets the facts right. This op-ed, however, fails to get a few key facts right.
Confused Americans want to know: Does Greg Mankiw believe in countercyclical fiscal policy in deep, prolonged recessions or not?

'GOP's Future Lies in Heeding Women's Concerns'

My daughter Amy in the SF Chronicle "on how the GOP can better talk to women":
GOP's future lies in heeding women's concerns, by Amy Thoma (open link): The Republican Party needs help. That might be the understatement of the past two election cycles. It seems that we're hemorrhaging voters - especially young women. Registration numbers released this month only underscore the party's need to expand its base. We're not giving women my age enough reasons to stay or join. 
As a 30-ish young professional, I don't see much coming out of the party that resonates with me. We didn't lose twentysomething and thirtysomething women in the last election because our digital efforts lagged (though they did) or because some crazy white guys said ridiculous things about rape (though they did), but rather because no one bothered to ask what we think or care about. I don't see any women on the national scene I relate to, and I don't hear any politicians addressing issues I care about.
I want the Republican Party to succeed. A successful two-party system is necessary to enact reasonable public policy, and I still believe that entrepreneurship, personal responsibility and freedom make the United States great. And Republicans are best positioned to promote these ideas. ...

Links for 03-31-2013

March 30, 2013

'The Price Is Wrong'

As noted below, it is a slow day, but this is well worth reading (there's quite a bit more in the original post):
The Price Is Wrong, by Paul Krugman: It’s a slow morning on the economic news front, as we wait for various euro shoes to drop, so I thought I’d share a meditation I’ve been having on the diagnosis and misdiagnosis of the Lesser Depression. ...
So, start with our big problem, which is mass unemployment. Basic supply and demand analysis says that ... prices are supposed to rise or fall to clear markets. So what’s with this apparent massive and persistent excess supply of labor? In general, market disequilibrium is a sign of prices out of whack... The big divide comes over the question of which price is wrong.
As I see it, the whole structural/classical/Austrian/supply-side/whatever side of this debate basically believes that the problem lies in the labor market. ... For some reason, they would argue, wages are too high... Some of them accept the notion that it’s because of downward nominal wage rigidity; more, I think, believe that workers are being encouraged to hold out for unsustainable wages by moocher-friendly programs like food stamps, unemployment benefits, disability insurance, and whatever.
As regular readers know, I find this prima facie absurd — it’s essentially the claim that soup kitchens caused the Great Depression. ...
So what’s the alternative view? It’s basically the notion that the interest rate is wrong — that given the overhang of debt and other factors depressing private demand, real interest rates would have to be deeply negative to match desired saving with desired investment at full employment. And real rates can’t go that negative because expected inflation is low and nominal rates can’t go below zero: we’re in a liquidity trap. ..
There are strong policy implications of these two views. If you think the problem is that wages are too high, your solution is that we need to meaner to workers — cut off their unemployment insurance, make them hungry by cutting off food stamps, so they have no alternative to do whatever it takes to get jobs, and wages fall. If you think the problem is the zero lower bound on interest rates, you think that this kind of solution wouldn’t just be cruel, it would make the economy worse, both because cutting workers’ incomes would reduce demand and because deflation would increase the burden of debt.
What my side of the debate would call for, instead, is a reduction in the real interest rate, if possible, by raising expected inflation; and failing that, more government spending to increase demand and put idle resources to work. ...
So yes, the price is wrong — but it’s a terrible, disastrous mistake to focus on the wrong wrong price.
Why should workers bear the burden of a recession they had nothing to do with causing? We should do our best to protect vulnerable workers and their families, and if it comes at the expense of those who were responsible for the boom and bust, I can live with that (and no, the cause wasn't poor people trying to buy houses -- people on the right who are afraid they will be asked to pay for their poor choices, or who want to pursue an anti-government, do not help the unfortunate with my hard-earned investment income agenda have tried to make this claim, and they are still at it, but it is "prima facie absurd").

Links for 03-30-2013

March 29, 2013

'Is 'Intellectual Property' a Misnomer?'

Tim Taylor:
Is "Intellectual Property" a Misnomer?, by Tim Taylor: The terminology of "intellectual property" goes back to the eighteenth century. But some modern critics of how the patent and copyright law have evolved have come to view the term as a tendentious choice. One you have used the "property" label, after all, you are implicitly making a claim about rights that should be enforced by the broader society. But "intellectual property"  is a much squishier subject than more basic applications of property, like whether someone can move into your house or drive away in your car or empty your bank account. ...
Is it really true that using someone else's invention is the actually the same thing as stealing their sheep? If I steal your sheep, you don't have them any more. If I use your idea, you still have the idea, but are less able to profit from using it. The two concepts may be cousins, but they not identical.

Those who believe that patent protection has in some cases gone overboard, and is now in many industries acting more to protect established firms than to encourage new innovators, thus refer to "intellectual property as a "propaganda term." For a vivid example of these arguments, see "The Case Against Patents," by Michele Boldrin and David K. Levine, in the Winter 2013 issue of my own Journal of Economic Perspectives. (Like all articles in JEP back to the first issue in 1987, it is freely available on-line courtesy of the American Economic Association.)

Mark Lemley offers a more detailed unpacking of the concept of "intellectual  property" in a 2005 article he wrote for the Texas Law Review called "Property, Intellectual Property, and Free Riding" Lemley writes: ""My worry is that the rhetoric of property has a clear meaning in the minds of courts, lawyers and commentators as “things that are owned by persons,” and that fixed meaning will make all too tempting to fall into the trap of treating intellectual property just like “other” forms of property. Further, it is all too common to assume that because something is property, only private and not public rights are implicated. Given the fundamental differences in the economics of real property and intellectual property, the use of the property label is simply too likely to mislead."

As Lemley emphasizes, intellectual property is better thought of as a kind of subsidy to encourage innovation--although the subsidy is paid in the form of higher prices by consumers rather than as tax collected from consumers and then spent by the government. A firm with a patent is able to charge more to consumers, because of the lack of competition, and thus earn higher profits. There is reasonably broad agreement among economists that it makes sense for society to subsidize innovation in certain ways, because innovators have a hard time capturing the social benefits they provide in terms of greater economic growth and a higher standard of living, so without some subsidy to innovation, it may well be underprovided.

But even if you buy that argument, there is room for considerable discussion of the most appropriate ways to subsidize innovation. How long should a patent be? Should the length or type of patent protection differ by industry? How fiercely or broadly should it be enforced by courts? In what ways might U.S. patent law be adapted based on experiences and practices in other major innovating nations like Japan or Germany? What is the role of direct government subsidies for innovation in the form of government-sponsored research and development? What about the role of indirect government subsidies for innovation in the form of tax breaks for firms that do research and development, or in the form of support for science, technology, and engineering education? Should trade secret protection be stronger, and patent protection be weaker, or vice versa?

These are all legitimate questions about the specific form and size of the subsidy that we provide to innovation. None of the questions about "intellectual property" can be answered yelling "it's my property."

The phrase "intellectual property" has been around a few hundred years, so it clearly has real staying power and widespread usage  I don't expect the term to disappear. But perhaps we can can start referring to intellectual "property" in quotation marks, as a gentle reminder that an overly literal interpretation of the term would be imprudent as a basis for reasoning about economics and public policy.

Crying Wolf, Bear, Lion -- Whatever It Takes

For conservatives, there is always a crisis just around the corner that just so happens to support and compel the policies they advocate. But like tomorrow, the crisis never comes:
Liz Cheney Is Even More Bonkers Than We Suspected, by Jon Chait: Liz Cheney’s op-ed in today’s Wall Street Journal is an important and alarming document. She is not a marginal figure... And she ... is obviously stark raving mad.
Even after four years of bug-eyed right-wing paranoia, Cheney’s op-ed stands out for its utter dearth of the slightest whiff of perspective or factual grounding. President Obama, she tells us,... does not want the economy to grow. (“He believes in greater redistribution of a much smaller pie.”) Obama “seems unaware that the free-enterprise system has lifted more people out of poverty than any other economic system devised by man” — which is odd, because Obama is always saying things like “business, and not government, will always be the primary generator of good jobs...” The best approximations of America’s future under Obama are tiny European nations that lack control of their own currency. (“If you're unsure of what this America would look like, Google ‘Cyprus’ or ‘Greece.’”) ...
The most telling piece of Cheney’s rant may be a quote she uses, from Ronald Reagan in 1961... In that speech, Reagan argued that establishing Medicare would inevitably lead ... inevitably ... to full government control over the entire economy...
Conservatives still quote this speech a lot, strangely considering it a prescient warning rather than evidence that their fears of Big Government are usually totally wrong. The paranoia is simply transferred from one event to the next. ... Reagan, speaking a quarter-century later, assured his audience that he loved Social Security but that Medicare would surely fulfill those same warnings. Republicans now pledge their love for Medicare but see Obamacare as the death knell for freedom.
Cheney, typically, draws the usual lesson. “President Reagan's words, spoken 52 years ago this weekend, still ring true, with one modification,” she writes, “If we don't defend our freedoms now against the onslaught of President Obama's policies, we won't have to wait until our sunset years for American freedom to be a distant memory.” The destruction of freedom keeps happening in America, and yet, somehow, not happening. It perpetually lies just over the horizon, close enough to keep refreshing the supply of right-wing paranoia.
Inflation will soar, interest rates will spike, blah, blah, blah. When people start to catch on to the 'cry wolf to make ideological gains' strategy, conservatives shift to a new warning about a dismal future. It's always sunset in America unless we follow their policies.

Speaking of sunset in America and destroying the economy, we should perhaps remember that Obama inherited an economy that was already destroyed. Let's see, who was president before Obama (hint: the same clowns were defending him even though they now hardly speak his name)?

Paul Krugman: Cheating Our Children

The deficit scolds have a new argument, but it's no better than the old one:
Cheating Our Children, by Paul Krugman, Commentary, NY Times: So, about that fiscal crisis — the one that would, any day now, turn us into Greece. Greece, I tell you: Never mind.
Over the past few weeks, there has been a remarkable change of position among the deficit scolds.... It’s as if someone sent out a memo saying that the Chicken Little act, with its repeated warnings of a U.S. debt crisis that keeps not happening, has outlived its usefulness. Suddenly, the argument has changed: It’s not about the crisis next month; it’s about the long run, about not cheating our children. ...
There’s just one problem: The new argument is as bad as the old one. ... What’s wrong with this argument? For one thing, it involves a fundamental misunderstanding of what debt does to the economy.
Contrary to almost everything you read in the papers or see on TV, debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves. ...
Yet there is, as I said, a lot of truth to the charge that we’re cheating our children. How? By neglecting public investment and failing to provide jobs. ... And right now — with vast numbers of unemployed construction workers and vast amounts of cash sitting idle — would be a great time to rebuild our infrastructure. Yet public investment has actually plunged since the slump began.
Or what about investing in our young? We’re cutting back there, too, having laid off hundreds of thousands of schoolteachers and slashed the aid that used to make college affordable for children of less-affluent families.
Last but not least, think of the waste of human potential caused by high unemployment among younger Americans — for example, among recent college graduates who can’t start their careers and will probably never make up the lost ground.
And why are we shortchanging the future so dramatically and inexcusably? Blame the deficit scolds,... whose constant inveighing against the risks of government borrowing, by undercutting political support for public investment and job creation, has done far more to cheat our children than deficits ever did.
Fiscal policy is, indeed, a moral issue, and we should be ashamed of what we’re doing to the next generation’s economic prospects. But our sin involves investing too little, not borrowing too much — and the deficit scolds, for all their claims to have our children’s interests at heart, are actually the bad guys in this story.

Links for 03-29-2013

March 28, 2013

'The Same-Old, Same-Old Labor Market'

David Altig (there is much more detail, graphs, etc. in the original post):
The Same-Old, Same-Old Labor Market, macroblog: In his March 24 Wall Street Journal piece on declining government payrolls, Sudeep Reddy offers up a key observation:
The cuts in the public-sector workforce—at the federal, state and local levels—marked the deepest retrenchment in government employment of civilians since just after World War II... down by about 740,000 jobs since the recession ended in June 2009. At the same time, the private sector has added more than 5.2 million jobs over the course of the recovery.
As the Journal article notes, the story of shrinking government employment combining with private-sector payroll expansion has been remarkably consistent for much of the recovery. ...
It is worth pointing out that the monthly average of 17,000 state, local, and federal government jobs lost since March 2010 has been nearly matched by average monthly increases of better than 14,000 jobs in manufacturing, a sector that persistently shed jobs in the previous recovery. The replacement of private- for public-sector employment has generated 175,000 to 185,000 net jobs per month in both 2011 and 2012. To put one perspective on that figure, at current labor force participation rates (along with some other assumptions and caveats), that pace would be sufficient to reach the Federal Open Market Committee's 6.5 percent unemployment threshold by sometime in spring 2015 (as you can verify yourself with the Atlanta Fed's Jobs Calculator). That calculation raises the stake somewhat on the matter of how "the rest of the private sector responds."
Think how much better things would be without shrinking government employment, or even better with a temporary expansion in government employment to bridge the gap until private sector employment prospects improve.

The Hierarchy of Macroeconomic Disasters

Brad DeLong rethinks his description of the economic downturn:
my conclusion is that I should stop calling the current episode the Lesser Depression. Yes, its shape is different from that of the Great Depression; but, so far at least, there is no reason to rank it any lower in the hierarchy of macroeconomic disasters.
More here.

Corporate Profitability

Corporations are making "historic levels" of profit:
Epi
Economy built for profits not prosperity, by Lawrence Mishel, EPI: Newly released data on corporate profitability for 2012 show the continuation of historic levels of profitability despite excessive unemployment and stagnant wages for most workers. Specifically, the share of capital income (such as profits and interest, which are hereafter referred to as ‘profits’) in the corporate sector increased to 25.6 percent in 2012, the highest in any year since 1950-1951 and far higher than the 19.9 percent share prevailing over 1969-2007, the five business cycles preceding the financial crisis. ...
This helps to explain the lack of enthusiasm among corporate leaders for a jobs/stimulus program. They're doing fine. (Though that won't stop them from arguing that corporate tax cuts -- which would further increase the mountain of cash they are sitting on -- are the key to the recovery. Note however that business investment is relatively strong and "This historic share of income going to profits reflects historically high returns on investments, meaning more profit per dollar of assets.")

Update: I meant to add, if only there was some way of putting those idle funds -- and people -- to work productively (picture Paul Krugman banging his head against the wall in frustration as our infrastructure crumbles...)

Links for 03-28-2013

March 27, 2013

'Do Intellectual Property Rights on Existing Technologies Hinder Subsequent Innovation?'

Out and about today, so quickly:
Do intellectual property rights on existing technologies hinder subsequent innovation?, EurekAlert: A recent study (Journal of Political Economy 121:1 February 2013) suggests that some types of intellectual property rights discourage subsequent scientific research.
"The goal of intellectual property rights – such as the patent system – is to provide incentives for the development of new technologies. However, in recent years many have expressed concerns that patents may be impeding innovation if patents on existing technologies hinder subsequent innovation," said Heidi Williams, author of the study. "We currently have very little empirical evidence on whether this is a problem in practice."
Williams investigated the sequencing of the human genome by the public Human Genome Project and the private firm Celera. Genes sequenced first by Celera were covered by a contract law-based form of intellectual property, whereas genes sequenced first by the Human Genome Project were placed in the public domain. Although Celera's intellectual property lasted a maximum of two years, it enabled Celera to sell its data for substantial fees and required firms to negotiate licensing agreements with Celera for any resulting commercial discoveries. ...
Williams' conclusion points to a persistent 20-30 percent reduction in subsequent scientific research and product development for those genes held by Celera's intellectual property.
"My take-away from this evidence is that – at least in some contexts – intellectual property can have substantial costs in terms of hindering subsequent innovation," said Williams. "The fact that these costs were – in this context – 'large enough to care about' motivates wanting to better understand whether alternative policy tools could be used to achieve a better outcome. It isn't clear that they can, although economists such as Michael Kremer have proposed some ideas on how they might. ..."

'Is Job Polarization Holding Back the Labor Market?'

Stefania Albanesi, Victoria Gregory, Christina Patterson, and Ayşegül Şahin of the NY Fed ask:
Is Job Polarization Holding Back the Labor Market?
Their answer:
Our findings show that while job polarization is an important ongoing trend in the labor market, it’s not a key contributor to the sluggish labor market recovery. Our analysis suggests that the weakness in the labor market is broad based and not limited to a certain segment of the market.
They find that the slow recovery is NOT due to pre-existing, "ongoing trends in the labor market that were exacerbated during the recession," i.e. (consistent with most evidence on this), it's a cyclical, lack of demand problem not a structural problem.

'Declining Wealth Brings a Rising Retirement Risk'

The "news isn’t good" about the shift from defined-benefit to defined-contribution pension plans:
Declining Wealth Brings a Rising Retirement Risk, by Bruce Bartlett, Commentary, NY Times: ...[In] defined-benefit ... pension plans..., workers are promised a specific income at retirement, which the employer provides. The employer bears all the risk of market fluctuations. Under a defined contribution scheme, such as a 401(k) plan, the worker and the employer jointly contribute to a tax-deductible and tax-deferred account from which the worker will finance retirement. ...
Now the first generation of workers who have virtually all their pension saving in defined-contribution plans is nearing retirement, and the news isn’t good. According to a March 19 report from the Employee Benefit Research Institute, only about half of workers nearing retirement have confidence that they have enough money saved for an adequate retirement.
Not surprisingly, retirement saving has taken a back seat to more pressing concerns – coping with unemployment, maintaining standards of living during an era of slow wage growth, putting children through increasingly expensive colleges and so on. ...
This problem is much more severe for black Americans. ... The wealth gap isn’t only racial, it’s generational...
What’s really depressing about these studies is the lack of solutions and the likelihood that the problem will only get worse.
Republicans in Congress have pressed for years to convert Social Security, a classic defined-benefit pension, into a defined contribution plan, and also to convert Medicare into a voucher program. These changes would shift even more of the financial risk in retirement onto families that have yet to adapt to fundamental changes in employer pensions and the economy over the last 30 years. The future doesn’t look pretty.
Members of Congress appear to be eager to cut retirement benefits even further to show they can make the hard choices (and the president seems to be on board). They should raise the payroll cap instead, but the "hard choice" that would hit the people who can afford it isn't under consideration. It's not hard to imagine why.

Links for 03-27-2013

March 26, 2013

'A Serious Warning That Consumers May Be Tightening Their Belts'

Dean Baker issues a warning:
Consumer Confidence Index (the one that matters) Declines: The Conference Board's index of consumer confidence fell in March. What is noteworthy for those following the economy is that the current conditions index dropped by 3.5 points to 57.9. This component is the one that actually tracks current consumption reasonably closely...
The recent drop in the current conditions index ... should be taken as a serious warning that consumers may be tightening their belts. That would not be a surprising response to the ending of the payroll tax cut, plus some amount of layoffs and cutbacks associated with the sequester.
This is just one report among many, but it does suggest that the recovery optimists singing about having finally turned the corner may be wrong.
[For evdence pointing in the other direction, see Tim Duy's The Recovery is Real.]

'Cyprus should Leave the Euro'

Paul Krugman says, politics aside:
Cyprus should leave the euro. Now.
More here.

Fed Watch: Fedspeak on Both Sides of the Atlantic

Tim Duy:
Fedspeak on Both Sides of the Atlantic, by Tim Duy: Federal Reserve Chairman Ben Bernanke and New York Fed President William Dudley both took to the podium yesterday. Dudley spoke directly to the current intersection between the economic outlook and monetary policy, while Bernanke took on the topic of monetary policy in a global context. Despite coming from different directions, both were supportive of current policy.
Dudley first, as it seems journalists are seeing the speech with somewhat different eyes. Jonathon Spicer at Reuters walked away with:
New York Fed President William Dudley, a close ally of Fed Chairman Ben Bernanke, gave a strong and comprehensive speech defending the very easy monetary policies that he said were gaining traction and must not yet be adjusted.
Spicer concludes from the speech, accurately I think, that it is consistent with expectations that the Fed will continue large scale asset purchases at the current pace for the foreseeable future (most of this year, by my expectations). Notable was Dudley's view of the labor market. From the speech:
So how are we doing relative to our objective of a substantial improvement in the labor market outlook?...The unemployment rate is modestly lower and private non-farm payroll growth a bit higher...other important indicators including the employment-to-population ratio and job-finding rates are essentially unchanged...This suggests that the labor market is far from healthy.
Moreover, our policy is based on the outlook for the labor market, not the level of employment or unemployment today. In this context I note that the recent improvement in payroll employment growth, which gets much of the attention, is out-sized relative to the growth rate of economic activity that supports it. We have seen this movie before...As a result, it is premature to conclude that we will soon see a substantial improvement in the labor market outlook.
The implication for policy:
Currently we are falling well short of our employment objective and the restrictive stance of federal fiscal policy is a factor. On inflation, we are also falling short, but by a considerably smaller margin. As a consequence, we need to keep monetary policy very accommodative.
I do not claim that there are no costs or risks associated with our unconventional monetary policy regime. But I see greater cost and risk in moving prematurely to a policy setting that might not prove sufficiently accommodative to ensure a sustainable, strengthening recovery...
Seems to be a clear indication that he is not inclined to alter the pace of asset purchases in the near future. At a minimum, Dudley is looking for evidence that the recent acceleration in job growth is sustainable (in concert with improvement across a broad range of indicators), and I think that will come only after another six months of nfp numbers consistently 200k+.
Other journalists took a different focus. The headline of Victoria McGrane's Wall Street Journal piece is:
Fed Banker Backs Dialing Down Easy Money
Something of a hawkish tone, no? From the article:
A member of the Federal Reserve's inner circle Monday promoted a plan for the central bank to scale back the pace of its bond-buying program as the jobs market improves, though he stressed that a decision on how to proceed is far from imminent.
Similarly, Robin Harding's Financial Times piece is titled:
Dudley gives first hints of slowing QE3
Again, something of a hawkish take. Harding's lead-in:
One of the Federal Reserve’s biggest backers of easy monetary policy said he supported the slowdown of the central bank’s asset purchases once the US economy had enough momentum.
I think these headlines imply that the end of quantitative easing is closer than conventional wisdom holds. I don't think that should be a takeaway. But these articles focus on another takeaway, that the Fed is coalescing around a plan to taper-off asset purchases, not end cold-turkey. From Harding's piece:
The comments by Bill Dudley amount to the first official hint that the pace of a reduction in the asset purchase programme – known as QE3 – is likely to be gradual, and may soothe market worries about the impact of reduced purchases by the Fed.
Back to the speech:
In my view, we should calibrate the total amount of purchases to that needed to deliver a substantial improvement in labor market conditions, by allowing the flow rate of purchases to respond to material changes in the labor market outlook...At some point, I expect that I will see sufficient evidence of economic momentum to cause me to favor gradually dialing back the pace of asset purchases.
Given the current outlook, FOMC members do not anticipate increasing the size of asset purchases. The discussion will thus naturally turn toward the other direction - when and how should we end asset purchases? I think Harding is correct to conclude that a consensus is building within the Fed to taper-off purchases gradually, but only after the sufficient progress is made on the labor market front. But be wary of losing focus on the latter point. Even if the Fed know how they want to end the asset purchase program, that time is still far off given the current forecasts.
Dudley added an interesting footnote to the last sentence I quoted above:
Assuming that the improvement in the outlook is not endogenous to the chosen policy setting to the extent that it would disappear if purchases were slowed.
This suggests that it is not enough that the labor market makes sufficient progress to justify changing policy. The Fed also has to be confident that the progress is self-sustaining in the absence of quantitative easing. It seems to me that this raises the bar for slowing asset purchases.
Separately, Bernanke took on the issue of the so-called currency wars. After a history of exchange rate policy during the Great Depression, Bernanke concludes:
The lessons for the present are clear. Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries. The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region. Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not "beggar-thy-neighbor" but rather are positive-sum, "enrich-thy-neighbor" actions.
Obviously, Bernanke rejects the currency war story, at least as far as it applies to developed nations. What about less-developed economies? The story is a bit more complicated. Bernanke notes that developing nations may be relying on an export-based growth strategy and may have underdeveloped financial sectors that leave them vulnerable to capital inflows. Bernanke responds that trade-weighted exchange rates are little changed since 2008, and that stronger developed nation growth helps exporters in developing nations. In addition, with regards to capital flows:
It is true that interest rate differentials associated with differences in national monetary policies can promote cross-border capital flows as investors seek higher returns. But my reading of recent research makes me skeptical that these policy differences are the dominant force behind capital flows to emerging market economies; differences in growth prospects across countries and swings in investor risk sentiment seem to have played a larger role. Moreover, the fact that some emerging market economies have policies that depress the values of their currencies may create an expectation of future appreciation that in and of itself induces speculative inflows.
Notice that at the end he hits the ball back to the currency manipulators? Furthermore, he advocates considering capital controls:
Of course, heavy capital inflows and their volatility pose challenges to emerging market policymakers, whatever their source. Policymakers do have some tools to address these concerns. In recent years, emerging market nations have implemented macroprudential measures aimed at strengthening their financial systems and reducing overheating in specific sectors, such as property markets. Policymakers have also experimented with various forms of capital controls. Such controls raise concerns about effectiveness, cost of implementation, and possible microeconomic distortions. Nevertheless, the International Monetary Fund has suggested that, in carefully circumscribed circumstances, capital controls may be a useful tool.
Again, Bernanke is pushing the conversation back onto his critics. Developing nations have tools to address their concerns. Use them.
Bottom Line: The Fed is not thinking about expanding the pace of asset purchases. Instead, they are thinking about when and how to end those purchases. Policymakers anticipate a gradual end to the program, and they want to communicate their intentions well ahead of the actual timing of the policy change. So expect them to continue to walk a fine line between acknowledging the exit strategy while making clear the exit is not imminent. Finally, Bernanke continues to brush off critics, both home and abroad.

Why Don’t Politicians Care about the Working Class?

We are live:
Why Don’t Politicians Care about the Working Class?, by Mark Thoma: If we want to ensure that our children and grandchildren have the brightest possible future, the national debt is not the most important problem to address. Reversing the polarization of the labor market – the hollowing out of the middle class and the associated rise in inequality over the last thirty years or so – is much more important. But money driven politics and a political class that has all but forgotten about the working class – Democrats in particular have forgotten who they are supposed to represent – stand in the way of progress on this important problem. ...

Links for 03-26-2013

March 25, 2013

'For 'Faster Growth,' Soak the Poor?'

 Glad to see someone (Josh Barro) trying to counter the latest nonsense from George Shultz, Gary Becker, Michael Boskin, John Cogan, Allan Meltzer, and John Taylor:
For 'Faster Growth,' Soak the Poor?, by By Josh Barro: This weekend, the Wall Street Journal assembled a redoubtable list of conservative heavies in economics (George Schulz! Gary Becker! John Taylor!) to produce a completely insane account of what is wrong with America's economy and how to fix it. The upshot of the piece is that the U.S. economy is in the tank because the government gives too much money to poor people, and so it should stop. ...
The article is another great example of conservatives' empathy gap on economic issues. The authors emphasize that entitlement cuts must be done in a "humane" way. But they do not stop and think about whether a one-third reduction in Social Security benefits would seem humane to a middle-class person who depends on Social Security as his largest source of income in retirement, as most do. They don't reckon with the possibility that capping the federal commitment to Medicaid would have not just fiscal effects but also human ones: denying health care to people who need it and cannot afford it. ...
So why respond to the poverty-trap problem by calling for big cuts to benefits? The answer, of course, is that every economic ill must be shoehorned into an argument for lower taxes and less government spending. If a proposed solution to an economic problem doesn't involve taking benefits away from poor people, then it's not a solution at all -- at least by the logic that prevails on the Wall Street Journal editorial page.

'Did the Iraq War Cause the Great Recession?'

Via Henry Farrell:
Did the Iraq War Cause the Great Recession?, Henry Farrell: Thomas Oatley thinks that it very plausibly did. His argument draws upon an interesting article (should be ungated) in the new issue of Perspectives on Politics, where he, Kindred Winecoff, Andrew Pennock and Sarah Bauerle Danzman argue that international political economy scholars pay too little attention to the structural characteristics of international politics. By concentrating too much on states as unitary actors, they fail to recognize the importance of the network connections between them. The network topology – the shape of the network – can have consequences – networks where no node gets very much more links than any other node are quite different in their consequences from networks where one or a couple of nodes receive a lot more links than others. This has implications for financial contagion – if contagion spreads across links, network topology will have important consequences for the likelihood of spread. As it turns out, there is strong reason to believe that the international financial system is one of the latter kinds of networks rather than one of the former. On two measures of financial ties, most countries on the periphery of the network have few links to other peripheral countries, but pretty well everyone has links to the US, and many have links to the UK too. ...[more]...
I'm not fully convinced by this theory that the Iraq war caused the recession, but it does bring up some important issue about network connectivity. Are highly interconnected networks better at dispersing risk? It depends upon the type of risk. Suppose a toxin hits a network. If diluting the toxin across the network also dilutes its effects to practically nothing, then we want the network to be as large and interconnected as possible. When shocks hit they will be quickly diluted and rendered relatively harmless. But for toxins that are deadly in minute doses, toxins that kill whatever they touch even when they are highly diluted, we want the infected node on the network to be isolated as much as possible.

Optimally, then, assuming that most shocks are not toxic if they are dispersed across a large network, we want the network to be large and highly interconnected so that risks can be diversified across the network to practically nothing. But we also want the ability to quickly disconnect nodes that become infected with toxins that don't lose their potency as they are diluted. And that's the problem, identifying when such a toxin hits a network is difficult -- there will always be denial if disconnecting nodes in the financial system costs people money -- and it may not be easy to quickly disconnect nodes from the network so that problem nodes can be isolated/quarantined before the toxin spreads.
We have been told that problems in places like Cyprus have been walled off -- nodes in the network have been isolated -- but so long as a few isolated connections still exist that are difficult to cut, highly toxic shocks can pollute the rest of the network. In addition, as we saw today when "Jeroen Dijsselbloem, the current head of the Eurogroup, held a formal, on-the-record joint interview with Reuters and the FT today, saying that the messy and chaotic Cyprus solution is a model for future bailouts" and financial markets reacted negatively (the statement is being walked back), some connections -- those involving expectations -- cannot be severed in any case.

Highly interconnected networks are highly desirable so long as (1) we can quickly identify trouble, and (2) nodes can be quickly and effectively isolated. But when those conditions are not present, the occasional highly toxic shock will cause quite a bit of damage.

'Fred Hiatt Bemoans the Fact that We Are Unlikely to Get an Economic Crisis to Advance His Agenda'

Dean Baker is upset with Fred Hiatt of the Washington Post:
Fred Hiatt Bemoans the Fact that We Are Unlikely to Get an Economic Crisis to Advance His Agenda: Nope, I'm not kidding. In his column today, Hiatt complained that no one seems to be moving forward on his deficit reduction agenda. He then told readers:
"What could shake them out of their own devices? One possibility, a fiscal hawk in the Obama administration told me almost wistfully, would be a 'minor market event.' A stock market plunge, an interest rate spike, a race to the exits by America’s foreign lenders — just enough to spook Congress.
Are you surprised to hear that there are fiscal hawks in the Obama administration? No? Anyway:
"But as long as the Federal Reserve is gobbling up U.S. debt to keep interest rates low, such a mishap seems unlikely."
Yes, it must be awful when you have a view of the economy that the economy refuses to corroborate. (In fairness, Hiatt, does add that such a market event could spin out of control, so "it is not really to be wished for.")
As usual, Hiatt is upset that President Obama is not pushing hard enough for cuts to Social Security and Medicare. While he does give Obama credit for proposing some cuts to Medicare (what happened to the chained CPI?), what really has him upset is that President Obama doesn't talk about inflicting pain... if Hiatt had access to economic data he would know that President Obama's policies are already causing the middle class to feel plenty of pain. ...
Of course the needed change in policy is the opposite of what Hiatt is pushing. We need larger deficits to generate the demand needed to boost the economy. ...
The fiscal hawks and scolds will never admit it, but they've harmed our ability to respond effectively to the unemployment crisis.

'On the Reliability of Chinese Output Figures'

This Economic Letter from the SF Fed says we can trust recent economic data from China:
On the Reliability of Chinese Output Figures, by John Fernald, Israel Malkin, and Mark Spiegel, FRBSF Economic Letter: Some commentators have questioned whether China’s economy slowed more in 2012 than official gross domestic product figures indicate. However, the 2012 reported output and industrial production figures are consistent both with alternative Chinese indicators of the country’s economic activity, such as electricity production, and trade volume measures reported by non-Chinese sources. These alternative domestic and foreign sources provide no evidence that China’s economic growth was slower than official data indicate.

Paul Krugman: Hot Money Blues

The end of an era:
Hot Money Blues, by Paul Krugman, Commentary, NY Times: Whatever the final outcome in the Cyprus crisis — we know it’s going to be ugly; we just don’t know exactly what form the ugliness will take — one thing seems certain:... the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. ... And ... Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland.
That’s quite a remarkable development. It will mark the end of an era ... when unrestricted movement of capital was taken as a desirable norm around the world. ... To some extent this reflected the ... rise of free-market ideology, the assumption that if financial markets want to move money across borders, there must be a good reason, and bureaucrats shouldn’t stand in their way. ...
But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.
It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course...: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.
What’s the common theme...? Conventional wisdom blames fiscal profligacy — but ... that story fits only one country, Greece. Runaway bankers are a better story... But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out. ...
Now what? I don’t expect to see a wholesale, sudden rejection of the idea that money should be free to go wherever it wants, whenever it wants. There may well, however, be a process of erosion, as governments intervene to limit both the pace at which money comes in and the rate at which it goes out. Global capitalism is, arguably, on track to become substantially less global.
And that’s O.K. Right now, the bad old days when it wasn’t that easy to move lots of money across borders are looking pretty good.

Links for 03-25-2013

March 24, 2013

Fed Watch: Do Capital Controls Mean Cyprus Has Already Left the Eurozone?

Tim Duy:
Do Capital Controls Mean Cyprus Has Already Left the Eurozone?, by Tim Duy: Cyprus is in a struggle to save itself, at least the European definition of "save itself," and remain a Eurozone member. But will Cyrpus even use the same euro as the rest of Europe when all is said and done?
After all, banks remain closed in Cyprus, which means a euro in a Cypriot bank has very little value. If you can't spend it, is it really a euro? And even when banks reopen, it is assumed that capital controls will be imposed to prevent euros from leaving the island. So a French euro will be able to purchase goods and services in Germany, but a Cypriot euro will not. It seems then that a Cypriot euro is unambiguously worth less than a French euro.
Thus, there will be two Euros in circulation (if not already). This is the thesis of blogger Guntrum B. Wolff (ht Ed Harrison):
The most important characteristic of a monetary union is the ability to move money without any restrictions from any bank to any other bank in the entire currency area. If this is restricted, the value of a euro in a Cypriot bank becomes significantly inferior to the value of a euro in any other bank in the euro area. Effectively, it means that a Cypriot euro is not a euro anymore. By agreeing to this measure, the ECB has de-facto introduced a new currency in Cyprus.
I think this might be right. If I can spend my dollar in Oregon but not in California, it is really the same dollar? I think not.
Is this how the Eurozone experiment will end? Not with a formal "exit," but with a return to banking dominated by national boundaries and enforced by capital controls? No longer a true common currency, but a dozen currencies sharing the same name, each with a different value?
There will be another banking crisis in Europe (just as a bank will fail in some US state) and depositors are now aware that they are fair game in any crisis response, so capital flight will intensify at an earlier stage in the crisis. As may have been noted, European policymakers find rapid crisis resolution to be something of a challenge, thus accelerated capital flight will necessitate a more rapid imposition of capital controls in the future - and with each round of capital controls, a new sub-euro will be born.
Bottom Line: Europe's response to the Cyprus situation will have long-lasting impacts on the Eurozone experiment itself, none of the good. Indeed, the imposition of capital controls should lead one to wonder if the "solution" to Cyprus is effectively an exit from the Eurozone is everything but name. And don't forget that the crisis also threatens to destabilize the region geopolitcally. I don't think that "disaster" is too strong a word in this case.

Links for 03-24-2013

March 23, 2013

Robert Frank: Mixing Freedoms in a 32-Ounce Soda

I have a hard time getting excited about the Big Gulp thing (I live on Coke Zero straight from 2 liter bottles and massive amounts of coffee, take those away and I would get excited), but Robert Frank argues that the "Evidence suggests that the current high volume of soft-drink consumption has generated enormous social costs":
Mixing Freedoms in a 32-Ounce Soda, by Robert Frank, Commentary, NY Times:
To him, it hinges on this question: "Does frequent exposure to supersize sodas really limit parents’ freedom to raise healthy children?" He argues that it does, and asks "How do the benefits of your right to drink tax-free sodas outweigh the substantial costs of defending it?"

Taking as given that there really are "enormous social costs" from soft drinks, I don't buy his argument that the peer effects undermining parental freedom are similar for large soft-drinks and cigarettes.