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April 30, 2013

The Future of Money: What's in Your Digital Wallet?

I thought this session on electronic payments was interesting:

The Future of Money: What's in Your Digital Wallet?
Tuesday, April 30, 2013 9:30 AM - 10:30 AM
Speakers:
  • Eric Dunn, Senior Vice President, Commerce Network Solutions, Intuit
  • Paul Galant, CEO, Citi Enterprise Payments
  • Mark Lavelle, Senior Vice President, Strategy and Business Development, PayPal
  • Ed McLaughlin, Chief Emerging Payments Officer, MasterCard
Moderator: Lauren Lyster, Co-Host, "Daily Ticker," Yahoo! Finance
Money is by nature symbolic - representing the erratic value of goods and services - but will it become entirely electronic? Some digital evangelists, touting the frictionlessness of cashlessness, think so. E-transactions are burgeoning along with the capabilities and reach of the Internet. Software engineering has fused with financial engineering and online communities are creating new forms of digital currency. Yet cash in circulation is also rising. Hand-held currency is an easy, uncomplicated means to know what you have and get what you want, which is all the more appealing in an era of economic insecurity and bitcoin chaos. Why rely on intermediaries and invisible transactions? Why trust if one can't readily verify? This panel will explore the forces that are changing money and, at the same time, keeping it in its traditional forms.

Why Do We Use Core Inflation?

Paul Krugman:
Blogging is a bit like teaching the same class year after year; inevitably there are moments when you feel exasperated at the class’s failure to grasp some point you know you explained at length — then you realize that this was last year or the year before, and it was to a different group of people.
So, I gather that the old core inflation bugaboo is rearing its head again — the complaint that it’s somehow stupid, dishonest, or worse to measure inflation without food and energy prices, often coupled with the claim that the statistics are being manipulated anyway. So, time for a refresher. ...
Hs refresher is here. Let me offer one of my own (from 2008):
Why Do We Use Core Inflation?: There is a lot of confusion over the Fed's use of core inflation as part of its policy making process. One reason for confusion is that we using a single measure to summarize three different definitions of the term "core inflation" based upon how it is used.
First, core inflation is used to forecast future inflation. For example, this recent paper uses a "bivariate integrated moving average ... model ... that fits the data on inflation very well," and finds that the long-run trend rate of inflation "is best gauged by focusing solely on prices excluding food and energy prices." That is, this paper finds that predictions of future inflation based upon core measures are more accurate than predictions based upon total inflation.
Second, we also use the core inflation rate to measure the current trend inflation rate. Because the inflation rate we observe contains both permanent and transitory components, the precise long-run inflation rate that consumers face going forward is not observed directly, it must be estimated. When food and energy are removed to obtain a core measure, the idea is to strip away the short-run movements thereby giving a better picture of the core or long-run inflation rate faced by households. I should note, however that this is not the only nor the best way to extract the trend and the Fed also looks at other measures of the trend inflation rate that have better statistical properties. Thus while the first use of core inflation was for forecasting future inflation rates, this use of core inflation attempts to find today's trend inflation rate [There is a way to combine the first and second uses into a single conceptual framework that encompasses both, but it seemed more intuitive to keep them separate. In both cases, the idea is to find the inflation rate that consumers are likely to face in the future.]
Let me emphasize one thing. If the question is "what is today's inflation rate," the total inflation rate is the best measure. It's intended to measure the cost of living and there's no reason at all to strip anything out. It's only when we ask different questions that different measures are used.
Third, and this is the function that is ignored most often in discussions of core inflation, but to me it is the most important of the three. The inflation target that best stabilizes the economy (i.e. best reduces the variation in output and employment) is a version of core inflation.
In theoretical models used to study monetary policy, the procedure for setting the policy rule is to find the monetary policy rule that maximizes household welfare (by minimizing variation in variables such as output, consumption, and employment). The rule will vary by model, but it usually involves a measure of output and a measure of prices, and those measures can be in levels, rates of change, or both depending upon the particular model being examined.
In general, a Taylor rule type framework comes out of this process ( i.e. a rule that links the federal funds rate to measures of output and prices). However, in the policy rule, the best measure of prices is usually something that looks like a core measure of inflation. Essentially, when prices are sticky, which is the most common assumption driving the interaction between policy and movements in real variables in these models, it's best to target an index that gives most of the weight to the stickiest prices (here's an explanation as to why from a post that echoes the themes here).  That is, volatile prices such as food and energy are essentially tossed out of the index used in the policy rule.
The indexes that come out of this type of theoretical exercise often includes both output and input prices, and occasionally asset prices as well. That is, a core measure of inflation composed of just output prices isn't the best thing for policymakers to target, a more general core inflation rate combining both input and output prices works better. ...
Finally, there is also a question of what we mean by inflation conceptually. Does a change in relative prices, e.g. from a large increase in energy costs, that raises the cost of living substantially count as inflation, or do we require the changes to be common across all prices as would occur when the money supply is increased? Which is better for measuring the cost of living? Which is a better target for stabilizing the economy? The answers may not be the same. For a nice discussion of this topic, see this speech given yesterday by Dennis Lockhart, President of the Atlanta Fed:
Inflation Beyond the Headlines, by Dennis P. Lockhart, President, Federal Reserve Bank of Atlanta: ...Let me begin by posing the simple question: What do we mean by "inflation"? The answer to that simple question isn't as simple as it may seem.
The popular treatment of inflation in our sound bite society risks confusing inflation with relative price movements and the cost of living. By cost of living, I'm referring to the costs you and I incur to maintain our level of consumption of various goods and services including essential items such as food, gasoline, and lodging. 
Relative price movements occur continuously in an economy as individual prices react to market forces affecting that good or service. Neither relative price movements nor sustained high living costs constitute inflation as economists commonly use the term....
And I think I'll end with this part of his remarks:
Attempts to measure the aggregate rate of price change—no matter how sophisticated—remain imperfect. As a result, when it comes to measuring inflation, judgment is needed to distinguish persistent price movements that underlie overall inflation from the relative price adjustments. Separating the inflation signal from noise involves much uncertainty—especially when making decisions in real time. Discerning accurately the underlying trend is difficult. It is essential for those of us who have responsibility for responding to these trends to use a wide variety of core measures and inflation projections to make the most informed judgment we can.

Video: Global Overview

This shouldn't be overly surprising, but Nouriel Roubini is pessimistic about the global economy (bubble/boom for two years, then a big crash):

Lunch Panel: Global Overview
Monday, April 29, 2013 12:00 PM - 1:45 PM
Introduction By: Michael Klowden, CEO, Milken Institute
Speakers:
  • Pierre Beaudoin, President and CEO, Bombardier Inc.
  • Scott Minerd, Managing Partner and Global Chief Investment Officer, Guggenheim Partners
  • Nouriel Roubini, Chairman and Co-Founder, Roubini Global Economics; Professor of Economics and International Business, Stern School of Business, New York University
  • Geraldine Sundstrom, Partner and Portfolio Manager, Emerging Markets Strategies Master Fund Limited, Brevan Howard
Moderator: Paul Gigot, Editorial Page Editor and Vice President, The Wall Street Journal
As mid-2013 comes into view, the crisis sparked by the international mortgage meltdown is receding into memory, spreading a sense of relief. In the eurozone, the debate is about austerity versus spending, but not dissolution. Meanwhile, living conditions are rising in many parts of the globe as millions join a swelling middle class. The expanding availability of healthcare could have a profound effect as well. Yet some regions continue to struggle. In our annual big-picture look at the world economy, we'll discuss whether China and the U.S. can pull other players along and how the debt bomb can be defused. What are the most potent trends steering capital markets? Which industries are rising, which are fading, and what governments are demonstrating they know how to solve problems? Can the flare-up in the Middle East be contained and give way to democracy and economic growth?

'Are We Purging the Poorest?'

“Should public resources go to the group most likely to take full advantage of them, or to the group that is most desperately in need of assistance?”:
Are we purging the poorest?, by Peter Dizikes, MIT News Office: In cities across America over the last two decades, high-rise public-housing projects, riddled with crime and poverty, have been torn down. In their places, developers have constructed lower-rise, mixed-use buildings. Crime has dropped, neighborhoods have gentrified, and many observers have lauded the overall approach.

But urban historian Lawrence J. Vale of MIT does not agree that the downsizing of public housing has been an obvious success.

“We’re faced with a situation of crisis in housing for those of the very lowest incomes,” says Vale, the Ford Professor of Urban Design and Planning at MIT. “Public housing has continued to fall far short of meeting the demand from low-income people.”

Take Chicago, where the last of the Cabrini-Green high-rises was torn down in 2011, ending a dismantling that commenced in 1993. Those buildings — just a short walk from the neighborhood where Vale grew up — have been replaced by lower-density residences. But where 3,600 apartments were once located, there are now just 400 units constructed for ex-Cabrini residents. Other Cabrini-Green occupants were given vouchers to help subsidize their housing costs, but their whereabouts have not been extensively tracked.

“There is a contradiction in saying to people, ‘You’re living in a terrible place, and we’re going to put massive investment into it to make it as safe and attractive as possible, but by the way, the vast majority of you are not going to be able to live here again once we do so,’” Vale says. “And there is relatively little effort to truly follow through on what the life trajectory is for those who go elsewhere and don’t have an opportunity to return to the redeveloped housing.”

Now Vale is expanding on that argument in a new book, “Purging the Poorest: Public Housing and the Design Politics of Twice-Cleared Communities”...

“Chicago and Atlanta are probably the nation’s most conspicuous experiments in getting rid of, or at least transforming, family public housing,” Vale explains. However, he notes, “It’s hard to find an older American city that doesn’t have at least one example of this double clearance.”

Essentially, Vale says, these cities exemplify one basic question: “Should public resources go to the group most likely to take full advantage of them, or to the group that is most desperately in need of assistance?”

Vale sees U.S. policy as vacillating between these views over time. At first, public housing was meant “to reward an upwardly mobile working-class population” — making public housing a place for strivers. Slums were cleared and larger apartment buildings developed, including Atlanta’s Techwood Homes, the first such major project in the country.

But after 1960, public housing tended to be the domain of urban families mired in poverty. “The conventional wisdom was that public housing dangerously concentrated poor people in a poorly designed and poorly managed system of projects, and we are now thankfully tearing it all down,” Vale says. “But that was mostly a middle phase of concentrated poverty from 1960 to 1990.”

Over the last two decades, he says, the pendulum has swung back, leaving a smaller number of housing units available for the less-troubled, which Vale calls “another round of trying to find the deserving poor who are able to live in close proximity with now-desirable downtown areas.”

Vale’s critique of this downsizing involves several elements. Projects such as Cabrini-Green might have been bad, but displacing people from them means “the loss of the community networks they had, their church, the people doing day care for their children, the opportunities that neighborhood did provide, even in the context of violence.”

Demolishing public housing can hurt former residents financially, too. “Techwood and Cabrini-Green were very central to downtown and people have lost job opportunities,” Vale says. Indeed, the elimination of those developments, even with all their attendant problems, does not seem to have measurably helped many former residents gain work...
“We don’t have very fine-tuned instruments to understand the difference between the person who genuinely needs assistance and the person who is gaming the system,” Vale says. “Far larger numbers of people get demonized, marginalized or ignored, instead of assisted.” ...
Ultimately, Vale thinks, the reality of the ongoing demand for public housing makes it an issue we have not solved.

“The irony of public housing is that people stigmatize it in every possible way, except the waiting lists continue to grow and it continues to be very much in demand,” Vale says. “If this is such a terrible [thing], why are so many hundreds of thousands of people trying to get into it? And why are we reducing the number of public-housing units?”

Links for 04-30-2013

April 29, 2013

Is Quantitative Easing Becoming Quantitative Exhaustion?

This discussion of Fed policy seems like a stacked deck:
Central Banks: Is Quantitative Easing Becoming Quantitative Exhaustion?
Monday, April 29, 2013 3:30 PM - 4:30 PM
Speakers:
  • James McCaughan , CEO, Principal Global Investors
  • Cliff Noreen, President, Babson Capital Management LLC
  • Tad Rivelle, Chief Investment Officer, Fixed Income, TCW
  • Aram Shishmanian, CEO, World Gold Council
  • Kevin Warsh, Distinguished Visiting Fellow, Hoover Institution; Former Member, Federal Reserve Board of Governors
Moderator: David Zervos, Chief Market Strategist, Jefferies LLC
Among the monetary measures central banks have taken to address the lingering impact of the 2008 financial rupture, keeping interest rates artificially low has been a primary aim. The term "financial repression" has become associated with that policy. Such measures were launched in the hope of not only stimulating economic activity but to ease the pressure of servicing onerous public debt. Concern is growing, however, that quantitative easing has distorted markets by interfering with the proper pricing of risk and, by extension, obscuring the true cost of capital. Our panel of experts will explore the possible effects of sustained QE and the quest for financial stability. For instance, are bubbles inflating? Will these effects be similar or will they vary from market to market? What costs will long-tem financial repression impose on the Federal Reserve and other central banks? What tools can be employed as alternatives?
It was stacked. Pretty much unanimous thumbs down on QE. Even the moderator is noting how one-sided the discussion is. It's making things worse! (e.g. QE drives up gas prices and holds back the economy). One panelist is even complaining that interest rates are too low, and no other panelist disagrees. They couldn't find anyone to defend the Fed's current policies? Someone to address all the questionable claims this panel is making? Wow. They are giving the Fed credit for stepping in saving markets when problems first hit financial markets, but seem to think we'd be better off if the Fed had done less. Sorry, but we wouldn't be. The Fed was slow to react and overly cautious at every stage of the crisis. We needed more, not less, and still do.

(Weird, the guy arguing that QE made things worse is now arguing that the recovery has been much stronger than most people are aware, e.g. unemployment not so bad as we hear...).

Anyway, think I've had enough of the Fox News version of a debate (actually, Fox would at least have an ineffective defender to tear apart). Time to move on.

[The video from each session will be posted here several hours after the session ends. I'll add the video to this (and other posts) once it appears.]

Fed Watch: Just a Few Weeks Makes a World of Difference

Tim Duy:
Just a Few Weeks Makes a World of Difference, by Tim Duy: The minutes of the last FOMC meeting, concluded on March 20, included this passage:
In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately. A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year. Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end. Two members indicated that purchases might well continue at the current pace at least through the end of the year.
The center of the FOMC appeared to be shifting toward agreement that large scale asset purchase program would likely be wrapped up by year end. Of course, they included a caveat:
It was also noted that were the outlook to deteriorate, the pace of purchases could be increased.
Since the last FOMC meeting, it has become clear that the economy continues along a suboptimal path, as illustrated by the disappointing 2.5 percent GDP growth for the first quarter; just a few weeks ago, Macroeconomic Advisors was anticipating a 3.6 percent growth rate. In addition, both employment and manufacturing reports have been less than impressive (see Calculated Risk for his take on today's Dallas Fed numbers and the implications for the ISM report). Moreover, fiscal austerity continues to bite:
0429GOVT
The end result is that investors have concluded, rightly, that FOMC members looking forward to cutting the pace of purchases by mid-year were overly optimistic. Consequently, the 10-year yield was bid down to just 1.67 percent this afternoon, well below the 2.05 in early March.
Probably more important, at this juncture is that disinflation is again evident, with headline and core PCE up just 1.0 and 1.1 percent, respectively, compared to last year:
0429PCE
In an April 17 Wall Street Journal interview, St. Louis Federal Reserve President James Bullard highlighted the possibility that a deteriorating inflation trend might require additional easing. Other policymakers have joined him in this concern. From Bloomberg:
“I’d of course be giving serious thought” to additional stimulus if disinflation persists, Richmond Fed President Jeffrey Lacker, who voted against the bond program last year, said last week -- while adding he doesn’t think that will happen. The Minneapolis Fed’s Narayana Kocherlakota also said this month weaker inflation may be reason to consider more accommodation.
The important point is that low inflation prompts concern even among policymakers who think the Fed can have little impact on employment growth. For this group, high unemployment is distressing but not actionable. But low inflation is both distressing and actionable. Thus, at a minimum, the low inflation numbers should push the FOMC back to avoiding a premature end to quantitative easing. In addition, it is easy to argue that the Fed should be thinking about additional easing. Not only are they missing on the employment mandate, but increasingly it looks like they are missing on the price stability mandate as well. A policy failure all around.
Bottom Line: The FOMC statement should shift to indicate the softer economy and falling inflation numbers; I am watching for how much emphasis they place on the latter as a signal as to the likelihood of easing further in future meetings. Like most, I don't anticipate an expansion of the program at this juncture. I doubt the FOMC would see the current data as justifying a leap from thinking about ending the program to expanding the program just six weeks later. It would be interesting if Kansas City Federal Reserve President Esther George pulls her dissent. Her objection has been that the Fed's policy stance risks financial stability for little economic benefit. Pulling her dissent in response to falling inflation would signal that disinflation concerns run deep in the FOMC.

Debt and the Deficit: What's Really on the Table?

I have a feeling this session is going to be a bit irritating:
Debt and the Deficit: What's Really on the Table?
Monday, April 29, 2013 2:15 PM - 3:15 PM
  • Speakers:
  • Bob Corker, U.S. Senator
  • David Cote, Chairman and CEO, Honeywell; Steering Committee Member, Campaign to Fix the Debt
  • Maya MacGuineas, Head, Campaign to Fix the Debt; President, Committee for a Responsible Federal Budget
  • Peter Orszag, Vice Chairman, Corporate and Investment Banking, Citigroup; former Director, Office of Management and Budget
Moderator: Steven Rattner, Chairman, Willett Advisors; former Counselor and Lead Auto Advisor to the U.S. Secretary of the Treasury
With outsize debt putting the stability of credit markets and the pace of economic growth at risk, will Americans embrace shared sacrifice to set the country on a path toward fiscal health? Or is the problem essentially the result of gridlock in Washington? And what does "shared sacrifice" actually mean? Who will bear the heavier burden: the rich, the elderly, the middle class? Are Simpson and Bowles still relevant? Our panel will examine the economics and politics around our accumulating public debt and annual deficit, with an eye toward palatable and realistic solutions. Can we grow our way out of the mess? How will we cope with the twin hazards of graying demographics and healthcare inflation? Back to the credit markets: Are Treasuries as safe as they seem?
There was remarkably little discussion of increasing revenues through tax rate increases. There was some discussion of increasing revenue, but it was mainly about eliminating deductions like home interest rather than increasing tax rates. Instead, most of the focus was on, surprise, "entitlement reform" with only Orszag being careful to point to health care costs as the main problem to solve.

The most entertaining moment was when the business guy on the panel, David Cote, said that unlike in business where what you think, say, and do must align, for Congress these are different decisions. Senator Corker said he was offended by that comment and went on to defend Congress (e.g. saying many people in business don't understand that politicians have to represent a diverse constituency). Ha. A Republican fighting with a business rep, then defending government. Too bad he wants to cut the crap out of it.

Other than that, the degree of hawkery and the implicit assumption that the only way to solve problems with our long-run budget picture is to cut social insurance programs the working class relies upon was, in fact, irritating. The continued discussion about deficit reduction as the key to spurring private sector growth was similarly irritating. It's exactly what we heard about the Bush tax cuts, and we know how that turned out. A huge increase in the debt load with little (if any) increased growth to show for it.

Finally, as far as I recall, the word "unemployment" did not come up. In the short-run, deficit hawkery is what's standing in the way of doing more to help with the unemployment problem. The key question -- whether the concern in the short-run with the debt rather than the unemployed is justified in the short-run (it isn't in my view) -- was not even discussed.

'The Welfare Queen of Denmark'

[Listening to Nouriel Roubini's pessimism about the future during the lunch panel as I do this -- the video of the panel discussing the state of the global economy should be available later today.]

Nancy Folbre objects to the "gendered language" used in the debate over social insurance programs, and to the conclusion that "cuddly" capitalism is bad for innovation:
The Welfare Queen of Denmark, by Nancy Folbre, Commentary, NY Times: ...In short, the Danish record offers no support for the social-spending-hurts-growth position. That doesn’t mean that some economists can’t figure out a way to make that argument anyway. For instance, Daron Acemoglu, James A. Robinson and Thierry Verdier have devised a theoretical model to show why what they term “cuddly” capitalism of the Danish sort may just be free-riding on the “cutthroat” capitalism of the United States sort.
The model posits that cutthroat levels of inequality, as in the United States, promote high levels of technological innovation. The benefits of these innovations cross national borders to help Danes and other Scandinavians achieve growth. In other words, they may be able to get away with being “cuddly,” but some country (like the United States) just has to be tough enough to reward risk-taking, even if it leads to hurt feelings.
The gendered language deployed in this model echoes a general tendency to view social spending in feminine terms: women like to cuddle and are often described as more risk-averse than men. It’s not uncommon to see the term “nanny state” used as a synonym for the welfare state.
Call the Scandinavians sissies if you like, but plenty of evidence in the latest World Competitiveness Report testifies to high levels of overall innovation there — as you might expect in economies even more export-oriented than our own. Danes are world leaders in renewable energy technology, especially wind power. ...
As I've noted before, "an enhanced safety net -- a backup if things go wrong -- can give people the security they need to take a chance on pursuing an innovative idea that might die otherwise, or opening a small business. So it may be that an expanded social safety net encourages innovation."

Risk of Debt?

Brad DeLong on when government debt is problematic, and when it's not -- a short excerpt from a much longer discussion:
Risks of Debt?: Extended Version, by Brad DeLong: ... The principal mistake Reinhart and Rogoff committed in their analysis and paper--indeed, the only significant mistake in the paper itself--was their use of the word "threshold". 
It and the graph led very many astray. It led the usually-unreliable Washington Post editorial board to condemn the "new school of thought about the deficit…. 'Don’t worry, be happy. We’ve made a lot of progress', says an array of liberal pundits… [including] Martin Wolf of the Financial Times…" on the grounds that "their analysis assumes steady economic growth and no war. If that’s even slightly off, debt-to-GDP could… stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." (Admittedly, experience since the start of the millennium gives abundant evidence that the Washington Post needs no empirical backup from anybody in order to lie and mislead in whatever way the wind blows.)
It misled European Commissioner Olli Rehn to claim that "when [government] debt reaches 80-90% of GDP, it starts to crowd out activity in the private sector and other parts of the economy." Both of these--and a host of others--think that if debt-to-annual-GDP is less than 90% (or, in Rehn's case, 80%, and I have no idea where the 80% comes from) an economy is safe, and that only if it is above 90% is the economy's growth in danger.
And in their enthusiasm when they entered congressional briefing mode it led Reinhart and Rogoff themselves astray. ...
Matthew O'Brien relays Tim Fernholz of Quartz's flagging of the following passage from Senator Tom Coburn:
Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask [Reinhart and Rogoff] his question: "Do we need to act this year? Is it better to act quickly?"
"Absolutely," Rogoff said. "Not acting moves the risk closer," he explained, because every year of not acting adds another year of debt accumulation. "You have very few levers at this point," he warned us.
Reinhart echoed Conrad's point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, "If it is not risky to hit the 90 percent threshold, we would expect a higher incidence."
And O'Brien quotes Reinhart and Rogoff writing in Bloomberg View:
Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP…. The biggest risk is that debt will accumulate until the overhang weighs on growth…
Yet the threshold at 90% is not there. In no sense is there empirical evidence that a 90% ratio of debt-to-annual-GDP is in any sense an "important marker", a red line. That it appears to be in Reinhart and Rogoff's paper is an artifact of Reinhart and Rogoff's non-parametric method: throw the data into four bins, with 90% the bottom of the top bin. There is, instead, a gradual and smooth decline in growth rates as debt-to-annual-GDP increases. 80% looks only trivially different than 100%. ...

Have Blog, Will Travel: Milken Global Conference

I am here today (Milken Global Conference 2013).

One quick first impression based upon the schedule of sessions. In the last few years, two or three years ago more so than last year, there were quite a few "soul-searching" sessions from the financial industry. How did financial markets fail, how can they be fixed, etc. That's not to say that there wasn't a lot of resistance to regulation from the industry, but they were at least dealing with the main issues, there was an attempt at an honest appraisal from many, and there were quite a few sessions on the topic.

There are sessions on regulation this year -- I'm currently in one called "Global Financial Regulation" (usual TBTF discussion so far, just turning to leverage) -- but compared to previous years the main concern now appears to be where we are headed in the next few years, opportunities for investment, etc. I suppose that's good news for the economy, but for financial stability? There's still a lot of work to be done, and an eroding will to do it.

Paul Krugman: The Story of Our Time

Why it's "a very bad time for spending cuts":
The Story of Our Time, by Paul Krugman, Commentary, NY Times: Those of us who have spent years arguing against premature fiscal austerity have just had a good two weeks. Academic studies that supposedly justified austerity have lost credibility; hard-liners in the European Commission and elsewhere have softened their rhetoric. The tone of the conversation has definitely changed.
My sense, however, is that many people still don’t understand ... the nature of our economic woes, and why this remains a very bad time for spending cuts.
Let’s start with ... what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment ... that persists to this day. ...
So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions,... government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused. ...
Now, just to be clear,... let’s try to reduce deficits and bring down government indebtedness once normal conditions return... But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity. ...
Is the story really that simple, and would it really be that easy to end the scourge of unemployment? Yes — but powerful people don’t want to believe it. Some of them have a visceral sense that suffering is good, that we must pay a price for past sins (even if the sinners then and the sufferers now are very different groups of people). Some of them see the crisis as an opportunity to dismantle the social safety net. And just about everyone in the policy elite takes cues from a wealthy minority that isn’t actually feeling much pain.
What has happened now, however, is that the drive for austerity has lost its intellectual fig leaf, and stands exposed as the expression of prejudice, opportunism and class interest it always was. And maybe, just maybe, that sudden exposure will give us a chance to start doing something about the depression we’re in.

Links for 04-29-2013

April 28, 2013

'Public and Private Sector Payroll Jobs: Bush and Obama'

One more before hitting the road once again:
Public and Private Sector Payroll Jobs: Bush and Obama by Bill McBride: ...several readers have asked if I could update the graphs comparing public and private sector job losses (or added) for President George W. Bush's two terms (following the stock market bust), and for President Obama tenure in office so far (following the housing bust and financial crisis).
Important: There are many differences between the two periods. ...

The first graph shows the change in private sector payroll jobs from when Mr. Bush took office (January 2001) compared to Mr. Obama's tenure (from January 2009). ...
Private Sector Payrolls 
Click on graph for larger image.
The employment recovery during Mr. Bush's first term was very sluggish, and private employment was down 946,000 jobs at the end of his first term.   At the end of Mr. Bush's second term, private employment was collapsing, and there were net 665,000 jobs lost during Mr. Bush's two terms. 

The recovery has been sluggish under Mr. Obama's presidency too, and there were only 1,933,000 more private sector jobs at the end of Mr. Obama's first term.  A couple of months into Mr. Obama's second term, there are now 2,282,000 more private sector jobs than when he took office.
Public Sector Payrolls
A big difference between Mr. Bush's tenure in office and Mr. Obama's presidency has been public sector employment. The public sector grew during Mr. Bush's term (up 1,748,000 jobs), but the public sector has declined since Obama took office (down 718,000 jobs). These job losses have mostly been at the state and local level, but they are still a significant drag on overall employment. ...

'The Great Degrader'

Paul Krugman says the biggest problem with George Bush wasn't the things he did, it was how he did them:
The Great Degrader: ...I sort of missed the big push to rehabilitate Bush’s image; also..., I’m kind of worn out on the subject. But it does need to be said: he was a terrible president, arguably the worst ever, and not just for the reasons many others are pointing out.
From what I’ve read, most of the pushback against revisionism focuses on just how bad Bush’s policies were, from the disaster in Iraq to the way he destroyed FEMA, from the way he squandered a budget surplus to the way he drove up Medicare’s costs. And all of that is fair.
But I think there was something even bigger, in some ways, than his policy failures: Bush brought an unprecedented level of systematic dishonesty to American political life, and we may never recover.
Think about his two main “achievements”, if you want to call them that: the tax cuts and the Iraq war, both of which continue to cast long shadows over our nation’s destiny. The key thing to remember is that both were sold with lies. ... Basically, every time the Bushies came out with a report, you knew that it was going to involve some kind of fraud, and the only question was which kind and where.
And no, this wasn’t standard practice before. ... There was a time when Americans expected their leaders to be more or less truthful. Nobody expected them to be saints, but we thought we could trust them not to lie about fundamental matters. That time is now behind us — and it was Bush who did it.
The media also echoed the Bush talking points on tax cuts and the war without giving them the scrutiny and skeptical eye they deserved (I got so tired of hearing the false claim that the Bush tax cuts would pay for themselves). There has been an admission that, well, maybe a few mistakes were made, but has the media learned its lesson? The ability of Republicans to use the same tactics in recent political debates suggests the answer is no.

Links for 04-28-2013

April 27, 2013

A Dream House?

A quick one from the road - Robert Shiller on housing:
Today’s Dream House May Not Be Tomorrow’s, by Robert Shiller, Commentary, NY Times: Houses are just buildings, but homes are often beautiful dreams. Unfortunately, as millions of people have learned in the housing crisis, those dreams don’t always comport with reality.
Economic and demographic changes may severely impair the value of a home when it’s time to sell, a decade or more in the future. Will a particular home still be fashionable then? Will social and economic shifts tilt demand toward new designs and types of communities —even toward renting rather than an outright purchase? Any of these factors could affect home prices substantially. ...
His bottom line is that:
Forecasting is indeed risky, because of factors like construction productivity, inflation, and the growth and bursting of speculative bubbles in both home prices and long-term interest rates. The outlook is so ambiguous that there is no single answer to the question of housing’s potential as a long-term investment.
And:
... it may be wisest to choose the housing that best meets your personal needs, among the choices you can afford.

Brad DeLong: Global Inequality

Another long travel day today, so for now a quick post via Brad DeLong:
Global Inequality: Saturday Twentieth Century Economic History Weblogging: Those economies relatively rich at the start of the twentieth century have by and large seen their material wealth and prosperity explode. Those nations and economies that were relatively poor have grown richer, but for the most part slowly. The relative gulf between rich and poor economies has grown steadily over the past century. Today it is larger than at any time in humanity’s previous experience...
This glass can be viewed either as half empty or as half full. The glass is half empty: we live today in a world that is nearly the most unequal world ever. Only the world of the 1970s and 1980s—with standards of living in China greatly depressed by the legacy of Mao, his Great Leap Forward, and his Cultural Revolution and with standards of living in India depressed to a lesser extent by the License Raj of the Nehru Dynasty—was more unequal than ours is, even today. The glass is half full: most of the world has already made the transition to sustained economic growth; most people live in economies that (while far poorer than the leading-edge post-industrial nations of the world’s economic core) have successfully climbed onto the escalator of economic growth and thus the escalator to modernity. The economic transformation of most of the world is less than a century behind the of the leading-edge economies...
On the other hand, one and a half billion people live in economies that have not made the transition to economic growth, and have not climbed onto the escalator to modernity. It is hard to argue that the median inhabitant of Africa has a higher real income than his or her counterpart of a generation ago.
From an economist’s point of view, the existence, persistence, and increasing size of large gaps in productivity levels and living standards across nations seems bizarre. We can understand why pre-industrial civilizations had different levels of technology and prosperity: they had different exploitable nature resources, and the diffusion of new ideas from civilization to civilization could be very slow. Such explanations do not apply to the world today. The source of the material prosperity seen today in leading-edge economies is no secret: it is the storehouse of technological capabilities.. Most of it is accessible to anyone who can read. Almost all of the rest is accessible to anyone who can obtain an M.S. in Engineering. Because of modern telecommunications, ideas today spread at the speed of light. Governments, entrepreneurs, and individuals in poor economies should be straining every muscle ... to do what Japan began to do in the mid-nineteenth century: acquire and apply everything in humanity's storehouse of technological capabilities.
This “divergence” in living standards and productivity levels is another key aspect of twentieth century economic history: economies are, by almost every measure, less alike today than a century ago in spite of a century’s worth of revolutions in transportation and communication. Moreover, there seems to be every reason to fear that this “divergence” in living standards and productivity levels will continue to grow in the future. ...
This is a potential source of great danger, because today’s world is sufficiently interdependent—politically, militarily, ecologically—that the passage to a truly human world requires that we all get there at roughly the same time.

Links for 04-27-2013

April 26, 2013

'Wage Disparity Continues to Grow'

There is stagnation and growing inequality in "usual wage income" (no overtime, bonuses, investment income, etc.):
Wage Disparity Continues to Grow: The median pay of American workers has stagnated in recent years, but that is not true for all workers. When adjusted for inflation, the wages of low-paid workers have declined. But the wages for better-paid workers have grown significantly more rapidly than inflation.
The Labor Department last week reported the levels of “usual weekly wages”... with details on the distribution of wages available since 2000. ... The national median wage in the first quarter of this year was $827 a week. In 2013 dollars, the median wage 13 years before was $819, so the increase is about 1 percent. The figures include all workers over the age of 25.
The department said that ... to earn more money than 90 percent of those with jobs ... a person needed to earn $1,909 a week. That figure was nearly 9 percent higher than in early 1980. To reach the 10th percentile ... required an income of $387 a week. After adjusting for inflation, that figure is down 3 percent from 2000. ...
Put another way, in 2000 a worker in the 75th percentile made 48 percent more than a worker at the median, or 50th percentile. Now, a worker in that group earns 58 percent more. ...
If wage stagnation and growing inequality somehow caused flight delays and other inconveniences for those who are doing okay -- the people with the most political power -- maybe we'd put more effort into doing something about it.

'GDP Report Has Good News and Bad News'

Justin Wolfers characterizes today's GDP report:
Gross Domestic Product Report Has Good News and Bad News: This morning's gross domestic product (GDP) report showed that the economic recovery continued through the first quarter of this year, growing at 2.5%. That's a reasonable (though not great) rate of growth, although a bit below expectations, which were for something closer to 3%. There's good news and bad news buried in the detail. The good is that consumers seem interested in spending again. We'll see whether that holds up over coming months. The bad is that firms aren't so optimistic, and investment was lackluster.
Government spending continues to detract from economic growth, as it has for 10 of the past 11 quarters. This report also provides the latest reading on the core PCE deflator, which is the rate of inflation targeted by the Fed. This measure shows inflation running at 1.2%, well below the Fed's target. Let's not get lost in the detail. This GDP report provides a soon-to-be-revised and noisy indicator of what happened in the economy a few months back. The bigger picture is that we have a fledgling recovery which needs help, but isn't getting it: Fiscal policy is set as a drag on growth, and monetary policy delivering below-target inflation.
See also Calculated Risk (more), Ryan Avent, and Catherine Rampell.

Paul Krugman: The 1 Percent’s Solution

Does evidence matter?:
The 1 Percent’s Solution, by Paul Krugman, Commentary, NY Times: Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close... At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.
Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims have become fodder for late-night comics?
On the first question:... the two main studies providing the alleged intellectual justification for austerity ... did not hold up under scrutiny. ... Meanwhile, real-world events ... quickly made nonsense of austerian predictions.
Yet austerity maintained and even strengthened its grip on elite opinion. Why?
Part of the answer surely lies in the widespread desire to see economics as a morality play... We lived beyond our means ... and now we’re paying the inevitable price. ... But... You can’t understand the influence of austerity doctrine without talking about class and inequality,... a point documented in a recent research paper... The ... average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. ... The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.
You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do. ...
And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?
I hope not; I’d like to believe that ideas and evidence matter... Otherwise, what am I doing with my life? But I guess we’ll see just how much cynicism is justified.

Links for 04-26-2013

April 25, 2013

'Unemployment Hits New Highs in Spain, France'

Been having computer troubles all day. A quick one from Calculated Risk:
WSJ: "Unemployment Hits New Highs in Spain, France", by Bill McBride: This is no surprise ... from the WSJ: Unemployment Hits New Highs in Spain, France ... Maybe, just maybe, policymakers in Europe will get the message that the almost singular focus on deficit reduction has been a policy mistake.

Twitter Chat on Reinhart and Rogoff

Hi:
Doing a twitter chat with @TCFdotorg on austerity, R/R, and path forward at 4pm with @rortybomb & @a_fieldhouse. Check out hashtag #TCFBest.

'Evidence and Economic Policy'

Paul Krugman:
Evidence and Economic Policy: Henry Blodget says that the economic debate is over; the austerians have lost and whatshisname has won. And it’s definitely true that in sheer intellectual terms, this is looking like an epic rout. The main economic studies that supposedly justified the austerian position have imploded; inflation has stayed low; the bond vigilantes have failed to make an appearance; the actual economic effects of austerity have tracked almost exactly what Keynesians predicted.
But will any of this make a difference? The story of the past three years, after all, is not that Alesina and Ardagna used a bad measure of fiscal policy, or that Reinhart and Rogoff mishandled their data. It is that important people’s will to believe trumped the already ample evidence that austerity would be a terrible mistake; A-A and R-R were just riders on the wave.
The cynic in me therefore says that after a brief period of regrouping, the VSPs will be right back at it — they’ll find new studies to put on pedestals, new economists to tell them what they want to hear, and those who got it right will continue to be considered unsound and unserious.
But maybe I’m wrong; maybe truth will prevail. Here’s hoping
On "the VSPs will be right back at it," Robert Samuelson to the rescue:
Although the newly discovered errors in Reinhart and Rogoff’s 2010 paper (“Growth in a Time of Debt”) are embarrassing, they do not alter one of its main conclusions: High debt and low economic growth often go together.
Paul Krugman responds here, Dean Baker here. Krugman makes a key point:
And anyway, the important story isn’t about the sins of the economists; it’s about our warped economic discourse, in which important people seize on academic work that fits their preconceptions.
Dani Rodrik thinks we should police ourselves:
Experts, knowledge and advocacy: This is so absolutely brilliant and important:
“One thing that experts know, and that non-experts do not, is that they know less than non-experts think they do.”
It comes from Kaushik Basu, currently chief economist at the World Bank and one of the world’s most thoughtful expert-economists.
Economists would be so much more honest (with themselves and the world) if they acted accordingly – letting their audience know that their results and prescriptions come with a large margin of uncertainty. Public intellectuals would do so much less damage if they did likewise. And if experts are not aware of the limits of their knowledge – well, they do not deserve to be called experts or intellectuals.
The real point, though, is that the other side – journalists, politicians, the general public -- always has a tendency to attribute greater authority and precision to what the experts say than the experts should really feel comfortable with. That is what calls for compensating action on the part of the experts.
So if you are an expert hang this gem from Basu prominently on your wall. And next time you talk to a journalist, advise a politician, or take to the stage in a public event, repeat it to yourself beforehand a few times.
This is asking a lot. My experience is that researchers really, really believe their own results so a call to temper enthusiasm will not work. They don't think they are overselling. So the cautions will have to come from people other than the authors of the work. That could help, but Krugman's point is, I think, more relevant. People have an interest in selling certain pieces of research that promote their political goals. For example, Reinhart and Rogoff played very well with those who wanted a smaller government and they helped to sell these results. Even if Reinhart and Rogoff had been quite humble about their findings, the correlations they found still would have likely been seized upon by those with an interest in using them to make progress toward ideological goals. Not sure how to solve this problem, but asking whether somebody has an interest in promoting a particular piece of research is a place to start.

Links for 04-25-2013

April 24, 2013

'Why Gold and Bitcoin Make Lousy Money'

David Andolfatto:
Why gold and bitcoin make lousy money: A desirable property of a monetary instrument is that it holds its value over short periods of time. Most assets do not have this property: their purchasing power fluctuates greatly at very high frequency. Imagine having gone to work for gold a few weeks ago, only to see the purchasing power of your wages drop by 10% in one day. Imagine having purchased something using Bitcoin, only to watch the purchasing power of your spent Bitcoin rise by 100% the next day. It would be frustrating. 
Is it important for a monetary instrument to hold its value over long periods of time? I used to think so. But now I'm not so sure. While I do not necessarily like the idea of inflation eating away at the value of fiat money, I don't think that a low and stable inflation rate is such a big deal. Money is not meant to be a long-term store of value, after all. Once you receive your wages, you are free to purchase gold, bitcoin, or any other asset you wish. (Inflation does hurt those on fixed nominal payments, but the remedy for that is simply to index those payments to inflation. No big deal.)
I find it interesting to compare the huge price movements in gold and Bitcoin recently, especially since the physical properties of the two objects are so different. That is, gold is a solid metal, while Bitcoin is just an abstract accounting unit (like fiat money). 
But despite these physical differences, the two objects do share two important characteristics:
[1] They are (or are perceived to be) in relatively fixed supply; and
[2] The demand for these objects can fluctuate violently.
The implication of [1] and [2] is that the purchasing power (or price) of these objects can fluctuate violently and at high frequency. Given [2], the property [1], which is the property that gold standard advocates like to emphasize, results in price-level instability. In principle, these wild fluctuations in purchasing power can be mitigated by having an "elastic" money supply, managed by some (private or public) monetary institution. This latter belief is what underlies the establishment of a central bank managing a fiat money system (though there are other ways to achieve the same result). ...
The key issue for any monetary system is credibility of the agencies responsible for managing the economy's money supply in a socially responsible manner. A popular design in many countries is a politically independent central bank, mandated to achieve some measure of price-level stability. And whatever faults one might ascribe to the U.S. Federal Reserve Bank,... since the early 1980s, the Fed has at least managed to keep inflation relatively low and relatively stable.

'Unemployment and the Free Market'

Chris Dillow takes on the idea that free market policies can solve our unemployment problem:
Unemployment and the Free Market, Stumbling and Mumbling: Bryan Caplan deserves praise for calling on free market economists to pay more attention to the "grave evil" of unemployment. I fear, though, that he overstates what free market policies can contribute to solving the problem.
My chart shows the problem. It shows the UK unemployment rate between 1855 (when data begins) and 1914. You can see that the jobless rate was often high - it averaged 4% - and volatile.
Unem1855
Note: data comes from the Bank of England.
And this was during a period of as free markets as one could practically get. This undermines at least three "free market" explanations for unemployment:
- "Welfare benefits mean the unemployed have little incentive to get work." In the 19th C, though, the only state support the unemployed got was in the Workhouse - and even as late as in my lifetime, this was spoken of with terror.
- "Big government and taxes deter job creation." But public spending in this time averaged only around 10% of GDP, and labour market regulation except for a few Factory Acts was nugatory by modern standards.
- "Wages are too rigid". But wages fell in nominal terms in 13 of the 59 years here, and in real terms in 12 of these years. Average nominal wages fell by 9% between 1874 and 1879, which is consistent with some sectors seeing very large falls.
There is, though, an alternative theory that fits these data. It's that a free market will see large swings in aggregate demand and employment, and that unemployment cannot be prevented by wage reductions alone. This was pointed out most famously - well famous in my house anyway - by Michal Kalecki in 1935... [long quote] ...
There's a good reason why almost all major economies abandoned free market economics. It's that such economies didn't and couldn't avoid mass unemployment.
I'll concede - much more than most lefties - that there's a big place for free market economics. But the labour market ain't it.