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March 7, 2014

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: The Hammock Fallacy

Posted: 07 Mar 2014 12:33 AM PST

We don't do enough to help people escape poverty:

The Hammock Fallacy, by Paul Krugman, Commentary, NY Times: Hypocrisy is the tribute vice pays to virtue. So when you see something like the current scramble by Republicans to declare their deep concern for America's poor, it's a good sign, indicating a positive change in social norms. Goodbye, sneering at the 47 percent; hello, fake compassion.
And the big new poverty report from the House Budget Committee, led by Representative Paul Ryan, offers additional reasons for optimism. Mr. Ryan used to rely on "scholarship" from places like the Heritage Foundation. ... This time, however, Mr. Ryan is citing a lot of actual social science research.
Unfortunately, the research he cites doesn't actually support his assertions. Even more important, his whole premise about why poverty persists is demonstrably wrong.
To understand where the new report is coming from,... recall something Mr. Ryan said two years ago: "We don't want to turn the safety net into a hammock that lulls able-bodied people to lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives." ...
What does scholarly research on antipoverty programs actually say? ... Mr. Ryan would have us believe that the "hammock" created by the social safety net is the reason so many Americans remain trapped in poverty. But the evidence says nothing of the kind.
After all, if generous aid ... perpetuates poverty, the United States — which treats its poor far more harshly than other rich countries, and induces them to work much longer hours — should lead the West in social mobility... In fact,... America has less social mobility...
And there's no puzzle why: it's hard for young people to get ahead when they suffer from poor nutrition, inadequate medical care, and lack of access to good education. The antipoverty programs that we have actually do a lot to help people rise. For example, Americans who received early access to food stamps were healthier and more productive... But we don't do enough... The reason so many Americans remain trapped in poverty isn't that the government helps them too much; it's that it helps them too little.
Which brings us back to the hypocrisy issue. It is, in a way, nice to see the likes of Mr. Ryan at least talking about the need to help the poor. But somehow their notion of aiding the poor involves slashing benefits while cutting taxes on the rich. Funny how that works.

Fed Watch: Unemployment, Wages, Inflation, and Fed Policy

Posted: 07 Mar 2014 12:24 AM PST

Tim Duy:

Unemployment, Wages, Inflation, and Fed Policy, by Tim Duy: I apologize if that was a misleading title.  This post is not a grand, unifying theory of macroeconomics.  It is instead a quick take on two posts floating around today.  The first is Paul Krugman's admonishment to the Federal Reserve against raising interest rates before wages rise:
So far, no clear sign that wage growth is accelerating. Even more important, however, wages are growing much more slowly now than they were before the crisis. There is no argument I can think of for not wanting wage growth to get at least back to pre-crisis levels before tightening. In fact, given that we've now seen just how dangerous the "lowflation" trap is, we should be aiming for a significantly higher underlying rate of growth in wages and prices than we previously thought appropriate.
I don't think that you should be surprised if the Federal Reserve starts raising rates well before wage growth returns to pre-crisis rates.  I think you should be very surprised if the Fed were to do as Krugman suggests.  Historically, the Fed tightens before wages growth accelerates much beyond 2%:


As I have noted earlier, wage growth tends to accelerate as unemployment approaches 6 percent, and so if you wanted to be ahead of inflation, they would be thinking about the first rate hike in the 6.0-6.5% range.  That 6.5% threshold was not pulled out of thin air.  
The second point is that the tightening cycle is usually topping out when wage growth is in the 4.0-4.5% range.  One interpretation is that the Fed continues to tighten policy to prevent workers from gaining too much of an upper-hand, thereby contributing to growing wage inequality.  Of course, I doubt they see it that way.  They see it as tightening monetary conditions to hold inflation in check.  Either way, the end is the same.  It would represent a very significant departure from past policy if the Fed waited until wage growth was at pre-recession rates before they tightened policy or if they allow conditions to remains sufficiently loose for wage growth to eventually rise above pre-recession rates.
If you want the Fed to make such a departure, start laying the groundwork soon.  The best I can offer is my expectation that Fed Chair Janet Yellen is more inclined than the average policymaker to wait until wages actually rise before acting.  I have trouble believing that even she would wait until wage growth accelerates to pre-recession trends.
Second, the Washington Post's Ylan Mui has this:
But a funny thing happens once unemployment hits 6.5 percent: The behavior of inflation starts to become random, as illustrated in this chart by HSBC chief U.S. economist Kevin Logan.


The black line represents the average annual unemployment rate for the past 30 years. You can see that in all but two cases (both of which were temporary shocks), inflation declined when the jobless rate was above 6.5 percent. But when unemployment rate fell below that point, inflation was almost as likely to increase as it was to decrease. In other words, what happens to inflation below the Fed's threshold is anybody's guess.
I would take issue with the idea that inflation behavior becomes "random" at unemployment rates below 6.5%.  You need to consider this kind of chart in the context of expected inflation and expected policy.  If inflation expectations are stable, and if the Federal Reserve provides policy to ensure that stability, you would expect random errors around expected inflation.  Couple this with downward nominal wage rigidities, and you should expect the same even under circumstances of high unemployment.  Here is my version of the same chart:


The data is monthly.  This y-axis is the change in inflation from a year ago, where inflation is measured as the year-over-year change in core-pce.  Unsurprisingly, since 2000, changes in core-inflation vary around zero.  Stable and low inflation expectations.  During periods of the 1970's and 1980's you see the impact of unstable expectations as the relationship circles all over the place.  But you also see the general pattern of disinflation since the early 1980's with the downward sloping relationship and many inflation observations, even at low unemployment rates, below zero.
Now it is fairly easy to put both of these posts together.  The Fed, wanting to ensure stable inflation expectations, begins raising interest rates well before wage rates begin rising.  This is turn controls the growth of actual inflation so that inflation rates do not rise as unemployment falls further.  The deviations of inflation from expectations are then just noise.  But actual inflation is not "random."  It is the result of specific monetary policy.
Bottom Line:  If the Fed follows historical behavior, they will beginning tightening before wages rise and in an environment of low inflation such that inflation remains stable even as unemployment falls.  In other words, in recent history that have not exhibited a tendency to overshoot.  Explicit overshooting would represent a very significant shift in the Fed's modus operandi

Links for 3-07-14

Posted: 07 Mar 2014 12:03 AM PST

Fed Watch: Tapering is Sooo 2013

Posted: 06 Mar 2014 03:32 PM PST

Tim Duy:

Tapering is Sooo 2013, by Tim Duy: New York Federal Reserve President William Dudley had a sit down with the Wall Street Journal in which he provides some key insights into Fed thinking. First, regarding the tepid pace of data, it's the weather:
Mr. Dudley said that he still expects, "the economy should do better" relative to last year, growing at around 3% this year.
He said, however, it appears very likely that harsh weather slowed economic growth in the first quarter to under a 2% annual rate.
See also this Wall Street Journal report on weak February retail sales. As expected, the Fed will dismiss soft numbers as an artifact of the cold. (although I think the acceleration at the end of 2013 was less than meets the eye to begin with). That means the pace of tapering is not going to change at the next meeting. But guess what? Tapering is not really data dependent in any event. It is more appropriately described as "outlier dependent":
"If the economy decided it was going to grow at 5% or the economy decided it wasn't going to grow at all, those would be the kind of changes in the outlook that I think would warrant changing the pace of taper," Mr. Dudley said Thursday.
How this is really any different from a fixed time-line is beyond me. If the range of acceptable outcomes to justify tapering is anywhere between 0 and 5% growth, the FOMC statement can be reduced by simply admitting that asset purchases are on a preset course. As I have said many times, the Fed wants out of the asset purchase business. It's all about interest rates now:
Mr. Dudley affirmed that nothing's changed when it comes to the short-term interest rate outlook. He said "we have a long time to go before we have to think about raising short-term interest rates."
Sometime in 2015. The weaker the data, the deeper into 2015 is the first rate hike, all else equal.
Finally, look for changes in the next FOMC statement to reflect what has been true for some time:
The 6.5% marker "is already a little bit obsolete in the sense we are really close to it," Mr. Dudley said. The level is "not really providing a lot of value in terms of our communications."
The meeting later this month would be a "a reasonable time to revamp (the) statement to take out that 6.5% threshold," he said. The Fed has amended its guidance to say rates could stay near zero well past that point as long as inflation remains in check.
The 6.5% marker is not a "little" obsolete. It is a "lot" obsolete. It became obsolete the minute the Fed made clear it was irrelevant as they had no intention of raising rates at that point. The are not going to replace it with another numerical guide. It will be replaced with qualitative, and ultimately discretionary, guidance.
Meanwhile, Dallas Federal Reserve President Richard Fisher made clear his view that asset bubbles are brewing left and right:
...there are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive.
Stock market metrics such as price to projected forward earnings, price-to-sales ratios and market capitalization as a percentage of GDP are at eye-popping levels not seen since the dot-com boom of the late 1990s. In the words of James Mackintosh, writer of the Financial Timescolumn "The Short View," a not insignificant number of stocks in the S&P 500 have valuations "that rely on belief in a financial fairy." Margin debt is pushing up against all-time records. And, in the bond market, narrow spreads between corporate and Treasury debt reflect lower risk premia on top of already abnormally low nominal yields. We must monitor these indicators very carefully so as to ensure that the ghost of "irrational exuberance" does not haunt us again.
Interestingly, former Federal Reserve Chairman Alan Greenspan writes today that such bubbles are just part of the territory:
Successful financial policy, in my experience, ironically spawns the emergence of bubbles. There was never anything resembling financial euphoria, or the bubbles it creates, in the old Soviet Union, nor is there in today's North Korea. At the Federal Reserve during my tenure, we often joked that our greatest fear was that policy might be too successful. Achieving an underlying stable rate of growth and low inflation appears to have been a necessary and sufficient condition for the emergence of a bubble. We would conclude with mock seriousness that optimum monetary policy for bubble prevention was to create destabilizing inflation.
There is much of interest in the Greenspan piece (including his claims that the 1994 tightening was an attempt to derail the bubble of the 1990s) and little time to take it up now. As if on cue, the Federal Reserve release the latest flow of funds data. Check out net worth:


Approaching the high seen in the last asset price bubble. Doesn't mean it can't go higher.
Tomorrow is employment report day. The general expectation is that weather played a starring role in depressing job growth while the ACA had a supporting role. Consensus is for 150k gain in payrolls with forecasts ranging from 80k to 203k. My recent track record has been a little (lot) shaky on this number of late, but maybe third time is a charm. Usual caveats apply about the insanity of forecasting a heavily revised rounding error of the massive monthly churn in the labor market. I will take the under this month and am looking for a gain of 118k:


More interesting will be the unemployment rate (what is the impact of the end of extended benefits?) and wage growth (are we seeing any yet?).

Bottom Line: Barring the outlier outcomes of either recession or explosive growth, tapering is on autopilot. Rate guidance is now qualitative and actual policy is discretionary. Incoming data is interesting for what it says about the timing of the first rate hike. So far, though, it is not telling us much given the Fed's belief that weak data is largely weather related. The degree to which asset bubbles are a concern varies greatly accross Fed officials but the general consensus is that such concerns are of second or third order magnitude compared to missing on both sides of the dual mandate.

'Redistribution, Inequality, and Sustainable Growth: Reconsidering the Evidence'

Posted: 06 Mar 2014 11:01 AM PST

A nice summary of some research that I've highlighted before:

Redistribution, inequality, and sustainable growth: Reconsidering the evidence, by Jonathan D Ostry, Andrew Berg, and Charalambos Tsangarides, Vox EU: Rising income inequality looms high on the global policy agenda, reflecting not only fears of its pernicious social and political effects (including questions about the consistency of extreme inequality with democratic governance), but also its economic implications. While positive incentives are surely needed to reward work and innovation, excessive inequality is likely to undercut growth – for example by undermining access to health and education, causing investment-reducing political and economic instability, and thwarting the social consensus required to adjust in the face of major shocks.

Understandably, economists have been trying to understand better the links between rising inequality and the fragility of economic growth. Recent narratives include how inequality intensified the leverage and financial cycle, sowing the seeds of crisis (Rajan 2010), or how political-economy factors – especially the influence of the rich – allowed financial excess to balloon ahead of the crisis (Stiglitz 2012).

But what is the role of policy – and in particular fiscal redistribution – in bringing about greater equality? Conventional wisdom suggests that redistribution would in itself be bad for growth, but by reducing inequality, it might conceivably help growth. Looking at past experience, we find scant evidence that typical efforts to redistribute have on average had an adverse effect on growth. Moreover, faster and more durable growth seems to have followed the associated reduction in inequality.

Disentangling the effects of inequality and redistribution on growth

In earlier work (Berg and Ostry 2011), we documented a robust medium-run relationship between equality and the sustainability of growth. We did not, however, have much to say on whether this relationship justifies efforts to redistribute.

Indeed, many argue that redistribution undermines growth, and even that efforts to redistribute to address high inequality are the source of the correlation between inequality and low growth. If this is right, then taxes and transfers may be precisely the wrong remedy – a cure that may be worse than the disease itself.

The literature on this score remains controversial. A number of papers (e.g. Benabou 2000) point out that some policies that are redistributive – e.g. public investments in infrastructure, spending on health and education, and social insurance provision – may be both pro-growth and pro-equality. Others are more supportive of a fundamental tradeoff between redistribution and growth, as argued by Okun (1975) when he referred to the efficiency 'leaks' that come with efforts to reduce inequality.

In a new paper (Ostry et al. 2014), we ask what the historical data say about the relationship between inequality, redistribution, and growth. In particular, what is the evidence about the macroeconomic effects of redistributive policies – both directly on growth, and indirectly as they reduce inequality, which in turn affects growth?

To disentangle the channels, we make use of a new cross-country dataset that carefully distinguishes net (post-tax and transfers) inequality from market (pre-tax and transfers) inequality, and allows us to calculate redistributive transfers for a large number of countries over time – covering both advanced and developing countries. We analyse the behaviour of average growth during five-year periods, as well as the sustainability and duration of growth.

Our key questions are empirical. How big is the 'big tradeoff'? How does the direct (in Okun's view negative) effect of redistribution compare to its indirect and apparently positive effect through reduced inequality?

Some striking results on the links between redistribution, inequality, and growth

First, we continue to find that inequality is a robust and powerful determinant both of the pace of medium-term growth and of the duration of growth spells, even controlling for the size of redistributive transfers.

Thus, it would still be a mistake to focus on growth and let inequality take care of itself, if only because the resulting growth may be low and unsustainable. Inequality and unsustainable growth may be two sides of the same coin.

Second, there is remarkably little evidence in the historical data used in our paper of adverse effects of fiscal redistribution on growth.

The average redistribution, and the associated reduction in inequality, seem to be robustly associated with higher and more durable growth. We find some mixed signs that very large redistributions may have direct negative effects on growth duration, such that the overall effect – including the positive effect on growth through lower inequality – is roughly growth-neutral.


These findings may suggest that countries that have carried out redistributive policies have actually designed those policies in a reasonably efficient way. However, it does not mean of course that countries wishing to enhance the redistributive role of fiscal policy should not pay attention to efficiency considerations. This is especially important for countries with weak governance and administrative capacity, where developing tax and spending instruments that can allow governments to undertake redistribution efficiently are of the essence. A forthcoming paper by the IMF will delve into these fiscal issues.

Of course, we should also be cautious about drawing definitive policy implications from cross-country regression analysis alone. We know from history and first principles that after some point redistribution will be destructive to growth, and that beyond some point extreme equality also cannot be conducive to growth. Causality is difficult to establish with full confidence, and we also know that different sorts of policies are likely to have different effects in different countries at different times.

Bottom line

The conclusion that emerges from the historical macroeconomic data used in this paper is that, on average across countries and over time, the things that governments have typically done to redistribute do not seem to have led to bad growth outcomes. Quite apart from ethical, political, or broader social considerations, the resulting equality seems to have helped support faster and more durable growth.

To put it simply, we find little evidence of a 'big tradeoff' between redistribution and growth. Inaction in the face of high inequality thus seems unlikely to be warranted in many cases.


Benabou, R (2000), "Unequal Societies: Income Distribution and the Social Contract", The American Economic Review, 90(1): 96–129.

Berg, A, J D Ostry, and J Zettelmeyer (2012), "What Makes Growth Sustained?", Journal of Development Economics, 98(2): 149–166.

Berg, A and J D Ostry (2011), "Inequality and Unsustainable Growth: Two Sides of the Same Coin?", IMF Staff Discussion Note 11/08.

Okun, A M (1975), Equality and Efficiency: the Big Trade-Off, Washington: Brookings Institution Press.

Ostry, J D, A Berg, and C G Tsangarides (2014), "Redistribution, Inequality, and Growth", IMF Staff Discussion Note 14/02.

Rajan, R (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy, Princeton: Princeton University Press.

Stiglitz, J (2012), The Price of Inequality: How Today's Divided Society Endangers Our Future, W W Norton & Company.

'Why DRM'ed Coffee-Pods May be Just the Awful Stupidity We Need'

Posted: 06 Mar 2014 08:40 AM PST

Speaking of anti-competitive behavior, here's Cory Doctorow:

Why DRM'ed coffee-pods may be just the awful stupidity we need, by Cory Doctorow: I've been thinking about the news that Keurig has added "DRM" to its pod coffee-makers since the story first started doing the rounds a couple of days ago. I've come to the conclusion that while the errand is a foolish one, and the company deserves nothing but contempt for such an anti-competitive move, that there might be a silver lining to this cloud. As I've written recently, there's not a lot of case-law on Section 1201 of the Digital Millennium Copyright Act (DMCA), the law that prohibits "circumventing...effective means of access control" to copyrighted works. In the past, we've seen printer companies and garage door opener manufacturers claim that the software in their devices was a "copyrighted work" and that anyone who made a spare part for their products was thus violating 1201. But that was 10 years ago, and it's been a while since there was someone stupid and greedy enough to try that defense.
I think Keurig might just be that stupid, greedy company. The reason they're adding "DRM" to their coffee pods is that they don't think that they make the obviously best product at the best price, but want to be able to force their customers to buy from them anyway. So when, inevitably, their system is cracked by a competitor who puts better coffee at a lower price into the pods, Keurig strikes me as the kind of company that might just sue. And not only sue, but keep on suing, even after they get their asses handed to them by successive courts. With any luck, they'll make some new appellate-level caselaw in a circuit where there's a lot of startups -- maybe by bringing a case against some spunky Research Triangle types in the Fourth Circuit.
Now, this is risky. Hard cases made bad law. A judge in a circuit where copyright claims are rarely heard might just buy the idea of copyright covering pods of coffee. The rebel forces that Keurig sues might be idiots (remember Aimster?). But of all the DRM Death Stars to be unveiled, Keurig's is a pretty good candidate for Battle Station Most Likely to Have a Convenient Thermal Exhaust Port.

[Boing Boing is licensed under a Creative Commons License permitting non-commercial sharing with attribution.]

'Did Robert Bork Understate the Competitive Impact of Mergers?'

Posted: 06 Mar 2014 08:38 AM PST

I have argued again and again that we aren't concerned enough about the concentration of economic power:

Did Robert Bork Understate the Competitive Impact of Mergers? Evidence from Consummated Mergers, by Orley C. Ashenfelter, Daniel Hosken, and Matthew C. Weinberg, NBER: In The Antitrust Paradox, Robert Bork viewed most mergers as either competitively neutral or efficiency enhancing. In his view, only mergers creating a dominant firm or monopoly were likely to harm consumers. Bork was especially skeptical of oligopoly concerns resulting from mergers. In this paper, we provide a critique of Bork's views on merger policy from The Antitrust Paradox. Many of Bork's recommendations have been implemented over time and have improved merger analysis. Bork's proposed horizontal merger policy, however, was too permissive. In particular, the empirical record shows that mergers in oligopolistic markets can raise consumer prices.

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