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August 1, 2014

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Latest Posts from Economist's View


Paul Krugman: Knowledge Isn’t Power

Posted: 01 Aug 2014 12:24 AM PDT

"Are we as societies even capable of taking good policy advice?":

Knowledge Isn't Power, by Paul Krugman, Commentary, NY Times: ...I've been looking at surveys from the Initiative on Global Markets, based at the University of Chicago. For two years, the initiative has been regularly polling a panel of leading economists... It usually turns out that there is much less professional controversy about an issue than the cacophony in the news media might have led you to expect.
This was certainly true of the most recent poll, which asked whether the American Recovery and Reinvestment Act — the Obama "stimulus" — reduced unemployment. All but one of those who responded said that it did, a vote of 36 to 1. ... 
As it happens, the odd man out — literally — in that poll on stimulus was Professor Alberto Alesina of Harvard. He has claimed that cuts in government spending are actually expansionary, but relatively few economists agree... Nonetheless, back when European leaders were making their decisive and disastrous turn toward austerity, they brushed off warnings that slashing spending in depressed economies would deepen their depression. Instead, they listened to economists telling them what they wanted to hear. It was, as Bloomberg Businessweek put it, "Alesina's hour."
Am I saying that the professional consensus is always right? No. But when politicians pick and choose which experts — or, in many cases, "experts" — to believe, the odds are that they will choose badly. Moreover, experience shows that there is no accountability in such matters. Bear in mind that the American right is still taking its economic advice mainly from people who have spent many years wrongly predicting runaway inflation and a collapsing dollar.
All of which raises a troubling question: Are we as societies even capable of taking good policy advice? ...
The only piece of our system that seemed to have learned anything from history was the Federal Reserve, and the Fed's actions under Ben Bernanke, continuing under Janet Yellen, are arguably the only reason we haven't had a full replay of the Depression. ... Sure enough, there are moves afoot in Congress to take away the Fed's freedom of action. Not a single member of the Chicago experts panel thinks this would be a good idea, but we've seen how much that matters.
And macroeconomics, of course, isn't the only challenge we face. In fact, it should be easy compared with many other issues that need to be addressed with specialized knowledge, above all climate change. So you really have to wonder whether and how we'll avoid disaster.

Links for 8-01-14

Posted: 01 Aug 2014 12:06 AM PDT

Fed Watch: On That ECI Number

Posted: 31 Jul 2014 01:29 PM PDT

Tim Duy (see Dean Baker too):

On That ECI Number: The employment cost index is bearing the blame for today's market sell-off. Sam Ro at Business Insider reports:
...traders agree that today's sell-off is probably due to one stat: the 0.7% jump in the employment cost index (ECI) in the second quarter.

This number, which crossed at 8:30 a.m. ET, was a bit higher than the 0.5% expected by economists. And it represents a year-over-year growth rate of over 2%.

It's a big deal, because it's both a sign of inflation and labor market tightness, two forces that put pressure on the Federal Reserve to tighten monetary policy sooner than later.

The ECI gain was driven by the private sector (compensation for the public sector was up just 0.5%, same as the first quarter), and I would be cautious about reading too much into those numbers. The Fed will take the Q2 reading in context of the low Q1 reading:

ECIa073114

The first two quarters averaged a just 0.46% increase, pretty much the same as recent trends of the past five years. And look at the year-over-year-trend:

ECIb073114

Nothing to see here, folks. Move along. Benefit costs for private sector workers also accelerated, but I think the Fed will likely interpret this as an anomaly:

ECIc073114

Again, not out-of-line with readings both before and after the recession.
Bottom Line:  I understand why market participants might be a little hypersensitive to anything related to wages. Indeed, wage growth is the missing link in the tight labor market story.  But I don't think the Fed will react much to these numbers; they will place them in context of recent behavior, and in that context they are not much different than current trends.  Watch the upcoming employment reports for signs of diminishing underutilization of labor - that is where the Fed will be looking.

'What Are Academics Good For?'

Posted: 31 Jul 2014 08:09 AM PDT

Simon Wren-Lewis

What are academics good for?: A survey of US academic economists, which found that 36 thought the Obama fiscal stimulus reduced unemployment and only one thought otherwise, led to this cri de coeur from Paul Krugman. What is the point in having academic research if it is ignored, he asked? At the same time I was involved in a conversation on twitter, where the person I was tweeting with asked ... why should we take any more notice of what academic economists say about economics than, well, City economists or economic journalists?
Here is a very good example of why. ...

'One Percent GDP Growth Is Nothing to Get Excited Over'

Posted: 31 Jul 2014 08:09 AM PDT

Dean Baker:

Curb Your Enthusiasm: One Percent GDP Growth Is Nothing to Get Excited Over: The Washington Post went a bit overboard with its lead article reporting on the second quarter GDP data. ...
Actually the 4.0 growth figure reported for the second quarter implies the economy is on a very slow growth path when averaged in with the -2.1 growth in the first quarter. Taken together, the economy grew at less than a 1.0 percent annual rate in the first half of 2014. That is hardly cause for celebration. 
And it is important to understand that the strong growth in the second quarter was directly related to the weak growth in the first quarter. Inventory growth was very weak in the first quarter, subtracting 1.16 percentage points from the quarter's growth. This meant that the return to a more normal pace of inventory accumulation in the second quarter was a strong boost to growth, adding 1.66 percentage points. Final sales grew at just a 2.3 percent annual rate in the second quarter.
Even that rate was likely inflated to some extent by the weakness from the first quarter. In particular, a sharp jump in car sales 0.42 percentage points to growth for the quarter. That will not be repeated in future quarters.
The report, taken together with the first quarter numbers, implies an underlying rate of growth close to 2.0 percent, the same as the rate for 2011-2013. This pace is at best keeping even with the economy's potential growth rate, meaning that it is making up none of the ground lost during the recession. ...

'Behind the Fed's Promise about Short-Term Rates'

Posted: 31 Jul 2014 07:40 AM PDT

At MoneyWatch:

Behind the Fed's promise about short-term rates, by Mark Thoma: Can promises about the future have an effect today? That's the theory behind the Federal Reserve's statement following Wednesday's monetary policy meeting.
The Fed said it "currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
How is this supposed to work? How can a promise about the future course of interest rates have a stimulative effect on the economy today? ...

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