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April 30, 2014

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'Where the World Is Headed'

Posted: 30 Apr 2014 12:15 AM PDT

This panel brings together prominent economists to debate a range of issues with global scope: from inequality and emerging markets to austerity policies and the impact of technology on employment. This will be a free-ranging discussion focused on where the world is headed and what can be done to improve economies and people's lives everywhere.

  • Speakers: Ken Rogoff, Professor of Economics, Harvard University; Former Chief Economist, International Monetary Fund
  • Nouriel Roubini, Chairman, Roubini Global Economics; Professor of Economics, Stern School of Business, New York University
  • John Taylor, Mary and Robert Raymond Professor of Economics, Stanford University; George P. Schultz Senior Fellow in Economics, Hoover Institution
  • Moderator: Gerard Baker, Managing Editor, The Wall Street Journal; Editor-in-Chief, Dow Jones & Company

Can't Keep Up With Email

Posted: 30 Apr 2014 12:06 AM PDT

If you've written me, and haven't heard back, apologies. I try, I really do, but I can't keep up: Photo

I feel like a real jerk when I don't reply to people who write to me, but I just can't answer all the email I get no matter how hard I try.

Sincere apologies if I haven't responded to your email.

Links for 4-30-14

Posted: 30 Apr 2014 12:03 AM PDT

Inequality and Mobility in America

Posted: 29 Apr 2014 01:59 PM PDT

If you want a tutorial on how the political right responds to inequality and mobility concerns, this video is for you (Chrystia and Jared do their best to respond, and Jared has a nice summary of all of the potential causes of inequality in his opening remarks):

Income inequality has diminished in many parts of the world--Chile, Turkey, Mexico and Hungary being a few examples. But in America, the gap has widened. Ironically, the same forces may be responsible for both: globalization and technology, which have eased poverty in the developing world but led to the loss of unskilled but well-paying middle-class jobs in the United States and other developed nations. For the first time in nearly a century, the top 10 percent of American earners take home more than half the nation's income. New research suggests that it's harder than ever for the poor to move up into the middle and upper classes, an issue that has potential consequences for our economy, government, institutions and people. What can--or should--be done to narrow this disparity? Is education the key? With many Americans falling behind, these questions are stirring concern among policymakers and the business community as well. This panel will examine the magnitude of this complex challenge and strategies for reversing the trend.

  • Speakers: Jared Bernstein, Economic Policy Fellow, Milken Institute; Senior Fellow, Center on Budget and Policy Priorities; Former Chief Economist to Vice President Joe Biden
  • Edward Conard, Author, "Unintended Consequences"; Former Senior Managing Director, Bain Capital
  • Robert Doar, Fellow in Poverty Studies, American Enterprise Institute; Former Commissioner, Human Resources Administration, City of New York
  • Chrystia Freeland, Member of Parliament, Canada; Author, "Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else"
  • Moderator: Alan Schwartz, Executive Chairman, Guggenheim Partners

'America's Debt and the Economy: A Hard Look at Public Spending and Finance'

Posted: 29 Apr 2014 08:41 AM PDT

This session, as I thought it would be before it started, was annoying:

America's Debt and the Economy: A Hard Look at Public Spending and Finance: With mandatory programs consuming 13.6 percent of GDP and rising, security spending at 5 percent, debt service at 1.5 percent (under benign interest-rate conditions), and revenue at 19 percent, there is little or no room in the nation's budget to fund the discretionary programs that support competitiveness and growth over the long term. That will require investment in infrastructure, technology, environmental protection, education and job training, among other areas. Despite the shutdowns and threats of default, both Republicans and Democrats understand that our future prosperity demands a responsible focus on these imperatives. But how can the government's budgeting process move beyond short-term fixes? This discussion will identify areas for strategic bipartisan collaboration to put the U.S. on track for meaningful reform, leading to the creation of a budget that better addresses our challenges and reflects our priorities.

Speakers:

  • Douglas Holtz-Eakin, President, American Action Forum; Former Director, Congressional Budget Office; Former Chief Economist, Council of Economic Advisers
  • Maya MacGuineas, President, Committee for Responsible Federal Budget
  • Steven Rattner, Chairman, Willett Advisors; Former Counselor and Lead Auto Advisor to the U.S. Secretary of the Treasury
  • Gene Sperling, Former Director, National Economic Council, The White House
  • Moderator: Maria Bartiromo, Anchor and Global Markets Editor, Fox Business Network

I heard things such as:

Need to get spending under control to create a good investment climate.
Large spending programs are crowding out discretionary programs such as defense and infrastructure.
One of the most serious issues we face.
Wait until rates go up.
Nobody in Washington is interested in talking about it.
We have to cut entitlements (Medicare, Medicaid, Social Security).
Our economic growth is lower because of the debt. Our economy is worse off because of it.
Huge benefit right now from cutting deficit.
Anyone who is sensible would agree with us.
Neither Bush nor Obama has been willing to explain to the public what a huge problem the debt is.
We need to do this, it is an important thing for our children.
President needs to make this a national priority, like it did with income inequality.
With all the problems in the world, is now the time to be cutting defense spending?
Simpson Bowles was a very, very, very good plan.

You get the idea. There was very little about tradeoffs, e.g. higher unemployment when we reduce the debt during a not so robust recovery, though Sperling did address this a bit, not enough on revenue enhancement, and -- though it did come up at times -- the relationship between health care costs and our long-term debt problems was not made as clear as it should have been.

When it comes to recovering from the recession, these people are the problem, not the solution.

But maybe I'm just being cranky (and biased from the start) -- watch the video and tell me what you think...

'Narrow Banks Won't Stop Bank Runs'

Posted: 29 Apr 2014 08:20 AM PDT

This is from a new blog by Stephen Cecchetti and Kermit Schoenholtz:

Narrow Banks Won't Stop Bank Runs: Every financial crisis leads to a new call to restrict the activities of banks. One frequent response is to call for "narrow banks." That is, change the legal and regulatory framework in a way that severely limits the assets that traditional deposit-taking banks can hold. One approach would require that all liabilities that are demandable at par be held in the form of deposits at the central bank. That is, accounts that can be withdrawn without notice and have fixed net asset value would face a 100% reserve requirement. The Depression-era "Chicago Plan" had this approach in mind.
In the aftermath of the financial crisis of 2007-09, Lawrence Kotlikoff, Jeremy Bulow and Paul Klemperer, John Kay, and, most recently, John Cochrane, and Martin Wolf have resurrected versions of narrow banking. All of these proposals, both the old and the new, have a common core: banks should be split into two parts, neither of which would supposedly be subject to runs. ...
Naturally, we share the objective of these reformers: preventing bank runs. The key issue is how to do so and at what cost. We suspect that narrow banking would be costly in terms of economic performance, yet unlikely to achieve this goal. ...
We know that a combination of transparency, high capital and liquidity requirements, deposit insurance and a central bank lender of last resort can make a financial system more resilient. We doubt that narrow banking would.

(The original post is much more detailed.)

Links for 4-29-14

Posted: 29 Apr 2014 12:03 AM PDT

 A bit late with theswe today, so there are more than usual:

April 29, 2014

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'New Data Sources: A Conversation with Google's Hal Varian'

Posted: 28 Apr 2014 12:01 PM PDT

Hal Varian is interviewed on Macroblog:

New Data Sources: A Conversation with Google's Hal Varian: In recent years, there has been an explosion of new data coming from places like Google, Facebook, and Twitter. Economists and central bankers have begun to realize that these data may provide valuable insights into the economy that inform and improve the decisions made by policy makers.
As chief economist at Google and emeritus professor at UC Berkeley, Hal Varian is uniquely qualified to discuss the issues surrounding these new data sources. Last week he was kind enough to take some time out of his schedule to answer a few questions about these data, the benefits of using them, and their limitations.
Mark Curtis: You've argued that new data sources from Google can improve our ability to "nowcast." Can you describe what this means and how the exorbitant amount of data that Google collects can be used to better understand the present?
Hal Varian: The simplest definition of "nowcasting" is "contemporaneous forecasting," though I do agree with David Hendry that this definition is probably too simple. Over the past decade or so, firms have spent billions of dollars to set up real-time data warehouses that track business metrics on a daily level. These metrics could include retail sales (like Wal-Mart and Target), package delivery (UPS and FedEx), credit card expenditure (MasterCard's SpendingPulse), employment (Intuit's small business employment index), and many other economically relevant measures. We have worked primarily with Google data, because it's what we have available, but there are lots of other sources.
Curtis: The ability to "nowcast" is also crucially important to the Fed. In his December press conference, former Fed Chairman Ben Bernanke stated that the Fed may have been slow to acknowledge the crisis in part due to deficient real-time information. Do you believe that new data sources such as Google search data might be able to improve the Fed's understanding of where the economy is and where it is going?
Varian: Yes, I think that this is definitely a possibility. The real-time data sources mentioned above are a good starting point. Google data seems to be helpful in getting real-time estimates of initial claims for unemployment benefits, housing sales, and loan modification, among other things.
Curtis: Janet Yellen stated in her first press conference as Fed Chair that the Fed should use other labor market indicators beyond the unemployment rate when measuring the health of labor markets. (The Atlanta Fed publishes a labor market spider chart incorporating a variety of indicators.) Are there particular indicators that Google produces that could be useful in this regard?
Varian: Absolutely. Queries related to job search seem to be indicative of labor market activity. Interestingly, queries having to do with killing time also seem to be correlated with unemployment measures!
Curtis: What are the downsides or potential pitfalls of using these types of new data sources?
Varian: First, the real measures—like credit card spending—are probably more indicative of actual outcomes than search data. Search is about intention, and spending is about transactions. Second, there can be feedback from news media and the like that may distort the intention measures. A headline story about a jump in unemployment can stimulate a lot of "unemployment rate" searches, so you have to be careful about how you interpret the data. Third, we've only had one recession since Google has been available, and it was pretty clearly a financially driven recession. But there are other kinds of recessions having to do with supply shocks, like energy prices, or monetary policy, as in the early 1980s. So we need to be careful about generalizing too broadly from this one example.
Curtis: Given the predominance of new data coming from Google, Twitter, and Facebook, do you think that this will limit, or even make obsolete, the role of traditional government statistical agencies such as Census Bureau and the Bureau of Labor Statistics in the future? If not, do you believe there is the potential for collaboration between these agencies and companies such as Google?
Varian: The government statistical agencies are the gold standard for data collection. It is likely that real-time data can be helpful in providing leading indicators for the standard metrics, and supplementing them in various ways, but I think it is highly unlikely that they will replace them. I hope that the private and public sector can work together in fruitful ways to exploit new sources of real-time data in ways that are mutually beneficial.
Curtis: A few years ago, former Fed Chairman Bernanke challenged researchers when he said, "Do we need new measures of expectations or new surveys? Information on the price expectations of businesses—who are, after all, the price setters in the first instance—as well as information on nominal wage expectations is particularly scarce." Do data from Google have the potential to fill this need?
Varian: We have a new product called Google Consumer Surveys that can be used to survey a broad audience of consumers. We don't have ways to go after specific audiences such as business managers or workers looking for jobs. But I wouldn't rule that out in the future.
Curtis: MIT recently introduced a big-data measure of inflation called the Billion Prices Project. Can you see a big future in big data as a measure of inflation?
Varian: Yes, I think so. I know there are also projects looking at supermarket scanner data and the like. One difficulty with online data is that it leaves out gasoline, electricity, housing, large consumer durables, and other categories of consumption. On the other hand, it is quite good for discretionary consumer spending. So I think that online price surveys will enable inexpensive ways to gather certain sorts of price data, but it certainly won't replace existing methods.

New Research in Economics: Central Banking For All: A Modest Case for Radical Reform

Posted: 28 Apr 2014 10:43 AM PDT

Via Nicholas Gruen:

Central Banking For All: A modest Case for Radical Reform (Download): This paper offers a  radical option for banking reform: government should offer central banking services not just to commercial banks, but directly to citizens.
Key Findings
Nicholas Gruen argues the UK and other countries need radical banking reform This can be achieved by a simple change: giving ordinary people the same right to use central banks' services as big commercial banks have. Though they enjoy high margins and/or fees, banks add little value to 'commodity services' like customer accounts and highly-collateralised mortgages like older ones that are partially paid off which are basically riskless.
There's widespread agreement that the UK needs better banks and a better deal for bank customers. This report by Nicholas Gruen, economist and founding chairman of Kaggle and The Australian Centre for Social Innovation, proposes a simple but radical solution.
Gruen argues that in the age of the internet, the Bank of England can now extend the services it currently offers only to banks to everyone in the UK. In particular, it should offer (for instance through National Savings & Investments) simple, cheap deposit and savings accounts to all, paying interest at Bank Rate. Second, it should offer to guarantee any well-collateralised mortgage (for instance a residential mortgage for less than 60 per cent of the value of the collateral).
At the moment, commercial banks provide these services at a cost (both in terms of worse rates, fees with their margins inflated by their funder's knowledge that they are implicitly government guaranteed).
By cutting out the middle-man in the form of the banks, Gruen argues customers would get a better deal, and private competitors providing finance could focus on the provision of finance where the efficient pricing of risk is essential – most particularly residential finance above 60 per cent of the value of collateral.
Policy Recommendations
The government should allow the Bank of England to provide central banking services directly to anyone who wants them, not just banks. The Bank should offer to fund or guarantee any well-collateralised mortgage (e.g. with less than 60 per cent of the property value outstanding) The Bank should, through National Savings and Investments, offer simple deposit and savings accounts to anyone who wants them with no upper limits, paying Bank Rate of interest.

Have Blog, Will Travel

Posted: 28 Apr 2014 09:38 AM PDT

At the Milken Global Conference for the next few days.

At a session on Abenomics, and the "three arrows" (monetary stimulus, fiscal stimulus, and supply-side structural reform).

I'll post the video from interesting sessions.

April 28, 2014

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Paul Krugman: High Plains Moochers

Posted: 28 Apr 2014 12:33 AM PDT

Let freedom ring. But first, get a clue about what freedom is:

High Plains Moochers, by Paul Krugman, Commentary, NY Times: It is, in a way, too bad that Cliven Bundy — the rancher who became a right-wing hero after refusing to pay fees for grazing his animals on federal land, and bringing in armed men to support his defiance — has turned out to be a crude racist. Why? Because his ranting has given conservatives an easy out, a way to dissociate themselves from his actions without facing up to the terrible wrong turn their movement has taken.
For at the heart of the standoff was a perversion of the concept of freedom, which for too much of the right has come to mean the freedom of the wealthy to do whatever they want...
Start with the narrow issue of land use. For historical reasons, the federal government owns a lot of land in the West... Like any landowner, the Bureau of Land Management charges fees for the use of its property. The only difference from private ownership is that by all accounts the government charges too little... In effect, the government is using its ownership of land to subsidize ranchers and mining companies at taxpayers' expense.
It's true that some of the people profiting from implicit taxpayer subsidies manage ... to convince themselves and others that they are rugged individualists. But they're actually welfare queens of the purple sage.
And this ... means that treating Mr. Bundy as some kind of libertarian hero is, not to put too fine a point on it, crazy. Suppose he had been grazing his cattle on land belonging to one of his neighbors, and had refused to pay for the privilege. That would clearly have been theft — and brandishing guns ... would have turned it into armed robbery. The fact that ... the public owns the land shouldn't make any difference.
So what were people like Sean Hannity of Fox News, who went all in on Mr. Bundy's behalf, thinking? Partly, no doubt, it was the general demonization of government..., that government takes money from hard-working Americans and gives it to Those People. White people who wear cowboy hats while profiting from government subsidies just don't fit the stereotype. ...
I'd like to think that the whole Bundy affair will cause at least some of the people who backed him to engage in self-reflection, and ask how they ended up lending support, even briefly, to someone like that. But I don't expect it to happen.

'Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones'

Posted: 28 Apr 2014 12:24 AM PDT

Good jobs are harder to find:

Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones: The deep recession wiped out primarily high-wage and middle-wage jobs. Yet the strongest employment growth during the sluggish recovery has been in low-wage work, at places like strip malls and fast-food restaurants.
In essence, the poor economy has replaced good jobs with bad ones. That is the conclusion of a new report from the National Employment Law Project, a research and advocacy group, analyzing employment trends four years into the recovery.
"Fast food is driving the bulk of the job growth at the low end — the job gains there are absolutely phenomenal," said Michael Evangelist, the report's author. "If this is the reality — if these jobs are here to stay and are going to be making up a considerable part of the economy — the question is, how do we make them better?"...
The National Employment Law Project study found especially strong growth in restaurants and food services, administrative and waste services and retail trades. Those industries — which often pay wages at the federal minimum — accounted for about 40 percent of the increase in private sector employment over the past four years.
There has also been strong jobs growth in some high-paying industries, like professional, scientific and technical services — a category that includes accountants, lawyers, software developers and engineers. That sector accounted for about 9 percent of the private-sector job gains in the recovery.

Links for 4-28-14

Posted: 28 Apr 2014 12:03 AM PDT

Fed Watch: FOMC Week

Posted: 27 Apr 2014 10:59 AM PDT

Tim Duy:

FOMC Week, by Tim Duy: The FOMC will wrap up a two-day meeting this Wednesday. I suspect the subsequent statement will be met with little fanfare. There simply has been little in the way of data to prompt any new policy path. Steady as she goes.
To be sure, the Fed will be greeted by the Q1 GDP report Wednesday morning, and it is widely expected to be very weak. But incoming data (retail sales, auto sales, industrial production, and employment, for example) suggests that much of this weakness was weather related while the underlying pace of activity, albeit arguably unexciting, remains unchanged. In short, the economy is evolving largely according to the Fed's script, and thus we should expect no major policy change. I anticipate the statement will reflect a greater confidence that the first quarter growth hiccup was a weather effect, that low inflation remains a concern, and a reiteration of the Fed's commitment to a low-rate policy path as long as inflation remains a concern. And another $10 billion cut in asset purchases to push the taper further along.
The Fed may identify housing as an area of concern. Indeed, the recent softening of that sector appears unrelated to the weather. Instead, a variety of issues are at play - higher housing prices in many areas, tight underwriting conditions, insufficient job growth, low wages relative to home prices, uncertainty about the financial benefits of being a homeowner, tight financing for new home development, and limited lot availability and other supply side issues. See Neil Irwin's excellent review of the issues. You can sum this up quickly by saying the contours of the housing market have changed dramatically in the past decade and we do not know when and if we will see a return to what in the past was considered a normal environment.
Moreover, the Fed can have little impact on these issues, with the exception of one factor not mentioned above - interest rates. The roughly 100bp rise in mortgage rates since the taper talk began likely contributed to the softening of housing markets. There was a lack of countervailing factors at play to offset the tighter policy (see also Jared Bernstein). The Fed, however, is not likely to reverse course. They want out of the asset purchase business, and higher mortgage rates was the price that needed to be paid. For now, the policy impact of housing weakness is to ensure the long-term, low rate story holds (all else equal, of course).
I have characterized the Fed's decision to taper as a desire to normalize policy by shifting attention back to their primary policy instrument of short-term interest rates. They believed at the time that they could change the mix of policies without changing the level of accommodation. The softening of housing activity, however, suggests otherwise. Intentionally or not, the decision to taper resulted in a somewhat more hawkish reaction function than is consistent with the Fed's economic forecast and policymaker rhetoric.

This leads to a comment recently posed to me:

I think governors will soon come under a lot of pressure to get off of the zero bound before the next recession hits. Given the big delay in monetary impulse-response, I fear some overshooting could result.
I frequently hear similar sentiments, but I don't think this is the correct way to phrase the issue. I think that policymakers want to be able to normalize policy further, but that ultimately the ability to do so depends on the evolution of the economy. In other words, the path of short-term interest rates is an endogenous variable determined within the context of the Fed's current reaction function. Policymakers realize they can't rush to normalize rates because doing so is counterproductive. Premature tightening will only ensure a low rate environment is sustained even longer. And note the Fed is emphasizing the low levels of rates in their forecast, explicitly acknowledging rates will remain below "normal" levels far into the future. No rush to hike rates.
The tapering adventure and the subsequent impact on mortgage rates and housing has probably driven this point home. Indeed, it could be argued that the recent flattening of the yield curve is an indication that the Fed already risked the ability to normalize policy by initiating the tapering process and signaling their rate hiking intentions:

SPREAD42714

They probably do not want to push this any further just yet.
That doesn't mean the Fed can't overshoot further on the tighter side, only that I suspect any such overshoot will be the result of a forecast error that prompts excessive tightening, not simply a desire to normalize rates. We aren't there yet. I think we could get there quickly given the Fed's relatively dovish outlook (if firmer data quickly mounted), but not yet.
Bottom Line: I anticipate a relatively uneventful FOMC meeting. The data flow appears sufficiently consistent with the Fed's forecast to hold policy in check.

'Is the Stock Market Getting Bubbly?'

Posted: 27 Apr 2014 09:13 AM PDT

Dean Baker:

Is the Stock Market Getting Bubbly?: Washington Post columnist Steve Pearlstein argues it is, taking issue with fellow columnist Barry Ritholtz who says it isn't. I'm going to come down in the middle here.
The market is somewhat above its historic levels relative to trend earnings. Pearlstein cites Shiller who puts the price to earnings ratio at 25 to 1, compared to a historic average of 16. ... I would agree that stock prices are somewhat above trend, but not by quite as large a margin as Shiller.
To get some perspective, at the peak of the stock bubble in early 2000, the S&P peaked at just under 1530. The economy is almost than 70 percent larger today (in nominal dollars), which would mean that the S&P would be over 2600 today if it were as high relative to the economy. If we throw in that the economy is still operating at 5 percent below its potential then the S&P would have to be over 2700 now to be as high relative to the economy as it was at the peak of the stock bubble. With a Friday close of 1863, we can see the market is at a level that is a bit more than two thirds of its 2000 bubble peak, relative to the size of the economy.
It also is much lower relative to the economy than it was in 2007 when almost no one was talking about a stock bubble. The S&P peaked at just over 1560 in the fall of 2007. Taking into account the economy's 18 percent nominal growth over this period, and the fact that we are still 5 percent below potential GDP, the S&P would have to be over 1900 today to be as high relative to potential GDP as it was in 2007. Given recent patterns, it certainly doesn't make sense to talk about a bubble for the market as a whole.
However, there are some points worth noting. The social media craze has allowed many companies with no profits and few prospects for making profits to market valuations in the hundreds of millions or even billions of dollars. That sure looks like the Internet bubble. Some of these companies may end up being profitable and worth something like their current share price. The vast majority probably will not.
The other point is that the higher than trend price to earnings ratio means that we should expect to see lower than trend real returns going forward. This is an important qualification to Ritholtz's analysis. While there is no reason that people should fear that stocks in general will take a tumble, as they did in 2000-2002, they also would be nuts to expect the same real returns going forward as they saw in the past.
With a price to earnings ratio that is roughly one-third about the long-term trend, they should expect real returns that are roughly one-third lower than the historic average. This means that instead of expecting real returns on stock of 7.0 percent, they should expect something closer to 5.0 percent. That might still make stocks a good investment, especially in the low interest rate environment we see today, but probably not as good as many people are banking on.
In short, there is not much basis for Pearlstein's bubble story, but we should also expect that because of higher than trend PE ratios stocks will not provide the same returns in the future as they did in the past. Anyone who thinks we can better have their calculator checked.

'Is A Banking Ban The Answer?'

Posted: 27 Apr 2014 09:13 AM PDT

Paul Krugman:

Is A Banking Ban The Answer?: OK, a genuinely interesting debate on financial reform is taking place. I'm not even sure where I stand. But it's certainly worth talking about.
Atif Mian and Amir Sufi draw our attention to proposals to either mandate or create strong incentives for 100-percent reserve banking, coming from Martin Wolf and, more surprisingly, John Cochrane. Equally surprising — at least to me — is that Cochrane seems more aware of the difficulties of the issue. ... So, three thoughts.
First, Wolf's omission is a big one. If we impose 100% reserve requirements on depository institutions, but stop there, we'll just drive even more finance into shadow banking, and make the system even riskier.
Second, Cochrane's proposal calls for a remarkable amount of government intervention in finance; it makes liberal proposals for a transactions tax look like minor nuisances. Cochrane insists that we can easily run our economy without dangerous short-term private debt — that we can easily set things up so that the manager of your index fund sells a tiny piece of your stock portfolio every time you use a debit card at 7-11. Is this right?
Third, and on a quite different note: Are we really sure that banking problems are the whole story about what went wrong? I've made this point before, but look at any measure of financial stress: what you see is a huge peak in 2008 that quickly went down:
Yet ... we're still depressed and many advanced countries are now on the edge of deflation, more than five years later. This strongly suggests that while bank runs may have brought things to a head, the problems ran deeper; in particular, I'm strongly of the view (based in part on Mian and Sufi's work) that broader issues of excess leverage, and the resulting balance-sheet problems of many households, are key. And neither 100% reserves nor a repo tax would have addressed that kind of leverage. ...

April 27, 2014

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Posted: 27 Apr 2014 12:03 AM PDT

'100% Reserve Banking' and 'Big Data: Are we Making a Big Mistake?'

Posted: 26 Apr 2014 11:05 AM PDT

A link to this post is being retweeted in unusually large numbers:

100% Reserve Banking — The History, by Atif Mian and Amir Sufi: So both John Cochrane and Martin Wolf are advocating 100% reserve banking. If these two agree on anything, it's worth taking seriously! (It's pretty amazing how advocates for narrow banking come from across the political spectrum.) We ... we wanted to provide some history behind the idea. ...

Using the "big data" from Twitter, this one too, though not quite on the same scale:

Big data: are we making a big mistake?: Big data is a vague term for a massive phenomenon that has rapidly become an obsession with entrepreneurs, scientists, governments and the media ...
"Big data" has arrived, but big insights have not. The challenge now is to solve new problems and gain new answers – without making the same old statistical mistakes on a grander scale than ever.

April 26, 2014

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'Greening Economics: It is Time'

Posted: 26 Apr 2014 12:33 AM PDT

Another call for change in how economics is taught:

Greening Economics: It is time, by Carlo Carraro, Marianne Fay, Marzio Galeotti, Vox EU: ... It took the deepest economic and financial crisis since the Great Depression to provoke an open debate amongst macroeconomists as to whether the 'economic model' taught in economics programs is adequate. We do hope it will not take the full realization of the adverse consequences of climate change for the profession to come to its senses regarding environmental economics and the way natural capital is ignored in most macroeconomic work. How many superstorm Sandys will it take? By how much does the sea level have to rise? How many severe droughts and floods (and where) will it take before we come to the realization that ignoring natural capital and its many externalities is simply bad economics?
The difference between the financial and environmental crisis is that we actually do have a good body of work that incorporates natural capital in models of growth. The problem is that it has remained to a large extent the restricted domain of environmental economists. The vast majority of us were able to get degrees in economics without ever reading a single paper on environmental economics or encountering natural capital as an argument in the production functions we studied. We did hear about Pigouvian taxes of course – and so figured the problem had been solved…
Environmental economists have long modified growth models to account for the role of the environment, thus revisiting the conditions that ensure growth, whether sustainable or sustained. Classical references are three 1974 articles by Partha Dasgupta and Geoffrey Heal, by William Nordhaus, and by Robert Solow (though Solow could be hardly defined an environmental economist). More generally, existing work is summarized in the survey chapters by Tasos Xepapadeas and by William Brock and Scott Taylor, both published in 2005. A more recent example that compares 'traditional' (brown?) and 'green' models of growth is a 2011 World Bank working paper by Stephane Hallegatte, Geoffrey Heal, Marianne Fay, and David Treguer.
As a result, environmental economists tend not to talk about economic growth per se, but about sustainable economic growth. When macroeconomists refer to sustainable growth, however, they usually mean sustained growth. When growth economists study the role of externalities in the growth process they almost exclusively refer to technological and knowledge externalities, and generally ignore environmental ones, even though the latter are likely to become largely more relevant in the coming decades. Even social capital, a relative newcomer in economics, appears better integrated into the growth literature.
Why such disregard for an issue that epitomizes market failures from externalities, common property issues, and whose importance in both growth processes and human well-being is well documented? Sheer ignorance, likely – or a vague notion that innovation will come to the rescue. But why would markets generate the technology to solve a problem that combines both knowledge and environmental externalities?
The teaching of economics
Here is a plea then for an urgent change in the economics curriculum, at both introductory and advanced levels. Growth chapters in today's macroeconomics textbooks make no reference to the environment – whether as an input into the production function or as a limiting factor affecting the productivity of human or physical capital. This is the case, for example, of David Romer's textbook, in its fourth edition in 2011; of Jean-Pascal Benassy's 2011 volume; or those of the Chicago School economists, such as Nancy Stokey, Robert Lucas and Edward Prescott's (1989) and of Lars Ljungqvist and Thomas Sargent (third edition, 2012); or even that of Neo-keynesian economists such as Olivier Blanchard and Stanly Fischer (1989); or, finally, the very recent example of Michael Wickens (2012).
What is needed is not simply that more environmental economics be offered, but rather that the macroeconomics courses teach that natural capital is a key input into production processes, and that the environment – through massive mismanagement and a chronic failure to apply the basic principles of economics – has now become a serious macroeconomic problem, one that requires a profound and dramatic change in our model of growth. The development model of the industrial revolution ('grow now and clean up later') partly worked for a world of 1.5 million people; it simply won't do for a global population approaching 9 billion.
If introducing the notion and role of the environment is necessary in macroeconomics teaching, it is a fortiori necessary when the student is presented with the theory and models of economic growth. There are a few economic growth textbooks written by well-known growth economists who are very active in that area. Going through the tables of contents, however, one is quickly disappointed. Neither the volume by Robert Barro and Xavier Sala-i-Martin (2003) nor the one by Daron Acemoglu (2008), for instance, consider explicitly the role of the environment in the process and in the perspectives of economic growth of a country. The same holds for the textbook by Olivier de la Grandville (2009), while Charles Jones and Dietrich Vollrath (2013) include a chapter on economic growth and natural resources, which is only a component of natural capital. Only the book by Philippe Aghion and Peter Howitt (2008) includes a chapter – the sixteenth – where the authors study 'how new growth theories can integrate the environmental dimension, and in particular how endogenous innovation and directed technical change make it possible to reconcile the sustained growth objective with the constraints imposed by exhaustible resources or the need to maintain the environment' (p.377).
It is remarkable that all textbooks on which undergraduate and graduate students learn the fundamental of economic growth invariably include a chapter on the role of human capital and of technological change, but always miss addressing the issue of the environment and natural capital.
As we believe that it is time to stop teaching that economic growth is uniquely measured by the growth of the production of all goods and services, we also firmly believe that the time has come to teach – from the first steps – that economic growth cannot abstract from the explicit consideration of the constraints and opportunities imposed by the environment and natural exhaustible resources. It is clear from many recent assessments (including the recently released IPCC Fifth Assessment Report) that environmental externalities, constraints on natural resources, and climate change – largely a macro problem – will constantly and deeply affect mankind's future. The teaching of economics can no longer ignore it.

'The Moment Is Right for Housing Reform'

Posted: 26 Apr 2014 12:24 AM PDT

Jason Furman and James Stock on housing finance reform:

The Moment Is Right for Housing Reform, Commentary, WSJ: ... The reformed housing-finance system should enable the dreams of middle-class and aspiring middle-class Americans to own homes by supporting consumer-friendly mortgage products such as the 30-year fixed-rate mortgage. It should provide help ... to creditworthy first-time borrowers who might otherwise have trouble qualifying for a mortgage; and it should stimulate broad access to mortgages for historically underserved communities.
A reformed housing-finance system should support rental housing... It should stimulate competition and innovation..., while building in consumer protections... And it should protect the taxpayer by placing substantial private capital in front of any government guarantee—and ensure that the taxpayer be properly compensated for that guarantee.
Less discussed, but also important...: Housing-finance reform presents an opportunity to enhance macroeconomic stability by making the housing sector more cyclically resilient. Housing has long been one of the most volatile sectors of the economy,... with ... the most vulnerable and disadvantaged bearing the brunt of housing-related or magnified recessions. ...
Housing-finance reform is a key unfinished piece of business from the financial crisis, and putting all the parts together is a complex undertaking. But the current period of relative economic calm is exactly the right time to do so. ...

Links for 4-26-14

Posted: 26 Apr 2014 12:03 AM PDT

April 25, 2014

Latest Posts from Economist's View

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Paul Krugman: The Piketty Panic

Posted: 25 Apr 2014 12:15 AM PDT

Money talks, but sometimes not very coherently:

The Piketty Panic, by Paul Krugman, Commentary, NY Times: "Capital in the Twenty-First Century," the new book by ... Thomas Piketty, is ... serious, discourse-changing scholarship... And conservatives are terrified. ...
The really striking thing about the debate so far is that the right seems unable to mount any kind of substantive counterattack... Instead, the response has been all about name-calling — ...that Mr. Piketty is a Marxist...
For the past couple of decades, the conservative response to attempts to make soaring incomes at the top into a political issue has involved two lines of defense: first, denial that the rich are actually doing as well and the rest as badly as they are, but when denial fails, claims that those soaring incomes at the top are a justified reward for services rendered. Don't call them the 1 percent, or the wealthy; call them "job creators."
But how do you make that defense if the rich derive much of their income not from the work they do but from the assets they own? And what if great wealth comes increasingly not from enterprise but from inheritance?
What Mr. Piketty shows is that these are not idle questions. Western societies before World War I were indeed dominated by an oligarchy of inherited wealth — and his book makes a compelling case that we're well on our way back toward that state.
So what's a conservative, fearing that this diagnosis might be used to justify higher taxes on the wealthy, to do? He could try to refute Mr. Piketty in a substantive way, but, so far, I've seen no sign of that happening. Instead, as I said, it has been all about name-calling..., to ... denounce Mr. Piketty as a Marxist..., which only makes sense if the mere mention of unequal wealth makes you a Marxist. ...
And The Wall Street Journal's review, predictably, goes the whole distance, somehow segueing from Mr. Piketty's call for progressive taxation as a way to limit the concentration of wealth ... to the evils of Stalinism. ...
Now, the fact that apologists for America's oligarchs are evidently at a loss for coherent arguments doesn't mean that they are on the run politically. Money still talks — indeed, thanks in part to the Roberts court, it talks louder than ever. Still, ideas matter too, shaping both how we talk about society and, eventually, what we do. And the Piketty panic shows that the right has run out of ideas.

Links for 4-25-14

Posted: 25 Apr 2014 12:03 AM PDT

'Will 2014 end up like 1914?'

Posted: 24 Apr 2014 10:07 AM PDT

Larry ("The Numerologist") Summers:

Will 2014 end up like 1914?: 2014 is a year, if you think about it correctly, of anniversaries. It is the 100th anniversary of 1914, a moment when the world mismanaged itself and reaped the legacy of its mismanagement in as terrible a way as has ever occurred. ... Seventy-five years ago the year was 1939. It had been thought that the war that began in 1914 was a war to end all wars. ... Fifty years ago it was 1964. ... 1964 was months after the assassination of President Kennedy. It was the year that saw the United States' entry into Vietnam. ... Twenty-five years ago it was 1989. It was the year that in a historical sense the 20th century ended. ... A totalitarian ideology and empire was defeated without a shot having been fired. ...
So, if you believe in numerology, if you believe in centuries and quarter centuries, this is a remarkable year. History does not repeat itself, it has been said, but it does rhyme. If you think about the challenges that I have described, that sometimes were met well and sometimes were met poorly, echoes of many can be heard today. ...
I would suggest last that history teaches that no individual nation can be a guarantor of the stability of the system. It is only through the cooperation of nations, through the establishment of institutions, through the legitimacy that comes from convocation and dialogue, that firm and clear lines can be drawn...
My impulse to government, in a sense, came to me as a young child watching the first president who impinged on my consciousness, John F. Kennedy. He said, "Man's problems were made by man. It follows that they can be solved by man." There is no reason why the darker parts of history ever need to be re-enacted... It lies in our hands, as concerned citizens, to shape what somebody in 2114 will say when they reflect on the past hundred years.

Consumption Inequality is Also Growing

Posted: 24 Apr 2014 08:46 AM PDT

Hearing a lot of talk about how Democrats never talk about consumption inequality, and that this is "the holy grail for inequality skeptics". It is talked about, and it's a "myth that growing consumption inequality is a myth." A very quick search of this blog turns up:

The Myth that Growing Consumption Inequality is a Myth 2012
Inequality of Income and Consumption 2012
Inequality Has Increased in Income and Consumption 2012
But They Have TVs and Cell Phones! - 2012
Has Consumption Inequality Mirrored Income Inequality? 2011
Is Consumption the Grail for Inequality Skeptics? 2009

Income Inequality, Spending Inequality, Wealth Inequality 2008

Consumption and Income Inequality 2008