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June 30, 2014

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Paul Krugman: Charlatans, Cranks and Kansas

Posted: 30 Jun 2014 12:24 AM PDT

"The enduring power of bad ideas":

Charlatans, Cranks and Kansas, by Paul Krugman, Commentary, NY Times: Two years ago Kansas embarked on a remarkable fiscal experiment: It sharply slashed income taxes without any clear idea of what would replace the lost revenue. Sam Brownback, the governor, proposed the legislation — in percentage terms, the largest tax cut in one year any state has ever enacted — in close consultation with the economist Arthur Laffer. And Mr. Brownback predicted that the cuts would jump-start an economic boom...
But Kansas isn't booming — in fact, its economy is lagging both neighboring states and America as a whole. Meanwhile, the state's budget has plunged deep into deficit, provoking a Moody's downgrade of its debt.
There's an important lesson here — but it's not what you think. Yes, the Kansas debacle shows that tax cuts don't have magical powers, but we already knew that. The real lesson from Kansas is the enduring power of bad ideas, as long as those ideas serve the interests of the right people. ...
For the Brownback tax cuts didn't emerge out of thin air. They closely followed a blueprint laid out by the American Legislative Exchange Council, or ALEC, which has also supported a series of economic studies purporting to show that tax cuts for corporations and the wealthy will promote rapid economic growth. The studies are embarrassingly bad, and the council's Board of Scholars — which includes both Mr. Laffer and Stephen Moore of the Heritage Foundation — doesn't exactly shout credibility. ...
And what is ALEC? It's a secretive group, financed by major corporations, that drafts model legislation for conservative state-level politicians.... And most of ALEC's efforts are directed, not surprisingly, at privatization, deregulation, and tax cuts for corporations and the wealthy.
And I do mean for the wealthy. ...ALEC supports ... cutting taxes at the top while actually increasing taxes at the bottom, as well as cutting social services.
But how can you justify enriching the already wealthy while making life harder for those struggling to get by? The answer is, you need an economic theory claiming that such a policy is the key to prosperity for all. So supply-side economics fills a need backed by lots of money, and the fact that it keeps failing doesn't matter.
And the Kansas debacle won't matter either. Oh, it will briefly give states considering similar policies pause. But the effect won't last long, because faith in tax-cut magic isn't about evidence; it's about finding reasons to give powerful interests what they want.

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Posted: 30 Jun 2014 12:06 AM PDT

'The Prospects for Egalitarian Capitalism'

Posted: 29 Jun 2014 09:48 AM PDT

Dan Little:

Thelen on the prospects for egalitarian capitalism:
source: Kathleen Thelen, Varieties of Liberalization (kl 3310)
There is a version of economic historical thinking that we might label as "capitalist triumphalism" -- the idea that the institutions of a capitalist economy drive out all other economic forms, and that they tend towards an ever-more pure form of unconstrained market society. "Liberalization," deregulation, and reduction of social rights are seen as economically inevitable. On this view, the various ways in which some countries have tried to ameliorate the harsh consequences of unconstrained capitalism on the least well off in society are doomed -- the welfare state, social democracy, extensive labor rights, or universal basic income (link). Through a race to the bottom, any institutional reforms that impede the freedom and mobility of capital will be forced out by a combination of economic and political pressures.
The graphs above demonstrate the current structural differences among Denmark, Sweden, Germany, Netherlands, and USA when it comes to training and income support for the unemployed and underemployed. It is visible that the four European economies devote substantially greater resources to support for the unemployed than the United States. And on the triumphalist view, the states demonstrating more generous benefits for the less-well-off will inevitably converge towards the profile represented by the fifth panel, the United States.
Kathleen Thelen is a gifted historical sociologist who has studied the institutions of labor education and training throughout the past twenty years. Her book How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan is an important contribution to our understanding of these basic economic institutions, and it also sheds important light on the meta-issues of stability and change in important social institutions. With James Mahoney she also edited the valuable collection Explaining Institutional Change: Ambiguity, Agency, and Power on this topic.
Thelen's most recent book, Varieties of Liberalization and the New Politics of Social Solidarity addresses the question of capitalist triumphalism. (That isn't a term that she uses, but it seems descriptive.) She locates her analysis within the "varieties of capitalism" field of scholarship, which maintains that there is not a single pathway of development for capitalist systems. "Coordinated" capitalism and neoliberal capitalism represent two poles of the space considered by the VofC literature.
From the beginning, the VofC literature challenged the idea that contemporary market pressures would drive a convergence on a single best or most efficient model of capitalism. (kl 228)
Thelen is interested in assessing the prospects for what she calls "egalitarian" capitalism -- the variants of capitalist political economy that feature redistribution, social welfare, and significant policy support for the less-well-off. She focuses on several key institutions -- industrial relations, vocational education and training, and labor market institutions, and she argues that these are particularly central for the historical issue of the development of capitalism towards harsher or gentler versions.
Different varieties of liberalization occur under the auspices of different social coalitions, and this has huge implications for the distributive outcomes in which many of us are ultimately interested. (kl 243)
This point is key to her view of the plasticity and path-dependency of basic economic institutions: these institutions change as a result of economic imperatives and the strength of various social groups who are in a position to influence the form that change takes. "The conclusions I reach here are based on a view of institutions that emphasizes the political-coalitional basis on which they rest" (kl 259). But there is no simple calculus proceeding from power group to institutional outcome; instead, the results for institutional change are a dynamic consequence of strategy, coalition, and constraint.
I suggest that the institutions of egalitarian capitalism survive best not when they stably reproduce the politics and patterns of the Golden Era, but rather when they are reconfigured -- in both form and function -- on the basis of significantly new political support coalitions. (kl 330)
A key finding in Thelen's analysis is that "coordinated" capitalism and "egalitarian" capitalism are not the same. Coordinated capitalism corresponds to the models associated with social democracies of the 1950s and 1960s, the "Nordic" model. But Thelen holds that egalitarian capitalism can take more innovative and flexible forms and may be a more durable alternative to neoliberal capitalism.

Is a more "egalitarian" capitalism possible? The data on labor markets that Thelen presents shows that there are major differences across OECD economies when it comes to wage inequality. Here is a striking chart:
Source: Thelen, Figure 3.3. Share of Employees in Low-Wage Work, 2010
Fully a quarter of US workers are employed in low-wage work in 2010. This is about double the rate of Denmark and quadruple the rate of low-wage workers in Sweden. Plainly this reflects a US economy that is creating substantially greater numbers of low-income people than any other OECD country. And yet all of these countries are capitalist economies, some with rates of growth that are higher than the United States. This demonstrates that there are institutional and policy choices available that are consistent with the imperatives of a capitalist market economy and yet that give rise to more egalitarian outcomes than we observe in the US, Canada, and the UK.
A key element in common among the more egalitarian labor outcomes that Thelen studies (Netherlands, Denmark, Sweden, Germany) is the expansion of part-time work, mini-jobs, and "flexi-curity". This phenomenon reflects a combination of liberalization (relaxation of work rules and requirements of long labor contracts), with a set of arrangements that allows a smoother allocation of labor to jobs and an improvement in income and security for the lower end of the labor market. This trend is part of what Thelen calls a strategy of "embedded flexibilization", which she regards as the best hope for a pathway towards equitable capitalism.
Thelen closes with a realistic observation about the uncertain coalitional basis that is available in support of the policies of embedded flexibilization. Xenophobic tendencies in countries like the Netherlands and Denmark have the potential for destroying the social consensus that currently exists for this model, and the leaders of nationalistic anti-immigrant parties have made this a key to their efforts at political mobilization (kl 5541). Maintenance of these policies will require strong political efforts on the part of progressive coalitions in those countries, and organized labor is key to those efforts.
This analysis is deeply international and comparative, but it has an important consequence for the political economy of the United States: where are the coalitions that can help steer our economy towards a more egalitarian form of capitalism?
(Readers may be interested in an earlier discussion of the Nordic model; link.)

June 29, 2014

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Posted: 29 Jun 2014 12:06 AM PDT

The Rise and Fall of the New Classical Model

Posted: 28 Jun 2014 10:27 AM PDT

Simon Wren-Lewis (my comments are at the end):

Understanding the New Classical revolution: In the account of the history of macroeconomic thought I gave here, the New Classical counter revolution was both methodological and ideological in nature. It was successful, I suggested, because too many economists were unhappy with the gulf between the methodology used in much of microeconomics, and the methodology of macroeconomics at the time.
There is a much simpler reading. Just as the original Keynesian revolution was caused by massive empirical failure (the Great Depression), the New Classical revolution was caused by the Keynesian failure of the 1970s: stagflation. An example of this reading is in this piece by the philosopher Alex Rosenberg (HT Diane Coyle). He writes: "Back then it was the New Classical macrotheory that gave the right answers and explained what the matter with the Keynesian models was."
I just do not think that is right. Stagflation is very easily explained: you just need an 'accelerationist' Phillips curve (i.e. where the coefficient on expected inflation is one), plus a period in which monetary policymakers systematically underestimate the natural rate of unemployment. You do not need rational expectations, or any of the other innovations introduced by New Classical economists.
No doubt the inflation of the 1970s made the macroeconomic status quo unattractive. But I do not think the basic appeal of New Classical ideas lay in their better predictive ability. The attraction of rational expectations was not that it explained actual expectations data better than some form of adaptive scheme. Instead it just seemed more consistent with the general idea of rationality that economists used all the time. Ricardian Equivalence was not successful because the data revealed that tax cuts had no impact on consumption - in fact study after study have shown that tax cuts do have a significant impact on consumption.
Stagflation did not kill IS-LM. In fact, because empirical validity was so central to the methodology of macroeconomics at the time, it adapted to stagflation very quickly. This gave a boost to the policy of monetarism, but this used the same IS-LM framework. If you want to find the decisive event that led to New Classical economists winning their counterrevolution, it was the theoretical realisation that if expectations were rational, but inflation was described by an accelerationist Phillips curve with expectations about current inflation on the right hand side, then deviations from the natural rate had to be random. The fatal flaw in the Keynesian/Monetarist theory of the 1970s was theoretical rather than empirical.

I agree with this, so let me add to it by talking about what led to the end of the New Classical revolution (see here for a discussion of the properties of New Classical, New Keynesian, and Real Business Cycle Models). The biggest factor was empirical validity. Although some versions of the New Classical model allowed monetary non-neutrality (e.g. King 1982, JPE), when three factors are present, continuous market clearing, rational expectations, and the natural rate hypothesis, monetary neutrality is generally present in these models. Initially work from people like Barrow found strong support for the prediction of these models that only unanticipated changes in monetary policy can affect real variables like output, but subsequent work and eventually the weight of the evidence pointed in the other direction. Both expected and unexpected changes in the money supply appeared to matter in contrast to a key prediction of the New Classical framework.

A second factor that worked against New Classical models is that they had difficulty explaining both the duration and magnitude of actual business cycles. If the reaction to an unexpected policy shock was focused in a single period, the magnitude could be matched, but not the duration. If the shock was spread over 3-5 years to match the duration, the magnitude of cycles could not be matched. Movements in macroeconomic variables arising from informational errors (unexpected policy shocks) did not have enough "power" to capture both aspects of actual business cycles.

The other factor that worked against these models was that information problems were a key factor in generating swings in GDP and employment, and these variations were costly in aggregate. Yet no markets for information appeared to resolve this problem. For those who believe in the power of markets, and many proponents of New Classical models were also market fundamentalists, the lack of markets for information was a problem.

The New Classical model had displaced the Keynesian model for the reasons highlighted above, but the failure of the New Classical model left the door open for the New Keynesian model to emerge (it appeared to be more consistent with the empirical evidence on the effects of changes in the money supply, and in other areas as well, e.g. the correlation between productivity and economic activity).

But while the New Classical revolution was relatively short-lived as macro models go, it left two important legacies, rational expectations and microfoundations (as well as better knowledge about how non-neutralities might arise, in essence the New Keynesian model drops continuous market clearing through the assumption of short-run price rigidities, and about how to model information sets). Rightly or wrongly, all subsequent models had to have these two elements present within them (RE and microfoundaions), or they would be dismissed.

June 28, 2014

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'Inequality Is Not Inevitable'

Posted: 28 Jun 2014 12:24 AM PDT

Joe Stiglitz:

Inequality Is Not Inevitable, by Joseph Stiglitz, Commentary, NY Times: An insidious trend has developed over this past third of a century. A country that experienced shared growth after World War II began to tear apart, so much so that when the Great Recession hit in late 2007, one could no longer ignore the fissures that had come to define the American economic landscape. How did this "shining city on a hill" become the advanced country with the greatest level of inequality?
One stream of the extraordinary discussion set in motion by Thomas Piketty's timely, important book, "Capital in the Twenty-First Century," has settled on the idea that violent extremes of wealth and income are inherent to capitalism. In this scheme, we should view the decades after World War II — a period of rapidly falling inequality — as an aberration.
This is actually a superficial reading of Mr. Piketty's work, which provides an institutional context for understanding the deepening of inequality over time. Unfortunately, that part of his analysis received somewhat less attention than the more fatalistic-seeming aspects.
Over the past year and a half, The Great Divide, a series in The New York Times for which I have served as moderator, has also presented a wide range of examples that undermine the notion that there are any truly fundamental laws of capitalism. The dynamics of the imperial capitalism of the 19th century needn't apply in the democracies of the 21st. We don't need to have this much inequality in America. ....[continue]...

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Posted: 28 Jun 2014 12:06 AM PDT

'How to Avoid the Next Crash'

Posted: 27 Jun 2014 01:11 PM PDT

From the editors at BloombergView:

How to Avoid the Next Crash: ... Many central banks, led by the U.S. Federal Reserve, have innovated boldly when it comes to monetary policy. They have pumped money into the financial system. They have provided banks with emergency loans. They have started providing "forward guidance" in an attempt to stabilize markets. Some even pay negative interest rates on reserves as a way to encourage private lending. Many countries have overhauled their financial regulatory systems as well.
There is a third category of innovation, however -- known as macroprudential policy -- that has lagged behind. It shouldn't.
As the name suggests, macroprudential policies are a kind of hybrid: financial regulations attuned to the condition of the system as a whole, rather than the soundness of particular banks or other institutions. ...
Few deny the need for macroprudential policy. If speeches and conferences on the topic were a measure of progress, there'd be no cause for concern. Sadly, they aren't. Governments should develop a sense of urgency before it's too late.

For me, stopping the equivalent of bank runs within the shadow banking system -- a big problem during the financial crisis that has not yet been fully addressed -- is a top priority.

The Panic Over Inflation Is 'Perplexing'

Posted: 27 Jun 2014 10:55 AM PDT

Greg Ip echoes Tim Duy on 'Inflation Hysteria':

The spontaneous combustion theory of inflation: In the last few weeks, ominous warnings of inflation's imminent resurgence have multiplied... On factual, theoretical and strategic grounds, I find the panic over inflation perplexing.
First, factual. Yes, core CPI inflation has rebounded to 2% from 1.6% in February and today we learned that core PCE inflation has risen to 1.5% from 1.1%. What should we infer from this? Nothing. In the short run inflation oscillates...
Second, theoretical. ... The New Keynesian theory, to which the Fed subscribes, considers inflation a function of slack and expectations. The evidence is pretty persuasive that while slack has shrunk in the last five years..., it remains ample. Expectations, likewise, have oscillated but shown no trend up or down. ...
What if you consider inflation always and everywhere a monetary phenomenon? I consider the money supply pretty useless for forecasting anything, but even if were a monetarist, I wouldn't be worried..., M2 is up just 6.5% in the last year...
Third, strategic. ... Of course, the Fed might wait too long to tighten and inflation could eventually rise above the 2% target. But,... overshooting inflation is clearly a lesser evil than undershooting inflation. This, more than anything else, is why the panic over inflation is misplaced.

June 27, 2014

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Paul Krugman: The Incompetence Dogma

Posted: 27 Jun 2014 12:24 AM PDT

Why heve predictions from "the enemies of health reform" been so wrong?:

The Incompetence Dogma, by Paul Krugman, Commentary, NY Times: Have you been following the news about Obamacare? The Affordable Care Act has receded from the front page, but information about how it's going keeps coming in — and almost all the news is good. Indeed, health reform has been on a roll ever since March, when it became clear that enrollment would surpass expectations despite the teething problems of the federal website.
What's interesting about this success story is that it has been accompanied at every step by cries of impending disaster. At this point, by my reckoning, the enemies of health reform are 0 for 6. That is, they made at least six distinct predictions about how Obamacare would fail — every one of which turned out to be wrong.
"To err is human," wrote Seneca. "To persist is diabolical." Everyone makes incorrect predictions. But to be that consistently, grossly wrong takes special effort. So what's this all about?
Many readers won't be surprised by the answer:... a dogmatic belief in public-sector incompetence — is now a central part of American conservatism, and the incompetence dogma has evidently made rational analysis of policy issues impossible.
It wasn't always thus. If you go back two decades, to the last great fight over health reform, conservatives seem to have been relatively clearheaded about the policy prospects, albeit deeply cynical. ...
But that was before conservatives had fully retreated into their own intellectual universe. Fox News didn't exist yet; policy analysts at right-wing think tanks had often begun their careers in relatively nonpolitical jobs. It was still possible to entertain the notion that reality wasn't what you wanted it to be.
It's different now. It's hard to think of anyone on the American right who even considered the possibility that Obamacare might work, or at any rate who was willing to admit that possibility in public. Instead, even the supposed experts kept peddling improbable tales of looming disaster...
And let's be clear: While it has been funny watching the right-wing cling to its delusions about health reform, it's also scary. After all, these people retain considerable ability to engage in policy mischief, and one of these days they may regain the White House. And you really, really don't want people who reject facts they don't like in that position. I mean, they might do unthinkable things, like starting a war for no good reason. Oh, wait.

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Posted: 27 Jun 2014 12:06 AM PDT

'The Enormous Wage Potential of Infrastructure Jobs'

Posted: 26 Jun 2014 10:45 AM PDT

Even after years of "recovery" it's not too late t help those struggling to find employment, and to improve our future potential for growth at the same time. Of course, that would require Congress -- particularly those on the political right -- to actually care about the unemployed, and to recognize the critical role that government (and taxes) must play in meeting our infrastructure needs:

The Enormous Wage Potential of Infrastructure Jobs, by Joseph Kane and Robert Puentes, Brookings: This month marks five years since the U.S. economic recovery began, but we clearly have a long way to go to address our nation's jobs deficit. Even though more workers are gradually finding employment, their wages continue to stagnate and hold back widespread economic growth. ...
Cutting across multiple industries and geographies, infrastructure jobs offer needed stability. Since these jobs also typically require less formal education and pay competitive wages across a variety of occupations, they give workers from all backgrounds a chance to make a decent living in today's unforgiving economy.
As our recent report reveals, infrastructure jobs tend to pay 30 percent more to lower income workers—wage earners at the 10th and 25th percentile—relative to all jobs nationally...
Infrastructure occupations not only employ thousands of workers with a high school diploma or less, but they also frequently offer higher wages compared to many other jobs, particularly those involved in sales, maintenance, production, and other support activities. ...
Over time, by forging stronger connections between our infrastructure investments and workforce needs, we can help boost the long-term opportunity available to American workers.

'Are the Rating Agencies About to Get Their Comeuppance?'

Posted: 26 Jun 2014 10:16 AM PDT

Barry Ritholtz:

Are the Rating Agencies About to Get Their Comeuppance?: This week in encouraging news, we learn that the Securities and Exchange Commission may finally be pursuing one of the prime enablers of the financial crisis — the ratings companies. Previously, it was reported that disclosure violations were on the SEC's radar, but truth be told, those are minor offenses.
The SEC's Office of Credit Ratings, a division whose sole purpose is essentially to oversee Moody's and Standard & Poor's, seems to be stirring. ... Multiple cases have reportedly been referred to the SEC's enforcement division, and new regulations are due.
And a welcome change it would be. Of all the players that helped cause the financial crisis, the ratings companies have gotten off scot-free. Banks have had massive fines while many mortgage and derivative underwriters have had their garbage securities put back to them at great cost. Since 2008, there have been 388 mortgage companies that have gone bankrupt. All of that junk paper found its way into AAA-rated securitized products and derivatives. The penalty for Moody's and S&P has been essentially nil. ...[continue]...

It may be "encouraging news" but why has it taken so long?

Why DSGEs Crash During Crises

Posted: 26 Jun 2014 09:24 AM PDT

David Hendry and Grayham Mizon with an important point about DSGE models:

Why DSGEs crash during crises, by David F. Hendry and Grayham E. Mizon: Many central banks rely on dynamic stochastic general equilibrium models – known as DSGEs to cognoscenti. This column – which is more technical than most Vox columns – argues that the models' mathematical basis fails when crises shift the underlying distributions of shocks. Specifically, the linchpin 'law of iterated expectations' fails, so economic analyses involving conditional expectations and inter-temporal derivations also fail. Like a fire station that automatically burns down whenever a big fire starts, DSGEs become unreliable when they are most needed.

Here's the introduction:

In most aspects of their lives humans must plan forwards. They take decisions today that affect their future in complex interactions with the decisions of others. When taking such decisions, the available information is only ever a subset of the universe of past and present information, as no individual or group of individuals can be aware of all the relevant information. Hence, views or expectations about the future, relevant for their decisions, use a partial information set, formally expressed as a conditional expectation given the available information.
Moreover, all such views are predicated on there being no unanticipated future changes in the environment pertinent to the decision. This is formally captured in the concept of 'stationarity'. Without stationarity, good outcomes based on conditional expectations could not be achieved consistently. Fortunately, there are periods of stability when insights into the way that past events unfolded can assist in planning for the future.
The world, however, is far from completely stationary. Unanticipated events occur, and they cannot be dealt with using standard data-transformation techniques such as differencing, or by taking linear combinations, or ratios. In particular, 'extrinsic unpredictability' – unpredicted shifts of the distributions of economic variables at unanticipated times – is common. As we shall illustrate, extrinsic unpredictability has dramatic consequences for the standard macroeconomic forecasting models used by governments around the world – models known as 'dynamic stochastic general equilibrium' models – or DSGE models. ...[continue]...

Update: [nerdy] Reply to Hendry and Mizon: we have DSGE models with time-varying parameters and variances.

June 26, 2014

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Posted: 26 Jun 2014 12:06 AM PDT

The Optimal Number of Immigrants

Posted: 25 Jun 2014 09:32 AM PDT

John Cochrane:

The optimal number of immigrants: Hoover's Peregrine asked me to write an essay with the title, "What is the optimal number of immigrants to the U.S?"  (Original version and prettier formatting here. Also a related podcast here.) My answer: Two billion, two million, fifty-two thousand and thirty-five (2,002,052,035). Seriously.
The United States is made up of three and a half million square miles, with 84 people per square mile. The United Kingdom has 650 people per square mile. If we let in two billion people, we'll have no more population density than the UK.

Why the UK? Well, it seems really pretty country and none too crowded on "Masterpiece Theater." The Netherlands is also attractive with 1,250 people per square mile, so maybe four billion. Okay, maybe more of the US is uninhabitable desert or tundra, so maybe only one billion. However you cut it, the US still looks severely underpopulated relative to many other pleasant advanced countries.

As you can see by my playful calculation, the title of this essay asks the wrong question. ...

'Speculation, Trading, and Bubbles'

Posted: 25 Jun 2014 09:32 AM PDT

For those who might be interested, an excerpt from a new book by José A. Scheinkman, Speculation, Trading, and Bubbles (with contributions by Sanford J. Grossman, Patrick Bolton, Kenneth J. Arrow, and Joseph E. Stiglitz):

 

'That Big Negative Q1 GDP Revision'

Posted: 25 Jun 2014 09:02 AM PDT

Jared Bernstein:

Whoa! Whassup With That Big Negative Q1 GDP Revision?: Yes, you read those headlines right: real GDP contracted at a 2.9% rate according to revised data released this AM. That's contracted, as in went down.
So, are we, like, back in recession (granting that a lot of people think we never left)?
Nope. That was a truly lousy quarter but it's highly unlikely to be repeated any time soon. The particularly bad winter weather played a role; both residential and commercial building were negative. Heavy inventory buildups in earlier quarters were reversed, which usually implies a positive bounce-back in coming quarters. Exports were revised down and imports up, so the trade deficit subtracted a large 1.5 points from the bottom line; that drag will likely diminish in coming quarters.
Health care spending, a strong contributor in earlier estimates of Q1 growth, went from contributing 1 percentage point to growth in an earlier vintage of Q1 GDP to subtracting 0.16 points in this update, suggesting earlier estimates of the pace of increased coverage were overstated. That doesn't mean they're not happening; it just means they'll be spread out over more quarters. [Update: check that--a colleague tells me that what's really happening here is that people didn't use as many services as first thought. I'll try to look further into this.] ...
Year-over-year—a good way to squeeze out some quarterly noise—real GDP is up 1.5%. That's better than the headline number, but it too is actually a weak number. The trend over the last two years is 2.1% growth... I don't believe today's revisions really signal a decline in that trend rate and most analysts expect coming quarters to clock in at 2.5-3%. ...

I still think that policymakers should revise their priors (downward), particularly given their tendency to brush off any bad news as temporary changes that will surely be reversed in coming quarters.

June 25, 2014

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Posted: 25 Jun 2014 12:06 AM PDT

'More Capital is Good is Not a Helpful Contribution'

Posted: 24 Jun 2014 11:35 AM PDT

Paul Krugman:

Sympathy for the Trustafarians: A number of people have asked me to comment on Greg Mankiw's defense of inherited wealth. It's a strange piece... But let me focus on two key problems... – one purely economic, one involving political economy.
So, on the economics: Mankiw argues that accumulation of dynastic wealth is good for everyone, because it increases the capital stock and therefore trickles down to workers in the form of higher wages. Is this a good argument? ...
In fact, what we're really talking about here is taxation of wealth, and the question is what would happen to that revenue versus what happens if the rich get to keep the money. If the government uses the extra revenue to reduce deficits, then all of it is saved – as opposed to only part of it if it's passed on to heirs. If the government uses the revenue to pay for social insurance and/or public goods, that's likely to provide a lot more benefit to workers than the trickle-down from increased capital.
The point is that you can only justify Mankiw's claim that inherited wealth is necessarily good for workers by insisting that the government would do nothing useful with the revenue from inheritance taxes. I'd call that assuming your conclusions...
But the larger criticism of Mankiw's piece is that it ignores the main reason we're concerned about the concentration of wealth in family dynasties – the belief that it warps our political economy, that it undermines democracy. ...
If Mankiw wants to argue that the costs of any attempt to limit wealth concentration would exceed the benefits, fine. But "more capital is good" is not a helpful contribution to the discussion.

'Bipartisan Report Tallies High Toll on Economy From Global Warming'

Posted: 24 Jun 2014 11:03 AM PDT

Republicans in Congress will ignore this bipartisan report and continue to block action on climate change. This "toxic mix of ideology and anti-intellectualism" is endangering our future:

Bipartisan Report Tallies High Toll on Economy From Global Warming, by Justin Gillis, NY Times: More than a million homes and businesses along the nation's coasts could flood repeatedly before ultimately being destroyed. Entire states in the Southeast and the Corn Belt may lose much of their agriculture as farming shifts northward in a warming world. Heat and humidity will probably grow so intense that spending time outside will become physically dangerous, throwing industries like construction and tourism into turmoil.
That is a picture of what may happen to the United States economy in a world of unchecked global warming, according to a major new report released Tuesday by a coalition of senior political and economic figures from the left, right and center, including three Treasury secretaries stretching back to the Nixon administration.
At a time when the issue of climate change has divided the American political landscape, pitting Republicans against Democrats and even fellow party members against one another, the unusual bipartisan alliance of political veterans said that the country — and business leaders in particular — must wake up to the enormous scale of the economic risk. ...

'Was the Neoclassical Synthesis Unstable?'

Posted: 24 Jun 2014 10:44 AM PDT

The last paragraph from a much longer argument by Simon Wren-Lewis:

Was the neoclassical synthesis unstable?: ... Of course we have moved on from the 1980s. Yet in some respects we have not moved very far. With the counter revolution we swung from one methodological extreme to the other, and we have not moved much since. The admissibility of models still depends on their theoretical consistency rather than consistency with evidence. It is still seen as more important when building models of the business cycle to allow for the endogeneity of labour supply than to allow for involuntary unemployment. What this means is that many macroeconomists who think they are just 'taking theory seriously' are in fact applying a particular theoretical view which happens to suit the ideology of the counter revolutionaries. The key to changing that is to first accept it.

June 24, 2014

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Posted: 24 Jun 2014 12:06 AM PDT

'Political Polarization and Income Inequality in the United States'

Posted: 23 Jun 2014 01:35 PM PDT

From the Liberty Street Economics blog at the NY Fed:

The Capitol Since the Nineteenth Century: Political Polarization and Income Inequality in the United States, by Rajashri Chakrabarti and Matt Mazewski, Liberty Street Economics: Even the most casual observer of American politics knows that today's Republican and Democratic parties seem to disagree with one another on just about every issue under the sun. Some assume that this divide is merely an inevitable feature of a two-party system, while others reminisce about a golden era of bipartisan cooperation and hold out hope that a spirit of compromise might one day return to Washington. In this post, we present evidence that political polarization—or the trend toward more ideologically distinct and internally homogeneous parties—is not a recent development in the United States, although it has reached unprecedented levels in the last several years. We also show that polarization is strongly correlated with the extent of income inequality, but only weakly associated with the rate of economic growth. We offer several tentative explanations for these relationships, and discuss whether all forms of polarization are created equal. ...

Bank Failure, Relationship Lending, and Local Economic Performance

Posted: 23 Jun 2014 01:17 PM PDT

John Kandrac (a former Ph.D. student):

Bank Failure, Relationship Lending, and Local Economic Performance, by John Kandrac, Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series: Abstract Whether bank failures have adverse effects on local economies is an important question for which there is conflicting and relatively scarce evidence. In this study, I use county-level data to examine the effect of bank failures and resolutions on local economies. Using quasi-experimental techniques as well as cross-sectional variation in bank failures, I show that recent bank failures lead to lower income and compensation growth, higher poverty rates, and lower employment. Additionally, I find that the structure of bank resolution appears to be important. Resolutions that include loss-sharing agreements tend to be less deleterious to local economies, supporting the notion that the importance of bank failure to local economies stems from banking and credit relationships. Finally, I show that markets with more inter-bank competition are more strongly affected by bank failure. [Download Full text]

How Much Do We Care About Future Generations?

Posted: 23 Jun 2014 08:28 AM PDT

At MoneyWatch:

How much do we care about future generations?, by Mark Thoma: Former U.S. Treasure Secretary Henry Paulson's recent warning that "We're staring down a climate bubble that poses enormous risks to both our environment and economy" and his call for a carbon tax brings up an important question. How do we assess the benefits to future generations from taking action on climate change now, especially benefits that may be decades or even centuries away?
To answer this question, it's necessary to consider what's known as the "discount rate" on such policies. ...