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July 31, 2014

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Posted: 31 Jul 2014 12:06 AM PDT

Fed Watch: FOMC Statement

Posted: 30 Jul 2014 01:19 PM PDT

Tim Duy:

FOMC Statement, by Tim Duy: At the conclusion of this week's FOMC meeting, policymakers released yet another statement that only a FedWatcher could love. It is definitely an exercise in reading between the lines. The Fed cut another $10 billion from the asset purchase program, as expected. The statement acknowledged that unemployment is no longer elevated and inflation has stabilized. But it is hard to see this as anything more that describing an evolution of activity that is fundamentally consistent with their existing outlook. Continue to expect the first rate hike around the middle of next year; my expectation leans toward the second quarter over the third.
The Fed began by acknowledging the second quarter GDP numbers:
Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter.
With the new data, the Fed's (downwardly revised) growth expectations for this year remain attainable, but still requires an acceleration of activity that has so far been unattainable:


Despite all the quarterly twists and turns, underlying growth is simply nothing to write home about:


That slow yet steady growth, however, has been sufficient to support gradual improvement in labor markets, prompting the Fed to drop this line from the June statement:
The unemployment rate, though lower, remains elevated.
and replace it with:
Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.
While the unemployment rate is no longer elevated, this is a fairly strong confirmation that Federal Reserve Chair Janet Yellen has the support of the FOMC. As a group, they continue to discount the improvement in the unemployment rate. And as long as wage growth remains tepid, this group will continue to have the upper hand.
The inflation story also reflects recent data. This from June:
Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable...The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.
became this:
Inflation has moved somewhat closer to the Committee's longer-run objective. Longer-term inflation expectations have remained stable...The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.
Rather than something to worry over, I sense that the majority of the FOMC is feeling relief over the recent inflation data. It is often forgotten that the Fed WANTS inflation to move closer to 2%. The reality is finally starting to look like their forecast, which clears the way to begin normalizing policy next year. Given the current outlook, expect only gradual normalization.
Finally, we had a dissent:
Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends," because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee's goals.
We probably should have seen this coming; Philadelphia Fed President Charles Plosser raised this issue weeks ago. Clearly he is not getting much traction yet among his colleagues. I doubt they want to change the language before they have settled on a general exit strategy (which was probably the main topic of this meeting and will be the next). Somewhat surprising is that Dallas Federal Reserve President Richard Fisher did not join Plosser given Fisher's sharp critique of monetary policy in Monday's Wall Street Journal. Note to Fisher: Put up or shut up.
Bottom Line: Remember that we should see the statement shift in response to the data relative to the outlook. In short, the statement needs to remain consistent with the reaction function. The changes in the July statement reflect that consistency. The data continues to evolve in such a way that the Fed can remain patient in regards to policy normalization. We will see if that changes with the upcoming employment report; focus on the underlying numbers, as the Fed continues to discount the headline numbers.

'Unemployment and the 'Skills Mismatch' Story: Overblown and Unpersuasive'

Posted: 30 Jul 2014 08:01 AM PDT

Gary Burtless:

Unemployment and the "Skills Mismatch" Story: Overblown and Unpersuasive, by Gary Burtless, Brookings: The jobless rate has dipped to 6.1 percent, and businesses are already complaining about a skills shortage. ... To an economist, the most accessible and persuasive evidence demonstrating a skills shortage should be found in wage data. ...
Where is the evidence of soaring pay for workers whose skills are in short supply? We frequently read anecdotal reports informing us some employers find it tough to fill job openings. What is harder to find is support for the skills mismatch hypothesis in the wage data..., there is little evidence wages or compensation are increasing much faster than 2% a year [i.e. outpacing inflation]. Even though unemployment has declined, there are still 2.5 times as many active job seekers as there are job vacancies. At the same time, there are between 3 and 3½ million potential workers outside the labor force who would become job seekers if they believed it were easier to find a job. The excess of job seekers over job openings continues to limit wage gains, notwithstanding the complaints of businesses that cannot fill vacancies. ...
It is cheap for employers to claim qualified workers are in short supply. It is a bit more expensive for them to do something to boost supply. Unless managers have forgotten everything they learned in Econ 101, they should recognize that one way to fill a vacancy is to offer qualified job seekers a compelling reason to take the job. Higher pay, better benefits, and more accommodating work hours are usually good reasons for job applicants to prefer one employment offer over another. When employers are unwilling to offer better compensation to fill their skill needs, it is reasonable to ask how urgently those skills are really needed. ...

'Real GDP increased at 4.0% Annualized Rate in Q2'

Posted: 30 Jul 2014 07:44 AM PDT

Bill McBride at Calculated Risk:

BEA: Real GDP increased at 4.0% Annualized Rate in Q2, by Bill McBride: From the BEA: Gross Domestic Product: Second Quarter 2014 (Advance Estimate) Annual Revision: 1999 through First Quarter 2014

Real gross domestic product ... increased at an annual rate of 4.0 percent in the second quarter of 2014... In the first quarter, real GDP decreased 2.1 percent (revised).
The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The advance Q2 GDP report, with 4.0% annualized growth, was above expectations of a 2.9% increase. Also Q1 was revised up.

Personal consumption expenditures (PCE) increased at a 2.5% annualized rate - a decent pace. Private investment rebounded with residential investment up 7.5% annualized, and equipment up 5.3%. Change in private inventories added 1.66 percentage points to growth after subtracting 1.16 in Q1.

Overall this was a solid report. I'll have more later on the report and revisions.

Update: Dean Baker:

Economy Rebounds in Second Quarter Based on Inventories and Cars: GDP grew at a 4.0 percent annual rate in the second quarter after shrinking at a 2.1 percent rate in the first quarter. Much of the shift was due to a considerably more rapid pace of inventory accumulation. Inventory changes which had subtracted 1.16 percentage points from first quarter growth added 1.66 percentage points to growth in the second quarter. New car sales added another 0.42 percentage points to growth, after adding just 0.13 percentage points in the first quarter. Equipment investment, which grew at a 7.0 percent rate, added another 0.4 percentage points to growth for the quarter.
Another positive item in this report was continued slow growth in health care costs. After a reported drop in the first quarter, health care costs grew at a 2.6 percent annual rate. They stand just 3.0 percent above their year-ago level.
On the negative side, the trade deficit expanded again last quarter rising to an annual rate of $564.0 billion. It subtracted 0.61 percentage points from growth in the quarter.
While the 4.0 percent growth is a sharp turnaround, it was very much in line with expectations. It means that for the first half of the year, the economy the economy grew at less than a 1.0 percent annual rate. The economy will have to sustain a growth rate of more than 3.0 percent over the second half of the year just to reach 2.0 percent growth for the year as a whole. This means 2014 will likely be another disappointing year for growth.

July 30, 2014

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Posted: 30 Jul 2014 12:06 AM PDT

'Why Not Maximum Wages?'

Posted: 29 Jul 2014 03:39 PM PDT

Simon Wren-Lewis:

If minimum wages, why not maximum wages?: I was in a gathering of academics the other day, and we were discussing minimum wages. The debate moved on to increasing inequality, and the difficulty of doing anything about it. I said why not have a maximum wage? To say that the idea was greeted with incredulity would be an understatement. So you want to bring back price controls was once response. How could you possibly decide on what a maximum wage should be was another.
So why the asymmetry? Why is the idea of setting a maximum wage considered outlandish among economists?
The problem is clear enough. All the evidence, in the US and UK, points to the income of the top 1% rising much faster than the average. ...
So why not consider a maximum wage? One possibility is to cap top pay as some multiple of the lowest paid, as a recent Swiss referendum proposed. That referendum was quite draconian, suggesting a multiple of 12, yet it received a large measure of popular support (35% in favour, 65% against). The Swiss did vote to ban 'golden hellos and goodbyes'. One neat idea is to link the maximum wage to the minimum wage, which would give CEOs an incentive to argue for higher minimum wages! Note that these proposals would have no disincentive effect on the self-employed entrepreneur. 
If economists have examined these various possibilities, I have missed it. One possible reason why many economists seem to baulk at this idea is that it reminds them too much of the 'bad old days' of incomes policies and attempts by governments to fix 'fair wages'. But this is an overreaction, as a maximum wage would just be the counterpart to the minimum wage. I would be interested in any other thoughts about why the idea of a maximum wage seems not to be part of economists' Overton window.

Why the Rich Should Take the Lead Income Redistribution

Posted: 29 Jul 2014 07:42 AM PDT

I have a new column:

Why the Rich Should Call for Income Redistribution: After the craze over Thomas Piketty's Capital in the Twenty First Century, nobody should be surprised to learn that inequality has been increasing over the last several decades. The question is what to do about it.
One answer is to do nothing and hope the problem fixes itself, or to deny it is a problem at all. But that is a dangerous approach. - See more at:

One answer is to do nothing and hope the problem fixes itself, or to deny it is a problem at all. But that is a dangerous approach. ...

Is it Worth Spending to Make Workers Happy?

Posted: 29 Jul 2014 07:42 AM PDT

Me, at CBS MoneyWatch:

Is it worth spending to make workers happy?: Numerous studies have found a correlation between employee satisfaction and company success. Does this mean happy employees are also the most productive workers? Should firms spend money to make workers happier with their jobs?
Answering these questions is trickier than it might seem at first glance. ...

July 29, 2014

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Posted: 29 Jul 2014 12:06 AM PDT

'Presidents and the U.S. Economy: An Econometric Exploration'

Posted: 28 Jul 2014 07:50 AM PDT

Alan Blinder and Mark Watson:

Presidents and the U.S. Economy: An Econometric Exploration, by Alan S. Blinder and Mark W. Watson, NBER Working Paper No. 20324 [open link]: The U.S. economy has grown faster—and scored higher on many other macroeconomic metrics—when the President of the United States is a Democrat rather than a Republican. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 complete presidential terms. This paper asks why. The answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. Many other potential explanations are examined but fail to explain the partisan growth gap.

July 28, 2014

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Paul Krugman: Corporate Artful Dodgers

Posted: 28 Jul 2014 12:24 AM PDT

Congress should do something about "ever-more-aggressive corporate tax avoidance":

Corporate Artful Dodgers, by Paul Krugman, Commentary, NY Times: In recent decisions, the conservative majority on the Supreme Court has made clear its view that corporations are people, with all the attendant rights. ...
There is, however, one big difference between corporate persons and the likes of you and me: On current trends, we're heading toward a world in which only the human people pay taxes.
We're not quite there yet: The federal government still gets a tenth of its revenue from corporate profits taxation. But it used to get a lot more — a third of revenue came from profits taxes in the early 1950s... Part of the decline since then reflects a fall in the tax rate, but mainly it reflects ever-more-aggressive corporate tax avoidance — avoidance that politicians have done little to prevent.
Which brings us to the tax-avoidance strategy du jour: "inversion." This refers to a legal maneuver in which a company declares that its U.S. operations are owned by its foreign subsidiary, not the other way around, and uses this role reversal to shift reported profits out of American jurisdiction to someplace with a lower tax rate.
The most important thing to understand about inversion is that it does not in any meaningful sense involve American business "moving overseas." ... All they're doing is dodging taxes on those profits.
And Congress could crack down on this tax dodge...
Opponents of a crackdown on inversion typically argue that instead of closing loopholes we should reform the whole system by which we tax profits, and maybe stop taxing profits altogether. They also tend to argue that taxing corporate profits hurts investment and job creation. But these are very bad arguments against ending the practice of inversion. ...
As for reforming the system: Yes, that would be a good idea. But..., there are big debates about the shape of reform, debates that would take years to resolve... Why let corporations avoid paying their fair share for years, while we wait for the logjam to break?
Finally, none of this has anything to do with investment and job creation. If and when Walgreen changes its "citizenship," it will get to keep more of its profits — but it will have no incentive to invest those extra profits in its U.S. operations.
So this should be easy. By all means let's have a debate about how and how much to tax profits. Meanwhile, however, let's close this outrageous loophole.

Links for 7-28-14

Posted: 28 Jul 2014 12:06 AM PDT

'Monetarist, Keynesian, and Minskyite Depressions Once Again'

Posted: 27 Jul 2014 10:15 AM PDT

Brad DeLong:

I have said this before. But I seem to need to say it again…
The very intelligent and thoughtful David Beckworth, Simon Wren-Lewis, and Nick Rowe are agreeing on New Keynesian-Market Monetarist monetary-fiscal convergence. Underpinning all of their analyses there seems to me to be the assumption that all aggregate demand shortfalls spring from the same deep market failures. And I think that that is wrong. ...[continue]...

July 27, 2014

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Posted: 27 Jul 2014 12:06 AM PDT

'The Illogic of Employer-Sponsored Health Insurance'

Posted: 26 Jul 2014 10:52 AM PDT

Uwe E. Reinhardt:

The Illogic of Employer-Sponsored Health Insurance, by Uwe E. Reinhardt, NY Times: ... Persuaded by both theory and empirical research, most economists believe that employer-based health insurance... ostensibly paid by employers ... is recovered from employees through commensurate reductions in take-home pay.
Evidently the majority of Supreme Court justices who just ruled in Burwell v. Hobby Lobby case do not buy the economists' theory. These justices seem to believe that the owners of "closely held" business firms buy health insurance for their employees out of the kindness of their hearts and with the owners' money. On that belief, they accord these owners the right to impose some of their ... religious beliefs ... on their employee's health insurance. ...
The Supreme Court's ruling may prompt Americans to re-examine whether the traditional, employment-based health insurance ... is really the ideal platform for health insurance coverage in the 21st century. The public health insurance exchanges established under the Affordable Care Act are likely to nibble away at this system....
In the meantime, the case should help puncture the illusion that employer-provided health insurance is an unearned gift bestowed on them by the owners and paid with the owners' money, giving those owners the moral right to dictate the nature of that gift.

'Are the Rich Coldhearted?'

Posted: 26 Jul 2014 10:52 AM PDT

Why are so many of the rich and powerful so callous and indifferent to the struggles of those who aren't so fortunate?:

Are the Rich Coldhearted?, by Michael Inzlicht and Sukhvinder Obhi, NY Times: ... Can people in high positions of power — presidents, bosses, celebrities, even dominant spouses — easily empathize with those beneath them?
Psychological research suggests the answer is no. ...
Why does power leave people seemingly coldhearted? Some, like the Princeton psychologist Susan Fiske, have suggested that powerful people don't attend well to others around them because they don't need them in order to access important resources; as powerful people, they already have plentiful access to those.
We suggest a different, albeit complementary, reason from cognitive neuroscience. On the basis of a study we recently published with the researcher Jeremy Hogeveen, in the Journal of Experimental Psychology: General, we contend that when people experience power, their brains fundamentally change how sensitive they are to the actions of others. ...
Does this mean that the powerful are heartless beings incapable of empathy? Hardly..., the bad news is that the powerful are, by default and at a neurological level, simply not motivated to care. But the good news is that they are, in theory, redeemable.

'Five Myths about the Gender Pay Gap'

Posted: 26 Jul 2014 09:53 AM PDT

Here are the myths described by Vivien Labaton:

1. The pay gap is closing rapidly. ...
2. Women earn less because they work in industries that pay less. ...
3. Women earn less because they don't negotiate well. ...
4. Women earn less because mothers choose to work less. ...
5. To close the pay gap, we should focus on deterring discrimination. ...

Details here.

Summers on 'The Greatest Threat to Open Market Capitalism'

Posted: 26 Jul 2014 08:58 AM PDT

Larry Summers on why he supports (conditionally) the Export-Import bank (from a longer interview):

Danny Vinik: I want to turn to your op-ed in the Financial Times on July 6 on the U.S. global stance on economic issues. In particular, you expressed support for the Export-Import bank and said that eliminating it would be an act of unilateral disarmament. Can you explain that?
Larry Summers: Probably at this moment, the greatest threat to open market capitalism comes from state-driven mercantilism capitalism, often carried on by authoritarian governments. They do not seek a level playing field. They seek a playing field that is tilted in their favor through the use of a variety of kinds of subsidized credits. The best and most credible way of deterring and limiting that behavior is to have a capacity to respond so that it does not produce commercial advantages. That's what the Ex-Im bank enables us to do.
There are some who believe that it is good for everybody globally to subsidize exports. I'm not among them. I'm in favor of negotiations that would move towards a system where you didn't have every country racing to compete with subsidies. But unilaterally renouncing our subsidies would be a source of great satisfaction in important parts of the world with which we compete and I do not think would be a productive way to bring about a more rules-based system.

July 26, 2014

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Posted: 26 Jul 2014 12:06 AM PDT

'Devolution Number Nine'

Posted: 25 Jul 2014 10:10 AM PDT

In case you missed this in today's links, it's worth noting explicitly:

Devolution Number Nine, by MaxSpeak: Rep. Paul Ryan (R-Crazy) has a new plan to fight poverty..., the common theme throughout the report is to convert Federal programs into block grants. A block grant is a fixed pot of money provided to a state or local government for broadly-defined purposes. Ryan's report is at pains to assert that the conversion would not entail spending cuts. This could not be further from the truth.
The story goes back to the days of Richard Nixon. I told it here. ... The short version is that a program or programs converted to a block grant is being set up to wither away. Block grants are designed through formulas to grow slowly or not at all, despite the likelihood that whatever the included programs were aimed at typically costs more to deal with every year. There are also two malignant political dynamics at work. One is that ... block grants transfer control to state governments. They have the fun of spending the money, Congress has the fun of raising the taxes to pay for it. The other is that the more vague — "flexible" — the purposes of the grant, the less focused is its political support. ...
The transfer of program responsibility from the Federal government to the states is known as devolution. It is the standard way of attacking domestic spending for social purposes, going back to Richard Nixon's dismantling of the original, more interesting War on Poverty launched by Lyndon Johnson. ...

'Ignoring Climate Change Could Sink the U.S. Economy'

Posted: 25 Jul 2014 08:28 AM PDT

Robert Rubin:

How ignoring climate change could sink the U.S. economy, by Robert E. Rubin: ...When it comes to the economy, much of the debate about climate change ... is framed as a trade-off between environmental protection and economic prosperity. Many people argue that moving away from fossil fuels and reducing carbon emissions will impede economic growth, hurt business and hamper job creation.
But from an economic perspective, that's precisely the wrong way to look at it. The real question should be: What is the cost of inaction? In my view — and in the view of a growing group of business people, economists, and other financial and market experts — the cost of inaction over the long term is far greater than the cost of action.
I recently participated in a bipartisan effort to measure the economic risks of unchecked climate change in the United States. We commissioned an independent analysis, led by a highly respected group of economists and climate scientists, and our inaugural report, "Risky Business," was released in June. The report's conclusions demonstrated the ... U.S. economy faces enormous risks from unmitigated climate change. ...
We do not face a choice between protecting our environment or protecting our economy. We face a choice between protecting our economy by protecting our environment — or allowing environmental havoc to create economic havoc. ...

July 25, 2014

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Paul Krugman: Left Coast Rising

Posted: 25 Jul 2014 12:24 AM PDT

Beware of "anti-government propaganda":

Left Coast Rising, by Paul Krugman, Commentary, NY Times: The states, Justice Brandeis famously pointed out, are the laboratories of democracy. And it's still true. For example, one reason we knew or should have known that Obamacare was workable was the post-2006 success of Romneycare in Massachusetts. More recently, Kansas went all-in on supply-side economics, slashing taxes on the affluent in the belief that this would spark a huge boom; the boom didn't happen, but the budget deficit exploded, offering an object lesson to those willing to learn from experience.
And there's an even bigger if less drastic experiment under way in the opposite direction. California has long suffered from political paralysis, with budget rules that allowed an increasingly extreme Republican minority to hamstring a Democratic majority; when the state's housing bubble burst, it plunged into fiscal crisis. In 2012, however, Democratic dominance finally became strong enough to overcome the paralysis, and Gov. Jerry Brown was able to push through a modestly liberal agenda of higher taxes, spending increases and a rise in the minimum wage. California also moved enthusiastically to implement Obamacare.
I guess we're not in Kansas anymore. (Sorry, I couldn't help myself.)
Needless to say, conservatives predicted doom. A representative reaction: Daniel J. Mitchell of the Cato Institute declared that by voting for Proposition 30, which authorized those tax increases, "the looters and moochers of the Golden State" (yes, they really do think they're living in an Ayn Rand novel) were committing "economic suicide." ...
What has actually happened? There is ... no sign of the promised catastrophe. If tax increases are causing a major flight of jobs from California, you can't see it in the job numbers. Employment is up 3.6 percent in the past 18 months, compared with a national average of 2.8 percent...
And, yes, the budget is back in surplus.
Has there been any soul-searching among the prophets of California doom, asking why they were so wrong? Not that I'm aware of. ...
So what do we learn from the California comeback? Mainly, that you should take anti-government propaganda with large helpings of salt. Tax increases aren't economic suicide; sometimes they're a useful way to pay for things we need. Government programs, like Obamacare, can work if the people running them want them to work, and if they aren't sabotaged from the right. In other words, California's success is a demonstration that the extremist ideology still dominating much of American politics is nonsense.

Links for 7-25-14

Posted: 25 Jul 2014 12:06 AM PDT

Should the Fed be Forced to Follow a Rule?

Posted: 24 Jul 2014 08:37 AM PDT

Me, at MoneyWatch:

Should the Fed have to play by a rule?: What if the U.S. Federal Reserve Board had to implement monetary policy according to a specific rule that would require specific policy actions depending on the circumstances?
That's the intent of a bill Republicans in the House of Representatives recently proposed. The Federal Reserve Accountability and Transparency Act would force the Fed's conduct of monetary policy to follow a prescribed rule...
Economists have long debated whether specific rules are better than giving central bankers the discretion to set monetary policy as they see fit. Here are the arguments for and against policy rules, and a compromise position that many economists advocate. ...

Meritocracy won’t happen: the problem’s with the ‘ocracy’

Posted: 24 Jul 2014 08:27 AM PDT

Andrew Gelman:

Meritocracy won't happen: the problem's with the 'ocracy', by Andrew Gelman, Monkey Cage: I've written about this before but I think the topic is worth returning to, because it comes up a lot in our political discourse.

For example, consider this recent post by Robert Reich (link from Mark Thoma):

The "self-made" man or woman, the symbol of American meritocracy, is disappearing. Six of today's ten wealthiest Americans are heirs to prominent fortunes. . . . We don't have to sit by and watch our meritocracy be replaced by a permanent aristocracy . . .

I don't disagree with Reich on the data..., the data seem to support Reich's point that lots of rich people come from rich families.

But I want to dispute Reich's other statement, which is that this is somehow contrary to the spirit of "meritocracy."

I claim the opposite: that inherited privilege is an intrinsic and central aspect of meritocracy. ...

'Sticky Prices and Behavioral Indifference Curves'

Posted: 24 Jul 2014 08:20 AM PDT

Is this why prices are sticky?:

Sticky prices and behavioural indifference curves, by John Komlos, Vox EU: Many quantities fail to respond smoothly to price changes. This column stresses that the 'endowment effect' – a well-known behavioral economics concept – implies kinks in indifference curves at the current consumption bundle price. Such kinks may account for the stickiness of prices, wages, and interest rates.

July 24, 2014

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Posted: 24 Jul 2014 12:06 AM PDT

'One of the Most Vivid Arithmetic Failings Displayed by Americans'

Posted: 23 Jul 2014 08:25 AM PDT

From James Choi:

Why the Third Pounder hamburger failed: One of the most vivid arithmetic failings displayed by Americans occurred in the early 1980s, when the A&W restaurant chain released a new hamburger to rival the McDonald's Quarter Pounder. With a third-pound of beef, the A&W burger had more meat than the Quarter Pounder; in taste tests, customers preferred A&W's burger. And it was less expensive. A lavish A&W television and radio marketing campaign cited these benefits. Yet instead of leaping at the great value, customers snubbed it. Only when the company held customer focus groups did it become clear why. The Third Pounder presented the American public with a test in fractions. And we failed. Misunderstanding the value of one-third, customers believed they were being overcharged. Why, they asked the researchers, should they pay the same amount for a third of a pound of meat as they did for a quarter-pound of meat at McDonald's. The "4" in "¼," larger than the "3" in "⅓," led them astray. --Elizabeth Green, NYT Magazine, on losing money by overestimating the American public's intelligence.

Another False Alarm on US Inflation

Posted: 23 Jul 2014 08:04 AM PDT

Gavyn Davies:

Another false alarm on US inflation?, by Gavyn Davies: There have been a few false alarms about a possible upsurge in inflation in the US in the past few years... There is an entrenched belief among some observers that the huge rise in central bank balance sheets must eventually leak into consumer prices, and they have not been deterred by the lack of evidence in their favour so far.
Another such scare has been brewing recently. ... As so often in the past, this happened because of temporary spikes in commodity prices, especially oil. But these have usually been reversed before a generalised inflation process has been triggered. ....
It now seems probable that part of the recent jump in core inflation was just a random fluctuation in the data. There have been suggestions that seasonal adjustment may have been awry in the spring.
But the main reason for the lack of concern is that wage pressures in the economy have remained stable, on virtually all the relevant measures. ...
On today's evidence, there has been yet another false alarm on US inflation.

'Wall Street Skips Economics Class'

Posted: 23 Jul 2014 08:04 AM PDT

The discussion continues:

Wall Street Skips Economics Class, by Noah Smith: If you care at all about what academic macroeconomists are cooking up (or if you do any macro investing), you might want to check out the latest economics blog discussion about the big change that happened in the late '70s and early '80s. Here's a post by the University of Chicago economist John Cochrane, and here's one by Oxford's Simon Wren-Lewis that includes links to most of the other contributions.
In case you don't know the background, here's the short version...