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November 30, 2014

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November 29, 2014

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November 28, 2014

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Paul Krugman: Pollution and Politics

Posted: 28 Nov 2014 03:33 AM PST

Why and when did Republicans become anti-environmentalists?:

Pollution and Politics, by Paul Krugman, Commentary, NY Times: Earlier this week, the Environmental Protection Agency announced proposed regulations to curb emissions of ozone, which causes smog, not to mention asthma, heart disease and premature death. And you know what happened: Republicans went on the attack, claiming that the new rules would impose enormous costs.
There's no reason to take these complaints seriously... Polluters and their political friends have a track record of crying wolf. ... Again and again, the actual costs have been far lower than they predicted. In fact, almost always below the E.P.A.'s predictions.
So it's the same old story. But why, exactly, does it always play this way? ... When and why did the Republican Party become the party of pollution?
For it wasn't always thus. The Clean Air Act of 1970 ... was signed into law by Richard Nixon. (I've heard veterans of the E.P.A. describe the Nixon years as a golden age.) A major amendment of the law, which among other things made possible the cap-and-trade system that limits acid rain, was signed in 1990 by former President George H.W. Bush.
But that was then. Today's Republican Party is putting a conspiracy theorist who views climate science as a "gigantic hoax" in charge of the Senate's environment committee. And this isn't an isolated case. ...
So what explains this anti-environmental shift?
You might be tempted simply to blame money in politics... But this doesn't explain why money from the most environmentally damaging industries, which used to flow to both parties, now goes overwhelmingly in one direction. ...
One answer could be ideology... My guess, however, is that ideology is only part of the story — or, more accurately, it's a symptom of the underlying cause...: rising inequality. ... Any policy that benefits lower- and middle-income Americans at the expense of the elite — like health reform, which guarantees insurance to all and pays for that guarantee in part with taxes on higher incomes — will face bitter Republican opposition.
And environmental protection is, in part, a class issue,... ownership of, say, stock in coal companies is concentrated in a few, wealthy hands. ...
In the case of the new ozone plan, the E.P.A.'s analysis suggests that, for the average American, the benefits would be more than twice the costs. But that doesn't necessarily matter to the nonaverage American driving one party's priorities. On ozone, as with almost everything these days, it's all about inequality.

'Economists vs Politicians'

Posted: 28 Nov 2014 02:43 AM PST

Chris Dillow:

Economists vs politicians: ... I suspect that there is a greater distance now between the political parties and economist than there has been for years. ...

You might think this isn't a wholly bad thing. Many ideas are not worth adopting ... This, however, doesn't justify politicians' lack of interest in the settled, established knowledge that economists do have.   

So, where is there such a gap between politicians and economists?

The fault might partly lie with economics. Many academics aren't as interested in closing the gap between academia and the "real world" as they should be. At least some of the discipline was discredited by the crisis, and I get the feeling that there aren't so many good new policy-relevant ideas now.

It might be that the voters are to blame. Maybe they don't want serious politicians who are interested in good ideas but rather, in our narcissistic age, they simply expect their demands to be met, however unreasonable. But is this the whole story? Janan Ganesh thinks not:

There is...an unsatisfied demand for seriousness and leadership. Most people do not vote Ukip or parse an MP's tweet for class meaning. The flight to frivolity in public life is not the voters' doing. Many are in fact waiting for a leader to arrest it.

This leaves a third suspect - the media. ... Political journalists have been complicit in creating a hyperreal bubble of mediamacro which perpetuates witless ideas (such as conflating the economy with the deficit) to the exclusion of such good ones as might exist.

I'm not sure, then, how exactly to apportion blame for the divorce between politicians and economists. But I do suspect that, net, it is a bad thing.  

[I left out his examples of "established knowledge that economists do have".]

The Rise and Fall of Part-Time Employment

Posted: 28 Nov 2014 02:34 AM PST

At MoneyWatch:

Why the Job Market is Better Than it Looks: True or false: Most of the jobs created during the sluggish economic recovery consist of part-time, not full-time, employment? ...

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Posted: 28 Nov 2014 12:15 AM PST

MarkSpeaks

Posted: 27 Nov 2014 09:28 AM PST

Simon Wren-Lewis:

As Mark Thoma often says, the problem is with macroeconomists rather than macroeconomics.

Much, much more here.

A Proclamation

Posted: 27 Nov 2014 09:19 AM PST

Happy Thanksgiving everyone. Not sure how much blogging I'll get done today:

Washington, D.C. October 3, 1863
By the President of the United States of America.
A Proclamation.
The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies.
To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God.
In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom.
No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.
In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.
Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the Unites States the Eighty-eighth.
By the President: Abraham Lincoln

November 27, 2014

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Posted: 27 Nov 2014 12:06 AM PST

'Keynes Is Slowly Winning'

Posted: 26 Nov 2014 08:59 AM PST

[Travel day, so no more until later.]

Paul Krugman:

Keynes Is Slowly Winning: Back in 2010, I had a revelation about just how bad economic policy was about to get; I read the OECD Economic Outlook, which called not just for fiscal austerity but for interest rate hikes — 350 basis points on the Fed funds rate by the end of 2011! — because, well, because.
Now, the OECD is calling for fiscal and monetary stimulus in Europe. ....
It has taken a while. ... But the hawks seem in retreat at the Fed; Mario Draghi ... sounds an awful lot like Janet Yellen; the whole way we're discussing Japan is very much on Keynesian turf. Three and a half years ago Businessweek was declaring that expansionary austerian Alberto Alesina was the new Keynes; now it tells us that Keynes is the new Keynes. And we have people like Paul Singer complaining about the "Krugmanization" of the debate.
Why does the tide finally seem to be turning? Partly, I think, it's just a matter of time; after six years it's becoming hard not to notice that the anti-Keynesians have been wrong about everything. Europe's slide toward deflation makes it even harder to deny the realities of liquidity-trap economics. And the refusal of almost everyone on the anti-Keynesian side to admit any kind of error has gradually made them look ridiculous.
All of this may be coming too little and too late to avoid policy disaster, especially in Europe. But it's something to cheer, faintly.

'Understanding George Osborne' or 'Osborne's Idiotic Idea'

Posted: 26 Nov 2014 08:58 AM PST

Simon Wren-Lewis:

Understanding George Osborne: Yesterday I spoke at the Resolution Foundation's launch of their analysis of the UK political parties' fiscal plans post 2015. I believe this analysis shows two things very clearly. First, there is potentially a large gap between the amount of austerity planned by the two major parties. Second, George Osborne's plans are scarcely credible. They represent a shrinking of the UK state that is unprecedented and which in my view virtually no one wants.  
I would add one other charge - Osborne's plans are illiterate in macroeconomic terms. The UK economy desperately needs more growth. ...
In this situation a Chancellor should not plan to reduce growth further. I have yet to come across a single macroeconomist who argues that Osborne's plans for renewed austerity will not in themselves reduce aggregate demand. So doing this when the recovery could go much further but is still fragile is just plain dumb. It is even dumber if you have done this once before, in a very similar situation, and the risks I outlined above have indeed materialised.
So why is the Chancellor proposing to make the same mistake twice? ...
I cannot think of any way to rationalise what the Chancellor is planning in macroeconomic terms. But perhaps I'm looking for something that does not exist. Perhaps he does not have a coherent economic framework. Instead he has a clear political framework, which has so far been remarkably successful. The goal is to reduce the size of the state, and because (with his encouragement) mediamacro believes reducing the deficit is the number one priority, he is using deficit reduction as a means to that end. However another priority is to get re-elected, so deficit reduction has to take place at the start of any parliament, so its impact on growth has disappeared by the time of the next election. But this explanation would imply we have a Chancellor that quite cynically puts the welfare of the majority of the UK's citizens at major risk for ideological and political ends, and I do not think I have ever experienced a UK Chancellor (with possibly one exception) who has done that. But as Sherlock Holmes famously said ...

Chris Dillow:

Osborne's idiotic idea: The FT reports that George Osborne wants to make unicorn farming compulsory:

The new fiscal mandate is expected to enshrine in law one area of common ground between the Tories and Lib Dems: that the cyclically adjusted current deficit should be eliminated by 2017-18.

This is imbecilic. ...

Now, you might think that, in saying all this I'm merely being a Keynesian.

Wrong. In fact, I'm writing in a Hayekian spirit. Hayek famously and correctly argued that economic knowledge was inherently fragmentary and dispersed and so central agencies could not possibly know very much. I'm echoing him. I'm saying that the OBR cannot know enough about the productive potential of millions of firms to know what the output gap is. And it hasn't got enough knowledge of the future to predict recessions.

In presuming otherwise, Osborne is thus not only anti-Keynesian, but anti-Hayekian. I thus agree with Simon - that he is illiterate and plain dumb.

Some Good News for the Unemployed

Posted: 26 Nov 2014 08:58 AM PST

At MoneyWatch:

Some Good News for the Unemployed: There has been considerable discussion of the "hollowing out" of middle class jobs in recent years, a trend that started before the Great Recession. But where do those who have lost their jobs go? Do they end up with low paying service jobs, McJobs as they are sometimes called, or do they move up the ladder to higher paying jobs?
Many people believe that most people who lose middle class jobs end up worse off than before, but recent research by Ellie Terry and John Robertson of the Atlanta Fed finds some surprising results. ...

November 26, 2014

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Posted: 26 Nov 2014 12:06 AM PST

Economic Growth and the Information Age

Posted: 25 Nov 2014 11:02 AM PST

Brad DeLong:

Over at Project Syndicate: Economic Growth and the Information Age: Daily Focus: ...America ... has become a vastly more unequal place since 1979... But the past generation has seen a third industrial revolution, a worthy information-age successor to the first of steam, iron, cotton, and machines and to the second of internal combustion, electricity, steel, and chemicals. Not everyone, but almost everyone in the North Atlantic and many and soon most in the world, can now if they wish have a smartphone–and so gain cheap access to the universe of human knowledge and entertainment to a degree that was far beyond the reach of all but the richest of a generation ago.
How much does this matter? How much does this mean that conventional measures of real income and real standard of living understate how much we, even the relatively poor of we, have progressed toward utopia? ...
Perhaps the right way to view the situation is that before the information age began our estimates of economic growth overstated true reality by perhaps 0.5%/year as the extra well-being we got from increased real wealth and income was offset by our noticing that the Jones's next door had more, better, and newer than we did? Perhaps the right way to view the situation is that those parts of the information age that escape conventional growth-accounting calculations simply neutralize those forces of envy and spite that were never included in the calculations in the first place? That is my tentative judgment–or rather guess–today.

'Is Uber Really in a Fight to the Death?'

Posted: 25 Nov 2014 10:28 AM PST

For those of you interested in Uber, this is from Joshua Gans:

Is Uber really in a fight to the death?: In recent days, since their PR troubles, there has been much discussion as to why Uber seems to be so aggressive. Reasons ranged from being inept, to the challenges of fighting politics against taxi regulations to a claim that Uber's market has a 'winner take all' nature. It is this last one that is of particular interest because it suggests that Uber has to fight hard against competitors like Lyft or it will lose. It also suggests that Uber's $20 billion odd valuation is based on beliefs that it will win, and win big.
I am not sure that this is really the case. Despite the name 'Uber' connoting, 'one Uber to rule them all,' the theory underlying the notion of winner take all is rather special and is far from being proven in cases like this. ...

''How to Think about 'Think' Tanks''

Posted: 25 Nov 2014 10:05 AM PST

Miles Corak:

Kady O'Malley Tweet on Think Tanks 1

How to think about "think" tanks: It is sometimes said that think tanks are good for democracy; indeed the more of them, the better. If there are more ideas in the public arena battling it out for your approval, then it's more likely that the best idea will win, and that we will all have better public policies. But intuitively many of us have trouble believing this, have trouble knowing who is being truthful, and don't know who to trust.
This battle of ideas, studies, and statistics has the potential to make many of us cynical about the whole process, and less trusting of all research and numbers. If a knowledgeable journalist like the Canadian Kady O'Malley expresses a certain exasperation that think-tank studies always back up "the think-tank's existing position," what hope is there for the rest of us? A flourishing of think tanks just let's politicians off the hook, always allowing them to pluck an idea that suits their purposes, and making it easier to justify what they wanted to do anyways.
Maybe we shouldn't be so surprised that think tanks produce studies confirming their (sometimes hidden) biases. After all this is something we all do. We need to arm ourselves with this self-awareness. If we do, then we can also be more aware of the things in a think tank's make-up that can help in judging its credibility, and also how public policy discussion should be structured to help promote a sincere exchange of facts and ideas. ...

He goes on to explain in considerable detail.

'A Deeper Dive into the Weeds of the CBO Household Income Data'

Posted: 25 Nov 2014 09:04 AM PST

On Twitter, Jared Bernstein says he is "Correcting the record for those who claim that accounting for taxes & transfers changes the inequality story":

A deeper dive into the weeds of the CBO household income data: ...between 1979 and 2011, inequality measured by the Gini coefficient rose 24% based solely on market outcomes and by 22% based on CBO's comprehensive, post-tax and transfer income data.
Here we show that changes in pre- and post-tax income shares* – the percentage of total U.S. income held by different income groups – reveals a similar trend:

Change-in-CBO-Income-Shares

The "low" category in this figure represents the lowest before-tax income quintile, the "middle" category represents households between the 40th and 60th income percentiles, and the "high" category represents the top quintile. As with the Gini, the change in pre- and post-tax income shares are similar. The share of total income held by the poorest households fell by 1 percentage point on a pre-tax basis, and by 1.2 points on a post-tax basis. The share of income held by middle-class households fell by almost two percentage points on a pretax basis and by 1.4 percentage points post-tax.
Only within the top fifth of households do we see relative gains, and in fact, most of the increase in top quintile income shares has accrued to the richest subset of this group: the top 1%.
A second motivation of our report was to document the stagnation of middle-class earnings to households with children and the increased importance of transfer income to these families. We note, for example, that the increase in earnings to middle-income households with children was actually less than the increase in the dollar value of transfers. ...
To be clear, there's nothing wrong and a lot right with transfers replacing lost earnings, especially in downturns. Tax cuts also helped offset middle quintile income losses. But this is not a reliable strategy by which to raise middle-class living standards for working families. For that, we must reconnect overall economic growth to paychecks... The CBO data highlight the nature of this problem and the urgency with which we must pursue the right solutions. ...

November 25, 2014

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Posted: 25 Nov 2014 12:06 AM PST

'And the Winner Is...Full-Time Jobs!

Posted: 24 Nov 2014 11:50 AM PST

This is from "Julie Hotchkiss, a research economist and senior policy adviser at the Atlanta Fed":

And the Winner Is...Full-Time Jobs!: Each month, the U.S. Bureau of Labor Statistics (BLS) surveys about 60,000 households and asks people over the age of 16 whether they are employed and, if so, if they are working full-time or part-time. The BLS defines full-time employment as working at least 35 hours per week. This survey, referred to as both the Current Population Survey and the Household Survey, is what produces the monthly unemployment rate, labor force participation rate, and other statistics related to activities and characteristics of the U.S. population.
For many months after the official end of the Great Recession in June 2009, the Household Survey produced less-than-happy news about the labor market. The unemployment rate didn't start to decline until October 2009, and nonfarm payroll job growth didn't emerge confidently from negative territory until October 2010. Now that the unemployment rate has fallen to 5.8 percent—much faster than most would have expected even a year ago—the attention has turned to the quality, rather than quantity, of jobs. This scrutiny is driven by a stubbornly high rate of people employed part-time "for economic reasons" (PTER). These are folks who are working part-time but would like a full-time job. Several of my colleagues here at the Atlanta Fed have looked at this phenomenon from many angles (here, here, here, here, and here).
The elevated share of PTER has left some to conclude that, yes, the economy is creating a significant number of jobs (an average of more than 228,000 nonfarm payroll jobs each month in 2014), but these are low-quality, part-time jobs. Several headlines have popped up over the past year or so claiming that "...most new jobs have been part-time since Obamacare became law," "Most 2013 job growth is in part-time work," "75 Percent Of Jobs Created This Year [2013] Were Part-Time," "Part-time jobs account for 97% of 2013 job growth," and as recently as July of this year, "...Jobs Report Is Great for Part-time Workers, Not So Much for Full-Time."
However, a more careful look at the postrecession data illustrates that since October 2010, with the exception of four months (November 2010 and May–July 2011), the growth in the number of people employed full-time has dominated growth in the number of people employed part-time. Of the additional 8.2 million people employed since October 2010, 7.8 million (95 percent) are employed full-time (see the charts). ...
During the Great Recession (until about October 2010), the growth in part-time employment clearly exceeded growth in full-time employment, which was deep in negative territory. The current high level of PTER employment is likely to reflect this extended period of time in which growth in part-time employment exceeded that of full-time employment. But in every month since August 2011, the increase in the number of full-time employed from the year before has far exceeded the increase in the number of part-time employed. This phenomenon includes all of the months of 2013, in spite of what some of the headlines above would have you believe.
So, in the post-Great Recession era, the growth in full-employment is, without a doubt, way out ahead.

Companies on Trial: Are They ‘Too Big to Jail’?

Posted: 24 Nov 2014 11:05 AM PST

Lawrence Summers:

Companies on trial: are they 'too big to jail'?: Disillusionment with government and large institutions is a salient feature of contemporary American life. An important cause is the widespread sense that big companies and those who run them are not held accountable for their crimes – that they are ... Too Big To Jail. The fact that no one has been imprisoned for the misdeeds that led to the financial crisis is seen as outrageous by many on Main Street. At the same time, the multibillion-dollar fines and enforcement actions against financial institutions that now seem to be a monthly event are a new phenomenon...
The current trend towards large fines ... seems to promote a somewhat unattractive combination of individual incentives. Managers do not find it personally costly to part with even billions of dollars of their shareholders' money, especially when fines represent only a small fraction of total market value. Paying with shareholders' money as the price of protecting themselves is a very attractive trade-off. Enforcement authorities like to either collect large fines or be seen as delivering compensation for those who have been victimized by corporate wrongdoing. So they are all too happy to go along.
In the process, punishment of individuals who do wrong or who fail in their managerial duty to monitor the behavior of their subordinates is short-changed. And deterrence is undermined. There is a broader cultural phenomenon here as well. Relative to other countries such as the UK or Japan, the principle that leaders should resign to take responsibility for failure on their watch even when they did not directly do wrong is less established in the US. This is probably an area where we have something to learn. ...

November 24, 2014

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Paul Krugman: Rock Bottom Economics

Posted: 24 Nov 2014 12:24 AM PST

The era of "rock-bottom economics" is far from over:

Rock Bottom Economics, by Paul Krugman, Commentary, NY Times: Six years ago the Federal Reserve hit rock bottom. It had been cutting the federal funds rate ... more or less frantically in an unsuccessful attempt to get ahead of the recession and financial crisis. But it eventually reached the point where it could cut no more...
Everything changes when the economy is at rock bottom... But for the longest time, nobody with the power to shape policy would believe it.
What do I mean by saying that everything changes? As I wrote..., in a rock-bottom economy "the usual rules of economic policy no longer apply..." Government spending doesn't compete with private investment — it actually promotes business spending. Central bankers, who normally cultivate an image as stern inflation-fighters, need to do the exact opposite, convincing markets ... that they will push inflation up. "Structural reform," which usually means making it easier to cut wages, is more likely to destroy jobs than create them.
This may all sound wild and radical, but ... it's what mainstream economic analysis says will happen once interest rates hit zero. And it's also what history tells us. ...
But as I said, nobody would believe it. By and large, policymakers and Very Serious People ... went with gut feelings rather than careful economic analysis. ...
Thus we were told ... that budget deficits were our most pressing economic problem, that interest rates would soar ... unless we imposed harsh fiscal austerity... —... demands that we cut government spending now, now, now have cost millions of jobs and deeply damaged our infrastructure.
We were also told repeatedly that printing money ... would lead to "currency debasement and inflation." The Fed ... stood up to this pressure, but other central banks didn't. ...
 But... Isn't the era of rock-bottom economics just about over? Don't count on it..., the counterintuitive realities of economic policy at the zero lower bound are likely to remain relevant for a long time..., which makes it crucial that influential people understand those realities. Unfortunately, too many still don't; one of the most striking aspects of economic debate in recent years has been the extent to which those whose economic doctrines have failed the reality test refuse to admit error, let alone learn from it. ...
This bodes ill for the future. What people in power don't know, or worse what they think they know but isn't so, can very definitely hurt us.

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Posted: 24 Nov 2014 12:06 AM PST

'Is Economics Really a Dismal Science for Women?'

Posted: 23 Nov 2014 11:23 AM PST

Since I posted an excerpt from Noah Smith's column, I should also post this response from Frances Woolley:

Is economics really a dismal science for women?: Donna Ginther and Shulamit Kahn have just published a paper that tracks thousands of American academics from the time they first get their PhDs through to their tenure and promotion decisions. ...
Noah Smith ... takes, Ginther and Kahn's cautious and nuanced results, and leaps to the conclusion that economics "seems to have a built-in bias that prevents women from advancing." 
Really?
I have never seen a woman denied tenure when a man with similar number and quality of publications was awarded it. I don't deny Ginther and Kahn's findings, but might there be a non-discriminatory explanation of the fact that a woman in economics with X number of publications is less likely to receive tenure than a man with X publications? ...

She goes on to give the "non-discriminatory explanation", and then says:

"Sexism" is not the result of some high level conspiracy. It is the product of millions of every day actions by thousands of ordinary people. ... If a man with 5 publications gets tenure while a woman with 5 publications does not, there must be a reason: either the man has higher quality publications, or higher impact publications, or more evidence of national or international reputation, or better letters of reference.
But a scholar's reputation and impact is determined by ... others: who they choose to acknowledge, who they choose to network with. Every single active academic can, through the citation and other decisions they make every day, influence other academics' reputations - and thus the probability that they will receive tenure or get promoted.  
Who do you cite? If you're like most people, you're more likely to cite the seminal work of some well-known male academic than the work of a female scholar. ...
Do you give women credit for their ideas? Just about every woman has had the experience of sitting in a committee, saying something, and having her contribution ignored. A man will then restate her point, and he is listened to, and receives credit for the idea. ...
How do you word your letters of reference? Do you use the same adjectives to describe women and men? Or are women delightful, pleasant, conscientious and hard-working while men are strong, original, insightful and persistent?
Who do you invite to present at conferences or departmental seminars? If a man, do you turn down invitations to participate in conferences with all-male line-ups...? Do you make it easy for female colleagues to come for a drink in the bar after a seminar by corralling them into the bar-going group? 
The economics profession is far from perfect. I personally don't find it any worse than the world of media (that the Globe and Mail paid Stephen Gordon more than me still burns), or the world of academic administration. But it could be better - and the power to change it lies within every one of us.

'Lower Oil Prices and the U.S. Economy'

Posted: 23 Nov 2014 10:43 AM PST

Jim Hamilton:

Lower oil prices and the U.S. economy: ... The current price of gasoline is 80 cents/gallon below what it has averaged over the last 3 years. Last year Americans consumed 135 billion gallons of gasoline. That means that if prices stay where they are, consumers will have an extra $108 billion each year to spend on other things. And if the historical pattern holds, spend it they will. ...
But another thing that's changed is that much more of the oil we consume is now being produced right here at home. While lower prices are a boon for consumers, they pose a potential threat to producers, especially the higher-cost operators. ...
If there are employment cuts in places like Texas, Louisiana, and North Dakota, that would obviously offset some of the gains to consumers noted above, and ultimately undercut the major force keeping the price of crude low for the time being, that being the success of small U.S. oil producers.
Nevertheless, there should be no question that at this point this is a favorable development on-balance for the U.S. economy. We're still importing 5 million more barrels each day of petroleum and products than we are exporting. Importing fewer barrels, and paying less for the barrels we do import, is a good thing.

November 23, 2014

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Posted: 23 Nov 2014 12:06 AM PST

'High Marginal Tax Rates on the Top 1%'

Posted: 22 Nov 2014 12:37 PM PST

Fabian Kindermann and Dirk Krueger:

High marginal tax rates on the top 1%: Optimal tax rates for the rich are a perennial source of controversy. This column argues that high marginal tax rates on the top 1% of earners can make society as a whole better off. Not knowing whether they would ever make it into the top 1%, but understanding it is very unlikely, households especially at younger ages would happily accept a life that is somewhat better most of the time and significantly worse in the rare event they rise to the top 1%.
Recently, public and scientific attention has been drawn to the increasing share of labour earnings, income, and wealth accruing to the so-called 'top 1%'. Robert B. Reich in his 2009 book Aftershock opines that: "Concentration of income and wealth at the top continues to be the crux of America's economic predicament". The book Capital in the Twenty-First Century by Thomas Piketty (2014) has renewed the scientific debate about the sources and consequences of the high and increasing concentration of wealth in the US and around the world.
But what is a proper public policy reaction to such a situation? Should the government address this inequality with its policy instruments at all, and if so, what are the consequences for the macroeconomy? The formidable literature on optimal taxation has provided important answers to the first question.1 Based on a static optimal tax analysis of labour income, Peter Diamond and Emmanuel Saez (2011) argue in favour of high marginal tax rates on the top 1% earners, aimed at maximising tax revenue from this group. Piketty (2014) advocates a wealth tax to reduce economy-wide wealth inequality....
Conclusions and limitations Overall we find that increasing tax rates at the very top of the income distribution and thereby reducing tax burdens for the rest of the population is a suitable measure to increase social welfare. As a side effect, it reduces both income and wealth inequality within the US population.
Admittedly, our results apply with certain qualifications. First, taxing the top 1% more heavily will most certainly not work if these people can engage in heavy tax avoidance, make use of extensive tax loopholes, or just leave the country in response to a tax increase at the top. Second, and probably as importantly, our results rely on a certain notion of how the top 1% became such high earners. In our model, earnings 'superstars' are made from luck coupled with labour effort. However, if high income tax rates at the top would lead individuals not to pursue high-earning careers at all, then our results might change.7 Last but not least, our analysis focuses solely on the taxation of large labour earnings rather than capital income at the top 1%.
Despite these limitations, which might affect the exact number for the optimal marginal tax rate on the top 1%, many sensitivity analyses in our research suggest one very robust result – current top marginal tax rates in the US are lower than would be optimal, and pursuing a policy aimed at increasing them is likely to be beneficial for society as a whole.

'The Risks to the Inflation Outlook'

Posted: 22 Nov 2014 12:02 PM PST

Remember all those predictions from those with other agendas about runaway inflation (e.g. see Paul Krugman today on The Wisdom of Peter Schiff)?:

The Risks to the Inflation Outlook, by Vasco C├║rdia, FRBSF Economic Letter: The Federal Reserve responded to the recent financial crisis and the Great Recession by aggressively cutting the target for its benchmark short-term interest rate, known as the federal funds rate, to near zero. The Fed also began providing information about the probable future path of the short-term interest rate. Known as forward guidance, this policy is intended to lead to lower long-term yields and therefore stimulate economic activity. Additionally, the Fed has purchased long-term Treasury securities and mortgage-backed securities, leading to a balance sheet that is substantially larger than before the financial crisis. Taylor (2014), among others, argues that these policies are likely to lead to substantially higher inflation. Nevertheless, the inflation rate remains below 2%, the target set by the Federal Open Market Committee (FOMC).
This Economic Letter describes results from a model that explicitly accounts for the different dimensions of monetary policy to quantify the risks to the inflation forecast. This analysis suggests that inflation is expected to remain low through the end of 2016, and the uncertainty around the forecast is tilted to the downside, that is, the risk of lower inflation. In particular, the probability of low inflation by the end of 2016 is twice as high as the probability of high inflation—the opposite of historical projections. The analysis also suggests that the risk of high inflation collapsed in 2008 and has remained well below normal since. Importantly, according to the model, there is little evidence that monetary policy constitutes a major source of inflation risk. ...

Of course, the lack of inflation can't be explained with modern macroeconomic models:

Inflation Dynamics During the Financial Crisis, by Simon Gilchrist, Raphael Schoenle, W. Sim, and Egon Zakrajsek,  September 18, 2013,  Preliminary & Incomplete: Abstract Using confidential product-level price data underlying the U.S. Producer Price Index (PPI), this paper analyzes the effect of changes in firms' financial conditions on their price-setting behavior during the "Great Recession." The evidence indicates that during the height of the crisis in late 2008, firms with "weak" balance sheets increased prices significantly, whereas firms with "strong" balance sheets lowered prices, a response consistent with an adverse demand shock. These stark differences in price-setting behavior are consistent with the notion that financial frictions may significantly influence the response of aggregate inflation to macroeconomic shocks. We explore the implications of these empirical findings within the New Keynesian general equilibrium framework that allows for customer markets and departures from the frictionless financial markets. In the model, firms have an incentive to set a low price to invest in market share, though when financial distortions are severe, firms forgo these investment opportunities and maintain high prices in an effort to preserve their balance-sheet capacity. Consistent with our empirical findings, the model with financial distortions—relative to the baseline model without such distortions—implies a substantial attenuation of price dynamics in response to contractionary demand shocks.

I know, some of you hate old Keynesian models (which can also explain this), and you don't believe in New Keynesian models (ad hoc price stickiness -- reject! -- even if, for some, it is only a cover to reject the notion of government involvement in the economy...). But your model predicted inflation that never came. Or some other such nonsense.

One final note. When I objected to this in 2010, I was called "Grumpy Thoma":

... I think it is quite possible that we will look back on QE2 as a severe error. In spite of the talk from some quarters about the intervention being too small, this is a very large-scale asset purchase for the Fed, on top of a previous very large purchase of mortgage-backed securities and agency securities. One possibility is that economic growth picks up, of its own accord, reserves become less attractive for the banks, and inflation builds up a head of steam. The Fed may find this difficult to control, or may be unwilling to do so. Even worse is the case where growth remains sluggish, but inflation well in excess of 2% starts to rear its ugly head anyway. Bernanke is telling us that he "has the tools to unwind these policies," but if the inflation rate is at 6% and the unemployment rate is still close to 10%, he will not have the stomach to fight the inflation. My concern here is that, given the specifics of the QE2 policy that was announced, the FOMC will be reluctant to cut back or stop the asset purchases, even if things start looking bad on the inflation front. Once inflation gets going, we know it is painful to stop it, and we don't need another problem to deal with.

More than four years later...we now have the same group using neo-Fisherism to explain why the Fed is causing low inflation with low nominal interest rates. With QE2 (and QE of any sort), it was the Fed's fault that we faced so much inflation risk, now it's the Fed's fault that we don't.