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March 31, 2015

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'Generous Welfare Benefits Make People More Likely To Want to Work, Not Less'

Posted: 31 Mar 2015 03:55 AM PDT

Not so sure this is conclusive -- it seems like the survey question could have been sharpened:

Generous welfare benefits make people more likely to want to work, not less: Survey responses from 19,000 people in 18 European countries, including the UK, showed that "the notion that big welfare states are associated with widespread cultures of dependency, or other adverse consequences of poor short term incentives to work, receives little support."
Sociologists Dr Kjetil van der Wel and Dr Knut Halvorsen examined responses to the statement 'I would enjoy having a paid job even if I did not need the money' put to the interviewees for the European Social Survey in 2010.
In a paper published in the journal Work, employment and society they compare this response with the amount the country spent on welfare benefits and employment schemes, while taking into account the population differences between states.
The researchers, of Oslo and Akershus University College, Norway, found that the more a country paid to the unemployed or sick, and invested in employment schemes, the more its likely people were likely to agree with the statement, whether employed or not. ...
The researchers also found that government programmes that intervene in the labour market to help the unemployed find work made people in general more likely to agree that they wanted work even if they didn't need the money. In the more active countries around 80% agreed with the statement and in the least around 45%. ...
"This article concludes that there are few signs that groups with traditionally weaker bonds to the labour market are less motivated to work if they live in generous and activating welfare states.
"The notion that big welfare states are associated with widespread cultures of dependency, or other adverse consequences of poor short term incentives to work, receives little support.
"On the contrary, employment commitment was much higher in all the studied groups in bigger welfare states. ..."

Thoughts on Yellen's Speech

Posted: 31 Mar 2015 03:43 AM PDT

Tim Duy:

Thoughts on Yellen's Speech, by Tim Duy: I came back from Spring Break vacation to find a detailed speech by Fed Chair Janet Yellen that further lays the groundwork for rate hikes to begin later this year. The speech is a remarkably clear elucidation of her views and provides plenty of insight into what we should be looking for as the Fed edges toward policy normalization. A speech like this once a month from a Federal Reserve Governor would, I think, go a long way toward enhancing the the Fed's communication strategy.
One of the most important takeaways from this speech is the importance of labor market data in the Fed's assessment of the appropriate level of accommodation:
Although the recovery of the labor market from the deep recession following the financial crisis was frustratingly slow for quite a long time, progress has been more rapid of late...Of course, we still have some way to go to reach our maximum employment goal..But I think we can all agree that the recovery in the labor market has been substantial.
I am cautiously optimistic that, in the context of moderate growth in aggregate output and spending, labor market conditions are likely to improve further in coming months. In particular, and despite the somewhat disappointing tone of the recent retail sales data, I think consumer spending is likely to expand at a good clip this year given such robust fundamentals as strong employment gains, boosts to real incomes from lower energy prices, continued increases in household wealth, and a relatively high level of consumer confidence.
Yellen intends to look through any first quarter weakness in GDP data, seeing it as largely an aberration (like arguably the first quarter of last year), as long as the employment data continues to hold up. And even there, I doubt any one weak report would do much to undermine her confidence in the recovery; we should be focusing on the story told by the next three employment reports in aggregate.
Regarding inflation, she sees little that worries her:
...Some of the weakness in inflation likely reflects continuing slack in labor and product markets. However, much of this weakness stems from the sharp decline in the price of oil and other one-time factors that, in the FOMC's judgment, are likely to have only a transitory negative effect on inflation, provided that inflation expectations remain well anchored.
In this regard, I take comfort from the continued stability of survey measures of longer-run inflation expectations. And although market-based measures of inflation compensation have declined appreciably since last summer and bear close watching, I suspect that these declines are primarily driven by changes in risk premiums and market factors that I expect to prove transitory...
Same story - as long as the employment data is solid, they will dismiss the inflation data. Regarding expectations for the first rate hike, she makes clear that a hike later this year is not likely just in the FOMC's opinion, but in hers as well:
Like most of my FOMC colleagues, I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year. 
A beginning for her story is the implications of zero rates:
I would first note that the current stance of monetary policy is clearly providing considerable economic stimulus. The near-zero setting for the federal funds rate has facilitated a sizable reduction in labor market slack over the past two years and appears to be consistent with further substantial gains. A modest increase in the federal funds rate would be highly unlikely to halt this progress, although such an increase might slow its pace somewhat.
Note again that Yellen highlights the importance of labor market gains in assessing the stance of policy. Then she pulls out the long-lags story:
Second, we need to keep in mind the well-established fact that the full effects of monetary policy are felt only after long lags. This means that policymakers cannot wait until they have achieved their objectives to begin adjusting policy. I would not consider it prudent to postpone the onset of normalization until we have reached, or are on the verge of reaching, our inflation objective. Doing so would create too great a risk of significantly overshooting both our objectives of maximum sustainable employment and 2 percent inflation, potentially undermining economic growth and employment if the FOMC is subsequently forced to tighten policy markedly or abruptly.
Yellen simply believes that if the Fed waits until inflation is back to target before the Fed acts, policy will be behind the curve, thereby raising the risk that policy will need to tighten dramatically as some point in the future. There is also the secondary concern of financial instabilities. Moreover, Yellen has full faith in the Phillips Curve:
An important factor working to increase my confidence in the inflation outlook will be continued improvement in the labor market. A substantial body of theory, informed by considerable historical evidence, suggests that inflation will eventually begin to rise as resource utilization continues to tighten.
And that faith thereby negates the value of the current low readings on inflation:
It is largely for this reason that a significant pickup in incoming readings on core inflation will not be a precondition for me to judge that an initial increase in the federal funds rate would be warranted.
And then she completely dismisses the importance of wage growth in her assessment of the path of inflation:
With respect to wages, I anticipate that real wage gains for American workers are likely to pick up to a rate more in line with trend labor productivity growth as employment settles in at its maximum sustainable level. We could see nominal wage growth eventually running notably higher than the current roughly 2 percent pace. But the outlook for wages is highly uncertain even if price inflation does move back to 2 percent and labor market conditions continue to improve as projected. For example, we cannot be sure about the future pace of productivity growth; nor can we be sure about other factors, such as global competition, the nature of technological change, and trends in unionization, that may also influence the pace of real wage growth over time. These factors, which are outside of the Federal Reserve's control, likely explain why real wages have failed to keep pace with productivity growth for at least the past 15 years. For such reasons, we can never be sure what growth rate of nominal wages is consistent with stable consumer price inflation, and this uncertainty limits the usefulness of wage trends as an indicator of the Fed's progress in achieving its inflation objective.
An array of nominal wage growth outcomes might be consistent with 2 percent inflation, most of which are outside the purview of the Fed, according to Yellen. Hence:
I have argued that a pickup in neither wage nor price inflation is indispensable for me to achieve reasonable confidence that inflation will move back to 2 percent over time.
But she leaves an out:
That said, I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably.
She doesn't need to see any of this indicators to head up to justify a rate hike; they just can't head down. In that respect, today's reading on PCE inflation must be something of a comfort to her. The month-over-month number pulled up, although recent trends are in my opinion still weak:


All that said, she still believes that Taylor-type rules - using the correct equilibrium interest rate, of course - still justify a zero interest rate:
 But the prescription offered by the Taylor rule changes significantly if one instead assumes, as I do, that appreciable slack still remains in the labor market, and that the economy's equilibrium real federal funds rate--that is, the real rate consistent with the economy achieving maximum employment and price stability over the medium term--is currently quite low by historical standards.Under assumptions that I consider more realistic under present circumstances, the same rules call for the federal funds rate to be close to zero.
And this prepares the listener for what I would argue is the most important part of her speech:
The FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase
The Fed very much wants to change the discussion from the timing of the first rate hike to the pace of subsequent rate hikes. On this topic, we need to delve further into the importance of the equilibrium real rate in assessing the path of policy:
The projected combination of a gradual rise in the nominal federal funds rate coupled with further progress on both legs of the dual mandate is consistent with an implicit assessment by the Committee that the equilibrium real federal funds rate--one measure of the economy's underlying strength--is rising only slowly over time. In the wake of the financial crisis, the equilibrium real rate apparently fell well below zero because of numerous persistent headwinds. These headwinds include tighter underwriting standards and restricted access to some forms of credit; the need for households to reduce their debt burdens; contractionary fiscal policy at all levels of government after the initial effects of the fiscal stimulus package had passed; and elevated uncertainty about the economic outlook that made firms hesitant to invest and hire, and households reluctant to buy houses, cars, and other discretionary goods.
So what is happening with the real equilibrium rate now:
Fortunately, the overall force of these headwinds appears to have diminished considerably over the past year or so, allowing employment to accelerate appreciably even as the level of the federal funds rate and the volume of our asset holdings remained nearly unchanged.
Employment is again the key indicator. The fact that employment growth is accelerating despite no change in monetary policy is, according to Yellen, fairly clear evidence that the equilibrium real rate is rising. In other words, monetary policy accommodation is actually increasing even as the Fed holds steady. She expects the equilibrium rate to continue rising over the next couple of years, thereby justifying the Fed's rate projections. 
But that forecast is data dependent, of course. And then comes the portion of Yellen's speech as she highlights reasons to believe that the actual rate path may differ from the Fed's expectations. Note that primarily focuses on reasons to expect a more subdued rate path, thus sounding dovish. She begins with the uncertainty of the equilibrium real rate:
The first, which is closely related to my expectation that the headwinds holding back growth are likely to continue to abate gradually, pertains to the risk that the equilibrium real federal funds rate may not, in fact, recover as much or as quickly as I anticipate...The experience of Japan over the past 20 years, and Sweden more recently, demonstrates that a tightening of policy when the equilibrium real rate remains low can result in appreciable economic costs, delaying the attainment of a central bank's price stability objective.
The fact that she highlights the errors of the Riksbank is comforting; it speaks to the willingness to learn from others' mistakes. Next is a tacit admission that although they say they can return to quantitative easing, they really think they are pretty much out of bullets:
A second reason for the Committee to proceed cautiously in removing policy accommodation relates to asymmetries in the effectiveness of monetary policy in the vicinity of the zero lower bound. In the event that growth in employment and overall activity proves unexpectedly robust and inflation moves significantly above our 2 percent objective, the FOMC can and will raise interest rates as needed to rein in inflation. But if growth was to falter and inflation was to fall yet further, the effective lower bound on nominal interest rates could limit the Committee's ability to provide the needed degree of accommodation. With an already large balance sheet, for example, the FOMC might be concerned about potential costs and risks associated with further asset purchases.
On this point, it is again comforting that she is not ignoring the signals of the bond market:
That said, it is sobering to note that many market participants appear to assess the risks to the outlook quite differently. For example, respondents to the Survey of Primary Dealers in late January thought there was a 20 percent probability that, after liftoff, the funds rate would fall back to zero sometime at or before late 2017. In addition, both the remarkably low level of long-term government bond yields in advanced economies and the low prevailing level of inflation compensation suggest that financial market participants may hold more pessimistic views than FOMC participants concerning the risks to the global outlook. Since long-term yields reflect the market's probability-weighted average of all possible short-term interest rate paths, along with compensating term and risk premiums, the generally low level of yields in advanced economies suggests that investors place considerable odds on adverse scenarios that would necessitate a lower and flatter trajectory of the federal funds than envisioned in participants' modal SEP projections.
Finally, she harkens back to her optimal-control policy days:
A final argument for gradually adjusting policy relates to the desirability of achieving a prompt return of inflation to the FOMC's 2 percent goal, an objective that would be advanced by allowing the unemployment rate to decline for a time somewhat below estimates of its longer-run sustainable level. To a limited degree, such an outcome is envisioned in many participants' most recent SEP projections.
Still, the gradualist path is not without risks. First, inflation:
Of course, taking a gradualist approach is not without risks. Proceeding too slowly to tighten policy could have adverse consequences for the attainment of the Committee's inflation objective over time, especially if it were to undermine the FOMC's inflation credibility. Inflation could, for example, exhibit nonlinear dynamics in which high levels of unemployment place relatively little downward pressure on inflation, but tight labor markets generate marked upward pressure. If so, a decline in unemployment below its natural rate could cause inflation to quickly rise to an undesirably high level. Rapid increases in short-term interest rates to arrest such an unwelcome development could, in turn, have adverse effects on financial markets and the broader economy.
Here you see Yellen's fear of inflation, in particular the concern of nonlinear dynamics. Yellen fears that inflation will jump sharply higher is unemployment sinks too far below its natural rate. This fear I think extends to the Fed's resistance to a different inflation target or a price level target. It is also why the Fed fears falling too far behind the curve.
Bottom Line: Employment data are key; the rest is for the moment just noise. If that data continues to improve, while monetary policy remains unchanged, it is evidence of growing monetary accommodation which must eventually be constrained. Moreover, the steady fall in the unemployment rate is signaling above trend growth as well. And while you might argue that employment data are a lagging indicator, the Fed would reply that there is no indication from the more leading indicator of initial claims that something troubling is amiss. Somewhat surprisingly, even price data is currently just noise; rising inflation or wage growth are not necessary to begin raising rates. Still, either would justify the acceleration of subsequent rate hikes as they would be evidence of a more normal economy consistent with a higher equilibrium real interest rate. Yellen anticipates that the equilibrium rate will return to more normal levels over the next couple of years, but remains wary that this will not turn out to be the case. This is good news as it raises the odds that she will not cut the expansion short. Her lack of emphasis of wages as a policy signal and continued faith in the Phillips Curve will make her a target of left-leaning critics.

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Posted: 31 Mar 2015 12:06 AM PDT

March 30, 2015

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Economic Journal 125th Anniversary Special Issue

Posted: 30 Mar 2015 04:13 AM PDT

The Economic Journal was among the first journals to come into existence. This is the first article of the 125th anniversary issue. The remaining articles are from notable economists (e.g. Stiglitz, Heckman, and many more) discussing seminal work that appeared in the Journal (the articles are relatively short):

Economic Journal 125th Anniversary Special Issue [under Creative Commons]: First published: 29 March 2015 Full publication history, DOI: 10.1111/ecoj.12230 View/save citation.
It is with great pleasure that we mark the 125th anniversary of the founding of the Economic Journal with this special issue. The EJ has published many seminal articles on a variety of topics over the years; in this issue we have selected some of what we think are the most important and asked leading economic thinkers of today to share their thoughts on the impact that these articles have had. The authors have explored the historic contribution of the articles and possible future ways to advance the subject. It has been an honour for us to work with these economists, whose own research is seminal to the future development of the profession. We thank them sincerely for their contributions to this project.
The Economic Journal was founded at a meeting convened by Professor Alfred Marshall at University College London, at the behest of Herbert Somerton Foxwell and Robert Harry Inglis Palgrave among others, and chaired by George Viscount Goschen, Chancellor of the Exchequer.1
The meeting was called to discuss setting up a journal of economics in England, and brought together around 200 people from surprisingly disparate backgrounds. Leading academics included Francis Ysidro Edgeworth, chair at King's College London and first editor of the Economic Journal; Mary Paley Marshall, one of the first female students at Cambridge and co-founder of economics at Bristol University with her husband; Henry Sidgwick, philosopher, economist, founder of Newnham College Cambridge and a supporter of women's education; and John Neville Keynes, renowned economist at Cambridge University. The hall at UCL was also packed with social philanthropists, journalists and businessmen. Notable names from the audience were Charles Booth, philanthropist and social researcher, who influenced the government in the establishment of the old age pension; Millicent Fawcett, radicalist and suffragette, who campaigned for women's rights and the better protection of children; Octavia Hill, social reformer and co-founder of the National Trust; Clara Collet, economist and reformist who sought to improve working conditions for women; Robert Giffen, economist and journalist at The Economist, the Daily News and The Times; and George Bernard Shaw, socialist, playwright and co-founder of the London School of Economics. There were also significant names who pledged their support to the cause in writing, including George Baden-Powell, the conservative politician; Sir Thomas Farrer, 1st Baron Farrer, civil servant and lawyer; Joseph Shield Nicholson, professor of political economy at Edinburgh; and George William Bramwell, judge.
There was unanimous agreement for the proposed journal of economics. Marshall had laid out the need for a journal to support the development of young economists. The aim of the journal was to encourage debate at the highest academic level and the audience unanimously carried the motion to establish the journal, cheering in support of the idea that the journal should incorporate diverse viewpoints for the benefit of the country at large.
George Bernard Shaw was the only person to introduce some controversy, by questioning the selection of a politician, Viscount Goschen, to lead the society in its publication aims. Marshall rather honestly confided that he was not a political supporter of Goschen but that they would be hard pressed to find a candidate for presidency who had no political views whatsoever.
The support for the EJ at its inauguration in 1890 only hinted at the impact the journal would achieve on a national scale. Numerous national newspapers reported on the meeting at UCL and pledged their support to the project. The Times, for example, stated that 'the propriety of the proposal was unquestionable. Not a dissentient voice was raised'.2 Interest did not stop with the initiation of the Journal but continued with the subjects discussed in each issue.
In the first edition of the Journal, Editor Francis Ysidro Edgeworth proudly declared that:
The most opposite doctrines may meet here as on a fair field. Thus the difficulties of Socialism will be considered in the first number; the difficulties of Individualism in the second. Opposing theories of currency will be represented with equal impartiality. Nor will it be attempted to prescribe the method, any more than the result, of scientific investigation.3
The Standard heralded these aims, saying:
We want such a publication in this country, where questions of public well-being can be discussed without reference to the party cries of the hour.4
It went on to discuss the diverse topics published in the issue ranging from 'The Eight Hour Day in Victoria' by John Rae, to 'The Fall of Silver' by Henry Hucks Gibbs and 'The Difficulties of Socialism' by Leonard Courtney, which the newspaper declared 'is [an article] which no person should miss reading.' The second issue of the Journal was met with the same interest as the first. The Cape Town Argus said 'its second number well maintains the high expectations with which it was started'. It picked out Sir Thomas Farrer's article entitled 'Some English Railway Robberies of the Next Decade' for particular mention, saying it was 'admirably clear and succinct'. The Manchester Courier included in-depth description of all articles included in the issue, adding that the Journal was an 'excellent and instructive publication'.5
While the subject matter and impact of the Journal has evolved considerably since its first issue, the editors are pleased to uphold the original simple values: to publish the best articles in economics in any field and to disseminate its research as widely as possible.
A note on 125 years of the Economic Journal would not be complete without mention of the bee motif, which marked its centenary in 2014. The bee was chosen as the seal of the Royal Economic Society when it received its Royal Charter and first appeared on the cover of the EJ in March 1904. There has been some debate as to the meaning and motivation for selection of this motif. It was proposed by Professor Mark Perlman that the bee was a symbol of the investigational method appropriate to the study of economics.6 He suggested that this notion was taken from Francis Bacon's Novum Organon, which was widely read in England in the nineteenth century:
Those who have handled the sciences have been either Empiricists or Rationalists. Empiricists, like ants, merely collect things and use them. The Rationalists, like spiders, spin webs out of themselves. The middle way is that of the bee, which gathers its material from the flowers of the garden and the field, but then transforms and digests it by a power of its own. And the true business of philosophy is much the same, for it does not rely only or chiefly on the powers of the mind, nor does it store the material supplied by natural history and practical experiments untouched in its memory, but lays it up in the understanding changed and refined. Thus from a closer and purer alliance of the two faculties- the experimental and the rational, such as has never yet been made- we have good reason for hope.7
Bacon's words seem to work not only as a metaphor for economic science but for the Economic Journal itself, which sought to combine approaches to economics and enable the study of the discipline through embracing different perspectives. However, a more prevalent theory is for the meaning of the bee is that it derived from The Fable of the Bees (1714) by Bernard Mandeville. This paradoxical thesis argued that social welfare, social progress, riches and benefits are all based on the human vices. The idea is said to underlie the theory of 'the invisible hand' of economic markets, developed by Adam Smith (1723–90). However, there is no documentary evidence to show categorically that either of these allegories was behind the selection of the bee motif.
Not all editors of the EJ have been fond of the busy bee. The stamp was removed from the Journal during the editorship of Brian Reddaway in a bid to modernise the cover. The symbol was reintroduced in 1990 by John Hey, as a mark of the centenary of the RES and the EJ. Austin Robinson, one of the longest serving editors of the Journal, applauded this move, admitting that he had 'a certain affection for it [the bee]'.8 The reintroduction of the bee motif however also marked a re-design, and added further complexity to its possible significance. The quote 'amor urget habendi' (acquisitiveness impels) was added to the modernised image, a line taken from Virgil's Georgics:
'ac ueluti lentis Cyclopes fulmina massis
cum properant, alii taurinis follibus auras
accipiunt redduntque, alii stridentia tingunt
aera lacu; gemit impositis incudibus Aetna;
illi inter sese magna ui bracchia tollunt
in numerum, uersantque tenaci forcipe ferrum
non aliter, si parua licet componere magnis
Cecropias innatus apes amor urget habendi
munere quamque suo.'9
'As when the Cyclopses forge thunderbolts
Deftly of ductile metal, some of them
Pump air from bullhide bellows, others plunge
The hissing bronze in troughs, while Etna groans
Under the weight of anvils. Mightily
They raise their arms in alternating rhythm
And turn the metal with their gripping tongs.
Just so (if small may be compared with great)
Innate acquisitiveness impels the bees
To ply their several tasks.'10
Here the bee is related to hard work, industry and the division of labour. As such, the motif may relate to the industry of the Journal and the Royal Economic Society, or to a broader view of economics as a study of the human drive to obtain. There is no record of why this quote was selected for the refashioning of the bee image and it only serves to open up the possibilities of the bee's meaning.
To celebrate 125 years of the Journal and 100 years of the busy bee, we have, for one issue, reinstated the original bee of which Austin Robinson was so fond and included all of the bees on the back cover. We will leave it to the reader to ponder why it was selected to represent the Journal and the society all those years ago.
We are pleased as editors to be able to carry on the tradition of the Economic Journal, which has such a vibrant history and has made such an important contribution to the development of the field.
Joint Managing Editors
Martin Cripps University College London
Andrea Galeotti University of Essex
Rachel Griffith University of Manchester
Morten Ravn University College London
Kjell Salvanes Norwegian School of Economics
Stepahnie Seavers Institute for Fiscal Studies
Frederic Vermeulen University of Leuven
Production Editor
David Mayes University of Auckland
Publishing Editor
Stephanie Seavers Institute for Fiscal Studies
  1. For further details of the meeting see 'The British Economic Association', Economic Journal, vol. 1 (Mar 1891), pp. 1–14.
  2. The Times, 21 November 1890. RES Archive, London School of Economics RES_1/3/2 p. 3.
  3. 'The British Economic Association', Economic Journal, vol. 1 (Mar 1891), p. 1.
  4. The Standard, 9 April 1891. RES Archive, London School of Economics RES_1/3/2 p. 5.
  5. The Cape Town Argus, 12 August 1891. RES Archive, London School of Economics RES_1/3/2 p. 8.
  6. Letter to Economic Journal Editor Professor John Hey on 3rd April, 1990. RES archive.
  7. Francis Bacon, Novum Organum, Peter Urbach and John Gibson (trans. and ed.), Open Court Publishing: Peru, Illinois, 1994, reprinted 1996, paragraph 95, bk.1, p. 105.
  8. Letter to Professor Perlman, University of Pittsburgh, on 20 September 1990. RES archive.
  9. Virgil, Georgics, Richard F. Thomas (ed.), Cambridge Greek and Latin Classics, University of Cambridge Press: 1988, reprinted 2001, vol. 2, Bks 111-1V, bk IV, p. 24, lines 170 to 179.
  10. Virgil, The Georgics, L. P. Wilkinson (trans.), Penguin Classics: London, 1982, pp. 129–30.

Paul Krugman: Imaginary Health Care Horrors

Posted: 30 Mar 2015 01:38 AM PDT

Why doesn't the public know how successful Obamacare has been?:

Imaginary Health Care Horrors, by Paul Krugman, Commentary, NY Times: ...Representative Pete Sessions of Texas, the chairman of the House Rules Committee, recently ... declared the cost of Obamacare "unconscionable." If you do "simple multiplication," he insisted, you find that the coverage expansion is costing $5 million per recipient. But ... the actual cost per newly insured American is about $4,000.
Now, everyone makes mistakes. But this wasn't a forgivable error..., one indisputable fact is that it's costing taxpayers much less than expected — about 20 percent less...
But that is, of course, how it's been all along with Obamacare. Before the law went into effect, opponents predicted disaster on all levels. What has happened instead is that the law is working pretty well. So how have the prophets of disaster responded? By pretending that the bad things they said would happen have, in fact, happened. ...
Remember, Obamacare was also supposed to be a huge job-killer. ... Well, Obamacare went into effect fully at the beginning of 2014 — and private-sector job growth actually accelerated, to a pace we haven't seen since the Clinton years. ...
Finally, there's the never-ending hunt for ... for ordinary, hard-working Americans who have suffered hardship thanks to health reform. ... Remarkably, however, they haven't been able to find those stories. ...
In reality, the only people hurt by health reform are Americans with very high incomes, who have seen their taxes go up, and a relatively small number of people who have seen their premiums rise because they're young and healthy...
In short, when it comes to the facts, the attack ... has come up empty-handed. But the public doesn't know that. ...
And the favorable experiences of the roughly 16 million Americans who have gained insurance ... have had little effect on public perceptions. Partly that's because the Affordable Care Act, by design, has had almost no effect on those who already had good health insurance..., they have seen no change in their status.
At a deeper level, however, what we're looking at here is the impact of post-truth politics. We live in an era in which politicians and the supposed experts who serve them never feel obliged to acknowledge uncomfortable facts, in which no argument is ever dropped, no matter how overwhelming the evidence that it's wrong.
And the result is that imaginary disasters can overshadow real successes. Obamacare isn't perfect, but it has dramatically improved the lives of millions. Someone should tell the voters.

Have Blog, Will Travel

Posted: 30 Mar 2015 01:38 AM PDT

I am here today:

Royal Economic Society Conference 2015
University of Manchester, United Kingdom
March 30, 2015

March 31, 2015

April 1, 2015

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Posted: 30 Mar 2015 12:06 AM PDT

'A Separating Equilibrium in Indiana'

Posted: 29 Mar 2015 04:31 PM PDT

Rajiv Sethi:

A Separating Equilibrium in Indiana: In the wake of Indiana's passage of the Religious Freedom and Restoration Act, the following stickers have started appearing on storefronts across the state:

These signs allow business owners to signal their disapproval of the law, and if they spread sufficiently far and wide, will force those not displaying them to implicitly signal approval of the law. It's worth reflecting on the consequences of this for customer choices, the profitability of firms, and the beliefs of individuals about the preferences of those with whom they occasionally interact.
At any given location, the meaning of the symbol will come to depend on the number and characteristics of the nearby firms displaying it. If all businesses were to paste the sticker alongside their Visa and Mastercard logos, it would be devoid of informational content and would not influence customer choices; this is what game theorists quaintly call a babbling equilibrium
But it's highly unlikely that such a situation would arise. Some owners will display the sign as a matter of principle, regardless of it's effect on their bottom line, while others will adamantly refuse to do to even if profitability suffers as a result. 
Between these extremes lies a large segment of firms for whom the choice involves a trade-off between profit and principle. They may disapprove of the law and yet abstain from taking a public position, or they may approve and cynically pretend to disapprove. What they choose will depend on the distribution of characteristics in their customer base, as well as the choices made by other firms.
In more liberal areas, such as college towns, those who display the stickers will likely profit from doing so, and owners concerned primarily with their profitability will be induced to join them. The meaning of the symbol will accordingly be diluted: some of those displaying it will be indifferent to the law or even mildly supportive. By the same token, the meaning of not displaying the symbol will be sharpened. Customers will sort themselves across businesses accordingly, with those opposed to the law actively avoiding businesses without stickers, thus reinforcing the effects on profitability and firm behavior.
In more conservative areas, those who display the stickers will likely experience a net loss of customers, and the meaning of the symbol will accordingly be quite different. Only those strongly opposed to the law will publicly exhibit their disapproval, and among those who abstain from displaying the stickers will be some who are privately opposed to the law. In this case customers opposed to the law will be less vigorous in seeking out businesses with stickers, again reinforcing the effects on profitability and firm behavior.
Just as customers will come to know more about the private preferences of business owners, the owners will come to know more about the customers they attract and retain. Furthermore, customers in a given store will come to know more about each other. Bars and bakeries will become a bit more like niche bookstores, and casual interactions will become a bit more segregated along ideological lines. None of these are intended consequences of the law, but they are some of its predictable effects, and it's worth giving some thought to whether or not they are desirable.
I've heard it said that businesses in Indiana had the authority to deny service to some customers even prior to the passage of the new law, and that it therefore doesn't involve any substantive change in rights. Even so, it's a symbolic gesture that pins upon a group of people a badge of inferiority. Responding to this with a different set of symbols thus seems entirely appropriate.

March 29, 2015

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Posted: 29 Mar 2015 12:06 AM PDT

'Unreal Keynesians'

Posted: 28 Mar 2015 03:31 PM PDT

Paul Krugman:

Unreal Keynesians: Brad DeLong points me to Lars Syll declaring that I am not a "real Keynesian", because I use equilibrium models and don't emphasize the instability of expectations. ...
I don't care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you. What you should ask is whether that approach has proved useful — and whether the critics have something better to offer.
And as I have often argued, these past 6 or 7 years have in fact been a triumph for IS-LM. Those of us using IS-LM made predictions about the quiescence of interest rates and inflation that were ridiculed by many on the right, but have been completely borne out in practice. We also predicted much bigger adverse effects from austerity than usual because of the zero lower bound, and that has also come true. ...

March 28, 2015

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Posted: 28 Mar 2015 12:06 AM PDT

How Idealism Can Fight Climate Change

Posted: 27 Mar 2015 12:06 PM PDT

Robert Shiller:

How Idealism, Expressed in Concrete Steps, Can Fight Climate Change: Idealism combined with an intriguing application of economic theory may accomplish what international conferences have not: solve the seemingly intractable problem of global warming.
Despite periodic flurries of optimism, diplomacy has been largely disappointing. ... From an economic standpoint, international efforts until now have foundered on a fundamental "free rider problem." ... Why not just take a "free ride" and let others do the hard work? ...
But there are other ways to look at this... In a new book, "Climate Shock: The Economic Consequences of a Hotter Planet" (Princeton 2015), Gernot Wagner of the Environmental Defense Fund and Martin L. Weitzman, a Harvard economist, question that assumption. In a proposal that they call the "Copenhagen Theory of Change," they say that we should be asking people to volunteer to save our climate by taking many small, individual actions. ...
The world is a diverse and complicated place, however. In order to combat global warming, social movements aren't enough. We also need a concrete framework on a global scale.
In his presidential address before the American Economic Association in Boston in January, William D. Nordhaus of Yale proposed what he calls "climate clubs"..., a group of countries that agree to create incentives for people to reduce carbon emissions, while also erecting tariff barriers on imports from countries that are not members of the club. ...
To actually solve the extremely challenging problem of climate change, we may want to rely on both theories...

'Microeconomic Origins of Macroeconomic Tail Risks'

Posted: 27 Mar 2015 12:06 PM PDT

Microfoundations from Acemogl, Oxdaglar, and Tahbaz-salehi:

Microeconomic origins of macroeconomic tail risks, by Daron Acemoglu, Asuman Ozdaglar, and Alireza Tahbaz-Salehi: Understanding large economic downturns is one of macroeconomics' central goals. This column argues that imbalances in input-output linkages can interact with firm-level shocks to produce output fluctuations that are much larger than the underlying shocks. The result can be large cycles arising from small, firm-level shocks. It is thus important to study the determinants of large economic downturns separately. Macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behavior for moderate deviations.
Most empirical studies in macroeconomics approximate the deviations of aggregate economic variables (such as the GDP) from their trends with a normal distribution. Besides analytical convenience, such an approximation has been relatively successful in capturing some of the more salient features of the behavior of aggregate variables in the US and other OECD countries.
Macroeconomic tail risks
A number of recent studies (see Fagiolo et al. 2008), however, have documented that the distributions of GDP growth rate in the US and many OECD countries do not follow the normal, or bell-shaped distribution. Large negative or positive growth rates are more common than the normal distribution would suggest. That is to say, the distributions exhibit significantly heavier 'tails' relative to that of the normal distribution. Using the normal distribution thus severely underpredicts the frequency of large economic downturns.
This divergence can be seen clearly in Figure 1. Panel (a) depicts the quantile-quantile plot of post-war US GDP growth rate (1947:QI to 2013:QIII) versus the normal distribution after removing the top and bottom 5% of data points. The close correspondence between this dataset and the normal distribution, shown as the dashed red line, suggests that once large deviations are excluded, the normal distribution is indeed a good candidate for approximating GDP fluctuations. Panel (b) shows the same quantile-quantile plot for the entire US post-war sample. It is easy to notice that this graph exhibits sizeable and systematic deviations from the normal line at both ends. Together, these plots suggest that even though the normal distribution does a fairly good job in approximating the nature of fluctuations during most of the sample, it severely underestimates the most consequential fact about business cycle fluctuations, namely, the frequency of large economic contractions.
Figure 1. The quantile-quantile plots of the post-war US GDP growth rate (1947:QI to 2013:QIII) vs. the standard normal distribution (dashed red line)

Acemoglu fig1 24 marNote: The horizontal axis shows quantiles of the standard normal distribution; the vertical axis shows quantiles of the sample data.

Input-output linkages, micro shocks, and macro risks
In recent work (Acemoglu et al. 2014), we have argued that input-output linkages between different firms and sectors within the economy can play a first-order role in determining the depth and frequency of large economic downturns. Building on an earlier framework by Acemoglu et al. (2012), we show that if all firms take roughly symmetric roles as input-suppliers to one another (in what we call a 'balanced' economy), not only GDP fluctuations are normally distributed, but also large economic downturns are extremely unlikely. In other words, absent any amplification mechanisms or aggregate shocks, microeconomic firm-level shocks cannot result in macroeconomic tail risks. More interestingly, this result holds regardless of how these firm-level microeconomic shocks are distributed.
Our subsequent analyses, however, establish that the irrelevance of microeconomic shocks for generating macroeconomic tail risks would no longer hold if the economy is 'unbalanced', in the sense that some firms play a much more important role as input-suppliers than others. More specifically, we argue that:
The propagation of microeconomic shocks through input-output linkages can significantly increase the likelihood of large economic downturns.
The implications of our theoretical results can be summarized as follows:
First, the frequency of large GDP contractions is highly sensitive to the nature of microeconomic shocks.
In particular, in an unbalanced economy, micro shocks with slightly thicker tails can lead to a significant increase in the likelihood of large economic downturns. This suggests that unbalanced input-output linkages can lead to the build-up of tail risks in the economy.
Second, depending on the distribution of microeconomic shocks, the economy may exhibit significant macroeconomic tail risks even though aggregate fluctuations away from the tails can be well-approximated by a normal distribution.
This outcome is consistent with the pattern of US post-war GDP fluctuations documented in Figure 1.
This observation underscores the importance of studying the determinants of large recessions, as such macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.
Finally, there is a trade-off between the normality of micro-level shocks and imbalances in the input-output linkages.
An economy with unbalanced input-output linkages subject to normal microeconomic shocks exhibits deep recessions as frequently as a balanced economy subject to heavy-tailed shocks.
Solving the 'small shocks, large cycles puzzle'
In this sense, our results provide a novel solution to what Bernanke et al. (1996) refer to as the 'small shocks, large cycles puzzle' by arguing that the interaction between the underlying input-output structure of the economy and the shape of the distribution of microeconomic shocks is of first-order importance in determining the nature of aggregate fluctuations.
Understanding the underlying causes of large economic downturns such as the Great Depression has been one of the central questions in macroeconomics. Our results suggest that the frequency and depth of such downturns may depend on the interaction between microeconomic firm-level shocks and the nature of input-output linkages across different firms. This is due to the fact that the propagation of shocks over input-output linkages can lead to the concentration of tail risks in the economy. This observation highlights the importance of separately studying the determinants of large economic downturns, as such macroeconomic tail risks may vary significantly even across economies that exhibit otherwise identical behaviour for moderate deviations.
Acemoglu, D, V M Carvalho, A Ozdaglar, and Al Tahbaz-Salehi (2012), "The network origins of aggregate fluctuations", Econometrica, 80, 1977–2016.
Acemoglu, D, A Ozdaglar, and A Tahbaz-Salehi (2014), "Microeconomic origins of macroeconomic tail risks", NBER Working Paper No. 20865.
Bernanke, B, M Gertler, and S Gilchrist (1996), "The financial accelerator and the flight to quality", The Review of Economics and Statistics, 78, 1–15.
Fagiolo, G, M Napoletano, and A Roventini (2008), "Are output growth-rate distributions fat-tailed? Some evidence from OECD countries", Journal of Applied Econometrics, 23, 639–669.

Paul Krugman: Mornings in Blue America

Posted: 27 Mar 2015 06:16 AM PDT

Conservatives have GNDS (good news derangement syndrome):

Mornings in Blue America, by Paul Krugman, Commentary, NY Times: ...remember how Obamacare was supposed to be a gigantic job killer? Well, in the first year of the Affordable Care Act..., the U.S. economy .,, added 3.3 million jobs — the biggest gain since the 1990s. ...
But recent job growth ... has big political implications — implications so disturbing to many on the right that they are in frantic denial, claiming that the recovery is somehow bogus. Why can't they handle the good news? The answer actually comes on three levels: Obama Derangement Syndrome, or O.D.S.; Reaganolatry; and the confidence con.
Not much need be said about O.D.S. It is, by now, a fixed idea on the right that this president is both evil and incompetent, that everything touched by the atheist Islamic Marxist Kenyan Democrat — mostly that last item — must go terribly wrong. When good news arrives about the budget, or the economy, or Obamacare ... it must be denied.
At a deeper level, modern conservative ideology utterly depends on the proposition that conservatives, and only they, possess the secret key to prosperity. As a result, you often have politicians on the right making claims like this one, from Senator Rand Paul: "When is the last time in our country we created millions of jobs? It was under Ronald Reagan."
Actually, if creating "millions of jobs" means adding two million or more jobs in a given year, we've done that ... eight times under Bill Clinton, twice under George W. Bush, and three times, so far, under Barack Obama. ...
Which brings us to the last point: the confidence con.
One enduring puzzle of political economy is why business interests so often oppose policies to fight unemployment. After all, boosting the economy with expansionary monetary and fiscal policy is good for profits...
As a number of observers have pointed out, however, for big businesses to admit that government policies can create jobs would be to devalue one of their favorite political arguments — the claim that to achieve prosperity politicians must preserve business confidence, among other things, by refraining from any criticism of what businesspeople do. ...
So, as I said at the beginning, the fact that we're now seeing mornings in blue America — solid job growth both at the national level and in states that have defied the right's tax-cutting, deregulatory orthodoxy — is a big problem for conservatives. Although they would never admit it, events have proved their most cherished beliefs wrong.