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September 11, 2015

Latest Posts from Economist's View

Posted: 09 Sep 2015 12:24 AM PDT
This research is examines how state-level income inequality impacts political polarization within state legislatures. It's from one of our graduate students, John Voorheis (who will be on the job market at the AEA meetings this year), along with Nolan McCarty at Princeton and Boris Shor at Georgetown (who have very good state level legislator ideology data).
They have some preliminary results, which were presented this at last weekend's APSA meetings (there is a preliminary working paper on SSRN). Here's a thumbnail sketch of the results:
  • They use a simulated instrument for state level inequality to address potential endogeneity between state politics and state income distributions. That allows them to estimate the causal effect of inequality on polarization (a first for this literature).
  • They find robust evidence that increases in state inequality cause increased political polarization (i.e. the ideological distance between Democratic and Republican parties).
  • Inequality affects the mean position of both Democratic and Republican parties, but the effect is larger and more precisely estimated for Democrats.
  • Income Inequality also causes a rightward shift in the average ideology of state legislatures.
  • They conclude that inequality's effect on polarization primarily occurs through moving the moderate wing of the Democratic party to the left; this occurs through replacing moderate Democrats with Republicans, which results in a more liberal Democratic party but a more conservative legislature overall.
John's work was supported by a young scholar grant from the Washington Center for Equitable Growth.
Posted: 09 Sep 2015 12:06 AM PDT
Posted: 08 Sep 2015 02:01 PM PDT
From the last of several points on disability claims from Teresa Tritch at the NY Times:
Busting the Myths About Disability Fraud: ... Disability claims are not skyrocketing. Rather, the population most likely to go on disability, those aged 50 to 64, is growing. The potential disability population is also larger now than in the past because today's older women are more likely to have worked enough to qualify for disability than in earlier generations. In any event, demographic pressures have already begun to subside. Adjusted for demographic factors, the share of workers on disability has gone from slightly below 4 percent in 2000 to slightly above 4 percent in 2014.
The solution to fraud in the disability system is not to make it more difficult to qualify for disability or to question the usefulness of the system itself. The United States already has stricter eligibility requirements and stingier benefits than in almost all other advanced economies, according to the Organization for Economic Cooperation and Development.
The solution to fraud is to prevent and detect it. So what has Congress done? It has refused to give the Social Security Administration the money it needs to keep up with fraud detection and maintain customer service. Since 2010, the agency's resources have declined in real terms, even as claims have increased due to the aging of the population. ...
Posted: 08 Sep 2015 08:28 AM PDT
I have a new column:
The Fed Must Banish the 1970's Inflation Devil: Will the Fed raise rates when it meets later this month? Inflation remains below the Fed's two percent target, and that argues against a rate increase. But labor markets appear to be tightening and that is raising worries that higher inflation is just ahead. Should the Fed launch a preemptive strike against the possibility of wage-fueled inflationary pressure? ...
Hopefully there's at least one argument against raising rates that you have not heard before.
Posted: 08 Sep 2015 08:19 AM PDT
Tim Duy:
Flying Mostly Blind Heading Into the September FOMC Meeting, by Tim Duy: Last year, I would have said you were crazy if you told me that short-term rates would still be hugging zero even as unemployment fell to 5.1 percent. Yet here we are, gearing up for a FOMC meeting that promises to be the most contentious in years. The era of data dependence yielded substantially less clarity on the direction of policy than one would hope for, leaving expectations for the meeting's outcome all over the place. That means this meeting is not just about 25 basis points – it's about defining the parameters of the Fed's reaction function. We will learn what data dependence means not just in theory, but in practice.
The argument for a move next week is straightforward. Actual and underlying economic activity remains sufficient to sustain further improvement in the labor market. Indeed, dramatic progress has been made when viewed through the eyes of Federal Reserve Chair Janet Yellen as she scoped out the economic landscape in 2013:
With unemployment at the Fed's estimate of the natural rate, inflationary pressures will soon emerge. To be sure, wage growth remains flat, but even Yellen leans toward writing that off as an expected outcome of low productivity growth:
The growth rate of output per hour worked in the business sector has averaged about 1-1/4 percent per year since the recession began in late 2007 and has been essentially flat over the past year. In contrast, annual productivity gains averaged 2-3/4 percent over the decade preceding the Great Recession. I mentioned earlier the sluggish pace of wage gains in recent years, and while I do think that this is evidence of some persisting labor market slack, it also may reflect, at least in part, fairly weak productivity growth.
When combined with stable inflation expectations, policymakers have good reason to be confident that actual inflation will soon reverse course and trend toward the Fed's target. In such an environment, financial accommodation needs to be withdrawn pre-emptively to avoid overshooting the targets. As policymakers prefer to raise rates gradually, they are impelled to raise them early to avoid the risk of more rapid increases in the future.
The counterargument, however, is also straightforward. Labor markets remain far from healed if viewed through the eyes of Yellen in 2014: 
Low wage growth is thus consistent with the hypothesis that underemployment indicators are important measures of labor market health. The persistence of weak wage growth should leads to revised estimates of the natural rate of unemployment. After all, targeting 5 percent unemployment when the natural rate is 4 percent means denying jobs to roughly 1.5 million people. That's no small responsibility.
Moreover, inflation continues to trend away from target. If you are uncertain of your estimate of the natural rate and inflation is moving away from target, why rush to hike rates? Even though Fed officials believe that inflation has been unduly influenced by the temporary factors of falling oil prices and a rising dollar, those factors reasserted themselves since the last FOMC meeting. And market-based measures of inflation expectations do not signal a revival of inflation anytime soon.
Recent financial turbulence also calls into doubt the wisdom of raising rates next week. To be sure, the Federal Reserve is not responsible for maintaining the value of everyone's portfolio. But they are responsible for maintaining the financial stability necessary to sustain economic growth. Recent market activity, including a stronger dollar, wider credit spreads, and falling stocks, points toward already tighter financial conditions in the absence of a rate hike. A forward-looking central bank should be cautious of further tightening. Indeed, a forward-looking central bank would be expected to react to current signals with a delayed and shallower path of rate hikes.
Ultimately, the Fed will need to choose between one of these two arguments, and by doing so they will define a direction for policy. This will be important new information. Ultimately, we will learn who rules the roost at the FOMC – the Janet Yellen of 2013, or the Janet Yellen of 2014. Will it be the hawkish or dovish Janet Yellen that appears in the subsequent press conference? I tend to think the later will appear, but the case for the former is strong as well. In any event, the signaling information we receive next week is far more important than any 25 basis points could be.

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