Posted: 27 Sep 2015 12:06 AM PDT
Posted: 26 Sep 2015 01:12 PM PDT
From an interview with Olivier Blanchard:
...IMF Survey: In pushing the envelope, you also hosted three major Rethinking Macroeconomics conferences. What were the key insights and what are the key concerns on the macroeconomic front?
Blanchard: Let me start with the obvious answer: That mainstream macroeconomics had taken the financial system for granted. The typical macro treatment of finance was a set of arbitrage equations, under the assumption that we did not need to look at who was doing what on Wall Street. That turned out to be badly wrong.
But let me give you a few less obvious answers:
The financial crisis raises a potentially existential crisis for macroeconomics. Practical macro is based on the assumption that there are fairly stable aggregate relations, so we do not need to keep track of each individual, firm, or financial institution—that we do not need to understand the details of the micro plumbing. We have learned that the plumbing, especially the financial plumbing, matters: the same aggregates can hide serious macro problems. How do we do macro then?
As a result of the crisis, a hundred intellectual flowers are blooming. Some are very old flowers: Hyman Minsky's financial instability hypothesis. Kaldorian models of growth and inequality. Some propositions that would have been considered anathema in the past are being proposed by "serious" economists: For example, monetary financing of the fiscal deficit. Some fundamental assumptions are being challenged, for example the clean separation between cycles and trends: Hysteresis is making a comeback. Some of the econometric tools, based on a vision of the world as being stationary around a trend, are being challenged. This is all for the best.
Finally, there is a clear swing of the pendulum away from markets towards government intervention, be it macro prudential tools, capital controls, etc. Most macroeconomists are now solidly in a second best world. But this shift is happening with a twist—that is, with much skepticism about the efficiency of government intervention. ...
Posted: 26 Sep 2015 12:47 PM PDT
Paul Krugman returns to a familiar theme:
Economics: What Went Right: ...I'm at EconEd; here are my slides for later today. The theme of my talk is something I've emphasized a lot over the past few years: basic macroeconomics has actually worked remarkably well in the post-crisis world, with those of us who took our Hicks seriously calling the big stuff — the effects of monetary and fiscal policy — right, and those who went with their gut getting it all wrong. ...
One thing I do try is to concede that one piece of the conventional story hasn't worked that well, namely the Phillips curve, where the "clockwise spirals" of previous protracted large output gaps haven't materialized. Maybe it's about what happens at very low inflation rates.
What's notable about the Fed's urge to raise rates, however, is that Fed officials, including Janet Yellen, are acting as if they have high confidence in their models of inflation dynamics –which is the one thing we really haven't done well at recently. I really fear that we're looking at incestuous amplification here.Agree about the uncertainty about inflation dynamics, but fear Fed officials will interpret it as risks on the upside that must be nullified through interest rate hikes. As for the Phillips curve, here's a graph from his talk:
As Krugman says, "Maybe it's about what happens at very low inflation rates." I would add that the combination of the zero bound, low inflation, and downward wage rigidity may be able to explain the change in the Phillips curve -- I'm not quite ready to give up yet.
More generally, estimating inflation dynamics has been far from successful. For example, in many VAR models (a widely used empirical specification for establishing relationships among macroeconomic series), a shock to the federal funds rate often causes prices to go up (theory says they should go down). This can be overcome somewhat by including commodity prices in the model. The idea is that when the Fed expects inflation to go up it raises the federal funds rate, and since the policy does not complete eliminate the inflation, the data will show a positive correlation between the federal funds rate and inflation. Commodity prices are thought to embody and be sensitive to future expected inflation, so including this variable helps to solve the "price puzzle" as it is known. Even so, the results are highly sensitive to specification, and when you work with these models regularly you come away believing that the estimated price dynamics are not very good at all.
But the Fed must forecast in order to do policy. There are lags (though I've argued they are likely shorter than common wisdom suggests), and the Fed must act before a clear picture emerges. The question is how the Fed should react to such uncertainty about its inflation forecasts, and to me -- given the corresponding uncertainties about the state of the labor market and the asymmetric nature of the costs of mistakes about inflation and unemployment (plus the distributional issues -- who gets hurt by each mistake?), it counsels patience rather than urgency on the inflation front.
Posted: 26 Sep 2015 12:05 PM PDT
Matthew Yglesias takes up a quote from Bush (I highlighted this yesterday):
Jeb Bush can't explain the cost of his tax cuts correctly: ...Jeb Bush ... talking to CNBC's John Harwood about the impact of his plan on the deficit:
Everybody freaks out about the deficit. And I worry about the structural deficit for sure. But if we grow our economy at a faster rate, the dynamic nature of tax policy will kick in. And so we'll be in the hole around $1.2 trillion over 10 years. And these are moderate growth effects. I'm not using the ones that I believe. I'm more optimistic.There's never been a time where there hasn't been a dynamic effect of taxation. That's not a risk at all. That's just a simple fact. Take the contrary argument here for a second: If tax policy doesn't matter, why don't we just tax everything?
Bush is referring to an estimate prepared for media consumption by John Cogan, Martin Feldstein, Glenn Hubbard, and Kevin Warsh — four men who are smart economists in good standing but who are also very much partisan Republicans. The right way to think about an estimate they put together is that it represents the outer limit of what a person is willing to claim on behalf of the growth impacts of Bush's tax cut and feel like he can still look at his graduate students with a straight face.
And guess what? The paper doesn't say what Bush says it says. ...
Obviously even if Bush were able to get his basic facts right, the underlying claim about the growth-boosting impact of the tax cuts is disputable. Jeb's brother claimed that the growth-boosting power of his tax cuts would avoid increasing the deficit, and we got eight years of fairly dismal economic performance.The argument Republicans can make is that growth would have been even faster without the drag from Obama's policies.. But that's where comparisons to the past are useful. These comparisons establish a baseline on what we should expect. So let's take a look. This is from Calculated Risk. It shows private sector employment under recent past presidents:
So Obama's job growth is all but tied with Reagan's, he beats both Bushes, G.W. by a considerable margin, but loses to Clinton and Carter. The most relevant comparison here is to G.W. Bush since Jeb promises to follow his policies for the most part, and by that comparison Obama wins soundly.
What about public sector jobs? Government has expanded under Obama correct? So if you add private sector jobs to public sector jobs, or course Obama looks even better than for private sector jobs alone and wins handily -- it's the undue influence of government expansion that is driving the overall job numbers, not his economic policies.
That story falls apart when the data are examined:
Obama is the big "loser" here in terms of public sector job creation, a source of annoyance for me (that's not what you do in a recession, instead wait until the economy improves to make these kinds of cuts -- it's stimulative, it avoids sending people to unemployment and a dismal job market and compounding our problems, and it avoids the need to increase social services to help the unemployed during their struggle to find new employment). But to Republicans, Obama ought to be a hero.
Okay, but surely Obamacare has been a job-killer, right? Republicans are noted for their forecasting ability, that runaway inflation we've had, the spike in interest rates, the stimulative effects of austerity (well, they are noted for how bad their forecasts have been), so surely they are right about this too. Obamacare has killed jobs and caused employers to shift people to part-time work, right?
That story falls apart when the data are examined (this should be the first thing to think when Republicans start spouting claims about economics). This is from Jared Bernstein:
Smell Something, Say Something: Obamacare, O'Reilly, and full-time jobs: ...I heard Fox's Bill O'Reilly claim that the Affordable Care Act "has made it more difficult to create full-time jobs in America," (around 2:30 in the video). The figure below, which indexes both full-time and part-time jobs to 100 in 2010, belies his claim. As ACA measures have been introduced, most notably the arrival of the subsidized exchanges and the Medicaid expansion in 2014, there's been no noticeable change and certainly no Obamacare-induced shift to part-time work. Other data show that the number of involuntary part-time workers is down 18 percent—1.4 million fewer workers—since 2013.
No one's claiming that the ACA is having miraculous effects on job growth, or even that it's responsible for the full-time job growth you see above. ... My point is that while Obamacare is having its intended effect of making coverage more affordable and thereby lowering the uninsured rate, I've not seen any data that would lead an objective person to conclude it's having a meaningful impact on the job market one way or the other.
In other words, those who still want to repeal Obamacare need a new rationale besides "it's not working" or "it's a job killer." It is working and it's not killing jobs. Those who claim otherwise are, in fact, fact-killers. ...If you want slow growth, poor job creation, tax cuts for the wealthy, harder times for everyone else as social programs are cut on the false pretenses of ending dependency and building character (we know what the true goals are for most Republicans), if you want health care to be harder to get for those "others", environmental policies to be rolled back in the name of "business interests", if you want all of this and more -- we haven't even touched on issues like the supreme court, war, and Federal Reserve appointments -- Jeb is the man for you.