Posted: 17 Oct 2015 12:33 AM PDT
Disarticulation goes North: ... In a recent piece published in the New York Times, Paul Theroux, after traveling through the American South, was shocked by the depth of poverty there, wrought in his opinion by the destruction of jobs that have all gone to Asia and import of cheap commodities from China. He was even more distraught by the apparent lack of interest of American political and economic elites who seem to even fail to notice the plight of the Americans in states like Mississippi and most ironically in Arkansas where philanthropists such as the Clinton Foundation have not been much seen even as they proudly boast of efforts "to save the elephants in Africa".
The key issue raised by Theroux was whether trade, that is, globalization was responsible for this plight. The second issue that was raised was why there is so little empathy with the domestic poor or interest in doing something about their destitution. ...
One can safely claim, to the extent that these things that be causally proven, that the rapid worldwide progress in poverty alleviation is due to globalization. It is also true that on any income or consumption metric, poverty in parts of Africa is much worse than in Mississippi. But of course none of that may be politically or socially relevant because national populations seldom care about cosmopolitan welfare functions (where happiness of every individual in the world is equally valued). They work with national welfare functions where a given level of destitution locally is given a much greater weight than the same destitution abroad. There are studies that show the revealed difference in implicit national vs. cosmopolitan weighting of poverty (the ratio for the US is estimated at 2000 to 1); there are arguments for this, going back to Aristotle who in Nicomachean ethics thought that our level of empathy diminishes as in concentric circles as we move further from a very narrow community. And there are also political philosophy arguments (by Rawls) why co-citizens do care more for each other than for the others.
But I think that it is insufficient to leave this argument at a very abstract level where one group of Americans would have a more cosmopolitan welfare function and better perception of global benefits of trade and another would be more nativist and ignorant of economics. I do not think that the real difference between the two groups has to do with welfare concerns and economic literacy but with their interests. Many rich Americans who like to point out to the benefits of globalization worldwide significantly benefited and continue to benefit from the type of globalization that has been unfolding during the past three decades. The numbers, showing their real income gains, are so well known that they need no repeating. They are large beneficiaries from this type of globalization because of their ability to play off less well-paid and more docile labor from poorer countries against the often too expensive domestic labor. They also benefit through inflows of unskilled foreign labor that keep the costs of the services they consume low. Thus rich Americans are made better off by the key forces of globalization: migration, outsourcing, cheap imports, which have also been responsible for the major reduction of worldwide poverty. Perhaps in a somewhat crude materialist fashion I think that their sudden interest in reducing worldwide poverty is just an ethical sugar-coating over their economic interests which are perfectly well served by globalization. Like every dominant class, or every beneficiary of an economic or political regime, they feel the need to situate their success within some larger whole and to explain that it is a by-product of a much grander betterment of human condition.
A new alliance, based on the coincidence of interests, is thus formed between some of the richest people in the world and poor people of Africa, Asia and Latin America. Those who are left out in the cold are the domestic lower-middle and middle classes squeezed between the competition from foreign labor and indifference of national ruling classes. ...
The idea that globalization is a force that is good and beneficial for all is an illusion. Tectonic economic changes such as those brought by globalization always have winners and losers. (The first sentence of my forthcoming book "Global inequality", Harvard University Press, April 2016, says exactly that.) Even if globalization is, as I believe, a positive phenomenon overall, both economically ... and ethically because it allows for the creation of something akin to community of all humankind, it is, and will remain, a deeply contradictory and disruptive force that would leave, at times significant groups of people, worse off. Refusing to see that is possible only if one is blinded by ideology of universal harmonies or by own economic interests.
Posted: 17 Oct 2015 12:24 AM PDT
Threats Perceived When There Are None: Sendhil Mullainathan is one of the most thoughtful people in the economics profession, but he has a recent piece in the New York Times with which I really must take issue.
Sendhil is implicitly assuming that a white motorist who behaved in exactly the same manner as Levar Jones did in the above video would have been treated in precisely the same manner by the officer in question, or that the incident shown here is too rare to have an impact on the aggregate data. Neither hypothesis seems plausible to me.
How, then, can once account for the rough parity between arrest rates and the rate of shooting deaths at the hands of law enforcement? If officers frequently behave differently in encounters with black civilians, shouldn't one see a higher rate of killing per encounter?
Not necessarily. To see why, think of the encounter involving Henry Louis Gates and Officer James Crowley back in 2009. This was a safe encounter as defined above, but may not have happened in the first place had Gates been white. If the very high incidence of encounters between police and black men is due, in part, to encounters that ought not to have occurred at all, then a disproportionate share of these will be safe, and one ought to expect fewer killings per encounter in the absence of bias. Observing parity would then be suggestive of bias, and eliminating bias would surely result in fewer killings.
In justifying the termination of the officer in the video above, the director of the South Carolina Department of Public Safety stated that he "reacted to a perceived threat where there was none." Fear is a powerful motivator, and even when there are strong incentives not to shoot, it is still a preferable option to being shot. This is why stand-you-ground laws have resulted in an increased incidence of homicide, despite narrowing the very definition of homicide to exclude certain killings. It is also why homicide is so volatile across time and space, and why staggering racial disparities in both victimization and offending persist.
None of this should detract from the other points made in Sendhil's piece. There are indeed deep structural problems underlying the high rate of encounters, and these need urgent policy attention. But a careful reading of the data does not support the claim that "removing police racial bias will have little effect on the killing rate." On the contrary, I expect that improved screening and better training, coupled with body and dashboard cameras, will result in fewer officers reacting to a perceived threat when there is none.
Posted: 17 Oct 2015 12:06 AM PDT
Posted: 16 Oct 2015 11:15 AM PDT
This surprised me. I was under the impression that things are moving in the opposite direction:
Economics and the Modern Economic Historian, by Ran Abramitzky, NBER Working Paper No. 21636, October 2015: Abstract I reflect on the role of modern economic history in economics. I document a substantial increase in the percentage of papers devoted to economic history in the top-5 economic journals over the last few decades. I discuss how the study of the past has contributed to economics by providing ground to test economic theory, improve economic policy, understand economic mechanisms, and answer big economic questions. Recent graduates in economic history appear to have roughly similar prospects to those of other economists in the economics job market. I speculate how the increase in availability of high quality micro level historical data, the decline in costs of digitizing data, and the use of computationally intensive methods to convert large-scale qualitative information into quantitative data might transform economic history in the future.From the introduction to the paper:
... This sense that economists "believe history to be of small and diminishing interest" was made clear ... in 1976, when McCloskey wrote in defense of economic history a paper entitled "Does the past have useful economics?". McCloskey concluded that the average American economist answers "no". McCloskey showed a sharp decline in the publication of economic history papers in the top economic journals (AER, QJE, JPE). It was clear that "…this older generation of American economists did not persuade many of the younger that history is essential to economics." ...
Today, thirty years later, economic history is far from being marginalized and overlooked by economists. To be sure, economic history remains a small field within economics, but the average economist today would answer a "yes" to the question of whether the past has useful economics. Economists increasingly recognize that historical events shape current economic development, and that current modern economies were once upon a time developing and their experience might be relevant for current developing countries. Recent debates in the US and Europe about immigration policies renewed interest in historical migration episodes. Most notably, the Great Recession of 2007-08 reminded economists of the Great Depression and other historic financial crises. Macroeconomic historian Christina Romer, a Great Depression expert, became the chief advisor of president Obama.3 Indeed, Barry Eichengreen, himself an expert on financial crises in history, started his 2011 presidential address by saying that "this has been a good crisis for economic history."
Posted: 16 Oct 2015 09:51 AM PDT
Alan S. Blinder and Mark Zandi:
The Financial Crisis: Lessons for the Next One: The massive and multifaceted policy responses to the financial crisis and Great Recession -- ranging from traditional fiscal stimulus to tools that policymakers invented on the fly -- dramatically reduced the severity and length of the meltdown that began in 2008; its effects on jobs, unemployment, and budget deficits; and its lasting impact on today's economy.
October 17, 2015
Posted: 16 Oct 2015 01:08 AM PDT
Financial tycoons broke up with Democrats. Now they ♥ Republicans (or maybe they are just using them with their money):
Democrats, Republicans and Wall Street Tycoons, by Paul Krugman, Commentary, NY Times: Hillary Clinton and Bernie Sanders had an argument about financial regulation during Tuesday's debate — but it wasn't about whether to crack down on banks. Instead, it was about whose plan was tougher. The contrast with Republicans like Jeb Bush or Marco Rubio, who have pledged to reverse even the moderate financial reforms enacted in 2010, couldn't be stronger.
For what it's worth, Mrs. Clinton had the better case. ... But is Mrs. Clinton's promise to take a tough line on the financial industry credible? Or would she ... return to the finance-friendly, deregulatory policies of the 1990s? ...
To understand the politics of financial reform and regulation, we have to start by acknowledging that there was a time when Wall Street and Democrats got on just fine. Robert Rubin of Goldman Sachs became Bill Clinton's most influential economic official; big banks had plenty of political access; and the industry by and large got what it wanted, including repeal of Glass-Steagall.
This cozy relationship was reflected in campaign contributions, with the securities industry splitting its donations more or less evenly between the parties, and hedge funds actually leaning Democratic.
But then came the financial crisis of 2008, and everything changed.
Many liberals feel that the Obama administration was far too lenient on the financial industry in the aftermath of the crisis. ... But the financiers didn't feel grateful for getting off so lightly. ... Financial tycoons loom large among the tiny group of wealthy families that is dominating campaign finance this election cycle — a group that overwhelmingly supports Republicans. Hedge funds used to give the majority of their contributions to Democrats, but since 2010 they have flipped almost totally to the G.O.P. ... Wall Street insiders take Democratic pledges to crack down on bankers' excesses seriously. And it also means that a victorious Democrat wouldn't owe much to the financial industry.
If a Democrat does win, does it matter much which one it is? Probably not. Any Democrat is likely to retain the financial reforms of 2010, and seek to stiffen them where possible. But major new reforms will be blocked until and unless Democrats regain control of both houses of Congress, which isn't likely to happen for a long time.
In other words, while there are some differences in financial policy between Mrs. Clinton and Mr. Sanders, as a practical matter they're trivial compared with the yawning gulf with Republicans.
Posted: 16 Oct 2015 12:06 AM PDT
Posted: 15 Oct 2015 07:04 PM PDT
GDP growth is not exogenous: Ken Rogoff in the Financial Times argues that the world economy is suffering from a debt hangover rather than deficient demand. The argument and the evidence are partly there: financial crises tend to be more persistent. However, there is still an open question whether this is the fundamental reason why growth has been so anemic and whether other potential reasons (deficient demand, secular stagnation,…) matter as much or even more.
In the article, Rogoff dismisses calls for policies to stimulate demand as the wrong actions to deal with debt, the ultimate cause of the crisis. ... But there is a perspective that is missing in that logic. The ratio of debt or government spending to GDP depends on GDP and GDP growth cannot be considered as exogenous. ...
In a recent paper Olivier Blanchard, Eugenio Cerutti and Larry Summers show that persistence and long-term effects on GDP is a feature of any crisis, regardless of the cause. Even crises that were initiated by tight monetary policy leave permanent effects on trend GDP. Their paper concludes that under this scenario, monetary and fiscal policy need to be more aggressive given the permanent costs of recessions
Using the same logic, in an ongoing project with Larry Summers we have explored the extent to which fiscal policy consolidations can be responsible for the persistence and permanent effects on GDP during the Great Recession. Our empirical evidence very much supports this hypothesis: countries that implemented the largest fiscal consolidating have seen a large permanent decrease in GDP. [And this is true taking into account the possibility of reverse causality (i.e. governments that believed that the trend was falling the most could have applied stronger contractionary policy).
While we recognize that there is always uncertainty..., the size of the effects that we find are large enough so that they cannot be easily ignored... In fact, using our estimates we calibrate the model of a recent paper by Larry Summers and Brad DeLong to show that fiscal contractions in Europe were very likely self-defeating. In other words, the resulting (permanent) fall in GDP led to a increase in debt to GDP ratios as opposed to a decline, which was the original objective of the fiscal consolidation.
The evidence from both of these papers strongly suggests that policy advice cannot ignore this possibility, that crises and monetary and fiscal actions can have permanent effects on GDP. Once we look at the world through this lens what might sound like obvious and solid policy advice can end up producing the opposite outcome of what was desired.
Posted: 15 Oct 2015 10:26 AM PDT
Via David Dayen on Twitter:
Black Americans Would Have Been Better Off Renting Than Buying: ...white Americans with low net worth who bought during the boom years made out much better than black Americans who had the same timing and similar financial circumstances. Black families who bought in 2005 lost almost $20,000 of net worth by 2007, according to the paper. By 2011 those losses were more like $30,000. White homeowners didn't have quite the same problem. Those who purchased in 2007 saw their net worth grow by $18,000 in two years, and then those gains eroded, leaving them with an increase of $13,000 by 2011. All told, the black families lost, on average, 43 percent of their wealth.
That news is perhaps to be expected given the inequities that exists in the housing market, including the quality of financing people have access to and the prospects of the neighborhoods they are buying into. The researchers note that neighborhood location, predatory loan practices, and how long families were able to hold on to homes all likely played a role in how white and black families fared during the early aughts. ...
Posted: 15 Oct 2015 09:43 AM PDT
I've been arguing we need to take a more active approach to reducing market power for many years, without much traction, so it's always nice to see others joining in (it hasn't been enough, but the Obama administration has been better than the Bush administration on this front). This is from Barry Ritholtz:
Monopolies Don't Give Us Nice Things: ...There is little intelligent discussion about the costs of too much regulation on the one hand, and the excesses of capitalism on the other. That is a shame, because both sides of those issues create real economic frictions with substantial societal costs. ...
I would like to address ... how poor a job the U.S. does in regulating industries to which it grants monopoly or oligopoly status. ...
As a nation we do a very poor job of managing competition and adopting the needed standards to improve market efficiency. Television services are just one example. ...
It seems impossible, however, to have a serious conversation about this as long as rich companies buy off elected officials who grant special tax breaks, dispensations and exemptions. You can pretty much name any intractable problem in the U.S. and you can trace it back to the money corrupting the political process. ...
Posted: 15 Oct 2015 12:15 AM PDT
Fed Debates and the EMU Technocratic Illusion, Gloomy European Economist: ...I have read with lots of interest the speech that newly appointed Federal Reserve Board Member Lael Brainard gave last Monday. The speech is a plea for holding on rate rises, and uses a number of convincing arguments. Much has been said on the issue (give a look at comments by Tim Duy and Paul Krugman). I have little to add, were it not for the point I made a number of times, that the extraordinarily difficult task of central bankers would be made substantially easier if fiscal policy were used more actively.
What I'd like to express here is my jealousy for the discussions (and the confrontation) that we observe in the US. These discussions are a sideproduct, a very positive one if you ask me, of the institutional design of the Fed. I just returned from a series of engaging policy meetings on central bank policy in Costa Rica, facilitated by the local ILO office, where I pleaded for the introduction of a dual mandate.
I wrote a background paper (that can be seen here) in which my main argument is that a central bank following a dual mandate will always be able to take an aggressive stance on inflation, if it deems it necessary to do so. ... No choice of weights, on the other hand, would allow a central bank following an inflation targeting mandate to explicitly target employment as well. Thus, the dual mandate can embed inflation targeting strategies, while the converse is not true. In terms of policy effectiveness, therefore, the dual mandate is a superior institutional arrangement.
I also cited evidence showing, and here we come at my jealousy for the Fed, that inflation targeting central banks, like the ECB, de facto target the output gap, but timidly and without explicitly saying so. This leads to low reactivity and opaque communication, that hamper the capacity of central banks to manage expectations and effectively steer the economy. I am sure that those who followed the EMU policy debate in the past few years will know what I am talking about.
One may argue that the cacophony currently characterizing the Federal Reserve Board is hardly positive for the economy, and that in terms of managing expectations, lately, the Fed did not excel. This is undeniable, and is the result of the Fed groping its way out of unprecedented policy measures. The difference with the ECB is that for the Fed the opacity results from an ongoing debate on how to best attain an objective that is clear and shared. We are not there yet, but the debate will eventually lead to an unambiguous (and hopefully appropriate) policy choice. The ECB opacity, is intrinsically linked to the confusion between its mandate and its actual action, and as such it cannot lead to any meaningful discussion, but just to legalistic disputes on the definition of price stability, of how medium is the medium term and the like.
And I can now come to my final point: a dual mandate has the merit to let the political nature of monetary policy emerge without ambiguities. It is indeed true that monetary policy with a dual mandate requires hard choices, as the ones that are debated these days, and hence is political in nature. The point is, that so is monetary policy with a simple inflation targeting objective. The level of inflation targeted, and the choice of the instruments to attain it, are all but neutral in terms of their consequences on the economy, most notably on the distribution of resources among market participants. Thus, an inflation targeting central bank is as political in its actions as a bank following a dual mandate, the only difference being that in the former case the political nature of monetary policy is concealed behind a technocratic curtain. The deep justification of exclusive focus on price stability can only lie in the acceptance of a neoclassical platonic world in which powerless governments need to make no choice. Once we dismiss that platonic view, monetary policy acquires a political role, regardless of the mandate it is given. A dual mandate has the merit of making this choice explicit, and hence to dispel the technocratic illusion.
I am not saying there would be no issues with the adoption of a dual mandate. The institutional design should be carefully crafted, in order to ensure that independence is maintained, and accountability (currently very low indeed) is enhanced. What I am saying is that after seven years (and counting) of dismal economic performance, and faced with strong arguments in favor of a broader central bank mandate, EMU policy makers should be engaged in discussions at least as lively as the ones of their counterparts in Washington. And yet, all is quiet on this side of the ocean… Circulez y a rien à voir
Posted: 15 Oct 2015 12:06 AM PDT
Posted: 14 Oct 2015 12:13 PM PDT
In case this is something you want to discuss (if not, that's okay too -- I got tired of this debate long, long ago):
In Search of the Science in Economics, by Noah Smith: ...I'd like to discuss the idea that economics is only a social science, and should discard its mathematical pretensions and return to a more literary approach.
First, let's talk about the idea that when you put the word "social" in front of "science," everything changes. The idea here is that you can't discover hard-and-fast principles that govern human behavior, or the actions of societies, the way physicists derive laws of motion for particles or biologists identify the actions of the body's various systems. You hear people say this all the time.
But is it true? As far as I can tell, it's just an assertion, with little to back it up. No one has discovered a law of the universe that you can't discover patterns in human societies. Sure, it's going to be hard -- a human being is vastly more complicated than an electron. But there is no obvious reason why the task is hopeless.
To the contrary, there have already been a great many successes. ...
What about math? .... I do think economists would often benefit from closer observation of the real world. ... But that doesn't mean math needs to go. Math allows quantitative measurement and prediction, which literary treatises do not. ...
So yes, social science can be science. There will always be a place in the world for people who walk around penning long, literary tomes full of vague ideas about how humans and societies function. But thanks to quantitative social science, we now have additional tools at our disposal. Those tools have already improved our world, and to throw them away would be a big mistake.This is from a post of mine in August, 2009 on the use of mathematics in economics:
Lucas roundtable: Ask the right questions, by Mark Thoma: In his essay, Robert Lucas defends macroeconomics against the charge that it is "valueless, even harmful", and that the tools economists use are "spectacularly useless".
I agree that the analytical tools economists use are not the problem. We cannot fully understand how the economy works without employing models of some sort, and we cannot build coherent models without using analytic tools such as mathematics. Some of these tools are very complex, but there is nothing wrong with sophistication so long as sophistication itself does not become the main goal, and sophistication is not used as a barrier to entry into the theorist's club rather than an analytical device to understand the world.
But all the tools in the world are useless if we lack the imagination needed to build the right models. Models are built to answer specific questions. When a theorist builds a model, it is an attempt to highlight the features of the world the theorist believes are the most important for the question at hand. For example, a map is a model of the real world, and sometimes I want a road map to help me find my way to my destination, but other times I might need a map showing crop production, or a map showing underground pipes and electrical lines. It all depends on the question I want to answer. If we try to make one map that answers every possible question we could ever ask of maps, it would be so cluttered with detail it would be useless. So we necessarily abstract from real world detail in order to highlight the essential elements needed to answer the question we have posed. The same is true for macroeconomic models.
But we have to ask the right questions before we can build the right models.
The problem wasn't the tools that macroeconomists use, it was the questions that we asked. The major debates in macroeconomics had nothing to do with the possibility of bubbles causing a financial system meltdown. That's not to say that there weren't models here and there that touched upon these questions, but the main focus of macroeconomic research was elsewhere. ...
It wasn't the tools, and it wasn't lack of imagination. As Brad DeLong points out, the voices were there—he points to Michael Mussa for one—but those voices were not heard. Nobody listened even though some people did see it coming. So I am more inclined to cite the sociology within the profession or the concentration of power as the main factors that caused us to dismiss these voices. ...
I don't know for sure the extent to which the ability of a small number of people in the field to control the academic discourse led to a concentration of power that stood in the way of alternative lines of investigation, or the extent to which the ideology that markets prices always tend to move toward their long-run equilibrium values and that markets will self-insure, caused us to ignore voices that foresaw the developing bubble and coming crisis. But something caused most of us to ask the wrong questions, and to dismiss the people who got it right, and I think one of our first orders of business is to understand how and why that happened.
Posted: 14 Oct 2015 11:36 AM PDT
Paul Krugman notes the correlation between getting tough on the financial industry and the flow of campaign cash. Some people argue this money doesn't much matter in terms of influencing elections, but the people giving it -- the ones so lauded on the political right for their wisdom on business and financial matters -- sure seem to think it does:
The Waaaaah Street Factor: Following up on my point about how this is looking like a Dodd-Frank election: to understand what's going on this election cycle, you really need to know about the dramatic shift in Wall Street's political preferences.
There was a time when Wall Street was quite favorable to Democrats. ...
But that all changed in 2010, when Democrats actually pushed through a significant although far from adequate financial reform, and Barack Obama said the obvious, that some financial types had behaved badly and helped cause the crisis. The result was a great freakout — the coming of "Obama rage".
Wall Street doesn't like the regulations, which really do seem to have more or less eliminated the implicit too-big-to-fail subsidy. Beyond that, with great wealth comes great pettiness: financial tycoons are accustomed to constant deference, and they went berserk at even the mild criticism they faced.
You can see the result in the chart: a drastic shift of campaign giving away from Democrats toward Republicans. And this will have consequences: if a Republican wins, he or she will be very much in Wall Street's pocket. If a Democrat wins, not so much.
Posted: 14 Oct 2015 12:24 AM PDT
"Reuven Glick, group vice president at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of October 8, 2015":
FRBSF: The Current Economy and the Outlook: Real GDP jumped to 3.9% in the second quarter of 2015, well above first-quarter growth of 0.6%. Personal consumption expenditures, business investment, and residential investment all made positive contributions to growth. In the six years since the Great Recession ended, real GDP growth has averaged 2.2% at an annual rate, near the economy's long-term trend of 2%.
We expect the U.S. economy to slow modestly in the third quarter because of reduced inventory buildups and weaker net exports. Propelled by solid momentum in consumption spending, moderate growth around the economy's long-term trend should resume heading into 2016. Ongoing risks to the growth outlook include possible spillovers from economic slowdowns in China and other foreign markets and a further strengthening of the U.S. dollar.
Employment growth has slowed somewhat but remains consistent with an improving labor market. Payroll employment increased by 142,000 in September, and the number of jobs added for July and August combined was revised down by 59,000. Significant job losses were recorded in recent months for the industries most exposed to overseas conditions, the energy sector and manufacturing. Still, average gains over the past six months have been around 200,000.
The unemployment rate in August remained at 5.1%, which is very close to the 5.0% level that we judge to be the natural rate of unemployment. Other signs of progress include lower unemployment insurance claims and declines in broader measures of unemployment that include discouraged and marginally attached workers. However, some measures of labor market slack, such as the labor force participation rate and employment-to-population ratio, remain well below pre-recession levels. We expect that the ongoing pace of job creation, though slowing, will be sufficient to bring the economy temporarily below the natural rate in 2016.
Inflation, as measured by the change in the personal consumption expenditures (PCE) price index, was 0.3% in the 12 months through August. Very low overall inflation is largely attributable to lower prices of energy goods and services, which have fallen by over 16% in the past year. Excluding energy as well as the typically volatile food component of spending, core PCE rose 1.3% over the past 12 months. Inflation has remained below the Federal Open Market Committee's 2% target since mid-2012. Absent further declines in energy prices or a further strengthening of the U.S. dollar, we expect that stable inflation expectations and diminishing slack will push core and overall PCE inflation up gradually towards 2%.
The PCE is a composite of the price changes of different products and services. Food and energy account for roughly 11% of total consumer spending, while core goods (excluding food and energy) account for 23% of spending, and core services (excluding energy costs of housing) account for the remaining 66%.
In recent years, core services inflation has tended to be positive, except during the recession and the early recovery. Core goods inflation has tended to be negative, with brief exceptions around 2009–10 because of tobacco tax hikes and 2011–12 because of rising textile and apparel costs. In recent months both core goods and services inflation have slowed, that is, services inflation has been less positive and goods inflation has been more negative.
The decline in core goods inflation can be attributed to declining import costs associated with the appreciating value of the dollar as well as lower costs abroad. Because goods account for most international trade, movements in exchange rates and foreign prices tend to exert more pressure on goods prices than on service prices. Lower prices of imported consumption goods directly affect core goods inflation. They also affect goods prices indirectly through imports of raw materials, such as metals, plastic, and rubber, used in the U.S. production of goods for domestic consumers.
Core service inflation has been pulled down by more subdued increases in health-care service costs, which represent a quarter of core services spending and 19% of overall core spending. Health-care services inflation has been slowing for several years and fell off sharply in 2014, primarily from capping of increases in Medicare payments to physicians.
The impact of import, energy, and health-care costs on core inflation can be gauged by "what-if" exercises that remove these sectors from the calculation. Excluding relatively import-intensive (for example, apparel and other nondurables) and energy-intensive (for example, transportation) sectors would raise core inflation modestly, by around 0.2%. Removing health-care services spending from the calculations would raise core inflation by an additional 0.3%.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System. FedViews generally appears around the middle of the month.
Posted: 14 Oct 2015 12:06 AM PDT
Posted: 13 Oct 2015 02:37 PM PDT
This is a good example of the type of research that interests Angus Deaton (here, though, he is mostly describing the work of others, though his own work paved the way for this type of research):
Letter from America: It's a big country and how to measure it, RES Newsletter, October, 2014t: In this Letter from America, Angus describes recent efforts to record the significant differences in regional price levels across the USA. The task is technically complex and also raises political sensitivities.
Posted: 13 Oct 2015 10:03 AM PDT
Global Dovishness: Tim Duy points us to a striking speech by Lael Brainard, who recently joined the Fed Board of Governors, which takes a notably more dovish line than we've been hearing from Yellen and Fischer. Basically, Brainard comes down on the ... precautionary principle side of the debate, arguing that given uncertainty about the path of the natural rate of interest, and great asymmetry in the consequences of moving too soon versus too late, rate hikes should be put on hold until you see the whites of inflation's eyes.
Posted: 13 Oct 2015 10:02 AM PDT
One 'stimulus junkie' has already had a go at this FT piece by the chief economist of the German finance ministry ...
German officials need to be very careful before they claim that recent German macro performance justifies their anti-Keynesian views, because it might just prompt people to look at what has actually happened. Germany did undertake a stimulus package in 2009. But more importantly, in the years preceding that, it built up a huge competitive advantage by undercutting its Eurozone neighbors via low wage increases. This is little different in effect from beggar my neighbor devaluation. It is a demand stimulus, but (unlike fiscal stimulus) one that steals demand from other countries. This may or may not have been intended, but it should make German officials think twice before they laud their own performance to their Eurozone neighbors. If these neighbors start getting decent macro advice and some political courage, they might start replying that Germany's current prosperity is a result of theft. ...
Posted: 13 Oct 2015 12:24 AM PDT
Brainard Drops A Policy Bomb, by Tim Duy: What if a Federal Reserve Governor drops a policy bomb in the woods and no one is there to hear it? Did it really make a noise?
Posted: 13 Oct 2015 12:06 AM PDT
Posted: 12 Oct 2015 01:31 PM PDT
This Economic Letter from Vasco Cúrdia of the SF Fed finds that even though interest rates are very low, so is the natural rate of interest, and that implies that monetary policy is "relatively tight." "The model projections for the natural rate are consistent with the federal funds rate only gradually returning to normal over the next few years, although substantial uncertainty surrounds this forecast":
Why So Slow? A Gradual Return for Interest Rates: Short-term interest rates in the United States have been very low since the financial crisis. Projections of the natural rate of interest indicate that a gradual return of short-term interest rates to normal over the next five years is consistent with promoting maximum employment and stable inflation. Uncertainty about the natural rate that is most consistent with an economy at its full potential suggests that the pace of normalization may be even more gradual than implied by these projections.
To boost economic growth during the financial crisis, the Federal Reserve aggressively cut the target for its benchmark short-term interest rate, known as the federal funds rate, to near zero around the beginning of 2009. Since then the time projected for the rate to return to more normal historical levels has been continually postponed.
To understand the level of the federal funds rate and when it might be normalized it is useful to consider the concept of the natural rate of interest first proposed by Wicksell in 1898 and introduced into modern macroeconomic models by Woodford (2003). The natural rate of interest is the real, or inflation-adjusted, interest rate that is consistent with an economy at full employment and with stable inflation. If the real interest rate is above (below) the natural rate then monetary conditions are tight (loose) and are likely to lead to underutilization (overutilization) of resources and inflation below (above) its target.
This Economic Letter analyzes the recent behavior of the natural rate using an empirical macroeconomic model. The results suggest that the natural rate is currently very low by historical standards. Because of this, monetary conditions remain relatively tight despite the near-zero federal funds rate, which in turn is keeping economic activity below potential and inflation below target. The model projections for the natural rate are consistent with the federal funds rate only gradually returning to normal over the next few years, although substantial uncertainty surrounds this forecast. ...And the conclusion:
... This Letter suggests that the natural rate of interest is expected to remain below its long-run level for some time. This implies that low interest rates over the next few years are consistent with the most efficient use of resources and stable inflation. The analysis also finds that the output gap is expected to remain negative even after the natural rate is close to its long-run level. Additionally, there is considerable uncertainty about both the short-run dynamics as well as what level should be expected in the longer run. All these considerations reinforce the possibility that interest rate normalization will be very gradual.
Posted: 12 Oct 2015 10:38 AM PDT
Busy this morning. Here's the press release on the award of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2015 to Angus Deaton:
Consumption, great and small: To design economic policy that promotes welfare and reduces poverty, we must first understand individual consumption choices. More than anyone else, Angus Deaton has enhanced this understanding. By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics, and development economics.
The work for which Deaton is now being honored revolves around three central questions:
How do consumers distribute their spending among different goods? Answering this question is not only necessary for explaining and forecasting actual consumption patterns, but also crucial in evaluating how policy reforms, like changes in consumption taxes, affect the welfare of different groups. In his early work around 1980, Deaton developed the Almost Ideal Demand System – a flexible, yet simple, way of estimating how the demand for each good depends on the prices of all goods and on individual incomes. His approach and its later modifications are now standard tools, both in academia and in practical policy evaluation.
How much of society's income is spent and how much is saved? To explain capital formation and the magnitudes of business cycles, it is necessary to understand the interplay between income and consumption over time. In a few papers around 1990, Deaton showed that the prevailing consumption theory could not explain the actual relationships if the starting point was aggregate income and consumption. Instead, one should sum up how individuals adapt their own consumption to their individual income, which fluctuates in a very different way to aggregate income. This research clearly demonstrated why the analysis of individual data is key to untangling the patterns we see in aggregate data, an approach that has since become widely adopted in modern macroeconomics.
How do we best measure and analyze welfare and poverty? In his more recent research, Deaton highlights how reliable measures of individual household consumption levels can be used to discern mechanisms behind economic development. His research has uncovered important pitfalls when comparing the extent of poverty across time and place. It has also exemplified how the clever use of household data may shed light on such issues as the relationships between income and calorie intake, and the extent of gender discrimination within the family. Deaton's focus on household surveys has helped transform development economics from a theoretical field based on aggregate data to an empirical field based on detailed individual data.More here, here, here, here, and here.
Update: Here too.