Month: February 2014

Yes, there were grave failures of macroeconomic analysis, failures of surveillance, failures of organization, and failures of imagination at the Federal Reserve from 2003-2008. But once–*after* they had let Lehman Brothers go into its uncontrolled bankruptcy–those worrying about inflation and moral hazard on the FOMC got quiet and Ben Bernanke got out the financial crisis Bagehot-Minsky-Kindleberger playbook, what followed in dealing with the crisis was not a failure of economic analysis: it was not the case–then, after Lehman–that macroeconomists, reality-based macroeconomists at least, were like French generals in 1940 (or, for that matter, French generals in 1914, or French generals in 1870).

What was an enormous post-September 2008 failure was a complete failure of the policymakers and the public sphere to grapple with a persistently depressed economy in which monetary policy was constrained by the zero lower bound and hysteresis threatened–reality-based ex-Keynesian and ex-monetarist economies willing to mark their beliefs to market understood what was and is going on rather well…

Paul Krugman: Fighting the Last Macro War?: “Noah Smith… argues that macroeconomic theorists have been like French generals…

Always preparing to fight the last war–in the 80s they were working on finding solutions for the problems of the 70s, in the 90s they were working on the problems of the 80s, and so on….

Continue reading “Fighting the Last Macro War?: Friday Focus: February 28, 2014” →

Must-Reads:

1. Yuriy Gorodnichenko and Gerard Roland: Ukraine: Emergency Economic Measures: “It is only a few days after the successful February revolution and the country is still in a state of flux. Nevertheless, a new government is needed to deal with emergency economic measures: The country is days away from facing a $2bln payment to international bondholders. The provisional Ukrainian government does not have the necessary legitimacy to make all the changes demanded by the Maidan protesters…”

2. Binyamin Applebaum: The Curse of Unanimity: “The transcripts that the Federal Reserve released… of… 2008… record in painful detail the ignorance of its officials…. What the transcripts do not explain is why the Fed failed at one of its most basic tasks…. The Fed discounted good data, failed to build better models… persisted in its mistaken assumptions… [even though] other people were able to see the cliff…. Fed officials strongly prefer to agree with each other. They are not satisfied with making decisions by a majority vote. They prefer to act unanimously. Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said in a speech Thursday that this esprit de corps has been a great strength…”

Continue reading “Things to Read on the Evening of February 28, 2014” →

Yuriy Gorodnichenko and Gerard Roland: Ukraine: Emergency Economic Measures: “It is only a few days after the successful February revolution and the country is still in a state of flux.

Nevertheless, a new government is needed to deal with emergency economic measures:

• The country is days away from facing a $2bln payment to international bondholders.
• The provisional Ukrainian government does not have the necessary legitimacy to make all the changes demanded by the Maidan protesters.

Continue reading “Evening Must Read: Yuriy Gorodnichenko and Gerard Roland: Ukraine: Emergency Economic Measures” →

Over at Project Syndicate: Revisiting the Fed’s Crisis: It has been busy days: reading through the transcripts from the 2008 Federal Reserve Open Market Committee meetings in the interstices between pieces of the day job. As I read, I find myself asking the same overarching question: how did the FOMC get into the mindset that it had in 2008?

Continue reading “Reading the Federal Reserve’s 2008 Meeting Transcripts” →

Ezra Klein: The Real Reason Nobody Reads Academic: “The good news is the chasm is closing.

Academics have increasingly turned to the blogosphere, opening a window on academic conversations that were formerly out of view. In political science, for instance, the Monkey Cage is a minor miracle. In economics, Mark Thoma at the Economist’s View is tireless in tracking discussion across the profession. Still, it would be better if academics didn’t have to blog, or know a blogger, to get their work in front of interested audiences. That would require a new model for disseminating academic work — one that gets beyond the samizdat system used for working papers on the one hand, and the rigid journal publication system on the other. If academia was easier to keep up with, I think a lot of academics would be surprised to learn how many journalists care about their work, and I think a lot of journalists would be happy to find how much academic research can do for their stories.

That is what the CBO’s revisions of its potential output forecasts since 2007 tell us:

Nothing on the supply side has happened to make the long-run outlook worse. And yet it is, much, much, much worse than it was only seven short years ago.

Figuring out how to calculate a present-value equivalent of the long-run growth path of the U.S. economy poses many conceptual puzzles, of which one is that the interest rate at which the U.S. government can borrow appears to be less than the growth rate of the economy, so however far out you look it always looks as if the bulk of the present value today of wealth still lies in the future.

Still, if you want to make the (unjustified) assumption that the right discount rate to use is the 5% real rate of the average stock market earnings yield, the present and future productive wealth of the United States today is then worth $335 trillion–and we have lost $27 trillion in the future and $8 trillion in the past as a result of the Lesser Depression.

And a lower rate-of-discount produces larger numbers…

Cf: CBO Economic Growth Is Projected to Be Solid in the Near Term, but Weakness in the Labor Market Will Probably Persist

Binyamin Applebaum: The Curse of Unanimity: “The transcripts that the Federal Reserve released… of… 2008… record in painful detail the ignorance of its officials….

What the transcripts do not explain is why the Fed failed at one of its most basic tasks…. The Fed discounted good data, failed to build better models… persisted in its mistaken assumptions… [even though] other people were able to see the cliff…. Fed officials strongly prefer to agree with each other. They are not satisfied with making decisions by a majority vote. They prefer to act unanimously. Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said in a speech Thursday that this esprit de corps has been a great strength…

Evan Soltas kicked off a debate:

Evan Soltas: Is the U.S. Better Off Without Unions?: “Three decades ago… Richard B. Freeman and James Medoff published… What Do Unions Do?

If they wrote it today, they would have to call it What Did Unions Do? Unions are dying… from about 35 percent in the 1950s to 6.7 percent in 2013…. Unions have been undermined by a combination of worker hostility and the rising power of capital over labor. Their demise raises a question: Is the U.S. better off without them?

Freeman and Medoff’s conclusion still stands. Unions have two roles to play in the American economy: They balance power between employers and workers, and they provide a voice for workers that management can hear. Freeman and Medoff thought the first role was important but not entirely positive, and they’re right…. But that’s not the union’s only job… their role as a worker voice… is unambiguously good. Whether to mourn unions depends on whether you believe the good outweighs the bad. Wherever you land on that question, though, the U.S. must find ways to replace what good unions did. It must restore power to labor in a world without Labor.

And that couldn’t be much more urgent. Workers’ share of income, which until recently had been so stable that fundamental economic models are premised on its stability, is plummeting…

The online debate continues:

• Evan Soltas
• Michael Hiltzik
• Michael Wasser
• Evan Soltas: “Why unions can’t be saved…”
• Kevin Drum
• Jeff Spross: “So @esoltas wants to replace unions w/ policies only passable w/ the political muscle unions historically provided…
• Timothy Noah on Twitter)
• Daniel Altman
• Matt Bruenig

Continue reading “Debate: Is There a Substitute for Unions in Achieving Equitable Growth? And Can Unions Be Saved?” →

Philadelphia Federal Reserve President Charles Plosser, February 11, 2014:

Charles Plosser: :

The economy is on firmer footing than it has been for the past several years. So let’s look at some of the details of how last year ended and the implications for the coming year. Real output grew at a 3.2 percent annual pace in the fourth quarter of last year, following a 4.1 percent growth rate in the third quarter. That means economic growth doubled in the second half of 2013 compared with the first half…

But it was clear on February 11 that that 3.2 percent annual pace was being revised downward–and indeed it was today, to 2.4%/year. And it was clear on February 11 that the best estimate of the first-quarter number was around 1.6%/year.

The best estimate we had of the current pace of growth of the U.S. economy on February 11 was the same as our best estimate now: that the U.S. economy is growing at a 2.0%/year averaging the current and the just-past quarter, 2.7%/year averaging three quarters, 2.6%/year averaging four quarters, and 2.4%/year averaging five, 2.1%/year averaging six.

There is no way calling people’s attention to the 3.7%/year growth average of late 2013 was, on February 11, the right thing to do…

Must-Reads:

1. Jon Hilsenrath: Geithner Among Fed Losers in 2008, Dudley Among Winners: “The story on Chairman Ben Bernanke has been written many times: He was slow to respond… but moved with command and authority… once he recognized what was at stake…. How about everyone else?…. WINNERS: William Dudley…. He got it…. Eric Rosengren: At almost every point in the crisis, he put his fingers on real problems…. Janet Yellen: We’ve already reported that transcripts from 2008 and earlier Fed policy meetings showed Ms. Yellen had pretty good judgment about risks brewing in housing, the financial markets and the broader economy…. LOSERS: New York Fed President Timothy Geithner…. Fed Vice Chairman Donald Kohn felt the need to gently push back in that case in January: ‘The repair process that President Geithner referenced among financial institutions strikes me as very fragile and quite incomplete’. Bear Stearns collapsed several weeks later…. Frederic Mishkin… produced a regular stream of cringe-inducing personal commentary…. Mr. Mishkin deserves some credit for usually being alert to the risks…. Thomas Hoenig… and Richard Fisher: It turns out they were focused on the wrong problem for much of 2008. While they worried about inflation, the foundations of the financial system and the broader economy were cracking…. Others in the hawk camp were Dallas Fed President Richard Fisher, Philadelphia Fed president Charles Plosser and Richmond Fed President Jeffrey Lacker.”

2. Over at the Washington Center for Equitable Growth: My excerpts of Matthew O’Brien: How the Fed Let the World Blow Up in 2008: “It was the day after Lehman failed, and the Federal Reserve was trying to decide what to do…. The Fed was blinded. It had been all summer. That’s when high oil prices started distracting it from the slow-burning financial crisis. They kept distracting it in September, even though oil had fallen far below its July highs. And they’re the reason that the Fed decided to do nothing on September 16th… and said that “the downside risks to growth and the upside risks to inflation are both significant concerns.” In other words, the Fed was just as worried about an inflation scare that was already passing as it was about a once-in-three-generations crisis…. The world changed on August 9, 2007. That’s when French bank BNP Paribas announced that it wouldn’t let investors withdraw money…. You can see this credit crunch in the chart… [that] shows the TED spread… during a financial crisis, it blows up: banks charge each other punitively high interest rates, and pile into government bonds they know are safe…. We might [have] muddle[d] through with something like the 1990 recession…. This is the three-chapter story of why that didn’t happen, the story of the three Fed meetings that took place during the summer of 2008…”

3. Austin Frakt: Obamacare’s labor market tax relief: “In addition to the new taxes it imposes, Obamacare includes the relief of a significant labor market tax. Surprised?… [P]rior to January 1, 2014… [people with] job[s] with employer-sponsored health insurance… enjoyed (1) tax-free health benefits (the big ESI tax subsidy), (2) guaranteed issue (the group plan had to take you, pre-existing conditions and all), and (3) community rating… the “Big Three”…. [But] individual market insurers in many states could deny you coverage or charge you more based on your health…. The labor market was clearly tilted by an explicit tax provision (the ESI tax subsidy) and two implicit ones (the existence of guaranteed issue/community rating in some labor market circumstances but not others)…. [This is a] labor market tax, albeit a complicated one…. Relative to those with an ESI option, those without were taxed: (i) Retired early to spend more time with grandkids or to care for a sick spouse? Taxed. (ii) Took a job with a small, non-profit that didn’t offer coverage? Taxed. (iii) Left the big firm to start your own business? Taxed. (iv) Laid off and exhausted COBRA benefits? Taxed. (v) Company went bankrupt and you couldn’t immediately find a new job with ESI benefits? Taxed. (vi) Fresh out of school but couldn’t find work with ESI benefits. Taxed. You get the idea…. Now, let’s consider some objections, some of which came up in emails to me: When considering ACA taxes, you can’t fold in stuff that isn’t in the ACA, like the ESI tax subsidy or that ESI is guaranteed issue/community rated? This makes zero sense. If we take this objection seriously, then we can’t compare the post-ACA world to the counterfactual, pre-ACA one at all. The point isn’t that ESI features existed pre-ACA. The point is that the difference between what a potential or actual labor market participant faces across options pre- and post-ACA has changed. Some tax has been removed (per the above) as some have been added. You can’t just focus on the added taxes and not consider that which was removed. That’s cherry picking and incomplete.”

4. Matthew O’Brien: Happy Birthday, Stimulus! You Saved the World: “It really was the end of the world…. 2008 Lehman’s collapse seemed like the start of something worse than a second Great Depression… the biggest economic shock in recorded history, and the abyss beckoned. But we avoided it. We ‘only’ got a Great Recession…. That’s because, despite the quicker collapse, policymakers today didn’t make all of the mistakes of the 1930s. Instead of raising rates and trying to balance budgets as the bottom fell out, they did the opposite—at least initially. In early 2009 China launched a relatively massive $585 billion infrastructure program. The Fed started printing money and buying bonds à l’outrance. And then there was the stimulus…. $787 billion stimulus was too small for the job, and even smaller than it sounded. A full $70 billion… [wa fixing the Alternative Minimum Tax. That left far too little money to fill the economy’s hole—a hole that was far deeper than we realized at the time. Indeed, when the administration said the Recovery Act would keep unemployment below 8 percent, it thought GDP was falling 3.8 percent; subsequent revisions showed it was actually falling 8.9 percent. But even if so much of the stimulus hadn’t gone to non-stimulus, and even if we’d known exactly how bad the economy was, there was one last problem. The administration assumed this time wasn’t different. That the economy would bounce back on its own—and soon. But it didn’t, and they should have known that it wouldn’t.”

Continue reading “Things to Read on the Morning of February 28, 2014” →