Month: July 2015

Must-Read: Noah Smith: Growth Fantasy of Tax Cuts and Small Government: “Jeb Bush says that if he’s elected president he wants to get us to sustained gross domestic product growth of 4 percent a year…

…I’m highly skeptical, and I’m far from the only one. But there are some true believers… John Cochrane, for example, has a long list of structural reforms that he thinks will do the trick. Now some of these are probably good ideas, and some are probably bad. But… belief that we can reform our way to sustained higher growth… boils down to faith and hope. There are many cases where that faith and hope has turned out not to be justified. For example, there is the case of the… American Legislative Exchange Council, a think tank comprised of state senators and representatives from a number of large corporations… Arthur Laffer…. Every year, ALEC produces a report called ‘Rich States, Poor States,’ in which it ranks states according to how business-friendly their policies are…. Alec lists 15 factors that it claims boost state growth rates. These boil down to low taxes, low levels of government spending and light regulation… the ideas John Cochrane describes, and that pro-free-market economists have been promising us will boost growth since time immemorial…. Shrink the state, cut taxes and the economy will grow.

But do the policies work? Empirical evidence suggests that they don’t deliver. Menzie Chinn… found… ALEC rankings didn’t predict a state’s growth within one year, three years or six years…. Supposedly pro-business policies, of the type constantly urged on us by conservative think tanks and rightward-leaning economists, are just not that effective in generating growth…. Don’t believe that Jeb Bush can deliver on his 4 percent growth promise simply by lowering taxes and easing regulation. As for the more radical steps John Cochrane suggests… many of these radical free-market policies would deliver a lot of economic and social disruption for very little actual growth.

Must-Read: Paul Krugman: Fire Phasers: “Jeb Bush doesn’t just want Americans to work more hours; he also wants to ‘phase out’ Medicare….

…Fact-checking organizations please note, by the way. The next time Democrats say that Republicans want to destroy Medicare, and Republicans start screaming that this is a lie, remember that when talking to their own people like Jeb themselves call what they’re proposing a plan to, yes, end Medicare…. The original idea… was that Medicare… a single-payer system of government insurance… could not act to control costs…. There was much sneering and scoffing at the… Affordable Care Ac[‘s] cost-saving measures…. But we’re now five years into… a spectacular slowdown in the growth of health costs, with the historical upward trend in Medicare costs…. How much credit should go to the ACA? Nobody really knows. But… the case that universal health insurance is affordable has never looked better. It’s amazing, isn’t it? Who could have imagined that conservatives would keep proposing the exact same policy despite strong evidence that they were wrong about the facts? Oh, wait.

Must-Read: Richard Fisher became President of the Federal Reserve Bank of Dallas in April 2005. He spent ten years as a regional bank President. I cannot think of a single case in which he was pulling the Federal Reserve Open Market Committee toward a more correct assessment of the current economic situation and of the major risks to it. And I cannot think of an episode in which, after events had proved his views of major risks erroneous, he ever marked his beliefs to market in any substantive ways.

Surely that is worth mentioning at least once in an article about the Dallas Fed? Can anybody make a case to me that Wall Street Journal reporter Michael Derby’s failure to even whisper this in his article is any way professional?

Michael Derby: Dallas Fed Struggles to Fill Fisher’s Big Shoes: “The Federal Reserve Bank of Dallas is taking its time picking a new president….

…Former president Richard Fisher stepped down March 19…. His exit was long anticipated…. ‘It’s beyond bizarre’ a new president hasn’t been named yet, said Danielle DiMartino Booth, who served as a close adviser to Mr. Fisher when they were both at the bank…. ‘Richard Fisher rose to the status of being a deity in Texas,’ Ms. Booth said. ‘People associate the success of the state’ with him, and it is ‘very difficult’ to find a new leader who can maintain that sort of profile, she said….

He was known for a brash public style as president. He made his case against the Fed’s easy money policies in speeches invoking high and pop culture, warning repeatedly about frothy financial markets and arguing in vain for higher interest rates. His predecessor Robert McTeer, operating under the nickname of the ‘Lonesome Dove,’ was known for opposing rate rises—sometimes via haiku. The Dallas Fed has ‘a tradition of having an outspoken leader,’ said Ethan Harris, chief economist at Bank of American Merrill Lynch. Those with knowledge of the process say the Dallas Fed is seeking a replacement who will carry on that tradition….

Some critics from labor unions and local community groups say they are disappointed by the lack of openness…. Not all think the bright light of transparency is a cure all. Lou Crandall, chief economist for Wrightson ICAP, said wanting to know more about the process is a ‘fair point.’ But he warned ‘you don’t want a lot of public jockeying over this.’

Must-Read: The process of creating a market–especially as delicate and complicated a market as a market for debt and equity investments in relatively large-scale enterprises–is not a straightforward process. Here Venture and Voth argue that the spillovers from the creation of the “technology” of a debt marketplace were enormous, as only after the government had dug the channels through which debt would flow for its own war-fighting purposes could first canal companies, then manufacturing companies, and then railroad companies take advantage of them.

Jaume Ventura and Hans-Joachim Voth: Debt miracle: Why the country that borrowed the most industrialised first: “Is debt really that bad?…

…This column looks at the towering debts, rapid tax hikes, and constant state of war that led to Britain’s Industrial Revolution, showing that the devil is in the detail when assessing sovereign debt…. Towering debts, rapidly rising taxes, constant and expensive wars, a debt burden surpassing 200% of GDP. What are the chances that a country with such characteristics would grow rapidly? Almost anyone would probably say ‘none’. And yet, these are exactly the conditions under which the Industrial Revolution took place in Britain….

Until now, scholars mostly thought of the effect of government borrowing on growth as either neutral or negative. One prominent view held that investment in private industry would have been higher had Britain fought and borrowed less (Williamson 1984). Another argument is that private savings decisions undid the potentially negative effects of massive borrowing – because debt eventually has to be repaid, private agents anticipated rising taxes in the future and neutralised the effects of debt accumulation (Barro 1990)…. We argue that Britain’s borrowing binge was actually good for growth (Ventura and Voth 2015)…. Financial intermediation was woefully inadequate–it failed to send the money where it should have gone. As one prominent historian of the British Industrial Revolution argued:

the reservoirs of savings were full enough, but conduits to connect them with the wheels of industry were few and meagre … surprisingly little of [Britain’s] wealth found its way into the new industrial enterprises …. (Postan 1935).

Without effective intermediation, new sectors had to self-finance…. [But] by issuing bonds on a massive scale, the government effectively pioneered a way… to put money in the pockets of entrepreneurs…. Government debt issuance ‘healed’ the negative consequences of financial frictions…. These efficiency-enhancing effects of government debt may be all the more important in developing countries. There, the added benefits of debt that we did not discuss–such as providing a safe store of value, and a certain source of liquidity (Holmstrom and Tirole 1998)–may tilt the overall scoresheet even more in favour of government borrowing…

Must-Read: Really, really bad news for the American economy. Alan Krueger concludes that we are now near “full employment” in a monetary policy-Federal Reserve-inflation sense. The implications? The implications are:

1. that the failure of the government and the Federal Reserve to more aggressively boost recovery has turned what was excess cyclical non-employment into structural non-employment,
2. that essentially none of the drop in production relative to the pre-2008 trend can or will be recouped without noticeably higher inflation.

Alan Krueger: Labor Force Participation:

Via Mark Thoma.

• http://www.irs.princeton.edu/announcements/alan-krueger-delivered-martin-feldstein-lecture-national-bureau-economic-research-0
• https://irs.princeton.edu/media/610

Must-Read: Steven Greenhouse: Jeb Bush ‘Should Be Embarrassed’ by His Overtime Pay Claims: “Jeb Bush… said Barack Obama’s proposal to expand overtime pay…

…would result in “less overtime pay” and “less wages earned”…. Daniel Hamermesh, a University of Texas labor economist, said: “He’s just 100% wrong,” adding that “there will be more overtime pay and more total earnings” and “there’s a huge amount of evidence employers will use more workers”…. Indeed, a Goldman Sachs study estimated that employers would hire 120,000 more workers in response to Obama’s overtime changes. And a similar study commissioned by the National Retail Federation–a fierce opponent of the proposed overtime rules–estimated that as a result of the new salary threshold, employers in the restaurant and retail industries would hire 117,500 new part-time workers… cost the increased US retail and restaurant industries $9.5bn a year, unless those industries made money-saving changes in response…. Jared Bernstein, former chief economist for vice-president Joe Biden and a senior economist with the liberal Center for Budget and Policy Priorities, said… “If employers want to avoid overtime pay, they hire more workers on straight time and that creates new jobs,” Bernstein said. “Even staunch opponents agree with that and disagree with Mr Bush.”…

Ross Eisenbrey, a vice-president of the Economic Policy Institute, a left-of-center research group, said: “Bush should be embarrassed about how misinformed he was.” Eisenbrey said the proposed rules do nothing whatsoever to bar employers from paying bonuses…. Michael Strain, a labor economist at the right-of-center American Enterprise Institute, sympathized with Bush’s sentiments on the overtime rule. “In general what he seems to be saying is that this will place restrictions on firms, how they operate and how they structure their compensation packages,” he said. “In some cases the impact will be positive, and in some cases, negative”…

Worth Attending If in Town: Bernie Sanders: Conference on the Greek Debt Crisis: Rm 902 Hart Senate Office Building. 2:30 PM, Thursday July 30th…

…Participants: U.S. Sen. Bernie Sanders. Joseph Stiglitz, Senior fellow and chief economist at Roosevelt Institute. James Galbraith, University of Texas. Jacob Funk Kirkegaard, Peterson Institute for International Economics. Stephanie Kelton, University of Missouri – Kansas City

Must-Read: Paul Krugman: The Euroskeptic Vindication: “Conventional Hicks/Keynes macroeconomics–whether or not you dress it up in New Keynesian algebra–has performed very well…

…Anti-Keynesians keep making more or less desperate efforts to refute this proposition, usually by taking something I said out of context and pretending that something that happened for one year somewhere or other is contrary to what the Evil One claimed. But the overall shape of events has been very Keynesian, and very much at odds with alternative stories.

And at this point I think we need to chalk up another success…. American economists warned about exactly the flaws in the euro that are now the source of so much suffering. Beckworth reminds us of a January 2010 article by Jonung and Drea that has become an accidental classic…. They provided an impressive bibliography and literature review of academic euroskepticism–and in so doing provided us with a sort of honor roll, because all the dire warnings from those ugly Americans came to pass within months of their article’s publication.

So why were the ugly Americans right? Because the theory of optimum currency areas turns out to be basically right. And that theory is best seen, I’d argue, as an application of the same Hicks/Keynes style of analysis that has worked so well on interest, inflation, and austerity. All in all, the past 7 years have been a very good time for old-fashioned macroeconomics. But of course nothing will make the Germans, or the U.S. right, concede that Keynesian ideas have worked.

Must-Read: I had always thought that we had a mixed economy and the social safety net in large part to counter and correct the market’s judgment as to who deserved to have resources used for their benefit. And I had always thought that this was an obvious and well-understood part of benefit-cost analysis. Have I in fact been wrong? Is this not well-understood? Do the younger economists–the kids these days!–Really think that the rights function for assessing societal well-being roughly multiplies each person’s utility by their individual income?

Harold Pollack, Bill Gardner, and Timothy Jost: Valuing Medicaid: “Finkelstein and her colleagues placed a very low value…

…$25,000–on a year of additional life for Medicaid beneficiaries. The typical threshold used in health services research is much larger, in recent studies far above $100,000….This assumption powerfully frames… analysis…. If you start out by assuming that Medicaid beneficiaries’ lives are worth very little, you will find that it is not worth spending much money to prolong them. These authors… defined this threshold based on reasonable assumptions about what low-income recipients themselves would have been willing to pay, had they been spending their own money for their Medicaid benefits. Poor people aren’t willing to spend as much as rich people…. Had these authors valued the health of poor patients as highly as health services researchers typically value the health of the average patient, their results would have been quite different…. Although Finkelstein, Hendren, and Luttmer’s baseline assumptions are methodologically defensible, they have radical implications that are rarely so bluntly applied in other domains of health-policy research. Choices about how to financially value the health of poor people relative to the health of others are inevitably both politically and morally freighted. It strains credulity, for example, to imagine American policymakers using this low a value for life when analyzing mammography, prostate cancer treatment, or implantable cardiac defibrillators for seniors…