Month: September 2015

Noted for Lunchtime on September 30, 2015

Posted on by Brad DeLong
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Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Torsten Slok: DB: Expect More Hawkish Fedspeak

Posted on by Brad DeLong

Must-Read: Remember, relative to Fed beliefs less than four years ago, we have already seen 75 basis points of tightening relative to the benchmark of the estimated natural rate:

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The more likely it is that we are in a régime of secular stagnation, the more important it is to take the 2%/year inflation target as an average rather than a ceiling, and the less-wise is the Federal Reserve’s expressed commitment to start raining interest rates come hell or high water. The markets appear to think–quite reasonably–that the Federal Reserve is gradually moving month-by-month toward a more reality-based Larry Summers-like view of the macroeconomic situation, and that when December comes around the current FOMC consensus for raising interest rates then will have sublimed away.

And if the market is wrong, the most likely reason for it to be wrong is if the Federal Reserve decides to be contrary and to stop its ongoing rethinking process, just to show that it can and that it is boss…

Torsten Slok: DB: Expect More Hawkish Fedspeak: “Before Yellen’s speech last week, the probability of a rate hike by the end of 2015 was 42%…

…Today it is 41%. The market continues to believe that the Fed will not hike rates later this year despite 13 out of 17 FOMC members expecting a hike in 2015. Why does the market not believe the Fed? One reason is likely that the Fed for several years now has been too optimistic… has had to revise down their forecasts of not only near-term growth but also longer-term growth prospects…. This one-way revision in forecasts over many years has probably had an impact on how market participants interpret Fed communication…. We continue to expect a rate hike in December and we continue to expect Fedspeak in the coming weeks will repeat their expectation of liftoff coming in 2015..

Must-Read: Sylvia Allegretto, Arindrajit Dube, Michael Reich and Ben Zipperer: Credible Research Designs for Minimum Wage Studies: A Response to Neumark, Salas and Wascher

Posted on by Brad DeLong

Must-Read: At this stage, Neumark, Salas, and Wascher’s are only hurting themselves–and hurting confidence not just in their minimum-wage work but their non-minimum wage work as well–by their refusal to acknowledge that the overwhelming weight of the evidence is that Card and Krueger were right: that increases in the minimum wage from levels currently present in the United States have at most very small disemployment effects.

Sylvia Allegretto, Arindrajit Dube, Michael Reich and Ben Zipperer: Credible Research Designs for Minimum Wage Studies: A Response to Neumark, Salas and Wascher: “We assess the Neumark, Salas and Wascher (NSW) critique of our minimum wage findings…

…Recent studies, including one by NSW, obtain small employment elasticities for restaurants, -0.06 or less in magnitude. The substantive critique in NSW thus centers primarily upon teens. Using a longer (1979-2014) sample than used by NSW and in our own previous work, we find clear evidence that teen minimum-wage employment elasticities from a two-way fixed-effects panel model are contaminated by negative pre-existing trends. Simply including state-specific linear trends produces small and statistically insignificant estimates (around -0.07); including division-period effects further reduces the estimated magnitudes toward zero. A LASSO-based selection procedure indicates these controls for time-varying heterogeneity are warranted. Including higher order state trends does not alter these findings, contrary to NSW. Consistent with bias in the fixed-effects estimates from time-varying heterogeneity, first-difference estimates are small or positive. Small, statistically insignificant, teen employment elasticities (around -0.06) obtain from border discontinuity design with contiguous counties. Contrary to NSW, such counties are more similar to each other than to other counties. Synthetic control studies also indicate small minimum wage elasticities (around -0.04). Nearby states receive significantly more weight in creating synthetic controls, providing further support for using regional controls. Finally, NSW’s preferred new matching estimates are plagued by a problematic sample that mixes treatment and control units, obtains poor matches, and shows the largest employment drops in areas with relative minimum wage declines.

Must-Read: Ed Kligore: The Brand: What You See Is What You Get

Posted on by Brad DeLong

Ed Kilgore: The Brand: What You See Is What You Get): “Ann Friedman has written a piece for TNR that will be of great interest to all of us who have had to grapple with the idea…

…of a personal ‘brand’… back in the day… called a ‘voice.’… Friedman shares with us the hilarious and sobering tale of her own wrestling match with ‘branding’…. Personally, I find it easier to remain ‘authentic’… by letting people absorb my unique characteristics organically, rather than spending time each day trying to figure out how to improve the lefty-cracker-Christian-bloviator-with-a-surprisingly-good-vocabulary brand…. We’re not entirely immune to the logic of ‘branding,’ but for the most part, what you see is what you get.

Must-Read: Mariana Mazzucato: Jeremy Corbyn’s Necessary Agenda

Posted on by Brad DeLong

Mariana Mazzucato: Jeremy Corbyn’s Necessary Agenda: “We must drop the false dichotomy of governments versus markets…

…and begin to think more clearly about the market outcomes we want. There is plenty to learn from public investments that were mission-oriented, instead of focused on ‘facilitating’ or ‘incentivizing’ business. Policy should actively shape and create markets, not just fix them when they go wrong. Indeed, policies traditionally considered ‘business friendly,’ such as tax credits and lower tax rates, can be bad for business in the long run if they limit governments’ future ability to invest in areas that increase innovation-led growth…. Moreover, we need more patient, long-term finance. Most existing finance is too speculative and too focused on short-term outcomes. Exit-driven venture capital might be appropriate for gadgets; but technological revolutions have historically required patient, committed public financing…. When the public sector takes key risks along the innovation chain… we should think more creatively about the kinds of contracts that enable the public to share not only the risks, but also some of the rewards. We must also shape a new narrative on debt. Rather than focus on budget deficits, we should concentrate on the denominator of debt-to-GDP ratios…

Must-Read: Scott Sumner: The Case for Tightening Is Getting Weaker and Weaker

Posted on by Brad DeLong
Graph 10 Year Breakeven Inflation Rate FRED St Louis Fed

Scott Sumner: The Case for Tightening Is Getting Weaker and Weaker: “The recent plunge in TIPS spreads is reaching frightening proportions…

…5 year = 1.09%. 10 year = 1.42%. 30 year = 1.61%. Yes, I know they can be distorted by illiquidity, but they are not THAT far off market expectations. And don’t forget they predict CPI inflation, which runs about 0.3% above the Fed’s preferred PCE. In essence, the Fed has a 2.3% inflation target. They aren’t likely to hit it. Also recall that since 2007 the Fed’s been consistently overly optimistic… markets have been more pessimistic, and more accurate. Also recall that Fed policy has a big impact on the global economy. Also recall that the global economy seems to be moving into a disinflationary cycle…. Given there is basically no upside from tightening now, the Fed’s got to ask itself one question: “Do I feel lucky today?”

Must-Read: Ben Thompson: What is Medium Doing?

Posted on by egdev

Must-Read: I had written, apropos of Medium: “I keep hoping that someone like Ben Thompson will write a dazzling piece on his daily newsletter to make everything clear to me.”

Lo and behold! Ben Thompson delivers!

What a strange new world, that has such people the ability to order up on whim a 2000-word essay from one of keenest of analysts exactly prepared to write on exactly the topic I am curious about in it!

Ben Thompson: What is Medium Doing?: “There are a huge number of publishers on the Internet….

…I believe [Medium’s] goal is to collate…. If the company can get the long tail to publish on their platform… a massive amount of really crappy posts… a not-insignificant number of really compelling pieces… from a theoretically endless supply of authors… if edited and curated properly… a very compelling stream of content…. Medium is suddenly a big publisher with an attractive proposition for advertisers….

That’s part one: the other part is… publisher of choice for the future John Grubers or Ben Thompsons… hosting, design, ad sales, subscription management… efficiently done at scale…. I do think this type of blogging has a bright future, but for now… [largely] inaccessible…. A platform that handles everything but the writing could make this path much more accessible…. It’s a vision I’m really excited about, particular the last segment….

That said, success is by no means assured…. [The] elephant in the room…. Facebook’s… redesign of its blog-like Notes tool… is now rolling out… [with] a design that will look familiar to anyone who has ever read a post on Medium…. The most potential readers are on Facebook. The most potential writers are on Facebook. Advertisers are on Facebook…. Facebook isn’t just the long tail, it’s the entire damn curve…. Notes is simply another piece of Facebook’s efforts to colonize the entire Social-Communication map. The company already mostly killed… blogging… because… most blog posts were little more than status updates, links, or photos. Notes is simply coming for the essays.

Must-Read: Ken Pomeranz: Review of Li Bozhang: Agricultural Development in Jiangnan

Posted on by Brad DeLong

Must-Read: The extremely-sharp Kenneth Pomeranz reviews Li Bozhang. It is another point for the coal-empire-metalworking view of the causes of the British Industrial Revolution, and against mentalité- or political institutions-based interpretations…

Ken Pomeranz:

Agricultural Development in Jiangnan, 1620-1850: “Chinese… economic history suffered badly during the 1960s and 1970s…

…In the generation that began rebuilding… probably the single most productive scholar has been Li Bozhong…. Yet only a fraction of Li’s massive scholarly output is available to those who do not read Chinese….

The economy of the Yangzi Delta (or Jiangnan)… the richest region in China… among the richest regions in the world from roughly 1000 until the mid-nineteenth century…. Li argues forcefully against two basic views of the Delta’s agriculture in the Ming (1368-1644) and Qing (1644-1912) periods: 1) the claims of some Chinese Marxist scholars that the Delta remained a subsistence-oriented “feudal” economy in which most peasants had very limited contact with the market until the nineteenth century; 2) the claim of some Western scholars that Malthusian pressures and very limited technological change produced a slow but steady trend of immiseration… from roughly 1250 (when the rate of technological progress seems to have slowed considerably) until at least the mid-nineteenth century…. In contrast to an older version of Chinese economic history… which saw an enormous spurt of technological change during the Song dynasty (960-1279), followed by stagnation or even regression thereafter…. Li argues that the combination of proto-industrialization and rising yields in agriculture (discussed above) propelled a significant improvement in per capita income and standard of living between 1550 and 1850… disagree[ing] with the still-regnant Chinese Marxist orthodoxy, which insists that China remained essentially a subsistence economy until the Opium War… [and] with American partisans of “involution,” who maintain that the late imperial period was characterized by miniscule gains in income achieved at the expense of very large increases in labor inputs….

Why [did not] the highly productive agriculture, commerce and handicrafts he describes… spawn something more like classical English industrialization[?]… He argues that institutional structure, surplus available for investment, and the educational level of the workforce were all quite adequate, and that there was widespread interest in productivity-enhancing technological change…. [He] finds his answers in geography and the supply of natural resources. In particular, he emphasizes a dearth of energy sources that he says gave Jiangnan production a marked bias away from anything energy-intensive, creating what he calls “a super light industrial” economy… few trees… not very many large work animals… no coal or peat, and, being at sea level, relatively little water power. Conditions were even unfavorable for the large-scale use of wind…. Thus, Jiangnan did what it was best at: sustaining a very productive agriculture (especially in rice: cotton yields do not seem to have been outstanding), mobilizing the large numbers of people it could feed to produce handicrafts, and taking advantage of its location at the mouth of a river system draining roughly a third of China, plus the coastline and the one thousand mile Grand Canal…

Here’s how high levels of household debt affect economic growth

Posted on by Bridget Ansel

The Great Recession and its aftermath sparked a lot of rethinking about economics and economic policy. One recurring theme in this rethinking is the danger of debt.

In “This Time Is Different,” a recent book that explores financial crises throughout history, Harvard University economists Carmen Reinhart and Ken Rogoff show how run-ups in debt are key to setting up crises. But what kind of debt should set off alarms for economists and policymakers? A new working paper by economists Atif Mian and Emil Verner of Princeton University and Amir Sufi of the University of Chicago points to household debt as a source of instability and lower economic growth.

The working paper looks at the relationship between household debt and economic growth in 30 countries from 1960 to 2012. Earlier research found that recessions driven by household debt—particularly mortgage debt—are particularly nasty. But Mian, Sufi, and Verner push this research a bit further to find that high levels of household debt, measured as the ratio of household debt to gross domestic product, predict lower economic growth.

The three economists can’t say exactly why household debt has a negative effect on growth and stability. Instead they point out that their results are consistent with models of the economy where the supply of credit expands, lenders are more likely to lend, or a decline in risk allows households to take out more loans to finance consumption.

The dynamics of how household debt affects economic growth are quite interesting. Higher debt results in more consumption by households and a larger share of economic output coming from consumption. At the same time, this results in the country running a larger current account deficit with the rest of the world as imports increase, with consumption goods making up a larger share of those imports. Once the economy enters a recession, however, imports fall dramatically and the country starts to export more than it imports. This mechanism allows the country that ran up debt to bounce back by selling goods to the global economy.

But that mechanism only works if the rest of the global economy is doing well and other countries didn’t also see an increase in the household debt. If the entire global economy has more household debt, then individual countries will have nowhere to export their goods when growth stalls. Mian, Sufi, and Verner find that an increase in global household debt is also predictive of lower economic growth for individual countries, and that countries particularly dependent on trade are affected even more by this global buildup.

A lot of these dynamics sound a lot like what happened during the 2000s in the run up to the Great Recession of 2007-2009, so it’s plausible that the general results are artifacts of what happened over the past 15 years and are not symptomatic of a more systemic issue. But when Mian, Sufi, and Verner look at the data before 2000, they find very similar results. And using those results, they can show that the run-up in household debt during the 2000s indicated a recession of the size and severity of the Great Recession.

These results seem almost obvious given what’s happened over the past decade, but the idea that household debt is bad for economic growth runs counter to quite a few economic models. Mian, Sufi, and Verner show that both the International Monetary Fund and the Organisation for Economic Co-Operation and Development have consistently been overly optimistic about economic growth because they have seen increasing household debt as a positive for economic growth. The evidence now points to just the opposite.

These results are important not for shaming certain institutions, but rather to show how important it is to consider the role of household debt in economic stability and growth.