The Prime-Age Men Missing from the Labor Force…

Two comments:

First, on non-participation of prime-age males:

  • We lost 22% of 55-64 male labor force participation 1958-1995…
  • Since 1995 we have gained 4% in 55-64 male labor force participation…
  • We were losing 1.2%-points of 25-54 prime-age male employment and labor force participation every decade….
  • Then we lost 7%-points of prime-age male employment in two years…
  • Now, seven years into the recovery, nearly a decade later we have gotten back to normal as far as the unemployment rate is concerned, but we are still 1.8%-points low of trend as far as prime-age male employment and participation is concerned…
  • We have crowded a generation’s worth of this shedding prime-age male participation process into a decade…
  • Is not the natural reading that the labor market shock of 2008-9 made a lot of people permanently sick, disabled, depressed, disconnected?
  • If not the psychological and sociological consequences of the Great Recession and Elusive Recovery, what else could have caused the speed-up of this process?
  • If anyone has an alternative candidate for the speedup, I would like to hear it…

Second, on video games:

  • There was a time when I had to decide whether I would win regularly at God level on the computer game Civilization or be an affective Deputy Assistant Secretary of the Treasury…
  • Back then I microwaved my CD-ROM…
  • But I am up to about one aleve every three days, so the lesson I take away from Alan is: I need to watch out…

Justin Fox: Not Working Makes People Sick: “Overall, men are less likely to be taking pain medication than women…

…But men who have dropped out of the labor force are much more likely to be taking pain meds than either other men or the women who’ve dropped out…. Most women who aren’t in the labor force are still working, just not for pay. Most men… simply aren’t working…. Half of the men not in the labor force… reporting that they were ill…. The ill-or-disabled percentage of the overall prime-age population wasn’t all that much higher for men (5.6 percent) than for women (5.4 percent).

Back in the 1950s and 1960s, about 97 percent of prime-age men either had jobs or were actively looking for them. Work has gotten less hazardous and physically demanding since then, not more. So how can it be that 5.6 percent of prime-age men report being out of the labor force now because of illness or disability, while only 3 percent were out of the labor force for any reason in the early 1960s?… A lot of it… is because long-term unemployment and inactivity make people sick…. Men who aren’t in the labor force spent an average of five and a half hours a day watching television and movies in 2014, compared with about two hours a day for working men and three and a half for unemployed men. That’s not exactly healthy.

It seems like vicious cycle. Men who drop out of the labor force–maybe initially for health reasons, maybe not–fall into lifestyles that render them ever less capable of rejoining it. (This may be true of a lot of women, too, but their characteristics are harder to nail down because of the split between those who are truly out of work and those with home responsibilities.) Getting them back into the labor force seems like it ought to be a national priority. But it’s not going to be easy.

Alan Krueger: Where Have All the Workers Gone?: “The Great Recession was accompanied by a noticeable decline in labor force participation, even among the prime working-age population…

…How much of this decline can be expected to reverse? Is a further tightening of the labor market a precondition for a much stronger rebound in participation? Is the lack of participation the consequence of a rise in the reservation wage or a fall in the market wage? Does it reflect a mismatch of skills? Would retraining programs be an effective tool to bring more people back into the labor force?

Alan B Krueger pdf Alan B Krueger pdf

DRAFT: Did Macroeconomic Policy Play a Different Role in the (Post-2009) Recovery?

Federal reserve bank of boston Google Search

J. Bradford DeLong
U.C. Berkeley
October 15, 2016

Federal Reserve Bank of Boston
60th Economic Conference
The Elusive “Great” Recovery: Causes and Implications for Future Business Cycle Dynamics

Abstract: How has macroeconomic policy been different in this recovery? In banking and regulatory policy, it has been distinguished from earlier patterns—or from what we thought earlier patterns implied for a shock this large and this persistent—in a relative unwillingness to apply the “penalty rate” part of the Bagehot Rule and in a slowness to restructure housing finance that are, for me at least, different than I had expected. In fiscal policy, the prolonged reign of austerity in an environment in which both classical and Keynesian principles suggest that it is time to run up the debt is surprising and unexpected, to me at least. In monetary policy it is more difficult to say what has been different and surprising in this recovery. There have been so many aspects of monetary policy and our expectations of what policy would be during a prolonged excursion to the zero lower bound that it is hard enough merely to say what monetary policy has been, and too much to ask how it has been different from whatever baseline view of what the policy rule would be that we ought to have held back in 2008.


Misdiagnosis of 2008 and the Fed: Inflation Targeting Was Not the Problem. An Unwillingness to Vaporize Asset Values Was Not the Problem…

This, from the very sharp Martin Wolf, seems to me to go substantially awry when Martin writes the word “convincingly”. Targeting inflation is not easy: you don’t see what the effects of today’s policies are on inflation until two years or more have passed. Targeting asset prices, by contrast, is very easy indeed: you buy and sell assets until their prices are what you want them to be.

As I have said before, as of that date January 28, 2004, at which Mallaby claims that Greenspan knew that he ought to “vaporise citizens’ savings by forcing down [housing] asset prices” but had “a reluctance to act forcefully”, that was not Greenspan’s thinking at all. Greenspan’s thinking, in increasing order of importance, was:

  1. Least important: that he would take political heat if the Fed tried to get in the way of or even warned about willing borrowers and willing lenders contracting to buy houses and to take out and issue mortgages.

  2. Less important: a Randite belief that it was not the Federal Reserve’s business to protect rich investors from the consequences of their own imprudent folly.

  3. Somewhat important: a lack of confidence that housing prices were, in fact, about fundamentals except in small and isolated markets.

  4. Of overwhelming importance: a belief that the Federal Reserve had the power and the tools to build firewalls to keep whatever disorder finance threw up from having serious consequences for the real economy of demand, production, and employment.

(1) would not have kept Greenspan from acting had the other more important considerations weighed in the other direction: Greenspan was no coward. William McChesney Martin had laid down the marker that: “If the System should lose its independence in the process of fighting for sound money, that would indeed be a great feather in its cap and ultimately its success would be great…” Preserving your independence by preemptively sacrificing it when it needed to be exercised was not Greenspan’s business. (2) was, I think, an error–but not a major one. And on (3), Greenspan was not wrong:

S P Case Shiller 20 City Composite Home Price Index© FRED St Louis Fed

Nationwide, housing prices today are 25% higher than they were at the start of 2004. There is no fundamental yardstick according to which housing values then needed to be “vaporized”. The housing bubble was an issue for 2005-6, not as of the start of 2004.

It was (4) that was the misjudgment. And the misjudgment was not that the economy could not handle the adjustment that would follow from the return of housing values from a stratospheric bubble to fundamentals. The economy handled that return fine: from late 2005 into 2008 housing construction slackened, but exports and business investment picked up the slack, and full employment was maintained:

Macroeconomic Overview Talk for UMKC MBA Students April 1 2013 DeLong Long Form

The problem was not that the economy could not climb down from a situation of irrationally exuberant and elevated asset prices without a major recession. The problem lay in the fact that the major money center banks were using derivatives not to lay subprime mortgage risk off onto the broad risk bearing capacity of the market, but rather to concentrate it in their own highly leveraged balance sheets. The fatal misjudgment on Greenspan’s part was his belief that because the high executives at money center banks had every financial incentive to understand their derivatives books that they in fact understood their derivatives books.

As Axel Weber remarked, afterwards:

I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions…. The industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them…

That elite money center financial vulnerability and the 2008 collapse of that Wall Street house of cards, not the unwinding of the housing bubble, was what produced the late 2008-2009 catastrophe:

Macroeconomic Overview Talk for UMKC MBA Students April 1 2013 DeLong Long Form

Greenspan’s error was not in targeting inflation (except at what in retrospect appears to be too low a level). Greenspan’s error was not in failing to anticipatorily vaporize asset values (though more talk warning potentially overleveraged homeowners of risks would have been a great mitzvah for them). Greenspan’s error was in failing to regulate and supervise.

Martin Wolf: Man in the Dock:

Of his time as Fed chairman, Mr Mallaby argues convincingly that:

The tragedy of Greenspan’s tenure is that he did not pursue his fear of finance far enough: he decided that targeting inflation was seductively easy, whereas targeting asset prices was hard; he did not like to confront the climate of opinion, which was willing to grant that central banks had a duty to fight inflation, but not that they should vaporise citizens’ savings by forcing down asset prices. It was a tragedy that grew out of the mix of qualities that had defined Greenspan throughout his public life—intellectual honesty on the one hand, a reluctance to act forcefully on the other.

Many will contrast Mr Greenspan’s malleability with the obduracy of his predecessor, Paul Volcker, who crushed inflation in the 1980s. Mr Greenspan lacked Mr Volcker’s moral courage. Yet one of the reasons why Mr Greenspan became Fed chairman was that the Reagan administration wanted to get rid of Mr Volcker, who “continued to believe that the alleged advantages of financial modernisation paled next to the risks of financial hubris.”

Mr Volcker was right. But Mr Greenspan survived so long because he knew which battles he could not win. Without this flexibility, he would not have kept his position. The independence of central bankers is always qualified. Nevertheless, Mr Greenspan had the intellectual and moral authority to do more. He admitted to Congress in 2008 that: “I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.” This “flaw” in his reasoning had long been evident. He knew the government and the Fed had put a safety net under the financial system. He could not assume financiers would be prudent.

Yet Mr Greenspan also held a fear and a hope. His fear was that participants in the financial game would always be too far ahead of the government’s referees and that the regulators would always fail. His hope was that “when risk management did fail, the Fed would clean up afterwards.” Unfortunately, after the big crisis, in 2007-08, this no longer proved true.

If Mr Mallaby faults Mr Greenspan for inertia on regulation, he is no less critical of the inflation-targeting that Mr Greenspan ultimately adopted, albeit without proclaiming this objective at all clearly. The advantage of inflation-targeting was that it provided an anchor for monetary policy, which had been lost with the collapse of the dollar’s link to gold in 1971 followed by that of monetary targeting. Yet experience has since shown that monetary policy is as likely to lead to instability with such an anchor as without one. Stable inflation does not guarantee economic stability and, quite possibly, the opposite.

Perhaps the biggest lesson of Mr Greenspan’s slide from being the “maestro” of the 1990s to the scapegoat of today is that the forces generating monetary and financial instability are immensely powerful. That is partly because we do not really know how to control them. It is also because we do not really want to control them. Readers of this book will surely conclude that it is only a matter of time before similar mistakes occur.

The root problem of 2008 was not that inflation targeting generates instability (even though a higher inflation target then and now would have been very helpful). The root problem of 2008 was not that the Federal Reserve was unwilling to vaporize asset values–the Federal Reserve vaporized asset values in 1982, and stood willing to do so again *if it were to seem appropriate*. The root problem of 2008 was a failure to recognize that the highly leveraged money center banks had used derivatives not to distribute subprime mortgage risk to the broad risk bearing capacity of the market as a whole but, rather, to concentrate it in themselves.

At least as I read Mallaby, he does not criticize Greenspan for “inertia on regulation” nearly as much as he does for Greenspan’s failure to “vaporise citizens’ savings by forcing down asset prices…” even when there is no evidence of rising inflation expectations or excess demand in the goods and labor markets as a whole.


Axel Weber’s full comment:

I think one of the things that really struck me was that, in Davos, I was invited to a group of banks–now Deutsche Bundesbank is frequently mixed up in invitations with Deutsche Bank.

I was the only central banker sitting on the panel. It was all banks. It was about securitizations. I asked my people to prepare. I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions.

When I was at this meeting–and I really should have been at these meetings earlier–I was talking to the banks, and I said: “It looks to me that since the buyers and the sellers are the same institutions, as a system they have not diversified”. That was one of the things that struck me: that the industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them.

What was missing–and I think that is important for the view of what could be learned in economics–is that finance and banking was too-much viewed as a microeconomic issue that could be analyzed by writing a lot of books about the details of microeconomic banking. And there was too little systemic views of banking and what the system as a whole would develop like.

The whole view of a systemic crisis was just basically locked out of the discussions and textbooks. I think that that is the one big lesson we have learned: that I now when I am on the board of a bank, I bring to that bank a view, don’t let us try to optimize the quarterly results and talk too much about our own idiosyncratic risk, let’s look at the system and try to get a better understanding of where the system is going, where the macroeconomy is going. In a way I take a central banker’s more systemic view to the institution-specific deliberations. I try to bring back the systemic view. And by and large I think that helps me understand where we should go in terms of how we manage risks and how we look at risks of the bank compared to risks of the system.

Brookings Productivity Festival on Friday

Real Gross Domestic Product FRED St Louis Fed

The current discussion of “slow growth in measured productivity” here in the U.S. seems to suffer from a great deal of confusion. From my perspective, there are six things going on:

  1. Since the 1920s, the rise of non-Smithian information goods…
  2. Since 1973, the productivity slowdown…
  3. Since 1995, the semiconductor-driven infotech speedup…
  4. Since 2004, Moore’s Law hitting the wall…
  5. Since 2008, what we will soon be calling “The Longer Depression”…
  6. And, remember, policy changes to speed productivity growth may well be nearly orthogonal to all of the above save (5)…

To talk about the cause of “slow growth in measured productivity” as if it is just one, not five, things causes confusion. To identify one or a small number of causes of a single thing that is “slow growth in measured productivity” causes great confusion. And then to insist that the best policy move is to undo that one or small number of thing causes even greater confusion…

The productivity puzzle: How can we speed up the growth of the economy? Friday, September 9, 2016, 9:30 – 11:00 am, Falk Auditorium: The Brookings Institution:

After nearly a decade of strong productivity growth starting in the mid-1990s, productivity growth has slowed down over the most recent decade. Output per hour worked in the U.S. business sector has grown at only 1.3 percent per year from 2004 to 2015, and growth was even slower from 2010 to 2015 at just 0.5 percent a year. These rates are only half or less of the pace of growth achieved in the past.

The United States is not alone in facing this problem, as all of the major advanced economies have also seen slow productivity growth. This slow growth has been a major cause of weak overall GDP growth, stagnation in real wages and household incomes, and it strongly impacts government revenues and the deficit.

On September 9, 2016 the Initiative on Business and Public Policy and the Hutchins Center on Fiscal and Monetary Policy at Brookings will host a forum on the policy implications of the growth slowdown. Senior Fellow Martin Baily will present an overview paper on the causes of the slowdown, followed by a panel discussion on the most effective policies to enhance productivity performance. After the panel discussion, panelists will take questions from the audience. The event will be webcast live.

Join the conversation on Twitter at #Productivity

Welcome: Louise Seiner

Paper: Martin Baily

Panel: Moderator: David Wessel

  • Jonathan Baker
  • Robert Barro
  • J. Bradford DeLong
  • Bronwyn Hall

Has Macro Policy Been Different since 2008?

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

Was macro policy different after 2008? I interpret that to be the question: “Did macro policy follow the same rule after 2008 that people had presumed before 2008 it would follow in a true tail event?” To answer that question requires determining just what policy rule people back before 2008 thought that the U.S. government was following. Let me propose four candidates for our (implicit) pre-2008 macroeconomic policy rule:

  1. Limit fiscal policy to automatic stabilizers, and follow a Taylor rule with John Taylor’s coefficients (Taylor).
  2. Follow Milton Friedman’s advice and target velocity-adjusted money: if nominal GDP is below trend, print more money and buy bonds; if that does not restore nominal GDP to either the trend level or the trend growth rate (depending on whether your favorite flavor has or does not have base-drift sprinkles), repeat (Friedman).
  3. Use open market operations to manipulate the short-term safe nominal interest rate to stabilize inflation and unemployment as long as you are not at the zero lower bound. At the zero lower bound credibly promise to be irresponsible in the future in order to raise inflation expectations by enough to push the real interest rate down to its negative Wicksellian neutral rate value, and so restore real macroeconomic balance (Krugman).
  4. Use open market operations to manipulate the short-term safe nominal interest rate to stabilize inflation and unemployment as long as you are not at the zero lower bound. At the zero lower bound resort to expansionary fiscal policy and do as much of it as needed, at least as long as interest rates on long-term government debt remain low (Blinder).

Were there any other live candidates for “the policy rule” back before 2008?

The Federal Reserve: I Repeat Myself

Real Gross Domestic Product FRED St Louis Fed

I repeat myself: to begin a tightening cycle and a process of interest-rate increases in December 2016–in fact, to announce in mid 2014 the end of further moves toward monetary expansion and a bias toward tightening as soon as it is not grossly imprudent–requires that one place only an infinitesimal weight on:

  1. Bond market very pessimistic long-run expectations.
  2. The asymmetry in policy responses and thus in risks created by the zero lower bound on short-term safe nominal interest rates.

I have been asking for quite a while now why any FOMC would choose to place such an infinitesimal weight not on just one but on both of these considerations. I have not gotten an answer from anywhere. I would like one. Very much…

What More Has to Happen Before the Fed Concludes That This Looks Like Yet Another Failed Interest-Rate Liftoff?

Real Gross Domestic Product FRED St Louis Fed

If you had told the Federal Reserve at the start of last December that 2015Q4, 2016Q1, and 2016Q2 were going to come in at 0.9%, 0.8%, and 1.2%, respectively, a rational Fed would not only have not raised interest rates in December, they would have announced that they would not even think of raising interest rates until well into 2017, and they would have started looking for more things they could do that would safely boost demand.

So why is the FOMC now not cutting interest rates back to zero? I mean, what more has to happen before the balance of probabilities says that this is likely to be yet another failed liftoff of interest rates?

Must-Read: Jon Faust: Why Has Transparency Been so Damn Confusing?

Must-Read: I believe that the extremely sharp Jon Faust is completely correct when he says that over the past three years Fed policy has been driven by: (1) as long as employment gains persist, gradually reducing accomodation; and (2) as long as inflation remains below target, pause in the removal of accommodation if it looks as though employment gains might falter. The problem is that there has been an awful lot of information hitting the Fed over the past three years about the economy. For one thing, we have learned that the unemployment rates typically thought of as reflecting full employment now come with prime-age employment-to-population ratios of not 81% or 80% but 78%:

Employment Population Ratio 25 54 years FRED St Louis Fed

And we have learned that financial markets are not looking forward to any maturity of Treasury bonds yielding more than inflation for, well, forever:

30 Year Treasury Constant Maturity Rate FRED St Louis Fed

Both of those pieces of information should have led to a reevaluation of the policy rule. They have not. Both of those pieces of information are not consistent with the economy evolving as the Fed expected it three years ago.

So the great question is: What–if anything–will trigger the Fed’s reevaluation of its policy rule? And what will it change its policy rule to if that reevaluation is triggered? That–rather than people getting distracted by shiny pronouncements from individual FOMC participants–is why transparency has been so damn confusing:

Jon Faust: Why Has Transparency Been so Damn Confusing?: “[Fed] consensus has behaved consistently as if driven by two principles…

…[1] So long as steady job market gains persist, continue a gradual, pre-announced removal of accommodation. [2] So long as inflation remains below target, take a tactical pause if credible evidence arises that the job gains might soon falter…. Over the last three years, we’ve gotten normalization at a preannounced pace as in to the first principle, punctuated only by brief (so far) tactical pauses as under the second…. My story directly contradicts the popular narrative of a skittish, market-obsessed Fed flip-flopping at every opportunity. This is where the well-disguised part comes in….

The 19 policymakers on the FOMC have, since the crisis held widely divergent views…. Under the leadership of the Chair, these views somehow blend in a reasonably coherent compromise policy… fully embraced by no one…. The chosen policy often appears to be an orphan, at best, and can become a whipping boy. But the consensus policy is generally much simpler to understand than those 19 component views…. There is a strong pull toward that ‘skittish, market-obsessed Fed’ narrative…. The FOMC statement and press conference… are the principal places where the communication is unambiguously directed at explaining the consensus…. Communications other than these systematically obscure and confuse much more than they clarify…

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle: “An issue of growing saliency…

…how… economic marginalization and financial vulnerability, associated with stagnant wages and rising inequality, contributed to the run-up to the financial crisis and how such marginalization and vulnerability could be relevant in the current recovery…. I want to zero in on the question of whether inequality itself is undermining our country’s economic strength according to available macroeconomic indicators….

I will argue that at the start of this recession, an unusually large number of low- and middle-income households were vulnerable to exactly the types of shocks that sparked the financial crisis… 30 years of very sluggish real-wage growth… unusually large share of their wealth in housing… debt…. exposure to house prices had increased dramatically. Thus, as in past recessions, suffering in the Great Recession–though widespread–was most painful and most perilous for low- and middle-income households, which were also more likely to be affected by job loss and had little wealth to fall back on. Moreover, I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker. The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth….

I want to explore these issues today because the answers may have implications for the Federal Reserve’s efforts to understand the recession and conduct policy in a way that contributes to a stronger pace of recovery…. I hope my remarks spur more inquiry and discussion. I should also note that the views I express are my own…. To be sure, the increase in mortgage debt prior to the recession occurred across all types of households. But it was families with modest incomes and wealth largely in their homes that were the most vulnerable to subsequent drops in home values…. Given these developments, when house prices fell, household finances were struck a devastating blow. The resulting fallout magnified this initial shock, ushering in the Great Recession….

About two-thirds of all job losses in the recession were in middle-wage occupations–such as manufacturing, skilled construction, and office administration jobs–but these occupations have accounted for less than one-fourth of subsequent job growth…. It is not only the occupational and industrial distribution of the new jobs that poses challenges for workers and their families struggling to make ends meet, but also the fact that many of the jobs that have returned are part time or make use of temporary arrangements popularly known as contingent work. The flexibility of these jobs may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or ‘permanent’ workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace….

My approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels I have emphasized generally do not play key roles in most macro models…. The narrative I have emphasized places economic inequality and the differential experiences of American families, particularly the highly adverse experiences of those least well positioned to absorb their ‘realized shocks,’ closer to the front and center of the macroeconomic adjustment process…. Circumstances–the outsized role of housing wealth in the portfolios of low- and middle-income households, the increased use of debt during the boom, and the subsequent unprecedented shocks to the housing market–may have attenuated the effectiveness of monetary policy during the depths of the recession. Households that have been through foreclosure or have underwater mortgages or are otherwise credit constrained are less able than other households to take advantage of the lower interest rates, either for homebuying or other purposes. In my view, these effects likely clogged some of the channels through which monetary policy traditionally works…


  • Congressional Budget Office (2011), Trends in the Distribution of Household Income between 1979 and 2007 (PDF) (Washington: CBO, October).
  • Orazio P. Attanasio and Guglielmo Weber (2010), ‘Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy,’ Journal of Economic Literature, vol. 48 (September), pp. 693-751.
  • Dirk Krueger and Fabrizio Perri (2006), ‘Does Income Inequality Lead to Consumption Inequality? Evidence and Theory,’ Review of Economic Studies, vol. 73 (January), pp. 163-93
  • Mark A. Aguiar and Mark Bils (2011), ‘Has Consumption Inequality Mirrored Income Inequality?’ NBER Working Paper Series 16807 (Cambridge, Mass.: National Bureau of Economic Research, February)
  • Orazio Attanasio, Erik Hurst, and Luigi Pistaferri (2012), ‘The Evolution of Income, Consumption, and Leisure Inequality in the US, 1980-2010,’ NBER Working Paper Series 17982 (Cambridge, Mass.: National Bureau of Economic Research, April).
  • Marianne Bertrand and Adair Morse (2013), ‘Trickle-Down Consumption,’ NBER Working Paper Series 18883 (Cambridge, Mass.: National Bureau of Economic Research, March).
  • Jason DeBacker, Bradley Heim, Vasia Panousi, and Ivan Vidangos (2011), ‘Rising Inequality: Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006,’ Finance and Economics Discussion Series 2011-60 (Washington: Board of Governors of the Federal Reserve System, December).
  • Raghuram Rajan (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, N.J.: Princeton University Press)
  • Michael Kumhof and Romain Ranciere (2011), ‘Inequality, Leverage and Crises,’ CEPR Discussion Paper 8179 (London: Centre for Economic Policy Research, January)
  • Michael D. Bordo and Christopher M. Meissner (2012), ‘Does Inequality Lead to a Financial Crisis?’ NBER Working Paper Series 17896 (Cambridge, Mass.: National Bureau of Economic Research, March)
  • Neil Bhutta (2011), ‘The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods,’ Journal of Law and Economics, vol. 54 (November), pp. 953-83
  • Neil Bhutta (2012), ‘GSE Activity and Mortgage Supply in Lower-Income and Minority Neighborhoods: The Effect of the Affordable Housing Goals,’ Journal of Real Estate Finance and Economics, vol. 45 (June), pp. 238-61.
  • Atif Mian, Kamalesh Rao, and Amir Sufi (2011), ‘Household Balance Sheets, Consumption, and the Economic Slump (PDF),’
  • Karen Dynan (2012), ‘Is a Household Debt Overhang Holding Back Consumption?’ Brookings Papers on Economic Activity, Spring, pp. 299-358.
  • Rudiger Ahrend, Jens Arnold, and Charlotte Moeser (2011), ‘The Sharing of Macroeconomic Risk: Who Loses (and Gains) from Macroeconomic Shocks,’ OECD Economics Department Working Papers 877 (Washington: OECD Publishing, July).
  • Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. Smith (2012), Income, Poverty, and Health Insurance Coverage in the United States: 2011 (PDF), U.S. Census Bureau Current Population Reports P60-243 (Washington: U.S. Government Printing Office, September).
  • National Employment Law Project (2012), ‘The Low-Wage Recovery and Growing Inequality,’ Data Brief, report (New York: NELP, August), http://nelp.3cdn.net/8ee4a46a37c86939c0_qjm6bkhe0.pdf.
  • See Nir Jaimovich and Henry E. Siu (2012), ‘The Trend Is the Cycle: Job Polarization and Jobless Recoveries,’ NBER Working Paper Series 18334 (Cambridge, Mass: National Bureau of Economic Research, August)
  • Christopher L. Foote and Richard W. Ryan (2012), ‘Labor-Market Polarization over the Business Cycle,’ Public Policy Discussion Paper 12-8 (Boston: Federal Reserve Bank of Boston, December).
  • U.S. Department of Labor, Commission on the Future of Worker-Management Relations (1994), ‘Contingent Workers,’ in Fact Finding Report.
  • Steven J. Davis and Till von Wachter (2011), ‘Recessions and the Costs of Job Loss,’ Brookings Papers on Economic Activity, Fall, pp. 1-55.
  • Jesse Rothstein (2012), ‘The Labor Market Four Years into the Crisis: Assessing Structural Explanations,’ ILRReview, vol. 65 (July), figure 11, p. 486.

Must-Read: Narayana Kocherlakota: Three Antidotes to the Brexit Crisis

Must-Read: Correct, IMHO, from the very sharp Narayana Kocherlakota. Now perhaps his successor Neel Kashkari and the other Reserve Bank presidents not named Charlie Evans might give him some back up?

The one thing I do not like is Narayana’s “Granted, there is a risk that such steps will spook markets by signaling that the Fed is concerned about the state of the U.S. financial system.” That sentence seems to me to misread market psychology completely. As I see it–and as the people in markets I talk to say–right now markets are fairly completely spooked by their belief that the Federal Reserve is unconcerned, and takes that lack of concern as a sign of Federal Reserve detachment from reality. Narayana’s following sentences seems to me to be highly likely to be the right take: “I’d say the markets are already pretty spooked” and “By demonstrating that it is paying attention to these obvious signals, the Fed can help to bolster confidence in its economic management”.

Let me stress that, at least from where I sit, that confidence in Federal Reserve economic management is, right now, lacking.

The people I talk to in financial markets tend to say that they believe markets took Stan Fischer on January 5 to be something of a wake-up call with respect to Fed groupthink:

Liesman: When I looked at where the market is priced, the market is priced below where the Fed median forecast is. Quite a bit. Two rate hikes really, if you count them in quarter points. Does that concern you that the market needs to catch up with where the Fed is or is it a matter of you think the Fed needs to recalibrate to where the market is?

Fischer: Well, we watch what the market thinks, but we can’t be led by what the market thinks. We’ve got to make our own analysis. We make our own analysis and our analysis says that the market is underestimating where we are going to be. You know, you can’t rule out that there is some probability they are right because there’s uncertainty. But we think that they are too low.

For eight straight years now the Federal Reserve has been more optimistic than the markets. And for eight straight years now the markets have been closer to being correct. And yet the Federal Reserve still believes that it “can’t be led by what the market thinks” and has “got to make our own analysis”? Why?

Narayana Kocherlakota: Three Antidotes to the Brexit Crisis: “The Fed should ensure that banks have enough loss-absorbing equity capital…

…not allow them to return equity to shareholders…. The measure should apply to all banks, so markets won’t read it as a signal about individual institutions’ relative strength. Second, there’s a risk that investors’ flight to safe assets could develop into a broader credit freeze. To mitigate this, the Fed should lower its short-term interest-rate target…. Finally, the Fed should consider reviving the Term Auction Facility, which allows banks to borrow funds from the central bank with less of the stigma…. Granted, there is a risk that such steps will spook markets by signaling that the Fed is concerned about the state of the U.S. financial system. That said, as an outsider who gets much of his information from Twitter, I’d say the markets are already pretty spooked. By demonstrating that it is paying attention to these obvious signals, the Fed can help to bolster confidence in its economic management. One important lesson of the last financial crisis is that the guarantors of stability must be proactive if they want to be effective. It’s time for the Fed to put that lesson into practice.