Month: August 2014

The extremely sharp and hard-working Neil Irwin has a nice piece that gives his answer:

Neil Irwin: Why Is the Economy Still Weak? Blame These Five Sectors: “The economy keeps underperforming…

…producing around $800 billion a year less in goods and services than it would if the economy were at full health, and as a result millions of people aren’t working who would be if conditions were better. But why?… To get at an answer, we needed a more basic question: What would the economy look like right now if it were fully healthy, and how is the actual reality… different?… A handful of sectors, including housing, government spending and spending on durable goods, are at fault for the continuing underperformance of the American economy…. Six of 11 sectors we analyzed are doing fine… consumer spending on services… spending on nondurable goods… Business spending on intellectual property….

The following, however, are the five pieces… [are] vastly undershooting… residential investment; consumption of durable goods; state and local government spending; business investment in equipment; and federal government spending. Together their deficit adds up to $845 billion — in other words, if those sectors returned to their typical share of economic potential, the economy wouldn’t just be doing well, it would be in an outright boom….

Housing is the biggest and least surprising…. Federal spending is below the level that would be expected…. State and local governments spent the years after the crisis cutting employees and trimming costs…. Durable goods consumption is $178 billion lower than it would be in our model of a fully healthy economy. This is most likely related to the same factors holding back housing. People aren’t buying cars, furniture and other big-ticket items as past patterns would suggest, perhaps related to the overhang of debt…. It’s no mystery which sectors are to blame for the crummy economy…

I look at it somewhat differently:

First, figuring out what the services spending trend is is extremely hairy–I have no confidence in my own estimates of how fast we “should” be shifting toward a service economy, let alone anybody else’s.

Second, if you add up all the components of consumption–services, nondurables, and durables–what I, at least, get is that they are jointly low because income is low and not because of any deeper cause: boost the other components of spending and they will, as a group, recover.

Third, there is something odd in the mix of consumption spending: too much in services and too little in durables. I blame this on the overhang of debt and on the failure to fully fix the breakdown in the credit channel. But while this distorts the pattern of what we buy–we would by happier buying fewer services and more durables, if those who would like to buy durables could get the credit–and distorts our allocation of labor and structure of production, the odd mix is not a cause of the shortfall.

Fourth, business equipment spending is also low not for any fundamental reason but because output is low: with low production, you have idle factories, and it would be silly to build capacity ahead of demand.

Thus, five, the shortfall in the economy is at base due to two sectors: residential construction–and here the Obama administration’s extraordinary unconcern with and unwillingness to fix housing finance must take the major part of the blame–and austerity both at the state and local and at the federal level. If we were to fix those two–housing and government–the economy would be fine right now, and the Federal Reserve would already have raised interest rates away from the zero nominal lower bound.

Now you could go a big deeper, and say: OK, housing and government are depressed. But the economy should be able to route around that and rebalance itself. Workers who would, if things were healthy, be producing thing for the government to buy or building housing could work in other sectors, after all, and now a great many of them are doing nothing at all. There, I think, we have to blame the zero lower bound on nominal interest rates–and the failure to effectively summon either the Confidence Fairy to boost business desire to invest or the Inflation-Expectations Imp to reduce household and business desire to save. At this slightly deeper level, given government austerity and housing credit-channel dysfunction, it is the Wicksellian excess of the market interest rate at its nominal lower bound of zero above the natural interest rate that keeps the economy from rejiggering asset prices and incentives and producing a labor market where demand balances supply.

James Pethokoukis: The ECB continues to ruin Europe: “The GOP…

…might have a soft spot for the European Central Bank. Republicans, including Paul Ryan and Kevin Brady, have in the past advocated changing the Fed’s dual jobs-inflation mandate to a sole focus on inflation. Unlike the Fed, the ECB has just a mandate to maintain price stability. Also unlike the Fed, the ECB hasn’t engaged in massive bond-buys to boost demand. It hasn’t, however, worked out so well for the euro zone where the jobless rate is 11.6%…. The difference between the US and EZ recoveries is startling. While the former is weak, the latter is comatose. A key explanation, I and other market monetarists have argued, is the more active Fed…

Paul Krugman: Phosphate Memories “Does anyone remember this…

…from Erick Erickson of Red State? ‘Washington State has turned its residents into a group of drug runners–crossing state lines to buy dish washer detergent with phosphate. At what point do the people tell the politicians to go to hell? At what point do they get off the couch, march down to their state legislator’s house, pull him outside, and beat him to a bloody pulp for being an idiot? At some point soon, it will happen.’ Yes, because there’s no possible reason meddling politicians should interfere with Americans’ God-given right to use phosphates however they like. Oh, wait. ‘It took a serendipitous slug of toxins and the loss of drinking water for a half-million residents to bring home what scientists and government officials in this part of the country have been saying for years: Lake Erie is in trouble, and getting worse by the year.’… As far as I can tell, there isn’t a well-organized phosphate denial campaign, insisting that runoff has nothing to do with algae blooms. But I’m sure one will arise as policy action grows nearer.

Brian Buetler: Watch Rand Paul Run for His Life Before Steve King Insults an Immigrant in Iowa: “It’s a cruel coincidence for GOP presidential aspirants…

…that the Republican Party’s most uncensored, most influential, anti-immigrant member (Representative Steve King) hails from a state (Iowa) where, for arbitrary reasons, presidential primary candidates face their first real electoral test… Republicans like Senator Rand Paul have to break bread in public… with someone they must be prepared to flee mid-meal, while still chewing. That’s what happened Monday at a Paul fundraiser in Okoboji, Iowa…. Sticking up for the DREAMer in the video would plausibly doom Paul’s primary campaign. Standing with King would pose an equal but opposite threat in the general, as would playing dumb. So, he did what he had to do. And it was a wise move…. To many Republicans, feigning surprise at an immigrant’s command of English and calling her a lawbreaker is unremarkable. As is the suggestion that children should refuse to travel with their parents absent proper authorization, or that they should self-deport once they grow up…. But most people don’t find these kinds of things particularly commendable.”

Must- and Should-Reads:

1. Brad DeLong (2011): Economic Downturns, the Social-Darwinist Waltz, and the Navigation of the Starship Asgard: “Tyler Cowen writes: ‘More rooftop-ready results on reservation wages: I conclude that some people aren’t very good at looking for jobs and further some people are not very good at accepting job offers….’ It seems to me that this is one of the steps in what I have sometimes called the Social-Darwinist Waltz. It goes like this…. 5. You say government has not intervened?… 6. Well, it must be because some people are not skilled decision-makers and are not rational judges of their own interests. 7. But their lack of skill and foresight is non-adaptive. 8. Their lack of skill and foresight is blameworthy. 9. And they should be punished. 10. And in punishing them, the market outcome is good after all…. It is, I think, very important for rational policy to halt the Social-Darwinist Waltz where Tyler is, at step 7, and not go on to step 8…. A system that for good outcomes requires that people act in ways people do not do is not a good system–and to blame the people rather than the system is to commit a major intellectual error. Consider the… Starship Asgard…. When one person transposes an 8 and a 3 in the fifth and sixth decimal places of a hand calculation, the result should not be to send the starship hundreds of light years off course into uncharted space. Similarly, in a well-functioning economy the failure of a critical mass of unemployed workers to realize that they really should drop their reservation wage because the economy is suffering from a nominal shock should not send the unemployment rate on a multiyear journey upward during which it kisses 10%.”

2. Adrianna McIntyre: 5 media mistakes in the Halbig debate: “Over the past few weeks, thousands of words have been written on Halbig v. Burwell…. There are some things… just getting lost… worth getting right here. 1) Administrative Law 101: The administration doesn’t need to prove intent, just ambiguity…. 2) And the text of the law can be read as ambiguous. Yes, even the words ‘established by the State’…. 3) Medicaid expansion is a deeply flawed analogy…. 4) The ‘foresight error’ argument could cut in favor of the government just as easily as it could cut against it…. 5) The courts won’t really care what Jonathan Gruber–or reporters–knew, or when they knew it…. As for the ‘But Gruber was lying in documents he filed with the court!’ line, even Michael Cannon… isn’t seizing on that…”

3. Abbe Gluck: The CBO Score and the Made-Up Narrative of the Obamacare Subsidies Case: “The CBO scoring of Obamacare was central, in the public eye, and intensely scrutinized by all involved…. CBO never assumed in scoring the bill that subsidies would be unavailable on federal exchanges…. The text of the ACA, when read not in isolation, but in context…clearly permits the Government’s interpretation of the subsidies…. But the CBO story offers another datum–along with the testimonials of staffers and reporters that have been pouring out all week–that no one ever assumed the statute said otherwise…. Remember this is a Chevron case–a case that turns on the doctrine of agency deference. To win under the doctrine, all the Government has to do is show that its reading of the statute is plausible. The challengers… have to convince the Court their reading of the statutory text is not only plausible but is the only possible reading…. A major lawsuit… should not be based on a story that is made up…”

4. Janet Currie: Health, Wealth and Foreclosure: “Losing your home to foreclosure can be bad for your health. Watching your neighbors lose their homes to foreclosure can be just as debilitating…. Nationwide the 2.82 million foreclosures in 2009 resulted in an additional 2.21 million emergency hospital visits—-an increase in hospitalizations that cost a whopping $5.6 billion in that year alone…. Many middle class Americans are only one medical emergency away from bankruptcy without even factoring in the loss of a home or the inability to sell their homes due the sharply deteriorated community housing values…. Now it could be that a sudden wave of serious mental and physical illness swept through neighborhoods experiencing higher rates of foreclosure or that the overall higher rates of poor health among low-income wage earners contributed to the inability of some of them to cover their monthly mortgage payments. But our study accounted for both factors…”

5. Matthew Yglesias: The false choice between equality and globalization: “Late Friday night House Republicans passed a bill to strip about 580,000 immigrants of their work permits while President Obama ponders executive action to reduce the pace of deportations and conservative columnist Ross Douthat preemptively slams the illegality of the as-yet-unknown measure. Which is to say that while Cowen’s point about the global picture is both interesting and correct, his political stance is backwards. It’s not fans of Capital in the 21st Century who are pushing nationalism as an alternative to plutocracy, but its detractors…. Inside the United States, a major debate has taken place inside GOP circles…. An initially popular idea, especially in business circles, was that the GOP should moderate its stance on immigration and seek Latino votes. This was, of course, countered by the party’s most retrograde elements–the Michele Bachmanns and the Steve Kings. But more importantly, the pro-immigration impulse was also opposed by the most forward-thinking elements in American conservative politics. Douthat, David Frum, Reihan Salam, and other ‘reform conservatives’ have positioned themselves as leading opponents of a compromise with the White House on immigration…. And the cause of its rise is not left-wing worries about inequality, but the failure of traditional supply-side economics. Reagan-era conservatives could be for welfare state rollback and broadly pro-immigration because they promised a rising tide that would lift all boats. Now that we’re decades into an era of wage stagnation, those kind of easy promises ring hollow. So for Cameron and the reformicons, a tilt against immigrants is the new answer…. Let the rich get richer, but prevent them from hiring maids from Latin America, and soon enough wages for native-born maids will rise…”

6. Paul Krugman: Con Men Aren’t Stupid: “Larry Kotlikoff fulminating about how mean I am — so mean that he apparently could’t bring himself to read what I wrote. No, I didn’t say that Paul Ryan is stupid. I did imply — and have said explicitly on many other occasions — that he is a con man. Why did I do that? Not as a way to avoid having a substantive discussion. I’ve documented Ryan’s many cons very extensively… his budgets were sold on false pretenses… magic asterisks…. Still, why not pretend that we’re having a nice, honest discussion? Because I’m trying to inform readers… and the attempt to sell right-wing goals under false pretenses is an important part of the story. If you fell for the carefully crafted image of Ryan as an honest wonk, you were being taken in — and it’s my job to ensure that you’re properly informed. I wish we lived in a world in which you could presume that major figures are arguing in good faith, in which what they claim to be doing in their policy proposals was what they were actually doing. But wishing doesn’t make it so, and I would be acting in bad faith myself if I pretended that the world was like that…”

And:

• Christopher D. Carroll (200): Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)
• Hilary Wething: What I’ve learned in the last three years
• Nick Bunker: Summertime blues for some workers and businesses

Should Be Aware of:

1. Brian Buetler: Ross Douthat Immigration ‘Amnesty’ Column Falsely Assumes Lawbreaking: “Douthat[‘s]… dynamic… [in] a single sentence: Democrats correctly regard impeachment as a political box canyon into which many conservatives want to march the Republican Party, and believe that maximal, unilateral action on behalf of immigrants is both an urgent priority and an effective way to exploit the tension between GOP leaders… and hardliners…. Douthat’s thesis rests on the assumption that aggressive executive action on behalf of certain unauthorized immigrants will by definition be ‘an extraordinary abuse of office…. [L]awless, reckless, a leap into the antidemocratic dark.’ These are awfully firm conclusions to draw about a policy that hasn’t been unveiled…. The problem is that outside of conservative media, where basically anything Obama does without explicit, immediate congressional authorization is presumed to be illegal, reporters have consulted experts… discovered that Obama probably has a great deal… of authority to defer deportation… also enjoys unchecked pardon power…. Despite all this, Douthat blends the assumption that Obama will be violating the law seamlessly into his column…”

2. Ross Douthat: Obama’s Impeachment Game: “SOMETHING rather dangerous is happening…. I do not mean the confusion of House Republicans…. Incompetence and gridlock are significant problems, indeed severe ones…. What is different–more cynical and more destructive–is the course President Obama is pursuing in response…. Sarah Palin’s pleas for attention have been creatively reinterpreted as G.O.P. marching orders, and an entire apocalyptic fund-raising campaign has been built around the specter of a House impeachment vote…. The president is… all but promising… extraordinary abuse of office…. Such an action would come equipped with legal justifications…. A John Yoo of the left… [will] build a case for the legality…. But the precedents would not actually justify the policy, because… selective enforcement of our laws amounts to a de facto repeal of their provisions…”

3. Matthew B. Canzoneri et al. (2006): Euler Equations and Money Market Interest Rates: A Challenge for Monetary Policy Models: “Standard macroeconomic models equate the money market rate targeted by the cental bank with the interest rate implied by a consumption Euler equation. We use U.S. data to calculate the interest rates implied by Euler equations derived from a number of specifications of household preferences. Correlations between these Euler equation rates and the Federal Funds rate are generally negative. Regression results and impulse response functions imply that the spreads between the Euler equation rates and the Federal Funds rate are systematically linked to the stance of monetary policy . Our findings pose a fundamental challenge for models that equate the two…”

Janet Currie: Health, Wealth and Foreclosure: “Losing your home to foreclosure can be bad…

…for your health. Watching your neighbors lose their homes to foreclosure can be just as debilitating…. Nationwide the 2.82 million foreclosures in 2009 resulted in an additional 2.21 million emergency hospital visits—-an increase in hospitalizations that cost a whopping $5.6 billion in that year alone…. Many middle class Americans are only one medical emergency away from bankruptcy without even factoring in the loss of a home or the inability to sell their homes due the sharply deteriorated community housing values….

Now it could be that a sudden wave of serious mental and physical illness swept through neighborhoods experiencing higher rates of foreclosure or that the overall higher rates of poor health among low-income wage earners contributed to the inability of some of them to cover their monthly mortgage payments. But our study accounted for both factors…

Abbe Gluck: The CBO Score and the Made-Up Narrative of the Obamacare Subsidies Case: “The CBO scoring of Obamacare was central…

…in the public eye, and intensely scrutinized by all involved…. CBO never assumed in scoring the bill that subsidies would be unavailable on federal exchanges…. The text of the ACA, when read not in isolation, but in context…clearly permits the Government’s interpretation of the subsidies…. But the CBO story offers another datum–along with the testimonials of staffers and reporters that have been pouring out all week–that no one ever assumed the statute said otherwise….

Remember this is a Chevron case–a case that turns on the doctrine of agency deference. To win under the doctrine, all the Government has to do is show that its reading of the statute is plausible. The challengers… have to convince the Court their reading of the statutory text is not only plausible but is the only possible reading…. A major lawsuit… should not be based on a story that is made up…

Adrianna McIntyre: 5 media mistakes in the Halbig debate: “Over the past few weeks…

…thousands of words have been written on Halbig v. Burwell…. There are some things… just getting lost… worth getting right here. 1) Administrative Law 101: The administration doesn’t need to prove intent, just ambiguity…. 2) And the text of the law can be read as ambiguous. Yes, even the words ‘established by the State’…. 3) Medicaid expansion is a deeply flawed analogy…. 4) The ‘foresight error’ argument could cut in favor of the government just as easily as it could cut against it…. 5) The courts won’t really care what Jonathan Gruber–or reporters–knew, or when they knew it…. As for the ‘But Gruber was lying in documents he filed with the court!’ line, even Michael Cannon… isn’t seizing on that…

Brad DeLong (2011): Economic Downturns, the Social-Darwinist Waltz, and the Navigation of the Starship Asgard: “Tyler Cowen writes: ‘More rooftop-ready results on reservation wages:…

I conclude that some people aren’t very good at looking for jobs and further some people are not very good at accepting job offers….

It seems to me that this is one of the steps in what I have sometimes called the Social-Darwinist Waltz. It goes like this…. 5. You say government has not intervened?… 6. Well, it must be because some people are not skilled decision-makers and are not rational judges of their own interests. 7. But their lack of skill and foresight is non-adaptive. 8. Their lack of skill and foresight is blameworthy. 9. And they should be punished. 10. And in punishing them, the market outcome is good after all…. It is, I think, very important for rational policy to halt the Social-Darwinist Waltz where Tyler is, at step 7, and not go on to step 8…. A system that for good outcomes requires that people act in ways people do not do is not a good system–and to blame the people rather than the system is to commit a major intellectual error.

Consider the… Starship Asgard…. When one person transposes an 8 and a 3 in the fifth and sixth decimal places of a hand calculation, the result should not be to send the starship hundreds of light years off course into uncharted space. Similarly, in a well-functioning economy the failure of a critical mass of unemployed workers to realize that they really should drop their reservation wage because the economy is suffering from a nominal shock should not send the unemployment rate on a multiyear journey upward during which it kisses 10%.