…key papers… maths and rational expectations… member of Sweden’s equivalent of the Monetary Policy Committee from 2007 to 2013…. Svensson… argued that there was still plenty of slack in the economy, and raising rates would be deflationary, so that inflation would fall well below the central bank’s target of 2%. By the end of 2012 inflation had indeed fallen to zero, and since then monthly inflation has more often been negative than positive. It was -0.4% in September. This week the Swedish central bank lowered their interest rate to zero…. Deviating from what mainstream macroeconomists in general advocate (and what one in particular recommended) has proved a costly mistake. (Svensson estimates it has cost 60,000 jobs.)… I am certainly not claiming that mainstream macroeconomics is without fault, as regular readers will know (e.g.) However it is important to recognise the achievements of macroeconomics as well as its faults. If we fail to do that, then central banks can start doing foolish things, with large costs in terms of the welfare of its country’s citizens…
Month: October 2014
The Federal Reserve Retires to Its Tent…: Morning Note on Tim Duy
A very interesting piece by Tim Duy on the recently-concluded Federal Reserve FOMC meeting. The precis: the Federal Reserve does not view itself as moving to tighten policy, but rather as moving to a policy that is still extraordinarily stimulative–especially considering the level of the unemployment rate.
If the unemployment rate were the only piece of information we had available, I would understand the FOMC’s position. But I see 2%/year wage growth. I see a prime-age employment-to-population ratio that is still extremely low, I see Japan where Abenomics hangs in the balance and a Eurozone where a triple dip is a 50-50 chance, I see the continued failure of the Obama Administration to fill Governor slots and the resulting rightward bias of the FOMC voices…
Either the FOMC consensus or I am greatly misreading the current macroeconomic situation. It may well be me. But I do not think so…
I have trouble imagining a scenario in which the Fed is content to watch unemployment fall below 5.5% without at least beginning the rate hike cycle. Remember that they think that even as they increase rates, they believe that policy will continue to be accommodative. In other words, they do not fear raising rates as necessarily a tightening of policy. They will view it as a necessary adjustment in financial accommodation in response to a decline in labor market slack. Hence the line:
The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run…
Robert Waldmann: Extra Thursday DeLong QE/Risk Smackdown: Morning Comment
…after massive QE tends to suggest that QE just doesn’t work. In 2010 it was possible to argue that massive purchases of long term treasuries would have an effect similar to reductions in the Federal Funds rate. Now not so much.
I do object to your identifying the risk born by the Fed with ‘duration risk’. That is true only of the pointless QE based on purchasing long term treasuries. The Fed also bought agency issued mortgage backed bonds. That is a very different kind of QE (one which I thought would work so my predictions are–as usual–bad).
I don’t see why anyone would think that the Fed bearing duration risk would stimulate fixed capital investment. Long term bonds are risky, because short term rates might go up–either because of inflation and the Fisher effect or because of high demand and FOMC fear of over heating and inflation. Actual physical capital is a hedge against these risks. That is long term bonds are a good hedge against the risk of lower than expected inflation or aggregate demand.
Making a hedge against the risks of NIPA investment more expensive is a very odd way to encourage more NIPA investment.
Risk is not a scalar. Correlations matter and some of them are negative.
Touché…
Morning Must-Read: Matt O’Brien: Why the Fed Is Giving Up too Soon on the Economy
As I see it, Federal Reserve policy right now is reasonable only if the unemployment rate is taken as a sufficient statistic for the state of the labor market. And it seems to me the odds are 4-1 against that being true…
…the Fed’s latest round of bond-buying, or QE3, is officially over. What did it get us?… The best answer is what it didn’t get us: a recession in 2013…. ‘Fiscal cliff’, ‘sequester’, and ‘debt ceiling’ might be hazy memories from a time when [the Republican House] Congress[ional Caucus] was doing its most to sabotage the recovery, so here’s a refresher…. There’s been an awful lot of austerity the last few years. Enough that the economy should have slowed down quite a bit…. But that’s not what happened…. QE… is the Fed’s way of printing its money where its mouth is when it says rates will stay low for a long time. That’s why, as economist Michael Woodford argued, QE works better when it’s used with forward guidance that makes the Fed’s promises about future policy more explicit. The question, then, is what message the Fed is sending now…
Stable families, prosperous economy
The American Enterprise Institute published a new report earlier this week on the importance of marriage in the growth of family incomes. The topline data point that many news organizations picked up was this—“family incomes would be 44 percent higher if Americans weren’t shying away from the altar,” as U.S. News & World Report put it. The authors of the report— Urban Institute economist Robert I. Lerman and University of Virginia sociologist W. Bradford Wilcox, a visiting scholar at AEI—marshaled an impressive array of new data to examine the importance of family structure on rising income inequality in the United States.
Equally important is the need for further research on whether and how income inequality fosters the conditions that make achieving strong, stable marriages difficult for more and more Americans. Marriages do not happen in an economic vacuum, and inevitably must be sustained amid tough economic times. What’s more, the increasing diversity of family structures means these kinds of economic issues are important for all adults, regardless of marital status.
Research on how economic inequality affects the prospects for marriage among low- and middle-income Americans points to several equally telling trends. Economists Eric Gould at the Center for Economic Policy Research and Boston University’s M. Daniele Paserman detail that marriage rates fall in cities where wage inequality is highest. Economists Melissa S. Kearney at the University of Maryland and Phillip B Levine at Wellesley College find that the proportion of young women having children out of wedlock is greatest in cities with the highestincome inequality. And economist David S. Loughran at the Rand Corporation finds that rising male wage inequality explains 7 to 18 percent of the fall in marriage for white women between 1970 and 1990.
In short, growing economic uncertainty and wage stagnation among the bottom 90 percent of income earners means greater family instability. Indeed, sociologists Kathryn Edin at Johns Hopkins University and Maria Kefalas at St. Joseph’s University find that the main reason unmarried women hesitate to marry—even if they have a stable partner—is because they see family economic instability and the fear of divorce as a bigger threat than being single. What’s more, Levine and Kearney also find that out-of-wedlock teen pregnancy is often driven by economic despair.
The release of yesterday’s AEI report by Lerman and Wilcox is a timely reminder that marriage matters amid the swift-changing economic landscape for most families in the United States, but we must also keep in mind that economic inequality plays a big role in the decline in marriages. Without question, families today are more financially and socially unstable than they were 40 years ago, when the rise of economic inequality to near Roaring Twenties-levels today first began. And this instability is now part of a feedback loop that makes it more likely for the next generation of American families to be even more stressed and increasingly not married.
But there are policies that those across the political spectrum can agree on—policies that could create conditions that foster healthy relationships and family life. Lerman and Wilcox’s paper provides an excellent starting place for a conversation about an economic policy agenda that supports strong and stable families. In particular, their recommendations regarding the expansion of the earned income tax credit and the child tax credit merit more attention because they have the potential to incentivize work and stabilize the economic lives of low- and middle-class Americans. Similarly, the recommendation to expand vocational education and apprenticeship opportunities for young Americans holds promise for strengthening the employment and earnings prospects of low and moderate income Americans, especially men.
Additional ideas belong on the table as well. A higher minimum wage would boost the take-home pay of millions of young workers. Policies to address work-life conflicts (especially for young parents) would provide much-needed stability for individuals seeking to establish and maintain healthy relationship with their partner. And reliable, high-quality early child-care, preschool, and after-care would remove a major stress from many family relationships.
Then there are health and criminal issues that need addressing. Providing easy access to effective and inexpensive contraception would help prevent unintended pregnancies, allowing couples to plan stable, secure family formation. Addressing the incarceration rate and the life-long consequences of imprisonment is a key point of policy intervention as well, particularly for low-income African-American men.
On both sides of the political aisle, there are signs of a commitment to the idea of strong, stable families as a critical element of our economy’s long-term success. Yesterday’s report suggests an opening for a policy agenda that could address this challenge head-on.
Suppose–Counterfactual World–That the U.S. Had Avoided Large-Scale QE since the Start of 2010…
…and that the employment, inflation, and futuer breakeven outcomes realized in that counterfactual world had been those seen in our world:
Is there any question that in that counterfactual world the FOMC would right now be actively and aggressively on the point of a massive QE program–that the only questions would be “how much” and “how quickly”?
Today, with the ending of QE, we live in that counterfactual world–with three differences:
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Since the start of 2010 the FOMC has already done $2.2 trillion of QE–and has thus taken duration risk of a magnitude that the private market requires $2 billion a month to bear off of private-sector balance sheets.
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As a result, whatever risks are involved in QE start from a baseline in which the private market is bearing $2 billion/month less in the amount of government and GSE duration risk than in the counterfactual world (modulus the Summers point that maturity extension has neutralized 1/3 of QE undertaken). And just what are those risks? And just how are they increased at the margin by starting with $2 billion/month less of government-issued duration risk in private-sector hands?
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As a result, whatever benefits are expected from QE have been modified by what we have learned over the past 4.75 years about the benefits of QE. And just what have we learned?
Question: How do those three differences move us from being on the point of undertaking a massive QE program to it being off the table?
Question: And why is the option of regime change–price-level targeting with at least partial catchup to the pre-2008 expected price level trend–off the table as well?
Afternoon Must-Watch: Emmanuel Saez and Laura Tyson: Income Inequality in the Twenty-First Century
Emmanuel Saez and Laura Tyson: Income Inequality in the Twenty-First Century:
What’s behind the drop in oil prices?
The past several months have seen a dramatic drop in oil prices across the globe. In July, a barrel of crude oil, specifically the West Texas Intermediate variety, sold for almost $108. Now prices are hovering around $82 a barrel. In The Atlantic, Derek Thompson wonders if we aren’t heading toward a $65 barrel. What exactly is going on with oil prices?
The simple, and uninformative answer, is changes in supply and demand. The relative importance of each factor, however, is up for debate—with important implications for economic growth and perhaps also for economic inequality here in the United States.
Let’s start with the supply side of the debate. Both Ben Casselman at FiveThirtyEight and Steven Mufson at The Washington Post peg increases in supply as the main culprit. Both writers bring up the large increase in oil production from the United States due to the fracking revolution. The technological advance has dramatically increased the supply of oil coming from the United States. In fact, Casselman has a chart showing U.S. oil production outpacing that of Saudi Arabia since late 2012. Mufson also mentions that oil companies have dramatically increased investment recently, resulting in increased supply.
But of course, the oil market isn’t perfectly competitive. The market is dominated by an oligopoly of oil-producing nations known as the Organization of the Petroleum Exporting Nations. These countries, including Saudi Arabia, Nigeria, and Venezuela decide on how much oil to produce and have a significant effect on global oil prices. So the question is why OPEC hasn’t reduced production to increase prices?
The answer is that Saudia Arabia, the “swing producer” who often sets OPEC policy, has decided not to reduce production. In fact, Izabella Kaminska argues at FT Alphaville that Saudi Arabia has an incentive to actually increase production. This increase in supply would further reduce prices and drive out other competitors, leaving Saudi Arabia as a monopolist. In other words, Saudi Arabia could be trying to drink other oil producers’ milkshakes.
Then there’s the demand side of the debate. Dean Baker, co-director of the Center for Economic and Policy Research, argues that supply actually isn’t an issue at all. Baker points out that oil production is still below projected levels made before the Great Recession. The culprit in this case is then demand. The decline in global economic growth has reduced demand and therefore oil prices.
If oil prices are dropping because the global economy is in trouble then oil producers and consumers may be in for a rough patch ahead. As Ben Walsh at the Huffington Post says, the bad news is that “oil is falling just like the stock market.” But he does have good news: the decline in oil prices is an economic stimulus because it increases disposable income for most Americans. So the price drop would help boost economic demand and economic growth while pushing economic inequality down a bit.
In the short-run, then, the global economic slowdown is helping the bottom line of many Americans. But these gains flow from the threat of another global economic recession. Silver linings amid gathering dark clouds.
Over at Project Syndicate: Material Well-Being in America since 1979: (Early) Thursday Focus for October 30, 2014
Material Well-Being in America since 1979
J. Bradford DeLong
Over at Project Syndicate: Over at Project Syndicate:
How true is this, really? The answer appears to be: true–with perhaps a very few caveats, but important caveats:
One important caveat is found in the Congressional Budget Office’s Distribution of Household Income and Federal Taxes:
[American] real after-tax income for the lowest quintile [was] 49 percent higher in 2010 than in 1979 (see Figure 9). Income growth averaged 1.3% annually for that group over the period. After-tax income for the middle three quintiles in 2010 was 40 percent higher than in 1979—equivalent to an average annual growth rate of 1.1% for the period. Households in the 81st to 99th percentiles… [saw] after-tax income… 64 percent above its level in 1979…. In 2010, household income for the top 1% was 201 percent above the mark for 1979, representing an average annual growth rate of 3.6%, far ahead of any other income group…
And, by now, with the recovery concentrated among the rich as well, the top 1% of Americans are highly likely to be back to a cumulative 300% gain since 1979.
But real income gains of 1.3% per year for those bottom-quintile slots in the American income distribution are not chopped liver, are they? The gap with the 1.6% per year real American GDP per capita growth rate is small, isn’t it?
Well, yes and no.
You can say that market income has become grossly more unequal since 1979 with the slots in the bottom half of the income distribution losing absolute ground in real income, and with taxation becoming less progressive, but that while this increase inequality has not been fully offset it has been substantially moderated by the growth of the social insurance state.
But when you look at the 1.3% per year growth rate of after-tax real income that the CBO calculates for the bottom quintile, 0.9%-points per year of that comes from the growth of the health-care financing programs: Medicare, Medicaid, SCHIP. CBO counts all of that growth as an increase in the after-tax real incomes of America’s poor. But that is not money that America’s poor can spend, so some haircut should be applied. Moreover, only half of those expenditures show up as more health care received by program beneficiaries–the other half flow into the general American health-care financing system and cover care that was previously uncompensated. And America’s health care financing system is uniquely inefficient: it really does look like other OECD countries get more bang in terms of health and healthcare services from $1 of spending then America gets $2. Apply all of those haircuts, and it seems to me that a better estimate of the contribution of expanded American public health-care programs to the material well-being of the American poor is not 0.9%-points per year but 0.2%-points per year.
Hence the necessity of something like RomneyCare, or ObamaCare, or biting the single-payer bullet, so that America gets something like normal OECD value out of its enormous health-care expenditures.
Depending on whether the day is odd or even, I come down in two different places on this issue of the interaction of growing government health-care financing programs and inequality. On odd days, my bottom line is that material well-being since 1979 has grown at 0.5% per year for America’s poor compared to 4.0% per year for America’s rich (and 6.0% per year for America’s super-rich) because most of the expansion is not the equivalent a greater income for America’s poor in any reasonable sense, and because America’s broken health-care financing system seems that America gets relatively little health well-being bang out of it’s typical health care financing buck. On odd days, my bottom line is that healthcare for and the health of America’s poor in 1979 lagged so far behind that achieved in a normal OECD social democracy that even though each extra $1 produced only $0.25 of real health-care services delivered, poor health status meant that that $0.25 was Worth about one dollar to the poor in terms of material well-being. On this reading, the expansion of the health-care programs has kept the properly-measured material well-being of America’s poor improving since 1979 at a rate not too much less then that of real GDP per capita. But that the healthcare coverage and financing gaps that existed in America in 1979 made it then a much more unequal place then the income dollar-share numbers then showed.
Lunchtime Must Read: Jonathan Chait: Yellen Mentions Inequality; Right Scandalized
…a moderate, wrote that Yellen is now ‘in danger of becoming a partisan hack.’… The parties don’t merely disagree about the merits of inequality, they disagree about the merits of even acknowledging it…. Remember Mitt Romney conceding that inequality should only be discussed in ‘quiet rooms’?… Merely by stating facts about inequality in public, even without taking a stand on it, Yellen has placed herself on one side of a partisan divide. It’s like saying ‘Jehovah.’
What Strain does not mention is that Yellen is hardly alone among Federal Reserve chairs…. Hardly a week went by without Greenspan interjecting himself into the political debate. And Greenspan, a former follower of Ayn Rand with staunchly conservative views, had none of Yellen’s careful reserve…. Is the new rule here that, starting now, the Federal Reserve chair has to stay completely out of partisan politics? Or is the rule that they need to stay out of politics unless they’re conservative?