Month: January 2015

Morning Must-Read: Tony Yates: ECB QE. Much too Late and Not to Be Counted on

Posted on by Brad DeLong

Tony Yates gives an even more pessimistic assessment of Eurozone QE than I gave yesterday.

But it is hard to disagree with him, and to be even as less-pessimistic as I was yesterday.

And that even this small, tentative step which carries no risks whatsoever that I can see excites such extraordinary opposition is a very bad sign for the Eurozone as a whole.

The German establishment appears to have decided that forcing “reform” in southern Europe is its only policy goal. I do not know whether they think it is worth risking the break up of the European project or are just ostriches. I don’t know whether they think it is worth risking recession in Germany, believe that a deeper crisis in the south will lower the value of the euro and produce a German boom and thus that recession in Germany is not a risk, or are just ostriches:

Tony Yates: ECB QE. Much too Late and Not to Be Counted on: “The slow, drawn out, reluctant, piecemeal way…

…that the ECB has handled the crisis… and the disputes that have raged about whether and how to do QE… minimise the bang per buck…. Second, in so far as QE works by signalling intentions about future central bank rates, there is now little to be got…. Third, in so far as QE acts through lowering term, liquidity or other premia, it’s too late for that too. Something has squeezed those premia out in Northern countries. And the risk that the remaining premia in the South reflect is not going to be taken off the local sovereign balance sheet…

What have we learned about the ACA over the last year?

Posted on by Nick Bunker

In his State of the Union address, President Obama stated “in the past year alone, about ten million uninsured Americans finally gained the security of health coverage.” The Affordable Care Act’s key coverage provisions (Medicaid expansion and the insurance exchanges) have been in effect for more than a year and are responsible for the increased coverage Obama highlighted. But what else can be said about health insurance reform?

The big ACA news from last year is the lack of bad news, but avoiding a disaster is a low bar. While they might not have gotten the most headlines there were some notable successes, too. More than 9 million people are estimated to be net newly insured and millions more have new insurance options. The Congressional Budget Office’s estimates for coverage were shockingly close to the actual enrollment despite the flawed roll-out. Premiums have remained stable or even declined in most places. In a big departure from the trend of the 2000s, medical inflation has been roughly the same as overall inflation. A recent study by researchers at the Urban Institute found no change in the number of people receiving insurance from their employers since the implementation of the new health law.

That said, the Affordable Care Act has not solved all of the nation’s health insurance problems. There are still tens of millions of uninsured people. The goals of the law, to increase insurance affordability and coverage, still have some way to go. Several states have elected not to expand Medicaid, which means many people will remain uninsured. Likewise, affordability will remain an issue. A new study from RAND researchers finds, somewhat counter-intuitively, that increased insurance competition may actually result in higher consumer costs by increasing the number of high deductible plans.

In addition to this mix of good and the bad news, there are some things that are not yet known. With only one year of full implementation of the coverage provisions, more issues may arise. For instance, the Affordable Care Act was assumed to reduce “job lock,” when people stay in a job they would quit if they did not need health insurance. A study by economists Craig Garthwaite and Matthew Notowidigdo of Northwestern University, and Tal Gross of Columbia University looked at the employment effects when people in Tennessee lost public insurance. Their analysis implies that we should expect the ACA to allow a lot of people to retire early or work part-time. The employment data may or may not  show this happening.

While economists are measuring the impact on job lock, there are other questions that health care researchers will be tackling over the next few years. How do Medicaid costs compare in states such as Arkansas that expanded Medicaid through a private option? Will the insurance markets remain stable as some of the ACA’s components such as reinsurance and risk corridors phase out? What additional reforms are needed to improve access to care, increase affordability, and raise quality? All of these issues will be important for researchers and policymakers to grapple with as they calculate the promise of the Affordable Care Act to reduce health insurance inequality in the United States.

Things to Read on the Morning of January 22, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

 

  1. Robert Waldmann: Debates: “I typed something…. ‘Name a Friedman Solow debate which, with the benefit of hindsight, we agree was won by Friedman. I do not think this is easy to do.’… My challenge was to name a Friedman-Solow debate and convince me (Robert Waldmann) that Friedman was right. Rowe interpreted ‘we’ to refer to… mainstream… macroeconomics…. For that set of people I use the pronoun ‘they’…. Take it as agreed that new Keynesian macroeconomics is basically Friedmanite macroeconomics… are very different from old Keynesian macroeconomics and [from] real business cycle theory…. This victory came in one of two ways… the victory over the straw man of the expectations-unaugmented Phillips curve…. The conventional recollection of that alleged debate is almost entirely fictional…. Samuelson and Solow 1960. Yes the profession (also over here with huge persistent unemployment) believes in the natural rate hypothesis. The profession is crazy. The permanent income hypothesis is… rejected… now the permanent income model and it is assserted that although it isn’t true it may be useful (the logic is almost that since it isn’t exactly true it must be useful)…. There is the idea that AD should be managed with monetary policy…. Recent experience doesn’t show that good monetary policy solves AD problems…”

  2. Paul de Grauwe: Quantitative Easing and the Euro Zone: The Sad Consequences of the Fear of QE: “I see two reasons why the case for [Eurozone] QE is overwhelming. First, QE is merely a correction for… the last two years… [when] the ECB withdrew about €1 trillion out of the euro-zone economy…. Second, the euro-zone economy is not getting off the ground…. Since Milton Friedman we have all become monetarists. In order to raise inflation it will be necessary to increase the growth rate of the money stock. This requires that the ECB increase the money base. And to achieve the latter there is only one practical instrument, ie, an open-market purchase of government bonds…. But… QE… is necessary but not sufficient. The fact that it is not sufficient, however, should not lead to the conclusion that it can be dispensed with…. There is much misunderstanding and fear regarding QE, especially in Germany. There is the fear that… German taxpayers risk having to foot the bill…. [But] if… say the Italian government were to default… [it] would stop paying interest but at the same time (applying the ‘juste retour’) it would not get any interest refund… no fiscal transfers…. [Any] write down ]of] the Italian bonds… [would be] purely an accounting operation…. A central bank… does not need equity…. This confusion between accounting losses and real losses… has led to long hesitation to act… leads to bad ideas and wrong proposals…”

  3. Paul Krugman: A Tale of Two Pegs: “By the numbers Switzerland’s monetary situation pre-collapse and Hong Kong’s now look remarkably similar…. So is the Hong Kong dollar at risk of a franc-like event? No, it isn’t. There’s not a hint of pressure to drop the currency board. Why is Hong Kong different The answer…is that the institutional setup and history… plays very differently with hard-money ideologues… even though the facts… weren’t very different…. Swiss currency intervention looked to the usual suspects like activist monetary policy, runaway expansion of the central bank’s balance sheet, ‘printing money’ to debase the currency even if the goal was to keep it from getting stronger. Meanwhile, Hong Kong has a currency board, which is the next best thing to the gold standard, so maintaining the peg… became a demonstration of stern Victorian monetary virtue…. It was the nagging from hard-money types that led to the debacle. Meanwhile, Hong Kong has managed to wrap the very same policy in libertarian clothes, and there’s no problem.”

  4. Lawrence Delevingne: Manager ‘truly sorry’ for blowing up hedge fund: “A hedge fund manager told clients he is ‘truly sorry’…. Owen Li, the founder of Canarsie Capital in New York, said Tuesday he had lost all but $200,000 of the firm’s capital–down from the roughly $100 million it ran as of late March…. ‘My only hope is that you understand that I acted in an attempt—however misguided—to generate higher returns for the fund and its investors. But even so, I acted overzealously, causing you devastating losses for which there is no excuse,’ he added. Li is a former trader at Raj Rajaratnam’s Galleon Group, which collapsed amid insider trading charges…. Li’s lieutenant at Canarsie is Ken deRegt, who joined in 2013 after retiring as the global head of fixed income sales and trading at Morgan Stanley…. Li and the deRegts did not immediately respond to emails seeking comment. No one picked up a phone call at Canarsie’s offices and no valid voicemail was available…. Li said in the letter that he made a series of ‘aggressive transactions’ over the last three weeks to make up for poor returns in December…”

  5. David Keohane: ECB QE guesswork, cut out and keep edition: Deutsche Bank: Screen Shot 2015 01 22 at 13 01 29 png 700×390 pixelsECB QE guesswork cut out and keep edition FT Alphaville

Should Be Aware of:

 

  1. Simon Wren-Lewis: Encouraging Dialogue: “Economists want (or need) to know why their approach is missing key issues or linkages which compromise their analysis, just as the doctor needs to know why they might be recommending the wrong treatment. You would not insist that your doctor needed to have studied economics before they can be a good doctor…. Let me take a real world economic problem: the response to the financial crisis…. Your economic analysis tells you that networks of many small entities can be as subject to crises as networks involving a few large banks. You are also able to devise a system of Chinese walls…. [But eventually] you realise that right from the start you made the wrong choice. You decided to focus on what you knew, which was how to design systems that worked well as long as those systems remained unchanged, but which were not robust to intervention by self-interested parties. In short, they were too open to rent-seeking. You realise that actually the best thing to have done was to break up the banks so that their political power was forever diminished. And you recall a conversation with your social science colleague when this all started, who might have been trying to tell you this if only you had understood the words he was using.”

The German Establishment’s Reversal-of-Field on Monetary Policy and the ECB

Posted on by Brad DeLong

In my inbox…

Then:

The design of the European Central Bank must follow the design of the Bundesbank. That means, first, goal independence: the ECB must have a fixed objective,and that objective should be an inflation rate near but less than 2%/year.

Now:

So what if inflation is far below its goal of near-but-less-than-2%/year? We like 0%/year now! Forget goal independence!

Then:

The design of the European Central Bank must follow the design of the Bundesbank. That means, second, instrument independence: the ECB as a technocratic institution must not have its elbow joggled by those less-expert in their understanding of monetary policy.

Now:

On interest rates, you ran out of room to cut and into the ZLB while the economy was still depressed. So you want to try this QE idea now? Why? that sounds very strange to us! Forget goal independence!

Then:

The design of the European Central Bank must follow the design of the Bundesbank. That means, third, following fixed, settled, and well thought-out rules rather than making it up on the fly.

Now:

Thank goodness our monetary policy is carried out via rules not discretion!”

Afternoon Must-Read: Robert Waldmann: Debates

Posted on by Brad DeLong

Robert Waldmann: Debates: “I typed something….

Name a Friedman Solow debate which, with the benefit of hindsight, we agree was won by Friedman. I do not think this is easy to do….

My challenge was to name a Friedman-Solow debate and convince me (Robert Waldmann) that Friedman was right. Rowe interpreted ‘we’ to refer to… mainstream… macroeconomics…. For that set of people I use the pronoun ‘they’….

Take it as agreed that new Keynesian macroeconomics is basically Friedmanite macroeconomics… are very different from old Keynesian macroeconomics and [from] real business cycle theory…. This victory came in one of two ways… the victory over the straw man of the expectations-unaugmented Phillips curve…. The conventional recollection of that alleged debate is almost entirely fictional…. Samuelson and Solow 1960. Yes the profession (also over here with huge persistent unemployment) believes in the natural rate hypothesis. The profession is crazy. The permanent income hypothesis is… rejected… now the permanent income model and it is assserted that although it isn’t true it may be useful (the logic is almost that since it isn’t exactly true it must be useful)…. There is the idea that AD should be managed with monetary policy…. Recent experience doesn’t show that good monetary policy solves AD problems….

There is strong evidence that expansionary fiscal policy (as in China) works, that modestly expansionary fiscal policy (the ARRA in the USA) works moderately and that austerity has terrible consequences…. The weight of evidence is very strongly against the idea that the best way to manage AD is always monetary policy. I note that part of the Friedman vs Old Keynesian debate was whether liquidity trapping was possible. Friedman argued no. I think the debate should be considered settled….

Floating exchange rates may beat the alternative, but the idea, which I ascribe to Friedman, that they won’t fluctuate widely with associated huge current account surpluses and deficits is now known to be false…. Rules v discretion in monetary policy. Has anyone noticed that the FOMC is not working according to a rule?…

Rowe and I agree that Friedman dominates mainstream (non RBC) macro…. He seems to think that this is the result of some sort of inquiry which might be construed as scientific. I think it is based on… contempt for the evidence….

I see I have gotten off topic…. I can think of two debates. One alleged and very famous debate was about the Phillips curve. However, recollections of Solow’s position are inconsistent with what he actually wrote. I see two points where Solow disagreed with Friedman…. Solow argued that inflation expectations were sometimes anchored…. Here, current discussion seems to me to follow Solow almost exactly. Second, Solow discussed cyclical unemployment becoming structural. This is now called hysteresis. As far as I know, Friedman didn’t consider the issue. It seems to be quite important….

On the PIH, Solow dismissed Ricardian equivalence. Friedman didn’t use the phrase, but he clearly appealed to the concept. I think the evidence on this point is very clear….

Alan Marin wrote something I was groping towards above:

Finally, for now at least, I think that on the crucial Rules vs. Discretion 1970s disagreement between Friedman and the Keynesians, current practice… is closer to the Keynesians. Nick Rowe overstated the Friedman ‘victory’ by ignoring the distinction between instruments and targets. Steady inflation is now viewed as a target, but Central Banks are given full discretion over their use of the instrument. This is very different than a Friedmanite rule…. Similarly, CB monetary policy does not take Friedman’s view that the lags in the effects of policy are so long and variable as to make any response to current events undesirable.

President Obama’s “middle-class economics”

Posted on by Bridget Ansel

Equitable growth was a central theme in President Obama’s State of the Union address last night. The president’s speech laid out a vision for “middle-class economics” that is clearly meant as a rebuke to “trickle-down economics,” the philosophy which has dominated Washington policymaking for the past four decades. But what exactly is middle-class economics?

First of all, it’s good political messaging because a plurality of Americans self-identify as middle class—it’s not just for those at the middle of the income ladder. The President’s “middle class economics” vision includes policies that help those at the bottom, middle, and, yes, the top of the income and wealth spectrum in our society, and in turn aims to kick-start the U.S. economy into a new era of equitable growth.

But middle-class economics also is good economics. Boosting wages is perhaps the right place to start, given the salience of wage stagnation as a key indicator of the failures of the past several decades of trickle-down’s ill-distributed growth. The president’s speech called for boosting the minimum wage, a policy move supported by a widening circle of politicians, including prominent Republicans who recognize that it’s not only publically popular but also important to improving the livelihoods of those on the bottom and middle rungs of the income ladder as that wage increase “trickles up” the income ladder.

The declining strength of the minimum wage over the past three decades is illustrated in this great infographic. And the best evidence on the economics of the minimum wage suggests little-to-no meaningful effects on job creation or job losses. Instead we see substantial reductions in labor employee turnover and improvements in business efficiency that help business owners and shareholders alike. Moreover, recent studies using a wave of state-level minimum wage increases show that states that increased their minimum wage saw stronger job growth than those that did not—another boon to both employees and employers.

It’s also worth noting that Econ101 says putting more money in the pockets of low-wage workers is good for the economy as it boosts consumer demand. It is these individuals that are most likely to spend that extra dollar in their pocket, and that spending is part of what drives economic growth. And, despite the popular counterpoint that many minimum wage workers are teenagers working for pocket change, over half of all minimum wage workers were 25 years old or older.

The president’s speech last night also included a pitch to reduce work-family conflict, with a policy agenda including paid sick leave, paid family leave, and affordable child care. All of these are much needed updates to workplace rules designed for the Mad Men-era, when a family could maintain a comfortable middle-class standard of living on one income. An updated set of family friendly policies isn’t just good for hard-working families, whether they’re dual-earner couples or struggling single parents. What’s good for families is also good for the economy.

One recent study shows that paid parental leave is not the “job killer,” and in contrasts actually boosts labor force participation and wages, as well as job quality. For instance, in a 2009-2010 survey of California employers, 87 percent reported that the state’s paid family leave policies resulted in no cost increases. Family friendly workplace programs also help working parents stay in the labor market. These policies mean breadwinners do not face the hard choice that 41 million American workers currently must make—miss a paycheck or even lose a job to care for a sick child or taking an ailing parent to the doctor’s office.

Finally, the President’s middle-class economics includes a new set of taxes on capital to lift them closer to those already levied on wages. The focus on capital taxation makes sense in light of the new evidence on the dramatic wealth gaps in the United States. My colleague, Nick Bunker, has written elsewhere on the president’s tax-reform proposals, but it’s worth briefly noting here the key take-away: Trickle-down economic messengers contend that increasing taxes on capital is a sure-fire way to kill growth, but a wide range of thoughtful economists tells us otherwise.

Tax Policy Center director and Syracuse University economist Len Burman, for instance, concludes that top capital gains rates have no relationship to economic growth. This means raising taxes on capital would enable our nation to make the investments we need to power more broad-based economic growth that helps everyone up and down the economic ladder now and well into the future. Think new infrastructure, universal pre-kindergarten, more affordable college, and more money for basic research and development to ensure the United States remains the world’s global technology and innovation leader.

In short, middle class economics tells us we can raise capital gains tax rates back to where they were under President Ronald Reagan—and by doing so finance government programs that can serve as a springboard for more equitable growth.

 

 

Morning Must-Read: Paul de Grauwe: Quantitative Easing and the Euro Zone: The Sad Consequences of the Fear of QE

Posted on by Brad DeLong

From my perspective, QE has always seemed to me to be likely to be:

  1. Very effective if it changes expectations of the future price level–that shakes rates rates of return significantly, and gives real people powerful incentives to spend their cash now.
  2. But setting up QE in such a way that it changes expectations of the future price level is difficult: the problem is that QE transactions are easily undone in the future, and there is every reason to think that an inflation-targeting central bank will undo them in the future.
  3. And if QE does not change expectations of the future price level its effects on real rates of return are minimal.

Think of it: for the ECB to buy €1 trillion of ten-year EU government bonds which have a term premium of 0.1%-point per year of duration means that the ECB takes duration risk off of private-sector balance sheets that the private market currently charges €10 billion/year to bear. It frees-up that risk-bearing capacity to be deployed elsewhere. In a €20 trillion/year Eurozone economy that is 0.05%. You can blather about financial accelerators and credit multipliers all you want, but it is a very uphill task to convince me that that is a big deal.

So why do it?

  1. It is a small plus.
  2. It might become part of a process that moves expectations and turns into a big plus.
  3. There is nothing else politically practical on the agenda that might be done that QE takes attention away from.

The very sharp Paul de Grauwe:

Paul de Grauwe: Quantitative Easing and the Euro Zone: The Sad Consequences of the Fear of QE: “I see two reasons why the case for [Eurozone] QE is overwhelming…

…First, QE is merely a correction for… the last two years… [when] the ECB withdrew about €1 trillion out of the euro-zone economy…. Second, the euro-zone economy is not getting off the ground…. Since Milton Friedman we have all become monetarists. In order to raise inflation it will be necessary to increase the growth rate of the money stock. This requires that the ECB increase the money base. And to achieve the latter there is only one practical instrument, ie, an open-market purchase of government bonds…. But… QE… is necessary but not sufficient. The fact that it is not sufficient, however, should not lead to the conclusion that it can be dispensed with….

There is much misunderstanding and fear regarding QE, especially in Germany. There is the fear that… German taxpayers risk having to foot the bill…. [But] if… say the Italian government were to default… [it] would stop paying interest but at the same time (applying the ‘juste retour’) it would not get any interest refund… no fiscal transfers…. [Any] write down ]of] the Italian bonds… [would be] purely an accounting operation…. A central bank… does not need equity…. This confusion between accounting losses and real losses… has led to long hesitation to act… leads to bad ideas and wrong proposals…

Morning Must-Read: Paul Krugman: A Tale of Two Pegs

Posted on by Brad DeLong

Paul Krugman: A Tale of Two Pegs: “By the numbers Switzerland’s monetary situation pre-collapse…

…and Hong Kong’s now look remarkably similar…. So is the Hong Kong dollar at risk of a franc-like event? No, it isn’t. There’s not a hint of pressure to drop the currency board. Why is Hong Kong different The answer…is that the institutional setup and history… plays very differently with hard-money ideologues… even though the facts… weren’t very different…. Swiss currency intervention looked to the usual suspects like activist monetary policy, runaway expansion of the central bank’s balance sheet, ‘printing money’ to debase the currency even if the goal was to keep it from getting stronger.

Meanwhile, Hong Kong has a currency board, which is the next best thing to the gold standard, so maintaining the peg… became a demonstration of stern Victorian monetary virtue…. It was the nagging from hard-money types that led to the debacle. Meanwhile, Hong Kong has managed to wrap the very same policy in libertarian clothes, and there’s no problem.

Taxation in the name of equity

Posted on by Nick Bunker

In his State of the Union address last night, President Obama announced a variety of proposals spanning education, housing finance, and the tax system. On that last topic, the president suggested several changes to the federal tax system, including raising the long-run capital gains tax rate. But perhaps the most interesting tax proposal was a tax on borrowing by banks with assets of at least $50 billion. The tax would raise funds, but its larger impact would be on the borrowing behavior of these large banks. A reduction in borrowing would be a boon to economic stability, with the costs borne by some of the best-off people in the U.S. economy.

First, a step back to understand the role of borrowing for banks. Broadly speaking, a business is funded either by debt or equity. Debt is borrowing, either in the form of a loan from a bank or the sale of a bond. Equity is a way to finance a firm by selling an ownership stake in the firm. An equity stake in a firm is better known as a stock share. The main difference between debt and equity is that equity is a much more flexible form of funding. If a business takes a hit to their revenue and they were expecting to pay stockholders a dividend they can just wait until revenues increase. Their valuation may decrease, but the business isn’t immediately in peril. But if this business has to make a debt payment, they must make the payment at the agreed upon time or risk default.

The mix of these two financing options determines the leverage ratio of the firm. The more levered a firm, the more debt the firm has taken on. The higher the ratio, the more profit a company can make on a given amount of earnings. But a higher ratio means that the impact of a loss is amplified. Leverage, in other words, acts like a financial accelerant.

While most businesses take on some leverage, banks as an industry have very high levels of leverage. By taxing borrowing, the Obama administration proposal would attempt to reduce these leverage ratios by discouraging debt and increasing financing through equity.

While this shift might reduce financial instability, how would less borrowing affect the rest of the economy? We often hearing about increased equity funding for banks referred to as banks “holding more capital.” Wouldn’t that mean banks are reducing lending?

The answer is no. Economists Anat Admati of Stanford University and Martin Hellwig of the Max Planck Institute document in their book “The Bankers’ New Clothes” and elsewhere that increased equity funding of banks doesn’t reduce lending. Banks aren’t holding money they already have. They are changing where they get the money from in the first place.

Increased reliance on equity wouldn’t reduce lending, but it would end up reducing bank profits, according to Admati and Hellwig. So there would be some losers from the shift. But the reduction in profits would likely be passed onto stockholders, most of whom are concentrated among at the top of the income ladder. The damage wouldn’t be severe.

The bank borrowing tax proposal isn’t the only way to get banks to reduce their debt financing. The Federal Reserve has required lower leverage ratios in the years since the financial crisis of 2008 and could go further. Regardless of the means, reducing banks’ reliance on debt would be a positive step toward equity, in every sense of the word.