…It’s kind of amazing they need to be said out loud as news, but people do need reminders. One trouble I have is that I think even very smart and experienced people are profoundly bad at knowing what the problems are in the economy, where the political winds are blowing, and what will work. This needs to be said out loud as well…. I spend a lot of time studying local labor markets in Africa…. I try to figure out what holds back legal work and test programs that deliver those things: skills, capital, socialization, and so on. And I get it wrong almost every time…. Experiments never end like I expect them to…. I was blindsided by how frequently the poorest young men in slums of Nairobi have a home robbery or theft, meaning it’s almost impossible to accumulate capital. I was amazed that, yes, with a little skills and capital that a young woman can become the 183rd tailor in her community and turn a good profit.
This isn’t a defeatist point of view. I’d make a different point: the way I’ve learned how things operate is to work with a government or organization to try out a policy and succeed or fail. This kind of trial and error seems crucial to me. Karl Popper called this the piecemeal social engineer. Deng Xiaoping called it crossing the river by feeling each stone…. A lot of people would say this is China’s secret to success: informal experimentation on a grand scale. The problem, as I see it, is that most governments and aid organizations I’ve worked with are really, really bad at this. They don’t use the lessons from past failures to try again a different, better way. They don’t throw out bad programs…. The important question is not ‘what is the right policy?’, but ‘what is the process for generating good policies over time?’, and more importantly ‘how to get governments and aid organizations to adapt to the good and throw out the bad?’…
Month: April 2015
Must-Read: David Beckworth: It Takes A Regime Shift to Raise an Economy
…as the best way to deal with the zero lower bound (ZLB) problem….
The second possible direction of change for the monetary policy framework would be to keep the targets-based approach that I favor, but to change the target… [to] raising the inflation target, targeting the price level, or targeting some function of nominal GDP… to deal more effectively with the zero lower bound on interest rates. But economically, it would be preferable to have more proactive fiscal policies and a more balanced monetary-fiscal mix when interest rates are close to zero. Greater reliance on fiscal policy would probably give better results, and would certainly be easier to explain, than changing the target for monetary policy.
So Bernanke wants the Fed to keep its inflation target of 2% and complement it with more aggressive use of fiscal policy…. What could possibly go wrong? A lot, actually…. Fiscal policy would [only] have had 60 basis points [of inflation] on average with which to work over the past six years in closing the output gap. Do we really think that would be enough for the level of aggregate demand shortfall experienced over this time? What was needed was a monetary policy regime shift… a permanent increases in the non-sterilized portion of the monetary base to spur rapid growth in total dollar spending. It was never going to happen with a 2% inflation target…. To get the kind of robust aggregate demand growth needed to close the output gap back in 2010, there needed to be a sustained (but ultimately temporary) period of higher-than-normal inflation…
What is the right size and purpose of the U.S. financial system?
The U.S. financial services industry weathered plenty of criticism in the wake of the 2007 financial crisis, a natural reaction considering the roles played by different financial institutions in inflating a housing bubble and triggering the worst recession since the Great Depression. Of course, more prudential financial regulations are now in place, courtesy of the Dodd-Frank Act of 2010, yet it’s still worthwhile to take a step back and consider the large role of the financial system in the U.S. economy today.
A first and important observation is that the finance sector as a whole has actually become less efficient since the 1980s, according to research by New York University economist Thomas Phillippon. But Noah Smith, a professor at Stony Brook University, points out in a column for Bloomberg View that what we think of as “finance” encompasses a variety of different services. Hedge funds are different from venture capital funds, which are different from community banks. But Smith notes that they all have one thing in common: They take savings and turn them into investments, which is an incredibly important function in a complex capitalist economy.
But how big and dominant does finance writ large need to be within the U.S. economy to perform this important function? Smith argues that the best way to figure this out is to evaluate the value of each specific part of the finance sector. The questions then become, for example, what’s the value of high-frequency trading or debt-driven private equity investing. His answer is that these are subsectors that probably are “too big on the margin.”
Then there’s the question of purpose. The U.S. financial system turns savings into investment, but are the kinds of investments chosen the most effective? Take, for example, the transformation of the commercial banking sector over the course of the 20th century. Most people think commercial banks are focused on funding business investments, yet the reality is that they increasingly focus on channeling savings into home mortgages while sub-financial sectors such as the bond markets and the leveraged loan markets serve the needs of businesses. Perhaps given these facts, we might want to consider restructuring the commercial banking sector to match its most prominent purpose.
Or consider the role of activist investors who deploy savings to drive the movement of investments toward increased dividends and share buybacks. These kinds of financial firms are setting the standards by which investments are judged. But are these payouts an accurate sign of the long-run stability of firms? If not, then that could have consequences for the broader economy. That’s certainly a question of purpose, not size.
So size might not be the only relevant question when it comes to the financial sector. The structure and the purpose of the financial system and its constituent parts are important to consider as well. If finance acts like an irrigation system for the broader economy, we need to question not only how big specific pipes are but also where those pipes eventually lead.
Over at Grasping Reality: Weekend Reading: Tony Yates: On John Taylor
I think Tony Yates gets it 100% correct. It is not just that I do not think that John Taylor’s current positions are incorrect, it is that I cannot imagine a possible world in which they would be consistent:
Tony Yates: John Taylor and His Thesis that Deviations from the 1983 Taylor Rule Caused the Global Financial Crisis: “John Taylor [here/here] recently reiterated his views on what caused the global financial crisis…
…He contends the following: That the Great Moderation was due to adherence to the Taylor Rule [and to ‘rules-based’ fiscal policy]. That during the early 2000s, monetary policy was set looser than that prescribed by the Taylor Rule. This caused the build up of debt and risk-taking, which ultimately led to the bust, and the end of the Great Moderation. Weak activity following the crisis has been due to departures from rules based monetary policy, in the form of unconventional monetary policy. And departure from rules based fiscal policy, in the form of the fiscal stimulus enacted by Obama in 2009. These departures have created uncertainty that has weighed against activity. Tighter policy on both counts would have led to more buoyant activity during the recovery on account of being more certain.
I think he’s wrong on every point…
Keynesian Multipliers, Investment Accelerators, and Crowding-in
This is what Ben Friedman wrote about in the late 1970s:
****: Crowding In and the Paradox of Thrift: “Francesco Saraceno notes… IMF… research… has become an extraordinary source of information and ideas…
…Chapter 4, on business investment… weak… [because of] a special problem of lack of business confidence, driven by fiscal worries, failure to make needed structural reforms, and maybe even careless rhetoric… [or] weak because the economy is weak[?]… The IMF comes down strongly for the second view….
But wait, there’s more…. To deal with… reverse causation… it looks for episodes of weak growth… clearly caused by… fiscal consolidation… [and] manages in passing both to refute a very widely held but false belief… that government deficits necessarily ‘crowd out’ investment, so that reducing deficits should free up funds that lead to higher investment. Not so, says the IMF: when governments introduce deficit-reduction measures, investment falls instead of rising. This says that the deficits were crowding investment in, not out… empirical confirmation of the existence of the paradox of thrift! Remarkable stuff. Someone tell Wolfgang Schäuble.
I, however, read this as not quite the “paradox of thrift”, however, but rather as the investment accelerator. As I read the IMF’s *World Economic Outlook* chapter 4 section on “How Much [Investment Weakness] Is Explained by Output? Insights Based on Instrumental Variables”, they are saying that *if* the government undertakes fiscal austerity and *if* there is not full monetary offset in order to hold real GDP to its pre-austerity path, *then* investment will be relatively weak. The absence of full monetary policy offset seems to me to be key–at least when I teach “crowding out”, it is something that happens as a consequence of full monetary offset, and thus of a stable real GDP path, in the event of a shift in government spending and taxes.
Nevertheless, the strong accelerator effects that the IMF team finds are very interesting–and are yet another reason why I find that I keep raising my estimate of what the simple Keynesian multiplier is.
Things to Read at Lunchtime on April 18, 2015
Must- and Should-Reads:
- : Europe’s Poisoned Chalice of Growth
Must-Read: : The Safety Trap - Must-Read: : A Real Problem with the ACA
- Must-Read: : Bond bubbles, MMT, and the Limits to Fiscal Policy
Might Like to Be Aware of:
Recession in Oil Patch Red States This Year?
In the Oil Patch, probably yes–lost demand from the failure to expand Medicaid is likely to push them over the edge and into recession. Elsewhere it will be close, but probably not:
…is leaving red states poorer and sicker…. King v. Burwell…. If the Supreme Court rules for the plaintiffs, those states, including Arizona, will lose their subsidies. That would be a disaster for those states. As Sarah Kliff writes:
Approximately 205,000 Arizonans are receiving coverage through the marketplace. Of those, 76 percent are receiving subsidies to help cover the cost of their premiums. An adverse ruling would likely lead the state’s exchange to collapse, as healthy, young Arizonans who could only afford insurance because of the subsidies pull out and the exchange itself enters into a death spiral.
What Arizona has promised to do is let that happen… a decision made, of course, by legislators and a governor who have insurance now, and will have it in the event of an adverse Supreme Court ruling….
If the subsidies are ripped out of federal exchanges, it will only cripple the law in red states that loathe the legislation. Obamacare will work fine in states that want it to work; those states either have their own exchanges now or they’ll quickly build them. But resistant red states will be left with a wrecked insurance market–and a hefty tax bill…. Republicans in those states will still be paying the taxes and bearing the spending cuts needed to fund Obamacare. They just won’t be getting anything back.
In effect, the Republican plan to destroy Obamacare has become a plan in which red states subsidize Obamacare in blue states….More than 20 Republican-led states have rejected the Medicaid expansion. The result is about 5 million more Americans without insurance… [and] those states are forgoing about $37 billion in federal funds in 2016 alone…. Republicans warned that Obamacare would wreck health insurance markets, do little to help the uninsured, and leave everyone else paying hefty taxes to fund a rolling disaster. In fact, Obamacare has covered millions of people at a much lower cost than expected. But as a byproduct of their tactics against Obamacare, Republicans are making their predictions come true, at least for their own residents.
After accounting for the multiplier, the absence of the Medicaid expansion and other ObamaCare nullification efforts is putting a downward drag on economic growth in Red States of about 0.5% this year: a 2%-point growth in the non-insurance gap times 1/6 of the economy times a 1/2 insurance-spending attenuation factor times a Keynesian multiplier of 3:
Add to that the effect of the oil price declines like 1986 and 1998 on the oil patch:
And I do not see how the Dallas Fed can still forecast:
This year Texas job growth likely to moderate to 2.0-2.5%, about 259,000 jobs–149,000 fewer than 2014–and close to US job growth…
Must-Read: Ricardo J. Caballero and Emmanuel Farhi: The Safety Trap
In particular, we discuss the emergence of a deflationary safety trap equilibrium which is an acute form of a liquidity trap. In this context, issuing public debt, swapping private risky assets for public debt, or increasing the inflation target, stimulate aggregate demand and output, while forward guidance is ineffective. The safety trap can be arbitrarily persistent, as in the secular stagnation hypothesis, despite the existence of infinitely lived assets. When we endogenize the private securitization capacity, we show that in a safety trap there is a securitization externality that leads to underprovision of safe assets.
Afternoon Seminar: Genevieve Kenney on Medicare and Medicaid
http://hrms.urban.org/briefs/Gains-in-Health-Insurance-Coverage-under-the-ACA-as-of-March-2015.html
Thank you for a wonderful talk. A comment, and a question:
The comment: I have long had a bone to pick with Amy Finkelstein and company and their Oregon Medicaid study. They use “significant” in two different ways in their paper. Improvements in blood pressure and in blood sugar levels in their study were not statistically significant. Not a lot of people in the sample had high blood pressure or high blood sugar, and so the drops seen were not big enough to be confident in a statistical sense that they were not just the luck fo the draw. But the drops in blood pressure and in blood sugar levels were in line with what we expect to follow from prescribing first line lisinopril and metphormin to those who need them, and those drops are clinically significant. I’ve been trying to get them to say that the improvements in the physical health indicators they found were clinically but not statistically significant — but without conspicuous success.
The question: Back in 2009 the word from Nancy-Ann Min DeParle’s office in the White House was: Don’t worry about the federal-state nature of ObamaCare. Every governor will want to grab the credit for successfully bringing the self-employed, small business, and the working poor under the insurance umbrella. The Republican political infrastructure, especially, in the states is so beholden to insurance, physician, and other medical lobbies for their campaign financing that the idea of attempted state-level nullification was absurd.
Huge miscalculation.
Is our current situation in which ObamaCare has been implemented in Blue States, has been only 1/2 implemented in pink states, and is a horror show in deep red states, stable? And what difference is this implementation gap making not just for the health sectors but, indeed, for the economies of red-state America?
Must-Read: Frances Coppola: Colds, Strokes and Brad Delong
…The authorities did not recognise the stroke… thought it was simply a particularly nasty cold… put extra whisky in the hot toddies…. Just as the patient was beginning to show signs of improvement, it experienced a second stroke. This one was not as catastrophic as the first, but it seriously set back the patient’s recovery. Once again, the stroke was misdiagnosed, this time as a hospital-acquired infection…. Now, seven years after the first stroke and three years after the second, the patient is still partly paralysed down the left side and has a speech impediment….
Herein lies my beef with Blanchard. Hot toddies and antibiotics are not the right treatment for strokes. Nor is deep cleaning of hospitals, important though this is. But the economics profession’s toolkit seems to be limited to hot toddies, antibiotics and cleaning ladies…. And it justifies its limited diagnostic skills and inadequate toolkit by arguing that if only we keep warm and dry and eat well, we won’t catch colds or suffer strokes anyway…. I confess I find it difficult to see how a system that is normally far from equilibrium can be adequately represented by a general equilibrium model, but then I am not a mathematician. I am encouraged therefore to see that Borio seems to share my concerns (my emphasis):
Modelling the financial cycle raises major analytical challenges for prevailing paradigms. It calls for booms that do not just precede but generate subsequent busts, for the explicit treatment of disequilibrium debt and capital stock overhangs during the busts, and for a clear distinction between non-inflationary and sustainable output, ie, a richer notion of potential output–all features outside the mainstream….
So, sorry Brad, but I do not think I am wrong to say that the economics profession’s love affair with linear models must be ended. Multiple equilibria, disequilibrium and non-linearities are the new flame. Having said that, Brad’s last comment is spot on:The key questions of macroeconomic political economy then are not the questions of the construction of nonlinear multiple-equilibrium models that Frances Coppola wants us to study. They are, instead, the questions of why ideological and rent-seeking capture were so complete that North Atlantic governments have not deployed their fiscal and credit policy tools properly since 2008.
Indeed, if policymakers want to deny stroke patients essential treatment and force them back to work before they are properly recovered, there is not a great deal economists can do to stop them. Such is democracy….
Despite my criticisms, Olivier Blanchard deserves credit for acknowledging the hubris of the 1980-2008 economic paradigm, and for attempting to change it within his own organisation. Some of the IMF’s economic research in recent years under his leadership has been outstanding. He is indeed a vir illustris.