Month: September 2015

What Do You Think the Chances Are that Jeffrey M. Lacker Is Right in 2015?

Posted on by Brad DeLong

Jeffrey M. Lacker, sole dissenter from the Federal Reserve’s decision last week to keep the interest rates it controls unchanged:

I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook. Household spending, which has grown steadily since the recession, has accelerated in the last couple of years. Labor market conditions have steadily improved as well and have tightened considerably this year. With the federal funds rate near zero and inflation running between 1 and 2 percent, real (inflation-adjusted) short-term interest rates are below negative 1 percent. Such exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets…

This is remarkable. This is remarkable, of course, because I cannot think of a single case since he became Richmond Regional Federal Reserve Bank President in 2004 in which any of Lacker’s dissents from the Federal Reserve have shown positive insight into the actual state of the economy.

Can anybody?

There is something very wrong with somebody whose views of the economy have been inferior to those of his colleagues ever single year since 2004–we are now talking twelve years running–and yet who continue to stubbornly think as he thought back then and dissent in the same way he would have dissented back then. Without ever giving any signs that twelve years of being wrong has induced any humility, or any attempts to mark his beliefs to market, or any rethinking of intellectual positions and ideological commitments at all…

Jeffrey M. Lacker: wrong in 2006: “Lacker’s vote was the solitary dissent in the August, September, October, and December 2006 Federal Open Market Committee (FOMC) meetings…”

Jeffrey M. Lacker: wrong in 2007:

Jeffrey M. Lacker (2007): The Economic Outlook: “As recently as its Aug. 7 meeting…

…the FOMC identified its ‘predominant policy risk’ as ‘the risk that inflation will fail to moderate as expected.’ I believe that this risk remains relevant…. Central banks should be careful to conduct policy during periods of financial market distress in ways that are consistent with their long-run goals, both for price stability and economic growth…. Federal funds rate adjustments in response to changes in the outlook for inflation and growth should continue to endeavor to stabilize inflation expectations…

Jeffrey M. Lacker: wrong in 2008:

Jeffrey M. Lacker (July 2008): The Economic Outlook: “Inflation is unacceptably high…

…Of course, price increases have been concentrated in the food and energy categories…. The risk is that elevated rates of increase in overall prices become embedded in expectations…. The apparent stability of inflation expectations does not justify complacency, however. Those expectations depend critically on confidence…. Maintaining credibility depends on continuing to conduct policy in a way that is consistent with the stability of inflation expectations, and acting forcefully should those expectations erode….

Just as easing policy aggressively in response to emerging downside risks made sense, withdrawing some of that stimulus as those risks diminish makes eminent sense as well…. We need to be attuned to the risk that we emerge from the slowdown with inflation following a higher trend than when we went in. This danger associated with the persistence of elevated inflation warrants an additional measure of vigilance…

Jeffrey M. Lacker: wrong in 2009: “[He] dissented because he preferred to expand the monetary base by purchasing U.S. Treasury securities rather than through targeted credit programs…”

Jeffrey M. Lacker: wrong in 2012: “[He] does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014…”

Jeffrey M. Lacker: wrong again in 2012: “I don’t think there’s much that monetary policy’s capable of doing…. The real economy is beyond our ability to influence in large measure…”

Must-Read: Charlie Stross: A Question About the Future of the World Wide Web

Posted on by Brad DeLong

Charlie Stross: A Question About the Future of the World Wide Web: “The current state of the ad-funded web…

…is a death-spiral…. Casual information consumers won’t pay for access to paywalled sites, and a lot of the struggling/bottom-feeding resources on the web are engaged in a zero-sum game for access to the same eyeballs that are increasingly irritated by the clickbait and attention-grabbing excesses of the worst advertisers…. Is there any way to get to a micro-billing infrastructure from where we are today that doesn’t involve burning down the web and starting again from scratch?

Weekend reading

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

The presidential campaign will be full of policy proposals, particularly those about reforming the tax system. The focus will almost certainly be on the individual side, but keep an eye out for changes to the corporate tax system.

The U.S. Department of Labor is currently contemplating a new rule that would change the regulations surrounding overtime protections. Ben Zipperer comments on the proposed rule.

The U.S. government has a habit of using the tax code extensively as an instrument of social policy. That approach has had some successes, but that’s not the case when it comes to higher education.

On Wednesday, the U.S. Census Bureau released new data on income and poverty during 2014. The Census data are an important resource, but they aren’t a perfect data set. Elisabeth Jacobs puts the new data in context.

The Federal Reserve’s policy-setting committee voted yesterday to keep interest rates near zero. This is a smart move, as a rate hike would have taken away some of the Fed’s credibility.

New research on student debt and data from the U.S. Department of Education turned attention to the troubles facing borrowers who attended for-profit or community colleges. But everything isn’t peachy for graduates of traditional colleges and universities, as Kavya Vaghul shows.

Links from around the web

The labor market recovery has been steady for a while now. 2014 saw many workers return to work and some big drops in the unemployment rate. But as Ben Casselman shows, more jobs hasn’t meant more income for many Americans. [fivethirtyeight]

While economists and analysts try to understand how a tax change will affect the economy and the income distribution, they often model changes without considering the growth effects of the tax changes. Why not? As Josh Barro points out, economists really don’t know how much tax cuts affect economic growth. [the upshot]

The Federal Reserve didn’t raise interest rates yesterday, but it will eventually. And after years of extraordinary monetary policy, the tools by which the Fed will raise rates has changed. Binyamin Appelbaum details the new instruments it will use when higher rates arrive. [ny times]

If a publicly traded company wants to pay out profits to its shareholders, it can pay out dividends or buy back stocks. But while dividends to shareholders are taxed, buybacks are not. Wanling Su, a Visiting Fellow at Yale Law School, argues the IRS made a mistake in making this distinction. [blue sky blog]

The debate about the relationship between productivity and compensation in the U.S. economy continues. Larry Mishel and Josh Bivens show that trends in industry-level productivity and compensation can’t be used to talk about individuals’ productivity. [epi]

Friday figure

091715-youth-earnings

Figure from “The pernicious effects of growing student debt on the economic security of young workers” by Kavya Vaghul.

Must-Read: Tim B. Lee: Carly Fiorina’s Controversial Record as CEO, Explained

Posted on by Brad DeLong

Must-Read: IMHO, Tim B. Lee gets this one very wrong indeed:

Tim B. Lee: Carly Fiorina’s Controversial Record as CEO, Explained: “Fiorina’s biggest and most controversial move–acquiring computing rival Compaq…

…The idea was that the two companies would be able to do the things they already did more effectively if they joined forces. Management consultants who examined the merger for HP found that (as Fiorina loved to put it) HP and Compaq ‘fit together like a zipper’…

Stop right there: when you are reduced to quoting management consultants hired to make the case for the deal the CEO wants to do, you are demonstrating that you have no good arguments.

TBL continues:

Bill Hewlett’s son Walter opposed the deal…. Hewlett’s critique of the deal was simple: Compaq was primarily a PC company, and the PC business was not very profitable. By merging with Compaq and swapping stock between the companies, HP was effectively trading a share of its more profitable businesses–especially its lucrative printer business–for a share in Compaq’s less profitable PC business…

And Hewlett was 100% correct.

So why does TBL write this?:

So who was right? It’s hard to say…. While losses in the PC sector were bad, it’s quite possible that the efficiency gains achieved in other parts of the company more than offset the increased exposure to the PC business.

What efficiency gains? What other parts of the company?

TBL never says.

And he continues:

The real question is whether she can convince voters that she has the best vision for the country’s future.

No, the real question is whether she has and can execute the best vision for the country’s future. The important thing for Vox to be focusing on is policies, not media strategies.

Must-Read: Paul Krugman: Fantasies and Fictions at GOP Debate

Posted on by Brad DeLong

Must-Read: Paul Krugman: Fantasies and Fictions at GOP Debate: “Modern G.O.P. economic discourse is completely dominated by an economic doctrine…

…the sovereign importance of low taxes on the rich–that has failed completely and utterly…. Bill Clinton’s tax hike was followed by a huge economic boom, the George W. Bush tax cuts by a weak recovery that ended in financial collapse. The tax increase of 2013 and the coming of Obamacare in 2014 were associated with the best job growth since the 1990s. Jerry Brown’s tax-raising, environmentally conscious California is growing fast; Sam Brownback’s tax- and spending-slashing Kansas isn’t…. Yet the hold of this failed dogma on Republican politics is stronger than ever, with no skeptics allowed. On Wednesday Jeb Bush claimed, once again, that his voodoo economics would double America’s growth rate, while Marco Rubio insisted that a tax on carbon emissions would ‘destroy the economy’…. If the discussion of economics was alarming, the discussion of foreign policy was practically demented…

Must-Read: Catherine Rampell: The economy was a no-show at GOP debate

Posted on by Brad DeLong

Must-Read: Catherine Rampell: The economy was a no-show at GOP debate: “There’s actually a good reason why Republican candidates might want to avoid…

…talking about the economy…. It’s hard to run against the economy these days…. Despite nearly seven years of stewardship by a supposedly crypto-socialist president, the U.S. economy is looking — dare I say it? — pretty good. For all the alarmist predictions about job-killing Obamacare; job-killing Environmental Protection Agency regulations; job-killing tax hikes; the unaffordable gas prices that would arise from blocking the Keystone XL pipeline; and the runaway hyperinflation crisis that would follow zero interest rates and quantitative easing, the metrics on all these issues are better than almost anyone expected…. The United States looks healthier than just about every other major economy…

Must-Read: Josh Barro: Carly Fiorina Increased Hewlett-Packard’s Sales, but Not Its Profits

Posted on by Brad DeLong

Must-Read: Josh Barro: Carly Fiorina Increased Hewlett-Packard’s Sales, but Not Its Profits: “Carly Fiorina… said… ‘despite those difficult times…

…we doubled the size of the company, we quadrupled its topline growth rate, we quadrupled its cash flow, we tripled its rate of innovation.’ The key undermining word in that statement is ‘topline.’… As Mr. Trump correctly pointed out… Fiorina’s strategy to quickly grow H.P.’s top line was to buy another large company, Compaq Computer. That deal was widely criticized at the time because it got H.P. a big increase in sales but little profit…. The idea behind H.P.’s purchase of Compaq was that, by getting a bigger slice of the P.C. market, the company could find economies of scale, get better prices on parts and raise its profit margins. Mrs. Fiorina pushed the acquisition through over objections from much of H.P.’s board and, most notably, the family foundations of the founders that held a large chunk of the shares…. The merger did not produce…. The Compaq merger brought a lot of growth to H.P. but not the sort that H.P.’s board or its shareholders found attractive. Hewlett-Packard’s profits in 2005 were $2.4 billion, a billion less than in the year Mrs. Fiorina started as C.E.O. That is a key reason she was fired.

Must-Read: Felix Salmon: Star Trek’s Utopia Is Already Here

Posted on by Brad DeLong

Must-Read: It is just very unevenly distributed, and is here only in part:

Felix Salmon: Star Trek’s Utopia is already here: “The Replicator obviates the need for humans to work…

…and satisfies all the basic needs of 24th century consumers. It is Star Trek’s way of telling us that in the future, human labor can be entirely replaced by machines. Can be, but won’t be. Because humans have a need to work at something, and if they’re not working for money, they’ll work for something else. In the Federation, that something else is reputation…. There are billions of largely-unseen Federation citizens who aren’t all competing, aggressively, for highly prestigious jobs working as starship captains. Still, Star Trek is not Wall-E: if you give us everything we could ever want, we don’t devolve into a race of overweight couch potatoes…

The pernicious effects of growing student debt on the economic security of young workers

Posted on by Bridget Ansel
Student debt illustration by David Evans, Equitable Growth

Student loans in the United States are now the second-largest source of debt, totaling $1.1 trillion shared among 42 million people with no sign of slowing down. Unfortunately, many questions about student debt, the characteristics of borrowers, and the nature of delinquency remain unanswered, primarily because agencies and researchers alike lacked access to the rich data in the U.S. Department of Education’s loan portfolio.

That changed last week when Adam Looney of the U.S. Department of the Treasury and Constantine Yannelis of Stanford University released an impressive new report that makes use of administrative data on student borrowing and earnings from linked, de-identified tax records to explore the student debt terrain.

Student debt nearly quadrupled over the past 15 years, and Looney and Yannelis find that the accelerated growth is largely due to a new type of borrower: students attending for-profit colleges. During the Great Recession, the number of students attending for-profit universities grew significantly in response to poor employment opportunities and a weak labor market. As a consequence, the number of borrowers grew too. Looney and Yannelis find that most of these “non-traditional” borrowers are vulnerable individuals who mostly come from lower-income backgrounds. Although average loan balances for borrowers who graduate from for-profit schools are smaller than those of nonprofit undergraduates or graduate students, these for-profit students face worse labor market opportunities, lower earnings, and, ultimately, much higher delinquency rates than their traditional college counterparts.

But just because the student loan crisis is concentrated among non-traditional borrowers does not mean that students attending a selective, non-profit, four-year university have it easy: The current labor market is not kind to young workers, even with traditional college degrees.

Young workers rely on job-to-job flows—transitioning between jobs to find better offers—in order to build their careers, move up the job ladder, and grow their earnings. Low unemployment allows workers to quit their jobs to search for more fruitful employment. When the labor market contracted during the Great Recession of 2007-2009, however, these job-to-job flows fell. Economists Giuseppe Moscarini of Yale University and Fabien Postel-Vinay of University College London find that during the recession, the jobs ladder shut down, trapping young workers in low-wage jobs. (See Figure 1.)

Figure 1

The danger for recent college graduates is that carrying a large load of student debt requires young people to remain employed, even at jobs that don’t pay well, and hence restricts their ability to search out better opportunities for long-term earnings growth.

Joseph Altonji, Lisa Kahn, and Jamin Speer of Yale University report that all recessions have a damaging long-term effect on recent college graduates no matter what they majored in. For the average major, a recession means a 10 percent reduction in earnings in their first year out of college. In past recessions, high-paying majors such as engineering were less adversely affected, but in the Great Recession, even an engineering degree wasn’t sufficient protection. The three researchers find that between 2007 and 2009, the effect of unemployment on earnings halved the relative advantage that a high-paying major previously guaranteed.

So if young, traditional college graduates are being challenged by the post-recession labor market, what happens when high levels of student debt are thrown into the mix? In a recent paper, Emmanuel Saez and Gabriel Zucman of the University of California-Berkeley find that between 1986 and 2012, the wealth of the bottom 90 percent of the wealth distribution in the United States didn’t grow at all. With the little wealth that is, it’s unlikely that recent graduates with large student debt are able to accumulate any savings after servicing their student debts. In fact, the Pew Research Center’s tabulations of the Survey of Consumer Finances show that college-educated householders under 40 who have student debt have one-seventh of the wealth of people who don’t.

Student debt is a long-term burden in other ways too. Paying off college loans displaces other costs associated with our traditional perception of U.S. adulthood and the economic life-cycle. Economists David Cooper and J. Christina Wang of the Federal Reserve Bank of Boston find that homeownership rates among college graduates ages 30 to 40 are lower for households with student debt. Similarly, other studies show that car ownership and marriage rates are also lower for young student borrowers.

As the student debt load grows for young borrowers, it is clear there may be long-term effects on young workers’ economic security. Just a generation ago, higher education was considerably more affordable or at least heavily subsidized by state governments, enabling young workers to begin saving and eventually realize the American Dream. But now, higher education is a transformative economic burden for the young workforce. And for the amount of student debt that graduates face upon entering the workforce, higher education certainly has not yielded commensurate benefits.

Noted for the Morning of September 17, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

  • Eric Liu: How to Be American: Why cultivating a shared cultural core is more important than ever—and why such a project serves progressive ends…
  • Kelly Dickerson: Why ‘The Martian’ Is the Best Space Sci-Fi Movie of My Time
  • Daniel Davies: “It’s not so much “marking your views to market”. It’s “closing all your positions because they’re so far out that you’re being ripped apart by margin calls”…
  • Nathan Pippenger: America’s Gun Problem and the Reassertion of Christian Leftism: Dan Hodges: “In retrospect Sandy Hook marked the end of the US gun control debate. Once America decided killing children was bearable, it was over…”
  • Ian Millhiser: Keep Fearing the Supreme Court: The real story of the Court’s recent term is… conservative overreach…. It’s unlikely that liberals will celebrate the 2015-16 term… poised to… kill affirmative action and throw public-sector unions into financial turmoil…