Category: Equitablog

Must-Read: Steve Goldstein: Fed’s Lael Brainard Calls for ‘Waiting’ as Labor Market Has Slowed

Posted on by Brad DeLong
Https www federalreserve gov monetarypolicy files fomcprojtabl20151216 pdf

Must-Read: If people on the FOMC had known late last November that the first half of 2016 would be as bad as it is shaping up to be–a GDP growth rate that looks to be 1.7%/year rather than 2.4%/year, and a PCE-chain inflation rate of not 1.6%/year but 0.8%/year–how many of them would have pulled the trigger and gone for an interest rate increase last December?

I confess I do not know why Lael Brainard is saying “there is uncertainty that future data will resolve in the near-term and so we should wait” rather than “if we knew then what we know now we wouldn’t have raised rates in December, and so we should cut”:

Steve Goldstein: Fed’s Lael Brainard Calls for ‘Waiting’ as Labor Market Has Slowed: “Brainard, who’s the first Fed official to speak since the Labor Department…

…reported just 38,000 jobs were added in May, said the central bank should wait for more data on how the economy is performing in the second quarter, as well as a key vote by Britain on whether to leave the European Union. ‘Recognizing the data we have on hand for the second quarter is quite mixed and still limited, and there is important near-term uncertainty, there would appear to be an advantage to waiting until developments provide greater confidence,’ Brainard said at the Council on Foreign Relations. She said she wanted to have a greater confidence in domestic activity, and specifically mentioned the uncertainty around the Brexit vote, as reasons to pause at the next Federal Open Market Committee meeting, which is due to end June 15…

Lack of Demand Creates Lack of Supply; Lack of Proper Knowledge of Past Disasters Creates Present and Future Ones

Posted on by Brad DeLong
FRED Graph FRED St Louis Fed

“We have lost 5 percent of capacity… $800 billion[/year]…. A soft economy casts a substantial shadow forward onto the economy’s future output and potential.” It is now three years later than when Summers and the rest of us did these calculations. If you believe Janet Yellen and Stan Fischer’s claims that we are now effectively at full employment, the permanent loss of productive capacity as a result of the 2007-9 financial crisis, the resulting Lesser Depression, and the subsequent bobbling of the recovery is not 5% now. It is much closer to 10%. And it is quite possibly aiming for 15% before it is over:

Lawrence Summers et al. (2014): Lack of Demand Creates Lack of Supply: “Jean-Baptiste Say, the patron saint of Chicago economists…

…enunciated the doctrine in the 19th century that supply creates its own demand…. If you produce things… you would have to create income… and then the people who got the income would spend the income and so how could you really have a problem[?]… Keynes… explain[ed] that [Say’s Law] was wrong, that in a world where the demand could be for money and for financial assets, there could be a systematic shortfall in demand.

Here’s Inverse Say’s Law: Lack of demand creates, over time, lack of supply…. We are now in the United States in round numbers 10 percent below what we thought the economy’s capacity would be today in 2007. Of that 10 percent, we regard approximately half as being a continuing shortfall relative to the economy’s potential and we regard half as being lost potential…. We have lost 5 percent of capacity… we otherwise would have had…. $800 billion[/year]. It is more than $2,500[/year] for every American…. A soft economy casts a substantial shadow forward onto the economy’s future output and potential. This might have been a theoretical notion some years ago, it is an empirical fact today…

What are we going to do?

Well, we are going to do nothing–or, rather, next to nothing. Life would be convenient for the Federal Reserve if right now (a) the U.S. economy were at full employment, (b) a rapid normalization of interest rates were necessary to avoid inflation rising significantly above the Federal Reserve’s 2%/year PCE chain index inflation target, and (c) U.S. tightening were more likely to stimulate economies abroad via greater opportunities to sell to the U.S. than contract economies abroad by withdrawing risk-bearing capacity. And the Federal Reserve appears to have decided to believe what makes life convenient. Thus nothing additional in the way of action to boost the economy can be expected from monetary policy. And on fiscal policy a dominant or at least a blocking position is held by those who, as the very sharp Olivier Blanchard put it recently, even though:

[1] In the short run, the demand for goods determines the level of output. A desire by people to save more leads to a decrease in demand and, in turn, a decrease in output. Except in exceptional circumstances, the same is true of fiscal consolidation [by governments]…

nevertheless Olivier Blanchard:

was struck by how many times… [he] had to explain the “paradox of saving” and fight the Hoover-German line, [2] “Reduce your budget deficit, keep your house in order, and don’t worry, the economy will be in good shape”…

Apparently he was flabbergasted by the number of people who would agree with [1] in theory and yet also demand that policies be made according to [2], and he plaintively asks for:

anybody who argues along these lines must explain how it is consistent with the IS relation…

Remember: the United States is not that different. As Barry Eichengreen wrote:

It is disturbing to see the refusal of [fiscal] policymakers, particularly in the US and Germany, to even contemplate… action, despite available fiscal space (as record-low treasury-bond yields and virtually every other economic indicator show). In Germany, ideological aversion to budget deficits runs deep… rooted in the post-World War II doctrine of “ordoliberalism”…. Ultimately, hostility to the use of fiscal policy, as with many things German, can be traced to the 1920s, when budget deficits led to hyperinflation. The circumstances today may be entirely different from those in the 1920s, but there is still guilt by association, as every German schoolboy and girl learns at an early age.

The US[‘s]… citizens have been suspicious of federal government power, including the power to run deficits…. From independence through the Civil War, that suspicion was strongest in the American South, where it was rooted in the fear that the federal government might abolish slavery. In the mid-twentieth century… Democratic President Lyndon Baines Johnson’s “Great Society”… threatened to withhold federal funding for health, education, and other state and local programs from jurisdictions that resisted legislative and judicial desegregation orders. The result was to render the South a solid Republican bloc and leave its leaders antagonistic to all exercise of federal power… a hostility that notably included countercyclical macroeconomic policy. Welcome to ordoliberalism, Dixie-style. Wolfgang Schäuble, meet Ted Cruz…

The world very badly needs an article–a long article, 20,000 words or so. It would teach us how we got into this mess, why we failed to get out, and how the situation might still be rectified–so that the Longer Depression of the early 21st century does not dwarf the Great Depression of the 20th century in future historians’ annals of macroeconomic disasters. Such a book would have to assimilate and transmit the lessons of what I think of as the six greatest books on our current ongoing disaster:

Plus it would have to summarize and evaluate Larry Summers’s musings on secular stagnation.

We were lucky that John Maynard Keynes started writing his General Theory summarizing the lessons we needed to learn from the Great Depression even before that depression reached its nadir. But we were not lucky enough. As Eichengreen stresses, only half the lessons of Keynes were assimilated–enough to keep us from repeating the disaster, but not enough to enable us to get out of it. (Although, to be fair, the world of the 1940s emerged from it only at the cost of imbibing the even more poisonous and deadly elixir called World War II.)

Paul? (Krugman, that is.) Are you up to the task?

Weekend reading: “Last weekend was the long one” edition

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

Economic dynamism is on the decline in the United States. Americans are less likely to start businesses, leave jobs and move to new ones. What explains this decline? There may not be one answer for all these trends.

The fourth interview in Equitable Growth’s interview series was published this week. Heather Boushey talks to Harvard University economist Claudia Goldin about the gender wage gap, its evolution, and potential policy solutions.

There’s recently been some push back on the idea that investments in early childhood education and care can help children and the overall economy. Heather Boushey shows that the research supports the importance of early childhood.

People are worried about unicorns—privately-owned start-ups worth more than $1 billion. What could happen if the current bubble in these firms burst? A look at how the wealth distribution matters for the aftermath of bubbles gives us hints.

The May 2016 Employment Situation report was released this morning. There’s quite a bit of data in the report, so Equitable Growth staff highlight five important trends in graph form.

Links from around the web

In a speech about the state of monetary policy, Charles Evans, the president of the Federal Reserve Bank of Chicago, argues that the Federal Reserve shouldn’t raise interest rates until core inflation hits 2 percent. It’s currently growing at a 1.6 percent rate. [chicago fed]

A measure of wage growth developed by staff at the Federal Reserve Bank of Atlanta has gained some popularity recently and it shows higher wage growth than other measures. Elise Gould argues that this measure doesn’t necessarily show a stronger labor market for all workers. [epi]

Rising housing process are usually heralded as a great sign for Americans and the U.S. economy. But rising prices are not an unalloyed good trend. Justin Fox tries to sow a little doubt about the benefits of higher home prices. [bloomberg view]

High corporate profits have started to trigger concerns among economists about the role of diminished competition in the U.S. economy. But perhaps the decline in competition is just a blip and technology will ramp up competition again. That’s the argument from Laura Tyson and James Manyika. [project syndicate]

Would a universal basic income solve poverty? Some authors and analysts have challenged that idea. Matt Yglesias argues that they are wrong. The program would work, but it would be a very expensive program and tough to sell politically. [vox]

Friday figure

Figure from “Equitable Growth’s Jobs Day Graphs: May 2016 Report Edition”

Must-Read: Paul von Ebers: Mega Health Insurance Mergers: Is Bigger Really Better?

Posted on by Brad DeLong

Must-Read: Paul von Ebers: Mega Health Insurance Mergers: Is Bigger Really Better?: “Health insurance… the announcement of three large mergers: Aetna/Humana, Anthem/Cigna, and Centene/HealthNet…

…But many benefits of megamergers put forward by these companies will not materialize, and there will be few benefits for consumers…. Scale economies, where fixed assets and overhead decrease with firm size, are very uncertain in health insurance mergers…. Studies in other industries suggest that even when economies of scale exist, the advantages dissipate with very large company sizes. Since administrative costs are a small portion of health insurance prices (10 to 15 percent, on average) it would take a large reduction in administrative costs to create a meaningful price reduction. For Aetna, this shouldn’t come as news….

Meanwhile, the American Hospital Association and the American Medical Association are worried that mega insurers will have more negotiating leverage in provider contracts with hospitals and doctors. The reality is more nuanced…. The impact of the Anthem/Cigna will depend on particular state circumstances. Anthem is the dominant insurer in states where it has the Blue brands and it usually pays lower prices for health care in those states. Anthem also has access to the Blue national network, which also generally pays lower prices. If Anthem converts the Cigna business to the Blue brands in those states, current Cigna customers will have lower medical costs…. Consolidation will somewhat increase the leverage mega insurers have with hospitals and doctors, but not as much as many expect…

Equitable Growth’s Jobs Day Graphs: May 2016 Report Edition

Posted on by Nick Bunker

Earlier this morning, The U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of May. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

The share of prime-age workers with a job hasn’t changed much in 2016, still hovering around 77.8%.

This continues the trend of slow growth in the employment rate, at least compared to previous recoveries.

Nominal wage growth is similarly stuck at a constant rate, about 2.5%. How much longer will this continue?

Private sector job growth has slowed recently, but it’s still doing much better than the public sector.

Long-term job growth has been concentrated in health care (+55,000 jobs in May) and educational services (+11,000).

Photo credit: Rick Bowmer, Associated Press

Must-Read: Timothy B. Lee: The Economy Just Got Its Worst Job Report in Years

Posted on by Brad DeLong

Must-Read: The way to bet is that two-thirds of the surprising component of this month’s employment report will be reversed over the next quarter or so.

Nevertheless: does anybody want to say that the Federal Reserve’s increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was prudent in retrospect? Anyone? Anyone? Bueller?

And does anybody want to say–given that the downside risks we are now seeing were in the fan of possibilities as of last December, and given that the Federal Reserve could have quickly reacted to neutralize any inflationary pressures generated by the upside possibilities in the fan last December–that the Federal Reserve’s increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was sensible as any form of an optimal-control exercise?

And we haven’t even gotten to the impact of the withdrawal of risk-bearing capacity from the rest of the world that happens in a Federal Reserve tightening cycle…

NewImage NewImage

Timothy B. Lee: The Economy Just Got Its Worst Job Report in Years: “The US economy created 38,000 jobs in May, the slowest pace of job growth in five years…

…Not only did job growth fall well short of economists’ expectations in May, the Labor Department also revised its estimates for March and April job growth downward by a total of 59,000…. One factor is the strike among Verizon workers, which cost the economy about 34,000 jobs. Those jobs should reappear in future reports…. There’s other bad news…. Over the last six months, the economy had started to reverse a years-long decline in the labor force participation rate…. But the latest report shows the economy has given most of those gains back, with the labor force participation rate falling from 63 percent in March to 62.6 percent in May…

Must-Reads: June 3, 2016

Posted on by Brad DeLong

Must-Read: Olivier Blanchard: How to Teach Intermediate Macroeconomics after the Crisis?

Posted on by Brad DeLong

Must-Read: Am I allowed to say that nearly all of this is in Paul Krugman’s 1998 The Return of Depression Economics?

Olivier Blanchard: How to Teach Intermediate Macroeconomics after the Crisis?: “The IS relation remains the key to understanding short-run movements in output…

…In the short run, the demand for goods determines the level of output. A desire by people to save more leads to a decrease in demand and, in turn, a decrease in output. Except in exceptional circumstances, the same is true of fiscal consolidation. I was struck by how many times during the crisis I had to explain the ‘paradox of saving’ and fight the Hoover-German line, ‘Reduce your budget deficit, keep your house in order, and don’t worry, the economy will be in good shape.’ Anybody who argues along these lines must explain how it is consistent with the IS relation. The demand for goods, in turn, depends on the rate at which people and firms can borrow (not the policy rate set by the central bank, more on this below) and on expectations… animal spirits… largely self-fulfilling. Worries about future prospects feed back to decisions today….

The LM relation… is the relic of a time when central banks focused on the money supply…. The LM equation must be replaced, quite simply, by the choice of the policy rate by the central bank, subject to the zero lower bound. How the central bank achieves it… can stay in the background…. Traditionally, the financial system was given short shrift in undergraduate macro texts. The same interest rate appeared in the IS and LM equations…. This is not the case and that things go very wrong. The teaching solution, in my view, is to… discuss how the financial system determines the spread between the two….

Turning to the supply side, the contraption known as the aggregate demand–aggregate supply model should be eliminated…. One simply uses a Phillips Curve…. Output above potential, or unemployment below the natural rate, puts upward pressure on inflation. The nature of the pressure depends on the formation of expectations…. If people expect inflation to be the same as in the recent past, pressure takes the form of an increase in the inflation rate. If people expect inflation to be roughly constant… pressure takes the form of higher—rather than increasing—inflation. What happens to the economy, whether it returns to its historical trend, then depends on how the central bank adjusts the policy rate in response to this inflation pressure…. This… is already standard in more advanced presentations and the new Keynesian model (although the Calvo specification used in that model, as elegant as it is, is arbitrarily constraining and does not do justice to the facts). It is time to integrate it into the undergraduate model…. These modified IS, LM, and PC relations can do a good job….

I consider two extensions… expectations… openness. Here, also, there are important lessons from the crisis…. The long interest rate… as the average of future expected short rates, with a fixed term premium. Quantitative easing… can affect this premium…. Deriv[ing]… exchange rates from the uncovered interest rate parity condition… assumes infinitely elastic capital flows. The crisis has shown… capital flows have finite elasticity and are subject to large shocks beyond movements in domestic and foreign interest rates. Periods of ‘risk on-risk off’ and large movements in capital flows have been an essential characteristic of the crisis and its aftermath…

Must-Read: Ben Thompson: Building Infrastructure

Posted on by Brad DeLong

Must-Read: Ben Thompson: Building Infrastructure: “I think the best way to think about physical retail going forward…

…is to start with what Bezos said about Amazon’s own initial foray:

The store is very different from any bookstore that you have gone into. It has a very small selection, very highly curated, only about 5,000 titles and they’re all face out on the shelves, and they’re picked based on the data that we have at Amazon from the website. If you come to the Amazon physical bookstore with a specific title in mind that you want to buy there’s a very good chance because we have such a curated selection that you’ll be disappointed. But why would we build a store that’s designed to — if you already know what book you want to buy we already have this thing called Amazon.com that’s very very good at satisfying that need, and so this is about satisfying a completely different need. It’s about browsing and discovery and having a really fun space to wander around in….

Because the design of the store starts with the assumption that Amazon.com exists, it can be totally optimized for, in Bezos’ words, ‘browsing and discovery and having a really fun space’ with little space wasted on holding inventory…. Physical retail has its benefits… the ones Bezos listed… demonstrating highly experiential and differentiated products. What will be critical, though, are business models and cost structures that start with the presumption of the Internet and its associated business models, and that is why Gap and the other merchants who built businesses around geographic limitations are (like newspapers before them) very much in trouble….

The other Bezos quote I promised you….

When I started Amazon all of the heavy lifting infrastructure to support Amazon was already in place. We did not have to invent a remote payment system. It was already there. It was called the credit card…. We did not have to invent transportation, local transportation, the last mile. There was this thing called U.S. Postal Service and UPS which was not invented for e-commerce but if we had had to deploy last mile transportation 20 years ago it would have cost hundreds of billions of dollars of capital. It would have been impossible for a company like Amazon to even conceive of doing that. Same thing deploying computer infrastructure…. And how did the Internet grow so fast? Even there the heavy lifting infrastructure had already been done for another purpose which was the long-distance phone network….

AWS and… Stripe… are building a new layer that enables entrepreneurism…. This new layer is about ongoing usage: AWS and Stripe’s value to entrepreneurs is less about reducing costs than it is controlling them on one side and enabling significantly more focus and specialization on the other…. The way organizations build, deploy and scale modern applications has fundamentally changed. Organizations must continuously bring new applications and features to market… rapid innovation…. freely experiment, quickly prototype and rapidly deploy new applications that are massively scalable…. Twilio, Stripe, and even AWS are bets on the idea that Software is Eating the World to the extent that mucking around with global communications networks is not worth whatever slight cost savings you might gain from forgoing Twilio’s margins — that your developers’ time is better spent building differentiation than it is redoing what Twilio has already done…

Must-Read: John Whitehead: The Conservative Bias in Economics?

Posted on by Brad DeLong

Must-Read: I think the rather sharp John Whitehead gets this critique of Mark Thoma wrong. Rather than being “ultra conservative”, Milton Friedman is rather a squish. The Stigler-Coase position is:

  1. If the government does not prevent it via misregulation, the private sector will contract to internalize all externalities, and
  2. Even if the private sector does not, government failure is still much worse than market failure.

Those two arguments were necessary to move away from the Henry Simons position that the government must and shall enforce competition–that the FTC should be the largest and most aggressive arm of government. If Chicago wanted to influence in the business-governed councils of the Republican Party and to please donors to the university, it needed to find a way to wriggle out of that first-generation Chicago-school economics midwestern-populist commitment. And it did.

Friedman, by contrast, was more of a wet. He wanted to make the market work, and he wanted in the here-and-now to make the market work better. That meant: a k%/year monetary growth rule. That meant: Pigovian taxes to substitute for incredibly inefficient command-and-control regulation. Via clever rhetoric Friedman could minimize his philosophical differences with the von Miseses and company. And the question of what to do after the Revolution… that would never arise…

John Whitehead: The Conservative Bias in Economics?: “Is [Thoma’s] argument liberal or conservative? I’d say neither…

…I’m tempted to add [ultra] or something like that to conservative in this excerpt because the argument is straight from the conservative economist Milton Friedman…. I pulled my copy of Free to Choose off the shelf and read the section on the environment…. Rather than a description of Coasian free-market environmentalism, it is a description of mainstream Pigouvian environmental economics. For example, on page 207:

Most economists agree that a far better way to control pollution than the present method of specific regulation and supervision is to introduce market discipline by imposing effluent charges.

Mainstream economists tend to be in favor of imposing market discipline with pollution taxes or permit markets relative to the ‘idea that markets work best when they are left alone.’