Category: Equitablog

Must-read: Donald Kohn and David Wessel: “Eight Ways to Improve the Fed’s Accountability”

Posted on by Brad DeLong

Must-Reads: Perhaps the most frustrating thing about monetary policy making since the taper tantrum has been that we outsiders find that (a) asymmetric risks plus (b) uncertainty about the true state of the labor market and (c) uncertainty about the position and slope of the Phillips Curve are dispositive. They make the case for keeping the monetary-expansion pedal to the metal overwhelming. Yet the Federal Reserve has not felt compelled to engage with outsiders making these arguments in any sustained and deep technocratic way. And those doing oversight at congress have been incapable of doing the job–what we have seen has been either blathering or, worse, ravings about the gold standard.

The extremely-sharp Don Kohn and David Wessel have good suggestions for procedural reform:

Donald Kohn and David Wessel: Eight Ways to Improve the Fed’s Accountability: “1. The Fed should… have monetary policy hearings quarterly…

…2. The now semi-annual Monetary Policy Report… should become quarterly…. 3. The Fed should publicly release the Monetary Policy Report three days before the relevant hearing…. 4. The Monetary Policy Report should continue to include the Fed’s assessment of financial stability risks…. 5. Fed staff should continue to brief and field questions from the congressional staff…. 6. Congress should establish a process for obtaining and publishing the views of outside experts…. 7. Each quarterly hearing in the House should allow only half the committee members to question the chair…. 8. The Fed should hire outside experts to periodically evaluate the procedures used to generate… economic projections….

None of these suggestions would reduce the Fed’s independence. Rather, they would improve Congress’s oversight and the Fed’s accountability, at a time when our economic discourse would greatly benefit from better public understanding and increased confidence in the efficacy and appropriateness of the central bank’s actions.

Must-read: John Plender: ‘Lehman Brothers: A Crisis of Value’ by Oonagh McDonald

Posted on by Brad DeLong

Must-Read: Either Lehman was a reasonable organization caught in a perfect storm–in which case its creditors should have been bailed out as part of its resolution–or Lehman should have been shut down and resolved while there was still enough notional equity value left in the portfolio to cover the inevitable surprises and the likely negative shock to risk tolerance. As I have come to read it, Paulson, Bernanke, and Geithner were afraid to do their job in spring and summer of 2008, and also afraid to take responsibility to do what their forbearance with Lehman in the spring and summer had made prudent in the fall.

Perhaps Paulson, Bernanke, and Geithner thought that although the way they handled Lehman was a small technocratic policy mistake, it was a political economy necessity. Perhaps they thought an uncontrolled Lehman bankruptcy that would deliver a painful shock to asset markets and economies would generate strong political benefits: constituents would feel that shock and then complain to congress, which would then give the Fed and the Treasury a free hand to keep it from happening again. Perhaps such considerations made it the right political-economy thing to do. Perhaps not.

But we have never had the debate over that. Paulson, Bernanke, and Geithner have instead claimed that they did not have legal authority to resolve Lehman in the fall. Combining with their failure to resolve it in the summer to generate the conclusion that they did not understand what their jobs were:

John Plender: ‘Lehman Brothers: A Crisis of Value’ by Oonagh McDonald: “The collapse of Lehman Brothers in 2008 was… a spectacular curtain raiser…

…Oonagh McDonald, a British financial regulation expert and former MP, brings a regulatory perspective to the story, exploring the multitude of flaws in the patchwork of rules… examines how, one weekend in September, Lehman went from being valued by the stock market at $639bn to being worth nothing at all…. Lehman… was so highly leveraged that its assets had only to fall in value by 3.6 per cent for the bank to be wiped out. The tale of how the management reached this point under the leadership of Dick Fuld is compelling. The response… to the credit crunch that began in mid-2007 was pure hubris. Having survived episodes of financial turmoil when many expected the bank to fail, Mr Fuld and his colleagues decided to take on more risk. Meanwhile, they neglected to inform the board that they were exceeding their self-imposed risk limits and excluding more racy assets from internal stress tests…. Much of the decline in the value of Lehman’s assets came from direct exposure to property….

The conclusion is a broader, provocative exploration of the concept of market value, in which McDonald tilts at the efficient market hypothesis that underlay much of the thinking in finance ministries, central banks and regulatory bodies before the crisis…. The brickbats McDonald aims at regulatory behaviour before the crisis are amply justified. More questionable is her critique of crisis management by the US Treasury and the US Federal Reserve. She thinks Lehman could and should have been bailed out in the interests of systemic stability, but does not address the question of how the troubled asset relief programme would have found its way through a hostile Congress without the extreme shock of Lehman’s collapse…

Must-read: Paul Krugman sending us to Gavyn Davies, Lael Briainard from last October, and himself from a year ago

Posted on by Brad DeLong

Must-Read: James Fallows will be upset as I buy into the myth of the boiling frog. The Federal Reserve’s decision to raise interest rates last December was, it thought, a marginal move that was running a small risk. But as evidence has piled in suggesting that the risks on the downside are larger and larger, the Federal Reserve has done… nothing…

Paul Krugman orders and inspects the arguments:

Paul Krugman sends us to Gavyn Davies, Lael Briainard from last October, and himself from a year ago:

  • Gavyn Davies today: The Fed and the Dollar Shock: “The dismal performance of asset prices continued…. The weakening US economy. This weakness seems to be in direct conflict with the continued determination of the Federal Reserve to tighten monetary policy. Janet Yellen’s… attitude was deemed by investors to be complacent about US growth. (See Tim Duy’s excellent analysis of her remarks here.) Why is the Federal Reserve apparently reluctant to respond to the mounting recessionary and deflationary risks faced by the US? It is human nature that they are reluctant to admit that their decision to raise rates in December was a mistake. Furthermore, they believe that markets are often volatile, and the squall could yet blow over. But I suspect that something deeper is going on. The FOMC may be underestimating the need to offset the major dollar shock that is currently hitting the economy…”

  • Lael Brainard: Economic Outlook and Monetary Policy–October 12, 2015: “The risks to the near-term outlook for inflation appear to be tilted to the downside…. Over the past year, a feedback loop has transmitted market expectations of policy divergence between the United States and our major trade partners into financial tightening in the U.S. through exchange rate and financial market channels…. The downside risks make a strong case for continuing to carefully nurture the U.S. recovery–and argue against prematurely taking away the support that has been so critical to its vitality…. These risks matter more than usual because the ability to provide additional accommodation if downside risks materialize is, in practice, more constrained than the ability to remove accommodation more rapidly if upside risks materialize…”

  • Paul Krugman: The Dollar and the Recovery: “Consider two pure cases of rising US demand…. #1, everyone sees the relative strength of US spending as temporary…. In that case the dollar doesn’t move, and the bulk of the demand surge stays in the US…. #2, everyone sees the strength of US spending relative to the rest of the world as more or less permanent. In that case the dollar rises sharply, effectively sharing the rise in US demand more or less evenly around the world. It’s important to note, by the way, that this is not just ordinary leakage via the import content of spending; it works via financial markets and the dollar, and happens even if the direct leakage through imports is fairly small. So, what’s actually happening? The dollar is rising a lot, which suggests that markets regard the relative rise in US demand as a fairly long-term phenomenon…. The strong dollar probably is going to be a major drag on recovery.”

Must-read: Barry Eichengreen and Charles Wyplosz: “How the Euro Crisis Was Successfully Resolved”

Posted on by Brad DeLong

Must-Read: When people ask me if Barry Eichengreen is in, I sometimes say: No, he is in the 1920s. But he will be coming back via time machine and in his office this afternoon.

Now I learn that I was wrong: that he has been visiting Charles Wyplosz, whose home base is a parallel universe in which the Euro crisis was successfully resolved in 2010:

Barry Eichengreen and Charles Wyplosz: How the Euro Crisis Was Successfully Resolved: “When the newly elected Greek government of George Papandreou…

…revealed that its predecessor had doctored the books, financial markets reacted violently. This column discusses the steps implemented by policymakers following this episode, which were essential in resolving the Crisis. What is remarkable, in hindsight, is the combination of pragmatism and reasoning based on sound economic principles displayed by European leaders. Instead of finger pointing, they acknowledged that they were collectively responsible for the Crisis….

A miracle [was] made possible by a combination of steely resolve and economic common sense. In their historic 11 February 2010 statement, European heads of state and government acknowledged that the Greek government’s debt was unsustainable. Rather than ‘extend and pretend’, they faced reality…. Greece, European leaders insisted, had to restructure its debt as a condition of external assistance…. Trichet, rather than opposing debt restructuring, opposed the Emergency Liquidity Assistance, noting that the ECB’s mandate limited it to lending against good collateral. German Chancellor Angela Merkel and French President Nicolas Sarkozy, not happy that their banks had recklessly taken positions in Greek bonds, agreed that those banks should now bear the consequences. If banks failed, then the German and French governments would resolve them, bailing in stakeholders while preserving small depositors. Chancellor Merkel was adamant: asking Greek taxpayers to effectively bail out foreign banks was not only unjust but would aggravate moral hazard….

[The] IMF staff’s debt-sustainability analysis showed that Greece’s debt was already too high for [any] large loan to be paid back…. The managing director quickly concluded that the expedient path was to ally with European leaders and embrace the priority they attached to debt restructuring. At the landmark meeting of the IMF Executive Board on Sunday 10 May, European directors overrode the objections of the US Executive Director. The Board agreed on a programme assuming a 50% haircut on Greek public debt…. Fiscal consolidation was still required but for the moment would be limited to 5% of GDP, which was just possible for Greece’s new national union government to swallow. 

In return for this help, Greece was asked to prepare a programme of structural reforms, starting with product market reform… [which] lowered prices and increased households’ spending power, thereby not worsening the recession…. Programme documents gave the Greek authorities considerable leeway in the design of these measures and acknowledged the reality that they would take time to implement. The Greek government having been reassured of IMF support commenced negotiations with its creditors. A market-based debt exchange, in which investors were offered a menu of bonds with a present value of 50 cents on the euro, was completed by the end of the year…

Must-reads: February 14, 2016

Posted on by Brad DeLong

Must-read: Richard Mayhew: “The Sovaldi that Wasn’t”

Posted on by Brad DeLong

Must-Read: Richard Mayhew: The Sovaldi that Wasn’t: “Last summer every insurer in the country was rerunning their models on how the next wave of cholesterol drugs…

…were going to blow up the cost structure… inhibitors… priced at over $1,000 per month…. The specific on-label use… were for a… subset… with high cholesterol… genetic markers and clinical indicators…. We got that one wrong…. “A surge in sales of pricey new cholesterol treatments is unlikely to materialize this year, contrary to the previous expectations of Express Scripts Holding, an executive from the largest manager of U.S. drug benefits said on Friday.”…

This is intriguing. It may be a blip or it could be a portent of a significant change in provider behavior.  If it is blip, disregard the rest. There is a possibility that providers are becoming price aware…. The big fear with the new inhibitors was that they would be widely prescribed for a much broader population of people than the clinically significant group…. That is the entire point of the pharmaceutrical advertising industry, to get providers prescribing higher cost medications for marginal cases.

Must-read: Dani Rodrik: “The Trade Numbers Game”

Posted on by Brad DeLong

Must-Read: I had thought that we understood rather well why freer trade created substantial winners and losers–that the shifts in the prices of goods from moves to freer trade caused magnified shifts in the rewards to factors that were used intensively in the production of such goods. And the consequences for the overall level of employment seem, to me at least, to be limited to the era of “Depression Economics” that we entered in 2007 and from which we have not emerged: NAFTA did not raise unemployment in the United States.

So I find myself failing to grasp large pieces of the very sharp Dani Rodrik’s argument here:

Dani Rodrik: The Trade Numbers Game: “The Trans-Pacific Partnership (TPP)… is the latest battleground in the decades-long confrontation…

…between proponents and opponents of trade agreements…. The pact’s advocates have marshaled quantitative models that make the agreement look like a no-brainer…. There is no disagreement between the models on the trade effects…. The differences arise largely from contrasting assumptions about how economies respond to changes in trade volumes sparked by liberalization. Petri and Plummer assume that labor markets are sufficiently flexible that job losses in adversely affected parts of the economy are necessarily offset by job gains elsewhere…. Capaldo and his collaborators offer a starkly different outlook: a competitive race to the bottom in labor markets…. The Petri-Plummer model is squarely rooted in decades of academic trade modeling…. By contrast, the Capaldo framework lacks sectoral and country detail; its behavioral assumptions remain opaque; and its extreme Keynesian assumptions sit uneasily with its medium-term perspective….

Economists do not fully understand why expanded trade has produced the negative consequences for wages and employment that it has. We do not yet have a good alternative framework to the kind that trade advocates use. But we should not act as if reality has not severely tarnished our cherished standard model….

The uncertainties do not end with macroeconomic interactions. The Petri-Plummer study predicts that the bulk of the economic benefits of the TPP will come from reductions in non-tariff barriers (such as regulatory barriers on imported services) and lower obstacles to foreign investment. But the modeling of these effects is an order of magnitude more difficult than in the case of tariff reductions…

Weekend reading: “What’s the deal with secular stagnation?” 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

The share of men with a job has been on the decline for decades in the United States. Most explanations for this trend focus on forces that affect men during their working years. But new research from Stanford University’s Raj Chetty and his co-workers highlights the influence of one’s boyhood environment on employment later in life.

The fourth report in Equitable Growth’s “History of Technology” series focuses on responsible innovation, a movement during the 1970s fighting for reforms to the research community in the United States. Cyrus Mody—the report’s author and a professor at Maastricht University—shows how those fights are relevant for thinking about innovative growth today.

Who pays a tax? The answer may not be as simple as whom the tax was placed upon. The incidence of a tax depends on how elastic the supply of and the demand for the good or service is. The example of a proposed oil tax may be illuminating.

The U.S. economy has a tale of two wage growth statistics going on right now. Nominal wage growth is subpar, but inflation-adjusted wage growth looks solid. Which statistic tells us more about the health of the labor market? Here’s an argument for focusing on nominal growth.

When a worker loses a job, they have to find a way to cushion the blow of losing their main source of income. Credit can help them bridge that gap. And increased access to credit can help them search for a higher-paying job than they would have found otherwise.

Yesterday marked the launch of “Equitable Growth in Conversation,” our new series of talks with economists and social scientists. The first installment is an interview with Larry Summers by Heather Boushey about secular stagnation and the role of economic inequality.

Links from around the web

The Great Recession has caused many rethinks in economics and spurred many research agendas. The role of fiscal policy in fighting recessions is an important example of shifting thinking in the wake of the recession. Adam Ozimek takes a look at what we’ve learned and what we still need to dig into. [datapoints]

This week’s release of data about labor market flows in December sparked optimism about the U.S. labor market. Workers are seemingly quitting their jobs at rates not seen since before the Great Recession—a sign of a healthier labor market. But Dean Baker argues we shouldn’t be satisfied until the rate has exceeded its old peak for a while. [beat the press]

One of the criticisms of the idea that increasing housing supply can increase housing affordability is that the housing being built is just for high-income residents. But evidence from the Bay Area indicates that lower-income neighborhoods with more housing construction saw less displacement than similar neighborhoods with less construction. Emily Badger reports. [wonkblog]

Negative interest rates are weird, to say the least. The advent of this heretofore impossible situation has sparked some really big questions about the role of the financial system and even the definition of money. Neil Irwin takes a look at the world on the other side of the monetary looking glass. [the upshot]

Negative interest rates—now that we know they are possible—may be the answer to how to ease monetary policy in our current environment. Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis, argues they are appropriate right now. But their necessity is an indictment of fiscal policymakers. [thoughts on policy]

Friday figure

Figure from “Demographics don’t explain the decline in quitting” by Nick Bunker and Kavya Vaghul

Must-read: Richard Mayhew: “The Hope of [Health Care Cost] Stabilization”

Posted on by Brad DeLong

Must-Read: Richard Mayhew: The Hope of [Health Care Cost] Stabilization: “We knew that there was going to be a massive amount of catch-up [health] care…

…as people who either were uncovered, sporadically covered or had no usable insurance because the cost sharing was atrocious got coverage through either Medicaid expansion or the Exchanges. The big question was always how much catch up care was happening and if/when would it subside as crisis care converted into maitenance care. There is starting to be some evidence that the catch up care wave is subsiding…. This uncertainty about catch-up care was why there were the three R’s of risk adjustment, risk corridors and re-insurance. No one knew how many expensive surprises were out there.