Category: Equitablog

Must-read: Ben Zipperer: “U.S. Job Growth Slows in January, as the Nation Remains Years Away from Full Employment”

Posted on by Brad DeLong

Must-Read: Almost all of those believing that we are now near full employment here in the U.S. dismiss the low employment-to-population ratio by noting that the population is aging. They very rarely confront the collapse since the late 1990s of the prime-age employment-to-population ratio.

But when they do confront the collapse since the late 1990s of the prime-age employment-to-population ratio, what do they say? I have heard only:

  1. “Peak male”–that the rise of the robots will systematically disadvantaging male workers, and we are starting to see this already. The problem with this is that the decline in employment-to-population since 2000 is about equal for 25-54 year-old males and females.

  2. “It’s too late”–that our failure to induce a rapid recovery in 2009-11 broke the connection of many prime-age workers to the social networks that allowed them to navigate the labor market, and that taking steps to get them back into the labor market could only succeed if accompanied by unwelcome and unthinkable inflation.

  3. “Stop and smell the roses”–that people found out in the late 1990s that they really did not want to work that hard and that long anyway.

May I say I find all three of these profoundly unconvincing?

Ben Zipperer: U.S. Job Growth Slows in January, as the Nation Remains Years Away from Full Employmenth: “Estimates of full employment vary, but one natural point of comparison is the tight labor market of the late 1990s…

…For the entire 1998-2000 period, the employed share of the prime-age population (ages 25 through 54) was at least 81 percent, reaching 81.9 percent in April of 2000. In the most recent business cycle, the prime-age employment rate was above 80 percent during the final quarter of 2006 and first quarter of 2007. A full employment standard of 81 percent therefore lies somewhere in between the peaks of the last two business cycles. Some of the brightest news in today’s employment report is that the employed share of the prime-age population moved to 77.7 percent, up from 77.4 percent in December…. Last month’s increase in the prime-age employment rate is excellent progress. But as part of its mandate to promote full employment, the Fed should consider the projected progress of the labor market as it considers slowing the rate of employment growth.

A Non-Sokratic Dialogue on Social Welfare Functions: Hoisted from the Archives from 2003

Posted on by Brad DeLong

A Non-Sokratic Dialogue on Social Welfare Functions: Hoisted from the Archives from 2003:

Glaukon: ‘Professor!’

Agathon: ‘Professor! Good to see you. Getting coffee?’

Glaukon: ‘Yes. I’m teaching. I find that teaching is always and everywhere a caffeine phenomenon.’

Agathon: ‘I tend to find that teaching is usually a bagel phenomenon myself. What are you going to teach them?’

Glaukon: ‘Social welfare. Utilitarianism. Condorcet. Arrow. Aggregation of preferences. Preference-revealing mechanisms.’

Agathon: ‘Sounds like a full class.’

Glaukon: ‘You have no idea.’

Agathon: ‘Be sure to teach them about the market’s social welfare function.’

Glaukon: ‘The market has a social welfare function?’

Agathon: ‘Under appropriate conditions of perfect competition, non-increasing returns, and the absence of externalities the market’s decisions about the production and allocation of goods and services attain a point on the Pareto frontier. Every point on the Pareto frontier maximizes some social welfare function.’

Glaukon: ‘Yes, of course.’

Agathon: ‘Therefore the market, considered as a collective mechanism for making social decisions, chooses to maximize a particular social welfare function. It is instructive to consider what that social welfare function is.’

Glaukon: ‘I resent the tone in which you are talking down to me.’

Agathon: ‘You do not. This part of this conversation never took place in even approximate form in the real world. It is interpolated in order to bring readers of this weblog up to speed. Since I never said my last speech to you, you could not have resented it.’

Glaukon: ‘And I want readers of this weblog to know that I am considerably smarter and more clued-in than he is letting me appear to be.’

Agathon: ‘Are you quite finished?’

Glaukon: ‘Plato at least worked harder to make his information dumps fit more gracefully into the conversation. I want a better author.

Agathon: ‘Are you quite finished?’

Glaukon: ‘Yes.’

Agathon: ‘As I was saying, the market system chooses an allocation. That allocation can only be justified under the assumption that moves along the Pareto frontier in every direction–moves that transfer wealth from one member of society to another–are of no benefit to social welfare, while moves toward the Pareto frontier do benefit social welfare. If we restrict ourselves to social welfare functions that are weighted sums of individual utilities, that means that the market system’s social welfare function gives each individual a weight inversely proportional to his or her marginal utility of wealth.’

Glaukon: ‘Didn’t somebody say about society that there was no such…’

Agathon: ‘Hush! If you want to quote Margaret Thatcher, you must introduce her as a speaking character in this dialogue and grant her some of her time…’

Glaukon: ‘I? You’re the authorial stand-in in this dialogue, not me…’

Agathon: ‘That means that the market system, in weighting utilities and adding them up, gives you a much lower utility than it gives Richard Cheney. In fact, if marginal utility of wealth is inversely proportional to the square of lifetime wealth, the market system gives Richard Cheney about 400 times as big a weight as it gives you.’

Glaukon: ‘That’s sick.’

Agathon: ‘And it gives Bill Gates a weight about 400,000,000 times as big a weight as it gives you.’

Glaukon: ‘That’s sicker.’

Agathon: ‘But it gives you about 40,000 times the weight it gives your average Bengali peasant, who thus has about 1/16,000,000,000,000 the amount of the market system’s concern as Bill Gates has. Will you teach that?’

Glaukon: ‘They’ll call me a Communist!’

Agathon: ‘But it’s true!’

Glaukon: ‘That I’m a Communist?’

Agathon: ‘No. That that’s what the market system does!’

Glaukon: ‘We are value neutral economists! We don’t care about distribution! We care about efficiency!’

Agathon: ‘But claiming that you don’t care about distribution is implicitly saying that shifts in distribution are of no account–which can be true only if the social welfare function gives everybody a weight inversely proportional to their marginal utility of wealth.’

Glaukon: ‘You’re introducing politics into a value-neutral technocratic social science.’

Agathon: ‘Politics?! Moi? I’m simply evaluating the derivatives of a social welfare function under the assumption that the market allocation is its ArgMax. What could be more technocratic than that? I’m just trying to attain a little clarity of thought.’

Thrasymachus: ‘But where rule rests not–as somebody or other said at one of Old Joseph de Maistre’s little soirees in St. Petersburg–on the hangman, but on misdirection and confusion, to strip away the veils of alienation and false consciousness that keep humans from perceiving their species-being, the act of unveiling is itself a powerfully political act.’

Agathon: ‘Are you Thrasymachus or Karl Marx?’

Thrasymachus: ‘Ah. Marx thought unveiling was a good thing. I think it is neither good nor bad, for ‘good’ like ‘justice’ is really just another word for the interest of the stronger party.’

Glaukon: ‘And we gave you tenure here at Berkeley?’

Thrasymachus: ‘Shhh! The humanities departments still think relativism is sexy. They haven’t yet figured out that to assume a position of relativism–like the claim to be neutral on issues of distribution–is really a statement that you are on the side of the powerful.’

Agathon: ‘And are you?’

Thrasymachus: ‘It is the just and the good–or, rather, the ‘just’ and the ‘good’–thing to do.

Weekend reading: “How low can they go?” 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 Bank of Japan cut interest rates last week and entered the realm of negative interest rates. And Japan isn’t alone—a number of central banks have pushed interest rates below zero. But how low can they go? Demand for cash may determine the effective lower bound.

A number of states are trying to fill the gaps in the current U.S. retirement savings system by offering state-sponsored accounts. Increasing access and actual contributions to savings accounts will be critical, but let’s make sure investment fees are low as well.

A recession in the United States might be imminent. Or it might not arrive for another year. Or even several years from now. But another one will come eventually. Now’s the time to think about how to fight the next recession.

The gender wage gap is a persistent if declining source of economic inequality in the United States. As the gap has declined, so has the relative importance of the reasons for the gap. But as we potentially enter the final chapter of the convergence, it’s worth looking at the current sources for the wage disparity.

Today’s jobs report on the labor market in January showed that the employed share of prime-age workers jumped up a bit after weak growth in 2015. But looking at recent trends is a bit more sobering. At the pace of the past two years, the U.S. economy won’t reach full employment until 2022, according to Ben Zipperer.

Links from around the web

One troubling trend in the U.S. labor market is the declining rate of job-to-job moves, particularly for young workers. Fewer workers quitting and moving up the job ladder slows down wage growth. That’s why employers’ increasing use of non-compete agreements, detailed by Aruna Viswanatha, is so troubling. [wsj]

Tim Duy breaks down a speech by Federal Reserve Vice Chair Stan Fischer from this past Monday. While Fischer seems confident in the central bank’s planned rate hikes this year, he doesn’t seem to fully grasp, in Duy’s view, how new the normal is when it comes to interest rates. [fed watch]

Negative interest rates were thought to be impossible for a number of reasons—one among them that the technical feasibility of passing on negative rates to retail savers was low. But as Martin Sandbu shows, those technical concerns have been assuaged. Net savers, however, might not like how they’ve been solved. [free lunch]

A major argument in tax policy, in both academic and policy circles, is the extent to which capital income should be taxed lower than labor income. One presidential candidate—Marco Rubio—wants to take it in a direction that would greatly reduce taxes for those at the top: total abolition of capital gains taxes. Josh Barro discusses the idea. [the upshot]

You’ve probably been told not to be concerned about the falling stock market because it isn’t that connected to the real economy. But what if exactly the opposite is true? What if stock market crashes are what cause recessions? John Carney lays out the views of UCLA economist Roger Farmer. [wsj]

Friday figure

Figure from “U.S. job growth slows in January, as the nation remains years away from full employment” by Ben Zipperer.

U.S. job growth slows in January, as the nation remains years away from full employment

Posted on by Bridget Ansel
A help-wanted sign displays outside the Mayfield Drive-In movie theater in Chardon, Ohio. U.S. job growth slowed in January, with employers adding 151,000 jobs last month, compared to the 262,000 jobs added in December.

After unusually warm weather helped boost U.S. employment growth at the end of 2015, job growth slowed a bit last month. According to the latest data from the Bureau of Labor Statistics, U.S. employers added 151,000 jobs last month, compared to the 262,000 jobs added in December. The best news in today’s report was that the nation’s prime-age employment rate jumped to 77.7 percent, but at current rates, the United States is still years away from full employment.

A slower pace of job gains early this year is expected, as some employers compensate for faster-than-usual hiring in December when the weather was unseasonably warm. Some of the warm weather at the end of 2015 may have also pulled hiring forward in the construction industry. Construction employment growth slowed significantly in January as the industry added only 18,000 jobs, compared to 48,000 new construction jobs in December. In contrast, the opposite trend occurred in retail, which may have been depressed during the warm weather in December as consumers avoided purchasing winter apparel. Retail employment growth was flat in December, but the sector posted strong gains of 57,700 jobs last month.

The pace of U.S. wage growth has also increased somewhat this year, now growing at a 2.5 percent annual rate. In particular, wages grew by 3.2 percent at an annual rate in the leisure and hospitality sector, which includes restaurants. Faster wage growth in these industries relative to the overall private sector is partially due to minimum-wage increases in January. Around the start of last month, 14 states and several cities and localities raised their minimum wages. Employees in the leisure and hospitality industry are more likely to be minimum-wage workers than employees in any other major sector.

The 2.5 percent wage growth rate is substantially better than the 2.1 percent average growth over 2014, and slightly better than the 2.3 percent average growth over 2015. But current rates are still far below what would be considered healthy wage growth. If the Federal Reserve maintains a long-run 2 percent inflation target, and U.S. productivity grows at roughly 1.5 percent annually, the workforce requires annual, sustained wage growth of at least 3.5 percent to keep income inequality from rising.

As the Fed considers slowing the economy further by raising interest rates, it’s also worth considering how far the United States remains from full employment. Estimates of full employment vary, but one natural point of comparison is the tight labor market of the late 1990s. For the entire 1998-2000 period, the employed share of the prime-age population (ages 25 through 54) was at least 81 percent, reaching 81.9 percent in April of 2000. In the most recent business cycle, the prime-age employment rate was above 80 percent during the final quarter of 2006 and first quarter of 2007. A full employment standard of 81 percent therefore lies somewhere in between the peaks of the last two business cycles.

Some of the brightest news in today’s employment report is that the employed share of the prime-age population moved to 77.7 percent, up from 77.4 percent in December. At recent rates of employment growth, however, the United States is not likely to obtain full employment until at least 2020. From 2013 to 2014, the employed share of the prime-age population grew by about 0.8 percentage points. Projecting that annual increase from today into the future, the prime-age employment rate should reach a full employment benchmark of 81 percent four years from now, at the beginning of the year 2020. (See figure below.)

The projection is more pessimistic if we use employment growth over the more recent 2014-2015 period, when employment growth slowed somewhat, and the employed share of the prime-age share of the population grew by about 0.5 percentage points. Under this more pessimistic scenario, the nation will not reach a full employment benchmark of 81 percent until 2022.

Last month’s increase in the prime-age employment rate is excellent progress. But as part of its mandate to promote full employment, the Fed should consider the projected progress of the labor market as it considers slowing the rate of employment growth.

Must-reads: February 4, 2016

Posted on by Brad DeLong

Must-read: Larry Hardesty: “Computer Science Meets Economics”

Posted on by Brad DeLong

Must-Read: Larry Hardesty: Computer Science Meets Economics: “Constantinos Daskalakis,[‘s]… dissertation… proves that computing the Nash equilibrium for a three-person game…

…is computationally intractable…. Consequently, Daskalakis argues, it’s unlikely that the real-world markets modeled by game theorists have converged on Nash equilibria either…. When computer scientists run up against an intractable problem, their first recourse is to investigate the tractability of approximate solutions to it. After his doctoral thesis, Daskalakis focused on importing notions of approximation from computer science into economics. First, he published several papers examining the computation of approximate Nash equilibria. Some of those results were disheartening: For general games, even relatively coarse approximations are still intractably hard to find…

The level and trend of the U.S. gender wage gap

Posted on by Bridget Ansel
Several women stage a protest in downtown Miami demanding equal pay for women.

The gender wage gap in the United States has been “been intensively investigated for a number of decades, but also remains an area of active and innovative research.” So starts a new working paper by Francine D. Blau and Lawrence M. Kahn, both economists at Cornell University. The paper reviews quite a bit of research on the topic and lays out some facts on the gap, its decline over the years, and its continued existence. Given that last point, it’s worth digging into the research and facts presented by Blau and Kahn to grapple with the difference in wages paid to similar men and women.

The most common presentation of the gender wage gap is the “unconditional gap”, or the gap between the earnings of the typical woman and the typical man. The U.S. Bureau of Labor Statistics reports that in 2014, for instance, the median weekly earnings of a woman working full-time were 83 percent of the weekly earnings of a man working full-time. But as the BLS points out, this comparison doesn’t take into account the number of factors that can affect this difference such as education levels, length of time in the labor force, occupations, and many others.

That’s where research like that surveyed by Blau and Kahn comes into play. These more robust studies account for these factors in understanding the wage gap. So here, in short, is what Blau and Kahn find.

The wage gap, while still around, has declined significantly since the 1950s. But the decline hasn’t been consistent over time. While the 1980s saw strong convergence and reduction in the gender wage gap, the rate of reduction slowed down over the following 20 or so years. What’s more, the increases that women saw overall in educational attainment and labor market experience were significant reasons for both the wage gap decline as well as women’s entrance into higher-paying occupations.

Yet while improvements in human capital—as some economists might call the improvements in education and work experience—used to be important in pushing down the wage gap, these factors don’t explain the current gap. In 1980, these factors explained about 27 percent of the gender pay gap; by 2010, they only explained 8 percent. Contrast that decline in explanatory power to the role of industry and occupational segregation. While these forces explained about 20 percent of the gender wage gap in 1980, they explained 51 percent of the gap as of 2010. The gap today is smaller, but more of it is explained by differences in occupational and industry employment between men and women.

The portion of the gap that cannot be explained, however, is still a significant portion of the gap—about 38 percent in 2010. There are numerous potential causes of this unexplained gap, one of which is discrimination, conscious or unconscious. At the same time, “compensating differentials” could also be part of this unexplained gap. In essence, women could be making less because they are less willing to take unpleasant jobs, which offer higher compensation to make up for those features. Such an effect lines up with research by Harvard economist Claudia Goldin on how the returns to long hours within some occupations (think corporate law) increases the gender wage gap as men are more willing to work those hours. Of course, discrimination can also be a reason why women are less likely to work at these jobs. It’s difficult to fully untangle discrimination from other explanations why there are human capital, industrial, and occupational differences between men and women.

The gender wage gap has declined quite a bit since the days of Don Draper. But to borrow the title of Goldin’s paper, the “convergence” has entered its last chapter, requiring more emphasis on understanding the causes of—and figuring out a solution to—the wage gap.

Must-read: Tim Duy: [Stan Fischer] “Resisting Change?”

Posted on by Brad DeLong

Must-Read: Two takeaways this morning from Stan Fischer, and from Tim Duy reading Stan Fischer:

  1. 1.4%-2% inflation “positive and broadly consistent with price stability” “not in another universe [from 2%]… not a negative number” is the new 2% inflation target.

  2. Because the Federal Reserve has no confidence in its ability to nudge the unemployment rate up to its long-run NAIRU level without overshooting and causing a recession, it must always attempt to glide down to the NAIRU from above–and must not follow policies that risk pushing unemployment below the NAIRU, whatever it really is:

Tim Duy and Friends: [Stan Fischer] Resisting Change?](https://twitter.com/TimDuy/status/694715619929780224): https://t.co/2g24mCkTzv

Lance Bachmeier: @kocherlakota009 @TimDuy: “Good post…

…SF/EG (inadvertently?) communicate that 1.5-2% inflation is ‘good enough’ for them.

NRKocherlakota: “@TimDuy Problem: if 2% is the true symmetric…

…target of policy, the FOMC needs a U-Turn, not just a pause: https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/1-21-16

Tim Duy: “@kocherlakota009 So…

…I don’t really believe the target is symmetric. Need to prove it to me.

NRKocherlakota: “@TimDuy Yes, and I worry that public/markets…

…have your same (reasonable!) doubts. SF’s and EG’s remarks don’t help assuage those doubts.

Lance Bachmeier: “@kocherlakota009 @TimDuy The strange thing…

…is that they’re lowering the [inflation] target after we’ve learned 2% is too low already.

Lance Bachmeier: “@kocherlakota009 @TimDuy I’m not even sure 2% is a ceiling…

…they want to prevent inflation from [even] reaching 2%.

Tim Duy: Resisting Change?: “Stanley Fischer[‘s]… speech… was both illuminating and frustrating…. Although his confidence is fading… he is resisting change…. The first source of my frustration… [is that] his definition of ‘accommodative’ depends upon a specific idea of the neutral Fed Funds rates. From the subsequent discussion:

Well, I think we have to wait to see…. We expect…. somewhere around 3 ¼, 3, 3 ½ percent, which is on average a bit lower than in the past. But we’ll be data-dependent….

If you don’t know the longer-run rate, how can you know how accommodative policy is? If the longer-run rate is close to 2 percent, then policy is less accommodative than you think it is. The endgame of policy is the dual employment/price stability mandate, not a specific level of interest rates…. [That the] Fed’s forecasts… have been foiled by oil and the dollar… would suggest a slower or delayed pace of rate hikes, but more on that later. As for market volatility and external events:

In addition, increased concern about the global outlook, particularly the ongoing structural adjustments in China and the effects of the declines in the prices of oil and other commodities on commodity exporting nations, appeared early this year to have triggered volatility in global asset markets. At this point, it is difficult to judge the likely implications of this volatility. If these developments lead to a persistent tightening of financial conditions, they could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.

This is unimpressive…. The likely implications of the volatility are straightforward. The decline in longer term yields signals the Fed is likely to be lower for longer…. It seems that Fischer does not acknowledge the Fed’s role in minimizing the impact of similar bouts of volatility. They have responded by either easing via additional quantitative easing, or easing by delaying tightening…. When you fail to recognize your role, you set the stage for a policy error. They can’t use the logic that they should hike in March because past volatility had no impact on growth when that same volatility actually changed their behavior and thus the economic outcomes. I guess they can use that logic, but they shouldn’t. So is March on the table still?… I can tell a story where they push ahead on the labor data alone. Back to Fischer….

A persistent large overshoot of our employment mandate would risk an undesirable rise in inflation that might require a relatively abrupt policy tightening, which could inadvertently push the economy into recession. Monetary policy should aim to avoid such risks and keep the expansion on a sustainable track….

Policymakers fear that they cannot allow unemployment to drift far below the natural rate because they do not believe they could just nudge it back higher without causing a recession. They can only glide into a sustainable path from above… [thus] the Fed will resist holding rates steady…. Indeed, one voting member is already working hard to downplay recent events. Today’s speech by Kansas City Federal Reserve President Esther George:

While taking a signal from such volatility is warranted, monetary policy cannot respond to every blip in financial markets. Instead, a focus on economic fundamentals, such as labor markets and inflation, can help guard against monetary policy over- or under- reacting to swings in financial conditions. To a great extent, the recent bout of volatility is not all that unexpected, nor necessarily worrisome, given that the Fed’s low interest rate and bond- buying policies focused on boosting asset prices as a means of stimulating the real economy. As asset prices adjust to the shift in monetary policy, it is to be expected that the pricing of risk will realign to this different rate environment…. If we wait for the data to provide complete confirmation before making a policy decision, we may well have waited too long….

Watch for policymakers to downplay the inflation numbers as well. Back to George:

Finally, inflation has remained muted as a result of lower oil prices and the strong U.S. dollar…. Yet… core measures of inflation have recently risen on a year-over-year basis. And although inflation rates… have hovered below the Fed’s goal of 2 percent, they have been positive and broadly consistent with price stability.

Note the ‘positive and broadly consistent’ line. And Fischer:

And our view of progress is what the law calls maximum employment and what we call maximum sustainable employment, and a 2 percent inflation rate. And when we get there—we’re there—we’re very close to there on employment, and on inflation the core number that came out this morning was 1.4 percent. You know, that’s not 2 percent. It’s not in another universe. It’s not a negative number. But inflation’s been pretty stable, and we’d like it to go up.

Not in ‘another universe’ from 2 percent. Not negative. Sure we’d like it to go up, but are we really worried about it? Doesn’t sound like it to me.

Bottom Line…. I suspect market volatility and lack of inflation data keep them on hold in March and maybe April…. However (although not my baseline), I can tell a story where they feel like the employment data forces their hand. Especially so if they continue to downplay the inflation numbers. A substantial part of their policy still appears directed by a pre-conceived notion of ‘normal’ policy. This I think is the Fed’s largest error; the fact that the yield curve stubbornly resists being pushed higher suggests that the Fed’s estimates of the terminal fed funds rates is wildly optimistic. There appear to be limits to which the Fed can resist the global pull of zero (or lower) rates.

Must-read: Martin Sandbu: “Four Takes on the Fed Fumble”

Posted on by Brad DeLong

Must-Read: That the Fed would be facing significant chances of recession and would be moving in the opposite policy direction than its peers over the winter was a serious risk of beginning a tightening cycle in December, and a risk that has now risen from a possibility to a probability.

What was the countervailing serious risk that starting the tightening cycle in December took off the table? I really do not see it…

Graph 5 Year 5 Year Forward Inflation Expectation Rate FRED St Louis Fed

Martin Sandbu: Four Takes on the Fed Fumble: “Remember September? Markets seemingly couldn’t wait for the Federal Reserve to raise interest rates…

…Now, however, markets seemingly can’t wait for the Fed to definitively snip the fledgling tightening cycle in the bud. And a growing chatter wonders whether the Fed made a mistake…. Market pricing now implies nearly a two-thirds probability that Fed policymakers will get past next September without a single further rate rise. The change in market sentiment is easy enough to understand… financial turmoil in China… slide in global stock markets… sharp US growth slowdown…. There are (at least) four different ways one may assess the Fed’s actions. First, the plain ‘the Fed goofed up’ view… Paul Krugman, Brad DeLong and Larry Summers. Free Lunch readers will know that this column shares their view on this issue… Jed Graham….

A second, perhaps more interesting, take is that in hindsight the Fed shouldn’t have raised rates, but that it couldn’t have known this at the time…. A third take… the mistake was to create expectations that caused financial conditions to tighten long before December…. A fourth view… the Fed was right to hike but wrong in thinking it would then proceed to lift rates through this year…. But… the arguments for a rise were… for the beginning of a sustained if gradual process. If that is now derailed, it removes much of the rationale for the first increase.

It also leaves open the question of what to do next…. Should the Fed reverse course? That is the view of Narayana Kocherlakota…

Must-read: Athanasios Orphanages: “The Euro Area Crisis Five Years After the Original Sin”

Posted on by Brad DeLong

Must-Read: Athanasios Orphanides: The Euro Area Crisis Five Years After the Original Sin: “Why did Europe fail to manage the euro area crisis?…

…Studying the EU/IMF program… imposed on Greece in May 2010–the original sin of the crisis–highlights both the nature of the problem and the difficulty in resolving it. The mismanagement can be traced to the flawed political structure of the euro area…. Undue influence of key euro area governments compromised the IMF’s role to the detriment of other member states and the euro area as a whole. Rather than help Greece, the May 2010 program was designed to protect specific political and financial interests in other member states. The ease with which the euro was exploited to shift losses from one member state to another and the absence of a corrective mechanism render the current framework unsustainable. In its current form, the euro poses a threat to the European project.