Category: Equitablog

Fall 2015 BPEA 10:45 AM Fr: Hausman and Wieland once again depress me:

Our analysis of Abenomics, and monetary policy in particular, suggests that its real effects so far have been small despite intermediate indicators, such as the real interest rate and the real exchange rate, moving in an expansionary direction…

My reading of the Great Depression era–FDR’s New Deal, Neville Chamberlain’s announcement that it was the policy of HMG to reverse the deflation that had occurred since 1929, Takahashi Korekiyo in Japan before his very untimely murder by militarist-fascist captains and majors–had convinced me that expectational effects were a thing. It was pretty clear from 1979-1984 that at the worker and firm level expectations of inflation and deflation were likely to be adaptive and backward looking. But the effects of Roosevelt’s, Chamberlain’s, and Takahashi’s policies in the 1930s gave me confidence that the announcement effect of Abenomics stood a very good chance of reversing Japan’s deflation and spurring a strong recovery–because expectations relevant for financial markets were forward-looking, and reasonable forecasts that could be affected by credible policy announcements.

Can I still believe that?

Hausman and Wieland:

We documented in sections 2.1 and 2.2 that most indicators of inflation expectations in Japan remain well below 2%, and we argued that this likely reflected imperfect credibility. One possible explanation for this lack of credibility, discussed at length in Hausman and Wieland (2014), is that observers doubt the political will to continue large-scale quantitative easing. Another possibility is that observers doubt the effectiveness of quantitative easing. Insofar as there are doubts about the political will to achieve to 2% inflation, it was unfortunate that the Bank of Japan’s expansion of quantitative easing in October 2014 passed with only a 5 to 4 vote….

Given that quantitative easing has not (yet) produced actual or expected 2% inflation, the Bank of Japan could consider following Denmark, the Eurozone, and Switzerland in paying negative nominal interest rates on reserves…. Negative nominal rates are only one of many alternative policies…. For instance, as discussed by Svensson (2003), the Bank of Japan could deliberately weaken the yen and peg the yen at a weak value. While net exports have not responded strongly to the recent yen depreciation, it is plausible that a peg could increase these effects by persuading firms of the weak yen’s permanence. Such a peg might also improve the credibility of the 2% inflation target. A practical difficulty is that exchange rate policy falls within the scope of the Ministry of Finance rather than the Bank of Japan, so that more explicit cooperation between them would be required.

We are hesitant to comment on more non-standard proposals, such as money-financed government expenditures or money-financed fiscal transfers. Our analysis above suggests uncertainty about what macroeconomic model applies to Japan. This implies uncertainty about how alternative policies would affect inflation and output.

Fall 2015 BPEA 10:00 AM Fr: Thinking about Ricardo Reis’s paper…

As we all know, in the absence of the Maastricht Treaty a financial crisis like that of Portugal 2010 would have been dealt with by depreciation and an IMF program–both to provide funding to cushion the effect of the sudden stop on capital inflows and to take the blame for the policy changes inevitable to create external balance at whatever capital account conformed to the post-crisis tolerance of both foreigners and Portuguese for Portugal risk.

One powerful benefit of such a resolution is that as long as–and this is a big “as long as”–the external debt was either denominated in Portugal’s national currency or private debt dischargeable via bankruptcy, we would not know be worrying about the legacy of Portugal’s pre-crisis debt. A second powerful benefit is that as long as–once again a big “as long as”–the Gods of the Elasticities cooperate in the medium-run, structural reform to boost export competitiveness and to curb import demand happens automatically, with the drawbacks of coming at the likely cost of a domestic inflation-spiral problem and without imposing pressure for productivity-boosting structural reforms.

Is there a case–as much of “a major success” as the German Ministry of Finance may claim Portugal is–that there is some net economic benefit from euro membership that offsets Portugal’s giving up of these two powerful benefits of adjustment via the exchange-rate channel?

Ricardo Reis: Looking for a Success: The Euro Crisis Adjustment Programs: “Portugal’s adjustment program was extensive, mostly followed… and…

…benefitted from the accumulation of some [previous] experience. Looking back in its 2015 anual report, the IMF describes the adjustment program as a success (IMF, 2015a), and even Wolfgang Schäuble, the influential German finance minister, stated at the conclusion of the program: “This is a major success” (German Federal Ministry of Finance, 2014). This article will argue that the verdict is more mixed…. While the main Portuguese aggregates indicate a success in stabilizing public finances but little gains in getting the economy out of its slump, evaluating the economy’s state… suggests the opposite: promising changes in the structure of the economy, while being far from a path that lowers the public debt….

The trade balance went from -7.1% to 1.1% of GDP…. The ratio of exports to GDP increased from 30% to 41%…. The stock of public debt went from 96% to 130% of GDP…. It is difficult to see how Portugal can get public debt under control without a new reconfiguration of maturities and interest payments on the troika debt that would significantly reduce the market value of the public debt…. In the World Economic Forum competitiveness index, Portugal improved from being ranked 46th to 36th… [as] the result of many legal reforms that were part of the extensive adjustment program… 494 different structural reform actions… half in the public sector, and half in deregulation…. Whether any of it leads to higher economic growth is an open question…

Must-Read: Andy Menke et al.: Prevalence of and Trends in Diabetes Among Adults in the United States, 1988-2012: “Diabetes… [is] a previous diagnosis of diabetes or…

…(1) a hemoglobin A1c level of 6.5% or greater or a fasting plasma glucose (FPG) level of 126 mg/dL or greater…. Prediabetes was defined as a hemoglobin A1c level of 5.7% to 6.4%, an FPG level of 100 mg/dL to 125 mg/dL…. In the overall 2011-2012 population, the unadjusted prevalence… was 14.3%… for total diabetes… and 38.0%… for prediabetes…

Fall 2015 BPEA 8:30 AM Fr: Twenty-two years and one month ago, after an OEOB meeting I spent carrying spears for David Cutler in one of his hopeless attempts to warn certain Assistant to the President for Health Policy precisely what reception his policy proposals would get from a CBO where Doug Elmendorf piloted the health-care desk, I returned to my office at the Treasury, and one of our career economists lectured me thus about dynamic scoring:

“Brad, you people come in with your exaggerated belief in the productivity benefits of public investment. And so you command us to score your policies as having a very favorable impact on the deficit. They come in with their exaggerated belief in the benefits of tax cuts. They command us to score their policies as having a very favorable impact. We cannot say we disagree with our bosses’ analytic judgments. But by holding the line and stating that we do not consider any macroeconomic effects of policies, we can at least prevent being whipsawed by this partisan rosy-scenario ratchet.”

Thus I find myself worrying about this:

I find myself thinking of CBO Directors past and future. I think of June O’Neill, talking over and over again about how her model showed substantial disemployment effects of universal health coverage, without ever letting past her lips any acknowledgement that the people whose jobs her model showed as “destroyed” had in fact moved to a higher utility level as a result. I find myself thinking of the persistent rumors that after Doug Elmendorf had wreaked his analytic wrath on Ira Magaziner, Majority Leader Mitchell had said to Bob Reischauer: “You are gone on January 4, 1995”.

One unintended side effect of the budget process introduced in the 1970s has been to give CBO and JCT great power, which they have by and large shouldered with great responsibility. But with great power comes great pressure. And it is not at all clear to me that, given the magnitude of this pressure, we want extra degrees of freedom in which these organizations can respond to the pressures they are under.

Yesterday, after all, I saw estimates of the dynamic revenue impact of Jeb!’s tax proposals that varied from negative–that the reduction in national savings would outweigh any positive incentive effects–to recouping 2/3 of the static revenue loss. And I imminently expect to see n estimate today that it will produce 4%/year real growth and thus raise revenue. It’s opening a can of worms. Doug and Peter may think the worms are dead. I fear they are not…

Doug Elmendorf: “Based on my experience as the director of CBO from January 2009 through March 2015…

…the principal concerns expressed about estimated macroeconomic effects of proposals apply with equal force to other aspects of budget estimates or can be addressed by CBO and JCT. In my view, including macroeconomic effects in budget estimates for certain legislative proposals would improve the accuracy of those estimates and would provide important information about the economic effects of those proposals. Moreover, if certain key conditions were satisfied, those estimates would meet the general goals of the estimating process that estimates be understandable and resistant to misinterpretation, based on a consistent and credible methodology, produced quickly enough to serve the legislative process, and prepared using the resources available to CBO and JCT.

Must-Read: This is, of course, false: Labor economics is “having its moment” only in a first-derivative sentence–in that it is no longer totally ignored but only mostly ignored by the ugly-celebrity-worship-and-champagne-drinking chattering glasses of Washington DC who fail to understand that America’s capital is not supposed to be a decadent court.

But the article is nice to see, even so.

Rob Kunzig: Labor Economics Are Having a Moment–and so Is Larry Mishel: “Americans are finally paying attention to wealth inequality…

…or, as he puts it, ‘how economic policy affects the vast majority.’ It’s been his focus for 28 years at the Economic Policy Institute, a Washington-based liberal think thank that focuses on labor issues. ‘I’m interested in productivity,’ said Mishel, who has served as EPI’s president since 2002. ‘I’m interested in GDP. But I’m mostly interested in how those things can benefit the majority, not as matters in and of themselves.’ After what Mishel calls the Great Recession, he said Americans are feeling ‘pretty ornery’…. EPI’s work… is finding fresh relevance and application. For example: The Department of Labor’s proposed revision of overtime standards closely follows recommendations made by economists Ross Eisenbrey and Jared Bernstein in a 2013 EPI paper. By increasing the income threshold from $24,000 to $50,000, the department (and, one can reasonably say, EPI) intends to make more than 5 million salaried workers eligible for overtime….

Bernie Sanders (I-Vt.), a hopeful for the Democratic nomination, hit up EPI for data on youth unemployment, and presidential hopeful Hillary Clinton recently tweeted out an EPI chart showing the divergence of productivity and pay…. ‘Listen, it’s a great moment for the Economic Policy Institute,’ he said, brushing off attempts to credit him personally. ‘I’ve always believed in building the institution, and the institution has provided a great platform for my work, but also other peoples’ work.’… He sits in a well-loved leather armchair, and he speaks slowly, breaking down the complexities of labor economics for slow-witted reporters. When he’s thinking, he closes his eyes.

He started working at EPI in 1987, in the waning days of President Ronald Reagan and his trickle-down economics. Mishel, a product of public education (he holds a Ph.D. in economics from the University of Wisconsin, and attended Penn State University before that), was one of five employees back then. In 1988, he co-authored the first edition of The State of Working America, EPI’s signature biannual book that ‘comprehensively documents the living standards of the vast majority, and how they’re faring,’ he said. Mishel has co-authored every edition since – 11 in total. And EPI now employs 40 staffers…. Whoever takes the Oval Office in 2016, Mishel said, they’ll have a lot of work to do. ‘We’re digging ourselves of a 40-year hole, and we’re not going to get out of it with one shovelful of dirt,’ he said. ‘But we can change it’…

Fall 2015 BPEA Th 4:30 PM: Kumar et al.: Am I right in reading this paper as saying not only that inflation expectations are not forward-looking, but that–at least when inflation is less than 5%/year–they are not especially backward-looking either? That inflation expectations, at least below some threshold are just not a thing that can be usefully modeled as affected by other macroeconomic variables?

Fall 2015 BPEA Th 3:00 PM: Boldin and Wright: I still find myself confused as to the extent to which weather-induced adverse supply shocks are permanent losses, are super-losses in that they disrupt something called “momentum”, or are merely shifts as activity that would have been carried out during a snowstorm is shifted to later in the year. I clearly need more guidance as to how to think about this…

Must-Read: Larry Summers: “If there’s one thing that characterizes our politics now, it is a sense amongst almost everyone in the middle class…

…that there’s someone who speaks for everybody except for them. Traditionally in America, the people who spoke for the broad middle class were the union movement. And if they are able to speak with less force because they have fewer members, if they are pushed towards the margins, the damage done at each employment unit is the smaller part of the damage. The larger part of the damage is what it does to our broad political dialogue…

Fall 2015 BPEA Th 1:00 PM: Schumacher and Weder di Mauro’s paper, “Diagnosing Greek Debt Sustainability: Why Is It so Hard?”, confuses me. It is not at all clear to me what “sustainable” or “less than 20% chance of debt-distress” really mean–as, indeed, it has become a term a political art rather than one of economic analysis.

Moreover, the interest-rate configuration now is so weird that I do not see how debt sustainability benchmarks constructed for what we used to see as normal times can be useful.

The German ten-year bund rate has been below the eurozone’s inflation target for more than four years now. The U.S. thirty-year Treasury rate has been below projected U.S. nominal GDP growth for more than eight years now. It is usually the case that, as the late Michael Mussa used to say, debt sustainability analyses are of the nature of: “if… if… if… as they would say where I grew up: ‘if my grandmother had wheels, she would be a bus’.” That is overwhelmingly the case now.

So I think we need to go back to basics. Rather than picking up sustainability benchmarks built for a different global macroeconomic situation. I want to see what is assumed with respect to:

• what the yield premium over the German benchmark is.
• when the German benchmark is expected to normalize.
• what the German benchmark is expected to normalize to.
• how fast the real principal is expected to be paid down.
• what share of GDP can be expected to be devoted to debt service and amortization.

Fall 2015 BPEA Th 1:00 PM: Reinhart and Trebesch: I note the statement that:

external creditors fared rather benignly in Greece, despite the many years of default. The real ex-post returns on the defaulted bonds were in the range of +1% to +5%, despite the losses due to haircuts and arrears… partly the result of the high yields… but also because partial debt service continued even in severe crisis years…

That seems to explain why people lend to Greece–that when the crisis comes, they have enough control to squeeze the lemon hard, whatever the excess burden of the taxes imposed and its cost for the Greeks.

Are the lessons: (a) a country should not borrow in a currency it cannot print, and (b) a country should not let its firms borrow in a currency it cannot print because private debt will be turned into public debt in a crisis?

It does make me wonder: what would have been the macroeconomic consequences for Texas in the early 1990s had the federal government insisted that Texas reimburse the RTC for payments made by the RTC to depositors in Texas S&Ls?