Category: Equitablog

Take “full recovery” to be a recovery to 87% (not 89%) in the share of 25 to 54-year-old males at work:

Or a recovery to 72% (not 74%) in the share of 25 to 54-year-old females at work:

What could produce such a thing? Exports are already very strong, and with both Europe and Japan seeking additional monetary expansion relative to the U.S. the large decline in the dollar needed to further boost exports does not seem to be in the cards. Equipment investment is strong, especially since we would expect it to be 1%-point or so below normal given the slackness in the economy: low employment and low growth should mean low equipment investment as well. And the kind of inflationary expectations that would lead businesses to think they should build capacity ahead of demand seems unlikely to proceed–although it might follow–full recovery. And we do not see consumption spending filling the remaining output gap either, for consumer optimism seems unlikely the absence of the kind of job security that is found only in the tight labor market that would follow full recovery.

That leaves us with only two possibilities: The first is a housing boom–or, rather, a restoration of investment in single-family housing to its normal share, or an unprecedented multifamily unit housing construction boom. The second is a restoration of government purchases to their normal share of GDP.

Anyone want to give odds on those two?

Must-Read: Marshall Steinbaum: Would Graduating More From College Reduce Inequality?: “All of these phenomena suggest that the labor market isn’t working for most employees…

…problems that aren’t confined to those without a college education—and that suggests the problem isn’t that too few people have college degrees. Rather than focus on education attainment as the solution to inequality, it’s time for policy-makers to move on from the race between education and technology and focus on our stagnant labor market. As Summers said, ‘the core problem is that there aren’t enough jobs.’ The key to reducing inequality is more jobs and a higher demand for labor. In the absence of more jobs, heroic assumptions about educational improvement are likely to deliver only modest economic benefits.

Must-Read: Financial Times: Cameron Points Migrant Talent Towards the Exit: “One of the canards of British political discourse is that no one dares talk frankly about immigration…

…Mr Cameron and Theresa May, his home secretary, every year refute this, delivering speeches about controlling the flow of people to Britain’s shores. Welfare rules have been tightened, “bogus colleges” closed down and charges introduced for users of the National Health Service from overseas…. The public’s concern with immigration is easy to explain…. When people born overseas are adding 0.5 per cent to a country’s population every year, the voters have a right to ask why….

For all the condemnation uttered by economists, Mr Cameron’s immigration policy has not, yet, dented UK growth. This may now change. The reason immigration presents a weak flank for the Tories is explained by how they let the issue be framed. In 2010 they promised to reduce net migration “to the tens of thousands”, and have repeated the pledge ever since, despite little sign that the target would be hit. Repetition of an unreachable target gave malcontents a stick with which to beat the prime minister…. Lacking the tools to achieve his goal, Mr Cameron is forced to show how hard he intends to try. This means new rules against offering accommodation, bank accounts or work to illegal immigrants. How enforceable or effective these will be is unclear. To threaten to confiscate the wages of illegal workers borders on the cruel….

But worse is an idea for curtailing the inflow of talent to Britain. Mr Cameron somehow believes that firms barred from employing skilled migrants will react by training up home-grown workers instead. This sort of conceit inspired socialist ministers half a century ago to restrict imports, hoping thereby to incubate a domestic alternative. Usually the business went overseas or simply withered. Britain is fortunate to import foreign workers more skilled than the average. A prime minister set on “winning the global race” should know that hiding from the competition dulls a country’s edge. Its domestic population will not grow any sharper when shielded from the world’s brightest and best.

Must-Read: Ashish Jha: Readmissions Penalty at Year 3: How Are We Doing?: “A few months ago, the Centers for Medicare and Medicaid Services (CMS)…

…put out its latest year of data on the Hospital Readmissions Reduction Program (HRRP)… the program within the Affordable Care Act (ACA) that penalizes hospitals for higher than expected readmission rates. We are now three years into the program and I thought a quick summary of where we are might be in order. I was initially quite unenthusiastic about the HRRP… but… have come to appreciate that as a utilization measure, it has value. Anecdotally, HRRP has gotten some hospitals to think more creatively…. A few years into the program, the evidence seems to be that the program is working – readmissions in the Medicare fee-for-service program are down about 1.1 percentage points nationally. To the extent that the drop comes from better care, we should be pleased….

In year 3, CMS expanded the conditions for which hospitals were being penalized to include COPD as well as surgical readmissions, specifically knee and hip replacements…. Here’s my take. Most hospitals got penalties in 2015 and a majority have been penalized all three years…. Safety-net hospitals are still getting bigger penalties, presumably because they care for more poor patients (who are more likely to come back to the hospital) but the gap has narrowed. This is good news. If we can move forward on actually adjusting the readmissions penalty for SES… and continue to make headway on improving risk-adjustment for medical readmissions, we can then evaluate and penalize hospitals on how well they care for their patients. And that would be a very good thing indeed.

Over at Grasping Reality: Note to self:

Perhaps I imposed too much of my own preconceptions on Skidelsky. But I had always seen Skidelsky as arguing that Keynes saw:

1. France as dominated by politicians—Clemenceau, Poincare, Laval, plus Moreau–hostile to European settlement and recovery, in part because a rapidly recovering Europe would soon be one with a much more powerful and dominant Germany.
2. Germany as tenuously ruled by proto-Adenauers trying to retain power under immense pressure from both the anti-liberal left and the anti-liberal right.
3. Failure to restore prosperity as likely to unleash even worse things than World War I.
4. Hence a tilt to Germany and its proto-Adenauers and against France and its poiticians in the hope of making the Germany that would dominate Europe a liberal one and keeping France too weak to impede sensible reparations and economic policies…

Cf: Stephen A. Schuker (2014): J.M. Keynes and the Personal Politics of Reparationshttp://www.tandfonline.com/loi/fdps20

John Maynard Keynes: The Economic Consequences of the Peace: “Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature

…of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.

Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built. But the spokesmen of the French and British peoples have run the risk of completing the ruin, which Germany began, by a Peace which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organization, already shaken and broken by war, through which alone the European peoples can employ themselves and live….

Europe is solid with herself. France, Germany, Italy, Austria and Holland, Russia and Roumania and Poland, throb together, and their structure and civilization are essentially one. They flourished together, they have rocked together in a war, which we, in spite of our enormous contributions and sacrifices (like though in a less degree than America), economically stood outside, and they may fall together. In this lies the destructive significance of the Peace of Paris. If the European Civil War is to end with France and Italy abusing their momentary victorious power to destroy Germany and Austria-Hungary now prostrate, they invite their own destruction also, being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds….

Paris was a nightmare, and every one there was morbid. A sense of impending catastrophe overhung the frivolous scene; the futility and smallness of man before the great events confronting him; the mingled significance and unreality of the decisions; levity, blindness, insolence, confused cries from without,—all the elements of ancient tragedy were there. Seated indeed amid the theatrical trappings of the French Saloons of State, one could wonder if the extraordinary visages of Wilson and of Clemenceau, with their fixed hue and unchanging characterization, were really faces at all and not the tragi-comic masks of some strange drama or puppet-show….

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilization and the progress of our generation. Even though the result disappoint us, must we not base our actions on better expectations, and believe that the prosperity and happiness of one country promotes that of others, that the solidarity of man is not a fiction, and that nations can still afford to treat other nations as fellow-creatures?…

Robert Waldmann: In Which I try to Defend Janet Yellen from Brad DeLong: “Fed Chair Janet Yellen said, among other things:

For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term. After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual. The various headwinds that are still restraining the economy…

The news is that “some point this year” means “not next month” A possible increase in June 2015 used to be discussed a lot.

Brad DeLong argues that raising rates “sometime this year” would be crazy… the speech includes no consideration of the risk of hitting the zero lower bound due to a shock after raising rates…. I’m going to go to a long boring comment. The main point, if any, is that a speech describing a sub-optimal plan for interest rates (as a function of future information) may be an optimal speech. But I also type about optimal control (both of us are trying to do math in our heads using plain English). I want to stress here that I think Brad is making a very important very valid point….

This is a public speech. I have a story for why she thinks it was optimal. It goes as follows:

1. Remember how the markets freaked out when we said we would taper QE3 ? We promised we weren’t going to raise the target federal funds rate and federal funds futures freaked fiercely. It is clear that lots of investors are just waiting for us to turn back into normal central bankers all of a sudden.

2. Sooner or later, we will have to raise the federal funds rate. There is a risk that investors will assume that we are going to turn into Trichet. This would be very bad. So we have to start now saying it won’t be a huge deal when we raise the target a bit.

I think she is saying: We aren’t going to do anything dramatic and scary. Don’t be scared by anything we do. Don’t panic.

It seems to me to be optimal control to say that. The instrument I am discussing is the speech not the federal funds rate.

Second there is the goal of also proving that she is not a raging reincarnation of Rudolf Havenstein. Repeated statements that even discussing raising rates is insane are accurate, but would infuriate powerful people. It is useful for Yellen to Clinton and say “I feel your desire to inflict pain.”

Third I don’t see why the rate increase is large when, finally, an increase is optimal…. Say the month of Austember is the one when it should raise the rate, In constrast during Stimember (the month before Austember) the target FF rate should be 0-0.25% . There must be two such months if 100% inflation is not optimal. From Stimember to Austember the only change is an 0.1% increase in the core inflation rate. This can have only a small effect on the marginal cost of inflation (which I consider trivial at 4% inflation) and also only a small effect on the expected present discounted cost of the future ZLB (being the value of the option to set interest rates below zero which we wish we had). All has changed little so the optimal federal funds rate can’t be high…. How can it be sensible to raise it to 1%?

It doesn’t jump: but when you have a steadily-improving economy then, relative to the no-ZLB bound, optimal control tells you to move late, and then move fast so that you coverage to the no-ZLB rate as the chance of hitting the ZLB again drops from high to near-zero:

Must- and Should-Reads:

• Richard Thaler: Unless You Are Spock, Irrelevant Things Matter in Economic Behavior
• Social Credit! Mark Blyth, Eric Lonergan and Simon Wren-Lewis: Now the Bank of England needs to deliver QE for the people. We propose that the government legislates to empower the Bank with the ability to make payments directly to the household sector…
• Must-Read: Christopher L. Foote and Christopher F. Goetz (2005): The Impact of Legalized Abortion on Crime: Comment
• Must-Read: Nicholas Bagley: Wreck the RUC
• Must-Read: William Lazonick: Stock buybacks: From retain-and reinvest to downsize-and-distribute
• Simon Johnson and Andrei Levchenko: The Trans-Pacific Partnership (TPP): This Is Not About Ricardo

Over at Equitable Growth—The Equitablog

• Casey Schoeneberger: Weekend reading
• Kavya Vaghul: What about commuting to new economic opportunities?

Plus:

• Things to Read on the Evening of January 31, 2015

And Over Here:

• Might Like to Be Aware of:

• Will Moore: A glass-half-full view of academic fraud in political science – The Washington Post

• Daniel Zadik: “The Y chromosomes of the majority of European men can be traced back to just three individuals living between 3,500 and 7,300 years ago…”)
• 2844 Webster St, Berkeley, CA 94705
• Hodding Carter III: Glenn Greenwald, I’m sorry: Why I changed my mind on Edward Snowden

It seems to me that this is likely to be analytically wrong–or, at least, far from the optimal policy under any expections scenario:

Janet Yellen: The Outlook for the Economy–May 22, 2015: “Given this economic outlook and the attendant uncertainty…

…how is monetary policy likely to evolve over the next few years? Because of the substantial lags in the effects of monetary policy on the economy, we must make policy in a forward-looking manner. Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy. For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term.

After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual. The various headwinds that are still restraining the economy, as I said, will likely take some time to fully abate, and the pace of that improvement is highly uncertain. If conditions develop as my colleagues and I expect, then the FOMC’s objectives of maximum employment and price stability would best be achieved by proceeding cautiously, which I expect would mean that it will be several years before the federal funds rate would be back to its normal, longer-run level…

It is one of Herbert Simon’s principles that one should model the most striking features of a situation, take the model as your guide, solve for the optimal policy for your oversimplified model, and then hope that the optimal solution to the oversimplified model is a good solution to the real world policy problem.

In the case of the Federal Reserve, the natural way to model it’s task is as an optimal control problem. In such a problem, the optimal path for your control–which is, in this case, the short-term safe nominal interest rate that the Federal Reserve sets–is one in which it is expected to drift up or down only slowly. And whenever new information arrives, the optimal policy is for the control path to jump until once again the control variable is at a level at which you expect it to drift one way or the other only slowly.

All this is true assuming that one can either lay raise or lower one’s control variable as one wishes.

If your control variable has a bound–like the zero lower bound on interest rates–the optimal control policy is different. The fact that you cannot lower your control variable below its bound adds an extra term to the math. This extra term makes it unpleasant to be even near the bound. So you should take steps to stay away from it–which means lowering your control variable closer to the bound as you get near it. And the nearer to it you are, the more you lower it below what it would be if there were no bound constraining it.

This bound principle has the implication that if do you wind up at the bound, you want to get off of it as soon as possible in a way that makes it highly unlikely you will wind back at it. Hence you stay at the bound until your optimal policy in the absence of the bound is well away, and then you move your control variable rapidly until it once again is expected to drift only slowly.

Thus Janet Yellen’s declaration today makes no sense: from an optimal control of you, you want to wait to raise interest rates until the economy is sufficiently strong that the appropriate interest rate raise is a substantial one.

The Federal Reserve knows the logic of this optimal control argument at least as well as I do. But so far I have not heard or seen anywhere a coherent explanation of why it does not or even might not apply right now.

A good day yesterday at the University of California center in Sacramento, which is in the basement on K St. a couple of blocks away from the California state capital. 20 students, and then 100 for the lecture. (And I do not yet have the URL for the videotape.)

I started out saying: I find my peers, as they age, become increasingly unwilling to mark their beliefs to market. They increasingly turn their smarts and their cleverness to rationalizing why they can still believe what they believed in their 20s. This is not wise. This is, in fact, very dumb. And this is boring.

I said: I do not want to be boring here today. You do not want me to be boring here today. So let me go against this type of the aging middle-aged professor. Let me, instead, spend my time this lunchtime detailing four points in economics at which the world has surprised me over the past decade, and in which as a result reality has led me to shift my beliefs.

In brief:

• The world has turned out to be more Keynesian than I would have imagined a decade ago.
• Low-tax low-service U.S. state level political economy has proved to be ineffective as an economic development model. I was always pretty sure that it was a lousy bet from the standpoint of societal welfare. But a decade ago I thought it at least boosted state-level GDP. Now I do not.
• The success of the implementation of Obamacare has raised my estimation of the administrative competence of the government.
• And the aggregate economic costs to America of local NIMBYism now appear to me to be much larger than I would have thought reasonable decade ago: we are no longer a country in which people can afford to move to places where they will be more productive and more highly paid because high-productivity places refuse to upgrade their residential density.

All this, I said, has powerful political consequences. And the politics of the last decade has also been very surprising to me. But I did not have time to get into that in any depth…