…is the art of recycling old ideas under new names. So it is with the debate over currency wars, which parallels exactly the 1930s debate over competitive currency devaluation. David Woo, meet Ragnar Nurkse. Nurkse, in… 1944… [argued that] competitive devaluation was a negative-sum game. These are exactly the arguments made by today’s Cassandras of currency wars…. Subsequent scholarship shows, however, that the main reason monetary policy didn’t work more powerfully in the 1930s was that it wasn’t tried…. Central banks in the 1930s were reluctant to utilise their newfound monetary freedom… failed to make open-ended commitments to raise prices… effectively transform expectations… supplement the new monetary regime with supportive fiscal action… failed to convince investors that they were committed to a fundamentally new policy regime…. And because they failed to coordinate their monetary and exchange rate policies internationally, haphazard exchange rate changes only created volatility and uncertainty, as argued here. Today, in contrast, central banks like the Bank of Japan and European Central Bank are making open-ended commitments to do what it takes…. Without that action and those steps, however, the Cassandras of currency wars will be right.
Category: Equitablog
Morning Must-Read: Tim Duy: On The Fed Credibility Gap
Mark Thoma sends us to
The markets think Fed officials and staff economists are overly optimistic about the U.S. economy, as they have been in the past….
I will suggest another framework: Financial markets are pricing in a ‘secular stagnation’ scenario that is at odds with Federal Reserve thinking…. Suppose that the short term equilibrium real rate has fallen to zero…. Change the estimate of NAIRU from 5.6% to 5%… close to pre-recession Fed estimates. The results… [are] fairly close to market expectations…. It thus appears reasonable to argue that financial market participants are pricing in a secular stagnation story combined with a pre-recession level of NAIRU. In contrast, the Fed is not seriously contemplating such a story…. The biggest risk to the expansion is a dogmatic view… on the part of the Federal Reserve…. Financial market participants are saying the Fed has less room to maneuver than monetary policymakers believe. The Fed, I fear, is not taking sufficient heed of those signals. Would it be outrageous to think that the Federal Reserve could find itself backtracking after just 200bp of rate hikes? Not if Sweden serves as any example…. The Fed… risk[s] tightening too aggressively and turning an expansion that should last at least four more years into one with only two left.
Big data and price discrimination
Many reasonable concerns about the rise of Big Data—the collection of very large amounts of data generated by digital activity—seem to be coming to a head due to worries about privacy as more and more information is collected on individuals. One particular concern is that businesses may use collected data to charge different prices to different individuals depending on the information businesses have access to. But could potential price discrimination fueled by big data be more benign? A recent analysis by the President’s Council of Economic Advisers looks into that very question.
Despite the connotation of the word discrimination, price discrimination is not necessarily a bad thing. Consider movie tickets. Movie theatres often charge differential prices to different groups for showings. Customers over 65 get senior discounts, for example, because theatres are using age as a proxy for sensitivity to prices as retirees often have a tighter budget than working people. By giving the elderly a discount, the theatres get more business and increase their profits by getting customers you might not have attended at the regular price. And those customers gain because they go to a movie that they wouldn’t be able to attend at the higher price.
This type of price discrimination is what economists call third-degree price discrimination, the kind where prices are based on demographics groups. Other examples include when e-commerce companies or travel reservation websites adjust their prices according to users’ computers or phones. Second-degree discrimination is when the price of a product goes down the more of it a consumer purchases, which happens all the time in a market economy.
But big data may give rise to the kind of price discrimination known as first-degree discrimination. In these cases, businesses can tailor prices to ensure each customer pays the highest price she is willing to pay for the product. The Council of Economic Advisers report uses the example of cars as a consumer good where prices are individualized. Anyone who’s bought a car at a new or used car dealership knows the sticker price is just a starting point and one-on-one haggling is expected. The use of this kind of discrimination when businesses have access to data on customers, such as their individual earnings profile and credit history, is fairly clear.
But here’s perhaps more telling example: If book sellers know that a potential customer has been sharing articles on a certain topic on social media they might be able to charge a higher price for a related book. The book seller gets a higher profit off the sale, but the customer might be left a lower consumer surplus as they were charged a higher price than a market targeted at the whole population might bare.
After talking to researchers and others using big data The Council of Economic Advisers report says the use of first-degree price discrimination doesn’t seem to have caught on. Internet companies appear to have held off on personalizing prices for now. But the report does note that companies do seem to be using tests on websites to figure out the demand curves for different goods. While not exactly price discrimination, this process does provide companies with information on what prices the market can bare.
So big-data-fueled price discrimination of the first degree doesn’t look like a reality in the present. But we are just at the beginning of the use of these kinds of large data sets for business use. In the meantime, as the authors suggest, policy may be better focused on enforcing existing regulations concerning privacy, consumer protection, and discrimination. Given the speed of technology, policy makers should keep an eye on this area.
Things to Read on the Afternoon of February 9, 2015
Must- and Shall-Reads:
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Mark Thoma sends us to: : Only Raise Rates when Whites of Inflation’s Eyes are Visible: “I cannot recall a moment when the gap between what markets expect the US Federal Reserve to do and what the Fed itself has forecast it will do has been as large. Markets predict that the Fed will raise rates only to 1.6 per cent by the end of 2017; the Federal Open Market Committee’s average forecast is 3.5 per cent. Such a divergence raises the risk of volatility and poses a communications challenge for the Fed. More important, it raises the question of what should guide future policy…. Available inflation data suggests little cause for concern. The core consumer price index has averaged 1.1 per cent over the past six months; if housing costs were stripped out it would be zero. Wages actually fell in December and over the past year employment costs have risen 2.25 per cent…. In such circumstances efforts to reduce demand and growth require a compelling justification. Yet the idea that below normal unemployment will necessarily lead to accelerating inflation as suggested by the so called Phillips curve is very uncertain…. [Moreover,] if inflation were to accelerate a bit this would be a good thing…. A plane that accelerates too rapidly as it takes off may cause passengers discomfort while a plane that accelerates too slowly may crash…. The US has never been more intertwined with the global economy…”
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: Interview Barack Obama: Teaser: “Ezra Klein: How had we gotten to the point where we can have high corporate profits and businesses can be doing so well, but the workers don’t necessarily share in that prosperity? Barack Obama: Well, this has been at least a three decade-long trend. There are a whole bunch of reasons for that. Some of it has to do with technology and entire sectors being eliminated–travel agents, bank tellers, a lot of middle management. A lot of it has to do with globalization–the rest of the world catching up. Post-World War II we had just some enormous structural advantages because our competitors had been devastated by war and we had made investments that put us ahead of the curve–education and infrastructure. Those advantages went away at the same time that workers had increasingly less leverage because of changes in labor laws. You combine all that stuff and it puts workers in a tougher position. So some people who just control enormous amounts of wealth–we don’t resent their success, but, just as a practical matter, we’re going to have problems making sure that we are investing enough in the common good to move forward. -
: Knowledge Units: “There are two models of online education: Preparatory knowledge, in the form of course-based video-delivered teachings: Coursera, Udacity, Thinkful, etc. On demand knowledge: Wikipedia, StackOverflow, Genius, etc. Of the two, the latter has been much more widely spread and far more influential… pull based… in digestible chunks… Wikipedia and StackOverflow are the knowledge you need, now…. Khan Academy fits somewhere in between… original[ly]… each video solved the problem at hand…. The platforms that lean towards smaller on demand units of knowledge are the ones that are created collaboratively…. There is, of course, something fundamentally missing when we only have on demand knowledge…. We do not want engineers whose only mode problem solving is searching StackOverflow instead of working from their own understanding of the data structures. This is the difference between an education… and… the solution…. A really great model would be one that combined small on-demand knowledge units with a laddered system. Khan Academy is the closest to this that I’ve seen, but I think they have gone too far down the class model…” -
: The Divine Coincidence: “The Divine Coincidence is the idea that by controlling inflation we also bring the output gap to zero, so we do not need separate targets for both…. Imagine a parallel universe where the monetary authority targeted the output gap, and not inflation…. In this parallel universe they too had a Great Recession, and (being parallel and all) their recovery was of a very similar shape to ours. How would the output gap-targeting monetary authority in this parallel universe perceive its performance? The story would be one of complete failure. After six years of trying, the output gap had still not been closed. A huge amount of resources had been wasted as a result…. I do not think, in our inflation targeting world, the monetary authorities have this view…. They believe performance over the last six years has not been too bad…. Over the last six years, the Divine Coincidence has been distinctly unholy…. I suspect in thirty years students will look back on this period with the same disbelief that we look back on the 1930s. How could they have allowed the recession to continue for so long, they will ask, when they had the tools to do much better? Part of the answer will be inflation targeting.”
Should Be Aware of:
- Capital and Main
- Migrate from Typepad or Movable Type to WordPress
- SageMath
- : RStudio in the Cloud, for Dummies
- : The Pmarca Blog Archive Is Back… as an Ebook
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: Meet the Unusual Plaintiffs Behind the Supreme Court Case That Could Destroy Obamacare: “Three of the four plaintiffs are nearly eligible for Medicare, meaning their objections to Obamacare will soon be moot. Two of them appear… not forced to acquire insurance… so it’s unclear how Obamacare had burdened them. These two plaintiffs seemed driven by their political opposition to President Obama; one has called him the ‘anti-Christ’ and said he won election by getting ‘his Muslim people to vote for him.’… One of the plaintiffs did not recall exactly how she’d been recruited for the case and seemed unaware of the possible consequences if she wins. Told that millions could lose their health coverage if the Supreme Court rules in her favor, she said that didn’t want this to happen…”
The connection between shadow banking and secular stagnation
Why are global investors in European bonds snapping up the corporate debt of Switzerland-based Nestlé SA at more than their face value, paying more than they are worth for the privilege of owning the bonds? And what does this have to do with the European Central Bank as well as growing economic inequality?
The easy answer is “it’s complicated,” but the more telling explanation has to do with the so-called shadow banking system. Shadow banking, simply put, includes banking activities (turning savings into loans) done by institutions that aren’t banks. Examples of shadow banks include certain kinds of hedge funds and money market mutual funds.
These shadow banks channel the savings from large pools of money that now slosh around outside of traditional banking. So where are these large pools of savings come from? Research by economist Zoltan Pozsar, a director of global strategy and research at Credit Suisse, sheds light on the more recent macroeconomic forces that have created the global shadow banking system. According to Pozsar, there are two major sources of what he calls “cash pools.”
The first is the large amount of foreign exchange reserves held by developing countries. China, Southeast Asian nations, and oil exporting countries are the primary driver of this increase in these reserves. Think sovereign wealth funds. As Pozsar put it, the source of this cash pool can be thought of as the imbalance in incomes between countries that run trade surpluses, such as China, and trade-deficit countries, such as the United States.
The second major cash pool is corporate cash balances, or the amount of savings held by corporations. The reasons for the increased savings of corporations are myriad. Globalization, according to Pozsar, is one part of the answer as international competition drove down U.S. wages. Another is that many companies can spend less than before, due to cheaper capital goods and the fact that leading companies spend less on equipment overall. Compare General Motors, which has to build factories, to Facebook, which deploys computer code.
Pozsar says this corporate cash pool is the result of the imbalance between income going to capital and labor. We can see this in the United States as the share of income going to labor has declined.
Now back to the European Central Bank and Nestlé bonds. All of these shadow banking players boast keen appetites for safe bonds, such as German government debt, just as the European Central Bank prepares to wade into the bond market buying European government bonds as part of its new quantitative easing program. Matthew Yglesias at Vox takes a deeper look at the resulting shifts in demand and supply of government bonds. And Matt O’Brien argues at The Washington Post that the shadow banking financial system desperately needs safe assets as the supply of government debt declines so investors are moving into corporate debt.
Now if these sources of savings sound familiar, it’s because you’ve heard of them in the context of another recent economic hypothesis. They are the same trends that Harvard University economist Larry Summers highlights as driving his concept of secular stagnation. The very forces that appear to have pushed down interest rates and fostered debt bubbles are the ones that created the shadow banking system. Secular stagnation and shadow banks are two sides of the same coin.
These forces, which are primarily about the distribution of income—between countries, factors of production, individuals and across time—may be at the heart of not only our current macroeconomic situation but the structure of our financial system, too.
Nighttime Must-Read: Lawrence Summers: Only Raise Rates when Whites of Inflation’s Eyes are Visible
Mark Thoma sends us to: : Only Raise Rates when Whites of Inflation’s Eyes are Visible
I cannot recall a moment when the gap between what markets expect the US Federal Reserve to do and what the Fed itself has forecast it will do has been as large. Markets predict that the Fed will raise rates only to 1.6 per cent by the end of 2017; the Federal Open Market Committee’s average forecast is 3.5 per cent. Such a divergence raises the risk of volatility and poses a communications challenge for the Fed. More important, it raises the question of what should guide future policy…. Available inflation data suggests little cause for concern. The core consumer price index has averaged 1.1 per cent over the past six months; if housing costs were stripped out it would be zero. Wages actually fell in December and over the past year employment costs have risen 2.25 per cent…. In such circumstances efforts to reduce demand and growth require a compelling justification. Yet the idea that below normal unemployment will necessarily lead to accelerating inflation as suggested by the so called Phillips curve is very uncertain…. [Moreover,] if inflation were to accelerate a bit this would be a good thing…. A plane that accelerates too rapidly as it takes off may cause passengers discomfort while a plane that accelerates too slowly may crash…. The US has never been more intertwined with the global economy…
Evening Must-Watch: Ezra Klein and Matthew Yglesias: Interview with Barack Obama: Teaser
Ezra Klein: How had we gotten to the point where we can have high corporate profits and businesses can be doing so well, but the workers don’t necessarily share in that prosperity?
Barack Obama: Well, this has been at least a three decade-long trend. There are a whole bunch of reasons for that. Some of it has to do with technology and entire sectors being eliminated–travel agents, bank tellers, a lot of middle management. A lot of it has to do with globalization–the rest of the world catching up. Post-World War II we had just some enormous structural advantages because our competitors had been devastated by war and we had made investments that put us ahead of the curve–education and infrastructure. Those advantages went away at the same time that workers had increasingly less leverage because of changes in labor laws. You combine all that stuff and it puts workers in a tougher position. So some people who just control enormous amounts of wealth–we don’t resent their success, but, just as a practical matter, we’re going to have problems making sure that we are investing enough in the common good to move forward.
Ezra Klein: Has this put us in a place long-term where redistribution becomes in a sense a positive in and of itself?
Barack Obama: I don’t think that is entirely new. Relative to our post-World War II history taxes now are not particularly high or particularly progressive compared to what they were in say the late 1950s or 1960s. There has always been this notion that for a country to thrive there are some things that, as Lincoln said, we do better together than we can do for ourselves, whether that is building roads or setting up effective power grids or making sure that we have got high-quality public education or that teachers are paid enough. The market will not cover those things, and we have to do them together. Basic research falls in that category. That has always been true. Part of what has changed is that a lot of that burden for making sure that the pie was properly shared took place before government even got involved. If you had stronger unions than you had higher wages. If you had a corporate culture that felt a sense of place and commitment, so that the CEO felt a real affinity for the community to reinvest in that community and to be seen as a corporate citizen. Today what we have is quarterly earning reports, compensation levels for CEOs that are tied directly to those quarterly earnings, you have international capital that is demanding short-term profits, and so what happens is that a lot of the distributional questions that used to be handled in the marketplace through decent wages or health care or defined-benefit pension plans–those all are eliminated, and the average employee–the average worker–doesn’t feel any benefit…
Afternoon Must-Read: Sam Gerstenzang: Knowledge Units
…Preparatory knowledge, in the form of course-based video-delivered teachings: Coursera, Udacity, Thinkful, etc. On demand knowledge: Wikipedia, StackOverflow, Genius, etc. Of the two, the latter has been much more widely spread and far more influential… pull based… in digestible chunks… Wikipedia and StackOverflow are the knowledge you need, now…. Khan Academy fits somewhere in between… original[ly]… each video solved the problem at hand…. The platforms that lean towards smaller on demand units of knowledge are the ones that are created collaboratively…. There is, of course, something fundamentally missing when we only have on demand knowledge…. We do not want engineers whose only mode problem solving is searching StackOverflow instead of working from their own understanding of the data structures. This is the difference between an education… and… the solution…. A really great model would be one that combined small on-demand knowledge units with a laddered system. Khan Academy is the closest to this that I’ve seen, but I think they have gone too far down the class model…
Afternoon Must-Read: Simon Wren-Lewis: The Divine Coincidence
…we also bring the output gap to zero, so we do not need separate targets for both…. Imagine a parallel universe where the monetary authority targeted the output gap, and not inflation…. In this parallel universe they too had a Great Recession, and (being parallel and all) their recovery was of a very similar shape to ours. How would the output gap-targeting monetary authority in this parallel universe perceive its performance? The story would be one of complete failure. After six years of trying, the output gap had still not been closed. A huge amount of resources had been wasted as a result…. I do not think, in our inflation targeting world, the monetary authorities have this view…. They believe performance over the last six years has not been too bad…. Over the last six years, the Divine Coincidence has been distinctly unholy…. I suspect in thirty years students will look back on this period with the same disbelief that we look back on the 1930s. How could they have allowed the recession to continue for so long, they will ask, when they had the tools to do much better? Part of the answer will be inflation targeting.
Things to Read on the Morning of February 7, 2015
Must- and Shall-Reads:
- **: A Keynesian Postscript on the Bright and Shining, Dearly Beloved, Depression of 1920-21
- : Syriza and the French indemnity of 1871-73
- : The Rewriting of the Affordable Care Act by the Challengers in King v. Burwell
- : Expanding Opportunity
- : Fed Updates
- : Republican Health Plan Would Cause Millions to Lose Current Coverage and Add to the Ranks of the Uninsured and Underinsured
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: Asymmetries and Uncertainties: “One way to put this point is to go back to the basic rationalisation behind flexible inflation targeting. It is OK to have a target based on inflation alone, with no mention of the output gap, because you cannot in the long run keep inflation at target without also keeping the output gap at zero. This is sometimes called the divine coincidence. However if, at low inflation rates, inflation becomes a noisy, weak and asymmetric indicator of the output gap, then focusing on inflation is going to perform badly. In these circumstances it could be many years before it becomes clear that we have been continually running the economy under capacity, and needlessly wasting resources. Unfortunately even when that point of realisation arrives, for obvious reasons monetary policymakers are going to be reluctant to acknowledge the mistake.” -
: Michael Pettis Explains the Euro Crisis: “This is literally the best analysis of the euro area’s problems we’ve ever read. You should take the time to closely read the whole thing yourself. We’ll wait. Now that you’re back, we thought we could add some value by highlighting and expanding on what we believe to be Pettis’s most important insights. First, the relevant units… aren’t countries but… sectors…. We shouldn’t forget that German workers have suffered from stagnant wages and decaying infrastructure…. Second, when it comes to big flows of capital across borders, it’s usually better to give than to receive… huge inflows of money are almost never matched by commensurate increases in the number of profitable investment projects, so a ton of money gets wasted….(Borrowing in a currency you can print is helpful but it doesn’t prevent a lot of resources getting misallocated and a lot of people ending up with excessive debt burdens.)… Third, it makes no sense to blame the recipients of the capital inflows for causing the crisis. If enough money is sloshing around willing to invest in any stupid idea, you shouldn’t be too surprised that a lot of stupid ideas get funded…. Schaeuble’s assignment of blame… prevents optimal solutions that are best for the majority of Europeans, Greek, Spanish, and German alike…. Fourth, it matters how your obligations are structured. Many smart people, most notably Daniel Davies, have argued that the headline numbers surrounding Greece’s public debt burden are irrelevant to understanding the situation in Greece…. But the focus on flows misses the impact of the structure of the debt stock on the incentives of private sector lenders and producers…. This is why Pettis thinks Varoufakis’s plan to swap existing Greek debts for obligations indexed to GDP is a good idea…. That’s very different from the current setup, where the Troika has every incentive to tie its funding to the willingness to implement austerity programmes…. That leads to the fifth point: euro area officials are running out of time…. We at Alphaville have no insight into the future of monetary policy or global liquidity here or in Europe. But we wouldn’t be surprised if it turned out that the optimal window for restructuring, even if you leave aside the political implications of persistently high unemployment, could soon close. Something for the can-kicking eurocrats to keep in mind. Finally… nothing about the euro crisis is particularly new. All of this has happened before and all of it will (probably) happen again… -
: The Next Internet Is TV: “Fusion… want[s]… to build ‘a new kind of newsroom to greet the changing demographics of America’ that is also ‘a little bit outside of the media bubble.’… For Fusion to talk about ‘promiscuous media’ and ‘build[ing] our brand in the places [the audience] is spending time’–as opposed to publishing everything on a single website and hoping it spreads from there–is not strange in the context of television companies… used to filling channels that they don’t totally control. Meanwhile, some of the most visible companies in internet media are converging on a nearby point…. [Suppose] websites are unnecessary vestiges of a time before there were better ways to find things to look at on your computer or your phone. What happens next? What does a media that knows or believes this look like? This is an incredibly obvious question that nobody seems to have taken much time to talk about??? I mean you have the ‘director of audience development’ at Vox telling trade publications that ‘in general, we do see higher sharing rates from the native-only posts’ and then its ‘global vp of marketing and partnerships’ dropping this excellent quote: ‘The great thing about Facebook leaning in to the new video strategy is that publishers on average are seeing a lot more views and a lot more engagement with that video content. This could theoretically be a pretty massive revenue stream with publishers when and if they do enable monetization around this inventory.’… Companies… begin to see their websites as Just One More App, and realize that fewer people are using them, proportionally…. Some of what worked in print didn’t work on the web; some of what worked on the web didn’t work on social media; some of what worked on social media won’t work in these apps…. What was even the point of websites, certain people will find themselves wondering. Were they just weird slow apps with nobody in them?…
Should Be Aware of:
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: Sorry, Bobby Jindal Is Still Wrong: “Conservatives continue to debate how (or whether) to replace the Affordable Care Act…. In response to my criticism of his idea, Jindal argues that his plan would have the advantage of lowering insurance premiums, and that the disadvantage I mention–it would result in millions of people losing their health insurance–is a ‘feature’ rather than a ‘bug.’… Jindal has talked himself into a perverse position. It would be, he says, a capitulation to the left for conservatives to back policies that would make it easier for millions of people to buy health insurance. But it’s Jindal who agrees with the left that the U.S. has to choose between conservatism and affordable coverage for all. He’s the one who thinks that if a plan results in such coverage, it is by definition not conservative. That’s the real capitulation, and it’s one conservatives shouldn’t make.”
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: “People remember exciting events not so much directly, as by remembering the stories they tell about them. And everyone has old memories they’ve inserted themselves into: stories they tell as as if they were there, and then realizing that they couldn’t have been, and they must be retelling a story they were told, or at least everyone’s seen someone else have that realization. Williams burned himself by getting his memories wrong on TV, where other witnesses could contradict him, and where he’d told an accurate story in the past. But I’d be really surprised if there were any sense in which he was intentionally lying–what he did seems like a completely ordinary way to get confused. Mostly, I don’t think anyone’s memory of anything is worth much unless it was recorded somehow immediately after the fact. People are just terrible at this kind of thing.”