…be constructed are very well-stated (actually making it more of a social science, and less model-juggling. However, it also would change the sort of person going into the field and change the field’s criteria for success. Not easy!). One thing… is the optimizing behavior of economic policy analysts. Fiscal policy seems off the table, so macroeconomists dive into unconventional monetary policy, which, one trusts, all know is extremely dicey. Why not more emphasis on yelling from the rooftops that the usual economic fears of expansionary fiscal policy (debt accumulation, waste)are simply off target, and less time worrying about the fine points of ‘tapering’? Your Brookings work with Larry shows the analytics of fiscal policy at this juncture very well. Criticizing the critics of expansionary fiscal policy as evil 0.01% oligarchs or mindless racist Tories might make one feel good and righteous but doesn’t get anybody anywhere; basic analysis held by what seems everybody but a few denizens of the Booth School shows the economic sense of the policy. The notion of criticizing Christie Romer as in thrall to Milton Friedman is indeed droll in the extreme. I guess to have to see the book to see what his problem is with Olivier.
Category: Equitablog
Morning Must-Read: Note That Politico Does Not Label Advertisements as Advertisements
Everybody working for–or reading–Politico needs to think hard about whether this is what they should be doing.
For Thursday: Josh Bivens, Brad DeLong, Jeff Madrick, Ylan Mui: How Mainstream Economic Thinking Imperils America
DRAFT NOTES:
How Mainstream Economic Thinking Imperils America:
Thursday, October 23, 2014
1:00 – 2: 30 p.m. ET
Economic Policy Institute
1333 H St., NW
Suite 300
Washington, DC 20005
http://www.epi.org/event/mainstream-economic-thinking-imperils-america/
- The “Invisible Hand”
- Say’s Law
- Friedman’s Folly: Government’s Limited Social Role
- Low Inflation Is All That Matters
- There Are No Bubbles
- Globalization Is Always Good
- Economics Is a Science
In Madrick’s Introduction and Reading Along:
- Praised in the Introduction:
- John Maynard Keynes
- Dani Rodrik
- Criticized in the Introduction:
- Adam Smith–no comment necessary…
- Olivier Blanchard–the de facto leader of the Sixth International: on the left of the spectrum of policymakers…
- Larry Summers–principal advocate of the Keynesian expansionary-fiscal solution to our troubles…
- Milton Friedman–when he was alive, the most powerful advocate of unlimited quantitative easing…
- Bob Rubin–on his watch big banks were bailed-in during financial crises, not bailed-out…
- Ben Bernanke–most left-wing central banker we had (although I will concede his attachment to 2%/year inflation target, and failure to reach it, are huge minuses)…
- Robert Lucas–underbriefed and destructive…
- Madrick on Christina Romer:
- In a piece she wrote for The New York Times criticizing an increase in the minimum wage, Christina Romer, the former Obama adviser and considered by many to be a political liberal, implicitly made this same oversimplified assumption that workers usually get what they deserve. This is an example of Friedman’s broad influence…
- Romer:
- We have better policies available: expand the EITC is better targeted
- For the long-run, universal kindergarten and pre-K have more bang for the buck
- And these are expansionary fiscal policy–spending money gives a macroeconomic boost as well
- But if the choice is for a higher minimum wage or nothing, I’m for a higher minimum wage…
- Of these 8, somewhere between 5 and 7 are to the left of current North Atlantic policymakers–not excluding Obama
PFoJ vs. JPF, Perhaps?
- A little misplaced ire, I think…
- But I don’t want to go there…
I Want to Go Here: The Problem, as I See It:
- Economics starts from the presumption that market success is the benchmark
- And that market failure is anomalous
- It ought to start from the presumption that market construction is difficult
- It ought to have a grammar of other forms of organization–command, bureaucracy, charity, cooperative, regulated monopoly, yardsticks, etc.–and where they succeed and where they fail
- We have a great deal of economic life where we know the market will not work well, and these sectors will only grow in relative importance
- Pensions
- Health-care finance
- Education
- Infrastructure
- Research and development
- Information goods more generally
- Policy is far to the right–and not to the smart right–of even where the really existing economics profession, at least the “serious” piece of it in an intellectual sense, is
- Why?
- How to fix it–books like Jeff’s, of course, but how else?
- Two tasks: move the “serious” economics profession, and move policymaking to the “serious” economics profesion–both seem of equal importance and difficulty
Why should policymakers care about economic inequality?
The International Monetary Fund earlier this month gathered economic policy experts from around the world to discuss, among other important things, the rise in economic inequality in developing and developed nations alike over the past several decades. One panel focused directly on how to encourage more inclusive economic growth— a panel moderated by the executive director and chief economist of the Washington Center for Equitable Growth, Heather Boushey.
At the conference, she and I also released a new summary of the academic literature exploring this subject. Our report and the telling discussion among the experts in Boushey’s panel made note of the fact that it was long assumed economic growth led to less economic inequality but also that any economic policy efforts to alleviate inequality would necessarily slow economic growth. These views, however, were formed in an era before there was sufficient data to truly test this view.
As the data collection improved in the 1980s and 1990s, economists began testing this hypothesis. In an early survey of the literature, economist Roland Benabou at Princeton University in 1996 found that the vast majority of studies said high and rising inequality harmed economic growth. These papers used a variety of data sets, methods, and measures of inequality but still consistently found this relationship.
In response to this early literature, various economists explored the nuances of this relationship. University of Melbourne economist Sarah Voitchovsky summarizes much of this middle literature in a 2009 review, finding that there was substantial disagreement about the relationship between inequality and growth. Some studies showing that inequality may improve growth under certain circumstances. The muddle of this middle period in this economic literature has given rise to a newer narrative. Methodological differences appear to have driven the differences in the results, with later analysis finding that higher inequality can be associated with faster economic growth in the short term, but over time higher inequality is related to lower growth.
Recent work by International Monetary Fund economists Andrew Berg, Jonathan Ostry, and Charalombos Tsangaridis as well as by Roy van der Weide of the World Bank and Branko Milanovic of the City University of New York have robustly found a negative relationship between economic inequality for developed countries and within the United States, respectively. This most recent wave of studies will likely not be the final word on the relationship between economic inequality and growth. Furthermore, there is substantial work needed to understand how inequality affects growth. Research supports several plausible channels that could explain the relationship between inequality and growth. Some studies provide evidence that better human capital formation—workforce education and training—is the key way to reducing high economic inequality that in turn slows economic growth.
Other studies find that a highly skewed distribution of income and wealth depresses consumption in the economy, crimping growth and leading to unsustainably excessive borrowing. Recent research on the on the 2007-8 financial crisis also implies that high inequality may restrict access to credit that entrepreneurs need to build small businesses into big businesses. We have evidence for each of these findings, but more work is needed.
While there are many open questions about the relationship between economic inequality and economic growth, we hope the debate can move beyond why we should care to how do we fix it. As the United States drifts into a society with levels of economic polarization not seen outside of the developing world, policies that produce more equitable growth may be needed if we are to remain economically vibrant. Understanding how to craft those policies will be key in the coming years.
Thomas Piketty, depreciation and the elasticity of substitution
When “Capital in the 21st Century” was published in English earlier this year, Thomas Piketty’s book was met with rapt attention and constant conversation. The book was lauded but also faced criticism, particularly from other economists who wanted to fit Piketty’s work into the models they knew well (Equitable Growth’s Marshall Steinbaum replied to many of those criticism here.) Now, a new working paper by the National Bureau of Economic Research shows how one of the more effective critiques of the book might not be as powerful as once thought.
To continue reading this post, click here.
Morning Must-Read: Richard Mayhew: Keeping It Like the Kaiser
…but the Kaiser twist on it is very wierd and as far as I know, no one else does it quite like Kaiser… a fully integrated payer provider with exclusive usage…. Almost all other non-governmental payer-providers are not exclusive walled gardens that systematically seek to minimize interaction with the entire US healthcare delivery ecosystem…. So what does this difference mean?… I think the Kaiser model allows it to capture and internalize significantly higher percentage of preventive and care coordination benefits than most other integrated payer provider models and far more benefits are captured than segregated payer/provider models. It allows for a common focus and a shared focus on quality and risk minimization as aligning incentives to pay docs to not order a needless test actually makes sense in all scenarios. Other integrated payer providers that are not exclusive walled gardens have the incentive to perform high quality and efficient care on their insured members but wasteful care on patients who are insured by someone else. A Sutter doc who orders an MRI on a non-best practice basis for a Sutter member is costing the company money, but ordering that MRI for an Anthem or United Health insured patient is a a revenue gain. Most providers don’t change their patterns of practice on a patient by patient basis, that means aggregate performance on minimizing needless tests, minimizing preventable care incidents is conflicted with revenue maximization…. The revenue risk is the biggest risk that will stop non-exclusive mostly open payer providers from converting to a Kaiser walled-garden approach…. At least a few payer-providers will install significant gatekeepers and low walls for their network to keep most of their members in and other people out, but the walls won’t be high nor hard to hop over. Kaiser is weird in the American context, and I anticipate it will continue to be an unusual but highly successful implementation of a fairly unique non-governmental model.”
Things to Read on the Afternoon of October 20, 2014
Must- and Shall-Reads:
- The right’s Lena Dunham delusion: Anger, misogyny and the dangers of business as usual
- Why did Britain’s political class buy into the Tories’ economic fairytale?
- Eurozone stagnation is a greater threat than debt
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Five Known Unknowns About the Future of the Global Economy: “Here are my top five known unknowns about the future of the global economy…. 1) The Summers/Gordon Question…. What if the elevated rates of economic growth that started with the Industrial Revolution are now petering out in the developed world? What if all the low-hanging fruit that have kept growth high for the last two centuries have been exhausted? 2) The Eichengreen/Rodrik Question. The default assumption that most economists make is that the developing world in general, and the BRICS in particular, will converge towards the affluence level of the developed world. This might not be the case… there is a very real ‘middle income trap’ that can lead to a serious growth slowdown in the advanced developing countries. Even more disturbing is Dani Rodrik’s contention that while globalization has led to a true convergence in manufacturing productivity, it hasn’t caused any convergence in the rest…. 3) The Angell/Gartzke Question…. What if geopolitical tensions force a re-ordering of economic ties? This could erode the pacifying effects of commercial liberalism that scholars from Norman Angell to Erik Gartzke have observed…. 4) The Fukuyama/Kirshner Question…. Jonathan Kirshner’s new book… argu[es] that China and others are now rejecting the U.S. financial model. If Kirshner is right, what will this mean for the future of economic growth? More radically, what if other countries reject the capitalist model wholesale?…. 5) The Piketty/Freeland… argument… that, left to its own devices, capitalism will produce a dystopia where elites will grab an ever-growing share of the economic pie. What happens to the global economy if he’s right? What kind of political backlash will it produce?…. Enjoy the week!”
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A Tale of Two Economies–It Was the Better of Times, It Was the Worst of Times: “As quantitative easing comes to an end (apparently) by the Fed and is taken up by the European Central Bank (ECB), let’s compare the behavior of nominal domestic demand in each central bank’s economy and venture a reason for any differences. Plotted in Chart 1 are index values of the nominal Gross Domestic Purchases in the U.S. and the eurozone, respectively…. Now, let’s examine the behavior of credit created by the central banks and depository institutions in each of these economies. This is credit that is created figuratively out of thin air. When central banks purchase securities in the open market, such as they do when they engage in quantitative easing (QE), they create credit out of thin air. When the depository institution system expands its loan and securities portfolios, it creates credit out of thin air. Credit created out of thin air enables the borrower to increase his/her current nominal spending while not requiring any other entity to reduce its current spending…”
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European Banking Stress Tests–Pour Encourager les Autres?: “It will turn out, I think, that a lot of banks will fail on the front cover, but pass at the back of the book–this would happen, for example, if a bank was made aware early in the year that it was at risk, and decided to do something about it. I think I can see the thinking behind this way of presenting the results. The Euroland supervisors are hoping that the headline news will be made by the front pages of the reports, so they will be able to have it both ways–a big headline in the Financial Times and the Wall Street Journal saying that their test was credible because it failed so many big names, while at the same time tipping the wink to market analysts that most of the ‘failures’ were not really failures at all, and that nearly all of the required recapitalisations have already happened. To be honest, I find this communication strategy rather clever…”
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Unemployment, and product and labour-market tightness: “We do not have a model that is rich enough… and simple enough to lend itself to pencil-and-paper analysis…. Michaillat and Saez (2014)… retains the architecture of the Barro-Grossman model but replaces the disequilibrium framework on the product and labour markets with an equilibrium matching framework…. Both meal prices and product market tightness can adjust to equilibrate supply and demand for meals…. Both wages and labour market tightness adjust to equilibrate labour supply and demand…. If product and labour market tightness remain constant, the equilibrium is reached by price adjustment…. If prices are rigid, the equilibrium is reached by adjustment of product and labour market tightness…. A negative labour demand shock leads to falls in both employment and labour market tightness…. A negative labour supply shock leads to a fall in employment but an increase in labour market tightness…. Output and product market tightness move in the same direction with demand shocks…. Output and product market tightness move in opposite direction with technology shocks…. Through the lens of our simple model, the empirical evidence suggests that price and real wage are somewhat rigid, and that unemployment fluctuations are mainly driven by aggregate demand shocks…” -
Asiaphoria Meets Regression to the Mean: “Consensus forecasts for the global economy over the medium and long term predict the world’s economic gravity will substantially shift towards Asia and especially towards the Asian Giants, China and India. While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated. Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth. Indeed, regression to the mean is the empirically most salient feature of economic growth. It is far more robust in the data than, say, the much-discussed middle-income trap. Furthermore, statistical analysis of growth reveals that in developing countries, episodes of rapid growth are frequently punctuated by discontinuous drop-offs in growth. Such discontinuities account for a large fraction of the variation in growth rates. We suggest that salient characteristics of China—high levels of state control and corruption along with high measures of authoritarian rule—make a discontinuous decline in growth even more likely than general experience would suggest. China’s growth record in the past 35 years has been remarkable, and nothing in our analysis suggests that a sharp slowdown is inevitable. Still, our analysis suggests that forecasters and planners looking at China would do well to contemplate a much wider range of outcomes than are typically considered.”
Should Be Aware of:
- The Cambridge University Worshippers of Cthulhu Society Home Page
- Return of the Space Shh!uttle | File 770
- The Pythagorean Theorem
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The history of inequality: Breaking the camel’s back: “Average heights have risen almost everywhere (by 1.1cm more in America in 1820-1990 than in China). The purchasing power of construction workers’ wages has grown everywhere, though in Britain the rise was tenfold in 1820-2000; in Indonesia it was only twice…. In China, Thailand, Germany and Egypt, income inequality was about the same in 2000 as it had been in 1820. Brazil and Mexico are even more unequal than they were at the time of Simón Bolívar. Only in a few rich nations—such as France and Japan—do you find the expected long-term decline in income inequality. What is true for individual countries is also true if you treat the world…. The two-century rise in global inequality… come[s] from…‘between-country inequality’, the gap between rich and poor nations…. In 1820 the world’s richest country—Britain—was about five times richer than the average poor nation. Now America is about 25 times wealthier than the average poor country…”
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When I draw comparisons between libertarians and slaveholders… : “When I put libertarians and slaveholders in the same orbit, libertarians go ape-shit. But when they do it— ‘We [Alex Tabarrok and Tyler Cowen] treat John C. Calhoun as a precursor of modern public choice theory. Calhoun anticipates the doctrine of public choice contractarianism as developed by Buchanan and Tullock and expands this approach in original directions. We consider Calhoun’s theory of why democracy fails to preserve liberty and Calhoun’s suggested constitutional reform, rule by unanimity. We also draw out parallels between Calhoun and Hayek with regard to theories of social change and Hayek’s analysis of ‘why the worst get to the top.’ The paper concludes with some remarks on problems in Calhoun’s theory.’ —it’s all good. Of course, it helps if you can resolve that pesky question of slavery like so: ‘Furthermore, Calhoun furnishes only weak ethical foundations for his advocacy of the concurrent majority…. This lack of ethical foundation shows up in Calhoun’s defense of slavery, which continues to hurt his reputation and draw attention from his more valid and interesting contributions’.”
Morning Must-Read: Daniel Drezner: Five Known Unknowns About the Future of the Global Economy
…about the future of the global economy…. 1) The Summers/Gordon Question…. What if the elevated rates of economic growth that started with the Industrial Revolution are now petering out in the developed world? What if all the low-hanging fruit that have kept growth high for the last two centuries have been exhausted? 2) The Eichengreen/Rodrik Question. The default assumption that most economists make is that the developing world in general, and the BRICS in particular, will converge towards the affluence level of the developed world. This might not be the case… there is a very real ‘middle income trap’ that can lead to a serious growth slowdown in the advanced developing countries. Even more disturbing is Dani Rodrik’s contention that while globalization has led to a true convergence in manufacturing productivity, it hasn’t caused any convergence in the rest…. 3) The Angell/Gartzke Question…. What if geopolitical tensions force a re-ordering of economic ties? This could erode the pacifying effects of commercial liberalism that scholars from Norman Angell to Erik Gartzke have observed…. 4) The Fukuyama/Kirshner Question…. Jonathan Kirshner’s new book… argu[es] that China and others are now rejecting the U.S. financial model. If Kirshner is right, what will this mean for the future of economic growth? More radically, what if other countries reject the capitalist model wholesale?…. 5) The Piketty/Freeland… argument… that, left to its own devices, capitalism will produce a dystopia where elites will grab an ever-growing share of the economic pie. What happens to the global economy if he’s right? What kind of political backlash will it produce?…. Enjoy the week!
On the Proper Inflation Target: Monday Focus for October 20, 2014
In the 60 years since 1954, the Federal Reserve has been moved to cut the 3-Mo. T-Bill rate when a recession threatens by 2.0%-points or more 13 times–once every 4.6 years. There have been eight cuts of 4.0%-points or more–once every 7.5 years. There have been five cuts of 5.0%-points or more–once every 12 years.
To me that suggests that the Greenspan-Bernanke policies–aim for 2.0%/year inflation, with a 300 basis-point “natural” short-term safe real interest rate on top of that when the economy is in the growth-along-the-potential-path phase of the business cycle–were already too restrictive. Once every 12 years is too often to run into ZLB problems, unless you are a strong believer in Coibion and Gorodnichenko arguments that price inertia is due to serious costs to businesses of altering price paths.
If you hold, with Jeremy Stein, that you are asking for trouble when T-Bill rates drop below 2%/year, and if you believe that secular factors have reduced the “natural” short-term safe real interest rate when the economy is in the growth-along-the-potential-path phase of the business cycle to 2%, and if you wish to have a 600 basis-point cushion to allow for appropriate cutting in a recession, then you should aim for a 6%/year inflation target.
If you don’t mind kissing the zero lower bound when you cut interest rates by 600 basis points, you could get away with a 4%/year inflation target.
And if you don’t mind dissing the zero lower bound and do not buy the argument that the “natural” short-term safe real interest rate when the economy is in the growth-along-the-potential-path phase of the business cycle is now not 3%/year but 2%/year, then you could get away with a 3%/year inflation target.
But I do not see how you can justify a 2%/year inflation target today.
Suppose that you want a 200-basis point cushion–that you are not happy with putting your commercial banks in a situation in which their business model requires that they take huge risks to even try to cover the costs of maintaining their ATMs and their branches–and buy the 2%/year “natural” short-term safe real interest rate when the economy is in the growth-along-the-potential-path phase of the business cycle, but recoil at a 6%/year inflation target as too high? What then? Then you have to go for régime change:
- Reform fiscal policy so that–unlike 2008-present–it does its stimulative job to boost aggregate demand when interest rates are at their zero lower bound.
- Move to some form of level targeting so that the inflation target is no longer fixed, but rises and rises sharply whenever aggregate demand or the price level undershoots its previously-expected growth path.
- Allow the central bank to engage in expansionary fiscal policy on a large scale on its own say-so, via helicopter drops–the Social Credit solution.
- Move to Miles Kimball Land
Those are the options…
Memo: Interest-rate cutting episodes since 1954: 2.9%-points, 2.1%, 2.0%, 5.0%, 2.2%, 4.5%, 8.5%, 9.0%, 3.2%, 2.5%, 5.0%, 4.3%, 9.5%-points (assuming the interest-rate rule called for cutting nominal rates in 2009 to -4.5%).
Morning Must-Read: Paul Kasriel: The Monetary Base and the Money Multiplier: U.S. and Eurozone
…by the Fed and is taken up by the European Central Bank (ECB), let’s compare the behavior of nominal domestic demand in each central bank’s economy and venture a reason for any differences. Plotted in Chart 1 are index values of the nominal Gross Domestic Purchases in the U.S. and the eurozone, respectively…. Now, let’s examine the behavior of credit created by the central banks and depository institutions in each of these economies. This is credit that is created figuratively out of thin air. When central banks purchase securities in the open market, such as they do when they engage in quantitative easing (QE), they create credit out of thin air. When the depository institution system expands its loan and securities portfolios, it creates credit out of thin air. Credit created out of thin air enables the borrower to increase his/her current nominal spending while not requiring any other entity to reduce its current spending…