…may be the biggest dove on the Federal Reserve, but his interest-rate projections would make him just an ordinary trader on Wall Street. The current Fed funds futures contract is pricing in interest rates of 2% at the end of the third quarter of 2017. The lowest “dot” on the Fed’s dot plot of interest rates is for rates of 2% at the end of 2017. And the next lowest dot is at 2.63%. It’s not known for certain that the 2% dot for 2017 comes from Kocherlakota, but his speeches are consistent with such a view. For example, unlike his colleagues, he doesn’t think any rate hike would be appropriate next year. He doesn’t expect inflation as measured by the PCE price index to get back to 2% until 2018. And he doesn’t want any reduction in accommodation unless the outlook is for inflation to be at 2% in two years time…
Category: Equitablog
Morning Must-Watch: Martin Wolf, Larry Summers, Mohamed El-Erian, Brad DeLong on Inequality at IIF Annual Meeting
Department of “Huh?!”: Yet Another Thomas Piketty Edition
Let’s quote Thomas Piketty:
…in the United States. The increase was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms…
…They’re intrigued, but not convinced. Perhaps Mr. Piketty has isolated the forces that will drive wealth inequality in the future, but for now, they’re not convinced the forces he focuses on are central to understanding the recent rise in wealth inequality. At least that’s my reading of the latest survey run by the University of Chicago’s Initiative on Global Markets. I’ve written before about their Economic Experts panel, which is intended to be broadly representative of opinion among elite academic economists…. The expert economists were asked whether
the most powerful force pushing toward greater wealth inequality in the U.S. since the 1970s is the gap between the after-tax return on capital and the economic growth rate.
To translate, does the T-shirt slogan “r>g” explain why wealth has become more unequally distributed?… 18 percent… uncertain. The clear majority either disagreed (59 percent) or strongly disagreed (21 percent)….
But what was the point of this? We saw from the Piketty quote up at the top that Piketty does not think that “r>g” has been driving the rise in American inequality. Why is it an interesting question to ask?
Justin, in my view, buries the lead, for he does indeed point out later on in his article:
If surveyed, it is likely that he would have joined the majority view in disagreeing with the claim the survey asked about. In Mr. Piketty’s telling, rising incomes among the super-rich are responsible for the recent rise in wealth inequality…
Shouldn’t the IGM Forum at the Booth Business School of the University of Chicago have found somebody who had actually read Piketty’s Capital in the Twenty-First Century to decide on what questions to ask?
I am sure that it was always such–that intellectual standards in the academy were always not that high, and that a great many of the people making arguments always were people who hadn’t done their homework. But I do seem to be reminded of it more and more these days, especially since the beginning of the financial crisis back in 2007…
Afternoon Must-Read: John Williams: More QE Might Be Appropriate If U.S. Economy Faltered
…I think moving back to additional asset purchases in a situation like that should be something we should seriously consider…. The concern is the next steps that [the ECB] may need. That worries me a little bit. Will their policy response be as timely and aggressive as needed?… The markets are pricing in a lot of other things that might happen and a lot of those are negative. The cross currents are really the story.
Jean Tirole and competition in the modern economy
The New Republic published a cover story last week by Franklin Foer that provocatively labeled Amazon.com, Inc. a monopoly. At the heart of Foer’s piece is a call to update antitrust policy in the era of market-dominating online companies such as Amazon, Google Inc,, or Facebook, Inc. Foer doesn’t mention any economic research in the article, but he would have been well served if he looked into the research of the most recent winner of the Nobel Prize for Economics, Jean Tirole.
Yesterday, the Royal Swedish Academy of Sciences awarded The Sveriges Riksbank Prize in Economic Sciences to Jean Tirole of the Toulouse School of Economics. The committee gave the award to Tirole for his research understanding the interaction between powerful firms and the regulation of these firms. Tirole is a prolific researcher who has made valuable contributions to several areas in economics. For those interested, a non-technical document summarizing his work provided by the Nobel committee is available here.
But one of Tirole’s greatest contributions, the one relevant to the question of firms such as Amazon, is the idea of “two-sided markets.” The concept is also known as “platform markets,” which is a bit more descriptive. In essence, in these markets a firm is providing a good or a service that connects two or more other parties via a platform. The classic example is a credit card company. The company needs to convince individuals to use the credit card, but at the same time convince other companies to accept the credit card when the customers use it. The credit card company is providing a service.
Or think about an ebook reader, such as the Amazon Kindle. The company that produces the reader needs to sell the reader to individuals but at the same time create a stable of ebooks that can be used on the ebook reader. By describing these markets, Tirole gave economists and policy markets a tool kit to understand the business models of these companies. Only then can they judge whether those companies are acting anti-competitively.
As Matthew Yglesias at Vox and Izabella Kaminska at FT Alphaville point out, Tirole’s idea of platform markets describes many of the most prominent technology companies today: Facebook and Google. Like newspapers did and still do, these companies give information to consumers in exchange for this attention to advertisements from other businesses.
And of course, the very structure on which these companies rest, broadband internet, is an example of a platform market. Tirole’s work has direct implications for the regulation of broadband service and net neutrality. Josh Gans, an economist at the University of Toronto, argues that the reason the United States has little competition in the broadband section is because the government ignored the lessons of Tirole’s research.
The amazing thing about Jean Tirole’s research career is that the idea described above is just one part of it. Yet this one idea is incredibly relevant for modern economies as we move toward firms that more and more compete in platform markets. We’d all be best served by engaging with his idea and extending them as our economy changes.
As Measured by the Five-Year Inflation Breakeven…
…the U.S. economy today is further from “normalization”–understood as a 2%/year breakeven inflation rate in financial markets–than it was in June 2012, just before Bernanke began talking about “unwinding” and triggered Ms Market’s Taper Tantrum:
Why the steep slide in expectations of inflation since June has not triggered more of an FOMC reassessment of its policies than it has is a mystery. Such a reassessment certainly was not on display or in sub rosa whispers in Washington DC during IMF week…
Things to Read on the Morning of October 14, 2014
Must- and Shall-Reads:
- Regulating Systemically Important Financial Institutions That Are Not Banks
- Europe Now Consists Of Two Factions: Germany, And Everybody Who Disagrees With Germany
- The Psychology of Human Misjudgement
- The Great Mortgaging
- Eurozone Factory Output Slumps
- Monetary policy: When will they learn?
- Missouri State of Mind: The CDC Says Ebola Should Be as Easy as MRSA for an Acute Care Hospital to Contain
- Lousy Economic Growth Is a Choice, Not an Inevitability
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The Great Mortgaging: “In 17 advanced economies since 1870…. (1) Mortgage lending was 1/3 of bank balance sheets about 100 years ago, but in the postwar era mortgage lending has now risen to 2/3, and rapidly so in recent decades. (2) Credit buildup is predictive of financial crisis events, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome. (3) Credit buildup in expansions is predictive of deeper recessions, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome as well…”
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Eurozone Factory Output Slumps: “August Figures Show Largest Decline Since the Months Following the Collapse of Lehman Brothers: Factory output across the 18 countries that use the euro slumped in August, driven by the largest decline in the manufacture of capital goods since the months following the collapse of Lehman Brothers, and possibly reflecting a similar decline in global business confidence. The European Union’s statistics agency Tuesday said production by factories, mines and utilities during August was 1.8% lower than in July, and 1.9% lower than in the same month of 2013…. The decline more than reversed a 0.9% gain in July, and suggests it is possible output for the third quarter as a whole will be lower than for the second quarter…”
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Monetary policy: When will they learn?: “THE monetary economics of a world in which interest rates are close to zero are not especially mysterious. Stimulating the economy at that point requires central banks to raise expected inflation. Disinflation, by contrast, results in passive tightening, since the central bank can’t lower its policy rate…. In this world, the downside risks are much larger than those to the upside. There is infinite room to raise interest rates if inflation runs uncomfortably high…. But there is no room to reduce interest rates if inflation is running to low. That, in turn, forces central banks to use unconventional policy or run psychological operations to try to boost expectations. Central banks are not very good at those sorts of things. You need to overshoot, in other words, because undershooting feeds on itself…”
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Missouri State of Mind: The CDC Says Ebola Should Be as Easy as MRSA for an Acute Care Hospital to Contain: “The CDC Says Ebola Should Be as Easy as MRSA for an Acute Care Hospital to Contain
Who else felt a shiver go up their spine when the CDC announced that any acute care facility capable of implementing strict infection control procedures should be capable of caring for an Ebola Virus case? Well, if you know anything at all about infection control success at U.S. acute care hospitals, this should have given you pause. Strict infection control in U.S. acute care facilities has not been our long suit. When I made this observation in a talk on health care quality at the University of Toledo School of Law’s joint medical-legal conference (‘Scalpel to Gavel’) this past Friday, it provoked audible, if uneasy, laughter from the health care provider-heavy crowd. The way I see it, the least well informed about health care (those who think the Ebola virus is naturally spread by airborne measures) and the best informed about health care (those who are cognizant of our astonishingly poor record on implementing infection control procedures) share a common fear. The Ebola Virus certainly makes for some interesting bedfellows.” -
Lousy Economic Growth Is a Choice, Not an Inevitability: “The notion that all this is inevitable and economic policy has done all that it can do is defeatist and wrong…. The Federal Reserve has done a lot, more than some Fed policymakers would have liked, not enough for its critics. But fiscal policy in the U.S. at the local, state and federal levels has been a restraint on growth…. And gridlock in Congress is an obstacle…. Matters are even worse in Europe. Mario Draghi is stepping up his efforts at the European Central Bank with resistance from Germany. German politicians appear reluctant to take the widespread advice that a country with strong government finances, a trade surplus, decaying infrastructure, a slowing (if still low-unemployment) economy, and a huge stake in the European project should be investing more in infrastructure, considering pro-investment tax cuts, and raising wages…. ‘There is a real risk of subpar growth persisting for a long period of time, but what is important is that we know it can be averted,’ Ms Lagarde said at the end of the weekend meetings of economic policymakers from around the world. ‘We know it can be averted. And, it will require some political courage, some will, some degree of realism on the part of national legislatures, but it can be done.’ In other words, settling for the ‘new mediocre’ is a choice.”
Should Be Aware of:
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mainly macro: The mythical Phillips curve?): “Suppose you had just an hour to teach the basics of macroeconomics, what relationship would you be sure to include? My answer would be the Phillips curve…. My faith in the Phillips curve comes from simple but highly plausible ideas. In a boom, demand is strong relative to the economy’s capacity to produce, so prices and wages tend to rise faster than in an economic downturn. However workers do not normally suffer from money illusion: in a boom they want higher real wages to go with increasing labour supply. Equally firms are interested in profit margins, so if costs rise, so will prices. As firms do not change prices every day, they will think about future as well as current costs. That means that inflation depends on expected inflation as well as some indicator of excess demand, like unemployment…. This combination of simple and formal theory would be of little interest if it was inconsistent with the data. A few do periodically claim just this…. (For example here is Stephen Williamson talking about Europe.)… If this was true, it would mean that monetary policymakers the world over were using the wrong framework in taking their decisions…. So is it true?… Just look at the raw data on inflation and unemployment for the US, and see whether it is really true that it is hard to find a Phillips curve…. We start down the bottom right in 1961…. The pattern[s] we get are called Phillips curve loops: falling unemployment over time is clearly associated with rising inflation, but this short run pattern is overlaid on a trend rise in inflation because inflation expectations are rising…. 2000 to 2013… looks much more like Phillips’s original observation: a simple negative relationship between inflation and unemployment. This could happen if expectations had become much more anchored as a result of credible inflation targeting, and survey data on expectations do suggest this has happened to some extent…. Once again the Phillips curve is pretty flat. We go from 4% to 10% unemployment, but inflation changes by at most 4%…. Given how ‘noisy’ macro data normally is, I find the data I have shown here pretty consistent with my beliefs.”
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A Worthy Economics Nobel for Jean Tirole: “In general, I’m not a fan of the economics Nobel. Too often… used to reward free-market orthodoxy…. At other times… a glorified long-service award… Buggins’s turn… work… innovative and influential in its own context [that] has little broader social value…. The very existence of the prize has contributed to the pretense that economics can, with the application of enough mathematics, be converted from a messy social science into a hard science along the lines of physics and chemistry. However, if the Swedes are going to persist in celebrating economists on an annual basis, this year’s honoree, the French theorist Jean Tirole, is a worthy one…. Tirole and his colleagues, particularly the late Jean-Jacques Laffont, didn’t establish a set of hard-and-fast rules for governments to follow in individual cases. But they did create a unifying intellectual framework that regulators, aggrieved parties, and the companies themselves can draw on in thinking through the relevant issues…. The essential insight here is that regulation isn’t just a mathematical exercise in designing price schedules that lead to efficiency. It’s an ongoing game between two players with different goals and secrets that they can hide from each other… a ‘principal-agent’ problem, where the government is the principal and the firm is the agent. The general question then becomes this: Can you design a regulatory system that offers incentives to both sides—the regulators and the firms—to do things that are in the public interest?…”
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“Yes Means Yes” is a terrible law, and I completely support it: “The Yes Means Yes law could also be called the You Better Be Pretty Damn Sure law. You Better Be Pretty Damn Sure she said yes. You Better Be Pretty Damn Sure she meant to say yes, and wasn’t consenting because she was scared, or high, or too tired of fighting. If you’re one half of a loving, committed relationship, then you probably can Be Pretty Damn Sure. If you’re not, then you better fucking ask. A version of the You Better Be Pretty Damn Sure law is already in effect at college campuses. It just sits as an impossible burden on women, who need to Be Pretty Damn Sure that the guy who was so nice to them at the party isn’t going to turn into a rapist if they let him into their dorm room — and that’s not something anyone can be sure about. It’s easier to get someone’s consent than it is to peer into their soul…”
Morning Must-Read: David Wessel: Lousy Economic Growth Is a Choice, Not an Inevitability
Lousy Economic Growth Is a Choice, Not an Inevitability: “The notion that all this is inevitable and economic policy has done all that it can do…
…is defeatist and wrong…. The Federal Reserve has done a lot, more than some Fed policymakers would have liked, not enough for its critics. But fiscal policy in the U.S. at the local, state and federal levels has been a restraint on growth…. And gridlock in Congress is an obstacle…. Matters are even worse in Europe. Mario Draghi is stepping up his efforts at the European Central Bank with resistance from Germany. German politicians appear reluctant to take the widespread advice that a country with strong government finances, a trade surplus, decaying infrastructure, a slowing (if still low-unemployment) economy, and a huge stake in the European project should be investing more in infrastructure, considering pro-investment tax cuts, and raising wages…. ‘There is a real risk of subpar growth persisting for a long period of time, but what is important is that we know it can be averted,’ Ms Lagarde said at the end of the weekend meetings of economic policymakers from around the world. ‘We know it can be averted. And, it will require some political courage, some will, some degree of realism on the part of national legislatures, but it can be done.’ In other words, settling for the ‘new mediocre’ is a choice.
Morning Must-Read: Ann Marie Marciarille: The CDC Says Ebola Should Be as Easy as MRSA for an Acute Care Hospital to Contain
…that any acute care facility capable of implementing strict infection control procedures should be capable of caring for an Ebola Virus case? Well, if you know anything at all about infection control success at U.S. acute care hospitals, this should have given you pause. Strict infection control in U.S. acute care facilities has not been our long suit. When I made this observation in a talk on health care quality at the University of Toledo School of Law’s joint medical-legal conference (‘Scalpel to Gavel’) this past Friday, it provoked audible, if uneasy, laughter from the health care provider-heavy crowd. The way I see it, the least well informed about health care (those who think the Ebola virus is naturally spread by airborne measures) and the best informed about health care (those who are cognizant of our astonishingly poor record on implementing infection control procedures) share a common fear. The Ebola Virus certainly makes for some interesting bedfellows.
Morning Must-Read: Ryan Avent: Monetary policy: When Will They Learn?
Fatigue may be setting in at the Federal Reserve, which is expected to end its asset-purchase programme at its meeting later this month. Hawkish members of the Federal Open Market Committee are seizing on a relatively low and falling unemployment rate and on good hiring numbers as evidence that the economy can stand on its own. And if the Fed’s main policy rate were at 4% rather than just above 0%, they might have a point. But the FOMC ought to have learned by now that an economy at the ZLB does not function like an economy in which interest rates are well above zero…. American markets are once again hunkering down for a bout of disinflation. Expectations for inflation over the next five years have fallen half a percentage point since July…. The yield on long-term Treasuries is tumbling again; the 10-year is down to around 2.2%, from nearly 3% earlier this year…. My question for the Fed is: what happens when disinflation continues in November and December after the Fed has terminated its asset purchase programme? Is it prepared to start purchases up right away, or will it wait to see whether things turn around? If so, how long is it prepared to wait? What is the plan here?…
The sensible course is what it has been for the last six years: keep pushing until the economy is well clear of danger. If inflation gets up to 3% or 4% or 5%, well, there are far worse things, and the response is simple enough: tighten policy. Erring in the opposite direction may end up far more costly, however. As, I fear, we all may learn.