Category: Equitablog

Paul Krugman: Debt Shall Have No Dominion: “Nick Bunker notes an important point…

about the CBO…. The budget office has marked down its estimate of long-term interest rates, reflecting the growing evidence for a secular downshift in the ‘natural’ rate… [and] declared an end to the debt spiral…. Change in debt/GDP = (debt/GDP)*(interest rate – nominal growth rate of GDP) – primary surplus/GDP…. We turn to Table A-1 on page 104 of the CBO report, and we learn that for the next 25 years CBO projects an average interest rate on federal debt of 4.1 percent and an average growth rate of nominal GDP of 4.3 percent. And this means no debt spiral at all…. I don’t want to say that debt doesn’t matter at all. But it clearly matters a lot less than the fearmongers tried to tell us…

Most of American discussion about equitable growth these days revolves around rapidly growing inequality: that the rising tide has been lifting the big boats much more than the others, that trickle-down economics has not been trickling down, that enormous plutocratic wealth explosions at the top have been accompanied by stagnant wages in the middle and the bottom. But that is not the entire story. Equally important–at least I think it is equally important–is that the American economy has underperformed in real GDP growth since the end of the Social Democratic Era back in 1979.

If you go to Sam Williamson and company’s Measuring Worth website–http://measuringworth.com–and look at the numbers he has scrubbed and put together, you can learn an enormous amount–or at least learn an enormous amount about what our current guesses are…

Today I want to focus on one thing you can learn: the magnitude by which the American economy as a whole has underperformed not just in distribution but in raw total an-extra-dollar-for-billionaires-is-as-good-as-an-extra-dollar-for-everybody-else since the high tide and end of the Social Demcratic Era, as marked by the attainment of a real (2009 dollar) level of GDP per capita of $28,694 at the 1979 business-cycle peak during the Jimmy Carter presidency.

Think back (if you can) to 1979. (I myself can barely do so.) Back then real GDP per capita was double what it had been 28 years before, in 1951. And in 1951 real GDP per capita was double what it had been 28 years before in 1923. Before then growth had been slower: the previous doubling had taken 16 extra years, and takes us back not to 28 years before in 1895 but 44 years before in 1879. And the doubling before that takes us back 49 years to 1830. And my guess is that British settlement in America saw perhaps one more doubling between 1750 and 1830 or so, before which living standards were likely to have been constant. The overall picture is one of accelerating geometric growth since the beginnings of the Industrial Revolution: doubling times of 80 years, then 49, then 44, then 28, and then 28. A techno-realist would have expected a further doubling to $57,388 in 28 years–from 1979 to 2007–as 28-year doubling appeared to be a feature of the modern mass-production research-and-development-based American economy. And a techno-optimist might have speculated that ever-shorter doubling times were a feature of ever higher-tech economies.

They would have been disappointed. 2007 saw American real GDP per capita not at $57,388 but $49,310.6–a 16% gap relative to reasonable expectations as of 1979. And, of course, after 2007 things really went into the toilet: Projecting growth forward from 1923, 1951, and 1979 to 2014 would have led us to expect a 2009-dollar real GDP level right now of $68,246.2. We are going to have $50,295.0–a 35.7% gap.

As of now, the missing growth since 1979–the missing growth, taking no account of distribution, taking an-extra-dollar-for-billionaires-is-as-good-as-an-extra-dollar-for-everybody-else–amounts to more than one-third of the level of our current prosperity. And when we compare the $28,694 real GDP per capita level of 1979 with the $50,295 we have today and the $68,246.2 that is the extrapolated 1923-1951-1979 trend–well, we have had barely as much as half the economic growth since 1979 that back in 1979 we expected.

And, as I said, the distributional considerations are all on top of this…

Tahmi Lubby: America’s Middle Class: Poorer than You Think: “Americans’ average wealth tops $301,000 per adult…

…enough to rank us fourth on the latest Credit Suisse Global Wealth report. But… Americans’ median wealth is a mere $44,900 per adult… only good enough for 19th place, below Japan, Canada, Australia and much of Western Europe. ‘Americans tend to think of their middle class as being the richest in the world, but it turns out, in terms of wealth, they rank fairly low among major industrialized countries,” said Edward Wolff…. Super-rich Americans skew average wealth upwards. The U.S. has… 49% of those with more than $50 million in assets…. This schism secures us the top rank in one net worth measure–wealth inequality…. Americans… are having trouble building wealth because wages have stagnated for more than a decade. Median household income was $51,017 in 2012, compared to $56,080 in 1999…. There are many reasons why middle class incomes are suffering, including the decline of unions’ power, the shift of jobs overseas and the increasing use of technology in the workplace, said Kenneth Thomas, professor of political science at University of Missouri, St. Louis.
Also, Americans have to pay more out of pocket for basics…

Citing: Giles Keating et al. (2013): Credit Suisse Global Wealth Report 2013

Should-Reads:

1. Paul Krugman: On the Neo-paleo-Keynesian Phillips Curve: “I mentioned…in passing that recent data actually look like an old-fashioned pre-accelerationist Phillips curve–that is, unemployment determines the inflation rate, not the rate of change of the inflation rate…. There seems to be one of these funny situations right now where people who don’t work on such issues consider this a wild and crazy, or maybe just silly assertion, while those actually doing serious empirical work treat it as a matter of course…. Is that just me? No. Consider two recent studies on unemployment and inflation…. Michael Kiley… had the very good idea of adding power by estimating the relationship across a number of metropolitan areas… his Phillips curve is non-accelerationist for the past 15 years…. Klitgaard and Peck at Liberty Street… does a similar exercise for eurozone countries. Their results… [are] a relationship between the change in unemployment and the change in inflation, equivalent to a relationship between the level of unemployment and the level of inflation–i.e., an old-fashioned Phillips curve…. All I’m saying is that people trying to fit recent data keep finding something that looks like the old-fashioned relationship. You can offer various explanations–downward wage rigidity, anchored expectations, or maybe it just isn’t worth adjusting price-setting to match fairly small variations in expected inflation. But anyway, that’s what the data look like.”

2. Tim Duy: Yellen Testimony: “Her choice of words is important here.  Note that she does not say ‘If the labor market improves more quickly’. Yellen says ‘continues to improve more quickly’ which means that the economy is already converging towards the Fed’s objective more quickly than anticipated by current forecasts…. It brings into question whether or not the Fed should maintain its ‘considerable period’ language: ‘The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends…’. There will be resistance… the Fed will want to ensure that any change is interpreted as the result of a change in the outlook rather than a change in the reaction function.  But the hawks will argue that the communications challenge is best handled by dropping the language sooner than later…. Bottom Line: A generally dovish performance by Yellen today consistent with current expectations…”

Should Be Aware of:

• Harold Pollack: Tobacco is still America’s top health threat. But Washington doesn’t treat it that way
• Jason Millman: Even with Obamacare, shopping for health insurance isn’t as easy as buying a plane ticket
• Sudeep Reddy: Live Blog: Federal Reserve Chairwoman Janet Yellen’s Semi-Annual Testimony
• Janet Yellen: Semiannual Monetary Policy Report to the Congress

And:

1. Zack Beauchamp: Why Hamas’ military wing scuttled a ceasefire with Israel: “Just hours after Israel accepted an Egyptian-brokered cease fire agreement on Tuesday morning, the calm collapsed. Hamas continued to fire rockets into Israel, and its militant wing announced ‘We will continue to bombard until out conditions are met’…. After six hours of holding its fire, Israel resumed bombing the Gaza Strip–and it’s not clear, now, when the fighting is going to stop…. No one’s quite sure what Hamas thinks about the cease fire agreement. That may sound bizarre, given that they’ve clearly violated its terms and never accepted it, but the group has not yet issued any official statement on the deal. The New York Times, CNN, and leading Israeli newspaper Ha’aretz all reported that Hamas’ cabinet was still considering the proposal as rockets were falling. What this suggests is that there may be a real division between Hamas’ military wing, the Izz ad-Dim al-Qassam Brigades, and its political leadership. Nominally, the military wing reports to the political wing, but it’s not clear that the political wing has total control over rocket fire. Notably, an al-Qassam statement, not a Hamas political spokesman, claimed responsibility for the rocket attacks that continues after the ceasefire. And just after the proposal was announced, a military wing statement said the ceasefire agreement ‘is not worth the ink that wrote it’…”

2. Nate Cohn and Derek Willis: More Evidence That Thad Cochran Owes Runoff Win to Black Voters: “The precinct-level results for… Mississippi… all but prove that Senator Thad Cochran defeated Chris McDaniel, a Tea Party-backed state senator, through a surge in black, Democratic turnout…. Cochran won by 7,682 votes in the state’s 286 most Democratic precincts, where President Obama won a combined 93 percent of the vote in 2012. That tally slightly exceeds Mr. Cochran’s… margin of… 7,667…. He won 92 percent of the vote in the state’s most uniformly Democratic precincts, where Mr. Obama won 99 percent of the vote. These precincts voted for Mr. Cochran by 3,889 votes, or more than half of his statewide margin of victory…”

3. Zeynep Tufekci: Engineering the public: Big data, surveillance and computational politics: “Digital technologies have given rise to a new combination of big data and computational practices which allow for massive, latent data collection and sophisticated computational modeling, increasing the capacity of those with resources and access to use these tools to carry out highly effective, opaque and unaccountable campaigns of persuasion and social engineering in political, civic and commercial spheres. I examine six intertwined dynamics that pertain to the rise of computational politics: the rise of big data, the shift away from demographics to individualized targeting, the opacity and power of computational modeling, the use of persuasive behavioral science, digital media enabling dynamic real-time experimentation, and the growth of new power brokers who own the data or social media environments. I then examine the consequences of these new mechanisms on the public sphere and political campaigns…”

4. John Holbo: Dreams and Plagiarism: “In other news: Zizek isn’t looking like an especially responsible scholar. I find the explanation that ‘a friend’ sent him a long passage cribbed from a white supremacist book review and told him ‘he could use it freely’, in addition to being insufficient, rather incredible. With ‘friends’ who trick you into plagiarizing white supremacists, who needs enemies?…”

Already-Noted Must-Reads:

1. Chris Blattman: Links to Reviews of James Scott’s “Seeing Like a State”: “Daron Acemoglu and James Robinson discuss the work of Jim Scott in a (so far) three-part series: here, here and here…. Brad Delong on Seeing Like a State. Also, Paul Seabright’s review in the LRB.

2. Chang-Tai Hsieh and Enrico Moretti: Growth in Cities and Countries: “We use a Rosen-Roback model of urban growth to show that a summary statistic for the aggregate effect of local growth (decline) is whether it shows up as an increase (decrease) in local employment or as an increase (decrease) in the nominal wage relative to other cities. Differences in the nominal wage across cities reflect differences in the marginal product of labor across cities which, ceteris paribus, lower aggregate output. We show that the dispersion of the average nominal wage across US cities increased from 1964 to 2009 and may be responsible for a 13% decline in aggregate output. Changes in amenities appear to account for only a small fraction of this output loss, with most of the loss likely caused by increased constraints to housing supply in highly productive cities. We conclude that welfare gains from spatial reallocation of the US labor force are likely to be substantial…”

3. Mark Blyth: Europe’s Goldilocks Dilemma: “The policy of austerity has twin goals: reducing growth in public debt and boosting investor confidence. On both counts, the eurozone’s attempts have been an unmitigated failure…. The confidence-inspiring powers of what was curiously called ‘expansionary fiscal contraction’, the idea that budget cuts today make people spend more since they will have lower taxes in the future, haven’t been any better. European consumer confidence dropped precipitously during the crisis and has yet to return to positive territory. Investment expectations, as measured by business confidence surveys, similarly fell as austerity took its toll and are now barely positive. Growth rates track these declines but with a North-South twist: Germany is pulling ahead, France is flat-lining, Italy is stagnating, and the periphery remains in negative territory. Unemployment rates (outside the export-driven North) are stuck at levels last seen on the eve of World War II. Given all this, you would think a halt to such self-defeating policies would be a good idea. And indeed, it is. But that doesn’t mean that Brussels and Berlin can actually stop austerity…”

4. Joe Romm: Hottest March-June On Record Globally, Reports Japan Meteorological Agency: “The JMA reported Monday that last month was the hottest June in more than 120 years of record-keeping…”

Joe Romm: Hottest March-June On Record Globally, Reports Japan Meteorological Agency: “The JMA reported Monday that last month was the hottest June in more than 120 years of record-keeping…”

Mark Blyth: Europe’s Goldilocks Dilemma: “The policy of austerity has twin goals…

…reducing growth in public debt and boosting investor confidence. On both counts, the eurozone’s attempts have been an unmitigated failure…. The confidence-inspiring powers of what was curiously called ‘expansionary fiscal contraction’, the idea that budget cuts today make people spend more since they will have lower taxes in the future, haven’t been any better. European consumer confidence dropped precipitously during the crisis and has yet to return to positive territory. Investment expectations, as measured by business confidence surveys, similarly fell as austerity took its toll and are now barely positive. Growth rates track these declines but with a North-South twist: Germany is pulling ahead, France is flat-lining, Italy is stagnating, and the periphery remains in negative territory. Unemployment rates (outside the export-driven North) are stuck at levels last seen on the eve of World War II. Given all this, you would think a halt to such self-defeating policies would be a good idea. And indeed, it is. But that doesn’t mean that Brussels and Berlin can actually stop austerity…

Chang-Tai Hsieh and Enrico Moretti: Growth in Cities and Countries: “We use a Rosen-Roback model of urban growth…

…to show that a summary statistic for the aggregate effect of local growth (decline) is whether it shows up as an increase (decrease) in local employment or as an increase (decrease) in the nominal wage relative to other cities. Differences in the nominal wage across cities reflect differences in the marginal product of labor across cities which, ceteris paribus, lower aggregate output. We show that the dispersion of the average nominal wage across US cities increased from 1964 to 2009 and may be responsible for a 13% decline in aggregate output. Changes in amenities appear to account for only a small fraction of this output loss, with most of the loss likely caused by increased constraints to housing supply in highly productive cities. We conclude that welfare gains from spatial reallocation of the US labor force are likely to be substantial…

Chris Blattman: Links to Reviews of James Scott’s “Seeing Like a State”: “Daron Acemoglu and James Robinson…

…discuss the work of Jim Scott in a (so far) three-part series: here, here and here…. Brad Delong on Seeing Like a State. Also, Paul Seabright’s review in the LRB.

Should-Reads:

1. David F. Hendry and Grayham E. Mizon: Why standard macro models fail in crises: “Many central banks rely on dynamic stochastic general equilibrium models. The models’ mathematical basis fails when crises shift the underlying distributions of shocks. Specifically, the linchpin ‘law of iterated expectations’ fails, so economic analyses involving conditional expectations and inter-temporal derivations also fail. Like a fire station that automatically burns down whenever a big fire starts, DSGEs become unreliable when they are most needed…”

2. John Aziz: Rube Goldbergnomics, or how I learned to stop worrying and love fiscal stimulus: “It is strange, to say the least, to witness the logical machinations of those who believe that austerity is the answer to a depressed economy…. It is an inherently reactionary position.  That is it originates not so much as in being an idea designed to solve a problem, but an idea designed to justify a political position. More specifically, the political position that greater government is never the solution, and that government spending just sucks money out of the productive economy. And that, I think, is why so few austerians have updated their priors against austerity as a remedy to a depression, and continue to clutch at straws to justify their position…. Here’s the key thing: cutting government spending is contractionary by definition. Cutting spending is cutting spending. The net effect will not always be contractionary, of course, because sometimes it will lead to a confidence boost (particularly, I think, if the cut spending was particuarly wasteful). But that confidence boost… depends on a pretty nebulous mechanism: that businesses will see a government policy, interpret the policy in a certain way and choose to respond in a certain manner. It is a Rube Goldberg mechanism: action A needs to lead to action B, needs to lead to action C…. There is no guarantee that this stream of events will occur…. What isn’t Goldbergian? Boosting government spending is expansionary by definition…”

3. Emma Sandoe: Medicaid is the Best: Part 1: “Medicaid is my personal favorite federal (more accurately federal-state partnership, but you get what I mean) program.  If you read this blog regularly I will attempt to convince you of that fact and you too will love Medicaid.  Soon, we all will be on Team Medicaid and I will finally have a purpose for these hundreds of t-shirts I ordered. Today: Medicaid as an innovator…”

Should Be Aware of:

• Moses Finley: The Ancestral Constitution
• Justin Vaisse (2010): Why Neoconservatism Still Matters
• Barry Ritholtz: Pro Forecasters Stink, You’re Worse
• Robert Frost: North of Boston
• Claudio Borio (2012): The Financial Cycle and Macroeconomics: What Have We Learnt?
• Koleman Strumpf: The Effect of File-Sharing on Box-Office Revenue
• Ashutosh Jogalekar: Richard Feynman, sexism and changing perceptions of a scientific icon

And:

1. Robert Waldmann: Comment on Del Negro, Giannoni & Schorfheide (2014): “1) I have just skimmed the paper. I didn’t work through the equations. 2) I am very hostile to the whole discorso (roughly literature or research program). 3) I am more favorably impressed than I would like to be…. Del Negro et al contest the claim that some special nominal rigidity at zero change is needed to fit the data…. In effect the story of the 70s and 80s is one of the bold Volcker regime shift which caused a dramatic change in inflation by causing a dramatic change in expected future inflation. Here there are implications for variables other than inflation–in the 70s and 80s explicit forecasts of inflation from surveys, and in this millennium TIPS spreads as well. These implications are not tested…. Risk premia are central to Del Negro et als (and DeLong’s) explanation…. The paper does not confront the risk premia forecast by the model for 2008-2014 with the time series of actual risk premia…. I have an even crankier complaint about the financial frictions. They are modelled as the effect on risk premia of exogenous and otherwise unobserved variation in the variance in skill across entrepreneurs…. Since this variable appears only as a shifter in the risk premium… the microfoundations add nothing and subtract nothing…. The only implication of the microfounded model is that risk premia can vary for unexplained reasons and risk premia affect investment. My objection is that, since in practice all deviations between microfounded models and an ad hoc aggregate models are bugs not features, what possible use could there ever be in micro founding models?”

2. Hussein Ibish: What Israel and Hamas are really trying to accomplish in Gaza: “Hamas has been desperately trying to get out of this morass that it’s found itself in…. They tried to foment trouble in the West Bank, and it didn’t succeed. They didn’t get anything out of the unity agreement, so it’s falling back on what it knows sometimes gets results–which is rocket attacks. What they are hoping for, this time, is concessions not from Ramallah or from Tel Aviv, but from Cairo…. What Hamas can get can only come from Egypt. From Israel, they’re demanding the release of prisoners that were part of the shahid squad [a Hamas military group] that was arrested when Israel was pretending they didn’t know the teenagers were dead. Israel tracked them down and dealt Hamas a serious blow. Which is why Netanyahu isn’t so interested in getting into an artillery/aerial exchange with Hamas–the Israelis frontloaded their retribution. It was all done in the West Bank, before the bodies were found…”

3. Gregg Carlstrom: Is This Hamas’ Last War?: “Sisi’s military-backed [Egyptian] regime… has declared Hamas a terrorist organization, and destroyed most of the smuggling tunnels into Gaza on which the group relied for weapons and tax revenue. The tunnel closures have brought Hamas to a point of diplomatic and financial isolation, which compelled it to announce a reconciliation deal with Fatah in April…. Hamas agreed to a ‘national consensus’ government that contained no members of the group. The deal had already begun to flounder before the Israeli military campaign, with both sides arguing over who should control Gaza, and the kidnapping pushed the Hamas-Fatah relationship again to the point of collapse.”

Already-Noted Must-Reads:

1. Noah Smith: Should the Fed crash the economy now to prevent a crash later?: “To many, the implication is clear: The Fed needs to raise interest rates in order to prevent a destabilizing market crash. That isn’t a good idea…. Higher asset prices due to lower safe interest rates aren’t some kind of nefarious plot–this is just Finance 101…. That’s rational price appreciation, not a bubble…. When practically everyone is convinced that asset prices are relatively high, like now, it’s pretty obvious that there aren’t many greater fools out there. If you look at past bubbles, such as the late-’90s tech bubble or the mid-2000s housing bubble, you see that there was always a large contingent of society that thought it wasn’t a bubble at all…. Who nowadays thinks that there’s some special Big New Thing that’s going to push stocks and bonds and commodities all to stratospheric heights forever?…. I say we hold off on our calls for anti-bubble rate hikes.

2. Nick Rowe: Some simple arithmetic for mistakes with Taylor Rules: “If you see your neighbour thinking of doing something daft apparently unaware of one of the problems, you ought to speak up. Especially if it will affect you too, because you do a lot of trade with your neighbour. A fixed Taylor Rule… makes the danger of hitting the ZLB bigger than you think it is. And Taylor Rules don’t work at the ZLB…. What happens if you are wrong about the natural rate of interest, or wrong about potential output?… If actual potential output is one percentage higher than you think it is, that makes you set the nominal rate 0.5 percentage points too high, and so inflation would need to be 0.33 percentage points too low on average to have a big enough offsetting effect to cancel out your mistake…. For a normal central bank, that is a problem, but it is not a big problem…. They fix mistakes in their Taylor Rule as they go along…. That’s probably the main reason why we always observe a lagged interest rate in the equation when we estimate a central bank’s reaction function…. But if the parameter values of the Taylor Rule are fixed by law, central banks are not allowed to learn from their mistakes…. If you really really want to legislate a Taylor Rule, OK. But there’s a price you must pay, if you want to maintain the same margin of safety against hitting the ZLB. That price is a higher average rate of inflation built right into that legislated Taylor Rule. Your choice: legislated Taylor Rules; hitting the ZLB more frequently; a higher rate of inflation. Pick any two…”

3. Simon Wren-Lewis: Why macroeconomists, not bankers, should set interest rates: “[The] interest rate… which closes the output gap [maintains] the level of output and unemployment that will keep underlying inflation constant… [is] the Wicksellian natural rate…. But, respond[s]… the BIS… monetary policy cannot afford to ignore the financial sector, and the risk of excessive lending and bubbles…. The implication is that a financial crisis only happens because interest rates are set at the wrong level…. The… deregulation of the financial sector in the decades before?–not an issue. The widespread misselling of subprime mortgages?–these things happen. All the other examples of misselling and fraud?–boys will be boys. An industry that profits from a massive implicit public subsidy?–we see no subsidy. Classifying subprime products as AAA? Massive increases in bank leverage in the 00s?–all the result of keeping interest rates too low. When those putting the BIS case tell you that macroprudential controls (a.k.a. financial regulations) are ‘untested’ and ‘uncertain in their impact’, what they are really saying is that the financial system cannot be regulated to make it safe when interest rates are low….
    
   “I like to praise the current UK government when I can. In setting up a Financial Policy Committee that is separate from the Monetary Policy Committee they did exactly the right thing. This formalises an assignment: macro prudential policy to control financial sector excess, and interest rates to control demand and inflation. Most macroeconomists know this makes sense. But the financial sector has a pecuniary interest in pretending otherwise. Those that get too close to that sector should be kept well away from setting interest rates.”