Et tu, Alan? When I read things like this, I become deeply, deeply depressed…
As a piece of Fed watching–a description of what the Federal Reserve as currently constituted is likely to do–this is, as you can rely on Alan Blinder to be, excellent: clear, insightful, accurate, illuminating:
Alan Blinder: Alan Blinder: Fed Hawks vs. Doves: The Sequel: “Once the Federal Open Market Committee (FOMC) announces a few more $10-billion-a-month ‘taperings’ of asset purchases…
The Federal Reserve on May 21 will release the minutes of the last meeting of the Federal Open Market Committee, the central bank’s policymaking committee. Fed watchers will be looking at the notes to see how Fed officials are thinking about the economy. The minutes are unlikely to contain any big policy actions, but there will be hints about future moves.
As Alan Blinder, a member of the Equitable Growth Steering Committee, points out, the debate about ending the Fed’s extraordinary efforts started during the crisis will heat up in the coming months. The debate between the hawks and the doves will center on inflation and unemployment, but the Fed’s actions also affect another aspect of our economy: income inequality.
The Fed’s mandate requires that it ensure price stability as well as maximum employment. The mandate doesn’t explicitly lay out what level of employment is maximum and how quickly prices have to be rising for them to be unstable, so the central bankers have to interpret their mission as the economy changes. The unemployment rate is currently falling, but the share of the population with a job has barely budged since the labor market bottomed out in 2010. Raising rates and throttling growth before employment is truly “maximum” could condemn millions of workers to permanent unemployment and our economy to a slower rate of economic growth.
That’s why the ongoing debate about the state of the labor market, as technical as it may be, is so vital for the health of our economy.
Not only would a premature tightening create inequality through unemployment, research shows that contractionary monetary policy can increase inequality in income and consumption. A National Bureau of Economic Research working paper by Olivier Coibion, Yuriy Gorodnichenko, Lorenz Kueng, and John Silvia looks at the effect of monetary policy shocks and inequality. They find that these shocks significantly affect income and consumption inequality and that the effect is similar in size to the effect of monetary policy on GDP and inflation.
What should Fed Open Market Committee members make of this research? This apparent inequality effect isn’t solely due to increased unemployment because earnings decline for full-time workers at the bottom of the income distribution, which indicates earnings went down for workers who weren’t thrown out of work. Furthermore, the authors find that earnings actually increase for households at the 90th percentile after monetary policy becomes contractionary, which means the rising inequality wasn’t just due to declining earnings at the bottom.
The Federal Reserve’s mandate says nothing about ensuring a reasonable amount of income inequality while keeping prices stable and employment as high as possible. But the members of the FOMC should consider that they may not be innocent bystanders when it comes to our economy’s high and rising levels of inequality.
Yet again? Yet again! It cannot be healthy for me to keep worrying this over and over again. But I do. The question of how we got into this Obama Stagnation–this situation in which US real GDP is 8% below its pre-2008 trend, with no signs of it ever reapproaching that trend–continues to bother me.
I continue to worry it for two big reasons:
It is the lowest-hanging fruit for equitable growth here in America. If you want to grow the economy in a way that shrinks income disparities, rebalancing the macroeconomy and returning to the old 1990s full-employment high-pressure economy is by far the easiest way to do the most good.
It is, I think, by far my greatest career analytical failure. I used to think that my greatest analytical failure was not seeing that NAFTA would generate a demand by Mexico’s wealthy for assets in the U.S. that would swamp the demand it would create by America’s corporations for factories in Mexico. Thus I did not see that NAFTA would weaken rather than strengthen the peso. But this is a bigger analytical howler. If you had asked me back in 2007 what the chances were that we would be here today, I would have given you all probably 100-to-1, and certainly 20-to-1 against–and I would have been willing to bet a substantial portion of my net worth on that position. And I would have been taken to the cleaners.
Continue reading “The Obama Stagnation: What Went Wrong? Yet Again!: Tuesday Focus: May 20, 2014”
Paul Krugman: That 80s Show: “The pivotal role of the 1980s in the development of economic thought….
The 70s have taken on mythical status, and are constantly invoked by inflation worriers, while the 80s get mentioned, if at all, as somehow proving the truth of supply-side economics. But what really happened in the early 80s…. Chicago’s Robert Lucas made an extremely influential case against any kind of activist policy… [because] only unanticipated changes in monetary policy had real effects. As soon as people understood that… the central bank had targeted a lower rate of inflation, prices and wages would adjust, without the need for sustained high unemployment. What actually happened in the 80s… was that… inflation did indeed come down–eventually. But along the way there were deep recessions and soaring unemployment, which went on much longer than you could justify with any plausible story about the monetary shock being unanticipated. This was very much a vindication of more or less Keynesian views about the economy…. But many economists had already dug themselves in too deep…. Unable to backtrack, they went even deeper, insisting despite all appearances that monetary policy had no real effects whatsoever, that it was all technological shocks….
For the rest of us the 80s were just as important as the 70s in setting attitudes toward policy…. The 70s showed the limits of policy, but the 80s showed that there were limits to those limits–that monetary policy (and fiscal policy, under some conditions) remained powerful…. And that insight has stood the test of time…
Should-Reads:
Sven Jari Stehn and David Mericle: 2014 Q4 to Q4 GDP Growth Forecast Now Lowered to 2.4%: “We see a number of reasons, however, for a somewhat less upbeat view of the underlying trend in housing activity…. Declining mortgage rates boosted growth in residential investment…. As this tailwind dissipates going forward, the trend in housing activity might be somewhat lower…. Mortgage credit availability remains tight…. Recent data raise questions about the strength of the recovery in household formation…. Given these headwinds, we are trimming our forecast for residential investment from 13% to 7.5% and from 12.5% to 10% in 2014H2 and 2015H1, respectively. As a result we are shaving our forecast for real GDP growth by 1⁄4 percentage point to 31⁄4% in 2014H2…”
Ed Luce: One of the above: Obama’s bet on gas throws caution to the wind: “As windfalls go, America’s natural gas boom verges on the biblical…. Hydraulic fracturing has opened up a supply of cheap and relatively clean gas for decades to come…. That, at least, is the assumption. But what if it is wrong?… Everyone is piling into the ‘dash for gas’ on the basis that US gas prices will remain cheap as far as the eye can see. Long before 2030, however, US producers will have been pushed into the more expensive shale formations…. Industry specialists protest that new technology will have opened up non-economic supplies by then. Yet gas euphoria has pushed risk management out of the window. However cushioned the basket might look, it is unwise to put all your eggs in it. Next month President Barack Obama’s administration will issue a new set of emissions rules that are likely to put most existing US coal-fired power plants out of business…. Three risks…. Twenty and 30-year investments are being made on the assumption that US gas prices will remain a third or so of levels elsewhere in the world…. Gas is still a fossil fuel. An unintended consequence of the dash for gas has been the displacement of research into carbon capture technology to mitigate global warming…. Finally, there is geopolitics…. Investments in LNG terminals and cross-border pipelines are bringing forward the day when there will be something resembling a global spot market in natural gas…. The closer that comes, the more vulnerable the US, and other economies, will be to global supply shocks…. Providence–and improved technology–gave the US a huge windfall. The big question is whether the US will use it wisely or fritter it away. Neither the Obama administration nor its opponents inspire much confidence that they will opt for the wise course…”
Should Be Aware of:
And:
Continue reading “Things to Read on the Morning of May 19, 2014”
Austin Frakt: The cost-benefit of universal coverage: “Michael Cannon…. ‘The state of the literature on the costs of universal coverage is worse still…
“I am aware of only one study that has even attempted to measure some costs of universal coverage and compare them to some of the benefits…. So how is it that despite this dearth of evidence, a vocal minority of the U.S. population is utterly and completely convinced that universal coverage is net beneficial?… Why do they hold this prior belief?’…. John Nyman estimates that if we value a year of life at $100,000… and if health insurance leads to a 25% reduction in mortality (which strikes me as high in light of recent work), then people are better off by $2,100 per year with insurance…. Kenneth Arrow… argued that health insurance is welfare improving…. Wilhelmine Miller and colleagues find that the gains in health from covering the uninsured to be valued at $65-$130 billion annually with costs estimated to be $34-$69 billion…. Peter Muennig, Peter Franks, and Marthe Gold calculated that health insurance yielded a quality-adjusted life year (QALY) for a non-elderly American at a cost of $35,000… supplementing Medicare with more generous coverage produced a QALY for $24,000…. McClellan and Skinner… estimate that for individuals in the bottom two-thirds of the income distribution, Medicare provides substantially more value than it costs…. One cannot credibly say there has been no consideration of the benefits and costs of coverage expansion…. There’s yet another point of view to consider. The work of David Cutler shows that medical care is overwhelmingly worth its cost…. Let us keep in mind, however, that even if health insurance of some type is worth its cost, that alone doesn’t imply universal coverage is… the most cost-effective policy we could implement now…
Jonathan Chait writes about how Mitch McConnell “hacked American politics”. But, I think–and I am not sure I am right–this is one of the (rare) things that Jonathan Chait gets wrong. Most of all, I think, Mitch McConnell hacked himself.
Mitch McConnell did not go to Washington to do nothing. Mitch McConnell went to Washington to make the country a better place–or, at the very least, to pass legislation or at least block legislation in ways that would please powerful interest groups that might someday employ him, and put them in his debt. He failed to block the marginal tax rate increase on the rich–and the upper middle class whose rates he may have preserved don’t hire ex-senators. He did please health-insurance companies by blocking the public option that would have been their competition–but his root-and-branch opposition to the rest of Nationwide RomneyCare… excuse me, ObamaCare, pissed them off much more. He might have blocked large-scale mortgage financing that might well have propelled a much stronger recovery–but Tim Geithner was doing a good job of doing that on his own, and neither mortgage debtors nor mortgage holders are pleased with the current mass-underwater situation at all. He did block cap-and-trade, but all that means is that instead of coal-burning utilities getting valuable carbon-emissions credits to sell, they are about to be hit by the EPA Clean Air Act-regulation hammer–that McConnell has replaced himself with Anthony Kennedy as the negotiating partner whom Obama needs to move forward on global-warming policy.
McConnell did block the infrastructure bank, and did make America a poorer place with more unemployment.
Continue reading “IMHO Mitch McConnell Hacked Himself: Monday Focus: May 19, 2014”
**Daron Acemoglu, Suresh Naidu, James A. Robinson, and Pascual Restrepo:** Democracy and Growth: New Evidence: “A country that switches from non-democracy to democracy…
>…achieves about 20% higher GDP per capita over the subsequent three decades… between 1960 and 2010…. These are large but not implausible effects, and suggest that the global rise in democracy over the past 50 years (of over 30 percentage points) has yielded roughly 6% higher world GDP…. We predict the probability of democratizing based on 4 years of GDP, and then reweight country-years so that we are effectively comparing the path of GDP following a democratization with the path of GDP following an ‘almost democratization’…. We develop an instrument for democracy based on regional waves of democratization…. The IV coefficients are much larger than the OLS coefficients compared to our measure, suggesting that we have reduced the measurement error in the democracy variable….
>David Brooks defending the Egyptian military coup: ‘It’s not that Egypt doesn’t have a recipe for a democratic transition. It seems to lack even the basic mental ingredients.’ Judge Posner also agrees with this conclusion and writes: ‘Dictatorship will often be optimal for very poor countries. Such countries tend not only to have simple economies but also to lack the cultural and institutional preconditions to democracy.’ Is there any evidence that democracy is only good for already developed economies? The answer is no…. So why does democracy increase growth?… We find that civil liberties are what seem to be the most important. We also find positive effects of democracy on economic reforms, private investment, the size and capacity of government, and a reduction in social conflict…
Should-Reads:
Kara Swisher: Dear Jill: From One Pushy Media Dame to Another: “Let me be perfectly clear when it comes to ousted New York Times executive editor Jill Abramson: She has, on some occasions I have spent time with her, scared the bejesus out of me. That said, it was in a very good way. I am not sure whether it was her unusually focused stare, which can be unsettling. Or her supernatural ability to be completely still when listening to you…. Or even her bone-dry wit, which can be sharp but in a manner that is, to my mind, brilliant. That steel-backed ability to communicate an aura of toughness and command has never been a minus to me, and, I would assume, not at the pinnacle of American journalism…. This is the big leagues, right, where there is no crying in baseball…. Let’s also be clear, since too many people — both men and women — don’t seem to be able to grok this too well, despite it being obviously obvious: Phrases like ‘crazy scary’ are often meant to send women quickly back behind the be-nice-ladies line and tap into the societal pressure for females to tamp down their confidence or package it in a more attractive way. Other words that are also used: ‘Loud-mouthed.’ ‘Jarring.’ ‘Strident.’ ‘Shrill.’ ‘Overbearing.’ ‘Bossy.’ ‘Bitchy.’ And, of course, pushy — which is in many ways, the worst of them, as it is defined thusly: ‘Excessively or unpleasantly self-assertive or ambitious.’ That is the word that has now been stuck like glue to Abramson, who was very famously fired last week by publisher Arthur O. Sulzberger Jr…”
Greg Robb: 5 things you won’t learn from reading Geithner’s book: “The Directors of the Federal Reserve Bank of New York XXXXX XXXXXX XXXXXXXXX XXXXXX XXXXXX…. What did the New York Fed know about Bear Stearns and when did they know it?… Where… was Barack Obama?… A recent report by the New York Times and ProPublica said that in 2009 a top Treasury official told Lanny Breuer that an indictment of HSBC ‘could cause broader problems for the financial system’. ‘Was Geithner the one telling them’, Kauffman asked?… What went wrong?… ‘If you read the book and didn’t know anything about the crisis, you’d have no idea what caused it’, said Gerding…”
Paul Krugman: Unemployment: It’s Not Personal: “Matt O’Brien has an interesting if depressing piece… making the point that long-term unemployment is basically bad luck: if you got laid off in a bad economy, you have a hard time finding a new job, and the longer you stay unemployed the harder it becomes to find work… decisively refute[s] the alternative story, which is that the long-term unemployed are workers with a problem…. Read between the lines of a lot of commentary on the unemployed–especially from those eager to slash benefits–and you’ll realize that something like this is the implicit underlying theory. But here’s the thing: the association between worker quality and unemployment should be much stronger in a good economy than in a bad economy. In 2000, with labor scarce, there probably was something wrong with many people who got laid off; in 2009, it was just a matter of being in the wrong place. So… being unemployed should have mattered less for job search after the Great Recession than before. What we actually see, of course, is the opposite… one more reason failure to provide more stimulus is a crime against American workers…”
Should Be Aware of:
And:
Continue reading “Things to Read at Lunchtime on May 18, 2014”
Felix Salmon: Tim Geithner as Unreliable Narrator: “Geithner makes simple declarations…
…which are easily fact-checked. So let’s turn to pages 79-81, where Geithner is covering his early tenure as the president of the New York Fed….
In my very first public speech at the New York Fed in March 2004, I tried to push back against complacency, telling a room full of bankers that the wonders of the new financial world would not necessarily prevent catastrophic failures of major institutions, and should not inspire delusions of safety on Wall Street. I even cited my favorite theorist on financial irrationality, the leading promoter of the idea that periodic financial crises are practically inevitable.
“These improvements are unlikely to have brought an end to what Charles Kindleberger called ‘manias and panics,’ ” I said. “It is important that those of you who run financial institutions build in a sufficient cushion against adversity.” …
This is Geithner at his most prescient and heroic. He enters a hidebound wood-paneled institution where coffee is brought to his desk on a silver tray while briefings involved precious little discussion or debate; and in his very first speech he… speak[s] truth to entrenched financial power… ‘push[es] back against complacency’ and warn[s] against the rise of the shadow banking system….
But here’s the thing: we can read the speech….
Continue reading “Nighttime Must-Read: Felix Salmon: Tim Geithner as Unreliable Narrator”