Category: Equitablog

Must Reads:

1. Saroj Bhattarai, Gauti Eggertsson, and Raphael Schoenle: Is Increased Price Flexibility Stabilizing? Redux: “In a simple DSGE model… more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained…. Using post-WWII U.S. data… we find that if prices and wages are fully flexible, the standard deviation of annualized output growth more than doubles.”

2. Jeffrey Frankel: The Startling Decline of Market-Based Approaches to Regulation: “Markets can fail. But, as has been demonstrated in areas like air pollution, traffic congestion, spectrum allocation, and tobacco consumption, market mechanisms are often the best way for governments to address such failures. So why are such mechanisms now in retreat?… Today, however, politics is killing ‘cap and trade’… cap-and-trade… for sulfur-dioxide emissions has effectively vanished. In Europe, the Emissions Trading System… has become increasingly irrelevant as well…. Market-oriented environmental regulation has in effect been superseded over the last five years by older ‘command-and-control’ approaches…. There is a fascinating parallel between the evolution of American political attitudes toward market mechanisms in environmental regulation and Republican hostility to ‘Obamacare’…. This was originally a conservative approach…”

3. Felix Salmon: News Genius: Annotated: Janet Yellen – Semiannual Monetary Policy Report to the Congress: Read the whole thing! For example: “Translation: QE isn’t just about dropping money from helicopters onto rich investors and financial institutions. It also creates jobs!” “Yellen here is going out of her way to draw a distinction between “maximum sustainable employment”, on the one hand, and the unemployment rate, on the other. You can use the latter as a tool to measure how close you are to the former, but it’s not an exact tool, and you want to look at other things too, like the long-term unemployment rate and the underemployment rate. The Fed’s full-employment mandate is not about hitting some unemployment-rate number, it’s about getting as many Americans to work as possible.” “Remember the government shutdown, and all those debt-ceiling antics? Yellen does. And, she’s saying, they hurt the economy hard — specifically, they hurt consumer spending. Which is not surprising, given the number of federal employees who had to live without any income.”

4. Ezra Klein: Republicans Discover Evidence of Jobs Crisis: “The U.S. has been in a jobs emergency since at least 2008. The cause of the crisis… isn’t mysterious, and neither are the solutions… invest in infrastructure to create construction jobs… give tax breaks to employers who hire… restore the payroll tax cut… help state and local governments hire back some of the employees they laid off…. But in recent years, these policies have been either blocked or canceled by congressional Republicans…. That’s the proper context in which to view this week’s hysteria about Obamacare…”

5. Gavyn Davies: A dose of humility from the central banks: “It is now quite difficult to generalise about what central bankers think. However, a few of the necessary pieces of the jigsaw puzzle slotted into place in the past week…. Ms Yellen… has declared herself… the agent of continuity…. A regime shift designed to shock the US economy back towards the pre-2008 trend line…. Why has she not done this?… She does not seem convinced that a further large dose of asset purchases would be successful anyway, in the context of a large drop in both productivity growth and the labour participation rate… supply-side pessimism… more of the post-2008 output losses are now thought to be permanent. Ms Yellen said on Tuesday that she was not sure how much of the decline in the labour participation rate could be reversed. Her uncertainty about this scarcely supports dramatic policy action either way.”

Continue reading “Things to Read on the Evening of February 13, 2014” →

Gavyn Davies: A dose of humility from the central banks: “The leading central banks in the developed economies have, of course, been the main actors underpinning the global bull market in risk assets since 2009. For long periods their stance has been unequivocally dovish as they have deliberately tried to strengthen an anaemic global economic recovery by boosting asset prices….

It is now quite difficult to generalise about what central bankers think. However, a few of the necessary pieces of the jigsaw puzzle slotted into place in the past week…. Ms Yellen is that she has declared herself to be the agent of continuity not the harbinger of a significant regime shift at the Fed…. A regime shift designed to shock the US economy back towards the pre-2008 trend line…. Why has she not done this?… She does not seem convinced that a further large dose of asset purchases would be successful anyway, in the context of a large drop in both productivity growth and the labour participation rate. Economists at the Fed, like the Congressional Budget Office, have been moving towards supply-side pessimism, implying that more of the post-2008 output losses are now thought to be permanent. Ms Yellen said on Tuesday that she was not sure how much of the decline in the labour participation rate could be reversed. Her uncertainty about this scarcely supports dramatic policy action either way.

Continue reading “Evening Must-Read: Gavyn Davies: Central Banks Frozen by Uncertainty and Supply-Side Pessimism” →

I have been thinking about Mauricio Drelichman and Hans-Joachim Voth’s Lending to the Borrower from Hell: Debt, Taxes, and Default in the Age of Philip II. And I just finished ranting about all this over breakfast at Rick and Ann’s to the patient, good-humored, and extremely intelligent Joachim Voth.

So it is only fair that I inflict on the rest of the world what I inflicted on him:

The point at issue is Daron Acemoglu, Simon Johnson, and James Robinson’s “Atlantic Trade” paper [1], which is… not wrong, exactly, but rather which makes things too simple.

AJR’s central argument is that the wave of wealth from the exploitation of the Americas and from the rise of the trans-oceanic carrying trade interacted in western Europe with the state of political economy on the ground. Small differences between Britain and Iberia in the strength of representative and intermediary institutions were amplified by political-economic processes generated by this influx of wealth, and so Iberia ended up poor and absolutist while Britain ended up rich and constitutional–even though as of 1500 the differences had been small, and constitutional government had been on the ropes in both.

This is, I think, much too simple…

Continue reading “How Key Was the Seventeenth-Eighteenth Century Commercial Revolution to the Eighteenth-Nineteenth Century Constitutional-Government Revolution?: Thursday Focus: February 13, 2014” →

This thinktank–the Washington Center for Equitable Growth–was started on top of John Podesta’s hunch and the Sandler family’s belief that it would soon be time to restart the bipartisan technocratic debate about what would be good policies to create an America of high upward mobility, equal opportunity, and broadly shared prosperity. That bipartisan technocratic debate–to the extent that it ever existed–stopped in, I believe, April of 1993, when then-senate minority leader Robert Dole (R-KS) told my boss Treasury Secretary Lloyd Bentsen (D-TX) that he, Dole, was going all-in to whip Republicans into unanimous opposition to OBRA 93, the Clinton administration’s deficit-reduction bill, which everybody up until then had seen as a second round to the George H.W. Bush administration deficit-reduction bill, OBRA 90, which had had Dole’s enthusiastic support.

Maybe, the thinking was, it is time to start again? Republican senate minority leader Mitch McConnell, when he took over at the start of 2007, did promise his troops that, if they maintained lockstep opposition to all Democratic priorities and filibustered them to the max, the resulting governmental dysfunction would redound to the electoral benefit of the Republican Party, and in one or at most two congressional cycles they would retake the congress and then do some legislatin’. Well, it’s been three cycles so far, and McConnell himself may not survive the fourth. Perhaps with Obama no longer on the ballot their would be the chance to actually get some bipartisan agreement on policies that would be good for America.

But the past two weeks, I must confess, have made me think that the time is clearly not yet ripe. So now I am thinking not now, but maybe a six month window in early 2015, and then January 2017 as our next chance for non-dysfunctional bipartisan government in the public interest.

What happened? What happened was that three Republican senators–Burr, Coburn, and Hatch–set forth an ObamaCare replacement plan that would (a) delink employment at a large firm and health-insurance by removing the tax preference for employer-sponsored insurance benefits, and (b) allowing those who maintain continuous coverage to purchase affordable insurance and avoid penalties for pre-existing conditions–thus keeping people from feeling that they are locked into their large-firm jobs by the requirement that they keep health insurance. And Burr, Coburn, and Hatch all of a sudden ran into the buzzsaw that (a) since ObamaCare’s (slow) moves toward equal tax treatment were a large tax increase on Americans their policy was an even larger tax increase, and (b) removing job lock is in fact encouraging sloth, and moocherhood.

Continue reading “Is It Time Yet for a Technocratic Domestic-Policy Debate?: Tuesday Focus: February 11, 2014” →

Ezra Klein: Republicans Discover Evidence of Jobs Crisis:

The U.S. has been in a jobs emergency since at least 2008. The cause of the crisis — too little demand — isn’t mysterious, and neither are the solutions… invest in infrastructure to create construction jobs… give tax breaks to employers who hire… restore the payroll tax cut… help state and local governments hire back some of the employees they laid off…. But in recent years, these policies have been either blocked or canceled by congressional Republicans…. That’s the proper context in which to view this week’s hysteria about Obamacare….

Continue reading “Lunchtime Must-Read: Ezra Klein: Republicans Discover Evidence of Jobs Crisis” →

Jeffrey Frankel: The Startling Decline of Market-Based Approaches to Regulation: “Markets can fail. But, as has been demonstrated in areas like air pollution, traffic congestion, spectrum allocation, and tobacco consumption, market mechanisms are often the best way for governments to address such failures. So why are such mechanisms now in retreat?…

Today, however, politics is killing “cap and trade.” In the United States, the highly successful cap-and-trade system for sulfur-dioxide emissions has effectively vanished. In Europe, the Emissions Trading System (ETS), the world’s largest market for carbon allowances, has become increasingly irrelevant as well. On both sides of the Atlantic, market-oriented environmental regulation has in effect been superseded over the last five years by older “command-and-control” approaches, by which the government dictates who should use which technologies, in what amounts, to reduce which emissions…. There is a fascinating parallel between the evolution of American political attitudes toward market mechanisms in environmental regulation and Republican hostility to “Obamacare” (the 2010 Affordable Care Act). The core of Obamacare is an attempt to ensure that all Americans have health insurance, via the individual mandate. But it is a market-oriented program insofar as health insurers and health-care providers remain private and compete against one other. This was originally a conservative approach.

Saroj Bhattarai, Gauti Eggertsson, and Raphael Schoenle: Is Increased Price Flexibility Stabilizing? Redux:

We study the implications of increased price flexibility on output volatility. In a simple DSGE model, we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained. We estimate a medium-scale DSGE model using post-WWII U.S. data. In a counterfactual experiment we find that if prices and wages are fully flexible, the standard deviation of annualized output growth more than doubles.

Must-Reads:

1. CBO: Frequently Asked Questions About CBO’s Estimates of the Labor Market Effects of the Affordable Care Act: “‘Q: Will 2.5 Million People Lose Their Jobs in 2024 Because of the ACA?’ A: No, we would not describe our estimates in that way. We wrote in the report: “CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor.”… Because the longer-term reduction in work is expected to come almost entirely from a decline in the amount of labor that workers choose to supply in response to the changes in their incentives, we do not think it is accurate to say that the reduction stems from people “losing” their jobs.”

2. John Quiggin: Macroeconomics made easy?: “I’ve just received a book entitled Big ideas in Macroeconomics: A nontechnical view by Kartik Athreya…. The new book is an attempt to simplify things…. The easiest way to see why the book is so striking is to list some topics that do not appear in the index (and are not discussed, or only mentioned in passing, in the text)… unemployment, inflation, recession, depression, business cycle, Phillips curve, NAIRU, Taylor Rule, money, monetary policy and fiscal policy. By contrast, the book includes a lengthy treatment of such topics as Bayes-Nash equilibrium in game theory, intertemporal optimization of consumption and the theory of mechanism design. If you think that this sounds like Hamlet not merely without the Prince, but without anyone in Elsinore, from King Hamlet’s Ghost to Fortinbras, that’s because you are expecting the wrong play…. There is almost zero intersection between Big Ideas in Macroeconomics and what I would think of as macroeconomics. It’s not so much that I think Athreya is wrong is that we are talking past each other. As Charles Goodhart said of DSGE, Athreya’s version of macro excludes everything in which I am interested.”

3. Ezra Klein: Comment on Paul Krugman’s “Who’s Savvy Now?”: “I don’t quite understand the model of politics underlying the backlash-to-the-backlash over the CBO report. The theory is that though the GOP’s initial spin on the report was wrong it’s meta-right because the lies will be used to power effective attack ads in the fall–and in politics, what’s true, and what voters can be tricked into believing is true, are two equally valid categories for inquiry. You see this model of politics… particularly during elections… wall-to-wall coverage of gaffes not because anyone believes the gaffe was important, but because they believe it might end up in attack ads. Beneath that model of politics lies an assumption that an important scarcity in politics is ‘lines that can be used in attack ads’, and so every time one party or the other finds one of those lines, it’s a big deal. This seems to me to wildly underestimate the creativity of the people who make attack ads…”

4. John Quiggin: Work and Beyond: “Ross Douthat… link[ed] to… [my] reflecting on Keynes ‘Economic Possibilities for our Grandchildren’…. Now he’s addressed the topic in the New York Times…. There’s some interesting food for thought… mixed up with some silly stuff reflecting his job as the NY Times token Republican…. He has to do some damage control over the… Repub lie… Obamacare will cost 2.5 million jobs. As Douthat delicately puts it ‘this is not exactly right’. But, although his heart clearly isn’t it, he tries to construct a narrative in which the Repubs might be right for the wrong reasons…. More interesting though, is Douthat’s discussion comparing idealised hopes for a post-work society with the reality in which well-educated professionals are working longer hours than ever, while… poorer men have withdrawn from the formal labour force….”

Continue reading “Things to Read on the Afternoon of February 10, 2014” →

CBO: CBO | Frequently Asked Questions About CBO’s Estimates of the Labor Market Effects of the Affordable Care Act:

Q: Will 2.5 Million People Lose Their Jobs in 2024 Because of the ACA?

A: No, we would not describe our estimates in that way. We wrote in the report: “CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor.”… Because the longer-term reduction in work is expected to come almost entirely from a decline in the amount of labor that workers choose to supply in response to the changes in their incentives, we do not think it is accurate to say that the reduction stems from people “losing” their jobs.

John Quiggin: Macroeconomics made easy?: “I’ve just received a book entitled Big ideas in Macroeconomics: A nontechnical view by Kartik Athreya….

The new book is an attempt to simplify things…. The easiest way to see why the book is so striking is to list some topics that do not appear in the index (and are not discussed, or only mentioned in passing, in the text)… unemployment, inflation, recession, depression, business cycle, Phillips curve, NAIRU, Taylor Rule, money, monetary policy and fiscal policy. By contrast, the book includes a lengthy treatment of such topics as Bayes-Nash equilibrium in game theory, intertemporal optimization of consumption and the theory of mechanism design. If you think that this sounds like Hamlet not merely without the Prince, but without anyone in Elsinore, from King Hamlet’s Ghost to Fortinbras, that’s because you are expecting the wrong play…. There is almost zero intersection between Big Ideas in Macroeconomics and what I would think of as macroeconomics. It’s not so much that I think Athreya is wrong is that we are talking past each other. As Charles Goodhart said of DSGE, Athreya’s version of macro excludes everything in which I am interested.