Must-Read: Noah Smith: Japan Shuts Down Its Monetary Lab

Posted on by Brad DeLong

Must-Read: Noah Smith: Japan Shuts Down Its Monetary Lab: “People know that the central bank can break its promises at any time…

…Even… rule[s] can be amended at any time. The bank might change its mind…. Or the people in charge of the central bank might simply be replaced with new, more hawkish leaders. Since the central bank can’t make believable long-term promises, the effects of forward guidance and bold rhetoric are limited in reality, even if they could work in an ideal world. As for quantitative easing, it has run into its own practical hurdles…. Eventually, it starts to affect corporate governance in ways that are well outside the scope of any macroeconomic model. And since companies and consumers knew that the buying binge was temporary, that probably limited its effectiveness.

So we’re seeing that even if inflationary monetary policy works fine in theory… reality just doesn’t work the way the models assume…. If Japan is out of the monetary easing game, other countries will doubtless follow. The era of bold monetary policy experimentation that began with the global financial crisis is now drawing to a close. More and more, economic policy makers will look to fiscal initiatives and to deeper structural reforms to boost growth and stop deflation.

Must-Read: Ben Steverman: Advice for the Next President: Expand Social Security

Posted on by Brad DeLong

Must-Read: The lowest-hanging fruit in terms of improving the conditions of life of the working class was… ObamaCare: the system that Mitt Romney had set up in Massachusetts generalized to the nation as a whole. But the next lowest-hanging fruit is Social Security expansion, as Jesse Rothstein points out:

Ben Steverman: Advice for the Next President: Expand Social Security: “Is expanding Social Security the right thing to do? Is it even possible? Yes and yes, Jesse Rothstein argues…

…The only problem with the word “crisis” is that it didn’t happen overnight—it’s a very slow-rolling crisis. An awfully large number of people hit retirement with nothing to live on except Social Security benefits…. [Franklin Roosevelt] talked about the “three-legged stool,” that Social Security would be basically one-third of the solution to the retirement puzzle…. And we’ve never really gotten the other two legs of the stool…. If you set up your “nudge” right, you can raise the share of people participating in their 401(k) plan by a few percentage points. But… there are still an awful lot of people who don’t participate. States trying to set up portable plans is a good idea, and we should be doing that. But ultimately what all these plans are relying on is voluntary contributions from people who aren’t necessarily making enough money to be able to make those contributions.

Social Security offers two things…. One, a Social Security payment is an annuity: The money keeps coming as long as you live. That’s really useful. If you’re living on private retirement savings, even if you saved enough, you have to be very careful how you spend it down, because you don’t know how long you need it to last. The other thing that Social Security solves is market risk….

We should be expanding Social Security. We should be making it more generous…. Instead of having the Social Security payroll tax rate be 6.2 percent, we could make it 7.2 percent, and all of a sudden everybody’s Social Security benefit gets 15 percent larger…. If we raise the cap and start taxing higher incomes, we can expand benefits by a lot without increasing the burden on middle-class workers….

If the question is, “Can we afford more generous Social Security benefits?” the right way to think about it is, we’re asking people to afford lots of private retirement savings in addition to Social Security. It doesn’t make it any less affordable to move it into the Social Security system rather than outside of it. And, again, Social Security offers you a much more robust benefit. The goal should be telling people not to save quite so much in their 401(k) or their IRAs, because Social Security is doing it for them….

The threat is that the vast majority of workers retire without enough to live on. People will continue to save, to try to assure themselves a secure retirement. And some of them will get it, and some of them won’t, due to factors entirely outside their control…

Must-Read: James Kwak: The Last Chapter Problem

Posted on by Brad DeLong

Must-Read: The bad thing about President-elect Donald Trump is that he has no clue about policy debates. The good thing is that he has, in the past, taken every single possible policy position on both sides in an off-the-cuff fashion. Thus there may be opportunities, depending on who can convince Jared Kushner that his father-in-law needs policies that will actually work:

James Kwak: The Last Chapter Problem: “Bernstein, to his credit, gets the description of the problem out of the way in the first two chapters…

…He devotes the rest of the book to solutions: policy tools that can not only increase growth but, just as importantly, ensure that the benefits of growth are widely shared… expanding automatic stabilizers, spending more on infrastructure, universal pre-school, and maintaining a symmetric monetary policy—that is, not pretending you have an inflation target when what you really have is an inflation ceiling…. Bernstein focuses on the importance of using economic policy to change the pre-tax distribution of income—bolstering the bargaining power of workers so they can demand a larger share of the gains from increases in their own productivity… unions, subsidized jobs and apprenticeship programs to help people gain skills, and ban-the-box rules…. But, as Bernstein writes, turnout by Democratic constituencies “may well hinge on whether they believe a candidate will try to implement a set of policies that convincingly relinks growth and their living standards.”… Democrats… [need to] convince the public that we care about something more than fiscal responsibility and overall economic growth.

Must-Read: Nathanael Johnson: What the New York Times missed with its big GMO story

Posted on by Brad DeLong

Must-Read: Nathanael Johnson: What the New York Times missed with its big GMO story: “A big piece [by Danny Hakim] that made the front page of the New York Times… takes aim at…

…[the claims that] genetically modified crops… increase yields… and reduce pesticide use…. The article concludes that GMO seeds are no better at either than any other form of breeding…. The story is an odd one…. The most mild interpretation of the piece–GMOs haven’t dramatically improved yields, but they are useful… is really not news…. If your takeaway… is that GMOs just aren’t useful, then it runs contrary to loads of evidence–which the story almost completely omits. And it makes comparisons that sound compelling, but don’t actually tell you much…. The problem here is that there’s enough data that you can easily pick the evidence to support your favorite narrative, depending on where you focus….

The most balanced approach is to look at all the available evidence–and that’s what the National Academy of Sciences report already did. Hakim cites the report where it supports his conclusions, but not in the places it contradicts them…. Perhaps the most compelling stats in Hakim’s story come from a comparison with France, which has reduced insecticide use by 65 percent… [while the] United States has only reduced insecticide use by 33 percent…. But… zoom in and you can see that France started with crazy-high pesticide application levels…. It’s also odd that Hakim would single out France: Pesticide use there has been declining, but it’s been increasing in other parts of Europe….

Because most of us aren’t farmers, we have a hard time seeing the GMO age at all. But U.S. farmers can see it. Farmers aren’t backward dupes…. They clearly think they’re getting something valuable when they pay the extra money for GMOs…. And GMOs really aren’t all associated with industrial farming. The disease-resistant papaya is a wonderful innovation. The insect-resistant eggplant seems to be reducing pesticide use in Bangladesh. This banana, this cassava, and this rice could all truly improve the lives of small farmers if those new crops make it over the technical and political hurdles…. It would be a shame if we on the liberal coasts decided the technology was useless just because we have a hard time seeing the benefits that are clear to Midwestern farmers…

Must-Read: John Perr: Inflation-Adjusted Federal Spending Has Fallen Under President Obama

Posted on by Brad DeLong

Must-Read: Federal spending needs to rise significantly if the government is to accomplish its missions:

John Perr: Inflation-Adjusted Federal Spending Has Fallen Under President Obama: “It is an article of conservative faith that federal spending under President Obama is ‘out of control’…

As the 2016 GOP Platform states in an amazing revision of recent history:

The Administration’s policies systematically crippled economic growth and job creation, driving up government costs and driving down revenues. When Congressional Republicans tried to reverse course, the Administration manufactured fiscal crises — phony government shutdowns — to demand excessive spending.

As the data and history show, every claim in those two sentences is flat-out wrong.

PERRspectives Inflation Adjusted Federal Spending Has Fallen Under President Obama

Must-Reads: November 9, 2016

Posted on by Brad DeLong
  • Nancy Cartwright and Angus Deaton: The Limitations of Randomised Controlled Trials: “A well-conducted RCT can yield a credible estimate of an ATE in one specific population, namely the ‘study population’…
  • Mark Thoma: My Voter’s Guide to Economic Policy: “Now we can finally come together as a nation and begin to make progress on important economic, social, and political issues (I can dream, can’t I?)…

Should Reads:

Principles that Should Govern American Fiscal Policy

Posted on by Brad DeLong
Employment Level 25 to 54 years FRED St Louis Fed

Well, that was a very interesting election night. Our failure in 2000 to introduce into the running code (as opposed to the specification document) of our constitution that electors switch votes so that the national popular vote winner wins the electoral college cost us dear in 2000, and may cost us even more today…

You may ask: How is one to judge what to do in such times? The answer is clear: As one has ever judged. Good and evil have not changed since yesteryear, nor are they one thing among Elves and another among Men. It is a human’s part to discern them, as much in the Golden Wood as in his own house. What would have been good policy yesterday would still be good policy today. What would have been bad policy yesterday would still be bad policy today. So we play our position.

I therefore set forth seven principles that should govern good technocratic fiscal policies that promise to enhance America’s societal well-being :

  • Preserve Our Credit
  • Our National Debt a National Blessing
  • Right Now Our National Debt Is too Low
  • International Agencies Agree
  • Benefits from a Higher Deficit If We Are at Full Employment
  • Benefits from a Higher Deficit If We Are Not at Full Employment

  • A Strong Argument for More Government Purchases Rather than Tax Cuts for the Rich

  • Preserve Our Credit: President-elect Donald Trump has been told by many that our national debt is too high and dangerous. He has responded as one would expect a real estate developer would respond. He has proposed taking steps to shake the confidence of our creditors, and then to buy back our debt, at a heavy discount, thus removing the danger. This is a substantial misreading of the situation. Market confidence in the credit worthiness of the United States of America is an extremely valuable asset, from which we derive much benefit, and which it would be folly to throw away.

  • Our National Debt a National Blessing: In fact, at the moment, with interest rates where they are now and are expected to be for the foreseeable future, our national debt is not a burden but a blessing. It is not a drain on the Treasury but a source of wealth for the Treasury. If we do our accounts using a reasonable benchmark–setting our goal to be keeping our available physical space constant–we find that, at the levels of interest rates we see now and expect to see for the foreseeable future, a lower national that would not allow us to lower but would require us to raise taxes in order to maintain the given level of spending. The United States right now is not in the position of a cash-strapped borrower forced to pay interest. The United States right now is, rather, in the position of something like the medieval Medici bank, which people pay to safeguard their money.

  • Right Now Our National Debt Is too Low: The fact is that our national debt, right now, is not a burden but a profit center. That implies that, whatever you think of the long-term multi-generational fiscal outlook, right now our national debt is not too high but too low. That is the case unless one confidently anticipates a rapid and substantial increase in interest rates in the relatively near future. This was, in fact, one of the major lesson of the big article that Larry Summers and I wrote for the Brookings Institution back in 2012.

  • International Agencies Agree: Note that, after four years of argument, the IMF and other international agences agree with Larry and my technocratic judgment that right now our national debt is too low, and thus that good economic policy requires higher deficits right now, not budget balance.

  • Benefits from a Higher Deficit If We Are at Full Employment: Right now, only the extremely rash would definitely claim to know one way or the other whether the United States is at full employment–whether further increases in the employment-to-population ratio would (1) start an inflationary spiral and require the Federal Reserve to raise interest rates to lower employment back down to its current level, or (2) bring large numbers of discouraged workers back into the labor force and make America richer. If the answer is (1), there are still substantial benefits to an economic policy stance, right now and for the foreseeable future as long as the global configuration of savings supply and investment demand is not transformed, with a larger deficit and tighter money and hence higher interest rates. Higher interest rates would restore the health of the banking sector. Higher interest rates might discourage the blowing of potentially dangerous bubbles. The drawback of raising interest rates–the reason that the Federal Reserve has not done so–is that it lowers employment. But if that reduction in employment is offset by an increase in the deficit that boosts employment, hit becomes a no-drawbacks policy.

  • Benefits from a Higher Deficit If We Are Not at Full Employment: Right now, only the extremely rash would definitely claim to know one way or the other whether the United States is at full employment–whether further increases in the employment-to-population ratio would (1) start an inflationary spiral and require the Federal Reserve to raise interest rates to lower employment back down to its current level, or (2) bring large numbers of discouraged workers back into the labor force and make America richer. If the answer is (2), there are massive benefits to an economic policy stance of running larger deficits–the benefit of raising employment and making people richer, and making those people richer who have suffered the most since the subprime crisis and crash of 2008.

  • A Strong Argument for More Government Purchases Rather than Tax Cuts for the Rich: If America does decide to run larger deficits, there are large benefits from choosing to do so by increasing government purchases than by cutting taxes, especially for the rich. Increasing government purchases puts to work and improves the lot of the people who have suffered the most since the subprime crisis and crash of 2008. And cutting taxes–especially for the rich–has much smaller effects on the balance between savings and the capital inflow on the one hand and investment and government borrowing on the other. Since the effectiveness of the policy in putting people to work and in creating space for the Federal Reserve to raise interest rates to a healthy level without harming employment depends on this investment-savings balance, there is much more bang for a buck of government purchases than from a buck of tax cuts.

An update on the U.S. labor market from the September JOLTS report

Posted on by Nick Bunker

Every month, the U.S. Bureau of Labor Statistics released data on flows in the U.S. labor market. These data from the Job Openings and Labor Turnover Survey tell us about how many workers are hired, quit their jobs, or are laid off from their jobs. It also tells us how many jobs employers are trying to hire.

Below are a few graphs pulling out key trends from the JOLTS data released yesterday morning. With the current recovery rolling into its seventh year, policymakers should continue to watch these data as the Federal Reserve considers a possible rate increase in December and as U.S. legislators and the Obama Administration wrestle over a budget deal in the coming lame duck session of Congress.

The Beveridge Curve shows the relationship between the number of job openings that employers are posting and the unemployment rate. During the recovery from the Great Recession, the curve seems to have shifted outward since the end of the downturn in mid-2009. The reason for this shift could be due to employers increasing the skills they require of workers or a lack of recruiting intensity from employers.

Breaking the curve out by length of unemployment shows that the shift outward is concentrated among workers who have been unemployed for 27 weeks or longer. A lower rate of hiring among long-term unemployed workers may be responsible for the overall outward shift.

Workers are more likely to quit their job when the labor market is stronger. If there are fewer unemployed workers to hire from, then workers who already have a job are likely to be poached and quit their current job. But different measures of labor market slack show a different relationship with quitting.

The rate of quitting seems in line with the previous relationship with the unemployment rate. Yet workers seem more likely to quit for a given prime-age employment-to-population ratio than in the past.

Must-Read: Mark Thoma: My Voter’s Guide to Economic Policy

Posted on by Brad DeLong

Must-Read: A very nice framework document for the economic policy dialogue:

Mark Thoma: My Voter’s Guide to Economic Policy: “Now we can finally come together as a nation and begin to make progress on important economic, social, and political issues (I can dream, can’t I?)…

…The Capitalist System: Let’s begin with an overview of how the two parties view the capitalist system. Both Democrats and Republicans believe the market system is the best way to satisfy our economic needs. Where they differ is the degree to which government should use social insurance to protect individuals and their families when the economy goes into a recession, when technological change destroys jobs, when jobs are moved to other countries, and so on. Democrats believe these risks should by widely shared…. That is, they believe in a system known as “social democracy.” Republicans have a different view. Social insurance, in their view (not mine from the evidence I’ve seen), creates dependency on government programs and blunts the incentive to work…. 

Market Failure: As just noted, both parties believe that when markets work they are the best way to meet our economic needs. But markets can fail for many reasons such as a high degree of monopoly power, differences in information about a product between the buyer and seller (e.g. patients who are unable to evaluate medical procedures, or a car owner knowing more about the quality of the car than the buyer), and the presence of externalities (e.g. firms that pollute the water or air without incurring the costs of doing so) – the full list is fairly long. And there are some goods, economist call them public goods, which the private sector will not produce at all (national defense is the classic example). Democrats believe the government ought to intervene when there are market failures…. Republicans became leery of government intervention during market failures…. 

Response to Recessions: Consistent with their views that government should intervene when the economy experiences problems, Democrats favor the use of monetary policy to combat mild recessions. In severe recessions, when monetary policy alone is not enough, they also favor the use of fiscal policy, particularly government spending…. Most Republicans agree that monetary policy should be used to smooth fluctuations in output and employment, but they would constrain the Fed’s behavior more than Democrats…. As for fiscal policy, they do not favor the use of government spending in severe recessions, even on things such as infrastructure. They do, however, favor another type of fiscal policy, tax cuts for businesses and the wealthy…. Some Republicans go even further and argue that the government should not intervene at all when the economy goes into a recession….

Inequality: Some degree of inequality is needed to create the correct incentives in a market system, but the two parties differ on whether excessive inequality reduces economic growth, the degree to which the income of those at the top is earned and hence deserved, and the need for government to address the inequality problem. Republicans argue that… people deserve what they get. Any attempt by government to redistribute income would blunt the incentive of those at the top to pursue innovative, entrepreneurial activity and reduce our rate of economic growth. Democrats… believe much of the income of those at the top is… due… unfair bargaining between workers and firms that redirects income upward, market failures, political power that has undermined unions and protected wealthy interests, cronyism on corporate boards, and so on….

Perhaps the difference between the two parties on economic policy can be summarized by the Republican’s faith in markets and their belief that when government tries to help it tends to make things worse rather than better versus the belief among Democrats that capitalist economies need government to keep them on track, to fix market imperfections, to promote equity and equal opportunity, and to ensure that the costs associated with economic shocks are broadly shared through social insurance. My support for Democrats comes, in part, from the belief that they have the stronger hand by far when it comes to economic policy, but whatever your views happen to be, please vote!