Must-Read: Jon Faust: Why Has Transparency Been so Damn Confusing?

Posted on by Brad DeLong

Must-Read: I believe that the extremely sharp Jon Faust is completely correct when he says that over the past three years Fed policy has been driven by: (1) as long as employment gains persist, gradually reducing accomodation; and (2) as long as inflation remains below target, pause in the removal of accommodation if it looks as though employment gains might falter. The problem is that there has been an awful lot of information hitting the Fed over the past three years about the economy. For one thing, we have learned that the unemployment rates typically thought of as reflecting full employment now come with prime-age employment-to-population ratios of not 81% or 80% but 78%:

Employment Population Ratio 25 54 years FRED St Louis Fed

And we have learned that financial markets are not looking forward to any maturity of Treasury bonds yielding more than inflation for, well, forever:

30 Year Treasury Constant Maturity Rate FRED St Louis Fed

Both of those pieces of information should have led to a reevaluation of the policy rule. They have not. Both of those pieces of information are not consistent with the economy evolving as the Fed expected it three years ago.

So the great question is: What–if anything–will trigger the Fed’s reevaluation of its policy rule? And what will it change its policy rule to if that reevaluation is triggered? That–rather than people getting distracted by shiny pronouncements from individual FOMC participants–is why transparency has been so damn confusing:

Jon Faust: Why Has Transparency Been so Damn Confusing?: “[Fed] consensus has behaved consistently as if driven by two principles…

…[1] So long as steady job market gains persist, continue a gradual, pre-announced removal of accommodation. [2] So long as inflation remains below target, take a tactical pause if credible evidence arises that the job gains might soon falter…. Over the last three years, we’ve gotten normalization at a preannounced pace as in to the first principle, punctuated only by brief (so far) tactical pauses as under the second…. My story directly contradicts the popular narrative of a skittish, market-obsessed Fed flip-flopping at every opportunity. This is where the well-disguised part comes in….

The 19 policymakers on the FOMC have, since the crisis held widely divergent views…. Under the leadership of the Chair, these views somehow blend in a reasonably coherent compromise policy… fully embraced by no one…. The chosen policy often appears to be an orphan, at best, and can become a whipping boy. But the consensus policy is generally much simpler to understand than those 19 component views…. There is a strong pull toward that ‘skittish, market-obsessed Fed’ narrative…. The FOMC statement and press conference… are the principal places where the communication is unambiguously directed at explaining the consensus…. Communications other than these systematically obscure and confuse much more than they clarify…

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations

Posted on by Brad DeLong

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations: “The global financial crisis has permanently lowered the path of GDP in all advanced economies…

..At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.

Must-Read: Christopher L. Foote, Lara Loewenstein, and Paul S. Willen: Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications

Posted on by Brad DeLong

Must-Read: Christopher L. Foote, Lara Loewenstein, and Paul S. Willen: Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications: “[The] reallocation of mortgage debt to low-income or marginally qualified borrowers…

…[in] the early 2000s housing boom… never occurred…. The distribution of mortgage debt with respect to income changed little…. There is no evidence that increases in homeownership during the boom were concentrated among low-income or marginal borrowers. Previous cross-sectional research stressing the importance of low-income borrowers and communities during the mortgage boom was based on the inflow of new mortgage originations alone. As a result, it could not detect offsetting outflows in mortgage terminations that left the allocation of debt with respect to income stable over time.

Must-Read: Judd Cramer and Alan B. Krueger: Disruptive Change in the Taxi Business: The Case of Uber

Posted on by Brad DeLong

Must-Read: Judd Cramer and Alan B. Krueger: Disruptive Change in the Taxi Business: The Case of Uber: “This paper… compar[es] the capacity utilization rate of UberX drivers…

…with that of traditional taxi drivers in five cities…. UberX drivers spend a significantly higher fraction of their time, and drive a substantially higher share of miles, with a passenger in their car than do taxi drivers…. 1) Uber’s more efficient driver-passenger matching technology; 2) the larger scale of Uber than taxi companies; 3) inefficient taxi regulations; and 4) Uber’s flexible labor supply model and surge pricing more closely match supply with demand throughout the day.

Must-Reads: July 17, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Atif R. Mian, Amir Sufi, and Emil Verner: Household Debt and Business Cycles Worldwide

Posted on by Brad DeLong

Must-Read: Atif R. Mian, Amir Sufi, and Emil Verner: Household Debt and Business Cycles Worldwide: “An increase in the household debt to GDP ratio in the medium run…

…predicts lower subsequent GDP growth, higher unemployment, and negative growth forecasting errors in a panel of 30 countries from 1960 to 2012…. Low mortgage spreads predict an increase in the household debt to GDP ratio and a decline in subsequent GDP growth when used as an instrument. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries that face stricter monetary policy constraints as measured by a less flexible exchange rate regime, proximity to the zero lower bound, or more external borrowing. A rise in the household debt to GDP ratio is contemporaneously associated with a consumption boom followed by a reversal in the trade deficit as imports collapse. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a household debt cycle more correlated with the global household debt cycle experience a sharper decline in growth after an increase in domestic household debt.

Must-Read: Quentin Skinner: Liberty Before Liberalism and All That

Posted on by Brad DeLong

Must-Read: Quentin Skinner: Liberty before Liberalism and All That: “The Digest of Roman Law[‘s]… fundamental distinction drawn at [its] outset…

…is between the liber homo, the free person, and the servus or slave…. A slave is someone who is in potestate, in the power of a master. The contrast is with someone who is sui iuris, able to act in their own right…. Sallust, Livy and Tacitus… answer… that if you are subject to the arbitrary will of anyone else, such that you are dependent on their mere goodwill, then you may be said to be living in servitude, however elevated may be your position in society. So, for example, Tacitus speaks of the servitude of the entire senatorial class under the Emperor Tiberius, so wholly subject were they to his lethal caprice….

Hobbes changes his mind…. Freedom is not absence of dependence; it is simply absence of external impediments to motion…. The only sense we can make of the idea of human liberty is to think of it as the freedom of an object to move. On this account, you are unfree if your movements are impeded by external impediments, but free if you are able to move without being obstructed…. He maintains… that the main reason why people obey the law is that they are more frightened of the consequences of disobedience. But as he now argues, fear does not take away freedom. Freedom, according to Hobbes’s new definition, is taken away only by external and physical impediments to motion. But fear is not an external impediment. On the contrary, fear is a motivating force….

I am very stuck by the extent to which Marx deploys, in his own way, a neo-Roman political vocabulary. He talks about wage slaves, and he talks about the dictatorship of the proletariat. He insists that, if you are free only to sell your labour, then you are not free at all. He stigmatises capitalism as a form of servitude. These are all recognizably neo-Roman moral commitments…. We tend to think of freedom essentially as a predicate of actions. But the earlier tradition took freedom essentially to be the name of a status, that of a free person by contrast with a slave…. For a neo-Roman thinker, many of the situations that in a market society are regarded as free–even as paradigmatically free–would appear as examples of servitude. The predicament of de-unionised labour, of those who live in conditions of economic dependence, of those in particular who live in dependence on violent partners, and of entire citizen-bodies whose representative assemblies have lost power to executives–all these would appear to a neo-Roman theorist to be examples of being made to live like slaves.

Must-Read: Elizabeth Stanton: Negishi Welfare Weights: The Mathematics of Global Inequality

Posted on by Brad DeLong

Must-Read: This seems to me to be not quite right. If, say, individuals’ utility is logarithmic in lifetime wealth, then Negishi welfare weights construct the social welfare function by weighting each person’s utility by their lifetime wealth and then adding up individual utilities.

This produces policies that are different from those that would “be optimal only in a world in which global income redistribution cannot and will not take place”. It is the case, even if global income distribution cannot and will not take place, that good government policies maximize the benefit weighting their effects on each person’s utility equally. But with Negishi welfare weights government policies are evaluated by multiplying their effect on an individual’s utility by that individual’s wealth before performing a utilitarian sum:

Elizabeth A. Stanton: Negishi Welfare Weights: The Mathematics of Global Inequality: “The importance of making transparent the ethical assumptions used in climate-economics models cannot be overestimated…

…Negishi weighting is a key ethical assumption at work in climate-economics models, but one that is virtually unknown to most model users. Negishi weights freeze the current distribution of income between world regions; without this constraint, IAMs that maximize global welfare would recommend an equalization of income across regions as part of their policy advice. With Negishi weights in place, these models instead recommend a course of action that would be optimal only in a world in which global income redistribution cannot and will not take place. This article describes the Negishi procedure and its origin in theoretical and applied welfare economics, and discusses the policy implications of the presentation and use of Negishi-weighted model results, as well as some alternatives to Negishi weighting in climate-economics models.

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle

Posted on by Brad DeLong

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle: “An issue of growing saliency…

…how… economic marginalization and financial vulnerability, associated with stagnant wages and rising inequality, contributed to the run-up to the financial crisis and how such marginalization and vulnerability could be relevant in the current recovery…. I want to zero in on the question of whether inequality itself is undermining our country’s economic strength according to available macroeconomic indicators….

I will argue that at the start of this recession, an unusually large number of low- and middle-income households were vulnerable to exactly the types of shocks that sparked the financial crisis… 30 years of very sluggish real-wage growth… unusually large share of their wealth in housing… debt…. exposure to house prices had increased dramatically. Thus, as in past recessions, suffering in the Great Recession–though widespread–was most painful and most perilous for low- and middle-income households, which were also more likely to be affected by job loss and had little wealth to fall back on. Moreover, I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker. The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth….

I want to explore these issues today because the answers may have implications for the Federal Reserve’s efforts to understand the recession and conduct policy in a way that contributes to a stronger pace of recovery…. I hope my remarks spur more inquiry and discussion. I should also note that the views I express are my own…. To be sure, the increase in mortgage debt prior to the recession occurred across all types of households. But it was families with modest incomes and wealth largely in their homes that were the most vulnerable to subsequent drops in home values…. Given these developments, when house prices fell, household finances were struck a devastating blow. The resulting fallout magnified this initial shock, ushering in the Great Recession….

About two-thirds of all job losses in the recession were in middle-wage occupations–such as manufacturing, skilled construction, and office administration jobs–but these occupations have accounted for less than one-fourth of subsequent job growth…. It is not only the occupational and industrial distribution of the new jobs that poses challenges for workers and their families struggling to make ends meet, but also the fact that many of the jobs that have returned are part time or make use of temporary arrangements popularly known as contingent work. The flexibility of these jobs may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or ‘permanent’ workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace….

My approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels I have emphasized generally do not play key roles in most macro models…. The narrative I have emphasized places economic inequality and the differential experiences of American families, particularly the highly adverse experiences of those least well positioned to absorb their ‘realized shocks,’ closer to the front and center of the macroeconomic adjustment process…. Circumstances–the outsized role of housing wealth in the portfolios of low- and middle-income households, the increased use of debt during the boom, and the subsequent unprecedented shocks to the housing market–may have attenuated the effectiveness of monetary policy during the depths of the recession. Households that have been through foreclosure or have underwater mortgages or are otherwise credit constrained are less able than other households to take advantage of the lower interest rates, either for homebuying or other purposes. In my view, these effects likely clogged some of the channels through which monetary policy traditionally works…

  • Congressional Budget Office (2011), Trends in the Distribution of Household Income between 1979 and 2007 (PDF) (Washington: CBO, October).
  • Orazio P. Attanasio and Guglielmo Weber (2010), ‘Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy,’ Journal of Economic Literature, vol. 48 (September), pp. 693-751.
  • Dirk Krueger and Fabrizio Perri (2006), ‘Does Income Inequality Lead to Consumption Inequality? Evidence and Theory,’ Review of Economic Studies, vol. 73 (January), pp. 163-93
  • Mark A. Aguiar and Mark Bils (2011), ‘Has Consumption Inequality Mirrored Income Inequality?’ NBER Working Paper Series 16807 (Cambridge, Mass.: National Bureau of Economic Research, February)
  • Orazio Attanasio, Erik Hurst, and Luigi Pistaferri (2012), ‘The Evolution of Income, Consumption, and Leisure Inequality in the US, 1980-2010,’ NBER Working Paper Series 17982 (Cambridge, Mass.: National Bureau of Economic Research, April).
  • Marianne Bertrand and Adair Morse (2013), ‘Trickle-Down Consumption,’ NBER Working Paper Series 18883 (Cambridge, Mass.: National Bureau of Economic Research, March).
  • Jason DeBacker, Bradley Heim, Vasia Panousi, and Ivan Vidangos (2011), ‘Rising Inequality: Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006,’ Finance and Economics Discussion Series 2011-60 (Washington: Board of Governors of the Federal Reserve System, December).
  • Raghuram Rajan (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, N.J.: Princeton University Press)
  • Michael Kumhof and Romain Ranciere (2011), ‘Inequality, Leverage and Crises,’ CEPR Discussion Paper 8179 (London: Centre for Economic Policy Research, January)
  • Michael D. Bordo and Christopher M. Meissner (2012), ‘Does Inequality Lead to a Financial Crisis?’ NBER Working Paper Series 17896 (Cambridge, Mass.: National Bureau of Economic Research, March)
  • Neil Bhutta (2011), ‘The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods,’ Journal of Law and Economics, vol. 54 (November), pp. 953-83
  • Neil Bhutta (2012), ‘GSE Activity and Mortgage Supply in Lower-Income and Minority Neighborhoods: The Effect of the Affordable Housing Goals,’ Journal of Real Estate Finance and Economics, vol. 45 (June), pp. 238-61.
  • Atif Mian, Kamalesh Rao, and Amir Sufi (2011), ‘Household Balance Sheets, Consumption, and the Economic Slump (PDF),’
  • Karen Dynan (2012), ‘Is a Household Debt Overhang Holding Back Consumption?’ Brookings Papers on Economic Activity, Spring, pp. 299-358.
  • Rudiger Ahrend, Jens Arnold, and Charlotte Moeser (2011), ‘The Sharing of Macroeconomic Risk: Who Loses (and Gains) from Macroeconomic Shocks,’ OECD Economics Department Working Papers 877 (Washington: OECD Publishing, July).
  • Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. Smith (2012), Income, Poverty, and Health Insurance Coverage in the United States: 2011 (PDF), U.S. Census Bureau Current Population Reports P60-243 (Washington: U.S. Government Printing Office, September).
  • National Employment Law Project (2012), ‘The Low-Wage Recovery and Growing Inequality,’ Data Brief, report (New York: NELP, August), http://nelp.3cdn.net/8ee4a46a37c86939c0_qjm6bkhe0.pdf.
  • See Nir Jaimovich and Henry E. Siu (2012), ‘The Trend Is the Cycle: Job Polarization and Jobless Recoveries,’ NBER Working Paper Series 18334 (Cambridge, Mass: National Bureau of Economic Research, August)
  • Christopher L. Foote and Richard W. Ryan (2012), ‘Labor-Market Polarization over the Business Cycle,’ Public Policy Discussion Paper 12-8 (Boston: Federal Reserve Bank of Boston, December).
  • U.S. Department of Labor, Commission on the Future of Worker-Management Relations (1994), ‘Contingent Workers,’ in Fact Finding Report.
  • Steven J. Davis and Till von Wachter (2011), ‘Recessions and the Costs of Job Loss,’ Brookings Papers on Economic Activity, Fall, pp. 1-55.
  • Jesse Rothstein (2012), ‘The Labor Market Four Years into the Crisis: Assessing Structural Explanations,’ ILRReview, vol. 65 (July), figure 11, p. 486.