Must-Reads: June 20, 2016

Posted on by Brad DeLong

Should Reads:

Determining the natural rate of interest

Posted on by Bridget Ansel
The headquarters of the Federal Reserve Bank is seen at sunrise in Washington.

Knut Wicksell is not a name you’d expect to pop up in a Wall Street Journal article, even if it’s about a Federal Reserve meeting. But the name of the late 19th and early 20th century Swedish economist appears in a recent article by Harriet Torry published after the U.S. central bank declined to move short-term interest rates up from its current target. He’s there for good reason. The Fed is currently grappling with a concept that Wicksell pioneered: the natural rate of interest.

The natural rate is the rate of interest that’s “consistent with the economy operating at its full potential, expanding without overheating,” as Torry puts it. And it’s also the rate of interest that balances desired savings with desired investment. As you might expect from institutions that try to affect interest rates, the Fed and other central banks have a strong interest in figuring out the natural rate.

The most immediate concern for the Federal Reserve, however, is determining the short-term federal funds rate of interest. One way to think about the natural rate is that it is the short-term rate the Fed sets that is consistent with full employment and stable inflation. This is the level where the Fed can stop hiking interest rates. The lower the natural rate, the fewer hikes the Federal Reserve will have to make during its tightening cycle.

Estimates of this short-term  rate can be found by looking at the “Longer Term” dots on the Fed’s quarterly dot plot. These estimates have declined over time and, as Federal Reserve chair Janet Yellen said during her press conference last week, the forecast and path for these rates is quite uncertain.

But how do these short-term rates relate to more longer-term interest rates? The Federal Reserve has far less control over interest rates 10 years out and further. But long-term rates are vitally important for policymakers because they determine the rates at which the federal government borrows money and partially determine how much debt servicing the government can afford. Since 1980, the global long-term natural rate has fallen by about 4.5 percentage points.

Economists Lukasz Rachel and Thomas D. Smith of the Bank of England took a look at what has caused this decline—with an eye to seeing how the natural rate might move in the future. According to their analysis, weaker economic growth has contributed to lower rates, but only by 1 percentage point of the total 4.5 points. Another three points of the decline can be attributed to shifts in demand for savings and investment. (The co-authors say they cannot identify the cause of final 0.5 percentage point change.)

On the savings side of those 3 percentage points, there are three important driving trends. A full percentage point of the decline is attributed to demographic trends of an aging society increasing desired savings, a half point coming from increased inequality, and only a quarter of a point is due to the “global savings glut,” the last of which is often cited by many economists as a major culprit for low long-term interest rates. On the investment side, the co-authors say three smaller factors are responsible for the decline of the long-term natural rate: the gap between the risk-free rate and the return on capital (0.7 points); a decline in the price of capital goods (0.5 points); and less public-sector investment (0.2 points).

Looking at these underlying factors, Rachel and Smith don’t expect a major increase in the long-term natural rate of interest anytime soon. Inequality doesn’t seem ready to decline quickly and they do not see more retirees boosting the savings rate significantly. If they are right then it means lower rates will make financing fiscal stimulus programs much easier, though it also will pose problems for conventional monetary policy. Fiscal and monetary policymakers should prepare for dealing with this reality for quite some time to come.

Must-Read: Daniel Davies: “The Absolute Height of Irresponsibility…

Posted on by Brad DeLong

Must-Read: I confess that I haven’t been following Brexit, because it has seemed to me that–whatever you think of the European Union–Britain’s strategy is obvious. It is large enough and important enough either to get an explicit carve out from European Union institutions it does not like (i.e., the Euro) or, if necessary, to nullify them. As long as it is in, it has a powerful voice to shape what happens in Brussels. Thus the right strategy is: Use your voice to pressure Brussels in positive directions, nullify the application inside Britain of European Union policies that are intolerable, and let the “leave” decision by theirs–make them throw you out if they don’t like your attitude.

“Leave” has always seemed to me to be a destructive attempt to summon the demons of nationalism, and “leave”‘s advocates have seemed to me to have careerist rather than public-spirited motivations…

Dan Davies: The absolute height of irresponsibility…:

Must-Read: Paul Krugman: Is Our Economists Learning?

Posted on by Brad DeLong

Must-Read: Paul Krugman: Is Our Economists Learning?: “Brad DeLong has an excellent presentation on the sad history of belief in the confidence fairy…

…and its dire effects on policy. One of his themes is the bad behavior of quite a few professional economists, who invented new doctrines on the fly to justify their opposition to stimulus and desire for austerity even in the face of a depression and zero interest rates.vOne quibble: I don’t think Brad makes it clear just how bad the Lucas-type claim that government spending would crowd out private investment even at the zero lower bound really was….

Two things crossed my virtual desk today that reinforce the point about how badly some of my colleagues continue to deal with fiscal policy issues. First, Greg Mankiw has a piece that talks about Alesina-Ardagna on expansionary austerity without mentioning any of the multiple studies refuting their results. And… as @obsoletedogma (Matt O’Brien) notes, he cites a 2002 Blanchard paper skeptical about fiscal stimulus while somehow not mentioning the famous 2013 Blanchard-Leigh paper showing that multipliers are much bigger than the IMF thought.

Second, I see a note from David Folkerts-Landau of Deutsche Bank lambasting the ECB for its easy-money policies, because: “by appointing itself the eurozone’s ‘whatever it takes’ saviour of last resort, the ECB has allowed politicians to sit on their hands with regard to growth-enhancing reforms and necessary fiscal consolidation. Thereby ECB policy is threatening the European project as a whole for the sake of short-term financial stability. The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics.” Yep. That ‘catharsis’ worked really well when Chancellor Brüning did it, didn’t it?…

[In] the 1970s… stagflation led to a dramatic revision of both macroeconomics and policy doctrine. This time far worse economic events, and predictions by freshwater economists far more at odds with experience than the mistakes of Keynesians in the past, seem to have produced no concessions whatsoever.

Must-Read: Paul Krugman: When Virtue Fails

Posted on by Brad DeLong

Must-Read: Paul Krugman: When Virtue Fails: “There are two narratives about the euro crisis….

…One… shocks happen, and when you establish a common currency without a shared government, you give countries no good way, fiscal or monetary, to respond…. The other narrative, however, favored by Berlin and Brussels, sees the whole thing as the wages of sin. Southern European countries behaved irresponsibly, and now they’re paying the price. What everyone needs to do, they say, is institute a reign of virtue, of fiscal responsibility with structural reform, and all will be well. So it’s important to note that the euro area’s locus of trouble is moving from the south to an arc of northern discomfort–to countries that don’t at all fit the stereotype of lazy southerners…. Finland is the new sick man of Europe. And the Netherlands… is doing slightly better than Italy but significantly worse than France and Portugal….

Finland has been hit by the fall of Nokia and the adverse effect of digital media on newsprint exports. The Dutch are suffering from a burst housing bubble, severe deleveraging, and an extra burden of austerity mania. But the overall point is that when things go wrong there’s no good answer. So maybe the woes of the euro reflect a bad system, not moral failure on the part of troubled nations? Das ist unmöglich!

Must-Reads: June 18, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Duncan Black: Sometimes We Get Results

Posted on by Brad DeLong

Must-Read: Duncan Black: Sometimes We Get Results: “Or, at least, play a part…

…Aside from yay team, it’s important to remember that this isn’t just some ideological thing, though it is that, too. It’s a recognition that the retirement crisis is here and it’s very real. I’d say there’s a broad enough consensus (does not include zombie-eyed granny starvers) that however we get to the goal, society should be structured in such a way that the vast majority of people hit retirement age with some economic stability. The current system has not done that, and whatever Exciting New Ideas we can come up with for the ideal retirement program (obviously I’m partial to plans which rhyme with brocial maturity), we have a crop of people in retirement or entering retirement soon who have no hope of coming up with that kind of post-retirement income stream. The only way to keep them off the streets, or for the lucky few working them until they die, is to provide non-trivial across the board benefit increases. And if you’re worried Donald Trump’s Social Security payment is too large (none of them are very large, so worrying about this is silly and the only people who claim to worry about such things are just using it as an excuse to not help anyone), you can just increase tax rates on rich people. That’s the easy way to means testing, and how a progressive tax system is supposed to work.

David Dayen: The Real Story Behind Obama’s Radical U-turn on Social Security: “The initial impulse from the Obama administration was to use Social Security cuts as a bargaining chip in a larger deal with Republicans…

…Grand bargain talks from 2011 to 2013 repeatedly invoked a different way to calculate the consumer price index (known as ‘chained CPI’), which would have resulted in $1,000 less a year for the average 85-year-old. Obama put chained CPI in his fiscal year 2014 budget. Contrary to some after-the-fact snickering, this was a very credible threat, and it allowed Republicans to point to a Democratic president favoring entitlement cuts. Only the Tea Party’s unwillingness to consider anything resembling a compromise saved retirees from cuts.

At first, liberal groups played defense on chained CPI, accustomed to mobilizing in opposition rather than staking out a bolder claim. But the expansion movement can really be traced back to one blogger: Duncan Black, popularly known as ‘Atrios,’ who waged an initially lonely crusade in a series of 2012 columns in USA Today, explaining why the retirement crisis was coming and how expanding Social Security represented the cleanest solution. Eventually, Black found adherents. The New America Foundation, in a groundbreaking proposal, called for an entirely new, $11,000-a-year universal benefit on top of Social Security. By mid-2013, most major liberal groups adopted an old bill from former Iowa Sen. Tom Harkin to modestly expand Social Security with more generous cost-of-living increases that better reflect rising medical costs for seniors. By 2014, chained CPI was out of the president’s budget. The reason Social Security expansion was a wedge issue waiting to be wielded is that it’s massively popular….

Now President Obama, who started this all by embracing the opposite position years ago, has explicitly endorsed the expansion of Social Security. This victory is a great credit to Duncan Black and everyone who moved a minority opinion in the corridors of power in the Democratic Party into the mainstream. There are wildly varying ways to claim support for Social Security expansion, ones that are modest and ones that are disruptive. But before the question, even among Democrats, was how much to cut Social Security; now the question is how much to expand it…. Politically, Republicans know that Social Security cuts equal political death. The same was true of opposition to same-sex marriage, which is why most of the GOP caucus just stopped talking about it. The path to Social Security expansion can’t go through the courts the way marriage equality did, and it will take a lot more work. But the center-left, in Washington and in the country, is on board. And that is a testament to the power of taking a stand and not relenting. Eventually, the world might just swing your way.

Slides For: The Confidence Fairy in Historical Perspective

Posted on by Brad DeLong

History of Economics Society :: June 17, 2016 :: Geneen Auditorium, Fuqua School of Business, Duke University, Durham, NC:

https://www.icloud.com/keynote/00033GAKBnIHC53Sv0UDhbqEw#2016-06-17_HES_Confidence_Fairy_in_Historical_Perspective | http://delong.typepad.com/2016-06-17-hes-confidence-fairy-in-historical-perspective.pdf

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Weekend reading: Job openings, the state of women, the No-Job-Loss criterion, and more!

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Job openings have grown much more quickly than new hires since the end of the Great Recession. Is that a sign of a “skills mismatch” in the labor market? Not likely. Evidence points to changes in how firms are posting jobs.

Tuesday afternoon Heather Boushey, Equitable Growth’s Executive Director and Chief Economist, addressed the White House United State of Women Summit on how women are reshaping the U.S. economy. Check out her remarks here.

Occupational licensing is under increasing scrutiny. One of the potential problems with licensing is that it may reduce geographic mobility as it hinders moving for a job. But new research doesn’t find much evidence for this hypothesis.

Getting people to respond to surveys can be tough. As the response rates to U.S. government surveys go down, the fact that hard-to-reach respondents are different from those who are easy to reach may pose some problems for official statistics.

A new Equitable Growth working paper from David Howell, Kea Fielder, and Stephanie Luce argues that the framing of the debate about the minimum wage should be changed from its current focus on preventing no job losses whatsoever.

The ups-and-downs for economic growth have an effect on income and wealth inequality, but how about the other way around? New research shows how economic inequality can influence the severity of recessions and overall fragility of the economy.

Links from around the web

Right now the amount of rent a federal housing voucher will cover is set by metropolitan level, despite the huge variation in housing costs within metros. Emily Badger describes a new rule that may end up setting voucher amounts by zip code and how that could improve life opportunities for low-income children. [wonkblog]

Why is productivity growth slow despite all the apparent innovation in technology in recent years? As Dietrich Vollrath argues, it may be because overall productivity growth is determined by productivity in the service sector where it’s hard to get productivity growth. [growth economics]

“The American workplace has basically become a Thunderdome where the victors are rewarded with long hours.” Jeff Spross writes about the rise of long hours in the U.S. economy as well as the distribution of those additional hours. [the week]

Low and even negative interest rates may be necessary to boost economic growth, but their effects on the banking sector are unclear. Maybe their even contributing to the “death of banking.” Kadhim Shubber looks at some evidence. [ft alphaville]

Speaking of low-interest rates, those negative interest rates may not be as low as you’d think. Remember, interest rates need to account for the pace of inflation as well. Peter Eavis notes that once you account for the deflation (negative inflation) in Europe, the cost of borrowing isn’t on the decline. [the upshot]

Friday figure

Figure from “The open questions about the rise of U.S. job openings” by Nick Bunker

Must-Read: David Glasner: What’s Wrong with Econ 101?

Posted on by Brad DeLong

Must-Read: David Glasner: What’s Wrong with Econ 101?: “The deeper problem… [with] Econ 101 is… fragility…

…Its essential propositions.. are deducible from the basic postulates of utility maximization and wealth maximization…. Not only are the propositions based on questionable psychological assumptions, the comparative-statics method imposes further restrictive assumptions designed to isolate a single purely theoretical relationship…. The bread and butter of Econ 101 is the microeconomic theory of market adjustment in which price and quantity adjust to equilibrate what consumers demand with what suppliers produce. This is the partial-equilibrium analysis derived from Alfred Marshall…. [But] all partial-equilibrium analysis relies on the–usually implicit–assumption that all markets but the single market under analysis are in equilibrium…. start[s] from an equilibrium state… [which] must be at least locally stable… restricted to markets that can be assumed to be very small relative to the entire system….

So the question naturally arises: If the logical basis of Econ 101 is as flimsy as I have been suggesting, should we stop teaching Econ 101? My answer is an emphatic, but qualified, no. Econ 101 is… still the most effective tool we have for systematically thinking about human conduct and its consequences, especially its unintended consequences. But we should be more forthright about its limitations and the nature of the assumptions that underlie the analysis…