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…

Barack Herbert Hoover Grover Cleveland Obama?: Hoisted from 6.5 Years Ago

Posted on by Brad DeLong

Hoisted from 6.5 Years Ago: Barack Herbert Hoover Grover Cleveland Obama?

UPDATE II: It seems that it is not a freeze in non-security discretionary outlays, but rather an overall cap on non-security discretionary–which is a diffrent animal. And it seems that it is not an overall cap on non-security discretionary outlays, but instead an overall cap on non-security discretionary authority–which is a different animal. And it seems that it is not a binding cap on overall non-security discretionary: that ARRA extensions and other job-boosting deficit-spending measures, plus other “emergencies”, are exempt…

UPDATE An administration source says that he believes that discretionary non-security is not frozen at 2010 ex-stimulus levels for 2011, but is instead bumped up from 2010 to 2011–that the freeze part applies to fiscal 2012, 2013, and 2014.

For some time I have been worried about fifty little Herbert Hoovers at the state level. Right now it looks like I have to worry about one big one:

Jackie Calmes: Obama to Propose Freeze on Some Spending to Trim Deficit: President Obama will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit, administration officials said Monday.

The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address on Wednesday and of the budget he will send to Congress on Monday for the fiscal year that begins in October.

The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, from air traffic control and farm subsidies to education, nutrition and national parks. ut it would exempt the budgets for the Pentagon…. The estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional debt the government is expected to accumulate over that time…

There are two ways to look at this. The first is that this is simply another game of Dingbat Kabuki. Non-security discretionary spending is some $500 billion a year. It ought to be growing at 5% per year in nominal terms (more because we are in a deep recession and should be pulling discretionary spending forward from the future as fast as we can)–that’s only $25 billion a year in a $3 trillion budget and a $15 trillion economy.

But in a country as big as this one even this is large stakes. What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion–employment lower by 350,000 or so–and in 2012 GDP will be lower by $70 billion–employment lower by 700,000 or so–than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year…)

And what do we get for these larger output gaps and higher unemployment rates in 2011 and 2012? Obama “signal[s] his seriousness about cutting the budget deficit,” Jackie Calmes reports.

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit–either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits–come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way.

As Jackie Calmes writes, this isn’t a real plan to control the deficit but a “symbolic” one:

[O]ne administration official said that limiting the much smaller discretionary domestic budget would have larger symbolic value. That spending includes lawmakers’ earmarks for parochial projects, and only when the public believes such perceived waste is being wrung out will they be willing to consider reductions in popular entitlement programs, the official said. “By helping to create a new atmosphere of fiscal discipline, it can actually also feed into debates over other components of the budget,” the official said, briefing reporters on the condition of anonymity.

As another deficit-hawk points out: it would be one thing to offer a short-term discretionary spending freeze (or long-run entitlement caps) in return for fifteen Republican senators signing on to revenue enhancement triggers. It’s quite another to negotiate against yourself and in addition attack employment in the short term. The fact that the unemployment rate is projected to remain stable over the next year means that there is a 30% chance it will go down, a 40% chance it will stay about the same, and a 30% chance that it will go up–and whatever it turns out to do, the administration’s budget has just given it an extra bump upwards.

Jonathan Zasloff:

Obama’s Self-Inflicted Lobotomy Proceeds Apace « The Reality-Based Community: I’m trying to think of what could possibly be a worse plan.  Let’s see: we might be entering a double-dip recession and unemployment is in double-digits, and you are going to freeze spending?  What in God’s name are they thinking? Perhaps the worst thing about this is how it cedes the ideological ground to the Republicans.  At some point someone must make an argument for government.  I think it was former Senator Paul Simon who said: “give the voters a choice between a Republican and a Republican and they will choose a Republican every time.”

What next?  The rotting corpse of Andrew Mellon as Treasury Secretary?  Or do we already have that?

How wealth and income inequality may affect U.S. economic downturns

Posted on by Bridget Ansel
In this March 15, 2009 photo, a man walks through his empty living room as he vacates his home in Culver City, California after losing his property in foreclosure.

In a recent poll of prominent economists, the IGM Forum at the University of Chicago Booth School of Business asked about the effects of unconventional U.S. monetary policy on the level of income inequality in the country. The respondents weren’t very confident in their answers, but the question is a sign of interest in the relationship between inequality and macroeconomic performance. Policymakers and economists often investigate about how growth and recessions affect inequality, but are also increasingly wondering about how inequality might affect growth and stability. One of the most interesting areas of research in this vein, however, explores how income and wealth inequality might shape recessions. Two new papers offer interesting investigations into this question.

The first paper is a National Bureau of Economic Research working paper, “Microeconomics and Household Heterogeneity,” which was released earlier this week by economists Dirk Krueger of the University of Pennsylvania, Kurt Mitman of Stockholm University and Fabrizio Perri of the Federal Reserve Bank of Minneapolis. The paper, as you can guess from the title, focuses on how differences among households affect the macroeconomy. To be clear, the paper doesn’t try to understand if inequality causes recessions, but rather how much worse does a recession get when wealth inequality is high.

According to the model built by Krueger, Mitman, and Perri, higher levels of inequality result in more severe economic downturns. When there are more households with no net worth then the response of households to the shock of a recession is more acute as these households pull back significantly on consumption. This means that the level of wealth held by those at the bottom at the income spectrum may matter greatly when a recession occurs.

The second working paper is from economist Jeffery Thompson of the Board of Governors of the Federal Reserve System. He doesn’t directly explore the impact of economic inequality on recessions but rather how income inequality specifically can set up the conditions that affect recessions. The paper looks at how income inequality might affect the amount of household borrowing, focusing on borrowing levels in different U.S. states. Some papers hypothesize that “keeping up with the Jones” might mean that higher levels of wealth and income inequality cause more borrowing by households not on the top rungs of society. Thompson’s paper finds some suggestive evidence for this hypothesis, identifying a strong correlation between higher incomes among the top 5 percent of income earners at the state level and increasing mortgage borrowing. This increased mortgage exposure can have consequences as economic research already shows that increased household debt can significantly affect the macroeconomy.

The two papers, side by side, tell different stories. The first paper argues that wealth inequality may determine the severity of a recession. The second shows how income inequality might affect the borrowing of the broader population, which may affect the fragility of the economy. But these stories are probably not the only possible ones in this area. So while these papers are a good sign for policymakers and academics interested in the potential effects of inequality on economic stability, clearly more research in this area is needed.

Must-Read: Matthew Yglesias: Financial markets are begging the US, Europe, and Japan to run bigger deficits

Posted on by Brad DeLong

Must-Read: Matthew Yglesias: Financial markets are begging the US, Europe, and Japan to run bigger deficits: “The international financial community wants to lend money this cheaply…

… [so] governments should borrow money and put it to good use. Ideally that would mean spending it on infrastructure projects that are large, expensive, and useful–the kind of thing that will pay dividends for decades to come…. But if you don’t believe there are any useful projects or if your country’s political system is simply too gridlocked to find them, there are easy alternatives. Do a broad-based tax cut…. The opportunity to borrow this cheaply (probably) won’t last forever, and countries that boost their deficits will (probably) have to reverse course, but while it lasts everyone could be enjoying a better life instead of pointless austerity.

Must-Reads: June 16, 2016

Posted on by Brad DeLong

Should Reads:

  • Paul Krugman: Bondage Fantasies at the WSJ: “Back in early 2009… rising rates, the paper declared, were a sign that all-wise markets feared budget deficits and inflation… government was the problem. Seven years on… [has] the Journal has apologized for getting it all wrong?… Hahahahaha. Instead… low rates are not a sign that governments should build infrastructure, or that inflation is too low. They ‘reflect a lack of confidence in options for private investment.’ So rising rates show that government is the problem, and falling rates also show that government is the problem.”
  • John Holbo: Walton’s Republic
  • Cardiff Garcia: Reminder: Macro Live, Janet Yellen presser edition, starting at 1:50pm EST: “Matt Klein and I will be joined by Alex Scaggs…. For some light pre-statement reading, we recommend: Recession Watch and the Global Reach of Fed Policy, by David Beckworth; Five Questions for Janet Yellen, by Tim Duy; QE, Basel III and the Fed’s New Target Rate, by Zoltan Poszar; The Fed is making the same mistakes over and over again, by Larry Summers”
  • Matt Klein: Markets keep fighting the Fed, will the Fed keep letting them win?: “In the past, the Fed has reacted to diminished expectations for the longer-term level of short-term interest rates by adjusting its own forecast. We’ll be sure to check if the pattern continues today.”

Must-Read: FOMC: Press Release–June 15, 2016

Posted on by Brad DeLong

Must-Read: Somebody really should have dissented from this press release: if 0.5% is the forecast of the appropriate Fed Funds rate in 2018, zero is the appropriate Fed Funds rate now.

But who? Charlie Evans or Lael Brainard? I would bet Lael, based solely on the Fed convention that a Governor’s dissent is a much bigger deal than a Regional Bank President’s dissent. But that is only a guess: I do not know…

Https www federalreserve gov monetarypolicy files fomcprojtabl20160615 pdf

FOMC: Press Release–June 15, 2016: “The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up…

…Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months…. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term…. Against this backdrop, the Committee decided to maintain the target range for the federal funds rate…. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation…. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data…

Must-Read: Gauti B. Eggertsson, Neil R. Mehrotra, Sanjay R. Singh, and Lawrence H. Summers: A Contagious Malady? Open Economy Dimensions of Secular Stagnation

Posted on by Brad DeLong

Must-Read: Gauti B. Eggertsson, Neil R. Mehrotra, Sanjay R. Singh, and Lawrence H. Summers: A Contagious Malady? Open Economy Dimensions of Secular Stagnation: “We consider an overlapping generations, open economy model of secular stagnation…

…and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries…. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor…. Competitiveness policies, including structural labor market reforms or neomercantilist trade policies, are also beggar-thy-neighbor in a global secular stagnation…

Are U.S. government economic surveys reaching the right mix of respondents?

Posted on by Bridget Ansel

New research finds that people’s willingness or ability to respond to a government survey is related to their working status, possibly biasing the survey results.

Surveys conducted by U.S. government statistical agencies are not an inherently exciting topic. Most people are fine knowing that the federal government calculates the unemployment rate. They might even care to know that the survey used to calculate that rate is known as the Current Population Survey, though that might be stretching it. Beyond that, the specifics of survey methodology aren’t going to grab headlines anytime soon.

But policymakers depend upon these statistical surveys to inform them about the U.S. economy, which means they should be concerned about potential bias in the data. Such bias isn’t intentional, instead stemming from the reality that sometimes it’s hard to get people to sit down for an interview for a survey. After all, for a survey to be able to say anything accurate about the entire population, it has to be representative. This is why polls and surveys will get reweighted to account for the fact that the demographics of the people they interviewed won’t be exactly the same as the country as a whole. Maybe they interviewed a lower percentage of African Americans than the national percentage or they interviewed relatively more women. The final results will account for that difference.

But what if the survey doesn’t account for some differences among workers that could bias statistics? According to a new research paper, such bias may exist in some important government surveys. The new paper by economists Ori Heffetz and Daniel B. Reeves at the National Bureau of Economic Research shows that there’s a relationship between how easy it is to get a person to respond to certain survey and their answers to the questions in the survey. In other words, the willingness or ability to respond to a survey is a characteristic of respondents that survey designers should consider because it skews results.

The economists consider three surveys—the Current Population Survey, the Consumer Expenditure Survey, and Behavioral Risk Factor Surveillance System—but let’s look at the relatively more familiar Current Population Survey for an example of the dynamics they examine. The CPS keeps track of how many times it takes to contact a respondent for an interview (one time, two times, or three or more times). Heffetz and Reeves look to see if there is any relationship between the difficulty of reaching someone and their answers about their working status and whether they are unemployed. They find that there is a relationship—people who are harder to reach are more likely to be in the labor force and have a job. In other words, the labor force participation rate for these respondents is higher and the unemployment rate is lower.

Now how does this produce a bias? Well, if we think of non-respondents as people who are extremely hard to contact then this would mean they are likely to have higher labor force participation rates and lower unemployment rates. Of course, without additional information on non-respondents, the authors can’t directly verify this assumption. But if this assumption is true, it means that as the response rate for surveys such as the Current Population Survey and other government surveys decline—as they have been in recent years—then this bias will increase. For policymakers and scholars interested in having unbiased economic data, this trend presents quite an unfortunate problem.

Must-Read: Y. Berman, O. Peters and A. Adamou: Far from Equilibrium: Wealth Reallocation in the United States

Posted on by Brad DeLong

Must-Read: Well, well, well–since the 1980s modeling the U.S. wealth distribution as an endless non-ergodic inegalitarian spiral seems to fit rather well. That’s a genuine surprise…

Y. Berman, O. Peters and A. Adamou: Far from Equilibrium: Wealth Reallocation in the United States: “We fit observed distributions of wealth–how many people have how much–to a model of noisy exponential growth and reallocation…

…Everyone’s wealth is assumed to follow geometric Brownian motion (GBM), enhanced by a term that collects from everyone at a rate in proportion to his wealth and redistributes the collected amount evenly across the population. We use US data from 1917 until 2012. Firstly, we find that the best-fit reallocation rate has been negative since the 1980s, meaning everyone pays the same dollar amount and the collected amount is redistributed in proportion to his wealth, a flow of wealth from poor to rich. This came as a big surprise: GBM on its own generates indefinitely increasing inequality, and one would expect this extreme model to require a correction that reduces the default tendency of increasing inequality. But that’s not the case: recent conditions are such that GBM needs to be corrected to speed up the increase in wealth inequality if we want to describe the observations. Secondly, our model has an equilibrium (ergodic) distribution if reallocation is positive, and it has no such distribution if reallocation is negative. Fitting the reallocation rate thus asks the system: are you ergodic? And the answer is no. With current best-fit parameters the model is non-ergodic, and throughout history whenever the parameters implied the existence of an ergodic distribution, their values implied equilibration times on the order of decades to centuries, so that the equilibrium state had no practical relevance. http://arXiv:1605.05631