Remind Me, Again: What Is Supposed to Drive Full Recovery?

Posted on by Brad DeLong

Take “full recovery” to be a recovery to 87% (not 89%) in the share of 25 to 54-year-old males at work:

Graph Employment Rate Aged 25 54 Males for the United States© FRED St Louis Fed

Or a recovery to 72% (not 74%) in the share of 25 to 54-year-old females at work:

Graph Employment Rate Aged 25 54 Females for the United States© FRED St Louis Fed

What could produce such a thing? Exports are already very strong, and with both Europe and Japan seeking additional monetary expansion relative to the U.S. the large decline in the dollar needed to further boost exports does not seem to be in the cards. Equipment investment is strong, especially since we would expect it to be 1%-point or so below normal given the slackness in the economy: low employment and low growth should mean low equipment investment as well. And the kind of inflationary expectations that would lead businesses to think they should build capacity ahead of demand seems unlikely to proceed–although it might follow–full recovery. And we do not see consumption spending filling the remaining output gap either, for consumer optimism seems unlikely the absence of the kind of job security that is found only in the tight labor market that would follow full recovery.

FRED Graph FRED St Louis Fed

That leaves us with only two possibilities: The first is a housing boom–or, rather, a restoration of investment in single-family housing to its normal share, or an unprecedented multifamily unit housing construction boom. The second is a restoration of government purchases to their normal share of GDP.

Anyone want to give odds on those two?

Must-Read: Marshall Steinbaum: Would Graduating More From College Reduce Inequality?

Posted on by Brad DeLong

Must-Read: Marshall Steinbaum: Would Graduating More From College Reduce Inequality?: “All of these phenomena suggest that the labor market isn’t working for most employees…

…problems that aren’t confined to those without a college education—and that suggests the problem isn’t that too few people have college degrees. Rather than focus on education attainment as the solution to inequality, it’s time for policy-makers to move on from the race between education and technology and focus on our stagnant labor market. As Summers said, ‘the core problem is that there aren’t enough jobs.’ The key to reducing inequality is more jobs and a higher demand for labor. In the absence of more jobs, heroic assumptions about educational improvement are likely to deliver only modest economic benefits.

Must-Read: Financial Times: Cameron Points Migrant Talent Towards the Exit

Posted on by Brad DeLong

Must-Read: Financial Times: Cameron Points Migrant Talent Towards the Exit: “One of the canards of British political discourse is that no one dares talk frankly about immigration…

…Mr Cameron and Theresa May, his home secretary, every year refute this, delivering speeches about controlling the flow of people to Britain’s shores. Welfare rules have been tightened, “bogus colleges” closed down and charges introduced for users of the National Health Service from overseas…. The public’s concern with immigration is easy to explain…. When people born overseas are adding 0.5 per cent to a country’s population every year, the voters have a right to ask why….

For all the condemnation uttered by economists, Mr Cameron’s immigration policy has not, yet, dented UK growth. This may now change. The reason immigration presents a weak flank for the Tories is explained by how they let the issue be framed. In 2010 they promised to reduce net migration “to the tens of thousands”, and have repeated the pledge ever since, despite little sign that the target would be hit. Repetition of an unreachable target gave malcontents a stick with which to beat the prime minister…. Lacking the tools to achieve his goal, Mr Cameron is forced to show how hard he intends to try. This means new rules against offering accommodation, bank accounts or work to illegal immigrants. How enforceable or effective these will be is unclear. To threaten to confiscate the wages of illegal workers borders on the cruel….

But worse is an idea for curtailing the inflow of talent to Britain. Mr Cameron somehow believes that firms barred from employing skilled migrants will react by training up home-grown workers instead. This sort of conceit inspired socialist ministers half a century ago to restrict imports, hoping thereby to incubate a domestic alternative. Usually the business went overseas or simply withered. Britain is fortunate to import foreign workers more skilled than the average. A prime minister set on “winning the global race” should know that hiding from the competition dulls a country’s edge. Its domestic population will not grow any sharper when shielded from the world’s brightest and best.

Must-Read: Ashish Jah: Readmissions Penalty at Year 3: How Are We Doing?

Posted on by Brad DeLong

Must-Read: Ashish Jha: Readmissions Penalty at Year 3: How Are We Doing?: “A few months ago, the Centers for Medicare and Medicaid Services (CMS)…

…put out its latest year of data on the Hospital Readmissions Reduction Program (HRRP)… the program within the Affordable Care Act (ACA) that penalizes hospitals for higher than expected readmission rates. We are now three years into the program and I thought a quick summary of where we are might be in order. I was initially quite unenthusiastic about the HRRP… but… have come to appreciate that as a utilization measure, it has value. Anecdotally, HRRP has gotten some hospitals to think more creatively…. A few years into the program, the evidence seems to be that the program is working – readmissions in the Medicare fee-for-service program are down about 1.1 percentage points nationally. To the extent that the drop comes from better care, we should be pleased….

In year 3, CMS expanded the conditions for which hospitals were being penalized to include COPD as well as surgical readmissions, specifically knee and hip replacements…. Here’s my take. Most hospitals got penalties in 2015 and a majority have been penalized all three years…. Safety-net hospitals are still getting bigger penalties, presumably because they care for more poor patients (who are more likely to come back to the hospital) but the gap has narrowed. This is good news. If we can move forward on actually adjusting the readmissions penalty for SES… and continue to make headway on improving risk-adjustment for medical readmissions, we can then evaluate and penalize hospitals on how well they care for their patients. And that would be a very good thing indeed.

John Maynard Keynes on the Necessity of a Generous Peace After World War I

Posted on by Brad DeLong

Over at Grasping Reality: Note to self:

Perhaps I imposed too much of my own preconceptions on Skidelsky. But I had always seen Skidelsky as arguing that Keynes saw:

  1. France as dominated by politicians—Clemenceau, Poincare, Laval, plus Moreau–hostile to European settlement and recovery, in part because a rapidly recovering Europe would soon be one with a much more powerful and dominant Germany.
  2. Germany as tenuously ruled by proto-Adenauers trying to retain power under immense pressure from both the anti-liberal left and the anti-liberal right.
  3. Failure to restore prosperity as likely to unleash even worse things than World War I.
  4. Hence a tilt to Germany and its proto-Adenauers and against France and its poiticians in the hope of making the Germany that would dominate Europe a liberal one and keeping France too weak to impede sensible reparations and economic policies…

Cf: Stephen A. Schuker (2014): J.M. Keynes and the Personal Politics of Reparationshttp://www.tandfonline.com/loi/fdps20

John Maynard Keynes: The Economic Consequences of the Peace: “Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature

…of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family.

Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built. But the spokesmen of the French and British peoples have run the risk of completing the ruin, which Germany began, by a Peace which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organization, already shaken and broken by war, through which alone the European peoples can employ themselves and live….

Europe is solid with herself. France, Germany, Italy, Austria and Holland, Russia and Roumania and Poland, throb together, and their structure and civilization are essentially one. They flourished together, they have rocked together in a war, which we, in spite of our enormous contributions and sacrifices (like though in a less degree than America), economically stood outside, and they may fall together. In this lies the destructive significance of the Peace of Paris. If the European Civil War is to end with France and Italy abusing their momentary victorious power to destroy Germany and Austria-Hungary now prostrate, they invite their own destruction also, being so deeply and inextricably intertwined with their victims by hidden psychic and economic bonds….

Paris was a nightmare, and every one there was morbid. A sense of impending catastrophe overhung the frivolous scene; the futility and smallness of man before the great events confronting him; the mingled significance and unreality of the decisions; levity, blindness, insolence, confused cries from without,—all the elements of ancient tragedy were there. Seated indeed amid the theatrical trappings of the French Saloons of State, one could wonder if the extraordinary visages of Wilson and of Clemenceau, with their fixed hue and unchanging characterization, were really faces at all and not the tragi-comic masks of some strange drama or puppet-show….

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilization and the progress of our generation. Even though the result disappoint us, must we not base our actions on better expectations, and believe that the prosperity and happiness of one country promotes that of others, that the solidarity of man is not a fiction, and that nations can still afford to treat other nations as fellow-creatures?…

U.S. scholars need access to public and private big data

Posted on by Casey Schoeneberger

Big Data holds the promise of a wealth of information to uncover new insights into how our economy works but also the peril of exposing private information that could harm individual citizens. We all know that commercial ventures primarily use data gathered on their customers to track their purchases and spending habits—promising to varying degrees to protect such individual information—but now some private companies are allowing select scholars access to this information for research usage after the companies “anonymize” it.

One case in point is the JPMorgan Chase Institute, which last week unveiled its first report on the financial habits of retail banking customers at JPMorgan Chase & Co. The new research institute tapped into the commercial banking arm’s internal administrative data to determine how income and consumption fluctuate on a monthly and yearly basis. These findings will have important policy implications for lawmakers seeking to improve citizen’s financial well-being.

Researchers are constantly looking for new sources of information in order to answer the most challenging economic questions. But it is important to understand that by definition, JPMorgan Chase’s data can only tell us about their own customers. It cannot give us insight into the whole U.S. population—or even specific demographic groups. To create effective policies, we must gather information on all banking customers, not just those from one bank.

Still, researchers are flocking to private sources of data such as those released by JPMorgan Chase as well as credit-reporting companies. Yet the private sector is not the sole source of administrative data out there. Not by a long shot. The U.S. government holds tax records, school district filings, social security information—the list goes on—in order to administer its tax and benefit programs. Such recordkeeping has gone on for decades, but recent technological advances have made it easier to process these large datasets. Most importantly, government administrative data is representative of the entire population.

But because of perfectly reasonable privacy concerns this data is difficult to access, making a critical source of information—one that could allow us to investigate deep into our economy and provide better questions for policymakers to consider. But when handled correctly, these privacy concerns can be resolved. Those who are able to access the data have done amazing things. Work done using information from the U.S. Internal Revenue Service, for example, has transformed our understanding of the composition of incomes for those at the very top of the income ladder. And using administrative data, Harvard University economics professor Raj Chetty has repeatedly illustrated the extent to which your family and place of birth shape your success later on in life.

Such findings, however, are limited to the few scholars who have the means to gain access to this information. Even Chetty, the most well-known user of government data, must occasionally rely on European countries—many of whom have created secure data systems for researchers—to do his research on retirement subsidies, unemployment insurance, the effects of taxes on labor supply, among others.  Such research tells us a great deal about European economies and their labor markets, but cannot directly translate into usable information for policymakers in the United States—a tragedy for U.S. researchers and policymakers alike.

Because scholars do not have the necessary access to U.S. government data in the same way that European countries provide access, it is welcome indeed that researchers can turn to the private sector. But this is a temporary solution to a much bigger problem. Yes, privacy surrounding government data is an issue. At the same time, we tacitly allow private companies to track our information with little vocal apprehension. What companies find out about us—and in the case of banks, they find out quite a lot—can be used to answer important economic and behavioral questions, but also by firms seeking to expand their profits.

Without full access to public administrative data, U.S. researchers cannot explore Big Data in pursuit of meaningful research. And firms like JPMorgan Chase cannot completely fill that gap. We need both public and private sources of information and, right now, public access is far behind.

 

 

Monday Smackdown Watch: Robert Waldmann Defends Janet Yellen from Brad DeLong

Posted on by Brad DeLong

Robert Waldmann: In Which I try to Defend Janet Yellen from Brad DeLong: “Fed Chair Janet Yellen said, among other things:

For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term. After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual. The various headwinds that are still restraining the economy…

The news is that “some point this year” means “not next month” A possible increase in June 2015 used to be discussed a lot.

Brad DeLong argues that raising rates “sometime this year” would be crazy… the speech includes no consideration of the risk of hitting the zero lower bound due to a shock after raising rates…. I’m going to go to a long boring comment. The main point, if any, is that a speech describing a sub-optimal plan for interest rates (as a function of future information) may be an optimal speech. But I also type about optimal control (both of us are trying to do math in our heads using plain English). I want to stress here that I think Brad is making a very important very valid point….

This is a public speech. I have a story for why she thinks it was optimal. It goes as follows:

  1. Remember how the markets freaked out when we said we would taper QE3 ? We promised we weren’t going to raise the target federal funds rate and federal funds futures freaked fiercely. It is clear that lots of investors are just waiting for us to turn back into normal central bankers all of a sudden.

  2. Sooner or later, we will have to raise the federal funds rate. There is a risk that investors will assume that we are going to turn into Trichet. This would be very bad. So we have to start now saying it won’t be a huge deal when we raise the target a bit.

I think she is saying: We aren’t going to do anything dramatic and scary. Don’t be scared by anything we do. Don’t panic.

It seems to me to be optimal control to say that. The instrument I am discussing is the speech not the federal funds rate.

Second there is the goal of also proving that she is not a raging reincarnation of Rudolf Havenstein. Repeated statements that even discussing raising rates is insane are accurate, but would infuriate powerful people. It is useful for Yellen to Clinton and say “I feel your desire to inflict pain.”

Third I don’t see why the rate increase is large when, finally, an increase is optimal…. Say the month of Austember is the one when it should raise the rate, In constrast during Stimember (the month before Austember) the target FF rate should be 0-0.25% . There must be two such months if 100% inflation is not optimal. From Stimember to Austember the only change is an 0.1% increase in the core inflation rate. This can have only a small effect on the marginal cost of inflation (which I consider trivial at 4% inflation) and also only a small effect on the expected present discounted cost of the future ZLB (being the value of the option to set interest rates below zero which we wish we had). All has changed little so the optimal federal funds rate can’t be high…. How can it be sensible to raise it to 1%?

It doesn’t jump: but when you have a steadily-improving economy then, relative to the no-ZLB bound, optimal control tells you to move late, and then move fast so that you coverage to the no-ZLB rate as the chance of hitting the ZLB again drops from high to near-zero:

Lifestream vpdoc Noted for Your Nighttime Procrastination for May 25 2015

Things to Read on the Morning of May 25, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Over at Equitable Growth—The Equitablog

Plus:

And Over Here: