…Purchases will be composed of sovereign bonds and securities from European institutions and national agencies. The ECB Governing Council imposed limits to ensure that the Eurosystem will not breach the prohibition on monetary financing. However, these limits will constrain the size and duration of the programme…. The PSPP profits that will ultimately be repatriated to national treasuries will be small. This was to be expected, given current very low yields…
The high economic costs of incarceration
The United States leads the world when it comes to incarceration rates. According to one estimate, there are 2.4 million individuals in U.S. jails or prisons—a massive number that stands in sharp contrast to the decline in violent crimes over the past four decades. The increased incarceration also caused a steep rise in the imprisonment of so called marginal defendants, or those who are on the edge of going to jail or staying out of it. The costs of this incarceration rate to the U.S. economy are strikingly large, according to a new paper harnessing a large and impressive data set.
The paper, by Michael Mueller-Smith, a PhD candidate at Columbia University, looks specifically at the effects of incarceration in Harris County, Texas, which includes the city of Houston. While the paper only looks at one county, the data set Mueller-Smith uses covers every single defendant in the county. The data cover all 1.1 million defendants from 1980 to 2009. The data also connect via court records to other data that reveal information about future criminal activity, wages, reliance on government assistance programs such as the Supplemental Nutrition Assistance Program (known as food stamps), and marriage records.
Mueller-Smith’s impressive array of data enables him to demonstrate causality due to the sentencing procedures used by Harris County. The county court system randomly assigns defendants to courtrooms, judges, and prosecutors. Because judges and prosecutors vary quite a bit in their desire or willingness to put defendants in jail or prison, this variation (which is determined randomly) lets Mueller-Smith identify the causal effects of incarceration.
In his calculations, Mueller-Smith focuses on the effects of incarceration on the marginal defendant, which means his study factors out the kind of defendants that society expects to be incarcerated, such as rapists or murders, so that he can zero in on those who commit crimes that could be punished with probation.
Given Texas’s commitment to be “tough on crime,” it’s likely that the marginal defendant in Harris County is committing crimes deemed less dangerous in other legal jurisdictions around the country. This means Mueller-Smith’s estimates might be biased toward finding more costs to incarceration. Furthermore, the research literature on the labor market effects of incarceration are mixed.
Even so, his findings are striking. He finds that the incarceration of marginal defendants increases their future criminal activity, reduces their employment prospects, increases their use of public benefits, and reduces their opportunities to get or remain married.
Specifically, Mueller-Smith finds that each additional year of being incarcerated increases the probability of facing a charge for a new crime by 5.6 percentage points per quarter after release. And he finds that released individuals are more likely to escalate the type of crime they commit after release, such as moving up to theft and burglary or drug crimes.
Incarceration also causes severe labor market problems for these marginal defendants. For each year a person is in jail or prison, their employment drops by 3.6 percentage points. For those convicted of a felony, the drop is even more severe: five years after release their employment is reduced by 24 percent. These marginal defendants also come to rely more on public assistance programs such as food stamps, another sign of a fragile attachment to the labor force.
The effects bleed into the defendant’s family life, too. Mueller-Smith finds that incarceration reduces marriage rates for younger defendants and boosts divorce rates for older defendants.
Putting all these effects together, Mueller-Smith calculates the social cost of incarceration. According to his estimate, one year of prison or jail for a marginal defendant has a social cost of ranging from $56,200 to $66,800.
Incarceration is supposed to punish convicted criminals but also reform prisoners to help them prepare for a life after jail or prison. Mueller-Smith’s results show that incarceration severely harms those marginal defendants who are best suited to be rehabilitated by reducing their labor market opportunities, damaging their families, and increasing their criminal activity.
Today’s Must-Must-Read: Matt O’Brien: What People Talk About When They Talk About Zero Interest Rates
Today’s Must-Must-Read: This is an important point that is worth saying as often as necessary–perhaps as often as possible:
…At least that’s what Wall Street thinks. Gillian Tett… tell[s] us… they think in between their flights from Davos to Aspen… that:
ultra-low interest rates have a nasty habit of distorting markets in all manner of unexpected ways, all over the world… [in the money in] U.S. activist funds, angel investments, laying down wine or jumping into the art market.
In other words, we should worry that billionaires are paying so much for Picassos and pinot noirs as part of the hyperinflation in the Hamptons. Now it’s true that lower interest rates make asset prices go up, but ‘distorts’ is a funny way of putting that. After all, we don’t say that higher interest rates ‘distort’ asset prices down…. [If] rates are inappropriately low… where’s the inflation? It’s not like central banks can keep rates lower than they should without prices going higher….
It’s the economy, not interest rates, that are distorted. People want to save more than they want to invest, and that is why rates are so low…. The mistake that Wall Street, and even some famous economists, make is… they think that lower rates are what’s messing up the economy, rather than reflecting the fact that it’s already messed up….
Just look at the countries that have tried, and failed, to keep rates up after they’ve hit zero: Japan, Europe, and Sweden. Each of them told themselves a story about why they needed to hike rates—they thought they’d recovered, or inflation was coming to get them, or maybe a bubble–and they each did so…. Well, it turns out that raising rates when your economy is still kind of weak isn’t a good idea. All of them ended up having to cut rates back down to zero, and then start buying bonds with newly-printed money…. It’s not the Fed’s job to worry about the Billionaire Price Index. It’d be… unnatural if it did.
The neutral or natural rate of interest is the rate of interest that balances desired savings with planned investment when the economy is at full employment, and when people’s expectations of the prices and inflation rates which they will be able to charge or have to pay are by-and-large correct. That is how things have been ever since Knut Wicksell started this particular sub literature of economics back in 1898. As John Maynard Keynes wrote back in 1923, having the market interest rate below or above the natural interest rate corresponds to monetary policy that produces a money stock that is either inappropriately high or inappropriately low, and generates:
inflation [which] is unjust and deflation [which] is inexpedient. Of the two perhaps deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned…
The right way to think about it is: Yes, interest rates are scarily low right now. But they are so because the Federal Reserve and other central banks are trying to mitigate the damage caused by the fact that the entire global macroeconomy is so distorted–inappropriate fiscal austerity, a global savings glut coming from emerging markets and elsewhere, secular stagnation, and a clogged housing-finance channel.
Afternoon Must-Read: Jared Bernstein: The U.K. vs. the U.S. Minimum-Wage Debate
…in blocking an increase in the minimum, at least at a national level. House Speaker John A. Boehner (R-Ohio) consistently rails against the policy as a ‘job killer.’ There’s even a whole ‘think tank,’ backed by the fast-food lobby, that exists to oppose minimum-wage increases and refute research like that of Manning…. What is it about our economic debates that often insulates them from facts? Why do views that are known to be wrong or overblown–it’s not that the minimum wage never costs anyone a job, but that the beneficiaries far outweigh the losers–continue to get an equal hearing?… Media outlets and journalists whose job it is to report on these issues do not want to be labeled as biased…. You can blame the news media for this…. But many others don’t have the time or the firepower to figure out who’s right. Money interacts in important ways here, more so here than in the United Kingdom and other advanced economies…. U.K. policymakers have of course shown themselves capable of making bad economic moves based more on ideology than fact…. But at least regarding the minimum wage, policy there has in no small part been driven by facts, compromise, collaboration and acknowledgement that in the face of those facts, a formerly held position was wrong. Why, oh why, does that sound so incredibly out of reach in today’s American politics?
Afternoon Must-Read: Helaine Olen: Poor Stories from [David] Brooks and [Ross] Douthat
…and certainly not one you’d like to think is based on a true story…. An alcoholic father… a mother way too overwhelmed… to show much love to her children. A pervert… attempts a sexual assault on the prepubescent Francie…. The Nolan family savings account… is constantly being raided. Francie’s Aunt Evy’s husband abandons his family. Another aunt ‘gets around’…. Her parents… fake an address in a better neighborhood… forced to drop out of school when her father dies and her mother is unable to support her family…. [A] memoir by Laura Ingalls Wilder… features wife beaters and murderers… Pa skipping out of town without paying the rent. Publishers of the 1930s passed on Wilder’s true-life tale, only responding when she and her daughter Rose Wilder Lane (who complained in her diary of growing up with ‘no affection, poverty, inferiority’) turned the rejected manuscript into the more homespun Little House in the Big Woods…. Even at the time, few readers wanted to hear the truth. Just as our own age does, the late 19th and early 20th century attracted a goodly share of two-bit moralists who confused cause and effect when it came to the lives of the lower classes…. When the young Francie Nolan writes about the truth of her life in A Tree Grows in Brooklyn, the response from her teacher is less than sympathetic: ‘Drunkards belong in jail not in stories. And poverty. There’s no excuse for that. There’s work enough for all who want it. People are poor because they’re too lazy to work. There’s nothing beautiful about laziness.’… This world receded, not because post-war Americans suddenly acquired morals, but because they achieved prosperity, not to mention a social safety net…. The second Gilded Age is imitating the first. None of this history features in the columns of Brooks, Douthat or others like them, however, who all warble on about an imaginary past.
Marking-One’s-Beliefs-to-Market Should Be a Collective Endeavor…: Focus
Apropos of my too-hot-for-Equitable-Growth, Time for a Rant!: Why Oh Why Cannot We Have Better Economists?, Paul Krugman inquires asks whether:
have forgotten, or perhaps never noticed, was Levine’s rant against me back in 2009, accusing me of failing to understand the depth and power of modern economic analysis.
I cannot remember reading it. It is a doozy–I will put it way down at the bottom. I will cut off the list of errors and just note the first four things I found wrong with it:
- “Who are these economists who got it so wrong? Speak for yourself kemo sabe. And since you got it wrong…”: Actually, Paul Krugman got it much more right than David K. Levine–April 18, 2005 sees Paul warning that the housing bubble (excuse me, DKL would say “elevated housing prices because rational expectations failed to evaluate what turned out ex post to be risks”) might collapse (excuse me, DKL would say “rationally-expected fundamentals might be rapidly revised downward”) with dire macroeconomic consequences.
- “Here we are, the recession is over and we’ve spent 10% of the money…. Not the 200% you thought we needed to end the recession…”: It is unclear whether DKL knows and is misleading his readers or is ignorant here: the 200%-of-stimulus was the amount thought likely not to half the decline in output but to return the economy to full employment.
- “John Cochrane has tried to educate you about what we’ve learned about fiscal stimulae…”: “Stimulus” is a second-declension Latin noun: its nominative plural is “stimuli”; its dative-ablative plural is “stimulis”. You could argue for either in this English sentence. You cannot make a case for “stimulae”.
- “You haven’t followed the debate about the causes of depressions between Peter Temin on one side and Timothy Kehoe and Ed Prescott on the other?…”: To the contrary, I know for a fact that Paul Krugman followed the Temin vs. Kehoe-Prescott debate rather closely.
Oops. It turns out I cannot cut (9):
(9) “I feel a little like a physicist at the cocktail party being assured that everything is relative. That isn’t what the theory of relativity says: it says that velocity is relative. Acceleration is most definitely not…”: Acceleration is not relative in Special Relativity. The central insight underlying General Relativity–the whole point of the Principle of Equivalence–is that acceleration, too, is relative: that there is no difference between being in a gravitational field and being in an accelerating frame of reference. That’s why it is called General Relativity!
We mock and snark here–Paul writes:
We need a name for a syndrome related to, but not quite the same as, the Dunning-Kruger effect… involv[ing] not competence but knowledge. The truly ignorant, I often find, don’t know that they’re ignorant–in fact, they’re often under the delusion of having deep knowledge and understanding…
But there is a very serious issue here. Back in 2009-2010 the austerians told us that expansive monetary policies–especially QE–were supposed to risk outbursts of stubborn and persistent inflation, in spite of the fact that financial markets were forecasting no such thing. The austerians told us that not fiscal expansion but fiscal austerity would speed the recovery from the Lesser Depression by restoring confidence. History since 2009 has not been friendly to either of these confident predictions.
Yet if there is a single prominent economist who made these predictions back in 2009 and 2010 who has undertaken any rethinking–done anything to even try to mark their beliefs to market–their doing so has escaped me.
I am happy to say what I have gotten wrong since 2005:
- Believing that central banks would make stabilizing the path of nominal GDP around its previous long-term trend their first and overwhelming priority, and would not rest until they had done so.
- Believing that all parties in governments would support them, understanding that a strong economy is the easiest road to reelection, that prosperity is a virtue, and that structural adjustment is much easier to accomplish in a high-pressure than in a low-pressure economy.
- Believing that governments understood both parts of the Bagehot Rule–that you lend freely at a penalty rate, which means that if you are propping up institutions of doubtful solvency you take their equity. (Yet you weren’t listening were you, Mr. Geithner, Mr. Obama?)
- Believing that governments understood that it was important to get whatever our new framework of housing finance is operational quickly so that the single-family housing credit channel would no longer be blocked. (Yet you weren’t listening were you, Mr. DeMarco, Mr. Watt, Mr. Geithner, Mr. Lew, Mr. Obama?)
- Believing that we were very unlikely to find ourselves in a situation in which monetary policy would have little expansionary traction.
Revising my beliefs about how the world works in the wake of those five major ex post analytical mistakes has been an important part of what I have been and am trying to do. But when I look around at the economists who forecast inflation and the benefits of expansionary fiscal austerity, I find myself rather… lonely…
Reference:
…Who are these economists who got it so wrong? Speak for yourself kemo sabe. And since you got it wrong – why should we believe your
discredited theories?It is a sad fact that whenever something bad happens people will claim that it means that they were right all along, and other people will listen to them. A professional prosecutor frustrated by the fact that you can’t beat confessions out of suspects? Wait until September 11 and try again and this time call it the “Patriot Act.” A progressive who would like to see higher taxes and more government programs? Wait until there is an economic crisis and call it a “fiscal stimulus bill.” Here we are, the recession is over and we’ve spent 10% of the money…. Not the 200% you thought we needed to end the recession.
It is a daunting task to bring you up to date on the developments in economics in the last quarter century. I know that John Cochrane has tried to educate you about what we’ve learned about fiscal stimulae in that period. But perhaps I can highlight a few other
developments? You seem under the impression that economists had resolved their internal disputes before the financial crisis. So that means you haven’t followed the debate about the causes of depressions between Peter Temin on one side and Timothy Kehoe and Ed Prescott on the other?You say that we think that the “central problem of depression-prevention has been solved.” Has it not? Are you forecasting that this recession will turn in to a depression? But of course “More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy.” That would be the profession that hasn’t been reading what the profession has written? Perhaps you should go look at that controversial book Kehoe and Prescott [2007], Great Depressions of the 20th Century. Or you might read Sargent, Williams and Zhao [September 2008], “Conquest of Latin American Inflation”. Wouldn’t it be nice if people had some idea of what was being written before criticizing it?
Let us talk more seriously about the supposed failure of the economics profession. You say “Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems.” The predictive failure is not a problem of the field – it is a problem for those who are under the impression that we should be able to predict crises. Do you number yourself in this bunch? Do physicists get it wrong because their theory says that they cannot predict where a photon shot through a sufficiently narrow slit will land? Economic models are like models of photons going through slits. Just as those models predict only the statistical distribution of photons, so our models only predict the likelihood of downturns–they do not predict when any particular downturn will occur. Saying “most economists failed to predict the downturn” is exactly like saying most physicists failed to predict the impact of the twelfth photon passing through the slit.
More to the point: our models don’t just fail to predict the timing of financial crises–they say that we cannot. Do you believe that it could be widely believed that the stock market will drop by 10% next week? If I believed that I’d sell like mad, and I expect that you would as well. Of course as we all sold and the price dropped, everyone else would ask around and when they started to believe the stock market will drop by 10% next week–why it would drop by 10% right now. This common sense is the heart of rational expectations models.
So the correct conclusion is that our–and your–inability to predict the crisis confirms our theories. I feel a little like a physicist at the cocktail party being assured that everything is relative. That isn’t what the theory of relativity says: it says that velocity is relative.
Acceleration is most definitely not. So were you to come forward with the puzzling discovery that acceleration is not relative…
Of course some people did predict the crisis. Some might even have been smart enough to know that if they consistently predict the opposite of a consensus point forecast, eventually they will be right when everyone else is wrong. If I say every year: there will be war; there will be an asset market crash; there will be a recession; there will be famine; we will run out of oil – eventually I’ll be right. These kind of predictions are only meaningful if more people than can be attributed to random good luck got it right at the right time or if whatever method they used to reach that conclusion is replicable. Or does the ability to replicate results fall under the category of “not very interesting because that would be an elegant theory?”
But let’s turn to what you say are our deeper failures. We “turned a blind eye to the limitations of human rationality that often lead to bubbles and busts.” It makes me feel physically ill that a distinguished economist could be so ignorant of his own profession. As a random example, how about my student Felipe Zurita’s thesis on speculation written in 1998? There are endless papers written about bubbles and busts–some assuming rationality, some not. Some are experimental, some are theoretical, some are empirical. There are economists who have devoted their entire careers to studying bubbles. There is a fellow named Stephen Morris. He isn’t what you would call a fringe member of the economics profession–he’s the editor of Econometrica which, as you know, is one of the leading journals in economics. He has written extensively about bubbles. I take it you aren’t familiar with his work. Perhaps you should walk down the hall and stick your head in his office and ask him about it? Each crisis–in Mexico, in South-east
Asia, in Argentina–had generated hundreds of papers examining how and why the crisis took place.Efficient markets? Where have you been for the last quarter century? The modern theory of how financial markets incorporate information is that they do so imperfectly. The technical device is that of noise traders originating in a 1985 paper of Admati. But I
think you knew of the idea earlier. In 1980 when you were a visitor at MIT, you participated in a graduate student seminar…in which I presented a paper starring noise traders…Do we really need some sort of behavioral model to understand why asset prices fall abruptly? If opinions about asset values change, prices must fall abruptly–it isn’t irrational to run for the exits when the theater is on fire. In addition to a beautiful 1983 paper of Steve Salant there is a large literature on bank runs and contagion, not to speak of credit and collateral cycles. If there was some sort of irrationality involved in a panic, prices ought to bounce right back the next day when everyone wakes up and sheepishly realizes that they were wrong. In fact asset prices seem to be tracking news of fundamentals pretty well–gradually recovering as we get better news
about fundamentals.Has behavioral economics offered anything that would help to solve the market failures that characterized this crisis? Was it herd behavior or animal spirits? Or was it risks that were not being priced? Serious economists like Lasse Pedersen try to analyze how liquidity risks created systemic problems and think about how to incorporate them into our understanding of how to ameliorate future crises. They don’t shake their heads and revert to discredited static theories of the 1930’s.
Crises have been ubiquitous throughout history. While we can’t forecast them we do know how to learn from them. And we certainly have a good idea what not to do in response: do what Chile did successfully–fail banks and recycle them, not do what Japan did unsuccessfully–keep the zombie banks limping feebly around. Like me you saw the bank bailout plan for what it was – not a necessary step to save the credit sector from collapse but a give-away of taxpayer money to investment bankers. But the stimulus plan? How can you be arguing for more? Since we are recovering before most of the stimulus money has entered the economy – isn’t that evidence it isn’t needed? How can you write as if you are proven right in supporting it?
Regards,
David
Duncan Wheldon Looks at the Eurozone Outlook
The very thoughtful Duncan Wheldon: Inflation, Macroeconomics, and the Dress, wrote:
The big question in the coming months (especially in the Eurozone) is whether the positive income shock from lower commodity prices is enough to boost aggregate demand by enough to turn around a longer running disinflationary trend. For the time being, that looks to be the case. At the moment the current ‘deflation scare’ in the West looks to be just that — a scare. To see if it’s really something to worry about, we need to look away from headline CPI and focus on core inflation and wage growth.
And? Do we get to look at that in the next serial episode?
It is certainly true that we have not since 1979 had an episode in which an oil-driven jump in headline price inflation has fed through via any sort of expectational mechanism into a persistent shift in core inflation or in wage inflation. As I read history, that was because A.V. (After Volcker) investors, businesses, and workers trusted (or feared) central bankers to keep nominal aggregate demand roughly on track over time no matter what happened to oil prices. But after the massive undershoots of 2008–2015 is this still true?
It is still only a risk. But I wouldn’t call it a “scare”. “Scare” implies that it really is not a risk, and I do not see how we can conclude that right now.
Lunchtime Must-Read: Paul Krugman (2005): A Whiff of Stagflation
…How do we get out of this bind? As the old joke goes, I wouldn’t start from here. We should have spent the years of cheap oil encouraging conservation; we should have spent the years of modest growth in medical costs reforming our health care system. Oh, and we’d have a wider range of policy options if the budget weren’t so deeply in deficit. So if any of these things does come to pass, we’ll just have to see how well an administration in which political operatives make all economic policy decisions, and the Treasury secretary is only a salesman, handles crises.
Entrepreneurialism and access to capital for women and minorities
New businesses are a critical source of employment for both new workers and those who are still struggling in the job market. According to a new Hamilton Project report by Michael Barr, the number of small businesses started by two specific groups—women and minorities—were on the rise prior to the Great Recession of 2007-2009. Yet the report finds that women and minorities still face several constraints to growth, one of the most important being a lack of access to capital.
In his report, Barr, a University of Michigan law professor (and a member of Equitable Growth’s research advisory board), emphasizes the importance of capital for the success and growth of start-up businesses. Barr finds that minority entrepreneurs must rely more on personal capital than external—which is problematic, considering that minorities and women have less access to external capital from outside lenders. Indeed, previous research shows that African Americans, Hispanics, and women all begin businesses with less capital than white men, and the gaps do not decrease over time. For those who want to grow their businesses, hire more workers, and compete with businesses owned by white men, this is often a major constraint.
Wealth inequality is another known factor in the success of white men launching new businesses with more capital. Analysis of the Federal Reserve’s Survey of Consumer Finances found that in 2013, the median wealth of white households was 13 times the median wealth of African American households and 10 times that of Hispanic households. And in 2007, never-married women held only 6 percent of the wealth of never married men. Less wealth means that women and minority entrepreneurs have less collateral for business loans—and therefore cannot invest as much in their businesses.
In fact, a 2005 study found that the disparity between African American and white asset levels accounted for over 15 percent of the difference in business creation rates between the two races. And, while policymakers tout the importance of growing small businesses, they do not address the critical importance of closing this wealth gap as a means to increase entrepreneurship. Addressing wealth inequality, while not a silver bullet, could effectively empower more women and minority entrepreneurs to grow their businesses and help expand the economy.
Barr’s policy recommendations also are worthy of consideration by lawmakers on Capitol Hill who are looking for more immediate solutions. Barr calls for expanding the State Small Business Credit Initiative and making the New Markets Tax Credit permanent—focusing more on expanding access to capital rather than wealth building. As policymakers continue to try to get Americans back to work, they need to focus on the constraints limiting women and minority entrepreneurs from growing their businesses and hiring more workers.
Nighttime Must-Read: Simon Wren-Lewis: Eurozone Fiscal Policy
…I did a back of the envelope calculation which said that GDP in 2013 might be around 4% lower as a result of cuts in government consumption and investment…. Sebastian Gechert, Andrew Hughes Hallett and Ansgar Rannenberg… use a meta analysis… fiscal multipliers are larger in depressed economies… GDP was 7.7% lower by 2013…. been willing or able to counteract. Yet the speed at which those in charge of the Eurozone begin to realise the mistake that they have made is painfully slow. Take this recent Vox piece by Marco Buti and Nicolas Carnot…. The mistake there is simple. When monetary policy is stuck at the Zero Lower Bound… getting the fiscal gap right is important in the longer term, but in the short term it is the means by which you get the output gap to zero…. An additional complication… a country… too competitive relative to the rest of the Eurozone… needs to run a positive output gap… to generate the inflation that will correct that position, and vice versa. For that reason Germany needs a large positive output gap at the moment… therefore a much more expansionary fiscal policy…. So at both the aggregate and individual country level, the inappropriate bias towards fiscal contraction that caused huge losses in the Eurozone in the past continues to operate…