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Again, this seems like a case of talking past each other. There is not much in particular that I see to disagree with in this Steven Williamson post. Though admittedly I skimmed it.
As a minor point I think Williamson suggests the Fed has no tools except expanding the stock of currency but of course the Fed can alter its balance sheet and by extension private balance sheets.
My key disagreement is this: In so many words Williamson suggests that the problem is not that the risk-free interest rate is too high but that the liquidity premium is too high. Thus we could not in theory solve this problem by driving down the risk free rate of interest.
This strikes me as wrong for two reasons.
1) Why? Or So What? If we drive down the risk-free rate then we drive down the rate + liquidity premium. Because I think the latter rate is important for inflation, there is no problem here.
2) The risk-free rate and the liquidity premium are intertwined. Intuitively we know that, though I don’t know if anyone has modeled this. However, part of what makes finance “different” is that you can’t just keep raising liquidity and credit premiums to make up for bad credit because the total interest rate itself affects the liquidity and credit of the borrower. There is a feedback.
But, if you lower the total interest rate the borrower becomes more liquid and more creditworthy and so the spread should decline.
I have some very quick thoughts in reply to Erik Kain’s post at Forbes comparing unions and corporations. His point, in brief, is:
Corporations are legal entities, sanctioned by the state. Why should we be any less sanguine about unions than about corporations? Corporations pool capital and resources, unions pool labor. What’s the difference?
One important difference is that corporations are subject to anti-trust regulation. However, I think libertarians who are otherwise critical of anti-trust activity should be wary of invoking this too strongly. If the market is the best mechanism for ensuring firms do not behave anti-competitively, then why won’t that work for unions?
Another important difference is that, as Coase argued, there are costs to using a price mechanism to coordinate economic activity, and corporations exist as an alternative institution for when such transaction costs are high. One can conceivably frame the voice function of unions in this way as well, however I think that’s better characterized as public goods problem where the group collectively benefits and individuals have insufficient incentives to express worker preferences.
The other “face” of unions, other than the voice face, is the monopoly face. One the one hand economists generally recognize that this is a problem with unions, not a benefit. On the other hand, many non-economists who favor unions use this as an explicit justification unions. If you see anti-competitive behavior as an unintended downside of unions, then one can draw parallels to corporations. If, however, you see anti-competitive behavior as a reason that unions exist, then the comparison falls apart.
The most important difference between the two is that unions suffer from a much more problematic fundamental legal framework. Labor economists are much more likely to argue that the fundamental laws defining unions need reform than IO economists are to complain similarly about corporations.
So what are the complaints? Economists generally agree that worker voice is an important and useful function of unions, and yet unions are vastly diminished in the economy. The problem is that the laws regulating unions, in part due to the way they encourage antagonistic relations with management, have led to what is likely an undersupply of the fundamental purpose of unions: worker voice. As an institution they are failing to provide their primary benefit. On the other hand, the monopoly face of unions is also problematic and some economists argue incompatible with a dynamic economy, but labor laws discourage alternative forms of worker voice that are less prone to these anticompetitive effects.
This isn’t to say corporations are perfect, or that no unions provide net economic benefits. But to put things in overly reductive terms, many economists who are pro-union and many who are anti-union agree that the fundamental laws defining and regulating unions need reform. The same can not be said of corporations.
There is much more to be said about this issue and I don’t consider the above comprehensive overview, but rather a few aspects.
Many of my fellow travelers in the quest for easier monetary policy have argued for more aggressive conditional Fed analysis. Things like saying we are going to bring the US back to trend NGDP or that we are going to keep printing until unemployment is at 5%, etc.
Though I liked the idea of price level targeting I have moved away from it, in recent months. I think its fine for the Fed to keep and NGDP or price level target in its back pocket but I don’t think the communication should operate that way.
I think in times like these the communication should focus on the Federal Funds rate and its time path. I think the Fed should do its best to forecast the optimal time path of the Fed Funds rate, communicate that to market participants and then stick to it.
Over the last year or so I have be extremely underwhelmed by the operational sophistication of Fed watchers and market participants in general. I am not sure what to chalk this up to. It could be pure cognitive limitations, which is Fed speak for – these guys are just not as smart as I thought. Though, I am of course, reluctant to accept that explanation.
It could be that conditional policy is confusing to congressional leaders who ultimately have the power to influence the composition of the FOMC. Market participants then accurately read that congressional confusion will lead to policy inconsistency. That is, congress will stop the Fed from doing what it promised because congress doesn’t understand the benefits.
In any case, the lack of a coherent explanation shouldn’t stop us from accepting what appear to be the facts of the matter: the more transparent and sophisticated Fed talk is, the less effective it seems to be.
In a speech, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday “I see no reason to revisit the decisions” made last month, and added “I plan to abide by the August 2011 commitment in thinking about my own future decision.”
The reason? With the Fed having made its pledge, “I believe that undoing this commitment in the near term would undercut the ability of the Committee to offer similar conditional commitments in the future.”
So, I heard a lot of disappointment from folks who thought that the FOMC statement was complacent and indicated they weren’t doing anything. On the contrary I thought the statement was an implicit commitment to hold interest rates low and was a return to “classic central banking” whereby we use the statement to influence interest rate expectations.
I believe this from the minutes supports my view.
Reinforcing the Committee’s forward guidance about the likely path of monetary policy was seen as a possible way to reduce interest rates and provide greater support to the economic expansion; a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to guidance that named specific spans of time or calendar dates.
Those viewing a shift toward more accommodative policy as appropriate generally agreed that a strengthening of the Committee’s forward guidance regarding the federal funds rate, by being more explicit about the period over which the Committee expected the federal funds rate to remain exceptionally low, would be a measured response to the deterioration in the outlook over the intermeeting period.
I’m debating Bob Murphy on Friday at 6pm. This is a web debate and its pay-per-view. Which means, of course, that both Bob and I will be in the Octagon, battling to submission.
This is the econ web cage match of DEATH.
So what’s the backstory?
Well, the Austrians at Mises.org challenged Paul Krugman to a debate. Krugman demurred. Seeing no champion to oppose them the Austrians declared victory and a pall was cast over the land.
Wickedness rose up and all that was just and right was driven into the shadows. Flowers wilted. Virgins cried. Cats couldn’t find a comfortable sleeping position. It was a time of unimaginable peril.
But just as things seemed their darkest, a new hope emerged. A hero came forth who could save what was good and decent about the world. A man who could give the people a reason to believe. I speak, of course, of myself.
Now on Friday that hero – me – will vanquish the great evil and send the demon Austrians back into the hellfire from whence they came.
What I humbly offer you, dear reader, is to be a part of this great event. To be present at the Quickening. To see light triumph over dark. To see good banish evil. To see a final resolution to the Manichean struggle that has gripped mankind since time before time.
Is this not worth but a small fee (that you could probably charge as a business expense, we are using cisco “web-conference” software) to witness a turning point in human history.
Tales of this event shall the good man teach his son. Yearly on the anniversary they will feast this day. Then will he pull forth his credit card receipt and say . . . this charge I made on that day.
Old men forget, yet all should be forgotten but he’ll remember with advantages what arguments we made that day.
Hayekian Triangles, Keynesian Crosses and fiscal multipliers shall be in their cups freshly remembered. And, economics debates shall ne’er go by from this day ‘til the ending of the world, but Bob and I will be remembered.
Will you join us dear reader? Will you be a part of this day?
If so, register now at: http://academy.mises.org/courses/murphy-smith/
Writing in Bloomberg View, Ed Glaeser argues, among other things, that the GSEs should wait to sell the stock of housing they own slowly:
Exploring options makes sense, because selling homes too quickly means low prices, especially if you are trying to move thousands of foreclosed homes at once. Yet the government needs to be quite careful here as well, because renting homes that were meant to be owned is never easy.
The case for slow sales was made in a classic paper by David Genesove and Chris Mayer, which found that Boston condominium sellers with high loan-to-equity levels sold their units more slowly and got substantially higher prices. Steve Levitt and Chad Syverson found that real estate agents, who presumably know more about housing markets than ordinary sellers, typically take 9.5 days longer to sell their homes and receive 3.7 percent higher prices, holding everything else constant.
In a frictionless, efficient market for a commodity good the government could not expect to make money by holding on to the houses and renting them since the net present value of the returns to renting for a year and then selling would be equal to the price they could get for the houses today. Glaeser cites Genesove and Mayer as providing justification for why this might not be the case. However, it is my recollection of this paper that the way that a home seller increases the sale price by waiting is through housing being in a matching market. In this kind of market, the seller gets a higher price by waiting for a better matched buyer. The problem here is that in a matching market you presumably find a better buyer by having the house on the market for longer, not simply by waiting until a later date to sell it. If I recall correctly, this is what Genesove and Mayer argue. In this case, Glaeser’s argument for renting and waiting to sell -at least as justified by the matching market- does not hold.
One could still argue that the optimal sale time of a stock of houses is slow based on the literature on forced sales, which Glaeser also cites. So this is not to say the rental idea is not a good one relative to quickly dumping all the houses onto the market, just that one should caution against interpreting the literature for time-on-the-market as applying to units which are being rented, and thus are not in fact on the market.
Your semi-daily reminder that claims on the future earnings of capital are not somehow magically more stable than claims on the future earnings of labor.
Will a declining labor force drive the marginal return to capital up or down?
When you consider attempts by business administrators to capture the capital stock and burn the corporate commons, I would be concerned.
So my baseline has been that the US will see continued real growth throughout the second half of 2011 and accelerating into 2012.
Nonetheless, I think we have to be alert for signs of weakness. Low Q2 GDP and the notion of a “stall rate” did not impress me much. However, the poor showing out of the regional manufacturing survey’s did. It is highly likely that manufacturing is now in decline in the United States. This is disconcerting.
All of that having been said, however, I am not yet calling for a double-dip, merely raising awareness about the data we should be looking at.
Dean Baker, is also not calling for a double dip but goes way too far, in my opinion.
The Commerce Department just released datashowing that real consumption spending rose by 0.5 percent in July. This makes it highly unlikely that growth will turn negative in the current quarter. Consumption is 70 percent of GDP and this figure implies a 6.0 percent annual growth rate.
Of course consumption is not really growing that fast, more likely it is increasing at near a 2.0 percent annual rate, but maybe this number will shut up the arithmetic challenged economists who keep talking about a double-dip recession.
So just as we knew or should have known that auto supply disruptions were going to drive down Q2, we should realize that resolution of those issues would boost Q3. Had that failed to happen, alarm bells would be going off like crazy.
So, I don’t the PCE data tells us anything besides “situation still uncertain.”
The Texas Manufacturing survey showed declines this month.
We are pretty much guaranteed at this point to see a week national ISM on Thursday and likely a loss of manufacturing jobs on Friday.
As I mentioned before this is historical precursor for a recession. Perhaps, more importantly right now, manufacturing was a major bright spot in the US recovery and it is now weakening.
Personal Consumption Expenditures (PCE) came in at a strong increase of 0.8% in July. However, this was driven largely by a 2% increase in the consumption of durable goods.
The strong assumption, of course, is that this is a reflection of the rebound in auto sales. Again, we are expecting and absolutely need this if we are to avoid recession. So, while this is good to hear, it doesn’t get us out of the woods by any means and PCE in total is not yet on track for a strong third quarter.
David Wessel at the Wall Street Journal reports that President Obama will nominate Alan Krueger to be the new head of the CEA. It’s interesting to note that, among his other areas of research, Krueger done important work on occupational licensing. Here is a paper he co-authored with Morris Kleiner showing that 35% of jobs are licensed or certified by the government. There they report:
Our estimates of the relationship of occupational licensing and wages is consistent with the hypothesized role by members of an occupation to raise wages by using the powers of government to drive up requirements and capture work for the regulated workers for larger geographic areas. These estimates suggest a strong role for the monopoly face of licensing in the labor market. Indeed, the wage premium associated with licensing is strikingly similar to that found in studies of the effect of unions on wages.
And here is an earlier paper, also with Kleiner, on the same. If one is concerned about lowering the long-term unemployment rate, improving the functioning of labor markets, and making it easier for workers to enter into more skilled service jobs, occupational licensing is a good place to look.
Wessel also notes that Carl Shapiro is also being nominated to the CEA. Importantly, Shapiro has done work on patents and antitrust. Here is a summary of a relevant paper:
Economists and policy makers have long recognized that innovators must be able to appropriate a reasonable portion of the social benefits of their innovations if innovation is to be suitably rewarded and encouraged. However, this paper identifies a number of specific fact patterns under which the current U.S. patent system allows patent holders to capture private rewards that exceed their social contributions. Such excessive patentee rewards are socially costly, since they raise the deadweight loss associated with the patent system and discourage innovation by others. Economic efficiency is promoted if rewards to patent holders are aligned with and do not exceed their social contributions. This paper analyzes two major reforms to the patent system designed to spur innovation by better aligning the rewards and contributions of patent holders: establishing an independent invention defense in patent infringement cases, and strengthening the procedures by which patents are re-examined after they are issued. Three additional reforms relating to patent litigation are also studied: limiting the use of injunctions, clarifying the way in which “reasonable royalties” are calculated, and narrowing the definition of “willful infringement.”
From Jim Hamilton
In January 2008, ExxonMobil and Norway’s Statoil announced a promising discovery in the Julia Field in the Gulf of Mexico that may contain a billion barrels of oil. In October of that year, Exxon applied for a 5-year extension of the lease for time to develop a suitable development plan. To the company’s surprise, the U.S. Department of Interior denied the request in February 2009, and has continued to turn down subsequent appeals.
Hamilton goes on to suggest that there are currently 10 idle rigs in the gulf representing at least 10,000 jobs in mining that could be filled.
Besides the obvious desire to not approve another Deep Water Horizon on their watch does anyone have an explanation for this?
People say no one would ever cut off their arm and replace it. If the technology gets there, which it looks like it will, people will think about it. They might be what you’d call an early adopter -a really early adopter- but people are going to have the option of having superior limbs, superior eyes at some point. So I think a lot of people will do it.
Someday, the ethical and legal controversies over whether bionically enhanced individuals can compete in existing sports leagues may actually make paying attention to sports interesting. We’re going to see interesting John Henry type contests in the future, except instead of competing against a steam hammer, he will be competing against a man with a steam hammer bionic arm.
The destruction in productive capital can easily mean a hurricane has a net negative economic impact, and not just on wealth but on the flow of economic activity. The positive economic impact of a hurricane comes from households and businesses stocking up on consumption goods and purchasing new capital, perhaps to replace old capital, e.g. buying a new sub-pump because the old one is worn out. This is why a hurricane that is expected to be huge but turns out to be much smaller is the most likely to have a positive economic impact: spending increases but capital is not destroyed.
An important question is how much of the spending will just be short term shifts from the next few weeks into today, as in the case where households stocked up on foods and will eat it over the next few weeks. I think households and business have a lot of what you could call small capital and inventory that just sits around for a long-time, like flashlights and candles, and if this is economic activity shifted forward it is likely to come from farther in the future, making it more likely to have a positive economic impact.
Another thing to consider is prevented economic activity, like restaurant and movie visits pre-empted. Or, say, entire cities being shut down. Here again, the best case scenario is the hurricane is very small.
In following trying to see whether we are really headed for a double dip I have been following the regional manufacturing surveys.
Why are these an important indicator?
Well there is a bit of a three-step but it goes like this:
1) Regional Surveys help us to forecast the national ISM
2) The National ISM helps us to forecast manufacturing payroll growth
3) Manufacturing payroll growth is “key” in recessions
I don’t have a graph to show you how closely the regionals match to the national ISM. Indeed, you would need a forecasting formula. But, suffice it to say lots of bad regional numbers do not add up to a good national number.
I can, however, show you national versus manufacturing growth over the last 30 years.
Though you can see some gaps in recent years the match up is incredibly tight and the gaps represent a secular trend downward in manufacturing growth. If we zoom in the time horizon the strong correlation re-appears.
This is the last ten years
Crazy tight huh? These aren’t even the same kind of units. One is a diffusion index and the other is a change in raw count. Its uncanny.
Now why is manufacturing so important. Because while manufacturing has declined without a recession, a recession has thus far never occurred without a decline in manufacturing.
Strikes in the early part of the century make the monthly data extremely bumpy and hard to read. When a strike is on manufacturing employment collapses and then when it is off manufacturing employment zooms.
But we can see the same thing by looking at year-over-year instead of month-over-month.
You can see that since we have been recording manufacturing employment there has never been a recession without a decline in manufacturing jobs. Its to quintessential cyclical sector.
So we look at regionals to guess ISM. ISM basically tells us manufacturing payroll growth and a decline manufacturing payrolls has been a pre-cursor for every recession.
I am not sure what to say about this Dave Weigel piece. His thrust seems to be that the Democrats shouldn’t push for a tax increase because its basically fighting on Republican turf.
Well, okay . . .
But, its still a good idea. For one thing even if it did nothing to “stimulate” the economy it would bring relief to working people in one the hardest economic times in recent memory. That’s a good unto itself.
However, even more than that its hard to see how you lose with a payroll tax cut. If people spend the cut it boosts Aggregate Demand and helps relieve unemployment. If people save the payroll tax cut, they will increase the rate at which repair household balance sheets and get out of the recession.
Moreover, unlike regular citizens the government can borrow at a profit!
If the government give you a tax cut today, pays for it with 5 year bonds, and then taxes you to pay back the bonds in five year you will be better off. Why?
Because the interest on the bonds will not cover the inflation between now and the time you have your taxes raised.
Indeed, the government should use this opportunity to completely cut the payroll tax to zero and allow households to repair themselves again at a profit!
I would also suggest cutting the tax rate on business because I believe that will not only spur demand but lower payroll constraints for lots of firms. However, even if only the rate on workers was cut that would be a great positive for the economy.
I think a while back I did a similar exercise where I looked at employment sans government, construction and manufacturing. Now I want to look at output more generally
This time we are going to take out government and residential investment. Both have seen unprecedented declines in the last few years.
Here is the economic growth without government and residential investment over the last decade.
While that isn’t the most robust recovery one could image it tops out at better than the economy performed over the peak of the last expansion.
I’ll pull back a little to see how this metric compares over time. I only have quarterly data back to 1995 but we can still see some interesting stuff.
One the non-government non-residential economy was just on fire in the 90s. Its so interesting I have to see which one is responsible. Here is just sans government.
Even better. I think we average over 5% real growth over much of that period. Interestingly still not too, too bad post-recession.
Here is just sans-residential
That’s clearly a littler more muted. Definitely under 5% for most of the period.
A couple of other things to note after seeing those charts.
1) If you don’t account for government employment then you can see a slow slide into recession starting all the way back in 2004. On the other hand if you don’t count housing, the economy just got whacked from out of left-field in 2008 but came back strong after 18 months.
2) Sans residential growth is surprisingly consistent between before the recession and after.
That’s growth here is a quick look at levels
Sans-residential and government
We can see full recovery even after the GDP revisions. And in many ways this recessions looks more natural than the dot-com bust.
This is just sans-government
This is just sans-residential
Interestingly there was no dot-com bust if you don’t count housing. I’ll have to look more into that.
Kevin Drum has some interesting thoughts on oil. The thesis
The basic story is simple: As long as there’s spare oil-production capacity, increasing demand caused by economic growth produces only a steady, manageable increase in oil prices. But oil production is now close to its maximum and can’t be easily or quickly expanded. When the global economy grows enough that demand starts to bump up against this ceiling, oil prices don’t rise slowly and steadily; rather, they spike suddenly, causing a recession, which in turn reduces oil demand and drives down prices. When the economy recovers, the cycle starts all over. Because of this dynamic, the production ceiling for oil produces a corresponding ceiling for world economic growth.
Oil and the macro-economy is definitely on my to-do list. I have strong priors that money, credit and banking are where its at, but the evidence on oil is intriguing.
My neophyte impression, however, is that $135 a barrel oil doesn’t make sense. As I understand it, the tar sands, shale oil and other non-conventional sources can be profitably tapped at constant price of $80 a barrel.
This implies that an oil prices that stays where it is today will see an enormous expansion in those resources. And, so it seems that is beginning to happen. Via Bloomberg:
The region is likely to see output climb 1.5 million barrels a day to 15.6 million by 2016 mostly because of increased output from Canadian oil sands and U.S. onshore shale formations, the Paris-based adviser to oil-consuming nations said today in its Medium-Term Oil and Gas Markets report.
Now that’s still well short of the additional we’d need if we stretch Kevin’s counter-factual out to 2016. However, I am told by industry folks that the IEA is well behind the curve and that sustained prices could just in a much bigger jump in production.
Moreover, that’s just North American production. Non-conventional production in South America and Russia are said to have enormous potential as well.
When you combine those factors together I see how we might get short-run spikes but consistent upward pressure from emerging economies should open up new supplies and keep oil prices in the sub $100 range.
Paul Krugman seems generally upset at Bernanke’s performance
These are tempestuous times, but when the storm is long past the ocean will be flat again.
OK, not a literal quote, but pretty much what he said.
I understand the frustration, but I don’t know if Krugman has carefully articulated what I would consider useful policy alternatives. No doubt one could glean the appropriate policy from his blogs and columns if you already had the base of knowledge and a sense of central banking. However, at this point I think a genuine public conversation needs more than that.
Michael Woodford is more explicit
Mr Bernanke can and should use his speech today to explain how his policy intentions are conditional upon future developments.
A clarification could help the economy in two ways. First, he could signal that a temporary increase in inflation will be allowed, before policy tightening is warranted. This would stimulate spending by lowering real interest rates. Second, specifying the size of any permanent price-level increase would avoid an increase in uncertainty about the long-run price level. This in turn would ward off an increase in inflation risk premiums that might otherwise counteract the desirable effect of the increase in near-term inflation expectations.
This has long been my preferred policy but even here I think this is too much. I was excited when NY President Dudley gave a speech outlining how level targeting would work in practice but it fell flat.
I actually now think the more realistic approach is for the Fed to continually harden its commitment to keeping the federal fund rate low for several years. This is actually the most clear signal that can be sent to market participants.
One lesson that we should learn – but I think is being missed – is that more information does not mean more clarity. Market participants are confused by analysis that seems plain to monetary economists.
Instead, the Fed should signal this “It is extremely likely that you are going to experience free short term financing for years to come”
When the Fed wants to loosen more it needs to make it clear that free short term financing is even more likely for an even longer period. Trying to explain level targeting to market participants is a recipe for confusion.
A commenter asks
I have two questions. Why did residential investment appear to contribute so little to GDP prior to 2008. Is this predictive of the housing bubble’s burst or had the bubble really already burst? And why in the world did government’s contribution to the GDP fall off so sharply when the stimulus package was passed?
Its worth putting these graphs back up because I think the contributions help tell a story that’s hard to tell otherwise.
Here is Residential Investment
You can see two things. First nothing about the early 2000s was super crazy. Second, the decline began in 2006.
This is very, very, very different from the story on home prices that most people focus on. Here we are talking about how investment of real resources there was in the housing sector.
That peaked around 2006. That means after 2006 the amount of resources devoted to the housing sector began to decline. The housing sector was recessing. Housing prices continued to rise and importantly houses continued to pour on to the market.
The purpose of the housing sector is to create and distribute housing. A shrinking housing sector does not mean that no housing are being created or that housing are being destroyed. It simply means that fewer houses are being created and distributed.
This as been going on since 2006. That is, the housing sector has been shrinking for approaching six years now. Indeed, it only stop shrinking because it just about hit zero. You can’t go lower than zero.
My best guess at the data is that now about as many homes are being created every year as are being demolished. This implies no net growth in the housing stock. This is a deeply shocking phenomenon.
My feeling is that understanding how this is possible will be key in the next generation of macroeconomics. What you are seeing is a strong relationship between asset price growth and the stock of the asset. However, both of these are utterly unmoored from micro-fundamentals and remain so to this day. Including the run-up in prices we are now looking at a full decade when either housing quantity or prices has been out of whack.
Now lets turn to government
How can government be shrinking so much at exactly the time the stimulus passed?
Two ways: first a significant chunk of the stimulus was tax cuts. Second, much of the rest of the stimulus was aid to the states. However, the states were facing very severe revenue decreases and in most states the stimulus was not even enough to fill the hole.
So, even though billions were going from the Federal government to the states, the states were still shrinking. Importantly, most government services are actually provided at the state and local level.
So when state and local government shrinks, government shrinks. This can be confusing because so much of your taxes go to the Federal government. Yet, that tax money is primarily used either for the military or to fund services actually provided by someone else. The Federal government for example, pays for Medicare but it doesn’t actually provide medical care to seniors. The health care sector does that.
Similarly, the Federal Government provides student aid to college students but the Federal Government doesn’t actually operate any non-military universities. Those are either private or run by the states and in a few cases the local government.
Washington is vey powerful and glamorous but most of the business of running the US public sector is done by the state and locals.
I have a bit of a different take than Niklas – though to be sure – I like to see principle disagreement among the bloggers here at Modeled Behavior.
The statement was utterly in line with my perception of the short run situation. Very close to my perception of the long run situation. The only difference is that I think long term fiscal imbalances are not that big of a deal. However, I would never have said that outloud if I were Bernanke anyway.
I thought the way he handled the debt ceiling debacle was tactful and fairly strong from a central banker.
I thought his repeat of the phrase “is likely to warrant” was understandable though slightly more conservative than what I would have been inclined to do. I would have considered adding “if not beyond”
I also felt his insinuations that short term fiscal policy needed to expansionary was done well in the context of what an independent Central Banker should say about a highly partisan issue.
Lastly, it is of some note to me that at least on first read I do not remember seeing the phrase “as always the views presented here are my own and not representative of the FOMC” that would tend to suggest to me that the remarks should be taken with a bit more force, but I would have to think a bit more on that to be sure.
I’m headed off to a conference, but I just wanted to voice my disgust with Ben Bernanke quickly. Here is what I gathered from his speech in Jackson Hole:
1. The Fed has the tools to offset shocks to money demand, but only sees fit to use them in the event that the country is facing actual deflation.
2. The Fed is highly committed to memory-less inflation targeting, and is happy living with inflation below 2%.
3. The Fed will not offset contractionary fiscal policy, handing proponents of active demand management victory on a silver platter, though they don’t deserve it.
We will have to wait until the next Fed meeting to see Bernanke’s “real” intentions on monetary policy. Will he steer the committee into a more aggressive stance? The stock market is very slightly up on the speech, so maybe WAll Street knows something that I don’t…but I just can’t see how an aggressive policy move is in the cards.
I began this post to illustrate that Equipment and Software is a strong contributor to measured GDP growth in the United States. Overall on par with the 90s. Indeed, the record was hit during this recovery.
And this is in terms of percentage point contribution to GDP growth. So if GDP growth was 3% and E&S contributed 1% then 1/3 of the growth in the US economy would be attributable to E&S.
However, since I already had FRED open I thought I would give some other major contributors by way of comparison.
This is residential investment.
This is non-residential structures
This is personal consumption
This is government
This is net exports
- The downward revision was driven primarily by a faster shrinking government sector than originally estimated.
- The decline in government spending now essentially matches the rise in personal consumption spending. Thus right now, all of the growth in the economy is coming from business investment.
I think the later point is important because few people seem to be able to internalize that business investment has been quite strong during this recession and indeed right now is the entire recovery, what recovery there is.
That being said, that can only go on for so long. The economy needs durables and residential investment to recover. That means cars and homes. The cars may be looking up and I am still waiting for more homebuilding but they do not seem imminent.
Its the nature of the academic to try to avoid embarrassing ones self by exposing a premature idea. I am, however, trying to beat that back inorder to gain the insights of the blogosphere.
Here is just a simple data point in the direction of my thesis. From NYT
It is hard to find a tax cut that Congressional Republicans dislike. Unless it is a tax cut pushed by President Obama.
In a turning of the tax policy tables, Democrats are increasingly hammering on Republicans who oppose the president’s proposal to extend for a year a payroll tax cut passed last year with bipartisan support.
. . .
A spokesman for Grover Norquist, who as leader of Americans for Tax Reform is the author of a no-tax-increase pledge that scores of Congressional Republicans have signed, expressed ambivalence about the cut.
“One could argue that therefore allowing it to lapse was not a tax hike,” said John Kartch, a spokesman for the group. “But safer to either continue the lower rate or cut some other tax rate by the same total amount so that any change was revenue neutral.
One could say that this exposes the fact that Republican opposition to taxes is really an opposition to Progressive taxation. I say that it exposes the fact that Republican opposition to taxes is opposition to President Obama.
This is not to say the GOP is packed full of nihilists or such Obama hating rage that they will cut off their nose to spite their face. It is to say like all things they are the product of evolution.
In a Republican Democracy political parties survive and thrive because they are good at winning elections. That necessarily means they are good at causing other people to lose elections.
Importantly – from an evolutionary standpoint – it doesn’t matter what the election is over or who the other is. It only matters that you win.
Over time this will produce parties who simply do whatever is most convenient to win with no regard for any long term ideology. We are not quite there yet but we are moving in this direction.
Moreover, I reject the notion that what people want is their dignity as human beings respected by the political system. I think this is what the intelligentsia wants but as Tyler Cowen reminds us – envy is local.
What people want is to be respected by their friends and neighbors. To have children who are regarded with high status and who are protected from hunger, disease and exposure. Democracy is not necessary for any of this to happen.
Dave Roberts spurs me to continue my admittedly underdeveloped thesis that republican democracy does not represent the end of history.
To make matters worse, the institutions that support redistributive policy, like unions, have withered. And this gets at a persistent flaw in neoliberalism: it contains no credible theory of politics. If organized labor is degraded and the middle class rendered less secure, what political force remains to push redistribution over the inevitable objections of the rentier class?
I don’t want to get into the viability of neoliberalism per se, but to address the issue of its inherent political instability.
I am sympathetic towards the position that neoliberalism lacks solid political foundation. However, I think this is the wrong lens. To my eyes there is no real rentier class left in the Western World. Even bond fund managers are pushing for expansionary US fiscal policy. More generally when unemployment is low, profits are high. A bad jobs report sends stocks down, not up.
Instead, I think neoliberalism struggles because of the zero sum nature of Republican Democracy.
Elections provide a way of settling political struggle bloodlessly. But, they also ensure that political struggle is endless. It doesn’t matter what the prevailing organizational model is. The model must be contested or there is nothing to have an election over.
While this tendency towards tumultuousness makes republican democracy flexible in rapidly changing social and economic landscape it is a liability in more stable times.
Because growth is not forever, social change is not forever. When it ends, so will republicanism.
That’s why propaganda is critical to the survival of the totalitarian state. Its not enough to that the people obey. They must believe
Dr. Kim looked down a dirt road that led to farmhouses. Most of them had walls around them with metal gates. She tried one; it turned out to be unlocked. She pushed it open and peered inside. On the ground she saw a small metal bowl with food. She looked closer – it was rice, white rice, mixed with scraps of meat. Dr. Kim couldn’t remember the last time she’d seen a bowl of pure white rice. What was a bowl of rice doing there, just sitting out on the ground? She figured it out just before she heard the dog’s bark.
Up until that moment, a part of her had hoped that China would be just as poor as North Korea. She still wanted to believe that her country was the best place in the world. The beliefs she had cherished for a lifetime would be vindicated. But now she couldn’t deny what was staring her plain in the face; dogs in China ate better than doctors in North Korea.
HT: Alex Tabarrok
I’ll have more to say about this later. The debate is going to try to get at the Keynesian versus Austrian business cycle theories. So, it something of replay of the Keynes/Hayek rap battle.
For now I let the Mises.org description speak for me:
The great debate between Keynesians and Austrians enters the digital age with the Mises Academy’s first ever online formal debate, between economists Karl Smith and Robert P. Murphy.
RESOLVED: GOVERNMENT SPENDING CAN PLAY AN IMPORTANT ROLE IN BOOSTING ECONOMIC GROWTH
Smith will argue in favor of this resolution, and Murphy will argue against.
Karl Smith is Assistant Professor of Public Economics and Government at the School of Government at the University of North Carolina at Chapel Hill. Smith also contributes to the popular economic blog Modeled Behavior. (See Dr. Murphy’s bio below.)
Each speaker will have 12 minutes to present his case, followed by 8 minutes each for rebuttals. Then each speaker will have 1 minute to present a list of questions, which his opponent will have 4 minutes to answer. Finally each speaker will have 5 minutes for concluding remarks. The 60-minute debate will be followed by a 20 minute question-and-answer period, in which each speaker will have 10 minutes to respond to questions submitted by attendees. Attendees will also have the opportunity to vote for or against the resolution both before and after the debate. Will the debaters be able to sway opinions on either side? We shall see!
The debate will be held on Friday, September 2, at 6pm Eastern time. It will be online, and use Webex, the industry-standard web conferencing service. Exact instructions for attending the session will be available at the debate’s main page, which will be accessible here upon registration. The session will be recorded and made available for attendees to download.
Kansas City Fed report shows stable manufacturing in the region. Production and employment fell slightly but capital expenditures rose. This is nice to hear but doesn’t tell us much. KC Fed district is small in terms of output and its mostly geared towards natural resources.
On the other hand New Claims for unemployment insurances rose to 417K. That’s two rises in a row and importantly they have broken what I expected to be a strong down streak. Its not just that we are at 417K, its that we are not at 370K – where would have been if we kept trending down.
This of course leans toward the narrative that growth in the United States is slowing and the summer wasn’t just a blip.
Brian Palmer attempts a takedown of twin studies that shows the opposite of what he suggests
Pause for a moment to examine that astonishing claim—that Americans’ stubborn insistence on disagreeing over hot-button national issues is the result neither of two parties adjusting their views to appeal to a shifting political center nor of the fact that the issues on which we have learned to agree simply fall out of the political debate. (How many slavery proponents do you know? I hear there used to be a few of them in the U.S. Senate.) Nope. It has to be the series of base pairs in our cellular nuclei.
Twin studies rest on two fundamental assumptions: 1) Monozygotic twins are genetically identical, and 2) the world treats monozygotic and dizygotic twins equivalently (the so-called "equal environments assumption"). The first is demonstrably and absolutely untrue, while the second has never been proven.
So not to get too much into the first paragraph but the suggestion here is not that “abolitionism is in your genes” so much as abolitionism isn’t about abolitionism per se. Abolitionism is about – say – the ability to empathize with “the other” and that is in your genes.
Indeed, if you believed that the issues were really about the issues then a deeper puzzle would be why people disagree at all. People who cared only about the issue itself should tend to converge on compromise views if for no other reason then that the very fact that some other rational person holds conflicting views should cause you doubt the veracity of your own convictions.
No, people are likely biased towards things that “feel right” and what feels right is probably heavily influenced by genes.
Now on to the twin studies. Palmer points out correctly that identical twins are not, in fact, genetically identical. However, this implies that twins studies underestimate the influence of genes.
That is the way twin studies work is that one assumes that any difference between identical twins must be due to something other than genes because they have the same genes. However, if they don’t actually have the same genes then this causes you to attribute things which are really genetic in source to non-genetic causes.
Especially, the more we think the brain of identical twins are different, the “No Two Alike” puzzle melts away. That puzzle is how it is possible that conjoined twins can be so different. They have the same genes because they are monozygotic and they have the same largely the same experiences because they are literally joined at the hip (or head or chest.)
How then do we explain the sometimes large disagreements between conjoined twins. Can being “on the left” really be that much of a life changer?
Now what about the similarities between mono and dizygotic twins. Maybe being treated as an identical twin makes you different. That’s could be true but is beside the point of genetic research. What you really want to say is being treated as a twin makes you more similar.
Perhaps. This sounds plausible. But, it sounds equally plausible that identical twins might want to distinguish themselves. That constantly being confused with one another would cause them to invent differences. We really don’t know.
Importantly, however, concern about this issue is undercut by another one of Brian’s points
There have been numerous studies showing that dizygotic twins who look similar have more personality traits in common than those who are easily distinguishable.
Yet, doesn’t this say that these personality traits are genetic in origin? Its simply that the genetic influence is mediated by the fact that people respond to you based on the way you look.
We know that taller men make more money. Maybe that’s the result of the higher marginal product stemming from height. More likely its because tall men are treated differently. However, that shows that height and hence genetics is a determinant of life outcomes.
I think the twin research is still compelling evidence that gives us a deep insight not just into the effect of genes but on “how genetic” a given trait may be.
And as a last note, I would say that I sense that some of the push back against genetic determinism is push back against determinism more broadly. However, unless you want to reject the block universe then rejecting twin research and genetic determinism doesn’t get you out of the determinist box.
A tabula rasa world is just as deterministic if you think that life experiences make the man.
Translated: okay, so equity gets hosed, which is just as it should be in insolvency. But it sounds like we will be paying $100 bill for something. And that would be? Why, the bondholders, I suppose–who else could it be, with numbers like this and on terms like this. It’s been the one abiding principle throughout the Geithner–no matter how parlous the state of whatever, no bondholder gets left behind. Apparently we need to say it again, guys: capitalism means the risk of failure, and real failure when things go bad. Bank bailouts that protect bondholders are ring-fencing for which the rest of us pay. Sheesh, is that so hard to understand?
No, I think this is wrong. I do not know why there is an enormous externality associated with letting bondholders get hosed. It is one of the great questions of our age.
However, I can recognize an empirical regularity when I see it. The bondholders should be saved when possible. To misquote Mark Twain: its no wonder truth is stranger than economic models. Economic models have to make sense.
Yet, we live in the real world. Not in the model. When someone finds actual empirical evidence of moral hazard on the part of credit holders causing crises we can talk. For now we have definitive evidence of massive credit losses causes crises and that’s what policy should be based on.
I went to this as a grad student. Just awesome. If you have a chance, go. As with so many things the actual competition for access to top intellectuals was limited.
Had lunch with Mirrlees; a walk by water with Doug North and a series of heated debates with Clive Granger and Bob Engle. If you talk to them, they will talk back.
The exception was John Nash. Surrounded by people and didn’t say much.
The US Treasury just auctioned off $35 Billion in 5 year Treasury Notes. $94 Billion in bids were placed.
The high yield was 1.0279%. Nearly $32 Billion worth of the bids were below that. How does that compare with expected inflation over the next five years.
At the beginning of the month it was around 1.5%. Could be lower now, but I am guessing not all the way down to 1.029%.
People are willing to lose money in real terms in order to give it to the US Federal Government. Maybe we should consider giving people what they want? I’m just saying.
Here are some quick and scattered thoughts that occur to me with respect to optimal carbon taxation in a recession. This isn’t meant to be a complete analysis, but merely a few things to consider.
In a recession we want to increase consumption spending whereas normally, or at least before this recession, more savings and less consumption is a good thing if anything. We’re also seeing some evidence that price elasticity of demand for gasoline is rising in the recession as people become more sensitive to costs, meaning the decrease in consumption for every dollar of carbon tax will be larger now. So any taxation that decreases spending is going to be more costly in a recession than not.
On the other hand, one can imagine carbon taxes primarily causing energy firms to make long-term capital investments in greener equipment today and only raise their prices slightly as marginal costs go up only slightly. It’s also easy to imagine carbon taxation being designed in a way to encourage this outcome, such as by phasing it in slowly or into the future at some point.
However, some workers may be complimentary to the old capital but not the new capital. The costs to laid off workers who must find a new industry are much higher in this economy than normal. If instead of affecting the timing and mix of capital spending among existing firms, the taxation causes a structural shift in industry, where new firms enter and old firms exit, this is a problem.
The basic problem is that the normal dynamism of creative destruction is more costly when it is harder for displaced workers to find new jobs. For this same reason I have concerns about suggestions that now is the right time to engineer a massive tax simplification plan, as this would perhaps hundreds of thousands of accountants out of business. In normal times I am the first to try to assuage concerns about creative destruction like this, and my point here is not that these changes aren’t worthwhile in a recession. I’m simply pointing out that some adjustment costs are higher now.
My biggest concern about carbon taxes in a recession is about sustainability and branding of the policy. One of the lessons of the current malaise is that any policy passed in a long recession stands the chance of being labeled part of the problem. In a short recession this could work the opposite, and that any policy passed will be seen by some people as contributing to the recovery.
One could help mitigate this by structuring a carbon tax bill so that is clearly and significantly contributes to the recovery. You could tie it to large, even obscenely large, mobility stipends paid displaced energy industry workers. Think of this as a bailout for coal counties. You could tie the tax to a bill allowing free citizenship to anyone with a college degree in math, science, or engineering, and charge them a fee that is used to fund an unconditional payment to every native tied directly to the headline immigration number that year.
In any case, my two-handed economist advice is that if any carbon tax were to be passed we should think about it differently than we would in normal times, as the relative costs have changed.
ADDENDUM: On twitter, @jeremyreff rightly points out that “carbon tax adoption and job displacement have to be read in context of tax that it would replace (i.e., payroll)”. This is an important aspect of the problem to be considered. If the carbon tax occurs in the future, and the money is spent today, perhaps via lower payroll tax, to make it revenue neutral then it is no different than normal fiscal policy except the outcome is more efficient. Are people more or less likely to exhibit Ricardian Equivalence when the future tax raise is a carbon tax?
ADDENDUM 2: Rational and forward looking will not necessarily exhibit Ricardian Equivalence if payroll taxes go down now and are offset by future carbon taxes. This is because people may respond in two ways to expected higher future energy costs: save the money they get from lower payroll taxes to pay their higher future bills, or invest it in more efficient energy technology that will lower the future bill. In this way, Ricardian Equivalence seems less likely to be a problem for future energy taxes than other kinds of taxes, since some available means of future cost mitigation stimulate current demand rather than just savings.
I should give this better treatment than I am about to but the basic point needs to be addressed.
From Steve Moore to Russ Roberts to Kevin Williamson one of the basic lines of arguments that you hear from conservative econ folks is about how stimulus/government/socialism is bad at creating value. Therefore they seem to reason, none of those things could be a solution to the Great Recession.
The thing is that the Great Recession is problematic not because we aren’t creating value but because we don’t have enough jobs. I know. I spend all semester saying we work to live, we don’t live to work. However, you have to hear me out on this.
Compare for example the depths of the Great Recession with peak of the 1990s in terms of GDP per capita.
You can see that even at the worst of the worst, using an updated data set that shows how truly awful the Great Recession was, we were still wealthier than we ever were during the 90s. That is, there we were making more per person in America than ever during the boom years.
Compared to the 90s that everyone loved, we were a value creating machine.
Ok you might say, but we were living high on the hog then. Now everyone has to cut back out of fear of being laid off. That’s the real pain. Is it? We can’t actually live as well as we did back then.
OK, so lets compare Personal Consumption per Person (this includes the unemployed remember) now versus then
Not even close. Now blows then away. We are consuming way more per person now than in the go-go 90s.
But wait. Tyler Cowen regularly reminds us that we are not as rich as we thought we were. That’s what the Great Recession was all about after all – that sudden realization. Well, lets look at net household assets. This data captures the massive run-up debt during the 90s as a negative, as well as the collapse in the housing and stock markets as negatives.
Now we come close but still no cigar. Even at the depths of the recession, with our mortgage debt sky high, our housing values in the toilet and our 401(k)s ruined, we were wealthier per person than at the height of the dot-com boom.
Yet, there is one measure that doesn’t even come close to matching that during the 1990s and that’s employment per capita.
Now that looks bad, bad, bad. Much below that 90s peak. If that’s the stat that matters then its easy to see why the 90s were freaking awesome and now just blows.
But that stat isn’t production, it isn’t consumption, it isn’t wealth. Its jobs.
The reason this time is so painful is because there is a dearth of jobs, not value. Why people care so much about jobs is a complex story. But the important point for now is that jobs are the issue, not the creation of value.
Lack of jobs is why everyone feels bad, not because they have less or are poorer or the country isn’t producing or consuming as much. And, not to get to meta – in what I hope is an easily readable post – but an economy that makes lots of people feel bad is by definition a bad economy.
Moreover, the feeling that you have now about the economy is not the feeling of lack of value creation. Its not the feeling of socialism.
I wish I had more time to go into this because “what socialism feels like” is an important concept. However, my more conservative readers will may readily get the following example.
Have you ever been pissed off at the fact that your neighborhood school doesn’t teach any of the stuff you want and it feels like your kid is just wasting her valuable time going to all of these pointless classes for no reason. THAT, is what socialism feels like. That is what the lack of value creation feels like.
Its not that you are afraid of losing what you have or that budget constraints are pinching. Its that the stuff which is available to you sucks. It – in extreme cases – is a world where everyone has a job but where no grocery store has fresh milk. It’s a world where everyone gets a pay check but no one can find shoes that fit.
That is what socialism feels like. That is what government getting in the way of the market feels like. In many ways it’s the exact opposite of the way this feels.
Because you know I can’t resist: When you are waiting in your doctor’s office and she is 50mins late and proceeds to be rude to you and not give you “permission” to go buy the drug that you are dying to buy because its finally been “approved.” That’s what socialism feels like.
And, it has nothing to do with whose paying for your insurance and everything to do with the fact that you will go to jail – that place with bars and guards – if you refuse to follow the proper protocols for obtaining drugs.
That’s what failure to create value feels like.
The Great Recession: that’s a problem with jobs, with labor. And, its very different in kind. When we think about what’s going wrong here and how to fix it, we have to keep that squarely in mind.
In response to me he says
Shifting the gears to include all sentient life makes me think that, yes, this really may not be the end of history. After all, the Fukuyama argument hinges crucially on the role of thymos in human affairs, but this is a contingent aspect of homo sapiens’ dispositions. It’s entirely reasonable to imagine the “return” of history some day in the form of something like the insectoid aliens from Enders Game or a robot rebellion.
Matt’s brain my be too small to comprehend my grand social and political theories but it will, nonetheless, provide a diversionary sacrifice to our insect overloads. In the mean time the more prudent among us will be defining the new history – Will Smith style.
I’ve always been highly skeptical that welfare reform would do much to alter the “culture of poverty” We have plenty of historical examples of masses of poor children with few resources. Rarely did they buckle-down and pull themselves up by their boot straps. More commonly they just died from malnutrition and exposure.
I don’t see any reason to think that human beings have changed in some radical and fundamental way.
At the same time, however, I didn’t think the effort to limit benefits to the poor was serious. It was propped-up by a strong economy, but I assumed the benefits would come back over time and or if economy worsened. The march of history is to expand the dole, not contract it.
Yet, there is some evidence that this is not in fact happening. I haven’t looked at the issue in depth but these charts and the stories that I hear through the policy network are in agreement. The safety net is not offsetting the rise in poverty.
There is – at this point – a small but not unreasonable chance that Bank of America is headed for insolvency and illiquidity. As always solvency isn’t that big of a deal if no one is looking. However, it does seem that people are looking. And, importantly illiquidity is not materially distinguishable from death.
So what is to be done?
The Federal Reserve and the Treasury should coordinate a bailout of Bank of America, of course.
Will it happen? I can’t say that I am sure.
Apropos of my previous post, there is a very small but again not zero chance that we are be about to see democracy wreak havoc on the lives of billions of people.
Matt Yglesias continues the argument that There Is No Alternative
. . . pay attention to what’s not being disputed. Nobody, as best I can tell, disagrees that in principle Libya ought to be a republican nation state with a government accountable to its people and beholden to some notion of human rights. Nobody is suggesting a dictatorship of the proletariat or the obsolescence of bourgeois democracy in an era of national struggle for blood and soil. The last big thing in Iran was a violent government crackdown on protestors who were brought out in the streets by election fraud. That’s bad. Yet it’s noteworthy that neither Franco nor Stalin would steal an election. Once you’re conceding the point that were it the case that you lost the election you would be obligated to step down, you’ve abandoned the quest for a viable alternative.
My gut instinct is that liberalism is not the end. And, in fact in the grand sweep of history it will be an curious oddity. My sense is that the future of sentient life is likely authoritarian, traditionalist and devoid of our values of individualism.
However, articulating this is a project for many years from now.
In August, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — declined nine points to −10 from July’s reading of −1. Among the index’s components, shipments lost sixteen points to −17, and new orders dropped six points to finish at −11, while the jobs index inched down three points to 1.
Other indicators also suggested additional softening. The index for capacity utilization declined eight points to −14 and the backlogs of orders fell seven points to end at −25. Additionally, the delivery times index moved down twelve points to end at −4, while our gauges for inventories were virtually unchanged in August. The finished goods inventory index held steady at 17 in August, while the raw materials inventories index added one point to finish at 19
This evidence continues to cut against my previous expectations for a return to growth after a blip. The downturn evident across surveys and has been persistent for several months now.
There can be little doubt at this point that manufacturing is beginning to recess. I would not be surprised to see Industrial Production peak in August.
Based on our standard understanding of how the macro-economy works, with construction depressed and industry recessing, the US economy may now be entering a recession.
I still don’t swallow it completely, but the data are the data and this does appear to be what it is saying.
A previous version of this post used the singular is in referring to data. It was pointed out by Andy Harless who finally snapped at the incessantly poor grammar and spelling in my posts.