Economist's View

Is ''Neo-Imperialism'' the Only Path to Development?

Branko Milanovic:

Is “neo-imperialism” the only path to development?: As is well-known (or should be well-known) Marxism has gradually developed two approaches to imperialism. Marx’s own position was (until the very last years of his life) essentially and unbendingly positive: imperialism, however brutal and disruptive, was the engine whereby more advanced social formation, namely capitalism, was introduced in and transformed more backward societies. Marx’s own writings on the British conquest of India are fairly unambiguous in that respect. Engels’ writings on the French conquest of Algeria are  (as is usually the case when one compares Engels’ and Marx’s writing styles) even more “brutal”. In that “classical” view, Western Europe, the United States and the “Third World” would all develop capitalistically, may relatively quickly come to the approximately same levels of development, and capitalism will then directly be replaced by socialism in all of them.

This view  depended crucially on two assumptions: that (1) the Western working class remain at the low level of income (subsistence) which would then (2) assure its continued revolutionary fervor. Assumption (1) was common to all 19th century economists, was supported until the mid-19th century by the observed evidence, and Marx was not an exception. But towards the end of the century, Engels had noticed the emergence of “workers’ aristocracy”  which blunted the edge of class conflict in Britain, and possibly other advanced countries. The increase in wages was “fed”, Engels argued, from colonial profits realized by British capitalists. Although the increases were mere “crumbs from capitalists’ table” (Engels) they exploded the theory of the “iron law of wages” and, collaterally, the revolutionary potential of the working class in the West.  Thus the seeds of the idea that imperialism may undermine class struggle in developed countries were sown and that had far reaching consequences. ...[continue]...

How Tales of ‘Flippers’ Led to a Housing Bubble

Robert Shiller:

How Tales of ‘Flippers’ Led to a Housing Bubble: There is still no consensus on why the last housing boom and bust happened. That is troubling, because that violent housing cycle helped to produce the Great Recession and financial crisis of 2007 to 2009. We need to understand it all if we are going to be able to avoid ordeals like that in the future.

But the explanations for what happened in housing are not, I think, to be found in the conventional data favored by economists but rather in sociologically important narratives — like tales of getting rich through “flipping” houses and shares of initial public offerings — that constitute the shifting mentality of the era. ...

By now, the notion of getting rich by flipping houses is entrenched. I searched Amazon for books on “flipping houses” and came up with 325 hits, most written in the past few years..., many of these books make extravagant pitches and seem aimed at inspiring amateurs to plunge into risky ventures.

The public fascination with speculating in housing has been held in check by regulators empowered by the 2010 Dodd-Frank Act, but that restraint is tenuous with the election as president of a real estate promoter intent on reducing regulators’ power. These narratives are still potent and could easily spur further spirals in the housing market.

Inflation Isn't Cooperating With the Fed

Tim Duy:

Inflation Isn't Cooperating With the Fed: The Federal Reserve can’t catch a break on the inflation numbers, which are simply not helping in its drive to normalize monetary policy.

Monetary policy makers have three possible responses to the weak inflation data. First, they can define down the extent of an acceptable miss on their target. Second, they can dismiss the numbers as transitory and focus instead on full employment. Third, they can rethink their estimates of full employment and the subsequent implications for the path of interest rates... Continue reading at Bloomberg Prophets...

Darwin Visits Wall Street

“biology is a closer fit to economics than physics”:

Darwin Visits Wall Street, by Peter Dizikes, MIT News: If you have money in the stock market, then you are probably anticipating a profit over the long term — a rational expectation given that stocks have historically performed well. But when stocks plunge, even for one day, you may also feel some fear and want to dump all those stress-creating equities.

There is a good reason for this: You’re human.

And that means, to generalize, that you have both a rational side and some normal human emotions. To Andrew Lo, the Charles E. and Susan T. Harris Professor and director of the Laboratory for Financial Engineering at the MIT Sloan School of Management, accepting this basic point means we should also rethink some common ideas about how markets work.

In economics and finance, after all, there is a long tradition of thinking about investors as profit-maximizing rational actors, while imagining that markets operate near a state of perfect efficiency. That sounds nice in theory. But evidence shows that this view is not sufficient for understanding the radical swings that market sentiment creates.  

“When you and I are making investment decisions independently, we’ll exhibit different behavior,” Lo says. Those varied decisions help keep markets stable, most of the time. “But when we all feel threatened at the same time, we’re likely to react in the same way. And if we all start selling stocks at once, we get a market crash and panic. Fear can overwhelm rationality.”

Now Lo has written a new book about the subject, “Adaptive Markets,” published this month by Princeton University Press. In the book, he draws on insights from evolutionary theory, psychology, neuroscience, and artificial intelligence to paint a new picture of investors. Instead of regarding investors simply as either rational or irrational, Lo explains how their behavior may be “maladaptive” — unsuited to the rapidly changing environments that shifting markets present.  

In so doing, Lo would like to resolve the divergence between the realities of human behavior and the long-standing “efficient markets hypothesis” (EMH) of finance with his own “adaptive markets hypothesis,” to account for the dynamics of markets — and to provide new regulatory mechanisms to better ward off damaging crashes.

“It takes a theory to beat a theory,” Lo quips, “and behavioralists haven’t yet put forward a theory of human behavior.”

Path-dependent

To get a grip on Lo’s thinking, briefly examine both sides of the EMH debate. On the one hand, markets do exhibit significant efficiencies. Do you own a mutual fund that tracks a major stock-market index? That’s because it is very hard for individual investors or fund managers to beat indexes over an extended period of time. On the other hand, based on what we know about market swings and investor behavior, it seems a stretch to think markets are always efficient.

“The EMH is a very powerful theory that has added a great deal of value to investors, portfolio managers, and regulators,” Lo says. “I don’t want to be viewed as criticizing it. What I’m hoping to do is to expand its reach, by explaining under which conditions it’s likely to work well, and under which other conditions we require a different approach.”

As Lo notes in the book, the EMH assumes that individuals always maximize their expected utility — they find the optimal way to spend and invest, all the time. Lo’s adaptive markets hypothesis relaxes this dictum on two counts. First, a successful investing adaptation doesn’t have to be the best of all possible adaptations — it just has to work fairly well at a given time.

And second, Lo’s adaptive markets hypothesis does not hold that people will constantly be finding the best possible investments. Instead, as he writes in the book, “consumer behavior is highly path-dependent,” based on what has worked well in the past.

Given those conditions, the market equivalent of natural selection weeds out poor investment strategies, Lo writes, and “ensures that consumer behavior is, while not necessarily optimal or ‘rational,’ good enough.” Not perfect, but decent.

In this light, consider fund managers who do beat the big stock indexes for a while. In many cases, their successes are followed by years of poor performance. Why? Because they did not keep adapting to a changing investing environment. This familiar dynamic, Lo contends, is one reason we should drop the physics-inspired notions of the market as an efficient mechanism, and think of it in evolutionary terms.

Or, as Lo writes in the book, “biology is a closer fit to economics than physics.” As the physicist Richard Feynman put it, “Imagine how much harder physics would be if electrons had feelings.”

Looking for policy impact

“Adaptive Markets” does not represent the first time Lo has put some of these ideas into print. It is the culmination of a long-term line of inquiry, and the most detailed, extended treatment he has given to the concept.

The book is written for a general audience but has received a wide hearing in academia. Nobuhiro Kiyotaki, an economist at Princeton University, calls “Adaptive Markets” a “wonderful book” that “presents many valuable findings” and “is itself a manifestation of the important finding that rational thinking and emotion go together.”

Lo says his hope for the book, however, is not just to change some minds among the public and other scholars, but to reach policymakers. Having served on multiple government advisory panels about regulation, Lo believes we need regulations that are more generally focused on limiting risk and large-scale crashes, rather than seeking to assess the legitimacy of umpteen new financial instruments.

The analogy Lo likes to make is that finance needs an equivalent of the National Transportation Safety Board, the federal agency that investigates the systemic causes of aviation accidents, among other things, and whose existence has helped engender a period of unprecedented air safety.

Even in the run-up to the 2008 financial-sector crisis, Lo contends, the notorious bond markets trading securities backed by subprime mortgages, and their derivatives, were not deeply “irrational.” After all, those markets had winners as well as losers; the problems included the way the markets were constructed and the opportunity for firms to wildly increase their risks while seeking big payoffs. 

“It’s not so much that market prices were wrong, it’s that the policies and incentives were flawed,” Lo contends.

That might generate some heated debate, but Lo says it is a discussion he welcomes.

“We aren’t really getting traction arguing either for or against efficient markets,” Lo says. “So maybe it’s time for a new perspective.”

Links for 05-18-17

• Calling Literatures From The Vasty Deep - Paul Krugman
• Surprise on long-term wage trends - Brookings Institution
• Economists’ publications lists: Less may be better - VoxEU
• Google and Facebook Arose from Antitrust Enforcement (Video) - ProMarket
• Household Borrowing in Historical Perspective - Liberty Street Economics
• The missing stimulus from the 2014-16 US oil price decline - VoxEU
• The end of silver as a unit of account - VoxEU
• The Market for US Prescription Drugs - Tim Taylor
• When bad arguments work - Stumbling and Mumbling
• But do the numbers add up? - mainly macro

Trump Tax Plan Would Give 400 Highest-Income Americans More Than $15 Million a Year in Tax Cuts

Brandon DeBot at the CBPP:

Trump Tax Plan Would Give 400 Highest-Income Americans More Than $15 Million a Year in Tax Cuts: President Trump’s tax plan contains specific, costly tax cuts for the wealthy and profitable corporations but only vague promises for working families.[1] Even accounting for his proposal to restrict most itemized deductions, the top 1 percent would still receive annual tax cuts averaging at least $250,000 per household. But the tax cuts at the very top would be far larger. Their annual tax cuts would be more than five times the typical college graduate’s lifetime earnings.The 400 highest-income taxpayers — whose incomes average more than $300 million a year — would get average tax cuts of at least $15 million a year each, we estimate from IRS data.  Their annual tax cuts would be more than five times the typical college graduate’s lifetime earnings.[2]..  The total tax cut for these 400 households would be at least $6 billion annually.

The Trump plan prioritizes these tax cuts for the highest-income Americans over many worthy programs that need more resources. For example, $6 billion is more than the federal government spends on grants for major job training programs to assist people struggling in today’s economy. An additional annual investment of $6 billion could enable roughly 1.5 million adults each year to train for a new career.[3]

Also, $6 billion is roughly the cost of providing 600,000 low-income families with housing vouchers that would help them afford decent, stable housing. ...

Yet, far from investing in these areas, President Trump has proposed to sharply cut the budget area (non-defense discretionary programs) that funds job training and housing vouchers, even as his tax plan delivers massive tax cuts to the top.[5] ...

While the Trump tax plan would clearly shower windfall tax cuts on those at the very top, it provides little detail on whether or how it would help working families. Indeed, the plan wouldn’t provide any tax benefits to at least 17 million working families and individuals because they don’t earn enough to owe federal income taxes (though most pay significant payroll and other taxes). Those families would very likely be worse off under the plan because policymakers eventually would likely pay for the large tax cuts for the very wealthy at least in part by cutting programs on which they and millions of other low- and middle-income families rely.[9]

Links for 05-17-17

• The immigrants who made America - VoxEU
• Talking Monetary Policy with Paul Krugman - David Beckworth
• The impact of usage-based pricing on broadband - Microeconomic Insights
• Trump’s Unconstitutional Executive Order on Regulations - Regulatory Review
• Potential growth and phony budgeting - Jared Bernstein
• Management practices and productivity - VoxEU
• State and Local Government Business Incentives - Tim Taylor
• What reforms for France? - Thomas Piketty
• Baumol’s Cost Disease - IGM Forum
• The media’s unbalanced referendum - mainly macro
• The Current Economy and the Outlook - FRBSF

Fed Watch: Can't Keep A Good Economy Down

Tim Duy:

Can't Keep A Good Economy Down, by Time Duy: Call it the revenge of the hard data. Industrial production popped in April while the number of sectors contracting fell sharply:

Manufacturing itself enjoyed a healthy monthly gain:

One point to watch is the improvement in automobile assemblies:

Given tepid auto sales, this may add to inventories and ultimately place downward pressure on car prices.

Housing starts remained solid in April:

To be sure, the volatile multi-family component slid, but I think that should not be unexpected. Apartment construction bounced backed more quickly after the recession and I suspect has peaked. More of the action should now be in the single family component, which continues to gain traction. Given under-building in many markets, there seems to be plenty of room for continued growth in that sector.

From last week, retail sales growth continues, albeit as a lackluster pace:

Nothing to write home about, either good or bad.

Altogether incoming data adds up to some healthy growth expectations for the first quarter. The Atlanta Fed GDPNow tracker is looking for 4.1 percent growth in the second quarter. Still, I don't think the US economy is really posting such numbers any more than I believe first quarter growth was 0.7 percent. Take the average of the two and you get 2.4 percent, which is probably closer to reality.

This all clears the way for the Fed to hike rates again in June. But going forward, inflation remains a sticking point:

Either inflation is headed higher or the economy has more slack than the Fed believes. We will be seeing how that story plays out in the second half of this year.

Top Taxes & Growth

Chris Dillow:

Top taxes & growth: Rich people don’t like paying taxes. This is pretty much the only thing we’ve learned from some of the hysterical reaction in the papers to Labour’s plan to raise taxes on the rich.

Let’s remember the historical facts here. Low tax rates aren’t associated with faster growth – if anything the opposite. ...

For me, the non-hysterical arguments against Labour’s tax plans lie elsewhere. You could argue that – with tax morale low partly as a result of the rise of individualism – they’ll decrease social solidarity. People will regard them not as the price for living in a civilized society but as a burden which subsidizes “scroungers”. Or you could argue that the revenue raised by taxes will fuel wasteful public spending. Or you might argue that redistributive taxation isn’t enough: we need to reduce inequalities of power as well as income. Or you might argue that the tax base should be shifted from incomes to land and inheritances...

What you shouldn’t do, though, is argue that higher top taxes will wreck the economy. Other things might do that, but it’s unlikely that top taxes will.

The Fed Is Making a $2 Trillion Mistake

Narayana Kocherlakota:

The Fed Is Making a $2 Trillion Mistake: Sometime later this year or early in 2018, the U.S. Federal Reserve intends to embark on an unprecedented maneuver: Reducing the vast bond holdings that it has accumulated in its efforts to support the economy over the past decade. I think this is a mistake, in both concept and implementation. ...

Links for 05-16-17

• Reducing inequality by deconcentrating capital - VoxEU
• The Fall of the Labor Share and the Rise of Superstar Firms - NBER
• Trump’s worst lie about ‘priming the pump’ - Washington Post
• Nattering Nabobs of NAFTA - Paul Krugman
• Understanding the Cost Disease of Services - Dietrich Vollrath
• Podcast: Krugman on Liquidity Traps, the Great Recession... - David Beckworth
• The career ladder, switching jobs, and the gender wage gap - Equitable Growth
• China Still Wants To Import Commodities, Not Manufactures - Brad Setser
• Housing Vouchers Work: Funded Vouchers Are Used - CBPP
• Constructing the Home Purchase Sentiment Index - FRBSF
• Esther George’s Excuse for Raising Interest Rates Has It Backwards - EconoSpeak
• Do Credit Markets Watch for Bankruptcy? - Liberty Street Economics
• Walmart and Banking: It's Time to Reconsider - Cecchetti & Schoenholtz
• The consequences of shrinking the Fed’s balance sheet - Gavyn Davies
• Should we demand ‘fully costed’ programmes? - mainly macro
• A Failure to Communicate - Economic Principals
• Determinants of sovereign bond yields - VoxEU

The Growing Dispersion of Wages and Productivity in OECD countries

Giuseppe Berlingieri, Patrick Blanchenay, and Chiara Criscuolo at VoxEU:

Great Divergences: The growing dispersion of wages and productivity in OECD countries: Summary Some firms pay well while others don’t; and some are highly productive while many aren’t. This column presents new firm-level data on the increasing dispersion of wages and productivity in both the manufacturing and services sectors in 16 OECD countries. Wage inequalities are growing between firms, even those operating in the same sector – and they are linked to growing differences between high and low productivity firms. Both globalisation and technological progress (notably information and communications technologies) influence these outcomes – as do policies and institutions such as minimum wages, employment protection legislation, unions, and processes of wage-setting.

Paul Krugman: The Priming of Mr. Donald Trump

"a delusion of truly Trumpian proportions":

The Priming of Mr. Donald Trump, by Paul Krugman, NY Times: Donald Trump has said many strange things in recent interviews. ... Over here in Econoland, however, the buzz was all about Trump’s expressed willingness, in an interview with the Economist magazine, to pursue tax cuts even if they increase deficits, because “we have to prime the pump” — an expression he claimed to have invented. “I came up with it a couple of days ago and I thought it was good.”

Actually, the expression goes back generations...

But why should anyone besides pedants care?

First, a mind is a terrible thing to lose..., that Economist interview was basically one long senior moment...

Second, we’re talking about some really bad economics here. ...

America may not be all the way back to full employment — there’s a lively debate among economists over that issue. But the economic engine no longer needs a fiscal jump-start. This is exactly the wrong time to be talking about the desirability of bigger budget deficits. ...

Which brings me to my third point: Trump’s fiscal delusions are arguably no worse than those of many, perhaps most professional observers of the Washington political scene.

If you’re a heavy news consumer, think about how many articles you’ve seen in the past few weeks with headlines along the lines of “Trump’s budget may create conflict with G.O.P. fiscal conservatives.” The premise ... is that there is a powerful faction among Republican members of Congress who worry deeply about budget deficits...

But there is no such faction, and never was.

There were and are poseurs like Paul Ryan, who claim to be big deficit hawks. But there’s a simple way to test such people’s sincerity:... when you see a politician claim that deficit concerns require that we slash Medicaid, privatize Medicare, and/or raise the retirement age — but somehow never require raising taxes on the wealthy, which in fact they propose to cut — you know that it’s just an act.

Yet somehow much of the news media keeps believing, or pretending to believe, that those imaginary deficit hawks are real, which is a delusion of truly Trumpian proportions.

So I’m worried. Trump may be not just ignorant but deeply out of it, and his economic proposals are terrible and irresponsible, but they may get implemented all the same.

But maybe I worry too much; maybe the only thing to fear is fear itself. Do you like that line? I just came up with it the other day.

Links for 05-14-17

• Jobless recoveries: Exploring technology's role - VoxEU
• The unknown Tocqueville in America - Branko Milanovic
• Counterproductive austerity - Stumbling and Mumbling
• How should theory and evidence relate to each other? - Noahpinion
• An Interview with Amanda Pallais - Women in Economics at Berkeley

Links for 05-13-17

• Trumpistan - Paul Krugman
• Medicaid Works, in 5 Charts - Center on Budget and Policy Priorities
• Trump et al’s weirder than weird economics interview - Jared Bernstein
• Trump Administration Contemplates the North Korea Model - Marcus Noland
• Brian Epstein's radical metaphysics - Understanding Society
• Working Class Has the Blues, and Elites Lack Answers - Noah Smith
• The Dollar, Robot Monetary Overloads, and the AD Gap - David Beckworth
• At the N.Y. Fed: The Evolution of OTC Derivatives Markets - Liberty Street
• The bias against emergence - Stumbling and Mumbling
• U.S. Trade Deficit Stable in Q1 - Brad Setser

Paul Krugman: Judas, Tax Cuts and the Great Betrayal

"almost an entire party appears to have decided that potential treason in the cause of tax cuts for the wealthy is no vice":

Judas, Tax Cuts and the Great Betrayal, by Paul Krugman, NY Times: The denarius, ancient Rome’s silver coin, was supposedly the daily wage of a manual worker. If so, the tax cuts that the richest 1 percent of Americans will receive if the Affordable Care Act is repealed — tax cuts that are, obviously, the real reason for repeal — would amount to the equivalent of around 500 pieces of silver each year.

What inspired this calculation? The spectacle of Mitch McConnell, the Senate majority leader, and Paul Ryan, the speaker of the House, defending Donald Trump’s firing of James Comey.

Everyone understands that Mr. Comey was fired ... because his probe of Russian connections with the Trump campaign was accelerating and, presumably, getting too close to home. So this looks very much like the use of presidential power to cover up possible foreign subversion of the U.S. government.

And the two leading Republicans in Congress are apparently O.K. with that cover-up, because the Trump ascendancy is giving them the chance to do what they always wanted, namely, take health insurance away from millions of Americans while slashing taxes on the wealthy.

So you can see why I find myself thinking of Judas.

For generations, Republicans have impugned their opponents’ patriotism. ...

But now we have what may be the real thing: circumstantial evidence that a hostile foreign power may have colluded with a U.S. presidential campaign, and may retain undue influence at the highest levels of our government. And all those self-proclaimed patriots have gone silent, or worse. ...

And we know how to resolve the remaining uncertainty: independent investigations...

At this point ... almost an entire party appears to have decided that potential treason in the cause of tax cuts for the wealthy is no vice. And that’s barely hyperbole. ...

So it’s naïve to expect Republicans to join forces with Democrats to get to the bottom of the Russia scandal — even if that scandal may strike at the very roots of our national security. Today’s Republicans just don’t cooperate with Democrats, period. They’d rather work with Vladimir Putin.

In fact, some of them probably did.

Now, maybe I’m being too pessimistic. Maybe there are enough Republicans with a conscience — or, failing that, sufficiently frightened of an electoral backlash — that the attempt to kill the Russia probe will fail. One can only hope so.

But it’s time to face up to the scary reality here. Most people now realize, I think, that Donald Trump holds basic American political values in contempt. What we need to realize is that much of his party shares that contempt.

Links for 05-12-17

• R-Star and the Draghi rules - VoxEU
• Trump and Sinclair's Art of the Deal - ProMarket
• The problem of ignorant voters - Stumbling and Mumbling
• The Link Between Inequality and Economic Development – IMF Blog
• Getting Fiscal Stimulus and Central Bank Independence In Synch - Adair Turner
• Global Audit Firms Are Lobbying  to Dilute Sarbanes-Oxley Reforms - ProMarket
• Increased Optimism about Home Price Growth - Liberty Street Economics
• China’s Q1 Import Surge, Disaggregated - Brad Setser
• Benefits and Challenges from Globalization - William Dudley
• Robots Aren’t Destroying Enough Jobs - Greg Ip
• Obamacare reduced bankruptcy rate - Kenneth Thomas

SNAP Helps Low-Wage Workers

Brynne Keith-Jennings at the CBPP:

SNAP Helps Low-Wage Workers: For millions of Americans, work doesn’t provide enough income for them to feed their families. Our major new report explains that SNAP (formerly food stamps) provides workers with low pay and often fluctuating incomes with crucial additional monthly income to help put food on the table. It also helps workers get by while they’re between jobs.

Up to 30 percent of Americans earn pay that would barely lift a family above the poverty line for full-time, year-round work. And, in many cases, workers who want a full-time job can only get part-time work or have irregular schedules that can change from week to week, with little advance notice or worker input.

Also, low-wage jobs tend to lack crucial supports such as paid sick leave, which can cost workers their jobs when they get sick or must care for an ill family member. In addition, low-wage workers are less likely than other workers to qualify for unemployment insurance.

SNAP benefits support work. The benefit formula phases out benefits slowly as earnings rise and includes a 20 percent deduction for earned income to reflect work-related expenses. As a result, SNAP benefits fall by only 24 to 36 cents for each additional $1 of earnings for most households. SNAP benefits can help smooth out volatile income and provide much-needed food assistance when workers’ hours are cut or they lose their jobs.

SNAP participants work in a wide range of jobs but, compared to all workers, a greater share of them are in service occupations (see graph) and industries such as retail and hospitality — jobs likelier to have low wages and other disadvantages. In some occupations, such as dishwashers, food preparation workers, and nursing, psychiatric, and home health aides, at least one-quarter of workers participate in SNAP. For them and millions of others whose jobs don’t provide enough or steady income to provide for their families, SNAP provides essential support.

The Economics of Trust

From the IMFBlog:

The Economics of Trust: Trust in other people – the glue that holds society together – is increasingly in short supply in the United States and Europe, and inequality may be the culprit.

In surveys over the past 40 years, the share of Americans who say that most people can be trusted has fallen to 33 percent from about 50 percent. The erosion of trust coincides with widening disparities in incomes.

But does inequality reduce trust? There is evidence that it does, according to research by Eric D. Gould, a professor of economics at Hebrew University, and Alexander Hijzen, a senior economist at the Organisation for Economic Cooperation and Development. They analyzed data from the American National Election Survey from 1980 to 2010. The results show that wider income inequality explains 44 percent of the drop in trust. The authors, who reported their findings in an IMF working paper, found similar results in Europe...

Links for 05-11-17

• Trump and Sinclair's Art of the Deal - ProMarket
• More Fish Through Less Fishing - Tim Taylor
• Escaping the Wage Trap - Bill Emmott
• The "fully costed" fallacy - Stumbling and Mumbling
• Countries with Higher Tariffs Have Larger Trade Deficits - Caroline Freund
• Which Dealers Used the Fed’s Lender-of-Last-Resort Facilities? - Liberty Street

Will Falling Unemployment Pressure The Fed?

Tim Duy:

Will Falling Unemployment Pressure The Fed?, by Tim Duy: The unemployment rate continues to slide, hitting 4.4 percent in April. The Federal Reserve’s median forecast for joblessness -- 4.5 percent from the end of 2017 through 2019 -- has once again proved optimistic. But does this mean that Fed officials will hike their interest rate projections at the next Open Market Committee meeting? ... Continued at Bloomberg Prophets...

Links for 05-10-17

• Google Is as Close to a Natural Monopoly as the Bell System in 1956 - ProMarket
• Why are the UK and US more vulnerable to right wing populism? - mainly macro
• Do you know an editor at a top general interest journal? - John Whitehead
• Medical Spending in Old Age - Federal Reserve Bank of Richmond
• Is US Manufacturing Really Great Again? - Douglas L. Campbell
• Lucas/Sargent critique’s inherent contradictions - Equitable Growth
• The Feds Turn a Blind Eye to Goldman’s Game - David Dayen
• What’s so Great about Science? - Uneasy Money
• Generativism - Understanding Society

The Fed Is on the Right Side of Its 'Transitory' Bet

Tim Duy:

The Fed Is on the Right Side of Its 'Transitory' Bet: The Federal Reserve receives a lot of criticism for the way it conducts monetary policy, but it shouldn’t be faulted for delivering a hawkish message at last week’s policy meeting in the face of data showing a marked slowdown in first-quarter growth. The May meeting came off largely as expected, with policy makers leaving interest rates unchanged and the post-meeting statement containing a clear message that policy makers remained set on a June rate hike... Continued at Bloomberg Prophets...

The Link between Family Structure and Wealth Is Weaker Than You Might Think

William Emmons and Lowell Ricketts of the St. Louis Fed:

The Link between Family Structure and Wealth Is Weaker Than You Might Think: ...While there is an overall correlation between, say, two-parent families and higher wealth, research presented at the symposium found that this link actually is inconsistent across racial and ethnic groups and quite weak in a causal sense.

Spurious Connections

In a nutshell, when we focus on family-structure differences within racial or ethnic groups, rather than between groups, there is essentially no relationship at all. Our interpretation is that any correlation between family structure and wealth that exists in aggregate data is largely spurious. That is, it reflects deeply rooted structural, systemic or other unobservable factors that differ across races and ethnicities.

These “deep” causes of differences in both family structure and wealth accumulation could include:

• The continuing effects of past discrimination
• Segregation in housing, health care and education
• Environmental, epigenetic (that is, suppressed expression of true genetic abilities) or cultural factors that differentially affect early-childhood development

We concluded that family-structure differences are a symptom of deeper driving forces, not an important cause per se of wealth differences. One implication is that, even if we could change patterns of marriage and child-bearing among many people, this alone would be unlikely to affect racial and ethnic wealth gaps very much, if at all. ...

Links for 05-09-17

• Our Bankrupt Policy for Puerto Rico - David Dayen
• Globalization in the Crosshairs - Brad DeLong
• Trust in fast and slow decisions - VoxEU
• Rage against the machines: New technology and violent unrest - VoxEU
• Regional trade agreements and growth volatility - VoxEU
• Income Stagnation Has Hit the Young Harder Than the Old - Kevin Drum
• Immiseration Revisited: The four phases of working time - EconoSpeak
• Changes in U.S. lifetime income inequality - Equitable Growth
• Sectoral concentration and bank performance - VoxEU
• America Is Forgetting Why We Share Things - Noah Smith
• Whistling Past the Geopolitical Graveyard - Nouriel Roubini
• When men were men and Republicans cared about deficits - Catherine Rampell
• Reassessing Frameworks and Strategies in a Low R-star World - John Williams
• Would Italy be better off without the euro? - Cecchetti & Schoenholtz
• A Good Effort with One Glaring Flaw - Regulatory Review
• Forecasting with Julia - Liberty Street Economics
• Replicating Anomalies - No Hesitations

The Great Risk Shift is Back

I have a new column:

Killing Banking Rules Will Invite a Whopper of a Recession: The vote in the House of Representatives to dismantle Obamacare was not the only attempt to undo key legislation from the Obama years that occurred last Thursday. Though it mostly went unnoticed, the House Financial Services Committee voted in favor of the Financial Choice Act. This legislation would substantially weaken the Dodd-Frank financial reforms.

If the Republicans are successful, and that is not assured at this point for either piece of legislation, it will increase economic insecurity for most households. ...

Paul Krugman: Republicans Party Like It’s 1984

"This is an act of deliberate betrayal":

Republicans Party Like It’s 1984, by Paul Krugman, NY Times: There have been many bad laws in U.S. history. ... But has there ever been anything like Trumpcare...? It’s a miserably designed law, full of unintended consequences. It’s a moral disaster, snatching health care from tens of millions mainly to give the very wealthy a near-trillion-dollar tax cut.

What really stands out, however, is the Orwell-level dishonesty of the whole effort. As far as I can tell, every word Republicans, from Trump on down, have said about their bill — about why they want to replace Obamacare, about what their replacement would do, and about how it would work — is a lie, including “a,” “and” and “the.”

And what does it say about the state of American politics that a majority of the representatives of one of our major political parties have gone along with this nightmarish process? ... Trumpcare breaks every promise Republicans ever made about health ... and ... they are doing so with intent. ... This is an act of deliberate betrayal.

...Why are they doing this, and why do they think they can get away with it?

Part of the answer to the first question is, presumably, simple greed. Tens of millions would lose access to health coverage, but ... people with incomes over $1 million would save an average of more than $50,000 a year.

And there is a powerful faction within the G.O.P. for whom cutting taxes on the rich is more or less the only thing that matters. ...

As for why they think they can get away with it: Well, isn’t recent history on their side? The general shape of what the G.O.P. would do to health care, for the white working class in particular, has long been obvious, yet many people who were sure to lose, bigly, voted Trump anyway.Why shouldn’t Republicans believe they can convince those same voters that the terrible things that will happen if Trumpcare becomes law are somehow liberals’ fault?

And for that matter, how confident are you that mainstream media will resist the temptation of both-sides-ism, the urge to produce “balanced” reporting that blurs the awful reality of what Trumpcare will do if enacted?

In any case, let’s be clear: What just happened on health care shouldn’t be treated as just another case of cynical political deal making. This was a Freedom is Slavery, Ignorance is Strength moment. And it may be the shape of things to come.

Links for 05-08-17

• Less is more when it comes to Federal Reserve policy - Larry Summers
• “Troubled Wisconsin Man Goes on 50 State Killing Spree” - Econbrowser
• Inflation targets and the benefits of an explicit tolerance ban - VoxEU
• On Health and Welfare, Moral Arguments Outweigh Economics - NYTimes
• Can France Survive Without Europe? - Gloomy European Economist
• Will Baumol - The Enlightened Economist
• Compassionate capitalism in the Middle Ages - VoxEU
• It's not the economy, stupid - Stumbling and Mumbling
• Underestimating the impact of austerity - mainly macro
• The Wrong Way to Fix Student Debt - The New York Times
• Gender discrimination vs market competition in India - VoxEU
• Snippets from the Roman world - Understanding Society

Links for 05-05-17

• Trends in US absolute income mobility since 1940 - VoxEU
• Arguments against basic income are straw men - VoxEU
• Committee Decisions and Monetary Policy Rules - Stanley Fischer
• 125 Years of Women's Participation in the Economy - Janet Yellen
• House Panel Approves Bill to Weaken Dodd-Frank - The New York Times
• Regulating Wall Street: What Needs to Happen Next? - Tim Taylor
• How Zombie Companies Stop Productivity Growth - Bloomberg
• Unemployment Has Nowhere to Go But Up for Trump - Noah Smith
• Productivity, Technology, and Demographics – IMF Blog
• William Baumol: Truly Productive Entrepreneurship - A Fine Theorem
• Rosy Forecasts of Growth Likely to Produce Unrealistic Budget Estimates - CBPP
• Animal Spirits in a Monetary Model - Roger Farmer and Konstantin Platonov
• Why Did Trump Accept Venezuela’s Money? - Kenneth Rogoff

Prime-Age Employment Rate Hits New High for Recovery

Dean Baker:

Prime-Age Employment Rate Hits New High for Recovery: College grads see little gain from last year of employment growth.

The overall unemployment rate fell to 4.4 percent in April, tying the lowest level reached since May of 2001 as the establishment survey reported the economy added 211,000 jobs. With roughly offsetting revisions to the prior two months' job growth, this brings the average for the last three months to 174,000.

While the report on the whole is quite positive, one item especially worth noting is the increase in the employment-to-population ratio (EPOP) among prime-age men. The employment rate for prime-age workers edged up to 78.6 percent. This is a new high for the recovery, although it is still 1.7 percentage points below the pre-recession peak and 3.3 percentage points below the 2000 peak.

In April, the EPOP for prime-age women edged down to 71.9 percent, 0.9 percentage points below its pre-recession peak and 3.0 percentage points below its 2000 peak. However, the EPOP for prime-age men rose 0.2 percentage points to 85.4 percent. This is still 2.6 percentage points below its pre-recession peak and 4.1 percentage points below its 2000 peak, but the rise does suggest that there is still more room for EPOPs among prime-age men to increase. The fact that EPOP for both prime-age men and women remain below pre-recession levels and far below 2000 levels strongly suggests that the issue is a lack of demand in the economy and not a decrease in the ability or desire of people to work.

Interestingly, employment patterns do not appear to be following the story where benefits are going disproportionately to the most educated. Over the last year, the unemployment rate for college grads has not changed, while the EPOP is actually down by 0.3 percentage points from its year-ago level. At 2.4 percent the unemployment rate for college grads is much lower than for those with less education, but it is still 0.6 percentage points above its pre-recession low. By comparison, the unemployment rate for those with just a high school degree has fallen by 0.8 percentage points over the last year to 4.6 percent, while the EPOP for this group has risen by 0.8 percentage points.

The number of people involuntarily working part-time fell sharply to 5,272,000. This is a new low for the recovery, but still more than 800,000 above pre-recession levels. While the number of people involuntarily working part-time has fallen sharply since the implementation of the Affordable Care Act, the number of people choosing to work part-time is up by more than 1.8 million. In this vein it is worth noting that the number of incorporated self-employed is up by 8.2 percent in the first four months of 2017 compared with 2013.

If minimum wage hikes in many states and cities are leading to preventing teens from getting jobs, it is not showing up in the national data. Teen employment is up by 3.4 percent over the last year.

While the duration measures for unemployment all edged down, one discouraging area is the relatively low quit rate. At 11.2 percent it is roughly a percentage point below pre-recession levels and is 4.0 percentage points below the peak reached in 2000. Workers are still reluctant to give up jobs.

The big job gainers in April were restaurants (26,200 jobs), professional and technical services (23,100 jobs), local government (23,000 jobs), and health care (19,500 jobs). While the growth in restaurant and professional services were roughly in line with their longer-term trend, the jump in local government jobs is clearly an anomaly. Employment growth in health care has been somewhat slow the last four months, averaging 19,500 a month. This is down from 31,700 in the year up to December.

Retail added only 6,300 jobs after losing 27,400 in March. The sector is likely to remain weak for the near future. Construction employment has been virtually flat the last two months, after jumping by 88,000 in the prior two months. This fits the warm winter story.

There continues to be little evidence of accelerating wage growth. Year-over-year wages are up 2.5 percent, while they are rising at a 2.6 percent annual rate taking the average of the most recent three months with the prior three months.

On the whole, this is very positive report, but one that provides little evidence of the labor market overheating. The EPOPs suggest and quit rates indicate there is still considerable slack.

See also Calculate Risk: Comment: A Solid Employment Report.

Paul Krugman: What’s the Matter With Europe?

If Macron wins, will the European elite learn the wrong lesson?:

What’s the Matter With Europe?, by Paul Krugman, NY Times: On Sunday France will hold its presidential runoff. Most observers expect Emmanuel Macron, a centrist, to defeat Marine Le Pen, the white nationalist — please, let’s stop dignifying this stuff by calling it “populism.” ... A Le Pen victory would be a disaster for Europe and the world.

Yet I also think it’s fair to ask a couple of questions... First, how did things get to this point? Second, would a Le Pen defeat be anything more than a temporary reprieve from the ongoing European crisis? ...

To begin, while France gets an amazing amount of bad press — much of it coming from ideologues who insist that generous welfare states must have disastrous effects — it’s actually a fairly successful economy. ...

Meanwhile..., France offers a social safety net beyond the wildest dreams of U.S. progressives... So why are so many willing to vote for — again, let’s not use euphemisms — a racist extremist?

There are, no doubt, multiple reasons, especially cultural anxiety over Islamic immigrants. But it seems clear that votes for Le Pen will in part be votes of protest against what are perceived as the highhanded, out-of-touch officials running the European Union. And that perception unfortunately has an element of truth.

Those of us who watched European institutions deal with the debt crisis ... were shocked at the ... callousness and arrogance that prevailed throughout. ...

Politically, Eurocrats got away with this behavior because small nations were easy to bully... But Europe’s elite will be making a terrible mistake if it believes it can behave the same way to bigger players.

Indeed, there are already intimations of disaster in the negotiations now taking place between the European Union and Britain. ... E.U. officials are sounding more and more like a jilted spouse determined to extract maximum damages in a divorce settlement. ...Greece-style bullying just isn’t going to work on a nation as big, rich and proud as the U.K.

Which brings me back to the French election. We should be terrified at the possibility of a Le Pen victory. But we should also be worried that a Macron victory will be taken by Brussels and Berlin to mean that Brexit was an aberration, that European voters can always be intimidated into going along with what their betters say is necessary.

So let’s be clear: Even if the worst is avoided this Sunday, all the European elite will get is a time-limited chance to mend its ways.