Category Archives: Mark Thoma is Indispensable

Brad DeLong Makes an Omission

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He writes,

So what do economists have to say when they speak as public intellectuals in the public square? As I see it, economists have five things to teach at the “micro” level–of how individuals act, and of their well-being as they try to make their way in the world. These are: the deep roots of markets in human psychology and society, the extroardinary [sic] power of markets as decentralized mechanisms for getting large groups of humans to work broadly together rather than at cross-purposes, the ways in which markets can powerfully reinforce and amplify the harm done by domination and oppression, the manifold other ways in which the market can go wrong because it is somewhat paradoxically so effective, and how the market needs the state to underpin and manage it on the “micro” level.

Pointer from Mark Thoma.

The phrase “the ways in which markets can powerfully reinforce and amplify the harm done by domination and oppression” locates Brad on the three-axis model, doesn’t it? You can read his post and see whether his examples prove his point. I tend to think not, but I do not want to focus my post on this issue.

What is absolutely missing in Brad’s list is any mention of public choice. Thus, we are left to take the enchanted view of the state as the cure for all of the market’s problems. Is he saying that economists are not qualified to speak about the flaws in government processes? Or is he saying that even though we know something about incentive problems and institutional weaknesses of government, we should shut up about it?

If Brad were to employ this gambit in a debate on economic philosophy, I think he would be dead out of the opening, as a chess player would put it.

The Wall Street Menace

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1. Stephen G Cecchetti and Enisse Kharroubi write,

we find that manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms. That is, we confirm the results in the model: by draining resources from the real economy, financial sector growth becomes a drag on real growth.

Pointer from Mark Thoma.

2. James Kwak writes,

According to Wilmarth, the fundamental problem, and the reason things don’t get significantly better, is the political power of major financial institutions.

He refers to this article.

Pointer also from Mark Thoma.

I would add that the proposed housing finance “reform” in Corker-Warner is exactly what Wall Street wants. If enacted, it will move essentially all of the risk in housing finance to the shadow banking sector. My guess is that interest-rate risk will prove to be the next bomb to go off, and it will not have a very long fuse.

A Public Sector Implosion?

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From Neil Irwin in the WaPo:

From July 2008 to January 2013, the sector shed more than 737,000 jobs. Had the jobs merely been maintained, the unemployment rate would be as much has half a percentage point lower.

Pointer from Mark Thoma.

From Mark Perry at AEI:

in the 50 months since June 2009 when the recession ended, more than 6.3 million jobs have been created in the private sector and the employment level today is 5.8% higher than in June 2009. Over that same period, government sector jobs have fallen by 3.3%, and by more than 750,000 jobs.

My guess is that state and local governments have to put relatively more money into Medicaid and into shoring up pension plans, which leaves them less to spend on new workers. Also, do not be so sure that this is macroeconomically important. It could be that if state and local governments had retained workers, then the private sector would not have expanded as much. In any case, the bigger story, numerically, is the drop in the labor force. As Brad Plumer puts it.

If the same percentage of adults were in the workforce today as when Barack Obama took office, the unemployment rate would be 10.8 percent.

David Andolfatto’s Challenge

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He writes,

The PCE inflation rate since 1990 averaged 2.09% per annum.

What’s interesting about this diagram is that even though the Fed does not officially target the PCE price level, the data above suggests that the Fed is behaving as if it does.

As a price-level (PL) target is equivalent to a nominal GDP (NGDP) target in a wide class of macroeconomic models (especially under the assumption of constant productivity growth), then what more does the NGDP crowd expect from an official NGDP target? Seems to me that they are just asking for more price inflation and wishfully hoping that some of the subsequent rise in NGDP will take the form of real income.

Tell me I’m wrong (and why).

Pointer from Mark Thoma.

1. I made a similar point when I wrote,

From April of 2003 through April of 2008, the rate of growth of the CPI averaged 3.2 percent. From April of 2008 through April of 2013, it averaged 1.6 percent. If in 2007 you had asked macroeconomists to predict the consequences of a decline in the inflation rate of that magnitude, how many would have told you to expect unemployment to rise above 7 percent? None of them would have foreseen it. My guess is that many of the macroeconomists would have regarded a drop in inflation of 1.6 percentage points as close to a non-event for unemployment.

2. I downloaded the quarterly PCE data from 1990 Q1 through 2013 Q3. The average inflation rate (simple average, not compounded) was 2.16 percent for the whole period. For the sub-period prior to 2008 Q3 it was 2.34 percent. For the sub-period since it has been 1.43 percent. So, suppose the Fed’s inflation target was actually 2.34 percent. In that case, it recently undershot its target by 0.91 percentage points. As I pointed out above, that hardly seems like enough to cause Armageddon.

In fact, it was not even the worst miss. From 1997 Q3 through 1999 Q3, the PCE inflation rate averaged 1.10 percent, which would be a miss of 1.20 percentage points. If 0.91 caused the Great Recession, why was 1.20 consistent with strong growth?

3. One of Scott Sumner’s arguments against targeting prices is that prices are mis-measured. I think if you go with the mis-measurement argument, you have to explain away the 1997-1999 anomaly by saying that there was more inflation and less real growth than what the statisticians reported; turning to 2008-Q3 to present, you explain the anomaly by saying that there was less inflation and more real growth than what the statisticians reported. I think those are pretty difficult cases to make. The sorry-looking employment figures for the last five years are consistent with weak real growth. (NOTE: I wrote this before Scott Sumner replied, but I think I anticipated most of Scott’s points. These days, I almost never publish a post immediately. Scheduling them in advance instead makes me more careful.)

4. I hope that Andolfatto sees that there is a larger point to be made here than to pick on Scott Sumner. If a “wide class” of models suggests that you would not see a Great Recession arising from a small miss to an inflation or price-level target, then I think it is time to open one’s mind to other ideas.

(The term “wide class” sticks in my craw. In my table of contents, you may recall that I said “the macroeconomics profession became narrow, inbred, and retarded.” The book is progressing well, but I have left that phrase out for now.)

Good Sentences

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From James Kwak.

the worrying thing is that the intellectual, regulatory, and political climate seems to be basically the same as it was in 2004: no one wants to [do] anything that might be construed as hurting the economy, and no one wants to offend the housing industry.

Pointer from Mark Thoma.

I get the same impression. The housing lobby is back and is running the show again. Indeed, Ed Pinto writes,

By caving in to the demands of the lobbies representing the Government Mortgage Complex, both the CFPB and the six agencies are committing a grievous error. Calling QMs a prime loan and making QM = QRM gives risky loans an imprimatur they do not deserve. This is a repeat of the false comfort Fannie and Freddie gave to the definition of a prime loan. As we now know there was little that was prime in most of their prime loans.

Have a nice day.

From Different Planets

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Daniel Little:

the idea that a properly functioning market economy will tend to reduce poverty and narrow the extremes of income inequality has been historically refuted — at least in the case of American capitalism.

Echoed by Mark Thoma.

On the other hand, Don Boudreaux.

Each and every thing that we consume today in market societies is something that requires the coordinated efforts of millions of people, yet each of us is able to command possession and use of these things in exchange for only a small fraction of our work time.

Labor Force (non-) Participation

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David Leonhardt writes,

Yes, the unemployment rate has fallen. But almost the entire reason it has fallen is the drop in the number of people in the labor force — either working or actively looking…This shift long predates the recent financial crisis, too. The labor force participation rate peaked more than a decade ago… the labor force participation rate has fallen almost as sharply for people aged 25 to 54 as it has for the overall adult population.

Pointer from Mark Thoma.

Leonhardt refers to this white paper, from Express Employment Professionals, which appears to be a search firm. It says,

According to Gallup’s “Payroll to Population” measure, fewer Millennials were working full time in June of 2013 than in June of 2012, 2011, or 2010…

That paper and Leonhardt also refer to a note by San Francisco Fed economists Leila Bengali, Mary Daly, and Rob Valletta. They write,

Although the 2007–09 downturn exhibits a strong positive relationship between state-level changes in employment and participation, the recovery so far does not. This calls into question our interpretation that much of the recent participation decline is cyclical and likely to reverse. However, the current weak correlation between changes in employment and labor force participation could reflect employment’s relatively modest recovery to date. The economy has been expanding for a sustained period. But, as of March 2013, we have recovered only 67% of total jobs lost during the downturn. Thirty-seven months after the employment trough in past recoveries, employment greatly exceeded the pre-recession peak.

Leonhardt argues that the phenomenon of lower labor force participation is important. I agree.

It is hard to invoke conventional macroeconomics to explain it. Sticky nominal wages? If wages are too high, then I would think we should see labor force participation that is high rather than low. That is, lots of people would want to work because wages are too high to clear the labor market.

Casey Mulligan’s idea of a redistribution recession? As I read the recent Cato paper by Tanner and Hughes, since 1995 the disincentive to work has gone down in many states (see table 2 of their paper). For example, in Illinois, they calculate that in 1995 overall welfare benefits were a salary equivalent to $29,000, but today they are only $13,580, after adjusting for inflation. One would think that labor force participation would have increased in such states. Meanwhile, no large state shows an increase of as much as $5000. I think one would have to bring disability into the story to make the case. Indeed, the white paper from EEP says,

Fourteen million Americans, including roughly 8.5 million former workers receive disability. In 2011, that included 4.6 percent of the population between the ages of 18 and 64. These Americans are not included among the “unemployed.” And it’s estimated that less than one percent of them have returned to the workforce in the last two years.

Another story to invoke is that of job polarization. The EEP paper refers to a previous survey.

The survey also found that 53 percent of more than 400 U.S. employers say that recruiting and filling positions is “somewhat difficult” or “very difficult.”

Banks and Political Power

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Simon Wren-Lewis and I may disagree on many things, but not on this.

Most economists are instinctively against state subsidies, unless there are obvious externalities which they are countering. With banks the subsidy is not just an unwarranted transfer of resources, but it is also distorting the incentives for bankers to take risk, as we found out in 2007/8. Bankers make money when the risk pays off, and get bailed out by governments when it does not.

Read the whole thing. Pointer from Mark Thoma

What Did Keynes Really Mean?

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Roger Farmer writes,

As I have argued now for more than six years, Keynesian economics is not about sticky wages and prices. It is about the inability of a market economy to coordinate on a Pareto efficient steady-state equilibrium.

Thanks to Mark Thoma for the pointer.

This is an old controversy–a “well-squeezed orange,” as Charles Kindleberger described the question of what caused the industrial revolution. In the 1960s, Clower and Leijonhufvud were the spokesmen for Farmer’s view.

The coordination problem also can be given a classical reading, as I do with PSST. However, I totally reject the notion of a “steady-state equilibrium.” The economy is constantly creating new opportunities and destroying old business models. It is in the midst of these dynamic changes that workers become unemployed.

A Theme from My Next Book

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Jag Bhalla writes a post entitled Is Economics More Like History Than Physics? If we are talking about macroeconomics, then I would say yes. That is a major theme of the book I am working on. Bhalla writes,

Steven Pinker says, “No sane thinker would try to explain World War I in the language of physics.” Yet some economists aim close to such craziness.

Pinker says the ”mindset of science” eliminates errors by “open debate, peer review, and double-blind methods,” and especially, experimentation. But experiments require repetition and control over all relevant variables. We can experiment on individual behavior, but not with history or macroeconomics.

Pointer from Mark Thoma.

Here is Pinker’s essay.