Ten Open Questions for the Techno-Optimist [feedly]

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Ten Open Questions for the Techno-Optimist
// Digitopoly

From what I can gather from several recent articles, many serious pundits have arguments with the views of 'techno-optimists.' A techno-optimist appears to be somebody who has blind faith in the power of technology to cure all ills, and particularly, to create economic growth. (See e.g., here, here, here, here, or here, and there are many more…)

I understand skepticism with an optimist, and asking someone naïve to 'show me the money.' As a rule of thumb, it is a good idea to be skeptical of bloggers and futurists who lack hard economic statistics.

That said, skepticism is an attitude, not a conclusion. Go ahead and ask for hard data, but do not close an open question. Sometimes innovative IT has had spectacular impact on the economy and sometimes it has not. It takes work to recognize the difference. Indeed, there is a set of norms and a range of standard tools for settling these questions – such as quality-adjusted price indices, revenue adjusted for inflation, and a range of economic accounting techniques.

This column (shamelessly) aims to educate journalists about some of the big open questions in research that studies productivity growth from innovative IT. While I am at it, I hope the topic informs graduate students about great topics for a thesis. Be forewarned, however. It is a little shocking how much (or how little) we really know about recent experience. Many of these questions are wickedly difficult.

The only thing I can promise with certainty is the absence of an easy answer.

1. Online pictures and videos are everywhere except in the productivity statistics. Tim Berners Lee invented the web to share graphs and pictures and other media, and nobody paid anything for licenses for the software. It spread everywhere, so we got a combination of low cost and wide use. Seems good for economic growth, right? To be sure, a space alien might see the web for the first time and might conclude that the web was invented primarily to share baby pictures and cat videos, and to illustrate men and women in, um, acts of procreation. Reflect for a thoughtful moment and really look beyond the superficial. There are millions of web pages. An enormous ecosystem of browsers and server software and networking infrastructure supports its use, and some of these actors – mainly Internet Service Providers – make some revenue, well north of fifty billion in wireline access. Online advertising is a little less. Is that it? How about online sales, which is less than eight percent of US sales revenues, but does not make large profits? What boost did the US get – a one-time surge in growth or a steady set of gains until now?

2. How much productivity does email produce? Email has a different history than the web, but its rise motivates almost the same types of questions. Nobody ever paid a licensing fee to make use of this invention. Last year over 200 billion emails were sent per day. To be sure, 75% of those emails are spam, but that still leaves a lot of quality communication. Where do we see those gains? Gmail and HoTMaiL, the two largest providers of email, charge nothing. Microsoft's Outlook makes revenue, but that is not the contribution of email to GDP. Surely not. So how much does it contribute? When did email lead to growth – twenty years ago, when email largely displaced postal mail of letters? How about recently?

3. What were the gains from reduction in search costs? Who among you uses portals, search engines, recommendation sites, and online maps? OK, everyone can put down the hands. Remember how your parents used to fumble through the Yellow Pages? Remember how a cross-city trip involved laying out a great big paper map on the kitchen table? Remember when a cousin's recommendation determined which restaurant in a new neighborhood you visited? Difficult as it might be for teenagers today to comprehend, everyone did manage in those dark ages. Still, today is much better. How much did the reduction in search costs bring to GDP, if anything, and when? Advertising supports some of this activity, which surely is only one aspect of a broad economic gain. Well, how do you measure those gains?

4. What were the gains from making the long tail available? Ebay, Amazon, Craigslist, and a gazillion sites made the long tail available – of books, music, clothing, memorabilia, and millions of other products. What an enormous variety lies at everyone's finger tips. What does the long tail contribute to economic growth? There have been some estimates in specific product categories, such as books and shoes, but none across the entire economy. Were most of those gains realized in late 1990s? Do those gains today simply grow along with Amazon's growth? Are most of the gains not realized as revenue, and, therefore, not measured?

5. Up to date online news is addictive. Is it productive too? The creation of online media ushered in an era for news-junkies. Again, hard for a child to comprehend how anybody checked the sports scores or learned timely financial news (without access to expensive Bloomberg terminals), but we did manage before. More deeply, what is the contribution of more timely information to economic productivity? Seems like many gains are not measured. If they are, where do those gains show up in national statistics? In which industries?

6. Did the rise of remote work change productivity? The cell phone and smart phone made work more mobile. The deployment of cloud is pushing in the same direction. There have been a few studies of a consumer's willingness to pay for mobility, but very little about its effect on work. How did the economy gain from the introduction of mobility into work life? Just like the other questions: Some of the gains might show up in productivity statistics, or in prices, or in the hours worked, or in labor participation rates. Or not. How do we know?

7. How much did Wikipedia benefit the economy? Founded in 2001, Wikipedia is the third largest repository of human knowledge in the world today, exceeded only by the British Library and the Library of Congress. It is a top twenty site in every developed country. Traditional GDP measurement would value the advertising, but Wikipedia does not have any. Is Wikipedia's value the displaced revenue at Encarta, Britannica, World Book and Colliers? Or is Wikipedia's worth the value of the time put in by all its volunteers? Or is it the value to users, and the time savings it affords? What concept of value is appropriate, how would you implement it and measure its growth?

8. Enterprises do not own all their IT. Does that mean they are more productive? We are well past the days when an organization owned all its IT. Today we live in the era of cloud, networked services, rented manufacturing facilities, and marketing with social graphs. We are far past the era when a firm bought inputs and produced outputs in a manufacturing process and its productivity could be measured inside the manufacturing plant. In the extreme examples today firms such as Uber and Lyft own very few cars and employ very few people, and, yet, the firms are worth tens of billions. Has more value been created for GDP, if any, by these new organizational forms, that leverage external resources? How would you know?

9. How big were the gains from serving low density areas? Improvements in Internet access led to gains in GDP in places that had limited access to retail outlets. Traditional price indices have an urban bias, because the information is easier to collect in urban stores. Rural America comprises the experience of 15% of the US population (45m people), and a much higher percentage (and number of people) in the developing world. Again, how big were the unmeasured gains? Were most of the gains realized in 1995, or has there been steady progress since as the Internet has gotten faster?

10. What is the value of the creative commons license? A little less than twenty years ago some legal scholars invented the licenses known as the creative commons license. It is designed to permit sharing of copyrighted material in much the same way that open source has licenses for sharing code. Millions of web sites operate with this clever legal adaptation, it is integral to some popular sites with user-provided content, such as YouTube. What is the value of this invention? Do the price indices properly capture the extraordinary decline in the cost of sharing photography and video recordings? If not, how would you make a more accurate index?

These questions presume that many economic gains from the deployment of the commercial Internet went largely unmeasured. Blame flaws in traditional price indices, inadequate definitions of revenue, and flawed productivity attribution exercises.

These questions also tend to imply that the processes that created growth in the recent past will continue to create growth in the future. That motivates the research question. While it is good to fix recent growth statistics, it is even better to measure the gains in the near future.

If these two features make me an optimist, then call me that.

More to the point, if you're an economic researcher and you do not like this list of ten questions, then make your own. Let's focus on one of the biggest unaddressed economic topics of our time.

Copyright held by IEEE. To view the printed essay, click here. (edit)

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Public and Private Sector Payroll Jobs: Carter, Reagan, Bush, Clinton, Bush, Obama [feedly]

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Public and Private Sector Payroll Jobs: Carter, Reagan, Bush, Clinton, Bush, Obama
// Calculated Risk

By request, here is another update of an earlier post through the August 2016 employment report including all revisions.

NOTE: Several readers have asked if I could add a lag to these graphs (obviously a new President has zero impact on employment for the month they are elected). But that would open a debate on the proper length of the lag, so I'll just stick to the beginning of each term.

Note: We frequently use Presidential terms as time markers - we could use Speaker of the House, or any other marker.

Important: There are many differences between these periods. Overall employment was smaller in the '80s, however the participation rate was increasing in the '80s (younger population and women joining the labor force), and the participation rate is generally declining now.  But these graphs give an overview of employment changes.

First, here is a table for private sector jobs. The top two private sector terms were both under President Clinton.  Reagan's 2nd term saw about the same job growth as during Carter's term.  Note: There was a severe recession at the beginning of Reagan's first term (when Volcker raised rates to slow inflation) and a recession near the end of Carter's term (gas prices increased sharply and there was an oil embargo).

TermPrivate Sector
Jobs Added (000s)Carter9,041Reagan 15,360Reagan 29,357GHW Bush1,510Clinton 110,884Clinton 210,082GW Bush 1-811GW Bush 2415Obama 11,921Obama 28,990¹¹43 months into 2nd term: 10,035 pace.
The first graph shows the change in private sector payroll jobs from when each president took office until the end of their term(s). Presidents Carter and George H.W. Bush only served one term, and President Obama is in the final months of his second term.

Mr. G.W. Bush (red) took office following the bursting of the stock market bubble, and left during the bursting of the housing bubble. Mr. Obama (blue) took office during the financial crisis and great recession. There was also a significant recession in the early '80s right after Mr. Reagan (yellow) took office.

There was a recession towards the end of President G.H.W. Bush (purple) term, and Mr Clinton (light blue) served for eight years without a recession.

 Click on graph for larger image.

The first graph is for private employment only.

The employment recovery during Mr. G.W. Bush's (red) first term was sluggish, and private employment was down 811,000 jobs at the end of his first term.   At the end of Mr. Bush's second term, private employment was collapsing, and there were net 396,000 private sector jobs lost during Mr. Bush's two terms. 

Private sector employment increased slightly under President G.H.W. Bush (purple), with 1,510,000 private sector jobs added.

Private sector employment increased by 20,966,000 under President Clinton (light blue), by 14,717,000 under President Reagan (yellow), and 9,041,000 under President Carter (dashed green).

There were only 1,921,000 more private sector jobs at the end of Mr. Obama's first term.  Forty three months into Mr. Obama's second term, there are now 10,911,000 more private sector jobs than when he initially took office.

 A big difference between the presidencies has been public sector employment.  Note the bumps in public sector employment due to the decennial Census in 1980, 1990, 2000, and 2010. 

The public sector grew during Mr. Carter's term (up 1,304,000), during Mr. Reagan's terms (up 1,414,000), during Mr. G.H.W. Bush's term (up 1,127,000), during Mr. Clinton's terms (up 1,934,000), and during Mr. G.W. Bush's terms (up 1,744,000 jobs).

However the public sector has declined significantly since Mr. Obama took office (down 366,000 jobs). This has been a significant drag on overall employment.

And a table for public sector jobs. Public sector jobs declined the most during Obama's first term, and increased the most during Reagan's 2nd term.

TermPublic Sector
Jobs Added (000s)Carter1,304Reagan 1-24Reagan 21,438GHW Bush1,127Clinton 1692Clinton 21,242GW Bush 1900GW Bush 2844Obama 1-708Obama 2342¹¹43 months into 2nd term, 382 pace
Looking forward, I expect the economy to continue to expand through 2016 (at least), so I don't expect a sharp decline in private employment as happened at the end of Mr. Bush's 2nd term (In 2005 and 2006 I was warning of a coming down turn due to the bursting of the housing bubble - and I predicted a recession in 2007).

For the public sector, the cutbacks are clearly over.  Right now I'm expecting some further increase in public employment during the remainder of Obama's 2nd term, but nothing like what happened during Reagan's second term.

Below is a table of the top four presidential terms for private job creation (they also happen to be the four best terms for total non-farm job creation).

Clinton's two terms were the best for both private and total non-farm job creation, followed by Reagan's 2nd term.

Currently Obama's 2nd term is on pace to be the 3rd best ever for private job creation.  However, with very few public sector jobs added, Obama's 2nd term is only on pace to be the fourth best for total job creation.

Note: Only 342 thousand public sector jobs have been added during the first forty three months of Obama's 2nd term (following a record loss of 708 thousand public sector jobs during Obama's 1st term).  This is about 25% of the public sector jobs added during Reagan's 2nd term!

Top Employment Gains per Presidential Terms (000s)RankTermPrivatePublic Total Non-Farm1Clinton 110,88469211,5762Clinton 210,0821,24211,3123Reagan 29,3571,43810,7954Carter9,0411,30410,345  Obama 2¹8,9903429,332  Pace²10,03538210,417¹43 Months into 2nd Term
²Current Pace for Obama's 2nd Term
The last table shows the jobs needed per month for Obama's 2nd term to be in the top four presidential terms. Right now it looks like Obama's 2nd term will be 2nd or 3rd for private employment, and either 4th or 5th for total employment.

Average Jobs needed per month (000s)
for remainder of Obama's 2nd Termto RankPrivateTotal#1379449#2218398#373293#410203
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Should the Fed keep its balance sheet large? [feedly]

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Should the Fed keep its balance sheet large?
// Ben Bernanke's Blog

I attended the Fed's recent gathering in beautiful Jackson Hole, Wyoming—the first time I had been since the end of my term as Fed chairman. I enjoyed the opportunity to catch up with many friends and former colleagues.

As usual, the media were most focused on divining the next policy move of the Federal Open Market Committee (FOMC), but I found the more interesting (and ultimately more consequential) discussions were about the Fed's longer-term policy framework, the theme of the conference. In this post I'll report on one important debate: the question of the optimal long-run size of the Fed's balance sheet. It seemed to me that the strongest arguments made at the conference supported a strategy of keeping the balance sheet large (though comparable to other major central banks), rather than shrinking it to its pre-crisis level as the FOMC currently plans to do. 

Author



Ben S. Bernanke

Distinguished Fellow in Residence - Economic Studies

The Fed's balance sheet has roughly quintupled since the financial crisis, from about $900 billion in 2007 to about $4.5 trillion today. (See here for a useful overview of the main elements of the Fed's pre-crisis and current balance sheets.) The increase mostly reflects the Fed's large-scale asset purchases (quantitative easing), which the FOMC employed to reduce longer-term interest rates to help the economy recover from the Great Recession. Although the Fed stopped adding to its stock of financial assets in October 2014, it still holds about $2.5 trillion of U.S. Treasury securities and $1.7 trillion of government-guaranteed mortgage-backed securities.

Corresponding to the increase in Fed assets, there have also been substantial changes to the liability side of the balance sheet. Before the crisis, the Fed's liabilities were mostly Federal Reserve notes (currency). Today, Federal Reserve notes are still a large item (about $1.4 trillion), but the largest category of Fed liabilities is bank reserves (deposits that commercial banks hold at the Fed). Bank reserves now total about $2.4 trillion, up from less than $20 billion in 2007. Ultimately, the source of the increase in reserves was the Fed's asset purchases: The Fed financed its purchases of securities from the private sector effectively by writing checks on itself. Sellers of securities deposited those checks in the banking system, and banks in turn added those funds to their reserves.

Importantly, the large increase in the size of the balance sheet, and in the quantity of bank reserves in particular, changed fundamentally how the Fed affects its short-term policy interest rate, the federal funds rate, which is the rate at which banks borrow and lend reserves to each other. Prior to 2008, before the balance sheet expanded, the Fed managed the rate by changing the quantity of reserves in the system. By reducing the available supply of reserves, for example, the Fed could push up their price, the federal funds rate.

With the enormous quantity of reserves now available, however, small changes in the supply of reserves no longer suffice to control the funds rate. Today, the Fed influences it and other short-term rates primarily by varying the interest rate it pays banks on their reserves (known as IOER, or interest on excess reserves). This approach relies on the presumption that banks are unlikely to want to borrow or lend in private markets at an interest rate much different from what they can earn on the reserves they hold at the Fed. To further improve its control of interest rates, the Fed now also allows other private-sector institutional lenders, such as money market funds, to earn a fixed rate of interest on cash held for short periods with the Fed, through a program known as the overnight reverse repurchase (RRP) program. Currently the IOER is set at one-half percentage point and the interest rate on the RRP program is set at one-fourth percentage point. The use of the two rates has proven quite successful so far in keeping the federal funds rate in the FOMC's target range of one-fourth to one-half percent.

It's worth noting that the Fed's current approach to setting interest rates is quite similar to that of other major central banks; the Fed's pre-2008 system, in contrast, was idiosyncratic. Conformity with international practice is not necessarily a reason to prefer the Fed's current tool set. But it is of some comfort to know that, rather than being new and untried, these methods have been in general use for a while and their implications for monetary control are well understood.

Because the size of the Fed's balance sheet is closely tied to its methods for influencing short-term interest rates, the debate at Jackson Hole was about which "package" makes more sense: (1) the pre-2008 system that includes a relatively small balance sheet and the management of the funds rate through operations that vary the supply of bank reserves; or (2) the current system that includes a large balance sheet and the setting of the IOER and the interest rate on RRPs to establish the fed funds rate. The FOMC's publicly announced strategy, reiterated by Janet Yellen in her opening speech, is to return over time to the pre-2008 system. The plan is to do this, at the appropriate time, by ending the reinvestment of maturing securities, thereby allowing the balance sheet to shrink "naturally," and by phasing out the RRP program, so that non-banks will not be able to make deposits at the Fed.

Does this plan make sense? The answer is not clear cut, but based on the discussions at the conference, I'll offer three arguments for changing course and keeping the balance sheet close to its current size in the long run, while managing interest rates through the payment of interest on bank reserves and a continued RRP program.[1]

First, in a paper presented at the conference, Robin Greenwood, Samuel Hanson, and (former Fed Board member) Jeremy Stein pointed out that a large Fed balance sheet could be a tool for enhancing financial stability. As the authors documented, there is a strong demand from the private sector for safe, liquid, short-term securities, as indicated by the fact that investors appear willing to accept much lower yields for very short-term government securities (e.g., one-week T-bills) than for government securities at longer terms, even say six months.[2] A variety of regulatory changes affecting banks, money-market funds, and other firms are likely to increase the demand for safe, liquid assets even further. How can this demand be met? One possibility is to leave it entirely to the private market to supply such assets. We have learned the hard way, though, that this strategy can lead to trouble, if the exceptionally low cost of very short-term borrowing incentivizes risky behavior. For example, before the financial crisis some firms financed long-term risky assets by issuing short-term commercial paper (so-called asset-backed commercial paper). When doubts arose about the quality of the underlying assets, however, this form of financing quickly disappeared, forcing the firms to sell off their assets in destabilizing "fire sales." This dynamic was a major source of the crisis.

To reduce the incentives for such behavior, Greenwood et al. explained, the Fed could provide safe short-term assets (unlike the private-sector analogues, they would be truly safe!), in the form of bank reserves and especially through an expanded RRP program that would be open to a wide range of counterparties. Presumably the availability of such assets at the Fed would crowd out at least some risky private behavior by reducing the liquidity premium on very short-term financing.[3] To do that in a quantitatively meaningful way, however, the Fed would have to keep its balance sheet near its current size and continue (or expand) its RRP program.[4] Importantly, by using its balance sheet as the primary tool for enhancing financial stability, the Fed would gain more scope to focus on its inflation and employment objectives when setting interest rates.

Second, as suggested by Darrell Duffie and Arvind Krishnamurthy in another paper at the conference, a larger balance sheet that incorporates a robust RRP program could improve the transmission of monetary policy. Although the Fed is able to control the federal funds rate reasonably accurately, monetary policy can only have its desired economic effects to the extent that changes in the federal funds rate are reflected in broader financial conditions. However, for various reasons, banks may not fully pass on changes in the funds rate to depositors and borrowers. The links between bank borrowing and lending rates and key rates in securities markets can also be imperfect, due to market fragmentation and inadequate liquidity. Recent regulatory changes threaten to further impede monetary policy transmission.[5] Duffie and Krishnamurthy argue that the Fed could better ensure that its interest rate decisions are transmitted to money markets and financial markets generally by maintaining a sizable RRP program, through which nonbank institutions can deposit directly with the Fed and earn the RRP interest rate.[6] With the RRP program providing a direct link between the short-term policy rate and the securities markets, the Fed could rely less on the indirect transmission of monetary policy through the banking system.

A third possible motivation for the Fed to keep a large balance sheet in the long run relates to its role as a lender of last resort during financial crises. During a panic, depositors and other providers of short-term funding run on financial institutions, which can lead liquidity-short institutions to dump assets at any price (the "fire sales" problem mentioned above). By serving as a lender of last resort (i.e., by standing ready to lend cash against good assets), central banks can replace missing liquidity, avoid the fire sale dynamic, and calm the panic. However, for a central bank to successfully inject liquidity into the system, financial institutions have to be willing to borrow, which they may be reluctant to do if they fear this will identify them as particularly weak financially; this inhibition to borrowing is known as "stigma." The Fed had to work hard to overcome stigma during the financial crisis of 2007-2009, and legislative changes since the crisis have probably make the Fed's stigma problem worse.

It is striking that the stigma problem in several other jurisdictions, notably the eurozone, was less severe. Generally, European financial institutions did not avoid borrowing from the European Central Bank (ECB). A possible reason is that, before the crisis, European financial firms had both substantial deposits at the ECB (reserves) as well as large borrowings.[7] (In contrast, in the U.S. before the crisis, neither bank reserves nor borrowings from the central bank were significant.) Because European firms routinely engaged with the central bank in normal times, during the crisis they appeared able to use their reserves or adjust their level of central bank borrowings without signaling sharp changes in their financial conditions, thus mitigating stigma. In this respect, the ECB's larger balance sheet coming into the crisis improved its ability to serve its critical function as lender of last resort.

I don't want to overstate this argument. As always, there are tradeoffs: For example, in providing more backstop liquidity to the financial system, central banks may reduce the private sector's incentives to manage its own liquidity effectively (the moral hazard problem).[8] The legal environment in the U.S. is also more restrictive than in Europe, in that the ECB can lend routinely to nonbank financial institutions but the Fed cannot. Still, there's a good case to be made that maintaining significant baseline levels of bank reserves and bank borrowings from the Fed would reduce stigma and thus enhance the Fed's ability to respond effectively to a panic.[9]

I've made three arguments for the Fed's keeping a large balance sheet in the future, which would also imply controlling the funds rate by setting the IOER and the rate on RRPs, or through similar methods. What are the counterarguments? Why does the FOMC evidently want to return to the smaller, simpler balance sheet of the pre-crisis period?

Related



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Monday, March 30, 2015



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Ben S. Bernanke

Monday, August 8, 2016



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What tools does the Fed have left? Part 3: Helicopter money

Ben S. Bernanke

Monday, April 11, 2016

One reason appears to be concerns that the RRP program could itself be destabilizing in a financial panic. In this view, in a period of financial stress, investors would be tempted to dump private short-term assets in favor of lending to the Fed. Phasing out the RRP program would avoid this possibility, it is argued.

While this issue deserves further consideration, some good responses came out of the conference. For example, as Jeremy Stein and others pointed out, the RRP program could be capped, limiting the amount of funds that could flow in during a stressed period. Keeping the RRP interest rate low even as private rates rise during a panic would also reduce the incentive for investors to flock to the Fed. To the extent that a larger balance sheet enhances financial stability and improves the Fed's ability to serve as a lender of last resort, as I've discussed in this post, these risks would also be reduced.

A different argument against a large Fed balance sheet was made by my former Princeton colleague Chris Sims in a lunchtime talk on the interaction of monetary and fiscal policies. Chris pointed out that, with large asset holdings, central banks may face increased risk of financial losses, losses which ultimately can affect the government's overall fiscal position. Fiscal losses in turn could trigger a legislative response, threatening the central bank's policy independence. Chris advocated a "lean" balance sheet, minimizing the fiscal risks taken by the central bank.[10]

Certainly this point is important, and it seemed to resonate with the central banking audience. However, Jeremy Stein in his session again made what I thought was an effective counterargument, which was that the central bank's financial risk depends more on the mix of assets held than on the overall quantity. He and his coauthor demonstrated in their paper that, if the Fed were to hold primarily assets that are safe and of limited duration (such as government debt of 2-3 years' maturity), a permanently large balance sheet need not imply excessive fiscal risks.

Overall, I think the FOMC's plan to return to a pre-2008 balance sheet and the associated operating framework needs more thought. The appropriate size and composition of the Fed's balance sheet inevitably depends on a range of complex decisions about the management of monetary policy and the role of the central bank in preventing and responding to financial crises. We've learned a lot about both areas since the crisis, and some important arguments have emerged for keeping the balance sheet larger than in the past. Maybe this is one of those cases where you can't go home again.

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[1] In a talk at the IMF in spring 2015, I raised (in a preliminary way) the points (#1 and #2 below) that a large balance sheet would allow the Fed to provide markets with a safe, short-term asset and that it could improve monetary control.

[2] The authors report that, from 1983-2009, the yield on one-week T-bills averaged 0.72 percentage points less than the yields on six-month bills. Since the risks to both assets are negligible, almost all this difference presumably reflects the "moneyness" of the shortest-term assets.

[3] In other words, the Fed would be using its balance sheet to flatten the short end of the yield curve, thereby reducing the private sector's incentive to engage in maturity transformation.

[4] An alternative public option would be for the Treasury to issue more short-term bills. However, that would involve frequent auctions of new bills, which (the authors argue) the Treasury sees as costly. The advantage of Fed-supplied assets is that they do not involve continuous auctions; instead, the Fed sets an interest rate and allows the demand for RRPs to vary with market conditions.

[5] For example, tougher limits on leverage make it less attractive for banks to participate in repo markets, reducing the liquidity of those markets and loosening the links between the repo rate, a critical short-term funding rate, and the funds rate.

[6] Additional arguments for why a large balance sheet could make monetary policy transmission more effective were provided at the conference by Ricardo Reis. Reis's paper focused on the liability side of the Fed's balance sheet and argued (among other points) that the ability to vary the interest rate paid on reserves according to the maturity of reserve holdings potentially provides the Fed with a new policy tool.

[7] For data on the ECB's balance sheet, see here.

[8] For a discussion of tradeoffs associated with liquidity provision, see this paper at Jackson Hole by Ulrich Bindseil.

[9] To induce banks to borrow from the discount window during normal times, the Fed could consider auctioning discount window credit, as it did during the crisis.

[10] On similar principles, there is a good argument that central banks should minimize interventions in credit markets. I think it makes sense for the Fed ultimately to eliminate its holdings of mortgage-backed securities, for example. At the conference, Bindseil (see footnote 8) also recommended a "lean" balance sheet consistent with the "core" functions of the central bank, although he presented arguments on both sides of the issue.

Comments are welcome but because of the volume, we only post selected comments. 

       

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Eastern Panhandle Independent Community (EPIC) Radio: Big Day On Labor Beat Thursday on EPIC Radio

Eastern Panhandle Independent Community (EPIC) Radio: Big Day On Labor Beat Thursday on EPIC Radio: Big Day On Labor Beat Thursday on EPIC Radio Our new Call-In Line: 1-304-885-0708 OR -- if  you are on Skype, just dial up jcase4218...

From newyorker.com: Obama Pays Mexico Five Billion Dollars to Keep Donald Trump

Obama Pays Mexico Five Billion Dollars to Keep Donald Trump
http://www.newyorker.com/humor/borowitz-report/obama-pays-mexico-five-billion-dollars-to-keep-donald-trump

Many Similarities, but Some Differences Between Cole, Justice [feedly]

Many Similarities, but Some Differences Between Cole, Justice
http://www.wvpolicy.org/many-similarities-but-some-differences-between-cole-justice/

Charleston Gazette-Mail – Both promise to bring back vanishing coal jobs, despite scant evidence that it's possible. Read

Both would fight West Virginia's drug epidemic by cracking down on dealers and pushing for increased treatment options for addicts.

Both want a pay raise for teachers but are vague on where the money would come from.

Neither supports Hillary Clinton for president.

There are quite a few similarities — more so than in most elections — between the two major party candidates for governor of West Virginia, Republican state Senate President Bill Cole and Democratic businessman Jim Justice.

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Bernstein: Context alert: Only 6% of those with health coverage get it through the “individual” market. [feedly]

Context alert: Only 6% of those with health coverage get it through the "individual" market.
http://jaredbernsteinblog.com/context-alert-only-6-of-those-with-health-coverage-get-it-through-the-individual-market/

Every morning these days I'm greeted by front-page articles explaining how Obamacare is seriously broken as private insurers are abandoning the exchanges. No question, that's an important problem for the individual, or "non-group" market, though one with many good solutions (I'll provide links in a moment).

But anyone who makes this point should also be required to make this other point: only 6 percent of health care coverage is provided through the non-group market. About half of those with coverage get it through their employers, another third through public sources, leaving about 10 percent without coverage, down from 13 percent a few years ago (see figure below from the Kaiser Family Foundation; these data are for 2014; the uninsured rate fell another point in 2015).

Source: Kaiser Family Foundation

Neither the Post nor the Journal made this point, and my concern is that its omission leads too many readers to assume that the thinning of providers in the individual market is a fatal flaw as opposed to a manageable problem amenable to fixes.

To be very clear, a 6 percent problem is still a problem, and Obamacare has led to an increase in that corner of the market. But absent the correct context re its minority share, these articles provide the health law's opponents opportunities for over-heated rhetoric, claiming, for example, that we're seeing "the latest piece of evidence that Obamacare is a failed law built on false promises."

In fact, as the coverage trend suggests, Obamacare is working (a point the WaPo, to give credit where it's due, explicitly makes, citing both the coverage gains and various places with healthy competition in the exchanges). Yes, we need to recalibrate the rules around the non-group market. Good ideas to do so include:

–President Obama's idea to add a public option: "Congress should revisit a public plan to compete alongside private insurers in areas of the country where competition is limited. Adding a public plan in such areas would strengthen the Marketplace approach, giving consumers more affordable options while also creating savings for the federal government."

–Henry Aaron's idea to "Make the Obamacare exchange one big marketplace for everyone buying individual health insurance coverage. Nationwide, this would merge the 12 million people who get their insurance through Obamacare with the roughly 9 million who buy their policies outside the exchanges." To be clear, you'd have to do this state-by-state, requiring that any plan sold in that state's non-group market had to be sold through the exchange, so this is obviously a heavy lift in practice (so far, only DC and Vermont take this approach).

But Aaron's idea gets at the heart of the problem, which is expanding the "risk pool" within the individual market to avoid adverse selection problems that have been costly to private insurers, who priced too many of their products for a healthier pool than the one that showed up. My colleague Sarah Lueck offers good ideas on how to make needed risk-pool adjustments.

All that said, my key point here is one of perspective. Without context, a 6 percent problem gets inflated to be far more consequential for the ultimate success of Obamacare than it really is.

 -- via my feedly newsfeed