Friday, June 16, 2017

Must-Read: Lawrence Summers : 5 reasons the Fed may be making a mistake http://delong.typepad.com/summers5-reasons.zip ... [feedly]

Must-Read: Lawrence Summers : 5 reasons the Fed may be making a mistake http://delong.typepad.com/summers5-reasons.zip ...
http://www.bradford-delong.com/2017/06/must-read-lawrence-summers-5-reasons-the-fed-may-be-making-a-mistake-the-paradigm-is-highly-problematic-muc.html

Must-Read: Lawrence Summers: 5 reasons the Fed may be making a mistakehttp://delong.typepad.com/summers5-reasons.zip: "The... paradigm... is highly problematic. Much better would be a "shoot only when you see the whites of the eyes of inflation" paradigm...

...more credible, more likely to result in the Fed's satisfying its dual mandate, reduce risks of recession, and increase the economy's resilience when recession comes. Many of my friends have recently issued a statement asserting that the Fed should change its inflation target.... I think that this issue is logically subsequent to the question of how policy should be made in the near term with the given 2 percent inflation target.... First, the Fed is not credible with the markets.... Markets do not share the Fed's view that inflation acceleration is a major risk. Indeed they do not believe the Fed will attain its 2 percent inflation target for a long time to come....Second, the Fed regularly proclaims that it has a symmetric commitment.... So why would the Fed want to be projecting only 2 percent inflation entering the 11th year of recovery with an unemployment rate clearly below their estimate of the NAIRU?... The PCE core price level is a full 4.3 percent where it would be had it risen by the Fed's target amount over the past decade.... Policy should be set with a view to modestly raise target inflation, perhaps 2.3 or even 2.5 percent inflation, during a boom with the expectation that inflation will decline during the next recession.... Third... we have little ability to judge when inflation will accelerate in a major way. The Phillips curve is at most barely present in data for the past 25 years. And as Staiger, Stock and Watson demonstrated years ago, the NAIRU, assuming such a thing exists, can only be estimated with extreme imprecision.... In recent months both overall and core inflation have come down along with market and survey measures of inflation expectations... contrary to all the Fed staff models....
Fourth... there is good reason to believe that a given level of rates is much less expansionary than it used to be given the structural forces operating to raise saving propensities and reduce investment propensities. I am not sure that a 2 percent funds rate is especially expansionary in the current environment.... Fifth, a "whites of their eyes" paradigm... require[s] the Fed... simply needs to assert that its objective is to assure that inflation averages 2 percent over long periods of time... inflation is... very difficult to forecast... focus on inflation and inflation expectations data rather than measures of output and employment in forecasting inflation. With these principles internalized, the Fed would lower its interest-rate forecasts to those of the market and be more credible. It would allow inflation to get closer to target and give employment and output more room to run...

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Budget Impasse at Critical Juncture; Time to Move Beyond Income Tax Cuts [feedly]

Budget Impasse at Critical Juncture; Time to Move Beyond Income Tax Cuts
http://www.wvpolicy.org/budget-impasse-at-critical-juncture-time-to-move-beyond-income-tax-cuts/

For Immediate Release
Contact: Caitlin Cook, 304.720.8682

(Charleston, WV) – WVCBP Executive Director Ted Boettner released the following statement on regarding the state's budget impasse:

"At this critical point with just 15 days left before a government shutdown, it is imperative budget discussions move beyond initiating major changes to the state's tax system and focus on passing a balanced budget that protects West Virginia families and our state's future," Boettner said. "The majority of the tax proposals offered during the regular session and special session have fallen short in regards to revenue after just one year, locking in future financial problems for West Virginia. PDF news release.

The recent actions by the Kansas Legislature to roll back the income tax cuts that led the state to three credit down grades and hundreds of millions in lost revenue should serve as a clear warning for West Virginia lawmakers. Low-and middle-income families should not have to pay for a tax break for the wealthy at a time when the state faces a severe budget crisis.

The controversy of including income tax cuts in the tax plan is making it much harder to balance and pass a budget for the upcoming year. Legislators should consider the Simple Plan or a variation of this plan that would balance the budget, share the load, not lock in future deficits and protect our families."

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Is the Fed fighting an old war? [feedly]

Is the Fed fighting an old war?
http://jaredbernsteinblog.com/is-the-fed-fighting-an-old-war/

As expected, as their meeting concluded yesterday, Federal Reserve Chair Janet Yellen and company decided to raise the benchmark interest rate they control by one-quarter of a percentage point. The question is: why?

She was, of course, asked about this in lots of different ways in her press conference. [Pause here for a moment and consider the substantive difference between a Yellen press conference and a Spicer press conference. Kinda makes you shudder.] Specifically, journalists reasonably wanted to know what was up with the rate hikes given how low inflation has been. Sure, we're closing in on full employment, but the Fed's preferred inflation gauge, the core PCE, is below their 2 percent inflation target and slowing. It's decelerated from 1.8 percent in the first two months of this year to 1.6 percent in the last two months. Expectations remain low–under 2 percent–as well. That's the opposite of what you'd expect if tight labor markets were juicing price growth, and a legitimate reason not to tap the growth brakes with another rate bump.

Chair Yellen, as you'd expect, made a coherent case about not getting "behind the curve" and thus tapping the brakes now to avoid slamming them later. She talked about one-time factors dampening price growth, predicting that as soon as these faded, inflation would firm up and begin to reflect the tight labor market.

Coherent, but not very convincing. Economist Joe Gagnon, though he considers the rate hike to be "reasonable" based on other indicators he cites, bemoaned the ad-hockery of the Fed's inflation analysis:

Is the FOMC revisiting the bad old days of the 1970s, when it tried to explain away inflation that was too high by pointing to a seemingly endless stream of one-off factors? The [core PCE] already excludes volatile food and energy prices. We certainly do not want to get on the slippery slope of excluding ever more categories with price movements the FOMC does not like.

A bit of ad-hockery and one-offery might be okay but for the following picture. The black line is the Q4/Q4 change in the core PCE, and the dotted lines are the Fed's projections of future inflation with each projection labeled by its date of publication (I left a few out for clarity, but they followed the same pattern). It's a pretty clear picture of hope over experience. The Fed keeps projecting that inflation will climb to their 2 percent target, while actual inflation keeps ignoring their predictions.

Sources: BEA, Fed

This suggests a problem with the model. One theory is that big, structural changes in trade and technology have permanently lowered the rate of price growth. But economist David Mericle from Goldman Sachs (no link) looks at trade, the internet, and productivity growth and finds they fail to explain much of the "hope-over-experience" pattern above. Import penetration from countries that export relatively cheap goods to us remains high compared to where it was 20 years ago, but it has actually come down in the past few years. Yes, we're buying a ton more stuff online, but online prices don't diverge that much from other prices, at least as measured by our deflators (Mericle cites "outlet bias," meaning the indexes don't always record when consumers switch to cheaper online sellers). Finally, it's awfully hard to tell an accelerating productivity story when productivity growth has slowed over the very period wherein the Fed's been consistently missing their target to the downside.

So, what's going on with inflation? If the Fed can't figure it out, I doubt I'll be able to do so. Gagnon points out that the recent decline in the dollar should nudge inflation up a bit. Mericle's points are all well taken, but perhaps when you add structural changes together, their whole is bigger than the sum of their parts.

Another thing to consider is that while we're surely closing in on full employment, there are signs that we're not there yet. Pockets of weakness persist for some less advantaged groups and in some parts of the country, a point Chair Yellen herself recently made, and even nationally, there's not all that much wage pressure. Worker bargaining power looks lower than I might have expected at 4.3 percent unemployment. Empirically, the links in the chain between tight labor markets, wage pressure, and price pressure appear much weaker than they were decades ago, a point Ben Spielberg underscores in the recent podcast we did on the Federal Reserve (which some have found surprisingly entertaining!). It's very important not to fight old wars.

For the record, Janet Yellen has long been a stalwart slack fighter, at least before she and most of the others decided: "enough already with the data-driven thing—it's time to get rates back up to normal levels." The problem is that figure above suggests there may well be a new normal, one to which the old benchmarks don't apply. On the basis of that possibility, I'd urge the members of the committee to put down the old maps and look out the window. It's a different world out there.

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The Long-Run Effects of Immigration during the Age of Mass Migration [feedly]

The Long-Run Effects of Immigration during the Age of Mass Migration
http://economistsview.typepad.com/economistsview/2017/06/the-long-run-effects-of-immigration-during-the-age-of-mass-migration.html

The Long-Run Effects of Immigration during the Age of Mass Migration, by Jay Fitzgerald:Studying immigrant flows during the period of highest immigration in U.S. history, Sandra Sequeira, Nathan Nunn, and Nancy Qian find that counties that received large influxes of immigrants experienced both short- and long-term economic benefits compared with other regions. In Migrants and the Making of America: The Short- and Long-Run Effects of Immigration during the Age of Mass Migration (NBER Working Paper No. 23289), they report that these benefits were realized without loss of social and civic cohesion and the long-term benefits persisted to the dawn of the 21st century.

U.S. counties that received larger numbers of immigrants between 1860 and 1920 had higher average incomes and lower unemployment and poverty rates in 2000.

The researchers recognize that immigrants may have been drawn to locations with particular attributes, and that these attributes may also have contributed to those locations' subsequent growth. They therefore focus on differences in the dates on which counties became connected to the railway network, which made it much easier for immigrants to reach a particular location, as a source of quasi-random variation in immigrant inflows.

Using census data along with historical railway maps and other source information, the researchers track county-level immigration, along with the decade-by-decade fluctuations in immigrant flows to the United States. The gradual expansion of railway networks, which connected only 20 percent of the nation in 1850 but 90 percent by 1920, together with the timing of waves of immigration, provide variation in how accessible different locations were to immigrants from 1850 to 1920.

A central finding is that the economic benefits of immigration were significant and long-lasting: In 2000, average incomes were 20 percent higher in counties with median immigrant inflows relative to counties with no immigrant inflows, the proportion of people living in poverty was 3 percentage points lower, the unemployment rate was 3 percentage points lower, the urbanization rate was 31 percentage points higher, and education attainment was higher as well. The researchers do not find any cost of immigration in terms of social cohesion. Counties with more immigrant settlement during the Age of Mass Migration today have levels of social capital, civic participation, and crime that are similar to those of regions that received fewer immigrants.

Measuring the short-term impacts of immigration from 1850 to 1920, the researchers find a 57 percent average increase by 1930 in manufacturing output per capita and a 39 to 58 percent increase in agricultural farm values in places that received the median number of immigrants relative to those that received none. Though some of the counties studied show a lower rate of literacy due to the influx of immigrants, many of whom did not speak English, the researchers find that illiteracy declined steadily over the years and that there was an increase in innovation activity, as measured by patents per capita, in counties with large immigrant populations.

The long-run positive effects of immigration in counties connected to rail lines appear to have arisen from the persistence of the short-run benefits, particularly greater industrialization, agricultural productivity, and innovation.

"Taken as a whole, our estimates provide evidence consistent with a historical narrative that is commonly told of how immigration facilitated economic growth," the researchers conclude. "Despite the unique conditions under which the largest episode of immigration in U.S. history took place, our estimates of the long-run effects of immigration may still be relevant for assessing the long-run effects of immigrants today."

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Links for 06-14-17 [feedly]

Links for 06-14-17
http://economistsview.typepad.com/economistsview/2017/06/links-for-06-14-17.html

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I’ve Covered Obamacare Since Day One. I’ve Never Seen Lying and Obstruction Like This. [feedly]

I've Covered Obamacare Since Day One. I've Never Seen Lying and Obstruction Like This.
http://economistsview.typepad.com/economistsview/2017/06/ive-covered-obamacare-since-day-one-ive-never-seen-lying-and-obstruction-like-this.html

Sarah Kliff:

I've covered Obamacare since day one. I've never seen lying and obstruction like this, Vox.com: Republicans do not want the country to know what is in their health care bill.

This has become more evident each day, as the Senate plots out a secretive path toward Obamacare repeal — and top White House officials (including the president) consistently lie about what the House bill actually does. ...

My biggest concern isn't the hypocrisy; there is plenty of that in Washington. It's that the process will lead to devastating results for millions of Americans who won't know to speak up until the damage is done. So far, the few details that have leaked out paint a picture of a bill sure to cover millions fewer people and raise costs on those with preexisting conditions.

The plan is expected to be far-reaching, potentially bringing lifetime limits back to employer-sponsored coverage, which could mean a death sentence for some chronically ill patients who exhaust their insurance benefits. ...

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NYTimes.com: A Finger Exercise On Hyperglobalization

Sent by jcase4218@gmail.com:

A Finger Exercise On Hyperglobalization

Why small cost reductions led to big trade.

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