Economist's View

Links for 06-23-17

• Conversation: David Weil - Equitable Growth
• Development Effects of the Extractive Colonial Economy - A Fine Theorem
• Shedding (night-time) light on the local resource curse - VoxEU
• Cyber attacks: An economic policy challenge - VoxEU
• The Story of Robert Keayne, Protocapitalist - Tim Taylor
• The lack of demand for equality - Stumbling and Mumbling
• Capitalism Can Thrive Without Cooking the Planet - Bloomberg
• Health insurance competition - Microeconomic Insights
• The rise (and fall?) of the cost of education - FRED Blog
• Explanation and critical realism - Understanding Society

Fed's Labor Market Forecasts Don't Make Sense

Tim Duy:

Fed's Labor Market Forecasts Don't Make Sense, by Tim Duy: The Federal Reserve’s unemployment forecast doesn’t add up. It is neither consistent with the median of policy makers’ growth forecasts nor consistent with Chair Janet Yellen’s description of labor market strength. Hence, central bankers will likely find unemployment undershooting their forecast in the second half of 2017. That will keep the central bank in a hawkish mood even if lackluster inflation continues. ...Continued at Bloomberg Prophets...

Links for 06-22-17

• Why you should never use the Hodrick-Prescott filter - VoxEU
• Is the Fed being misguided by the Phillips curve? - Equitable Growth
• Intergenerational mobility and preferences for redistribution - VoxEU
• Low Interest Rates and Bank Profits - Liberty Street Economics
• Price manipulation in the Bitcoin ecosystem - VoxEU
• Free markets need equality - Stumbling and Mumbling
• The Wrong Kind of Entrepreneurs Flourish in America - Bloomberg
• UK monetary policy: you cannot be serious? - mainly macro
• Deficits - IGM Forum

Does the Fed Have a Financial Stability Mandate?

From the Federal Reserve Bank of Richmond:

Does the Fed Have a Financial Stability Mandate?, by Renee Haltom and John A. Weinberg, FRB Richmond: The 2007–08 financial crisis and the Fed's unprecedented response raised new questions about the Fed's role in maintaining the stability of the U.S. financial system.

Central banks have a natural role in financial stability for several reasons. First, monetary policy affects financial conditions in ways that can contribute to either stability or instability; erratic policy or volatile inflation could be destabilizing, for instance. Second, they obtain and develop insights useful for financial stability policy through the course of their other functions. Third, financial conditions are among the broad set of factors considered by central banks in assessing the state of the economy and the appropriate stance of monetary policy.

But for many central banks, the full scope of what they're expected to do in support of financial stability — the extent to which they have an explicit or implicit financial stability mandate — is ambiguous. This is important because a central bank's policy actions and its responses to developments in the economy and financial markets are shaped by its understanding of its mandate. So the nature of the mandate matters for economic outcomes, market expectations (the ex ante "rules of the game"), and accountability.

One reason this issue is inherently challenging is that there is no single definition of "financial stability." Most recent discussions focus on banking crises like the 2007–08 financial crisis, which tend to feature failures of large or many financial institutions, cascading losses, and government interventions. But central banks also have played a role in other types of financial market disturbances, for example, sharp asset price declines (like the Fed's liquidity assurances after the 1987 stock market crash), sovereign debt crises (like the European Central Bank's role in the recent eurozone crisis), and currency crises (like the Fed's role in Mexico's 1994 bailout).

This challenge is clear in the breadth of a definition for financial stability offered in the latest Purposes and Functions publication from the Board of Governors of the Federal Reserve System: "A financial system is considered stable when financial institutions — banks, savings and loans, and other financial product and service providers — and financial markets are able to provide households, communities, and businesses with the resources, services, and products they need to invest, grow, and participate in a well-functioning economy." The publication further states that a financial system ought to have the ability to do so "even in an otherwise stressed economic environment."¹

This Economic Brief takes a descriptive look at the Fed's role in financial stability, including how that role has changed over time, and raises some fundamental questions. ...

Rodrik: Doing (and Teaching) Economics [Video]

(Starts at 7:00 min. The sound is a bit buzzy.)

Links for 06-21-17

• Seattle’s Minimum Wage Experience 2015-16 - IRLE
• Don’t Raise the Debt Limit—Repeal It - WSJ
• Fisticuffs Over the Route to a Clean-Energy Future - NYTimes
• Selecting for Corbynism - Stumbling and Mumbling
• The Blockchain Is Going to Revolutionize Central Banking - ProMarket

Unions in Decline: Some International Comparisons

Tim Taylor: 

Unions in Decline: Some International Comparisons: Union membership and clout has been dropping in the US economy for decades. But it's not just a US phenomenon: a similar drop is happening in many high-income countries. The OECD Employment Outlook 2017 discussed the evidence in "Chapter 4: Collective Bargaining in a Changing World of Work."

Here are a couple of illustrative figures. ...

The OECD chapter provides a more detailed discussion... But several overall patterns seem clear.

1) Labor union power is weaker just about everywhere.

2) The extent of labor union power varies considerably across countries, many of which have roughly similar income levels.  This pattern suggests that existence of unions, one way or another, may be less important for economic outcomes than the way in which those unions function. The chapter notes the importance of "peaceful and cooperative industrial relations," which can emerge--or not--from varying patterns of unionization.

3) In the next few decades, the big-picture question for union workers, and indeed for all workers, is how to adjust their workplace skills and tasks so that they remain valued contributors in an economy characterized by new technologies and global ties. Workers need political representation--whether in the form of unions or in some other form--that goes beyond arguing for near-term pay raises, and considers the difficult problem of how to raise the chances for sustained pay raises and secure jobs into the future.

New Evidence for a Lower New Normal in Interest Rates

This is an FRBSF Economic Letter by Jens H.E. Christensen and Glenn D. Rudebusch:

New Evidence for a Lower New Normal in Interest Rates: The general level of U.S. interest rates has gradually fallen over the past few decades. In the 1980s and 1990s, lower inflation expectations played a key role in this decline. But more recently, actual inflation as well as survey-based measures of longer-run inflation expectations have both stabilized close to 2%. Therefore, some researchers have argued that the decline in interest rates since 2000 reflects a variety of persistent economic factors other than inflation. These longer-run real factors—such as slower productivity growth and an aging population—affect global saving and investment and can push down yields by lowering the steady-state level of the short-term inflation-adjusted interest rate (Bauer and Rudebusch 2016 and Williams 2016). This normal real rate is often called the equilibrium or natural or neutral rate of interest—or simply “r-star.”

However, other observers have dismissed the evidence for a new lower equilibrium real rate and downplayed the role of persistent factors. They argue that yields have been held down recently by temporary factors such as the headwinds from credit deleveraging in the aftermath of the financial crisis. So far, this ongoing debate about a possible lower new normal for interest rates has focused on estimates drawn from macroeconomic models and data. In this Economic Letter, we describe new analysis that uses financial models and data to provide an alternative perspective (see Christensen and Rudebusch 2017). This analysis uses a dynamic model of the term structure of interest rates that is estimated on prices of U.S. Treasury Inflation-Protected Securities (TIPS). The resulting finance-based measure provides new evidence that the equilibrium interest rate has gradually declined over the past two decades.

Macro-based estimates of the equilibrium interest rate

The issue of whether there has been a persistent shift in the equilibrium interest rate is quite important. For investors, this short-term real rate of return that would prevail in the absence of transitory disturbances serves as a key foundation for valuing financial assets. For policymakers and researchers, the equilibrium interest rate provides a neutral benchmark to calibrate the stance of monetary policy: Monetary policy is expansionary if the short-term real interest rate lies below the equilibrium rate and contractionary if it lies above. Therefore, determining a good estimate of the equilibrium real rate has been at the center of recent policy debates (Nechio and Rudebusch 2016 and Williams 2017).

Given the significance of the equilibrium interest rate, many researchers have used macroeconomic models and data to try to pin it down. As Laubach and Williams (2016, p. 57) define it, the equilibrium interest rate is based on “a ‘longer-run’ perspective, in that it refers to the level of the real interest rate expected to prevail, say, five to 10 years in the future, after the economy has emerged from any cyclical fluctuations and is expanding at its trend rate.” Laubach and Williams (2003, 2016) estimate this equilibrium interest rate using a simple macroeconomic model and data on a nominal short-term interest rate, consumer price inflation, and the output gap. Similarly, Johannsen and Mertens (2016) and Lubik and Matthes (2015) provide closely related estimates also by using macroeconomic models and data.

The blue line in Figure 1 summarizes the results of these three fairly similar studies. It shows the average of their three estimated equilibrium real interest rates, which smooths across specific modeling assumptions in each study. In the 1980s and 1990s, this simple macro-based summary measure remained around 2½%. This effectively constant equilibrium interest rate is consistent with the conventional wisdom of that time. It is only in the late 1990s that a decided downtrend begins, and the macro-based measure falls to almost zero by the end of the sample.

Figure 1
Estimates of the equilibrium real interest rate

However, the various macro-based approaches for identifying a new lower equilibrium interest rate have several potential shortcomings. First, these estimates depend on having the correct specification of the complete model, including the output and inflation dynamics. One difficulty in this regard is how to account for the period after the Great Recession when nominal interest rates were constrained by the zero lower bound. During that episode, the link between interest rates and other elements in the economy was altered in ways that are difficult to model. Finally, these estimates use extensively revised macroeconomic data to create historical equilibrium interest rate estimates that would not have been available in real time.

A new finance-based estimate of the equilibrium interest rate

Given the possible limitations of the macro-based estimates, we turn to financial models and data to provide a complementary estimate of the equilibrium interest rate. As detailed in Christensen and Rudebusch (2017), we use the market prices of TIPS, which have coupon and principal payments adjusted for changes in the consumer price index (CPI). These securities compensate investors for the erosion of purchasing power due to price inflation, so they provide a fairly direct reading on real interest rates. We assume that the longer-term expectations embedded in TIPS prices reflect financial market participants’ views about the steady state of the economy including the equilibrium interest rate. Unlike the macro-based estimates, one advantage of this market-based measure is that it can be obtained in real time at a high frequency—even daily. In addition, it doesn’t depend on an uncertain specification of the dynamics of output and inflation. Furthermore, because real TIPS yields are not subject to a lower bound, we avoid complications associated with zero nominal interest rates altogether.

Our analysis focuses on a term structure model that is based only on the prices of TIPS. This choice contrasts with previous TIPS research that has jointly modeled inflation-indexed and standard nominal U.S. Treasury yields (for example, Christensen, Lopez, and Rudebusch 2010). Such joint specifications can also be used to estimate the steady-state real rate—though earlier work has emphasized only the measurement of inflation expectations and risk. However, a joint specification requires additional modeling structure—including specifying an inflation risk premium and inflation expectations. The greater number of modeling elements—along with the requirement that this more elaborate structure remain stable over the sample—raise the risk of model misspecification, which can contaminate estimates of the equilibrium interest rate. By relying solely on TIPS yields, we avoid these complications as well as problems associated with the lower bound on nominal rates.

Still, the use of TIPS for measuring the steady-state short-term real interest rate poses its own empirical challenges. One difficulty is that inflation-indexed bond prices include a real term premium. In addition, despite the fairly large amount of outstanding TIPS, these securities face appreciable liquidity risk resulting in wider bid-ask spreads than nominal Treasury bonds. To estimate the equilibrium rate of interest from TIPS in the presence of liquidity and real term premiums, we use an arbitrage-free dynamic term structure model of real yields augmented with a liquidity risk factor as described in Andreasen, Christensen, and Riddell (2017). The identification of the liquidity risk factor comes from its unique loading for each individual TIPS. This loading assumes that, over time, an increasing proportion of any bond’s outstanding inventory is locked up in buy-and-hold investors’ portfolios. Given forward-looking investor behavior, this lock-up effect implies that a particular bond’s sensitivity to the market-wide liquidity factor will vary depending on how seasoned the bond is and how close to maturity it is. Our analysis uses prices of the individual TIPS rather than the more usual input of yields from fitted synthetic curves. By observing prices from a cross section of TIPS that have different age characteristics, we can identify the liquidity factor. With estimates of both the liquidity premium and real term premium, we calculate the equilibrium interest rate as the average expected real short rate over a five-year period starting five years ahead.

Our finance-based estimate of the natural rate of interest is shown as the green line in Figure 1. These estimates are adjusted slightly upward to account for a persistent 0.23 percentage point measurement bias in CPI inflation. The model uses data back to the late 1990s around the time when the TIPS program was launched. Fortuitously, TIPS were introduced about the same time as the macro-based estimates started to decline, so the available sample is particularly relevant for discerning shifts in the equilibrium real rate. During their shared sample, the macro- and finance-based estimates exhibit a similar general trend—starting from just above 2% in the late 1990s and ending the sample near zero. Most importantly, both methodologies imply that the equilibrium rate is currently near its historical low. The finance- and macro-based estimates of the equilibrium rate rely on different assumptions about the structure of the economy and different data sources. Thus, they have different pros and cons, so their broad agreement about the level of the equilibrium rate is mutually reinforcing.

There are differences between the precise trajectories over time of the two estimates. The macro-based estimate of the natural rate shows only a modest decline from the late 1990s until the financial crisis and the start of the Great Recession. Then, it drops precipitously to less than 1% and edges only slightly lower thereafter. Arguably, the timing of the macro-based path leaves open the possibility that the recession played a key role in causing the decline in the equilibrium rate. This suggests that the drop could be at least partly reversed by a cyclical boom. In contrast, the finance-based estimate falls in the early 2000s, levels off a bit above 1%, and then declines more in 2012. Therefore, the drop in the finance-based estimate does not coincide with the Great Recession, which is consistent with more secular drivers such as demographics or a productivity slowdown.

Finally, we should note that the model dynamics of fluctuations in the equilibrium rate are estimated to be very persistent. Thus, looking ahead, our model also suggests that the natural rate is more likely than not to remain near its current low for at least the next several years.

Conclusion

Given the historic downtrend in yields in recent decades, many researchers have investigated the factors pushing down the steady-state level of the short-term real interest rate. To complement earlier empirical work based on macroeconomic models and data, we estimate the equilibrium real rate using only prices of inflation-indexed bonds. From 1998 to the end of 2016, we estimate that the equilibrium real rate fell from just over 2% to just above zero. Accordingly, our results show that about half of the 4 percentage point decline in longer-term Treasury yields during this period represents a reduction in the natural rate of interest.

Jens H.E. Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco.

Glenn D. Rudebusch is senior policy advisor and executive vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco.

References

Andreasen, Martin M., Jens H.E. Christensen, and Simon Riddell. 2017. “The TIPS Liquidity Premium.” FRB San Francisco Working Paper 2017-11.

Bauer, Michael D., and Glenn D. Rudebusch. 2016. “Why Are Long-Term Interest Rates So Low?” FRBSF Economic Letter 2016-36 (December 5).

Christensen, Jens H.E., Jose A. Lopez, and Glenn D. Rudebusch. 2010. “Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields.” Journal of Money, Credit, and Banking 42(6), pp. 143–178.

Christensen, Jens H.E., and Glenn D. Rudebusch. 2017. “A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt.” FRB San Francisco Working Paper 2017-07.

Johannsen, Benjamin K., and Elmar Mertens. 2016. “The Expected Real Interest Rate in the Long Run: Time Series Evidence with the Effective Lower Bound.” FEDS Notes, Board of Governors of the Federal Reserve System, February 9.

Laubach, Thomas, and John C. Williams. 2003. “Measuring the Natural Rate of Interest.” Review of Economics and Statistics 85(4, November), pp. 1,063–1,070.

Laubach, Thomas, and John C. Williams. 2016. “Measuring the Natural Rate of Interest Redux.” Business Economics 51(2), pp. 57–67.

Lubik, Thomas, and Christian Matthes. 2015. “Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches.” FRB Richmond Economic Brief 15-10 (October 15).

Nechio, Fernanda, and Glenn D. Rudebusch. 2016. “Has the Fed Fallen behind the Curve This Year?” FRBSF Economic Letter 2016-33 (November 7).

Williams, John C. 2016. “Monetary Policy in a Low R-star World.” FRBSF Economic Letter 2016-23 (August 15).

Williams, John C. 2017. “Three Questions on R-star.” FRBSF Economic Letter 2017-05 (February 21).

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

Links for 06-20-17

• Congress can’t pretend tax cuts pay for themselves - Brookings Institution
• Unions, Workers, and Wages at the Peak of the Labor Movement - NBER
• The Blockchain Is Going to Revolutionize Central Banking - ProMarket
• Congress can’t pretend tax cuts pay for themselves - Brookings Institution
• Congress wants to micromanage the Federal Reserve - Jared Bernstein
• Public attitudes to immigration: Salience matters - VoxEU
• Food insecurity among children in 2015 - Brookings Institution
• The Treasury's Missed Opportunity - Cecchetti & Schoenholtz
• Austerity will only end when our leaders start being honest - mainly macro
• The border adjustment tax - VoxEU

Trump’s Apprenticeships are Based upon a Problem That Doesn’t Exist

I have a new column:

Trump’s Apprenticeships are Based upon a Problem That Doesn’t Exist: Last week the Trump administration announced “a workforce training initiative focused on skill-based apprenticeship education” with a goal of creating one million apprenticeships over the next two years. The motivation behind the initiative was explained by Ivanka Trump: “The reality is that there are still Americans seeking employment despite low unemployment rates, and companies are struggling to fill vacancies for positions that require varying levels of skills and training. So the Trump administration is committed to working very closely to close the skills gap."

But is a “skills gap” really a problem in the US? ...

Paul Krugman: Zombies, Vampires and Republicans

"The one obvious payoff to taking health care away from millions: a big tax cut for the wealthy":

Zombies, Vampires and Republicans, by Paul Krugman, NY Times: Zombies have long ruled the Republican Party. ... What are these zombies of which I speak? Among wonks, the term refers to policy ideas that should have been abandoned long ago in the face of evidence and experience, but just keep shambling along.

The right’s zombie-in-chief is the insistence that low taxes on the rich are the key to prosperity. This doctrine should have died...

Despite the consistent wrongness of their predictions, however, tax-cut fanatics just kept gaining influence in the G.O.P. — until the disaster in Kansas...

Will this banish the tax-cut zombie? Maybe — although the economists behind the Kansas debacle, who have of course learned nothing, appear to be the principal movers behind the Trump tax plan, such as it is.

But even as the zombies move offstage, vampire policies — so-called not so much because of their bloodsucking nature, although that too, as because they can’t survive daylight — have taken their place.

Consider what’s happening right now on health care.

Last month House Republicans rammed through one of the worst, cruelest pieces of legislation in history. ...

This bill is, as it should be, wildly unpopular. Nonetheless, Republican Senate leaders are now trying to ram through their own version of the A.H.C.A., one that, all reports suggest, will differ only in minor, cosmetic ways. And they’re trying to do it in total secrecy. ...

Clearly, the goal is to pass legislation that will have devastating effects on tens of millions of Americans without giving those expected to pass it, let alone the general public, any real chance to understand what they’re voting for. ...

This is unprecedented...

Of course..., the one obvious payoff to taking health care away from millions: a big tax cut for the wealthy. As I said, while bloodsucking isn’t the main reason to call this a vampire policy, it’s part of the picture....

You can blame Donald Trump for many things, including the fact that he will surely sign whatever bad bill is put in front of him. But as far as health care is concerned, he’s just an ignorant bystander...

So this isn’t a Trump story; it’s about the cynicism and corruption of the whole congressional G.O.P. Remember, it would take just a few conservatives with conscience — specifically, three Republican senators — to stop this outrage in its tracks. But right now, it looks as if those principled Republicans don’t exist.

Links for 06-19-17

• Are High Rents Inevitable? - The Regulatory Review
• The commercial value of news in the internet era - VoxEU
• Hayek and Rational Expectations - Uneasy Money
• Amazon vs. Walmart - Economic Principals
• Central bank communication strategies - VoxEU

Links for 06-17-17

• FedViews - FRBSF
• Raising the inflation target - mainly macro
• Politicians Vote Against the Will of Constituents 35% of the Time - ProMarket
• How Do You Forecast the Present? - Liberty Street Economics
• The landlords' party - Stumbling and Mumbling
• Cacophony of the social - Understanding Society
• An Update on Foreign Direct Investment - Tim Taylor
• Eliminating high denomination notes and the mob - Bank Underground
• Japan's entry into world markets during the first age of globalisation - VoxEU
• Trends in artificial intelligence technology invention - VoxEU

Janet Yellen Is Her Own Best Successor

Narayana Kocherlakota:

Janet Yellen Is Her Own Best Successor: President Donald Trump has reportedly begun the process of deciding who will lead the U.S. Federal Reserve after Janet Yellen's term ends early next year. If he wants the best outcome for the economy, he can't do better than Janet Yellen. ...

Yellen's policies have contributed to a surprisingly strong labor market recovery, yet also been sufficiently cautious to keep inflation below target. Some would see this as an all-around success, though the Fed's caution does have a downside: Markets appear to believe that the central bank is unwilling or unable to hit its inflation target with consistency. ... If it persists, this loss of credibility means that the Fed will have less ammunition to fight the next recession.  

So could any of the other potential appointees do better? ...

Warsh, Taylor, and Hubbard all reportedly see Yellen’s Fed as having been too dovish, suggesting that that they would have done less to support the economic recovery. This approach would have led to higher unemployment and lower inflation -- an inferior fulfilment of the Fed's dual mandate that marks them as worse candidates than Yellen.  It's also important to remember that Taylor and Warsh argued publicly against additional monetary stimulus in November 2010, when the unemployment rate was almost 10 percent and the inflation rate had fallen nearly to 1 percent. Their concerns about excessive inflation proved to be completely unjustified. Yellen, by contrast, supported stimulus.

Yellen has a proven track record that's hard to beat. ... The president should reappoint her to the position of Fed chair.

The Silence of the Hacks

Paul Krugman:

The Silence of the Hacks: The actual text of the Senate version of Trumpcare is still a secret, even from almost all the Senators who are expected to vote for it. But that’s actually a secondary issue: never mind the precise details, what’s the organizing idea? What is the bill supposed to do, and how is it supposed to do it?

The answer — which I’ve been suggesting for a while — is that they have no idea, and more broadly, no ideas in general. Now Vox confirms this...

Time was when even the worst legislation came with some kind of justification, when you could count on the hacks at Heritage to explain why eating children will encourage entrepreneurship, or something. ...

But now we have legislation that will change the lives of millions, and they haven’t even summoned the usual suspects to explain what a great idea it is. If hypocrisy is the tribute vice pays to virtue, Republicans have decided that even that’s too much; they’re going to try to pass legislation that takes from the poor and gives to the rich without even trying to offer a justification.

And they’ll try to do it by dead of night, of course.

This has nothing to do with Trump, who is, as I’ve been saying, an ignorant bystander — yes, he’s betraying every promise he made, but what else is new? It’s about Congressional Republicans.

Which Congressional Republicans? All of them. Remember, three senators who cared even a bit about substance, legislative process, and just plain honesty with the public, could stop this. So far, it doesn’t look as if there are those three senators.

This is a level of corruption that’s hard to fathom. Yet it’s the reality of one of our two parties.

Links for 06-15-17

• A Finger Exercise On Hyperglobalization - Paul Krugman
• College attendance drops after widespread job loss - EurekAlert
• The Controversy Over Inflation - Annie Lowrey
• Five reasons to doubt Yellen and the Fed’s wisdom - Larry Summers
• Musings on June's FOMC Meeting - David Beckworth
• Can Trump’s “Apprentice” model fix infrastructure and create jobs? - Brookings
• Trump Move on Job Training Brings ‘Skills Gap’ Debate to the Fore - NYTimes
• Political pundits' biases - Stumbling and Mumbling
• The Robot Takeover Is Greatly Exaggerated - Bloomberg
• The Treasury Portfolio - John Cochrane
• Lousy Pay Raise? That May Be as Good as It Gets - WSJ
• Services as a growth escalator in low-income countries - VoxEU
• Two to Tango—Inflation Management in Unusual Times – IMF Blog

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

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. ...

Links for 06-14-17

• Mobile Phones and Monetary Policy - Joseph Gagnon
• Fed balance-sheet reduction not scaring anyone - Econbrowser
• Removing the Tax Consequences of Student Loan Discharge - Regulatory Review
• Why do mothers earn less? - American Economic Association
• Offshore profits and domestic productivity - VoxEU
• Economic impact of US immigration policies in the Age of Trump - VoxEU
• Organizational learning - Understanding Society
• Living Trusts for Banking - John Cochrane
• Is America Encouraging the Wrong Kind of Entrepreneurship? - HBR

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

From the NBER Digest:

 

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."

Links for 06-13-17

• Their Own Private Pyongyang - Paul Krugman
• Reagan to the power of ten - Thomas Piketty
• A President at War With His Fed Chief, 5 Decades Before Trump - NYTimes
• Can US States Right Trump’s Wrongs? - Barry Eichengreen
• The World Bank in the Era of Trump - VoxEU
• Containers and globalisation - VoxEU
• The problem with privatization - Larry Summers
• The Hidden Cost of Privatization - INET
• The Fed's Unspoken Mandate - Bloomberg
• Macroeconomics: The Simple and the Fancy - Paul Krugman
• We're Not Even In Kansas Anymore - Paul Krugman
• Yes: The ZLB Is a Big Deal, or, Brad Goes Down a Rabbit Hole... - Brad DeLong
• It Is Not Harder to Make the Case for Free Trade These Days... - Brad DeLong

Things have been a bit slow here lately. Sorry about that. With Trump, economic commentary has waned considerably. Guess you can only say this policy is stupid so many times. Plus, it's all hidden behind closed doors so we can't comment. Can't imagine why...

FOMC Ahead

Tim Duy:

The recent inflation data doesn't exactly support the Federal Reserve’s monetary tightening plans. Chair Janet Yellen and her colleagues will surely take note of the weakness at this week’s Federal Open Market Committee meeting, but they will downplay any such concerns as transitory. At the moment, low unemployment remains the focus. Add to that loosening financial conditions and you get a central bank that is more likely than not to stay the course on its plan to hike interest rates. [...Continued at Bloomberg Prophets...]

Links for 06-12-17

• The resource curse in action - American Economic Association
• Hayek and Temporary Equilibrium - Uneasy Money
• Don’t be fooled, Trump’s budget proposal is very much ‘undead’ - Brookings
• The Importance of Exploring the Black/White Wealth Gap - FRB St. Louis
• Tightening by stealth - VoxEU
• Egyptian and Mesopotamian approaches in economics - Tim Johnson
• Imports and the composition of expenditure - Bank Underground
• Fintech, Central Banking and Digital Currency - Cecchetti & Schoenholtz
• Who loses disability insurance when it’s harder to apply? - Equitable Growth
• They Don't Need No Information - Paul Krugman
• Health reform in the Age of Trump - VoxEU
• The Value of Free in GDP - Digitopoly
• The changing class divide - Stumbling and Mumbling
• Treasury debt held by the public - Econbrowser
• Child-related transfers, labour supply, and welfare - VoxEU
• The lifecycle of research citations - VoxEU

Links for 06-09-17

• Rethink 2% - Brad DeLong
• The Fed Needs a Better Inflation Target - Narayana Kocherlakota
• Why the Fed Should Rethink Its 2% Inflation Target - Brad DeLong
• Bitcoin and the conditions for a takeover of fiat money - longandvariable
• Environmental Protection and Africa's Cities - Tim Taylor
• The G.O.P. Plan to Unleash Wall Street - The New York Times
• Globalisation and executive compensation - VoxEU
• Labour and its Left - mainly macro
• Countering the mining curse - VoxEU

 

Paul Krugman: Wrecking the Ship of State

"Trump is neither up to the job of being president nor willing to step aside and let others do the work right":

Wrecking the Ship of State, by Paul Krugman, NY Times: After Donald Trump’s surprise election victory, many people on the right and even in the center tried to make the case that he wouldn’t really be that bad. Every time he showed a hint of self-restraint — even if it amounted to nothing more than reading his lines without ad-libbing and laying off Twitter for a day or two — pundits rushed to declare that he had just “become president.”

But can we now admit that he really is as bad as — or worse than — his harshest critics predicted he would be? And it’s not just his contempt for the rule of law, which came through so clearly in the James Comey testimony: As the legal scholar Jeffrey Toobin says, if this isn’t obstruction of justice, what is? There’s also the way Trump’s character, his combination of petty vindictiveness with sheer laziness, leaves him clearly not up to doing the job.

And that’s a huge problem. Think, for a minute, of just how much damage this man has done on multiple fronts in just five months.

Take health care. ...

Or take the remarkable decision to take Saudi Arabia’s side in its dispute with Qatar...

And consider his refusal to endorse the central principle of NATO, the obligation to come to our allies’ defense... What was that about? Nobody knows...

The point, again, is that everything suggests that Trump is neither up to the job of being president nor willing to step aside and let others do the work right. And this is already starting to have real consequences, from disrupted health coverage to ruined alliances to lost credibility on the world stage.

But, you say, stocks are up, so how bad can it be? And it’s true that while Wall Street has lost some of its initial enthusiasm for Trumponomics — the dollar is back down to pre-election levels — investors and businesses don’t seem to be pricing in the risk of really disastrous policy.

That risk is, however, all too real — and one suspects that the big money, which tends to equate wealth with virtue, will be the last to realize just how big that risk really is. The American presidency is, in many ways, sort of an elected monarchy, in which a temperamentally and intellectually unqualified leader can do immense damage.

That’s what’s happening now. And we’re barely one-tenth of the way through Trump’s first term. The worst, almost surely, is yet to come.