Yellen, Nader, and Social Security

Fed Chair Janet Yellen just responded to Ralph Nader’s terrible letter arguing with the Fed over zero interest rate policy. Nader apparently has no grasp on basic macroeconomics. The rationale for the policy is that the Fed’s job is to keep interest rates at the best possible place for maintaining stable inflation and full employment. By this metric the Fed has been failing for 6 or so years because interest rates have been too HIGH, not too LOW (inflation is below the Fed’s 2% target and inflation is just now returning to the low levels that are considered ‘full employment’).

It’s too bad that savers aren’t making high returns from interest rates on cash in their savings accounts, but as has been pointed out… it’s mostly very rich people who have lots of money sitting around in their savings accounts, and it is mostly well-to-do people who live off of interest earnings. What Yellen does not elaborate on in her response letter is that seniors/retirees are overwhelmingly poor, and many rely almost exclusively on Social Security. If you want to help extremely poor seniors: expand Social Security!

Yellen also does not mention that many of the factors keeping interest rates extremely low are secular (meaning longer-term factors), not related to the Federal Reserve. Importantly, demographics in the U.S. make it much harder to sustain higher levels of growth and corresponding higher interest rates: the U.S. population is aging and the population will grow more and more slowly, meaning that possible economic growth will presumably be slower in the future. This means that it is increasingly unrealistic to believe that most seniors can live off of retirement savings/interest, and it becomes more important for retirees to have fixed sources of income. Nowadays that’s pretty much Social Security (defined benefit retirement plans have mostly been destroyed).

[Sidenote: another policy solution to deal with persistently low interest rates is significant expansion of immigration into the U.S. — this used to be one of the great ‘conservative’ economic ideas… not so today…]

Unfortunately, the Fed cannot (/should not) comment on these types of policy issues (presumably because the Fed keeping it’s nose out of Congress’ business means Congress will keep it’s nose out of the Fed’s policy decisions… that arrangement isn’t working out well right now as Congress tries to tighten its grip on the Fed and Milton Friedman turns over in his grave).

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A revolutionary (old) idea: public debt is good

Prof. Brad Delong reminds us that Alexander Hamilton, an important U.S. founder and economic thinker, expounded on the importance of government debt… in 1781:

Speaking within moderate bounds our population will be doubled in thirty years; there will be a confluence of emigrants from all parts of the world; our commerce will have a proportionable progress, and of course our wealth and capacity for revenue.

It will be a matter of choice, if we are not out of debt in twenty years, without at all encumbering the people.

A national debt if it is not excessive will be to us a national blessing; it will be powerfull cement of our union. It will also create a necessity for keeping up taxation to a degree which without being oppressive, will be a spur to industry; remote as we are from Europe and shall be from danger, it were otherwise to be feared our popular maxims would incline us to too great parsimony and indulgence. We labour less now than any civilized nation of Europe, and a habit of labour in the people is as essential to the health and vigor of their minds and bodies as it is conducive to the welfare of the State. We ought not to Suffer our self-love to deceive us in a comparison, upon these points.

He also made a related argument in favor of the establishment of a national bank, a chain of logic with which some GOP Presidential candidates should probably acquaint themselves.  Continue reading

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People don’t understand econ because of their brains

Researchers are looking at why the public have trouble understanding economics (beyond being lied to and misled by public figures). David Leiser and  Zeev Kril find (via Chris Dillow) that apparently…

The human mind, they say, “is not particularly equipped to think about economics”:

People are remarkably poor at combining causal links into a system [and] are ill-equipped to cope with the aggregate effects of the individual decisions of many people…Thinking in terms of how an interlocking system of causal links produces an emergent outcome does not come naturally to laypeople.

This helps explain the bias against markets of which John Rentoul and Bryan Caplan have complained: because people underestimate the tendency of emergent processes to produce benign outcomes, demands for price and rent controls are stronger than most economists think they should be.

Faced with this complexity, say Leiser and Krill, people resort to metaphors – the most notorious being that governments should manage the public finances as if it were a household. Worse still, they are often overconfident about the applicability of these metaphors. Both of these habits were encapsulated by the silly BBC Question Time audience member who was so ably corrected by Yanis Varoufakis.

There is, though, another heuristic laypeople use, which Leiser calls the “good begets good heuristic” (pdf). He shows that people believe that good things cause good things to happen, and bad things to cause bad things. For example, they think a rise in unemployment is associated (pdf) with a rise in inflation because both are bad – in contradiction of the standard economists’ belief in a short-term Phillips curve.

Such a belief, whilst irrational, is not always wrong*: the standard Phillips curvedoesn’t jump out of the UK data, in part because supply shocks are common. What might be more problematic is that people think government spending is bad, and so associate it with rising unemployment.

I’ve got three observations here. First, the poor public understanding of economics is NOT a partisan matter. It leads both to anti-market attitudes and to anti-Keynesian ones.

Second, the issue here is not confined to the UK: the bad habits described by Leiser can be found among Israelis, Americans and Australians (and I suspect Europeans too) as well as Brits.

Thirdly, our political and social institutions do not adequately correct these problems, and might exacerbate them. Politicians and the media tend to pander to misconceptions rather than correct them: Mr Varoufakis’s reply to that audience member was welcome because it was so rare. There seems little effort to educate the public in economics: the BBC, perhaps because of its commitment to due impartiality, has failed. And I’m not sure academia can or will do the job. It’s not just economists who should lament this, but everyone who cares about the quality of our democracy.

* The distinction matters; rationality is about how beliefs are formed, rightness about their congruence to reality. You can be rational but wrong or irrational but right.

The household vs government analogy is particularly frustrating.


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Peak Duy: Fed rate increase, please wait?

Professor Tim Duy is on point, as usual. Go to his post for cool graphs and the full discussion.

Many/most economists and Fed officials are looking at a September rate hike (to start a gradual, steady process of rate normalization).

Bottom Line: Ultimately, as the crisis fades further into the rearview mirror, the Fed see the policy risks shifting. Many, including Yellen, will shift back toward the central banker’s natural inclination to fight inflation, despite the lack of inflation for the past two decades. And that natural inclination keeps the September option alive. Given the Fed’s penchant for tight policy on average, the risk is that while they don’t trip the economy into recession in the near term, they instead lock the economy into a sub-par equilibrium.

The problem is one of asymmetric risks. The Fed is concerned with too-high inflation, when they should still be worried about too-low inflation.

Paul Krugman thinks the Fed’s logic is completely backwards. From his Bloomberg interview this week:

If the Fed waits too long to raise rates, then we get a little bit of inflation. If the Fed raises rates too soon, we risk getting caught in another lost decade. So the risks are hugely asymmetric. I really find it quite mysterious that the Fed is eager to raise rates given that, they’re going to be wrong one way or the other, we just don’t know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other.

The Fed, I think, believes the risks are asymmetric in the other direction – that inflation expectations are very fragile to the upside, and hence waiting too long risks a costly rise in actual inflation.

If I had to bet who would be proven right, I would put my money with Krugman. Inflation and inflation expectations have proven substantially less fragile in the past twenty years than the Fed likes to admit. Consider first that inflation has tended to hover mostly below two percent since 1995:


The Fed would argue that their credibility explains stable inflation expectations. By acting ahead of inflation, the Fed ensures there is no above-target inflation, and that connection between policy and outcomes gives rise to that credibility. I would argue that two decades of generally below target inflation suggests an overly excessive pursuit of credibility at the cost of economic underperformance. We don’t reach the target inflation consistently, but we do get recessions and slow job market recoveries.

Continue reading

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Rising Portuguese Socialists

Exciting news out of Portugal as the Socialist Party has the potential to kick out the conservative Troika-following coalition. Their rhetoric sounds somewhat similar to Greece’s Syriza, but their situation is very different (for example, better in that they’ve had a semi-successful bailout, worse because some of the structural pieces of their economy are weaker).

I enjoyed this great article about it from Ambrose Evans-Pritchard of The Telegraph

… Portugal’s Socialist Party vowed to defy austerity demands from the country’s creditors and block any further sackings of public officials.

“We will carry out a reverse policy,” said Antonio Costa, the Socialist leader.

Mr Costa said a clear majority of his party wants to halt the “obsession with austerity”. Speaking to journalists in Lisbon as his country prepares for elections – expected in October – he insisted that Portugal must start rebuilding key parts of the public sector following the drastic cuts under the previous EU-IMF Troika regime.

The Socialists hold a narrow lead over the ruling conservative coalition in the opinion polls and may team up with far-Left parties, possibly even with the old Communist Party.

One interesting thing mentioned is Costa’s aggressive rhetoric towards the IMF, and attempted reassurance about the EU (even though the EU main one is pushing harsh austerity). I see it as a deliberate strategy to scapegoat the IMF, while trying to maintain some positive feelings towards the EU among Socialist Party members, which would be good for the over-arching European Project (lasting peace, building pan-European identity, etc.).

Mr Costa accused the Portuguese government of launching a blitz of privatisations in its dying days, signalling that the Socialists will either block or review the sale of the national airline TAP, as well as public transport hubs and water works.

His harshest language was reserved for the International Monetary Fund but this reflects the cultural milieu of the Portuguese Left. In reality the IMF was the junior partner in the Troika missions. Continue reading

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Misleading ‘facts’ in the case for TPP

I haven’t been blogging much lately, in part because I’ve been preoccupied with an impending job change, and in part because I haven’t been especially inspired to share on the blog.

I recently have had some discussions with friends in real life and over email, and on twitter with Jim O’Sullivan, where I have had some time to think about TPP. The CEA in their research brief and in the 2015 Economic Report of the President has made an economic case for TPP. After thinking and reading economists on both sides, I am increasingly agreeing with the TPP-skeptics side of the discussion (I have a hard time disagreeing with Senator Warren anyway).

It is difficult not to be skeptical of the agreement, especially when the proponents arguments seem to increasingly rely on 1. generally arguing that increasing trade and lowering trade barriers is a good thing; and 2. making false or at least somewhat misleading arguments that end up weakening their case.

Dean Baker, Jared Bernstein, Paul Krugman, economists at EPI, and others continue to make the case against (or at least the case to be skeptical of) the TPP.

I want to focus on one fairly narrow fact, where I think the proponents have been manipulative of the facts surrounding TPP. They argue that the scope of the TPP is huge, implying that the effect will also be large and positive for the U.S. In both linked sources above, CEA has presented the trade statistics of the TPP countries as a group, and they are large.

econ report of pres tpp


The TPP countries as a percentage of total U.S. bilateral trade is about 40.5%. This is larger than all of our other free trade agreements. These facts I do not dispute (except, maybe, for calling this a ‘free’ trade agreement… maybe even for calling it a ‘trade’ agreement).

I believe CEA is purposefully misleading because they have ignored, excepting a cryptic footnote, that the trade to and from TPP countries is overwhelmingly already covered by existing free trade agreements (FTAs). The U.S. already has FTAs with Canada, Mexico, Australia. Singapore, and Chile. It is unclear to me how including them in a summary statistic in the above chart is at all informative. It seems to be entirely manipulative. Canada and Mexico are the U.S.’s two largest single country trade partners, so obviously TPP countries make up a huge proportion of U.S. bilateral trade. In fact, the 5 countries with FTAs make up 32.8% of U.S. bilateral trade (38.6% of U.S. exports, while all 11 countries only make up 44.8% of total U.S. exports). Data from Census.

pie chart of bilateral trade


table of tpp trade



The point here is that for all of the hype the administration is trying to create around TPP, the marginal effects of the agreement are likely extremely small–Prof. Krugman said it first, and Dean Baker continues to say it incessantly. Trade barriers are extremely low with most of the TPP countries, meaning potential benefits of an FTA are fairly low. What matters then is the non-tariff, non-trade agreements, of which we should be extremely skeptical.

After this very harsh and skeptical post, I feel like I should add the disclaimer that it is certainly possible that the text of the agreements will vindicate the Administration for their secrecy, and prove the critics (including me) wrong for the criticism. Or as I suggested to my friends, drumming up this controversy is actually providing the Administration cover to demand more in negotiations, which would be House of Cards-esque, but likely still wouldn’t provide them an opportunity to begin to address currency manipulation, a trade issue that actually has huge effects on U.S. trade.

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Market Power and the Big Pizza Industry

I hate it when I see things (companies, celebrities, etc.) I like do something I dislike. So it goes in the world of pizza. Apparently the pizza industry is staunchly Republican and anti-regulation. Interestingly, the industry has fairly small political spending, yet it exerts substantial power.

They’re not throwing money around — pizza’s biggest spenders devoted less than $500,000 to lobbying last year and just $1.5 million in political contributions in the last two election cycles.

I don’t feel particularly bad about that though because the biggest spenders, like Pizza Hut, also make the worst pizza. Hopefully the best pizza places (Vace!) are not subverting our political system, though I have known at least one hard-core Republican small-pizza-business owner. I would also imagine that there is an important distinction to be made between frozen and non-frozen pizza makers, and that the frozen pizza industry is a subtle and malignant force that commands the market for school lunch. I can’t help but think there is a significant problem with market power in the school lunch market. It follows that the business would be extremely lucrative, leading to violently powerful special interest/lobbying responses to any existential threat.

And in testimony before Congress in August of that year, Karen Wilder, chief nutritionist for Schwan Food, said many foods packed with nutrients, including pizza, risked elimination from school lunch by the proposed rules. A subsidiary of Schwan supplies 70 percent of school lunch pizza.

Prof. Krugman made a small introduction to the literature that examines the relationship between obesity and politics.

There are outliers — Utah especially, but also Montana and Wyoming, of which more in a minute, but overall the relationship is really clear. At the county level, the “diabetes belt” — that’s the CDC’s term, not mine — is clearly very Republican.

Again, I imagine this has to do with market power, regulation, environmental/lifestyle and, maybe, ideology drives some of those differences (I doubt the difference has to do with heredity).

I was interested, so I found a 2011 NYTimes article that discusses some of the causes and policy proposals to address the rise in obesity. It looks a lot like the industries related to cars, housing/urban development and regional planning, soft drinks, and all of our food changed a lot post-WWII, especially starting in the 1970s, and our bodies ended up changing with them.

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