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Category: macroeconomics

Published on Leave a comment on Samwick Media Watch

I've been invited to be a guest on Warren Olney's "To the Point" show today on Public Radio International. Here's the teaser:

The Public, the Economy and the Federal 'Fiscal Stimulus'

With the stock market falling as they went to the polls, Super Tuesday voters were thinking about the economy. But those rebates many Americans may be counting on are now tied up in Congress. Thursday, on To the Point, will the rebates be fair? Will the "fiscal stimulus" come in time to help avoid a recession?

You can listen online or on one of these fine stations.

UPDATE: A fun show, until I stumbled my way through this line of reasoning. Jason Furman was also on the segment, and he made his points very well.

Published on Leave a comment on The January Employment Report

The headline number from today's employment report was a decline of 17,000 jobs in January. (Permanent link likely here.) This number is not significantly different from zero, so the BLS calls it "essentially unchanged." However, the point estimate at this point is the first negative number since August 2003, and that will likely dominate the news.

The January report is also where we see some revisions for calendar year 2007, and these are worth considering when trying to get a fix on where we are in the business cycle. Year-end nonfarm payroll employment was revised downward by 376,000 jobs relative to prior estimates. Very little of this revision pertained to the 4th quarter. Factoring in the January number, employment growth has averaged 66,000 over the last 4 months. That's weak growth in anybody's book.

Looking at the household survey, the unemployment rate was also "essentially unchanged" with a 0.1 percentage point decline. Digging a little deeper, the two alternative measures of unemployment that incorporate marginally attached workers (and in one, those employed part-time for economic reasons) ticked up by 0.2 percentage points. These numbers are presented in Table A-12 of the report.

For more on the details, read Barry Ritholz at The Big Picture.

Published on Leave a comment on The Whiner of First Resort

Via Mark Thoma, this piece in the Financial Times by Ricardo Hausmann is quite good. Here's the big finish:

The US should face its need for adjustment with courage and reason, not fear. It should stop behaving as the whiner of first resort, ready to waste all its dry powder on a short-sighted attempt to prevent a 2008 recession. Many poorer countries with weaker markets and institutions have survived and benefited from an adjustment that involves a year of negative growth. Faster bank recapitalisation, fiscal investment stimulus and international co-ordination should be first on the ­policy agenda.

Read the whole thing.

Published on Leave a comment on This Is Rich

From the Real Time Economics Blog:

Huckabee and Paulson Spar over Stimulus Plan
Republican presidential hopeful Mike Huckabee accused President Bush and the House of Representatives of missing the point with their new emergency anti-recession plan, including $100 billion in payments to individuals and $50 billion in tax breaks to get businesses to invest.

“The problem I have is that what we are really doing is borrowing about $150 billion from the Chinese, which is where this money has got to end up coming from,” Huckabee said on CNN’s “Late Edition” Sunday.

“Then we’re going to give rebates to taxpayers, and that’s great. - I’m glad,” Huckabee continued. “But what will most of them do with it? They’re going to buy things that were imported from China.”

“So I have to ask,” he added, “whose economy is being stimulated the most?”

The former Arkansas governor said a better plan would be to provide an infusion of federal dollars to repair and replace crumbling bridges, airports and other infrastructure.

Huckabee has a reasonable argument, to a point. If the purpose of the stimulus package is to prevent GDP growth from turning negative by boosting consumption, then the import share of the incremental consumption (relative to total consumption) has to be considered. And as I've argued before, he is right in noting that this deficit spending on simple consumption when public infrastructure might be a more sensible addition to the budget.

Published on Leave a comment on A Better Way to Deal With Downturns

A wise man in Washington once told me that in politics, you can't beat something with nothing. In that spirit, I continue the anti-fiscal-stimulus rant with a Sunday op-ed in The Washington Post, available a day early online. Welcome to Washington Post readers. For those new to the blog, please take a look at some of the other posts categorized in the sidebar on the right side of the page when you are done with this post.

The constructive idea in the op-ed is to consider the backlog of public infrastructure projects needing attention, prioritize them, schedule them in over a multiyear horizon, include their costs in budget projections, and then move them forward in time if the economy weakens and prices go down to make them cheaper to do sooner rather than later. Note well the parts I put in bold.

The imperative to enact a fiscal stimulus bill (the motives for which I discuss in the op-ed) kicked up such an election year hurricane that even the usual watchdogs seemed to get swept up in it. Consider:

1) Fed Chairman Ben Bernanke's testimony to the House Budget Committee on January 17. The last two paragraphs address the topic of fiscal stimulus. He provides the right context and the usual warnings, but the Representatives could have interpreted all of this as a yellow light. The red light would have been if he said, "It would be unwise and imprudent to enact a fiscal stimulus bill until we get some data on whether the large monetary stimulus has had the intended effect." On Capitol Hill, yellow lights mean speed up, not slow down.

2) The Blue Dog Democrats. Here's how it looked on January 15, and then hardly a whimper out of them in the following week.

3) Policy Experts. The buzzwords of "timely, targeted, and temporary" were spoon fed to the policy makers by Doug Elmendorf and Jason Furman earlier this month with this primer from the Hamilton Project. I don't fault them for doing it, either. Once the battle over whether we should "do something" was lost, it was very reassuring to have focused the debate around these three principles. I just hope that policy makers work as hard on the conclusion of that report --Building a Better Long-run Policy--as they did on the short-term recommendations.

4) Think Tanks. Consider this statement from the Committee for a Responsible Federal Budget, released January 22 as the stimulus package was about to be announced. It says:

If a stimulus package were paid for in the out-years, we would certainly be pleased. However, we believe that such a requirement is likely to derail the process of trying to assemble an effective stimulus package.

That's a flashing yellow light. And, unfortunately, this part of the next paragraph is likely to be ignored:

Although the Committee would accept using increased deficits as a tool to spur the economy in the short-run, we urge the President and the Congress to take the next important step: A long-term budget plan that addresses entitlements, tax reform, and spending restraint.

We would all like to see that. We could get it, too, if we made a commitment to hold our elected officials accountable for it.

Published on Leave a comment on It’s Not a Stimulus, It’s Deficit Spending

Commentary based on this recent post aired this evening on NPR's marketplace. The teaser:

The proposal for the $150 billion stimulus package has Washington basking in bipartisanship. But commentator Andrew Samwick says the pricetag for all that collegiality might be too high.

Enjoy!

Published on Leave a comment on Len Burman Pokes a Finger in the Eye of the Stimulus

I enjoyed Len Burman's op-ed in today's New York Times for reaching this conclusion, in "Make the Tax Cuts Work:"

There’s bipartisan agreement that something along these lines should be done, but the president has also argued for an extension of his tax cuts, now scheduled to expire at the end of 2010. This idea has met with less support. It would accomplish nothing in the short run, and most of the benefits would go to the very rich — the group least likely to spend a tax windfall.

But if they were repealed in a year, the Bush tax cuts could spur a burst of economic activity in 2008. If people knew that their tax rates were going up next year, they’d work to make sure that more of their income is taxed at this year’s lower rates. Investors would likewise have a giant incentive to cash out their capital gains now to avoid paying higher taxes later. In 1986, stock sales doubled as taxpayers rushed to avoid the capital gains tax rate increase scheduled for 1987. If people pour their stock gains into yachts and fast cars, that’s pure fiscal stimulus.

The money involved could be considerable. Capital gains in 2007 were something like $700 billion, representing well over $1 trillion in asset sales. It looks as if gains will be much lower in 2008, but a looming tax increase could easily spur an additional $500 billion in sales. If only 20 percent of that translated into extra spending, we’d have as much or more short-term stimulus as we could get from the package Congress and the president are considering.

Best of all, this is one stimulus proposal that would reduce the deficit — the single largest threat to the economy’s long-term health. And that long-term benefit wouldn’t depend on our getting the timing and amount of stimulus right, something policymakers are notoriously inept at.

UPDATE: Len responds to some of his fan mail at the TaxVox blog.

Published on Leave a comment on Ben Bernanke Waves a Handkerchief

As the old saying goes, when America sneezes, the rest of the world catches a cold. A second day of selloffs in overseas markets prompted the Fed to cut 75 basis point cuts in both the discount rate and the federal funds rate. From The New York Times this morning:

The Federal Reserve, responding to an international stock sell-off and the likelihood of a sharp drop in America on Tuesday morning, cut its benchmark interest rate by three-quarters of a percentage point.

The Federal Open Market Committee lowered its target for the federal funds rate on overnight loans between banks to 3.5 percent, from 4.25 percent.

In a statement, the Fed said: “The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.”

“Moreover,” the statement continued, “incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”

In a related action, the Fed approved a 75 basis-point decrease in the discount rate, to 4 percent.

Within minutes after the announcement, trading in stock-index futures, which had been presaging a deep slide on American stock exchanges Tuesday, retraced much of their earlier declines, which had been driven by a second sour day in Asia and Europe.

The reaction of the overseas markets is what strikes me as excessive. Conditional on that, a rate reduction of some magnitude (if not 0.75 percentage points) is not much of a surprise. It should make for an interesting week in the financial markets.

Published on Leave a comment on Econophysics

Picking up on the theme of the post on neuroeconomics, another field attempting to build bridges to economics is physics, in the form of Econophysics. Quoting from its Wikipedia page, econophysics applies ...

theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic elements and nonlinear dynamics. Its application to the study of financial markets has also been termed statistical finance referring to its roots in statistical physics.

For more background, see this site or this blog. The payoff would be similar to the case of neuroeconomics--if you can link the economic problem to an analogous problem in the natural sciences that has been more thoroughly investigated, then the results of those investigations can be brought to bear in the economic problem as well. It may not be the most promising avenue of research, but academia thrives on experimentation and risk-taking in the realm of ideas.

The January 2008 issue of the Journal of Economic Dynamics and Control is a special issue on "Applications of Statistical Physics in Economics and Finance." In their introduction, J. Doyne Farmer and Thomas Lux discuss some of the reasons why the field has been slow to catch on among "mainstream" economists:

The contact between econophysics and economics has, however, been hampered by several factors. The very different culture of scientific publishing in physics and economics has generally prevented publications from econophysics in economics journals. This is partly a matter of style of presentation, but it also reflects fundamental differences in the epistemology of the two fields, in particular different views about the objectives of science. Physicists have a very different view about how work should be presented, and in particular about mathematical rigor (which they generally disdain). In addition, physics has a laissez-faire attitude about publication, believing that it is better to err on the side of letting as many new ideas in as possible, and to let the market eventually decide what is good and what is bad through a Darwinian process that selects what is useful and forgets what is not. As a result there are many econophysics papers of poor quality, which shocks economists. When combined with the fact that the best econophysics papers are published in journals that most economists never read, this body of work remains almost unknown outside the sphere of econophysics.

Communication between physicists and economists has been poor. Physicists are perhaps the only group of scientific professionals who are even more arrogant than economists, and in many cases the arrogance and emotions of both sides have been strongly on display. Many physicists have given the impression that they think that economists know little or nothing about their business, at the same time that they are asking for admission into their club. Many economists have reacted with apprehension to what they view as an attempted invasion by aliens, and have scornfully rejected any work by physicists out of hand, without bothering to have even a passing familiarity with it.

There seems to be a lot of truth in that assessment, and perhaps some of it is also applicable to the field of neuroeconomics as well. If you are interested in the links between economics and the sciences, the first article in that special issue, "Classical Thermodynamics and Economic General Equilibrium Theory," by Eric Smith and Duncan K. Foley, seems to make progress on establishing the parallels across economics and the relevant natural science. (See this working paper if you cannot access the journal directly.)