Shutdown

What to expect Day 1. 10 ways it could affect you. Why it happened. And the bigger looming problem of the debt ceiling.

The Fed Surprise

As an exercise for the macro student, watch this video starting around minute 30. The video is a brief Q&A with Narayana Kocherlakota, the President of the Minneapolis Federal Reserve Bank.

Then make a prediction for monetary policy going forward.
A) The Fed Tapers or
B) The Fed Waits.

Then read what happened here.

Surprised?

ECO 712: Week 8 Readings

Here are the readings for week 8:

U.S. Industrial Production Rises in Stabilization Sign

China Slowdown Seen Longer Than in Crisis by State Economist

 

ECO 712: Week 7 Readings

This week readings from Paige:

Olive Oil Prices: Drizzle and drought.

Here is another that will be useful to think about after the lecture: IS-LMentary.

Stimulus

Here is an excellent compendium of the recent recent on the effects of stimulus spending.

In this post, I’ve pulled together my summaries of the original nine papers, and added sections on the six new additions to the literature. The critical issue in these studies concerns the “fiscal multiplier” — that is, how much bang the government gets for its stimulus buck. For example, if each dollar spent on a particular kind of tax cut results in a $1 increase in GDP, the multiplier for that tax cut is 1. Any multiplier that is greater than zero indicates a program is stimulative, but the higher the multiplier, the more effective stimulus spending is.

Here a a reply of sorts. It points out the limitations of the research, by noting the following:

Stimulus Advocates Largely Ignore the Public Choice Problems with Implementing Stimulus.

Stimulus Advocates Often Brush Past Long Run / Short Run Distinctions.

ECO 712: Week 5 readings

Here are the readings for this week:

Counterfeit goods becoming more dangerous.
From tequila crisis to sunrise.

Note: I will likely let class out early so you can all have your popcorn popped and ready to go for the 8pm Presidential Debate. The debate is scheduled to cover domestic policy. Given we are still at an level of employment below the level of December of 2007, you can bet that Jobs will be something you hear often.Take notes. We will discuss their proposals the following week after the exam.

ECO 712: Week 4 Readings

The articles for this week:

Article #1 Local employment expected recovery 2017.

Article #2: Inflation in India.

Extra Credit: Point out all the crazy economic ideas in this analysis

Wonkblog has an interesting graph:

DWL

Apparently the editorial board at the New York Times doesn't understand Deadweight Loss. The say:

Voters don’t react positively when a candidate speaks incomprehensibly about taxes, as Mr. Romney did on “60 Minutes.” He said he would lower everyone’s tax rate by 20 percent but that everyone would wind up paying essentially the same taxes because he would limit unspecified deductions and exemptions. Even on its face, that makes little sense. If everyone will pay the same taxes, how does that stimulate growth or reduce unfairness? In fact, tax experts say the rate cut is such a huge benefit for the rich that it can’t be balanced by curbing their deductions. But listeners don’t have to do the math to calculate how fundamentally hollow the proposal is.

I'm not arguing that the cut in rates (and here I assume he was specifically referring to the top marginal rate) will actually be revenue neutral, though Feldstein and Rosen argue its feasible. Krugman and others suggest the cut in top marginal rates is too large to be offset by base broadening. I am suggesting, if it were possible it is easy to think about how that stimulates growth and reduces unfairness. Think of lower top marginal rates lowering the incentive to hide income as an example.

ECO 712: WEEK 3 Readings

Here are the readings for tonight, with some others I plan to use if not tonight in the future.

Labor Force Participation

Hating on Bernanke. Paul Krugman

Here are a few more articles I want to keep in the back of there mind. In a scary new paper by Robert Gordon, he lays out the end of growth as we have known it.

Is Economic Growth Over? Robert Gordon

From our discussion last week about the impact the iPhone 5 and its potential impact on GDP, Paul Krugman notes the inherent fallacy with hailing GDP as the measure of well being.

Broken Windows and the iPhone 5 Paul Krugman

ECO 712: WEEK 2 Readings

Two students sent along the following for us to discuss this week:

Boxed in: Global trade has turned down sharply this year. The outlook is pretty bleak, too
 
Taiwan pins faith on investment to offset falling exports

Both are related to the macro consequences of a decrease in trade. 

Unemployment Report

While the decrease in the unemployment rate in this morning's employment report seems like it is good news, the devil is in the details. Unemployment fell to 8.1%, but job growth was a paltry 96,000.The problem is that the unemployment rate fell in part because people left the labor market.

The labor force participation rate, or the percentage of Americans who either have a job or are looking for one, fell to 63.5 percent -- the lowest since September 1981.

As Bernanke notes in his Jackson Hole Speech.

"The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years."

And the Chicago Fed President Evans makes a plea to do more:

Finding a way to deliver more accommodation — whether it is monetary or fiscal — is particularly important now because delays in reducing unemployment are costly. An unusually large percentage of the unemployed have been without work for quite an extended period of time; their skills can become less current or even deteriorate, leaving affected workers with permanent scars on their lifetime earnings. And any resulting lower aggregate productivity also weighs on potential output, wages and profits for the economy as a whole. The damage intensifies the longer that unemployment remains high. Failure to act aggressively now could lower the capacity of the economy for many years to come.

... I have outlined some policy actions that I think can take us in the direction of a more vibrant and resilient economy. Given the risks we face, I think it is vital that we make such moves today. I don’t think we should be in a mode where we are waiting to see what the next few data releases bring. We are well past the threshold for additional action; we should take that action now.

His full speech is here.

ECO 712 News

I plan to use this space to share links to some of the topical news items I plan to discuss in class. Here are two article I plan to discuss:

The European Central Bank offers unlimited aid to euro zone members — but only if they behave

Ben Bernanke makes case for Fed to take more action

Here are a couple of graphs from FRED.
Non-Farm Payroll Employment.
Real GDP.
CPI.
Unemployment Rate.

How to Study

Welcome to the Fall 2011 semester. Want to know how to do a better job of studying this semester? Check out this quick series of videos from a cognitive psychologist.

Better Data

We need better data.

The shortcomings of the data-gathering system came through loud and clear here Friday and Saturday at a first-of-its-kind gathering of economists from academia and government determined to come up with a more accurate statistical picture.


The fundamental shortcoming is in the way imports are accounted for. A carburetor bought for $50 in China as a component of an American-made car, for example, more often than not shows up in the statistics as if it were the American-made version valued at, say, $100. The failure to distinguish adequately between what is made in America and what is made abroad falsely inflates the gross domestic product, which sums up all value added within the country.


American workers lose their jobs when carburetors they once made are imported instead. The federal data notices the decline in employment but fails to revalue the carburetors or even pinpoint that they are foreign-made. Because it seems as if $100 carburetors are being produced but fewer workers are needed to do so, productivity falsely rises — in the national statistics.


“We don’t have the data collection structure to capture what is happening in a real time way, or what is being traded and how it is affecting workers,” said Susan Houseman, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., who has done pioneering research in the field. “We have no idea how to measure the occupations being offshored or what is being inshored.”

The Debt

I'm often asked about the "problem" our debt represents. Below is a largely good video explaining who holds the debt and the "problem" it presents. One VERY important caveat. While the author gets the idea correct that what matters is publicly outstanding debt, since inter-government debt is merely a wash, he does not accurately address this same issue when talking about bonds as financial assets. Remember that a US government bond is an asset to the holder, but a liability to the tax payer. We care about our net position as tax payers. Also, from an economic perspective, bond holders and tax payers are not the same people, so there are distributional consequences to changes in the level of the debt. But with that said this might help somewhat.

Finances Altered?

I believe the findings of this survey, support what I have been saying.

"This new survey points to a profound shift in the way people think about their saving and spending," said Eric Eve, senior vice president of global community relations at Citi. "The current economic environment is altering, perhaps permanently, the way we think about spending money."

Economic Recovery Dashboard

Keep an eye on our recovery here.

Death Tax

Keith and I did another Sunday debate, this time on the estate tax. You'll find my piece here and Keith's here.

And here is my piece for posterity:

Estate tax fails to meet standards of a ‘good tax’
By TAGGERT J. BROOKS / La Crosse
As I write this, I’m looking at a Web cam image of my parents on a cruise ship in the Mediterranean. They are busy spending my inheritance on expensive trips like this one. My father, an accountant by training, tells me he is just trying to avoid the estate tax. A tax which I oppose on principle, even though my dad is making sure it will never affect me.

Afew confessions to make: In 2006 you won’t need to file an estate return unless your gross estate exceeds $2 million. Even then, you may not pay a tax if you qualify for certain deductions. Estimates are that only the wealthiest 2 percent of Americans will be subject to the estate tax, but that doesn’t mean the other 98 percent of Americans shouldn’t care.

Because, as economists are often wont to say, who pays the tax (as in from whom the tax is collected), is not necessarily the same as the person who pays (as in who is affected by) the tax. Not only are the heirs affected, but so is everyone else in our economy, through slower economic growth.

I am not arguing that we should not pay taxes. Rather I’m arguing that this particular tax does not meet the standards of a good tax. I know “good tax” sounds like an oxymoron, but a good tax is simple, easily understood, seldom changes, is neutral to different choices and promotes economic growth.The estate tax fails at least the last two principles since it treats saving and wealth accumulation differently depending on how much you have saved. It does not treat the savings over $2 million as it does the first $2 million. And in so doing it discourages economic growth by discouraging capital accumulation.

Let’s say I had another set of parents, a more austere couple, they eschew the globetrotting for a life of ramen noodles and coupon clipping so that they can provide me and my future family with a financial safety net. Why should the government impose a tax on them that they will not impose on my actual parents?Why would a fair tax system penalize someone for self-sacrificing behavior intended to make their children and grandchildren better off? Why are we penalizing those who live frugally and through their frugal behavior are laying the seeds of economic growth for the rest of us to enjoy? Not only should we not discourage that behavior, we should probably do more to encourage it.

As anybody who has noticed the rising amount of U.S. debt held by foreigners should realize, it is not occurring because typical Ameri-cans save too much, but because they are saving too little. So let’s not penalize people for saving more.

If it’s the deficit that worries you, find somewhere else to raise revenue or, better yet, cut spending. I offer the expenditures in Iraq as a starting place because I know Keith would agree with me on that one.

Keith argues that private wealth accumulation is due to our public institutions and markets and therefore should be taxed more heavily. Keith is confused. I’d like to point out that our system of progressive taxation will not be affected by eliminating the death tax, in fact it will be improved as there will be more incentive to accumulate wealth for your children rather than pass your current income on to them now when they are likely to be in a much lower tax bracket.

It’s not clear that the tax is very effective at raising revenue either. Wealthy Americans can afford to hire accountants, lawyers, and estate planners to figure out ways to avoid paying the estate tax. Even though this might be one of the nicer things lawyers do for people, it isn’t a very productive use of society’s resources. So, Keith, please join me in setting those lawyers free — and encouraging economic growth for all — by ending the estate tax.

Taggert J. Brooks teaches economics at the University of Wisconsin-La Crosse.

Prices

From the ever useful New Economist:

Five facts about prices
Emi Nakamura and Jon Steinsson from
Harvard University present Five Facts About Prices: A Reevaluation of Menu Cost Models (PDF):

We establish five facts about prices in the U.S. economy:
1) The median duration of consumer prices when sales are excluded at the product level is 11months. The median duration of finished goods producer prices is 8.7 months.
2)Two-thirds of regular price changes are price increases.
3) The frequency of price increases responds strongly to inflation while the frequency of price decreases and the size of price increases and price decreases do not.
4) The frequency of price change is highly seasonal: It is highest in
the 1st quarter and lowest in the 4th quarter.
5) The hazard function of price changes for individual consumer and producer goods is downward sloping for the first few months and then flat (except for a large spike at 12 months in consumer services and all producer prices).

These facts are based on CPI microdata and a new comprehensive data set of microdata on producer prices that we construct from raw production files underlying the PPI. We show that the 1st, 2nd and 3rd facts are consistent with a benchmark menu-cost model, while the 4th and 5th facts are not.