Monday, June 29, 2015

Kashyap on Greece

Anil Kashyap has an excellent summary of the Greek debt crisis.

He sees government printed IOUs as a much better solution to the banking and payments crisis than for Greece to exit the euro and try to reestablish the Drachma. I agree entirely.

His summary goes back to the beginning, and reminds us that Greece did not get bailed out; Greece's creditors (mainly european banks) got bailed out.

Wages and inflation

Marty Feldstein has a very interesting opinion piece on Project Syndicate. His main point is that micro distortions from social programs (and taxes, labor laws, regulations etc.) are leading many people not to work, and is well stated.

An introductory paragraph poses a puzzle to me, however,
Consider this: Average hourly earnings in May were 2.3% higher than in May 2014; but, since the beginning of this year, hourly earnings are up 3.3%, and in May alone rose at a 3.8% rate – a clear sign of full employment. The acceleration began in 2013 as labor markets started to tighten. Average compensation per hour rose just 1.1% from 2012 to 2013, but then increased at a 2.6% rate from 2013 to 2014, and at 3.3% in the first quarter of 2015.
These wage increases will soon show up in higher price inflation. 
This is a common story I hear. However I hear another story too -- the puzzle that the share of capital seems to have increased, and that real wages have not kept up with productivity.

So, maybe we should cheer -- rising real wages means wages finally catch up with productivity, and do not signal inflation. The long-delayed "middle class" (real) wage rise is here.

I'd be curious to hear opinions, better informed than mine, about how to tell the two stories apart.  

Wednesday, June 24, 2015

4% growth

I wrote last week on the simple factual question of whether and how often the US has experienced 4% real GDP growth in the past.

The deeper question, is that growth possible again? I answered yes, it's surely possible as a matter of economics. 

A few have asked me "why do so many of your colleagues disagree?" It's a question I hate. It's hard enough to understand the economy, I don't pretend to understand how others respond to media inquiries. And I don't like the invitation to squabble in public. 

It has taken me some time to reflect on it, though, and I think I have a useful answer. I think we actually agree.

As I read through the many economists' quotes in the media, I don't think there is in fact substantial disagreement on the economic question -- is it economically possible for the U.S. to grow at 4% for a decade or more? Their caution is political. They don't think that any of the announced candidates (at least with a prayer of being elected) will advocate, let alone get enacted, a set of policies sufficiently radical to raise growth that much. 

This is a sensible position. When I answer the question, is 4% growth for a decade economically possible, my answer is whether the most extreme pro-growth policies would yield at least that result. A  short list:

Tuesday, June 23, 2015

Last Greek thoughts

A few salient points that don't seem to be on the top of the outpouring of Greece commentary.

1. Greece seems to be coming to a standstill.  Kerin Hope at FT  (HT Marginal Revolution):
... many [Greeks] have simply stopped making payments altogether, virtually freezing economic activity.
Tax revenues for May, for example, fell €1bn short of the budget target, with so many Greek citizens balking at filing returns. 
The government, itself, has contributed to the chain of non-payment by freezing payments due to suppliers. That has had a knock-on effect, stifling the small businesses that dominate the economy and building up a mountain of arrears that will take months, if not years, to settle.
“Business-to-business payments have almost been paused,” one Athens businessman says. “They are just rolling over postdated cheques.”
 Around 70 per cent of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners,” one banker said.
2.  If a Greek goes to the ATM and takes out a load of cash, where does that cash come from? The answer is, basically, that the Greek central bank prints up the cash. Then, the Greek central bank owes the amount to the ECB. The ECB treats this as a loan, with the Greek central bank taking the credit risk. If the Greek government defaults, the Greek central bank is supposed to make the ECB good on all the ECB's lending to Greece.  It's pretty clear what that promise is worth.

Some observations on what these stories mean.

Saturday, June 20, 2015

Econ 1

John Taylor is offering his Economics 1, the introductory economics course for Stanford undergraduates, as a free online class. Class starts Monday, June 22.

John's blog post here, and registration page here.

Yes, Martha, apparently there is a free lunch.

Friday, June 19, 2015

Roy's plan

I found two novel (to me) and interesting points in the heath insurance reform plan  put forward by Avik Roy of the Manhattan Institute. (His Forbes articles here.)

First, the ACA establishes that it is ok to help people by subsidizing their purchase of private health insurance. It is not necessary to provide completely free insurance, medicaid, VA, medicare, and so on.

Yes, the health insurance you can buy has been salted up with extras, competition severely restricted, and large insurers so deeply in bed with their regulators that to call insurance "private" is a stretch and "competitive" a dream. But people do have to pay something, if they want better coverage they have to pay more, and the insurers are still nominally private companies.

Second, it is ok to ask people to contribute pretty substantial copayments.  That's a vital component to getting a functioning health care market.

Thursday, June 18, 2015


Source: Wall Street Journal
Today's (June 18) Wall Street Journal has two noteworthy pieces on tax reform, "Rubio's tax mistake" in the Review and Outlook and Rand Paul's "Blow Up the Tax Code and Start Over" Perhaps now that pretty much everyone agrees the tax code is a mess, something will be done about it.

Paul is sure to be pilloried about the 14.5% rate and whether it will generate enough growth to sustain tax revenues and pay for 20% of GDP spending.

But the structure of the tax code is far more important than the rate. It is refreshing to hear a serious presidential candidate stand up to say
"...repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of [rate deliberately deleted] on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. 

It's not exactly the structure I would advocate, but close enough. And close enough even if 14.5% becomes 20%. Or adds higher brackets at higher incomes.  We should talk about the structure separately from the rates to avoid all these distractions.

Wednesday, June 17, 2015

Noah Smith Writing Lesson

Source Noah Smith
Noah Smith has a good review of the writing in Deirdre McCloskey's review of Thomas Piketty's book.

A lesson for students learning to write papers: Don't needlessly annoy readers before you get to your point. If a reader disagrees, finds something wrong, or insufficiently documented, of if you offend a reader, he or she will leave without getting to the main point.  Once a reader finds one thing he or she thinks is wrong, he or she will distrust the rest of the argument. Grand methodological statements and criticisms of swaths of literature are especially dangerous.

Noah's post is a great example. As you can see, Noah never got to the main point of McCloskey's review, and happily admits it.

Tuesday, June 16, 2015

Four percent?

Timothy Noah from Politico called yesterday to ask if I thought four percent growth for a decade is possible. Story here. In particular he asked me if I agreed with other economists, later identified in the story, who commented that it has never happened in the US so presumably it is impossible.

This prompts me to look up the facts, presented in the charts at left. The top graph is annual GDP growth. The bottom graph gives decade averages. Data here. The red lines mark the 4% growth point. Notice the sad disappearance of growth in the 2000s.

Judge for yourself how far out of historical norms a goal of 4% growth is.

By my eye, avoiding a recession and returning to pre-2000 norms gets you pretty close.  A strong pro-growth policy tilt, cleaning up the obvious tax, legal, and regulatory constraints drowning our Republic of Paperwork (HT Mark Steyn) only needs to add less than a percent on top of that. 4% might be too low a target!

Note the question asks about real GDP not per capita. Adding capitas counts. If you want total GDP to grow, regularizing the 11 million people who are here and letting people who want to come and work and pay taxes counts toward the number. You may argue with the wisdom of that policy, but the point here is about numbers.

Wednesday, June 3, 2015

Asset Pricing Summer School

I’m going to offer my online course “Asset Pricing” over the summer. The intent is a “summer school” for PhD students, either incoming or between the first year of foundation courses and the second year of specialized finance courses.

At least one university is going to use this more formally: Require completion of the class for their PhD students (either incoming or between first and second year,) and organize a TA and group meetings around the class. We have found that this sort of social organization helps a lot for students to get through online classes.

Greek roll-over

The latest Greek debt "crisis" poses an interesting puzzle. (Quotes because it's hard to call something that's been going on this long a "crisis.") Greece needs to come up with $300 million euros by Friday to pay off the IMF. And the most likely source of this money is... the IMF.

What's going on here? Obviously, Greece was going to need decades to pay off loans, in the sense of running primary surpluses to actually work down debt. Why lend Greece money for a short amount of time, then institute regular "crises" about rolling over the debt?

Tuesday, June 2, 2015

Bank at the Fed

"Segregated Balance Accounts" is a nice new paper by Rodney Garratt, Antoine Martin, James McAndrews, and Ed Nosal.

Currently, large depositors, especially companies, have a problem. If they put money in banks, deposit insurance is limited. So, they use money market funds, overnight repo, and other very short-term overnight debt instead to park cash. If you've got $10 million in cash, these are safer than banks. But they're prone to runs, which cause little financial hiccups like fall 2008.

But there is a way to have completely run-free interest-paying money, not needing any taxpayer guarantee: Let people and companies invest in interest-paying reserves at the Fed. Or, allow narrow deposit-taking: deposits channeled 100% to reserves at the Fed.

(I'm being persnickety about language. I don't like the words "narrow banking." I like "narrow deposit-taking" and "equity-financed banking," to be clear that banking can stay as big as it wants.)

That's essentially what Segregated Balance Accounts are. A big depositor gives money to a bank, the bank invests it in reserves. If the bank goes under, the depositor immediately gets the reserves, which just need to be transferred to another bank. This gets around the pesky limitation that the Fed is not supposed to take deposits from people and institutions that aren't legally banks.

Saturday, May 30, 2015

Betting on Grexit

A capital flight mechanism I hadn't thought of, from  Hans-Werner Sinn (HT Marginal revolution)
Basically, Greek citizens take out loans from local banks, funded largely by the Greek central bank, which acquires funds through the European Central Bank’s emergency liquidity assistance (ELA) scheme. They then transfer the money to other countries to purchase foreign assets (or redeem their debts),... 
 In January and February, Greece’s TARGET debts increased by almost €1 billion ($1.1 billion) per day, owing to capital flight by Greek citizens and foreign investors. At the end of April, those debts amounted to €99 billion. 
I knew Greeks are taking money out of bank deposits, and parking it abroad, and that in the end this money came from the ECB. When a Greek depositor wants his or her money, the Greek bank gets it from the Greek central bank, who gets it from the ECB, which prints it (metaphorically). It had not occurred to me that of course borrowing every cent you can from a Greek bank and parking it abroad is just as smart.

Of course, If Greece leaves the Euro, the Greek central bank goes bust, the ECB loses and Greek borrowers or ex-depositors keep their euros.

Hans-Werner seems to think capital controls are a good idea to stop this run. I think the likely imposition of capital controls is just why people are running in the first place. Similarly, if both Greece and Europe were to credibly say that Greek government default will not mean leaving the euro that would also stop the run.

But news for the day is this interesting run on the borrowing side, not just the depositor side.

Friday, May 29, 2015

On writing well

The WSJ notable and quotable picked a lovely snippet from “On Writing Well” (1976) by William Zinsser, who died May 12 at age 92. 
Clutter is the disease of American writing. We are a society strangling in unnecessary words, circular constructions, pompous frills and meaningless jargon. 
Who can understand the clotted language of everyday American commerce: the memo, the corporate report, the business letter, the notice from the bank explaining its latest “simplified” statement? What member of an insurance plan can decipher the brochure explaining the costs and benefits? What father or mother can put together a child’s toy from the instructions on the box? Our national tendency is to inflate and thereby sound important. The airline pilot who announces that he is presently anticipating experiencing considerable precipitation wouldn’t think of saying it may rain. The sentence is too simple—there must be something wrong with it. 
But the secret of good writing is to strip every sentence to its cleanest components. Every word that serves no function, every long word that could be a short word, every adverb that carries the same meaning that’s already in the verb, every passive construction that leaves the reader unsure who is doing what—these are the thousand and one adulterants that weaken the strength of a sentence. And they usually occur in proportion to education and rank.
Though each sentence is spare,  Zinsser includes some long and concrete lists. Notice how effective that combination is.

From the New York Times Obituary
His advice was straightforward: Write clearly. Guard the message with your life. Avoid jargon and big words. Use active verbs. Make the reader think you enjoyed writing the piece. 
He conveyed that himself with lively turns of phrase: 
“There’s not much to be said about the period except that most writers don’t reach it soon enough,” ... 
“Abraham Lincoln and Winston Churchill rode to glory on the back of the strong declarative sentence,” ..
Zinsser's book was an inspiration to me.  I highly recommend it to economists and PhD students. (My reading list for a PhD writing workshop.)

Measure your time. You may think you're a social scientist, but in fact you're a writer.

Thursday, May 28, 2015

Small shoes and headroom

I talked with Kathleen Hays and Michael McKee on Bloomberg Radio last week, and they asked (twice!) a question that comes up often in thinking about Fed policy: shouldn't the Fed raise rates now, so it has some "headroom" to lower them again if another recession should strike?

I could only answer with my standard joke: That's like the theory that you should wear shoes two sizes too small because it feels so good to take them off at the end of the day.

But the question comes up so often, it's worth thinking about a little more seriously. Under what views about the economy does this common idea make any sense?

Wednesday, May 27, 2015

Tucker and Bagehot at Hoover

I had the pleasure last week of attending the conference on Central Bank Governance And Oversight Reform at Hoover, organized by John Taylor.

Avoiding the usual academic question of what should the Fed do, and the endless media question will-she-or-won't she raise rates, this conference focused on how central banks should make decisions. Particularly in the context of legislation to constrain the Fed coming from Congress, with financial dirigisme and "macro-prudential" policy an increasing temptation, I found these moments of reflection quite useful.

Some of the issues: Should the Fed follow an "instrument rule," like the Taylor rule? Should it have "goal," like an inflation target, but then wide latitude to do what it takes to attain that goal? What structures should implement such a rule? Implicit in a rule that the Fed should do things, like target inflation and employment, is an implicit rule that it should ignore others, like asset prices, exchange rates and so on. (I think this is much too often overlooked. As financial reform should start by delineating what is not systemic, and hence exempt from regulation, monetary policy rules should start by saying what the Fed should ignore.) Should that limitation be more explicit? What's the right governance structure? Should we keep the regional Feds? How should Fed meetings be conducted? Is "transparency" the enemy of productive debate? How much discretion can an agency have while remaining independent?  And so on.

I was going to post thoughts on he whole conference, but John Taylor just posted an excellent summary, so I'll just point you there.

My job was to discuss Paul Tucker's (ex Deputy Governor of the Bank of England) thoughtful paper, "How Can Central Banks Deliver Credible Commitment and be “Emergency Institutions" Paul's paper starts to think deeply about independent regulatory agencies in general, and monetary and fiscal policy together. My discussion is narrower. I'll pass on the discussion (pdf here) as today's blog post, as it might be interesting to blog readers.

Comments on “How Can Central Banks Deliver Credible Commitment and be “Emergency Institutions” By Paul Tucker
May 21 2015

Let me start by summarizing, and cheering, Paul’s important points.

The standard view says that perhaps monetary policy should follow a rule, but financial-crisis firefighting needs discretion; a big mop to clean up big messes; flexibility to “do what it takes”; “emergency” powers to fight emergencies.

I think Paul is telling us, politely, that this is rubbish. Crisis-response and lender-of-last-resort actions need rules, or “regimes,” even more than monetary policy actions need rules. At a basic level any decision is a mapping from states of the world to actions. “Discretion” just means not talking about it.

More deeply, you need rules to constrain this mapping, to pre-commit yourself ex-ante against actions that you will choose ex-post, and regret. Monetary policy rules guard against “just this once” inflations. Lender of last resort rules guard against “just this once” bailouts and loans.

But you need rules even more, when the system responds to its expectations of your actions. And preventing crises is all about controlling this moral hazard.

Tuesday, May 26, 2015

Bailout barometer

The Richmond Fed updated its "bailout barometer," at left. Post here and longer report here. (WSJ coverage here)

I found the numbers and the table from the longer report interesting as well. Guaranteeing more than half of financial sector liabilities is impressive. But most of us don't know how large financial sector liabilities are. GDP is about $17 Trillion. $43 Trillion is a lot.

This is only financial system guarantees. It doesn't include, for example, the federal debt. It doesn't include student loans, small business loan guarantees, direct loan guarantees to businesses, the ex-im bank and so on and so forth. It doesn't include non-financial but likely bailouts like auto companies, states and local governments, their pensions, and so on.

Guaranteeing debt subsidizes things off budget. Of course, the chance that the government will have to simultaneously pay all these claims at once in full is small. But the chance that substantial debt guarantees might have to be paid is no longer vanishing.

Friday, May 22, 2015

Homo economicus or homo paleas?

Or at least that's how Google translate renders "straw man."

Dick Thaler is in the news, with a long review of his book in the Wall Street Journal  and a thoughtful opinion piece in the New York Times, earning plaudits from Greg Mankiw no less.

The pieces are nice reference points to think about just where psychological economics is. (That's a better adjective than "behavioral" since we are all students of behavior.)

Bottom line: People do a lot of nutty things. But when you raise the price of tomatoes, they buy fewer tomatoes, just as if utility maximizers had walked into the grocery store.

Homo paleas

Dick spends the first half of his precious space in the New York Times and much of the WSJ review complaining about homo economicus, the dispassionate rational maximizer of economic theory.

Tuesday, May 19, 2015

Feldstein on inflation

Martin Feldstein has an interesting Op-Ed in the Wall Street Journal, "Why the U.S. Underestimates Growth."

The basic idea is that inflation may be overstated, because it doesn't do a good job of handling new products. As a result, real output growth may be a bit stronger than measured.  Marty runs through a lot of sensible conclusions.

He doesn't talk about monetary policy, but that's interesting too. So what if inflation really is (say) 3% lower than we think it is, and therefore real output growth is 3% larger than it really is?

Saturday, May 9, 2015

McAndrews on negative nominal rates

Jamie McAndrews of the New York Fed has a thoughtful and clear speech on negative nominal rates and the benefits of currency. (Some previous posts on the subject here  here and here.)

A few high points:

1. Needed: anonymous electronic transactions.

Many (not all) negative interest rate proposals call for the elimination of currency. Currency is dying anyway due to the great advantages of electronic transactions. I bemoaned the loss of privacy and political freedom when the NSA, the IRS, and pretty soon Twitter and the Chinese Department of Hacking have a record of everything you've ever bought or sold. Jamie brings up another important point:
The anonymity afforded by currency transactions prevents a buyer from suffering from any actions taken after the transactions that could exploit the knowledge gained by the seller of the buyer’s identity. For example, identity theft, or theft of credit or debit card information, is avoided through the use of currency. This is an economic benefit that is distinct from valuing privacy from a civil liberties point of view. If currency cannot be used in transactions, buyers are at a disadvantage, and many otherwise beneficial transactions (not related to buyers seeking to engage in tax evasion or otherwise illicit activity) would not take place.
Anonymity has value in many transactions. Anonymity equals finality.

It's not hard to have anonymous electronic transactions. Stored value cards could work well as electronic cash. If regulators allowed it, it would be simple enough to set up a money market fund that allows anonymous investing. Regulators don't allow it.

2. Hysterisis of institutions and the lesson of the 70s