United States Economy 2012

First, fuck Apple and fuck this fucking piece of shit fucking phone. I'd sooner cut my dick off than by another fucking Apple product after it's refreshed away my post twice now. Piece of fucking shit.

Second, that's a change in messaging, not stance, by the Fed. They're still more focused on the quantity of action being taken than the results from a particular action. They're also not really shifting the boundaries much on acceptable inflation thanks to the inclusion of a third variable in the form of long term inflation expectations, where they've still got an unlisted trigger point. So I don't expect much of any serious change from this.

Mark Carney's explicit avowel of NGDPLT was way more exciting as he's currently the rockstar of central banking and a one time stalwart in the old school econ camp of inflation targeting.

Next, a tangential point to that one about quantity vs results from Lombard Street (bagehot)

Note the emphasis on accepting collateral deemed good in NORMAL times vs the modern obsession with collateral quality in CURRENT times. Central banks won't lose money by lending to insolvent entities whose collateral CURRENTLY sucks because the very fact of their intervention restores conditions to NORMAL and the collateral to good state. Contrast that statement with the extreme risk aversion of the ECB and the lesser but still astounding aversion of the fed toward action outside the tbill market. Their policy actions have lost effectiveness because they've restricted themselves to markets where they are manifestly unnecessary to the maintenance of asset prices.

Which brings me to this interesting bit:

www.economist.com/blogs/freeexchange/2012/11/monetary-policy-unintended-consequences?fsrc=rss

And another longer segment inside about the composition of rates.

And now back to my central point: our central bankers are so fucking retarded it's unfuckingbelievable.

Also, that the iPhone is a satan machine designed for shredding dicks and causing pain and only masochists who love love loooove Apple's mandatory apps and hate their dick should use one.*

* I am granting all individuals without dicks an honorary dick for the purpose of hating this fucking phone.

Whether they're actually doing it is less important than they feel the need to say it. Got to start somewhere.

While it's not ideal, it represents another major step forward. Back in Sept-Oct we got open-ended QE3, now we have explicit targets for inflation and unemployment. PROGRESS.

Here is Noah Smith getting at some of the discomfort I have with NGDP level targeting.

Under NGDP level targeting the Fed is supposed to set an explicit target. If the Fed misses the explicit target they'll have to explain why they missed. So, uh, I don't think this critique makes sense?

Setting an explicit target is fine and dandy. But many in the NGDPLT crowd have ascribed to the Fed the ability to subsequently hit any NGDP target it chooses.

His criticisms are that the Fed's power is:

unfalsifiable
potentially inaccurate
bounded by other factors

Accuracy is a specious complait because NGDPLT has an assumption of implementation inaccuracy baked in. If the Fed overshoots in one period it undershoots in the next to compensate, no biggie. If over time they can't manage that it'll be real obvious.

Power is a specious complaint after watching the Fed crush inflation in the 80s and create a Depression today. But if it does everything right and can't hit the targets we've got options: target is shit, implementation is shit, Fed is politically bounded in its domain, Fed is economically bounded within its domain. All of these can be tested. All of them are obvious from long term failure to hit target.

Exterior factors that can impact policy are real factors from the rest of the economy. Constraints on oil production, shitty regulation forcing costs up, corruption, all of these can impact the price level forcing a weakening of GDP growth to maintain target. The existence of real factors is hardly controversial.

Last thing, this is infuriatingly lacking in any discussion whatsoever of expectations theory. Discussing NGDPLT post Woodford without reference to expectations is inane dickwafflery. The whole mechanism derives its power from elegantly solving the coordination problem. If you don't talk about that of course it all makes no sense!

Why Is Ben Bernanke The Only Man in Washington Who Care About Jobs?

Synopsis: Historically the Federal Reserve only worried about inflation, while Congress and the President worried about unemployment. This is now reversed.

Possibility one: The article is accurate, and the Federal reserve really didn't ever think about unemployment until 2008.
Possibility two: They did, but it was so out of the DC discussion loop that pieces like this can get written.

ADP calls December employment at +215k. Typically they overstate relative to the initial BLS figures; but once BLS gets in two months worth of adjustments they tend to converge. So here's hoping!

December unemployment report!

Highlights: December +155k, October revision -1k, November revision +15k for a net of +170k. Unemployment rate unchanged at 7.8%.

Winning Sectors:
healthcare +45k
food services +38k
construction +30k
manufacturing +25k

No big losers this month. Yay? Kind of the soft bigotry of low expectations; it's still going to take forever to get us back to full employment at this rate.

Yeah it's not 2012 any more but this thread long ago became a general ec thread for D&D so fuckit.

This is a very cool Ryan Avent post. Go read it now. It concerns a paper that takes a pretty novel approach to analyzing inequality. Basically, the starting point is that there are some cities where you get paid a lot of money and housing is very expensive. These cities also have lots of cool amenities such that, if you've got spare cash after paying the rent/mortgage/whatever, you can have a totally killer time. Anyway, the idea being that this leads to a result wherein welfare inequality - a sort of abstract hand-wavy aggregate measure of how well-off you are overall - is actually greater than income inequality. E.g., a maid living in SF is going to make more than one living in Idaho and maybe she can even afford the huge rent on her one-bedroom apartment. But she's not going to have enough money to partake of all the cool things SF has to offer, whereas the highly paid software engineer is. Thus, inequality going beyond raw income.

It's a blog post and kind of a novel link between two subjects I'm interested in (inequality and housing policy). I'm going to have to give the paper a read!

Here is a cool slideshow on the history of macro. Like all good slideshows it's missing something without the actual presentation, but you can still glean a few things. One thing I'd sort of known but never really internalized was that macro models still don't include the financial industry; they treat it as a transparent "veil" between savers and borrowers.

To go with the presentation: here's a post from The Economist's blog regarding the history of macro.

Today at interfluidity: a post that pretty much agrees with my intuition about developments in the economy over the past thirty years. And confirms them with graphs!

My mental model of the past thirty or forty years of the US economy: inequality began to kick into high gear. This should have led to a drop in aggregate demand and thus GDP because rich people have a lower marginal propensity to consume; if a larger share of national income goes to wealthy people then demand (and thus GDP) should decline. But we didn't see that. Why? Because the non-rich supplemented their income with increased borrowing. This papered over the inequality-induced drop in GDP for a while, but eventually the non-rich became too indebted and the shit hit the fan. And here we are today. The non-rich are working off their debt, but they're not going back into debt and thus we've got a GDP gap.

Here is the key graph that interfluidity uses:


From 1950 through the mid-60s you've got a marked increase in household indebtedness. I'm not sure what this is, if I had to postulate I'd guess it represents the postwar building boom, as households began to acquire homes for the first time. The trend levels off for nearly twenty years, but in the early eighties household borrowing begins to increase. There's a moderate increase during the 1980s, a slower increase in the 1990s, and then a crazy increase in the 2000's, followed by a steep decline. Note that we're still at mid-2000s level, I don't know what the trend level of savings ought to be but I wouldn't be surprised if we're only halfway to where we're eventually going.

The post goes on into some exploration of the implications of the above premise and it's very good stuff; he constructs a pretty compelling case for inequality driving the recent economic downturn. It's not definitive, but it certainly passes a sniff test. His concluding 'graf is pretty key:

Open questions:
1) What caused the rise in inequality?
2) How does monetary policy interact with an inequality-driven drop in GDP?

Noah Smith on rational expectations.

My totally amateur opinion is that neoclassical economics has been basically a rathole and that rational expectations are a silly thing to build your macroeconomic theory on. If I'm being cynical, I'd go the Delong/Thoma route and declare that the concept was invented because theories based on rational expectations produce results that confirm the political beliefs of those doing the theorizing. But what do I know!?!?

A range of things. I'd say it was half class interest based political manoeuvring half economic 'innovation' driven:

• Increasing replacement of labour with capital. see: robotic technology advances, computers, the internet.
• Increasing replacement of western labour with third world labour.
• Financialization of the global economy. A novel way for a handful of individuals to gain huge amounts of money in a way largely divorced from the rest of the economy. Either completely essential or utterly worthless depending on who you talk to.
• Changes in tax structure of most western nations from one that promoted equality towards one overflowing with ways to reduce tax burdens practically only available to the wealthy (see the special, and almost universally lower, tax designation of 'capital gains' income over 'labour gains' income)
• Changes in the willingness and ability of wealthy individuals and corporations to take advantage of a politically divided but economically united world to manipulate their tax affairs such that the wealthier you are the more likely you are to pay close to zero tax (unless making symbolic public relations 'donations' to government tax authorities)

You need Aeon221 for this.


On the broader question of how possible it is to defeat inequality. Personally, I think not very possible. Economic globalization has meant that vast gobs of money is as easy to move around as a few clicks of a mouse. As long as you have enough wealth to step into the class of people that can afford the setup costs you are a true economic citizen of the world and the world only has as high a tax rate as it's lowest tax haven and right now there are an army of countries competing to be the lowest.

To stop that trend you would need the political/fiscal organisation of the world to match it's private economic organisation. In other words you would require a body like the UN/IMF/World Bank have the power to levy tax rates on the wealthy. I'll give you a moment to reflect on how likely that is to ever happen.

US GDP growth went negative in the Sept-December quarter; initial estimates are -0.1%. The real odd thing is the 22% decline in defense spending. Gosh, it's almost as if government consumption and investment actually contributes to national income!

But I have been told that cutting government spending is the only way to increase growth! I HAVE BEEN TOLD!

January summary: +157k; Unemployment rate ticked up to 7.5%

Some sexy revisions in there though:
December: from +155k to +196k
November: from +161k to +247k (!!!)

November showed actual honest to goodness impressive job growth!

This is a good example of why we should pay less attention to the numbers when they come out, and instead wait for a few revisions. These numbers make me believe that the -0.1% GDP number we saw for Q4 2012 is going to be revised upward.

edit: also, the uptick in the unemployment rate is because in January the BLS uses a different population estimate as its baseline, but it doesn't project that estimate backwards. So there's not a real apples to apples comparison to be made here; it's basically unchanged. Also also some benchmark revisions discovered an additional 400k jobs in 2012. Which is nice!

On my drive up to Rutgers today I was listening to NPR; it was a bit frustrating that they focused almost entirely on the headline numbers and only briefly mentioned the (just as important) revisions. NPR is normally a pretty good news source; I can only imagine how awful coverage must be on like CNN.

shift6 finance industry isn't included in macro because it's no more relevant to macro performance than any other sector. Financial sector implodes due to collapse in asset prices (demand) and gdi (income). If central banks target gdi growth, finance sector can't herp out and damage gdi through synchronized pants shitting.

tl;dr financial crisis was a real and therefore micro response to a nominal and therefore macro shock.

This is a Really Fucking Important concept.

That said, it can heavily impact the distribution of gdi btw rgdi growth and "inflation". But that's sectoral, micro and real, nothing to do with macro.

jeffd

If you don't believe rational expectations matter then elephants tits mcnoodle dickberries.

People can rationally expect something, and that thing they rationally expect can be wrong because we can't predict the future. Shit happens, after all. All it means is that people will attempt a best possible forecast given limited time and search cost (think algorithms). Obviously there wil be error terms. Obviously not everyone makes the exact same choice. But just as obviously if the weather app says "70% chance of rain" we don't all sit around in our bathing suits waiting for a sunny day.

Most of the critiques are from one of two angles:

Rationality is hard because math, which ignores that non-math people can make reasonable approximations of a financial decision's likely impact on them (eg: college) by "polling" peers, colleagues and relatives. IOW it's exactly the sort of herd consciousness you can observe wrt pedestrian crossing decisions at confusing intersections such as the one near the Whole Foods on Houston. Nonverbal communication + observation results in joint cross decision well before the white man on the sign says it's ok.

Other line of attack is usually along the lines of picking some arbitrary task, assuming some choice is the rational one and then declaring RE suspect when people don't make that choice. Common one is X dollars now vs Y dollars Z days from now, which of course ignores concepts like present value of uture payments in declaring people irrational for almost universally choosing now over delay. Returning to a center to get money imposes shoe leather costs, trust in promise bein fulfilled is low, tl;dr cash in hand is desireable because non-cash elements dominate value of Y-X. IMO it should be done the other way around: offer people a choice and then figure out why the fuck they decide what they do in order to better understand what is and isn't actually rational vs what economists think is rational. Or in other words I'm more inclined to trust decision making of populations in aggregate over economists, possibly because I'm familiar with how shit economists are at macro.

This gets into game theory, which I think everyone interested in economics should study.

re: monetary impact on inequality

I initially thought there'd be an impact based on studies, but most of the studies (on review) confused low rates with easy money so aren't worth shit. The only obvious place it'd impact people would be creditors vs debtors, but it turns out studies on savings rates by income bracket tend to mean catching lots of people with a good year saving and lots of people with a bad year dissaving. So saving is probably dominated by stuff like life cycle, income shocks (pos & neg) and real factors like whether or not the govt encourages saving vs consumption rather than something like income/wealth.

Without creditor v debtor for inflation to work on you're left with real (micro) problems of allocating nominal growth between individuals. So stuf like Friedman's negative income tax, LBJ's great society, FDR's new deal would (assuming no capture by thieving bastards) tend to increase equality while stuff like ultra low captial gains (double tax of corporate incone notwithstanding), financial sector high leverage w/ bonus determined by roe etc would decrease equality.

Shitty monetary policy can mean a lot of unemployed people which hurts income equality, but the solution there is less shit monetary policy. Otherwise it's all a question of parceling out gdi growth efficiently.

I just want to super-strongly second Aeon221 's recommendation for game theory and extend it to goddamn everyone.

The rational expectations modeling approaching of perfectly rational far-seeing robots makes no goddamn sense, but bounded rationality, information asymmetry, and search costs gives you a useful replacement in the same space. It leads to wildly different predictions and recommendations, of course.

At the level of individual agents yes, absolutely. Total rationality at that level gives you stupid results, hence the need to fuzz things with semirandom weighting of coefficients, data uncertainty and similar things.

At the macro level -- which is necessarily the level of this thread , being as it deals with nations -- no, not at all, because the end result at that aggregate level is equivalent, which is why markets are still efficient despite flawed agents.

You can still lose money in an efficient market by being wrong ofc, but wrongness doesn't destroy rationality. Future is unknowable, hence rational expectations from current data can reach different conclusions given different but logically defensible weights.

I'm not referring to fuzziness, just that the fully rational individual is straight-up wrong. Stiglitz's Whither Socialism is brutal on this point.

Ignoring micro, at the macro level if agents were "rational" it's impossible to explain the Great Depression, or even guardian variety recessions occuring in response to financial crises. Did everyone rationally expect it was time to have a stock market boom and crash, followed by a decade of reduced output?

Aeon221 forgive me if I'm misinterpreting your post, but both the "finance as veil" approach to macro, and the rational expectations based approach to macro have both yielded dismal results.

Also I get that you like the NGDPLT approach to macro stabilization, but it's far from clear that this is actually the way to go; embedded within it are all sorts of assumptions (fed has total control over inflation/NGDP expectations; expectations functions are continuous and differentiable, etc) such that it's not at all clear to me that an NGDPLT regime is necessarily the way to go.

I've only posted once in this thread, nearly six months ago, and it was a goof reply to Jason concerning something he had said about inflation. So... elephant balls or pooptits or something? I forget.

Jason McCullough

Am I really going to have to redo the whole great depression was caused by the fed thing again? We've got Bernanke on record as fed chair saying exactly that almost ten years ago now. This shouldn't be up for debate, and I'm sick of having to repeat that thing.

So, to recap, why did every financial indicator drop simultaneously while unemployment rocketed up at the start of the great depression? Because monetary policy was too damn tight. You can even explain it with something as simple as the infamous Krugman baby sitting club.

Just because it doesn't make sense to you doesn't mean it was irrational. The irrational bit was individual actors at the fed refusing to ease policy in the face of overwhelming evidence that policy was too tight. Once that changed economy got back on track,

jeffd The financial crash was a symptom of the nominal crash, not the cause. If your argument is financial crisis -> depression, where was our depression after the brutal S&L crisis? Fed cut rates, no crisis. Even the inflation hawks at the fed (well, the sane ones) have admitted that if rates were at 4% they'd be voting for hefty rate cuts.

Financial sector isn't special. It can fail without taking the economy down so long as the monetary authority acts to keep income growth stable

The S&L crisis was largely firewalled off.

Even assuming perfect fed behavior you're going to get a recession following financial crashes. What's rational about that?

I know very little of this stuff, but there were rules put in place after the "great depression" to prevent that sort of reckless bahavior, right?
How in the hell were they allowed to be repealed creating the S&L crisis and our lovely little great recession?
Why aren't people being dragged through the streets?

Financial markets and instruments have become exponentially more complicated in 30 years and all that added complication means intelligent-yet-amoral people can find ways to make money while pushing risk around so creatively that no one understands what is happening. Regulations are literally a decade behind the Gordon Geckos of today and it is very hard to write effective laws that don't overgeneralize while also running a (largely) free market. The key laws that came out of the Great Depression were all written 50+ years ago and most of the rules put in place have since either been hobbled or completely repealed. For example, Glass Steagall (1933) repealed under the Clinton administration is a big one.

Bread and circuses.

Recession, no. Collapse in RGDP, yes. Burst of inflation, yes. Change in employment? Maybe, depends on how fast people can transition between sectors.

Perfect Fed reaction is unnecessary so long as Fed reaction function is well understood and market participants believe the Fed will carry it out. This is game theory, specifically credible "threats".

If market participants find fed threat credible they'll react (even though they "move" first) with behavior that assumes a particular response (in this case massive easing to counter any fall in GDP).

But of course we're discussing this as if financial crises are a cause of recessions, rather than an effect of overly tight money. Which is silly, because they don't cause recessions. S&L recession wasn't there because fed eased aggressively.

You're unintentionally recycling austrian/real business cycle theory. To my knowledge, there is zero evidence or plausible models that unemployment would remain unchanged in light of a financial shock, even with instantaneous perfect Federal Reserve response. The two immediate objections that come to mind is that 1) expectations take a non-trivial amount of time to change and 2) sticky prices and wages are a well-documented fact. It's not like I have super expertise in this shit, but there you go.

Needs citation.

Isn't this precisely the kind of argument that "rational expectations" is used to counter? "Monetary policy can't affect anything - every market participant will immediately and perfectly take account of the possible effects of monetary tightening/loosening and act in unison to counterbalance it." Government prints money to stimulate spending, everybody knows there's going to be inflation as a result and that therefore the money they have will lose value and therefore it's just as important to hold onto it as before, &c &c.

I've always found rational expectations to be interesting, but then somehow incorrect price signals (like low interest rates), aren't identified.

Actually defense spending contributes one of the largest multipliers. Probably has to do with manufacturing and employing young people.

Although, I do wonder, if the government spent 100% of all money, what sort of economic benefit would be achieved.

What does that even mean? Government spending 100% of all money? Do you mean that the government would spend in any given year an amount of money equal to the total money in circulation?

Throwing this out there: it's from the Military Times, but its an Army PA&E document that shows (on page 2) the state-by-state impact of the DoD portion of the sequester. Keep in mind that this is both civilian contractor and direct military, and that this isn't BRAC-related that I'm aware of.

Happy Sequestration Day, everyone!

What a collective bunch of f'ing retards we've got up there in Congress.

Teenager schools conservative economist on Maher.