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Will an Increase in Interest Rates Reverse the Decline in Savings?

Martin Feldstein says yes:

The saving rate began falling in the early 1990s as households increased consumption in response to their rising level of wealth – initially a rising stock market and, more importantly, double digit increases in house prices. More recently, this wealth effect was reinforced by the rise in mortgage refinancing that was induced by falling interest rates. Households extracted trillions of dollars … from the value of their homes and a substantial part of that cash found its way into consumer spending. The forces that lowered the US saving rate are now being reversed. House prices nationwide are down from the peak reached in the middle of last summer. The Federal Reserve has reversed its low interest rate policy … It will only be a matter of time until the household saving rate is at least back to the 2.4 per cent level of 2002. To convert this higher saving to a reduction in the current account deficit requires increased exports and a shift in Americans’ spending from imports to domestically produced goods and services. A lower dollar will provide the necessary incentive for both of those changes to occur.

In other words, the recent increase in interest rates combined with a possible reversal of the wealth effect will induce households to save (rather than consume) more of their after-tax income. Mark Thoma focused on the movement along the savings schedule aspect rather than the wealth effect induced shift of the savings schedule – and then provided us an interesting time series graph of the personal savings rate versus the nominal interest rate on Treasury bills.

I could be critical of Mark’s graph and argue that we should be looking at the real interest rate, but then for the last 20 years or so, much of the movement in nominal rates has likely been movements in real rates as inflation has been relatively low and stable (as compared to say the 1970’s and early 1980’s). I could also note that correlations of two endogenous variables (interest rates and savings rates) over time tells us little about the elasticity of their relationship when both the demand curve (investment) and the supply curve (savings) shift over time. But this is where the story gets interesting.

Part of the debate over whether Bush’s fiscal folly would massively crowd out investment – at least in terms of a long-run neoclassical growth model – has to do with one’s views as to the Ricardian Equivalence proposition that a reduction in public savings would be matched by an increase in private savings. Simply put – the fall in private savings might at first glance be a puzzle to true believers in the Ricardian Equivalence proposition. Many of us have argued, however, the fiscal folly has indeed induced an inward shift of the national savings schedule. Ricardians might counter than the alleged inward shift was due to wealth effects.

Of course, an inward shift of the savings schedule should have increased real interest rates – to which Ben Bernanke argued we have been witnessing a global savings glut. Others (including me) have argued the fall in real interest rates was more due to the decline in investment demand as well as net exports – at least in terms of the U.S. economy. Feldstein is arguing that part of the reason for low savings rates is simply this shift along the savings schedule. The good news is that the global investment deficiency is reversing itself and Feldstein is hoping the same thing happens in regards U.S. net exports. And with an outward shift in the demand for loanable funds driving up interest rates, Feldstein is hoping for an increase in national savings on his premise that the national savings schedule is not perfectly inelastic.

While I have similar hopes in regards investment and net export demand, we have to ask whether the observed correlation between savings rates and interest rates is solid evidence for the proposition of an elastic savings schedule. On this empirical issue, I just don’t know.

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Global Warming: Krugman v. the National Review

Hat tip to Ezra Klein for taking on the personal attacks on Al Gore from Jonah Goldberg who we noted has a reading comprehension problem regarding the facts regarding global warming.

Via Mark Thoma comes Paul Krugman who does know how to read the evidence:

Mr. Gore couldn’t have asked for a better illustration of disinformation campaigns than the reaction of energy-industry lobbyists and right-wing media organizations to his film. … As evidence that global warming isn’t really happening, [the National Review] offers the fact that some Antarctic ice sheets are getting thicker … Curt Davis, … whose work is cited … has already protested. … He points out that an initial increase in the thickness of Antarctica’s interior ice sheets is a predicted consequence of a warming planet, so that his results actually support global warming … [T]hey [also] issue hysterical warnings about the economic consequences of environmentalism. “Al Gore’s global warming movie: could it destroy the economy?” Fox News asked. Well, no, it couldn’t. There’s … broad consensus that even a very strong program to reduce emissions would have only modest effects on economic growth. At worst, G.D.P. growth might be, say, one-tenth or two-tenths of a percentage point lower over the next 20 years. ….

And if one needs evidence that the National Review is guilty as charged, read Rich Lowry:

The Antarctic Peninsula has indeed been melting, but it constitutes only 2 percent of Antarctica’s total area. 2002 study in Nature found that two-thirds of the continent actually got colder from 1966 to 2000. A 2005 study published in Science looked at about 70 percent of Antarctica’s surface area and reported that the East Antarctic ice sheet had gained – yes, gained – 45 billion tons of ice annually between 1992 and 2003.

Yes, that 2% does sound small – doesn’t it? Of course, the National Review crows over a couple of billion dollars in Federal spending reductions as if that’s going to solve the massive Federal deficit problem even though it is only 0.2% of GDP. But has Lowry done the math as to the effect of the additional water in the oceans and their effects on coastal property. No, Aunt Bee of Topeka, Kansas has more to worry about from NSA wiretaps of her calls than she does in terms of her backyard being flooded – but there are a lot of people who do live near the shores.

Lowry also linked to Jason Lee Steorts who writes:

What is not moral is to distort the truth for political ends – which is precisely what has been done with the ice-caps story.

I guess Steorts was talking about the distortions found in the National Review.

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Female Labor Force Participation: 1975–2005

It’s been over a year since we discussed a paper on labor force participation by Julie Hotchkiss of the Atlanta Federal Reserve. The latest paper from Julie Hotchkiss addresses the rise in female labor force participation from 1975 to the late 1990’s as well as the recent reversal of this trend:

After decades of consistent increases, the labor force participation of women began to flatten out in the late 1990s and decline after 2000. This article investigates the changes in the labor force participation rate among women aged twenty-five to fifty-four that have occurred over the past thirty years … The rate of change in behavior has also declined over the past thirty years. Indeed, behavioral change between 1994 and 2005 had a direct negative influence on the observed decline in the labor force participation rate during these decades. Special attention is given to the unprecedented 2.7 percentage point decline in the labor force participation rate between 2000 and 2005, which can be explained by changes in both behavior and characteristics, with weaker labor market conditions in 2005 being one of the characteristics providing the greatest downward pressure. However, if the unemployment rate had been at the 2000 level of 4.5 percent in 2005 (holding everything else at 2005 levels), the labor force participation rate of women would still have been 2.3 percentage points lower than in 2000.

While some of us economists on the left wish to emphasize how weak the labor market remains citing the fact that the employment to population ratio is still far below where it was in 2000, some of the economists on the right are arguing that part of this decline represents choices and not weak aggregate demand. Hotchkiss’s conclusions give a bit of ammunition for those on the right. (Hat tip to Mark Thoma for his email).

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Has Poverty in Venezuela Increased Under Hugo Chavez?

As I read Brad DeLong fulfilling the plea from Jonah Goldberg:

Well, we want to put up more quotes from the pages of NR, past, present and future there

I had to wonder. Brad is a very good economist and yet he provided quotes about NR’s racism and love for Joseph McCarthy but nothing on economics. Then I read Dean Baker:

It appears that Mexico is not the only Latin American country for which the media have difficulty with official statistics. Apparently, the media have been anxious to tout high poverty numbers for Venezuela. The problem appears to be that they want to cite poverty data for 2004, which showed a large upturn in the poverty rate in the immediate wake of a strike in the oil sector. The Venezuelan economy rebounded sharply in 2005, and the poverty rate predictably fell back below its previous levels. However, even though the 2005 data is now available, the media continues to use the much higher numbers from 2004.

Which reminded me of the Stephen Johnson hit piece on Venezuela’s president, Hugo Chavez:

Venezuela now rivals Haiti in poverty and underemployment.

Really?! Dean points us to a recent study from CEPR. Poverty rates in terms of the number of people before 1999 exceeded 50% but had declined to 45.4% by the end of 2001. CEPR notes the decline in poverty was attributable to strong economic growth. The oil strike, however, led to a recession and an increase in poverty. By the end of 2005, however, the number of people living below the poverty line fell to 43.7% as the economy recovered from the oil strike led recession. As CEPR notes:

How then have so many people reached a different conclusion? The most common mistake has been to use the data from the first half of 2004, which was gathered in the first quarter of that year. The household poverty rate at that time was 53.1 percent, which is of course up enormously from 1999. There are several things wrong with using this measure. Most importantly, this poverty rate is measuring the impact of the oil strike and recession of 2002-2003. Poverty rates are very sensitive to expansion and downturns in the economy, so to compare 1999 with the first quarter of 2004, leaving off the subsequent recovery, is meaningless and misleading. As noted above, the Venezuelan economy grew by 17.9 percent in 2004, and by 9.3 percent in 2005. We would expect and, in fact, did see a massive reduction in poverty from an economic recovery of this magnitude. So most of the news reports and articles alleging an increase in poverty under the Chávez administration are analogous to comparing winter temperatures to spring temperatures, and concluding on that basis that there is no global warming.

Dean is frustrated that the press does such a poor job in reporting economic matters. I guess it would be expecting too much from the National Review especially given their tendency to cherry pick variations in economic data and report them as if they are long-term trends.

And while we are on the topic of misrepresenting data, Mark Thoma catches Robert Rector relying on Heritage Foundation spin on immigration that has already been debunked by a CBPP analysis.

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Global Warming: TCS v. Al Gore and Andrew Sullivan

Robert Balling over at TCS goes after Al Gore’s “An Inconvenient Truth” by noting a passage taken from this study, which got NRO’s Jonah Goldberg all excited. Andrew Sullivan more carefully reads what the study said and did not say and links to this piece which has in large font the following:

Emissions of greenhouse gases and aerosols due to human activities continue to alter the atmosphere in ways that are expected to affect the climate.

Since Jonah Goldberg has been lecturing Andrew Sullivan on more carefully reading source material, I’m a little shocked at this feeble reply. All Jonah did was to call TCS and have them whine about how their own source – which they may have misrepresented.

Back to Andrew:

I should say that I find the evidence for global warming overwhelming

No argument here!

Update: Iain Murphy of the Corner Kids at NRO tries to smear those of us who understand global warming by noting that the folks at the company that Ken Lay built also understand this issue. Ah Iain, Ken Lay may have been less than honest about the accounting in late 2001 – but he was still a very smart person.

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Feeling Bearish

David Wessel of the Wall Street Journal is feeling bearish this morning:

Every so often, economic forces and financial markets collide in ways that make for a tumultuous year — the stock market crash in 1987, the Asian financial crisis and bond-market paralysis in 1998, the bursting stock bubble in 2000.

Suddenly, this year has all the ingredients of a Big One.

The dollar is sinking. Global stock markets are volatile. Bond-market interest rates are climbing. Oil prices are up. Gold is at a quarter-century high. Housing prices are softening. Protectionist pressures are intensifying. General Motors Corp. is a candidate for bankruptcy court. Iran may be on the verge of going nuclear. A nasty, partisan congressional election looms. And a new Federal Reserve chairman’s inflation-fighting resolve is being tested.

Alan Greenspan certainly picked a good time to retire.

Wessel neglected to mention the fuel that the US’s enormous current account balance adds to this unignited fire, but even so, he seems to have reasons enough for concern. It’s not clear what the spark will be, or even whether there will be a spark at all. There may not be. But I think that Wessel is right to suggest that there is enough dry wood and kindling piled together to give 2006 the potential to generate more than a comfortable amount of heat and flames.


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Everything’s Relative

GDP growth in the first quarter of this year was just revised upward to a very robust 5.3%. Yet a lot of analysts are disappointed:

WASHINGTON (MarketWatch) — The U.S. economy grew at a 5.3% annual rate in the first quarter, the Commerce Department said Thursday in its first revision of gross domestic product estimates. A month ago, the government agency estimated real (inflation-adjusted) growth in the period January through March at an annualized 4.8%.

The upward revision was not as large as expected. Economists were expecting an upward revision to 5.6%, according to a survey conducted by MarketWatch.

…The upward revision was largely due to higher inventory investment and a lower trade deficit than the government had initially estimated. Commerce said that lower consumer spending on electricity and natural gas over the winter and weaker investment in equipment and software offset some of the upward revision.

“In my view, the report as a whole is at the margin disappointing. We had looked for a higher Q1 growth figure, and the shortfalls were in the two most important categories, consumption and business investment,” said Stephen Stanley, chief economist at RBS Greenwich Capital.


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Confusing Financial Assets with Goods Production

Why does the National Review allow John Tamny to publish such utterly stupid comments:

If a homeowner secures a loan that enables him or her to purchase more goods, by definition there is a lender who has foregone that same consumption. There’s no direct stimulus here, just a shift of money from one person to another.

Tamny is trying to suggest that the increase in the relative price of houses has no wealth effect and hence no impact on consumption or aggregate demand. The empirical evidence suggests otherwise. But the real concern is whether residential investment will decline. One cannot dismiss the fact that residential investment has propped up overall investment demand over the past few years. Tamny may have a point here:

Far from harming our economy, a downturn in real estate has the potential to bring more capital to the stock market. England, Australia, and New Zealand offer useful examples here in that stocks rallied 17, 28, and 38 percent respectively in the years after property booms in those countries ended around the beginning of this millennium.

The slump in business investment after 2000 lowered interest rates, which is one reason why residential investment was so strong. My hope is that the recent recovery of business investment can allow continued strong aggregate demand growth even if residential investment declines.

So what is my real beef with the latest nonsense from the National Review?

If there is an economic slowdown on the way, it will arguably be the result of the same weak-dollar phenomenon that drove the above-mentioned property rallies in the 1970s, and which drove the most recent one.

Does Tamny understand that part of the reason why aggregate demand growth was so weak over the 2001 to 2003 period was the decline in net exports? Does he not get the simple point that the devaluation of the dollar will tend to increase net exports? Or perhaps Tamny subscribes to the National Review theory that only core GDP (sum of consumption and investment) matters?

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The Passing of a Former Treasury Secretary

Brad DeLong pays tribute to the late Lloyd Bentsen as does David Rosenbaum. While it was not the purpose of his post, Daniel Drezner pays a very nice tribute to Bill Clinton’s first Treasury Secretary:

The White House seems to view the Treasury Secretary as a salesman’s job, as opposed to a position where that requires any requisite policy knowledge, expertise, or anything of that nature … The truly scary thing about that last paragraph is the White House’s belief that one can find a Treasury Secretary who would be a salesman while still commanding respect in the markets. To my knowledge, the only value-added John Snow has brought to the Treasury position has been his willingness to be the Bush administration’s salesman – and I’m pretty sure the markets don’t respect him all that much.

Bentsen was influential in getting Bush41 to push for the 1990 tax increase and helping Clinton assure passage of the 1993 tax increase. The markets certainly respected Secretary Bentsen. Of course, Bush43 does not want to admit that his fiscal policy is piling up deferred tax liabilities – so it’s unlikely that the White House could convince someone like Lloyd Bentsen to serve as Treasury Secretary unless the White House changed course over fiscal policy.

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Speaker Hastert Defends Privacy Rights of William Jefferson

Could someone please explain this:

WASHINGTON (CNN) – House Speaker Dennis Hastert said Tuesday that the FBI and the Justice Department “took the wrong path” when they searched a Democratic congressman’s office this weekend as part of an anti-corruption probe. “We understand that they want to support and pursue the process that the Justice Department is trying to pursue,” Hastert, a Republican from Illinois, said. “But there’s ways to do it, and my opinion is that they took the wrong path.” Over the weekend, The FBI searched the Washington home and office of Rep. William Jefferson, D-Louisiana, and found $90,000 of allegedly ill-gotten funds in the freezer of his home, according to an affidavit.

I know the right side of BlogLand went nuts over law enforcement looking into potential wrongdoing by Rush Limbaugh, but the left side of BlogLand has no sympathy for this Democratic Congressman. But the Republican Speaker of the House does? Justin Rood suggests:

After sitting largely silent for more than five years of assaults against citizens’ constitutional rights, our legislators have been moved to protect the Constitution because one of their own – a man who meets contacts in hotel parking lots to accept briefcases full of money, and actually kept $90,000 in cash bundled in his freezer – had his offices searched by the FBI. Methinks the Congress doth protest too much.

Can anyone else provide an alternative explanation that makes any sense? I can’t.

Update: Kevin Drum reminds us:

But at least the FBI got a search warrant signed by a judge. Congress should feel lucky they were treated with such sensitivity.

Update II: Hastert is being investigated by the FBI as well. Meanwhile, Jonah Goldberg is on the record saying:

I think this mess – if it really amounts to a mess – could have been avoided if a more politically savvy AG were at the helm. John Ashcroft, for example, would probably have found a way to raid Jefferson’s office without needlessly ticking off Hill Republicans and giving the press a reason to ignore Democratic corruption in favor of whining about White House arrogance.

That a-boy Jonah – call for the Justice Department to be just another tool of the RNC!

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