Relevant and even prescient commentary on news, politics and the economy.

Researcher at San Francisco Fed warns of Excessive Easy Monetary Policy

Today we see an article, Betting the house: Monetary policy, mortgage booms and housing prices by Oscar Jorda, Moritz Schularick, Alan Taylor. They warn of excessive easy monetary policies.

Their research uses a large data set.

“In our new paper (Jordà et al. 2014), we analyse the link between monetary conditions, mortgage credit growth, and house prices using data spanning 140 years of modern economic history across 14 advanced economies. Such a long and broad historical analysis has become possible for the first time by bringing together two novel datasets, each of which is the result of an extensive multi-year data collection effort.”

Their research gives a warning that low interest rates will be detrimental to the stability of the economy.

“These historical insights suggest that the potentially destabilising by-products of easy money must be taken seriously and considered against the benefits of stimulating flagging economic activity… Resolving this dichotomy requires central banks to make greater use of macroprudential tools alongside conventional interest rate policy. “

The implication may be that conventional interest policy would suggest a higher Fed rate than we currently see.

Keynes also wrote that low interest rates used to stimulate an economy could eventually produce more waste than benefits. (Chapter 22 of General Theory)

“… it is, I think, arguable that a more advantageous average state of expectation might result from a banking policy which always nipped in the bud an incipient boom by a rate of interest high enough to deter even the most misguided optimists. The disappointment of expectation, characteristic of the slump, may lead to so much loss and waste that the average level of useful investment might be higher if a deterrent is applied.”

The Federal Reserve would like to get out of the Zero Low Bound business, if they can.

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Clinton-Becerra 2016

I am not going to say nobody ever thought of this pairing, but a quick trip around the Google-sphere got me a paucity of results. So I am going to stake my claim here.

Why Becerra? (Or for some Becerra who?)

Chicano. California. Ambitious. Young. CPC (Congressional Progressive Caucus). The guy ticks off so many boxes that it is ridiculous. Particularly the CPC piece. Clinton needs the support of the Warren Wing of the Democratic Party. And once you go down that list you just don’t find many leaders who can step up AND provide the needed electoral balance. Love me some Raul Grijalva (CPC co-chair). But he is not even going to deliver Arizona. Also admire Keith Ellison (CPC co-chair). But in the immediate wake of Obama the possibility of actual installing a person who is actually a Muslim as well as being black from a State that Hillary would win hands-down anyway (Minnesota) is not happening. And you can go down the list of CPC’ers and not find anyone who is enough opposite to Hillary to make for balance.

My second prediction would be Martin O’Malley. But face it, the guy is not about to whip up excitement in places where you need the votes. Of course I am not only probably wrong, I am almost certainly wrong, and for reasons AB readers will be happy to point out in Comments all of an idiot, a loon, and a fecklessly idiotic loon.

Okay. But you heard it here first. (Unless you are WAY deep in the fever swamps of the polit-Toobz)

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Health news

I’m not sure if there are studies looking at the long term effects of such advice on one’s health especially in this economy, but I can see where in the words of Arlo Guthrie, it could create a movement.


Health Experts Recommend Standing up at Desk, Leaving Office and Never Coming Back

ROCHESTER, MN—In an effort to help working individuals improve their fitness and well-being, experts at the Mayo Clinic issued a new set of health guidelines Thursday recommending that Americans stand up at their desk, leave their office, and never return. “Many Americans spend a minimum of eight hours per day sitting in an office, but we observed significant physical and mental health benefits in subjects after just one instance of standing up, walking out the door, and never coming back to their place of work again,” said researcher Claudine Sparks, who explained that those who implemented the practice in their lives reported an improvement in mood and reduced stress that lasted for the remainder of the day, and which appeared to persist even into subsequent weeks. “We encourage Americans to experiment with stretching their legs by strolling across their office and leaving all their responsibilities behind forever just one time to see how much better they feel. People tend to become more productive, motivated, and happy almost immediately. We found that you can also really get the blood flowing by pairing this activity with hurling your staff ID across the parking lot.” Sparks added that Americans could maximize positive effects by using their lunch break to walk until nothing looks familiar anymore and your old life is a distant memory.

The Onion February 6, 2015

Maybe the labor unions could follow-up on this advice and determine what the long term benefits might be?

There is also this report today:

New Study Finds Therapy, Antidepressants Equally Effective At Monetizing Depression

NORMAN, OK—Noting that similar outcomes were achieved under both approaches, a landmark decade-long study of mental health treatment options published Tuesday has found that talk therapy and antidepressant medications are equally effective at monetizing clinical depression. “Our data indicate that regular counseling sessions and prescription drugs have similarly high success rates in generating large sums of money from the clinically depressed,” said Katherine Hutton of the University of Oklahoma, the study’s lead author, noting that both methods demonstrated consistent positive earnings across chronic, episodic, and seasonal depression cases. “While some people make tremendous profits with drugs, others see substantial revenues from therapy. Together, these are two very powerful tools for improving the health care industry’s bottom line.” The study concluded that when both approaches are combined, financial results are likely to be reached far more quickly than with one method alone.

The Onion, February 17, 2015


I think this raises some ethical questions for the medical profession and possibly concerns for congress as to the incentives within the ACA.

Certainly, the expert advice combined with the study would create some discussion within congress regarding the policy related to just about anything…






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Third Way trade agreements study leaves out a lot

Third Way (h/t TPM), a Democratic pro-trade think tank, has released a new study, “Are Modern Trade Deals Working?” It examines the various “free trade” deals the U.S. has signed since 2000 to conclude that 13 of 17 have led to an improvement in our goods (not including services; see more below) trade balance with the countries involved, giving a net improvement over the 17 agreements studied of $30.2 billion per year.

I did a similar analysis of this very question (though in less detail than the Third Way study) in 2012. Unlike the Third Way report, my post included all U.S. free trade agreements (rather than starting in 2001 like Third Way) as well as the effect of the 2000 agreement for Permanent Normalized Trade Relations (PNTR) with China. So, compared to the Third Way study, my post includes the FTAs with Israel, Canada, and Mexico, but did not consider the Panama FTA, which had not yet come into effect when I posted. My conclusion was essentially the same as Third Way’s, that the effects of the agreements on our trade in goods were usually positive, but of small size (the effect of the Israel FTA was also small). Because the Third Way study begins in 2001, however, it omits the impacts of NAFTA and PNTR with China. However, as my post showed, they are the most important by far.

This fact is not lost on opponents of the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Lori Wallach of Public Citizen Global Trade Watch told the Associated Press that “studies such as Third Way’s make a big deal out of modest trade improvements with countries like Panama, and gloss over huge trade deficits with major trading partners such as South Korea, Mexico and Canada.” She’s right.

In 1993, the year before NAFTA went into effect, the United States had a surplus with Mexico on trade in goods of $1.7 billion. In 1995, it went to a deficit of $15.8 billion, and in 2014 the goods trade deficit was $53.8 billion, down from 2007’s peak of $74.8 billion. This was in sharp contrast with the analysis of Gary Hufbauer and Jeffrey Schott, who predicted trade surpluses on the order of $9-12 billion through the 2000s, even as they admitted that the peso was overvalued (it collapsed in value in the December 1994 “Tequila crisis”).

Meanwhile, the balance of trade in goods with Canada went from a deficit of $10.8 billion in 1993 to $34.0 billion in 2014. Note that the U.S. had a peak deficit of $78.3 billion in 2008, which collapsed to  $21.6 billion in 2009.

In 2000, the year PNTR was adopted, the United States had an $83.9 billion goods trade deficit with China. In May of that year, the International Trade Commission (h/t David Cay Johnston) released a report estimating that the trade balance would worsen by a further $4.3 billion. According to the article, the U.S. Trade Representative and the White House both criticized this study strongly. And in fact, the 2001 deficit fell to $83.1 billion. However, in 2002 it was $103.1 billion, an increase more than four times the ITC prediction, and by 2014 it had grown to $342.6 billion.

By including trade in goods but not trade in services, Third Way is admirably the stacking the deck against its own position. It points out that the U.S. has a global surplus in trade in services of $232 billion in 2014, including a $45 billion surplus with Canada and Mexico. However, it doesn’t mention that the U.S. goods trade deficit was $737 billion in 2014, or that the country’s overall 2014 trade deficit was $505 billion, up from $477 billion in 2013.

The ultimate question is whether TPP and TTIP are going to be more like the U.S.-Australia Free Trade Agreement, or more like NAFTA and PNTR. Considering that the TPP includes all the NAFTA countries, Australia, Chile, Japan, and six others, comprising “nearly 40 percent of global GDP,” I think it’s safe to assume that it will have a much bigger impact than the FTAs with Australia or Chile, for instance. Similarly, since the European Union has an economy about the same size as the U.S. economy, I believe the TTIP will also have big consequences.

Moreover, we have to remember that these are much more than trade agreements. Both of them have increased protections for investors, patents, trademarks, and other intellectual property, and in both of them the U.S. is advocating the inclusion of investor-state dispute settlement so companies can sue governments through arbitration rather than courts, something that has proven more favorable for companies vis-a-vis both governments and consumers. So, in addition to the negative effects on U.S. workers that we would expect on the basis of the Stolper-Samuelson Theorem, all signatory countries are likely to suffer from higher prices for medicine and assaults on their regulations through investor-state dispute settlement.

Thus, while the Third Way study is right as far as it goes, what it leaves out is far more significant and worrisome.

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Fishing with Anti-Malaria nets

At the NY Times Jeffrey Gettleman reports that people are using anti-malaria nets to fish
(via Anne Laurie at Balloon Juice).

After reading the headline but not the article (not wanting to be discouraged) I thought the problem was just that the pesticide treated nets were not being used to protect the people from malaria. The solution would just be to give extra nets so there were plenty for both purposes. The article explains that fishing with such nets is itself a problem.

Nobody in his hut, including his seven children, sleeps under a net at night. Instead, Mr. Ndefi has taken his family’s supply of anti-malaria nets and sewn them together into a gigantic sieve that he uses to drag the bottom of the swamp ponds, sweeping up all sorts of life: baby catfish, banded tilapia,


mouthbrooders, orange fish eggs, water bugs and the occasional green frog.


the unsparing mesh, with holes smaller than mosquitoes, traps much more life than traditional fishing nets do. Scientists say that could imperil already stressed fish populations, a critical food source for millions of the world’s poorest people.

Scientists are hardly the only ones alarmed. Fistfights are breaking out on the beaches of Madagascar between fishermen who fear that the nets will ruin their livelihoods, and those who say they will starve without them. Congolese officials have snatched and burned the nets, and in August, Uganda’s president, Yoweri Museveni, threatened to jail anyone fishing with a mosquito net.


permethrin is “highly toxic” to fish.


“If you’re using freshly treated nets in a smallish stream or a bay in the lake, it’s quite likely you’re going to kill fish you don’t intend to kill,” said Dan Strickman,


When asked where he had gotten his, he smiled.

“At the hospital,” he said. “Much cheaper than a real net.”

(A “real” net costs about $50, an enormous expense in a place where many people survive on a few dollars a day.)

It seems to me that the solution is to give fishermen regular fishing nets in addition to the anti-malaria bed nets. Their aim isn’t to catch water bugs and minnows, so it should be easy to crowd out the use of nets which catch too much by providing nets which catch only fish big enough to eat.

I still don’t have a clear sense of the relative severity of different problems:
1) not sleeping under the nets (extremely severe but cheaply and easily solved by giving more nets) 2) 2) pesticide on the nets (easily solved)
3) too fine mesh (fairly easily solved)
4) a ratio of people with lots of time and little food to fish such that only inefficient fishing technology prevents over-fishing (very hard to solve).

I think joint provision of anti-malaria nets and fishing nets would solve most of the problem.

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The Taper Tantrum

I am marking my beliefs to market as Brad DeLong does from time to time. One of my old beliefs whose market quotation has declined is extreme skepticism about the effectivenss of US monetary policy at the zero lower bound.

This skepticism was largely caused by what I perceived to be the weak effects of the second round of US quantitative easing (QE2) and what I perceived to be much weaker arguments that it had been highly effective based, in my view, on the use of extremely convenient and highly variable lags. Also interest rate shifts of two or three tenths of a percent were treated as extremely important. The ability to reliably predict such shifts would be worth a huge amount to bond traders, but macroeconomic research focused on the effects of interest rates gives no hint that they would have a reliably detectable effect on output, employment or inflation.

[I am moving some borderline relevant text after the jump. The bottom line is that Abenomics shows nonstandard monetary policy can have the effects which I doubted it could. I think the open debate is about what the FOMC can do given the federal reserve act and the political environment.]

A dramatic event, the taper tantrum, strongly suggested that my view of the effects of nonstandard monetary policy in the USA was totally wrong. As I vaguely recall, the taper tantrum was a dramatic increase in long term bond rates and a dramatic decline in inflatin breakevens which followed immediately after a FOMC press conference in which the tapering off of QE3 was discussed. Googling back, I see it was much more complicated than that.

First a sincere attempt to time the taper tantrum gave me the date May 22 2013.

Exactly one year ago today, on May 22, 2013, the Federal Reserve announced that it would begin tapering back its roughly $70 billion a month in bond and mortgage backed securities program. The news made risk assets the ugly duckling of financial markets.

FRED caused me to ask “What tantrum ?”


Nothing much happened around the data of Bernanke’s testimony.

Further googling revealed a four week gap between the first public extremely official discussion of tapering and the tantrum

positive economic news in the spring of 2013 led Federal Reserve Chairman Ben Bernanke to testify to Congress on May 22, 2013, that the Fed would likely start slowing—that is, tapering—the pace of its bond purchases later in the year, conditional on continuing good economic news. This testimony laid the groundwork for the June 19 press conference in which the Chairman optimistically described economic conditions and again suggested that asset purchases might be reduced later in 2013: “[T]he Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.”

the tantrum occured after the press conference whose content seems to add little to Bernanke’s testimony. Notably less than a year later, a Forbes contributor Kenneth Rapoza seems to have conflated the two announcements. We seem to be back to convenient and variable lags.

But even the June events do not fit the story as I vaguely recalled it. There was a market response whose timing matched the press conference, but it consisted of an interest rate increase of about 30 basis points and a breakeven decline of about 20 (meaning real interest rates increased about 10). There is no way that such changes can be a big macroeoncomic deal. Again events which matter a great dea to bond traders were discussed as if they have important effects on people in general.

Zooming out, interest rate shifts in the Spring of 2013 are large enough to potentially make a noticeable difference — long term rates including mortgage rates went up by about 1%. But the identification of the whole shift with the taper announcement is based on stressing timing when it is convenient to do so and ignoring it when it is inconvenient. Either the few days around June 19 2013 are the topic (and there was no similar news May 22) so interest rate shifts are too small to be worth all the fuss or properly called a tantrum, or a long interval of time matters so the claim that the issue was the taper press conference (and not of course the taper testimony) is based on ignoring the event studies method not on using it.

update: graph and some discussion added


Notice that the small quick late June shifts have the pattern one would expect given monetary tightening — a nominal interest rate went up, expected inflation went down, the S%P 500 index declined and the dollar appreciated against the Euro. However, the large slow shifts from the end of April through early September do not show that pattern at all. The nominal interest rate went up, expected inflation went down, the S&P 500 went up, and the dollar depreciated (slightly). Higher nominal interest rates and stock prices correspond to good news about growth. The overall pattern seems to me to fit a decline in the expected price of petroleum. But in any case, it doesn’t look at all like the effects of tighter monetary policy or tighter expected future monetary policy.

Totally aside from timing (which is critical for identification except when it is inconvenient and irrelevant) the pattern suggests that most of the shift in Spring and Summer 2013 was not a tantrum due to the taper. The dramatic shift June 19th got attention. The large shifts over the whole period looked important, and, given vague memories, seem to have occured about the time of the taper (at least that is what I carelessly thought when looking at long time series). But they clearly are different — occuring over different intervals and with opposite sign changes in Stock prices and the dollar Euro exchange rate. The whole graph doesn’t support the idea that anything the FOMC said or did had a large enough impact on the economy to be noticeable. In a way, this is good news for those convinced that US monetary policy at the ZLB matters. US economic growth accelerated about a quaerter or two after the taper tantrum. Anyone silly enough to think a 30 basis point shift in interest rates should cause a major adjustment to expected future GDP growth would have gotten the sign of the change in growth rates wrong.

end update:

In conclusion, I think the standard analysis of the taper tantrum (including mine until just now) is of the same quality as the analysis of QE2 which drove me (temporarily) nuts. A story fits the data if magnitudes are ignored and if exact timing is both critical and irrelevant.

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New Milestone: Majority of Public School Students Now Considered Low-Income

Via Southern Education Foundation:

Students are eligible for free meals if they live in households with no more than 135 percent of the poverty level, and they qualify for reduced-price meals if household income is no more than 185 percent of the poverty level. In 2013, the federal poverty threshold was $23,550 for a family of four.

poor in school

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US 76, EU 6

No, it’s not a sports score. It’s the number of $100 million incentive packages offered in each place beginning in 2010. This is based on my first paper to use the February 2015 update of Good Jobs First’s Megadeals database (you can download the entire update in spreadsheet form).

I’ve said before that U.S. investment incentive use is totally out of control. The new paper confirms this beyond my worst nightmares. Think about it: The United States and the European Union have comparably large economies, yet U.S. state and local governments have put together an average of 15 $100 million packages per year in 2010-2014, compared to 1.2 per year in the EU. Yes, more than ten times as many per year in the U.S.!

The U.S. incentive packages are bigger, too. The largest of the six EU packages (Global Foundries in Dresden, Germany, in 2011) comes to about $285 million at an exchange rate of $1.35 per euro (and the euro is down to less than $1.15 now). Boeing, Sempra Energy, Intel, Cerner Corporation, Cheniere Energy, Shell, Tesla, and Chrysler all received packages worth over $1 billion. Moreover, Boeing’s incentives were accompanied by substantial retirement and other benefit concessions from its workers.

How does this happen? Governments in the European Union and the United States both face the same need to attract investment, but the EU has a binding legal framework that restricts what Member States can do. Every subsidy program or large individual subsidy must be notified in advance to the European Commission, and only implemented if the Commission approves. Every region in the EU has a maximum subsidy level it can give, with a limit of 0 for the richest regions and only 50% (subsidy/investment) for the poorest regions, mostly in the former Communist countries. Finally, investments larger than €50 million have their maximum allowable subsidy cut sharply, by 50% on the amount between €50 million and €100 million, and by 66% for the amount over €100 million.

Because of the lack of a framework in the United States, state and local governments spend almost $50 billion per year just to attract investment, and up to a further $20 billion in subsidies not even requiring investment, according to my estimates. This is more than enough to rehire every state and local employee who lost their job since the recession. All other things equal, subsidies make the economy less productive, and these subsidies transfer money from average taxpayers to the far richer subsidy recipients. In other words, they slow economic growth and contribute to economic inequality.

Changing this is a huge job. The first step is simply knowing what the stakes are, achieving transparency in how much governments give to business. Things are improving on the transparency front, but we still have a long way to go. Then we’ve actually got to change the rules…

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To fix or not to fix: Jeffry Frieden’s “Currency Politics”

by Joseph Joyce

To fix or not to fix: Jeffry Frieden’s “Currency Politics”

The decision by the Swiss National Bank to abandon its peg to the euro serves as an example of the relatively limited life spans of fixed exchange rate regimes. While the fragility of exchange rate commitments has been known since the publication of a 1995 paper by Obstfeld and Rogoff, the question of why some central banks fix the value of their currencies and others do not is less well understood. Jeffry Frieden’s Currency Politics provides a thoughtful guide to the political economy of exchange rate policy.

Frieden, the Stanfield Professor of International Peace at Harvard’s Department of Government, analyzes the decisions on the choice of exchange rate regime and also the level of the exchange rate. There is rarely a consensus within a country on these issues, and the position of the domestic parties depends on how they are affected by fluctuations in the exchange rate. The principal supporters of a fixed rate will be those who are exposed to substantial foreign exchange rate risk in their global activities, such as financial institutions and multinational corporations. Those who have borrowed in a foreign currency will also have a stake in keeping the domestic value of their debt fixed. Producers of tradable goods tied largely to world prices, such as commodities and standardized manufactured goods, will favor a depreciated exchange rate, as will those who use nontradable goods as inputs. While decisions over the choice of regime and the level of a currency’s value are conceptually separate, Frieden writes that the politics usually lead to a split between those who favor a fixed rate versus those who seek a depreciation.

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