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Do economic crises reflect crises in economics?

Dan here…Worth reading the whole 12 pages.   (Hat tip New Deal democrat)

Do economic crises reflect crises in economics?

Keynote address, ‘Rethinking Economics’ conference, Stiftverband für die Deutsche Wissenschaft/Handelsblatt, Frankfurt am Main, 23 January 2012.

Diane Coyle, Enlightenment Economics and Institute of Political and Economic Governance, University of Manchester

 

The ‘series of unfortunate events’ in the global economy since 2008 make it natural to ask where the economists have been.1 If you have a leaky boiler, you expect the plumber to mend it; a dentist should cure your toothache; so why haven’t the economists been able to fix the economy?

When economists meet privately these days, we will most often whisper to each other, isn’t it all so interesting? These are fascinating times. Every day brings something new to think about. It isn’t only economists who want to understand what’s going on. There has been an increase in the number of students choosing economics at university, and there seems to be a strong appetite for popular books and lectures.

So I would like to present a paradox. Economics is both in crisis and experiencing an extraordinarily fruitful renaissance. There is already a new approach emerging from the pre-crisis framework, like a butterfly hatching out of its chrysalis. It’s much less tied to a particular theoretical approach, more pragmatic, more empirical. It is rooted in a lot of existing work that has been more or less hidden from public view but is what most economists actually do.

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Is Real GDP at Potential?

I will present a way to determine potential real GDP using a regression of past data. First take the official CBO potential and subtract it from real GDP.

pot 6

When the red line is above zero (0), real GDP is over potential. Normally the red line rises above potential before a recession. So it looks as though we are from a recession at the moment.

Now I will do a regression with this line against 3 variables.

  1. Capacity Utilization (TCU)
  2. Unemployment rate (UNRATE)
  3. Labor share index, non-farm business (LSI)

Generally in the regression, capacity utilization and unemployment will represent real GDP. Labor share will represent changes in potential.

But I will select parts of the line above for the regression. Yes, I am cherry-picking because I do not trust the CBO potential of the 1990’s. The CBO had a terrible time ascertaining potential in the 90’s with new technologies and such. The CBO is still having a terrible time as they constantly adjust potential.

The time periods for the regression are

  1. 1967 to 2nd quarter 1990
  2. 1st quarter 2004 to 2nd quarter 2007

I take out the 1990’s and the data since the crisis because there are more doubts about their validity.

Here is the report of the regression.

SUMMARY OUTPUT
Regression Statistics
Multiple R 0.950
R Square 0.903
Adjusted R Square 0.900
Standard Error 50.45
Observations 108
ANOVA
df SS MS F Significance F
Regression 3 2452450 817483.4 321.21 1.99E-52
Residual 104 264682.6 2545.02
Total 107 2717133
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept -829.32 237.82 -3.49 0.000717 -1300.93 -357.70
TCU 23.37 2.20 10.63 2.62E-18 19.01 27.72
LSI -8.12 2.25 -3.61 0.00048 -12.59 -3.66
UNRATE -41.84 5.14 -8.14 8.93E-13 -52.03 -31.65

The adjusted R square is 90%. The P-values are low.

What does this regression look like plotted against the official line above?

pot 7

The new plot (green line) is a way to assess real GDP in relation to potential. The line tracks well with official numbers before 1990 and before the crisis.

But how does the regression fill in the time periods left out of the regression? It shows that real GDP was over potential in the 1990’s in a moderate way as compared to the steep rise to a very high spike seen in official data. The line implies that in the 90’s, real GDP went over potential about to the same extent as before the 1980 and 1991 recessions. (Maybe the Fed did not have to raise the Fed rate as much as they did near the turn of the century.)

The regression implies that real GDP was sitting at potential for a few years before the crisis.

These differences from the official line (red) are somewhat reasonable.

Yet, now the regression is implying that real GDP reached potential during 2014. This may also be reasonable because one might expect unemployment to drop quicker than expected when real GDP reaches potential.

Note: One might assume that labor share is fairly constant and that the real driving forces behind the regression are capacity utilization and unemployment. However, labor share itself was changing in response to these cycles of real GDP around potential.

pot 8

When labor share drops, the regression says that potential drops. And when labor share rises, the regression says that potential is rising. When labor share drops, real GDP seems to move faster toward potential, because according to the regression potential is dropping toward real GDP.

  • Is real GDP at potential?
  • Will real GDP rise much more?
  • or Will the utilization of labor and capital stabilize now if real GDP is at potential?
  • Will the decline in capacity utilization during March stick around?
  • Even if labor share was to rise now, would real GDP still seem to stabilize around potential according to the regression? So that a rise in labor share is matched by changes in the utilization of labor and capital to keep real GDP near potential?

Time will tell…

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Growing US Partisanship

I think you want to read this excellent post by Jonathan Chait. That is all.

update:

US partisanshipe appears to be the meme of the day. Dana Milbank (who is very different from Chait) also wrote about it. Milbank cites a different academic study. From the brief summaries both academic studies sound very convincing to me.

update 2: yep it’s a meme. Charlie Cook too.

update 3: Dan Balz too

end update 3

One of the more interesting changes in U.S. politics in recent years has been the increasingly parliamentary nature of voting behavior. Fewer people are straying beyond their party affiliations, we are seeing more straight-ticket voting, and the characteristics of individual candidates mean less than ever

end update 2.

I was intrigued by this passage in Milbank’s column

“Also of note is that the partisan polarization occurs even though Americans aren’t all that split on policies or ideology. Their partisanship is more tribal than anything — the result of an ill-informed electorate. ” Milbank supports this claim with a quote from Sean Westwood (one of the academics). I clicked the (pdf warning) link to the academic article. I am going to guess that the non split on politicies and ideology is of the following form — partisan Republicans agree with Democrats that rich people should pay higher taxes and that Medicare and Social Security should be expanded not cut. In other words I dare guess that the evidence of a tribal ill-informed electorate who hate the other party even though they agree with its proposed policies is asymmetric with the evidence of irrational tribalism actually evidence of irrational tribal Republicans.

Even before I check my guess, I note that my firm belief that a majority of US Republicans are ill-informed tribal and totally confused is one more data point supporting the Chait/Milbank hypothesis. I, for one, sure am a tribal Democrat. I will now check my guess and report back.

Oooops egg on my face. I can’t find anything about ideology or policy preferences in the linked article. Westwood’s statement to Milbank must be based on other evidence.

Also the paper is fascinating. It includes actual games using real money — the dictator game and the trust game. I suggest you just click the link and scroll down to that section. The results are dramatically asymmetric. The difference between sharing with and trusting partisans of the same party and of the different party are stressed in the abstract and introduction. This is Ballanced because the authors don’t stress differences between Republicans and Democrats. But the detailed results show a more dramatic difference between Republicans and Democrats than between same party vs opposite party pairs. Republicans are less generous and trusting. Republicans are more partisan (their actions differ much more depending on whether they are playing with a Republican or a Democrat). The point estimate is that Democrats are less generous with Republicans than with other Democrats Republicans are with other Republicans, but the difference isn’t statistically significant.

partisan

In the dictator game player one (the participant) decides how to divide up some money. Given zero to the other player obviously maximizes one’s payoff, but it is rare.

Basically the asymmetry — Republicans are less generous than Democrats — is about as strong as partisanship — people are more generous with other people of the same party. Yet the symmetric result was stressed more. I think the eccellent paper shows how people bend over backwards to not appear partisan when denouncing partisanship.

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Northwest Plan for Social Security: Conservative “Workers – Take Your Medicine”-ism (and why this Social Democrat likes it)

Long time readers of Angry Bear will be familiar with the Northwest Plan for a Real Social Security Fix. It has been pushed here in a series of posts and in innumerable comments (mostly by Dale Coberly) since 2009 including this core post: NW Plan for a Real Social Security Fix Ver 2.0: 2009 Trigger. Those who have questions about its details can ask them in Comments. But lets have the short version.

The Northwest Plan is inherently conservative in the old-fashioned sense of the word. It accepts that status quo that has resulted from the Social Security Act of 1935 and the important Amendments of 1939, 1950 and 1956 and for the sake of argument accepts the tests and Reporting imposed on Social Security by current law and the practice of the Social Security Trustees and the projections of the Social Security Office of the Chief Actuary. Having accepted that status quo in all its respects it then proceeds to ask a simple question: “What would it take to guarantee full Scheduled Benefits going forward under the constraints of current law and under the projections of the (standard) Intermediate Cost projection?” Or in other words “What would it take to Fix Social Security without Reforming it?” Where ‘Reform’ would include proposals from both the Right (which mostly take the form of benefit reductions) or from the Left (which generally take the form of modifying or eliminating the income cap formula). Or in still other words “What if we just made workers take their medicine and take the entire burden on themselves?”

In answering this question the authors of the Northwest Plan, primarily Dale Coberly with assists from Bruce Webb and Arne Larson, suggest starting from the arithmetic. Which in this case takes the form of “actuarial gap”. Now actuarial gap can be measured and presented in various ways over various time periods but is by the Trustees typically presented in the following form: “What is the gap between current rates of FICA and the rate currently needed to fully fund Scheduled Benefits over the 75 year Long Range Actuarial Window without changing either the Benefit formula or the Cap formula?” Now granted that there are a lot of barely buried assumptions in this formulation what would happen if we just ran with it? And answers to that under the fold.

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The Curious Case of the ACA at tax time

Tax day has come and gone and nothing extraordinary happened (at least nothing extraordinary enough to be reported by the Washington Post or the New York Times). This non news should be news, because the much hated Obamacare mandate has been applied. Some Refund checks (many of which have not have been mailed yet) were or will be reduced by the Obamacare penalty. Then that’s it — extraordinarily the penalty can’t be enforced in any other way unlike other liabilities.

Perhaps more importantly, many more taxpayers have gone through the hassle of demonstrating that they have health insurance. This has not lead to enough outrage for it to be heard here on the other side of the Atlantic.

This is just the latest no news is good news for Obamacare. Oponents and alarmed supporters of have predicted several train wrecks, but only one has occurred — the exchange web site was not ready October 2013. However, actual payments to actual health care providers were made with no more than usual nightmare hassles starting January 1 2014. Roughly the predicted number of people signed up for health insurance. The vast majority of policyholders actually paid premiums. They were about as healthy as health insurance companies predicted, so selling insurance on the exchanges was profitable. More companies offered plans the second open enrollment period than the first. Efforts to find someone who was harmed because non Obamacare compliant mini-med plan (purchased after the ACA passed) was cancelled were unsuccessful.

None of these events was certain. Only the number of people signing up was headline news. Good news is no news. But this week saw a dramatically important non-event.

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Oh, look! The uninsured rate fell again!

As any conservative can tell you, Obamacare is a job-killing “train wreck.” Not only is it a job killer, there is no way that it could possibly work. Except, of course, it does.

When I last visited this issue, the percentage of adults without health insurance had fallen from its peak of 18.0% in the third quarter of 2013 to 13.4% in the second quarter of 2014. Now, as Gallup (via Matt Yglesias) shows us, it continues to fall, dropping to 11.9% in the first quarter of 2015, based on over 43,000 interviews throughout the quarter. This is a drop of exactly one percentage point from the fourth quarter of 2014, or about 2.4 million adults.

The gains that we have seen now through two enrollment cycles (Q4 2013 through Q1 2015) affect every major demographic group, as the following table from Gallup shows.

 

Percentage of Uninsured Americans, by Subgroup

 

Especially notable are the gains for minorities (8.3 percentage points for Hispanics and 7.3 for African-Americans), those with income below $36,000 per year (8.7 points) and adults from 26-34 (7.4 points). But notice that even Americans making over $90,000 annually have seen their uninsured rate fall by 2.3 points, meaning that 40% of this group is no longer uninsured. This is actually the biggest percentage gain among any of the demographics Gallup surveyed.

As Gallup and Yglesias both point out, part of the reason for the improvement is the declining unemployment rate. But Yglesias is right on the money that this undermines the “job-killer” meme. In fact, as he shows, 2014 was “the best year of job creation since 1999.”

This is one argument conservatives aren’t going to win. In fact, it looks like they’ve already lost the vote of one Tea Partier who was able to retire early because of Obamacare.

Cross-posted from Middle Class Political Economist.

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National Debt: Since When is the Fed “The Public”?

This issue has been driving me crazy for a while, and I never see it written about.

When responsible people talk about the national debt, they point to Debt Held by the Public: what the federal government owes to non-government entities — households, firms, and foreign entities. (Irresponsible people talk about Gross Public Debt — an utterly arbitrary and much larger measure that includes debt the government owes to itself.)

Debt Held by the Public is the almost-universally-accepted measure of “the national debt.” That would be perfectly reasonable, except that…

Federal Reserve banks are counted as part of “the public.” So government bonds held by this government entity — money that the government owes to itself — are counted as part of the debt government owes to others.

The Fed has bought up trillions of dollars in government bonds since 2008, to the point that Debt Held by the Public has become an almost meaningless measure (click for source):

fredgraph (15)

Here it is as a percent of GDP:

fredgraph (16)

Debt actually held by “the public” equals 57% of GDP — and declining — not 73% of GDP.

I don’t know how economists or pundits think they can have any conversation at all about this subject, analyze it in any useful way, if they ignore this basic reality. Reinhart and Rogoff, are you listening?

Cross-posted at Asymptosis.

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