Yesterday, the Federal Reserve confirmed that it would end new purchases of Treasury bonds and mortgage-backed securities (MBS)—what’s known as quantitative easing—in October. In response, the media are heralding the end of the Fed’s stimulus:
“Fed Stimulus is Really Going to End and Nobody Cares,” says the Wall Street Journal.
“Federal Reserve Plans to End Stimulus in October,” reports the BBC.
This is utterly wrong.
What the Fed is about to do is stop increasing the amount of stimulus it provides. For the mathematically inclined, it’s the first derivative of stimulus that is going to zero, not stimulus itself. For the analogy-inclined, it’s as though the Fed had announced (in more normal times) that it would stop cutting interest rates. New stimulus is ending, not the stimulus that’s already in place.
The Federal Reserve has piled up more than $4 trillion in long-term Treasuries and MBS, thus forcing investors to move into other assets. There’s great debate about how much stimulus that provides. But whatever it is, it will persist after the Fed stops adding to its holdings.
P.S. I have just espoused what is known as the “stock” view of quantitative easing, i.e., that it’s the stock of assets owned by the Fed that matters. A competing “flow” view holds that it’s the pace of purchases that matters. If there’s any good evidence for the “flow” view, I’d love to see it. It may be that both matter. In that case, my point still stands: the Fed will still be providing stimulus through the stock effect.
P.P.S. I wrote about this last year during the tapering debate. In the lingo of that post, the Fed is moving from quantitative easing to quantitative accommodation. To actually eliminate the stimulus, the Fed would have to move on to quantitative tightening.
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The Council of Economic Advisers just released an interesting paper examining the macroeconomic harm from the government shutdown and debt limit brinksmanship. To do so, they created a Weekly Economic Index from data that are released either daily or weekly (and weren’t delayed by the shutdown). These data include measures of consumer sentiment, unemployment claims, retail sales, steel production, and mortgage purchase applications.
The headline result: They estimate that the budget showdown cost about 120,000 jobs by October 12.
Looking ahead, I wonder whether this index might prove useful in identifying future shocks to the economy, whether positive or negative. As the authors note:
In normal times estimating weekly changes in the economy is likely to detract from the focus on the more meaningful longer term trends in the economy which are best measured over a monthly, quarterly, or even yearly basis. But when there is a sharp shift in the economic environment, analyzing high-frequency changes with only a very short lag since they occurred can be very valuable.
P.S. I am pleased to see CEA come down on the right side of the “brinksmanship” vs. “brinkmanship” debate.
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Posted in Budget, Data, Economy, Measurement, Taxes, tagged Budget, Debt, Deficit, GDP, Measurement, Spending, Taxes on July 31, 2013 |
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At 8:30 this morning, Uncle Sam suddenly shrunk.
Federal spending fell from 21.5 percent of gross domestic product to 20.8 percent, while taxes declined from 17.5 percent to 16.9 percent.
To be clear, the government is spending and collecting just as much as it did yesterday. But we now know that the U.S. economy is bigger than we thought. GDP totaled $16.2 trillion in 2012, for example, about $560 billion larger than the Bureau of Economic Analysis previously estimated. That 3.6 percent boost reflects the Bureau’s new accounting system, which now treats research and development and artistic creation as investments rather than immediate expenses.
In the days and months ahead, analysts will sort through these and other revisions (which stretch back to 1929) to see how they change our understanding of America’s economic history. But one effect is already clear: the federal budget is smaller, relative to the economy, than previously thought.
The public debt, for example, was on track to hit 75 percent of GDP at year’s end; that figure is now 72.5 percent. Taxes had averaged about 18 percent of GDP over the past four decades; now that figure is about 17.5 percent. Average spending similarly got marked down from 21 percent of GDP to about 20.5 percent.
These changes have no direct practical effect—federal programs and tax collections are percolating along just as before. But they will change how we talk about the federal budget.
Measured against an economy that is bigger than we thought, Uncle Sam now appears slightly smaller. Wonks need to update their budget talking points accordingly.
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By many accounts, Sweden did a great job managing its financial and fiscal crises in the early 1990s. But more than 20 years onward, its unemployment rate is still higher than before the crisis, as noted in a recent commentary by the Cleveland Fed’s O. Emre Ergungor (ht: Torsten Slok):
And its labor force participation rate is still lower:
Does Sweden’s experience portend similar problems for the United States? Ergungor thinks not. Instead, he attributes this shift to a structural change in Swedish policy that has no direct analog in the United States:
One study of public sector employment policies published in 2008 by Hans-Ulrich Derlien and Guy Peters indicates that for many years, the labor market had been kept artificially tight by government policies that replaced disappearing jobs in failing industries with jobs in the government. The financial crisis was the breaking point of an economic system that had grown increasingly more unstable over a long period of time. It was a watershed event that marked the end of an unsustainable structure and the beginning of a new one. Public sector employment declined from 423,000 in 1985 to 240,000 in 1996 mainly through the privatization of large employers—like the Swedish postal service, the Swedish Telecommunications Administration, and Vattenfall, the electricity enterprise—and it has remained almost flat since then.
With such a large structural change, what came before the crisis may no longer be a reference point for what will come after. Having corrected the root of the problem, the Swedish labor market is now operating at a new equilibrium.
That doesn’t mean smooth sailing for the United States, as he discusses. But it does leave hope that perhaps we do better than Sweden in creating jobs in the wake of a financial crisis.
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Taxes are the Swiss Army Knife of economic and social policy. With enough ingenuity, you can attempt almost any policy goal, from encouraging health insurance to discouraging pollution to stimulating the economy, to name just three. Over at Bloomberg Businessweek, Rina Chandran explains yet another use: helping a troubled economy achieve the moral and economic equivalent of a currency devaluation, without actually devaluing. That’s particularly intriguing for countries in the Euro zone:
The idea of fiscal devaluation originates with John Maynard Keynes. [Harvard Professor Gita] Gopinath’s insight was to advocate fiscal devaluation for Europe’s beleaguered currency union in a 2011 paper she co-authored with her colleague Emmanuel Farhi and former student Oleg Itskhoki, now an assistant professor at Princeton. …
The paper examines a “remarkably simple alternative” that doesn’t require countries to abandon the euro and devalue their currencies to revive growth through exports, Gopinath says. By increasing value-added taxes while cutting payroll taxes, a government can affect gross domestic product, consumption, employment, and inflation much as a currency devaluation would.
The higher VAT raises the price of imported goods as foreign companies pay the levy on the products and services they export to that country. The lower payroll tax helps offset the extra sales tax for domestic companies, reducing the need for them to raise prices. Since exports are VAT-exempt, the payroll cost saving allows producers to sell goods more cheaply overseas, simulating the effect of a weaker currency, according to the paper. The policy also can help on the fiscal front, as increased competitiveness can lead to higher tax revenue, Gopinath says.
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In today’s New York Times, Greg Mankiw offers a nice explanation for why many economists favor immigration:
First, many economists, especially conservative ones, have a libertarian streak. Ever since Adam Smith taught us about the wonders of free markets and the magic of the invisible hand, we have been loath to prohibit mutually advantageous trades between consenting adults. If an American farmer wants to hire a worker to pick fruits and vegetables, the fact that the worker happens to have been born in Mexico does not seem a compelling reason to stop the transaction.
Second, many economists, especially liberal ones, have an egalitarian streak. They follow the philosopher John Rawls’s theory of justice in believing that policy should be particularly attuned to its impact on the least fortunate. When thinking about immigration, there is little doubt that the least fortunate, and the ones with the most at stake in the outcome, are the poor workers who yearn to come to the United States to make a better life for themselves and their families.
Third, economists of all stripes recognize that our own profession has benefited greatly from an influx of talent from abroad.
I’d add a fourth item to Greg’s list: Many economists, both liberal and conservative, have a cosmopolitan streak. They thus place great weight on the wellbeing of foreigners, not just native Americans. From the libertarian side, that means caring about the liberty of the Mexican worker, not just the American farmer. And from the egalitarian side, that means caring about the poor immigrant worker seeking a better life, not just the person who employs them or the resident worker competing for similar work.
Such cosmopolitanism isn’t universal, of course. For example, some economists oppose greater immigration on the egalitarian, but non-cosmopolitan, concern that it would drive down wages for existing U.S. workers. On average, though, that perspective seems less common among economists than among non-economists.
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The U.S. economy has recovered slowly since the official end of the Great Recession in 2009. Mark Lasky and Charles Whalen of the Congressional Budget Office just released a study asking why. Their answer: two-thirds of the slowness (relative to past recoveries) reflects weak growth in the economy’s potential. The potential labor force, capital stock, and productivity are all growing less rapidly than they did following past recessions. The other third reflects cyclical weakness, particularly in government, housing, and consumer spending.
CBO’s Maureen Costantino and Jonathan Schwabish turned those results into a nifty infographic (click to make larger):
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