Very cool

Interactive population map from Forbes. See net migration for every county in the US. I think if you used gross in- and out-migration figures you could come up with a nice "inbredness" index.

Good employment news

The ADP estimates that private sector employment rose 206,000 in November and revised up its estimates for October. I think government job losses are starting to taper off, so it's possible the BLS estimate on Friday could be in the 200,000 range as well - that would be great news. Coupled with recent data showing that initial claims for unemployment compensation have fallen below 400,000 and seem to be on a downward trend, and strong estimates of retail sales, and we could have the makings of a modest strengthening of the economy here. Only two things could derail us: Congressional Republicans refuse to extend the payroll tax cuts that were passed last year, and Europe implodes. And I wouldn't bet on either of those two things not happening.

Must read

Christina Romer reviews the evidence for the effectiveness of fiscal policy. Very persuasive and accessible to the educated non-economist.

The Supercommittee's failure is probably the best we could have expected

The first thing to understand about the US budget deficit problem is this figure:

If the Supercommittee disbands without proposing legislation to reduce the budget deficit, and if Congress follows the Supercommittee out the door, turns off the lights in the Capitol building and shuts down the bill-passing machine (which hasn't been working all that well anyway) for ten years, the budget deficit shrinks to a very manageable 1.6% of GDP by 2014 and 1.2% of GDP by 2021 (by coincidence this is precisely what the deficit was in 2007). Why the happy outlook? Because the Bush tax cuts expire in 2013. We can see that here:

The Republicans on the Supercommittee made headlines by proposing modest revenue increases in exchange for large cuts in entitlements. Curious thing about those revenue increases however: they involved closing tax loopholes in exchange for lowering tax rates for high income people even below those established by the Bush tax cuts. It appears that these proposals increase tax revenues only if the baseline is a continuation of current tax rates; if the baseline against which the Republican proposals were compared was current law, under which the Bush tax cuts expire in 2013, the proposals surely amount to trillions of dollars of tax cuts. In other words, we get more revenue by rejecting the Republican proposals than we would by accepting them.

It's clear that Republicans will never accept a deal that doesn't at least extend the Bush tax cuts if not lower the rates further; so what's in it for the Democrats or for anyone concerned with reducing the long-term budget deficit to accept any kind of Supercommittee deal? Sure, failure to produce a deal means large cuts to defense and Medicare as specified in last August's Budget Control Act. Funny thing about legislation however - it can always be repealed or revised. If Congress doesn't want to impose big cuts on defense and Medicare it need only pass a budget for 2013 that doesn't include those cuts. Better yet, let the defense cuts go through as scheduled. The Congressional Budget Office says the cuts would amount to $55 billion per year; I refuse to believe that there is not $55 billion that could be easily cut from defense without reducing our national security - let's start with the $4-$6 billion plutonium facility the Administration wants to build at Los Alamos.

The key to reducing the deficit over the long term is simple. Get the economy growing again; let the Bush tax cuts expire as scheduled; implement cost-saving policies for Medicare and Medicaid as specified in the Affordable Care Act of 2010. A Supercommittee deal or any deal with the Republicans for that matter will worsen the deficit situation rather than improve it.

Shorter Ted Deutch

Proposed amendment to the Constitution:

Corporations aren't people fer cryin' out loud!

Who's more popular than Aaron Rodgers?

Public Policy Polling wanted to find out. The answer: "Me", Abraham Lincoln, and Jesus Christ. In that order.

Boy I hope Greg Mankiw is being facetious

He points out that the share of income going to the top 1 percent has risen dramatically in the UK since about 1979, and that this is true in other countries as well:

This figure, via Paul Krugman, shows the income share of the top 1 percent in the United Kingdom. The broad pattern is very similar to what U.S. data shows. The figure suggests that the explanation of growing inequality over the past several decades cannot be U.S.-specific but must have broader applicability.

You can generate more plots like this here. You find a similar U-shaped pattern in Australia, Canada, Ireland, and New Zealand but much less so in France, Germany, Japan, and Sweden. Might the rising share of the top 1 percent be related to the increasing use of English as a global language?

Really? The English language? I think the nature of Anglo-American economic institutions may have a tad more to do with it.

Putting the US recovery in context

Say what you will about the Obama Administration's economic policy failures, the fact remains that among the G-7 countries there are three - Germany, Canada, and the US - that have had unspectacular but real recoveries, and four - UK, France, Japan, and Italy - that have not. Germany's recovery has been especially strong in large part because it is the manufacturing center of Europe. It would be interesting to compare the recovery in the US manufacturing regions (say Great Lakes states) with Germany; I'd bet these areas have seen comparable growth. Canada's growth rate faltered in the last quarter while the US's accelerated. So the US is really something of a success story compared to the world's other large economies.

The financial crisis made simple

Maybe the problem with monetary policy is Boehner, not Bernanke

The Fed is coming under a lot of criticism from commentators and economists of a Keynesian bent (myself included) for its reluctance to take dramatic action to put the economy on the road to recovery. The economy is stuck in neutral with unemployment at 9 percent; has been pretty much so for a year and a half. The Fed has many tricks it could pull from its sleeve, most promising among them large scale purchases of mortgage backed securities to encourage refinancing under the new HARP rules or announcing a commitment to target nominal GDP or inflation backed up by large scale asset purchases. Ezra Klein says that Obama's decision to reappoint Ben Bernanke may have been a serious mistake; Paul Krugman says he used to think that Bernanke was a dove saddled with more hawkish colleagues on the FOMC, but now he thinks Bernanke just doesn't get it. Tim Duy says the Fed's inaction is "inexplicable." Brad DeLong and Mark Thoma are similarly disappointed.

But perhaps the problem is not Ben Bernanke but the political environment in which he is operating. My "political constraints hypothesis" (here's my paper applying this theory to the US Great Inflation of the 1970s) says that the Fed has two objectives:

1. Maintain its institutional independence by defending itself against political attacks.

2. Pursue the objectives of maximum employment and price stability as mandated by Congress.

In that order. Many at the Fed would deny that #1 is a significant constraint on pursuit of #2. The Fed is basically a politically-neutral, technocratic institution that pursues policies that it judges are best for the economy. I think the record of the 1970s contradicts this claim. Some at the Fed might argue that the only way to pursue #2 in the long run is to periodically make compromises to satisfy #1. I believe that is a reasonable interpretation of Fed behavior that is consistent with the record from the 1970s.

The implication of the political constraints hypothesis is that the Fed's room to maneuver on monetary policy is constrained by political forces. The stance of monetary policy measured by the federal funds rate in normal times or by changes in the size of the balance sheet in times like today moves much like market exchange rates under an exchange rate target zone regime. When well within the politically-determined bounds, monetary policy freely pursues the Fed's economic objectives. As the Fed approaches a political bound (e.g. Congress' opposition to high interest rates in the 1970s) it gets more cautious, and when the political bound is reached it abandons its economic goals. This seems to be what happened when the Fed abandoned attempts at disinflation in 1970, 1973 and 1974. The political bounds can move, requiring a Fed that was previously operating within the bounds to adjust policy as in 1970 and 1977, or permitting actions that the Fed is inclined to take but that were previously out of bounds as in 1979.

The political pressures on the Fed today are obvious. Ron Paul may pose little threat as chair of the subcommittee that oversees the Fed as long as Democrats control the White House and Senate. But there is a good chance that Republicans will sweep the 2012 elections, in which case Ron Paul becomes a serious threat to the Fed's independence indeed. One of the Republican presidential candidates has warned Ben Bernanke that further efforts to stimulate the economy would be treasonous. All have said that they disapprove of the Fed's recent policy efforts. The top Republican leaders in the Senate and House, including Mitch McConnell and John Boehner, have written an open letter to Bernanke and the other members of the Board of Governors "expressing reservations" about another round of quantitative easing. The Fed has reason to fear that its autonomy (and in the case of Bernanke, his job) would be endangered if it pursued aggressive measures today and then found itself answering to President Romney, Speaker Boehner, and Majority Leader McConnell in January 2013.

What predictions would the political constraints hypothesis make about monetary policy in the current environment? We would expect policy to become less aggressive following Republican victories in the 2010 midterms. And in fact the Fed allowed the second round of quantitative easing to expire as scheduled in spring 2011 and allowed its balance sheet to shrink despite obvious signs of a weakening economy in late spring and summer. We would expect to see the Fed deviating from policies that it would normally undertake on economic grounds. And here we have the Fed "inexplicably" choosing not to take a more aggressive stance despite reducing its growth forecasts.

Of course the Fed may in the current instance be guided by purely economic rather than political motives. Perhaps it is convinced that further quantitative easing would have little effect, or that increasing the size of its balance sheet further will make it difficult to unwind its policies when the economy begins to recover, or that buying more long-term and risky assets exposes the Treasury to too much risk. Certainly this is the type of argument that the Fed makes in public, but then you would not expect members of an institution that values its reputation for political independence to publicly acknowledge that they are responding to political pressures. It's even possible that a member of the FOMC who is disposed to change his or her policy recommendations on political grounds will be more easily convinced by the economic arguments consistent with this change, so that the members themselves may not be fully aware of the extent to which they are being influenced by political pressure.

So my hypothesis about the Fed's current behavior may be impossible to verify. Five years from now when the FOMC transcripts are released we may get a better idea, but even then the transcripts may provide evidence for both explanations of Fed behavior, as they do for the 1970s. But based on the logic of the political constraints hypothesis, I will make the following prediction. The Fed will not initiate another round of quantitative easing or take other aggressive action unless:

- there is a dramatic weakening of the economy that the political community as a whole will recognize as justifying further action, or

- the political fortunes of the Republican party weaken dramatically, assuring continued Democratic control of the Senate and White House.

I hope I'm wrong.

The Fed considers targeting nominal GDP

Back in December, 1982:

MR. AXILROD. I would say, President Corrigan, that we did hold out the hope, but mostly we didn't really want to be in a position of prejudging it at this particular time. I guess we mostly felt that something was needed between the Committee and GNP. If we don't have some aggregate--I don't see much else to choose from, the others may speak for themselves--between the Committee and GNP, then in that case you might just as well start controlling interest rates depending on your best assessment of what is going to happen to GNP. That is what we were grappling with.

...

MR. WALLICH. I would like to note that if you want a survey of targeting possibilities, some are not in the paper. While I wouldn't recommend these, I think there are serious contenders. One, on the basis of the research done here at the Board, is that the use of intermediate targets is inefficient and that better and more precise results can be obtained by targeting on the real sector directly. On the other hand, there are many arguments against that, including the political one, but it is something that one ought to bear in mind as one makes these choices. Also, I note that there is nothing in the paper about exchange rates. Again, while I don't think exchange rates are a proper target for this economy, they are targets that are used in other countries, in the EMS countries for instance. That again is something to think about. I would think certainly that exchange rates might play a greater role in our targeting in the future than they have. We have a little sentence [on them] in the directive but not much attention is paid to them. Finally, there is a reference to nominal GNP. You may recall that Martin Feldstein came here a few weeks ago and gave us a talk recommending that we target on that. I think that's dangerous advice. It means playing God, and the central bank should be a humble technician administering the aggregates and not trying to say what nominal GNP is to be.

...

MR. MORRIS. I think we need a proxy--an independent intermediate target-- for nominal GNP, or the closest thing we can come to as a proxy for nominal GNP, because that's what the name of the game is supposed to be. If we have to target something that is not predictably related to GNP, which M1 has not been in the past two years, one of two things can happen. One is that we can do as we did in 1981 and say the M1 shift adjusted, which was our target, is coming in too low and we are just going to let it come in low--we're not going to use it as a target de facto. I think that was the right decision. If we had tried to hit our targets for M1 in 1981, we obviously would have put too much money into the system. I think the targets have misled us this year. That is, up until October when we finally caught up with it, it seems to me that the monetary aggregates misled this Committee into following a much more restrictive policy than we intended. And that is reflected in a nominal GNP growth this year, which we're now estimating at 3.6 percent, that I don't think any of us a year ago would have [favored] as a target for nominal GNP. It seems to me that the best proxy for nominal GNP in this world of enormous change is the rate of growth of debt. Now, that may not be a perfect proxy, either. But we certainly don't want to go back to interest rate targeting. Politically, I don't think we could adopt a nominal GNP targeting approach even though theoretically that is what we ought to be doing. I don't think we can do it. We need a proxy for nominal GNP.

CHAIRMAN VOLCKER. What is that political objection?

MR. MORRIS. Well, let's say the President comes out in January and says we are going to have 12 percent nominal GNP growth, and you go up before the congressional committee in your Humphrey-Hawkins testimony the next month and say we're going to finance a 9 percent nominal GNP growth. It seems to me it is not well suited to the needs of the central bank to be that far out on a limb.

CHAIRMAN VOLCKER. How far do you think we can go in that regard by saying we're going to project a 9 percent credit growth or 9 percent M2 growth or something that is inconsistent with the 12 percent [nominal GNP growth]?

MR. MORRIS. I would merely submit that we've been getting away with this on the money supply for a number of years. I'm quite amazed that we have. But I think it's very clear that the intermediate target should not be politically sensitive. And the wonderful thing about the rate of growth in the money supply, for all of its problems, is that it was never a politically sensitive item such as the unemployment rate, or interest rates, and so on. Nominal GNP, if we were to use that as a target, would be a politically sensitive target, and we ought to avoid it for that reason. But we need a proxy for it.

...

MR. CORRIGAN. Just a simple case: Assume that we have not only a central tendency but a tremendous convergence that says nominal GNP is going to grow by 9 percent; prices will rise by 4 percent and real GNP by 5 percent to make it nice. Then we say we think M2 and M3 and total credit will look like X, Y, and Z. But then this central tendency [puts our forecasts] in a different light than the old forecasts if, as we get into the year, there's a marked departure in actual performance of the economy from the central tendency even though the Ms and whatever else we use in our steering devices look all right. The question is: Do you contemplate any more of a direct linkage between what we would do with the steering devices or targets and that central tendency forecast?

CHAIRMAN VOLCKER. Well, I'm not sure; my instinctive answer would be that I'd try not to make the central tendency all that prominent in terms of what is desirable. But I think we are going to be forced into precisely what you are saying, after some statement. It probably will be viewed more against the Administration forecast or some congressional forecast. They will say: We think a minimum adequate growth is X and if it's below that, are you going to ease?. And if X is low enough, our answer might have to be yes. I don't know how to state it or fuzz that up, but at some point that's precisely what I would expect to happen.

MR. WALLICH. I might have to state the associated increase in inflation.

CHAIRMAN VOLCKER. Well, you can't tell. Suppose after all the different permutations and combinations, the inflation rate is high and the real growth rate is low; we'd have a different answer than if real growth is low and inflation is low. One can [consider] any other combination of those. I'd try to talk my way around it. I think the Administration is going to have a low real [GNP forecast], as a matter of fact, because Mr. Feldstein is so preoccupied with not overestimating. But where I'm a little afraid of getting trapped is this: If they have high inflation and high real growth and the Congress says that's just fine, we're glad to live with 5 or 6 percent inflation and we want 5 percent real growth--that's not what the forecast is going to be but suppose it were--we would say that's much too much inflation and we're satisfied with much less real growth. Then we'd have a real problem, I think.

MR. PARTEE. Yes, if we get a high nominal, then we really have trouble. However it adds up, 11 or 12 percent is a problem.

CHAIRMAN VOLCKER. I could picture that the happy staff optimism on inflation is right and it is coming in around [their forecast], but the real growth isn't doing very well. They might say: My word, you're doing much better on inflation than you're supposed to be doing in some sense and you're not doing very well on real growth, so you obviously have to ease up. That, I think, is going to be a big problem. And it's going to be more so in that connection [depending on] what we say is the central tendency.

(FOMC transcript, December 1982)

Brad DeLong and others have been extolling the potential benefits of the Fed's targeting nominal GDP. And I think that economically speaking, that is the way to go. But my Political Constraints Hypothesis says that the Fed does not want to put itself into a position where its policy decisions will subject it to political pressure that threatens its independence. "The intermediate target should not be politically sensitive" makes a lot of sense from a political economy perspective.

It will be interesting to see from the Minutes of this week's meeting whether the Fed considered GDP targeting or other aggressive options. Today's policy statement doesn't make mention of it - the committee essentially chose to hold pat. A very disappointing decision:

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

Did Fannie and Freddie and CRA cause the housing bubble and crash?

I'm sure you've heard that this is so. The Community Reinvestment Act forced Fannie Mae and Freddie Mac to buy huge quantities of subprime mortgages. Barney Frank used his enormous power as a minority member of the House Financial Services Committee to prevent the reforms that would have solved the problem. Michael Bloomberg is the latest to make this charge. The implication is that government screwups, not market failure, were responsible for the housing catastrophe, and therefore that less government involvement in housing and financial markets, not more regulation, is what we need today.

This argument is absolutely, positively wrong. The housing bubble was made on Wall Street by private lending institutions. Mike Konczal has the most thorough debunking of the "made in Washington" theory I've seen yet. It's worth reading carefully in preparation for the political debates over who's to blame in the coming election season.

If you have any doubt that the financial wizards of Wall Street can do incredibly dumb things without any help from the US gummint whatsoever, look under "Corzine, Jon."

Study break