Economics: What might work, what should work, what has worked (command v. open market)

[Spring Bass]

For teachers, you'd look at whatever measures you want to use for class performance, and then at class sizes. Does shrinking the class size (IE increasing the number of teachers per students) result in greater performance by students? By how much does it work? 

Of course, then you'd have to come up with the estimated value of an education. You could look at lifetime earnings of people based off of educational completion levels and use the differences to measure the value, but that's a narrow measure of educational value. I don't think it's impossible, though - after all, we calculate the statistical value of a human life for liability and safety purposes in the US. 

[Iskaral Pust]

8 hours ago, Jo498 said:

How does one figure out the "marginal productivity" of a firefighter, a teacher or a police officer? For most civil servants the concept does not make any sense. Obviously, even if there are hardly any fires and low crime, one needs a certain minimum of firemen and police just in case. So one can hardly make a quotient with the number of firemen employed and their cost and the number of fires or something like that.

(I am not an economist but I read that even in typical production industries the marginal productivity of another worker is almost impossible to calculate objectively.)

It’s very difficult to calculate in a single instance, especially since you cannot observe the counterfactual.  But fortunately there are lots of natural experiments of similar situations (types of location, population, etc) with variations in the number of police, firefighters, teachers, DMV agents, etc and you can compare average productivity (over a viable period) between them to estimate marginal productivity.  And these locations will also offer variations I local employment and in the public sector pay level, both in absolute terms and relative to local cost of living.  

Economists love big data sets like this to create a proxy of supply and demand curves for the labor market.  They do the same with the private sector too. 

[aceluby]

On 7/28/2018 at 11:40 AM, Summer Bass said:

For teachers, you'd look at whatever measures you want to use for class performance, and then at class sizes. Does shrinking the class size (IE increasing the number of teachers per students) result in greater performance by students? By how much does it work? 

Of course, then you'd have to come up with the estimated value of an education. You could look at lifetime earnings of people based off of educational completion levels and use the differences to measure the value, but that's a narrow measure of educational value. I don't think it's impossible, though - after all, we calculate the statistical value of a human life for liability and safety purposes in the US. 

It's impossible to measure teacher's in this way due to the number of variables, namely each individual student and the collective whole of the class.  Year over year with different students will produce different results regardless of any other changes, which of course there will be.

[Altherion]

Here's an interesting article about the effect of recent monetary policy on inequality:

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“Post-crisis monetary and regulatory policy had an unintended but nonetheless dramatic impact on the income and wealth divides,” she wrote recently.

That particular sentence was in a blog post devoted to a recent study by the Federal Reserve Bank of Minneapolis that evaluated income and wealth inequality from 1949 to 2016. The study certainly seems to validate her thesis. It shows that between 1989 and 2007, the top 10 percent increased their share of the nation’s wealth by just 5.8 percent. But in just the next nine years, between 2007 and 2016, the richest Americans captured an additional 8.3 percent of the country’s wealth. Meanwhile, those in the 50 percent to 90 percent wealth bracket saw their share of the nation’s wealth drop by 17 percent, and those in the bottom 50 percent saw a 52 percent drop. The single biggest variable that changed after 2007 was the way banking was conducted and regulated.

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The Fed did two things with huge inequality implications. First, with its massive quantitative easing, it sucked $4.5 trillion of assets out of the banking system. The idea was that it would empty out the bank balance sheets so that they would start to make loans. And that didn’t happen —initially the banks were too weak, and as they recovered, the rules created significant impediments. If you look at who is getting loans it is large corporations, not small businesses. Second, the Fed’s low-interest policy gave rise to yield-chasing. And what has the stock market done since 2010? Everybody who has money has seen their financial assets appreciate dramatically. Everybody who doesn’t have money, which is the bottom 90 percent, what is their principal source of wealth? Houses? House-price appreciation for expensive houses is way up since 2012. But overall, real U.S. house prices are down 10 percent.

The recommendations from her conclusions probably aren't happening though:

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I think it would mean to taper their portfolio far more quickly than they are. If the economy is in a real recovery, why does the Fed still need to hold $4.5 trillion of the funds that should be out working in the economy and keep interest rates below zero in real terms?

...

The Fed needs to let interest rates normalize. Right now, what the Fed calls the neutral rate — the rate that drives their thinking  — is about 2 percent. The previous neutral rate had been 5 percent. Think about that on an inflation-adjusted return. Back in the day when Treasury bills were 5 percent or higher, if I had my savings in that, I could make money in low-risk assets. If you have monetary policy where the rate is 2, that combined with the 2 percent inflation, and you will have a permanently impoverished middle class. My main call in my book is that the Fed needs to think about that.

 

[OldGimletEye]

5 hours ago, Altherion said:

The recommendations from her conclusions probably aren't happening though:

Good. Because I believe a lot of what she says is bull pucky. I don't know if she thinks monetary policy affects aggregate demand or not. But it does. And since we we're able to get sane fiscal policy over the last ten years, monetary policy is the only game in town. And there is no reason for the FED to tighten too quickly at this juncture.

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The Fed needs to let interest rates normalize. Right now, what the Fed calls the neutral rate — the rate that drives their thinking  — is about 2 percent. The previous neutral rate had been 5 percent. Think about that on an inflation-adjusted return. Back in the day when Treasury bills were 5 percent or higher, if I had my savings in that, I could make money in low-risk assets. If you have monetary policy where the rate is 2, that combined with the 2 percent inflation, and you will have a permanently impoverished middle class. 

Except the neutral rate or the wicksellian rate isn't just something the FED pulls out of thin air. It just can't say, well fuck lets just set the natural rate at 5% percent cause "poor savers". If the neutral rate is at 2% and the FED sets the rate at 5%, then all sorts of bad stuff happens, including deflation and unemployment.

Also, if Ms. Petrou is just oh so worried about "poor savers!" having access to cheap safe assets, then there was a way to do it. Issue more of them. But I have a feeling that Ms. Petrou isn't really all that worried about poor Ma and Pa Kettle that can't buy cheaper safe assets, but more like her bankster clients that can't buy them.

And the FED doesn't need to let interest rates "normalize" just for the sake of letting it "normalize". If the FED picks an inflation target, hopefully one that will keep us away from the ZLB, then it needs to make sure that people's long term expectations of that inflation target remains grounded. Which means that inflation target should be an average, not an upper bound.

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 The whole Fed view of monetary policy is based on the view that if you stimulate the economy, wealthier people will buy a lot of stuff, and companies will have more money to invest in plants and hire more people. And that is totally not happening.

And does Ms. Petrou think that monetary policy is super neutral? Is she working in an RBC model? Does she think monetary policy had no role in the Great Depression and the recovery in the 1980s?

Anyone? 

Bueller?

Bueller?

I'll have more to say about the rest of her stuff later.

[Spring Bass]

I've never seen a good explanation of how the Federal Reserve calculates the "natural rate of unemployment" that wasn't basically just a Phillips Curve argument (i.e. the closer we get to 0% unemployment, the more likely inflation picks up). 

[OldGimletEye]

3 hours ago, Summer Bass said:

I've never seen a good explanation of how the Federal Reserve calculates the "natural rate of unemployment" that wasn't basically just a Phillips Curve argument (i.e. the closer we get to 0% unemployment, the more likely inflation picks up). 

Agree that estimating the natural rate of unemployment or the natural rate of interest are not exactly very easy empirical exercises.

But, if you basically accept the neo-Wicksellian logic of mainstream New Keynesian models (and I'm not saying they are perfect nor problem free), then one simply doesn't get to pick the natural rate of interest because of "poor savers!" The FED can't say "well 'poor savers!' are having a rough time of it because safe assets are only paying 2%, so well just jack up the nominal interest rate to 5% and all will be well!"

You'd think Ms. "The sharpest mind in banking" would understand this.

[Iskaral Pust]

On 8/9/2018 at 11:03 PM, Altherion said:

Here's an interesting article about the effect of recent monetary policy on inequality:

 

Thanks for posting.  We're still in the echo of the GFC and politics/society obviously still has not come to terms with either the outcome or future prognosis, even if most economists are pretty aligned on how things have played out (although it took a while for all the inflation scaremongers to go quiet).

The shift in wealth from 2007-2016 is partly influenced by the change in house prices: a lot of people in the lower 90% in 2007 had a large proportion of unrealized paper wealth in the form of a leveraged & inflated house value, which was sharply corrected.  It's disingenuous to claim that "wealth" should have been protected and preserved by any policy intervention.

Second, a fiscal ( (rather than monetary) policy response to the GFC would have changed the dynamics that played out -- e.g. huge unemployment benefits, tax cuts, and massive govt spending on infrastructure projects, all (eventually) raising aggregate demand, the fiscal debt and therefore interest rates -- but a fiscal policy response was politically impossible.  So you can complain about how a monetary policy response plays out but it was the only game in town, unless you prefer the Austrian approach of leaving the recession to run its course and the all-knowing market will eventually balance.  The over-reliance on monetary policy, and even fiscal austerity, are thanks to public ignorance in a democratic system (not just in the US).

Third, monetary easing is a transfer from savers to borrowers and that is generally helpful to the less wealthy.  The wealthiest/oldest are the owners of capital, the rest are generally borrowers.  Lower interest rates transferred wealth from the old/rich to the young/poor during the past decade through lower cost of debt: mortgages, credit cards, student loans, auto loans, business loans.  However, lower interest rates also increase the price of financial assets like stocks and bonds -- because it requires less income to finance their purchase (e.g. buy stock on margin), and their future yield is lower -- and this wealth effect was a fully intended part of the stimulus: people with capacity to spend more (wealthy people who can choose to spend less and save more during a recession) will feel more willing to do so, while people with no capacity to spend more (low income people already spending all their income) will at least have their debt service cost reduced and have some freed up income to spend elsewhere.  So the wealthy holders of financial assets benefit from temporary asset appreciation, and spend more because they feel good about it, but they receive less interest/yield on those assets.  Their wealth goes up but their income does not.  And as soon as interest rates go back up, their wealth valuation will come right back down; income still unchanged.  So again it is disingenuous to focus on "wealth" via temporarily inflated financial assets in 2016.  Wait another five years and see how it balances out.  The income derived from wealth has not changed.

Fourth, and this is where it really is about pure economics, the Fed cannot arbitrarily set their interest rates far above the neutral rate because one political interest group wishes it so.  That causes recession.  You cannot just wish away macroeconomics to get the political outcome the author wants.  Economic reality always wins and politics collapses afterward (look at Turkey).  The neutral rate of interest is not set by the Fed, the Fed just tries to move the actual rate of interest as close as possible to the neutral rate.  They have been higher than neutral for most of the past decade (ZLB), and now are rising rates steadily as they think the neutral rate has been rising.  If anything, financial markets are concerned that they are rising too quickly and over-shooting the neutral rate, that's why the yield curve has flattened almost to the point of inversion, which historically has been an excellent predictor of recession.

So this article sounds like a shill lobbying for something that benefits her clients at the expense of the rest of the economy, who disingenuously (or perhaps ignorantly) selects misleading information points to create a sympathy/outrage narrative to win support.