Monthly Archives: December 2013

Janet Yellen in 2009

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In a comment on this post, Mark Thoma pointed out that Janet Yellen’s views have changed since 2005. In this piece from 2009, she says

the hand we have been dealt today doesn’t look anything like the textbook ideal that I just described. Instead, we are experiencing pervasive financial market failures with devastating macroeconomic effects. The normal monetary transmission mechanism has been hobbled by dysfunctional money and credit markets. Risk spreads have ballooned on supposedly safe assets like agency debt and mortgage-backed securities (MBS). What does optimal monetary policy look like in this situation? How do we gauge the effectiveness of policy actions, and how can we implement and communicate systematic policy responses under these conditions?

What strikes me is that Yellen’s views in 2005, that I cited in the earlier post, closely reflected the consensus point of view at that time. And the 2009 speech closely reflects the consensus view at that time.

Today, the problem for the 2009 consensus view is that financial markets recovered really well by the Spring of 2009, but the labor market, particularly as measured by the civilian employment/population ratio, has failed to recover. So now, macroeconomists are struggling to explain how a financial crisis five years ago could still be causing high unemployment today. (Of course, Reinhardt and Rogoff warned that the recovery would be slow, but other economists have challenged their view that financial crises produce slow recoveries.) Do we think that the new consensus will be “secular stagnation” and that Janet Yellen will once again join it?

Mark Thoma on Different Macro Models

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He writes,

The New Keynesian model was built to explain a world of moderate fluctuations in GDP. It features temporary price rigidities, and the macroeconomic aggregates in the model are consistent with the optimizing behavior of individual consumers and producers. For certain types of questions – how should policymakers behave to stabilize an economy with mild fluctuations induced by price rigidities – it is the best model to use. Hence it’s popularity during the “Great Moderation” from 1984-2007 when there were no large shocks to the economy…

The IS-LM model, on the other hand, was built in the aftermath of the Great Depression to examine precisely the kinds of questions we faced throughout the Great Recession, issues such as a liquidity trap, the paradox of thrift, and how policymakers should react in such an environment. Why is it surprising that a model built to explain a particular set of questions does better than a model built to explain other things?

Read the whole essay. My guess is that even those who are inclined to be sympathetic to Thoma on this point, myself included, will have a hard time accepting the idea that one should switch models depending on circumstances. Yet I would argue that the evidence is that economists have done exactly that over the past 50 years.

Russ Roberts and Lant Pritchett

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Talking about Pritchett’s new book, which I really liked. Here is an excerpt from the podcast.

I do mention that Clay Christiansen has this idea of disruptive innovation. Which is where you actually moves to something that looks like lower quality but then rebuild a higher quality on top of that. The classic example of course is the PC (personal computer), which in computing terms when it came out in 1980 was a garage hobbyist toy that no serious computer engineer would pay any attention to. And all the firms that ignored the incipient disruptive innovation of the PC got themselves blown away by this, at the time, low-quality alternative. So I do think technology is going to change the way classrooms are managed in ways that are going to look disruptive, in the sense that they may appear to be de-skilling the classroom. But I think that in the long run there will be a disruptive innovation in the developing world that will rapidly accelerate the rate at which they can close on these higher levels of schooling. But when I hinted at this chaos–it’s going to be very chaotic. It’s going to be lots of people doing things that don’t look like finished classrooms, but produce incredible gains, and they are going to reconstitute a new way of doing education.

Keep in mind that I believe in the null hypothesis, which is that no education technique makes a big difference in terms of outcomes. Pritchett’s book actually offers a lot of support for that hypothesis, in that many results that he reports show little or no difference. However, he does offer one example, from Pakistan, in which giving parents “report cards” on school performance puts pressure on schools to improve and leads to some significant gains in the context of a controlled experiment.

My Review of Phelps

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Is now available. A brief excerpt:

Corporatism satisfies a desire for security. People want security of consumption, security of jobs, and security of their economic status. Corporatism replaces the decentralized competition of the market with political control over the economy. The forms of protection people obtain include occupational license restrictions, labor unions, and entitlement programs.

Janet Yellen on the Housing Bubble

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In a speech from 2005.

House prices could be high for some good, fundamental reasons. For example, there have been changes in the tax laws that reduce the potential tax bite from selling one home and buying another. Another development, which may be making housing more like an investment vehicle in the U.S., is that it’s now easier and cheaper to get at the equity—either through refinancing, which has become a less costly process, or through an equity line of credit. These innovations in mortgage markets make the funds invested in houses more liquid. There are also constraints on the supply of housing in a number of markets, including the Bay Area. Probably the most obvious candidate for a fundamental factor is low mortgage interest rates. Even so, the consensus seems to be that the high price-to-rent ratio for housing cannot be fully accounted for by these factors. So, while I’m certainly not predicting anything about future house price movements, I think it’s obvious that the housing sector represents a serious issue for monetary policymakers to consider.

…In my view, it makes sense to organize one’s thinking around three consecutive questions—three hurdles to jump before pulling the monetary policy trigger. First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble?

My answers to these questions in the shortest possible form are, “no,” “no,” and “no.”

In hindsight, her third “no” is the most persuasive. Her point is that regulatory policy could have served to deflate the bubble more directly than monetary policy. However, political leaders at the time were primarily focused on policies that served to inflate the bubble.

The pointer is from John Hussman, a Stanford-trained investment adviser who is concerned that we are in the midst of an equity bubble. He writes,

while price/earnings multiples appear only moderately elevated, those multiples themselves reflect earnings that embed record profit margins that stand about 70% above their historical norms.

Read Hussman’s entire essay. My comments:

1. I share the concern that stock prices may be overvalued.

2. However, I am not convinced that there is anything but a psychological connection between monetary policy and stock valuation.

3. One can hope that even a large “correction” in stock prices would not produce a financial crisis. It seems that debt, rather than equity, is the main cause of financial crises.

4. Therefore, I would not be appealing to the Fed to try to pop the (alleged) stock market bubble.

Bad Demographic News for Libertarians

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Timothy Taylor writes,

Married households with children were 40.3% of all US households in 1970; in 2012, that share had fallen by more than half to 19.6%. Interestingly, the share of households that were married without children has stayed at about 30%. Other Family Households, usually meaning single-parent families with children, has risen.

I am afraid that the number of households married to the state has soared.