tag:blogger.com,1999:blog-56244363274041496212024-03-19T04:28:33.458-07:00Quantitative Ease by Carola BinderCarolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.comBlogger191125tag:blogger.com,1999:blog-5624436327404149621.post-75730842097250231812018-12-31T12:47:00.000-08:002018-12-31T12:47:08.226-08:00Central Banking Stories to Watch in 2019Happy New Year, everybody! 2018 has been a quiet year for my blog, but productive on other fronts, as I've kept busy with <a href="https://carolabinder.sites.haverford.edu/research/">research</a> and my family. But here are a few central bank-related stories I'm interested in following in the new year.<br />
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<b>1. New Governor at Reserve Bank of India</b><br />
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Following the early exit of Governor Urjit Patel in December, Prime Minister Modi appointed the <a href="https://www.cnbc.com/2018/12/11/rbi-reserve-bank-of-india-governorurjit--patel-resigns.html">third central bank governor in just three years</a>: <a href="https://in.reuters.com/article/india-cenbank-governor/expert-views-india-appoints-shaktikanta-das-as-rbi-governor-idINKBN1OA1N0">Shaktikanta Das</a>. Patel's resignation followed reported <a href="https://www.cnn.com/2018/12/10/economy/urjit-patel-rbi-governor/index.html">pressure from Modi</a> to relax lending criteria. This is certainly a troubling sign about central bank independence, but Das' words and actions in 2019 should give us a better picture of just how troubling. And it is part of a larger trend of <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3244148">political pressure on central banks</a> post-crisis.<br />
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<b>2. Central Bank Independence Reforms in Brazil</b><br />
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Among the many reform plans considered by Brazil's right-wing President-elect Jair Bolsonaro-- already dubbed "<a href="https://www.ft.com/content/ab6d338a-09f8-11e9-9fe8-acdb36967cfc">Bolsonomics</a>" -- is more <a href="https://www.business-standard.com/article/finance/not-just-rbi-other-central-banks-are-also-being-challenged-by-lawmakers-118120700325_1.html">legal independence</a> for the central bank.<br />
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Before the 2014 elections in Brazil, <a href="https://clasberkeley.wordpress.com/2014/09/26/the-brazilian-election-and-central-bank-independence/">I wrote about</a> President Rousseff's debates with Socialist Party candidate Marina Silva about central bank independence. Silva favored reforms to insulate the central bank from political pressure, but of course was not elected.<br />
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<b>3. Reserve Bank of New Zealand Switching to Committee-Based Policy and Dual Mandate</b><br />
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Most central banks make monetary policy by committee, but the Reserve Bank of New Zealand (RBNZ) has been a notable exception. Monetary policy decisions are made by the <a href="https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/independent-review-of-the-operation-of-monetary-policy-2/communication-of-monetary-policy-decisions">Governor alone</a>, with a committee that serves a purely advisory role. That is expected to change as part of reforms that will give the finance minister the <a href="https://www.bloomberg.com/news/articles/2018-12-07/the-political-heat-is-on-for-central-banks-from-u-s-to-europe">ability to appoint</a> a monetary policy committee, including a non-voting Treasury observer. Alan Blinder is the expert on <a href="https://www.princeton.edu/ceps/workingpapers/153blinder.pdf">monetary policy committees</a>, and he has said that they are generally better than monetary policy by individual though the optimal size and structure is still not clear.<br />
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The RBNZ, one of the first adopters of inflation targeting, is also adopting a dual mandate that calls for <a href="https://www.marketwatch.com/story/new-zealand-adds-job-mandate-to-monetary-policy-2018-03-26">maximizing sustainable unemployment</a>.<br />
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<b>4. U.S. Unemployment Duration Approaching Pre-Recession Levels</b><br />
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In November, the median duration of unemployment in the U.S. was 8.9 weeks. That is down from a peak of 25.2 weeks in June 2010. (Unemployment duration is a trailing indicator, so it peaked long after the recession was over.) The average from 2005-2007 was 8.6 weeks. The mean duration of unemployment is higher than the median, since the distribution is heavily skewed. It was 21.7 weeks in November, versus around 40 weeks in 2011 and 17.4 weeks in 2005-2007.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh61uh3I99hZZbGnYMurgBgVMbkJse9OTrqPFBDnS4LWNJArxC7t-RBnKX2TQAoEL6g1MGrZmAwdQJ-ea5w9Qk06qBkQtIkJ6QQeiLdCyCuIMzYUd77KnFe4dm-OGli_WrE1EFo0abwL-0/s1600/fredgraph+%25282%2529.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="470" data-original-width="1168" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh61uh3I99hZZbGnYMurgBgVMbkJse9OTrqPFBDnS4LWNJArxC7t-RBnKX2TQAoEL6g1MGrZmAwdQJ-ea5w9Qk06qBkQtIkJ6QQeiLdCyCuIMzYUd77KnFe4dm-OGli_WrE1EFo0abwL-0/s640/fredgraph+%25282%2529.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: https://fred.stlouisfed.org/graph/?g=mw0X</td></tr>
</tbody></table>
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I classify this as a central banking story because <a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp441.pdf?c7a6d1edce90ab735bd52d8b57d98afd">some literature</a> finds that high long-term unemployment can reduce the slope of the Phillips curve, as workers who have been unemployed for a long time are less attached to the labor market and exert less pressure on wages and prices. It's also a central banking story because one of the big questions for the Fed and other central banks is whether the labor market is "back to normal" and what that even means, and what, if any scars from the Great Recession will remain. The labor force participation rate, for example, is still higher than pre-recession and doesn't appear to be falling. But even a few years ago, unemployment duration looked like it would never return to normal.<br />
<br />Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com237tag:blogger.com,1999:blog-5624436327404149621.post-89098881683311191932018-08-31T10:21:00.001-07:002018-08-31T10:21:15.418-07:00Inflation Expectations and the Price at the PumpMy paper "Inflation Expectations and the Price at the Pump" is now published in the Journal of Macroeconomics. <a href="https://authors.elsevier.com/a/1XejKbJYV04Hy">Here</a> is an open-access link to the official version (through October 20, 2018). And <a href="https://carolabinder.sites.haverford.edu/research/">here</a> is my new website which has links to the ungated versions of this and my other papers.<br />
<br />
The key takeaway of this paper is that, though gas prices and average household inflation expectations are correlated, consumers do not seem to overweight gas prices when forming inflation expectations. Since the impact of gas prices on expectations fades quickly with forecast horizon, energy price shocks seem unlikely to unanchor longer-run inflation expectations.Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com115tag:blogger.com,1999:blog-5624436327404149621.post-68434919966727251092018-08-08T05:28:00.000-07:002018-08-08T05:28:30.424-07:00"Macroeconomic Research, Present and Past"I am at the Liberal Arts Macro Workshop at Wake Forest University. The plenary talk last night was<br />by the authors of "<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3225417">Macroeconomic Research, Present and Past.</a>" <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1834934">Philip Glandon</a>, <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=171771">Kenneth N. Kuttner</a>, <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=938598">Sandeep Mazumder</a>, and <a href="https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1508064">Caleb Stroup</a> read over 1000 papers from five top macroeconomics journals to catalog the epistemology, methodology, theoretical framework, and several other key characteristics of the papers (see table below).<br />
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They read all regular articles (not e.g. book reviews) from the 2016-2017 issues of the the Journal of Monetary Economics (JME), the Journal of Economic Dynamics and Control
(JEDC), the Journal of Money, Credit and Banking (JMCB), the Review of Economic
Dynamics (RED), and the American Economic Journal: Macroeconomics (AEJ). For the JME and the JMCB, they also read all articles from 1980, 1990, 2000, 2006, 2008, and 2010.<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRAWL8V3-MpIGB28DrHVASRZ8SWj0UnCtOu1ViguEt2j_NNyhlQ_VLwFekvDqtsArVLXeUjpx90lOLDcv2sQyOXA9bdHMw5FO76f9E_GDQJV8-U2UIfvKINrqH9RJt0dtrWbS6R-Q4qdI/s1600/stroup1.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1018" data-original-width="1298" height="311" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRAWL8V3-MpIGB28DrHVASRZ8SWj0UnCtOu1ViguEt2j_NNyhlQ_VLwFekvDqtsArVLXeUjpx90lOLDcv2sQyOXA9bdHMw5FO76f9E_GDQJV8-U2UIfvKINrqH9RJt0dtrWbS6R-Q4qdI/s400/stroup1.PNG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3225417">Glandon, Kuttner, Mazumder, and Stroup</a>, Table 1</td></tr>
</tbody></table>
<div class="separator" style="clear: both; text-align: center;">
<br /></div>
<div class="separator" style="clear: both; text-align: left;">
The figure below shows how the share of papers in each epistemological approach has varied over time. "Model fitting" papers were almost non-existent in the 1980s, and now account for around a third of macro papers in the sample.</div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0UwqjY2ZVpEJX45M5yy1sfaN9zTfLmlqQhKzCsfgM_5TDbI4aM778ziam6QoMkRD80-tzaupIpEe87uaR_fxfHrcCVGuO7kLBls4rAb9g5ruFEmvXJCk5EQptGE366LkETNycaJkhYXU/s1600/stroup4.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1201" data-original-width="1343" height="355" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0UwqjY2ZVpEJX45M5yy1sfaN9zTfLmlqQhKzCsfgM_5TDbI4aM778ziam6QoMkRD80-tzaupIpEe87uaR_fxfHrcCVGuO7kLBls4rAb9g5ruFEmvXJCk5EQptGE366LkETNycaJkhYXU/s400/stroup4.PNG" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3225417">Glandon, Kuttner, Mazumder, and Stroup</a></td></tr>
</tbody></table>
<br />The authors also document a rise in the use of applied micro (as opposed to time series) empirical methods, and a very large rise in the use of proprietary data. Two additional tables are below, but there is much more of interest in the paper, so I recommend checking it out!<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjae_QI3jYVyeFkbI4jkK1fmdKjC8FpfLidGqK1Zw-9gCGtza3-kpobT-N4HdcBkzmOyw7drTfBZfpA0Zai6cTVGacW8oynjuhWEmEjf0E5Gsv8HeAETWNhQqH1wkJAlKJQN2cLKGcOIvQ/s1600/stroup2.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1362" data-original-width="1414" height="616" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjae_QI3jYVyeFkbI4jkK1fmdKjC8FpfLidGqK1Zw-9gCGtza3-kpobT-N4HdcBkzmOyw7drTfBZfpA0Zai6cTVGacW8oynjuhWEmEjf0E5Gsv8HeAETWNhQqH1wkJAlKJQN2cLKGcOIvQ/s640/stroup2.PNG" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3225417">Glandon, Kuttner, Mazumder, and Stroup</a></td></tr>
</tbody></table>
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGiJny7MnuK8PSFAuTJ5eBTTd1azlw3iV8_eFktQ5FNS_UxqEJQoD5oRgwG18G0f8k2rKoz68SxrmkVsFYPrBIHAIqfZWwzWt1GLZrt9MYpHMYGjHLAldb0SRKHfx05d3cHK1VoEP1WQY/s1600/stroup3.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1402" data-original-width="1348" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGiJny7MnuK8PSFAuTJ5eBTTd1azlw3iV8_eFktQ5FNS_UxqEJQoD5oRgwG18G0f8k2rKoz68SxrmkVsFYPrBIHAIqfZWwzWt1GLZrt9MYpHMYGjHLAldb0SRKHfx05d3cHK1VoEP1WQY/s640/stroup3.PNG" width="614" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3225417">Glandon, Kuttner, Mazumder, and Stroup</a></td></tr>
</tbody></table>
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<br />Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com77tag:blogger.com,1999:blog-5624436327404149621.post-32823840086909309882018-07-18T13:45:00.000-07:002018-07-18T13:46:54.033-07:00From Senior Thesis to PublicationOne of the most challenging and rewarding aspects of my job at Haverford College is advising senior theses. At Haverford, every student in every major writes a senior thesis (or equivalent capstone project). I co-teach the senior thesis course in the fall with two or three colleagues, and advise thesis writers in the spring. In the fall, students work on choosing a topic and research question, conducting a literature review, and developing a research proposal. In the spring, they work one-on-one with an advisor to see the proposal through.<br />
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Every completed thesis is an achievement, and we celebrate all of our seniors with a champagne reception on the due date. But today, for the first time, one of my advisee's theses has successfully made its way through the peer review process and is published!<br />
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Samantha Wetzel, Haverford College class of 2018, excelled both as an economics student and on the basketball team. We published "<a href="https://authors.elsevier.com/a/1XPPS_3mNGnHNq">The FOMC versus the staff, revisited: When do policymakers add value?</a>" in Economics Letters. (<a href="https://authors.elsevier.com/a/1XPPS_3mNGnHNq">This link</a> should provide temporary free access to the published version; <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3163456">here</a> is the SSRN working paper version.)<br />
<div>
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<div>
The thesis, and this letter based on it, follow up on Romer and Romer's (2008) <a href="https://eml.berkeley.edu/~dromer/papers/aer_98_2.pdf">similarly-titled</a> paper. Here is the abstract:</div>
<blockquote class="tr_bq">
The Board of Governors staff and the Federal Open Market Committee both publish macroeconomic forecasts. Romer and Romer (2008) show that policymakers' attempts to add information to the staff forecasts are counterproductive. In more recent years, however, policymakers have improved upon staff forecasts. We show that policymakers' value-added is greater when economic conditions are unfavorable or uncertain.</blockquote>
For other undergraduate researchers hoping to write a successful, potentially publishable thesis, I have a few bits of advice based on this advising experience. First, start early if possible. Samantha came up with her thesis topic during junior year, when she read Romer and Romer (2008) in my course on the Federal Reserve.<br />
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Second, ask a well-defined question. This may be the hardest part. Your thesis (like Sam's) will probably be much longer than the 2000 word limit of Economics Letters, with a longer literature review and more robustness checks etc., but you should be able to easily explain what you asked, what you found, and how you found it in a few pages. Your thesis is far more likely to be successful if you have a primary hypothesis that you can precisely state. (Even if you think you can state it, <i>write it down</i> to be sure!)<br />
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Third, come up with a plan so that you can make progress each week-- use your advisor to help you decide on a timeline for key goals and to hold you accountable. For student athletes like Samantha, this means thinking in advance about when key games and travel will be, and planning accordingly.Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com119tag:blogger.com,1999:blog-5624436327404149621.post-43766391833426773512018-05-12T12:34:00.000-07:002018-05-12T12:34:04.487-07:00Snapshot of the Publication and Review Process as an Assistant ProfessorI have just completed my third year as an Assistant Professor. I have kept a spreadsheet for the three years of all of my journal submissions and the results (desk reject, referee reject, revise and resubmit, or accept, with dates for nearly everything). I had almost no idea what the publication process would be like when I finished grad school, and would have loved to see such a spreadsheet. So I thought I'd share some summary statistics in case this can help some new researchers or give students an idea of what the publication process is like.<br />
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I have no idea whether my experience is representative. Keep in mind, I am at a liberal arts college, albeit one that values research. <a href="http://davidcard.berkeley.edu/papers/JEL-9-Facts.pdf">Stefano DellaVigna and David Card</a> have the actual statistics on publication in the top 5 journals. I have not published in those journals. To protect editorial privacy, I am not going to name any journals specifically or report on submission and decision dates.<br />
<blockquote class="twitter-tweet" data-lang="en">
<div dir="ltr" lang="en">
We have a 2018 update to "Nine Facts about Top Journals in Economics" (JEL) with David Card, since a few people had asked about page length, submissions, and acceptance rates. Fact 1: Submissions keep increasing fast, at all journals now also including JPE. AER has the most subs <a href="https://t.co/gHvy1jam7H">pic.twitter.com/gHvy1jam7H</a></div>
— Stefano DellaVigna (@sdellavi) <a href="https://twitter.com/sdellavi/status/989195589735694336?ref_src=twsrc%5Etfw">April 25, 2018</a></blockquote>
<script async="" charset="utf-8" src="https://platform.twitter.com/widgets.js"></script>
<br />
My spreadsheet includes 15 papers that have been submitted at least once. Of these:<br />
-7 are now published or accepted for publication.<br />
-3 have "revise and resubmit" status.<br />
-The rest are either under review or in the file drawer.<br />
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I made a total of 39 distinct submissions. This means counting the first submission of a particular paper to a particular journal, NOT counting revision rounds.<br />
- 12 resulted in desk rejection (i.e. rejected by the editor without going to referees).<br />
-Counting revision rounds, I made 49 submissions.<br />
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For the 7 papers that are published or accepted:<br />
-5 were accepted at the first journal to which I submitted. Of these, 3 required revisions.<br />
-One was accepted (after revisions) at the third journal to which I submitted.<br />
-One was accepted (after revisions) at the EIGHTH journal to which I submitted (following four desk rejections and three referee rejections). I am proud of that paper and do not agree with some rules of thumb I've heard about giving up on a paper after X attempts. I think it depends a lot on the paper.<br />
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There is substantial selection bias in the above stats on number of submissions per publication, since those are the stats for my papers that were quickest to publish. For the 8 papers that are not published, obviously none were accepted at the first journal to which I submitted! If/when these get published, my average number of submissions per publication will increase substantially. Three of them have already been submitted to at least 5 places.<br />
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An interesting note is that I wrote exactly the same number of referee reports as I received. I felt like I was writing a ton of referee reports, but I guess it was pretty fair. I do think I wrote more words of referee reports than I received!<br />
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I will update again in a few years. I anticipate some changes as I gain experience with research and knowing where to submit papers, and working on different types of projects and coauthored papers.Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com14tag:blogger.com,1999:blog-5624436327404149621.post-69297984822301271982018-04-16T13:03:00.004-07:002018-04-16T13:03:52.943-07:00Mortgage-Backed Securities Ratings and Losses Maybe Not So BadAn NBER <a href="http://www.nber.org/papers/w24509">working paper</a> released today conducts a "post mortem" on the role of non-agency mortgage-backed securities (MBS) in the 2008 financial crisis. The authors, Juan Ospina and Harald Uhlig, suggest that some of the standard narratives about the financial crisis were "created in the heat of the moment" and merit re-examination a decade later.<br />
<blockquote class="tr_bq">
"One such standard narrative has it that the financial meltdown of 2008 was caused by an
overextension of mortgages to weak borrowers, repackaged and then sold to willing lenders
drawn in by faulty risk ratings for these mortgage back securities. To many, mortgage backed
securities and rating agencies became the key villains of that financial crisis. In particular,
rating agencies were blamed for assigning the coveted AAA rating to many securities, which
did not deserve it, particularly in the subprime segment of the market, and that these ratings
then lead to substantial losses for institutional investors, who needed to invest in safe assets
and who mistakenly put their trust in these misguided ratings... </blockquote>
<blockquote class="tr_bq">
First, were these mortgage backed securities bad investments? Second, were the ratings wrong?
We answer these questions, using a new and detailed data set on the universe of non-agency
residential mortgage backed securities (RMBS), obtained by devoting considerable work to
carefully assembling data from Bloomberg and other sources. This data set allows us to examine
the actual repayment stream and losses on principal on these securities up to 2014, and thus
with a considerable distance since the crisis events...We find that the conventional narrative needs
substantial rewriting: the ratings and the losses were not nearly as bad as this narrative would
lead one to believe.</blockquote>
An ungated version of the paper is available <a href="https://economics.sas.upenn.edu/events/tba-money-macro-workshop-17">here</a>.Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com24tag:blogger.com,1999:blog-5624436327404149621.post-46388840414607289332018-03-08T08:59:00.002-08:002018-03-08T09:04:06.225-08:00D is for Devastating: A Statistical Error and the Vitamin D Saga<div>
<a href="http://www.physiology.org/doi/pdf/10.1152/ajpendo.00484.2003">Statistical errors</a> in research are quite common in research, and not always detected. As economists are well aware, when an error with important policy implications is revealed, it may prompt a media frenzy. I was surprised to learn recently of a major statistical error with potentially huge public health implications, yet with seemingly sparse media coverage when it was revealed. <br />
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The error concerns the Recommended Dietary Allowance (RDA) of Vitamin D. A <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4210929/">2014 paper</a> found a statistical error in a study used by the Institute of Medicine (IOM) to determine the RDA, resulting in a recommendation that was about an order of magnitude too low. <br />
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I am neither a public health expert nor medically trained, but (following <a href="http://supplysideliberal.tumblr.com/">Miles Kimball's</a> lead) have developed an interest in public health, and especially nutrition, research, largely due to its <a href="http://carolabinder.blogspot.com/2017/07/the-obesity-code-and-economists-as.html">parallels with macroeconomic research</a>. What little press coverage I did find about this Vitamin D study omitted technical discussion of the statistical error--"We'll spare you the gritty mathematical details," said <a href="https://www.mensjournal.com/health-fitness/how-much-vitamin-d-do-you-need-20150413/">one article</a>. But I wanted these details, and so might you, so I dove in to what turned out to be a fascinating story. You may want to share it with your econometrics students: Correct interpretation of confidence intervals can truly be a matter of life and death.<br />
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First, some background. The human body can make <a href="https://www.vitamindcouncil.org/about-vitamin-d/what-is-vitamin-d/">Vitamin D (unlike other vitamins)</a> when exposed to sunlight. It can also be attained by nutritional sources and supplements. Upon activation by the liver and kidneys, it <a href="https://www.medpagetoday.com/primarycare/dietnutrition/47012">acts as a hormone</a> that plays a role in calcium metabolism. Sufficient Vitamin D is critical for bone health and a plethora of other health outcomes (more on that later). Research on the health effects of Vitamin D typically looks at health outcomes associated with different serum 25-hydroxyvitamin D (25(OH)D) levels (a measure of concentration in the blood).<br />
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The IOM issues dietary recommendations, including RDAs, for the US and Canada. The RDA is supposed to designate the nutrient intake sufficient to meet the needs of 97.5% of healthy individuals. For Vitamin D, issuing this guideline requires first deciding what 26(OH)D level is desirable, then deciding how much supplemental Vitamin D should be taken so that most people have the desired 26(OH)D level. Based on associations between 26(OH)D levels and various health outcomes, the IOM aimed to recommend an RDA that would result in 25(OH)D levels of 50 nmol/L or more.<br />
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The IOM then had to determine how much supplemental Vitamin D to recommend based on this goal. They looked at 10 studies of the dose response relationship of vitamin D intake and 25(OH)D. Some of these studies examined 25(OH)D levels for multiple different doses, so in total there were 32 estimates (the green diamonds in Figure 1). They fitted a dose response relationship curve to these points, with 95% confidence interval. The IOM came up with an RDA for individuals 1 to 70 years of age of 600 IU per day. You can see the vertical line at 600 in Figure 1. It intersects the fitted dose response curve at 63 nmol/L and the lower bound of the 95% confidence interval at 56 nmol/L. Remember, this was the amount that was supposed to achieve 25(OH)D levels of at least 50 nmol/L in at least 97.5% of healthy individuals. <br />
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<span style="font-family: "times new roman" , serif; font-size: 9.5pt;">Figure
1. Source: </span><a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4210929/#B1-nutrients-06-04472"><span style="color: blue; font-family: "times new roman" , serif; font-size: 9.5pt;">Veugelers and Ekwaru</span></a><span style="font-family: "times new roman" , serif; font-size: 9.5pt;"> (2014)<o:p></o:p></span></div>
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In October 2014, Paul J. Veugelers and John Paul Ekwaru explained in a <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4210929/#B1-nutrients-06-04472">paper</a> in Nutrients that the IOM's interpretation of these confidence intervals was incorrect. They thought that 2.5% of individuals would have serum levels below the lower 95% confidence interval, but in this meta-analysis, the unit of observation was not the individual, but the study average. In the authors' words:<br />
<blockquote class="tr_bq">
The correct interpretation of the lower prediction limit is that 97.5% of study averages are predicted to have values exceeding this limit. This is essentially different from the IOM’s conclusion that 97.5% of individuals will have values exceeding the lower prediction limit.</blockquote>
Veugelers and Ekwaru returned to the 10 studies, eight of which reported both average and standard deviation serum level for particular doses of Vitamin D. From these statistics, the authors could calculate the 2.5th percentile at each dose. Then they regressed these 2.5 percentile values (the 23 yellow dots in Figure 2) on vitamin D intake, coming up with the red dashed line in Figure 2. The green dashed lines are the confidence intervals from Figure 1, for the sake of comparison. <br />
<br />
In the figure, you can see that at 600 IU per day, 97.5% of individuals will have serum levels above around 27 nmol/L, not 50 nmol/L. To get 97.5% of individuals with serum levels above 50 nmol/L, you would actually need a higher dose than any of the studies examined. Out-of-sample extrapolation led them to estimate that 8895 IU of vitamin D per day would actually be required. Veugelers and Ekwaru also pointed to <a href="https://www.ncbi.nlm.nih.gov/pubmed/20730415">two</a> <a href="https://www.statcan.gc.ca/pub/82-624-x/2013001/article/11727-eng.htm">studies</a> in which 10% or 15% of Canadian subjects had serum 25(OH)D levels of less than 50 nmol/L despite vitamin D supplementation at the RDA level. They wrote, "If the RDA had been adequate, these percentages should not have exceeded 2.5%. Herewith these studies show that the current public health target is not being met."<br />
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<span style="font-family: "times new roman" , serif; font-size: 9.5pt;">Figure 2. Source: </span><a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4210929/#B1-nutrients-06-04472"><span style="color: blue; font-family: "times new roman" , serif; font-size: 9.5pt;">Veugelers and Ekwaru</span></a><span style="font-family: "times new roman" , serif; font-size: 9.5pt;"> (2014)<o:p></o:p></span></div>
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Veugelers and Ekwaru did caution that as t8895 IU of vitamin D per day "is far beyond the range of studied doses, caution is warranted when interpreting this estimate. Regardless, the very high estimate illustrates that the dose is well in excess of the current RDA of 600 IU per day and the tolerable upper intake of 4000 IU per day." <br />
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In March 2015, in the same journal, Robert Heaney, Cedric Garland, Carole Baggerly, Christine French, and Edward Gorham published a <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4377874/">letter</a> in the same journal that alleviated some of the concern about extrapolating beyond the available data. They presented entirely different data on individuals with daily vitamin D intakes from zero to over 10,000 IU. They came up with an estimate that was slightly lower than Veugelers and Ekwaru's, but confirming the finding that the IOM recommendation was around an order of magnitude too low, and wrote:<br />
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Thus, we confirm the findings of these investigators with regard to the published RDA for vitamin and we call for the IOM and all public health authorities concerned with transmitting accurate nutritional information to the public to designate, as the RDA, a value of approximately 7000 IU per day from all sources.</blockquote>
Like Veugelers and Ekwaru, Heaney et al. remarked upon the safety of such a high recommendation, though their take was more optimistic: <br /><blockquote class="tr_bq">
The total, all-source intake of 7000 IU/day is below the no observed adverse effect level (NOAEL) of both the IOM and the Endocrine Society, below the tolerable upper intake level (UL) of the Endocrine Society, and well within the safe range delineated by <a href="https://www.ncbi.nlm.nih.gov/pubmed/17209171">Hathcock et al.</a>, who had generated that range using the IOM’s method of hazard identification.</blockquote>
The hormonal role of vitamin D explains why the Endocrine Society also issues guidance about it. Remember, vitamin D is <a href="https://www.webmd.com/vitamins-and-supplements/nutrition-vitamins-11/fat-water-nutrient?page=2">fat-soluble, so excess amounts are stored</a> and can accumulate in body tissues-- hence the concern about safety at higher doses. Overall health benefits may increase with dose up to a point, and then start to decline. Initial guidelines on Vitamin D RDA were based on prevention of rickets. But as scientists have learned more about other health benefits, the cost-benefits calculus of vitamin D recommendations has shifted. This shift, however, was slow to be reflected inn health policy. <br />
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"Worldwide reports have highlighted a variety of vitamin D insufficiency and deficiency diseases. Despite many publications and scientific meetings reporting advances in vitamin D science, a disturbing realization is growing that the newer scientific and clinical knowledge is not being translated into better human health," wrote <a href="https://academic.oup.com/ajcn/article/88/2/491S/4649916">Andrew Norman</a> in a 2008 issue of the American Journal of Clinical Nutrition. A 2007<a href="https://academic.oup.com/ajcn/article/85/3/649/4633228"> article</a> in the same journal, by Reinhold Vieth and many coauthors, describes the situation as a "frustrating and regrettable situation for nutrition researchers."<br />
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Vieth et al. summarize the many health benefits attributable to adequate vitamin D, and evidence that the tolerable upper limit is around ten times higher than officially-recommended intakes. But they point to an over-cautious and under-nuanced take by the public media that has kept public supplemental intake too low:<br />
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Evaluation of most relations of health and disease that involve vitamin D leads to the conclusion that a desirable 25(OH)D concentration is ≥75 nmol/L (30 ng/mL). If a concentration of 75 nmol/L is the goal to be achieved by consumption of vitamin D, then why is it so rare for members of the population to accomplish this? One reason is that almost every time the public media report that vitamin D nutrition status is too low, or that higher vitamin D intakes may improve measures of health, the advice that accompanies the report is outdated and thus misleading. Media reports to the public are typically accompanied by a paragraph that approximates the following: “Current recommendations from the Institute of Medicine call for 200 IU/d from birth through age 50 y, 400 IU for those aged 51–70 y, and 600 IU for those aged >70 y. Some experts say that optimal amounts are closer to 1000 IU daily. Until more is known, it is wise not to overdo it.” The only conclusion that the public can draw from this is to do nothing different from what they have done in the past.</blockquote>
The evidence in favor of higher 25(OH)D concentration and a higher RDA continued to grow in subsequent years. "Despite research on the association between low vitamin D status and many diseases, no consensus has emerged on the optimal serum 25(OH)D concentration. The concern is whether it is safe to maintain serum 25(OH)D concentrations in the range high enough to prevent some types of cancers and coronary heart disease," wrote <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4103214/">Garland et al. 2014</a> in the American Journal of Public Health. In a meta-analysis of serum 25(OH)D and age-adjusted all-cause mortality, they showed that overall age-adjusted hazard ratios for mortality decline steeply with 25(OH)D for serum levels below 30 nmol/L, then gradually level off (Figure 3). The hazard ratio is not statistically different from 1 at 36 nmol/L.<br />
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In Finland, public health policy was changed in response to widespread low serum 25(OH)D concentration. Vitamin D fortification of certain dairy products and spreads began in 2002, and fortification levels were increased in 2010. This <a href="https://academic.oup.com/eurpub/article-abstract/27/2/268/2670162">was successful in raising vitamin D intake</a>, and health benefits are already measurable. In July 2017, <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5541280/">Dimitrios Papadimitriou</a> noted in the Journal of Preventive Medicine and Public Health the Type I diabetes, which had been on the rise, leveled off and then declined in Finland after the vitamin D fortification policy was implemented. Papadimitriou discusses vitamin D's role as a "powerful nuclear receptor-activating hormone of critical importance, especially to the immune system," and calls for public health authorities worldwide to modify RDAs in line with now quite substantive scientific research.<br />
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Papadimitriou titled his article "<a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5541280/">The Big Vitamin D Mistake</a>," referring in a narrow sense to the IOM's statistical error. But he really discusses a mistake in a broader sense-- mounting evidence has been too slow to be incorporated into policymaking and practice.</div>
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Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com99tag:blogger.com,1999:blog-5624436327404149621.post-13627651307873915092018-01-06T08:47:00.002-08:002018-01-06T08:47:57.312-08:00To Eradicate or to Manage?<div class="MsoNormal">
I am lucky that the American Economic Association annual
meetings are in my city this year, so I made it easily to the sessions despite
the snow and bitter cold. On Saturday, January 6, I attended an excellent 8
a.m. session on central bank communication. I may write more about the session
later—I already <a href="https://twitter.com/cconces/status/949630800240300033">tweeted</a> some of it—but for now I wanted to share an interesting
aside made by Alan Blinder. He said something like, “<i>In life, some problems are
solved and some are managed.</i>”<o:p></o:p></div>
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The context for his remark was his prediction that <b><a href="http://www.lombard-rates.com/blog/2015/10/17/fed-dispels-cacophony-concern">cacophony</a></b> will remain a problem for
<a href="http://bis.org/events/conf080626/blinder.pdf">communication by central bank committees</a>. He asserted that this is a problem
that will never go away; we can never hope to solve it, only to manage it.
Here’s Blinder’s example of how cacophony can be managed:<o:p></o:p></div>
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Alan Blinder on how to reduce cacophony in monetary policy communication by using *more* words. <a href="https://twitter.com/hashtag/ASSA2018?src=hash&ref_src=twsrc%5Etfw">#ASSA2018</a> <a href="https://t.co/amSCxx0YZd">pic.twitter.com/amSCxx0YZd</a></div>
— Carola Conces Binder (@cconces) <a href="https://twitter.com/cconces/status/949632109416763392?ref_src=twsrc%5Etfw">January 6, 2018</a></blockquote>
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This made me wonder
which other problems (economic or otherwise) fall into the “solvable” versus
“manageable” categories. This taxonomy seems more natural in public health. In fact,
a <a href="https://www.cdc.gov/mmwr/preview/mmwrhtml/su48a7.htm">CDC report</a> discusses a “hierarchy of possible public health interventions in
dealing with infectious diseases,” which runs along the gradient from manage to
solve: <i>control, elimination of disease, elimination of infections, eradication,
and extinction</i>. <o:p></o:p><br />
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The report notes that in 1993, the <a href="https://www.cdc.gov/mmwr/preview/mmwrhtml/00001590.htm">International Task Forcefor Disease Eradication</a> evaluated 80 infectious diseases and determined that 6
were potentially eradicable. The potential for eradication depends on
biological, societal, and political criteria. Biological criteria for
eradicability can change with technological innovation.<o:p></o:p><br />
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The categorization of a disease along the hierarchy is a
weighty one, as “Health resources are limited and resources cross sectors.
Therefore, decisions have to be made as to whether the use of resources for an
elimination or eradication programme is preferable to their use in nonhealth
projects, in alternative health interventions, in continued control of the
condition, or even in the eradication of other eradicable conditions.” A failed
eradication attempt can come at tremendous costs to credibility and resources.
The decision to attempt an eradication effort should depend on careful and
broad cost-benefit analysis and consideration of the numerous stakeholders:<o:p></o:p><br />
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“Consensus on the priority and
justification for [eradication] must be developed by technical experts, the
decision-makers, and the scientific community. Political commitment must be
gained at the highest levels, following informed discussion at regional and
local levels….Eradication requires an effective alliance with all potential collaborators
and partners…The eradication programme must address the issues of equity and be
supportive of broaer goalss that have a positive impact on the health
infrastructure…should also take into consideration the ideal sequencing of
potentially concurrent campaigns.”<o:p></o:p></div>
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The approaches that policymakers and researchers take to public
health problems depend on whether they have categorized the problem as one
to be eradicated or to be managed. It seems like this should be true of other
economic and social problems too, and I wonder if people are thinking about
things like homelessness, discrimination, poverty, asset bubbles, etc. in this
way. Or even if conflicting views on whether these types of problems are
feasible and worthy of eradication are at some fundamental level responsible
for conflicts over the appropriate course of action. Food for thought.<o:p></o:p></div>
Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com67tag:blogger.com,1999:blog-5624436327404149621.post-9474177304124903762017-12-07T11:18:00.001-08:002017-12-07T11:18:47.970-08:00Consumer Inflation Uncertainty Holding SteadyI recently updated my <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2576439">Consumer Inflation Uncertainty Index</a> through October 2017. Data is available <a href="https://sites.google.com/site/inflationuncertainty/">here</a> and the official (gated) publication in the Journal of Monetary Economics is <a href="https://www.sciencedirect.com/science/article/pii/S0304393217300612">here</a>. Inflation uncertainty remains low by historic standards. Uncertainty about longer-run (5- to 10-year ahead) inflation remains lower than uncertainty about next-year inflation.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8yp54ttdJLJKsmnTjz8mFT8Vubd3xoL6gNziPqXZ3mMWePUY2o8liENZqtjTmXBrCh8sTFI30bhfrdPJ1aEzeN-A9NZ2CiTLF8bU3kh6DHCZ1-CfrQsPWODmceyQXmyrAyBjHNVfJnwk/s1600/InflationUncertainty.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1164" data-original-width="1600" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8yp54ttdJLJKsmnTjz8mFT8Vubd3xoL6gNziPqXZ3mMWePUY2o8liENZqtjTmXBrCh8sTFI30bhfrdPJ1aEzeN-A9NZ2CiTLF8bU3kh6DHCZ1-CfrQsPWODmceyQXmyrAyBjHNVfJnwk/s400/InflationUncertainty.png" width="400" /></a></div>
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In recent months, there has been no notable change in inflation uncertainty at either horizon.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSXHK7pqhVVMOoWW6SGfMhO0TbDVgrzQoa-zC3Ze_-KCOc0Zn2UN5ZpgkSGxc4wP4IvMPBXpGMs1OPDVzbP5zLlTKlNXwfZCshnl58J-ydGnJPADoFZdZhQC96dEjC9asaq1BrwjSfCi8/s1600/InflationUncertaintyRecent.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1164" data-original-width="1600" height="290" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSXHK7pqhVVMOoWW6SGfMhO0TbDVgrzQoa-zC3Ze_-KCOc0Zn2UN5ZpgkSGxc4wP4IvMPBXpGMs1OPDVzbP5zLlTKlNXwfZCshnl58J-ydGnJPADoFZdZhQC96dEjC9asaq1BrwjSfCi8/s400/InflationUncertaintyRecent.png" width="400" /></a></div>
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The average "less uncertain" type consumer still expects longer-run inflation around 2.4%, while the longer-run inflation forecasts of "highly uncertain" consumers have risen in recent months to the 8-10% range.<br />
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<br />Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com55tag:blogger.com,1999:blog-5624436327404149621.post-62332083470705856362017-10-24T09:41:00.000-07:002017-10-24T09:41:08.545-07:00Is Taylor a Hawk or Not?Two Bloomberg articles published just a week apart call John Taylor, a contender for Fed Chair, first hawkish, then dovish. The <a href="https://www.bloomberg.com/news/articles/2017-10-17/whatever-the-rule-investors-see-taylor-turning-fed-hawkish">first</a>, by Garfield Clinton Reynolds, notes:<br />
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...The dollar rose and the 10-year U.S. Treasury note fell on Monday after Bloomberg News reported Taylor, a professor at Stanford University, <a href="https://www.bloomberg.com/politics/articles/2017-10-16/taylor-is-said-to-impress-trump-for-fed-chairman-as-warsh-slips">impressed President Donald Trump</a> in a recent White House interview. </blockquote>
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Driving those trades was speculation that the 70 year-old Taylor would push rates up to higher levels than a Fed helmed by its current chair, Janet Yellen. That’s because he is the architect of the Taylor Rule, a tool widely used among policy makers as a guide for setting rates since he developed it in the early 1990s.</blockquote>
But the second, by Rich Miller, claims that "<a href="https://www.bloomberg.com/news/articles/2017-10-24/taylor-s-walk-on-supply-side-may-leave-him-more-dove-than-yellen">Taylor’s Walk on Supply Side May Leave Him More Dove Than Yellen</a>." Miller explains,<br />
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"While Taylor believes the [Trump] administration can substantially lift non-inflationary economic growth through deregulation and tax changes, Yellen is more cautious. That suggests that the Republican Taylor would be less prone than the Democrat Yellen to raise interest rates in response to a policy-driven economic pick-up."</blockquote>
What actually makes someone a hawk? Simply favoring rules-based policy is not enough. A central banker could use a variation of the Taylor rule that implies very little response to inflation, or that allows very high average inflation. Beliefs about the efficacy of supply-side policies also do not determine hawk or dove status. Let's look at the Taylor rule from <a href="http://web.stanford.edu/~johntayl/Papers/Discretion.PDF">Taylor's 1993 paper</a>:<br />
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r = p + .5y + .5(p – 2) + 2,</blockquote>
where r is the federal funds rate, y is the percent deviation of real GDP from target, and p is inflation over the previous 4 quarters. Taylor notes (p. 202) that lagged inflation is used as a proxy for expected inflation, and y=100(Y-Y*)/Y* where Y is real GDP and Y* is trend GDP (a proxy for potential GDP).<div>
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The 0.5 coefficients on the y and (p-2) terms reflect how Taylor estimated that the Fed approximately behaved, but in general a Taylor rule could have different coefficients, reflecting the central bank's preferences. The bank could also have an inflation target p* not equal to 2, and replace (p-2) with (p-p*). Just being really committed to following a Taylor rule does not tell you what steady state inflation rate or how much volatility a central banker would allow. For example, a central bank could follow a rule with p*=5 and a relatively large coefficient on y and small coefficient on (p-5), allowing both high and volatile inflation.</div>
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What do "supply side" beliefs imply? Well, Miller thinks that Taylor believes the Trump tax and deregulatory policy changes will raise potential GDP, or Y*. For a given value of Y, a higher estimate of Y* implies a lower estimate of y, which implies lower r. So yes, in the very short run, we could see lower r from a central banker who "believes" in supply side economics than from one who doesn't, all else equal.</div>
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But what if Y* does not really rise as much as a supply-sider central banker thinks it will? Then the lower r will result in higher p (and Y), to which the central bank will react by raising r. So long as the central bank follows the Taylor principle (so the sum of the coefficients on p and (p-p*) in the rule are greater than 1), equilibrium long-run inflation is p*.</div>
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The parameters of the Taylor rule reflect the central bank's preferences. The right-hand-side variables, like Y*, are measured or forecasted. That reflects a central bank's competence at measuring and forecasting, which depends on a number of factors ranging from the strength of its staff economists to the priors of the Fed Chair to the volatility and unpredictability of other economic conditions and policies. </div>
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Neither Taylor nor Yellen seems likely to change the inflation target to something other than 2 (and even if they wanted to, they could not unilaterally make that decision.) They do likely differ in their preferences for stabilizing inflation versus stabilizing output, and in that respect I'd guess Taylor is more hawkish. </div>
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Yellen's efforts to look at <a href="http://carolabinder.blogspot.com/2014/07/thoughts-on-feds-new-labor-market.html">alternative measures of labor market conditions</a> in the past are also about Y*. In some versions of the Taylor rule, you see unemployment measures instead of output measures (where the idea is that they generally comove). Willingness to consider multiple measures of employment and/or output is really just an attempt to get a better measure on how far the real economy is from "potential." It doesn't make a person inherently more or less hawkish.</div>
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As an aside, this whole discussion presumes that monetary policy itself (or more generally, aggregate demand shifts) do not change Y*. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1369054">Hysteresis</a> theories reject that premise. </div>
Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com29tag:blogger.com,1999:blog-5624436327404149621.post-24898469472669778162017-10-23T11:32:00.002-07:002017-10-23T11:32:36.233-07:00Cowen and Sumner on Voters' Hatred of InflationA recent Scott Sumner piece has the declarative title, "<a href="http://econlog.econlib.org/archives/2017/10/voters_dont_hat.html">Voters don't hate inflation</a>." Sumner is responding to a piece by <a href="https://www.bloomberg.com/view/articles/2017-10-19/the-only-fed-rule-is-that-there-are-no-fed-rules">Tyler Cowen</a> in Bloomberg, where Cowen writes:<blockquote class="tr_bq">
Congress insists that the Fed is “independent"...But if voters hated what the Fed was doing, Congress could rather rapidly hold hearings and exert a good deal of influence. Over time there is a delicate balancing act, where the Fed is reluctant to show it is kowtowing to Congress, so it very subtlety monitors its popularity so it doesn’t have to explicitly do so. </blockquote>
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If we imposed a monetary rule on the Fed, even a theoretically optimal rule, it would stop the Fed from playing this political game. <b>Many monetary rules <a href="https://www.bloomberg.com/view/articles/2017-10-19/taylor-and-his-rule-are-not-what-the-fed-needs">call for higher rates</a> of price inflation if the economy starts to enter a downturn. That’s often the right economic prescription, but voters hate high inflation. </b></blockquote>
Emphasis added, and the emphasized bit is quoted by Scott Sumner, who argues that voters don't hate inflation <i>per se</i>, but hate falling standards of living. He adds, "How people feel about a price change depends entirely on whether it's caused by an aggregate supply shift or a demand shift."<br />
<br />
The whole exchange made my head hurt a bit because it turns the usual premise behind macroeconomic policy design--and specifically, central bank independence and monetary policy rules--on its head. The textbook <a href="http://www.bis.org/review/r001018b.pdf">reasoning</a> goes something like this. Policymakers facing re-election have an incentive to pursue expansionary macroeconomic policies (positive aggregate demand shocks). This boosts their popularity, because people enjoy the lower unemployment <i>and don't really notice or worry about the inflationary consequences</i>.<br />
<br />
Even an independent central bank operating under discretion faces the classic "<a href="https://sites.hks.harvard.edu/fs/jfrankel/API120/ls/L8-TimeConsistency&rules.pdf">dynamic inconsistency</a>" problem if it tries to commit to low inflation, resulting in suboptimally high (expected and actual) inflation. So monetary policy rules (the topic of Cowen's piece) are, in theory, a way for the central bank to "bind its hands" and help it achieve <i>lower</i> (expected and actual) inflation. An alternative that is sometimes suggested is to appoint a central banker who is <i>more</i> inflation averse than the public. If the problem is that the public hates inflation, how is this a solution?<br />
<br />
Cowen seems to argue that a monetary rule would be unpopular, and hence not fully credible, exactly when it calls for policy to be expansionary. But such a rule, in theory, would have been put into place to prevent policy from being <i>too</i> expansionary. Without such a rule, policy would presumably be more expansionary, so if voters hate high inflation, they would really hate removing the rule.<br />
<br />
One issue that came up frequently at the <a href="http://carolabinder.blogspot.com/2017/10/rethinking-macroeconomic-policy.html">Rethinking Macroeconomic Policy IV</a> conference was the notion that inflationary bias, and the implications for central banking that come with it, might be a thing of the past. There is certainly something to that story in the recent low inflation environment. But I can still hardly imagine circumstances in which expansionary policy in a downturn would be the unpopular choice among voters themselves. It may be unpopular among members of Congress for other reasons-- because it is unpopular among select powerful constituents, for example-- but that is another issue. And the members of Congress who are most in favor of imposing a monetary policy rule for the Fed are also, I suspect, the most inflation <i>averse</i>, so I find it hard to see how the potentially inflationary nature of rules is what would (a) make them politically unpopular and (b) lead Congress to thus restrict the Fed's independence.Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com24tag:blogger.com,1999:blog-5624436327404149621.post-62508259420725319952017-10-13T12:35:00.001-07:002017-10-13T12:35:36.128-07:00Rethinking Macroeconomic PolicyI had the pleasure of attending “<a href="https://piie.com/events/rethinking-macroeconomic-policy">Rethinking Macroeconomic Policy IV</a>” at the Peterson Institute for International Economics. I highly recommend viewing the panels and materials online. <br /><br />The two-day conference left me wondering what it actually means to “rethink” macro. The conference title refers to rethinking macroeconomic <i>policy</i>, not macroeconomic research or analysis, but of course these are related. Adam Posen’s opening remarks expressed dissatisfaction with DSGE models, VARs, and the like, and these sentiments were occasionally echoed in the other panels in the context of the potentially large role of nonlinearities in economic dynamics. Then, in the opening session, Olivier Blanchard talked about whether we need a “revolution” or “evolution” in macroeconomic thought. He leans toward the latter, while his coauthor Larry Summers leans toward the former. But what could either of these look like? How could we replace or transform the existing modes of analysis? <br /><br />I looked back on the materials from <a href="https://www.imf.org/external/pubs/ft/spn/2010/spn1003.pdf">Rethinking Macroeconomic Policy of 2010</a>. Many of the policy challenges discussed at that conference are still among the biggest challenges today. For example, low inflation and low nominal interest rates limit the scope of monetary policy in recessions. In 2010, raising the inflation target and strengthening automatic fiscal stabilizers were both suggested as possible policy solutions meriting further research and discussion. Inflation and nominal rates are still very low seven years later, and higher inflation targets and stronger automatic stabilizers are still discussed, but what I don’t see is a serious proposal for change in the way we evaluate these policy proposals. <br /><br />Plenty of papers use basically standard macro models and simulations to quantify the costs and benefits of <a href="http://carolabinder.blogspot.cz/2014/09/targeting-two.html">raising the inflation target</a>. Should we care? Should we discard them and rely solely on intuition? I’d say: probably yes, and probably no. Will we (academics and think tankers) ever feel confident enough in these results to make a real policy change? Maybe, but then it might not be up to us.<br /><br />Ben Bernanke raised probably the most specific and novel policy idea of the conference, a monetary policy framework that would resemble a hybrid of inflation targeting and price level targeting. In normal times, the central bank would have a 2% inflation target. At the zero lower bound, the central bank would allow inflation to rise above the 2% target until inflation over the duration of the ZLB episode averaged 2%. He suggested that this framework would have some of the benefits of a higher inflation target and of price level targeting without some of the associated costs. Inflation would average 2%, so distortions from higher inflation associated with a 4% target would be avoided. The possibly adverse credibility costs of switching to a higher target would also be minimized. The policy would provide the usual benefits of history-dependence associated with price level targeting, without the problems that this poses when there are oil shocks.<br /><br />It’s an exciting idea, and intuitively really appealing to me. But how should the Fed ever decide whether or not to implement it? Bernanke mentioned that economists at the Board are working on simulations of this policy. I would guess that these simulations involve many of the assumptions and linearizations that rethinking types love to demonize. So again: Should we care? Should we rely solely on intuition and verbal reasoning? What else is there?<br /><br />Later, Jason Furman presented a paper titled, “Should policymakers care whether inequality is helpful or harmful for growth?” He discussed some examples of evaluating tradeoffs between output and distribution in toy models of tax reform. He begins with the Mankiw and Weinzierl (2006) example of a 10 percent reduction in labor taxes paid for by a lump-sum tax. In a Ramsey model with a representative agent, this policy change would raise output by 1 percent. Replacing the representative agent with agents with the actual 2010 distribution of U.S. incomes, only 46 percent of households would see their after-tax income increase and 41 percent would see their welfare increase. More generally, he claims that “the growth effects of tax changes are about an order of magnitude smaller than the distributional effects of tax changes—and the disparity between the welfare and distribution effects is even larger” (14). He concludes:<br /><blockquote class="tr_bq">
“a welfarist analyzing tax policies that entail tradeoffs between efficiency and equity would not be far off in just looking at static distribution tables and ignoring any dynamic effects altogether. This is true for just about any social welfare function that places a greater weight on absolute gains for households at the bottom than at the top. Under such an approach policymaking could still be done under a lexicographic process—so two tax plans with the same distribution would be evaluated on the basis of whichever had higher growth rates…but in this case growth would be the last consideration, not the first” (16).</blockquote>
<br />As Posen then pointed out, Furman’s paper and his discussants largely ignored the discussions of macroeconomic stabilization and business cycles that dominated the previous sessions on monetary and fiscal policy. The panelists acceded that recessions, and hysteresis in unemployment, can exacerbate economic disparities. But the fact that stabilization policy was so disconnected from the initial discussion of inequality and growth shows just how much rethinking still has not occurred. <br /><br />In 1987, Robert <a href="http://www.wiley.com/WileyCDA/WileyTitle/productCd-0631147918.html">Lucas</a> calculated that the welfare costs of business cycles are minimal. In some sense, <a href="http://www.nber.org/chapters/c11010.pdf">we have “rethought”</a> this finding. We know that it is built on assumptions of a representative agent and no hysteresis, among other things. And given the emphasis in the fiscal and monetary policy sessions on avoiding or minimizing business cycle fluctuations, clearly we believe that the costs of business cycle fluctuations are in fact quite large. I doubt many economists would agree with the statement that “the welfare costs of business cycles are minimal.” Yet, the public finance literature, even as presented at a conference on rethinking macroeconomic policy, still evaluates welfare effects of policy using models that totally omit business cycle fluctuations, because, within those models, such fluctuations hardly matter for welfare. If we believe that the models are “wrong” in their implications for the welfare effects of fluctuations, why are we willing to take their implications for the welfare effects of tax policies at face value?<br /><br />I don’t have a good alternative—but if there is a Rethinking Macroeconomic Policy V, I hope some will be suggested. The fact that the conference speakers are so distinguished is both an upside and a downside. They have the greatest understanding of our current models and policies, and in many cases were central to developing them. They can <i>re</i>think, because they have already thought, and moreover, they have large influence and loud platforms. But they are also quite invested in the status quo, for all they might criticize it, in a way that may prevent really radical rethinking (if it is really needed, which I’m not yet convinced of). (A more minor personal downside is that I was asked multiple times whether I was an intern.)<br /><br />If there is a Rethinking Macroeconomic Policy V, I also hope that there will be a session on teaching and training. The real rethinking is going to come from the next generations of economists. How do we help them learn and benefit from the current state of economic knowledge without being constrained by it? This session could also touch on continuing education for current economists. What kinds of skills should we be trying to develop now? What interdisciplinary overtures should we be making? Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com23tag:blogger.com,1999:blog-5624436327404149621.post-41774782377816154312017-09-28T06:22:00.001-07:002017-09-28T06:22:29.919-07:00An Inflation Expectations ExperimentLast semester, my senior thesis advisee Alex Rodrigue conducted a survey-based information experiment via <a href="https://www.mturk.com/mturk/welcome">Amazon Mechanical Turk</a>. We have coauthored a working paper detailing the experiment and results titled "<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040706">Household Informedness and Long-Run Inflation Expectations: Experimental Evidence</a>." I presented our research at my department seminar yesterday with the twin babies in tow, and my tweet about the experience is by far my most popular to date:<br />
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I gave a 90 minute econ seminar today with the twin babies, both awake. Held one and audience passed the other around. A first in economics?</div>
— Carola Conces Binder (@cconces) <a href="https://twitter.com/cconces/status/913198689404977153?ref_src=twsrc%5Etfw">September 28, 2017</a></blockquote>
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Consumers' inflation expectations are very disperse; on household surveys, many people report long-run inflation expectations that are <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2789903">far from the Fed's 2% target</a>. Are these people unaware of the target, or do they know it but remain unconvinced of its credibility? In another <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2789903">paper </a>in the Journal of Macroeconomics, I provide some non-experimental evidence that public knowledge of the Fed and its objectives is quite limited. In this paper, we directly treat respondents with information about the target and about past inflation, in randomized order, and see how they revise their reported long-run inflation expectations. We also collect some information about their prior knowledge of the Fed and the target, their self-reported understanding of inflation, and their numeracy and demographic characteristics. About a quarter of respondents knew the Fed's target and two-thirds could identify Yellen as Fed Chair from a list of three options.<br />
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As shown in the figure above, before receiving the treatments, very few respondents forecast 2% inflation over the long-run and only about a third even forecast in the 1-3% range. Over half report a multiple-of-5% forecast, which, as I argue in a recent <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2576439">paper</a> in the Journal of Monetary Economics, is a likely <a href="http://carolabinder.blogspot.com/2017/07/new-publication-measuring-uncertainty.html">sign of high uncertainty</a>. When presented with a graph of the past 15 years of inflation, or with the FOMC statement announcing the 2% target, the average respondent revises their forecast around 2 percentage points closer to the target. Uncertainty also declines.<br />
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The results are consistent with imperfect information models because the information treatments are publicly available, yet respondents still revise their expectations after the treatments. Low informedness is part of the reason why expectations are far from the target. The results are also consistent with Bayesian updating, in the sense that high prior uncertainty is associated with larger revisions. But equally noteworthy is the fact that even after receiving both treatments, expectations are still quite heterogeneous and many still substantially depart from the target. So people seem to interpret the information in different ways and view it as imperfectly credible.<br />
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We look at how treatment effects vary by respondent characteristic. One interesting result is that, after receiving both treatments, the discrepancy between mean male and female inflation expectations (which has been noted in many <a href="https://ideas.repec.org/a/fip/fedcec/y2011imay17n2011-7.html">studies</a>) nearly disappears (see figure below).<br />
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There is <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040706">more in the paper </a>about how treatment effects vary with other characteristics, including respondents' opinion of government policy and their prior knowledge. We also look at whether expectations can be "un-anchored from below" with the graph treatment.<br />
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<br />Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com7tag:blogger.com,1999:blog-5624436327404149621.post-20028755029497416392017-09-14T09:21:00.000-07:002017-09-14T09:21:21.663-07:00Consumer Forecast Revisions: Is Information Really so Sticky?My paper "<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3036559">Consumer Forecast Revisions: Is Information Really so Sticky?</a>" was just accepted for publication in <i>Economics Letters</i>. This is a short paper that I believe makes an important point. <div>
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Sticky information models are one way of modeling imperfect information. In these models, only a fraction (λ) of agents update their information sets each period. If λ is low, information is quite sticky, and that can have important implications for macroeconomic dynamics. There have been several empirical approaches to estimating λ. With micro-level survey data, a non-parametric and time-varying estimate of λ <a href="https://ideas.repec.org/p/tiu/tiucen/515ee09e-b946-439f-afff-d348a491b752.html">can be obtained</a> by calculating the
fraction of respondents who revise their forecasts (say, for inflation) at each survey date. <a href="https://ideas.repec.org/a/eee/ecolet/v117y2012i3p807-810.html">Estimates</a> from the Michigan Survey of Consumers (MSC) imply that consumers update their information about inflation approximately once every 8 months.</div>
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Here are two issues that I point out with these estimates:</div>
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I show that several issues with estimates of information stickiness based on consumer
survey microdata lead to substantial <i>underestimation</i> of the frequency with which consumers
update their expectations. The first issue stems from data frequency. The rotating panel of
Michigan Survey of Consumer (MSC) respondents take the survey twice with a six-month
gap. A consumer may have the same forecast at months t and t+ 6 but different forecasts in
between. The second issue is that responses are reported to the nearest integer. A consumer
may update her information, but if the update results in a sufficiently small revisions, it will
appear that she has not updated her information. </blockquote>
To quantify how these issues matter, I use data from the New York Fed Survey of Consumer Expectations, which is available monthly and not rounded to the nearest integer. I compute updating frequency with this data. It is very high-- at least 5 revisions in 8 months, as opposed to the 1 revision per 8 months found in previous literature.<br />
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Then I transform the data so that it is like the MSC data. First I round the responses to the nearest integer. This makes the updating frequency estimates decrease a little. Then I look at it at the six-month frequency instead of monthly. This makes the updating frequency estimates decrease a lot, and I find similar estimates to the previous literature-- updates about every 8 months.<br />
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So low-frequency data, and, to a lesser extent, rounded responses, result in large underestimates of revision frequency (or equivalently, overestimates of information stickiness). And if information is not really so sticky, then sticky information models may not be as good at explaining aggregate dynamics. Other classes of imperfect information models, or sticky information models combined with other classes of models, might be better.<br />
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<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3036559">Read the ungated version here</a>. I will post a link to the official version when it is published.Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com4tag:blogger.com,1999:blog-5624436327404149621.post-52395796061629099792017-08-21T09:40:00.001-07:002017-08-21T09:40:48.286-07:00New Argument for a Higher Inflation TargetOn <a href="http://voxeu.org/">voxeu.org</a>, Philippe Aghion, Antonin Bergeaud, Timo Boppart, Peter Klenow, and Huiyu Li <a href="http://voxeu.org/article/missing-growth">discuss their recent work</a> on the measurement of output and whether measurement bias can account for the measured slowdown in productivity growth. While the work is mostly relevant to discussions of the <a href="http://jaredbernsteinblog.com/the-productivity-slowdown-mismeasurement-or-misallocationor-both/">productivity slowdown</a> and secular stagnation, I was interested in a corollary that ties it to <a href="http://carolabinder.blogspot.cz/2014/09/targeting-two.html">discussions</a> of the optimal level of the inflation target.<br /><br />The authors note the high frequency of "creative destruction" in the US, which they define as when "products exit the market because they are eclipsed by a better product sold by a new producer." This presents a challenge for statistical offices trying to measure inflation:<br /><blockquote class="tr_bq">
The standard procedure in such cases is to assume that the quality-adjusted inflation rate is the same as for other items in the same category that the statistical office can follow over time, i.e. products that are not subject to creative destruction. However, creative destruction implies that the new products enter the market because they have a lower quality-adjusted price. Our study tries to quantify the bias that arises from relying on imputation to measure US productivity growth in cases of creative destruction.</blockquote>
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They explain that this can lead to mismeasurement of TFP growth, which they quantify by examining changes in the share of incumbent products over time:</div>
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If the statistical office is correct to assume that the quality-adjusted inflation rate is the same for creatively destroyed products as for surviving incumbent products, then the market share of surviving incumbent products should stay constant over time. If instead the market share of these incumbent products shrinks systematically over time, then the surviving subset of products must have higher average inflation than creatively destroyed products. For a given elasticity of substitution between products, the more the market share shrinks for surviving products, the more the missing growth.</blockquote>
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From 1983 to 2013, they estimate that "missing growth" averaged about 0.63% per year. This is substantial, but there is no clear time trend (i.e. there is not more missed growth in recent years), so it can't account for the measured productivity growth slowdown.</div>
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The authors suggest that the Fed should consider adjusting its inflation target upwards to "get closer to achieving quality-adjusted price stability." A few months ago, <a href="https://www.bloomberg.com/news/articles/2017-06-09/fed-should-study-higher-inflation-target-liberal-economists-say">22 economists</a> including Joseph Stiglitz and Narayana Kocherlakota wrote a <a href="https://populardemocracy.org/news-and-publications/prominent-economists-question-fed-inflation-target">letter</a> urging the Fed to consider raising its inflation target, in which they stated:</div>
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<span style="background-color: white; color: #212121; font-family: Lora, serif; font-size: 16px;">Policymakers must be willing to rigorously assess the costs and benefits of previously-accepted policy parameters in response to economic changes. One of these key parameters that should be rigorously reassessed is the very low inflation targets that have guided monetary policy in recent decades. We believe that the Fed should appoint a diverse and representative blue ribbon commission with expertise, integrity, and transparency to evaluate and expeditiously recommend a path forward on these questions.</span></blockquote>
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The letter did not mention this measurement bias rationale for a higher target, but the blue ribbon commission they propose should take it into consideration.</div>
Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com8tag:blogger.com,1999:blog-5624436327404149621.post-60079952202471193892017-08-18T11:05:00.002-07:002017-08-18T11:05:36.228-07:00The Low Misery DilemmaThe other day, <a href="https://twitter.com/TimDuy" target="_blank">Tim Duy</a> tweeted:<br />
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I expect the FOMC minutes to reveal that some participants were concerned about low inflation while others focused on low unemployment.</div>
— Tim Duy (@TimDuy) <a href="https://twitter.com/TimDuy/status/897668713800925184">August 16, 2017</a></blockquote>
It took me a moment--and I'd guess I'm not alone--to even recognize how remarkable this is. The New York Times ran an <a href="https://www.nytimes.com/2017/08/16/business/economy/federal-reserve-minutes.html?rref=collection%2Fbyline%2Fbinyamin-appelbaum&action=click&contentCollection=undefined&region=stream&module=stream_unit&version=latest&contentPlacement=1&pgtype=collection&_r=0" target="_blank">article</a> with the headline "Fed Officials Confront New Reality: Low Inflation and Low Unemployment." <i>Confront</i>, not embrace, not celebrate.<br />
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The <a href="http://www.miseryindex.us/indexbyyear.aspx" target="_blank">misery index</a> is the sum of unemployment and inflation. Arthur Okun proposed it in the 1960s as a crude gauge of the economy, based on the fact that high inflation and high unemployment are both miserable (so high values of the index are bad). The misery index was pretty low in the 60s, in the 6% to 8% range, similar to where it has been since around 2014. Now it is around 6%. Great, right?<br />
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The NYT article notes that we are in an opposite situation to the stagflation of the 1970s and early 80s, when both high inflation and high unemployment were concerns. The misery index reached a high of 21% in 1980. (The unemployment data is only available since 1948).<br />
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Very high inflation and high unemployment are each individually troubling for the social welfare costs they impose (which are more obvious for unemployment). But observed together, they also troubled economists for seeming to run contrary to the Phillips curve-based models of the time. The <i>tradeoff</i> between inflation and unemployment wasn't what economists and policymakers had believed, and their misunderstanding probably contributed to the misery.<br />
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Though economic theory has evolved, the basic Phillips curve tradeoff idea is still an important part of central bankers' models. By models, I mean both the formal quantitative models used by their staffs and the way they think about how the world works. General idea: if the economy is above full employment, that should put upward pressure on wages, which should put upward pressure on prices.<br />
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So low unemployment combined with low inflation seem like a nice problem to have, but if they are indeed a new reality-- that is, something that will last--then there is something amiss in that chain of logic. Maybe we are not at full employment, because the natural rate of unemployment is a lot lower than we thought, or we are <a href="http://carolabinder.blogspot.com/2017/08/labor-market-conditions-index.html" target="_blank">looking at the wrong labor market indicators</a>. Maybe full employment does not put upward pressure on wages, for some reason, or maybe we are looking at the wrong wage measures. For example, <a href="http://www.frbsf.org/our-district/about/sf-fed-blog/wage-growth-good-news/?utm_source=frbsf-home-sffedblog-title&utm_medium=frbsf&utm_campaign=sffedblog" target="_blank">San Francisco Fed researchers argue</a> that wage growth measures should be adjusted in light of retiring Baby Boomers. Or maybe the <a href="http://carolabinder.blogspot.com/2014/08/wage-inflation-and-price-inflation.html" target="_blank">link between wage and price inflation</a> has weakened.<br />
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Until policymakers feel confident that they understand why we are experiencing both low inflation and low unemployment, they can't simply embrace the low misery. It is natural that they will worry that they are missing something, and that the consequences of whatever that is could be disastrous. The question is what to do in the meanwhile.<br />
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There are two camps for Fed policy. One camp favors a wait-and-see approach: hold rates steady until we actually observe inflation rising above 2%. Maybe even let it stay above 2% for awhile, to make up for the lengthy period of below-2% inflation. The other camp favors raising rates preemptively, just in case we are missing some sign that inflation is about to spiral out of control. This latter possibility strikes me as unlikely, but I'm admittedly oversimplifying the concerns, and also haven't personally experienced high inflation.<br />
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<br />Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com1tag:blogger.com,1999:blog-5624436327404149621.post-42094322478249065332017-08-10T10:52:00.000-07:002017-08-10T10:52:43.544-07:00Macro in the Econ Major and at Liberal Arts CollegesLast week, I attended the 13th annual <a href="http://lamacro.davidson.edu/" target="_blank">Conference of Macroeconomists from Liberal Arts Colleges</a>, hosted this year by Davidson College. I also <a href="http://carolabinder.blogspot.com/2015/08/macroeconomics-research-at-liberal-arts.html" target="_blank">attended</a> the conference two years ago at Union College. I can't recommend this conference strongly enough!<br />
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The conference is a response to the increasing expectation of high quality research at many liberal arts colleges. Many of us are the only macroeconomist at our college, and can't regularly attend macro seminars, so the conference is a much-needed opportunity to receive feedback on work in progress. (The <a href="http://carolabinder.blogspot.com/2017/07/new-publication-measuring-uncertainty.html" target="_blank">paper I presented last time</a> just came out in the Journal of Monetary Economics!)<br />
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This time, I presented "<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2784793" target="_blank">Inflation Expectations and the Price at the Pump</a>" and discussed Erin Wolcott's paper, "<a href="http://lamacro.davidson.edu/wp-content/uploads/2017/07/Foreign_Official_Purchases.pdf" target="_blank">Impact of Foreign Official Purchases of U.S.Treasuries on the Yield Curve</a>."<br />
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There was a wide range of interesting work. For example, Gina Pieters presented “<a href="http://lamacro.davidson.edu/wp-content/uploads/gravity_forms/1-95b74353d944e7d67926fb1900938dee/2017/04/Bitcoin_XR.pdf">Bitcoin Reveals Unofficial Exchange Rates and Detects Capital Controls</a>.” M. Saif Mehkari's work on “<a href="http://lamacro.davidson.edu/wp-content/uploads/2017/07/CGMJuly-6056151.pdf">Repatriation Taxes</a>” is highly relevant to today's policy discussions. Most of the presenters and attendees were junior faculty members, but three more senior scholars held a panel discussion at dinner. Next year, the conference will be held at Wake Forest.<br />
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I also attended a session on "Macro in the Econ Major" led by <a href="http://www.kenyon.edu/directories/campus-directory/biography/pj-glandon/" target="_blank">PJ Glandon</a>. A link to his slides is <a href="https://drive.google.com/open?id=0B0p1V8IL9ARHbHJWb291eTctdlU" target="_blank">here</a>. One slide presented the image below, prompting an interesting discussion about whether and how we should tailor what is taught in macro courses to our perception of the students' interests and career goals.<br />
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Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com1tag:blogger.com,1999:blog-5624436327404149621.post-39635347201420438072017-08-07T07:15:00.001-07:002017-08-07T07:15:14.907-07:00Labor Market Conditions Index DiscontinuedA few years ago, I <a href="http://carolabinder.blogspot.com/2014/07/thoughts-on-feds-new-labor-market.html">blogged about</a> the Fed's new Labor Market Conditions Index (LMCI). The index attempts to summarize the state of the labor market using a statistical technique that captures the primary common variation from 19 labor market indicators. I was skeptical about the usefulness of the LMCI for a few reasons. And as it turns out, the LMCI is now <a href="https://www.federalreserve.gov/econresdata/notes/feds-notes/2014/updating-the-labor-market-conditions-index-20141001.html">discontinued</a> as of August 3.<div>
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The discontinuation is newsworthy because the LMCI was cited in policy discussions at the Fed, even by Janet Yellen. The index became high-profile enough that I was even interviewed about it on NPR's Marketplace.<br /><br />One issue that I noted with the index in my blog was the following:<br /><blockquote class="tr_bq">
A minor quibble with the index is its inclusion of wages in the list of indicators. This introduces endogeneity that makes it unsuitable for use in Phillips Curve-type estimations of the relationship between labor market conditions and wages or inflation. In other words, we can't attempt to estimate how wages depend on labor market tightness if our measure of labor market tightness already depends on wages by construction.</blockquote>
This corresponds to one <a href="https://www.federalreserve.gov/econresdata/notes/feds-notes/2014/updating-the-labor-market-conditions-index-20141001.html">reason that is provided</a> for the discontinuation of the index: "including average hourly earnings as an indicator did not provide a meaningful link between labor market conditions and wage growth."</div>
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The other reasons provided for discontinuation are that "model estimates turned out to be more sensitive to the detrending procedure than we had expected" and "the measurement of some indicators in recent years has changed in ways that significantly degraded their signal content."</div>
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I also noted in my blog post and on NPR that the index is almost perfectly correlated with the unemployment rate, meaning it provides very little additional information about labor market conditions. (Or interpreted differently, meaning that the unemployment rate provides a lot of information about labor market conditions.) The development of the LMCI was part of a worthy effort to develop alternative informative measures of labor market conditions that can help policymakers gauge where we are relative to full employment and predict what is likely to happen to prices and wages. So since resources and attention are limited, I think it is wise that they can be directed toward developing and evaluating other measures. </div>
Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com8tag:blogger.com,1999:blog-5624436327404149621.post-30095080601733382082017-07-27T09:10:00.000-07:002017-07-27T09:10:45.744-07:00The Obesity Code and Economists as General Practitioners<blockquote class="tr_bq">
"The past generation, like several generations before it, has indeed been one of greater and greater specialization…This advance has not been attained without cost. The price has been the loss of minds, or the neglect to develop minds, trained to cope with the complex problems of today in the comprehensive, overall manner called for by such problems.”</blockquote>
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The above quote may sound like a recent criticism of economics, but it actually comes from a 1936 article, "<a href="https://www.jstor.org/stable/1230708?seq=1#page_scan_tab_contents" target="_blank">The Need for `Generalists,'</a>" by A. G. Black, Chief of the Bureau of Agricultural Economics, in the Journal of Farm Economics (p. 657). Just 12 years prior, John Maynard Keynes' penned his <a href="https://economicsociology.org/2015/03/01/who-is-an-economist-here-is-keynes-answer/" target="_blank">much-quoted description</a> of economists for a 1924 obituary of Alfred Marshall:</div>
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“The study of economics does not seem to require any specialized gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy or pure science? An easy subject at which few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard” (p. 321-322).</blockquote>
While Keynes celebrated economist-as-generalist, Black's complaint about the trend of overspecialization, coupled with excessive "<a href="https://www.bloomberg.com/view/articles/2015-09-01/economics-has-a-math-problem" target="_blank">mathiness</a>" and insularity, <a href="https://www.timeshighereducation.com/news/economics-degrees-still-too-narrow-focus" target="_blank">continues</a>. This often-fair criticism frequently comes from within the profession--because who loves thinking about economists more than economists? But at the same time, there is a trend in the opposite direction, a trend towards taking an increasing scope of nature and institutions into regard. Nowhere is this more obvious than among the blogging, tweeting, punditing economists with whom I associate.<br />
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The other day, for example, <a href="https://twitter.com/mileskimball" target="_blank">Miles Kimball</a> wrote a bunch of tweets about the causes of obesity. When I liked one of his tweets (because it suggested cheese is not bad for you, and how could I not like that?) he asked if I would read "<a href="https://www.amazon.com/Obesity-Code-Unlocking-Secrets-Weight/dp/1771641258" target="_blank">The Obesity Code</a>" by Jason Fung, which he <a href="https://blog.supplysideliberal.com/post/2017/7/3/chx0ya2doz7p70m5mcseih8g9qdfoo" target="_blank">blogged about</a> earlier, and respond to the evidence.<br />
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I was quick to agree. Only later did I pause to consider the irony that I feel more confident in my ability to evaluate scholarship from a medical field in which I have zero training than I often feel when asked to review scholarship or policies in my field of supposed expertise, monetary economics. Am I being a master-economist à la Keynes, or simply irresponsible?<br />
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Kenneth Arrow's 1963 "<a href="https://web.stanford.edu/~jay/health_class/Readings/Lecture01/arrow.pdf" target="_blank">Uncertainty and the Welfare Economics of Healthcare</a>" is credited with the <a href="http://www.scielosp.org/scielo.php?script=sci_arttext&pid=S0042-96862004000200012" target="_blank">birth of health economics</a>. In this article, Arrow notes that he is concerned only with the market and non-market institutions of medical services, and not health itself. But since then, health economics has <a href="https://www.journals.elsevier.com/journal-of-health-economics/most-downloaded-articles" target="_blank">broadened in scope</a>, and incorporates the study of actual health outcomes (like obesity), to both acclaim and criticism. See my <a href="http://carolabinder.blogspot.com/2016/12/pushing-boundaries-of-economics.html" target="_blank">earlier post</a> about economics research on depression, or consider the extremely polarized ratings of economist Emily Oster's <a href="https://www.amazon.com/Expecting-Better-Conventional-Pregnancy-Wrong/dp/0143125702" target="_blank">book on pregnancy</a> (which I like very much).<br />
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Jason Fung himself is not an obesity researcher, but rather a physician who specializes in end-stage kidney disease requiring dialysis. The foreward to his book remarks, "His credentials do not obviously explain why he should author a book titled The Obesity Code," before going on to justify his decision. So, while duly aware of my limited credentials, I feel willing to at least comment on the book and point out many of its parallels with macroeconomic research.<br />
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<b>The Trouble with Accounting Identities (and Counting Calories)</b><br />
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Fung's book takes issue with the dominant "Calories In/Calories Out" paradigm for weight loss. This idea-- that to lose weight, you need to consume fewer calories than you burn-- is based on the First Law of Thermodynamics: energy can neither be created nor destroyed in an isolated system. Fung obviously doesn't dispute the Law, but he disputes its application to weight loss, premised on "Assumption 1: Calories In and Calories Out are independent of each other."<br />
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Fung argues that in response to a reduction in Calories In, the body will reduce Calories Out, citing a number of studies in which underfed participants started burning far fewer calories per day, becoming cold and unable to concentrate as the body expended fewer resources on heating itself and on brain functioning.<br />
<br />
In economics, an accounting identity is an equality that by definition or construction must be true. Every introductory macro course teaches national income accounting: GDP=C+I+G+NX. What happens, we may ask, if government spending (G) increases by $1000? Most students would probably guess that GDP would also increase by $1000, but this is relying on a <i>ceteris parabis</i> assumption. If consumption (C), investment (I), and net exports (NX) stay the same when G rises, then yes, GDP must rise by $1000. But if C, I, or NX is not independent of G, the response of GDP could very well be quite different. For example, in the extreme case that the government spending completely crowds out private investment, so I falls by $1000 (with no change in C or NX), then GDP will not change at all.<br />
<br />
The First Law of Thermodynamics is also an accounting identity. It is true that if Calories In exceed Calories Out, we will gain weight, and vice versa. But it is not true that reducing Calories In leaves Calories Out unchanged. And according to Fung, Calories Out may respond so strongly to Calories In, almost one-for-one, that sustained weight loss will not occur.<br />
<br />
<b>Proximate and Ultimate Causes</b><br />
<b><br /></b>
A caloric deficit (Calories In < Calories Out) is a <i>proximate</i> cause of weight loss, and a caloric surplus a <i>proximate</i> cause of weight gain. But proximate causes are not useful for policy prescriptions. Think again about the GDP=C+I+G+NX accounting identity. This tells us that we can increase GDP by increasing consumption. Great! But how can we increase consumption? We need to know the deeper determinants of the components of GDP. Telling a patient to increase her caloric deficit to lose weight is as practical as advising a government to boost consumption to achieve higher GDP, and neither effort is likely to be very sustainable. So most of Fung's book is devoted to exploring what he claims are the ultimate causes of body weight and the policy implications that follow.<br />
<b><br /></b>
<b>Set Points </b><br />
<br />
One of the most important concepts in Fung's book is the "set point" for body weight. This is the weight at which the body "wants" be be; efforts to sustain weight loss are unlikely to persist, as the body returns to its set weight by reducing basal energy expenditure.<br />
<br />
An important question is what determines the set point. A second set of questions surrounds what happens away from the set point. In other words, what are the mechanisms by which homeostasis occurs? In macro models, too, we may focus on finding the equilibrium and on the off-equilibrium dynamics. The very idea that the body has a set point is controversial, or at least counterintuitive, as is the existence of certain set points in macro, especially the natural rate of unemployment.<br />
<br />
The set point, according to Fung, is all about insulin. Reducing insulin levels and insulin resistance allows fat burning (lipolysis) so the body has plenty of energy coming in without the need to lower basal metabolism; this is the only way to reduce the set point. The whole premise of his <a href="https://intensivedietarymanagement.com/tag/hormonal-obesity-theory/" target="_blank">hormonal obesity theory</a> rests on this. It is the starting point for his explanation of why obesity occurs and what to do about it. Obesity occurs when the body's set point gradually increases over time, as insulin levels and insulin resistance rise in a "vicious cycle." So we need to understand the mechanisms behind the rise and the dynamics of this cycle.<br />
<br />
<b>Mechanisms and Models</b><br />
<br />
Fung goes into great detail about the workings of insulin and related hormones and their interactions with glucose and fructose. This background all aims to support his proposals about the causes of obesity. The causes are multifactorial, but mostly have to do with the composition and timing of the modern diet (what and when we eat). Culprits include refined and processed foods, added sugar, and emphasis on low fat/high carb diets, high cortisol levels from stress and sleep deprivation, and frequent snacking. Fung cites dozens of empirical studies, some observational and others controlled trials, to support his hormonal obesity theory.<br />
<br />
Here I am not entirely sure how closely to draw a parallel to economics. Macroeconomists also rely on models that lay out a series of mechanisms, and use (mostly) observational and (rarely) experimental data to test them, and like epidemiological researchers face challenges of endogeneity and omitted variable bias. But are biological mechanisms inherently different than economic ones because they are more observable, stable, and falsifiable? My intuition says yes, but I don't know enough about medical and biological research to be sure. Fung does not discuss the research behind scientists' knowledge of how hormones work, but only the research on health and weight outcomes associated with various nutritional strategies and drugs.<br />
<br />
At the beginning of the book, Fung announces his refusal to even consider animal studies. This somewhat surprises me, as I thought that finding a result consistently across species could strengthen our conclusions, and mechanisms are likely to be similar, but he seems to view animal studies as totally uninformative for humans. If that is true, then why do we use animals in medical research at all?<br />
<br />
<b>Persistence Creates Resistance</b><br />
<br />
So how does the body's set point rise enough that a person becomes obese? Fung claims that the Calories In/Calories Out model neglects the time-dependence of obesity, noting that it is much easier for a person who has been overweight for only a short while to lose weight. If someone has been overweight a long time, it is much harder, because they have <a href="https://intensivedietarymanagement.com/insulin-resistance-hormonal-obesity-viii/" target="_blank">developed insulin resistance</a>. Insulin levels normally rise and fall over the course of the day, not normally causing any problem. But persistently high levels of insulin, a hormonal imbalance, <a href="https://intensivedietarymanagement.com/drug-tolerance-hormonal-obesity-ix/" target="_blank">result in insulin resistance</a>, leading to yet higher levels of insulin, and yet greater insulin resistance (and weight gain). Fung uses the cycle of antibiotic resistance as an analogy for the development of insulin resistance:<br />
<blockquote class="tr_bq">
Exposure causes resistance...As we use an antibiotic more and more, organisms resistance to it are naturally selected to survive and reproduce. Evenually, these resistance organisms dominate, and the antibiotic becomes useless (p. 110).</blockquote>
He also uses the example of drug resistance: a cocaine user needs ever greater doses. "Drugs cause drug resistance" (p. 111). Macroeconomics provides its own metaphors. In the early conception of the Phillips Curve, it was believed that the inverse relationship between unemployment and inflation could be exploited by policymakers. Just as a doctor who wants to cure a bacterial infection may prescribe antibiotics, a policymaker who wants lower unemployment must just tolerate a little higher inflation. But the trouble with following such a policy is that as that higher inflation persists, people's expectations adapt. They come to expect higher inflation in the future, and that expectation is self-fulfilling, so it takes yet higher inflation to keep unemployment at or below its "set point."<br />
<br />
<b>Institutional Interest and Influence</b><br />
<br />
How a field evaluates evidence and puts it into practice--and even what research is funded and publicized--depends on the powerful institutions in the field and their vested interests, even if the interest is merely in saving face. According to Fung, the American Heart Association (AHA), snack food companies, and doctors repeatedly ignored evidence against the low-fat low-carb diet and the Calories In/Calories Out model to make money or save face. His criticisms of the AHA, in particular, are reminiscent of <a href="http://www.economicshelp.org/blog/glossary/imf-criticism/" target="_blank">those against the IMF</a> for the policies it has imposed through the conditions of its loans.<br />
<br />
Of course, the critics themselves may have biases or vested interests. Fung himself quite likely neglected to mention a number of studies that did not fit his theory. In an effort to sell books and promote his website and reputation, he very likely is oversimplifying and projecting more-than-warranted confidence. So how do I evaluate the book overall, and will I follow its recommendations for myself and my family?<br />
<br />
First, while the book's title emphasizes obesity, it doesn't seem to be written only for readers who are or are becoming obese. It is not clear whether the recommendations presented in this book are useful for people who are already maintaining a healthy weight, but he certainly never suggests otherwise. And for a book so focused on hormones, he makes shockingly little distinction between male and female dietary needs and responses. Since I am breastfeeding twins, and am a still-active former college athlete, my hormonal balance and dietary needs must be far from average, and I'm not looking to lose weight. He also doesn't make much distinction between the needs of adults and kids (like my toddler).<br />
<br />
Still, despite the fact that he presents himself as destroying the conventional wisdom on weight loss, most of his advice is unlikely to be controversial: eat whole foods, reduce added sugar, don't fear healthy fats. Before reading this book, I already knew I should try to do that, though sometimes chose not to. I was especially focused on nutrition during my twin pregnancy, and most of the advice was basically equivalent. After reading this book, I'm slightly more motivated, as I have somewhat more evidence as to why it is beneficial, and I still don't see how it could hurt. Other advice is less supported, but at least not likely to be harmful: avoid artificial sweeteners (even Stevia), eat vinegar.<br />
<br />
His support of fasting and snack avoidance, and his views on <a href="https://www.diabetes-warrior.net/2015/04/20/fung-us-among-us/" target="_blank">insulin provision to diabetics</a>, seem the least supported and most likely to be harmful. He says that fasting and skipping snacks and breakfast provides recurrent periods of very low insulin levels, reducing insulin resistance, but I don't see any concrete evidence of the length of time you must wait in between eating to reap benefits. He cites ancient Greeks, like Hippocrates of Kos, and a few case studies, as "evidence" of the benefits of fasting. Maybe it is my own proclivity for "grazing," and my observations of my two-year-old when we skip a snack, that makes me skeptical. This may work for some, but I'm in no rush to try it.<br />
<br />
<br />Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com10tag:blogger.com,1999:blog-5624436327404149621.post-66134403583029528142017-07-07T15:05:00.002-07:002017-07-07T15:05:19.262-07:00New Publication: Measuring Uncertainty Based on RoundingFor the next few weeks, you can download my new paper in the Journal of Monetary Economics for free <a href="http://www.sciencedirect.com/science/article/pii/S0304393217300612" target="_blank">here</a>. The title is "Measuring uncertainty based on rounding: New method and application to inflation expectations." It became available online the same day that my twins were born (!!) but was much longer in the making, as it was my job market paper at Berkeley.<br />
<br />
Here is the abstract:<br />
<blockquote class="tr_bq">
The literature on cognition and communication documents that people use round numbers to convey uncertainty. This paper introduces a method of quantifying the uncertainty associated with round responses in pre-existing survey data. I construct micro-level and time series measures of inflation uncertainty since 1978. Inflation uncertainty is countercyclical and correlated with inflation disagreement, volatility, and the Economic Policy Uncertainty index. Inflation uncertainty is lowest among high-income consumers, college graduates, males, and stock market investors. More uncertain consumers are more reluctant to spend on durables, cars, and homes. Round responses are common on many surveys, suggesting numerous applications of this method.</blockquote>
Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com9tag:blogger.com,1999:blog-5624436327404149621.post-35633459050640316492017-05-31T08:33:00.002-07:002017-05-31T08:33:06.384-07:00Low Inflation at "Essentially Full Employment"<a href="http://www.bradford-delong.com/2017/05/why-is-the-fomc-so-certain-the-us-is-essentially-at-full-employment.html" target="_blank">Yesterday</a>, Brad Delong took issue with Charles Evans' recent claim that "Today, we have essentially returned to full employment in the U.S." Evans, President of the Federal Reserve Bank of Chicago and a member of the FOMC, was speaking before the Bank of Japan Institute for Monetary and Economic Studies in Tokyo on "<a href="https://www.chicagofed.org/publications/speeches/2017/05-25-lessons-learned-and-challenges-ahead-bank-of-japan" target="_blank">lessons learned and challenges ahead</a>" in monetary policy. Delong points out that the age 25-54 employment-to-population ratio in the United States of 78.5% is low by historical standards and given social and demographic trends.<br />
<br />
Evans' claim that the U.S. has returned to full employment is followed by his comment that "Unfortunately, low inflation has been more stubborn, being slower to return to our objective. From 2009 to the present, core PCE inflation, which strips out the volatile food and energy components, has underrun 2% and often by substantial amounts." Delong asks,<br />
<blockquote class="tr_bq">
And why the puzzlement at the failure of core inflation to rise to 2%? That is a puzzle only if you assume that you know with certainty that the unemployment rate is the right variable to put on the right hand side of the Phillips Curve. If you say that the right variable is equal to some combination with weight λ on prime-age employment-to-population and weight 1-λ on the unemployment rate, then there is no puzzle—there is simply information about what the current value of λ is.</blockquote>
It is not totally obvious why prime-age employment-to-population should drive inflation distinctly from unemployment--that is, why Delong's λ should not be zero, as in the standard Phillips Curve. Note that the employment-to-population ratio grows with the labor force participation rate (LFPR) and declines with the unemployment rate. Typically, labor force participation is mostly acyclical: its longer run trends dwarf any movements at the business cycle frequency (see graph below). So in a normal recession, the decline in the employment-to-population ratio is mostly attributable to the rise in the unemployment rate, not the fall in LFPR (so it shouldn't really matter if you simply impose λ=0).<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQ-LH-HoVcCY8XrbcQJmPSv4tqBV1ji61IolFMGAVEBA8wr_t2kKbdFxX-qKG6h6QUbNxMm6dDvdC5b84lMUc8MKzAxU7S8vOiZKYRxgOgWXh8n_QLm4i5Ch7jItMtY_-EuSjEBQlnFyA/s1600/fredgraph+%25289%2529.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="617" data-original-width="1600" height="246" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQ-LH-HoVcCY8XrbcQJmPSv4tqBV1ji61IolFMGAVEBA8wr_t2kKbdFxX-qKG6h6QUbNxMm6dDvdC5b84lMUc8MKzAxU7S8vOiZKYRxgOgWXh8n_QLm4i5Ch7jItMtY_-EuSjEBQlnFyA/s640/fredgraph+%25289%2529.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">https://fred.stlouisfed.org/series/LNS11300060</td></tr>
</tbody></table>
As <a href="https://www.imf.org/external/pubs/ft/wp/2013/wp13245.pdf" target="_blank">Christopher Erceg and Andrew Levin</a> explain, a recession of moderate size and severity does not prompt many departures from the labor market, but long recessions can produce quite pronounced declines in labor force participation. In their model, this gradual response of labor force participation to the unemployment rate arises from high adjustment costs of moving in and out of the formal labor market. But the Great Recession was protracted enough to lead people to leave the labor force despite the adjustment costs. According to their analysis:<br />
<blockquote class="tr_bq">
cyclical
factors can fully account for the post-2007 decline of 1.5 percentage points in
the LFPR for prime-age adults (i.e., 25–54 years old). We define the labor force
participation gap as the deviation of the LFPR from its potential path implied by
demographic and structural considerations, and we find that as of mid-2013 this gap
stood at around 2%. Indeed, our analysis suggests that the labor force gap and the
unemployment gap each accounts for roughly half of the current employment gap,
that is, the shortfall of the employment-to-population rate from its precrisis trend.</blockquote>
Erceg and Levin discuss their results in the context of the Phillips Curve, noting that "a large negative participation gap induces
labor force participants to reduce their wage demands, although our calibration
implies that the participation gap has less influence than the unemployment rate quantitatively." This means that both unemployment and labor force participation enter the right hand side of the Phillips Curve (and Delong's λ is nonzero), so if a deep recession leaves the LFPR (and, accordingly, the employment-to-population ratio) low even as unemployment returns to its natural rate, inflation will still remain low.<br />
<br />
Erceg and Levin also discuss implications for monetary policy design, considering the consequences of responding to the cyclical component of the LFPR in addition to the unemployment rate.<br />
<blockquote class="tr_bq">
We
use our model to analyze the implications of alternative monetary policy strategies
against the backdrop of a deep recession that leaves the LFPR well below its longer
run potential level. Specifically, we compare a noninertial Taylor rule, which responds
to inflation and the unemployment gap to an augmented rule that also responds to
the participation gap. In the simulations, the zero lower bound precludes the central
bank from lowering policy rates enough to offset the aggregate demand shock for
some time, producing a deep recession; once the shock dies away sufficiently, policy
responds according to the Taylor rule.
A key result of our analysis is that monetary policy can induce a more rapid closure
of the participation gap through allowing the unemployment rate to fall below its longrun
natural rate. Quite intuitively, keeping unemployment persistently low draws
cyclical nonparticipants back into labor force more quickly. Given that the cyclical
nonparticipants exert some downward pressure on inflation, some undershooting
of the long-run natural rate actually turns out to be consistent with keeping inflation
stable in our model.</blockquote>
While the authors don't explicitly use the phrase "full employment," their paper does provide a rationale for the low core inflation we're experiencing despite low unemployment. Erceg and Levin's paper was published in the <a href="http://onlinelibrary.wiley.com/doi/10.1111/jmcb.12151/pdf" target="_blank">Journal of Money, Credit, and Banking in 2014</a>; ungated working paper versions from 2013 are available <a href="https://ideas.repec.org/a/wly/jmoncb/v46y2014is2p3-49.html" target="_blank">here</a>.Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com12tag:blogger.com,1999:blog-5624436327404149621.post-54420606911692380892017-05-02T10:06:00.000-07:002017-06-06T13:29:16.212-07:00Do Socially Responsible Investors Have It All Wrong?<div class="tr_bq">
<a href="https://www.theguardian.com/environment/2015/jun/23/a-beginners-guide-to-fossil-fuel-divestment" target="_blank">Fossil fuels divestment</a> is a widely debated topic at many <a href="https://350philadelphia.wordpress.com/divest-from-fossil-fuels/divestment-on-campus/" target="_blank">college campuses</a>, <a href="https://campaigns.gofossilfree.org/petitions/haverford-college" target="_blank">including my own</a>. The push, often led by students, to divest from fossil fuels companies is an example of the <a href="https://en.wikipedia.org/wiki/Socially_responsible_investing" target="_blank">socially responsible investing</a> (SRI) movement. SRI strategies seek to promote goals like environmental stewardship, diversity, and human rights through portfolio management, including the screening of companies involved with objectionable products or behaviors.</div>
<br />
It seems intuitive that the endowment of a foundation of educational institution should not invest in a firm whose activities oppose the foundation's mission. Why would a charity that fights lung cancer invest in tobacco, for example? But in a recent Federal Reserve Board working paper, "<a href="https://www.federalreserve.gov/econres/feds/files/2017042pap.pdf" target="_blank">Divest, Disregard, or Double Down?</a>", <a href="https://www.federalreserve.gov/econres/brigitte-roth-tran.htm" target="_blank">Brigitte Roth Tran</a> suggests that intuition may be exactly backwards. She explains that "if firm returns increase with activities the
endowment combats, doubling down on the investment increases expected
utility by aligning funding availability with need. I call this 'mission hedging.'"<br />
<br />
Returning to the example of the lung-cancer-fighting charity, suppose that the charity is heavily invested in tobacco. If the tobacco industry does unexpectedly well, then the charity will get large returns on its investments <i>precisely when its funding needs are greatest</i> (because presumably tobacco use and lung cancer rates will be up).<br />
<br />
Roth Tran uses the Capital Asset Pricing Model to show that this mission hedging strategy "increases expected utility when endowment managers boost portfolio weights on firms
whose returns correlate with activities the foundation seeks to reduce." More specifically,<br />
<blockquote>
"foundations that do not account for covariance between idiosyncratic risk and marginal utility of assets will generally under-invest in high covariance assets. Because objectionable firms are more likely to have such covariance, firewall foundations will underinvest in these firms by disregarding the mission in the investment process. SRI foundations will tend to underinvest in these firms even more by avoiding them altogether."</blockquote>
Roth Tran acknowledges that there are a number of reasons that mission hedging is not the norm. First, the foundation may experience direct negative utility from investing in a firm it considers reprehensible-- or experience a "warm glow" from divesting from such a firm. Second, the foundation may worry that investing in an objectionable firm will hurt its fundraising efforts or reputation (if donors do not understand the benefits of mission hedging). Third, the foundation may believe that divestment will directly lower the levels of the objectionable activity, though this effect is likely to be very small. Roth Tran points out that student leaders of the Harvard fossil fuel divestment campaign acknowledged that the financial impact on fossil fuel companies would be negligible.<br />
<br />
<br />Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com9tag:blogger.com,1999:blog-5624436327404149621.post-66291702963807452562017-04-17T12:35:00.002-07:002017-04-17T12:35:56.459-07:00EconTalk on the Economics of Pope Francis<div class="tr_bq" dir="ltr">
Russ Roberts recently <a href="http://www.econtalk.org/archives/2017/03/robert_whaples.html" target="_blank">interviewed Robert Whaples</a> on the EconTalk podcast, which I have listened to regularly for years. I was especially interested when I saw the title of this episode, The Economics of Pope Francis, both because I am a Catholic and because I generally find Roberts' discussions of religion (from his Jewish perspective) interesting and so articulate that they help me clarify my own thinking, even if my views diverge from his. </div>
<div dir="ltr">
<br /></div>
<div dir="ltr">
In this episode, Roberts and <a href="http://users.wfu.edu/whaples/" target="_blank">Whaples</a>, an economics professor at Wake Forest and convert to Catholicism, discuss the Pope's 2015 encyclical <a href="https://laudatosi.com/watch" target="_blank">Laudato Si</a>, which focuses on environmental issues and issues of markets, capitalism, and inequality more broadly. Given Roberts' strong support of free markets in most circumstances, I was pleased and impressed that he did not simply dismiss the Pope's work as anti-market, <a href="https://www.forbes.com/sites/realspin/2016/03/11/against-the-catholic-grain-pope-francis-trumpets-socialism-over-capitalism/#2263c38042d3" target="_blank">as many have</a>. Near the end of the episode, Roberts says:</div>
<blockquote>
when I think about people who are hostile to capitalism, per se, I would argue that capitalism is not the problem. It's us. Capitalism is, what it's really good at, is giving us what we want--more or less...And so, if you want to change capitalism, you've got to change us. And that's--I really see that--I like the Pope doing that. I'm all for that.</blockquote>
<div>
I agree with Roberts' point that one place where religious leaders have an important role to play in the economy is in guiding the religious toward changing, or at least managing, their desires. Whaples discusses this too, summarizing the encyclical as being mainly about people's excessive focus on consumption:</div>
<blockquote>
It's mainly on the--the point we were talking about before, consuming too much. It's exhortation. He is basically saying what has been said by the Church for the last 2000 year...Look, you don't need all this stuff. It's pulling you away from the ultimate ends of your life. You are just pursuing it and not what you are meant, what you were created by God to pursue. You were created by God to pursue God, not to pursue this Mammon stuff.</blockquote>
<div>
Roberts and Whaples both agree that a lot of problems that are typically blamed on market capitalism could be improved if people's desires changed, and that religion can play a role in this (though they acknowledge that some non-religious people also turn away from materialism for various reasons.) Roberts' main criticism of the encyclical, however, is that: "The problem is the document has got too much other stuff there...it comes across as an institutional indictment, and much less an indictment of human frailty."</div>
<div>
<br /></div>
<div>
I would add, though, that just as markets reflect human wants, so do institutions, whether deliberately designed or developed and evolved more organically. So it is not totally clear to me that we can separate "indictment of human frailty" and "institutional indictment." No economic institutions are totally value-neutral, even free markets. Institutions and preferences <a href="http://samoa.santafe.edu/media/workingpapers/09-04-008.pdf" target="_blank">co-evolve</a>, and institutions can even <a href="http://www.homepages.ucl.ac.uk/~uctpsc0/Research/KCLLC.pdf" target="_blank">shape preferences</a>. And the Pope is of course the head of one of the oldest and largest institutions in the world, so it does not seem beyond his role to comment on institutions as an <i>integral</i> <i>part</i> of his exhortation to his flock.</div>
<div>
<br /></div>
Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com3tag:blogger.com,1999:blog-5624436327404149621.post-81704145180760224312017-04-07T04:26:00.001-07:002017-04-07T04:26:30.175-07:00Happiness as a Macroeconomic Policy ObjectiveEconomists have mixed opinions about the degree to which subjective wellbeing and happiness should guide policymaking. Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, and Ricardo Reis <a href="http://voxeu.org/article/views-happiness-and-wellbeing-objectives-macroeconomic-policy" target="_blank">summarize</a> a recent survey of European economists by the Centre for Macroeconomics and CEPR. They note that the survey "finds a reasonable amount of openness to wellbeing measures among European macroeconomists. On balance, though, there remains a strong sense that while these measures merit further research, we are a long way off reaching a point where they are widely accepted and sufficiently reliable for macroeconomic analysis and policymaking."<br />
<br />
As the authors note, the idea that happiness should be a primary focus of economic policy is central to Jeremy Bentham's "<a href="https://www.utilitarianism.com/jeremy-bentham/greatest-happiness.pdf" target="_blank">maximum happiness principle</a>." <a href="https://www.utilitarianism.com/jeremy-bentham/greatest-happiness.pdf" target="_blank">Bentham</a> is considered the founder of utilitarianism. Though the incorporation of survey-based quantitative measures of subjective wellbeing and life satisfaction is a relatively recent development in economics, utilitarianism, of course, is not. Notably, John Stuart Mill and many classical economists including William Stanley Jevons, Alfred Marshall, and Francis Edgeworth were deeply influenced by Bentham.<br />
<br />
These classical economists might have been perplexed to see the results of Question 2 of the recent survey of economists, which asked whether quantitative wellbeing analysis should play an important role in guiding policymakers in determining macroeconomic policies. The responses, shown below, reveal slightly more negative than positive responses to the question. And yet, what macroeconomists and macroeconomic policymakers do today descends directly from the strategies for "quantitative wellbeing analysis" developed by classical economists.<br />
<br />
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<tr><td><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYA79-cGN0Jr-LTfYLKNmJi9kL7fdidnSItUPFpw04KIvNW8aT8qzFNlhna44QAp7Du6EsUkCF3SL5RMqd7oW8Y1CsexVuzXqi4RtoHTg-gKt_emA4uAMOR-vZmmoZGUOm_3JXeymPSUU/s1600/happiness.PNG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="364" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYA79-cGN0Jr-LTfYLKNmJi9kL7fdidnSItUPFpw04KIvNW8aT8qzFNlhna44QAp7Du6EsUkCF3SL5RMqd7oW8Y1CsexVuzXqi4RtoHTg-gKt_emA4uAMOR-vZmmoZGUOm_3JXeymPSUU/s640/happiness.PNG" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="font-size: 12.8px;">Source: <a href="http://voxeu.org/article/views-happiness-and-wellbeing-objectives-macroeconomic-policy">http://voxeu.org/article/views-happiness-and-wellbeing-objectives-macroeconomic-policy</a></td></tr>
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In <a href="http://www.econlib.org/library/YPDBooks/Jevons/jvnPE1.html" target="_blank">The Theory of Political Economy</a> (1871), for example, Jevons wrote:<br />
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"A unit of pleasure or pain is difficult even to conceive; but it is the amount of
these feelings which is continually prompting us to buying and selling,
borrowing and lending, labouring and resting, producing and consuming; and
it is from the quantitative effects of the feelings that we must estimate their
comparative amounts."</blockquote>
Hence generations of economists have been trained in welfare economics based on <i>utility</i> theory, in which utility is an increasing function of consumption, u(c). Under neoclassical assumptions-- cardinal utility, stable preferences, diminishing marginal utility, and interpersonally comparable utility functions-- trying to maximize a social welfare function that is just the sum of all individual utility functions is totally Benthamite. And a focus on GDP growth is very natural, as more income should mean more consumption.<br />
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The focus on happiness survey data I think stems from recognition of some of the problems with the assumptions that allow us to link GDP to consumption to utility, for example, stable and exogenous preferences and interpersonally comparable utility functions (that depend exclusively on one's own consumption). One approach is to relax these assumptions (and introduce others) by, for example, using more complicated utility functions with additional arguments and/or changing preferences. So we see models with <a href="http://www.econ2.jhu.edu/people/ccarroll/public/LectureNotes/Consumption/Habits/" target="_blank">habit formation</a> and "<a href="https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp444.pdf?b1dd789a6b1b43f5b65caac58cd99eb5" target="_blank">keeping up with the Joneses</a>" effects.<br />
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Another approach is to ask people <i>directly</i> about their happiness. This, of course, introduces its own issues of methodology and interpretation, as many of the economist panelists <a href="http://voxeu.org/article/views-happiness-and-wellbeing-objectives-macroeconomic-policy" target="_blank">point out</a>. Michael Wickens, for example, notes that the “original happiness literature was in reality a measure of unhappiness: envy over income differentials, illness, divorce, being unmarried etc” and that “none of these is a natural macro policy objective.”<br />
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I think that responses to subjective happiness questions also include some backward-looking and some forward-looking components; happiness depends on what has happened to you and what you expect to happen in the future. This makes it hard for me to imagine how to design macroeconomic policy to formally target these indicators, and makes me tend to agree with Reis' opinion that they should be used as<span style="background-color: white; font-family: Arial, Verdana, Arial, Helvetica, sans-serif; font-size: 16px;"> </span>“complements to GDP though, not substitutes.”Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com3tag:blogger.com,1999:blog-5624436327404149621.post-88420910926102339522017-03-16T10:45:00.000-07:002017-03-16T10:45:46.671-07:00Cautious Optimism about Fed IndependenceUnsurprisingly, the <a href="https://www.federalreserve.gov/newsevents/press/monetary/20170315a.htm" target="_blank">FOMC decided</a> to raise its federal funds rate target by 25 basis points at its March 15 meeting. The move was <a href="http://economistsview.typepad.com/economistsview/2017/03/fed-watch-green-light-.html" target="_blank">widely anticipated</a>, especially following the strong recent employment report. The day before the meeting, the New York Times wrote that the "<a href="https://www.nytimes.com/2017/03/14/business/economy/fed-opposition-interest-rates.html?_r=0" target="_blank">Fed's challenge, after raising rates, may be existential</a>," anticipating greater-than-ever threats to the Fed's independence from the President and Congress.<br />
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In the past few years, Republicans have been more frequent critics of low interest rates than Democrats. During the campaign, in September, Trump <a href="http://www.huffingtonpost.com/entry/trump-yellen-should-be-ashamed_us_57d6c12be4b06a74c9f59bd6" target="_blank">accused Yellen</a> of keeping interest rates artificially low to boost support for Obama and the Democrats. However, a few months prior, in May, he <a href="https://www.wsj.com/articles/donald-trump-says-he-would-replace-janet-yellen-supports-low-interest-rates-1462465158?utm_source=huffingtonpost.com&utm_medium=referral&utm_campaign=pubexchange_article" target="_blank">expressed support</a> for the Fed's low interest rate policy, primarily because of its favorable impact of the U.S. trade position with China and on government borrowing costs.<br />
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And since the election, it can again be presumed that he favors the maintenance of low rates. Why? For the same reason that most Presidents favor lower rates--to boost employment and growth (at least in the short run), and, in turn, Presidential approval. This is exactly why most central banks are granted independence: if Presidents set monetary policy, it would tend to be too loose, and therefore inflationary.<br />
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With Trump, this desire to boost employment and growth as a means to gain personal approval is especially acute. Trump is brazen in his desire to pass off job growth as a marker of his personal success:<br />
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JOBS, JOBS, JOBS! <a href="https://t.co/wAkQMKdPXA">pic.twitter.com/wAkQMKdPXA</a></div>
— Donald J. Trump (@realDonaldTrump) <a href="https://twitter.com/realDonaldTrump/status/841665325682827265">March 14, 2017</a></blockquote>
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So the worry reflected in the New York Times piece and <a href="http://www.reuters.com/article/us-federal-reserve-commentary-idUSKBN16L2V0" target="_blank">elsewhere</a> is that by raising rates, Yellen and the Fed are opposing the President's desires and risking retribution. The retribution could come in the form of legislation that would reduce the Fed's power or discretion, or in the form of Presidential appointments to the Board of Governors who would be more susceptible to Presidential persuasion. Trump will also have the opportunity to reappoint or replace Yellen as Chair next year. It seems, at first blush, that Federal Reserve independence is in serious danger.<br />
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While I don't want to undersell that danger, I do want to point out reasons to maintain at least a drop of optimism. First, fear of Presidential or Congressional retribution did not lead the FOMC to avoid this rate hike. Yellen is not willing to play by Trump's rules to ensure her reappointment. That was probably already obvious to anyone familiar with her career and reputation, but it is still noteworthy enough to reflect on. While the Fed's <i>de jure</i> independence is in tact for now, its <i>de facto</i> independence seems to be as well.<br />
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Second, with a President this polarizing and with approval ratings so low, Presidential attacks on the Fed could actually be just what the Fed needs. So far, Trump has avoided tweeting about the FOMC decision. But suppose Trump does criticize the Fed on Twitter soon. This might not be all bad-- it could be a case of "all press is good press." The biggest obstacle to the Fed's communication strategy, and in turn to accountability, seems to be its lack of a broad audience, and Trump--with 27 million twitter followers to the <a href="https://twitter.com/federalreserve" target="_blank">Fed's</a> 402,000--could inadvertently provide the Fed with the communication platform it has so severely been lacking. The key will be for the Fed to use any newly-gained pulpit to convincingly argue why independence is worth protecting. This will be more effective if combined with discussions of how the Fed intends to hold itself more accountable to the public in the future.<br />
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Carolahttp://www.blogger.com/profile/12783977056485775882noreply@blogger.com3