The Fed’s QE2 Traders, Buying Bonds by the Billions – In a spare, government-issue office in Lower Manhattan, behind a bank of cubicles and a scruffy copy machine, Josh Frost and a band of market specialists are making the Fed’s ultimate Wall Street trade. They are buying hundreds of billions of dollars of United States Treasury securities on the open market in a controversial attempt to keep interest rates low and, in the process, revive the economy. To critics, it is a Hail Mary play — an admission that the economy’s persistent weakness has all but exhausted the central bank’s powers and tested the limits of its policy making. Around the world, some warn the unusual strategy will weaken the dollar and lead to crippling inflation. But inside the Operations Room, on the ninth floor of the New York Fed’s fortresslike headquarters, there is no time for second-guessing. Here the second round of what is known as quantitative easing — QE2, as it is called on Wall Street — is being put into practice almost daily by the central bank’s powerful New York arm
Is Income Redistribution the Key to Economic Growth? – That’s the thesis Mark Thoma puts forth in this article at the Fiscal Times. There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive – the most unequal distribution of income imaginable – will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.
State Of The Unions, by James Surowiecki: In the heart of the Great Depression, millions of American workers did something they’d never done before: they joined a union. Seventy-five years later, in the wake of another economic crisis, things couldn’t be more different. … In the recent midterm elections, voters in several states passed initiatives making it harder for unions to organize. Across the country, governors and mayors wrestling with budget shortfalls are blaming public-sector unions for the problems. And in polls public support for labor has fallen to historic lows. There are a couple of reasons for this. In the past, a sizable percentage of American workers belonged to unions, or had family members who did. Then, too, even people who didn’t belong to unions often reaped some benefit from them…: in heavily unionized industries, non-union employers had to pay their workers better in order to fend off unionization. Finally, benefits that union members won for themselves—like the eight-hour day, or weekends off—often ended up percolating down to other workers
Household Credit and Personal Saving – FRBSF Economic Letter – In the years since the bursting of the housing bubble, the personal saving rate has trended up from around 1% to around 6%, while the ratio of household debt to disposable income has dropped from 130% to 118%. Changes over time in the availability of credit to households can explain 90% of the variance of the saving rate since the mid-1960s, including the recent uptrend, according to a simple empirical model.
New Rules for the Global Economy – Dani Rodrik – Suppose that the world’s leading policymakers were to meet again in Bretton Woods, New Hampshire, to design a new global economic order. They would naturally be preoccupied with today’s problems: the eurozone crisis, global recovery, financial regulation, international macroeconomic imbalances, and so on. But addressing these issues would require the assembled leaders to rise above them and consider the soundness of global economic arrangements overall. Here are seven commonsense principles of global economic governance that they might agree on.
Economics and Morality – Paul Krugman – Mark Thoma directs me to Eric Schoeneberg, who argues that the right is winning economic debates because people believe, wrongly, that there’s something inherently moral about free-market outcomes. My guess is that this is only part of the story; there’s more than a bit of Ayn Randism on the right, but there’s also the appeal of simplicity: goldbuggism is intellectually easy, Keynesianism is intellectually hard, as evidenced by the inability of many trained economists to get it. Still, Schoeneberg is right about the tendency to ascribe moral value to market values, and the need for a counter-narrative. I’m going to think about that; but right now, let me describe how I see the US income distribution in terms of justice or the lack thereof.
Some evidence about state government spending multipliers – The findings should give the pain caucus some pause.Daniel Shoag:This paper employs a novel identification strategy to isolate exogenous and unexpected variation in state government spending. State governments manage large defined-benefit pension plans for which they bear the investment risk. Using a newly-collected dataset on the returns and portfolios of these plans, I show that the idiosyncratic component of their returns is a strong predictor of subsequentstate government spending. Instrumenting with this ‘windfall’ component of returns, I find that state government spending has a large positive effect on income and employment. Baseline estimates indicate that each dollar of spending raises in-state income by 2.12, and that 35,000 of spending generates one additional job. These effects are not due to in-state investment bias, are concentrated in the non-traded sector, and are larger during times of labor force ‘slack.’ Finally, I consider how these results compare with the predictions of a standard macroeconomic model and outline which features in the model are consistent with the empirical findings.
The effects of state budget cuts on employment and income – Balanced budget requirements lead to substantial pro-cyclicality in state government spending outside of safety-net programs. At the beginnings of recessions, states tend to experience unexpected deficits. While all states ultimately pay these deficits down, differences in the stringency of their balanced budget requirements dictate the pace at which they adjust. States with strict rules enact large rescissions to their budgets during the years in which adverse shocks occur; states with weak rules make up the difference during the following years. We use this variation to identify the impact of mid-year budget cuts on state income and employment. Our baseline estimates imply i) a state-spending multiplier of 1.7 and ii) that avoiding $25,000 in mid-year cuts preserves one job. These cuts are associated with shifts in the timing of government expenditures rather than differences in total spending over the course of the business cycle. Consequently, our results are informative about the potential gains from smoothing the path of state government spending. They imply that states could reduce the amplitude of business-cycle fluctuations by 15% if they completely smoothed their capital spending and service provision outside of safety-net programs.