Winter 2015

I am working on the syllabus and all that for Winter 2015. No texts, just readings, and more readings. I will emphasize three overlapping themes. One is to give an overview of “modern” macroeconomics and its strengths and weaknesses. Doing that begins with the Solow growth model, with overlapping generations models, with (rational) expectations and with making policy endogenous, eg the Taylor Rule. A second is to ask how we can know things in macroeconomics. We will have a bit of history of thought — the theory side — and a bit on empirical issues. Third, we will tie these together loosely by asking what the size is of the fiscal multiplier.

The output from your end will consist of blogging, short papers and presentations on macroeconomic issues, the formal course content, paired with developing (and presenting) a “capstone” research paper proposal of perhaps 20 pages in length, plus bibliography. For the latter, we will have a couple days devoted to mandatory one-on-one meetings (supplemented by office hours), in lieu of class meetings.

I will indicate here when I post a tentative schedule and syllabus.

The Law of Accelerating Returns

Robert Gordon sees the absence of significant growth prior to 1750 as evidence that “the rapid progress made over the past 250 years could well turn out to be a unique episode in human history (Gordon 2012).” However, another interpretation of the same data has led people like MIT professors Erik Brynjolfsson and Andrew McAfee to predict long run-growth. They interpret technological advancement as an exponential function. Exponential growth functions are not exceptional in their early stages, but in time they yield dramatic results. Google engineer and author Ray Kurweil made the bold prediction in 2001 that the exponential nature of technological change will result in 20,000 years of progress (at the 2001 rate of technological progress doubling every decade) over the course of the 21st century.
Techno-optimists look toward evolution as a precedent for the exponential growth. The development of DNA dramatically increased the rate of evolution, and it led to the relatively rapid development of complex organs like the brain(Kurweil, 9). However, unlike exponential growth in nature technological progress on the digital frontier will not be be as susceptible to scare resources.

“When businesses are based on bits instead of atoms, then each new product adds to the set of building blocks available to the next entrepreneur instead of depleting the stock of ideas the way minerals or farmlands are depleted in the physical world (Brynjolfsson, 4).”

“It took two centuries to fill the U.S. Library of Congress in Washington, D.C. with more than 29 million books and periodicals, 2.7 million recordings, 12 million photographs, 4.8 million maps, and 57 million manuscripts. Today it takes about 15 minutes for the world to churn out an equivalent amount of new digital information. It does so about 100 times every day, for a grand total of five exabytes annually. That’s an amount equal to all the words ever spoken by humans, according to Roy Williams, who heads the Center for Advanced Computing Research at the California Institute of Technology, in Pasadena. (Moran 2008).”

European Central Banks Poised to Implement QE

Several weeks ago, a major impediment to implementing a quantitative easing policy by the ECB was removed when the head of the typically conservative Bundesbank’s, Jens Weidmann, publicly announced his support for unconventional monetary policies if deflation continues to threaten the economy. The Bundesbank Chief’s change of heart seems to have had a significant influence on the remaining conservative members of the ECB policy board.

In the strongest signal yet, ECB president Mario Draghi declared that the 24 member governing council was united in its support for unconventional quantitative easing policies if inflation rates continue to decrease. Mr. Draghi went on to say “All instruments that fall within the mandate, including QE, are intended to be part of this statement.” However, the council did note that they have yet to exhaust conventional methods to combat low inflation and that unconventional monetary policies would only be implemented after trying additional rate cuts.

Mr. Draghi statement reveals that the ECB is willing to implement a quantitative easing policy not only if prices begin to fall but also if inflation remains low. Given that inflation rates in the Eurozone remain at 0.5%, less than a quarter of the ECB’s 2% target, and the near absence of price pressures in the economy, a quantitative easing policy in the Eurozone seems to be more and more likely.

Payrolls in U.S. Rose 192,000 in March, Unemployment 6.7%

Companies powered the U.S. job market past a milestone in March as private employment exceeded the pre-recession peak for the first time, showing the kind of progress Federal Reserve officials look for to maintain their current policy course.

Payrolls excluding government agencies rose by 192,000 workers after a 188,000 gain in February that was larger than first estimated, the Labor Department reported today in Washington. That brought the job count to 116.1 million, beating the January 2008 high of 116 million. The jobless rate held at 6.7 percent even as almost half a million people entered the workforce.

“The Fed doesn’t need to do anything at this point, it’s in a bit of a sweet spot,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, and the top payrolls forecaster in the last two years, according to data compiled by Bloomberg. “Growth looks like it’s back on track. Equally good news is that inflation is not a threat right now.”

All of March’s gains came from the private sector. That brought total private payrolls to 116.09 million, surpassing the former peak of 115.98 million in January 2008. Still, the gains haven’t kept pace with population growth. The civilian labor force has grown by roughly 2 million over the past six years.

Read more at:
Wall Street Journal

US Economy Job Growth Remains Slow and Steady

In the most recent jobs report, the US economy is said to have added 192,000 jobs in March. While, slightly below the expectation of 206,000 jobs, the report was slightly disappointing, with unemployment rates remaining stagnant at 6.7%.

However, the report shed a positive light on the US employment market by demonstrating the winter slowdown in job growth was likely due to bad weather. Furthermore, with revisions to previous reports adding 37,000 jobs to previous months, the overall message is that underlying growth is strong and the unemployment rate will continue to slowly, steadily decrease. In another positive sign for the labor market, there was an increase in labor force participation rates, which increased from 63 to 63.2 percent reaching the highest participation rates since last autumn. Most of this job growth came from the service and business service sector, the health and education sector, the leisure sector, and the construction sector.

Given that the job growth is in line with Fed forecast for economic growth, the Fed is likely to continue to slowly taper its expansive monetary polices over the next year, with interest rates expected to begin to rise sometime in 2015.

Head of IMF Says Global Growth Too Weak

The head of the IMF, Christine Lagarde, said Wednesday that the global economic recovery is not moving fast enough. She blames the crisis in Ukraine, low Eurozone inflation, and emerging market volatility. While she says that the global economy has turned the corner from recession and is stable, she also says that growth is too weak for comfort. She fears that without countries banding together to take the right policy measures, we will be facing years of slow and sub-par growth.

She also said that the IMF had forecasted higher growth than the 3% experienced in 2013 and urged the European Central Bank to further loosen their monetary policy to fight low inflation levels that are the lowest since November 2009. Next week, the IMF will hold their annual spring meetings and present their revised outlook for the global economy. Until then, this is all.

Trade Deficit in U.S. Unexpectedly Widened in February

The trade deficit in the U.S. unexpectedly widened in February to the highest level in five months as exports of fuels and capital equipment dropped.

The gap widened by 7.7 percent to $42.3 billion, the biggest since September, from the prior month’s $39.3 billion, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg survey of 69 economists called for a reduction to $38.5 billion. Imports were little changed.

“Trade is going to be a little bit of a drag for first-quarter growth,” said Guy Berger, a U.S. economist at RBS Securities in Stamford, Connecticut, who had forecast a widening of the gap. Beyond that, “factors favor a gradual narrowing of the trade deficit. Exports will increase as many of the emerging markets are still expanding, and while Europe is not doing great, it is growing. Imports will rise as the economy gets better.”

Service industries in the U.S. picked up in March after expanding at the slowest pace in four years, showing the biggest part of the economy was starting to thaw along with the weather, another report today showed. The Institute for Supply Management’s non-manufacturing index rose to 53.1 from 51.6 in February, the Tempe, Arizona-based group said today. Readings greater than 50 signal expansion. The median projection in a Bloomberg survey of economists called for a gain to 53.5.

Exports decreased 1.1 percent to $190.4 billion, depressed by declining sales of refined petroleum products. Fuel shipments to overseas customers had climbed in prior months as U.S. energy production grew.

Sales of U.S.-made products to buyers in South and Central America were the weakest since February 2011.

Read more at: Bloomberg

China Leverage Seen Rising Through 2016

China’s debt is poised to keep expanding faster than the economy through at least 2016, testing the limits of a credit-driven growth model that’s already exceeded the imbalances in Japan before its lost decade.

The combined ratio of government, corporate and household debt to gross domestic product is set to climb to 236.5 percent in 2016 from 225 percent last year, based on median estimates in a Bloomberg News survey of economists and analysts. Asked when the ratio will peak over the next decade, the largest proportion of respondents said 2018 or 2019.

“China needs to watch out — it has pushed the envelope,” said Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, who formerly worked at the World Bank and International Monetary Fund. “It needs to work on mitigating the risks, mitigating the excesses.”

China’s credit-to-GDP ratio rose to 187 percent in 2012 from 105 percent in 2000, compared with Japan’s increase to 176 percent in 1990 from 127 percent in 1980, JPMorgan economists wrote in a report last year.

“If the bulk of that increase will stem from business as usual,” with credit going to heavy industry or state-owned enterprises, “then a further buildup will increase the risks,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong.

Read more at: Bloomberg