Increase inflation AND combat structural issues

Inflation is below target. Increasing output and decreasing or stagnant inflation is an indication that inflation expectations are becoming unanchored. That’s bad. Inflation should not spend too long, too far from its implicit target of 2%.

Structural unemployment is high right now. Instead of just dumbly extending UI benefits and scratching our heads on why unemployment among the young is increasing after three subsequent increases in the real minimum wage, we should do something about it.

Politically — I’m only guessing because I’m no expert — dealing with structural unemployment would be cheaper. The Fed, more than anyone else, knows how to increase inflation and they have figured out the cheapest way to do it. You might think, however, there are personnel issues at the Fed, i.e. too many hawks, that make “doing the right thing” impossible. And so, you might think, political pressure would have an effect on policy in the short run. I’m not sure why you think that. The FOMC meets only ever so often and they never take radically new action one way or the other. Policy stickiness is one of the most reliable facts about Fed policy. According to Goodfriend and King, even Volcker’s radical disinflation started over a year after he became chairman (and it took another 1/2 year to start to see employment effects). BTW, we’re not changing the chairman for a long while and even supposing Bernanke was suddenly reborn a Sumnerian, how do you think employers would react if the Fed announced bold action one way or the other? Ditto for massive institutional changes at the Fed.

In any case, with the Bernanke Put getting close to its strike price, the monetary policy car is going in the right direction. Given the current institutional framework, political pressure is not going to speed the car up.

But we can do more about structural unemployment. All it would take is for some enterprising think-tank researcher to buddy up with a promising young politician ((I’m thinking there may be an “only Nixon can go to China” effect here, but I’m sure a charming Democrat could pull it off too)) and to come up with a bold plan to deal with it. Radical changes to the UI system. Radical policies to deal with labor immobility. Radical interventions in the housing market. If engineered and sold to help reduce unemployment and as a package deal, these policies would be supported by both sides.

PS – We shouldn’t look to Europe for examples for good labor market institutions… the EU’s unemployment rate is higher than the US’s right now.

Sentences of the day

From both the macro evidence and this body of micro–economic work, a large consensus—right or wrong—has emerged:
It holds that modern economies need to constantly reallocate resources, including labor, from old to new products, from bad to good firms. At the same time, workers value security and insurance against major adverse professional events, job loss in particular. While there is a trade-off between efficiency and insurance, the experience of the successful European countries suggests it need not be very steep. What is important in essence is to protect workers, not jobs

— From this neat summary of the experience with unemployment in Europe over the last several decades (and the changing intellectual story-telling that went with those trends)

Living on The Rock

On this day in 1938, Orwell was in Gibraltar and wrote:

Standard of living apparently not very low, no barefooted adults and few children. Fruit and vegetables cheap, wine and tobacco evidently untaxed or taxed very little (English cigarettes 3/- a hundred, Spanish 10d. a hundred), silk very cheap. No English sugar or matches, all Belgian. Cows’ milk 6d. a pint.

Jeez. In that one paragraph he beat Krugman to the “love of varieties” thing by about 40 years and he beat Broada and Romalis to the “price deflate using the basket of goods actually bought” thing by 70 years.

American exceptionalism

Growing up a red-blooded American, I believed America was a special place, a proud beacon shining the light of freedom upon humanity… or something. Anyway, I listened to Rush Limbaugh.

Then I went to Berkeley and they cured me of those ideas and I started listening to Democracy Now!.

Statistically, though, the U.S. is a special place. I don’t mean special in the we’re-an-outlier-in-the-good-way sense. I mean special in the why-the-hell-do-they-compare-Sweden (pop. 9m)-to-a-country-with-300m-people sense. We’re bigger than most everyone else. This means our political system is different (making our institutions different) than most other places, too. Scale suggests our “Parliament” shouldn’t spend much time debating airport expansions and hospital locations. Transportation and health care policy are delegated to the State level.

In comparing most policy differences, then, it makes sense to compare U.S. States to other countries, a la this map:

And in some cases, its more appropriate to compare U.S. cities to countries… like Sweden vs. New York City (population 8m).

Dick Marty

(I’m in Vegas… baby… but through the magic of WordPress, I’m still posting to my blog.)

Besides having two first names and being from my ancestral birth place (Canton Ticino), Dick Marty is known for creating a well-respected study of the CIA’s rendition program in Europe:

Our analysis of the CIA ‘rendition’ programme has revealed a network that resembles a ‘spider’s web’ spun across the globe. The analysis is based on official information provided by national and international air traffic control authorities, as well as on other information. This ‘web’ is composed of several landing points, which we have subdivided into different categories, and which are linked up among themselves by civilian planes used by the CIA or military aircraft.

Analysis of the network’s functioning and of ten individual cases allows us to make a number of conclusions both about human rights violations – some of which continue – and about the responsibilities of some Council of Europe Member states, which are bound by the European Convention on Human Rights and the European Convention for the Prevention of Torture.

The United States, an observer state of our Organisation, actually created this reprehensible network, which we criticise in light of the values shared on both sides of the Atlantic. But we also believe having established that it is only through the intentional or grossly negligent collusion of the European partners that this “web” was able to spread also over Europe.

Whilst hard evidence, at least according to the strict meaning of the word, is still not forthcoming, a number of coherent and converging elements indicate that secret detention centres have indeed existed and unlawful inter-state transfers have taken place in Europe. It is not intended to pronounce that the authorities of these countries are ‘guilty’ for having tolerated secret detention sites, but rather it is to hold them ‘responsible’ for failing to comply with the positive obligation to diligently investigate any serious allegation of fundamental rights violations.

The draft resolution and recommendation propose different measures so that terrorism can be fought effectively whilst respecting human rights at the same time.

How I Learned to Stop Worrying and Love the EU

My democratic instinct made me hate an institution that so often ignores the will of the people. Of course, reading Bryan Caplan’s Myth of the Rational Voter has mostly cured me of that instinct. But still, I didn’t like the EU until I read this article in the London Review of Books:

The standard argument [defending the non-democratic nature of the EU], to be found in journals such as Prospect, goes like this. The EU deals essentially with the technical and administrative issues – market competition, product specification, consumer protection and the like – posed by the aim of the Treaty of Rome to assure the free movement of goods, persons and capital within its borders. These are matters in which voters have little interest, rightly taking the view that they are best handled by appropriate experts, rather than incompetent parliamentarians. Just as the police, fire brigade or officer corps are not elected, but enjoy the widest public trust, so it is – at any rate tacitly – with the functionaries in Brussels. The democratic deficit is a myth, because matters which voters do care strongly about – pre-eminently taxes and social services, the real stuff of politics – continue to be decided, not at Union but at national level, by traditional electoral mechanisms. So long as the separation between the two arenas and their respective types of decision is respected, and we are spared demagogic exercises in populism – putting issues that the masses cannot understand, and that should never be on a ballot in the first place, to referenda – democracy remains intact, indeed enhanced. Considered soberly, all is for the best in the best of all possible Europes.

Since the Treaty of Maastricht, the Union has not by any means been confined to regulatory issues of scant interest to the population at large. It now has a Central Bank, without even the commitment of the Federal Reserve to sustain employment, let alone its duties to report to Congress, that sets interest rates for the whole Eurozone, backed by a Stability Pact that requires national governments to meet hard budgetary targets. In other words, determination of macroeconomic policy at the highest level has shifted upwards from national capitals to Frankfurt and Brussels. What this means is that just those issues that voters usually feel most strongly about – jobs, taxes and social services – fall squarely under the guillotines of the Bank and the Commission… The notion that today’s EU comprises little more than a set of innocuous technical rules, as value-neutral as traffic lights, is a fatuity.

Federalism stymied, inter-governmentalism corroded, what had emerged was neither the rudiments of a European democracy controlled by its citizens, nor the formation of a European directory guided by its powers, but a vast zone of increasingly unbound market exchange, much closer to a European ‘catallaxy’ as Hayek had conceived it.

Today’s EU, with its pinched spending (just over 1 per cent of Union GDP), minuscule bureaucracy (around 16,000 officials, excluding translators), absence of independent taxation, and lack of any means of administrative enforcement, could in many ways be regarded as a ne plus ultra of the minimal state… As a leading authority, Andrew Moravcsik, explains, ‘the neo-liberal bias of the EU, if it exists, is justified by the social welfare bias of current national policies,’ which ‘no responsible analyst believes can be maintained’ – ‘European social policy exists only in the dreams of disgruntled socialists.’ The salutary truth is that ‘the EU is overwhelmingly about the promotion of free markets. Its primary interest group support comes from multinational firms, not least US ones.’ In short: regnant in this Union is not democracy, and not welfare, but capital. ‘The EU is basically about business.’

And here’s a funny part about Europe’s dependence on America:

So natural has this asymmetrical symbiosis now become that the United States can openly specify what further states should join the Union. When Bush told European leaders in Ankara, at a gathering of Nato, that Turkey must be admitted into the EU, Chirac was heard to grumble that the US would not like being instructed by Europeans to welcome Mexico into the federation; but when the European Council met to decide whether to open accession negotiations with Turkey, Rice telephoned the assembled leaders from Washington to ensure the right outcome, without hearing any inappropriate complaints from them about sovereignty.

I encourage the interested reader to Read the Whole Thing. The author does a good job bursting the “Europe as shining beacon of hope for humanity” bubble. There’s a good section on the politics in Europe over Iraq and this line: “Pillars of society, pimping for torture.” Good stuff.

Americans work more than Europeans…

or do they?

The conventional view is that Americans work longer hours than Germans and other Europeans but when time in household production is included, overall working time is very similar on both sides of the Atlantic. Americans spend more time on market work but German invest more in household production. This paper examines whether these differences in the allocation of time can be explained by differences in the incentive structure, this is by the tax wedge and differences in the wage differentials, as economic theory suggests. Its analysis of unique time-use data reveals that the differences in time-allocation patterns can indeed be explained by economic variables.

This means its not culture.

(h/t The Economist)