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Research

Forward Guidance: Theory versus Reality

Michael Belongia and Peter Ireland | e21 | February 9, 2015

Mainstream monetary economics posits that the Federal Reserve influences economic activity by shaping expectations about the future.  According to theory, when the Fed provides “forward guidance” about the future course of monetary policy, consumers and producers adjust their spending, hiring, and investment decisions accordingly.  Forward guidance, in turn, can be communicated to the public via statements from Fed officials or public understanding of a policy rule that leads the Federal Open Market Committee to adjust its target for the federal funds rate.

Have 91% of Gains During the Recovery Gone to the Top?

Scott Winship | Forbes | January 27, 2015

Forgive me for going out of order and not taking up the Economic Policy Institute’s productivity/compensation chart as promised in my inaugural column in this series. But Berkeley economist Emmanuel Saez has published the latest estimates on income concentration in the United States, extending a series he has produced with Thomas Piketty.

http://www.economics21.org/files/pdf/e21_03.pdf

Welfare in America, 1998–2013: The Case for Further Reform

Diana Furchtgott-Roth | Economics21 | January 13, 2015

This paper examines the evolution of major U.S. welfare programs since 1998—shortly after the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), the 1996 federal welfare reform signed into law by President Clinton, went into effect.

The paper chronicles the average amount of aid provided, as well as length of time on public assistance, focusing on the following programs: SNAP; Temporary Aid to Needy Families, or TANF (established by PRWORA); Medicaid; and Section 8 Housing Choice Vouchers (HCV). The paper also reports on how welfare eligibility and enrollment have expanded significantly since the Great Recession began in late 2007.

Indeed, while the U.S. economy has since improved, participation in such programs has generally not declined. This paper concludes that there is ample scope for states to reform welfare, and it proposes two substantial changes: (1) cap welfare spending at the rate of inflation and the number of Americans in poverty; and (2) allow states to direct savings from welfare programs to other budget functions.

While politically challenging, such changes would allow states greater flexibility to better target the neediest, as well as stem the increasing flow of money into such programs. For instance, this paper finds that federal savings through 2013 would, after accounting for inflation and the number of Americans in poverty, total $1.3 trillion had welfare funding remained at 1998 levels.

Did Inequality Rob Middle-Class Households Of $18,000?

Scott Winship | Forbes | January 13, 2015

Last week, the Economic Policy Institute released a report on trends in wages, earnings, and incomes called, “Wage Stagnation in Nine Charts.” The report, by EPI president Larry Mishel, Elise Gould, and Josh Bivens is a greatest-hits compilation of EPI’s attempts to show that the American middle class is in trouble because of rising inequality.

http://www.economics21.org/files/pdf/Exiting%20from%20Low%20Interest%20Rates-15-2-2-1.pdf

Exiting from Low Interest Rates to Normality: An Historical Perspective

Michael D. Bordo | Mortimer Caplin Conference | January 12, 2015

The recent financial recession ended in 2009. It has been followed by close to six years of abnormally sluggish growth. To allay the crisis and contraction, the Federal Reserve drove short-term interest rates to the zero lower bound. To continue stimulating the economy, the Fed has followed a policy of quantitative easing (QE) which has more than tripled its balance sheet. The policy has kept both short-term and long-term interest rates at historically low levels. The U.S. economy is finally showing meaningful signs of recovery and, thus, the Fed stopped its QE policy at the end of October 2014. However, debate continues over the effectiveness of QE and the timing of the Fed’s return to normality either through an increase in its policy rate or by other means. This paper examines the exit debate by looking back at the experience of the 1930s and 1940s when the Fed, under Treasury control, kept interest rates at levels comparable to today and its balance sheet increased similarly. 

http://www.manhattan-institute.org/pdf/e21_02.pdf

Does Immigration Increase Economic Growth?

Diana Furchtgott-Roth | December 2, 2014

The question of how many legal immigrants should be admitted to the United States—and what level of skills these immigrants should have—is among the most divisive issues in the current U.S. domestic policy landscape. Much of the controversy that it sparks can be traced to a single question: Do immigrants help or harm the economy?

http://www.economics21.org/files/pdf/Trumka.pdf

Black Friday Letter from Richard Trumka

AFL-CIO | November 25, 2014
http://www.economics21.org/files/pdf/Kroger%20Dayton%20&%20UFCW%2075%20x15.PDF

Kroger UFCW Contract

UFCW | November 25, 2014

An Emerging Consensus: Medicare Advantage Is Working And Can Deliver Meaningful Reform

November 6, 2014

This was originally published in Health Affairs.

http://www.economics21.org/files/pdf/aov4.pdf

European Headwind: ECB Policy and Fed Normalization

Athanasios Orphanides | SOMC | November 3, 2014

It has been five years since the epicenter of the global financial crisis that erupted in late 2008 moved from the United States across the Atlantic.  Since then, while the U.S. economy has enjoyed recovery with steady growth, the euro area economy has languished, going through a double dip slump and currently at risk of falling back to an unprecedented triple dip recession.  The mismanagement of the euro area crisis has converted a relatively small and potentially easily manageable fiscal problem that originated in Greece into a systemic crisis for the euro area as a whole.  

http://www.economics21.org/files/pdf/Calomiris.pdf

Phony Deflation Worries

Charles W. Calomiris | SOMC | October 31, 2014

These days deflation risk is a concern that many central bankers, pundits, and journalists voice regularly.  Concern may be the wrong word; it might be better called an obsession. Central bankers – we are told – must battle deflation risk today at all costs because deflation slows growth, and may cause recessions and financial system collapses. As I will show in this essay, the economic risks associated with disinflation or deflation are being exaggerated by central bankers and others. 

http://www.economics21.org/files/pdf/Levy.pdf

Rate Hike Fears Are Unwarranted

Mickey D. Levy | SOMC | October 31, 2014

How often have we heard the phrase “if the Fed hikes rates too early, the economic recovery will be derailed”?  It’s ingrained into the Fed’s mindset and statements like it appear frequently in the media.  Yet the history of Fed rate hikes during prior economic expansions suggest that such fears are unwarranted, and the current 5 ½ year old expansion is on sound footing and would fare just fine and even be enhanced if the Fed began hiking rates.  Normalizing interest rates should be welcomed, not feared by the Fed.

http://www.economics21.org/files/pdf/Goodfriend.pdf

Monetary Policy as a Carry Trade

Marvin Goodfriend | SOMC | October 31, 2014

Quantitative monetary policy at the zero interest bound should be understood as a “bond market carry trade.” Net interest earnings on the front end of the monetary carry trade should be retained—to guard against the central bank having to create reserves (or borrow) to pay interest on reserves or managed liabilities on the back end, and to show that interest expenses are paid for in large part by earnings from the front end. In the United States, the Federal Reserve balance sheet reflects the front end of a carry trade in that by the end of 2014. The Fed has long asserted independent authority to retain net interest income thought necessary as surplus capital against prospective exposures on its balance sheet. The Fed recognizes that the retention of net interest earnings to build up surplus capital incurs no resource cost for the Treasury or taxpayers. Yet, the Fed has chosen not to build up surplus capital against the carry trade exposure and risk on its balance sheet, jeopardizing the operational credibility of monetary policy for price stability.

http://www.economics21.org/files/pdf/McCallum.pdf

Bitcoin Issues

Bennett T. McCallum | SOMC | October 31, 2014

The appearance of the Bitcoin system, which offers a radically new type of asset that is intended to be used not only as an investment but also as a medium of exchange—and whose operation lies entirely outside the domain of the Federal Reserve—is an extremely interesting recent development in the area of monetary institutions. As matters stand now, the quantitative magnitude of Bitcoin is extremely small in comparison with traditional assets. It must be said, nevertheless, that the development of the system reflects an extremely impressive intellectual achievement. 

http://www.economics21.org/files/pdf/Hess.pdf

Can We Trust the Fed?

Gregory D. Hess | SOMC | October 31, 2014

“In God We Trust” was first emblazoned on U.S. paper currency in 1957, and was steadily introduced to all U.S. paper currency by August of 1966.   How has this demonstrative, articulated trust in God underpinned the value of our currency? Trust in God, sadly it seems, has led to an over two-fold increase in the rate of deterioration in the value of our currency. Trust in God alone has not preserved the value of our currency – so in the spirit that we “render unto Caesar that which is Caeser’s” , trust in the Fed is likely more important to underpin the value of a dollar. But can we trust the Fed? 


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