Tuesday, October 21, 2014

Soda Calories and the Ethics of Nudge

The “surprisingly simple way to get people to stop buying soda,” according to a new and highly-hyped study, is to tell them how long they will have to run in order to burn off the calories in the soda. Since so many of my friends are economists, runners, or both, articles about this study ended up plastered all over my Facebook and Twitter pages, followed by a lot of commentary and debate. Some of the issues that came up included paternalism, the identification of social goods and ills, the replicability of field experiments on a larger scale or longer time frame, and the ethics of nudge policies.

My friend and classmate David Berger has allowed me to share his take:
Alright, this keeps coming up: public health types saying stupidly pessimistic things about the number of hours you have to burn off x amount of calories. Friends, it's easy to deceive yourself about how many calories you actually burn doing cardio. And then there's a whole bunch of people--treadmill manufacturers, for example--who want to inflate the numbers. But this trend of public health know-it-alls using the most pessimistic calculations needs to stop. It's just wrong. These people convinced teenagers that it would take 50 minutes of running to burn off one soda. They must be targeting non-runners. 
Actually, who they are targeting is baffling. They base their calculations on the activity-energy equivalents for a 110 pound fifteen year old. Nowhere do they indicate pace, although when I use the calculator on runner's world to give a 110 pound a 15 min/mile pace (a pace walkers in comfortable clothing can manage), it gives me 277 calories for 50 minutes. 
Let's do a real calculation. If you are less worried about 110 pounders drinking soda, try a 200 pounder. Let's give the same walking pace of 15 min/mile, and keep it at 50 minutes. 504 calories. Alternately, that's 25 minutes to work off a soda. 
Or, suppose you expect someone to aspire to something, and someone reading this public service message to know the difference between walking and running, and to be able to determine whether they can maintain a running pace for 50 minutes. I won't even make them a good runner, just a 12:30 min/mile, which someone starting out can manage in most cases. The same 50 minutes goes up to 605 calories. Granted 50 minutes might be much for someone starting out, but then they only need 21 minutes to manage a 250 calorie soda. 
Now, calories/hour will be lower if you weigh less than 200 pounds. But then you will probably be able to run faster than 12:30. I understand this push society is making overall: there's too much false hope in the ability of exercise to compensate for constantly immoderate caloric choices, and there's too much acceptance of empty nutrition (like soda) as a source of calories. But if the next heavy-handed social tactic is outright lying, can we please just not?

Wednesday, October 1, 2014

The Brazilian Election and Central Bank Independence

From my post at the Berkeley Center for Latin American Studies (CLAS) blog:
Brazilians will head to the polls on October 5 to vote in a tight presidential race. President Dilma Rousseff’s leading challenger is Socialist Party candidate Marina Silva. A key component of Silva’s economic platform is her support for a more independent central bank. Central bank independence, long a topic of interest to economists, is now capturing wide public attention — and for good reason...
You can read the rest at the CLAS blog. There is also a lot of interesting material there about the economics, culture, and politics of Latin America. For example, there's a video of a recent CLAS seminar by Professor João Saboia on "Macroeconomics, the Labor Market, and Income Distribution in Brazil." I wrote an article on his lecture that will appear in a forthcoming issue of the Berkeley Review of Latin American Studies. Since CLAS is a collaboration between professors and graduate students in many different departments at Berkeley, there is a great mix of material there on cinema, literature, the environment, policy, etc.

Friday, September 26, 2014

Targeting Two

In the Washington Post, Jared Bernstein asks why the Fed's inflation target is 2 percent. "The fact is that the target is 2 percent because the target is 2 percent," he writes. Bernstein refers to a paper by Laurence Ball suggesting that a 4% target could be preferable by reducing the likelihood of the economy running up against the zero lower bound on nominal interest rates.

Paul Krugman chimes in, adding that a 2 percent target:
"was low enough that the price stability types could be persuaded, or were willing to concede as a possibility, that true inflation — taking account of quality changes — was really zero. Meanwhile, as of the mid 1990s modeling efforts suggested that 2 percent was enough to make sustained periods at the zero lower bound unlikely and to lubricate the labor market sufficiently that downward wage stickiness would have minor effects. So 2 percent it was, and this rough guess acquired force as a focal point, a respectable place that wouldn’t get you in trouble. 
The problem is that we now know that both the zero lower bound and wage stickiness are much bigger issues than anyone realized in the 1990s."
Krugman calls the target "the terrible two," and laments that "Unfortunately, it’s now very hard to change the target; anything above 2 isn’t considered respectable."

Dean Baker also has a post in which he explains that Krugman's discussion of the 2 percent target "argues that it is a pretty much arbitrary compromise between the idea that the target should be zero (the dollar keeps its value constant forever) and the idea that we need some inflation to keep the economy operating smoothly and avoid the zero lower bound for interest rates. This is far too generous... Not only is there not much justification for 2.0 percent, there is not much justification for any target."

I'll add three papers, in reverse chronological order, that should be relevant to this discussion. Yuriy Gorodnichenko, Olivier Coibion, and Johannes Wieland have a 2010 paper called, "The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise their Inflation Targets in Light of the ZLB?" They say the answer is probably no:
The optimal inflation rate implied by the model is 1.2% per year which is within, but near the bottom, of the range of implicit inflation targets used by central banks in industrialized countries of 1-3% per year. In addition, the welfare loss from higher inflation rates is non-trivial: raising the target rate from 1.2% to 4% per year is equivalent to permanently reducing consumption by nearly 2%. In short, using a calibrated model of the U.S. economy which balances the costs of inflation arising from infrequent adjustment of prices against the benefit of reducing the frequency of hitting the ZLB yields an optimal inflation target which is certainly no higher than what is currently in use by central banks.
Their model balances the costs of inflation that arise from infrequent price adjustment against the benefit of reducing the frequency of hitting the zero lower bound. In the model, at 0 percent inflation, the zero lower bound would be binding 15 percent of the time, while at 3.5 percent  inflation, the bound would bind 4 percent of the time, but the costs from price stickiness would be high. They compute that welfare would be maximized at 1.2 percent inflation.

Another paper, which I would guess influenced some people at the Fed, is by George Akerlof, William Dickens, and George Perry in 2000. They build a model in which some agents in the economy are "near rational" instead of fully rational in the way they think about inflation:
"when inflation is low it is not especially salient, and wage and price setting will respond less than proportionally to expected inflation. At sufficiently high rates of inflation, by contrast, anticipating inflation becomes important and wage and price setting responds fully to expected inflation."
As a result, there is some moderate positive level of inflation that is optimal for employment. They estimate that this optimal rate of inflation is between 1.6 and 3.2 percent.

The first few sections of the Akerlof et al. paper are interesting in that they discuss how psychologists and economists have different approaches to the way they think about people's decisionmaking. The model in the paper tries to take a more realistic, but still relatively simple, approach to how people make decisions based on their inflation expectations. I wouldn't be surprised if this paper influenced the adoption of the 2% target.

And then, of course, is John Taylor's 1993 paper, "Discretion versus Policy Rules in Practice." Just about everyone at the Fed must have read it at some point. Here's his original Taylor rule from page 202:

If GDP is at target, the rule suggests raising the federal funds rate if inflation is above 2 percent and lowering it if inflation is less than 2 percent. He calls 2 percent the Fed's implicit target. Later he writes that "Given biases...in measuring prices, the 2-percent per year implicit inflation target rate is probably very close to price stability or zero inflation" (p. 210). This is probably where Krugman gets his argument that 2 percent "was low enough that the price stability types could be persuaded, or were willing to concede as a possibility, that true inflation — taking account of quality changes — was really zero." More importantly, this paper probably helped propagate the idea that the Fed has had an implicit 2 percent inflation target since at least the early 1990s. So when deciding on an explicit target in 2012, 2 percent seemed a natural choice.

Tuesday, September 16, 2014

(New) Economic Thinking

In "Can New Economic Thinking Solve the Next Crisis?," Mark Thoma writes:
There has been quite a bit of criticism directed at the tools and techniques that macroeconomists use, e.g. criticism of dynamic stochastic general equilibrium (DSGE) models, but that criticism is misplaced. The tools and techniques that macroeconomists use are developed to answer specific questions. If we ask the right questions, then we will find the tools and techniques needed to answer them.  
The problem with macroeconomics is not that it has become overly mathematical – it is not the tools and techniques we use to answer questions. The problem is the sociology within the economics profession that prevents some questions from being asked. Why, for example, were the very questions we needed to ask prior to the Great Recession ridiculed by important voices within the profession?
Since I didn't start studying economics until the Great Recession was in full swing, I don't have a full perspective on "new economic thinking" compared to old, or on what it was like to be in the economics profession prior to the Recession. I only gain second-hand perspective through reading and through studying economic history (which at Berkeley, coincidentally, is largely supported by the Institute for New Economic Thinking).  Thoma's article was prompted by the Rethinking Economics conference, but for me, I'm still learning how to think economics, much less rethink it.

One course that was particularly helpful in shaping my economic thinking was an elective on Empirical Macrofinance taught by Atif Mian. He made a point on one of the first days of class that really stood out. He told us not to see what questions we could answer with the data we have, but rather, to start with the question, and then think about what data we needed to answer it. More often than not, we'd need microdata. Not a problem! We are not in a data-scarce environment!

Mian's work with Amir Sufi on the role of household debt in the Great Recession is a great example of both his point and Thoma's point: start with the question, then choose your tools, techniques, and data. I realize this is easier said than done (trust me, I really do, after spending the last few years trying to implement it in my dissertation), but to me, that's just economic thinking.

Speaking of my dissertation, I'm preparing to go on the job market this year, which is why the blogging has been a bit less frequent! While the preparation is a lot of work, I am fortunate to be very enthusiastic about my research, because I did start with questions I care about, so working on it is a joy, even if it takes away blogging time. Eventually I will blog about my research, just not quite yet.

Tuesday, August 19, 2014

Wage Inflation and Price Inflation

Real wage growth has been disappointingly flat since the Great Recession. Reuters reports that "Most economists do not expect the U.S. central bank to raise benchmark rates until around the middle of next year, given sluggish wage growth." If and when wage growth picks up, I anticipate many debates about the relationship between wage inflation and price inflation by Fed officials and Fed-watchers. The Wall Street Journal blog recently wrote about how Fed-watchers should pay attention to wage growth as an indicator of inflation pressures:
Wage growth is a sign of labor market health but also spills into the Fed’s other mandate: price stability. Labor costs are the driver of costs for most businesses overall. Bigger pay gains push businesses to mark up their own selling prices, leading to higher inflation overall.
But the transmission of wage growth to growth in prices is not straightforward or perfectly understood. It is not safe to assume that firms translate some fixed proportion of labor cost increases into price increases. A 1997 New York Fed study called "Do Rising Labor Costs Trigger Higher Inflation?" found that the answer to its title question is, "It depends." There are several major groups of industries for which labor cost increases and price increases are not directly linked. In industries with high import-penetration ratios, global competition limits firms' abilities to translate higher unit labor costs into higher prices. In some large industries such as utilities, public transportation, and medical care, the government plays a large role in setting prices, so there is not a direct transmission of increased labor costs into increased prices. Housing prices are little affected by rising labor costs because the short-run supply of housing is essentially fixed, so prices depend more on land values and material costs than on labor costs. And finally, some firms are able to respond to labor cost increases by taking steps to increase productivity to maintain profitability without raising prices. The study finds that only in the service sector are cost increases easily passed on to customers.

The relationship between wage inflation and price inflation may be even more tenuous in the context of the post-Great Recession labor market. A new Cleveland Fed study that just came out today, by Edward Knotek II and Saeed Zaman, readdresses the question of whether rising labor costs trigger higher inflation. They look at the cross-correlations of inflation and various wage measures. Their cross-correlation graphs below are meant to show how inflation is correlated with future or past wage growth, as an indication of whether price inflation predicts wage inflation or vice versa. Using data from 1960-present, there is moderate positive correlation at several leads and lags, suggesting that price inflation and wage inflation move together, without one clearly preceding the other. When they use data only from 1984-present, the correlations are still positive, but smaller, indicating a weaker relationship between wage inflation and price inflation in more recent decades.


While Knotek and Zaman only break the time sample into pre- and post-1984, there is reason to believe that the relationship between wage and price inflation may have changed since the Great Recession. For instance, the figure below, from Cleveland Fed researchers, shows that labor income as a share of total income is extremely low by historical standards. This means that firms facing rising labor costs may have a bit more flexibility than usual to absorb the cost increases rather than passing them on to customers.

Several Federal Reserve surveys attempt to gauge firms' perceptions and expectations of their cost increases and price changes. The New York Fed's Empire State Manufacturing Survey is a monthly survey sent to about 200 manufacturing executives in New York State. The executives are asked about current business conditions and their expectations of conditions in six months. Several of the questions ask about prices paid (for inputs) and prices received (for sales).

In the just-released August survey, 30% of firms say they are paying higher prices, but only 16% say they are receiving higher prices. And 47% expect to pay higher prices six months from now, but only 31% expect to receive higher prices. The discrepancy between changes in prices paid and changes in prices received suggests that these firms will not be fully passing on increased input costs to customers. A supplemental section of the Empire State Manufacturing Survey this month asked firms about their response to the Affordable Care Act, and 36% said they will increase or have increased the prices they charge to customers as a result of the Act.

The Atlanta Fed also surveys businesses about cost and price expectations.  This survey asks respondents how various factors will influence the prices they charge over the next 12 months. Just over half of firms expect labor costs to have a "moderate upward influence" on the prices they charge, and another third of firms expect labor costs to have little or no influence on the prices they charge. Meanwhile, 64% of firms expect non-labor costs to have moderate upward influence on the prices they charge and 24% expect non-labor costs to have little or no influence. A special question on the latest round of the Atlanta Fed survey asked about year-ahead compensation expectations. Firms expect an average 2.8% compensation growth (see figure below).

An important takeaway from Knotek and Zaman's study is that "given wages’ limited forecasting power, they are but one piece in a larger puzzle about where the economy and inflation are going."

Wednesday, July 23, 2014

Yellen's Storyline Strategy

Storyline, launched this week at the Washington Post, is "dedicated to the power of stories to help us understand complicated, critical things." Storyline will be a sister site to Wonkblog, and will mix storytelling and data journalism. The editor, Jim Tankersley, introduces the new site:
"We’re focused on public policy, but not on Washington process. We care about policy as experienced by people across America. About the problems in people’s lives that demand a shift from government policymakers and about the way policies from Washington are shifting how people live. 
We’ll tell those stories at Web speed and frequency. 
We’ll ground them in data — insights from empirical research and our own deep-dive analysis — to add big-picture context to tightly focused human drama."
I couldn't help but be reminded of Janet Yellen's first public speech as Fed chair on March 31. She took the approach Tankersley is aiming for. She began with the data:
"Since the unemployment rate peaked at 10 percent in October 2009, the economy has added more than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points to 6.7 percent. That progress has been gradual but remarkably steady--February was the 41st consecutive month of payroll growth, one of the longest stretches ever....But while there has been steady progress, there is also no doubt that the economy and the job market are not back to normal health. That will not be news to many of you, or to the 348,000 people in and around Chicago who were counted as looking for work in January...The recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics. At 6.7 percent, the national unemployment rate is still higher than it ever got during the 2001 recession... Research shows employers are less willing to hire the long-term unemployed and often prefer other job candidates with less or even no relevant experience."
Then she added three stories:
"That is what Dorine Poole learned, after she lost her job processing medical insurance claims, just as the recession was getting started. Like many others, she could not find any job, despite clerical skills and experience acquired over 15 years of steady employment. When employers started hiring again, two years of unemployment became a disqualification. Even those needing her skills and experience preferred less qualified workers without a long spell of unemployment. That career, that part of Dorine's life, had ended. 
For Dorine and others, we know that workers displaced by layoffs and plant closures who manage to find work suffer long-lasting and often permanent wage reductions. Jermaine Brownlee was an apprentice plumber and skilled construction worker when the recession hit, and he saw his wages drop sharply as he scrambled for odd jobs and temporary work. He is doing better now, but still working for a lower wage than he earned before the recession. 
Vicki Lira lost her full-time job of 20 years when the printing plant she worked in shut down in 2006. Then she lost a job processing mortgage applications when the housing market crashed. Vicki faced some very difficult years. At times she was homeless. Today she enjoys her part-time job serving food samples to customers at a grocery store but wishes she could get more hours."
The inclusion of these anecdotes was unusual enough for a monetary policy speech that Yellen felt obligated to explain herself, in what could be a perfect advertisement for Storyline.
"I have described the experiences of Dorine, Jermaine, and Vicki because they tell us important things that the unemployment rate alone cannot. First, they are a reminder that there are real people behind the statistics, struggling to get by and eager for the opportunity to build better lives. Second, their experiences show some of the uniquely challenging and lasting effects of the Great Recession. Recognizing and trying to understand these effects helps provide a clearer picture of the progress we have made in the recovery, as well as a view of just how far we still have to go."
Recognition of the power of story is not new to the Federal Reserve. I noted in a January 2013 post that the word "story" appears 82 times in 2007 FOMC transcripts. One member, Frederic Mishkin, said that "We need to tell a story, a good narrative, about [the forecasts]. To be understood, the forecasts need a story behind them. I strongly believe that we need to write up a good story and that a good narrative can help us obtain public support for our policy actions—which is, again, a critical factor."

But Yellen's emphasis on personal stories as a communication device does seem new. I think it is no coincidence that her husband, George Akerlof, is the author (with Rachel Kranton) of Identity Economics, which "introduces identity—a person’s sense of self—into economic analysis." Yellen's stories of Dorine, Jermaine, and Vicki are stories of identity, conveying the idea that a legitimate cost of a poor labor market is an identity cost. 

Saturday, July 19, 2014

The Most Transparent Central Bank in the World?

At a hearing before the House Financial Services Committee on Wednesday, Federal Reserve Chair Janet Yellen called the Fed the "the most transparent central bank to my knowledge in the world.” I'll try to evaluate her claim in this post. For context, the hearing focused on legislation proposed by House Republicans called the Federal Reserve Accountability and Transparency Act, which would require the Fed to choose and disclose a rule for making policy decisions. Alan Blinder explains:
"A 'rule' in this context means a precise set of instructions—often a mathematical formula—that tells the Fed how to set monetary policy. Strictly speaking, with such a rule in place, you don't need a committee to make decisions—or even a human being. A handheld calculator will do."
Blinder, who has long advocated central bank transparency, calls FRAT an "unneccessary fix" for the Fed. Discretion by an independent Fed needs not impede or preclude transparency, and the imposition of rules-based policy would not guarantee improved accountability and transparency.

What about Yellen's description of the Fed as the most transparent central bank in the world? Is it reasonable?  Nergiz Dincer and Barry Eichengreen have constructed an index of transparency for more than 100 central banks. Updates to the index, released earlier this year, cover the years 1998 to 2010.

Dincer and Eichengreen rate transparency on a scale of 0 (lowest) to 15 (highest). The 15-point transparency scale is based on awarding up to 3 points in each of the following components:

  1. Political transparency: statement of objectives and prioritization, quantification of primary objective, and explicit contracts between monetary authority and government
  2. Economic transparency: publication of central bank data, models, and forecasts
  3. Procedural transparency: use of an explicit policy rule or strategy, and transparency over the decision-making process and deliberations
  4. Policy transparency: prompt announcement and explanations of decisions and intentions; 
  5. Operational transparency: regular evaluation of the extent to which targets have been achieved, provision of information on disturbances that affect monetary policy transmission, and evaluation of policy outcomes
The most transparent central banks as of 2010 are the Swedish Riksbank (14.5), the Reserve Bank of New Zealand (14), the Central Bank of Hungary (13.5), the Czech National Bank (12), the Bank of England (12), and the Bank of Israel (11.5).

The Federal Reserve, with a transparency score of 11, is tied for 7th with the ECB, the Bank of Canada, and the Reserve Bank of Australia. In 1998, the Fed's score was 8.5, and has held steady at 11 since 2006. So it is certainly reasonable to say that the Fed is among the most transparent central banks in the world. And since we can interpret transparency subjectively, and any rating scale has some degree of arbitrariness, these ratings don't disprove Yellen's claim.

The ratings were made in 2010. The Fed earned 1 out of 3 points in the political transparency category, 2.5 of 3 in procedural transparency, 1.5 of 3 in operational transparency, and perfect scores in the other categories.  The Fed's score should improve at the next update, since the January 2012 announcement of a quantitative 2% inflation goal may restore some partial credit in the political transparency category. A perfect 15 is not necessarily desirable. For example, one point in the political transparency category can only be awarded if the bank has either a single explicit objective or explicitly ranks its objectives in order or priority. Most banks that earn that point explicitly target inflation. To earn that point, the Fed would have to formally declare its price stability mandate a higher priority than its maximum employment mandate (or vice versa, which seems highly unlikely), while the Congressional mandate in the Federal Reserve Act does not prioritize one over the other.