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A few weeks ago, I received an e-mail inviting me to sign a statement drafted by a group calling itself “Economists Concerned by Hillary Clinton’s Economic Agenda.” The statement, a vaguely worded five paragraph denunciation of Democratic policies (and proposed policies) is unremarkable — as are the authors, a collection of reliably conservative policy makers and commentators whose support for Donald Trump appear with some regularity in the media.

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have not yet seen Lin-Manuel Miranda’s hit Broadway show Hamilton. I feel badly about this for three reasons. First, Miranda is a 2002 Wesleyan graduate, a loyal and generous alumnus who gave a great commencement speech in 2015 and remains solidly committed to the university. Second, the music and lyrics are, quite simply, amazing. Third, as an economic historian, it is heartening to see one of America’s economic heroes make it to Broadway.

The post Alexander Hamilton and the public debt appeared first on OUPblog.

have not yet seen Lin-Manuel Miranda’s hit Broadway show Hamilton. I feel badly about this for three reasons. First, Miranda is a 2002 Wesleyan graduate, a loyal and generous alumnus who gave a great commencement speech in 2015 and remains solidly committed to the university. Second, the music and lyrics are, quite simply, amazing. Third, as an economic historian, it is heartening to see one of America’s economic heroes make it to Broadway.

The post Alexander Hamilton and the public debt appeared first on OUPblog.

Milton Friedman is regarded as one of the most prominent economists of the twentieth century, contributing to both economic theory and policy. 31st July is his birthday, and this year marks 10 years since his death, and 40 years since he won the Nobel Prize for Economics for his contributions to consumption analysis and to monetary theory and history.

The post How much do you know about Milton Friedman? [quiz] appeared first on OUPblog.

The 2008 global economic crisis has been the most severe recession since the Great Depression. Notwithstanding its dramatic effects, cross-country analyses on its heterogeneous impacts and its potential causes are still scarce. By analysing the geography of the 2008 crisis, policy-relevant lessons can be learned on how cities and regions react to economic shocks in order to design adequate responses.

The post Austerity and the slow recovery of European city-regions appeared first on OUPblog.

In the 1983 movie The Right Stuff, during a test of wills between the Mercury Seven astronauts and the German scientists who designed the spacecraft, the actor playing astronaut Gordon Cooper asks: “Do you boys know what makes this bird fly?” Before the hapless engineer can reply with a long-winded scientific explanation, Cooper answers: “Funding!” If an economist were asked, “Do you know what makes this economy fly?” the answer, in one word, would be “trust.”

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One of the most striking structural weaknesses uncovered by the euro crisis is the lack of consistent banking regulation and supervision in Europe. Although the European Banking Authority has existed since 2011, its influence is often trumped by national authorities. And many national governments within the European Union do not seem anxious to submit their financial institutions to European-wide regulation and supervision.

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Do neighbourhoods matter to outcomes? Which classroom interventions improve educational attainment? How should we raise money to provide important and valued public goods? Do energy prices affect energy demand? How can we motivate people to become healthier, greener, and more cooperative? These are some of the most challenging questions policy-makers face. Academics have been trying to understand and uncover these important relationships for decades.

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The industrialized world is currently moving through a period of ultra-low interest rates. The main benchmark interest rates of central banks in the United States, the United Kingdom, Japan, and the euro-zone are all 0.50% or less. The US rate has been near zero since December 2008; the Japanese rate has been at or below 0.50% since 1995. Then there are the central banks that have gone negative: the benchmark rates in Denmark, Sweden, and Switzerland are all below zero. Other short-term interest rates are similarly at rock-bottom levels, or below.

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Last month, the European Central Bank (ECB) announced its plans to commence a €60 billion (nearly $70 billion) of quantitative easing (QE) through September 2016. In doing so, it is following in the footsteps of American, British, and Japanese central banks all of which have undertaken QE in recent years. Given the ECB’s actions, now is a good time to review quantitative easing. What is it? Why has the ECB decided to adopt this policy now? And what are the likely consequences for Europe and the wider world?

What is quantitative easing (QE)?

Under normal circumstances, central banks undertake monetary policy via open market operations. This typically involves buying (or selling) securities in a short-term money market to lower (or raise) the interest rate prevailing in that market. Central banks are well equipped to do this. They have large inventories of securities that they can easily sell in order withdraw money from the market and push interest rate up. They also have a monopoly on the creation of their particular currency, which they can use to buy securities and push the interest rate down. Open market purchases and sales usually only last for a day or two (through repurchase agreements, or repos), but can be repeated as often as necessary and adjusted in size to achieve the targeted rate.

For an economy that is mired in recession, open market purchases can be a good policy move: buying securities lowers short-term interest rates and increases the money supply. In time, such expansionary monetary policy can also reduce longer-term interest rates, which may stimulate spending on new houses, factories, and equipment, since such investment spending is often made with borrowed money. Expansionary monetary policy will also lead to a decline in the value of the domestic currency on international markets (i.e., depreciation), which will help domestic exports. Too much sustained monetary expansion can lead to inflation, which is one of the main risks of this policy.

In the current economic climate, however, short-term interest rates are already hovering around zero. Although some central banks have flirted with the idea of negative interest rates, there is not much room for conventional expansionary monetary policy to do much good.

Enter quantitative easing. Using quantitative easing, central banks purchase longer-term securities and, unlike open market operations, the purchases are usually permanent instead of for just a few days. This lowers longer-term interest rates. Since individuals and firms that borrow money to invest in homes, factories, and equipment generally do not finance these long-loved assets with overnight borrowing (for mortgages, 15- and 30-year terms are more typical), lowering longer-term interest rates may be a good way to stimulate such long-term investment.

Why now?

The European economy is listless. GDP appears to have grown—just barely—during the year just finished. Although 2014’s performance was an improvement over 2013’s decline in GDP, the EU’s growth forecasts for 2015 and 2016 are far from rosy. The job market is sluggish: EU-wide unemployment was 11.6% in 2014, down slightly from 12.0% in 2013. And a pick-up in inflation, which should accompany growth, was absent in 2014: the authorities have set a 2.0% for inflation; instead prices rose by an anemic 0.4% in 2014. Several countries have made progress toward much-needed structural reform; however, it is not clear that such reforms alone will get the European economy out of the doldrums anytime soon.

Other dangers facing the European economy also argue in favor of quantitative easing. To the east, tensions with Russia could flare at any time. The terrorist attacks in France have given a boost to right-wing parties throughout Europe, another threat to stability. And the election victory of the anti-austerity Syriza party in Greece, suggests that relations between Greece and the EU are about to get rockier.

What are the consequences?

Quantitative easing will strengthen Europe’s wobbly recovery. The announcement quickly lifted European stock markets—the Euro Stoxx 50-share index rose 1.6% on the news. Lower longer-term interest rates should encourage more borrowing and investment spending. And QE will lead to a continued depreciation in the value of the euro, already at a decade-low against the US dollar, which will make European exports more competitive in world markets. The results will not be so pleasant for American exports, since the euro’s depreciation will cut into recent American export growth, which has benefitted from three rounds of American QE, the last of which ended a few months ago.

Quantitative easing will not sit well with all Euro-zone countries. Germany, which is economically far more robust than its European partners, is not a fan of QE. Memories of a destructive hyperinflation in the 1920s still linger in the national consciousness, lead Germans to be far more skeptical of a potentially inflationary policy that they see as bailing out their more profligate neighbors at their expense.

Finally, the European Central Bank has not said exactly which bonds it will buy. When the US Federal Reserve undertook QE, it had a wide variety of Treasury securities to purchase. Given the high credit-worthiness of the US government and the fact that the market for US Treasury securities is the most liquid market in the world, it was not difficult to find suitable securities to purchase. Will the ECB buy the debt of the fiscally weak euro-zone nations and put their balance sheet at risk? Or will it restrict its purchases to only the most credit worthy countries and risk the ire of the citizens from less well-heeled nations?

Despite these legitimate concerns, Europe’s weak economic performance requires bold action. Quantitative easing is an important step in the right direction.

Featured image credit: Growing Euros, by Images_of_money. CC-BY-2.0 via Flickr.

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I have written about the dangers of making economic policy on the basis of ideology rather than cold, hard economic analysis. Ideologically-based economic policy has laid the groundwork for many of the worst economic disasters of the last 200 years.

• The decision to abandon the first and second central banks in the United States in the early 19^th century led to chronic financial instability for much of the next three quarters of a century.
• Britain’s re-establishment of the gold standard in 1925, which encouraged other countries to do likewise, contributed to the spread and intensification of the Great Depression.
• Europe’s decision to adopt the euro, despite the fact that economic theory and history suggested that it was a mistake, contributed to the European sovereign debt crisis.
• President George W. Bush’s decision to cut taxes three times during his first term while embarking on substantial spending connected to the wars in Afghanistan and Iraq, was an important driver of the macroeconomic boom-bust cycle that led to the subprime crisis.

In each of these four cases, a policy was adopted for primarily ideological, rather than economic reasons. In each case, prominent thinkers and policy makers argued forcefully against adoption, but were ignored. In each case, the consequences of the policy were severe.

So how do we avoid excessively ideological economic policy?

One way is by making sure that policy-makers are exposed to a wide range of opinions during their deliberations. This method has been taken on board by a number central banks, where many important officials are either foreign-born or have considerable policy experience outside of their home institution and/or country. Mark Carney, a Canadian who formerly ran that that country’s central bank, is not the first non-British governor of the Bank of England in its 320-year history. Stanley Fischer, who was born in southern Africa and has been governor of the Bank of Israel, is now the vice chairman of the US Federal Reserve. The widely respected governor of the Central Bank of Ireland, Patrick Honohan, spent nearly a decade at the World Bank in Washington, DC. One of Honohan’s deputies is a Swede with experience at the Hong Kong Monetary Authority; the other is a Frenchman.

But isn’t it unreasonable to expect politicians to come to the policy making process without any ideological bent whatsoever? After all, don’t citizens deserve to see a grand contest of ideas between those who propose higher taxes and greater public spending with those who argue for less of both?

In fact, we do expect—and want–our politicians to come to the table with differing views. Nonetheless, politicians often support their arguments with unfounded assertions that their policies will lead to widespread prosperity, while those of their adversaries will lead to doom. The public needs to be able to subject those competing claims to cold, hard economic analysis.

Fortunately, the United States and a growing number of other countries have established institutions that are mandated to provide high quality, professional, non-partisan economic analysis. Typically, these institutions are tasked with forecasting the budgetary effects of legislation, making it difficult for one side or the other to tout the economic benefits of their favorite policies without subjecting them to a reality check by a disinterested party.

In the United States, this job is undertaken by the Congressional Budget Office (CBO) which offers well-regarded forecasts of the budgetary effects of legislation under consideration by Congress. [Disclaimer: The current director of the CBO is a graduate school classmate of mine.]

The CBO is not always the most popular agency in Washington. When the CBO calculates that that the cost of a congressman’s pet project is excessive, that congressman can be counted on to take the agency to task in the most public manner possible.

According to the New York Times, the CBO’s “…analyses of the Clinton-era legislation were so unpopular among Democrats that [then-CBO Director Robert Reischauer] was referred to as the ‘skunk at the garden party.’ It has since become a budget office tradition for the new director to be presented with a stuffed toy skunk.”

For the most part, however, congressional leaders from both sides of the aisle hold the CBO and its work in high regard, as do observers of the economic scene from the government, academia, journalism, and the private sector.

The CBO, founded in 1974, is one of the oldest of such agencies, predated only by the Netherlands Bureau for Economic Policy Analysis (1945) and the Danish Economic Council (1962). More recent additions to the growing ranks of these agencies include Australia’s Parliamentary Budget Office (2012), Canada’s Parliamentary Budget Officer (2006), South Korea’s National Assembly Budget Office (2003), and the UK’s Office for Budget Responsibility (2010).

These organizations each have their own institutional history and slightly different responsibilities. For the most part, however, they are constituted to be non-partisan, independent agencies of the legislative branch of government. We should be grateful for their existence.

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By Richard S. Grossman

As an early-stage graduate student in the 1980s, I took a summer off from academia to work at an investment bank. One of my most eye-opening experiences was discovering just how much effort Wall Street devoted to “Fed watching”, that is, trying to figure out the Federal Reserve’s monetary policy plans.

If you spend any time following the financial news today, you will not find that surprising. Economic growth, inflation, stock market returns, and exchange rates, among many other things, depend crucially on the course of monetary policy. Consequently, speculation about monetary policy frequently dominates the financial headlines.

Back in the 1980s, the life of a Fed watcher was more challenging: not only were the Fed’s future actions unknown, its current actions were also something of a mystery.

You read that right. Thirty years ago, not only did the Fed not tell you where monetary policy was going but, aside from vague statements, it did not say much about where it was either.

Given that many of the world’s central banks were established as private, profit-making institutions with little public responsibility, and even less public accountability, it is unremarkable that central bankers became accustomed to conducting their business behind closed doors. Montagu Norman, the governor of the Bank of England between 1920 and 1944 was famous for the measures he would take to avoid of the press. He adopted cloak and dagger methods, going so far as to travel under an assumed name, to avoid drawing unwanted attention to himself.

The Federal Reserve may well have learned a thing or two from Norman during its early years. The Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC), was created under the Banking Act of 1935. For the first three decades of its existence, it published brief summaries of its policy actions only in the Fed’s annual report. Thus, policy decisions might not become public for as long as a year after they were made.

Limited movements toward greater transparency began in the 1960s. By the mid-1960s, policy actions were published 90 days after the meetings in which they were taken; by the mid-1970s, the lag was reduced to approximately 45 days.

Since the mid-1990s, the increase in transparency at the Fed has accelerated. The lag time for the release of policy actions has been reduced to about three weeks. In addition, minutes of the discussions leading to policy actions are also released, giving Fed watchers additional insight into the reasoning behind the policy.

More recently, FOMC publicly announces its target for the Federal Funds rate, a key monetary policy tool, and explains its reasoning for the particular policy course chosen. Since 2007, the FOMC minutes include the numerical forecasts generated by the Federal Reserve’s staff economists. And, in a move that no doubt would have appalled Montagu Norman, since 2011 the Federal Reserve chair has held regular press conferences to explain its most recent policy actions.

The Fed is not alone in its move to become more transparent. The European Central Bank, in particular, has made transparency a stated goal of its monetary policy operations. The Bank of Japan and Bank of England have made similar noises, although exactly how far individual central banks can, or should, go in the direction of transparency is still very much debated.

Despite disagreements over how much transparency is desirable, it is clear that the steps taken by the Fed have been positive ones. Rather than making the public and financial professionals waste time trying to figure out what the central bank plans to do—which, back in the 1980s took a lot of time and effort and often led to incorrect guesses—the Fed just tells us. This make monetary policy more certain and, therefore, more effective.

Greater transparency also reduces uncertainty and the risk of violent market fluctuations based on incorrect expectations of what the Fed will do. Transparency makes Fed policy more credible and, at the same time, pressures the Fed to adhere to its stated policy. And when circumstances force the Fed to deviate from the stated policy or undertake extraordinary measures, as it has done in the wake of the financial crisis, it allows it to do so with a minimum of disruption to financial markets.

Montagu Norman is no doubt spinning in his grave. But increased transparency has made us all better off.

Richard S. Grossman is a Professor of Economics at Wesleyan University in Connecticut, USA and a visiting scholar at Harvard University’s Institute for Quantitative Social Science. His most recent book is WRONG: Nine Economic Policy Disasters and What We Can Learn from Them. His homepage is RichardSGrossman.com, he blogs at UnsettledAccount.com, and you can follow him on Twitter at @RSGrossman. You can also read his previous OUPblog posts.

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