Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, March 24, 2014

AI Summary. Economic models of "uncertainty traps" show feedback loops in which firms invest less when they perceive high uncertainty, while low investment limits the flow of information and sustains that uncertainty. The authors argue this can produce multiple stable regimes, so short-lived shocks generate prolonged downturns even with strong fundamentals.

Fajgelbaum, Pablo, Edouard Schael and Mathieu Taschereau-Dumouchel National Bureau of Economic Research
Date Posted:
Is Database:
Database

Uncertainty Traps by @FajgelbaumPablo @EdouardSchael @MathieuTD, @nberpub: Feedback loops in economic systems can amplify uncertainty, leading to prolonged recessions even when fundamentals are strong.

Can brief shocks cause long downturns when fundamentals stay strong?

Core argument: The uncertainty trap model holds that feedback loops amplify uncertainty, so short-lived shocks can generate prolonged recessions even when economic fundamentals are strong.

The concept of uncertainty traps highlights how feedback loops in economic systems can amplify uncertainty, leading to prolonged recessions even when fundamentals are strong. This model suggests that short-lived shocks can have long-lasting effects, explaining phenomena like the slow recovery of U.S. output post-recession despite rapid productivity gains. The economy may settle into a high-activity regime with low uncertainty or a low-activity regime with high uncertainty, depending on initial conditions. Firms are more likely to invest when they perceive lower uncertainty, but low investment rates can increase uncertainty by limiting information flow. This dynamic creates multiple stationary points in economic activity, where only significant positive shocks can shift the economy from a low to a high-activity regime.

Takeaways by Macro Roundup® AI

  1. The uncertainty trap model holds that feedback loops amplify uncertainty, so short-lived shocks can generate prolonged recessions even when economic fundamentals are strong.
  2. In the model, firms invest more when they perceive lower uncertainty, while low investment rates raise uncertainty by limiting information flow, producing multiple stationary points in economic activity.
  3. In the uncertainty trap model, the economy settles into either a high-activity, low-uncertainty regime or a low-activity, high-uncertainty regime depending on initial conditions, with only significant positive shocks shifting it from low to high activity.

Uncertainty Trapspresents a new model that suggest and attempts to quantify uncertainty as a dynamic factor that generates feedback loops that can amplify its own impact. The authors explain this relationship on a firm level:

Fajgelbaum, Pablo, Edouard Schael and Mathieu Taschereau-Dumouchel, Uncertainty Traps, NBER March 5, 2014. Available at:http://www.parisschoolofeconomics.eu/IMG/pdf/uncertainty_traps.pdf

Because these relationships are driven by feedback loops they are highly non-linear.

Short-lived shocks can generate long lasting recessions, and low activity may persist even under good fundamentals. Thus, the theory rationalizes salient features of U.S. macroeconomic activity that are not easily explained by standard business cycle models, such as the slow recovery of output after recessions despite typically faster improvements in measured productivity.

The authors believe this premise explains American macroeconomic activity better than standard business cycle models as it combines two forces, “higher uncertainty about economic fundamentals deters investment, and uncertainty evolves endogenously because agents learn from the actions of others” Due to their self-reinforcing nature episodes:

The economy will converge to either a good regime (with low uncertainty and high economic activity) if the current level of uncertainty is sufficiently low or to a bad regime (with high uncertainty and low activity) if the current level of uncertainty is sufficiently high. As a result of this multiplicity, the economy exhibits strong nonlinearities in its response to shocks. The economy quickly recovers after small temporary shocks, but it may shift into low-activity regime after a large temporary shock. Once it has fallen in the low regime, only a large enough positive shock can but the economy back into the high-activity regime.

The basic thesis is the relationship between information and investment can create feedback loops - uncertainty traps - in the papers parlance “the coexistence of multiple stationary points in the dynamics of uncertainty and economic activity.” Thus:

Firms are more likely to invest if their beliefs about the fundamentals have higher mean, but also if they have smaller variance (lower uncertainty). At the same time, the laws of motion for the mean and variance of beliefs depend on the investment rate. When few firms invest, little information is released, so uncertainty rises.

Wednesday, April 9, 2014

AI Summary. During the Great Recession, transfers rose across income groups but not strongly progressively within low-income populations: up 8% for those in deep poverty versus 11% for the near-poor. The authors find the safety net has shifted benefits toward higher incomes, with little evidence that greater spending expanded work disincentives.

Robert Moffitt Johns Hopkins University
Date Posted:
Is Database:
Database

The social safety net saw increased transfers across income groups during the Great Recession, but the increase was not strongly progressive within low-income populations.

Has the safety net shifted benefits toward higher-income households?

Core argument: During the Great Recession, transfers rose 8% for those in deep poverty across 2004–2008 and 2008–2010, compared with 9–10% for shallow poverty and 11% for near poverty, an increase that was not strongly progressive within low-income populations.

During the Great Recession, the social safety net, encompassing both transfer and major social insurance programs, saw increased transfers across income groups. However, the increase was not strongly progressive within low-income populations. Transfers rose by 8% for those in deep poverty from 2004-2008 and 2008-2010, while shallow poverty groups saw increases of 9% and 10%, and near poverty groups experienced an 11% rise. The Earned Income Tax Credit (EITC) contributed to this trend, with aggregate expenditures rising from $49bn to $59bn, a 12% increase in per capita real spending. Despite this, expansions in SNAP [Supplemental Nutrition Assistance Program] and UI [Unemployment Insurance] provided more benefits to those at the bottom of the income distribution. The evolution of the safety net has shifted benefits towards those with higher incomes, reducing progressivity, yet there is little evidence that increased social welfare spending has expanded work disincentives.

Takeaways by Macro Roundup® AI

  1. During the Great Recession, transfers rose 8% for those in deep poverty across 2004–2008 and 2008–2010, compared with 9–10% for shallow poverty and 11% for near poverty, an increase that was not strongly progressive within low-income populations.
  2. Aggregate Earned Income Tax Credit expenditures rose from $49bn to $59bn, a 12% increase in per capita real spending, while expansions in SNAP and Unemployment Insurance delivered more benefits to those at the bottom of the income distribution.
  3. The safety net's evolution has shifted benefits toward those with higher incomes and reduced progressivity, with little evidence that increased social welfare spending has expanded work disincentives.

In “The Great Recession and Social Safety Net” Robert Moffitt examines the performance of the social safety net - in which he includes both transfer programs (means tested programs) and major social insurance programs - during the Great Recession. Moffitt found the increase in transfers was shared across income groups and employment levels.

Moffitt segments the poor into three income groups, “deep poverty” (pre-tax, pre-transfer income less than 50 percent of the poverty line) “shallow poverty” (50 percent to 100 percent of the poverty line) and “near poverty” (200 percent to 150 percent of the poverty line). Notably:

The increase in transfer amounts was, however, not strongly progressive across income classes within the low-income population. The percent increase in transfers was positive for all income groups but was slightly larger for those just below the poverty line and those just above it, compared to those at the bottom of the income distribution.

The increase in average transfers were approximately 8 percent from 2004 to 2008 and from 2008 to 2010 for those in deep poverty well the corresponding rates of increase for those in shallow poverty were 9 and 10 percent respectively and for those in near poverty were 11 percent over both time intervals.

This was driven by the EITC which if looked at as a distributional program rather than one to induce work incentives is regressive within low income ranges and provides greater benefits to those with higher family incomes. Aggregate expenditures on EITC rose from $49 billion to $59 billion, or per capital real spending rose from $217 to $242, a 12 percent increase (Btw 2007-2010) However “the expansions of SNAP and UI benefitted those at the bottom of the income distribution to a greater extent.”

The primary takeaways from the paper were

  1. If the EITC is maintained as presently constituted the social safety net will have evolved to benefit those with somewhat higher incomes - decreasing progressivity.

    Total Real per Capital Spending is just under $9,000. (See Figure A-1)

    As of today there is little evidence that the expenditure increase on social welfare spending in the face of the recession has expanded the disincentives to work.

Moffitt, Robert, “The Great Recession and Social Safety Net” April 2013, Available at:http://www.econ2.jhu.edu/people/Moffitt/moffitt%20annals%204-26-2013.pdf