Neil Irwin had an Upshot piece trying to work through some of the fallout from the vote to leave the European Union. It is worth elaborating on a couple of the points in this piece.

First, Irwin seems to give financial markets undue credit in having a clue. He argues that the effects of the vote will be transmitted to the economy through financial markets. While this is largely true, financial markets are notoriously fickle. They often over-respond to events or even non-events, the most obvious being the 25 percent plunge in October of 1987 that wasn't linked to anything in the world. This plunge also had only a very limited impact on the economy. For this reason, it doesn't make much sense to project economic affects based on one day's market movements.

Second, Irwin highlights the 8.0 percent plunge in the value of the pound against the dollar as something that is likely to have a substantial impact on the UK economy. This is true, but a little more background here is important.

The UK was running a trade deficit in the neighborhood of 5 percent of GDP (@ $900 billion in the U.S.). This deficit was being in large part fueled by an inflow of foreign money to buy UK real estate, leading to an enormous run-up in housing prices, especially in London. This was unsustainable. (Some folks may have heard about housing bubbles but apparently it was difficult in the UK in the pre-Brexit era to get information on such things.)

Anyhow, the correction for a large trade deficit is a drop in the value of the currency. If the UK had competent economic managers, they would have tried to engineer a drop in the value of their currency. They also would have tried to prevent the bubble from growing so large. The plunge in the pound may now bring about the necessary correction in the trade deficit. It may also stop and even reverse the inflow of foreign capital to buy real estate, thereby crashing the bubble.

If that happens, then the Brexit vote will have merely brought forward events that were inevitable. While Washington Post types will inevitably engage in a round of intense finger-wagging at the Brexit voters, the real problem here was the incompetent management of the UK economy by Prime Minister Cameron and the English Central Bank.

Dean Baker
PBS Newshour, June 24, 2016

Dean Baker
The Nation, June 24, 2016

Days before the June 14 end of provisional president Jocelerme Privert’s mandate, a coalition of political parties close to former president Michel Martelly formalized an alliance and began advocating for Privert’s removal. Led by former de facto prime minister under Marelly, Evans Paul, the “Entente Democratique” (ED) or “democratic agreement” as they have called themselves, have denounced the “totalitarian tendencies” of Privert and categorized the possible extension of his mandate as an illegal power grab.

Haitian parliamentarians were expected to vote earlier this week on extending or replacing Privert, who was appointed provisional president in early February after Martelly’s term ended with no elected replacement. The vote was delayed, as it has been previously.  

The creation of ED has formalized an alliance between Martelly’s political movement, PHTK, and Guy Philippe, a notorious paramilitary leader who is running for a seat in the Senate. Philippe was the head of a paramilitary force that helped destabilize the country in the run-up to the 2004 coup against former president Jean-Bertrand Aristide. From its bases in the Dominican Republic, the group mounted numerous attacks targeting police stations and government supporters. According to Human Rights Watch, Philippe also oversaw extrajudicial killings while a police chief in the late 90s. Facing a sealed indictment in the U.S. for alleged drug trafficking ties and money laundering, Philippe remains a DEA most wanted fugitive.

Philippe appeared alongside Martelly’s chosen successor Jovenel Moïse at a December political rally and has voiced his support for Moïse’s candidacy in radio broadcasts, but the formal alliance is an indication that those ties are now deepening. Philippe, a former police chief who received training from U.S. military forces in Ecuador, found an ally in Martelly, who made the army’s restoration a central plank of his presidency and his party. The army was disbanded under Aristide after a long history of human rights abuses and involvement in coup d’états. “The army has always been a part of our policy…There is no way to have Haiti without an army,” Roudy Chute, a PHTK party representative, stated during an August interview.

In February, Philippe warned of a “civil war” if Privert did not hold elections in April. The political accord that brought Privert to office called for elections in April, but after an electoral verification commission recommended scrapping the entire first round due to fraud, new presidential elections have been scheduled for October.

Last month, Philippe was allegedly tied to a paramilitary attack on a police station in the rural town of Cayes that killed 6, though he has denied involvement and refused to appear for questioning. Philippe had previously been prevented from running for office due to his ties to drug trafficking, but certain regulations were removed last year, allowing a number of candidates with criminal pasts to register. In 2006 Philippe ran for president, garnering less than two percent of the vote.

A DEA spokesperson confirmed that Philippe remains a fugitive, adding that he has proven to be “very elusive,” and that U.S. Marshalls had been given apprehension authority. A spokesperson for the Marshalls contested this, saying the DEA has “solid information about the subject’s whereabouts,” so there was no need for them to transfer apprehension authority. The DEA later acknowledged its responsibility for apprehending Philippe, but would not confirm if any active efforts to do so were underway.

Though the DEA has been involved in a number of high profile arrests in Haiti during the last five years, Philippe remains free.

In the meantime, the ED has called for an uprising against Privert. In a June 12 letter, the group called on Haitian National Police director-general Michel Ange Gédéon to disobey “any illegal order coming from a person stripped of legality and legitimacy,” referring to Privert. The ED also called on the international community to withhold recognition of Privert’s government after June 14.

These calls have largely fallen on deaf ears. The international community has urged parliament to meet to decide Privert’s future and U.S. Haiti Special Coordinator Ken Merten offered a tepid recognition of Privert on a call with reporters last week. Anti-Privert protests planned for last week failed to materialize.

In the 1970s, economist Arthur Okun coined the term “misery index.” The misery index was meant to calculate the amount of economic misery by adding the unemployment rate to the annual inflation rate. This treats a one percentage-point rise in the unemployment rate as being no worse than a one percentage rise in the inflation rate.

In a sense, the Federal Reserve actually adheres to a version of Okun’s misery index when setting monetary policy. As part of its dual mandate, the Fed pursues the twin goals of “maximum employment” and “stable prices.” While the mandate allows room for ambiguity, many Fed officials seem to assign greater importance to inflation than unemployment.

However, as Binyamin Appelbaum reported three years ago in The New York Times, consumer surveys from both the U.S. and Europe indicate that unemployment creates about four times as much misery as inflation. This result has been attested to in a host of academic studies (see pages 1–3).

A properly constructed misery index would therefore place four times as much weight on a one percentage point rise in the unemployment rate as on a one percentage point rise in the inflation rate. In terms of promoting well-being, an economy with low unemployment will usually beat an economy with low inflation.

Back in my teaching days I would use the seriously wrong answers on student exams as valuable information telling me what concepts I need to explain better. Charles Lane's Washington Post column on a universal basic income can be used the same way. Lane clearly does not like the idea of a universal basic income (UBI), but his confused rationale ties together many common misunderstandings.

First, the whole idea of job-killing robots is more than a bit bizarre for a couple of reasons. Robots kills jobs in the same way that technology has always killed jobs. They displace human labor. We used to need far more workers to make a car than we do today, or a ton of steel, or to harvest a ton of wheat. In all of these cases we were able to use technology to accomplish more work with fewer people.

Robots are part of the same story. What possible difference can it make if a job is displaced by a robot or a more efficient assembly line? We have seen whole industries, like photographic film, wiped out by digital technology. Would the former workers at Kodak somehow be worse off if they had lost their jobs to robots than to digital cameras?

The point is that robots are productivity growth. Say that a few thousands times until it sinks in. The impact of robots on the economy is nothing more or less than any other innovation that produces the same amount of productivity growth.

And on this account the story is not terribly impressive. Lane cites an analysis by Carl Frey and Michael Osborne that claims that 47 percent of U.S. jobs are at risk due to technology over the next two decades. Now they just said these jobs were at risk, but lets assume we lose them all. That would translate into 3.1 percent annual productivity growth. That is roughly the same rate as we saw in the 1947-1973 golden age, a period of rapid wage growth and low unemployment. Are you scared yet?

Mark WeisbrotThe Hill, June 21, 2016

This is the sixth in a series of profiles of the members of the Federal Reserve Board’s Open Market Committee [FOMC]. The profiles will focus on their writings, public statements, and voting records as members of the FOMC.

Unlike Esther George, Loretta Mester, Eric Rosengren, James Bullard, and William Dudley — first five members of the FOMC to be profiled by CEPR — Patrick Harker does not have an extensive background at the Federal Reserve. Having been officially appointed to head the Philadelphia Federal Reserve on July 1, 2015, Harker has been in office less than a year.^[1] Moreover, as the President of the Philadelphia Fed, Harker will not serve as a voting member of the FOMC for the first time until 2017.^[2] (The head of the Philadelphia Fed is given a vote once every three years.^[2]) This means that Harker has no voting record and has only a short history of public statements on monetary policy.

Dean Baker
Truthout, June 20, 2016

Last month the International U.S. Trade Commission (ITC) came out with its assessment of the Trans-Pacific Partnership (TPP). It projected that in 2032, when the economy will have experienced most of the effects of the deal, income will be 0.23 percent higher than in a baseline without the TPP. This translates to an increase in the annual growth rate of 0.014 percentage point.

That is not the sort of thing that would likely get most people too excited. It means that with the TPP in place we will basically be as rich on January 1, 2032 as we would be in the middle of February of 2032 without the TPP. Still this is better than nothing, so why not take the gains the ITC is projecting?

The answer to that question is that the ITC projections are hardly a sure deal. Its past track record, like that of most modelers of trade agreements, has been pretty dismal. The actual patterns in trade have born essentially no relationship to the projected patterns.

This may be due to the possibility that the impact of factors not included in the models swamped the projected impact of the changes being modeled. That’s an argument that can save the validity of the models used by the ITC and other economists, but doesn’t change the fact that these models have not been useful guides to the future course of trade and economic growth.

Bryce Covert had a column in the NYT this morning arguing that the performance of the economy in a president's term is largely out of their control. There is considerable truth to this. Business cycles have a dynamic that is largely outside of the president's control. President Reagan was fortunate in having a severe recession in the first year of his administration. Memories being what they are, voters blamed the recession on Reagan's predecessor, while giving Reagan credit for the robust recovery which was largely inevitable.

Similarly, world events can have enormous impact in ways that are largely outside of the president's control. Jimmy Carter had the bad fortune to be sitting in the White House when the Iranian revolution took 6 million barrels a day of oil production off world markets, more than quadrupling oil prices.

But it is possible to take the powerless president story too far. First, as the piece notes, the president appoints members of the Federal Reserve Board. The next president will come into office with two vacancies on the seven person Board of Governors. In addition, the will have the opportunity to pick a new Fed chair (or reappoint Janet Yellen) in their first year in office. The Fed can have an enormous near-term influence on the economy. At the moment, if it were to raise rates, as many policy types advocate (including some at the Fed), it would slow growth and reduce job creation.

The second point is that both President Clinton and Bush II sat on expanding asset bubbles, stock in the case of Clinton and housing in the case of Bush II. While these bubbles grew, they had a positive impact on the economy raising incomes and boosting growth. However the collapse of the bubbles was inevitable and devastating in both cases. Clinton had the good fortune to leave office before the impact of the collapse on the economy was fully realized. Bush II was less lucky.

Paul Krugman devoted his column on Friday to a mild critique of the drive to take the United Kingdom out of the European Union. The reason the column was somewhat moderate in its criticisms of the desire to leave EU is that Krugman sympathizes with the complaints of many in the UK and elsewhere about the bureaucrats in Brussels being unaccountable to the public. This is of course right, but it is worth taking the issue here a step further.

If we expect to hold people accountable then they have to face consequences for doing their job badly. In particular, if they mess up really badly then they should be fired. There is a whole economics literature on the importance of being able to fire workers as a way of ensuring work discipline. Unfortunately this never seems to apply to the people at the top. And this is seen most clearly in the cases of those responsible for economic policy in the European Union.

The European Central Bank (ECB) was amazingly negligent in its failure to recognize the dangers of the housing bubbles in Spain, Ireland, and elsewhere. Its response to the downturn was also incredibly inept, needlessly pushing many countries to the brink of default, thereby inflating interest rates to stratospheric levels. Nonetheless, when Jean-Claude Trichet retired as head of the bank in 2011, he was applauded for his years of service and patted himself on the back for keeping inflation under the bank's 2.0 percent. (For those arguing that this was the bank's exclusive mandate, it is worth noting that Mario Draghi, his successor, is operating under the same mandate. He nonetheless sees it as the bank's job to maintain financial stability and promote growth.) 

Greg Mankiw used his NYT column to discuss the weak growth the U.S. economy has experienced over the last decade and goes through five explanations. To my view there's not much complicated about the story. We lost a huge amount of demand when the housing bubble collapsed and there is nothing to replace it. That is essentially #4, presented as secular stagnation by Larry Summers. Regular BTP readers know the story well, so let me briefly comment on the other four.

The first one, that the economy actually is growing rapidly but we are missing it because the gains are not picked up in our measurements, really flunks the laugh test. The items identified are things like getting music and information free on the web or being able to use our smart phones as cameras. These are great things, but if you try to put a price tag on them (in the old days most people would buy a cheap camera every ten years or so), they are pretty small.

Furthermore, there were always benefits from new products that weren't being picked up (also costs — try getting by without a cell phone — the need for a cell phone and the monthly service is not included as a negative in the data), what these folks have to show is that the annual size of these benefits has increased. If you want to be generous, give them a 0.1 percentage point of GDP and tell them to shut up.

The crisis hangover story is also widely told. Firms are scared to invest, banks are scared to lend. This one also seems to defy the data. First, until the recent downturn in investment following the collapse of oil prices and the rise in the trade deficit following the run-up in the dollar, investment was pretty much back to its pre-recession share of GDP. Banks are also lending at their pre-recession rate. So it's a nice story to humor reporters, but there is nothing in the world to support it.

Jake Johnston
Le Nouvelliste, 13 juin, 2016