What Does Your Fed Valentine Say?

One of the most wonderful things about Twitter is the spontaneous conversations that start around almost anything. And so, inspired by the hilarious #HealthPolicyValentines, I began a new hashtag on Twitter this morning: #FedValentines.  Folks are tweeting all sorts of Fed-themed valentine’s wishes. As I write, it’s the second-top trending hashtag in the U.S.  

Given that it’s Friday, I figured it worth sharing the fun.  Here’s what I came up with:

The Politics of Political Prediction Markets

For years, I have argued that the best way to track what really matters through election season is to follow the political prediction markets. The one difficulty is that these markets aren’t really available to the general public.  Sure, the University of Iowa runs a market, but because it’s for research purposes, the maximum bet is set at only $500. And while I track InTrade closely, they’re based in Ireland, and are frowned upon by American regulators. Likewise, Betfair won’t deal with American customers.  But all that may be about to change.

Economics and Open Marriage

I have to admit that it counts as one of the more bizarre requests of my scholarly life.  After all, I’m just a straight-laced economist. But in light of the Gingrich affair — (which one? the one involving his wife’s accusation that he asked for an open marriage) — the New York Times Room for Debate section asked Betsey Stevenson and me to give an economist’s perspective on open marriage. 

Is Higher Income Inequality Associated with Lower Intergenerational Mobility?

A lot of our political debate boils down to questions about equality of outcomes versus equality of opportunity. But it turns out that they’re pretty closely related. Take a look at the chart below, which is from a terrific recent speech (with charts!) by Alan Krueger:

The horizontal axis shows the Gini coefficient, which is a summary of the degree of income inequality for each country. I think of this as a measure of inequality of outcomes. The United States sits out there on the right, which says that we have high inequality, which I bet that doesn’t surprise you.

Operation Twist 101

Given the confusion about Operation Twist, here's an explanation.

What is Operation Twist? Basically the Fed can’t reduce short-term interest rates any further—they’re already at zero. So they want to reduce long-term interest rates instead. They do this by buying long-term bonds. When you buy more of something, you raise the price. And when you raise the price of a bond, you lower the interest rate. So what the Fed is doing, is lowering long-term interest rates.

How does the Fed pay for these bonds? With QE1 and QE2, the Fed effectively just printed the money. (They “expanded their balanced sheet.”) Instead, they are selling short-term bonds, and using the proceeds to buy the long-term bonds. Now selling a bunch of short-term bonds will—usually—lower their price, raising short-term interest rates. That’s why people call this “Operation Twist”—it should “twist” the yield curve—lowering long-term interest rates (which is what matters when you buy a house, or when a firm borrows to buy new machinery), but it also raises short-term interest rates.

Raising short-term interest rates is a bug, not a feature. But fortunately, this time, the effect on short-term interest rates will be small. Why? The Fed has already committed to keeping short-term interest rates near zero for the next couple of years. And so given this commitment, the 2-year bond will also be close to zero.

The Latest from the Brookings Panel

I’m back from my favorite conference of the year—the Brookings Papers on Economic Activity. It was a terrific line-up of papers. And to call the discussion lively would be an understatement. (Full disclosure: David Romer and I are the co-editors.)

While a close reading of technical research papers is my idea of a good time, I’m told not everyone is wired this way. So I went into the studio to record a very simple summary of my thoughts on the papers. You won’t quite get the whole two days of economic policy wonk-ery, but this video is a start:

Forgive Student Loans? Worst Idea Ever.

There's an argument going around right now that forgiving the country's student loan debt would have a stimulative effect on the economy. This online petition by Signon.org, an offshoot of Moveon.org, has nearly 300,000 signatures. Its basic argument is this:

Forgiving the student loan debt of all Americans will have an immediate stimulative effect on our economy. With the stroke of the President's pen, millions of Americans would suddenly have hundreds, or in some cases, thousands of extra dollars in their pockets each and every month with which to spend on ailing sectors of the economy. As consumer spending increases, businesses will begin to hire, jobs will be created and a new era of innovation, entrepreneurship and prosperity will be ushered in for all.

How Big? A Caption Contest

It's Friday afternoon, and so I'm sure all of us are looking for a break. You know what that means: time for a caption contest! I mean, this picture is really crying out for it, isn't it? Add your funniest caption in the comments. We'll crowdsource the voting: Use the thumbs-up button to vote for your favorites. And we'll make sure to round up some schwag for the winner.

Obama's Jobs Bill: A Reasonable Plan

Here are some quick thoughts on President Obama's jobs plan:

- It's reasonably big, at about 3% of GDP.

- It's reasonably front-loaded. Goldman Sachs says it will raise 2012 GDP by about 1.5%--before any multiplier effects. Moody's chief economist Mark Zandi thinks the effect on 2012 GDP will be about 2%. Expect more estimates in the 1-3% range for 2012; smaller for 2013.

- It's reasonably well targeted. Unemployment insurance extensions will get spent. Infrastructure money gets spent and also builds stuff. as for the payroll tax: Who knows if it gets spent, but the point is to stimulate hiring, rather than spending.

- It's reasonably well designed. The biggest problem with a payroll tax is that firms get it even for employees already on the books. But this time, the biggest payroll tax cut is only for firms raising their payrolls. This will yield a much bigger bang-for-each-buck. Early analyses have yet to realize how important this is.

Channeling FDR: The Moral Case Against Unemployment

My last weekend in D.C. provided a final chance to enjoy my favorite haunts. And so I found myself walking amongst the memorialized giants of U.S. history: Washington, Lincoln, and now, Martin Luther King. On I walked, through the FDR Memorial, where I stumbled across the chiseled message below. Sure, I had seen it before. But I had forgotten how beautiful it is. And with the President about to announce his new jobs package, and Congress set to (hopefully!) debate these measures, it seems well worth sharing my serendipitous moment with Franklin Delano Roosevelt. A reminder, if you like, of why we care.