Pure Class Warfare, With Extra Contempt: The Senate version of Trumpcare – the Better Care Reconciliation Act – is out. The substance is terrible: tens of millions of people will experience financial distress if this passes, and tens if not hundreds of thousands will die premature deaths, all for the sake of tax cuts for a handful of wealthy people. What’s even more amazing is that Republicans are making almost no effort to justify this massive upward redistribution of income. They’re doing it because they can, because they believe that the tribalism of their voters is strong enough that they will continue to support politicians who are ruining their lives.
In this sense – and in only this sense – what we’re seeing now is a departure from previous Republican practice.
In the past, laws that would take from the poor and working class while giving to the rich came with excuses. Tax cuts, their sponsors declared, would unleash market dynamism and make everyone more prosperous. Deregulation would increase efficiency and lower prices. It was all voodoo; the promises never came true. But at least there was some pretense of working for the common good.
Now we have none of this. This bill does nothing to reduce health care costs. It does nothing to improve the functioning of health insurance markets – in fact, it will send them into death spirals by reducing subsidies and eliminating the individual mandate. There is nothing at all in the bill that will make health care more affordable for those currently having trouble paying for it. And it will gradually squeeze Medicaid, eventually destroying any possibility of insurance for millions. ...
But Republican leaders believe that their voters are tribal enough, sufficiently walled off from information, that they’ll ignore the attack on their lives and keep voting R – indeed, that as they lose health care, get hit with crushing out-of-pocket bills, see their friends and neighbors face ruin, they’ll blame it on Democrats.
In Long Run, There’s No Such Thing as an Einstein Investor, NY Times: There are no easy answers in investing. It is tempting to replicate a successful strategy — one created by an outstanding investor, like Warren Buffett, or through in-depth statistical analysis of the wisdom of crowds — and such approaches can actually work for long periods.
But paint-by-number portfolios won’t succeed forever. And without deep expertise, it makes little sense to veer much from a simple market portfolio — one that seeks to match the overall performance of the market, and not beat it.
Fed's Labor Market Forecasts Don't Make Sense, by Tim Duy: The Federal Reserve’s unemployment forecast doesn’t add up. It is neither consistent with the median of policy makers’ growth forecasts nor consistent with Chair Janet Yellen’s description of labor market strength. Hence, central bankers will likely find unemployment undershooting their forecast in the second half of 2017. That will keep the central bank in a hawkish mood even if lackluster inflation continues. ...Continued at Bloomberg Prophets...
Central banks have a natural role in financial stability for several reasons. First, monetary policy affects financial conditions in ways that can contribute to either stability or instability; erratic policy or volatile inflation could be destabilizing, for instance. Second, they obtain and develop insights useful for financial stability policy through the course of their other functions. Third, financial conditions are among the broad set of factors considered by central banks in assessing the state of the economy and the appropriate stance of monetary policy.
But for many central banks, the full scope of what they're expected to do in support of financial stability — the extent to which they have an explicit or implicit financial stability mandate — is ambiguous. This is important because a central bank's policy actions and its responses to developments in the economy and financial markets are shaped by its understanding of its mandate. So the nature of the mandate matters for economic outcomes, market expectations (the ex ante "rules of the game"), and accountability.
One reason this issue is inherently challenging is that there is no single definition of "financial stability." Most recent discussions focus on banking crises like the 2007–08 financial crisis, which tend to feature failures of large or many financial institutions, cascading losses, and government interventions. But central banks also have played a role in other types of financial market disturbances, for example, sharp asset price declines (like the Fed's liquidity assurances after the 1987 stock market crash), sovereign debt crises (like the European Central Bank's role in the recent eurozone crisis), and currency crises (like the Fed's role in Mexico's 1994 bailout).
This challenge is clear in the breadth of a definition for financial stability offered in the latest Purposes and Functions publication from the Board of Governors of the Federal Reserve System: "A financial system is considered stable when financial institutions — banks, savings and loans, and other financial product and service providers — and financial markets are able to provide households, communities, and businesses with the resources, services, and products they need to invest, grow, and participate in a well-functioning economy." The publication further states that a financial system ought to have the ability to do so "even in an otherwise stressed economic environment."1
This Economic Brief takes a descriptive look at the Fed's role in financial stability, including how that role has changed over time, and raises some fundamental questions. ...
The OECD chapter provides a more detailed discussion... But several overall patterns seem clear.
1) Labor union power is weaker just about everywhere.
2) The extent of labor union power varies considerably across countries, many of which have roughly similar income levels. This pattern suggests that existence of unions, one way or another, may be less important for economic outcomes than the way in which those unions function. The chapter notes the importance of "peaceful and cooperative industrial relations," which can emerge--or not--from varying patterns of unionization.
3) In the next few decades, the big-picture question for union workers, and indeed for all workers, is how to adjust their workplace skills and tasks so that they remain valued contributors in an economy characterized by new technologies and global ties. Workers need political representation--whether in the form of unions or in some other form--that goes beyond arguing for near-term pay raises, and considers the difficult problem of how to raise the chances for sustained pay raises and secure jobs into the future.
This is an FRBSF Economic Letter by Jens H.E. Christensen and Glenn D. Rudebusch:
New Evidence for a Lower New Normal in Interest Rates: The general level of U.S. interest rates has gradually fallen over the past few decades. In the 1980s and 1990s, lower inflation expectations played a key role in this decline. But more recently, actual inflation as well as survey-based measures of longer-run inflation expectations have both stabilized close to 2%. Therefore, some researchers have argued that the decline in interest rates since 2000 reflects a variety of persistent economic factors other than inflation. These longer-run real factors—such as slower productivity growth and an aging population—affect global saving and investment and can push down yields by lowering the steady-state level of the short-term inflation-adjusted interest rate (Bauer and Rudebusch 2016 and Williams 2016). This normal real rate is often called the equilibrium or natural or neutral rate of interest—or simply “r-star.”
However, other observers have dismissed the evidence for a new lower equilibrium real rate and downplayed the role of persistent factors. They argue that yields have been held down recently by temporary factors such as the headwinds from credit deleveraging in the aftermath of the financial crisis. So far, this ongoing debate about a possible lower new normal for interest rates has focused on estimates drawn from macroeconomic models and data. In this Economic Letter, we describe new analysis that uses financial models and data to provide an alternative perspective (see Christensen and Rudebusch 2017). This analysis uses a dynamic model of the term structure of interest rates that is estimated on prices of U.S. Treasury Inflation-Protected Securities (TIPS). The resulting finance-based measure provides new evidence that the equilibrium interest rate has gradually declined over the past two decades.
Macro-based estimates of the equilibrium interest rate
The issue of whether there has been a persistent shift in the equilibrium interest rate is quite important. For investors, this short-term real rate of return that would prevail in the absence of transitory disturbances serves as a key foundation for valuing financial assets. For policymakers and researchers, the equilibrium interest rate provides a neutral benchmark to calibrate the stance of monetary policy: Monetary policy is expansionary if the short-term real interest rate lies below the equilibrium rate and contractionary if it lies above. Therefore, determining a good estimate of the equilibrium real rate has been at the center of recent policy debates (Nechio and Rudebusch 2016 and Williams 2017).
Given the significance of the equilibrium interest rate, many researchers have used macroeconomic models and data to try to pin it down. As Laubach and Williams (2016, p. 57) define it, the equilibrium interest rate is based on “a ‘longer-run’ perspective, in that it refers to the level of the real interest rate expected to prevail, say, five to 10 years in the future, after the economy has emerged from any cyclical fluctuations and is expanding at its trend rate.” Laubach and Williams (2003, 2016) estimate this equilibrium interest rate using a simple macroeconomic model and data on a nominal short-term interest rate, consumer price inflation, and the output gap. Similarly, Johannsen and Mertens (2016) and Lubik and Matthes (2015) provide closely related estimates also by using macroeconomic models and data.
The blue line in Figure 1 summarizes the results of these three fairly similar studies. It shows the average of their three estimated equilibrium real interest rates, which smooths across specific modeling assumptions in each study. In the 1980s and 1990s, this simple macro-based summary measure remained around 2½%. This effectively constant equilibrium interest rate is consistent with the conventional wisdom of that time. It is only in the late 1990s that a decided downtrend begins, and the macro-based measure falls to almost zero by the end of the sample.
Figure 1 Estimates of the equilibrium real interest rate
However, the various macro-based approaches for identifying a new lower equilibrium interest rate have several potential shortcomings. First, these estimates depend on having the correct specification of the complete model, including the output and inflation dynamics. One difficulty in this regard is how to account for the period after the Great Recession when nominal interest rates were constrained by the zero lower bound. During that episode, the link between interest rates and other elements in the economy was altered in ways that are difficult to model. Finally, these estimates use extensively revised macroeconomic data to create historical equilibrium interest rate estimates that would not have been available in real time.
A new finance-based estimate of the equilibrium interest rate
Given the possible limitations of the macro-based estimates, we turn to financial models and data to provide a complementary estimate of the equilibrium interest rate. As detailed in Christensen and Rudebusch (2017), we use the market prices of TIPS, which have coupon and principal payments adjusted for changes in the consumer price index (CPI). These securities compensate investors for the erosion of purchasing power due to price inflation, so they provide a fairly direct reading on real interest rates. We assume that the longer-term expectations embedded in TIPS prices reflect financial market participants’ views about the steady state of the economy including the equilibrium interest rate. Unlike the macro-based estimates, one advantage of this market-based measure is that it can be obtained in real time at a high frequency—even daily. In addition, it doesn’t depend on an uncertain specification of the dynamics of output and inflation. Furthermore, because real TIPS yields are not subject to a lower bound, we avoid complications associated with zero nominal interest rates altogether.
Our analysis focuses on a term structure model that is based only on the prices of TIPS. This choice contrasts with previous TIPS research that has jointly modeled inflation-indexed and standard nominal U.S. Treasury yields (for example, Christensen, Lopez, and Rudebusch 2010). Such joint specifications can also be used to estimate the steady-state real rate—though earlier work has emphasized only the measurement of inflation expectations and risk. However, a joint specification requires additional modeling structure—including specifying an inflation risk premium and inflation expectations. The greater number of modeling elements—along with the requirement that this more elaborate structure remain stable over the sample—raise the risk of model misspecification, which can contaminate estimates of the equilibrium interest rate. By relying solely on TIPS yields, we avoid these complications as well as problems associated with the lower bound on nominal rates.
Still, the use of TIPS for measuring the steady-state short-term real interest rate poses its own empirical challenges. One difficulty is that inflation-indexed bond prices include a real term premium. In addition, despite the fairly large amount of outstanding TIPS, these securities face appreciable liquidity risk resulting in wider bid-ask spreads than nominal Treasury bonds. To estimate the equilibrium rate of interest from TIPS in the presence of liquidity and real term premiums, we use an arbitrage-free dynamic term structure model of real yields augmented with a liquidity risk factor as described in Andreasen, Christensen, and Riddell (2017). The identification of the liquidity risk factor comes from its unique loading for each individual TIPS. This loading assumes that, over time, an increasing proportion of any bond’s outstanding inventory is locked up in buy-and-hold investors’ portfolios. Given forward-looking investor behavior, this lock-up effect implies that a particular bond’s sensitivity to the market-wide liquidity factor will vary depending on how seasoned the bond is and how close to maturity it is. Our analysis uses prices of the individual TIPS rather than the more usual input of yields from fitted synthetic curves. By observing prices from a cross section of TIPS that have different age characteristics, we can identify the liquidity factor. With estimates of both the liquidity premium and real term premium, we calculate the equilibrium interest rate as the average expected real short rate over a five-year period starting five years ahead.
Our finance-based estimate of the natural rate of interest is shown as the green line in Figure 1. These estimates are adjusted slightly upward to account for a persistent 0.23 percentage point measurement bias in CPI inflation. The model uses data back to the late 1990s around the time when the TIPS program was launched. Fortuitously, TIPS were introduced about the same time as the macro-based estimates started to decline, so the available sample is particularly relevant for discerning shifts in the equilibrium real rate. During their shared sample, the macro- and finance-based estimates exhibit a similar general trend—starting from just above 2% in the late 1990s and ending the sample near zero. Most importantly, both methodologies imply that the equilibrium rate is currently near its historical low. The finance- and macro-based estimates of the equilibrium rate rely on different assumptions about the structure of the economy and different data sources. Thus, they have different pros and cons, so their broad agreement about the level of the equilibrium rate is mutually reinforcing.
There are differences between the precise trajectories over time of the two estimates. The macro-based estimate of the natural rate shows only a modest decline from the late 1990s until the financial crisis and the start of the Great Recession. Then, it drops precipitously to less than 1% and edges only slightly lower thereafter. Arguably, the timing of the macro-based path leaves open the possibility that the recession played a key role in causing the decline in the equilibrium rate. This suggests that the drop could be at least partly reversed by a cyclical boom. In contrast, the finance-based estimate falls in the early 2000s, levels off a bit above 1%, and then declines more in 2012. Therefore, the drop in the finance-based estimate does not coincide with the Great Recession, which is consistent with more secular drivers such as demographics or a productivity slowdown.
Finally, we should note that the model dynamics of fluctuations in the equilibrium rate are estimated to be very persistent. Thus, looking ahead, our model also suggests that the natural rate is more likely than not to remain near its current low for at least the next several years.
Given the historic downtrend in yields in recent decades, many researchers have investigated the factors pushing down the steady-state level of the short-term real interest rate. To complement earlier empirical work based on macroeconomic models and data, we estimate the equilibrium real rate using only prices of inflation-indexed bonds. From 1998 to the end of 2016, we estimate that the equilibrium real rate fell from just over 2% to just above zero. Accordingly, our results show that about half of the 4 percentage point decline in longer-term Treasury yields during this period represents a reduction in the natural rate of interest.
Jens H.E. Christensen is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Glenn D. Rudebusch is senior policy advisor and executive vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Christensen, Jens H.E., Jose A. Lopez, and Glenn D. Rudebusch. 2010. “Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields.” Journal of Money, Credit, and Banking 42(6), pp. 143–178.
Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.
Trump’s Apprenticeships are Based upon a Problem That Doesn’t Exist: Last week the Trump administration announced “a workforce training initiative focused on skill-based apprenticeship education” with a goal of creating one million apprenticeships over the next two years. The motivation behind the initiative was explained by Ivanka Trump: “The reality is that there are still Americans seeking employment despite low unemployment rates, and companies are struggling to fill vacancies for positions that require varying levels of skills and training. So the Trump administration is committed to working very closely to close the skills gap."
But is a “skills gap” really a problem in the US? ...
"The one obvious payoff to taking health care away from millions: a big tax cut for the wealthy":
Zombies, Vampires and Republicans, by Paul Krugman, NY Times: Zombies have long ruled the Republican Party. ... What are these zombies of which I speak? Among wonks, the term refers to policy ideas that should have been abandoned long ago in the face of evidence and experience, but just keep shambling along.
The right’s zombie-in-chief is the insistence that low taxes on the rich are the key to prosperity. This doctrine should have died...
Despite the consistent wrongness of their predictions, however, tax-cut fanatics just kept gaining influence in the G.O.P. — until the disaster in Kansas...
Will this banish the tax-cut zombie? Maybe — although the economists behind the Kansas debacle, who have of course learned nothing, appear to be the principal movers behind the Trump tax plan, such as it is.
But even as the zombies move offstage, vampire policies — so-called not so much because of their bloodsucking nature, although that too, as because they can’t survive daylight — have taken their place.
Consider what’s happening right now on health care.
Last month House Republicans rammed through one of the worst, cruelest pieces of legislation in history. ...
This bill is, as it should be, wildly unpopular. Nonetheless, Republican Senate leaders are now trying to ram through their own version of the A.H.C.A., one that, all reports suggest, will differ only in minor, cosmetic ways. And they’re trying to do it in total secrecy. ...
Clearly, the goal is to pass legislation that will have devastating effects on tens of millions of Americans without giving those expected to pass it, let alone the general public, any real chance to understand what they’re voting for. ...
This is unprecedented...
Of course..., the one obvious payoff to taking health care away from millions: a big tax cut for the wealthy. As I said, while bloodsucking isn’t the main reason to call this a vampire policy, it’s part of the picture....
You can blame Donald Trump for many things, including the fact that he will surely sign whatever bad bill is put in front of him. But as far as health care is concerned, he’s just an ignorant bystander...
So this isn’t a Trump story; it’s about the cynicism and corruption of the whole congressional G.O.P. Remember, it would take just a few conservatives with conscience — specifically, three Republican senators — to stop this outrage in its tracks. But right now, it looks as if those principled Republicans don’t exist.
Janet Yellen Is Her Own Best Successor: President Donald Trump has reportedly begun the process of deciding who will lead the U.S. Federal Reserve after Janet Yellen's term ends early next year. If he wants the best outcome for the economy, he can't do better than Janet Yellen. ...
Yellen's policies have contributed to a surprisingly strong labor market recovery, yet also been sufficiently cautious to keep inflation below target. Some would see this as an all-around success, though the Fed's caution does have a downside: Markets appear to believe that the central bank is unwilling or unable to hit its inflation target with consistency. ... If it persists, this loss of credibility means that the Fed will have less ammunition to fight the next recession.
So could any of the other potential appointees do better? ...
Warsh, Taylor, and Hubbard all reportedly see Yellen’s Fed as having been too dovish, suggesting that that they would have done less to support the economic recovery. This approach would have led to higher unemployment and lower inflation -- an inferior fulfilment of the Fed's dual mandate that marks them as worse candidates than Yellen. It's also important to remember that Taylor and Warsh argued publicly against additional monetary stimulus in November 2010, when the unemployment rate was almost 10 percent and the inflation rate had fallen nearly to 1 percent. Their concerns about excessive inflation proved to be completely unjustified. Yellen, by contrast, supported stimulus.
Yellen has a proven track record that's hard to beat. ... The president should reappoint her to the position of Fed chair.
The Silence of the Hacks: The actual text of the Senate version of Trumpcare is still a secret, even from almost all the Senators who are expected to vote for it. But that’s actually a secondary issue: never mind the precise details, what’s the organizing idea? What is the bill supposed to do, and how is it supposed to do it?
Time was when even the worst legislation came with some kind of justification, when you could count on the hacks at Heritage to explain why eating children will encourage entrepreneurship, or something. ...
But now we have legislation that will change the lives of millions, and they haven’t even summoned the usual suspects to explain what a great idea it is. If hypocrisy is the tribute vice pays to virtue, Republicans have decided that even that’s too much; they’re going to try to pass legislation that takes from the poor and gives to the rich without even trying to offer a justification.
And they’ll try to do it by dead of night, of course.
This has nothing to do with Trump, who is, as I’ve been saying, an ignorant bystander — yes, he’s betraying every promise he made, but what else is new? It’s about Congressional Republicans.
Which Congressional Republicans? All of them. Remember, three senators who cared even a bit about substance, legislative process, and just plain honesty with the public, could stop this. So far, it doesn’t look as if there are those three senators.
This is a level of corruption that’s hard to fathom. Yet it’s the reality of one of our two parties.
This has become more evident each day, as the Senate plots out a secretive path toward Obamacare repeal — and top White House officials (including the president) consistently lie about what the House bill actually does. ...
My biggest concern isn’t the hypocrisy; there is plenty of that in Washington. It’s that the process will lead to devastating results for millions of Americans who won’t know to speak up until the damage is done. So far, the few details that have leaked out paint a picture of a bill sure to cover millions fewer people and raise costs on those with preexisting conditions.
The plan is expected to be far-reaching, potentially bringing lifetime limits back to employer-sponsored coverage, which could mean a death sentence for some chronically ill patients who exhaust their insurance benefits. ...
The Long-Run Effects of Immigration during the Age of Mass Migration, by Jay Fitzgerald:Studying immigrant flows during the period of highest immigration in U.S. history, Sandra Sequeira, Nathan Nunn, and Nancy Qian find that counties that received large influxes of immigrants experienced both short- and long-term economic benefits compared with other regions. In Migrants and the Making of America: The Short- and Long-Run Effects of Immigration during the Age of Mass Migration (NBER Working Paper No. 23289), they report that these benefits were realized without loss of social and civic cohesion and the long-term benefits persisted to the dawn of the 21st century.
U.S. counties that received larger numbers of immigrants between 1860 and 1920 had higher average incomes and lower unemployment and poverty rates in 2000.
The researchers recognize that immigrants may have been drawn to locations with particular attributes, and that these attributes may also have contributed to those locations' subsequent growth. They therefore focus on differences in the dates on which counties became connected to the railway network, which made it much easier for immigrants to reach a particular location, as a source of quasi-random variation in immigrant inflows.
Using census data along with historical railway maps and other source information, the researchers track county-level immigration, along with the decade-by-decade fluctuations in immigrant flows to the United States. The gradual expansion of railway networks, which connected only 20 percent of the nation in 1850 but 90 percent by 1920, together with the timing of waves of immigration, provide variation in how accessible different locations were to immigrants from 1850 to 1920.
A central finding is that the economic benefits of immigration were significant and long-lasting: In 2000, average incomes were 20 percent higher in counties with median immigrant inflows relative to counties with no immigrant inflows, the proportion of people living in poverty was 3 percentage points lower, the unemployment rate was 3 percentage points lower, the urbanization rate was 31 percentage points higher, and education attainment was higher as well. The researchers do not find any cost of immigration in terms of social cohesion. Counties with more immigrant settlement during the Age of Mass Migration today have levels of social capital, civic participation, and crime that are similar to those of regions that received fewer immigrants.
Measuring the short-term impacts of immigration from 1850 to 1920, the researchers find a 57 percent average increase by 1930 in manufacturing output per capita and a 39 to 58 percent increase in agricultural farm values in places that received the median number of immigrants relative to those that received none. Though some of the counties studied show a lower rate of literacy due to the influx of immigrants, many of whom did not speak English, the researchers find that illiteracy declined steadily over the years and that there was an increase in innovation activity, as measured by patents per capita, in counties with large immigrant populations.
The long-run positive effects of immigration in counties connected to rail lines appear to have arisen from the persistence of the short-run benefits, particularly greater industrialization, agricultural productivity, and innovation.
"Taken as a whole, our estimates provide evidence consistent with a historical narrative that is commonly told of how immigration facilitated economic growth," the researchers conclude. "Despite the unique conditions under which the largest episode of immigration in U.S. history took place, our estimates of the long-run effects of immigration may still be relevant for assessing the long-run effects of immigrants today."
Things have been a bit slow here lately. Sorry about that. With Trump, economic commentary has waned considerably. Guess you can only say this policy is stupid so many times. Plus, it's all hidden behind closed doors so we can't comment. Can't imagine why...
The recent inflation data doesn't exactly support the Federal Reserve’s monetary tightening plans. Chair Janet Yellen and her colleagues will surely take note of the weakness at this week’s Federal Open Market Committee meeting, but they will downplay any such concerns as transitory. At the moment, low unemployment remains the focus. Add to that loosening financial conditions and you get a central bank that is more likely than not to stay the course on its plan to hike interest rates. [...Continued at Bloomberg Prophets...]
"Trump is neither up to the job of being president nor willing to step aside and let others do the work right":
Wrecking the Ship of State, by Paul Krugman, NY Times: After Donald Trump’s surprise election victory, many people on the right and even in the center tried to make the case that he wouldn’t really be that bad. Every time he showed a hint of self-restraint — even if it amounted to nothing more than reading his lines without ad-libbing and laying off Twitter for a day or two — pundits rushed to declare that he had just “become president.”
But can we now admit that he really is as bad as — or worse than — his harshest critics predicted he would be? And it’s not just his contempt for the rule of law, which came through so clearly in the James Comey testimony: As the legal scholar Jeffrey Toobin says, if this isn’t obstruction of justice, what is? There’s also the way Trump’s character, his combination of petty vindictiveness with sheer laziness, leaves him clearly not up to doing the job.
And that’s a huge problem. Think, for a minute, of just how much damage this man has done on multiple fronts in just five months.
And consider his refusal to endorse the central principle of NATO, the obligation to come to our allies’ defense... What was that about? Nobody knows...
The point, again, is that everything suggests that Trump is neither up to the job of being president nor willing to step aside and let others do the work right. And this is already starting to have real consequences, from disrupted health coverage to ruined alliances to lost credibility on the world stage.
But, you say, stocks are up, so how bad can it be? And it’s true that while Wall Street has lost some of its initial enthusiasm for Trumponomics — the dollar is back down to pre-election levels — investors and businesses don’t seem to be pricing in the risk of really disastrous policy.
That risk is, however, all too real — and one suspects that the big money, which tends to equate wealth with virtue, will be the last to realize just how big that risk really is. The American presidency is, in many ways, sort of an elected monarchy, in which a temperamentally and intellectually unqualified leader can do immense damage.
That’s what’s happening now. And we’re barely one-tenth of the way through Trump’s first term. The worst, almost surely, is yet to come.
Fed Just Sort Of Confident About Full Employment, by Tim Duy: Over at Project Syndicate, Brad DeLong takes issue with Fed policy decisions. Importantly, he identifies, correctly, that the Fed's forecasting record in recent years has been less than optimal. Much less. The repeated optimism that inflation will soon revert to target is a most significant problem for a central bank with a formal inflation target. On this point the Fed has faced disappointment time and time again.
Brad is correct in his summary that the Fed needs to reassess its forecasting methodology to ensure that it is not biased toward high inflation forecasts. That said, I believe the issue is not quite as severe as Brad believes. In particular, I think this may be a bit unfair:
The FOMC’s blind spot stems from the fact that it is relying more on its assessment of the labor market, which it considers to be at or above “full employment,” than on noisy month-to-month inflation data. But “full employment” is a rather tenuous and unreliable construct. It has now been 20 years since economists Douglas Staiger, James Stock, and Mark Watson showed that Fed policymakers should not be so confident in estimates of “full employment.” And yet, for some reason, the Fed community has not let this essential message sink in.
I think there is actually quite a bit of uncertainty among Fed officials about the exact level of full employment. To be sure, policymakers repeatedly argue that they believe they are near full employment. But first, take that into context of changing estimates of full employment:
Clearly policymakers are willing to change their minds as new information becomes available.
Second, if they were fairly inflexible regarding their estimates of full employment and the implications for inflation, they would have raised rates after unemployment fell to 6.5% - the threshold for maintaining zero rates under the Evans Rule.
Third, and probably most importantly, if they clung to a strict confidence in their estimates of full employment, they would have long ago abandoned their gradual approach to raising interest rates. As of now, the unemployment rate at 4.3% is a full 0.4 percentage points below the median estimate of the longer run unemployment rate and below the 4.5-5.0% range of estimates of that measure. Moreover, job growth remains strong enough to drive the unemployment rate further down. So if they were very confident of their estimates of full employment, Fed officials would be much more concerned that they had already fallen behind the inflation curve. They would be raising rates at every meeting, not just an expected three times this year. They wouldn't be dragging their heels on raising interest rates back to their estimate of neutral. They would be racing to do so.
The unemployment rate in May stood 0.5 percentage points below the January level. At this pace, the rate will fall below 4% by the end of this year. That is not unreasonable at this point. Yet policymakers largely continue to expect just two more rate hike this year - which I find incredibly patient given that I doubt there is any FOMC participant who believes that inflation can remain contained if the unemployment rate holds consistently below 4%.
Fourth, recall the conclusion of Federal Reserve Governors Lael Brainard's recent speech:
While that remains my baseline expectation, I will be watching carefully for any signs that progress toward our inflation objective is slowing. With a low neutral real rate, achieving our symmetric inflation target is more important than ever in order to preserve some room for conventional policy to buffer adverse developments in the economy. If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy.
I take this at face value - the Fed will likely reduce the path of expected rate hikes if inflation does not firm in the next few months.
Finally, I understand the hesitancy to raise rates in the face of low inflation. I too have an innate desire to hold back policy until we see the "whites in the eyes" of the inflation beast. But I also understand the position of policymakers - the uncertainty cuts both ways. There is a chance that the Phillips curve is nonlinear and the economy is close to an inflection point. And if that inflection point hits, they don't have confidence they can easily slow the economy without triggering a recession. So, from their perspective, restraining the economy a notch now may maximize the net present value of output if it prevents a recession later.
Bottom Line: The Fed's gradual, data-dependent path is almost perfectly designed to make no one happy. Too slow for some, too fast for others. Perhaps that means it is more right than wrong after all.
... Jim Tankersley: But you don’t think, particularly in those first moments of the crisis when Fed officials and Treasury officials were trying to work together to stop the bleeding, there weren’t more things that could have been done for homeowners, for folks who were just those underwater people that you mentioned in the very beginning of your answer.
Ben Bernanke: Again, I focused first on what the Fed could do. The Fed has a certain set of tools. We were successful in stabilizing the financial system after the crisis. We were successful in getting the economy back on a recovery track, as we’ve seen. Now the specific example you give is homeowners — that was the responsibility of the Treasury, although we were very interested in that at the Fed; we had many conversations with the Treasury about what they were doing.
I think the Treasury made a pretty serious effort on that front. There was money appropriated under the TARP to help homeowners, and the Treasury set up programs both to help people refinance their mortgages and to modify or restructure troubled mortgages. And some millions of people were helped by those programs.
My perceptions of that effort, though, speaking from someone who was outside of that policy effort, was that there were two big sets of constraints. One was that it’s just a lot harder than you think to, for example, to modify or restructure mortgages when the borrower is possibly unemployed, possibly not interested in talking to the bank or participating in a program. It was awfully difficult as a practical manner to manage the restructuring programs.
But the other part was that, people don’t remember this necessarily, it was actually very politically unpopular to help troubled homeowners. And Congress put lots of restrictions on what could be done, and tried to make sure there wasn’t any significant subsidy, for example. So within the inherent logistical difficulties, which were substantial, and the political constraints from Congress, the Treasury was hampered, I think, in its efforts. It did make, I think, a good-faith effort, and it did help millions of people.
Again, whether a bigger effort would’ve had more effect on the recovery, I’m not sure that it was a first-order issue. It certainly would’ve helped a lot of individual people, a lot of families. From the political point of view, it cuts both ways. The story is that the Tea Party was triggered not by anger necessarily at the financial players, but at the idea that the government would be helping people who had “overborrowed” or been irresponsible in taking out mortgages. ...
Anxious About the Economy?, by Tim Duy: The current U.S. economic expansion is one of the longest on record. The longer it lasts, the more likely growth will become tepid and uneven, raising angst about its sustainability. See the May employment report, with its disappointing 138,000 gain in payrolls, downward revisions to previous months, and soft wage growth. Yet, at the same time, the unemployment rate fell to the lowest level since 2001. Anxiety is elevated with speculation that the Trump administration's pro-growth, fiscal stimulus plans are on the ropes. ...
The More Trump Fails, the Better Off We’ll Be: The Trump administration has gone to war against independent sources of information that pose a challenge to its policy goals and the narratives it tells to support them. One of the most recent targets is the Congressional Budget Office. ...
The truth is out there, but it's buried under a large pile of nonsense, lies, misleading statements, and deception:
Making Ignorance Great Again, by Paul Krugman, NY Times: Donald Trump just took us out of the Paris climate accord for no good reason. I don’t mean that his decision was wrong. I mean, literally, that he didn’t offer any substantive justification... It was just what he felt like doing.
And here’s the thing: What just happened on climate isn’t an unusual case — and Trump isn’t especially unusual for a modern Republican. ... Facts and hard thinking aren’t wanted, and anyone who tries to bring such things into the discussion is the enemy.
Consider ... health care. ... Did the administration and its allies consult with experts, study previous experience with health reform, and try to devise a plan that made sense? Of course not. In fact, House leaders made a point of ramming a bill through before the Congressional Budget Office ... could assess its likely impact.
When the budget office did weigh in, its conclusions were what you might expect:... a lot of people are going to lose coverage. Is 23 million a good estimate...? Yes — it might be 18 million, or it might be 28 million, but surely it would be in that range.
So how did the administration respond? By trying to shoot the messenger. Mick Mulvaney, the White House budget director, attacked the C.B.O...
So, Mr. Mulvaney, where’s your assessment of Trumpcare? You had plenty of resources to do your own study before trying to pass a bill. ...
But Mulvaney and his party don’t study issues, they just decide, and attack the motives of anyone who questions their decisions. ... Truth, as something that exists apart from and in possible opposition to political convenience, is no longer part of their philosophical universe. ...
And as health care and climate go, so goes everything else. Can you think of any major policy area where the G.O.P. hasn’t gone post-truth? ...
But does any of it matter? The president, backed by his party, is talking nonsense, destroying American credibility day by day. But hey, stocks are up, so what’s the problem?
Well, bear in mind that so far Trump hasn’t faced a single crisis not of his own making. As George Orwell noted ... in his essay “In Front of Your Nose,” people can indeed talk nonsense for a very long time, without paying an obvious price. But “sooner or later a false belief bumps up against solid reality, usually on a battlefield.” Now there’s a happy thought.
The unemployment rate fell to 4.3 percent in May, a new low for the recovery and the lowest level since 2001. However, this decline in the unemployment rate was the result of people leaving the labor market, as the number of people reported as employed in the household survey actually fell, with the overall employment-to-population ratio (EPOP) dropping from 60.2 percent in April to 60.0 percent in May.
The establishment survey showed further evidence of a weakening labor market as the pace of job growth slowed in May to 138,000. There were also substantial downward revisions to the prior two months’ job growth numbers, which brought the average for the last three months to just 121,000. ...
The situation in the household survey was mixed. The drop in employment was among prime-age workers, with the EPOP falling from 78.6 percent to 78.4 percent, with both men and women seeing small declines. On the plus side, the unemployment rate for African American men over 20 fell 0.8 percentage points to 6.5 percent, the lowest level since April of 2000. However this was entirely due to men dropping out of the labor force as employment actually fell.
All the duration measures of unemployment rose modestly in May. The quit rate rose modestly to 11.7 percent, which is still below pre-recession peaks and well below the peaks hit in 2000. Involuntary part-time employment fell for the fourth consecutive month to a new low for the recovery. It is now only slightly larger relative to the size of the labor force than before the recession. Voluntary part-time rose by 320,000 but is still slightly below the peak hit in November.
The summary data continue to show little evidence for the story that the labor market is increasingly benefiting the most educated workers. While the unemployment rate for college educated workers edged down by 0.1 percentage point, so did the EPOP. It now stands 0.4 percentage points below its year-ago level. In terms of EPOPs, those with high school degrees and less than high school were the biggest gainers in the last year.
There is certainly little evidence in this report that the labor market is overheating or is likely to do so any time in the foreseeable future.
See also Bill McBride at Calculated Risk (here too):
A Disappointing Employment ReportThe headline jobs number was below expectations, and there were combined downward revisions to the previous two months. Is this is slowdown in hiring a short term issue, part of the normal business cycle, or due to a Trump Slump? My view is this slowdown in hiring is mostly part of the normal business cycle (my expectation was job growth would slow further this year). There was still some good news - especially with the unemployment rate falling to 4.3% (lowest since 2001), and U-6 falling to 8.4% (lowest since 2007). But overall this was a disappointing report. ...
Trump Gratuitously Rejects the Paris Climate Accord, by Paul Krugman, NY Times: As Donald Trump does his best to destroy the world’s hopes of reining in climate change, let’s be clear about one thing: This has nothing to do with serving America’s national interest. The U.S. economy, in particular, would do just fine under the Paris accord. This isn’t about nationalism; mainly, it’s about sheer spite.
About the economics:... Clearly, it would be an economy running on electricity...
What would life in an economy that made such an energy transition be like? Almost indistinguishable from life in the economy we have now. ...
Wouldn’t energy be more expensive in this alternative economy? Probably, but not by much: Technological progress in solar and wind has drastically reduced their cost, and it looks as if the same thing is starting to happen with energy storage.
Meanwhile, there would be compensating benefits. Notably, the adverse health effects of air pollution would be greatly reduced, and it’s quite possible that lower health care costs would all by themselves make up for the costs of energy transition, even ignoring the whole saving-civilization-from-catastrophic-climate-change thing. ...
Why, then, are so many people on the right determined to block climate action, and even trying to sabotage the progress we’ve been making on new energy sources?
Don’t tell me that they’re honestly worried about the inherent uncertainty of climate projections. ...
Don’t tell me that it’s about coal miners. ...
While it isn’t about coal jobs, right-wing anti-environmentalism is in part about protecting the profits of the coal industry, which in 2016 gave 97 percent of its political contributions to Republicans. ...
Pay any attention to modern right-wing discourse — including op-ed articles by top Trump officials — and you find deep hostility to any notion that some problems require collective action beyond shooting people and blowing things up.
Beyond this, much of today’s right seems driven above all by animus toward liberals rather than specific issues. If liberals are for it, they’re against it. If liberals hate it, it’s good. Add to this the anti-intellectualism of the G.O.P. base, for whom scientific consensus on an issue is a minus, not a plus, with extra bonus points for undermining anything associated with President Barack Obama.
And if all this sounds too petty and vindictive to be the basis for momentous policy decisions, consider the character of the man in the White House. Need I say more?
Brainard, Powell, Employment Report Ahead, by Tim Duy: Federal Reserve policymakers are turning a cautious eye to the inflation numbers, but for now believe special factors account for much of the weakness. Consequently, they remain more focused on the labor market in their policy deliberations. For now, that implies they will resist changing their expectations of further tightening this year as the US jobs market continues to hold strong. Tomorrow we should see more evidence of that strength.
Inflation continues to come in below expectations. The latest PCE inflation report, for example, was better than March but still anemic:
This weakness has not gone unnoticed on Constitution Ave, but Fed officials are not ready to call it quits on the expected path of monetary policy. Federal Reserve Governor Lael Brainard said earlier this week:
Even so, I see some tension between signs that the economy is in the neighborhood of full employment and indications that the tentative progress we had seen on inflation may be slowing. If the tension between the progress on employment and the lack of progress on inflation persists, it may lead me to reassess the expected path of the federal funds rate in the future, although it is premature to make that call today.
Core inflation was 1.5 percent for the 12 months through April. This measure has also risen since 2015, although its gradual increase appears to have paused because of weak inflation readings for March and April. Some of the recent weakness can be explained by transitory factors. And there are good reasons to expect that inflation will resume its gradual rise.
On the other side of the country, San Francisco Federal Reserve President John Williams repeats the same:
Meanwhile, although inflation has been running somewhat below the Fed’s goal of 2 percent, with the economy doing well and some of the factors that have held inflation down waning, I expect we’ll reach that goal by next year.
The tendency to dismiss weak inflation numbers will continue as long as unemployment plumbs fresh lows for this cycle. Central bankers believe they are in the range of full employment, and don't want to risk being too far below their estimates of the neutral interest rate when inflation finally does take hold a bit more aggressively.
But will unemployment continue to push lower? The labor market appears to maintain considerable momentum. Initial claims remain low, ADP anticipates private sector job growth for May at 253k, and the ISM employment index picked up. See Calculated Risk for the rundown. Wall Street anticipates job growth of 185k for May within a range of 140k to 231k. My expectation is just on the north side of the consensus number:
This should be enough job growth to maintain downward pressure on unemployment; as the economy matures, the Fed anticipates a requirement of only roughly 100k jobs per months to hold unemployment steady. A number closer to 200k will leave them concerned that sooner or later inflation will eventually emerge and they need to be ahead of that emergence not behind.
Two more interesting points on this from Powell. First, he thinks that labor force participation is near trend levels:
The labor force participation rate, which had declined sharply after the crisis, has now been roughly stable for 3-1/2 years, which represents an improvement against its estimated downward trend. Participation is now close to estimates of its trend level.
This implies that he anticipates need to slow job growth sooner than later to avoid excessive undershooting of the unemployment rate. Second, he see wages growth as just about right after accounting for productivity:
Wage data have gradually moved up, consistent with a tightening labor market. Although average hourly earnings are rising only about 2.5 percent per year, slower than before the crisis, much of that downshift may reflect the slowdown in productivity growth we have experienced. For example, over the past three years, unit labor costs--that is, nominal wages adjusted for increases in productivity--have been generally rising a bit faster than prices.
If productivity growth is 50bp lower than just prior to the recession, then real wages are close to target:
So, assuming the Fed maintains its assumptions regarding productivity growth, we don't need to see much faster wage growth for policymakers to become more convinced the economy is near full employment. Another point to remember when analyzing the labor report.
Bottom Line: The Fed's focus remains on the labor market. Hence, they remain focused on two rate hikes and balance sheet action still to come this year. One of those rate hikes will come this month. If sustained, weak inflation will eventually push them to rethink the path of policy. But the impact of those changes might fall more on 2018 than on 2017.
How America Could Save $65 Billion in Mobile Phone Bills: It is a fact of nature that all countries have the same electromagnetic spectrum of radio frequencies. It is a fact of politics that countries have different rules for allocating these frequencies. And it is a fact of economics that people in different countries pay very different rates for their use of spectrum. Mara Faccio and Luigi Zingales ask: "Why does the price of the same basket of mobile phone services vary around the world from $10.07 to $47.25? Why does the price of a 1GB mobile-broadband internet plan vary from $11.24 to $100.28?" They investigate the question in a January 2017 working paper "Political Determinants of Competition in the MobileTelecommunication Industry"... For those who prefer to get their economics via cartoon, the most recent issue of the Chicago Booth Review has you covered with on this topic.
Countries can affect the competitive situation of telecommunications industries in many ways, including the rules that govern entry, the extent of price regulation, whether phone numbers are easily portable when shifting between carriers, whether voice-over-internet calls are permitted, and so on. These rules vary substantially across countries. ...
The ... authors ... argue that the relatively small differences in quality cannot explain the relatively large differences in prices paid by consumers; indeed, the higher prices paid by consumers help to explain the high stock prices for major US carriers like AT&T, Verizon, T-Mobile, and Sprint. In looking at their overall data set, the authors write: "We test this hypothesis and we find no evidence that a higher degree of competition leads to lower quality of service or less investments. If anything, the results go in the opposite direction."
In the United States, the Federal Communications Commission just completed in March 2017 its first "incentive" auction, in which the broadcast TV companies that were allocated huge chunks of spectrum decades ago, but now deliver most of their content via cables, have an chance to sell off that spectrum to mobile services. As the FCC writes: "In the auction, TV broadcasters could voluntarily give up their current broadcast channel in exchange for a share of the proceeds from an auction of their channel to commercial wireless service providers to provide expanded mobile broadband services." This is a step in the right direction. But American consumers have every reason to keep comparing their mobile bills to those in Germany, Denmark, and elsewhere, and to get an answer from their government on why the electromagnetic spectrum that is naturally available everywhere should cost more in the United States.
The working class’s role in Trump’s election: President Donald Trump’s election victory last year was driven in part by support he got in the traditionally Democratic parts of the industrial Northeast and Midwest of the US. Many analysts have argued that Trump’s promises to bring back US manufacturing hollowed out by trade and technology changes paved the way for his achievement.
Recent empirical evidence shows that trade shocks can influence voting patterns. Autor et al. (2016) find that import competition from China is associated with increased political polarisation in US congressional elections, as measured by the number of moderate incumbents who lost their seats. Using data on voting patterns in six presidential elections, Jensen et al. (2016) extend this analysis to include trade in services and exports, and find that while rising imports are associated with more polarisation, rising exports are associated with more support for the incumbent. Che et al. (2016) find that greater import competition from China is correlated with increases in election turnout and the share of votes for a Democrat in congressional elections.
Evidence that the decline in manufacturing was not the real reason for Trump’s success
The data show that this bit of conventional wisdom might be misplaced. Education and race were far bigger factors in determining the change in voting results from the 2012 election. These two factors alone explain more than 70% of the variation in the Republican vote share across counties, as compared with the last election, and more than 80% in the swing states.
And within manufacturing, race mattered greatly: only the predominantly white manufacturing counties were drawn to Trump’s message. Racially diverse manufacturing counties rejected it. These twin factors roughly cancelled each other out. In the end, whether or not manufacturing was part of a county’s economic base did not have much of an effect on its change in voting behaviour.
In a new paper, Dario Sidhu and I examine electoral data from the 2016 compared with previous presidential elections (Freund and Sidhu 2017). The county-by-county breakdown in the data shows that on aggregate, manufacturing jobs did not play a significant role in the election results.
When economics, identity, and demographic variables were considered together, the share of employees in manufacturing was not significantly associated with increased support for Donald Trump, versus Mitt Romney in 2012. Even more striking, counties where manufacturing declined since 2000 – many of which received special attention during the campaign – also did not have an increase in their vote share for Trump from four years before.
None of this is to say manufacturing as an economic foundation for a county did not matter at all in the election. But it boosted Trump only in counties that were predominately white.
In mostly white manufacturing counties, there was a significant increase in the Republican vote share since 2012. In more racially and ethnically diverse manufacturing counties (above average share of black and Hispanic residents), there was a significant decline in the share of votes going to the Republican candidate. On aggregate, these effects roughly offset each other, with the net result that the presence of manufacturing in a county (or the extent of job loss) was not associated with the result. To the extent manufacturing played a role, it was through the ethnic makeup of counties. The impact of this effect was magnified in crucial swing states, where counties are on average less diverse than the nation as a whole.
Figure 1 Republican vote share change from 2012 to 2016 and manufacturing employment
Notes: Standardized coefficients. Additional controls, median wage, unemployment, labour force participation, age, religion, county size. Source: Freund and Sidhu (2017).
Why are counties polarised within manufacturing by race?
There are two potential explanations for why predominantly white manufacturing counties became more Republican and diverse manufacturing counties voted more Democratic in this election.
The first is that economic shocks were different across white and diverse counties. Perhaps white manufacturing towns specialise in products more prone to technological change or facing pronounced import competition; alternatively, white manufacturing towns may have been largely one company towns with few alternative employment opportunities.
The second is that the two groups reacted differently to economic changes that have occurred over time. It is possible that white manufacturing towns rejected existing policies, such as openness to trade and increased income redistribution (for example, through the Affordable Care Act); while diverse manufacturing towns rejected the message that economic conditions in the US were deteriorating.
The analysis shows that the second explanation – different reactions to economic change – is more consistent with the data. Perhaps most telling, comparing the 2016 election results with the county’s share of employment in manufacturing from 1986 – when manufacturing employment was near its peak and one in four manufacturing workers was in a union – the same polarisation is evident. Historical manufacturing counties that are mostly white voted more Republican, but historical manufacturing towns that are relatively diverse voted more Democratic, as compared with 2012.
Does this mean the population is becoming more polarised?
Morris Fiorina, a political scientist at Stanford University, has shown that polarisation can be driven by the electorate or the candidates (Fiorina 2004). While a polarised population – with a large group on the right and a large group on the left – produces a split electorate, polarising candidates can yield a similar outcome, even if most of the population has centrist political views. The difference is that with an increasingly polarised electorate, voter participation should logically increase, as each group is tied to its candidate and opposed to the alternate. In contrast, with polarising candidates, the middle of the distribution is unsatisfied, so voter participation should in theory decrease.
When other factors are eliminated, the data show that the rise in the Republican share of votes in white manufacturing counties was largely due to a drop in Democratic votes; while the rise in the Democratic share in non-white manufacturing counties was driven by a relatively higher drop in Republican votes. In addition, on average across counties, as compared with 2012, relatively low voting rates among Democratic voters was a bigger contributor to the results than high voting rates among Republicans. Put differently, Trump did not win the white working class, Clinton lost it.
The 2016 election outcome is thus more consistent with Fiorina’s example of polarising candidates than a polarised electorate. The good news is that Americans are probably far less divided then they appear. The bad news is that the US desperately needs a more centrist and less partisan government to unify and lead, but that seems unlikely anytime soon.
Autor, D, D Dorn, G Hanson, and K Majlesi (2016), “Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure”, NBER Working Paper No. 22637.
Che, Y, Y Lu, J R Pierce, P K Schott and Z Tao (2016), “Does Trade Liberalization with China Influence US Elections?”, NBER Working Paper No. 22178.
Fiorina, M (2004), Culture War? The Myth of a Polarized America, Stanford University Press.