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“Avoiding An Overheated Economy,” by Tim Duy: Federal Reserve Chairman Jerome Powell delivered the Fed’s Semiannual Monetary Policy Report Tuesday morning. Powell smoothly and confidently responded to – or deflected – questions as if he were already seasoned in the role of Chair. As to the content of his remarks, they were hawkish. More hawkish than I anticipated and arguably signaled a significant change of focus for the Fed. ...continued here...
Posted by Mark Thoma on Wednesday, February 28, 2018 at 10:45 AM
Posted by Mark Thoma on Wednesday, February 28, 2018 at 10:45 AM in Economics, Links |
Looking For Policy Continuity From Powell, by Tim Duy: Federal Reserve Chairman Jerome Powell will tackle his first Semiannual Monetary Policy Report to the Congress this week. The expectation is that Powell will by and large reiterate the case for continued gradual tightening of monetary policy. That has come to mean three rate hikes in 2018, although given the data dependence of policy the risk is that three becomes four. Market participants remains nervous, however, that Powell will set a more hawkish tone indicating a sharp acceleration of rate hikes. I think this very unlikely at this juncture. I do think there is room, however, to emphasize that if fiscal spending supercharges growth in 2018, then rate hikes will continue into 2019. ...Continued here...
Posted by Mark Thoma on Monday, February 26, 2018 at 12:03 PM in Economics, Monetary Policy |
Posted by Mark Thoma on Monday, February 26, 2018 at 11:28 AM in Economics, Links |
Posted by Mark Thoma on Friday, February 23, 2018 at 09:38 AM in Economics, Links |
"there’s a faction in our country that sees public action for the public good, no matter how justified, as part of a conspiracy to destroy our freedom":
Nasty, Brutish and Trump, by Paul Krugman, NY Times: On Wednesday, after listening to the heart-rending stories of those who lost children and friends in the Parkland school shooting — while holding a cue card with empathetic-sounding phrases — Donald Trump proposed his answer: arming schoolteachers.
It says something about the state of our national discourse that this wasn’t even among the vilest, stupidest reactions to the atrocity. No, those honors go to the assertions by many conservative figures that bereaved students were being manipulated by sinister forces, or even that they were paid actors.
Still, Trump’s horrible idea, taken straight from the N.R.A. playbook, was deeply revealing...
To see why, consider the very case often used to illustrate how bizarrely we treat guns: how we treat car ownership and operation...,there’s a lot of variation in car safety among states within the U.S., just as there’s a lot of variation in gun violence.
America has a “car death belt” in the Deep South and the Great Plains; it corresponds quite closely to the firearms death belt defined by age-adjusted gun death rates. It also corresponds pretty closely to the Trump vote — and also to the states that have refused to expand Medicaid, gratuitously denying health care to millions of their citizens. ...
For whatever reason, there’s a faction in our country that sees public action for the public good, no matter how justified, as part of a conspiracy to destroy our freedom.
This paranoia strikes both deep and wide. ... And it goes along with basically infantile fantasies about individual action — the “good guy with a gun” — taking the place of such fundamentally public functions as policing.
Anyway, this political faction is doing all it can to push us toward becoming a society in which individuals can’t count on the community to provide them with even the most basic guarantees of security — security from crazed gunmen, security from drunken drivers, security from exorbitant medical bills (which every other advanced country treats as a right, and does in fact manage to provide).
In short, you might want to think of our madness over guns as just one aspect of the drive to turn us into what Thomas Hobbes described long ago: a society “wherein men live without other security than what their own strength and their own invention shall furnish them.” And Hobbes famously told us what life in such a society is like: “solitary, poor, nasty, brutish and short.”
Yep, that sounds like Trump’s America.
Posted by Mark Thoma on Friday, February 23, 2018 at 09:30 AM in Economics, Politics |
I am here today:
Economic Fluctuations and Growth Research Meeting
Andrew Atkeson and Monika Piazzesi, Organizers
Federal Reserve Bank of San Francisco
February 23, 2018
Friday, February 23
Fatih Guvenen, University of Minnesota and NBER
Gueorgui Kambourov, University of Toronto
Burhanettin Kuruscu, University of Toronto
Sergio Ocampo-Diaz, University of Minnesota
Daphne Chen, Florida State University
Use It Or Lose It: Efficiency Gains from Wealth Taxation
Discussant: Roger H. Gordon, University of California at San Diego and NBER
Matteo Maggiori, Harvard University and NBER
Brent Neiman, University of Chicago and NBER
Jesse Schreger, Columbia University and NBER
International Currencies and Capital Allocation
Discussant: Harald Uhlig, University of Chicago and NBER
Katarína Borovičková, New York University
Robert Shimer, University of Chicago and NBER
High Wage Workers Work for High Wage Firms
Discussant: Isaac Sorkin, Stanford University and NBER
Marcus Hagedorn, University of Oslo
Iourii Manovskii, University of Pennsylvania and NBER
Kurt Mitman, Institute for International Economic Studies
The Fiscal Multiplier
Discussant: Adrien Auclert, Stanford University and NBER
Carlos Garriga, Federal Reserve Bank of St. Louis
Aaron Hedlund, University of Missouri
Housing Finance, Boom-Bust Episodes, and Macroeconomic Fragility
Discussant: Veronica Guerrieri, University of Chicago and NBER
John Kennan, University of Wisconsin at Madison and NBER
Spatial Variation in Higher Education Financing and the Supply of College Graduates
Discussant: Danny Yagan, University of California at Berkeley and NBER
Posted by Mark Thoma on Friday, February 23, 2018 at 09:08 AM in Academic Papers, Conferences, Economics, Macroeconomics |
Fedspeak Reiterates Gradual Path: Fed speakers continue to reiterate that policy remains on a gradual path of tightening. So far, the inflation data and brightening economy has more emboldened their commitment to gradual rate hikes than a faster pace of hikes. What about fiscal policy? That train has left the station, but central bankers don’t seem too concerned – yet. ...continued here...
And one more from Tim:
First Impressions of the January FOMC Minutes: The minutes of the January FOMC meeting revealed increasing confidence in the economic outlook. That translated into increased confidence that gradual rate hikes remains the appropriate policy path. Does that mean the central bankers stand poised to raise their “dots” such that the median rate hike projection rises to four hikes? I don’t think so. I read the minutes as wiping away lingering concerns about the inflation outlook and allowing policymakers to coalesce around the existing three hike projection. The risk remains, of course, that conditions remain sufficiently buoyant to raise the rate projection in June or September. More important to me at this juncture is I see clear hints that the projections beyond 2018 are vulnerable to upward revisions. ...continued here...
Posted by Mark Thoma on Thursday, February 22, 2018 at 02:27 PM in Economics, Monetary Policy |
Posted by Mark Thoma on Thursday, February 22, 2018 at 08:31 AM in Economics, Links |
Anna Stansbury and Lawrence Summers at VoxEU:
On the link between US pay and productivity, by Anna Stansbury and Lawrence Summers, VoxEU: Pay growth for middle class workers in the US has been abysmal over recent decades – in real terms, median hourly compensation rose only 11% between 1973 and 2016.1 At the same time, hourly labour productivity has grown steadily, rising by 75%.
This divergence between productivity and the typical worker’s pay is a relatively recent phenomenon. Using production/nonsupervisory compensation as a proxy for median compensation (since there are no data on the median before 1973), Bivens and Mishel (2015) show that typical compensation and productivity grew at the same rate over 1948-1973, and only began to diverge in 1973 (see Figure 1).
Figure 1 Labour productivity, average compensation, and production/nonsupervisory compensation 1948-2016
Notes: Labour productivity: total economy real output per hour (constructed from BLS and BEA data). Average compensation: total economy compensation per hour (constructed from BLS data). Production/nonsupervisory compensation: real compensation per hour, production and nonsupervisory workers (Economic Policy Institute).
What does this stark divergence imply about the relationship between productivity and typical compensation? Since productivity growth has been so much faster than median pay growth, the question is how much does productivity growth benefit the typical worker?2
A number of authors have raised these questions in recent years. Harold Meyerson, for example, wrote in American Prospect in 2014 that “for the vast majority of American workers, the link between their productivity and their compensation no longer exists”, and the Economist wrote in 2013 that “unless you are rich, GDP growth isn't doing much to raise your income anymore”. Bernstein (2015) raises the concern that “[f]aster productivity growth would be great. I’m just not at all sure we can count on it to lift middle-class incomes.” Bivens and Mishel (2015) write “although boosting productivity growth is an important long-run goal, this will not lead to broad-based wage gains unless we pursue policies that reconnect productivity growth and the pay of the vast majority”.
Has typical compensation delinked from productivity?
Figure 1 appears to suggest that a one-to-one relationship between productivity and typical compensation existed before 1973, and that this relationship broke down after 1973. On the other hand, just as two time series apparently growing in tandem does not mean that one causes the other, two series diverging may not mean that the causal link between the two has broken down. Rather, other factors may have come into play which appear to have severed the connection between productivity and typical compensation.
As such there is a spectrum of possibilities for the true underlying relationship between productivity and typical compensation. On one end of the spectrum – which we call ‘strong delinkage’ – it’s possible that factors are blocking the transmission mechanism from productivity to typical compensation, such that increases in productivity don’t feed through to pay. At the opposite end of the spectrum – which we call ‘strong linkage’ – it’s possible that productivity growth translates fully into increases in typical workers’ pay, but even as productivity growth has been acting to raise pay, other factors (orthogonal to productivity) have been acting to reduce it. Between these two ends of the spectrum is a range of possibilities where some degree of linkage or delinkage exists between productivity and typical compensation.
In a recent paper, we estimate which point on this linkage-delinkage spectrum best describes the productivity-typical compensation relationship (Stansbury and Summers 2017). Using medium-term fluctuations in productivity growth, we test the relationship between productivity growth and two key measures of typical compensation growth: median compensation, and average compensation for production and nonsupervisory workers.
Simply plotting the annual growth rates of productivity and our two measures of typical compensation (Figure 2) suggests support for quite substantial linkage – the series seem to move together, although typical compensation growth is almost always lower.
Figure 2 Change in log productivity and typical compensation, three-year moving average
Notes: Data from BLS, BEA and Economic Policy Institute. Series are three-year backward-looking moving averages of change in log variable.
Making use of the high frequency changes in productivity growth over one- to five-year periods, we run a series of regressions to test this link more rigorously. We find that periods of higher productivity growth are associated with substantially higher growth in median and production/nonsupervisory worker compensation – even during the period since 1973, where productivity and typical compensation have diverged so much in levels. A one percentage point increase in the growth rate of productivity has been associated with between two-thirds and one percentage point higher growth in median worker compensation in the period since 1973, and with between 0.4 and 0.7 percentage points higher growth in production/nonsupervisory worker compensation. These results suggest that there is substantial linkage between productivity and median compensation (even the strong linkage view cannot be rejected), and that there is a significant degree of linkage between productivity and production/nonsupervisory worker compensation.
How is it possible to find this relationship when productivity has clearly grown so much faster than median workers’ pay? Our findings imply that even as productivity growth has been acting to push workers’ pay up, other factors not associated with productivity growth have acted to push workers’ pay down. So while it may appear on first glance that productivity growth has not benefited typical workers much, our findings imply that if productivity growth had been lower, typical workers would have likely done substantially worse.
If the link between productivity and pay hasn’t broken, what has happened?
The productivity-median compensation divergence can be broken down into two aspects of rising inequality: the rise in top-half income inequality (divergence between mean and median compensation) which began around 1973, and the fall in the labour share (divergence between productivity and mean compensation) which began around 2000.
For both of these phenomena, technological change is often invoked as the primary cause. Computerisation and automation have been put forward as causes of rising mean-median income inequality (e.g. Autor et al. 1998, Acemoglu and Restrepo 2017); and automation, falling prices of investment goods, and rapid labour-augmenting technological change have been put forward as causes of the fall in the labour share (e.g. Karabarbounis and Neiman 2014, Acemoglu and Restrepo 2016, Brynjolffson and McAfee 2014, Lawrence 2015).
At the same time, non-purely technological hypotheses for rising mean-median inequality include the race between education and technology (Goldin and Katz 2007), declining unionisation (Freeman et al. 2016), globalisation (Autor et al. 2013), immigration (Borjas 2003), and the ‘superstar effect’ (Rosen 1981, Gabaix et al. 2016). Non-technological hypotheses for the falling labour share include labour market institutions (Levy and Temin 2007, Mishel and Bivens 2015), market structure and monopoly power (Autor et al. 2017, Barkai 2017), capital accumulation (Piketty 2014, Piketty and Zucman 2014), and the productivity slowdown itself (Grossman et al. 2017).
While we do not analyse these theories in detail, a simple empirical test can help distinguish the relative importance of these two categories of explanation – purely technology-based or not – for rising mean-median inequality and the falling labour share. More rapid technological progress should cause faster productivity growth – so, if some aspect of faster technological progress has caused inequality, we should see periods of faster productivity growth come alongside more rapid growth in inequality.
We find very little evidence for this. Our regressions find no significant relationship between productivity growth and changes in mean-median inequality, and very little relationship between productivity growth and changes in the labour share. In addition, as Table 1 shows, the two periods of slower productivity growth (1973-1996 and 2003-2014) were associated with faster growth in inequality (an increasing mean/median ratio and a falling labour share).
Taken together, this evidence casts doubt on the idea that more rapid technological progress alone has been the primary driver of rising inequality over recent decades, and tends to lend support to more institutional and structural explanations.
Table 1 Average annual growth rates of productivity, the labour share and the mean/median ratio during the US’ productivity booms and productivity slowdowns
Note: Data from BLS, Penn World Tables, EPI Data Library.
The slow growth in median workers’ pay and the large and persistent rise in inequality are extremely concerning on grounds of both welfare and equity. There are important ongoing debates about the factors responsible for this phenomenon, and what must be done to reverse it.
Our contribution to these debates is, we believe, to demonstrate that productivity growth still matters substantially for middle income Americans. If productivity accelerates for reasons relating to technology or to policy, the likely impact will be increased pay growth for the typical worker.
We can use our estimates to calculate a rough counterfactual. If the ratio of the mean to median worker's hourly compensation in 2016 had been the same as it was in 1973, and mean compensation remained at its 2016 level, the median worker's pay would have been around 33% higher. If the ratio of labour productivity to mean compensation in 2016 had been the same as it was in 1973 (i.e. the labour share had not fallen), the average and median worker would both have had 4-8% more hourly compensation all else constant. Assuming our estimated relationship between compensation and productivity holds, if productivity growth had been as fast over 1973-2016 as it was over 1949-1973, median and mean compensation would have been around 41% higher in 2016, holding other factors constant.
This suggests that the potential effect of raising productivity growth on the average American’s pay may be as great as the effect of policies to reverse trends in income inequality – and that a continued productivity slowdown should be a major concern for those hoping for increases in real compensation for middle income workers.
This does not mean that policy should ignore questions of redistribution or labour market intervention – the evidence of the past four decades demonstrates that productivity growth alone is not necessarily enough to raise real incomes substantially, particularly in the face of strong downward pressures on pay. However it does mean that policy should not focus on these issues to the exclusion of productivity growth – strategies that focus both on productivity growth and on policies to promote inclusion are likely to have the greatest impact on the living standards of middle-income Americans.
Acemoglu, D and P Restrepo (2017), "Robots and jobs: Evidence from US labour markets", NBER Working Paper 23285.
Acemoglu, D and P Restrepo (2016), “The race between machine and man: Implications of technology for growth, factor shares and employment”, NBER, Working Paper 22252.
Autor, D, D Dorn, L F Katz, C Patterson and J Van Reenen (2017), “The fall of the labour share and the rise of superstar firms”, CEPR Discussion Paper 12041.
Autor, D, D Dorn and G H Hanson (2013), "The China syndrome: Local labour market effects of import competition in the United States", American Economic Review 103(6): 2121-2168.
Autor, D, L F Katz and A B Krueger (1998), "Computing inequality: Have computers changed the labour market?" Quarterly Journal of Economics 113(4): 1169-1213.
Barkai, S (2016), "Declining labour and capital shares", Stigler Center for the Study of the Economy and the State, New Working Paper Series 2.
Bernstein, J (2015), “Faster productivity growth would be great. I’m just not sure we can count on it to lift middle class incomes”, On the Economy Blog, 21 April.
Bivens, J and L Mishel (2015), “Understanding the historic divergence between productivity and a typical worker's pay: Why it matters and why it's real", Economic Policy Institute, Washington DC.
Borjas, G J (2003), “The labour demand curve is downward sloping: Reexamining the impact of immigration on the labour market”, Quarterly Journal of Economics 118(4): 1335-1374.
Brynjolfsson, E and A McAfee (2014), The second machine age: Work, progress, and prosperity in a time of brilliant technologies, WW Norton & Company.
The Economist (2015), “Inequality: A defining issue – for poor people”, Economist Blog – Democracy in America, 16 December.
Elsby, M, B Hobijn and A Şahin (2013), "The decline of the US labour share", Brookings Papers on Economic Activity 2013(2): 1-63.
Feldstein, M (2008), “Did wages reflect growth in productivity?" Journal of Policy Modeling 30(4): 591-594.
Freeman, R B, E Han, B Duke, D Madland (2016), “How does declining unionism affect the American middle class and inter-generational mobility?”, Federal Reserve Bank, 2015 Community Development Research Conference Publication.
Gabaix, X, J‐M Lasry, P‐L Lions and B Moll (2016), "The dynamics of inequality", Econometrica 84(6): 2071-2111.
Goldin, C D, and L F Katz (2009), The race between education and technology, Harvard University Press.
Grossman, G M, E Helpman, E Oberfield and T Sampson (2017), “The productivity slowdown and the declining labour share: A neoclassical exploration”, NBER, Working Paper No 23853.
Karabarbounis, L and B Neiman (2014), “The global decline of the labour share", Quarterly Journal of Economics 129(1): 61-103.
Lawrence, R Z (2015), “Recent declines in labour's share in US income: A preliminary neoclassical account", NBER Working Paper No w21296.
Lawrence, R Z (2016), “Does productivity still determine worker compensation? Domestic and international evidence”, in The US Labour Market: Questions and Challenges for Public Policy, American Enterprise Institute Press.
Levy, F and P Temin (2007), "Inequality and institutions in 20th century America", NBER Working Paper 13106
Meyerson, H (2014), “How to raise Americans’ wages”, The American Prospect, 18 March.
Piketty, T (2014), Capital in the Twenty-First Century, Cambridge, MA: Belknap Press.
Piketty, T and G Zucman (2014), “Capital is back: Wealth-income ratios in rich countries 1700–2010”, Quarterly Journal of Economics 129(3): 1255–1310.
Stansbury, A and L Summers (2017), “Productivity and pay: Is the link broken?”, NBER, Working Paper 24165.
 As measured using the CPI-U-RS consumer price deflator. Using the PCE consumer price deflator, median compensation has risen by about 26% over the period rather than 12%. We use the Economic Policy Institute’s measure of median compensation, which they calculate from median wages (BLS) and the average wage-total compensation ratio (BEA NIPA).
 Note that we focus in this column on the divergence of median or typical pay from average productivity. The divergence of average compensation from average productivity – equivalent to the declining labour share – has been smaller and more recent. Analyses of the average compensation-average productivity divergence can be found in Feldstein (2008), Lawrence (2016) and our recent paper (Stansbury and Summers 2017).
Posted by Mark Thoma on Tuesday, February 20, 2018 at 11:08 AM in Economics, Income Distribution, Productivity |
Posted by Mark Thoma on Tuesday, February 20, 2018 at 11:08 AM in Economics, Links |
Inflation, General Data Flow, Fiscal Stimulus, And Implications For Monetary Policy, by Tim Duy: The data flow remains supportive of the Fed’s forecast of sustained moderate growth. A spike in prices, however, drove core CPI inflation to the fastest monthly pace since 2005, again raising fears that the Fed will accelerate the pace of rate hikes. I still think this is premature. To be sure, the risk is that the Fed hikes rates more than the projected three times this year. But Powell & Co. will need more data to support a faster pace of rate hikes. They will not overreact to data that may prove to be nothing more than a flash in a pan. ...continued here...
Posted by Mark Thoma on Tuesday, February 20, 2018 at 11:08 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Monday, February 19, 2018 at 11:56 AM in Economics, Links |
"our job, whether we’re policy analysts or journalists, isn’t to be “balanced”; it’s to tell the truth":
Budgets, Bad Faith and ‘Balance’, by Paul Krugman, NY Times: Over the past couple of months Republicans have passed or proposed three big budget initiatives. First, they enacted a springtime-for-plutocrats tax cut that will shower huge benefits on the wealthy while offering a few crumbs for ordinary families — crumbs that will be snatched away after a few years, so that it ends up becoming a middle-class tax hike. Then they signed on to a what-me-worry budget deal that will blow up the budget deficit to levels never before seen except during wars or severe recessions. Finally, the Trump administration released a surpassingly vicious budget proposal that would punish not just the vulnerable but also most working families.
Looking at all of this should make you very angry... But my anger isn’t mostly directed at Republicans; it’s directed at their enablers, the professional centrists, both-sides pundits, and news organizations that spent years refusing to acknowledge that the modern G.O.P. is what it so clearly is.
Which is not to say that Republicans should be let off the hook. ...I can’t think of a previous example of a party that so consistently acted in bad faith — pretending to care about things it didn’t, pretending to serve goals that were the opposite of its actual intentions. ... The ... party’s true agenda, dictated by the interests of a handful of super-wealthy donors, would be very unpopular if the public understood it. So the party must consistently lie...
Meanwhile, many news organizations ... treat recent G.O.P. actions as if they are some kind of ... departure from previous principles. They aren’t. Republicans are what they always were: They never cared about deficits; they always wanted to dismantle Medicare, not defend it. They just happen not to be who they pretended to be.
Now, there’s no mystery about why many people won’t face up to the reality of Republican bad faith. Washington is full of professional centrists, whose public personas are built around a carefully cultivated image of standing above the partisan fray, which means that they can’t admit that while there are dishonest politicians everywhere, one party basically lies about everything. News organizations are intimidated by accusations of liberal bias, which means that they try desperately to show “balance” by blaming both parties equally for all problems.
But our job, whether we’re policy analysts or journalists, isn’t to be “balanced”; it’s to tell the truth. And while Democrats are hardly angels, at this point in American history, the truth has a well-known liberal bias.
Posted by Mark Thoma on Friday, February 16, 2018 at 12:39 PM in Economics, Politics, Press |
Posted by Mark Thoma on Thursday, February 15, 2018 at 10:51 AM in Economics, Links |
Posted by Mark Thoma on Tuesday, February 13, 2018 at 01:39 PM in Economics, Links |
"Trump’s offer on infrastructure is this: nothing":
Trump Doesn’t Give a Dam, by Paul Krugman, NY Times: Donald Trump doesn’t give a dam. Or a bridge. Or a road. Or a sewer system. Or any of the other things we talk about when we talk about infrastructure.
But how can that be when he just announced a $1.5 trillion infrastructure plan? That’s easy: It’s not a plan, it’s a scam. The $1.5 trillion number is just made up; he’s only proposing federal spending of $200 billion, which is somehow supposed to magically induce a vastly bigger overall increase in infrastructure investment, mainly paid for either by state and local governments (which are not exactly rolling in cash, but whatever) or by the private sector.
And even the $200 billion is essentially fraudulent: The budget proposal announced the same day doesn’t just impose savage cuts on the poor, it includes sharp cuts for the Department of Transportation, the Department of Energy and other agencies that would be crucially involved in any real infrastructure plan. Realistically, Trump’s offer on infrastructure is this: nothing.
That’s not to say that the plan is completely vacuous. One section says that it would “authorize federal divestiture of assets that would be better managed by state, local or private entities.” Translation: We’re going to privatize whatever we can. It’s conceivable that this would be done only in cases where the private sector really would do better, and contracts would be handed out fairly, without a hint of cronyism. And if you believe that, I have a degree from Trump University you might want to buy. ...
So why isn’t Trump proposing something real? Why this dog’s breakfast of a proposal that everyone knows won’t go anywhere?
Part of the answer is that in practice Trump always defers to Republican orthodoxy, and the modern G.O.P. hates any program that might show people that government can work and help people.
But I also suspect that Trump is afraid to try anything substantive. To do public investment successfully, you need leadership and advice from experts. And this administration doesn’t do expertise, in any field. Not only do experts have a nasty habit of telling you things you don’t want to hear, their loyalty is suspect: You never know when their professional ethics might kick in.
So the Trump administration probably couldn’t put together a real infrastructure plan even if it wanted to. And that’s why it didn’t.
Posted by Mark Thoma on Tuesday, February 13, 2018 at 01:39 PM in Economics, Fiscal Policy, Politics |
From the San Francisco Fed:
FRBSF Fed Views: Fernanda Nechio, research advisor at the Federal Reserve Bank of San Francisco, stated her views on the current economy and the outlook as of February 8, 2018.
Based on the advance estimate of the Bureau of Economic Analysis, real GDP expanded at an annual rate of 2.6 percent for the fourth quarter of 2017 and 2.5 percent for the year overall. The bulk of the strength in real GDP growth can be attributed to robust consumer spending, which in turn reflects household wage gains, increased equity prices, and supportive financial conditions. As monetary policy continues to normalize over the next two to three years, we expect growth gradually to fall back to our trend growth estimate of about 1.8%.
Recent employment gains remain solid. Nonfarm payroll employment in January rose by 200,000 jobs. During 2017, payroll gains have averaged around 181,000 jobs per month.
The unemployment rate remained at 4.1% in January, unchanged since October. We expect this rate to fall below 4% in 2018 before gradually returning to our estimate for its natural level at 4.75%.
Inflation continues to remain below the Federal Reserve’s 2% target. Overall inflation in the twelve months through December, as measured by the price index for personal consumption expenditures was 1.7%. Core inflation, which excludes volatile food and energy prices, rose 1.5% in the twelve months through December. Given the strong labor market conditions, we expect overall and core consumer price inflation to rise gradually and reach our 2% target over the next couple of years.
Interest rates are continuing to increase with the gradual removal of monetary policy accommodation. At its January meeting, the FOMC maintained the target range for the federal funds target at 1.25% to 1.5%.
The developed world is undergoing a dramatic demographic transition. In most advanced economies, actual and expected longevity have increased steadily, while the median retirement age has changed little, leading to longer retirement periods. Meanwhile, population growth rates are declining and in some cases, even becoming negative.
Changing demographics can affect the natural real rate of interest, r-star; the inflation-adjusted interest rate that is consistent with steady inflation at the Fed’s target and the economy growing at its potential. Demographic trends affect the equilibrium rate by changing incentives to save and consume. Lengthier retirement periods may raise some households’ desire to save rather than consume, lowering r-star. At the same time, declining population growth increases the share of older households in the economy, who generally have higher marginal propensities to consume, raising consumption and r-star. As population growth declines, it could also reduce real GDP growth and productivity, thereby putting downward pressure on r-star.
In the United States, these demographic changes have already put significant downward pressure on interest rates between 1990 and 2017. As demographic movements tend to be long-lasting, the effects on interest rates may be ongoing. A lower equilibrium rate has the potential to limit the scope for the Federal Reserve to cut interest rates in response to future recessionary shocks.
The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.
Posted by Mark Thoma on Tuesday, February 13, 2018 at 01:28 PM in Economics |
Stick To The Forecast, by Tim Duy:
So far, I’d say this is small potatoes… -- New York Federal Reserve President William Dudley, February 8, 2018
All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. -- Federal Reserve Chairman Ben Bernanke, May 17, 2007
Friday was yet another day of wild swings on Wall Street as market participants continue to digest the implications for stocks and bonds of this new stage of the business cycle. In short, there looks to be a painful repricing underway that involves a new equilibrium set of prices for bonds and stocks. For now, though the Fed doesn’t care about your pain. At least that’s the message from Fed officials. They want to keep the focus on the bigger picture. That bigger picture is the economic forecast – which continues to point to gradual rate hikes. ...[continued here]...
Posted by Mark Thoma on Monday, February 12, 2018 at 01:57 PM in Economics, Monetary Policy |
Posted by Mark Thoma on Monday, February 12, 2018 at 01:52 PM in Economics, Links |
"...pretending to care about the deficit served several useful political purposes":
Fraudulence of the Fiscal Hawks, by Paul Krugman, NY Times: In 2011, House Republicans, led by Paul Ryan, issued a report full of dire warnings about the dangers of budget deficits. ... Citing the horrors of big deficits, Republicans refused to raise the federal debt ceiling, threatening to create financial turmoil and effectively blackmailing President Barack Obama into cutting spending on domestic programs.
How big were these horrifying deficits? In the 2012 fiscal year the federal deficit was $1.09 trillion. Much of this deficit, however, was a direct result of a depressed economy... The deficit fell rapidly over the next few years as the economy recovered.
This week Republicans, having just enacted a huge tax cut, cheerfully agreed to a budget deal that, according to independent experts, will push next year’s deficit up to around $1.15 trillion — bigger than in 2012..., but this time none of the deficit will be a result of a depressed economy.
Wait, it gets worse. In 2012 there were strong economic reasons to run budget deficits. The economy was still suffering the aftereffects of the 2008 financial crisis. ... By contrast, there is no comparable case for deficits now, with the economy near full employment and the Fed raising interest rates to head off potential inflation. ...
If anything, we should be using this time of relatively full employment to pay down debt, or at least reduce it relative to G.D.P. ...Republicans ... are providing more stimulus to an economy with 4 percent unemployment than they were willing to allow an economy with 8 percent unemployment.
There have been many “news analysis” pieces asking why Republicans have changed their views on deficit spending. But let’s be serious: Their views haven’t changed at all. They never really cared about debt and deficits; it was a fraud all along. ...
However, pretending to care about the deficit served several useful political purposes. It was a way to push for cuts in social programs. It was also a way to hobble Obama’s presidency.
And I don’t think it’s unfair to suggest that there was an element of deliberate economic sabotage. ... Basically, they were against anything that might help the economy on President Obama’s watch.
Now Obama is gone, and suddenly deficits don’t matter. ...
No, this is all about Republican bad faith. Everything they said about budgets, every step of the way, was fraudulent. And nobody should believe anything they say now.
Posted by Mark Thoma on Friday, February 9, 2018 at 02:40 PM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Friday, February 9, 2018 at 12:43 PM in Economics, Links |
"In an interview with ProMarket, Nobel Prize-winning economist Angus Deaton talks about the connection of rent-seeking and monopolization to rising inequality":
Angus Deaton on the Under-Discussed Driver of Inequality in America: “It’s Easier for Rent-Seekers to Affect Policy Here Than In Much of Europe”: In December, the United Nations’ special rapporteur on extreme poverty and human rights, Philip Alston, embarked on a coast-to-coast tour of the United States. Alston’s fact-finding mission, conducted at the invitation of the federal government, resulted in a grim report that declared the US “the world champion of extreme inequality” and highlighted the vast inequities that plague American society: The US is one of the world’s wealthiest countries, yet 40 million of its inhabitants live in poverty, its infant mortality rates are the highest among developed nations, and Americans lead “shorter and sicker lives, compared to people living in any other rich democracy.” The US also has the lowest rate of social mobility of any rich country, rapidly turning the American Dream—its national ethos—to “an American illusion.”
Rising inequality has been the focus of countless articles, books and debates in recent years, as more and more empirical studies show that in the decades since 1980, income gains have gone overwhelmingly to the top 1 percent and 0.1 percent. Much of the debate, however, is concerned with the implications of inequality: Does rising inequality negatively affect economic growth? Does it undermine democracy? Did it contribute to the rise of populist politics in America and around the developed world?
Those, says Nobel Prize-winning economist Angus Deaton, are the wrong questions to ask if we wish to understand inequality. In fact, he suggested in a recent piece for Project Syndicate, it’s possible that the term “inequality” itself might be ill-fitting. A better term might be “unfairness”: Inequality, he argued, is the consequence of economic, political, and social processes—some good, some bad, and some very bad. The key to addressing its rapid increase is to address the processes that can be deemed “unfair.”
Examples are plenty. In his piece, Deaton focuses on several processes and policies that have allowed the rich to get richer while holding down middle- and working-class wages. Among them: rising health care costs, market consolidation, diminishing labor power, and corporations’ political power. These processes do not stem from “unstoppable processes” like technology or globalization, argues Deaton, but are the result of rent-seeking.
Deaton, the recipient of the 2015 Nobel Prize in Economics, is one of the world’s foremost experts on inequality. The groundbreaking research on US mortality rates he conducted together with Anne Case revealed an increase in midlife mortality rates among white non-Hispanic Americans, led by death related to drugs, alcohol and suicide—what they called “deaths of despair.”
To better understand the connection between inequality and rent-seeking in America, we spoke with Deaton, a Senior Scholar and the Dwight D. Eisenhower Professor of Economics and International Affairs Emeritus at the Woodrow Wilson School of Public and International Affairs and the Economics Department at Princeton University. In his interview with ProMarket, Deaton discussed the connection of rent-seeking and monopolization to rising inequality, and explained why he believes it’s easier for rent-seekers to influence policy in the US than in Europe. ...[continue]...
Posted by Mark Thoma on Thursday, February 8, 2018 at 01:19 PM in Economics, Income Distribution, Market Failure |
Posted by Mark Thoma on Wednesday, February 7, 2018 at 09:52 AM in Economics, Links |
On the Uses (and Abuses) of Economath: The Malthusian Models: Many American undergraduates in Economics interested in doing a Ph.D. are surprised to learn that the first year of an Econ Ph.D. feels much more like entering a Ph.D. in solving mathematical models by hand than it does with learning economics. Typically, there is very little reading or writing involved, but loads and loads of fast algebra is required. Why is it like this? ...
Posted by Mark Thoma on Tuesday, February 6, 2018 at 11:04 AM in Economics, Methodology |
"all of this would be manageable if key policymakers could be counted on to act effectively":
Has Trumphoria Finally Hit a Wall?, by Paul Krugman, NY Times: When talking about stock markets, there are three rules you have to remember. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy.
So the market plunge of the past few days might mean nothing at all. ...
Still, market turmoil should make us take a hard look at the economy’s prospects. And what the data say, I’d argue, is that at the very least America is heading for a downshift in its growth rate; the available evidence suggests that growth over the next decade will be something like 1.5 percent a year, not the 3 percent Donald Trump and his minions keep promising. ...
But should we be worried about something worse than a mere downshift in growth?
Well, asset prices do look high: A widely used gauge of stock valuations puts them at a 15-year high, while a conceptually similar measure says that housing prices have retraced a bit less than half the rise that culminated in the great housing bust.
Individually, these numbers aren’t that alarming: Stocks, as I said, don’t look nearly as overvalued as they did in 2000, housing not nearly as overvalued as it was in 2006. On the other hand, this time both markets look overvalued at the same time, at least raising the possibility of a double-bubble burst like the one that hit Japan at the end of the 1980s.
And if asset prices take a hit, we might expect consumers — who have been spending heavily and saving very little — to pull back.
Still, all of this would be manageable if key policymakers could be counted on to act effectively. Which is where I get worried.
It’s surely not a good thing that Trump got rid of one of the most distinguished Federal Reserve chairs in history just before markets started to flash some warning signs. Jerome Powell, Janet Yellen’s replacement, seems like a reasonable guy. But we have no idea how well he would handle a crisis if one developed.
Meanwhile, the current secretary of the Treasury — who declared of Davos, “I don’t think it’s a hangout for globalists” — may be the least distinguished, least informed individual ever to hold that position.
So are we heading for trouble? Too soon to tell. But if we are, rest assured that we’ll have the worst possible people on the case.
Posted by Mark Thoma on Tuesday, February 6, 2018 at 10:25 AM in Economics, Financial System, Monetary Policy |
Posted by Mark Thoma on Tuesday, February 6, 2018 at 10:25 AM in Economics, Links |
Moving Pieces, by Tim Duy: There are lots of moving pieces right now. So many that few wanted to step in front of last week’s selling on Wall Street. I am going to try to sort out some of these pieces here.
The employment report and, most notably, the pop in wages caught analysts off guard. If you were expecting the job market to slow down early this year, you continue to be on the wrong side of the story. Employers added 200k workers to payrolls in January, close to the three-month average of 192k. Curiously, the unemployment rate has held steady for four months in a row despite job growth well in excess of labor force growth. To be sure, those numbers come from different surveys, so they don’t need to match up month to month. Still, I think the household survey will eventually catch up and hence we should be prepared for a sharp lurch downward in the unemployment rate in the coming months. ...continued here...
Posted by Mark Thoma on Monday, February 5, 2018 at 10:36 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Monday, February 5, 2018 at 10:36 AM in Economics, Links |
"lower-level Fed appointments are becoming cause for concern":
The Gang That Couldn’t Think Straight, by Paul Krugman, NY Times: ...A remarkable number of Trump appointees have been forced out over falsified credentials, unethical practices or racist remarks. And you can be sure there are many other appointees who did the same things, but haven’t yet been caught. ...
But what’s the problem? After all, stocks are up and the economy is steadily growing. Does competence even matter?
The answer is that America ... can run on momentum for a long time even if none of the people in charge know what they’re doing. Sooner or later, however, stuff happens — and then incompetence becomes a very big deal...
What kind of stuff may happen? The scariest scenarios involve national security. But we can’t count on smooth sailing for the economy, either. And who will manage economic turbulence if and when it hits? After all, we currently have perhaps the least impressive Treasury secretary in U.S. history.
Matters are a bit better at the Federal Reserve, where nobody seems to have bad things to say about Jerome Powell, just confirmed as Fed chairman. On the other hand, why didn’t Trump just follow the usual norms and appoint Janet Yellen, who has done a fantastic job, to a second term?
One answer may be that Trump is a traditionalist — and few things are more traditional than passing over a highly qualified woman in favor of a less qualified man. But I also suspect that he found Yellen’s independent stature threatening.
And lower-level Fed appointments are becoming cause for concern.
Last week, senators at a confirmation hearing questioned the economist Marvin Goodfriend, whom Trump has nominated for the Fed’s Board of Governors. Democrats pointed out that Goodfriend was wrong, again and again, about monetary policy during the crisis, repeatedly predicting inflation that didn’t happen.
Now, everyone makes bad predictions now and then; God knows I have. But you’re supposed to face up to your mistakes, figure out what went wrong and adapt your views. Goodfriend refused to do any of that. And why should he? His errors were politically correct; they reinforced Republican orthodoxy. From the G.O.P.’s point of view, having been completely wrong about monetary policy isn’t a defect, it’s practically a badge of honor.
The point is that even at the Fed, which is partly insulated from the Trumpian reign of error, U.S. policymaking is being denuded of expertise. And the whole nation will eventually pay the price.
Posted by Mark Thoma on Friday, February 2, 2018 at 11:31 AM in Economics, Monetary Policy, Policy, Politics |
Economy Adds 200,000 Jobs in January, Black Unemployment Jumps 0.9 Percentage Points, CEPR: The Bureau of Labor Statistics reported that the economy added 200,000 jobs in January. With modest downward revisions to the prior two months data, this brings average growth over the last three months to 192,000. This is slightly more rapid than the 176,000 average over the last year. The picture on the household side was mixed, with the both the unemployment rate and employment-to-population ratios (EPOPs) remaining unchanged.
However, while the unemployment rate for whites dipped by 0.2 percentage points to 3.5 percent, the black unemployment rate jumped 0.9 percentage points to 7.7 percent, putting it just a hair under the 7.8 percent rate of January, 2017. This was associated with a 0.6 percentage point drop in the employment rate.
This is disappointing since the 6.8 percent rate in December was the lowest on record. (The data only go back to 1972.) ... The employment data for blacks are highly erratic and it is likely that much of this change is driven by measurement error, but it is nonetheless discouraging to see this reported jump.
The percentage of unemployment due to voluntary quits, a measure of people’s confidence in their labor market prospects, was unchanged at 10.9 percent. It stood at over 12.0 percent before the recession and peaked at over 15 percent in 2000.
Less-educated workers continue to be the biggest job gainers. ...
One item suggesting slower job growth going forward is a drop in the diffusion indexes, which show the percentage of industries intending to add jobs. The overall index fell from 65.5 to 57.9, while the manufacturing index fell from 60.5 to 53.9.
The story is mixed on the wage side. The overall average hourly wage is up 2.9 percent year-over-year, a modest acceleration from its prior pace. However, the average wage for production and nonsupervisory workers, a group that excludes many higher-paid workers, rose just 2.4 percent over the last year. By industry, the fastest growth appears to be in restaurants, with higher wages driven both by minimum wage increases and a tightening of the labor market. Wage growth in manufacturing, at 1.9 percent, lags the overall average, as does the 2.2 percent growth in retail.
Overall, this is a positive picture of the labor market with the jump in wages being especially good news. However, there are discouraging signs, such as the drop in the diffusion indexes, the small percentage of unemployment due to voluntary quits, and of course, the rise in the black unemployment rate. In addition, there was a 0.2 hour drop in the length of the average workweek. This led to a drop in average weekly pay, despite the higher hourly rate. This is most likely a blip in the data, but one that is worth noting.
Posted by Mark Thoma on Friday, February 2, 2018 at 11:12 AM in Economics, Unemployment |
Posted by Mark Thoma on Friday, February 2, 2018 at 11:07 AM in Economics, Links |