Category Archive for: Economics [Return to Main]

Friday, July 29, 2016

Links for 07-29-16

Thursday, July 28, 2016

What Does 'Regulatory Capture' Mean to Business and the Economy?

James Ledbetter:

What Does 'Regulatory Capture' Mean to Business and the Economy?: In recent months, the idea of "regulatory capture" ... has been enjoying its star turn. ... Earlier this year, the Government Accountability Office revealed that it had (at the urging of two members of Congress) begun investigating whether the New York office of the Federal Reserve is too close to the financial institutions it is supposed to regulate. This is, apparently, the first GAO investigation of its kind. ...
For all the ubiquity of charges of capture, however, it can be difficult to grasp exactly what capture is, or how serious a social and economic problem it represents.
As it is commonly used, "capture" seems malleable enough to fit into the worldviews of both the left (evil corporations outfox, outspend, and manipulate regulators) and the right (state regulation is harmful to businesses). And yet, historically, capture theory embodies a more collusive view of the relationship between government and enterprise. Classic capturists argue that ... businesses accept regulations because they ultimately help improve profits. ...
Intuitively, though, we know that not all regulation benefits companies. ...
Some scholars are urging that we rethink the entire idea. A 2013 essay by William Novak, a law professor at the University of Michigan, ... accepts that regulatory capture exists, but he offers two refinements... One is that capture may be more likely among "vertical" regulators--those who enforce rules within a single industry, such as trucking--than among "horizontal" regulators, those whose mandates apply broadly across society, such as the Environmental Protection Agency or the Occupational Safety and Health Administration.
The second is that ... it is far from proven that regulators are any more prone to it than other institutions. The financial crisis ... was a regulatory failure, to be sure. But, as Novak said in an interview, "entire sectors of the government became enamored with financial interests, including Congress."
And thus, if we intend to tackle the problem of capture, we need more precise definitions and measurements. There is a risk of either weakening regulations that genuinely protect the public, or allowing some incumbents to continue their unearned free ride and squash disrupters. ...

The Case for a Financial Transactions Tax

Dean Baker:

The Case for a Financial Transactions Tax, The Century Foundation: There has been considerable interest in financial transactions taxes (FTTs) in the United States and other wealthy countries in the years since the financial crisis. An FTT can be a way to both raise a large amount of revenue and also rein in the financial sector. This report examines the evidence on the potential for raising revenue through an FTT, its impact on the economy, and also the possibility of using the revenue to defray in particular the cost of higher education. The report argues:

  • A financial transactions tax could likely raise over $105 billion annually (0.6 percent of GDP) based on 2015 trading volume. This estimate is roughly in the middle of recent estimates that ranged from as high as $580 billion to as low as $30 billion.
  • The full amount of this tax would be borne by the financial industry, and not individual holders of stock or pension funds and other institutional investors. Evidence suggests that trading volume is elastic with respect to price, meaning that any drop in trading volume resulting from the tax would reduce costs for end users by a larger amount than the tax would increase them.
  • It is reasonable to believe that the industry would be no less effective in serving its productive use (allocating capital) after the tax is in place. This means that one of the primary effects of the tax would be to reduce waste in the financial sector, reducing costs while having little or no effect on its principal purpose: to allocate capital effectively.
  • The revenue raised through an FTT would easily be large enough to cover the cost of free college tuition (among other social programs), although if nothing were done to stem the growth rate of college costs, it would eventually prove inadequate.

The report also notes that the financial sector is the main source of income for many of the highest earners in the economy. This means that downsizing the industry through an FTT could play an important role in reducing income inequality. ...

Links for 07-28-16

Wednesday, July 27, 2016

Fed Policy Unchanged

Here's a link to the Fed's statement on its policy decision today:

FOMC statement - FRB

Policy is unchanged, sees improvements in the economy, says short-term risks have fallen.

July FOMC Preview

Tim Duy:

July FOMC Preview on Bloomberg: How long can doves at the Federal Reserve stand their ground?
The fight within the U.S. central bank continues at this week's Federal Open Market Committee (FOMC) meeting as both hawks and doves jockey for dominant position. This battle will go to the doves; the Fed is not expected to raise its interest rate target just yet. Both the hawks and the doves know this. Both camps also know that this meeting is about laying down markers for the September meeting. And while the doves have the upper hand this month, the current flow of data will increasingly place them on the defensive as the second half of the year progresses.
Continued at Bloomberg....

Links for 07-27-16

Tuesday, July 26, 2016

Economists Give Up on Milton Friedman's Biggest Idea

Noah Smith:

Economists Give Up on Milton Friedman's Biggest Idea: One of the core pieces of modern macroeconomic theory, handed down to us by the great Milton Friedman, probably missed the mark. ...
The idea is called the permanent income hypothesis (PIH). ... The PIH says that people’s consumption doesn’t depend on how much they earn today, but on how much they expect to earn over their lifetime. ...
That assumption about human behavior has huge implications for policy. If true, the PIH means that the effectiveness of a fiscal stimulus is likely to be a lot lower than economists thought in the 1960s. ...
It’s also important for finance. ... Friedman’s idea says that consumers want to smooth out their consumption... So in theory people will spend a lot for financial assets that pay off during recessions, allowing them to avoid tightening their belts.
PIH is so dominant that almost all modern macroeconomic theories are based on it. ... Unfortunately, there’s just one small problem -- it’s almost certainly wrong. Not completely wrong, mind you, just somewhat wrong. ...
The mounting evidence against the PIH -- the papers I cited are only a small sampling -- is causing economists to cast around for an alternative. ...Narayana Kocherlakota ...thinks macroeconomists should set aside their big, complex formal models of the economy, since these elaborate constructions are built on a foundation that probably doesn’t describe reality all that well. He recommends that economists go back to the drawing board, and look around for new, more accurate kernels of insight with which to build the theories of tomorrow.
In the meantime, we should all recognize that Milton Friedman’s ideas might have been too influential. His impact on economics was deep and lasting, but this theory, at least, hasn’t stood the test of time.

Trump Jr.’s Pants-on-Fire Allegation of Manipulated Jobs Numbers

Jeff Frankel at Econbrowser:

Trump Jr.’s Pants-on-Fire Allegation of Manipulated Jobs Numbers: When interviewed about the unemployment numbers, which have fallen steadily since 2010, Donald Trump Jr., replied “These are artificial numbers. These are numbers that are massaged to make the existing economy look good, to make this administration look good when, in fact, it’s a total disaster.” PolitiFact asked a variety of experts about the quote. Their bottom line: the quote from the younger Trump was a “Pants on Fire” lie. The truth is that presidents don’t and can’t manipulate the jobs numbers. No White House has even tried — at least not since Richard Nixon made a heavy-handed attempt in 1971 to interfere with BLS staffing. After that, extra firewalls were put in place.
Here is my own full response to PolitiFact’s question regarding the Trump claim...

Pax Trumpiana

Paul Krugman:

Pax Trumpiana: With everything else going on, it may be hard to stay with the evolving Trump/Putin story. But it’s really crucial. I don’t think Trump is literally an agent of the Kremlin; instead, he’s someone Putin is aiding because he knows Trump is close to, probably financially entangled with friendly oligarchs. And equally important, Putin knows that Trump’s combination of ignorance and greed would quickly undermine the Western alliance: already we have, incredibly, a presidential candidate essentially proposing that we turn NATO into a protection racket, in which countries get defended only if they pay up.
All of this is, as it turns out, dovetailing with my bedtime reading.
I’m a huge fan of Adrian Goldsworthy’s histories, and I have a galley of his new opus, Pax Romana. Great fun as usual, plus lots of detail. ...
America is, one hopes, not ancient Rome; we aspired to universal values from the beginning, and the Pax Americana, while far from being perfect or even free from some evil, has surely been the most benign great-power domination in history. Still, there is some parallel between how we’ve run much of the world and what the Romans learned to do.
But Trump doesn’t care about any of that — he basically wants America to behave like Rome at its worst, to become the predatory power of Lucullus and Sulla.
And all those ultra-patriotic Republicans are cheering him on.

Economists, Blogs, and Donald Trump

I have a new column:

Economists, Blogs, and Donald Trump: The reason I have this column can be credited to, or blamed on, George Bush.
During the presidential campaigns before the 2004 election, I was very unhappy with the coverage of Bush’s economic proposals in the press. The reporting on the claim that tax cuts would cause so much growth they would pay for themselves, and the discussion of Social Security privatization were particularly irksome, but there was a more general sense that people writing about economic issues were too easily lulled into “bothsideism” and swayed by political spin. Readers were not being informed about what economic theory and evidence says about the policies the candidates were proposing. 
In an attempt to do whatever I could to change that, I started writing letters to the local paper followed by three op-eds. Then, one day in March of 2005 I started ablog. That eventually led to this column. 
I wasn’t the only one who began using blogs to try and improve communication about economics. The number of economists with blogs has grown substantially, and it has made a difference. The press coverage of economic issues is much better than it was during the campaigns for president in 2004. It’s not perfect, there are still occasions when I want to tear my hair out in frustration, but it’s far better than it was. ...
So it’s been frustrating to see how little difference it has made in the current presidential campaign. ...

Links for 07-26-16

Monday, July 25, 2016

Brexit: A Blow to the Low-Paid?

Chris Dillow:

Brexit: a blow to the low-paid?: The CBI reported today that manufacturers’ business confidence has fallen at its fastest rate since early 2009, causing falls in investment and hiring plans. This corroborates surveys by Deloitte, Markit (pdf), the Institute of Directors and, to a lesser extent the Bank of England* all of which suggest that the Brexit vote will depress economic activity. ...

What worries me is that the pain of this will disproportionately hit the low-paid. A new paper (pdf) from the Minneapolis Fed says:

It is precisely the households at the bottom of the wealth distribution with low savings rates and high propensities to consume out of current income that suffer the largest welfare losses from a severe recession. Further, these losses are much more severe than those sustained by the "average" household.

This is because the low-paid have no financial assets to cushion themselves against job loss and so must suffer either big falls in living standards or resort to high-cost payday lenders whereas the rich have savings and/or access to cheaper credit**. Also, firms faced with uncertainty might well respond by hoarding skilled labour – which is harder to find when needed – and trimming unskilled workers.

Although the coming downturn will probably not be as severe as the 2009 one, I suspect that these mechanisms will still operate. ...

What’s more, for now we are only seeing the short-run effect of increased uncertainty. In the long-run, it’s possible that by depressing world trade growth, the losers from Brexit will be those in more skilled manufacturing and finance jobs.

For now, though, it might be the low-paid that suffer the most from Brexit. These, though, were more likely (pdf) to have voted Leave. We might ask them Johnny Rotten’s famous question: ““Ever get the feeling you’ve been cheated?”

Central Bank Digital Currency: The End of Monetary Policy As We Know It?

Marilyne Tolle at the Bank of England's Bank Underground blog:

Central bank digital currency: the end of monetary policy as we know it?: Central banks (CBs) have long issued paper currency. The development of Bitcoin and other private digital currencies has provided them with the technological means to issue their own digital currency. But should they?
Addressing this question is part of the Bank’s Research Agenda. In this post I sketch out how a CB digital currency – call it CBcoin – might affect the monetary and banking systems – setting aside other important and complex systemic implications that range from prudential regulation and financial stability to technology, operational and financial conduct.
I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy. ...

Links for 07-25-16

Sunday, July 24, 2016

Dani Rodrik and Mr. Trump

David Warsh:

Dani Rodrik and Mr. Trump: David Brooks, of The New York Times, wrote the single best piece I read last week on the Republican convention: “Death of the Party.” Like him, I was riveted by Donald Trump’s acceptance speech. The scene seemed straight out of one of those dystopian Batman movies of the 1980s, ’90s, and ’00s, an outlandish character, sailing under false colors, bullying and threatening, preying on fears, selling Gotham a bill of goods, preparing chaos.
By the time the nominee bellowed, “I am your voice” to the hall of delegates, he seemed simply the latest in a long line of improbable adversaries: the Joker, the Penguin, the Riddler, Mr. Freeze, Poison Ivy, Ra’s al Ghul, the Scarecrow, Bane, Mr. Trump.
But then Batman movies depend on the Caped Crusader, the Dark Knight, to answer the Bat signal, expose the fraud, counter the villains’ plans, and save the city.
Batman in this case is Dani Rodrik, 58, of Harvard University’s Kennedy School of Government. He is likely to be the next economist to enter the pantheon of those who went to school in the ’70s whom much of the public knows today” Jeffrey Sachs, Paul Krugman, Larry Summers, Ben Bernanke. ...
Rodrik isn’t exactly fighting with Trump, the way Batman fights with those villains.  He is, by his own account, recasting the globalization narrative, replacing the familiar triumphalist version with a more nuanced account, including the ill-effects of integration that gave rise to the Trump and Bernie Sanders campaigns, and those of H. Ross Perot and Pat Buchanan before them.  (Meanwhile, Rodrik is interpreting events in Turkey as well.)
The Trump campaign supports no intellectual edifice whatsoever. For all its flaws, it is up to the Clinton campaign to begin translating into political terms the deeper understanding globalization – its costs as well as its benefits – that Rodrik, Unger, and many others have been working out.
Holy Hoodwink, Batman!  Let’s get to work!

Links for 07-24-16

Saturday, July 23, 2016

Links for 07-23-16

Friday, July 22, 2016

In Defense of Equality (without Welfare Economics)

Branko Milanovic:

In defense of equality (without welfare economics): When I taught recently at the Summer School at Groningen University, I began my lecture on the measurement of inequality by distinguishing between the Italian and English schools as they were defined in 1921 by Corrado Gini...
I put myself squarely in the camp of the “Italians”. Measurement of income inequality is like measurement of any natural or social phenomenon. We measure inequality as we measure temperature or height of people. The English (or welfarist) school believes that the measure of income inequality is only a proxy for a measure of a more fundamental phenomenon: inequality in welfare. The ultimate variable, according to them, that we want  to estimate is welfare (or even happiness) and it is distributed. Income provides only an empirically feasible short-cut to it.
I would have been sympathetic to that approach if I knew how individual utility can be measured. There is, I believe, no way to compare utilities of different persons. ... The only way for the “welfaristas” to solve this conundrum is to assume that all individuals  have the same utility function. This is such an unrealistically bold assumption that I think nobody would really care to defend it...
Now, the welfarst approach continues to be associated with pro-equality policies. Why? Because if all people have the same utility function, then the optimal distribution of income is such that everybody has the same income. ...
My students then asked how I can justify concern with inequality if I reject the welfarist view which is the main ideological vehicle through which equality of outcomes is being justified. (A non-utilitarian, contractarian alternative is provided by Rawls. Yet another alternative, based on equal capabilities—a close cousin to equality of opportunity (of which more below) is provided by Amartya Sen.)
My answer was that I justify concern with income inequality on three grounds.
The first ground is instrumental: the effect on economic growth. ...
The second is political effect. In societies where economic and political  spheres are not separated by the Chinese wall (and all existing societies are such), inequality in economic power seeps and ultimately invades and conquers the political sphere. ...
The third ground is philosophical. As Rawls has argued, every departure from unequal distribution of resources has to be defended by an appeal to a higher principle. Because we are all equal individuals (whether as declared by the Universal Charter of Human Rights or by God), we should all have an approximately equal opportunity to develop our skills and to lead a “good (and pleasant) life”. Because inequality of income almost directly translates into inequality of opportunities, it also directly negates that fundamental equality of all humans.  ...
I have to say here that in addition inequality of opportunity affects negatively economic growth...
My argument, if I need to reiterate it, is: you can reject welfarism, hold that inter-personal comparison of utility is impossible, and still feel very strongly that economic outcomes should be made more equal—that inequality should be limited so that it does not strongly affect opportunities, so that it does not slow growth and so that it does not undermine democracy. Isn’t that enough?

Thursday, July 21, 2016

Yellen Needs to Make More Speeches

Narayana Kocherlakota:

Yellen Needs to Make More Speeches: What does the U.S. Federal Reserve think about the repercussions of Britain's vote to leave the European Union? Amazingly, we still don’t really know...
Fed officials give a lot of speeches, and many have addressed Brexit in recent weeks. But, as they always say, they don’t speak on behalf of the Federal Open Market Committee...
Only one official, Fed Chair Janet Yellen, has the authority to speak on the committee's behalf, and she does so rarely. ... In all, according to the Fed's website, she has discussed policy at six formal public appearances this year. Her next won’t come until the Kansas City Fed's Jackson Hole conference in late August and the committee meeting of Sept. 20 to 21. ...
The Fed hasn’t always been so taciturn. In 2004, at the beginning of the central bank's last tightening cycle, Chairman Alan Greenspan spoke or testified on 29 separate occasions... Granted, his language was famously hard to parse. But by speaking nearly three times a month, he left no confusion among the public or Fed watchers about who to follow if they wanted to know the future course of monetary policy.
Today, people are a lot more concerned about the state of the global economy than they were in 2004... So if anything, the Fed should be communicating more. That means having a press conference after every open-market committee meeting, and having Yellen make a lot more public speeches. ...

Demand-Side Business Dynamism

Mike Konczal and Marshall Steinbaum:

New Paper: Demand-Side Business Dynamism, by Mike Konczal and Marshall Steinbaum: We—Marshall Steinbaum, who has recently joined the Roosevelt Institute as a visiting fellow, and Mike Konczal—have a new working paper out titled Declining Entrepreneurship, Labor Mobility, and Business Dynamism: A Demand-side Approach. We hope you check it out! We think it adds some important evidence on an unfolding debate. ...
A lot of people have recently been focusing on a worsening economic phenomenon commonly referred to as the decline in “business dynamism” or “labor market fluidity.” There are a lot of ways to measure that, but it’s generally defined as the declining rate at which new businesses are formed and grow, or a decline in overall labor market mobility, which includes job transitions, quitting a job, and geographic migration for work. ...
Most ... analyses stress supply-side factors such as excessive occupational licensing, restrictions on building new housing, and regulations more broadly. However, recent investigations haven’t found evidence for these supply-side factors as drivers of the decline. Measures of dynamism that don’t require geographic mobility are also falling, so it’s not driven by housing. ...
This paper provides an alternative explanation for the recent trends of declining entrepreneurship, falling labor mobility, and rising concentration of employment in old firms and large firms. Our explanation focuses on weakening demand, especially during the slow recovery from the last two recessions. That demand slowdown should, in turn, be investigated further, keeping in mind both secular stagnation and how power is shifting in favor of the owners and managers of incumbent firms alongside rising profits and inter-firm inequality. The key findings in this report are...

Jumping to the conclusion:

This paper argues that the decline in mobility, dynamism, and entrepreneurship is a result of declining labor demand since 2000. When it is hard to find another job, employed workers stay at the jobs they have, impairing their ascent up the job ladder and the accompanying wage growth over careers that historically led to the middle class. Declining entrepreneurship can also be explained by workers’ reluctance to leave large, stable incumbents to start their own firm or to work at a start-up when they cannot be assured that they will have a more stable job to return to. Thus, we find that the concentration of employment in old firms and in large firms mirrors the timing of declining labor mobility due to declining demand.
Regardless of what you make of the merits of policy debates over occupational licensing, housing restrictions, and regulation, these items are not the driver of the aggregate decline in labor market fluidity. Our alternative analysis suggests future research should investigate potential policy-related causes of those trends in demand and market structure—such as declining effective marginal tax rates on high earners and a permissive environment for inter-firm mergers—that deemphasize full employment and market competition and enable secular stagnation. ...

Links for 07-21-16

Wednesday, July 20, 2016

Is Finance a Powerful Driver of Growth?

Saleem Bahaj, Iren Levina, and Jumana Saleheen at the Bank of England's Bank Underground:

Is finance a powerful driver of growth?: Since the financial crisis the UK has experienced a period of weak productivity growth, weak investment coupled with a decline in credit to non-financial sectors of the economy. But there is debate about the direction of causality: did low growth and other structural factors mean firms and households wanted to borrow less – as argued by Martin Wolf? Or did the financial sector offer too few funds to the real economy in the wake of the crisis as banks tried to repair their balance sheets. Alternatively, the financial system may not be functioning properly in general, if much of the financial sector’s activity contributes little to the betterment of lives and efficiency of business – a point made by John Kay.
In this post, we analyse whether there has been enough finance to enable productive investment? This question was posed to the Bank of England by the Government last year, as part of its ‘productivity plan’. One concern is: Is the financial sector is holding back UK productivity? This post summarises our own insights on this topic, partly drawing on the recent Bank Discussion Paper. Importantly, our interpretation is blurred by the lack of data. But let’s start with the really interesting things we uncovered.
What we know
To measure the concept of finance for productive investment, we split our thinking into two questions:
(Q1) Are there unexploited productive investment opportunities in the UK? We found no conclusive evidence of investment deficiency....
(Q2) Is there enough finance to ensure productive investment takes place? Yes for the corporate sector as a whole, but not for all firms
The real question of interest here is if investment is low, is the blockage that is stopping investment taking place due to real economy factors – such as globalisation and secular stagnation – or financial factors – such as a lack of access to finance. ...
Large firms, with access to bond and stock markets, don’t appear to have problems financing themselves. Small firms that do have access to capital markets rely heavily on net equity issuance to finance their business... But the vast majority of small firms do not have access to market-based finance and are heavily dependent on bank funding or internal funds. Surveys show that small firms’ access to finance remains an issue, but it now affects a smaller proportion of firms than in recent years...
What next?
In an era of big data, we have discovered the presence of big data gaps. These data gaps may have blurred our bottom line: we have not found any conclusive evidence of investment deficiency in the UK; and the corporate sector as a whole appears to have an adequate supply of finance to fund their desired investment activities. ...

Links for 07-20-16

Tuesday, July 19, 2016

European Red Tape Is a Bogus Justification for Brexit

Simeon Djankov at PIIE:

European Red Tape Is a Bogus Justification for Brexit: Did the European Union’s ship of state run aground on misleading anecdotes? It would appear so. Red tape is frequently mentioned as one of the main reasons for Brexit. ...
But however much Brussels is reviled for burdensome regulations, especially in the conservative British press, it is primarily up to the national governments to regulate business and ensure that their regulation is competitive. In recent years, individual European countries have actually improved the environment for doing business. Half of the 25 countries in the world where it is easiest to do business are EU members, according to the 2016 World Bank’s Doing Business survey. These are Denmark (3), United Kingdom (6), Sweden (8), Finland (10), Germany (15), Estonia (16), Ireland (17), Lithuania (20), Austria (21), Latvia (22), Portugal (23), and Poland (25). Malta is the lowest-ranked EU country, at 80 (of 189 economies). ...
An examination of the EU’s record on regulations shows that in practice the EU governs few areas of business activity and that it has a lighter regulatory touch than many other parts of the world, including the United States. Yet the perception of bureaucratic Europe persists. ...

Why the Fed Can't and Shouldn't Raise Interest Rates

Tim Duy at Bloomberg:

Why the Fed Can't and Shouldn't Raise Interest Rates: ... The flattening of the U.S. yield curve as investors see little chance of rates rising in the longer term should serve as a red flag that their focus on short-term interest rates may be doomed to failure.

One of the defining features of this tightening cycle is the same as the cycles that came before – the yield curve is flattening, and very quickly. The spread between 10-year and two-year U.S. Treasuries has collapsed to 88 basis points at a time when the federal funds target rate is 25-50bps. This suggests that the Fed actually has very little room to raise short-term rates. If additional rates hikes compress the yield curve further, the capacity for maturity transformation – effectively the process of borrowing on shorter time frames to lend on longer time frames – will soon be compromised. ...

... Bottom Line: The Fed needs to remember that how they got into this policy stance may offer a lesson for how to get out. Policy makers cut rates to zero and then instituted quantitative easing. Now they should consider selling assets before raising rates. Or, at a minimum, utilizing a mixed strategy of rate hikes and asset sales. The objective of meeting the Fed's mandate in the context of maintaining financial stability may be unattainable using the interest rate tool and associated forward guidance alone. Unfortunately, the Fed does not appear to be debating the policy mix — at least not in public. They remain focused on interest rates, delaying balance sheet policy to a later date. On the current trajectory, however, that later date may never come.

Don't Try This Crazy Trick on the Economy

Narayana Kocherlakota:

Don't Try This Crazy Trick on the Economy: Some economists argue that the Federal Reserve should take a highly unconventional approach to ending a long period of below-target inflation: Instead of keeping interest rates low to spur economic activity and push up prices, it should raise rates.
Labeled "Neo-Fisherism" ... (after the famous monetary economist Irving Fisher), it's an idea I once entertained. Allow me to explain why I now think it’s dangerous. ...

Links for 07-19-16

Monday, July 18, 2016

Why Has Transparency Been So Damn Confusing?

Jon Faust:

Why has transparency been so damn confusing?: The theme of our recent series of posts on understanding FOMC actions and communications has been the well-disguised, steady predictability of FOMC policy. The basic story is that policy is driven by a consensus on the FOMC. The consensus tends to evolve slowly and predictably, and for some time now, the consensus has behaved consistently as if driven by two principles:
So long as steady job market gains persist, continue a gradual, pre-announced removal of accommodation.
So long as inflation remains below target, take a tactical pause if credible evidence arises that the job gains might soon falter.
The factual record, I argued, is unambiguous: over the last three years, we’ve gotten normalization at a preannounced pace as in to the first principle, punctuated only by brief (so far) tactical pauses as under the second.[1]
But the fact that my low-drama story lines up with the facts doesn’t make it correct. And my story directly contradicts the popular narrative of a skittish, market-obsessed Fed flip-flopping at every opportunity. This is where the well-disguised part comes in.
Before continuing, however, I want to emphasize that I came to the views I’m describing during my years working on transparency and communications on behalf of the chairs Bernanke and Yellen—a job that ended about 2 years ago now. Yes, I did my small part in making the mess. But the FOMC members and Fed staffers like me also worked pretty hard to understand what was going wrong and attempting to improve the situation. This series of posts is essentially the lessons I took from these efforts. It would be inappropriate for me to say who among my former colleagues subscribes to these views, but I similarly don’t want to claim the ideas as my own. For now,[2] I’ll be deliberately and appropriately vague in saying that all the points I’m making were in the air at the Fed while I was there. In this post, I’ll sketch the basics, leaving details and support for subsequent posts. ...

The Toughest Question about Global Trade

I have a new post at MoneyWatch:

The toughest question about global trade: This year's battle for the White House has put international trade in the spotlight. Donald Trump has led the charge against trade agreements, but Hillary Clinton's reversal of her support for President Obama's Trans-Pacific Partnership (TPP) also reflects the evolving view of the benefits of globalization.
The American public has long been suspicious of international trade, but economists have been much more supportive. However, new evidence in the economics literature has caused a rethinking of how to evaluate trade agreements.

This research documents that the negative effects of globalization on employment and wages are larger than many people realized. In addition, it recognizes that most of the benefits have accrued to those at the top of the income distribution while the costs -- lost jobs, lower wages and fewer attractive employment opportunities -- have fallen mainly on the working class.

One response from many advocates is to point out that international trade has lifted millions of people around the world out of poverty and that reducing the pace of globalization would slow the rate of global poverty reduction.

All of which brings up an important and rather difficult question: Just how should we value international trade? ...

Paul Krugman: Both Sides Now?

Balancing the unbalanced:

Both Sides Now?, by Paul Krugman, NY Times: When Donald Trump began his run for the White House, many people treated it as a joke. Nothing he has done or said since makes him look better. On the contrary, his policy ignorance has become even more striking, his positions more extreme, the flaws in his character more obvious, and he has repeatedly demonstrated a level of contempt for the truth that is unprecedented in American politics.
Yet while most polls suggest that he’s running behind in the general election..., there’s still a real chance that he might win. How is that possible? Part of the answer, I’d argue, is that voters don’t fully appreciate his awfulness. And the reason is that too much of the news media still can’t break with bothsidesism — the almost pathological determination to portray politicians and their programs as being equally good or equally bad, no matter how ludicrous that pretense becomes. ...
You might think that Donald Trump, who lies so much that fact-checkers have a hard time keeping up, who keeps repeating falsehoods even after they’ve been proved wrong, and who combines all of this with a general level of thuggishness aimed in part at the press, would be too much even for the balance cultists to excuse.
But you would be wrong. ...
And in the last few days we’ve seen a spectacular demonstration of bothsidesism...: an op-ed article from the incoming and outgoing heads of the White House Correspondents’ Association, with the headline “Trump, Clinton both threaten free press.” How so? Well, Mr. Trump has selectively banned news organizations he considers hostile; he has also, although the op-ed didn’t mention it, attacked both those organizations and individual reporters, and refused to condemn supporters who, for example, have harassed reporters with anti-Semitic insults.
Meanwhile, while Mrs. Clinton hasn’t done any of these things, and has a staff that readily responds to fact-checking questions, she doesn’t like to hold press conferences. Equivalence!
Stung by criticism, the authors ... issued a statement denying that they had engaged in “false equivalency” — I guess saying that the candidates are acting “similarly” doesn’t mean saying that they are acting similarly. And they once again refused to indicate which candidate was behaving worse.
As I said, bothsidesism isn’t new, and it has always been an evasion of responsibility. But taking the position that “both sides do it” now, in the face of this campaign and this candidate, is an act of mind-boggling irresponsibility.

Links for 07-18-16

Sunday, July 17, 2016

Helicopter Money

Jim Hamilton:

Helicopter money: Despite aggressive actions by central banks, many of the world’s economies are still stagnating and facing new shocks, leading to renewed calls for helicopter money as a serious policy prescription for countries like Japan and the U.K.. And, if things go badly, maybe the United States? ...

After discussing helicopter money, he concludes with:

... If helicopter money is no more than a combination of fiscal expansion and LSAP, and if we think LSAP hasn’t been able to do that much, it’s clear that the fiscal expansion part is where the real action is coming from. On the other hand, if we think both components make a difference, there’s no inherent reason that the size of the fiscal operation has to be exactly the same as the size of the monetary operation.

Nevertheless, as has been true with LSAP, there might be some psychological impact, if nothing else, from announcing this as if it were a new policy. For example, I could imagine the Fed announcing that for the next n months, it will buy all the new debt that the Treasury issues. For maximal effect this would be coupled with a Treasury announcement of a new spending operation. Doubtless the announcement would bring out calls from certain quarters that the U.S. was going the route of Zimbabwe. And just as in the previous times we heard those warnings, those pundits would be proven wrong, as indeed the effects would not be that different from what we’re already getting from central bank expansions around the globe.

Helicopter money is no bazooka for stimulating the economy. Ben Bernanke offered this reasonable summary:

Money-financed fiscal programs (MFFPs), known colloquially as helicopter drops, are very unlikely to be needed in the United States in the foreseeable future. They also present a number of practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank. However, under certain extreme circumstances– sharply deficient aggregate demand, exhausted monetary policy, and unwillingness of the legislature to use debt-financed fiscal policies– such programs may be the best available alternative. It would be premature to rule them out.

Links for 07-17-16

Saturday, July 16, 2016

Links for 07-16-16

Friday, July 15, 2016

Fed Watch: Data Dump

Tim Duy:

Data dump, by Tim Duy: Interesting mix of data today that will give monetary policymakers plenty of food for thought. My guess is that it will probably drive a deeper division in the Fed between those who looking to secure two hikes this year rather and those good with just one or none at all.
Retail sales came in stronger than expected, although prior months were revised down. Various measures of sales excluding gas are perking up compared to last year:

RS0716

While prior expansions churned out some better spending numbers, the consumer is clearly not in some kind of recessionary free-fall. Remember, 2% growth is the new 4%. These data will help reassure the Fed that the bulk of economic activity - that directed by consumers - remains solid.
Industrial production rose, albeit on the back of autos. Compared to a year ago, factory activity remains in negative territory. Still, softness in the sector does not exhibit the degree of dispersion typically experienced in recessions:

IP0716

Still looks to me more like a mid-cycle slowdown like the mid-80s and 90s rather than a recession. Containing such a slowdown argues for keeping rates low for now.
Inflation as measured by the consumer price index continues to firm. Core CPI inflation came in at 0.2 percent m-o-m and 2.3 percent y-o-y. Of course, the Fed targets PCE inflation, and there the core number is weaker:

CPI0716

See Calculated Risk for more measures of inflation. The key point here is that the Fed's preferred measure is tracking lower than other measures. Watch for the hawks to press their case on those higher measures; the doves should keep a focus on PCE. The doves should win this battle. If they don't win, the Fed will be effectively targeting a different inflation rate than stated in their long-run policy objectives. That would then render those objectives and likely future similar missives essentially worthless.
The Atlanta Fed released its wage measures for June. These measures - which track persons steadily employed over the past twelve months - continue to exceed the average measures of the employment report:

WAGSE0716

The Atlanta Fed measure just about in the pre-recession territory; while the standard measures still have a ways to go. The Atlanta Fed measure tells the Fed that cyclical labor market dynamics are not terribly different than the past. When unemployment goes down, wage growth accelerates:

AT0716

Demographic effects - the exit of higher earning Boomers from the labor force, replaced by lower earning Millennials - appear to be weighing on average wage growth. Which one is the better guide for monetary policy? Policymakers will again find themselves at odds along the obvious lines. The San Francisco Fed gives mixed guidance on the issue:
How to best gauge the impact of wage growth on overall inflation is less clear. As long as employers can keep their wage bills low by replacing or expanding staff with lower-paid workers, labor cost pressures for higher price inflation could remain muted for some time. If, however, these lower-wage workers are less productive, continued increases in unit labor costs could be hiding behind low readings on measures of aggregate wage growth.
On net, when the Fed faces a mixed message, they tend to move slower than faster. So given the low core-PCE environment, the doves will likely remain in control.
Separately, the Wall Street Journal has a story on which Fed speakers are most useful as policy guides. The article is behind the WSJPro paywall, but via Twitter came this graphic:

FEDLISTEN

Granted, this type of list is always in flux. That said, I would definitely move Brainard, Powell, and Tarullo up with Yellen and Dudley. I find it very rare that you would learn less from a Board member than a regional president. This is especially true given the caliber of these three speakers. And remember that Tarullo doesn't talk a lot about monetary policy, but when he does you probably should listen. Brainard has been driving policy since last fall. Of the regionals, I would place Evans at the top. Williams has been too hawkish in his guidance the past couple of years; you really need to put a negative delta on any rate forecast you glean from him. Rosengren steered you wrong this year as he joined Williams in trying to set the stage for a June rate hike. I don't see where Lockhart should be in the top half of this list. And I don't know what to make of Fischer. He has leaned hawkish this cycle as well, to the point of being one who scolds markets for thinking differently. He appears to me to be an outlier on the Board at the moment, not one driving the policy debate.
Bottom Line: Generally solid data sufficient to keep the prospect of a rate hike or two alive for this year. But soft or mixed enough on key points to lean policy closer to the former than the latter.

The Outsized Impact of the Fall in Commodity Prices on Global Trade

Brad Setser:

The Outsized Impact of the Fall in Commodity Prices on Global Trade: Global trade has not grown since the start of 2015.
Emerging market imports appear to be running somewhat below their 2014 levels.
Creeping protectionism? Perhaps.
But for now the underlying national data points to much more prosaic explanation.
The “turning” point in trade came just after oil prices fell. ...

Paul Krugman: Bull Market Blues

High stock prices are "not evidence of a healthy economy":

Bull Market Blues, by Paul Krugman, NY Times: Like most economists, I don’t usually have much to say about stocks. Stocks ... have a lot less to do with the state of the economy or its future prospects than many people believe. ...
Still, we shouldn’t completely ignore stock prices. The fact that the major averages have lately been hitting new highs ... is newsworthy and noteworthy. What are those Wall Street indexes telling us?
The answer, I’d suggest, isn’t entirely positive..., in some ways the stock market’s gains reflect economic weaknesses, not strengths. ...
We measure the economy’s success by the extent to which it generates rising incomes for the population. But stocks ... only reflect the part of income that shows up as profits.
This wouldn’t matter if the share of profits in overall income were stable; but it isn’t. The share of profits ... has been a lot higher in recent years than it was during the great stock surge of the late 1990s ... making the relationship between profits and prosperity weak at best. ...
When investors buy stocks, they’re buying a share of future profits. What that’s worth to them depends on what other options they have for converting money today into income tomorrow. And these days those options are pretty poor... So investors are willing to pay a lot for future income, hence high stock prices for any given level of profits. ...
This may seem, however, to present a paradox. If the private sector doesn’t see itself as having a lot of good investment opportunities, how can profits be so high? The answer, I’d suggest, is that these days profits often seem to bear little relationship to investment in new capacity. Instead, profits come from some kind of market power... And companies making profits from such power can simultaneously have high stock prices and little reason to spend.
Consider the fact that the three most valuable companies in America are Apple, Google and Microsoft. None of the three spends large sums on bricks and mortar. ...
In other words, while record stock prices do put the lie to claims that the Obama administration has been anti-business, they’re not evidence of a healthy economy. If anything, they’re a sign of an economy with too few opportunities for productive investment and too much monopoly power.
So when you read headlines about stock prices, remember: What’s good for the Dow isn’t necessarily good for America, or vice versa.

Links for 07-15-16

Thursday, July 14, 2016

On Arrest Filters and Empirical Inferences

Rajiv Sethi:

On Arrest Filters and Empirical Inferences: I've been thinking a bit more about Roland Fryer's working paperce use of force, prompted by this thread by Europile and excellent posts by Michelle Phelps and Ezekeil Kweku.

The Europile thread contains a quick, precise, and insightful summary of the empirical exercise conducted by Fryer to look for racial bias in police shootings. There are two distinct pools of observations: an arrest pool and a shooting pool. The arrest pool is composed of "a random sample of police-civilian interactions from the Houston police department from arrests codes in which lethal force is more likely to be justified: attempted capital murder of a public safety officer, aggravated assault on a public safety officer, resisting arrest, evading arrest, and interfering in arrest." The shooting pool is a sample of interactions that resulted in the discharge of a firearm by an officer, also in Houston. 

Importantly, the latter pool is not a subset of the former, or even a subset of the set of arrests from which the former pool is drawn. Put another way, had the interactions in the shooting pool been resolved without incident, many of them would never have made it into the arrest pool. Think of the Castile traffic stop: had this resulted in a traffic violation or a warning or nothing at all, it would not have been recorded in arrest data of this kind.

The analysis in the paper is based on a comparison between the two pools. The arrest pool is 58% black while the shooting pool is 52% black, which is the basis for Fryer's claim that blacks are less likely to be shot by whites in the raw data. He understands, of course, that there may be differences in behavioral and contextual factors that make the black subset of the arrest pool different from the white, and attempts to correct for this using regression analysis. He reports that doing so "does not significantly alter the raw racial differences."

This analysis is useful, as far as it goes. But does this really imply that the video evidence that has animated the black lives matter movement is highly selective and deeply misleading, as initial reports on the paper suggested? 

Not at all. The protests are about the killing of innocents, not about the treatment of those whose actions would legitimately plant them in the serious arrest pool. What Fryer's paper suggests (if one takes the incident categorization by police at face value) is that at least in Houston, those who would assault or attempt to kill a public safety officer are treated in much the same way, regardless of race. 

But think of the cases that animate the protest movement, for instance the list of eleven compiled here. Families of six of the eleven have already received large settlements (without admission of fault). Six led to civil rights investigations by the justice department. With one or two possible exceptions, it doesn't appear to me that these interactions would have made it past Fryer's arrest filter had they been handled more professionally. 

The point is this: if there is little or no racial bias in the way police handle genuinely dangerous suspects, but there is bias that leads some mundane interactions to turn potentially deadly, then the kind of analysis conducted by Fryer would not be helpful in detecting it. Which in turn means that the breathless manner in which the paper was initially reported was really quite irresponsible. 

For this the author bears some responsibility, having inserted the following into his discussion of the Houston findings:

Given the stream of video "evidence", which many take to be indicative of structural racism in police departments across America, the ensuing and understandable outrage in black communities across America, and the results from our previous analysis of non-lethal uses of force, the results displayed in Table 5 are startling... Blacks are 23.8 percent less likely to be shot by police, relative to whites.

His claim that this was "the most surprising result of my career" was an invitation to misunderstand and misreport the findings, which are important but clearly limited in relevance and scope.

It is More Difficult for Workers to Move Up the Income Ladder

Austin Clemens at Equitable Growth:

New analysis shows it is more difficult for workers to move up the income ladder: Against a rising chorus of concern about increasing income inequality, some economists are pushing back, suggesting that it is not income inequality we should be concerned with but rather income mobility. Income mobility describes the ability of individuals to move up and down the income ladder over some period of time. As long as mobility is healthy, they argue, society can remain egalitarian in the face of inequality, because the poor can move up and the rich down. ...
Equitable Growth grantees Michael D. Carr and Emily E. Wiemers at the University of Massachusetts-Boston used a new dataset to revisit the measurement of earnings mobility, the part of income that comes from work. Their results suggest that lifetime earnings mobility has declined in recent years. ...

Links for 07-14-16

Wednesday, July 13, 2016

Cameron's Failure: Austerity

Chris Dillow:

Cameron's failure: austerity: David Cameron’s premiership must be considered a failure. He wanted to keep the UK in the EU, but failed; he wanted to preserve the Union but Scotland might well leave as a result of Brexit; and he wanted to heal a “broken Britain” but leaves the country divided and with hate crime rising.
A big reason for these failures lies in economic policy. Unnecessary austerity contributed to Brexit in four ways:
 - In contributing to stagnant incomes for many, it increased hostility to immigrants, which some Brexiteers exploited. When combined with high inequality – which Cameron did little to combat – it also contributed to increasing distrust of “elites”. ...
 - In worsening public services, Cameron and Osborne allowed the false impression to grow that immigrants were responsible for pressure on the NHS. ...
 - Austerity policies ran contrary to the established wisdom of most economic experts. Having shut out experts in one area, Cameron and Osborne were then less able to appeal to them on the merits of staying in the EU. They created a precedent for a rejection of mainstream economics. 
 - Supporting austerity at home meant that the Tories could not argue for expansionary policies in the euro zone – policies which would have both helped to reduce migration to the UK and which would have diminished the image of the EU as a failing institution. ...
In this sense, the costs of austerity have been far higher than estimated by conventional macroeconomic thinking. This perhaps reinforces an old piece of political wisdom – that if a government doesn’t get economic policy right, it’ll not get much else right either.

The Costs of Monopoly: A New View

James Schmitz:

The Costs of Monopoly: A New View, The Region, FRB Minneapolis: Economists overwhelmingly agree that the actual costs of monopoly are small, even trivial. This consensus is based on a theory that assumes monopolies are well-run businesses that limit their output in order to drive up prices and maximize profit. And because empirical studies have found that monopolists do not restrict output or raise prices by very much, most economists have concluded that monopolies inflict relatively little harm on the economy.
In this essay, I review recent research that upends both the theoretical and empirical elements of this consensus view.2 This research shows that monopolies are not well-run businesses, but instead are deeply inefficient. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. These productivity losses are a dead-weight loss for the economy, and far from trivial.
The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products—usually by blocking low-cost substitutes. By limiting supply of these competing products, the monopolist drives up demand for its own. Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. But because production of the substitutes is restricted, total output falls.
The reduction in productivity exacts a toll on all of society. But the blocking of low-cost substitutes particularly harms the poor, who might not be able to afford the monopolist’s product. Thus, monopolies drive the poor out of many markets.
Outline
In this essay, I first review the standard theory of monopoly that contends it inflicts little harm, and then I introduce a new theory that refutes that view. In this new theory, groups within monopolies act as both adversaries that reduce productivity and allies that eliminate substitutes. The new theory thus demonstrates that monopolies in fact cause substantial economic harm, and that harm falls disproportionately on people with fewer financial resources.
I then provide several historical examples of monopolies from my own research and that of others. I’ll discuss monopoly subgroups in their role as adversaries in the sugar, cement and construction industries. I’ll discuss monopoly subgroups acting as allies in the dental and legal industries. But I want to emphasize that in all monopolies, subgroups engage in both roles. I’ll also take a fresh look at a familiar example of a monopoly, U.S. Steel, showing how subgroups acted as both adversaries and allies. These few examples are illustrative only and provide a narrow glimpse of a far broader economic phenomenon: Monopolies are prevalent in the U.S. (and international) economy. ...

Skipping forward to the summary and conclusion:

For decades, the theoretical understanding and empirical analysis of monopoly have themselves been monopolized by a dominant paradigm—that the costs of monopoly are trivial. This blindness to new theory and analysis has impeded economists’ understanding of the actual harm caused by monopoly. Rather than inflicting little actual damage, adversarial relationships within monopolies have significantly reduced productivity and economic welfare. And in many industries, subgroups within monopolies collaborate to eliminate competition from low-cost substitutes. This lack of competition in the marketplace has a disproportionate impact on poor citizens who might otherwise find low-cost services that would meet their needs.
I’ve described this as a “new” theory, but in truth its roots go back decades, to the ideas of Thurman Arnold. Arnold ran the Antitrust Division at the Department of Justice from 1938 to 1943, taking aim at a broad range of targets, from automakers to Hollywood movie producers to the American Medical Association.10 He argued that lack of competition reduced productivity and that monopolies crushed low-cost substitutes, hurting the poor. Arnold supported his arguments through intensive real-world research. He and his staff undertook detailed investigations of monopolies, examining the on-site operations of many industries and documenting the productivity losses and destruction of substitutes caused by monopoly.
Arnold began his work at a pivotal time—in the midst of the Great Depression, just after the United States had experimented with the cartelization of its economy. Faith in competitive markets had reached such a low that cartels and monopolies were thought to be, perhaps, better alternatives. His work and ideas played a big role in reinvigorating confidence in competitive markets. He mounted an aggressive campaign to protect society from monopoly. The campaign had two parts: forceful prosecution of monopoly through the courts, accompanied by an array of speeches and articles to educate the general public about its costs.
Economists gradually forgot Arnold and his ideas, convinced by Harberger’s empirical work and the introspection of economists, leading to, for example, the logic provided by Stigler and others. Scholars and regulators who studied monopolies focused on prices alone and found little to worry about.
But as shown by the research reviewed in this essay—and an expanding body of empirical work—the problems caused by monopoly are significant, and still pervasive. My hope is that this paper will open a new era of discussion about monopoly and its costs, and ultimately lead policymakers to encourage greater competition for the benefit of all.

Links for 07-13-16

Tuesday, July 12, 2016

Still Confused About Brexit Macroeconomics

Paul Krugman:

Still Confused About Brexit Macroeconomics: OK, I am still finding it hard to understand the near-consensus among my colleagues about the short- and medium-term effects of Brexit. As I’ve tried to point out, while there are clear reasons to believe that Brexit will make Britain somewhat poorer in the long run, it’s not completely obvious why this should lead to a recession in the short run. ...

When we say “uncertainty”, what do we mean? The best answer I’ve gotten is that for a while, until things have shaken out, firms won’t be sure where the good investment opportunities in Britain are, so there will be an option value to waiting.

Let’s be slightly spuriously concrete. Suppose you think Brexit might have seriously adverse effects on service exports from the City of London. This would mean that investment in, say, London office buildings would become a bad idea. On the other hand, it would also mean a weaker pound, making investment in industrial properties in the north of England more attractive. But you don’t know how big either effect might be. So both kinds of investment are put on hold, pending clarification.

OK, that’s a coherent story, and it could lead to a recession next year.

At some point, however, this situation clarifies. Either we see financial business exiting London, and it becomes clear that a weak pound is here to stay, or the charms of Paris and Frankfurt turn out to be overstated, and London goes back to what it was. Either way, the pent-up investment spending that was put on hold should come back. This doesn’t just mean that the hit to growth is temporary: there should also be a bounce-back, a period of above-normal growth as the delayed investment kicks in.

And again, since some people seem unable to read what I’m saying, this should happen even if the negative scenario holds; it’s the resolution that should produce the delayed boom, whichever way that resolution goes. But that’s not what ... almost anyone else ... seems to be saying; they’re projecting lower growth as far as the eye can see. They could be right. But I still don’t see the logic. It seems to me that “uncertainty” is being used as a catchall for “bad stuff”.

Update: See also Brad DeLong: Brexit: I Think Paul Krugman Is Confused Here...

New Economic Thinking is Needed to Stop Charlatans Like Trump

I have a new column:

New Economic Thinking is Needed to Stop Charlatans Like Trump: After the positive employment report last week, we are hearing that faster wage growth may be “around the corner.” This is not the first time this hope has been raised, but workers have not yet realized significant gains. Will this time be different? The average hourly wage is up 2.6 percent relative to a year ago, and there are some signs of wage acceleration in recent months. However, part of the increase appears to be a shift from health care benefits to wages so the gains up to this point have not been as large as statistics on wage growth alone suggest. 
If there is acceleration in wage growth that is not offset by a further decline in benefits, it would certainly be a welcome change from the wage stagnation and rising inequality that workers have experienced in recent decades. But faster wage growth won’t solve the problem of rising inequality on its own. ...

Fed Watch: Catching Up

Tim Duy:

Catching Up: I snuck out of town last week and am catching up on Fed/economy news. Highlights from the past week:
1.) The labor report comes in better than expected. Nonfarm payrolls rose by 287k in June compared to the downwardly revised 11k gain in May. These results speak to the volatility typically seen in the employment data. See also Matthew Boesler on impact of end of the school year on the data. On a twelve month basis, job growth has eased only moderately. But on a three month basis, the slowdown is more pronounced:

NFP0716

You have to decide if this is one of those situations when the longer term trend is missing a more severe turning point in the data.
My sense is that these numbers are sufficient to convince many Fed officials that the unemployment rate will decline further in the months ahead. But many will also see reason for caution. First, as noted earlier, near term trends reveal a moderation in the pace of job growth. And the rate of improvement in the unemployment rate has slowed markedly in recent months:

NFPd0716

This raises the prospect that job growth is actually not that much higher than that necessary to hold the unemployment rate constant. Moreover, progress toward reducing unemployment has slowed or stalled:

NFPe0716

And while wage gains are accelerating, the pace remains tepid, roughly 100bp below the pre-recession rates:

NFPb0716

It would be disappointing if wage growth stalled out here. Note also that the long-leading indicator of temporary help employment is tracking sideways to slightly down:

NFPc0716

All of these indicators may be headed for upside breakouts in the months ahead, but at the moment I sense some loss of momentum in labor market improvement. This, I think, places the Fed on some precarious ground, something that the bulk of the FOMC likely recognizes. It's not that the fundamentals of the economy have necessarily broken down; it's that the Fed needs to maintain a sufficiently accommodative policy to allow those fundamentals to exert themselves.

2.) Influential policymakers urge patience. Federal Reserve Governor Dan Tarullo came out strongly against additional rate hikes at this time. Via MarketWatch:

“Inflation is not at our stated target, not near our stated target, and hasn’t been so in quite some time,” Tarullo said in a conversation at a Wall Street Journal breakfast.

“This is not an economy that is running hot,” he added.

“For some time now I thought it was the better course to wait to see more convincing evidence that inflation is moving toward and would remain around the 2% target,” Tarullo said.

“To this point, I have not seen that type of evidence,” he said.

It seems to me that Tarullo is looking for something close to the proposed Evans Rule 2.0 - no rate hikes until core-inflation hits 2 percent year-over-year. Even more interesting is this:

Tarullo said he didn’t think that the worry that low interest rates may fuel asset bubbles was an “immediate concern.”

The Fed governor, who is the quarterback of the Fed’s efforts to regulate banks, questioned whether raising rates would ease financial stability concerns in an environment where the market was pessimistic about the economic outlook.

“If markets do regard economic prospects as only modest or moderate going forward, then raising short-term rates is almost surely going to flatten the yield curve, which generally speaking is not good for financial intermediation, and in some sense could exacerbate financial stability concerns,” Tarullo said.

When rates are low, regulators should pay more attention to financial stability issues “but it doesn’t translate into ‘therefore raise rates and all will be well,’” he added.

Tarullo is obviously not pleased that the yield curve continues to flatten

NFPg0716

and is not interested in hiking into such an environment. New York Federal Reserve President William Dudley echoes this concern:

Federal Reserve Bank of New York President William Dudley voiced concern Wednesday about very low yields on 10-year Treasury notes, which could be a sign that investor expectations for growth and inflation are waning. Mr. Dudley, who had been meeting with local leaders at Binghamton University in New York, said low yields weren’t “completely good news.”

This suggests these two policymakers would prefer to hike if long-term yield were rising, pulling the Fed along for the ride. Low yields are only feeding into the Fed's suspicion that their expectations of where rates are headed are wildly optimistic.

3.) Williams interview. Gregg Robb of MarketWatch has a long interview with San Francisco Federal Reserve President John Williams. The whole interview is worth a read. Two points. First, Williams is in the camp that the Fed need to act sooner than later to forestall the growth of imbalances:

The risk I think we face in waiting too long, or waiting maybe as long as some of these market expectations are, is that the economy is already pretty strong and if we wait too long in further removal of accommodation I do think imbalances will form more generally. It could show up as more inflation pressures down the road, we’re not seeing those yet, but I think that you do see some of this in terms of real-estate markets and other asset markets which are being priced to perfection based on an outlook of very low interest rates. You are seeing extremely high asset valuations in real estate, commercial real estate, the stock market is very strong relative to fundamentals. That is a natural result from low interest rates, that’s one of the ways monetary policy affects the economy. But if asset prices, real estate prices, continue to go further and further away from longer-term fundamentals I think that creates risk for the economy, I think it creates risks eventually for the financial system.

Note that this runs counter to Tarullo, who argued that the flattening yield curve could worsen, not improve, the financial stability situation. The need to rates rates in the name of financial stability is a growing fault line within the Fed.

Second, Williams gives his view of the disconnect between financial markets and the Fed:

In term of the private-sector forecasts, I think it’s very hard to fully understand what the Fed’s decision-making is given that we haven’t done many active policy steps in the last few years. I mean we did obviously as I mentioned the asset purchases during that period, but since we’ve ended that, we talked a lot about raising rates, we’ve given a lot of “dot plots” about raising rates, we did one rate increase in December, but then it has been over six whole months since then, and - I try to put myself in the shoes of a private sector forecaster - one of the hard things to do is kind of see what is our reaction function. What is it that is driving our decision?...

...Right now we’re just in a situation where there is just not a lot of data on actual actions because, for various reasons we’ve held off a long time on our first rate increase and then we held off so far on a second rate increase.

This I think is wrong; lack of action is a policy choice as much as action. Williams seems to think the only useful information about the Fed's reaction function comes when the Fed changes rates. This implies that holding policy steady conveys no information. I would argue that steady policy is in fact signaling the Fed's reaction function, and hence, in combination with the data flow, financial market participants are concluding that the Fed will continue at a glacial pace regardless of what the "dots" say. Indeed, I would say that financial market participants are signaling that the Fed's stated policy path would be a policy error, an error that they don't expect the Fed to make. I guess you could argue that the market doesn't think the Fed understands it's own reaction function. And given the path of policy versus the dots, the market appears to be right.

4.) Mester, seriously? Cleveland Federal Reserve President Loretta Mester dropped this line in a July 1 speech (emphasis added):

But there are also risks to forestalling rate increases for too long when we are continuing to make cumulative progress on our policy goals. Waiting too long increases risks to financial stability and raises the chance that we would have to move more aggressively in the future, which poses its own set of risks to the outlook. I believe waiting too long also jeopardizes our future ability to use the nontraditional monetary policy tools that the Fed developed to deal with the effects of the global financial crisis and deep recession. If we fail to gracefully navigate back toward a more normal policy stance at the appropriate time, then I believe there is a non-negligible chance that these tools will essentially be off the table because the public will have deemed them as ultimately ineffective. This is a risk to the outlook should we ever find ourselves in a situation of needing such tools in the future. Of course, such a risk is hard to measure and is not one we typically consider. But we live in atypical times, and we need to take the whole set of risks into account when assessing appropriate policy.

The part about low rates and financial instability is, as I noted earlier, a growing fault line within the Fed. But the next part about needing to "gracefully" return to a normal policy stance to regain policy effectiveness of nontraditional tools was unexpected. This a variation on a theme. There is a common misperception that policymakers need to raise rates not because the economy needs it, but because it needs tools to fight a future recession. Completely backwards logic, of course. Premature rate hikes only speeds up the arrival of next recession and ensures that policymakers lack room to maneuver. They don't, as Mester suggests, preserve your options. A central banker should know this.

5.) The minutes. My short takeaway from the minutes is that the divide among FOMC participants is greater than the divide among FOMC members. In other words, a larger percentage of participants are looking to hike rates sooner than members. Until the balance on the FOMC shifts, discount hawkish Fedspeak.

Bottom Line: I am keeping an eye on Tarullo; he has been more public on his monetary policy views in recent months. And those views are fairly dovish. My guess is that he and other doves regret taking one for the team last December and falling in line with a rate hike. They won't go down so easily this time around.

Links for 07-12-16

Monday, July 11, 2016

Brexit Q&A

Here's a Q&A on the economics of Brexit from Christian Odendahl and John Springford of the Centre for European Reform:

Long day’s journey into economic night: There are currently more questions than answers in post-Brexit Britain. The short-term economic consequences of the vote are no exception. We have attempted to clarify our thinking about what we believe will happen, through a series of questions and (sometimes tentative) answers. ...