Category Archive for: Economics [Return to Main]

Tuesday, February 21, 2017

Unemployment versus Underemployment: Assessing Labor Market Slack

John Robertson at the Atlanta Fed's macroblog:

Unemployment versus Underemployment: Assessing Labor Market Slack: The U-3 unemployment rate has returned to prerecession levels and is close to estimates of its longer-run sustainable level. Yet other indicators of slack, such as the U-6 statistic, which includes people working part-time but wanting to work full-time (often referred to as part-time for economic reasons, or PTER), has not declined as quickly or by as much as the U-3 unemployment rate.
If unemployment and PTER reflect the same business-cycle effects, then they should move pretty much in lockstep. But as the following chart shows, such uniformity hasn't generally been the case. In the most recent recovery, unemployment started declining in 2010, but PTER started to move substantially lower beginning only in 2013. The upshot is that for each unemployed worker, there are now many more involuntary part-time workers than in the past.

Regarding the above chart, I should note that I adjusted the pre-1994 data to be consistent with the 1994 redesign of the Current Population Survey from the U.S. Bureau of Labor Statistics (see, for example, research from Rob Valletta and Leila Bengali and Anne Polivka and Stephen Miller ). This adjustment amounts to reducing the pre-1994 number of PTER workers by about 20 percent.
The elevated level of PTER workers has been most pronounced for workers in low-skill occupations. As shown in the next chart, PTER workers in low-skill jobs now outnumber unemployed workers who left low-skill jobs. Prior to the most recent recession, low-skill unemployment was always higher than low-skill PTER.

The increase in PTER workers is also mostly in the retail trade industry, as well as the leisure and hospitality industry, where low-skill occupations are concentrated. The PTER-to-unemployment ratio for the goods-producing sector (manufacturing, construction, and mining) has remained essentially unchanged. In those industries, unemployment and PTER move together.
Some researchers, such as our colleagues at the San Francisco Fed Rob Valletta and Catherine van der List, have argued that the increase in the prevalence of involuntary part-time work relative to unemployment suggests the importance of factors other than overall demand for labor. Among these factors are shifting demographics (a greater number of older workers who are less willing to do part-time work) and industry mix (more employment in industries with higher concentrations of part-time jobs). Such factors are almost certainly playing a role.
Recent analysis by Jon Willis at the Kansas City Fed  suggests that the elevated levels of PTER in low-skill occupations may reflect that during the last recession, firms reduced the hours of workers in low-skill jobs more than they cut the number of low-skill jobs. In other words, firms still had some work that needed to get done, probably with peak demand at certain times of the day, and those tasks couldn't readily be outsourced or automated.
As the following chart from Willis's research shows, between 2007 and 2010, low-skill (non-PTER) employment actually increased slightly overall, but the mix of employment shifted dramatically toward part-time.

Since the recession, the pace of (non-PTER) low-skill job creation has been modest (about 20,000 jobs per month compared with 60,000 jobs per month in the years preceding the recession). Initially, this trend helped reduce low-skill unemployment more than the incidence of PTER—one reason why the ratio of PTER to unemployment continued to increase.
But the number of PTER workers in low-skill jobs has since been declining as more people have been able to find full-time jobs. At the current pace of job creation and (net) transition rates out of PTER, Willis estimates it would take until 2020 to return to prerecession levels of low-skill PTER. That seems a reasonable guess to me.

Why All Exchange Rates Are Bad

Tim Taylor:

Why All Exchange Rates Are Bad: The economics of exchange rates can be tough sledding. Every now and then, I post on the bulletin board beside my office a quotation from Kenneth Kasa back in 1995: "If you asked a random sample of economists to name the three most difficult questions confronting mankind, the answers would probably be: (1) What is the meaning of life? (2) What is the relationship between quantum mechanics and general relativity? and (3) What's going on in the foreign exchange market. (Not necessarily in that order)."

But even after duly acknowledging that exchange rates can be a tough subject, the political discussion of how exchange rates are manipulated and unfair to the US economy is a dog's breakfast of confusions about facts, institutions, and economics. For one of many possible examples, see the op-ed published in the Wall Street Journal last week by Judy Shelton, an economist identified as an adviser to the Trump transition team, titled "Currency Manipulation is a Real Problem." The obvious conclusion to draw from that essay, and from a number of other writing on manipulated exchange rates, is that all exchange rates are bad.

Sometimes other countries have policies that the value of their currency is lower relative to that of the US dollar. This is bad, because it benefits exporters from those countries and helps them to sell against US companies in world markets.

But other times, countries are manipulating the value of the exchange rate so that the value of their currency is higher relative to the US dollar, like China. This is also bad, as Shelton write in the WSJ: "Whether China is propping up exchange rates or holding them down, manipulation is manipulation and should not be overlooked. ... A country that props up the value of its currency against the dollar may have strategic goals for investing in U.S. assets."

Exchanges rates that move are bad, too. Shelton writes that "free trade should be based on stable exchange rates so that goods and capital flow in accordance with free-market principles."
But stable exchange rates are also bad.  After all, China is apparently stabilizing its exchange rate at the "wrong" level, and the argument that exchange rate manipulation is a problem clearly implies that many major exchange rates around the world should be reshuffled to different levels.

The bottom line is clear as mud. Exchange rates are bad if they are higher, or lower, or moving, or stable. The goal is that exchange rates should be manipulated to arrive at some perfect level, and then should just stick at that level without any further manipulation, which would be forbidden. This perspective on exchange rates is so confused as to be incoherent. With the perils of explaining exchange rates in mind, let me lay out some alternative facts and perspectives.

Currencies are traded in international markets; indeed, about $5 trillion per day is traded on foreign exchange markets. This amount is vastly more than what is needed for international trade of goods and services (about $24 trillion per year) or for foreign direct investment (which is about $1.0-1.5 trillion per year). Thus, exchange rate markets are driven by investors trying to figure out where higher rates of return will be available in the future, while simultanously trying to reduce and diversify the risks they face if exchange rates shift in a way they didn't expect. Because of these dynamics, exchange rate markets are notoriously volatile. For example, they often react quickly and sharply when new information arises about the possibilities of changes in national-level interest rates, inflation rates, and growth rates.

In this context, deciding whether exchange rates have bubbled too high or too low is a tricky business. But William R. Cline regularly puts out a set of estimates. For example, he writes in "Estimates of Fundamental Equilibrium Exchange Rates, November 2016" (Peterson Institute for International Economics, Policy Brief 16-22):
"As of mid-November, the US dollar has become overvalued by about 11 percent. The prospect of fiscal stimulus and associated interest rate increases under the new US administration risks still further increases in the dollar.  The new estimates, all based on October exchange rates, again find a modest undervaluation of the yen (by 3 percent) but no misalignment of the euro and Chinese renminbi. The Korean won is undervalued by 6 percent. Cases of significant overvaluation besides that of the United States include Argentina (by about 7 percent), Turkey (by about 9 percent), Australia (by about 6 percent), and New Zealand (by about 4 percent). A familiar list of smaller economies with significantly undervalued currencies once again shows undervaluation in Singapore and Taiwan (by 26 to 27 percent), and Sweden and Switzerland (by 5 to 7 percent)."
Several points are worth emphasizing here. The exchange rates of the euro, China's renminbi, and Japan's yen don't appear much overvalued. The US dollar does seem overvalued, but the underlying economic reasons aren't mainly about manipulation by other countries. Instead, it's because investor in the turbulent foreign exchange markets are looking ahead at promises from the Trump administration that would lead to large fiscal stimulus and predictions from the Federal Reserve of higher exchange rates, and demanding more US dollars as a result.

Countries around the world have sought different ways to grapple with risks of exchange rate fluctuations. Small- and medium-sized economies around the world are vulnerable to a nasty cycle in which they first become a popular destination for investors around the world, who hasten to buy their currency (thus driving up its value), as well as investing in their national stock and real estate markets (driving up their prices), and also lending money. But when the news shifts and some other destination becomes the flavor-of-the-month as an investment destination, then as investors sell off the currency and their investments in the country, the exchange rate, stock market, and real estate can all crash. This situation can become even worse if the country has done a lot of borrowing in US dollars, because when the exchange rate falls, it becomes impossible to repay those US-dollar loans. The combination of falling stock market and real estate prices, together with a wave of bad loans, can lead to severe distress in the country's financial sector and steep recession. For details, check with Argentina, Mexico, Thailand, Indonesia, Russia, and a number of others.

The International Monetary Fund puts out regular reports describing exchange rate arrangements, like the Annual Report on Exchange Arrangements and Exchange Restrictions 2014. That report points out that about one-third of the countries in the world have floating exchange rates--that is, rates that are mostly or entirely determined by those $5 trillion per day exchange rate markets. About one-eighth of the countries in the world have "hard peg" exchange rate, in which the country either doesn't have its own separate currency (like the countries sharing the euro) or else the countries technically have a separate currency but manage it so that the exchange rate is always identical (a "currency board" arrangement).

The rest of the economies in the world have some form of "soft peg" or "managed" exchange rate policy. These countries don't dare to leave themselves open to the full force and fluctuations of the international exchange rate markets. But on the other hand, they also don't dare lock in a stable exchange rate in a way that can't change, no matter the cross-national patterns of interest rates, inflation rates, and growth rates. Many of these countries are quite aware that the ultra-stable exchange rate known as the euro has not, to put it mildly, been an unmixed blessing for the countries of Europe.

The fundamental issue is that an exchange rate is a price, the price of one currency in terms of another currency. A weaker currency tends to favor exporters, because their production costs in the domestic currency are lower compared to the revenue they gain when selling in a foreign currency.
A stronger currency tends to favor importers, because they can afford to buy more goods in the supermarket that is the world economy.

Of course, the reality is that the US economy has all kinds of different players, some of whom would benefit from a stronger exchange rate and some of whom would benefit from a weaker exchange rate. Think about the difference between a firm that imports inputs, uses them in production, and re-exports much of the output, as opposed to a form that imports goods that are sold directly to US consumers. Think about the difference between a worker in a firm that does almost no exporting, but benefits as a consumer from stronger exchange rates, and a worker in a firm that does most of its production in the US and then exports heavily, where the employer would benefit from a weaker exchange rate. Think about a firm which has invested heavily in foreign assets: a weaker US dollar makes those foreign assets worth relatively more in US dollar terms, thus rewarding the firm for its foresight in investing abroad.

Here's one useful way to cut through the confusions about what a higher or lower exchange rate means, which is from work done by economists Gita Gopinath,  Emmanuel Farhi, Oleg Itskhoki, who point out that the economic effects of changes in exchange rates are fundamentally the same as a  policy that combines changes in value-added and payroll taxes. Specifically, a weaker currency has the same effect as a policy of a policy of raising value-added taxes and cutting payroll taxes by an equivalent amount. This should make some intuitive sense, because a weaker currency makes it harder for buyers (like a higher value-added tax) but reduces the relative costs of domestic production (like a lower payroll tax).

In short, every time the US exchange rate moves, for whatever reason, there will be a mixed bag of those who benefit and those who are harmed. A weaker currency is the economic equivalent of combining a higher tax that hinders consumption, like the higher value-added (or sales) tax, with an offsetting cut in a tax that lowers costs of domestic production, like the lower payroll tax. If the policy goal is to help US exporters, but not to impose costs on US importers and consumers, then seeking a lower US dollar exchange rate is the wrong policy tool. It is a mirage (and a fundamental confusion) to argue that some change in the dollar exchange rate will be all benefits and no costs for the US economy.

Just to be clear, I'm certainly not arguing that exchange rates are never "too high" or "too low"; it's clear that exchange rates are volatile and can have bubbles and valleys.

Nor am I arguing that countries never try to manipulate their exchange rates; indeed, I would argue that every country manipulates its exchange rates in one way or another.   If countries allow their exchange rates to float, then when the central bank adjusts interest rates or allows a chance in inflation or stimulates an economy, the exchange rate is going to shift, which is clearly a way in which exchange rates are manipulated by policy.  If countries don't let their exchange rates move, that's clearly a form of manipulation. And if countries allow their exchange rates to move, but act to limit big swings in those movements, that is also manipulation.

What I am arguing is that given even a basic notion how exchange rate markets work and the economic forces that affect exchange rates, it is opaque how "non-manipulation" would work. Are exchange rates going to be held stable across countries, even in the face of cross-national economic changes in interest rates, inflation, and  growth? A wide variety of experience, including the breakdown of the Bretton Woods agreement in the early 1970s and the current problems with euro, suggest that holding exchange rates stable is impractical over time and can have some very bad consequences. But if exchange rates are going to be allowed to move, then the question arises of who decides when and how much. Most national governments, especially after having watched the euro in action, will want to keep some power over exchange rates. There are serious people who discuss what kind of international agreements and cooperation it would take to have greater exchange rate stability, but it's a hard task, and squawking about how all exchange rates are bad--stronger, weaker, moving, stable--is not a serious answer.

Links for 02-21-17

Monday, February 20, 2017

Let's Think Harder About the Role of Globalization in Wage Stagnation

Brad DeLong:

Let's Think Harder About the Role of Globalization in Wage Stagnation: It's disturbing. As we face the probable abrogation of NAFTA, possible trade wars with China, Germany, and others, and the total cluster** that is the Trump administration's policies (if any) toward NATO and Russia, a number of really smart and really well-intentioned people are, I think, making rhetorical--and in some cases substantive--errors that are degrading the quality of the debate and increasing the chances of bad outcomes. And they are doing it while trying to be forces for good, light, human betterment, truth, justice, and the American way...
So let me do some boundary policing here...
Let me ask people--all of whom are wiser than I am, or if not wiser smarter, or if not smarter more knowledgeable--to think about whether they really hold the positions they set forward, and think about whether they have set them forward in a way most calculated to guard against destructive misinterpretation. Today: Larry Summers...
Larry's big point here--the headline--is 100% correct: Revoking Trade Deals Will Not Help American Middle Classes. Hold tight to that.
Larry's second point is also correct: the big deal in terms of the changing shape of the American workforce--and, quite plausibly, changing life chances, the collapse of upward mobility, and wage stagnation--is technology: rampant improvement in manufacturing technology coupled with limited demand, for while nearly all of us want one few of us want too and only a minuscule proportion of us want three refrigerators. That means that if you are hoping to be relatively high up in the wage distribution by virtue of your position as a hard-to-replace cog on a manufacturing assembly line, you are increasingly out of luck. If you are hoping for high blue-collar wages to lift your own via competition, you are increasingly out of luck.
But then Larry goes, I think, rhetorically awry. His third point should be that inequality has been a political creation: those elected to power in America in the 1980s were elected on the platform that America's biggest problem was that it was, economically, too equal a society. Economic equality was strangling entrepreneurship and enterprise. And so they undertook policies to raise inequality. Those policies were successful. But we are still waiting for the flourishing of entrepreneurship and enterprise. He passes over this, not because he does not know this but because he has other fish to fry. Passing over what should have been his third point is, I think, a major rhetorical mistake: it is never good to pass up an opportunity to remind readers that the rise in inequality since 1980 has been something that those who made the Reagan Revolution hoped to accomplish and are proud of.
Bargaining power has flowed to finance and the executive suite and away from the shop- and assembly-floor. Top tax rates have come way down. It could have been otherwise--this is, primarily, a thing that has happened in English-speaking countries. It has happened much less elsewhere. It could have happened much less here.
And then, I think, Larry goes rhetorically awry again by passing over what ought to have been his fourth point. Over and above the decision to put the government's thumb on the scale assisting in the rise of inequality, wage stagnation and manufacturing decline have been driven by bad macroeconomic policies. The consequences of the Reagan deficits were to cream midwestern manufacturing and destroy worker bargaining power in export and import-competing industries. The switch from government surpluses to deficits under George W. Bush had much the same consequences. The low-pressure economies of Volcker, late Greenspan, and Bernanke wreaked immense damage. The strong-dollar policy was kept long past its proper sell-by date. A rich country like the United States ought to be a net lender to abroad, and ought to have a dollar policy that supports that net lending. Larry passes over this as well.
And so, rather than going technology--willed inequality--bad macro policies--globalization, Larry jumps from technology to globalization. Globalization thus shows up as the second most important factor affecting middle-class wages and inequality rather than the fourth.
It is at this point that I have, I think, a (rare) substantive disagreement with Larry. And I do acknowledge that when I have substantive disagreements with Larry, I am wrong at least as often as I am right.
Larry sees the coming of globalization as bringing with it a sharp reduction in the market power of American blue-collar workers in mass-production industries, and thus as exerting significant downward pressure on middle class wages and upward pressure on inequality. The live question, he thinks, is how large and significant these pressures have been.
I see it differently. Yes, technology, inequality promotion--union busting, so-called "right to work" laws, stagnant minimum wages, etc.--and lousy macro policies working through their effects on the trade sector have creamed the market bargaining power of American blue-collar workers. But globalization? Globalization's big effect has been to enable the construction of intercontinental value chains and to create a much finer global division of labor. It has greatly weakened the bargaining power of unskilled manufacturing workers here in the United States, yes. But has it done the same to semi-skilled and skilled manufacturing workers? If the United States had imposed barriers to the construction of intercontinental value chains would the semi-skilled and skilled manufacturing workers of the U.S. be better off? Or would they face stronger and more effective competition from firms headquartered in Japan and Europe that had created efficient global value chains?
Unskilled manufacturing jobs are not good jobs. Semi-skilled and skilled manufacturing jobs are. I think that odds are at least 50-50 that Larry has gotten the sign of the effects of globalization on bargaining power wrong for those manufacturing jobs that are worth keeping.
Thus I don't think that Larry should concede that "the advent of global supply chains has changed production patterns in the US" in a manner adverse to the interests of blue-collar and middle-class American workers. I think that might be true, but equally probably might be false. I think we need to think harder about this...

Paul Krugman: On Economic Arrogance

Why do Republicans insist, contrary to the evidence, that tax cuts and deregulation will spur economic growth:

On Economic Arrogance, by Paul Krugman, NY Times: According to press reports, the Trump administration is basing its budget projections on the assumption that the U.S. economy will grow very rapidly over the next decade — in fact, almost twice as fast as independent institutions like the Congressional Budget Office and the Federal Reserve expect. There is, as far as we can tell, no serious analysis behind this optimism; instead, the number was plugged in to make the fiscal outlook appear better.
I guess this was only to be expected from a man who keeps insisting that crime, which is actually near record lows, is at a record high, that millions of illegal ballots were responsible for his popular vote loss, and so on: In Trumpworld, numbers are what you want them to be, and anything else is fake news. ...
The only way we could have a growth miracle now would be a huge takeoff in productivity... This could, of course, happen: maybe driverless flying cars will arrive en masse. But it’s hardly something one should assume for a baseline projection.
And it’s certainly not something one should count on as a result of conservative economic policies. ...
The ... belief that tax cuts and deregulation will reliably produce awesome growth isn’t unique to the Trump-Putin administration. We heard the same thing from Jeb Bush (who?); we hear it from congressional Republicans like Paul Ryan. The question is why. After all, there is nothing — nothing at all — in the historical record to justify this arrogance. ...
The evidence ... is totally at odds with claims that tax-cutting and deregulation are economic wonder drugs. So why does a whole political party continue to insist that they are the answer to all problems?
It would be nice to pretend that we’re still having a serious, honest discussion here, but we aren’t. At this point we have to get real and talk about whose interests are being served.
Never mind whether slashing taxes on billionaires while giving scammers and polluters the freedom to scam and pollute is good for the economy as a whole; it’s clearly good for billionaires, scammers, and polluters. Campaign finance being what it is, this creates a clear incentive for politicians to keep espousing a failed doctrine, for think tanks to keep inventing new excuses for that doctrine, and more.
And on such matters Donald Trump is really no worse than the rest of his party. Unfortunately, he’s also no better.

Links for 02-20-17

Saturday, February 18, 2017

Links for 02-18-17

Friday, February 17, 2017

Report: Trump Transition Ordered Government Economists to Cook Up Rosy Growth Forecasts

Mathew Yglesias:

Report: Trump transition ordered government economists to cook up rosy growth forecasts: As the White House staff tries to put together a budget for President Donald Trump, they face a fundamental problem. Trump has promised to cut taxes, increase spending on the military and infrastructure, and avoid cuts to Social Security and Medicare. The only way to do that without producing an exploding budget deficit is to assume a big increase in economic growth.
And Nick Timiraos at the Wall Street Journal reports that Trump is planning to do just that — by making things up.
Deep into his story about Trump budget hijinks, Timiraos reveals that “what’s unusual about the administration’s forecasts isn’t just their relative optimism but also the process by which they were derived.” Specifically, what’s unusual about them is that they weren’t derived by any process at all. Instead of letting economists build a forecast, Trump’s budget was put together with “transition officials telling the CEA staff the growth targets that their budget would produce and asking them to backfill other estimates off those figures.” ...

NAIRU Bashing

Simon Wren-Lewis:

NAIRU bashing: The NAIRU is the level of unemployment at which inflation is stable. Ever since economists invented the concept people have poked fun at how difficult to measure and elusive the NAIRU appears to be, and these articles often end with the proclamation that it is time we ditched the concept. Even good journalists can do it. But few of these attempts to trash the NAIRU answer a very simple and obvious question - how else do we link the real economy to inflation? ...
The NAIRU is one of those economic concepts which is essential to understand the economy but is extremely difficult to measure. ...
While we should not be obsessed by the 1970s, we should not wipe it from our minds either. Then policy makers did in effect ditch the NAIRU, and we got uncomfortably high inflation. In 1980 in the US and UK policy changed and increased unemployment, and inflation fell. There is a relationship between inflation and unemployment, but it is just very difficult to pin down. For most macroeconomists, the concept of the NAIRU really just stands for that basic macroeconomic truth. ...

Paul Krugman: The Silence of the Hacks

The truth is out there:

The Silence of the Hacks, by Paul Krugman, NY Times: The story so far: A foreign dictator intervened on behalf of a U.S. presidential candidate — and that candidate won. Close associates of the new president were in contact with the dictator’s espionage officials during the campaign, and his national security adviser was forced out over improper calls to that country’s ambassador...
Meanwhile, the president seems oddly solicitous of the dictator’s interests, and rumors swirl about his personal financial connections to the country in question. ...
Maybe ... it’s all perfectly innocent. But if it’s not innocent, it’s very bad indeed. So what do Republicans in Congress, who have the power to investigate the situation, believe should be done?
Nothing.
Paul Ryan ... says that Michael Flynn’s conversations with the Russian ambassador were “entirely appropriate.”
Devin Nunes, the chairman of the House Intelligence Committee, angrily dismissed calls for a select committee to investigate contacts during the campaign: “There is absolutely not going to be one.”
Jason Chaffetz, the chairman of the House oversight committee — who hounded Hillary Clinton endlessly over Benghazi — declared that the “situation has taken care of itself.”
Just the other day Republicans were hot in pursuit of potential scandal, and posed as ultrapatriots. Now they’re indifferent to actual subversion and the real possibility that we are being governed by people who take their cues from Moscow. ...
The point is that you can’t understand the mess we’re in without appreciating not just the potential corruption of the president, but the unmistakable corruption of his party — a party so intent on cutting taxes for the wealthy, deregulating banks and polluters and dismantling social programs that accepting foreign subversion is, apparently, a small price to pay. ...
So how does this crisis end? It’s not a constitutional crisis — yet. But Donald Trump is facing a clear crisis of legitimacy. ... And nothing he has done since the inauguration allays fears that he is in effect a Putin puppet.
How can a leader under such a cloud send American soldiers to die? How can he be granted the right to shape the Supreme Court for a generation? ...
The thing is, this nightmare could be ended by a handful of Republican legislators willing to make common cause with Democrats to demand the truth. And maybe there are enough people of conscience left in the G.O.P.
But there probably aren’t. And that’s a problem that’s even scarier than the Trump-Putin axis.

Links for 02-17-17

Thursday, February 16, 2017

Low Real Interest Rates: Depression Economics, Not Secular Trends

Gene Kindberg-Hanlon at Bank Underground:

Low real interest rates: depression economics, not secular trends: Real interest rates have fallen by around 5 percentage points since the 1980s. Many economists attribute this to “secular” trends such as a structural slowdown in global growth, changing demographics and a fall in the relative price of capital goods which will hold equilibrium rates low for a decade or more (Eggertsson et al., Summers, Rachel and Smith, and IMF). In this blog post, I argue this explanation is wrong because it’s at odds with pre-1980s experience. The 1980s were the anomaly (chart A). The decline in real rates over the 1990s and early 2000s simply reflected a return to historical norms from an unusually high starting point. Further falls since 2008 are far more plausibly related to the financial crisis than secular trends.
Chart A: US 1 year real interest rates since 1900
Charta
Source: Robert Shiller and author’s calculations
Note: Simple estimate of real rates using 1-year US treasury bill converted to a real yield using the year-ahead CPI outturn. Model-based estimates of short and long-term real interest rates show similar trends to the above chart (for example, see IMF).

Do secular trends affecting real interest rates fit the data before the 1980s?

Studies proposing a secular fall in real interest rates have generally taken the 1980s as their starting point. However, the 1980s appear to be an anomaly, as real interest rates were well above rates observed earlier in the 20th century. The secular trends proposed to be causing declining real rates since the 1980s do not fit the data beforehand. ...

... It would not be the first time that economists had fallen into the trap of assuming growth and interest rates would remain permanently lower for longer as a result of secular trends following a large financial crisis. In the late 1930s, Alvin Hansen developed the term “secular stagnation” to describe his concerns that structural factors such as stagnant technological development and weaker population growth prospects would weigh on growth permanently. We know now that these concerns over secular trends proved misplaced, and played little role in weaker growth. But there is large uncertainty over the length and depth of the slowdown in growth following a broad-based financial crisis of the severity seen in 2008. The Great Depression was only ended by rearmament and war, but other financial crises have seen recoveries at or before the 10-year mark. Are we now at a point in which the effects of the 2008 crisis on interest rates may begin to wear off?

Links for 02-16-17

Wednesday, February 15, 2017

Jeb Hensarling's Alternative Facts

Adam Levitin:

Jeb Hensarling's Alternative Facts: House Financial Services Committee Chairman Jeb Hensarling (R-Texas 5th) has an alternative fact problem. In a Wall Street Journal op-ed Hensarling alleged that "Since the CFPB’s advent, the number of banks offering free checking has drastically declined, while many bank fees have increased. Mortgage originations and auto loans have become more expensive for many Americans.”
The problem with these claims?  They are verifiably false.  Free checking has become more common, bank fees have plateaued after decades of steep increases, and both mortgage rates and auto loan rates have fallen. One can question how much any of these things are causally related to the CFPB, but using Hensarling's logic, the CFPB should be commended for expanding free checking and bringing down mortgage and auto loan rates. Hmmm.  
Below the break I go through each of Chairman Hensarling's claims and demonstrate that each one is not only unsupported, but in fact outright contradicted by the best evidence available, general FDIC and Federal Reserve Board data. ...
...Bottom line:  Jeb Hensarling's claims about the CFPB are based on a set of utterly concocted alternative facts. This is not the way we should be making policy.

The Problem with Puzder as Labor Secretary

My latest at MoneyWatch:

The problem with Puzder as Labor Secretary: Donald Trump’s pick for secretary of labor, Andrew Puzder, is scheduled to undergo confirmation hearings Thursday before the Senate Health, Education, Labor and Pensions Committee. Prior to his nomination, Puzder was the CEO of CKE Restaurants, the parent company of fast-food chains Hardee’s and Carl’s Jr.
Democrats and other critics of Puzder’s nomination have raised concerns about Puzder’s employment of an undocumented housekeeper (a transgression that has disqualified nominees of previous administrations). But for me, the biggest issue is the extent to which he can fulfill the Labor Department’s own stated mission, to be an advocate for labor...

It ends with:

...that’s a portrait of a “Secretary of Business Owners” rather than a “Secretary of Labor.” In this time of rising inequality, stagnant wages and increasing economic insecurity due to globalization and technological change, workers need someone to protect their interests, someone willing to work endlessly to improve all aspects of their working lives.
President Trump promised workers that he would stand up for them and bring decent jobs to regions of the country that have struggled in recent years. In my eyes, the nomination of Puzder for labor secretary betrays that promise, and to me, that’s reason enough that he should not be confirmed.

Links for 02-15-17

Tuesday, February 14, 2017

What Type of Tax Changes Boost Economic Growth?

Me, at MoneyWatch:

Not just any kind of tax cut can boost economic growth: President Donald Trump promised last week he would unveil a “phenomenal” tax reform package in the next few weeks. Although no details were offered, Mr. Trump’s past statements suggest that his proposal will adhere to fairly standard supply-side principles.
The idea behind supply-side policy is to encourage more investment, more labor effort and technological innovation through changes in the tax code and regulatory structure.
Have these policies been successful in the past? Are some types of policies better than others at spurring economic growth? To answer those questions, it’s useful to put supply-side policies into broad categories...

On inequality in China

Thomas Piketty:

On inequality in China: With Trump and Brexit, the Western-type democratic model is under fire. The Chinese media are having a field day. In column after column, the Global Times (official daily newspaper) condemns the explosive cocktail of nationalism, xenophobia, separatism, TV-reality, vulgarity and ‘money reigns supreme’, the outcome of the so-called free elections and the wonderful political institutions which the West would like to impose on the world. No more lessons!
Recently the Chinese authorities organised an international colloquium on ‘The Role of Political Parties in Global Economic Governance’. The message sent to the colloquium by the Chinese Communist Party (CCP) was perfectly clear. Reliance on solid intermediary institutions such as the CCP (which includes 90 million members, or roughly 10% of the adult population, almost as many as the number of voters in the American or French primaries) enables the organisation of discussions and decision-making and the design of a model for stable, harmonious and duly considered development in which identity conflicts can be overcome.
By so doing, the Chinese regime may well be over-confident. The limits of the model are well known, beginning with the total lack of transparency and the ferocious repression suffered by all those who condemn the opacity of the regime. ...

Links for 02-14-17

Monday, February 13, 2017

Fed Watch: Takeaways From Fischer Speech

Tim Duy:

Takeaways From Fischer Speech, by Tim Duy: Federal Reserve Governor Stanley Fischer gave a very nice speech this weekend that shed light on the current monetary policymaking process. I found three points particularly notable. First:
One important but underappreciated aspect of the SEP is that its projections are based on each individual's assessment of appropriate monetary policy. Each FOMC participant writes down what he or she regards as the appropriate path for policy. They do not write down what they expect the Committee to do. Yet the public often misinterprets the interest rate paths we write down as a projection of the Committee's policy path or a commitment to a particular path.
The interest rate projections in the SEP do not represent the Committee’s forecast because there is no such forecast. And they certainly do not represent a policy commitment. It is often easy, however, to use the shorthand of referring to the median of the SEP projections as the Fed’s forecast, which is why we fall in the habit of doing so. It is important to realize, however, that this is not an official forecast, and even if it were, it can change over the year so it is not a promise.
My preference is to view the median SEP projection as a baseline to assess policy shifts throughout the year. For instance, I do not believe that incoming data suggests that the Fed will raise its projection relative to the baseline at the upcoming March FOMC meeting. In other words, the median projection is not likely to shift from three to four hikes. This further suggests that given the Fed’s predilection to delay rate hikes in favor of further labor market gains, there is no pressing reason for the Fed to hike in March. They still have plenty of time to raise rates three times this year if necessary and the data do not suggest they need to move early to act on the possibility of needing four rate hikes this year. So no rate hike is likely in March.
A second point from Fischer:
Figure 2 reproduces panels from the April 2011 Tealbook that show the staff's baseline forecast--the solid black line--as well as prescriptions from three simple policy rules that were generated using the FRB/US model. The panel on the left shows the paths for the federal funds rate, while the panels on the right show the implications of those policy prescriptions for the unemployment rate and core PCE (personal consumption expenditures) price inflation, respectively…
… How does the FOMC choose its interest rate decision? Fundamentally, it uses charts like those shown in figure 2 as an important input into the discussion. And in their discussion, members of the FOMC explain their policy choices, and try to persuade other members of the FOMC of their viewpoints.
The chart:

Fischer

An important takeaway here is that the Fed makes monetary policy decisions on the basis of a medium term forecast. In other words, they tailor policy to meet their objectives over the medium term. This stands in contrast with criticism that the Fed either only sees the short-term outcomes of their actions or that they base policy only on the last piece of data. In reality, they are incorporating that most recent data into the medium term forecast and adjusting policy appropriately.
This process, however, is challenging for the public to understand. Moreover, I do not think the Fed has spent sufficient time explaining their actions in terms of the forecast. I suspect that the Fed may not be doing itself any favors with the opening paragraph of the FOMC statement, which is backwards-looking in nature and portrays the impression that the most recent data is the basis of policymaking. I thus appreciate that Fischer is using charts like these to explain policy choices and hope to see more of it in the future.
A final point from Fischer:
As the August 2011 meeting illustrates, the eureka moment I thought I had 50-plus years ago was a chimera. Why is that? First, the economy is very complex, and models that attempt to approximate that complexity can sometimes let us down. A particular difficulty is that expectations of the future play a critical role in determining how the economy reacts to a policy change. Moreover, the economy changes over time--this means that policymakers need to be able to adapt their models promptly and accurately in real time. And, finally, no one model or policy rule can capture the varied experiences and views brought to policymaking by a committee. All of these factors and more recommend against accepting the prescriptions of any one model or policy rule at face value.
The Fed relies on models, but not only models. Moreover, those models, or the underlying components of those models, such as the natural rate of interest, change over time. This is not a weakness of policymaking, it is a strength. The Fed responds to a ;changing economy. It is not possible to place the Fed in the straightjacket of a simplistic Taylor Rule and expect good outcomes for the economy. Clearly this is intended to push back at ongoing efforts to limit the Fed’s independence.
Bottom Line: Read Fischer’s speech for a greater understanding of the interplay between models, forecasts, data and judgment that governs the Fed’s policy choices.

Will Trump Bankrupt the Fed as an Institution?

I have a new column:

If Trump Stacks Its Board, He Politicizes the Fed and Demeans Its Independence: Daniel Tarullo announced on Friday that he is resigning from the Federal Reserve Board of Governors in early April, nearly five years before his term expires on January 31, 2022. Governor Tarullo, who was appointed by President Obama in 2009, led the effort to plug the holes in financial regulation that allowed the housing bubble and financial panic to occur. So his resignation comes at an inopportune time for those of us worried about Trump’s plans for wholesale deregulation of the financial sector and the vulnerability to another financial crisis that comes with it. 
Trump could also have a large impact on how the Fed conducts monetary policy..., the Fed could be permanently damaged...

A Credible and Bold Basic Income

Thomas Piketty:

Is our basic income really universal?: After our call « For a credible and bold basic income » launched by a group of ten researchers  (Antoine Bozio, Thomas Breda, Julia Cagé, Lucas Chancel, Elise Huillery, Camille Landais, Dominique Méda, Emmanuel Saez, Tancrède Voituriez), we received considerable support and also, of course, questions and requests for clarification. The first question was: Given that the system of a basic income which we propose does not defend the idea of an identical monthly allowance paid to each individual, is it really universal? The question is legitimate and I would like to reply here as clearly as possible. ...

Background (from the link in the excerpt):

...The goals of the candidates standing in the presidential primary elections launched by the left must be judged on the relevance of their proposals, their impact on the recovery of economic activity and employment in France, and their effect on social cohesion in the country.
The economic and fiscal policy adopted during François Hollande’s five-year term of office has prevented France from engaging in the dynamics of strong and sustainable economic recovery. The choice made in 2012 to forcibly impose an increase in taxes and reduce deficits in a period of recession killed any hope of growth. The numerous warnings launched in this respect remained unanswered. Those who bear the responsibility for this disastrous policy and who claim to have had no part in it must be held to account today.
In the ongoing debates in the primaries, discussions are crystallizing around a new issue: a basic income (in French sometime referred to as a « revenu universel » or « revenu de base »). Benoît Hamon is faced with the accusation that he is incompetent to govern because he introduced this proposal. According to his critics, the introduction of a basic income would mean bankruptcy for France. The accusation is easily made but over-hasty. Economically and socially, a basic income can be both relevant and innovative. It could be quite the reverse of the fiscal and budgetary choices made in 2012 and in particular the incredibly complex and inefficient tax credit for competitivity and employment, not to mention the exoneration of overtime which even the right wing has abandoned and Manuel Valls would like to bring back today. Properly designed and defined, the basic income can be a structuring element in a new foundation for our social model. ...

Links for 02-13-17

Saturday, February 11, 2017

Links for 02-11-17

Friday, February 10, 2017

Fed's Bullard Knows His Treasury Yield Curve

Tim Duy:

Fed's Bullard Knows His Treasury Yield Curve: Having tipped their toes in the water with two interest-rate hikes -- and more expected to come -- the Federal Reserve officials have begun the discussion about reducing the size of the central bank’s $4.45 trillion balance sheet. To date, they have tended to look at interest rate-policy as separate from balance-sheet policy. Once the former is heading toward normalization, then they can begin the latter... Continued at Bloomberg Prophets ...

Links for 02-10-17

Thursday, February 09, 2017

Three Reasons We’re Not Yet at Full Employment

Jared Bernstein:

Three reasons we’re not yet at full employment: It is often asserted that the U.S. labor market, where unemployment has been at or below 5 percent since late 2015, has reached full employment. But I’ve got three reasons we’re not yet quite there yet:
— the underemployment employment rate is still too high;
— employment rates are still too low;
— wage pressures are still too mild.
I’ll explain each in turn...

Housing Crisis Boxed in Some Job Seekers

Jay Fitzgerald at the NBER Digest:

Housing Crisis Boxed in Some Job Seekers: The housing crash of 2007-08 devastated many homeowners who suddenly found themselves facing an array of woes, from owning homes no longer worth the purchase prices to keeping up with mortgage payments amidst one of the worst recessions in generations. In Locked in by Leverage: Job Search During the Housing Crisis (NBER Working Paper No. 22929), Jennifer Brown and David A. Matsa find that being underwater on a mortgage in a distressed housing market impeded the job searches of these homeowners by reducing their mobility. By constraining job search, this reduced mobility likely damaged their long-term compensation and career prospects.
Housing-market downturns can devastate homeowners' overall wealth, and lower housing values can actually "lock in" owners who can't sell their homes with negative equity, forcing them to remain in their homes and limiting their mobility to buy homes and find work elsewhere. But little is known about how a housing bust specifically affects labor supply, largely because it's difficult to separate effects on labor supply and on labor demand.

These researchers studied the crash's effect on job searches. With data from a large online job search platform, they analyzed more than four million applications to 60,000 online job postings in the financial services sector between May 2008 and December 2009. The data encompassed a rich array of jobs, including posts for bank tellers, administrative assistants, software engineers, account executives, and financial advisers. The postings were spread across all 50 states, 12,157 ZIP codes and more than 700 commuting zones.

The researchers matched information from the job search platform to housing market data. Monthly estimates of home values and borrowing were drawn from Zillow and CoreLogic's Loan-Level Market Analytics, while labor market data came from the U.S. Bureau of Labor Statistics and the Bureau of the Census.
Home value declines and the presence of negative equity led job seekers in depressed housing markets to apply for fewer jobs that required relocation; a 30 percent decline in home values led to a 15 percent decline in applications for jobs outside of the job seeker's commuting zone.

Housing

When job searchers were constrained geographically due to the "lock in" effect of lower home values, they were more likely to apply for lower-level and lower-paying positions within their commuting zone.
This constrained search pattern was particularly pronounced in distressed housing markets with recourse mortgages, which allow lenders to go after a defaulting homeowner's other assets. The researchers found clear job-search differences in border areas in which one state allowed recourse mortgages and the other did not.
From the standpoint of firms, the constrained search of some prospective workers had two effects. Firms had reduced access to a national labor market if millions of Americans couldn't or wouldn't relocate due to housing value concerns. At the same time, firms within distressed housing markets faced less competition for labor and benefited by being able to hire well qualified workers at lower salaries than they might otherwise have had to offer.
The researchers conclude that the housing market has important effects on the labor market, as "workers who accept positions below their skill or experience levels forego opportunities to build their human capital." They note that those forced to seek lower-level jobs than they would typically consider could also crowd out other workers, who in turn suffer, creating a far-reaching labor market ripple effect "even if housing market constraints are short-lived."

Links for 02-09-17

Wednesday, February 08, 2017

Competition from China Reduced Domestic Innovation

Steve Maas at the NBER Digest:

Competition from China Reduced Domestic Innovation: While much attention has been paid to the impact of Chinese imports on U.S. factory employment, relatively little has been focused on other affected areas, such as innovation by American manufacturers.
In Foreign Competition and Domestic Innovation: Evidence from U.S. Patents (NBER Working Paper No. 22879), David Autor, David Dorn, Gordon H. Hanson, Gary Pisano, and Pian Shu compare firm-level data on patents obtained in the period 1975 to 1991—before the surge in Chinese imports—with data for the period 1991 to 2007. They find that while patent output and exposure to trade were not significantly correlated in the earlier period, they were in the latter.
China's exports made up nearly 19 percent of the world's total in 2013, up from just 2.3 percent in 1991. The study finds that corporations in U.S. industries where the Chinese made their greatest inroads experienced the most pronounced decline in innovation.

Innovation

The researchers use patents as their main proxy for innovation, but the study's conclusions are corroborated by corresponding trends in research and development spending. Corporations tightened their belts across the board as imports eroded revenues. There was no association between rising imports and patents generated among entities relatively immune to international market forces, such as universities, hospitals, and nonprofit research institutions.
In conducting their study, the researchers controlled for other factors that could influence the rate of patent generation, such as the post-2001 dot-com bust, a trend toward greater scrutiny of patent applications, and pre-existing trends in the rate of patenting in key industries.
The study's long-term perspective, using data from 1975 to 2007, reveals a growth trend in patenting in the computer and electronics industries and a trend of stagnation of patenting in chemicals and pharmaceuticals, which are two of the most important sectors for innovation. Both of these trends predate the surge in Chinese import competition of the 1990s and 2000s, which was much stronger in the computer and electronics industries than in industries that create new chemical patents.
Given the countervailing trends in these two large, patent-intensive sectors, simple correlations would suggest — misleadingly, it turns out—that industries with larger increases in trade exposure during the sample period of 1991 to 2007 did not exhibit significant falls in patenting. Once the researchers account for preexisting trends in just these two sectors—computers and chemicals—the adverse impact of trade exposure on industry patenting becomes strongly apparent and can be precisely estimated.
While manufacturing employs less than a tenth of U.S. private nonfarm workers, it accounts for two-thirds of the country's research and development spending and corporate patents. "The relationship between competition in the global marketplace and the creation of new products and production processes is thus one of immense importance for the U.S. economy," they write.
The researchers ask why corporations do not spend more on innovation in the face of mounting Chinese imports. One possibility is that firms assume increased competition will lead to a permanent decline in the profitability of their market sectors, giving them little incentive to invest. Another is that American consumers, accustomed to low-cost Chinese goods, have become less inclined to pay more for innovative alternatives. A third possibility is that as American companies shifted their factories to lower-cost countries while keeping R&D at home, the geographic separation impeded the coordination that helps fertilize innovation.
"Each explanation has important implications for both policy and our understanding of the impact of trade on economic performance," the researchers conclude.

The U.S. Tax Code Actually Doesn’t 'Soak the Rich'

Nick Buffie at the CEPR:

The U.S. Tax Code Actually Doesn’t “Soak the Rich” : In 2012, Republican presidential candidate Mitt Romney famously commented that 47 percent of Americans were “dependent on government” because they didn’t pay any federal income taxes. He went on to explain that his job was “not to worry about those people.”
Journalists and other public figures often claim that only the rich pay taxes, supporting this with the argument that the rich pay the vast majority of federal income taxes. However, federal income taxes are just one part of the broader tax code. When we consider other types of federal taxes as well as state and local taxes, it becomes clear that the overall tax code isn’t extremely progressive – in other words, it doesn’t “soak the rich,” and it certainly doesn’t let the poor off the hook. ...

A Conservative Case for Climate Action

Feldstein, Halstead, and Mankiw :

A Conservative Case for Climate Action: Crazy as it may sound, this is the perfect time to enact a sensible policy to address the dangerous threat of climate change. Before you call us nuts, hear us out.
During his eight years in office, President Obama regularly warned of the very real dangers of global warming, but he did not sign any meaningful domestic legislation to address the problem, largely because he and Congress did not see eye to eye. Instead, Mr. Obama left us with a grab bag of regulations aimed at reducing carbon emissions, often established by executive order. ... As Democrats are learning the hard way, it is all too easy for a new administration to reverse the executive orders of its predecessors.
On-again-off-again regulation is a poor way to protect the environment. ...
Our own analysis finds that a carbon dividends program starting at $40 per ton would achieve nearly twice the emissions reductions of all Obama-era climate regulations combined. ...
The idea of using taxes to correct a problem like pollution is an old one with wide support among economists. ...
Republicans are in charge of both Congress and the White House. If they do nothing other than reverse regulations from the Obama administration, they will squander the opportunity to show the full power of the conservative canon, and its core principles of free markets, limited government and stewardship. ...

One suggested edit to the last paragraph: If the Republicans do more than reverse regulations from the Obama administration and impose a carbon tax, they will squander the opportunity to show the full power of the conservative canon, and its core principle of rewarding wealthy supporters in the business community.

Links for 02-08-17

Tuesday, February 07, 2017

Do Consumers Respond in the Same Way to Good and Bad Income Surprises?

Philip Bunn, Jeanne Le Roux, Kate Reinold and Paolo Surico at Bank Underground:

Do consumers respond in the same way to good and bad income surprises?: If you unexpectedly received £1000 of extra income this year, how much of it would you spend? All? Half? None? Now, by how much would you cut your spending if it had been an unexpected fall in income? Standard economic theory (for example the ‘permanent income hypothesis’) suggests that your answers should be symmetric. But there are good reasons to think that they might not be, for example in the face of limits on borrowing or uncertainty about future income. That is backed up by new survey evidence, which finds that an unanticipated fall in income leads to consumption changes which are significantly larger than the consumption changes associated with an income rise of the same size ...
The asymmetry that we document could have important implications for the way that households respond to changes in their income that are brought about by monetary and fiscal policies. For example, changes in monetary policy redistribute income between borrowers and savers (Cloyne, Ferreira & Surico (2016)). Borrowers reported higher MPCs than savers out of both positive and negative income shocks, as is typically assumed, but the asymmetry in MPCs was clearly present for both groups. Such an asymmetry in MPCs implies that, at least in the short term, a given interest rate rise would have a larger contractionary effect on spending than the expansionary effect from an equivalent fall in rates, although households may respond differently to small changes in rates than they do to large changes in income.

The Great Recession: A Macroeconomic Earthquake

Larry Christiano on why the Great Recession happened, why it lasted so long, why it wasn't foreseen, and how it’s changing macroeconomic theory (the excerpt below is about the last of these, how it's changing theory):

The Great Recession: A Macroeconomic Earthquake, Federal Reserve Bank of Minneapolis: ...Impact on macroeconomics The Great Recession is having an enormous impact on macroeconomics as a discipline, in two ways. First, it is leading economists to reconsider two theories that had largely been discredited or neglected. Second, it has led the profession to find ways to incorporate the financial sector into macroeconomic theory.

Neglected paradigms
At its heart, the narrative described above characterizes the Great Recession as the response of the economy to a negative shock to the demand for goods all across the board. This is very much in the spirit of the traditional macroeconomic paradigm captured by the famous IS-LM (or Hicks-Hansen) model,9 which places demand shocks like this at the heart of its theory of business cycle fluctuations. Similarly, the paradox-of-thrift argument10 is also expressed naturally in the IS-LM model.

 The IS-LM paradigm, together with the paradox of thrift and the notion that a decision by a group of people11 could give rise to a welfare-reducing drop in output, had been largely discredited among professional macroeconomists since the 1980s. But the Great Recession seems impossible to understand without invoking paradox-of-thrift logic and appealing to shocks in aggregate demand. As a consequence, the modern equivalent of the IS-LM model— the New Keynesian model—has returned to center stage.12 (To be fair, the return of the IS-LM model began in the late 1990s, but the Great Recession dramatically accelerated the process.)

The return of the dynamic version of the IS-LM model is revolutionary because that model is closely allied with the view that the economic system can sometimes become dysfunctional, necessitating some form of government intervention. This is a big shift from the dominant view in the macroeconomics profession in the wake of the costly high inflation of the 1970s. Because that inflation was viewed as a failure of policy, many economists in the 1980s were comfortable with models that imply markets work well by themselves and government intervention is typically unproductive.

Accounting for the financial sector
The Great Recession has had a second important effect on the practice of macroeconomics. Before the Great Recession, there was a consensus among professional macroeconomists that dysfunction in the financial sector could safely be ignored by macroeconomic theory. The idea was that what happens on Wall Street stays on Wall Street—that is, it has as little impact on the economy as what happens in Las Vegas casinos. This idea received support from the U.S. experiences in 1987 and the early 2000s, when the economy seemed unfazed by substantial stock market volatility. But the idea that financial markets could be ignored in macroeconomics died with the Great Recession.

Now macroeconomists are actively thinking about the financial system, how it interacts with the broader economy and how it should be regulated. This has necessitated the construction of new models that incorporate finance, and the models that are empirically successful have generally integrated financial factors into a version of the New Keynesian model, for the reasons discussed above. (See, for example, Christiano, Motto and Rostagno 2014.)

Economists have made much progress in this direction, too much to summarize in this brief essay. One particularly notable set of advances is seen in recent research by Mark Gertler, Nobuhiro Kiyotaki and Andrea Prestipino. (See Gertler and Kiyotaki 2015 and Gertler, Kiyotaki and Prestipino 2016.) In their models, banks finance long-term assets with short- term liabilities. This liquidity mismatch between assets and liabilities captures the essential reason that real world financial institutions are vulnerable to runs. As such, the model enables economists to think precisely about the narrative described above (and advocated by Bernanke 2010 and others) about what launched the Great Recession in 2007. Refining models of this kind is essential for understanding the root causes of severe economic downturns and for designing regulatory and other policies that can prevent a recurrence of disasters like the Great Recession.

Links for 02-07-17

Monday, February 06, 2017

Short-Run Effects of Lower Productivity Growth: A Twist on the Secular Stagnation Hypothesis

Olivier Blanchard (PIIE), Guido Lorenzoni (Northwestern University,) and Jean Paul L'Huillier (Einaudi Institute for Economics and Finance):

Short-Run Effects of Lower Productivity Growth: A Twist on the Secular Stagnation Hypothesis: Despite interest rates being very close to zero, US GDP growth has been anemic in the last four years largely due to lower optimism about the future, more specifically to downward revisions in growth forecasts, rather than legacies of the past. Put simply, demand is temporarily weak because people are adjusting to a less bright future. The authors suggest that downward revisions of productivity growth may have decreased demand by 0.5 to 1.0 percent a year since 2012. This explanation, if correct, has important implications for policy and forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates to sustain demand may be partly temporary. It also implies that, to the extent that investors in financial markets have not fully taken this undershooting into account, the current yield curve may underestimate the strength of future demand and the need for higher interest rates in the future. The authors’ hypothesis is not an alternative to the secular stagnation hypothesis but a twist on it. They do not question that interest rates will probably be lower in the future than they were in the past but argue that, for a while, they may be undershooting their long-run value. [paper]

How Incomplete is the Theory of the Firm? Q&A with Daniel Carpenter

ProMarket interviews Daniel Carpenter "ahead of the upcoming conference on the theory of the firm, in which he will be taking part, Carpenter shared some of thoughts on the role of corporations and government interference in the market:

How Incomplete is the Theory of the Firm? Q&A with Daniel Carpenter: ...Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big an omission do you think this is?
I think it’s an immense omission. For one, we can’t even talk about the historical origins of many firms without talking about corporate charters, limited liability arrangements, zoning, public contracts and grants, and so on. To view these processes as legal and not political is a significant mistake. I’m currently writing a lot on the history of petitioning in Europe and North America, and in areas ranging from railroads, to technology-heavy industries, to extractive industries, to banking, firms (or their investors) had to bring a case before the legislature, or an agency of government, or both. They usually used petitions to do so. 
Beyond the past and into the present, there are a range of firm activities that we can’t understand without looking at politics. ...
And in the future, the profitability and survival prospects of many firms in the coming years will depend heavily, in a polarized environment, on the political skills of managers. ...
Q: Some people describe Donald Trump’s economic policies as “corporatism.” Are you more worried by Trump’s interference in the market economy or by companies’ ability to subvert markets’ rules?
I don’t see those as binary opposites but as complements. If regulation is constitutive of marketplaces (fraud standards, disclosure and labeling requirements, evidentiary requirements), then companies’ ability to subvert market rules will in fact interfere in the proper functioning of a market economy.
I think we’re likely to see both Trumpian interference and company subversion, in other words.
That said, I am concerned about Trump’s interference in markets, for example his bullying of companies and the idea of imposing border taxes. In the U.S. and elsewhere, we are going to see the need for legislative and judicial constraints upon this kind of executive action.

Links for 02-06-17

Sunday, February 05, 2017

Revoking Trade Deals Will Not Help American Middle Classes

Larry Summers:

Revoking trade deals will not help American middle classes: ...The idea that renegotiating trade agreements will “make America great again” by substantially increasing job creation and economic growth swept Donald Trump into office.
More broadly, the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. ...
The reality is that the impact of trade and globalisation on wages is debatable and could be substantial. But the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. ... My judgment is that these effects are considerably smaller than the impacts of technological progress.
A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.

Saturday, February 04, 2017

Trump Picks Wall Street Over Main Street

Mike Konczal:

Trump Picks Wall Street Over Main Street: President Trump fired the first round in his war against financial regulations by signing two executive orders on Friday.
The first calls for the Treasury secretary to conduct a review over the next 120 days of regulations stemming from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The second calls for a review of the Department of Labor’s “fiduciary rule,” which requires investment professionals to act in the best interest of their clients, rather than seek the highest profits for themselves...
Though they don’t do too much by themselves to roll back these reforms, the directives do offer important details on how Mr. Trump will approach the financial industry in the next four years — and provide three reasons that people on Main Street should be scared about how Mr. Trump will help Wall Street.
The first is that President Trump, contrary to the hopes of many, has no intention of getting tough with finance. ...
Second, while Mr. Trump wants to repeal the fiduciary rule, he appears to have no interest in a replacement for it. ...
Third, rather than meet with regulators, small businesses or community banks, Mr. Trump met with the titans of Wall Street before announcing the directives. ...
It’s no wonder financial stocks have been soaring since Mr. Trump was elected. Voters who hoped he would “drain the swamp” and upset the elite are in for a big surprise. ...

Links for 02-04-17

Friday, February 03, 2017

Job Growth on Stable Course as Employment Rate Rises

Dean Baker

Job Growth on Stable Course as Employment Rate Rises: The unemployment rate inched up in January to 4.8 percent, as the economy reportedly added 227,000 jobs. The modest change in the unemployment rate was also associated with a rise in the employment-to-population ratio (EPOP) to 59.9 percent. This is equal to the previous high for the recovery in March of last year. The jobs growth figure was somewhat higher than had generally been expected, but is somewhat offset by the fact that the prior months’ numbers were revised down by 39,000.

While the rise in the EPOP is good news, it is still well below pre-recession levels. The drop remains even when looking at prime-age workers (ages 25-54), with the EPOP for prime-age men 2.7 percentage points below pre-recession peaks and the EPOP for women is down 1.5 percentage points. The overall EPOP for African Americans hit a new high for the recovery, at 57.5 percent. While these data are erratic, the January figure is more than a full percentage point above the year-round average for 2016.

Other data in the household survey were mixed, notably there was a substantial decline in the share of unemployment due to voluntary quits. The January percentage was 11.4 percent, 1.1 percentage point below its November peak. This measure of workers’ confidence in their labor market prospects is almost a full percentage point below the pre-recession peak of 12.3 percent, and almost four percentage points below the 15.2 percent peak in April of 2000. ...

Wage growth appears to have moderated slightly in the most recent data. The average hourly wage in January was 2.5 percent above its year-ago level. Comparing the average for the last three months with the prior three months, wages grew at just a 2.2 percent annual rate. It is worth remembering that there is some shift from non-wage benefits such as health care to wages, so that wage growth exceeds to some extent the rate of growth of compensation. The Employment Cost Index rose by just 2.2 percent over the last year. ...
The January job gains were likely in part attributable to weather, as there were few serious snowstorms in the northeast and Midwest in the period preceding the reference week, which is unusual for January. This could suggest somewhat weaker growth going forward. It is also worth noting the continued weakness in hours. Although the number of jobs has increased by 1.6 percent over the last year, the aggregate weekly hours index has risen by just 1.1 percent.
On the whole the report shows a labor force that is growing at a respectable, but not overly rapid rate. There is no evidence of overheating in the form of accelerating wage growth or longer workweeks. However by any measure the last jobs report of the Obama years is hugely better than the first one.

Paul Krugman: Donald the Menace

"A man who is out of his depth and out of control":

Donald the Menace, by Paul Krugman, NY Times: For the past couple of months, thoughtful people have been quietly worrying that the Trump administration might get us into a foreign policy crisis, maybe even a war. ...
The most likely flash point seemed to be China ... where disputes over islands in the South China Sea could easily turn into shooting incidents. But the war with China will, it seems, have to wait. First comes Australia. And Mexico. And Iran. And the European Union. (But never Russia.) ...
The Australian confrontation has gotten the most press... Australia is, after all, arguably America’s most faithful friend in the whole world...
Well, at least Mr. Trump didn’t threaten to invade Australia. In his conversation with President Enrique Peña Nieto of Mexico, however, he did just that. ...
The blowups with Mexico and Australia have overshadowed a more conventional war of words with Iran...
There was also ... the response to ... Russia’s escalation of its proxy war in Ukraine. Senator John McCain called on the president to help Ukraine. Strangely, however, the White House has said nothing... This is getting a bit obvious, isn’t it?
Oh, and ... Peter Navarro, head of Mr. Trump’s new National Trade Council, accused Germany of exploiting the United States with an undervalued currency..., government officials aren’t supposed to make that sort of accusation unless they’re prepared to fight a trade war. Are they?
I doubt it. In fact, this administration doesn’t seem prepared on any front. Mr. Trump’s confrontational phone calls, in particular, don’t sound like the working out of an economic or even political strategy — cunning schemers don’t waste time boasting about their election victories and whining about media reports on crowd sizes.
No, what we’re hearing sounds like a man who is out of his depth and out of control, who can’t even pretend to master his feelings of personal insecurity. His first two weeks in office have been utter chaos, and things just keep getting worse — perhaps because he responds to each debacle with a desperate attempt to change the subject that only leads to a fresh debacle.
America and the world can’t take much more of this. Think about it: If you had an employee behaving this way, you’d immediately remove him from any position of responsibility and strongly suggest that he seek counseling. And this guy is commander in chief of the world’s most powerful military.
Thanks, Comey.

Links for 02-03-17

Thursday, February 02, 2017

Fed Watch: FOMC, Employment Report, Warsh

Tim Duy:

FOMC, Employment Report, Warsh, by Tim Duy: The FOMC meeting came and went with little fanfare this week. As expected, there was no policy change, with only small modifications to post-meeting statement. With only small changes, it is a struggle to read much into the statement. Some thoughts:
1. Business investment. The Fed drew attention to weak business investment. The recent gains in core capital goods orders and improving ISM manufacturing numbers could be pointing to an upturn in the months ahead, possibly enough to boost growth estimates. Keep an eye on this space.
2. Business/Consumer Confidence. The Fed cited the post-Trump improvement in confidence. These gains, however, could easily prove to be ephemeral. The Fed will see them as a risk to their outlook, but will need actual data before changing their outlook.
3. Inflation expectations. The Fed noted that market-based inflation compensation estimates remain low. I think this means that they are not panicking about the recent rise in such expectations; they remains well below pre-recession levels:

5Y5Y

If they aren't panicking, neither should you. For what it's worth, I suspect that they will only address market-based inflation numbers when convenient and ignore them when inconvenient.
4. Inflation confidence. The Fed deleted the factors (energy, import prices) restraining inflation. This could be viewed as confidence in their inflation outlook (my initial response). Alternatively, it could be interpreted as saying they don't have any more excuses if inflation remains below target. Or, it could mean the former to some at the table, the latter to others at the table.  
All that said, the changes were relatively minor and provide no concrete clues about the Fed's next move. My thoughts on March remains unchanged - without more supportive data, the odds of a March rate hike remains low.
Could the January employment report start building the case for a March hike? It sure can - if, in particular, the ADP report is a reliable predictor. But regardless of ADP, the case was building for a solid number - see Calculated Risk. The consensus expectation is 175k within a range of 155k to 190k. Taking the ADP number at face value suggests the report will prove to be better than expected: 

NFPfor020217

I think there is upside risk to the consensus forecast this month. (Note the error bands. Forecasting the monthly NFP change is risky business). If that is indeed the reality, the Fed will take notice. They will certainly take notice if unemployment dips lower or wages spike higher.
This week I wrote a detailed response to former Federal Reserve Governor Kevin Warsh's recent WSJ op-ed. One interpretation of this puzzling op-ed is that auditions for the Fed Chair require you to find fault with the Fed regardless of whether or not you actually find fault. Hence he lists supposed reforms that more than anything already reflect current policy, knowing that if chosen to be Chair he would be able to maintain much of that policy. This, however, is something of a dangerous game because it undermines the credibility of the Fed - how much can we trust the Fed if one of their own is so critical of their policies? That credibility is especially vulnerable now given the extent of the current threats to Fed independence. In effect, he is giving the Fed's critics ammunition to weaken the institution he reportedly is in the race to lead. One would think this is then a counterproductive approach. Moreover, he is doing the public and market participants no favors  by misrepresenting the Fed and its policies.
Bottom Line: And now we await the employment report...

Class & Confidence

Chris Dillow:

Class & confidence: On Radio 4’s Media Show yesterday Andrea Catherwood told Sarah Sands, the incoming editor of the Today programme:

The job specification did say that there was a requirement of extensive experience of broadcast journalism and a sound appreciation of studio broadcast techniques. You obviously got over that hurdle (16’23” in).

Many of us, though, wouldn’t even have tried the hurdle. If I’d had Ms Sands otherwise decent CV, I’d have looked at that job spec and ruled myself out as unqualified. Ms Sands, obviously, did not.

In this, she’s following many others. Tristram Hunt has become head of the V&A despite no experience of curating or of running large organizations. David Cameron wanted to become PM because he thought he’d be “rather good” at it – a judgment which now looks dubious. And the last Labour government asked David Freud to review welfare policy even though, by his own admission, he “didn't know anything about welfare at all.”

These people have something in common: they come from families sufficiently rich to afford private schooling*. And they are not isolated instances. ...

One thing that’s going on here is a difference in confidence. Coming from a posh family emboldens many people to think they can do jobs even if they lack requisite qualifications. By contrast, others get the confidence knocked out of them (16’20 in)**. As Toby Morris has brilliantly shown, apparently small differences in upbringing can over the years translate into differences not only in achievement but also in senses of entitlement.

The point is not (just) that people from working-class backgrounds suffer outright discrimination. It’s that they put themselves forward less than others, and so save hirers the bother of discriminating against them. ...

Herein lies an issue. In hiring Ms Sands (and no doubt many others like her) the BBC is conforming to a pattern whereby inequality perpetuates itself. This suggests that the corporation is badly placed to address what is for many of us one of the great issues of our time - the many aspects of class inequality – because it is part of the problem. And it compounds this bias by focusing upon other matters instead – for example by the incessant airtime it gives to the (Dulwich College-educated) Farage***. Bias consists not merely in what is said and reported, but in what is not – in the choice of agenda. In matters of class, the BBC is not impartial. ...

If Obama Was For It, We Had To Be Against It

Just a reminder -- this is a (slightly edited) rerun of a post from August 10, 2012:

Biden: McConnell decided to withhold all cooperation even before we took office, by Greg Sargent, Washington Post: I’ve got my copy of Michael Grunwald’s new book on the making of stimulus, The New New Deal, and ... it may shed new light on the degree to which Republicans may have decided to deny Obama all cooperation for the explicit purpose of rendering his presidency a failure — making it easier for them to mount a political comeback after their disastrous 2008 losses.

Grunwald has Joe Biden on the record making a striking charge. Biden says that during the transition, a number of Republican Senators privately confided to him that Mitch McConnell had given them the directive that there was to be no cooperation with the new administration — because he had decided that “we can’t let you succeed.” ...

Biden, of course, has a history of outsized comments. But two former Republican Senators [Bob Bennett and Arlen Specter] are confirming the gist of the charges... Meanwhile, former Senator George Voinovich also goes on record telling Grunwald that Republican marching orders were to oppose everything the Obama administration proposed.

“If he was for it, we had to be against it,” Voinovich tells Grunwald. ... “He wanted everyone to hold the fort. All he cared about was making sure Obama could never have a clean victory.” ...

It seems pretty newsworthy for the Vice President of the United States to charge that seven members of the opposition confided to him that their party had adopted a comprehensive strategy to oppose literally everything the new President did — with the explicit purpose of denying him any successes of any kind for their own political purposes — even before he took office.

Links for 02-02-17

Wednesday, February 01, 2017

Help for Business Scholars and Students Affected by the US Restrictions

Via Joshua Gans (and Brad DeLong's excerpt):

The Rotman School of Management, University of Toronto... is offering to help scholars and students impacted on by the new US immigration restrictions. We would like to hear from anyone who:

  • Can no longer return to the US to continue their academic position or studies in a business, economics or related areas.
  • Missed application deadlines for University of Toronto degree programs in business, economics, or related areas; but are concerned they will not be able to undertake studies in the US anymore.
  • Facing temporary disruptions as a result of the new policies who may need a place in North America to continue their academic work.

The official statement is here: http://www.rotman.utoronto.ca/Connect/MediaCentre/NewsReleases/20170201