Category Archive for: Economics [Return to Main]

Tuesday, May 02, 2017

Links for 05-02-17

Monday, May 01, 2017

Members of Congress, Administration Officials, and CEOs

At the Milken Global Conference. This is what wealth buys:

This annual gathering of government and business leaders at the Global Conference will examine policy priorities and investments that will enhance American competitiveness and drive economic growth. This off-the-record session allows participants including members of Congress, administration officials, and CEOs of leading corporations and financial institutions to engage in an informative, candid dialogue.

It's not okay for the wealthy to have this kind of access and influence over government.

Sunday, April 30, 2017

Links for 04-30-17

Saturday, April 29, 2017

Links for 04-29-17

Friday, April 28, 2017

Paul Krugman: Living in the Trump Zone

"Don’t pretend that this is normal":

Living in the Trump Zone, by Paul Krugman, NY Times: Fans of old TV series may remember a classic “Twilight Zone” episode titled “It’s a Good Life.” It featured a small town terrorized by a 6-year-old who for some reason had monstrous superpowers, coupled with complete emotional immaturity. Everyone lived in constant fear, made worse by the need to pretend that everything was fine. After all, any hint of discontent could bring terrible retribution.
And now you know what it must be like working in the Trump administration. ...
What set me off on this chain of association? The answer may surprise you; it was the tax “plan” the administration released on Wednesday..., the single-page document ... bore no resemblance to what people normally mean when they talk about a tax plan. ...
So why would the White House release such an embarrassing document? Why would the Treasury Department go along with this clown show?...
Every report from inside the White House conveys the impression that Trump is like a temperamental child, bored by details and easily frustrated when things don’t go his way... If he says he wants something, no matter how ridiculous, you say, “Yes, Mr. President!”; at most, you try to minimize the damage.
Right now, by all accounts, the child-man in chief is in a snit over the prospect of news stories that review his first 100 days and conclude that he hasn’t achieved much if anything (because he hasn’t). So last week he announced the imminent release of something he could call a tax plan. ... But nobody dared tell him it couldn’t be done. Instead, they released … something, with nobody sure what it means.
And the absence of a real tax plan isn’t the only thing the inner circle apparently doesn’t dare tell him. ...
...I’d like to make a plea to my colleagues in the news media: Don’t pretend that this is normal. Let’s not act as if that thing released on Wednesday, whatever it was, was something like, say, the 2001 Bush tax cut; I strongly disapproved of that cut, but at least it was comprehensible. Let’s not pretend that we’re having a real discussion of, say, the growth effects of changes in business tax rates.
No, what we’re looking at here isn’t policy; it’s pieces of paper whose goal is to soothe the big man’s temper tantrums. Unfortunately, we may all pay the price of his therapy.

Is There a Case to be Made for Political Antitrust?

Asher Schechter at ProMarket:

Is There a Case to be Made for Political Antitrust?: After decades of approaching antitrust through purely economic analyses, are economists once again willing to take into account political considerations as well?Should political considerations play a role in antitrust? In the last four decades, the predominant approach was that antitrust enforcement should only be guided by economic considerations such as efficiency and consumer welfare. Now, if a panel at the recent Stigler Center conference on concentration in America is any indication, it seems that some economists are once again willing to take into account the political dimensions of antitrust.
 In 1979, former FTC chairman Robert Pitofsky published a seminal paper on what he termed the “political content” of antitrust. Contrary to the view that antitrust should be concerned exclusively with economic questions, Pitofsky argued that “political values” should be incorporated into the enforcement of antitrust laws. 
Among those values, Pitofsky listed “the fear that excessive concentration of economic power will foster anti-democratic political pressures, the desire to reduce the range of private discretion by a few in order to enhance individual freedom, and the fear that increased governmental intrusion will become necessary if the economy is dominated by the few.” Ignoring those concerns, Pitofsky asserted, would be tantamount to ignoring “the bases of antitrust” and the “rough political consensus that has supported antitrust enforcement for almost a century.”
The notion that economic power can be politically dangerous has played an integral part in American political culture since the founding of the republic. While in Paris in 1787, Thomas Jefferson famously supported the inclusion of a “restriction against monopolies” in the Bill of Rights. Since then, the fear that concentration of economic power engenders political power has been taken up as a cause by many, most notably by Supreme Court Justice Louis Brandeis in the early 20th century. In the 1930s, University of Chicago economist Henry Simons discussed the anti-democratic nature of monopoly power. “Political liberty can survive only within an effectively competitive economic system,” he wrote. “Thus, the great enemy of democracy is monopoly, in all its forms.” ...

Links for 04-28-17

Thursday, April 27, 2017

Trade, Jobs, and Inequality (Video)

Participants:

Paul Krugman, Nobel Prize-winning economist, New York Times columnist, and distinguished professor at the Graduate Center.

David Autor, leading labor economist; professor at MIT, where he directs the School Effectiveness and Inequality Initiative; and editor in chief of the Journal of Economic Perspectives.

Brad DeLong, economics professor at U.C. Berkeley; weblogger for the Washington Center for Equitable Growth; and former U.S. deputy assistant secretary of the treasury, in the Clinton administration.

Anne Harrison, professor at the Wharton School, University of Pennsylvania; former director of development policy at the World Bank; and author of Globalization and Poverty.

Do Sweatshops Lift Workers Out of Poverty?

Christopher Blattman and Stefan Dercon:

Do Sweatshops Lift Workers Out of Poverty?: In the 1990s, Americans learned more about the appalling conditions at the factories where our sneakers and T-shirts were made, and opposition to sweatshops surged. But some economists pushed back. For them, the wages and conditions in sweatshops might be appalling, but they are an improvement on people’s less visible rural poverty.
As the economist Joan Robinson said, “The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.”
Textbook economics offers two reasons factory jobs can be “an escalator out of poverty.” ...
Expecting to prove the experts right, we went to Ethiopia and — working with the Innovations for Poverty Action and the Ethiopian Development Research Institute — performed the first randomized trial of industrial employment on workers. Little did we anticipate that everything we believed would turn out to be wrong. ...

Yes, the Stock and Bond Markets Can Both Be Right

Tim Duy:

Yes, the Stock and Bond Markets Can Both Be Right: Equities have renewed their rally -- and so have bonds, and that is creating much alarm among some investors. Whereas the former suggests the stage is set for solid growth, the latter and the accompanying narrowing of the yield curve raises red flags about the health of the economy. I am not sure there is much of a puzzle here. This dichotomy is fairly typical of a monetary tightening cycle and can exist for a long time. How long? Until the Federal Reserve finally snuffs out the expansion with excessively tight monetary policy ...Continued at Bloomberg View ...

Links for 04-27-17

Wednesday, April 26, 2017

Minimum Wages and the Distribution of Family Incomes in the United States

Arindrajit Dube at Equitable Growth: 

Minimum wages and the distribution of family incomes in the United States: Introduction The ability of minimum-wage policies in the United States to aid lower-income families depends on how they affect wage gains, potential job losses, and other sources of family income, including public assistance. In contrast to a large body of research on the effects of minimum wages on employment,1 there are relatively fewer studies that empirically estimate the impact of minimum wage policies on family incomes. 
In my new paper, I use individual-level data between 1984 and 2013 from the Current Population Survey by the U.S. Census Bureau to provide a thorough assessment of how U.S. minimum wage policies have affected the distribution of family incomes.2 Similar to existing work, I consider how minimum wages influence the poverty rate. Going beyond most existing research, however, I also calculate the effect of the policies for each income percentile, adjusting for family size. This highlights the types of families that are helped or hurt by wage increases. I also calculate the effect on a broader measure of income that includes tax credits and noncash transfers. I quantify the offset effect of higher wages on the use of transfer programs and the gains net of the offsets by income percentiles, painting a fuller picture of how minimum-wage policies affect the U.S. income distribution and the overall well-being of U.S. families.
Overall, I find robust evidence that higher minimum wages lead to increases in incomes among families at the bottom of the income distribution and that these wages reduce the poverty rate. A 10 percent increase in the minimum wage reduces the nonelderly poverty rate by about 5 percent. At the same time, I find evidence for some substitution of government transfers with earnings, as evidenced by the somewhat smaller income increases after accounting for tax credits such as the Earned Income Tax Credit and noncash transfers such as the Supplemental Nutrition Assistance Program. The overall increase in post-tax income is about 70 percent as large as the increase in pretax income. ...

Links for 04-26-17

Tuesday, April 25, 2017

What Can Be Done to Improve the Episteme of Economics?

Brad DeLong:

What Can Be Done to Improve the Episteme of Economics?: I think this is needed:
INET: Education Initiative: "We are thrilled that you are joining us at the Berkeley Spring 2017 Education Convening, Friday, April 28th 9am-5pm Blum Hall, B100 #5570, Berkeley, CA 94720-5570... https://www.ineteconomics.org/education/curricula-modules/education-initiative
...Sign up here: https://fs24.formsite.com/inet/form97/index.html or email aoe@ineteconomics.org...
I strongly share INET's view that things have gone horribly wrong, and that it is important to listen, learn, and brainstorm about how to improve economics education.
Let me just note six straws in the wind:
The macro-modeling discussion is wrong: The brilliant Olivier Blanchard https://piie.com/blogs/realtime-economic-issues-watch/need-least-five-classes-macro-models: "The current core... RBC (real business cycle) structure [model] with one main distortion, nominal rigidities, seems too much at odds with reality.... Both the Euler equation for consumers and the pricing equation for price-setters seem to imply, in combination with rational expectations, much too forward-lookingness.... The core model must have nominal rigidities, bounded rationality and limited horizons, incomplete markets and the role of debt..."
The macro-finance discussion is wrong: The efficient market hypothesis (EMH) claimed that movements in stock indexes were driven either by (a) changing rational expectations of future cash flows or by (b) changing rational expectations of interest rates on investment-grade bonds, so that expected returns were either (a) unchanged or (b) moved roughly one-for-one with returns on investment grade bonds. That claim lies in total shreds. Movements in stock indexes have either no utility-theoretic rationale at all or must be ascribed to huge and rapid changes in the curvature of investors' utility functions. Yet Robert Lucas claims that the EMH is perfect, perfect he tells us http://www.economist.com/node/14165405: "Fama tested the predictions of the EMH.... These tests could have come out either way, but they came out very favourably.... A flood of criticism which has served mainly to confirm the accuracy of the hypothesis.... Exceptions and 'anomalies' [are]... for the purposes of macroeconomic analysis and forecasting... too small to matter..."
The challenge posed by the 2007-9 financial crisis is too-often ignored: Tom Sargent https://www.minneapolisfed.org/publications/the-region/interview-with-thomas-sargent: "I was at Princeton then.... There were interesting discussions of many aspects of the financial crisis. But the sense was surely not that modern macro needed to be reconstructed.... Seminar participants were in the business of using the tools of modern macro, especially rational expectations theorizing, to shed light on the financial crisis..."
What smart economists have to say about policy is too-often dismissed: Then-Treasury Secretary Tim Geithner, according to Zach Goldfarb https://www.washingtonpost.com/blogs/wonkblog/post/geithner-stimulus-is-sugar-for-the-economy/2011/05/19/AGz9JvLH_blog.html: "The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as [Christina] Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was 'sugar', and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.... In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration..."
The competitive model has too great a hold: "Brad, you're the only person I've ever heard say that Card-Krueger changed their mind on how much market power there is in the labor market..."
The problem is of very long standing indeed: John Maynard Keynes (1926) https://www.panarchy.org/keynes/laissezfaire.1926.html: "Some of the most important work of Alfred Marshall-to take one instance-was directed to the elucidation of the leading cases in which private interest and social interest are not harmonious. Nevertheless, the guarded and undogmatic attitude of the best economists has not prevailed against the general opinion that an individualistic laissez-faire is both what they ought to teach and what in fact they do teach..."

Monday, April 24, 2017

Paul Krugman: Zombies of Voodoo Economics

 "Because it offers a rationale for lower taxes on the wealthy":

Zombies of Voodoo Economics, by Paul Krugman, NY Times: According to many reports, Donald Trump is getting frantic as his administration nears the 100-day mark. It’s an arbitrary line in the sand, but one he himself touted in many pre-inauguration boasts. And it will be an occasion for numerous articles detailing how little of substance he has actually accomplished. ...
Mr. Trump sold himself to voters as unorthodox as well as effective. He was going to be a different kind of president, a consummate deal-maker who would transcend the usual ideological divide. His supporters should therefore be dismayed, not just by his failure to actually close any deals, but by the fact that he evidently has no new ideas to offer, just the same old snake oil the right has been peddling for decades.
We saw that on Trumpcare... And now we’re seeing it on taxes. ... Whatever the details, Trumptax will be a big exercise in fantasy economics.
How do we know this? Last week Stephen Mnuchin, the Treasury secretary, told a financial industry audience that “the plan will pay for itself with growth.” And we all know what that means..., history offers not a shred of support for faith in the pro-growth effects of tax cuts..., supply-side economics is a classic example of a zombie doctrine: a view that should have been killed by the evidence long ago... Why, then, does it persist? Because it offers a rationale for lower taxes on the wealthy...
Still, Donald Trump was supposed to be different. Guess what: he isn’t.
To be fair, it’s not clear whether Mr. Trump really believes in right-wing economic orthodoxy. He may just be looking for something, anything, he can call a win — and it’s a lot easier to come up with a tax reform plan if you don’t try to make things add up, if you just assume that extra growth and the revenue it brings will materialize out of thin air.
We might also note that a man who insists that he won the popular vote he lost, who insists that crime is at a record high when it’s at a record low, doesn’t need a fancy doctrine to claim that his budget adds up when it doesn’t.
Still, the fact is that the Trump agenda so far is absolutely indistinguishable from what one might have expected from, say, Ted Cruz. It’s just voodoo with extra bad math. Was that what his supporters expected?

Friday, April 21, 2017

Paul Krugman: The Balloon, the Box and Health Care

If they persist in trying to fit the balloon in the box, eventually it will pop:

The Balloon, the Box and Health Care, by Paul Krugman, NY Times: Imagine a man who for some reason is determined to stuff a balloon into a box — a box that, aside from being the wrong shape, just isn’t big enough. He starts working at one corner, pushing the balloon into position. But then he realizes that the air he’s squeezed out at one end has caused the balloon to expand elsewhere. So he tries at the opposite corner, but this undoes his original work.
If he’s stupid or obsessive enough, he can spend a long time at this exercise, trying it from various different angles, and maybe even briefly convince himself that he’s making progress. But he’s kidding himself: No matter what he does, the balloon isn’t going to fit in that box.
Now you understand what’s happening to G.O.P. efforts to repeal and replace the Affordable Care Act.
Republicans have spent many years denouncing Obamacare as a terrible, horrible, no good law and insisting that they can do much better. They successfully convinced many voters that they could preserve the good stuff — the dramatic expansion of coverage that has brought the percentage of Americans without health insurance to a record low — while reducing premiums, shrinking deductibles and, of course, doing away with the taxes on high incomes that pay for the program.
Those promises basically define the box into which they’re trying to stuff health care. ...
Again and again, we read news reports to the effect that Republicans are closing in on a plan that will break the political deadlock..., the latest idea being floated, they’ll let insurance companies raise premiums on people with pre-existing conditions and compensate by creating special high-risk pools! ...
And because the task Republicans have set for themselves is basically impossible, their ongoing debacle over health care isn’t about political tactics or leadership..., this thing just can’t work. ...
All of this raises the obvious question: If Republicans never had a plausible alternative to Obamacare, if this debacle was so inevitable, what was the constant refrain of “repeal and replace” all about?
The answer, surely, is that it began as a cynical ploy; at first, the Republicans hoped to kill health reform before it really got started. And now they’ve trapped themselves: They can’t admit that they have no ideas without, in effect, admitting that they were lying all along.
And the result is that they just keep trying to stuff the balloon into that box.

Thursday, April 20, 2017

GE2017: Why Economic Facts will be Ignored Once Again

Simon Wren-Lewis:

GE2017: Why economic facts will be ignored once again: In 2015, the Conservatives spun the line that Labour profligacy had messed up the economy, and they had no choice but to clear up the mess. In short, austerity was Labour’s fault. As Labour chose not to challenge this narrative, almost all the media and half the voters assumed it must be true. The reality was the complete opposite. The rising deficit was a consequence of the global financial crisis, not Labour profligacy. Doing something about it should and could have been delayed until the recovery was underway. By acting prematurely, Osborne delayed the recovery and lost the average UK household resources worth thousands of pounds. The story that we had to cut now because of the markets was completely false. ...
The 2015 General Election was the first recent occasion that the economic facts were ignored. The second was of course the EU referendum. ...
A critical issue during the referendum was a belief that immigration had reduced the access of UK natives to public services. Economists know that is simply wrong for the economy as a whole, and if it happens locally it is because the government has pocketed the taxes immigrants pay. But the media did little to inform voters of why it is wrong, and I suspect this is why most of those voting Leave believed they would be no worse off in the long run outside the EU. ...
Brexit may not have led to the immediate economic downturn that some expected, but the Brexit depreciation has brought to a halt the short period during of rising real wages. The economic pain that economists said would follow any vote to leave is starting to happen. ...
As far as economics is concerned GE2017 is likely to be nothing more than a combination of GE2015 and the EU referendum. The economy has not got any better than in 2015, and is about to get worse, but mediamacro will let Conservatives insist that the economy is strong. ... The exchange rate has fallen and real wages have stopped rising, but we will still be told this is just Project Fear and the consensus among economists will get ignored once again. So, for the third time, we will have a vote where economics is critical but economic facts will be largely ignored. ...
As inflation rises and real wages fall the facts may be changing, but the narrative survives.
Narratives are a way people can try to understand things they know little about, and most people know little about economics or politics. Mediamacro is a set of narratives. Project fear is a narrative. The right and the ideologues are very good at selling narratives, and they have a media machine to invent them, road test them and spread them. The left and the realists have none of those things, and are hopeless at it anyway because they know reality is more complex than most narratives. That is why they have lost two elections, and look like losing a third big time.

Links for 04-20-17

Wednesday, April 19, 2017

Krugman: Elizabeth Warren Lays Out the Reasons Democrats Should Keep Fighting

Paul Krugman reviews This is Our Fight: The Battle to Save America’s Middle Class, By Elizabeth Warren, Metropolitan Books/Henry Holt & Company:

Elizabeth Warren Lays Out the Reasons Democrats Should Keep Fighting: ...Elizabeth Warren ... brings an edge to her advocacy that many Democrats have shied away from... Even the Obama administration, while doing much more to fight inequality than many realize, balked at making inequality reduction an explicit goal.
Furthermore, Warren comes down forcefully on the left side of an ongoing debate over both the causes of inequality and the ways it can be reduced.
One view, which was dominant even among Democratic-leaning economists in the 1990s, saw rising inequality mainly as a result of ineluctable market forces. Technology, in particular... Given this view, even liberals generally favored free-market policies. ...
The alternative view, which Warren clearly endorses, is all for taxing the rich and strengthening the safety net, but it also argues that public policy can do a lot to increase workers’ bargaining power — and that inequality has soared in large part because policy has, in fact, gone the other way.
This view has gained much more prominence over the past couple of decades, mainly because it’s now backed by a lot of evidence...
But why has actual policy gone the other way? ...
Consider ... West Virginia, where Obamacare cut the number of uninsured by about 60 percent, where minimum wage hikes and revived unions could do wonders for workers in health care and social services, the state’s largest industry. That is, it’s a perfect example of a state that would benefit hugely from an enlightened-populist agenda.
But last November West Virginia went almost three-to-one for a very unenlightened populist...
But maybe it’s a matter of time, and what Democrats need right now is a reason to keep fighting. And that’s something Warren’s muscular, unapologetic book definitely offers. It’s an important contribution, even if it isn’t the last word.

Supply-side, trickle-down nonsense on the NYT oped page

Jared Bernstein:

Supply-side, trickle-down nonsense on the NYT oped page: There’s a robust debate to be had as to why the NYT published this op-ed on the alleged economic benefits of trickle-down tax cuts, as virtually every paragraph touts an alternative fact. It is the opinion page, I guess, and the authors advise (or at least advised) the president, so I can see why it’s there. But it does require debunking, so thanks NYT, for some make work.
Here’s much of the article’s text, followed by my comments in italics:

A few of the comments:

... Here we have the first in a series of trickle-down claims. The alleged sequencing is: cut taxes of business and the wealthy, they invest more, that raises profits and productivity, and the benefits trickle down to the middle class. Every link in that chain is broken: tax cuts, even on investment income, do not correlate with greater investment, and they certainly are uncorrelated with faster productivity growth. Businesses already receive very favorable tax treatment on their investments; in fact, their tax burden on debt-financed investments can be negative. No question, tax cuts raise after-tax profitability, but absent much more worker bargaining power, those profits stay in the pockets of those at the top of the income scale. ...
Here we have the “money” ‘graf: the straight-up claim that trickle down tax cuts will boost the earnings of the working class, which will help offset their cost—the Laffer curve in action. I guess I should give the authors credit for adding “if we are right,” though I’ll give you very long odds that the editors insisted on this addition. Because there’s no reason to ask if they’re right. They’re not, with the latest exhibit being the state of Kansas, an “experiment” derived by some of these very authors.
BTW, I’ve endorsed my friend Kevin Hassett for his new job as a voice of economic reason in this administration. But I’ve been careful to note this flaw in his work and his thinking. In fact, the study they reference here has been thoroughly debunked in various places. ...
Again with the urgency, and “trust us, folks, it’s not the zillionaires for whom our hearts bleed—it’s ‘jobs and the economy.’” Not to mention the stock market, which is getting “jittery” over the possibility that Trump won’t deliver a tax plan like the one these guys wrote, which delivers fully half of its goodies to the top 1 percent (or even better, the Ryan plan, which, once fully phased in, delivers 99 percent of its cuts to the top 1 percent).
Puh-lease. How stupid do these people think we are (rhetorical question!)? Their simple scheme—Trump wins, the rich get big tax cut—has turned out to be harder to pull off than they’d hoped. That’s a feature, not a bug, of our current political moment, even if it means we have to read a WSJ oped in the NYT.

Links for 04-19-17

Tuesday, April 18, 2017

Fed Watch: Autos Drag Down Industrial Production, Housing Solid

Tim Duy:

Autos Drag Down Industrial Production, Housing Solid, by Tim Duy: The Federal Reserve released March industrial production data today. Overall production was up 0.5% supported by a big jump in utilities. Despite the headline gains, it was something of a mixed message. First, the dispersion of weakness was the lowest since 2014:

Ipsector0317

It looks like with the rebound in energy prices and related production activity, the industrial side of the economy has turned a corner. On a softer note, manufacturing activity tumbled:

Ipman0317

This was fairly disappointing considering the long run of solid growth beginning in the second half of last year. Slowing motor vehicle production took a bite out of the numbers. Specifically, autos, not trucks:

Ipmotors0317

That chart makes it fairly clear that Americans prefer big vehicles to small ones. Overall motor vehicle sales are probably past their peak, and we can expect this source of weakness in industrial production to persist until sales settle into a new level. Note that motor vehicle output contributed 0.14 and 0.06 percentage points to overall growth in 2015 and 2016 respectively. That gives some sense of the magnitude of the opposite effect on growth this year - noticeable, but small.
Housing starts were below expectations, but February was revised upwards. Overall, a solid start to the year:

Starts0317

I don't see any reason to believe the uptrend in single family has broken, but multifamily is likely near cycle highs. For more on housing see Calculated Risk here and here.
Yesterday Federal Reserve Governor Stanley Fisher gave remarks on central bank communication. Of more immediate relevancy were his comments on balance sheet adjustment. Specifically, he doesn't see it as having a disruptive impact:
My tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum. But, of course, as we continue to discuss and eventually implement policies to reduce our balance sheet, we will have to continue to monitor market developments and expectations carefully.
Separately, Kansas City Federal Reserve President Esther George argued for continued rate hikes despite choppy data:
Overall, I am encouraged by the start of the normalization process and want to see it continue. Resisting the temptation to react to near-term fluctuations in the data will be necessary. Looking ahead, we should expect inflation to move up and down around 2 percent. A modest decline in inflation or an overshoot may not necessarily warrant the monetary policy normalization process to slow or accelerate. Such attempts at monetary fine-tuning can easily backfire, so a more forward looking view of inflation is needed.
And as part of that process she would like to see balance sheet reduction placed on auto pilot mode:
Balance sheet adjustments will need to be gradual and smooth, which is an approach that carries the least risk in terms of a strategy to normalize its size. Importantly, once the process begins, it should continue without reconsideration at each subsequent FOMC meeting. In other words, the process should be on autopilot and not necessarily vary with moderate movements in the economic data. To do otherwise would amount to using the balance sheet as an active tool of policy outside of periods of severe financial or economic stress, and would increase uncertainty rather than reduce it.
She also argues against deliberately overshooting the inflation rate. Her key reason is an often forgotten point. Not all goods and services have the same inflation rate, and a higher overall inflation rate may exacerbate inflation differences across the economy. Those differences would be expected to force a restructuring of the economy that could be costly. Her example is that housing costs may accelerate even faster if the Fed were to push for above target inflation:
Such concentration and persistently rising prices in one area suggests the economy is struggling to reallocate resources. For housing, it could reflect several factors such as tight lending standards faced by home builders and scarcity of skilled craftsmen needed to construct homes. I expect the market to eventually solve for, or at least adapt to, such factors. Using monetary policy however to compensate for them could easily end up hurting the population the policy is intended to help.
So count George as a "no" when it comes to any discussion of raising the Fed's inflation target.
Meanwhile, the Trump trade in bonds is reversing course; ten year yields are below 2.2 percent as I write. Also, odds of a Fed rate hike in June have fallen below 50 percent. Market participants are reasonably starting to think that the normalization process may take a bit longer than the Fed anticipates. It will be interesting to see if the Fed agrees. I expect that on average Fedspeak will stick with a fairly hawkish story as policymakers largely dismiss the choppy data of late. We will see if any of George's colleagues share her conviction that policy should not react to recent noise. I tend to think it is a small group, but I argued that Federal Reserve Chair Yellen sounded fairly complacent about the economy last week. Given that the Fed doesn't like to surprise, expect policymakers to speak out forcefully if they feel market participants just don't get it.

Monetary Policy Medicine: Large Effects from Small Doses?

An FRBSF Economic Letter from  ÒscarJordà, Moritz Schularick, and Alan M. Taylor:

Monetary Policy Medicine: Large Effects from Small Doses?: Making sure the economy operates at full employment without triggering inflation is tricky. Price stability can conflict with supporting a thriving economy. Choosing the right dose of monetary policy thus requires understanding how interest rates affect general economic activity and prices separately. Not surprisingly, few questions in economics have received as much attention.
Medical researchers consider randomized trials the gold standard in testing alternative treatments. In this Economic Letter, we adapt this approach to measure the efficacy of interest rates in achieving economic goals. Using historical economic data, we extend a traditional economic approach of controlling for domestic factors with a novel strategy that compares data from different external institutional arrangements, our randomized trials. Our findings suggest that interest rate effects may have been previously undermeasured. This has important implications now that some central banks are preparing for a sustained tightening of monetary policy after years of near-zero interest rates.
Randomized trials in practice
When the central bank raises interest rates, inflation and economic activity usually slow down—aggregate demand is being reined in. While researchers have come up with numerous theories to explain why this might happen, precisely measuring this tradeoff is considerably more difficult. Unlike the natural sciences, economics must rely on observational rather than experimental data.
Sinclair Lewis explained experimental data eloquently:
When a physician boasted of his success with this drug or that electric cabinet, Gottlieb always snorted, “Where was your control? How many cases did you have under identical conditions, and how many of them did not get the treatment?” – Arrowsmith, 1925
Central banks do not have the luxury of running such randomized experiments—they do not roll the dice when conducting monetary policy. Inflation and output reflect monetary policy as well as the factors that determined that policy to begin with. Just as umbrellas do not make it rain, if central banks cut interest rates when the economy slows it does not mean that accommodative monetary policy causes recessions.
Economists typically measure the effects of monetary policy with a variety of statistical methods that share a common thread: They control as much as possible for the information that the central bank might have used in choosing interest rates. Any remaining variation in interest rates is considered random. That is, interest rate adjustments that differ from predictions based on available information are like quasi-random experiments. We call this leftover variation in interest rates controlled variation.
The correlation of inflation and output over time with this quasi-random controlled variation in interest rates can provide a measure of the causal effect of monetary policy. For this empirical strategy to succeed, however, one has to make sure that no relevant information is left out, which is a tall order. Unobserved factors can make this type of measurement fraught, justifying the popularity of the randomized controlled trial in the sciences.
In experimental settings, random assignment into treated and control groups forms the basis of randomized controlled trials such as those described by Sinclair Lewis. While advanced economies have not randomly entered into various monetary and trade arrangements, some of these arrangements, like the euro zone, can provide a setting for an alternative type of monetary experiment. Economies that fix their exchange rate but allow capital to move freely across borders effectively relinquish control of domestic monetary policy. In such situations, monetary policy may not respond to domestic conditions and hence may produce quasi-random variation in interest rates that is less sensitive to unobserved factors.
We take advantage of this observation, extending the traditional approach of controlling for domestic factors with a novel strategy that explores what happens to economies that have historically pegged exchange rates while allowing unfettered capital movement. While the United States does not have a pegged exchange rate, we discuss direct implications for U.S. monetary policy later.
Quasi-random monetary experiments
Over the history of modern finance, advanced economies have managed exchange rate policies in a variety of ways. Sometimes they have allowed market forces to determine the exchange rate, generally called floating exchange rate regimes—or “floats” for brevity. At other times, countries we will call “pegs” have pegged the exchange rate to another currency. Examples of peg arrangements include the classical gold standard era that ended with World War I; the Bretton Woods era that began after World War II and ended around 1973; and, the European Monetary System in the 1970s up to when the euro was rolled out in 1999.
Two countries that peg the exchange rate and allow capital to move freely must have the same short-term safe interest rate. Otherwise an investor could borrow funds in one country for less than the return offered by the other without bearing any risk—a sure way to make unlimited profit. The absence of such risk-free arbitrage essentially robs local central banks of their autonomy by forcing interest rates to equalize across borders with those set by the center country’s central bank. The mechanism just described is often referred to as the trilemma in international finance (see, for example, Obstfeld, Shambaugh, and Taylor 2005).
In a recent paper (Jordà, Schularick, and Taylor 2017), we take advantage of this phenomenon to single out episodes in which interest rates fluctuated for reasons unrelated to the domestic outlook and direct decisions by the home-country central bank. We use such episodes to calculate how interest rates affect output and inflation. These episodes are our quasi-random monetary trials. We call variation in interest rates due to these episodes peg variation.
In particular, we rely on annual data for 17 advanced economies including the United States since 1870. In our sample, countries have moved in and out of exchange rate arrangements over time. We start by focusing on the sample for country-year pairs for pegs. We find that there is a difference between controls that use only observable information and those that add information on the variation in interest rates caused by the peg. This finding can improve our understanding of the effects of monetary policy.
Interest rates are a powerful lever
If using observables for the control is sufficient, the measured response of output and inflation to interest rates using either controlled variation or peg variation should be equivalent. If there are omitted factors, any differences will arise when using controlled variation. And in that case, variation due to the peg offers a more reliable guide. Just to be sure, we also include as controls information on GDP, inflation, and several other macroeconomic conditions.
Figures 1 and 2 suggest there is cause for concern when focusing on measures based on controlled-variation. Using post-World War II data, Figure 1 shows the response of inflation-adjusted GDP per capita in response to a 1 percentage point increase in short-term interest rates in year 0 calculated two different ways. The green line uses the traditional controlled variation approach, while the red line uses the peg variation approach surrounded by a gray 90% confidence band. There is a stark difference between the two approaches. In the first case, interest rates barely cause a ripple, whereas in the second, real GDP per capita is about 2% lower in year 4 than it was at the start.

Figure 1
Cumulative response of real GDP per capita

G12017-09-1

Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.

A similar picture emerges in Figure 2. The measured response of prices using controlled variation in interest rates is muted—prices are about 0.5% lower by year 4 relative to year 0. The same response calculated with peg variation is estimated to be nearly 2%. In other words, assuming a constant rate of price decline, inflation is about 0.4 percentage point per year lower.

Figure 2
Cumulative response of consumer price index level

G22017-09-2

Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.
The different paths in the figures suggest that the traditional controlled variation approach undermeasures the macroeconomic impact of changes in interest rates. One possible explanation is that interest rates follow different paths after year 0 under each type of measurement approach.
Figure 3 shows that interest rate paths clearly differ somewhat between the two approaches. Measures based on peg variation indicate that interest rates go up further in year 1 but then come down very quickly. The path using controlled variation is more persistent and would tend to have a longer-lasting effect on output and prices, which clearly contradicts the actual pattern seen in Figures 1 and 2.

Figure 3
Cumulative response of short-term interest rates

G32017-09-3

Note: Response to 1 percentage point increase in interest rates in year 0; gray shading shows 90% confidence band.
Checking the reliability of the results
What else could explain the stark differences in the figures? The first thing to check is whether there are differences between peg and float economies that would make their responses to interest rates fundamentally different. Although measures of peg variation are unavailable for floats, Jordà, Schularick, and Taylor (2017) find that controlled variation measures for both pegs and floats are, in fact, very similar, so the explanation must lie elsewhere.
Peg variation may reflect spillover effects from trade channels or other mechanisms that distort measures of the response to interest rates. Jordà, Schularick, and Taylor (2017) find that, if anything, spillover effects would tend to increase the differences.
Finally, our estimates are very similar to those reported in other research, including Romer and Romer (2004) and Cloyne and Hürtgen (2016). This line of research tries to avoid the pitfalls of the controlled variation approach using staff forecast errors from the Federal Reserve and the Bank of England, respectively, to identify exogenous changes in policy rates.
Conclusion
We do not have a definitive measure of how interest rates affect economic activity and inflation. However, along with other recent research, we find that interest rates have stronger effects on the macroeconomy than previously understood. Although the monetary experiments we use to calculate the response to interest rate changes rely on countries that peg—by contrast, the United States allows its exchange rate to freely float—there are good reasons to think that the U.S. economy responds to interest rate changes no differently. Our sample is made up of advanced economies that have institutional characteristics similar to the United States and whose economies respond much the same way as ours when using controlled variation. Without delving into the timing or path of monetary strategy more deeply, our research suggests that even a modest tightening cycle can have a substantial restraining effect on both inflation and economic activity.
References
Cloyne, James S., and Patrick Hürtgen. 2016. “The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom.” American Economic Journal: Macroeconomics 8(4), pp. 75–102.
Jordà, Òscar, Moritz Schularick, and Alan M. Taylor. 2017. “Large and State-Dependent Effects of Quasi-Random Monetary Experiments.” FRB San Francisco Working Paper 2017-02.
Lewis, Sinclair. 1925. Arrowsmith. New York: Harcourt, Brace & Company.
Obstfeld, Maurice, Jay C. Shambaugh, and Alan M. Taylor. 2005. “The Trilemma in History: Tradeoffs Among Exchange Rates, Monetary Policies, and Capital Mobility.” Review of Economics and Statistics 87(3), pp. 423–438.
Romer, Christina D., and David H. Romer. 2004. “A New Measure of Monetary Shocks: Derivation and Implications.” American Economic Review 94(4), pp. 1,055–1,084.
Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.

Links for 04-18-17

Monday, April 17, 2017

Fed Watch: Fed Looking Forward to the Second Quarter

Tim Duy:

Fed Looking Forward to the Second Quarter, by Tim Duy: First quarter growth is likely to fall flat - at least that is the signal from numerous forecasters and the Atlanta Fed. But what does it mean for Fed policy? Probably not much for now. It will leave policymakers a little cautious as we head toward the June FOMC meeting (May seems most likely a off the table for policy action). But mostly the Fed will be watching incoming data from the end of the first quarter and the beginning of the second. If the data flow picks up over the next couple of months, they will likely move forward with a June hike. They seem to be in a "what, me worry?" frame of mind.
Retail sales stumbled in March, following up on a revised decline in February as well. Motor vehicle sales are partly to blame; we have likely seen the peak in car sales for this cycle and are settling into a lower pace of activity going forward. Lower gas prices and sluggish sales at building supply stores contributed to the fall as well. Stripping out the more volatile components, however, suggests a bit more stability in sales than suggested by the headline numbers:

Retailsales0317

March inflation came in lower than expected, with a surprise hit to core:

Corecpi0317

Ocular econometrics suggests the March print is something of an outlier - the first monthly decrease since 2010. A big 7 percent decline in cellular service prices played a roll, as did falling used car and apparel prices. While I anticipate a rebound in April, this kind of print will help keep the Fed's inflation forecast intact thus preventing them from stepping up the pace of tightening. Watch how this plays through to core-PCE inflation. As a reminder, that was running hot in the first two months of the year:

PCEb033117

In another sign that the Fed's inflation metrics will remain contained, the PPI for health services remained subdued in March:

Ppihealth0317

The New York Federal Reserve issued its survey of inflation expectations for February. Interesting split between the high and low numeracy groups:

Infexp0317

The low numeracy group tends to be more volatile, so I anticipate it will revert back in the next month.
How will any of this matter for the Fed? First, remember that the Fed started dismissing first quarter data at the March FOMC meeting. From the minutes:
Participants generally saw the incoming economic information as consistent, overall, with their expectations and indicated that their views about the economic outlook had changed little since the January-February FOMC meeting. Al­though GDP appeared to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality.
Hence I don't think they will be surprised by a weak GDP number; they will be surprised if that weakness looks to be carrying forward into the second quarter.
Second, I think the same goes for inflation. For the moment, I think that the decline in unemployment to 4.5% will weigh more heavily on their decisions than a weak inflation number. Still, I believe that if inflation looks to be tracking below their forecasts, they will eventually reduce their estimate of the natural rate. Just not right away.
Third, I think this take on Federal Reserve Chair Janet Yellen's talk last week from Marc Chandler is accurate:
We had detected a shift in the Fed’s stance that we characterized as looking for data to confirm the recovery to now looking for opportunities to normalize conditions. Yellen sees similarly. She said the Fed has shifted from “a post-crisis exercise of healing” to now trying to sustain the economic progress.
The Fed is not living in the crisis anymore. Policymakers no longer worry about trying to boost the pace of activity. The economy is, by their estimates, near full employment with growth is near potential growth. In this framework, a normal economy demands a more normal monetary policy. Policymakers are thinking that the expansion will be eight years old this summer with a good chance that this could turn into the longest running US economic expansion on record. They generally believe that preemptive but gradual rate hikes offer the best chance of expanding the expansion to ten years and beyond. Hence I tend to think their bias is to continue along the current policy path, which suggests they will continue to sound hawkish relative to what recent data would suggest.
Bottom Line: Fed likely to dismiss recent data as unrepresentative of underlying economic trends.

U.S. Exporters Could Face High Tariffs without NAFTA

Mary Amiti and Caroline Freund atthe NY Fed's Liberty Street Economics:

U.S. Exporters Could Face High Tariffs without NAFTA: An underappreciated benefit of the North American Free Trade Agreement (NAFTA) is the protection it offers U.S. exporters from extreme tariff uncertainty in Mexico. U.S. exporters have not only gained greater tariff preferences under NAFTA than Mexican exporters gained in the United States, they have also been exempt from potential tariff hikes facing other exporters. Mexico’s bound tariff rates—the maximum tariff rate a World Trade Organization (WTO) member can impose—are very high and far exceed U.S. bound rates. Without NAFTA, there is a risk that tariffs on U.S. exports to Mexico could reach their bound rates, which average 35 percent. In contrast, U.S. bound rates average only 4 percent. At the very least, U.S. exporters would be subject to a higher level of policy uncertainty without the trade agreement. ...

Sunday, April 16, 2017

Links for 04-16-17

Saturday, April 15, 2017

"The Sense That the System Is Rigged Relates Directly to Governments’ Failure to Address Inequality and Concentration"

From a ProMarket interview with Anat Admati:

... Q: The World Economic Forum has called for “reimagining” and “reforming” capitalism. To what extent is this need for reform the result of disruption brought by technological change, globalization, and immigration and to what extent is it the effect of rent-seeking and regulatory capture?
The impact of technological change, globalization, and immigration on society depends on how the relevant institutions manage these developments. Capitalism has worked poorly in recent years because governments mishandled the challenges of technological change and globalization, and that failure is related to rent-seeking and regulatory capture. The elites who engage with each other through the World Economic Forum and elsewhere can become out of touch and blind to reality; you can see the problem from Steve Schwarzman of Blackstone saying in Davos in 2016 that he found public anger “astonishing.”
Acemoglu and Robinson argued in Why Nations Fail: The Origins of Power, Prosperity, and Poverty that “man-made political and economic institutions… underlie economic success (or lack of it).” Technological developments have highlighted the immense power associated with controlling information. The business of investigative reporting is in a crisis. Corporations often play off governments, shopping jurisdictions and making bargains. For capitalism to work, the relevant institutions must work effectively and avoid excessive rent extraction. The governance challenge of the global economy is daunting.
Here are a few examples...
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? ...

Links for 04-15-17

Friday, April 14, 2017

Paul Krugman: Can Trump Take Health Care Hostage?

With the extent to which Trump is cashing in on his presidency, I suppose we could say the buck stops at the White House. Trump doesn't seem to understand that's true more broadly:

Can Trump Take Health Care Hostage?, by Paul Krugman, NY Times: Three weeks have passed since the Trumpcare debacle. After eight years spent denouncing the Affordable Care Act, the G.O.P. finally found itself in a position to do what it had promised, and deliver something better. But it couldn’t.
And Republicans, President Trump very much included, had nobody but themselves to blame. ...
But Mr. Trump, as you may have noticed, isn’t big on accepting responsibility for his failures. Instead, he has decided to blame Democrats for not cooperating in the destruction of their proudest achievement in decades. And on Wednesday, in an interview with The Wall Street Journal, he openly threatened to sabotage health care for millions if the opposition party doesn’t give him what he wants. ...
It’s a nasty political tactic. It’s also remarkably stupid.
The nastiness should be obvious, but let’s spell it out. Mr. Trump is trying to bully Democrats by threatening to hurt millions of innocent bystanders — ordinary American families who have gained coverage thanks to health reform. ...
Why does Mr. Trump even imagine that this threat might work? Implicitly, he’s saying that hurting innocent people doesn’t bother him as much as it bothers his opponents. Actually, this is probably true...
What makes Mr. Trump’s tactic stupid as well as nasty is the reality that Democrats have no incentive whatsoever to give in. ...
Maybe Mr. Trump believes that he could somehow shift the blame for the devastation he has threatened to wreak onto Democrats. “See, there’s the death spiral I predicted!” But that probably wouldn’t work even if he hadn’t effectively proclaimed his own guilt in advance. Voters tend to blame whoever holds the White House for bad things, and in this case they’d be right: ...
So the Trump health care threat is, as I said, stupid as well as nasty. And it’s hard to believe that it will be carried out.
But here’s the thing: Even if Mr. Trump wimps out, as he is doing on so many other issues, he may already have done much of the threatened damage. Insurers are deciding right now whether to participate in the 2018 Obamacare exchanges. Mr. Trump’s tough talk is creating a lot of uncertainty, which in itself may undermine coverage for many Americans.
There is, of course, a good chance that Mr. Trump doesn’t understand any of this. Unfortunately, when you’re in the White House, what you don’t know can hurt a lot of people.

Links for 04-14-17

Thursday, April 13, 2017

The Zero Lower Bound on Interest Rates: How Should the Fed Respond?

Ben Bernanke:

...the Fed and other central banks cannot ignore the risks created by a low level of “normal” interest rates, which in turn limit the scope for interest-rate cuts. A wide-ranging discussion of alternative policy approaches would thus be welcome. Although raising the inflation target is one of the options that should be considered, that approach has significant drawbacks. Fortunately, there are promising policy options that may be able to mitigate the effects of the zero lower bound on interest rates without forcing the public to accept a permanently higher rate of inflation. Two such options (which are related, and could be combined) are price-level targeting and a “make-up” approach, under which the central bank commits to compensating for “missing” monetary ease after the economy leaves the zero lower bound.

Much more here: The zero lower bound on interest rates: How should the Fed respond? (link fixed).

Tax Reforms and Top Incomes

Enrico Rubolino and Daniel Waldenström at VoxEU:

Tax reforms and top incomes: The link between tax progressivity and the income distribution is the subject of intense debate. This column presents new evidence from tax reforms during the 1980s and 1990s to examine how reduced progressivity affects top income shares. Reduced progressivity boosted top incomes, particularly for those in the top 0.1% of earners. Income tax changes are a plausible candidate for explaining the recent surge in income inequality. ...
Tax reforms did not increase the size of the cake
Tax progressivity was reduced in the 1980s on the argument that there would be a positive impact on economic activity and efficiency (Auerbach and Slemrod 1997, Gale and Samswick 2014). Therefore it could be that the estimated boost in top shares reflects new resources created in top groups, rather than a redistribution of incomes away from the bottom and middle. We evaluate this hypothesis..., this analysis does not show large real income responses to reductions in progressivity. ...
Taxation and inequality
Our findings suggest that tax progressivity changes influence pre-tax income inequality. Focusing on large, progressivity-reducing tax reforms in the 1980s and 1990s, we show that they had a positive, increasing effect on top income shares in all the countries we studied. ...

Links for 04-13-17

Wednesday, April 12, 2017

The End of China’s Export Juggernaut

Thomas Klitgaard and Harry Wheeler at the NY Fed's Liberty Street Economics blog:

The End of China’s Export Juggernaut: China has been an exporting juggernaut for decades. In the United States, this has meant a dramatic increase in China’s share of imports and a ballooning bilateral trade deficit. Gaining sales in the United States at the expense of other countries, Chinese goods rose from only 2 percent of U.S. non-oil imports in 1990 to 8 percent in 2000 and 17 percent in 2010. But these steady gains in U.S. import share have stopped in recent years, with China even losing ground to other countries in some categories of goods. One explanation for this shift is that Chinese firms now have to directly compete against manufacturers in high-skill developed countries while also fending off competition from lower-wage countries, such as Vietnam. This inability to make additional gains at the expense of other countries means that exports don’t contribute as much to China’s overall growth as they used to.
Taking the U.S. Market by Storm—And Then, Not so Much
The United States had a merchandise trade deficit of $350 billion with China in 2016, accounting for roughly half of the overall U.S. trade deficit. The import growth of goods from China has been impressive, with imports from China growing at an annual rate of 14 percent since 1990, while total U.S. imports were growing at an annual rate of only 6 percent. That is, China has had great success in selling to the United States by taking market share away from other countries.
A breakdown of U.S. imports into the four largest categories, accounting for roughly two-thirds of the total, demonstrates the source of this success. As seen in the chart below, China’s import shares for apparel, electronics, electric machinery, and non-electric machinery were all fairly high in 2002, the beginning of the data series used here, and continued to increase. In 2002, China accounted for 25 percent of all U.S. apparel imports and 15 percent of all electronics imports. By 2010, these shares were up to 50 percent and 40 percent, respectively. Market-share increases in general machinery and electrical machinery were less dramatic but still substantial over this period, rising by 8 percentage points (to 15 percent) and 11 percentage points (to 35 percent), respectively.

China's Share of U.S. Imports

 

So which countries were losing market share during this period? In apparel, Mexico’s share of U.S. imports dropped by 7 percentage points and Hong Kong’s slipped by 6 percentage points from 2002 to 2010. South Korea and Taiwan had smaller losses in market share over the same horizon. Japan was the main loser of U.S. import share for other major manufactured goods. For electronics, Japan’s U.S. share fell by 7 percentage points, while 2-percentage-point share declines were reported for South Korea, Singapore, Taiwan, and Canada. For electrical equipment, Japan lost 7 percentage points of the U.S. market, with Germany, the United Kingdom, and Taiwan also losing market share. For non-electric machinery, China’s gains were largely at the expense of goods produced in Japan.
Around 2010, China’s ability to gain market share from other imports faltered. The import share for Chinese apparel has dropped over the past five years, while the share for electronics, by far the largest of the four categories, declined last year. China’s share of the U.S. electric machinery market is showing tentative signs of falling and its gains in the non-electric machinery category have ended.
Limits to China Increasing Its Market Share
It is not a complete surprise that Chinese goods would eventually peak as a share of U.S. imports. To keep increasing their share of the U.S. import market, Chinese firms would need to gain sales by competing more directly against manufacturers in Europe, Japan, and other advanced economies. China would also need to successfully compete against other developing countries with lower labor costs. Indeed, China has been ceding market share to Vietnam for electronics and electrical machinery, while India and Bangladesh have been making gains in apparel. It may be the case that assembly operations are moving from China to lower-wage countries, repeating the process that previously benefited China.
The challenge for China is that its exports to the United States are now only growing as fast as total U.S. imports since its goods are no longer displacing those from other countries. From 2000 to 2010, U.S. imports from China grew at a 20 percent annualized rate. From 2010 to 2016, the rate of growth dropped to 4 percent. This slowdown has also hit China’s exports (in U.S. dollars) to the rest of the world, which slowed from a 21 percent annual growth rate in the 2000-10 period to 5 percent since 2010.
Measuring the Impact of Slower Export Growth Is a Challenge
When evaluating the slowdown in China’s exports, it is important to recognize that trade data measure the value of goods that arrive from a particular country, not that country’s contribution to the item’s value. For example, if a U.S. import from China is largely made of components produced in Japan and assembled in China, then the import data would significantly overstate the revenue that ended up in China from that sale. Cross-border supply chains are motivated, in part, by differences in labor costs, with components manufactured using high-wage labor and the assembly of these parts done in low-wage countries. This processing of components into final goods has been an important attribute of Chinese exports. The chart below shows that exports of such goods peaked in 2000 at almost 60 percent of China’s total exports. So, to the extent that China’s export growth figures reflect trade in processed goods, they overstate the domestic gains China has realized from these export sales when taken at face value.

 

China: Processing Exports Share of Total Exports

 

More recently, however, the data show a significant decrease in China’s processing trade amid an overall slowdown in export growth. Processing exports fell to 50 percent of China’s total exports in 2010 and then declined rapidly, hitting 35 percent in early 2017. This transformation partly reflects rising wages in China (as the skill level of its workers increases) and the related migration of assembly operations from China to lower-wage countries. A positive take on these developments is that each dollar of exports now has a larger positive impact on domestic income. The negative take is that China’s much more modest export performance is, in part, due to the loss of processing exports that would have otherwise been a source of income.
Challenge for China
Exports have been a great boost to China’s economic development, with rapid increases in foreign sales helping to transform the economy into a major producer of the world’s manufactured goods. The slowdown in export growth in recent years has been substantial and highlights the difficulties of trying to compete in foreign markets against both high- and low-wage countries. One of the consequences of the end of China’s export boom is that it puts more pressure on domestic demand to sustain the country’s rate of growth.

Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

How Big a Problem is the Zero Lower Bound on Interest Rates?

Ben Bernanke:

How big a problem is the zero lower bound on interest rates?: If inflation is too low or unemployment too high, the Fed normally responds by pushing down short-term interest rates to boost spending. However, the scope for rate cuts is  limited by the fact that interest rates cannot fall (much) below zero, as people always have the option of holding cash, which pays zero interest, rather than negative-yielding assets.[1] When short-term interest rates reach zero, further monetary easing becomes difficult and may require unconventional monetary policy, such as large-scale asset purchases (quantitative easing).
Before 2008, most economists viewed this zero lower bound (ZLB) on short-term interest rates as unlikely to be relevant very often and thus not a serious constraint on monetary policy. (Japan had been dealing with the ZLB for several decades but was seen as a special case.) However, in 2008 the Fed responded to the worsening economic crisis by cutting its policy rate nearly to zero, where it remained until late 2015. Although the Fed was able to further ease monetary policy after 2008 through unconventional methods, the ZLB constraint greatly complicated the Fed’s task.
How big a problem is the ZLB likely to be in the future? ...

Links for 04-12-17

Tuesday, April 11, 2017

Links for 04-11-17

Fed Watch: Solid Employment Report

Tim Duy:

Solid Employment Report, by Tim Duy: Labor markets were generally solid in March, with nothing by itself to dissuade the Fed from its current path. We should be watching for the Fed reaction to the decline in the unemployment rate, assuming it persists in the coming months. Could be dovish if the Fed lowers its estimate of the natural rate. Could be hawkish if they see a higher risk of undershooting the natural rate.
Nonfarm payroll growth slowed to 98k:

NfpA0317

While this was below expectations, it wasn't a surprise. My interpretation is that most analysts expected downside risk to the estimates based on cold weather in March. No reason to think the basic underlying trend of solid but slowing declining job growth.
The unemployment rate dipped to a cycle low of 4.5% and stands below the Federal Reserve's longer run unemployment projection:

NfpB0317

This will raise some eyebrows at the Federal Reserve. The median FOMC participant forecast 4.5% for December. So we are a little ahead of schedule on that. Does this mean the economy is poised to overheat? The wage numbers do not support that hypothesis:

NfpC0317

Wage growth flattened out in recent months, suggesting the economy is not yet in danger of overheating. Policymakers will be closely watching this dynamic and, more importantly, the path of inflation, between now and the next meeting. If inflation looks to be overshooting the forecast, the Fed may conclude that weak wage growth reflects low productivity rather than slack in the economy. That would be hawkish. Keep an eye on this space.
While the headline jobs growth numbers disappointed, note that the forward looking indicator temporary help payrolls remains on an uptrend:

NfpD0317

In some ways this feels like 1995-96, with a temporary slowdown followed by a sustained period of solid growth.
The back-to-back declines in retail trade reflected the ongoing stress in that sector:

RetailB0317

Note too slowing wage growth in retail trade:

RetailC0317

As of the last JOLTS report, the dynamics in retail trade employment are not driven by layoffs, but by a hiring slowdown:

RetailA0317

Looks like both quits and hirings rolled over in recent months. What is interesting is that the due to the labor churn in the sector, a slowdown in hiring alone can have significant impact on the net job growth without relying on mass layoffs - at least not yet. Notice that discharges and layoffs in the sector are down from 2015. Still, the decline in the level of quits reflects employee worries about the state of the industry - they don't see it quite as easy to find a new job as they did in 2015.
One data point that doesn't seem to fit with the story of an industry in decline is the level of job openings:

RetailD0317

If the sector is experiencing a truly apocalyptic event, we would expect job openings to roll over. How will the Fed view this story? Most likely as industry specific and not indicative of the broader economy but they will attempting to gauge the resulting slack, if any, in labor markets.
Bottom Line: Employment report was in line with (diminished) expectations. Most important for monetary policy was the decline in the unemployment rate. But absent more data, the exact implication could be either dovish or hawkish. Until the fog on that issues clears, expect the Fed to stick to its story: More tightening is coming, but at a gradual pace.

Monday, April 10, 2017

Blanchard: On the Need for (At Least) Five Classes of Macro Models

Olivier Blanchard:

On the Need for (At Least) Five Classes of Macro Models: One of the best pieces of advice Rudi Dornbusch gave me was: Never talk about methodology. Just do it. Yet, I shall disobey and take the plunge.
The reason and the background for this blog is a project started by David Vines about DSGEs, how they performed in the crisis, and how they could be improved.[1] Needled by his opinions, I wrote a PIIE Policy Brief. Then, in answer to the comments to the brief, I wrote a PIIE RealTime blog. And yet a third, another blog, each time hopefully a little wiser. I thought I was done, but David organized a one-day conference on the topic, from which I learned a lot and which has led me to write my final (?) piece on the topic.
This piece has a simple theme: We need different types of macro models. One type is not better than the other. They are all needed, and indeed they should all interact. Such remarks would be trivial and superfluous if that proposition were widely accepted, and there were no wars of religion. But it is not, and there are.
Here is my attempt at typology, distinguishing between five types. (I limit myself to general equilibrium models. Much of macro must, however, be about building the individual pieces, constructing partial equilibrium models, and examining the corresponding empirical micro and macro evidence, pieces on which the general equilibrium models must then build.) In doing so, I shall, with apologies, repeat some of what was in the previous blogs. ...

Paul Krugman: Publicity Stunts Aren’t Policy

All hat and no cattle:

Publicity Stunts Aren’t Policy, by Paul Krugman, NY Times: Does anyone still remember the Carrier deal? Back in December President-elect Donald Trump announced, triumphantly, that he had reached a deal ... to keep 1,100 jobs in America rather than moving them to Mexico. And the media spent days celebrating the achievement. ...
Around 75,000 U.S. workers are laid off or fired every working day, so a few hundred here or there hardly matter.... Whatever Mr. Trump did or didn’t achieve with Carrier, the real question was whether he would take steps to make a lasting difference.
So far..., there isn’t even the vague outline of a real Trumpist jobs policy. And corporations and investors seem to have decided that ... Mr. Trump is a paper tiger in practice. ...
In other words, showy actions that win a news cycle or two are no substitute for actual, coherent policies. Indeed, their main lasting effect can be to squander a government’s credibility. Which brings us to last week’s missile strike on Syria.
The attack instantly transformed news coverage of the Trump administration. Suddenly stories about infighting and dysfunction were replaced with screaming headlines about the president’s toughness...
But outside ... the news cycle, how much did the strike actually accomplish? A few hours after the attack, Syrian warplanes were taking off from the same airfield, and airstrikes resumed on the town where use of poison gas provoked Mr. Trump into action. ...
In fact, if last week’s action was the end of the story, the eventual effect may well be to strengthen the Assad regime — Look, they stood up to a superpower! — and weaken American credibility. ...
The media reaction ... showed that many pundits and news organizations have learned nothing from past failures. ...
The U.S. fired off some missiles, and ... Mr. Trump “became president.” Aside from everything else, think about the incentives this creates. The Trump administration now knows that it can always crowd out reporting about its scandals and failures by bombing someone. ...
Real leadership means devising and carrying out sustained policies that make the world a better place. Publicity stunts may generate a few days of favorable media coverage, but they end up making America weaker, not stronger, because they show the world that we have a government that can’t follow through.
And has anyone seen a sign, any sign, that Mr. Trump is ready to provide real leadership in that sense? I haven’t.

The Fed, the Reality of Tax Cuts Reality, and Donald Trump

I have a new column:

The Fed, the Reality of Tax Cuts Reality, and Donald Trump: For many years, Republicans argued that tax cuts for the wealthy pay for themselves. Cutting taxes on the wealthy, according to Republicans, allows them to keep a larger share of anything new they create and this leads to new economic activity and new innovation – so much that the resulting increase in economic growth and tax revenue fully offsets the budgetary effects of the tax cuts. Everyone is better off as income “trickled down” from the top.
What actually happened is that the tax cuts had very little, if any, impact on economic growth. Deficits went up, and somehow income never trickled down – if anything, it trickled up. Today, Republicans are less likely to argue that tax cuts pay for themselves, though you still hear it, but they still insist tax cuts for the wealthy magically increase economic growth and offset much of the revenue loss.
But even in the very unlikely case that Trump’s proposed tax cuts are successful (beyond increasing the income of the wealthy which many argue is the true goal), the economic growth rates Trump has promised are unlikely to be attained. ...

Sunday, April 09, 2017

Why People Prefer Unequal Societies

People prefer fair inequality:

Why people prefer unequal societies, by Christina Starmans , Mark Sheskin  & Paul Bloom, Nature Human Behaviour 1, Article number: 0082 (2017): Abstract There is immense concern about economic inequality, both among the scholarly community and in the general public, and many insist that equality is an important social goal. However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. We suggest that these two phenomena can be reconciled by noticing that, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness. ...

Saturday, April 08, 2017

Links for 04-08-17

Friday, April 07, 2017

Paul Krugman: The Bad, the Worse and the Ugly

Donald Trump is ugly:

The Bad, the Worse and the Ugly, by Paul Krugman, NY Times: This week’s New York Times interview with Donald Trump was horrifying, yet curiously unsurprising. Yes, the world’s most powerful man is lazy, ignorant, dishonest and vindictive. But we knew that already.
In fact, the most revealing thing in the interview may be Mr. Trump’s defense of Bill O’Reilly, accused of sexual predation and abuse of power: “He’s a good person.” This, I’d argue, tells us more about both the man from Mar-a-Lago and the motivations of his base than his ramblings about infrastructure and trade.
First, however, here’s a question: How much difference has it made, really, that Donald Trump rather than a conventional Republican sits in the White House?
The Trump administration is, by all accounts, a mess. ... Yet Mr. Trump’s first great policy and political debacle — the ignominious collapse of the effort to kill Obamacare — owed almost nothing to executive dysfunction. Repeal-and-replace ... failed because Republicans have been lying about health care for eight years. ...
Similar considerations apply on other fronts. Tax reform looks like a bust ...
What about areas where Mr. Trump sometimes sounds very different from ordinary Republicans, like infrastructure? ... [G]iven what we heard in the interview ... it’s clear that the administration has no actual infrastructure plan...
True, there are some places where Mr. Trump does seem likely to have a big impact — most notably, in crippling environmental policy. But that’s what any Republican would have done...
So Trumpist governance in practice so far is turning out to be just Republican governance with (much) worse management. Which brings me back to the original question: Does the appalling character of the man on top matter?
I think it does. The substance of Trump policy may not be that distinctive in practice. But style matters, too, because it shapes the broader political climate. And what Trumpism has brought is a new sense of empowerment to the ugliest aspects of American politics. ...
One way to think about Fox News in general, and Mr. O’Reilly in particular, is that they provide a safe space for people who want an affirmation that their uglier impulses are, in fact, justified and perfectly O.K. And one way to think about the Trump White House is that it’s attempting to expand that safe space to include the nation as a whole.
And the big question about Trumpism — bigger, arguably, than the legislative agenda — is whether unapologetic ugliness is a winning political strategy.

Fed Watch: Fed Likely To Discount Weakness in March Employment Report

Tim Duy:

Fed Likely To Discount Weakness in March Employment Report, Tim Duy: It seems that we are conditioned for a disappointing jobs report tomorrow. Although the ADP report came in strong, we have mixed signals from the employment components of the ISM reports, with the employment index up in manufacturing but down in the much bigger service sector. In addition, weather may be a factor - did warm weather goose the January and February numbers and now we will see payback due to a cold March? I expect that the Fed will be expecting the latter. The minutes suggest they are already primed for weaker first quarter numbers to begin with:
Participants generally saw the incoming economic information as consistent, overall, with their expectations and indicated that their views about the economic outlook had changed little since the January-February FOMC meeting. Al­though GDP appeared to be expanding relatively slowly in the current quarter, that development seemed primarily to reflect temporary factors, possibly including residual seasonality.
They would probably write off a weak headline payrolls numbers as a reflection of just another temporary factor. Of course, that also means they will embrace a solid number. It's kind of a heads they win, tails you lose situation for the Fed.
Consensus is looking for 175k on the payrolls in a range of 125k to 202k. This sounds reasonable; my estimate is 190k within a wider range of 106k to 275k:

Nfpfor0317

Variance on these estimates, however, is notoriously high. My inclination is to expect the actual print to be more likely below and above 190k.
Assuming a weak read of payrolls that is written off to weather, the rest of the report is more important. The Fed maintains a laser sharp focus on signs unemployment is significantly undershooting the natural rate. Consensus expects the rate to hold at 4.7%. A drop would raise eyebrows at the Fed. An increase in the participation rate, however, would be welcome news that they can maintain a gradual pace of tightening. And wages of course will help guide them as they assess their distance from the natural rate.
Bottom Line: Unless the report is a complete disaster, I would expect the Fed is poised to look though any weakness. But that means a strong report will grab their attention.

Links for 04-07-17

Thursday, April 06, 2017

Fed Watch: Lots To Chew On In The FOMC Minutes

Tim Duy:

Lots To Chew On In The FOMC Minutes, by Tim Duy: The minutes of the March FOMC meeting confirmed that the Fed remains poised to tighten policy further, first via raising the federal funds rate followed by action to reduce the balance sheet later in the year. It appears most likely that the Fed will see the latter as a substitute for the former. That means rate hikes would perhaps be on hold during the start of 2018 as the Fed assesses the efficacy of its actions. To be sure, however, the pace and mix of tightening remain data dependent. With the Fed in general agreement that the economy is near full employment, an uptick in either the pace of growth or inflation concerns will prompt the Fed begin murmuring about an accelerated the pace of tightening.
The Fed tackled balance sheet strategy early in the meeting. On timing, the policymakers thought thought it soon be upon us:
Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year.
Now place that prediction in the context of this discussion from the committee action portion of the minutes:
Members generally noted that the increase in the target range did not reflect changes in their assessments of the economic outlook or the appropriate path of the federal funds rate, adding that the increase was consistent with the gradual pace of removal of accommodation that was anticipated in December, when the Committee last raised the target range.
The median rate projection in March held at a total of three hikes for 2017. The Fed believes that the March rate hike was consistent with the gradual pace of policy removal as anticipated in December. Assume then that the economy continues to stay the course, holding generally in line with the Fed's forecasts. Suppose that means the current pace of tightening holds as well.
A continuation of the current pace of tightening - one action per quarter - would put rate hikes in June and September. At that point, the target range in 1.25-1.5%. That is roughly halfway to the currently anticipated neutral rate. Then the normalization of rate policy would be well underway, and then, in December, the Fed switches gears to balance sheet reduction. Later this year, as stated in the minutes.
That suggests that "gradual" means policy action once a quarter. (Remember the Fed began 2016 thinking four hikes? I think once a quarter seems about right to them.) If so, and they still intend a total of three rates hikes and balance sheet action for 2018, it implies they think, reasonably, that action on balance sheet reduction is a substitute for rate hikes. And, furthermore, that the balance sheet forecast is implicitly built into the median rate forecast. If not for having to deal with the balance sheet, I suspect the median forecast for 2017 would be 4 rate hikes.
That gets you through 2017. What about 2018? They probably have in mind that the phasing out of reinvestments could take six months, though this has not yet been decided. Back to the minutes:
An approach that phased out reinvestments was seen as reducing the risks of triggering financial market volatility or of potentially sending misleading signals about the Committee's policy intentions while only modestly slowing reductions in the Committee's securities holdings. An approach that ended reinvestments all at once, however, was generally viewed as easier to communicate while allowing for somewhat swifter normalization of the size of the balance sheet.
The Fed could go cold turkey on reinvestments, option 2, but I suspect will choose to ease into balance sheet reduction, option 1. Less chance of disrupting financial markets. That would mean policy action at the second meeting of 2018 to get reinvestment strategy on its final path, followed up quarterly rate hikes after that.
Assuming this is the schedule they have in mind, policymakers expect to tighten policy once per quarter for the next two years, trading off between rate hikes and balance sheet policy. The risk, however is that balance sheet reduction takes longer than expected, or it more disruptive than expected, thus reducing the scope for rate hikes in 2018. Time will tell on that one.
The Fed, however, could step up the pace of action. On the mandates:
Nearly all participants judged that the U.S. economy was operating at or near maximum employment. In contrast, participants held different views regarding prospects for the attainment of the Committee's inflation goal.
Inflation continues to be the sticking point. If inflationary pressures were more visible, the Fed would be acting more aggressively. Watch this space, and core-PCE inflation in particular. It picked up in January and February. If that continues into March and April, the Fed will worry that they have pushed "gradual" as far as it will go. Watching employment, however, is a bit more tricky. For now, I expect the Fed to get nervous of a significant undershoot if the unemployment rate dips much further. Persistent low inflation, however, could yield a decrease in the Fed's estimate of the natural rate of unemployment.
Finally, note this:
In their discussion of recent developments in financial markets, participants noted that financial conditions remained accommodative despite the rise in longer-term interest rates in recent months and continued to support the expansion of economic activity. Many participants discussed the implications of the rise in equity prices over the past few months, with several of them citing it as contributing to an easing of financial conditions. A few participants attributed the recent equity price appreciation to expectations for corporate tax cuts or to increased risk tolerance among investors rather than to expectations of stronger economic growth. Some participants viewed equity prices as quite high relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high-yield corporate bonds, and commercial real estate, had also risen significantly in recent months. In contrast, prices of farmland reportedly had edged lower, in part because low commodity prices continued to weigh on farm income. Still, farmland valuations were said to remain quite high as gauged by standard benchmarks such as rent-to-price ratios.
Fed officials aren't growing nervous about just equities. They are seeing high prices across a wide range of risky assets. If it was just one asset class, they might conclude that it doesn't pose systemic risk for the US economy. Or they might conclude that macro prudential policies were sufficient to maintain financial stability. But a wide range of assets might require a more blunt tool - like higher rates. Another space to watch. Where this space gets messy is the tendency of equity prices to remain high even as the Fed tightens - a pattern which may induce the Fed to tighten much more aggressively than they should.
Bottom Line: The Fed clearly anticipates more tightening, likely at a pace of one action per quarter between interest rates and balance sheet. My interpretation of the minutes is that with the economy near full employment and assuming asset prices stay high, it wouldn't take much movement on the labor market or inflation expectations to make Fed officials sufficiently nervous that you begin to hear more about stepping up the pace of tightening.

Links for 04-06-17

Wednesday, April 05, 2017

Why Regulators Should Focus on Bankers’ Incentives

Charles Goodhart:

Why regulators should focus on bankers’ incentives: Last autumn, Charles Goodhart gave a special lecture at the Bank. In this guest post he argues that regulators should focus more on the incentives of individual decision makers.
The incentive for those in any institution is to justify and extol the virtues of the decisions that they have taken. Criticisms of current regulatory measures are more likely to come from outsiders, perhaps especially from academics, (with tenure), who can play the fool to the regulatory king. I offer some thoughts here from that perspective. I contend that the regulatory failures that led to the crisis and the shortcomings of regulation since are largely derived from a failure to identify the persons responsible for bad decisions. Banks cannot take decisions, exhibit behavior, or have feelings – but individuals can. The solution lies in reforming the governance set-up and realigning incentives faced by banks’ management. ...
There are two questions that need reconsideration. The first relates to the scope of responsibility for outcomes in a hierarchical institution; the second relates to the downside that those responsible should face when failure or bad behavior occurs. ...

He concludes with:

If a bank CEO knew that his own family’s fortunes would remain at risk throughout his subsequent lifetime for any failure of an employee’s behavior during his period in office, it would do more to improve banking ‘culture’ than any set of sermons and required oaths of good behavior. The root of the problem is the bad behavior of bankers, not of banks, who are incapable of behavior, for good or ill. The regulatory framework should be refocused towards the latter, with a focus on reforming incentives.