The Chinese Century: ...2014 was the last year in which the United States could claim to be the world’s largest economic power. China enters 2015 in the top position, where it will likely remain for a very long time, if not forever. In doing so, it returns to the position it held through most of human history. ...
The areas where the United States remains competitive with China are not always ones we’d most want to call attention to. The two countries have comparable levels of inequality. ... China outpaces America in the number of people executed every year, but the U.S. is far ahead when it comes to the proportion of the population in prison... China overtook the U.S. in 2007 as the world’s largest polluter, by total volume, though on a per capita basis we continue to hold the lead. The United States remains the largest military power... (not that we have always used our military power wisely). But the bedrock strength of the U.S. has always rested less on hard military power than on “soft power,” most notably its economic influence. That is an essential point to remember. ...
The economic interests of China and the U.S. are intricately intertwined. We both have an interest in seeing a stable and well-functioning global political and economic order. Given historical memories and its own sense of dignity, China won’t be able to accept the global system simply as it is, with rules that have been set by the West, to benefit the West and its corporate interests, and that reflect the West’s perspectives. We will have to cooperate, like it or not—and we should want to. In the meantime, the most important thing America can do to maintain the value of its soft power is to address its own systemic deficiencies—economic and political practices that are corrupt, to put the matter baldly, and skewed toward the rich and powerful. ...
[There's quite a bit more in the article.]
Posted by Mark Thoma on Monday, December 8, 2014 at 10:23 AM in China, Economics |
Economic recovery from a recession: Obama versus Bush:
Recovery at Last?, by Paul Krugman, Commentary, NY Times: Last week we got an actually good employment report... We’re still nowhere near full employment, but getting there no longer seems like an impossible dream.
And there are some important lessons from this belated good news..., it does put the lie to some of the nonsense you hear about why the economy has lagged.
Let’s talk first about reasons not to celebrate.
Things are finally looking better for American workers, but this improvement comes after years of suffering..., it has been a terrible seven years... Why was it so bad?
You often hear claims, sometimes from pundits who should know better, that nobody predicted a sluggish recovery, and that this proves that mainstream macroeconomics is all wrong. The truth is that many economists, myself included, predicted a slow recovery from the very beginning. Why? ...
We could have had a much faster recovery if the U.S. government had ramped up public investment and put more money in the hands of families likely to spend it. But the Obama stimulus was much too small and short-lived..., and since 2010 what we have actually seen, thanks to scorched-earth Republican opposition on all fronts, are unprecedented cutbacks in government spending, especially investment, and in government employment.
O.K., at this point I’m sure many readers are thinking that they’ve been hearing a very different story about what went wrong — the conservative story that attributes the sluggish recovery to the ... Obama administration. ...
Which is where the new job numbers come in. At this point we have enough data points to compare the job recovery under President Obama with the job recovery under former President George W. Bush, who also presided over a postmodern recession... And by any measure you might choose ... the Obama recovery has been stronger and faster. Oh, and its pace has picked up over the past year, as health reform has gone fully into effect.
Just to be clear, I’m not calling the Obama-era economy a success story. We needed faster job growth ... than under Mr. Bush, because the recession was deeper, and unemployment stayed far too high for far too long. But we can now say with confidence that the recovery’s weakness had nothing to do with Mr. Obama’s (falsely) alleged anti-business slant. What it reflected, instead, was the damage done by government paralysis — paralysis that has, alas, richly rewarded the very politicians who caused it.
Posted by Mark Thoma on Monday, December 8, 2014 at 12:24 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Monday, December 8, 2014 at 12:06 AM
The imaginary world of small state people: ...In ... Europe ... there actually was a large constituency on the left that wanted a large state as a matter of principle. In the UK that constituency lost all its influence with Margaret Thatcher and New Labour, and it has also lost its influence in the rest of Europe. However this decline in the influence of big state people on the left was matched by a rise to power on the right of those who want a small state as a matter of principle. George Osborne’s plan for the UK over the next few years is the apotheosis of this neoliberal view.
I think I’m like the majority of people in not having any fixed ideological position about whether the state should be large or small. The state is clearly good at doing some things, and bad at doing others. In between there is a large and diverse set of activities which may or may not be better achieved through state direction or control, and they really need to be looked at item by item on their merits.
My first major problem with small state people is that they are not prepared to look at these items on their merits. Instead they have a blanket ideological distaste for all things to do with government. ... My second major difficulty with many small state people, like George Osborne, is that they are using fear of a debt crisis (a possibility which for the UK and US is non-existent) to achieve their ends. This is political deceit on a grand scale. My third major problem follows from the second: reducing government spending during a liquidity trap recession does real harm. It wastes resources on a huge scale. ...
Which brings me to a final problem I have with small state people, which is their disregard for the evidence. It is true that most people are bad at acknowledging counter evidence, but those with an ideological conviction are worse than most. ...
The ... claim that Osborne’s cuts have been such a success that they will cause a “deeper intellectual wound to the left than we currently understand” is simply delusional. These are fantasy ideas from those living in an imaginary world, while in reality the policies they support do serious harm.
Posted by Mark Thoma on Sunday, December 7, 2014 at 10:46 AM in Economics, Politics |
Bill McBride at Calculated Risk:
Decline in the Labor Force Participation Rate: Mostly Demographics and Long Term Trends: For several years, I've been arguing that "most of the recent decline in the participation rate" was due to demographics and other long term structural trends (like more education). Clearly this was an important issue because if most of the decline had been due to cyclical weakness, then we'd expect a significant increase in participation as the economy improved. If the decline was due to demographics and other long term trends, then the participation rate might keep falling (or flatten out for a period before declining again) as the economy improves. ...
Most of the recent research supports my view. ...
After going through lots of evidence, including the reasons for the decline in the participation rate for prime age workers (how much is due to the recession?), he concludes:
The bottom line is that the participation rate was declining for prime working age workers before the recession, there are several reasons for this decline (not just recent "economic weakness") and many estimates of "missing workers" are probably way too high.
Posted by Mark Thoma on Sunday, December 7, 2014 at 10:16 AM in Economics, Unemployment |
Brad DeLong follows up on a recent post from Paul Krugman (and another from Kevin Drum) showing how much better the recovery has been under Obama as compared to recovery under Bush:
Morning Must-Read: Kevin Drum on Paul Krugman on the Obama Recovery:
Kevin Drum: The Obama Recovery Has Been Miles Better Than the Bush Recovery: ...
... If you want to credit Bush for his tax cuts and malign Obama for his stimulus program and his regulatory posture, then you have to accept the results as well. And by virtually any measure, including the fact that the current recovery hasn’t ended in an epic global crash, Obama has done considerably better than Bush.
I ... want to reinforce and mark this thing that is going on in the public intellectual sphere: that to be a partisan Republican these days appears to be to make absolutely no effort to connect whatever one says to empirical reality. I hear, over and over again, that government policy was settled and certain under Bush and is unsettled and uncertain under Obama, and that that is the reason that the Obama recovery has been so weak. And yet anyone who looks at the numbers can only respond to this in one way: “Huh?!” ...
The question is: is this the same thing that is going on in Chicago economics, or not? As you know, Bob, when Chicago Lucas models began failing their empirical statistical tests massively, the response was to abandon statistical testing because it was “rejecting too many good models”. When Chicago finance model began failing their empirical statistical tests massively, the response was to redefine what investor psychology was: Investors no longer had a stable utility function relating their consumption spending to their well-being exhibiting declining marginal utility. Instead, investors had whatever and however rapidly changing a function relating their well-being to their consumption spending that was needed in order to keep the efficient markets hypothesis from being falsified.
The question is: Are these different things, or are these the same things? And how are they related to the earlier tobacco money-infused campaign of tobacco denialism? And how are they related to the present oil money-infused campaign of global warming denialism? And how are they related to the Cato Institute’s failure to register that its anti-fiscal stimulus campaign of 2009–along with its anti-ObamaCare campaign, and its anti-debt crisis campaign–now looks like something really not to be proud of?
Posted by Mark Thoma on Sunday, December 7, 2014 at 09:56 AM
Posted by Mark Thoma on Sunday, December 7, 2014 at 12:06 AM in Economics, Links |
In my very first piece for CBS news back in early November of 2009, almost a year and a half into the "recovery", I wrote an article saying that unemployment may not fully recover until 2013, four years later. The editors (who were different at the time than they are now) asked me a couple of times if I really wanted to be that pessimistic, and I said yes, I did. I honestly thought it would take that long, I wasn't just trolling (it was based in large part on an SF Fed forecast that output would recover in 2012 which turned out to be overly optimistic). And I kept warning from then on (as I had even before then here) that the recovery would be slow.
In the article I said:
... The reason for the slow recovery is partly due to the depth of the recession -- the deeper the hole, the longer it takes to crawl out of it -- but it's also because of the large amount of structural change that the economy must go through before it can recover. Prior to the recession we had too many resources in the housing, finance, and auto industries, and it will take time to move the people and resources who used to work in these industries into areas of the economy where they can be employed productively. And as new productive activities outside these areas arise, firms will install the best technology available. This technology will, in general, be more capital-intensive than before, and so we will need to surpass the pre-recession level of output before the demand for labor will return to its previous level. In addition, firms typically reorganize their job assignments after layoffs and discover that the same work can be performed with fewer workers and this, too, can slow the recovery period for employment relative to output.
The bottom line is that there's still a long road ahead, particularly for labor, and for that reason I am very much in favor of additional government policy targeted directly at the employment problem. In addition, given the record levels of long-term unemployment we are experiencing (those unemployed 27 weeks or more now constitute 35.6 percent of the unemployed; see here for a graphical representation of the situation), the recent vote to extend unemployment benefits was overdue and very welcome.
I also emphasized the delayed peak of unemployment relative to the trough for output in the previous recessions, and expected that to contribute to the slow recovery, but that didn't happen this time -- so I got that particular detail wrong (though not the more general idea of a jobless recovery like the previous two). And as time progressed, I began to also emphasize the problems households have in recovering from the losses they incur in a "balance sheet recession" -- that takes a long time -- but that was not part of this argument.
In the end, while I thought I was being pessimistic, four years to recover?, I was not pessimistic enough (though the pessimism was updated over time) and we are still waiting for full recovery.
On that note, Paul Krugman says today:
Comparing Postmodern Recoveries: Very early on — in fact, long before the 2007 recession was either declared officially, or admitted as reality by those still touting a Bush Boom — some of us warned that recovery would be slow, and initially jobless. Why? Because this was a postmodern business cycle, brought on not by monetary tightening but by private-sector overreach, and hence harder to turn around than, say, the 1979-82 slump. Nonetheless, as Menzie Chinn notes, a constant talking point on the right has been that slow growth showed the damage done by Obama policies. And not just at Heritage or whatever; people like Ed Lazear or John Taylor demonstrated the reality of the hack gap by asserting that the private sector wasn’t creating jobs because Obama was looking at them funny; also Obamacare.
How could you test this? Well, when I began talking about postmodern recessions, I argued that the 2007 slump was the third such example — that 1990-91 and 2001 were also postmodern recessions, followed by jobless recoveries. I’ll leave 1990-91 aside for now, because I’m lazy, and just note that we now have enough information to make a clear comparison between the recovery that began in 2001 and the one that began in 2009. ...
By any standard I can think of, the Obama-era job recovery has been stronger than the Bush-era job recovery. Now, I don’t think that reflects excellent policies; and I would argue that in some ways the depth of the preceding slump set the stage for a faster recovery. But the point is that the usual suspects have been using the alleged uniquely poor performance under Obama to claim uniquely bad policies, or bad attitude, or something. And if that’s the game they want to play, they have just scored an impressive own goal.
Posted by Mark Thoma on Saturday, December 6, 2014 at 10:13 AM in Economics, Unemployment |
Posted by Mark Thoma on Saturday, December 6, 2014 at 12:06 AM in Economics, Links |
Economy Clearly Gaining Momentum, by Tim Duy: The November employment report came in ahead of expectations, with a monthly nfp gain of 321k and 44k of upward revisions to previous months. Job gains were spread throughout the major sectors of the economy. The 2014 acceleration in job growth is clearly evident:
The employment report in the context of indicators previously identified by Federal Reserve Chair Janet Yellen as important to watch:
Measures of underemployment are generally moving in the right direction. To be sure, the labor force participation rate remains in a general downward trend, but on this point I think you have to accept that demographic forces are driving the train. Year-over-year wage growth remains anemic although average wages gained 0.37% on the month. While this indicates that wage gains are not dead and gone forever, I would find it more impressive if these kinds of gains repeated themselves in the next few months. As I have said before, I think that will happen as unemployment rates fall further. I read nothing of importance into the unchanged unemployment rate for the month.
The tenor of this report harmonizes well with the song sung by recent data. Of course, data are inherently variable, and not every report will be as bright (or as dark) as the last. Nor would we expect a string of 300k+ gains in employment just yet. But I think any reasonable single extraction effort tells you that activity is on a firmer footing than it has been in years, and there is little reason to expect the improvements will reverse quickly. The US economy has momentum. Do not discount the value of that momentum.
Fixed income markets quickly discerned what this report means for the Fed - the risk is that rate hikes will come sooner than expected. At time of writing, the yield on the two-year bond gained 11bp, while the ten-year yield rose 9bp. The Fed will be pleased by the upward though controlled gains at the longer end of the yield curve as they will associate those gains with modestly less financial accommodation. They may be less pleased that stocks keeps hitting record highs as it suggests that financial conditions are easing somewhat, thus perhaps necessitating a faster pace of rate hikes. Over the longer run, I remain wary of the flattening yield curve.
My guess is that the Fed will soon begin to believe that they stayed pessimistic on the recovery the year the recovery began to show significant signs of life. More on the Fed next week.
Bottom Line: A solid employment report. The risk that the first rate hike comes sooner than June continues to rise.
Posted by Mark Thoma on Friday, December 5, 2014 at 10:38 AM in Economics, Fed Watch, Monetary Policy |
Dean Baker on today's jobs report. Not his concluding paragraph:
Economy Adds 321,000 Jobs, Strongest Gain in Almost Three Years: Over the last three months wages grew at a 1.8 percent annual rate.
The economy added 321,000 jobs in November, the strongest gain since it added 360,000 in January of 2012. With upward revisions to the prior two months data, the average job gain over the last three months has been 275,000. The household survey showed unemployment unchanged at 5.8 percent, with the employment-to-population ratio (EPOP) also unchanged at 59.2 percent.
The gains were widely spread across sectors. ...
Other news in the establishment survey was also positive. The average workweek increased by 0.1 hour to 34.6, the longest since May of 2008 and wages reportedly rose by 9 cents. The one-month jump was in large part an anomaly; over the last three months wages have risen at just a 1.8 percent annual rate compared with the prior three months. There is little evidence of any wage acceleration in any major sector.
While the overall employment and unemployment numbers changed little in November, there was some positive news in the household survey. The number of people involuntarily employed part time fell by 200,000. It is now almost 900,000 below the year-ago level. By contrast, the number of people voluntarily choosing to work part-time rose by 297,000. It is now more than 1 million higher than the year-ago level. This is almost certainly the result of the Affordable Care Act, which has allowed people to get insurance outside of employment so that many people no longer have to work full-time jobs to get insurance for themselves or their families.
In another positive sign, the percent of the unemployed who had voluntarily quit their job rose to 9.1 percent. This measure of confidence in the labor market is at its highest level in the recovery, albeit well below the 11-12 percent range in the pre-recession period. The median duration of unemployment spells and the share of long-term unemployed both fell to their lowest level in the recovery, although the average duration rose slightly. Black teen employment rate rose to 21.8 percent, the highest since January of 2008, while unemployment fell to 28.1 percent, the lowest since April of 2008.
Interestingly, the recovery seems to be disproportionately benefiting workers with less education. Over the last year, the unemployment rate for workers without a high school degree fell 2.1 percentage points and for workers with just a high school degree by 1.7 percentage points. By contrast, the unemployment rate for college grads has only dropped by 0.2 percentage points. The unemployment rate for college grads is still more than a percentage point above its pre-recession level.
Overall, this is a very positive report, but it still must be understood in the context of the hole created by the downturn. It would take two and half years at this growth rate to restore demographically adjusted pre-recession levels of the employment to population ratio.
Paul Krugman issues a warning:
On Not Counting Chickens: A genuinely good employment report this morning... But — you knew there would be a but — good news can turn into bad news if it encourages complacency.
There will, predictably, be calls to respond to the good news by normalizing monetary policy, raising interest rates soon. And we will want to raise rates off zero at some point. But it’s important to say that (a) we are still highly uncertain about the underlying strength of the economy (b) the risks remain very asymmetric, with much more danger from tightening too soon than from tightening too late. ...
So still: the Fed should wait until it sees the whites of inflation’s eyes — and by inflation I mean inflation clearly above 2 percent, and if I had my way higher than that.
See also Calculated Risk (here and here).
Posted by Mark Thoma on Friday, December 5, 2014 at 09:01 AM in Economics, Unemployment |
Despite the political difficulties it has caused, Obamacare was not a mistake:
Democrats Against Reform, by Paul Krugman, Commentary, NY Times: It’s easy to understand why Republicans wish health reform had never happened.... But it’s more puzzling — and disturbing — when Democrats like Charles Schumer, senator from New York, declare that the Obama administration’s signature achievement was a mistake.
In a minute I’ll take on Mr. Schumer’s recent remarks. But first, an update on Obamacare..., which continues to rack up remarkable (and largely unreported) successes ... with more than 10 million people gaining coverage since last year. ... And ... a huge majority of the newly insured are pleased with their coverage...
What about costs? There were many predictions of soaring premiums. But... Premiums for 2014 came in well below expectations...
In short,... as a policy intended to improve American lives, it’s going really well. Yet it has not ... been a political winner for Democrats. Which brings us to Mr. Schumer.
The Schumer critique — he certainly isn’t the first to say these things... — calls health reform a mistake because it only benefits a minority of Americans, and that’s not enough to win elections. What President Obama should have done ... was focus on improving the economy as a whole.
This is deeply wrongheaded in at least three ways.
First, while it’s true that most Americans have insurance through Medicare, Medicaid, and employment-based coverage..., but what happens if you’re fired, or your employer goes bust, or it cancels its insurance program? What if you want to change jobs for whatever reason, but can’t find a new job that comes with insurance? ...
Second, whenever someone says that Mr. Obama should have focused on the economy, my question is, what do you mean by that? Should he have tried for a bigger stimulus? I’d say yes, but ... especially after 2010 scorched-earth Republican opposition killed just about every economic policy he proposed. Do you think this would have been different without health reform? Seriously? ...
Finally, we need to ask, what is the purpose of winning elections? The answer, I hope, is to do good — not simply to set yourself up to win the next election. ....
And one related observation: If more Democrats had been willing to defend the best thing they’ve done in decades, rather than run away from their own achievement and implicitly concede that the smears against health reform were right, the politics of the issue might look very different today.
Posted by Mark Thoma on Friday, December 5, 2014 at 12:24 AM in Economics, Health Care, Politics |
Posted by Mark Thoma on Friday, December 5, 2014 at 12:06 AM in Economics, Links |
Via Owen Zidar:
Who Pays for the Minimum Wage?: From Attila Lindner and Péter Harasztosi:
This paper analyzes the effects of a large (~60%) and persistent increase in the minimum wage instituted in Hungary in 2001. We propose a new approach to estimating the employment effects of a minimum wage increase that exploits information on the distribution of wages before and after the policy change. We infer the number of jobs destroyed by comparing the number of pre-reform jobs below the new minimum wage to the excess number of jobs paying at (and above) the new minimum wage. Our estimates imply that the higher minimum wage had at most a small negative effect on employment, and so the main effect was pushing up wages. We then use data on a large panel of firms to evaluate the economic incidence of the minimum wage increase. Contrary to theoretical models that attribute the small employment effects of minimum wage changes to monopsonistic wage setting, we find no evidence that the rise in the minimum wage led to lower profitability among low-wage employers. Instead, we find that the costs of the minimum wage were largely passed through to consumers.
Posted by Mark Thoma on Thursday, December 4, 2014 at 10:09 AM in Economics, Unemployment |
Tim Johnson, "a mathematician who works on financial problems":
Maths and morals, economics and greed: ... Mathematics has always been part of finance but with the re-introduction of derivatives markets in the 1970s and their growth in the nineties, ‘quants’, trained in engineering, physics and mathematics, came to dominate the ‘casino banking’ that is widely criticised. My concern is that the quants are not amenable to questions of morality, and so the problems of finance are going to be difficult to resolve without finding the right way of communicating with the bankers who see themselves as scientists. ...
The Chartered Institute of Bankers are working on Professional Standards but are struggling to engage with the quants, who operate the casino branch of banking, because the quants believe science is value neutral; it delivers truths beyond morality. ...
This brings to mind Alasdair MacIntyre's ‘disquieting suggestion’ that modern society has completely lost the ability to make moral judgements and I see it as the brick wall that most attempts to reform banking will crash into.
I believe the brick wall can be dismantled relatively easily: by recognising that many of the practices of contemporary finance associated with ‘casino banking’ were widespread before the eighteenth century. Unlike today, they were undertaken in the context not of consequentialist or deontological ethics, but of virtue ethics that focuses on good practice. It might seem surprising that I suggest this is a relatively easy approach. What make it easy is that rather than criticising modern finance on the basis that it is degraded from a mythic golden age of finance, the starting point is the doux-commerce thesis that finance is civilising. Rather than characterising bankers as amoral spivs, they are presented as paragons of rational morality and the approach gives the bankers the opportunity to carry on their activities while, critically, reconstructing their own ethos. I developed this representation in my paper Reciprocity as a Foundation of Financial Economics.
The hurdle this approach needs to cross is that of the dominant ideologies of markets. The market ideology holds that the market mechanism will deliver optimal solutions to society, while anti-market ideology argues that profits are degrading and markets are destructive. The hurdle can be crossed by ignoring both these ideologies and analysing the role that money and markets have played in forming both Western science and democracy. We need to represent markets as centres of communication and deliberation, not as competitive arenas driven by profit maximisation. The clue is in the word forum, which defined both the market place and the political centre of a Roman city.
As I noted after a speech by William Dudley on the same topic, I am not so sure this will work, but it's interesting how much of the recent commentary on the problems in financial markets are focused on changing the ethics of the financial industry. I'd rather focus on regulation and enforcement -- real regulation and real enforcement, not what we had before the financial crisis -- and more importantly putting circuit breakers in place that will limit the damage should problems reoccur, as they surely will at some point now matter how much we regulate or what ethical structure is in place (e.g. limits on leverage and interconnectedness).
Posted by Mark Thoma on Thursday, December 4, 2014 at 09:44 AM in Economics, Financial System, Regulation |
Ahead of the November Employment Report, by Tim Duy: Data in the first week of December has told a generally bullish story for the US economy. The week began with an upbeat number from the ISM manufacturing index with solid underlying data:
While this was seemingly at odds with the Markit manufacturing index, I would say that both of these series (like consumer confidence) exhibit far too much variability to place too much weight on any one month of data. If I look at the ISM measure in context with other US manufacturing data, the overall view is one of steadily improving activity in the sector (note the estimated 17.1 million auto sales rate for November):
This also seems consistent with the anecdotal story told by the Beige Book:
Manufacturing activity generally advanced during the reporting period. The automotive and aerospace industries continued to be sources of strength. Steel production increased in Cleveland, Chicago, and San Francisco. Fabricated metal manufacturers in the Chicago and Dallas Districts noted widespread growth in orders. Dallas reported that domestic sales for plastics were strong, while demand for plastics was steady in Richmond and declined in Kansas City. Chemical manufacturers in the Boston District indicated that the falling price of oil relative to natural gas had made U.S. producers less competitive, because foreign chemical producers rely more heavily on oil for feedstock and production. St. Louis, Minneapolis, and Dallas reported that food production was little changed on balance, but production in Kansas City continued to decline. Chicago and Dallas indicated that shipments of construction materials increased. Manufacturers of heavy machinery in the Chicago District cited improvements in sales of construction machinery, but reported ongoing weak demand for agricultural and mining equipment. High-tech manufacturers in Boston, Dallas, and San Francisco noted steady growth in demand. Biotech revenue increased in the San Francisco District.
I would also add that the Beige Book had a decidedly optimistic tenor:
Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand in October and November. A number of Districts also noted that contacts remained optimistic about the outlook for future economic activity.
The ISM's service sector report was equally upbeat:
The ADP report fell somewhat short of expectations, but again this number is far too volatile to place much if any weight on a small miss. Or even a large miss, for that matter. Calculated Risk places the ADP number in context of other labor market indicators, concluding that:
There is always some randomness to the employment report. The consensus forecast is pretty strong, but I'll take the over again (above 230,000).
I don't have much to add here. As I have said before, predicting the monthly nonfarm payroll change is a fool's errand, yet an errand we all undertake. I would pick 235k with an upside risk. More important is what happens to wage growth. I expect that to pick up over the next six months, but would be surprised to see any large gain this month.
Jon Hilsenrath at the Wall Street Journal reports that top Federal Reserve policymakers are not deterred in their plans for policy normalization:
In public appearances this week, Janet Yellen’s two top lieutenants sounded like individuals who want to start raising short-term interest rates in the months ahead, despite mounting uncertainties about growth abroad and associated downward pressure on commodities prices...
...“It is clear we are getting closer” to dropping an assurance that rates will stay low for a considerable time, he said. Mr. Fischer repeatedly emphasized his desire to get back to normal. “We almost got used to thinking that zero is the natural place for the interest rate. It is far from it,” he said.
In case there is any doubt about where top Fed officials are going with this, New York Fed president Bill Dudley said bluntly: “Market expectations that lift-off will occur around mid-2015 seem reasonable to me.” Like Mr. Fischer, Mr. Dudley sees the recent decline in oil prices as a net positive for the U.S., a net importer of energy which benefits from a lower cost of imported oil.
I think the speech my New York Federal Reserve President William Dudley is a must read. I have been repeatedly drawn to this paragraph (emphasis added):
First, when lift-off occurs, the pace of monetary policy normalization will depend, in part, on how financial market conditions react to the initial and subsequent tightening moves. If the reaction is relatively large—think of the response of financial market conditions during the so-called “taper tantrum” during the spring and summer of 2013—then this would likely prompt a slower and more cautious approach. In contrast, if the reaction were relatively small or even in the wrong direction, with financial market conditions easing—think of the response of long-term bond yields and the equity market as the asset purchase program was gradually phased out over the past year—then this would imply a more aggressive approach. The key point is this: We will pursue the monetary policy stance that best generates the set of financial market conditions most consistent with achievement of the FOMC’s dual mandate objectives. This depends both on how financial market conditions respond to the Fed’s policy actions and on how the real economy responds to the changes in financial conditions.
Long term yields have been drifting down since the "taper tantrum," flattening the yield curve significantly:
Dudley seems to be saying that he does not think that financial conditions should be easing, especially since he thinks he has been clear that the time to begin policy normalization is fast approaching. Robin Harding at the Financial Times sees the implications:
Although Mr Dudley does not say it, this argument could apply to the timing of rate rises as well as their pace. Markets have not reacted much to the prospect of Fed rate rises: the ten-year yield at 2.22 per cent is no higher than it was before the taper tantrum in summer 2013; the S&P 500 is up by 15 per cent on a year ago. Mr Dudley explicitly cites the low level of 10-year Treasury yields, saying they are presumably due, “in part, to the fact that long-term interest rates in Europe and Japan are much lower”.
If markets are not reacting to potential Fed rate rises then, by Mr Dudley’s logic, rate rises could need to come earlier as well as faster. The initial rate rise, in particular, could help the Fed to learn about the financial market response. That may help to explain why Mr Dudley is still in June 2015 for rate lift-off despite his dovish views.
Take this all in context of an earlier passage from the Dudley speech:
...during the 2004-07 period, the FOMC tightened monetary policy nearly continuously, raising the federal funds rate from 1 percent to 5.25 percent in 17 steps. However, during this period, 10-year Treasury note yields did not rise much, credit spreads generally narrowed and U.S. equity price indices moved higher. Moreover, the availability of mortgage credit eased, rather than tightened. As a result, financial market conditions did not tighten.
As a result, financial conditions remained quite loose, despite the large increase in the federal funds rate. With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector...
Dudley appears to be increasingly concerned that the evolution of financial conditions this year suggests the Fed needs to pursue a more aggressive policy stance or else risk a repeat of 04-07. If this concern is being felt more generally within the Fed, it clearly puts a more hawkish bias to the Fed's reaction function. And, in my opinion, I think the risk of a more hawkish Federal Reserve is under-appreciated. Few are expecting a hawkish Federal Reserve, reasonably so given the path of policy since 2008. But I don't think the data are that far from a tipping point for the Federal Reserve. Of course, take that in the context of my general optimism.
A second point is that Dudley is not taking seriously the possibility that the flattening yields curve suggests the Fed has less room to move than policymakers think they do. This is something I worry about - if the Fed leans on the short end too much, they risk taking an expansion that should last another fours years to one that has just two more years left. But that might be a story for next December.
Bottom Line: Generally positive US data leave the Fed on track for a rate hike in the middle of next year. I am inclined to believe that the risk is that rate hikes come sooner and faster than anticipated outweigh the risk of later and slower.
Posted by Mark Thoma on Thursday, December 4, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, December 4, 2014 at 12:04 AM in Economics, Links |
I was looking for an old post of mine on social insurance and entrepreneurship to complement this post today from Nick Bunker when I came across this from September of 2005 (slightly edited). Maybe I wasn't one of the people yelling loudly that the Great Recession was about to hit, but I did warn that "Things happen," so be ready when they do:
...The discussion concerning Social Security has, in my view, largely underplayed the role the government has to play in guaranteeing the social insurance aspect of the system, particularly from those in favor of private accounts. When all shocks that hit people are individual so that there are winners and losers, but overall the winners and losers balance, then it is possible for people to voluntarily enter into arrangements where the individual risks are shared and thus largely eliminated (abstracting for the moment from market failure problems in social insurance markets). Conversely, if people want to bear the risks individually, they can. This system works fine for time periods when shocks are small and idiosyncratic. But what about large disasters such as a hurricane that floods New Orleans, or a Great Depression that guts an entire economy?
The Social Security program grew out of a time when there was a large aggregate shock, a shock that resulted in the Great Depression. The Great Depression affected people collectively, it wasn’t just a few unlucky individuals balanced somewhere else by winners. It’s been hard for me to see how private accounts would help when stock market values fall, as they did after the crash of 1929, to one sixth their pre-crash values. Without some sort of social support from the government, such as it is, people would be much worse off after such events. How will personal accounts and individual accountability rebuild schools or bridges in New Orleans? How will private accounts or even the private sector rescue the elderly from rooftops or provide security against looters? They won’t. For large collective shocks the government, not the private sector induced purely by profit, must stand ready to act as the "insurer of last resort."
To have a social security system that falls apart when you most need it, when there are large disasters affecting entire regions or economies, is not optimal. Personal accounts would not have withstood the stock market crash associated with the Great Depression. Why do we want to implement a social support system that fails when it is needed the most? I don’t think any of us believes we should leave it to individuals to bear the full cost of the disaster caused by Hurricane Katrina, i.e. that government should not be involved at all. We all know that government has a role to play in this disaster, the cry from all sides is that the government is doing too little, not that it is doing too much. Things may not be perfect with government involved, and there is certainly room for improvement, but things would be even worse if government did not get involved at all. And just as the government has an essential role to play in this disaster, it will also have an essential role to play when the next big shock, whether it’s financial, natural, or human induced, hits us in the future. Social insurance systems aren’t just for the next few years, they must survive as long as the country does. Social insurance must survive the big shocks, and for that to happen the government must, in the end, provide the insurance.
If you think such large shocks cannot happen again, that big shocks such as a Great Depression will never, ever happen again to anyone ever, think about the events in any one hundred year time period. Things happen.
Posted by Mark Thoma on Wednesday, December 3, 2014 at 02:03 PM in Economics, Policy, Social Insurance, Social Security |
In 2009 I argued:
...A more extensive social safety net can reduce the risk of attempts at entrepreneurship. If there is an extensive social safety net to fall back upon if things don't work out, you might be more willing to quit the job you hate (the one with health insurance for the kids) and sink everything you have into a small business that you've always wanted to run. But I'm not sure the data above support this interpretation, i.e. that there is an obvious positive association between the strength of social insurance and the prevalence of small business. But it is highly suggestive, and regressions that control for other cross-country differences could help to settle the issue.
Nick Bunker discusses a paper that provides supporting evidence:
Entrepreneurship, down-side risks, and social insurance, Washington Center for Equitable Growth: When Americans talk about entrepreneurs, or at least the reasons for becoming one, the possibility of great success is most often the first topic of discussion. The great wealth that company founders such as Bill Gates or Mark Zuckerberg amassed certainly make the idea of starting a business more attractive to potential entrepreneurs. But according to a new National Bureau of Economic Research working paper, we should be paying more attend to the down-side risks when it comes to fostering entrepreneurship.
The new paper, by economists John Hombert and David Thesmar of HEC Paris, David Sraer of the University of California-Berkeley, and Antoinette Schoar of the Massachusetts Institute of Technology, looks at a reform in the French unemployment insurance system enacted in 2002. The reform allowed unemployed workers who start a new business to keep the right to their unemployment benefits for up to three years. They could use the accrued benefits to make up the difference between their business’s revenue and the level of benefits they would have otherwise received.
The four researchers find that the policy change acted as a sort of entrepreneurship insurance. Workers who before would have been hesitant to start a business may be more likely to do so now that they had some protection against downside risk. The new paper documents that the rate at which firms were created increased by 25 percent after the 2002 reform....
They also find that ... the evidence points toward these new entrepreneurs being capable businesspeople who just needed a safety net before starting a business. What’s more, these new firms had a positive impact on the overall economy. ...
Many U.S. policymakers and economists are worried about the decline in entrepreneurship and business creation. They might want to consider investigating whether alleviating the down-side risks to starting a company can help solve that problem.
Posted by Mark Thoma on Wednesday, December 3, 2014 at 11:43 AM in Economics, Social Insurance |
I hope the Fed listens to Charlie Evans (as opposed to Charles Plosser):
Q. and A. With Charles Evans of the Fed: Low Inflation Is the Primary Concern: Charles Evans, president of the Federal Reserve Bank of Chicago, is nervous about inflation. His worry, however, is not the old Fed fear that prices are rising too quickly, but the new Fed fear that prices are not rising fast enough.
Mr. Evans said in an interview Tuesday that he now saw the sluggish pace of inflation as the primary reason the Fed should keep short-term interest rates near zero, a view shared by a growing number of Fed officials.
Mr. Evans, one of the 10 Fed officials who will vote on monetary policy decisions next year, has emerged since the financial crisis as one of the most forceful advocates for the Fed’s stimulus campaign. He pressed successfully in 2012 for more forceful action to reduce unemployment. Now he is warning that the Fed must be careful to avoid raising rates prematurely. ...
Posted by Mark Thoma on Wednesday, December 3, 2014 at 10:24 AM in Economics, Inflation, Monetary Policy |
Return of Focus Hocus Pocus: I’ve been getting correspondence from people saying that I need to respond to Tom Edsall channeling Chuck Schumer on how health reform was a mistake, Obama should have focused on the economy.
The thing is, I responded to this argument four years ago, and everything I said then still applies. When people say that Obama should have “focused” on the economy, what, specifically, are they saying he should have done? Enacted a bigger stimulus? Maybe he could have done that at the very beginning, but that wouldn’t have conflicted with the effort to pass health reform — and anyway, I don’t hear many of the “focus” types saying that. So what do they mean? Obama should have gone around squinting and saying “I’m focused on the economy”? What would that have done?
Look, governing is not just theater. For sure the weakness of the recovery has hurt Democrats. But “focusing”, whatever that means, wouldn’t have delivered more job growth. What should Obama have done that he actually could have done in the face of scorched-earth Republican opposition? And how, if at all, did health reform stand in the way of doing whatever it is you’re saying he should have done?
I have seen no answer to these questions.
I am going to have to disagree slightly. Politics is, in large part, about identity and I don't think Obama did nearly enough to show he identifies with the working class. Fighting for their needs publicly and loudly probably wouldn't have made any difference in terms of fiscal policy, but doing more to signal that he identifies with their struggles might have helped at the ballot box. I don't see how it could have hurt. Yes, various jobs programs were proposed along the way, and nothing came of them for the most part, but there just wasn't enough fist-pounding on this issue by the administration.
Update: See also Robert Waldmann.
Posted by Mark Thoma on Wednesday, December 3, 2014 at 10:18 AM in Economics, Politics, Unemployment |
Salim Furth, who "is senior policy analyst in macroeconomics at the Heritage Foundation’s Center for Data Analysis":
What’s Causing the Increase in Long-Term Unemployment?: Some economic indicators, including the short-term unemployment rate, have recovered to levels associated with “normal times.” But long-term unemployment remains high...
Many economists, myself included, expected that the expiration of long-term unemployment benefits at the end of 2013 would sharply lower the long-term unemployment rate. Instead, the rate has continued its slow, steady decline. ...
Nor is it merely a holdover from the Great Recession: Few of the long-term unemployed report being out of work for more than two years. The majority are still in their first year of joblessness.
Economists have not yet found convincing explanations for the persistent rise in long-term unemployment. Most economists agree that multi-year unemployment spells have permanent negative effects on workers’ productivity and pay, in addition to their happiness. The problem is worth studying.
They will have to find another social insurance program to blame...instead of, say, lack of demand (a policy failure) combined with the stigma attached to the long-term unemployed.
Posted by Mark Thoma on Wednesday, December 3, 2014 at 10:08 AM
Posted by Mark Thoma on Wednesday, December 3, 2014 at 12:06 AM in Economics, Links |
Marking Beliefs to Market: What I Got Wrong about the Great Recession: It’s the time of year when analysts and pundits begin “marking their beliefs to market” – telling us what they got right or wrong in the previous year. In that spirit, here are some of the things I got wrong about the Great Recession...
With everyone talking about what they got right about the Great Recession, thought I'd do the opposite. [Also, the title of the column is from an editor -- it doesn't fit very well...]
Posted by Mark Thoma on Tuesday, December 2, 2014 at 08:58 AM in Economics, Fiscal Times |
Why Economists Are Paid So Much: The profession of economics periodically finds itself under rhetorical attack from sociologists. Part of this is due to the differing political slants of the disciplines -- sociology tends to lean heavily to the left, while economics, being fairly well balanced between liberals and conservatives, is thus the most right-wing discipline in academia. Part of the rivalry is due to the attempts by some economists, such as Gary Becker, to model phenomena such as discrimination and family life that were traditionally in the realm of sociologists. In the siloed social sciences, people fear such “imperialism.” ...
But there is one way in which economists clearly do dominate the other social sciences, and that is in the amount of money they make. ... They have many lucrative outside options. The most important of these are the consulting and financial industries.
But why do economists have the option to go work in consulting and finance? The answer is simple: They have the technical skills to do so. I’m not talking about fancy math. No one hires you to do real analysis... If financial companies need someone to do serious math, they will hire a mathematician or a physicist. ...
The technical skill I am talking about is statistics. Economists learn a lot of statistics... Statistics is hugely valuable in the real world. ... As Econ 101 would tell us, these skills command a large premium. ... If sociologists want to crack this bastion of economists’ “superiority,” they need to tech up with statistics. ...
Sociologists... It’s time to stop whining and tech up.
I'm staying out of this one...
Posted by Mark Thoma on Tuesday, December 2, 2014 at 08:57 AM in Economics |
Ryan Avent responds to Tim Duy:
Why so glum?: Tim Duy, one of the best writers on macro policy issues, is optimistic about America's economy and wonders why more people aren't...
Have we all been too pessimistic about the American economy? What attitude should we have?
One metric might be a cross-country comparison. On that score one might suppose optimism is clearly warranted. America's recovery is the envy of the rich world. On the other hand, that is not saying much. Being the best of the bunch when the bunch has done so miserably is not exactly reason for cheer. ...
An historical comparison, by contrast, leads to a much bleaker assessment of the current recovery. ...
That brings us to another case for pessimism... GDP is growing, but ... Real GDP per capita is only a shade above its level of seven years ago... At the median the performance has been much worse...
Sentiment is an important economic variable; if you want people to buy things and invest, rather than grasp fearfully to their incomes, then you need them to be confident: indeed, optimistic. Optimism is self-fulfilling. But it is not detached from reality. ... I don't find it remotely surprising that people are glum. That is an indictment of the Fed, whose job it is to coordinate our expectations so that we all anticipate, and therefore cause to occur, maximum employment and an average inflation rate of 2%. ...
Being down so long things look like up is not optimism. ... I will turn optimistic when the Fed convinces me such a turn is warranted.
I don't think the Fed performed perfectly, but to me this places too much of the blame in their hands.
Posted by Mark Thoma on Tuesday, December 2, 2014 at 08:56 AM in Economics, Monetary Policy |
Jared Bernstein is unhappy with the WSJ editorial page:
Some serious nonsense on CBO from the WSJ: I almost never bother with editorials from the Wall St. Journal, which read to me something like, “Boy, if toasters could sing and dance, breakfast would be a lot more fun!”
But this AMs entry was almost like a satire—an Onion version—of their usual fare. They want to get rid of the Congressional Budget Office (and the tax revenue score-keeper, the Joint Tax Committee) because they were created, according to the Journal, by Democrats to “support the agenda of expanding government.” ...
There’s been a fair bit of scribbling about the roles and practices of CBO since the election... I disagree with ... calls for “dynamic scoring”... CBO doesn’t go there, because there’s insufficient evidence that such macroeconomic feedback effects can be reliably estimated (CBO does allow for some behavioral responses to tax changes, such as timing changes in realizing capital gains).
Thus, dynamic scoring that correctly reflects this uncertainty returns a range of results... While I don’t always agree with CBO, I think they’re already giving us the best numbers they can... The job is not to be innovative. It’s to honestly apply the state of our knowledge.
In fact, here’s where I’d argue the budget office could improve: by being more explicit about the limits of that knowledge state. CBO’s estimates should always be delivered to the public with explicit confidence intervals, to better convey to the public the uncertainty of their guesstimates. ...
Instead of pretending they can accurately estimate macroeconomic impacts, as ... the Journal would like, the CBO could help us avoid our bad habit of over-confidence in their current estimates by really hammering on the uncertainty therein.
Posted by Mark Thoma on Tuesday, December 2, 2014 at 08:55 AM
Posted by Mark Thoma on Tuesday, December 2, 2014 at 12:06 AM in Economics, Links |
Sometimes I Wonder, by Tim Duy: Sometimes I wonder if the Fed every actually looks at the data. This, from Ann Saphir and Jonathon Spicer at Reuters:
With the U.S. economy humming along at its fastest clip in more than a decade, the Federal Reserve should be confident about its ability to weather a global slowdown and start lifting interest rates around the middle of next year.
But then there is inflation.
Interviews with Fed officials and those familiar with its thinking show the mood inside is more somber than the central bank's reassuring statements and evidence of robust economic health would suggest. The reason is the central bank's failure to nudge price growth up to its 2 percent target and, more importantly, signs that investors and consumers are losing faith it can get there any time soon...
..."The primary concern at the moment is whether you can get back to 2 percent in a way that keeps expectations anchored, and maintains the credibility of the Fed as an institution that can achieve its goal," said Jeffrey Fuhrer, the Boston Fed's senior policy advisor...
...One Fed official, who declined to be named, told Reuters policymakers must resist the urge to lift rates at the first opportunity because they might be forced to backtrack if inflation failed to pick up...
One would think that central bank officials would recognize that low inflation is not a new phenomenon. It has been a persistent phenomenon for the past twenty years:
Note the long periods of below trend core inflation. Has this trend really gone unnoticed on Constitution Avenue? Moreover, the periods of elevated inflation have been more persistent when unemployment is below 5%, compared to the current 5.8%. At current rates, I would say you are more likely to be below than about 2% inflation:
And even focusing on 5% you have to ignore the low inflation of the late 1990's as an outlier. It seems clear that the economy is only now moving into a range where upward pressure on inflation is more likely to occur. So why should the Fed be surprised at the inflation numbers?
Bottom Line: Sometimes I think the Fed's underlying pessimism stems from some belief that inflation and wage pressures were about to occur when there was absolutely no reason to hold such a belief. The economy is only just beginning to move into a zone where more interesting things could happen. Honestly, it would be much more interesting if the economy moved to 4% unemployment with no wage or price pressures.
Posted by Mark Thoma on Monday, December 1, 2014 at 10:04 AM in Economics, Fed Watch, Monetary Policy |
What's the problem with Europe?:
Being Bad Europeans, by Paul Krugman, Commentary, NY Times: The U.S. economy finally seems to be climbing out of the deep hole it entered during the global financial crisis. Unfortunately, Europe, the other epicenter of crisis, can’t say the same. ...
Why is Europe in such dire straits? The conventional wisdom among European policy makers is that we’re looking at the price of irresponsibility: some governments have failed to behave with the prudence a shared currency requires, choosing instead to pander to misguided voters and cling to failed economic doctrines. And if you ask me (and a number of other economists who have looked hard at the issue), this analysis is essentially right, except for one thing: They’ve got the identity of the bad actors wrong.
For the bad behavior at the core of Europe’s slow-motion disaster isn’t coming from Greece, or Italy, or France. It’s coming from Germany.
I’m not denying that the Greek government behaved irresponsibly before the crisis, or that Italy has a big problem with stagnating productivity. But Greece is a small country whose fiscal mess is unique, while Italy’s long-run problems aren’t the source of Europe’s deflationary downdraft. If you try to identify countries whose policies were way out of line before the crisis, have hurt Europe since the crisis, and refuse to learn from experience, everything points to Germany as the worst actor. ...
Yet European policy makers seem determined to blame the wrong countries and the wrong policies for their plight. True, the European Commission has floated a plan to stimulate the economy with public investment — but the public outlay is so tiny compared with the problem that the plan is almost a joke. And meanwhile, the commission is warning France, which has the lowest borrowing costs in its history, that it may face fines for not cutting its budget deficit enough.
What about resolving the problem of too little inflation in Germany? Very aggressive monetary policy might do the trick (although I wouldn’t count on it), but German monetary officials are warning against such policies because they might let debtors off the hook.
What we’re seeing, then, is the immensely destructive power of bad ideas. It’s not entirely Germany’s fault — Germany is a big player in Europe, but it’s only able to impose deflationary policies because so much of the European elite has bought into the same false narrative. And you have to wonder what will cause reality to break in.
Posted by Mark Thoma on Monday, December 1, 2014 at 12:33 AM in Economics |
UC Davis Economics Professor: There Is No American Dream: A UC Davis economics professor has determined there is no American Dream. ...
“America has no higher rate of social mobility than medieval England, Or pre-industrial Sweden,” he said. “That’s the most difficult part of talking about social mobility is because it is shattering people s dreams.”
Clark crunched the numbers in the U.S. from the past 100 years. His data shows the so-called American Dream—where hard work leads to more opportunities—is an illusion in the United States, and that social mobility here is no different than in the rest of the world. ...
Posted by Mark Thoma on Monday, December 1, 2014 at 12:24 AM in Economics, Income Distribution |
Yes, I am Optimistic, by Tim Duy: I stood relieved when Federal Reserve policymakers recognized the tendency toward pessimism during this recovery when no such pessimism was warranted:
Finally, a couple of members suggested including language in the statement indicating that recent foreign economic developments had increased uncertainty or had boosted downside risks to the U.S. economic outlook, but participants generally judged that such wording would suggest greater pessimism about the economic outlook than they thought appropriate.
This stands in contrast to fairly consistent efforts to find the dark cloud in every silver lining. This, from the Wall Street Journal:
Economic prospects are flagging across Europe, Japan and big emerging markets such as India, a turn that presents fresh challenges to the relatively robust U.S. economy at a time when the world needs a dependable growth engine.
At least they mentioned the "robust" part. And the perennial activity of agonizing over holiday sales is in full swing, despite the reality that holiday sales tell you little if anything about the overall economy.
The lesson no one wants to draw from this recovery is that the US economy is both stronger and more resilient than commonly believed. Everyone, it would seem, is in the pessimism business - and such pessimism seems endemic throughout the US public. Perhaps only pessimism scores political points. Or perhaps that is only human nature. As Deirdre McCloskey recently remarked in her review of Piketty:
…pessimism sells. For reasons I have never understood, people like to hear that the world is going to hell, and become huffy and scornful when some idiotic optimist intrudes on their pleasure. Yet pessimism has consistently been a poor guide to the modern economic world. We are gigantically richer in body and spirit than we were two centuries ago…
Overall, I find the pessimism (from the right and the left) inconsistent with the fact that despite the ups and downs of the quarterly data, throughout the recovery, GDP has grown at a fairly consistent rate:
And even that might hide the strength of the recovery this year. GDP growth has exceeded 3% in four of the last five quarters. In two of those quarters, growth was in excess of 4%. It is simply reasonable to believe that the first quarter GDP report was largely an aberration. Do not dismiss the real improvement in the economy since 2009. It is not unimportant that 2014 is likely to be the biggest year for private sector employment since 1999 and that auto sales will reach a level not seen since 2001. It is not unimportant, in contrast to the conventional wisdom, that "in the post-Great Recession era, the growth in full-employment is, without a doubt, way out ahead." These are just three of many genuine signals of economic strength. It seems to me that in the effort to find what is wrong with the economy, everyone misses what is right.
The US economy is far more resilient than it is given credit for. None of the downside risks of recent years have been sufficient to derail the recovery, nor will the supposed downside risks of next year. They are mostly external, while the primary engine of US growth is internal and flexible. The decline in energy prices (another purported reason to fear the new year) will prove to be no exception. I believe we are witnessing a supply driven dynamic, not collapsing global demand. The US economy will adjust as the balance shifts from energy producers to energy consumers. While this will have some concentrated, negative implications for a handful of sectors and geographies (I would hope but find it unlikely that state and municipal leaders in North Dakota recognized the boom-bust nature of the commodity cycle well in advance of the bust part), I expect that the net impact will be modestly positive.
Indeed, the resiliency of the economy was almost certainly on display in the years preceding the Great Recession. Brad DeLong likes to note that the economy was adjusting to the housing collapse (a much deeper and widespread sector of the economy than energy production) fairly well until the financial crisis:
…you also have a strong argument that it was the financial crisis and not the collapse of the housing bubble that was the lead violin in this catastrophe. Construction reached its housing-bubble peak in the third quarter of 2005. From then until the third quarter of 2008, through the business cycle peak and out the other side, the market economy adjusted as smoothly to the recognition of a sectoral disequilibrium as the most optimistic of macroeconomists could have hoped: interest rates fell as demand for loans to finance construction eased off, and exports and business investment took up the slack resources released by the shrinking construction sector. The NBER's Business-Cycle Dating Committee did not conclude that the U.S. economy was in a full-blown recession until more than halfway through the fourth quarter of 2008.
As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying (and under-appreciated) impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy. This ultimately is the reason that despite the seemingly persistent belief that the recessionary bogeyman is just around the corner, recessions are remarkably rare events.
Since 1983, the US economy has been in expansion for 350 months. Recessions account for just 34 months, less than 10% of the time. In any given month, the probability of recession is certainly less than 10%. Recessions are concentrated in a handful of periods. If you are not in a recession this month, it is almost certain that you will not be in a recession next month. Consider that only three times since 1983 has a recession occurred in a month preceded by an expansion.
But this makes it seem as if recessions simply spring out of thin air, which they do not. Even if you thought the conditions for a recession were currently brewing, it is highly unlikely that the momentum of the US economy will turn in twelve months or less. Even if you thought, for example that the financial sector could not absorb any losses that stem from a decline in energy prices and thus be faced once again with crisis (unlikely, in my opinion, especially in the wake of regulatory enhancements since the last crisis), it would still take months for that shock to propagate throughout the economy.
Moreover, this ignores the other relevant feature of US recessions – they are preceded by long periods of sustained monetary tightening. And the Fed has not yet initiated even its first rate hike. Even if you accept that tapering is tightening, we are still on the front end of the cycle rather than the back end.
Hence my probability of recession in the next twelve months: 0%. I would place similar odds on the following twelve months as well.
To be sure, improvements were not as quick as many had hoped, but the shortfalls can largely be traced to two sectors – housing, in which the financing mechanism was damaged, and the failure of the fiscal authorities to adequately plug the hole. But the resilient economy continued to march higher nonetheless. And now fiscal policy is no longer a drag; the bottom in government jobs has likely been reached. Moreover, there is one silver lining in the relatively low pace of new housing activity – such activity has room to run. I expect that over the next two years housing will become an increasingly strong force in the US economy. Nor will the economy likely be impeded by monetary policy, which even if tighter than expected is likely to remain more accommodative than traditional metrics of appropriate monetary conditions would suggest.
Bottom Line: Perhaps, just perhaps, the US economic expansion has been consistently undersold, and continues to be undersold. It is worth considering that maybe it is time to just accept the good news without the desperate search for every dark cloud.
Posted by Mark Thoma on Monday, December 1, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Monday, December 1, 2014 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Sunday, November 30, 2014 at 03:33 AM in Economics, Links |
Posted by Mark Thoma on Saturday, November 29, 2014 at 12:06 AM in Economics, Links |
Why and when did Republicans become anti-environmentalists?:
Pollution and Politics, by Paul Krugman, Commentary, NY Times: Earlier this week, the Environmental Protection Agency announced proposed regulations to curb emissions of ozone, which causes smog, not to mention asthma, heart disease and premature death. And you know what happened: Republicans went on the attack, claiming that the new rules would impose enormous costs.
There’s no reason to take these complaints seriously... Polluters and their political friends have a track record of crying wolf. ... Again and again, the actual costs have been far lower than they predicted. In fact, almost always below the E.P.A.’s predictions.
So it’s the same old story. But why, exactly, does it always play this way? ... When and why did the Republican Party become the party of pollution?
For it wasn’t always thus. The Clean Air Act of 1970 ... was signed into law by Richard Nixon. (I’ve heard veterans of the E.P.A. describe the Nixon years as a golden age.) A major amendment of the law, which among other things made possible the cap-and-trade system that limits acid rain, was signed in 1990 by former President George H.W. Bush.
But that was then. Today’s Republican Party is putting a conspiracy theorist who views climate science as a “gigantic hoax” in charge of the Senate’s environment committee. And this isn’t an isolated case. ...
So what explains this anti-environmental shift?
You might be tempted simply to blame money in politics... But this doesn’t explain why money from the most environmentally damaging industries, which used to flow to both parties, now goes overwhelmingly in one direction. ...
One answer could be ideology... My guess, however, is that ideology is only part of the story — or, more accurately, it’s a symptom of the underlying cause...: rising inequality. ... Any policy that benefits lower- and middle-income Americans at the expense of the elite — like health reform, which guarantees insurance to all and pays for that guarantee in part with taxes on higher incomes — will face bitter Republican opposition.
And environmental protection is, in part, a class issue,... ownership of, say, stock in coal companies is concentrated in a few, wealthy hands. ...
In the case of the new ozone plan, the E.P.A.’s analysis suggests that, for the average American, the benefits would be more than twice the costs. But that doesn’t necessarily matter to the nonaverage American driving one party’s priorities. On ozone, as with almost everything these days, it’s all about inequality.
Posted by Mark Thoma on Friday, November 28, 2014 at 03:33 AM in Economics, Environment, Politics |
Economists vs politicians: ... I suspect that there is a greater distance now between the political parties and economist than there has been for years. ...
You might think this isn't a wholly bad thing. Many ideas are not worth adopting ... This, however, doesn't justify politicians' lack of interest in the settled, established knowledge that economists do have.
So, where is there such a gap between politicians and economists?
The fault might partly lie with economics. Many academics aren't as interested in closing the gap between academia and the "real world" as they should be. At least some of the discipline was discredited by the crisis, and I get the feeling that there aren't so many good new policy-relevant ideas now.
It might be that the voters are to blame. Maybe they don't want serious politicians who are interested in good ideas but rather, in our narcissistic age, they simply expect their demands to be met, however unreasonable. But is this the whole story? Janan Ganesh thinks not:
There is...an unsatisfied demand for seriousness and leadership. Most people do not vote Ukip or parse an MP’s tweet for class meaning. The flight to frivolity in public life is not the voters’ doing. Many are in fact waiting for a leader to arrest it.
This leaves a third suspect - the media. ... Political journalists have been complicit in creating a hyperreal bubble of mediamacro which perpetuates witless ideas (such as conflating the economy with the deficit) to the exclusion of such good ones as might exist.
I'm not sure, then, how exactly to apportion blame for the divorce between politicians and economists. But I do suspect that, net, it is a bad thing.
[I left out his examples of "established knowledge that economists do have".]
Posted by Mark Thoma on Friday, November 28, 2014 at 02:43 AM in Economics, Policy, Politics |
Why the Job Market is Better Than it Looks: True or false: Most of the jobs created during the sluggish economic recovery consist of part-time, not full-time, employment? ...
Posted by Mark Thoma on Friday, November 28, 2014 at 02:34 AM
Posted by Mark Thoma on Friday, November 28, 2014 at 12:15 AM in Economics, Links |
As Mark Thoma often says, the problem is with macroeconomists rather than macroeconomics.
Much, much more here.
Posted by Mark Thoma on Thursday, November 27, 2014 at 09:28 AM in Economics, Macroeconomics, Methodology |
Happy Thanksgiving everyone. Not sure how much blogging I'll get done today:
Washington, D.C. October 3, 1863
By the President of the United States of America.
The year that is drawing towards its close, has been filled with the blessings of fruitful fields and healthful skies.
To these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God.
In the midst of a civil war of unequaled magnitude and severity, which has sometimes seemed to foreign States to invite and to provoke their aggression, peace has been preserved with all nations, order has been maintained, the laws have been respected and obeyed, and harmony has prevailed everywhere except in the theatre of military conflict; while that theatre has been greatly contracted by the advancing armies and navies of the Union. Needful diversions of wealth and of strength from the fields of peaceful industry to the national defence, have not arrested the plough, the shuttle or the ship; the axe has enlarged the borders of our settlements, and the mines, as well of iron and coal as of the precious metals, have yielded even more abundantly than heretofore. Population has steadily increased, notwithstanding the waste that has been made in the camp, the siege and the battle-field; and the country, rejoicing in the consiousness of augmented strength and vigor, is permitted to expect continuance of years with large increase of freedom.
No human counsel hath devised nor hath any mortal hand worked out these great things. They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy. It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People. I do therefore invite my fellow citizens in every part of the United States, and also those who are at sea and those who are sojourning in foreign lands, to set apart and observe the last Thursday of November next, as a day of Thanksgiving and Praise to our beneficent Father who dwelleth in the Heavens. And I recommend to them that while offering up the ascriptions justly due to Him for such singular deliverances and blessings, they do also, with humble penitence for our national perverseness and disobedience, commend to His tender care all those who have become widows, orphans, mourners or sufferers in the lamentable civil strife in which we are unavoidably engaged, and fervently implore the interposition of the Almighty Hand to heal the wounds of the nation and to restore it as soon as may be consistent with the Divine purposes to the full enjoyment of peace, harmony, tranquillity and Union.
In testimony whereof, I have hereunto set my hand and caused the Seal of the United States to be affixed.
Done at the City of Washington, this Third day of October, in the year of our Lord one thousand eight hundred and sixty-three, and of the Independence of the Unites States the Eighty-eighth.
By the President: Abraham Lincoln
Posted by Mark Thoma on Thursday, November 27, 2014 at 09:19 AM in Economics, Miscellaneous |
Posted by Mark Thoma on Thursday, November 27, 2014 at 12:06 AM in Economics, Links |
[Travel day, so no more until later.]
Keynes Is Slowly Winning: Back in 2010, I had a revelation about just how bad economic policy was about to get; I read the OECD Economic Outlook, which called not just for fiscal austerity but for interest rate hikes — 350 basis points on the Fed funds rate by the end of 2011! — because, well, because.
Now, the OECD is calling for fiscal and monetary stimulus in Europe. ....
It has taken a while. ... But the hawks seem in retreat at the Fed; Mario Draghi ... sounds an awful lot like Janet Yellen; the whole way we’re discussing Japan is very much on Keynesian turf. Three and a half years ago Businessweek was declaring that expansionary austerian Alberto Alesina was the new Keynes; now it tells us that Keynes is the new Keynes. And we have people like Paul Singer complaining about the “Krugmanization” of the debate.
Why does the tide finally seem to be turning? Partly, I think, it’s just a matter of time; after six years it’s becoming hard not to notice that the anti-Keynesians have been wrong about everything. Europe’s slide toward deflation makes it even harder to deny the realities of liquidity-trap economics. And the refusal of almost everyone on the anti-Keynesian side to admit any kind of error has gradually made them look ridiculous.
All of this may be coming too little and too late to avoid policy disaster, especially in Europe. But it’s something to cheer, faintly.
Posted by Mark Thoma on Wednesday, November 26, 2014 at 08:59 AM in Economics, Fiscal Policy, Monetary Policy, Politics |
Understanding George Osborne: Yesterday I spoke at the Resolution Foundation’s launch of their analysis of the UK political parties’ fiscal plans post 2015. I believe this analysis shows two things very clearly. First, there is potentially a large gap between the amount of austerity planned by the two major parties. Second, George Osborne’s plans are scarcely credible. They represent a shrinking of the UK state that is unprecedented and which in my view virtually no one wants.
I would add one other charge - Osborne's plans are illiterate in macroeconomic terms. The UK economy desperately needs more growth. ...
In this situation a Chancellor should not plan to reduce growth further. I have yet to come across a single macroeconomist who argues that Osborne’s plans for renewed austerity will not in themselves reduce aggregate demand. So doing this when the recovery could go much further but is still fragile is just plain dumb. It is even dumber if you have done this once before, in a very similar situation, and the risks I outlined above have indeed materialised.
So why is the Chancellor proposing to make the same mistake twice? ...
I cannot think of any way to rationalise what the Chancellor is planning in macroeconomic terms. But perhaps I’m looking for something that does not exist. Perhaps he does not have a coherent economic framework. Instead he has a clear political framework, which has so far been remarkably successful. The goal is to reduce the size of the state, and because (with his encouragement) mediamacro believes reducing the deficit is the number one priority, he is using deficit reduction as a means to that end. However another priority is to get re-elected, so deficit reduction has to take place at the start of any parliament, so its impact on growth has disappeared by the time of the next election. But this explanation would imply we have a Chancellor that quite cynically puts the welfare of the majority of the UK’s citizens at major risk for ideological and political ends, and I do not think I have ever experienced a UK Chancellor (with possibly one exception) who has done that. But as Sherlock Holmes famously said ...
Osborne's idiotic idea: The FT reports that George Osborne wants to make unicorn farming compulsory:
The new fiscal mandate is expected to enshrine in law one area of common ground between the Tories and Lib Dems: that the cyclically adjusted current deficit should be eliminated by 2017-18.
This is imbecilic. ...
Now, you might think that, in saying all this I'm merely being a Keynesian.
Wrong. In fact, I'm writing in a Hayekian spirit. Hayek famously and correctly argued that economic knowledge was inherently fragmentary and dispersed and so central agencies could not possibly know very much. I'm echoing him. I'm saying that the OBR cannot know enough about the productive potential of millions of firms to know what the output gap is. And it hasn't got enough knowledge of the future to predict recessions.
In presuming otherwise, Osborne is thus not only anti-Keynesian, but anti-Hayekian. I thus agree with Simon - that he is illiterate and plain dumb.
Posted by Mark Thoma on Wednesday, November 26, 2014 at 08:58 AM in Economics, Fiscal Policy, Politics |
Some Good News for the Unemployed: There has been considerable discussion of the “hollowing out” of middle class jobs in recent years, a trend that started before the Great Recession. But where do those who have lost their jobs go? Do they end up with low paying service jobs, McJobs as they are sometimes called, or do they move up the ladder to higher paying jobs?
Many people believe that most people who lose middle class jobs end up worse off than before, but recent research by Ellie Terry and John Robertson of the Atlanta Fed finds some surprising results. ...
Posted by Mark Thoma on Wednesday, November 26, 2014 at 08:58 AM in Economics, MoneyWatch, Unemployment |
Posted by Mark Thoma on Wednesday, November 26, 2014 at 12:06 AM in Economics, Links |
Over at Project Syndicate: Economic Growth and the Information Age: Daily Focus: ...America ... has become a vastly more unequal place since 1979... But the past generation has seen a third industrial revolution, a worthy information-age successor to the first of steam, iron, cotton, and machines and to the second of internal combustion, electricity, steel, and chemicals. Not everyone, but almost everyone in the North Atlantic and many and soon most in the world, can now if they wish have a smartphone–and so gain cheap access to the universe of human knowledge and entertainment to a degree that was far beyond the reach of all but the richest of a generation ago.
How much does this matter? How much does this mean that conventional measures of real income and real standard of living understate how much we, even the relatively poor of we, have progressed toward utopia? ...
Perhaps the right way to view the situation is that before the information age began our estimates of economic growth overstated true reality by perhaps 0.5%/year as the extra well-being we got from increased real wealth and income was offset by our noticing that the Jones’s next door had more, better, and newer than we did? Perhaps the right way to view the situation is that those parts of the information age that escape conventional growth-accounting calculations simply neutralize those forces of envy and spite that were never included in the calculations in the first place? That is my tentative judgment–or rather guess–today.
Posted by Mark Thoma on Tuesday, November 25, 2014 at 11:02 AM in Economics, Income Distribution |
For those of you interested in Uber, this is from Joshua Gans:
Is Uber really in a fight to the death?: In recent days, since their PR troubles, there has been much discussion as to why Uber seems to be so aggressive. Reasons ranged from being inept, to the challenges of fighting politics against taxi regulations to a claim that Uber’s market has a ‘winner take all’ nature. It is this last one that is of particular interest because it suggests that Uber has to fight hard against competitors like Lyft or it will lose. It also suggests that Uber’s $20 billion odd valuation is based on beliefs that it will win, and win big.
I am not sure that this is really the case. Despite the name ‘Uber’ connoting, ‘one Uber to rule them all,’ the theory underlying the notion of winner take all is rather special and is far from being proven in cases like this. ...
Posted by Mark Thoma on Tuesday, November 25, 2014 at 10:28 AM in Economics, Technology |
How to think about “think” tanks: It is sometimes said that think tanks are good for democracy; indeed the more of them, the better. If there are more ideas in the public arena battling it out for your approval, then it’s more likely that the best idea will win, and that we will all have better public policies. But intuitively many of us have trouble believing this, have trouble knowing who is being truthful, and don’t know who to trust.
This battle of ideas, studies, and statistics has the potential to make many of us cynical about the whole process, and less trusting of all research and numbers. If a knowledgeable journalist like the Canadian Kady O’Malley expresses a certain exasperation that think-tank studies always back up “the think-tank’s existing position,” what hope is there for the rest of us? A flourishing of think tanks just let’s politicians off the hook, always allowing them to pluck an idea that suits their purposes, and making it easier to justify what they wanted to do anyways.
Maybe we shouldn’t be so surprised that think tanks produce studies confirming their (sometimes hidden) biases. After all this is something we all do. We need to arm ourselves with this self-awareness. If we do, then we can also be more aware of the things in a think tank’s make-up that can help in judging its credibility, and also how public policy discussion should be structured to help promote a sincere exchange of facts and ideas. ...
He goes on to explain in considerable detail.
Posted by Mark Thoma on Tuesday, November 25, 2014 at 10:05 AM in Economics, Politics |
On Twitter, Jared Bernstein says he is "Correcting the record for those who claim that accounting for taxes & transfers changes the inequality story":
A deeper dive into the weeds of the CBO household income data: ...between 1979 and 2011, inequality measured by the Gini coefficient rose 24% based solely on market outcomes and by 22% based on CBO’s comprehensive, post-tax and transfer income data.
Here we show that changes in pre- and post-tax income shares* – the percentage of total U.S. income held by different income groups – reveals a similar trend:
The “low” category in this figure represents the lowest before-tax income quintile, the “middle” category represents households between the 40th and 60th income percentiles, and the “high” category represents the top quintile. As with the Gini, the change in pre- and post-tax income shares are similar. The share of total income held by the poorest households fell by 1 percentage point on a pre-tax basis, and by 1.2 points on a post-tax basis. The share of income held by middle-class households fell by almost two percentage points on a pretax basis and by 1.4 percentage points post-tax.
Only within the top fifth of households do we see relative gains, and in fact, most of the increase in top quintile income shares has accrued to the richest subset of this group: the top 1%.
A second motivation of our report was to document the stagnation of middle-class earnings to households with children and the increased importance of transfer income to these families. We note, for example, that the increase in earnings to middle-income households with children was actually less than the increase in the dollar value of transfers. ...
To be clear, there’s nothing wrong and a lot right with transfers replacing lost earnings, especially in downturns. Tax cuts also helped offset middle quintile income losses. But this is not a reliable strategy by which to raise middle-class living standards for working families. For that, we must reconnect overall economic growth to paychecks... The CBO data highlight the nature of this problem and the urgency with which we must pursue the right solutions. ...
Posted by Mark Thoma on Tuesday, November 25, 2014 at 09:04 AM in Economics, Income Distribution |