I have a new column:
Full Employment Alone Won’t Solve Problem of Stagnating Wages: The most recent employment report brought mixed news. The unemployment rate continues its slow but steady downward path and now stands at 5.6 percent, but wages remain flat. In response, most analysts made two points. First, the lack of wage growth indicates that we are not yet close enough to full employment to generate upward pressure on wages, so policymakers should be patient in reversing attempts to stimulate the economy. Second, once we do get closer to full employment the picture for wages will change and the long awaited acceleration in labor compensation will finally materialize.
I fear this trust that market forces will eventually raise wages will lead to disappointment. ...
Posted by Mark Thoma on Tuesday, January 13, 2015 at 08:38 AM in Economics, Fiscal Times, Income Distribution, Unemployment |
Selective Voodoo: House Republicans have passed a measure demanding that the Congressional Budget Office use “dynamic scoring” in its revenue projections — taking into account the supposed positive growth effects of tax cuts. It remains to be seen how much damage this rule will actually cause. The reality is that there is no evidence for the large effects that are central to right-wing ideology, so the question is whether CBO will be forced to accept supply-side fantasies.
Meanwhile, one thing is fairly certain: CBO won’t be applying dynamic scoring to the positive effects of government spending, even though there’s a lot of evidence for such effects.
A good piece in yesterday’s Upshot reports on a recent study of the effects of Medicaid for children; it shows that children who received the aid were not just healthier but more productive as adults, and as a result paid more taxes. So Medicaid for kids may largely if not completely pay for itself. It’s a good guess that the Affordable Care Act, by expanding Medicaid and in general by ensuring that more families have adequate health care, will similarly generate significant extra growth and revenue in the long run. Do you think the GOP will be interested in revising down estimates of the cost of Obamacare to reflect these effects? ...
Posted by Mark Thoma on Tuesday, January 13, 2015 at 08:37 AM in Economics, Fiscal Policy, Politics, Taxes |
Climagte change may be more costly than we thought:
Estimated social cost of climate change not accurate, Stanford scientists say: The economic damage caused by a ton of carbon dioxide emissions - often referred to as the "social cost" of carbon - could actually be six times higher than the value that the United States now uses to guide current energy regulations, and possibly future mitigation policies, Stanford scientists say.
A recent U.S. government study concluded, based on the results of three widely used economic impact models, that an additional ton of carbon dioxide emitted in 2015 would cause $37 worth of economic damages. These damages are expected to take various forms, including decreased agricultural yields, harm to human health and lower worker productivity, all related to climate change.
But according to a new study, published online this week in the journal Nature Climate Change, the actual cost could be much higher. "We estimate that the social cost of carbon is not $37 per ton, as previously estimated, but $220 per ton," ...
See also: New economic model may radically boost the social cost of carbon - Ars Technica.
Posted by Mark Thoma on Tuesday, January 13, 2015 at 08:36 AM in Economics, Environment |
Posted by Mark Thoma on Tuesday, January 13, 2015 at 12:06 AM in Economics, Links |
Rob Valletta in an SF Fed Economic Letter:
Higher Education, Wages, and Polarization, by Rob Valletta, FRBSF Economic Letter: Holding a four-year college degree gives a worker a distinct advantage in the U.S. labor market. The wage gap between college-educated working adults and those with high school degrees is large and has grown steadily over the past 35 years. This gap appears to be bolstered by technological advances in the workplace, notably the ever-growing reliance on computers, because the skills needed to apply these technologies are often acquired through or associated with higher education. Since 2000, however, this trend has altered. Increasingly, the U.S. labor market favors workers who hold a graduate degree, while the wage advantage for those who hold a four-year college degree has changed little. In this Economic Letter, I examine the potential explanations for this change. I focus on the polarization hypothesis, which emphasizes employment and wage growth at the top and bottom portions of the skill distribution (Acemoglu and Autor 2011). ...
Posted by Mark Thoma on Monday, January 12, 2015 at 10:17 AM in Economics, Universities |
Cecchetti & Schoenholtz:
Conflicts of Interest in Finance: ...Financial corruption ... is ... widespread... The corruption exposed in recent years is breathtaking in its scale, scope, and resistance to remedy. We have seen traders collude to manipulate LIBOR ... and the foreign exchange (FX) market... We have seen firms facilitate tax evasion and money laundering. We have seen financial behemoths taking concentrated risks that undermine their capital and their funding, threatening the financial system as a whole until they are bailed out by public support. And we have witnessed what are arguably the largest Ponzi schemes in history (see our earlier post).
The policy response also has been wide-ranging. Congress enacted the most far-reaching financial reform since the 1930s. Regulators leaned on financial firms to diminish risk-taking incentives in their compensation schemes. Prosecutors, regulators and private litigants obtained ever-larger pecuniary settlements – the total since 2009 is now approaching $200 billion.
Previously frustrated by the “too big to jail” taboo (following the 2002 collapse of Arthur Andersen), in 2014 prosecutors again moved beyond simply seeking monetary settlement without admission of guilt and charged a bank with criminal behavior. They are also pursuing individual traders in the LIBOR and FX scandals in the criminal courts. Finally, leading regulators are openly warning the largest U.S. institutions that a failure to improve their ethical culture could lead policymakers to seek a dramatic downsizing of their firms to ensure financial stability.
So far, the most obvious response from the financial sector has been on the employment side: firms have hired or will hire thousands of compliance officers and risk managers to police the behavior of their employees (see here, here, and – if you have Wall Street Journal access – here).
We will be delighted if these reforms work to reduce corruption dramatically, but we remain skeptical. ... What to do? The only major alternatives we see are either to break up large institutions into smaller ones with restricted scope, to hold individuals more accountable, or some mix of both. ... Our preferred approach emphasizes a version of the second remedy: hold managers collectively more accountable for the actions of their firm. ...
One can hope that with their financial solvency really at stake, managers would become more aggressive in policing behavior inside of their organizations. Either that, or they will simply refuse to engage in activities where conflicts are most likely to arise. So much the better.
Unfortunately, there exists no panacea for containing conflicts of interest. ...
[I cut quite a bit from the original.]
Posted by Mark Thoma on Monday, January 12, 2015 at 10:12 AM in Economics, Financial System, Regulation |
What's the real reason Republicans are pushing for the Keystone XL pipeline?:
For the Love of Carbon, Commentary, NY Times: It should come as no surprise that the very first move of the new Republican Senate is an attempt to push President Obama into approving the Keystone XL pipeline... After all,... the oil and gas industry — which gave 87 percent of its 2014 campaign contributions to the G.O.P. — expects to be rewarded for its support.
But why is this environmentally troubling project an urgent priority in a time of plunging world oil prices? Well, the party line, from people like Mitch McConnell, the new Senate majority leader, is that it’s all about jobs. ...
Let’s back up for a minute and discuss economic principles. For more than seven years ... the United States economy has suffered from inadequate demand. ... In such an environment, anything that increases spending creates jobs. ...
From the beginning, however, Republican leaders have held ... that we should slash public spending... And they’ve gotten their way... The evidence overwhelmingly indicates that this kind of fiscal austerity in a depressed economy is destructive...
Needless to say, the guilty parties here will never admit that they were wrong. But if you look at their behavior closely, you see clear signs that they don’t really believe in their own doctrine.
Consider, for example, the case of military spending. When it comes to possible cuts in defense contracts, politicians ... suddenly begin talking about all the jobs that will be destroyed. ... This is the phenomenon former Representative Barney Frank dubbed “weaponized Keynesianism.”
And the argument being made for Keystone XL is very similar; call it “carbonized Keynesianism.” ... But government spending on roads, bridges and schools would do the same thing. ... If Mr. McConnell and company really believe that we need more spending to create jobs, why not support a push to upgrade America’s crumbling infrastructure?
So what should be done about Keystone XL? If you believe that it would be environmentally damaging — which I do — then you should be against it, and you should ignore the claims about job creation. The numbers being thrown around are tiny compared with the country’s overall work force. And in any case, the jobs argument for the pipeline is basically a sick joke coming from people who have done all they can to destroy American jobs — and are now employing the very arguments they used to ridicule government job programs to justify a big giveaway to their friends in the fossil fuel industry.
Posted by Mark Thoma on Monday, January 12, 2015 at 12:24 AM in Economics, Environment, Oil, Politics |
Posted by Mark Thoma on Monday, January 12, 2015 at 12:06 AM in Economics, Links |
Demand factors in the collapse of oil prices: The price of oil passed another milestone last week, falling below $50 a barrel, a level that I had not expected to see again in my lifetime.
It’s interesting that we crossed another milestone last week, with the yield on 10-year Treasury bonds falling below 2%. That, too, is something I had not expected to see.
And these two striking developments are surely related. I attribute sinking yields to ongoing weakening of the global economy, particularly Europe. And slower growth of world GDP means slower growth in the demand for oil. Other indicators of an economic slowdown outside the United States are falling prices of other commodities and a strengthening dollar.
A month ago I provided some simple analysis of the connection between these developments... The price of oil has fallen another $8/barrel since then, prompting me to update those calculations. ... On the basis of the above regression,... of the $55 drop in the price of oil since the start of July, about $24, or 44%, seems attributable to broader demand factors rather than anything specific happening to the oil market. That’s almost the same percentage as when I performed the calculation using data that we had available a month ago.
So what’s been happening on the supply side of oil markets is important. But so is what’s been happening on the demand side. ...
Posted by Mark Thoma on Sunday, January 11, 2015 at 09:43 AM in Economics, Oil |
Posted by Mark Thoma on Sunday, January 11, 2015 at 12:06 AM in Economics, Links |
Why don't more households refinance their mortgages when it would be beneficial to do so?:
Borrowers Forgo Billions through Failure to Refinance Mortgages, by Les Picker, NBER Digest: As of December 2010, approximately 20 percent of households with mortgages could have refinanced profitably but did not do so.
Buying and financing a house is one of the most important financial decisions a household makes. It can have substantial long-term consequences for household wealth accumulation. In the United States, where housing equity makes up almost two thirds of the median household's total wealth, public policies have been crafted to encourage home ownership and to help households finance and refinance home mortgages. The impact of these policies hinges on the decisions that households make.
Households that fail to refinance when interest rates decline can lose out on tens of thousands of dollars in savings. For example, a household with a 30-year, fixed-rate mortgage of $200,000 at an interest rate of 6.5 percent that refinances when rates fall to 4.5 percent will save over $80,000 in interest payments over the life of the loan, even after accounting for typical refinancing costs. With long-term mortgage rates at roughly 3.35 percent, this same household would save roughly $130,000 over the life of the loan by refinancing. But in spite of these potential savings, many households do not refinance when interest rates decline.
In Failure to Refinance (NBER Working Paper No. 20401), Benjamin J. Keys, Devin G. Pope, and Jaren C. Pope provide empirical evidence that many households in the U.S. fail to refinance, and they approximate the magnitude of forgone interest savings. The analysis utilizes a nationally representative sample of approximately one million single-family residential mortgages that were active in December 2010. These data include information about the origination characteristics of each loan, the current balance, second liens, payment history, and interest rate being paid. Given these data, the authors calculate how many households would save money over the life of the loan if they were to refinance their mortgages at the prevailing interest rate while adjusting for tax implications and probability of the household moving.
A key challenge in determining whether households are failing to refinance is knowing whether a household had the option to refinance - especially given the tightening banking standards over this time period. The authors take advantage of the rich data environment to make reasonable assumptions about the ability of individuals to refinance based on various factors (e.g. loan-to-value ratios) and provide evidence of robustness to the assumptions made.
The authors find that, in December of 2010, approximately 20 percent of households that appeared unconstrained to refinance and were in a position in which refinancing would have been beneficial had failed to do so. The median household would have saved $160 per month over the remaining life of the loan, and the total present discounted value of the forgone savings was approximately $11,500. The authors estimate that the total forgone savings of U.S. households was approximately $5.4 billion.
In 2009, the Federal Housing Finance Agency (FHFA) and the Department of the Treasury announced a refinancing program entitled "Home Affordable Refinance Program" (HARP). This program enabled homeowners who were current on their federally guaranteed mortgage and met other conditions of the loan to refinance to a lower interest rate even if they had little or no equity in their homes. When HARP was announced, FHFA and the Treasury estimated that four to five million borrowers whose mortgages were backed by Fannie Mae and Freddie Mac could take advantage of it. By September 2011, however, fewer than a million mortgagors had refinanced under HARP. Although modifications to the program have resulted in more households taking up refinance offers, the overall take-up rate remains low.
These results raise questions about why borrowers do not take advantage of refinancing opportunities that would substantially lower their interest payments. The authors suggest that there may be information barriers regarding potential benefits and costs of refinancing, and that expanding and developing partnerships with certified housing counseling agencies to offer more-targeted and in-depth workshops and counseling surrounding the refinancing decision could alleviate barriers for people in need of financial education.
The authors also suggest that psychological factors, such as procrastination, mistrust, and the inability to understand complex decisions, may be barriers to refinancing.
Posted by Mark Thoma on Saturday, January 10, 2015 at 11:47 AM in Economics, Housing |
Orthodoxy, Heterodoxy, and Ideology: Many economists responded badly to the economic crisis. And there’s a lot wrong with mainstream economic analysis. But how closely are these two assertions related? Not as much as you might think. So I’m very much in accord with Simon Wren-Lewis on the remarkable unhelpfulness of recent heterodox assaults on the field. Not that there’s anything wrong with being heterodox in general; but a lot of what we’ve been seeing misidentifies the problem, and if anything gives aid and comfort to the wrong people.
The point is that standard macroeconomics does NOT justify the attacks on fiscal stimulus and the embrace of austerity. On these issues, people like Simon and myself have been following well-established models and analyses, while the austerians have been making up new stuff and/or rediscovering old fallacies to justify the policies they want. Formal modeling and quantitative analysis doesn’t justify the austerian position; on the contrary, austerians had to throw out the models and abandon statistical principles to justify their claims.
Let’s look at several examples. ...
See also Chris Dillow: Heterodox economics & the left.
It's remarkable how many people rejected the conclusions of *modern* macroeconomic models (or invented nonsense) in order to oppose fiscal policy. It seemed to have more to do with ideology (the government can't possible help no matter what the model says...) and identification (I'm a serious macroeconomist, don't lump me in with all those old fashioned Keynesian hippie types) than with standard macroeconomic analysis.
On this point, see Simon Wren-Lewis: Faith based macroeconomics.
Posted by Mark Thoma on Saturday, January 10, 2015 at 10:53 AM in Economics, Fiscal Policy, Macroeconomics |
This is silly (it's from a discussion of the costs of policy uncertainty from the Becker Friedman Institute):
If the Affordable Care Act has taught us anything, it’s this: A party in power can push through a major policy initiative in the teeth of strong political opposition, but it probably shouldn’t. A better strategy is to secure some support across the political aisle, even at the cost of compromise. Persistent attacks on the Affordable Care Act continue to generate uncertainty about its political durability and raise doubts about what the healthcare delivery landscape will look like in the U.S. for many years to come.
That simply wasn't a choice. Securing support across the political aisle was not an option. No amount of compromise would have mattered. Would the millions who now have health insurance, those who now have the option to change jobs without losing insurance, people with pre-existing conditions, etc., etc. be better off if the law had not passed? Because that was the choice Democrats faced, a highly imperfect bill that would do quite a bit of good even with its imperfections, or no bill at all. Bipartisan support for policy is surely a worthy goal, and sometimes a bit of compromise can bring it about. But other times there is no choice except to ram through legislation that one side believes has the potential to do considerable good.
Interesting that the authors didn't pick tax cuts for the wealthy as their example of policy uncertainty. The future prospects for this policy were just as uncertain under Obama, the policy had a high degree of opposition from the other side of the political aisle, and the tax cuts did far less good than the ACA beyond reducing the tax payments for a group of wealthy individuals who didn't need the help. And unlike the ACA and its documented success (if you look past Fox News), the promised trickle down and economic growth miracle never materialized. If we are looking for a case where the harm from policy uncertainty exceeds the benefits of the policy, this is a much better candidate than the ACA.
I do like some of their other recommendations though, e.g. to use automatic stabilizers:
Automatic stabilizers—unemployment insurance spending that goes up when employment falls, for example—offer some advantages over discretionary measures. The fiscal equivalent of an “advance directive,” they kick-in quickly in real time as economic fundamentals change. They don’t need to wait for a legislative act. And while every distribution of federal dollars involves some political infighting, a policy response developed in advance of actual need is more likely to be evaluated primarily on its economic rather than political merits. Finally, those bearing the brunt of the shock—wage earners and businesses—aren’t left wondering when or if some help is on the way.
Take some of the politicking out of policymaking. A Congress that indiscriminately exercises its right to debate, amend, and delay can produce excessive tug-of-war policymaking that comes with the cost of heightened uncertainty. Asking Congress to skip the dickering and bind itself to a simple up or down vote, as it already does with military base closures and fast-track trade authority, could minimize the drama—and cost—of indecision.
Though taking the politicking out of policymaking is probably wishful thinking, and it's hard to imagine Republicans going along with any expansion of automatic stabilizers (their proposals are likely to run in the other direction, reducing support for programs such as food stamps).
So long as we have political parties with differing ideological views, there will always be policy uncertainty. One side will always want to undo what the other puts into place. They will rarely agree, and a call for bipartisan support before anything can be done is a call to do nothing. I don't think that's the best approach.
But so long as we are engaged in wishful thinking, let me add to the list. What I'd add is more honesty in evaluating programs after they are put into place. More attention and responsiveness to the empirical evidence. If tax cuts don't trickle down or create growth, if austerity actually makes things worse, if fiscal policy multipliers are non-zero in deep recessions when we are stuck at the zero bound, if the ACA is working to provide health services to millions of people who dearly needed such help, etc., etc., then accept the evidence and adjust policy accordingly. I suppose it's too much to expect politicians to do this, but can we at least get economists to treat these issues honestly (and maybe the media would do better as a consequence)? I'd settle for that.
Posted by Mark Thoma on Saturday, January 10, 2015 at 10:45 AM in Economics, Policy, Politics |
Posted by Mark Thoma on Saturday, January 10, 2015 at 12:06 AM in Economics, Links |
Wage Growth - or Lack of - Continues to Surprise, by Tim Duy: The December employment report, with its surprising combination of solid job gains and decelerating wage growth, leaves Fed policy up the air.
Headline nonfarm payrolls gained by 252k, while previous months were revised up a net 50k. Job growth continues to accelerate:
Note the acceleration in aggregate hours worked:
Such gains suggest the recent acceleration in GDP growth is real and likely to be sustained. From the household survey, we see that the unemployment rate continues to decline. Fed forecasts will once again soon be in jeopardy:
In the context of indicators previously identified by Federal Reserve Chair Janet Yellen:
Overall, the story is one of ongoing improvement in labor markets, including metrics of underemployment. Wage growth, however, nosedived during the month:
I would be wary of this read on wages - strikes me as an aberration that is likely to be violently reversed, but I also stick to what I wrote yesterday:
I believe that an acceleration of wage growth would do the trick, which is why this remains the data to watch in the employment report. If June rolls around with no inflation and no greater wage growth, the Fed will find it challenging to begin normalization. In that case, they would need to focus on the employment mandate or pivot to some financial stability story to justify a rate hike.
Bottom Line: Generally a very solid report. But the wage numbers present a dilemma for the Fed. Simply put, no wage growth means the Fed can't be particularly confident that inflation will trend toward target. Not that a rate hike was imminent in any event; Fed is still looking at June, but they need some more help from the data. Of course, June is still a long way off - we have five more employment reports before that meeting. Time enough for these numbers to turn around. Note that if the wage trend does reverse quickly, policy expectations would shift just as quickly.
Posted by Mark Thoma on Friday, January 9, 2015 at 12:21 PM in Economics, Fed Watch, Monetary Policy, Unemployment |
In case you missed the news. This is from Calculated Risk:
December Employment Report: 252,000 Jobs, 5.6% Unemployment Rate: From the BLS:
Total nonfarm payroll employment rose by 252,000 in December, and the unemployment rate declined to 5.6 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in professional and business services, construction, food services and drinking places, health care, and manufacturing.
...Eleven consecutive months over 200 thousand. Employment is now up 2.952 million year-over-year. ... For total employment, 2014 was the best year since 1999.
The change in total nonfarm payroll employment for October was revised from +243,000 to +261,000, and the change for November was revised from +321,000 to +353,000. With these revisions, employment gains in October and November were 50,000 higher than previously reported.
For private employment, 2014 was the best year since 1997. ...
The Labor Force Participation Rate declined in December to 62.7%. ... A large portion of the recent decline in the participation rate is due to demographics.
The Employment-Population ratio was unchanged at 59.2%... The unemployment rate declined in December to 5,6%.
This was above expectations of 245,000, and with the upward revisions to prior months, this was another strong report.
I'll have much more later ...
Posted by Mark Thoma on Friday, January 9, 2015 at 08:24 AM in Economics, Unemployment |
Ideological rigidity causes blindness to the facts:
Voodoo Time Machine, by Paul Krugman, Commentary, NY Times: Many of us in the econ biz were wondering how the new leaders of Congress would respond to the sharp increase in American economic growth that ... began last spring. After years of insisting that President Obama is responsible for a weak economy, they couldn’t say the truth — that short-run economic performance has very little to do with who holds the White House. So what would they say?
Well, I didn’t see that one coming: They’re claiming credit. Never mind the fact that all of the good data refer to a period before the midterm elections. Mitch McConnell, the new Senate majority leader, says ... that growth reflected “the expectation of a new Republican Congress.”
The response of the Democratic National Committee — “Hahahahahahaha” — seems appropriate. I mean, talk about voodoo economics: Mr. McConnell is claiming not just that he can create prosperity without, you know, actually passing any legislation, but that he can reach back in time and create prosperity before even taking power. ...Mr. McConnell’s self-aggrandizement is ... scary ... because it’s a symptom of his party’s epistemic closure. Republicans know many things that aren’t so, and no amount of contrary evidence will get them to change their minds. ... Congress is now controlled by men who never acknowledge error, let alone learn from their mistakes.
In some cases, they may not even know that they were wrong. After all, conservative news media are not exactly known for their balanced coverage; if your picture of ... health reform is ... based on Fox News, you probably have a sense that it has been a vast disaster, even though the reality is one of success...
The main point, however, is that we’re looking at a political subculture in which ideological tenets are simply not to be questioned... Supply-side economics is valid no matter what actually happens to the economy, guaranteed health insurance must be a failure even if it’s working, and anyone who points out the troubling facts is ipso facto an enemy.
And we’re not talking about marginal figures. You sometimes hear claims that the old-fashioned Republican establishment is making a comeback, that Tea Party extremists are on the run and we can get back to bipartisan cooperation. But that is a fantasy. We can’t have meaningful cooperation when we can’t agree on reality, when even establishment figures in the Republican Party essentially believe that facts have a liberal bias.
Posted by Mark Thoma on Friday, January 9, 2015 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Friday, January 9, 2015 at 12:06 AM in Economics, Links |
Volatile Week Ahead of Employment Report, by Tim Duy: At the moment, there are many different competing threads in the tapestry of monetary policy, with another thread entering the pattern with tomorrow's employment report. In short, the Fed is balancing clear evidence of accelerating US activity in the back half of 2014 against the implications of declining oil prices and a host of international weaknesses that are roiling financial markets. The reality of volatility in asset prices was on full display this week. The Fed desire to begin normalizing policy with a rate hike in the middle of this year certainly appears in jeopardy. They very much need continued solid data on the US side of the equation to push forward with their plans.
Early 2015 US data in the form of ISM reports provides little new guidance. While the measures slipped from recent high, I would be hard-pressed to say that the underlying trend has changed after considering the volatility of this data:
Likewise, initial unemployment claims continue to hover below pre-recession lows, signaling solid labor demand:
Plunging gasoline prices will almost certainly bolster consumer confidence:
The Fed anticipates that declining energy prices will have a net positive impact on the economy. Via the minutes of the most recent FOMC meeting:
In their discussion of the foreign economic outlook, participants noted that the implications of the drop in crude oil prices would differ across regions, especially if the price declines affected inflation expectations and financial markets; a few participants said that the effect on overseas employment and output as a whole was likely to be positive. While some participants had lowered their assessments of the prospects for global economic growth, several noted that the likelihood of further responses by policymakers abroad had increased. Several participants indicated that they expected slower economic growth abroad to negatively affect the U.S. economy, principally through lower net exports, but the net effect of lower oil prices on U.S. economic activity was anticipated to be positive.
I tend agree that the net impact will be positive, but note that the negative impacts will be fairly concentrated and easy for the media to sensationalize, while the positive impacts will be fairly dispersed. We all know what is going to happen to rig counts, high-yield energy debt, and the economies of North Dakota and at least parts of Texas. "Kablooey," I think, is the technical term. Easy media fodder. Much more difficult to see the positive impact spread across the real incomes of millions of households, with particularly solid gains at the lower ends of the income distribution. This will be most likely revealed in the aggregate data and be much less newsworthy.
The decline in energy prices, combined with the stronger dollar, confounds the Fed's inflation outlook, but for now they seem content to assume the impacts are transitory:
Participants generally anticipated that inflation was likely to decline further in the near term, reflecting the reduction in oil prices and the effects of the rise in the foreign exchange value of the dollar on import prices.Most participants saw these influences as temporary and thus continued to expect inflation to move back gradually to the Committee's 2 percent longer-run objective as the labor market improved further in an environment of well-anchored inflation expectations.
The Fed also, at least for now, is choosing to heavily discount market-based measures of inflation expectations:
Survey-based measures of longer-term inflation expectations remained stable, although market-based measures of inflation compensation over the next five years, as well as over the five-year period beginning five years ahead, moved down further over the intermeeting period.Participants discussed various explanations for the decline in market-based measures, including a fall in expected future inflation, reductions in inflation risk premiums, and higher liquidity and other premiums that might be influencing the prices of Treasury Inflation-Protected Securities and inflation derivatives.Model-based decompositions of inflation compensation seemed to support the message from surveys that longer-term inflation expectations had remained stable, although it was observed that these results were sensitive to the assumptions underlying the particular models used. It was noted that even if the declines in inflation compensation reflected lower inflation risk premiums rather than a reduction in expected inflation, policymakers might still want to take them into account because such changes could reflect increased concerns on the part of investors about adverse outcomes in which low inflation was accompanied by weak economic activity. In the end, participants generally agreed that it would take more time and analysis to draw definitive conclusions regarding the recent behavior of inflation compensation.
For example, the Cleveland Federal Reserve measure of inflation expectations over the next ten years was 1.83% in December, within spitting distance of the Fed's target. This kind of analysis, combined with survey-based measures, provides the Fed with a great deal of comfort regarding the inflation situation.
That said, inflation remains below target and, importantly, was decelerating before the impact of lower energy prices worked its way through the economy:
Shouldn't this alone keep any talk of rate hikes at bay? You might think so, but the Fed already believed there was a good chance that they would raise interest rates while core-inflation was below target:
With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time.
So what is the bar for "reasonably confident"? I believe that an acceleration of wage growth would do the trick, which is why this remains the data to watch in the employment report. If June rolls around with no inflation and no greater wage growth, the Fed will find it challenging to begin normalization. In that case, they would need to focus on the employment mandate or pivot to some financial stability story to justify a rate hike.
Jon Hilsenrath offers a potential interpretation of the implications of the rally at the long end of the Treasury yield curve:
If falling yields are a reflection of diminishing inflation prospects, as is typically the case, it ought to prompt the Fed to hold off on raising short-term interest rates in the months ahead. If, on the other hand, lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner or more aggressively than planned.
The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made at length in a speech in December. He argued the Fed had the wrong reaction to lower long rates in the 2000s, a mistake that might have contributed to the housing boom that ended disastrously.
I wrote about this last month, coming to the conclusion:
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.
I think the late-90's is a better comparator to the current envrionment, but that will take another post to deal with. For the moment, I will add that San Francisco Federal Reserve President John Williams hinted that current action in the bond market is in fact telling a less hawkish story. Via Greg Robb at MarketWatch:
Williams said he thinks a rate hike this year will be appropriate, but added he is in "no rush" to tighten. He said that mid-2015 is a reasonable guess of when the Fed will first ask "should we do it now or wait a little longer."
I have interpreted Williams remarks in the past as pointing at a June rate hike. Arguably, here he hedges and says June is when they should start considering the rate hike. Perhaps falling Treasury yields are having the traditional impact on Fed thinking after all.
Bottom Line: Fed wants to begin normalizing policy, but sees a murkier path compared to even just last month. They need hard US data to overwhelm the oil/international driven fears. An acceleration of wage growth would help put some light on the path they want to follow.
Posted by Mark Thoma on Thursday, January 8, 2015 at 12:00 PM in Economics, Fed Watch, Monetary Policy |
Today’s Essay at Trying to Understand Current FedThink: Daily Focus, by Brad DeLong: The “more thoughts about this” I promised earlier below…
Jon Hilsenrath: Could Lower 10-Year Yields Spark A More Aggressive Fed?:
“Falling long-term interest rates pose a quandary for Federal Reserve officials….
…If falling yields are a reflection of diminishing inflation prospects… it ought to prompt the Fed to hold off on raising short-term interest rates…. If… lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner…. The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made….
The Fed’s next policy meeting is three weeks away. It is clear officials will spend a considerable time debating the correct response to a perplexing lurch down in long-term rates. ...
Our current remarkably-low long-term interest rates has three possible interpretations:
Ms. Market expects currently-planned near-term Fed policy to produce a very weak economy for a long time to come, and hence very low interest rates in the out years. Ms. Market is correct. In this case, low long-term interest rates are a signal that the Federal Reserve’s current liftoff plans are a mistake and should be revisited.
Ms. Market expects currently-planned near-term Fed policy to produce a very weak economy for a long time to come, and hence very low interest rates in the out years. Ms. Market is wrong. In this case, low long-term interest rates are not a signal that the Federal Reserve’s current liftoff plans are a mistake and should be revisited. Rather, the Federal Reserve should act as in (3).
Ms. Market expects currently-planned near-term Fed policy to produce a normal economy in the out-years, but the U.S. Treasury market has an unusually small or negative term premium because of the large number of foreign investors seeking U.S.-based political and economic risk insurance via holdings of U.S. Treasuries. In this case, low long-term interest rates are inappropriately stimulative and run the risk of generating an overheating economy, and the proper response by the Federal Reserve is to announce that it will raise interest rates sooner and faster in order to push long-term rates to where they need to be for a sustainable Goldilocks continued recovery.
The Federal Reserve strongly believes that Ms. Market has no information about the future course of the macroeconomy that the Federal Reserve does not have–that (1) is simply unthinkable. That leaves (2)–Ms. Market thinks the Federal Reserve’s currently-planned near-term policy path is risking another lost decade, but Ms. Market is wrong–or (3)–long-term rates have an anomalously-low term premium because of foreign-investor demand.
A glance at the graph above would seem to rule out (3): 10-Yr breakeven inflation has fallen from 2.5%/year just before the taper tantrum to 1.6%/year today, while the TIPS has risen from -0.7%/year to +0.4%/year today. If it were (3), the surge of foreign demand ought to have put downward pressure on both nominal Treasuries and TIPS, leaving the breakeven largely unchanged. That is not what has happened. If the Federal Reserve wants to hold to (3), therefore, it needs to add to it:
3′. Something else weird and unrelated has happened in the market for TIPS.
While that is possible, it is disfavored by Occam’s Razor.
Thus Dudley seems to be chasing down a red herring. The interpretation he wants to put forward ought to be this:
Today Ms. Market expects inflation over the next ten years to be 0.9%/year less than it expected it to be back in June 2013. But we know better: the economy is actually much stronger than Ms. Market thinks.
Coming from a Federal Reserve that has overestimated the future strength of the economy in every single quarter since the start of 2007, that is not a terribly reassuring posture for it to take.
Posted by Mark Thoma on Thursday, January 8, 2015 at 10:35 AM in Economics, Monetary Policy |
Laurent Belsie in the NBER Digest:
The Link between High Employment and Labor Market Fluidity: U.S. labor markets lost much of their fluidity well before the onset of the Great Recession, according to Labor Market Fluidity and Economic Performance (NBER Working Paper No. 20479). The economy's ability to move jobs quickly from shrinking firms to young, growing enterprises slowed after 1990. Job reallocation rates fell by more than a quarter. After 2000, the volume of hiring and firing - known as the worker reallocation rate - also dropped. The decline was broad-based, affecting multiple industries, states, and demographic groups. The groups that suffered the most were the less-educated and the young, particularly young men.
"The loss of labor market fluidity suggests the U.S. economy became less dynamic and responsive in recent decades," authors Steven J. Davis and John Haltiwanger conclude. "Direct evidence confirms that U.S. employers became less responsive to shocks in recent decades, not that employer-level shocks became less variable."
Many factors contributed to the decline in job and worker reallocation rates, among them a shift to older companies, an aging workforce, changing business models and supply chains, the effects of the information revolution on hiring, and government policies.
About a quarter of the decline in job reallocation can be explained by the decline in the formation of young firms in the U.S. From the early 1980s and until about 2000, retail and services accounted for most of the decline in job reallocation. This occurred even though jobs shifted away from manufacturing and toward retail, where job creation is normally more dynamic and worker turnover more pronounced. One reason for the slowdown in turnover was the growing importance of big box chains in the retail sector. The authors note that other studies find that jobs are more durable in larger retail firms, and their workers are more productive than workers at the smaller stores these retailers replaced.
Fewer layoffs and more employment stability are generally considered positive trends and natural outgrowths of an aging workforce. The flip side of this equation, however, is that slower job and worker reallocation mean slower creation of new jobs, putting the jobless, including young people, at a heightened risk of long-term unemployment. These developments also slow job advancement and career changes, which are associated with boosts in wages.
This is of particular significance since 2000, when the concentration of declines in job reallocation rates and the employment share of young firms shifted from the retail sector to high-tech industries.
"These developments raise concerns about productivity growth, which has close links to creative destruction and factor reallocation in prominent theories of innovation and growth and in many empirical studies," the authors write.
Government regulation also played a role in slowing job and worker reallocation rates. In 1950, under five percent of workers required a government license to hold their job; by 2008, the percentage had risen to 29 percent. Add in government certification and the share rises to 38 percent. Wrongful discharge laws make it harder to fire employees. Federal and state laws protect classes of workers based on race, religion, gender, and other attributes. Minimum-wage laws and the heightened importance of employer-provided health insurance also make job changes less frequent.
The authors study the effects of the decline in job and worker reallocation rates on employment rates by gender, education, and age, using state-level data. They find that states with especially large declines in labor market fluidity also experienced the largest declines in employment rates, with young and less-educated persons the most adversely affected.
"...if our assessment is correct," the authors conclude, "the United States is unlikely to return to sustained high employment rates without restoring labor market fluidity."
Posted by Mark Thoma on Thursday, January 8, 2015 at 10:03 AM in Academic Papers, Economics, Unemployment |
Posted by Mark Thoma on Thursday, January 8, 2015 at 12:06 AM in Economics, Links |
It didn't take Republicans long to begin their assault on Social Security:
Getting It Wrong on Disability Insurance, by Kathy Ruffing, CBPP: I’ve explained that a new House rule will make it harder to reapportion payroll taxes between Social Security’s retirement and Disability Insurance (DI) trust funds to avert a one-fifth cut in benefits to severely impaired DI recipients in late 2016. In a revealing statement, co-sponsor Representative Tom Reed (R-NY) says the change is designed to prevent Congress from “raiding Social Security to bail out a failing federal program.” He’s doubly wrong.
First, far from “failing,” DI has grown mostly in response to well-understood demographic and program factors like the aging of the baby boom, and the program’s trustees have long anticipated the need to replenish the trust fund next year... Second, DI isn’t distinct from Social Security; it’s an essential part of Social Security.
Social Security is much more than a retirement program. It pays modest but guaranteed benefits when someone with a steady work history dies, retires, or becomes severely disabled. ...
Statements like Representative Reed’s implicitly attempt to pit Social Security retirement and disability beneficiaries against each other. ...
Posted by Mark Thoma on Wednesday, January 7, 2015 at 02:01 PM in Economics, Politics, Social Insurance, Social Security |
After harming the recovery from the Great Recession -- and making it harder for the unemployed to find jobs -- through austerity, blocking jobs bills, and standing in the way of additional stimulus measures, Republicans are trying to take credit for the recovery. They made things worse, and when they stopped doing harmful things, the economy improved and they want credit for that:
The new Senate majority leader, Mitch McConnell, suggested earlier today that the Republican Party deserves credit for recent data showing that the economic recovery has picked up speed. ... Mr. McConnell is claiming credit for a recovery based solely on the fact that Republicans have just taken control of both houses of Congress...
Here’s what Mr. McConnell said on the floor this morning:
“After so many years of sluggish growth, we’re finally starting to see some economic data that can provide a glimmer of hope. The uptick appears to coincide with the biggest political change of the Obama Administration’s long tenure in Washington: the expectation of a new Republican Congress.”
That deserves ridicule. Republicans were terribly wrong about Federal Reserve policy, just as wrong about austerity and the confidence fairy, yet here they are once again telling us that the confidence fairy rather than the end of their awful policy is responsible for the recovery.
Posted by Mark Thoma on Wednesday, January 7, 2015 at 10:29 AM in Economics, Fiscal Policy, Politics |
Simon Wren-Lewis is "fed up":
Sachs and the age of diminished expectations: I do not normally talk much about the US economy, because there are so many others writing articles and posts that can do so with more authority. But I am getting increasingly fed up with people telling me that US growth disproves the idea that austerity is bad for you at the Zero Lower Bound (ZLB). Jeffrey Sachs just joins a long list.
Of course the proper way to tackle this is as Paul Krugman does. As he says other stuff happens (like a large fall in the US savings ratio in 2013), so you need to go beyond a single country and look at lots of data. However this might leave the impression that somehow the US case is unusual and does not fit a Keynesian story. In this respect I did a simple exercise...
After presenting his exercise -- he compares a counterfactual where there was no austerity to the actual austerity driven path for the US -- he concludes:
With recent US experience, there is no case against Keynesian analysis to answer.
This suggests to me two things. First, lots of people are desperate to show that critics of austerity at the ZLB are wrong, and are prepared to make nonsense arguments to that end. This may be particularly true if you very publicly proclaimed the need for austerity in 2010 (note the co-author: HT John McHale). Second, it is a sad day when anyone thinks that 2.3% growth is “brisk” when we are recovering from a deep recession and interest rates have remained at the ZLB. It is so very dangerous when these diminished expectations become internalised by the elite.
As he says, we also need to look across countries, and he has presented lots of evidence on the harm austerity has done to the UK economy.
Posted by Mark Thoma on Wednesday, January 7, 2015 at 09:19 AM in Economics, Fiscal Policy |
Posted by Mark Thoma on Wednesday, January 7, 2015 at 12:06 AM in Economics, Links |
This was in the daily links not too long ago, but just in case it was missed (it is from the Growth Economics blog):
Job Quality is about Policies, not Technology, by Dietz Vollrath: Nouriel Roubini posted an article titled “Where Will All the Workers Go?”... The worry here is that technology will replace certain jobs (particularly goods-producing jobs) and that there will literally be nothing for those people to do. They will presumably exit the labor market completely and possibly need permanent income support.
Let’s quickly deal with the “lump of labor” fallacy sitting behind this. ... We’ve been creating new kinds of jobs for two hundred years. ... The economy is going to find something for these people to do. The question is what kind of jobs these will be.
Will they be “bad jobs”? McJobs at retail outlets... We can worry about the quality of jobs, but the mistake here is to confound “good jobs” with manufacturing or goods-producing jobs. Manufacturing jobs are not inherently “good jobs”. There is nothing magic about repetitively assembling parts together. You think the people at Foxconn have good jobs? There is no greater dignity to manufacturing than to providing a service. Cops produce no goods. Nurses produce no goods. Teachers produce no goods.
Manufacturing jobs were historically “good jobs” because they came with benefits that were not found in other industries. Those benefits – job security, health care, regular raises – have nothing to do with the dignity of “real work” and lots to do with manufacturing being an industry that is conducive to unionization. The same scale economies that make gigantic factories productive also make them relatively easy places to organize. ... To beat home the point, consider that what we consider “good” service jobs – teacher, cop – are also heavily unionized. Public employees, no less.
If you want people to get “good jobs” – particularly those displaced by technology – then work to reverse the loss of labor’s negotiating power relative to ownership. Raise minimum wages. Alleviate the difficulty in unionizing service workers.
You want to smooth the transition for people who are displaced, and help them move into new industries? Great. Let’s have a discussion about our optimal level of social insurance and support for training and education. ...
Any job can be a “good job” if the worker and employer can coordinate on a good equilibrium. Costco coordinates on a high-wage, high-benefit, high-effort, low-turnover equilibrium. Sam’s Club coordinates on a low-wage, low-benefit, low-effort, high-turnover equilibrium. Both companies make money, but one provides better jobs than the other. So as technology continues to displace workers, think about how to get *all* companies to coordinate on the “good” equilibrium rather than pining for lost days of manly steelworkers or making the silly presumption that we will literally run out of things to do.
Posted by Mark Thoma on Tuesday, January 6, 2015 at 11:52 AM in Economics, Income Distribution, Unemployment |
John Kay at the FT:
In 1920, the 1 per cent ... accounted for 15-20 per cent of total gross income in developed countries. ... In the 50 years that followed, the share of the 1 per cent fell almost everywhere by about half... During that half century, public spending on health, education and especially social benefits increased; taxation became more burdensome and more progressive. The forces of equalisation were powerful indeed. ...
From 1970, the egalitarian trend came to an end everywhere ... principally the result of two interrelated causes: the growth of the finance sector; and the explosion of the remuneration of senior executives. ...
These effects have not been seen in countries, such as France and Germany, that have proved more resistant to financialisation. It is in Britain and the US, which have experienced the most extensive growth in the sector, where they have made their greatest impact.
Speaking of France and attempts to turn back the forces of equality such as public spending on education, health, generous social insurance, and highly progressive taxation:
About That French Time Bomb, by Paul Krugman: ... It’s really amazing how much bad press France gets — and not just from goldbugs and the like. It was the Economist that declared, on its cover more than two years ago, that France was the time bomb at the heart of Europe. And of course the inflationistas were even more certain that France faced imminent doom; for example, John Mauldin proclaimed that France was in fact worse than Greece.
Now that time bomb — which has actually had better economic growth since 2007 than Britain — can borrow at an interest rate of only 0.8 percent.
It seems obvious to me that the bad-mouthing of France was and is essentially political. Of course France has big problems; who doesn’t? But the real sin of the French body politic is its refusal to buy into the notion that the welfare state must be sharply downsized if not dismantled; hence the continuing warnings that France is doomed, doomed I tell you.
And this in turn reflects the larger issue of what calls for austerity are really about. Can we imagine a clearer demonstration that they’re not really about appeasing bond vigilantes?
Posted by Mark Thoma on Tuesday, January 6, 2015 at 10:27 AM in Economics, Income Distribution |
An hypothesis about jobless recoveries:
Grown-up business cycles, by Benjamin Pugsley and Aysegul Sahin, FRBNY: We document two striking facts about U.S. firm dynamics and interpret their significance for aggregate employment dynamics. The first observation is the steady decline in the firm entry rate over the last thirty years, and the second is the gradual shift of employment from younger to older firms over the same period. Both observations hold across industries and geographies. We show that, despite these trends, firms’ life-cycle dynamics and business-cycle properties have remained virtually unchanged. Consequently, the reallocation of employment toward older firms results entirely from the cumulative effect of the thirty-year decline in firm entry. This “start-up deficit” has both an immediate and a delayed (by shifting the age distribution) effect on aggregate employment dynamics. Recognizing this evolving heterogeneity is crucial for understanding shifts in aggregate behavior of employment over the business cycle. With mature firms less responsive to business cycle shocks, the cyclical component of aggregate employment growth diminishes with the increasing share of mature firms. At the same time, the trend decline in firm entry masks the diminishing cyclicality during contractions and reinforces it during expansions, which generates the appearance of jobless recoveries where aggregate employment recovers slowly relative to output. [Download Full text.]
This may be part of the explanation for jobless recoveries, but I suspect there is more to it than this.
Posted by Mark Thoma on Tuesday, January 6, 2015 at 10:26 AM in Economics, Unemployment |
Posted by Mark Thoma on Tuesday, January 6, 2015 at 12:06 AM in Economics, Links |
Me, at MoneyWatch, on the Republican's effort to institute dynamic scoring:
Do tax cuts partly pay for themselves?: Now that Republicans have taken control of the House and Senate, they are pushing to change how the Congressional Budget Office (CBO) and the Joint Tax Committee (JTC) evaluate tax legislation.
The effort is being made on two fronts. The first is an attempt by many Republicans to replace the director of the CBO, Doug Elmendorf, with someone more sympathetic to a new approach to evaluating the budgetary impact of proposed legislation. The second is a push from Rep. Paul Ryan, R-Wisconsin, who will take over as chair of the to the Ways and Mean Committee in January, to implement a new rule that would require the CBO and JCT to implement the alternative approach.
At issue is what is known as "dynamic scoring." ...
[I should note that this was written before this appeared.]
Posted by Mark Thoma on Monday, January 5, 2015 at 08:35 AM in Economics, Politics, Taxes |
Mary Daly and Bart Hobijn of the SF Fed:
Why Is Wage Growth So Slow?, by Mary C. Daly and Bart Hobijn, FRBSF Economic Letter: Abstract: Despite considerable improvement in the labor market, growth in wages continues to be disappointing. One reason is that many firms were unable to reduce wages during the recession, and they must now work off a stockpile of pent-up wage cuts. This pattern is evident nationwide and explains the variation in wage growth across industries. Industries that were least able to cut wages during the downturn and therefore accrued the most pent-up cuts have experienced relatively slower wage growth during the recovery.
A prominent feature of the Great Recession and subsequent recovery has been the unusual behavior of wages. In standard economic models, unemployment and wage growth are tightly connected, moving at nearly the same time in opposite directions: As unemployment rises, wage growth slows, and vice versa. Since 2008 this relationship has slipped. During the recession, wage growth slowed much less than expected in response to the sharp increase in unemployment (Daly, Hobijn, and Lucking 2012). And so far in the recovery, wage growth has remained slow, despite substantial declines in the unemployment rate (Daly, Hobijn, and Ni 2013).
One explanation for this pattern is the hesitancy of employers to reduce wages and the reluctance of workers to accept wage cuts, even during recessions, a behavior known as downward nominal wage rigidity. Daly and Hobijn (2014) argue that this behavior affected the aggregate relationship between the unemployment rate and wage growth during the past three recessions and recoveries and has been especially pronounced during and after the Great Recession.
This Economic Letter examines whether the effects of wage rigidities over the recent recession and recovery can also be seen across industries. In particular, we consider whether industries with higher or lower degrees of wage flexibility have seen different evolutions of wage growth and unemployment. Our findings suggest that industries with the most downwardly rigid wage structures before the recession have seen the slowest wage growth during the recovery, conditional on changes in unemployment. In contrast, industries with fairly flexible wage structures have seen unemployment and wage growth move more closely together. These findings provide cross-industry evidence that downward nominal wage rigidities have played an important role in the modest recovery of wages in recent years.
Downward nominal wage rigidities, wage growth, and unemployment
Downward nominal wage rigidities are a well-documented feature of the U.S. labor market (see, for example, Akerlof, Dickens, and Perry 1996 and Card and Hyslop 1996). With that in mind, Daly and Hobijn (2014) introduce a model to illustrate how such rigidities can affect the relationship between unemployment and wage growth. Downward rigidities prevent businesses from reducing wages as much as they would like following a negative shock to the economy. This keeps wages from falling, but it also further reduces the demand for workers, contributing to the rise in unemployment. Accordingly, the higher wages come with more unemployment than would occur if wages were flexible and could be fully reduced.
As the economy recovers, the situation reverses and the pressure to cut wages dissipates. However, the accumulated stockpile of pent-up wage cuts remains and must be worked off to put the labor market back in balance. In response, businesses hold back wage increases and wait for inflation and productivity growth to bring wages closer to their desired level. Since it takes some time to fully exhaust the pool of wage cuts, wage growth remains low even as the economy expands and the unemployment rate declines. Daly and Hobijn (2014) show that this mechanism causes a bending of the wage Phillips curve—the curve that characterizes the relationship between unemployment and wage growth.
Wage Phillips curve for all civilian workers, 2008–14
Figure 1 shows that the bending of the Phillips curve in our model matches the data for the United States during the Great Recession and subsequent recovery. This same pattern has held in the past three recessions (Daly and Hobijn 2014). The figure shows the relationship between wage growth on the vertical axis, measured as the four-quarter moving average of the four-quarter growth rate of wages and salaries in the employment cost index, and the 12-month moving average of the unemployment rate on the horizontal axis. The figure covers the period from the first quarter of 2008 through the third quarter of 2014. The arrows show the path of the observations over time, and the size of the dots is proportional to the fraction of workers that report no wage changes over the past year.
The first part of the curve shows the behavior of wage growth and the unemployment rate during the recession, when the unemployment rate increased by about 5 percentage points and wage growth slowed by about 2 percentage points. The second part of the curve shows that during the subsequent recovery wage growth did not increase as much as it declined during the downturn. The result is that the most recent reported wage growth was 1 percentage point lower than it was at the same level of the unemployment rate when unemployment was rising. This difference is the result of the bending of the Phillips curve, which can be generated by wage rigidity as described in Daly and Hobijn (2014). The recent flattening of the Phillips curve is one reason wage growth has remained sluggish during the recent recovery despite substantial declines in unemployment.
Share of workers with frozen wages over past year
Source: FRBSF Wage Rigidity Meter.
Rigidity and wage growth across industries
If downward nominal wage rigidities are an important explanation for recent slow wage growth, we should see differential effects across industries. Although all industries have some rigidity in wages, the degree of rigidity varies greatly. Figure 2 shows the difference between two industries most affected by the Great Recession: construction and finance, insurance, and real estate (FIRE). The figure plots the 12-month moving average of the share of workers who had their wages fixed over the last year—the standard measure of wage rigidity taken from the FRBSF Wage Rigidity Meter: http://www.frbsf.org/economic-research/nominal-wage-rigidity/.
As the figure shows, both industries have some degree of frozen wages that move up and down over the business cycle, just like the national data. However, the level in the construction sector is almost always higher than in FIRE. In fact, with the exception of the late 1990s, the fraction of workers with their wages fixed from one year to the next, zero change, is substantially smaller in FIRE than in construction.
Wage Phillips curves by industry, 2008–14
Source: Bureau of Labor Statistics.
The question for our analysis is whether such sectoral differences can further illuminate the relationship between wage growth and unemployment during the Great Recession and subsequent recovery. To examine this we turn again to the wage Phillips curve. Figure 3 shows the wage Phillips curves for the construction and FIRE sectors for 2008 through 2014. As in Figure 1, wage growth in each sector from the employment cost index is on the vertical axis and the industry-specific unemployment rate is on the horizontal axis. The arrows show the path of the observations over time and the size of the markers reflects the share of workers that report no wage change over the past year.
Comparing the two shows that large wage stagnation in the construction sector changed the relationship between wage growth and labor market slack relative to the FIRE sector. More rigid wages in construction created a bend in the curve, consistent with the theory. This bend represents the fact that, while wage growth slowed when the unemployment rate rose, it has moved little as unemployment has declined. More specifically, although the 12-month moving average of the unemployment rate in the construction sector has declined from 20.9% in mid-2010 to 9.5% in the third quarter of 2014, wage growth has risen only 0.6 percentage point over the same period and currently stands at 1.4% per year.
One way to assess how much construction deviates from the normal relationship between unemployment and wage growth is to consider what wage growth was in construction at a comparable level of unemployment during the labor market downturn. This difference is shown in the figure as the red dashed line, which indicates that the most recent wage growth is 2.3 percentage points lower than at the beginning of the recession. This gap is a measure of the degree to which the wage Phillips curve is bent.
Notably, the shape of the curve in construction stands in stark contrast with that in FIRE, where wages are more flexible. FIRE wage growth fell precipitously as the unemployment rate rose. Once unemployment in the sector started to decline, wage growth accelerated. As of the third quarter of 2014, wage growth was actually 0.4 percentage point higher than it was the last time the unemployment rate was so low. Hence, FIRE does not show the curve bending associated with downward wage rigidities.
Wage rigidities and the bending of the Phillips curve
The relationship between the shape of the wage Phillips curve and the level of the pre-recession wage rigidities for construction and FIRE is indicative of a pattern that holds across the 15 major private industries for which we have wage growth data, shown in Figure 4. The figure plots the size of the wage growth gaps (vertical axis), which we used in Figure 3 to measure the degree of bending of the curve, in the third quarter of 2014 against the degree of wage rigidity in 2007 (horizontal axis). The figure confirms what the theory implies: Sectors where wages are more downwardly rigid are the ones with the largest bends in their wage price Phillips curves.
Importantly, this relationship between the level of wage rigidity and the degree of curve bending across industries is statistically significant. The dashed line plots the fitted regression line for this relationship, with each industry weighted by its size in terms of number of payroll employees. Cross-industry variation in the level of wage rigidity in 2007 accounts for 60% of the variation in the bending of the wage Phillips curve across sectors in this weighted regression. This industry-level evidence is consistent with the idea that the reluctance of employers to cut wages during the downturn has had a significant impact on the dynamics of wage growth and unemployment during the recovery.
National and cross-industry evidence shows that pent-up wage cuts reflecting downward nominal wage rigidities have been an important force during the Great Recession and subsequent recovery. The rigidity of wages in a number of sectors has shaped the dynamics of unemployment and wage growth and is likely to continue to do so until labor markets have fully returned to normal.
Mary C. Daly is a senior vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Bart Hobijn is a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco
Akerlof, George A., William T. Dickens, and George L. Perry. 1996. “The Macroeconomics of Low Inflation.” Brookings Papers on Economic Activity 1996(1).
Card, David, and Dean Hyslop. 1996. “Does Inflation ‘Grease the Wheels of the Labor Market’?” National Bureau of Economic Research Working Paper 5538.
Congressional Budget Office. 2012. The Budget and Economic Outlook: Fiscal Years 2012 to 2022. Washington, DC: Congressional Budget Office.
Daly, Mary C., and Bart Hobijn. 2014. “Downward Nominal Wage Rigidities Bend the Phillips Curve.” FRB San Francisco Working Paper 2013-08.
Daly, Mary C., Bart Hobijn, and Brian Lucking. 2012. “Why Has Wage Growth Stayed Strong?” FRBSF Economic Letter 2012-10 (April 2).
Daly, Mary C., Bart Hobijn, and Timothy Ni. 2013. “The Path of Wage Growth and Unemployment” FRBSF Economic Letter 2013-20 (July 15).
Posted by Mark Thoma on Monday, January 5, 2015 at 08:28 AM in Economics, Income Distribution, Unemployment |
Can President Obama take credit for the improving economy?:
Presidents and the Economy, by Paul Krugman, Commentary, NY Times: Suddenly, or so it seems, the U.S. economy is looking better. ...
The improving economy is surely one factor in President Obama’s rising approval rating. ... How much influence does ... the White House have on the economy,,,? The standard answer among economists ... is: not much. But is this time different?
To understand why economists usually downplay the economic role of presidents,... normally the Fed, not the White House, rules the economy. Should we apply the same rule to the Obama years?
For one thing, the Fed has had a hard time gaining traction ... because the aftermath of a huge housing and mortgage bubble has left private spending relatively unresponsive to interest rates. This time around, monetary policy really needed help from a temporary increase in government spending, which meant that the president could have made a big difference. And he did, for a while; politically, the Obama stimulus may have been a failure, but an overwhelming majority of economists believe that it helped mitigate the slump.
Since then, however, scorched-earth Republican opposition has more than reversed that initial effort. In fact, federal spending adjusted for inflation and population growth is lower now than it was when Mr. Obama took office...
There is, however, another sense in which Mr. Obama has arguably made a big difference. The Fed has had a hard time getting traction, but it has at least made an effort to boost the economy — and it has done so despite ferocious attacks from conservatives... Without Mr. Obama to shield its independence, the Fed might well have been bullied into raising interest rates, which would have been disastrous. So the president has indirectly aided the economy by helping to fend off the hard-money mob.
Last but not least,... the fact is his opponents have spent years claiming that his bad attitude — he has been known to suggest ... that some bankers have behaved badly — is somehow responsible for the economy’s weakness. Now that he’s presiding over unexpected economic strength, they can’t just turn around and assert his irrelevance.
So is the president responsible for the accelerating recovery? No. Can we nonetheless say that we’re doing better than we would be if the other party held the White House? Yes. Do those who were blaming Mr. Obama for all our economic ills now look like knaves and fools? Yes, they do. And that’s because they are.
Posted by Mark Thoma on Monday, January 5, 2015 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Monday, January 5, 2015 at 12:06 AM in Economics, Links |
Let this be the year when we put a proper price on carbon: The case for carbon taxes has long been compelling. With the recent steep fall in oil prices and associated declines in other energy prices it is overwhelming. There is room for debate about the size of the tax and about how the proceeds should be deployed. But there should be no doubt that starting from the current zero tax rate on carbon, increased taxation would be desirable.
The core of the case for taxation is the recognition that those who use carbon-based fuels or products do not bear all the costs of their actions. ...
Progressives who are concerned about climate change should rally to a carbon tax as the most important step for mobilising against it. Conservatives who believe in the power of markets should favour carbon taxes on market principles. .... Now is the time.
Posted by Mark Thoma on Sunday, January 4, 2015 at 09:42 AM in Economics, Environment, Market Failure, Oil |
Who bears risk?: There's one aspect of the collapse of City Link that deserves more attention than it gets - that it undermines the conventional idea that firms' owners are risk-takers.
Better Capital's stake in the firm took the firm of a secured loan, which means they'll get first dibs on its residual value. Thanks to this, Jon Moulton, Better Capital's manager claims to stand to lose only £2m - which is a tiny fraction of his £170m wealth.
By contrast, many of City Link's drivers had to supply capital to the firm in the form of paying for uniforms and van livery, and are unsecured creditors who might not get back what they are owed. Many thus face a bigger loss as a share of their wealth than Mr Moulton. In this sense, it is workers rather than capitalists who are risk-takers. This point is not, of course, specific to City Link. ...
There are two implications of all this. First, it means that the idea that capitalists are brave entrepreneurs who deserve big rewards for taking risk is just rubbish. ... Secondly, it suggests that ownership might in some cases lie in the wrong hands. ... This is yet another case for worker ownership.
This in turn reminds us of a cost of inequality; sometimes, ownership is in the wrong hands simply because the most efficient owners can't afford to buy the firm.
All this poses the question: are there policy measures, other than worker ownership, which could ensure a more equitable bearing of risk? One answer would be policies to achieve serious full employment. Full employment would allow workers to reject job offers which expose them to excessive risk....
Secondly, we need a more redistributive welfare state. The welfare state is not a scheme whereby "we" pay for "scroungers". It is instead an insurance mechanism. It is a means of pooling human capital risk... The fact that many workers suffer a massive drop in income when they lose their jobs suggests the welfare state isn't providing enough insurance.
Of course, all these ways of improving risk-bearing fall outside the Overton window.
Posted by Mark Thoma on Sunday, January 4, 2015 at 09:42 AM in Economics, Social Insurance |
Posted by Mark Thoma on Sunday, January 4, 2015 at 12:06 AM in Economics, Links |
"Rather than point fingers outward, we should look inward":
The Measuring Sticks of Racial Bias, by Sendhil Mullainathan, NY Times: The deaths of African-Americans at the hands of the police in Ferguson, Mo., in Cleveland and on Staten Island have reignited a debate about race. Some argue that these events are isolated and that racism is a thing of the past. Others contend that they are merely the tip of the iceberg, highlighting that skin color still has a huge effect on how people are treated.
Arguments about race are often heated and anecdotal. As a social scientist, I naturally turn to empirical research for answers. As it turns out, an impressive body of research spanning decades addresses just these issues — and leads to some uncomfortable conclusions and makes us look at this debate from a different angle. ...
Posted by Mark Thoma on Saturday, January 3, 2015 at 10:33 AM in Economics |
In defence of NGDP targets: Tony Yates had recently written a couple of posts (here, and here, but see also the discussion with Andy Harless on the second) slamming the idea of NGDP targets. (From now on I assume this refers to targeting the level of NGDP.) Now you might think that NGDP targets do not need any support from lukewarm advocates like me, given all the supporters in the econ blogging world. That would be wrong, because - as Tony rightly says - most advocates of NGDP targets tend to argue in a model free way. Both he and I want to stay close to the academic literature, at least as a starting point.
I think Tony is wrong when he says that “the case for levels based targets – including NGDP levels targets – is, both practically and analytically, extremely weak”. In making such a claim, Tony should be very worried that one of the supporters of NGDP targets is Michael Woodford, who literally wrote the book on modern monetary theory. ...
After explaining, he concludes with:
Having said all this, it is great that Tony is opening up the discussion on the correct level, so we can get away from what often seems like faith based arguments for NGDP targets. I think the framework that he seems to have in mind is also the correct one: the ultimate policy target would be inflation (and the output gap: I would want a dual mandate), and NGDP would be an intermediate target to achieving welfare maximising paths. So I hope this discussion continues. My one last plea is that arguments make clear whether a NGDP targeting regime is being compared to some form of optimal policy, or policy as currently practiced: as I suggest here these are (unfortunately) different things.
Yates replies here.
Posted by Mark Thoma on Saturday, January 3, 2015 at 10:02 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Saturday, January 3, 2015 at 12:06 AM in Economics, Links |
Are happy days here again for the economy?: Just before Christmas Day, the Bureau of Economic Analysis updated its estimate of growth to 5 percent for 2014's third quarter, and it also revised second-quarter growth to 4.6 percent. Those very strong readings are a welcome acceleration over the very slow recovery from the Great Recession, and they've led many people to ask if happy days are here again.
Perhaps, but we have reasons to be wary as well...
Posted by Mark Thoma on Friday, January 2, 2015 at 09:27 AM in Economics |
There's more to the inequality story:
Twin Peaks Planet, by Paul Krugman, Commentary, NY Times: In 2014, soaring inequality in advanced nations finally received the attention it deserved, as Thomas Piketty’s “Capital in the Twenty-First Century” became a surprise (and deserving) best seller. ...
But that’s a story about developments within nations... You really want to supplement Piketty-style analysis with a global view...
So let me suggest that you look at a remarkable chart ... produced by Branko Milanovic... What Mr. Milanovic shows is that income growth since the fall of the Berlin Wall has been a “twin peaks” story. Incomes have ... soared at the top, as the world’s elite becomes ever richer. But there have also been huge gains for what we might call the global middle — largely consisting of the rising middle classes of China and India. ...
Now for the bad news: Between these twin peaks ... lies what we might call the valley of despond: Incomes have grown slowly, if at all, for ... the advanced-country working classes...
Furthermore..., soaring incomes at the top were achieved, in large part, by squeezing those below: by cutting wages, slashing benefits, crushing unions, and diverting a rising share of national resources to financial wheeling and dealing.
Perhaps more important..., the wealthy exert a vastly disproportionate effect on policy. And elite priorities — obsessive concern with budget deficits, with the supposed need to slash social programs — have done a lot to deepen the valley of despond. ...
The problem with these conventional leaders, I’d argue, is that they’re afraid to challenge elite priorities, in particular the obsession with budget deficits, for fear of being considered irresponsible. And that leaves the field open for unconventional leaders — some of them seriously scary — who are willing to address the anger and despair of ordinary citizens.
The Greek leftists who may well come to power there later this month are arguably the least scary of the bunch... Elsewhere, however, we see the rise of nationalist, anti-immigrant parties like France’s National Front and the U.K. Independence Party, or UKIP, in Britain — and there are even worse people waiting in the wings. ...
I’m not suggesting that we’re on the verge of fully replaying the 1930s. But I would argue that political and opinion leaders need to face up to the reality that our current global setup isn’t working for everyone..., that valley of despond is very real. And bad things will happen if we don’t do something about it.
Posted by Mark Thoma on Friday, January 2, 2015 at 12:24 AM in Economics, Income Distribution |
Posted by Mark Thoma on Friday, January 2, 2015 at 12:06 AM in Economics, Links |
Back before World War I ... there was a deflation caucus–a great mass of wealth committed to investments in long-term nominal bonds and in real estate rented out in long term leases at fixed nominal rates. This deflation caucus had a very strong material interest in the hardest of hard monies and, by virtue of its wealth, a dominant political voice.
Since every nominal asset comes with a nominal liability, arithmetic tells us that, as far as economic material interest is concerned, the soft money-caucus has as much at stake at the margin as does the hard-money caucus. But back before World War I a great deal of the soft-money caucus did not have the vote. Combine the restriction of the formal franchise with wealth’s dominance of the informal franchise and it is not surprising that–except in times of total war or revolution–hard money ruled in the North Atlantic core of the global economy from the days of Sir Isaac Newton to World War I. In between World Wars I and II ,as the material power of the hard money caucus ebbed, it made sense that its ideological power would wane only with a lag.
Since World War II, however, there has been no material hard-money caucus: all of the rich have broadly diversified portfolios. And everyone has the franchise. Since World War II, the stakes in the zero-sum hard-money soft-money debate are now very low. Since World War II, we all have a common interest in full employment and shared prosperity–we are all the 100%.
So whence come the many policy disasters since 2007? How are we to explain what has happened? We have managed to throw away between 5%-10% of the potential wealth of the North Atlantic, and we appear to have thrown it away permanently. How? Why? And why can’t we fix it?
And, of course, why haven’t we drawn the obvious and transparent lessons from the past seven years of what we need to do in order to keep this from happening again? Let me turn the microphone over to Paul Krugman...
Posted by Mark Thoma on Thursday, January 1, 2015 at 11:25 AM in Economics, Financial System |
Posted by Mark Thoma on Thursday, January 1, 2015 at 12:06 AM in Economics, Links |
On the Stupidity of Demand Deficient Stagnation: In my last post I wrote about “why recessions caused by demand deficiency when inflation is below target are such a scandalous waste. It is a problem that can be easily solved, with lots of winners and no losers. The only reason that this is not obvious to more people is that we have created an institutional divorce between monetary and fiscal policy that obscures that truth.” I suspect I often write stuff that is meaningful to me as a write it but appears obtuse to readers. So this post spells out what I meant. ...
Posted by Mark Thoma on Wednesday, December 31, 2014 at 09:43 AM in Economics, Fiscal Policy, Monetary Policy |
I'm pretty sure my dissertation advisor (Greg Duncan, a McFadden student at Berkeley) helped to create the model used to make the BART prediction discussed below (I think they used a program called QUAIL, and precursor to LIMDEP):
Here's What Economics Gets Right, by Noah Smith: Criticizing economics for not being scientific enough is a crime of which many of us -- I’ve done it -- are guilty. But there’s a right way to do it and a wrong way to do it. Alex Rosenberg and Tyler Curtain, writing in the New York Times, have done it the wrong way.
Here are Rosenberg and Curtain:
Over time, the question of why economics has not (yet) qualified as a science has become an obsession among theorists, including philosophers of science like us...The trouble with economics is that it lacks the most important of science’s characteristics — a record of improvement in predictive range and accuracy...In fact, when it comes to economic theory’s track record, there isn’t much predictive success to speak of at all.
Economics doesn’t have predictive success, eh? This is something a lot of people claim, but once you look beyond the well-publicized fact that economists can’t predict recessions, you can see that the claim just isn’t true. Economics can predict plenty of things.
My favorite example is the story of Daniel McFadden and the BART...
Posted by Mark Thoma on Wednesday, December 31, 2014 at 09:42 AM in Econometrics, Economics |
Posted by Mark Thoma on Wednesday, December 31, 2014 at 12:06 AM in Economics, Links |
Musings on 25-54 Employment-to-Population Rates and the Macroeconomy: (1) If the US economy were operating at its productive potential, the share of 25 to 54-year-olds who are employed ought to be what it was at the start of 2000. Back then there were few visible pressures leading to rising inflation in the economy.
Does anybody disagree with that?
(2) Right now, 25 to 54-year-olds–both male and female–are employed at a rate lower by 5%-age points then they were at the start of 2000. That’s 6.5%, or 1/15, more 25-54 labor at work than we have today.
Does anybody disagree with that? ...
That's just the start (too hard to excerpt effectively -- there are three more points followed by two questions, five more points, then two more questions).
Posted by Mark Thoma on Tuesday, December 30, 2014 at 10:04 AM in Economics, Unemployment |
Danielle Kurtzleben, vox.com:
Damning court filings show Morgan Stanley pushed risky subprime mortgage lending:
- Court filings say Morgan Stanley, a major Wall Street bank, pushed subprime lender New Century into making riskier and riskier mortgage loans, the New York Times reports.
- The filings include damning emails, showing that Morgan Stanley employees knew about and even joked about some borrowers' inability to pay on their mortgages.
- The Justice Department is now investigating the connection between Morgan Stanley and New Century.
- The fines further tarnish the reputation of a big bank that, despite its heavy involvement in mortgage-backed securities, until recently had few crisis-related legal troubles.
Posted by Mark Thoma on Tuesday, December 30, 2014 at 10:04 AM in Economics, Housing |