- Why We’re in a New Gilded Age - Paul Krugman
- Cable News Silences Women On The Economy - Media Matters
- I Am Perturbed by Kenneth Rogoff... - Brad DeLong
- The Continuing Saga of Sustained Secular Stagnation - Dean Baker
- The case for asset based reserve requirements - Thomas Palley
- Monetary Goals and Strategy - Charles Evans
- Minutes of the FOMC, March 18-19, 2014 - FRB
- The Absurdity of Fifth Third - Baseline Scenario
- Here Come the Robots? - Tim Taylor
- Who Bears “Federal Reserve Risk”? - House of Debt
- Low Inflation and Structural Illusions - Paul Krugman
- Stagnation Without End, Amen - Paul Krugman
Thursday, April 10, 2014
Wednesday, April 09, 2014
Traveling today. I'll post as (and if) I can, but probably no more blogging until tonight.
In case you missed this in today's links, Larry Bartels:
Rich people rule!, by Larry Bartels, Commentary, Washington Post: Everyone thinks they know that money is important in American politics. But how important? .. For decades, most political scientists have sidestepped that question... But now, political scientists are belatedly turning more systematic attention to the political impact of wealth, and their findings should reshape how we think about American democracy.
A forthcoming article ... by ... Martin Gilens and ... Benjamin Page marks a notable step in that process. ... They conclude that “economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while mass-based interest groups and average citizens have little or no independent influence.”
Average citizens have “little or no independent influence” on the policy-making process? This must be an overstatement of Gilens’s and Page’s findings, no?
Alas, no. In their primary statistical analysis, the collective preferences of ordinary citizens had only a negligible estimated effect on policy outcomes, while the collective preferences of “economic elites” ... were 15 times as important. ...
'Long-Term Unemployment Is Elevated Across All Education, Age, Occupation, Industry, Gender, And Racial And Ethnic Groups'
Who are the long-term unemployed? From Heidi Shierholz at the EPI:
Long-Term Unemployment Is Elevated Across All Education, Age, Occupation, Industry, Gender, And Racial And Ethnic Groups, by Heidi Shierholz: Today’s Economic Snapshot shows that long-term unemployment is elevated for workers at every education level. ... The long-term unemployment rate is between 2.9 and 4.3 times as high now as it was six years ago for all age, education, occupation, industry, gender, and racial and ethnic groups. Today’s long-term unemployment crisis is not at all confined to unlucky or inflexible workers who happen to be looking for work in specific occupations or industries where jobs aren’t available. Long-term unemployment is elevated in every group, in every occupation, in every industry, at all levels of education.
Elevated long-term unemployment for all groups, like we see today, means that today’s long-term unemployment crisis is not due to something wrong with these workers, it is due to the fact that businesses across the board simply haven’t needed to significantly increase hiring because they haven’t seen demand for their goods and services pick up enough to warrant it.
Nevertheless, Congress allowed federal unemployment insurance to expire at the end of 2013, and over two million workers have lost their unemployment benefits since then. In the first sign of progress in months, yesterday the Senate reinstated a temporary five-month extension of federal unemployment insurance. It will, however, face an uphill battle in the House. In considering this measure, the House should not ignore the fact that our long-term unemployment crisis is not the fault of individual unemployed workers failing to exert enough effort or flexibility in their job search. It is instead due to more than six years of weak hiring on the part of businesses, who simply don’t need more workers because they don’t have enough demand for their products.
- Rich people rule! - Larry Bartels
- Is There a Wonk Bubble? - Felix Salmon - Politico
- How poorer nations benefit from EU membership - vox
- Regulators Approve New Capital Rule - NYTimes.com
- As Demand Improves, Time to Focus More on Supply - Olivier Blanchard
- A Closer Look at Post-2007 Labor Force Participation Trends - macroblog
- Beveridge Curve Starting to Look a Little More Normal - WSJ
- In New Tack, I.M.F. Aims at Income Inequality - NYTimes.com
- Why We Need Long-term Unemployment Insurance - Treasury Blog
- Three Legs Good, One Leg Bad - Paul Krugman
- Global Warming Scare Tactics - NYTimes.com
- Will Real Interest Rates Bounce Back? - Tim Taylor
- Is Short-Term Unemployment a Better Predictor of Inflation? - Rortybomb
- The Real Problem with High-Frequency Trading - Uneasy Money
- Disability Insurance Basics - Baseline Scenario
- Sources of Federal Revenues, Explained - CBPP
- Monetary Policy Report - Narayana Kocherlakota
- Output gap, RIP - Chris Dillow
- When the definition of a recession matters - mainly macro
- Understanding Simpson's paradox using a graph - Andrew Gelman
- US warns China after renminbi depreciation - FT.com
Tuesday, April 08, 2014
Gauti Eggertson and Neil Mehotra have an interesting new paper:
A Model of Secular Stagnation, by Gauti Eggertsson and Neil Mehrotra: 1 Introduction During the closing phase of the Great Depression in 1938, the President of the American Economic Association, Alvin Hansen, delivered a disturbing message in his Presidential Address to the Association (see Hansen ( 1939 )). He suggested that the Great Depression might just be the start of a new era of ongoing unemployment and economic stagnation without any natural force towards full employment. This idea was termed the ”secular stagnation” hypothesis. One of the main driving forces of secular stagnation, according to Hansen, was a decline in the population birth rate and an oversupply of savings that was suppressing aggregate demand. Soon after Hansen’s address, the Second World War led to a massive increase in government spending effectively end- ing any concern of insufficient demand. Moreover, the baby boom following WWII drastically changed the population dynamics in the US, thus effectively erasing the problem of excess sav- ings of an aging population that was of principal importance in his secular stagnation hypothesis.
Recently Hansen’s secular stagnation hypothesis has gained increased attention. One obvious motivation is the Japanese malaise that has by now lasted two decades and has many of the same symptoms as the U.S. Great Depression - namely dwindling population growth, a nominal interest rate at zero, and subpar GDP growth. Another reason for renewed interest is that even if the financial panic of 2008 was contained, growth remains weak in the United States and unemployment high. Most prominently, Lawrence Summers raised the prospect that the crisis of 2008 may have ushered in the beginning of secular stagnation in the United States in much the same way as suggested by Alvin Hansen in 1938. Summers suggests that this episode of low demand may even have started well before 2008 but was masked by the housing bubble before the onset of the crisis of 2008. In Summers’ words, we may have found ourselves in a situation in which the natural rate of interest - the short-term real interest rate consistent with full employment - is permanently negative (see Summers ( 2013 )). And this, according to Summers, has profound implications for the conduct of monetary, fiscal and financial stability policy today.
Despite the prominence of Summers’ discussion of the secular stagnation hypothesis and a flurry of commentary that followed it (see e.g. Krugman ( 2013 ), Taylor ( 2014 ), Delong ( 2014 ) for a few examples), there has not, to the best of our knowledge, been any attempt to formally model this idea, i.e., to write down an explicit model in which unemployment is high for an indefinite amount of time due to a permanent drop in the natural rate of interest. The goal of this paper is to fill this gap. ...[read more]...
In the abstract, they note the policy prescriptions for secular stagnation:
In contrast to earlier work on deleveraging, our model does not feature a strong self-correcting force back to full employment in the long-run, absent policy actions. Successful policy actions include, among others, a permanent increase in inflation and a permanent increase in government spending. We also establish conditions under which an income redistribution can increase demand. Policies such as committing to keep nominal interest rates low or temporary government spending, however, are less powerful than in models with temporary slumps. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession.
I have a new "explainer" -- their term -- at Moneywatch:
Explainer: Why is deflation so harmful?, by Mark Thoma, CBS News: John Makin, writing for conservative-leaning think tank the American Enterprise Institute, warned on Monday that "Now is the time to preempt deflation." Conservatives are usually inflation hawks. So, why are some of them calling for "aggressive monetization" to avoid the deflation threat in the U.S. and Europe?
Deflation is an actual fall in prices, rather than just the inflation rate getting lower, which is call disinflation. Recall that the fear of deflation was the main reason the Federal Reserve instituted the first round of quantitative easing. What was the Fed so afraid of?
There are three main reasons to fear deflation. ...
Who’s to Blame for the Power Shift at the Fed?, by Mark Thoma, The Fiscal Times: Federal Reserve Board governor Jeremy Stein announced that he is stepping down at the end of May. That could leave the Board of Governors severely short-handed. Presently, three of the seven positions on the Board are open. There are nominations for two of the open positions, and the nominees, Stanley Fischer and Lael Brainard, await Senate confirmation. However, President Obama has not yet nominated anyone to fill the third open seat, and if Senate confirmation for Fischer and Brainard does not occur before June, then only three of the seven Board positions will be filled.
That will alter the balance of power on the committee responsible for setting monetary policy, the all-important Federal Open Market Committee. ...
One problem in filling the open positions on the Federal Reserve Board is that nominations have been blocked in the Senate, and Republicans have been particularly obstructionist. What is the reason for this?
In addition to the desire to block whatever this president tries to do as a way of obtaining political advantage, there are two factors that have helped to motivate the obstructionist tendencies. ...
- Asymmetric Stupidity - Paul Krugman
- Age Discrimination and the Great Recession - FRBSF
- The Anti-Abenomics Argument, in Full - WSJ
- Obamacare Increased Voluntary Part-Time, Involuntary Is Down - Dean Baker
- A Look at Three Critical Labor Market Trends - NYTimes.com
- The safety net catches the middle class more than the poor - Catherine Rampell
- Argument for Financial Transaction Tax Regains Footing - NYTimes.com
- The foxy Fed - Noahpinion
- Are Investors Less Confused About Real and Nominal Rates? - Dean Baker
- Long-Term Unemployment and Older Workers - Tim Taylor
- Why hasn’t democracy saved us from inequality? - Monkey Cage
- Where Our Federal Tax Dollars Go - CBPP
- Now is the time to preempt deflation - AEI
- Summers: Lack of Demand Creates Lack of Supply - CBPP
- Channels of Oligarchic Influence: An Example - Paul Krugman
- Point Forecast Accuracy Evaluation - No Hesitations
- High frequency trading - Jérémie Cohen-Setton
- The Evolution of Monetary Policy: More Art and Less Science - IMF Blog
- The Financial Vulnerability of Americans - House of Debt
- A New Idea on Bank Capital - Liberty Street Economics
Monday, April 07, 2014
For those of you who just can't get enough of Larry Summers (his talk starts at the 9:00 mark):
Class interests stand in the way of raising the inflation target:
Oligarchs and Money, by Paul Krugman, Commentary, NY Times: Econonerds eagerly await each new edition of the International Monetary Fund’s World Economic Outlook. ... This latest report ... in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries. ...
First, let’s talk about the case for higher inflation. ... It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices...
But ... would it be enough to get back to 2 percent, the official inflation target...? Almost certainly not.
You see, monetary experts ... thought that 2 percent was high enough to ... make liquidity traps ... very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.
Furthermore,... there’s strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash..., thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.
So why is the obvious unsayable? One answer is that serious people like to prove their seriousness by calling for tough choices and sacrifice (by other people, of course). They hate being told about answers that don’t involve more suffering.
And behind this attitude, one suspects, lies class bias. Doing what America did after World War II — using low interest rates and inflation to erode the debt burden — is often referred to as “financial repression,” which sounds bad. But who wouldn’t prefer modest inflation and a bit of asset erosion to mass unemployment? Well, you know who: the 0.1 percent... Modestly higher inflation, say 4 percent, would be good for the vast majority of people, but it would be bad for the superelite. And guess who gets to define conventional wisdom.
Now, I don’t think that class interest is all-powerful. Good arguments and good policies sometimes prevail even if they hurt the 0.1 percent — otherwise we would never have gotten health reform. But we do need to make clear what’s going on, and realize that in monetary policy as in so much else, what’s good for oligarchs isn’t good for America.
- An agenda for the IMF - Lawrence Summers
- What the Heck is “Calibration” Anyway? - Orderstatistic
- Eight (No, Nine!) Problems With Big Data - NYTimes.com
- The Front-Runners of Wall Street - NYTimes.com
- The future for real interest rates - Gavyn Davies
- The effectiveness of unconventional monetary policy - Econbrowser
- Economic liberty in the long run: Evidence from OECD countries - vox
- Prime-Working Age Men's Labor Force Participation - Calculated Risk
- Labor Force Participation Rate Update - Calculated Risk
- GDP and Well-Being, Positive and Normative - EconoSpeak
- Bronze, Silver, Gold, Platinum – Why Choose? - Economic Principals
- Thomas Piketty Unsuccessful Attempted Smackdown Watch - Brad DeLong
- Oligarchy and Monetary Policy - Paul Krugman
- The impact of bank capital requirements during an upswing - vox
- On intersectionality - Chris Dillow
Sunday, April 06, 2014
Superfluous Financial Intermediation: I'm only about halfway through Flash Boys but have already come across a couple of striking examples of what might charitably be called superfluous financial intermediation. This is the practice of inserting oneself between a buyer and a seller of an asset, when both parties have already communicated to the market a willingness to trade at a mutually acceptable price. If the intermediary were simply absent from the marketplace, a trade would occur between the parties virtually instantaneously at a single price that is acceptable to both. Instead, both parties trade against the intermediary, at different prices. The intermediary captures the spread at the expense of the parties who wish to transact, adds nothing to liquidity in the market for the asset, and doubles the notional volume of trade. ... [gives two examples] ....
Michael Lewis has focused on practices such as these because their social wastefulness and fundamental unfairness is so transparent. But it's important to recognize that most of the strategies implemented by high frequency trading firms may not be quite so easy to classify or condemn. For instance, how is one to evaluate trading based on short term price forecasts based on genuinely public information? I have tried to argue in earlier posts that the proliferation of such information extracting strategies can give rise to greater price volatility. Furthermore, an arms race among intermediaries willing to sink significant resources into securing the slightest of speed advantages must ultimately be paid for by investors. ...
I hope that the minor factual errors in Flash Boys won't detract from the book's main message, or derail the important and overdue debate that it has predictably stirred. By focusing on the most egregious practices Lewis has already picked the low-hanging fruit. What remains to be figured out is how typical such practices really are. Taking full account of the range of strategies used by high frequency traders, to what extent are our asset markets characterized by superfluous financial intermediation?
- WSJ Employment Graph ignores Demographics - Calculated Risk
- White paper on universal health insurance - The Irish Economy
- The gender gap in women’s pay - Kathleen Geier
- Hypocritical Tax Cuts - NYTimes.com
- Capitalize Workers! - NYTimes.com
- Robber Baron Etymology - Tim Taylor
- How rich nations benefit from EU membership - vox
- Taxation and the distorted allocation of talent - Tyler Cowen
- No one really knows if HFT is good or bad - Noahpinion
- An Economic Gauge, Imperfect but Vital - NYTimes.com
- Glenn Hubbard Says We Have a Shortage of Workers - Beat the Press
- Suggestive Evidence That Democracy Promotes Growth - Filip Spagnoli
- Transparency for Policy Wonks - John Taylor
- Sign of Spring on Pay: Real Wage Growth - NYTimes.com
Saturday, April 05, 2014
Automation Alone Isn’t Killing Jobs, by Tyler Cowen, Commentary, NY Times: Although the labor market report on Friday showed modest job growth, employment opportunities remain stubbornly low in the United States, giving new prominence to the old notion that automation throws people out of work.
Back in the 19th century, steam power and machinery took away many traditional jobs, though they also created new ones. This time around, computers, smart software and robots are seen as the culprits. They seem to be replacing many of the remaining manufacturing jobs and encroaching on service-sector jobs, too.
Driverless vehicles and drone aircraft are no longer science fiction, and over time, they may eliminate millions of transportation jobs. Many other examples of automatable jobs are discussed in “The Second Machine Age,” a book by Erik Brynjolfsson and Andrew McAfee, and in my own book, “Average Is Over.” The upshot is that machines are often filling in for our smarts, not just for our brawn — and this trend is likely to grow.
How afraid should workers be of these new technologies? There is reason to be skeptical of the assumption that machines will leave humanity without jobs. ...
- Euphemistic At The IMF - Paul Krugman
- Unconventional Monetary Policies Spell Success in Any Language - WSJ
- What Were They Thinking? The Fed on the Brink of Zero - Joe Gagnon
- Scientists unmask the climate uncertainty monster - EurekAlert
- Inequality and the Jobs Report - John Cassidy
- More Pseudo-Contrarianism - Baseline Scenario
- Comment on Jobs Recovery and Policy - Calculated Risk
- The futility of hoping for a finance ‘moral compass’ - longandvariable
- Wall Street’s Subsidy Safety Net - David Dayen
- More Good Obamacare News - Paul Krugman
- Incidence - Baseline Scenario
- Equivalences - Paul Krugman
- Temporary vs permanent money multipliers - Nick Rowe
- Latin America: Modest Progress on Inequality - Tim Taylor
- House prices & secular stagnation - Chris Dillow
- Reflections on the Series on Large and Complex Banks - Liberty Street
- Annuities and inheritance - mainly macro
Friday, April 04, 2014
One For the Doves, by Tim Duy: The March employment report came in pretty much in line with expectations. Nonfarm payrolls gained by 192k, and January and February were both revised higher. If you can discern any meaningful change in the underlying pace of economic activity from the nonfarm payrolls numbers, you have sharper eyes than me:
You could almost draw that twelve month trend with a ruler. The unemployment rate moved sideways:
In the past, sharp declines in the unemployment rate have been followed by periods of relative stability. I suspect we are currently in one such period.
The internals of the household report were generally positive. The labor force rose by 503k, pushing the participation rate up by 0.2 percentage points. And the labor market appeared to absorb those new participants nicely, with employment rise by 476k while the ranks of unemployed grew by just 27k. Measures of underemployment remain consistent with recent trends:
As might be expected if there remains plenty of slack in labor markets, wage growth remained largely unchanged:
I would say that on average, this report fits nicely with the view outlined by Federal Reserve Chair Janet Yellen earlier this week. The labor market continues to improve at a moderate pace, a pace that remains insufficient to rapidly alleviate the issues of underemployment and low wage growth. Indeed, combined with the readings on inflation:
I think the real policy question should be why is the Fed engaged in reducing policy accommodation in the first place? If Yellen is as concerned about the plight of labor as she purports to be, and if she and her colleagues are as committed to the 2% inflation target as they purport to be, then it seems like there is a strong argument for slowing the pace of the taper and using a rules based approach to taket the risk of earlier-than-anticipated rate hikes off the table. In short, there seems to be a disconnect between the Fed's rhetoric and the general policy direction. They seem to have lost interest in speeding the pace of the recovery.
Persistently low inflation, however, may push them into action. St. Louis Federal Reserve President James Bullard opened up the door to slowing the taper if inflation does not prove to be bottoming. Via Bloomberg:
“I still think it is important to defend the inflation target from the low side,” Bullard, who doesn’t vote on policy this year, said today in a Bloomberg Radio interview with Kathleen Hays and Vonnie Quinn in St. Louis. “If inflation takes another step down, that will put heavy pressure” on policy makers “to take further action.”
That said, take this in context of a Fed that fundamentally wants out of the asset purchase business. Moreover, this is not Bullard's baseline forecast. Via Reuters:
"Mine is in the first quarter of 2015, as far as liftoff for the funds rate," St. Louis Federal Reserve Bank President James Bullard told Reuters Insider television, when asked for his view on when the U.S. central bank should make its first rate hike since 2006.
"You have to keep in mind I tend to be a more optimistic member of the committee," he said. "I have a probably, a somewhat stronger forecast and a view about policy that suggests that maybe we should get up a bit faster than what some of the other members have."
This labor report, however, is not exactly consistent with such a view, but that is also still a year away. In contrast San Franscisco President John Williams reiterated his view, which is much more consistent with the general consensus. Via Reuters:
"Given the economic outlook, and given also my view that we need accommodative policy relative to historical norms, we need to have relatively low levels of interest rates for quite some time," San Francisco Federal Reserve Bank President John Williams told Reuters. "My own view is it makes sense to start raising rates in the second half of 2015."
But the pace of rate increases, in Williams' view, should be extremely slow, with rates ending 2016 well below the historical norm of 4 percent, "with the first digit being a '2,'" he said.
Of course, the second half of 2015 is a fairly big window, and I suspect that any conditions that draw the first rate hike to the front end of that forecast, and certainly to Bullard's forecast, will be followed by a more rapid pace of tightening than currently anticipated. But that again is a matter for the data to decide. That and financial stability concerns; such concerns seem to be having a bigger impact on policy than officials like to admit.
Bottom Line: The doves win this round. One wonders, however, why, if they hold such a strong hand, they have been unable or unwilling to stop the systematic reduction in accommodation that began with the tapering talk of last year?
Tim Johnson on high frequency trading:
The Legitimacy of High Frequency Trading: Mark Thoma brought my attention to a post by Dean Baker, High Speed Trading and Slow-Witted Economic Policy. High Frequency Trading, or more generically Computer Based Trading, is proving problematic because it is a general term involving a variety of different techniques, some of which appear uncontroversial, others appear very dubious.The problem I have with Baker's argument is that I do not think it is robust. ... [explains why] ...
For example, a technique I would consider legitimate derives from Robert Almgren and Neil Chriss' work on optimal order execution: how do you structure a large trade such that it has minimal negative price impact and low transaction costs. There are firms that now specialise in performing these trades on behalf of institutions and I don't think there is an issue with how they innovate in order to generate profits.
The technique that is most widely regarded as illegitimate is order, or quote, stuffing. The technique involves placing orders and within a tenth of a second or less, cancelling them if they are not executed. I suspect this is the process that Baker refers to that enables HFTs to 'front run' the market. Baker regards the process as illegitimate...
The substantive question is whether I can come up with a more robust argument than Baker's, and I offer an argument at the bottom of this piece. ...
Dean Baker (see also "Comments on Employment Report" by Calculated Risk):
Economy Adds 192,000 Jobs in March, Unemployment Rate Unchanged: The ACA appears to be allowing workers to opt for part-time jobs and older workers to retire early.
The economy added 192,000 jobs in March, bringing the average over the last three months to 178,000. The unemployment rate was unchanged at 6.7 percent. The employment-to-population ratio (EPOP) edged up to 58.9 percent. This is the highest of the recovery, but still four full percentage points below its pre-recession level.
This report answered several questions that had come up based on the prior two reports. First, it appears the weakness in prior months was in fact largely the result of the weather. The three month average of 178,000 is probably close to the economy's underlying trend at this point. It was also encouraging to see a jump of 0.2 hours in the length of the average workweek to 34.5 hours. This completely wipes out the decline in average hours worked that many were attributing to the Affordable Care Act (ACA) and other measures.
The average hourly wage for production workers also fell slightly last month. While this is not good news, it does show that the concerns raised by many about a tight labor market leading to excessive wage growth, and that this would trigger inflation, were completely unfounded. Over the last year, wages for production and non-supervisory workers have risen by 2.2 percent. That’s up slightly from 1.9 percent over the prior twelve months, but still below the 2.3 percent rate of increase in the 12 months from March of 2009 to 2010. Basically, wage growth in this series has hovered near 2.0 percent for the last five years.
There is some evidence in this report that the ACA is having its predicted impact on the labor market. The number of employed people over age 55 fell by 133,000 in March. Since August, employment among people in this age group has risen by just 125,000. It had risen by an average of 1,150,000 annually over the prior four years, accounting for almost all of employment growth over this period. It is possible that the ACA is allowing many of these workers to retire early now that they can get health care insurance outside of employment. Workers in the 25-34 age group seem to be filling the gap, with an increase in employment of over 680,000 (2.2 percent) over the last seven months. However these numbers are erratic, so it is too early to make too much of this pattern.
The other area where we may be seeing the effect of the ACA is the rising number of people opting for part-time employment. The number of people who are voluntarily working part-time is up 415,000 (2.2 percent) from its year-ago level and is at its highest point since Lehman. (Involuntary part-time also rose, but is still below last fall’s levels.) At this point there is little evidence of more people opting for self-employment, as the number fell slightly in March, although it is still 262,000 (3.1 percent) above the year-ago level.
The job growth in March was heavily concentrated in employment services (42,000), restaurants (30,400), retail (21,300), and health care (19,400). The growth in retail is somewhat of a bounce-back after two months of declining employment. Manufacturing employment edged down by 1,000, its first drop since July. The decline was due to a drop in non-durable employment as the durable sector added 8,000 jobs. With overtime hours for production workers in the durable goods sector at their highest level since November of 2005, there may be more rapid hiring in the months ahead. Employment in the government sector was unchanged as a loss of 9,000 federal jobs and 2,000 state government jobs was offset by an increase in employment of 11,000 at the local level. Construction added 19,000 jobs, raising employment in the sector to 48,000 above the year-ago level.
With population growth implying labor force growth in the neighborhood of 90,000, the economy is cutting into the backlog of unemployed workers at the rate of 90,000 a month. With the economy still down close to 7 million jobs from trend levels, this would imply that we would reach full employment some time in 2020.
Supporters of health reform should "go ahead and celebrate":
Rube Goldberg Survives, by Paul Krugman, Commentary, NY Times: Holy seven million, Batman! ...Obamacare has made a stunning comeback from its shambolic start..., the original target of seven million signups, widely dismissed as unattainable, has been surpassed.
But what does it mean? That depends on whether you ask the law’s opponents or its supporters. You see, the opponents think that it means a lot, while the law’s supporters are being very cautious. And, in this one case, the enemies of health reform are right. This is a very big deal indeed.
Of course, you don’t find many Obamacare opponents admitting outright that 7.1 million and counting signups is a huge victory... But their reaction to the results — It’s a fraud! They’re cooking the books! — tells the tale. ...
So why are many reform supporters ... telling us not to read too much into the figures? ... I’d argue that they’re missing the forest for the trees.
The crucial thing to understand about the Affordable Care Act is that it’s a Rube Goldberg device, a complicated way to do something inherently simple. ... Remember, giving everyone health insurance doesn’t have to be hard; you can just do it with a government-run program..., extending Medicare to everyone would have been technically easy.
But it wasn’t politically possible,... health reform had to be run largely through private insurers, and be an add-on to the existing system... And, as a result, it had to be somewhat complex. ... It’s a system in which many things can go wrong; the nightmare scenario has always been that conservatives would seize on technical problems to discredit health reform... And last fall that nightmare seemed to be coming true.
But the nightmare is over. ... Now we know that the technical details can be managed... This thing is going to work.
And, yes, it’s also a big political victory for Democrats. They can point to a system that is already providing vital aid to millions of Americans, and Republicans — who were planning to run against a debacle — have nothing to offer in response. And I mean nothing. ...
So my advice to reform supporters is, go ahead and celebrate. Oh, and feel free to ridicule right-wingers who confidently predicted doom.
Clearly, there’s a lot of work ahead, and we can count on the news media to play up every hitch and glitch as if it were an existential disaster. But Rube Goldberg has survived; health reform has won.
- The many hands of Mario Draghi - Antonio Fatas
- The FRB/US Model: A Tool for Macroeconomic Policy Analysis - FRB
- Out of Work, Benefits, and Running Out of Options - NYTimes.com
- Transmission of Fed tapering news to emerging markets - vox
- ECB addresses the zero lower bound - Gavyn Davies
- High Frequency Trading: Threat or Menace? - Justin Fox
- On The Pathetic Left - Paul Krugman
- What's a Gini Coefficient? - Tim Taylor
- The state & inequality - Stumbling and Mumbling
- The Failure Resolution of Lehman Brothers - Liberty Street
- Why Bail-in? - Liberty Street Economics
- The Fifth Freedom - Paul Krugman
Thursday, April 03, 2014
Employment Report Ahead, by Tim Duy: Sorry for the light blogging this week - just getting back into the swings of things during the first week of spring term. But nothing like an employment report to pull me out of hibernation.
It is no secret that the employment report has a significant impact on monetary policy. And we need to make increasingly deeper dives at the data to discern the implications for policy. Federal Reserve Chair Janet Yellen made that clear in her speech this week when she outlined a number of indicators - part-time but want full-time, wages,long-term unemployment, and labor force participation - as evidence of slack in the labor market. Such slack is sufficient, in her view, to justify maintaining accommodative policy for a considerable period (although note that accommodative does not mean zero rates).
Yellen, I think, outlined the most dovish case possible given the current information set. This suggests to me that the risk lies in the hawkish direction. Moreover, I think that Yellen and the remaining doves are losing the internal policy battle, leaving policy with a generally overall hawkish tone. Gone is the Evans rule and explicit allowance for above target inflation, gone, it seems, is a low bar for slowing the taper, gone is quantitative guidance in favor of qualitative guidance, gone is rules-based policy in favor of ad-hockery. And now departing Governor Jeremy Stein leaves behind an intellectual legacy that raises the importance of financial stability concerns when setting policy. Altogether, the stage is set for the Fed to move in a sharply more hawkish direction with just a little push from the data.
That said, that little push from the data is important. While I believe that the Fed has a hawkish bias, that bias will not be realized in the absence of data that is reasonably stronger than the Fed's forecasts. Which brings us to the next employment report. In general, the consensus view that the labor market shook off the winter doldrums with a 206k gain in nonfarm payrolls and 6.6% unemployment rate is probably pretty close to the Fed's expectations. The forecast range for payrolls, however, is skewed to the upside, with a range from 175k to 275k. The possibility of upside surprise follows from an expectation of a sharper bounce from earlier weather-related softness. This was evident in the employment component of the ISM Services report:
In addition, weekly initial claims have improved in recent weeks, lending additional credence to expectations for a better-than-expected report:
Finally, the ADP number for private employment growth came in at a solid 191k for the month (noting of course, the less than perfect signal ADP provides). My quick and dirty approach - which admittedly was not particularly effective in recent months - points at a nfp gain of 199k in March, in line with consensus expectations:
As always, usual caveats apply. Guessing the preliminary numbers of a heavily revised data series is by itself something of a questionable game, a game we all play nonetheless.
As I noted earlier, however, headline numbers won't tell the whole story. The Fed will be looking deeper into the numbers for evidence of greater slack than indicated by the unemployment rate. My opinion is that if the slack is diminishing faster than the Fed doves expect, it is most likely we will see wage growth accelerate. If wage growth remains low, then the Fed will be confident that there is little incipient inflation pressure to justify a more aggressive reduction of policy accommodation.
Bottom Line: The baseline case remains zero rates until the middle to end of 2015, followed by a gentle pace of rate hikes. That said, it is all data dependent, and the baseline case appears to be contingent on a particularly dovish forecast. It seems to me that the risk thus lies in a less than dovish reality. SIgns that wages are increasing more rapidly would suggest just that. Still stagnant wage growth, however, gives the Fed more room to stick with the current policy path.
When the Federal reserve Board is fully staffed, the Board members outnumber the regional bank presidents 7-5 on the FOMC (the committee that sets monetary policy). Presently, however, the power balance has shifted and it may shift even more:
Jeremy Stein to Resign From Fed Board, by Binyamin Appelbaum, NY Times: Jeremy Stein, a member of the Federal Reserve’s board..., will resign at the end of May and return to his previous role at Harvard. Mr. Stein, who joined the Fed in 2012, needed to return within two years to preserve his tenured professorship. ...
Mr. Stein, an economist and noted academic, has helped to provide an intellectual rationale for the cautious evolution of the Fed’s stimulus campaign, which has not succeeded in returning either unemployment or inflation to normal levels.
He has argued that the Fed should temper its efforts to minimize unemployment because those policies encourage financial risk-taking, which can undermine long-term growth by destabilizing markets and causing new crises. ...
His views remain controversial. ... Mr. Stein’s tenure will be among the shortest in recent Fed history...
His departure could create a fourth vacancy on the seven-member board. Two nominees, Stanley Fischer and Lael Brainard, are awaiting Senate confirmation. Mr. Obama has not announced a nominee for a third vacancy, created last month when Sarah Bloom Raskin became deputy Treasury secretary.
I think the Fed should have been more aggressive, especially early on, but it was probably good to have someone asking questions about QE and risk-taking.
David Wessel reports on the IMF's World Economic Outlook:
...Two economists writing in the International Monetary Fund’s new World Economic Outlook note that inflation-adjusted interest rates have been coming down for more than three decades and suggests they may remain lower than normal for a very long time. ... But the important point is the trend towards lower interest rates began long before the Great Recession and advent of the Fed’s quantitative easing...
Why does this matter? ... It also would pose a big challenge for the Fed. For one thing, it boosts the risk that investors will do foolish things to get a little extra yield and provoke the much-dreaded “financial instability.”
It also increases the likelihood the economy will spend a whole lot more time with nominal rates ... uncomfortably close to zero, where it’s much harder for a central bank to use interest rates to steer the economy out of recessions. ...
If so, that argues ... for worrying a lot less about government budget deficits and a lot more about using government spending to give the economy a lift that monetary policy cannot provide. ...
And at the same time, "Governments Scale Back Spending on School Construction, Public Safety."
- Microfoundations and the Phillips curve - mainly macro
- Why Those Guys Won the Economics Nobels - Justin Fox
- The Perpetual Bubble Economy - NYTimes.com
- Lenders Are Taking More Risk - House of Debt
- (Mis)measuring prices in an era of globalisation - vox
- The Possibilities and Pitfalls of Virtual Currencies - David Andolfatto
- Moderate resource use & reduced inequality keys to sustainability - EurekAlert
- A New Look at Big-Bank Subsidies - Simon Johnson
- What is a "managed exchange rate"? - Nick Rowe
- Job lock: Conclusion - The Incidental Economist
- The Will To Believe - Paul Krugman
- Resolution of Failed Banks - Liberty Street Economics
- On Master's Programs in Economics - Miles Kimball
Wednesday, April 02, 2014
This shouldn't be a surprise:
The Wealth Gap in America Is Growing, Too, by Annie Lowrey, NY Times: It is, by now, well known that income inequality has increased in the United States. The top 10 percent of earners took more than half of the country’s overall income in 2012, the highest proportion recorded in a century of government record keeping.
But wealth inequality has been increasing too, as a new study by Thomas Piketty of the Paris School of Economics and Gabriel Zucman of the University of California, Berkeley, shows. In a preliminary report, Mr. Zucman and Emmanuel Saez, also of Berkeley, find that at the very top, wealth is distributed as unevenly as it was in the early 20th century. And the wealthiest 0.1 percent, and especially the 0.01 percent, have left the rest of the 1 percent in the dust. ...
More on the Ryan budget. This is Paul Krugman:
Same As He Ever Was: ... The latest Paul Ryan budget is getting a lot of well-deserved flak, and so is Ryan himself. The combination of cruelty and raw dishonesty is so obvious, it’s hard to see how anyone can fail to see what’s going on.
But Ryan hasn’t changed; his budgets have always been like this, and so has he. Yet for years he was the darling of centrist pundits, who proclaimed him an “honest, open-minded, solution-oriented fiscal conservative.” What were they thinking?
The answer was that they wanted someone to fill that role; they knew, just knew, that there had to be people like that — because if there weren’t, if there weren’t any serious, honest conservatives with real influence, shrill people like me were actually right. And that couldn’t be true. So they invented a character called “Paul Ryan” who was what they wanted to see, but bore no resemblance to the real character with that name.
And while Ryan himself may have been devalued — although I’m not even sure of that — there will be others. Remember all the praise lavished on Chris Christie until Bridgegate broke? Again, it was easy to see what Christie was — but only, apparently, for those of us not committed to the belief that sensible moderates must exist in the GOP.
So, who’s next?
This post from 2012 "Ryan's Budget: The Most Fraudulent Proposal in American History" still gets quite a bit of traffic.
Inequality is caused by ideology, not technology, by John Quiggin: I’ve just had an article published at New Left Project, under the title Don’t Blame the Internet for Rising Inequality. Much of it will be familiar, but I want to stress a particular, and I think novel, critique of the idea that skill-intensive technology is responsible for rising inequality
...The real gains over this period have gone to a subset of the top 1 per cent, dominated by CEOs, other senior managers and finance industry operators. This group has nearly quadrupled its real income over the past 30 years...
This is a major problem for the Race Against the Machine hypothesis. Much of the growth in income share of the top 1 per cent occurred before 2000, when the stereotypical CEO was a technological illiterate who had his (sic) secretary print out his emails. Even today, the technology available to the typical senior manager—a PC with access to the Internet, and a corporate intranet with very limited capabilities—is no different to that of the average knowledge worker, and inferior to that of workers in tech-intensive specialties.
Nor does the ownership of capital explain much here. Even for tech-intensive jobs, the capital and telecomm requirements for an individual worker cost no more than $10,000 for a top-of-the-line computer setup (amortized over 3-5 years), and perhaps $1000 a year for a broadband internet connection. This is well within the capacity of self-employed professional workers to pay for themselves, and in fact many professionals have better equipment at home than at work. Advances in information and communications technology thus can’t explain the vast majority of the growth in inequality over the past three decades.
- Permahawkery - Paul Krugman
- Managing the exchange rate - vox
- Where Are Real Interest Rates Headed? - IMF Blog
- How economic "rents" affect inequality - Mark Thoma
- Quantitative and qualitative social science - Understanding Society
- The credit cycle and LatAm vulnerabilities - vox
- Poverty, inequality, and Public Health - Harold Pollack
- Old Forecast of Famine May Yet Come True - NYTimes.com
- Which radical ideas come true? - Berkeley Blog
- Stupidity in Economic Discourse 2 - Paul Krugman
- A Big Biden Deal - Paul Krugman
- A Marshall Plan for the Culture War - Noahpinion
- Commodity-Price Comovement and Global Economic Activity - Econbrowser
- Governments Cut Spending on School Construction, Public Safety - WSJ
- Air Pollution: World's Biggest Health Hazard - Tim Taylor
- Seven Million - Paul Krugman
- Mixing and Matching Collateral in Dealer Banks - Liberty Street
- Spite Is Good. Spite Works. - NYTimes.com
Tuesday, April 01, 2014
Another quick one. John Cassidy on Paul Ryan's budget:
Ryan Budget Shows G.O.P. Stuck in Rah-Rah Land, by John Cassidy: Here’s all you need to know about the G.O.P.’s effort to face reality, moderate its policies, and present a more coherent policy platform to voters in 2016. David Camp, the Michigan Republican who chairs the powerful House Ways and Means Committee, and who in February introduced a sweeping tax-reform plan that, at least, recognized the basic laws of arithmetic, is leaving Congress. Paul Ryan, the conservative Moses of Capitol Hill, is sticking around. On Wednesday, he unveiled the latest of his right-wing manifestos, thinly disguised as a serious budget, proposing to repeal Obamacare, privatize Medicare, and slash spending on Medicaid and food stamps.
No, it wasn’t an April Fool’s joke. The Republican Party’s reform effort, which was heralded by a March, 2013, internal report that said that the G.O.P. was trapped in “an ideological cul de sac,” is over almost before it had begun. On issue after issue (gun control, immigration, gay marriage, Obamacare, climate change, unemployment benefits, the minimum wage), suggestions that the Party might revise its extreme positions have been stomped on. The ultras have won out. And nowhere is this more true than in the biggest policy area of all: taxes and spending. ...
Busy morning, so I will take advantage of the Creative Commons license and do a quick post. This is from Dean Baker:
High Speed Trading and Slow-Witted Economic Policy, by Dean Baker: Michael Lewis' new book, Flash Boys, is leading to large amounts of discussion both on and off the business pages. The basic story is that a new breed of traders can use sophisticated algorithms and super fast computers to effectively front-run trades. This allows them to make large amounts of money by essentially skimming off the margins. By selling ahead of a big trade, they will push down the price that trader receives for their stock by a fraction of a percent. Similarly, by buying ahead of a big trade, they will also raise the price paid for that trade by a fraction of a percent. Since these trades are essentially a sure bet (they know that a big sell order or a big buy order is coming), the profits can be enormous.
This book is seeming to prompt outrage, although it is not clear exactly why. The basic story of high frequency trading is not new. It has been reported in most major news outlets over the last few years. It would be nice if we could move beyond the outrage to a serious discussion of the policy issues and ideally some simple and reasonable policy to address the issue. (Yes, simple should be front and center. If it's complicated we will be employing people in pointless exercises -- perhaps a good job program, but bad from the standpoint of effective policy.)
The issue here is that people are earning large amounts of money by using sophisticated computers to beat the market. This is effectively a form of insider trading. Pure insider trading, for example trading based on the CEO giving advance knowledge of better than expected profits, is illegal. The reason is that it rewards people for doing nothing productive at the expense of honest investors.
On the other hand, there are people who make large amounts of money by doing good research to get ahead of the market. For example, many analysts may carefully study weather patterns to get an estimate of the size of the wheat crop and then either buy or sell wheat based on what they have learned about the about this year's crop relative to the generally held view. In principle, we can view the rewards for this activity as being warranted since they are effectively providing information to the market with the their trades. If they recognize an abundant wheat crop will lead to lower prices, their sales of wheat will cause the price to fall before it would otherwise, thereby allowing the markets to adjust more quickly. The gains to the economy may not in all cases be equal to the private gains to these traders, but at least they are providing some service.
By contrast, the front-running high speed trader, like the inside trader, is providing no information to the market. They are causing the price of stocks to adjust milliseconds more quickly than would otherwise be the case. It is implausible that this can provide any benefit to the economy. This is simply siphoning off money at the expense of other actors in the market.
There are many complicated ways to try to address this problem, but there is one simple method that would virtually destroy the practice. A modest tax on financial transactions would make this sort of rapid trading unprofitable since it depends on extremely small margins. A bill proposed by Senator Tom Harkin and Representative Peter DeFazio would impose a 0.03 percent tax on all trades of stocks, bonds, and derivatives. This would quickly wipe out the high-frequency trading industry while having a trivial impact on normal investors. (Most research indicates that other investors will reduce their trading roughly in proportion to the increase in the cost per trade, leaving their total trading costs unchanged.)The Joint Tax Committee projected that this tax would raise roughly $400 billion over a decade.
A scaled tax that imposed a somewhat higher fee on stock trades and lower fee on short-term assets like options could be even more effective. Japan had a such tax in place in the 1980s and early 1990s. It raised more than 1 percent of GDP ($170 billion a year in the United States). Representative Keith Ellison has proposed this sort of tax for the United States.
If the political system were not so corrupt, such taxes would be near the top of the policy agenda. Even the International Monetary Fund has complained that the financial sector is under-taxed. However, because of the money and power of the industry the leadership of both political parties will run away from imposing any tax on the financial industry. In fact Treasury Secretary Jack Lew has been working to torpedo the imposition of such a tax in Europe. So look for lots of handwringing and outrage in response to Lewis' book. And look also for nothing real to be done.
- Comcast-Time Warner merger is a bad deal - Catherine Rampell
- Obamacare, The Unknown Ideal - Paul Krugman
- Another Debt-Fueled Spending Spree? - House of Debt
- Consumption Contagion and Income Inequality - Carola Binder
- The Fed's Missing Guidance - Martin Feldstein, Inflation Hawk
- The Desperation of the Vanishing Middle Class - Baseline Scenario
- Austerity Memories - Paul Krugman
- The Distributional Games - Robert Reich
- Career Changes Decline during Recessions - FRBSF
- Who the Job Creators Really Are - NYTimes.com
- Measuring Global Bank Complexity - Liberty Street Economics
- Does Economics Make You a Bad Person? - Tim Taylor
- Why do we take physicists seriously? - Magic, maths and money
- Technodox Economics and ‘Deepak Chopra Mode’ - Orderstatistic
- The Left and Economic Policy - mainly macro
- ECB: One Size Fits None - Gloomy European Economist
- Is Abenomics Working? - FT Alphaville
Monday, March 31, 2014
This sounds familiar:
Should we care about inequality?, by David Stasavage, Monkey Cage, Washington Post: ...As a firm believer that commercial societies would witness an inexorable increase in inequality, [Jean-Jacques] Rousseau in his “Discourse on Political Economy” wrote of the corrupting influence of inequality and “luxury” and of the need to levy taxes on the rich to curb the problem. ...
Rousseau’s text was originally published in Denis Diderot’s famous Encyclopedia as the entry for “Political Economy.” ... Jean-François de Saint-Lambert was commissioned by Diderot to write the article on “Luxury” for the encyclopedia. The interest of such a text was obvious; at the time the pundits of the day were fiercely debating the virtues and vices of “luxury” and its potentially corrupting effect on nations. Take our 21st century debates, substitute the word “inequality” for “luxury,” and you get a sense of the tone.
Saint-Lambert was among the first to move the debate in a new direction. He suggested that luxury itself was not the problem; what mattered was how luxury was generated. If luxury was earned thanks to institutionalized privilege, or by those who had gamed the system, then it would inevitably have a corrupting influence. The effects for the nation would be disastrous. ...
Now in cases where luxury is instead acquired through industriousness, Saint-Lambert argued that it would not have these nefarious effects. ...
Janet Yellen says the Fed cares about the unemployed:
What the Federal Reserve is Doing to Promote a Stronger Job Market, by Janet L. Yellen, Federal Reserve: ... The past six years have been difficult for many Americans, but the hardships faced by some have shattered lives and families. Too many people know firsthand how devastating it is to lose a job at which you had succeeded and be unable to find another; to run through your savings and even lose your home, as months and sometimes years pass trying to find work; to feel your marriage and other relationships strained and broken by financial difficulties. And yet many of those who have suffered the most find the will to keep trying. I will introduce you to three of these brave men and women, your neighbors here in the great city of Chicago. These individuals have benefited from just the kind of help from community groups that I highlighted a moment ago, and they recently shared their personal stories with me.
It might seem obvious, but the second thing that is needed to help people find jobs...is jobs. No amount of training will be enough if there are not enough jobs to fill. I have mentioned some of the things the Fed does to help communities, but the most important thing we do is to use monetary policy to promote a stronger economy. The Federal Reserve has taken extraordinary steps since the onset of the financial crisis to spur economic activity and create jobs, and I will explain why I believe those efforts are still needed.
The Fed provides this help by influencing interest rates. Although we work through financial markets, our goal is to help Main Street, not Wall Street. By keeping interest rates low, we are trying to make homes more affordable and revive the housing market. We are trying to make it cheaper for businesses to build, expand, and hire. We are trying to lower the costs of buying a car that can carry a worker to a new job and kids to school, and our policies are also spurring the revival of the auto industry. We are trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery.
When the Federal Reserve's policies are effective, they improve the welfare of everyone who benefits from a stronger economy, most of all those who have been hit hardest by the recession and the slow recovery.
Now let me offer my view of the state of the recovery, with particular attention to the labor market and conditions faced by workers. Nationwide, and in Chicago, the economy and the labor market have strengthened considerably from the depths of the Great Recession. Since the unemployment rate peaked at 10 percent in October 2009, the economy has added more than 7-1/2 million jobs and the unemployment rate has fallen more than 3 percentage points to 6.7 percent. That progress has been gradual but remarkably steady--February was the 41st consecutive month of payroll growth, one of the longest stretches ever. ...
But while there has been steady progress, there is also no doubt that the economy and the job market are not back to normal health. ...
The recovery still feels like a recession to many Americans, and it also looks that way in some economic statistics. At 6.7 percent, the national unemployment rate is still higher than it ever got during the 2001 recession. ... It certainly feels like a recession to many younger workers, to older workers who lost long-term jobs, and to African Americans, who are facing a job market today that is nearly as tough as it was during the two downturns that preceded the Great Recession.
In some ways, the job market is tougher now than in any recession. The numbers of people who have been trying to find work for more than six months or more than a year are much higher today than they ever were since records began decades ago. We know that the long-term unemployed face big challenges. Research shows employers are less willing to hire the long-term unemployed and often prefer other job candidates with less or even no relevant experience.3
That is what Dorine Poole learned, after she lost her job processing medical insurance claims, just as the recession was getting started. Like many others, she could not find any job, despite clerical skills and experience acquired over 15 years of steady employment. When employers started hiring again, two years of unemployment became a disqualification. Even those needing her skills and experience preferred less qualified workers without a long spell of unemployment. That career, that part of Dorine's life, had ended.
For Dorine and others, we know that workers displaced by layoffs and plant closures who manage to find work suffer long-lasting and often permanent wage reductions.4 Jermaine Brownlee was an apprentice plumber and skilled construction worker when the recession hit, and he saw his wages drop sharply as he scrambled for odd jobs and temporary work. He is doing better now, but still working for a lower wage than he earned before the recession.
Vicki Lira lost her full-time job of 20 years when the printing plant she worked in shut down in 2006. Then she lost a job processing mortgage applications when the housing market crashed. Vicki faced some very difficult years. At times she was homeless. Today she enjoys her part-time job serving food samples to customers at a grocery store but wishes she could get more hours.
Vicki Lira is one of many Americans who lost a full-time job in the recession and seem stuck working part time. The unemployment rate is down, but not included in that rate are more than seven million people who are working part time but want a full-time job. As a share of the workforce, that number is very high historically.
I have described the experiences of Dorine, Jermaine, and Vicki because they tell us important things that the unemployment rate alone cannot. First, they are a reminder that there are real people behind the statistics, struggling to get by and eager for the opportunity to build better lives. Second, their experiences show some of the uniquely challenging and lasting effects of the Great Recession. Recognizing and trying to understand these effects helps provide a clearer picture of the progress we have made in the recovery, as well as a view of just how far we still have to go.
And based on the evidence available, it is clear to me that the U.S. economy is still considerably short of the two goals assigned to the Federal Reserve by the Congress. The first of those goals is maximum sustainable employment, the highest level of employment that can be sustained while maintaining a stable inflation rate. Most of my colleagues on the Federal Open Market Committee and I estimate that the unemployment rate consistent with maximum sustainable employment is now between 5.2 percent and 5.6 percent, well below the 6.7 percent rate in February.
The other goal assigned by the Congress is stable prices, which means keeping inflation under control. In the past, there have been times when these two goals conflicted--fighting inflation often requires actions that slow the economy and raise the unemployment rate. But that is not a dilemma now, because inflation is well below 2 percent, the Fed's longer-term goal.
The Federal Reserve takes its inflation goal very seriously. One reason why I believe it is appropriate for the Federal Reserve to continue to provide substantial help to the labor market, without adding to the risks of inflation, is because of the evidence I see that there remains considerable slack in the economy and the labor market. Let me explain what I mean by that word "slack" and why it is so important.
Slack means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill. During a period of little or no slack, there still may be vacant jobs and people who want to work, but a large share of those willing to work lack the skills or are otherwise not well suited for the jobs that are available. ...
But a lack of jobs is the heart of the problem when unemployment is caused by slack, which we also call "cyclical unemployment." The government has the tools to address cyclical unemployment. Monetary policy is one such tool, and the Federal Reserve has been actively using it to strengthen the recovery and create jobs, which brings me to why the amount of slack is so important.
If unemployment were mostly structural, if workers were unable to perform the jobs available, then the Federal Reserve's efforts to create jobs would not be very effective. Worse than that, without slack in the labor market, the economic stimulus from the Fed could put attaining our inflation goal at risk. In fact, judging how much slack there is in the labor market is one of the most important questions that my Federal Reserve colleagues and I consider when making monetary policy decisions, because our inflation goal is no less important than the goal of maximum employment.
This is not just an academic debate. For Dorine Poole, Jermaine Brownlee, and Vicki Lira, and for millions of others dislocated by the Great Recession who continue to struggle, the cause of the slow recovery is enormously important. As I said earlier, the powerful force that sustains them and others who keep trying to succeed in this recovery is the faith that their job prospects will improve and that their efforts will be rewarded.
Now let me explain why I believe there is still considerable slack in the labor market, why I think there is room for continued help from the Fed for workers, and why I believe Dorine Poole, Jermaine Brownlee, and Vicki Lira are right to hope for better days ahead.
One form of evidence for slack is found in other labor market data, beyond the unemployment rate or payrolls, some of which I have touched on already. For example, the seven million people who are working part time but would like a full-time job. This number is much larger than we would expect at 6.7 percent unemployment, based on past experience, and the existence of such a large pool of "partly unemployed" workers is a sign that labor conditions are worse than indicated by the unemployment rate. Statistics on job turnover also point to considerable slack in the labor market. Although firms are now laying off fewer workers, they have been reluctant to increase the pace of hiring. Likewise, the number of people who voluntarily quit their jobs is noticeably below levels before the recession; that is an indicator that people are reluctant to risk leaving their jobs because they worry that it will be hard to find another. It is also a sign that firms may not be recruiting very aggressively to hire workers away from their competitors.
A second form of evidence for slack is that the decline in unemployment has not helped raise wages for workers as in past recoveries. Workers in a slack market have little leverage to demand raises. Labor compensation has increased an average of only a little more than 2 percent per year since the recession, which is very low by historical standards.5 Wage growth for most workers was modest for a couple of decades before the recession due to globalization and other factors beyond the level of economic activity, and those forces are undoubtedly still relevant. But labor market slack has also surely been a factor in holding down compensation. The low rate of wage growth is, to me, another sign that the Fed's job is not yet done.
A third form of evidence related to slack concerns the characteristics of the extraordinarily large share of the unemployed who have been out of work for six months or more. These workers find it exceptionally hard to find steady, regular work, and they appear to be at a severe competitive disadvantage when trying to find a job. The concern is that the long-term unemployed may remain on the sidelines, ultimately dropping out of the workforce. But the data suggest that the long-term unemployed look basically the same as other unemployed people in terms of their occupations, educational attainment, and other characteristics. And, although they find jobs with lower frequency than the short-term jobless do, the rate at which job seekers are finding jobs has only marginally improved for both groups. That is, we have not yet seen clear indications that the short-term unemployed are finding it increasingly easier to find work relative to the long-term unemployed. This fact gives me hope that a significant share of the long-term unemployed will ultimately benefit from a stronger labor market.
A final piece of evidence of slack in the labor market has been the behavior of the participation rate--the proportion of working-age adults that hold or are seeking jobs. Participation falls in a slack job market when people who want a job give up trying to find one. When the recession began, 66 percent of the working-age population was part of the labor force. Participation dropped, as it normally does in a recession, but then kept dropping in the recovery. It now stands at 63 percent, the same level as in 1978, when a much smaller share of women were in the workforce. Lower participation could mean that the 6.7 percent unemployment rate is overstating the progress in the labor market.
One factor lowering participation is the aging of the population, which means that an increasing share of the population is retired. If demographics were the only or overwhelming reason for falling participation, then declining participation would not be a sign of labor market slack. But some "retirements" are not voluntary, and some of these workers may rejoin the labor force in a stronger economy. Participation rates have been falling broadly for workers of different ages, including many in the prime of their working lives. Based on the evidence, my own view is that a significant amount of the decline in participation during the recovery is due to slack, another sign that help from the Fed can still be effective.
Since late 2008, the Fed has taken extraordinary steps to revive the economy. At the height of the crisis, we provided liquidity to help avert a collapse of the financial system, which enabled banks and other institutions to continue to provide credit to people and businesses depending on it. We cut short-term interest rates as low as they can go and indicated that we would keep them low for as long as necessary to support a stronger economic recovery. And we have been purchasing large quantities of longer-term securities in order to put additional downward pressure on longer-term interest rates--the rates that matter to people shopping for a new car, looking to buy or renovate a home, or expand a business. There is little doubt that without these actions, the recession and slow recovery would have been far worse.
These different measures have the same goal--to encourage consumers to spend and businesses to invest, to promote a recovery in the housing market, and to put more people to work. Together they represent an unprecedentedly large and sustained commitment by the Fed to do what is necessary to help our nation recover from the Great Recession. For the many reasons I have noted today, I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed.
In this context, recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labor market means our aid for the recovery need not grow as quickly. Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come.
This commitment is strong, and I believe the Fed's policies will continue to help sustain progress in the job market. But the scars from the Great Recession remain, and reaching our goals will take time. ...
It is my hope that the courageous and determined working people I have told you about today, and millions more, will get the chance they deserve to build better lives. ...
There is no skills gap:
Jobs and Skills and Zombies, by Paul krugman, Commentary, NY Times: A few months ago, Jamie Dimon, the chief executive of JPMorgan Chase, and Marlene Seltzer, the chief executive of Jobs for the Future, published an article in Politico titled “Closing the Skills Gap.” They began portentously: “Today, nearly 11 million Americans are unemployed. Yet, at the same time, 4 million jobs sit unfilled” — supposedly demonstrating “the gulf between the skills job seekers currently have and the skills employers need.”
Actually,... multiple careful studies have found no support for claims that inadequate worker skills explain high unemployment.
But the belief that America suffers from a severe “skills gap” is one of those things that everyone important knows must be true, because everyone they know says it’s true. It’s a prime example of a zombie idea — an idea that should have been killed by evidence, but refuses to die.
And it does a lot of harm. ...
So how does the myth of a skills shortage ... persist...? Well, there was a nice illustration of the process last fall, when some news media reported that 92 percent of top executives said that there was, indeed, a skills gap. The basis for this claim? A telephone survey in which executives were asked, “Which of the following do you feel best describes the ‘gap’ in the U.S. workforce skills gap?” followed by a list of alternatives. Given the loaded question, it’s actually amazing that 8 percent of the respondents were willing to declare that there was no gap.
The point is that influential people move in circles in which repeating the skills-gap story — or, better yet, writing about skill gaps in media outlets like Politico — is a badge of seriousness, an assertion of tribal identity. And the zombie shambles on.
Unfortunately, the skills myth — like the myth of a looming debt crisis — is having dire effects on real-world policy. Instead of focusing on the way disastrously wrongheaded fiscal policy and inadequate action by the Federal Reserve have crippled the economy and demanding action, important people piously wring their hands about the failings of American workers.
Moreover, by blaming workers for their own plight, the skills myth shifts attention away from the spectacle of soaring profits and bonuses even as employment and wages stagnate. Of course, that may be another reason corporate executives like the myth so much.
So we need to kill this zombie, if we can, and stop making excuses for an economy that punishes workers.
- Relevance of Marx? - Brad DeLong
- Tight oil making a difference - Econbrowser
- The ACA Surge Blackout - Paul Krugman
- Should We Be Worried? - David Beckworth
- The price of political uncertainty - vox
- Piketty, Veblen and Kalecki (for anne at Economist's View) - EconoSpeak
- Regime Switching at the Lower Bound: A Research Topic - Roger Farmer
- Effective demand, endogenous money, and debt - Thomas Palley
- Understanding the Underlying Asumptions - Dave Giles
- Two first year multipliers: their truth, beauty, and usefulness - Nick Rowe
- Private charity can't replace government social programs - latimes.com
Sunday, March 30, 2014
The Fed has consistently missed its inflation target:
Monetary Policy And Secular Stagnation, by Atif Mian and Amir Sufi: ...The Fed’s goal is to achieve the target of 2% inflation in the long-term, and its preferred price index is the core personal consumption expenditure price index that excludes the volatile food and energy sectors (or core PCE for short). So how has the Fed performed in achieving its target of 2% inflation in the past 15 years?
The chart above plots the implied core PCE index if inflation had met its 2% target (red line), and the actual core PCE index (blue line) starting from 1999. ... The divergence between target and actual inflation is all the more striking given the elevated rate of unemployment during the sample period. ...
It is hard to fault the Fed for not trying... The Fed’s difficulty in maintaining a 2% target is not just about the Great Recession. The divergence started in the 2000′s... In fact the only period when the blue line runs parallel to the red (implying a 2% rate of inflation for a while) is the 2004-2006 period when the economy witnessed an unprecedented growth in credit. ...
What we are witnessing is the limit of what monetary policy alone can do. Sometimes there is a tendency to assume that the Fed can “target” any inflation rate it wishes, or that it can target the overall price level – the so-called nominal GDP targeting. The evidence suggests that the Fed may not be so omnipotent. ...
Another interpretation is that, at least during normal times, the Fed does have quite a bit of control over the inflation rate, but it treats 2% inflation as a ceiling (i.e. inflation must never rise above 2%) rather than a central tendency (i.e. inflation is allowed to fluctuate both above and below the 2% target so that, on average, inflation is 2%).
- Obamacare Makes Progress - Jeffrey Toobin
- Measuring Wealth Inequality - House of Debt
- Delivering the Eurozone ‘Consistent Trinity’ - vox
- Economists and Philosophy - NYTimes.com
- Costs, Benefits and Masterpieces in Detroit - Robert Frank
- War and calculation - Understanding Society
- Keynes: Cultural Rebel - EconoSpeak
- The Quit Rate, the Fed, and Braindead Employers - Beat the Press
- A Quick Note on Two Claims Re Productivity Growth - Jared Bernstein
- Pensions and neoliberal fantasies - mainly macro
- Where Do Policy Rules Come From? - John Taylor
Saturday, March 29, 2014
The Skills Zombie: One of the most frustrating aspects of economic debate since 2008 has been the preference of influential people for stories about our troubles that sound serious as opposed to those that actually are serious. The reality, all along, has been that our economy is depressed because there isn’t enough spending... But policymakers and pundits want to hear about tough decisions and hard choices, and they just recoil from any suggestion that terrible problems might have easy answers.
The most destructive example is, of course, the deficit obsession... The deficit obsession has faded a bit; but we still have others..., namely, the notion that we have big problems because our work force lacks essential skills.
This is very much a zombie doctrine — that is, a doctrine that should be dead by now, having been repeatedly refuted by evidence...
Yet the skills story just keeps showing up in supposedly informed discussion. Again, I think that this is because it sounds like the kind of thing serious people should say.
The sad truth is that while disasters brought on by inadequate demand have an easy economic answer — just spend more! — the psychology of policy elites is such that they generally refuse to believe in this answer, and look for tough choices to make instead. And the result is that unless something comes along to jolt them out of that mindset — something like a war — the slump goes on for a very long time.
I think there is also a prefeence for explanations and policies that won't take money out of their (VSP's) pockets. "Tough choices" = things that are hard for other people.
- Economic Realism (Wonkish) - Paul Krugman
- Time inconsistency and debt - mainly macro
- Monetary Policy And Secular Stagnation - House of Debt
- What I Mean When I Talk About IS-LM (Wonkish) - Paul Krugman
- Europe’s banking problems and secular stagnation - vox
- Stress Tests, Lending, and Capital Requirements - Baseline Scenario
- The Anatomy of Imitation - Digitopoly
- “Incentives to produce” are incentives to rig the game - interfluidity
- Higher food prices are good for the poor ... in the long run - Derek Headey
- There can be an excess supply of commercial bank money - Nick Rowe
- Back to Econ 101: Costs versus Transfers - EconoSpeak
- Growth Versus Distribution: Hunger Games - Paul Krugman
Friday, March 28, 2014
Save capitalism from the capitalists by taxing wealth, by Thomas Piketty, Commentary, FT: The distribution of income and wealth is one of the most controversial issues of the day. ...
America ... was conceived as the antithesis of the patrimonial societies of old Europe. ... Until the first world war, the concentration of wealth in the hands of the rich was far less extreme in the US than Europe. In the 20th century, however, the situation was reversed. ... US income inequality has sharpened since the 1980s, largely reflecting the huge incomes of people at the top. ...
The ideal solution would be a global progressive tax on individual net worth. ... This would keep inequality under control and make it easier to climb the ladder. And it would put global wealth dynamics under public scrutiny. The lack of financial transparency and reliable wealth statistics is one of the main challenges for modern democracies. ...
There's quite a bit more in the article.
- The Growth of Murky Finance - Liberty Street Economics
- Expect Surge in Temp Jobs to Continue - Real Time Economics
- The Dollar Value of an Extra Year of Life - NYTimes.com
- Thoughts on Accommodative Monetary Policy... - Charles Evans
- Too Much Faith In Models, Capital Taxation Edition - Paul Krugman
- Coming into econ from physics (and other fields) - Noahpinion
- Some Macro Implications of a Minimum Wage Hike - Econbrowser
- What’s good for GM may no longer depend on the US - Rampage
- The Republic of Science - Magic, maths and money
- Ad Hoc Monetary Policy - David Beckworth
- Corporate Profits, Proprietors’ Income, and Labor Compensation - owenzidar
- U.S. Monetary Policy and Emerging Market Economies - William Dudley
- Obamacare Fails to Fail - Paul Krugman
- Independent within—not of—Government: The Fed - Owen Humpage
- Raise earnings, but go beyond the minumum wage to do it - Edward Glaeser
- Osborne's spending paradox - Stumbling and Mumbling
- SSI Should Be Strengthened, Not Cut - CBPP
- Q4 GDP Revised up to 2.6%, Unemployment Claims decline - Calculated Risk
- Another Reason Why the Realism of Assumptions Matters - EconoSpeak
- Can economists forecast technological progress? - Digitopoly
"Confiscatory taxation" was an "American invention":
America’s Taxation Tradition, by Paul Krugman, Commentary, NY Times: ...Some conservatives argue that focusing on inequality is ... un-American — that we’ve always celebrated those who achieve wealth...
And they’re right. No true American would say this: “The absence of effective State, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power,” and follow that statement with a call for “a graduated inheritance tax on big fortunes ... increasing rapidly in amount with the size of the estate.”
Who was this left-winger? Theodore Roosevelt, in ... 1910...
The truth is that, in the early 20th century, many leading Americans warned about the dangers of extreme wealth concentration, and urged that tax policy be used to limit the growth of great fortunes. Here’s another example: In 1919, the great economist Irving Fisher ... devoted his presidential address to the American Economic Association largely to warning against the effects of “an undemocratic distribution of wealth.” And he spoke favorably of proposals to limit inherited wealth through heavy taxation of estates.
Nor was the notion of limiting the concentration of wealth, especially inherited wealth, just talk..., “confiscatory taxation of excessive incomes” — that is, taxation ... to reduce income and wealth disparities, rather than to raise money — was an “American invention.”...
Back when Teddy Roosevelt gave his speech, many thoughtful Americans realized ... that the New World was at risk of turning into Old Europe. And they were forthright in arguing that public policy should seek to limit inequality for political as well as economic reasons, that great wealth posed a danger to democracy. ...
You sometimes hear the argument that concentrated wealth is no longer an important issue... But ...... the share of wealth held at the very top ... has doubled since the 1980s, and is now as high as it was when Teddy Roosevelt and Irving Fisher issued their warnings. ...
We aren’t yet a society with a hereditary aristocracy of wealth, but, if nothing changes, we’ll become that kind of society over the next couple of decades.
In short, the demonization of anyone who talks about the dangers of concentrated wealth is based on a misreading of both the past and the present. Such talk isn’t un-American; it’s very much in the American tradition. And it’s not at all irrelevant to the modern world. So who will be this generation’s Teddy Roosevelt?
Thursday, March 27, 2014
Stanford University's Paul Pfleiderer:
Chameleons: The Misuse of Theoretical Models in Finance and Economics, by Paul Pfleiderer, March 2014: Abstract In this essay I discuss how theoretical models in finance and economics are used in ways that make them “chameleons” and how chameleons devalue the intellectual currency and muddy policy debates. A model becomes a chameleon when it is built on assumptions with dubious connections to the real world but nevertheless has conclusions that are uncritically (or not critically enough) applied to understanding our economy. I discuss how chameleons are created and nurtured by the mistaken notion that one should not judge a model by its assumptions, by the unfounded argument that models should have equal standing until definitive empirical tests are conducted, and by misplaced appeals to “as-if” arguments, mathematical elegance, subtlety, references to assumptions that are “standard in the literature,” and the need for tractability.
I still believe international trade makes us better off on net, but there are winners and losers from these agreements and we don't do anywhere near enough to help those who are hurt by these deals -- no wonder they are opposed:
Nafta Still Bedevils Unions, by Annie Lowrey, NY Times: Two decades after its enactment, the North American Free Trade Agreement — better known as Nafta — remains a source of deep disagreement among economists.
Maybe it has led employers to add tens of thousands of jobs. Or perhaps it has caused the loss of 700,000 jobs. Maybe it has been “a bonanza for U.S. farmers and ranchers,” as the United States Chamber of Commerce has said. But perhaps it has depressed wages for millions of working families. Then again, maybe all sides are wrong: “Nafta brought neither the huge gains its proponents promised nor the dramatic losses its adversaries warned of,” wrote Jorge G. Castañeda in an essay for Foreign Affairs this winter. “Everything else is debatable.”
But for labor groups, there is no debate: Nafta hurt American jobs and household earnings. And the sweeping trade agreement cast a shadow that persists today, spurring deep skepticism of the major trade deals the Obama administration is negotiating with Europe and a dozen Pacific Rim countries. ...
On Thursday, the A.F.L.-C.I.O. released a report excoriating Nafta... Among its conclusions: That Nafta increased corporate profits while depressing wages; that its labor-protection provisions have not improved labor conditions on the ground; that its environmental standards have not protected the environment; and that higher trade flows have not meant shared prosperity. ...
Atif Mian and Amir Sufi:
Why the Income Distribution Matters for Macroeconomics, by Atif Mian and Amir Sufi: A central argument we have made on this blog and in our book is that the distribution of income/wealth matters a great deal for thinking about the macro-economy. Convincing some of this fact is not easy...
Perhaps the easiest way to see the importance of the income distribution is to examine how households respond to a windfall of cash or wealth. Do they spend the money, or do they save it? And does the spending response to a windfall of cash depend on the income of the household?
The answer is a resounding yes: low income households spend a much higher fraction of cash windfalls than high income households. In the parlance of economics, low income households have a much higher marginal propensity to consume, or MPC, than high income households.
This is one of the most well-established facts in empirical research in macroeconomics. Here is a summary: ...[reviews evidence]...
The implications of the differences in spending propensities across the population are enormous, especially if we believe that inadequate demand explains economic weakness during severe recessions. For example, facilitating debt forgiveness or progressive fiscal stimulus rebates will likely boost spending during the most severe part of a recession.
But perhaps even more interesting are the implications for the secular stagnation hypothesis, which holds that we are in a long-run stagnating economy because of inadequate demand. Is it a coincidence that the secular stagnation hypothesis is being revived exactly when income inequality is accelerating? If a higher share of income goes to the wealthiest households who spend very little of it, then perhaps these two trends are closely related.
What America Isn’t, Or Anyway Wasn’t: ...one point Piketty makes is that the modern notion that redistribution and “penalizing success” is un- and anti-American is completely at odds with our country’s actual history. ... America actually pioneered very high taxes on the rich...
Why...? Piketty points to the American egalitarian ideal, which went along with fear of creating a hereditary aristocracy. High taxes, especially on estates, were motivated in part by “fear of coming to resemble Old Europe.” Among those who called for high estate taxation on social and political grounds was the great economist Irving Fisher.
Just to reemphasize the point: during the Progressive Era, it was commonplace and widely accepted to support high taxes on the rich specifically in order to keep the rich from getting richer — a position that few people in politics today would dare espouse.
...redistribution is ... as American as apple pie.
- Dare To Be Silly - Paul Krugman
- A Nation of Takers? - Nicholas Kristof
- Piketty's Inequality Story in Six Charts - John Cassidy
- Proposed Housing Bill Would Create a Co-op of Mortgage Lenders - NYT
- Bullard: Limited Value In Central Bank International Coordination - WSJ
- Evidence on Banks’ “Too-Big-to-Fail” Subsidy - Liberty Street Economics
- Do “Too-Big-to-Fail” Banks Take On More Risk? - Liberty Street Economics
- MCMC for Econometrics Students - Part IV - Dave Giles
- A Book That Needed To Be Written - The Baseline Scenario
- Using big data in finance: Example of sentiment-extraction - FEDS Notes
- It’s the economics, not the politics - mainly macro
- China's Shadow Banking Malaise - Boone and Johnson
- What Is the Fed's Credibility Worth? - Dean Baker
- A scholar who thinks globally and acts locally - MIT News
- Q&A: Why the Dollar Remains the Reserve Currency - NYTimes.com
Wednesday, March 26, 2014
From the CBPP:
Why the EITC Is No Substitute for the Safety Net, CBPP: The Earned Income Tax Credit is a critically important and highly effective part of the safety net, but it can’t — and wasn’t meant to — stand alone as our answer to poverty, according to our new commentary. Here’s the opening:
House Budget Committee Chair Paul Ryan’s recent report on safety net programs rightly praised the Earned Income Tax Credit (EITC) for reducing poverty and promoting work. But, Ryan’s report criticizes much of the rest of the safety net. And, over the past several years, Chairman Ryan’s budget plans have targeted low-income programs such as SNAP (formerly food stamps) and Medicaid for extremely deep cuts. While it’s heartening to hear Chairman Ryan trumpet the EITC’s success, the EITC alone can’t do what’s needed to ameliorate poverty and hardship./p>
The things that the EITC — and its sibling the Child Tax Credit, which helps offset the cost of raising children — can’t do without other safety net programs include:
- help people who are out of work or can’t work;
- help families get health care;
- help families on a monthly basis;
- serve as an effective automatic stabilizer for the economy in recessions; and
- keep large numbers of people out of “deep poverty,” or above half the poverty line.