Seconded, by Tim Duy: I see Jon Hilsenrath at the Wall Street Journal seconds my take from this morning:
Federal Reserve officials are on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation.
This is generally consistent with my view. The Fed is likely reacting more slowly than market participants. Hilsenrath adds something I forgot to mention:
Central to their internal deliberations ahead of the March meeting is a debate about how low the jobless rate can fall before it stirs wage and inflation pressure. Fed officials estimate the “natural rate” of unemployment—meaning the rate below which wage pressures increase—is between 5.2% and 5.5%.
Mr. Rosengren said he was considering revising this estimate down because the jobless rate has fallen to near the 5.2%-5.5% range without triggering any sign of wage pressure. He said he suspected some of his Fed colleagues also were considering moving this estimate down. The lower the estimate goes, the more patient they might be before raising rates.
Just as I think it will be hard for the Fed to raise rates if the unemployment rate continues to fall while wage growth remains subdued, it will also be difficult to justify current estimates of the natural rate of unemployment under those circumstances. Still, I would caution that lowering the estimate of the natural rate would be, I think, an implicit rejection of the "underemployment hypothesis." It would be easier to adjust estimates of the natural rate downward if measures of underemployment were more consistent with their traditional relationships with unemployment. In other words, the natural rate may be consistent with subdued wage growth due to the existence of high levels of underemployment.
My opinion is that the global disinflationary environment would support low inflation at levels of unemployment below the Fed's current estimate of the natural rate, similar to the situation of the late 1990s.
Posted by Mark Thoma on Monday, January 19, 2015 at 02:49 PM in Economics, Fed Watch, Monetary Policy |
Were poor people to blame for the housing crisis?, by Tyler Cowen:
When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007.
...That is from the new NBER working paper by Adelino, Schoar, and Severino. In other words, poor people (or various ethnic groups, in some accounts) were not primarily at fault for the wave of mortgage defaults precipitating the financial crisis. The biggest problems came in zip codes where home prices were having large run-ups. ...
Posted by Mark Thoma on Monday, January 19, 2015 at 11:11 AM in Economics, Financial System, Housing |
Will The Fed Take a Dovish Turn Next Week?, by Tim Duy: As it stands now, we are heading into the next FOMC meeting with the growing expectation that the Fed will take a dovish turn. Is it not obvious that global economic turmoil, collapsing oil prices, weak inflation, and a stronger dollar are clearly pointing to rapidly rising downside risks to the US economy? For financial market participants, they answer is a clear "yes." Expectations of the first rate hike have been pushed out to the end of this year, seemingly in complete defiance of Fed plans for policy normalization. The Fed may get there as well and abandon their carefully crafted mid-year plan, but I suspect they will not move quite as rapidly as financial market participants desire.
As a general rule, the Fed tends to act in a more deliberate fashion. To be sure, this was not evident during the crisis. Indeed, "panicky" might be a better adjective during that period. But note that in comparison to past bouts of tumolt on global markets, the US economy is in a much better place, with accelerating job growth when unemployment is already near traditional mandate-levels. From their point of view, this is a whole different world compared to that of the last round of Euro-induced crisis.
This take from Jonathan Spicer and Ann Saphir at Reuters probably saw less play than it deserved:
Tumbling oil prices have strengthened rather than weakened the Federal Reserve's resolve to start raising interest rates around midyear even as volatile markets and a softening U.S. inflation outlook made investors push back the timing of the "liftoff."
Kind of a "Fed is from Mars, markets are from Venus" situation. It is important to recognize that the Fed sees falling oil prices as a significant, unexpected development that represents the realization of an upside risk to their forecast. They are thinking of an outcome not unlike that revealed in the most recent Bloomberg/UMich read on consumer sentiment:
Through the roof, one might say. So at this point the Fed will view the external threats to the economy as just risks, but the very real move in oil is at a minimum adding upside risk to their forecasts or already pushing their forecasts to the upside. With regards to external threats, they probably think that more aggressive ECB action is in the wings to put their immediate fears to rest. And the downward push on inflation is, from their perspective, a transitory issue and therefore a non-issue.
Consider this also from the Reuters article:
Interviews with senior Fed officials and advisors suggest they remain confident the U.S. economy will be ready for a modest policy tightening in the June-September period, while any subsequent rate hikes will probably be slow and depend on how markets will behave.
in light of this from St. Louis Federal Reserve President James Bullard:
“The level of inflation is not so low that it can alone justify a policy rate of zero,” Mr. Bullard said in material prepared for a speech in Chicago.
and this from San Fransisco Federal Reserve President John Williams:
Placing heavy emphasis on the date of liftoff “suggests that you don’t have any other decisions to make,” Williams said. “We want to be very confident that we’re on the right path, that the data support that first move, but that first move on tightening is only one of many, many policy actions we’ll need to do during the normalization. It’s not the critical component.”
and this from Federal Reserve Chair Janet Yellen:
So, I think you raise a very important point because, although there is a great deal of market focus on the timing of liftoff, what to matter in thinking about the stance of policy is what the entire path of interest rates will look like. And I really don’t have much for you other than to say that they will be data dependent—that, over time, the stance of policy will be adjusted to try to keep the economy on a track where we see continuing progress toward achieving our goals of maximum employment and price stability.
My takeway is that the Fed sees the timing of the first rate hike as less important than everything that comes after that hike. This will leave them less eager to delay the hike. Given where the economy currently stands, I suspect they see little chance of damage from that first hike alone.
This is also interesting:
Some of those interviewed stressed that in the light of last year's strong jobs gains waiting until mid-year represented a cautious approach rather than an aggressive one, allowing the Fed to delay the rate liftoff if needed, particularly if inflation expectations turned sharply down.
The suggestion here is that at least some Fed officials view signaling a mid-year rate hike as the cautious approach because the data increasingly suggests to them that they should be moving sooner than later.
Bottom Line: I reiterate my view that despite the generally positive data flow, and the upward boost from oil, I don't see how they can justify raising rates without some reasonable acceleration in wage growth. That said, perhaps by my own argument above they can justify it on the basis of 25bp won't hurt anyone anyways. But my broader point is this: During normal times the Fed moves methodically if not ponderously. The current state of the economy gives them room to move as such. So I would not be surpised to see a fairly steady hand revealed in the next FOMC statement.
Posted by Mark Thoma on Monday, January 19, 2015 at 08:38 AM in Economics, Fed Watch, Monetary Policy |
Why do conservatives hate government?:
Hating Good Government, by Paul Krugman, Commentary, NY Times: It’s now official: 2014 was the warmest year on record. You might expect this to be a politically important milestone. ... So will the deniers now concede that climate change is real?
Of course not. Evidence doesn’t matter for the “debate” over climate policy... And this situation is by no means unique. Indeed,... it’s hard to think of a major policy dispute where facts actually do matter; it’s unshakable dogma, across the board. And the real question is why.
Before I get into that, let me remind you of some other news that won’t matter.
First, consider the Kansas experiment. Back in 2012 Sam Brownback, the state’s right-wing governor, went all in on supply-side economics: He drastically cut taxes, assuring everyone that the resulting boom would make up for the initial loss in revenues. Unfortunately..., his experiment has been a resounding failure. ... So will we see conservatives scaling back their claims about the magical efficacy of tax cuts...? Of course not. ...
Meanwhile, the news on health reform keeps ... being more favorable than even the supporters expected. ...
All this is utterly at odds with dire predictions that reform would lead to declining coverage and soaring costs. So will we see any of the people claiming that Obamacare is doomed ... revising their position? You know the answer.
And the list goes on..., a big chunk of America’s body politic holds views that are completely at odds with, and completely unmovable by, actual experience. ...
The question, as I said at the beginning, is why. Why the dogmatism? Why the rage...,why this hatred of government in the public interest? Well, the political scientist Corey Robin argues that most self-proclaimed conservatives are actually reactionaries. That is, they’re defenders of traditional hierarchy — the kind of hierarchy that is threatened by any expansion of government, even (or perhaps especially) when that expansion makes the lives of ordinary citizens better and more secure. I’m partial to that story, partly because it helps explain why climate science and health economics inspire so much rage.
Whether this is the right explanation or not, the fact is that we’re living in a political era in which facts don’t matter. This doesn’t mean that those of us who care about evidence should stop seeking it out. But we should be realistic in our expectations, and not expect even the most decisive evidence to make much difference.
Posted by Mark Thoma on Monday, January 19, 2015 at 12:24 AM in Economics, Politics |
Posted by Mark Thoma on Monday, January 19, 2015 at 12:06 AM in Economics, Links |
It can be morning again for the world’s middle class, by Lawrence Summers, FT [open link]:The most challenging economic issue ahead of us involves a group that will barely be represented at this week’s annual Davos summit — the middle classes of the world’s industrial countries..., no one should lose sight of the fact that without substantial changes in policy the prospects for the middle class globally are at best highly problematic.
First, the economic growth that is a necessary condition for rising incomes is threatened by the spectre of secular stagnation and deflation. ... Second, the capacity of our economies to sustain increasing growth and provide for rising living standards is not assured on the current policy path. ... Third, if it is to benefit the middle class, prosperity must be inclusive and in the current environment this is far from assured. ...
The experience of many countries and many eras shows that sustained growth in middle class living standards is attainable. But it requires elites to recognise its importance and commit themselves to its achievement. That must be the focus of this year’s Davos.
Posted by Mark Thoma on Sunday, January 18, 2015 at 11:05 AM in Economics, Income Distribution |
Driving the Obama Tax Plan: The Great Wage Slowdown: The key to understanding President Obama’s new plan to cut taxes for the middle class is the great wage slowdown of the 21st century. ... There is little modern precedent for a period of income stagnation lasting as long as this one. ...
The wage slowdown is the dominant force in American politics and will continue to be as long as it exists. ...
No politician, of either party, can quickly alter the basic forces behind the great wage slowdown. That’s why Mr. Obama has begun talking about a tax cut for the middle class, to be financed by a tax increase on the affluent — who have continued to do quite well in recent years. It’s also why several conservatives are talking about a cut in the payroll tax, the largest federal tax for most Americans.
And you can expect the 2016 presidential candidates to talk about middle-class tax cuts, too. ...
Posted by Mark Thoma on Sunday, January 18, 2015 at 09:50 AM in Economics, Income Distribution |
Posted by Mark Thoma on Sunday, January 18, 2015 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, January 17, 2015 at 12:06 AM in Economics, Links |
I've been studying inequality for more than 30 years, and for most of that time it's been an issue well out of the limelight. And so I've been delighted to see it enter the political conversation in a big way recently.
But something major is missing from that conversation, which centers on questions of fairness. Fairness clearly matters, but focusing on it presupposes a zero-sum competition between different classes. That's consistent with the conventional view that inequality is good for the rich and bad for the poor, and so the rich should favor it while the poor should oppose it. But the conventional view is wrong.
High levels of inequality are bad for the rich, too, and not just because inequality offends norms of fairness. As I'll explain, inequality is also extremely wasteful.
It's easy to demonstrate that growing income disparities have made life more difficult not just for the poor, but also for the economy's ostensible winners — the very wealthy. The good news is that a simple change in tax policy could free up literally trillions of dollars a year without requiring painful sacrifices from anyone. If that claim strikes you as far-fetched, you'll be surprised to see that it rests on only five simple premises. ...
He goes on to explain in detail.
Posted by Mark Thoma on Friday, January 16, 2015 at 09:26 AM in Economics, Income Distribution |
A lesson to be learned:
Francs, Fear and Folly, by Paul Krugman, Commentary, NY Times: ...On Thursday the Swiss National Bank, the equivalent of the Federal Reserve, shocked the financial world with a double whammy, simultaneously abandoning its policy of pegging the Swiss franc to the euro and cutting the interest rate it pays on bank reserves to minus, that’s right, minus 0.75 percent. Market turmoil ensued.
And you should feel a shiver of fear, even if you don’t have any direct financial stake in the value of the franc. For Switzerland’s monetary travails illustrate in miniature just how hard it is to fight the deflationary vortex now dragging down much of the world economy. ...
If you ask me, the Swiss just made a big mistake. But frankly — francly? — the fate of Switzerland isn’t the important issue. What’s important, instead, is the demonstration of just how hard it is to fight the deflationary forces that are now afflicting much of the world — not just Europe and Japan, but quite possibly China too. And while America has had a pretty good run the past few quarters, it would be foolish to assume that we’re immune.
What this says is that you really, really shouldn’t let yourself get too close to deflation — you might fall in, and then it’s extremely hard to get out. This is one reason that slashing government spending in a depressed economy is such a bad idea: It’s not just the immediate cost in lost jobs, but the increased risk of getting caught in a deflationary trap.
It’s also a reason to be very cautious about raising interest rates when you have low inflation, even if you don’t think deflation is imminent. Right now serious people — the same serious people who decided, wrongly, that 2010 was the year we should pivot from jobs to deficits — seem to be arriving at a consensus that the Fed should start hiking very soon. But why? There’s no sign of accelerating inflation in the actual data, and market indicators of expected inflation are plunging, suggesting that investors see deflationary risk even if the Fed doesn’t.
And I share that market concern. If the U.S. recovery weakens, either through contagion from troubles abroad or because our own fundamentals aren’t as strong as we think, tightening monetary policy could all too easily prove to be an act of utter folly.
So let’s learn from the Swiss. They’ve been careful; they’ve maintained sound money for generations. And now they’re paying the price.
Posted by Mark Thoma on Friday, January 16, 2015 at 12:24 AM in Economics, International Finance |
Posted by Mark Thoma on Friday, January 16, 2015 at 12:06 AM in Economics, Links |
Michael Leachman of the CBPP:
State and Local Tax Systems Hit Lower-Income Families the Hardest, CBPP: In nearly every state, low- and middle-income families pay a bigger share of their income in state and local taxes than wealthy families, a new report from the Institute on Taxation and Economic Policy (ITEP) finds. As the New York Times’ Patricia Cohen wrote, “When it comes to the taxes closest to home, the less you earn, the harder you’re hit.”...
In the ten states with the most regressive tax systems, the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy neighbors. ...
A number of states, including Kansas, North Carolina, and Ohio, have made the situation worse in recent years by cutting income taxes, the only major state revenue source typically based on ability to pay. Income tax cuts thus tend to push more of the cost of paying for schools and other public services to the middle class and poor — exactly the opposite of what is needed.
Posted by Mark Thoma on Thursday, January 15, 2015 at 10:36 AM in Economics, Income Distribution, Taxes |
Economic Lessons From Switzerland’s One-Day, 18 Percent Currency Rise: ...It is not every day that the currency of an advanced, economically important country rises by double-digit percentages against the currencies of other such countries within mere hours. But that is what happened to the Swiss franc on Thursday. It is up 18 percent against the euro as of Thursday morning, and at one point was up 39 percent. Currency strategists were searching for any analogue in modern history for a similarly abrupt move in major Western currency and coming up empty.
The Swiss move offers interesting lessons about the oddly precarious state of the global economy, but first it’s worth working through what exactly the Swiss National Bank has done. ...
Posted by Mark Thoma on Thursday, January 15, 2015 at 10:17 AM in Economics, International Finance |
Posted by Mark Thoma on Thursday, January 15, 2015 at 12:06 AM in Economics, Links |
Is anyone surprised?:
Republican assault on Dodd-Frank act intensifies, by Barney Jopson, FT: Republicans are intensifying an assault on the Dodd-Frank financial reform act in the second week of a new Congress...
Under attack in the House on Wednesday was part of the so-called Volcker rule, a provision of the reforms that limits bank risk taking.
Lawmakers voted 271-154 to delay from 2017 to 2019 a ban on banks holding securitised debt that has been packaged into collateralised loan obligations, with 29 Democrats supporting the postponement along with Republicans. ...
Because the Masters of the Universe need years and years to adjust to this change (Dodd-Frank was passed nearly *five* years ago). Or maybe they are simply hoping to delay and delay until they can get repeal? The president has said he will veto this if it also gets through the Senate, but they will likely try to attach it to other legislation to make a veto much harder.
I don't think the repeal of Glass-Steagall caused the financial crisis. But that doesn't mean the Volcker rule has no value, only costs. Repeal of Glass-Steagall sets up a vulnerability that could cause a crisis in the future, so it's worth fixing via the Volcker rule.
Posted by Mark Thoma on Wednesday, January 14, 2015 at 12:28 PM in Economics, Financial System, Politics, Regulation |
...Norman Ture indeed was the original supply-sider who basically told Chairman Mills to ignore the CEA’s recommendations for fiscal restraint in 1966. We now know the unfortunate history of politics not heeding the advice of sensible economists. And yes – the supply-siders once again pushed for fiscal stimulus in 1981. How did that work out? I bring this up today in light of the fact that Mitt Romney is once again running for President. The last time he did so, he advocated large tax cuts without any serious consideration of how to pay for them. I’m sure Romney will have plenty of supply-side enablers once again.
Posted by Mark Thoma on Wednesday, January 14, 2015 at 11:45 AM in Economics, Politics, Taxes |
Let us hope for a Syriza victory: If you think this sentiment is dangerous, because you have read that if this left wing party formed a government after the forthcoming Greek elections the Eurozone would be plunged into crisis, I suspect you should reconsider where you get your information from. Here is why.
Syriza wants to reduce the burden of Greek government debt by various means, which would clearly benefit Greece and mean losses for its creditors. Its bargaining position is strong because the government is running a primary surplus. This means that if all debt was written off and the Greek government was unable to borrowing anything more, it would be immediately better off because taxes exceed government spending. In contrast the creditors’ position in such a situation is normally very weak, which is why some kind of deal is usually done to reduce the debt burden. Creditors take a hit, but not as bad a hit as they would if all debt was written off. ...
Posted by Mark Thoma on Wednesday, January 14, 2015 at 10:02 AM in Economics |
From Clio Chang at The Century Foundation:
Seven Lessons about Child Poverty: Introduction: The official child poverty rate in the United States stands at 20 percent, the second-highest among its developed counterparts, for a total of almost 15 million children. Since the 2008 recession, 1.7 million more kids have fallen into poverty, according to UNICEF’s relative measure of poverty.
Compared to other age groups, a much higher share of Americans aged 0 to 18 are impoverished.
Let that sink in for a minute.
Why are we allowing so many Americans to start their lives in poverty, knowing that it likely will do them significant long-term damage, as well as limit our growth as a nation? It is a blow to our nation’s dedication to equal opportunity.
That question is especially perplexing because relatively simple, proven approaches would address some of the worst impacts of child poverty. What follows are seven lessons drawn from The Century Foundation’s Bernard L. Schwartz Rediscovering Government Initiative conference last June, Inequality Begins at Birth, that would help us tackle gaps in our public policy, as part of the Initiative’s equal opportunity agenda. The lessons are as follows:
Lesson 1: The Stress of Childhood Poverty Is Costly for the Brain and Bank Accounts ...
- The Stress of Childhood Poverty Is Costly for the Brain and Bank Accounts
- Child Poverty Is Not Distributed Equally
- The Power of Parental Education
- Higher Minimum Wage Is a Minimum Requirement
- Workplaces Need to Recognize Parenthood
- Government Works
- Cash Allowances Are Effective
Posted by Mark Thoma on Wednesday, January 14, 2015 at 12:24 AM in Economics, Income Distribution |
Posted by Mark Thoma on Wednesday, January 14, 2015 at 12:06 AM in Economics, Links |
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 |