Janet Yellen's Inflation Problem, by Tim Duy: Federal Reserve Chair Janet Yellen has been vexed by an inflation problem. Now she is also vexed by an inflation expectations problem. Last week she said (emphasis added):
Uncertainty concerning the outlook for inflation also reflects, in part, uncertainty about the behavior of those inflation expectations that are relevant to price setting. For two decades, inflation has been relatively stable, reacting less persistently than before to temporary factors like a recession or a swing in oil prices. The most convincing explanation for this stability, in my view, is that longer-term inflation expectations have remained quite stable. So it bears noting that some survey measures of longer-term inflation expectations have moved a little lower over the past couple of years, while proxies for these expectations inferred from financial market instruments like inflation-protected securities have moved down more noticeably. It is unclear whether these indicators point to a true decline in those inflation expectations that are relevant for price setting; for example, the financial market measures may reflect changing attitudes toward inflation risk more than actual inflation expectations. But the indicators have moved enough to get my close attention. If inflation expectations really are moving lower, that could call into question whether inflation will move back to 2 percent as quickly as I expect.
Subsequently, the University of Michigan's read on long-run inflation expectations plunged to a series low:
Just for reference, consider the behavior of the inflation expectations during the last three tightening cycles:
Spot the odd man out.
This, one would think, should grab Yellen's attention. There is speculation of what this means for this week's FOMC statement. For example see here:
“The key thing to watch will be whether the Fed changes its language on inflation expectations” in the statement it publishes after its meeting, said Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York.
They should change the language, but I don't think the will. The problem is that if the Fed acknowledges serious concern about declining inflation expectations, they have to deal with this line from the FOMC statement:
The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
It makes no sense to show concern with the possibility of unanchored inflation expectations to the downside while at the same time stating that you anticipate the next policy action will be a hike. If inflation expectations are no longer stable, then any rational central banker must act accordingly, and this this case that means easing policy. Anything else is simply irrational, and the Fed should be called out for it.
Do any of us believe the Fed is about to ease policy?
Chicago Federal Reserve President Charles Evans opened the door to an easier policy stance by offering Evans Rule 2.0: Commit to holding steady on rates until core inflation has reached the Fed's inflation target. But think of how big of a leap that would be for the Fed. The Chair just gave a relatively optimistic outlook for the US economy, reiterating her belief that higher rates were coming. Up until the May employment report (a report that Yellen downplayed), policy makers were falling over each other to put the June meeting in play, pushing the message that was eventually revealed in the minutes of the April meeting. Unemployment is at 4.7 percent, a level generally believed within the Fed as consistent with full employment. Second quarter growth looks to be respectable in the 2.0-2.5 percent range. Financial markets stabilized after a tumultuous first quarter. Oil prices moved higher. In short, there is a reason Fed officials put June into play.
It's hard to see the Fed moving from "we plan to hike rates as early as June" to "rate hikes are off the table until inflation hits 2 percent" in just a few weeks. Moreover, adopting Evans Rule 2.0 would dramatically jack up the odds that the Fed would subsequently need to hit the inflation target from above. But the Fed has shown little willingness to consider anything other than hitting the target from below. A shift to Evans Rule 2.0 would take a sea change of sentiment at the Fed. I don't see it happening in just a few weeks on the basis of essentially one number.
So my expectation is that the Fed does not change its inflation expectations language in this week's FOMC statement. If they do, they have to understand that they market participants will price out rate hikes until 2017. I don't think they want this; I think instead the Fed will be working to keep July in play (a tall order in my opinion).
There is now a natural press conference question to add to my existing list:
Chair Yellen, last week you said that inflation expectations were low enough to be on your radar. Now they have turned even lower, but the FOMC declined to acknowledge the weakness in this FOMC statement. Just how low do inflation expectations need to be before the Fed acts?
I would guess that this is the first question for Yellen.
Bottom Line: It is reasonable to think that the Fed will change their inflation expectations language at this week's FOMC meeting. Completely rational considering Yellen's comment last week. A comment that I suspect she now regrets. But a change to the language requires a policy response I don't think the Fed is ready to make. If I am wrong, if the Fed is much more dovish than recent comments, or the most recent minutes, suggest.
Posted by Mark Thoma on Sunday, June 12, 2016 at 03:38 PM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Sunday, June 12, 2016 at 12:06 AM in Economics, Links |
Macroeconomics, Fantasy, Reality, and Intellectual Utility…: A very nice overview piece this morning from smart young whippersnapper Noah Smith:
Noah Smith: Economics Struggles to Cope With Reality: "Four different activities... go by the name of macroeconomics... But they actually have relatively little to do with each other.... Coffee-house macro.... Finance macro.... Academic macro.... Fed macro....
However, I think he has picked the wrong four. ...
Posted by Mark Thoma on Saturday, June 11, 2016 at 09:34 AM in Economics, Macroeconomics |
Luigi Zingales at ProMarket:
RBI Governor Rajan’s Fight Against Crony Capitalism: In any country in the world, a central banker who has managed to reduce inflation from 11 percent to 5 percent while simultaneously enabling an increase in growth from 5 percent to 8 percent in just three years would have a guaranteed reconfirmation. Not in India. The Governor of India’s Central Bank, Raghuram Rajan, much admired by the international press, is under heavy attack in his country. ...
Why such anger? With his work, Rajan is fighting not only inflation, but also the inefficiency of the banking system, burdened by bad loans. The Indian banking system is mainly in public hands and was used to finance crony capitalism, which has held the country back for too many years. ...
As Governor, Rajan has rightly decided to force the banks to cut down exposure to their most dubious borrowers, even at the cost of bringing out non-performing loans. ...
Though it was the right thing, this policy has produced collateral damage: banks’ share prices were affected, and even more affected were those Indian oligarchs who had enjoyed easy credit. They are the ones fueling dissent, because Rajan has dared to publicly criticize the behavior of some of them. ...
Despite these attacks, public opinion is strongly on Rajan’s side. ... Rajan, ... is the dream of the new India: young, competent, and reached the top of the Indian central bank because of his skill, not because of his political alignment. ...
By late August, Indian Prime Minister Narendra Modi will have to decide whether to reconfirm him. This decision is the litmus test for change in India. On one hand is the young India, competent and meritocratic, that is conquering the world with its software and products, on the other hand is the India of the great political and economic dynasties, who established their power on political connections, if not directly on corruption, and that use a false sense of national identity to protect their declining power. It’s up to Modi to choose.
Posted by Mark Thoma on Saturday, June 11, 2016 at 09:34 AM in Economics, India |
Impact of the ‘great bailout’: Evidence from car sales, by Efraim Benmelech, Ralf R Meisenzahl, Rodney Ramcharan: Nearly a decade since it took place, the US federal government’s rescue of the financial system in 2008-2009 remains highly controversial. At the time, the Troubled Asset Relief Program (TARP), which injected equity into commercial banks and provided for the bailout of the General Motors Acceptance Corporation (GMAC) — the lending arm of General Motors— and the US automobile sector, was initially rejected by Congress as a ‘bailout to bankers’. And even today, populists on both the right and the left echo a similar refrain, as economic growth remains tepid while asset prices boom. Moreover, nuance and careful research by highly respected economists observe that more aggressive intervention to relieve the household debt burden might have made for a stronger economic recovery (Mian and Sufi 2014). It remains an open question, then, whether the government’s rescue of the financial sector helped the US economy beyond Wall Street. Or was the government’s focus on the financial sector fundamentally misplaced?
We may never have definitive answers to these questions. But in new research, we suggest that without federal intervention to stabilize financial markets and recapitalize some non-bank lenders such as GMAC, the magnitude of the economic collapse in 2008-2009 might have been much worse (Benmelech et al. 2016). Before the financial crisis, a large network of non-bank financial institutions, such as mortgage brokers and consumer finance companies —the shadow banking system — became increasingly important sources of credit in the US. For example, finance companies like GMAC financed about half of new car sales in 2005. The form of shadow banking financing differed markedly from traditional banks. While the latter use government insured deposits to make loans, non-bank lenders make loans using short-term uninsured wholesale funding, mostly from entities such as money market funds (MMFs) and pension funds.1 In 2008 and 2009, MMFs and pension funds became unwilling or unable to fund many of these non-bank lenders (Kacperczyk and Schnabl 2013). Car sales collapsed in the US, and GM and Chrysler entered bankruptcy...
Skipping ahead to the last paragraph:
It may difficult to definitively judge whether the federal resources and attention devoted to rescuing the financial system, relative to relieving household debt overhang, was appropriate. And the evidence in Mian and Sufi (2014) makes a compelling case that too little might have been done for households. But Wall Street and Main Street are intimately connected. And despite the enormous scale of the federal rescue of the US financial sector, our work and others show that the dislocations in financial markets resonated well beyond Wall Street. One can surmise then that without the rescue, the Great Recession of 2008-2009 might have been much more severe. ...
Posted by Mark Thoma on Saturday, June 11, 2016 at 09:34 AM in Economics, Financial System |
Posted by Mark Thoma on Saturday, June 11, 2016 at 12:06 AM in Economics, Links |
The Overinflated Fear of Being Priced Out of Housing: Rising home prices set off fears that real estate will become even more expensive, making it impossible ever to buy a home in a given city.
It’s easy to understand how such worries spread, but the historical record suggests that these fears are generally exaggerated. ...
There is another wrinkle, however. Demand lately has tilted toward homes in central cities, where land is scarce, rather than in more spacious distant suburbs. This creates imbalances. ... While living space is constrained in the heart of large, high-priced cities like New York, builders elsewhere have usually been able to accommodate people’s demands for cheap large homes roughly where they want them. ...
Given these facts, why do people still worry that home prices are getting out of reach? The answer can’t be found in the housing data. Instead, these fears may reflect anxieties about other issues — like income inequality, globalization and the threat of job losses because of robots and artificial intelligence. In prosperous cities, rising prices may connote economic exclusion.
After all, American society is increasingly divided according to educational attainment and income. In some circles, rarefied home prices may set off worries about being unable to live in choice locations shared with successful people. Home prices may, unfortunately, be viewed as a measurement of success in life rather than merely of floor space, and fear of being priced out of housing may well be rooted in deeper broodings about maintaining a position in the social hierarchy.
Posted by Mark Thoma on Friday, June 10, 2016 at 10:09 AM in Economics, Housing, Income Distribution |
Next week's meeting of the Federal Open Market Committee (FOMC) includes a press conference with Chair Janet Yellen. These are five questions I would ask if I had the opportunity to do so in light of recent events.
1. What's the deal with labor market conditions?
You advocated for the creation of the Federal Reserve's Labor Market Conditions Index (LMCI) to serve as a broader measure of the labor market and as an alternative to a narrow measure such as the unemployment rate...
Continues at Bloomberg....
Posted by Mark Thoma on Friday, June 10, 2016 at 09:14 AM in Economics, Fed Watch, Monetary Policy |
"Group identity is an unavoidable part of politics":
Hillary and the Horizontals, by Paul Krugman, NY Times: I spent much of this politically momentous week at a workshop on inequality... As so often happens at conferences..., what really got me thinking was a question during coffee break: “Why don’t you talk more about horizontal inequality?”
What? Horizontal inequality is the term of art for inequality measured, not between individuals, but between racially or culturally defined groups. ... And like it or not, horizontal inequality, racial inequality above all, will define the general election. ...
Defining oneself at least in part by membership in a group is part of human nature. Even if you try to step away from such definitions, other people won’t..., a truth reconfirmed by the upsurge in vocal anti-Semitism unleashed by the Trump phenomenon.
So group identity is an unavoidable part of politics... Racial and ethnic minorities know that very well, which is one reason they overwhelmingly supported Hillary Clinton, who gets it, over Mr. Sanders, with his exclusive focus on individual inequality. And politicians know it too.
Indeed, the road to Trumpism began with ideological conservatives cynically exploiting America’s racial divisions. The modern Republican Party’s central policy agenda of cutting taxes on the rich while slashing benefits has never been very popular, even among its own voters. It won elections nonetheless by getting working-class whites to think of themselves as a group under siege, and to see government programs as giveaways to Those People. ...
And race-based political mobilization cuts both ways. Black and Hispanic support for Democrats makes obvious sense, given the fact that these are relatively low-income groups that benefit disproportionately from progressive policies. ... But the overwhelming nature of that support reflects group identity.
Furthermore, some groups with relatively high income, like Jews and, increasingly, Asian-Americans, also vote strongly Democratic. Why? The answer in both cases, surely, is the suspicion that the same racial animus that drives many people to vote Republican could, all too easily, turn against other groups with a long history of persecution. ...
The Republican nominee represents little more than the rage of white men over a changing nation. And he’ll be facing a woman — yes, gender is another important dimension in this story — who owes her nomination to the very groups his base hates and fears.
The odds are that Mrs. Clinton will prevail, because the country has already moved a long way in her direction. But one thing is for sure: It’s going to be ugly.
Posted by Mark Thoma on Friday, June 10, 2016 at 08:40 AM in Economics, Politics |
Posted by Mark Thoma on Friday, June 10, 2016 at 12:06 AM in Economics, Links |
It’s Not Just Millennials Who Aren't Buying Homes: In recent years, much attention has been focused on the growing tendency of millennials to rent. Theories for the decrease in homeownership among young adults abound. They include rising student debt levels that crowd out additional borrowing, a tendency to live in more urban areas where the cost to buy is relatively high, a generally tougher credit environment, and even shifts in the perception of homeownership in the wake of the housing bust. The ideas have been widely debated, and yet no single factor seems to neatly explain the declining share of the millennial population opting to buy a house. (See this webcast by the Atlanta Fed's Center for Real Estate Analytics for a discussion of these issues.)
To the extent that these factors are true, they may be affecting the decisions of other generations as well. Chart 1 below shows the overall average homeownership rate and homeownership rates by age group from 1982 to 2015. It's clear that homeownership rates have declined for everyone during the past 10 years, not just for millennials.
In fact, homeownership among young Generation Xers has fallen by a bit more than the millennial generation since the housing peak—declining 11 percentage points since 2005 compared with a decline of 9 percentage points for those under 35 years old. ...
The data suggest that whatever is affecting millennials' homeownership decisions is applicable to older individuals as well. Further, it seems there are other, possibly larger, factors affecting homeownership, such as the changing face of America. Although homeownership rates by family types and racial groups are a bit above the level seen in 1994, the average person in 2015 was about as likely to live in a home that is owned or being bought. Thus, the shift in the distribution of the population toward racial groups and family types (and likely other factors) that tend to have lower homeownership rates is likely exerting an important influence on the overall homeownership rate.
Posted by Mark Thoma on Thursday, June 9, 2016 at 08:02 AM in Economics, Housing |
Dennis Rasmussen at The Atlantic
The Problem With Inequality, According to Adam Smith, by Dennis C. Rasmussen, The Atlantic: ...Many a scholar has made a career, in recent decades, by pointing out that this view of Smith is a gross caricature. ...
What has received little attention, even by those who approach Smith’s thought from the contemporary left, is that he also identified some deep problems with economic inequality. ... When people worry about inequality today, they generally worry that it inhibits economic growth, prevents social mobility, impairs democracy, or runs afoul of some standard of fairness. ...
None of these problems, however, were Smith’s chief concern—that economic inequality distorts people’s sympathies, leading them to admire and emulate the very rich and to neglect and even scorn the poor. Smith used the term “sympathy” ... to denote the process of imaginatively projecting oneself into the situation of another person, or of putting oneself into another’s shoes. ... And he claimed that, due to a quirk of human nature, people generally find it easier to sympathize with joy than with sorrow, or at least with what they perceive to be joy and sorrow. ...
What’s more, Smith saw this distortion of people’s sympathies as having profound consequences: It undermines both morality and happiness. First, morality. Smith saw the widespread admiration of the rich as morally problematic because he did not believe that the rich in fact tend to be terribly admirable people. On the contrary, he portrayed the “superior stations” of society as suffused with “vice and folly,” “presumption and vanity,” “flattery and falsehood,” “proud ambition and ostentatious avidity.” In Smith’s view, the reason why the rich generally do not behave admirably is, ironically, that they are widely admired anyway...
Smith also believed that the tendency to sympathize with the rich more easily than the poor makes people less happy. ...Smith’s writings ... associated happiness with tranquility—a lack of internal discord—and insisted not only that money can’t buy happiness but also that the pursuit of riches generally detracts from one’s happiness. ... Happiness consists largely of tranquility, and there is little tranquility to be found in a life of toiling and striving to keep up with the Joneses. ...
[See the full article for more, e.g. Smith's ideas on the alleviation of poverty.]
Posted by Mark Thoma on Thursday, June 9, 2016 at 07:58 AM in Economics, History of Thought, Income Distribution |
Posted by Mark Thoma on Thursday, June 9, 2016 at 12:06 AM in Economics, Links |
Bad business: This post mainly uses examples from the UK, but I suspect much the same story could be told in many countries. The reaction to Obama's criticism of Wall Street was extraordinary, until perhaps you realize that in the US political support is sometimes a commodity that corporations and the wealthy can buy. I return to the US at the end of this post.
I am sure the employment regime that existed at 'Sports Direct' would horrify anyone. A system of discipline that penalized taking time off sick such that ambulances responding to emergency calls were regular visitors to the factory. Many of the staff were not paid the minimum wage. This is what can happen when the majority of workers are not represented by a union, and local jobs are scarce, or other employers are not much better. We know about it because of the work of investigative journalists, but there are few of them left so how many other cases do we not know about?
A long time ago the Conservative party represented business, and the Labor party represented employees through their links to trade unions. In the 1980s the power of the trade unions was significantly reduced, and Labor leaders even thought they could gain votes by attacking some union actions. Since then, Labor have avoided ever siding with workers in industrial disputes. This continues under the current leadership... As a result, we can ask who represents employees against exploitation by employers within the workplace, and who represents society against rent seeking by employers at the national level?
The Conservative party was and still is the party of business. ... In the last election business leaders did all they could to support the Conservatives, both financially and with explicit support. When this tight link between a political party and business is combined with an ideological belief among many in the party that regulations such as those that support employees are 'red tape' that needs to be cast aside, we get a mix which is potentially dangerous for employees and society. ...
An interesting question is why this should be seen as a problem for Labor. The answer has to be that approval by business is seen by many voters as a mark of economic competence. Of course economists know that running a business is very different from running the economy. ... But the media environment encourages a rather different view. ...
The result of all this may be that Labor wants to avoid appearing anti-business. ...Conservatives will throw the anti-business charge the moment Labor adopts any measures that restrict business freedom or threatens the incomes of business executives, and business leaders – for reasons already explained – will back them up. If this leads to a significant number of voters concluding that Labor are not competent to run the economy, we are in danger of hard wiring bad business. As Luigi Zingales observes in this perceptive article, although there is a deep distrust of crony capitalism among many Republican supporters, they still elected a crony capitalist.
Posted by Mark Thoma on Wednesday, June 8, 2016 at 07:49 AM in Economics, Politics |
Posted by Mark Thoma on Wednesday, June 8, 2016 at 12:06 AM in Economics, Links |
Justin Fox (also in today's links):
This Job Market Slump Started a While Ago: The sharp May hiring slowdown revealed in Friday's employment report took a lot of people -- including me -- by surprise. It shouldn't have. Things have actually been on the downswing for the U.S. labor market for months, according to the Federal Reserve's Labor Market Conditions Index.
The LMCI is a new measure cooked up by Federal Reserve Board economists in 2014 that consolidates 19 different labor market indicators to reflect changes in the job market. ... As you can see from the chart, the index has now declined for five straight months -- its worst performance since the recession. The index does get revised a lot. ...
Though the signals coming from the U.S. labor market have been mostly negative for several months now, according to the LMCI, they'll have to get much worse before it indicates that the economy is falling into a recession. Still, this is clearly more than just one off month.
Posted by Mark Thoma on Tuesday, June 7, 2016 at 08:46 AM in Economics, Unemployment |
From Microeconomic Insights:
The dynamics of labor market adjustment to trade liberalization, by Rafael Dix-Carneiro: International trade theory has typically ignored the costs of adjusting to a change in trade policy, focusing instead on static models and long-run conclusions. However, adjustment costs are central to much of the controversy over trade liberalization. This work measures the importance of the dynamics of adjustment in shaping the distributional consequences of trade policy, and characterizes the time it takes for the economy to complete the transition to the new long-run equilibrium. When these adjustment costs are taken into account, the benefits of trade liberalization can be substantially smaller. ...
Posted by Mark Thoma on Tuesday, June 7, 2016 at 08:41 AM in Economics, International Trade, Unemployment |
From the CBPP:
Commentary: Under Current Poverty Programs, It Pays to Work, Despite House Republicans’ Contentions, by June 6, 2016 by Isaac Shapiro: In the overwhelming majority of cases, adults in poverty are significantly better off if they take a job, work more hours, or receive a wage hike, we found in our recent comprehensive analysis of the data and research related to work and the safety net. Further, various changes in the safety net over the past two decades (including health reform, or the Affordable Care Act) have substantially increased incentives to work for people in poverty.
Nevertheless, leading up to the release of their forthcoming plan to address poverty, House Republicans continue to claim that the low-income assistance system strongly discourages work. They have said that people receiving assistance from these programs often receive more, or nearly as much, from not working — and receiving government aid — than from working. Or they’ve argued that low-paid workers have little incentive to work more hours or seek higher wages because losses in government aid will cancel out the earnings gains. They may repeat such claims in the coming days. But our research has found that these assertions don’t withstand scrutiny. ...
Policymakers should not ignore those circumstances in which marginal tax rates can be quite high. But it’s important they also recognize that such circumstances are concentrated among a small fraction of families with earnings just above the poverty line that receive benefits from a number of programs that phase down simultaneously — and, just as importantly, that reducing such marginal rates involves very difficult tradeoffs.
There are really only two options to lowering marginal tax rates. One is to phase out benefits more slowly as earnings rise; this reduces marginal tax rates for those currently in the phase-out range. But it also extends benefits farther up the income scale and increases costs considerably, a tradeoff that many policymakers may not want to make. The second option is to shrink (or even eliminate) benefits for people in poverty so they have less of a benefit to phase out and thus lose less as benefits are phased down. This reduces marginal tax rates, but it pushes poor families into — or deeper into — poverty and increases hardship, and thus may cause significant harm to children in these families. In effect, the second option would “help” the poor by making them worse off. ...
The solution that some who use marginal-tax-rate arguments to attack safety net programs have advanced in the past — block grants with extensive state flexibility — does nothing to resolve these inevitable tradeoffs. Block grants would merely pass the buck in making these tradeoffs from federal to state decision-makers.
Posted by Mark Thoma on Tuesday, June 7, 2016 at 07:48 AM in Economics, Social Insurance |
This paper by Gauti Eggertsston, Neil Mehrotra, Sanjay Singh, and Larry Summers was released yesterday as an NBER Working paper. The paper looks at secular stagnation in open economy and examines how it is transmitted across countries (in an OLG framework with many countries and imperfect capital integration). One interesting implication is that if the Fed pursues an interest rate hike, and the rest of the world does not follow, we should expect strong capital flows into the US thus possibly generating a mismatch between desired savings and investment. This, in turn, leads to a drop in the US natural rate of interest forcing the Fed to cut rates again to avoid a recession:
A Contagious Malady? Open Economy Dimensions of Secular Stagnation, by Gauti B. Eggertsson, Neil R. Mehrotra, Sanjay R. Singh, Lawrence H. Summers, NBER Working Paper No. 22299: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.
A related variation that strips down the argument in the paper (which uses and elaborate DSGE model) into a simple textbook IS-MP framework is in this year's AER Papers and Proceedings volume. The results are much the same. See here. The more elaborate model should give people comfort in knowing that the key insights hold once you put add all the bells and whistles of a modern DSGE (or perhaps it's the other way around).
Posted by Mark Thoma on Tuesday, June 7, 2016 at 04:32 AM in Academic Papers, Economics |
Posted by Mark Thoma on Tuesday, June 7, 2016 at 12:06 AM in Economics, Links |
Employment Report, Yellen, and More, by Tim Duy: Lot's of Fed news over the past few days that add up to a simple takeaway: June is off the table (again), the stars have to align just right for a July rate hike (not likely), and September is coming into focus as the next possible rate hike opportunity. September, however, assumes that the employment report is more of an outlier than part of a trend. that's what the Fed will be taking out of the data in the coming months.
Nonfarm payrolls grew by a disappointing 38K in May, low even after accounting for the Verizon strike. Downward revisions struck previous months, leaving behind a marked deceleration in job growth:
Slowest three-month average since 2011. Perversely, the unemployment rate dropped to 4.7 percent, breaking a long period of stagnate readings. The decline, however, was driven by an exit from the labor force - not exactly the improvement we were hoping for. Measures if underemployment continue to track generally sideways at elevated levels:
By these metrics, progress toward full employment has slowly noticeably. Wage growth, however, is showing signs of improvement, and should get a boost next month from base year effects:
How should we interpret the mess that is the May employment report? One take is to treat it as an anomaly, simply a bad draw. Federal Reserve Chair Janet Yellen leaned in this direction in today's speech. After characterizing the economy as near full employment, she added:
So the overall labor market situation has been quite positive. In that context, this past Friday's labor market report was disappointing...Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report. Other timely indicators from the labor market have been more positive. For example, the number of people filing new claims for unemployment insurance--which can be a good early indicator of changes in labor market conditions--remains quite low, and the public's perceptions of the health of the labor market, as reported in various consumer surveys, remain positive...
Still, the data disappointed sufficiently to push her to the sidelines:
That said, the monthly labor market report is an important economic indicator, and so we will need to watch labor market developments carefully.
Later she adds:
Over the past few months, financial conditions have recovered significantly and many of the risks from abroad have diminished, although some risks remain. In addition, consumer spending appears to have rebounded, providing some reassurance that overall growth has indeed picked up as expected. Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? My colleagues and I will be wrestling with these and other related questions going forward.
Will Yellen be able to answer these questions with enough confidence to hike in July? Doubtful, in my opinion. A strong report for May would have been sufficient to put them on track for a July hike. But now a July hike requires a sharp rebound in June payroll growth plus substantial upward revisions to the May numbers (in addition to the rest of the data falling into place). That is not likely, and may account for Yellen dropping the "coming months" language when referring to the expected policy path. June or July looked like reasonable possibilities last week, but not so much now.
A second interpretation, however, is more ominous. In this interpretation, the employment data is finally catching up with the slower pace of GDP growth:
The acceleration that began in 2013 looks to have played itself out by the middle of last year. Job growth remained strong, however, pushing productivity growth into negative territory. This, as David Rosenberg explains at Business Insider, was not sustainable. Something had to give, and the labor market finally gave. Similarly, wage growth is a lagging indicator - if the labor market is faltering, the current pace of gains will not be sustainable.
Similarly, note that the ISM services data looks to be catching up to this story as well:
In addition, temporary employment payrolls is flashing a yellow light:
If this is the story, the the Fed will move to the sidelines for an extended period of time, pushing out any hope of a rate hike until December. That assumes the Fed does not make a policy error by rushing to raise rates in these circumstances.
In other news, Federal Reserve Governor Daniel Tarullo, who rarely speaks publicly on monetary policy, defined the current dynamic within the FOMC as those looking to hike versus those looking not to hike. Via MarketWatch:
In an interview with Bloomberg TV, Tarullo said he is in the camp of Fed officials that backs further, gradual, rate hikes but said he is more cautious about a move than some others in that camp.
One group favoring gradual rate hikes wants to hike “unless there is a reason not to” in order to avoid problems with inflation later on, he said.
The other camp, where he sits, wants “an affirmative reason to move” and asks “why do we need” an interest rate hike. Tarullo said.
“The second approach I’ve been a little bit more inclined towards is to say ‘gee, you know, it is not clear what full employment is, we’re in a global environment that is not inflationary, we can perhaps get some more employment and some higher wages which will be particularly useful to those more on the margins of the labor force,’” Tarullo said.
Positioning himself ahead of the FOMC meeting as opposing a rate hike. And this was before the employment report.
Federal Reserve Governor Lael Brainard also put down her marker ahead of the meeting:
Prudent risk-management would suggest the risks from waiting until the totality of the data provides greater confidence in a rebound in domestic activity, and there is greater certainty regarding the "Brexit" vote, seem lower than the risks associated with moving ahead of these developments. This is especially true since the feedback loop through exchange rate and financial market channels appears to be elevated. In light of this amplified feedback loop, when conditions are appropriate for a policy move, it will be important that it be understood that any subsequent moves would be conditioned on further evidence confirming continued progress toward our objectives and not as inevitable steps on a preset course.
I think these are both key influencers within the FOMC; Brainard's resistance to rate hikes in particular is something that hawks would need to overcome to get their way. I don't think that will be easy.
Chicago Federal Reserve President Charles Evans called for an Evans Rule 2.0:
The question is whether such upside risks would increase substantially under a policy of holding the funds rate at its current level until core inflation returned to 2 percent. I just don’t see it. Given the shallow path of market policy expectations today, there is a good argument that inflationary risks would not become serious even under this alternative policy threshold. And when inflation rises above 2 percent, as it inevitably will at some point, the FOMC knows how to respond and will do so to provide the necessary, more restrictive financial conditions to keep inflation near our price stability objective.
So one can bet he would oppose a rate hike in June. Or July. And even St. Louis Federal Reserve President James Bullard has lost his appetite for a near-term rate hike. Via the Wall Street Journal:
Federal Reserve Bank of St. Louis President James Bullard said in an interview Monday that he is leaning against supporting a rate rise at the central bank’s coming meeting.
If the Fed is going to raise its short-term interest-rate target, “I’d rather move on the back of good news about the economy,” Mr. Bullard told The Wall Street Journal. And since the Fed will be meeting following the release of the underwhelming May jobs data, it is a “fair assessment” the argument for raising rates is now considerably weaker than it had been
Meanwhile, Atlanta Federal Reserve President Dennis Lockhart worked to keep July in play:
“I don’t personally see a lot of cost to being patient to the July meeting at least,” Lockhart said Monday in a Bloomberg Television interview with Michael McKee in New York. “I think we can be watchful and see how things develop over the next few weeks.”
There will be resistance to letting the markets price out July. That will play into the FOMC's crafting of their statement next week as well as Yellen's press conference.
Bottom Line: The May employment report killed the chances of a rate hike in June. And it was weak enough that July no longer looks likely as well. I had thought that, assuming a solid May number they would set the stage for a July hike. That seems unlikely now; they will probably need two months of good numbers to overcome the May hit. The data might bounce in the direction of July, to be sure. Hence Fed officials won't want to take July off the table just yet, so expect, in particular, the more hawkish elements of the FOMC to keep up the tough talk.
Posted by Mark Thoma on Monday, June 6, 2016 at 02:28 PM in Economics, Fed Watch, Monetary Policy |
Nicole Dussault, Maxim Pinkovskiy, and Basit Zafar at the NY Fed's Liberty Street Economics blog:
Is Health Insurance Good for Your Financial Health?: What is the purpose of health care? What is the purpose of health insurance? When people fall ill, they seek health care in order to get better. But insurance has a slightly different function: Its main role is not to protect our health per se, but to protect our finances. For most people, lifetime health expenditures are quite low. However, some people have enormous health costs owing to major illnesses or health conditions. And this is where health insurance comes in—its goal (like that of any other form of insurance) is to protect these individuals against large, and sometimes ruinous, health expenditures. Has the recent health reform served this purpose?
Protection against financial hardship was one of the drivers behind passage of the 2010 Patient Protection and Affordable Care Act, commonly known as the Affordable Care Act (ACA). ...
In this blog post, we discuss the results of a research project that examines the effect of the Affordable Care Act’s Medicaid expansion on personal financial indicators. We find suggestive evidence that after the implementation of the ACA in the first quarter of 2014, counties with a high uninsurance burden pre-reform in states that subsequently expanded Medicaid had a decrease in average debt sent to collections agencies compared with such counties in states that did not expand Medicaid.
Our findings are consistent with prior research that has provided evidence that health insurance is good for individual finances...
While the full effects of the Affordable Care Act on financial health are yet to be seen, and while the effects of the ACA—positive or negative—are not restricted to financial health, we offer suggestive early evidence that the Medicaid expansion is fulfilling the goal of health insurance: providing “peace of mind” by protecting against financial hardship. ...
Posted by Mark Thoma on Monday, June 6, 2016 at 09:06 AM in Economics, Health Care, Social Insurance |
The Semi-Surprising Weakness of U.S. Imports: I suspect the big jobs report meant that last Friday’s trade release got a bit less attention than normal.
The dollar’s strength continues to have the expected impact on real exports, more or less. Excluding petrol, real goods exports are down 2.5 percent in the first four months of the year (relative to the same period in 2016). ... This is pretty common when the real dollar is strong. .... The real dollar ... is about between 10 and 15 percent points higher than it was in early 2014.
I am surprised though at how flat imports continue to be. Real goods imports are about half a point lower in the first four months of 2016 than in the first four months of 2015... Real goods imports haven’t really changed at all for say the last 15 or so months. ...
While real GDP growth hasn’t been spectacular, demand has continued to grow. .... Positive demand growth usually means positive import growth, which mechanically subtracts from overall growth. ... Most careful analysis also has shown there is some impact of the dollar on imports, even if the impact on exports is greater.
So I at least find the weakness in goods imports a bit puzzling weakness. It isn’t explained by falling oil imports either...
And, as a result of more or less flat imports, net exports haven’t subtracted significantly from U.S. growth over the last four quarters — which also runs against my priors.
Put a bit differently, it wouldn’t surprise me if net exports emerge as a stronger headwind over the next couple of quarters. All it would take is for imports to start to respond a bit more normally to U.S. demand growth.
Posted by Mark Thoma on Monday, June 6, 2016 at 08:48 AM
If the economy goes into recession, Republicans will stand in the way of the needed response from monetary and fiscal policy:
A Pause That Distresses, by Paul Krugman, NY Times: Friday’s employment report was a major disappointment: only 38,000 jobs added, a big step down from the more than 200,000 a month average since January 2013. Special factors, notably the Verizon strike, explain part of the bad news, and in any case job growth is a noisy series... Still, all the evidence points to slowing growth. It’s not a recession, at least not yet, but it is definitely a pause in the economy’s progress. ...
So what is causing the economy to slow? My guess is that the biggest factor is the recent sharp rise in the dollar, which has made U.S. goods less competitive on world markets. The dollar’s rise, in turn, largely reflected misguided talk by the Federal Reserve about the need to raise interest rates. ...
Whatever the cause of a downturn, the economy can recover quickly if policy makers can and do take useful action. ...
But that won’t — in fact, can’t — happen this time. Short-term interest rates, which the Fed more or less controls, are still very low... We now know that it’s possible for rates to go slightly below zero, but there still isn’t much room for a rate cut.
That said, there are other policies that could easily reverse an economic downturn. ... For the simplest, most effective answer to a downturn would be fiscal stimulus...
But unless the coming election delivers Democratic control of the House, which is unlikely, Republicans would almost surely block anything along those lines. Partly, this would reflect ideology... It would also reflect an unwillingness to do anything that might help a Democrat in the White House. ...
If not fiscal stimulus, then what? For much of the past six years the Fed, unable to cut interest rates further, has tried to boost the economy through large-scale purchases of things like long-term government debt and mortgage-backed securities. But it’s unclear how much difference that made — and meanwhile, this policy faced constant attacks and vilification from the right, with claims that it was debasing the dollar and/or illegitimately bailing out a fiscally irresponsible president. We can guess that the Fed will be very reluctant to resume the program...
So the evidence of a U.S. slowdown should worry you. I don’t see anything like the 2008 crisis on the horizon (he says with fingers crossed behind his back), but even a smaller negative shock could turn into very bad news, given our political gridlock.
Posted by Mark Thoma on Monday, June 6, 2016 at 08:09 AM in Economics, Fiscal Policy, Monetary Policy, Politics |
Posted by Mark Thoma on Monday, June 6, 2016 at 12:06 AM in Economics, Links |
Larry Summers (Update: Washing Post link)
... What I find surprising is that US and global markets and financial policymakers seem much less sensitive to “Trump risk” than they are to “Brexit risk”. Options markets suggest only modestly elevated volatility in the period leading up to the presidential election. ...
Yet, as great as the risks of Brexit are to the British economy, I believe the risks to the US and global economies of Mr Trump’s election as president are far greater. If he is elected, I would expect a protracted recession to begin within 18 months. The damage would be felt far beyond the United States. ...
Posted by Mark Thoma on Sunday, June 5, 2016 at 10:19 AM in Economics, Politics |
Posted by Mark Thoma on Sunday, June 5, 2016 at 10:17 AM in Econometrics, Economics, Video |
Posted by Mark Thoma on Sunday, June 5, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, June 4, 2016 at 12:06 AM in Economics, Links |
A Disappointing Employment Report: The headline jobs number was very disappointing, and there were downward revisions to job growth for prior months. The key negatives were few jobs added (only 38 thousand, although the Verizon strike cut the job growth by about 37 thousand), a decline in the participation rate, and a sharp increase in the number of people working part time for economic reasons. A few positives include wage growth, a lower unemployment rate (however, for the wrong reason - a lower participation rate), and fewer long term unemployed. ...
There are still signs of slack (as example, part time workers for economic reasons increase sharply, and elevated U-6), but there also signs the labor market is tightening (decline in long term unemployed, slight pickup in wages). Overall this was a disappointing report.
The way to bet is that two-thirds of the surprising component of this month's employment report will be reversed over the next quarter or so.
Nevertheless: does anybody want to say that the Federal Reserve's increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was prudent in retrospect? Anyone? Anyone? Bueller?
And does anybody want to say--given that the downside risks we are now seeing were in the fan of possibilities as of last December, and given that the Federal Reserve could have quickly reacted to neutralize any inflationary pressures generated by the upside possibilities in the fan last December--that the Federal Reserve's increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was sensible as any form of an optimal-control exercise?
And we haven't even gotten to the impact of the withdrawal of risk-bearing capacity from the rest of the world that happens in a Federal Reserve tightening cycle...
Job Growth Plunges in May, Although the Unemployment Rate Fall to 4.7 Percent: The Labor Department reported that the economy created just 38,000 new jobs in May, the weakest job growth since September of 2010, when it lost 52,000 jobs. In addition, the jobs numbers for the prior two months were revised down by 59,000, bringing the average for the last three months to just 116,000.
The household survey showed a drop of 0.3 percentage points in the unemployment rate, but this is not especially good news. The decline was almost entirely due to people leaving the labor force. The employment to population ratio [EPOP] was unchanged at 59.7 percent, 0.2 pp below the peak for the recovery.
The drop in EPOPs is especially disturbing since it is among prime age workers and it is for both women and men. ... While many analysts have tried to explain this drop as a supply side story, it seems implausible... The only plausible explanation is that the demand for labor has weakened sharply. ...
Other data in the household survey was mixed. The number of people involuntarily working part-time jumped by 468,000 (7.8 percent). However the duration measures of unemployment all fell in May. The percentage of the unemployment due to voluntary quits was little changed. The number of people who chose to work part-time continued its upward path, growing by 110,000. It is now 640,000 above its year ago level.
There was little positive news in the establishment survey. ...
There is little change in the wage growth picture, with wages up by 2.5 percent over the last year, although the annualized rate comparing the most recent three months with the prior three months is somewhat better at 2.9 percent. It is important to remember that wages have been rising faster than total compensation, as employers have been reducing the generosity of their health care benefits.
Adding to the picture of weakness in this report, the one-month employment diffusion index, which shows the percentage of industries adding jobs, was just 51.3 in May, the lowest reading since February of 2010. The 3-month and 6-month indexes, which reflect employer hiring intentions, were similarly weak. The index of aggregate hours rose just 0.1 percent in May, the same as the prior two months and is actually below its January level. It would be difficult for the Fed to look at these data and say that the economy should be growing more slowly.
Posted by Mark Thoma on Friday, June 3, 2016 at 07:12 AM in Economics, Unemployment |
Donald Trump is "mind-bogglingly petty":
The Id That Ate the Planet, by Paul Krugman, NY Times: ...Donald Trump’s personality endangers the whole planet. ...
The outlook for climate change if current policies continue has never looked worse, but the prospects for turning away from the path of destruction have never looked better. Everything depends on who ends up sitting in the White House for the next few years. ...
But what happens if the next president is a man who doesn’t believe in climate science, or indeed in inconvenient facts of any kind?
Republican hostility to climate science and climate action is usually attributed to ideology and the power of special interests, and both of these surely play important roles. ... Meanwhile, buying politicians is a pretty good business investment for fossil-fuel magnates like the Koch brothers.
But I’ve always had the sense that there was a third factor, which is basically psychological. There are some men — it’s almost always men — who become enraged at any suggestion that they must give up something they want for the common good..., for example, prominent conservatives suggesting violence against government officials because they don’t like the performance of phosphate-free detergent. But polluter’s rage isn’t about rational thought.
Which brings us to the presumptive Republican presidential nominee ...
No doubt Donald Trump hates environmental protection in part for the usual reasons. But there’s an extra layer of venom to his pro-pollution stances that is both personal and mind-bogglingly petty.
For example, he has repeatedly denounced restrictions intended to protect the ozone layer — one of the great success stories of global environmental policy — because, he claims, they’re the reason his hair spray doesn’t work as well as it used to. I am not making this up.
He’s also a bitter foe of wind power..., his real motivation seems to be ire over unsuccessful attempts to block an offshore wind farm near one of his British golf courses.
And if evidence gets in the way of his self-centeredness, never mind. Recently he assured audiences that there isn’t a drought in California, that officials have just refused to turn on the water.
I know how ridiculous it sounds. Can the planet really be in danger because a rich guy worries about his hairdo? But Republicans are rallying around this guy just as if he were a normal candidate. And if Democrats don’t rally the same way, he just might make it to the White House.
Posted by Mark Thoma on Friday, June 3, 2016 at 06:41 AM in Economics, Environment, Politics |
Posted by Mark Thoma on Friday, June 3, 2016 at 12:06 AM in Economics, Links |
I am going to have to redo the videos and other materials for my online macroeconomics course that uses this text:
How to Teach Intermediate Macroeconomics after the Crisis?, by Olivier Blanchard: Having just concluded a seven-year run as chief economist of the International Monetary Fund, and having to rewrite the seventh edition of my undergraduate macroeconomics book (link is external) , I had to confront the issue: How should we teach macroeconomics to undergraduates after the crisis? Here are some of my conclusions (I shall focus here on the short and medium runs; it will take another blog to discuss how we should teach growth theory).
The Investment-Saving (IS) Relation The IS relation remains the key to understanding short-run movements in output. In the short run, the demand for goods determines the level of output. A desire by people to save more leads to a decrease in demand and, in turn, a decrease in output. Except in exceptional circumstances, the same is true of fiscal consolidation.
I was struck by how many times during the crisis I had to explain the “paradox of saving” and fight the Hoover-German line, “Reduce your budget deficit, keep your house in order, and don’t worry, the economy will be in good shape.” Anybody who argues along these lines must explain how it is consistent with the IS relation.
The demand for goods, in turn, depends on the rate at which people and firms can borrow (not the policy rate set by the central bank, more on this below) and on expectations of the future. John Maynard Keynes rightly insisted on the role of animal spirits. Uncertainty, pessimism, justified or not, decrease demand and can be largely self-fulfilling. Worries about future prospects feed back to decisions today. Such worries are probably the source of our slow recovery. (link is external)
The Liquidity Preference/Money Supply (LM) Relation The LM relation, in its traditional formulation, is the relic of a time when central banks focused on the money supply rather than the interest rate. ... The reality is now different. Central banks think of the policy rate as their main instrument and adjust the money supply to achieve it. Thus, the LM equation must be replaced, quite simply, by the choice of the policy rate by the central bank, subject to the zero lower bound. ... This change had already taken place in the new Keynesian models; it should make its way into undergraduate texts.
Integrating the Financial System into Macro Models If anything, the crisis has shown the importance of the financial system for macroeconomics. Traditionally, the financial system was given short shrift in undergraduate macro texts. The same interest rate appeared in the IS and LM equations; in other words, people and firms were assumed to borrow at the policy rate set by the central bank. We have learned, dearly, that this is not the case and that things go very wrong.
The teaching solution, in my view, is to introduce two interest rates, the policy rate set by the central bank in the LM equation and the rate at which people and firms can borrow, which enters the IS equation, and then to discuss how the financial system determines the spread between the two. I see this as the required extension of the traditional IS-LM model. A simple model of banks showing the role of capital, on the one hand, and the role of liquidity, on the other, can do the trick. Many of the issues that dominated the crisis, from losses and low capital to liquidity runs can be discussed and integrated into the IS-LM model. With this extension, one can show both the effects of shocks on the financial system and the way in which the financial system modifies the effects of other shocks on the economy.
(Getting Rid of) Aggregate Demand–Aggregate Supply Turning to the supply side, the contraption known as the aggregate demand–aggregate supply model should be eliminated. It is clunky and, for good reasons, undergraduates find it difficult to understand. Its main point is to show how output naturally returns to potential with no change in policy, through a mechanism that appears marginally relevant in practice..
These difficulties are avoided if one simply uses a Phillips Curve (PC) relation to characterize the supply side. ...
Again, this way of discussing the supply side is already standard in more advanced presentations and the new Keynesian model (although the Calvo specification used in that model, as elegant as it is, is arbitrarily constraining and does not do justice to the facts). It is time to integrate it into the undergraduate model.
The IS-LM-Phillips Curve Model Put together, these modified IS, LM, and PC relations can do a good job of explaining recent and current events. For example, financial dislocations lead to a large spread between the borrowing and policy rates. The zero lower bound (or as we have learned, the slightly negative lower bound) prevents the central bank from decreasing the policy rate by enough to maintain demand. Output falls. Inflation decreases, potentially to the point where it turns into deflation, increasing real interest rates, and making it even harder to return to potential output.
One can go much further. ...
Macroeconomics is a tremendously exciting subject. Most of what we taught before the crisis remains highly relevant. But it needs some dusting and updating. My hope is that a model along the lines above can contribute to it.
Posted by Mark Thoma on Thursday, June 2, 2016 at 11:48 AM in Economics, Macroeconomics |
President Obama leans into Social Security expansion: “It’s time we finally made Social Security more generous and increased its benefits so today’s retirees and future generations get the dignified retirement that they have earned.”
Guess who said that? Bernie Sanders? Hillary Clinton? The Donald? Sen. Warren? Dean Baker? Me? None of the above.
Those words were spoken by President Obama on Wednesday in his economics speech in Elkhart, Ind. ...
But wouldn’t it be fiscally reckless to expand benefits, say, for low-income retirees? Well, first, you heard the president suggest a “payfor,” by increasing taxes on those at the top of the scale. In fact..., there’s now a smaller share of covered earnings below the tax max: about 81 percent now vs. 90 percent a few decades ago. So there’s a real margin for new revenue to support the program.
Second, if you consider the three-legged retirement security stool — savings, pensions and Social Security — for many less well-off aging people, the latter is in the best financial shape of all..., contrary to critics’ false claims, it ain’t exactly going broke.
That said, the big point here is that we should get the venerable program on a more solid fiscal trajectory, one that doesn’t just close the long-term funding gap but considers an expansion of the type the president suggested. ...
It’s great to hear the president defending this essential, efficient, progressive program. ...
Posted by Mark Thoma on Thursday, June 2, 2016 at 10:44 AM in Economics, Social Insurance, Social Security |
Full session: Plenary Session: Minimum Wages Presented by: Alan. B. Krueger
(Lecture starts at 6:35)
1 Richard Blundell, University College London and Institute of Fiscal Studies
2 Arindrajit Dube, University of Massachusetts Amherst
Posted by Mark Thoma on Thursday, June 2, 2016 at 09:52 AM in Economics, Video |
Rethinking Macro Policy: Progress or Confusion?: On April 15 and 16, 2015, the IMF hosted the third conference on “Rethinking Macroeconomic Policy.” I had initially chosen as the title and subtitle “Rethinking Macroeconomic Policy III. Down in the Trenches.” I thought of the first conference in 2011 as having identified the main failings of previous policies, the second conference in 2013 as having identified general directions, and this conference as a progress report. My subtitle was rejected by one of the co-organizers, Larry Summers. He argued that I was far too optimistic, that we were nowhere close to knowing where were going. Arguing with Larry is tough, so I chose an agnostic title and shifted to “Rethinking Macro Policy III: Progress or Confusion?” Where do I think we are today? I think both Larry and I are right. I do not say this for diplomatic reasons. We are indeed proceeding in the trenches. But where the trenches will eventually lead remains unclear. This is the theme I shall develop in these concluding remarks, focusing on macroprudential tools, monetary policy, and fiscal policy. ...
Brad DeLong responds: On this one--views of fiscal policy--put me down not for progress but for "confusion for $2000", Alex, for on this one I think the very sharp Olivier Blanchard has got it wrong. ...
Posted by Mark Thoma on Thursday, June 2, 2016 at 08:03 AM in Economics, Macroeconomics |
Posted by Mark Thoma on Thursday, June 2, 2016 at 12:06 AM in Economics, Links |
Waiting For The Employment Report, by Tim Duy: Last week Federal Reserve Chair Janet Yellen gave the green light for a rate hike this summer. Via the Wall Street Journal:
“It’s appropriate…for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate,” she said during a panel discussion at the Radcliffe Institute for Advanced Study at Harvard University.
This follows on the back numerous Fed speakers, as well as the minutes of the last meeting, that helped place June into play. Of course, Yellen's "coming months" could easily be beyond June, and I suspect that her concern about underemployment and low wage growth will induce her to proceed cautiously and take a pass on June. That said, the meeting is clearly in play and the bar for the next rate hike appears relatively low.
The personal income and spending report bolstered the hawkish position that first quarter economic jitters were much ado about nothing. Real spending jumped 0.6 percent on the back of a lower savings rate, helping to put a floor under the year-over-year numbers:
The consumer stubbornly refuses to believe that a recession is underway.
Inflation firmed somewhat for the month:
Two of the last three monthly readings on the core were just above 2 percent annualized, something that will also give confidence to Fed hawks that their inflation forecast will play out (they will assume headline will head in that direction). Compared to a year ago, however, core inflation continues to languish below target.
The ISM report came in somewhat better than expected considering weak regional surveys. Most of the action was in suppliers delivers (slower), customers' inventories (flat), and prices (higher). New orders held up well; employment still a touch below 50:
On net, neither a great relief nor a disaster. But then it is probably too early to expect the healing touch of a weaker dollar and stronger oil to be evident in the manufacturing data.
In addition, construction spending was down (see Calculated Risk), which, in addition to the ISM report brought the Atlanta Fed estimate of Q2 GDP growth down to a still respectable 2.5 percent from 2.8 percent. If the Fed could be confident in the number, they would have a strong incentive to hike. But I suspect they will wanted an even clearer picture that won't be available until the July meeting at the earliest.
The Beige Book was fairly uneventful on most accounts. Growth was still just "modest" but with an optimistic outlook:
Information received from the 12 Federal Reserve Districts mostly described modest economic growth since the last Beige Book report. Economic activity in April through mid-May increased at a moderate pace in the San Francisco District, while modest growth was reported by Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, and Minneapolis. Chicago noted that the pace of growth slowed, as did Kansas City. Dallas reported that economic activity grew marginally, while New York characterized activity as generally flat since the last report. Several Districts noted that contacts had generally optimistic outlooks, with firms expecting growth either to continue at its current pace or to increase.
There was some anecdotal evidence that hawks will use to justify a rate hike:
Employment grew modestly since the last report, but tight labor markets were widely noted; wages grew modestly, and price pressure grew slightly in most Districts.
In my opinion, modest wage growth and slight price pressures do not sound particularly worrisome.
Auto sales ran at estimated 17.4 million annual rate in May. Bloomberg suggested that the numbers might scare the Fed straight:
U.S. auto sales were softer than predicted in May, a bellwether month that may help Federal Reserve decision makers determine whether the economy can handle an interest-rate hike this summer.
My guess is that the Fed already knows that auto sales are leveling out and are not likely to be a significant source of growth going forward. In other words, I have to imagine it is already in the forecast.
Another Bloomberg story to keep an eye on:
Softening apartment rents in New York and San Francisco have forced landlord Equity Residential to lower its revenue forecast for the second time this year, as newly signed leases aren’t meeting the company’s expectations.
Equity Residential said it expects revenue growth from properties open at least a year to be no higher than 4.5 percent this year, according to a statement Wednesday. The reduction follows one made in April, when the Chicago-based real estate investment trust set the upper limit at 5 percent, down from a previous estimate of 5.25 percent.
Two thoughts. First is that maybe multifamily construction has finally caught up with demand, thus rent growth will slow and so will its impact on inflation. Second thought is that if demand for apartments is tapering off, then it may be that millennials are growing out of apartments and into single family housing. This handoff is thus likely to continue:
Look for softer underwriting conditions and marketing campaigns to help encourage this shift.
The Verizon strike likely negatively impacted the headline nonfarm payrolls numbers in the May employment report, so adjust your expectations accordingly. I would pay special attention to the unemployment rate and metrics of underemployment; the Fed would be more inclined to hike rates if progress on these from resumed.
Bottom Line: Nothing here suggests to me that the Fed will soon reject their expectation of a rate hike in the "coming months."
Posted by Mark Thoma on Wednesday, June 1, 2016 at 03:37 PM in Economics, Fed Watch, Monetary Policy |
There Goes the Fed's Credibility, by Narayana Kocherlakota: Back in January 2012, the Federal Reserve promised to keep its preferred measure of inflation close to 2 percent over the longer run. More than three years later, that promise remains unfulfilled, casting doubt on the central bank's willingness to deliver.
The latest reading for the measure, known as the price index for personal consumption expenditures, showed annual inflation running at only 1.1 percent in April. Excluding volatile food and energy prices, the inflation rate was 1.6 percent. ...
Some would say that central banks are out of ammunition... Actually, though, the Fed has been deliberately tightening monetary policy over the past three years. ...
To understand the Fed's motivations, consider this: Would it have started pulling back on stimulus in May 2013 if its short-term interest-rate target had been at 5 percent instead of near zero, and if it hadn’t been holding trillions of dollars in bonds? I strongly suspect that the Fed would instead have added stimulus by lowering interest rates. If so, then the Fed's current course is driven not by state of the economy, but by a desire to get interest rates and its balance sheet back to what is considered "normal." ...
Posted by Mark Thoma on Wednesday, June 1, 2016 at 07:48 AM in Economics, Monetary Policy |
I have something at MoneyWatch:
Tax hikes on the wealthy: Good or bad for growth?: Conservatives have argued for decades that tax cuts are the key to economic prosperity. And the tax plan presumptive GOP nominee Donald Trump is pushing would cut taxes for the top 0.1 percent of earners by an average of approximately $1.3 million per year, embracing that conservative point of view.
On the other hand, Democrats such as front-runner Hillary Clinton take another approach. Clinton says she'll reform the U.S. tax code so that the wealthiest pay their fair share. The response from Republicans has been predictable: They argue that such a tax plan will lower growth and harm the economy.
Do the conservative arguments against tax increases have any merit? Or are they, as Democrats claim, a way to serve an ideological goal of smaller government and reward wealthy Republican donors? Let's take a closer look. ...
Posted by Mark Thoma on Wednesday, June 1, 2016 at 06:58 AM in Economics, MoneyWatch, Taxes |
Posted by Mark Thoma on Wednesday, June 1, 2016 at 12:06 AM in Economics, Links |
I have a new column:
Yes, Nick Kristof, There Is a Conservative Bias in Economics: Nicholas Kristof recent reignited the debate over liberal bias in academia with his claim that “universities risk becoming liberal echo chambers and hostile environments for conservatives.” He does single out my profession, economics, as being better than most social science departments in representing conservative viewpoints:
“Economists remain influential. I wonder if that isn’t partly because there is a critical mass of Republican economists who battle the Democratic economists and thus tether the discipline to the American mainstream.”
But the extent to which conservative ideology is represented within the profession is much larger than a simple tally of the number of conservatives versus liberals indicates. ...
It was too long, so I cut this part:
In my 30 years of participating in the hiring of new faculty, I can’t recall a single time when the politics of the candidate came up in the discussion, or when there was resistance to the type of question the candidate’s research was addressing. The research may have been viewed as uninteresting, flawed, or otherwise unlikely to make a splash in the best journals, but all that mattered was the quality of the research and the likelihood it would help our department to get better. If an applicant is likely to publish important papers in the top journal in the field, they will be offered job. I don’t even know the politics of many of my colleagues, it’s just not something that comes up in the day-to-day work on research. And it wouldn’t be simple to characterize their views in any case as I suspect some would be liberal on social issues, but conservative with respect to economic policy.
Posted by Mark Thoma on Tuesday, May 31, 2016 at 06:47 AM in Economics, Politics |
Heather Boushey "talks with economist Claudia Goldin about the gender wage gap and some of its implications
A Grand Gender Convergence: Its Last Chapter“—and I love the title of that—you argue that the gender wage gap cannot be explained by differences in productivity between men and women. Instead, when we look at occupations, we see that there is a price paid for flexibility in the workplace. ... Can you tell me a little bit more about this result?
Claudia Goldin: So the key finding is that there is a gender wage gap. But the question is why? We know from lots of people’s work that we used to be able to squeeze a lot of the gap away due to differences in education—differences in your college major, whether you went to college or not, whether you have a Ph.D., an M.D., whatever. We were also able to squeeze a lot away on the basis of whether you had continuous work experience or not.
Today, we are not able to squeeze much away. In fact, women on average have more education than men. The quantities [of women with college degrees] are higher, and even the qualities [of degrees] aren’t that much different anymore. And the extent of past labor force participation is pretty high. Lifecycle labor force participation for women is very, very high. So we can’t squeeze that much away anymore.
What’s also really striking is that, given lots of factors such as an individual’s education level, many occupations have very large gender gaps and some occupations have very small gender gaps. Looking at occupations at the higher part of the income spectrum, which is also the higher part of the education spectrum — so occupations where about 50 or 60 percent of all college graduates are—we see that the biggest gaps are in occupations in the corporate and finance field, in law, and in health occupations that have high amounts of self-employment. And the smallest gaps are found in occupations in technology, in science, and in lots of the health occupations where there is a very low level of self-employment.
That’s sort of a striking finding.
Then when we dig deeper and look at particular occupations—in law, for example, and in the corporate and finance field—we see a couple of things. We see that differences in hours have very high penalties even on a per hour basis. Differences in short amounts of time off have very high penalties, unlike in other fields. And many of the differences occur at the event of or just after the event of first birth. So there is something that looks like women disproportionately, relative to men, are doing something different after they have kids.
When we look at men and women in the finance and corporate fields who haven’t taken any time off and among the women who don’t have kids, we find that the differences are really tiny. So those are the differences that are coming about, not surprisingly, from the fact that women are valuing predictability, and flexibility, and many other aspects of the job that many men are not valuing.
So, looking at data for the United States, we find that this change from being an employee, a worker, and a professional, to being an employee, a worker, a professional, and a parent has a disproportionate impact on women.
Now one might say, isn’t that because the United States has really lousy coverage in terms of parental leave policy, and in terms of subsidized daycare? Well, there are two very interesting papers, one for Sweden and one for Denmark. Both countries have policies that are just about the best in the world...
And women are moving into occupations that have more flexibility, but they are working fewer hours and getting less per hour. And the same sorts of things are going on even in countries that have incredibly good parental leave policies, subsidized daycare, schools that appear to us to be better, and what we think of as social norms that are better. ...
Posted by Mark Thoma on Tuesday, May 31, 2016 at 06:39 AM in Economics |
Posted by Mark Thoma on Tuesday, May 31, 2016 at 12:06 AM in Economics, Links |
The current state of the race:
Feel the Math, by Paul Krugman, NY Times: ...So far, election commentary has been even worse than I imagined it would be..., bang-your-head-on-the-desk awful... I know this isn’t scientific, but based on conversations I’ve had recently, many people ... have been given a fundamentally wrong impression of the current state of play..., people aren’t being properly informed about the basic arithmetic of the situation.
Now, I’m not a political scientist or polling expert... But I am fairly numerate, and I assiduously follow real experts... And they’ve taught me some basic rules that I keep seeing violated.
First, at a certain point you have to stop reporting about the race for a party’s nomination as if it’s mainly about narrative and “momentum.” ... Eventually ... it all becomes a simple, concrete matter of delegate counts.
That’s why Hillary Clinton will be the Democratic nominee; she locked it up over a month ago with her big Mid-Atlantic wins...
And no, saying that the race is effectively over isn’t somehow aiding a nefarious plot to shut it down by prematurely declaring victory. ... You may think those people chose the wrong candidate, but choose her they did.
Second, polls can be really helpful at assessing the state of a race, but only if you fight the temptation to cherry-pick... What the polling experts keep telling us to do is rely on averages of polls rather than highlighting any one poll in particular. ...
Which brings us to the general election. Here’s what you should know, but may not be hearing clearly in the political reporting: Mrs. Clinton is clearly ahead, both in general election polls and in Electoral College projections based on state polls. ... So unless Bernie Sanders refuses to concede and insinuates that the nomination was somehow stolen by the candidate who won more votes, Mrs. Clinton is a clear favorite to win the White House.
Now, obviously things can and will change over the course of the general election campaign. Every one of the presidential elections I’ve covered at The Times felt at some point like a nail-biter. But the current state of the race should not be a source of dispute or confusion. Barring the equivalent of a meteor strike, Hillary Clinton will be the Democratic nominee; despite the reluctance of Sanders supporters to concede that reality, she’s currently ahead of Donald Trump. That’s what the math says, and anyone who says it doesn’t is misleading you.
Posted by Mark Thoma on Monday, May 30, 2016 at 08:29 AM in Politics |
Posted by Mark Thoma on Monday, May 30, 2016 at 12:06 AM in Economics, Links |
Bill McBride at Calculated Risk:
The War on Data, Calculated Risk: People have different priorities and different values. But we share the same data. Over the last few days, we've heard a presidential contender make comments completing ignoring the data. This should concern everyone - ignoring data leads to irresponsible comments and poor policy decisions.
First, I live in California, and I was shocked to hear Donald Trump say there is no drought in the state. That is the opposite of what the data says! Here is an excerpt from Daniel Swain at the California Weather Blog (written 10 days ago discussing the data):
While the reservoirs in California’s wetter, more northern reaches have reached (or are nearing) capacity after a slightly wetter-than-average winter in that part of the state, multi-year water deficits remain enormous. The 2015-2016 winter did bring some drought relief to California, but nearly all long-term drought indicators continue to suggest that California remains in a significant drought. ...
... Mr. Trump's comments were incorrect and irresponsible.
Second, Mr. Trump was also quoted as saying that anyone who believes the unemployment rate is 5% is a "dummy".
Trump says he thinks the US unemployment rate is close to 20 percent and not the 5 percent reported by the Labor Department.
Anyone who believes the 5 percent is a “dummy,” he said.
I don't believe the headline U-3 unemployment rate tells the entire story, and that is why I also track U-6 (a measure of underemployment) and other measures. But U-3 is measured in a transparent way - and remains a key measure of unemployment - and is measured consistently.
When we use U-6 (includes "unemployed, plus all marginally attached workers plus total employed part time for economic reasons") we need to compare to previous readings of U-6, not previous readings of U-3. Currently U-6 is at 9.7%. U-6 bottomed in 2006 at 7.9% and in 2000 at 6.8%. So U-6 is still elevated and there is still slack in the labor market.
Also, some people think the participation rate will increase significantly as the labor market improves. I've written about the participation rate extensively... There is no huge hidden pool of workers that will suddenly show up in the labor force. Looking at the data, Mr. Trump's suggestion that unemployment is closer to 20% than 5% is absurd.
I guess Trump thinks I'm a "dummy"! I think he is reckless and irresponsible.
Posted by Mark Thoma on Sunday, May 29, 2016 at 07:03 PM in Economics, Politics |
Posted by Mark Thoma on Sunday, May 29, 2016 at 12:06 AM in Economics, Links |
On the road headed to my dad's 80th birthday party, so just a quick one for now. This is from VoxEU:
How bank networks amplify financial crises: Evidence from the Great Depression, by Kris James Mitchener and Gary Richardson: How financial networks propagate shocks and magnify recessions is of interest to both scholars and policymakers. The financial crisis of 2007-8 convinced many observers that financial networks were fragile, and while reforms are underway, much remains to be learned about how and why connections between financial firms matter for the macroeconomy. Indeed, the complexity and sheer number of linkages has made it particularly challenging to formulate empirical estimates of their role in amplifying downturns.
Economic theory suggests many channels through which networks may transmit shocks (Allen and Gale 2000, Cabellero and Simesek 2013) and empirical research has provided some evidence of contagious failures flowing through interbank markets, particularly for the recent financial crisis in the US and Europe (Puhr et al. 2012, Fricke and Lux 2012). History should have a lot to say about the role of networks in contributing to the severity of financial crises, but it is a surprisingly lightly studied aspect of earlier periods of financial turmoil – even for well-researched episodes such as the Great Depression. This lacuna exists despite the fact that financial networks of the past may be simpler in structure, thus making it somewhat easier to identify empirically how aggregate variables, such as lending, were affected when linkages were disrupted.
In a recent paper, we document how the interbank network transmitted liquidity shocks through the US banking system and how the transmission of these shocks amplified the contraction in real economic activity during the Great Depression (Mitchener and Richardson 2016). The paper contributes to the growing literature on financial networks and the real economy, illuminating both a mechanism for transmission (interbank deposits) as well as a source of amplification (balance-sheet effects). It also introduces an additional channel through which banking distress deepened the Great Depression and complements existing research on how bank distress during the Great Depression influenced the real economy.
We describe how a pyramid-like structure of interbank deposits developed in the 19th century, how the founding of the Fed altered the holdings of these deposits, and how this structure then influenced real economic activity during periods of severe distress, such as banking panics (Mitchener and Richardson 2016). The interbank network that existed on the eve of the Great Depression linked large money centre banks in New York and Chicago to tens of thousands of smaller rural banks throughout the US. The money centre banks served as correspondents holding deposits from institutions in the countryside. Interbank balances exposed correspondent banks to shocks afflicting banks in the hinterland. Interbank deposits were a liquid source of funds that could be deployed to meet sudden demands by depositors to convert claims to cash, and the removal of these deposits from correspondent banks peaked during periods that contemporary commentators described as – and that our detailed statistical analysis of bank suspensions confirms were – banking panics. Although the pyramided system of interbank deposits could handle idiosyncratic bank runs, when runs clustered in time and space (i.e. when panics occurred) the system became overwhelmed in the sense that banks higher up the pyramid were forced to adjust to these changes in liabilities by changing their assets (i.e. lending). ...
Ironically, the Federal Reserve System had been created with the purpose of preventing crises such as those that had regularly plagued the banking system in the 19th century. We help to explain why the Fed failed to fulfill this basic responsibility. ...
Posted by Mark Thoma on Saturday, May 28, 2016 at 10:20 AM in Economics, Financial System |
Posted by Mark Thoma on Saturday, May 28, 2016 at 12:06 AM in Economics, Links |