Takeaways From Fischer Speech, by Tim Duy: Federal Reserve Governor Stanley Fischer gave a very nice speech this weekend that shed light on the current monetary policymaking process. I found three points particularly notable. First:
One important but underappreciated aspect of the SEP is that its projections are based on each individual's assessment of appropriate monetary policy. Each FOMC participant writes down what he or she regards as the appropriate path for policy. They do not write down what they expect the Committee to do. Yet the public often misinterprets the interest rate paths we write down as a projection of the Committee's policy path or a commitment to a particular path.
The interest rate projections in the SEP do not represent the Committee’s forecast because there is no such forecast. And they certainly do not represent a policy commitment. It is often easy, however, to use the shorthand of referring to the median of the SEP projections as the Fed’s forecast, which is why we fall in the habit of doing so. It is important to realize, however, that this is not an official forecast, and even if it were, it can change over the year so it is not a promise.
My preference is to view the median SEP projection as a baseline to assess policy shifts throughout the year. For instance, I do not believe that incoming data suggests that the Fed will raise its projection relative to the baseline at the upcoming March FOMC meeting. In other words, the median projection is not likely to shift from three to four hikes. This further suggests that given the Fed’s predilection to delay rate hikes in favor of further labor market gains, there is no pressing reason for the Fed to hike in March. They still have plenty of time to raise rates three times this year if necessary and the data do not suggest they need to move early to act on the possibility of needing four rate hikes this year. So no rate hike is likely in March.
A second point from Fischer:
Figure 2 reproduces panels from the April 2011 Tealbook that show the staff's baseline forecast--the solid black line--as well as prescriptions from three simple policy rules that were generated using the FRB/US model. The panel on the left shows the paths for the federal funds rate, while the panels on the right show the implications of those policy prescriptions for the unemployment rate and core PCE (personal consumption expenditures) price inflation, respectively…
… How does the FOMC choose its interest rate decision? Fundamentally, it uses charts like those shown in figure 2 as an important input into the discussion. And in their discussion, members of the FOMC explain their policy choices, and try to persuade other members of the FOMC of their viewpoints.
An important takeaway here is that the Fed makes monetary policy decisions on the basis of a medium term forecast. In other words, they tailor policy to meet their objectives over the medium term. This stands in contrast with criticism that the Fed either only sees the short-term outcomes of their actions or that they base policy only on the last piece of data. In reality, they are incorporating that most recent data into the medium term forecast and adjusting policy appropriately.
This process, however, is challenging for the public to understand. Moreover, I do not think the Fed has spent sufficient time explaining their actions in terms of the forecast. I suspect that the Fed may not be doing itself any favors with the opening paragraph of the FOMC statement, which is backwards-looking in nature and portrays the impression that the most recent data is the basis of policymaking. I thus appreciate that Fischer is using charts like these to explain policy choices and hope to see more of it in the future.
A final point from Fischer:
As the August 2011 meeting illustrates, the eureka moment I thought I had 50-plus years ago was a chimera. Why is that? First, the economy is very complex, and models that attempt to approximate that complexity can sometimes let us down. A particular difficulty is that expectations of the future play a critical role in determining how the economy reacts to a policy change. Moreover, the economy changes over time--this means that policymakers need to be able to adapt their models promptly and accurately in real time. And, finally, no one model or policy rule can capture the varied experiences and views brought to policymaking by a committee. All of these factors and more recommend against accepting the prescriptions of any one model or policy rule at face value.
The Fed relies on models, but not only models. Moreover, those models, or the underlying components of those models, such as the natural rate of interest, change over time. This is not a weakness of policymaking, it is a strength. The Fed responds to a ;changing economy. It is not possible to place the Fed in the straightjacket of a simplistic Taylor Rule and expect good outcomes for the economy. Clearly this is intended to push back at ongoing efforts to limit the Fed’s independence.
Bottom Line: Read Fischer’s speech for a greater understanding of the interplay between models, forecasts, data and judgment that governs the Fed’s policy choices.
Posted by Mark Thoma on Monday, February 13, 2017 at 03:05 PM in Economics, Fed Watch, Monetary Policy |
I have a new column:
If Trump Stacks Its Board, He Politicizes the Fed and Demeans Its Independence: Daniel Tarullo announced on Friday that he is resigning from the Federal Reserve Board of Governors in early April, nearly five years before his term expires on January 31, 2022. Governor Tarullo, who was appointed by President Obama in 2009, led the effort to plug the holes in financial regulation that allowed the housing bubble and financial panic to occur. So his resignation comes at an inopportune time for those of us worried about Trump’s plans for wholesale deregulation of the financial sector and the vulnerability to another financial crisis that comes with it.
Trump could also have a large impact on how the Fed conducts monetary policy..., the Fed could be permanently damaged...
Posted by Mark Thoma on Monday, February 13, 2017 at 02:34 AM in Economics, Monetary Policy, Politics |
There's a reason Republicans don't like experts:
Ignorance Is Strength. by Paul Krugman, NY Times: When I travel to Asia, I’m fairly often met at the airport by someone holding a sign reading “Mr. Paul.” Why? In much of Asia, names are given family first, personal second — at home, the prime minister of Japan is referred to as Abe Shinzo. And the mistake is completely forgivable when it’s made by a taxi driver picking up a professor.
It’s not so forgivable, however, if the president ... makes the same mistake when welcoming the leader of one of our most important economic and security partners. But there it was: Donald Trump referring to Mr. Abe as, yes, Prime Minister Shinzo.
Mr. Abe did not, as far as we know, respond by calling his host President Donald.
Trivial? Well, it would be if it were an isolated instance. But it isn’t. What we’ve seen instead over the past three weeks is an awesome display of raw ignorance on every front. Worse, there’s no hint that either the White House or its allies in Congress see this as a problem. They appear to believe that expertise, or even basic familiarity with a subject, is for wimps; ignorance is strength. ...
And that is, of course, the point. Competent lawyers might tell you that your Muslim ban is unconstitutional; competent scientists that climate change is real; competent economists that tax cuts don’t pay for themselves; competent voting experts that there weren’t millions of illegal ballots; competent diplomats that the Iran deal makes sense, and Putin is not your friend. So competence must be excluded.
At this point, someone is bound to say, “If they’re so dumb, how come they won?” Part of the answer is that disdain for experts — sorry, “so-called” experts — resonates with an important part of the electorate. Bigotry wasn’t the only dark force at work in the election; so was anti-intellectualism, hostility toward “elites” who claim that opinions should be based on careful study and thought. ...
In some ways this cluelessness may be a good thing: malevolence may ... be tempered by incompetence. It’s not just the court defeat over immigration; Republican ignorance has turned what was supposed to be a blitzkrieg against Obamacare into a quagmire, to the great benefit of millions. And Mr. Trump’s imploding job approval might help slow the march to autocracy.
But meanwhile, who’s in charge? Crises happen, and we have an intellectual vacuum at the top. Be afraid, be very afraid.
Posted by Mark Thoma on Monday, February 13, 2017 at 12:33 AM
Is our basic income really universal?: After our call « For a credible and bold basic income » launched by a group of ten researchers (Antoine Bozio, Thomas Breda, Julia Cagé, Lucas Chancel, Elise Huillery, Camille Landais, Dominique Méda, Emmanuel Saez, Tancrède Voituriez), we received considerable support and also, of course, questions and requests for clarification. The first question was: Given that the system of a basic income which we propose does not defend the idea of an identical monthly allowance paid to each individual, is it really universal? The question is legitimate and I would like to reply here as clearly as possible. ...
Background (from the link in the excerpt):
...The goals of the candidates standing in the presidential primary elections launched by the left must be judged on the relevance of their proposals, their impact on the recovery of economic activity and employment in France, and their effect on social cohesion in the country.
The economic and fiscal policy adopted during François Hollande’s five-year term of office has prevented France from engaging in the dynamics of strong and sustainable economic recovery. The choice made in 2012 to forcibly impose an increase in taxes and reduce deficits in a period of recession killed any hope of growth. The numerous warnings launched in this respect remained unanswered. Those who bear the responsibility for this disastrous policy and who claim to have had no part in it must be held to account today.
In the ongoing debates in the primaries, discussions are crystallizing around a new issue: a basic income (in French sometime referred to as a « revenu universel » or « revenu de base »). Benoît Hamon is faced with the accusation that he is incompetent to govern because he introduced this proposal. According to his critics, the introduction of a basic income would mean bankruptcy for France. The accusation is easily made but over-hasty. Economically and socially, a basic income can be both relevant and innovative. It could be quite the reverse of the fiscal and budgetary choices made in 2012 and in particular the incredibly complex and inefficient tax credit for competitivity and employment, not to mention the exoneration of overtime which even the right wing has abandoned and Manuel Valls would like to bring back today. Properly designed and defined, the basic income can be a structuring element in a new foundation for our social model. ...
Posted by Mark Thoma on Monday, February 13, 2017 at 12:24 AM in Economics, Social Insurance |
Posted by Mark Thoma on Monday, February 13, 2017 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, February 11, 2017 at 12:06 AM in Economics, Links |
Fed's Bullard Knows His Treasury Yield Curve: Having tipped their toes in the water with two interest-rate hikes -- and more expected to come -- the Federal Reserve officials have begun the discussion about reducing the size of the central bank’s $4.45 trillion balance sheet. To date, they have tended to look at interest rate-policy as separate from balance-sheet policy. Once the former is heading toward normalization, then they can begin the latter... Continued at Bloomberg Prophets ...
Posted by Mark Thoma on Friday, February 10, 2017 at 10:46 AM in Economics, Monetary Policy |
Who will stop him?:
When the Fire Comes, by Paul Krugman, NY Times: ...there’s a pretty good chance that sometime over the next few years something nasty will happen — a terrorist attack on a public place, an exchange of fire in the South China Sea, something. Then what?
After 9/11, the overwhelming public response was to rally around the commander in chief. Doubts about the legitimacy of a president who lost the popular vote and was installed by a bare majority on the Supreme Court were swept aside. Unquestioning support for the man in the White House was, many Americans believed, what patriotism demanded. ...
Unfortunately, the suspension of critical thinking ended ... badly. The Bush administration exploited the post-9/11 rush of patriotism to take America into an unrelated war, then used the initial illusion of success in that war to ram through huge tax cuts for the wealthy.
Bad as that was, however, the consequences if Donald Trump finds himself similarly empowered will be incomparably worse. ...
Mr. Trump’s attack on Judge James Robart, who put a stay on his immigration ban, was ... unprecedented. ... The really striking thing about Mr. Trump’s Twitter tirade, however, was his palpable eagerness to see an attack on America, which would show everyone the folly of constraining his power... What we see here is the most powerful man in the world blatantly telegraphing his intention to use national misfortune to grab even more power. And the question becomes, who will stop him?
Don’t talk about institutions, and the checks and balances they create. Institutions are only as good as the people who serve them. Authoritarianism, American-style, can be averted only if people have the courage to stand against it. So who are these people?
It certainly won’t be Mr. Trump’s inner circle. It won’t be Jeff Sessions, his new attorney general... It might be the courts — but Mr. Trump is doing all he can to delegitimize judicial oversight in advance.
What about Congress? Well..., maybe, just maybe, there are enough Republican senators who really do care about America’s fundamental values to cross party lines in their defense. But given what we’ve seen so far, that’s just hopeful speculation.
In the end, I fear, it’s going to rest on the people — on whether enough Americans are willing to take a public stand. We can’t handle another post-9/11-style suspension of doubt about the man in charge; if that happens, America as we know it will soon be gone.
Posted by Mark Thoma on Friday, February 10, 2017 at 02:07 AM in Politics |
Posted by Mark Thoma on Friday, February 10, 2017 at 12:06 AM in Economics, Links |
Three reasons we’re not yet at full employment: It is often asserted that the U.S. labor market, where unemployment has been at or below 5 percent since late 2015, has reached full employment. But I’ve got three reasons we’re not yet quite there yet:
— the underemployment employment rate is still too high;
— employment rates are still too low;
— wage pressures are still too mild.
I’ll explain each in turn...
Posted by Mark Thoma on Thursday, February 9, 2017 at 10:31 AM in Economics, Unemployment |
Jay Fitzgerald at the NBER Digest:
Housing Crisis Boxed in Some Job Seekers: The housing crash of 2007-08 devastated many homeowners who suddenly found themselves facing an array of woes, from owning homes no longer worth the purchase prices to keeping up with mortgage payments amidst one of the worst recessions in generations. In Locked in by Leverage: Job Search During the Housing Crisis (NBER Working Paper No. 22929), Jennifer Brown and David A. Matsa find that being underwater on a mortgage in a distressed housing market impeded the job searches of these homeowners by reducing their mobility. By constraining job search, this reduced mobility likely damaged their long-term compensation and career prospects.
Housing-market downturns can devastate homeowners' overall wealth, and lower housing values can actually "lock in" owners who can't sell their homes with negative equity, forcing them to remain in their homes and limiting their mobility to buy homes and find work elsewhere. But little is known about how a housing bust specifically affects labor supply, largely because it's difficult to separate effects on labor supply and on labor demand.
These researchers studied the crash's effect on job searches. With data from a large online job search platform, they analyzed more than four million applications to 60,000 online job postings in the financial services sector between May 2008 and December 2009. The data encompassed a rich array of jobs, including posts for bank tellers, administrative assistants, software engineers, account executives, and financial advisers. The postings were spread across all 50 states, 12,157 ZIP codes and more than 700 commuting zones.
The researchers matched information from the job search platform to housing market data. Monthly estimates of home values and borrowing were drawn from Zillow and CoreLogic's Loan-Level Market Analytics, while labor market data came from the U.S. Bureau of Labor Statistics and the Bureau of the Census.
Home value declines and the presence of negative equity led job seekers in depressed housing markets to apply for fewer jobs that required relocation; a 30 percent decline in home values led to a 15 percent decline in applications for jobs outside of the job seeker's commuting zone.
When job searchers were constrained geographically due to the "lock in" effect of lower home values, they were more likely to apply for lower-level and lower-paying positions within their commuting zone.
This constrained search pattern was particularly pronounced in distressed housing markets with recourse mortgages, which allow lenders to go after a defaulting homeowner's other assets. The researchers found clear job-search differences in border areas in which one state allowed recourse mortgages and the other did not.
From the standpoint of firms, the constrained search of some prospective workers had two effects. Firms had reduced access to a national labor market if millions of Americans couldn't or wouldn't relocate due to housing value concerns. At the same time, firms within distressed housing markets faced less competition for labor and benefited by being able to hire well qualified workers at lower salaries than they might otherwise have had to offer.
The researchers conclude that the housing market has important effects on the labor market, as "workers who accept positions below their skill or experience levels forego opportunities to build their human capital." They note that those forced to seek lower-level jobs than they would typically consider could also crowd out other workers, who in turn suffer, creating a far-reaching labor market ripple effect "even if housing market constraints are short-lived."
Posted by Mark Thoma on Thursday, February 9, 2017 at 10:27 AM in Economics, Housing, Unemployment |
Posted by Mark Thoma on Thursday, February 9, 2017 at 12:06 AM in Economics, Links |
Steve Maas at the NBER Digest:
Competition from China Reduced Domestic Innovation: While much attention has been paid to the impact of Chinese imports on U.S. factory employment, relatively little has been focused on other affected areas, such as innovation by American manufacturers.
In Foreign Competition and Domestic Innovation: Evidence from U.S. Patents (NBER Working Paper No. 22879), David Autor, David Dorn, Gordon H. Hanson, Gary Pisano, and Pian Shu compare firm-level data on patents obtained in the period 1975 to 1991—before the surge in Chinese imports—with data for the period 1991 to 2007. They find that while patent output and exposure to trade were not significantly correlated in the earlier period, they were in the latter.
China's exports made up nearly 19 percent of the world's total in 2013, up from just 2.3 percent in 1991. The study finds that corporations in U.S. industries where the Chinese made their greatest inroads experienced the most pronounced decline in innovation.
The researchers use patents as their main proxy for innovation, but the study's conclusions are corroborated by corresponding trends in research and development spending. Corporations tightened their belts across the board as imports eroded revenues. There was no association between rising imports and patents generated among entities relatively immune to international market forces, such as universities, hospitals, and nonprofit research institutions.
In conducting their study, the researchers controlled for other factors that could influence the rate of patent generation, such as the post-2001 dot-com bust, a trend toward greater scrutiny of patent applications, and pre-existing trends in the rate of patenting in key industries.
The study's long-term perspective, using data from 1975 to 2007, reveals a growth trend in patenting in the computer and electronics industries and a trend of stagnation of patenting in chemicals and pharmaceuticals, which are two of the most important sectors for innovation. Both of these trends predate the surge in Chinese import competition of the 1990s and 2000s, which was much stronger in the computer and electronics industries than in industries that create new chemical patents.
Given the countervailing trends in these two large, patent-intensive sectors, simple correlations would suggest — misleadingly, it turns out—that industries with larger increases in trade exposure during the sample period of 1991 to 2007 did not exhibit significant falls in patenting. Once the researchers account for preexisting trends in just these two sectors—computers and chemicals—the adverse impact of trade exposure on industry patenting becomes strongly apparent and can be precisely estimated.
While manufacturing employs less than a tenth of U.S. private nonfarm workers, it accounts for two-thirds of the country's research and development spending and corporate patents. "The relationship between competition in the global marketplace and the creation of new products and production processes is thus one of immense importance for the U.S. economy," they write.
The researchers ask why corporations do not spend more on innovation in the face of mounting Chinese imports. One possibility is that firms assume increased competition will lead to a permanent decline in the profitability of their market sectors, giving them little incentive to invest. Another is that American consumers, accustomed to low-cost Chinese goods, have become less inclined to pay more for innovative alternatives. A third possibility is that as American companies shifted their factories to lower-cost countries while keeping R&D at home, the geographic separation impeded the coordination that helps fertilize innovation.
"Each explanation has important implications for both policy and our understanding of the impact of trade on economic performance," the researchers conclude.
Posted by Mark Thoma on Wednesday, February 8, 2017 at 01:59 PM in China, Economics, Productivity, Technology |
Nick Buffie at the CEPR:
The U.S. Tax Code Actually Doesn’t “Soak the Rich” : In 2012, Republican presidential candidate Mitt Romney famously commented that 47 percent of Americans were “dependent on government” because they didn’t pay any federal income taxes. He went on to explain that his job was “not to worry about those people.”
Journalists and other public figures often claim that only the rich pay taxes, supporting this with the argument that the rich pay the vast majority of federal income taxes. However, federal income taxes are just one part of the broader tax code. When we consider other types of federal taxes as well as state and local taxes, it becomes clear that the overall tax code isn’t extremely progressive – in other words, it doesn’t “soak the rich,” and it certainly doesn’t let the poor off the hook. ...
Posted by Mark Thoma on Wednesday, February 8, 2017 at 12:49 PM in Economics, Taxes |
Feldstein, Halstead, and Mankiw :
A Conservative Case for Climate Action: Crazy as it may sound, this is the perfect time to enact a sensible policy to address the dangerous threat of climate change. Before you call us nuts, hear us out.
During his eight years in office, President Obama regularly warned of the very real dangers of global warming, but he did not sign any meaningful domestic legislation to address the problem, largely because he and Congress did not see eye to eye. Instead, Mr. Obama left us with a grab bag of regulations aimed at reducing carbon emissions, often established by executive order. ... As Democrats are learning the hard way, it is all too easy for a new administration to reverse the executive orders of its predecessors.
On-again-off-again regulation is a poor way to protect the environment. ...
Our own analysis finds that a carbon dividends program starting at $40 per ton would achieve nearly twice the emissions reductions of all Obama-era climate regulations combined. ...
The idea of using taxes to correct a problem like pollution is an old one with wide support among economists. ...
Republicans are in charge of both Congress and the White House. If they do nothing other than reverse regulations from the Obama administration, they will squander the opportunity to show the full power of the conservative canon, and its core principles of free markets, limited government and stewardship. ...
One suggested edit to the last paragraph: If the Republicans do more than reverse regulations from the Obama administration and impose a carbon tax, they will squander the opportunity to show the full power of the conservative canon, and its core principle of rewarding wealthy supporters in the business community.
Posted by Mark Thoma on Wednesday, February 8, 2017 at 10:34 AM in Economics, Environment, Politics, Regulation, Taxes |
Posted by Mark Thoma on Wednesday, February 8, 2017 at 12:06 AM in Economics, Links |
Philip Bunn, Jeanne Le Roux, Kate Reinold and Paolo Surico at Bank Underground:
Do consumers respond in the same way to good and bad income surprises?: If you unexpectedly received £1000 of extra income this year, how much of it would you spend? All? Half? None? Now, by how much would you cut your spending if it had been an unexpected fall in income? Standard economic theory (for example the ‘permanent income hypothesis’) suggests that your answers should be symmetric. But there are good reasons to think that they might not be, for example in the face of limits on borrowing or uncertainty about future income. That is backed up by new survey evidence, which finds that an unanticipated fall in income leads to consumption changes which are significantly larger than the consumption changes associated with an income rise of the same size ...
The asymmetry that we document could have important implications for the way that households respond to changes in their income that are brought about by monetary and fiscal policies. For example, changes in monetary policy redistribute income between borrowers and savers (Cloyne, Ferreira & Surico (2016)). Borrowers reported higher MPCs than savers out of both positive and negative income shocks, as is typically assumed, but the asymmetry in MPCs was clearly present for both groups. Such an asymmetry in MPCs implies that, at least in the short term, a given interest rate rise would have a larger contractionary effect on spending than the expansionary effect from an equivalent fall in rates, although households may respond differently to small changes in rates than they do to large changes in income.
Posted by Mark Thoma on Tuesday, February 7, 2017 at 12:49 PM in Economics, Fiscal Policy, Monetary Policy |
Larry Christiano on why the Great Recession happened, why it lasted so long, why it wasn't foreseen, and how it’s changing macroeconomic theory (the excerpt below is about the last of these, how it's changing theory):
The Great Recession: A Macroeconomic Earthquake, Federal Reserve Bank of Minneapolis: ...Impact on macroeconomics The Great Recession is having an enormous impact on macroeconomics as a discipline, in two ways. First, it is leading economists to reconsider two theories that had largely been discredited or neglected. Second, it has led the profession to find ways to incorporate the financial sector into macroeconomic theory.
At its heart, the narrative described above characterizes the Great Recession as the response of the economy to a negative shock to the demand for goods all across the board. This is very much in the spirit of the traditional macroeconomic paradigm captured by the famous IS-LM (or Hicks-Hansen) model,9 which places demand shocks like this at the heart of its theory of business cycle fluctuations. Similarly, the paradox-of-thrift argument10 is also expressed naturally in the IS-LM model.
The IS-LM paradigm, together with the paradox of thrift and the notion that a decision by a group of people11 could give rise to a welfare-reducing drop in output, had been largely discredited among professional macroeconomists since the 1980s. But the Great Recession seems impossible to understand without invoking paradox-of-thrift logic and appealing to shocks in aggregate demand. As a consequence, the modern equivalent of the IS-LM model— the New Keynesian model—has returned to center stage.12 (To be fair, the return of the IS-LM model began in the late 1990s, but the Great Recession dramatically accelerated the process.)
The return of the dynamic version of the IS-LM model is revolutionary because that model is closely allied with the view that the economic system can sometimes become dysfunctional, necessitating some form of government intervention. This is a big shift from the dominant view in the macroeconomics profession in the wake of the costly high inflation of the 1970s. Because that inflation was viewed as a failure of policy, many economists in the 1980s were comfortable with models that imply markets work well by themselves and government intervention is typically unproductive.
Accounting for the financial sector
The Great Recession has had a second important effect on the practice of macroeconomics. Before the Great Recession, there was a consensus among professional macroeconomists that dysfunction in the financial sector could safely be ignored by macroeconomic theory. The idea was that what happens on Wall Street stays on Wall Street—that is, it has as little impact on the economy as what happens in Las Vegas casinos. This idea received support from the U.S. experiences in 1987 and the early 2000s, when the economy seemed unfazed by substantial stock market volatility. But the idea that financial markets could be ignored in macroeconomics died with the Great Recession.
Now macroeconomists are actively thinking about the financial system, how it interacts with the broader economy and how it should be regulated. This has necessitated the construction of new models that incorporate finance, and the models that are empirically successful have generally integrated financial factors into a version of the New Keynesian model, for the reasons discussed above. (See, for example, Christiano, Motto and Rostagno 2014.)
Economists have made much progress in this direction, too much to summarize in this brief essay. One particularly notable set of advances is seen in recent research by Mark Gertler, Nobuhiro Kiyotaki and Andrea Prestipino. (See Gertler and Kiyotaki 2015 and Gertler, Kiyotaki and Prestipino 2016.) In their models, banks finance long-term assets with short- term liabilities. This liquidity mismatch between assets and liabilities captures the essential reason that real world financial institutions are vulnerable to runs. As such, the model enables economists to think precisely about the narrative described above (and advocated by Bernanke 2010 and others) about what launched the Great Recession in 2007. Refining models of this kind is essential for understanding the root causes of severe economic downturns and for designing regulatory and other policies that can prevent a recurrence of disasters like the Great Recession.
Posted by Mark Thoma on Tuesday, February 7, 2017 at 10:57 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Tuesday, February 7, 2017 at 12:06 AM in Economics, Links |
Olivier Blanchard (PIIE), Guido Lorenzoni (Northwestern University,) and Jean Paul L'Huillier (Einaudi Institute for Economics and Finance):
Short-Run Effects of Lower Productivity Growth: A Twist on the Secular Stagnation Hypothesis: Despite interest rates being very close to zero, US GDP growth has been anemic in the last four years largely due to lower optimism about the future, more specifically to downward revisions in growth forecasts, rather than legacies of the past. Put simply, demand is temporarily weak because people are adjusting to a less bright future. The authors suggest that downward revisions of productivity growth may have decreased demand by 0.5 to 1.0 percent a year since 2012. This explanation, if correct, has important implications for policy and forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates to sustain demand may be partly temporary. It also implies that, to the extent that investors in ﬁnancial markets have not fully taken this undershooting into account, the current yield curve may underestimate the strength of future demand and the need for higher interest rates in the future. The authors’ hypothesis is not an alternative to the secular stagnation hypothesis but a twist on it. They do not question that interest rates will probably be lower in the future than they were in the past but argue that, for a while, they may be undershooting their long-run value. [paper]
Posted by Mark Thoma on Monday, February 6, 2017 at 02:15 PM in Economics, Productivity |
ProMarket interviews Daniel Carpenter "ahead of the upcoming conference on the theory of the firm, in which he will be taking part, Carpenter shared some of thoughts on the role of corporations and government interference in the market:
How Incomplete is the Theory of the Firm? Q&A with Daniel Carpenter: ...Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big an omission do you think this is?
I think it’s an immense omission. For one, we can’t even talk about the historical origins of many firms without talking about corporate charters, limited liability arrangements, zoning, public contracts and grants, and so on. To view these processes as legal and not political is a significant mistake. I’m currently writing a lot on the history of petitioning in Europe and North America, and in areas ranging from railroads, to technology-heavy industries, to extractive industries, to banking, firms (or their investors) had to bring a case before the legislature, or an agency of government, or both. They usually used petitions to do so.
Beyond the past and into the present, there are a range of firm activities that we can’t understand without looking at politics. ...
And in the future, the profitability and survival prospects of many firms in the coming years will depend heavily, in a polarized environment, on the political skills of managers. ...
Q: Some people describe Donald Trump’s economic policies as “corporatism.” Are you more worried by Trump’s interference in the market economy or by companies’ ability to subvert markets’ rules?
I don’t see those as binary opposites but as complements. If regulation is constitutive of marketplaces (fraud standards, disclosure and labeling requirements, evidentiary requirements), then companies’ ability to subvert market rules will in fact interfere in the proper functioning of a market economy.
I think we’re likely to see both Trumpian interference and company subversion, in other words.
That said, I am concerned about Trump’s interference in markets, for example his bullying of companies and the idea of imposing border taxes. In the U.S. and elsewhere, we are going to see the need for legislative and judicial constraints upon this kind of executive action.
Posted by Mark Thoma on Monday, February 6, 2017 at 11:02 AM in Economics, Market Failure, Politics |
Financial regulation is under attack:
Springtime for Scammers, by Paul Krugman, NY Times: ...Donald Trump ... and his allies in Congress are making it a priority to unravel financial reform — and specifically the parts of financial reform that protect consumers against predators.
Last week Mr. Trump released a memorandum calling on the Department of Labor to reconsider its new “fiduciary rule,” which requires financial advisers to act in their clients’ best interests — as opposed to, say, steering them into investments on which the advisers get big commissions. He also issued an executive order designed to weaken the Dodd-Frank financial reform...
Why ...was the fiduciary rule created? The main issue here is retirement savings..., “conflicted investment advice” has been ... costing ordinary Americans around $17 billion each year. Where has that $17 billion been going? Largely into the pockets of various financial-industry players. And now we have a White House trying to ensure that this game goes on.
On Dodd-Frank: Republicans would like to repeal the whole law, but probably don’t have the votes. What they can do is try to cripple enforcement, especially by undermining the Consumer Financial Protection Bureau, whose goal is to protect ordinary families from financial scams. ...
Remember the Wells Fargo scandal...? This scandal only came to light thanks to the bureau.
So why are consumer protections in the Trump firing line?
Gary Cohn, the Goldman Sachs banker appointed to head Mr. Trump’s National Economic Council — populism! — says that the fiduciary rule is like “putting only healthy food on the menu” and denying people the right to eat unhealthy food if they want it. Of course, it doesn’t do anything like that. If you want a better analogy, it’s like preventing restaurants from claiming that their 1400-calorie portions are health food.
Mr. Trump offers a different explanation for his hostility to financial reform: It’s hurting credit availability. ... What we do know is that U.S. banks have generally shunned Mr. Trump’s own businesses ... perhaps because of his history of defaults.
Other would-be borrowers, however, don’t seem to be having problems. ... Overall bank lending ... has been quite robust since Dodd-Frank was enacted.
So what’s motivating the attack on financial regulation? Well, there’s a lot of money at stake — money that the financial industry has been extracting from unwitting, unprotected consumers. Financial reform was starting to roll back these abuses, but we clearly now have a political leadership determined to roll back the rollback. Make financial predation great again!
Posted by Mark Thoma on Monday, February 6, 2017 at 01:45 AM
Posted by Mark Thoma on Monday, February 6, 2017 at 12:06 AM in Economics, Links |
Revoking trade deals will not help American middle classes: ...The idea that renegotiating trade agreements will “make America great again” by substantially increasing job creation and economic growth swept Donald Trump into office.
More broadly, the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. ...
The reality is that the impact of trade and globalisation on wages is debatable and could be substantial. But the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. ... My judgment is that these effects are considerably smaller than the impacts of technological progress.
A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.
Posted by Mark Thoma on Sunday, February 5, 2017 at 10:55 AM in Economics, International Trade |
Trump Picks Wall Street Over Main Street: President Trump fired the first round in his war against financial regulations by signing two executive orders on Friday.
The first calls for the Treasury secretary to conduct a review over the next 120 days of regulations stemming from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The second calls for a review of the Department of Labor’s “fiduciary rule,” which requires investment professionals to act in the best interest of their clients, rather than seek the highest profits for themselves...
Though they don’t do too much by themselves to roll back these reforms, the directives do offer important details on how Mr. Trump will approach the financial industry in the next four years — and provide three reasons that people on Main Street should be scared about how Mr. Trump will help Wall Street.
The first is that President Trump, contrary to the hopes of many, has no intention of getting tough with finance. ...
Second, while Mr. Trump wants to repeal the fiduciary rule, he appears to have no interest in a replacement for it. ...
Third, rather than meet with regulators, small businesses or community banks, Mr. Trump met with the titans of Wall Street before announcing the directives. ...
It’s no wonder financial stocks have been soaring since Mr. Trump was elected. Voters who hoped he would “drain the swamp” and upset the elite are in for a big surprise. ...
Posted by Mark Thoma on Saturday, February 4, 2017 at 12:17 PM in Economics, Financial System, Politics, Regulation |
Posted by Mark Thoma on Saturday, February 4, 2017 at 12:06 AM in Economics, Links |
ProMarket's Guy Rolnik interviews Bernie Yeung:
“In a System with Dominance, There is Built-In Resistance to Change”: ProMarket Interviews Bernie Yeung, Part 2: Last week, we published the first part of an extensive three-part interview with Bernard (Bernie) Yeung, Dean of National University of Singapore’s business school. This is the second part. The third and final part will be published next week. In the first part of our interview with Bernard Yeung, we talked about his seminal papers on power concentration, on which he collaborated mainly with Randall Morck. The discussion there focused on dominant players and their ability to shape their own markets, the capital market, and even the economy. In this installment, we talk about how free trade may have backfired, how wealth and power are connected, how big corporations can control and distort the market for ideas, and why governments may actually prefer markets that are controlled by dominant players rather than by many competitors. ...
... GR: Can you elaborate on what you call economic conditioning, mainly the part in which you say it may not be vicious?
BY: Let’s imagine I got rich and now own and control a bank. I’m saying to myself that I know what’s right and what’s wrong. I cannot allow new people to set up new banks and compete with me in an unruly manner. That will create chaos. They will cause people to lose their jobs. I help to set up barriers to entry in the financial sector. I myself lend money to my rich friends and they will create many jobs. I think I’m right—and I am righteous.
I overlook the positive effects that competition will generate for the economy. I overlook the contributions of new ideas and innovations which leads to strong future growth and good future jobs. I focus on my lending to the established, which preserves current jobs and creates interest earnings for me. I am not [attuned] to the counterfactuals. I’m conditioned to believe that all I’ve done is good for my bank, for the financial sector, and for the country. That’s economic conditioning. I’m not being sinful. I’m not being vicious. I only see what’s good for me, and I believe that’s good for the whole society.
GR: This was the case for the Robber Barons in the U.S. more then a century ago.
BY: Oh yes, and I believe it’s very much how Donald Trump is thinking.
GR: Do you think they genuinely believe that the country should be run by the incumbent oligarchs?
BY: If it ain’t broken don’t fix it, right? ‘Look at all the good things I have done. If I’m so rich and keep so many people employed, I cannot be so bad. I will never see people who cannot get into the market because of my behavior. I never see them. Indeed, I am always thinking that, in helping my established friends and using business judgment that brings me profits, I help society, create jobs and wealth, and my donations help society further. I see myself and my friends as pillars of our country.’ ...
... In a system with dominance, and I’ve already put that in paper, I think there is built-in resistance to change. Rich people don’t like change and competition. And they themselves don’t invest too much in innovations that displace their own business; that is, no creative self-destruction.
I believe that a vibrant and robust capital market that gives people with good ideas a chance is very important. The problem is failed capital markets, lack of transparency and alternatives and dominant players in control who don’t encourage entrepreneurship. ...
... GR: Is there empirical data that shows that, when we take out economic concentration, we get better growth, better distribution of income, and a better quality of life?
BY: Yes. Once, Randall, his student, and I looked at a current list of top firms, compared it to a similar list of 20 years earlier, and asked ourselves how many survived. We showed that high stability is correlated with lower growth, lower productivity, and poorer Gini. ...
Posted by Mark Thoma on Friday, February 3, 2017 at 01:06 PM
Job Growth on Stable Course as Employment Rate Rises: The unemployment rate inched up in January to 4.8 percent, as the economy reportedly added 227,000 jobs. The modest change in the unemployment rate was also associated with a rise in the employment-to-population ratio (EPOP) to 59.9 percent. This is equal to the previous high for the recovery in March of last year. The jobs growth figure was somewhat higher than had generally been expected, but is somewhat offset by the fact that the prior months’ numbers were revised down by 39,000.
While the rise in the EPOP is good news, it is still well below pre-recession levels. The drop remains even when looking at prime-age workers (ages 25-54), with the EPOP for prime-age men 2.7 percentage points below pre-recession peaks and the EPOP for women is down 1.5 percentage points. The overall EPOP for African Americans hit a new high for the recovery, at 57.5 percent. While these data are erratic, the January figure is more than a full percentage point above the year-round average for 2016.
Other data in the household survey were mixed, notably there was a substantial decline in the share of unemployment due to voluntary quits. The January percentage was 11.4 percent, 1.1 percentage point below its November peak. This measure of workers’ confidence in their labor market prospects is almost a full percentage point below the pre-recession peak of 12.3 percent, and almost four percentage points below the 15.2 percent peak in April of 2000. ...
Wage growth appears to have moderated slightly in the most recent data. The average hourly wage in January was 2.5 percent above its year-ago level. Comparing the average for the last three months with the prior three months, wages grew at just a 2.2 percent annual rate. It is worth remembering that there is some shift from non-wage benefits such as health care to wages, so that wage growth exceeds to some extent the rate of growth of compensation. The Employment Cost Index rose by just 2.2 percent over the last year. ...
The January job gains were likely in part attributable to weather, as there were few serious snowstorms in the northeast and Midwest in the period preceding the reference week, which is unusual for January. This could suggest somewhat weaker growth going forward. It is also worth noting the continued weakness in hours. Although the number of jobs has increased by 1.6 percent over the last year, the aggregate weekly hours index has risen by just 1.1 percent.
On the whole the report shows a labor force that is growing at a respectable, but not overly rapid rate. There is no evidence of overheating in the form of accelerating wage growth or longer workweeks. However by any measure the last jobs report of the Obama years is hugely better than the first one.
Posted by Mark Thoma on Friday, February 3, 2017 at 12:46 PM in Economics, Unemployment |
"A man who is out of his depth and out of control":
Donald the Menace, by Paul Krugman, NY Times: For the past couple of months, thoughtful people have been quietly worrying that the Trump administration might get us into a foreign policy crisis, maybe even a war. ...
The most likely flash point seemed to be China ... where disputes over islands in the South China Sea could easily turn into shooting incidents. But the war with China will, it seems, have to wait. First comes Australia. And Mexico. And Iran. And the European Union. (But never Russia.) ...
The Australian confrontation has gotten the most press... Australia is, after all, arguably America’s most faithful friend in the whole world...
Well, at least Mr. Trump didn’t threaten to invade Australia. In his conversation with President Enrique Peña Nieto of Mexico, however, he did just that. ...
The blowups with Mexico and Australia have overshadowed a more conventional war of words with Iran...
There was also ... the response to ... Russia’s escalation of its proxy war in Ukraine. Senator John McCain called on the president to help Ukraine. Strangely, however, the White House has said nothing... This is getting a bit obvious, isn’t it?
Oh, and ... Peter Navarro, head of Mr. Trump’s new National Trade Council, accused Germany of exploiting the United States with an undervalued currency..., government officials aren’t supposed to make that sort of accusation unless they’re prepared to fight a trade war. Are they?
I doubt it. In fact, this administration doesn’t seem prepared on any front. Mr. Trump’s confrontational phone calls, in particular, don’t sound like the working out of an economic or even political strategy — cunning schemers don’t waste time boasting about their election victories and whining about media reports on crowd sizes.
No, what we’re hearing sounds like a man who is out of his depth and out of control, who can’t even pretend to master his feelings of personal insecurity. His first two weeks in office have been utter chaos, and things just keep getting worse — perhaps because he responds to each debacle with a desperate attempt to change the subject that only leads to a fresh debacle.
America and the world can’t take much more of this. Think about it: If you had an employee behaving this way, you’d immediately remove him from any position of responsibility and strongly suggest that he seek counseling. And this guy is commander in chief of the world’s most powerful military.
Posted by Mark Thoma on Friday, February 3, 2017 at 02:34 AM in Economics, Politics |
Posted by Mark Thoma on Friday, February 3, 2017 at 12:06 AM in Economics, Links |
FOMC, Employment Report, Warsh, by Tim Duy: The FOMC meeting came and went with little fanfare this week. As expected, there was no policy change, with only small modifications to post-meeting statement. With only small changes, it is a struggle to read much into the statement. Some thoughts:
1. Business investment. The Fed drew attention to weak business investment. The recent gains in core capital goods orders and improving ISM manufacturing numbers could be pointing to an upturn in the months ahead, possibly enough to boost growth estimates. Keep an eye on this space.
2. Business/Consumer Confidence. The Fed cited the post-Trump improvement in confidence. These gains, however, could easily prove to be ephemeral. The Fed will see them as a risk to their outlook, but will need actual data before changing their outlook.
3. Inflation expectations. The Fed noted that market-based inflation compensation estimates remain low. I think this means that they are not panicking about the recent rise in such expectations; they remains well below pre-recession levels:
If they aren't panicking, neither should you. For what it's worth, I suspect that they will only address market-based inflation numbers when convenient and ignore them when inconvenient.
4. Inflation confidence. The Fed deleted the factors (energy, import prices) restraining inflation. This could be viewed as confidence in their inflation outlook (my initial response). Alternatively, it could be interpreted as saying they don't have any more excuses if inflation remains below target. Or, it could mean the former to some at the table, the latter to others at the table.
All that said, the changes were relatively minor and provide no concrete clues about the Fed's next move. My thoughts on March remains unchanged - without more supportive data, the odds of a March rate hike remains low.
Could the January employment report start building the case for a March hike? It sure can - if, in particular, the ADP report is a reliable predictor. But regardless of ADP, the case was building for a solid number - see Calculated Risk. The consensus expectation is 175k within a range of 155k to 190k. Taking the ADP number at face value suggests the report will prove to be better than expected:
I think there is upside risk to the consensus forecast this month. (Note the error bands. Forecasting the monthly NFP change is risky business). If that is indeed the reality, the Fed will take notice. They will certainly take notice if unemployment dips lower or wages spike higher.
This week I wrote a detailed response to former Federal Reserve Governor Kevin Warsh's recent WSJ op-ed. One interpretation of this puzzling op-ed is that auditions for the Fed Chair require you to find fault with the Fed regardless of whether or not you actually find fault. Hence he lists supposed reforms that more than anything already reflect current policy, knowing that if chosen to be Chair he would be able to maintain much of that policy. This, however, is something of a dangerous game because it undermines the credibility of the Fed - how much can we trust the Fed if one of their own is so critical of their policies? That credibility is especially vulnerable now given the extent of the current threats to Fed independence. In effect, he is giving the Fed's critics ammunition to weaken the institution he reportedly is in the race to lead. One would think this is then a counterproductive approach. Moreover, he is doing the public and market participants no favors by misrepresenting the Fed and its policies.
Bottom Line: And now we await the employment report...
Posted by Mark Thoma on Thursday, February 2, 2017 at 12:04 PM in Economics, Fed Watch, Monetary Policy |
Class & confidence: On Radio 4’s Media Show yesterday Andrea Catherwood told Sarah Sands, the incoming editor of the Today programme:
The job specification did say that there was a requirement of extensive experience of broadcast journalism and a sound appreciation of studio broadcast techniques. You obviously got over that hurdle (16’23” in).
Many of us, though, wouldn’t even have tried the hurdle. If I’d had Ms Sands otherwise decent CV, I’d have looked at that job spec and ruled myself out as unqualified. Ms Sands, obviously, did not.
In this, she’s following many others. Tristram Hunt has become head of the V&A despite no experience of curating or of running large organizations. David Cameron wanted to become PM because he thought he’d be “rather good” at it – a judgment which now looks dubious. And the last Labour government asked David Freud to review welfare policy even though, by his own admission, he “didn't know anything about welfare at all.”
These people have something in common: they come from families sufficiently rich to afford private schooling*. And they are not isolated instances. ...
One thing that’s going on here is a difference in confidence. Coming from a posh family emboldens many people to think they can do jobs even if they lack requisite qualifications. By contrast, others get the confidence knocked out of them (16’20 in)**. As Toby Morris has brilliantly shown, apparently small differences in upbringing can over the years translate into differences not only in achievement but also in senses of entitlement.
The point is not (just) that people from working-class backgrounds suffer outright discrimination. It’s that they put themselves forward less than others, and so save hirers the bother of discriminating against them. ...
Herein lies an issue. In hiring Ms Sands (and no doubt many others like her) the BBC is conforming to a pattern whereby inequality perpetuates itself. This suggests that the corporation is badly placed to address what is for many of us one of the great issues of our time - the many aspects of class inequality – because it is part of the problem. And it compounds this bias by focusing upon other matters instead – for example by the incessant airtime it gives to the (Dulwich College-educated) Farage***. Bias consists not merely in what is said and reported, but in what is not – in the choice of agenda. In matters of class, the BBC is not impartial. ...
Posted by Mark Thoma on Thursday, February 2, 2017 at 11:30 AM in Economics, Income Distribution, Politics |
Just a reminder -- this is a (slightly edited) rerun of a post from August 10, 2012:
Biden: McConnell decided to withhold all cooperation even before we took office, by Greg Sargent, Washington Post: I’ve got my copy of Michael Grunwald’s new book on the making of stimulus, The New New Deal, and ... it may shed new light on the degree to which Republicans may have decided to deny Obama all cooperation for the explicit purpose of rendering his presidency a failure — making it easier for them to mount a political comeback after their disastrous 2008 losses.
Grunwald has Joe Biden on the record making a striking charge. Biden says that during the transition, a number of Republican Senators privately confided to him that Mitch McConnell had given them the directive that there was to be no cooperation with the new administration — because he had decided that “we can’t let you succeed.” ...
Biden, of course, has a history of outsized comments. But two former Republican Senators [Bob Bennett and Arlen Specter] are confirming the gist of the charges... Meanwhile, former Senator George Voinovich also goes on record telling Grunwald that Republican marching orders were to oppose everything the Obama administration proposed.
“If he was for it, we had to be against it,” Voinovich tells Grunwald. ... “He wanted everyone to hold the fort. All he cared about was making sure Obama could never have a clean victory.” ...
It seems pretty newsworthy for the Vice President of the United States to charge that seven members of the opposition confided to him that their party had adopted a comprehensive strategy to oppose literally everything the new President did — with the explicit purpose of denying him any successes of any kind for their own political purposes — even before he took office.
Posted by Mark Thoma on Thursday, February 2, 2017 at 11:30 AM in Economics, Politics |
Posted by Mark Thoma on Thursday, February 2, 2017 at 12:06 AM in Economics, Links |
Via Joshua Gans (and Brad DeLong's excerpt):
The Rotman School of Management, University of Toronto... is offering to help scholars and students impacted on by the new US immigration restrictions. We would like to hear from anyone who:
- Can no longer return to the US to continue their academic position or studies in a business, economics or related areas.
- Missed application deadlines for University of Toronto degree programs in business, economics, or related areas; but are concerned they will not be able to undertake studies in the US anymore.
- Facing temporary disruptions as a result of the new policies who may need a place in North America to continue their academic work.
The official statement is here: http://www.rotman.utoronto.ca/Connect/MediaCentre/NewsReleases/20170201
Posted by Mark Thoma on Wednesday, February 1, 2017 at 12:08 PM in Economics, Politics, Universities |
Press Release, Release Date: February 1, 2017, For release at 2:00 p.m. EST: Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low. Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee's 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. 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. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Daniel K. Tarullo.
Implementation Note issued February 1, 2017
Posted by Mark Thoma on Wednesday, February 1, 2017 at 11:03 AM in Economics, Monetary Policy |
Was Kevin Warsh Really A Fed Governor?, by Tim Duy: Former Federal Reserve Governor Kevin Warsh’s column in Tuesday’s Wall Street Journal was so riddled with errors and misperceptions that it is hard to believe he was actually a governor.
Warsh wants the Fed to announce a “practicable long-term strategy and stick to it,” claiming they have offered many such plans but never stuck to them. I don’t agree. The Fed has a plan, but Warsh just refuses to see it.
The former governor’s first critique:
A year ago around this time, the U.S. stock market fell about 10%. The Fed reacted precipitously, reversing its announced plan for 2016 of four quarter-point rate increases. But when prices rallied near the end of the year, the Fed decided it wouldn’t look good to let the moment pass without raising rates. It raised its key interest rate by a quarter point in December.
The Fed did not reverse its announced plan. The rate forecast contained within the Fed’s Summary of Economic Projections is just that, a forecast, not a plan. Incoming data triggered a revision of that forecast. And, contrary to the narcissistic belief of many market participants, it wasn’t all about them. Falling equity prices were just one of many data points that changed the course of policy. The Fed faced a very real slowdown in activity. Andrew Levin, former Fed economist, for instance, described the economy as operating at stall speed. Note that output growth slowed markedly during 2015 and into 2016:
The unemployment rate stalled out:
And inflation remained tepid:
If the Fed updated their forecast, it was for good reason.
Warsh follows with another instance of the Fed supposedly reversing course:
In late October, Fed Chair Janet Yellen expressed willingness to run a “high-pressure economy” to push the unemployment rate lower and inflation higher. Yet in a speech two weeks ago, she said that allowing the economy to run “persistently ‘hot’ would be risky and unwise.”
Yellen never expressed a willingness to run a high-pressure economy. That was always a complete misrepresentation of her comments. In that speech, she was simply proposing a research agenda for macroeconomists, including the topic of the influence of aggregate demand on supply. Had anyone actually read the speech (and I have to assume Warsh did not), they would see that she did not provide any policy proposals. Her subsequent comments were nothing more than an effort to set the record straight, not a shift in position.
Warsh uses the above episodes to claim that the Fed lacks a strategy:
Changes in judgment should be encouraged, but they ought to indicate something other than day trading or academic fashion. They must be rooted in strategy. Otherwise, the real economy winds up worse off…
…The Fed’s technocratic expertise is no substitute for a durable strategy. This make-it-up-as-you-go-along approach causes many Fed members to race to their ideological corners, covering themselves as hawks and doves…
The problem here is that the Fed does have a strategy, but Warsh refuses to see it. Specifically, incoming information alters the Fed’s economic forecast and, in accordance with a basic Taylor Rule, the Fed’s rate forecast with the goal of meeting the dual mandates over the medium term. Indeed, San Francisco Federal Reserve economists Fernanda Nechio and Glenn Rudebusch show that the Fed altered its rate forecast systematically in response to incoming data in this manner. That data brought the Fed’s original forecast for four rate hikes down to the actual one rate hike.
There is indeed a strategy. It is not the Fed that is too focused on the near-term. It is Warsh that is too focused on the near-term.
Warsh proposes five reforms for the Federal Reserve, beginning with:
First, the Fed should establish an inflation objective of around 1% to 2%, with a band of acceptable outcomes. The current 2.0% inflation target offers false precision. According to the Fed’s preferred measure, inflation is running at 1.7%, only a few tenths below target. The difference to the right of the decimal point is too thin a reed alone to justify the current policy stance. It also undermines credibility to claim more knowledge than the data support.
This one reveals Warsh’s true intentions – the current inflation target does not support his desire for higher rates, so he wants to move the target! Moreover, the current target does not offer false precision. No one at the Fed believes they can consistently hit two percent. And being below two percent has not stopped them from raising rates. In practice, the Fed will tolerate misses within a reasonable (25bp) range around two percent as long as forecasted inflation is trending toward target. That’s the medium-term strategy Warsh claims to be so concerned about.
Second, the Fed should adjust monetary policy only when deviations from its employment and inflation objectives are readily observable and significant. The Fed should stop indulging in a policy of trying to fine-tune the economy. When the central bank acts in response to a monthly payroll report, it confuses the immediate with the important. Seeking in the short run to exploit a Phillips curve trade-off between inflation and employment is bound to end badly.
It is a misperception that the Fed acts impetuously on the most recent data. They use that data to update their forecast in a systematic fashion (see above). I generally excuse most people from not understanding this distinction. It is a difficult concept and, quite frankly, one that the Fed does a poor job communicating. Warsh, however, has no such excuse.
For his third reform:
…the Fed should elevate the importance of nonwage prices, including commodity prices, as a forward-looking measure of inflation. It should stop treating labor-market data as the ultimate arbiter of price stability…A material catch-up in wages after a long period of stagnation need not trigger a panicky response.
I don’t think Warsh understands the foundations of Fed’s approach to inflation forecasting. From Yellen’s lengthy discussion of the topic in September 2015:
To summarize, this analysis suggests that economic slack, changes in imported goods prices, and idiosyncratic shocks all cause core inflation to deviate from a longer-term trend that is ultimately determined by long-run inflation expectations. As some will recognize, this model of core inflation is a variant of a theoretical model that is commonly referred to as an expectations-augmented Phillips curve. Total inflation in turn reflects movements in core inflation, combined with changes in the prices of food and energy.
Wages aren’t in that description. Wages are primarily a guide to estimating full employment (economic slack). Rising wage growth indicates the economy is approaching full employment. Wage growth in excess of the inflation target plus productivity growth raises warning signs that the economy is operating beyond full employment. Also, commodity prices are included as idiosyncratic shocks. Finally, the labor market data is very clearly not the ultimate arbiter of price stability. In the long-run, inflation expectations are the ultimate arbiter of price stability.
Warsh’s next reform:
Fourth, the Fed should assess monetary policy by examining the business cycle and the financial cycle. Continued quantitative easing—which Fed leaders praise unabashedly—increases the value of financial assets like stocks, while doing little to bolster the real economy. Finance, money and credit curiously are at the fringe of the Fed’s dominant models and deliberations. That must change, because booms and busts take the central bank farthest afield from its objectives.
Note that earlier Warsh complained that the Fed reacted to the financial cycles – easing policy when equity prices were falling and vice-versa. Now he wants the Fed to react to those cycles? In actuality, the Fed does take financial considerations seriously. See, for example Governor Jerome Powell here. Vice Chair Stanley Fischer here. Governor Daniel Tarullo here. Go back to the work of former Governor Jeremy Stein. And with regards to quantitative easing, the Fed would argue that their actions have indeed bolstered the real economy. And while busts in particular do take the Fed far away from its mandate, so too would strangling the economy to address a theoretical financial risk. Incorporating a financial stability term in the Taylor Rule is easier said than done.
Fifth, the Fed should institutionalize its new strategy and boldly pursue it with a keen eye toward the medium-term.
As I noted earlier, the Fed does have a strategy, the focus of that strategy is the medium run forecast, and the Fed changes their behavior in a systematic way to pursue that strategy. In short, the Fed’s already acts in accord with this supposed “reform.” Move along, folks, nothing to see here.
Bottom Line: If you want to understand the Federal Reserve and monetary policy, I don’t think reading Warsh’s op-ed gives you much to work with.
Posted by Mark Thoma on Wednesday, February 1, 2017 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Wednesday, February 1, 2017 at 12:06 AM in Economics, Links |
Imports Normally Would Have Subtracted More From 2016 U.S. Growth: ...I ... think in some ways the U.S. was lucky not to have slowed more in 2016.
Why? Because import growth stalled, and imports did not subtract as much from U.S. growth as normally would be expected (and yes, that obviously wasn’t the dominant narrative of the 2016 election).
Plus the U.S. essentially got a small GDP boost as a result of a bad harvest in Brazil that raised U.S. soybeans exports in q3 (a rise that was only partially reversed in q4). The U.S. isn’t (yet) a commodity-driven economy, but it also isn’t (yet) a robot-based intellectual property rights (IPR) royalty-driven economy totally divorced from natural sources of economic volatility. ...
Based on normal historical relationships, the expected drag from imports at various points over the last year should have been 35 to 50 basis points of GDP (using the trailing 4q average of contributions as the measure). Even if you believe the elasticity of imports to growth has now fallen and it should track the share of imports in the economy, imports should have increased by about 15 percent of demand growth, so the drag from imports mechanically should have been 20 to 30 basis points of GDP.
And generally speaking, the dollar’s strength over this period should have led imports to over-perform domestic demand in a standard model. That obviously did not happen.
No wonder the Fed’s trade model was puzzled. ...
So the odds are that—absent a big shift in trade policy (and well the odds now favor a big shift in trade policy)—imports will subtract a bit more from growth going forward. And exports—which tend to respond to the exchange rate—are likely to remain weak (and odds are that they will get weaker thanks to the global response to the expected change in U.S. trade policy). ...
Posted by Mark Thoma on Tuesday, January 31, 2017 at 12:42 PM in Economics, International Trade |
CNN Hires Hack Trump Adviser to Spout Gibberish About Economics: ...I would like to pause for a brief moment to commemorate the act of journalistic malpractice CNN has just committed by hiring conservative scribbler and Trump adviser Stephen Moore as an economics analyst. It is a doozy. ...
In economics circles, Moore is looked at as a sort of tragicomic figure, the supply-side gang leader who can't count straight. ...
CNN has a habit of veering wildly from serious journalism from its Washington bureau or its online KFile investigative team to vomit-worthy infotainment in which toadies like Jeffrey Lord or—previously—Corey Lewandowski defend whatever the heck Donald Trump has just said. (The network has a lot of airtime to fill, and it fills it with mostly useless discussion panels.) You can guess which side the pendulum just swung to with Moore's hire.
A network that is serious about delivering factual information instead of propaganda to viewers would not have made these hires.
Posted by Mark Thoma on Tuesday, January 31, 2017 at 11:09 AM in Economics, Politics, Press |
Here's my latest column:
In the Trump Administration, Credibility May be a Problem, by Mark Thoma: ...politicians have an additional credibility problem over and above their inability to make long-run commitments. Little of what politicians say can be trusted even during the years they are in office. And with Trump saying whatever comes to his mind, or whatever a particular audience wants to hear, his erratic behavior, and his tendency to contradict himself, who knows what to believe? Nothing is credible until it happens, and even then it might be reversed. ...
Posted by Mark Thoma on Tuesday, January 31, 2017 at 09:25 AM in Economics, Politics |
Posted by Mark Thoma on Tuesday, January 31, 2017 at 12:06 AM in Economics, Links |
From the Journal of Economic Perspectives:
"How to Write an Effective Referee Report and Improve the Scientific Review Process," by Jonathan B. Berk, Campbell R. Harvey and David Hirshleifer [Full-Text Access | Supplementary Materials]: The review process for academic journals in economics has grown vastly more extensive over time. Journals demand more revisions, and papers have become bloated with numerous robustness checks and extensions. Even if the extra resulting revisions do on average lead to improved papers--a claim that is debatable--the cost is enormous. We argue that much of the time involved in these revisions is a waste of research effort. Another cause for concern is the level of disagreement amongst referees, a pattern that suggests a high level of arbitrariness in the review process. To identify and highlight what is going right and what is going wrong in the reviewing process, we wrote to a sample of former editors of the American Economic Review, the Journal of Political Economy, the Quarterly Journal of Economics, Econometrica, the Review of Economic Studies, and the Journal of Financial Economics, and asked them for their thoughts about what might improve the process. We found a rough consensus that referees for top journals in economics tend to make similar, correctable mistakes. The italicized quotations throughout this paper are drawn from our correspondence with these editors and our own experience. Their insights are consistent with our own experiences as editors at the Journal of Finance and the Review of Financial Studies. Our objective is to highlight these mistakes and provide a roadmap for how to avoid them.
Posted by Mark Thoma on Monday, January 30, 2017 at 12:02 PM in Academic Papers, Economics |
Cecchetti & Schoenholtz:
When Government Misguides: "That [comparative advantage] is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them." Paul Samuelson
Governments play favorites. They promote residential construction by making mortgages tax deductible. They encourage ethanol production by subsidizing corn. They boost sales of electric cars by offering tax rebates. These political favors usually diminish, rather than increase, aggregate income. They’re about distribution, not production.
With the ascendance of Donald Trump to the presidency, U.S. government intervention has taken a particularly troubling turn. Not only has he threatened companies planning to produce their products outside of the United States, but he has appointed strident free-trade opponents (ranging from China-bashing Peter Navarro to trade-litigator Robert Lighthizer) to key positions in his administration. In his first week in office, President Trump has pulled the United States out of the Trans-Pacific Partnership (TPP) and moved to renegotiate the North American Free Trade Agreement (NAFTA). His representatives also have threatened to impose tariffs on Mexico (and other countries). In what seems like the blink of an eye, these actions have sacrificed the valuable U.S. reputation–earned over seven decades since President Truman—as a trustworthy leader in the global fight for open, competitive markets. ...
Posted by Mark Thoma on Monday, January 30, 2017 at 11:07 AM in Economics, Politics |
"The story seems, like so much that’s happened lately, to have started with President Trump’s insecure ego":
Building a Wall of Ignorance, by Paul Krugman, NY Times: We’re just over a week into the Trump-Putin regime, and it’s already getting hard to keep track of the disasters. ...
But I want to hold on, just for a minute, to the story that dominated the news on Thursday, before it was, er, trumped by the uproar over the refugee ban. As you may recall ... the White House first seemed to say that it would impose a 20 percent tariff on Mexico, but may have been talking about a tax plan, proposed by Republicans in the House, that would do no such thing; then said that it was just an idea; then dropped the subject, at least for now. ...
The story seems, like so much that’s happened lately, to have started with President Trump’s insecure ego: People were making fun of him because Mexico will not, as he promised during the campaign, pay for that useless wall along the border. So his spokesman, Sean Spicer, went out and declared that a border tax on Mexican products would, in fact, pay for the wall. So there!
As economists quickly pointed out, however, tariffs aren’t paid by the exporter..., they’re paid for by ... consumers. America, not Mexico, would therefore end up paying for the wall.
Oops. But that wasn’t the only problem. America is part of a system of agreements — a system we built — that sets rules for trade policy, and one of the key rules is that you can’t just unilaterally hike tariffs that were reduced in previous negotiations.
If America were to casually break that rule, the consequences would be severe. ... If we treat the rules with contempt, so will everyone else. The whole trading system would start to unravel, with hugely disruptive effects everywhere, very much including U.S. manufacturing. ...
All of this should be placed in the larger context of America’s quickly collapsing credibility.
Our government hasn’t always done the right thing. But it has kept its promises, to nations and individuals alike.
Now all of that is in question. Everyone, from small nations who thought they were protected against Russian aggression, to Mexican entrepreneurs who thought they had guaranteed access to our markets, to Iraqi interpreters who thought their service with the U.S. meant an assurance of sanctuary, now has to wonder whether they’ll be treated like stiffed contractors at a Trump hotel.
That’s a very big loss. And it’s probably irreversible.
Posted by Mark Thoma on Monday, January 30, 2017 at 09:54 AM in Economics, International Trade, Politics |
Posted by Mark Thoma on Monday, January 30, 2017 at 12:06 AM in Economics, Links |
FOMC Preview, by Tim Duy: The Fed will take a pass at this week’s FOMC meeting. The median policy participant forecasts just three 25bp rate hikes this year and incoming data offers no surprises to force one of those this month. March, however, remains in play.
The three forecasted rate hikes is not a promise. It could be one hike or could be four or more. The actual outcome will depend on the path of actual economic outcomes and what those outcomes imply for the forecast.
The Fed is aware that crosscurrents in the economy – such as potentially significant changes to fiscal and economic policy – create substantial uncertainties about the course of monetary policy this year. From the most recent minutes:
…many participants emphasized that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate.
Translation: The Fed’s crystal ball is as cloudy as everyone else’s, but that’s hard to explain. For example, the potential positive demand shock from expected deficit spending could be overwhelmed by a potential negative supply shock from an increasingly xenophobic Trump Administration.
What does this mean for March? Currently, market participants place low odds of a March rate hike. The underlying bet is that if the Fed moves three times this year, the most likely timing will be June, September, and December. I think this is reasonable; bringing March into that mix requires a change in the tone of the data.
Specifically, to pull a rate hike forward, the Fed needs evidence that either inflation is firming more than anticipated or that unemployment is more significantly undershooting its natural rate. Both would be cause for concern for policymakers. But, in practice, given the inflation inertia evident in recent years, the labor market would most likely be the driving force of behind a March rate hike. From the minutes:
Several members noted that if the labor market appeared to be tightening significantly more than expected, it might become necessary to adjust the Committee's communications about the expected path of the federal funds rate, consistent with the possibility that a less gradual pace of increases could become appropriate.
The December labor report was largely consistent with the Fed’s forecasts, and thus will have little impact on the March meeting. The same is true for the GDP report for the final quarter of 2016. Notable is that domestic demand has held up well the last three quarters:
They will also be heartened that equipment investment, broke a string of four consecutive negative quarters with a 3.1 percent gain. Also, note that core durable goods orders are finally back to making year over year gains:
This too is consistent with the small uptick in growth anticipated by the Fed for 2017.
But we still have plenty of data between now and March. In particular, watch incoming data and how they impact the forecast of key variables such as unemployment and inflation. The Fed will pay close attention to:
- Nonfarm payrolls. They expect payroll growth to continue slowing to something close to 100k a month. A re-acceleration would raise eyebrows on Constitution Ave.
- The unemployment rate. The Fed’s estimate of the natural rate of unemployment firmed over the past year. Hesitation to drop it lower means that surprise falls in unemployment would prompt more aggressive Fed action.
- Faster wage growth. Some policy makers argued in December that subdued wage growth gave them more time to respond to an unemployment overshoot. But wage growth accelerated in December to 2.9% annually, the highest pace since 2009. Watch this space (and see this from Bloomberg on competition for workers in the fast food industry).
- Inflation numbers. Although, as noted earlier, inflation has been fairly inertial, that could change at the economy settles further into full employment/potential output.
- Acceleration? The Fed is not anticipating a large acceleration in activity this year, so any indication that activity is picking up more than expected will be watched with wary eyes.
At this point I still do not anticipate a March hike. And note that a March move doesn’t guarantee a faster pace of rate hikes; it could be largely pre-emptive, just displacing a subsequent rate hike. But if they could justify a March move and you were anticipating two to three rate hikes this year, you should probably be thinking of three to four. Not to mention some action on the balance sheet added to the mix.
Posted by Mark Thoma on Sunday, January 29, 2017 at 02:14 PM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Sunday, January 29, 2017 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, January 28, 2017 at 12:06 AM in Economics, Links |
From the BEA: Gross Domestic Product: Fourth Quarter and Annual 2016 (Advance Estimate)
Real gross domestic product (GDP) increased at an annual rate of 1.9 percent in the fourth quarter of 2016, according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.5 percent.
The increase in real GDP in the fourth quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by negative contributions from exports and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP in the fourth quarter reflected a downturn in exports, an acceleration in imports, a deceleration in PCE, and a downturn in federal government spending that were partly offset by an upturn in residential fixed investment, an acceleration in private inventory investment, an upturn in state and local government spending, and an acceleration in nonresidential fixed investment.
The advance Q4 GDP report, with 1.9% annualized growth, was below expectations of a 2.2% increase. ...
Posted by Mark Thoma on Friday, January 27, 2017 at 09:25 AM in Economics |