Via email, a new paper from Josh R. Stillwagon, an Assistant Professor of Economics at Trinity College, appearing in the Journal of International Financial Markets, Institutions & Money. The paper "applies some of Keynes's insights about liquidity preference to understanding term structure premia. The following is an excerpt paraphrased from the conclusion":
"This work uses survey data on traders' interest rate forecasts to test the expectations hypothesis of the term structure and finds clear evidence of a time-varying risk premium in four markets... Further, it identifies two significant factors which impact the magnitude of the risk premium. The first is overall consumer sentiment analogous to Keynes's "animal spirits"... The second factor is the level of and/or changes in the interest rate, consistent with the imperfect knowledge economics gap model [applied now to term premia]; the intuition being that the increasing skew to potential bond price movements from a fall in the interest rate [leaving more to fear than to hope as Keynes put it] causes investors to demand a greater premium. This was primarily observed in the medium-run relations of the I(2) CVAR, indicating that these effects are transitory suggesting, as Keynes argued, that what matters is not merely how far the interest rate is from zero but rather how far it is from recent levels."
This link is free for 50 days: http://authors.elsevier.com/a/1QYk23j1YpaN3o
Posted by Mark Thoma on Tuesday, February 17, 2015 at 09:41 AM in Academic Papers, Economics, Financial System |
Posted by Mark Thoma on Tuesday, February 17, 2015 at 12:06 AM in Economics, Links |
The Drug that is Bankrupting America: America is the land of breakthrough science ... in the case of the new hepatitis C virus (HCV) cure named sofosbuvir, sold under the brand name Solvadi by the drug company Gilead Sciences. There is no question that Solvadi is a godsend - a lifesaver for millions ... around the world ... Yet Solvadi is also the poster child of a US healthcare system that is being bankrupted by greed, lobbying and indefensible policies on drug pricing.
The basic facts are these. ... Gilead set the price for a twelve-week treatment course of Solvadi at $84,000... According to researchers at Liverpool University, the actual production costs of Solvadi for the twelve-week course is in the range $68-$136. ...
The standard defense by the drug companies ... is that drug discovery is costly and their high profits reimburse the R&D costs. Here is where the story of Solvadi gets even more interesting. The total private-sector outlays on R&D were ... almost surely under $500 million, meaning that the decade-long R&D outlays were likely recouped in a few weeks of drug sales.
Here is the background. Sofosbuvir was developed under the leadership of Prof. Raymond Schinazi, a brilliant professor of biochemistry at Emory University. The US Government heavily funded Prof. Schinazi's research...
Solvadi ... shows how publicly financed science easily turns into arbitrarily large private profits paid for by taxpayers. The challenge facing the US is to adopt a rational drug pricing system that continues to spur excellent scientific breakthroughs while keeping greed in check. Big Pharma and the US public are on a collision course when they should be partners for the advancement of health.
Posted by Mark Thoma on Monday, February 16, 2015 at 12:20 PM in Economics, Health Care, Market Failure |
Cecchetti & Schoenholtz:
The Congressional Reserve Board: A Really Bad Idea: “We are – I’ll be blunt – audited out the wazoo. Every Federal Reserve Bank has a private auditor. We have our auditor of the system. We have our own inspector general. We are audited. What he’s talking about is politicizing monetary policy.” Richard Fisher, President, Federal Reserve Bank of Dallas, Dallas Morning News, February 9, 2015.
What would you think if you were to open your morning newspaper to find the following headline?
“Congress Closes Down Fed, Takes Over Monetary Policy”
If you’re like us, you’d panic. In short order, you’d think that long-term inflation expectations would rise, pushing bond yields higher. You’d anticipate an increase in the volatility of growth, employment and inflation. That more volatile environment would drive up the risk premium required on new investments, hindering long-term economic growth. Finally, you'd be very worried about how these Congressional policymakers would manage the next financial crisis.
This is not a pretty picture. Why would anyone want it to become a reality? Well, these are surely not the intended goals, but they are the likely outcomes should lawmakers ever replace the Federal Reserve Board with what we would call a Congressional Reserve Board.
While the Federal Reserve Transparency Act of 2015 – aka, the “Audit the Fed” Act – doesn’t shut down the Federal Reserve, it would go a long way to putting Congress directly in charge of monetary policy and to weakening the Fed’s effectiveness as a lender of last resort.
To explain our concerns, we will start by describing why it has become almost universally accepted practice to make the institution setting monetary (and regulatory) policy independent of political interference. That is, why most advanced and emerging market economies have opted to make their central banks “independent.” We will also explain why the “Transparency Act” is really about controlling monetary policy, not about making the Fed accountable (the short answer: it already is). And, finally, we will explain the bill’s impact on the Fed’s lender of last resort powers. ...
Posted by Mark Thoma on Monday, February 16, 2015 at 10:00 AM in Economics, Monetary Policy, Politics |
The lesson of Weimar Germany is different than many people think:
Weimar on the Aegean, by Paul Krugman, Commentary, NY Times: Try to talk about the policies we need in a depressed world economy, and someone is sure to counter with the specter of Weimar Germany, supposedly an object lesson in the dangers of budget deficits and monetary expansion. But the history of Germany after World War I is almost always cited in a curiously selective way. We hear endlessly about the hyperinflation of 1923, when people carted around wheelbarrows full of cash, but we never hear about the much more relevant deflation of the early 1930s, as the government of Chancellor Brüning — having learned the wrong lessons — tried to defend Germany’s peg to gold with tight money and harsh austerity.
And what about what happened before the hyperinflation, when the victorious Allies tried to force Germany to pay huge reparations? ... In the end, and inevitably, the actual sums collected from Germany fell far short of Allied demands. But the attempt to levy tribute... — incredibly, France actually invaded and occupied the Ruhr, Germany’s industrial heartland, in an effort to extract payment — crippled German democracy and poisoned relations with its neighbors.
Which brings us to the confrontation between Greece and its creditors. ... Greece cannot pay its debts in full. Austerity has devastated its economy as thoroughly as military defeat devastated Germany...
Despite this catastrophe, Greece is making payments to its creditors ... of around 1.5 percent of G.D.P. And the new Greek government is willing to keep running that surplus. What it is not willing to do is meet creditor demands that it triple the surplus..., cuts have already driven Greece into a deep depression...
What would happen if Greece were simply to refuse to pay? Well, 21st-century European nations don’t use their armies as bill collectors. But there are other forms of coercion. We now know that in 2010 the European Central Bank threatened, in effect, to collapse the Irish banking system unless Dublin agreed to an International Monetary Fund program.
The threat of something similar hangs implicitly over Greece, although my hope is that the central bank ... wouldn’t go along.
In any case, European creditors should realize that flexibility — giving Greece a chance to recover — is in their own interests. They may not like the new leftist government, but it’s a duly elected government whose leaders are ... sincerely committed to democratic ideals. Europe could do a lot worse — and if the creditors are vengeful, it will.
Posted by Mark Thoma on Monday, February 16, 2015 at 09:33 AM in Economics, International Finance |
Posted by Mark Thoma on Monday, February 16, 2015 at 12:06 AM in Economics, Links |
One reason to worry about US inequality...it is really bad for our babies: My colleague Alice Chen, along with Emily Oster and Heidi Williams, have a new paper that explains differences in the infant mortality rate in the United States and other OECD countries. ...
Chen, Oster and Williams ... find that the US continues to lag the others in terms of first year survival. What is particularly interesting is that the difference between the US and other countries accelerates over the course of the first year of life--as neonatal threats recede, the position of the US worsened relative to Austria and Finland.
Here is where inequality comes in--if when Chen and co-authors look at children born to advantaged individuals (meaning married, college-educated and white) in the US, they survive at the same rates as their counterparts in Austria and Finland. But the trio find that children of disadvantaged parents in the US have much lower survival rates than children of disadvantaged parents in the other countries. This may well be because Europe's safety nets make the disadvantaged less disadvantaged.
Posted by Mark Thoma on Sunday, February 15, 2015 at 08:22 PM in Economics, Income Distribution |
Posted by Mark Thoma on Sunday, February 15, 2015 at 12:06 AM in Economics, Links |
A Simple Model of Multiple Equilibrium Business Cycles: Noah Smith has a nice piece here on Roger Farmer's view of the business cycle.
The basic idea is that, absent intervention, economic slumps (as measured, say, by an elevated rate of unemployment) can persist for a very long time owing to a self-reinforcing feedback effect. The economy can get stuck in what game theorists would label a "bad equilibrium." This interpretation seems to me to be highly consistent with Keynes' (1936) own view on the matter as expressed in this passage:
[I]t is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.
Now, there is more than one way to explain how an economy can get stuck in a rut. A favorite argument on the right is that recessions are naturally self-correcting if the market is left to its own devices and that prolonged slumps are attributable primarily to the misguided, clumsy and uninformed attempts on the part of government policymakers to "fix" the problem (see here).
But there is another view. The view begins with an observation from game theory: most structures that govern social interaction permit many possible outcomes--outcomes that have nothing to do with the existence of any fundamental uncertainty. ...
Posted by Mark Thoma on Saturday, February 14, 2015 at 10:57 PM
Posted by Mark Thoma on Saturday, February 14, 2015 at 12:06 AM in Economics, Links |
States Consider Increasing Taxes on Poor, Cutting Them on Affluent: A number of Republican-led states are considering tax changes that, in many cases, would have the effect of cutting taxes on the rich and raising them on the poor.
Conservatives are known for hating taxes but particularly hate income taxes, which they say have a greater dampening effect on growth. Of the 10 or so Republican governors who have proposed tax increases, virtually all have called for increases in consumption taxes, which hit the poor and middle class harder than the rich.
Favorite targets for the new taxes include gasoline, e-cigarettes, and goods and services in general (Governor Paul LePage of Maine would like to start taxing movie tickets and haircuts). At the same time, some of those governors — most notably Mr. LePage, Nikki Haley of South Carolina and John Kasich of Ohio — have proposed significant cuts to their state income tax. ...
Posted by Mark Thoma on Friday, February 13, 2015 at 08:46 AM in Economics, Income Distribution, Politics, Taxes |
Why are conservatives so crazy about money?:
Money Makes Crazy, by Paul Krugman, Commentary, NY Times: Monetary policy probably won’t be a major issue in the 2016 campaign, but it should be. It is, after all, extremely important, and the Republican base and many leading politicians have strong views about the Federal Reserve and its conduct. And the eventual presidential nominee will surely have to endorse the party line.
So it matters that the emerging G.O.P. consensus on money is crazy — full-on conspiracy-theory crazy. ...
So monetary crazy is pervasive in today’s G.O.P. But why? Class interests no doubt play a role — the wealthy tend to be lenders rather than borrowers, and they benefit at least in relative terms from deflationary policies. But I also suspect that conservatives have a deep psychological problem with modern monetary systems.
You see, in the conservative worldview, markets aren’t just a useful way to organize the economy; they’re a moral structure: People get paid what they deserve, and what goods cost is what they are truly worth to society. ...
Modern money — consisting of pieces of paper or their digital equivalent that are issued by the Fed, not created by the heroic efforts of entrepreneurs — is an affront to that worldview. Mr. Ryan is on record declaring that his views on monetary policy come from a speech given by one of Ayn Rand’s fictional characters. And what the speaker declares is that money is “the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. ... Paper is a check drawn by legal looters.”
Once you understand that this is how many conservatives really think, it all falls into place. Of course they predict disaster from monetary expansion, no matter the circumstances. Of course they are undaunted in their views no matter how wrong their predictions have been in the past. Of course they are quick to accuse the Fed of vile motives. From their point of view, monetary policy isn’t really a technical issue, a question of what works; it’s a matter of theology: Printing money is evil.
So as I said, monetary policy should be an issue in 2016. Because there’s a pretty good chance that someone who either gets his monetary economics from Ayn Rand, or at any rate feels the need to defer to such views, will get to appoint the next head of the Federal Reserve.
Posted by Mark Thoma on Friday, February 13, 2015 at 08:16 AM in Economics, Monetary Policy, Politics |
Posted by Mark Thoma on Friday, February 13, 2015 at 12:06 AM in Economics, Links |
John Robertson and Ellie Terry at the Atlanta Fed's Macroblog:
Are We Becoming a Part-Time Economy?: Compared with 2007, the U.S. labor market now has about 2.5 million more people working part-time and about 2.2 million fewer people working full-time. In this sense, U.S. businesses are more reliant on part-time workers now than in the past.
But that doesn't necessarily imply we are moving toward a permanently higher share of the workforce engaged in part-time employment. As our colleague Julie Hotchkiss pointed out, almost all jobs created on net from 2010 to 2014 have been full-time. As a result, from 2009 to 2014, the part-time share of employment has declined from 21 percent to 19 percent and is about halfway back to its prerecession level.
But the decline in part-time utilization is not uniform across industries and occupations. In particular, the decline is much slower for occupations that tend to have an above-average share of people working part-time. This portion of the workforce includes general-service jobs such as food preparation, office and administrative support, janitorial services, personal care services, and sales.
Why has the demand for full-time workers in general-service occupations been more subdued than for other jobs? As the following chart shows, wage growth for these occupations has been quite weak in the past few years, suggesting that employers have not been experiencing much tightness in the supply of workers to fill vacancies for these occupations. Presumably, then, the firms generally find it acceptable to have a greater share of part-time workers than in the past.
The overall share of the workforce employed in part-time jobs is declining and is likely to continue to decline. But the decline is not uniform across industries and occupations. Working part-time has become much more likely in general-service occupations than in the past—and a greater share of those workers are not happy about it.
Posted by Mark Thoma on Thursday, February 12, 2015 at 12:30 PM in Economics, Unemployment |
Part of an interview with Tim Geithner:
... The really important distinction to make in terms of both diagnosing the risks of a crisis and of thinking about how to respond is to try to determine when your system is vulnerable to a truly systemic disruption and when it is not. If there is a lot of dry tinder, you are more vulnerable and even a modest shock can risk tipping you over into a more systemic panic. You want to make your system resilient to such shocks. So, the most important thing is to ask yourself: where today do we face the kinds of vulnerabilities, the kinds of conditions – the dry tinder – that might make us more vulnerable to a more cataclysmic kind of shock that would be very damaging to the economy?
For systems to face that kind of threat you really need to have had a long boom in credit financed either through the banking system or through the financial system in ways that create a classic vulnerability to a run. That is, you need to have a set of long-dated assets that are illiquid, are vulnerable to a loss, and are funded short. We don’t face that sort of vulnerability in the financial system today. In many ways, the crisis is still too recent. The memory is too fresh for us to have had that long build up in borrowing through the banking system that makes you susceptible to systemic panic. Since the crisis, credit growth has been very modest while financial reforms have produced a system that is much better capitalized.
The one exception I would make to that general view is that Europe is vulnerable for different reasons to a kind of classic run or panic. They don’t have the institutions that would allow them to defend themselves credibly against such an event. For them to build that kind of arsenal (like what we eventually built in 2008-2009 to break a panic) they would have to do a whole range of things – creating institutions that aren’t in place today.
Beyond that, there is a familiar set of risks out there. But they are not risks on a scale like those that made the world vulnerable to a panic in 2008-2009. ...
We should probably remember that he has an incentive to say that the things he helped to do during the financial crisis have made the system safer today.
Posted by Mark Thoma on Thursday, February 12, 2015 at 09:16 AM in Economics, Financial System, Regulation |
Simon Wren-Lewis in the London Review of Books:
The Austerity Con: ‘The government cannot go on living beyond its means.’ This seems common sense, so when someone puts forward the view that just now austerity is harmful, and should wait until times are better, it appears fanciful and too good to be true. Why would the government be putting us through all this if it didn’t have to?
By insisting on cuts in government spending and higher taxes that could easily have been postponed until the recovery from recession was assured, the government delayed the recovery by two years. And with the election drawing nearer, it allowed the pace of austerity to slow, while pretending that it hadn’t. Now George Osborne is promising, should the Tories win the election in May, to put the country through the same painful and unnecessary process all over again. Why? Why did the government take decisions that were bound to put the recovery at risk, when those decisions weren’t required even according to its own rules? How did a policy that makes so little sense to economists come to be seen by so many people as inevitable? ...
Posted by Mark Thoma on Thursday, February 12, 2015 at 08:57 AM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Thursday, February 12, 2015 at 12:06 AM in Economics, Links |
Via Chris Dillow, a new paper on inequality and economic growth:
The Long-Term Impact of Inequality on Entrepreneurship and Job Creation, by Roxana Gutiérrez-Romero and Luciana Méndez-Errico: Abstract We assess the extent to which historical levels of inequality affect the likelihood of businesses being created, surviving and of these cr eating jobs overtime. To this end, we build a pseudo-panel of entrepreneurs across 48 countries using the Global Entrepreneurship Monitor Survey over 2001-2009. We complement this pseudo-panel with historical data of income distribution and indicators of current business regulation. We find that in countries with higher levels of inequality in the 1700s and 1800s, businesses today are more likely to die young and create fewer jobs. Our evidence supports economic theories that argue initial wealth distribution influences countries’ development path, having therefore important policy implications for wealth redistribution.
Chris argues through a series of examples that such long-term effects are reasonable (things in the 1700s and 1800s mattering today), and then concludes with:
... All this suggests that, contrary to simple-minded neoclassical economics and Randian libertarianism, individuals are not and cannot be self-made men. We are instead creations of history. History is not simply a list of the misdeeds of irrelevant has-beens; it is a story of how we were made. Burke was right: society is "a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born."
One radical implication of all this is Herbert Simon's:
When we compare the poorest with the richest nations, it is hard to conclude that social capital can produce less than about 90 percent of income in wealthy societies like those of the United States or Northwestern Europe. On moral grounds, then, we could argue for a flat income tax of 90 percent to return that wealth to its real owners.
I find myself skeptical of such long-term effects, but maybe...
Posted by Mark Thoma on Wednesday, February 11, 2015 at 11:21 AM in Academic Papers, Economics, Income Distribution |
A small part of a much longer essay from Robert Reich:
... A Forbes Magazine contributor ... writes that jobs exist only “when both employer and employee are happy with the deal being made.” So if the new jobs are low-paying and irregular, too bad.
Much the same argument was voiced in the late nineteenth century over alleged “freedom of contract.” Any deal between employees and workers was assumed to be fine if both sides voluntarily agreed to it.
It was an era when many workers were “happy” to toil twelve-hour days in sweat shops for lack of any better alternative.
It was also a time of great wealth for a few and squalor for many. And of corruption, as the lackeys of robber barons deposited sacks of cash on the desks of pliant legislators.
Finally, after decades of labor strife and political tumult, the twentieth century brought an understanding that capitalism requires minimum standards of decency and fairness – workplace safety, a minimum wage, maximum hours (and time-and-a-half for overtime), and a ban on child labor.
We also learned that capitalism needs a fair balance of power between big corporations and workers.
We achieved that through antitrust laws that reduced the capacity of giant corporations to impose their will, and labor laws that allowed workers to organize and bargain collectively.
By the 1950s, when 35 percent of private-sector workers belonged to a labor union, they were able to negotiate higher wages and better working conditions than employers would otherwise have been “happy” to provide.
But now we seem to be heading back to nineteenth century. ...
Posted by Mark Thoma on Wednesday, February 11, 2015 at 11:01 AM
Republicans and misguided centrist Democrats are coming after Social Security. One target is disability insurance. However:
The Disability Insurance Non-Crisis, CBPP: Although the Senate Budget Committee will hold a hearing tomorrow titled “The Coming Crisis: Social Security Disability Trust Fund Insolvency,” Disability Insurance (DI) is not, in fact, in crisis.
Here, briefly, are the facts...
Posted by Mark Thoma on Wednesday, February 11, 2015 at 11:01 AM in Economics, Social Insurance, Social Security |
Hmm. I must be missing something, for once I don't strongly disagree with Richard Fisher:
A Fed Insider Calls for Reform, by James Freeman, WSJ: Richard Fisher, President of the Federal Reserve Bank of Dallas, believes “there’s too much power concentrated in the New York Fed.” And that goes as well for the Fed’s Washington headquarters. ... It’s ... an effort to head off Congressional efforts that Mr. Fisher believes could threaten the independence of the central bank. ...
To reform the Fed while maintaining its independence, Mr. Fisher first proposes to end the long tradition of the New York Fed President serving as the vice chairman of the FOMC. ...
Mr. Fisher would further boost representation for those outside of Washington and New York. Today, the Washington-based Fed governors and the Chairman hold a total of seven votes on the FOMC. That would not change. But whereas today New York gets a permanent seat and the other 11 regional banks take turns sharing four remaining seats, the regional banks would hold six seats under the Fisher plan. New York would lose its permanent seat and instead take its turn in the rotation for one of the six regional seats. So the Fed governors and Chairman, selected by the President and confirmed by the Senate, would still have a majority on the FOMC, but power would be further dispersed outside of the Acela corridor. ...
And to address “the potential for regulatory capture,” Mr. Fisher says that teams in charge of supervision of a “systemically important” bank should come from a district outside where the giant bank is based. ...
There is resistance to giving the regional banks more power (in part because of people like Fisher), but I think the Fed is viewed suspiciously by most. If we can make typical households believe the Fed is representing their interests, it would help. Not sure this proposal is the best way to do that, but I do feel that most people have the perception (as opposed to the reality) that the Fed has been captured by interests other than their own.
Posted by Mark Thoma on Wednesday, February 11, 2015 at 09:49 AM in Economics, Monetary Policy |
Erskine Bowles writes a letter to the NY Times:
The Risks of Delaying Fiscal Reforms: To the Editor:
Paul Krugman’s Feb. 2 column, “The Long-Run Cop-Out,” claims that we don’t need to deal with our long-term fiscal challenges any time soon, and that those who argue otherwise are lazy and lacking in courage. His message is a disservice to the critically important debate about our nation’s economic future. ...
Mr. Krugman’s assertion that America followed a course of austerity while the economy was still in a deep slump due to the influence of “Bowles-Simpsonism” ignores the fact that one of the key principles set out in the National Commission on Fiscal Responsibility and Reform report was that deficit reduction must not disrupt the fragile economic recovery.
Indeed, it is largely due to the failure of our elected leaders to reach agreement on long-term deficit reduction along the lines of our recommendations that we ended up with the mindless austerity of sequestration. In our report we recommended delaying significant budget cuts until the economy recovered, and implementing reforms gradually. ...
Does anyone remember Bowles or his associates objecting strenuously to the sequester, getting out in public forums and arguing it was a big mistake? Writing letters and op-eds to the NY Times, that sort of thing? I don't (and see Dean Baker below on this point - Update: from a Tweet by @BowlesSimpson, see here, but I don't see them calling for delay until the economy recovers, only for a different type of austerity, e.g. "simply waiving this sequester — or coming up with some agreement to spend partway between pre- and post-sequester levels — would represent a huge failure. It would send a message to creditors and citizens alike that Washington is not serious about the national debt and that even when lawmakers put in place mechanisms to force seriousness, they will simply vote later to evade them. Deal with the deficit President Barack Obama and Congress have a responsibility to put politics aside and work quickly to replace sequestration and put our fiscal house in order with targeted cuts and real reforms in both the entitlement programs and the tax code.").
As for the budget projections, I'm old enough to remember a time not so long ago when the main worry was what to do about the budget surplus that would begin accumulating (e.g. how could the Fed conduct monetary policy if the supply of T-Bills dried up?). We have no idea what the budget will look like 10 or 15 years from now (unless you have suddenly started to believe that economists have the ability to make accurate forecasts even a year ahead, let alone a decade or more). That's why Krugman said:
It’s true that many projections suggest that our major social insurance programs will face financial difficulties in the future (although the dramatic slowing of increases in health costs makes even that proposition uncertain). If so, at some point we may need to cut benefits. But why, exactly, is it crucial that we deal with the threat of future benefits cuts by locking in plans to cut future benefits?
Dean Baker also responds:
Erskine Bowles Is Back and Still Pushing Austerity: Erskine Bowles, the superhero of the fiscal austerity crowd, took time off from his duties on corporate boards to once again argue the need to "put our fiscal house in order." He apparently hasn't been following the numbers lately. If he had, he would have noticed that growth rate of Medicare and other government health care programs is now on a path that is lower than the proposals that he and Alan Simpson put forward in their report. (He refers to their report as a report of the National Commission on Fiscal Responsibility and Reform. This is not true. According to its bylaws a report would have needed the support of 14 of the 18 members of the commission. The Bowles-Simpson proposal only had support of 10 members of the commission.)
Bowles also inaccurately claims they proposed delaying deficit reduction until after the economy had recovered. In fact, the report proposed deficit reduction of $330 billion (2.0 percent of GDP) beginning in the fall of 2011. This was long before the economy had recovered or would have in any scenario without a large dose of fiscal stimulus.
Bowles also fails to give any reason whatsoever why the country would benefit from dealing with large projected deficits a decade into the future. These projections may themselves be far off the mark, as has frequently been the case in the past. It is also worth noting that the rise in the deficit depends on projections of sharply higher interest rates in the years after 2020. There is no obvious basis for assuming this would be the case.
In the event that large deficits do prove to be a problem in 2025 and beyond there is no obvious reason why we would think that the Congress and president would not be able to deal with them at the time. That is what experience would suggest. In the mean time, we have real problems like millions of people unable to find jobs and tens of millions who have not shared in the benefits of growth for the last fifteen years. Or, to put it in generational terms, we have tens of millions of children growing up in families whose parents don't earn enough to provide them with a comfortable upbringing.
Posted by Mark Thoma on Wednesday, February 11, 2015 at 09:18 AM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Wednesday, February 11, 2015 at 12:06 AM in Economics, Links |
I have a new column:
Why Social Insurance Is a Necessary Part of Capitalism:
It's a defense of social insurance against Republican attempts to dismantle it.
Posted by Mark Thoma on Tuesday, February 10, 2015 at 08:03 AM in Economics, Social Insurance |
Is the U.S. Really Below Potential GDP?: The CBO just released a new projection of both GDP and the budget out to 2024. In short, the CBO sees the U.S. staying below potential GDP for several years. Menzie Chinn just did a short review of how people use inflation and/or unemployment to try and figure out the difference difference between actual and potential GDP.
From a growth perspective, I wanted to take a look at the projections a little differently. First, I don’t much care about the level of aggregate GDP, I care about the level of GDP per capita. So I took the CBO numbers and combined them with population figures and projections to get actual and projected GDP per capita for the U.S. Note, I’m using the CBO projections for actual GDP, not their potential GDP numbers. I want to look at the expected GDP numbers.
Second, I wanted to consider how this projected GDP per capita compared to long-run trends, rather than using inflation or unemployment to assess whether GDP per capita is “at potential”. I am looking instead whether GDP per capita has deviated from its long-run path. To do this I merged the GDP per capita projections from the CBO with the Maddison dataset on GDP per capita from 1970 to 2008. (The CBO goes back far enough that the two series overlap and I can adjust the actual levels of GDP per capita to match). ...
After several paragraphs of analysis, he concludes:
... I really thought when I started playing with this data that I’d be writing a post about how the Great Recession had fundamentally shifted GDP per capita below the long-run trend, and that this represented a really fundamental shock given how stable the long-run trend had been until now. But the current path of GDP per capita doesn’t appear to be that surprising in historical perspective.
The big caveat here is that the CBO could be entirely wrong about future GDP per capita growth. If they have been overly optimistic, then we could certainly find ourselves falling below even the very long-run trend. Then again, they could have been pessimistic, and we might find ourselves above trend for all I know. But even with all the uncertainty, the expectation is that the U.S. economy will find itself right where you would have predicted it would be.
Posted by Mark Thoma on Tuesday, February 10, 2015 at 08:02 AM in Economics |
Fedspeak Points To June, by Tim Duy: Federal Reserve speakers were out and about today. First off, Richmond Federal Reserve President Jeffrey Lacker set a fairly high bar for NOT hiking in June. Via the Wall Street Journal:
“At this point, raising rates in June looks like the attractive option for me,” Mr. Lacker told reporters following a speech Tuesday in Raleigh, N.C. “Data between now and then may change my mind, but it would have to be surprising data.”...
...“The economy’s clearly growing at a more rapid, sustained pace than it was a year ago,” he said. “Economies that are growing faster need higher real interest rates, and a variety of indicators point to the need for higher real rates.”
What about inflation? It is all about oil:
Mr. Lacker said the effects of lower gasoline prices on inflation should be transitory, and he expects inflation will move back toward the Fed’s 2% annual target over the next year or two. “The inflation rate was clearly moving towards 2% before oil prices began falling last summer,” he said.
Here I worry, because Lacker is clearly ignoring the data, or least weighing the year-over-year changes far too heavily. Inflation actually accelerated in the second half of 2013, but was clearly decelerating by the beginning of 2014 (right idea, wrong dates) first half of 2014, but was clearly decelerating by June, prior to the oil shock. By July, the 3-month annualized change in core was just 0.97% while oil was still above $100 and gas above $3.50:
But the Fed is close to achieving the employment mandate, so inflation data be damned! Still think the employment part of the dual mandate is really a good idea?
San Francisco Federal Reserve President John Williams digs in his heals and assures us a rate hike is coming. Via the Financial Times:
John Williams, president of the Federal Reserve Bank of San Francisco, said the time for the US central bank to start raising rates is getting “closer and closer” amid faster-than-expected wage rises in January and “really strong” hiring. Some investors may be caught out by a rate increase, but that should not stop the Fed from tightening policy if necessary, he said.
What about inflation? No problem, it is all about the lags:
...Economists including Lawrence Summers, a former US Treasury secretary, have urged the Fed to leave rates unchanged until there is clear evidence that inflation, and inflation expectations, are set to breach its 2 per cent target.
However Mr Williams dismissed such calls, warning of the risk that the Fed gets behind the curve on inflation and that it could end up being forced to hike rates “much more dramatically” to rein in inflation, provoking market turmoil. Given the trails with which monetary policy operates it was better to start raising interest rates “gradually, thoughtfully”, he said.
Note that he pulled out the "if we don't hike now we will need to hike more later" argument. That, along with the financial stability argument, is how they will justify a rate increase in the absence of inflation. Williams, however, hedges on June:
A key question obsessing financial markets is whether the Fed pulls the trigger in the middle of the year or waits longer. Mr Williams did not commit himself to voting for a move in June, saying instead that the decision of whether to hike or delay a bit longer would be “in play” at that point.
Time is growing short for the wage gains necessary to begin hiking in June.
Importantly, Williams also rejects the idea that bond markets are signaling secular stagnation:
He dismissed arguments that low long-term bond yields in the US reflect fears of a gloomy outlook for the American economy, saying they more likely were a result of global financial conditions, amid slowdowns and policy easing in large parts of the rest of the world.
US policy would still be very accommodative even after the Fed raised rates, he stressed. “That first step of raising interest rates is just removing a sliver of that accommodation,” he said.
The last paragraph is key. Williams, like the rest of the FOMC argues that conditions will remain very accommodative after even a small rate hike. As I noted last night, this is not true under the secular stagnation hypothesis:
It would be interesting if we had William's estimate of the equilibrium rate for comparison. Wait, we do - from his January 2014 Brookings paper:
Oh my, that brownish-greenish line appears to be a fairly pessimistic estimate of the natural rate, certainly one inconsistent the assertion that conditions remain accommodative after even just a small rate hike. Perhaps some journalists should start pressing Williams on the policy implications of his research. And, for that matter, I think the Fed's view on the equilibrium real rate should be a front-and-center topic for the next FOMC press conference.
Meanwhile, soon-to-retire Dallas Federal Reserve President Richard Fisher is pegging his rate outlook to wage gains:
“If we were to see employment continue to increase, we’re getting much, much better on that front and you begin to see the wage price pressures, that should govern what we do with interest rates.”
The Fed simply has no justification to raise rates in June absent acceleration in wage growth. Even Fisher agrees. Fisher also pushes back against the renewed "Audit the Fed" movement:
“We are — I’ll be blunt — we are audited out the wazoo. Every Federal Reserve Bank has a private auditor. We have our auditor of the system. We have our own inspector general. We are audited. That’s not what he’s talking about. What he’s talking about is politicizing monetary policy.”
That's the plain truth. It has nothing to do with economics, and everything to do with politics.
Bottom Line: The Fed wants to hike in June. They continue to dismiss the inflation data, but they still need wage growth to hike. They dismiss the secular stagnation hypothesis. I hope they are right on that, or this is going to get ugly. Quickly.
Posted by Mark Thoma on Tuesday, February 10, 2015 at 08:01 AM in Economics, Fed Watch, Monetary Policy |
On The Fed Credibility Gap, by Tim Duy: Financial market participants do not believe the Fed will pursue their expected policy path:
David Wessel opines on the reasons from his post at Brookings:
First, financial markets are not interested in the median Fed official; they’re interested in Chairwoman Janet Yellen, and they assume her dot is lower than the median...Second, the markets think Fed officials and staff economists are overly optimistic about the U.S. economy, as they have been in the past...Third, there’s the inflation issue. Many do not believe that the Fed will raise rates until underlying inflation is a lot closer to its 2% target....
I will suggest another framework: Financial markets are pricing in a "secular stagnation" scenario that is at odds with Federal Reserve thinking. It is fairly easy to consider this in terms of the Taylor rule. One implication of the "secular stagnation" hypothesis is a decline in real interest rates. Suppose that the short term equilibrium real rate has fallen to zero. Consider the monetary policy implications from a basic Taylor rule:
The black dots are median Fed funds projections from the SEP; the colored dots are the Taylor rule predictions from the midpoint of SEP projections of core inflation and unemployment. In this scenario, monetary policy is only slightly loose by the end of 2015, near-neutral in 2016, and a little tight at then end of 2017.
But notice that even with the 0% equilibrium rate hypothesis, the Taylor-implied neutral Fed funds rate in 2017 is 2.5-3%, still high relative to the market implied rate of 2% at the end of 2017. So let's change the estimate of NAIRU from 5.6% to 5%. This does not appear to be unreasonable given the lack of wage response to date. Moreover, it is close to pre-recession Fed estimates. The results:
I would say this is fairly close to market expectations, albeit with a slightly lower neutral Fed funds estimate of 1.7-1.8% at the end of 2017. It thus appears reasonable to argue that financial market participants are pricing in a secular stagnation story combined with a pre-recession level of NAIRU.
In contrast, the Fed is not seriously contemplating such a story, at least the secular stagnation part. We know this from Federal Reserve Chair Janet Yellen herself:
I know that’s a mouthful, but it says, in effect, that the Committee believes that the economic conditions that have made recovery difficult, we’re getting beyond them. They are optimistic that those conditions will lift. They see the longer-run normal level of interest rates as around 33/4 percent. So there’s no view in the Committee that there is secular stagnation in the sense that we won’t eventually get back to pretty historically normal levels of interest rates. But they have said, it’ll, you know, the economy has required to get where it is a good deal of monetary policy accommodation; we expect to be able to normalize policy.
The biggest risk to the expansion is a dogmatic view of the neutral Fed funds rate on the part of the Federal Reserve. Markets are pricing in a secular stagnation story. The decline in long yields is also consistent with that story. So at the moment, financial market participants are saying the Fed has less room to maneuver than monetary policymakers believe. The Fed, I fear, is not taking sufficient heed of those signals.
Would it be outrageous to think that the Federal Reserve could find itself backtracking after just 200bp of rate hikes? Not if Sweden serves as any example. The Riksbank attempted to normalize policy when long-term rates were still low, and continued despite minimal gains in those rates. The result? The Riksbank managed to get to 200bp before being forced to reverse course:
I suspect there will be disbelief if not outright hostility to the idea that equilibrium short term real rates are near zero. Monetary policy makers will not like the result because it implies a narrow range to the effectiveness of their interest rate tools. They will also fear the asset bubble implications; many market participants will lament the same. I understand. That those in the rentier business would be hostile to the euthanasia of the rentier is expected and understandable. But if (safe) real returns are indeed collapsing toward zero, then obtaining higher returns will require taking on more risk, and more of those in the rentier business using more money to chase more risk will undoubtedly yield more asset bubbles of one variety or another. Those entrusted with financial stability will counter with a more costly regulatory environment to limit the creation of those bubbles, thereby making the rentier business even more difficult. In short, the future looks challenging for the rentier business.
Bottom Line: The Fed's expected policy path, and any desire for an even more aggressive policy path pushed by some market participants, is at odds with a secular stagnation scenario. But it appears something similar to that scenario is price into bond markets. If the Fed is not open to such a scenario, they risk tightening too aggressively and turning an expansion that should last at least four more years into one with only two left.
Posted by Mark Thoma on Tuesday, February 10, 2015 at 12:15 AM
Posted by Mark Thoma on Tuesday, February 10, 2015 at 12:06 AM in Economics, Links |
An FRBSF Economic Letter from John Fernald and Bing Wang:
The Recent Rise and Fall of Rapid Productivity Growth: Information technology fueled a surge in U.S. productivity growth in the late 1990s and early 2000s. However, this rapid pace proved to be temporary, as productivity growth slowed before the Great Recession. Furthermore, looking through the effects of the economic downturn on productivity, the reduced pace of productivity gains has continued and suggests that average future output growth will likely be relatively slow.
The past decade has been wrenching for the U.S. and global economies. In the depths of the Great Recession, the U.S. unemployment rate rose to 10%, reflecting an economy operating far short of its potential. As the effects of the Great Recession have receded, it is important to know how fast the economy can sustainably grow going forward. This Economic Letter explores trends in productivity growth—a key contributor to this sustainable pace. A recent paper by Fernald (2014a) finds that the exceptional boost to productivity growth from information technology in the late 1990s and early 2000s has vanished during the past decade. Although there is considerable uncertainty, a relatively slow pace is the best guess for the future. ...
Posted by Mark Thoma on Monday, February 9, 2015 at 10:54 AM in Economics |
Austerity has been a disaster:
Nobody Understands Debt, by Paul Krugman, Commentary, NY Times: ...Last week, the McKinsey Global Institute issued a report titled “Debt and (Not Much) Deleveraging,” which found, basically, that no nation has reduced its ratio of total debt to G.D.P. ...
You might think our failure to reduce debt ratios shows that we aren’t trying hard enough — that families and governments haven’t been making a serious effort to tighten their belts, and that what the world needs is, yes, more austerity. But we have, in fact, had unprecedented austerity. ...
All this austerity has, however, only made things worse — and predictably so, because demands that everyone tighten their belts were based on a misunderstanding of the role debt plays in the economy. ...
Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer). True, debt can pose a threat to financial stability — but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression.
Which brings us to current events, for there is a direct connection between the overall failure to deleverage and the emerging political crisis in Europe.
European leaders completely bought into the notion that the economic crisis was brought on by too much spending, by nations living beyond their means. The way forward, Chancellor Angela Merkel of Germany insisted, was a return to frugality. Europe, she declared, should emulate the famously thrifty Swabian housewife.
This was a prescription for slow-motion disaster. European debtors did, in fact, need to tighten their belts — but the austerity they were actually forced to impose was incredibly savage. ...
Suffering voters put up with this policy disaster for a remarkably long time, believing in the promises of the elite that they would soon see their sacrifices rewarded. But as the pain went on and on... Anyone surprised by the left’s victory in Greece, or the surge of anti-establishment forces in Spain, hasn’t been paying attention.
Nobody knows what happens next, although bookmakers are now giving better than even odds that Greece will exit the euro. Maybe the damage would stop there, but I don’t believe it — a Greek exit is all too likely to threaten the whole currency project. And if the euro does fail, here’s what should be written on its tombstone: “Died of a bad analogy.”
Posted by Mark Thoma on Monday, February 9, 2015 at 08:44 AM in Budget Deficit, Economics, Politics |
Posted by Mark Thoma on Monday, February 9, 2015 at 12:06 AM in Economics, Links |
Only raise US rates when whites of inflation’s eyes are visible: ... Especially after Friday’s very strong employment report, there can be no doubt that cyclical conditions are normalising. ... All of this taken in isolation would suggest that interest rates should not remain at zero much longer.
On the other hand, the available inflation data suggests little cause for concern. ... Perhaps most troubling: market indications suggest inflation is more likely to fall than rise .
The Fed has rightly made clear that its decisions will be data dependent. The further key point is that it should allow the flow of information on inflation rather than on real economic activity to determine its timing in adjusting interest rates. And it should not raise rates until there is clear evidence that inflation, and inflation expectations, are in danger of exceeding its 2 per cent target. Here are four important reasons why. ...
Posted by Mark Thoma on Sunday, February 8, 2015 at 11:48 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Sunday, February 8, 2015 at 12:06 AM in Economics, Links |
Anxiety and Interest Rates: How Uncertainty Is Weighing on Us: Anxiety and uncertainty are weighing on individuals even where the overall economy is growing. Some of this angst is the fallout from advances in information technology..., the technologies may eliminate our jobs... Even people with moderately high incomes have reason to be uncertain. ... Along with this ... is the psychic cost of growing income inequality. ...
I suspect that there is a real, if still unsubstantiated, link between widespread anxieties and the strange dynamics of the economic world... — a link that helps to explain why ... short-term interest rates ... are very low,... long-term rates, too..., why stock market prices are so high in some countries and why real estate prices have come up in many places...
When there is unusual uncertainty about the future, and if not enough new business initiatives can be found to increase the supply of good investments, people will compete to bid up existing investable assets. ...
Uncertainties ... can affect asset prices through an important indirect channel, government policy... Governments ... use expanded credit in a desperate effort to placate a dissatisfied electorate. Credit expansion can create housing bubbles and an illusion of wealth for many people, for a while, at least. The idea is: “Let them eat credit.”
But with rising anxiety about our economic lives and about the state of the markets, we need something more substantial than credit expansion to help us. We all need to think hard about the underlying mechanisms producing individual uncertainty and inequality, and we need to devise financial and insurance plans to help us to deal with whatever looms ahead.
Posted by Mark Thoma on Saturday, February 7, 2015 at 09:57 AM
Posted by Mark Thoma on Saturday, February 7, 2015 at 12:06 AM in Economics, Links |
Upbeat Jobs Report, by Tim Duy: The January jobs report came in above expectations, with nonfarm payrolls growing by 257k and, more importantly, there were large upward revisions to the previous two months. Simply put rumors of the demise of the US economy continue to be premature.
The pace of job gains accelerated further on average:
Oil and gas extraction jobs declined by 1.9k, but we all know more are coming. But outside of that sector, the economy added 255k jobs. The oil and gas extraction sector itself is only 200k jobs. In short, the fears that this sector is going to topple the US economy are just simply not going to come to pass.
In the context of data Federal Reserve Chair Janet Yellen has previously signaled as important:
Ongoing general improvement with measures of underemployment still elevated. There was some excitement about the 12 cent gain in average hourly earnings. I myself am less impressed as to me this largely represents a correction from December's anomalous drop. Wage growth remains fairly anemic year-over-year:
I would also like to see what happens after the impact of minimum wage hikes dissipates. The Fed, however, my take more comfort in the uptick than me. It goes without saying that a June rate hike remains on the table, although I think it is difficult to justify without faster wage growth. Still four jobs reports till then, so plenty of time to pull that number upward.
Jon Hilsenrath reiterates the view that if the Fed wants to keep the June option open they need to pull the word "patient" in March:
Second, Fed officials will decide at their March meeting whether to change or drop the language in their policy statement pledging to “be patient” in deciding when to raise their benchmark short-term interest rate from zero. That phrase means they won’t move for at least two more meetings.
After the March gathering, the Fed has meetings scheduled for April and June. If the policy makers keep the “patient” language in the statement, that would indicate they don’t think they’ll raise rates at those meetings. If they scrap the phrase, that would give them the option to move as early as June if the economic data hold up.
I doubt this is as black and white as Hilsenrath argues. I don't think Yellen intended to imply that "patient" always means two meetings. Perhaps I just have too many memories about "considerable time" first meaning six months and then not. Plus, the Fed is aware of its past history, and in 2004 "patient" turned to "moderate" just one meeting before the hike. But it was technically the second meeting after "patient" was dropped, so is that two meetings? Also, as we saw with the "considerable" to "patient" transition, the Fed has its own unique way of wordsmithing that can deliver something for everyone. And finally, Yellen has the press conference to redefine her interpretation of "patient." But maybe I am wrong. In any event, I am not taking a fixed stand on what "patient" means until the press conference.
Bottom Line: The US economy has very real momentum on its side at the moment. It is more resilient to shocks than commonly assumed. This isn't 2011. June is still on the table.
Posted by Mark Thoma on Friday, February 6, 2015 at 10:52 AM in Economics, Fed Watch, Monetary Policy |
What role did the rich play in causing, propagating, and amplifying the Great Recession?:
The rich and the Great Recession, by Bas Bakker and Joshua Felman Vox EU: Many academic papers about the Great Recession in the US have focused on the boom-bust in housing wealth and how it affected spending of the middle class. But there are reasons to think that a large role was actually played by the rich, as they responded to developments in their overall wealth.
According to the traditional narrative, the rich play a role but as generators of ‘excess saving’ (Kumhof et al. 2013) and not as part of the spending boom-bust. In the 1980s, incomes of the high-saving rich soared, while those of the middle class stagnated. So the rich lent their ‘increased’ savings to the middle class, who used the funds to maintain their consumption growth (Rajan 2010) and speculate in real estate. Initially, all was well, as the real estate boom propelled a construction-based expansion. But by 2007, the music had stopped. The middle class became overextended and ceased buying houses, causing prices to collapse so sharply that many homeowners were plunged ‘underwater’ on their mortgages, owing more than their houses were worth. Some defaulted, while others rapidly increased their saving rates so they could pay down their debts (Mian and Sufi 2014). The result was a deep recession.
In a recent paper (Bakker and Felman 2014) we argue that:
- It was not just the drop in housing wealth that made the Great Recession so deep, but also the decline in financial wealth. The decline in total wealth was key to explaining the depth of the recession, not the decline in housing wealth only.
- The rich were not merely passive spectators, generating excess saving to finance the middle class, but active participants in the consumption boom-bust cycle. The saving rate of the rich actually went through a similar cycle as that of the middle class, as rising wealth first spurred their consumption and then falling wealth restrained it. And as the rich accounted for such a large share of aggregate income, this cycle had a profound impact on overall consumption.
Our results suggest that the standard narrative of the Great Recession may need to be adjusted. Housing played a role, but so did financial assets, which actually accounted for the bulk of the loss in wealth. The middle class played a role, but so did the rich. In fact, the rich now account for such a large share of the economy, and their wealth has become so large and volatile, that wealth effects on their consumption have started to have a significant impact on the macroeconomy. Indeed, the rich may have accounted for the bulk of the swings in aggregate consumption during the boom-bust.
Posted by Mark Thoma on Friday, February 6, 2015 at 09:40 AM
Europe is playing a dangerous game:
A Game of Chicken, by Paul Krugman, Commentary, NY Times: On Wednesday, the European Central Bank announced that it would no longer accept Greek government debt as collateral for loans. This move, it turns out, was more symbolic than substantive. Still, the moment of truth is clearly approaching.
And it’s a moment of truth not just for Greece, but for the whole of Europe — and, in particular, for the central bank, which may soon have to decide whom it really works for.
Basically, the current situation may be summarized with the following... Germany is demanding that Greece keep trying to pay its debts in full by imposing incredibly harsh austerity. The implied threat if Greece refuses is that the central bank will cut off the support it gives to Greek banks, which is what Wednesday’s move sounded like but wasn’t. And that would wreak havoc with Greece’s already terrible economy.
Yet pulling the plug on Greece would pose enormous risks, not just to Europe’s economy, but to the whole European project... What we’re looking at here is, in short, a very dangerous confrontation. ..., how much more can Greece take? Clearly, it can’t pay the debt in full; that’s obvious to anyone who has done the math.
Unfortunately, German politicians have never explained the math to their constituents. Instead, they’ve taken the lazy path: moralizing about the irresponsibility of borrowers, declaring that debts must and will be paid in full, playing into stereotypes about shiftless southern Europeans. And now that the Greek electorate has finally declared that it can take no more, German officials just keep repeating the same old lines. ...
Furthermore, there’s still reason to hope that the European Central Bank will refuse to play along.
On Wednesday, the central bank made an announcement that sounded like severe punishment for Greece, but wasn’t, because it left the really important channel of support for Greek banks (Emergency Liquidity Assistance — don’t ask) in place. So it was more of a wake-up call than anything else, and arguably it was as much a wake-up call for Germany as it was for Greece.
And what if the Germans don’t wake up? In that case we can hope that the central bank takes a stand and declares that its proper role is to do all it can to safeguard Europe’s economy and democratic institutions — not to act as Germany’s debt collector. As I said, we’re rapidly approaching a moment of truth.
Posted by Mark Thoma on Friday, February 6, 2015 at 09:29 AM in Economics, International Finance |
Dean Baker on the employment report:
Economy Adds 257,000 Jobs in January: The Labor Department reported that the economy added 257,000 new jobs in January. With upward revisions to the prior two months' data, this brings the average over the last three months to 336,000 jobs. The unemployment rate was essentially unchanged at 5.7 percent. Adjusting for changes in population controls, the household survey still showed an increase in employment of 435,000 in January.
The job growth in the establishment survey was widely spread across industries, but it is noteworthy that the goods production sector remained strong. Construction added 39,000 jobs, bringing the average over the prior three months to 37,700. Manufacturing added 22,000 jobs bringing the average over the last three months to 31,000. The oil and gas sector is showing the impact of falling prices, with employment down by 1,900 in January. Employment in coal mining also fell by 700. Over the last year, the coal industry has lost 4,800 jobs with employment now standing at 71,300.
Retail added 45,900 jobs in January, while health care added 38,300. The latter figure continues an uptick in job growth in the health care sector that began in the fall. Job growth had averaged under 14,000 a month in 2013 and 19,000 in the first half of 2014. It has averaged 39,000 a month since September. The temp sector showed a loss of 4,100 jobs in January after gaining 55,800 jobs over the prior two months. This more likely represents an erratic movement in the data than a reversal in employment trends in the sector. Restaurant employment rose by 34,600, almost exactly equal to its growth rate over the last year. The government sector lost 10,000 jobs, but most of this was due to the loss of 6,100 jobs in the Postal Service.
There was a 12 cent jump in average hourly pay, but this reflects the erratic movement of this series, not a real development in the economy. Taking the last three months together, compared with the prior three months, wages have grown at just a 2.0 percent annual rate, down from a 2.2 percent increase over the last year. In other words, there is still no real evidence of wage acceleration in the data.
The household survey showed little change in the employment situation for most groups. It is striking that less educated workers continue to be the largest beneficiaries of the recovery. In the last year, the employment rate (EPOP) for workers without high school degrees has risen by 2.1 percentage points, while their unemployment rate has dropped by 1.1 percentage points. High school grads have seen a similar drop in their unemployment rates, although their EPOP has risen by just 0.2 percentage points. By contrast, the unemployment rate for college graduates has fallen by 0.5 percentage points, while their EPOP has dropped by 0.7 percentage points. The unemployment rate for college graduates is still 0.8 percentage points above its average for 2007.
While the unemployment rate edged up, the overall EPOP also rose, hitting 59.3 percent, a new high for the recovery. However this is still 3.7 percentage points below the average for the year before the recession. Contrary to what is frequently claimed, most of this decline is due to prime age workers (ages 25-54) dropping out of the labor force. That reversed the pre-recession trend, in which the percentage of both prime age men and women in the labor force had been rising.
The number of people involuntarily working part-time was little changed from December but was 453,000 below its year-ago level. Voluntary part-time is up by 535,000 from a year ago. Another positive item was that the percentage of unemployment due to people voluntarily quitting their jobs hit a recovery high of 9.5 percent. This is still far below the rates of more than 11 percent before the downturn and more than 14 percent in the 1990s boom.
The January report provides further evidence of a strengthening labor market. However, the weak 4th quarter GDP growth, coupled with a rising trade deficit and continued weakness in investment, should raise concerns about its durability. The labor market is not yet tight enough to produce substantial wage growth, which means that future consumption growth will be limited.
Posted by Mark Thoma on Friday, February 6, 2015 at 09:02 AM in Economics, Unemployment |
Posted by Mark Thoma on Friday, February 6, 2015 at 12:06 AM in Economics, Links |
Fed Updates, by Tim Duy: Some quick notes on monetary policy this afternoon:
1.) Another policymaker in favor of a first half rate hike. Cleveland Federal Reserve President Loretta Mester supports a rate hike by June. Via Michael Derby at the Wall Street Journal:
Expressing confidence weak inflation will eventually rise again, Federal Reserve Bank of Cleveland President Loretta Mester said Wednesday the U.S. central bank remains on track for raising rates in the next few months.
Noting that Fed policy isn’t on a “pre-set path,” Ms. Mester said “if incoming economic information supports my forecast, I would be comfortable with liftoff in the first half of this year.” Because Fed policy actions affect the economy over a long period of time, the central banker said the Fed will need to act before it has fully achieved its job and price mandates.
She is, however, watching the survey data:
The official told reporters after her speech that if inflation expectations began to weaken, especially ones derived from surveys, “that would give me pause” when it comes to advocating for rate increases.
While the timing of any policy move remains in flux, Mester's basic story is close to consensus: The Fed is looking at putting the economy on a glide path to achieving its mandates, which means moving ahead of those mandates.
2.) But another is pointing out the danger of low inflation. Boston Federal Reserve President Eric Rosengren doesn't speak to the timing of rate hikes, but low inflation is clearly on his mind:
Of course today, after significant labor market improvement, and with the horizon over which inflation will return to its target being uncertain, inflation has taken on a more prominent role in our deliberations.
Currently, an obvious caveat in interpreting the low inflation rate in the U.S. is the supporting role played by the recent decline in energy prices. Oil shocks have been associated with major changes in monetary policy before. The failure to control inflation in the United States during the 1970s, in the presence of an adverse oil supply shock, highlighted a serious dilemma facing monetary policy at that time. Importantly in that case, what might have been a temporary pass-through of oil to non-oil prices turned into a more lasting problem with overall inflation, as wage and price dynamics at that time helped turn increases in oil prices into fairly protracted increases in overall inflation. Former Federal Reserve Board Chairman Volcker is rightfully recognized for taking forceful action to address the situation and ultimately tame inflation in the United States.
Currently, a concern is that central banks are facing the mirror image of the problem in the 1970s. The problem of significantly undershooting inflation – a dynamic which could well keep interest rates at the zero lower bound – is likely to be a key challenge to central bankers in the first two decades of the 21st century. And I would say that as with the oil shock in the 1970s, the current shock has served to accentuate a potential monetary policy pitfall – in this case, the failure to quickly and vigorously address a significant undershooting of inflation targets, potentially leaving economies stagnant at the zero lower bound.
He would support later rather than sooner with regards to the first rate hike.
3.) Fed ready to lower NAIRU? I have argued in the past that if the Fed is faced with ongoing slow wage growth, they would need to reassess their estimates of NAIRU. Cardiff Garcia reminded me:
@TheStalwart @TimDuy Whether/extent to which Fed reverts nat-rate estimates to pre-2010 range is one of 2015's big Qs pic.twitter.com/CKieHx2zRC
— Cardiff Garcia (@CardiffGarcia) February 4, 2015
While David Wessel adds today:
JPMorgan run the Fed's statistical model of the economy and says the NAIRU (which was 5.6%+ through 2013 data) is now down to 5%.
— David Wessel (@davidmwessel) February 5, 2015
Jim O'Sullivan from High Frequency Economics says not yet:
"Hard-to-fill" @NFIB jobs series up to 26 in Jan (+1). Corroborates unempl decline, with no sign of lower #NAIRU pic.twitter.com/DVYGyGV4e6
— Jim O'Sullivan (@osullivanEcon) February 5, 2015
A reduction in the Fed's estimate of the natural rate of unemployment would likely mean a delayed and more gradual path of policy tightening, should of course the Fed ever get the chance to pull off the zero bound. Keep an eye on this issue!
4.) Will the Fed remain "patient" in March? Jon Hilsenrath at the Wall Street Journal says the Fed needs to remove "patient" from the FOMC statement in March if they want to move in June:
The “patient” assurance, Fed chairwoman Janet Yellen has said, means no rate increases for at least two more policy meetings. The next two policy meetings after March are in April and June. If officials think they might raise rates in June, they need to remove “patient” in March to give themselves the option to proceed if economic data justify a move by June.
Interesting - this is a stricter interpretation of "patient" than I had from Yellen's comments. I did not think that "patient" would always mean just two more meetings, only that in December "patient" meant two more meetings. During the last rate hike cycle, the Fed maintained "patient" until March, switched to "measured" in May, and hiked in June. So they hiked the second meeting after the last "patient." Does that meet the definition that Yellen gave in December? I don't know, but I an not sure she meant to imply that "patient" always and forever means no hike for the next two meetings. So I guess we have our first question for the next press conference. At the moment, following the last cycle, I don't think that keeping "patient" means they are taking June off the table.
5.) Employment report watch. Calculated Risk notes that Goldman Sachs cut their forecast for tomorrow's employment report to a 210k gain in nonfarm payrolls and a 5.5% unemployment rate, at the low end of consensus and similar to my forecast. But the January number might be an even bigger crapshoot than usual anyway. Via Bloomberg:
A significant risk to the January payroll print is that the seasonal adjustment may not be properly calibrated. If employers added more seasonal workers than usual based on a firmer assessment of economic conditions, then there may be more layoffs in January. If the seasonal factors do not properly account for this, then a weaker-than-expected payroll gain could result.
And note that one number doesn't make a trend:
Underlying labor market momentum is largely being sustained, as economic growth remains decent, albeit slower than the mid-year hot streak between Q2 and Q3 of 2014. As such, if January employment disappoints, it is probably an anomaly related to seasonal adjustment issues, not a meaningful downshift in the pace of hiring.
The ongoing improvement in consumer attitudes is an encouraging sign that households continue to sense a healthy labor market.
6.) Falling interest rates worldwide. The global push for easier monetary policy continues. China's central bank is now officially in easing mode, while the Danish Central Bank moves deeper into negative territory. The Fed wants to be able to move in the opposite direction, but financial markets are telling them this isn't the time to move off of zero. The Fed will resist - this isn't 2011 when the US economy was much further from reaching its employment mandate than it is today. That said, they eventually had to relent and ease in 1998, so holding steady would be familiar territory (they are not bringing QE back to life yet). But will they worry that easing then helped sustain an asset bubble, a situation they do not want to repeat? Increasingly, the Fed looks to be back in a place they hoped they had left behind - between a rock and a hard place.
And with that we await tomorrow's employment report. Sorry I don't have time to give each of these topics the time they deserve.
Posted by Mark Thoma on Thursday, February 5, 2015 at 02:41 PM in Economics, Fed Watch, Monetary Policy |
If this research is correct, widespread opportunity to move from blue-collar to white-collar occupations is important for "individualism":
Increasing individualism in US linked with rise of white-collar jobs, Association for Psychological Science: Rising individualism in the United States over the last 150 years is mainly associated with a societal shift toward more white-collar occupations, according to new research published in Psychological Science, a journal of the Association for Psychological Science. ...
"Across many markers of individualism, social class was the only factor that systematically preceded changes in individualism over time, tentatively suggesting a causal relationship between them," explains psychological scientist and study author Igor Grossmann of the University of Waterloo.
According to Grossmann, who conducted the research with co-author Michael Varnum of the Arizona State University, the study represents one of the first ever large-scale attempts to test various theories explaining cultural change in individualism over a time span longer than 30 or 40 years. ...
Across all cultural indicators, the researchers found evidence that individualism has been rising steadily over the last 150 years. ...
"We were surprised that only one of the six tested cultural psychological theories was any good for statistically predicting changes in US individualism over time," says Grossmann. "The only theoretical claim that we found systematic support for is the one suggesting that the rise in individualism is due to societal changes in social class, from blue collar to white collar occupations."
The researchers note that these data do not allow them to draw a conclusive causal link between occupational status and individualism, but they do suggest that the other factors examined were unlikely to account for rising individualism.
Contrary to popular notions, the research indicates that increasing individualism is not a recent phenomenon. ...
Posted by Mark Thoma on Thursday, February 5, 2015 at 12:01 PM in Economics, Income Distribution |
The percentage may not be as high as you think, and is currently at the lowest level since at least 1972 (click on the figure for a larger, clearer version):
Posted by Mark Thoma on Thursday, February 5, 2015 at 09:51 AM in Economics, Social Insurance, Unemployment |
I wish the Fed was more reassuring about its ability to use its "central bank policy toolkit" for crisis prevention. This is part of an interview of Federal Reserve Governor Jeremy Stein:
Has the experience of the crisis changed your view of the central bank policy toolkit?
Governor Stein: Yes, on two dimensions. First, on the toolkit insofar as it has to do with crisis prevention; and second, insofar as it has to do with what you do in the aftermath, when the economy is very weak and you are stuck at the zero lower bound.
Let me focus on the first of these two—what we’ve learned about crisis prevention. Speaking broadly, the tools of central banks can be classified into monetary policy, lender of last resort, and regulation. You might argue that – since we’ve learned that financial crises are more damaging then we had previously thought – we should use each of these tools to do more in the way of either crisis prevention or crisis mitigation. To the extent that there exists a consensus, this is surely true with respect to regulation. That is to say, I think that everyone basically believes that regulation in the period leading up to the crisis was inadequate and that we need to do better.
The other two are a little more interesting. You might have thought that one lesson from the crisis is that central banks acting as a lender of last resort was an important and powerful part of the response. Yet, the general thrust of Dodd-Frank is to make it harder to use the lender of last resort function for nonbanks like broker-dealer firms – namely, to make it more difficult to invoke Federal Reserve Act Section 13(3) powers in “unusual and exigent circumstances” for a specific firm. I think it’s an open question whether that’s a useful direction to go. I might lean against that a little bit: if you have the ability to regulate broker-dealers effectively, and you can regulate them as stringently as a bank, then you might want to have the ability to make the Federal Reserve’s lender of last resort capabilities available to them as well.
And the second is with respect to monetary policy. If you take the view that we should be working with all of our tools to mitigate crises, should monetary policy be drawn into trying to reduce the odds of a crisis, or more generally, should it concern itself with buildups of risk in financial markets ex ante? I don’t know if there’s a consensus lesson there, but clearly the question has come more to the fore.
Posted by Mark Thoma on Thursday, February 5, 2015 at 09:22 AM
A new report from Mike Cassidy of the Century Foundation:
Where Are the Jobs?: Overview If all the job openings in the United States were to be filled today, an additional 5 million Americans would be employed. That total is higher than the population of twenty-eight states, as well as every American city other than New York. It is the most job openings at any one time in the United States since 2001—enough to provide work for nearly three-in-five of the 8.7 million Americans who are now categorized as unemployed.
Of course, the notion of instantaneously and simultaneously filling all of America’s vacancies is a nice thought exercise, but not particularly realistic. A healthy economy will always have openings as it grows and changes, as businesses open and close, and as workers leave jobs and begin new ones.
But the sheer magnitude of current job availabilities raises important questions. Why are employers apparently having more difficulty filling openings than in the past? Is it because applicants lack the skills required? Or are businesses feeling uncertain about the durability of the recovery? What industries have rebounded most strongly after the Great Recession, and which have lagged behind?
This report, the third in The Century Foundation’s Working Paper Series, will explore these issues complicating the demand side of the U.S. labor market. But our guiding question will be a simple one: Where are the jobs? ...
Posted by Mark Thoma on Thursday, February 5, 2015 at 12:15 AM in Economics, Unemployment |
Posted by Mark Thoma on Thursday, February 5, 2015 at 12:06 AM in Economics, Links |
Social mobility barely exists but let’s not give up on equality: We live surrounded by inequality. Some have wealth, health, education, satisfying occupations. Others get poverty, ill-health and drudgery. The Conservative reaction, personified by David Cameron, is to promote social mobility and meritocracy.
History shows this will fail to increase mobility rates. Given that social mobility rates are immutable, it is better to reduce the gains people make from having high status, and the penalties from low status. The Swedish model of compressed inequality is a realistic option, the American dream of rapid mobility an illusion. ...
How then can we reduce the inequalities associated with status? There is the obvious mechanism of redistribution through the tax system. Provide minimum levels of consumption to all, funded by transfers from the prosperous.
But also you can create labour market institutions that compress wages and salaries, as in the Nordic societies. ... You can also structure educational systems to narrow the social rewards to those at the top of the ability distribution, or to amplify these rewards. ...
The message here is that while mobility seems governed by a social physics that defies easy intervention, the magnitude of social inequalities varies considerably across societies, and can be strongly influenced by social institutions. We cannot change the winners in the social lottery, but we can change the value of their prizes.
Posted by Mark Thoma on Wednesday, February 4, 2015 at 09:34 AM in Economics, Income Distribution |
Me, at MoneyWatch:
Fed optimism could cost the economy dearly: Is the Fed overoptimistic about where the economy is headed? If so, that could cause the central bank to raise interest rates too soon, a policy error that could leave the economy stuck in a "deflationary trap" and remain at subpar growth levels for an extended time period.
The answer to that question is yes. The Fed's tendency to be overly optimistic about the economy is documented in a recent Economic Letter from the San Francisco Fed. In the Economic Letter, Kevin Lansing and Benjamin Pyle note that the Fed's economic forecasts "(1) did not anticipate the Great Recession that started in December 2007, (2) underestimated the severity of the downturn once it began, and (3) consistently overpredicted the speed of the recovery..."
The following two charts presented along with the researchers' findings show how far off the Fed's projections for the economy have been...
This had consequences. Although the central bank's monetary policy was much better than Washington's fiscal policy, the "green shoots" the Fed saw around every corner often caused policymakers to be too slow to put new policy in place (e.g. to turn from interest rate policy to quantitative easing, and then to new rounds of quantitative easing), and to be less aggressive than needed. ...
The risk now is that the Fed will repeat these mistakes. ...
Posted by Mark Thoma on Wednesday, February 4, 2015 at 08:57 AM in Economics, Monetary Policy |
This is from the New York Fed's Liberty Street Economics blog:
Household Formation within the “Boomerang Generation”, by Zachary Bleemer, Meta Brown, Donghoon Lee, and Wilbert van der Klaauw: Young Americans’ living arrangements have changed strikingly over the past fifteen years, with recent cohorts entering the housing market at much lower rates and lingering much longer in their parents’ households. The New York Times Magazine reported this past summer on the surge in college-educated young people who “boomerang” back to living with their parents after graduation. Joining that trend are the many other members of this cohort who have never left home, whether or not they attend college. Why might young people increasingly reside with their parents? They may be unable to find employment, they may be saving their income to pay down increasing levels of student debt, or they may be unable to afford the rent for an apartment in the face of lower income or higher housing prices.
In a new Federal Reserve Bank of New York staff report, we discuss our analysis of these trends using the New York Fed Consumer Credit Panel (CCP). The CCP is a unique data set that includes information on the ages and locations of a large, representative sample of U.S. individuals and households. This data set’s size allows us to analyze residence patterns for very narrow age groups, here twenty-five- and thirty-year-olds, at very fine geographic levels. Such fine age and geographic detail helps us distinguish among the various local economic forces that may be driving young people home.
After a long explanation, they conclude:
Our findings, then, confirm the view, widely reported in the American media, that today’s young people are more likely to live in parental households long into their twenties than were young people one or two decades ago. This trend is widespread across the United States. Finally, while local economic growth, reflected in rising youth employment and escalating house prices, has mixed consequences for youth independence, the increasing magnitude of student debt among college graduates appears to be driving young people home and keeping them there. We will examine this relationship—between education, finance, and socioeconomic outcomes in the short and long term—further in our future research.
Posted by Mark Thoma on Wednesday, February 4, 2015 at 08:13 AM in Economics |
Posted by Mark Thoma on Wednesday, February 4, 2015 at 12:06 AM in Economics, Links |