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Friday, January 17, 2014

Paul Krugman: Scandal in France

Unfortunately for Europe, France in particular, "the long-debunked fallacy known as Say’s Law" lives on:

Scandal in France, by Paul Krugman, Commentary, NY Times: ...François Hollande, the president of France,... has done something truly scandalous.
I am not, of course, talking about his alleged affair... No, what’s shocking is his embrace of discredited right-wing economic doctrines. It’s a reminder that Europe’s ongoing economic woes can’t be attributed solely to the bad ideas of the right. Yes, callous, wrongheaded conservatives have been driving policy, but they have been abetted and enabled by spineless, muddleheaded politicians on the moderate left.
Right now, Europe seems to be emerging from its double-dip recession and growing a bit. But this slight uptick follows years of disastrous performance. ...
In this depressed and depressing landscape, France isn’t an especially bad performer. ... It’s true that the latest data show France failing to share in Europe’s general uptick. Most observers ... attribute this recent weakness largely to austerity policies. But now Mr. Hollande has spoken up about his plans to change France’s course — and it’s hard not to feel a sense of despair.
For Mr. Hollande, in announcing his intention to reduce taxes on businesses while cutting (unspecified) spending to offset the cost, declared, “It is upon supply that we need to act,” and he further declared that “supply actually creates demand.”
Oh, boy. That echoes, almost verbatim, the long-debunked fallacy known as Say’s Law — the claim that overall shortfalls in demand can’t happen, because people have to spend their income on something. This just isn’t true... All the evidence says that France is awash in productive resources, both labor and capital, that are sitting idle because demand is inadequate. ...
So what’s the significance of the fact that, at this of all times, Mr. Hollande has adopted this discredited doctrine?
As I said, it’s a sign of the haplessness of the European center-left. For four years, Europe has been in the grip of austerity fever, with mostly disastrous results... Given the hardship these policies have inflicted, you might have expected left-of-center politicians to argue strenuously for a change in course. Yet everywhere in Europe, the center-left has at best (for example, in Britain) offered weak, halfhearted criticism, and often simply cringed in submission.
When Mr. Hollande became leader of the second-ranked euro economy, some of us hoped that he might take a stand. Instead, he fell into the usual cringe — a cringe that has now turned into intellectual collapse. And Europe’s second depression goes on and on.

    Posted by on Friday, January 17, 2014 at 12:24 AM in Economics | Permalink  Comments (79) 


    Links for 01-17-2014

      Posted by on Friday, January 17, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (36) 


      Thursday, January 16, 2014

      'The Potential Effects of QE on Gross Financial Flows to Developing Countries'

      Jamus Jerome Lim (World Bank), Sanket Mohapatra (World Bank), and Marc Stocker (World Bank), at econbrowser:

      Guest Contribution: "Understanding the Potential Effects of QE on Gross Financial Flows to Developing Countries": In late November 2008, the Federal Reserve announced the first of a series of unconventional monetary policies---quantitative easing (QE)---which, by the beginning of 2014, had swelled its balance sheet to an unprecedented $4 trillion. Although QE was primarily designed to stimulate the U.S. economy, the program was far from innocuous for developing countries; faced with near-zero returns in the U.S. and other high-income countries (many of which were pursuing unconventional monetary policies of their own), financial capital began searching for alternative sources of yield, for which emerging economies were well-poised to offer.
      In a background paper written for the thematic chapter of the recently-released Global Economic Prospects, we probe the question of whether QE had an effect on gross financial flows to developing countries. ...
      Our baseline estimates place the lower bound of the effect of QE at around 3 percent of gross financial inflows, for the average developing economy. ... Overall, the effects of unconventional monetary policy, insofar as its impact on gross financial inflows, appears to be measurable and nontrivial. However, to the extent that QE appears to operate primarily via portfolio inflows to the largest emerging markets (rather than FDI), the broader benefits of QE for development finance are more likely to be second-order (relaxing financing constraints for firms able to access bond markets, enhancing liquidity in developing-country financial markets, and promoting overall financial development), and may also be more exposed to the risk of sudden reversals.

        Posted by on Thursday, January 16, 2014 at 10:13 AM in Economics, International Finance, Monetary Policy | Permalink  Comments (8) 


        'Democracy's Pains'

        Daron Acemoglu and James Robinson:

        Democracy's pains: Disillusionment with political leaders is spreading across the globe. In the United States, the approval ratings of the President and the Congress are at all-time lows, and probably for good reason. There is general dissatisfaction with the ruling class across much of Europe, particularly in the South. But this is much broader than a Western world phenomenon.
        Protests and alternatives to the Congress Party’s domination of Indian politics are growing, fueling support for fringe activists...
        In Turkey, hundreds of thousands poured into the streets in the summer to protest Prime Minister Erdoğan’s increasingly authoritarian rule, and the discontent is now spreading more broadly... Discontent with the rule of establishment politicians is also growing in Bangladesh, Cambodia and Indonesia.
        So what’s going on? Two factors seem to be at work, one healthy, one unhealthy.
        First, citizens seem to be increasingly unwilling to put up with the antics of unaccountable political elites, often all too willing to pursue policies that their voters do not approve of. ...
        All in all, even if the details vary across countries and even if some of the discontent is driven by confused notions and sometimes even by unsavory characters and ideas, a greater unwillingness by the masses to let their political elites run amok is broadly welcome. Democracy will function better, and has a better chance of approximating our ideal “inclusive political institutions,” when complemented by non-electoral constraints, which includes not just the media but also the willingness of ordinary people to get up and protest in the streets.
        The second sort is quite different, however. In several countries, vocal and well-organized minorities are proving unwilling to accept elected governments that have brought to power previously disempowered groups. ...[S]o long as elites and a vocal minority refuse to accept electoral results they don’t like, the path to a healthy democracy and truly inclusive institutions will be long, arduous and perhaps blocked for a long time.

          Posted by on Thursday, January 16, 2014 at 09:48 AM in Economics, Politics | Permalink  Comments (19) 


          'France by the Numbers'

          Paul Krugman:

          France by the Numbers: “You shall not crucify mankind upon a croissant d’or.” That was Alan Taylor’s response (in correspondence) to François Hollande’s embrace of Say’s law — he literally said that “supply actually creates demand” — together with a shift to, again in his own words, supply-side policies. Kevin O’Rourke also weighs in, as did Ambrose Evans-Pritchard . ...
          The amazing thing to me, aside from Hollande’s haplessness, is the extreme pessimism that has evidently enveloped French elite opinion. You’d think that France was a disaster area. Yet the numbers, while not good, just aren’t that dramatic. ... [presents evidence]...
          Again, things aren’t good. But you do have to wonder why the French elite is so easily intimidated into making a hard right turn while the elites of much worse cases like Finland and the Netherlands remain steadfast in their notion that the worse things get, the more committed they have to be to inflicting further pain.

          Update: Dean Baker:

          The Austerians Take Over the NYT's News Pages: The Case of France: The New York Times news section praised the decision by French President François Hollande to cut social welfare spending and taxes in the same way that sports reporters trumpet the performance of the local team's quarterback. The article described the plan as moving in "a centrist direction" and said that "economic experts" were "gratified that Mr. Hollande finally seemed willing to wrestle with France’s intractable unemployment."
          Really? Cutting spending when France's economy is still far below full employment is considered a pro-employment move by economic experts? Do these experts have any evidence to contradict the now vast literature, much of it produced by the International Monetary Fund, that shows such spending cuts will reduce growth and raise unemployment? (Paul Krugman does a nice job summarizing the case this morning...)
          The point here is that the NYT is acting as a mouthpiece for the agenda of the right-wing in Europe. It is presenting a position that has been decisively defeated in the economic debates of the last five years as the consensus within the economics profession. If anything, the consensus view within the economics profession is that Hollande's program will slow growth and raise unemployment. France's economy needs more demand, not spending cuts.

            Posted by on Thursday, January 16, 2014 at 09:34 AM in Economics | Permalink  Comments (11) 


            Links for 01-16-2014

              Posted by on Thursday, January 16, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (78) 


              Wednesday, January 15, 2014

              'L’offre Crée Même la Demande'

              Kevin O'Rourke has more on Hollande’s statement that Supply Actually Creates Demand:

              L’offre crée même la demande, by Kevin O’Rourke: I can’t quite believe that he said it, but he apparently did. Go tell it to the small businesses in my favourite French village who have had to close since 2008.

              Arguing against Say at a time like this is like shooting fish in a barrel, so let’s not even bother. The more alarming point is what this tells us about the European left: to all intents and purposes, in many countries there is none. Ambrose Evans-Pritchard puts it well, I think:

              Trade unions in the West are strangely silent, pushed to the margins by the atomised structure of modern work. Europe’s political Left is so compromised by ideological defence of monetary union - a Right-wing project, or “bankers’ ramp” as the Old Left used to say - that it cannot muster any articulate policy.

              Hollande’s extraordinary statement that supply creates its own demand, at a time when the Eurozone economy is up against the zero lower bound, and unemployment is terrifyingly high in several EMU member states, is just an extreme, self-satirizing, example of the phenomenon. If what Europe needs is for France to make Germany an offer it can’t refuse — allow the ECB to seriously loosen monetary policy, or we may not be able to stick with EMU — then we’re not getting it any time soon. ...

                Posted by on Wednesday, January 15, 2014 at 12:01 PM in Economics | Permalink  Comments (77) 


                Evans on the Outlook for Monetary Policy

                Chicago Fed president Charlie Evans on what is likely to happen to the federal funds rate as the unemployment rate crosses the 6.5% thresshold:

                Back in December 2012, the FOMC introduced conditional forward guidance by saying it would hold the funds rate at exceptionally low levels at least as long as the unemployment rate remains above 6-1/2 percent and the projection for inflation between one and two years ahead is less than 2-1/2 percent and longer-term inflation expectations remain well anchored. Let me emphasize the “at least.” As we often stated, the 6-1/2 percent unemployment number was a threshold and not a trigger. Crossing 6-1/2 percent would not automatically result in an increase in the funds rate. Exactly when we would begin to raise the funds rate once we hit 6-1/2 percent depends critically on whether we are expecting continued improvements in the labor market and on what the outlook for inflation is relative to our 2 percent target.
                When evaluating the situation at our meeting this past December, we reasoned that conditions had evolved in a way that meant we could — and should — provide more specificity on what might happen with the federal funds rate when the economy reached this threshold. Importantly, in my mind, the low readings for inflation by themselves now suggest that it likely will be appropriate to keep the funds rate at its current level for quite some time. So I supported our change in language to say that the federal funds rate likely will remain in its current range “well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”[2] This elaboration of our forward guidance should more strongly communicate that we are in no hurry to raise rates: We will not prematurely reduce accommodation in an economy with elevated unemployment and very low inflation pressures.

                If that's the case, then why taper QE?:

                When the Committee met this past December, with the unemployment rate at 7 percent and other labor market indicators showing improvement, we decided that the cumulative improvement to that point met the criteria for first scaling back purchases. This decision does not, however, mean we thought the economy needed less overall policy accommodation. Rather, the Committee agreed it was time to rebalance the mix of monetary policy. Large-scale asset purchases have been effective in stimulating activity, and their effects have shown more through to top-line gross domestic product (GDP) growth now that the most restrictive fiscal influences in the first half of 2013 have waned some. Nevertheless, QE3 is a nontraditional policy instrument. If in fact monetary policy and the recovery are now gaining better traction, it makes sense to rely more on our traditional short-term interest rate policy tool, the federal funds rate. We have a much better understanding of how changes in the funds rate affect the economy than we do of the benefits and potential costs associated with large-scale asset purchases, largely because we simply have more experience with the former policy tool.
                In order to clarify that overall monetary policy will remain highly accommodative as long as necessary, we also decided to strengthen the forward guidance in our policy statement concerning the economic conditions likely to prevail when we might eventually first increase the federal funds rate.

                Part of the problem is that fiscal policy has been a "powerful headwind":

                Theme 1: Fiscal Restraint Has Been a Powerful Headwind
                Heightened fiscal austerity has been front page news in 2013. The year began with both tax hikes and automatic spending cuts known as sequestration. The Congressional Budget Office (CBO) estimates that federal fiscal restraint reduced real GDP growth by about 1-1/2 percentage points last year.[3] In other words, to get to 2-1/2 percent real GDP growth, the rest of the economy had to generate 4 percentage points of growth. ...
                If we look at the entire 2009 through 2013 period, real GDP increased at an average annual rate of 2.2 percent. However, excluding state, local and federal government purchases, private spending grew at a 3.2 percent pace. This isn’t the stellar rate of growth for private spending that one would hope for given the magnitude of the Great Recession, but it is a much healthier number than the 2.2 percent rate of growth for real GDP: At some level, this reflects how private sector strength supported by monetary policy accommodation offset the contraction in government purchases.
                Of course, government restraint has not been the only headwind the economy has faced. The fallout from the financial crisis has been large. ... But the restraint from the federal government sector has been a self-inflicted wound, and it has been unusual relative to other historical episodes.
                Let me give you an example. In 1981-82, the economy experienced a severe downturn, but it rebounded rapidly. One reason was that increases in government purchases contributed nearly a percentage point to growth, on average, in 1983 and 1984. Large tax cuts also helped fuel the recovery. Contrast that to the fiscal restraint that we’ve seen recently.
                In addition to fiscal policy impetus, the Federal Reserve was able to reduce the federal funds rate as much as was necessary to get growth back on track. With the federal funds rate at nearly 15 percent in 1982, it was possible to drop the rate by 6 percentage points. However, in the current environment, monetary policy has less room to maneuver because short-term interest rates are already pushed to their lowest possible limits. We have had to work harder and turn to unconventional tools to help counteract the fiscal restraint and other forces holding back growth. This leads me to the second theme.
                Theme 2: The Zero Lower Bound
                Today, the federal funds rate is effectively pushed as low as it can go. It stands near zero and has been at that rate since December 2008. Central bankers refer to this as the zero lower bound. Operating near the zero lower bound has limited the Fed’s ability to use its traditional tools to offset the ferocious impediments to growth that I just outlined. We have tried to overcome this obstacle with nontraditional policies. The main two are the ones I discussed earlier — our large-scale asset purchase programs and, separately, forward guidance regarding the economic conditions under which we would consider to begin to raise rates. ...
                By mitigating some of the headwinds I mentioned earlier, LSAPs and forward guidance have helped return the economy to better health. There is still a ways to go. Our two nontraditional policy tools have simply not been strong enough to overcome these headwinds and generate an early 1980s “morning in America” recovery yet.[4] Moreover, inflation remains stubbornly low.
                This low inflation environment is the third theme I’d like to cover today. ...

                He ends with:

                In terms of monetary policy strategy, after four years of weak and inadequate growth with low inflation, we need extraordinary monetary accommodation to finish the task at hand. The public must have confidence in the Fed’s ultimate resolve to successfully address economic challenges. We need to be both bold and committed to following through. ...
                We often talk about this in terms of credibility. Credibility means that we are clear about our goals, have the tools to achieve those goals and are committed to using those tools.
                We have been clear about our goals. We are dedicated to achieving our statutory dual mandate of maximum employment and price stability. We certainly have turned to unprecedented actions to get the job done — near-zero short-term interest rates; strong forward guidance about keeping rates low for well after the economic recovery strengthens; and large-scale assets purchases that have boosted our balance sheet from about $800 billion to more than $4 trillion. And we must continue to be willing to use these tools to put us on a clear track back to full employment and inflation averaging our 2 percent target.

                I'm not sure everyone would agree that tapering is simply a step to "rebalance the mix of monetary policy" rather than a change in overall accommodation.

                  Posted by on Wednesday, January 15, 2014 at 11:03 AM in Economics, Fed Speeches, Monetary Policy | Permalink  Comments (7) 


                  Does Sweden Have a Housing Bubble?

                  Disagreement:

                  Does Sweden have a housing bubble?: Nobel laureate in economics Paul Krugman told newspaper Svenska Dagbladet recently that based solely on the fact that "prices have gone up a lot and that household debt is quite high", Sweden is probably showing the symptoms of a housing bubble.

                  His claim prompted a response from his former colleague Lars E.O. Svensson.

                  "Prices have gone up for good fundamental reasons" (interview)

                  The former deputy governor of the Swedish Central Bank and an economics professor himself, Svensson told Radio Sweden he disagrees that Sweden has a housing bubble.

                  "If you look at the facts since 2007, prices have increased only a little in real terms and they have actually fallen relative to disposable income. So that doesn't look like a bubble," says Svensson.

                  Krugman told SvD that over the last few years, "all the places where people said oh this is different, it's turned out that no, actually it wasn't. So, just on that general thing, I'd say probably it's a bubble."

                  However, Svensson insists that Sweden's case is different from other countries which have proven to have housing bubbles. "Typically, you've had a lot of speculation, a lot of construction, very little savings..." he says, whereas in his view, Sweden has the opposite situation.

                    Posted by on Wednesday, January 15, 2014 at 10:06 AM in Economics, Housing | Permalink  Comments (32) 


                    'Supply Actually Creates Demand'

                    Gloomy European Economist:

                    Jean-Baptiste Hollande :
                    le temps est venu de régler le principal problème de la France : sa production.
                    Oui, je dis bien sa production. Il nous faut produire plus, il nous faut produire mieux.
                    C’est donc sur l’offre qu’il faut agir. Sur l’offre !
                    Ce n’est pas contradictoire avec la demande. L’offre crée même la demande.
                    François Hollande – January 14, 2014
                    France is often pointed to as the “sick man of Europe”. Low growth, public finances in distress, increasing problems of competitiveness, a structural inability to reform its over-regulated economy.  Reforms that, it goes without saying, would open the way to a new era of growth, productivity and affluence.
                    François Hollande has tackled the second half of his mandate subscribing to this view. In the third press conference since he became President, he outlined the main lines of intervention to revive the French economy,  most notably a sharp reduction of social contributions for French firms (around € 30bn before 2017), financed by yet unspecified reductions in public spending.  During the press conference, he justified this decision on the ground that growth will resume once firms start producing more. Thus, he tells us, “It is upon supply that we need to act. On supply! This is not contradictory with demand. Supply actually creates demand“. Hmmm, let me think.  Supply creates demand. Where did I read this? ...

                    The post argues -- with evidence -- that the problem is (surprise) demand, not supply.

                      Posted by on Wednesday, January 15, 2014 at 09:39 AM in Economics | Permalink  Comments (22) 


                      Links for 01-15-2014

                        Posted by on Wednesday, January 15, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (90) 


                        Tuesday, January 14, 2014

                        'Capital Markets Balkanization Should Not Prevent Regulation'

                        Adair Turner:

                        Adair Turner: Capital Markets Balkanization Should Not Prevent Regulation, by The Institute for New Economic Thinking: “Don’t worry about the balkanisation of global capital markets” – Adair Turner
                        Fears that bank regulation or capital controls could lead to a “balkanisation” of global capital markets are overstated and should not constrain policy action to address the problems created by volatile short term capital flows and excessive credit creation, says Adair Turner, Senior Fellow at the Institute for New Economic Thinking and former chairman of the United Kingdom Financial Services Authority.
                        Speaking at a conference in Delhi sponsored by the Reserve Bank of India, Turner focused on the links between the international monetary system and domestic financial stability. [For the text of the speech and presentation please see below.] ...
                        Ultimately, Turner rejected the idea that this would lead to a harmful fragmentation of global capital markets.
                        “Talk of such policies is often met by objections that this will lead to a dangerous ‘balkanisation’ of global capital markets, preventing the free flow of capital and stymieing its allocative efficiency benefits,” he said. “But since the evidence for the benefits of financial integration is at best elusive and ambiguous, some ‘balkanisation’ of short term international debt markets could be a good thing”.

                          Posted by on Tuesday, January 14, 2014 at 12:26 PM in Economics, Financial System, Regulation | Permalink  Comments (21) 


                          Why is the Recovery so Agonizingly Slow?

                          New column:

                          Why is the Recovery so Agonizingly Slow?, by Mark Thoma: Friday’s employment report underscored just how slow the recovery from the Great Recession has been. When the recession officially ended in June of 2009 the unemployment rate stood at 9.5 percent, and it peaked at 10 percent a few months later.  In the four and a half years that have passed since, the unemployment rate has fallen to 6.7 percent. That is still quite a bit above the full employment level, and the fall in unemployment over that time period has been driven in large part by people leaving the labor force rather than the creation of new jobs. When these discouraged workers are taken into account, the labor market is in poor shape even after more than four years of “recovery”.
                          Why has the recovery been so slow? ...

                            Posted by on Tuesday, January 14, 2014 at 08:46 AM in Economics, Fiscal Times | Permalink  Comments (68) 


                            Fed Watch: Lockhart Greenlights Tapering

                            Tim Duy:

                            Lockhart Greenlights Tapering, by Tim Duy: Atlanta Federal Reserve President Dennis Lockhart presented his 2014 forecast in a speech today. In short, he expects modestly better growth, ongoing improvement in labor markets, and inflation to gradually rise to the Fed's target. Pretty much the standard 2014 outlook, and with the usual caveats: There is still much progress to be made in labor markets, and inflation is currently on the low side. And, assuming all goes according to plan:

                            If all goes as expected, there is a policy transition under way from a QE world, so to speak, to a post-QE world. As I said, that decision was made in December.

                            Some of his more interesting comments come in the post-speech conversation with journalists. Michael Derby at the Wall Street Journal has the story. While the December employment number was a disappointment, it is not itself likely to deter policymakers from tapering plans:

                            ...Mr. Lockhart told reporters what happened in the job market last month has not shaken his monetary policy outlook. “I don’t think we should overreact to one month” and should bear in mind employment data frequently undergoes notable revisions, he said.

                            Lockhart's views on stock prices are intriguing:

                            In response to audience questions, Mr. Lockhart rejected the idea that big gains in stock prices over the course of the last year mean the equities market has lost its moorings. When taking stock of what has happened, “I don’t see it as a bubble,” the official said, although he added he would like to see company earnings validate the advances the market has experienced. The official also said “we are watching very carefully to make sure we don’t get into bubble territory.”

                            He seems to be implying that he believes stock prices are reasonable only if earnings rise. Which is the same thing as saying he really doesn't believe that stock prices are exactly reasonable. They are just not sufficiently unreasonable to define as a "bubble." Combined with the careful "watching," one could interpret Lockhart as saying that the Federal Reserve believes stock markets are starting to get ahead of themselves. They are watching the financial stability issue like hawks...no pun intended.

                            Regarding the Evans rule, Lockhart admits what already should be evident to everyone:

                            ...The Fed says that it will not raise short term interest rates until the jobless rate falls well under 6.5% so long as inflation remains contained. Mr. Lockhart said the fast approach to that level–unemployment was at 6.7% in December, from 7% the prior month– threatens to complicate the central bank’s message.

                            Rate hike guidance was supposed to be “easy” to understand, but given what’s happening, it will now require central bankers to have to explain more why they aren’t raising rates when the threshold is crossed, Mr. Lockhart said. He noted the Fed may need to revisit the guidance and refine it to deal with the current “challenges in communications,” and that may mean the central bank may need to make the jobless threshold less connected to the jobless rate.

                            The Evan's rule is defunct. Like I said yesterday, the Federal Reserve thought the Evans rule would be easy to understand, but the rapid drop in unemployment has greatly complicated their communications strategy. I like the part about making the jobless threshold less connected to the jobless rate. That is pretty much already the case. It seems increasingly evident that Fed communications strategy is at a major inflection point. Do they replace the Evans rule with fresh, specific numerical based guidance? Do they continue to specify labor market indicators? Does the statement get more or less wordy? And shouldn't these changes happen at the December meeting, rather than after unemployment plunges below 6.5%?

                            Moreover, wouldn't the Fed's communication strategy be easier if they just dropped mention of the employment mandate and focused on the inflation target? As Lockhard notes in his speech:

                            Over the past 12 months, inflation has averaged only 0.9 percent. Indeed, the broad patterns in the price data suggest we have been on a disinflationary trend for about two years, as shown in this slide.

                            Continued disinflation could pose risks to economic performance. This slide shows the trend of one key measure of inflation (the personal consumption expenditures inflation index) over the last four years. At the Fed, we follow a number of inflation indices, and they show basically the same picture.

                            The inflation situation shown here seems disconnected from the recent growth momentum and the outlook that it will continue.

                            As I mentioned earlier, I think inflation will stabilize and begin to move back in the direction of the FOMC's 2 percent objective as the economy gathers momentum. So I'm interpreting the soft inflation numbers as a risk signal. Through the lens of prices, the economy could be weaker than we currently believe.

                            The inflation rate alone gives them license to hold rates near zero without the complications of devining the message of the decline in the labor force participation rate. And he also suggests that low inflation is a signal that economic growth is weaker than commonly believed, again suggesting that there is no reason to rate rates.

                            So why not just focus on the inflation rate? I suspect because the Federal Reserve envisions the possibility that they may raise interest rates even if inflation is low. It's not the base case by any means (no rate hike until 2015 in the absence of real evidence of inflation is the base case), but it is something they don't want to ignore as well. An alternative situation is if unemployment declines further and the Fed fears they will fall behind the curve if they don't tighten. Another situation is that the Fed fears they will need to tighten policy to stifle potential bubbles. Indeed, the latter possibility probably already leads the Fed to hesitate before lowering the unemployment threshold.

                            In short, I think the Fed is looking to maintain maximum discretion with regards to rate policy; to the extent they want to find a new rule, it will almost certainly be a rule that, like the Evans rule, they were sure they would not want to break. In other words, they would like to find a rule that is clearly time consistent and easy to communicate. But as markets bubble and unemployment drops further, I think it is increasingly difficult for them to find such a rule. Suggestions anyone? And yes, I know one suggestion will be an NGDP target. I don't think the Fed is there yet.

                            Bottom Line: Another Fed speaker downplaying the December nonfarm payroll number, essentially giving the green light for another $10 billion cut in the pace of asset purchases. Pencil in $10 billion a meeting. But that's not really the big story at this point. The big story is the communications strategy. The era of transparency has arguably delivered only more complicated and confusing targets, thresholds, and statements. With the Evans rule turning into a pumpkin soon, they will need to decide if they want to double-down on this strategy or move onto something else. But what is that something else? Whatever it is, it must be near the top of incoming Chair Janet Yellen's to-do list.

                              Posted by on Tuesday, January 14, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (21) 


                              Links for 01-14-2014

                                Posted by on Tuesday, January 14, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (64) 


                                Monday, January 13, 2014

                                5 Reasons Why Your Pay Isn't Rising as Fast as it Should

                                At MoneyWatch:

                                ... In theory, wages should grow at the rate of inflation plus the rate of growth of productivity. But in the last several years wage growth has been below this benchmark. Why? Here are five factors that are conspiring to restrain wage growth. ...

                                  Posted by on Monday, January 13, 2014 at 09:58 AM in Economics, Income Distribution, Productivity, Unemployment | Permalink  Comments (52) 


                                  'Discount Window Stigma'

                                  Banks are reluctant to borrow from the discount window:

                                  Discount Window Stigma, by Olivier Armantier: One of the main missions of central banks is to act as a lender of last resort to the banking system. In the United States, the Federal Reserve has relied on the discount window (DW) for nearly a century to fulfill this task. Historically, however, the DW has been little used even when banks may have faced acute liquidity shortages, a phenomenon commonly attributed to stigma. In this post, we show that during the last financial crisis banks were willing to pay large premia to avoid borrowing from the DW, suggesting that DW stigma is an economically important phenomenon.
                                  DW stigma is generally defined as banks’ reluctance to approach the DW out of concerns that, if detected, depositors, creditors, or analysts could interpret DW borrowing as a sign of financial weakness. It is believed that such inferences could have severe consequences for DW borrowers such as a run on deposits, a loss of confidence by market analysts, a drop in the institution’s stock price, or a withdrawal of market sources of liquidity. The economic consequences of DW stigma may be particularly severe during financial crises, preventing the Fed from effectively disseminating liquidity when it is most needed. In addition, a bank that delays accessing the DW may resort instead to costly alternatives (such as fire sales of assets), which may further weaken the bank and add to financial system instability. Finally, a reluctance to borrow at the DW could lead banks to excessively self-insure against tail risks, thereby reducing the loans it extends to other financial firms and to the real economy. ...

                                    Posted by on Monday, January 13, 2014 at 09:53 AM in Economics, Monetary Policy | Permalink  Comments (4) 


                                    Paul Krugman: Enemies of the Poor

                                    Will Republicans ever care about the poor?:

                                    Enemies of the Poor, by Paul Krugman, Commentary, NY Times: Suddenly it’s O.K., even mandatory, for politicians with national ambitions to talk about helping the poor. This is easy for Democrats, who can go back to being the party of F.D.R. and L.B.J. It’s much more difficult for Republicans, who are having a hard time shaking their reputation for reverse Robin-Hoodism, for being the party that takes from the poor and gives to the rich.
                                    And the reason that reputation is so hard to shake is that it’s justified. It’s not much of an exaggeration to say that right now Republicans are doing all they can to hurt the poor, and they would have inflicted vast additional harm if they had won the 2012 election. Moreover, G.O.P. harshness toward the less fortunate isn’t just a matter of spite...; it’s deeply rooted in the party’s ideology...
                                    Let’s start with the recent Republican track record.
                                    The most important current policy development in America is the rollout of the Affordable Care Act, a k a Obamacare. Most Republican-controlled states are, however, refusing to implement a key part of the act, the expansion of Medicaid, thereby denying health coverage to almost five million low-income Americans. And the amazing thing is that ... the aid through would cost almost nothing; nearly all the costs ... would be paid by Washington.
                                    Meanwhile, those Republican-controlled states are slashing unemployment benefits, education financing and more. As I said, it’s not much of an exaggeration to say that the G.O.P. is hurting the poor as much as it can.
                                    What would Republicans have done if they had won the White House in 2012? Much more of the same. Bear in mind that every budget the G.O.P. has offered since it took over the House in 2010 involves savage cuts in Medicaid, food stamps and other antipoverty programs. ...
                                    The point is that a party committed to small government and low taxes on the rich is, more or less necessarily, a party committed to hurting, not helping, the poor. ...
                                    Republicans weren’t always like this. In fact, all of our major antipoverty programs — Medicaid, food stamps, the earned-income tax credit — used to have bipartisan support. And maybe someday moderation will return to the G.O.P.
                                    For now, however, Republicans are in a deep sense enemies of America’s poor. And that will remain true no matter how hard the likes of Paul Ryan and Marco Rubio try to convince us otherwise.

                                      Posted by on Monday, January 13, 2014 at 12:33 AM in Economics, Politics, Social Insurance | Permalink  Comments (69) 


                                      Fed Watch: Employment Report Keeps Policymakers on Their Toes

                                      Tim Duy:

                                      Employment Report Keeps Policymakers on Their Toes. by Tim Duy: Just about everyone (myself included) who ventured a payrolls forecast was crushed by the scant December gain of just 74k. How much should you adjust your outlook on the basis of just this one number? Not much, if at all. It is important to watch for trends in the data, and always keep Barry Ritholtz's warning in the back of your mind:
                                      ...we know from each month’s revisions that the initial read is off, often by a substantial amount. It’s a noisy series, subject to many errors and subsequent corrections.
                                      To put this into some context, consider what it is we are measuring: The change in monthly hires minus fires. A monthly change in a labor force of more than 150 million people. That turns out to be a tiny net number relative to the entire pool -- about one tenth of one percent.
                                      This is why I continually suggest ignoring any given month, and paying attention to the overall trend. That is the most useful aspect of the monthly NFP data...if you focus on the monthly numbers, you will be given so many false signals and head fakes that you cannot possibly trade on this information in an intelligent manner.
                                      Indeed, the December number was mitigated by an upward revision to November, leaving the growth pattern looking very familiar:

                                      EMPc011214

                                      One interpretation of the December outcome was that it was largely weather related. One would think, however, that such an event would have a forecastable negative impact on payrolls. Regardless, the bigger message is that the monthly change in payrolls is a volatile series, and one should be wary of putting too much emphasis on either small or large gains.
                                      Perhaps the real story then is that another existing trend in the data, the downward pressure on the unemployment rate from a falling labor force participation rate, continues unabated:

                                      EMPa011214

                                      Moreover, the pace of improvement in alternative measures of labor utilization is not accelerating and arguably appears to be slowing as might be expected if the formally cyclically unemployed increasingly become structurally unemployed:

                                      EMPb011214

                                      Altogether, I think the report can be neatly summed up as 1.) indicative of a more modest improvement in activity than suggested by actual and estimated GDP numbers for the final half of 2013 and 2.) suggestive of structural change in labor markets.
                                      The employment report generally complicates monetary policymaking. Not the nonfarm payrolls numbers so much; that number will largely be written off as anomalous in the context of the overall trend. Indeed, this was the first word from Fed officials. St. Louis Federal Reserve President James Bullard, via the Wall Street Journal:
                                      "I would be disinclined to react to one month's number. I think it's important to get future jobs reports and see if new trends are developing," said Mr. Bullard at a press briefing following remarks here to local business leaders.
                                      Richmond Federal Reserve President Jeffrey Lacker offered similar sentiments:
                                      “As a general principle, it’s wise not to overreact to one month’s employment report,” Lacker said. “Employment has been growing along a pretty steady trend this year. It takes a lot more than one labor-market report to be convincing that the trend has shifted, and in my experience one employment report rarely has an effect by itself on monetary policy.”
                                      I think the Fed is generally committed to winding down asset purchases this year, and will not want to be overly sensitive to just one report (that said, they will be overly sensitive to one number if it fits their preferred policy path). Only a more significant change in the overall tenor of the data will alter the pace of tapering.
                                      The drop in the unemployment rate, however, is something more of a challenge. The Evans rule simply isn't looking quite so clever anymore:

                                      EMPd011214

                                      Monetary officials generally believed not only that 6.5% unemployment was far in the future, but also that policy would become much more obvious as we approached that target because inflation pressures would be evident. Neither has been true. Not only has unemployment fallen more quickly than anticipated, but inflation remains stubbornly low. With regards to the former, officials increasingly see the decline in labor force participation as largely structural and outside the purview of monetary policy. Bullard, via the article quoted earlier:
                                      Mr. Bullard signaled he wasn't particularly alarmed by a decline in labor force participation, saying it appears at the right level given current demographics.
                                      And, via a nice Wall Street Journal interview with San Francisco President John Williams by Jon Hilsenrath:
                                      We’re still working hard on this issue of employment-to-population. Everybody is struggling with the puzzle of why the employment-to-population ratio has stayed low. To what extent are movements in labor force participation structural or cyclical? And to what extent can monetary policy have an influence on those developments? I think the majority of the decline in the participation rate is due to structural factors related to the aging of the population and people going into disability. Very few people come back into the labor force from that. I do think part of it is cyclical. The data in the next year or so are going to inform us better about what is the trend.
                                      With each passing month policymakers are increasingly comfortable taking the unemployment rate at face value. That means they increasingly expect the inflation numbers to pick up. Back to Williams:
                                      As the unemployment rate continues to come down, utilization continues to go up, as the economy continues to improve, I would expect the underlying inflation rate to track back towards 2%.
                                      But he clearly recognizes the potential for inflation to remain low:
                                      The second question is why is inflation so low? To what extent does it reflect just some transitory influences, such as health care costs, and to what extent is it really reflecting a persistent ongoing inflation trend that is too low? And again how can monetary policy affect that? We’re in this world where inflation doesn’t move around a lot around 2%. It has become hard to model and to know exactly what are the factors causing inflation to be too low and which are the ones that are going to help bring it back to 2%. That gets to the downside risk question. If inflation does stay stubbornly low, that obviously is an argument for more monetary accommodation than otherwise.
                                      Likewise, Bullard shares these concerns:
                                      Mr. Bullard said he continues to watch inflation closely, saying it should rise as the economy picks up and the jobless rate continues to fall. But the central banker added he wants to actually see that rise come to fruition as the Fed assesses further tapering of its bond-buying.
                                      "If inflation stepped lower in a clear way, I think that would give me some pause," Mr. Bullard said. "I'm looking for signs inflation is going to come back."
                                      So where does this leave us? First of all, I think the Evans rule is already for all intents and purposes defunct. The unemployment rate is just a hair away from 6.5%, and the Fed has no intention of considering raising rates anytime soon. Second, there probably isn't a replacement for the Evans rule in the works. Bullard:
                                      He expects the Fed for now to hold its threshold for unemployment at 6.5%. The Fed has said it won't increase interest rates until the jobless rate falls below that level so long as inflation stays contained.
                                      "Moving (thresholds) around too much is likely to damage our credibility," Mr. Bullard said
                                      And Williams on not setting a lower bound for inflation:
                                      My view is the current [Fed policy] statement does a good job of capturing the fact that once unemployment gets below 6.5%, then obviously we’ll be taking seriously what is happening in inflation, we will be looking at what is happening with employment and growth and everything, and then we’ll be judging what is the appropriate stance of policy. It just gets very complicated quickly when you start adding more and more clauses about what conditions would you or would you not raise interest rates. Unfortunately, that is the game we’re playing … the FOMC statement has gotten awfully long. It has gotten awfully complicated. The statement is probably better used to try to emphasize the key points as opposed to trying to explain everything in our thinking.
                                      My sense is that they thought the Evans rule was clever and simple, but it turns out that fixed numerical objectives are not quite so simple. Well, multiple numerical objectives are not quite so simple. The ironic outcome to the Evans rule experiment is that policy communication would arguably have been smoother if the Fed simply emphasized an inflation target. Policymakers could have been agnostic on the reasons for the declines in labor force participation; it was irrelevant given the path of inflation. Perhaps the focus on the unemployment rate was something of an unnecessary complication that now needlessly leaves the impression that policy will soon turn more hawkish than is the case.
                                      Thus, the third takeaway is that policy is now largely about inflation (although arguably it always is always about inflation). Ann Saphir and Jonathon Spicer at Reuters:
                                      Stubbornly weak inflation is shaping up as the wild card for U.S. monetary policy makers this year, with top Federal Reserve officials stumped by why it has lingered so low for so long and at odds as to what to do about it.
                                      As the Fed wrestled through last year with deciding when to start trimming its massive bond-buying stimulus, the bulk of attention was focused on the unemployment rate, which until recently has been slow to fall following its spike up to 10 percent during the recession.
                                      By last month, policy makers had grown confident enough in the job market to dial back on the program. Figures released Friday showed the jobless rate fell to a five-year low of 6.7 percent in December, despite the smallest monthly job gains in three years. With much of the hiring slowdown attributed to bad weather, however, many analysts say the Fed will stay on track with plans to end bond buying by late this year.
                                      But there is a hitch: inflation has been drifting down for much of the last two years, measuring a feeble 1.1 percent in November by the Fed's preferred gauge.
                                      As long as inflation reverts to target slowly (with a caveat to be noted below), the Fed will not be quick to hike rates. But the Fed will be increasingly nervous that a sudden burst of inflation means they are behind the curve. Williams:
                                      Whether we cut purchases by 10 billion a month or not, we still have a very accommodative stance of policy and that is going to stay with us for quite some time. That is where I worry. If the economy really picks up or inflation or risks to financial stability really do start to emerge in a serious way, we need to be able to move policy back to normal, or adjust policy appropriately, in a timely manner. It’s always a difficult issue. This time it is just a much greater risk because we’re in a much more accommodative stance of policy.
                                      I think it will be the sensitivity to positive inflation surprises that has the potential to add a hawkish tenor to policymaking. Without those surprises, policy will continue along current expectations. There is a caveat - note that Williams essentially admits that the possibility and willingness to use monetary policy to address financial stability. Triple mandate. Watch for it.
                                      Bottom Line: I don't see much in the employment report to indicate any fundamental change to existing trends. Nor do I anticipate any change in policy. Tapering is likely to continue at its modest pace. As expected, the Evans rule is defunct, and it doesn't seem like policymakers are inclined to replace it with another set of fixed numerical guidelines. The primary driver of policy is now the pace of incoming data relative to the inflation outlook. Financial stability is probably something like a third-order concern at this point, at least as far as monetary policy is concerned. But that could change.

                                        Posted by on Monday, January 13, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy, Unemployment | Permalink  Comments (18) 


                                        Links for 01-13-2014

                                          Posted by on Monday, January 13, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (42) 


                                          Sunday, January 12, 2014

                                          'The Vicious Circle of Income Inequality'

                                          Robert Frank says we should pay more attention to growing inequality and "public policies that might contain it":

                                          The Vicious Circle of Income Inequality, by Robert Frank, Commentary, NY Times: ...Given the grave threats to the social order that extreme inequality has posed in other countries, it’s easy to see why the growing income gap is poised to become the signature political issue of 2014. Low- and middle-income Americans don’t appear to be on the threshold of revolt. But the middle-class squeeze continues to tighten, and it would be imprudent to consider ourselves immune. So if growing inequality has become a self-reinforcing process, we’ll want to think more creatively about public policies that might contain it. ...

                                            Posted by on Sunday, January 12, 2014 at 10:26 AM in Economics, Income Distribution | Permalink  Comments (43) 


                                            'Congress is a Millionaires' Club. Why that Matters...'

                                            Kathleen Geier:

                                            Congress is a millionaires' club. Why that matters, and what we can do about it: This week at the Monkey Cage blog, Duke University political scientist Nicholas Carnes wrote a fascinating pair of posts arguing that, when it comes to America's political system, class matters -- even more than a lot of us thought. ...
                                            Carnes points out that, although millionaires make up only 3 percent of the population, they "have a majority in the House of Representatives, a filibuster-proof super-majority in the Senate, a 5 to 4 majority on the Supreme Court and a man in the White House." At the same time, working class people -- whom he defines as "people with manual-labor and service-industry jobs" -- make up more than half of the population, yet people from working class backgrounds have never held more than 2 percent of the seats in Congress. ...
                                            Carnes performed simulations that showed that a number of important economic victories for the right "probably wouldn’t have passed if Congress had been made up of the same mix of classes as the nation it represents." The 2001 Bush tax cuts, for example... In general, the absence of working class legislators is associated with "tax policies [that] are more favorable to businesses, social safety net programs[that] are stingier, protections for workers [that] are weaker, and economic inequality [that] is significantly worse."
                                            What can we do to alleviate this problem? According to Carnes' research, the issue isn't that voters are biased in favor of rich candidates. Nor is it the case that working class Americans lack the talents to govern. The most basic problem is that so few working class people run for office in the first place. ...
                                            Of course, the chances of passing a reform like publicly financed elections would be dramatically improved if we elected more working class people to Congress in the first place. As is so often the case where economic inequality is concerned, unequal institutions become even more so because the self-dealing elites who dominate them tend to support policies that entrench their own power...

                                              Posted by on Sunday, January 12, 2014 at 10:06 AM in Economics, Politics | Permalink  Comments (18) 


                                              Links for 01-12-2014

                                                Posted by on Sunday, January 12, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (110) 


                                                Saturday, January 11, 2014

                                                'Bravo for Bernanke and the QE Era'

                                                Austin Goolsbee:

                                                Bravo for Bernanke and the QE Era, by Austan Goolsbee, Commentary, WSJ: ...critics of quantitative easing have condemned the expansion of the balance sheet at the Federal Reserve as risking a hyperinflation, have panned the "forward guidance" of the Fed promising low rates well into the future as ineffectual and dangerous, and have even mocked the Fed's new more-open communications strategy and the chairman's news conferences as demeaning to the office.
                                                As Mr. Bernanke prepares to depart at the end of January and the Fed has initiated the exit-strategy countdown with the start of tapering, it is time to take stock of the QE Era—and time for the critics to admit they were wrong...,the critics were wrong that QE would cause inflation and harm the economy. ...
                                                The research indicates that these Fed policies have helped the economy, albeit modestly. ...

                                                  Posted by on Saturday, January 11, 2014 at 12:13 PM in Economics, Monetary Policy | Permalink  Comments (52) 


                                                  Links for 01-11-2014

                                                    Posted by on Saturday, January 11, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (69) 


                                                    Friday, January 10, 2014

                                                    Undernutrition

                                                    From the Milken Institute

                                                    ... Undernutrition is now the largest single contributor to child mortality around the world. Increasingly, across both developing and developed countries, experts agree that addressing undernutrition is not only an investment in health, it is an investment in long-term economic growth. Responsible for billions of dollars in health-care expenditures and lost productivity, the combined effects of undernutrition can cost affected countries up to 11 percent of GDP, encumbering growth as well as health. Yet this health threat remains one of the least funded and most under-prioritized issues in the global aid landscape. Efforts to alleviate hunger suffer an estimated $10.3 billion annual funding gap for preventative and treatment measures. ...

                                                      Posted by on Friday, January 10, 2014 at 01:21 PM in Economics | Permalink  Comments (12) 


                                                      'Sharp Drop in Unemployment Due to People Leaving the Labor Force'

                                                      Dean Baker:

                                                      Sharp Drop in Unemployment Due to People Leaving the Labor Force: The headline unemployment rate fell sharply to 6.7 percent in December. However, this is not good news. The drop was almost entirely due to people leaving the labor force as the number of people reported employed in December only rose by 143,000, just enough to keep the employment-to-population ratio constant.
                                                      Blacks disproportionately left the labor market, with the labor force participation rate for African Americans dropping by 0.3 percentage points to 60.2 percent, the lowest rate since December of 1977. The rate for African American men fell 0.7 percentage points to 65.6 percent, the lowest on record.
                                                      The data on the establishment side was not any brighter with the survey reporting an increase of just 74,000 jobs. Some of this weakness was due to unusually slow growth in health care and restaurant employment. This is likely an anomaly that will be reversed in future months. However, there was also a decline in the index of average weekly hours. This suggests that the economy may be weaker than some of the more  recent optimistic accounts indicated.

                                                      More detail here.

                                                        Posted by on Friday, January 10, 2014 at 09:23 AM in Economics, Unemployment | Permalink  Comments (99) 


                                                        Paul Krugman: The War Over Poverty

                                                        The changing politics of poverty:

                                                        The War Over Poverty, by Paul Krugman, Commentary, NY Times: Fifty years have passed since Lyndon Johnson declared war on poverty. ... For a long time, everyone ... “knew” that the war on poverty had been an abject failure. And they knew why: It was the fault of the poor themselves. But what everyone knew wasn’t true, and the public seems to have caught on.
                                                        The narrative went like this: ...poverty ... was basically a social problem — a problem of broken families, crime and a culture of dependence that was only reinforced by government aid. And because this narrative was so widely accepted, bashing the poor was good politics...
                                                        Yet this view of poverty, which may have had some truth to it in the 1970s, bears no resemblance to anything that has happened since.
                                                        For one thing, the war on poverty has, in fact, achieved quite a lot..., evidence ... points to a big improvement in the lives of America’s poor...
                                                        And if progress against poverty has nonetheless been disappointingly slow ... blame rests not with the poor..., the problem of poverty has become part of the broader problem of rising income inequality...
                                                        So how should we respond to this reality?
                                                        The conservative position, essentially, is that we shouldn’t respond. Conservatives ... treat every beneficiary of a safety-net program as if he or she were “a Cadillac-driving welfare queen.” And why not? After all, for decades their position was a political winner, because middle-class Americans saw “welfare” as something that Those People got but they didn’t.
                                                        But that was then. At this point, the rise of the 1 percent at the expense of everyone else is so obvious that it’s no longer possible to shut down any discussion of rising inequality with cries of “class warfare.” Meanwhile, hard times have forced many more Americans to turn to safety-net programs. And as conservatives have responded by defining an ever-growing fraction of the population as morally unworthy “takers” ... they have made themselves look callous and meanspirited. ...
                                                        Meanwhile, progressives are on offense. They have decided that inequality is a winning political issue. They see war-on-poverty programs like food stamps, Medicaid, and the earned-income tax credit as success stories... And if these programs enroll a growing number of Americans ... so what?
                                                        So guess what: On its 50th birthday, the war on poverty no longer looks like a failure. It looks, instead, like a template for a rising, increasingly confident progressive movement.

                                                          Posted by on Friday, January 10, 2014 at 12:24 AM in Economics, Income Distribution, Social Insurance | Permalink  Comments (88) 


                                                          Links for 01-10-2014

                                                            Posted by on Friday, January 10, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (46) 


                                                            Thursday, January 09, 2014

                                                            Fed Watch: Next Up: Employment Report

                                                            Tim Duy:

                                                            Next Up: Employment Report, by Tim Duy: Another quick post between appointments. Tomorrow is the all-important employment report release day for December. I say "all-important" partly in jest. I would caution against placing too much weight on a preliminary number that is well-known to be heavily revised. But the Federal Reserve seems to place an unusually high weight on the most recent month of data, so we must too.

                                                            Since it worked well last time, my quick-and-dirty estimate is a 245k gain for nonfarm payrolls in December:

                                                            NFPGUESS010814

                                                            Use with caution, usual caveats apply. Forecasting the preliminary nonfarm payroll gain is akin to throwing darts. And my prior is that something that worked well last month probably will not work well this month. That said, while this technique might not predict the exact number, I think it tells us that:

                                                            1. The labor market is improving modestly.
                                                            2. Any large deviation from a gain of 245k - either positive or negative - is likely not indicative of the underlying trend in labor markets.

                                                            For comparison, this is a decidedly above consensus forecast. Consensus is for 200k with a range of 120k to 225k. 245k would be a large upward surprise.

                                                            Finally, when considering the policy implications of the report (unless I happen to be up at 5:30am tomorrow, I won't get a chance to review the report until well after the market closes), consider the tension between incoming chair Janet Yellen's preferred preferred measures of labor market slack/tightness:

                                                            YELLEN010814

                                                            The improvement on the left exceeds that on the right. That argues for policy inertia unless policymakers shift their focus toward on side or the other. The obvious concern is that improvement on the left becomes too much for policymakers to easily ignore.

                                                              Posted by on Thursday, January 9, 2014 at 10:47 AM in Economics, Fed Watch, Monetary Policy, Unemployment | Permalink  Comments (7) 


                                                              'Why The Republican’s Old Divide-and-Conquer Strategy Is Backfiring'

                                                              It's been awhile since we've checked in with Robert Reich:

                                                              Why The Republican’s Old Divide-and-Conquer Strategy — Setting Working Class Against the Poor — Is Backfiring, by Robert Reich: For almost forty years Republicans have pursued a divide-and-conquer strategy intended to convince ... the working class that its hard-earned tax dollars were being siphoned off to pay for “welfare queens” ... and other nefarious loafers. The poor were “them” — lazy, dependent on government handouts, and overwhelmingly black — in sharp contrast to “us,” who were working ever harder, proudly independent..., and white.  
                                                              It was a cunning strategy designed to split the broad Democratic coalition that had supported the New Deal and Great Society, by using the cleavers of racial prejudice and economic anxiety. It also conveniently fueled resentment of government taxes and spending. 
                                                              The strategy also served to distract attention from the real cause of the working class’s shrinking paychecks — corporations that were busily busting unions, outsourcing abroad, and replacing jobs with automated equipment and, subsequently, computers and robotics.  
                                                              But the divide-and-conquer strategy is no longer convincing because the dividing line between poor and middle class has all but disappeared. “They” are fast becoming “us.”... Three decades of flattening wages and declining economic security have taken a broader toll..., unexpected poverty has become a real possibility for almost everyone these days. And there’s little margin of safety. ... 
                                                              Race is no longer a dividing line, either. ... Most people are now on the same losing side of the divide. ...
                                                              Which means Republican opposition to extended unemployment insurance, food stamps, jobs programs, and a higher minimum wage pose a real danger of backfiring on the GOP. ... It’s not hard to imagine a new political coalition of America’s poor and working middle class, bent not only on repairing the nation’s frayed safety nets but also on getting a fair share of the economies’ gains.

                                                                Posted by on Thursday, January 9, 2014 at 09:52 AM in Economics, Politics, Social Insurance | Permalink  Comments (33) 


                                                                Fed Watch: FOMC Minutes - The Quick Review

                                                                Tim Duy:

                                                                FOMC Minutes - The Quick Review, by Tim Duy: Running short on time tonight (a problem that I don't think will be resolved until the next week). Still, I want to make some quick comments - disjointed as they may be - on the minutes of the December 2013 FOMC meeting.

                                                                Near the beginning of the minutes, the staff presents a survey on the expected costs and benefits of the asset purchase program. I feel I need to highlight this section since I have complained that the Fed is leaving us in the dark on the cost/benefit calculus. Now I know why they are leaving us in the dark - they are pretty much in the dark themselves. They sense that the math still favors ongoing purchases:

                                                                Most participants judged the marginal costs of asset purchases as unlikely to be sufficient, relative to their marginal benefits, to justify ending the purchases now or relatively soon; a few participants identified some possible costs as being more substantial, indicating that the costs could justify ending purchases now or relatively soon even if the Committee's macroeconomic goals for the purchase program had not yet been achieved.

                                                                Still, they are worried about financial stability:

                                                                Participants were most concerned about the marginal cost of additional asset purchases arising from risks to financial stability, pointing out that a highly accommodative stance of monetary policy could provide an incentive for excessive risk-taking in the financial sector.

                                                                And they really don't know what they are doing:

                                                                It was noted that the risks to financial stability could be somewhat larger in the case of asset purchases than in the case of interest rate policy because purchases work in part by affecting term premiums and policymakers have less experience with term premium effects than with more conventional interest rate policy.

                                                                Some continue to think of the Fed's balance sheet like that of a regular bank:

                                                                Participants also expressed some concern that additional asset purchases increase the likelihood that the Federal Reserve might at some point suffer capital losses.

                                                                But common sense prevails:

                                                                But it was pointed out that the Federal Reserve's asset purchases would almost certainly provide significant net income to the Treasury over the life of the program, especially when the effects of the program on the broader economy were taken into account, and that potential reputational risks to the Federal Reserve arising from any future capital losses could be mitigated by communicating that point to the public.

                                                                I think it silly to complain about potential future losses without acknowledging the current profits; the asset purchase program needs to be evaluated across its entire lifespan. Moreover, it's silly to think the Federal Reserve needs to make a "profit" as if it were a regular bank. The Federal Reserve does not exist to make a profit. It exists to conduct the monetary policy of the nation. But I digress. In any event, policymakers should actually understand this, and hopefully recognize that the only reason for concern on this point is the public optics.

                                                                Then comes the issue of exit:

                                                                Further, participants noted that ongoing asset purchases could increase the difficulty of managing exit from the current highly accommodative policy stance when the time came.

                                                                But in general they feel prepared:

                                                                Many participants, however, expressed confidence in the tools at the Federal Reserve's disposal for managing its balance sheet and for normalizing the stance of policy at the appropriate time.

                                                                The success with the "reverse repo" facility (noted in the minutes) probably bolsters their confidence on this point. Regarding the benefits of the program, they understand the communications value of quantitative easing:

                                                                Regarding the marginal efficacy of the purchase program, most participants viewed the program as continuing to support accommodative financial conditions, with a number of them pointing to the importance of purchases in serving to enhance the credibility of the Committee's forward guidance about the target federal funds rate.

                                                                Still, their faith in the program is wavering:

                                                                A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue, although some noted the difficulty inherent in making such an assessment.

                                                                Basically, they don't really have any basis for quantifying the marginal benefits of the program now. That said, there is push back:

                                                                A couple of participants thought that the marginal efficacy of the program was not declining, as evidenced by the substantial effects in financial markets in recent months of news about the likely path of purchases.

                                                                The great QE debate of 2013 was evidence of the program's communication value, but arguably if they change the policy mix such that communication is provided by forward guidance, then the benefits of the asset purchase program will fade, and with them the rational for the program. Overall, I don't see a lot of cohesion around any method to quantify the cost/benefit trade-off of the program. It seems they are just taking the position that they will know the math has shifted against the program when they see it. Which of course make assessing their likely policy path something of a challenge.

                                                                Participants still struggle with the reasons for the drop in labor force participation. Structural or cyclical? Really just covering much of the same ground:

                                                                Some participants cited research that found that demographic and other structural factors, particularly rising retirements by older workers, accounted for much of the recent decline in participation. However, several others continued to see important elements of cyclical weakness in the low labor force participation rate and cited other indicators of considerable slack in the labor market, including the still-high levels of long-duration unemployment and of workers employed part time for economic reasons and the still-depressed ratio of employment to population for workers ages 25 to 54. In addition, although a couple of participants had heard reports of labor shortages, particularly for workers with specialized skills, most measures of wages had not accelerated. A few participants noted the risk that the persistent weakness in labor force participation and low rates of productivity growth might indicate lasting structural economic damage from the financial crisis and ensuing recession.

                                                                The healthy debate on this topic likely leaves them wary to change the unemployment threshold. Unsurprisingly, inflation was also a topic of conversation. They remain convinced that the current trend will soon be reversed:

                                                                Inflation continued to run noticeably below the Committee's longer-run objective of 2 percent, but participants anticipated that it would move back toward 2 percent over time as the economic recovery strengthened and longer-run inflation expectations remained steady.

                                                                That said, there were broad concerns on this outlook:

                                                                Nonetheless, many participants expressed concern about the deceleration in consumer prices over the past year, and a couple pointed out that a number of other advanced economies were also experiencing very low inflation. Among the costs of very low or declining inflation that were cited were its effects in raising real interest rates and debt burdens. A few participants raised the possibility that recent declines in inflation might suggest that the economic recovery was not as strong as some thought.

                                                                Inflation isn't just low in the United States - it's low in many parts of the world. Europe, in particular comes to mind. They must be concerned that low inflation abroad will translate to low inflation at home, even if the economy is strengthening as expected. And then there is another possibility. Although everyone is getting warm and fuzzy about the pace of the recovery, perhaps the inflation numbers are telling the real story. I still think it is odd that they overlooked such concerns and pulled the trigger on the taper, justifying it, as I thought they would, with the forecast and stable inflation expectations. Indeed, the inflation concern was prominent in the taper debate:

                                                                ...most participants saw a reduction in the pace of purchases as appropriate at this meeting and consistent with the Committee's previous policy communications. Many commented that progress to date had been meaningful, and some expressed the view that the criterion of substantial improvement in the outlook for the labor market was likely to be met in the coming year if the economy evolved as expected. However, several participants stressed that the unemployment rate remained elevated, that a range of other indicators had shown less progress toward levels consistent with a full recovery in the labor market, and that the projected pickup in economic growth was not assured. Some participants also questioned whether slowing the pace of purchases at a time when inflation was running well below the Committee's longer-run objective was appropriate. For some, the considerable slack remaining in the labor market and shortfall of inflation from the Committee's longer-run objective warranted continuing asset purchases at the current pace for a time in order to wait for additional information confirming sustained progress toward the Committee's objectives or to promote faster progress toward those objectives.

                                                                Ultimately, the tiny taper combined with discretion in the pace of future reductions won the day:

                                                                Among those inclined to begin to reduce the pace of asset purchases at this meeting, many favored a modest initial reduction accompanied by guidance indicating that decisions regarding future reductions would depend on economic and financial developments as well as the efficacy and costs of purchases. Some other participants preferred a larger reduction in purchases at this meeting and future reductions that would bring the program to a close relatively quickly. A few proposed that the Committee lay out, either at this meeting or subsequently, a more deterministic path for winding down the program or that it announce a fixed amount of additional purchases and an expected completion date, thereby reducing uncertainty about the trajectory of the purchase program.

                                                                They simply were uncertain enough about the cost and benefits of the asset purchase program that they wanted to use the "progress toward goals" provision as an excuse to do a trial run on the exit.

                                                                Stepping back a bit in the minutes, the issue of financial stability makes another appearance:

                                                                Participants also reviewed indicators of financial vulnerabilities that could pose risks to financial stability and the broader economy. These indicators generally suggested that such risks were moderate, in part because of the reduction in leverage and maturity transformation that has occurred in the financial sector since the onset of the financial crisis.

                                                                What are policymakers looking for?

                                                                In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some small-cap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans.

                                                                And what will financial stability issues means for future policy? Read carefully:

                                                                A couple of participants offered views on the role of financial stability in monetary policy decisionmaking more broadly. One proposed that the Committee analyze more explicitly the potential consequences of specific risks to the financial system for its dual-mandate objectives and take account of the possible effects of monetary policy on such risks in its assessment of appropriate policy. Another suggested that the importance of financial stability considerations in the Committee's deliberations would likely increase over time as progress is made toward the Committee's objectives, and that such considerations should be incorporated into forward guidance for the federal funds rate and asset purchases.

                                                                The idea of using monetary policy tools to combat financial instability is in its infancy, but is certainly something to watch. My sense is the majority of the FOMC believes they can address financial stability via macroprudential regulation. Hence I believe the Fed is a long way from turning the dual-mandate of monetary policy into a triple-mandate. But the baby was born alive and well on Constitution Ave.

                                                                Finally, at least for me tonight, the idea of lowering the unemployment thresholds was considered and rejected in favor of enhanced forward guidance:

                                                                Participants debated the advantages and disadvantages of lowering the unemployment rate threshold provided in the forward guidance. In the view of the few participants who advocated such a change, a lower threshold would be a clear signal of the Committee's intentions and was an appropriate adjustment in light of recent labor market and inflation trends. In contrast, a few others expressed concern that any change in the threshold might be confusing and could undermine the credibility of the Committee's forward guidance. Most were inclined to retain the current thresholds for the unemployment and inflation rates and to instead provide qualitative guidance regarding the Committee's likely behavior after a threshold was crossed.

                                                                Bottom Line: I am not sure the minutes provide many surprises. Overall, I think they reveal a very divided Federal Reserve, and the result is that every policy choice is a middle ground. This strikes me as a recipe for policy inertia. No abrupt changes to the pace of tapering. No abrupt changes to the interest rate outlook. No abrupt changes to the Evan's rule. But I wonder if the middle ground is more like a knife edge - that general policy fatique means the FOMC would shift its stance rapidly if the data broke decisively higher. This, I think, is something that might keep a bond trader up at night.

                                                                  Posted by on Thursday, January 9, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (3) 


                                                                  Links for 01-09-2014

                                                                    Posted by on Thursday, January 9, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (68) 


                                                                    Wednesday, January 08, 2014

                                                                    Rubin: Sound Government Finances will Promote Recovery

                                                                    I don't have time to address this properly, hopefully you can do that in comments, but I'm kind of annoyed with Robert Rubin. He appears to believe in the confidence fairy:

                                                                    Sound government finances will promote recovery, by Robert Rubin, Commentary, Financial Times: ... The US recovery remains slow by historical standards – even if recent signs of improvement are borne out. One reason is that our unsound fiscal trajectory undermines business confidence, and thus job creation, by creating uncertainty about future policy and exacerbating concerns about the will of Congress to govern. Business leaders frequently cite our fiscal outlook as a deterrent to hiring and investment.

                                                                    Yes, but  they cite lack of demand as the biggest factor by some margin.

                                                                    He's also worried about monetary policy:

                                                                    Unconventional policy decisions by central banks are sometimes justified as the only available tools in the absence of necessary government policies. The right criterion for action, however, is not the absence of alternatives, but an assessment of costs and benefits. ...
                                                                    In the US, there are widely posed questions about the benefits of QE3, but the risks are significant. ...
                                                                    Confidence generated by a sound fiscal regime could help ameliorate ... risks. Such a regime should be enacted now to stabilise, or preferably reduce, the ratio of debt-to-gross domestic product over 10 years...

                                                                    At least there's this (though I left out his call for entitlement reform as that annoyed me too):

                                                                    Fiscal discipline could provide room for reasonable stimulus to create jobs. The partially cancelled sequestration should be fully rescinded to eliminate its fiscal drag. Fiscal funding should come largely from revenue increases...

                                                                    He ends with:

                                                                    Unconventional monetary policy and stimulus can be part of a successful economic programme for a period of time. But they are no substitute for fiscal discipline, public investment and structural reform.

                                                                    So let me turn this over to you. Have at it...

                                                                      Posted by on Wednesday, January 8, 2014 at 11:10 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (58) 


                                                                      Yellen's 'Unprecedented Challenge'

                                                                      I can't watch myself, so have no idea if this is horrible or not, but in case it's of interest:


                                                                        Posted by on Wednesday, January 8, 2014 at 10:32 AM in Economics, Monetary Policy, Video | Permalink  Comments (2) 


                                                                        'On Fighting the Last War (On Poverty)'

                                                                        Paul Krugman:

                                                                        On Fighting the Last War (On Poverty), by Paul Krugman: ... I wanted ... to say something about the 50th anniversary of Lyndon Johnson’s War on Poverty. ...
                                                                        The narrative in the 1970s was that the war on poverty had failed because of social disintegration: government attempts to help the poor were outpaced by the collapse of the family, rising crime, and so on. And on the right, and to some extent in the center, it was often argued that government aid was if anything promoting this social disintegration. ...
                                                                        But that was a long time ago. These days crime is way down, so is teenage pregnancy, and so on; society did not collapse. What collapsed instead is economic opportunity. If progress against poverty has been disappointing over the past half century, the reason is not the decline of the family but the rise of extreme inequality. We’re a much richer nation than we were in 1964, but little if any of that increased wealth has trickled down to workers in the bottom half of the income distribution.
                                                                        The trouble is that the American right is still living in the 1970s, or actually a Reaganite fantasy of the 1970s; its notion of an anti-poverty agenda is still all about getting those layabouts to go to work and stop living off welfare. The reality that lower-end jobs, even if you can get one, don’t pay enough to lift you out of poverty just hasn’t sunk in. And the idea of helping the poor by actually helping them remains anathema.
                                                                        Will it ever be possible to move this debate away from welfare queens and all that? I don’t know. But for now, the key to understanding poverty arguments is that the main cause of persistent poverty now is high inequality of market income — but that the right can’t bring itself to acknowledge that reality.

                                                                          Posted by on Wednesday, January 8, 2014 at 09:52 AM in Economics, Income Distribution, Politics | Permalink  Comments (18) 


                                                                          Links for 01-08-2014

                                                                            Posted by on Wednesday, January 8, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (107) 


                                                                            Tuesday, January 07, 2014

                                                                            'What Happened to US Life Expectancy?'

                                                                            life expectancy at birth

                                                                            More here.

                                                                              Posted by on Tuesday, January 7, 2014 at 10:20 AM in Economics, Health Care | Permalink  Comments (70) 


                                                                              How to Tell if Fiscal Policy Works

                                                                              I have a new column:

                                                                              How to Tell if Fiscal Policy Works: There is a raging debate in the econo-blogosphere concerning the effectiveness of fiscal policy when the economy is in a deep recession. This question is important because monetary policy loses much of its effectiveness in severe downturns. ...

                                                                              It's about how to determine if fiscal policy is effective, and the importance of establishing defensible baselines.

                                                                                Posted by on Tuesday, January 7, 2014 at 08:57 AM in Economics, Fiscal Policy, Fiscal Times | Permalink  Comments (11) 


                                                                                Fed Watch: How Divided is the Fed?

                                                                                Tim Duy:

                                                                                How Divided is the Fed?, by Tim Duy: The minutes of the December 2013 FOMC meeting will be released Wednesday. I am looking for divisions within the FOMC on key topics, notably likely timing of the first rate hike, likely pace of rate hikes, and discussion of what follows the Evans rule. I am not so much concerned with the tapering process at this point. In my mind, that is now something of a dead issue. Barring any large shifts in the pace of economic activity, I think the Fed is largely committed to winding down that program this year. And I think that the Fed is likely committed to low interest rates through 2014. It's in the 2015 policy outlook that the real divisions start to show.
                                                                                As far as quantitative easing is concerned, I think the Federal Reserve is looking to end the program. Although they have not fully explained the calculus in the background, I think the cost/benefit analysis shifted against asset purchases. Moreover, the markets did not collapse after policymakers pulled the trigger on the taper, and everyone (all right, everyone but Boston Federal Reserve President Eric Rosengren) seems relatively comfortable with the pace at with asset purchases are expected draw to a close. Sure, arguably the hawks would like to see it brought to a close sooner than later, but are really just happy to see a path out, a clear indication that there is no such thing as QEInfinity.
                                                                                With regards to interest rates in 2014, here again I think the vast majority of FOMC members are comfortable with the idea that short term rates will most likely hold near zero for the remainder of the year. Even if the US economy receives a faster than expected burst of cyclical activity, the still large output gap and high unemployment rate suggest there is room to let the growth engine run on all cylinders for awhile This is especially the case given the inflation numbers.
                                                                                There is enough uncertainty about inflation, however, that I think the Fed will hesitate to lower the unemployment threshold. Unless they change the threshold, the Evan's rule becomes defunct in just 0.5 percentage points. I tend to think that the Fed does not want to change the threshold, and would like to let such specific, numerical rules-based guidance die a quiet death. Of course, that leaves as an open question of what would be the nature of any rules based guidance going forward.
                                                                                This could be a place where fundamental divisions among policymakers would be important. Most policymakers could get on board with Evans rule considering the special circumstances - the ongoing Great Recession - and the reality that a 6.5% threshold was in some sense not likely to be meaningful in the first place. I doubt more than one or two policymakers thought that the Fed would be hiking rates anytime before 6.5%. In effect, it was a promise that was easy to keep. Not changing the threshold, however, suggests they they can't agree on any other promise would be easy to keep. In any event, I am watching the minutes to see if there is more support for a specific change to the Evan's rule than I currently expect.
                                                                                That leaves 2015. Here, I think, we tend to be overlook the wide range of expectations for 2015 (and 2016, for that matter):

                                                                                DECINT010614

                                                                                Yes, in 2015 there is a weight on the dovish side of the Fed - but even within that side there is a range of 100bp. Which means some relatively dovish policymakers still think a rate hike toward the beginning of 2015 is likely. And 2016 offers an even wider spread of rate expectations - forecasts of the pace of rate hikes vary widely across policymakers. This suggests deep divisions.
                                                                                But what is the source of these divisions? If the divisions simply represent different economic forecasts, they might not be very interesting. Presumably, as economic forecasts converge so too would the rate forecasts. In other words, as long as most FOMC members are working with roughly the same reaction function, they really won't be divided when it comes to actually setting policy - they will line up on the dovish or hawkish side as data dictates. So your view of rate policy is driven by your forecast, and how strongly the Fed leans against that view is dependent how closely they believe the incoming data matches that forecast.
                                                                                More interesting is the possibility that some of the difference represents fundamentally different reaction functions. To be sure, this is already likely the case to some extent, and is visible in the 2014 forecasts. Even more interesting is the possibility that some of the difference is attributable not just to differing reaction functions regarding inflation and unemployment, but to difference opinions regarding the importance of financial stability in the formation of monetary policy. In other words, do some policymakers desire to accelerate the pace of rate increases to step in front of potential financial instabilities that may be brewing?
                                                                                Such a camp would be expected to include Kansas City Federal Reserve President Esther George and Dallas Federal Reserve President Richard Fisher. Neither of them, however, have sufficient intellectual weight to move the needle. Governor Jeremy Stein, however, is another matter. He is an intellectual force. And while there is a widespread hope that macroprudential regulation is sufficient to address stability concerns, Stein has already shown a willingness to consider using the tools of monetary policy as an alternative:
                                                                                Nevertheless, as we move forward, I believe it will be important to keep an open mind and avoid adhering to the decoupling philosophy too rigidly. In spite of the caveats I just described, I can imagine situations where it might make sense to enlist monetary policy tools in the pursuit of financial stability....
                                                                                Importantly:
                                                                                Second, while monetary policy may not be quite the right tool for the job, it has one important advantage relative to supervision and regulation--namely that it gets in all of the cracks.
                                                                                Could Stein bring incoming Chair Janet Yellen and others along to accepting a more aggressive policy to prevent the financial instabilities we have seen in recent cycles (assuming he heads in that direction himself)? The presumption is that Yellen will shy away from using the tools of monetary policy to achieve financial stability. Neil Irwin at the Washington Post, however, see this as Yellen's greatest challenge:
                                                                                ...Yellen confronts an old dilemma, the same one that she and current chairman Ben Bernanke have been wrestling with for the last three years or so. The tools they have to try to pump up growth are deeply flawed and can create dangerous side effects. But the central bank is the only policymaking entity in Washington focused on encouraging growth at all.
                                                                                So the debate has been this: Do we use the tools in our arsenal, even aware of the risks? Or do we allow growth to underperform its potential, leaving millions of jobless by the wayside when we may just be able to help, out of fear of some theoretical risks of a new credit bubble and ensuing crisis.
                                                                                The Fed's answer this past three years -- with strong support from Yellen -- has been that the unemployment crisis is so severe and the risks from interventionism are small and theoretical enough that, yes, the Fed should employ its full set of tools to try to boost growth. But as financial markets get closer to levels that suggest they are fully valued, and flirt with bubble territory, the cost-benefit analysis may well change.
                                                                                I don't know where Yellen's thoughts will evolve on this topic. What I do know is this: She has been built up as an dove of the highest order. Consequently, I can't help but think there is only one surprise she could possibly deliver. Since I think it would be virtually impossible for her policy direction to be more dovish than anticipated (the outcome of optimal control-based policy orientation), the only surprise that seems possible is that she is more hawkish than anticipated.
                                                                                Bottom Line: What I am watching for in the minutes - signs of division. Division on the forecasts themselves will make it hard to agree to a successor to the Evans rule. Divisions on the reaction function will make it even harder. And the possibility that monetary policy could have a role in pouring cold water on financial markets; it is hard to see how they lower the unemployment threshold while keeping that option open. And, of course, I am wary of the opposite as well - maybe they surprise me and lean toward lowering the unemployment threshold soon. There may still be more dovish tricks in the old magic hat after all.

                                                                                  Posted by on Tuesday, January 7, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (2) 


                                                                                  Links for 01-07-2014

                                                                                    Posted by on Tuesday, January 7, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (91) 


                                                                                    Monday, January 06, 2014

                                                                                    'Monetary versus Fiscal: An Odd Debate'

                                                                                    Simon Wren-Lewis is puzzled by the opposition to the use of fiscal policy. His bottom line:

                                                                                    I remain mystified where this desire to downgrade the usefulness of fiscal policy at the ZLB comes from. I suspect I am missing something, and would like to know what that is.

                                                                                    I've become weary of arguing about the usefulness of fiscal policy in deep recessions after years of doing so, so it's nice to have fresh bloggers to take up the fight, especially ones who know what they are talking about as much as Simon Wren-Lewis does.

                                                                                      Posted by on Monday, January 6, 2014 at 05:23 PM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (14) 


                                                                                      'On Respect and Income Equality'

                                                                                      Tim Duy:

                                                                                      On Respect and Income Equality, by Tim Duy: Noah Smith laments the days of yore, hypothesising that what we need is not a redistribution of income, but of respect:

                                                                                      I want this to change. I want to move back toward a society where the hard work of an unskilled laborer is considered worthwhile in social interactions, regardless of how many dollars it brings home. I want to move back toward a society where being a good parent or a friendly neighbor earns as much respect as making a hundred million dollars on Wall Street.

                                                                                      In other words, I want our "democracy" back. We need to redistribute respect.

                                                                                      My first thought was "Did such a world ever exist?" Perhaps someone with a little more vintage than me can add to that conversation, but I worry that such an idyllic view of the past is what one gets watching sitcoms of the 1950's that leave out inconvenient issues like apartheid in the American South.

                                                                                      My second thought was that if respect was more equally distributed in the past, this was almost certainly because incomes were more equally distributed. Chris Dillow at Stumbling and Mumbling latches onto the theme:

                                                                                      ...I fear that Noah is under-estimating the extent to which inequality of respect is endogenous. It arises out of the forces that generate and sustain inequalities of power and wealth.

                                                                                      My third thought was that this is not exactly a new topic. The underlying tendency to treat the poor with contempt has been around a long, long time. Indeed, it seems like an opportunity to curl up with an old friend, Adam Smith's Theory of Moral Sentiments. Smith recognized that inequality of incomes would result in inequality of respect:

                                                                                      This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages.

                                                                                      Adam Smith continues in a paragraph so beautiful it can be read time and time again:

                                                                                      We desire both to be respectable and to be respected. We dread both to be contemptible and to be contemned. But, upon coming into the world, we soon find that wisdom and virtue are by no means the sole objects of respect; nor vice and folly, of contempt. We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent. To deserve, to acquire, and to enjoy the respect and admiration of mankind, are the great objects of ambition and emulation. Two different roads are presented to us, equally leading to the attainment of this so much desired object; the one, by the study of wisdom and the practice of virtue; the other, by the acquisition of wealth and greatness. Two different characters are presented to our emulation; the one, of proud ambition and ostentatious avidity. the other, of humble modesty and equitable justice. Two different models, two different pictures, are held out to us, according to which we may fashion our own character and behaviour; the one more gaudy and glittering in its colouring; the other more correct and more exquisitely beautiful in its outline: the one forcing itself upon the notice of every wandering eye; the other, attracting the attention of scarce any body but the most studious and careful observer. They are the wise and the virtuous chiefly, a select, though, I am afraid, but a small party, who are the real and steady admirers of wisdom and virtue. The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness.

                                                                                      I think the tendency to equate poverty with "vice and folly" is a long-standing tradition. What may have changed is this:

                                                                                      In equal degrees of merit there is scarce any man who does not respect more the rich and the great, than the poor and the humble. With most men the presumption and vanity of the former are much more admired, than the real and solid merit of the latter. It is scarce agreeable to good morals, or even to good language, perhaps, to say, that mere wealth and greatness, abstracted from merit and virtue, deserve our respect. We must acknowledge, however, that they almost constantly obtain it; and that they may, therefore, be considered as, in some respects, the natural objects of it.

                                                                                      I am not sure that it is now considered "scarce agreeable to good morals" to openly proclaim that wealth and greatness by themselves deserve respect. Or worse, that poverty alone deserves our contempt. Indeed, the "War on the Poor" seems now to be pretty much out in the open. This I think is a result of ever greater income inequality and the need of the wealthy to justify that inequality. One such justification is that which Adam Smith lamented: Wealth must be an indication of moral superiority, luck doesn't have anything to do with it.

                                                                                      Moreover, Noah Smith points to the 1980's as the time respect disappeared from the public discourse:

                                                                                      I feel like the America I grew up in could learn a thing or two from Japan in this regard. I don't know if the word "loser" was a common insult before the 1980s, but in recent decades it has become ubiquitous. People who work in the service industry almost always seem ashamed when they tell me what they do for a living. Low-skilled workers are treated in a peremptory way, constantly reminded that they are "losers".

                                                                                      It shouldn't be a surprise that disrespect toward the poor grows beginning in the 1980s - that is also when inequality starts to explode. It doesn't take long for the rich/poor theme to appear in popular culture. I just watched "Trading Places," a 1983 movie that leverages off the disrespect for the poor on the part of the rich. That theme is also critical to the 1986 movie "Pretty in Pink." A memorable scene, after Blane attempts to take the "girl from the wrong side of the tracks" Andie to the rich Steff's party:

                                                                                      Steff: Look, that was very uncool of you last night, Blane.
                                                                                      Blane: What?
                                                                                      Steff: [mockingly] What?
                                                                                      Blane: You mean Andie?
                                                                                      Steff: Yeah, I mean Andie.
                                                                                      Blane: What's the big deal? I like her. Matter of fact, I was pissed off at you guys for being so nasty to her.
                                                                                      Steff: It was way out of order for you to force her on the party.
                                                                                      Blane: [disbelievingly] Steff, do you hear yourself? Do you hear the same asshole shit I hear?
                                                                                      Steff: What, do I have to spell it out for you?
                                                                                      Blane: [pissed off] I guess so.
                                                                                      Steff: Nobody appreciates your sense of humor, you know. As a matter of fact, everyone's just about to puke from you. If you've got a hard-on for trash, don't take care of it around us.

                                                                                      The social pressure becomes too much for Blane:

                                                                                      Blane: What do you want to hear?
                                                                                      Andie: Tell me!
                                                                                      Blane: What?
                                                                                      Andie: You're ashamed to be seen with me.
                                                                                      Blane: No, I am not!
                                                                                      Andie: You're ashamed to go out with me. You're terrified that you're goddamn rich friends won't approve.
                                                                                      [Andie hits Blane]
                                                                                      Andie: Just say it!
                                                                                      [Andie hits him again]
                                                                                      Andie: Just tell me the truth!
                                                                                      Blane: You don't understand that it has nothing at all do with you.
                                                                                      [Andie runs away]
                                                                                      Blane: [wipes a tear] Andie!

                                                                                      As movies often conclude, Blane comes to see Adam Smith's point that he should not automatically equate wealth and greatness with virtue and wisdom:

                                                                                      Blane: You couldn't buy her, though, that's what's killing you, isn't it? Stef? That's it, Stef. She thinks you're shit. And deep down, you know she's right.

                                                                                      Since, 1986, however, income inequality has only grown, and with it contempt for the poor. Life rarely ends in the way of a John Hughes movie.

                                                                                      So while I agree with Noah Smith that we should seek equality of respect, I think, like Chris Dillow, that this will come only after greater equality of incomes. Greater income equality would reduce the ability to make moral comparisons against one another on the basis of income alone. It forces us to look toward other factors ("... real and solid professional abilities, joined to prudent, just, firm, and temperate conduct...") as a basis for respect.

                                                                                      ****

                                                                                      Addendum I: In the past, my students were required to use "Pretty in Pink" to explain Marx. The obviously well-trained students soon revolted, pointing out that it was a much better fit with Smith.

                                                                                      Addendum II: I now dutifully await the smackdown to be delivered by Gavin Kennedy for what will be shown to be a questionable understanding of Adam Smith.

                                                                                        Posted by on Monday, January 6, 2014 at 04:11 PM in Economics, History of Thought, Income Distribution | Permalink  Comments (30) 


                                                                                        Government Homeownership Policy Does *Not* Explain the Housing Bubble

                                                                                        Once again, Dean Baker takes on Peter Wallison's claim that government homeownership policy caused the housing bubble:

                                                                                        Peter Wallison's Housing Bubble, Beat the Press: Peter Wallison, who was White House Counsel under President Reagan and has long been a fellow at the American Enterprise Institute, told NYT readers today that the housing bubble is back. Wallison is right to be concerned about the return of a bubble, as I have pointed out elsewhere, but his account of the last bubble and the risks of a new one are strangely off the mark.
                                                                                        Wallison wants to blame the bubble on government policy of promoting homeownership. There certainly has been a problem of a housing policy that is far too tilted toward homeownership, but this does not explain the bubble. Fannie Mae and Freddie Mac were bad actors in the bubble years, buying up trillions of dollars of loans issued on houses purchased at bubble inflated prices, as I said at the time.
                                                                                        However the worst loans were securitized by folks like Citigroup, Merrill Lynch, and Goldman Sachs. They weren't securitizing junk mortgages to meet government goals for low-income homeownership, they were doing it to make money. And they made lots of money in these years. In fact, the private securitizers were so successful in securitizing junk mortgages that they almost put the Federal Housing Authority (FHA) out of business. Since the FHA maintained its lending standards it couldn't compete with the zero down payment loans being securitized on Wall Street. It saw its market share fall to 2 percent at the peak of the bubble. Some of us warned about the problem posed by the bubble in low-income communities at the time. ...
                                                                                        As I have frequently noted, house prices were growing very rapidly in the first half of 2013 posing a real risk of a return to a bubble. However Bernanke's taper talk in June and the resulting rise in mortgage rates appears to have curbed the irrational exuberance, although it will be important to watch future price appreciation closely. In any case, it appears that the main culprits today are private equity funds and hedge funds who have been buying up large blocks of homes as investment properties, not low income buyers.

                                                                                        Here are many, many more posts making te same argument. It wasn't Fannie and Freddie, and it wasn't the CRA.

                                                                                          Posted by on Monday, January 6, 2014 at 09:20 AM in Economics, Housing | Permalink  Comments (32) 


                                                                                          Fed Watch: A Weekend of Fedspeak

                                                                                          Tim Duy:

                                                                                          A Weekend of Fedspeak, by Tim Duy: Federal Reserve speakers were out in force this weekend at the American Economic Association's annual meeting in Philadelphia. The first rumblings from Fed speakers came from the hawkish-side of the aisle. Via MarketWatch:

                                                                                          Philadelphia Fed President Charles Plosser warned Friday that the central bank may have to be "aggressive" in lifting interest rates and may have to chase market rates higher, if banks were to quickly release reserves. He also suggested the expectations of his colleagues by the end of 2016 that calls for Fed funds rates to be below 2% even when the job market is back to normal may be too low.

                                                                                          This should come as no surprise - Plosser has tended to be wary of the Fed's accommodative stance. There is nothing here we don't already know. As it stands today, the Fed is comfortable with a steep yield curve. They are willing to tolerate rising long-rates to the extent that the increases are not driven by shifting expectations of Fed policy. But clearly, if the economic circumstances improve markedly, the Federal reserve will be inclined to raise short-term rates sooner than expected. That's how monetary policy works. So all Plosser is telling us is that his inflation forecast differs from the FOMC as a whole, and if his forecast is realized, then policy will change accordingly.

                                                                                          More interestingly, in a later speech Plosser challenged incoming Federal Reserve Chair Janet Yellen's preferred policy framework:

                                                                                          ...there are several different ways to interpret the economic dynamics we have seen in recent years, and those perspectives would call for different policy responses. Some view the shocks hitting the economy as transitory and potential GDP as stable. Others view the shocks as being more permanent, affecting both actual and potential output.

                                                                                          In addition, there are alternative concepts of the output gap itself, some of which focus on the efficient level of output instead of potential output...

                                                                                          This state of affairs has led me to be skeptical of relying on gaps in general as well as optimal control exercises that are derived from specific models. Instead, I have long advocated that we should think in terms of robust policies that yield good economic outcomes across a variety of models and frameworks.

                                                                                          What such framework would Plosser suggest? From 2010:

                                                                                          So, if we have problems in measuring output gaps, what type of rule should we use? I believe it makes more sense to use an interest rate rule that responds aggressively to movements in inflation relative to a target and, if it responds to real economic activity, responds to a measure of the change in economic activity itself rather than some deviation from unobserved potential.

                                                                                          But, but, but...why then is Plosser so hawkish? Inflation has been moving away from target, so it would seem that he should be taking a dovish stance. How exactly is he going to mount a challenge to a Yellen Fed's basic policy approach? By jointly arguing that policy is too loosely and suggesting a rule that, if followed, would loosen policy further? I am just not seeing it, and thus not seeing how Plosser would be effective in affecting Fed policy. As such, I am not convinced that Plosser's ascension to voting status this year will make much difference other than providing journalists/economists/etc. with a dissenting voice.

                                                                                          Outgoing Federal Reserve Chair Ben Bernanke took his victory lap with an overview of his tenure. Too much here to cover adequately in this post, so I will skip to some of his comments on tapering:

                                                                                          ...the FOMC's decision to modestly reduce the pace of asset purchases at its December meeting did not indicate any diminution of its commitment to maintain a highly accommodative monetary policy for as long as needed; rather, it reflected the progress we have made toward our goal of substantial improvement in the labor market outlook that we set out when we began the current purchase program in September 2012.

                                                                                          No surprise here either. The Fed has been pushing to divorce asset purchases from interest rate policy, and are cautiously optimistic they have done so successfully. Regarding the ability of the Federal Reserve to extricate itself from its current position:

                                                                                          Once the economy improves sufficiently so that unconventional tools are no longer needed, the Committee will face issues of policy implementation and, ultimately, the design of the policy framework. Large-scale asset purchases have increased the size of our balance sheet and created substantial excess reserves in the banking system. Under the operating procedures used prior to the crisis, the presence of large quantities of excess reserves likely would have impeded the FOMC's ability to raise short-term nominal interest rates when appropriate. However, the Federal Reserve now has effective tools to normalize the stance of policy when conditions warrant, without reliance on asset sales. The interest rate on excess reserves can be raised, which will put upward pressure on short-term rates; in addition, the Federal Reserve will be able to employ other tools, such as fixed-rate overnight reverse repurchase agreements, term deposits, or term repurchase agreements, to drain bank reserves and tighten its control over money market rates if this proves necessary. As a result, at the appropriate time, the FOMC will be able to return to conducting monetary policy primarily through adjustments in the short-term policy rate.

                                                                                          All sounds so easy, doesn't it? In contrast, Mike Derby at the Wall Street Journal reports that the person responsible for making it happen isn't quite to confident:

                                                                                          Speaking as part of a panel in Philadelphia on the activities of the regional Fed banks, Mr. Dudley acknowledged a lot is still unknown about how the bond buying works. His observation is important because he has long been a supporter of aggressive Fed actions to help the economy.

                                                                                          The New York Fed leader has for some time expressed support for continuing the purchases, even as he also voted in favor of the Fed’s decision last month to cut back.

                                                                                          Referring to the Fed’s stimulus program, Mr. Dudley said, “we don’t understand fully how large-scale asset-purchase programs work to ease financial market conditions—is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?”...

                                                                                          ...Mr. Dudley also said that when it comes time to unwind the Fed’s easy-money stance, uncertainty is again a major issue facing central bankers.

                                                                                          “There could be unintended consequences” about moving to a more normalized state of monetary policy, he said.

                                                                                          I tend to think that such uncertainty runs deeper than it appears at the Fed, which is why policymakers are eager to end asset purchases. The more they buy, the more they risk "unintended consequences" at exit time.

                                                                                          Bernanke also threw cold water on the long-run forecast even as his was relative optimistic for faster growth in 2014:

                                                                                          For example, over the past year unemployment has declined notably more quickly than we or other forecasters expected, even as GDP growth was moderately lower than expected a year ago. This discrepancy reflects a number of factors, including declines in participation, but an important reason is the slow growth of productivity during this recovery; intuitively, when productivity gains are limited, firms need more workers even if demand is growing slowly. Disappointing productivity growth accordingly must be added to the list of reasons that economic growth has been slower than hoped...The reasons for weak productivity growth are not entirely clear: It may be a result of the severity of the financial crisis, for example, if tight credit conditions have inhibited innovation, productivity-improving investments, and the formation of new firms; or it may simply reflect slow growth in sales, which have led firms to use capital and labor less intensively, or even mismeasurement. Notably, productivity growth has also flagged in a number of foreign economies that were hard-hit by the financial crisis. Yet another possibility is weak productivity growth reflects longer-term trends largely unrelated to the recession. Obviously, the resolution of the productivity puzzle will be important in shaping our expectations for longer-term growth.

                                                                                          Richmond Federal Reserve President Jeffery Lacker offered similar concerns:

                                                                                          ...Adding up all these categories of spending yields a forecast for GDP growth of just a little above 2 percent — not much different from what we've seen for the last three years.

                                                                                          That's my forecast for this year, but when thinking about growth prospects, I believe it's important to keep an eye on longer-run trends as well. To do that, it's useful to break down real GDP growth into the sum of the growth in labor productivity — that is, output per worker — and the growth in the number of workers. It turns out both of these components have slowed since the Great Moderation. If growth in overall output is going to rise substantially, then we would need to see an increase in labor productivity growth, or in employment growth, or both.

                                                                                          Lacker sees 1% growth in both labor force and productivity combining to deliver roughly 2% underlying growth for the near future, which is also his 2014 forecast - he is less optimistic about a cyclical burst of activity than Bernanke. The central issue is that there is widespread uncertainty about the breakdown of cyclical versus structural factors in the current environment. This is not an impediment to accommodative policy with unemployment at 7%. And the Fed forecasts give the cyclical issues the benefit of the doubt, which allows for policymakers to believe they can delay any rate hikes until 2015. But the uncertainty over the structural/cyclical divide is sufficient to prevent policymakers from dropping the unemployment threshold to 6% or lower and shifting their forward guidance from a forecast to a promise. As of yet, there is no replacement for the Evan's rule, leaving forward guidance more vulnerable to challenges from markets. Markets get ahead of the Fed, Fed beats them back, markets get ahead of the Fed, etc.

                                                                                          Bottom Line: Fedspeak over the weekend was generally consistent with my priors. Policymakers don't want to undershoot the recovery, but I don't sense they want to overshoot either. That points toward cautious withdrawal of accommodation. Pencil in somewhat stronger growth in 2014. Pencil in a steady reduction in the pace of asset purchases until the program winds down at the end of the year. Pencil in an extended period of low rates. But also recognize that the tide of monetary policy is now receding - albeit ever so slightly - with the Fed's first step of ending the asset purchase program. They don't want to do more if they can avoid it, and I don't think the risks are weighted toward a reversal of of their current expected policy path. The data flow would need to turn sharply weaker to prompt the Fed to turn tail and increase the pace of asset purchases. Same too, I think, for changing the unemployment threshold. They would need to be very confident that a new threshold was not locking them into a policy they thought to be too accommodative. Instead, I tend to think the risks are weighted in the other direction, that a positive change in the pace of activity would precipitate a more aggressive withdrawal of accommodation. This is especially the case given the Fed's concerns over the size of the balance sheet, uncertainty with regards to the degree of structural changes to the economy, and resulting hesitancy to lower the unemployment threshold. That said, there will be limits to the degree of hawkishness the Fed would be willing to adopt in the absence of a real change in the inflation outlook. The challenge for the Fed will be containing the idea of a more hawkish policy stance to a risk to the outlook rather than allowing it to become the baseline scenario. With the high tide of policy now in the past, and the discussion turning back to when will policymakers do less, expect financial market participants to keep testing and retesting policymaker resolve.

                                                                                            Posted by on Monday, January 6, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (6) 


                                                                                            Links for 01-06-2014

                                                                                              Posted by on Monday, January 6, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (62) 


                                                                                              Sunday, January 05, 2014

                                                                                              Summers: Strategies for Sustainable Growth

                                                                                              Larry Summers:

                                                                                              Strategies for sustainable growth, by Lawrence Summers, Commentary, Washington Post: Last month I argued that the U.S. and global economies may be in a period of secular stagnation in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come with problematically low real interest rates. ...
                                                                                              More troubling,... there are signs of eroding credit standards and inflated asset values. If the United States were to enjoy several years of healthy growth under anything like current credit conditions, there is every reason to expect a return to the kind of problems of bubbles and excess lending seen in 2005 to 2007...
                                                                                              The challenge of secular stagnation, then, is not just to achieve reasonable growth but to do so in a financially sustainable way. There are, essentially, three approaches. The first would emphasize ... deep supply-side fundamentals: the skills of the workforce, companies’ capacity for innovation, structural tax reform and ensuring the sustainability of entitlement programs. ...
                                                                                              The second strategy, which has dominated U.S. policy in recent years, is lowering relevant interest rates and capital costs as much as possible and relying on regulatory policies to ensure financial stability. ...

                                                                                              He explains why the first two strategies are problematic, especially the second, and moves on to:

                                                                                              The third approach — and the one that holds the most promise — is a commitment to raising the level of demand...
                                                                                              Secular stagnation is not inevitable. With the right policy choices, the United States can have both reasonable growth and financial stability. But without a clear diagnosis of our problem and a commitment to structural increases in demand, we will be condemned to oscillating between inadequate growth and unsustainable finance. We can do better.

                                                                                                Posted by on Sunday, January 5, 2014 at 04:54 PM in Economics | Permalink  Comments (47) 


                                                                                                'A Grand Gender Convergence: Its Last Chapter'

                                                                                                Claudia Goldin's American Economic Association Presidential Address:

                                                                                                A Grand Gender Convergence: Its Last Chapter: Of the many advances in society and the economy in the last century the converging roles of men and women are among the grandest. A narrowing has occurred between men and women in labor force participation, paid hours of work, hours of work at home, life-time labor force experience, occupations, college majors and education, where there has been an overtaking by females.1 And there has also been convergence in earnings, on which this essay will focus. Although my evidence is for the United States, the themes developed are more broadly applicable.
                                                                                                These parts of the grand gender convergence occupy various metaphorical chapters in the history of gender roles in the economy and society. But what must be in the last chapter for there to be real equality?
                                                                                                The answer may come as a surprise. The solution does not (necessarily) have to involve government intervention. It does not have to improve women and desire to compete. And it does not necessarily have to make men more responsible in the home (although that wouldn't hurt). But it must involve alterations in the labor market, in particular changing how jobs are structured and remunerated to enhance temporal flexibility. The gender gap in pay would be considerably reduced and might even vanish if firms did not have an incentive to disproportionately reward individuals who worked long hours and who worked particular hours. Such change has already occurred in various sectors, but not in enough. ...

                                                                                                  Posted by on Sunday, January 5, 2014 at 08:47 AM in Economics | Permalink  Comments (29) 


                                                                                                  Links for 01-05-2014

                                                                                                    Posted by on Sunday, January 5, 2014 at 12:03 AM in Economics, Links | Permalink  Comments (79) 


                                                                                                    Saturday, January 04, 2014

                                                                                                    Looking for (But Not Finding) Shortages of Skilled Labor in the Manufacturing Sector

                                                                                                    Lots of comments lately on the "skills shortage" holding back the economy. Does it really exist? Let's turn to some research from Federal Reserve economists:

                                                                                                    Looking for Shortages of Skilled Labor in the Manufacturing Sector, by Jessica Stahl and Norman Morin, Federal Reserve: Anecdotal reports have suggested that some firms have struggled to find sufficient numbers of skilled workers. For instance, the Federal Reserve's January 2013 Beige Book (PDF) mentioned that "contacts in several [Federal Reserve] Districts reported difficulties finding qualified workers in some specialized fields, such as skilled manufacturing, energy, and IT" (page ix). Here we focus on the manufacturing sector. Although manufacturing currently accounts for only 10½ percent of private employment, the reports of labor shortages are often specific to this sector.1   Indeed, earlier this year, inquiries conducted by the Philadelphia and New York Federal Reserve Banks suggested that skilled labor shortages were a significant factor restraining hiring in the manufacturing sector--though slow expected growth of sales was by far the most important reason cited.2 
                                                                                                    Further information about the extent of skilled labor shortages in manufacturing--and, importantly, how they have changed over time--can be seen in data from the Census Bureau's Quarterly Survey of Plant Capacity Utilization (QPC) and its annual predecessor, the Survey of Plant Capacity (SPC). The QPC, which is jointly funded by the Federal Reserve Board and the Department of Defense, provides the data used to benchmark the Federal Reserve Board's measures of manufacturing capacity. The survey asks roughly 7,500 plant managers about their plants' actual production and total sustainable productive capacities and, when applicable, the reasons that plants are operating below capacity levels of output. 
                                                                                                    The QPC and SPC have indicated fairly widespread labor shortages before. As shown in figures 1 and 2, "Insufficient supply of local labor force/skills" was cited as a factor restraining production by more than 20 percent of survey respondents in the late 1990s and by nearly 15 percent during the expansionary period leading up to the most recent recession.3 

                                                                                                    Figure 1

                                                                                                    Stahl_morin_fig1_20130621

                                                                                                    Figure 2
                                                                                                    Insufficient supply of local labor force/skills as a reason for operating at less than capacity:
                                                                                                    Selected years
                                                                                                    YearPercent of Respondents
                                                                                                    1999 20.4
                                                                                                    2002 7.6
                                                                                                    2006 14.5
                                                                                                    2009 1.5
                                                                                                    2012 5.4


                                                                                                    Note: The data are fourth-quarter values.
                                                                                                    Source: Census Bureau

                                                                                                    The share of plant managers choosing this reason plummeted to less than 2 percent during the recession. The share reporting that skills shortages were a restraint on production has moved up somewhat since then: As of the fourth quarter of last year, the proportion was about 5-1/2 percent (with a standard error of 0.7 percentage point), somewhat below the 7-3/4 percent share it reached in the second quarter of last year. The share citing skill shortages remains below its historical average, and the share is not higher than one would expect given the state of the wider labor market and the amount of slack in the manufacturing sector. In particular, the share is broadly consistent with a regression-based prediction using the unemployment rate and manufacturing capacity utilization. Indeed, both historically and currently, the dominant reason cited by plant managers for operating at less than capacity has been "Insufficient orders" (the red line in the figure); this reason was chosen by nearly 84 percent of respondents at the end of last year (with a standard error of 1.1 percentage points) and remains above its long-run average.4 

                                                                                                    Even when the QPC and SPC data are examined for major industry categories within the broader manufacturing sector, they suggest that skilled labor shortages were not a major factor restraining production in the fourth quarter of 2012 (the latest available data). Figure 3 presents results for two industries that are frequently mentioned in press reports as facing labor shortages: machinery and fabricated metals. Plant managers in these industries historically have been significantly more likely than other managers to report that skilled labor shortages are restraining production: For example, they were mentioned in the late 1990s by one-third of respondents in the machinery industry. However, even for these two industries, the share of survey respondents in recent quarters who cited skilled labor shortages as a reason for operating below capacity has remained well below the share before the recession. 

                                                                                                    Figure 3

                                                                                                    Stahl_morin_fig3_20130621

                                                                                                    All told, while some skilled labor shortages are being reported in the manufacturing sector, the extent to which these shortages are restraining production appear about in line with the current sluggishness in the labor market and the degree of slack in the manufacturing sector. Furthermore, the finding that skilled labor shortages are not a significant and widespread restraint on production is consistent with other data continuing to show subdued increases in the wages and salaries of manufacturing workers.

                                                                                                    1. For instance, the 2011 skills gap report, Boiling Point? The Skills Gap in U.S. Manufacturing Leaving the Board, sponsored by The Manufacturing Institute (an affiliate of the National Association of Manufacturers) and Deloitte, stated that skilled labor shortages were a pressing problem within manufacturing, but noted that "[t]his problem is not new" (p. 1). 
                                                                                                    2. "Cannot find workers with required skills" was the fourth most frequently named factor in the case of New York (where 33 percent of respondents named it among the three most important restraints on hiring) and fifth in the case of Philadelphia (around 25 percent). These figures are lower than in similar inquiries conducted in mid-2012; unfortunately, comparisons are not available for periods before the most recent recession, when the labor market was tighter. 
                                                                                                    3. The responses are weighted by plant-level receipts; unweighted results are similar. 
                                                                                                    4. In addition to "Insufficient orders" and "Insufficient supply of local labor force/skills," the other choices are: "Not most profitable to operate at capacity," "Sufficient inventory of finished goods on hand," "Insufficient supply of materials," "Equipment limitations," "Seasonal operations," "Lack of sufficient fuel or electrical energy," "Storage limitations," "Logistics/transportation constraints," "Strike or work stoppage," and "Environmental restrictions." Respondents may choose as many factors as they deem applicable. 
                                                                                                    Disclaimer: FEDS Notes are articles in which Board economists offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers.

                                                                                                      Posted by on Saturday, January 4, 2014 at 11:38 AM in Economics, Unemployment | Permalink  Comments (63)