At MoneyWatch:
Deconstructing President Trump's jobless numbers: In Donald Trump’s address to Congress last week, he discussed the economy and the policies he intends to pursue. “We must honestly acknowledge the circumstances we inherited [from the Obama administration],” he said. “Ninety-four million Americans are out of the labor force.”
Let’s honestly examine this claim and whether it accurately portrays the circumstances the president inherited. ...
Me, at MoneyWatch:
Not just any kind of tax cut can boost economic growth: President Donald Trump promised last week he would unveil a “phenomenal” tax reform package in the next few weeks. Although no details were offered, Mr. Trump’s past statements suggest that his proposal will adhere to fairly standard supply-side principles.
The idea behind supply-side policy is to encourage more investment, more labor effort and technological innovation through changes in the tax code and regulatory structure.
Have these policies been successful in the past? Are some types of policies better than others at spurring economic growth? To answer those questions, it’s useful to put supply-side policies into broad categories...
I have a new article at MoneyWatch:
Infrastructure, jobs and wages: It's not so simple: Whether Donald Trump implements a major infrastructure rebuilding program remains to be seen, but he has certainly created the expectation that it could happen. The U.S. surely needs more infrastructure spending, and not just on new projects -- updating of existing systems is also needed.
Discussions about increasing outlays on infrastructure frequently include claims about the positive impact these programs would have on employment and wages, often referring to the fiscal policy “multiplier.” For example, it’s often claimed that government spending on infrastructure has a multiplier between 1.5 and 2.
Does this mean we should expect a significant increase in employment and income if the government undertakes major new investment in the nation’s infrastructure? Let’s take a closer look. ...
Me, at CBS MoneyWatch:
America's working age population is finally growing again: For most of the last two decades, the growth rate of America’s workforce has been declining because baby boomers have been retiring at a faster pace than younger workers are entering the labor force. However, the potential workforce recently began growing again. What impact will this have on the economy? ...
Me, at MoneyWatch:
Why interest rates will likely rise faster than inflation: Is higher inflation just around the corner? That seems to be how the bond market sees it: As soon as traders heard Donald Trump had won the presidency, bond yields spiked (chart below). That’s because it’s widely assumed that inflation and interest rates will be higher under Trump than they would have been under Democrat Hillary Clinton.
There are two reasons to expect higher interest rates and rising inflationary pressure with Trump rather than Clinton as president...
I have something at MoneyWatch:
Tax hikes on the wealthy: Good or bad for growth?: Conservatives have argued for decades that tax cuts are the key to economic prosperity. And the tax plan presumptive GOP nominee Donald Trump is pushing would cut taxes for the top 0.1 percent of earners by an average of approximately $1.3 million per year, embracing that conservative point of view.
On the other hand, Democrats such as front-runner Hillary Clinton take another approach. Clinton says she'll reform the U.S. tax code so that the wealthiest pay their fair share. The response from Republicans has been predictable: They argue that such a tax plan will lower growth and harm the economy.
Do the conservative arguments against tax increases have any merit? Or are they, as Democrats claim, a way to serve an ideological goal of smaller government and reward wealthy Republican donors? Let's take a closer look. ...
At MoneyWatch (they choose the titles, not me):
The economic "disease" eating away at the U.S.: It's no secret that productivity -- an essential driver for economic growth -- has weakened in recent years in the U.S. and around the world. Less evident is what, if anything, can be done about it.
"Productivity isn't everything, but in the long run it is almost everything," Nobel Laureate economist Paul Krugman wrote in "The Age of Diminishing Expectations." "A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker." ...
Recent data suggest that pattern is likely to continue for some time.
Over the first three months of the year, productivity increased 0.6 percent. That's below the 1.1 percent rate of growth since the end of the recession, and far below the 2.3 percent average rate of growth from 1990 to the onset of the Great Recession.
What does seem to be a secret is how to fix the problem... What can be done to boost productivity? ...
I have something at MoneyWatch:
Will Election 2016 Soothe Americans' Fears?:... The extent to which employment can recover further depends in large part on the availability of jobs and the wage rate, both of which will be affected by the course of monetary and fiscal policy. If the Fed raises interest rates too fast and too soon, wages and employment will be suppressed, and valuable members of the workforce will never return.
If Congress continues to serve the interests of the donor class rather than the working class, fails to provide the economy with the infrastructure it needs and the jobs that come with it, and forces further reductions in social services through tax cuts and demagoguery over the national debt, the discouragement so many people feel will only get worse. ...
Events in this year's presidential campaign have made it clear that people are unhappy with the present state of the economy. They believe policy has been tilted too much toward the interests of the financial industry, big business and the wealthy -- and that they've been forgotten.
But these problems won't be solved by closing the door to international trade and immigration, by enacting huge tax cuts for the wealthy or by embracing politics that divide us as a nation.
Policymakers at the Fed and in Congress must do all that they can to create jobs and opportunity for those who feel overlooked and forgotten. People are speaking clearly this election cycle: They want jobs, they want opportunity, they want wages to go up and they want inequality in to go down. ...
[The beginning was changed by the editor...]
Tim Duy:
On Credibility: Narayana Kocherlakota and David Andolfatto have been discussing the issue of Fed credibility. This is my effort to weigh in on the topic.
I break the issue of credibility of monetary policy into two parts. The first I think of as “soft” credibility, or the perception that policy needs to follow a proscribed course due to some perceived promise. The second I think of as “hard” credibility, or the expectation that policymakers will pursue policies that maximize its odds of achieving its goals over the long run, price stability with maximum sustainable employment, regardless of perceived promises. We should encourage policymakers to pursue “hard” credibility and avoid communications or actions that lead to policy directed at achieving “soft” credibility.
Let’s step back to last summer. It was widely anticipated that the Fed would hike interest rates at the September 2015 FOMC meeting. Market turmoil in August, however, made the Fed think twice. It also encouraged no shortage of commentary urging the Fed to pursue what I consider “soft” credibility. Via Jon Hilsenrath at the Wall Street Journal:
After months of forewarning by Federal Reserve officials that they are preparing to raise short-term interest rates, some international officials attending the Fed’s annual retreat here this week have a message: Get on with it already.
Fed policy makers are wavering on whether to move rates up in September. Volatile stock prices, falling commodities, a strong dollar and signs of a deepening economic slowdown in China have created doubts at the U.S. central bank about the outlook for global growth.
International officials have been saying for months they will be prepared when the Fed moves rates higher, a message that is being echoed as central bankers, academics, journalists and others converge now in Jackson Hole for the Federal Reserve Bank of Kansas City’s annual symposium.
“If you delay something that you were planning to do, then you leave the impression that your compass is different than what you led markets to believe,” Jacob Frenkel, chairman of J.P. Morgan Chase International and former head of the Bank of Israel, said in an interview Thursday. Market drama is increased by delay, he added.
What I wrote:
Hey, it's been a hard couple of weeks. Things changed. That certain rate hike became a lot less certain. Maybe that changes back by September 17. Maybe not. All of us Fed watchers probably won't come to agreement until September 16. Getting emotional and moralizing about change isn't going to stop it…Stocks dropped sharply. It is a clear sign, on top of other signs, that financial conditions are tightening ahead of the Fed, and arguably too much ahead of the Fed. If the Fed heeds that warning you have to remember that's their job. Smoothly functioning financial markets. Lender of last resort. All that stuff. Maybe things work out just fine if they don't heed that warning. I am not interested in taking that risk. Not enough upside for me.
Ultimately, the Fed took a pass on the September meeting. That I consider favoring “hard” credibility over “soft” credibility. Rather than meet a perceived promise to hike, Yellen & Co. stood down in response to changing economic and financial conditions.
Unfortunately, I fear the Fed took a wrong turn in the October meeting, setting up an expectation that a December hike was a certainty. Fed officials took much grief over their decision to skip September. Market participants subsequently priced out rate hikes for 2015. But the Fed had promised a hike, and they were damn well going to deliver. And they drove the message home in October with this line:
In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.
According to some excellent reporting by Jonathan Spicer, Ann Saphir and Howard Schneider at Reuters:
When the U.S. Federal Reserve tweaked its policy statement last week and put a December rate rise squarely back in play, it took a calculated gamble that reaching for an old and controversial policy tool would get financial markets' attention.
That gamble was to specifically reference the next policy meeting as a date of a possible lift-off, and it had the desired effect: investors quickly rolled back bets that rates would stay near zero until next year.
But interviews with current and former Fed officials, and with those close to policymakers, show the decision to use what is called calendar guidance in central bank parlance and what some described as a "hammer" did not come easy. Some officials felt that even mentioning a date in the context of a potential policy change would be taken not as a contingent expectation but as a promise that would be painful to break...
...Yet Fed Chair Janet Yellen and her deputies got so frustrated that investors virtually ignored their message that a rate rise before the year end was probable that they decided last month it was a risk worth taking, the interviews show.
As a result, futures markets are now giving slightly better-than-even odds that rates will rise from near zero next month, compared with mid-October when the odds were less than 30 percent. In contrast, economists polled by Reuters have been leaning towards a December rate hike even before the Fed's last meeting.
So the Fed wanted to raise rates just to teach markets a lesson? Maybe the message was ignored because it was the wrong thing to do and market participants expected the Fed to pursue "hard" over "soft" credibility? More telling was this line:
On Oct. 16, Dudley got an earful from Wall Street bankers and economists on a New York Fed advisory panel criticizing the Fed for its muddled message, according to three people who attended the meeting.
The interviews with Fed officials and those close to the central bank suggest that it was around this time that the plan to hint at December in the next policy statement started taking shape.
That sounds as if Dudley was falling prey to the fetish of “soft” credibility. We need to pick a message and stick with it. That's what the guys on Wall Street say. They say we are going to loose our credibility. We need to get ahead of that.
And perhaps this is why the Fed’s decision in December always felt forced. Me, in December:
Given that the Fed likely only gets one chance to lift-off from the zero bound on a sustained basis, it is reasonable to think they would wait until they were absolutely sure inflation was coming. Even more so given the poor performance of their inflation forecasts. But the Fed thinks there is now more danger in waiting than moving. And so into the darkness we go.
I don’t think the Fed would ever admit December was a mistake, but at a minimum the decision to hold pat in March and dramatically mark down their rate expectations for further rate hikes in 2016 tells me the Fed thought they were certainly on the verge of making a major policy error and pulled back quickly. In my framework, the Fed shifted back to seeking to preserve “hard” credibility.
That said, note the tendency to try to goad the Fed right back into seeking “soft” credibility. From the March press conference:
Steve Liesman, CNBC. Madam Chair, as you know, inflation has gone up the last two months. We had another strong jobs report, the tracking forecasts for GDP have returned to 2 percent, and yet the Fed stands pat while it’s in a process of what it said it launched in December was a “process of normalization.” So I have two questions about this: Does the Fed have a credibility problem, in the sense that it says it will do some—one thing under certain conditions but doesn’t end up doing it? And then, frankly, if the current conditions are not sufficient for the Fed to raise rates, well, what would those conditions ever look like?
I hope Fed policymakers remain resistant to such taunts.
The Fed is especially vulnerable to the problem of “soft” credibility when they lay down specific markers. The infamous dot-plot is one such marker. Policymakers have difficulty explaining the dot-plot is not a promise of future action; it is nothing more than a guideline. But the instant they establish that guideline, the mere fact that it induces some market participants to believe a promise has been made creates the belief that not meeting that promise will cost the Fed credibility. “Soft” credibility. The Fed needs to distinguish between this and “hard” credibility.
Another such marker is the 2 percent inflation target. Although Fed officials have repeatedly warned that they assume there will be symmetric errors around the target, we don’t know that until we actually have above-target inflation. The rule was created in an era of below-target inflation, so it is easy to say the Fed lacks credibility on the inflation target. I have said so. But I have come to perceive this as another instance of “soft” credibility. I worry that if the Fed becomes concerned about their supposed credibility from inflation at 50bp below target, they will overreact to inflation that is 50bp above target. What we really want is the Fed to maintain inflation within 50bp of target without triggering a recession. That would be the “hard” credibility of meeting the Fed’s mandate over the long run.
Bottom Line: The Fed should be playing the long game. In my opinion, that means pursuing the “hard” credibility of choosing the path most likely to meet their mandate over the long run. This may require sacrificing some “soft” credibility along the way. That means not hiking rates – or hiking rates – despite a perceived promise to do the opposite. The Fed should not fret over those costs. They are minor and quickly forgotten. And worse yet, being a slave to the fetish of “soft” credibility only raises the odds of a policy error. They will do less harm by breaking their “promise” than by keeping that promise via a poor decision.
At MoneyWatch:
Why the Fed should allow wages to rise, by Mark Thoma: On Wednesday, the Federal Reserve's Open Market Committee announced its decision to leave its target interest rate unchanged. I believe that was a wise decision. However, the committee noted that labor market conditions will be a key part of its decisions about future rate increases:
A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. ...The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. ...In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. ...In assessing the need for future rate increases, it's important to take a closer look at one component of labor market conditions: how wage increases have been distributed. In 2015, wages increased by 2.2 percent, enough to outpace inflation over that period by a small margin, and wages have continued to rise at close to this rate, but how has that growth been distributed?
According to a recent analysis by the Economic Policy Institute, the growth in wages adjusted for inflation, or alternatively, wages and benefits adjusted for inflation, has been concentrated among those at the top of the income distribution since the onset of the Great Recession (chart below). ...
At MoneyWatch:
Rising insecurity and the rise of Trump and Sanders, by Mark Thoma: Capitalism is the best economic system yet invented for producing economic growth and satisfying the diverse desires of millions and millions of people. The key to its success is the ability to respond quickly to changes in economic conditions.
But this comes with a cost that has been magnified by the failure of our political system to protect the people who pay the price of capitalism's dynamism, a failure that has fueled the economic insecurity that's helping the rise of Donald Trump and Bernie Sanders. ...
See also: Why the Working Class Is Choosing Trump and Sanders.
Couldn't resist commenting on this:
Where Fed's critics got it wrong in GOP debate, by Mark Thoma: The Federal Reserve was instrumental in easing the impact of the Great Recession. As bad as the downturn was, it could have have been worse if central bankers hadn't aggressively used monetary policy to curb the severity of the crisis and help put the U.S. economy on the path to recovery.
So it has been disappointing to hear Republican presidential candidates bash the Fed in their debates and on the campaign trail. ...
Rhys Bidder of the SF Fed (I should probably note that these are his views, not the Fed's, though I hope the Fed is paying attention):
Are Wages Useful in Forecasting Price Inflation?, FRBSF Economic Letter: Wages and prices are closely related. Wages are an important part of businesses’ costs and are thus tied to their pricing decisions. Similarly, people take the general level of prices into account when figuring out how much pay they deserve for their work. It is intuitive, therefore, that wage data could contain important information about prices and, in particular, might be useful for forecasting price inflation. Indeed, the recent declines in some wage indicators following hints of strengthening earlier in the year have raised questions about what this might mean for future inflation.
In this Letter I summarize what research can tell us about whether or not wage data are, in fact, informative for future price inflation. Overall, the literature suggests that wages do not provide significant additional information beyond what can already be gleaned from other sources, including prices themselves. ...
In classical economic theory, the labor market clears at a nominal wage that makes labor supply equal to labor demand. Both supply and demand depend on the face value of wages relative to the overall price level—typically called the “real wage” because it shows how much can be bought with the wage at current prices. The real wage determines the benefit to the worker of working and the real cost to the business of employing that worker.
In the long run, the real wage is determined by factors such as productivity, bargaining power, and the ability of firms to mark up prices over costs. Consequently, prices and nominal wages must adjust relative to each other to be consistent with these fundamentals. ...
However, while the connection between wages and prices is relatively well understood in the long run, their short- to medium-run relationship is not so simple. Wages and prices may fluctuate relative to each other in response to transitory influences and to restore their long-run relationship. The bargaining power of firms and workers may vary and productivity may change temporarily. Even if there are no long-run trends in these variables, there may be changes in their steady-state relationships that lead to transient but long-lasting adjustments. These phenomena introduce complicated dynamics into the relationship between wages and prices that determine how useful wage data are for forecasting inflation. ...
These results do not imply that wages and prices are unrelated. Certainly they are tied together in the long run, and wage data will surely contain some information for future price inflation. However, after incorporating information from prices and activity measures, the marginal additional benefit of using wage data appears small. ...
Fundamentally, the weak forecasting power of wages for prices suggests that unexpectedly high or low inflation could occur regardless of the recent behavior of wages. Thus, as ever, policymakers must be vigilant to ensure policy is consistent with the targeted inflation rate. ...
Researchers have extensively studied how wage data might help predict future price inflation. The overall conclusion of the literature is that wages generally provide less valuable insight into future prices than some other indicators. In fact, models that do not incorporate wages often result in superior inflation forecasts.
At Moneywatch, a discussion of the Atlanta Fed's new ZPOP measure of the labor market's performance:
How will the Fed know if we've hit "full employment"?: How close are we to full employment? That is a crucial question for the Federal reserve, and the answer plays a crucial role in the Federal Reserve’s decision about when to begin raising its target rate of interest.
According to the most recent data, the unemployment rate is 5.1 percent, a level that historically has been at or very near full employment. But there are well-known problems with the “headline” unemployment statistics such as the failure to account for discouraged workers, underutilized workers, and demographic effects. When these factors are accounted for, and when other statistics such as the prime-age employment to population ratio are examined, the labor market picture does not look as rosy. But there is still considerable uncertainty about the true state of the labor market, and researchers at the Atlanta Fed have developed an alternative to standard labor market measures that hopefully gives a clearer picture of where we stand. ...
[The editors always change the title/introduction, and there are usually other edits as well, but I never read the new versions to avoid becoming annoyed at the changes (I don't approve changes, they are simply made).]
I often forget to post the link to my MoneyWatch pieces:
Republicans and Climate Change: What should we do about climate change? When Jake Tapper asked that question at the Republican debate Wednesday night, the candidates were united in their view that the economic costs of fighting climate change are much larger than the potential benefits.
Florida Senator Marco Rubio, for example, said "Every proposal they (Democrats) put forward will make it harder to do business in America. Harder to create jobs in America." New Jersey Governor Chris Christie had similar sentiments. "We shouldn't be destroying our economy in order to chase some wild left-wing idea that somehow us by ourselves is going to fix the climate," he said. And Wisconsin Governor Scott Walker responded with: "We're going to put people -- manufacturing jobs -- this administration is going to put them at risk."
The skepticism among those on the political right about the benefits of addressing climate change could be at least partly based on the apparent pause in global warming from 1998-2013. But according to work from a group of researchers at Stanford University, that "hiatus" is a statistical artifact. The climb in temperatures hasn't paused at all.
Given that, and the voluminous scientific evidence indicating that global warming is a substantial threat, it's important to understand the extent to which climate change will affect the economy. Will the loss to GDP be large (so that the benefits of abatement are also large)? Will the impacts be equally distributed across geographic regions? Is it possible that some regions will actually benefit from global warming? ...
Why trade deals don't get more public support, by Mark Thoma: Although President Obama supports the Trans-Pacific Partnership (TPP) trade agreement, he's running into resistance from many progressives. Why are they opposed to a deal that negotiators have worked on for years, includes the U.S. and 11 Pacific Rim nations (but not yet China) and accounts for 40 percent of the global economy? ...
Update: See also Americans Get Free Trade's Dark Side - Noah Smith.
At MoneyWatch:
Low-income loans didn't cause the financial crisis, by Mark Thoma: What caused the housing bubble and collapse of the financial system? Many fingers have pointed to a lack of regulation, financial innovation that didn't live up to its promises of risk-sharing and risk-reduction, and low interest rates from the Fed, which created an excess of liquidity.
Another cause that's often cited says the financial crisis was the result of government pressure to make subprime home loans to those at the lower end of the income scale. But recent work from the National Bureau of Economic Research provides no support for that claim. ...
At MoneyWatch:
Some Good News for the Unemployed: There has been considerable discussion of the “hollowing out” of middle class jobs in recent years, a trend that started before the Great Recession. But where do those who have lost their jobs go? Do they end up with low paying service jobs, McJobs as they are sometimes called, or do they move up the ladder to higher paying jobs?
Many people believe that most people who lose middle class jobs end up worse off than before, but recent research by Ellie Terry and John Robertson of the Atlanta Fed finds some surprising results. ...
At MoneyWatch:
The Long-Term and Short-Term Unemployed are Remarkably Similar
Or, as I said here, we shouldn't ignore the long-term unemployed.
At Moneywatch:
The Permanent Effects of the Great Recession
It was edited quite a bit, e.g. here is my opening for comparison:
Economists have long believed that shocks to aggregate demand are temporary. It might take time to return to the previous trend rate of output growth, years in some cases, but given enough time the economy will return to the pre-recession path. This graph from Nobel Prize winning economist Robert Lucas, for example, illustrates this point of view. The red line is trend economic growth, and the blue line shows how aggregate demand shocks cause the economy to deviate from the trend, and then return.
[Graph]
However, the experience of the great recession along with recent work such as “Potential Output and Recessions: Are We Fooling Ourselves?” from economists Robert F. Martin, Teyanna Munyan, and Beth Anne Wilson at the Federal Reserve call this into question. ...
Me, at MoneyWatch:
Yes, immigration does help domestic workers: The contentious debate over immigration in both the U.S. and Europe is largely based on the worry that immigration hurts domestic workers, particularly low-skilled workers. But is this actually true? Could this concern over immigration be misplaced? Could it be that immigrants actually help native workers? ...
Me, at CBS MoneyWatch:
Is it worth spending to make workers happy?: Numerous studies have found a correlation between employee satisfaction and company success. Does this mean happy employees are also the most productive workers? Should firms spend money to make workers happier with their jobs?
Answering these questions is trickier than it might seem at first glance. ...
I have a new article at MoneyWatch:
Stiglitz: Making the case for industrial policy: Nobel Prize winning economist Joseph Stiglitz's latest book, "Creating a Learning Society: A New Approach to Growth, Development, and Social Progress," co-written with Bruce C. Greenwald, takes on one of the most sacred ideas in economics, the benefits of free trade between nations. Ever since Adam Smith and David Ricardo pointed out the benefits of absolute and comparative advantage, economists have promoted the advantages of specialization and trade among nations: Protectionism of markets or industries within a country is to be avoided, and open markets are the key to prosperity for all.
There may be winners and losers within a country, with an example of the latter being workers who become unemployed as production moves to countries with an advantage in a particular industry. Still, it's generally possible to compensate the losers and still have enough left over to make everyone in a country better off.
But is this true always and everywhere? If not, what are the exceptions to the argument that free trade has the potential to make everyone better off? And when is protectionism in one form or another justified? ...
I have a new "explainer" -- their term -- at Moneywatch:
Explainer: Why is deflation so harmful?, by Mark Thoma, CBS News: John Makin, writing for conservative-leaning think tank the American Enterprise Institute, warned on Monday that "Now is the time to preempt deflation." Conservatives are usually inflation hawks. So, why are some of them calling for "aggressive monetization" to avoid the deflation threat in the U.S. and Europe?
Deflation is an actual fall in prices, rather than just the inflation rate getting lower, which is call disinflation. Recall that the fear of deflation was the main reason the Federal Reserve instituted the first round of quantitative easing. What was the Fed so afraid of?
There are three main reasons to fear deflation. ...
My latest "Explainer" At CBS MoneyWatch:
What is the best way to measure inflation?
Should CPI vor PCE be used, and should it be core or overall inflation? It depends...
At CBS MoneyWatch, my latest "explainer":
Explainer: What is "moral hazard"
What it is, and what to do about it.
At MoneyWatch, a very basic explanation of how the Fed changes interest rates to stimulate or slow the economy:
In addition to discussing traditional policy, there's also a brief discussion of quantitative easing and how it works.
I have a post at CBS MoneyWatch:
[Traveling today, so not sure how much I'll be able to post...]
A few (later than hoped for) comments on Ben Bernanke's testimony this morning before the Senate Banking Committee:
I guess it continues a theme.
A few thoughts on economic policy during Obama's second term. I'm a bit worried that unemployment is going to remain a persistent problem:
[There were a few edits I wouldn't have made, e.g. the phrase "Now that we know it will be Obama on the economic tiller," but nothing substantive.]Economic Policy during President Obama's Second Term, CBS MoneyWatch
A few things on the election I posted elsewhere:
And, at both sides:
I posted the graph showing that the US has the highest share of employees performing relatively low wage work at CBS News:
Tim Duy:
More on Rigid Nominal Wage Growth, By Tim Duy: Paul Krugman looks at the evidence on nominal wage rigidities here and sees additional reason to believe the primary economic challenge is a demand shortfall. He concludes with this point:
Oh, and someone is sure to chime in and say that this proves that the solution to unemployment is to make wages more flexible. No, it isn’t: in a liquidity trapped, deleveraging economy lower wages would actually worsen the situation.
It is important to emphasize this point, and Japan provides a good example. Via the Financial Times:
..Bonuses have been coming under heavy pressure in Japan for years as part of a wider effort to restrain incomes.
And while workers around the developed world have been complaining of a squeeze on incomes over the past two decades, in Japan thinner pay packets fuel wider deflation. That makes it even harder for the government to rein in its runaway debt and for the central bank to use monetary policy to boost growth...
...While policymakers bemoan the salary squeeze, political pressure is growing for heavy cuts to public sector pay as a quid pro quo for a proposed doubling of Japan’s 5 per cent consumption tax. Shortly after becoming prime minister last year, Yoshihiko Noda – already Japan’s poorest premier on record – gave himself a 30 per cent pay cut.
I think the role of role of bonuses in driving Japan's deflation is underappreciated. The bonus system allows for more flexible wages, thus allowing for the real possibility of negative nominal wage growth and thus deflation. In contrast, downward nominal wage rigidities in the US reduce the likelihood of deflation, but lessen the resolve of monetary policymakers to stimulate activity - for example, see the efforts by St. Louis Federal Reserve President James Bullard to argue that existence of low rates of inflation is evidence that the economy is operating at potential rather than see the flattening of the relationship between unemployment and inflation as a straightforward outcome of downward nominal wage rigidities.
One of the editors asked for comments on a new survey of business executives about what is holding back the economy:
No surprise that, as with other surverys like this, the most common factor cited is lack of demand.
Tax increases will be needed to close the budget gap:
Will Tax Increases to Close the Deficit Harm Economic Growth?, by Mark Thoma, CBS News: Politicians want you to believe tax increases will kill the economy. They won't.
COMMENTARY The CBO's latest Budget and Economic Outlook showing the magnitude of the long-run budget problem we face is another reminder that the considerable long-run deficit problem we face cannot be solved by program cuts alone -- the cuts required would be too deep to be acceptable -- an increase in revenues is needed.
If that's true, why are politicians, particularly those on the right, taking such a strong stance against tax increases of any kind? Taking a hard line on tax increases and insisting on program cuts is an attempt to make as much of the adjustment as possible accord with their ideological preference for smaller government. But politicians understand that enhanced revenue will be part of the final package even if their political posturing suggests otherwise.
But there is another reason for this posturing against tax increases beyond the hope for a smaller government. The resistance to tax increases is also over who will end up paying the increased revenue. Will it be tax increases for the wealthy, closing deductions such as mortgage interest, tax increases for the middle class, etc.? Who, exactly, will foot the bill?
This is evident in the testimony of Doug Elmendorf before Congress today explaining the CBO's findings. From the Atlantic:
...it's no surprise that Doug Elmendorf's appearance before Congress today was dominated by political grandstanding, as members asked extremely loaded questions designed to get Doug Elmendorf to say that we should close the hole by either raising taxes or cutting spending. Elmendorf ably ducked these attempts to lead him, but you could see him steeling himself every time a new congressman took their turn.As this issue heats up, you will hear again and again that tax increases, particularly on the wealthy, will depress economic growth. However, as I detailed in a previous article, there's very little evidence that tax changes of the magnitudes and types being considered will have a significant impact on economic activity:
Economic theory helps us to determine which types of taxes are best in terms of efficiency, but the equity of taxes -- who pays them and whether it's fair -- also matters. Questions of equity must be resolved in the political arena, economics cannot help here, and equity is one of the factors that determines whether a tax is feasible. If allowing the Bush tax cuts to expire for the wealthy is the only acceptably equitable way to raise taxes in this political environment, then there is little evidence that this will be harmful. The cost of allowing these tax cuts to expire is low, and there is much to be gained in terms of reducing our long-term budget problem.There are ways to produce negative effects from tax increases, and there are ways to harm growth through program cuts as well, I don't mean to imply otherwise. But despite the concerted attempts to make people think their jobs are on the line if certain types of tax increases, e.g. for the wealthy, are put into place, given the plans on the table this is fundamentally a political issue about the size of government and how to pay for it equitably rather than an issue about avoiding economic harm. In fact, if avoiding harm to individual households in one form or another is an important objective alongside deficit reduction, as I think it should be, we should worry just as much about program cuts as tax increases.
My response to the economic policies discussed by president Obama in the State of the Union address (no link yet):
SOTU: The president's economic proposals, Commentary, CBS News: Prior to president Obama's State of the Union address I said he should do two things, defend the administration's economic policies to date, and talk about what will be done from this point forward to solve the nation's economic problems.
However, except for the bailout of the auto industry and a brief mention of a few other successful initiatives such as financial reform, the president didn't say much about his administration's past economic policies. In retrospect, that was probably wise. Trying to convince people that the stimulus and bailout policies were more effective than they realize simply brings these issues into the limelight. The policies were very unpopular, and arguing with the public about their success is a losing proposition. It's better to look ahead. As Obama said in the speech:
I want to speak about how we move forward, and lay out a blueprint for an economy that's built to last -- an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values.
The president began the discussion of his economic initiatives by outlining a proposal to revive manufacturing in the US. The plan is to use tax breaks to encourage companies to locate in the US, to keep jobs at home by eliminating tax advantages for companies that move offshore, to lower corporate taxes in the US, and to appeal to the goodwill of US companies (who should do what they can do to bring jobs back to this country).
He also wants to boost exports. To this end, he proposed more trade agreements (and lauded those the administration has already put into place), and he highlighted the creation of a "Trade Enforcement Unit that will be charged with investigating unfair trade practices in countries like China."
Finally, the plan to revive economic growth and employment also involves more support of small businesses, e.g. tax cuts and a reduced regulatory burden, support for research and development (particularly in energy related areas), mortgage refinancing for "responsible" homeowners," an extension of the payroll tax cut, and a plan to repair crumbling infrastructure.
The plan the president outlined is fine as far as it goes, but I wanted a jobs plan that was big and bold. I wanted a plan that puts immediate job creation at the forefront. However, this plan is largely tax cuts, it's piecemeal, and it's mostly directed at our long-run problems. Bringing business home doesn't happen overnight, R&D takes time, so does infrastructure, and so on. Millions of people need jobs now, not later. They don't have time to wait, for example, for manufacturing to move from China back to the US, and there's no certainty that will happen in any case. What was missing from the speech is a strong, coherent plan to create jobs immediately. Don't get me wrong, we need to address our long-run problems. But we also need to get people back to work as soon as possible.
Obama's education initiatives also deal with long-run rather than short-run issues. His call to improve education at all levels, and to make sure higher education is available to everyone is certainly welcome and it would help us in the long-run, but it won't create many jobs over the next few months. He does call for improved job retraining programs, and "a national commitment to train two million Americans with skills that will lead directly to a job," but even those programs will take time to put into place.
He also mentioned other issues in the speech such as the budget deficit and the need to regulate markets, financial markets in particular. The most notable proposals are his plan to impose a minimum 30 percent tax rate for incomes over a million dollars per year, and the surprisingly strong commitment to pursue financial fraud. The administration will create "a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people's investments." Obama will also ask the Attorney General "to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis." This is very much needed, and should have been done long ago.
Finally, in my list of recommendations I also mentioned the need to hammer Republicans over obstructionism, and on this topic the president said "I intend to fight obstruction with action." I'm not exactly sure how that works, but at least he mentioned the issue.
Right now, there are millions of people unemployed. That's a poor state of the union -- we have an employment crisis -- and putting people back to work ought to be treated as a national emergency. Though I am less enthusiastic than the administration about an export led strategy for economic growth, the speech hit many of the right notes where our structural problems are concerned. And there were certainly nods toward our short-run problems as well. But a strong sense of urgency about our immediate employment problem was missing from the speech. It's probably wise politically not to promise to create jobs between now and November. That could backfire if unemployment falls sluggishly or not at all (and if unemployment falls at a relatively fast pace, the administration can still claim credit). Nevertheless, I would have preferred a more concerted and detailed effort to deal with our immediate employment problems.
This is something I wrote on Friday for CBS on how long it will take the economy to recover, but it didn't get posted until today:
Are we there yet?
I noted that policy can speed the recovery, and that we are not doing enough -- hence the forecast for a slow recovery. But I wish I would have emphasized the point made by Christina Romer a bit more, i.e. that even though the recession is due to a financial collapse, and recovery from this type of recession is notoriously slow, we are not destined to have our own lost decade. Effective policy can shorten the recovery time. But as things stand now, including the forecast for (the lack of aggressive) policy, it's hard to see how things can turn around anytime soon.
A few comments on today's FOMC decision:
I have some comments on the GDP report:
The main message is that even though the number improved over last quarter, "policymakers should not conclude that they are off the hook."
To state the obvious, we need to create a lot more jobs per month than we have so far. If we continue at present rates, the unemployment rate will stay constant or increase even further. Even if we duplicate the performance of the economy prior to the recession, it will take four years to reach an unemployment rate of 7%. Thus, to get out of this in a reasonable amount of time we need job creation to accelerate considerably, and it's hard to see that happening without help from Congress. Unfortunately, Congress pretends to "feel your pain," but they don't seem to really understand how hard it is for those who are struggling with unemployment -- that this is a crisis requiring immediate, agressive action -- and it's hard to imagine that Congress will give labor markets the amount of help they need. So no need to hold on to your hats, it looks like we're headed for a very slow ride:
Two more job market charts, macroblog: ...Payroll employment growth has averaged about 110,000 jobs a month since February 2010, the jobs low point associated with the crisis and recession. This growth level compares, unfavorably, with the 158,000 jobs added per month during the last jobs recovery period from August 2003 (the low point following the 2001 recession) through November 2007 (the month before the recent recession began). One hundred and ten thousand jobs a month compares favorably, however, to the 96,000 job creation pace so far this year.
Are these sorts of differences material? ...[W]ith a few assumptions, such as the presumptions that the labor force will grow at the same rate as census population projections (for the aficionados, my calculations also assume that the ratio of household employment to establishment employment is equal to its average value since January of this year), the unemployment rates associated with job growth of 158,000, 110,000, and 96,000 per month would look something like this:
These paths are just suggestive, of course, but I think they tell the story. The same jobs recovery rate of the prerecession period would get the unemployment rate down below 7 percent in four years or so. But at the pace we have been going this year, things get worse, not better.
There is a lot of discussion on how the Fed will react to the jobs report in its meeting this month, e.g. here and here. My view is that if the Fed is moved to action by the report -- and it is not at all certain that they will be -- they will do the least they possibly can while still looking like they are doing something about the problem.
What is the least they can do while still satisfying the demand for action? One option is to change the average duration of the assets they hold on their balance sheet by trading short-term for long-term assets (i.e. lengthen the average duration of the portfolio). This could bring down the long end of the yield curve a bit -- not much as there isn't all that much room for long-term rates to fall -- and perhaps stimulate economic activity. However, it's hard to see how a fall in long-term interest rates of such a small magnitude will produce a change in investment and a change in the consumption of durables such as cars and refrigerators of the magnitude that is needed. If there is a response from consumers and businesses to a small drop in the long-term rate, it will be far, far short of what we need.
Another option would be to cut the rate the Fed is paying on reserves held in banks. Ben Bernanke has stated this would disrupt the overnight federal funds market, so I think this is unlikely, but it could be cut, say in half from its current level of 0.25%, or even to zero. Any change in this rate can be reversed quickly if needed, so it's not a very risky option -- that's why I think it is one potential response -- but again I don't think it would do a lot of good. The problem isn't the supply of loans, it's the demand, and this wouldn't do much to stimulate new demand.
The Fed has already used up another option that doesn't require much actual action -- committing to low interest rates for an extended period of time -- but so far that hasn't seemed to have helped much. The options after that such as QE3 or adopting (and then trying to hit) a higher inflation target require much more action from the Fed and are likely to be resisted.
But things are much worse than the Fed thought they would be, the green shoots they keep pointing to whither away as soon as they depend upon them, and it's time -- way past time actually -- to quit hoping things improve and take the possibility of an extended period of stagnation seriously. I blame fiscal policymakers more than the Fed, fiscal policy is our best hope for job creation and we should have had a large job creation program in place long ago. But we need both policy barrels pointed at this problem, it's too large to solve without both policies working together, and it's time for the Fed to quit hoping a miracle saves them from the hard decisions they need to make and to move forward with more aggressive policy.
Here's my reaction to today's the FOMC meeting:
"For once, I'd like to see the Fed get out in front of the problem, and with the recent emergent signs of weakness on so many fronts, now would have been a great time for the Fed to show it can do more than look in the rear view mirror."
The editors at MoneyWatch asked for a comment on the "Gang of Six" deficit reduction proposal:
Will the Return of the Gang of Six End the Debt Ceiling Showdown?: As I explain, I don't think so, but the Gang of Six proposal may help to guide the actual agreement, and the size of the immediate cuts in the proposal ($500 billion) is worrisome given the state of the economy.
At MoneyWatch:
[This borrows from an op-ed in the local paper: Interest rates not the only way the Fed boosts economy, by Tim Duy and Mark Thoma.]
The editors at MoneyWatch asked me to comment on the tax repatration proposal that's been floated as a way to increase investment and create jobs:
A Tax Holiday for Repatriated Corporate Profits: The Costs Exceed the Benefits
Here's my reaction to the Fed's press release from the FOMC meeting that ended today:
The statement was expected, but not at all what I wanted to hear.
I just added some comments on Bernanke's press conference.
Update on Bernanke's Press Conference: Bernanke all but ruled out QE3. In response to a question about whether the Fed is considering further easing, Bernanke noted that this is a committee decision, it's not his to make alone, but he gave two main reasons why the Fed is reluctant to pursue additional asset purchases. First, when the Fed decided to put QE2 in place, there were substantial worries about deflation. Thus, the Fed was missing both elements of its dual mandate by a wide margin, and further easing would help to increase inflation and stimulate output. Now, however, although the output gap is still large, the Fed is starting to see signs of inflation. Bernanke stated that most people underestimate the negative impact inflation can have on growth and employment, and this indicates the Fed will not be willing to increase the risks that inflation will become a problem.
The other reason he gave for being wary of further easing is that the Fed is starting to increases in wages. Thus, the Fed is worried about an emerging wage-price spiral, and it is determined to stop this from happening. A wage-price spiral was a big problem in the 1970s and the beginning of the 1980s, and memories of this episode make the Fed unlikely to do anything that might cause it to happen again.
In the past, Bernanke has also stated that the Fed is in unfamiliar territory with the inflated balance sheet from QE1 and QE2, and that creates a lot of uncertainty about how much inflation risk the Fed has created. This also works against further easing.
Finally, in his presentation of the Committee's forecasts of where the economy is headed, Bernanke noted that most committee members expect relatively strong output growth next year, and that is another reason why the committee is thinking more about when to begin tightening than it is about further easing.
There were many questions about this, i.e. when the Fed might begin tightening policy, but Bernanke was very careful not to tip his hand. He said it will depend on how the recovery progresses, but as noted above most Committee members expect relatively strong growth next year.
If the economy weakens considerably, anything is possible, but there's no indication at this time that the Fed has any inclination toward further easing.
One more thing. As I've said a couple of times recently, I think it's a mistake for the Fed to look past the current slowdown in the recovery (it should ask itself how often it has had to downgrade its forecasts in the past). This is a critical point in the recovery, and if the Fed makes the wrong choice, it could make things worse than they need to be. I didn't expect to hear news of further easing at this meeting, but I did hope to hear a bit more willingness to consider it.
One of the editors at CBS MoneyWatch asked me what I thought of this story at Foxnews.com:
U.S. Offers Foreign Aid to Countries Holding Billions in Treasury Securities, FoxNews.com
The story claims that foreign aid to countries like China creates a dangerous "co-dependency" where we give foreign aid in rerurn forpurchasing our debt.
I'm not sure I got this right, so (constructive) comments are welcome.
At MoneyWatch:
I don't say anything particularly novel, it's just another futile attempt to prevent us from repeating the errors of the past.
The editors at MoneyWatch wanted someone to talk about reports that John Boehner will demand spending cuts that equal or exceed any increase in the debt ceiling, in particular how it might affect the recovery. I took the bait and did some rough, back of the envelope calculations of the impact on output and employment:
John Boehner's Premature Austerity
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