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September 9, 2011

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Paul Krugman: Setting Their Hair on Fire

Posted: 09 Sep 2011 12:42 AM PDT

Obama's jobs plan was "bigger and bolder than expected':

Setting Their Hair on Fire, by Paul Krugman, Commentary, NY Times: First things first: I was favorably surprised by the new Obama jobs plan, which is significantly bolder and better than I expected. It's not nearly as bold as the plan I'd want in an ideal world. But if it actually became law, it would probably make a significant dent in unemployment. ...
Before I get to the Obama plan, let me talk about the other important economic speech of the week ... given by Charles Evans, the president of the Federal Reserve of Chicago. Mr. Evans said, forthrightly, what some of us have been hoping to hear from Fed officials for years now.
As Mr. Evans pointed out, the Fed, both as a matter of law and as a matter of social responsibility, should try to keep both inflation and unemployment low — and while inflation seems likely to stay near or below the Fed's target of around 2 percent, unemployment remains extremely high.
So how should the Fed be reacting? Mr. Evans: "Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn't any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market."
But the Fed's hair is manifestly not on fire, nor do most politicians seem to see any urgency about the situation. ...
O.K., about the Obama plan: It calls for about $200 billion in new spending ... and $240 billion in tax cuts. That may sound like a lot, but it actually isn't. ... And it's unclear, in particular, how effective the tax cuts would be at boosting spending.
Still, the plan would be a lot better than nothing... As I said, it's much bolder and better than I expected. President Obama's hair may not be on fire, but it's definitely smoking; clearly and gratifyingly, he does grasp how desperate the jobs situation is.
But his plan isn't likely to become law, thanks to Republican opposition. And it's worth noting just how much that opposition has hardened over time... Republicans are against tax cuts — at least if they benefit working Americans rather than rich people and corporations. And they're against monetary policy, too. ...
So, at this point, leading Republicans are basically against anything that might help the unemployed. ...
The good news in all this is that by going bigger and bolder than expected, Mr. Obama may finally have set the stage for a political debate about job creation. For, in the end, nothing will be done until the American people demand action.

Fed Watch: Ben Speaks

Posted: 09 Sep 2011 12:24 AM PDT

Tim Duy:

Ben Speaks, by Tim Duy: Federal Reserve Chairman Ben Bernanke took the stage today, providing few hints about the path of monetary policy in the months ahead. Market participants were hoping for more specific details on what the Fed has up its sleeve at the next meeting, but got more of the same:

In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. My FOMC colleagues and I will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September and are prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability.

More interesting was his extended comments on inflation:

However, inflation is expected to moderate in the coming quarters as these transitory influences wane. In particular, the prices of oil and many other commodities have either leveled off or have come down from their highs. Meanwhile, the step-up in automobile production should reduce pressure on car prices. Importantly, we see little indication that the higher rate of inflation experienced so far this year has become ingrained in the economy. Longer-term inflation expectations have remained stable according to the indicators we monitor, such as the measure of households' longer-term expectations from the Thompson Reuters/University of Michigan survey, the 10-year inflation projections of professional forecasters, and the five-year-forward measure of inflation compensation derived from yields of inflation-protected Treasury securities. In addition to the stability of longer-term inflation expectations, the substantial amount of resource slack that exists in U.S. labor and product markets should continue to have a moderating influence on inflationary pressures. Notably, because of ongoing weakness in labor demand over the course of the recovery, nominal wage increases have been roughly offset by productivity gains, leaving the level of unit labor costs close to where it had stood at the onset of the recession. Given the large share of labor costs in the production costs of most firms, subdued unit labor costs should be an important restraining influence on inflation.

A couple of points. First, he takes the inflation boogeyman off the table for the time being. Not only are temporary factors easing, but long-term expectations remain stable and wage gains are subdued. Focus more, however, on the inflation expectations story – clearly Bernanke is not phased by the deterioration in the five and ten year-forward breakevens. The ten year in particular still hovers well above the levels that triggered QE2.

So where are we at? The deterioration in the real economy coupled with moderating inflation suggests more easing is at hand. Indeed, we know there is a growing dovish FOMC group that desires more aggressive policy. But how aggressive? Chicago Federal Reserve President Charles Evans desires a relatively aggressive stance that includes allowing inflation to drift up to 3% at least temporarily. But I don't think we will get something like that. And I can't see a return to quantitative easing short of a real deflation threat – I don't see the core of the FOMC or Bernanke himself supportive of such a step at this time. Ditto for allowing the inflation target to drift upward.

If higher inflation targets and an open-ended program of quanitative easing are off the table, what's left? As I noted earlier this week, the usual suspects, with the extending the duration of the Fed's portfolio high on the list of market expectations. See Neil Irwin's piece at the Washington Post.

What I have trouble seeing is a strong commitment about the path of monetary policy. More soft commitments, yes. But not a locked in stone, willing to endure higher inflation commitment. Consider, for example, this week's speech by San Francisco Federal Reserve President John Williams. He seems open to additional policy:

Despite these efforts, the recovery slowed to a crawl this year. But what does this mean for monetary policy? After all, monetary policy cannot cure all that ails our economy, which in large measure involves the aftereffects of the mortgage lending boom, the housing crash, and the resulting financial crisis. But, monetary policy can help limit the damage and provide support to other areas of the economy.

Williams sounds supportive of additional action, which he made more clear in comments. Via Reuters:

"There's still considerable room for monetary accommodation to improve financial conditions," San Francisco Federal Reserve Bank President John Williams told reporters after a speech to the Rotary Club of Seattle. "My main concern is really not the concern that inflation is going to be too high over the medium term. I think my main concern really is the pace of recovery and the high degree of unemployment."

"If anything more monetary accommodation seems appropriate than not," he added.

Still, something dramatic, moving into the relm of Evans? Note the mixed message. Yes, there is more we can do to prevent the patient (his analogy later) from deteriorating further, but the medicine is limited. How does this play into monetary policy? He continues:

The monetary policy situation is similar. Like the hospital patient, the economy took a turn for the worse and faces heightened risks. In addition, inflation is expected to drift down. These circumstances called for additional monetary easing. At our August meeting, the FOMC took a step in that direction, issuing a statement that we are likely to keep the federal funds rate at exceptionally low levels at least through mid-2013.

Arguably, if data continues to disappoint heading into the next meeting, the same logic will hold true, and the Fed will embrace some additional easing. So far, so good. But then he undermines the FOMC statement, first by dismissing it relevance:

In one respect, this wasn't such big news. Even before the announcement, financial market participants generally didn't expect the Fed to raise rates much earlier than mid-2013.

Then he backtracks and claims:

But it was news in the sense that it removed uncertainty and helped financial markets better understand our intentions.

I like that, removing uncertainty is a good thing. But then he puts the uncertainty right back into the mix:

Note also that we are not tying our hands by making this announcement. We haven't made a guarantee. We will alter our policy as appropriate if circumstances change.

When is a commitment not a commitment? When made by the Federal Reserve. Which makes me wary of any supposed policy guidelines. Most policymakers - even increasingly dovish ones such as Williams - don't want to have their hands tied, and few other than Evans are interested in seeing inflation drift above 2%. Williams on inflation, via Bloomberg:

When asked by reporters whether he would be willing to tolerate higher inflation if it brought down unemployment, Williams said, "I don't think there's a tradeoff. I don't think that's really a choice we can make over the long term."

"We have to focus on keeping inflation relatively low over the medium term and again keeping employment as close as we can to the maximum sustainable level," he said.

Still others don't believe additional policy will do much good. And quite frankly, I am sympathetic with that view. If the Fed is going to have an impact, policymakers need to go big time. 20 basis points on the long-end of the yield curve through a maturity extension just is not going to cut it. Allowing inflation to drift up to 3% is not going to cut it. Chopping the interest rate on reserves in half is not going to cut it. Half commitments to policy paths are not going to cut it. I am not even confident committing to a rate of 1% on the ten year will cut it, unless fiscal policymakers take advantage of such a gift and step up government spending. I am not sure the private sector will want to make many 1% loans – financial institutions need some spread to make a profit. These are all things that probably won't hurt and should be tried, but don't expect miracles either.

What would work? I am sympathetic to the notion that if fiscal policymakers can address the mortgage mess, then lower interest rates that encourage refinancing can help. But this isn't something the Fed can do alone. I am also sympathetic to targeting an asset price that you are very confident will stimulate demand. And that brings you to the hand played by the Swiss National Bank – commit to currency depreciation. Set a target for the dollar, and purchase foreign assets in unlimited quantities to achieve that goal.

Bottom Line: Bernanke continues to hold his cards close to his chest. The data flow, and the subsequent forecast implications, justifies additional easing. Indeed, Bernanke's inflation view appears to take out one impediment to such easing. That said, the lack of concern about the path of longer-term inflation expectations still suggests additional easing will fall short of what we saw during last year's deflation scare. The composition of the portfolio seems high on the list, although I am hesitant to believe there is a lot of traction to be gained when the ten year rate is hovering around 2%. Steps in the right direction, to be sure, but, as Federal Reserve officials continue to emphasize, nothing that will rapidly restore economic vibrancy.

links for 2011-09-08

Posted: 08 Sep 2011 11:52 PM PDT

Obama's Jobs Speech: Bolder Than Expected

Posted: 08 Sep 2011 05:49 PM PDT

Here's my reaction to the speech:

Obama's Jobs Speech: Bolder Than Expected

What did you think?

"The Postrecession Job Picture"

Posted: 08 Sep 2011 02:25 PM PDT

David Altig has questions:

Another cut at the postrecession job picture, macroblog: There is not much to be said about the August employment report released last Friday—or not much good, anyway. The ongoing updates at Calculated Risk provide a chronicle of the questions and challenges that have characterized the postrecession period. An exhaustive set of graphs are spread across several posts, here, here, and here. The last post in the series focused on construction employment specifically and includes this observation, which is based on the addition of 26,000 construction jobs in 2011 through August:

"After five consecutive years of job losses for residential construction (and four years for total construction), this is a baby step in the right direction. However there will not be a strong increase in residential construction until the excess supply of housing is absorbed."

Given the likely pace of turnaround in the housing market, that sounds like a problem. It is not much surprise that employment in the construction sector is, and likely will continue to be, significantly weaker than it was before the recession. Can the same be said of most other sectors? The following chart shows pre- and postrecession, cross-sector average monthly changes in payroll employment, broadly defined according to U.S. Bureau of Labor Statistics' classifications. For reference, the size of the circles in the chart reflect the relative prerecession size of the sector in terms of employment.

A few points:

  • The 45-degree line represents points where average monthly employment changes before the recession (from December 2001 through November 2007, precisely) are exactly the same as the average changes after the recession (July 2009 through August 2011). Consistent with the slow pace of overall employment growth during this recovery, the majority of circles representing different sectors lie below the 45-degree line.
  • In general, the pattern of circles is such that those sectors with relatively high employment changes prerecession are those that have exhibited relatively high changes during the recovery. In other words, we have not yet seen a widespread reshuffling of cross-sectoral employment trends outside of the recession. For example, employment changes in the education and health care sector led the pack before the recession, and that sector has led the pack thus far in the recovery. At the opposite end of the scale, job growth in the information sector has remained on a negative trend in the recovery period, just as it was prior to the recession.
  • I want to note a few exceptions to the preceding observation... As noted, employment in the construction sector is well off its prerecession pace. What may be less appreciated is the fact that manufacturing employment, outside of the motor vehicles and auto parts sector, has experienced monthly employment gains that are better than the prerecession rate. Employment in the government sector, on the other hand, has noticeably flipped from positive to negative. This shift is also true of job growth in the financial activities sector, though the change is less dramatic than in the government sector.

Manufacturing and government represent relatively big shares of employment. Including motor vehicles and parts, manufacturing payroll employment was over 11 percent of total U.S. jobs for the period from 2002 through 2007. Government employment was about 16.5 percent (and had the largest single share of sectoral employment in the breakdown used in the chart above). The bad news in the big picture is that the better performance in manufacturing job creation is really a shift from negative job creation in the prerecession period to zero job creation in the postrecession period. And as for government employment, it seems unlikely that the forces will soon align to move job growth in the public sector back into positive territory. (The same could probably be said of financial activities employment.)

I am not pushing any particular interpretation of these facts, but a couple of questions come to mind. Will non-auto manufacturing employment revert to the contracting trend in place prior to the recession? Will employment in the financial activities and government sectors continue to shrink? If so, will these jobs be absorbed by increased employment in other sectors, and how long will that take?

Too long, and too timid policy from monetary and fiscal policymakers isn't helping.

Krugman: The Profession and the Crisis

Posted: 08 Sep 2011 07:38 AM PDT

Via Tim Taylor, here's Paul Krugman's Presidential Address to the Eastern Economic Association:

The Profession and the Crisis, by Paul Krugman, Eastern Economic Journal: So we're having an economic crisis. I say "having," not "had," because we have by no means recovered. Financial panic may have subsided, stocks may be up, but employment remains far below pre-crisis levels, and unemployment — especially long-term unemployment — remains disastrously high. And while you can make the case that the economy is slowly on the mend, slowly is the operative word. We have already been through two years of economic purgatory, and there's no end in sight.
There is a real sense in which times like these are what economists are for, just as wars are what career military officers are for. OK, maybe I can let microeconomists off the hook. But macroeconomics is, above all, about understanding and preventing or at least mitigating economic downturns. This crisis was the time for the economics profession to justify its existence, for us academic scribblers to show what all our models and analysis are good for.
We have not, to put it mildly, delivered.
What do I mean by that? As I see it, there are three main complaints one can make about economists and their role in the current crisis. First is the complaint that economists fell down on the job by not seeing the crisis coming. Second is the complaint that economists failed even to see the possibility of this kind of crisis — and that by pointing out the possibility, they could have helped head the crisis off. Third is the complaint that they have either failed to offer useful advice on what to do after the crisis struck, or that they have offered such a cacophony of voices as to provide no useful guidance for policy.
As I see it, the first complaint is mostly — though not entirely — unfair. The second is much more substantial: anyone with some knowledge of history should have realized that the age of financial crises was far from over. But the most damning failure of economists, I'd argue, was their acquired ignorance of what I've called depression economics — the principles that should govern policy after a financial crisis has left conventional open-market operations impotent.
So let me walk through these issues one at a time. ...[continue reading]...

Obama's Speech: What are the Best Policies to Help the Unemployed?

Posted: 08 Sep 2011 07:02 AM PDT

At MoneyWatch:

Obama's Speech: What are the Best Policies to Help the Unemployed?

The bottom line: "I am not very confident that anything will make it through Congress in this political climate. So the final recommendation is for the White House to take whatever steps it can on its own, and to view this as the first step in a much longer battle to provide help to the unemployed."

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