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September 15, 2012

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Latest Posts from Economist's View


Paul Krugman: The iPhone Stimulus

Posted: 14 Sep 2012 12:12 AM PDT

The economic boost expected from the iPhone 5 shows that "the government should spend more, not less, in a depressed economy":
The iPhone Stimulus, by Paul Krugman, Commentary, NY Times: Are you, or is someone you know, a gadget freak? If so, you doubtless know that Wednesday was iPhone 5 day...
What I'm interested in ... are suggestions that the unveiling of the iPhone 5 might provide a significant boost to the U.S. economy... Do you find this plausible? If so, I have news for you: you are, whether you know it or not, a Keynesian — and you have implicitly accepted the case that the government should spend more, not less, in a depressed economy. ...
The ... reason JPMorgan believes that the iPhone 5 will boost the economy ... is simply that it will induce people to spend more.
And to believe that more spending will provide an economic boost, you have to believe — as you should — that demand, not supply, is what's holding the economy back. ... And the solution is to find some way to increase overall spending so that the nation can get back to work.
So where can more spending come from? Businesses are sitting on lots of cash but, for the most part, have seen little reason to do a lot of investment. ... And because businesses aren't spending a lot, incomes are low, so consumer demand is low, which perpetuates those low sales. ...
Why not have the government step in and spend more, say on education and infrastructure, to help the economy through its rough patch? Don't say that the government can't add to total spending, or that government spending can't create jobs. If you believe that the iPhone 5 can give the economy a lift, you've already conceded ... that more spending is what we need. And there's no reason this spending has to be private.
Yet far from using public spending to support the economy in its time of trouble, our political system — driven by a combination of ideology, exaggerated deficit fears and Republican obstructionism — has moved to make the depression worse. Yes, unemployment benefits and food stamps are up, because so many more people are in need; but government employment has plunged, as has public investment.
Now, despite all this, we will eventually recover. Over time there will be more equipment that needs replacing, more iPhone-like innovations that boost spending, and, in the long run, we will exit this economic trap. But, as Keynes famously pointed out in another context, in the long run we are all dead. To borrow a phrase from myself, why not end this depression now?

Links for 09-14-2012

Posted: 14 Sep 2012 12:06 AM PDT

'Where Have All the Workers Gone?'

Posted: 13 Sep 2012 03:34 PM PDT

Jessie Romero of the Richmond Fed analyzes why so many people are leaving the labor force, and what they are doing after they exit:

Where Have All the Workers Gone?, by Jessie Romero, Richmond Fed: Since September of last year, the unemployment rate in the United States has declined nearly a full percentage point, from 9 percent to 8.3 percent. On its face, this is an encouraging signal about the health of the labor market. But some of the change is due to a potentially troubling trend: a dramatic decline in the number of Americans who are part of the labor force. Prior to the recession, 66 percent of the population (not counting active duty military or people in a nursing home or in prison) over the age of 16 was in the labor force. Just four years later, this rate — known as the "labor force participation rate," or LFPR — has fallen to 63.7 percent. While this might not sound like a large decline, it is unprecedented in the postwar era. The dropoff is all the more striking because it does not include unemployed workers who are actively seeking work; such workers are still considered to be part of the labor force. It is only when the unemployed decide to stop looking for jobs, perhaps because they have given up on the possibility of finding one, that they are considered out of the labor force...
Not-in-LF
The current low labor force participation rate is the result of both long-term structural changes, such as an aging population and decreased demand for low-skill workers, and cyclical factors, namely the lingering effects of the 2007-09 recession. ... But it's difficult to discern the impact of the business cycle relative to structural change. "The certain answer I can give you is that they're both playing a role. If you want me to divide it proportionally and say how important is each, that's where it becomes much, much more difficult," says Betsey Stevenson... A recent report by Dean Maki, an economist at Barclays Capital, argued that only about one-third of the recent decline in the LFPR is due to the weak labor market, with the rest due to demographic factors. Economist Willem Van Zandweghe at the Kansas City Fed found that the split is closer to 50-50, as did economists at the Chicago Fed. Van Zandweghe used a model in which the overall unemployment rate is the primary cyclical indicator. When he altered the model to include the long-term unemployment rate, which might be a better gauge of labor market weakness, he found that cyclical factors could explain as much as 90 percent of the decline in the LFPR.
Whatever the research eventually shows, the fact remains that millions of people who would like to be working have given up trying to find a job. According to the monthly Current Population Survey (CPS) conducted by the BLS, the share of workers not in the labor force who report that they want a job ... [is] 6.8 million workers. "There's a large group of people who are counted as out of the labor force who we should be trying to find jobs for, and who would want jobs if they were available," says Rothstein. ... [much more here, including what the workers are doing after they leave the labor force] ...

Bernanke's Press Conference, The FOMC's Press Release, and the FOMC Forecasts

Posted: 13 Sep 2012 02:41 PM PDT

Press Release, Release Date: September 13, 201, For immediate release:

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.

Statement Regarding Transactions in Agency Mortgage-Backed Securities and Treasury Securities


Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents

Projections materials (PDF)

The Fed Announces Additional Easing

Posted: 13 Sep 2012 10:55 AM PDT

Here's my reaction to the Fed's announcement (I should note that the editors asked me to try to avoid the need to use the "commentary" tag.)

The Fed Announces Additional Easing: (MoneyWatch) The Federal Reserve's announcement today of an additional round of quantitative easing of $40 billion per month along with an extension of its guidance on interest rates - it now says rates will stay low through mid 2015 instead of the end of 2014 - validated widely held expectations that the Fed would provide more monetary stimulus in an effort to hasten the recovery.

The additional Fed easing, along with its intention to continue reinvesting the proceeds from principal payments from its holdings of financial assets, will increase the Fed's inventory of securities by approximately "$85 billion each month through the end of the year." These actions, which are more aggressive than many analysts expected, "should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."

The Fed's decision to provide further accommodation breaks the gridlock within the Fed's monetary policy committee resulting from disagreement about the costs and benefits of further action. One faction has argued that structural impediments in the economy limit the ability of the Fed to stimulate employment. This group believes the main consequence of further easing will be inflation, and hence the costs of further easing are larger than the benefits. In fact, some within this group would prefer to reverse existing policy. The other faction believes the inflation fears are overblown, and there is plenty the Fed can and should do to help with the unemployment problem.

There are also several centrist members who believe the potential for inflation and the benefit of further action are fairly close, and up until today the scale has tipped against further action. Several things changed their minds. First, the main driving force behind the policy change was the recent Labor Department report showing that the labor market continues to stagnate. But a second factor was also important. At the recent annual Federal Reserve conference in Jackson Hole, Wyoming the chairman of George Bush's Council of Economic Advisors, Ed Lazear of Stanford University, presented evidence that the unemployment problem is not structural as many who object to more stimulus contend. This likely led some members of the Fed to reevaluate the benefits of further easing, and tipped the scale in the other direction. Finally, recent data has not justified the worries about inflation. In fact, many measures show inflation running below the Fed's target level.

The policy the Fed announced today is unusual in that it is an open-ended purchase of securities. The Fed did not announce a total dollar value as it has in the past, but instead committed to continue buying assets until economic conditions change, i.e. until unemployment falls "substantially," or inflation begins to increase to worrisome levels. The extension of the forward guidance on interest rates from 2014 to 2015 is also unusual, but both of these can also be explained by the recent conference in Jackson Hole. At that conference, Michael Woodford, a very highly respected monetary economist, delivered a paper showing that the Fed has the most impact on the economy when it credibly commits to future actions. Thus, according to Woodford, it is not the quantitative easing itself that helps the economy (i.e. how many assets the Fed holds), but rather it's the commitment to continue purchasing assets until the unemployment rate improves substantially that matters. This is a form of forward guidance, and it complements the forward guidance on interest rates the Fed has issued in the past, and extended today.

Even with the policy commitments issued today, and the actual actions the Fed will take, there is some question about how effective the Fed will be at stimulating the economy. The policies work mainly through lowering long-term interest rates and elevating stock market values. But there is not much room for long-term interest rates to fall, and the stimulative effects of higher stock values aren't that large. In addition, some analysts worry that this will make it far less likely that Congress will initiate tax cuts, additional spending, or direct job creation measures, though political gridlock likely eliminates that possibility in any case. However, not everyone agrees that the Fed is relatively powerless, and with fiscal policy off the table, inflation worries very low, and the unemployment problem very large, the Fed decided that more action was justified. It may not be able to completely fix our economic problems, but it does believe it can help.

Update: I should have also notedthat Tim Duy nailed it with this prediction:

... I don't anticipate a lump sum QE announcement. I anticipate an open-ended commitment to regular purchases of securities, Treasuries and/or MBS, that can be scaled up or down in response to the economy. Wall Street may be initially disappointed by the lack of a big number, but over time I think markets will come to appreciate the greater impact offered by a regular commitment based upon economic outcomes rather than the arbitrary amounts and time lines of previous QE efforts. ...

Roubini: Fiddling at the Fire

Posted: 13 Sep 2012 08:34 AM PDT

Nouriel Roubini says our economic troubles are far from over, and that "governments with weak leadership are at the root of the problem":

Fiddling at the Fire, by Nouriel Roubini, Commentary, Project Syndicate: ...In the eurozone, euphoria followed the ECB's decision to provide support with potentially unlimited purchases of distressed countries' bonds. But the move is not a game changer; it only buys time for policymakers to implement the tough measures needed to resolve the crisis. And the policy challenges are daunting... Even the ECB's support is not obvious. ... Moreover, Greece could exit the eurozone in 2013, before Spain and Italy are successfully ring-fenced...
In the United States, the latest economic data – including a weak labor market – confirm that growth is anemic... In China, a hard economic landing looks increasingly likely...
Meanwhile, Brazil, India, Russia, and other emerging economies ... have not adjusted as advanced economies' weakness reduces the room for export-led growth; and many delayed structural reforms needed to boost private-sector development and productivity growth, while embracing a model of state capitalism that will soon reveal its limits. So the recent slowdown of growth in emerging markets is not just cyclical,... it is also structural. ...
Ineffective governments with weak leadership are at the root of the problem. In democracies, repeated elections lead to short-term policy choices. In autocracies like China and Russia, leaders resist the radical reforms that would reduce the power of entrenched lobbies and interests, thereby fueling social unrest as resentment against corruption and rent-seeking boils over into protest.
But, as everyone kicks the can down the road, the can is getting heavier and, in the major emerging markets and advanced economies alike, is approaching a brick wall. Policymakers can either crash into that wall, or they can show the leadership and vision needed to dismantle it safely.

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