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October 18, 2012

Latest Posts from Economist's View

Latest Posts from Economist's View

'Contra Romney, This is a Real Recovery'

Posted: 06 Oct 2012 12:33 AM PDT

Greg Mankiw posts this:

Monitoring the Recovery

He knows better, or ought to, and Paul Krugman sets the record straight:

Constant-demography Employment

Links for 10-06-2012

Posted: 06 Oct 2012 12:03 AM PDT

'The Community Reinvestment Act Did Not Induce Subprime Lending'

Posted: 05 Oct 2012 05:53 PM PDT

Via Richard Green:

Rub ́en Herna ́ndez-Murillo, Andra C. Ghent, and Michael T. Owyang show that the Community Reinvestment Act did not induce subprime lending: They look at lending originations and loan performance on either side of the CRA thresholds. If CRA encouraged subprime lending, one should see a discontinuity at the thresholds, but there is none.
These are originations for 2-28 subprime loans. Under CRA, lenders received credit for originating and funding loans in census tracts whose median incomes were below 80 percent of area median income. If the CRA was inducing lending, we should see a jump in lending to the left of the 80 percent cut-off--there isn't (either visually or econometrically). They find the same result when looking at pricing and default.

The Disingenuous James Bullard

Posted: 05 Oct 2012 03:33 PM PDT

Tim Duy:

The Disingenuous James Bullard, by Tim Duy: St. Louis Federal Reserve President James Bullard is making some headlines today. He fears that inflation expectations are becoming unglued:

Is this happening? Distant inflation expectations from the TIPS market seem to suggest that investors do not completely trust the Fed to deliver on its 2 percent inflation target.

He seeks to prove this claim with this chart:


I just can't let this one go. I honestly don't know if I should laugh or cry. I have a whole new respect for Federal Reserve Chairman Ben Bernanke if this is any indication of the kind of grief he needs to deal with on a regular basis.
This is disingenuous on two levels. The first is that TIPS returns are based on CPI inflation, not the Fed's PCE inflation target. I find it hard to believe that Bullard does not understand the distinction. Putting the Fed's inflation target on this chart is comparing apples to oranges. Bullard should know this. If he does, he is deliberately misleading his audience. If he doesn't...well, I don't really know what to say about a top monetary policymaker that can't identify the proper inflation target.
To understand why the TIPS breakeven rate will be above the Fed's PCE inflation target, simply note that CPI inflation tends to run above PCE inflation, on the average of about 44bp since 1990:


The second reason this is disingenuous is the length of the time series. Bullard begins his chart at the beginning of this year, leaving the audience to believe that these high inflation expectations are a new phenomenon. Again, deliberating misleading the audience. Let's go to the tape:


Nothing to see here, folks. Move along.

Bullard starts down this path as a response to suggestions for higher inflation to reduce real debt burdens. This appears at least partly in response to his realization that the work of Professors Reinhart and Rogoff is not as obviously supportive of his position as he previously believed. Rogoff has offered up the possibility of higher inflation to address the debt load. Bullard offers a number of bullet points in response:

The partial default would occur against savers, mostly older U.S. households, and against foreign creditors.

Alas, in economics there is no free lunch.

A partial default today through higher inflation would be paid for via higher inflation premiums in future borrowing. 

There is an important point here - a partial default will have winners and losers. But guess what? So will no default, hard or soft. Just ask the people of Greece (worst of all worlds, partial hard default). Or Ireland. Or Spain. As I said with regard to the Japanese situation:

They are all taxpayers and bondholders. They take the hit in taxes, spending, or capital position. The longer they wait to take that hit, the bigger it will be....

...In other words, you can take your inflation medicine a little bit at a time, or a whole bunch at once. But a even a little bit at a time becomes increasingly more difficult politically as the debt load grows larger.

Pay attention to the last line; Bullard is already identifying older households as a class resistant to taking a capital loss. But they are also struggling with low returns. Now they can't win. This is exactly the trap Japan found itself in - those who initially lost from the zero bound lose again if they were to exit the zero bound. The zero bound is a very bad place to be for an extended time. I don't think the Federal Reserve takes this problem seriously enough.

In short, Bullard wants to pretend that the only costless option is the strict low inflation option. That's simply not true. It has a cost as well, in a particular distribution of winners and losers. A higher inflation target will result in a different distribution of winners and losers that may be more beneficial to domestic residents if, for example, the burden of higher inflation were to fall disproportionately on foreign central banks who have acquired large holdings of dollar assets for mercantilistic reasons (hint, hint). There is also the issue of using inflation to lower the real rate at the zero bound.

It very well may be the case that the US economy normalizes such that output returns to a level that the fiscal impulse can be lessened and debt to GDP ratios level off and decline while interest rates climb such that the Fed returns to using the fed funds rate as their primary tool throughout the next cycle. In such a scenario, there may be no need to exercise the inflation option. But other equilibriums are possible. Japan never experienced sufficient lift-off to break its reliance on fiscal stimulus. Policymakers should be aware of the possibility and adopt a flexible response, one that does not a priori rule out what may be the most cost-effective options.

Bottom Line: If Bullard wants to take a hard line against higher inflation, so be it. In reality, that hard line has been adopted by the vast majority of Fed officials. They aren't inclined to touch the inflation option for fear, I think, that it would work. Then what's to stop 4% from becoming 6%? And 6% from becoming 8%? And I do believe this question would need to be addressed. But don't pretend that not pursuing the inflation option is costless. Just different costs. And please don't use an obviously disingenuous data analysis to fuel inflation fears. We expect better from our policymakers. Or at least we should.

Fed Watch: On The Surface Better, But Underneath The Same

Posted: 05 Oct 2012 10:47 AM PDT

Tim Duy:

On The Surface Better, But Underneath The Same, by Tim Duy: The jobs numbers are out, and they are reasonably solid. Reasonably solid as long as you weren't expecting miracles. Very strong if you thought the economy was heading into recession. But just about where they should be if you think the economy is just sort of grinding along at a slow but steady pace.
Nonfarm payrolls gained by 114k, about consensus, but both July and August were revised, adding 40k and 46k jobs, respectively. As upward revisions tend to follow upward revisions, we can expect the final September number will print higher as well. The average of the past three months is 146k. The average of the past twelve months is 150k. In short, ignoring the twists and turns of the data leaves you with pretty consistent job growth over the past year:


In my mind, the policy significance of the twists and turns is not so much that the economy was threatened with excessive slowing this spring, but that the Fed's anticipated acceleration in activity was to be unrealized. The continuation of slow and steady is what prompted open-ended QE (although the downside risks didn't hurt either).
Note that hours worked, which had flattened out, are again on the rise:


Likewise, the unemployment rate unexpectedly dropped to 7.8% after holding steady for much of the year:


Again, look through the twists and turns. On average, the economy is adding about 150k jobs a month. At the moment, holding the unemployment rate constant probably takes something closer to 100k jobs. As a consequence, the unemployment rate grinds lower.
This slow rate of unemployment decline presents some interesting challenges for policymakers. My first thought is that Chicago Federal Reserve President Charles Evans should be thankful that his colleagues did not take him up on his 7% target as minimum rate to consider a policy shift. We could get there sooner than expected. Evans should shift gears and join with Minneapolis Federal Reserve President Narayana Kocherlakota and his 5.5% rate (putting aside the issue of "price stability" for the moment).
Why is this important? Because 7% unemployment could be met with considerable slack left over in the labor market. Wage growth remains anemic, for both production and nonsupervisory employees:


and all employees:


A distressingly large portion of the unemployed are long-term unemployed:


Those employed part time for economic reasons continues hold at high levels:


And the employment to population ration remains stagnant:


Bill McBride notes that there has been some gains in the employment to population ratio for persons in their prime working years (25-54), but much ground still needs to be covered.

The point is that it would be very likely premature to tighten policy even when the unemployment rate breaches 7%. But tighter policy may be needed before 5.5%. It is this kind of complexity that shows up in the minutes of the last Federal Reserve meeting as:

Many participants thought that more-effective forward guidance could be provided by specifying numerical thresholds for labor market and inflation indicators that would be consistent with maintaining the federal funds rate at exceptionally low levels. However, reaching agreement on specific thresholds could be challenging given the diversity of participants' views, and some were reluctant to specify explicit numerical thresholds out of concern that such thresholds would necessarily be too simple to fully capture the complexities of the economy and the policy process or could be incorrectly interpreted as triggers prompting an automatic policy response.

Admittedly, differentiating between cyclical and structural unemployment will become increasingly difficult as the unemployment rate continues to fall. I think that I would fall back on wage growth as a key signal of labor market tightness. Until wage growth is "substantially and sustainably" higher, we really shouldn't worry much about the inflation risk.

Bottom Line: A solid report, but basically consistent with the trends of the past year.

'The Outrageous Attack on BLS'

Posted: 05 Oct 2012 09:31 AM PDT

According to the BLS, the unemployment rate dropped from 8.1% to 7.8%. The response from some Republicans was that thenumber must have been manipulated to help Obama. Larry Mishel responds:

The outrageous attack on BLS: Apparently, Jack Welch, former chairman and CEO of General Electric, is accusing the Bureau of Labor Statistics of manipulating the jobs report to help President Obama. Others seem to be adding their voices to this slanderous lie. It is simply outrageous to make such a claim and echoes the worrying general distrust of facts that seems to have swept segments of our nation. The BLS employment report draws on two surveys, one (the establishment survey) of 141,000 businesses and government agencies and the other (the household survey) of 60,000 households. The household survey is done by the Census Bureau on behalf of BLS. It's important to note that large single-month divergences between the employment numbers in these two surveys (like the divergence in September) are just not that rare. EPI's Elise Gould has a great paper on the differences between these two surveys.
BLS is a highly professional agency with dozens of people involved in the tabulation and analysis of these data. The idea that the data are manipulated is just completely implausible. Moreover, the data trends reported are clearly in line with previous monthly reports and other economic indicators (such as GDP)..., there's nothing implausible about the reported data. ... All in all, there was nothing particularly strange about this month's jobs reports—and certainly nothing to spur accusations of outright fraud.

See also:

Douglas Holtz-Eakin Stops Being an Economist, by Brad DeLong


Jack Welch Should be Ashamed, by Jared Bernstein
Update: Paul Krugman:
Democrat Derangement Syndrome

Update: Here are my comments on the employment report:

Have we turned the corner on unemployment?

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