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February 5, 2014

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Fed Watch: No End To Tapering Yet

Posted: 05 Feb 2014 12:06 AM PST

Tim Duy:

No End To Tapering Yet, by Tim Duy: Yesterday I said:
Altogether, the desire to end asset purchases suggests to me that what we have seen so far is insufficient to prompt the Fed to change their plans. That is especially the case if the data does not soften further - if, for example, the next employment report shows a rebound in payroll growth and a further decline in the unemployment rate.
Today we learn via Bloomberg:
"The hurdle ought to remain pretty high for pausing in tapering," Richmond Fed President Jeffrey Lacker said after a speech today in Winchester, Virginia. Chicago's Charles Evans said in Detroit that policy makers probably face "a high hurdle to deviate" from $10 billion cuts in monthly bond buying at each of their next several meetings. Evans and Lacker don't vote on policy this year.
One hawk, one dove, both concluding that the bar to stopping the taper is quite high. Things need to get worse. This just won't cut it:

SP020414

Also take note of Jon Hilsenrath's view via the Wall Street Journal:
Last summer, as U.S. stock prices and emerging markets wobbled, the Federal Reserve was at the center of the turmoil. This time, the Fed might be just a bystander in the stock market selloff and not the proximate cause...
...The market, in short, is now pricing in a much easier Fed, not a tighter Fed. Movements in 10-year Treasury notes are telling the same story. Last summer, 10-year yields were rising because investors saw a tighter Fed. Now they're falling. Investors seem to be reading a string of soft economic data – weaker car sales, a manufacturing slowdown, disappointing job growth – and concluding the economic coast is not as clear as it appeared just a few weeks ago.
I would suggest that the decline in rates indicates the Fed is too tight, not too easy. Indeed, we would hope that they would only be tapering in the context of a rising interest rate environment as it would suggest that market participants were anticipating higher growth and inflation. But the Fed doesn't see it that way. They see lower rates as a signal that policy is easier. And hence are not inclined to react to ease policy further by stopping the taper.
Moreover, I don't think the Fed believes that the end of asset purchases is impacting global markets because they are convinced that tapering is not tightening. If it is tightening, then why should global markets react? And even if it was tightening, the Fed wouldn't see it as their problem in the first place. (To be sure, you may or may not agree, and I suggest you read Izabella Kaminska, Frances Coppola, and Felix Salmon for further insight into the topic.)
Bottom Line: The Fed isn't ready to change course. Recent turbulence is enough to peak their curiosity, not enough to suggest that tapering was premature.

Links for 02-05-2014

Posted: 05 Feb 2014 12:03 AM PST

'Where is the Land of Opportunity? Intergenerational Mobility in the US'

Posted: 04 Feb 2014 10:26 AM PST

Raj Chetty, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez, the authors of the economic mobility study we've heard so much about lately, explain their findings:

Where is the land of opportunity? Intergenerational mobility in the US, by Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, Vox EU: The US is often hailed as the land of opportunity, a society in which a child's chances of success depend little on her family background. Is this reputation warranted? An extensive empirical literature on intergenerational mobility, reviewed by Solon (1999), Grawe and Mulligan (2002), and Black and Devereux (2011), has compared mobility across countries and have found that relative mobility is lower in the US than in other developed countries. In new research (Chetty et al. 2014) we show that this question does not have a clear answer because there is substantial variation in intergenerational mobility across areas within the US. The US is better described as a collection of societies, some of which are `lands of opportunity' with high rates of mobility across generations, and others in which few children escape poverty.
New evidence on intergenerational mobility
We present a new portrait of social mobility in the US by compiling statistics from millions of anonymous earnings records. Our core sample consists of all children in the US born between 1980-82, whose income we measure in 2011-12, when they are approximately 30 years old.
Using these income data, we calculate two measures of intergenerational mobility. The first, relative mobility, measures the difference in the expected economic outcomes between children from high-income and low-income families. The second, absolute upward mobility, measures the expected economic outcomes of children born to a family earning an income of approximately $30,000 (the 25th percentile of the income distribution).
We construct measures of relative and absolute mobility for 741 "commuting zones" in the US. Commuting zones are geographical aggregations of counties that are similar to metro areas but also cover rural areas. Children are assigned to a zone based on their location at age 16 (no matter where they live as adults), so that their location represents where they grew up. When analysing local area variation, we rank both children and parents based on their positions in the national income distribution. Hence, our statistics measure how well children do relative to those in the nation as a whole rather than those in their own particular community.
We find substantial variation in mobility across areas (Figure 1). To take one example, children from families at the 25th percentile in Seattle have outcomes comparable to children from families at the median in Atlanta. Some cities – such as Salt Lake City and San Jose – have rates of mobility comparable to countries with the highest rates of relative mobility, such as Denmark. Other cities – such as Atlanta and Milwaukee – have lower rates of mobility than any developed country for which data are currently available.

Figure 1. Intergenerational mobility in the US

Mobility

Notes: This map shows the average percentile rank of children who grow up in below-median income families across areas of the US (absolute upward mobility). Lighter colours represent areas where children from low-income families are more likely to move up in the income distribution. To look up statistics for your own city, use the interactive version of this map created by The New York Times.

What drives social mobility?
Next, we analyse what drives the variation in social mobility across areas. The spatial patterns of the gradients of college attendance and teenage birth rates with respect to parent income across zones are very similar to the pattern in intergenerational income mobility. The fact that much of the spatial variation in children's outcomes emerges before they enter the labour market suggests that the differences in mobility are driven by factors that affect children while they are growing up.
We explore such factors by correlating the spatial variation in mobility with observable characteristics. We begin by showing that upward income mobility is significantly lower in areas with larger African-American populations. However, white individuals in areas with large African-American populations also have lower rates of upward mobility, implying that racial shares matter at the community (rather than individual) level. One mechanism for such a community-level effect of race is segregation. Areas with larger black populations tend to be more segregated by income and race, which could affect both white and black low-income individuals adversely. Indeed, we find a strong negative correlation between standard measures of racial and income segregation and upward mobility. Moreover, we also find that upward mobility is higher in cities with less sprawl, as measured by commute times to work. These findings lead us to identify segregation as the first of five major factors that are strongly correlated with mobility.
The second factor we explore is inequality. Commuting zones with larger Gini coefficients have less upward mobility, consistent with the "Great Gatsby curve" documented across countries (Krueger 2012, Corak 2013). In contrast, top 1% income shares are not highly correlated with intergenerational mobility both across zones within the US and across countries. Although one cannot draw definitive conclusions from such correlations, they suggest that the factors that erode the middle class hamper intergenerational mobility more than the factors that lead to income growth in the upper tail.
Third, proxies for the quality of the K-12 school system are also correlated with mobility. Areas with higher test scores (controlling for income levels), lower dropout rates, and smaller class sizes have higher rates of upward mobility. In addition, areas with higher local tax rates, which are predominantly used to finance public schools, have higher rates of mobility.
Fourth, social capital indices (Putnam 1995) – which are proxies for the strength of social networks and community involvement in an area -- are very strongly correlated with mobility. For instance, high upward mobility areas tend to have higher fractions of religious individuals and greater participation in local civic organisations.
Finally, the strongest predictors of upward mobility are measures of family structure such as the fraction of single parents in the area. As with race, parents' marital status does not matter purely through its effects at the individual level. Children of married parents also have higher rates of upward mobility if they live in communities with fewer single parents.
We find modest correlations between upward mobility and local tax and government expenditure policies and no systematic correlation between mobility and local labour market conditions, rates of migration, or access to higher education.
Caveats
We caution that all of the findings in this study are correlational and cannot be interpreted as causal effects. For instance, areas with high rates of segregation may also have other characteristics that could be the root cause driving the differences in children's outcomes.
What is clear from this research is that there is substantial variation in the US in the prospects for escaping poverty. Understanding the properties of the highest mobility areas – and how we can improve mobility in areas that currently have lower rates of mobility – is an important question for future research that we and other social scientists are exploring.
To facilitate this ongoing work, we have posted the mobility statistics by area and the other correlates used in the study on the project website.
References
Black, Sandra E. and Paul J. Devereux (2011), "Recent Developments in Intergenerational Mobility" in O Ashenfelter and D Card (eds.), Handbook of Labor Economics, Vol. 4, Elsevier, chapter 16, pp. 1487-1541.
Chetty, Raj, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez (2014), "Where is the Land of Opportunity? The Geography of Intergenerational Mobility in the US", NBER Working Paper 19843
Corak, Miles (2013), Income Inequality, Equality of Opportunity, and Intergenerational Mobility." Journal of Economic Perspectives, 27 (3): 79-102.
Grawe, Nathan D and Casey B Mulligan (2002), Economic Interpretations of Intergenerational Correlations", Journal of Economic Perspectives, 16 (3): 45-58.
Krueger, Alan (2012), "The Rise and Consequences of Inequality in the US", Speech at the Center for American Progress, Washington D.C. on 12 January.
Solon, Gary (1999), "Intergenerational Mobility in the Labor Market" in O Ashenfelter and D Card, (eds.), Handbook of Labor Economics, Vol. 3, Elsevier, pp. 1761-1800.

Unemployment is Hellish

Posted: 04 Feb 2014 10:25 AM PST

A follow-up to the post below this on how politicians have turned their backs on the unemployed:

New research reveals that unemployment is especially hellish in the U.S., by Kathleen Geier: ...I am one of those long-term unemployed you keep hearing about...
I've interviewed for some great jobs, and I've made it to the final stage several times. A few weeks ago, for my dream job, I was one of the final two people they considered — but then of course, they decided to go with the other person. I always hear, "We really liked you!" "We were so impressed!" But someone else always turns out to be a "better fit." Always! It's beyond frustrating. ... "Someone else was a better fit" — story of my life. ...
I've gone through episodes of deep depression and intense anxiety over this — you have no idea. Some day, somewhere else I will write about it all at length, but the Catch-22 is that I don't want to do so until I find permanent work. I mean, I don't want to become the internet's poster child for unemployment — otherwise I'm afraid the stigma of being unemployed will stick and I'll never land a job. I survive the horror day to day by keeping myself busy with other things, and by trying not to think about it too much. Denial is a coping strategy, people! Also, "one day at a time" may well be the best life advice anyone has ever given me about anything.
But this stretch — going on 18+ months now — of long-term unemployment is by far the most shattering, soul-destroying, traumatic thing I've ever experienced in my adult life, and that includes a heartbreaking divorce. I hope, one day, to write more about my personal story and explain just why long-term unemployment is so devastating. But for now, please take my word for it. Most important of all, please understand this is not just about me. There are millions more like me, who are experiencing mind-boggling levels of psychic distress in this labor market, and who are financially just hanging on by a thread. The suffering caused by this economy has been immense. It inflicts deep damage and it leaves scars. You can trust me on that one.

'Confronting Old Problem May Require a New Deal'

Posted: 04 Feb 2014 09:33 AM PST

Eduardo Porter:

Confronting Old Problem May Require a New Deal, by Eduardo Porter, NY Times: ...As he delivered his fifth State of the Union address, President Obama, not unlike President Franklin D. Roosevelt early in his second term, seemed to have given up far too early in the game on trying to stimulate the recovery. ...
The Obama administration's boldest propositions are sensible, from raising the minimum wage to $10.10 to extending emergency unemployment insurance. But they are not quite on the scale of a trillion dollars' worth of lost gross domestic product.
This is not just the president's doing. The bipartisan cooperation that would be needed to start a jobs program of the scale of what was tried during the New Deal — not to mention the World War II production explosion that finally ended the Depression — is out of the question today.
Perhaps more important, however, is that even among Democrats there remains little appetite for the kind of aggressive government action that was popular in F.D.R.'s day.
The fear, however, seems overdone. ...
There are potentially great benefits to government investments in public works at a time like this. ... And it would not even be very expensive. With the borrowing costs of the federal government below the rate of inflation, investments would actually help reduce the nation's debt burden. Lenders are, in effect, paying the government to borrow money. ...
[T]he path favored by many Republicans in the House..., slash government spending and let the economy run its bedraggled course..., would probably transform our economic emergency from a painful though temporary setback into a permanent feature called stagnation.
And yet this is essentially the policy the nation is following.

I am not fully sold on the secular stagnation argument (see the article for more, Keynes worried about the same thing), but there's no excuse for turning our backs on the unemployed. We could have, and should have done more. Even now, it's not too late.

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