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April 28, 2014

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Paul Krugman: High Plains Moochers

Posted: 28 Apr 2014 12:33 AM PDT

Let freedom ring. But first, get a clue about what freedom is:

High Plains Moochers, by Paul Krugman, Commentary, NY Times: It is, in a way, too bad that Cliven Bundy — the rancher who became a right-wing hero after refusing to pay fees for grazing his animals on federal land, and bringing in armed men to support his defiance — has turned out to be a crude racist. Why? Because his ranting has given conservatives an easy out, a way to dissociate themselves from his actions without facing up to the terrible wrong turn their movement has taken.
For at the heart of the standoff was a perversion of the concept of freedom, which for too much of the right has come to mean the freedom of the wealthy to do whatever they want...
Start with the narrow issue of land use. For historical reasons, the federal government owns a lot of land in the West... Like any landowner, the Bureau of Land Management charges fees for the use of its property. The only difference from private ownership is that by all accounts the government charges too little... In effect, the government is using its ownership of land to subsidize ranchers and mining companies at taxpayers' expense.
It's true that some of the people profiting from implicit taxpayer subsidies manage ... to convince themselves and others that they are rugged individualists. But they're actually welfare queens of the purple sage.
And this ... means that treating Mr. Bundy as some kind of libertarian hero is, not to put too fine a point on it, crazy. Suppose he had been grazing his cattle on land belonging to one of his neighbors, and had refused to pay for the privilege. That would clearly have been theft — and brandishing guns ... would have turned it into armed robbery. The fact that ... the public owns the land shouldn't make any difference.
So what were people like Sean Hannity of Fox News, who went all in on Mr. Bundy's behalf, thinking? Partly, no doubt, it was the general demonization of government..., that government takes money from hard-working Americans and gives it to Those People. White people who wear cowboy hats while profiting from government subsidies just don't fit the stereotype. ...
I'd like to think that the whole Bundy affair will cause at least some of the people who backed him to engage in self-reflection, and ask how they ended up lending support, even briefly, to someone like that. But I don't expect it to happen.

'Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones'

Posted: 28 Apr 2014 12:24 AM PDT

Good jobs are harder to find:

Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones: The deep recession wiped out primarily high-wage and middle-wage jobs. Yet the strongest employment growth during the sluggish recovery has been in low-wage work, at places like strip malls and fast-food restaurants.
In essence, the poor economy has replaced good jobs with bad ones. That is the conclusion of a new report from the National Employment Law Project, a research and advocacy group, analyzing employment trends four years into the recovery.
"Fast food is driving the bulk of the job growth at the low end — the job gains there are absolutely phenomenal," said Michael Evangelist, the report's author. "If this is the reality — if these jobs are here to stay and are going to be making up a considerable part of the economy — the question is, how do we make them better?"...
The National Employment Law Project study found especially strong growth in restaurants and food services, administrative and waste services and retail trades. Those industries — which often pay wages at the federal minimum — accounted for about 40 percent of the increase in private sector employment over the past four years.
There has also been strong jobs growth in some high-paying industries, like professional, scientific and technical services — a category that includes accountants, lawyers, software developers and engineers. That sector accounted for about 9 percent of the private-sector job gains in the recovery.

Links for 4-28-14

Posted: 28 Apr 2014 12:03 AM PDT

Fed Watch: FOMC Week

Posted: 27 Apr 2014 10:59 AM PDT

Tim Duy:

FOMC Week, by Tim Duy: The FOMC will wrap up a two-day meeting this Wednesday. I suspect the subsequent statement will be met with little fanfare. There simply has been little in the way of data to prompt any new policy path. Steady as she goes.
To be sure, the Fed will be greeted by the Q1 GDP report Wednesday morning, and it is widely expected to be very weak. But incoming data (retail sales, auto sales, industrial production, and employment, for example) suggests that much of this weakness was weather related while the underlying pace of activity, albeit arguably unexciting, remains unchanged. In short, the economy is evolving largely according to the Fed's script, and thus we should expect no major policy change. I anticipate the statement will reflect a greater confidence that the first quarter growth hiccup was a weather effect, that low inflation remains a concern, and a reiteration of the Fed's commitment to a low-rate policy path as long as inflation remains a concern. And another $10 billion cut in asset purchases to push the taper further along.
The Fed may identify housing as an area of concern. Indeed, the recent softening of that sector appears unrelated to the weather. Instead, a variety of issues are at play - higher housing prices in many areas, tight underwriting conditions, insufficient job growth, low wages relative to home prices, uncertainty about the financial benefits of being a homeowner, tight financing for new home development, and limited lot availability and other supply side issues. See Neil Irwin's excellent review of the issues. You can sum this up quickly by saying the contours of the housing market have changed dramatically in the past decade and we do not know when and if we will see a return to what in the past was considered a normal environment.
Moreover, the Fed can have little impact on these issues, with the exception of one factor not mentioned above - interest rates. The roughly 100bp rise in mortgage rates since the taper talk began likely contributed to the softening of housing markets. There was a lack of countervailing factors at play to offset the tighter policy (see also Jared Bernstein). The Fed, however, is not likely to reverse course. They want out of the asset purchase business, and higher mortgage rates was the price that needed to be paid. For now, the policy impact of housing weakness is to ensure the long-term, low rate story holds (all else equal, of course).
I have characterized the Fed's decision to taper as a desire to normalize policy by shifting attention back to their primary policy instrument of short-term interest rates. They believed at the time that they could change the mix of policies without changing the level of accommodation. The softening of housing activity, however, suggests otherwise. Intentionally or not, the decision to taper resulted in a somewhat more hawkish reaction function than is consistent with the Fed's economic forecast and policymaker rhetoric.

This leads to a comment recently posed to me:

I think governors will soon come under a lot of pressure to get off of the zero bound before the next recession hits. Given the big delay in monetary impulse-response, I fear some overshooting could result.
I frequently hear similar sentiments, but I don't think this is the correct way to phrase the issue. I think that policymakers want to be able to normalize policy further, but that ultimately the ability to do so depends on the evolution of the economy. In other words, the path of short-term interest rates is an endogenous variable determined within the context of the Fed's current reaction function. Policymakers realize they can't rush to normalize rates because doing so is counterproductive. Premature tightening will only ensure a low rate environment is sustained even longer. And note the Fed is emphasizing the low levels of rates in their forecast, explicitly acknowledging rates will remain below "normal" levels far into the future. No rush to hike rates.
The tapering adventure and the subsequent impact on mortgage rates and housing has probably driven this point home. Indeed, it could be argued that the recent flattening of the yield curve is an indication that the Fed already risked the ability to normalize policy by initiating the tapering process and signaling their rate hiking intentions:


They probably do not want to push this any further just yet.
That doesn't mean the Fed can't overshoot further on the tighter side, only that I suspect any such overshoot will be the result of a forecast error that prompts excessive tightening, not simply a desire to normalize rates. We aren't there yet. I think we could get there quickly given the Fed's relatively dovish outlook (if firmer data quickly mounted), but not yet.
Bottom Line: I anticipate a relatively uneventful FOMC meeting. The data flow appears sufficiently consistent with the Fed's forecast to hold policy in check.

'Is the Stock Market Getting Bubbly?'

Posted: 27 Apr 2014 09:13 AM PDT

Dean Baker:

Is the Stock Market Getting Bubbly?: Washington Post columnist Steve Pearlstein argues it is, taking issue with fellow columnist Barry Ritholtz who says it isn't. I'm going to come down in the middle here.
The market is somewhat above its historic levels relative to trend earnings. Pearlstein cites Shiller who puts the price to earnings ratio at 25 to 1, compared to a historic average of 16. ... I would agree that stock prices are somewhat above trend, but not by quite as large a margin as Shiller.
To get some perspective, at the peak of the stock bubble in early 2000, the S&P peaked at just under 1530. The economy is almost than 70 percent larger today (in nominal dollars), which would mean that the S&P would be over 2600 today if it were as high relative to the economy. If we throw in that the economy is still operating at 5 percent below its potential then the S&P would have to be over 2700 now to be as high relative to the economy as it was at the peak of the stock bubble. With a Friday close of 1863, we can see the market is at a level that is a bit more than two thirds of its 2000 bubble peak, relative to the size of the economy.
It also is much lower relative to the economy than it was in 2007 when almost no one was talking about a stock bubble. The S&P peaked at just over 1560 in the fall of 2007. Taking into account the economy's 18 percent nominal growth over this period, and the fact that we are still 5 percent below potential GDP, the S&P would have to be over 1900 today to be as high relative to potential GDP as it was in 2007. Given recent patterns, it certainly doesn't make sense to talk about a bubble for the market as a whole.
However, there are some points worth noting. The social media craze has allowed many companies with no profits and few prospects for making profits to market valuations in the hundreds of millions or even billions of dollars. That sure looks like the Internet bubble. Some of these companies may end up being profitable and worth something like their current share price. The vast majority probably will not.
The other point is that the higher than trend price to earnings ratio means that we should expect to see lower than trend real returns going forward. This is an important qualification to Ritholtz's analysis. While there is no reason that people should fear that stocks in general will take a tumble, as they did in 2000-2002, they also would be nuts to expect the same real returns going forward as they saw in the past.
With a price to earnings ratio that is roughly one-third about the long-term trend, they should expect real returns that are roughly one-third lower than the historic average. This means that instead of expecting real returns on stock of 7.0 percent, they should expect something closer to 5.0 percent. That might still make stocks a good investment, especially in the low interest rate environment we see today, but probably not as good as many people are banking on.
In short, there is not much basis for Pearlstein's bubble story, but we should also expect that because of higher than trend PE ratios stocks will not provide the same returns in the future as they did in the past. Anyone who thinks we can better have their calculator checked.

'Is A Banking Ban The Answer?'

Posted: 27 Apr 2014 09:13 AM PDT

Paul Krugman:

Is A Banking Ban The Answer?: OK, a genuinely interesting debate on financial reform is taking place. I'm not even sure where I stand. But it's certainly worth talking about.
Atif Mian and Amir Sufi draw our attention to proposals to either mandate or create strong incentives for 100-percent reserve banking, coming from Martin Wolf and, more surprisingly, John Cochrane. Equally surprising — at least to me — is that Cochrane seems more aware of the difficulties of the issue. ... So, three thoughts.
First, Wolf's omission is a big one. If we impose 100% reserve requirements on depository institutions, but stop there, we'll just drive even more finance into shadow banking, and make the system even riskier.
Second, Cochrane's proposal calls for a remarkable amount of government intervention in finance; it makes liberal proposals for a transactions tax look like minor nuisances. Cochrane insists that we can easily run our economy without dangerous short-term private debt — that we can easily set things up so that the manager of your index fund sells a tiny piece of your stock portfolio every time you use a debit card at 7-11. Is this right?
Third, and on a quite different note: Are we really sure that banking problems are the whole story about what went wrong? I've made this point before, but look at any measure of financial stress: what you see is a huge peak in 2008 that quickly went down:
Yet ... we're still depressed and many advanced countries are now on the edge of deflation, more than five years later. This strongly suggests that while bank runs may have brought things to a head, the problems ran deeper; in particular, I'm strongly of the view (based in part on Mian and Sufi's work) that broader issues of excess leverage, and the resulting balance-sheet problems of many households, are key. And neither 100% reserves nor a repo tax would have addressed that kind of leverage. ...

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