Redirect


This site has moved to http://economistsview.typepad.com/
The posts below are backup copies from the new site.

July 4, 2014

Latest Posts from Economist's View

Latest Posts from Economist's View


Paul Krugman: Build We Won’t

Posted: 04 Jul 2014 12:24 AM PDT

Why has public investment collapsed?:

Build We Won't, by Paul Krugman, Commentary, NY Times: You often find people talking about our economic difficulties as if they were complicated and mysterious, with no obvious solution. ... The basic story of what went wrong is, in fact, almost absurdly simple: We had an immense housing bubble, and, when the bubble burst, it left a huge hole in spending. Everything else is footnotes.
And the appropriate policy response was simple, too: Fill that hole in demand. In particular, the aftermath of the bursting bubble was (and still is) a very good time to invest in infrastructure. ... Since 2008,... our economy has been awash in unemployed workers ... and capital with no place to go (which is why government borrowing costs are at historic lows). Putting those idle resources to work building useful stuff should have been a no-brainer.
But what actually happened was exactly the opposite: an unprecedented plunge in infrastructure spending. ... In policy terms, this represents an almost surreally awful wrong turn; we've managed to weaken the economy in the short run even as we undermine its prospects for the long run. Well played!
And it's about to get even worse. The federal highway trust fund ... is almost exhausted. Unless Congress agrees to top up the fund..., road work all across the country will have to be scaled back just a few weeks from now. If this were to happen, it would quickly cost us hundreds of thousands of jobs, which might derail the employment recovery that finally seems to be gaining steam. And it would also reduce long-run economic potential.
How did things go so wrong? As with so many of our problems, the answer is the combined effect of rigid ideology and scorched-earth political tactics. The highway fund crisis is just one example of a much broader problem. ... The collapse of public investment was ... a political choice.
What's useful about the looming highway crisis is that it illustrates just how self-destructive that political choice has become. It's one thing to block green investment, or high-speed rail, or even school construction. I'm for such things, but many on the right aren't. But everyone from progressive think tanks to the United States Chamber of Commerce thinks we need good roads. Yet the combination of anti-tax ideology and deficit hysteria (itself mostly whipped up in an attempt to bully President Obama into spending cuts) means that we're letting our highways, and our future, erode away.

Links for 7-04-14

Posted: 04 Jul 2014 12:06 AM PDT

'An Interview with Dr. Mark Thoma'

Posted: 03 Jul 2014 11:25 AM PDT

I was interviewed (via email):

An Interview with Dr. Mark Thoma

Fed Watch: June Employment Report

Posted: 03 Jul 2014 11:22 AM PDT

Tim Duy:

June Employment Report, by Tim Duy: The BLS reported solid numbers for the labor market in June, although there may be somewhat less acceleration than meets the eye. On net, the ongoing rapid fall in the unemployment rate nudges forward my expectation of when the Fed makes history and begins to lift rates from the zero bound. Still, there does not appear to be sufficient reason yet to believe the Fed will steepen the pace of increases.
Nonfarm payrolls rose by 288k, ahead of expectations for 211k. Job growth was broad-based and earlier months were revised higher. The three-month average for job growth is at its highest since 2011 while the 12-month average is slowly crawling up and now stands above 200k:

EMPDAYd070314

It is worth remembering that in order to maintain constant percentage changes over time, the absolute change has to increase. Indeed, the acceleration in percentage terms over the past year looks less than impressive:

EMPDAYb070314

Still somewhat below that experienced at the height of the housing bubble, clearly weaker then the late 1990s, and note in particular the acceleration in the early 1990's. It was that kind of acceleration that caught the Fed's attention. We are not seeing anything like that yet.
Also note that while hours worked has recovered from the winter doldrums, it too is not growing at some blockbuster pace:

EMPDAYh070314

EMPDAYc070314

In short, in some sense the excitement over the recent improvement in absolute job growth says less about an acceleration in actual activty and more about our diminished expectations for this recovery.
The persistent decline in the unemployment rate will undoubtedly cause consternation among the more hawkish FOMC members:

EMPDAYf070314

Recall St. Louis Federal Reserve President James Bullard recent warning:
The Federal Open Market Committee is closer to its goals for full employment and low and stable inflation than many investors realize, Bullard said. He predicted the pace of economic growth will accelerate to 3 percent this year after an unexpectedly deep first-quarter contraction.
"Inflation is picking up now. It is still below target but it has been moving up in recent months," he said in response to a question at a forum organized by the Council on Foreign Relations. "I don't think financial markets have internalized how close we are to our ultimate goals, and I don't think the FOMC has internalized how close we are."
Bullard's story in a picture:

EMPDAYg070314

As the Fed closes in on its traditional policy goals, the pressure from the hawks, and even the center, for a rate increase will increase. Still, the doves are not without a defence. Federal Reserve Chair Janet Yellen's measures of underemployment are still underwhelming:

EMPDAYa070314

In particular, wage growth has stalled, adding additional credence to the argument that substantial labor market slack remains despite the decline in the unemployment rate:

EMPDAYe070314

Also note that there is nothing here yet to challenge the more general consensus among policymakers that equilibrium interest rates are lower than in past cycles.
Bottom Line: The jobs report is generally good news, albeit I would argue there remains room for substantial improvement. That room for improvement continues to restrain the Fed from dramatically tighter policy. My expectations for the first rate hike center around the middle of next year. On net, this report drags my expectations forward somewhat and suggests a higher probability of a hike before June than after June. Score one for the FOMC hawks. But I also see little here yet to suggest the need for any dramatic tightening; I doubt FOMC's expectation of a long, gradual tightening cycle is much altered. That's one for the doves.

'The Financial Instability Argument for Raising Rates'

Posted: 03 Jul 2014 11:21 AM PDT

Simon Wren-Lewis responds to calls to raise interest rates to promote financial stability:

The financial instability argument for raising rates: ... Let's call the proposition that we should raise rates now to avoid financial instability the BIS case, after the Bank of International Settlements who have been making this argument ever since the recession began. ...
I want to begin by conceding a point. Suppose, as a monetary policymaker, you believe a financial crisis is possible, and that by raising rates you may be able to prevent it. Assume, crucially, that there is nothing else you can do to help prevent the financial crisis. In that case, you will consider raising rates, even if inflation is below target. ...
However that is not the end of the story. If you raise rates to prevent financial instability when inflation is below target, inflation will remain below target or may fall even further. You cannot ignore that. So if interest rates are raised today to head off a financial crisis, they will have to be lower in the future to deal with the lower inflation or even deflation you have caused. ... So by raising rates by a modest amount today we might prevent financial instability, but at the cost of delaying the recovery. ...
As Ryan Avent says, we can avoid all these difficulties by adding an extra instrument, which is macroprudential regulation. ... Now, as R.A. notes, those taking the BIS position counter that such measures are untested and may not be effective. Here is a typical example in the FT, where it is stated that "macroprudential policies will fail to stop investors taking irrational risks".
So we must raise interest rates, and delay the recovery, because nothing else can stop some in the financial system taking excessive risks. To which I can only say, summoning all my academic gravitas, what audacity, what impudence! Not only have we had to suffer the consequences of the Great Recession because of excessive risk taking within a largely unregulated financial system, we now have to cut short our main means of getting out of that recession because they might do it again. I do not know what planet these people are on, but if its mine, can they please get off and play their games elsewhere.

Jane Yellen on how to deal with financial instability:

... Well, I think my main theme here today is that macroprudential policies should be the main line of defense, and I think the efforts that we're engaged in in the United States but all countries coordinating through the — through Basel, through the Financial Stability Boards — the efforts that we are taking to globally strengthen the resilience of the financial system: more capital, higher quality capital, higher liquidity buffers, stronger and — arrangements for central clearing of derivatives that reduce interconnectedness among systemically important financial institutions, strengthening of the architecture of payments and clearing system dealing with risks we see in areas like tri-party repo. ...
I would also put resolution planning which we're engaging in actively as among those measures. And, you know, as I mentioned, I think cyclical policies and sector-specific policies that we're seeing many emerging markets take steps that can be used, particularly when we see problems developing in housing or a particular sector. These are really promising.
I don't think we yet understand how they work. When they can be effective, how we should use them. I hope this will be an area for the IMF and for us of active research so we can better deploy those tools, capital — countercyclical capital charges.
But I think importantly, I've not taken monetary policy totally off the table as a measure to be used when financial excesses are developing because I think we have to recognize that macroprudential tools have their limitations. ... So to me, it's not a first line of defense, but it is something that has to be actively in the mix. ...

Paul Krugman says "It's about sadomonetarism, not stability."

I think the macroprudential approach is correct. Using interest rates to deal with pockets of financial instability is too blunt of an instrument, e.g. it hits all industries, not just the ones where the instability is suspected and it may not directly address the particular problem generating the instability. It's much better to target the sectors where the problems exist, and to shape the policies to directly address the underlying problem(s).

Employment Report: Positives and Negatives

Posted: 03 Jul 2014 09:31 AM PDT

 Jared Bernstein:

Jobs Report, First Impressions: A Strong June for the Job Market: Payrolls were up 288,000 and the unemployment rate ticked down to a near six-year low of 6.1% last month, according to today's employment report from the BLS (a rare Thursday edition due to the holiday weekend). It's an unquestionably strong report, with industries across the economy posting job gains. Adding to the positive news, job growth estimates for the prior two reports were revised up by 29,000, implying an underlying average growth pace of 272,000 for payrolls in the second quarter of the year.

Unlike some prior months when the jobless rate came down, June's unemployment rate fell for the "right reasons:" not more people leaving the labor force, but more people getting jobs.

The only negative I'm seeing at first glance is the 275,000 increase in the number of involuntary part-timers (part-time workers who'd rather have full-time jobs). But this is a volatile monthly number and is down 650,000 over the past year. ...

Calculated Risk

Comments on Employment Report: [Earlier: June Employment Report: 288,000 Jobs, 6.1% Unemployment Rate] Total employment increased 288,000 from May to June, and is now 415,000 above the previous peak. Private payroll employment increased 262,000 from May to June, and private employment is now 895,000 above the previous peak (the unprecedented large number of government layoffs has held back total employment). Through the first half of 2014, the economy has added 1,385,000 payroll jobs - up from 1,221,000 added during the same period in 2013 - even with the severe weather early this year.   My expectation at the beginning of the year was the economy would add between 2.4 and 2.7 million payroll jobs this year, and that still looks about right. Hopefully - now that the unemployment rate has fallen to 6.1% - wage growth will start to pick up. Overall this was another solid employment report. ...

Real Time Economics:

In an Overall Sunny Jobs Report, Here Are the Few Clouds, by Ben Leubsdorf: The June U.S. jobs report was broadly positive. Payrolls rose strongly, the unemployment rate fell and the number of Americans who have been out of work for more than six months continued to decline.
But there were a few upbeat ingredients still missing from the brew: accelerating wage growth, rising labor-force participation and more Americans finding full-time work instead of settling for a part-time job. ...

No comments: