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September 5, 2014

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Latest Posts from Economist's View


Paul Krugman: The Deflation Caucus

Posted: 05 Sep 2014 12:15 AM PDT

Why is there so much fear of inflation, particularly on the political right?:

The Deflation Caucus, by Paul Krugman, Commentary, NY Times: On Thursday, the European Central Bank announced a series of new steps it was taking in an effort to boost Europe's economy. ... But its epiphany may have come too late. It's far from clear that the measures now on the table will be strong enough to reverse the downward spiral.
And there but for the grace of Bernanke go we. Things ... are far from O.K., but we seem ... to have steered clear of the kind of trap facing Europe. Why? One answer is that the Federal Reserve started doing the right thing years ago, buying trillions of dollars' worth of bonds in order to avoid the situation its European counterpart now faces.
You can argue ... the Fed should have done even more. But Fed officials have faced fierce attacks... Pundits, politicians and plutocrats have accused them, over and over again, of "debasing" the dollar, and warned that soaring inflation is just around the corner..., but despite being wrong year after year, hardly any of the critics have admitted being wrong, or even changed their tune. And the question I've been trying to answer is why. What ... makes a powerful faction in our body politic — ...the deflation caucus — demand tight money even in a depressed, low-inflation economy? ...
One answer is ... truthiness — Stephen Colbert's justly famed term for things that aren't true, but feel true to some people. "The Fed is printing money, printing money leads to inflation, and inflation is always a bad thing" is a triply untrue statement, but it feels true to a lot of people. ...
Another answer is class interest. Inflation helps debtors and hurts creditors, deflation does the reverse. And the wealthy are much more likely than workers and the poor to be creditors... So perceived class interest is probably also a key motivation for the deflation caucus. ...
And the important thing to understand is that the dominance of creditor interests on both sides of the Atlantic, supported by false but viscerally appealing economic doctrines, has had tragic consequences. Our economies have been dragged down by the woes of debtors, who have been forced to slash spending. To avoid a deep, prolonged slump, we needed policies to offset this drag. What we got instead was an obsession with the evils of budget deficits and paranoia over inflation — and a slump that has gone on and on.

Links for 9-05-14

Posted: 05 Sep 2014 12:06 AM PDT

Fed Watch: August Employment Report Tomorrow

Posted: 04 Sep 2014 12:28 PM PDT

Tim Duy:

August Employment Report Tomorrow, by Tim Duy: Tomorrow morning we will be obsessing over the details of the August employment report with an eye toward the implications for monetary policy. Time for a quick review of some key indicators. First, initial unemployment claims continue to track at pre-recession levels:

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The employment components of both ISM reports where solid:

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The ADP report, however, was arguably lackluster with a gain of just 204k private sector jobs:

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The consensus forecast is for nonfarm payroll growth of 230k with a range of 195k to 279k. I am in general agreement with that forecast:

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I am somewhat concerned that I should be downgrading the importance of the ADP number and upgrading the strong claims and ISM data, leading me to conclude that the balance of risks lies to the upside of this forecast.
Of course, the headline nonfarm payrolls report is not necessarily the most important. Per usual, we will be scouring the data for indications that underemployment is lessening and slack being driven out of the labor market. And although Fed Chair Yellen has diverted our attention to those numbers, we should also keep a close eye on the unemployment rate, still the best single indicator of the state of the labor market. Consensus is a slight drop in the rate to 6.1%. I would hazard that a sub-6% rate is not out of the question as we have seen our share of 0.3 percentage point declines or greater in recent years.
A 5 handle on the unemployment rate would increase tensions in the FOMC between those who believe we are straying dangerously far from traditional indicators of appropriate monetary policy:

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and those who are willing to risk falling behind the curve by waiting until at least sustained target inflation is reached:

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Either way, I suspect any meaningful decline in unemployment will add fire to the communications debate at the Federal Reserve. Newly minted Cleveland Federal Reserve President Loretta Mester said today:
In addition to taking another step to taper asset purchases, in July, the FOMC maintained its forward guidance on interest rates. This guidance indicated that given our assessment of realized and expected progress toward our dual-mandate objectives, it will likely be appropriate to maintain the current 0-to-¼ percentage point range for the federal funds rate for a considerable period after the asset purchase program ends. With the end of the program nearing, I believe it is again time for the Committee to reformulate its forward guidance.
Bottom Line: Any further good news in labor markets will make it increasingly difficult for the Fed to maintain its "considerable period" guidance.

FRB Explanatory Video: Changes in Family Finances

Posted: 04 Sep 2014 11:23 AM PDT

'The US Economy Performs Better Under Democratic Presidents. Why?'

Posted: 04 Sep 2014 09:48 AM PDT

In case you missed this research from Blinder and Watson:

The US economy performs better under Democratic presidents. Why?, by Alan S. Blinder, Mark Watson: Economists and political scientists – not to mention the political commentariat – have devoted a huge amount of attention to the well-established fact that faster economic growth helps re-elect the incumbent party (see, for example, Fair 2011 for the US). But what about causation in the opposite direction – from election outcomes to economic performance? It turns out that the US economy grows faster – indeed, performs better by almost every metric – when a Democratic president occupies the White House.
This partisan gap has barely been noticed by researchers, but it is wide.1 Since the end of World War II, there have been 16 complete four-year presidential terms - seven Democratic and nine Republican. Growth of real GDP averaged 4.35% per annum under the Democratic presidents but only 2.54% under the Republicans. That partisan growth gap of 1.8 percentage points is large by any standard - it implies that real GDP grew by 18.6% during a typical Democratic four-year term, but only by 10.6% during a typical Republican term - and it is statistically significant despite the relative paucity of data.2 In fact, as Figure 1 shows, growth has always slowed down when a Republican president replaced a Democrat and always sped up when a Democrat replaced a Republican. There are no exceptions.3
Similar partisan gaps favouring Democrats – some larger, some smaller, and not always significant – appear in almost any macroeconomic indicator you can think of: the incidence of NBER recessions, employment growth, business investment growth, stock market returns, the profit share of GDP, and so on.

Figure 1. Average annualised GDP growth, by presidential term

The data hold more surprises. Here are a few:

  1. Even though the US Constitution assigns power over the budget (and most other economic powers) to Congress, not to the president, there is no difference in growth rates depending on which party controls Congress. It's the presidency that matters.
  2. The Democratic growth advantage is concentrated in the first two years of a presidency, especially the first, even though Republicans bequeath much slower-growing economies to Democrats and US GDP growth is positively serially correlated (ρ ≈ 0.40 in quarterly data).
  3. As indicated both by time series models and by genuine ex ante forecasts, Democrats do not inherit economies that are poised for more rapid growth. Granger-causality runs from party-to-growth not from growth-to-party.

Trying to explain the partisan growth gap

Confronted with such stark partisan differences, a macroeconomist naturally wonders whether the explanation could be that fiscal policy was, on average, more expansionary under Democrats. We assess this possibility in a variety of ways and come up with the same answer: no. What about monetary policy, despite the Federal Reserve's vaunted independence from politics? The answer here is that, if anything, monetary policy was more pro-growth under Republican presidents.4

If the partisan gap cannot be explained by differential monetary and fiscal policy, what does explain it? And do these explanatory factors suggest it was good luck or good policy? We searched over a wide variety of factors, mostly entered in the form of econometric 'shocks', that is, as residuals from regressions that include the variable's own lags and the current and lagged values of GDP growth. Four showed econometric promise:5

  1. Oil price shocks;
  2. Total factor productivity (TFP) shocks, adjusted to remove cyclical influences;
  3. Foreign (that is, European) growth shocks;
  4. Shocks to consumer expectations of future economic conditions.

In addition, defence spending shocks mattered in samples that include the Korean War, but not much in samples that do not. Using all five of these variables enables us to explain about half of the partisan gap in GDP growth rates since 1947.

As we peruse the list of explanatory variables, the first (oil shocks) looks to be mainly good luck, although US foreign policy (rather than economic policy) certainly played a role. (Think about George W Bush's invasion of Iraq, for example.) The second variable (TFP) should in principle measure improvements in technology – and so be mostly driven by luck. But a wide variety of economic policies, ranging from R&D spending to regulation and much else, might influence TFP in multiple, subtle ways. And TFP shocks affect the economy with long lags, so that a portion of the TFP-induced strong growth for Democrats was inherited from previous administrations. The third (real growth in Europe) should not have much to do with US economic policies. And when you couple the fourth variable (consumer expectations) with the observed fact that spending on consumer durables grows much faster under Democrats, you get a tantalising suggestion of a self-fulfilling prophecy – consumers, expecting faster growth under Democratic presidents, buy more durable goods on that belief, which makes the economy grow faster. Did they know something economists didn't?6

These findings raise a host of questions. Among them:

  • Is the basic finding limited to post-World War II data?

We think not. We found a similar (though smaller) partisan growth gap in US data going all the way back to 1875. But the 1875–1947 data are dominated by the administration of Franklin D Roosevelt, during which real GDP grew at a heady 7.4% annual rate.

  • Are there similar partisan gaps in other countries?

We looked briefly at four other large democracies with stable two-party systems: Canada, the UK, France, and Germany. The Canadian data display a similar (though not quite as large) GDP growth gap in favour of Liberal over Conservative prime ministers. But that is not true in any of the three European countries.

Our best econometric efforts explained little more than half of the Democratic growth gap - our 'glass' wound up literally half full and half empty. What factors explain the rest? Hopefully, further research will cast some light on that question.

References

Alberto Alesina and Jeffrey Sachs (1988), "Political Parties and the Business Cycle in the United States, 1948–1984", Journal of Money, Credit, and Banking, 20(1): 63–82.

Larry M Bartels (2008), Unequal Democracy: The Political Economy of the New Gilded Age, New York: Russell Sage Foundation, and Princeton, NJ: Princeton University Press.

Alan S Blinder and Mark W Watson (2014), "Presidents and the U.S. Economy: An Econometric Exploration", NBER Working Paper 20324, July. 

Michael Comiskey and Lawrence C Marsh (2012), "Presidents, Parties, and the Business Cycle, 1949–2009", Presidential Studies Quarterly, 42(1): 40–59.

Ray C Fair (2011), Predicting Presidential Elections and Other Things, Second Edition, Stanford, CA: Stanford University Press.

Endnotes

1 Alesina and Sachs (1988), Bartels (2008, Chapter 2), and Comiskey and Marsh (2012) are a few exceptions. There are not many.

2 In Blinder and Watson (2014), we compute standard errors in a variety of ways and find that the partisan gap is statistically significant at roughly a 1% significance level.

3 But the Carter-to-Reagan transition exhibits only a small slowdown.

4 This is true even though growth was decidedly faster under Fed chairmen who were first appointed by Democrats.

5 We omit from this list factors that we found help explain why Republican presidents should have shown a growth advantage.

6 The partisan growth gap does not rely on recent data. In fact, the estimate generally increases as we shorten the sample by eliminating more recent data.

'Are the Job Prospects of Recent College Graduates Improving?'

Posted: 04 Sep 2014 09:05 AM PDT

My students worry about this:

Are the Job Prospects of Recent College Graduates Improving?, by Jaison R. Abel and Richard Deitz: This post is the fourth in a series of four Liberty Street Economics posts examining the value of a college degree. The promise of finding a good job upon graduation has always been an important consideration when weighing the value of a college degree. In our final post of this week's blog series, we take a look at the job prospects of recent college graduates. While unemployment among recent graduates has continued to fall since 2011, underemployment has continued to climb—meaning that fewer graduates are finding jobs that make use of their degrees. Do these trends mean that there has been a decline in the demand for those with college degrees? Using data on online job postings, we show that after falling sharply during the Great Recession, the demand for college graduates rebounded during the early stages of the recovery, but has been flat for the past year and a half, suggesting that the demand for college graduates has leveled off. All in all, while finding a job has become easier for recent college graduates over the past few years, finding a good job has not, and doing so is likely to remain a challenge for some time to come. ...

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