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September 11, 2015

Latest Posts from Economist's View


Posted: 10 Sep 2015 12:06 AM PDT
Posted: 09 Sep 2015 12:31 PM PDT
Jared Bernstein on the Bush tax plan:
Jeb Bush's new tax plan: A revenue-eating wolf in sheep's clothing: It seems like just yesterday we were pointing out that a) the arithmetic in Republican presidential candidates' tax plans didn't add up, and b) they were highly regressive.
Well, crank up the old calculator, because Jeb Bush's new tax plan appears to have both of those problems, big time. ... I can confidently assert that the plan loses piles of revenue. Perhaps that's the point, but if so, it's a serious problem for our fiscal accounts, our economy, and the ability of our government to do what we need it to do. ...[some details of the plan] ...
These are just absolutely huge, regressive changes, far bigger than his bro's, and really–what did we get for all of W's supply-side cuts? Growth, jobs, and productivity had little to show for them, while after-tax inequality significantly worsened.
There are a few pieces I'll note below that claw back some lost revenue, but this is really aggressive tax cutting. ... But didn't I say something about sheep's clothing?
There are a few ideas in the plan that tilt in different directions from the usual supply-side formula. To its credit, the Bush team expands the Earned Income Tax Credit for childless workers... They also expand the standard deduction, thereby significantly reducing the number of households with federal tax liability..., this pits Bush against the Romney "makers/takers" crowd...
[More details, both positive and negative] ... OK, that's enough of the weeds. And I give the Bush team credit for presenting a fairly detailed plan at this early stage of the race. Also..., we'll have to wait for a score by someone not associated with the campaign (rev up the hamster wheels, TPC!) to see the real extent of the revenue and distributional damage. But I'd be amazed—and I promise ... I will admit my mistake on these pages ... if I'm wrong—if this plan doesn't blow a huge hole in the budget and make the federal tax code less progressive.
And those are two things we really, really don't need right now.
Posted: 09 Sep 2015 10:19 AM PDT
I tried to argue against the points Richard Fisher is making in my column yesterday.
First, he tells us to ignore the headline inflation rate since it is subject to lots of short-run variation from factors such as food and commodity prices, and instead focus on the Dallas Fed's trimmed mean measure. Here it is:
12-month PCE inflation
Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15
PCE
0.3
0.3
0.2
0.2
0.3
0.3
PCE excluding food & energy
1.3
1.3
1.3
1.3
1.3
1.2
Trimmed Mean PCE
1.6
1.6
1.6
1.6
1.7
1.6
See the problem? The Fed's target rte of inflation is 2.0 percent, but trimmed mean inflation, which is intended to isolate long-run inflation trends and ignore short-run variation, is holding steady at 1.6 percent.
Actually, Fisher is a bit loose with the numbers. He says:
conventional core PCE inflation has averaged 1.65 per cent, nearly 30 basis points below headline inflation's 1.94 per cent average.
But, his preferred measure of inflation, the trimmed mean, shows inflation:
coming in at 1.83 per cent over the past decade, 10 basis points below the headline rate.
But for policy, who cares about 10 years ago? Recently, as shown above, the measure has been close to 1.6 percent, and that's a big miss on the downward side. He does acknowledge this, but still acts as though it is only a near miss:
the Dallas Fed trimmed mean rate has been running steadily at 1.6 per cent over the past year, lower than policymakers are shooting for, but less discouraging than the most watched measures suggest.
Yes, 1.6 versus 1.2 percent for July (see above) is a bit better, but let's not pretend it's close to target. Maybe it is "less discouraging," but it is still discouraging.
In any case, if you are a hawk and want rates up, what do you argue at this point? First, that labor markets are tightening (he ignores the secular stagnation point others use to argue labor markets are tighter than they seem), and inflation is just around the corner (as it always is if you are Richard Fisher, go back and look at what he has been saying throughout the crisis -- inflation has always been just ahead):
History tells us that wage growth initially picks up slowly when unemployment starts to fall but, as it approaches more fulsome levels, wage rises accelerate.
That is the territory we are approaching now. Unemployment has reached 5.1 per cent sooner than the Fed's rate setters expected. Wage-inflation pressures are not yet nettlesome but they have been rising, smack dab in line with past experience.
But as I explained in my column, recent research says much of that history can be ignored since the relationship between wage inflation and price inflation has changed considerably over the years (pass-through has diminished quite a bit since 1980, i.e. wage increases no longer translate into price increases as they once did, for example in the 1970s Fisher remembers so well). And as the WSJ recently explained, where is the wage inflation the hawks are so worried about?:
U.S. employers aren't yet being squeezed by workers demanding higher wages. The employment-cost index, a broad gauge of wage and benefit expenditures, rose a seasonally adjusted 0.6% in the fourth quarter last year, the Labor Department said Friday. That's down from 0.7% in the two earlier quarters and jibes with other data showing only limited wage pressure across the U.S. 
But inflation is coming. It's always coming, right?
Okay, price inflation is below target, wage inflation is really hard to find, and there are many reasons to suspect that labor markets are not as robust as the unemployment rate suggests (not to mention uncertainties in the world economy). But if you are a hawk, you don't give up merely because the data is stacked against you. Instead, you fall back on the "long lags" argument:
Monetary policy ... operates with a lag. If the Fed waits for full employment and then has to throttle back sharply, there will be a nasty shock. The upcoming Fed meetings present a timely opportunity to start slowing down the engines
The question I raised yesterday is whether, with advances in digital technology, we should expect these lags to be as long as they were in the past, e.g. in the 1970s. It seems to me that they have likely shortened, perhaps quite a bit, and that gives the Fed more room for patience than it had in the past. Couldn't it at least wait for clear signs of a problem before acting?
Finally, why the huge fear over a little bit of inflation rather than huge fear over higher than necessary unemployment? Why not reserve the same level of fear for those who struggle with unemployment and all the troubles that come with it? Which is the greater problem to avoid? If we make a mistake, should it be to allow a bit of inflation, which the Fed can quickly reverse, or allow a higher level of unemployment, a problem that is much more costly and much harder to deal with? Why does inflation get so much more attention from some people? Why the hurry to raise rates?
Posted: 09 Sep 2015 08:33 AM PDT
Dean Bakers says we shouldn't get overly excited about today's seemingly positive data on job openings and turnover:
Hold the Celebration on Job Openings: The Labor Department released new data this morning on job openings and turnover. The release showed a big jump in openings in July compared with June or July of 2014. In the past this has been taken as evidence of the economy's strength and also as an indication that employers are having problems get workers with the needed skills.
One problem with this story is that many of the openings are showing up in retail trade and restaurants, which are not areas where we ordinarily think the skill requirements are very high (which does not mean that the work is not difficult). The chart below shows most of the sectors responsible for the jump in openings. The biggest rise is professional and business services, which includes many highly skilled occupations, but also includes temp help and custodians. The point here is that it is not clear what is going on in these markets based on the rise in openings. If employers were really having trouble getting the workers they need then they should be offering higher pay. Thus far, they are not.
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