Peak Duy: Fed rate increase, please wait?

Professor Tim Duy is on point, as usual. Go to his post for cool graphs and the full discussion.

Many/most economists and Fed officials are looking at a September rate hike (to start a gradual, steady process of rate normalization).

Bottom Line: Ultimately, as the crisis fades further into the rearview mirror, the Fed see the policy risks shifting. Many, including Yellen, will shift back toward the central banker’s natural inclination to fight inflation, despite the lack of inflation for the past two decades. And that natural inclination keeps the September option alive. Given the Fed’s penchant for tight policy on average, the risk is that while they don’t trip the economy into recession in the near term, they instead lock the economy into a sub-par equilibrium.

The problem is one of asymmetric risks. The Fed is concerned with too-high inflation, when they should still be worried about too-low inflation.

Paul Krugman thinks the Fed’s logic is completely backwards. From his Bloomberg interview this week:

If the Fed waits too long to raise rates, then we get a little bit of inflation. If the Fed raises rates too soon, we risk getting caught in another lost decade. So the risks are hugely asymmetric. I really find it quite mysterious that the Fed is eager to raise rates given that, they’re going to be wrong one way or the other, we just don’t know which way. But the costs of being wrong in one direction are so much higher than the costs of being the other.

The Fed, I think, believes the risks are asymmetric in the other direction – that inflation expectations are very fragile to the upside, and hence waiting too long risks a costly rise in actual inflation.

If I had to bet who would be proven right, I would put my money with Krugman. Inflation and inflation expectations have proven substantially less fragile in the past twenty years than the Fed likes to admit. Consider first that inflation has tended to hover mostly below two percent since 1995:


The Fed would argue that their credibility explains stable inflation expectations. By acting ahead of inflation, the Fed ensures there is no above-target inflation, and that connection between policy and outcomes gives rise to that credibility. I would argue that two decades of generally below target inflation suggests an overly excessive pursuit of credibility at the cost of economic underperformance. We don’t reach the target inflation consistently, but we do get recessions and slow job market recoveries.

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Rising Portuguese Socialists

Exciting news out of Portugal as the Socialist Party has the potential to kick out the conservative Troika-following coalition. Their rhetoric sounds somewhat similar to Greece’s Syriza, but their situation is very different (for example, better in that they’ve had a semi-successful bailout, worse because some of the structural pieces of their economy are weaker).

I enjoyed this great article about it from Ambrose Evans-Pritchard of The Telegraph

… Portugal’s Socialist Party vowed to defy austerity demands from the country’s creditors and block any further sackings of public officials.

“We will carry out a reverse policy,” said Antonio Costa, the Socialist leader.

Mr Costa said a clear majority of his party wants to halt the “obsession with austerity”. Speaking to journalists in Lisbon as his country prepares for elections – expected in October – he insisted that Portugal must start rebuilding key parts of the public sector following the drastic cuts under the previous EU-IMF Troika regime.

The Socialists hold a narrow lead over the ruling conservative coalition in the opinion polls and may team up with far-Left parties, possibly even with the old Communist Party.

One interesting thing mentioned is Costa’s aggressive rhetoric towards the IMF, and attempted reassurance about the EU (even though the EU main one is pushing harsh austerity). I see it as a deliberate strategy to scapegoat the IMF, while trying to maintain some positive feelings towards the EU among Socialist Party members, which would be good for the over-arching European Project (lasting peace, building pan-European identity, etc.).

Mr Costa accused the Portuguese government of launching a blitz of privatisations in its dying days, signalling that the Socialists will either block or review the sale of the national airline TAP, as well as public transport hubs and water works.

His harshest language was reserved for the International Monetary Fund but this reflects the cultural milieu of the Portuguese Left. In reality the IMF was the junior partner in the Troika missions. Continue reading

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Misleading ‘facts’ in the case for TPP

I haven’t been blogging much lately, in part because I’ve been preoccupied with an impending job change, and in part because I haven’t been especially inspired to share on the blog.

I recently have had some discussions with friends in real life and over email, and on twitter with Jim O’Sullivan, where I have had some time to think about TPP. The CEA in their research brief and in the 2015 Economic Report of the President has made an economic case for TPP. After thinking and reading economists on both sides, I am increasingly agreeing with the TPP-skeptics side of the discussion (I have a hard time disagreeing with Senator Warren anyway).

It is difficult not to be skeptical of the agreement, especially when the proponents arguments seem to increasingly rely on 1. generally arguing that increasing trade and lowering trade barriers is a good thing; and 2. making false or at least somewhat misleading arguments that end up weakening their case.

Dean Baker, Jared Bernstein, Paul Krugman, economists at EPI, and others continue to make the case against (or at least the case to be skeptical of) the TPP.

I want to focus on one fairly narrow fact, where I think the proponents have been manipulative of the facts surrounding TPP. They argue that the scope of the TPP is huge, implying that the effect will also be large and positive for the U.S. In both linked sources above, CEA has presented the trade statistics of the TPP countries as a group, and they are large.

econ report of pres tpp


The TPP countries as a percentage of total U.S. bilateral trade is about 40.5%. This is larger than all of our other free trade agreements. These facts I do not dispute (except, maybe, for calling this a ‘free’ trade agreement… maybe even for calling it a ‘trade’ agreement).

I believe CEA is purposefully misleading because they have ignored, excepting a cryptic footnote, that the trade to and from TPP countries is overwhelmingly already covered by existing free trade agreements (FTAs). The U.S. already has FTAs with Canada, Mexico, Australia. Singapore, and Chile. It is unclear to me how including them in a summary statistic in the above chart is at all informative. It seems to be entirely manipulative. Canada and Mexico are the U.S.’s two largest single country trade partners, so obviously TPP countries make up a huge proportion of U.S. bilateral trade. In fact, the 5 countries with FTAs make up 32.8% of U.S. bilateral trade (38.6% of U.S. exports, while all 11 countries only make up 44.8% of total U.S. exports). Data from Census.

pie chart of bilateral trade


table of tpp trade



The point here is that for all of the hype the administration is trying to create around TPP, the marginal effects of the agreement are likely extremely small–Prof. Krugman said it first, and Dean Baker continues to say it incessantly. Trade barriers are extremely low with most of the TPP countries, meaning potential benefits of an FTA are fairly low. What matters then is the non-tariff, non-trade agreements, of which we should be extremely skeptical.

After this very harsh and skeptical post, I feel like I should add the disclaimer that it is certainly possible that the text of the agreements will vindicate the Administration for their secrecy, and prove the critics (including me) wrong for the criticism. Or as I suggested to my friends, drumming up this controversy is actually providing the Administration cover to demand more in negotiations, which would be House of Cards-esque, but likely still wouldn’t provide them an opportunity to begin to address currency manipulation, a trade issue that actually has huge effects on U.S. trade.

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Market Power and the Big Pizza Industry

I hate it when I see things (companies, celebrities, etc.) I like do something I dislike. So it goes in the world of pizza. Apparently the pizza industry is staunchly Republican and anti-regulation. Interestingly, the industry has fairly small political spending, yet it exerts substantial power.

They’re not throwing money around — pizza’s biggest spenders devoted less than $500,000 to lobbying last year and just $1.5 million in political contributions in the last two election cycles.

I don’t feel particularly bad about that though because the biggest spenders, like Pizza Hut, also make the worst pizza. Hopefully the best pizza places (Vace!) are not subverting our political system, though I have known at least one hard-core Republican small-pizza-business owner. I would also imagine that there is an important distinction to be made between frozen and non-frozen pizza makers, and that the frozen pizza industry is a subtle and malignant force that commands the market for school lunch. I can’t help but think there is a significant problem with market power in the school lunch market. It follows that the business would be extremely lucrative, leading to violently powerful special interest/lobbying responses to any existential threat.

And in testimony before Congress in August of that year, Karen Wilder, chief nutritionist for Schwan Food, said many foods packed with nutrients, including pizza, risked elimination from school lunch by the proposed rules. A subsidiary of Schwan supplies 70 percent of school lunch pizza.

Prof. Krugman made a small introduction to the literature that examines the relationship between obesity and politics.

There are outliers — Utah especially, but also Montana and Wyoming, of which more in a minute, but overall the relationship is really clear. At the county level, the “diabetes belt” — that’s the CDC’s term, not mine — is clearly very Republican.

Again, I imagine this has to do with market power, regulation, environmental/lifestyle and, maybe, ideology drives some of those differences (I doubt the difference has to do with heredity).

I was interested, so I found a 2011 NYTimes article that discusses some of the causes and policy proposals to address the rise in obesity. It looks a lot like the industries related to cars, housing/urban development and regional planning, soft drinks, and all of our food changed a lot post-WWII, especially starting in the 1970s, and our bodies ended up changing with them.

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Interesting (?) thoughts on wage growth and good jobs

I thought this blog post by Prof. Vollrath was very clear and interesting in informing how to think about technology and “good jobs.”

Hoping or trying to recreate the employment structure of 1950 is stupid. We don’t needthat many people to assemble stuff together any more because we are so freaking good at it now. The expansion of service employment isn’t some kind of historical mistake we need to reverse.

Any job can be a “good job” if the worker and employer can coordinate on a good equilibrium. Costco coordinates on a high-wage, high-benefit, high-effort, low-turnover equilibrium. Sam’s Club coordinates on a low-wage, low-benefit, low-effort, high-turnover equilibrium. Both companies make money, but one provides better jobs than the other. So as technology continues to displace workers, think about how to get *all* companies to coordinate on the “good” equilibrium rather than pining for lost days of manly steelworkers or making the silly presumption that we will literally run out of things to do.

It seems like the Walmart/low-wage workers raises may be an indication that employers realize the importance of making better jobs, but the U.S. is not nearly there yet. It seems like EPI is very focused on the issue of how to create good jobs. It’s tough with little collective organizing by/for workers.

When we think about a post-recession world, it is interesting to consider than the slow wage growth is related to “pent-up wage cuts” resulting from downward nominal wage rigidity. Still, unsatisfactory wage growth and low job quality have been issues for a while. Workers wages and productivity have decoupled. First, we had polarized job creation (growth in the top and the bottom). Now, we mostly have job growth at the bottom of the income distribution. Those lower-paying jobs are going to workers who are better educated (and presumably more indebted).

There are two trends that I have come across in the academic research, and I wonder if (and how) they might be related:

1) The labor market and firms have become less fluid and less dynamic. “[T]hat reduced fluidity has harmful consequences for productivity, real wages and employment.”

This seems like an observation that should raise a red flag for rent-seeking/market power watchers. [From the more conservative side, there have been attempts to attribute the decline in U.S. dynamism  (a “start-up deficit”) to increasing or more stringent regulations. This hypothesis, as conceptualized by Prof. Tabarrok, did not return any discernible results that related regulation to business dynamism.]

In my mind, (at this moment, at least) there might be two factors that might be causal (or at least correlated) with decreasing dynamism and fluidity. One, I suspect, is an insufficient social safety net. It would be interesting to see a comparison of start-ups and dynamism in an economy with a basic income, for example. The idea is that people would be more willing to take risks–start businesses, quit their jobs, innovate, etc.–if they had a more attractive fall-back option, if they ended up failing. It might have something to do with debt (which is the same social safety net story, more or less) caused by education, health, or housing costs. The second thing related to reduced dynamism, and the second research area I wanted to mention, is the rise of finance.

2) Profs. Cecchetti and Kharroubi recelty released a paper through the BIS (very interesting place for this to come from) that lays out a comprehensive argument for why and how finance has crowded out real economic growth. They also have a pithily titled blog post “Finance is great, but it can be a real drag, too.” Prof. Cecchetti starts out with a couple anecdotal paragraphs about how college students have gone from wanting to work on “galactic structures, superconductors, computer algorithms, subcellular mechanisms, and genetic coding” to wanting to get “high-paying jobs” in finance. This rings true with my experience. Although, personally, I think attitudes may have changed, but another important factor is where the jobs/money actually are/is. Anyway, here is the briefest summary of the results:

For the past few years, one of us (Steve) has been studying the relationship between economic growth and finance. The results are striking. They come in two categories. First, the financial system can get too big – to the point where it drags productivity growth down. And second, the financial system can grow too fast, diminishing its contribution to economic growth and welfare. …

We can think of additional reasons why finance causes problems for economic growth, and we’ve written about them extensively on this blog (see, for example, our pieces on credit ratings, conflict of interest, Ponzi schemes, and leverage). Most important, when intermediaries fail to perform the critical screening and monitoring necessary to ensure efficient allocation of resources, productivity suffers and the financial system as a whole can become vulnerable to crises.

So, what should we conclude? Many observers (especially the largest financial intermediaries themselves) are critical of the increased regulation of the financial sector following the crisis of 2007-2009, arguing that it will slow economic growth. We, too, can think of some misdirected regulatory efforts that may diminish long-run efficiency without reducing systemic risk (see, for example, our take on raising the maximum loan-to-value ratio for mortgages to 97%).

But, we strongly support the authorities’ efforts to raise capital requirements in order to make the financial system safer. If anything, the research on finance and economic growth strengthens that view, suggesting that there will be little, if any, cost in terms of economic growth even if further increases in capital requirements were to lead to some shrinkage of the size of the financial sector in the advanced economies.

I’m not sure how direct the linkages are, but I think that the rise of finance has been important in wage growth and job quality. I have the same impression (picked up in large part from my time at CAP and UNC CCC) that Prof. Cecchetti expressed, that finance greatly improves people’s lives when properly harnessed. Today though, the evidence has begun to accumulate to a point where it is pretty clearly that the U.S. financial sector has gotten too large. I find it hard not to suspect that the overgrowth has led to rent-seeking behavior and market power accumulation, and that has had effects on business dynamics and the labor market that we have not teased out completely (yet).

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At least one German policymaker is talking sense: its Joschka Fischer (surprise!)

In college, one of mine (and Mattis’) favorite politicians was Joschka Fischer, a leader in the German Green Party and former Foreign Minister and Vice Chancellor. It is encouraging to see him publishing at Project Syndicate, and I certainly hope more German policymakers see problems in Europe the same way he does. If they don’t, Germany may be in trouble, because an export-led growth model is, by definition and by experience, not built to last. German domestic demand certainly looks fairly weak. We will have to see what happens, but after the continuing low inflation/negative yields and continued downward revisions to economic growth, something had to give, and hopefully that something will be Greece and Yanis Varoufakis.

Anyway, the reason I got thinking about this post, Joschka Fischer:

Not long ago, German politicians and journalists confidently declared that the euro crisis was over; Germany and the European Union, they believed, had weathered the storm. Today, we know that this was just another mistake in an ongoing crisis that has been full of them. The latest error, as with most of the earlier ones, stemmed from wishful thinking – and, once again, it is Greece that has broken the reverie.
Even before the leftist Syriza party’s overwhelming victory in Greece’s recent general election, it was obvious that, far from being over, the crisis was threatening to worsen. Austerity – the policy of saving your way out of a demand shortfall – simply does not work. In a shrinking economy, a country’s debt-to-GDP ratio rises rather than falls, and Europe’s recession-ridden crisis countries have now saved themselves into a depression, resulting in mass unemployment, alarming levels of poverty, and scant hope.

Warnings of a severe political backlash went unheeded. Shadowed by Germany’s deep-seated inflation taboo, Chancellor Angela Merkel’s government stubbornly insisted that the pain of austerity was essential to economic recovery; the EU had little choice but to go along. Now, with Greece’s voters having driven out their country’s exhausted and corrupt elite in favor of a party that has vowed to end austerity, the backlash has arrived. Continue reading

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Wages may rise, but not as much as we think they should

Prof. Mark Thoma has another extremely accessible article arguing that achieving “full employment” alone is not nearly enough to solve the problem of stagnating wages.

I’m planning on posting some more interesting research on new trends in labor economics, but I’ve been hesitant because I’m not sure what I want to say. I am developing my own thoughts about what is happening in the U.S. labor market, but I’m not quite ready to share them.

Anyway, I want to share a lot of Prof. Thoma’s article. I really liked the quote from St. Thomas Aquinas.

The most recent employment report brought mixed news. The unemployment rate continues its slow but steady downward path and now stands at 5.6 percent, but wages remain flat. In response, most analysts made two points. First, the lack of wage growth indicates that we are not yet close enough to full employment to generate upward pressure on wages, so policymakers should be patient in reversing attempts to stimulate the economy. Second, once we do get closer to full employment the picture for wages will change and the long awaited acceleration in labor compensation will finally materialize.

I fear this trust that market forces will eventually raise wages will lead to disappointment. Inequality has been increasing for over three decades, and during that time we have been at or near full employment many times. Yet, wages over this time period have been flat. As noted by the Economic Policy Institute, “Since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth.” The idea that market forces alone will increase wages sufficiently to offset increasing inequality is not supported by the evidence from these years. There’s more to the story than market forces.

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