Friday, September 08, 2017

Fed Watch: Fed Round-Up For September 7, 2017

Tim Duy:

Fed Round-Up For September 7, 2017, by Tim Duy: Federal Reserve hawks were on the march today, laying the groundwork for an additional rate hike this year despite weak inflation. 
First off, Cleveland Federal Reserve President Loretta Mester (voter next year), reiterated the "it's only temporary story" regarding inflation:
In assessing where we are relative to the inflation goal, it’s always a good idea to look through temporary movements in the numbers, both those above and those below our goal, and focus on where inflation is going on a sustained basis. For example, when assessing the underlying trend in inflation, we should look through a temporary increase in gasoline prices stemming from disruptions caused by Hurricane Harvey. Similarly, some of the weakness in recent inflation reports reflects special factors, like the drop in the prices of prescription drugs and cell phone service plans earlier in the year. It may take a couple more months for these factors to work themselves through, but these types of price declines aren’t signaling a general downward trend in consumer prices from weak demand. Instead, they reflect supply-side factors and relative price changes.
She did give a nod to Federal Reserve Governor Lael Brainard's argument that maybe trend inflation has fallen:
At the same time, we need to recognize that weak inflation numbers, no matter what the source, can become a problem if they start to undermine the public’s expectations about future inflation. If inflation expectations were to become unanchored and began steadily declining, it would be much more difficult to raise inflation back to the Fed’s goal.
But she doesn't buy it:
I don’t expect the economy to get to that point, and my current assessment is that inflation will remain below our goal for somewhat longer but that the conditions remain in place for inflation to gradually return over the next year or so to our symmetric goal of 2 percent on a sustained basis. These conditions include growth that’s expected to be at or slightly above trend, continued strength in the labor market, and reasonably stable inflation expectations.
On the inflation forecast, this is interesting:
We need to recognize that there are risks around any inflation projection—both upside risks, considering the current and future expected strength in labor markets, and downside risks, given the softness in recent inflation readings. In fact, inflation is difficult to forecast: based on historical forecast errors over the past 20 years, the 70 percent confidence range for forecasts of PCE inflation one year ahead is plus or minus 1 percentage point, and a significant portion of the variation in inflation rates comes from idiosyncratic factors that can’t be forecasted. Indeed, since the 1990s, assuming that inflation will return to 2 percent over the next one to two years has been one of the most accurate forecasts. In the recent period, this is perhaps a testament to the importance of well-anchored inflation expectations and of the FOMC’s commitment to its 2 percent symmetric inflation goal. In any case, I will be scrutinizing incoming data on inflation and inflation expectations and the reports from my business contacts to help me assess the inflation outlook.
Since 1990, a 2 percent forecast has worked more than not, so lets just stick with that as the baseline for policy? By that logic, since the great recession, a 1.75% forecast has worked more than not, a testament to the Fed's one-sided inflation target and falling inflation expectations. I am not buying into her inflation forecast story yet.
Regardless, Mester's commitment to the faith on the inflation forecast means that as of now, she is probably sticking with the current rate path, including a December hike.
Meanwhile, FOMC heavyweight New York Federal Reserve William Dudley stuck to his guns as well tonight. His basic outlook:
Overall, the economy remains on a trajectory of slightly above-trend growth, which is gradually tightening the U.S. labor market.  Over time, this should support a rise in wage growth.  When combined with a firmer import price trend—partly reflecting recent depreciation of the dollar—and the fading of effects from a number of temporary, idiosyncratic factors, that causes me to expect inflation will rise and stabilize around the FOMC’s 2 percent objective over the medium term.  In response, the Fed will likely continue to remove monetary policy accommodation gradually.  But, the upward trajectory of the policy rate path should continue to be shallow, in part because the level of short-term interest rates consistent with keeping the economy on a sustainable long-run growth path is likely to be considerably lower than it was in prior business cycles. 
Dudley, however, will continue watching the inflation numbers, looking for this story:
If it turns out that structural changes have played a significant role, I would generally view this as a positive, rather than negative, development.  It would imply that the U.S. economy could operate at a higher level of labor resource utilization without generating a troublesome large rise in inflation.  More people could be put to work on a sustainable basis, enabling them to gain opportunities not just to earn greater income, but also to develop their skills and grow their human capital.
This opens up a downward revision of estimates of the natural rate of unemployment. Still, he thinks the Fed should continue hiking rates, in part due to easing financial conditions:
This judgment is supported by the fact that financial conditions have eased, rather than tightened, even as the Fed has raised its short-term interest rate target range by 75 basis points since last December. 
Yep, this is an expected response from Dudley. So is his pushback on inflation concerns:
 In addition, the long and variable lags between monetary policy adjustments and their impact on the economy imply that the FOMC may need to remove accommodation even when inflation is below its goal.  In particular, if the unemployment rate were already below its longer-run natural rate, as may be the case currently, the impact on wage growth and price inflation would still likely take some time to become evident. 
But, OMG, he follows up with this:
This would be particularly true if inflation expectations were well-anchored at or slightly below our 2 percent objective, as is the case currently. 

Brainard strikes again! But notice that HE SEES IT AS MORE LIKELY THAT INFLATION EXPECTATIONS ARE BELOW THAN ABOVE TARGET! One would think this would give him a bit more concern before pushing forward with more rate hikes, but no.

Fundamentally, Dudley wants to keep hiking as long as financial conditions keep easing. 
That's enough on Fed speakers for now. Time to return to yesterday's topic of new Fed appointees. This from Bloomberg:
The White House is considering at least a half-dozen candidates to be the next head of the Federal Reserve, including economists, executives with banking experience and other business people, according to three people familiar with the matter.
The breadth of the search goes against the narrative that has taken hold in Washington and on Wall Street that the Fed chair nomination is a two-horse race between National Economic Council Director Gary Cohn and current Fed Chair Janet Yellen, whose term expires in February.
Some of the other possible contenders include former Fed Governor Kevin Warsh, Columbia University economist Glenn Hubbard and Stanford University professor John Taylor, one of the people familiar said. Lawrence Lindsey, a former economic adviser to President George W. Bush, has been discussed. Former US Bancorp CEO Richard Davis and John Allison, the former CEO of BB&T Corp., have also been considered.
This doesn't sound good for Yellen. Sounds like a wide-open field that will keep us guessing for weeks. 
Separately, on the data front, we get this from Commerce, via Reuters:
The U.S. economy probably grew faster than reported in the second quarter, with data on Thursday suggesting stronger consumer spending than previously estimated. 
The quarterly services survey, or QSS, from the Commerce Department implied consumer spending increased more briskly than the 3.3 percent annualized rate reported last week in its second estimate of gross domestic product.
The Fed forecasts are based on more modest growth numbers. Stronger growth numbers will tilt them toward further rate hikes.
On the other hand, the anecdotal evidence via the Beige Book was less optimistic. In that read of the economy, activity was only modest to moderate with limited wage and inflation pressures. That said, I tend to believe that data trumps anecdotal evidence when it comes to policy.
Bottom Line: Hawks are still pushing for additional rate hikes, holding to the story that low inflation is all about transitory factors. This I think remains the dominant position on the FOMC. For what its worth, market participants do not believe this is how it will play out. The odds of a December rate hike are now hovering around 25%. Markets participants are not seeing the same story as most central bankers. Something's gotta give.

    Posted by on Friday, September 8, 2017 at 12:15 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (22) 

    Links for 09-08-17

      Posted by on Friday, September 8, 2017 at 12:06 AM in Economics, Links | Permalink  Comments (64) 

      Thursday, September 07, 2017

      Fed Watch: The Times They Are A-Changin'

      Tim Duy:

      The Times They Are A-Changin' , by Tim Duy: The Federal Reserve is now destined to get a dramatic makeover in the next few months. That is assuming that the Trump administration carves some time out of their busy schedule of managing chaos to nominate more governors. And the Senate finds the time to confirm those nominations.
      Until the time the administration and Senate get their acts together, the balance of power at the Federal Reserve will shift to the regional presidents. And that could put monetary policy on a less certain course over the next year as doves on the FOMC are replaced with hawks and the Board lacks sufficient person-power to hold a steady line.
      The Board of Governors of the Federal Reserve is supposed to have seven members. At the beginning of the Trump era, two spots were open. Then former Governor Daniel Tarullo resigned. That left four members and three openings.
      Today we learned that Vice Chair Stanley Fischer will soon depart, on or around October 13 of this year. The stated explanation for his departure is "personal reasons." I fear this means a serious health issue. If so, my thoughts and prayers go out to him and his family.
      That leaves three members and four openings. To give a sense of what this means operationally for the Fed, take a gander at the Board Committee assignments:


      Federal Reserve Governor Lael Brainard is serving on SEVEN committees! Federal Reserve Governor Jerome Powell is on FIVE. You might think he is slacking, but he is the chair of those committees. Fischer currently has four assignments. Unless we get some new governors soon, Brainard and Powell will have to step it up a bit more to cover for him. I am thinking they are overworked. Just a bit.
      Hats off to Brainard and Powell. Committee work is some of my least favorite work.
      Who am I kidding? It is my least favorite work.
      So now we are down to three governors and five regional presidents on the FOMC. At least in theory, this means the regional presidents can roll the governors on policy votes. Which means I have to start taking the presidents a little more seriously. Because in all honestly when the Board is fully staffed, that is where the power resides. And there is only so much time in the day to read speeches. The presidents talk a lot (but will the come speak at my events in Portland, a little hop from San Francisco - noooo), the governors too little.
      Moreover, the Board generally offers a certain consistency of thought across years, whereas the regional presidents on the FOMC rotate. So next year, for example, the torch will pass from the dovish Minneapolis and Chicago Presidents Neal Kashkari and Charles Evans to the more hawkish San Francisco and Cleveland Presidents John Williams and Loretta Mester. Also added will be the still-to-be-announced Richmond Federal Reserve President, a hawkish spot in recent years.
      The tide might turn on the hawks this year though, as it is easy to tell a story where Chair Yellen, Powell, Philadelphia President Patrick Harker, and New York President William Dudley all support a December rate hike while Brainard, Kashkari, Evans, and Dallas President Robert Kaplan oppose. What fun would that meeting be?
      Of course, Randy Quarles is waiting in the wings for Senate confirmation, so perhaps he would tip the balance to the hawkish side. Marvin Goodfriend is rumored for another open position, but has yet to be nominated (I can see both hawk and dove in his record, but I am thinking he will lean hawkish). So it may be that by the beginning of the year the voting power will tip back to the Board, backed by a fairly hawkish rotation of presidents. So if the doves want to take a longer pause before hiking rates again, they need to ensure Yellen is on their side going into the end of the year.
      Speaking of Yellen, a decision on the Chair will soon need to be made. Yellen term expires in February of next year. Trump has toyed with the financial press by claiming she is in the running. I hope this is true, but Trump appears more interested in wiping the slate clean of Obama appointees than anything else. And she would be the pro-regulatory fly in the ointment, opposing Trump's preferred deregulatory agenda. So I can't get on board the Yellen train just yet.
      White House economic advisor Gary Cohn had been thought to be in the front-running for the spot, but the latest word is that he tanked that opportunity with his frank (but belated) criticism of Trump's handling of the Charlotsville incident. What a way to go - catching it on one end for not speaking out soon enough and then, after already having lost that battle, grows a conscience and then catches it on the other end. Long story short, the White House is scrambling for a new name - and now need to get a replacement for Fischer (who could have stayed after his term as Vice Chair ended).
      The Washington Post is reporting that Powell could be up for the job. That would be a good pick in my opinion. Former Governor Keven Warsh is also reportedly in the running. He has something few can match: Trump's childhood friend Ron Lauder is Warsh's father-in-law. It's not what you know, it's who you know. My feelings about Warsh are not warm.
      Also, to add a bit more excitement into the mix, Yellen can stay on as Governor even if she is not the chair. Would she stay? Maybe not. Maybe. No chair has stayed since Mariner Eccles. Maybe it is a good time for one to stick around a few more years.
      Bottom Line: Phew. I think that is the current state of play. Many potentially significant changes happening at the Fed over the next several months, and it is hard to predict how it will all end. All we know for now is a reported debt-ceiling deal removes the final potential obstacle to balance sheet reduction this month. That first step of unwinding the quantitative easing of the crisis years has wide support at the Fed; central bankers would like to get it underway before leadership changes begin in earnest.

        Posted by on Thursday, September 7, 2017 at 09:00 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (27) 

        Wednesday, September 06, 2017

        Fed Watch: Can She Do It Again?

        Tim Duy:

        Can She Do It Again?, by Tim Duy: In the fall of 2015, Federal Reserve Governor Lael Brainard began building the intellectual framework to slow the pace of rate increases. Not soon enough to stop the rate hike of December that year, but the rest of the Fed soon fell in line, and the projected four rate hikes in 2016 became only one actual hike, a hike delayed until December of 2016.
        Can she shift the focus of the FOMC again? She made a valiant effort today. But will her colleagues get on board as they did last time?  A key issue: he doesn't have the downtrend in the economy and financial markets of 2016 to back her up.
         Brainard begins by acknowledging the problem facing the Federal Reserve:
        The labor market continues to bring more Americans off the sidelines and into productive employment, which is a very welcome development. Nonetheless, there is a notable disconnect between signs that the economy is in the neighborhood of full employment and a string of lower-than-projected inflation readings, especially since inflation has come in stubbornly below target for five years. 
        The US economy is in the midst of what could easily become a record breaking expansion. Labor markets have shown dramatic improvement in that time as steady job growth pushed the economy into the range of full employment. Moreover, the outlook remains bright:
        There has been a noteworthy pickup in business investment this year compared with last year. Investment in the equipment and intellectual property category has risen at an annual rate of 6 percent so far this year after remaining roughly flat last year. The latest data on orders and shipments of capital equipment suggest that solid growth will likely continue in the second half of the year. In addition, oil drilling had rebounded this year after dropping sharply last year, although Hurricane Harvey creates uncertainty about drilling in coming months. While lackluster consumer spending was one of the key reasons for the weak increase in first-quarter gross domestic product (GDP), growth in personal consumption expenditures (PCE) bounced back strongly in the second quarter, and recent readings on retail sales suggest another solid increase in consumer spending this quarter.
        And, as Brainard notes, even if the anticipated fiscal stimulus has failed to materialize, the economy has been supported by a global upturn in growth as well. Sure, Hurricane Harvey may dent the short-term numbers, the medium term picture is solid.
        But all is not well:
        In contrast, what is troubling is five straight years in which inflation fell short of our target despite a sharp improvement in resource utilization. 
        Brainard runs through the usual suspects offered as explanations for the inflation numbers - import prices, resource utilization, and transitory factors - and finds them all wanting. So what's going on? Brainard turns her attention to a fundamental element of the Fed's inflation model:
        ...In many of the models economists use to analyze inflation, a key feature is "underlying," or trend, inflation, which is believed to anchor the rate of inflation over a fairly long horizon. Underlying inflation can be thought of as the slow-moving trend that exerts a strong pull on wage and price setting and is often viewed as related to some notion of longer-run inflation expectations.
        There is no single highly reliable measure of that underlying trend or the closely associated notion of longer-run inflation expectations. Nonetheless, a variety of measures suggest underlying trend inflation may currently be lower than it was before the crisis, contributing to the ongoing shortfall of inflation from our objective...
        This is a big deal. Brainard suggests that inflation expectations are not anchored at 2 percent. And they have not become unanchored to the upside as so many of her colleagues fear will happen if they do not act preemptively. Expectations are unanchored to the downside.
        Why are expectations falling? Brainard posits that perhaps households and firms are reacting to the persistent undershooting in recent years. She also relates this to low neutral interest rates, noting that the resulting lack of conventional monetary policy power increases the episodes of below target inflation, further entrenching low inflation expectations.
        Now comes the tricky part. How should policymakers respond? Can low unemployment do the job? This is interesting:
        Given the flatness of the Phillips curve, it could take a considerable undershooting of the natural rate of unemployment to achieve our inflation objective if we were to rely on resource utilization alone. 
        For all these reasons, achieving our inflation target on a sustainable basis is likely to require a firming in longer-run inflation expectations--that is, the underlying trend. The key question in my mind is how to achieve an improvement in longer-run inflation expectations to a level that will allow us to achieve our inflation objective. The persistent failure to meet our inflation objective should push us to think broadly about diagnoses and solutions.
        It is not enough to just force down unemployment. Policymakers need to match such a policy with a commitment mechanism that pulls up inflation expectations. And that mechanism likely includes explicit overshooting of the inflation target
        She highlights this point in the context of setting rates. Brainard believes the neutral rate is low and likely to stay low (this will be exacerbated by the balance sheet run off). Consequently, the Fed might reach the neutral level of the federal funds rate in very short order. That means they need to be cautious moving forward, and should adjust down the expected path of tightening accordingly. Moreover, central bankers need to match the policy with a stronger goal:
        To the extent that the neutral rate remains low relative to its historical value, there is a high premium on guiding inflation back up to target so as to retain space to buffer adverse shocks with conventional policy. In this regard, I believe it is important to be clear that we would be comfortable with inflation moving modestly above our target for a time
        But will Brainard's colleagues listen as they did in 2016? At that point the economic conditions appeared fragile as the impact of the oil price crash filtered through the manufacturing sector. Moreover, financial conditions had tightened with a period of higher corporate yield spreads, declining equity prices, and a strong dollar. The opposite is true now - not only does the economy look healthier, but financial conditions have loosened despite Fed tightening. So I am not yet convinced she can carry the day. But this is undoubtedly a space worth watching.
        Bottom Line: Brainard is making a push to slow the pace of rate hikes. I am not sure she will be as successful as her last effort to change the course of policy. But she still has two important takeaways for investors. First, if you think interest rates will rise sharply, think again. The neutral rate of interest is too low to expect much more tightening - we need much faster growth to justify a higher estimate of the neutral rate. Second, assuming she is right and the Fed doesn't take her advice, her colleagues are positioning themselves for a substantial policy error that would both bring the expansion to an end sooner than later and further entrench disinflationary expectations. And that would only make the Fed's job harder in the future.

          Posted by on Wednesday, September 6, 2017 at 08:57 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (43) 

          Links for 09-06-17

            Posted by on Wednesday, September 6, 2017 at 08:56 AM in Economics, Links | Permalink  Comments (124) 

            Tuesday, September 05, 2017

            Fed Watch: Mediocre To Solid Data Flow, But Weak Inflation Still Key

            Tim Duy:

            Mediocre To Solid Data Flow, But Weak Inflation Still Key, by Tim Duy: The data flow is generally supportive of additional Fed action, surely enough to allow the Fed to move forward with balance sheet action later this month. But what about another rate hike? That remains an open question as low inflation remains an obstacle to further rate hikes for a sizable faction within the Fed.
            The employment report disappointed with job growth of 156k, shy of expectations for 180k. Previous months were revised downward. Looking through the monthly volatility, the report does little to change the basic story that job growth continues the slow downward trend that began in 2015: 


            Mediocre, but not disastrous. A key issue for the Fed is where does this slowdown stop? If they were reasonably confident job growth would soon stabilize around 100k a month, then the pressure for additional rate hikes would ease substantially. For the Fed that figure would be sufficient to bring stability to the unemployment rate. For now, though, it looks like the current pace of job growth is likely to bring further declines in the unemployment rate:


            In other words, the recent stability in unemployment around 4.3-4.4% is only temporary. A significant faction of the Fed will worry that additional declines in unemployment will signal that the economy is operating beyond full employment, placing inflation stability at risk. Hence that faction will press for additional pre-emptive tightening.
            That said, tepid wage growth calls into question the Fed's current estimates of full employment:


            I think that going forward the Fed will essentially split the difference by edging down estimates of full employment while remaining concerned that the pace of job growth still exceeds that required for inflation stability over the medium-term. On net, that leaves December still open for a rate hike. More on that later.
            In the meantime, it looks like the manufacturing sector continues to shake off the 2015-6 doldrums. The latest ISM report was strong:


            To be sure, a slowdown in auto sales will weigh on manufacturing in the months ahead. That said, Hurricane Harvey wiped out a half a million vehicles in Texas, so that throws some needed support to that sector going forward. 
            Overall, consumer spending looks solid, continuing to hold the pace of the last 18 months:


            Not the best of the cycle, but not the worst either. Something that might be expected in a more mature phase of the cycle, which is probably about right. And within a reasonable margin of error of what might be expected given consumer sentiment numbers:


             And then there is inflation. Or, more accurately there isn't inflation, at least any to be concerned about:


            It is fairly clear that the disinflation this year is more persistent than the Fed would like to believe. It seems like too many one-sided errors to be just coincidence. Truth be told, looking at that chart makes me think that inflation expectations are anchored around 1.75% rather than the Fed's target of 2%. I don't think the Fed thinks that, but I also don't think it is an unreasonable idea either.
            Bottom Line: So where does this leave us? The Fed continues to be caught between the push of the generally positive momentum of the US economy and the pull of the surprise weakness on the wage/inflation front. Luckily for them, they don't need to decide between the two until December. Their next move is to start reducing the balance sheet - they want to have that process underway before any leadership changes next year. Moreover, they would like to ensure the process begins smoothly before returning to the issue of rate hikes. My expectations about December are, not surprisingly, data dependent. If the current mix of activity continues - generally upward momentum suggestive of actual or forecasted declines in unemployment, coupled with what the Fed will view as fairly easy financial conditions (watch the dollar!) - the Fed will hike in December even if inflation remains tepid. I think the Fed will need to see more evidence of slowing in the real economy before they cease rate hikes - I suspect they will see the economy as operating to close to full employment to risk the potential inflationary consequences of delaying additional rate hikes.

              Posted by on Tuesday, September 5, 2017 at 08:16 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (46) 

              Beliefs, Networks, History and the Housing Premium Puzzle

              Roger Farmer:

              Beliefs, Networks, History and the Housing Premium Puzzle: This is week five of my posts featuring research presented at the conference on Applications of Behavioural Economics and Multiple Equilibrium Models to Macroeconomics Policy Conference held at the Bank of England on July 3rd and 4th 2017. Today’s post features the coauthored work of Héctor Calvo-Pardo, and a series of coauthored papers by Alan Taylor, a co-organizer of the conference. 
              Hector Calvo-Pardo, from the University of Southampton, presented his paper on social networks, coauthored with Luc Arrondel Research Director at CNRS in Paris, Chryssi Giannitsaro of Cambridge University and Michael Haliassos of Goethe University. Alan Taylor, a Professor at UC Davis, helped organize the conference. In a linked video, he discusses an amazing new data set developed jointly with Òscar Jordà, Vice President of the Federal Reserve Bank of San Francisco and Moritz Schularick, Professor of Economics at the University of Bonn. ...

                Posted by on Tuesday, September 5, 2017 at 08:16 AM Permalink  Comments (2) 

                Links for 09-05-17

                  Posted by on Tuesday, September 5, 2017 at 08:15 AM Permalink  Comments (114) 

                  Monday, September 04, 2017

                  Paul Krugman: Why Can’t We Get Cities Right?

                  "It’s not hard to see what we should be doing":

                  Why Can’t We Get Cities Right?, by Paul Krugman, NY Times: The waters are receding in Houston, and so, inevitably, is national interest. But Harvey will leave a huge amount of wreckage behind, some of it invisible. In particular, we don’t yet know just how much poison has been released by flooding of chemical plants, waste dumps, and more. But it’s a good bet that more people will eventually die from the toxins Harvey leaves behind than were killed during the storm itself. ...
                  ...Harvey was an epic disaster. And it was a disaster brought on, in large part, by ... rampant, unregulated development. ...
                  So is Houston’s disaster a lesson in the importance of urban land-use regulation, of not letting developers build whatever they want, wherever they want? Yes, but.
                  To understand that “but,” consider the different kind of disaster taking place in San Francisco. Where Houston has long been famous for its virtual absence of regulations on building, greater San Francisco is famous for its NIMBYism — that is, the power of “not in my backyard” sentiment to prevent new housing construction. The Bay Area economy has boomed in recent years, mainly thanks to Silicon Valley; but very few new housing units have been added.
                  The result has been soaring rents and home prices..., so why not have more tall buildings?
                  But politics has blocked that kind of construction, and the result is housing that’s out of reach for ordinary working families. ...
                  Houston and San Francisco are extreme cases, but not that extreme. ...
                  Why can’t we get urban policy right? It’s not hard to see what we should be doing. We should have regulation that prevents clear hazards, like exploding chemical plants in the middle of residential neighborhoods, preserves a fair amount of open land, but allows housing construction.
                  In particular, we should encourage construction that takes advantage of the most effective mass transit technology yet devised: the elevator.
                  In practice, however, policy all too often ends up being captured by interest groups. ...
                  Can America break out of these political traps? Maybe. In blue states where cities build too little, there’s a growing political movement calling for more housing supply. Until now, there’s been much less evidence of second thoughts about unmanaged development in red states, but Harvey may serve as a wake-up call.
                  One thing is clear: How we manage urban land is a really important issue, with huge impacts on American lives.

                    Posted by on Monday, September 4, 2017 at 11:14 AM in Economics, Housing, Regulation | Permalink  Comments (66) 

                    The Rise and Fall of U.S. Low-Skilled Immigration

                    In a fun coincidence, Gordon Hanson hosted a brunch the day after my son's wedding (he is a friend of the bride's family). It gave me an opportunity to talk to him about this paper:

                    The Rise and Fall of U.S. Low-Skilled Immigration, by Gordon Hanson, Chen Liu, and Craig McIntosh, NBER Working Paper No. 23753 Issued in August 2017: From the 1970s to the early 2000s, the United States experienced an epochal wave of low-skilled immigration. Since the Great Recession, however, U.S. borders have become a far less active place when it comes to the net arrival of foreign workers. The number of undocumented immigrants has declined in absolute terms, while the overall population of low-skilled, foreign-born workers has remained stable. We examine how the scale and composition of low-skilled immigration in the United States have evolved over time, and how relative income growth and demographic shifts in the Western Hemisphere have contributed to the recent immigration slowdown. Because major source countries for U.S. immigration are now seeing and will continue to see weak growth of the labor supply relative to the United States, future immigration rates of young, low-skilled workers appear unlikely to rebound, whether or not U.S. immigration policies tighten further.

                    [Open link to earlier version of the paper.]

                      Posted by on Monday, September 4, 2017 at 10:52 AM Permalink  Comments (3) 


                      The University of Oregon's statement on DACA:

                      Members of the University of Oregon community,

                      President Trump this week is expected to make changes to the Deferred Action for Childhood Arrivals immigration policy, also known as DACA. I join hundreds of university leaders as well as local, state, federal, and business leaders in strongly urging President Trump to continue this program. I also write to let our students know that we support them, and to provide information about where our students and their families can go for assistance, should the need arise. 

                      In a world full of ambiguities, there is no ambiguity for me about the importance of continuing DACA. My view of morality dictates that young people, many of whom were brought here as infants or toddlers, must be allowed to remain in the United States to learn, work, and make a life for themselves. The United States is their home. To uproot them would be wrong. Period.

                      But the argument for DACA doesn’t just rest on principles of morality; it is also good for our country. One of the reasons the United States became the greatest nation in the world is because it was founded, built, and shaped by immigrants. Millions and millions of people, including all of my grandparents, risked everything to come to the United States to escape religious, ethnic, and political oppression or to seek out a better life for their children. The very act of coming here showed grit and determination, the willingness to assume risk, and courage—just the skills necessary to build our nation.

                      The future of our nation’s economic prosperity also depends upon embracing immigrants and making sure that they are educated to become productive citizens and positive contributors to the economy. Birthrates are declining among our country’s native-born, and immigrants currently make up about 13 percent of the workforce. To uproot young immigrants from their schools and jobs or to force them into the shadows is the equivalent of shooting ourselves in our collective feet.

                      Regardless of what happens in our nation’s capital, I want to again make very clear that the University of Oregon supports every student, regardless of immigration status. Every person on our campus is valued and welcomed because of and not despite their diversity of thought, race, culture, background, religion, gender identity, sexual orientation, and birthplace. Our many differences enrich this institution’s learning environment, enhance the student experience, and are essential to our mission of teaching, research, and service.

                      As is currently our practice, the UO will continue to protect the privacy of students, follow the law, and treat every member of campus with respect and inclusion. This means: 

                      • The University of Oregon will not facilitate immigration enforcement on our campus without legal compulsion, such as in the form of a warrant or a clear demonstration of exigent circumstances such as the imminent risk to the health or safety of others;
                      • The University of Oregon Police Department will not act on behalf of federal officials in enforcing immigration laws;
                      • The University of Oregon will not share with immigration enforcement any information on the immigration status of students unless required by court order.

                      The university is reaching out directly to students who may be impacted by the president’s decision to provide them with information about support and services. Several important points of contact and sources of information will continue to be updated as needed in the coming days and weeks:

                      • For current information on the status of DACA and frequently asked questions about immigration issues, please see the Immigration FAQ webpage.
                      • Justine Carpenter, director of Multicultural and Identity-Based Support Services, is the campus point-person in support of undocumented and DACA students, and students of mixed-status families. Carpenter is located in the Office of the Dean of Students and can be reached at 541-346-1123 or 
                      • For additional information on the UO's support for DACA students, please visit the UO DREAMers Workgroup website.
                      • Should an immigration official ask for information about a UO student, employee, or visiting scholar, please immediately contact the Office of the General Counsel at 541-346-3082 or

                      In the coming weeks and months, I urge everyone in our community to reach out and embrace those students who now face the uncertainty of knowing whether they will be able to remain in the United States. As I have repeated on many occasions—we are a family. Families take care of each other, and we will do everything in our power to ensure that all of our students are supported.

                      Thank you.

                      Michael H. Schill President and Professor of Law

                        Posted by on Monday, September 4, 2017 at 10:49 AM in Economics, Immigration, University of Oregon | Permalink  Comments (17) 

                        Links for 09-04-17

                          Posted by on Monday, September 4, 2017 at 03:10 AM in Economics, Links | Permalink  Comments (106) 

                          Sunday, September 03, 2017

                          They Grow Up

                          It's been a busy summer. Six weeks ago, my daughter Amy got married:


                          Yesterday, it was my son Paul's turn:


                          Hopefully I can get back to regular blogging soon.

                            Posted by on Sunday, September 3, 2017 at 09:18 AM Permalink  Comments (25) 

                            Friday, September 01, 2017

                            Job Growth Slows in August

                            Dean Baker:

                            Job Growth Slows in August: Weakness in wage growth and drop in prime-age EPOPs shows slack in labor market.

                            The Bureau of Labor Statistics reported that the economy added 156,000 jobs in August, somewhat less than most economists had expected. This figure, combined with downward revisions of 41,000 to the prior two months data, brought the average over the last three months to 185,000. The household survey also showed some evidence of weakness with the unemployment rate edging up to 4.4 percent and the employment-to-population ratio (EPOP) falling back 0.1 percentage point to 60.1 percent.

                            Perhaps more noteworthy was a drop of 0.3 percentage points in the EPOP of prime-age (ages 25 to 54) workers to 78.4 percent. The EPOP for both prime-age men and women dropped by 0.3 percentage points. ...

                            Other data in the household survey were mostly positive. The number of people involuntarily working part-time fell by 27,000, it is now only slightly larger as a share of the workforce than before the recession. The number of people choosing to work part-time increased by 187,000, reaching a new high. This number has increased by more than 2.6 million since the end of the 2013 when the Affordable Care Act took effect. It indicates that many people are taking advantage of the opportunity to get insurance outside of employment and therefore opting to work part-time.
                            The percentage of people who are unemployed because they quit their jobs increased to 11.3 percent, but this is still 1.2 percentage points below the peak for the recovery reached last November. One peculiar item in the August report was a big drop in the number of people who are multiple job holders, especially among women. This number, which is not seasonally adjusted, is down 0.4 percentage points from its year-ago level for women and now stands at 4.8 percent of employed women. (It is 4.3 percent for employed men.) This could mean that fewer women feel they need to work more than one job, or it could just be an anomaly that will be reversed in future months.

                            Wage growth continues to be moderate, with the average hourly wage up 2.5 percent over the last year. The annual rate of increase in the average hourly wage, comparing the last three months with the prior three months, is also 2.5 percent. As a result of the weak growth in the hourly wage and a modest decline in the length of the average workweek, average weekly earnings actually fell slightly in the month. ...

                            On the whole, this is a mixed report. The rate of job growth is respectable but certainly should not raise concerns about being too rapid, especially given continued weakness in wage growth. And the drop in prime-age EPOPs indicates the labor market still has considerable slack.

                            See also: Calculated Risk, Jared Bernstein.

                              Posted by on Friday, September 1, 2017 at 09:30 AM in Economics, Unemployment | Permalink  Comments (59) 

                              Links for 09-01-17

                                Posted by on Friday, September 1, 2017 at 09:30 AM in Economics, Links | Permalink  Comments (97) 

                                Thursday, August 31, 2017

                                Monopoly Rents and Corporate Taxation

                                Paul Krugman:

                                Monopoly Rents and Corporate Taxation (Wonkish): At one level it’s hard to take the Trump administration’s tax “reform” push seriously. A guy gets elected as a populist and his first two big proposals are (a) taking away health insurance from millions (b) cutting corporate taxes. Wow.
                                Furthermore, Trump is invincibly ignorant on taxes (and everything else) — he keeps declaring that America is the highest taxed nation in the world, which is nearly the opposite of the truth among advanced countries. And his allies in Congress aren’t ignorant, but they’re liars: Paul Ryan is the master of mystery meat, of promising to raise and save trillions in unspecified ways.
                                But there is an actual interesting question here, even if we shouldn’t give any credence to Republican answers. Who does, in fact, pay the corporate profit tax? Does it fall on corporations, and hence eventually on their shareholders? Or is the ultimate incidence mainly on wages, as the administration claims?

                                Skipping forward to the punchline:

                                ...much corporate taxation probably doesn’t fall on returns to physical capital, but rather on monopoly rents. ... As long as the local source of profit is some kind of monopoly rent, corporate tax incidence is going to fall on shareholders, not workers. ...
                                And there’s a lot of reason to believe that market power is an increasingly big deal. ...
                                This changes the narrative, doesn’t it? Instead of focusing on rising capital mobility as a reason profits taxes might fall on workers, maybe we should focus on rising market power as a reason why profits taxes fall on capitalists.
                                The point for now is that when someone tells you that changes in the world have made old-style corporate taxes obsolete, be skeptical. Some changes in the world may have made profit taxation a better idea than ever.

                                  Posted by on Thursday, August 31, 2017 at 09:48 AM in Economics, Income Distribution, Politics, Taxes | Permalink  Comments (89) 

                                  Raghuram Rajan: Populist Nationalism Is “the First Step Toward Crony Capitalism”

                                  Asher Schechter at ProMarket discusses Raghuram Rajan's views on the rise of populist nationalism:

                                  Raghuram Rajan: Populist Nationalism Is “the First Step Toward Crony Capitalism”: The wave of populist nationalism that has been sweeping through Western democracies in the past two years is “a cry for help from communities who have seen growth bypass them.”
                                  So said Raghuram Rajan, the former governor of the Reserve Bank of India, during a keynote address he gave at the Stigler Center’s conference on the political economy of finance that took place in June. 
                                  Rajan, a professor of finance at the University of Chicago Booth School of Business, spoke about the “concentrated and devastating” impact of technology and trade on blue-collar communities in areas like the Midwest, the anger toward “totally discredited” elites following the 2008 financial crisis, and the subsequent rise of populist nationalism, seen as a way to restore a sense of community via exclusion.
                                  In his talk, Rajan focused on three questions related to current populist discontent: 1. Why is anger focused on trade? 2. Why now? 3. Why do so many voters turn to far-right nationalist movements?
                                  “Pointing fingers at these communities and telling them they don’t understand is not the right answer,” he warned. “In many ways, the kind of angst that we see in industrial countries today is similar to the bleak times [of] the 1920s and 1930s. Most people in industrial countries used to believe that their children would have a better future than their already pleasant present. Today this is no longer true.” ...

                                  There's quite a bit more. I don't agree with everything he (Raghuram) says, but thought it might provoke discussion.

                                    Posted by on Thursday, August 31, 2017 at 09:48 AM in Economics, Income Distribution | Permalink  Comments (7) 

                                    Is Poor Health Hindering Economic Growth?

                                    Ellyn Terry at the Atlanta Fed's macroblog:

                                    Is Poor Health Hindering Economic Growth?: It is well known that poor health is bad for an individual's income, partially because it can lower the propensity to participate in the labor market. In fact, 5.4 percent of prime-age individuals (those 25–54 years old) reported being too sick or disabled to work in the second quarter of 2017. This is the most commonly cited reason prime-age men do not want a job, and for prime-age women, it is the second most often cited reason behind family responsibilities (see the chart). (Throughout this article, I use the measure "not wanting a job because of poor health or disability" as a proxy for serious health problems.)

                                    In addition to being prevalent, the share of the prime-age population citing poor health or disability as the main reason for not wanting a job has increased significantly during the past two decades and tends to be higher among those with less education (see the chart).

                                    Yet by some standards, the health of Americans is improving. For example, compared to two decades ago the average American is living two years longer, and the likelihood of dying from cancer or cardiovascular disease has fallen. These specific outcomes, however, may have more to do with improvements in the treatment of chronic disease (and the resulting reduction in mortality rates) than improvements in the incidence of health problems.
                                    Another puzzle—which is perhaps also a clue—is the considerable variation across states in the rates of being too sick or disabled to work. For example, people living in Mississippi, Alabama, Kentucky, or West Virginia in 2016 were more than three times likelier to indicate being too sick or disabled to work than residents of Utah, North Dakota, Iowa, or Minnesota (see the maps below).
                                    This cross-state variation is useful because it allows state-by-state comparisons of the prevalence of specific health problems. Among a list of more than 30 health indicators, the two factors that most correlate with the share of a state's population too sick or disabled to work were high blood pressure (a correlation of 0.86) and diabetes (a correlation of 0.83). Both of these conditions are associated with risk factors such as family history, race, inactivity, poor diet, and obesity. Both of these health issues have increased significantly on a national basis in recent years.

                                    So how might poor health hinder economic growth? Health factors accounts for a significant part of the decline in labor force participation since at least the late 1990s. After controlling for demographic changes, the share of people too sick or disabled to work is about 1.6 percentage points higher today than it was two decades ago (see the interactive charts on our website). Other things equal, if this trend reversed itself during the next year, it could increase the workforce by up to 4 million people, and add around 2.6 percentage points to gross domestic product (calculated using our Labor Market Sliders).
                                    Of course, such a sudden and large reversal in health is highly unlikely. Nonetheless, significant improvements to the health of the working-age population would help lessen the drag on growth of the labor supply coming from an aging population. Public policy efforts centered on both prevention and treatment of work-impeding health conditions could play an important role in bolstering the nation's workforce.

                                      Posted by on Thursday, August 31, 2017 at 07:21 AM in Economics, Health Care | Permalink  Comments (11) 

                                      Wednesday, August 30, 2017

                                      A Better Way to Elect Presidents (Video) - Eric Maskin

                                      The systems that most countries use to elect presidents are deeply flawed. In particular, candidates A and B may each be more popular than C (in the sense that either would beat C in a head-to-head contest), but nevertheless each may lose to C if they both run. The systems therefore fail to reflect voters’ preferences adequately. In this lecture, I will illustrate this point with examples from U.S. and French political history. I will also propose an election system that is far superior to the current ones.

                                        Posted by on Wednesday, August 30, 2017 at 01:52 PM in Economics, Politics, Video | Permalink  Comments (18) 

                                        Links for 08-30-17

                                          Posted by on Wednesday, August 30, 2017 at 08:29 AM in Economics, Links | Permalink  Comments (122) 

                                          Tuesday, August 29, 2017

                                          Links for 08-29-17

                                            Posted by on Tuesday, August 29, 2017 at 10:01 AM in Economics, Links | Permalink  Comments (95) 

                                            Yellen's Odds of Being Reappointed Get Slimmer

                                            Tim Duy:

                                            Yellen's Odds of Being Reappointed Get Slimmer: The Federal Reserve Bank of Kansas City’s annual Jackson Hole conference offered little direct insight into the path of monetary policy for this year and next. But that doesn’t mean it was a nonevent. Perhaps the biggest takeaway is that the already small odds of Chair Janet Yellen being reappointed by the Trump administration when her term ends in February just got a lot slimmer. ...Continued at Bloomberg Prophets...

                                              Posted by on Tuesday, August 29, 2017 at 03:03 AM in Economics, Monetary Policy | Permalink  Comments (54) 

                                              Monday, August 28, 2017

                                              Links for 08-28-17

                                                Posted by on Monday, August 28, 2017 at 09:07 AM in Economics, Links | Permalink  Comments (83) 

                                                What Can and Should We Do about Inequality (Video)

                                                  Posted by on Monday, August 28, 2017 at 07:11 AM Permalink  Comments (6) 

                                                  Short Sharp Shocks

                                                  Roger Farmer:

                                                  Short Sharp Shocks: This is week four of my posts featuring research presented at the conference on Applications of Behavioural Economics, and Multiple Equilibrium Models to Macroeconomics Policy Conference held at the Bank of England on July 3rd and 4th 2017.
                                                  Today’s memo features two economists working on models of multiple equilibria from different perspectives. George Evans is a pioneer in models of adaptive learning, a topic he has worked on for more than thirty years. George presented his joint work with Seppo Honkapohja, Deputy Governor of the Bank of Finland, and Kaushik Mitra, Professor of Economics at the University of Birmingham. Patrick Pintus, a Researcher at the Banque de France, presented a co-authored paper with Yi Wen, an Assistant Vice-President at the Federal Reserve Bank of St. Louis and Xiaochuan Xing from Yale University.  ...
                                                  George Evans began his work on adaptive learning in his Ph.D. dissertation at Berkeley in the early 1980s. When the rest of the profession was swept up by the rational expectations revolution, George persevered with the important idea that perfectly correct beliefs about the future cannot be plucked from the air, they must be learned. For an introduction to George’s work, I highly recommend the book co-authored with his long-time co-author, Seppo Honkapohja.
                                                  The paper of Evans, Honkapohja and Mitra (EHM), begins with a theme we met in post two where I discussed the fact that the standard New Keynesian model, in which the central bank follows a Taylor Rule, has two steady state equilibria. ...
                                                  Evans, Honkapohja and Mitra (EHM) build on this idea by adding a theory of adaptive learning. I am often asked how my own work on the belief function is related to George’s work on adaptive learning. They are very closely linked. ...
                                                  Previous work has shown that, in the basic New-Keynesian model, the upper steady state is stable under adaptive learning but the lower steady state is not. They modify the basic model by adding the assumption that the rate at which prices and output can fall has a lower bound. They show that this assumption implies that there exists a third steady state in which recessions can be persistent and deep. ...
                                                  George and his co-authors use their analysis to argue that a large fiscal intervention, a short-sharp shock, can knock the economy out of region C and back into region A. Readers of this blog will know that I have expressed scepticism of that idea in the past, largely because I am not a big fan of the basic NK model. However, this is the most convincing rationale in favour of a large fiscal stimulus that I have yet seen. ... If you are a young researcher who is thinking of working in macroeconomic theory and policy, consider working on models of expectations formation. 
                                                  Next, I will turn to the work of Patrick Pintus, Yi Wen and Xiaochuan Xing (PWX). ...
                                                  PWX take up a puzzle that has long been known to plague the equilibrium real business cycle (RBC) model that has dominated macroeconomic theory for more than thirty years. That model predicts that when interest rates are high, the economy will soon enter an expansion. The reality is different. High interest rates are an omen that a recession is coming down the road. What are the features of the real world that are missed by the classical RBC paradigm? ...

                                                    Posted by on Monday, August 28, 2017 at 07:11 AM in Academic Papers, Conferences, Economics | Permalink  Comments (4) 

                                                    Paul Krugman: Fascism, American Style

                                                    "Let’s call things by their proper names":

                                                    Fascism, American Style, by Paul Krugman, NY Times: As sheriff of Maricopa County, Ariz., Joe Arpaio engaged in blatant racial discrimination. His officers systematically targeted Latinos, often arresting them on spurious charges and at least sometimes beating them up... Read the report from the Justice Department’s Civil Rights Division, and prepare to be horrified.
                                                    Once Latinos were arrested, bad things happened to them. Many were sent to Tent City, which Arpaio himself proudly called a “concentration camp,” where they lived under brutal conditions, with temperatures inside the tents sometimes rising to 145 degrees.
                                                    And when he received court orders to stop these practices, he simply ignored them, which led to his eventual conviction — after decades in office — for contempt of court. But he had friends in high places, indeed in the highest of places. We now know that Donald Trump tried to get the Justice Department to drop the case against Arpaio, a clear case of attempted obstruction of justice. And when that ploy failed, Trump ... pardoned him. ...
                                                    Let’s call things by their proper names here. Arpaio is, of course, a white supremacist. But he’s more than that. There’s a word for political regimes that round up members of minority groups and send them to concentration camps, while rejecting the rule of law: What Arpaio brought to Maricopa, and what the president of the United States has just endorsed, was fascism, American style. ...
                                                    There have been endless reports about the low-education white voters who went overwhelmingly for Trump... But he wouldn’t have made it over the top without millions of votes from well-educated Republicans who ... had no excuse for not realizing what kind of man he was. ...
                                                    This bodes ill if, as seems all too likely, the Arpaio pardon is only the beginning: We may well be in the early stages of a constitutional crisis. Does anyone consider it unthinkable that Trump will fire Robert Mueller, and try to shut down investigations into his personal and political links to Russia? Does anyone have confidence that Republicans in Congress will do anything more than express mild disagreement ... if he does?
                                                    As I said, there’s a word for people who round up members of ethnic minorities and send them to concentration camps, or praise such actions. There’s also a word for people who, out of cowardice or self-interest, go along with such abuses: collaborators. How many such collaborators will there be? I’m afraid we’ll soon find out.

                                                      Posted by on Monday, August 28, 2017 at 07:10 AM in Politics | Permalink  Comments (138) 

                                                      Sunday, August 27, 2017

                                                      Working in the Age of Robots (Video) Christopher Pissarides

                                                        Posted by on Sunday, August 27, 2017 at 12:55 PM Permalink  Comments (4) 

                                                        Links for 08-27-17

                                                          Posted by on Sunday, August 27, 2017 at 12:52 PM in Economics, Links | Permalink  Comments (44) 

                                                          Friday, August 25, 2017

                                                          New Conditions for Monetary and Fiscal Policy?

                                                            Posted by on Friday, August 25, 2017 at 12:39 PM in Conferences, Economics, Video | Permalink  Comments (19) 

                                                            Links for 08-25-17

                                                              Posted by on Friday, August 25, 2017 at 11:44 AM in Economics, Links | Permalink  Comments (162) 

                                                              Paul Krugman: Trump and Pruitt, Making America Polluted Again

                                                              "Don’t say that the administration’s agenda is stalled":

                                                              Trump and Pruitt, Making America Polluted Again, by Paul Krugman, NY Times: Efforts to kill Obamacare have failed, at least for now. Tax “reform” — which really means big tax cuts for the rich — faces doubtful prospects. ...
                                                              So many observers are asking whether Trump can restart his stalled agenda. But that turns out to be a bad question...
                                                              First, Trump doesn’t really have an agenda beyond “winning.” He has instincts and prejudices, but no interest in the details, or even the broad outlines, of policy...
                                                              Which brings me to my second point: While the legislative agenda does indeed appear stalled, a lot of what those interest groups want doesn’t require legislation, and is anything but stalled. This is especially true for environmental policy, where decisions about how to interpret and enforce laws ... can have a huge impact.
                                                              So Trump’s true legacy may well be defined not by the laws he does or more likely doesn’t pass, but by his decision to put Scott Pruitt in charge of the Environmental Protection Agency.
                                                              As Oklahoma’s attorney general, Pruitt effectively acted as a servant, not of the public, but of polluting industries. That’s not an accusation; it’s confirmed by his own email trail. ...
                                                              Pruitt can do a lot of harm without changing the law. He can, for example, reverse the ban on a pesticide that the E.P.A.’s own scientists say may damage children’s nervous systems. Or he can move to scrap a rule that would limit heavy-metal contamination from power-plant wastewater.
                                                              And he can cripple enforcement of the rules he doesn’t undo simply by working with Trump to starve his own agency of personnel and funds. The Trump budget released in May ... was an indication of priorities — and it called for cutting funding for the E.P.A. by 31 percent, more than any other agency.
                                                              Individually, no one of these actions is likely to be treated as front-page news... Cumulatively, however, they will kill or cripple large numbers of Americans — for that is what pollution does, even if the damage is gradual and sometimes invisible.
                                                              By the way, if you’re wondering whether an anti-environmental agenda will at least be good for job creation, the answer is no... This agenda will, however, be worth billions to certain campaign donors.
                                                              So don’t say that the administration’s agenda is stalled. Some parts are, but other parts are moving right along. When it comes to environmental policy, Trump will definitely change America — and his legacy will literally be toxic.

                                                                Posted by on Friday, August 25, 2017 at 11:40 AM in Economics, Environment, Politics | Permalink  Comments (10) 

                                                                The Market Is Behaving Much Like It Did in the Past

                                                                Tim Duy:

                                                                The Market Is Behaving Much Like It Did in the Past: The prevailing wisdom these days is that markets are behaving in inexplicable ways.
                                                                I have a different view. If the market means U.S. equities, the behavior since the Federal Reserve began this tightening cycle has been very consistent with the behavior of past cycles. It's not sure all that complicated -- it’s about consistent economic growth -- and I am pretty sure fighting it is a losing bet. ...Continued at Bloomberg Prophets...

                                                                  Posted by on Friday, August 25, 2017 at 11:03 AM in Economics, Monetary Policy | Permalink  Comments (7) 

                                                                  Agent-Based Models and Loss Aversion in the UK Housing Market

                                                                  Roger Farmer:

                                                                  Agent-Based Models and Loss Aversion in the UK Housing Market: This is my third post featuring research presented at the conference on Applications of Behavioural Economics, and Multiple Equilibrium Models to Macroeconomics Policy Conference held at the Bank of England on July 3rd and 4th 2017.
                                                                  Last week I featured two US central bankers, Jim Bullard, President of the St Louis Fed and Kevin Lansing, a Research Advisor at the Federal Reserve Bank of San Francisco. This week’s post features two papers on the housing market, presented by two researchers at the Bank of England; Arzu Uluc and Philippe Bracke. One of these papers uses an Agent Based-Modelling approach to study the effects of macroprudential policy in the housing market. The other is a large-scale empirical study which finds significant evidence against the hypothesis that we are all perfectly rational. Homo Economicus and Femina Economica display more subtle behaviour than simple neo-classical models admit. 
                                                                  Let’s begin with a fascinating paper co-authored by Philippe Bracke and Silvana Tenreyo. ...

                                                                    Posted by on Friday, August 25, 2017 at 10:57 AM in Academic Papers, Economics | Permalink  Comments (0) 

                                                                    Thursday, August 24, 2017

                                                                    Links for 08-24-17

                                                                      Posted by on Thursday, August 24, 2017 at 04:36 AM in Economics, Links | Permalink  Comments (139) 

                                                                      Fed Has Good Reason to Expect Faster Wage Growth

                                                                      Tim Duy:

                                                                      Fed Has Good Reason to Expect Faster Wage Growth: Federal Reserve officials must think that something soon has to give in this economy. The current equilibrium, characterized by low inflation, low unemployment, low wage growth and high corporate profit margins, isn’t sustainable indefinitely, but they don’t know how or when it will crack. ...Continued at Bloomberg Prophets...

                                                                        Posted by on Thursday, August 24, 2017 at 04:32 AM in Economics, Monetary Policy | Permalink  Comments (2) 

                                                                        Monday, August 21, 2017

                                                                        Links for 08-21-17

                                                                          Posted by on Monday, August 21, 2017 at 10:55 AM in Economics, Links | Permalink  Comments (191) 

                                                                          Paul Krugman: What Will Trump Do to American Workers?

                                                                          "So is the Trump agenda dead? Not necessarily":

                                                                          What Will Trump Do to American Workers?, by Paul Krugman, NY Times: ...Donald Trump’s promise to be a populist fighting for ordinary workers was worth about as much as any other Trump promise — that is, nothing. His agenda, such as it is, amounts to reverse Robin Hood with extra racism — the conventional Republican strategy of taking from struggling families to give to the rich, while distracting lower-income whites by attacking Those People, with the only difference being just how blatantly he plays the race card.
                                                                          At first sight, however, the Trump version of this strategy doesn’t seem to be going very well. ...
                                                                          So is the Trump agenda dead? Not necessarily, because trickle-down has never been the whole story of the Republican assault on workers. Or to put it another way: Don’t just watch Congress, keep your eyes on what federal agencies are doing.
                                                                          When you step back and take the long view on trickle-down policies, what you realize is that Trump’s legislative failure is more the rule than the exception. The election of Ronald Reagan was supposed to have set America on a path toward lower taxes and smaller government — and it did, for a while. But those changes have largely been reversed. ...
                                                                          But here’s the thing: While the rich still pay taxes and the safety net has in some ways gotten stronger, the decades since Reagan have nonetheless been marked by vastly increased inequality, with stagnating wages for most, but soaring incomes for a tiny elite. How did that happen?
                                                                          Yes, globalization probably played some role, as did technology. But other wealthy countries, just as exposed to the winds of global change, haven’t seen anything like America’s headlong rush into a new Gilded Age. To understand what happened to us..., you need to look at policy — and especially the kind of policy that often flies under the media’s radar. ...
                                                                          Which brings us back to Trump and the effect he’ll have on America’s working class. Right now it looks as if he may have much less impact on taxing and spending than most people expected. But other policies, often made administratively by federal agencies rather than via legislation, can matter a lot. ...
                                                                          The point is that progressives shouldn’t celebrate too much over Trump’s legislative failures. As long as he’s in office, he retains a lot of power to betray the working people who supported him. And in case you haven’t noticed, betraying those who trust him is a Trump specialty.

                                                                            Posted by on Monday, August 21, 2017 at 10:49 AM in Economics, Politics | Permalink  Comments (31) 

                                                                            Friday, August 18, 2017

                                                                            Links for 08-18-17

                                                                              Posted by on Friday, August 18, 2017 at 02:16 AM in Economics, Links | Permalink  Comments (278) 

                                                                              Paul Krugman: Trump Makes Caligula Look Pretty Good

                                                                              "The Worst President Ever™":

                                                                              Trump Makes Caligula Look Pretty Good, by Paul Krugman, NY Times: Even before the media obsession with Hillary Clinton’s email server put The Worst President Ever™ in the White House, historians were comparing Donald Trump to Caligula, the cruel, depraved Roman emperor who delighted in humiliating others, especially members of the empire’s elite. But seven months into the Trump administration, we can see that this comparison was unfair.
                                                                              For one thing, Caligula did not, as far as we know, foment ethnic violence within the empire. For another ... Rome’s government continued to function reasonably well despite his antics...
                                                                              Finally, when his behavior became truly intolerable, Rome’s elite did what the party now controlling Congress seems unable even to contemplate: It found a way to get rid of him.
                                                                              Anyone with eyes — eyes not glued to Fox News, anyway — has long realized that Trump is utterly incapable, morally and intellectually, of filling the office he holds. But in the past few days things seem to have reached a critical mass. ...
                                                                              Everyone in Washington now knows that we have a president who never meant it when he swore to defend the Constitution. He violates that oath just about every day and is never going to get any better.
                                                                              The good news is that the founding fathers contemplated that possibility and offered a constitutional remedy: Unlike the senators of ancient Rome, who had to conspire with the Praetorian Guard to get Caligula assassinated, the U.S. Congress has the ability to remove a rogue president.
                                                                              But ... all we get from the vast majority of elected Republicans are off-the-record expressions of “dismay” or denunciations of bigotry that somehow fail to name the bigot in chief. ...
                                                                              The fact is that white supremacists have long been a key if unacknowledged part of the G.O.P. coalition, and Republicans need those votes to win general elections. Given the profiles in cowardice they’ve presented so far, it’s hard to imagine anything — up to and including evidence of collusion with a foreign power — that would make them risk losing those voters’ support.
                                                                              So the odds are that we’re stuck with a malevolent, incompetent president... If so, we have to hope that our country somehow stumbles through the next year and a half without catastrophe, and that the midterm elections transform the political calculus and make the Constitution great again.
                                                                              If that doesn’t happen, all one can say is God save America. Because all indications are that the Republicans won’t.

                                                                                Posted by on Friday, August 18, 2017 at 02:16 AM in Economics, Politics | Permalink  Comments (47) 

                                                                                Wednesday, August 16, 2017

                                                                                Links for 08-16-17

                                                                                  Posted by on Wednesday, August 16, 2017 at 10:14 AM in Economics, Links | Permalink  Comments (217) 

                                                                                  Tuesday, August 15, 2017

                                                                                  Fed Watch: Retail Sales, Dudley, Wages

                                                                                  Tim Duy:

                                                                                  Retail Sales, Dudley, Wages, by Tim Duy: Some quick thoughts for the day.
                                                                                  First, New York Federal Reserve President William Dudley gave an extended interview to the Associate Press. Definitely worth the time to read. Some highlights:
                                                                                  1.) Dudley never put a Trump bump in his forecast, so his forecast is essentially unchanged:
                                                                                   I think we’re still on the same trajectory we’ve been on for several years. Above trend growth, gradually tightening labor market, inflation -- somewhat below our objective -- but we do expect as the labor market continues to tighten, to see firmer wage gains and that will ultimately filter into inflation moving up towards our 2% objective.
                                                                                  2.) He expects inflation numbers to improve. He wants us to ignore the year-over-year numbers (of course, recent month-over-month numbers are not great):
                                                                                  Well, the reason why inflation won’t get up to 2% very quickly on a year-over-year basis is because we’ve had these very low inflation readings over the last 4 or 5 months. So it’s going to take time for those to sort of drop out of the year-over-year calculation.
                                                                                  3.) Assuming the forecast continues as he expects, he believes the Fed will hike rates again: 
                                                                                  I think it depends on how the economic forecast evolves. If it evolves in line with my expectations, I would expect -- I would be in favor of doing another rate hike later this year.
                                                                                  4.) Bubble? What bubble?
                                                                                  My own view is that -- I’m not particularly concerned about where our asset prices are today for a couple of reasons. The main one is that I think that the asset prices are pretty consistent with what we’re seeing in terms of the actual performance of the economy.
                                                                                  5.) But - and I think this is important - financial conditions continue to easy despite rate hikes:
                                                                                  Now the reason why I think you’d want to continue to gradually remove monetary policy accommodation, even with inflation somewhat below target, is that 1) monetary policy is still accommodative, so the level of short-term rates is pretty low, and 2) and this is probably even more important, financial conditions have been easing rather than tightening. So despite the fact that we’ve raised short-term interest rates, financial conditions are easier today than they were a year ago.
                                                                                  The stock market’s up, credit spreads have narrowed, the dollar has weakened, and those have more than offset the effects of somewhat higher short-term rates and the very modest increases that we’ve seen in longer-term yields.
                                                                                  6.) Balance sheet normalization is coming:
                                                                                  Well, we obviously have to have the FOMC meeting to make that decision at the next FOMC meeting. But, I don’t think the expectations of market participants are unreasonable. In June, following the June FOMC meeting, we laid out a plan in terms of how we would actually do our balance sheet normalization. How we would allow Treasury and agency mortgage-backed securities to gradually run off our portfolio over time.
                                                                                  And so the plan is out there. It’s been I think generally well-received, and fully anticipated. People expect it to take place. In the last FOMC statement, we said that we expected this to happen relatively soon. So, I expect it to happen relatively soon.
                                                                                  7.) At the end of the day, the balance sheet reduction might amount to very little:
                                                                                  My own view is, if I had to say today, we’re probably going to see a balance sheet five years from now that’s probably in the order of 2-1/2 to 3-1/2 trillion rather than the 4-1/2 trillion dollar balance sheet.
                                                                                  Overall, Dudley continues to adhere to what amounts to the Fed's median forecast, and that means he thinks another rate hike this year is solidly in play.
                                                                                  Separately, retail sales for July were up:


                                                                                  The monthly data is noisy, so be wary that it reflects the true state of spending. The three-month and twelve-month changes (for core sales) are similar at 3.2% and 3.6% respectively and more likely reflect the underlying trend. Basically, the consumer continues to press forward at a modest pace. Stop worrying about consumer spending. It isn't an imminent threat to the outlook.
                                                                                  And why should it be a threat? Like, job growth, wage growth is actually fairly solid. The headline weakness in wage growth is all about demographic shift, at least according to new research from Mary Daly of the Federal Reserve Bank of San Francisco. Via Bloomberg:
                                                                                  Fresh research from the San Francisco Fed provides an explanation: baby boomers. As they retire in droves, their exit from the workforce is distorting the data for average earnings, according to a blog post published Monday on the bank’s website.
                                                                                  “Wage growth isn’t as disappointing as it looks,” Mary Daly, director of economic research at the San Francisco Fed, said in an interview. “Wage growth, when cleaned up, looks consistent with other measures seen in the labor market.”
                                                                                   The implication is that the labor market low wage growth does not necessarily imply the labor market is weak. It is an artifact of demographic change. That change has been fairly persistent, but at the end of the note Daly holds out some hope that it may be changing:
                                                                                  Overall, these factors have combined to hold down growth in the median weekly earnings measure by a little under 2 percentage points (Figure 2), a sizable effect relative to the normal expected gains.
                                                                                  Most recently, the effect from flows into and out of full-time work has started to tick upward and might be a sign of stronger growth ahead.
                                                                                  We will see.

                                                                                    Posted by on Tuesday, August 15, 2017 at 12:03 PM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (13) 

                                                                                    Fed Shouldn't View Productivity as an Exogenous Factor

                                                                                    Tim Duy:

                                                                                    Fed Shouldn't View Productivity as an Exogenous Factor: The Federal Reserve has an opportunity to test a hypothesis critical to the health of the U.S. economy: Can persistently loose monetary policy boost the pace of productivity growth? Sadly, for now, an adherence to a strict Phillips curve framework for the economy and fear of financial instability will prevent the Fed from venturing down this path. ...[Continued at Bloomberg Prophets]...

                                                                                      Posted by on Tuesday, August 15, 2017 at 12:03 PM in Economics, Monetary Policy | Permalink  Comments (24) 

                                                                                      Do Low Interest Rates Punish Savers?

                                                                                      Roger Farmer:

                                                                                      Do Low Interest Rates Punish Savers?: This is the second of my posts on the conference: Applications of Behavioural Economics, and Multiple Equilibrium Models to Macroeconomic Policy, held at the Bank of England on July 3rd and 4th. I feature two papers written by officials from the Federal Reserve System. James Bullard, President of the Federal Reserve Bank of St. Louis, discusses the implications of his recent research for low interest rates. And Kevin Lansing, a Research Advisor at the Federal Reserve Bank of San Francisco, discusses his work on multiple equilibria. ...

                                                                                        Posted by on Tuesday, August 15, 2017 at 09:35 AM in Academic Papers, Economics | Permalink  Comments (20) 

                                                                                        Links for 08-15-17

                                                                                          Posted by on Tuesday, August 15, 2017 at 09:32 AM in Economics, Links | Permalink  Comments (75) 

                                                                                          Monday, August 14, 2017

                                                                                          Paul Krugman: When the President Is Un-American

                                                                                          "we don’t need to wonder whether an anti-American cabal ... has seized power in Washington. It has:":

                                                                                          When the President Is Un-American, by Payl Krugman, NY Times: ...what makes America America is that it is built around an idea: the idea that all men are created equal, and are entitled to basic human rights. Take away that idea and we’re just a giant version of a two-bit autocracy. ...
                                                                                          Real Americans understand that our nation is built around values, not the “blood and soil” of the marchers’ chants; what makes you an American is your attempt to live up to those values, not the place or race your ancestors came from. ...
                                                                                          But the man who began his political ascent by falsely questioning Barack Obama’s place of birth — a blood-and-soil argument if ever there was one — clearly cares nothing about the openness and inclusiveness that have always been essential parts of who we are...
                                                                                          Real Americans understand that our nation was born in a rebellion against tyranny. They feel an instinctive aversion to tyrants..., and an underlying sympathy for democratic regimes...
                                                                                          But the present occupant of the White House has made no secret of preferring the company, not of democratic leaders, but of authoritarian rulers...
                                                                                          Real Americans expect public officials to be humbled by the responsibility that comes with the job. They’re not supposed to be boastful blowhards ... like Trump...
                                                                                          Real Americans understand that being a powerful public figure means facing criticism... Foreign autocrats may rage against unflattering news reports, threaten to inflict financial harm on publications they dislike, talk about imprisoning journalists; American leaders aren’t supposed to sound like that.
                                                                                          Finally, real Americans who manage to achieve high office realize that they are ... meant to use their position for the public good. ... Now we have a leader who is transparently exploiting his office for personal enrichment, in ways that all too obviously amount in practice to influence-buying by domestic malefactors and foreign governments alike.
                                                                                          In short, these days we have a president who is really, truly, deeply un-American, someone who doesn’t share the values and ideals that made this country special...., it’s remarkable that Trump won’t even pretend to be outraged at Putin’s meddling with our election. ...
                                                                                          Whatever role foreign influence may have played and may still be playing, however, we don’t need to wonder whether an anti-American cabal, hostile to everything we stand for, determined to undermine everything that truly makes this country great, has seized power in Washington. It has: it’s called the Trump administration.

                                                                                            Posted by on Monday, August 14, 2017 at 03:34 PM in Politics | Permalink  Comments (126) 

                                                                                            The Republican Retreat From Market-Based Regulation

                                                                                            I have a new column:

                                                                                            The Republican Retreat From Market-Based Regulation: During the debate over the repeal of Obamacare, Republicans made frequent reference to their desire for a “free market” for health care. This is consistent with the GOP’s long-standing support of deregulation and free market principles.
                                                                                            But all well-functioning markets are regulated to one degree or another. ...

                                                                                              Posted by on Monday, August 14, 2017 at 09:43 AM in Economics, Fiscal Times, Regulation | Permalink  Comments (25) 

                                                                                              Fed Watch: Don't Add To The Fire

                                                                                              Tim Duy:

                                                                                              Don't Add To The Fire: Vox has an article out this morning with the title "The real "deep state" sabotage is happening at the Fed." It begins:
                                                                                              Trump administration officials are notorious for their suspicion that a “deep state” of career military, intelligence, diplomatic, or civil service professionals is seeking to sabotage their work. But for a clearer example of sabotage — albeit without much in the way of a conspiracy — Trump would do well to cast his gaze at the Federal Reserve, which, dating back to before his inauguration, has been waging war on an inflationary menace that appears not to exist.
                                                                                              I have no qualms with the criticism that the Fed's is excessively focused on inflation or, more accurately, possibly working with a broken model of inflation. That's fair game. 
                                                                                              What I find disturbing and quite frankly irresponsible is the use of "deep state" language to describe the Fed. This is the language used by the far right to discredit and undermine faith in our government institutions. For the left to adopt the same language adds to the fire already burning. 
                                                                                              Take this language into consideration with the rage already directed against the Federal Reserve. This, for instance:
                                                                                              A Sayre man has been arrested in connection with what authorities says is a foiled plot to blow up a bank building in Downtown Oklahoma City with a truck filled with fake explosives.
                                                                                              Jerry Drake Varnell, 23, of Sayre, initially wanted to blow up the Federal Reserve Building in Washington, D.C., but settled on attempting to detonate a bomb at the BancFirst building at 101 N Broadway in downtown Oklahoma City, according to court documents.
                                                                                              An undercover FBI agent posed as someone who could help Varnell to blow up the building, according to a complaint filed Sunday in U.S. District Court for the Western District of Oklahoma. Varnell allegedly told an FBI informant that he wanted to blow up the Federal Reserve Building in Washington, D.C., with a device similar to the one used in the 1995 Oklahoma City bombing because he was upset with the government.
                                                                                              I am honestly just simply disappointed that Vox chose to add to the hate directed at the Fed by using the inflammatory language of the far right. I have had plenty of criticisms of the Fed over the years. I am concerned that their model of inflation isn't working, and that their estimate of the natural rate of interest is too high. But that type of criticism is a far cry from describing the institution as the "deep state." We have seen time and time again that fomenting that kind of thought only leads to bloodshed. The last thing we need is the left helping to incite another Oklahoma City bombing on Constitution Ave. - or anywhere for that matter.

                                                                                                Posted by on Monday, August 14, 2017 at 09:36 AM in Economics, Fed Watch, Monetary Policy | Permalink  Comments (94) 

                                                                                                Saturday, August 12, 2017

                                                                                                Links for 08-12-17

                                                                                                  Posted by on Saturday, August 12, 2017 at 02:11 PM in Economics, Links | Permalink  Comments (187) 

                                                                                                  Friday, August 11, 2017

                                                                                                  Paul Krugman: The Axis of Climate Evil

                                                                                                  "Where does climate denial come from?":

                                                                                                  The Axis of Climate Evil, by Paul Krugman, NY Times: ...At this point the evidence for human-caused global warming just keeps getting more overwhelming, and the plausible scenarios for the future — extreme weather events, rising sea levels, drought, and more — just keep getting scarier.
                                                                                                  In a rational world urgent action to limit climate change would be the overwhelming policy priority for governments everywhere.
                                                                                                  But the U.S. government is, of course, now controlled by a party within which climate denial — rejecting not just scientific evidence but also obvious lived experience, and fiercely opposing any effort to slow the trend — has become a defining marker of tribal identity. ...
                                                                                                  So where does climate denial come from? ... The answer, I’d argue, is that there are actually three groups involved — a sort of axis of climate evil.
                                                                                                  First, and most obvious, there’s the fossil fuel industry — think the Koch brothers — which has an obvious financial stake in continuing to sell dirty energy. And the industry ... has systematically showered money on think tanks and scientists willing to express skepticism about climate change. ...
                                                                                                  Still, the mercenary interests of fossil fuel companies aren’t the whole story here. There’s also ideology.
                                                                                                  An influential part of the U.S. political spectrum — think the Wall Street Journal editorial page — is opposed to any and all forms of government economic regulation; it’s committed to Reagan’s doctrine that government is always the problem, never the solution. ...
                                                                                                  Some conservatives ... support market-friendly intervention to limit greenhouse gas emissions. But all too many prefer simply to deny the existence of the issue — if facts conflict with their ideology, they deny the facts.
                                                                                                  Finally, there are a few public intellectuals — less important than the plutocrats and ideologues, but if you ask me even more shameful — who adopt a pose of climate skepticism out of sheer ego. In effect, they say: “Look at me! I’m smart! I’m contrarian! I’ll show you how clever I am by denying the scientific consensus!” And for the sake of this posturing, they’re willing to nudge us further down the road to catastrophe.
                                                                                                  Which brings me back to the current political situation. Right now progressives are feeling better than they expected to a few months ago: Donald Trump and his frenemies in Congress are accomplishing a lot less than they hoped, and their opponents feared. But that doesn’t change the reality that the axis of climate evil is now firmly in control of U.S. policy, and the world may never recover.

                                                                                                    Posted by on Friday, August 11, 2017 at 09:34 AM in Economics, Environment, Politics | Permalink  Comments (65) 

                                                                                                    Thursday, August 10, 2017

                                                                                                    Links for 08-10-17

                                                                                                      Posted by on Thursday, August 10, 2017 at 10:58 AM in Economics, Links | Permalink  Comments (135)