The loss of a great economist and a great man

March 18th, 2019 at 11:15 am

Like everyone else who knew him, I’m in shock and despair over news of the death of the economist Alan Krueger. Alan was the best kind of colleague: always inquisitive, incredibly rigorous about what constituted facts and evidence in economics, and willing and able to talk about his work in ways that made sense to anyone who would listen.

I admired everything about Alan, but a few things stand out. He taught us a lot about creativity. Like the rest of us, he crunched numbers that were available from the usual sources. But he didn’t stop there. He believed that if you want to know the answer to something, sometimes you have to go out and get the data yourself, something very few economists do.

I can’t be the only one who’s been in meetings with Alan, scratching our heads about some policy outcome, only to have him show up at the next meeting with a survey he somehow fielded with the answer to the question.

It was this creativity that led to his path-breaking, minimum-wage work with David Card. Their book, Myth and Measurement, stands as one of the most muscular treatises not just on the facts of minimum wages–a national debate, btw, that Alan and David totally altered, to the benefit of millions of low-wage workers and their families (and how many of us can say that?…). The book is a shining example, one I’ve tried to emulate my own work, of how to test an economic assumption that everyone believes, but is wrong.

With his brain power, he could have been high-handed and haughty, but he was anything but. To the contrary, he went out of his way to be a kind and empathetic friend. Once, when we worked together in the Obama administration, a prominent Democrat publicly distanced himself from some something I’d written. Before I’d even heard about it, I got a sympathetic note from Alan reminding me that politics is one thing, but we don’t throw our friends under the bus (his words, which I remember to this day).

I simply can’t believe he’s not there for me to shoot an email off to, asking him some gnarly question that he typically answered for me in a clarifying sentence that completely unwound my confusion. Then, with that out of the way, we’d gossip a bit.

A terribly sad day…a huge loss. All any of us can take solace in is how lucky we are to have known him.

Jobs report, Feb 2019 [truncated]: Outliers happen, and faster real wage growth!

March 8th, 2019 at 9:34 am

Got a late start this AM, so just highlights for now, with more analysis to come.

Outliers happen!

Payrolls rose a mere 20K last month, a huge downside outlier given the recent trends as shown below in our monthly smoother. The average over the past 3-months of 186K is a much more reliable take on the current underlying pace of job growth. Consider, for example, that payroll jobs were up 311K last month, a value well above trend. So, at least for now, consider this downside miss payback for last month’s huge upside.

Of course, the 20K could be harbinger of a downshifting in the pace of payroll job growth. Such a downshift–though not of that magnitude–is not unexpected given a number of facts: job growth slows as we close in on full capacity in the labor market; US GDP is slowing as fiscal stimulus fades (the tax cuts were a sugar high; not a trickle-down miracle); global growth has slowed; the trade deficit–a drag on growth–has increased in recent quarters.

But one month does not a new trend make and it is too soon to tell whether a new trend is underway.

Then there’s the Household Survey

The survey of households, from which the jobless rate is derived, is telling a different story, one more consistent with the trend conditions in the job market (some of these results are bounceback from January’s gov’t shutdown). The unemployment rate ticked down to 3.8 percent and not because people left the labor market (the participation rate was unchanged) but because the unemployed got jobs (employment rose 255,000 in this survey). There was a large, shutdown-related reversal in involuntary part-time work; unemployment for high-school dropouts hit a near-all-time low of 5.3 percent (it was 5 percent last July), suggesting robust labor demand in the low-wage labor market (a key theme of my work in this area is the extent to which persistently tight labor markets help the least advantaged); and the broader underemployment measure (U-6) also fell to a cyclical low of 7.3 percent.

Finally, decent wage growth, nominal and real

The figures show annual changes in nominal hourly wages for all private-sector workers and for the 80 percent who are production, non-supervisors (think “middle-wage workers”), with 6-month moving averages. The story here is that after being stuck at 2.5 percent for a patch around 2017, the tighter job market began to deliver more bargaining power to wage earners, and firms have had to bid wages up, such that hourly pay is now rising about a point faster than it was back then.

Because topline inflation has been held back by low energy prices, the next figure shows a beneficent collision between faster nominal pay and slower price growth, the difference being real earnings growth. I estimate that the CPI for February rose 1.6 percent. If I’m right, real hourly pay for middle-wage workers is up almost 2 percent, a solid pace for real wages that will boost the buying power of working households.

I’m going to jump for now but will be back soon with some compelling figures (if one can say so ones self) showing how low unemployment is boosting wage growth, but faster wage growth is not juicing price growth.

There’s a new financial transaction tax proposal in town. Here’s why that’s good news.

March 1st, 2019 at 7:41 am

The 2017 Trump tax cut committed at least two fiscal sins. By delivering most of its cuts to those at the top of the wealth scale, it worsened our already high-levels of pretax inequalities. And in so doing, it robs the Treasury of much needed revenues; based on our aging population, we’re going to need more, not less, revenues for the next few years.

Now, along comes an idea that pushes back against both of these problems (and one other one!): a small tax on financial transactions (FTT). Sen. Schatz (D-HI) and Cong. DeFazio (D-OR) are planning to introduce a tax of one-tenth-of-one-percent, or 10 basis points (100 basis points, or bps, equals 1 percentage point), on securities trades, including stocks, bonds, and derivatives, one that would raise $777 billion over 10 years (0.3 percent of cumulative GDP a decade), according to CBO (by the way, 10 bps on a $1,000 trade comes to a dollar).

Numerous articles have gotten into the arguments for and against an FTT. I’ve got one from a few years back that covers similar ground. My colleague Dean Baker has long argued on behalf of FTTs as has Sarah Anderson of IPS. Importantly, FTTs exist in various countries, including the UK and France, with Germany considering the tax (also, Brazil, India, South Korea, and Argentina). The UK is a particularly germane example, where an FTT has long co-existed with London’s vibrant, global financial market (though we’ll see if Brexit changes that).

In fact, we have an FTT here too! The SEC funds its operating budget through a tiny FTT of 0.23 basis points on securities transactions and $0.0042 per transaction for futures trades.

The pro-FTT argument focuses on the reversing the two fiscal sins noted above, along with raising the cost of high-frequency trading. In a Vox interview, Sen. Schatz was particularly motivated by this latter aspect of the tax: “High-frequency trading is a real risk to the system, and it screws regular people; that’s the main reason to do this. If in the process of solving that problem we happen to generate revenue for public services, that’s an important benefit, but that’s not the main reason to pass this into law.”

Because the value of the stock holdings is highly skewed toward the wealthy, the FTT is highly progressive: The TPC estimates that 40 percent of the cost of the tax falls on the top 1 percent (which makes sense as they hold about 40 percent of the value of the stock market and 40 percent of national wealth).

Finally, on the pro-side, there’s a certain justice in taxing the pumped-up transactions of a financial sector that not only played a key role in inflating the housing bubble that led to the Great Recession, but thanks to government bailouts, recovered from it well before the median household. In this expansion, corporate profits and the securities markets that rise and fall on such profitability have mostly boomed while workers’ wages have only recently caught a bit of a buzz.

So, as my grandma used to say, “What’s not to like?”

Opponents raise numerous concerns, some of which should be taken more seriously than others. The high-speed traders correctly note that even a small FTT would upend their business model. Unlike most such squawking of those effected by tax proposals, in this case I suspect they’re right. While a dollar on a $1,000 trade doesn’t sound like much, when your industry is running 4 billion trades a day, 10 bps can be a prohibitive increase in the cost of transactions.

But again, on this point, opponents and advocates agree. We just have different goals. Someone could make an argument that high-frequency trading improves capital allocation, but it would be a steep, uphill argument.

The more serious objection is that the FTT catches more than just the “flash boys” in its net, raising transaction costs for plain vanilla traders. This is, by definition, true, and because of this effect, FTTs tend to reduce trading volumes. But too often, opponents stop there, as if this is some sort of coup de grace for the tax.

That’s only the case, however, if current trading volumes are somehow optimal, or if diminished volumes create markets that are too thin to reveal price signals to buyers and sellers. But in markets where half the daily trades are high frequency, reduced volume does not necessarily translate into reduced liquidity or dampened price signaling. There’s such a thing, it turns out, as too much volume (you’ve heard heavy metal, right?).

In fact, work by economists Thomas Philipon and Rajiv Sethi have documented ways in which something unusual has occurred. As transaction costs have fallen—quite dramatically, given the rise of electronic trading and its diminished marginal transaction costs—financial markets have not become more efficient. One reason is that falling transaction costs have been offset by higher “intermediation costs,” meaning the incomes of the brokers and dealers in the industry (Sethi provides compelling examples of “superfluous financial intermediation”).

It is therefore plausible, as Sen. Schatz believes, that an FTT will reduce “rent seeking” in the finance sector (economese for excess profits beyond those they’d get under normal, competitive conditions), unproductive financial “innovation,” and speculative bubbles.

But it is also possible that both assets and trading volumes will be more negatively affected than I and other advocates of the tax believe to be the case. Design issues can help here. Sweden’s FTT worked badly as it was set at a high rate but with a relatively narrow base, so avoidance was rampant. The Schatz/DeFazio bill avoids this pitfall with a low rate and a broad base. It’s notable in this regard that the CBOs revenue estimate of a plan upon which the new proposal is modeled includes the budget office’s guesstimates of these dynamic responses (e.g., reduced volumes), and it still raises serious revenues.

Given the uncertainty, here’s what I think should guide our thinking regarding an FTT. First, there is no perfect tax. In every case, you can come up with stories, some of which will be true (most of which will be hugely exaggerated) about some person or sector who is going to get hurt. In this case, the tax is small and there’s a plausible argument that its sectoral impact could be benign or useful. Second, we need the revenues. Third, we need the progressivity.

In other words, if the Trump tax cuts committed fiscal and distributional sins, the FTT looks potentially corrective and meritorious. I’d say it’s time we give it a Schat(z).

What does it mean when both stock and bond prices are falling?

February 25th, 2019 at 8:33 am

Just a quick comment on this recent NYT piece that scratches its head about an ongoing, simultaneous rally in both stock and bond prices. “Stock and bond prices are not supposed to rise and fall in tandem,” claims the writer.

Consider the grid below. I don’t have the relative frequencies for each box but I’ve seen them, and while the boxes on the diagonal get fewer hits than the others, my recollection is that periods with price movements in those boxes isn’t that unusual (bond yields move inversely to their prices). But correct me if I’m wrong about that.

 

Stock Prices
+
Bond Prices + B+, S+ B+, S-
B-, S+ B-, S-

The Times piece focuses on the upper left box. In the near term, being there is largely a function of the Fed deciding to pause, mixed with an argument between stock and bond investors. The former expect at least trend growth (maybe not 3% real GDP, but at least 2%), solid corporate profitability, even more share buybacks, and a truce in the trade war with China (Trump’s weekend decision to suspend the start date of higher Chinese tariffs is a point for this team). The latter are more focused on predictions of slower GDP growth; e.g., they may be looking at the Atlanta Fed’s GDPNow estimate for Q4 of 1.9%. And, of course, many of these investors are the same person, buying bonds as a hedge in case the equity market loses the argument.

The next box over (B+, S-) typically signals weak expected growth, leading to an equity sell off and flight to the safety of bonds.

B-, S+, conversely, implies positive growth news (flight from safety), and the other diagonal (B-,S-), implies a Fed that’s more hawkish than it should be from the markets perspective. Equity markets, in particular, have come to disdain a hawkish Fed, in no small part because it is, in recent years, a very unfamiliar creature to them.

Now, consider the intersection of the upper-left box (B+, S+), “secular stagnation” (the notion that without monetary or fiscal stimulus, economies won’t achieve their potential in expansions), and inequality. In a piece I’ve got in today’s WaPo, I note that it took just a pretty small increase in the Fed funds rate and the forthcoming withdrawal of fiscal stimulus (along with a bunch of other stuff, of course, but there’s always other stuff) to significantly downgrade expectations about the strength on the U.S. economy. As I wrote, we’re too much like a bike that cruises along at a decent clip until it hits the slightest hill, and then, without a push, starts to wobble.

Even at low growth, however, corporate profitability has remained solid and boosted equity markets. This, in turn, is a symptom of the weak bargaining clout of labor such that even at low unemployment, workers have a harder time than they should claiming more of the growth they’re helping to generate (to be clear, we’ve definitely started to see some real wage gains; the pressure of full employment still works!). And that’s just another way of talking about inequality.

So, I wonder if part of what we’re seeing when we see a bullish stock market amidst a low, falling bond yields is not just an argument between equities and fixed incomes about the near-term data flow, but a longer-term debate about structurally slow growth and high inequality.

Real wage gains and energy prices

February 14th, 2019 at 2:19 pm

Readers know I’m a huge booster of the impact of low unemployment rates on wage gains, especially for middle and low-wage workers. This dynamic is alive and well in current data and those of us on team Full Employment should elevate and tout it!

But, when it comes to real wage gains in “high frequency data,” which have been notable of late–as in, beating productivity growth–it’s important to also parse out the role of low energy prices.

The most recent CPI report showed a low topline inflation rate of 1.6 percent over the past 12 months (core CPI inflation rose 2.2 percent). The main factor pushing down on price growth was energy, down 5 percent, with gas prices (a sub-category of energy), down 10 percent.

In my recent write-ups of the jobs and other reports with wage info, I’ve mentioned the role of low energy prices in real wage growth, but here I’d like to formalize the analysis a bit to try to get a more accurate feel of the importance of this factor.

The first figure below shows recent trends in real hourly wages of mid-level workers (the production, non-sup series from the Establishment survey) deflated by both the topline CPI and CPI less energy. Of course, given volatile energy prices, wages deflated by the sans-energy deflator are smoother and have been gradually climbing since 2015, hitting 1.3 percent last month. The other series hit 1.8 percent, suggesting the difference–0.5 percent–is due to low energy prices.

REAL WAGE GROWTH, YR/YR, DEFLATE BY CPI AND CPI-SANS-ENERGY

Source: BLS

How important is this energy-price effect? Well, a year ago, real wage growth for this series was 0.4 percent, meaning real growth has accelerated by 1.4 percent. But back then, rising energy prices were pushing the other way, i.e., slightly crimping real wage growth. Thus, the change in the energy effect–the difference in difference between the values in the two series above over the past year–is 0.8 percent. That means that 56 percent of the acceleration in real wages over the past year is due to falling energy prices. (See note for details)

That’s a sizable impact, but look back at 2015 to see even bigger effects. In Jan, 2015, energy prices were 20 percent below their year-ago level. That month, real wages were up a strong 2.2 percent, and acceleration of 1.5 percent over their year-ago level. The energy price effect more than explains that change.

Such findings do not undercut the longer-term full employment/wage growth connection, as both nominal and real gains are correlated with tighter job markets (I’ve argued non-linearities are in play but others find that not to be the case). Note, again, the smooth acceleration in real wages since 2015 using the non-energy deflator in the figure above.

But they’re also a reminder of the important role of energy prices in near-term, real wage trends. For what it’s worth, which isn’t a lot, the general consensus is that oil prices, while not expected to fall further, should stay roughly around where they are going forward, as strong global supply meets middling demand. However, there are some noises about OPEC constraining supply, so stay tuned.

Data note: What I’m calling the “energy effect” here is: d_rw_c – d_rw_ne, where the first term is the 12 month log change in the real wage deflated by the top line CPI and the second term is the 12 month log change in the real wage deflated by the CPI less energy. The acceleration calculations first difference d_rw_c and d_rw_ne with their values one year ago and then difference those differences to get the change in the energy effect.