Two WaPo posts for your entertainment: First, when it comes to fixing the recklessly drafted tax bill, the D’s have some leverage. I offer some thoughts on how they should use it.
Second, my old friend Larry Kudlow’s going to be heading Trump’s NEC. Some reflections on about 25 years of arguing with the dude.
Readers know I’ve long been promoting subsidized jobs programs. Even as we close in on full employment, there are still significant pockets of folks who have difficulty finding their way into the job market. Sometimes it’s a supply-side problem–skills, health, criminal record, discrimination–sometimes, demand side, as in not enough jobs.
I’m often asked: what will these folks do? Well, some programs subsidize private sector jobs, so the answer is: the same stuff everyone else does. But other ideas involve the public sector creating employment opportunities, which can range from child care, educational assistance, maintaining public properties, and more.
This WaPo article told the story of “the National Green Infrastructure Certification Program. Created through a partnership between DC Water and the Water Environment Federation, the program educates and trains new workers in how to build, inspect and keep up green infrastructure like rain gardens, roof gardens and pavement that absorbs water. The projects can slow, clean and sometimes reuse storm water that otherwise would flow dirty and unchecked into area waterways.”
Great idea! And, just to be clear, this is an existing program. When I talk about these ideas for jobs programs, people sometimes react as if I’m way outside the box. In fact, we’ve had long experience with public job creation, and have some informed ideas about what works and what doesn’t.
More to come on that…
A couple of days ago, I participated in the “On Point” radio show about this (sort of) bispartisan effort to significantly rollback the Dodd-Frank financial reform bill that passed back in 2010. I was a member of team Obama back then and thought this was an important and very necessary advance. Imperfect, sure, but an essential set of regulations and consumer protections to diminish the seemingly endless repetition of the economic shampoo cycle: bubble, bust, repeat.
You can listen to my take on the show. I think this so-called fix to the bill goes way too far and exempts or partially exempts too many potentially risky institutions from the necessary oversight in Dodd-Frank. This mistake represents a) precisely the amnesia about reckless finance that repeatedly shows up years after the last crisis, b) an underestimate by the Senate Democrats signing on to the measure of the risk brought back into the system , and c) an almost completely unnecessary bit of work.
By that last point, I mean this: what’s the motivation here? The financial sector, large and small, is doing great in terms of profitability (and that’s before all their goodies in the tax cuts), credit is freely flowing, and while there’s always speculation afoot in financial markets, there are no large and potentially destabilizing credit bubbles. So, of all the problems we face, why should Congress waste valuable time fixing something that’s clearly not broken?
No question, as I stressed on the show, compliance with Dodd-Frank is far from costless, as any banking executive will readily tell you. And while the compliance burden is smaller for smaller banks, it’s still a pain for some institutions, like community banks and credit unions. So, I grant that there’s a rationale for reducing that burden. But, as you’d expect, given the linkages between Congress and the deep-pocketed banking lobby (and, trust me, I’m not just talking about the R’s), the Senate legislation goes much further than that.
Moreover, once the bill gets out of the Senate, it may well have to be reconciled with a far more deregulatory House bill. Most notably, the Senate bill leaves the Consumer Financial Protection Bureau created by Dodd-Frank intact, whereas House conservatives have long been trying to crush the CFPB.
But there were two points that came up in the show that I wanted to further amplify, including an important fact check.
A couple of times in the show, advocates of the rollback argued that Dodd-Frank was responsible for putting a bunch of smaller banks out of business. I pointed out that while it’s true that there are fewer smaller banks, this is a long-term trend that did not accelerate post Dodd-Frank. The figure below shows this to be the case, which correct the strong, wrong assertion to the contrary made by Cong. Jeb Henserling towards the end of the show.
My second point is one I alluded to but wanted to further underscore: just because a bank is not “systemically connected,” i.e., its failure does not threaten the larger financial system, doesn’t mean it should be able to engage in excessively risky finance.
The rollback allows smaller banks to make some of the same kind of risky mortgages that inflated the bubble that ultimately gave us the Great Recession. For two reasons, however, proponents of the bill argue this won’t be a problem. First, because the banks can’t securitize and offload the mortgages, so keeping them on their books gives them the incentive to not underprice risk. Second, they simply don’t lend enough in this space to threaten the system.
I don’t buy the first claim for a moment. The reason the shampoo cycle exists is because time-and-again, institutions increasingly get their risk on as the memory of the last meltdown fades. We had plenty of credit bubbles and busts before securitization come on this scene.
I asked the Roosevelt Institute’s Mike Konczal (read his excellent, deep-dive oped on the rollback bill) about this second point: whether we should downplay concerns about smaller banks because they’re not “systemically connected.” Like me, he views such concerns as highly germane to this misguided legislation: “When banks fail, they usually fail in a correlated way, because they are chasing the same strategies and ideas. So, you can have several mid-sized or smaller banks collapse at the same time and added together they become a real threat. At that point you’ll wish they were better capitalized and had better failure planning, which is exactly what this bill rolls back.”
This is far from over, and I can tell you from my own visits up to the Hill in recent days that many Democrats, and not just from the Sanders/Warren wing, recognize what’s going on here, oppose the bill, and fear their Senate colleagues got rolled. So, assuming you’d rather not end up where we were ten years ago, stay tuned into this and join me in pushing back on it.
Payrolls rose 313,000 last month, well above expectations, and the unemployment rate held at 4.1 percent, as wage growth moderated a bit from last month’s pace (up 2.6 percent, yr/yr). Though these monthly data are notoriously jumpy, the out-sized job gains were accompanied by a nice pop in labor force participation rate–up 0.3 percent to 63 percent–suggesting that the hot labor market may be pulling new workers in from the sidelines. If so–if this turns out to be more of a trend than a blip–this has important, positive implications for the increased “supply-side” of the economy, implying more room-to-run than many economists believe to be the case.
This was the first over 300K month since July 2016, and the jump in labor force participation comes after the rate was stuck at 62.7 percent since last September. However, both of these values jump around and so our monthly smoother provides a look at the underlying trend in job growth by taking 3, 6, and 12 month averages of the monthly changes.
This month, the smoother tells a surprising story. Typically, as economies close in on full employment, we expect the rate of job gains to slow, as the labor market nears its capacity. But the smoother shows the opposite pattern, that of a (slightly) accelerating trend. For example, over the past three months, the average monthly job gains come to 242,000, but over the last 12 months, they amount to a lower 190,000. We should be careful not to over-interpret even these smoothed numbers, but the punchline is that it’s hard to make a case that employment growth is DEcelerating, as would be the case if the economy’s water glass, if you will, were full to the brim.
This question of how much room-to-run exists out there is leading, as it should, to close scrutiny of wage growth for signs that job market pressures are pushing up paychecks. The figures below show yearly hourly wage growth (along with a smoother trend) of both all private sector workers and the lower paid 80 percent who are blue-collar or non-managers. The wage pop that spooked markets last month (Jan17/Jan18) was revised down slightly, from allegedly scary 2.9 percent to 2.8 percent. As noted, this month’s wage pace slowed a bit to 2.6 percent.
Again, the smooth trend (6-mos average, in this case) in wage growth deserves a close look, and it shows remarkably little acceleration given the persistent tightness of the job market. I’ll discuss why that may be occurring in a moment, but in fact, there’s a bit more there than meets the eye. Taking annualized growth rates of quarterly averages reveals more wage acceleration: 2.9 percent over the past three months compared to 2.5 percent last spring. This suggests perhaps a bit more pressure than the annual growth numbers reveal, which is, of course, what we’d expect at this point.
That said, there’s just no story right now, at least in the actual data (as opposed to expectations), of an overly tight job market leading to inflationary wage gains. The figure below shows some of the key indicators from the Fed’s dashboard, including unemployment, the Fed’s guess at the “natural rate” (the lowest unemployment rate consistent with stable inflation), actual inflation (PCE core, the Fed’s preferred gauge), and the Fed’s inflation target of 2 percent.
As you see, unemployment has been below the Fed’s “natural rate” for about a year (!) and both inflation and wage growth remain subdued. In other words, the links in the chain that go from a tight labor market, to faster wage growth, to faster inflation, remain uniquely weak.
There are surely many reasons for this, not all of which are understood. Productivity growth is lower, which tamps down potential wage growth. But also, worker bargaining power looks weaker than it should be at low unemployment. That’s partly because the unemployment rate isn’t telling the full story. Consider the prime-age (25-54) employment rate. Its peak in 2007 was 80.3 percent and its trough was 74.8 percent. Last month, it popped up three-tenths to 79.3 percent, thus it has recovered 4.5 out of 5.5 lost points. Given the population of these workers, each point amounts to 1.3 million potential workers added to the labor force. In other words, while there’s no question that there’s less slack in the job market, it’s very likely a mistake to conclude there’s no slack left.
A few more details:
–Warmer February weather compared to a harsh January may have played a role in the big jobs pop. The strong construction number (61,000 jobs added) may be evidence of that effect.
–Retailers (brick and mortar stores) got an off-trend-to-the-upside bump of 50,000. I suspect that trails off in coming months.
–Manufacturing, perhaps helped by the weaker dollar, continues to post decent gains, and is up 224,000 over the past year.
–Black unemployment, which spiked last month, fell back down to 6.9 percent, close to its historical low, suggesting the tight labor market is helping to employ minority workers. Still, the black rate remains close to twice the white rate.
This morning I read a pretty typical market take of the current job market. Economists at Barclays Bank wrote: “Looking ahead, we will view solid growth in employment less favorably.”
While I’m sorry in this analytic context for getting my class warrior on, why must Wall St. begrudge Main St. right now? The answer is high pressure job markets threaten wage gains which threaten both profit margins and inflation. Well, we’ve had too few wage gains relative to profits, and not enough inflation. So I, for one, will be looking at more reports like this one “more favorably.”
First, let’s get this out of the way: I’m certain the Trump tariffs will do more harm than good. But I’ve been trying to add a bit more nuance to the conversation than “trade war!” and “higher prices!”
It’s been clear forever that team Trump mistakenly views the trade deficit as a scorecard, one that’s not improved on their watch so far. Again, nuance is required. There are times when the overall trade deficit is a clear drag on growth, and times when the capital flows that support it are distortionary. But this is not one of those times, and targeting bilateral trade deficits makes no sense and can be counterproductive, as I describe here (and I’ll have more to say about this question of when trade deficits are problematic in coming days).
Still, Trump’s lousy tariff idea is surely motivated by our persistent deficits in steel and aluminum, a point I thought was missing from this otherwise useful article in the AMs WaPo on US productivity gains in steel.
The piece describes impressive productivity gains in steel production:
Labor productivity has seen a fivefold increase since the early 1980s, going from an average of 10 hours of work for each finished ton to an average of two hours in 2016, according to the American Iron and Steel Institute. Many North American plants were producing a ton of finished steel in less than one person-hour…
But if we’re so damn productive in steel, which should imply competitive pricing, why are we by far the world’s largest importer with persistent net imbalances? Why is so much domestic demand for steel met by imports? Obviously, price—but again, why?
It could be that other countries’ productivity gains in steel production have been greater than ours, or their labor costs are lower, i.e., our unit labor costs are not so competitive. But at least in broad manufacturing, that’s not the case–our ULCs are, on a dollar basis (so factoring in exchange rates), are below that of most of our trading partners, both in levels and growth rates.
Certainly at the heart of the problem is China’s out-sized contribution to excess global capacity, which neutralizes the productivity gains documented in the WaPo piece (excess capacity is roughly unutilized production). This 2016 Duke University study (sponsored by the Alliance for American Manufacturing) gets right to the point:
The global steel sector is once again in a state of overcapacity. The sector, predominantly fueled by China’s expansion since 2000, has grown to over 2,300 million metric tons (MT) while only needing 1,500 MT to meet global demand. The result is a global steel sector at unviable profit levels and an influx of cheap steel in the global trading system adversely affecting companies, workers, and the global trading regime.
The first figure shows the Duke studies measure of steel capacity and production, along with the difference, which is overcapacity. The table below that shows production by country, wherein you can see the extent to which China is an outlier.
The table also shows how clearly Trump’s scattershot tariffs are not the solution; just look at Canada’s production! But the fact that Trump’s tariffs are the wrong solution does not mean there isn’t a problem!