Some greatest hits of the 10-year lookback pieces on the crisis.

September 17th, 2018 at 8:30 am

I’ve read probably 100 of those “lessons learned (or not)” pieces about the crisis on the 10-year anniversary of Lehman’s collapse.

Here are some that stood out to me, though one inevitably leaves out some worthy of your attention, so feel free to add others. (My own piece is out today on WaPo.)

–I found this Steve Pearlstein piece interesting on a couple of levels. It’s a solid take of the shampoo economy dynamics (bubble, bust, repeat) that I’ve long bemoaned, citing the insights of Minsky’s analysis (by putting financial cycles and regulatory amnesia at the heart of his model, Minsky explains a reality that conventional economics, which assigns finance a benign, intermediary role, assumes away).

But on a deeper level, as someone who’s read Pearlstein’s work over the years–he’s long been a celebrated business writer for the WaPo–his identification of the flaws in capitalism take on greater weight as they come from a writer who did not start out looking for such flaws.

–As I note in my WaPo piece, for all the ink spilled on these 10-year anniversary pieces, there’s one critical question that hardly gets asked at all: how did we miss it? Dean Baker, one of the few who didn’t miss the housing bubble, points out that this shouldn’t have been so hard to see.

“The [housing] bubble and the risks it posed should have been evident to any careful observer. We saw an unprecedented run-up in house prices with no plausible explanation in the fundamentals of the housing market…The fact that prices were being driven in part by questionable loans was not a secret. The fact that lenders were issuing loans to people who had not previously been eligible was widely touted by the financial industry. The fact that many of these loans involved little or no down payment was also widely known.”

–Dean’s piece gets into the response to the crisis from the perspective of the negative impact on consumer spending from the loss of trillions in housing wealth, along with tanking home building/residential investment. Others, as in a recent piece by Ben Bernanke, argue that panicked credit markets were a more important driver of the loss of output and jobs in the downturn. Krugman agrees with Dean, emphasizing that output and jobs remained weak well after credit conditions thawed.

Surely both–the credit freeze and the negative demand shock–mattered. Banks and non-bank lenders were engaged in a carry trade of borrowing low in short-term money markets and lending long in asset markets, especially housing. The bank run that ensued when the loans soured and the short-term credit evaporated practically overnight was, of course, as Bernanke argues, an important driver of the output losses that followed. But absent bolder Keynesian interventions, reflating credit alone would have, and in fact, did, amount to pushing on a string (though see Furman below for a somewhat upbeat take of the U.S. fiscal case).

–This engenders bailout questions and arguments that have been going on since TARP was born. John Cassidy takes us through the issues in a review of Adam Tooze’s new book Crashed, which looks like a very deep dive into the global finance aspects of the crash.

–Neil Irwin provides a painful reminder of how horribly unpopular the bailouts were. He argues that they accomplished their goals of reflating credit markets, but at tremendous political cost, a cost I’m reminded of with every presidential tweet.

–Based on this moral hazard problem, Robert Samuelson asks: “How do you protect the system without seeming to reward the guilty?” This seems very straightforward to me: regulate the heck out of the financial markets. The extent of regulation should be proportional to the risk posed to the rest of the economy. And the time to worry about moral hazard is not in the crunch. It’s precisely now, when markets are ebullient and policy makers are reading urging regulators to go night-night at the switch.

–Jason Furman reminds us that the fiscal policy response to the downturn was a lot more robust than the Recovery Act. In fact, if you sum up all the countercyclical fiscal programs over the period of the Great Recession, the price tag is twice that of the Recovery Act ($1.5 trillion according to his Table 1). While Furman gives a relatively favorable review of the fiscal actions taken back then (with solid evidence), he doesn’t look at the Obama administration’s housing relief policies, which were arguably woeful under-performers.

New Census data show that low-income people are responding as they always do to tight labor markets…by working!

September 12th, 2018 at 2:35 pm

One of the particularly frustrating, fact-free aspects of the conservative push to add (or ramp up) work requirements in anti-poverty programs like Medicaid or SNAP is that low-income people who can do so are already working hard. Moreover, as the job market tightens, they respond to tightening conditions.

Using the new Census data, Kathleen Bryant and I, with help from Raheem Chaudhry, used the 2017 microdata (the data on which the poverty and income numbers are based) to compare the employment rates of low-income single mothers (with incomes below twice the poverty threshold) with prime-age (25-54), non-poor adults. We found that between 2010 and 2017, the employment rates of the low-income single moms increased by 5.4 percentage points (67.7% to 73.2%), while those of non-poor adults increased by just 1.2 percentage points (87.8% to 89%).

Source: CBPP analysis.

It’s true that the single moms, by dint of their lower employment rate levels, have more room to grow, but the prime-age adults are not obviously hitting a ceiling on their rates.

At any rate, we believe this shows that a large and growing majority of low-income moms are already trying to both raise their kids and support their families through work, and that they’re actively taking advantage of the tight labor market. Adding work requirements will just give them one more needless, bureaucratic barrier to leap over, likely reducing their ability to maintain their benefits, even as they’re playing by the rules. Forgive me if I cynically suspect that such hassle-induced benefit losses are the point.

 

Poverty and middle-class income data out tomorrow morning

September 11th, 2018 at 4:49 pm

It’s that time of year again, when the Census Bureau releases its poverty, income, and health-insurance coverage data for 2017. I’ll get a write-up out as soon as I can after the 10am data release, but be forewarned: these data are more complicated and a lot less standardized than, say, the BLS jobs data. So, it will take a few hours to chew through them.

For what it’s worth, which isn’t much, as recent survey changes make these data tough to accurately forecast, my predictions are that poverty fell half a point last year (from 12.7% to 12.2%) and real median household income grew about 1.7%. If so, both changes would be statistically significant gains.

But they would be smaller gains than the prior two years, and one reason for that, if I’m in the ballpark, will be that inflation was a bit faster last year (2.1%) compared to 2015 (0.1%) and 2016 (1.3%).

Details to follow tomorrow!

A couple of economists respectfully disagree on the politics of policy in the age of Trump and the new socialists

September 9th, 2018 at 8:03 pm

Belle Sawhill is an economist I greatly admire, so I carefully read her Twitter-thread critique of a piece I recently posted in the WaPo.

My piece makes the case that technocratic policy wonks, like Belle and me, should not be overly critical of ambitious, even unrealistic, policy proposals by the new socialists. True, they often eschew the path dependency by which many of us are constrained. But they signal to key constituencies that, relative to establishment or centrist Democrats, they’re going to bring a new, aggressive fight to the powerful, well-endowed forces that have long been aligned against the progressive agenda.

I argue that:

“What Trump should have taught us by now is that if people believe you’ve got their backs, you can do things never imagined by the status quo. In this regard, the new socialists are saying to the majority that has long been left behind, “We’ve really got your back.” Moreover, their analysis of market power is far more convincing than Trump’s promotion of fear and divisiveness.

Yes, the socialists are eschewing path dependency, and not all their plans pass technocratic muster. But, for now, that’s beside the point.

What is that point? To enlist poor, middle-class and diverse America in the struggle to take back their country and their democracy from the oligarchs who are actively undermining it.”

Belle argues that I’m advocating “politics first, policy later,” and that this strategy invokes significant risks. These include a) alienating a public that is more moderate than activists, b) exposing D’s “to barrage of criticisms from right, painting them as socialists who will raise taxes, take away freedoms, and scare away swing voters, including Rs unhappy with Trump,” and c) deepening distrust of government by promising big and delivering little, if anything.

Instead, she recommends: “A simple values-based agenda that provides good jobs, honors personal responsibility, diversity, community-based efforts, and demands integrity from public servants.” That sounds good, but we’ll all have to read her new book (looking forward to it!) to understand what she’s suggesting. Surely a “values-based agenda” means different things to different people.

In fact, such differences make me skeptical of Belle’s claim that the public is more moderate than activists. That may be true in Conor Lamb’s district, but it’s demonstrably not so in Ocasio-Cortez’s or Jahana Hayes’ or Ayanna Pressley’s or Andrew Gillum’s or Stacey Abrams’.

I suspect Belle is thinking about general elections, not primaries, where activists tend to be more prominent. Still, it’s hard for me not to see what the Times calls a “surge of progressive energy on the left among nonwhite voters and white millennials” as a critical movement pushing our politics in a less moderate direction. Individual elements of the socialist agenda poll well among the general public, sometimes even with Trump voters. President Obama just endorsed Medicare for All and debt-free college, planks of the new socialist agenda. In fact, a recent Reuters/Ipsos poll found that a slight majority of Republican voters support Medicare For All. These poll results suggest to me that young people are increasingly uninspired by status-quo, establishment, middle-way arguments.

Next, there’s no question that right-wing opponents will make all the accusations Belle notes under “b” above. But they already make all these accusations – President Obama was routinely called a socialist for pushing an agenda with which I suspect Belle is very comfortable.

So what? I’m not going to let their cat calls dictate my policy agenda. I’m sure that universal coverage, higher minimum wages, employment supports, access to quality education from pre-school on up, promote freedom. And it’s my—I’d argue “our”—job as policy wonks to make the case.

If that means more tax revenue, which it does, then we must be honest about that too. The fact that one party will only cut taxes and the other will only raise them on a narrow sliver of the richest voters is simply unsustainable and inconsistent with meeting the challenges of climate change, aging demographics, infrastructure, health care, poverty, affordable, quality pre-school through college, and more.

Finally, I can envision an endgame that raises, not lowers, trust in government. If the Ds were to take back the Congress and the White House, the lions would have to sit down with the Lambs. That is, Democratic moderates would have to work with the progressive insurgents to hammer out a compromise policy agenda in the areas above. I doubt they’d end up with single payer and free college, but I’m optimistic that they’d get part of the way there.

That might well disappoint some activists, but it would have a potentially much larger, positive effect in tapping the growing recognition that we need a functional, responsive, representative government that can help to solve real problems.

Jobs Report: A long-awaited wage pop that’s hopefully part of an emerging trend

September 7th, 2018 at 9:24 am

Payrolls grew 201,000 last month, and the unemployment rate held steady at 3.9 percent in yet another in a long series of strong job reports (at 3.853 percent, the rate just missed a tick down). Though there are still some people and places who’ve been left behind, the U.S. labor market remain solidly in the midst of one of its longest expansions on record, with no signs of strained capacity or overheating.

Hourly pay for private-sector workers is a standout in today’s report, up 2.9% over last year, its strongest posting since 2009. Though we don’t yet know August inflation, my guess is that it comes in lower than that, perhaps ~2.6 percent, implying a much-needed gain in real hourly wage growth. For middle-wage workers (the 82 percent of the private workforce covered by the Bureau’s “production, non-supervisory” category), hourly pay rose 2.8 percent over the past year.

The figures below smooth out the jumps in the underlying wage series with a 6-month moving average, and both show a slight acceleration in wage growth which I expect to persist, absent unforeseen shocks to the system (escalating tariffs, for example, could become a problem). If so, this will be a long-awaited development that will correct one of the clear missing pieces from the recovery over the past two years: the absence of sustained, real pay gains for middle-wage workers.

Of course, this raises the specter of economic overheating. Below, I present evidence that this is not an obvious threat at this point.

Turning to the payroll results, JB’s monthly smoother–averages of monthly job gains over 3, 6, and 12 month periods–shows an underlying trend of around 190,000 jobs per month. At this stage of the recovery, that trend is easily strong enough to put downward pressure on unemployment.

Why, then, did the unemployment rate not fall? As is often the case, it’s a tale of two different surveys. The household survey, from which unemployment is derived, was less positive in August than the survey of establishments which generates the payroll numbers. The labor force participation rate fell two-tenths, to 62.7 percent, as about 470,000 people were reported to have left the labor market. This indicator is, however, quite volatile on a monthly basis and I thus down-weight its monthly ups and downs.

In another strong sign of labor-market tightness, the underemployment rate, which justly takes credit for the steady decline in part-timers who want full-time jobs, fell to 7.4 percent last month, its lowest rate since 2001, and close to its all time low of 6.8 percent in late 2000.

In other words, in year nine of this long expansion, labor demand, meaning job creation derived from economic activity by consumers, investors, and government, still remains strong. Though real wages have been a soft spot, there’s some indication of an upturn in that trend.

Does this imply price pressures, overheating, and the need for the Fed to accelerate its rate hiking campaign?

The figure below suggests not. It shows that even while unemployment has long been below the rate the Fed considers the lowest jobless rate consistent with stable prices, wage growth is gradual and core inflation, after years of coming in below their 2 percent target, is now just hitting it. Equally importantly, unit labor costs (compensation growth adjusted for productivity growth), which is a measure of labor cost per unit of output, is growing smoothly at 2 percent, and showing no signs of acceleration (see chart 2 here).

These observations suggest the Fed’s current path of slowly and steadily raising rates one-quarter point per quarter is adequate to the task of a “smooth landing,” i.e., getting its benchmark rate back its usual perch without overly slowing a recovery that’s starting to reach many who’ve long been waiting for that moment.