The strong dollar, its impact on growth, and the TPP

March 27th, 2015 at 9:45 am

When it comes to the debate over whether the Trans Pacific Partnership trade agreement should include rules against managing currency, the recent, sharp rise in the value of the dollar offers a little something for everyone.

For TPP supporters who oppose a currency chapter—i.e., explicit actions to be taken against signatories who push down the value of their currency to subsidize their exports and tax their imports—it shows that the value of the dollar against other currencies, up 20% over the past year, can rise for reasons that have little to do with interventions by currency-managing countries. The current appreciation is due to stronger growth rates here compared to Europe, slowing demand in emerging economies, and central bank actions as our Fed is talking about raising rates (which boost the dollar’s value) while Europe’s central bank is aggressively lowering rates.

On the other hand, the dollar’s climb also shows how such an increase raises the cost of our exports, cheapens imports, and thus significantly dampens growth. This morning’s GDP report for 2014Q4 shows that while real GDP was up a moderate 2.2%, the growing trade deficit shaved one percentage point off of that growth.

Researchers from Goldman Sachs (no link) examined trade flows of durable goods and concluded that “the categories that have historically been most sensitive to the dollar have suffered disproportionately since the dollar began to strengthen…we find that the full effect of dollar appreciation so far has probably not yet appeared in the durables data, especially the impact on shipments. These findings reinforce our view that trade is likely to remain a drag on growth.” They expect trade to subtract six-tenths of a point from GDP growth in the current quarter.

It is precisely these sorts of growth impacts that motivate those of us calling for a currency chapter in the trade deal. The fact that the dollar’s rise is not due to actions by our competitors to artificially depress the value of their currency relative to the dollar is not irrelevant—it’s an important reminder that there are lots of moving parts in play here—but neither does nor should it assuage anyone’s concerns. The dollar remains the globe’s main reserve currency and it would be foolish to assume that countries will not at some point down the road accumulate dollars in the interest of raising their exports to us and reducing ours to them.

Interestingly, because the currencies of some of our major trading partners, like Japan and China, do not appear to be misaligned right now, the administration has argued that we don’t need language against currency manipulation. But you don’t throw away your umbrella just because it’s a sunny day. As Simon Johnson wrote in a must-read piece on this issue of currency and the TPP:

[There is] nothing to stop China or any other country from resuming large-scale currency-market intervention if and when it chooses. And the lack of diplomatic tension around exchange rates today makes this a good moment to raise the topic.

This last point is a strong one. If, as the administration claims, this just isn’t a big deal anymore, then it shouldn’t be hard to negotiate. Who’d object to rules against something they don’t do anymore?

As I pointed out above, we just had a decent growth quarter, driven by strong consumer spending, even amidst this dollar induced drag on growth. And as I often stress in this context, in 2000, the last time the US labor market was clearly at full employment, we had a large trade deficit of -4% of GDP (we also had a bubble, which is related to the trade deficit as well, as countries export their excess savings to us in ways that have led to investment bubbles). In other words, trade deficits can and are often offset by growth in other parts of the economy. But since the mid-1970s (!) they’ve been a drag on growth and a major factor in both the decline in our manufacturing sector and wage stagnation for many middle-class earners.

The current dollar episode is a reminder that currency values matter and while manipulation is not in play this time, it could be so again in the future. If the TPP is as important as its advocates say it is, I can think of no better time and place to take preventive action against those who manage their currencies to our disadvantage.

Ideas to boost wage growth from the Resolution Foundation

March 26th, 2015 at 3:38 pm

I’ve often touted the UK think tank, the Resolution Foundation, for their timely, accessible, and smart policy work on all the key issues–macro, micro, budgets. But their work has been particularly important in raising the issue of wage stagnation in the UK–basically, the Brits caught our wage disease–median and low-wage stagnation, growing dispersion–later than us, but catch it they did.

Now RF’s out with an edited volume called Securing a pay rise: The path back to shared wage growth with chapters by some of the top UK economists (and a couple of Yanks thrown in for good measure, including myself and Arin Dube, one of the top authorities on the minimum wage).

I’ve not yet read everything in there but here are a few highlights:

–John Van Rheenen writes about the productivity/wage split, particularly regarding the median wage. Both he and Steve Machin lean strongly into the idea that faster productivity growth would help boost wages, though I didn’t think either said enough about what it would take to reconnect faster productivity growth to median and low-wage growth. OTOH, Van Reenen does something you don’t see enough of: he thinks in some depth about ways in which the UK could boost what’s been a flat productivity trend, including a pretty granular set of ideas for investments in public infrastructure (guided by an independent board/planning commission), housing reform (the housing market in big UK cities has looked awfully bubbly for a while now), skills training, and incentives for more patient capital.

Alan Manning presents one of the more in depth analyses I seen recently of the decline in worker bargaining power. I find this to be a resonant point (despite the fact that they refuse to spell labor the way we do! Don’t they know the credo of US union-busters?: “There’s no (yo)u in labor!”):

When it comes to thinking about how wages are determined, these days one must think about things from the perspectives of employers as that is with whom the decision now lies. Once workers would have been looking for the first opportunity to press for higher wages, now employers are looking at pay rises as a last resort. What makes employers pay higher wages is when they are struggling to recruit and retain workers, as a result of competing for labour directly with other employers. One of the features of the labour market in recent years (and not just the UK, the US as well) is that the level of direct job-to-job moves has been falling – these days a higher proportion of new hires are from non-employment rather than from other jobs.  And when your latest hire is from non-employment there is no other employer to compete directly with.

As he notes, there’s been less employment churn here as well and that’s one reason for reduced wage pressures. His solutions include full employment, improved labor standards, more union power, and grass roots mobilization around pay.

–Like all of these authors, Simon Wren-Lewis calls for better macro policy in the interest of promoting full employment–I mean, it is the land of Keynes. He makes a point that I’ve been featuring in much of my writing lately as well: when the Fed funds rate is stuck at zero and demand remains weak, fiscal policy is that much more important. But with politicians turning to austerity at tremendous costs to their constituents, Wren recognizes the need for a plan B:

Central banks have tried quantitative easing (QE), and this has had some effect, but it remains a very uncertain and ineffective policy. There is a simple and straightforward alternative which would be much more effective: creating money and giving it to people to spend. This is what economists call helicopter money, although some have recently called it QE for the people. QE involves creating large amounts of money to buy financial assets, with highly uncertain effects on demand. Helicopter money would involve creating much less money with a much more certain positive impact on demand.

He goes through the reasons why this could work (convincingly, I thought)–and not necessary risk spiraling inflation–but at least here, I’m quite certain our Fed’s charter would disallow QE for people. Last I checked, the Fed couldn’t even buy municipal bonds (they were restricted to Treasuries and “agency” MBS). Thus, it would take Congress to legislate a peoples’ QE, which um…isn’t gonna happen. Still, I get his motivation–he’s trying to simulate more direct fiscal policy measures through the independent monetary authority. Good for him for thinking outside the box!

I look forward to reading the rest of the entries and suggest you do as well.


Book chapter summary: politics and the reconnection agenda

March 26th, 2015 at 7:58 am

Over at PostEverything.

As I say in the piece, I can’t get through a presentation of this material without someone asking the completely reasonable question: what makes you think any of this stuff has a snowball’s chance of Congressional support?

One could argue: well, the pendulum will swing back and we need to have a robust agenda loaded when it does.

One could argue: what are progressive economists supposed to do in these dark ages–just sit on our hands until facts are once again de rigueur?

And there’s something to both of those. But in the final chapter of my forthcoming book, I’ve tried to dive deeper into some current political dynamics. See what you think.

Fiscal needs monetary and monetary needs fiscal…increasingly so

March 23rd, 2015 at 11:04 am

In weak economies, these two policy behemoths are complements, not substitutes. Over at PostEverything–it’s a summary from a chapter from my book, out in a few weeks!

Special tabular bonus for OTE’ers:


Source: Bernstein, The Reconnection Agenda: Reuniting Growth and Prosperity (forthcoming)

Very important to be in box 1 in downturns. We started out there but too quickly moved to box 7, which is pretty much the austerity box these days, as central banks push toward more growth while governments push the other way through fiscal consolidation (e.g., Europe, though they’ve also had bouts of box 8, as their ECB was slow and spotty out of the gate). In 2014, the US moved from box 7 to box 4, and that helped set the stage for the labor market improvements that began last year.

Going forward, the concern is that the Fed moves us from box 4 to box 5 too soon. And, of course, with sequestration and the austere R budgets out there, that means box 6 is not out of the question.

Some (lonely) facts about Obamacare and part-time work

March 19th, 2015 at 4:42 pm

In a debate on the (great) Diane Rehm show yesterday (around minute 43 of the broadcast), the argument was made that Obamacare was leading employers to move full-time workers onto part-time schedules to avoid the employer mandate. I pointed out that this is inconsistent with the evidence shown below, i.e., the fall in the number of involuntary part-time workers since the Affordable Care Act has been in place.

If Obamacare were pushing people into part-time work, we would expect an increase in involuntary part-time work (part-timers who want to work full time) and a decline in voluntary part-time work. The figure shows both measures, indexed to 100 at the beginning of 2012. As you see, the opposite has occurred: involuntary part-timers are down sharply, by 20% over the past few years while voluntary part-timers are up by about 5%. In fact, since the employer mandate began to phase in starting this year, the decline in involuntary part-timers has accelerated, again, contrary to the prediction by the ACA repealers.


Source: BLS

As I stressed in the back-and-forth, such an incentive exists in the law, and so you have to look at the data to see if and how it’s playing out. And this is an admittedly aggregate look–as the job market has notably improved and labor demand has strengthened, we’d expect the stock of involuntary part-timers to fall. But then you can’t claim Obamacare is killing the job market if the job market is getting better at a faster pace now, can you?

BTW, one reason why this result should not surprise you is that the set of workers vulnerable to the negative incentive is actually quite small. My colleague Paul Van de Water points out that “only about 7 percent of employees work 30 to 34 hours a week (and thus would be easiest for employers to shift below 30 hours).  Moreover, less than one-half of 1 percent of employees work 30 to 34 hours a week and are employed by businesses affected by the employer mandate and do not have insurance.”

I recently wrote about the serious problem in US economic debates where those with non-credible arguments hold far too much sway in some of our most important debates. This is increasingly the case in particular with Obamacare. As journalist Jonathan Weisman commented after this exchange wherein my opponent wouldn’t back down, facts just don’t seem to be winning the day on this issue. People know what they know, and they don’t want to be bothered with any of your damn evidence!

If the program continues to increase affordable coverage and hold down the growth of health costs, I expect that to change, though that outcome depends non-trivially on a SCOTUS with a number of judges who make me nail-bitingly nervous.