A quick note on the Fed meeting and the need for “patience” for a “considerable time.”

December 17th, 2014 at 9:10 am

As the Federal Reserve Open Market Committee meets today to decide their path for monetary policy, there’s great focus on whether they’ll change a few key words of their guidance language. Specifically, will they drop “considerable time” from the sentence wherein the telegraph their thinking about how long they’ll hold interest rates at around zero? EG, from their last FOMC statement (my bold):

The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time

I’ll share a few substantive thoughts in a moment, but I’m sure Chair Yellen and co. are looking for helpful alternatives, so here are some suggestions:

Go Zen: When the petals of the plum blossom cascade in the warm winds of future days, so too shall we be moved to action. [investors: note the usage of “warm breeze,” suggesting a spring liftoff…]

Go Brooklyn: Hey, fuggetaboutit…we’ll let yas know when we’re good and ready!

Go Greenspan-ian opacity: There is a frequency distribution wherein the optimal spectrum of rate movements exists alongside stochastic properties that guide a set of choice functions.

Go Logic problem: The FOMC is sitting around a large table. Janet, who wants a later liftoff, is sitting next to Bill, who wants a sooner lifter. Stan is next to Narayana, who wants an even later liftoff…etc…

Go Seasonal: “You better watch out, you’d better not pry, we’ll raise when we see, inflation’s white eye…”

Slightly more seriously, while it’s hard for normal humans to parse the difference between “considerable time” and “patience” (the lead candidate for the word change), such a change should be taken as guidance that they’re on track to raise rates sometime later next year which from my perspective seems like a big mistake.

The narrative around the rate liftoff has morphed into: if you’re hawkish, you’d like to see increases beginning in say Q2 of next year. If you’re a dove, then it’s Q3. But as far as the real economy goes, there’s no difference, especially considering that the magnitude of increases in the federal funds rate is likely to be quite small at first.

But why this obsession with raising at all in the near term? Even as US GDP and employment growth have accelerated, inflation remains extremely quiescent. I worry more about deflation than inflation. Look at the yield of the 10-year treasury, last seen at 2.05%, i.e., flitting around historical lows, implying low inflation expectations a midst strong demand for a safe harbor. Look at oil (from BLS this AM: overall CPI up 1.3%, yr/yr, on falling energy costs; core up 1.7%).

Look at “Strips“: my CBPP pal Chuck Marr sends me this from Bloomberg, telling of strong demand for these zero-coupon securities whose return is eroded by future inflation, meaning market actors are willing to bet real money that inflation will be low for years to come.

Couldn’t they be wrong? Of course, but that’s not what matters re Fed guidance and policy. What matters are market expectations for future inflation which are very clearly “well-anchored.” (BTW, this high Strips demand also implies investors are not worried about future deficits pushing up private interest rates—aka “crowding out.” Deficit hawks, if they’re still out there, really have little-to-nothing by way of evidence for this phenomenon.)

There’s still no wage pressure and no evidence that what wage growth we’ve seen is bleeding into prices. There’s still considerable room for non-inflationary wage growth: it’s been stuck at 2 percent annually but could grow 3.5 percent (productivity of around 1.5 percent + the Fed’s 2 percent inflation target) or even faster if there were some redistribution from the historically inflated profit share of national income into the depressed compensation share.

There’s still considerable slack in the job market, millions of un- and underemployed persons, and millions more who’ve left the labor market but might well come back in if demand would strengthen. Even under current conditions, there variables will take years to get to their full employment levels.

So, the petals of the plum blossom should stay on the damn tree. And as far as all this rate talk goes…fuggetaboutit!

An idea whose time has come: raise the federal gas tax. Also, an important, new-ish trend.

December 16th, 2014 at 9:20 am

Here’s an argument–raising the federal gas tax that’s been stuck at $0.18/gallon since 1993–that IMHO should be highly resonant right now with progressives, environmentalists, fiscally responsible types, those with common sense, and anyone else I’ve left out. Anyway, it’s over at PostEverything. There’s even some bipartisan support for the idea.

Let me add two pictures I left out of the piece. First, FWIW (and who knows, really?), here’s EIA’s forecast for gas prices over the next year. If they’re right, that’s another reason why a slow phase in of a small increase shouldn’t hardly bite consumers at all.


Second, and much more importantly, here’s a really remarkable trend that I’ve mentioned before but has been extremely persistent: the flattening of vehicle miles traveled since the last recession.


Source: US Federal Highway Administration. I’ve seasonally adjusted the data and run a filter to identify the trend.

I’ve run a smooth trend through the data but the flattening is evident either way. Obviously, income loss has played a role but even while you can see some cyclicality in the series, there’s nothing in there that comes close to the recent flattening (the trend reveals a slight uptick toward the end but you’ve got to squint to see it).

So what’s going on here? I don’t know and it certainly warrants some research, as this is an important change with economic and even cultural implications. I will offer an hypothesis: it’s what Ben Spielberg and I call “the inequality wedge” at work. This recovery has been unique, even relative to past deep recessions like the early 1980s double dip, in how little income has reached the middle class, as the wedge of inequality has diverted growth to the top of the scale.

This is known, but all the elasticities it triggers are not. For example, car travel at the margin may be more of thing for middle and lower-income than higher-income households. Since the FHA (the source of the data in figure 2 above) collect data by state (I believe) perhaps some enterprising researcher or student out there could create a panel data set of vehicle miles traveled in states over time to generate the variance necessary to see how that correlates with various relevant economic measures, like state-level wage, median income, or inequality measures.

[Brad Plumer also makes this argument, and very effectively.]

Hey, What’d I Miss? OTE 11/25 — 12/15

December 15th, 2014 at 2:05 pm
  • On November’s employment numbers: my first impressions of the month’s solid employment report, asking Congress and the Fed not to mess up the recovery, and questioning Twitter’s role in compressing the employment report news cycle.
  • On the 2015 budget: describing why House cuts for the IRS are a big mistake, explaining how the CRomnibus actually cuts discretionary spending to historic lows as a share of GDP, and analyzing the budget deal, underpriced risk, and financial market instability.
  • Diving deeper into the weeds of CBO’s recently updated household income data.
  • Explaining why Congress’ tax extender deal is a lame duck turkey.
  • Examining why our macroeconomy is doing so much better than Europe’s.
  • Looking at policies that are both pro-growth and promote greater income equality.
  • Pointing out some serious nonsense on CBO from the WSJ editorial board.
  • Analyzing the debate surrounding the nomination of Antonio Weiss for under-secretary of the Treasury.
  • Examining the increase in the average hourly wage in November’s strong jobs report.
  • Jotting down my version of the progressive agenda on a little bag. Take that, complexity!
  • Observing the House and the Fed going in opposite directions on financial market oversight.
  • Highlighting my talk to the Roosevelt Institute Campus Network’s 10th anniversary party.
  • Reviewing three stories that caught my eye in Sunday’s papers.

Sunday Snippets: Three News Stories that Catch the Eye

December 14th, 2014 at 1:59 pm

The Cruz Paradox: Senate hits a level of dysfunction that actually somehow turns back on itself and gets things done.

As far as I can tell, this is a new phenomenon in the space-time continuum of political science: In their negotiations over the CRomnibus spending bill, a couple of conservative senators—Sens. Cruz and Lee—insisted on keeping the Senate in session to take a meaningless vote against the President’s recent immigration action. That enabled Sen. Reid to maneuver around a long-term Republican block and bring a bunch of President Obama’s nominees to the floor for a vote. And remember, these appointments can no longer be filibustered, so they’ll pass in this session with majority D’s (as opposed to the incoming Senate).

I feel certain there’s some advanced algebraic topology that explains how knots of dysfunction unravel in higher dimensions, but I’m not smart enough to write down the equations. Surely there’s a poli-sci dissertation in here somewhere.

The Price of Oil and the Calculus of Tight Oil

There are many interesting dimensions to the dramatic decline in oil prices in recent weeks, and I hope to write more about one in particular in coming weeks, i.e., taking advantage of this moment to put a federal gas tax increase on the table.

But one interesting economic question arising here is why isn’t OPEC acting like a cartel and restricting supply to arrest the price decline? Instead, they’re pumping as much as ever, especially the Saudi’s, OPEC’s largest supplier.

The answer appears to be that they’re sacrificing profits today for market share tomorrow. They believe—correctly, according to conventional analysis—that when oil hits $60-$70 a barrel, which is where it is now, extracting “tight oil”—fracking and tar sands—is no longer profitable. And in fact, there’s some evidence that it’s working already, as tight oil producers respond quite elastically to the new, low price.

The implication, of course, is that once supply adjusts, energy prices will start climbing again. So I’d think twice before picking up that new Hummer.

The Unique Politics and Policy of Balancing Work and Family

The NYT has an extended feature on the decline of women’s employment rates in the US relative to that of women in other advanced economies. Read it yourself, but one theme of the piece is that US policy—really, the absence of such policy—makes it harder for women to balance work and family here relative to Europe. Research cited in the report suggests that these differences explain one-third of the difference in movements of women’s labor force participation. “Had the United States had the same policies [as Europe] women’s labor force participation rate would have been seven percentage points higher by 2010.” Given the typical movements in these numbers, that’s a very large effect.

My strong reaction is this: I’m hard pressed to think of another set of policies that more tightly hits that rare sweet spot of great politics and great policy than this one. If I were a politician considering a run for high office, I’d be all about these work/family balance ideas. They’re pro-growth, pro-family, and as the NYT piece stresses, have to potential to reach a lot of women who struggle for balance in this space.

Which is why I touted them in a recent paper as an important PGEP:

PGEPs in this space include paid sick leave, robust maternal and paternal leave policies, worker-centered scheduling, ensuring parents have ample time and resources to care for children and elderly parents (prevent discrimination against caregivers), and affordable, high quality child care.

My talk to the Roosevelt Institute Campus Network

December 12th, 2014 at 4:45 pm

It was my privilege last night to give the keynote presentation at the Roosevelt Institute Campus Network’s 10th anniversary party.

Why me? Because when they started out a decade ago, I recognized what a great idea they had and tried to help a bit. What they’ve accomplished since then is remarkable and gives me hope for the future.

Plus, they were having a rockin’ party with an open bar, yet not only did they stop and listen to 15 minutes of my gum flapping, but they quite madly applauded when I talked about the importance of interdependent utility functions. Them’s my kind of nerds.

Here’s my talk.