No one, including the Fed, has done the necessary analysis to answer the question re QE and inequality.

October 27th, 2014 at 8:37 am

If you’re in the NYC area tonight, be sure to come see Larry Kudlow and me debate the issue of income inequality at the 92nd Street Y on behalf of the “bring light not heat” Common Ground committee. See you there!

Speaking of inequality, though this argument has been around for a while, ever since the Boston Fed’s inequality-of-opportunity conference a few weeks ago, the idea that the Fed’s quantitative easing and low interest rate policies have exacerbated inequality has gained steam.

The argument is twofold. First, QE inflated asset prices which are disproportionately held by the wealthy. Second, low interest rates have hurt lower-income savers, like seniors, who live on fixed incomes. Also, low yields on bonds have goosed the stock market as the TINA destination for investors (“there-is-no-alternative”).

As I’ve stressed in various places, I find this argument unconvincing, in no small part because it lacks a counterfactual. That is, the argument fails to account for two critical factors. First, how middle and lower-income households would have fared through the Great Recession and weak recovery in the absence of monetary stimulus, and second, how asset prices would have trended under a no- (or less-) stimulative regime.

William Cohan, for example, delivers a cogent argument that QE has exacerbated inequality, except for the fact that he completely ignores its impact on the “real” economy—growth, jobs, unemployment. As I note in one of the links above:

analysis by Fed economists finds that its asset-buying program “…may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.”

I’d also note, and Dean Baker dives a bit deeper into this point, that while corporate profitability and equity market returns have more than recovered well ahead of the middle class, that unfortunately looks much like the pattern in the last few recoveries, when Fed policy was not nearly as aggressive as today’s. I suspect the forces driving structural inequalities are much more in play here.

So those suggesting the Fed’s actions are exacerbating inequality need to first make the case that those actions are not helping to offset unequal growth through faster job growth and lower unemployment than would otherwise be the case. Neither can they just point to rising asset prices without analysis showing QE to be a primary player.

But—and here, I’ll defend Cohan et al a bit—the Fed itself should be doing more of this work. They’ve got large staffs of some of the top analytical economists in the world and yet I find little to nothing in defense of their actions in this space. I deeply respect and defend their politically neutral, independent position above the fray, such that they can’t be pulled into such debates the way Dean and I are. But it is well within both their skill sets and analytical purview to provide a lot more analysis of the type referenced above.

I pulled the quote above out of an old Bernanke speech and even that, as far as I can tell, came from internal, unpublished work. What are their current estimates of the impact of their actions on jobs, unemployment, wages, profits, and equity prices relative to the relevant counterfactuals? It’s possible that they’ve done so and I’ve missed it, but I follow such things pretty closely.

While I’m not asking them to get into the hurly-burly of high-frequency economic policy debates, they do have a responsibility to not only evaluate the impact of their actions, which I know they’re always doing internally, but to provide that analysis to interested outside parties so we can both better assess their impacts and have a more informed public debate about them.

Slides from this AM’s talk to social work educators

October 24th, 2014 at 12:00 pm

I told the (totally awesome) audience at the Tampa, FL meeting of the Council on Social Work Education that I’d post my presentation ASAP. Here it is.

A few clarifications.

YOYO=you’re on your own
WITT=we’re in this together

In case the video doesn’t work, go here and start at 1:40. And h/t to Chuck Sheketoff for pointing me towards this.

The part where I mention Gov. Brownback in passing is about this issue (though this presentation is much more fun (albeit a bit racy in places)–“Now why would we need a tractor dancer on this farm?”).

Global growth, the $, (under-priced) oil and their impact on US growth rates.

October 22nd, 2014 at 7:55 am

Those stalwart number crunching research economists at Goldman Sachs (i.e., not the traders) have a really interesting graph out this AM that packs in a ton of info on current growth pluses and negatives.

The figure uses the Federal Reserve’s macro model (which is actually publically available now…and, yes, I will fire it up myself once I have the time to figure out its bells/whistles) to decompose a set of factors nudging real GDP growth this way and that, including slower global growth, the stronger dollar—they’re the larger negatives—and lower oil prices and interest rates (pro-growth).

The GS analysts offer two flavors of growth impacts, one if equity and fixed income markets remain weak and one if they strengthen (ftr, GS seems to make money either way, but that’s a different post).

A few observations:

–Even under the weak market scenario, the drag on growth is predicted to be a few tenths of GDP at most. This is partly due to our relative low export share—13% of GDP, half that of the Eurozone–as well as the offsetting impact of cheaper oil.

–If you follow this stuff, I suspect you’re well aware of the global slowdown and the cheaper oil parts of the story. But the stronger dollar has been a bit of sleeper, and it’s something I worry about a lot. Right now, it’s less a function of currency management by our trading partners and more the result of weakness in other economy’s currencies. But the figure provides an important reminder that a strengthening dollar is a drag on growth through the export channel.

–On the other hand, both the dollar and the oil dynamics will put downward pressure on prices (though oil is not in the core price index most closely watched by the Fed) and this could lead a data-driven Fed to postpone the liftoff of the Fed funds rate.

–From what I can glean, the oil price decline is a function of both stronger supply and weaker demand, with the former dominating. In this regard, it’s worth remembering that the price of energy fails to account for environmental degradation, i.e., considering polluting externalities, it is under-priced. That is the motivation for a carbon tax and that, in turn, is a reminder about our existentially lousy politics.


Larry Mishel and the wage message: “Don’t give up the hole!”

October 21st, 2014 at 9:25 am

Larry Mishel puts not too fine a point on it as you see in this WSJ review of his talk at the Boston Fed inequality conference. Some of those same points show up in this American Prospect piece I did on the topic a few weeks ago.

Larry’s comments are much in the spirit of the “don’t give up the hole” theme I’ve been trying to develop in recent weeks, where the hole is wage growth (it’s a golfing expression: don’t be so finessed on the green that you forget that the goal is to sink the putt).

The first thing to know is that hourly wages, long a focus at EPI, are the building block of the living standards of low- and middle-income families and they’ve lost ground for many workers across the education scale (even for college-educated workers, as Larry stresses) in recent decades. Taxes and transfers matter too, especially at the bottom, but if hourly wages aren’t beating inflation, and they generally haven’t been for many workers for decades, there are only three ways for families to get ahead.

They can work more hours, get more transfers (and/or pay less in taxes), or borrow. Working families have tried all of the above, but each is constrained. Families can only work so many hours without incurring serious difficulties balancing work and family. Also, this option depends on robust demand for labor, a key missing ingredient in much of the US labor market in recent decades.

Transfers have made a real difference for low-income families, especially the EITC, but this too is limited by political constraints and tends not to reach up to the middle of the income scale, at least for working-age households. Also, there are valid concerns about the extent to which such transfers subsidize low-wage employers, who are able to pay lower market wages leaving the tax-supported transfers to make up the difference in the post-tax wage.

As for borrowing—well, all’s I can say here is that borrowing against stagnant earnings or bubbly house prices is a recipe for disaster. QED.

Second, while educational earnings differentials—the pay gap between workers at different education levels—are large, they’ve not grown much in recent years. That’s one of the factors behind this provocative assertion by Larry:

“The intellectual basis for [skill-biased technological change, SBTC] in my view has collapsed. It has very little to contribute to the understanding over inequality over the last 20 years, and is not the basis for thinking about the future so much.”

I explain and track this claim in the Prospect piece above. Here’s an extended excerpt from that piece emphasizing both my conclusions and the key roles that skills and technology have played over time. But they are not what’s behind weak wage growth today, and thus Larry’s point about the limits of relying solely on human capital policies are well taken.

If you hear a bit of an edge in his argument, it’s because a) he was speaking at the Federal Reserve which has a lot to do with full employment and a lot less to do with education policy, so do the math, and b) he strongly believes that some analysts hide behind the apron strings of “social mobility” which is a lot easier to argue for than wage-boosting market interventions like minimum wages and more union power.

Dude has a point, no?

Technology and employers’ skill demands have played a critical role in our job market forever, but they turn out to be of limited use in explaining the depressed incomes of today, or of the past decade.

Consider: The demand for college-educated workers has actually slowed quite sharply since 2000 and their real wages have been flat. If that fails to surprise you, you may well be someone who’s recently graduated and looked for work. If that does surprise you, you may well be a high-level economic policy maker.

Before I go any further, allow me to assert the following, and not just to inoculate myself, but because I really believe it: Technology is a hugely important force in economies across the globe. Neither I nor any economist I know would question that we should want the most skilled workforce we can get, not to mention the best educated electorate. There’s no question that those with more education earn more than those with less—the college wage premium is as high as it’s ever been. No question that the upward mobility of far too many disadvantaged children is thwarted by unacceptably high barriers to attending and completing college. No question that way too many people lack the skills they need to make it in today’s job market.

But a number of important new studies show that it’s not technology-driven skill deficits that are depressing wage and job growth. It’s the weak economy, not yet recovered from the Great Recession, it’s persistently high unemployment robbing workers at almost every skill level of the bargaining power they need to claim their fair share of the growth, it’s terrible fiscal policy, it’s large and persistent trade deficits, it’s imbalanced sectoral growth as finance booms while manufacturing lags.

The policy implications that flow from these findings are profound. Improving workers’ skills is obviously insufficient. Supply doesn’t create demand. In fact, there’s evidence that as demand for college-educated workers has tailed off, they’ve been moving down the occupation scale, displacing workers with lower education levels.

If we want to improve the quantity of jobs, we’ll have to do more to promote labor demand. We’ll need to worry less about robots and more about austere fiscal policy, imbalanced trade, weak capital investment, and bubbles and busts. If we want the jobs we create to be of higher quality, we’ll have to do more to lift workers’ bargaining power, by enforcing labor standards, raising minimum wages, and leveling the playing field for collective bargaining. Supply-side solutions targeting workers’ skills may well help the targeted individuals, but they won’t help raise the number and quality of jobs.