OK–I’m officially astounded: Summers et al on the importance of anti-currency manipulation language in trade deals.

January 15th, 2015 at 4:03 pm

I’ll have a lot more to say about this important and impressive new report from CAP about “inclusive growth” which some are hailing as a conversation starter for the 2016 D’s agenda. The commission behind the report is co-chaired by Larry Summers, a former Treasury Sec’y (that’s relevant to the part I’m about to highlight).

In lots of writings lately, I’ve been obsessing about the wage- and growth-dampening role of global imbalances, our persistent trade deficits, and most recently, the need for a currency chapter in any forthcoming trade deals, most notably the Trans-Pacific Partnership.

So this officially blew me away (my bold):

“…mechanisms must be found to ensure that the goal of free trade is not subverted by exchange rate manipulation. With the U.S. dollar at the center of the international financial system, misaligned exchange rates present an impediment to employment and wage growth for the United States in particular. But undervalued exchange rates also pose significant costs to people in the countries that are doing the manipulating, effectively reducing their real wages by raising the cost of imported goods and services—and therefore that of domestic, import-competing goods and services.

 The World Trade Organization, or WTO, rules pertaining to exchange rates are inadequate to address the challenge of unfair advantage from skewed exchange rates. Thus, it is unsurprising that no WTO member country has ever brought a currency dispute to the body. New trade agreements should explicitly include enforceable disciplines against currency manipulation that appropriately tie mutual trade preferences to mutual recognition that exchange rates should not be allowed to subsidize one party’s exports at the expense of others.”

To be clear, I’m not saying everyone on the commission, including Larry, endorses this. The intro to the doc notes: “there may be specific matters…on which some of us have different views.”

But the imprimatur of a former US Treasury Sec’y who is also one of the world’s top economists makes this all the more impactful. For those of us who’ve held this position for a long time, it’s a powerful and explicit endorsement of a critically important policy change.

The White House announces a renewed push for balancing work and family (a PGEP!)

January 15th, 2015 at 10:14 am

Well, this is turning out to be a pretty impressive week for the introduction of progressive ideas in high places. And while it’s easy to dismissively say, “um…they’re not going anywhere in this Congress,” I’d argue that reaction is too short-sighted.

Before we get to the latest salvo, let me set the stage with something I recently wrote about PGEPs—“pro-growth equalizing policies” (and, yes, like everyone else in this town, I’ve got an acronym problem, or, if you prefer: IGAAP!). PGEP’s are policies which both promote macro growth (G) and reduce inequality:

A final example of a PGEP in this space is one wherein “G” [for growth] takes on a broader meaning: policies designed to help balance work and family life. Such policies may or may not increase growth as conventionally measured—though to the extent that they boost worker productivity, they could have such effects—but they are very likely to increase a growth rate that factored in family well-being, including spending quality time together.

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.

Well, yesterday the White House announced a renewed push for some of these policies to help balance work and family, including legislation that would allow those without paid sick leave—and that’s 43 million workers–to earn up to seven days of paid leave per year, a $2 billion fund to encourage states to develop paid family and medical leave programs, and a Presidential Memorandum directing federal agencies to advance up to six weeks of paid sick leave for parents with a new child.

I’ve always been struck by how those who need the most flexibility at work, say, a single-parent in a low-paying, hourly job with shaky child care, often have the least flexibility and vice versa—a denizen of the top 1 percent with Cadillac child care can typically take off whenever she needs to. So, in the way I tried to allude to above re PGEPs, ideas like these promote a bit more equity in the system.

The usual suspects—employer lobbies, the Chamber of Commerce—often oppose such measures as they raise labor costs and can cut into profits. The White House argues offers counter evidence:

…a body of research shows that offering paid sick days and paid family leave can benefit employers by reducing turnover and increasing productivity.  Paid sick days would help reduce lost productivity due to the spread of illness in the workplace. And these policies can benefit our economy by fostering a more productive workforce.  Policies that better support working families can meet the needs of both employers and employees alike, and strengthen America’s economy.  For this reason, it is no surprise that many businesses see the benefit of employees earning sick days.  Two years after passage of a law requiring workers to earn paid sick days in Connecticut, more than three-quarters of employers responding to a survey indicated that they supported the new law, and employers reported that there were little or no negative effects of the new law on their bottom line.

So the forces of darkness and light will scrum over this stuff and hard to imagine it will get very far in DC, though part of the plan—and the WH is smart to go there—is providing states with some resources to explore the feasibility of introducing some of these measures on their own.

But put this together with the Van Hollen tax plan (see link above) and you begin to see an interesting dynamic that I suspect we’ll hear more about in next week’s State of the Union speech: the economy is reliably growing, and yet too little of that growth is reaching the middle class. Therefore, policy makers must relentlessly work on the policy agenda that will reconnect growth and more broadly shared prosperity.

If that sounds obvious, it actually makes what I believe is a critically important distinction. For all their willingness to acknowledge that inequality exists—no less than Jeb Bush highlights the issue on his new PAC site (“We believe the income gap is real, but that only conservative principles can solve it by removing the barriers to upward mobility”)—the heart of the conservative agenda is, in fact, simply more growth. Tax cuts for the wealthy, spending cuts for the poor, deficit reduction, and so on, are always sold as boosting overall growth which will then trickle down and enrich everyone else.

But if we’ve learned anything about this theory over the past few decades it’s that growth is necessary, not sufficient. Of course, I’m not saying seven days of paid sick leave fixes that equation. But I am saying it’s part of a reconnection agenda that I for one have been waiting to hear more about for a long time.

Josh Bivens for the Win: The Fed Interest Rate Liftoff is the New Deficit Reduction

January 14th, 2015 at 2:06 pm

Orange may be the new black, but in my world raising the federal funds rate is the new deficit reduction.

Let me explain. I keep bumping into arguments about why, despite pressures from wages or prices, either in real life or in expectations, the Fed should pre-emptively raise the interest rate it controls in order to stave off future inflation. There’s this, from the NYT the other day, quoting the president of the Atlanta Fed:

“We are going to conceivably have to make a judgment that the outlook, even in the absence of real­time inflation readings that are rising, that inflation is nonetheless converging to target.”

Which I think is a convoluted way of saying, “I don’t care if it’s not in the data. Let’s just raise the damn rate already!”

Then I read this Goldman Sachs research note this morning (no link). Their stuff is usually very sensible but this one was a head scratcher. It started out from the important observation, one I’ve been struck by as well, that interest rates on longer-term government debt continue to tumble to historic lows (see figure). But then it went as follows:

“If long-term yields are low due to a diminished inflation outlook, Fed officials delay the first hike of the funds rate in our simulation. But if long-term yields are primarily low due to a reduced term premium–for example, because of QE expectations in Europe–Fed officials respond with a more aggressive normalization of the funds rate in our analysis.”

I guess they’re just reporting what the simulation models say (and they use the Fed’s macro model) but does this make sense? Not the “diminished inflation outlook” part, of course, but the term premium part.

A lower term premium just means investors are looking for less insurance against interest rate risk when locking up their dough in longer maturity bonds. And that’s because the future looks weak, especially regarding…wait for it…inflation! Is there some other secret message in embedded in low Treasury yields that should paradoxically nudge the Fed to liftoff sooner than later? If so, I don’t see it (the GS folks have something in there about European QE, but I don’t find that convincing). I see falling Treasury yields reflecting the safe haven of the US economy, along with the weak outlook for inflation here and elsewhere.

I don’t mean to be fetishistic about this—I don’t imagine that a 15 or 25 basis point increase in the funds rate in the second half of the year will be a huge deal, especially with everyone seeing it coming. But why go there? What’s the substantive rationale? The risks here remain as asymmetric as ever: a pre-emptive rate hike that slowed growth and jobs and paychecks poses far more danger than the inflationary risks engendered by a hike that came too late.

I was chatting about that “why” question with EPI research director Josh Bivens this morning and he said, “the Fed’s interest rate increase is the new deficit reduction. Everyone just knows it needs to happen.”

It’s an awfully apt analogy, if you ask me. For years, even when the evidence of pre-emptive fiscal contraction, aka austerity, was known to be clearly negative, serious people insisted that deficits had to come down. Now many of those same finger-waggers just feel it in their bones: the Fed needs to liftoff. “It’s bad enough they’re getting social insurance; now they want a wage increase!”

To be clear, there’s of course a time for deficit reduction and a time for raising the funds rate. But even with the recent progress on the jobs front, we remain some distance from full employment—just look at the wage and price data shown here.

Our deficit scolds are morphing into Fed scolds. So be it. The proper response is the same as it ever was: to ignore them.