A few things I forgot to post yesterday: midterm dystopia and great music!

November 8th, 2014 at 10:29 am

First, a bit more on the political economy of the midterms, over at PostEverything.

Second, and much more importantly, two great musical entrees for your edification, funkification, and swingification.

First, it was made clear to me that some of the youngsters where I work were unfamiliar with this funk classic from the man himself, James Brown: Pass the Peas Like We Used to Say. If this fails get your fanny out of the chair then you’d better check your pulse to make sure you’re still alive.

Next, it was my great fortune to reconnect with my old friend from back in my own musician days, the pianist Ted Rosenthal. Do your ears a favor and listen to his version of my theme song from the midterms, Let’s Call the Whole Thing Off. You’ll hear some Red G, some Ahmad J, some Monk, but mostly Ted.

October jobs report: first impressions

November 7th, 2014 at 9:22 am

The US job market continues to truck along at a solid clip, with payrolls adding over 200,000 jobs for the ninth straight month—including 214,000 last month—the unemployment rate ticking down to 5.8%, the closely watched participation rate ticking up a tenth, positive payroll revisions of 31,000 for August and September, and a slight bump up in average weekly hours worked.

Yet wage growth is still stuck at 2% on a yearly basis, just slightly ahead of inflation. In other words, while the job market is unquestionably tightening, it’s still not tight enough to boost the bargaining clout of most workers. More job seekers are finding work, more incumbent workers are getting the extra hours they seek—involuntary part-time work is down by about one million workers over the past year. Even the long-stagnant employment rate (the share of the population with a job) is showing a bit of muscle, up 20 basis points last month and one percentage point compared to year ago.

But wage growth has been stuck at about 2% since late 2009, standing out as the most important piece of unfinished business in the labor market.

Turning briefing to the payroll numbers, my patented jobs day smoother, which averages monthly gains over different intervals, tells the story of how employers are adding jobs at a fairly steady pace now between 220K and 230K per month (see figure below). Not breakneck job growth, but steady and fast enough to lead to a steady tick down in the jobless rate.

In fact, at 5.8%, unemployment is the lowest it’s been since the summer of 2008 and the more comprehensive measure of underemployment, at 11.5%, has fallen steeply off of its peak rate of 17.1% back in late 2009, amidst the worst of the downturn.

Today’s report also offers another data point in another important trend: the stabilization of the labor force participation rate, which has wiggled within a narrow range between 62.7% and 63.2% since last August. This suggests that working-age people are increasingly less likely to drop out of the job market due to their perceived lack of adequate opportunities.

While the growth in average hourly earnings is flat, that of weekly earnings is up 2.6% due to the aforementioned bump in weekly hours, which at 34.6 hours per week hit a post-recession high. That’s a plus for real weekly paychecks, given the inflation was last seen rising at about 1.7% on a yearly basis, implying real weekly earnings are up almost a percent. Moreover, with gas prices falling, weekly paychecks are likely to climb even a bit further in real terms in coming months.

However, let’s be clear about this: if the only way to get ahead is more weekly hours at stagnant hourly wages, then eventually stresses to balancing work and family will begin to show. What we see here is something that’s been evident in the US job market since the latter 1970s: productivity—or output per hour of work—is rising but it’s not showing up in most workers’ hourly wages.

This combination of stagnant hourly wage growth and low inflation (even without energy prices, as in the Fed’s inflation gauge) implies a strong need for patience regarding the unwinding of monetary stimulus at the Fed. The job market is slowly but steadily moving towards full employment, but there’s still considerable slack. If we want to see real wages going up across the wage scale—not just at the top, but at the bottom as well—we’re going to need to not only get to full employment, but to stay there.

smooth_11_7_14

Source: BLS, my analysis.

Is the Fed really losing its street cred?

November 4th, 2014 at 10:09 am

Ryan Avent posts an incisive and compelling critique of the US Federal Reserve, largely around their decision to end their quantitative easing (QE, or large-scale asset purchases) program even while their benchmark inflation rate remains consistently below its target rate of 2 percent.

I disagree with the vehemence of the argument—the idea that ending the asset buys is “shortsighted and dangerous” or what he calls “the most basic argument of all: the Fed is taking a serious risk in undermining the credibility of its nominal [inflation] anchor.” Also, I think he’s wrong re fiscal policy. But it’s still smart and muscular argument, well worth reading.

Avent’s argument rests of two incontrovertible points: first, the Fed, as I’ve shown in various posts, has consistently overestimated the future growth of the US economy. In this, they are not alone. These days a good economic forecaster is the one who can convincingly explain why she has consistently had to mark down her forecasts. And in fact, the Fed’s US forecasts look relatively competent compared to European counterparts. Still, Avent’s on solid ground here.

Second, and more importantly, the Fed’s benchmark inflation rate has consistently run below its 2 percent target, leading Avent to raise credibility questions:

Setting a public target, consistently missing that target, projecting that the target will be consistently missed in future, and conducting policy so as to make sure the target is in fact missed: that is lousy monetary policy making. And I cannot understand why the Fed does not see this record as detrimental to the recovery and highly corrosive of the Fed’s credibility.

What should the central bank be doing in Avent’s opinion? Keep QE going, for one. For the Fed to be moving into tightening mode now makes little sense. As long as they’re missing their inflation target so consistently, they should keep using whatever tools they have at their disposal until they reach it.

I’ve pled for Fed patience as well, though more so in terms of when they liftoff on the Fed funds rate. I don’t see tapering off asset buys as obviously problematic, especially if the stock of their purchases—the Fed’s $4 trillion balance sheet—remains fixed, i.e., no unwinding. Avent cites a small literature on this and argues, correctly in my view, that QE was helping and not hurting, i.e., it was lowering some key long term rates without ginning up an asset bubble or contributing to higher inequality (against a counterfactual of tighter monetary policy), so why not keep it up?

Fair point, but he goes too far to claim the Fed’s making a serious mistake here or that their credibility is on the line. Basically, the Fed’s not the problem. It’s the lack of complementary fiscal support.

Here’s where I thought Avent gets it wrong:

…governments are really bad at providing sufficient fiscal stimulus to boost the economy (at least when the threat of massive global conflict is not providing the necessary incentive). The rich-world record on this score over the last few years is simply abysmal. Counting on elected governments to do better in future is a recipe for deeper recessions and more volatile business cycles.

No question, that’s been the case in Europe, but at least in the US, that’s only been the case since 2010, and history did not begin then. Avent’s being far too historically chauvinistic, failing to recognize two key points.

First, it is essential to recognize the one-two punch, the inherent complementarities, of fiscal and monetary policies. The Fed can set the table but they can’t get customers to come in off the streets to order off the menu. That takes complementary fiscal policy. As we’ve seen, Fed-induced low rates absent more fiscally-driven demand will deliver growth, but it will be tepid. (BTW, while I’m onboard with the secular stagnationists, this is one problem I have with some of their rhetoric: if only we could get real interests down to their equilibrium level, they seem to argue, all would be well; I doubt it.)

Second, Avent’s wrong on the record. The US stimulus demonstrably helped a lot. It added millions of jobs, significantly raised GDP, and pulled the recovery forward. It also did not last anywhere near long enough—that’s the 2010 problem cited above. But there’s reams of analysis to support that point. I’ll post links if you insist but in the meantime just poke around yourself (I’ve always thought this comprehensive study was well done).

And not only do I count on future governments to “do better,” the record shows they almost certainly will. They could hardly do worse. One thing you quickly learn from American economic history is that one definition of a Keynesian is a Republican in a recession.

Again, I see where Ryan is coming from and I yield to no one in my profound disgust with fiscal policy as currently practiced. Even there however, it should be noted that we’re somehow doing better this year than last. In 2013, negative fiscal impulse subtracted 1.5 percentage points off of real GDP growth. This year, about zero. From the current obstructionists in Congress, I’m afraid the best you can expect is “do no harm.”

So, sure, the Fed should definitely keep monetary stimulus going full blast and as Avent says, they should overshoot their targets to help mop up the damage that all this persistent slack has caused. But a fulsome critique of their actions and credibility should include the fiscal context in which they’re working. Grading on that curve, I think they’re doing about as well as can be expected.

And there’s no way we can conclude, based on what’s passed for policy over the past few years, that smart Keynesian policies are dead forever. Even as I write this on the morning of an election day that is likely to yield results that bolster Avent’s predictions more than my own, the pendulum will swing back one day, and maybe sooner if we push it in the right direction.

True, in the long-run we’re all dead…you’ve got me there. But in meanwhile, let us not forget those immortal words of the great economist Steve Miller: “you’ve got to go through hell to get to heaven.”