A quick note on China’s devaluation

August 5th, 2019 at 6:50 am

Source: WSJ

Just back from ranting about this on CNBC so I’ll quickly share some thoughts on the news that the Chinese yuan broke 7/$, in a depreciation that threatens trade-war escalation.

Bottom line: the trade war may be about to get worse, and that won’t be good for markets, consumers, and the global economy. It’s hard to see a way out between these two sides, though electoral politics could force Trump to stand down next year.

The numbers:

–Depreciations offset tariffs. That is, a 10% tariff, paid by importers and passed forward to consumers, is fully offset by a 10% depreciation. This is especially relevant in the case of Trump’s latest plan to place a 10% tariff on $300 billion more in Chinese goods, two-thirds of which are consumer goods (shoes, apparel, toys, cell phones). Earlier tranches have mostly been intermediate goods.

–The yuan depreciated over 1% relative to the dollar since last night and about 13% since its peak in March of 2018 (see figure above).

–Markets, which have been highly sensitive to the ups and downs of the Trump/China trade war, ain’t loving this; Dow futures are down about 300 points prior to today’s opening.

–If the market’s trade-related losses (which began last week) continue, it raises the question of the extent to which worsening financial conditions counteract the impact of last week’s Fed rate cut, and thus raises the likelihood of further cuts.

The trade politics:

–What’s freaking out the markets is their expectation that Team Trump will view this as an escalation. In fact, China’s central bank said the move was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China.”

–I share the market’s expectation. Trump obviously has more weighty, tragic issues to deal with today, but one thing he seems to understand is the role of currency movements in this fight and I expect him to hit back.

–The most obvious response would be to raise the 10% on the $300bn to match the 25% already in place on the rest of our imports from China.

–These dynamics aren’t pretty for China either. They have to worry about the impact of the devaluation on capital flight, an increasing problem in China. Also, since many Chinese firms borrow in dollars, this makes their debt service more expensive.

–Meanwhile, the whole damn trade war looks to be going badly from Trump’s perspective, predictably so as such wars tend to ding both imports and exports. In fact, in the most recent quarter, exports/GDP were close to a 10-year low and the trade deficit hasn’t improved at all on Trump’s watch.

–Is there any way out of this mess? The only thing I can think of is a political pressure valve. If the escalating trade war whacks US consumers through inflation and real growth channels, and does so close enough to the 2020 election, Trump could decide to dial his protectionism way back, and fast.

–As noted, markets are highly elastic to such whipsawing, and businesses have probably held back investments as well due to trade-war-induced uncertainty. So, the economic impact of some sort of resolution could be quite positive.

–Analysts at Goldman Sachs made an interesting point about this possibility. Suppose the Fed lowers more aggressively to offset any forthcoming escalation. Then, for electoral reasons, Trump suspends the war. The Fed will be reluctant to raise much in an election year, so GS argues this could pose an overheating threat.

–I’m inherently skeptical of arguments with a lot of links in their chain, and predictions of overheating have consistently been wrong. But worth watching.

Still a solid job market, but with a cloud or two

August 2nd, 2019 at 9:35 am

Payrolls rose 164,000 last month and the unemployment rate held steady at 3.7 percent. Wage growth accelerated very slightly–3.1% in June to 3.2% in July (year-over-year nominal hourly pay)–but it has been roughly stalled just north of 3 so far this year.

Downward revisions for the prior two months–May and June–appear to have slowed the underlying trend in job growth. In our report from last month, we showed the 3 and 6-month trends to be 170K jobs per month. As this month’s jobs smoother shows, both the 3 and 6 month averages are now about 140K.

Part of this is deceleration is because two big job months–January and April–dropped out of the 6 and 3 month averages, so this slowdown may not stick. But if it does, it raises the question of whether job growth is slowing because long expansion is exhausting the supply of workers available to the job market, or whether employer demand is slightly softening (or some combination of the two). As always, it will take many more monthly reports to reliably answer the question, but recent wage trends offer a hint that softening demand could be the dominant factor.

As the figures below reveal, particularly the 6-month moving averages (dark line), wage growth is roughly stalled a bit above 3 percent. This could be a function of the unemployment rate low but stable–it has stayed between 3.7 and 4 percent since March of 2018–or it could represent less worker bargaining clout due to slightly weaker labor demand.

To be clear, however, these are nuanced reflections as the job market remains strong and, if not at full employment, closer to it than has been the case for most of the past few decades (with the latter 1990s as the most recent exception). In fact, as the next figure shows, while nominal wage growth of mid-wage workers has flattened over the past few months, low inflation has helped to generate solid real gains of about 1.5 percent.

Here are a few other notable findings from today’s report:

Manufacturing ain’t what it used to be. Over the past 6 months, the factory sector has added just 6,300 jobs/month. Over the prior 6 months, the sector was adding 19,800 per month. The trade war is part of the explanation, and that looks to be getting worse before it gets better.

Where are the Census jobs? Typically, by this time in years that end in a ‘9’ we see some hiring of Census takers for the decennial Census. It’s possible that budget issues or the squabble over the citizenship question are slowing hiring in this round, which could be worrisome for the process.

–Are prime-age epops topping out? This one’s a potential big deal. The prime-age (25-54) employment rate has been a go-to variable for those of us arguing there’s “room-to-run” in the job market. In July, it ticked down slightly from 79.7 to 79.5 percent, exclusively due to women: their rate fell by half-a-percent, from 73.5 to 73 percent. But more notable is the recent trend shown in the figure which shows the variable falling off its peak in recent months. In other work, I’ve noted that the prime-age epop tends to peak before a recession, so this bears close watching (see figure).

All told, we’ve got a solid job market with some very tentative softening signs. Manufacturing is being hit by destructive trade policy, and wage gains have stalled out a bit. But they’ve done so at a pace well above inflation, so paychecks are growing in real terms.

 

Sharing the wealth, or at least the compensation

July 30th, 2019 at 10:54 am

Twitter econ asked for my historical ECI series, so here you go. See tab “finaltbl.” For columns B and C–pvt industry–I do a small splice re older data which you can track through the spreadsheet. For cols D & E–these are “all civilian” and are the series we use for our wage mashup–I don’t bother splicing. I doesn’t really make a difference as splice factor is tiny for toplines (they matter more for industries).

Now, in return, I want gobs of twitter love and a wage series to be named later.

Some responses to the responses to my “4-economic mistakes” piece.

July 22nd, 2019 at 8:54 am

I got lots of interesting feedback on a piece I wrote for Vox about long-held but empirically wrong assumptions in some key areas of economics, assumptions that have been asymmetrically harmful. That is, their costs consistently fall on those with low- and moderate incomes and their benefits help the wealthy.

Some argued that I didn’t go far enough. Dean Baker, a friend and frequent co-author, argued that I pulled punches regarding globalization, which “…was designed to hurt workers. We could have had globalization where we reduced IP barriers and trade in professional services (e.g. doctors).” (Baker explores such themes in his book Rigged, a close, older cousin of themes in my Vox piece.) Various respondents added other harmful policies supported by bad economics, such as Kevin Drum’s reference to supply-side tax cuts.

But the main complaint was that I was too blaming of economists, not all of whom promote these wrong ideas, and that I conflated economists and policy makers. In fact, I explicitly tried not make that conflation in the piece, which starts with arguably the most important economic official in the world, Fed chair Jerome Powell (a lawyer, not an economist, but still…), agreeing that estimates of the “natural rate” of unemployment have been too high.

On globalization, I emphasize that trade theory itself is very clear that expanded trade generates winners and losers, and explicitly tagged policymakers:

“But the theory never said expanded trade would be win-win for all. Instead, it (and its more contemporary extensions) explicitly said that expanded trade generates winners and losers, and that the latter would be our blue-collar production workers exposed to international competition. True, the theory maintained (correctly in my view) that the benefits to the winners were large enough to offset the costs to the losers and still come out ahead. But as trade between nations expanded, policymakers quickly forgot about the need to compensate for the losses.”

But I also want to be careful to not be overly exonerating. In trade debates in the 1990s, as any Economic Policy Institute veteran will tell you, pure win-win arguments, like the one I pulled out of the 1994 Economic Report of the President, dominated among economists. EPI’s arguments that elevated the plight of those hurt by trade were treated as heresy, and not just by politicians trying to pass NAFTA, but by economists. Just ask EPIers like Rob Scott, Thea Lee, and Larry Mishel, who have the scars to prove it.

On the minimum wage, I personally recall debates with economists—and such debates persist to this day (though I readily grant that there are now fewer of them)—that essentially argue “if you raise the price of something, people will buy less of it, full stop.” As Robert Cherry reveals in this survey of older textbooks, the notion that increases in minimum wages could help low-wage workers was, as I said, treated as akin to believing that water flowed uphill.

Also, the piece stressed the point that prominent, powerfully placed economists were motivated by “crowd-out” arguments in the pretty recent past.

To underscore a theme that maybe didn’t come across strongly enough, excellent, evidence-based work is throwing off many of these old chains. The piece was again explicit about the important minimum-wage analysis by economists to test the assumption that increases mostly harm their intended beneficiaries (I mention the late Alan Krueger, as he was a trailblazer, but he was far from alone). There’s been similarly important work on the folly of budget austerity, like the renown Blanchard analysis I review here. So, while I understand where my fellow econo-travelers would take umbrage (justifiably provoked by some of the writing), the point is not that every economist always makes these mistakes. It’s that these mistakes were, and in some cases, still are, made with high frequency, and at great cost. There’s even a credible argument that the denial of trade’s downsides helped elect Trump, especially when you consider how the geography of the electoral college intersects with the people and places most hurt by expanded, imbalanced trade.

Something else I didn’t emphasize enough is that none of these relationships is etched in stone. The Phillips Curve could steepen (i.e., the negative correlation between unemployment and inflation could revive); excessive public borrowing could push up interest rates; it’s of course possible to set the minimum wage too high. The key economic point of the piece is that these, and every other asserted relationship in economics, must constantly be empirically evaluated. (The “constantly” is important. Elasticities change over time.)

The key political point is that the first-order assumptions I challenge invariably support capital over labor, and that this power bias is a big reason such bad economics persist, even in the face of better economics.

Finally, a few people asked what we should do in the four areas upon which I focused. I’ve written reams about that and don’t have the patience to dig up links. But on estimates of the too-high natural rate, the key is to be evidence-based, as was/is the practice of the Yellen/Powell Fed. Absent price/wage pressures, realized and expected, it’s hard to make a convincing case that actual unemployment is below the “natural rate.” On globalization, I’ve written tons on ideas to help, some of which I tick off in the piece. On austerity, see the link above re the Blanchard piece re good debt, bad debt. On the minimum wage…raise it!

Here’s a simple way to tell if someone (like the Nat’ Restaurant Assoc.) is abusing numbers to mislead.

July 19th, 2019 at 7:44 am

One sure way to tell in someone is making a biased argument is showing up in various statements by those who oppose the proposal to raise the minimum wage. I wanted to be sure to elevate this dastardly ploy, as it’s a tell that someone is trying to win an argument based on their bias, not on the evidence.

Here’s a tweet from the National Restaurant Association, a group that’s honor bound to oppose the minimum wage, and here’s the same ploy from a Texas Republican member of Congress. In both cases, they exclusively characterize the CBO’s job loss estimate from the agency’s recent minimum wage report as “as many as 3.7 million.”

Now, if you’ve been following the debate over the CBO’s findings, you’ve probably heard the number of jobs lost cited as 1.3 million, not 3.7 million. Here’s how the budget agency summarized their results (my bold).

In an average week in 2025, the $15 option would boost the wages of 17 million workers who would otherwise earn less than $15 per hour. Another 10 million workers otherwise earning slightly more than $15 per hour might see their wages rise as well. But 1.3 million other workers would become jobless, according to CBO’s median estimate. There is a two-thirds chance that the change in employment would be between about zero and a decrease of 3.7 million workers. The number of people with annual income below the poverty threshold in 2025 would fall by 1.3 million.

Put aside the benefit-cost argument as to whether the gains to 27 million are worth pursuing given the estimated median loss to 1.3 million (I get into that here). My point here regards the practice of exclusively citing the upper bound.

First, it’s not wrong. The “as many as” phrasing is the correct way to characterize the upper bound. But it is clearly biased. It would be equally correct—and equally biased—to say the CBO found “as few as zero workers would lose their jobs from the increase.”

Economic estimates like this are highly uncertain and CBO gets extra credit for being explicit about the range. The more of that, the better (see, for example, the top figure on page 4 here where CBO gives us the range of possible outcomes for their long-term debt/GDP forecast). But publishing a range clearly offers ripe fruit to cherry pickers.

The moral of this little tale is simple. When someone—and it will almost always be an advocate for a position supported by their funders—uses exclusively the “as many as” frame, without giving the central estimate and the range, you can be sure they’re all about winning the argument and not about seriously considering the evidence. As such, they should be summarily ignored by anyone honestly trying to figure out what’s actually going on.