Hey, What’d I Miss? OTE 10/15 — 10/20

October 20th, 2014 at 3:27 pm
  • Evaluating early results from the Treasury’s move to curb corporate tax inversions.
  • Explaining the impact of inequality, opportunity, and growth on stagnant wage trends.
  • Describing why to say “we fought the war on poverty and lost” is to reveal ones contempt for the facts of the case.
  • Explaining why we should be careful not to view our global economic problems as separate from our political dysfunction problems.
  • Analyzing Chair Yellen’s talk on the inequality of opportunity and asking the big question hovering above this conversation — can the Fed do anything about inequality? (Hint: Of course.)

Inequality and the Fed

October 20th, 2014 at 8:10 am

There’s lots of interesting press following the Boston Fed conference on inequality of opportunity that I posted on last week.

This AM, I’ve added something on a big question that hovers above this conversation: can the Fed do anything about inequality? My answer is a firm “yes!” over at PostEverything.

BTW, in part due to space constraints I did not deal with the argument that the Fed’s near-zero Fed funds rate and asset-buying programs are contributing to inequality by boosting asset prices and the stock market. In short, there’s something to that point but in order to do the required analysis, one would have to quantify both this effect and the one in which I focus on in the piece: the positive impact on growth and jobs. Then you’d have to net out the difference relative to a counterfactual–what would have happened absent the Fed’s actions.

I haven’t seen that (i.e., the inequality bit; my WaPo piece cites some Fed research on the latter bit) but my hunch is that the positive economic effects strongly dominate. One piece of circumstantial evidence is that the pattern of inequality’s growth in this recovery looks similar to that of the last one, when Fed policy wasn’t nearly as aggressive. Even though the 2001 recession was a lot less deep, it too was followed by an initial jobless, low-wage-gain recovery, yet those at the top recovered well ahead of anyone else.  

In other words, it’s cyclical and structural factors, from the absence of full employment to globalization to long-term bargaining power deficits that are driving inequality’s growth, not Fed policy.

Chair Yellen Holds Forth on the Inequality of Opportunity

October 17th, 2014 at 12:00 pm

Just heard Fed chair Janet Yellen give this great talk on inequality of wealth, income, and importantly, opportunity. I’ll have more to say later, but do give this a read.

Some points that jumped out to me:

–It’s fundamentally important that she gave this speech, as it was when President Obama gave a speech elevating inequality as a serious challenge. The Federal Reserve is of course focused by mandate on employment and inflation, but of course inequality of opportunity is linked to economic conditions. In fact, while I thought her speech was excellent, Chair Yellen could have hit harder on this point, as I note below.

–While many of her slides will be familiar to those who follow the issue, figure 10 (below) packs in a lot of information about this issue of inequality of opportunity. It shows the inequality of debt associated with higher education by wealth class. It’s unequal, of course, but has become considerably more so over time. We also see the stable and low debt burden of the top 5%.

I’m reminded of another finding here that poor kids with high cognitive test scores in 8th grade have about the same college completion rates of low-scoring rich kids.

–Chair Yellen stressed four “…sources of economic opportunity in America–think of them as “building blocks” for the gains in income and wealth that most Americans hope are within reach of those who strive for them. The first two are widely recognized as important sources of opportunity: resources available for children and affordable higher education. The second two may come as more of a surprise: business ownership and inheritances.”

First, I must say: where’s the macroeconomy here? Where’s full employment? I recognize that we’re talking about long-term trends across the life-cycle, but surely there’s a chain of reactions between tight labor markets, more broadly shared economic gains, and greater opportunity. These opportunity dynamics are complex with lots of moving parts, but it’s not a coincidence that inequality’s growth was quiescent during the post-war decades of full employment.

Second, especially given r>g Piketty-style dynamics, I’m not sure how much traction there is in terms of increasing opportunity for those on the wrong side of the inequality equation through inheritances and business ownership.

Still, even if she didn’t make all the connections I might have liked, it’s a great advance for the chair of the Fed to take such a deep dive into these inequality issues. And while I would have liked Chair Yellen to more closely tie full employment to the inequality of both outcomes and opportunities, the fact is that she’s fighting hard to keep the focus on the remaining slack in the job market is what matters most.

No questions, these are tough times for economies across the globe but we’re lucky to have such a great Fed chair.


Source: Yellen


The new global slowdown isn’t new and the problem isn’t the economies. It’s the policies.

October 16th, 2014 at 2:14 pm

What the heck is going on with the global economy?

If you’ve been following news about things other than Ebola, you’ve likely picked up on the following:

–New worries about the rate of global growth have led to all sorts of market volatility.

–Declining rates of interest and inflation both here and in Europe reflect clear signs of weakness and, in the case of the declining yield in US Treasuries, both flight to safety and lower expected growth.

–Inflation in the Euro area just clocked in at 0.3%; unemployment there is 11.5%.

–Stagnant US wages are a likely factor in yesterday’s disappointing new on retail sales.

–The rising dollar will make it tougher to reduce the growth-restraining US trade deficit.

The title of the latest IMF World Outlook is instructive, and even a little poetic, in this regard: Legacies, Clouds, Uncertainties. Their infographic describes the problems as stemming from financial sector excesses, geopolitical tensions, slowing emerging markets, and monetary surprises. Though inadequate fiscal support—the premature pivot to fiscal austerity—is clearly one of the most important aspects of the diagnosis, the IMF tends to pull their punch on that point, as this is unfortunately, if not unbelievably, still a hotly debated topic among key members.

Wolfgang Schaeuble, Germany’s finance minister and Mr. Austerity himself, said just the other day that “writing checks” wouldn’t help “…the euro zone to boost growth, and he urged France and Italy to do more in the way of economic reforms.”

Still, at least the Fund led with infrastructure investment and “jobs-friendly” fiscal policy on their “what-to-do” list. Such investments were also the consensus of a panel on the topic in which I participated the other day.

You can go deep in the weeds in this if you like, but the fact is that nothing fundamental has changed in recent weeks or months or quarters. (The one exception is the decline in oil prices, which is largely a supply-side factor, and while it will put some downward pressure on prices (less so on core prices), it is more important as a boost to growth and real incomes.)

The IMF’s 0.4% markdown of their growth forecast is not some new phenomenon. Our own Fed and CBO have done the same thing many, many times. When Larry Summers speaks of secular stagnation, he looks very much to be speaking of something real: economies stuck in weak-demand doldrums, where potential investment dollars abound on the sidelines but are not put to use even at persistently negative real interest rates. Where inequality diverts earnings from the broad middle-class, dampening spending and increasing economic anxiety. Where long-term unemployment and weak-demand-driven labor force exiters contribute to reductions in both the active labor force and the potential rate of growth.

So, is all of this just a depressing new normal? Only if we accept it as such.

As David Wessel correctly puts it “lousy economic growth is a choice.” The problem is political, not economic. This is a well-articulated policy agenda that would go a long way toward generating more of the demand that’s lacking; constructing and developing that agenda is the point of CBPPs full employment project, and this first tranche of papers is, if I may be allowed to say so, a strong start.

That assertion re politics begs a million questions and complaints, I know. On the panel to which I linked above, when someone suggested a political solution, someone else would say, “Gridlock!!” That’s fair, though there are some sub-state developments that deserve more attention.

But my point here is that we should be very careful not to separate the global economic problems from the political dysfunction problems, whether the latter is European ministers who resist evidence regarding austerity or the US Congress that resists an obvious opportunity to invest in public goods.

It is not at all correct to throw up your hands and say “everything’s broken—government doesn’t work and economies won’t recover. This new normal sucks!” No. Economies won’t recover because government doesn’t work.

The new normal is only here to stay if we continue to make it so comfortable.

To say: “we fought the war on poverty and lost” is to reveal your contempt for facts.

October 16th, 2014 at 1:12 pm

Yes, that title puts not too fine a point on it. But I stand by that claim. I stand by it in the cross-section. I stand by it over time. I stand by it with a fox…I stand by it in a box…whoops…ignore that last bit.

As my CBPP colleague Danilo Trisi shows in a post based on new Census Bureau data out today (see figure below):

Safety net programs cut the poverty rate nearly in half in 2013, our analysis of Census data released today finds, lifting 39 million people — including more than 8 million children — out of poverty.  The data highlight the effectiveness of cash assistance such as Social Security, non-cash benefits such as rent subsidies and SNAP (formerly food stamps), and tax credits for working families like the Earned Income Tax Credit (EITC).  They also rebut claims, based on poverty statistics that omit non-cash and tax-based safety net programs, that these programs do little to reduce poverty.

They do indeed. The we-lost-the-war ideologues typically depend on the Census measure that leaves out precisely the anti-poverty measures we’ve ramped up in recent decades. Back in the pre-war-on-poverty early 1960s, the official rate stood at around 20%; now it’s around 15%. So even by the inadequate official metric, there’s been a decline in the rate. And ftr, such sweeping comparisons over so many years ignore so many changing dynamics in economics, families, and policies that they’re not very meaningful anyway.

That said, if you made the correct comparison–one that includes the anti-poverty measures left out of the official measure–you’d find that poverty fell from 26% in 1967 to 16% in 2012.

That’s still way too much poverty in such a rich country, no question. As these new data show, the safety net helps a lot but it cannot take the place of robust economic opportunity, human capital development, and the upward mobility that’s lacking for far too many low-income families.

But to ignore findings of the type Danilo posts today is to willfully mislead. So the next time you hear someone spout the meme in the title–e.g., Sen. Hatch or Rep. Ryan–recognize that they do not deserve your or anyone else’s attention on this issue.