Incoherency on the TPP’s currency “side deal”

November 13th, 2015 at 9:42 am

The WaPo’s editorial in support of ratifying the Trans Pacific Partnership 12-country trade deal makes some good points, like you need to learn what’s in this beast before you sound off about it.

I’m working my way through the TPP and will have more to say at a later date. So far, I’ve seen better language in parts of the text than in past agreements, but you’ve got to be careful. It was good to see a requirement for minimum wages in the labor chapter, for example, but I didn’t see anything that would prevent a signatory country from setting a minimum wage at the equivalent of one cent and being in compliance.

The dispute settlements process may be improved—the text calls for greater transparency and more input from individual states representing their “public interest,” but only in practice will we know how much substantive input sovereign states have in these multi-country tribunals. The fact that the tobacco industry is explicitly prohibited from bringing dispute cases regarding public health regulations is both a clear, progressive advance, and a worrisome reminder that other safety hazards do not have such carve outs.

But the ed board is incoherent on currency management. There is no currency chapter in the deal, just a side agreement with no enforcement mechanisms against countries managing the value of their currency, typically suppressing its value relative to the dollar to make their exports more price competitive. According to the WaPo, echoing the administration:

…this omission is entirely appropriate. Any agreement that intruded so deeply on the monetary policies of the member states, the United States included, would have been rejected by all — in the unlikely event currency ma­nipu­la­tion could have been reduced to an intelligible, legally binding definition in the first place. Differences over currencies are best handled through diplomacy; and, through a side agreement, the TPP negotiations produced promises to avoid unfair currency practices and a first-of-its-kind forum through which countries can press complaints as they arise.

First, it is widely known by participants in this debate, or at least it should be, that the IMF has long had an “intelligible” definition of the action that comprise currency management. In fact, the declaration itself mentions the IMF’s “exchange rate assessment” as a useful tool in identifying the problem (see part above about the importance of actually reading these materials before you hold forth).

Second, accepting the argument that pressing action against currency manipulation intrudes on monetary policies essentially undermines any posturing that the declaration, despite the fact that its language reveals a solid understanding of the problem, goes beyond current, inadequate policy in this area.

If countries can simply cry “we’re simply engaged in domestic monetary policy!” as they intervene aggressively in foreign exchange markets, and there’s no enforceable discipline against doing so, it’s hard to see the value of the joint declaration, with one possible exception: the declaration calls for better, more timely data that would allow analysts to identify exchange rate manipulation by specific countries in close to real time. OTOH, that may leave us all dressed up with nowhere to go.

While they could have stuck with the reasonable argument that the other countries simply wouldn’t accept a currency chapter (though that kinda tells you it’s necessary), the administration created this problem by opportunistically arguing that a currency chapter would undermine sovereign monetary policy, an argument that makes little sense from the US perspective (our holdings of foreign reserves have always been and will likely always be tiny compared to those of known currency managers). Again, once you accept that premise, you’ve blocked yourself from prosecuting the case.

So where do we go from here? Absent legislative action that would allow Congress and future administrations to take action against currency managers, we’re back where we started. Of course, the administration will be pushing hard on members of Congress in both parties to support the TPP in the forthcoming up-or-down vote. While the deal can’t be amended (it’s on a “fast track”), there’s no reason members can’t make their support contingent on enforceable currency rules outside of the TPP, e.g., legislation that gives Congress the ability to assess countervailing duties against currency managers. In fact, such a measure could have greater scope in that it would apply to all our trading partners, including China and other non-TPP countries. (BTW, the argument that because China’s currency is no longer misaligned, it will never be so again should not be taken seriously.)

The dollar is strong right now due to relative growth rates and relative central bank plans (we’re considering raising interest rates; Europe is not), not, as far as I can tell, due to currency management. But the impact of the strong dollar can be seen in the growing trade deficit, the drag that creates on growth, and the flat-lining of manufacturing employment so far this year. This gives you a sense of what’s at stake here. Based on the language in the joint declaration, I suspect USTR and the Obama admin agrees with these stakes. We need to find a way to do something real about them.

Wherein I argue with friends and allies about the Cadillac tax

November 12th, 2015 at 8:13 am

If we want to avoid undermining Obamacare, it would be better to try to tweak the tax rather than repeal it. It’s got numerous attributes and, as I readily admit, some potential problems. But the most important thing it has going for it is that it’s on the books. Those who think they can join ranks with O’care haters for repeal and break ranks with them to replace, in this Congress, are kidding themselves.

Over at WaPo.

This is your paycheck at full employment…maybe

November 10th, 2015 at 6:00 am

Surely one of the most important missing pieces of the current recovery is faster wage growth in response to the tighter job market. Well, last week’s strong jobs report hinted that wage growth could finally be ticking up, at least on average, though it’s too soon to tell for sure. These monthly numbers jump around a bit, but the yearly growth rate of average hourly wages has been slowly picking up speed since June, when it was 2%, through last month, when it was up 2.5%. These are all nominal values, but as inflation has been so unusually low, they imply more purchasing power.

This is not an entirely surprising development for those of us who have long argued that full employment is associated with higher pay, as employers, like it or not, must at some point offer higher compensation if they want to get and keep the workers they need to meet the demands for their goods or services.

That said, we’re not at full employment yet, at least by my preferred measure—the one cooked up by economist Andy Levin, which takes account of unemployment, involuntary part-timers, and those missing in action from the labor force. Each of those variables has contributed labor market slack in recent years, but the second two are left out of the traditional unemployment measure. At its peak in late 2009, the slack variable was 7 percentage points (ppts) above full employment. Now it’s 2 ptts above the target.

In order to quantify some of these musings, I’ve built a simple model of wage growth using our combined 5-series wage mashup (to generate a composite picture of wage growth), and regressed yearly changes of that measure against Levin slack, slack squared (as GS economist David Mericle has uncovered non-linearites is this relationship), and a few (3) lags of the wage-growth variable. I then project that the slack variable will continue along its recent downslope until it hits zero in late 2018.

The figure below shows that the model tracks the wage-growth series well, and it also picks up the recent acceleration, again suggesting that we may be at the cusp of faster average wage growth.

Annual wage growth and forecast

Source: See text

Source: See text

Projecting forward, the model predicts that at full employment nominal wages are growing at a rate of about 3.5% (the reason wage growth flattens at this point is because I don’t allow the slack measure to go below zero*). That 3.5 is an interesting number because it’s the wage target mentioned by Fed chair Yellen and others: it is the sum of underlying productivity growth (1.5%) and the Fed’s inflation target (2%), implying real average wages growing at the rate of productivity, aka steady unit labor costs.

OK, caveats abound: the model is very simple and could of course be wrong; who says we’ll get to full employment, especially if the Fed gets nervous and does more than just tap the breaks?; this will have to be among the longest of expansions if we’re to get to full employment by late 2018; as I’ve stressed, this is the average—in the age of inequality, the average takes off well before the median.

That said, work I’ve done with Dean Baker finds that if we can get to and stay at full employment for a while, the benefits in terms of wage growth will disproportionately go to middle and lower paid workers, including racial minorities (as economist Valerie Wilson has shown). They’re the ones with the least bargaining power in slack labor markets and thus with the most to gain from full employment.

Won’t this drive faster inflation? I don’t expect so. First, the reason 3.5% is the Yellen wage target is because real wage growth at the rate of productivity growth is not inflationary—productivity absorbs the real wage gains. One potentially problematic wrinkle here is that assumed trend productivity growth rate—1.5%–is…um…well above current trend productivity growth.

But more to the point, the evidence for wage-push inflation is just increasingly elusive. There’s now a number of solid, econometric studies questioning the importance of wage-price pass through; it’s actually pretty hard to find it in the data.

So, fear not rising wages. Fear them not at the average. Fear them not at the median or 20th percentile. Fear them not in a box…fear them not with a fox.

Whoops…got away from me a bit there at the end, but you get the picture.

And speaking of the picture above, here are the data if you want to play along at home.


*Zero on the Levin measure means that unemployment is at its “natural rate” according to CBO, and the involuntary unemployed and labor force participation have returned to the their pre-recession trend levels.

Friday musical interlude: a brilliant pianist plays Mozart

November 6th, 2015 at 8:54 pm

I’ve been remiss re musical interludes of late but I’ll make it up to you many times over with this post of the pianist Yeol Eum Son in a breathtakingly beautiful performance of Mozart’s piano concerto #21.

I love the crystal clarity of her touch, the depth she draws from the famous slow movement, and the way her flawless technique is always evident but never distracts from the music.

And what music! It’s like the orchestra and piano are great friends going for a romp in the Austrian woods. The orchestra introduces the theme, the piano picks it up, has great fun with it, throws it back to the strings, and they’re off and running.

Hat tip to AG for introducing me to this gifted pianist.