You Go, House D’s!

December 11th, 2014 at 4:19 pm

This may well be out-of-date by the time you read it but as I write it, the House D’s are considering blocking the CRomnibus budget bill proposed by the R majority to keep the gov’t running past its deadline at midnight tonight.

Details here, but the R’s went too far by adding in repeals of certain parts of Dodd-Frank financial market reform, as I described yesterday. And in an interesting twist, because the bill doesn’t go far enough on punishing the President for his immigration action for conservative House R’s, it looks like Rep. Boehner once again needs D’s to pass the funding measure.

So if you’re a D who recognizes the need for strong financial market oversight, why should you support this bill? Because the R’s have you backed into a corner in terms of a shutdown? Believe me, I very much don’t want to see that outcome either, but that doesn’t mean I’d swallow whatever they served up.

Because you’re better off negotiating a budget deal with these R’s than with the more conservative incoming R’s? Again, I can see the point, but fact is you’ll be negotiating a new budget deal with the incoming class either way. The bill they’re voting on today only lasts through Sept. 2015 (and the Homeland Security part only lasts through Feb!).

Here’s what Nancy Pelosi wrote to her colleagues:

Pelosi Dear Democratic Colleague on CRomnibus

Dear Democratic Colleague,

It is clear from this recess on the floor that the Republicans don’t have enough votes to pass the CRomnibus.  This increases our leverage to get two offensive provisions of the bill removed: the bank bailout and big money for campaigns provision.

However you decide to vote in the end, I thank those who continue to give us leverage to improve the bill.

Stay tuned.


I agree and am glad she and a number of her colleagues are taking this stand.

Update: The indispensable Mike Konczal provides these links that help explain the importance of the Dodd-Frank measures under attack. As I thought, they’re a big deal. 

The House and the Fed go in opposite directions on financial market oversight.

December 10th, 2014 at 10:03 am

Ensuring that financial institutions have adequate capital buffers is an essential line of defense against the bubbles and busts that have characterized the US business cycle in recent decades, at great cost to the living standards of most households. So I was happy to see the Fed’s proposal to kick up banks’ reserve requirements, especially for the ones involved in more complex, riskier trades.

And then there’s the House. I give them some credit for coming up with a 92% omnibus budget bill, where, unlike the continuing resolutions they’ve relied on in recent years, they appropriated new spending levels for 11 out of 12 agencies through next September. The exception is Homeland Security, which just gets a CR through February—their way of complaining about the President’s recent immigration action.

But they also jammed in some language to weaken aspects of Dodd-Frank, most notably a measure intended to hive off derivative trading from the part of the bank that’s insured by taxpayers. According to the NYT, this attack on the “Volcker rule” was largely written by Citibank…not good.

The bill that Citigroup helped draft: This bill would repeal one of the more contentious provisions in Dodd Frank, requirement that banks “push out” some derivatives trading into separate units that are not backed by the government’s deposit insurance fund. The proponents of the push­out rule argued that it would isolate risky trading from parts of a bank eligible for a government bailout.

My understanding of the new House measure is that it doesn’t repeal “push-out,” but instead pulls back in a bunch of categories of derivative trades—exempting them from Volcker coverage.

There are some other big problems with the agreed upon spending levels in the House bill, one of which—a cut to the IRS budget—that I’ll write about ASAP as this is a real concern of mine. In my view, it’s basically House R’s trying to promote and facilitate more tax avoidance.

The contrast between the Fed and the Congress on the fin reg stuff is just a crystal clear lesson on the value of political independence at the Fed. Yes, their regulators suffer market capture too–look at their inaction around housing bubble. I could also see pushing the equity buffer up higher than is being proposed; the risk here is almost always on the side of doing too little. Also, risk-weighting the buffers—requiring more exposed institutions to hold more capital–is probably more art than science, and whenever there’s leeway in this sort of market regulation there’s the strong potential for regulatory capture/failure.

But there’s just no question that the Congress is a shopping mall for the banking lobby in a way that the Fed is not.

The current wage story as I see it.

December 8th, 2014 at 10:57 am

There was a fair bit of excitement and commentary about nine cents last week.

I’m talking about the increase in the average hourly wage from November’s strong jobs report, an increase in 0.4%, which is, in fact, a sizable bump for these monthly data. But the monthly data are noisy, and the prior few months this hourly wage measure had been pretty stagnant, so some of what we saw in November was just catch up to the not-so-impressive wage growth trend that has persisted for years now (I thought some of the reporting got too close to pronouncing our wage problems–which have persisted for decades–behind us based on one month of noisy data).

The much better way to get at that underlying wage growth trend is to look at the year-over-year percent changes. Since 2010, average wage growth has averaged 2% with a standard deviation of 0.2%, meaning that trend has been pretty steady. In fact, when you measure the November wage gain compared to November 2013, the increase is…wait for it…2.1%, right on trend.

That’s just a bit better than the rate of inflation, meaning worker buying power has been pretty stagnant in real terms. To the extent folks are getting ahead, it’s been coming from more work at flat real hourly wages.

Given the obvious and even accelerating improvement in the US economy, why is it taking so long for overall growth to reach paychecks and what does this imply for policy makers? The three most important (and closely related) factors are likely historically weak bargaining power of most workers, the long-term absence of full employment, and the earnings inequality firmly embedded in our economy.

I’ve made all these points before in lots of different places, but here are the bullets:

–Given the fact of the Fed’s 2% inflation target and productivity growth of something like 1.5%, nominal wage growth of 3.5% is not inflationary, so there’s at least that much room to grow.

–One outcome of higher inequality has been more of the nation’s income going into business profits and less into workers’ paychecks. So compensation as a share of national income, a variable that was pretty stable for decades, is down five percentage points since 2000. That’s the equivalent of $740 billion today, or about $5,000 per worker, shifted from the compensation slice of the national income pie to the profit share.

My point here is that this creates more room for non-inflationary wage growth, through a shift back in at least some of this income from profits to paychecks.

–Much like the mechanisms that translate diminished labor market slack into faster wage growth, the ones that channel wage growth into price growth are also operating below their usual levels (technically, both Phillips wage and price curves are pretty flat right now).

Finally, here’s something new. Using a comprehensive measure of labor market slack (created by economist Andy Levin), and making the assumption that it continues to close at about the rate it’s been falling over the past year, I constructed a simple model of compensation growth that regressed an index of yearly wage growth (a combination of five different series on wages, weekly earnings, and total comp) on labor market slack and lagged values of the wage growth series.

The assumptions about the path of slack may be optimistic, but they follow the recent trend: involuntary part-time work and labor force participation fully normalize, and we hit full employment as measured by CBO—i.e., we close both under- and unemployment gaps—by late 2017 and stay there after that. Of course, this embeds the assumption that the recovery proceeds apace.

At any rate, you see the results below. The predictions from the simple model at least loosely track the actual year-over-year wage growth series, particularly most recently, which matters most for the forecast. And the punchline is: the forecast has wage growth hitting 3.5% by the end of 2018.


Source: my analysis; see text.

One key implication of this finding is that the Federal Reserve must proceed with care and heavily weight the asymmetric risk profile they face: from the perspective of millions of working households, the downsides of acting too soon are worse than those of holding off. Second, while the model is simple and could easily be improved upon, I suspect its central message will hold: if we want to see wage growth get back to the point where the benefits of grow begin to be more broadly shared, it will take not just getting to full employment, but staying there.

Finally, remember, this simulation is largely driven by average wage and compensation measures. For the expansion to reach middle and low-wage workers it will take even more persistent banishment of slack.

So sure, I’m as happy to see nine more cents as the next guy. But I assure you, one month doesn’t change much. It may well still be years before we see the recovery show up the way it should in worker pay.