May Jobs Report, first impressions: Another solid report, outside of manufacturing (and that’s due to the strong $)

June 5th, 2015 at 9:23 am

Payrolls were up 280,000 last month in a better-than-expected jobs report, with employers adding jobs across almost all of the service industries and government. Positive revisions for April and May added another 32,000 to the payroll count. Analysts had been expecting around 225K jobs, so put May’s initial print in the “upside surprise” column.

The jobless rate ticked up slightly from 5.4% to 5.5% but for the right reason: more people joining the labor force (in fact, the increase—from 0.0544 to 0.0551—was statistically insignificant). An important metric here is the labor force participation rate, which ticked up to 62.9%. While that’s a tick in the right direction, the LFPR has been hovering closely around 63% since late 2013, about three percentage points below its pre-recession peak.

Given today’s working-age population, three percentage points is over seven million potential workers. Many—most, by some measures—of those “missing workers” are aging boomers leaving the labor force for retirement. But as many others—I’d guess a third to a half—are potential workers who could get pulled back into the job market as it tightens up.

As usual, in order to get a better feel for the underlying trend in net job creation, the smoother chart below looks at monthly averages over 3, 6, and 12 month intervals. Over the past three months, payrolls are up about 200,000 per month, a slight deceleration over the longer term trends.


Source: BLS, my calculations

I suspect this slowdown reflect some underlying headwinds in the broader economy. One salient connection here is the stronger US dollar, up 18% over the past year against the currencies of our trading partners. By making our exports relatively more expensive, the stronger dollar makes it tougher for our manufacturers to compete in foreign markets.

The second figure plots the monthly change in factory jobs against the rising dollar. Last year, we added about 18K a month in the sector, on average. This year, we’re bouncing along the bottom—the average gain over the past three months is only 5K.

Dollar and Factory Jobs

Source: BLS, Federal Reserve

Average hourly wages were up 2.3% over the past year, a touch faster than in past months. However, measured on an annualized, quarterly basis, hourly wages are up 2.9%, a notable acceleration. This metric, it should be underscored, is noisier and thus less reliable than the year-over-year measure, so we’ll have to see if a true acceleration is really underway. If so, that would be long-awaited good news for the majority of working-age households who depend on paychecks.

All told, May delivered another in a series of solid jobs reports, suggesting that the US labor market continues to expand and providing another data point that discounts the 0.7% drop in first quarter GDP.

While wages may be finally responding a bit, from the perspective of the Fed and their nascent tightening campaign, there are a few things to consider. First, there’s still slack in the job market, as noted in the LFPR discussion above, not to mention the still elevated number of involuntary part-timers (6.7 million in May). Second, the strong dollar is both anti-inflationary, and, as noted, a drag on growth in a key sector (and remember that a rate hike would further boost the dollar’s value). Third, inflation remains extremely quiescent. Fourth, based on the Fed’s 2% inflation target and the underlying productivity growth rate of around 1.5%, hourly pay could rise by 3.5% and still be non-inflationary (if you consider the need to rebalance the compensation share of national income, as I do, wages could even grow faster than that for awhile).

What I see in these numbers is a job market that’s maybe, sorta, kinda starting to reach working people…six years into the recovery! So my message to the Fed: love it and leave it alone!

Wall St, Injured Dogs, and the Election

June 2nd, 2015 at 9:11 am

When, during a public address, I’m asked about the 2009 bank bailouts, I sometimes tell the analogy of the injured dog. Those of us in the first Obama administration were driving along, and saw an injured Doberman on the side of the road. We picked it up and nursed it back to health…and once it was back to full strength, it attacked us.

The analogy is more artful than accurate. The economic system must have credit flows and given the failure of this aspect of the market, it wasn’t a question as to whether or not we should try to heal the injured dog (of course, how we went about it has been controversial, but that’s a different argument; my take is here). And there is one narrative that says the dog only attacked us after we attacked it, i.e., after President Obama started serving up some heated rhetoric to the denizens of the finance sector.

This all came to mind during a CNBC spot yesterday when I was asked to comment on part of Gov. Martin O’Malley’s speech from last weekend wherein he launched his bid for the White House. The former mayor of Baltimore and governor of Maryland tore into Wall St., riffing off of a comment by Goldman Sachs CEO Lloyd Blankfein:

Decrying big banks as having been behind the financial crisis of 2008, O’Malley singled out Goldman Sachs for particular criticism. He said Goldman Sachs CEO Lloyd Blankfein recently told his employees that “he’d be just fine” with either Republican Jeb Bush or Hillary Clinton as president after the November 2016 election.

“Well, I’ve got news for the bullies of Wall Street,” O’Malley said. “The presidency is not a crown to be passed back and forth by you between two royal families.”

There’s a lot in that quote, a mix of anger at the top 1% and financial markets, heavily seasoned with a reminder that one reason for America in the first place was to shed the yoke of royal succession, a point well made earlier by no less than Jeb Bush’s mom (as she put it, surely there are other families beyond “Kennedys, Clintons, Bushes”).

Obviously, the CNBC panel didn’t like the O’Malley launch one bit, but who’d expect otherwise? Bringing such rhetoric to a financial markets setting is like bringing PB&J sandwiches to the monthly lunch of the severely-allergic-to-peanuts society.

More to the point, is this a viable strategy for someone who wants to be president (putting aside the polling data that show Ms. Clinton far ahead of the pack, by which I mean Bernie and Marty)? It costs a lot of money to run for president and a lot of that money has ties to financial markets. While attacks like those the governor meted out reach the base, how does a candidate thread that needle? Again, this may not turn into a serious issue for those who don’t ultimately pitch a national campaign in the general, but it may well be for others, including Sec’y Clinton.

I’ll leave the political strategizing to those who get paid to do that. But just for fun, here’s how I’d play this if I were a candidate.

I’m not interested in demonizing anyone, or more precisely, any sector of the economy (so I probably won’t get very far). Because that’s what “Wall St.” is—it’s another sector, just like there’s a household sector, retail sector, government sector, and so on. It currently is an inflated sector, and it’s claiming more wealth than it should, often in the form of “rents.” Even more damagingly, it is doing so while too often engaging in counterproductive speculation and bubble-generation.

The problem thus is not that there are greedy individuals in that sector—greed abounds in every sector (I mean, maybe you’d find fewer greedy social workers than hedge fund managers, but you know what I mean). The problem is that financial regulatory policy goosed by bad economics—theories of “rational expectations” which conclude that traders accurately price risk and that banks will self-regulate—has devolved in such a way as to amp up the greed beyond that of Gordon Gekko’s wildest dreams.

So the policy target asks: what will it take to get this sector functioning productively again, by which I mean allocating excess savings (of which there are a lot sloshing about the globe right now) to its most productive uses? That means much less buyback activity, less noise (high-frequency) trading, less dominance by the giant banks, less volatility, and less rent-seeking.

Interestingly, while you haven’t heard enough about this, both Sen. Sanders and Gov. O’Malley have policy ideas in this space. Sanders is pushing a financial transaction tax (modeled after this plan by Rep. Ellison, I’m told), and O’Malley wants to bring back some version of Glass-Steagall, the law that separated commercial and investment banking. An FTT would both dampen noise trading and raise significant revenue; I’m less certain how a renewed Glass-Steagall would work—to some extent, we’re trying to accomplish similar goals with a Volcker rule—but it would be likely to diminish the size and interconnectedness of the system (the latter, more than size, is how systemic risk gets amplified).

Again, I’m out of my lane when it comes to campaign strategy, but as an economist with an appreciation for the tradition role of financial markets, such ideas, along with the implementation of Dodd-Frank, particularly the four pillars I stress here, could be sold as ways to get markets to work better, to get the dog to be a nice house pet that doesn’t attack his owners but plays nice with them.

And with that, and speaking of dogs, you’ll agree with what VP Biden used to tell me when I waxed about such things: “you couldn’t get elected dog catcher.” Which I will take as a compliment.

Why is it so hard to regulate the banks? It’s less the complexity than the political power.

May 31st, 2015 at 10:47 am

Give a read to this incisive analysis by Adam Davidson on the challenge of regulating banks. It’s deceptively hard to write about this world as clearly as Davidson does here (I tried to do so in Chapter 7 of The Reconnection Agenda; not sure how well I succeeded). I think his conclusion is unduly pessimistic, or, more precisely, pessimistic for the wrong reason. The problem in regulating banks is less complexity–though that’s a real challenge–and more their political power.

(Also, as I stress below, in passing he gives us a great working definition of the concept of economic “rents,” one that confuses many readers.)

Davidson worries that we can’t effectively regulate the banking sector because if we try to do so with a light touch, they’ll easily evade the regulations. But if we then try to write complex regulations that get into nuanced corners of modern finance, the resulting intricacy will render the rules unenforceable. For example, under Dodd-Frank’s Volcker rule, we’re asking regulators to figure out if a deal made by an insured bank is legitimate “market making” on behalf of a client (e.g., finding buyers for a stock that the market isn’t moving on its own), and thus exempt from Volcker, or a risky bet that exposes taxpayers.

He points out that banks have the resources—deep pockets, bevies of lawyers—to tie up the regulatory process ad infinitum arguing cases like that. Moreover, they’re quick to point out that imposing such rules gums up the credit system and thus costs us growth and jobs. And they’ve got powerful politicians on their payrolls, as it were, to back them up.

That’s all true, of course, but my argument in The RA is that if we can get the four corners of Dodd-Frank firmly in place, we’ve got a good chance of busting, or at least dampening, the “shampoo cycles”—bubble, bust, repeat—that have repeatedly laid waste to economic recoveries both here and abroad. The idea behind the structure I advocate is that if you get some of the big stuff right, the parts you get wrong won’t create as much external damage.

Briefly, the four corners are (see chap 7 for details):

–When a bank gets kicked in its assets, it needs an adequate capital buffer. Significantly raising the amount of equity that banks must hold against losses will diminish their profitability but it is by far the first line of defense against the shampoo cycle.

–The Consumer Financial Protection Bureau must vigilantly protect against shoddy underwriting. If underpriced risk is the evil genius of financial bubbles, than bad underwriting is the work of her minions. As I stress in the book, this is not that complex an endeavor, and the CFPB is actually off to a good start, despite outside pressures pushing against their efforts.

–A Federal Reserve that trolls the waters for systemic risk. Former Fed chairs argued that the Fed couldn’t really spot bubbles and even if they could, they didn’t have the tools to do much about them without hurting growth. Chair Yellen disagrees, and Dodd-Frank creates a mechanism for the Fed to oversee this process. Importantly, she distinguishes between “macro-prudential” policies and macro-management ones.

A strong Volker rule. As noted, this one is tricky, and the “market maker” exemption has already had to be tightened a bit. I’m less confident about this corner of the architecture but if the other three are in place it may be less consequential.

I’m not saying any of these are simple—no one knows the optimal capital buffer ratio and spotting systemic risk is not obvious (though neither is it so obscure, as Dean Baker stresses re the housing bubble). But where I depart from Davidson is that the challenge is not substantive details. It’s politics.

Take capital buffers. Erring on the side of caution would suggest taking what the experts recommend—something around 10-15% of assets as a buffer zone—and adding another 5%. But remember that part above about the finance sector’s influence on politics?

That, not complexity, is what drives my pessimism in this space. Same with spotting and deflating bubbles before they explode and prohibiting glaringly obvious forms of underwriting that under-prices risk (“no-doc loans”; “exploding ARMs”; do those sound like prudent products to you?). None of this is beyond the scope of oversight; none is so complex that it couldn’t be accomplished.

The problem is less creating the switches; it’s blocking political power from paying people to fall asleep at them.


Here at OTE, I often point to the market failure of rent-seeking, a serious problem in advanced economies that’s closely associated with high levels of economic inequality and particularly pernicious in finance. It’s not an intuitive or particularly well-named concept, and people often ask me what it really means. I thought Davidson’s description was clear and resonant:

Generally speaking, businesses earn profits in one of two basic ways. The first is by providing goods and services more productively than others and selling them at a price people are willing to pay. The second is by seeking rents. “Rent,” in the economic sense, refers broadly to any excess benefits that people and businesses receive simply because they have power over something that others need. Patents are a form of rent, as are cable ­TV monopolies.

For economists, rent­-seeking is everywhere, and is a common way that economies go awry. Crudely speaking, productivity enhancement is good, because it makes society richer over all. Equally crudely, rent­-seeking is bad, because it makes the people who are already rich even richer. Rent-­seeking tends to be a force against innovation and for stagnancy, in large part because its focus is on the past — on maintaining power and influence gained long ago, often at the expense of innovation. Businesses built around rent­-seeking don’t try to increase the size of the pie; they just want to make sure they get a bigger slice. (If a company doesn’t seem to care about your opinion of it as a customer, there’s a good chance that it is seeking rents.)

I’m not sure about that last part. It’s certainly true at the company level. The fact that Comcast can tell you that they’ll come fix your internet connection sometime between 10 and 5 suggest a level of monopolistic market power that reeks of rent-seeking. But there’s another reason we all have lots of customer interactions where it seems like the firm doesn’t care about our business: the principal-agent problem. It’s not rents, but it’s another form of market failure.