The elusive u*

December 19th, 2016 at 10:51 am

‘u*’ is econo-shorthand for the so-called “natural rate” of unemployment, or the lowest unemployment rate consistent with stable inflation. The problem is, as I explore over at WaPo today, it’s an unobserved variable that is increasingly hard to pin down. That makes it an…um…imperfect yardstick for Fed policy.

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6 comments in reply to "The elusive u*"

  1. Nobody says:

    A very rough idea for trade agreements follows.

    It shouldn’t be very hard to design a system for developing new trade partners if that is really the goal of the US trade agreements. Unfortunately, most existing trade deals with poor nations rely upon a dual interest, that is a profit motive by a US corporation combined with slack labor and/or investment demand in the target country. This model bypasses American labor and investment markets and exploits foreign workers in many cases.

    A new agency is created. I’ll call it the Trade Development Agency (TDA). It would work something like this:

    TDA provides econ data to development partners upon request, to governments, domestic corporations and entrepreneurs.
    The TDA has no financial connection to US corporations but may consult with such corporations to provide advice to target country corporations and entrepreneurs, but it must also provide all of its raw data to the target country. It does not provide any kind of capital beyond basic econ information and financial loans.
    Entrepreneurs and corporations in development partner countries submit business plans to TDA. If plan is approved, a corporation is formed or a new agreement with an existing corporation is created and the TDA provides a loan from the US treasury. Environmental conditions are attached, and a low-standard labor rights agreement is put in place, including a fairly low minimum wage (unrelated to US wages) and a 40-hour work week with overtime pay.
    TDA provides information to facilitate access to US goods and services using loan funds.
    If corporation fails, TDA is the creditor and takes possession of goods except plant and land. Plant and land may be forfeited to another corporation in target country and becomes a debt of that corporation to the TDA. The loan rate for new loans is determined by a base rate plus a rate based upon the total amount of outstanding plant/land debt by the partner country, which encourages turning over plant and land for use by a different TDA corporation.
    If a TDA corporation is successful, the loan is eventually paid back and that corporation becomes a potential import/export partner with US and/or other nations.
    No tariffs are applied to any goods to or from the TDA corporation with the US. If the corporation is providing a service imported to the US, the labor for that service is subject to a much higher minimum wage close to the US average US wage for that labor (2/3 or so). A loan is revoked in cases of copyright or patent infringement.

    One big difference between this and the world bank is that the debtor is a corporation owned by citizens of the target country rather than the government.

    If a US corporation wants to invest in foreign plant and/or labor, a much higher labor standard is required and tariffs may apply depending upon the circumstances. At least 3/4 of US pay for similar work in the US for all workers. If the target country’s government interferes, they risk losing support from this agency, but nothing other than a basic level of environmental protection and a high level of labor rights is part of the agreement.

    This is a ground-up approach. It would over time develop popular resistance to governmental interference and help to foster democracy rather than hinder it as many US trade deals currently do.

    This is a non-imperialistic system. It serves to aid the economy of foreign countries by becoming trading partners with the US but the risk of investment is carried jointly between individual foreign corporations and the US treasury rather than the government of target countries.

    • Smith says:

      You might want to save comments on trade until the blog is addressing that topic, which occur fairly often. Otherwise readers interested in that subject (foreign trade) could easily miss your entry or be confused due to it’s lacking context.
      As to the substance of your suggestion, I can’t say I see much merit in the idea. The government needs less bureaucracy, not more, and coupled with a planned economy regime where investment incentives are not restricted to special policies (like promoting clean sources of energy) seems like an invitation to waste and corruption.

    • Smith says:

      Sorry, I’d add the problem you address, of foreign workers lacking labor rights, is a serious concern. I’d advocate a movement to sanction, boycott, and divest from those countries. Peaceful disengagement may be the preferable solution. You can’t tell Chinese leaders or Arab oil sheiks how to run their countries. Instead every individual consumer can decide not to buy their products.

    • Nobody says:

      Smithy, I’m not following blogs anymore, so there’s nothing to wait for. This is my last input forever.

      Take it or leave it. The point is that if we want a trade agreement to accomplish what idealist jerks like Delong want, this is how it can be done.

      The other point is that this isn’t the goal of anyone in this country, so this become rhetorical. This is why I’ll never listen to Liberal economists again. Never. We’re done listening to this lot.

      Good bye.

  2. Robert Salzberg says:

    We know that unemployment hit 4% in the late 90s without accelerating inflation. The Fed rationalized that as due to an upward blip in productivity. Since then Labor power has been steadily eroded by market forces and government policy, so u must be lower than it was in the late 90s. ego 4% or lower.

    Since we have had almost a decade of below target inflation, years of slightly above target inflation would not only be doable, but consistent with the dual mandate of the Fed. Unfortunately, inflation fears have much stronger weight at the Fed than unemployment fears so the dual mandate hasn’t really been followed since Greenspan kept the Fed from raising rates in the late 90s.

    As Krugman has noted, if the Fed waited till it saw the whites of inflation’s eyes, (consistent above target inflation with some acceleration), then that data point would bring clarity to u but since the Fed is likely to get more inflation obsessed rather than less, empirical evidence from that data point ain’t happening anytime soon.

    The only reasonable conclusion is that the Fed’s claims of being evidence based should be questioned and workers won’t reap the proportional benefits of the past few decades of their increased productivity.

  3. Smith says:

    Here’s a chart of U6 less U3, implying unemployment is elevated1.5% above full, meaning an additional 2 million workers. That means is that if job creation continues to average a robust 180,000 per month, it would still take two years to deplete the 2 million to reach full employment.
    Maybe that’s why desperate voters voted for change, even with a 4.5% unemployment rate. I mean to say the U6 and U6 U3 gap may more accurately reflect the economy. People shouting low Labor Force Participation Rate also saying the same thing.

    2% or less inflation, average unemployment less than 5%, in non recessionary year, only in 1998, 1965, 1955, 1954 ((uses cpi or pce, including energy and food, not just core), hence 2% target too low and unsupported.

    Even if we were at full employment, raising interests rates is not the way to control prices. Control prices by controlling prices. Enforce antitrust, regulatory mechanisms over natural monopolies, encourage competition, price transparency, use government purchasing power to suppress prices, tax away profits to remove management incentives to deny workers real pay increases, back labor so management sees the futility of raising prices to counter wage increases sharing profits.

    Workers can’t regain a fair share of the economy if interest hikes are used to control inflation. The same structure that enables the top 10 to 2% to take an additional 10% of national income and the top 1% to take another 10% of national income is the one that creates inflation in response to wage hikes. The top 10% gain income share due to control over prices. They can raise prices beyond any wage increase. They can and do create record corporate profits even in years of elevated unemployment.

    The extra 20% in national income means they are ripping you off of $3 trillion dollars every year.