Month: July 2014

Mike Konczal: Dodd-Frank Reforms Are Finally Paying Off: “This past year has seen significant advances…

…with at least four major wins. And crucially, the battles that still remain are coming clearly into focus. First, banks are now required by regulators to hold higher levels of capital…. Last fall, the Commodity Futures Trading Commission oversaw the launch of the exchanges for trading derivatives…. Part of the goal of this reform was to enforce price transparency…. Another win was the ruling on the Volcker Rule…. There will be a long implementation process as regulators make calls about what falls inside and outside of the rule, but the fact that it survived this process is important…. The FDIC this past year started to put serious meat on the process of how it would create a death panel for a failed large financial firm…. Conservatives should rejoice. I consistently hear about how Dodd-Frank is a ‘corporatist’ bill that protects firms by labeling them systemically important. And if being seen as systemically important and subject to Dodd-Frank rules was an implicit subsidy—-the ‘biggest kiss’, as Mitt Romney put it during the 2012 debates—then firms should be running toward the designation. The opposite of that happened in 2013….

The Tea Party narrative [now] officially absolv[es]… Wall Street from any and all dubious activity or need for reform…. Jeb Hensarling… mocks the idea that ‘an alchemy of Wall Street greed, outsized risk and massive Washington de-regulation almost blew up the planet’…. In recent years Republicans would at least reference the idea that some reforms were needed, even if they were minimal. That is no longer in play. [Peter] Suderman and other critics are wrong in arguing that there’s no logic behind Dodd-Frank. Dodd-Frank was to port the regulatory system of banks that had kept the economy working during the Golden mid-century period over to the capital markets that have exploded in the past 30 years. This process is slowly working…

James Hamilton: The Changing Face of World Oil Markets: “1. World oil demand is now driven by the emerging economies…

…2. Growth in production since 2005 has come from lower-quality hydrocarbons…. 3. Stagnating world production of crude oil meant significantly higher prices…. 4. Geopolitical disturbances held back growth in oil production…. 5. Geological limitations are another reason that world oil production stagnated…. More recently, the decline in U.S. production has turned around dramatically with the exploitation of tight oil formations…. Many analysts are optimistic that the trend of growing production from this resource will continue…. But even if this forecast proves accurate, it is abundantly clear that it would not return real oil prices to their values of a decade ago…. Rather than a force pushing oil prices back to historical lows, it seems more accurate to view the emerging tight-oil plays as a factor that can mitigate for a while what would otherwise be a tendency for prices to continue to rise in the face of growing demand from emerging economies and stagnant supplies from conventional sources…

It now looks like that, instead of the 3.3% real GDP growth 2014 that we expected at the end of last fall, we are going to have half that: a 1.7% real GDP growth 2014. But the having of growth is coming 100% out of productivity: all labor market indicators are on the track that was expected late last fall.

Trying to wrap my head around this turning out to be really, really difficult.

The undershoot relative to previous expectations of first-quarter real GDP growth by 6%-points, followed by no bounce-back catch-up at all, would seem to be bad news for inflation, for profit margins and hence stock valuations, and for long-run potential GDP. But the stock market does not seem to care. And inflation expectations as measured by the TIPS-Treasuries breakeven do not seem to care.

Is it that people trading in the breakeven think that the Federal Reserve will hit the economy on the head if inflation starts to rise, and so think that the stock market in failing to react and fall is irrational? Is it that people trading in the stock market think that the effect of lower long-run potential and lower profit margins on real stock values are offset by higher inflation and hence have no impact on nominal stock market values, and that the breakeven market by failing to markup future inflation is irrational? If you think the markets had it right in January, then right now either the stock market is too high or the TIPS-Treasuries interest-rate spread is too low. People ought to have been shorting the stock market, shorting treasuries, and hedging by buying TIPS on a large scale.

The stock market should have fallen, TIPS should have risen (in price), or Treasuries should have fallen (in price) as it became clear first set the first quarter of 2014 would be so bad and then that there would be no bounce back in real GDP.

I find the failure of any of these three things to happen disturbing. It suggests a lack of faith by Ms Market in the national income identities…

Sarah Kliff: Halbig says Congress meant to limit subsidies. Congress disagrees: “Did Congress intend for Obamacare’s federal-run exchanges…

…to distribute tax credits to millions of enrollees? Two circuit courts have spent a combined 116 pages opining on the issue…. For staffers who helped write Obamacare though, there isn’t really a debate at all. The answer, for them, is crystal clear: they definitely meant to have subsidies available in all 50 states, regardless on who ran the marketplace. ‘It was always intended that the federal fallback exchange would do everything that the statute told the states to do, which includes delivering the subsidies’,”says Chris Condeluci, who worked as tax and benefits counsel for the Senate Finance Committee Republicans during the Affordable Care Act debate…. ‘The evidence of Congressional intent here is overwhelming’, John McDonough, who worked on the Health, Education, Labor and Pension committee during the health reform debate, wrote in an email. ‘There is not a scintilla of evidence that the Democratic lawmakers who designed the law intended to deny subsidies to any state, regardless of exchange status’…

Should-Reads:

1. Nicholas Bagley: The government may have lost in D.C., but it just won in the Fourth Circuit: “Just hours after the D.C. Circuit invalidated an IRS rule extending tax credits to federally established exchanges, the Fourth Circuit issued an opinion upholding the very same rule…. In the Fourth Circuit’s view, the relevant ACA language—the language that pins the calculation of tax credits to the cost of a plan purchased on an exchange that was ‘established by the State under 1311’–is ‘ambiguous and subject to multiple interpretations’…. The context… cuts against the challengers’ interpretation…. In the court’s view, ‘it makes sense to read § 1321(c)’s directive that HHS establish “such Exchange” to mean that the federal government acts on behalf of the state when it establishes its own Exchange’…. At the end of the day, the court said that it could not definitively ‘discern whether Congress intended one way or another to make the tax credits available on HHS-facilitated exchanges’. As such, the court reasoned, under basic principles of Chevron deference, the IRS’s interpretation of the ambiguous statute was owed deference. That’s especially so, the court reasoned, since ‘the plaintiffs do not dispute that the premium tax credits are an essential component of the Act’s viability’…”

2. Mary Daly and Bart Hobijn: Downward Nominal Wage Rigidities Bend the Phillips Curve: “Both the slope and curvature of the Phillips curve depend on the level of inflation and the extent of downward nominal wage rigidities…. Downward nominal wage rigidities likely have played a role in shaping the dynamics of unemployment and wage growth during the last three recessions and subsequent recoveries.”

3. Brianna Cardiff-Hicks et al.: Do Large Modern Retailers Pay Premium Wages?: “With malls, franchise strips and big-box retailers increasingly dotting the landscape, there is concern that middle-class jobs in manufacturing in the U.S. are being replaced by minimum wage jobs in retail. Retail jobs have spread, while manufacturing jobs have shrunk in number. In this paper, we characterize the wages that have accompanied the growth in retail. We show that wage rates in the retail sector rise markedly with firm size and with establishment size. These increases are halved when we control for worker fixed effects, suggesting that there is sorting of better workers into larger firms. Also, higher ability workers get promoted to the position of manager, which is associated with higher pay. We conclude that the growth in modern retail, characterized by larger chains of larger establishments with more levels of hierarchy, is raising wage rates relative to traditional mom-and-pop retail stores…”

4. Josh Barro: Not Everyone Is Addicted to Inflation: “The fight over monetary policy is rather similar to the fight over Common Core curriculum standards. These reforms, born out of a years-long bipartisan consensus process and supported by policy wonks on both sides of the aisle, have become the latest object of conservative opposition now that President Obama is taking credit for them. The obvious move for a Republican politician wishing to please the conservative base is to oppose Common Core…. Bobby Jindal… who listed Common Core as a plank of his education reform agenda in 2012, is now an ardent foe. Yet withdrawing from Common Core has proved surprisingly hard, even in places where Republicans control all branches of government…. Look at Wisconsin. Gov. Scott Walker has decided he wants out of Common Core. But Common Core opponents have run into a roadblock in the form of the Republican chairmen…. It’s one thing to oppose Common Core when your career is not steeped in education policy; it’s another thing to throw away years of work toward a policy you’ve long thought was good. On inflation, as on curriculum, the conservatives who matter most have been generally able to resist the demands of their base.”

5. Ryan Sweet and Adam Ozimek: The U.S. Labor Market’s Chicken-Egg Dilemma: “Policymakers can approach the situation in several ways. One would be to assume that labor force participation will not respond to wage growth… and unless the Fed raises rates soon inflation will accelerate. Second, they can assume the labor force will respond… and simply wait for that to happen, holding to the current course of near-zero interest rates…. A third approach would focus on productivity growth, which could remain suppressed by underinvestment over the next couple of years. This would hurt wages and thus keep many out of the labor force longer. Since higher interest rates would likely undermine investment, the Fed should be patient. One advantage of the wait-and-see approach is that will at least allow economists and policymakers to see which story is correct…. In contrast, acting now by raising rates will leave the answer unknown to the structural-versus-cyclical question…”

Should Be Aware of:

• Fabius Maximus: Tom Clancy, manufacturer of myths that kept us happy & ignorant
• Seth Borenstein: World Breaks Monthly Heat Record 2 Times in a Row

And:

1. Charles Stross: App Store Annoyances: “For most mobile apps I use iOS…. Walled gardens may be prisons, but the bigger they are the less you notice the walls: also… the best iOS apps are pretty, and if I’m going to be interacting with a device from dawn ’til dusk I do not want it to offend my eyes every time I look at it…. But now for my main gripe…. The App Store has usability flaws that are becoming crippling…. The iTunes app store offers virtually zero library management and curation tools…. My app library is slowly sinking under a pile of… Abandonware…. Take-overware…. Forced upgrade-ware…. Get-out-of-my-face-ware…. Excessively-updated-ware…. Over to you folks. What do you acutely feel the lack of in these curated app collections?”

2. Guido Matias Cortes et al.: The Micro and Macro of Disappearing Routine Jobs: A Flows Approach: “The U.S. labor market has become increasingly polarized since the 1980s, with the share of employment in middle-wage occupations shrinking over time. This job polarization process has been associated with the disappearance of per capita employment in occupations focused on routine tasks. We use matched individual-level data from the CPS to study labor market flows into and out of routine occupations and determine how this disappearance has played out at the “micro” and “macro” levels. At the macro level, we determine which changes in transition rates account for the disappearance of routine employment since the 1980s. We find that changes in three transition rate categories are of primary importance: (i) that from unemployment to employment in routine occupations, (ii) that from labor force non-participation to routine employment, and (iii) that from routine employment to non-participation. At the micro level, we study how these transition rates have changed since job polarization, and the extent to which these changes are accounted for by changes in demographic composition or changes in the behavior of individuals with particular demographic characteristics. We find that the preponderance of changes is due to the propensity of individuals to make such transitions, and relatively little due to demographics. Moreover, we find that changes in the transition propensities of the young are of primary importance in accounting for the fall in routine employment…”

Already-Noted Must-Reads:

1. Robert Waldmann: Anchored Perceived Inflation, or How Fox News Helped Obama: “A huge recession, sluggish recovery and gigantic persistent output gap…. Core PCE inflation… fell from sticking close to 2% to fluctuating in the range of 1% to 2%. The standard lowbrow backward-looking forecasting equation… completely failed…. There are two candidate explanations for this surprising behavior of inflation. One is that there is strong downward nominal rigidity…. Another quite different explanation is that expected future inflation has a very important role in wage and price setting and that inflation expectations are anchored…. The median respondent in the Michigan University/IPSOS Reuters survey persistently expected future inflation of almost exactly 3% in almost all surveys since mid 2009… in period after period a majority of survey participants have been surprised by actual inflation lower than their forecast. This is a new phenomenon…. [Perhaps,] like inflation expectations, inflation perceptions have delinked from reality…. I give the credit to Fox news…. People… [who] rely on Fox News… are out of touch with reality–their expectations and perceptions are what Roger Ailes wants them to be…. Fox News convinces people that inflation has been and will be high…. [Thus] actual inflation is low but positive. It fits the facts which I reported. You decide.”

2. Scott Lemieux: The Teleological Fallacy: “A good point about… Thomas Frank… [by] fearless navigator of our new comment system JeremyW…. ‘[W]hat strikes me… is that… rather than a system where actual progressive change is difficult to win support for and subject to several veto points, he seems to think we have one where radical changes are constantly on the cusp of occurring and the whole neoliberal enterprise must be held together by a dastardly sellout president who can subvert the will of the people.’

   “The most crucial underlying premise of Frank’s argument is that the American political economy was on the verge of a radical transformation in 2008, and this was prevented from happening because Barack Obama saved neoliberalism’s bacon. This is a rather problematic for his argument given its transparent falsity. It’s simply not true that most Americans drew the same conclusions from the financial meltdown that Frank did, and even they did the elites who control or strongly influence many key veto points in the American system certainly didn’t…. Similar premises are also generally seen on attacks on the ACA from the left. To argue that the ACA isn’t better than the status quo ante from a progressive standpoint would be ridiculous, so the strategy is to change the baseline and compare the ACA to another alternative. In policy terms, this isn’t challenging, since you could throw a dart and Western Europe and get a health care system preferable to the ACA. But it’s also completely irrelevant…

   “Left ACA critics smart enough not to argue that Barack Obama could have forced the Senate to pass single payer through such brilliant strategery as promising senators that he would campaign for them in states where he’s enormously unpopular turn to assertions that the American insurance industry was on the verge of collapse before Barack Obama saved it… sheer lunacy…. To people who confuse American politics with the Oxford debating society, the success of Medicare should make Medicare for all highly popular. In reality, the overwhelmingly conservative white beneficiaries of Medicare are much more likely to take the lesson of ‘I’ve got mine and to hell with you’…. What’s going on with Republican statehouses and the Medicaid expansion should draw a line under that. The typical Republican state politician is willing to turn down huge pots of free money from the federal government to validate the principle that if the working poor get sick it should be left to the Great Market in the Sky to sort things out. To believe in this context that the collapse of the private American health insurance industry was inevitable absent the ACA is to enter a land of fantasia.”

3. Nicholas Bagley: ObamaCare and Halbig: What Does This Morning’s Decision Mean?: “In a major setback for the Affordable Care Act the D.C. Circuit just released a fractured opinion invalidating the IRS’s rule extending tax credits to federally facilitated exchanges…. About two-thirds of the states… declined to establish exchanges. In those states, the federal government stepped in and established the exchanges on the states’ behalf. In today’s opinion, the D.C. Circuit held that a federally facilitated exchange isn’t “established by the State under 1311.” As a result, the IRS can’t offer tax credits to those who purchase plans on such exchanges… the average estimated tax credit in 2014 is $4,700…”

4. Bob Laszewski: Halbig Decision Puts Obamacare Back on the Front Burner and Will Give Republicans a Huge Political Headache: “In the DC Court ruling one of the majority judges said: ‘The fact is that the legislative record provides little indication one way or the other of the Congressional intent, but the statutory text does. Section 36B plainly makes subsidies only available only on Exchanges established by states.’… This issue never came up…. About everyone also believed some states would not establish their own exchanges. Smaller states, for example, might opt out because they just didn’t have the scale needed to make the program work. I don’t recall a single member of Congress, Republican or Democrat, who believed that if this happened those states would lose their subsidies. At worst, this is clearly a drafting error that in the old days would have been quickly fixed in a technical corrections bill. But these aren’t the old days…. No one risks losing their subsidies until this issue is finally decided….

   “This would put Republicans in the federal exchange states in a heck of a political bind…. The political consequences for all of these people losing their subsidies and their coverage would immediately shift to the Republicans who control these state governments. Proponents of Halbig argue that the fault for people losing their coverage would be on the Obama administration because they have operated Obamacare in an illegal manner…. Millions of people would have their insurance yanked out from under them in what people will see as part of the ongoing partisan political wars being waged by people out of touch with life in the rest of the country. The fundamental problem the Halbig proponents have here is that common sense, whatever a court rules, tells people that denying subsidies in half the states was never the intent of the Congress–that this is all about political point scoring and stopping a law Republicans hate…. Obamacare’s most partisan and ideologically opposed enemies scored a big victory today…. But below the surface lots of sensible Republicans must be sweating bullets.”

Bob Laszewski: Halbig Decision Puts Obamacare Back on the Front Burner and Will Give Republicans a Huge Political Headache: “In the DC Court ruling one of the majority judges said…

…’The fact is that the legislative record provides little indication one way or the other of the Congressional intent, but the statutory text does. Section 36B plainly makes subsidies only available only on Exchanges established by states.’… This issue never came up…. About everyone also believed some states would not establish their own exchanges. Smaller states, for example, might opt out because they just didn’t have the scale needed to make the program work. I don’t recall a single member of Congress, Republican or Democrat, who believed that if this happened those states would lose their subsidies. At worst, this is clearly a drafting error that in the old days would have been quickly fixed in a technical corrections bill. But these aren’t the old days…. No one risks losing their subsidies until this issue is finally decided….

This would put Republicans in the federal exchange states in a heck of a political bind…. The political consequences for all of these people losing their subsidies and their coverage would immediately shift to the Republicans who control these state governments. Proponents of Halbig argue that the fault for people losing their coverage would be on the Obama administration because they have operated Obamacare in an illegal manner…. Millions of people would have their insurance yanked out from under them in what people will see as part of the ongoing partisan political wars being waged by people out of touch with life in the rest of the country. The fundamental problem the Halbig proponents have here is that common sense, whatever a court rules, tells people that denying subsidies in half the states was never the intent of the Congress–that this is all about political point scoring and stopping a law Republicans hate…. Obamacare’s most partisan and ideologically opposed enemies scored a big victory today…. But below the surface lots of sensible Republicans must be sweating bullets.

Sarah Kliff: Separate circuit court rules in favor of Obamacare subsidies: “The Fourth Circuit Court of Appeals…

ruled Tuesday afternoon that Obamacare subsidies could be offered through federally-run insurance marketplaces.

It is… clear that widely available tax credits are essential to fulfilling the Act’s primary goals and that Congress was aware of their importance when drafting the bill,” the Fourth Circuit Court ruled.

We’ll have more coverage soon….”

The estimable Neil Irwin and Tyler Cowen get, I think, things wrong here.

First, Tyler, commenting on Neil:

Tyler Cowen: Facts about non-residential investment: “One simple hypothesis is that it’s not worth spending more on American workers at current wage levels.  As workers, while Americans are quite good, they are just not that much better than a variety of high-IQ individuals in cheaper countries, many of whom now have acceptable infrastructure to work with.

Next, Neil:

Neil Irwin @ The Upshot: “Five years into the economic recovery…

…businesses still aren’t plowing much money into big-ticket investments for the future. Nonresidential fixed investment… still hasn’t bounced back to its pre-crisis share of the economy, let alone made up for lost ground from the record lows of 2009…. If firms increased their spending enough to close that gap, it would mean an extra $220 billion in annual economic activity and perhaps a couple of million more jobs. But there may be even more important and lasting consequences for this lack of spending by businesses. Capital spending improves worker productivity. And worker productivity improves living standards. Less capital spending by businesses means less investment in the kinds of equipment, software and intellectual property that will make the economy more competitive over the long haul.

But when I look at the time series I see, for the nominal/nominal equipment spending share of potential GDP:

And for the real/real share:

For the real/real measure, neither Tyler nor Neil’s point is a thing: as far as equipping U.S. workers with productive tools, understood as equipment and software, even in the depressed economy of today the U.
S. is, even given the enormous amount of slack in the economy, doing a better job than it did save in the decade or so that started in 2007. In longer-run perspective this is not a thing.

For the nominal/nominal measure–which assumes that the appropriate reaction to the secular decline in equipment and software prices relative to GDP in general is for companies to boost their expenditure in order to keep the nominal investment share of potential GDP the same–we still seem to be ahead of the average pace of the 1950s, 1960s, and early and mid 1970s. Whether there is a shortfall depends on whether you think that there is little economic slack left–in which case equipment and software investment is lagging substantially behind where we would expect it to be–or whether there is still an enormous amount of economic slack. If, as I think, there is still more economic slack in the economy than there was at the business-cycle troughs of 1992 and 2001, equipment investment is not doing too bad. And when you reflect on the fact that back in 1992 and in 2002 virtually everyone expected much stronger demand growth than we expect now it seems entirely reasonable to see the nominal/nominal share of equipment investment and software in potential GDP as not lower but higher than reasonably expected.

What do I think? I think that if you want to look for an explanation of why the U.S. economy is currently depressed, then look at depressed residential investment and government-spending austerity–do not look at equipment investment to infer businesses hobbled by regulations and more pessimistic about the future than the state of present and expected future demand warrants. Similarly, I think that if you want to look for indicators that U.S. workers are overpaid (or that the value of the dollar is too high) do not look at equipment investment.

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