…Moving to look at a different part of the mirror only distorts a different part of the reflection. And given that this is his only mirror, how does he know which parts are distorted and which are accurate in the first place? To witness such slapstick nonsense is like trying to observe the relationship between the economy and the yield curve….
The supply dynamics of advanced-economy sovereign debt, with net issuance available to the public set to turn sharply negative this year and next, are mostly fixed in the near-term. (The demand dynamics are more complicated, dependent as they are on macroeconomic outcomes.) And these dynamics suggest that longer-dated US Treasury yields will be under pressure yet again because of foreign demand, with much of the cause assignable to the combination of aggregate fiscal austerity and current account surpluses in Europe, in addition to the ECB’s quantitative easing program, which is more aggressive than had been expected earlier this year. Once the Fed begins to hike the policy rate later this year, there is a chance that longer yields will not follow them higher. What would this mean? Does it foreshadow a repeat of the conditions that prevailed in the mid-2000s, when Alan Greenspan labeled the failure of long rates to attend his own tightening of policy a ‘conundrum’?Unfortunately, an effort to understand the relevance of a new bond market conundrum risks a lapse into ‘haruspicy, or perhaps plastromancy,’ as Brad DeLong writes. The relevant sample size is too small….
If a new conundrum becomes reality:
(1) The Fed responds to a new conundrum by loosening policy, promising to delay further rate hikes and lowering its forecasted path for policy rates. Simultaneously, to target the curve more directly, the Fed might also sell some of its longer-dated holdings — and, if it would rather not shrink its balance sheet too much, the Fed could also buy short-maturity debt in a kind of reverse Operation Twist. What would happen?
One possibility is that inflation expectations would climb, with the market interpreting the move as a willingness by the Fed to tolerate a higher path of economic growth and inflation than was previously understood. The curve would thus steepen, and the steepening would be reinforced by the Fed’s direct involvement in the Treasury market.
Another possibility is that the market would interpret the move as a renewed commitment by the Fed to keep rates low for longer than had been expected. If long-term rates do indeed reflect the expected path of short-term rates, then these long-term rates could fall in tandem with the Fed’s action. The curve would actually flatten even more, perhaps enough even to offset the Fed’s direct involvement in the Treasury market.
(2) The Fed responds to a new conundrum by tightening policy, following Dudley’s prescription and raising policy rates more quickly. To target the curve more directly, the Fed might also start selling down its longer-dated holdings. What would happen?
One possibility is that inflation expectations would fall, with the market interpreting the move as a willingness by the Fed not to tolerate the higher path of economic growth and inflation that lower long-term rates might lead to. The curve would actually flatten even more, perhaps enough even to offset the Fed’s direct involvement in the Treasury market.
Another possibility is that the market would interpret the move as a new commitment by the Fed to follow a higher path for its policy rates. If long-term rates do indeed reflect the expected path of short-term rates, then these long-term rates could rise in tandem with the Fed’s action. The curve would thus steepen, and the steepening would be reinforced by the Fed’s direct involvement in the Treasury market.
You see what I did there….
Have a nice day.
Month: April 2015
Morning Must-Watch: Jared Bernstein: Our Full Employment Event… The Video!
…Ben Bernanke–now a fellow blogger(!)–gave a great keynote speech wherein he made a connection that I view as very important: adding an international dimension to the secular stagnation discussion. After Ben B speaks, there’s a panel where Valerie Wilson, Andy Levin, and Maurice Emsellem all present important papers, which you can find here. Read them now! As OTE’ers will note, I’ve often stressed the drag on growth from our persistent and sizable US trade deficits. And, importantly, as Bernanke pointed out in his earlier work, these deficits are not the result of profligate American over-consuming, but the outcome of excess savings in trade surplus countries who buy dollar reserves to gain a price advantage in export markets.
The Housing Bubble and the Lesser Depression: Either the Very Sharp Dean Baker or I Am Hopelessly Confused
And, of course, I think that it is him…
Dean maintains and has long maintained that the financial crisis was froth that had little impact on the overall economy:
…[having] something to do with the financial crisis… looming as a dark cloud hanging over the head of an otherwise healthy economy. Fortunately, for arithmetic fans the story was never very difficult. In the last business cycle the economy was being driven in large part by a housing bubble. The unprecedented run-up in nationwide house prices lead to booms in both residential construction and consumption…. In the 1980s and 1990s… residential construction accounted for an average of less than 4.4 percent of GDP. At the peak… in 2005, construction rose to more than 6.5 percent of GDP…. The $8 trillion in equity created by the housing bubble made homeowners feel wealthier…. When the bubble burst, homeowners cut back their consumption since this wealth no longer existed…. A long and severe downturn that was entirely predictable. There is no mystery about the downturn or the potential routes to recovery. The only problem is that the people in control of economic policy have no interest in taking the steps necessary to bring the economy back to full employment…
I agree that the vanishing of $8 trillion of housing equity pushed private consumption down by an annual amount of $400 billion after the bubble burst. And I agree that the boom in construction pushed private investment spending up by an annual amount $300 billion before the bubble burst. And I agree that with a simple multiplier of 2 those two shocks to autonomous spending can account for the downturn.
But.
There are other things going on as well.
The first $250 billion of the fall in construction spending had no net effect on the level of economic activity. Why not? Because the financial flows that had and would have funded construction were redirected to fund increased exports and increased business investment:
There is every reason to think that, in the absence of the financial crisis, the Federal Reserve’s lowering interest rates as consumption spending fell in response to the decline in home equity would have pushed down the value of the dollar and made further hikes in business investment a profitable proposition and so directed the additional household savings thus generated into even stronger booms in exports and business investment: in the absence of the financial crisis, what was in store for the U.S. was not a long, deep depression but, rather, a shallow recession plus a pronounced sectoral rotation.
But the financial crisis doubled the size of the housing bubble collapse. After all, housing values are now halfway back from their 2009 trough to their 2006 peak.
And it was the financial crisis–not the collapse of the housing bubble–that led to the final tranche of the decline in construction, and to the catastrophic collapses in business investment and exports in 2008:
And slow recovery since has been the product of three factors since:
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The inability given low inflation of the Federal Reserve to push interest rates low enough to attain the financial crisis-depressed Wicksellian natural rate of interest.
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The extraordinary fiscal austerity since the start of 2010.
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The failure to reorganize the broken housing finance channel and thus restore residential construction to some semblance of normality.
Indeed, even with the zero lower bound on interest rates constraining monetary policy, we would probably have had a satisfactory recovery were it not for fiscal austerity and the failure to clear the clogged housing-finance channel. The business-investment and exports recoveries have been impressive:
None of the catastrophe we have suffered and continue to suffer was baked in the cake by the housing bubble.
Matthew Ingram vs. Tom Standage: The Economist’s Digital Strategy Considered Harmful
If The Economist is going to add value for society, it will have to become a trusted information intermediary, rather than just seem to be a trusted information intermediary. It may survive, and it may return healthy profits to its conglomerate owners and lavish salaries to its workers if it seems to be a trusted information intermediary, but, really, is that the point?
Does Matthew Ingram and I cannot be the only people who are deeply alarmed at the internet strategy that the very sharp Tom Standage has just outlined for the Nieman Journalism Lab. If you focus on becoming a trusted information intermediary, you may well make it. If you just focus on seeming to be a trusted information intermediary, you surely will not make it.
…The Economist wants its audience to feel like they have learned whatever they need to know about a topic by reading its coverage, regardless of what format it appears in:
We sell the antidote to information overload–we sell a finite, finishable, very tightly curated bundle of content…. The promise we make to the reader is that if you trust us to filter and distill the news, and if you give us an hour and a half of your time, then we’ll tell you what matters…
What the Economist is selling is an illusion…. But that illusion can be very powerful, and very appealing…. There’s something very satisfying about… thinking ‘Okay, I’m done now.’… The Economist doesn’t link out to either other media outlets or even external websites in its digital offerings…. Linking to other websites or sources of information would ruin the illusion of completeness… readers would be worried that they weren’t being completely informed. So the magazine doesn’t do it. [Standage:]
Another aspect of it is that we don’t do links…. If you want… links you can… go on Twitter and get as many as you like. But the idea was everything that you need to know is distilled into this thing that you can get to the end of, and you can get to the end of it without worrying that you should’ve clicked on those links…. We’ve clicked on the links already…. We’ve decided what’s interesting…
I’m not sure I can agree with Standage on his approach. I understand why it makes for a saleable product for The Economist…. But… it leaves… out… something critically important… the ability to check, verify, expand on and test the assumptions in a particular piece…
Besides, in my experience there are few things more annoying than having a discussion with someone has read 1000 words in The Economist, has had its authoritative tone trigger his Dunning-Kruger effect, and really does sincerely believe that now he knows it all.
Today’s Must-Must Read: Greg Ip: Hard Decisions on Easy Money: Growth Now or Turmoil Later?
…It’s also getting some less savory side effects. Asset prices are sky high, fueling fears of a chaotic reversal that could hammer the economy as wealth evaporates and credit dries up. This leaves Fed officials conflicted as they weigh when to lift interest rates…. Given the harm past crises have inflicted, maintaining financial stability is hardly at odds with full employment. At some point, financial stability may be a reason for the Fed to tighten. That point is still some ways off. Raising interest rates now trades tangible harm for intangible benefits. Only once the economy can safely withstand higher rates and the associated turmoil will such a trade-off make sense….
Market turmoil is unpleasant but rarely threatens the economy…. Interest rates today may not in fact be artificially low. Global forces such as excessive saving, low inflation and low investment are also at work. This is why markets have priced in a lower path of Fed tightening than the Fed itself seems to contemplate…. The Fed should not be under any illusions: holding rates at current levels raises the odds of future turmoil. For now, those odds aren’t high enough to sacrifice some growth.
Morning Must-Read: Pedro Nicolaci da Costa: On Larry Ball and Sub-5% Unemployment
…That could help bring some discouraged workers to reenter the labor market, as well as help the long-term unemployed find work and involuntary part-time workers find full-time jobs, he said…. Mr. Ball… argues that the Fed would have a much easier time raising interest rates to fight modest inflation than it would battling persistently low inflation or deflation with rates already close to zero…
Morning Must-Read: Gary Burtless: Employment impacts of the Affordable Care Act
…As it happens, all of the job gains that have occurred since March 2010 have been in full-time employment…. Has the ACA increased part-time work among people who would prefer to hold full-time jobs?… The percentage of job holders who have part-time jobs but who would prefer full-time work… remains stubbornly higher than it was the last time the unemployment rate was 5.5%. If the entire gap is traceable to the impact of the ACA, the law has increased the number of workers who involuntarily hold part-time jobs by more than 1 million. My guess is that the number of workers who involuntarily hold part-time jobs has remained high because of the weakness of the economic recovery rather than the effect of the ACA. It is not easy to devise a statistical test that allows us to confirm this suspicion, however. Even if it were true that the ACA has induced employers to create more part-time jobs and fewer full-time jobs, it is not obvious whether this shift reduced workers’ well-being…. If total work hours remain unchanged it also follows that more workers must hold jobs, reducing the number of involuntarily unemployed workers. It seems odd that critics of the ACA emphasize the potentially adverse impacts of the law on workers forced to accept part-time jobs but fail to notice that their logic suggests more workers in total must be employed…
Things to Read on the Morning of April 1, 2015
Must- and Should-Reads:
- Afternoon Must-Read: : Pooling Multiple Case Studies Using Synthetic Controls: An Application to Minimum Wage Policies
- Lunchtime Must-Read: : Barney Frank Explains the Financial Crisis
- Today’s Must-Must-Read: : The Missing Deflation and the Argument for a Higher Inflation Target
- : Labor Market Slack and Monetary Policy
- : Response to Robert Caro’s The Power Broker
- : Monetary Policy for a High-Pressure Economy
- (1986): Spurious Volatility in Historical Unemployment Data
Might Like to Be Aware of:
- : “You must overcome any shyness and have a conversation with the librarian, because he can offer you reliable advice that will save you much time. You must consider that the librarian (if not overworked or neurotic) is happy when he can demonstrate two things: the quality of his memory and erudition and the richness of his library, especially if it is small. The more isolated and disregarded the library, the more the librarian is consumed with sorrow for its underestimation. A person who asks for help makes the librarian happy…”
- (1998): Racism and Science Fiction
How much does job search matter for job switching?
When economists, policymakers or the general public talk about searching for a job, we often assume the one doing the searching is the worker. Under this view, most workers end up with a job because they went out and looked for one. But new research published yesterday by the Federal Reserve Bank of San Francisco challenges this notion.
The authors of the “economic letter,” Carlos Carrillo-Tudella of the University of Essex, Bart Hobijn and Patryk Perkowski of the San Francisco Fed, and Ludo Visschers of the University of Edinburgh point out that the most commonly used data set about the U.S. labor market doesn’t tell us anything about the search for jobs. The Current Population Survey, run by the U.S. Bureau of Labor Statistics, doesn’t tell researchers anything about the search effort that workers put into finding a job. Instead they look at the Contingent Worker Supplement to the CPS, which has data about job searches three months prior to the survey.
Unfortunately, the most recent data is from 2005, yet the results they find are still quite interesting. More than 67 percent of workers who were hired didn’t look for a job in the previous three months. So less than one-third of total hires were workers who were actively searching for a job. What’s more, the importance of non-searchers in switching jobs holds up when the researchers break the data down by the employment state of these workers as well.
According to the authors’ analysis, about 26 percent of overall hires were of employed workers who weren’t searching for a job. Another 42 percent of new hires were workers without jobs who weren’t looking for a job. In other words, they were out of the labor force. This second result is particularly interesting. We often think of workers out of the labor force as discouraged workers who won’t find jobs. Or if they are on their way to employment, they need to start searching first and enter the ranks of the officially unemployed.
Consider the Beveridge Curve, which looks at the relationship between job openings and the unemployment rate. This curve is supposed to show the relationship of workers transitioning from not having a job to having one. If this new analysis out of the San Francisco Fed is true, it emphasizes the need for a better understanding of the data that underlies the curve.
But let’s put these numbers into context. These results don’t mean that searching for a job is futile. In fact, quite the opposite. Workers who actively search for a job were far more likely to move over into a job (11 percent) than workers who didn’t look for a job (1.8 percent). So looking for a job is incredibly important for individual workers—even though the act of not looking for a job doesn’t mean workers won’t soon switch jobs.
If workers aren’t searching for new employment, then it appears employers are the ones conducting a search. Recruitment and poaching are likely ways employers do this, the authors point out. But how can researchers measure employer recruitment efforts? The Job Openings and Labor Turnover Survey, published by the Bureau of Labor Statistics every month, measures job openings. But Carrillo-Tudella, Hobijn, Perkowski, and Visschers cite research that finds over 40 percent of hires at firms were for jobs that were never publically advertised.
What to make of this research? The big picture is that some very important dynamics of job-to-job mobility don’t register in important data sets and the common conception of the U.S. labor market. Of course, the data used in this analysis is about 10 years old at this point. But that means looking into this question is perhaps even more pressing.