Category: Equitablog

Must-read: Juan Linz: “The Perils of Presidentialism”

Posted on by Brad DeLong

Must-Read: Juan Linz’s “The Perils of Presidentialism” is a rather good analysis of Richard Nixon and his situation, but a rather bad analysis of Barack Obama and his. In a way, the McConnell-Boehner-Ryan strategy, taken over from the Gingrich playbook, was based on Linz: Block everything Obama attempts, they decided, and then his supporters who have an exaggerated idea of his power will turn against him, and we will rise to power:

Juan Linz: The Perils of Presidentialism: “Given his unavoidable institutional situation…

…a president bids fair to become the focus for whatever exaggerated expectations his supporters may harbor. They are prone to think that he has more power than he really has or should have, and may sometimes be politically mobilized against any adversaries who bar his way. The interaction between a popular president and the crowd acclimating him can generate fear among his opponents and a tense political climate…. In the absence of any principled method of distinguishing the true bearer of democratic legitimacy,, the president may use ideological formulations to discredit his foes; institutional rivalry may thus assume the character of potentially explosive social and political strife….

This analysis of presidentialism’s unpromising implications for democracy is not meant to imply that no presidential democracy can be stable; on th contrary, the world’s most stable democracy–the United States–has a presidential constitution. Nevertheless… the odds that presidentialism will help preserve democracy are… less favorable…. The best type of parliamentary constitution… [needs] a prime-ministerial office combining power with responsibility… [to] help foster responsible decision-making and table governments… encourage genuine party competition without causing undue political fragmentation…. Finally… our analysis establishes only probabilities…. In the final analysis, all regimes… must depend… upon the support of society at large… a public consensus which recognizes as legitimate authority only that power which is acquired through lawful and democratic means… on the ability of their leaders to govern, to inspire trust, to respect the limits of their power, and to reach an adequate degree of consensus. Although these qualities are most needed in a presidential system, it is precisely there they are most difficult to achieve…

Looking at Obama’s 53% approval rating and contrasting it with GWB’s 28%, it has, obviously, not worked out that way. Instead, it is McConnell and Boehner and Ryan’s supporters–not the president’s–who had exaggerated expectations that were disappointed by reality, and have now turned against their putative leaders and representatives.

Must-read: Tim Duy: “Yellen Pivots Toward Saving Her Legacy”

Posted on by Brad DeLong

Must-Read: Ever since the Taper Tantrum, it has seemed to me that the center of gravity of the FOMC has not had a… realistic picture of the true forward fan of possible scenarios.

Now Tim Duy sees signs that the center of the FOMC’s distribution is moving closer to mine. Of course, I still do not see the FOMC taking proper account of the asymmetries, but at least their forecast of central tendencies no longer seems as far awry to me as it had between the Taper Tantrum and, well, last month:

Tim Duy: Yellen Pivots Toward Saving Her Legacy: “Janet Yellen… [would] her legacy… amount to being just another central banker…

…who failed miserably in their efforts to raise interest rates back into positive territory[?] The Federal Reserve was set to follow in the footsteps of the Bank of Japan and the Riksbank, seemingly oblivious to their errors. In September… a confident Yellen declared the Fed would be different…. ANN SAPHIR…. “Are you worried… that you may never escape from this zero lower bound situation?” CHAIR YELLEN…. “I would be very surprised if that’s the case. That is not the way I see the outlook or the way the Committee sees the outlook…. That’s an extreme downside risk that in no way is near the center of my outlook.”…

Bottom Line: Rising risks to the outlook placed Yellen’s legacy in danger. If the first rate hike wasn’t a mistake, certainly follow up hikes would be. And there is no room to run; if you want to ‘normalize’ policy, Yellen needs to ensure that rates rise well above zero before the next recession hits. The incoming data suggests that means the economy needs to run hotter for longer if the Fed wants to leave the zero bound behind. Yellen is getting that message. But perhaps more than anything, the risk of deteriorating inflation expectations – the basis for the Fed’s credibility on its inflation target – signaled to Yellen that rates hike need to be put on hold. Continue to watch those survey-based measures; they could be key for the timing of the next rate hike.

Weekend reading: April Fool’s Day edition (but no joke, this is good reading)

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

The U.S. labor share has declined quite a bit over the past 15 years. But it’s actually increased since 2012, in part due to the continued economic recovery. Does this mean we can return the labor share to its old levels through strong economic growth alone?

Social insurance isn’t just a form of redistribution. It is, unsurprisingly, also a form of insurance. Programs like Medicaid don’t just insure against the risk of deprivation, but also encourage workers to move into riskier yet higher-paying jobs.

You’ve almost certainly heard of the gig economy. But you probably haven’t heard concrete numbers on its size or importance to the labor market. New research shows that reality is far from the caricature we often hear about Uber and its ilk.

The number of good-paying union jobs and manufacturing jobs have fallen sharply in the United States over the past several decades. Ben Zipperer explains why this downturn has hurt African American workers more than white workers.

Links from around the web

Discussions of higher education among policymakers and the media are dominated by talk about the experiences and challenges that students have when they apply to and attend selective four-year universities. But the typical college-going American has a very different experience. Ben Casselman describes how this skews the public debate about higher ed. [fivethirtyeight]

Larry Summers works through why record-high corporate profits may be a problem. “Suggestive evidence of increases in monopoly power,” he writes, “makes me think that the issue of growing market power deserves increased attention from economists and especially from macroeconomists.” [larrysummersdotcom]

There’s been a significant rise in the number of contractors and temps over the past decade, larger than the rise in overall employment from 2005 to 2015. This trend poses a number of big questions—specifically about the state of social insurance and how much of it will be shifted onto workers, writes Neil Irwin. [the upshot]

The Federal Reserve has a large impact on the U.S. economy, but you wouldn’t know that by the debates presidential candidates are having about the state of the economy. The public would be better served by the candidates talking about the role of the central bank. Narayana Kocherlakota, former president of the Minneapolis Fed, offers some questions on the topic. [bloomberg view]

Speaking of the Federal Reserve, some commentators have worried that Congress is increasingly posing a threat to the independence of the central bank. But is that sense borne out by the data? Carola Binder takes a look and says it doesn’t look like it does. [quantitative ease]

Friday figure

Figure from “How the student debt crisis affects African Americans and Latinos” by Marshall Steinbaum and Kavya Vaghul.

Must-reads: April 1, 2016

Posted on by Brad DeLong

Must-read: Dean Baker: “Prime-Age Workers Re-Enter Labor Market”

Posted on by Brad DeLong

Must-Read: The Federal Reserve is looking at the past six months and seeing significant improvement in the labor market. It is also looking at financial markets and seeing increased pessimism about inflation. It is having a difficult time reconciling these two.

The reconciliation is, I think, that financial markets now believe that the Phillips Curve is flatter and that the NAIRU is lower than they thought two years ago–and they are likely to be right:

Dean Baker: Prime-Age Workers Re-Enter Labor Market: “The economy added 215,000 jobs in March…

Graph Employment Rate Aged 25 54 All Persons for the United States© FRED St Louis Fed

…with the unemployment rate rounding up to 5.0 percent from February’s 4.9 percent. However, the modest increase in unemployment was largely good news, since it was the result of another 396,000 people entering the labor force. There has been large increase in the labor force over the last six months, especially among prime-age workers. Since September, the labor force participation rate for prime-age workers has increased by 0.6 percentage points. This seems to support the view that the people who left the labor market during the downturn will come back if they see jobs available. However even with this rise, the employment-to-population ratio for prime-age workers is still down by more than two full percentage points from its pre-recession peak.

Another positive item in the household survey was a large jump in the percentage of unemployment due to voluntary quits. This sign of confidence in the labor market rose to 10.5 percent, the highest level in the recovery, although it’s still more than a percentage point below the pre-recession peaks and almost four percentage points below the levels reached in 2000.

While the rate of employment growth in the establishment survey was in line with expectations, average weekly hours remained at 34.4, down from 34.6 in January. As a result, the index of aggregate hours worked is down by 0.2 percent from the January level. This could be a sign of slower job growth in future months.

Must-read: Ben Thompson: “Andy Grove and the iPhone SE”

Posted on by Brad DeLong

Must-Read: Invest like mad in your technology drivers–even if it looks as if they are not the most profitable. But, conversely, don’t keep pouring money into things that used to be technology drivers but are no longer. And keep your mind open and place many bets as to what your future true technology drivers will be:

Ben Thompson: Andy Grove and the iPhone SE: “While [Gordon] Moore is immortalized for having created ‘Moore’s Law’…

…the fact that the number of transistors in an integrated circuit doubles approximately every two years is the result of a choice made first and foremost by Intel to spend the amount of time and money necessary to make Moore’s Law a reality… and the person most responsible for making this choice was Grove…. Grove [also] created a culture predicated on a lack of hierarchy, vigorous debate, and buy-in to the cause (compensated with stock)…. Intel not only made future tech companies possible, it also provided the template for how they should be run….

Grove’s most famous decision…. Intel was founded as a memory company… the best employees and best manufacturing facilities were devoted to memory in adherence to Intel’s belief that memory was their ‘technology driver’…. The problem is that by the mid-1980s Japanese competitors were producing more reliable memory at lower costs (allegedly) backed by unlimited funding from the Japanese government…. Grove soon persuaded Moore, who was still CEO to get out of the memory business, and then proceeded on the even more difficult task of getting the rest of Intel on board; it would take nearly three years for the company to fully commit to the microprocessor….

Intel today is still a very profitable company…. [But] the company’s strategic position is much less secure than its financials indicate, thanks to Intel’s having missed mobile. The critical decision came in 2005…. Steve Jobs was interested in… the XScale ARM-based processor… [for] the iPhone. Then-CEO Paul Otellini….

We ended up not winning it or passing on it, depending on how you want to view it. And the world would have been a lot different if we’d done it…. You have to remember is that this was before the iPhone was introduced and no one knew what the iPhone would do…. At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.

It was the opposite of Grove’s memory-to-microprocessor decision: Otellini prioritized Intel’s current business (x86 processors) instead of moving to what was next (Intel would go on to sell XScale to Marvell in 2006), much to the company’s long-term detriment…

Must-read: Narayana Kocherlakota: “Information in Inflation Breakevens about Fed Credibility”

Posted on by Brad DeLong

Must-Read: Whenever I look at a graph like this, I think: “Doesn’t this graph tell me that the last two years were the wrong time to give up sniffing glue the zero interest-rate policy”? Anyone? Anyone? Bueller?

Graph 3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

And Narayana Kocherlakota agrees, and makes the case:

Narayana Kocherlakota: Information in Inflation Breakevens about Fed Credibility: “The Federal Open Market Committee has been gradually tightening monetary policy since mid-2013…

…Concurrent with the Fed’s actions, five year-five year forward  inflation breakevens have declined by almost a full percentage point since mid-2014.  I’ve been concerned about this decline for some time (as an FOMC member, I dissented from Committee actions in October and December 2014 exactly because of this concern).  In this post, I explain why I see a decline in inflation breakevens as being a very worrisome signal about the FOMC’s credibility (which I define to be investor/public confidence in the Fed’s ability and/or willingness to achieve its mandated objectives over an extended period of time).

First, terminology.   The ten-year breakeven refers to the difference in yields between a standard (nominal) 10-year Treasury and an inflation-protected 10-year Treasury (called TIPS).  Intuitively, this difference in yields is shaped by investors’ beliefs about inflation over the next ten years.  The five-year breakeven is the same thing, except that it’s over five years, rather than 10.  

Then, the five-year five-year forward breakeven is defined to be the difference between the 10-year breakeven and the five-year breakeven.   Intuitively, this difference in yields is shaped by beliefs about inflation over a five year horizon that starts five years from now.   In particular, there is no reason for beliefs about inflation over, say, the next couple years to affect the five-year five-year forward breakeven. 

Conceptually, the five-year five-year forward breakeven can be thought of as the sum of two components:
 
1. investors’ best forecast about what inflation will average 5 to 10 years from now

  1. the inflation risk premium over a horizon five to ten years from now – that is, the extra yield over that horizon that investors demand for bearing the inflation risk embedded in standard Treasuries.
     
    (There’s also a liquidity-premium component, but movements in this component have not been all that important in the past two years.) 

There is often a lot of discussion about how to divide a given change in breakevens in these two components.  My own assessment is that both components have declined.  But my main point will be a decline in either component is a troubling signal about FOMC credibility.  

It is well-understood why a decline in the first component should be seen as problematic for FOMC credibility.  The FOMC has pledged to deliver 2% inflation over the long run.  If investors see this pledge as credible, their best forecast of inflation over five to ten year horizon should also be 2%.   A decline in the first component of breakevens signals a decline in this form of credibility.  

Let me turn then to the inflation-risk premium (which is generally thought to move around a lot more than inflation forecasts). A decline in the inflation risk premium means that investors are demanding less compensation (in terms of yield) for bearing inflation risk. In other words, they increasingly see standard Treasuries as being a better hedge against macroeconomic risks than TIPs.  

But Treasuries are only a better hedge than TIPs against macroeconomic risk if inflation turns out to be low when economic activity turns out to be low.  This observation is why a decline in the inflation risk premium has information about FOMC credibility.  The decline reflects investors’ assigning increasing probability to a scenario in which inflation is low over an extended period at the same time that employment is low – that is, increasing probability to a scenario in which both employment and prices are too low relative to the FOMC’s goals. 

Should we see such a change in investor beliefs since mid-2014 as being ‘crazy’ or ‘irrational’? The FOMC is continuing to tighten monetary policy in the face of marked disinflationary pressures, including those from commodity price declines.  Through these actions, the Committee is communicating an aversion to the use of its primary monetary policy tools: extraordinarily low interest rates and large assetholdings. Isn’t it natural, given this communication, that investors would increasingly put weight on the possibility of an extended period in which prices and employment are too low relative to the FOMC’s goals?

To sum up: we’ve seen a marked decline in the five year-five year forward inflation breakevens since mid-2014.  This decline is likely attributable to a simultaneous fall in investors’ forecasts of future inflation and to a fall in the inflation risk premium.   My main point is that both of these changes suggest that there has been a decline in the FOMC’s credibility.   

To be clear: as I well know, in the world of policymaking, no signal comes without noise.  But the risks for monetary policymakers associated with a slippage in the inflation anchor are considerable.   Given these risks, I do believe that it would be wise for the Committee to be responsive to the ongoing decline in inflation breakevens by reversing course on its current tightening path.

Must-read: Bill Black: “Announcing the Bank Whistleblowers United Initial Initiatives”

Posted on by Brad DeLong

Must-Read: Bill Black: Announcing the Bank Whistleblowers United Initial Initiatives: “I am writing to announce the formation of a new pro bono group and a policy initiative that we hope many of our readers will support and help publicize…

…Gary Aguirre, Bill Black, Richard Bowen, and Michael Winston are the founding members of the Bank Whistleblowers United.  We are all from the general field of finance and we are all whistleblowers who are unemployable in finance and financial regulation because we spoke truth to power and committed the one unforgivable sin in finance and in Washington, D.C. – being repeatedly proved correct when the powerful are repeatedly proved wrong….

Our group publicly released four documents on January 29, 2016.  The first outlines our proposals, all but one of which could be implemented within 60 days by any newly-elected President (or President Obama) without any new legislation or rulemaking.  Most of our proposals consist of the practical steps a President could implement to restore the rule of law to Wall Street.  As such, we expect that candidates of every party and philosophy will find most of our proposals to be matters that they strongly support and will pledge to implement. The second document fleshes out and explains the proposals.  We ask each candidate to pledge in writing to implement the portions of our plan that they specify to be provisions they support.  Again, we invite President Obama to do the same. The third document asks each candidate to pledge not to take campaign contributions from financial felons.  That group, according to the federal agencies that have investigated them, includes virtually all the largest banks. The fourth document explains why we formed our group is and contains our bios….

The most recent U.S. bubble and resultant financial crisis and Great Recession were driven by three epidemics of fraud led by elite bankers. The three epidemics that drove the crisis are appraisal fraud, ‘liar’s’ loans (collectively, these were the loan origination frauds), and the resale of those fraudulently originated mortgages through fraudulent ‘reps and warranties’ to the secondary market and the public. Banks, like fish, rot from the head – the ‘C Suite.’ Liar’s loans is an industry term that shouts the industry’s knowledge that it was originating overwhelmingly fraudulent loans.  In a liar’s loan the lender agrees not to verify data that is essential to prudent underwriting.  This would be an insane practice for an honest lender – and it was practice that was always discouraged by the federal regulators – but it optimizes ‘accounting control fraud.’… Not a single one of those elite bankers who led the fraud epidemics has been prosecuted and only one, a woman who was only moderately senior, has been held personally accountable in any meaningful way through a civil suit (made possible by a whistleblower). This is the greatest strategic failure of the DOJ in recent history. The SEC has also proven ineffective in holding the elite Wall Street bankers who led these fraud epidemics personally accountable. As with DOJ, one of the fundamental problems that has gotten worse is the ‘revolving door.’  We propose a practical means of reducing that problem….

We unanimously support the 60-Day Plan, but our Plan is not a ‘take it or leave it’ demand.  The candidates will choose which provisions of our Plan they support and will pledge to implement. In this first document we outline the substance of the Plan.  We are simultaneously releasing a longer document that explains the rationale for our Plan provisions and exactly how they can be implemented without new legislation or rules…

African American workers are hurt more by the decline in union and manufacturing jobs

Posted on by Bridget Ansel

The sources of income growth and mobility in the U.S. labor market have changed dramatically over the past several decades. Good-paying union jobs and manufacturing employment were once a prominent foundation for the country’s middle class, but these jobs have been eviscerated in recent history—with a disproportionate effect on African Americans.

Since the 1980s, union membership has plummeted for all demographic groups across the United States. For black workers, however, union jobs have disappeared significantly faster than they have for white workers. (See Figure 1.)

Figure 1

In 1983—the earliest year for which we have comparable data—31.7 percent of black workers were union members or covered by a union contract, compared to 22.2 percent of white workers. By 2015, however, union representation rates for black and white workers had fallen to 14.2 percent and 12.5 percent, respectively. While this was a steep decline for white workers (a drop of 43.6 percent), the fall for black workers was substantially sharper (a drop of 55.2 percent).

Research shows that the decline of unions is a significant cause of rising wage inequality among male workers. Recent work also demonstrates a strong correlation between union membership and intergenerational earnings mobility. African Americans may be disproportionately losing these positive benefits of unionization.

A major reason for the fall in unionization has been the large decrease in manufacturing employment, due primarily to long-term downward trends among rich countries but also to a large trade deficit. Yet the overall decline in the role of manufacturing has actually been more acute for African Americans than it has been for white workers. (See Figure 2.)

Figure 2

Prior to the 1990s, both black and white workers were equally likely to be employed in manufacturing. In 1979, the share of African Americans working in manufacturing was 23.9 percent, essentially the same rate for white workers of 23.5 percent. In 1990, both of these rates had fallen but remained the same for black (18.4 percent) and white (18.3 percent) workers.

After the early 1990s, however, black and white representation in manufacturing industries began to diverge. As of last year, the share of African Americans in manufacturing was only 8.6 percent, compared to 11.2 percent of white workers. In other words, a black worker was 23.2 percent less likely to have a manufacturing job than a white worker—a substantial blow considering that manufacturing jobs typically pay higher wages than other industries.

Manufacturing employers aren’t hiring African American workers like they did in prior years. Even though the black share of the overall U.S. workforce grew between 1979 and 2015, the black share of the manufacturing workforce did not increase commensurately during that time and actually declined from 9.5 percent in 1979 to 9.2 percent in 2015.

The combination of the downturn in manufacturing jobs and the decline in unionization has disproportionately affected African American workers. As we pursue policies to improve the quality of work, we should prioritize those which benefit the groups who have lost more of the good jobs that the labor market used to provide.

Project Syndicate: Debunking America’s Populist Narrative

Posted on by Brad DeLong

Debunking America’s Populist Narrative: BERKELEY – One does not need to be particularly good at hearing to decipher the dog whistles being used during this year’s election campaign in the United States. Listen even briefly, and you will understand that Mexicans and Chinese are working with Wall Street to forge lousy trade deals that rob American workers of their rightful jobs, and that Muslims want to blow everyone up.

All of this fear mongering is scarier than the usual election-year fare. It is frightening to people in foreign countries, who can conclude only that voters in the world’s only superpower have become dangerously unbalanced. And it is frightening to Americans, who until recently believed – or perhaps hoped – that they were living in a republic based on the traditions established by George Washington, Abraham Lincoln, and Teddy and Franklin Roosevelt. READ MOAR