…behind flexible inflation targeting. It is OK to have a target based on inflation alone, with no mention of the output gap, because you cannot in the long run keep inflation at target without also keeping the output gap at zero. This is sometimes called the divine coincidence. However if, at low inflation rates, inflation becomes a noisy, weak and asymmetric indicator of the output gap, then focusing on inflation is going to perform badly. In these circumstances it could be many years before it becomes clear that we have been continually running the economy under capacity, and needlessly wasting resources. Unfortunately even when that point of realisation arrives, for obvious reasons monetary policymakers are going to be reluctant to acknowledge the mistake.
Category: Equitablog
U.S. wage growth remains sluggish despite employment gains
The most recent wage figures in the United States show that raises were exceedingly hard to come by for most workers even as employment rose in January by 257,000. Nominal hourly wages (before factoring in inflation) over the past year grew by 2.2 percent, according to today’s employment and earnings data from the U.S. Bureau of Labor Statistics.
These paltry gains are significantly below the wage-growth levels that economists expect to see in a healthy labor market. For wage gains that reduce income inequality and strengthen family income, nominal wage growth would need to exceed 3.5 to 4.0 percent, assuming a productivity growth rate of 1.5 percent and the Federal Reserve’s target inflation rate of 2.0 percent. Wage growth may begin to pick up as the economy continues to add jobs, but it is outside of recent historical experience for the labor market to exhibit healthy wage growth without substantially higher levels of employment.
Stronger wage growth for production and nonsupervisory employees, who make up about four-fifths of the private sector, follows higher levels of employment. In the past 25 years, nominal wage growth for these workers exceeded 4.0 percent only when the employed share of prime-age workers between the ages of 25 and 54 was at least 80 percent. Only when the prime-age employment-to-population ratio exceeded 79 percent has nominal wage growth been faster than 3.5 percent. (See Figure 1)
Figure 1
The unemployment rate, at 5.7 percent in January, rose slightly from December’s 5.6 percent, but it is helpful to focus on the employed share of the overall population because the unemployment rate does not account for workers who have left the labor force. Last month, the prime-age employment-to-population ratio was only 77.2, up from 77.0 last month, indicating the U.S. labor market is not sufficiently tight enough to produce consistent and meaningful real wage gains in the near future. Unfortunately at the current pace of employment growth, the prime-age employment rate will not exceed 79 to 80 percent until sometime in 2017 or 2018.
If the Federal Reserve raises interest rates this year, as it has suggested, it will slow employment growth and limit the possibilities for wage gains especially for workers at the bottom of the income ladder. Even when workers begin to receive significant pay raises, it will take several years of high wage growth to make up for the ground lost in the Great Recession.
Morning Must-Read: Matthew Klein: Michael Pettis Explains the Euro Crisis
…of the euro area’s problems we’ve ever read. You should take the time to closely read the whole thing yourself. We’ll wait. Now that you’re back, we thought we could add some value by highlighting and expanding on what we believe to be Pettis’s most important insights. First, the relevant units… aren’t countries but… sectors…. We shouldn’t forget that German workers have suffered from stagnant wages and decaying infrastructure…. Second, when it comes to big flows of capital across borders, it’s usually better to give than to receive… huge inflows of money are almost never matched by commensurate increases in the number of profitable investment projects, so a ton of money gets wasted….(Borrowing in a currency you can print is helpful but it doesn’t prevent a lot of resources getting misallocated and a lot of people ending up with excessive debt burdens.)…
Third, it makes no sense to blame the recipients of the capital inflows for causing the crisis. If enough money is sloshing around willing to invest in any stupid idea, you shouldn’t be too surprised that a lot of stupid ideas get funded…. Schaeuble’s assignment of blame… prevents optimal solutions that are best for the majority of Europeans, Greek, Spanish, and German alike…. Fourth, it matters how your obligations are structured. Many smart people, most notably Daniel Davies, have argued that the headline numbers surrounding Greece’s public debt burden are irrelevant to understanding the situation in Greece…. But the focus on flows misses the impact of the structure of the debt stock on the incentives of private sector lenders and producers…. This is why Pettis thinks Varoufakis’s plan to swap existing Greek debts for obligations indexed to GDP is a good idea…. That’s very different from the current setup, where the Troika has every incentive to tie its funding to the willingness to implement austerity programmes….
That leads to the fifth point: euro area officials are running out of time…. We at Alphaville have no insight into the future of monetary policy or global liquidity here or in Europe. But we wouldn’t be surprised if it turned out that the optimal window for restructuring, even if you leave aside the political implications of persistently high unemployment, could soon close. Something for the can-kicking eurocrats to keep in mind. Finally… nothing about the euro crisis is particularly new. All of this has happened before and all of it will (probably) happen again…
Morning Must-Read: John Herrman: The Next Internet Is TV
…the changing demographics of America’ that is also ‘a little bit outside of the media bubble.’… For Fusion to talk about ‘promiscuous media’ and ‘build[ing] our brand in the places [the audience] is spending time’–as opposed to publishing everything on a single website and hoping it spreads from there–is not strange in the context of television companies… used to filling channels that they don’t totally control. Meanwhile, some of the most visible companies in internet media are converging on a nearby point…. [Suppose] websites are unnecessary vestiges of a time before there were better ways to find things to look at on your computer or your phone. What happens next? What does a media that knows or believes this look like? This is an incredibly obvious question that nobody seems to have taken much time to talk about???
I mean you have the ‘director of audience development’ at Vox telling trade publications that ‘in general, we do see higher sharing rates from the native-only posts’ and then its ‘global vp of marketing and partnerships’ dropping this excellent quote:
The great thing about Facebook leaning in to the new video strategy is that publishers on average are seeing a lot more views and a lot more engagement with that video content. This could theoretically be a pretty massive revenue stream with publishers when and if they do enable monetization around this inventory….
Companies… begin to see their websites as Just One More App, and realize that fewer people are using them, proportionally…. Some of what worked in print didn’t work on the web; some of what worked on the web didn’t work on social media; some of what worked on social media won’t work in these apps…. What was even the point of websites, certain people will find themselves wondering. Were they just weird slow apps with nobody in them?…
Why Do I Feel That the Congressional Leaders Are Playing Kabuki Theatre?; Focus
I am left with a lot of questions: If Senator Richard Burr does not see a path to passing an ObamaCare replacement this year, why make a splash with a proposal that is not a bill rather than simply scheduling hearings? If Richard Burr thinks that the Burr-Coburn-Hatch proposal from last year was unfairly rejected by his Republican colleagues and that they should take another look at it, why put Burr-Hatch-Upton forward as if it were brand-new–as if it were not a reboot of last year’s Burr-Coburn-Hatch? And why does Peter Sullivan of The Hill not tell his readers that BHU is a reboot of BCH–if, that is, he has the slightest desire at all to be in the trusted-information-intermediary business? And even if he doesn’t want to be in the trusted-information-intermediary business, why does it please Burr to have The Hill’s readers thinking that this is something that Burr has come up with in the last two months, rather than a line of approach that he has been thinking bout, tweaking, and trying to get right for years?
As far as legislative-process and coalition-assembly is concerned, this looks like Kabuki. More, it looks like Dingbat Kabuki–the motives of the performers seem, to me, to be incomprehensible. And I have worked in the U.S. Treasury. I have not just seen the sausage being made but actually done some sausage-making myself.
From The Hill:
…might not be able to pass an alternative to ObamaCare until 2017. Burr, along with Sen. Orrin Hatch (R-Utah) and Rep. Fred Upton (R-Mich.) unveiled a GOP replacement plan for ObamaCare on Wednesday. But, appearing the next evening on Fox News’s ‘Special Report with Bret Baier,’ Burr said no single idea is likely to generate consensus. ‘I don’t think so,’ he said. ‘I think that there are going to be a lot of ideas not only in Congress but around the think tanks here in Washington and around the country.’… ‘The long-term is, how do we revamp this in 2017 and after so it works for America’s patients?’ Burr’s plan would repeal ObamaCare and replace it with tax credits to help people buy insurance, while scrapping the law’s mandates and protecting people with pre-existing conditions who have been continuously insured…
If Peter Sullivan is going to write a story about the political maneuvering that is leading Burr to advance a proposal he regards as a feint, he should tell us the story of the political maneuvering that is leading Burr to advance a proposal he regards as a feint. If Peter Sullivan is going to write a story about options for health-care reform, he should tell us what the options for health care reform are. This is, it seems to me, to be neither…
Things to Read on the Morning of February 6, 2015
Must- and Shall-Reads:
- : “If the Fed is overly optimistic yet again… it could raise interest rates too soon… perhaps even create a stall…. Most… believe that the risks involved with raising rates too soon are much larger than the risks of patience…. Asymmetric risks… combined with the Fed’s tendency to be overly optimistic [make] the argument for a cautious, patient approach… stronger.”
- : “The ECB is acting far beyond its mandate in seeking to influence negotiations between Eurozone member states regarding the terms and conditions under which member states lend to their distressed partners…”
- : Your Right to Skip Shots Ends Where My Kid Begins
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: @tnielsenhayden: “If personal beliefs: were a valid basis for public-health-related behavior, there wouldn’t be a history of health & hygiene regs being laid down in legal codes around the world since law and writing were invented. They exist because personal preference doesn’t work. Typhoid Mary was sure she wasn’t causing typhoid outbreaks in households where she worked. 19th C. dairy farmers likewise knew that their unpasteurized milk wasn’t a problem. Every law prohibiting open sewers or toxic food adulterants is a monument to the existence of citizens who wouldn’t behave responsibly unless the law compelled them to do so.” -
: The Disruptive Potential of Online Learning: “What do we know about the performance of online education thus far?… The most basic question about online programs is whether they can actually reduce the cost of tertiary education…. Does the quality of education suffer when content is delivered online?… Two recent studies have found negative impacts of switching from in-person to online instruction on course final grades in an introductory economics class (Alpert et al. 2014, Joyce et al. 2014)…. For business job vacancies… employers strongly prefer applicants with degrees from (nonselective or selective) public institutions as opposed to applicants with degrees from for-profits. The biggest callback ‘penalty’ is imposed on the applicants with an online for-profit degree…. Online education… can succeed in cutting… costs…. But preliminary evidence suggests that–t least for the time being–the new technology comes at a cost of quality…” -
: Missouri State of Mind: Sutter Health vs. Blue Shield: War of the Gargantuas: “I like… increased health insurance literacy, price transparency, and the promotion of [consumer] competition in health care markets. But when I see consumers whipsawed as with the current War of the Gargantuas taking place in Northern California, I wonder if consumer activation alone will save us. In order to have been a savvy purchaser of health insurance… you would also have to have known something about the health insurance and health care services contracting world. Can we reasonably expect consumers to master this, to ferret out what they really need to know?… Northern California employers have a fall open enrollment period…. Here’s what your employer (or exchange) surely didn’t tell health insurance shoppers… this past fall: 1. Blue Shield of California is a huge insurance company, with about three million covered lives in California. 2. Sutter Health is a huge health care provider with, for example, over 4300 licensed acute care beds in California. 3. They bargain fiercely right through and past the open enrollment deadline over the next year’s contract rates. 4. Even a behemoth such as Blue Shield… has, historically, been unable to bring Sutter to heel…. 5. Decisions… [may be] made after the close of your open enrollment period…. 6. The decision by a major provider to exit an established health plan after the close of the open enrollment period is apparently not deemed a qualifying life event allowing for special enrollment under Covered California…. So the chat boards are lighting up. Can it be that a change in a health plan’s coverage options in a highly concentrated market such as Sacramento or the East Bay is not a a trigger for special enrollment rights? You mean you didn’t know all this already? Watch out where Gargantua steps.” -
: What We Talk About When We Talk About the Middle Class: “The problem, as Vox’s Ezra Klein recently wrote, is that the middle class is almost impossible to define. The obvious stumbling block is the variation in local living costs: ‘[T]he amount of money needed to feel middle class varies sharply across the country. Making $50,000 leaves you struggling in Manhattan and wealthy in Detroit…. But… is living in New York City a necessity, or is it a luxury good, much like buying a fancy car or a huge house?’… Middle class is more of a state of mind… means a feeling of being in a similar economic situation to the people around you, combined with a sense of overall optimism and security…. That’s why inequality kills the idea of a middle class, even if it improves people’s standard of living overall. When everyone makes $50,000 a year, it’s easy to tell that you’re middle class. If half of those people suddenly start making $150,000 a year, it’s no longer so easy. For the half of people still making $50,000, nothing has changed in terms of their absolute material standard of living…. But now they might think to themselves, ‘Have I failed in some way?… The idea of the middle class is dead. There is no going back in our lifetimes. We need to find a new way of thinking about broadly shared prosperity.” -
: Social Mobility Barely Exists, But Let’s Not Give Up on Equality: “We live surrounded by inequality…. The Conservative reaction, personified by David Cameron, is to promote social mobility and meritocracy. History shows… that social mobility rates are immutable, [thus] it is better to reduce the gains people make from having high status, and the penalties from low status. The Swedish model of compressed inequality is a realistic option, the American dream of rapid mobility an illusion…. An illustration of the power of lineage even in modern England comes even from the first names children receive at birth. Naming your daughter Jade means she has one hundredth the chance of attending Oxford as a girl whose parents chose for her Eleanor. Similarly for Bradley versus Peter. Is this just the survival of sclerotic olde England, where the dead hand of the past exercises an especially powerful grip? No…. Why is social mobility so resistant to change? The reason is the strong transmission within families of the attributes that lead to social success… policy can do no more than nibble at the fringes of status persistence. Marriage is highly assortative…. Create labour market institutions that compress wages and salaries…. Structure educational systems to narrow the social rewards to those at the top…. We cannot change the winners in the social lottery, but we can change the value of their prizes.” -
: Social Networks and Journalists: “Journalism needs a lot more journalists who are technically proficient, and the new gods, the platform companies, social networks and search engines, need to hire a lot more technologists who are proficient in news. Because at the moment we have a situation which is not working for either of us… we need to work together, because we are now part of one continuous global information loop…”
Should Be Aware of:
- : “After sending Roger Vanderklok for… asking to file a complaint, Philadelphia… TSA supervisor Charles Kieser… lied… in court… fabricated an aggressive confrontation and a bomb threat, neither of which are in evidence on the CCTV footage or in the police report. His victim was help incommunicado in jail, panicking his wife who had no idea where he’d gone. Kieser gets to keep his job.”
- : The best way to win an argument
- Volunteer of the Month: Michael DeLong
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(2014): Reinventing the wheel: “Following up on my post this morning on the financing of the P-CARE proposal there is a significant change as the Republicans proposing this bill realize that they are proposing a massively expensive and disruptive tax hike that will impact middle class and upper middle class voters. Sen. Coburn’s office issued a “clarification” this morning: ‘Institute a modest cap on the exclusion for the most generous high-cost plans; specifically, cap it at 65 percent of the average market price for an expensive high-option plan.’ Hey numbnuts, there is already a 40% excise tax scheduled to go into effect for the most expensive plans. It is called the Cadillac tax and your f—ing campaign committees have been running against it for four years now. Why re-invent the wheel?” <– This is as much a question this year with this year’s Patient CARE proposal as it was last year with last year’s Patient CARE proposal.
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(1953): On Stalin <:– Given the context of discrimination and Jim Crow in W.E.B. Du Bois’s era, attachment to the only political party to make racial equality a goal that it tried to live every day is understandable, but he really should have known better than this by 1953.
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: Pope Francis Declares Oscar Romero a Martyr: “Pope Francis has declared Salvadoran Archbishop Oscar Romero, who was murdered while celebrating Mass in 1980, a martyr…. The U.S. embassy had evidence that Roberto D’Aubuisson, an anti-Communist former army major whom Reaganites considered a Cold War ally, was behind the killing…” -
: Welcome to SubTropolis: The Business Complex Buried Under Kansas City: “Welcome to SubTropolis: The Massive Business Complex Buried Under Kansas City
More than 1,000 people spend their workdays in SubTropolis, an industrial park housed in an excavated mine the size of 140 football fields…”
Morning Must-Read: Teresa Nielsen Hayden: “If Personal Beliefs Were a Valid Basis for Public Health…
…there wouldn’t be a history of health & hygiene regs being laid down in legal codes around the world since law and writing were invented. They exist because personal preference doesn’t work. Typhoid Mary was sure she wasn’t causing typhoid outbreaks in households where she worked. 19th C. dairy farmers likewise knew that their unpasteurized milk wasn’t a problem. Every law prohibiting open sewers or toxic food adulterants is a monument to the existence of citizens who wouldn’t behave responsibly unless the law compelled them to do so.
Afternoon Must-Read: David Deming, Claudia Goldin, Lawrence F. Katz, and Noam Yuchtman: The Disruptive Potential of Online Learning
…The most basic question about online programs is whether they can actually reduce the cost of tertiary education…. Does the quality of education suffer when content is delivered online?… Two recent studies have found negative impacts of switching from in-person to online instruction on course final grades in an introductory economics class (Alpert et al. 2014, Joyce et al. 2014)…. For business job vacancies… employers strongly prefer applicants with degrees from (nonselective or selective) public institutions as opposed to applicants with degrees from for-profits. The biggest callback ‘penalty’ is imposed on the applicants with an online for-profit degree…. Online education… can succeed in cutting… costs…. But preliminary evidence suggests that–t least for the time being–the new technology comes at a cost of quality…
Lunchtime Must-Read: Ann Marie Marciarille: Sutter Health vs. Blue Shield: War of the Gargantuas
The interaction of health-care regulation and antitrust policy is perhaps the most fraught area in the fight over how to build a system to control our health care costs. And not just individuals but the government has an enormous stake in this game–through exchange subsidies, and through all the other programs in which reimbursement rates are in any way influenced by what is customary and appropriate in the private marketplace:
…price transparency, and the promotion of [consumer] competition in health care markets. But when I see consumers whipsawed as with the current War of the Gargantuas taking place in Northern California, I wonder if consumer activation alone will save us. In order to have been a savvy purchaser of health insurance… you would also have to have known something about the health insurance and health care services contracting world. Can we reasonably expect consumers to master this, to ferret out what they really need to know?… Northern California employers have a fall open enrollment period…. Here’s what your employer (or exchange) surely didn’t tell health insurance shoppers… this past fall:
1. Blue Shield of California is a huge insurance company, with about three million covered lives in California.
2. Sutter Health is a huge health care provider with, for example, over 4300 licensed acute care beds in California.
3. They bargain fiercely right through and past the open enrollment deadline over the next year’s contract rates.
4. Even a behemoth such as Blue Shield… has, historically, been unable to bring Sutter to heel….
5. Decisions… [may be] made after the close of your open enrollment period….
6. The decision by a major provider to exit an established health plan after the close of the open enrollment period is apparently not deemed a qualifying life event allowing for special enrollment under Covered California….So the chat boards are lighting up. Can it be that a change in a health plan’s coverage options in a highly concentrated market such as Sacramento or the East Bay is not a a trigger for special enrollment rights? You mean you didn’t know all this already?
Watch out where Gargantua steps.
Morning Must-Read: Noah Smith: What We Talk About When We Talk About the Middle Class
Noah Smith argues that inequality has a direct effect on utility functions and societal well-being–not via the envy/spite channel, but through a yardstick channel by which an unequal society is one in which people feel insecure:
…is that the middle class is almost impossible to define. The obvious stumbling block is the variation in local living costs:
[T]he amount of money needed to feel middle class varies sharply across the country. Making $50,000 leaves you struggling in Manhattan and wealthy in Detroit…. But… is living in New York City a necessity, or is it a luxury good, much like buying a fancy car or a huge house?…
Middle class is more of a state of mind… means a feeling of being in a similar economic situation to the people around you, combined with a sense of overall optimism and security…. That’s why inequality kills the idea of a middle class, even if it improves people’s standard of living overall. When everyone makes $50,000 a year, it’s easy to tell that you’re middle class. If half of those people suddenly start making $150,000 a year, it’s no longer so easy. For the half of people still making $50,000, nothing has changed in terms of their absolute material standard of living…. But now they might think to themselves, ‘Have I failed in some way?…
The idea of the middle class is dead. There is no going back in our lifetimes. We need to find a new way of thinking about broadly shared prosperity.