Employment Situation Summary:
“Total nonfarm payroll employment rose by 252,000…
…in December, and the unemployment rate declined to 5.6 percent…. The unemployment rate declined by 0.2 percentage points… and the number of unemployed persons declined by 383,000 to 8.7 million…. The civilian labor force participation rate edged down by 0.2 percentage point
to 62.7 percent in December.”
Must- and Shall-Reads:
US Export Economy Fails to Import Jobs:
“In 2009, exports created 9.7m jobs; by 2013 the tally was 11.3m…. Back in 2009, each billion dollar’s worth of exports was creating 6,763 jobs. In 2013, it was 5,590 jobs. That is a fall of 17 per cent–in just four years…. American companies are becoming more innovative and competitive on the world stage…. There is a more pessimistic twist to all this: what will the surplus workers do?… Mr Kleinfeld has recently started working with community colleges on retraining programmes, in a bid to help workers to adapt. Other companies are doing the same. But what is lamentably missing is any coherent policy from Washington to support such endeavour…. That needs to change–well before the current recovery loses steam.”
Markets Prophesy Secular Stagnation:
“This is indeed a downbeat story. It is neither healthy nor sustainable for long-term rates to stay this low for this long…. Savers cannot survive on negative real returns. Pension funds are already struggling…. Although finance ministries sell bonds more easily in such an environment, they should not look to prolong it. Their policies should aim at restoring growth to levels that would lead to a higher level of interest rates…. he first recourse is for central banks to show fewer qualms in pursuit of higher inflation. But a useful next step would be for governments to take advantage of these cheap rates to borrow and invest…. It is hard to imagine a future finance minister wishing he had borrowed less when the price was negative.”
Could Lower 10-Year Yields Spark A More Aggressive Fed?:
“Falling long-term interest rates pose a quandary for Federal Reserve officials…. If falling yields are a reflection of diminishing inflation prospects… it ought to prompt the Fed to hold off on raising short-term interest rates…. If… lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner…. The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made…. ‘During the 2004-07 period, the (Fed) tightened monetary policy nearly continuously, raising the federal funds rate from 1 percent to 5.25 percent in 17 steps. However, during this period, 10-year Treasury note yields did not rise much… the availability of mortgage credit eased…. With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector.’ Mr. Dudley’s conclusion was that the pace of the Fed’s short-term interest rate moves this time around ought to be dictated in part by whether the rest of the financial system is moving with or against the Fed’s intentions when it decides it ought to start restraining credit creation: ‘When lift-off occurs, the pace of monetary policy normalization will depend, in part, on how financial market conditions react to the initial and subsequent tightening moves.’… The challenge for the Fed is that one can make any number of arguments about the cause of falling long-term rates today…. The Fed’s next policy meeting is three weeks away. It is clear officials will spend a considerable time debating the correct response to a perplexing lurch down in long-term rates.”
Why the Fight Over the Keystone Pipeline is Completely Divorced From Reality:
“Several years ago, liberals… settled on Keystone because the oil it would transport… is especially damaging to the environment…. Conservatives seized on Keystone because it offered a clear example of liberals prioritizing the environment over the jobs the pipeline’s construction would create, an effective political attack in a lousy economy. President Obama’s… only added to the appeal…. Keystone has attained tremendous symbolic importance for both Democrats and Republicans. But… the pipeline’s actual importance to oil markets, the economy and the environment has steadily diminished. Whoever wins, the ‘victory’ will be pointless and hollow…”
Jeb Bush Presidential PAC:
“If Jeb Bush is trying to show Republicans that he’s conservative enough to be their nominee, he has a strange way of showing it…. His… political action committee, The Right to Rise… income inequality as a core economic problem…. In a Pew poll last spring, only 19 percent of Republicans called the divide between rich and poor a ‘very big problem.’ And when asked why that gap exists, a plurality of Republicans said it was because the poor don’t work as hard…. The notion that… Americans… have rights to a minimum standard of economic well-being was made famous by Franklin Roosevelt…. Ever since FDR outlined these ‘positive rights,’ rejecting them has constituted an important part of what it means to be an American conservative…. ‘The right to rise’ may sound more entrepreneurial than the right to health care, housing, and a decent job, but it amounts to the same thing…. In the 2011… op-ed… [Bush] did say that Americans also have the right to fall…. But now that he’s running for president as the Republican who can win over non-Republicans, Jeb has jettisoned that part…. His rhetoric effectively makes upward mobility a government obligation…. It’s unlikely to impress real conservatives, who will sooner or letter realize that a politician they already distrust is trying to have it both ways.”
Should Be Aware of:
The GOP said Obamanomics would kill the economy. It didn’t. Now what?:
“Making the case that an improving economy would be improving even faster with smarter GOP policies isn’t as politically compelling as simply pointing to an economy in flames…. Also, a lot harder…. The GOP’s recent aversion to the Federal Reserve makes it tough to offer up active monetary policy as an alternate theory–despite its explanatory power–for why the U.S. is doing far better than other advanced economies…. It’s not just that Republicans need to offer a positive agenda; they also need one that goes beyond an obsession with deficits and debt and that tackles the everyday concerns of most Americans…. One big worry for many parents is that their kids will have less opportunity than they did…. The U.S. economy has plenty of pressing problems, just often not the ones Republicans have been most worried about.”
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Professors, Politicians, and Moments of Truth: “Simon Wren-Lewis… whether US growth despite sequestration is a huge problem for Keynesians…. Look at the scatterplot…. [Has the U.S.] done… better enough to be considered a serious challenge?… Really? The question then becomes, why would… [an] economist with a reputation to defend… make that claim?… Wren-Lewis points us to a 2010 article… co-authored by Jeff Sachs and… George Osborne… all about the invisible bond vigilantes and the confidence fairy…. 2010 was a real moment of truth…. Being a forthright Keynesian at the time meant sticking out your neck… running very much counter to… the Very Serious People…. As it turned out, however, the Keynesian view came out looking very good, and siding with the VSPs was not a good move after all…. If you’re an economist… it’s not so easy to walk away unscathed…. Enough said.”
Samsung Gets Mugged in Androidland:
“What just happened here? What happened is that Samsung had a fun little run as the premium maker of devices in a burgeoning technology ecosystem it doesn’t control, and now the inexorable forces of competition, commoditization, modularity and the like have brought it back to earth… selling smartphones is turning out to be less lucrative than it looked to be a couple of years ago. This shouldn’t surprise anyone who was reading the business pages in the 1990s…. History never repeats itself, it only rhymes, so there are also differences…. Nobody controls the Android ecosystem the way that Microsoft and Intel controlled PCs…. Apple has done a much better job this time around of defining a role for itself. It’s got… 11.7 percent to Android’s 84.4…. But that 11.7 percent represents the most affluent, profitable customers…. I have no idea how long Apple can maintain this lock on unimaginative affluent people. (I needed to buy a new phone this week, spent about 30 seconds thinking about it, then ordered an iPhone 6.)… In the… Android ecosystem… consumers… especially [the] less-affluent… are getting the windfall. Thanks, Google! Sorry, Samsung! And now let me go check if my new iPhone 6 has arrived yet.”
US Export Economy Fails to Import Jobs:
“In 2009, exports created 9.7m jobs…
…by 2013 the tally was 11.3m…. Back in 2009, each billion dollar’s worth of exports was creating 6,763 jobs. In 2013, it was 5,590 jobs. That is a fall of 17 per cent–in just four years…. American companies are becoming more innovative and competitive on the world stage…. There is a more pessimistic twist to all this: what will the surplus workers do?… Mr Kleinfeld has recently started working with community colleges on retraining programmes, in a bid to help workers to adapt. Other companies are doing the same. But what is lamentably missing is any coherent policy from Washington to support such endeavour…. That needs to change–well before the current recovery loses steam.
Comment on:
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Efficient Credit Policies in a Housing Debt Crisis:
Very nicely done by the very sharp Janice Eberly and Arvind Krishnamurthy, yet after reading it I am more mystified than I was before. I am more mystified that conforming-refinancing loans with equity kickers were not offered to all underwater and above-water homeowners alike. I am mystified that, instead, the debt overhang was removed via foreclosures and some case-by-case renegotiations. It was brutal, as discussant Paul Willen had acknowledged, and it is not clear that it is over yet. Even though during the housing bubble a million single-family homes above trend were being built each year, since 2007 the annual total has dropped to half a million, far below the long-run trend of 1.2 million.
Now the country is 4 million single-family homes short based on pre-housing-bubble trends. That translates into 4 million families living in makeshift situations–primarly their relatives’ basements and attics. Yet, strangely, this enormous overhang is not exerting any pressure for a single-family housing construction recovery.
It is clear that both these potential homeowners and the lenders are unwilling to take on the types of risk they routinely took before 2008. The single-family housing credit channel has not been restored to its old status. Is this a good finance pattern? Was the previous pattern a poor idea in the first place? Or is the country now incurring enormous societal welfare losses due to the Obama administration’s failure to use its administrative powers to fix the housing-finance credit channel?
Comment on:
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The Early Impact of the Affordable Care Act:
I am surprised that costs have risen in so many places.
That suggests to me that many of the previously uninsured were not low-value consumers, the kind who would not demand much health care, as we saw in the case in Massachusetts.
That foregone consumer surplus caused by not insuring the uninsured earlier has thus turned out to be very much bigger in the pre-ACA regime than I had thought. And so the potential positive social welfare effects of the ACA are significantly greater than I had believed likely.
Moreover, the paper seems to me to imply that the division of the surplus from subsidies between insurance companies on the one hand and consumers on the other is very different between the states that have aggressively pursued ACA enforcement and those that have not. In the passive and nonimplementing states–the nullification states–insurance companies appear to have grabbed a greater amount of the surplus. I wonder if that might explain some of the absence of a strong insurance lobby in nullification states for more aggressive implementation? Non-implementation means that insurance companies forego some of the potential subsidy pool. But it also means that the pressures in the ACA that would increase market competition are also largely absent.
A view diametrically opposed to the Federal Reserve’s view as set out by William Dudley. While Dudley wants to take current very-low rates as a sign that Ms. Market doesn’t understand the world and that the Fed should raise rates sooner and faster than it was planning to, the FT does not–it thinks that the market accurately perceives the Federal Reserve as, once again, failing to understand the gravity of the situation…
Note also the next to last sentence I quote. Larry Summers and I have completely won the intellectual argument that as long as interest rates are this low governments should be spending more and taxing less, no? So why have we had no effect on policy?
Markets Prophesy Secular Stagnation:
“This is indeed a downbeat story…
…It is neither healthy nor sustainable for long-term rates to stay this low for this long…. Savers cannot survive on negative real returns. Pension funds are already struggling…. Although finance ministries sell bonds more easily in such an environment, they should not look to prolong it. Their policies should aim at restoring growth to levels that would lead to a higher level of interest rates…. he first recourse is for central banks to show fewer qualms in pursuit of higher inflation. But a useful next step would be for governments to take advantage of these cheap rates to borrow and invest…. It is hard to imagine a future finance minister wishing he had borrowed less when the price was negative.”
The “more thoughts about this” I promised earlier below…
Could Lower 10-Year Yields Spark A More Aggressive Fed?:
“Falling long-term interest rates pose a quandary for Federal Reserve officials….
…If falling yields are a reflection of diminishing inflation prospects… it ought to prompt the Fed to hold off on raising short-term interest rates…. If… lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner…. The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made….
During the 2004-07 period, the (Fed) tightened monetary policy nearly continuously, raising the federal funds rate from 1 percent to 5.25 percent in 17 steps. However, during this period, 10-year Treasury note yields did not rise much… the availability of mortgage credit eased…. With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector.
Mr. Dudley’s conclusion was that the pace of the Fed’s short-term interest rate moves this time around ought to be dictated in part by whether the rest of the financial system is moving with or against the Fed’s intentions when it decides it ought to start restraining credit creation:
When lift-off occurs, the pace of monetary policy normalization will depend, in part, on how financial market conditions react to the initial and subsequent tightening moves….
The challenge for the Fed is that one can make any number of arguments about the cause of falling long-term rates today…. The Fed’s next policy meeting is three weeks away. It is clear officials will spend a considerable time debating the correct response to a perplexing lurch down in long-term rates.
Our current remarkably-low long-term interest rates has three possible interpretations:
Ms. Market expects currently-planned near-term Fed policy to produce a very weak economy for a long time to come, and hence very low interest rates in the out years. Ms. Market is correct. In this case, low long-term interest rates are a signal that the Federal Reserve’s current liftoff plans are a mistake and should be revisited.
Ms. Market expects currently-planned near-term Fed policy to produce a very weak economy for a long time to come, and hence very low interest rates in the out years. Ms. Market is wrong. In this case, low long-term interest rates are not a signal that the Federal Reserve’s current liftoff plans are a mistake and should be revisited. Rather, the Federal Reserve should act as in (3).
Ms. Market expects currently-planned near-term Fed policy to produce a normal economy in the out-years, but the U.S. Treasury market has an unusually small or negative term premium because of the large number of foreign investors seeking U.S.-based political and economic risk insurance via holdings of U.S. Treasuries. In this case, low long-term interest rates are inappropriately stimulative and run the risk of generating an overheating economy, and the proper response by the Federal Reserve is to announce that it will raise interest rates sooner and faster in order to push long-term rates to where they need to be for a sustainable Goldilocks continued recovery.
The Federal Reserve strongly believes that Ms. Market has no information about the future course of the macroeconomy that the Federal Reserve does not have–that (1) is simply unthinkable. That leaves (2)–Ms. Market thinks the Federal Reserve’s currently-planned near-term policy path is risking another lost decade, but Ms. Market is wrong–or (3)–long-term rates have an anomalously-low term premium because of foreign-investor demand.
A glance at the graph above would seem to rule out (3): 10-Yr breakeven inflation has fallen from 2.5%/year just before the taper tantrum to 1.6%/year today, while the TIPS has risen from -0.7%/year to +0.4%/year today. If it were (3), the surge of foreign demand ought to have put downward pressure on both nominal Treasuries and TIPS, leaving the breakeven largely unchanged. That is not what has happened. If the Federal Reserve wants to hold to (3), therefore, it needs to add to it:
3′. Something else weird and unrelated has happened in the market for TIPS.
While that is possible, it is disfavored by Occam’s Razor.
Thus Dudley seems to be chasing down a red herring. The interpretation he wants to put forward ought to be this:
Today Ms. Market expects inflation over the next ten years to be 0.9%/year less than it expected it to be back in June 2013. But we know better: the economy is actually much stronger than Ms. Market thinks.
Coming from a Federal Reserve that has overestimated the future strength of the economy in every single quarter since the start of 2007, that is not a terribly reassuring posture for it to take.
804 words
At least one thing here from William Dudley seems to me to be completely wrong: The US economy did not need higher interest rates in 2004-2007–there were no signs of accelerating wage or core price inflation that would indicate that the Federal Reserve was behind the curve as far as aggregate demand management was concerned. There were macroprudential failures–a failure to ensure that mortgage borrowers understood and could manage the risks they were running, that MBS purchasers understood and could manage the risks they were running, and that key too-big-to-fail-institutions were not creating systemic risk via regulatory arbitrage by which they held as reserves things they claimed were reserves but were not in fact safe enough assets to be reserves. These were major policies surveillance failures. But they have little to do with raising interest rates to hit the economy on the head with a brick and raise unemployment.
More thoughts about the rest later…
Could Lower 10-Year Yields Spark A More Aggressive Fed?:
“Falling long-term interest rates pose a quandary for Federal Reserve officials….
…If falling yields are a reflection of diminishing inflation prospects… it ought to prompt the Fed to hold off on raising short-term interest rates…. If… lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner…. The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made….
During the 2004-07 period, the (Fed) tightened monetary policy nearly continuously, raising the federal funds rate from 1 percent to 5.25 percent in 17 steps. However, during this period, 10-year Treasury note yields did not rise much… the availability of mortgage credit eased…. With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector.
Mr. Dudley’s conclusion was that the pace of the Fed’s short-term interest rate moves this time around ought to be dictated in part by whether the rest of the financial system is moving with or against the Fed’s intentions when it decides it ought to start restraining credit creation:
When lift-off occurs, the pace of monetary policy normalization will depend, in part, on how financial market conditions react to the initial and subsequent tightening moves.’…
The challenge for the Fed is that one can make any number of arguments about the cause of falling long-term rates today…. The Fed’s next policy meeting is three weeks away. It is clear officials will spend a considerable time debating the correct response to a perplexing lurch down in long-term rates.
Innovation, most people can agree, is a good thing. Continued advances in technology are critical for the long-run growth of the economy and rising living standards. The tricky thing is figuring out how to best promote innovation. One well-trodden policy tool is giving the creator of a new technology or process an incentive by providing her with a monopoly over the invention, also known as a patent. But can there be too much of good thing. Patents may help spur one innovation, but hurt overall innovation further down the line.
No innovation is an island. One advance helps spur several others, either directly or indirectly, with the resulting accumulation of knowledge and technology further boosting economic growth. But patents, if they hinder innovations based on the new innovation, may slow down the pace of follow-on innovation.
A paper presented at the recently completed annual Allied Social Sciences Associations meeting found a significant effect of patents on cumulative innovation. Alberto Galasso of the University of Toronto and Mark Schankerman of the London School of Economics look specifically at the effect of patent invalidations on citations of those innovations in future patents.
Patents in the United States can be invalidated by a federal court as well as a special appeals court, the U.S. Court of Appeal for the Federal Circuit, which has exclusive jurisdiction over appeals cases involving patents. The authors look at what happens to citations after the patent was struck down.
Galasso and Schankerman find a large effect from patent invalidations: Citations increase by about 50 percent on average in the five years afterward. But once they dig deeper into the data, they find that the effect isn’t the same for all patents. For many fields, such as pharmaceuticals, the effect was minimal to non-existent.
The fields that did see significant effects on cumulative innovation were computers and communications, electronics, and medical instruments. These fields are ones where the technology is complex and patent ownership is widely spread, making it more likely that patents can block follow-on innovations.
The authors also looked at the sizes of the firms affected by these decisions. They find that the effect is entirely about the patents of large firms being invalidated and the increased citations are by small firms. So these patents were seemingly restricting the innovative efforts of smaller businesses.
If patents are acting as a barrier, what is to be done? Remember that the effect is only for certain kinds of technology industries. So the authors point out that more efficient patent arrangements for certain industries should be considered. Other options for spurring innovation outside of the patent system, such as innovation prizes, exist as well. More federal spending on basic scientific research is fundamental, too. Regardless of the method, policymakers need to consider the best way to foster innovation now without hindering it in the future.
Must- and Shall-Reads:
Should Be Aware of:
Comments: