Daniel Riera-Crichton et al.: Procyclical and Countercyclical Fiscal Multipliers: Evidence from OECD Countries: “It is not always the case that government spending…
…is going up in recessions…. The ‘true’ long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In extreme recessions, the long-run multiplier reaches 3.1.”
Adam Ozimek: Part-Time Work Is Up Even Among the Self-Employed: “The U.S. unemployment rate…
…is nearing levels normally associated with full employment…. [But] the number of people who say they would rather have full-time jobs and cite economic reasons for why they don’t… rose from around 4 million before the recession to 9 million at its peak, and is now down to around 7 million…. Those favoring structural explanations argue that the increased use of complicated staffing software has allowed firms to be more flexible, and thus to employ more part-timers. Another structural explanation is that higher benefit costs—particularly for healthcare under the Affordable Care Act…. Several factors suggest the rise in involuntary part-time work is cyclical, including the fact that it has occurred across industries and demographics groups…. Even more telling, the same rise in involuntary part-time work has occurred among the self-employed. This can’t be a result of staffing software or a desire to avoid healthcare or other benefit costs…
Antonio Fatas: The permanent scars of fiscal consolidation: “I… look at the actual change in potential output during those years (2010-11)…
…as presented in the April 2014 IMF World Economic Outlook. Comparing this figure to the forecast done back in April 2010, we can calculate for each country the forecast error associated to potential output growth. Most models assume that there should be no correlation between these two numbers. Fiscal consolidations affect output in the short run but not in the long run…. Fiscal consolidations have led to a large change in our views on potential output… around -0.75…. This number is very large and it provides supporting evidence of the arguments made by DeLong and Summers regarding the possibility of fiscal contractions leading to increases in debt via the permanent effects they have on potential output…
Must- and Shall-Reads:
Martin Wolf (2012): The German Response: “Mr Ludger Schuknecht: ‘Sir, Martin Wolf… voices a fundamental critique of the European fiscal and economic policy strategy in the context of the current debt crisis. He argues that the “eurozone is now on a journey towards break-up that Germany shows little will to alter”…. Mr Wolf’s solution for the current problems is risk transfer via eurobonds (of some sort), and demand stimulation via cheaper money and less fiscal consolidation in Germany. But the public and markets have been led to believe in short-term measures for far too long. And they know there is too much moral hazard already. Eurobonds would only make it worse and the healthier countries–mainly Germany and France–cannot even afford them.’… The aim is not risk transfer, but rather substantially to reduce the problems members of the currency union now have in retaining liquidity in their sovereign bond markets. Mr Schuknecht argues that such multiple equilibria are impossible. There is good reason to believe he is wrong…. I do not know what ‘short-term measures’, Mr Schuknecht is referring to. But the public presumably expects the eurozone at least to hit its inflation target. At present, there is good reason to doubt that it will…. ‘Moral hazard’ is not the clincher Mr Schuknecht believes it is. We have fire brigades, despite moral hazard, because it is bad for the neighbourhood for a house to burn down….. Deep economic collapses are very dangerous. Mr Schuknecht, with his emphasis on the long term, completely ignores these dangers. If trying to avoid such a dire outcome is ‘short-termism’, so be it. I think of it as trying to find a practical exit from the current trap. Without it, the eurozone may never reach the long term…”
Jordi Galí: The effects of a money-financed fiscal stimulus: “The implications for output and inflation of a money-financed fiscal stimulus are highly model-dependent…. When that fiscal intervention is analysed in the context of an ‘idealised’ classical monetary economy with perfect competition in all markets and fully flexible prices and wages, the money-financed fiscal stimulus has a very small effect on output and employment and a huge, frontloaded impact on inflation…. When I deviate from an ideal classical world and use instead a more realistic model allowing for imperfect competition and nominal wage and price rigidities to evaluate the impact of a money-financed fiscal stimulus, the effects are very different… very strong effects on economic activity with relatively mild inflationary consequences spread over several years…a crowding-in of private consumption and investment, caused by the persistently lower real interest rates due to higher expected inflation. The debt-GDP ratio is also predicted to go down over time…”
Financial Times: ECB’s Mario Draghi and his misguided malcontents: “Two years ago, Mario Draghi pledged to do ‘whatever it takes’ to save the euro… to use the full monetary policy arsenal to revive the stalling eurozone economy. On Thursday, the European Central Bank president primed his latest weapon…. Yet misguided opposition from inside and outside the bank continues to prevent him firing at will. His colleagues should pass him the ammunition and move out of his way…. The feeble eurozone recovery has stalled. The inflation rate in the currency area is down to 0.3 per cent and the core economies of Germany, France and Italy are at or close to standstill…. Mr Schäuble is not wrong to emphasise the need for structural reform within eurozone economies, but liberalisation and asset purchases are complements…. Reality must at some point impinge upon the monetary theocrats: the threat of outright deflation in the eurozone is not a sign of rising competitiveness–it is a menace…. Since the onset of the eurozone sovereign debt crisis in 2010, the standard pattern has been to do the right thing between six and 18 months too late, the delay generally originating in Frankfurt or Berlin. Now is another opportunity to ditch faulty analysis and wrong-headed policy and arrest deflation before it takes hold. Mr Draghi has shown the right instincts since he took over the ECB presidency. Those critics who have been proved wrong again and again in the eurozone crisis should stop standing in his path.”
Ta-Nehisi Coates (2012): We Are All Welfare Queens Now: “Thinking some more on Mitt Romney’s high-handed claim that one in two Americans will vote for Obama simply to better ensure their own sloth, I was reminded of Lee Atwater’s famous explanation of the Southern Strategy: ‘You start out in 1954 by saying, “Nigger, nigger, nigger.” By 1968 you can’t say “nigger”…. So you say… forced busing, states’ rights…. You’re getting so abstract… talking about… economic things and a byproduct of them is [that] blacks get hurt worse than whites…. If it is getting that abstract, and that coded, that we are doing away with the racial problem one way or the other… a hell of a lot more abstract than “Nigger, nigger.”‘… I think what’s often missed in analyzing these tactics is how they, themselves, are evidence of progress and the liberal dream of equal citizenship before the law…. As tactics aimed at suppressing black citizenship become more abstract, they also have the side-effect of enveloping non-blacks…. At each interval the ostensible pariah grows, until one in two Americans are members of the pariah class…. When the party of white populism finds itself writing off half the country, we are really close.”
Jared Bernstein: How the Jobless Rate Underestimates the Economy’s Problems: “Why not just look at the unemployment rate and call it a day? Because special factors in play right now make the jobless rate an inadequate measure of slack. In fact, at 6.1 percent last month, it’s within spitting distance of the rate many economists consider to be consistent with full employment, about 5.5 percent…. First, there are over seven million involuntary part-time workers… up two percentage points from its pre-recession trough… the unemployment rate doesn’t capture this dimension of slack at all…. Second… participation…. Economists have scurried about trying to figure out how much of the three-percentage-point decline in the labor force participation rate… to attribute to… structural… factors…. Jan Hatzius… another 1.6 million people worth of slack…”
Should Be Aware of:
Josh Barro: Inflation Hawks’ Views are Independent of Actual Monetary Outcomes: “23 reasonably prominent economists, fund managers, academics and journalists signed a coalition letter opposed to quantitative easing…. The letter warned that it would ‘risk currency debasement and inflation’ and fail to create jobs; as such, they argued, quantitative easing should be ‘reconsidered and discontinued.’ Four years later, inflation is still low (lower even than the 2 percent the Federal Reserve is supposed to be aiming for), unemployment has fallen, economic and job growth has been modest but present, and the stock market has soared. Despite the authors’ insistence that quantitative easing faced ‘broad opposition from other central banks,’ the Bank of England and the Bank of Japan have undertaken similar programs. So… Caleb Melby, Laura Marcinek and Danielle Burger went back to the letter’s signers with a simple question: Have you changed your mind? And pretty uniformly, the signatories said they had…. Ha-ha, I’m just kidding. People who obsess over inflation don’t change their minds…. 14 had the good sense not to comment. The other nine told Bloomberg their views were unchanged…. Their explanations are pretty creative…. Grant… [said] we have had inflation–it just hasn’t shown up in consumer prices…. Holtz-Eakin… explained that the letter was correct because it didn’t set a date… [and] noted that inflation would surely someday exceed 2 percent. Several other signatories similarly rested their arguments on the lack of a date in the letter, and warned that high inflation could still come. Among them is Niall Ferguson, the Harvard history professor, who wrote a 2011 op-ed for Newsweek proclaiming that ‘double-digit inflation is back.’ (It wasn’t.)… I am not surprised…. It’s hard to admit you are wrong–whether you’re Niall Ferguson or Jenny McCarthy.”
Steve M.: Rand Paul is an Ebola Truther: “[Rand] Paul thinks it’s a huge mistake to downplay the threat of an epidemic, and believes political correctness is what’s hampering a real discussion from taking place…. ‘It’s an incredibly transmissible disease that everyone is downplaying, saying it’s hard to catch. Well, we have physicians and health workers who are catching it who are completely gloved down and taking every precaution and they’re still getting it.’… Of course, that’s not what’s going on. Here’s the truth: ‘Health care workers in poor nations often do not have enough protective gear to keep them safe from being infected with blood-borne viruses such as Ebola and HIV, a new study shows…. “In many cases, medical staff are at risk because no protective equipment is available–not even gloves and face masks,” the WHO statement added…. In Liberia, only 56 percent of hospitals had protective eyewear for doctors and nurses and only 63 percent had sterile gloves. In Sierra Leone, those figures were 30 percent and 70 percent….’ The mainstream press hates Barack Obama and Hillary Clinton and is just dying to anoint someone, anyone, as the modern, hipster embodiment of a rejuvenated GOP. Rand Paul, with his groovy dudebro libertarianism, is the one the insider journos have pinned the most hopes on. Well, yeah, this Ebola trutherism is hip, but it’s hip the way vaccine skepticism is hip…”
Pro-Growth Liberal: Public Infrastructure Investment: IMF v. Mankiw: “Abdul Abiad, David Furceri, and Petia Topalova… sensibly state: ‘Many advanced economies are stuck in a low growth and high unemployment environment, and borrowing costs are low. Increased public infrastructure investment is one of the few remaining policy levers to support growth. In many emerging market and developing economies, infrastructure bottlenecks are putting a brake on how quickly these economies can grow.’ Greg Mankiw responds: ‘The IMF endorses the free-lunch view of infrastructure spending. That is, an IMF study suggests that the expansionary effects are sufficiently large that debt-financed infrastructure spending could reduce the debt-GDP ratio over time. Certainly this outcome is theoretically possible (just like self-financing tax cuts), but you can count me as skeptical about how often it will occur in practice (just like self-financing tax cuts). The human tendency for wishful thinking and the desire to avoid hard tradeoffs are so common that it is dangerous for a prominent institution like the IMF to encourage free-lunch thinking.’ Did Mankiw miss the memo? We are far below full employment and monetary policy alone has not restored full employment. Even if fiscal stimulus is not self financing, the IMF case is still solid. Funny how times change. Back in 2001 Mankiw was endorsing all sorts of budget busting fiscal stimulus on the grounds that we were below full employment. And back then we were not in a liquidity trap so using monetary policy alone was a more viable option.”
Martin Wolf (2012): The German Response: “Mr Ludger Schuknecht: ‘Sir, Martin Wolf…
…voices a fundamental critique of the European fiscal and economic policy strategy in the context of the current debt crisis. He argues that the “eurozone is now on a journey towards break-up that Germany shows little will to alter”…. Mr Wolf’s solution for the current problems is risk transfer via eurobonds (of some sort), and demand stimulation via cheaper money and less fiscal consolidation in Germany. But the public and markets have been led to believe in short-term measures for far too long. And they know there is too much moral hazard already. Eurobonds would only make it worse and the healthier countries–mainly Germany and France–cannot even afford them.’…
The aim is not risk transfer, but rather substantially to reduce the problems members of the currency union now have in retaining liquidity in their sovereign bond markets. Mr Schuknecht argues that such multiple equilibria are impossible. There is good reason to believe he is wrong…. I do not know what ‘short-term measures’, Mr Schuknecht is referring to. But the public presumably expects the eurozone at least to hit its inflation target. At present, there is good reason to doubt that it will….
‘Moral hazard’ is not the clincher Mr Schuknecht believes it is. We have fire brigades, despite moral hazard, because it is bad for the neighbourhood for a house to burn down….. Deep economic collapses are very dangerous. Mr Schuknecht, with his emphasis on the long term, completely ignores these dangers. If trying to avoid such a dire outcome is ‘short-termism’, so be it. I think of it as trying to find a practical exit from the current trap. Without it, the eurozone may never reach the long term…”
New data released today about the U.S. labor market show the economic recovery continues apace, with persistent job growth and a reduction in the unemployment rate. Yet the lack of real wage growth also reveals weakness in the economy.
The Bureau of Labor Statistics announced that the unemployment rate was 5.9 percent in September and that the economy added 248,000 jobs during the month. The reduction in the unemployment rate was due to both an increase in employment and workers dropping out of the labor force. According to the BLS household survey, the number of employed workers increased by 232,000, but the number of people not in the labor force increased by 315,000.
Put another way, the labor force participation rate declined by 0.1 percentage points to 62.7, while the employment-to-population ratio stayed flat at 59 percent. But the trend for the employment-to-population ratio is slightly different if we look at the figure for prime-age workers, those ages 25 to 54. The share of this group with a job declined by 0.1 percentage points to 76.7. The trend over the past year, however, has been upward for prime-age workers as the rate continues its climb toward its December 2007 level of 79.7.
Other measures of labor market slack decreased as well. The so called U-6 unemployment rate, which adds those marginally attached to the labor force and those working part time for economic reasons to the official unemployment rate, declined to 11.8 percent from 12 percent in August.
In addition to the increase in the pace of job creation in September, the new data show that job growth in August and July was stronger than previously thought, by 69,000 jobs. In September, both the private and public sectors added jobs, with the split going 236,000 for the private sector and 12,000 for the public sector. Within the private sector, job creation was led by professional and business services (81,000 jobs), retail trade (35,300 jobs), and health care (22,700 jobs). But job growth was less broad based in September. The diffusion index—a measure showing essentially what percent of industries added jobs—declined to 57.8 from 62.7 the previous month.
While many figures showed gains, one important statistic continues to be flat. The year-on-year growth in average hourly wages for all private sector workers was again 2 percent. Nominal wage growth (wage growth that doesn’t account for inflation) has been stuck at this level for years now. Given inflation has been roughly 2 percent over this period as well, real wage growth (inflation-adjusted) has been non-existent.
This lack of real wage growth as the unemployment rate declines may be an indicator of labor market slack. But given the tepid economic growth of the past several years, any anticipated pent- up demand for raises among workers may not appear until the unemployment rate falls even further. Either way, stagnant real wages means that many Americans are not feeling the full benefits of the labor market recovery. The labor market is healing, but the recovery will be incomplete without robust wage growth.
Bureau of Labor Statistics” Employment Situation Summary “In September, the unemployment rate declined…
…by 0.2 percentage point to 5.9
percent…. The civilian labor force participation rate, at 62.7 percent, changed little…. The employment-population ratio was 59.0 percent for the fourth consecutive month…. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in September at 7.1 million…. 2.2 million persons were marginally attached to the labor force, essentially unchanged from a year earlier….Total nonfarm payroll employment rose by 248,000 in September, compared with an average monthly gain of 213,000 over the prior 12 months…. The average workweek for all employees on private nonfarm payrolls
edged up by 0.1 hour to 34.6 hours…. The average
workweek for production and nonsupervisory employees on private nonfarm payrollsedged down by 0.1 hour to 33.7 hours…. Average hourly earnings for all employees on private nonfarm payrolls, at $24.53,
changed little in September….The change in total nonfarm payroll employment for July was revised from +212,000 to +243,000, and the change for August was revised from +142,000 to +180,000. With these revisions, employment gains in July and August combined were 69,000 more
than previously reported…
I believe that, counting revisions, this is the fourth-best monthly establishment employment game performance of this recovery, exceeded only by the April to May 2010 jump, the March to April 2011 jump, and the December 2011 to January 2012 jump. The big lesson is that the fact that this is a strong relative report in this recovery underscores how weak the recovery has been. The little lesson is that we may be, finally, on a track to see recovery of the employment-to-population ratio to where it demographically should be.
…late, just ending a dream about how you run into Warren Buffett and Charlie Munger at the Pilot Travel Center truckstop on I-29 in Council Bluffs. They then buy you beer for two hours and tell you everything they know about how asset pricing works in the real world. When you wake up, you hasten to write it all down. But because you woke up late you have to rush to the gym, and by the time gym finishes it’s all gone…
Hopefully not an omen for the weekend…
Financial Times: ECB’s Mario Draghi and his misguided malcontents: “Two years ago, Mario Draghi pledged to do ‘whatever it takes’ to save the euro…
…to use the full monetary policy arsenal to revive the stalling eurozone economy. On Thursday, the European Central Bank president primed his latest weapon…. Yet misguided opposition from inside and outside the bank continues to prevent him firing at will. His colleagues should pass him the ammunition and move out of his way…. The feeble eurozone recovery has stalled. The inflation rate in the currency area is down to 0.3 per cent and the core economies of Germany, France and Italy are at or close to standstill…. Mr Schäuble is not wrong to emphasise the need for structural reform within eurozone economies, but liberalisation and asset purchases are complements…. Reality must at some point impinge upon the monetary theocrats: the threat of outright deflation in the eurozone is not a sign of rising competitiveness–it is a menace…. Since the onset of the eurozone sovereign debt crisis in 2010, the standard pattern has been to do the right thing between six and 18 months too late, the delay generally originating in Frankfurt or Berlin. Now is another opportunity to ditch faulty analysis and wrong-headed policy and arrest deflation before it takes hold. Mr Draghi has shown the right instincts since he took over the ECB presidency. Those critics who have been proved wrong again and again in the eurozone crisis should stop standing in his path.