…People born in 1980-82. The family income of these persons in 2011-12… was compared with the income of their parents in 1996-2000…. We focused on the probability that a child raised in the bottom fifth of the U.S. income distribution rose to the top fifth.
Today’s Must-Must-Read: David Wessel: Why Are Unions so Focused on Fighting Trade Deals?
…So with states passing right-to-work laws, Congress pressuring the National Labor Relations Board, the tax code rewarding big corporations that move overseas, funding for education, training and infrastructure under pressure, middle-income wages stagnating across the whole economy, why so much union energy devoted to fighting TPP?…
Rich Trumka… assigns a very large share–an improbably large share, in my view–of the blame for stagnant wages and inequality to recent trade agreements…. There is evidence… that globalization is part of the reason American workers aren’t doing better… by allowing more earning opportunities for those at the top and exposing ordinary workers to more competition, especially in manufacturing…. [And] Mr. Trumka isn’t alone in suggesting that much of what’s in TPP is aimed at shoring up intellectual-property and other protections for U.S. corporations. That’s good for the companies, but may not do much for their American workers…. Still, I find it hard to find an economic rationale for the intensity of the AFL-CIO’s fight against TPP….
Morning Must-Read: Charles Gaba: Dear Pete Sessions: “Bazillion” Is Not a Real Number Either
…If you just do simple multiplication, 12 million [insured individuals] into $108 billion, we are talking literally every single [Obamacare] recipient would be costing this government more than $5 million per person for their insurance. It’s staggering….$108 billion for 12 million people is immoral. It’s unconscionable. – Rep. Pete Sessions (R-Tex.), statement on the House floor, March 24, 2015….
For the record: Rep. Sessions is not a 3rd grader. He’s 60 years old. He attended (and presumably graduated from) Southwestern University. He was a marketing district manager for Southwestern Bell, and is now the Chair of the House Rules Committee of the United States House of Representatives…. Instead of ‘$108 billion’ Sessions meant ‘$95 billion’, and instead of ’12 million’ he meant ’23 million’.,,, The actual number Rep. Sessions should have used was ‘less than $5,000 per person’ as opposed to ‘more than $5 MILLION per person’ (off by a factor of 1,000x) or, if you believe his later ‘clarification’, ‘$60,000 per person’ (off by a factor of 12x)…. If the ACA really did cost ‘more than $5 million’ for every enrollee, that would be $60,000,000,000,000 ($60 Trillion), which I do admit would be a wee bit on the pricey side. On the other hand, I should thank Rep. Sessions for at least admitting that 12 million people have enrolled in private ACA exchange policies, since some of his Republican colleagues still seem to have a hard time believing that.
A new era of earnings-led consumption growth?
After the U.S. housing bubble burst in 2007, many economists and policymakers claimed that the United States could no longer depend upon credit growth to boost consumption and economic growth. Investment and earnings would have become the foundation for future increases in personal consumption. It seems that part of that recommendation may be coming true. Personal consumption appears to be now strongly linked to earnings growth, a relationship that could have important implications for the future pace and stability of economic growth.
Late last week, Bloomberg News reported on an analysis of consumption growth by Tom Porcelli, the chief U.S. economist for RBC Capital Markets. The analysis looked at the correlation between the growth in earnings, specifically total weekly payrolls, and consumption growth. Porcelli finds that correlation during the current economic expansion, from June 2009 to today, is 0.9, a very high correlation. Compare that to the correlation for the expansion from late 2001 to late 2007, which was just over 0.1. This weak relationship between consumption and earnings growth during this earlier period makes sense as this was when the housing bubble was inflating.
Porcelli’s results indicate that consumption and earnings growth are currently tightly linked. Looking at the growth in weekly payrolls over the past two expansions, the difference in the rate isn’t that large. For the expansion between November 2001 and December 2007, the growth rate in payrolls was 4.12 percent on an annual basis. For the most recent expansion, June 2009 to today, the average annual growth rate is 4.09 percent. Yet there’s a significant difference in the growth rate of consumption. For the previous expansion, the average annual growth rate in inflation-adjusted personal consumption expenditures, or PCE, was 2.8 percent. Yet, with roughly the same payroll growth, the average annual growth rate in PCE for this expansion now stands at 2.3 percent, a full half percentage point lower, though of course the current expansion has yet to run its full course.
A dig into the data shows that the decline in consumption powering economic growth is about the growth in the consumption of nondurable goods (food and clothing) and the consumption of services (healthcare and transportation). In the 2001-to-2007 expansion, consumption of nondurable goods grew at a 2.6 percent average annual rate and services grew by 2.5 percent. In the current expansion, the average rates are 1.9 percent and 1.8 percent, respectively. And as economists Atif Mian of Princeton University and Amir Sufi of the University of Chicago noted last year, nondurable and services PCE growth is historically weak during this business cycle.
Earnings growth over a recovery intuitively seems more connected to nondurable and services rather than durable goods. The reason: Durable goods (a car or a dishwasher) are often large essentials for a household whereas nondurable goods and services are more likely to be expenditures that are not critical for the maintenance of life. Households could hold back on these expenditures if earnings growth isn’t as strong.
Personal consumption is about 70 percent of the total U.S. economy, so understanding the changing determinants of consumption growth is critical. If consumption is more earnings-led and earnings growth picks up, then the result would be more sustainable and equitable growth. But if it doesn’t pick up then consumption growth may become permanently lower. So either consumption would become a lower share of total economic growth or total growth slow down. Any of the above scenarios would be a stark and important change for the U.S. economy.
Today’s Must-Must-Read: Robert Skidelsky: Messed-Up Macro
…After the financial crisis of 2008 erupted, we got the Great Recession instead. Governments managed to limit the damage by pumping huge amounts of money into the global economy and slashing interest rates to near zero. But, having cut off the downward slide of 2008-2009, they ran out of intellectual and political ammunition. Economic advisers assured their bosses that recovery would be rapid…. But then it stalled in 2010…. It is now pretty much agreed that fiscal tightening has cost developed economies 5-10 percentage points of GDP growth since 2010. All of that output and income has been permanently lost… [and] made the task of reducing budget deficits and national debt as a share of GDP much more difficult…. That should have ended the argument. But it did not…
Evening Must Read: Mark Thoma: The Attack of the Anti-Keynesians
…and… little guidance… [to] fiscal policy in particular. So we should not have been surprised when many people turned to a model that had been developed to address precisely these types of questions, the Keynesian model, for guidance. Was this guidance useful?… The insights and advice… turned out to be remarkably good…. Modern macroeconomic models were not up to the task when they were needed the most, and nobody should be faulted for turning to the ‘old fashioned’ Keynesian model… for guidance…
The Assumptions Behind the Federal Reserve’s Choice of 2% per Year Were Erroneous
A question I will never ask any Federal Reserve policymakers— not in public, not in private. They do not need their elbows jiggled in this way:
The decision by the Federal Reserve in the mid-1990s to settle on a 2% per year target inflation rate depended on three facts — or, rather, on three things that were presumed to be facts back in the mid-1990s:
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That the long run Phillips curve was vertical even with an inflation rate averaging 2% per year, so that there was no production or employment cost of such a target.
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That the safe real interest rate would be positive and significant, so that a 2% per year inflation target would not entail disturbingly low levels of nominal interest rates that might lead to instabilities in velocity.
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That shocks to the economy would be small, so that the Federal Reserve would never seek to compensate with an interest-rate reduction in the range of 5% or more.
We now know that all three of these were and are false.
The easiest way to fix this problem would be to revise the Federal Reserve Act — perhaps to add “healthy rate of nominal wage growth” to the list of Federal Reserve monetary policy objectives.
A Rant Against the Use of the Word “Bubble” in the Context of the Bond Market
I was reading Duncan Weldon’s very interesting “A Policy Driven Bond Bubble” (see also “Is There a Bubble in Fear” plus “A Monetary Policy Which Is Cheap But Not Easy”), and I found myself thinking:
We should careful when we call things “bubbles”.
When we call something a “bubble” we attach a number of meaning-tags to it. Here are three:
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Bubbles are collective irrationality.
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Bubbles pop.
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Owning bubbly assets entails large long- and fat-tailed risks.
Safe bond prices are certainly elevated — more than elevated: absurd. The Federal Reserve has squeezed the term premium by shrinking the supply of long-term bonds and put the underlying fundamental future short rate to which the term previous applied on a very low path.
But does holding bonds entail accepting large long- and fat-tailed risks? Only if you must sell your bonds in the future. If you have the option to hold them to maturity, your risks are bounded and very small. What you are complaining about is not risk, but rather lousy expected return. And even if you cannot hold them to maturity, the fact that others can hold them to maturity provides a pool of demand that limits how far bond prices can crash.
Must bond prices undergo a sharp drop as interest rates spike? No. It might happen — and it might not. But with a bubble you know there is going to be a crash. With a bubble, the people holding the asset at any moment know that its fundamental value does not match its price. They hope that they will be able to sell their position to a greater fool at a higher price. But nobody in a bubble who understands what is going on thinks holding the asset to maturity or for the long run will end in less than tears.
And are bond prices collective irrationality? Are the traders and investors who are holding bonds making a large collective mistake? I certainly believe most of them should shrink their bond positions and invest in diversified equities instead. But many have: that is why the Shiller stock price to average earnings over the last decade stands at 27.85 — a cyclically-adjusted earnings yield of 4%/year:
But if you are unwilling to accept the equity risk that you could lose 40% of your value in a year — as people did in 2008, 2001, 1974, 1945, 1937, 1929-1933, 1907, and 1904, and almost in 1970 and 1987 — should stock prices return next year to their long-term average earnings yields, your choices are limited. Cash and near-cash are not attractive to anyone save those unable to get the option to hold long Treasuries to maturity. What is “irrational” is not bond traders and investors, but rather the economy that has convinced the Federal Reserve that its current low-rates-forecast-forever policy path is the best it can do.
Thus I think clearer thought is obtained by eschewing applying the word “bubble” the bond market. Call them extremely richly-valued. Call them low return. Call them risky for those without the option to hold them to maturity. But if you have to use the word “bubble” apply it to other things.
I wouldn’t even say that the U.S. is currently in a monetary policy bubble. For that to be the case, it would have to be a small open economy borrowing heavily in foreign currency, or in some form of currency union with larger economic powers…
Things to Read on the Morning of March 24, 2015
Must- and Should-Reads:
- Morning Must-Read: : How Secular Stagnation Came to Smurf Village
- : Mortgaging the Future?
- Nighttime Must-Read: : Dirty Energy Taxes and Clean Energy Innovation
- Afternoon Must-Read: : Free Speech on Campus Is Not Simple
- Nighttime Must-Read: : Default Panic and Other Tall Stories
- Nighttime Must-Read: : “Claims that climate science is a hoax, that human action is not a factor
Might Like to Be Aware of:
- Nighttime Must-Read: **: How Tip O’Neill and Ronald Reagan would make this Congress work
- : “This blog is a scholarly experiment… the space where I can work through ideas and arguments for a book project on Trajan, the Senate and Republicanism… how emperor-senate relations are preserved in the textual and material record from Caesar to Trajan; and… picking apart why Trajan becomes memorialized as… Optimus Princeps…”
- : I just saw the first movie from Oculus, and it is the future
- : Judith and Holofernes
- : Gulf Stream Is Slowing Down Faster than Ever
- : The War Over Who Steve Jobs Was
Fixed: “A Significant Step Toward the Entrenchment of Abnormal Dynamics”: Focus
Fixed: “Beginning the normalization of policy will be a significant step toward the restoration entrenchment of… normal abnormal dynamics
…However it is widely expected that the rate will lift off before the end of this year, as the normalization of monetary policy gets underway. The approach of liftoff reflects the significant progress we have made toward our objectives of maximum employment and price stability. The extraordinary monetary policy accommodation that the Federal Reserve has undertaken in response to the crisis has contributed importantly to the economic recovery, though the recovery has taken longer than we expected. The unemployment rate, at 5.5 percent in February, is nearing estimates of its natural rate, and we expect that inflation will gradually rise toward the Fed’s target of 2 percent. Beginning the normalization of policy will be a significant step toward the restoration of the economy’s normal dynamics, allowing monetary policy to respond to shocks without recourse to unconventional tools…
Let me say this politely.
It will not.
A Federal Reserve that seeks to create and maintain a low-pressure economy does two things. First, it makes growth inequitable by ensuring that labor has little bargaining power, and thus that the fruits of economic growth Will flow in an ever more-concentrated way toward the rich. Second, it helps anchor inflation expectations at a low level by convincing everyone that the Federal Reserve has a very low tolerance for inflation.
The participations in the Federal Reserve Open Market Committee all believe that given currency policy the “longer run” “range or target level for the federal funds rate” is lower than 4.5%. The median estimate is 3.75%.
Eight times in the past fifty years–once every six years–the Federal Reserve has wished to drop the federal funds rate by more than 3.75% as part of its management of monetary policy.
A policy that aims at a longer-run federal funds rate of 3.75% is a policy that seeks a return to the zero lower bound by 2021.
And that assumes that the liftoff is successfully accomplished, and not quickly reversed.