Relevant and even prescient commentary on news, politics and the economy.

Guest post: 8.2 Miles from Mutuality

by Rev. Nathan Detering

(First Parish church, Sherborn, MA, delivered October , 2014)

Guest post:    8.2 Miles from Mutuality

“We are caught in an escapable network of mutuality,

Tied in a single garment of destiny. Injustice anywhere is a threat to justice

Everywhere.”

How many of us have heard the words before, just by show of hands?  MLK spoke them at the Christmas Eve service of Ebenezer Baptist Church on December 24, 1967. Three months later he would be dead.  If you’re like me, what happens with profound, powerful quotes like this is that they lose some of their profoundness over time, so that they become stripped a bit of their context and domesticated, we might say suburbanized, from their original power to rattle us.

What King meant to say, speaking to a primarily African-American congregation, was that my fate depends on your fate, and your fate depends on my fate – In other words, there is no true segregation, and peace will only come when we act as though that were true. Which is actually quite annoying, this being caught up with one another.

Says the Very Rev. Alan Jones, an esteemed Episcopal priest I was lucky enough to hear preach at Chautauqua Institute this summer:

The most annoying morality in religion is that I cannot be me without you,

And you cannot be you without me!”

And that’s annoying because the you referred to here is not the person just like you, who reminds you of your lovely self, but the you that drives 15 miles over the speed limit down your street, Or the anonymous you that discarded the dunkin donuts clear cup Inside the Styrofoam cup, still half-full of days old iced-coffee, In middle of the woods where you take your morning walk, Or the you whose religious beliefs leave you running screaming from the room, or the you you have nothing in common with…thank God…becausemof what they think about guns or gay rights or black people or white people or women or gays or democrats or republicans or Americans or Christians or UU’s or Muslims.

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A thought for Sunday: the importance of state-level third parties

by New Deal democrat   (from Bonddad blog)

A thought for Sunday: the importance of state-level third parties

[You know the drill. It’s Sunday.  Regular nerdy economic blogging will resume tomorrow.  And be sure to read Bonddad’s latest summary, below]

There was a devastating piece about the Democratic Party published about a month ago by Chris Bowers, I think, that reads particularly bitterly in the light of last Tuesday’s midterm election results. Of course I can’t find it now.   (UPDATE:  I think it was This piece. By Matt Stoller. If you haven’t read it yet, go read it now).

But in summary, it said that the high point of the left netroots was the Lamont-Lieberman Senate contest in 2006.  Anti-Iraq war progressives defeated Joe Lieberman in the primary. But because Connecticut has no “sore loser” law preventing primary losers from re-filing and running as independents in the general election, Lieberman did so, and the Democratic Party establishment, including one Barack Obama, rallied around him.  When Lieberman won with the help of GOP votes, he got a standing ovation in the Senate.

In 2008 most of the netroots backed Obama, who also suggested that he was anti-Iraq war (he never actually cast a vote) vs. the pro-Iraq war Hillary Clinton.  But once Obama won and no longer needed  progressives, he dumped Howard Dean as Democratic Party Chair, along with his “50 state strategy,” and installed economic neoliberals as his most powerful appointments.

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Visualizing Historical Data for Interest Rate Paths

I have recently wrote 2 posts on a model for interest rates and inflation based on the Fisher equation…

Nominal rate = real rate + inflation

Here is the model that I will overlay actual data to below… (link to previous post)

rate play 3

The yellow star represents the Long-run natural target for normalized monetary policy at full employment… with a 2% inflation target and 2% natural real rate, which would give a 4% nominal rate. The Fed would like to achieve a 4% nominal Fed rate by full employment, but there is a possibility that they will only reach 3%.

The present location of the US economy is shown by the blue star. The goal would be to move the blue star directly to the yellow star as the economy reaches full employment.

Has the economy taken this direct path in the past? How did the Fed rate move toward its normalized rate at full employment?

Here is data for the 1960’s… (note: Sun symbol marks end of decade data.)

rate play 13

The path is mostly parallel to a constant inflation rate moving toward the Long-run normalized monetary target.

rate play 14

In the 1970’s, there were times of constant inflation moving toward a normalized monetary policy at full employment. There were also times where inflation grew in spite of rising nominal rates. At the end of the decade, the nominal rate, the real rate and inflation were all rising toward full employment.

rate play 15

In the 1980’s, Volcker set the real interest target over 5%, which brought down inflation. The paths were still many times parallel to constant inflation rates.

rate play 16

In the 1990’s, inflation was coming down. Yet, the path of interest rates during the business cycle was still to raise nominal rates and real rates together. There was momentum to overcome the rising real rates.

rate play 17

In the 2000’s until the ZLB, inflation was well-anchored. So the path of rates was direct toward normalized monetary policy at full employment.

We can see then that the suggested path by Paul Krugman of increasing inflation expectations would be very unusual historically.

rate play 5

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Kevin Drum and the White Working Class

Lifted from Robert Waldmann‘s Stochastic Thoughts:

Kevin Drum and the White Working Class

I agree a bit less than usual with Kevin Drum who writes on the problem of Democrats and the White Working Class (which is defined as whites without 4 year college degrees including, as John Quiggin noted, the horny handed sons and daughters of toil, such as Bill Gates and Paris Hilton).

I quote bits here and cut and paste my comment

“white working class, which voted Republican by a 30-point margin last week:”

“As Ruy Teixeira and John Halpin observed this summer, 54 percent of the white working class born after 1980 think gays and lesbians should have the right to marry, according to data assembled from the 2012 election.” — Kevin Drum quoting Noam Scheiber quoting Teixeira and Halpin

“But if that’s the case, why does the WWC continue to loathe Democrats so badly? I think the answer is as old as the discussion itself: They hate welfare. ”

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Grey Power and Rational Self Interest

Lifted from Robert Waldmann‘s Stochastic Thoughts.

Dan here. NDD’s post on voter turnout for older voters being an economic question in general about interest rates and cola rates, Robert points to less “rational” economic behavior. Of course there is quixotic voting such as the lady in Kentucky who was for the KY health exchange and against the socialism of Obamacare. Perceptions matter. But then…

Grey Power and Rational Self Interest

The extraordinarily smart and well informed Richard Mayhew presents amazing data on voter turnout by age in presidential elections and mid terms. He also attempts to make sense of yesterday’s vote. I think this attempt fails.

He concludes “we have an off-cycle electorate that assumes that they’ll be dead in 15 years, so let the good times roll.”

I comment.

The argument makes sense, but the votes of US adults over 60 don’t. The Republican policy stance (except during campaigns) is the opposite of “let the good times role”. They fight for reduced deficits and, in particular, demand entitlement reform.

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Visualizing Paths with the Short-run Natural Real Rate… via Miles Kimball

I wrote a post with many graphs to visualize the various paths that interest rates can take in order to normalize monetary policy in the Long-run. (link to previous post) Here is a basic graph from that post…

rate play 3

To recap… Nominal rates on the y-axis. Real rates on the x-axis. Up-sloping lines represent constant rates of inflation. Inflation increases Northwest in the model.

The basic equation guiding the model is the Fisher equation…

Nominal rate = real rate + expected inflation

The vertical dashed line represents the Long-run natural real interest rate at any nominal rate. The Long-run natural real rate is independent of monetary policy and inflation (at least in theory, but there are qualifications to that which I will not go into here.) The yellow star represents where the Long-run natural real rate crosses the inflation target of a central bank. The blue star shows where the US economy is now. The blue star would like to get to the yellow star in the Long-run.

OK… Now Bring in Miles Kimball

Miles Kimball wrote a post in June 2013 (link) defining the difference between short-run and Medium-run natural real interest rates. His Medium-run is my Long-run. He is up-to-date with the terminology. Medium-run is the better accepted term nowadays, so I will use Medium-run for the rest of the post. The graphs show Long-run but they are actually Medium-run.

“The reason I wrote this post is because many people don’t seem to understand that low levels of output lower the net rental rate and therefore lower the short-run natural interest rate. Leaving aside other shocks to the economy, monetary policy will not tend to increase output above its current level unless the interest rate is set below the short-run natural interest rate. That means that the deeper the recession an economy is in, the lower a central bank needs to push interest rates in order to stimulate the economy.” – Miles Kimball

Why is the distinction between Short-run and Medium-run natural real rates important? Short-run monetary policy should seek the Short-run natural real rate instead of the Long-run. So that means that we have to draw a second vertical line in the graph above for the Short-run natural real rate.

rate play 9

I have placed the Short-run natural rate below the real rate in the US currently… to show a problem that arises. What is the problem? Well, we would like the blue star to go right toward the yellow star… and we would like economic momentum to build as we move there, but the real interest rate would need to go to the Short-run natural rate on the left first in order to build that momentum according to the logic of Miles Kimball. So how would that happen? How can the real rate go left and right?

Visualizing Paths Again

I presented this path in the previous post which represents the view of Paul Krugman and others.

rate play 10

We see that inflation expectations are increased which lowers the real rate below its Short-run natural rate. Then the economy picks up momentum. Then the Federal Reserve would be able to start raising the nominal rate upon this economic momentum.

Miles Kimball has a path that he favors. He would drop the nominal rate below the zero lower bound at the current inflation rate. His path would be something like this…

rate play 11

The advantage to Miles Kimball’s approach is that the Short-run natural real rate is reached quicker and more directly, instead of trying to build change inflation expectations…. which may not even be possible since inflation expectations are so well-anchored.

Another point… As the Short-run natural real rate shifts right toward the blue star during the recovery, there would come a time when economic momentum would appear on its own. Then inflation momentum would appear too. Some Fed officials are waiting for this sign. We would then see conditions building for raising nominal rates. Then the blue star would start heading back to the yellow star in the Medium-run.

Where might the Short-run Natural Real Rate be?

Have we seen any sign that economic momentum has picked up? Yes… Miles Kimball gives an equation for the rental rate of capital.

  • R for the the rental rate,
  • K for the amount of capital,
  • W for the wage, and
  • L for the amount of total worker hours,

RK = constant * WL.

Dividing both sides of this equation gives an equation for the rental rate:

R = constant * WL/K.

His equation is similar to the profit-rate equation I have posted before. (link)

Profit rate = (Productivity – Real compensation) * Total labor hours/Capital stock

Modified Profit rate = Capital share of income * Total labor hours/Capital stock

In both equations, as labor hours increase, so does the rental rate. My point is that labor hours have increased in 2014 with the relatively rapid decrease in unemployment. Thus via Miles Kimball, the rental rate increases, and the Short-run natural real rate shifts right in the graph. Like this…

rate play 12

If the Short-run natural real rate has shifted to the right of the blue star, then monetary policy can now start normalizing. Remember that Miles Kimball wrote his post in June 2013. The Short-run natural real rate has certainly moved since then.

However, the question is whether the vertical Short-run natural real rate has crossed the current real rate (blue star) or if it is still to the left of the current real rate.  If it has crossed, then the time for raising the nominal rate would be coming soon. But still, is there enough left in the gas tank of the business cycle to give enough sustainable momentum to reach the yellow star of normalized monetary policy? Or is the US economy too uncertain with Europe, Japan and China slowing down? Or is the fragility of emerging markets to a rise in the US Fed rate slowing down normalization of monetary policy?

If the US falls into another recession, the Short-run natural real rate will shift left again, and monetary policy will have the same problem all over again.

So there are obstacles and uncertainties to normalizing monetary policy even though it may be the time to start doing just that.

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Further proof that the U.S. uses incentives more than the EU

As if any more proof were needed, I recently came across yet more evidence that U.S. state and local governments give far more in location incentives than EU Member States do. A paper given this spring at the annual meeting of the Association des Économistes Québécois (Association of Quebecois Economists) includes a summary of project-by-project subsidy reporting by the consulting firm ICA Incentives.

ICA Incentives, which has on several occasions provided me data on $100+ million incentives in Europe and the United States, reports on the announcements of large investment projects. Thus, the data summarized in the paper will omit the thousands of smaller projects in the United States that are subsidized by state and local governments. My guess (I have not seen the underlying data) is that the coverage of EU projects is more complete, since EU rules require pre-notification of subsidies to the European Commission and the Commission posts all state aid decisions on its website.

From page 10 of the paper, the total of incentive packages in 2011 through 2013 inclusive, is as follows:

United State: $37.2 billion

European Union: $6.6 billion

Canada: $2.2 billion

South America: $8.4 billion (more than the EU, which has a GDP over 3 times as large)

Asia: $1 billion (I would guess this is an underestimate)

We can see that the United States gave more than 5 1/2 times as much as the European Union did over the three years analyzed. Given that these economies are approximately the same size, that is a gigantic disparity, and it shows, as I have argued on numerous occasions, that the EU state aid controls work to reduce location incentives. The result for South America also suggests this.

Moreover, the consequences of giving such large state and local incentives are enormous. As I have reported before, the value of state and local subsidies ($70 billion per year) substantially exceeds the cost of the state and local government jobs that were cut in the wake of the Great Recession. This is a huge opportunity cost for these governments as well as representing efficiency and equity losses as a result of the subsidies. With this additional evidence, the need for incentive reform is stronger than ever.

Cross-posted from Middle Class Political Economist.

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What’s with US GDP ? DeLong politely critiques Tett and I snear.

Brad DeLong shows he can be firm but polite here

A puzzling piece from the very sharp Gillian Tett of the FT. My tentative conclusion was that she has fallen victim to the anthropologist’s disease–getting so far into the heads and the mindsets of the culture she is observing that she loses track of the fact that there is a world outside.

-DeLong

HBS alumni… asked to explain why America’s economic growth has been so dismal…. The most hated culprit was the political machine. … Can the midterms change the mood?… This matters…. Company executives have been sitting frozen in recent years, reluctant to invest, because of uncertainty…. $2tn of spare cash is sitting on US corporate balance sheets… banks have another $2.8tn of funds sitting idly at the Federal Reserves…. If just a tiny proportion can be deployed, the economic impact could be significant. And if a few tangible policy changes emerge from Congress, it is possible animal spirits will return.

Tett edited down by DeLong and then me.

But when I look at the numbers for the economy-wide components of fixed investment:

[graphs]

Depressed business animal spirits do not jump out at me. Private nonresidential fixed investment spending is above its average share of GDP since 1950. It is at its average since 1990. … It is residential investment spending that is 1.8%-points below its post-1950 and 1.4%-points below its post-1990 average–and of this shortfall, all is in single-family housing and none in multiple-unit dwelling construction. And it is public infrastructure investment that is way low.

So when I look at this, I see an economy depressed because public investment and single-family residential construction are depressed. The first is depressed because of austerity: it’s a policy choice. The second is depressed because the Obama administration has failed to take any of the steps that would have been necessary to unblock the clogged single family-housing finance credit channel.

-DeLong

and he concludes

If business executives’ animal spirits were unduly and irrationally depressed, it would be more credible to say that some political Potemkin village press events in Washington–Obama, Boehner, and McConnell proving that they can get things done, a minor trade deal, a small corporate tax deal, might summon the Confidence Fairy. But if business executives’ current level of investment reflects a more-or-less normal assessment of fundamentals, such an argument becomes less credible.

I agree with his argument and his conclusion. Of course he is asking Tett to not only put up with Harvard Business School graduates but also argue that she learned nothing important from them, because their concerns aren’t the problem.

But his points are extremely important and not made often enough (DeKrugman have been making the points for a while but two voices are too few).

My contribution is to snipe and boast.

My comment

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