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

More Socially Desirable Firms gain strength from Normalization of Monetary Policy

If the Fed raises interest rates and marginal companies are pushed into struggling for survival, is this a bad thing? Won’t we lose jobs? Won’t wages be hurt? Well, the question is… Are the healthier companies (those that can better survive a higher Fed rate) willing to make employees happier?

Well, we now have a study that supports the view that healthier companies are more likely to have happier employees. And I safely assume for the moment that happier relates to better pay. What did the study find?

“Companies that employees report to be a good place to work have significantly outperformed the S&P 500 over the past six years… Since 2008, the S&P 500 has returned 121%, but the companies that employees rate well have returned 218.5%.” (source WSJ)

These more profitable companies are the ones that would easily survive a normalization process of monetary policy… And the employees are much more satisfied.

Even though the source article from the WSJ offered some explanations for this condition, labor economists have been aware of this condition for a long time. Beatrice Webb and her husband wrote about it over a hundred years ago. Here is a quote from a paper by Bruce Kaufman.

“Apropos labels today are “low road” vs. “high road” employment systems.”

“This duality comes from a combination of technological, institutional and human features. A consequence of assuming heterogeneity in factor inputs and production sets is that firms have different cost curves and, given a uniform market price for the good, different levels of profit. As a useful generalization, some firms are very technologically advanced, have efficient managements, and operate at a larger minimum efficient scale. These firms earn above normal profits and, for human motivational reasons, share some of their rents with workers. On the other end of the same product market are undercapitalized, small-scale, and poorly managed firms with higher cost curves that put them in a constant struggle to stay in business. Here, instead of sharing rents, these firms stay in business by taking it out of workers in the form of wages and conditions below the competitive social cost level. The Webbs characterize the worst of these firms as sweatshops and note, “the bottom of the industrial army…. suffers not from great capitalists but from small masters”.” (Kaufman 2013)

These “high-road” firms are more likely to pay better wages. And the implication is that accommodative policy to keep marginal firms alive has put a drag on wage increases. This is why I say that a properly-timed raise in the Fed rate is efficient for the economy and allows better wages in the medium-term. Recent accommodative monetary policy has kept “low-road” firms in business.

More from Bruce Kaufman on the dual structure between “high-road” and “low-road” firms…

“Institutional factors also encourage a dual structure. The larger and better managed firms often develop internal labor markets (Doeringer and Piore 1971). This term was not invented when the Webbs wrote but they observed that certain large employers in the late 19th century were already using various devices to create a long–term employment relationship on the belief it increases productivity and profit (1897: 661 – 62). Smaller–scale and less efficiently managed firms, on the other hand, gain cost advantage by relying on the external labor market with low wages, high turnover, and bare bones training and conditions. Other institutional factors creating a dual structure are sectional collective bargaining, gendered social norms, and labor laws specific to occupations and industries.” (Kaufman 2010)

In the absence of unions and other institutions boosting labor power, we need to support the profitable firms that are already taking better care of their employees. So if less-profitable & marginal companies struggle under a raise in the Fed rate, there is security in knowing that the surviving firms are more likely to raise wages and make their employees happier. Normalizing monetary policy would help weed out the “low-road” firms.
Kaufman, Bruce E. “Sidney and Beatrice Webb’s Institutional Theory of Labor Markets and Wage Determination.” Industrial Relations: A Journal of Economy and Society 52.3 (2013): 765-791.
Kaufman, Bruce E. “Institutional economics and the minimum wage: broadening the theoretical and policy debate.” Industrial & Labor Relations Review 63.3 (2010): 427-453.

Comments (19) | |

I’m beginning to suspect that Matt O’Brien isn’t omniscient.

The Ezra Kleinless wonkblog remains excellent. In particular Matt O’Brien is about as young, smart, witty, and hard working as Klein. However, I think he may not have read everything.

He notes that the allegedly reformicon tax plan includes the Bush tax cuts for the rich on steroids. Then he reviews recent, but only recent, history writing

“Apparently raising the top marginal tax rate to 39.6 percent is the first step on the road to serfdom. (I’m pretty sure that’s in the Communist Manifesto).”

Why yes it is (pretty much).

Point 2 of the 10 point plan in the Communist Manifesto

“2. A heavy progressive or graduated income tax. “

Now 39.5% would seem absurdly light to Dwight (Eisenhower) but it would have sounded extremely heavy in 1848*. Note that Marx and Engels added “or graduated” in case their readers needed further explanation of the strange concept of a “progressive income tax.” At the time, a flat income tax would have been less regressive than the existing systems based mainly on excise taxes.

* typo corrected thanks to Lyle in comments.

Comments (19) | |

Retail Sales

The Census Bureau had a press release this morning announcing that nominal retail sales fell -0.6% in February, the third consecutive fall.

Wall Street economists,analysts, strategists and managers have been watching these weak retail sales reports and speculating on why the drop in oil prices has not lead to the boost in consumer spending that virtually everyone expected.

The problem is that the nominal data can be misleading. Few know that the Bureau of Economic Analysis (BEA) as part of its GDP calculation also creates an unpublished series on retail sales that will be available later this month.  The BEA also estimates  deflators for the various components of retail sales and an estimate of monthly real retail sales by category.

The BEA data is much better than the series of nominal sales deflated by the CPI available in FRED ( the St. Louis Fed. public data base).

Over the previous three months –November, December and January –both Census and BEA estimated that nominal retail sales fell 1.3%.
But the BEA data also showed that over these three months the retail deflator fell -3.34%. Consequently, the -1.3% drop in nominal sales
is actually a 2.15%increase  in real retail sales, or almost 9% at an annual rate.

I expect when the BEA deflator becomes available the – 0.6% drop in February nominal sales will actually be a real increase.

The  sharp decline in the retail deflator is not just oil.  Almost every segment of retail sales except food stores and restaurants is showing a sharp drop in prices.  In 2013 and  2014 the change in the retail deflator  bounced around zero.  But as of January the year over year change in retail sales prices fell to -3.3%.  While the Fed is worrying about inflation and the Cassandras who have seen inflation right around the corner for years continue to forecast a massive inflationary surge, the data implies that deflation may be much more likely.






Comments (13) | |

Non-Financial Business Debt rises in 4th quarter, 2014

The Flow of Funds report from the Federal Reserve came out today for the 4th quarter of 2014. Non-financial business debt grew quite fast.

“Non-financial business debt rose at an annual rate of 7.2 percent in the fourth quarter, a somewhat larger increase than in the previous quarter. As in recent years, corporate bonds accounted for most of the increase.” (page i of report)

The non-financial business debt had grown at an average a little over 5% for the previous 4 quarters.

We may be seeing an increase in lending ahead of the somewhat anticipated Fed rate rise. Will these funds be invested in domestic productive capacity, purchases of existing assets or held for a rainy day?

Still, a benefit from the Fed signaling a future rate rise is that businesses tend to increase borrowing ahead of time. Normalizing monetary policy gives increasing incentives for investment now rather than later. Normalizing monetary policy can be stimulative when there is confidence that the business cycle will continue for a couple of years.

How confident are businesses?

How confident are businesses that the business cycle will last another 2 years? Do businesses believe that the Fed rate is far behind the curve of the business cycle? The answer will be found in how they use the funds.

Comments (0) | |

Economists’ Views

I am trying to think of issues on which there is a marked difference between the views typical of economists and those of non-economists. It is certainly true that non-economists (especially social scientists other than economists) think there are typical economists’ views. These views are held by a solid majority of professors at the University of Chicago economics department (last I heard that was a sample of 15 people with only one clear exception — Lars Hansen but I last heard in 1990). However, US academic economists tend to be Democrats (more balanced than other departments but to the left of the general public).

I was motivated by an old discussion. Here are some links

So far I have been speculating wildly. Klein and Stern via Google gave me some actual information.

I cut and paste their abstract

Abstract. In Spring 2003, a survey of 1000 economists was conducted using a randomly
generated membership list from the American Economics Association. The survey contained
questions about 18 policy issues, voting behavior, and several background variables. The response was 264 (nonblank) surveys. The responses show that most economists are supporters of
safety regulations, gun control, redistribution, public schooling, and anti-discrimination laws.
They are evenly mixed on personal choice issues, military action, and the minimum wage.
Most economists oppose tighter immigration controls, government ownership of enterprise
and tariffs. In voting, the Democratic:Republican ratio is 2.5:1. These results are compared to
those of previous surveys of economists. We itemize a series of important questions raised by
these results.

My abstract of the abstract

Out of date and low respnse rate — should I google more — nahhh their results fit my priors.
“supporters of”Generally left of center or left of ultra far right.
“mixed on … the minimum wage” is well right of the median US adult, but “mixed” means there isn’t a typical economist’s view.
“oppose … government ownership of enterprises” means not ultra far left by US standards.

Oppose “tighter immigration controls” and “tariffs”. OK that’s it. I note that the majority of the general public supports immigration reform including a path to citizenship, so the best candidate for an gap between economists and the general public is on tariffs.

I considered two other candidates. One was the minimum wage. It used to be that egalitarian economists were very unenthusiastic about the minimum wage stressing their view that the earned income tax credit was a much better policy (I am thinking of three people but can only name one — Robert Waldmann). Here I think economists’ views have changed because of empirical analysis of data largely by Card and Krueger. I don’t know why the survey respondents’ views were mixed, but I think this might be an actual case of economic theory bowing to facts.

The other is rent control. I am pretty sure economists are against rent control. It didn’t appear on the survey, because it barely exists in the USA. Here I guess there isn’t a characteristic economists’ view, because the uninented effects of rent control are clear enough to have convinced non-economists.

There is a fairly broad consensus that rent control was a mistake (broad enough to include almost all Italians — but you wouldn’t believe the insane rent control they used to have).

That leaves tariffs and immigration (so Klein and Stern were ahead of me in 2003). here I see a pincer attack on nativism and protectionism. Pro-market economists oppose restrictions on trade and migration, because they are restrictions. Egalitarian economists oppose them because we believe they hurt the third world poor, that is the poorest.

However, tariffs have largely joined rent control on the ash heap of history. International negotiations on so called trade agreements such as the Trans Pacific Partnership have little to do with eliminating minor remaining barriers to trade. If, you want to know more, this is not the bear you are looking for. Read Kenneth Thomas Dan Crawford and Daniel Becker.

*yes Mark, the title is Thoma link bait.

Comments (8) | |

Why are so many Dem-leaning pundits so profoundly clueless? [Updated.]

Today, Martin O’Malley, the former Maryland governor who has been talking about challenging Clinton from the left, was repeatedly asked by reporters to comment on Clinton’s emails, and he repeatedly refused. Not because he doesn’t think there are legitimate questions here, but because his advisers say raising them might reflect badly on him:

“His advisers say there’s no benefit to him criticizing Clinton at this point. She’s already on the defensive, they reason, and die-hard Democrats are likely to be turned off if O’Malley sounds too much like Clindeiton’s Republican critics.”

Well, I hope that isn’t the real rationale. I suspect most Democratic voters and activists want to hear a spirited debate about Clinton’s emails; in fact, such a debate among Democrats could be more illuminating than whatever results from Republican criticism of her over it, which is likely to be polluted by overreach.

Maybe it’s time for a real Democratic presidential primary, Greg Sargent, Washington Post, today

Of course!  I’ve been dying to hear a spirited debate about Clinton’s emails! Because there’s obviously a lot of room for disagreement on whether or not it was a good idea for Clinton to set up a separate, private email server and commingle all her personal emails about her daughter’s wedding and her mother’s funeral with her State Department-related emails.  And because this is, unquestionably, the issue I care most about.

So please, Mr. O’Malley, keep me and all of us Dems in suspense no longer: Would you, as president, require your Secretary of State to use the State Department email system for State Department-related emails?  And if not, would you require that your Secretary of State comply with the Federal Records Act and related laws?

Such a debate among Democrats absolutely could be more illuminating than whatever results from Republican criticism of Clinton over it.  Which obviously is saying quite a lot.


Last weekend, O’Malley appeared at some Dem functions in New Hampshire and discussed the types of issues that Elizabeth Warren talks about, and even the types of issues that Paul Krugman talks about—and deigned to allude to the latest actions by Scott Walker and economic-policy statements from Jeb Bush.  Reading some of the specifics of his comments, I was delighted.  And I assumed that most Dems would be, too.  Maybe we’ll start gaining some traction on these things, instead of constantly having to settle for more Clinton silliness and more Clinton banalities, clichés and hints about the approximate month of her formal announcement, I thought.  Hurray! Hurray!

Then I read that some New Hampshire state senator and a few other attendees at one or another of the functions was disappointed that O’Malley effectively demurred when asked to comment on the Clinton email mess.  If he’s going to run, he has to comment on what the big issue of the moment is, the state senator said.

Which sure seems right if the big issue of the moment is, say, a substantivepolicy issue.  But best as I can tell, email policy for federal officials isn’t, really.

Then there was Dana Milbank’s comment a few days ago comparing O’Malley with the tooth fairy.  Or, more precisely, comparing people who think O’Malley could beat Clinton for the nomination with people who believe in the tooth fairy.  And this evening he has a more detailed follow-up, the thrust of which is that O’Malley was just a governor and, before that, mayor of Baltimore.  As opposed to, say, Scott Walker, who is a governor and was, before that, a County Executive.  And as opposed to, say, Jeb Bush, who was a governor and, before that, a president’s son.

I certainly get that only the Republican Party is entitled to nominate such folks for president. Which, of course, they did, in 2012.  Minus the big-city-mayor/big-county-executive part.  I’m not sure what percentage of the public outside of Wisconsin knew anything about Walker until two months ago, but many more people sure do now. For better or for worse, but that’s beside the point.  Walker didn’t have to compete for the media’s notice with someone whom the press has been obsessed with for a quarter-century—the members of the press, that is, who were covering politics in the ‘90s.  Or who followed stuff like that when they were in elementary school.

But O’Malley does have to compete for the media’s attention with Hillary Clinton.  A political media, that is, whose members apparently almost universally believe that the minimum voting age is 42.  And so competing, it appears, is impossible.

I keep reading political commentary that “we” all have already made up our minds about Hillary Clinton. Each of us either loves her or hates her, having decided which one all the way back in the ‘90s.  When some of “us” were in the primary grades in school and others of “us” were adolescents or teenagers. And when a small percentage of “us” were still in diapers.

But some of us do remember the ‘90s, if not all the specifics.  I speak as someone who does remember ‘90s politics, but who had forgotten such specifics as that Clinton said during her “pink sweater” press conference in 1994 that she had thought that her husband’s and her own unusual financial pursuits that depended upon friendships and connections during her husband’s terms as governor should have been viewed as within a privacy zone.  She couldn’t distinguish then between land development deals and cattle-futures trading, on the one hand, and buying, say, Vanguard Index Fund shares, on the other.  And so her law firm’s billing records for the Whitewater land deal (or whatever) remained hidden for two years in a White House closet until things got wackily out-of-hand, politically.

What I, unlike Sargent, suspect is that most Democratic voters and activists want to hear a spirited debate about the subjects that we actually care about. Including a spirited response to Scott Walker’s and Jeb Bush’s economic’fiscal/regulatory policy positions and their counterfactual justifications for them, and Paul Ryan’s ahistorical claims about supply side economics, financial industry regulations, and federal budget deficits in the ‘70s and ‘80s.  Some discussion of what’s happening with, say, Kansas’s budget and economic growth, and maybe even Wisconsin’s, and Europe’s—and why—would be very, very welcome.

There are only two reasons why most of us want a meaningful primary debate, forced by a meaningful candidacy—and neither of those reasons is to make Hillary Clinton a stronger candidate.  One reason is to have the option to vote for a genuine economic-policy progressive.  The other is to enable our party to actually put forward the arguments for progressive economic policy, and that means ending the constant focus on this silly woman, her huge “circle,” her incessant calculations and decisions-by-committee about absolutely everything, and waiting for the next shoe (and the next, and the next) to drop.

The very, very, very, very last thing most Democrats want is a spirited debate about Clinton’s emails.  We don’t want to debate Clinton’s emails.  We want to debate actual substantive-policy issues, especially but not solely economic/fiscal/regulatory policy issues.  Government email policy isn’t on our list.  If Warren were planning to run, would anyone claim that she needed to take a break from those economic-policy/bank-deregulation/policy-of-by-and-for-the-mega-campaign-donors things and talk about the more important issue of government officials’ email-procedure?  Really?

Look. Hillary Clinton should not run for president.  Her life, her husband’s life, her family’s foundation’s life, all are too complicated for her to be able even to concentrate on serious, specific policy issues other than the women’s-movement issues whose clichés she cites, mantra-like, and has for the past 40-plus years.  These are by no means trivial issues.  They are, though, by no means what most people think should be the end-all-and-be-all of the Democratic nominee’s concerns.

I myself agree with Bill Clinton’s comments a few days ago that, on balance, their family’s foundation has done more good than harm—thanks in large part to Chelsea Clinton’s efforts to make the foundation into what it should be: something far more important than just a Bill and Hillary Clinton ad and a well-paying landing place for their many hangers-on.  Hillary Clinton should put her time and effort into furthering the meaningful goals of that organization, and wind up her career with something truly special. She should not impose so upon those who need to have this election be about what it should be about. Which is to say, about things more important than her.

I can assure Dana Milbank, and Martin O’Malley, that I don’t believe in the tooth fairy.  Even though Clinton will of course run.



Probing, persistent questions like these from the political press corps at Tuesday’s news conference are the sort that rival candidates would be expected to ask on the campaign trail or in televised debates, as Barack Obama did against Mrs. Clinton in 2007 and 2008 over the Iraq war and other issues.

Unlike then, however, Mrs. Clinton is not expected to face comparably aggressive opponents for her party’s nomination. Among the possible Democratic field, former Gov. Martin O’Malley of Maryland has shown little taste for cutthroat tactics.

Early in 2016 Race, Clinton’s Toughest Foe Appears to be the News Media, Patrick Healy, New York Times, today

Uh-huh.  Can’t beat Clinton unless you use cutthroat tactics.  Talking just about economic-policy/bank-regulation/big-money-dictating-policy issues hasn’t worked well at all for Elizabeth Warren.  Which is why, much as a huge swath of Democrats cares deeply about those issues, there’s no movement to draft Warren to run for the nomination, and why no one pays attention when she speaks, right? She doesn’t use cutthroat tactics against Clinton, instead using cutthroat tactics only against the Republicans.

Mr. Healy, talking about economic-policy/bank-regulation/big-money-dictating-policy is a cutthroat tactic. It’s just that the political-news media hasn’t noticed.

Updated 3/12 at 12:12 p.m.

Tags: , , , , , , , Comments (8) | |

Inflation in the 21st century: Oil, not wage growth or unemployment, is the issue

by New Deal democrat

Inflation in the 21st century: Oil, not wage growth or unemployment, is the issue

This post follows up on my last piece, in which I argued that there are historically non-existent wage or inflationary pressures in the economy, so the notion that the Fed should raise short term rates now to contain such pressures doesn’t pass muster.

I’m going to show you that by looking at the Phillips Curve (the tradeoff between the unemployment rate and inflation) in my next piece.

But I can cut to the chase with just one graph.  Here is the CPI for all items (green) compared with core CPI (blue), and CPI less energy (red):

Focus on two things.

Comments (2) | |

John Williams Easing Us into Normalization

leaf boat

The President of the Federal Reserve Bank of San Francisco, John Williams, gave a presentation on March 5th about the outlook for monetary policy.

He basically is easing our understanding towards accepting the rationale for normalizing (raising) nominal interest rates. I personally am in agreement with what he says and how he says it. He is making the case that the Federal Reserve needs to start raising the Fed rate soon so as not to raise it more drastically later.

He is not worried about low inflation. He is not worried about low wage inflation. He recognizes that the unemployment rate is getting close to his projection of 5.2% as the full employment rate in the NAIRU sense. He anticipates wage inflation by 2016 and wants to be proactive in responding.

In his presentation, he refers to others, like Paul Krugman, who would rather see inflation return to target before raising rates.

“Not everyone agrees, of course. There are a number of people who think we should wait until inflation is very close to, or has crossed, the finish line. They’re mainly worried that raising rates too soon would allow inflation to fall further and possibly derail the recovery.”

His best response to them is…

“Monetary policy, as Milton Friedman famously reminded us, has long and variable lags (Friedman 1961). As I said, it usually takes a year or two for policy to have its full effect. As a result, policy must be forward-looking. When you’re driving towards a stoplight, you don’t keep your foot on the accelerator; you ease off so you’re ready to stop at your target. Otherwise you slam on the brakes—and probably wind up in the middle of the intersection.”

John Williams seems to be sensible in his projections. I agree with him that a slight rate hike in mid-2015 would not derail the economy. Of course, there will be some stress on the economy as rates tighten, but that stress is designed to balance vulnerabilities in the economy.

Moreover, how fast will the Fed rate rise after the first rate hike? That is the interesting question. How will the data respond to the first rate hike in the short-run considering that Williams says that the effects of monetary policy have a lag of 1 to 2 years? How will the Fed respond to incomplete data responses in the short-run?

John Williams is basically saying… Take it easy folks, a slight rate hike is a safe and sensible step toward the needed normalization of monetary policy.

Comments (27) | |