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February update: real wages and real spending

by New Deal democrat

February update: real wages and real spending

Now that we have February inflation, let’s take an updated look at real wages and real spending.
First of all, real average hourly wages increased slightly in February, but are still -0.6% under their July peak:
But, because the total hours worked surged so much in February, real aggregate wage earnings, which had stalled since July, rose to a new record:
If it’s not revised away, this means that the middle and working classes have more income to spend, without dipping more into savings.

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The Grand Illusion 2.0

The Grand Illusion 2.0

Introductory note: this is a very long epistle. But I think my point needs to be made fully and at length. Before you go further, in fairness here is the TL:DR version:

  • Advocates of free trade and globalization were taken aback a week ago by the assumption by China’s President Xi Jinping of rule for life.
  • This was because it runs completely contrary to their theory that free trade leads to economic liberalization, which in turn leads to political liberalization.
  • This theory has been repeatedly and thoroughly repudiated throughout history, most catastrophically be World War I.
  • That’s because autocrats will use the gains of economic trade for their own ends, typically the pursuit of further political and military power.
  • Historically middle classes do not revolt against autocracy when they are prospering, but rather only after a period of rising expectations has been dashed by an economic downturn in which the autocratic elite unfairly forces all of the burden onto them.
  • But since these historical facts are nowhere to be found in the economic models, they are ignored as if they do not exist. We can only hope they do not once again lead to catastrophe.

First, let me pose a thought experiment.  Country A and Country B propose to enter into Agreement X. We have no idea at all what Agreement X is, but we know that the result will be that both Country A and Country B will each be richer by $1 Trillion each and every year thereafter.
Country A, being an egalitarian paradise, is going to share out the proceeds equally among its population of 250 million, with each person getting $4,000 per year.
The dictator of Country B is going to do the same with 1/2 of its $1 Trillion gain, making his population very happy, but — because this is his personal aim — he is going to spend the other $500 Billion each and every year in building up its military so that it can challenge and eventually vanquish Country A, and then keep all of the gains of Agreement X to itself.
Should Country A enter into Agreement X?
——————
A week ago The Economist opined that “The West’s Bet on China has Failed,” stating that:

Last week China stepped from autonomy into dictatorship. That was when Xi Jinping … let it be known that he will change China’s constitution so that he can rule as president for as long as he chooses …. This is not just a big change for China but also strong evidence that the West’s 25 year long bet on China has failed.

After the collapse of the Soviet Union, the West welcomed [China] into the global economic order. Western leaders believed that by giving China a stake in institutions such as the World Trade Organization would bind it into the rules based system … They hoped that economic integration would encourage China to evolve into a market economy and that, as its people grew wealthier, its people would come to yearn for democratic reforms ….

CNN’s Fareed Zakaria recoiled in horror, writing in the Washington Post that

[W]hat’s happening in China … is huge and consequential. China is making the most significant change to its political system in 35 years.

For decades, China seemed to be getting more institutionalized…. But that trend has now been turned on its head. If term limits are abolished, which is now almost certain, Xi Jinping could stay China’s president, general secretary of the Communist Party and chairman of the Central Military Commission for the rest of his life. And he is just 64.

…. The real danger is that China is eliminating perhaps the central restraint in a system that provides staggering amounts of power to the country’s leaders. What will that do, over time, to the ambitions and appetites of leaders? “Power tends to corrupt,” Lord Acton famously wrote in 1887, “and absolute power corrupts absolutely.” Perhaps China will avoid this tendency, but it has been widespread throughout history.

If Zakaria felt blindsided, he should not have been. Because ten years ago, after he published “The Post-American World,” arguing that because the US had successfully spread the ideals of liberal democracy across the world, other countries were competing for economic, industrial, and  cultural — but not military — power, I confronted him at the former TPM Cafe.
For the truth is, the West’s bet on China, so ruefully mourned by The Economist and Zakaria, was always likely to fail. That free trade leads to economic and political liberalism and to peace —- championed by neoliberal economists and their political retinue — has been a fantasy for over 100 years, and for 100 years it has been a lie. They would have known if their theories and equations could account for the likes of Kaiser Wilhelm II. But since their equations and theories are blind to the pursuit of power, they dismiss it — at horrible cost to the world.

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Labor force participation, unemployment, and wages: an update

Labor force participation, unemployment, and wages: an update

About a year ago I wrote a series of posts on the relationship between the unemployment rate, labor force participation, and wage growth. Especially in view of last Friday’s jobs report, which showed blockbuster hiring, but a continuation of tepid wage growth over 8 years into the expansion, now is a good time for an update.

To recapitulate, history shows that wage growth is lags the economy, and specifically only turns after the unemployment rate begins to decline. More specifically, since 1994, once the underemployment rate has fallen below about 9% (red, inverted in the graphs below), wage growth (blue) has begun to improve:

Meanwhile, the YoY% change in the prime age labor force participation rate turns about one year before wages (green):

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Interest rates and jobs: a variation on the model

Interest rates and jobs: a variation on the model

Friday is nonfarm payrolls day, so in the absence more noteworthy economic news, let me follow up on Monday’s post in which I discussed “A simple model of interest rates and the jobs market.”
In it, I suggested that:
1. a YoY increase in the Fed funds rate equal to the YoY% change in job growth has in the past almost infallibly been correlated with a recession within roughly 12 months.
2. the YoY change in the Fed funds rate also does a very good job forecasting the *rate* of YoY change in payrolls 12 to 24 months out.
One shortfall of that model is that there are two “false negatives” in the low interest rate environment of the 1950s, during which the YoY increases in interest rates by the Fed were relatively modest, and did not exceed the YoY change in payrolls until after the recessions had already begun.
I suspect that in a low interest rate environment, more modest increases in interest rates might have a more pronounced effect. For example, an increase in mortgage rates from 2% to 4% doubles the monthly interest payments on a mortgage (i.e., a 100% increase), whereas an increase from 8% to 10% only increase it by 25%.
While I haven’t explicitly looked at mortgage rates as of yet, what I did do is plot the simple rise in interest rates from their low points near the beginning of each expansion since the mid-1950s, and see if, during a period of Fed tightening, they always rose to exceed the YoY% change in job growth *before* the onset of all of the recessions since.  Here’s what I got:

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One third of the way to the 2020 Presidential election

One third of the way to the 2020 Presidential election

Today marks 16 months since the 2016 election, and 32 months before the one in 2020.
We are one third of the way through.  Barring a major industrial or nuclear war, we are going to make it.
The only major legislative accomplishment so far is the pro-cyclical, lopsided tax cut giveaway to corporations and the wealthy.  Additionally a bunch of lifetime judicial appointments have been made.
On the executive side, there have been a slew of directives, and a bunch of regulatory backsliding, chiefly at the EPA, and net neutrality.
In 2021, the executive directives can be quickly undone.  New federal court judgeships at the lower levels can be established equal in number to those appointed by the current executive. Anthony Kennedy. bless his soul, looks like he is not retiring. The tax cuts can be reversed using the same reconciliation process as was used to establish them (and the booty clawed back). New regulators can restore what was lost.
And the blue tsunami of voters born since 1974 will building higher and higher as the red wave recedes one funeral at a time.
Deep breaths. We  will get there.

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Great news on job security, but on income line workers can hold back on breaking out the champagne

Great news on job security, but on income line workers can hold back on breaking out the champagne

Some really good news this morning, but a note to hold your horses on the celebration of at least one aspect of that news.
Initial jobless claims, which I’ve called the single most positive data point in the entire economy, posted nearly a 50-year low at 210,000. On a population- or labor force-adjusted basis, it is an all time low.
This, by the way, bodes well for a another decrease in the unemployment rate in the next several months, possibly as early as in next week’s jobs report, as initial jobless claims lead the unemployment rate typically with a short 1-3 month lag.
Bottom line: people may not have great jobs, but the jobs they have are more secure now than they have been at any point since the 1960s.  That’s great news.
There was good news in personal income and outlays as well, with a strong +0.5% increase in income, and a pop in the savings rate from 2.5% to 3.2%.
BUT … the big positive news looks like a one-time jump based on the payment of bonuses, and also the decline in tax withholding in January due to the tax law changes passed by Congress.

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China, not automation, is by far the biggest factor in the decline of prime age labor force participation

China, not automation, is by far the biggest factor in the decline of prime age labor force participation

Perhaps the biggest mystery in economic analysis in the last few years has been trying to find an explanation for the big decline in labor force participation since 1999.  A recent NBER working paper by Abraham and Kearney has posited the most comprehensive answer to date.  Since it was summarized in this Washington Post article, I’m just going to quote a few paragraphs and suggest that you read the entire article.

The share of Americans with jobs dropped 4.5 percentage points from 1999 to 2016 — amounting to about 11.4 million fewer workers in 2016.

At least half of that decline probably was due to an aging population. Explaining the remainder has been the inspiration for much of the economic research published after the Great Recession.

– snip –

University of Maryland economists Katharine Abraham and Melissa Kearney built [a method to arrive at a detailed analysis of the data]. After reviewing the most robust research available and doing some rough-but-rigorous math to estimate how much job loss each phenomenon can explain, the duo discovered something surprising: pretty much all the missing jobs are accounted for.

Just as important, they pinpointed the culprits. In a draft paper released by the National Bureau for Economic Research this week, Abraham and Kearney find that trade with China and the rise of robots are to blame for millions of the missing jobs.

To summarize, here are the number of job losses they found due to each reason:
China 2,650,000
Automation 1,400,000
Minimum wage increases 490,000
SS disability 360,000
Veteran’s disability 150,000
Incarceration 320,000
TOTAL: 5,320,000

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Memo to younger readers: in an era of rising interest rates, deficits DO matter very much

Memo to younger readers: in an era of rising interest rates, deficits DO matter very much

If you are under about 45 years of age, the odds are that you agree with one statement made by Dick Cheney: that “Reagan proved that deficits don’t matter.”
As I mention from time to time, I am a fossil. I remember the “guns and butter” inflation of the late 1960s (Google is your friend) and the stagflationary 1970s.
Here is a graph of the interest yield on the 10 year bond from 1981 through 2013:
In an era of declining interest rates, deficits don’t matter — or at least very little.

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Initial jobless claims: the single most positive aspect of the entire economy

Initial jobless claims: the single most positive aspect of the entire economy

I haven’t been bothering to comment on initial jobless claims reports lately, for the simple fact that every week it’s the same story:  they’re good! In fact, the initial jobless claims reports are probably the single most positive aspect of the entire economic expansion.  For all intents and purposes, nobody is being laid off!
For initial jobless claims even to be giving a “caution signal” about the economy, I would need the YoY comparison to increase:
Note that this frequently but not always happens several years in advance of any downturn.  By contrast, current numbers are running on the order of 5% less than last year.
One dismissal that it occasionally heard is that the number is bogus because there are fewer “covered employees,” i.e., employees entitled to make a claim for unemployment benefits, in this expansion than previously.

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No, Matt Yglesias, Trump is *not* “probably gonna be re-elected”

No, Matt Yglesias, Trump is *not* “probably gonna be re-elected”

While I generally agree with the political and social observations of Matt Yglesias and Ezra Klein, their takes that involve the economy frequently drive me crazy.
So it was this morning when I encountered these two tweets from Yglesias:
This is just incredibly shallow analysis and, well, wrong!
Presidential and midterm elections are completely different beasts. Midterms are decided by partisan turnout — people who strongly agree or disagree with the policies that have been enacted as the President’s agenda. Presidential elections are primarily (although certainly not exclusively) driven by the strength of the economy.

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