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

Drain the Ukrainian Swamp

Drain the Ukrainian Swamp

Trump’s latest excuse for withholding arms for the Ukrainian government to defend itself against Putin’s invitations so he can extract dirt against the Bidens is what again? Oh yea – he wants to root out corruption. REALLY? OK – start with this:

KYIV, Ukraine (AP) — As Rudy Giuliani was pushing Ukrainian officials last spring to investigate one of Donald Trump’s main political rivals, a group of individuals with ties to the president and his personal lawyer were also active in the former Soviet republic. Their aims were profit, not politics. This circle of businessmen and Republican donors touted connections to Giuliani and Trump while trying to install new management at the top of Ukraine’s massive state gas company. Their plan was to then steer lucrative contracts to companies controlled by Trump allies, according to two people with knowledge of their plans.

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Elisabeth Warren Has a Plan for America First

I plan to vote for Warren in the primary and general election, but I am not thrilled by all aspects of her plan for economic patriotism. I also have doubts about medicare for all (good policy bad politics) and forgiving student debt (good politics bad policy).

Trying to be brief and actually get to the topic of this post, my problem with Medicare for All is that people fear change and, while a majority support a Medicare option, a minority supports just enrolling everyone in Medicare aotomatically. I am in that minority, but Medicare for All is bad politics and also will never actually be approved by the Senate. Student loan forgiveness is the opposite. Many people burdened by student debt will vote for a candidate who promises to forgive it. But they are not the people most in need. They are US college graduates and relatively wealthy (even if not as fortunate as older graduates who got degrees when tuition was much lower). I do support free (public) college. The difference is that not charging tuition encourages people to get bachelors degrees which reduces supply of people without bachelors degrees and increases their relative wages (see the huge accidental experiment of enrollment to avoid the draft during the Vietnam war and the dramatic decline in the college wage premium). Given to someone who has already made the decision does not have this effect. It is special interest politics with beneficiaries who know exactly who they are at the cost of other programs or lower taxes or who knows ? (well rich people know they will be hammered by Warren and will vote for her only if they are patriotic, but there aren’t many of them).

OK now the plan for economic patriotism. I am sure this is excellent politics. I support some of the proposals (more money for apprenticeships so not all of the subsidies for education go to fancy pants bachelor’s degrees). I object to some. I also disagree with some of the analysis (which is a critique of work by friends of mine and is provocative and very high quality for a candidates web site).

First the general focus is on helping US workers also against foreign workers. I know this is almost universally accepted as a goal, but I find myself in the tiny minority who are against that. The income of US blue collar workers is pretty high up the world income distribution. I reject nationalism and oppose the aspects of patriotism which overlap with nationalism. This is a question of values not analysis and I won’t type more about it.

Second, the web page argues that the problem for US manufacturing workers is trade not technology. This is actually engaging in the economics debate at a reasonably high level.

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Binyamin Applebaum vs Economics 101 ism

I haven’t Applebaum’s book, just a column. I think the elite embrace of economics 101 occurred throughout the rich world. Certainly including Massimo D’Alema (Italian Prime Minister raised as a communist). In any case, I recognise the type over here in Rome (not just in my home town Washington DC)

The book is “The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society”
by Binyamin Appelbaum

My tweet which I copied above is a reply to this tweet by Scott Winship @swinshi

Any explanation for slower US growth has to explain slowed growth THROUGHOUT THE RICH WORLD. But sure, economists and elites are THAT powerful and influential and homogeneous. The merging of progressives & national conservatives continues apace.

I think Winship claims that Applebaum just assumed that the whole rich world is similar to his circle of acquaintances. It seems to be the common claim that members of the coastal liberal establishment elite are out of touch.
I defend Applebaum. The ideology, movement, policy shifts and consequences he discusses are certainly all strong in continental Europe. I think there is extremely strong evidence that an elite which includes economists but mostly consists of non economists who respect economists and have a particular opinion of what economists say is exceedingly powerful influential and homogenous. It is definitely not just a US phenomenon.
Explaining the tweet. First I was born in Washington DC. The ideology is often called neoliberalism or The Washington Consensus. I like Noah Smith’s term Economics 101. Smith’s point is that many non-economists think economics consists of the very simplest economic models which are now mainly used to introduce the subject to undergraduates (and now high school students including 2 of my nieces). He has a lot to say. I just googled Noah Smith Economics 101

Massimo D’Alema was Prime minister of Italy 1998-2000. He is the first ex-Communist Italian Prime Minister. I am showing my age by still thinking of him. He is an example which comes to my mind of a powerful, influential, and homogeneous elite. In particular, he hosted a summit of center left politicians including Clinton, Blair, German Chancellor Gerhard Shroeder, Tony Blair, and (reluctantly attending) Lionel Jospin. This was a declaration of victory by the victors after the end of history (narrator: History didn’t agree that it had ended).
D’Alema is the son of a prominent Italian Communist. He was raised in the Communist Party as some of his contemporaries were raised in the Catholic Church. He remained loyal to the party when he was an undergraduate at the super elite Scuola Normale Superiore, where almost everyone else was way to the left of the party (think a Lyndon Johnson fan at Harvard in 1968 if you are even older than me).

A source tells me that, at another meeting this one of the post communist democratic party of the left, D’Alema said roughly (and in Italian — he is very elite but not multilingual) that
[Tony Blair is lucky, because Thatcher did what had to be done and then he could come in and take care of the wounded. We are going to have to do what has to be done ourselves.] (I use [] for paraphrases and in this case translations of vague memories)
So the first Italian Prime Minister coming from the Italian Communist Party explicitly presented Margaret Thatcher as a model to emulate. I wasn’t there, I heard this second hand, but I promise you, it wasn’t surprising at the time. When a longtime loyal party member finally became prime minister, he was dedicated to privatization and deregulation.
“Neoliberalism” has two meanings on different sides of the Atlantic. In the USA it means “like Bill Clinton” or “typical of the Clinton administration and say the guys who wrote for “The New Republic” when Clinton was in office. In the rest of the world it refers to the extreme pro-market small government ideology. I am very very sad to say that the two meanings aren’t all that different, because Clinton administration policies were far right by the standards of the rest of the world.

I think the perfect expression of the ideology was found in “The Economist”, but the old “New Republic” gave them a race for their money.
The Washington Consensus is a consensus of staffers (prominently including economists) at the IMF, the World Bank and the Clinton Treasury. A central figure is Larry Summers who went from chief economist at the world bank to first chairman of the National Economic Council under Bill Clinton.
He is one of many people who can confirm that there was an international elite which prominently included economists and which was convinced in the 1990s that it had found the answers, alll the answers. They were interested in, among other things, globalization, by which they meant economic globalization and especially the massive increase in trade in intermediate goods due to offshoring and the globalization of value added chains. I am pretty sure that they are willing to call themselves globalists (I sure am).
I’m sure Applebaum can defend himself, and does make a case in the book (which I haven’t read).
I have a critique of Applebaum’s op-ed “Blame Economists for the Mess We’re In” https://www.nytimes.com/2019/08/24/opinion/sunday/economics-milton-friedman.html which I have read. It is unfair to economists and to economics. Applebaum describes the economic theory which was extremely influential in the 1980s & 1990s. It is economics 101, or rather really the first semester or so of economics 101. This tiny subset of economic theory (which has little to do with current academic research) the economy is described as a market with demand and supply. Without regulation, markets in these models clear with demand equal to supply. This outcome is not so horrible that a policy maker can help everyone, without one exception, by intervening. The economics 101ism is an ideology which says that the answer to all policy questions can be found by assuming that these models describe the world and that an government intervention which helps all but one person and hurts that person a little is unacceptable.

So it has two components. First exceedingly strong positive assumptions about how the world works. These are testable (and overwhelmingly rejected by the data). They include complete markets (if you want to bet that the temperature at a given address in Deluth will be between 73.2 and 73.3 degrees at 11:14 AM on March 14th 2023 you can) perfect competition (so if a store owner raised the unit price of a good by 1 cent then no one would buy it and if she cut it by one cent she would sell out instantly) and no externalities (so you don’t care if I decide to end it all by releasing a ton of nerve gas) and symmetric information (so you know exactly how much I prefer chocolate ice cream to vanilla ice cream, that is exactly how much more I would be willing to pay for a pint of chocolate than for a pint of Vanilla).

With all these absurd assumptions, one can reach an absurdly weak conclusion — there is no intervention which helps everyone. The full 100% 200 proof economics 101 ideology concludes that this means that laissez faire (no government intervention except for protecting people and their property rights from violence) is the best policy.
This is insane. The actual ideology is that the models are useful approximations, and we will separately consider equity and Pareto efficiency and hem and haw, so in this case moving towards laissez faire is an improvement (notice that the Pareto improvement implies that approximations can’t be useful as a tiny harm to one person makes a huge difference – the ideology requires both assuming that approximations must be useful and that approximations can’t be useful – it is not just totally wrong, it is internally inconsistent https://angrybearblog.com/2009/10/schizzo-welfare-economics.html

This is very weak argument, but it was strong enough to change the world.

However, even introductory economics courses go on to teach about imperfect competition, externalities, something about welfare economics other than the Pareto principle and maybe asymmetric information. They don’t discuss what can happen if markets are incomplete (as they are). That involves hard math. I will try to explain it in plain English in another post. Also economic research is now mostly based on assessing the effects of policy by finding natural experiments (or even conducting actual experiments). It no longer relies on assuming that hypotheses which have been rejected by the data must therefore be useful approximations. Also members of the American Economic Association tend to favor more rather than less government intervention. Also there are no anti-Keynesians in foxholes.

So Applebaum is wrong wrong wrong about everything except about the power of a homogeneous international elite and its recent (now weakening) pro-market ideology.

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Does France Have an “Exorbitant Privilege”?

by Joseph Joyce

Does France Have an “Exorbitant Privilege”?

The U.S. has long been accused of using the international role of the dollar to exercise an “exorbitant privilege.” The term, first used by French finance minister Valéry Giscard d’Estaing, refers to the ability of the U.S. to finance its current account deficits and acquire foreign assets by issuing dollars as a reserve currency. While flexible exchange rates have lowered the need for reserve currencies, the use of the dollar in international trade and finance ensures that there is a continuing need for dollar-denominated assets. The status of the dollar contributes to the surplus in U.S. international investment income despite its negative net international investment position (NIIP). But France also has a surplus in international investment income and a negative NIIP. Does it possess its own privilege?

The U.S. surplus reflects the composition of its external balance sheet as well as the return on its assets and liabilities. The U.S. has a positive balance on equity, and in particular, FDI, which is offset by the negative balance on portfolio securities, such as bonds. U.S. Treasury bonds are the universal “safe asset,” held by private foreign investors as well as central banks. The return on the equity assets exceeds that paid on the debt liabilities, thus yielding a positive investment income balance. This is the return that the U.S. receives for playing the role of the “world’s venture capitalist,” according to Pierre-Olivier Gourinchas of UC-Berkeley and Hélène Rey of the London Business School. In addition, the U.S. receives a higher return on its FDI assets than it pays out on its FDI liabilities.

France also has a negative NIIP but a positive net international investment income balance. In 2018, for example, it received $35.6 billion in investment income. Moreover, the Banque de France pointed out in the 2015 Annual Report on the French Balance of Payments and International Investment Position that while the ratio of outward direct investment stocks to liabilities was 2 to 1, the ratio of FDI receipts to payments was 3 to 1. The French surplus, like that of the U.S., therefore can be attributed to both a “composition” effect reflecting the difference in the types of assets and liabilities it possesses, but also a “returns” effect due to the relatively higher return on its direct investment assets vis-à-vis its liabilities.

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Have we finally reached “full employment”?

Have we finally reached “full employment”?

As I noted on Friday, the household report – the one that tells us about unemployment, underemployment, and labor force participation – was particularly good. In fact, the last two months together have been so good that, at least by some measures, we may finally have arrived at “full employment.”

Let’s start with the basics. Gains in employment as measured by the household survey (blue in the graphs below), as opposed to the larger (and, yes, more reliable) payrolls survey (red), were 590,000 and 391,000 in the last two months, respectively. Those were the biggest gains in nearly a year:

 

At 3.5%, that gave us the lowest unemployment rate in the past 65 years (except for a few months in 1968-69):

 

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The Repo Ruckus

The Repo Ruckus

This is now about three weeks old news, but it is increasingly clear that it is not clear why it happened or if it will happen again.  There was an outbreak of completely unexpected volatility in the repo market, where in the past the Fed had carried out open market operations, although that had largely passed.  Indeed in more recent years when the Fed has intervened in markets it has been in the reverse repo market.  In any case, interests rates shot up as high as 9 or 10 percent at one point, with the federal funds rate also getting out of its allowed range on the upside, although not by that much.  The New York Fed pumped about $400 billion into the market to stabilize it, so there was no immediate fallout from this, and if it happens again, probably the Fed can do it again. Nevertheless, this is a sign of things going on in the markets that are poorly understood, and John Williams, the New York Fed president has come under criticism for not providing any clear explanations.

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September jobs report: excellent in coincident and lagging sectors, cautionary in leading sectors

September jobs report: excellent in coincident and lagging sectors, cautionary in leading sectors

HEADLINES:

  • +136,000 jobs added (+135,000 ex-Census)
  • U3 unemployment rate declined -0.2% from 3.7% to 3.5% (NEW LOW)
  • U6 underemployment rate declined -0.3% from 7.2% to 6.9% (NEW LOW)

Leading employment indicators of a slowdown or recession

I am highlighting these because many leading indicators overall strongly suggest that an employment slowdown is coming. The following more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were mixed.

  • the average manufacturing workweek declined -0.1 from 40.6 hours to 40.5 hours. This is one of the 10 components of the LEI and is negative.
  • Manufacturing jobs declined by -2,000. YoY manufacturing is up 117,000, a deceleration from 2018’s pace.
  • construction jobs rose by 7,000. YoY construction jobs are up 156,000, also a deceleration from summer 2018. Residential construction jobs, which are even more leading, rose by 500.
  • temporary jobs rose by 10,200. (NOTE: July, which was originally reported at +10,500, is now shown at -2,200. August was revised down by -900 to +14,500).
  • the number of people unemployed for 5 weeks or less declined by -339,000 from 2,207,000 to 1,868,000. (NEW EXPANSION LOW)
Wages and participation rates

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STOCK MARKET DOWNSIDE RISK VS. UPSIDE POTENTIAL

Despite all the recent stock market volatility the actual S&P 500 PE on trailing operating earnings is almost exactly where my model says it should be.

The biggest problem is that the market PE  is about 19 and bond yields are under 2%.  The quick and dirty rule of thumb is that a 100 basis point change in yields should generate a 100 basis point change in the S&P 500 PE.    With bond yields already under 2% the upside potential for the market PE is under 200 basis points — driving the PE to the upper limit of the fair value band.

Consequently, further market increases are almost completely dependent on earnings growth. But currently, unit labor cost are rising faster than prices as measured by the non-farm business deflator and world economic growth remains very weak.  While this spread is a powerful determinate of earnings growth you have to be careful with it as the most recent observations are subject to significant revisions.

Given these conditions the stock market downside risks clearly looks larger than the upside potential.

 

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Once again, two sharply contrasting reports to start the month

Once again, two sharply contrasting reports to start the month

One month ago, I wrote that the first reports in September, construction spending and the ISM manufacturing index, showed two contrasting views of the economy. That was again the case today.

As in last month, residential construction spending increased for the month. Below I show it in comparison with single family permits:

Typically construction follows permits. In the past few years, it has been almost coincident with permits. In any event, this is more confirming evidence that in the important and leading housing sector, the decline that started in early 2018 has ended. This is positive news for the economy as a whole in 2020.

 

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Expect a weak report for the leading jobs sectors on Friday

Expect a weak report for the leading jobs sectors on Friday

September motor vehicle sales will be reported later today, after the domestic US manufacturers post their numbers. Sales of all other vehicles were down -13% YoY, but that is without seasonal adjustment including for Labor Day, so the seasonally adjusted sales might tell a completely different story.

In the meantime, with an eye towards Friday’s jobs report, let’s take a look at what is happening with temporary help services, one of the most leading components of employment.

Every week I update the American Staffing Index, (from which site the first four graphs below are taken) which has a 14 year history and in that time has correlated pretty well with the final temp help employment numbers. This year it has turned increasingly negative, and this week had the most negative YoY reading so far, down -5.45% YoY for the single week, and off -4.9% YoY as a 4 week moving average:

Maybe the best way to see how bad this is, is this non-seasonally adjusted look at the index’s entire history:

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