CSX connects most major U.S. cities east of the Mississippi River. Since 2017, the railroad has laid off 6,000 employees, cut back on capital spending, and slashed the number of trains it runs and discontinued hundreds of the routes it serves.

Together CSX and Union Pacific serve major U.S. cities west of the Mississippi River and together they discontinued service on 197 out of 301 cross-country routes that the two rail giants partnered on in September 2017.

The results of these actions leaves shippers who want to send goods across the country no “direct” means to send a container by rail from Houston to Baltimore. Instead, CSX will take the container as far as Chambersburg, Penn. And the rest of the way will be by a container trucker going the remaining 77 miles to Baltimore. The same exists if the shipper uses Norfolk Southern. Norfolk will take the container only as far as Harrisburg, Penn. And the container will be transferred to a container trucker for the balance of the 76 miles to Baltimore.

Why would CSX owners do this when the need still exists? The cost cutting brings short-term profits and a soaring stock price. Between the beginning of 2017 and the end of this year’s third quarter, CSX labor expenses declined by 18% and the value of its stock rose by 106 percent. Rather than increase the price on its route, CSX can maximize profits and minimize capital and maintenance costs by cutting service in the aggregate. The cut in Labor cost is just an add on when compared to the cuts in Overhead costs.

Side Note: So much for common carrier and public utility laws. “The term utilities can refer to the set of services provided by these organizations consumed by the public: Coal, electricity, natural gas, water, sewage, telephone, and transportation. Broadband internet services (both fixed-line and mobile) are increasingly being included within the definition” while a “common carrier offers its services to the general public under license or authority provided by a regulatory body. The regulatory body has usually been granted ‘ministerial authority’ by the legislation that created it. The regulatory body may create, interpret, and enforce its regulations upon the common carrier (subject to judicial review) with independence and finality, as long as it acts within the bounds of the enabling legislation.”

E. Hunter Harrison is the man who figured out how-to pump-up profits by cutting service. Over the course of his career at the Illinois Central, Canadian National, and Canadian Pacific Railways; Harrison implemented his trademark program: “precision scheduled railroading.” Besides cutting capital (engines, cars, etc.) Overhead (maintenance of equipment, facilities rail beds, costs associated with Labor, etc.) and Labor costs; precision scheduled railroading means less service, fewer and longer trains, fewer routes, and ignoring some major cities.

Side Note: This is the same type of cuts in service many politicians and competitors of the USPS are pushing for today. Railways like the postal service are utilities and are vital to the community. The purpose of both mail and railroads was to provide a service as a public utility. Railroads being granted exclusivity for certain routes and governed by common carrier law. Someone is purposely asleep at the switch and abating the destruction of infrastructure.

Why would CSX cut service drastically? Hedge fund Mantle Ridge and founder and CEO Paul Hilal. Mantle Ridge had and still has only one investment, an initial $1.2 billion stake in CSX stock purchased in late 2016. The $1.2 billion is now worth nearly $3 billion as of the last quarter. In January 2017 with Mantle Ridge’s investment, Hilal pushed CSX to hire his partner Harrison and implement precision schedule railroading (nothing to do with schedules and more to do with providing service).

CSX agreed to Hilal’s demands. Shareholders salivated at the thought of Harrison boosting CSX’s profits right into their pockets and showed large support for Harrison’s leadership at CSX. Harrison saying that “shareholders took a much more active role than I’ve ever seen before. They wanted change.”

Of course, they wanted change at CSX for short term profits or rent taking. They will leave CSX a shadow of its formal self. The loss of the necessary infrastructure promoting the transportation of goods in the US will be born by its citizens in increased costs and impinge upon national security.

On a similar note and action . . . October 15, 2018 Sears faced a deadline for payment of $134 million on its debt. It didn’t have the money, so it filed for protection from its creditors. Eddie Lampert — the largest shareholder in the company, with nearly half its shares — stepped down as CEO. Another corporate pirate who will strip the assets of the company and leave Sears a shell of its former self.

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Mark Thoma had this up on Facebook. and pulled this from Tim Taylor’s Conversable Economist. It is an interesting read.

“Fifty years ago in 1968, Milton Friedman’s Presidential Address to the American Economic Association set the stage for battles in macroeconomics that have continued ever since. The legacy of the talk has been important enough that in the Winter 2018 issue of the Journal of Economic Perspectives, where I work as Managing Editor (Tim Taylor), we published a three-paper symposium on ‘Friedman’s Natural Rate Hypothesis After 50 Years.'”

What was the key insight or argument in Friedman’s 1968 address? Friedman offers a reminder that interest rates and unemployment rates are set by economic forces. Friedman uses this idea to build a distinction between the long-run and the short-run. In the short run, it is possible for a central bank like the Federal Reserve to influence interest rates and the unemployment rate. In the long run, there is a “natural” rate of interest and a “natural” rate of unemployment which is trying to emerge, gradually, over time from all the various forces in the economy.

The rest you can read for yourself at Tim’s site.

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Senator Grassley tweeting: “Five times now we hv granted extension for Dr Ford to decide if she wants to proceed w her desire stated one wk ago that she wants to tell senate her story Dr Ford if u changed ur mind say so so we can move on I want to hear ur testimony. Come to us or we to u,”

I like how tweeting brings out the intellect in people and especially our politicians. And Chuckie the tweeting senator does this on a public forum with Ford and Kavanaugh so everyone can read along with him.

In New Jersey’s 2019 ACA marketplace, fruits of reinsurance, individual mandate, and silver loading.

New Jersey’s Dept. of Banking and Insurance has posted individual market health plan prices for 2019. Thanks to the state’s new reinsurance program, state-based individual mandate, and silver loading (actively encouraged by DOBI), unsubsidized enrollees will see price drops from 2018. For the subsidized, it looks pretty much like status quo ante — although network changes and plan design changes could alter that picture.

As was the case last year, AmeriHealth has sewn up all the lowest price points. AmeriHealth and Oscar are offering discounted silver plans off-exchange — presumably because of silver loading (Cost Sharing Reduction, available only with silver plans and only on-exchange, is not priced into off-exchange silver). Horizon is not offering any off-exchange discounts, but it has dropped prices about 7% from last year. A few salient year-to-year comparisons below. Quoted premiums are for a 46 year-old — where they’re a clean 1.5 times the base rate posted by DOBI. Andrew Sprung at xpostfactoid

More states should follow New Jersey’s lead.

Further evidence that the tax cuts have not led to widespread bonuses, wage or compensation growth. Economics Policy Institute.

Newly released Bureau of Labor Statistics’ Employer Costs for Employee Compensation data allow us to examine nonproduction bonuses in the first two quarters of 2018 to assess the trends in bonuses in absolute dollars and as a share of compensation. The bottom line is that there has been very little increase in private sector compensation or W-2 wages since the end of 2017. The $0.03 per hour (inflation-adjusted) bump in bonuses between the fourth quarter of 2018 and the second quarter of 2018 is very small and not necessarily attributable to the tax cuts rather than employer efforts to recruit workers in a continued low unemployment environment.

“Saving the Planet Doesn’t Mean Killing Economic Growth”

Noah Smith: Hickel cites analyses by the United Nations Environment Program and others showing that even big improvements in resource efficiency, encouraged by very high carbon taxes, will be unable to halt overall resource use or global carbon emissions. But this evidence doesn’t support Hickel’s conclusions, which rely on several misconceptions about the nature and the importance of growth.

Hickel doesn’t seem to grasp the fact of most economic growth happening in countries that are relatively poor. From 2010 to 2015 as determined by estimates by the IMF emerging markets, developing countries were responsible for about 70 percent of global output and consumption growth and advanced economies were responsible for the rest. World Bank’s forecasts for 2017-2019 are similar.

China’s contribution to global growth will be double the U.S. growth and India’s will be larger than the whole of the entire euro zone. The same is true of greenhouse gas emissions. Since about 1990, emissions from the U.S. and EU have fallen, while emissions from developing countries such as (and especially) China and India have exploded.

In 2017, the International Energy Agency estimated that the growth in energy-related carbon emissions in China and the rest of developing Asia was more than five times the growth in the European Union while U.S. emissions declined.

If Hickel and others succeed in stopping economic growth in developing countries, it will not be rich countries bearing the brunt of the change. It will be poor and middle-income countries such as India and China. The desperately poor African countries will not a chance at increased prosperity.

$600,000 in Debt and the Crisis is Worsening “The student loan default rate more than doubled between 2003 and 2011, and 40 percent of borrowers are expected to fall behind on their loans by 2023.”

There is a long history of Congress favoring financial institutions with laws and regulation blocking students from debt relief. Yet, our president can bankruptcy relief multiple times without any court or law blocking him. For him it is business as usual, getting a new loan to buy property and increase profits, pay the old loan with then new loan, and declaring bankruptcy when costs exceed cash inflow. Students do not have the luxury of gaming the system.

With the cost of an education in this country is only rising, borrowing is unlikely to slow. State funding for public colleges fell by $9 billion between 2008 and 2017, and the gap has been filled with tuition hikes. For the first time, half of all states relied more heavily on tuition last year than on government appropriations to fund higher public education. Americans now spend an approximate $30,000 per student a year to gain a college education or twice as much as the average developed country.

The IBR and Repaye programs put in place by well-meaning advocates has been a failure due to a lack of understanding in how to manage it yearly and with some servicers such as Naviente deliberating misleading students into multiple postponements of loans instead of into the income-driven repayment plans. The plans cap monthly payments at a percentage of the borrower’s income. It is not the first-time commercial interests have lied to students and taken a predatory approach on student loans. Naviente is being sued by five states and the CFPB.

Indian sailor Abhilash Tomy injured on disabled yacht.

A multinational rescue effort is underway to try to reach an injured sailor whose yacht is disabled in the South Indian Ocean.

Abhilash Tomy, a 39-year-old Indian naval commander, was competing in the 2018 Golden Globe Race. The race is a nonstop, 30,000-mile solo yachting competition that bars the use of modern technology. To me, this sounds like a lot of fun and a lot of work. I always like to sail as the quiet of the water is soothing.

Abhilash Tomy boat the “Thuriya,” hit a storm in the South Indian Ocean. The 36-foot boat was one of several hit by 80 mph winds and 46-foot seas midway across the South Indian Ocean on Friday, day 82 days of the race. Thuriya’s mast was broken about 1,900 miles southwest of Perth, Australia and “at the extreme limit of immediate rescue range,” according to media statements.

Organizers became concerned after Tomy sent a text message reading: “ROLLED. DISMASTED. SEVERE BACK INJURY. CANNOT GET UP,” and then was unheard from for nearly 15 hours. In a later satellite text message, the sailor gave his location and wrote: “ACTIVATED EPIRB (Emergency Position Indicating Radio Beacon). CANT WALK. MIGHT NEED STRETCHER.”

What is the White House Deflecting from Now?

It is no secret one of the strategies used by the White House is to deflect attacks on their agenda by creating another emer . . . spectacle . . . gency when the news and the opposition gets close to defeating their plans. The attack on Rosenstein as led by the NYT is just too easy, convenient, and laughable (almost). The deflections have happened too many times already. Trump holds Fire

Continuing on this path; “Kavanaugh Accuser Agrees to Testify” I am sure Grassley and other members of the Senate, Hatch, Cornyn, Cruz, Hannity, and the tier two Senators such as Flake, etc. will make this debacle into another shameful attack on Ford, women, and the truth. What, no women on the Repub side? I am sure the 4 women on the Dem side can support Ford and strike back.

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I had written this in 2009 and it also appeared in “the new agenda.” It is a decent piece about people who saw the coming crisis pre-2007/8 and those who opposed them.

Recently, Stanford Magazine did an article on one of the University’s former law review presidents who graduated at the top of the 1964 class. The first female to hold either distinction of graduating first in her class and also as president of the school’s Law Review. Prophet and Loss. Stanford Magazine, April 2009.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” Alan Greenspan

“I thought it was counterproductive. If you want to move forward . . . you engage with parties in a constructive way,” Rubin told the Washington Post. “My recollection was . . . this was done in a more strident way.”

“characterized as being abrasive.” Arthur Levitt

It would seem the three coupled with Larry Summers’s push back in Congress on the regulation of derivatives, had the problem and not Brooksley Born. Since then, all three men have suggested there should have been more regulation of the derivatives market Greenspan has called its recent collapse a “once in-a-century credit tsunami.” Called a modern-day Cassandra by Stanford Magazine, one could only wonder where we would be today if the economic and financial wizards had taken heed of Brooksley’s warning.

Short histories on CDO/CDS . . . Collateral Debt Obligations (CDO) were invented by Drexel Burnham Lambert (Milken) as a way to package asset-based securities. The CDO was tranched into similar asset backed securities of the same rating allowing investors to concentrate on the rating rather than the issuer of the bond. Ten years later, JP Morgan invented Credit Default Swaps (CDS) which was used as a mechanism to bet on a 3rd party default. In 2000, CDS were made legal with the passage of the Commodity Futures Modernization Act and any regulation of them was stymied with this bills passage. Later on, an investment firm decided to team CDS and CDO together, transferring the risk from the CDO to the issuer of the CDS, and creating a synthetic CDO. Few CDS if any and their counters naked CDS had the reserves set aside to payout a claim against a failed CDO.

It was 1994, Bankers Trust lost ~$800 million from various derivative investments. The chief losers were P&G and Gibson Greetings. Bankers Trust was formed by a consortium of banks, shedding the loan image for conducting trades. Bankers Trust was successfully sued by P&G for its losses by claiming racketeering and fraud. Bankers Trust also became known for its remarks about Gibson Greetings not knowing what Bankers Trust was doing. In 1998, Bankers Trust pled guilty to institutional fraud due to the failure of certain members of senior management to escheat abandoned property to the State of New York and other states.

In 1998, LCTM was struck by a downturn in the market when Russia defaulted on government bonds, a security LCTM was holding. To make a significant profit on small differences in value, the hedge fund took high-leveraged positions. At the start of 1998, the fund had assets of about $5 billion and had borrowed about $125 billion. When investors panicked and sold Japanese and European bonds and bought US treasuries, the spreads between LCTM holdings increased, resulting in a loss of ~$1.8 billion by August 1998. LCTM was saved by an orchestrated Fed bailout utilizing private investors.

In both cases, the history was there to call for more regulation.

It was in 1998, Brooksley Born testified to Congress about the dangers of the unregulated derivatives market referencing the LCTM losses as a recent example. It was then deputy Treasurer Larry Summers testified to Congress that Born’s desire to regulate is “casting a shadow of regulatory uncertainty over an otherwise thriving market.” Larry’s testimony set the stage for Congress to rein in the power of the Brooksley Born’s and the CFTC with the passage of Phil Gramm’s Financial Service Modernization Act of 1999 prohibiting the regulation of the derivatives market (In 2005, the revised bankruptcy laws would place derivatives outside of the laws making it the first in line to receive compensation). Wall Street and banks had clear unregulated sailing in the sea of laissez faire in 2000 with a closing of the door for debtors in 2005. It was little better than a roach motel, you could check in but you could never check out.

In 1999 in the Senate, opposition arose to the passage of the Financial Services Act in the form of North Dakota’s Senator Dorgan. An excerpt from the Senator’s speech the day before the bill was passed:

“I, obviously, am in a minority here. We have people who dressed in their best suits and they just think this is the greatest piece of legislation that has ever been given to Congress. We have choruses of folks standing outside this Chamber who spent their lifetimes working to get this done, to say: Would you just forget all that nonsense back in the 1930s about bank failures and Glass-Steagall and the requirement to separate risk from banking enterprises; just forget all that. Time has moved on. Let’s understand that. Change with the times.

We have folks outside who have worked on this very hard and who very much want this to happen. We have a lot of folks in here who are very compliant to say: Absolutely, let me be the lead singer. And here we are. We have this bill, which I will bet, in 5, 10, 15 years from now, we will be back thinking of this bill like we thought of the bill passed in the late 1970s and early 1980s, in which this Congress unhitched the savings and loans so some sleepy little Texas institution could gather brokered deposits from all around America and, like a giant rocket, become a huge enterprise. And guess what. With all the speculation in the S&Ls and brokered deposits and all the things that went with it that this Congress allowed, what did it cost the American taxpayer to bail out that bunch of failures? What did it cost? Hundreds of billions of dollars. I will bet one day somebody is going to look back at this and they are going to say: How on Earth could we have thought it made sense to allow the banking industry to concentrate, through merger and acquisition, to become bigger and bigger and bigger; far more firms in the category of too big to fail?”

Daily KOS, Senator Dorgan’s Speech, November 4, 1999 on “Gramm-Leach – Bliley Act” also known as the Financial Services Modernization Act (you can hear the 16-minute speech here or read it)

Larry Summers has been present throughout much of this change, supporting it, denigrating the opposition, and claiming his experience at D. E Shaw gave him an insider’ knowledge as to how the derivatives market works. While President of Harvard University; Larry received a letter (May 12, 2002) from Iris Mack, a new employee of the Harvard Management Company managing Harvard’s endowment funds. A Doctorate in Mathematics from Harvard and a former employee of Enron who dealt in derivative trades, she expressed concern about the trades (swaps and other complex financial instruments) being made by the funds and the lack of understanding of the trades by the traders. On July 1, Iris was called into the office of Jack Meyer, the chief manager of Harvard Management. On July 2, Iris was fired for making what Harvard Management termed as: ‘baseless allegations against HMC to individuals outside of HMC.”Ex-Employee Says She Warned Harvard of Risky Moves” Boston Globe, April 3, 2009. While Harvard Management Company claims above normal returns on its endowment funds, it has spent much of last year selling off private equity and investments to raise cash to pay for losses.

The attitude expressed by the head of the Economic Council was one of “trust me now” as I have all of the experience necessary to fix the current economic and financial problems. Instead he has promulgated the issues of the collapse by denigrating Brooksley Born’s request to Congress for regulatory power, ignoring the advice of Iris Mack at Harvard University, by consulting to D.E. Shaw (hedge fund) making ~$5.2 million as the financial engineer’s engineer following a model Buffet called Financial Weapons of Destruction, and he has been repeatedly wrong in his direction and advice to Congress and Industry.

In the game of deregulation and global efficiency, Larry Summers was its cheer leader signing off on a letter encouraging the dumping of toxic wastes in Asia at the World Bank. He helped to shepherd China into the WTO claiming:

“The agreement with China is a one-way street. China opens its markets to an unprecedented degree, while in return the United States simply maintains its current market access policies.
‘It is difficult to discern any disadvantage to the United States in passing this legislation.” Larry Summers and Senator Dorgan, Angry Bear blog.

Personality, ego, and a blind belief in the ability of the market place to dictate the proper path and the correction has gotten in front of common sense. Maybe it was time to sideline Greenspan, Summers and his protégé Geithner beliefs in favor of Born, Mack, and Dorgan’s?. The latter has shown more foresight into how today’s problems and issues were created and how to resolve them. SEC head Arthur Levitt later recanted his decision to support the Commodity Futures and Modernization Act calling it one of the worst decision he ever made.

“I certainly am not pleased with the results. I think the market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and more pervasive than it otherwise would have been.” Brooksley Born, Stanford Magazine, April 2009

*’The messenger wore a skirt,’ says Marna Tucker, a Washington lawyer and a longtime friend of Born. ‘Could Alan Greenspan take that?’”

run75441@ Angry Bear Blog
revised Sept. 20, 2018

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Paul Krugman put many of his thoughts together here “What Do We Actually Know About the Economy? (Wonkish)” Basically he concludes that some economists are confused but Paul Krugman knows a lot (no one has ever accused him of being diplomatic). Of course I agree with him.
However, I am very pleased to note that I finally find one or two points of disagreement.

I’d just click the link but to try to summarize

“Macroeconomics is better than you think, microeconomics worse, and data are limited”

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in an important sense the past decade has been a huge validation for textbook macroeconomics; meanwhile, the exaltation of micro as the only “real” economics both gives microeconomics too much credit and is largely responsible for the ways macroeconomic theory has gone wrong.

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Now, the thing about IS-LM-type analysis is that using it isn’t that big a deal in normal times, but it makes some very strong predictions – predictions very much at odds with many peoples’ priors — about abnormal times. Specifically, this kind of analysis says that when there is a really big adverse shock to demand – say, from the collapse of a major housing bubble – there’s a regime change, and neither monetary nor fiscal policy have the same effects they do in normal times.

On the monetary side, old-fashioned macro says that once interest rates have been driven down to the zero lower bound, monetary policy loses traction.

[skip]

What about fiscal policy? Traditional macro said that at the zero lower bound there would be no crowding out – that deficits wouldn’t drive up interest rates, and that fiscal multipliers would be larger than under normal conditions.

The overall story, then, is one of overwhelming predictive success. Basic, old-fashioned macroeconomics didn’t fail in the crisis – it worked extremely well. In fact, it’s hard to think of any other example of economic models working this well – making predictions that most non-economists (and some economists) refused to believe, indeed found implausible, but which came true. Where, for example, can you find any comparable successes in microeconomics?

Then by microeconomics he means mostly microeconomic theory (the micro on which the Chicago school decided Macro had to be founded) and by data without theory he means accidental theory — basically assuming any parameter you estimate is stabe so any estimate reveals the law of motion of the economy.

I have mild criticisms of each of the three parts of the essay.

First on macroeconmics we are short one equation. Krugman discusses IS-LM but 1960s macro was IS-LM-Phillips curve. In any case, to complete the model one needs a model of aggregate supply. Krugman doesn’t mention the death, rebirth and re-death of the Phillips curve. 1960s macro implies that wage inflation should be increasing. The change from 10 to 3.9% unemployment with a very modest change in the rate of nominal wage inflation is a mystery. The unreversed decline in the share of labor is a puzzle (not to mention a tough problem for workers). This is also a case in which Paul Krugman in particular made predictions which were contradicted by the data. He mocks those who forecast hyperinflation in 2010, but he forecast deflation. Instead wages and prices conditnued to increase albeit very slowly. Krugman recognizes that even he didn’t appreciate 1960s macroeconomists (for example James Tobin) who stressed downward nominal wage rigitidy. This shows that off the shelf 1960s macro wasn’t a total success (largely because some of it was left on the shelf).

The current puzzle is worse. It has lead some people to use the wages taboo site:angrybearblog.com . The failure is the exact opposite of that predicted by Friedman and Lucas who argued that the correctly understood Phillips curve (as a structural causal relationship) is not a downward sloping curve but a vertical line. The data seem to think it is pretty much a horizontal line. But changing parameters are a problem for macroeconomics no matter which direction they change.

On microeconomics, Krugman briefly praises empirical micro, but then goes on to criticize the theory.

I am contrarian enough to immediately try to think of a success of a surprising prediction based on micro theory which non-economists found implausible. The prediction was popularized by Krugman who argued that the California electricity crisis would be resolved if the Federal Government put a maximum price on electricity flowing across state lines. The argument was that the crisis was created by electicity companies (including Enron) and that, if they couldn’t charge huge prices to relieve shortages, they wouldn’t create shortages to relieve. The hypothesis was based on a close reading of California’s rules for electricity pricing and the guess that that really was time for some game theory. When they finally intervened, the shortages vanished. Then Enron went bankrupt and was investigated showing that the game theory was entirely exactly correct. I think this was good micro theory. They key point was that economics 101 (really 1st semester economics 101) was inadequate because one can’t assume the wholesale electricity market is perfectly competitive. It is dominated by a few firms hence the game theory. This shows how good micro is based on sweating the details. Someone not involved in the scam had to read the regulations to figure out how they were being manipulated.

But more generally Krugman’s review of micro does not correspond to the current balance of articles and citations, because most research is now empirical. Micro theory still exists, but it doesn’t interfere with empirical work in microeconmics.

This brings me to Krugman’s critique of the accidental theorist. He considers how one would go wrong assuming correlations are constant whether or not the economy is in a liquidity trap. This is, indeed, an example of how theory is useful. The theory is very very simple, the interest paid on cash is zero and can’t be negative (except for storage costs).

I really agree entirely with Krugman that one can’t analyse data without assumptions, without a specification or prior or something. But it is a bit odd to call all identifying assumptions “theory”. This is technically true but highly misleading. Non-economists don’t perceive arguments about keeping cash in a safe as theory (although they are theory in a way). Very generally, a lot of the new empirical economics consists of looking for natural experiments– often using the states which are the laboratories of democracy as uh laboratories.

The theory is also common sense. it is immediately comprehensible to ordinary people who also find it convincing. It is very very different from the sterile theory which lead macroeconomics astray. It is also very different from the industrial organization applied game theory which was useful when discussing elecriticy shortages in California, and, finally, not at all like the theoretical work for which Krugman was awarded a Nobel memorial prize.

Finally, new empirical micro is relevant to macroeconomics. The micro distribution of changes in wages with a huge spike at zero which appeared around 2009 is very strong evidence for downward nominal rigidity. Basing macro on the assumption that people’s behavior fits micro observations of peoples’ behavior is a way to micro found which is completely unlike the project started in the 70s. I don’t think it should be dismissed as un-necessary, like the failed effort or accidental theory.

I also don’t think Krugman dismisses it. But I do think his emphasis is other than ideal

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Conversable Economist Tim Taylor presents a chart representing spending over a life time on Education and Skills in America.

“Figure 4 (depicted) is from a report by the White House Council of Economic Advisers, titled “Addressing America’s Reskilling Challenge” (July 2018). The blue area shows public education spending, which is high during K-12 years, but the average spending per person drops off during college years. After all, many people don’t attend college, and of those who do many don’t attend a public college. Private education spending shown by the red area takes off during college years, and then trails off through the 20s and 30s of an average person. By about age 40, public and private spending on education and skills training is very low. Spending on formal training by employers, shown by the gray area, does continue through most of the work-life.

The figure focuses on explicit spending, not on informal learning on the job. As the report notes: “Some estimates suggest that the value of these informal training opportunities is more than twice that of formal training.” Nonetheless, it is striking that the spending on skills and human capital is so front-loaded in life. The report cites estimates that over a working lifetime from ages 25-64, the average employer spending per person on formal training totals about $40,000.”

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I almost always agree with Kevin Drum who is, among other things, a brilliant economist even thoug (or largely because) he didn’t study economics much in college.

But I don’t entirely agree with his one minute explanation of the importance of the yield curve for macroeconomic forecasting.

the ever-fascinating yield curve, which tracks the difference between long-term and short-term treasury bond yields. Normally the long-term yield is higher to compensate investors for the risk of the economy eventually going sour. But what if you think things are about to get sour really soon? Then you’ll bid down the price of short-term bonds, which increases their yield, and pretty soon long-term yield is less than the short-term yield. The yield curve has “inverted,” which suggests that investors are nervous about a recession hitting.

My comment

I think the yield curve story isn’t that simple really. First it always used to be an indicator of monetary policy. The Fed controls short term interest rates. When it chooses contractionary monetary policy (to fight inflation) it sets high short term rates. The long term rates don’t move up as much, because investors are sure the fed will relent after inflation falls. This was always the normal pattern.

Back in the good old days (before 1999) an inverted yield curve occured if and only if the Fed was cracking down to fight inflation. Notice the 90s. The yield curve was very close to flat during the whole late 90s boom. What was happening was the Fed was pressing gently on the brake worried about inflation & the magic of the internet (or foolish dot com mania) kept the economy booming. The alarmingly exuberance caused the fed to raise rates in 2000 (not at all trying to prevent Gore from being elected nooo Greenspan would never do such a thing). And the bubble burst.

Notice also the S&L recession happened without a dramatic yield curve inverstion. There were these two really smart time series econometricians Stock and Watson who had a model which “predicted” recessions really well. In 1990, it never said a recession was coming. Their explanation was that it detected inflation fighting recessions — that from wwII until 1990 recessions occured when the Fed decided to cause a recession to fight inflation (the also very smart Romer and Romer noted that recessions occured after statements like “we have to cause a recession to fight inflation” appeared in the Fed open market committee minutes).

I’d say a steep yield curve shows a fed desperately trying to pump up the economy and, therefore, pushing short term rates far below normal (long term rates being equal to the short term rate investors think is normal plus a small term premium cause they know they don’t know what is normal).

So the graph shows desperate efforts to stimulate when Republicans are in the White House or Bernanke or Yellen is chair (not that Saint Alan Greenspan was partisan or anything). The flattening just shows that the FOMC is no longer stimulating as hard as it can by keeping the short term rate at 0.25%.

Also the long term rate which investors now guess is normal is very low. That is called secular stagnation not incipient recession. Looking at short and long rates separately helps. Both are very low now. In 2000 both were high as the Fed was fighting the boom (a tiny bit too hard but it lead to a tiny miniscule recession). 2008 was a strange strange time when both short and long term interest rates were almost zero and yet demand was low. Then zero was not low enough. Now the FOMC thinks zero interest is a bit too low.

So I don’t agree with your story.
In general economic downturns cause low interest rates both directly and through active monetary policy. The yield curve slopes up because investors fear the Fed might decide to fight inflation, not because they fear a recession will just happen and it will drive up interest rates. The causation is high interest rates cause recessions not the other way.

In 1990 and 2008, I’d say the issue in 1990 and (much more so) in 2008 was people expected long lasting trouble, so persistenly low short term interest rates, so long term rates were low too. In 2000 and all recessions post WWII and pre presidents Bush the yield curve inverted because short term interest rates were high because the Fed was pressing on the brake.

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The current mania for “job guarantee” policies is making the Sandwichman anxious. I’ve been on the full employment beat for over 20 years so I think I have a pretty good grasp of the terrain. First principle is that there are no panaceas. My favorite policy option — reduction of working time — is not a panacea. Neither is yours.

Like my learned friend Max B. Sawicky, I am in favor of a job guarantee — provided it meets MY criteria. The proposals currently being shopped around don’t. That should not be a fatal flaw. Inadequate policy proposals can serve as the starting point for dialog that can lead to better proposals. From the left, Matt Brunig, and from the center?, Timothy Taylor have offered constructive critiques of the current proposals. I would like to offer a bit of critique from history.

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“Guaranteed jobs programs, creating floors for wages and benefits, and expanding the right to collectively bargain are exactly the type of roles that government must take to shift power back to workers and our communities,” — Senator Kirsten Gillibrand

“By strengthening their bargaining power and eliminating the threat of unemployment once and for all, a federal job guarantee would bring power back to the workers where it belongs.” — Mark Paul, William Darity, Jr., and Darrick Hamilton,

“Support for workers’ right to organize and collectively bargaining would, of course, be part of any such effort.” — Harry J. Holzer

 “This, then, was the broad issue to which Samuelson and Solow’s paper was addressed: Were price stability and full employment – or, as it was sometimes put, were price stability, full employment and collective bargaining – compatible in the America of their times?” — James Forder

Under conditions of full employment, can a rising spiral of wages and prices be prevented if collective bargaining, with the right to strike, remains absolutely free?  Can the right to strike be limited generally in a free society in peace-time? — William Beveridge, Full Employment in a Free Society

Everyone is talking about Job Guarantees these days and no one appears to have thought through the implications of such a policy for collective bargaining with anything like the thoroughness that William Beveridge did in 1946. In 1960, Paul Samuelson and Robert Solow concluded their discussion of full employment and inflation with a disclaimer:

We have not here entered upon the important question of what feasible institutional reforms might be introduced to lessen the degree of disharmony between full employment and price stability. These could of course, involve such wide-ranging issues as direct price and wage controls, anti-union and antitrust legislation, and a host of other measures hopefully designed to move the American Phillips’ curves downward and to the left.

We are told by the adherents of Modern Monetary Theory that inflation is not a problem. The government just sops up inflation by taxing back some of the money it has created to fund the program expenditures. Correct me if I’m wrong, but that seems like what they say. At the same time, though, at the same time, advocates of a Federal Job Guarantee tout the increased bargaining power that it would give to workers.

Usually that bargaining power is not specified as collective bargaining power. Harry Holzer’s comment is the exception. Senator Gillibrand’s mention of Job Guarantee and expanding the right to bargain collectively may have just been a smorgasbord of good things and not meant to imply advocacy of collective bargaining specifically for people in the Job Guarantee program. To use a distinction Richard Freeman and James Medoff adopted from Albert O. Hirschman, the “bargaining power” mentioned by Paul, Darity and Hamilton could as easily refer to the “exit” of individual choice as to the “voice” of collective action.

Well, who doesn’t want to see workers gain more bargaining power? That is not a rhetorical question. To ask it is to call attention to the very powerful political forces that have seen to it, especially over the last 40 years or so, that they don’t. Could it be that the advocates of the Job Guarantee have not done their opposition research? Do they suppose that the regime of supply-side, trickle-down, corporate neo-liberalism was inadvertent?

I am not so certain that the Kochs and the Waltons and Jeff Bezos and Jamie Dimon are going to shrug their shoulders and say, “O.K., workers, your turn now. Best of luck!” Regardless of whatever MMT says about inflation, the “inflation!” card will be played against any proposed job guarantee election platform, as will the “socialism!” card, the “moochers!” card, the “boondoggle!” card, and, yes, even the “lump-of-labor!” card.

In individual terms, bargaining power comes down to the alternative options if one quits a job — what is the Best Alternative if There is No Agreement (BATNA). Collectively, bargaining power is determined by strike leverage, which is a mutual perception of the relative capabilities of the two parties to endure a prolonged work stoppage. A Job Guarantee would appear to give additional leverage to unions in the event of a work site closure or the hiring of replacement workers. The amount of leverage depends on what the rules are regarding the eligibility of striking workers for a Job Guarantee. Presumably, workers currently on strike would be ineligible. But what happens if the employer hires scabs (otherwise known as “replacement workers”)? What if the company closes down and moves away? Would there be a waiting period before discharged workers become eligible for the Job Guarantee?

And what about the rights of the Job Guarantee workers themselves to collectively bargain and to strike? Until relatively recently public employees were denied the right to collective bargaining and the right to strike. Even today those rights are not universally acknowledged:

All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service… A strike of public employees manifests nothing less than an intent on their part to obstruct the operations of government until their demands are satisfied. Such action looking toward the paralysis of government by those who have sworn to support it is unthinkable and intolerable.

Who said that? Governor Scott Walker in 2011? Chris Christie? No, Franklin Delano Roosevelt, in a 1937 letter to the president of the National Federation of Federal Employees. Scott Walker cited FDR in a 2013 speech. Could a Job Guarantee program that denied participants the right to strike become a Trojan horse for rolling back public sector unionism? That is not a rhetorical question.

The conspicuous lacunae in the Job Guarantee literature regarding collective bargaining and the right to strike strikes me as an elephant in the room. The fact that no one talks about it could not conceivably be because no one notices it. For what is at stake here is nothing less than the sovereignty of the State and its monopoly on the legitimate use of violence. In an astonishing paragraph in his essay on the “Crtique of Violence,” Walter Benjamin makes this not so much “clear” as available for deciphering.

Benjamin’s provocative claim, distilled from the writings of Georges Sorel and Carl Schmitt, is that “Organized labor is, apart from the state, probably today the only legal subject entitled to exercise violence.” Let that sink in…

Benjamin goes on to offer qualifications and explanations that address the inevitable objections to that statement. By conceding the political right’s standard objection to the labor strike as violent, however, Benjamin — again following Sorel — has isolated and emphasized the one circumstance in which it is not — the revolutionary general strike. This is not to discount the inevitability of retaliatory violence from the State.

The insertion of Benjamin’s argument into the debate on the Job Guarantee idea may seem esoteric to the casual reader. The reason it doesn’t seem esoteric to me is that I have spent the last 20 years studying the history of anti-labor rhetoric of the right and how it gets translated ultimately into seemingly innocuous “policy principles.” Public works as an employment stabilizer sounds like a good idea — what happened to it? Full employment after the war sounds like a good idea — what happened to it? The reduction of the hours of work sounds like a good idea — what happened to it? As John Stuart Mill rightly pointed out, “He who knows only his own side of the case, knows little of that.”

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The great recession of 2008-9 followed an extraordinary house price bubble. The sluggish was characterized by a very slow recovery of residential investment. Oddly, the extensive revision of macroeconomic models which implied a very low probability of great recessions has not involved a focus on housing. Instead it has focused on financial frictions – essentially it is assumed that the 2008-9 recession was extraordinary because a major financial crisis occurred. Dean Baker dissents (as he often does) arguing that the severity of the recession could have been predicted given the massive decline in housing prices and earlier estimates of the effect of home equity on consumption. This note attempts to being to assess that claim. It also asks if it is possible to forecast GDP growth over the medium term. Finally it is part of the Rip Van Keynes series, because I will use an empirical strategy which has been out of fashion for at least four decades – basically an ad hoc OLS regression (sometimes I even include an exponential trend).

The basic result is that if the relative price of housing is high (compared to an exponential trend) then GDP growth over the following 5 years is low (compared to an exponential trend). Aiming to test out of sample forecasting, I start using 20th century data only.

-7.52 is a fairly impressive t-statistic.
Lnindex L20 is the logarithm of the ratio of the all transactions house price index to the consumer price index lagged 20 quarters. Gdp5 is the growth of the logarithm of real gdp over the past 5 years. Quarter is the calender quarter up to the 4th quarter of 1999 = 1999.75. The data were downloaded from Fred and are described in what might be generously considered a sort of data appendix. One point must be mentioned here – the all transactions house price index is available only starting in 1975, so the first useful observation is growth of GDP from 1975q1 to 1980q1.
The series are quarterly, so the dependent variable is a moving average of changes summed over 20 quarters. In the crudest attempt to deal with this, I calculate Newey West standard errors with 19 lags. These would be valid if log GDP were a random walk with drift (the constant) and trend (growth slowdown).
This regression is at least a hint that 8 years before the great recession began, there was already evidence that extremely high relative price of housing was likely to be followed by low GDP growth. Because the regression is, at best, barely presentable, I focus on out of sample forecasting. pgdp5 is the fitted value which can be considered a very crude forecast of real gdp growth over the following 5 years.
Out of sample the forecasts and outcomes are positively correlated. The correlation of pgdp5 and gdp5 over 2000q1 through 2018q1 is over 0.86. Out of sample forecasts of GDP growth over the following 5 years seem to be quite useful. This may be simply due to the estimated trends.

The following regression shows that forecasts of deviations from trend are correlated with deviations from trend.
. newey gdp5 pgdp5 quarter if quarter>1999.9,lag(19)

This is a test of out of sample forecasting performance. It is, to put it mildly, rather more successful than out of sample tests of long term macroeconomic forecasts usually are.
The data are, perhaps, more usefully summarized with a graph. Figure 1 (finally) is a scatter of the logarithm of the relative price of housing and GDP growth over the following 5 years.

This ignores even the deterministic trends. Also the whole sample is graphed. Notably while some periods show extraordinarily high relative prices of housing and extraordinarily low subsequent real GDP growth, the GDP growth does not look anomalous. The computer is not surprised by the severity and duration of the great recession given the early 21st century housing bubble.
Here are the time series. L20.lnindexm4 is lnindex lagged 20 quarters – 4.0 (the base years for the all transactions housing price index and the CPI are different).

Notice that the first observation for the index lagged 20 quarters is 1980q1 because the index is available from 1975q1 on.
Here are the series of outcomes and forecasts. The only anomaly is that the great recession was so mild. The computer forecast 5 year gdp growth as low as -10% and it never actually was less than zero. Still this is unusually successful out of sample forecasting of medium term gdp growth.

Robustness checks etc after the jump. Also this post is available as a pdf here.

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