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A business cycle theory of labor force participation and wage growth

A business cycle theory of labor force participation and wage growth

I’ve devoted a lot of time and thought, and typed a lot of pixels of commentary, about wage growth in the last few years. Some of it has panned out: based on past expansions,I expected YoY wage growth to bottom consistent with an unemployment rate of about 6%. A little later I refined that to an underemployment rate of 9%. In retrospect that is indeed about when wage growth bottomed out in this expansion.

But even three years ago, I expected wage growth to rather quickly reach 3% YoY once that level of underemployment was breached to the downside.  Obviously, that didn’t happen.

Rather than ignore the call that didn’t pan out, I have tried to understand why.

One important part is the changed behavioral set-points of both employers and employees. Ever since the 1980s, when unions were effectively broken, employers have found that they can get away with paying less and less to maintain employees. Those employees learned to expect less and less in the way of raises from employers. During each successive expansion, employers have tightened the screws more and more, until by now giving raises has become a taboo, where employers would rather sacrifice at the least short term profits from more production than give in to the necessity of raising pay.

But if the taboo against raising wages is a secularly increasing phenomenon, on another level I think we can still tease out a lot of information in terms of the order and direction of employment and wage trends.

To that end, I want to propose a general theory of labor force participation and wages within business cycles. To wit, at least in the modern era since 1982, the pattern has been:

1. the unemployment rate peaks, and begins to decline.
2. prime age labor force participation bottoms, and begins to rise
3. nominal wage growth bottoms, and begins to rise.
4. If labor force participation grows too quickly, wage growth languishes.

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Does The University of Illinois have a Problem

I’m not a lawyer. Also Republicans are worse than I imagine possible even taking into account the fact that they are worse than I imagine possible. However, I think Brett Kavanaugh defender Andrew Leipold of The U of Illinois School of Law is unfit to serve as a law professor.

The issue is that Kavanaugh signed the Starr report which argued that Clinton could be impeached for delaying his interview with special prosecutor Starr. Therefore, either Kavanaugh agrees that Trump should be impeached or he is a complete hypocrite and partisan hack (no prize for guessing which).

Leipold argues that people are not responsible for their signatures “I don’t think it’s a fair conclusion to draw that everyone’s name who appeared on the report agreed with everything written there,” Ah and what if it were an affidavit ?

Also “Our job was to emphasize the grounds for impeachment,” he added. “We’re not the decision maker; Congress is the decision maker.” I had the impression that a prosecutor’s job is to seek the truth and to attempt to make sure that justice is served. His saying that his job was to support a specifici conclusion is a a confession of prosecutorial misconduct.

Yet the University of Illinois pays him to teach students how to practice law.

I’m pretty sure tenure can’t be revoked for misconduct which preceeded the tenure decision. Telling the truth about how one is a hack is not moral turpitude. I don’t think there is anything to be done about the problem. But it is a problem.

On the other hand, judge Kavanaugh can certainly be asked whether he agrees that prosecutors are supposed to be biased against people they investigate, whether he knew of Leipold’s attitude at the time, and whether he tried to do anything to protect justice for Leipold.

I am hope that Kavanaugh can’t handle being under oath. He chose to lie the day his nomination was announced (saying no president nominating a justice had been more thorough than Trump). I think conservatives often have a problem in settings in which conservative and good are not treated as synonyms. Now he has been writing opinions for the DC circuit court and he has a Yale law degree, but I sure can hope.

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How Much Do the NATO Members Spend on National Defense?

How Much Do the NATO Members Spend on National Defense?

Josh Marshall provides a nice discussion of the difference between how NATO is funded versus how much each of its members spends on national defense, which begins with:

As we move toward the NATO Summit and the Putin-Trump summit, I thought it made sense to review some of the details behind the President’s demands that NATO member countries pay up and stop doing what he regards as freeloading on the US taxpayer dime. Most people have a general sense that Trump doesn’t seem to grasp how an alliance works, that it’s not meant to function as a protection racket. But the actual details are both sillier and more significant than it may seem on the surface.

While I applaud his discussion, something is amiss here:

The vastly greater amount is the combined military budgets of all the member countries combined, which was $921 billion in 2017. The great majority of that is made up of the US military budget. In 2017 the US military budget was $610 billion. The coming fiscal year puts it at $700 billion. (That big run-up is significant and we’ll return to it.) Some of that difference is driven by the fact that the US economy is far larger than any individual NATO member state. But the US also spends much more on a per capita basis. Staying with the 2017 numbers, the US spends 3.61% of GDP on defense. The next major NATO member is the UK down at 2.36% while most other major NATO powers are significantly under 2%. (Examples: France, 1.79%; Germany, 1.2% Canada, 1.02%)

Actually, U.S. national defense spending was over $744 billion in 2017, which came to 3.8% according to this source. Call me a pacifist but maybe we should all be spending less on the ability to wage war.

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Understanding the simple strategy for the 2018 elections

Understanding the simple strategy for the 2018 elections

Pretend for a moment that you are a political strategist. Your party is the party in power. The opposition has been enraged since the moment of your standard-bearer’s election. In the special and off-year elections since, they have been showing up in unprecedented droves for offices up and down the ticket, from Governor and US Senator to state representative and local council.

The mid-term election is bearing down, and you know very well that midterm elections are fundamentally referendums on how the party in power is doing. The odds look overwhelming that the opposition turnout tsunami, at least, is likely to continue.

As a strategist, what of the following courses of action do you recommend?

(a) make soothing noises, hoping that the anger of the opposition is mollified enough that your candidates squeak through

(b) engage in searingly divisive behavior that will rile up your base

(c) get rip-roaring drunk and hide under a table curled up in a fetal position until it’s over, so that you don’t remember anything

Whether or not you choose to do (c), it’s pretty obvious that (b) is the correct answer, isn’t it?

Opposition supporters already hate your with the heat of 1000 suns. So what if you repeatedly do such cruel and outrageous things that they become incandescent with rage. They’re going to turn up anyway, regardless of what you do.

Since the opposition is going to turn out in droves, your best option is to get your base to turn out in droves as well. You don’t do that by disappointing your base, or putting them to sleep (Cf. Obama, 2010). Here’s Rasmussen’s poll of “strong approval vs. strong disapproval” from that time:


Note how enervated Obama’s base was, with only about 27% +/-2% during that time.

No, you do that by getting your base incandescent with rage as well. You want to pick the bloodiest fights you can, so that your base feels they need to show up and support you and your allies, lest their enemies prevail. Here’s Rasmussen’s equivalent poll for Trump right now:

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A teaser about wages and labor force participation

A teaser about wages and labor force participation

I was going to put up a short piece about wages this morning, but it has turned into a longer, more comprehensive piece, so in the meantime, here are some teasers to ponder.

1. There is a direct relationship between the economy generally, and child care costs specifically, and couples’ decisions about whether or not to have more children:

The below graph comes from It is the top eight reasons that couples give for not having (more) children:

Note that 6 of the 8 reasons have to do with the economy, and 4 of those specifically have to do with the costs of child care.

2. While correlation is not causation, nonetheless in the modern era, there has been a clear correlation whereby prime age labor force participation leads nominal wage growth:

3. Despite #2 above, in the shorter term there appears to be an inverse correlation between the rate of prime age employment growth and relative wage growth:

I’ll flesh this out in the more comprehensive post.

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Bombing for Votes: Public opinion shifts during the Iraq war and implications for future conflicts

by Jeff Soplop

Bombing for Votes: Public opinion shifts during the Iraq war and implications for future conflicts

Despite the recent summit in Singapore, which mostly made for good television and little substance, North Korea appears to be quickly ignoring any promises–whether implicit, explicit, or imagined–made to President Trump to dismantle its nuclear program. In Iran, Trump’s decision to withdraw from the six-party nuclear deal and the re-imposition of sanctions has created a possibility that Iran will resume pursuing a nuclear weapon of its own. The common thread between Iran and North Korea, of course, is the continued march of nuclear proliferation and, with it, an elevated chance of the US initiating armed conflict as a means to slow or stop such proliferation.

In this post, I’m not going to speculate how probable armed conflict with either Iran or North Korea might be (although I might take a shot at it in a future post). Instead, I’m interested in what the public reaction to such a conflict would be and how it would affect support for Trump, especially in the run up to an election.

To estimate public reaction, it’s useful to consider how the public mood shifted throughout the course of the Iraq war. Even 15 years after it started, the Iraq war continues to be divisive. As shown in the chart below from Pew Research, when the Iraq invasion was first launched in March, 2003 a large majority of the country supported it as the “right decision.” By early 2005, however, that support eroded and has remained relatively stable since then.


Similar to the start of the Iraq war, other research has shown a public “rally around the flag” effect at the outset of military action. One study, for example, looked at 41 US foreign policy crises and found the average effect was a boost of 1.4 percentage points to the president’s approval rating. But, when the military action was large enough to merit front-page coverage by the New York Times, that effect jumped by another 8 percentage points, representing a significant lift for any president.

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Financial Arson Report: This Time It’s Blatant

Don’t say I didn’t warn you (in particular, don’t say I didn’t warn you on September 25 2008). Naked CDS make financial arson profitable. It is also, probably, legal. It seems Blackstone made some money by threatening financial arson (arson meets grenmail).

WSJ (via Drum)

Blackstone offered Hovnanian a low-cost loan and persuaded the builder to miss a small interest payment in exchange, which would trigger payouts on $333 million in Blackstone’s credit-insurance contracts

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The Value of Life and the Metaphor of Choice

The Value of Life and the Metaphor of Choice

Perhaps no topic generates such bewilderment between economists and the general public as the monetary valuation of human life, or the value of a statistical life (VSL) to use the term preferred by professional economists.  Economists insist that longevity is a commodity bought and sold on markets like anything else, which means it has a price and an underlying schedule of willingness to pay just as we would find for any other good or service.  Most noneconomists regard this as madness: surely the value of a human life can’t be expressed as the equivalent of a certain number of pizzas, even a very large number of pizzas.  But, respond the economists, you do trade off longer life against pizzas, or at least the money that could be used to buy them, since there is a limit to how much you’ll spend to reduce a physical risk.  And then there is a reply to the reply: yes, but that has nothing to do with the value of being alive, which can’t be reduced to a monetary price.  And it goes back and forth from there, with neither side able to understand the other.

Elsewhere I have made substantive arguments for why we are better off without putting monetary values on our lives, but I won’t get into that here.  My interest at the moment is the incomprehension on all sides of the VSL debate.

Here’s what I think it comes down to: the metaphor of choice.  This metaphor is so deeply ingrained in economic analysis most economists can’t think beyond it, but the moment it is invoked the very notion of what it means to be alive rather than dead is rendered irrelevant.

No need to reinvent the wheel.  I discussed the metaphor of choice in my introductory micro text:


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The Banking Hustle

The Fed just let Morgan Stanley and Goldman Sachs off the hook after both failed the required stress tests under Dodd-Frank. The stress test is supposed to predict whether banks and so-called banks like Morgan Stanley and Goldman Sachs can weather a financial crisis.

This is not an instance of if you remember in 2008, who could forget? Few TBTF had set aside the necessary reserves to back the tranched MBS and the more risky CDS/naked CDS. These were the heady days of financial engineering and gambling on Wall Street. The models could not fail as they were statistically proven. Some investment firms such as Goldman Sachs (before it was made a bank by the Fed to save it’s hiney) made the call (CDS) on other nonbank firms such as AIG leaving AIG in dire straits as the money, the reserves were already paid out in dividends and bonuses. Greenspan did little to curb the appetite of investment firms and TBTF. The clearing board to track derivatives had not been installed by Wall Street. We were safe in the scheme of people pursuing what was best in the economy will only do what was right.

When it all hit the fan, the Fed had to make the investment firms (GS, Morgan Stanley, etc.) as well as others (American Express, GMAC [now Ally], etc.) banks in order to lend them money under the provisions of TARP and other save – the – banks plans (Barkley recommended a book; “The Alchemists: Three Central Bankers and a World on Fire” about what went on behind the scenes during the troubled times and a near economic collapse. I found it to be an interesting read during my long flights). The banks and newly designated banks and Wall Street survived (grumbling all the way about the inequities imposed upon them and lack of bonuses). Main Street paid the price in a crashing economy to which Labor as measured by Participation Rate has still not recovered from its numeric pre-2008. Republicans were all to willing to end lengthy unemployment and job training benefits for the less moneyed.

Back-step a little in time, just a few months ago Congress in all of its wisdom passed a revision to Dodd-Frank which raised the limit of banks from $50 billion to $250 billion in assets-cash-capital to avoid the Dodd-Frank stress tests. This was done under the guise of being called, (cough-cough, clearing my throat) community banks or The Community (Bank) Hustle as the Intercept would label it. You would expect this type of push to occur from Republicans; but, Democrats also joined in the give-away to the banking industry. 17 Democrats who were mostly (10) up for elections. Senators such as Michigan’s Debbie Stabenow (Stabenow also joined Biden in passing the 2005 Bankruptcy Act which included a provision disallowing bankruptcy for student loans) voted for this revision of Dodd-Frank. When there is a backbone needed, Democrats are largely silent and fade into the group hoping they are not noticed. “S.2155 The 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act” has a nice ring to it the same as the Bankruptcy Abuse Prevention and Consumer Protection Act which disposed of bankruptcy for Student Loans. Consumer Protection?

Volcker felt $75 billion was enough leeway for banks and former Congressional Rep and sponsor Barney Frank felt $100 billion was enough (it may be reversed; but each is less than $250 billion). The $250 billion limit allows some of the riff-raff such as Deutsche Bank and Holding Company to escape the surveillance it should have through stress testing. With the $250 billion limit, “25 of the 38 largest banks in the United States would no longer be subject to stronger capital and liquidity rules, enhanced risk management standards, living-will requirements, and stress testing requirements. They collectively hold $3.5 trillion in assets or an approximate one-sixth of the assets in the entire banking sector. Scandal-plagued Deutsche Bank and other foreign banks such as BNP Paribas, UBS, and Credit Suisse should still be more heavily monitored rather than deregulated.

In May, Congress lessened the burden of maintaining adequate reserves for community banks which included 25 of the largest banks in the US plus the scandal-ridden banks (Deutsche, BNP Paribas, UBS, and Credit Suisse). The same act allows mortgages to be created with little or no confirmation of whether the borrower has the ability to pay back the loans and allows loans made outside of escrow requirements in which borrowers may be confronted with costly tax liens or force-placed insurance and loans being made with indirect kickbacks. And this is called Consumer Protection, the same as eliminating the bankruptcy protection on student loans without limiting what commercial banks could do to make those loans.

In June, “the Federal Reserve gave the giant investment banks Morgan Stanley and Goldman Sachs a pass for ‘stress tests’ even though they had failed it. In the review of their financial conditions, it was determined that the banks did not have enough assets to allow them to weather a financial crisis. Despite failing the stress tests, the Fed agreed to allow the banks to pay $billions in profits to investors which, under normal application of the rules, the banks should have kept. This is just the latest example of leniency that the Fed, governed now by Trump appointees, is showing the financial industry. Other examples include the dismantling of the Consumer Financial Protection Bureau, the rolling back of the Dodd-Frank post-2008 financial regulations for medium-sized banks, and the reduction of compliance penalties under the Community Reinvestment Act.”

Bill Black: “the US is in the eighth straight year of economic expansion. The country is close to full employment (I would disagree on that point). Business failures are at a minimum and would not be defaulting on their loans. Banks should easily pass these stress tests. The San Francisco Fed recently published results that showed in the last 60 years, inverted yield curves have predicted recessions. with the exception of one, an inverted yield curve was followed by a recession and followed by a substantial reduction in growth. The yield curve looks like it’s about to invert again (longer-term interest rates are lower than shorter-term interest rates).”

Maybe now is not the right time to loosen regulations on major banks.

run75441 @ Angry Bear Blog

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