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

Not-So-Select Short Subjects

Now that I know we’re just members of the “Peanut Gallery,”* let this random links post work as a placeholder for longer posts as we prepare for the “holiday”:

Shorter Mark Thoma at Marketwatch: If you can’t build a better model, best to reappoint a man who doesn’t think he has to do half of his job. (UPDATE: Or even less than that. [h/t Linda Beale])

Shorter Mark Thoma at his own blog: All of our current models prefer people to starve and die.

A fun graphic (h/t Abnormal Returns)

Think the Health Insurance “Reform” Bill will “bend the cost curve”? Think again.

*That the “Periodic Table” pretends to be about Finance Bloggers and yet categorizes DeLong, Thoma, and Mankiw, to name three, as “Rocket Scien[tists]” instead of Economists should in no way be seen to impune the quality of the analysis, of course.

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The Perfect Negative Indicator Weighs In

Alan Greenspan:

The U.S. Federal Reserve has done all it can do to reduce unemployment and needs to worry more about the risk of inflation from the stimulus it poured into the economy, former Fed Chairman Alan Greenspan said on Sunday.

But didn’t we just Get All That Money Back? [link added]

Greenspan’s reason unemployment will go down soon: GOVERNMENT JOBS:

Greenspan said he expected the U.S. unemployment rate, which is currently at 10 percent, to “be significantly lower a year from now” but still very high.

The U.S. Census Bureau’s plan to hire close to 800,000 workers by April will take several tenths of a percent off the unemployment rate, he said.

Let’s ignore that 800,000 temporary hires won’t balance the 900,000 jobs to be lost on the state level next year (h/t Brad DeLong) And let’s ignore that temporary jobs are, by definition, “frictional” and not “structural” employment.

But let’s not forget, as Ben Bernanke did,* that, as noted by Dean Baker, “the dual mandate [of the Fed] is full employment (defined as 4.0 percent unemployment) and price stability.” [emphasis mine].

10.0% is not 4.0%. Indeed, 9.3% (10.0-0.7) is not 4.0%. So unless there is a miraculous 5.3% of other employment coming Real Soon Now (and I don’t even see Daniel Gross predicting that, let alone Mark Thoma or Paul Krugman), the Fed, as has been standard under Bernanke, is missing its targets.

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Inflation Detour II: Crisis and Recovery across Great "Fluctuations"

We are now almost 24 months into the Great Recession. While many expect NBER will eventually say that The Great Recession ended several months ago, they have not yet.

By contrast, the recession that began The Great Depression, per NBER, lasted 43 months. It seems only fair to compare the two, so I trust I can be forgiven for not yet having declared The Great Recession over.

One of the problems is that of official government data. Many of the statistics we now consider “standard” were first tracked as part of the government funding and jobs created by FDR’s Administration. (The irony of multiple economists and idiots arguing that the data shows that those programs should never have happened should not be lost on the reader.)

For an examination of Wall Street, though, reasonable proxy data is available. With some issues noted, we can use the change in Real Prices as a proxy. Comparing the two periods produces:

Fairly comparable. The market had a better six months prior to the October 1929 crash, which is rather neutralized by the drop about five months after the first Depression Recession begins, which is steeper than the comparable drop in the current period.

In spite of all the support for the banking system, the recovery is fairly comparable to the one from the Great Depression—at least so far.

Below the fold, let’s look at Main Street.


As noted above, most of the data required for measuring Main Street—most especially a reliable measure of unemployment—is not available publicly. (If anyone wants to provide me with a copy of the Haver Analytics data, for instance, I won’t complain. Meanwhile, see this post at CR for a graphic of that data from the Depression Era.)

So let’s take another approach. Accept, for the sake of discussion, the traditional Republican argument that inflation reduces the ability of Main Street to grow business, borrow money, and generally live.

If we therefore take the inverse of the Annual Inflation Rate, we can see the “gain” the consumer makes. (Note that, in most periods, the consumer is deemed to have lost. Reality may be different, as smoothing hides may variances. But that is always true, and likely always shall be.)

So let’s look at how Main Street fares, then and now:

Judging strictly by the two periods, it appears that Main Street did significantly better—speaking in terms of earning power—during the time leading up to and beginning the Great Depression than it has during the Great Recession. Indeed, the two paths track each other rather well.

It would appear—information that will surprise few other than perhaps Larry Summers and Tim Geithner—that all of the efforts of the Federal Reserve Board and the U.S. Treasury have had no positive effect on Main Street, leaving its purchasing power significantly lower than the same period of the Great Depression.

Probably more on this on a future rock. Comments and suggestions are rather welcome.

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I Blame This on the NHL

With all the talk of “Detroit,” you would think that Michigan would have lost the most employees, as a percentage of same, on the year. After all, the scariest graph of the U.S. MSAs isn’t scary for nothing.

But the Regional and State Employment data is out for October (h/t CR), and there’s a different leader.

Apparently, the bursting of the Sunbelt Bubble (building expensive houses in the absence of a water table; what could go wrong?) compares well with destroying unionized automobile production. (Note to Senator Shelby: destroying Detroit didn’t keep your state from being #10 on the list.)

Also note that #4 on the list is my favorite state for bank failures. (The three states with 20 or more bank failures since Bear Stearns failed are 4th, 9th, and 11th on the list. The only other state in double-digits right now, Florida, is 16th.) I’ll wait patiently for Brad DeLong to explain again how “support of the banking system by the Fed and the Treasury [has] significantly helped the economy.”

The third and biggest point is that many of those are large states that have leaned Democratic in the past several years. Anyone betting that they—and the next two states, North Carolina and Wisconsin, which both went for Obama in 2008—will be hard-pressed to support Democratic policies twelve months from now without a significant change in the trend.

New Jersey showed you what happens when you run a former Goldman Sachs CEO for Governor right now. Virginia showed what happens when the base isn’t motivated. Paul Krugman makes the point directly:

The longer high unemployment drags on, the greater the odds that crazy people will win big in the midterm elections — dooming us to economic policy failure on a truly grand scale.

What are the odds of crazy people winning big? I’m not certain, but I make them much better than 20:1 based on the current data.

UPDATE: Via Mark Thoma, Free Exchange, of all places, also sees the danger:

[W]hat is clear is that it does no good for prominent, respected economists to continue heaping praise on a Fed that failed in its mission before the crisis and which [sic] is failing in its mission now.

Because as unpleasant as the prospect of Congressional intervention in monetary policy is, two more years of high unemployment might well lead to far worse.

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I Be Officially Right of Center Now?

As I am arguing on the same side as Henry Kaufman, and against the kind-hearted Mark Thoma, does the phrase “left-of-center” at the top of this blog have as much Memory Meaning as the Suzanne Vega song from Pretty in Pink?

Kaufman:

During the Greenspan years (1987-2006), the Fed clearly failed to recognize the significance of the many structural changes in the financial markets—such as the rapid growth of securitization and derivatives—on economic and financial behavior and thus for its monetary policy. The Fed also failed to foresee how the 1999 repeal of the Glass-Steagall Act, which had separated commercial from investment banking since 1933, would sharply accelerate financial concentration through mergers and acquisitions and thus contribute to the “too-big-to-fail” phenomenon.

Thoma:

The hope is that an independent Fed can overcome the temptation to use monetary policy to influence elections, and also overcome the temptation to monetize the debt, and that it will do what’s best for the economy in the long-run rather than adopting the policy that maximizes the chances of politicians being reelected.

On of those people lives in reality. The other, apparently, is a good econometrician.

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The Fed’s attempt to assuage inflation fears that don’t need assuaging

by Rebecca

There is no shortage of speeches by US central bankers these days. The following is an excerpt from a NY Times article that highlights the debate among key Fed officials about the speed and method of stimulus withdrawal once the decision to exit has been made:

Mr. Bernanke and other officials want to see evidence that the economic recovery is self-sustaining, strong enough to generate jobs without the crutch of extremely low interest rates.

But Mr. Warsh, as a Fed governor, has begun arguing that the central bank cannot afford to wait for irrefutable evidence of a solid expansion. Mr. Warsh recently argued that the Fed should take at least some of its cue from stock prices and other financial indicators, which turn around earlier and more quickly than the underlying economy.

Mr. Warsh and some other Fed officials also argue that when the time does come to change gears, the central bank may have to raise rates almost as fast as it slashed them when the crisis began.

We are far from seeing “irrefutable evidence of a solid expansion”. This debate is likely confusing the public more than anything else, or as my title puts it: the Fed is attempting to assuage inflation fears that don’t need assuaging. There is simply no measured inflation concern at this time, not even over the next ten years.

The chart illustrates the 30-day moving average of expected inflation for the next 5, 7, 10, and 20 years. Expected inflation, roughly speaking, is the nominal Treasury Security rate minus the associated Treasury Inflation-Protected Security (TIPS) rate, the real rate of return or the break-even rate. Technically this break-even rate is not a perfect measure of inflation expectations; but it’s close and measured daily (see this SF Fed article for more on TIPS).

The “inflation problem” is way overstated in the media. Roughly speaking, markets have priced in just 1.3% annual inflation each year over the next five years, 2% over the next ten years.

By giving speech after speech (Bernanke’s latest), the Fed is attempting to keep inflation expectations in check. However, the Fed is walking a fine line between alleviating concerns about long-term inflation prospects and overemphasizing the short-term disinflation (deflation) risks.

Rebecca Wilder

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The Fed called a mulligan

by Rebecca

Ex post, it is obvious that the Fed was way too tight in the second half of 2008. To be sure, the FOMC was actively engaged in its standard easing policies; however, the Fed got the Treasury to aid in its sterilization efforts, and later the Fed fast-tracked the interest on reserves (IOR) program (originally set for an October 1, 2011 start). The Fed was misguided in its sterilization efforts, as aggregate demand was already collapsing.

Something was afoot well before the collapse of Lehman Brothers. David Beckworth at Macro and Other Market Musings backs up Scott Sumner’s (TheMoneyIllusion blog) theories with an intuitive analysis using the equation of exchange (MV = PY):

Below is a table with the results in annualized values (Click to enlarge):

This table confirms what we saw in the levels: a sharp decline in velocity appears to be the main contributor to the collapse in nominal spending in late 2008 and early 2009 as changes in the monetary base and the money multiplier largely offset each other.

… (And a little later)

Unfortunately, though, it appears the Fed was so focused on preventing its credit easing program from destabilizing the money supply that it overlooked, or least underestimated, developments with real money demand (i.e. velocity). As a consequence, nominal spending crashed.

This line research essentially posits that the Fed got it terribly wrong in the second half of 2008. As David shows in the table above, the velocity of money was dropping with households clinging to cash under heightened economic uncertainty.

If this theory is true, then one could view the $300 billion Treasury buyback program (see the NY Fed’s Q&A here) as the Fed’s equivalent of “calling a mulligan” in an attempt to take back its sterilization efforts in 2008.

The $300 billion buyback of Treasuries will restock about 75% of the Fed’s Treasury holdings (focused in notes and bonds rather than bills, but there is a contemporaneous objective to pull long rates down) that dwindled previous to the onset of the SFP account. Unfortunately, though, it was already too late.

(The Treasury issued short-term notes and deposited the proceeds with the Fed in order to aid in the Fed’s sterilization efforts – see an old post of mine for a more thorough explanation of the SFP, or the Supplementary Financing Program.)

Another event recently occurred that would support the view that the FOMC is backpedaling: the Treasury’s Supplementary Financing Program (SFP) is going bye bye.

The Treasury started this week to unwind its account with the Fed (the SFP listed on the liabilities side of the Fed balance sheet). This is almost surely going to end up as excess reserve balances in the banking institution, as the Fed is unlikely to sterilize these flows. (Note that one could see if the Fed was sterilizing the flows if its Treasury holdings started to fall again.)

I guess that the real question is: where would we be now if the Fed had pushed harder on the money supply in 2008? I imagine that Angry Bear readers have many thoughts on this.

Rebecca Wilder

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Texas is Not in a Recession, but it’s Bottoming Out

Rick Perry famously declared that there was no recession in Texas, even though the only way they balanced the budget was through emergency funding.

Rick Perry and the Federal Reserve Bank of Dallas appear not to talk with each other:

Texas factory activity showed the first signs of bottoming out in September, according to the business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of current manufacturing activity, came in close to zero as the number of companies seeing increases and decreases was nearly equal….

Employment indicators suggest manufacturers are still trimming payrolls, but the key indexes are becoming less negative. The average work week index rose for the second consecutive month, and about 17 percent of manufacturers noted increases in work hours. The employment index also improved as

the share of firms reporting job cuts fell

, while those reporting new hires rose from last month. Wage pressures remained minimal, with 92 percent of producers noting no change in compensation.

Yep. Just what we expect to see in a “normal” economy.

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The Fed’s moving target: NAIRU

by Rebecca

Neal Soss and Henry Mo at Credit Suisse published a very interesting article, “Where is full employment in a more volatile macroeconomy?”, where they argue that the natural (long run) rate of unemployment may be shifting (they do this by showing that the Beveridge curve, which plots the the job vacancy rate against the unemployment rate, is shifting upward). I cannot provide a link, but here are their conclusions pertaining to monetary policy:

In the case of rising NAIRU [RW: this is the rate of unemployment that does not grow inflation, often called the long-run rate] and higher economic volatility, the monetary policy implication is complicated.

On the one hand, a higher NAIRU suggests that it would require a strong and prolonged recovery for the unemployment rate to return to the level attained in the past two decades. This scenario argues for a long period of low interest rates, because the economy’s structure will make it harder to get unemployment back to the low levels of recent business expansions.

On the other hand, a higher NAIRU suggests higher inflation pressure, as the output gap is smaller than otherwise would be the case. In other words, the Fed would have to normalize its policy stance sooner than would have been the case warranted by a stable NAIRU.

The burden of this is likely to be several years of quite low short-term interest rates by any modern standard other than the zero-ish levels of today. Even if the NAIRU is deteriorating, it is likely to be several years before the economy generates enough of a drop in unemployment to get to the new NAIRU, presumably above the levels of the last 20 years but surely below the current 9.7% unemployment rate. Between now and then, high unemployment is likely to remain the focus of policy attention. Labor market policies, such as job retraining for the unemployed, to improve the inflation unemployment trade-off, would make the central bank’s job a lot easier as that longer-run unfolds.

Basically, if the long-run level of unemployment, which the Fed targets implicitly under their dual mandate (maximum sustainable employment and stable prices), is changing then the Fed’s job becomes that much more difficult. Policy is only as good as the model’s calibration: they need to confidently estimate and target a level of employment that may be very much in flux. A simple Taylor Rule estimation illustrates this point.

Note: The Taylor Rule is a policy rule that relates the federal funds target to inflation and the output gap: roughly speaking, as inflation rises relative to the output gap, the Fed should tighten (raise its target); and as the output gap rises relative to inflation, then Fed should ease (lower its target). I estimate the relationship, and you can view my data here, and Wells Fargo’s forecast here.

On one hand, the CBO projects that NAIRU is 4.8%. In this case, the Taylor Rule policy drops the fed funds target to -4.6% by the end of the year. Put it this way: the output gap is so big that policy is very, very aggressive but bound by zero.

On the other hand, if NAIRU has shifted to something more like 6% – this is roughly its level in the 1980’s – then the policy prescription is less aggressive. The output gap remains wide, but the implied target rises to -3% rather than almost -5% – still negative, but suggestive of a more benign policy strategy. Inflation pressures would start to build earlier than under the 4.8% case.

This complexity has been documented by the Fed in the minutes of their August 2009 meeting:

Though recent data indicated that the pace at which employment was declining had slowed appreciably, job losses remained sizable. Moreover, long-term unemployment and permanent separations continued to rise, suggesting possible problems of skill loss and a need for labor reallocation that could slow recovery in employment as the economy begins to expand.

Note: this not the same thing as a jobless recovery – the unemployment rate may very well fall with economic growth (no jobless recovery), but then settle at a structurally higher level.

Rebecca Wilder

P.S. I will not be able to respond to comments until tomorrow.

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Brad’s Draft Lecture

Robert Waldmann

Brad DeLong just posted a very interesting Draft Henry George lecture. It contains ideas which I haven’t found written down before by Brad or by Krugman. I strongly recommend reading it (for one thing I don’t know how to cut and paste from it). People who have read the draft lecture are invited to read my thoughts after the jump (I can’t keep people who haven’t read it out, but comments which reveal ignorance of the lecture will be mocked ruthlessly).

update: I hereby ruthlessly mock myself for failing to provide the link.
What an idiot. That’s the problem with blogger.com it enables people incapable of handling html to post on the web.

So that was a nice lecture wasn’t it ? Much of it was new to me.

1) Brad confesses the reason for his lapsed Greenspanism.

I hadn’t seen the explanation that he opposed tight regulation of finance, because he thought the purpose of structured finance was to trick people into bearing more risk that they want to bear and that this is a good thing, since people are irrationally unwilling to bear risk.

Oh my not just Greenspanian but a Straussian believer in noble welfare enhancing lies. I might have found the argument convincing in 2006, so I’m glad I didn’t read it.

2) Brad claims that fresh water economists have traction, are getting attention etc. I didn’t know that. I’d guess a lot of it is due to Paul Krugman who is arguing with them in public. Also, I mean, Nobel memorial laureates tend to get all the attention they want. However, Brad has an interesting theory. Republicans in power listen to economists who don’t sound crazy to them (and all non economists). Republicans in opposition use any rhetorical weapon to hand so any criticism of Obama however crazy it sounds to non economists is amplified by the vast right wing conspiracy. An interesting idea. Are fresh water economists really getting a hearing from non economists ? That’s a scary thought.

3) Brad notes the similarities between Herbert Hoover, Alan Greenspan and Job. Hoover and Greenspan have been very loyal to the pro market ideology. yet when trouble comes, people who should be their friends accuse them of being pinkos.
Now that is an excellent rhetorical weapon to hand.

Brad’s been writing about how Prescott has decided that the Great Depression was caused by the anti market policies of Herbert Hoover. He notes that for Prescott’s latest theory to make sense, one would have to argue that Hoover was more anti market than Roosevelt, Truman or Johnson (or any post WWII European socialist ever in power). Now to me, this is no more absurd than the average assertion by Prescott. But it seems to me much more striking to non economists. Usually Prescott uses mathematical terminology and so most people either have no clue as to what he is saying or assume that the clue they have must be misleading, because he couldn’t be claiming that (as he is). I’d say some documentation that Hoover was not a pinko is in order.

The similar claim that fresh water economists are saying that Greenspan over regulated is also interesting. I think documentation of that claim is in order. Then I’d go to Greenspan’s personal history as a disciple of Ayn Rand. I just found out that he was not just a fan from a distance but part of her tiny group. Rand was a very extreme ideologue and a very unpleasant person. Many on the right will not accept criticism of her. In a no holds barred rhetorical struggle, writing about Rand and Greenspan is likely to be an effective strategy.

Of course, I am not interested in rhetoric and think we should all seek the truth together assuming that all are sincere and well meaning, so I will have nothing to do with that. But someone less high minded and scrupulous than I would talk about Ayn Rand’s sex life as often as possible.

update: I am not suggesting that Brad is interested in using any rhetorical arm at hand. I’m sure he argues in good faith and presumes that others do as well until they prove otherwise.

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