Dammit Janet, I love you!*

9 October 2013

I am very pleased with the president’s nomination of Janet Yellen to be the next Federal Reserve Chair. Ms. Yellen has impeccable credentials, the best economic forecasting record of any recent Fed official, and appears to take the regulator part of the Fed Chair job seriously.

This last part is important. Larry Summers, the original front-runner for the job, helped push through the key deregulation of the late Clinton years, has dismissed the idea that it contributed to the bubble or crash, and has basically never admitted a mistake in this area. Alan Greenspan was essentially hostile to financial regulation, and bears as much responsibility as anyone for the housing bubble of the 2000s. Ben Bernanke has acknowledged that the Fed failed as a regulator during the housing bubble, but he was a Fed governor for most of that bubble and Chair for the last two years of it. Economist Bill Black finds Bernanke to have been sorely lacking as a regulator. The Fed’s main regulatory task is to try to detect and reduce systemic risk, i.e., risky activities that threaten the larger financial system and economy. Granted, Yellen told the Financial Crisis Inquiry Commission in 2010 that she failed to see several of those risks (securitization, credit rating agencies, Special Investment Vehicles) when she was San Francisco Fed President in 2004-2010, but on the other hand she was among the first at the Fed to publicly call attention to the housing bubble

Granted, monetary policy, not financial regulation, is the main part of the job. I agree with those who have said she will probably be very similar to Bernanke as far as that goes, and I’d call that a good thing. The Fed needs to do what it can to pull us out of this Little Depression, and since interest rates cannot fall below zero, additional measures like buying long-term bonds and mortgage-backed securities (i.e., quantitative easing, or QE) make sense, as long as they work. Yellen is often stereotyped as a “dove” because in recent years she favored expansionary policy and did not state that inflation was an imminent risk, but those recent years were the Little Depression that began in 2008. When unemployment is not the nation’s biggest problem, Yellen is more concerned about inflation. Such as in the roaring 1990s, when Yellen was Clinton’s Chair of the Council of Economic Advisers and then a Fed governor. With unemployment down to its lowest levels in decades, Yellen was an inflation “hawk,” as Matthew O’Brien details.

Whether the Senate is capable of that much nuance as it considers her nomination remains to be seen. I expect she’ll win majority support, including a handful of Republicans, and that Republicans will resist the temptation to filibuster her nomination. The right-leaning American Enterprise Institute offers several reasons why an anti-Yellen filibuster would be a disaster. Then again, flirting with disaster seems to be the Congressional Republicans’ game plan of late.

PS Here is a recent (Nov 2012) interview with Janet Yellen.

* Title stolen from EconoMonitor, who of course got it from Rocky Horror:

No taper, no problem

18 September 2013

The Federal Open Market Committee concluded one of its most anticipated meetings in a long time with the expected decision to keep its federal funds rate target near zero (0 – 0.25%) and, less expectedly, not to “taper,” i.e., announce that it would gradually reduce its monthly purchases of mortgage-backed securities and longer-term Treasury bonds. Those purchases are otherwise known as “quantitative easing” (QE).

From various market surveys and betting sites, it appeared that about half the market was expecting a taper. Just why is hard to figure. Excessive asset purchases by the Fed can be inflationary, but excessive is in the eye of the beholder, and inflation has been under, not over, the Fed’s target of 2%. There is the argument that these new and unusual QE policies are damaging to investor confidence, but they’re not that new anymore, and the investors in the stock market seem remarkably undamaged — the S&P 500 has more than doubled since early 2009, i.e., since shortly after the first round of QE was implemented. Then there is the opposite argument that QE has created a “sugar high” in the stock market and maybe the housing market, too. This last argument has to be taken seriously, in view of how the 2000s housing bubble was stoked in part by the Fed’s easy-money policies circa 2004, when economic recovery was well underway.

But not too seriously. The S&P 500 is only about 15% higher now than it was mid-2007; adjusting for inflation, it’s hardly any higher at all (and the jury’s still out over whether stocks, as opposed to housing, were a bubble in 2007). Moreover, corporate profits are at record highs, so the fundamentals look rather good. Home prices are rising fast, but they’re still at 2004 levels, and monthly mortgage payments are cheaper than rents. A true speculative bubble is when people are obviously overpaying for assets, especially when they do so knowingly, with the plan of selling to a greater sucker later on. Is there evidence of that here?

The evidence about the general state of the economy is much stronger, and the evidence is that it’s still pretty weak. In particular, employment — the indicator that the Fed is supposed to focus on, along with inflation — is dismal. The employment-to-population ratio is still under 76%, or 4 points below where it was before the crisis. (The graph below, by the way, is of the “prime-age” population, 25-54 year-olds; if it included 16-24 year-olds, it would look even worse.)


For more on unemployment and tape:


Impossible Germany

18 August 2013

The Eurozone has had famously high unemployment rates since the euro’s inception in 1999, and for most of that time Germany has been a key sufferer, with unemployment over 8%. Since the financial crisis broke in 2008, German economic policy has been mostly associated with austerity policies, which have predictably tended to worsen Europe’s employment situation. Yet Germany’s labor market appears to have been thriving over the past five years, with an enviable unemployment rate last month of 5.4%, second-lowest in the entire 27-country Eurozone. (Relatively tiny Austria has the lowest, 4.6%.)


What accounts for the German labor market miracle? I’ve been pondering this for a while now.

First, is this miracle for real? In the US, for example, the official unemployment rate has lately been falling, yet the employment-to-population ratio has barely budged, largely because fewer people are entering the labor force (i.e., getting jobs or looking for jobs). Yet Germany’s labor force participation rate and employment-to-population ratio have been increasing. Has Germany suddenly changed its definitions of who is unemployed or not in the labor force? Apparently not, and it wouldn’t matter anyway, as these numbers are the International Labor Organization definitions of unemployment, the same as the US uses. Also, this is a fairly long-term pattern, back to 2005 (coincident with, though not necessarily caused by, Angela Merkel’s term as Chancellor following the 2005 elections).

On the other hand, perhaps Germany’s official count of the employed, like the US’s, includes a lot of part-time workers who want full-time work but cannot find it because of bad economic conditions. Indeed, The Telegraph reports:

nearly one-in-five German workers is in a tax-exempt mini-job, earning €450 a month or less. A government survey a few years ago found that nearly a third of mini-jobs workers were looking for a job with longer hours but were unable to find one.

Let’s do the math. <20% * <(1/3) = employment rate of 94.6%. Subtract 6% of 94.6%, and you’ve got 88.92%, or an unemployment rate of about 11%. This is roughly similar to the US situation, where counting involuntary part-time workers as unemployed would add 6.2 points to the unemployment rate. On the other hand, Germany’s “mini-jobs” are more a matter of government policy than their US counterparts. For more, see this Wall Street Journal article on mini-jobs, in which German experts call them dead-end jobs that provide no incentive for employers to move these workers to full-time or for the workers to give up their tax and welfare benefits for full-time work. Balance it out with this other Telegraph article that argues that mini-jobs are a helpful means of providing work.

All of this is quite different from the post I expected to write. I was going to mention how the euro’s recent weakness (for the past two years, it’s been down about 10-15% from its 2009 peak) helps Germany’s net exports. It does so both in the usual way and because Germany’s currency is surely cheaper under the euro than it would be if Germany were still on the Deutschmark. Crisis countries like Greece and Italy drag down the value of the euro, while whatever the high demand for German assets as financial safe havens does to raise the price of the euro is offset by reduced demand for other euro-country assets.

I was also going to mention Germany’s sluggish population growth and difficulty in attracting immigrants, which have caused the labor force to grow slowly. It’s easier to find jobs for a trickle of new labor force entrants than for a flood of them.

Finally, I was going to mention this 2011 National Bureau of Economic Research paper by Michael C. Burda and Jennifer Hunt, which finds the “German labor market miracle” to be real and attributes it to a hiring catch-up on the part of employers who were reluctant to hire early on in the 2000s expansion, “wage moderation” (unions accepting smaller pay increases, apparently), and “working time accounts,” seemingly similar to the “flex-time accounts” proposed by Chamber of Commerce Republicans, that allow employers to avoid paying overtime if the employee work week averages out to the standard amount. Note that the paper (or at least its abstract) does not mention “mini-jobs,” which may mean that mini-jobs are nothing new in Germany and that their use has not expanded much of late (I could not find anything much on the history of mini-jobs in my Googling).

All things considered, Germany’s labor market still looks a lot better than that of the rest of the Eurozone (except German-speaking Austria). I’d like to see a German equivalent of the comprehensive “U-6” unemployment rate that the US reports every month. My guess is that it would be very high, much like that of the US, but still showing dramatic improvement since 2005. They’re doing something right over there, but it’s hard to tell just what.

7.4%: Good news you can’t use

4 August 2013

Another first Friday, another BLS employment report, and the headline news is pretty good: In July the official unemployment rate fell to its lowest level, 7.4%, since 2008. If you were a White House publicist that morning, you could have noted that fact and also that the comprehensive U-6 unemployment rate (which includes discouraged job-seekers and involuntary part-timers) also fell, from 14.3% to 14.0%. And then you could have taken the rest of the day off.

The improvement in the U-6 unemployment rate was not enough to cancel out the previous month’s 0.5% point jump. The U-6 rate was below 14% in March, April, and May. The improvement in the official (U-3) rate was exactly counterbalanced by an 0.1% point drop in the labor force participation rate (to 63.4%). The employment/population ratio was unchanged (at 58.7% for all adults, and 75.9% for prime-age (25-54) year-old adults). The decline in participation defies easy explanation, as it involves three distinct subgroups — adult white males, white teenagers, and adult black females — but not others. (A notable recent trend, by the way, is for fewer people, especially young women, to not enter the work force.)

The unemployment rates come from the BLS’s survey of households. The BLS’s other survey, of employers (the “payroll survey”), is disappointing relative to the previous month’s. June’s report showed the economy with net job growth of 195,000, plus upward revisions of 70,000 jobs to the previous two months. July’s report has net job growth of 162,000, and downward revisions of 26,000 to the previous two months. At this month’s pace, it would take us a year longer to get back to 6% unemployment than at last month’s pace (using the handy Jobs Calculator of the Atlanta Fed).

The stock and bond markets seem to have gotten this report about right. The stock market barely budged, and the 10-year Treasury bond rate actually fell somewhat, from 2.72% to 2.60%, despite the improvement in the official unemployment rate. Both markets watch the employment reports with an eye toward the Fed’s next move on interest rates and “quantitative easing” (“QE”; special purchases of long-term bonds and mortgage-backed securities), all the more so after the Fed recently announced that it would start “tapering” off QE when unemployment falls to about 7.0% and start raising its key interest rate when unemployment falls to about 6.5%. While we’re a notch closer to those rates now, the trend does not look good. Treading water is about all this labor market is doing, and the markets seem to get that.

Employment report: Black and white is always gray

13 July 2013

Has the dust settled yet on last Friday’s BLS employment report? The big news was that the economy generated 195,000 new jobs in June, better than expected, and revised data show 70,000 more new jobs in April and May than previously reported. The basic unemployment rate was unchanged at 7.6%, but the new 265,000 jobs were enough to set the media and markets aflutter. Most articles I saw hailed the jobs news as fabulous. The S&P 500 had a good day, up 1.6%. Ten-year Treasury bond rates shot up 21 basis points (from 2.501% to 2.715%), in anticipation of higher interest rates to come, either from the natural forces of higher demand for credit in a stronger economy or from the Fed’s “tapering” its expansionary Little Depression-era policies.

The higher jobs numbers are welcome news, to be sure. Using the Atlanta Federal Reserve’s wonderful jobs calculator, at a rate of 195,000 new jobs per month, the US economy would be back to 6% unemployment by September 2015 and 5% unemployment by February 2017. Not great, but at least a visible end of the tunnel. For a long time the math was much more dismal — e.g., not until 2020. With the new revisions, the average job growth for 2012 is actually a bit better than June’s, 202,000. (Which, by the way, is better than in 2010 or 2011.) Plug that into the jobs calculator and we hit those targets three months sooner.

But that’s only half the story. The BLS employment report gives the results of two surveys: the “payrolls survey” of companies, above, and the “household survey” of individuals. Because these are two different survey populations, often the results are very different. The total number of jobs in the household survey rose by 189,000, but the number of new part-time jobs was more than twice that amount, 432,000. The difference is a whopping 243,000 drop in the number of full-time jobs. Ouch. The number of people working part-time because of “slack work or business conditions” rose by 352,000; the only good news here is that the number of people working part-time because they could not find full-time worked dropped a bit, by 69,000. (Hat tip: Paul Solman. The payrolls survey, by the way, does not distinguish between full- and part-time work, though it shows no change in average weekly hours, which implies no big change.)

This shift from full-time to part-time work may reflect a trend of employers’ increased preferences for part-time over full-time workers; for example, in the wholesale and retail trade sector, since 2006 full-time employment is down 500,000 while part-time jobs are up 1,000,000. Avoiding the “Obamacare” employer mandate for firms with 50+ workers would be another logical reason, and I wonder if this trend is a reason for the administration’s recently announced one-year delay of the mandate. But neither of these trends is new, so I don’t know why June would have seen such a particularly huge shift to part-time.

We see the same pattern in my favorite alternative unemployment rate, the U-6 unemployment rate, which includes part-time workers who would prefer full-time work and “discouraged workers” who want a job but have given up looking. Unlike the standard unemployment rate, which stayed at 7.6%, this comprehensive jobless shot up from 13.8% to 14.3%. Part of the rise was due to more discouraged workers, but most of it was from an increase in involuntary part-timers.

Overall, not a great employment report. It’s possible the household survey, which economists tend to regard as less reliable than the payrolls survey (even though it’s the one we use to derive the all-important unemployment rate), was just weird this month. For the past 12 months as a whole, we do not observe a shift from full-time to part-time work. The net increase in jobs was 2.4 million, and slightly under 10% of that was part-time jobs, about the same as for the labor force as a whole (i.e., including old and new jobs).

The bond market may have taken a while to digest the ambiguous nature of this report, as long-term Treasury yields, after rising sharply on the Friday of the report, lost half of that increase in the next week. The stock market continued to boom, perhaps because they see the rise in part-time employment as promising greater flexibility and profitability on the part of corporations. But of course these prices change for a lot of reasons.


This just in: College is costly

26 June 2013


Don’t worry, it’s still worth it, in a big way, at least on average. But that’s another story. This chart here has some interesting stories to tell:


(1) The big difference between average published tuition (“sticker price”) and net tuition at public four-year colleges is a big surprise to me. I teach at a four-year public college, and I don’t think we offer big tuition scholarships to all that many people. I know that some of the flagship state universities do, and those schools also have a lot more people paying high out-of-state tuition, which surely explains some of the gap. But a difference of more than a half? I would not have guessed.

— Side note: My students would no doubt point out that this chart includes only tuition and not room/board/etc., which cost a lot more than tuition at ours and many state colleges.

(2) The average net tuition paid at four-year public colleges has doubled in real (inflation-adjusted) terms in just ten years! That’s a big jump. Parents and younger siblings cannot be pleased about this.

(3) The average net tuition at private colleges is well under half the sticker price, but it’s still steep: $52,000 for four years, more if you figure that tuition inflation will continue.

(4) State schools have lost about half their relative (tuition) cost advantage to private colleges, and state school tuition is about one-fifth of private college tuition. I’m not sure which of those statistics is more significant. Overall, assuming the quality difference between public and private schools has not changed, the first point means state schools are only half as good a deal (ignoring non-tuition fee) as they used to be. But how many private colleges are five times better than public colleges (taking into account consumption value, impact on future earnings, impact on future quality of life)? Okay, throw in room, board, etc. and they are about $10.000 at both private and public, and now it’s a $12,500 net cost at public school vs. $23.000 at private school, so now the private school costs “only” 84% more. Still a big difference.

It seems the burden of proof is on private colleges to justify their huge extra cost. Depending on the college and the applicant, some are probably worth it and some aren’t. (I remember a bright student awhile back who said his father told him, “I’m not going to pay through the nose for four years just so you can screw around.”) Prospective applicants to pricey private colleges have some justifying of their own to do (hint, hint).

The top 1% are different. Yes, they own more financial assets.

25 June 2013

Lawrence Mishel’s recent piece on inequality includes a very telling graph:


We see that the second half of the 1990s  is the first prolonged period when the top 1%’s income soared above that of the college educated in general; it coincided with the dot-com boom/bubble. We see a similar takeoff during the mid-2000s housing bubble and stock boom. In the market corrections/crashes that began in 2000 and 2007, we see the top 1%’s advantage mostly, but not completely, disappear. 

A combination of stock options, stock-market-based bonuses, and “Takes money to make money” seems to be at work here. The graph seems to be at odds with the common argument (Greg Mankiw’s?) that the top 1% deserve all they get because they are so much more productive, as it seems doubtful that their superior productivity deserts them in bad times.

Fed talk is anything but cheap

24 June 2013

After last Wednesday, I bet Ben Bernanke can relate to this observation by George Carlin about his Catholic upbringing:

If you woke up in the morning and said, “I’m going down to 42nd street and commit a mortal sin!” Save your car fare; you did it, man!

It’s the thought that counts! The Fed didn’t “do” anything last Tuesday and Wednesday at its Federal Open Market Committee meeting. Bernanke’s concluding comments about the continuing slump were not much more specific than “This too shall pass, someday,” combined with the obvious point that normal times will bring normal monetary policies. The main news was that he thought normal times would come sooner than many people expected. But that was enough. Evidently, the bond market was expecting the economy to be flat on its back for most of the next decade: 10-year Treasury bond rates had lately been in the range of 2.1-2.2%, whereas the recent historical norm is about 5%. After Bernanke’s remarks, the rate jumped by 30 basis points (0.30% point) to a Friday close of about 2.5%. It jumped further this morning to 2.6%.

Two observations:

(1) Just as in Carlin’s church, Bernanke doesn’t actually have to do anything to tank the long-term bond market. Just thinking about it aloud is enough.

(2) The long-term bond market is really not the economy’s friend. What tanked the bond market is the prospect of interest rates rising a bit sooner and faster than expected, on account of the Fed reacting to a stronger economy. So in a weird sense the spike in bond rates is good news: Bernanke said better times were coming, the markets believed him, and they acted accordingly. Not to say that their action was malicious, just that it was predictable: if you are expecting interest rates to rise in the future, you should buy bonds in the future, not now.


24 June 2013

My first Huffington Post column was posted last week. It’s on Ireland’s economy, against the backdrop of the G8 summit in Northern Ireland. Check it out.

Or, if you already did, check this out instead:

If markets could talk

21 June 2013

The stock market would be telling the Fed something like this:


Sounds crazy, but that’s how present discounted value works. (And thanks to my daughter for the meme.)

This week the Dow fell 3% this after Fed Chair Ben Bernanke’s announcement that eventually the economy would get better and then the Fed would gradually take its foot off the accelerator. That is, the Fed would taper off its quantitative easing (QE; emergency mass purchases of long-term bonds) when unemployment (now 7.6%) fell to 7.0% and then, as announced before, would start raising short-term interest rates back toward normal levels when unemployment fell to 6.5%. He didn’t say this was going to happen soon, and reiterated that the (near-) zero interest rate policy would continue until unemployment falls to 6.5%. Granted, he sounded mildly optimistic that the economy would recovery sooner than expected, but he presented no new data on that score, so it’s an easy prediction to shrug off. Not that the markets did.

The present-discounted-value approach to stock pricing says that a stock is worth its company’s expected future profits in all years to come, divided by a discount factor that is based on the long-term interest rate. The lower the interest rate, the higher the stock’s price should be. The odd thing here is that if the economy picks up, corporate profits should too, which should offset the higher interest rates that Bernanke is hinting at. It may be that corporate profits are already high and are not always easy to predict, whereas long-term interest rates are known now. The 10-year Treasury bond rate rose from 2.2% to 2.5% after Bernanke’s announcement, a 14% increase that is right about in line with the 15% drop in stock prices. (The 10-year Treasury yield is still at a near-historic low, by the way.)

The financial media tend to report any significant-looking drop in stock prices as an economic calamity, overlooking the most basic facts about the stock market, namely that it is volatile and its short-term swings have very little macroeconomic impact. The less we worry about short-term market reaction to the Fed, the better off we’ll be. Jared Bernstein has an excellent piece on the Fed’s announcement, to which I don’t have much to add, only to say that I don’t see much new in the announcement, other than some optimistic predictions and an exit strategy for QE (which had to end sometime).