Posts Tagged ‘bloomberg’

The deficits between politicians’ ears

17 August 2011

‘This isn’t hard. Hire people to build things with the free money the world is offering us.’

— Jay Ackroyd, at Eschaton (Hat tip: Brad DeLong)

Well, yeah. We should worry about the long-term deficit, but when the world is ready to lend us more money at zero real interest rates, the world clearly has other priorities. And so should we — like the 16% of the labor force that’s either unemployed or underemployed. What might we do with all this money the world is so eager to lend us?

The closest thing to a proposal to build things that’s come out of Washington lately is an infrastructure bank, to fund various improvements in the nation’s roads, bridges, levees, and such. A recent Bloomberg editorial praises the idea, and Pres. Obama is urging Congress to create such a bank. The obstacle, not surprisingly, is Congressional Republicans who view all domestic spending as “pork.” In this case, however, the pork is more like bacon bits. From the WSJ:

‘Under the White House plan, the infrastructure bank would augment current highway and transit programs. The bank would receive $30 billion over six years and would issue grants, loans and other financial tools.’

$5 billion a year? Barely a drop in the giant bucket that is the U.S. output gap. And barely a dent in our nation’s gaping infrastructure needs, which the American Society of Civil Engineers (ASCE) estimates as costing $2.2 trillion over 5 years. Way to think big, Mr. President. As Krugman wrote recently, the battle in Washington is between Republicans who want to do nothing and Democrats who want to do very, very little. And outside the beltway, we have a Republican presidential front-runner who thinks that doing anything to help the economy before November 2012 is not only wrong but treasonous.

But heroically assuming for a minute that Washington actually wanted to employ people to fix the nation’s infrastructure, the ASCE’s website provides ample details about where to do it. Talk about “shovel-ready projects.” Meanwhile, my former professor David F. Weiman recounts some of the infrastructural marvels of the New Deal. Even a longtime Great Depression researcher (me) was amazed:

‘The New Deal’s Public Works and Works Progress administrations spurred rapid productivity growth in the midst of the Depression. New roads and electrical power networks paved the way for post-World War II economic expansion built around the automobile and the suburban home. Astonishing 21st-century innovations such as next-day FedEx deliveries and Wi-Fi still rely on these aging investments. We associate FDR with massive hydroelectric dam projects — including the Grand Coulee and Hoover dams in the West, and the Tennessee Valley Authority in the South — but the New Deal also electrified rural America through cooperatives that distributed cheap, reliable power. Nearly 12 percent of Americans still belong to these collectives. Without the New Deal, they would be stuck in the much darker 1920s.

‘As would modern travelers. Without the New Deal, New York commuters would be without the FDR Drive, the Triboroughand Whitestone bridges, and the Lincoln and Queens-Midtown tunnels. There would be no air traffic at LaGuardia and Reagan National airports. D.C.’s Union Station, wired for electricity during the New Deal, would have a very different food court. Between New York and Washington, Amtrak runs on rails first electrified during the New Deal.

‘Out West, the New Deal gave us Golden Gate Bridge access ramps, the Oakland-San Francisco Bay Bridge, the first modern freeways, and San Francisco and LAX airports. Between the coasts, it brought more than 650,000 miles of paved roads, thousands of bridges and tunnels, more than 700 miles of new and expanded runways, improvements to railroad lines, and scenic routes such as the mid-South’s Natchez Trace Parkway. Without the New Deal, of course, some of these would have eventually been built by state and local governments or the private sector — years after America’s recovery from the Depression.

‘Moreover, private infrastructure improvements would have bypassed poor regions such as the South. Because of its vision and virtually unlimited borrowing capacity, the New Deal underwrote Southern modernization with new roads, hospitals, rural electrification and schools. These public investments paid off. After 50 years of stagnation, average Southern incomes began to catch up with the national average during the New Deal era.’

Granted, economic historians have long criticized FDR’s New Deal deficits as being too small to restore the economy to full employment, but neither were they insignificant. An average of 3.5 million workers a year worked in New Deal jobs. From the above it’s clear that a great many of those jobs produced great gains for America’s infrastructure, economy, and society.

Is inflation on target? (corrected)

5 August 2011

The new BLS unemployment numbers (9.1% unemployment rate, 16.1% comprehensive unemployment rate, 117,000 new jobs created) are the talk of the morning. I don’t have much to add to it, but I’ll echo the oft-made point that job growth needs to be twice as fast for the next several years for unemployment to fall to normal levels. I’ll also note that the numbers are a bit better than those of a year ago, but a bit worse than those of March, when unemployment was 8.8%. So although the numbers are better than expected, they’re still underwhelming and we still might be in a double-dip recession.

Instead I want to focus on the other big economic variable. Inflation has been so low over the past few years — in the range of 1-2% — that Ben Bernanke and others have seemed more worried about deflation than inflation. At the same time, some Fed critics have charged that the Fed’s actions to backstop dodgy financial asset markets and flood the banks with new reserves will lead to a massive inflation after the slump is over or a stagflation (stagnant economy with high inflation) even sooner. Some numbers to remember: Inflation has averaged 3% a year over the past century, and close to that over the past few decades. The Fed’s unofficial target for inflation is 2%. What do the markets expect for the years to come?

A good way to answer that question is to compare the well-reported interest rates on regular Treasury bonds with the interest rates on “TIPS” — Treasury Inflation-Protected Securities. The payments on a TIPS bond are adjusted for whatever inflation occurs over the bond’s lifespan.  The inflation adjustment is trickier than I’d originally thought — instead of simply adding the inflation rate to the interest rate that arose from the bond’s auction, the interest rate stays the same but the bond’s principal rises, and the interest payments are based on the original interest rate times the new principal. (Ex.: Imagine a 1-year, $1000-face-value TIPS bond that sells at par, i.e., for $1000 and therefore has an interest rate of 0%. If inflation is 3% over the next year, then the principal rises 3% to $1030. The interest is still $0, but the overall yield on the bond is 3% ($30/$1000). That’s a simplified example. It’s more complicated if the interest rate isn’t 0%.) Because the arithmetic can get complicated, it’s easier to look up the “breakeven” rate, which is the inflation rate implied by the different on TIPS and ordinary T-bonds.

(Add to that a conceptual complication: Because the TIPS bond is less risky, since it’s indexed for inflation, it should be in somewhat greater demand than the regular T-bond. So, other things equal, it should command a higher price and pay a lower interest rate. With that in mind, the difference between the interest rates on regular T-bonds and TIPS bonds is roughly the expected inflation rate plus an inflation-risk premium, which reflects people’s uncertainty about future inflation.)

Comparing the interest rates for 5-year bonds last week (when this was originally posted), the  T-bonds paid 1.12% and the TIPS paid -0.67%. The implied inflation rate (1.80%, if my spreadsheet math is correct) is actually very close to the difference in the interest rates on the two bonds (1.79%). Apparently the market is expecting the Fed to be just shy of its 2% target over the next 5 years.

Looking at the 10-year bonds, the T-bonds paid 2.47% and the TIPS paid 0.24%. The 2.03-percentage-point difference is again a close approximation of the breakeven rate; my spreadsheet math yields an expected inflation rate of 2.22%, or slightly over the Fed’s target. Together the two breakeven rates imply that the market is expecting inflation to average about 2.6% in years 6 through 10. These numbers provide no guide to where they think that inflation is going to come from (recovery? shortages of gas or food? QE5?), but the weakness in the stock market suggests they’re not expecting a recovery anytime soon. It may just be that their flight to safety has gone into overdrive, and TIPS are in exceptionally heavy demand because they are even less risky than regular T-bonds. So possibly they’re expecting inflation rates of about 1% through 2016 and 2% in 2016-2021, with the remainder being a risk premium.

In sum, the Fed does seem to be hitting its inflation target, more or less, but that’s about all. Bondholders appear willing to lock in near-zero or negative real returns over the next five or ten years, just so they can hold a safe asset. Which suggests they’re scared shitless.

Bummer in the summer (updated)

22 June 2011

In today’s press conference Bernanke acknowledges the obvious: the economy is worse than we thought and likely to stay that way into 2012.  The Fed lowered its official economic growth forecasts and raised its unemployment rate forecasts for 2011-2012. After almost two years of slow but steady recovery and myriad positive straws that one could grasp, the last couple of months have brought mostly lousy news, notably the latest jobs report, which showed a gain of just 54,000 jobs last month, only about a quarter or a sixth as many as we’d need to get unemployment down to normal levels in five years or so.

It’s notable that the imminent end of the Fed’s quantitative easing, all $600 billion of which will be over by the end of the month, brings few calls for another round — everyone seems to agree that we’re in a liquidity trap, in which further monetary stimulus fails to stimulate, because interest rates are already practically 0%, banks are not eager to lend, and companies are not eager to invest in new capital.*

Our best hope, it seems to me, is an almost nihilistic one: the economy somehow recovers on its own, through black-box mechanisms that we still don’t really understand. Business confidence returns, hiring finally picks up, and the economy roars forth. This may be a vain hope, but the “animal spirits” of investors (and consumers) that Keynes wrote about in The General Theory are not really visible, despite the several monthly surveys of business sentiment that are out there.

Our next best hope is another fiscal stimulus. It won’t be like the first one, which is about to run out and was too small anyway, not with a Republican majority in the House that believes spending = death and doesn’t even want to avert a financial crisis by raising the debt ceiling unless the Democrats agree to massive long-term spending cuts. But I could see the two parties agreeing on a big set of tax cuts, which is the usual form that a fiscal stimulus takes anyway (e.g., 1964, 1981, 2001).  That has a couple of disadvantages: (1) the “multiplier” effect of a tax cut on GDP is typically empirically estimated to be smaller than that of a spending increase of equal size, because not all of a tax cut gets spent; (2) tax cuts are hard to reverse, as everyone hates seeing their taxes go up, so they could make the long-term debt problem much worse. Still, it’s probably the only politically viable option for a fiscal stimulus.

* The last part of that statement (companies are not eager to invest in new capital) is less true than I had thought. As the Wall Street Journal article linked to below notes, a survey of banks indicated that small businesses were demanding more loans, at least in the first quarter of the year.

UPDATE: This Associated Press article from the next day’s newspapers adds some helpful detail. The headline from the Syracuse Post-Standard’s version of that article says it all: “Slow Economy a Puzzle: Fed chief flummoxed, says troubles could last a while.” My quick take:

(1) The economy has long been in a liquidity trap (Krugman’s definition, i.e., a slump in which monetary policy is no longer effective).

(2) Bernanke has long suspected this himself, but as Fed Chairman he feels obligated to try to stimulate the economy through monetary policy, via unusual, unprecedented channels “that just might work” like QE2.

(3) QE2 has failed to measurably stimulate the economy, because the economy was in a liquidity trap.

(4) Liquidity trap or not, it’s not easy for the Fed to just throw in the towel, so a QE3 might well happen. But I doubt the Street will get all that excited about it, considering what a dud QE2 seems to have been.

Green shoots and leaves

18 November 2010

The Conference Board’s index of leading economic indicators is up again, by 0.5%, for each of the last two months.  This is very good news, yet it was hardly reported at all.

That wasn’t all of today’s good news, either.  Jobless claims (i.e., unemployment insurance claims) were at about the same level as last week’s two-year low.  And the Philadelphia Federal Reserve district, which had been very weak, showed astounding improvement in today’s report, with its general business conditions index jumping from near-zero to 22.5, way ahead of the consensus forecast range of 4.o to 9.6.  Bloomberg summed up the Philly Fed news as follows:

“Philly Fed data have been lagging regional and national data but not in November. The report’s November index on general business conditions jumped from a zero-flat trend to a prodigious 22.5 to indicate very sharp month-to-month growth. New orders rose more than 15 points to 10.4. Shipments also rose more than 15 points, to 16.8. The region’s manufacturers are showing commitment by adding to their workforces as the jobs index rose more than 10 points to 13.3. . .

“This report points to accelerating strength for what is already solid growth for the national manufacturing sector. Interestingly, these results contrast with Monday’s weak Empire State report from the New York Fed, a report that had been significantly stronger than Philly’s. Month-to-month swings in regional data shouldn’t cloud what is generally a positive outlook and continued leadership for the nation’s manufacturing sector.”

A genuine recovery really does seem to be underway.  It’s still not nearly fast enough, but the pace could easily pick up, and these indicators suggest it will.  I have other reasons for my current optimism, but I’ll get to those later.