Archive for October 2018


Recent articles

I have three new pieces that just came out. At The Hill, I have an article that discusses wages:

On Friday, the government announced average hourly wage growth for October, which came in at an annual rate of 2.8 percent.

The case was similar in September, and the media reported that Fed officials may react by tightening monetary policy. Not surprisingly, this puzzles lots of people: Shouldn’t we welcome higher wages, especially after decades of sub-par wage growth?

The short answer is that we should welcome higher “real” wages, but the Fed does have reason to be concerned about higher “nominal” wages. . . .

It’s true that printing lots of money can lead to higher nominal wages. However, as workers in places like Mexico and Argentina have discovered, if productivity is stagnant, then large nominal pay raises do not translate into higher real wages.

The recent 2.8 percent average hourly wage growth doesn’t pose a large threat, but the Fed has good reasons to be wary of a steep upsurge in nominal wage growth.

At Mercatus, I have a new policy report discussing the Hypermind NGDP prediction market:

It is difficult to understand why it took so long for an NGDP prediction market to be created, as NGDP is probably the best single indicator of whether monetary policy is too expansionary or too contractionary. Given that the Fed has already expressed an interest in TIPS spreads, it likely would be equally interested in market forecasts of NGDP growth.

Had this market been in existence during 2008–2009, it might well have provided valuable signals to the Fed. After all, even Ben Bernanke admits that the Fed erred in September 2008, when it refused to cut its target interest rate from 2 percent right after Lehman failed. At the time, TIPS market expectations of inflation were much lower than Fed forecasts. But NGDP growth expectations are even more informative about the state of the economy than inflation expectations.

In the end, the Hypermind NGDP prediction market is a sort of demonstration project. One would hope that the Fed will set up its own (better-funded) NGDP futures market, which could help it to make more informed policy decisions. The cost would be trivial relative to the potential gains from more effective monetary policy.

At The Bridge, I have a piece pointing out that monetary policy is becoming increasingly accommodative:

Thus whether you judge policy solely by considering inflation, or both inflation and employment, you reach the same conclusion. Policy was too restrictive to hit both the Fed’s inflation target and its employment target during 2009-16, and policy is now relatively accommodative, with inflation above the two percent target and the unemployment rate below the 4.0 percent to 4.6 percent range that the Fed views as “full employment”.

The fact that monetary policy is increasingly accommodative does not necessarily imply it is too accommodative. The Fed needs to look beyond the current data and forecast the impact of its policy on the future condition of the economy. Inflation has recently been pushed up by a sharp rise in oil prices, and it’s possible that it may fall back below two percent during 2019. Even so, the balance of risks has recently shifted, and the long period of excessively restrictive monetary policy is over.


Where are these jobs coming from?

As always, the jobs market remains a bit of a mystery. If you think you have an explanation for the recent jobs growth, I’m about to show you that you are wrong. (Notice I didn’t say “US jobs market”, which is already a clue that the mystery is even deeper than we imagine.)

Job growth has been running at around 200,000 per month, and the unemployment rate has fallen to 3.7% (lowest since the 1960s.) It’s best to start with the accounting, which basically involves three factors: population growth, the labor force participation rate and the unemployment rate. You can use prime age labor force participation, but that makes things more complicated and also misses the growth in older workers.

In the last few years, employment has been growing faster than predicted by growth in adult population, which can only mean that either adult labor force participation is rising, or the unemployment rate is falling.  It’s not labor force participation, which was falling and then leveled off some time around 2014 or 2015 (it’s hard to be precise, as the data is noisy.)

Screen Shot 2018-10-05 at 12.13.42 PM

Some people might start screaming that I’m ignoring the aging of the population.  I’m not.  It’s true that the population is aging, and it’s true that this means the leveling off of LFPC rate is actually a very good thing; it shows participation is rising among prime age workers.  It might even show that Trump is the greatest president in history.  But it does not explain the recent growth in employment.  It simply suggests that we should be doing less bad than the aging alone would predict.

To fully explain the recent growth in employment (of 200,000/month) in an accounting sense, you need to look at the unemployment rate, which has fallen to shocking low levels:

Screen Shot 2018-10-05 at 12.09.19 PMA couple years ago, I expected employment growth to slow by now.  The main reason I was wrong is that I expected the unemployment rate to level off in the mid-fours, and it instead fell to 3.7%.  I don’t have any special ability to forecast, I was just going with the conventional wisdom:

In September 2016, for example, the median forecast of Federal Reserve officials was that the unemployment rate would be 4.5 percent at the end of 2018; it now looks likely to be substantially lower.

I also expected a tad worse performance for the LFPR, and rising prime age participation is part of the story.  But unemployment is the big mystery that needs to be explained.

There are two possible explanations for the very low unemployment—a fall in the natural rate, or a demand shock that pushes unemployment below the natural rate.  I would not completely rule out the latter, but Neil Irwin of the NYT points to a problem with demand-side explanations:

The even better news is that the last time the jobless rate was this low, at the end of 1969, it was already fueling high inflation. Consumer prices rose 5.9 percent that year. Currently, that measure is 2.7 percent.

In fairness, that 2.7% figure is consistent with somewhat of a demand boost, thus it’s not that different from the situation in 1966 (when inflation was about the same).  But on balance I don’t see much evidence that this is a demand-side issue, partly because the inflation figure includes recent oil price increases, and inflation forecasts continue to run at around 2%.  In a couple years we’ll have more perspective on this issue, but right now I’m going with the supply-side explanation, i.e. an unusual fall in the natural rate.  Later I’ll provide international evidence for that view.

I’ve been racking my brain for reasons why the natural rate of unemployment should have fallen to perhaps the lowest levels in history (actual unemployment was below the natural rate during the Korean and Vietnam Wars), but it’s not obvious what those are.  In a recent Econlog blog post, I discussed the fact that the federal minimum wage was now so low as to be almost meaningless.  But that affects only a small part of the labor force.  You could point to Trump initiatives like a corporate tax cut that boosted RGDP growth. But the same occurred during the Reagan boom, and yet the unemployment rate never fell below 5%, even after very strong RGDP growth spurred by tax cuts and deregulation.

At this point I look to other countries for assistance.  Europe has a very different unemployment pattern than the US.  During the post-WWII boom they had an extremely low natural rate, relative to the US.  During the 1980s and 1990s, their natural rate rose far above the US, even in Germany.  It remains elevated in France and southern Europe, but has recently fallen in the UK:

Screen Shot 2018-10-05 at 12.36.50 PMAnd in Germany:

Screen Shot 2018-10-05 at 12.37.26 PMSo there is modest evidence that this phenomenon of falling natural rates is affecting other countries.  Canada is a bit more ambiguous, with a higher natural rate than the US, but some evidence of a downward trend since the 1980s:

Screen Shot 2018-10-05 at 12.39.55 PM

I don’t have a good explanation for why Canada has a significantly higher natural rate than the US.  It may have a bigger welfare state, but the same is true of the UK and Germany.

So unemployment remains something of a mystery.  By the end of the Obama administration, unemployment had already fallen below the lowest levels of the Reagan boom (to 4.6% on November 2016), despite slower growth and less business friendly regulation.  So while I would not rule out the importance of supply-side policies, especially the tax cuts, I think a portion of the story remains unexplained.

Note that Germany and the UK have seen their unemployment rates fall dramatically to the 3.5% to 4% range, despite tight fiscal policies.  So Keynesians should be just as confused as supply-siders.  Fiscal policy has also gotten tighter under Abe, and Japan’s unemployment has fallen to 2.5% (although they’ve traditionally had very low unemployment.)

Before commenting, think about how your explanation fits the international pattern, and also the US time series going back to the 1940s.  It’s harder than you think.  BTW, we won’t be able to figure out the trend rate of growth in RGDP until we can observe a year of two of RGDP growth with a stable unemployment rate.  The wait continues. . . .

If you want an even longer time series, there’s a UK graph going back to 1760, when unemployment was 3.63%.  (Love that precision!)

Screen Shot 2018-10-05 at 12.48.50 PM

One remaining man of principle

It’s hard not to be dismayed went you look at what’s happened to society.  We now live in a country where almost everyone, including those in the elite media, has a view of reality that is completely shaped by their politics.  Thus whether people believe decades-old accusations of sexual assault depends almost entirely on the relationship between the political party of the observer and the political party of the accused.  There are days when I wonder if we wouldn’t all be better off if a giant asteroid hit Earth and put us out of our hypocrisy, er, misery.

But then I recall that there is one moral giant with a long and consistent record on sexual assault, regardless of the politics of the accused.  I speak, of course, of Donald Trump:

Days after President Clinton admitted to having an inappropriate relationship with former White House intern Monica Lewinsky, Trump said Clinton was a “victim” and critiqued the physical appearances of various women with whom Clinton had been accused of having extramarital relations at different times.

“It’s like it’s from hell, it’s a terrible group of people,” Trump said in an interview with FOX News’ Neil Cavuto on Aug. 19, 1998. . . .

“I don’t know if that’s a good thing in terms of what Starr has done or a terrible thing, I think it’s a terrible thing, actually,” Trump added, presumably referring to the former Whitewater independent counsel who expanded his investigation into the Lewinsky affair.

As far as his personal opinion of Clinton, Trump gave Clinton a strong rating.

My only quibble is that when Trump discussed Starr’s persecution of Clinton, he left out his sidekick, Brett Kavanaugh.  Today, Trump continues to relentlessly defend any and all men accused of sexual misconduct; Rob Porter, Roger Ailes, Roy Moore, Bill O’Reilly and one other name I can’t recall.

Unlike 99% of Americans, he doesn’t let politics affect his moral compass, which never deviates from his core beliefs:

Trump: And when you’re a star, they let you do it. You can do anything.

Trump: Grab ’em by the pussy. You can do anything.

But Trump doesn’t stop there, he also understands the need for America’s President to mock and shame women who come forth with accusations of sexual abuse:

Playing to the crowd of thousands gathered to cheer him on, the president pretended to be Dr. Blasey testifying before the Senate Judiciary Committee last Thursday. “Thirty-six years ago this happened. I had one beer, right? I had one beer,” said Mr. Trump, channeling his version of Dr. Blasey. He then imitated one of her questioners, followed by her responses about what she could not recall about the alleged attack.

“How did you get home? I don’t remember. How’d you get home? I don’t remember. Where was the place? I don’t remember. How many years ago was it? I don’t know. I don’t know. I don’t know,” Mr. Trump said, as the crowd applauded. “I don’t know — but I had one beer. That’s the only thing I remember.”

Trump and his crowd of supporters must have had so much fun!  But there’s also a serious side to Trump; he understands the suffering endured by so many  . . .  er, people:

Asked if he had a message to men, the president said: “Well, I say that it’s a very scary time for young men in America when you can be guilty of something that you may not be guilty of. This is a very, very — this is a very difficult time.” . . .

Asked if he had a message for young women, he said, “Women are doing great.”

(BTW, I want to reassure readers that I’m doing OK, despite being male.)

Trump has also reached out to foreign leaders who share his moral principles, like Philippine President Duterte:

Mr Duterte once joked about the gang rape and murder of an Australian missionary, suggesting that, because he was mayor of the town it took place in, he should have been allowed to go first. (US president Donald Trump has since said that he has a “great relationship” with the Filipino leader.)

In contrast to Obama, who preferred polite, wimpy leaders like Merkel and Trudeau, Trump likes tough guys like Italy’s Salvini:

Mr Salvini, Italy’s deputy prime minister and a Trump admirer, has also taunted female politicians. In 2016, at a political rally, he pointed to a sex doll on the stage and claimed that it was a “double” of Laura Boldrini, who was then president of Italy’s Chamber of Deputies. In a recent interview with Politico, Ms Boldrini said that she has received numerous rape and death threats in recent years, adding that Italy’s populists had targeted her because “I was a woman and I was advocating for refugees, for human rights, for women’s rights”.

And of course Putin:

Vladimir Putin’s international image was tainted today after it emerged he had let slip another of his infamous remarks – this time praising the president of Israel for alleged sex offences.”He turned out to be a strong man, raped 10 women,” the Russian president was quoted by Russian media as saying at a meeting in Moscow with Israeli prime minister Ehud Olmert. “I never would have expected it of him. He has surprised us all, we all envy him!”

Israeli police announced on Sunday that the president, Moshe Katsav, could be charged with the rape and sexual harassment of several women.

Soon, Trump will be joined by a fellow traveller in Brazil:

Mr Bolsonaro has exploited their fury brilliantly. Until the Lava Jato scandals, he was an undistinguished seven-term congressman from the state of Rio de Janeiro. He has a long history of being grossly offensive. He said he would not rape a congresswoman because she was “very ugly”; he said he would prefer a dead son to a gay one; and he suggested that people who live in settlements founded by escaped slaves are fat and lazy. Suddenly that willingness to break taboos is being taken as evidence that he is different from the political hacks in the capital city, Brasília.

It’s so refreshing that politicians are now able to ignore taboos against racism and rape jokes.

PS.  Do I have to say the preceding was a pathetic attempt at satire?  I suppose so. If you want some seriously good satire, read Will Wilkinson’s set of tweets on Trump as a Shakespearean figure—it’s great.  If you don’t understand the context, you may need to look at the NYT’s recent demolition of Trump’s entire business career.  Yes, it was also built on a pack of lies and fraud, plus frequent bailouts from daddy.  I know; how can you demolish a reputation that is already a mere pile of rubble?

PPS.  And let’s not forget the National Review, who seems to think the biggest problem with the GOP is Jeff Flake.  Or CNN News, which never met a female accuser they did not believe.  Or the “trendy” parts of the academy, which was again discredited in an hilarious update of the Sokal Hoax.

I feel I’m overdosing on cynicism.  I need some sort of medication to deal with those 6-hour lulls in the news cycle where nothing Onion-level insane happens in the world.  Perhaps if I go kayaking in New Zealand and get slapped in the face by an octopus wielding seal, it will shake me out of my ennui.

Economic nationalism in action

The Canadian dollar is up today on news that the new free trade agreement will be essentially identical to the old agreement.

This got me thinking about the 2016 campaign, economic nationalism and related issues.  Here are a few observations:

1. Much of the punditry of 2016 now looks pretty hyperbolic, almost ridiculous.  There was lots of talk that “neoliberalism” was passé, that American workers were being crushed by foreign trade, and that the Trump campaign represented a rejection of globalism.  Two years into his 4-year term, Trump has precisely one major achievement to help blue collar workers—a big corporate tax cut.  It’s hard to find a more neoliberal policy than corporate tax cuts. Any time you are reading a political pundit and come across the term “neoliberalism”, just stop.  You will be getting dumber if you continue to read.

2.  Some will argue that Trump never really believed in economic nationalism, that it was all an act to get votes.  That’s possible; although I suspect he really does believe some of the nonsense he spouts about winning trade wars.  But surely the people around him are serious economic nationalists.  Peter Navarro, Wilbur Ross, Steve Bannon and others didn’t suddenly adopt these ideas for the 2016 campaign.

3.  Economic nationalists are really, really, really dumb, and this has a big impact on how the events have played out.  Their number one goal has been to reduce the US trade deficit, and they don’t even have a clue as to how this can be done.  As a result, they flounder around trying to negotiate trivial changes in trade deals, while the rest of the Trump administration enacts policies that will make the trade deficit even bigger.  What would a policy of reducing trade deficits look like?  Something like this:

A. Large budget surpluses to boost national saving.  Instead, Trump is increasing the budget deficit at a rate far beyond anything we’ve ever seen in a time of peace and prosperity.

B.  A big increase in the corporate tax rate, to reduce domestic investment.  Policies to discourage domestic homebuilding.  Again, Trump has done mostly the opposite, although the incentive to take out a home mortgage was modestly reduced in the new tax bill.

C.  Public policy changes to encourage domestic saving, as you see in places like Singapore.  As far as I know, there’s almost nothing being done in this area.

As a result, the trade deficit will likely get bigger.  (Especially the actual deficit.  The recent change in the corporate tax code will lead companies to report more output as domestic, which would modestly reduce the measured deficit without impacting the actual deficit.)

No doubt commenters will insist that they can’t be that dumb; there is some sort of secret plan to fix the trade deficit.  Sorry, but read the stuff written by Peter Navarro and Wilbur Ross; they really are that dumb.  (The smart ones like Gary Cohn are gone.) These are guys who think the GDP = C + I + G + NX equation somehow demonstrates that trade deficits reduce GDP.  No, I’m not joking.

Economic nationalism is a profoundly self-destructive philosophy, but we are blessed to have economic nationalists who are so incompetent that they don’t even know how to reduce the trade deficit.  That’s why stocks are up today.