No workers = no growth
Today’s jobs report showed the unemployment rate falling to 4.3%. That’s lower than at any time during the housing boom. It’s almost as low as the peak of the tech boom. Indeed, other than during a brief period around 2000, it’s the lowest unemployment rate since the 1960s. Even the U-6 rate is back to the levels of the summer of 2006.
So we must be producing lots of jobs, right? No, payroll employment rose by just 138,000 in May, well below the pace of the previous 7 years. Yes, one month is not significant, but job growth over the past three months has averaged only 121,000. Companies cannot find workers.
In 2018, we’ll look back on these job gains as boom numbers, as things are going to get even worse. And if Trump cracks down on immigration, growth will slow to a near standstill. The second quarter GDP numbers are expected to be strong, but don’t be fooled by that (seasonal) head fake—we are entering a very slow growth period.
After Trump was elected there was a big “reflation trade” and the 10-year bond yield rose to over 2.6%, Today it’s down to 2.17%, as the yield curve gets flatter and flatter. At the time, I thought people were forgetting about monetary offset. But even I missed the fact that Trump was too incompetent to get his supply side package through Congress. I expected a few tenths of a percent more RGDP growth, now I doubt even that.
So why are stocks doing well? In my view it’s the same story as what we’ve seen since 2009:
1. Markets are gradually realizing that ultra low interest rates are the new normal.
2. In the “FANG” economy, American corporations don’t need fast growth to make big profits.
Predictions:
1. This will end up being the longest economic expansion in American history.
2. This will end up being the weakest economic expansion in American history.
3. Interest rates will stay low.
4. Unemployment will fall to 4%.
5. Inflation will stay low (because the Phillips Curve model is wrong.)
6. Janet Yellen will end up producing the most stable rate of NGDP growth of any Fed chair in American history.
PS. Unlike during 2008-14, there’s nothing wrong with the current stance of monetary policy—the problem is the regime.
Tags:
2. June 2017 at 06:45
Stock prices are rising more slowly since February, often moving sideways and let’s not forget many of the gains were in specific sectors expected to benefit from Trump, like the banking sector.
2. June 2017 at 06:52
Scott
1. You can’t have this discussion without taking into account LFPR. 4.3% now is not in any way comparable to 4.3% in the 60’s.
2. Who cares about growth. We should only care about growth per capita. And the only way to get that is more investment… and the only way to get that is lower taxes on capital. The Democrats raised taxes on capital by 60% and that’s why we have low growth, low rates, low unemployment and low LFPR. (Tyler Cowen must have misheard Occam’s punchline and instead of picking the obvious simple explanation, instead concocted the most convoluted story he could imagine to explain low growth.)
3. I know you don’t believe in EMH but you might want to check the temporal correlation between the recent stock run up and the date of the U.S. election.
2. June 2017 at 07:13
I hate to substantiate anything that Major Freedom says, but he’s right about the C&I loan numbers looking back. We may be looking at the peak of the recovery.
2. June 2017 at 07:21
I can’t find anything to disagree with here. I looked at Census projections of the 16-64 year old population, and growth here is slowing and will be low for many years to come. It will only grow 753k in 2018, and average 543k over the next 10 years. Sure, there will be an increase in the number of 65+ workers, but not all of the increase in the working age population will translate into labor force or employment growth either.
The U.S. seriously needs supply side reforms. If productivity growth can get back into the 1.5%-2.0% range, we could enjoy 2% real GDP growth despite it all. As is, it’s looking like we may be lucky to see 1% trend real GDP growth. The Trump Administration’s expectations of 3% seems to me to be pure madness.
2. June 2017 at 07:59
@dtoh:
Raw population growth is still important for the structure of the economy. With a stable or shrinking population, we would expect economic activity to become less land-intensive over time. If the marginal acre of land is expected to give zero or negative yield, that has some pretty ugly consequences for (say) the fate of rural communities.
Beyond that, as far as we can predict the marginal return on capital decreases with capital intensity. Changing capital tax rates will likely change the overall level of capital intensity, but over the medium to long term the growth rates of capital should be approximately the same. There’s no reason to expect a long-run change to the slope of the potential GDP (per capita, sure) curve from a one-off (but permanent) change in tax policy.
2. June 2017 at 08:30
I was looking at some labor market data today and noticed the prime age employment to population ratio is only about 2% off the levels from the high before the financial crisis (78.4% vs. 80.3%). The Philip’s curve model may be wrong, but I suspect that we may see more wage pressures as that number climbs higher.
2. June 2017 at 08:39
“Unlike during 2008-14, there’s nothing wrong with the current stance of monetary policy—the problem is the regime.”
I agree with everything that Dr. Sumner says above—including all six predictions—but this piece strikes me as the one with the most unfavorable ratio of [important that policy makers understand it]:[difficult to make policy makers understand it].
2. June 2017 at 13:16
Liberals and Conservatives will argue about this growth period forever. Who gets the credit? Most of it happened during Obama’s term. If it is to Obama’s credit that growth was so long it will be to his discredit that growth was so anemic and wages for so many did not budge. Then when there is the next recession in a few years Trump will blame Obama and liberals will blame Trump. But all this credit and blame simply obfuscates what is the real story
2. June 2017 at 16:30
“So we must be producing lots of jobs, right? No, payroll employment rose by just 138,000 in May, well below the pace of the previous 7 years. Yes, one month is not significant, but job growth over the past three months has averaged only 121,000. Companies cannot find workers.”
That’s because the workers are already hired. It is why the unemployment rate is so low.
It is sort of silly to expect a linear rise in newly employed as we go from below full employment to at or near full employment. It makes sense that increases in employment would taper off and get lower and lower.
At absolute full employment, if we imagine not even frictional unemployment, then guess what? The rate of job growth will “grind to a standstill” as people entering the workforce are largely offset by people leaving the workforce, in a country with a very low population growth rate, AND a boomer generation continuing to retire.
Couple this with the fact that we have gone through many years of high unemployment, so there is an adaptive aspect to the labor and capital markets as well, which general equilibrium model-like thinking will never enable anyone to grasp.
Leave it to Sumner to find fake negatives in what he would be over the moon if a communist were president.
Speaking of communists, they took a big hit with us leaving the Paris Accord. It would have seen us being mandated to cut carbon emissions by 26% while China and India don’t have to cut anything, and it would have seen us have to pay $3 billion to third world countries even more corrupt than ours, while again China and India wouldn’t have to pay squat.
The Paris Accord is nothing but a communist inspired massive transfer of wealth from the haves to the have nots. It would not have solved anything climate related. The leaders in the corrupt third world countries would have squandered the money as usual.
“So why are stocks doing well?”
NOT TRUMP!!!! NOT TRUMP!!!!
The stock market did jump after it was announced the Paris agreement was rejected. Where is Sumner’s “the market was fooled by this symbolic agreement”?
Hahaha
2. June 2017 at 16:43
Tight labor markets are a positive.
Japan is now exhibiting increasing labor participation rates.
The same can happen in the United States if wages rise and if Social Security and VA disability outlays are reduced.
There are still 1.4 people looking for a job for every job opening in the United States. In Japan the ratio is reversed. There is no inflation in Japan.
“Tight” labor markets should be considered a feature, not a bug, of proper macroeconomic management.
Tyler Cowen posts that young men in America make 31% less in real terms in wages then in 1969. Oh, that?
I suggest “tight” labor markets for as far as the eye can see….
2. June 2017 at 17:10
dtoh, You are right, the LFPR today is much higher than in the 1960s—making my argument even stronger.
https://fred.stlouisfed.org/series/CIVPART
2. There are no studies that suggest a 8.8% increase in the tax on capital would have a big impact on US trend GDP growth. None. We’ve seen far higher taxes on capital, with little impact on growth.
3. I do believe in the EMH, which is why I don’t think the election had much effect.
Justin, recall that I was predicting 1.2% trend growth back when the profession was still predicting 2% or more.
2. June 2017 at 17:59
Scott
1. Not when you normalize for gender. Quit obfuscating. You know the discussion is not about women’s participation in the work force
2. If you need a study to figure out the impact of higher taxes, your understanding of economics must be utterly devoid of any real world experience to say nothing of elementary logic.
3. June 2017 at 04:25
Yes, the unemployment rate is low and, yes, U-6 is now back at levels last seen in 2006. And new job numbers are relatively low compared to earlier in this cycle. And growth was low and falling during Obama’s second term and was unimpressive during the first quarter of 2017. Let’s stipulate that the Phillips curve is wrong and that demand side reforms would be beneficial.
If our problem with growth is that business can’t find workers, shouldn’t the lack of workers cause an increase in wage inflation (even if, Phillips being wrong, it doesn’t cause a general increase in inflation)? Shouldn’t the lack of workers also cause an increase in productivity as high productivity employers out bid others for workers? But wage inflation has hardly moved and productivity growth has been terrible.
Does Yellen get credit for “stable” NGDP growth when it finally falls to zero? (Reminds me of the old joke about the patient being “stable” after death.) But the problem is the “regime”? Trump did all this economic damage, some of which occurred prior to his taking office, in just six month?
Aren’t all of the things you described more easily explained as a long term effect of the Fed’s suppression of interest rates?
3. June 2017 at 05:41
The OECD forecasts 5.48%(2018) growth
https://data.oecd.org/gdp/nominal-gdp-forecast.htm
(My selling @43 about 5300 shares still on order @Hypermind )
3. June 2017 at 06:28
May 29, 2017 How Debt-Asset Bubbles Implode: The Supernova Model of Financial Collapse
Gravity eventually overpowers financial fakery. As I noted yesterday in Will the Crazy Global Debt Bubble Ever End?, I’ve used the Supernova analogy for years, but didn’t properly explain why it illuminates the dynamics of financial bubbles imploding.
http://wallstreetexaminer.com/2017/05/debt-asset-bubbles-implode-supernova-model-financial-collapse/
3. June 2017 at 06:35
Mar 20, 2017 US Debt of $20 Trillion Visualized in Stacks of Physical Cash
Showing stacks of physical cash in following sequence: $100, $10,000, $1 Million, $2 Billion, $1 Trillion, $20 Trillion. The faith and value of the US Dollar rests on the Government’s ability to repay its debt. “The money in the video has already been spent”
https://youtu.be/XqUwr-Nkq9g
3. June 2017 at 07:00
A few items:
1) Global economy, we have access to the world’s labor supply, and we may import things produced overseas, add value here and export those things back out. There may be several ways to look at this, and I have to wonder how it distorts things in the labor market.
2) Stocks are doing well because of global sales. I believe GNI has diverged higher than GDP since 2008 https://fred.stlouisfed.org/graph/fredgraph.png?g=dXM6
3) The world is flooded with bank reserves, and that will continue to put downward pressure on rates
3. June 2017 at 08:02
dtoh, Then why didn’t you say “male labor participation?” And why don’t women matter?
In any case, what does the LFPR of the 1960s have to do with today? Surely you aren’t suggesting we could return to that ratio? Women aren’t going to go back to being housewives, and men aren’t going back to being off disability.
Monetary policy needs to deal with the reality of today.
As far as “logic”, I wasn’t aware that you could prove causation in economics with “logic”. What is the “logical” explanation for big increases in taxes on capital not signficantly impacting trend growth in earlier decades?
bmcburney, You said:
“Let’s stipulate that the Phillips curve is wrong and that demand side reforms would be beneficial.”
Actually, it’s supply side reforms that would be helpful.
You asked:
“If our problem with growth is that business can’t find workers, shouldn’t the lack of workers cause an increase in wage inflation”
No, that’s not an implication of shortages. It depends on what causes the shortage. If it is sticky wages then you are correct, if it is monopsony power in the labor market then this is not likely to occur.
You said:
“Does Yellen get credit for “stable” NGDP growth when it finally falls to zero? (Reminds me of the old joke about the patient being “stable” after death.) But the problem is the “regime”? Trump did all this economic damage, some of which occurred prior to his taking office, in just six month?”
These are stupid questions.
And the Fed doesn’t “suppress” interest rates.
Wasshoi, What has the OECD been smoking?
Matt,
1. Not sure how this relates to my post.
2. That GNI data seems wrong:
https://fred.stlouisfed.org/series/MKTGNIUSA646NWDB
3. You are confusing cause and effect. The low rates explain the high demand for ERs.
3. June 2017 at 08:20
How does this shrinking workforce growth rate intersect with the AI/automation narrative that will supposedly make many jobs irrelevant? Would they balance each other out? Do we have any idea?
3. June 2017 at 11:02
Yes, I thought “supply side” but wrote “demand side”. Oh well. It happens.
Is there really a person or entity with monopsony power in the US labor market? If so, our problems with slow growth and poor labor market participation seem easy to fix. If not, I don’t understand why you found it necessary to raise this possibility.
If your point is that the Fed does not have as much control over long term rates as compared to short term rates, I understand and agree. However, the Fed does and has suppressed interest rates. It is silly to claim otherwise. The Fed is now in the process of increasing short term rates by fiat. Previously, the Fed suppressed those rates by the same mechanism.
At the end of the day, you cannot blame Trump for recent disappointing growth. He has not been President for six months yet.
3. June 2017 at 11:28
If increasing the capital gains tax by 9% won’t increase aggregate investment (and hence long run growth via solow model), then what does that say about the state of our economy? No one wants to invest even after the government gives them a massive subsidy to do so? That suggests we are really in a world of secular stagnation.
3. June 2017 at 12:25
Scott,
Unless I’m mistaken you’re arguing that growth is now constrained by the availability of labor as evidenced by the low unemployment number. I think you’re wrong. Growth is systemically constrained by higher tax rates and the better measure of labor availability is the LFPR. With lower tax rates, employment and the LFPR would increase. Your counter-argument that the LRPR was lower in the 60’s is flawed because the lower LFPR at that time reflected a different composition of the workforce whereas now the low LFPR is result from 12 million (?) people dropping out of the workforce due to post 2007 economic conditions.
As to logic, give me specific examples and I’ll give you specific logic, but in general investment is directly related to expected after tax returns and this is impacted not just by nominal tax rates, but also by expected future tax rate changes, deductions and credits, effectiveness of enforcement of tax collection, the timing of investment decisions and results, as well as the degree of symmetry of pre-tax returns.
I mean come one. Do you seriously believe tax rates don’t have a major impact on investment. Next thing I know you’ll be arguing minimum wage laws don’t impact employment and that supply curves are downward sloping. If your arguments become sufficiently absurd, you might even get hired as an editorial writer for the NYT. -:)
3. June 2017 at 12:58
Scott not sure how I am confusing cause and effect. Central banks can control the amount of reserves in the banking system. Since 2008 (though it is now coming down) central banks added the excess reserves via things like QE – that pushes short rates down does it not? The whole world has been flooded with liquidity and that is pushing rates down. I don’t think banks are demanding ERs right now, and the banking system cannot get rid of reserves only the Fed can drain reserves (or the Federal gov can run a surplus, which can also drains reserves, but that could be offset by the fed if they sell bonds on their balance sheet back in).
3. June 2017 at 13:20
“And the Fed doesn’t “suppress” interest rates.”
Yes they do
3. June 2017 at 15:16
Immigration is only a short term fix to this issue. It softens the negatives of our supply-restrictive education and welfare policies, but those two core problems remain the real issue regardless of immigration.
3. June 2017 at 21:00
Sometimes this comment section reads as if half the posts were from machine learning algorithm trained by reading nothing but Mises.org and Ron Paul’s newsletters.
That may sound harsh, but how could one possibly read this blog for any stretch of time and mistake Scott as being anti-EMH?
4. June 2017 at 02:37
I bet that if AHCA passes, the LFPR will go up.
4. June 2017 at 04:18
This was written in June 2011.
“The reason we’re not going to get a double dip is that there’s no more risk to be shed. There are no more workers to be fired. There are homes to be liquidated, but the banks have enough capital to absorb it, and they’re not making loans anyway. Mortgage lending has collapsed, the housing sector is flattened, entrepreneurship is despondent–but big corporations can still take advantage of global economic growth. They will churn out profits but they won’t hire.
This is NOT, NOT, NOT a business cycle. Throw out your macroeconomics textbook. It was lousy in the past when we had business cycles. Now we have a different sort of economy.”
http://www.algora.com/235/news/details.html
4. June 2017 at 08:59
‘ Central banks can control the amount of reserves in the banking system. Since 2008 (though it is now coming down) central banks added the excess reserves via things like QE – that pushes short rates down does it not?’
Not necessarily. Which is why Scott (and Milton Friedman, and the old, scholarly, Ben Bernanke) say interest rates are an unreliable indicator of the stance of monetary policy.
‘The whole world has been flooded with liquidity and that is pushing rates down.’
I thought you were talking about ‘excess reserves’. They merely sit in accounts at the Fed and have no effect on liquidity in the actual economy.
‘I don’t think banks are demanding ERs right now…’
It’s the Fed that ‘demands’ ERs, by paying interest on them, thus discouraging banks from lending them to borrowers/investors.
‘…and the banking system cannot get rid of reserves…’
No, but it can transform them into non-reserves by lending them out for productive purposes. Or even non-productive, inflationary purposes.
Say, you’re not one of those guys who thinks interest rates are the price(s) of money, are you?
4. June 2017 at 09:11
‘Is there really a person or entity with monopsony power in the US labor market?’
It’s pretty rare, but there are some local near-monopsonists. Hawaii’s single public school district comes to mind. But, it’s amazing how many people who should know better–like my old pal Menzie Chinn http://www.ssc.wisc.edu/~mchinn/ ) take the idea of monopsony in labor markets seriously.
4. June 2017 at 09:21
June 3, 2017 BLS B.S.: 93% Of New Jobs Since 2008 Were Birth/Death Model Estimates
A research report from Morningside Hill Capital sourced from Zerohedge shows that 93% of the jobs “created” since 2008 were Birth/Death model estimates.
http://investmentresearchdynamics.com/bls-b-s-93-of-new-jobs-since-2008-were-birthdeath-model-estimates/
4. June 2017 at 09:30
Jun 2, 2017 Weak Data Further Undermines Fed’s Credibility
The Peter Schiff Show Podcast – Episode 253
https://youtu.be/AF2DDrEaSOg
4. June 2017 at 09:57
Jordan,
I’m not sure because I’m only here sporadically (I can only take so much Trump bashing), but the anti-EMH comment could be due to some here thinking that Scott’s views on Trump and markets reflect more a rationalization than consistency regarding his views on the EMH.
4. June 2017 at 19:12
bmcburney,
1. Most firms have monopsony power in the labor market.
2. The Fed does not suppress interest rates.
3. I never suggested that Trump was slowing growth.
Please stop with the fake news.
John, You said:
“If increasing the capital gains tax by 9% won’t increase aggregate investment (and hence long run growth via solow model), then what does that say about the state of our economy?”
Of course it will increase long run growth, I never suggested otherwise.
dtoh, I’ve spent a lot of time looking at the trend RGDP growth rate in the US, and the tax rates on capital. If the effect was what you suggest it would be obvious in the data. It’s not. There is an effect, but it’s an order of magnitude less than you claim. I am confident that if you’d study the data as closely as I have you’d reach the same conclusion.
Matthew, Short rates fell to zero because of slow NGDP growth, not easy money. The Fed added reserves because rates were zero, not the other way around.
4. June 2017 at 19:24
Scott can you clarify? Are you saying that short term effect is very small/zero if I cut capital gains tax? Is that what you mean by “trend effect” on RGDP? That seems consistent with evidence.
4. June 2017 at 21:22
Scott,
Have you looked at…
The totality of capital taxes (corporate rates, dividend income, income on pass throughs, cap gains rates)
The actual legislative narrative (i.e. when the market expected rate changes as opposed to when the rate changes became effective)
Reverse causality (tax changes in response to economic conditions)
Growth normalized for increased labor input
I doubt it and I doubt you can find any serious study that has carefully considered these factors which will support your suppositions.
For successful businesses (i.e. the ones who pay taxes and make investments), a $1 tax increase equates to something like a $3 reduction in capital spending. Unless you’re concocting some kind of argument that the U.S. has entered an era of low marginal productivity of capital, there is no logical or factual basis for the argument that taxes don’t have a very significant impact on growth. This is just so manifestly self-evident, it’s hard to believe that I’m even having this discussion.
5. June 2017 at 04:52
1. About 30 million employers in the US and “most” of them have monopsony power in the labor market? Maybe we have different ideas of what the word “monopsony” means. I was using the word in its conventional sense of “a market situation in which there is only one buyer.”
Assuming this is true, however, I don’t understand why additional immigration would address the problem. Won’t the monopsonists just push wages down until equilibrium is re-established at lower wage levels (and higher profit levels) but the same levels of growth and employment which they currently find copacetic?
2. Okay, I guess I could join you and Major Freedom in your “debate” and just assert that they do but I didn’t come here to end up in a Monty Python sketch. Do you really believe that all US interest rates would be at exactly the same levels today if the Fed did not exist at all? That’s not what Janet thinks.
3. I must have misunderstood the “regime” comment. I thought you were saying that since 2014 monetary policy has been good so the slow down in growth is caused by a problem with “the regime.” Technically, of course, the “regime” means, roughly, the system of governance so I suppose you meant the Constitution, the Rule of Law, representative democracy, etc. Have you now gone full Commie? Man, never go full Commie.
Seriously, is this all you have to offer? Unexplained assertions (which you yourself don’t really believe) and insults? Most employers have a monopsony position in the labor market and the Fed does not suppress interest rates and I am spreading “fake news”?
5. June 2017 at 05:04
The Fed certainly can suppress rates. By executing QE, they flood the system with excess reserves, and that drives the Fed Funds rate to ZERO. In order to reach their target they pay IOER, pushing the rate up to offset their own QE operation. Are negative rates not short rate “suppression”?
I do not see interest rates as the “price” of money. I do see it as the price for credit, or the opportunity cost of money that people plug into various formulas.
Excess reserves are not needed for banks to make loans.
5. June 2017 at 06:23
DFI lending/investing expands both the volume and velocity of *new* money. Lending/investing by the NBFIs activates *existing* money (strictly a velocity relationship). So both DFI credit creation and NBFI credit transmission expand credit velocity, Vt.
An important point to understand is that all money turnover, for both commercial banks and financial intermediaries (non-banks), clear thru the payment’s system. Thus, bank debits broadly reflect all economic activity or aggregate monetary purchasing power, AD.
The protracted deceleration in money velocity is due to two principal factors. The first is the saturation in financial innovation within the commercial bank’s deposit classifications. This apex occurred with the widespread introduction of ATS, NOW, and MMDA accounts in the 1st qtr. of 1981. It is thus no happenstance that the bull market in bonds started in 1981.
The second factor is more obtuse. It has to do with the demise of Reg. Q ceilings (the complete deregulation of interest rates). In fact, it is completely mis-understood by every single professional economist, including the 300 Ph.Ds. on the Fed’s technical staff. Thus the enactment of the DIDMCA of March 31st 1980 was the direct cause (as predicted in May 1980), of the S&L crisis.
I.e., the payment’s velocity of bank-held savings deposits is zero. The payment’s velocity is zero because from the standpoint of the entire system and the economy, commercial banks do not loan out existing deposits, saved or otherwise (which paradoxically is at odds with an individual commercial bank’s operations/perspective). The DFIs always create new money somewhere within the banking system whenever they lend/invest. I.e., the DFIs pay for their new earning assets with newly created money.
Thus, as the proportion of bank-held savings accounts increases, money velocity is destroyed. There is now no “monetary offset” as occurred between 1965 and 1981. And the remuneration of IBDDs, which induces non-bank dis-intermediation (where the size of the non-banks shrink, but the size of the DFI system remains unaffected), exacerbates this decline in saving’s velocity (and is responsible for the subpar economic growth since Bankrupt u Bernanke destroyed the non-banks).
As I said: “Raise the remuneration rate and in a twinkling, the economy subsequently suffers. – Apr 28, 2016. Or conversely (with the expiration of unlimited transaction deposit insurance), as I said on 12-16-12, 01:50 PM “Jan-Apr could be a zinger”, or “predictive success”.
In other words, the growth of commercial bank-held time deposits shrinks aggregate demand, and vice versa (something you won’t find in any economic text book).
5. June 2017 at 06:37
Any country that remunerates IBDDs (that includes required reserves), other things equal, has lower growth rates, a higher output gap, and higher trade deficits.
All savings originate within the payment’s system. And saver-holders never transfer their savings outside of the payment’s system (unless they hoard currency or convert to other national currencies). However, savings are never activated (put back to work), unless their owners spend or invest, directly or indirectly, via non-bank conduits. It’s simple accounting.
You get higher and firmer *real* rates of interest by forcing the commercial banks out of the savings business (the opposite of the political/economic instruction since the late 50s, hiking then eliminating caps on commercial bank deposit classifications). You also get lower loss from bad debt. This increases the ROA and ROE for the commercial banks. It also increases NIMs for the non-banks. I.e., the profitability of the DFIs is dependent upon the profitability of the NBFIs (where the size of the DFI system is not synonymous with the system’s and individual bank’s overall profitability)
Commercial banks pay for their new earning assets (from a system’s standpoint), with new money (not existing deposits). And since time deposits originate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot per se increase the size of the banking system.
If you tally the principle “outside” factors that affect the money stock, e.g., reserve bank credit, expansion in bank capital accounts, etc., you will find that collectively, these factors are peripheral to any alteration in bank deposit growth (the money stock). It is a fact that the capacity of the commercial banking system to lend, and its aggregate size, is determined by monetary policy.
From the standpoint of the system, the monetary savings practices of the public are reflected in the velocity of their deposits and not in their volume. Whether the public saves, dis-saves, chooses to hold their savings in the commercial banks or to transfer them to a non-bank will not, per se, alter the total assets or liabilities of the commercial banks, nor alter the forms of these assets and liabilities.
The commercial banks could continue to lend even if the non-bank public ceased to save altogether.
I.e., Keynes’ “optical illusion” is universally mis-understood:
See e-mail response from senior economist and V.P. FRB-STL:
———–
Re: Savings are not a source of “financing” for the commercial bankers
Dan Thornton
Thu 3/9, 2:47 PMYou
See the graph below.
http://bit.ly/2n03HJ8
Daniel L. Thornton
D.L. Thornton Economics LLC
xxxxx
Never are the commercial banks intermediaries (conduits between savers and borrowers), in the savings-investment process.
5. June 2017 at 06:43
John, No, I am saying that cutting the cap gains rate by 8.8% has a small impact on the long term trend rate of RGDP growth.
dtoh, That’s a very different claim from your earlier claim that an 8.8% cut in cap gains taxes would have a big impact on growth. For instance, any Trump tax cut is likely to be temporary, offset in 4 years by the next president. So why do you think an 8.8% cut in cap gains taxes would have a big impact on trend RGDP growth?
You haven’t presented any studies showing that a $1 cut in capital taxes leads to an extra $3 in investment.
Yes, I think the marginal return on capital is quite low today, that’s one reason why real interest rates are so low.
bmcburney, You said:
“Maybe we have different ideas of what the word “monopsony” means.”
Yes, maybe I know what the term “monopsony power” means and you do not. It refers to firms that face an upward sloping supply of labor.
I never said the Fed had no impact on interest rates.
You also don’t seem to know what a monetary regime refers to. That’s fine, but don’t pretend that I’m the ignorant one here.
Matthew, When rates are not zero then printing lots of money creates hyperinflation and high interest rates. Again, you are reversing causation.
5. June 2017 at 09:58
A quick thought about workers: the prime-age (25-64) employment ratio in the US is 78.5% today vs a historical peak of nearly 82%. It’s been growing by 0.6 percentage points per year since 2011, adding nearly a full percentage point to GDP growth.
Other countries: Iceland 90.9%, Switzerland 87.7%, Sweden 86.0%, Germany 84.2%, Japan 83.7%, United Kingdom 83.1%, Canada 81.5%.
The US could possibly reach 82% or even 85% in the future. At a 0.6 percentage point annual pace, that could take 5 to 10 years.
In other words, increasing the employment ratio of prime-age workers could add nearly a percentage point to GDP growth for the next decade and help keep growth closer to 2%/year than to 1%/year.
5. June 2017 at 10:07
Scott, two main questions:
(1) Could you clarify why you think reducing capital gains tax would increase growth in the long run? I tend to agree with that, but I recall being taught in intermediate macro and the Blanchard book that no change in IS can impact long run growth, only change in technology can.
(2) Can you clarify this statement: “Matthew, When rates are not zero then printing lots of money creates hyperinflation and high interest rates. Again, you are reversing causation.”
Are you saying that when at significantly >0 nominal rate, aggressive monetary stimulus such that the rate drops to zero would be enough to spur large inflation and thus push the nominal rate up higher than it was before (even though it pushes the real rate negative per the Fischer equation)?
If I’m reading this correctly, why doesn’t that work at a zero nominal rate? Why can’t central banks just do a negative nominal rate with the same impact as declining positive rate? Also, if at zero nominal rate, isn’t it that large printing of money not resulting in inflation is a problem of credibility and markets not viewing the injections as permanent?
5. June 2017 at 10:17
You are making yourself look ridiculous chasing a debating point. How does the fact that most firms face an upward sloping supply of labor prevent wage inflation under conditions of labor scarcity? How does the fact that most firms face an upward sloping supply of labor inhibit productivity growth under conditions of labor scarcity?
So the Fed has an “impact” on interest rates but never suppresses them? Are you using some special meaning of the words “suppress” or “impact”?
Was your reference to a “regime” intended to mean a “monetary regime”? You are correct that I was ignorant of your intended meaning; I was only reading your words.
5. June 2017 at 10:28
Trump advocated a merit based immigration system, specifically like the Canada model. And of course a temporary travel ban on six specific countries.
Sumner completely agrees with Trump’s immigration proposal and the Canadian immigration model, but refuses to cede the point to the Trumpistas.
5. June 2017 at 17:20
bmcburney, I tried to make a point earlier, and maybe not well. If labor is scarce, then import what you need from abroad. There is plenty of global labor to produce things.
5. June 2017 at 19:04
Monopsony means ‘one buyer.’ There are almost none in labor markets.
7. June 2017 at 05:35
Steve, Yes, the key distinction is temporary vs permanent. But as a practical matter, large injections at positive interest rates tend to be permanent.
bmcburney: You said:
“You are making yourself look ridiculous chasing a debating point. How does the fact that most firms face an upward sloping supply of labor prevent wage inflation under conditions of labor scarcity?”
I never said it did. Read what I wrote again.
Massimo, Still with Trump? After all this nonsense? Sad!
Patrick, Monopsony means one buyer, but monopsony power does not mean one buyer. Just as monopoly means one seller, but monopoly power refers to any firm with pricing power, which is the vast majority of firms in America. This is EC101.
9. June 2017 at 13:09
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