Danger: Snowflakes falling on stairs

The New York Times has a piece on Long Island City’s acclaimed new library:

In his 2010 renderings for the children’s wing, Steven Holl, the project’s lead architect, had sketched images of children reading on bleacher-like seats that spanned from the lower level of the wing to the upper one, adjoined by an interior staircase.

But library officials, in a walk-through before the building opened, instead saw a potential liability for small children who could jump and fall on them. They have closed off the stairs and the top five bleachers until fixes can be made, said Elisabeth de Bourbon, a spokeswoman for the Queens Library.

Wood panels now block the staircase entrances and protective glass barriers have been added to the tallest bleachers. The bottom three bleachers remain open, however, and a security guard who usually stands there keeps an eye on them.

. . .

“What the lawyers believe is safe or not is a constantly evolving thing in this society,” he said. “Five years ago, they wouldn’t have even thought to block off that area, or even two years ago.”

When you get to be my age the world will seem increasingly crazy.

Sahm’s Rule and mini-recessions

A business cycle forecasting tool developed by Claudia Sahm has recently attracted some media attention.  This is from a WSJ article:

Sahm suggested that she got the idea from Jason Furman, who heard about the idea from Doug Elmendorf

Back in 2011, I had a similar insight in a blog post on mini-recessions (or more specifically the lack of mini-recessions):

I searched the postwar data, which starts at 1948 and covers 11 recessions.  During expansions I found only 12 occasions where the unemployment rate rose by more than 0.6%.  In 11 cases the terminal date was during a recession.  In other words, if you see the unemployment rate rise by more than 0.6%, you can be pretty sure we are entering an recession.  The exception was during 1959, when unemployment rose by 0.8% during the nationwide steel strike, and then fell right back down a few months later.  That’s not called a recession (and shouldn’t be in my view.)  Oddly, unemployment had risen by exactly 0.6% above the Bush expansion low point by December 2007 (when the current recession began) and by 0.7% by March 2008, and yet many economists didn’t predict a recession until mid-2008, or even later.

What’s my point?  That fluctuations in U of up to 0.6% are generally noise, and don’t necessarily indicate any significant movement in the business cycle.  But anything more almost certainly represents a recession.

Now here’s one of the most striking facts about US business cycles.  When the unemployment rate does rise by more than 0.6%, it keeps going up and up and up.  With the exception of the 1959 steel strike, there are no mini-recessions in the US.  The smallest recession occurred in 1980, when the unemployment rate rose 2.2% above the Carter expansion lows.  That’s a huge gap, almost nothing between 0.6% and 2.2%.

Sahm’s formulation is superior to mine because the month-to-month unemployment rate is noisy. By taking a three-month average in measured unemployment she gets a better view of the underlying trend in actual unemployment. In my 2011 post, I hypothesized that any rise in the actual unemployment rate, no matter how small, was an indicator of recession. Because the data is noisy, I suggested that you’d need more than a 0.6% rise in the measured unemployment rate to be certain that the actual unemployment rate had risen at all:

To understand mini-recessions we first need to understand the monthly unemployment data collected by the Bureau of Labor Statistics.  This data is based on large surveys of households.  It seems relatively “smooth,” rising and falling with the business cycle.  Month to month changes, however, often show movements that seem “too large” by 0.1% to 0.3%, relative to the other underlying macro data available (including the more accurate payroll survey.)  So let’s assume that once and a while the reported unemployment rate is about 0.3% below the actual rate.  And once in a great while this is followed soon after by an unemployment rate that is about 0.3% above the actual rate.  Then if the actual rate didn’t change during that period, the reported rate would rise by about 0.6%.

Sahm says that you need more than a 0.4% rise in the 3-month moving average of measured unemployment.

The FT argued that the Sahm indicator doesn’t really “predict” recessions, as it’s a coincident indicator. But even that is highly useful, as we often don’t know that we are in a recession until 6 to 9 months after it began. The most recent recession began in December 2007, but as late as August 2008 the Fed didn’t even know we were in a recession. By that time, the Sahm rule had been indicating a recession for months.

The Sahm Rule has a deep connection to the mini-recession mystery. The rule works in the US precisely because we never have any mini-recessions (for some unknown and deeply mysterious reason.) It doesn’t always work in foreign countries because they do have mini-recessions.

Two plus two is four (connect the dots)

Jay Powell has a bland speaking style, but if you listen carefully to the content then his press conferences can be quite interesting. I don’t have a written transcript, so the following is not precisely word for word, but pretty close:

Inflation expectations are quite central in how we think about inflation.
We need them to be anchored at a level consistent with our 2% inflation goal. . . . We need to conduct policy in a way that supports that outcome.

So he wants to set policy at a position where the public expects 2% inflation.  What about level targeting?

We are also as a part of our review  . . . looking at potential innovations, changes to the framework that would be more supportive of achieving inflation on a symmetric 2% basis over time. . . . That’s at the very heart of what we are doing in the review.

Translation:  The Fed is edging closer to level targeting, or average inflation targeting.  Later, he indicated that the policy review would last until the middle of next year.  I doubt they’d change policy right before the election, so look for a late 2020 announcement.

What about real growth?

Our outlook overall is for moderate growth of around 2%, which is pretty close to trend . . . and we feel like our current stance of policy is appropriate as long as that remains the outlook.

Translation:  Policy is currently set at a level expected to produce roughly 2% RGDP growth.  If expected RGDP growth changed then policy would need to be adjusted.

Let’s summarize these “dots”.  Policy is set at a level where the Fed expects 2% RGDP growth.  Policy is set at a level where the public expects 2% inflation.  Hmmm, what sort of expected NGDP growth does that imply?

Powell also indicates that the policy framework needs to change in a direction where the misses are “symmetric”, which is what happens with level targeting.  That change will likely be announced later next year.

More than 10 years ago, I began blogging on the need for stable growth in NGDP, with level targeting.  I argued that policy should be set at a position where the markets expected 5% NGDP growth, later changed to 4% when the Great Stagnation kicked in and the Fed said it wanted to stick with a 2% inflation target.

We do not yet have a policy regime where the Fed sets policy at a position that the market expects will result in 4% NGDP growth, with level targeting.  But we are a heck of a lot closer to that regime than we were in February 2009.

Can I say we are 50% of the way there?  And what about the other 50%?  We need to shift from a focus on the public’s inflation expectations to a focus on the financial market’s inflation expectations.  And we need to shift from a focus on the Fed’s RGDP growth outlook to the market’s RGDP outlook.  And we need to add the two.

Two plus two is four.  That’s not so complicated, is it?

Three more years of steady NGDP growth and America will have its first ever soft landing.  In that case, I’ll declare victory and go home.

The economy is racing ahead at 2%

(I’m not being sarcastic.)

Many people (actually almost everyone) have trouble interpreting growth data. There’s a tendency to conflate the normal rate of growth in an expansion with the long run trend rate of growth in RGDP. Actually, the trend rate of growth in RGDP is measured over the entire cycle, including both expansions and recessions.

The real growth rate in the US over the past 10 years has averaged slightly above 2%. A few years ago I predicted that it would have slowed to less than 2% by now. I was wrong. Today’s data shows that growth continues right at 2% over the past 12 months.

But I was not wrong because productivity has grown faster than I expected; I was wrong because the economy continues to expand at a rate well above its underlying trend rate of growth. (Here we should cut the Fed a bit of slack, as they made the same sort of error that I made.)

In an accounting sense, the strong 2% growth rate has been produced by slow productivity growth combined with a rising employment-population ratio:

You might think that this graph shows that the employment population ratio remains sharply depressed. Not so, adjusting for demographic changes it is near the 2000 peak. As baby boomers retire, you’d expect to see a decline in the ratio, as only about 24% of healthy people over 65 are still working (and even fewer disabled people). The ratio is modestly below peak for ages 25-54, and well above peak for 55-64 and over 65.

Take a look at the employment ratio for the 55-64 age group:

Notice that this ratio is now 64.2%, far above the 58% ratio at the peak of the 2000 tech boom. The over 65 ratio is also rising briskly. (Think about all those old codgers working for Uber.)

This is what I got wrong. I thought that growth would slow to 1.5% by now, because I didn’t expect so many old people like me to be working. Indeed, 5 years ago I fully expected to be retired by now—-so I didn’t even correctly forecast my own labor force participation rate at age 64! (Actually, I would be retired if my Mercatus opportunity had not come along.) Old boomers are harder working than previous generations (albeit in much softer jobs.)

Can this surge in labor force participation continue for some time? Yes, I’m duly chastened by my inaccurate forecasts of 5 years ago. But here’s what I do know, the labor force participation rate cannot go above 100%. We’ll need more immigration at some point if we want to maintain 2% RGDP growth—a lot more.

Here’s the most important point I’d like to make. The trend rate of growth is the growth rate that occurs when the age-adjusted employment-population ratio is stable. Because this ratio has recently been rising briskly, even faster than the aggregate data show due to composition effects, we are now growing at well above the economy’s long run trend rate of growth.

That’s right, the recent 2% RGDP growth derided in the media as “weak” is actually very strong, reflective of an unsustainable boom. It might last for several more years, but it’s ultimately unsustainable. The Great Stagnation continues.

PS. I rarely agree with the Germans on monetary policy, but this is an exception:

The head of Germany’s central bank has said he opposes using monetary policy to tackle climate change, setting up a potential clash with Christine Lagarde, who plans to explore the idea after she becomes European Central Bank president on Friday.

Not from the Onion

In the 1990s, this sort of Bloomberg headline would be assumed to be a spoof from The Onion:

Taxing the Rich to Fund Welfare Is the Nobel Winner’s Growth Mantra

Just because it seems whacky doesn’t mean it’s wrong. My views on the Great Recession (tight money caused it) are also widely viewed as being whacky. But in this case, the Nobel Prize winner’s views are wrong for two reasons.

Abhijit Banerjee recommends higher taxes on investment, with the money redistributed to lower income people. The argument is that the rich have a lower propensity to spend and hence redistribution to the poor will boost aggregate demand.

One obvious problem is that the Fed will engage in monetary offset, either raising interest rates or cutting them less rapidly, and hence there will be no impact on aggregate demand. This is true even if the Fed is consistently undershooting its 2% inflation target by a few tenths of a percent, due to over-reliance on Phillips curve models.

But even if the Fed does not adjust interest rates in response, the policy is likely to fail. It’s a mistake to focus only on the different marginal propensities to spend. A tax on investment will depress the propensity to investment, and this will reduce the equilibrium interest rate. So even if the Fed keeps interest rates constant, money will become effectively tighter. Indeed we’ve seen something like this over the past 12 months, albeit due to the trade war, not higher taxes on investment. And the opposite occurred during 2017-18, when lower corporate taxes boosted business investment demand and raised the equilibrium interest rate.

Banerjee is relying on a model that Paul Krugman used to call “vulgar Keynesianism”. It’s just as wrong today as it was in the late 1990s.

PS. I’m not suggesting that redistribution is a bad idea; progressive consumption taxes and low wage subsidies have a lot of merit.

HT: Michael Darda