The WSJ discovers long and variable leads

Jared Pincin directed me to a new example of long and variable leads, from the Wall Street Journal:

The European Central Bank begins its much-anticipated purchases of sovereign bonds on Monday, and ECB President Mario Draghi says the program known as quantitative easing is working before it has even begun. He’s right about that, as strange as it sounds, and therein lies the paradox of Europe’s dive into QE: It may already have had the most effect it is going to have through Mr. Draghi’s salesmanship and Europe’s will to believe.

Recall how the ECB got here. Demands have grown for years for an ECB program to match the bond purchases by central banks in the U.S., U.K. and Japan. Mr. Draghi started hinting at a willingness to play along in his August speech at the global central banking conference at Jackson Hole, Wyo. By the time Mr. Draghi in September announced a plan to buy private securities, investors viewed it as a stepping-stone to buying sovereign debt too.

As investors came to view QE as inevitable, prices responded, especially the price of the euro. As a result of Mr. Draghi’s open-mouth operations to talk down the euro””coupled with an expectation that interest rates might rise soon in the U.S.””the euro has declined steadily against the dollar and other currencies. On Thursday it hit an 11-year low of $1.10, compared to about $1.40 last summer.

In other news, the rapid improvement in the labor market, which began in early 2013 with fiscal austerity and accelerated in 2014 with the end of extended unemployment insurance benefits, continues into 2015.  Unemployment is now down to 5.5%, from 10% in October 2009 and 8% in early 2013.  Job growth continues at a rate far faster that the growth of the working age population.  Conservative structuralists and inflation fearmongers were wrong, as were liberal austerity fearmongers and those who denied extended UI insurance affected unemployment.  Who was right?  The same group that’s been right about almost everything else since 2008.

Monetary policy drives NGDP, which drives the business cycle.  When you pay people not to work, you get less work.  What a pity that Keynesian economics emerged from the 1930s, instead of Hawtreynomics.


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22 Responses to “The WSJ discovers long and variable leads”

  1. Gravatar of foosion foosion
    6. March 2015 at 13:37

    Let’s try reasoning to a price (and yield) change, as today US equity markets were down about 1.5%, real and nominal yields rose significantly across the board and the dollar strengthened.

    What set of beliefs would most likely lead to these outcomes? Would the obvious answer – increased likelihood of Fed tightening leading to lower NGDP growth – explain the increase in long rates?

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. March 2015 at 15:10

    And Bob Murphy finds yet more evidence of what good economist Paul Krugman used to be;

    http://www.pkarchive.org/cranks/LivingWage.html

    ———quote——-
    So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. This theoretical prediction has, however, been hard to confirm with actual data. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages “do,” in fact, reduce employment, but that the effects are small and swamped by other forces.

    What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda–for arguing that living wages “can play an important role in reversing the 25-year decline in wages experienced by most working people in America” (as this book’s back cover has it). Clearly these advocates very much want to believe that the price of labor–unlike that of gasoline, or Manhattan apartments–can be set based on considerations of justice, not supply and demand, without unpleasant side effects. This will to believe is obvious in this book: The authors not only take the Card-Krueger results as gospel, but advance a number of other arguments that just do not hold up under examination.

    For example, the authors argue at length that because only a fraction of the work force in the firms affected by living wage proposals will be affected, total costs will be increased by only 1 or 2 percent–and that as a result, not only will there be no significant reduction in employment, but the extra cost will be absorbed out of profits rather than passed on in higher prices. This latter claim is wishful thinking of the first order: Since when do we think that cost increases are not passed on to customers if they are small enough? And the idea that employment “of the affected workers” will not suffer because the affected wages are only a small part of costs is a non sequitur at best. Imagine that a new local law required supermarkets to sell milk at, say, 25 cents a gallon. The loss in revenue would be only a small fraction of each supermarket’s total sales–but do you really think that milk would be just as available as before?
    ———-endquote———–

    Book Review Paul (1998) v. Op-ed Paul (2015)

  3. Gravatar of Josh Josh
    6. March 2015 at 16:33

    Could something like this explain a divergence between stocks and interest rates?
    1) NGDP growth rate recovers and stabilizes, after a deep recession (including ZLB).
    2) recovery leads to an increase in the natural rate, which lags the increase in NGDP growth rate (and also lags recovery in stock market)
    3) that leads to an increase in the ratio of nominal rates / NGDP growth
    4) Equities adjust slightly downward, discounting their present value by the higher rate

  4. Gravatar of Major.Freedom Major.Freedom
    6. March 2015 at 17:33

    As investors came to view QE as inevitable, prices responded, especially the price of the euro. As a result of Mr. Draghi’s open-mouth operations to talk down the euro””coupled with an expectation that interest rates might rise soon in the U.S.””the euro has declined steadily against the dollar and other currencies. On Thursday it hit an 11-year low of $1.10, compared to about $1.40 last summer.

    Yes, these are ONE type of effect of monetary changes. Expected future changes.

    But this does not refute long and variable lags having an effect on the same present day data. Present day data is the effect of both past events and expected future events. Aggregate spending is what it is because of all past inflation of the money supply, and, to a delimited extent, expected future inflation. The so called velocity of money can undergo quite significant fluctuations, however we can still argue that in general, the amount of money that is spent is primarily a function of the amount of money that exists. We don’t have Zimbabwe level NGDP because we don’t have Zimbabwe level money supply. Velocity increases can only go so far. It would be almost impossible for us to increase velocity given today’s USD money supply so as to match Zimbabwe NGDP.

    Long and variable leads AND long and variable lags exist.

    —————–

    Sumner:

    “In other news, the rapid improvement in the labor market, which began in early 2013 with fiscal austerity and accelerated in 2014 with the end of extended unemployment insurance benefits, continues into 2015. Unemployment is now down to 5.5%, from 10% in October 2009 and 8% in early 2013. Job growth continues at a rate far faster that the growth of the working age population.”

    As I mentioned in the previous blog post concerning “long and variable leads”, the above statistical facts are entirely consistent with the existence of, and effects from, long and variable lags.

    Merely pointing to past facts does not in itself prove any economic theory. Theory is what is used to understand past statistics.

    “Conservative structuralists and inflation fearmongers were wrong, as were liberal austerity fearmongers and those who denied extended UI insurance affected unemployment. Who was right? The same group that’s been right about almost everything else since 2008.”

    False. Those whom you call “conservative structuralists, I.e. Austrian economists (it’s OK! You can name them!) were right. Nothing in Austrian theory (structuralism) was refuted by what has transpired since 2008.

    The structure of the economy was distorted even further, in large part at the world leve. Structural distortions can and have increased and persisted before correction for many years, as the long and variable lags have their effect on the real economy and thus is part on spending, both absolute and relative.

    As you unintentionally conceded in a recent blog post, NGDP fell 2008 because of intentional market actor actions, not because of intentional Fed actions.

    “Monetary policy drives NGDP, which drives the business cycle.”

    False. NGDP does not drive the business cycle. NGDP is one among many effects of what causes the business cycle.

    NGDO falling is but one effect of the same cause of what drives the business cycle. The driver of business cycles is non-market distortions of economic calculation.

    “When you pay people not to work, you get less work. What a pity that Keynesian economics emerged from the 1930s, instead of Hawtreynomics.”

    What a pity socialism has persisted in money, which has mislead many “take what we’re given” passive minded opportunists to pretend that the solution to the very problems it causes for simply existing, can somehow be utilized as a cure.

    Only the market process can cure the problems. Market monetarism is not market at all. It is still socialism.

  5. Gravatar of ssumner ssumner
    6. March 2015 at 18:54

    Foosion, I don’t know, but if I had to guess the markets are worried by the rapid fall in the unemployment rate. That seems to confirm that we are rapidly seeing the slack in the economy disappear, and that we are not seeing the LFPR expand. This means the recovery is running out of steam, and we’ll soon be at full employment. Stocks do well when there is a long recovery ahead, with lots of slack.

    As we approach full employment, rates will rise. Often higher rates are associated with higher stock prices. But in this case the higher rates may not reflect higher growth expectations, just a fear we’ll get to full employment sooner than expected. Does that make sense?

    Patrick, Classic Bob Murphy. I enjoyed that.

    Josh, That’s possible.

  6. Gravatar of Ray Lopez Ray Lopez
    6. March 2015 at 22:01

    Sumner: “Monetary policy drives NGDP, which drives the business cycle.” – says the man who on 6. March 2015 at 12:42 believes not only money neutrality has no effect on NGDPLT, but superneutrality has no effect either (Wikipedia: ‘Superneutrality of money is a stronger property than neutrality of money. It holds that not only is the real economy unaffected by the level of the money supply but also that the rate of money supply growth has no effect on real variables’). NGDPLT = all things to everybody, and therefore nothing to nobody.

  7. Gravatar of benjamin cole benjamin cole
    7. March 2015 at 01:22

    Excellent blogging. There may be more slack in US labor markets than thought. If people think they might actualy get a job…

  8. Gravatar of JLK JLK
    7. March 2015 at 02:07

    OK, so what caused the recovering labor market in the US? There has been no monetary policy change that I can perceive for several quarters — no regime change, no new target, no acknowledged failure to hit inflation targets from bellow. Austerity has proved a dud of an explanation for the hydraulic Keynesian explanation that Scott mocks (and refutes and rebuts, but also mocks). But I don’t see a tension between the “what Keynes really meant” Keynesian insights, appropriate to his time and his problems, which was mostly focused on expectations. (See Keynes on “state of confidence.”) Starting from the premise was the purpose of the General Theory. If 6.5 years ago you told a Keynesian of the “WKRM” sort that international fiscal and monetary policy would muddle through for a decade, s/he would probably say “Yeah, that’s about right, a lost decade is the most likely outcome.”

    So the labor market is slowly, gradually easing out of a prolonged slump. Aggregate demand is still weak. Fiscal policy is pointing in a flat direction (not keeping up with inflation); monetary policy is pointing in a flat to slightly positive nominal direction, and has last-mover advantage. What would happen if fiscal policy and monetary policy were to point in the same, slightly higher direction? Might they not reinforce each other,and get Keynes’s professional gamblers off othe sideline to increase V? Scott seems to believe the fiscal part is utterly unnecessary; I see them potentially reinforcing each other (through the expectations channel). I have seen Scott praise earlier incarnations of Swiss monetary authorities, based on a promise to print more money. But would would happen if the central bank and the legislature promised that they would both be working to improvee the econmoy? Self-reinforcing!

  9. Gravatar of ssumner ssumner
    7. March 2015 at 06:52

    For a moment there I thought Ray commented, but that’s not possible as he said he’s not commenting any more.

    Thanks Ben.

    JKL, I think the recovery has two phases. Up until January 2013 the recovery was very slow, since then the unemployment rate has fallen at 0.1% per month, which is actually fairly fast by historical standards. That’s partly because monetary policy got a bit more expansionary, and partly because of the end of extended unemployment benefits in early 2014. The latter policy change boosted AS.

    I see fiscal as a sideshow, if they did more monetary would do less. The counterfactual you want is monetary doing more, which is why we need NGDPLT—then we wouldn’t need fiscal.

    The main reason this recovery took longer than previous recoveries is that we had much tighter money. NGDP grew at 11% in the first 6 quarters of the 1983-84 recovery, whereas it’s grown a bit over 4% throughout this recovery.

  10. Gravatar of LK Beland LK Beland
    7. March 2015 at 08:01

    I totally agree with Ben Cole.

    The 25-54 male employment rate still seems pretty low. A point, btw, that Delong has been hammering for the past few months: http://www.bradford-delong.com/2015/03/cyclical-and-structural-employment-gaps-an-announcement.html

    As Ben Cole blogged earlier, hours worked in the US are barely at the level of the two previous peaks (from 15 years ago!).

    U6 is still pretty high (11%, vs historical lows in the 7%-9% range).

    All this suggests there is still quite a bit of slack in the economy.

    That said, it looks like the economy has adjusted to 4% NGDP growth. If the Fed steers the economy on that path, the gap should continue to close rapidly. Hypermind seems to think they are pretty much on track to do that this year.

  11. Gravatar of ssumner ssumner
    7. March 2015 at 09:24

    LK, The 25-54 rate is not a reliable data point, as many have pointed out. The 11% U6 is a good point, and I agree there is some slack. But the slack will be gone by yearend.

    On the other hand supply-side reforms could massively boost employment.

  12. Gravatar of Major.Freedom Major.Freedom
    7. March 2015 at 15:01

    Yeah, about those unemployment numbers:

    http://econimica.blogspot.com/2015/03/amazing-math-from-bureau-of-labor.html

  13. Gravatar of benjamin cole benjamin cole
    7. March 2015 at 16:33

    OT: $500 billion more in US cash in circulation since 2008. Now $1.34 trillion, more than $4k per US resident. Egads.
    Question: Did the Fed play any role in this cash surge? Is the cash surge stimulative?

  14. Gravatar of Major.Freedom Major.Freedom
    7. March 2015 at 18:06

    Benjamin Cole:

    Egads? The money supply (which includes cash) “is a misleading indicator of the stance of monetary policy”. What matters is NGDP. It doesn’t matter if the money supply increased 10% or 20% or 50%, or if it even doubled during that time. If a doubled money supply is necessary to prevent NGDP from falling, then that just means people for some reason have a desire for double, and no more!, the money in their checking accounts. This is totally normal and it is something we should support with no questions about whether that is a good idea.

    The Fed’s job, according to me, is to spend as much new money as is necessary to keep NGDP growing at a nice steady pace.

  15. Gravatar of Brian Donohue Brian Donohue
    8. March 2015 at 06:53

    Scott, below are selected historical jobs numbers from BLS. I think an interesting story for the 21st century emerges:

    Total Jobs (thousands)
    Month Total Private Gov’t % Gov’t
    Feb 01 132,617 111,711 20,906 15.8%
    Jan 08 138,365 115,977 22,388 16.2%
    Feb 10 129,649 107,173 22,476 17.3%
    Feb 15 141,126 119,215 21,911 15.5%

    Recall that in 1996, a Democratic President declared that “The era of big government is over.”

    During the Bush years, from employment peak (2/2001) to employment peak (1/2008), only 831,000 jobs were added annually (26% of them in the public sector), versus an average of 1.46 million per year since 1940. Blegh.

    During the employment downtown (peak to trough 1/ 2008 to 2/2010), over 2.1 years, the economy lost jobs at an annual clip of 4.2 million. This is completely off the charts compared to any post-war experience. The Fed must acknowledge its part in this.

    Over the past five years (trough to now), the private sector has produced 2.4 million jobs per year, while government employment has fallen, soaking up lots of excess labor while bringing us back in line with the Clinton-era level of government employment.

    Overall,however, the economy has only added 608,000 jobs per year over the 14 years since the employment peak in February 2001. There’s still at least SOME slack in the labor market right now.

  16. Gravatar of ssumner ssumner
    8. March 2015 at 10:18

    Ben, I think it mostly reflects more demand for cash due to the low interest rates.

    Brian, Yes, there is some slack, but probably less than people assume, due to the boomers retiring and the young people being less interested in working.

  17. Gravatar of postkey postkey
    9. March 2015 at 02:42

    “So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. ”

    Assuming the labor market is not monoponistic?

  18. Gravatar of postkey postkey
    9. March 2015 at 02:55

    monopsonistic!

  19. Gravatar of James in London James in London
    9. March 2015 at 14:09

    The most heart-warming story of the year so far:
    http://www.bloomberg.com/news/articles/2015-03-06/why-retailers-are-suddenly-desperate-to-keep-their-least-valuable-workers

  20. Gravatar of ThomasH ThomasH
    9. March 2015 at 16:40

    “When you pay people not to work[/tax work], you get less work.”

    An insight that could be usefully applied to the payroll tax, urban congestion, and emission of CO2 and other pollutants.

  21. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    10. March 2015 at 04:37

    Long and Variable Leads,

    ECB QE has just started, Euro hits new lows … Who can doubt expectations drive the world ?

  22. Gravatar of ssumner ssumner
    10. March 2015 at 06:18

    James, Good article.

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