Archive for the ‘Uncategorized’ Category
Jul 5th 2014 | WASHINGTON, DC | From the print edition
IAN TONER, an architect in Philadelphia, recently went to city offices for a permit to build a stoop for a client’s home. The city, he learned, had just imposed new requirements: he would have to get maps from gas, electric, water and other utilities to ensure the stoop would not disturb their underground lines and then resubmit his application. A process he thought would take a day took more than two weeks.
That’s not all. Other new rules require that he prove that his builder has general liability, workers’ compensation and car insurance, and has paid all his taxes. Four times a year he must set aside a half day to ensure he is paying the state’s and city’s myriad taxes correctly. Mr Toner doesn’t question the need for rules and taxes; what galls him is the time and hassle involved in complying with them. “The information exists all over the place and the burden is on me not just to gather it but [to] interpret it. I’m not going to leave here because of this, but they’re all things that could turn a person off of coming here.”
America’s states and cities have traditionally tried to attract businesses by offering them tax breaks and other cash incentives. Yet there may be a more effective way, and one which puts no strain on stretched budgets: make life simpler. Read the rest of this entry »
Jul 2nd 2014, 20:32 by G.I. | WASHINGTON, D.C.
Janet Yellen, the Federal Reserve chair, has long said there might be times when monetary policy could be used to counteract financial instability. But in a speech before the International Monetary Fund today, she erected such a high bar to its use that is seems unlikely ever to happen: the “potential cost … is likely to be too great … at least most of the time.”
The unstated logical conclusion is that there is some optimal exposure to crisis. Read the rest of this entry »
Jun 19th 2014, 18:25 by G.I. | WASHINGTON, D.C.
Secular stagnation is a delightfully alliterative description of America’s economy, but also an ambiguous one. “Secular” implies the depressed state of the economy is down to structural, supply-side factors, whereas “stagnation” suggests cyclical obstacles to demand are to blame. The distinction matters, because it will determine the path for interest rates.
Let’s assume stagnation is the problem: the normal cyclical recovery of the economy is being smothered by headwinds to demand: deleveraging, tight credit, fiscal contraction, post-crisis risk aversion, etc. The supply side is largely unscathed. This means there’s a big gap between actual and potential output which puts significant downward pressure on inflation. In this case, the path of interest rates should resemble the blue line in the nearby chart. The Fed keeps interest rates near zero as long as possible to overcome those headwinds. The large output gap ensures this doesn’t allow inflation to emerge. But eventually, the headwinds fade, demand springs back and the Fed must quickly tighten so that by the time demand converges with supply (i.e. the output gap closes), rates are back to their natural, equilibrium rate. In this case, the natural rate is same as it was before the crisis, i.e. a nominal rate of around 4%, and a real rate around 2%.
Now suppose instead that secular, supply-side forces are the reason growth has been so disappointing. These would include diminished labour force growth because of aging, lifestyle choices, lower fertility and immigration; reduced innovation; and as a consequence of all these things, less capital investment. In this case, the right path for interest rates is shown by the red line. Because weak growth is due primarily to lower potential, the output gap is much smaller and an outbreak of inflation more of a risk. This means the Fed must start to raise interest rates sooner, and more quickly, so that they are back to normal by the time the output gap closes. But lower potential growth means the return on capital is lower which reduces the natural, or Wicksellian (named for Knut Wicksell) interest rate, and so Fed funds plateaus at a lower level.
Deciding which of the two scenarios applies requires estimating both potential growth and the natural rate of interest – no easy task since neither can be directly observed.
Thomas Laubach of the Federal Reserve Board and John Williams, now president of the Federal Reserve Bank of San Francisco, managed to do just that with an elegant, intuitive model in a 2001 paper. They define the natural rate as the rate needed to keep the output gap at zero. Then they develop a model of potential output that yields an output gap, and from that infer the natural rate. This is determined by both potential growth, and a bunch of other factors like risk aversion and desired saving. Because these latter factors move a lot over the business cycle, the natural rate fluctuates more than if only relatively-slow moving potential growth mattered. For example, Mr Williams’ updated estimates imply the real natural rate of interest was -0.2% at the end of 2013, owing both to high desired saving, and a steady decline in potential growth, to about 2% now from 2.9% in 2007.
Your choice of interest rate path thus depends heavily on how you interpret recent data. The fact that unemployment has fallen far faster than GDP can explain may be down to demand – a lot of discouraged workers have quit the labour force – and thus require zero rates for longer; or it may be because potential growth is lower, which means the output gap is closing quickly, and the Fed must start tightening relatively soon. For most of the last few years, Fed officials threw their lot in with the demand side story: they kept pushing out the date that rates would start rising. That’s changing. In the FOMC’s latest survey of economic projections, released yesterday, members lowered both expected growth and unemployment this year while trimming their estimate of potential growth to 2.2% from 2.25% (it was 2.65% in 2009). They slightly raised the path of expected hikes in the Fed funds rate while lowering its long-run level (the de facto the natural rate) to 3.75%, from 4%.
This process is probably not over; labour market and demographics factors may have depressed potential growth to below 2%. Add in high desired saving from fiscal consolidation and reserve accumulation by emerging economies, and the natural rate is probably closer to 3% than 3.75%. This also means inflation has probably bottomed out and could move back to, or even above, target within a year or so.
This doesn’t necessarily mean, however, that bond yields are about to shoot higher. That’s because the negative of a quicker liftoff by the Fed is more than offset by the positive of a lower long-run natural rate. For equities, the implications are ambiguous: a lower natural rate reduces the discount rate and raises the price-earnings ratio, but lower potential depresses earnings growth.
My analysis treats supply and demand separately. In reality, they are interrelated. People who lose their jobs for cyclical reasons and then go long enough without work can end up permanently out of the labour force. As Mr Williams and his colleague Glenn Rudebusch note in a recent paper, getting the long-term unemployed back to work can restore some of the economy’s lost potential. But it will require more stimulative monetary policy and inflation overshooting for a while. This is a prospect the Fed may have to grapple with before long. When I asked Janet Yellen about it, she indicated she was open to letting inflation overshoot if it was necessary to get unemployment down: “If the distance from achieving an objective [either full employment or low inflation] is particularly large, it would be consistent with the balanced approach that we would tolerate some movement in the opposite direction on the other objective.” She suggested that such a scenario was pretty unlikely. Hopefully, though, she’s preparing for it – just in case.
The original article is linked here.
Central banks around the world are struggling to promote growth without fomenting worrisome risk-taking
Jun 21st 2014 | Washington, DC | From the print edition
UNTIL the global financial crisis, central banks treated bubbles with benign neglect: they were hard to detect and harder to deflate, so best left alone; the mess could be mopped up after they burst. No self-respecting central bank admits to benign neglect any longer. “No one wants to live through another financial crisis,” Janet Yellen, then a candidate to head the Federal Reserve, said last year. “I would not rule out using monetary policy as a tool to address asset-price misalignments.”
After six years of interest rates near zero the tension between central banks’ responsibility for output and inflation on one hand and financial stability on the other is growing. On June 12th the Bank of England hinted it would pursue new measures to curb ever-climbing property prices. Shortly afterwards Ms Yellen fretted about the “reach for yield” and subdued volatility, a sign of investors’ complacency.
Read the rest of this entry »
Public and private austerity takes its toll on health-care workers
RUNAWAY health-care spending has one silver lining: it generates millions of jobs for doctors, nurses and medical orderlies. Employment at doctors’ offices, nursing homes and hospitals grew steadily throughout the recession even as it cratered everywhere else (see chart 1).
But a few years ago health spending began to slow and now, with a lag, so have the jobs. Health-care employment grew only 1.8% in the past 12 months, including a bump up in May. Pay has also suffered: hourly health-care wages rose just 1.2% in the year through May, barely half as fast as total private-sector wages (see chart 2). Last year health care was the second leading source of layoff announcements, after finance. The Cleveland Clinic cut hundreds of unfilled jobs and offered early retirement to 700 workers. Read the rest of this entry »
A radical proposal for making finance safer resurfaces
WHEN Franklin Roosevelt took office in 1933, his first order of business was to arrest the banking collapse that was plunging America ever deeper into depression. As part of the plan for doing so, he signed into law the first federal insurance scheme for deposits, reshaping American finance.
Roosevelt did so at the behest of Congress, but had deep reservations. He worried that deposit insurance would “make the United States government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future.” He was right to worry. As intended, deposit insurance made banks less prone to runs (depositors trying to withdraw their money before everyone else does). But it also reduced depositors’ incentive to monitor banks’ behaviour. With less market discipline, a heavy-handed system of regulation evolved. Read the rest of this entry »
In many industries, blue-collar wages are on the upswing
FOUR years ago construction was still deep in recession. When Baker Triangle, a drywalling firm, put out word that it was hiring, applicants would be lining up outside the door the next day. Now it has to place an ad, and “I’m lucky if I get two or three people in the door,” moans Mike Sireno, a manager. He once looked for ten years’ experience; now, two or three years’ is a triumph, and he will happily hire workers “right out of high school with no experience whatsoever”. Read the rest of this entry »
May 22nd 2014, 18:15 by G.I. | WASHINGTON, D.C.
The most notable thing in the financial markets today is the absence of anything notable: volatility has collapsed to near-historic lows. Take a look at the accompanying chart from Bianco Research. It shows that Vix, a measure of how volatile stocks are expected to be based on options prices, has dropped to its lowest since 2007. Bond volatility is creeping closer to the historic lows reached a year ago, just before the taper tantrum. And foreign exchange volatility is also back to the lows of 2007.
Before we discuss the implications, let’s examine why asset prices are so stable. A decade ago economists proclaimed that, since 1982, the rich world, and America in particular, had entered the “Great Moderation”: an era of infrequent, shallow recessions, low and stable inflation, and limited quarter-to-quarter volatility. That talk came to an end with the crisis and recession. But as our article in this week’s issue shows, the Great Moderation seems to be back. Judged by quarter-to-quarter swings in GDP growth and month-to-month variation in job growth, the economy has been as stable since 2009 as it was in the years before the crisis, which were the least volatile of the post-war era.
Since the macroeconomy is the primary driver of asset prices, a low-vol economy, all else equal, produces low-vol markets. But there’s more going on. Before 2007, economists attributed much of the great moderation to judicious monetary policy: central banks had been quicker to ease in the face of economic weakness, and quicker to tighten to head off incipient inflation. The resulting swings in interest rates would have raised market volatility, offsetting some of the impact of stable economic output. So, for example, when the Fed started tightening in 1987 to head off inflation, the stock market crashed. But then the Fed eased, so the crash did not derail the economy. Read the rest of this entry »
Volatility has disappeared from the economy and markets. That could be a problem
May 24th 2014 | WASHINGTON, DC | From the print edition
A DECADE ago, the business cycle was an endangered species. Recessions in the rich world had become rare, shallow and short; inflation was predictably low and boring. Economists dubbed this the “Great Moderation” and gave credit for it to deft macroeconomic management by central banks. Such talk, naturally, ended abruptly with the financial crisis.
But obituaries of the Great Moderation may have been premature. Since America emerged from recession in 2009, its growth, although low, has been as stable as during the Great Moderation’s heyday, from the early 1980s to 2007, judging by the volatility of quarterly gross domestic product (see chart) and monthly job creation. That, in turn, has pushed the gyrations of stock and bond prices to their lowest levels since 2007. The trend is less pronounced outside America, but economists at Goldman Sachs nonetheless find that pre-crisis levels of tranquillity have returned in Germany, Japan and Britain. Read the rest of this entry »