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Yep, we have such clear warning signs of imminent disaster. I should probably also point out that the interest burden measured as a share of GDP (net of money refunded from the Fed) is at the lowest level since before World War II. You can see we are imposing a terrible burden on our children. At least the Post is honest and says that its deficit reduction means cutting Social Security and Medicare.
Oh well, here on Planet Earth low interest rates and low inflation are a very good market signal that the economy could use much more demand (i.e. larger budget deficits). The Post actually seems to support this, but tells us about the Congressional Budget Office’s (CBO) projection of higher deficits in future years. As we pointed out yesterday, those higher deficits are the result of CBO’s projection that interest rates will rise sharply. They have a great track record of being badly wrong on this score six years in a row. I suppose seventh time could be a charm, but I wouldn’t bet on it.
Anyhow, serious people would be worried about boosting the economy now and putting people back to work. People are suffering today and our children our suffering. This is both because we have plenty of money so that they don’t have to drink lead and also because putting their parents out of work is a horrible thing to do to kids.
Yep, we have such clear warning signs of imminent disaster. I should probably also point out that the interest burden measured as a share of GDP (net of money refunded from the Fed) is at the lowest level since before World War II. You can see we are imposing a terrible burden on our children. At least the Post is honest and says that its deficit reduction means cutting Social Security and Medicare.
Oh well, here on Planet Earth low interest rates and low inflation are a very good market signal that the economy could use much more demand (i.e. larger budget deficits). The Post actually seems to support this, but tells us about the Congressional Budget Office’s (CBO) projection of higher deficits in future years. As we pointed out yesterday, those higher deficits are the result of CBO’s projection that interest rates will rise sharply. They have a great track record of being badly wrong on this score six years in a row. I suppose seventh time could be a charm, but I wouldn’t bet on it.
Anyhow, serious people would be worried about boosting the economy now and putting people back to work. People are suffering today and our children our suffering. This is both because we have plenty of money so that they don’t have to drink lead and also because putting their parents out of work is a horrible thing to do to kids.
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Yesterday the Labor Department released data from its December Job Openings and Labor Turnover Survey (JOLTS). One of the items that got lots of attention was a rise in the quit rate to its highest level of the recovery. In fact, it is now pretty much back to pre-recession levels. (This is especially true of workers in the public sector — interesting story for another day.)
While it is good news if workers feel they can leave a job where they are unhappy or which does not fully utilize their skills, the news may not be as good as it first appears. The weak labor market of the last seven years led to very low quit rates. This means that many people who would have left their jobs in a more normal labor market stayed at their job because they were worried about finding a new one. As a result, we should expect there are many more people at jobs they would like to leave in early 2016 than would be the case say in 2007 before the recession hit.
The implication would be that quit rates should not just be returning to their pre-recession level, but rather they should rise substantially above their pre-recession level, at least for a period of time. I’m not sure whether this makes sense or not. We don’t have data on quit rates prior to 2000, so we can’t look back at what happened after prior recoveries from a steep downturn.
Anyhow, it seems plausible to me that the quit rate should be elevated for a period of time to compensate for the unusually low quit rate of prior years. If someone wants to tell me why this is wrong, I’m listening.
Yesterday the Labor Department released data from its December Job Openings and Labor Turnover Survey (JOLTS). One of the items that got lots of attention was a rise in the quit rate to its highest level of the recovery. In fact, it is now pretty much back to pre-recession levels. (This is especially true of workers in the public sector — interesting story for another day.)
While it is good news if workers feel they can leave a job where they are unhappy or which does not fully utilize their skills, the news may not be as good as it first appears. The weak labor market of the last seven years led to very low quit rates. This means that many people who would have left their jobs in a more normal labor market stayed at their job because they were worried about finding a new one. As a result, we should expect there are many more people at jobs they would like to leave in early 2016 than would be the case say in 2007 before the recession hit.
The implication would be that quit rates should not just be returning to their pre-recession level, but rather they should rise substantially above their pre-recession level, at least for a period of time. I’m not sure whether this makes sense or not. We don’t have data on quit rates prior to 2000, so we can’t look back at what happened after prior recoveries from a steep downturn.
Anyhow, it seems plausible to me that the quit rate should be elevated for a period of time to compensate for the unusually low quit rate of prior years. If someone wants to tell me why this is wrong, I’m listening.
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Binyamin Appelbaum has an NYT piece arguing that many economists oppose a draft. At the risk of losing my economist card, let me raise a couple of points of dissent.
First, Appelbaum dismisses the argument that requiring everyone to share the risk of fighting a war, regardless of class, as being a deterrent to politicians’ adventurism. He refers to research that shows this is not true.
While I have not seen the research, I would be skeptical. Even if the children from wealthier families can ultimately escape a draft, forcing them to jump through hoops still means they pay a price for a war, even if not as great a price as the children from poorer families who actually have to fight. (Bill Clinton’s letter to his ROTC colonel is an excellent example of this sort of price. ROTC was a way to escape the war for those lucky enough or connected enough to get in.) Certainly protests of the Vietnam War seemed to fall off sharply when Nixon stopped sending draftees there, as the piece notes.
The other point is that the military has historically been an important source of upward mobility, at least for men, when it involved near universal service. This meant that children from disadvantaged backgrounds had the opportunity to meet, and occasionally make connections with, people who grew up in families with far more resources. (It is also good if people who will subsequently hold positions of responsibility at least have some contact with people who grew up in working class and poor families.)
These benefits are even more concrete when veterans enjoy benefits like low-cost or no-cost college tuition and access to low interest mortgages. Congress is more likely to support generous veterans benefits when they apply to nearly the whole population, rather than a subset of relatively low-income people who have little alternative to the military as a promising career opportunity.
For these reasons a draft might not be a bad idea, in spite of the standard economic arguments against it.
Correction: An earlier version incorrectly said that the piece had claimed that “all” economists opposed the draft.
Binyamin Appelbaum has an NYT piece arguing that many economists oppose a draft. At the risk of losing my economist card, let me raise a couple of points of dissent.
First, Appelbaum dismisses the argument that requiring everyone to share the risk of fighting a war, regardless of class, as being a deterrent to politicians’ adventurism. He refers to research that shows this is not true.
While I have not seen the research, I would be skeptical. Even if the children from wealthier families can ultimately escape a draft, forcing them to jump through hoops still means they pay a price for a war, even if not as great a price as the children from poorer families who actually have to fight. (Bill Clinton’s letter to his ROTC colonel is an excellent example of this sort of price. ROTC was a way to escape the war for those lucky enough or connected enough to get in.) Certainly protests of the Vietnam War seemed to fall off sharply when Nixon stopped sending draftees there, as the piece notes.
The other point is that the military has historically been an important source of upward mobility, at least for men, when it involved near universal service. This meant that children from disadvantaged backgrounds had the opportunity to meet, and occasionally make connections with, people who grew up in families with far more resources. (It is also good if people who will subsequently hold positions of responsibility at least have some contact with people who grew up in working class and poor families.)
These benefits are even more concrete when veterans enjoy benefits like low-cost or no-cost college tuition and access to low interest mortgages. Congress is more likely to support generous veterans benefits when they apply to nearly the whole population, rather than a subset of relatively low-income people who have little alternative to the military as a promising career opportunity.
For these reasons a draft might not be a bad idea, in spite of the standard economic arguments against it.
Correction: An earlier version incorrectly said that the piece had claimed that “all” economists opposed the draft.
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In most ways the January employment report was weaker than most economists had expected (not me, my jobs prediction was 140,000). However, many reporters seized on the 12 cent reported rise in wages in January to say that wages are finally starting to rise at a healthy pace. This was indeed a large one-month jump, but the 2.5 percent rise over the last year was pretty much the same we had been seeing for many months. (The Post piece took the 2.9 percent annual rate over the last six months to claim a more solid rise.)
There are two points to make on this wage growth. First, the monthly numbers are extremely erratic. The Labor Department reported zero growth in the hourly wage for December. It is almost inconceivable that average wages didn’t rise at all in December and then suddenly jumped 12 cents (0.5 percent) in January. This is why it is best to do some averaging.
The six month average used by the Post is better than taking a single month, but can also be misleading. If we had done six month averages last year, we would have been happy to see a rise of 2.6 percent over the prior six months in August, only to be disappointed when it dropped to 2.2 percent in September. My preferred approach is to compare the average wage of the last three month period (Nov to Jan in this case) and compare it to the average for the prior three month period (Aug to Oct). That produces an annual rate of 2.45 percent in this case. Not much evidence of an acceleration of wage growth in this story.
The other point is that the rise in January was almost certainly helped by the effect of a rise in many state and local minimum wages at the start of the year. The average hourly wage in the leisure and hospitality sector rose by 0.8 percent in January. This is important to note, since we will not see this effect repeated in future months. In short, we should hold the applause on wage growth until we see it confirmed by more data. (On this point, it is worth noting that the Labor Department’s Employment Cost Index for the 4th quarter showed no evidence of any acceleration in the growth of wages or compensation.)
It is striking that the bad news in this report has been largely overlooked. In the addition to the slower than expected jobs growth, some of the measures on the household side were not good. Both the average and median length of unemployment increased, as did the share of long-term unemployed. Also, the percentage of unemployment due to voluntary job leavers fell. At 9.9 percent, it is at a level that would be expected in a recession, not a strong labor market.
In short, while not a terrible report, this is not one that should have prompted celebration.
In most ways the January employment report was weaker than most economists had expected (not me, my jobs prediction was 140,000). However, many reporters seized on the 12 cent reported rise in wages in January to say that wages are finally starting to rise at a healthy pace. This was indeed a large one-month jump, but the 2.5 percent rise over the last year was pretty much the same we had been seeing for many months. (The Post piece took the 2.9 percent annual rate over the last six months to claim a more solid rise.)
There are two points to make on this wage growth. First, the monthly numbers are extremely erratic. The Labor Department reported zero growth in the hourly wage for December. It is almost inconceivable that average wages didn’t rise at all in December and then suddenly jumped 12 cents (0.5 percent) in January. This is why it is best to do some averaging.
The six month average used by the Post is better than taking a single month, but can also be misleading. If we had done six month averages last year, we would have been happy to see a rise of 2.6 percent over the prior six months in August, only to be disappointed when it dropped to 2.2 percent in September. My preferred approach is to compare the average wage of the last three month period (Nov to Jan in this case) and compare it to the average for the prior three month period (Aug to Oct). That produces an annual rate of 2.45 percent in this case. Not much evidence of an acceleration of wage growth in this story.
The other point is that the rise in January was almost certainly helped by the effect of a rise in many state and local minimum wages at the start of the year. The average hourly wage in the leisure and hospitality sector rose by 0.8 percent in January. This is important to note, since we will not see this effect repeated in future months. In short, we should hold the applause on wage growth until we see it confirmed by more data. (On this point, it is worth noting that the Labor Department’s Employment Cost Index for the 4th quarter showed no evidence of any acceleration in the growth of wages or compensation.)
It is striking that the bad news in this report has been largely overlooked. In the addition to the slower than expected jobs growth, some of the measures on the household side were not good. Both the average and median length of unemployment increased, as did the share of long-term unemployed. Also, the percentage of unemployment due to voluntary job leavers fell. At 9.9 percent, it is at a level that would be expected in a recession, not a strong labor market.
In short, while not a terrible report, this is not one that should have prompted celebration.
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The Washington Post had an article on a vote in West Virginia to make it a “right-to-work” state. This means that workers cannot sign enforceable contracts with employers, which require that workers covered by the contract pay the union their share of its operating costs.
The piece refers to a study that purported to find that states with “right-to-work” (RTW) laws had more job growth than other states. This study was fundamentally flawed in its design, since it was treated as a time series study, using years as individual observations, when it really was a cross section study.
Only one state actually switched from being non-RTW to being RTW in the period analyzed. (The study wrongly has both Texas and Utah making this switch, when in fact they just adopted stronger RTW laws.) This means that they really only have data on the 50 states, not separate observations for each year for each state. Treating the analysis as a time-series in this way gives an illusion of having much more data than is actually available. This makes it possible to get statistical significant results when it almost certainly would not be possible if the analysis were done correctly.
To see this point, imagine the study had used monthly data instead of annual data. This would give them twelve times as many data points, even though there was no additional information on the relevant variable. If a test finds statistically significant results in this context, which would not be present in a simple cross section analysis, then these results are clearly being driven by other factors, not a state’s RTW status.
The Washington Post had an article on a vote in West Virginia to make it a “right-to-work” state. This means that workers cannot sign enforceable contracts with employers, which require that workers covered by the contract pay the union their share of its operating costs.
The piece refers to a study that purported to find that states with “right-to-work” (RTW) laws had more job growth than other states. This study was fundamentally flawed in its design, since it was treated as a time series study, using years as individual observations, when it really was a cross section study.
Only one state actually switched from being non-RTW to being RTW in the period analyzed. (The study wrongly has both Texas and Utah making this switch, when in fact they just adopted stronger RTW laws.) This means that they really only have data on the 50 states, not separate observations for each year for each state. Treating the analysis as a time-series in this way gives an illusion of having much more data than is actually available. This makes it possible to get statistical significant results when it almost certainly would not be possible if the analysis were done correctly.
To see this point, imagine the study had used monthly data instead of annual data. This would give them twelve times as many data points, even though there was no additional information on the relevant variable. If a test finds statistically significant results in this context, which would not be present in a simple cross section analysis, then these results are clearly being driven by other factors, not a state’s RTW status.
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Neil Irwin had an Upshot piece this morning on the likelihood that the U.S. economy will fall into recession in 2016. He argues that a recession is unlikely, but then gives readers a scenario in which it is possible.
I will say first that I agree that a recession is unlikely. Recessions in the past were brought on by the Fed’s efforts to slow inflation with higher interest rates or by the bursting of an asset bubble.
The Fed’s December rate hike was a mistake, but that is not going to cause a recession. And, few of the members of the Fed’s Open Market Committee are wacky enough to raise rates further in a weak economy with no inflation.
While there may have been bubbles in some sectors of the economy, there was nothing like the $10 trillion bubble in the stock market in the late 1990s or the $8 trillion bubble in the housing market in the last decade. None of the various bubbles were driving the economy, so their collapse will not bring about a recession.
The question then is what could bring a recession. Irwin’s answer is that the continuation of low oil and commodity prices leads to downturns in oil exporting countries and loan defaults by energy producers both domestic and foreign. The hurt to the economy from weaker demand is then compounded by the pessimism of consumers and firms. The former cut back on consumption, while the latter cut back on investment. With the Fed paralyzed by already low interest rates, and also its unwillingness to concede the December rate hike was a mistake, the economy slides into recession.
I see this story as highly unlikely. First, while psychology does matter, there is a tendency to hugely over-rate the size of these effects. For years economists and economic writers were telling us that people were reluctant to consume following the collapse of the housing bubble because they were fearful about their economic prospects.
In fact, there was a much simpler explanation. People had lost trillions of dollars of wealth when the housing bubble burst and the stock market plunged. The “wealth effect,” the idea that people spend based on their wealth, is an economic concept that dates back almost a century. Alan Greenspan frequently touted that people were consuming based on the equity generated by the housing bubble.
Why was it a surprise that they cut back their consumption when this wealth disappeared? The evidence that people are now saving their oil dividend is extremely weak and can easily disappear in subsequent revisions to the data. In short, I don’t see a story where people cut back their consumption in a big way because they hear that Russian economy is in trouble.
There may be a bit more of a story on the investment side, but here too the psychological hit in 2008 was hugely exaggerated. If we pull out structures (there was also a bubble in non-residential investment) Investment actually didn’t fall that much in the downturn and fairly quickly got back to pre-recession levels as a share of GDP. This doesn’t mean that bad vibrations from plummeting oil prices can’t have an impact, just that it is not likely large enough to be recession material.
On the Fed, it is important to note that it is far from out of ammunition. In addition to its conventional control of the short-term interest rate, and its buying of long-term bonds under quantitative easing, the Fed can also go the route of targeting long-term interest rates. Under this policy, which has been pushed by Joe Gagnon, a former Fed economist, the Fed would set a target of say 1.0 percent for the interest rate on 5-year Treasury notes. It would commit itself to buying as many notes as necessary to keep the interest rate at its targeted level.
The Fed has not tried this sort of policy in more than half a century, but there is no legal constraint that prevents it from going this route. Presumably its hesitance is the fear that such a policy could spur inflation.
While it is understandable that the Fed must concern itself with inflation, it is important for the public to recognize that it has policy options to boost the economy and lower unemployment that it has chosen not to use. It is simply wrong to say the Fed is out of ammunition.
Neil Irwin had an Upshot piece this morning on the likelihood that the U.S. economy will fall into recession in 2016. He argues that a recession is unlikely, but then gives readers a scenario in which it is possible.
I will say first that I agree that a recession is unlikely. Recessions in the past were brought on by the Fed’s efforts to slow inflation with higher interest rates or by the bursting of an asset bubble.
The Fed’s December rate hike was a mistake, but that is not going to cause a recession. And, few of the members of the Fed’s Open Market Committee are wacky enough to raise rates further in a weak economy with no inflation.
While there may have been bubbles in some sectors of the economy, there was nothing like the $10 trillion bubble in the stock market in the late 1990s or the $8 trillion bubble in the housing market in the last decade. None of the various bubbles were driving the economy, so their collapse will not bring about a recession.
The question then is what could bring a recession. Irwin’s answer is that the continuation of low oil and commodity prices leads to downturns in oil exporting countries and loan defaults by energy producers both domestic and foreign. The hurt to the economy from weaker demand is then compounded by the pessimism of consumers and firms. The former cut back on consumption, while the latter cut back on investment. With the Fed paralyzed by already low interest rates, and also its unwillingness to concede the December rate hike was a mistake, the economy slides into recession.
I see this story as highly unlikely. First, while psychology does matter, there is a tendency to hugely over-rate the size of these effects. For years economists and economic writers were telling us that people were reluctant to consume following the collapse of the housing bubble because they were fearful about their economic prospects.
In fact, there was a much simpler explanation. People had lost trillions of dollars of wealth when the housing bubble burst and the stock market plunged. The “wealth effect,” the idea that people spend based on their wealth, is an economic concept that dates back almost a century. Alan Greenspan frequently touted that people were consuming based on the equity generated by the housing bubble.
Why was it a surprise that they cut back their consumption when this wealth disappeared? The evidence that people are now saving their oil dividend is extremely weak and can easily disappear in subsequent revisions to the data. In short, I don’t see a story where people cut back their consumption in a big way because they hear that Russian economy is in trouble.
There may be a bit more of a story on the investment side, but here too the psychological hit in 2008 was hugely exaggerated. If we pull out structures (there was also a bubble in non-residential investment) Investment actually didn’t fall that much in the downturn and fairly quickly got back to pre-recession levels as a share of GDP. This doesn’t mean that bad vibrations from plummeting oil prices can’t have an impact, just that it is not likely large enough to be recession material.
On the Fed, it is important to note that it is far from out of ammunition. In addition to its conventional control of the short-term interest rate, and its buying of long-term bonds under quantitative easing, the Fed can also go the route of targeting long-term interest rates. Under this policy, which has been pushed by Joe Gagnon, a former Fed economist, the Fed would set a target of say 1.0 percent for the interest rate on 5-year Treasury notes. It would commit itself to buying as many notes as necessary to keep the interest rate at its targeted level.
The Fed has not tried this sort of policy in more than half a century, but there is no legal constraint that prevents it from going this route. Presumably its hesitance is the fear that such a policy could spur inflation.
While it is understandable that the Fed must concern itself with inflation, it is important for the public to recognize that it has policy options to boost the economy and lower unemployment that it has chosen not to use. It is simply wrong to say the Fed is out of ammunition.
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