Robert Samuelson used his column on Monday to debate the need for the Fed to clamp down on wage growth and came down on the right side: hurry up and wait. This is good to see, but there are a few more data points that make the case even more strongly.
First, the quit rate — the share of unemployment due to people voluntarily quitting their jobs — is still at levels that we would expect in a recession. This is important because it is a relatively direct measure of workers’ confidence in their labor market prospects. If they are unhappy at their job, but they don’t feel they have much opportunity to find a better one, they will be reluctant to quit unless they have a new job lined up.
Percentage of Unemployment Due to Job Leavers
Source: Bureau of Labor Statistics.
The second noteworthy point is the high number of people who report working part-time involuntarily. We can debate the reasons that prime age workers might have dropped out of the labor force, but there is no plausible case that people who work part-time jobs and say they want full-time employment, don’t actually want full-time employment. This number is still up by more than 2 million (@ 50 percent) from pre-recession levels, suggesting a large amount of labor market slack.
The last point is that we really don’t have much basis for fear about getting this wrong by being too lax. According to research from the Congressional Budget Office, the terms of the trade-off between unemployment and inflation have flattened. This research indicates that even if the unemployment rate was a full percentage point below the NAIRU for a full year, the inflation rate would only rise by 0.3 percentage points.
The NAIRU or non-accelerating inflation rate of unemployment, is supposed to be the lowest unemployment rate we can hit without having the inflation rate start to rise. We don’t know exactly where it is, but most economists put it between 5.2 percent and 5.5 percent unemployment. (I think we can go far lower.) But the point is that if the “true” number is 5.5 percent, and we allowed the unemployment rate to fall to 4.5 percent for a full year, the inflation rate would only be 0.3 percentage points higher than at the end of the year than the beginning. In the current environment, that would mean going from a 1.6 percent core inflation rate to a 1.9 percent core inflation rate.
That doesn’t sound like a really bad story. For this reason, it’s hard to see why anyone should be talking about raising interest rates and deliberately slowing the economy right now.
Note: Link fixed.
Robert Samuelson used his column on Monday to debate the need for the Fed to clamp down on wage growth and came down on the right side: hurry up and wait. This is good to see, but there are a few more data points that make the case even more strongly.
First, the quit rate — the share of unemployment due to people voluntarily quitting their jobs — is still at levels that we would expect in a recession. This is important because it is a relatively direct measure of workers’ confidence in their labor market prospects. If they are unhappy at their job, but they don’t feel they have much opportunity to find a better one, they will be reluctant to quit unless they have a new job lined up.
Percentage of Unemployment Due to Job Leavers
Source: Bureau of Labor Statistics.
The second noteworthy point is the high number of people who report working part-time involuntarily. We can debate the reasons that prime age workers might have dropped out of the labor force, but there is no plausible case that people who work part-time jobs and say they want full-time employment, don’t actually want full-time employment. This number is still up by more than 2 million (@ 50 percent) from pre-recession levels, suggesting a large amount of labor market slack.
The last point is that we really don’t have much basis for fear about getting this wrong by being too lax. According to research from the Congressional Budget Office, the terms of the trade-off between unemployment and inflation have flattened. This research indicates that even if the unemployment rate was a full percentage point below the NAIRU for a full year, the inflation rate would only rise by 0.3 percentage points.
The NAIRU or non-accelerating inflation rate of unemployment, is supposed to be the lowest unemployment rate we can hit without having the inflation rate start to rise. We don’t know exactly where it is, but most economists put it between 5.2 percent and 5.5 percent unemployment. (I think we can go far lower.) But the point is that if the “true” number is 5.5 percent, and we allowed the unemployment rate to fall to 4.5 percent for a full year, the inflation rate would only be 0.3 percentage points higher than at the end of the year than the beginning. In the current environment, that would mean going from a 1.6 percent core inflation rate to a 1.9 percent core inflation rate.
That doesn’t sound like a really bad story. For this reason, it’s hard to see why anyone should be talking about raising interest rates and deliberately slowing the economy right now.
Note: Link fixed.
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The NYT ran an article headlined, “China’s Economy Expands at Slowest Rate in Quarter Century.” People who read the piece discovered that China’s growth rate for 2014 was estimated at 7.4 percent, which is more than three times the growth rate projected for the United States. More strikingly, this is not much of a slowdown from the last two years.
The I.M.F. reports growth in both of these years was 7.7 percent. Measured as a share of growth, a drop from 7.7 percent to 7.4 percent in China would be equivalent to a drop from 2.0 percent to 1.92 percent in the United States. It’s not clear that this sort of slowdown would draw headlines.
There are questions about the accuracy of China’s growth data, but this article refers only to the reported numbers. These do not provide much a basis for talk of a major slowing of China’s economy.
The NYT ran an article headlined, “China’s Economy Expands at Slowest Rate in Quarter Century.” People who read the piece discovered that China’s growth rate for 2014 was estimated at 7.4 percent, which is more than three times the growth rate projected for the United States. More strikingly, this is not much of a slowdown from the last two years.
The I.M.F. reports growth in both of these years was 7.7 percent. Measured as a share of growth, a drop from 7.7 percent to 7.4 percent in China would be equivalent to a drop from 2.0 percent to 1.92 percent in the United States. It’s not clear that this sort of slowdown would draw headlines.
There are questions about the accuracy of China’s growth data, but this article refers only to the reported numbers. These do not provide much a basis for talk of a major slowing of China’s economy.
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Usually when a country takes steps to “defend” its currency, the problem is that the value of its currency is falling in world currency markets. This is most often due to higher inflation in the country in question, although the situation can be worsened by speculative attacks. Raising interest rates is a standard form of defense, since it makes it more desirable to hold assets denominated in that currency.
Against this normal pattern, the NYT told readers that Denmark was “defending” its currency by cutting interest rates. Apparently the problem is that the krone, Denmark’s currency, was rising against the euro. The krone has been pegged against the euro since its inception. The recent upswing in its value threatened to push the krone above its designated range.
So in this case, the “defense” is intended to reduce the value of the currency, not to raise it.
Usually when a country takes steps to “defend” its currency, the problem is that the value of its currency is falling in world currency markets. This is most often due to higher inflation in the country in question, although the situation can be worsened by speculative attacks. Raising interest rates is a standard form of defense, since it makes it more desirable to hold assets denominated in that currency.
Against this normal pattern, the NYT told readers that Denmark was “defending” its currency by cutting interest rates. Apparently the problem is that the krone, Denmark’s currency, was rising against the euro. The krone has been pegged against the euro since its inception. The recent upswing in its value threatened to push the krone above its designated range.
So in this case, the “defense” is intended to reduce the value of the currency, not to raise it.
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Paul Krugman is still upset over the decision by Switzerland’s central bank to end its peg to the euro and allow the value of the Swiss franc to rise. Since some of us non-hyper-inflation worriers don’t share his anger, perhaps it worth explaining the difference in views.
Krugman sees the peg as a sort of quantitative easing. He argues it was working (Switzerland’s economy has largely recovered), so there was no reason to abandon it. He sees the basis for abandonment as a needless fear over inflation and possibly a concern about central bank losses. (The Swiss central bank is partly private. Sound familiar?)
Krugman may well be right about the reasons that Switzerland’s central bank abandoned its peg, but that doesn’t mean that it was wrong to do so.
Switzerland’s peg was designed to promote its growth at the expense of its neighbors. The under-valued currency boosts the economy by making Swiss exports cheaper relative to the goods and services of its trading partners and making imports into Switzerland more expensive. In this story, Switzerland’s growth is a direct subtraction from the growth of its trading partners.
This is not a big deal with a relatively small country like Switzerland, but imagine that Germany left the euro (hold the applause) and adopted the same policy of deliberately under-valuing the new mark against the euro. Germany would then run large trade surpluses and the other euro zone countries would run large deficits, draining away demand. Should we applaud this policy as a form of quantitative easing that needs to be supported?
Krugman’s argument rests largely on the idea that we need to promote central bank credibility. I’m a bit more skeptical on this one. Central bank credibility is a two-edged sword. One of the main reasons that we are not supposed to pursue QE-type policies is the risk of inflation, which could undermine central bank credibility.
I would agree with Krugman that the risk of any serious outburst of inflation in the current economic situation is near zero, but of course it is not zero. And the risk of inflation in an economy with less demand and higher unemployment is lower than the risk in an economy with more demand and lower unemployment. This means that we do face more of a risk of inflation and damaging central bank credibility on keeping inflation low with QE than without.
For me, this is a no-brainer. How many parents of children should be unemployed so that everyone knows the Fed won’t let the inflation rate get above 2.0? The answer would be very few, but if central bank credibility is some great good of enormous value, then the QE-foes may have a point.
I would keep credibility on the back burner here. Switzerland has a budget surplus and extremely low government debt. It should be running budget deficits to boost its economy and those of its neighbors. There is no reason we should be applauding its efforts to sustain demand in its economy at the expense of its neighbors.
Paul Krugman is still upset over the decision by Switzerland’s central bank to end its peg to the euro and allow the value of the Swiss franc to rise. Since some of us non-hyper-inflation worriers don’t share his anger, perhaps it worth explaining the difference in views.
Krugman sees the peg as a sort of quantitative easing. He argues it was working (Switzerland’s economy has largely recovered), so there was no reason to abandon it. He sees the basis for abandonment as a needless fear over inflation and possibly a concern about central bank losses. (The Swiss central bank is partly private. Sound familiar?)
Krugman may well be right about the reasons that Switzerland’s central bank abandoned its peg, but that doesn’t mean that it was wrong to do so.
Switzerland’s peg was designed to promote its growth at the expense of its neighbors. The under-valued currency boosts the economy by making Swiss exports cheaper relative to the goods and services of its trading partners and making imports into Switzerland more expensive. In this story, Switzerland’s growth is a direct subtraction from the growth of its trading partners.
This is not a big deal with a relatively small country like Switzerland, but imagine that Germany left the euro (hold the applause) and adopted the same policy of deliberately under-valuing the new mark against the euro. Germany would then run large trade surpluses and the other euro zone countries would run large deficits, draining away demand. Should we applaud this policy as a form of quantitative easing that needs to be supported?
Krugman’s argument rests largely on the idea that we need to promote central bank credibility. I’m a bit more skeptical on this one. Central bank credibility is a two-edged sword. One of the main reasons that we are not supposed to pursue QE-type policies is the risk of inflation, which could undermine central bank credibility.
I would agree with Krugman that the risk of any serious outburst of inflation in the current economic situation is near zero, but of course it is not zero. And the risk of inflation in an economy with less demand and higher unemployment is lower than the risk in an economy with more demand and lower unemployment. This means that we do face more of a risk of inflation and damaging central bank credibility on keeping inflation low with QE than without.
For me, this is a no-brainer. How many parents of children should be unemployed so that everyone knows the Fed won’t let the inflation rate get above 2.0? The answer would be very few, but if central bank credibility is some great good of enormous value, then the QE-foes may have a point.
I would keep credibility on the back burner here. Switzerland has a budget surplus and extremely low government debt. It should be running budget deficits to boost its economy and those of its neighbors. There is no reason we should be applauding its efforts to sustain demand in its economy at the expense of its neighbors.
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A Washington Post article on President Obama’s new willingness to push an economic agenda contrasted U.S. economic performance with “the anemic economies of Europe and Japan.” It’s not clear on what basis Japan’s economy is supposed to be anemic compared with the U.S.
Its unemployment rate stood at 3.5 percent in November, the most recent month for which data are available. Its employment rate has risen by two full percentage points since the end of 2012 when its new government shifted towards Keynesian expansionary policies. By comparison, the employment rate has risen by just 0.8 percentage points over the same period in the United States (it did rise by another 0.3 percentage points in the fourth quarter). The 1.2 percentage point difference for the period for which we have data from both countries would correspond to another 3 million people being employed in the United States.
It is also worth noting that the employment rate in Japan is 1.7 percentage points above its pre-recession level. In the United States it is more than 3.0 percentage points below its pre-recession level.
A Washington Post article on President Obama’s new willingness to push an economic agenda contrasted U.S. economic performance with “the anemic economies of Europe and Japan.” It’s not clear on what basis Japan’s economy is supposed to be anemic compared with the U.S.
Its unemployment rate stood at 3.5 percent in November, the most recent month for which data are available. Its employment rate has risen by two full percentage points since the end of 2012 when its new government shifted towards Keynesian expansionary policies. By comparison, the employment rate has risen by just 0.8 percentage points over the same period in the United States (it did rise by another 0.3 percentage points in the fourth quarter). The 1.2 percentage point difference for the period for which we have data from both countries would correspond to another 3 million people being employed in the United States.
It is also worth noting that the employment rate in Japan is 1.7 percentage points above its pre-recession level. In the United States it is more than 3.0 percentage points below its pre-recession level.
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It isn’t often that I think Paul Krugman gets one wrong, but I think he wrongly attacks those chocolate loving cuckoo clock making Swiss in his column today. His complaint is that the Swiss central bank abandoned its commitment to keep down the value of the Swiss franc against the euro. Krugman sees this a failure of will, with the central bank giving up a commitment to pursue an inflationary policy. This is part of a larger saga of feckless central banks that continue to obsess about inflation when the real problem facing world economies is an inflation rate that is too low.
While the general point is right, it is hard to see how this story applies to Switzerland. Switzerland did not see the same sort of downturn as the rest of the OECD in 2008. Furthermore, it has fully recovered from its downturn with a GDP that is 8 percent above its pre-recession level and an unemployment rate of 3.5 percent.
In this context, it is actually doing what we should want Switzerland to do as a good world citizen. By allowing its currency to rise, it will make its goods and services less competitive internationally. This means it will import more from its trading partners and export less, effectively providing them with an economic boost. This is what we should want to see. The countries that are at or near full employment should be running larger trade deficits or smaller surpluses.
So give the Swiss a gold star. They called this one right. (Now if we can get them to talk to China ….)
It isn’t often that I think Paul Krugman gets one wrong, but I think he wrongly attacks those chocolate loving cuckoo clock making Swiss in his column today. His complaint is that the Swiss central bank abandoned its commitment to keep down the value of the Swiss franc against the euro. Krugman sees this a failure of will, with the central bank giving up a commitment to pursue an inflationary policy. This is part of a larger saga of feckless central banks that continue to obsess about inflation when the real problem facing world economies is an inflation rate that is too low.
While the general point is right, it is hard to see how this story applies to Switzerland. Switzerland did not see the same sort of downturn as the rest of the OECD in 2008. Furthermore, it has fully recovered from its downturn with a GDP that is 8 percent above its pre-recession level and an unemployment rate of 3.5 percent.
In this context, it is actually doing what we should want Switzerland to do as a good world citizen. By allowing its currency to rise, it will make its goods and services less competitive internationally. This means it will import more from its trading partners and export less, effectively providing them with an economic boost. This is what we should want to see. The countries that are at or near full employment should be running larger trade deficits or smaller surpluses.
So give the Swiss a gold star. They called this one right. (Now if we can get them to talk to China ….)
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The NYT has somehow decided that Japan needs budget discipline. It’s not clear what the basis for this determination is, but the fourth paragraph of an article on Japan’s latest budget proposal told readers:
“With the budget proposal, Japan is trying to balance its need for growth and discipline.”
The markets apparently do not see the same need as the NYT. The current interest rate on 10-year government bonds is 0.25 percent.
The NYT has somehow decided that Japan needs budget discipline. It’s not clear what the basis for this determination is, but the fourth paragraph of an article on Japan’s latest budget proposal told readers:
“With the budget proposal, Japan is trying to balance its need for growth and discipline.”
The markets apparently do not see the same need as the NYT. The current interest rate on 10-year government bonds is 0.25 percent.
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It’s more than a bit bizarre that patent protection doesn’t get a single mention in a NYT column on “why drugs cost so much.” Of course without government granted patent monopolies the vast majority of drugs would sell for $5-$10 per prescription. And, drug companies would not have incentive to mislead the public about the safety and effectiveness of their drugs.
It’s more than a bit bizarre that patent protection doesn’t get a single mention in a NYT column on “why drugs cost so much.” Of course without government granted patent monopolies the vast majority of drugs would sell for $5-$10 per prescription. And, drug companies would not have incentive to mislead the public about the safety and effectiveness of their drugs.
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The folks setting economic policy in Europe have already inflicted massive damage on the continent, putting foreign enemies and natural disasters to shame. But the pain goes on.
The NYT reported on a preliminary ruling on the European Central Bank’s (ECB) plans to buy government bonds by one of the advocates general at the Court of Justice of the European Union. According to the piece, the ruling authorized the ECB to buy government debt, but said:
“the central bank should not buy government bonds immediately after they are issued, to allow markets to determine a price.”
The point of a bond buying program is to raise the price of bonds and push down interest rates below the market level. Also, it really doesn’t matter whether the ECB buys the bonds directly from a government or from third parties after they are issued. In both cases it would be taking possession of the same share of the stock of outstanding debt, which is the relevant factor for determining bond prices and interest rates.
Can someone buy these folks an intro econ text?
The folks setting economic policy in Europe have already inflicted massive damage on the continent, putting foreign enemies and natural disasters to shame. But the pain goes on.
The NYT reported on a preliminary ruling on the European Central Bank’s (ECB) plans to buy government bonds by one of the advocates general at the Court of Justice of the European Union. According to the piece, the ruling authorized the ECB to buy government debt, but said:
“the central bank should not buy government bonds immediately after they are issued, to allow markets to determine a price.”
The point of a bond buying program is to raise the price of bonds and push down interest rates below the market level. Also, it really doesn’t matter whether the ECB buys the bonds directly from a government or from third parties after they are issued. In both cases it would be taking possession of the same share of the stock of outstanding debt, which is the relevant factor for determining bond prices and interest rates.
Can someone buy these folks an intro econ text?
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