Economics, Monetary Policy, Pethokoukis

Why the rush to raise US interest rates, exactly?


For 28-straight months, the Fed’s preferred inflation gauge — the price index for personal consumption expenditures — has undershot the central bank’s 2% target. It advanced just 1.5% in August. Given what happened before the past three tightening cycles, should there be any rush to start raising rates? Some good points from Joseph LaVorgna at Deutsche Bank:

1.) What do the last three tightening cycles show? The 12-month change in core inflation averaged 1.9% at the time of the initial Fed tightening. In February 1994, the core PCE deflator was up 2.3% from its year earlier level. In June 1999, the core PCE deflator was up just 1.4% over the previous 12 months, and in June 2004, the core PCE deflator was up 2.0%. If the year-over-year growth rate in the core PCE deflator has not meaningfully picked up by next June, then all else being equal, Fed tightening will be pushed further out.

2.) For the Fed to hike rates with the core PCE deflator well under 2%, policymakers would need to see some combination of the following: One, inflation expectations would need to be rising. Two, there would have to be noticeable signs of upward wage pressure. Three, the economy would have to be on very solid footing, meaning real GDP growth running well above 3%, monthly job gains averaging substantially above 200k, and the unemployment rate would have to be hovering around the non-accelerating inflation rate of unemployment, which the Fed estimates to be between 5.2% to 5.5%.

3.) The bottom line is that monetary policymakers have set a high bar for beginning the process of interest rate normalization. They want to be absolutely sure the economy can withstand the inevitable tightening of financial conditions that would accompany such a move. For doves such as Yellen, Dudley and Evans, a premature rate hike would be much worse than being a bit behind the inflation curve.

Caution is warranted. This is an economy, after all, so fragile that a bout of cold weather can produce some nasty shrinkage. And here is little evidence inflation expectations have become unanchored. The Cleveland Fed reports that its latest estimate of 10-year expected inflation is 1.89%. Finally, economist Mike Darda offers this historical lesson:

Another reason for the Fed to be patient / gradual is the lopsided history of ZLB exits being premature instead of late. To wit: the Fed tried to exit prematurely (and thus failed) in 1936-1937; the BoJ presided over two premature (and thus failed) ZLB exits in 2000 and 2006 and several European central banks blew it in 2011 with premature tightening, triggering double-dip recessions and deflation risk.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


The Hong Kong protests: The economic impact of Tiananmen 2.0

Vox’s Timothy Lee notes the diminishing importance of Hong Kong to China’s economy:

In 1997, Hong Kong’s economy was more than 18 percent the size of the economy of the mainland. Today, the figure is down to three percent. Mainland China produces 30 times as many goods and services as does Hong Kong.

On a per capita basis, Hong Kong is still dramatically wealthier than the mainland. Last year, Hong Kong produced $38,000 per resident, compared to $6,800 on the mainland. But the mainland is narrowing that gap pretty quickly.

So it would seem logical to conclude — at least given the lessened risk of economic fallout — that China is far more likely to take a tougher stand against a Hong Kong democracy movement today than two decade ago. But this note from Capital Economics outlines the potential economic risk of Tiananmen 2.0:

If push comes to shove, the Hong Kong government might then choose to  the police to use force to clear the streets. And if things get really out of hand, the Chinese government might even conceivably decide to call upon the army to disperse the demonstrators.

In this scenario, there would be a much greater risk of contagion because the consequences for China – and for the myriad countries that depend upon her growth – could be serious. For a start, Hong Kong has provided enormous benefits to China over the past few decades as a gateway to the rest of the world. If Hong Kong’s status as an international financial centre were jeopardised by such a nasty turn of events – as it presumably would be – then China’s own economy would suffer. And if China attempted to resolve the problem in a heavy-handed way, the rest of the world might respond – say by imposing trade sanctions on China, or by seeking to limit her influence in global policymaking (as it has done with Russia). Meanwhile, any sign of growing tension between the rest of the world and a large economic and military superpower like China would surely dull investors’ appetite for risk.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


No minimum wage or other pay for Lena Dunham’s warm-up acts on her book tour

Actress Lena Dunham, a big supporter of President Obama, is embarking on an elaborate book tour, which will feature warm-up acts chosen from an open casting-call via video. From the New York Times:

“Three of the videos were disturbing, but the rest were super awesome,” Ms. Dunham said, adding that she spent several hours screening the auditions in bed.

Apparently these performers will not be paid. “Performing free of charge” is how the Times puts it. About which, Gawker offers this analysis: 092914dunham As one reader of the Gawker piece put it: “It’s amazing how lax some fairly liberal people can get with minimum wage laws when it comes to their own hires.” Yes, it is amazing how people promote certain issues in the abstract, but act quite differently in their own lives — especially when they have to dig into their own pockets. Another example might be, say, celebrities who march against global warming but show up to protests in a yacht. Then again, perhaps Dunham is actually an opponent of the minimum wage and favors rather an expanded Earned Income Tax Credit or other wage subsidy. I doubt it, but will certainly update this post if that turns out to be the case.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


What we’re reading today: September 26, 2014

Check out the top pieces we’re reading today on the economy, family, technology, and more.

1.) Isabel Sawhill at Brookings asks, is marriage coming back?

2.) A robust economy is the fix that policy won’t allow, argues Jeffrey Snider at RCM.

3.) From Quartz comes a piece on the six paths of the typical US college graduate—and why they’re all wrong.

4.) The IMF blog looks at a tale of two states—bringing back US productivity growth.

5.) Claire Cain Miller in The Upshot writes on start-ups and the death of do-it-yourself.

6.) Guess what’s holding back housing, says Jonathan J. Miller in BloombergView.

7.) Michael Graetz takes a look at the bipartisan ‘inversion’ evasion in his WSJ op-ed.

8.) CEOs get paid too much, according to pretty much everyone in the world, according to the Harvard Business Review.

9.) From the Chicago Fed: Should regulators reveal information about banks?

10.) Evan Ackerman at IEEE Spectrum discusses when drone delivery makes sense.

11.) WalletHub presents 2014’s fastest growing cities. Number one is Mission, Texas.

12.) Morton Keller over at the Hoover Institution has a new piece titled “America stalled.”

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.


Milton Friedman explains why the Great Recession happened

No, that’s not a typo in headline. In the video below, Milton Friedman explains how the Great Depression was a failure of government — notably the Federal Reserve — not the private sector. But in doing so, he also in effect explains how the Fed was responsible for the Great Recession (more on that explanation here) — not business.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


On another Romney presidential run …

Image Credit: Gage Skidmore (Flickr) (CC BY-SA 2.0)

Image Credit: Gage Skidmore (Flickr) (CC BY-SA 2.0)

I know insidery people who think Mitt Romney might run again for president (especially if Jeb Bush doesn’t), while others think there’s no chance. Given the unsettled state of the potential GOP 2016 field, speculation is sure to continue — which makes me wonder how another Romney campaign would be different from the previous one. I would certainly expect a tonal difference given that voters thought Romney competent but uncaring.

But a campaign different in substance, too. For instance: recall that the Romney economic agenda prioritized maintaining the Bush-era tax cuts. But the high-end ones on labor and capital income have now lapsed. Oh, well. Romney’s “repeal and replace” Obamacare plan would now need to acknowledge that (a) health reform is now up and running and (b) all the great work done on conservative fixes by wonks such as Jim Capretta and Avik Roy. Team Romney apparently thought back in 2012 that it really could block Obamacare implementation. Here is Romney policy advisor and transition team member Tevi Troy in National Affairs on what the new administration’s approach would have been:

One key campaign promise that affected the Department of Health and Human Services was the pledge to repeal Obamacare. This promise elicited widespread skepticism, because even in the optimistic scenarios that had Romney winning the presidency, the prospects for a GOP majority in the Senate were plummeting fast (and the odds of a GOP supermajority of 60 votes were zero). Without full control of both houses, a straight-up, all-out repeal was unlikely.

In response to this challenge, the R2P team, which included some of the GOP’s top health-care thinkers, came up with an aggressive approach that would have both stopped and rolled back the implementation of Obamacare in such an overwhelming way that Senate Democrats would have had to come to the table to discuss some kind of repeal package. The law gives HHS enormous leeway to make a large number of key implementation decisions, and in the hands of an administration eager for repeal, our experts concluded that this leeway would make it possible to effectively nullify the new system through a carefully choreographed series of executive actions. The regulatory rollback would have been so complete that we were confident Obamacare never could have gotten off the ground and that a path toward real, market-based health-care reform would have been opened.

The path toward “real, market-based health-care reform” is a much tougher slog today. After the “47%” debacle, I also would hope Team Romney would take a good look at the evolving conservative reform agenda on upward mobility and equality opportunity with its focus on lifting the poor and strengthening the middle class. Whoever the next GOP nominee is, that person will need the ability to persuasively articulate a broad, inclusive prosperity agenda to a nation that sees the American Dream slipping away. 

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.


What we’re reading today: September 25, 2014

Check out the top pieces we’re reading today on the economy, family, technology, and more.

1.) In this WSJ piece, James Freeman writes that there’s been a surge in student debt forgiveness.

2.) The Upshot shows the flooding risk from climate change, country by country.

3.) Leslie Kan at Education Next has a blog on how teacher retention varies across and within districts.

4.) Carson Bruno at RCM looks at California’s economic recovery that wasn’t.

5.) From the Federal Reserve: Signaling status: The impact of relative income on household consumption and financial decisions.

6.) Marriage rates keep falling, as money concerns rise, notes Claire Cain Miller in The Upshot.

7.) Over at Bloomberg, Megan McArdle takes a look at Washington’s affordable-housing bind.

8.) Update: Ebola death toll nears 3,000 in West Africa, says WHO.

9.) This new Urban Institute publication asks: who benefits from asset-building tax subsidies?

10.) In her e21 article, Diana Furchtgott-Roth presents 5 reasons to counter climate change.

11.) This piece from The Atlantic looks at America, the plannable: how banks affect family size.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.


What would be the economic impact of a global pandemic?

Given the ongoing Ebola crisis, I thought it might be a good time to look at the potential economic impact of a global pandemic  From Reuters piece on a flu outbreak:

A global pandemic that lasted a year could trigger a “major global recession,” warned a 2008 report from the World Bank. If a pandemic were on the scale of the Hong Kong flu of 1968-69 in its transmissibility and severity, a yearlong outbreak could cause world GDP to fall 0.7 percent. If we get hit with something like the 1957 Asian flu, say goodbye to 2 percent of GDP. Something as bad as the 1918-19 Spanish flu would cut the world’s economic output by 4.8 percent and cost more than $3 trillion. “Generally speaking,” the report added, “developing countries would be hardest hit, because higher population densities and poverty accentuate the economic impacts.”

The majority of the economic losses would come not from sickness or death but from what the World Bank calls “efforts to avoid infection: reducing air travel … avoiding travel to infected destinations, and reducing consumption of services such as restaurant dining, tourism, mass transport, and nonessential retail shopping.”

The really bad news is that we may not be hearing all the bad news. Economists who study pandemics worry they may be underestimating the financial toll because they haven’t been considering all the ramifications. “Research to understand the indirect costs of an epidemic has been growing, focusing on how to accurately incorporate productivity losses and effects on economic activity,” says Bruce Lee of the University of Pittsburgh Medical Center, where he is an associate professor, director of the Public Health Computational and Operations Research Group, and an expert in the economics of infectious diseases.

Of course, this analysis concerns a flu pandemic, not an outbreak of something like Ebola. This chart from a risk modeling firm – which calls a global Ebola pandemic “unlikely,” or did a month ago – gives a feel for the difference in diseases transmission rates:




Who gets the $400 billion in annual federal asset-building tax subsidies?

Urban Institute

Urban Institute

From the Urban Institute study, “Who Benefits from Asset-Building Tax Subsidies?“:

In 2013, US federal income tax expenditures totaled roughly $1. 2 trillion, about the amount of revenue raised by the individual income tax. Of this total, $384 billion went toward asset building subsidies for homeownership, retirement and other savings, and higher education investments in human capital.

Despite this large sum, these subsidies do little to help most households build wealth, particularly those with low or average incomes. Those households are helped in other ways. For example, the amount of in come tax they pay is limited by the standard deduction and personal exemptions. Still, as a result of this combination of policies, the tax policies largely intended to help households save simply fail to do so, while providing the most incentive to higher-income households who likely need it less.


Urban Institute

Urban Institute

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.