Pethokoukis

James Pethokoukis: Covering the nexus of Washington and Wall Street

Economics, Monetary Policy, Pethokoukis

Mishkin and Woodford to Fed on NGDP level targeting: Faster, please

|
010713outputgap

It was big news when the Federal Reserve recently announced the specific economic criteria that would guide its interest rate policy. Historic even.

But not historic enough for economists Frederic Mishkin and Michael Woodford. In a WSJ op-ed today, they first praise the FOMC for deciding to keep interest rates near zero as long as the unemployment rate remains above 6.5%, and the inflation rate is projected to be no higher than 2.5%. Mishkin and Woodford

The Fed’s increased clarity about its intentions is highly desirable. This is especially so now, when the current funds-rate target cannot be further lowered, yet aggregate demand remains insufficient. A commitment not to raise rates in the future as soon as might have been expected is an obvious way the FOMC can loosen current financial conditions. Yet the new approach has downsides that the Fed needs to address.

But Mishkin and Woodford worry that those criteria, while a step in the right direction, leave too much perceived wiggle room on inflation. Plus the unemployment rate is an imprecise bit of data. M&W:

It would have been better if the FOMC had explained its temporary policy by describing the size of the nominal growth shortfall that needed to be made up. A stated intention to “catch up” to a particular nominal GDP path would have clarified that how long interest rates will remain low will depend on economic outcomes, while emphasizing the central bank’s intention to return to a path consistent with its long-run inflation target.

Woodford was already a member of the NGDPLT (nominal gross domestic product level targeting) community and is now joined by Mishkin, a former Fed governor. Here’s a bit more from Woodford in a new Bloomberg interview:

I think the Fed should be more explicit about how exactly it expects to choose among possible short-run paths, lest the inflation target itself cease to be meaningful; and I think that a commitment to a nominal GDP target path — one that is chosen so as to yield the desired inflation rate in the medium to long run, while also explaining how to balance the inflation outlook with the outlook for real GDP growth in the short run — would be a good way to do that. … A nominal GDP target would explain why they’re doing what they’re doing now, and also how they would shift to a less accommodative regime in the future, once the ”catch up” to the target path has occurred. … I think that a move to a nominal GDP target could actually provide much-needed clarity. It’s not too late for it to have a positive effect.

M&W, shorter: Faster, please.

 

Reply
Pethokoukis

Global bank regulators go for growth over safety, keep fingers crossed

|

This whole deal has the stink of fear all over it. Fear about the health of the global economy and fear about the health of the post-Financial Crisis banking system. Reuters:

The Basel Committee agreed on Sunday to give banks four more years to build up cash buffers against future shocks like the 2008/09 financial crisis, and to widen the range of assets they can use to include shares and residential mortgage-backed securities, as well as lower-rated company bonds.

This pull-back from an earlier draft of global liquidity rules, which aim to help prevent another banking crisis, means lenders will in theory have more scope to use some of their reserves to help struggling economies grow.

1. I understand the logic in wanting to break the sovereign debt loop — banks get in trouble by holding too many bonds of their cash-strapped governments, government borrows to bail them out, sovereign prices fall further, banks gets in more trouble — but doesn’t this lessen one possible check on government borrowing?

2. No surprise that Ben Bernanke was reportedly in favor of this. The earlier version would seem to work against the Fed’s effort to boost growth and the housing market by lowering mortgage rates. As WRG’s Jaret Seiberg notes. “We have argued for two years that regulators would never implement the Liquidity Coverage Ratio as proposed because it would curtail lending, cause banks to dump mortgage-backed securities, and force them to dominate the Treasury market.”

3. I also wonder if this wasn’t a case of the Basel committee carefully picking its fights and reserving some powder for when it introduces new limits on banks’ reliance on short-term funding.

4. I love this bit from the WSJ’s analysis:

Nobody knows for sure whether the rules will strike the right balance between preventing banks from becoming dangerously fragile and providing the industry the flexibility needed to finance economies around the world. Previous iterations of the Basel rules failed to prevent banking crises, partly because they didn’t anticipate the then-obscure corners of the financial system that would cause future problems.

Indeed.

1
Economics, Entitlements, Pethokoukis

Obama says Washington ‘doesn’t have a spending problem.’ Really?

|
Image Credit: White House Flickr stream

Image Credit: White House Flickr stream

In his Wall Street Journal interview with John Boehner, writer Steve Moore didn’t bury the lede:

What stunned House Speaker John Boehner more than anything else during his prolonged closed-door budget negotiations with Barack Obama was this revelation: “At one point several weeks ago,” Mr. Boehner says, “the president said to me, ‘We don’t have a spending problem.’”

On the face of it, such a statement is completely ridiculous — and a bit scary. Just have a look at the alternative fiscal scenario from the Congressional Budget Office.

In it, the CBO assumes a) Medicare’s payment rates for physicians remain unchanged from the current amounts, and b) the sequester’s automatic spending reductions required by the Budget Control Act don’t take effect — although the original caps on discretionary appropriations in that law remain in place.

Under this scenario, federal spending would average 23% of GDP over the next decade — climbing as the decade drew to a close. Not only is that level of spending three percentage points higher than average federal spending from 1987-2007, it represents a sustained level of spending unheard of in US history. The only comparable period outside of World War Two was the 1980s military buildup, when spending averaged 22.7% of GDP from 1981-1986. But at least that budget binge set the stage for lower defense spending in the future. It was temporary.

The current spendathon shows no end in sight. As long as the US can keep borrowing, it goes on and on and on — and up and up and up. The CBO:

Indeed, when you look at what drives US budget deficits over the next decade, it’s spending that’s above normal vs. tax revenue right at its historical average of around 18%.

Now, we find out later in the piece that President Obama does qualify his curious statement:

The president’s insistence that Washington doesn’t have a spending problem, Mr. Boehner says, is predicated on the belief that massive federal deficits stem from what Mr. Obama called “a health-care problem.” Mr. Boehner says that after he recovered from his astonishment—”They blame all of the fiscal woes on our health-care system”—he replied: “Clearly we have a health-care problem, which is about to get worse with ObamaCare. But, Mr. President, we have a very serious spending problem.” He repeated this message so often, he says, that toward the end of the negotiations, the president became irritated and said: “I’m getting tired of hearing you say that.”

A few thoughts on that:

1. It reaffirms that health care reform was about creating an new entitlement, not getting health care spending under control.

2. I assume what Obama means is that the long-term debt problem is due to Medicare and Medicaid, not discretionary spending. And he’s more or less right about that. According to CBO’s alternate fiscal scenario, the US will spend 35.7% of GDP in 2037 vs. 22% in 2012. Where does that 13.7 percentage point rise come from?

– Medicare spending increases by 3.0 percentage points, from 3.7% to 6.7%

– Medicaid spending increases by 2.0 percentage points, from 1.7% to 2.7%

– Social Security spending increases by 1.2 percentage points, from 5.0% to 6.2%

– Interest on the debt increases by 8.1 percentage points, from 1.4% to 9.5%

And discretionary spending? It actually falls by 2.0 percentage points, from 11.6% to 9.6%.

3. But health care spending by the government is still spending. Obama’s rhetorical legerdemain is unhelpful. It obscures the reality that how the federal government spends health care dollars — such as through fee-for-service Medicare — contributes to health care cost inflation by encouraging overuse of pricey health care services. It’s not some exogenous factor. We should be injecting choice and competition into the system wherever possible.

4. If Washington wants Main Street to trust it on entitlement reform, it should use discretionary spending as a proof-of-concept that it can improve the efficiency of government programs. Don’t just cut it across the board, reform and modernize it. Bring on the Romney Commission.

Is spending a problem? It sure is Mr. President.

34
Economics, Pethokoukis

8 ways to make the US economy more productive and competitive

|
010513mckinsey

How can we get the American economy moving forward again? Consultancy McKinsey Global Institute offers a few general ideas (in the above chart) that should help focus attention in Washington. Indeed, bad government is a common theme as to why the US economy is not as productive or competitive as it could and should be. In some areas it should do more, others less.

And some final conclusions:

10
Economics, Pethokoukis

Bank analyst: Either the 14th amendment or trillion-dollar platinum coin options ‘would be as bad as an actual default’

|
Image Credit: Kevin Dooley (Flickr) (CC BY 2.0)

Image Credit: Kevin Dooley (Flickr) (CC BY 2.0)

Are there other financial options for the US government other than Congress approving a higher debt ceiling? Analyst Jaret Seiberg from the Washington Research Group has looked at two that are being discussed — and he’s dismissive of both:

The President could assert that that 14th amendment negates the requirement for Congress to raise the debt ceiling. Or Treasury could mint a $1 trillion platinum coin and deposit it at the Federal Reserve. Neither are great options. We see chaos if the market has to confront Treasuries where the debt is backed by Congress and those where it is not backed by Congress.

And the $1 trillion coin would expand the money supply by a considerable amount, which could spark serious inflation. And it seems like something out of a Simpson’s episode. So we are not even sure anyone would take this as an actual solution. All of this economic chaos could worsen the economic downturn, which would further weaken credit conditions and impose higher losses on banks.

For banks, this might be as bad as an actual default. The economic uncertainty could cause lending to grind to a halt, the disruptions could cause unemployment to spike which means higher loan losses, and interest rates could skyrocket as the market is unsure whether one of these creative solutions is even legal.

That sounds about right. Far better for Democrats and Republicans to agree on spending and entitlement cuts and raise the debt ceiling.

7
Economics, Pethokoukis

Study: Making a tax code more progressive hurts economic growth

|

From the “Macroeconomic Effects of Progressive Taxation” by Tae-hwan Rhee of the Samsung Economic Institute (via the American Economic Association annual meeting):

In this paper, I analyze the progressivity of state income tax in the United States. Using the IRS public use file data and NBER TaxSim, two types of indices – the Suits index and effective progression – are constructed for each of 50 U.S. states and for each year from 1979 to 2004. While federal income tax makes up the bulk of the combined federal plus state tax and drives most of the combined fluctuation over time, the state income tax still has significant variation from year to year and from state to state. Using these indices of progressivity, the relation between macroeconomic growth and income tax progressivity is investigated. Contemporaneous regressions do not show any significant effect in either direction. However, with three years of lag, income tax progressivity has a significant negative effect on the current year’s growth rate, after controlling for the average tax rate and state/year fixed effects. Although these regressions do not prove causality, these findings do support the idea that there is a tradeoff between economic growth and egalitarian redistribution.

Three possible reasons are offered to explain the apparent growth-equality tradeoff:

1. Migration. High income, high productivity people leave a state when the tax code grows more progressive — that is, raises taxes on them.

2. Work incentives. A progressive income tax effectively lowers the wage of higher-income groups, who then substitute leisure for labor.

3. Weaker entrepreneurship. Rhee:

Entrepreneurship can play a role here, too. Starting a new business is risky. The biggest motivation to take this risk is the higher expected income from the start-up than from the current job. A more progressive income tax makes this expected gain smaller after tax, which leads to less risk-taking behavior. This means that a highly progressive tax system might discourage small-scale innovations, leading to lower gross product

 

Are you paying attention, Illinois and California?

4
Economics, Pethokoukis

Study: Firms founded by Dems more likely to be ‘socially responsible’ — and less valuable

|

From  the study “Are Red or Blue Companies More Likely to go Green? Politics and Corporate Social Responsibility” (via the American Economic Association annual meeting):

We examine whether the political leanings of a firm’s stakeholders affect its behavior in terms of corporate social responsibility (CSR). Using firm-level CSR ratings from Kinder, Lydenberg, Domini (KLD), we find that firms score higher on CSR when they have Democratic rather than Republican founders, CEOs, and directors, and when they are headquartered in Democratic rather than Republican-leaning states.

We estimate that CSR costs Democratic-leaning firms approximately $20 million more in annual SG&A expenses than Republican-leaning firms ($80 million more within the sample of S&P500 firms), representing about 10% of net income.

We also show that changes in firm CSR policies (KLD “strengths”) are negatively associated with future stock returns, changes in institutional ownership, and changes in ROA, suggesting some loss of firm financial value in exchange for any direct value benefits to stakeholders from social responsibility.

 

2
Economics, Pethokoukis

New study suggests U.S. fiscal stimulus generates less than $1 in GDP growth for every $1 spent

|

The economic theory driving the $800 billion Obama stimulus holds that government spending has a multiplier, especially during tough economic times. For every $1 of spending, overall GDP increases by more than $1, maybe $1.50 or so. That is pretty much what Team Obama assumed.

But there are lots of theories and studies about fiscal multipliers. Some even hold that for every $1 of government spending, we get less than $1 of output — and that’s not even taking into account that higher taxes will be needed to pay for debt-financed stimulus.

“Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data,” a new study from economists at the St. Louis Fed, University of California, San Diego, and the Bank of Canada, looks at fiscal multipliers during periods of economic “slack” over the past hundreds years or so, which they define as periods of 6.5% or higher unemployment in the U.S., 7.0% of higher unemployment in Canada. As does economist Robert Barro in his work, economists Michael Owyang, Valerie Ramey, and Sarah Zubairy concentrate on the impact of defense spending (via the American Economic Association annual meeting):

We have investigated the proposition that multipliers are greater during periods of slack using newly constructed historical data for the U.S. and Canada. Using Jordà’s (2005) local projection method, a threshold model based on the level of the unemployment rate, shocks to military news, and definitions of variables that obviate the need for ad hoc conversion factors, we find no evidence that multipliers are higher during periods of slack in quarterly U.S. data from 1890 to 2010. In all states, multipliers appear to be between 0.6 and 0.7.

In contrast, estimates using quarterly Canadian data from 1921 to 2011 indicate that multipliers are typically greater during periods of slack. The multipliers are around 0.5 during the nonslack state, but are above unity during the slack state at many horizons. It is important to point out, though, that because we do not adjust for the fact that taxes often rise at the same time as government spending, these estimated multipliers are not necessarily equal to pure deficit-financed multipliers.

6
Pethokoukis

Connections are key for the careers of male Wall Street analysts. For females, it’s education and forecast accuracy

|

Sometimes it’s not what you know but who you know, at least for men on Wall Street. For women, it’s, you know, ability and results. From the paper “Gender and Connections Among Wall Street Analysts” (via the American Economic Association annual meeting):

We study how the interplay between gender and connections affect career outcomes and performance among Wall Street analysts. We measure connections using alumni ties between analysts and the firms they cover. Male and female analysts are equally connected on average. Connection is associated with more accurate earnings forecasts for men, but not for women. Controlling for accuracy, connection is important in explaining men’s, but not women’s, probability of being voted by institutional investors as “star” analysts, an important measure of career success. For women, education achievements and accurate forecasts are important factors that determine voting outcomes. This asymmetry in the effect of connections between the two genders does not exist in an alternative, computerized process of evaluating analysts, and is most pronounced among young analysts. Our results suggest that men reap higher returns from connections than women, and that investors are more willing to rely on soft information such as connections to evaluate men than women.

1
Economics, Pethokoukis

Why male CEOs get stingy on worker pay after having a kid

|

If your company has a male CEO and he just had a kid — especially a boy — you may not be getting a raise anytime soon. From the new paper, “Fatherhood and Managerial Style: How a Male CEO’s Children Affect the Wages of His Employees“:

Motivated by a growing literature in the social sciences suggesting that the transition to fatherhood has a profound effect on men’s values, we study how the wages of employees change after a male chief executive officer (CEO) has children using comprehensive panel data on the employees, CEOs, and families of CEOs in all but the smallest Danish firms between 1996 and
2006. We find:

1. A male CEO generally pays his employees less generously after fathering a child/

2. The birth of a daughter has a less negative influence on wages than does the birth of a son and has a positive influence if the daughter is the CEO’s first.

3. The wages of female employees are less adversely affected than are those of male employees and positively affected by the CEO’s first child of either gender.

4. We also find that male CEOs pay themselves more after fathering a child, especially after fathering a son.

These results are consistent with a desire by the CEO to husband more resources for his family after fathering a child and the psychological priming of the CEO’s generosity after the birth of his first daughter and specifically toward women after the birth of his first child of either gender.

 

1
  1. Pages:
  3. 1
  4. ...
  5. 46
  6. 47
  7. 48
  8. 49
  9. 50
  10. ...
  11. 103

You May Also Like

  • The Bernanke difference

    The mild May jobs report should serve as yet another reminder to President Obama and Congress that the U.S. labor market is suffering a Long Emergency.

    read more >
  • Welcome to the recovery: Year five

    Happy fourth anniversary, America. June 2009 marked the official end of the Great Recession - as reckoned by the National Bureau of Economic Research - and the beginning of the current recovery. So, how are we doing?

    read more >
  • Fix, don't flatten, the tax code

    If the sluggish U.S. economy wasn’t reason enough for tax reform, the ongoing IRS scandal demonstrates how a devilishly complex tax code enables government mischief.

    read more >