Economics, Pethokoukis, U.S. Economy

Study: Economic uncertainty has cost the US a million jobs since 2010


Usually talk about the impact of “uncertainty” on the US economy refers to supposed business fears about debt, tax hikes, and Obamacare. But the new study “The Asymmetric Effects of Uncertainty” by Kansas City Fed economist Andrew Foerster looks at heightened uncertainty — as measured by the Chicago Board Options Exchange Volatility Index, or VIX — from three specific events: the May 2010 European sovereign debt crisis, the August 2011 US debt ceiling crisis, and the June 2013 confusion about the Fed’s plan to wind down its bond buying program.

Foerster finds that uncertainty generated by those key events had a big negative impact on economic growth and job creation:

High uncertainty during the current recovery has led to a relatively modest recovery by historical standards. Economic theory suggests that when uncertainty increases, firms and consumers postpone their decisions, lowering economic activity. When uncertainty decreases, economic activity may rebound, but not necessarily immediately. The empirical evidence presented in this article suggests that uncertainty has asymmetric effects and that decreases in uncertainty do not necessarily offset increases. As a result, spikes in uncertainty may produce persis tent declines in economic activity.

Uncertainty’s asymmetric effects imply that the large VIX increases associated with the European sovereign debt crisis and the U.S. debt ceiling crisis—and, to a lesser extent, the taper tantrum—led to lower growth in economic activity and employment during the recovery. Combined, these three episodes resulted in a substantial cumulative loss in employment.

Foerster estimates US employment at the end of 2013 was nearly 1 million jobs lower than it would be other wise. Less uncertainty, as measured by a counterfactual VIX, have meant the following:

 … 400,000 more people would have been employed following the European sovereign debt crisis, 600,000 more after the U.S. debt ceiling crisis, and 800,000 more by the end of 2013. This cumulative deficit at the end of 2013 is equivalent to about 16,000 fewer jobs gained per month from 2010 to 2013 because of these three uncertainty episodes.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

About that second-half economic recovery …

Here we go again. Barclays:

In the US, core retail sales increased less than expected in July, and sales in previous months  were revised down. Combined with softer inventory data, these numbers lowered our  tracking estimate for Q2 14 to 3.8%, below the advance estimate of 4.0%, while that for Q3  14 now stands at 2.4%, a bit below our 2.5% forecast.

To us, the more important message  is that the data suggest that the consensus forecast of 3.0% or better H2 14 real GDP  growth in the US may be too optimistic, echoing the trend of the past several years. 

Don’t tell the White House, which has begun to trumpet the economy’s improvement. Looking like a sub-2% GDP year if Barclays is correct …

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis

Economist: ‘Americans have lost a lot of confidence and replaced it with fear’

Image Credit: shutterstock

Image Credit: shutterstock

Recall the Wall Street Journal/NBC News poll  from last week that found — five years into an economic recovery — that (a) 49% of Americans think we are still in a recession, (b) an all-time higher of 76% “lack confidence that their children’s generation will have a better life than they do, and (c) 71% think the country is on the wrong track, up 8 percentage points from June.

Which brings us to today’s new report on consumer confidence from the Reuters/University of Michigan. Its sentiment index slipped 2.6 points in mid-August to 79.2, the lowest reading since November 2013. But what really got the attention of economists was the expectations bit. Kind of sour, as the JPMorgan chart below shows:



Economist Robert Brusca offers some worthwhile perspective:

The expectations index fell sharply this month and sits in the 16th percentile of its historic queue. It is weaker only about 16% of the time-repeat WEAKER only 16% of the time. … Expected business conditions are worse only about 11% of the time. That’s frightening.

 So we have extraordinary weakness in expectations and current conditions are only slowly drifting higher. It’s hard to see this is a formula for expedited growth in the second half of the year. Retail sales disappoint and yet we continue to hear optimism about how that’s temporary. Job growth has picked up to some extent, but that elevated pace cooled last month. And wages really do not have much upward momentum. There’s been enough of an uptick in inflation to erode the small nominal wage gains that there were.

 On top of all this we have very uneven geopolitical circumstances, the US is increasing its involvement in Iraq, and there is potential confrontation with the Russians at the Ukraine border.

While current conditions are improving they are grinding higher an extremely slow pace. The real problem is with expectations. People are aware of the Social Security problems that this country faces. People are worried about their pensions. Even if they have not been laid off they are concerned about the jobs because they see if they get lose their jobs that there really are not a lot of good possibilities out there.

Americans have lost a lot of confidence and replaced it with fear and concern that if something goes wrong things will get even worse. People no longer have that feeling that if they fall down they can pick themselves back up. And I think that’s expressed in the expectation variables. The economy needs to put in stronger numbers for people to feel that they are on more solid ground. And it’s fair to say that the politician simply don’t get it and don’t accept the blame for their contribution to this difficult situation. I was not very optimistic about what the Michigan index would do this week. But the survey managed to come in bellow my expectations. It’s a very depressing report.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.


What the world looks like when America doesn’t lead

I don’t write much, if really at all, about foreign policy. But when I look around and see (a) a terrorist group — “a movement of a qualitatively higher order than al-Qaeda” — setting up “a new Afghanistan in the heart of the Middle East,” (b) mass slaughter in Syria, (c) a newly aggressive Russia on the move into Europe, (c) China growing more confrontational with its neighbors … well, it makes me think about a more inward-focused America and what that means globally.

To be specific, it makes me think about the 2008 alternative history/sci-fi book “Without Warning” by John Birmingham. The McGuffin is a mysterious, never-explained “energy wave” which disappears every human in the continental United States (except for a sliver in the northwest, including Seattle), southern Canada, and northern Mexico. To further up the ante, the energy wave strikes on the eve of the Iraq War in 2003. With America in chaos, its enemies strike. Iraq and Iran team up against coalition forces in Kuwait. And things only gets worse as geopolitical chaos spreads across the globe, including Israeli nuclear strikes against its enemies and nuclear war between India and Pakistan.

Anyway, this bit of sarcastic dialogue has stuck with me:

Think about what’s going to happen there now that the evil global overlord is no longer around to oppress everyone into behaving themselves. Think about what’s going to happen to the evil world financial system now that the planet’s greatest debtor nation has winked out of existence and won’t be meeting its loan repayments to anyone. Think about what happens when you take the lid off Pandora’s box and everything that we forgot about history comes spilling out to bite you in the ass. Do you know how unusual it is in human history for children to be able to grow up in a place like this?

Just a work of fiction, of course — but one that may have something insightful to say about a world where America leads from behind or maybe not at all.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Monetary Policy, Pethokoukis, U.S. Economy

Republicans are drawing all the wrong lessons from Europe’s depression

MKM Partners

MKM Partners

Tight money and fiscal austerity are a dreadful combination. One look at the ongoing depression in Europe is evidence of that. That should be the lesson which right-of-center policymakers take from the region’s economic catastrophe. Yes, Europe has a debt problem. The real problem, however, that sparked the debt crisis was a collapse in nominal GDP, which made dealing with that debt extraordinarily difficult. And for that, blame the European Central Bank.

As economist Michael Darda noted in a podcast with me, “Europe fell into a double-dip two-year recession starting in 2011 in large measure because the European Central Bank tightened policy two times that year.” That grave policy error is reflected in the above chart which contrasts US and European economic performance since those hikes.

So given that, I have to concede Paul Krugman pretty much nails it today:

European officials eagerly embraced now-discredited doctrines that allegedly justified fiscal austerity even in depressed economies (although America has de facto done a lot of austerity, too, thanks to the sequester and cuts at the state and local level). And the European Central Bank, or E.C.B., not only failed to match the Fed’s asset purchases, it actually raised interest rates back in 2011 to head off the imaginary risk of inflation.

The E.C.B. reversed course when Europe slid back into recession, and, as I’ve already mentioned, under Mario Draghi’s leadership, it did a lot to alleviate the European debt crisis. But this wasn’t enough. The European economy did start growing again last year, but not enough to make more than a small dent in the unemployment rate.

And now growth has stalled, while inflation has fallen far below the E.C.B.’s target of 2 percent, and prices are actually falling in debtor nations. It’s really a dismal picture. Mr. Draghi & Co. need to do whatever they can to try to turn things around, but given the political and institutional constraints they face, Europe will arguably be lucky if all it experiences is one lost decade.

When Republicans look at Europe, if all they see are the dangers of high taxes, over regulation, and too much debt — which are real problems holding back potential GDP — they are really missing the story. (Amazing that the US recovery has been so much stronger despite tax hikes, rising debt, Obamacare, Dodd Frank, the EPA … . Credit the Fed.) Krugman is also right that given the fragile nature of the US recovery, the Fed shouldn’t be in much of a hurry to jack up interest rates. Thankfully Fed boss Janet Yellen seems to realize this and won’t mimic the ECB’s mistake. Hopefully.

Here is a moderately optimistic take on Europe, and it’s still pretty discouraging. From IHS Global:

Nevertheless, the Eurozone still faces significant growth constraints. Fiscal policy is still generally restrictive, despite increased flexibility over countries’ fiscal targets, and tight credit conditions persist in several countries amid still significant banking sector problems. Unemployment remains elevated (the Eurozone unemployment rate was still up at 11.5% in June) and is unlikely to come down substantially any time soon, while consumer purchasing power is limited by low earnings growth. … On balance, we believe that the Eurozone recovery will resume in the second half of 2014. Consequently, in our yet-to-be-released August forecast we project Eurozone GDP to grow by 0.9%/1.0% in 2014, down from 1.1% reported in the July forecast after the weaker-than-expected second-quarter GDP developments. A gradual continuation of the improving trend from the second half of 2014 will result in Eurozone GDP growth picking up to around 1.5% in 2015.

Indeed, Europe’s continuing problems post a threat to strength of the US recovery.  As AEI’s Desmond Lachman wrote yesterday: “With inflation now running at around one quarter of the ECB’s inflation target and with large gaps still characterizing the European labor and product markets, it is difficult to understand why the ECB is delaying a more aggressive and proactive response to Europe’s very real deflation risk.” And deflation just makes the region’s debt burden more, well, burdensome. The natural experiment in monetary policy between the US and Europe continues …

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Monetary Policy, Pethokoukis

Please, can we stop talking about a return to the gold standard?

Photo Credit: Shutterstock

Photo Credit: Shutterstock

The same strange malady that makes otherwise rational people on right think inflation is ravaging the US economy has another odd effect: it creates a desire to return to the gold standard. Down with fiat money! Except the gold standard is just another form of fiat money, as the St. Louis Fed explains:

Unfortunately, a gold standard is not a guarantee of price stability. It is simply a promise made “out of thin air” to keep the supply of money anchored to the supply of gold. To consider how tenuous such a promise can be, consider the following example. On April 5, 1933, President Franklin D. Roosevelt ordered all gold coins and certificates of denominations in excess of $100 turned in for other money by May 1 at a set price of $20.67 per ounce. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the dollar value of gold on the Federal Reserve’s balance sheet by almost 70 percent. This action allowed the Federal Reserve to increase the money supply by a corresponding amount and, subsequently, led to significant price inflation.

What Congress creates, Congress can take away or change. Now this isn’t to say the Fed shouldn’t have a rule guiding monetary policy. My preference is for a market-based targeting of nominal GDP that would allow the central bank the flexibility to respond to economic shocks. In a way, it would be a 21st century version of the old gold standard. As Scott Sumner has explained:

It might be helpful to compare this idea to the old international gold standard. Under that system, the U.S. government agreed to buy and sell unlimited gold at $20.67 per ounce. This kept gold prices stable, and the money supply adjusted automatically. Unfortunately, however, stable gold prices did not always mean a stable macroeconomic environment. Putting NGDP futures contracts on the market along a similar model would likewise create a stable price for those contracts, hence stabilizing expected NGDP growth. And stable NGDP growth would be more conducive to macroeconomic stability than a stable price of gold, especially in a world in which rapidly growing demand from Asia might distort the relative price of gold.

And here is Milton Friedman on the gold standard:

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

How Captain America conquered China — and why it matters



The Marvel blockbuster “Captain America: The Winter Soldier” made $116 million in China alone as part of its $454 million overseas haul. On one hand, the film’s performance, reflects the changing Chinese movie market. As Edward Gresser notes at Progressive Economy, China’s total box-office take doubled to $3.6 billion in 2013 vs. 2010. And the country’s high concentration of IMAX and 3D screens gives a big edge to high-action flicks such as superhero films. So far this year “X-Men: Days of Future Past” has made $117 million while the overall box-office leader is “Transformers: Age of Extinction” with $301 million.

But maybe there was something else going on. You would think a move about a star-spangled, patriotic American supersoldier might not play well in China. Indeed, “Captain America: The First Avenger” made just $194 million overseas total. But perhaps the anti-government plot of “CA:TWS” struck a chord and, who knows, maybe planted a few subversive seeds. Here is Gresser:

Back now to Winter Soldier. What is the emotional appeal of the American superhero to Chinese youth? “Douban,” a review site for film buffs in China, features some unsurprising comments – handsome lead actor, explosions – but also (via Foreign Policy) an observation on the appeal of the film’s corrupt-enemy-within theme and the complex nature of patriotism: “[The new villain] is the very country he loves and protects….To love one’s country isn’t the same as loving one’s government: This is the main draw of Captain America.”  … A 2008 poll done by the Chicago Council on Global Affairs, for example, found 14 percent of Chinese viewing the influence of American popular culture as ‘very positive’ and 57 percent as mainly positive.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, Society and Culture

What we’re reading today

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

1.) Mercatus looks at “Innovation, investment, and competition in broadband and the impact on America’s digital economy”: “The United States’ growing digital economy is the result of the vast majority of Americans having broadband access and using it to produce and consume a range of goods and ser­vices. A fixation on broadband speeds would harm policies that promote greater adoption and investment, as well as more competition.”

2.) Avik Roy at the Manhattan Institute presents “Transcending Obamacare: A patient-centered plan for near-universal coverage and permanent fiscal solvency.”

3.) Pew reports “Birth rate for unmarried women declining for first time in decades”: “The rate peaked in 2008 at about 52 babies per 1000 unmarried women of childbearing age, before dropping to 45 births in 2013. [I]t’s quite likely that this recent decline in the non-marital birth rate also occurred as a result of the economic recession of 2007-2009.”

4.) The Washington Post looks at “How Congress could wind up accidentally saving Aereo.”

5.) “‘Living wills’ for banks are pointless without market discipline,” according to Hester Pierce: “Good plans will only emerge if markets and regulators believe that resolution plans would actually be used in a time of crisis. As the big banks consider how to redo their living wills, policymakers should take parallel efforts to revamp the bankruptcy code and eliminate regulators’ ability to skirt bankruptcy in a time of crisis.”

6.) “What would happen if someone got Ebola in America?” Find out in this piece from the Atlantic.

7.) “New York’s Common Core tests: tough questions, curious choices,” writes Robert Pondiscio at Education Next: “[W]e can now begin to see if the tests are, as one New York principal insisted last spring, ‘confusing, developmentally inappropriate and not well aligned with the Common Core standards’…. [O]n the charge of ‘confusing,’ I find the tests (at least somewhat) guilty. Not well aligned with the Common Core standards? Not guilty.”

8.) “Can lending technology revive America’s small businesses?” asks Karen Mills: “Since the onset of the financial crisis, and particularly during the economic recovery, there has been significant growth in innovative alternative sources of loan capital to small businesses, driven by technology.”

9.) “Baby makes three: More unmarried new moms cohabiting,” says USA Today: “Nearly three in five births to unmarried women across the USA [in 2013] were to women living with their partner — marking the first time a majority of these births were to women in cohabiting relationships.” Demographer Sam Sturgeon “predicts the rate of non-marital childbearing has stabilized to the point it will remain flat through 2016, marking an about-face from the increases seen for decades.”

Follow AEIdeas on Twitter at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

More on America’s old, sclerotic economy

Innovation does best when there is maximum competitive intensity. It is a theme I have been stressing, so glad to see the FT’s Tim Hartford is also on board.

Monopolists can sometimes use their scale and cash flow to produce real innovations – the glory years of Bell Labs come to mind. But the ferocious cut and thrust of smaller competitors seems a more reliable way to produce many of the everyday innovations that matter.

That cut and thrust is no longer so cutting or thrusting as once it was. “The business sector of the US economy is ageing,” says a Brookings research paper. It is a trend found across regions and industries, as incumbent players enjoy entrenched advantages. “The rate of business start-ups and the pace of employment dynamism in the US economy has fallen over recent decades . . . This downward trend accelerated after 2000,” adds a survey in the Journal of Economic Perspectives.

That means higher prices and less innovation, but perhaps the game is broader still. The continuing debate in the US over “net neutrality” is really an argument about the least damaging way to regulate the conduct of cable companies that hold local monopolies. If customers had real choice over their internet service provider, net neutrality rules would be needed only as a backstop.

As the debate reminds us, large companies enjoy power as lobbyists. When they are monopolists, the incentive to lobby increases because the gains from convenient new rules and laws accrue solely to them. Monopolies are no friend of a healthy democracy.

They are, alas, often the friend of government bureaucracies. This is not just a case of corruption but also about what is convenient and comprehensible to a politician or civil servant. If they want something done about climate change, they have a chat with the oil companies. Obesity is a problem to be discussed with the likes of McDonald’s. If anything on the internet makes a politician feel sad, from alleged copyright infringement to “the right to be forgotten”, there is now a one-stop shop to sort it all out: Google. Politicians feel this is a sensible, almost convivial, way to do business – but neither the problems in question nor the goal of vigorous competition are resolved as a result.

Of course, cronyism works both ways. It is not just Big Business influencing Big Government, but also politicians using their ability to tax/regulate/ spend to extract desired actions/contributions from business. Either way, the result is a less dynamic economy and more corrupt government. And this less dynamic economy produces fewer game-changing innovations that generate new good, services, and jobs. (Hartford is right, by the way, about net neutrality and the internet economy. More competition, not more regulation.)

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

That Financial Times study on US income inequality and housing totally misses the point

Image Credit: Shutterstock

Image Credit: Shutterstock

A new Financial Times analysis blames income inequality for the weak housing recovery:

The income gap between America’s richest and poorest metropolitan regions has reached its widest on record, shaping an uneven housing recovery that threatens to hold back the broader revival of the world’s largest economy. The gap has narrowed and widened in past cycles, but the rebound from the most recent financial crisis has seen the ratio hit its most unequal since data collection began 45 years ago, fueling policy makers’ concerns. US Commerce and Labor Department data for the 100 largest metropolitan areas by population, analysed for the Financial Times by property website Trulia, found the income disparity between the 10th most expensive region and the 90th by home prices in 2013 hit its widest since records began in 1969. The research shows Boston – ranked at 10 – reporting a per-capita income 1.61 times that of Cincinnati ranked at 90. At its low point in 1976, the gap was 1.36 times, between San Francisco and El Paso.

Right. Some geographic areas are doing better than others and thus so are their housing markets. But why? The focus on income inequality distracts rather than enlightens. Three of the top-performing cities mentioned in the FT piece — Austin, Boston, and San Francisco — are all what economist Enrico Moretti calls “brain hubs.” These are places with a high density of smart workers employed by lots of innovative technology companies. (Moretti’s research suggests that these tech jobs have a demand multiplier affect with each hiring of a Google software engineer creating five new job openings in local services from lawyers and nurses to waiters and security guards.) The resulting urban ecosystem then serves as a magnet for more educated workers and cutting-edge firms. Cities that have this ecosystem do better and better. Cities that don’t fall further behind. This is a long-term structural trend, perhaps accelerated by the housing crash. Moretti in The Wall Street Journal last year:

Since 1980, data show that the economic success of a city has been increasingly defined by its number of highly educated workers. Cities with many college-educated workers and innovative employers started attracting more of the same, and cities with a less educated workforce and less innovative employers—such as traditional manufacturing—started losing ground. It is a tipping-point dynamic: Once a city spawns some innovative companies, its ecosystem changes in ways that make it even more attractive to others. For instance, the existence of Salesforce, Twitter and Yelp in downtown San Francisco increases the city’s appeal to other high-tech entrepreneurs, and makes them more likely to locate their companies there, along with tech workers from all over the world. Nationwide, high-tech employment has grown 25 times faster than the rest of the economy.

And Moretti in The American:

Differences in geographical mobility, coupled with increasing polarization among American cities, exacerbate income differences across education groups. Indeed, if the less educated people were more able and willing to move to cities with better job opportunities, the gap between college graduates and high school graduates would shrink.

And it is this divergence and its impact on jobs and incomes that has played such a critical role in creating the housing recovery disparity found by the FT. So what to do (beyond the usual calls for education reform)? For one thing, make it cheaper to live in high-wage, high-innovation cities by making it easier to build housing through looser zoning laws and other kinds urban development deregulation. Ryan Avent, a columnist with The Economist, writes in “The Gated City” that various urban land-use regulations cost US GDP growth as much as a half a percentage point per year.

Another idea is to make it easier to move to these successful, innovative cities. Mobility between states is about half what it was 20 years ago. AEI economist Michael Strain has advocated increasing worker mobility by funding relocation subsidies for the long-term unemployed living in weak local labor markets. (What’s more, a recent New York Fed study found that “the larger and thicker local labor markets of big cities appear to help college graduates find better jobs by increasing both the likelihood and the quality of a job match.”) And for cities that aren’t doing so well? Moretti: “Clearly, the best way for a city or state to generate jobs for everyone is to attract innovative companies that hire highly educated workers.”

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.