Economics, Monetary Policy, Pethokoukis

So where are all those bubbles the Fed’s QE bond buying has supposedly caused?

Image credit: Action Sports Photography /

Image credit: Action Sports Photography /

To QE or not to QE? Inflation is low, and the US labor market is still miles from the old normal. On the other side you have fear that the Fed is causing bubbles. MKM Partners economist Mike Darda looks at the evidence of bubbles and finds it lacking:




082713darda4And while we are on the topic, a few thoughts from The Atlantic’s Matthew O’Brien:

The S&P 500 has had a good year. It’s up over 18.6 percent the past 12 months — enough that Hamilton Nolan of Gawker thinks it just might be THE NEXT BUBBLE. (Dun dun dun). But what’s his evidence that valuations have rocketed away from reality into the non-planetary realm of Well, the S&P 500′s price-earnings (PE) ratio has jumped 14 percent the past year, the most since 1999, jumping all the way up to … 16. So case closed?

Not exactly. Now, a PE ratio of 16 isn’t cheap, but it isn’t a bubble either. As you can see in the chart below, the S&P 500′s PE ratio is only half as high now as it was during the tech bubble, when all you needed to IPO was a sock puppet, a dotcom address, and a business plan. And sometimes just a sock puppet and a dotcom address.

Oh, by the way, here are corporate profits, the mother’s milk of stocks as Larry Kudlow likes to say, as a share of GDP:


Pethokoukis, Economics, U.S. Economy

The big new immigration study that will have no impact on US immigration debate


A massive new OECD study, see above chart, looks at the net fiscal impact of immigration across advanced economies. Michael Clemens of the Center for Global Development sums it up:

The OECD analysis proceeds to calculate the true “net direct fiscal position” impact of immigrants, using the world’s best data harmonized across most OECD countries. The net direct fiscal position equals the taxes and social security contributions of immigrants minus the social transfers they receive. In the figure below, the vertical axis shows this net direct fiscal position for an average household. A positive number means they pay more in taxes than they benefits they use. The blue bars are immigrant-headed households, the white diamonds are native-headed households.

In the United States, the OECD finds that the fiscal impact of the average native household and the average immigrant household are similar and positive. The average immigrant household makes a positive contribution equivalent to more than 8,000 Euros per year (around US$11,000) more in taxes than they take out in benefits.

This impact is “direct” because it only counts current cashflows into and out of the public purse. Such an estimate is conservatively low because, the OECD notes, it “neglects the indirect implications resulting from migrants’ broader impact on the economy”. Other analyses show that including these broader economic stimulus effects raises the fiscal impact of US immigration, such as a recent peer-reviewed academic study by Chojnicki, Docquier, and Ragot. It is furthermore conservatively low because it omits the fiscal impact of US immigrants’ children, which is known to be positive and large.

A thorough report, I am sure, but one unlikely to have much impact on the US immigration debate. The primary issue here goes more to the net fiscal and economic impact of lower-skill immigrants. That is where the action is. I would say most so-called “restrictionists” would be happy to have more high-skill, highly educated immigrants join Team America but worry more low-skill immigrants will worsen the position of low-skill natives already buffeted by globalization and automation — and perhaps more and more competing with higher-skill natives. Reihan Salam:

One shouldn’t discount the possibility that a dramatic increase in less-skilled immigration would create employment opportunities for skilled workers. But in light of technological change, it also seems premature to dismiss the possibility that mechanization will reduce employment levels in some domains that have traditionally been limited to less-skilled workers (like the picking of produce) while skilled workers will grow increasingly willing to work in others, like eldercare and food preparation.

Pethokoukis, Economics, U.S. Economy

4 years after the Great Recession ended, are ‘signs of resilience’ as good as it gets for the US economy?

Image Credit: Shutterstock

Image Credit: Shutterstock

One of the most influential public policy books for me is 1988′s Third Century, co-written by Joel Kotkin and Yoriko Kishimoto. It was a timely and thorough — and correct — response to a spate of books theorizing that America/free enterprise was in permanent decline versus Japan/industrial policy. Rather, argued Kotkin and Kishimoto, America’s flexible, entrepreneurial economy gave it a “reserve power,” or sokojikara, that would enable it to out innovate its Asian competitors.

Good call. As this following chart shows, Third Century came out right around the time Japanese per capita GDP peaked as a share of America’s and then began declining as the Land of the Rising Sun entered its long stagnation:


All of which leads me to this upbeat Bloomberg story: “America Resilient Five Years After Great Recession” by Kasia Klimasinska  and Shobhana Chandra. The piece outlines the US economic rebound since the Great Depression:

The U.S. is weathering federal budget cuts and higher payroll taxes, growth is picking up and some economists predict the expansion, now in its fifth year, may last longer than most. The signs of resilience are everywhere: Households continue to spend. Businesses are investing and hiring. Home sales are rebounding, and the automobile industry is surging. Banks have healthier balance sheets, and credit is easing. All this coincides with the economy shedding the excesses of the past, such as unmanageable levels of consumer and corporate debt.

In other words, we are in an economic recovery. Which is great. But there is more to the story, as WaPo reporter Jim Tankersley notes:


And let me add a few other things via the miracle of pictures:

1. The slowdown in productivity growth starting in 2006:

Credit: BLS

Credit: BLS

2. The continuing output gap:


3. The dead-in-the-water labor market:


Perhaps most of all, I am worried about America’s sokojikara. As the FT’s Ed Luce noted recently: “The rate of small business creation in the US is in long-term decline. Last year, just 513,000 businesses were created, down from 543,000 in 2011. Overall, businesses under five years old account for just 8 per cent of US businesses, against 13 per cent in the 1980s, according to the Kauffman Foundation.” And there are even more troubling numbers here and here about our entrepreneurial economy.

Yes, America is recovering. And things might even pick up a bit over the next year or two. But are we really laying a foundation that will avoid a New Normal future? We need to move from signs of resilience to signs of above-trend growth. No wonder more than half the country still thinks America is in recession.

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

Is Larry Summers a lock to replace Bernanke as Fed chairman?

Image Credit: Wikimedia

Image Credit: Wikimedia

My CNBC colleague John Harwood says the bane of the Winklevii is the big favorite right now:

A source from Team Obama told CNBC that Larry Summers will likely be named chairman of the Federal Reserve in a few weeks though he is “still being vetted” so it might take a little longer.

It’s largely come down to a two-horse race between Summers, a former Treasury secretary, and Fed Vice Chairman Janet Yellen for the next Fed chief.

Several Fed officials, who spoke on condition of anonymity, told Reuters that they did think Summers was Obama’s clear favorite, though they had a few doubts.

“Has he devised a strategy to be effective within the institution?” one asked.

Some insiders also expressed concern about Summers’ close ties to Wall Street.

Earlier this summer, my sources said Summers was something close to a lock. Then came weeks of push-back, including a pro-Yellen letter from a bunch of Senate Democrats. And now, apparently, he’s still something close to a lock.

If Summers is the pick, I look forward to the confirmation hearings and his analysis of unconventional monetary policy, financial deregulation, and the role of 1990s housing policy planting the seeds of the housing bubble. And as far as his confirmation prospects go, BBW’s Joshua Green makes a good point that the lack of Democratic presidential contenders in the Senate is a lucky break for Summers:

Why does that matter? Because presidential candidates are almost always captive to the passions of their party’s base, and the liberal base of the Democratic Party loathes Summers. That would produce tremendous pressure to oppose him. … The fact that Summers doesn’t have three Democratic presidential hopefuls in the Senate probably means he’ll have three more votes than he would have otherwise—and that may wind up being the deciding factor if he’s nominated.

And long-time Washington analyst Peter Davis offers his two cents: “Summers will face difficult questioning before the Senate Banking Committee on his Wall Street ties, his role in bank bailouts, and his statements on women. Despite significant opposition from liberal Democrats and some Republicans, I expect Summers to be confirmed late this year.”

Pethokoukis, Economics, U.S. Economy

New Normal unemployment: Why America’s shadow labor market will probably stay in the shadows

Credit: Kansas City Fed

Credit: Kansas City Fed

“The Shadow Labor Supply and Its Implications for the Unemployment Rate” by Troy Davig and José Mustre-del-Río of the Kansas City Fed:

In the wake of the Great Recession, with more Americans unemployed than at any other time in the last quarter-century, millions of workers stopped seeking work.

The crisis saw a sharp rise in the number of people who, in response to surveys, indicated they wanted a job but were not actively seeking one. As long as these individuals are not actively seeking work, they are not considered part of the labor force and are not counted as unemployed in official government statistics such as the unemployment rate.

The group continued to swell through the first few years of the economic recovery and, by early 2013, numbered some 6.7 million—nearly 2 million more than before the crisis. Residing on the periphery of the labor market, this group may be viewed as a “shadow labor supply.”

And what are the implications here for the unemployment rate? As the economy continues to glacially recover, will those folks flood back in and send the U-3 rate higher or leave it stagnant? Probably not. The longer someone stays out of the labor market, the less likely after a certain point he or she is to return:

Although individuals in the shadow labor force do flow back into unemployment, the peak in their return to the labor force typically occurs in the first few post-recession years. The recent, post-recession peak of their flow back into unemployment has already occurred, in mid-2010. While another surge back into the labor force by individuals in the shadow labor supply is possible, historical evidence suggests it is unlikely.

Which would mean the US will have a permanently larger pool of the unemployed than if the Great Recession had not happened — with all that implies fiscally, economically, and socially.

Economics, Monetary Policy, Pethokoukis

Here’s what happened when the ECB did what Republicans want the Fed to do

Credit: MKM Partners

Credit: MKM Partners

The above chart is one of many “reality check” charts in a new research note from economist Mike Darda of MKM Partners. This one shows a stunning correlation between ECB tightening and further economic weakness in the eurozone back in 2011. Something for those on the center-right and elsewhere to think about as they bemoan the “easy” Bernanke Fed.

As Darda also points out, “the Fed has done enough to avoid deflation and double dip recession despite the most intense fiscal consolidation since the Korean War demobilization.”

That and no more, unfortunately.

Pethokoukis, Economics, U.S. Economy

San Francisco Fed study: Obamacare not to blame for the rise in part-time work


How should we think about 71% of the net increase in jobs so far in 2013 being part-time jobs? Blame the slow economy, say researchers Rob Valletta and Leila Bengali:

Part-time work spiked during the recent recession and has stayed stubbornly high, raising concerns that elevated part-time employment represents a “new normal” in the labor market. However, recent movements and current levels of part-time work are largely within historical norms, despite increases for selected demographic groups, such as prime-age workers with a high-school degree or less. In that respect, the continued high incidence of part-time work likely reflects a slow labor market recovery and does not portend permanent changes in the proportion of part-time jobs.

The above chart, modified to take into account a redesigned survey question, shows the part-time employment share peaked at 20.3% in 1983, a bit above the recent peak of 19.7% in 2010.

As regards the impact of the Affordable Care Act, V&B note that a) most large employers were already subject to rules that prevented them from denying health benefits to full-time workers, so Obamacare doesn’t change their incentives to create part-time jobs; b) a 2013 study that suggests “the ultimate increase in the incidence of part-time work when the ACA provisions are fully implemented is likely to be small, on the order of a 1 to 2 percentage point increase or less;” and c) the example of Hawaii, where part-time work “increased only slightly” in the two decades following enforcement of a state employer mandate.

Two caveats: V&B point out that while the level of part-time work in recent years “is not unprecedented … its persistence during the ongoing recovery is unusual.”

That is certainly interesting. As is this observation, which plays into the previous one: “Part-time work has been rising among selected groups of prime-age workers age 25 to 54, primarily those with limited education.” Still, the researchers maintain “it is more probable that the continued high incidence of individuals working part time for economic reasons reflects a slow recovery of the jobs lost during the recession rather than permanent changes in the proportion of part-time jobs.”

Well, we will see if the “unusual persistence” in part-time jobs continues and if the Hawaii example is applicable more broadly. Also, the researchers seems a bit dismissive of the 1 to 2 percentage point jump when Obamacare is fully implemented. That would equal up to two-thirds of the three percentage point increase in part-time work seen since the Great Recession. So are they saying, really, that Obamacare is not yet really affecting the US labor market — but in the future it will have as much two-thirds (though perhaps much lower) the impact of a near-depression on part-time work? What am I missing here?


Will Obama ever go and see North Dakota’s energy boom for himself?

There are seven states President Obama has yet to visit. But only one of them is the heart of an almost miraculous energy boom that has resulted in the nation’s lowest jobless rate. Obama not going to North Dakota and the Bakken area is like Bill Clinton going out of his way to stiff Silicon Valley in the 1990s. National Journal’s Amy Harder offers several possible explanations, including this one:

Going to a state to tout domestic oil production could also further inflame Obama’s environmental base, which is already worked up over his pending decision on the Keystone XL pipeline (which would ship some Bakken oil, if approved).

But, as Harder notes, Obama could use the visit to highlight both the opportunities and challenges of this energy revolution. Life is about trade-offs, after all. Hope the president sees this one as a net positive.

Economics, Monetary Policy, Pethokoukis

Did the housing crash cause the Great Recession? No, it was the Fed

Image Credit: Medill DC (Flickr) (CC BY 2.0)

Image Credit: Medill DC (Flickr) (CC BY 2.0)

Just as the 1929 stock market crash didn’t cause the Great Depression, the housing collapse didn’t cause the Great Recession. In both cases, monetary policy mistakes were the likely proximate and fundamental cause. The role of the Federal Reserve in the Great Depression was the subject of Milton Friedman and Anna Schwartz’s A Monetary History of the United States. The Fed’s role in causing the Great Recession and Financial Crisis is explained in The Great Recession: Market Failure or Policy Failure? by Robert Hetzel. The first book caused a major rethink in the economic profession, so should the second. As Hetzel puts it: “Restrictive monetary policy rather than the deleveraging in financial markets that had begun in August 2007 offers a more direct explanation of the intensification of the recession that began in the summer of 2008.”

I have written a number of blog posts on this topic. But Ramesh Ponnuru gives a great overview on the theory in his wonderful new National Review story, “Cause for Depression.” Although the housing slump began in mid-2006, the economy actually weathered the decline quite well until 2008. The following two charts show housing prices and starts vs. the unemployment rate:



Ponnuru picks up the story:

One way monetary policy affects the economy, and arguably the crucial way, is by shaping expectations. When the Fed creates an impression about future spending levels, it affects the spending that people undertake today in anticipation of that future. So when the Fed suggests that it will pursue a tighter policy in the future, it is effectively tightening money in the present. Even when it cuts the federal-funds rate, it may be tightening money if markets had projected a sharper cut.

By mid 2008 the Fed had been effectively tightening for months. In December 2007 the Fed cut the federal-funds rate by less than markets had expected. During the summer Fed officials made inflation-phobic comments that led informed market participants to expect a tighter policy in the future. The minutes of the August 2008 meeting declared that “members generally anticipated that the next policy move would likely be a tightening.” Current policy was “passively” tightening as well: As the economy deteriorated, the distance between the looseness it needed and what the Fed was providing increased.

Even after Lehman Brothers collapsed in September 2008, the Fed refused to cut the federal-funds rate and issued a statement citing the risks of inflation. Market expectations of inflation fell further. The Fed would not cut rates until October 8, weeks after the crisis had started to dominate the news — and even that decision followed a contractionary move, the October 6 decision to pay banks interest on excess reserves, which discouraged bank lending.

Markets had no reason to have any confidence that the Fed would continue to keep total spending throughout the economy rising at a steady rate, as it had more or less done for the previous quarter-century. Indeed, spending started to fall in June 2008, months before Lehman’s collapse, and ended up declining at the fastest rate since “the recession within the Depression” of 1937–38. Tight money — that is, reduced expectations of future spending — made everything worse. It depressed asset prices and raised debt burdens, adding to bank losses and making households more fearful about spending.

Which is why some folks call the Great Recession “Bernanke’s Little Depression.” While the Bernanke Fed should get much credit for being as active as it was once the economy collapsed — especially compared to the European Central Bank — it could and should have done more, as Ponnuru adds: … “very tight money led first to a financial crisis and then to a slow recovery.”

Now, this is an extremely inconvenient narrative for those blaming the Great Recession on a free-market failure as a way of pushing for more government regulation and control in all aspects of the economy. And while it may also be how most Americans view the Great Recession, pro-market advocates should nevertheless try and set the record straight.


Nasdaq and the day the computers died

Miles Kimball on high-frequency trading and the Nasdaq shutdown:

Whatever the exact trigger that brought Nasdaq down, it is likely that a contributing cause is the huge increase in lightning-fast high-frequency computer trading in recent years. …

It could be that giving high-frequency traders that kind of advantage entices them to provide liquidity in the market, selling to those who want to buy and buying from those who want to sell. But the magnitude of this supposed benefit is unproven. As Popper writes: “Regulators are still grappling with whether the rise of high-speed firms has been a net benefit or loss for investors.” …

If letting high-frequency traders have an advantage measured in milliseconds doesn’t provide enough benefits to be worth the seeming unfairness, what can be done? One simple approach would be to have the market only clear 20 times per second, and insisting that all orders received by, say, 11:05:02.05 a.m., be treated in a totally even-handed way in that moment of market clearing (as buy and sell orders are matched).

Further, it should be insisted that orders be absolutely secret from other traders until the moment of market clearing when that order is supposed to be revealed and executed. It is possible that having the market clear only 20 times per second would reduce the total amount of information processing done by the market every day, but discouraging high-frequency traders and their advantageous zero-sum game off sheer speed of execution might lead the traders to focus on more socially-valuable forms of information processing.