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Article Artículo

Roger Lowenstein, F**k Your Stock Portfolio

I realize it would be too much to ask that people who write on economics for major news outlets have any clue about how the economy works. I say that seriously; I have been commenting on economic reporting for more than two decades. Being a writer on economics is not like being a custodian or bus driver where you have to meet certain standards. The right family or friends can get you the job and there is virtually no risk of losing it as a result of inadequate performance.

But Roger Lowenstein performs a valuable service for us in the Washington Post this morning when he unambiguously equates the value of the stock market with the country’s economic well-being. It seems that Mr. Lowenstein is unhappy that Donald Trump’s recent tariff proposals sent the market plummeting. The piece is titled, “when the president tanks your stock portfolio.” It holds up Trump’s tariff plans as a uniquely irresponsible act because of its impact on stock prices.

Okay, let’s step back for a moment and ask what the stock market is supposed to be telling us. The stock market is not a measure of economic well-being even in principle. It is ostensibly a measure of the value of future corporate profits, nothing more.

Suppose the successful teacher strike in West Virginia spills over into strikes in other states, as now appears likely. Suppose this increased labor militancy spills over to the private sector and organized workers are able to gain back some of the money lost to capital in the last dozen years. That would not be good news for Mr. Lowenstein’s stock portfolio, but it would certainly be good news for the vast majority of the people in the country.

But this is the result of private actors, Lowenstein is upset about a president’s action’s tanking the stock market. Well, let’s give another one that would likely have an even larger negative impact on Mr. Lowenstein’s stock portfolio.

Suppose the next president announces that she will raise the corporate income tax rate back to 35 percent from its current 21 percent level. Any bets on what this does to stock prices?

CEPR / April 01, 2018

Article Artículo

Will Interest Payments Take Up the Entire Federal Budget?

Greg Ip gave us another rendition of this old scare story in a Wall Street Journal column. The argument is that the interest paid on US government debt will soon impose an enormous burden on the federal government, choking off spending on important government programs.

The key part of this story is that interest rates will jump at some point in the not too distant future. While this is in fact what the Congressional Budget Office predicts, it is also what it has been predicting even since the Great Recession, and consistently been shown wrong.

The key question is, why would interest rates rise? There are two stories where we see interest rates rise. One is that we start to see an uptick in the inflation rate. In that case, long-term rates would almost certainly rise since investors would have the option of getting a better return just by holding physical commodities. Of course, the Fed would almost certainly raise interest rates in response to higher inflation, which would more directly cause interest rates to rise. One point about higher inflation that is worth noting is that it reduces the real value of the debt.

The other reason interest rates could rise is that the Fed raises rates even in the absence of higher inflation. In that case, the Fed as a matter of policy would be increasing our interest burden. (Selling off its assets also has the same effect, since the interest on the assets held by the Fed is refunded to the Treasury.)

Arguably, the Fed's rate increases in the last year and a half have not been justified by higher inflation, as the inflation rate remains well below the Fed's target. It is striking that none of the deficit hawks, including the Committee for a Responsible Federal Budget, which is cited in this piece, have ever expressed concern about the higher debt service burden resulting from these interest rate hikes.

CEPR / March 30, 2018

Article Artículo

John Williams as President of New York Federal Reserve Bank?

Several press accounts have fingered John Williams, currently president of the San Francisco Federal Reserve Bank, to be the next president of the New York Fed. There are several reasons why this should be upsetting.

First, while the NY Fed had committed itself to an open process in selecting its new president, the turn to Williams seems to have taken place in the dark of night. He had not been mentioned as being one of the people in contention until just the last week.

It is also upsetting to see yet another white male picked for one of the top positions at the Fed so recently after Jerome Powell replaced Janet Yellen as chair. The president of the New York Fed, unlike the other Fed presidents, has a vote at every meeting. The New York bank president sits aside the chair and the vice-chair as one of the three most important members of the Fed’s Open Market Committee, which sets monetary policy.

The labor and community coalition Fed Up (with which I work) had submitted a diverse list of potential candidates to be considered for this position. The list included current and former Fed bank presidents and governors, members of the President’s Council of Economic Advisers, and heads of government statistical agencies. It appears that almost none of these people were even considered for the position.

An open process would have involved a public listing of names of people who were being considered and then a short list of finalists. This would have provided an opportunity for interested parties to assess the individuals’ qualifications and views. That is not what we saw here.

The selection of Williams specifically raises serious concerns about both his views on monetary policy and his responsibilities as one of the country’s most important financial regulators. Williams has repeatedly indicated a desire to raise interest rates and slow job growth, even when the economy was still far from full employment.

For example, in May of 2015, he said the economy was “nearing full employment” when the unemployment rate was still 5.5 percent. He said the same thing the following year when the unemployment rate was 4.7 percent. Last fall he complained that, “[...]we’ve not only reached the full employment mark, we’ve exceeded it.”

While Williams has thankfully modified his views as the unemployment rate has dropped without leading to inflation (in 2012, he put the floor for non-inflation unemployment at 6.5 percent), he has been all too willing to sacrifice jobs out of fears of inflation that proved to be unfounded. Had he been able to get the Fed to act based on his views, the unemployment rate today would almost certainly be considerably higher than its current 4.1 percent level.

This would mean that millions of today’s workers would be without jobs, with the losers being disproportionately blacks, Hispanics, and other relatively disadvantaged groups. In addition, the tightening of the labor market has allowed of tens of millions of workers at the middle and bottom end of the wage distribution to see real wage gains for the first time since the 1990s boom.

In addition to his problematic views on monetary policy, there are also grounds for being concerned about his effectiveness as a regulator. The New York Fed has responsibility for overseeing the Wall Street banks. Its failure to take this responsibility seriously was a major factor in the build-up to the financial crisis. (Timothy Geithner, who had been New York Fed bank president during the build-up of the housing bubble, famously once commented in subsequent congressional testimony that he had never been a regulator. A statement that was unfortunately close to being true.)

CEPR / March 26, 2018

Article Artículo

More Thoughts on Trade

Neil Irwin had an interesting piece arguing that Trump is fighting the last battle on trade in worrying about imports of steel and aluminum. His main point, that the millions of jobs we lost in manufacturing to trade in the last decade are not coming back, is largely correct. But there are a few points worth adding.

First, it would be worth having a little honesty about the impact of trade on the country’s workers. It is standard wisdom in political circles to say that trade really wasn’t what caused job loss in manufacturing, the real cause of job loss was productivity growth. This is true, but only in a way that is incredibly misleading.

Suppose a factory that was the major employer in a small city burned down, leaving all the workers unemployed. An economist can truthfully say that the major cause of the loss of manufacturing jobs in the city was productivity growth since over the last five decades the city almost certainly lost more manufacturing jobs from productivity growth than due to fire. At the same time, the people who are newly out of work are 100 percent right in blaming the fire.

This pretty well describes how many economists have been talking about the impact of trade in the last decade. Manufacturing has been falling as a share of total employment since the 1970s, but the total number of jobs in manufacturing had changed little, apart from cyclical ups and downs, until our trade deficit exploded in the last decade. (The sharp rise in the trade deficit actually began in 1997, but its impact was offset by the late 1990s boom.) In December of 1970, there were 17,300,000 jobs in manufacturing. In December of 2000 there 17,180,000, a drop of just 120,000. By comparison, in December of 2007, before the start of the Great Recession, manufacturing employment was down to 13,750,000, a drop of 3,430,000 jobs in just seven years.

This was overwhelmingly due to the rise in the trade deficit, which peaked at almost 6.0 percent of GDP in 2005 and 2006. We were seeing productivity growth in manufacturing during this whole time, so that was not something that was new in the years 2000 to 2007. What was new was the large trade deficit. The manufacturing job loss also had a secondary impact on communities across the Rust Belt where it was a major employer.

CEPR / March 25, 2018

Article Artículo

Trump vs. Krugman on Trade Wars

Paul Krugman used his column this morning to go after Donald Trump for rushing blindly into a trade war. While I agree with Krugman's basic points, Trump does not seem to know what he is doing and therefore this is not likely to end well, I would disagree with Paul on a few points.

First, Krugman makes the point that the Commerce Department's measure of our trade deficit with China is overstated because it counts the full value of exports from China as coming from China, even though most of the value added may come from elsewhere. This could mean, for example, we count the full value of an iPhone exported from China as a Chinese export, even though the vast majority of the price is attributable to components made elsewhere.

Krugman is clearly right on this but ignores the flip side. When we import goods from Japan, Korea, Germany and other countries, some of the price will reflect the value of parts that were manufactured in China. My guess is the amount of foreign value added in our imports from China is probably larger the amount of Chinese value added in our imports from third countries, but the latter is clearly not zero.

If we want to do an honest accounting to determine our true trade deficit with China, we have to look at both sides of this issue. It is interesting to note the lack of interest in this value-added issue when it comes to our trade with Canada.

CEPR / March 23, 2018