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Article Artículo

St. Louis Bank President Jim Bullard Tells Us Why the Fed Needs to Be Reformed

The Federal Reserve Board has enormous power over the nation’s economy. Its efforts to promote growth through pushing down interest rates in the wake of the Great Recession have almost certainly created more than one million jobs, while saving homeowners hundreds of billions of dollars in mortgage interest. (The Fed has become especially important in the context of a Congress that shows little interest in doing anything to promote growth and jobs.)

But the Fed doesn’t always act to promote growth and employment. The current debate at the Fed over raising interest rates is posing the question of whether the Fed should be deliberately trying to slow the rate of growth and job creation. Just as pushing interest rates down earlier in the recovery helped to boost growth, raising them now would slow growth.

There are various reasons being put forward by proponents of rate hikes, but most of them center on the idea that we risk seeing the inflation rate rise if the rate of job growth doesn’t slow. The concern is that strong job growth will lead to a tighter labor market, which will allow workers to get higher wages. Higher wages can get passed on in higher prices, and pretty soon we will have a wage price spiral like we did in the 1970s. To prevent this from happening, proponents of higher rates argue that we should raise rates now to reduce the risk.

The central story here is that we are debating a risk of higher inflation in the future, against a certainty of higher unemployment and weaker labor markets in the present. People may differ on how they view this trade-off, which is why it is important to ask who sits at the table making the decision.

Under the current system, 12 of the 19 people on the Federal Reserve Board’s Open Market Committee (FOMC) are presidents of the Fed’s district banks. (Five of these bank presidents have a vote at any given meeting.) The district banks are actually owned by the banks in the district, with the presidents appointed through a process that is dominated by the banks. This means that banks have a grossly disproportionate voice in determining the country’s monetary policy.

This is likely to tilt monetary policy towards being more focused on fighting inflation than might be the case if the Fed was entirely a public institution, since bankers tend to be very concerned about even modest increases in the rate of inflation. Also, as a practical matter, it is unlikely that too many bank presidents are directly hurt by the fact that the unemployment rate is higher than it could be.

CEPR / August 31, 2016

Article Artículo

Unions

United States

Workers

Declining Unionization Rates Means Less Say for Workers

The share of employees with union representation has been steadily declining for the past three decades. Because unions are one of the most important institutions within the political sphere for non-elites to advance their interests — higher wages, better work conditions, hours, benefits, etc. — this is unfortunate. Unsurprisingly, the dramatic decline in union representation since the 1980s has been accompanied by widening economic inequality.

The private sector, accounting for roughly 85 percent of those employed in 2015, has experienced the largest decline in employees represented by a union, down just over 11 percentage points from 1983 to 2015. This dramatic decline means fewer workers have the opportunity to advocate for their interests. Unionization rates in the public sector have declined as well, though at a significantly lower rate (down 6.5 percentage points, from 45.5 percent in 1983 to 39 percent in 2015). Technological advances and a more global economy are less the cause of this decline than legislation that purposefully weakens unions and employers’ unfavorable attitudes towards unions.

CEPR and Tillie McInnis / August 29, 2016

Article Artículo

World's Greatest Economic Expert, "No One," Appears in Robert Samuelson Column

We all have come to appreciate the economic wisdom of no one. After all, no one saw the housing bubble and no one expected the recovery to be so weak. So when no one talks, people listen.

That's why people were impressed to see no one make an appearance in Robert Samuelson's column. Samuelson notes the weak 1.2 percent economic growth in the first half of 2016, which he says puts us at the edge of a recession. He contrasts this with the relatively healthy job growth which he inaccurately describes as "booming." (The 200,000 monthly rate of job growth is certainly respectable, but not exactly a boom.) Samuelson then tells readers:

"No one really understands the gap between the GDP and job figures."

No one certainly does understand the gap. First and foremost, no one realizes that the slow growth in the second quarter was simply an inventory story. Final demand grew at a 2.4 percent annual rate in the second quarter. No one also knows that GDP growth is likely to be considerably faster in the third quarter as inventory accumulations raise growth. No one knows that the Atlanta Fed's GDPNow projection shows GDP growth of 3.4 percent for the third quarter. In other words, no one knows that a recession is not now on the horizon.

No one also knows that the gap between relatively weak GDP growth and relatively strong job growth has been a feature of this economy for the last five years. It means that productivity growth has been very weak, averaging less than 1.0 percent annually. No one attributes this weak productivity growth to the weak labor market. Workers have been forced to take jobs at low wages, which means that businesses have incentive to create low wage jobs. (Think of the greeters standing around in Walmart or the people working the midnight shift at a 7-Eleven. These jobs likely would not exist if the companies had to pay $15 an hour.)

No one recognizes that several other points in Robert Samuelson's column are wrong or confused. For example, Samuelson comes up with an wholly implausible story on the difference between the rate of job growth and GDP growth:

CEPR / August 29, 2016

Article Artículo

Bernstein and Krugman Worry about the Fed and the Next Recession

I see that my friends Jared Bernstein and Paul Krugman are worried that the Fed may not have enough ammunition to combat the next recession when it comes. I can’t say I share their concern.

First, we have to remember that recessions aren’t something that just happens (like global warming :)). Recessions are caused by one of two things: either the Fed brings them on as a result of raising interest rates to combat inflation or a bubble bursts throwing the economy into a recession.

Taking these in turn, if the Fed were raising interest rates in response to actual inflation (and not the creative imagination of FOMC members) then we would presumably be looking at a higher interest rate structure throughout the economy. In that case, the Fed should then have more or less as much room to maneuver as it has in prior recessions.

The bubble story could be bad news, but it is important to think a bit about what a bubble bursting recession means. There has been a serious effort in many circles to treat bubbles as really sneaky creatures. They just pop up when no one is looking and then they burst and sink the economy.

That is a convenient view for all the people who were in positions of responsibility in the housing bubble years and ignored the threat the bubble posed to the economy. But the reality is that the housing bubble was easy to see for anyone with their eyes open. We saw an unprecedented run up in house prices with no increase in real rents at all. Vacancy rates were hitting record highs even before the bubble burst.

And the deterioration in loan quality was hardly a secret. The business press was full of stories about “NINJA” loans, which stood for no-income, no job, no assets.

And most importantly it was evident the bubble was moving the economy. If a bubble in the barley or platinum markets burst, it’s no big deal unless you happen to be employed or run a business in these sectors. But the housing bubble had pushed residential construction to a post-war high as a share of GDP at a time when a flood of retiring baby boomers might have suggested it would be unusually low.

CEPR / August 28, 2016

Article Artículo

Interest Payments on the Debt Have Fallen to 0.8 Percent of GDP, So WaPo Wants to Cut Social Security and Medicare

Both parts of the that headline are true, although the Post did not connect them in exactly this way. It's editorial instead highlighted the debt-to-GDP ratio, trying to hide from readers the fact that the real burden of the debt is near a post-World War II low.

This is a classic case of the ends justifying the means. The end here is to cut the Social Security and Medicare benefits of middle income retirees. The Post sees this as the obvious policy option to pursue in a context where there has been a massive upward redistribution of income over the last four decades. And if they have to use a bit of deception to get there, well that's okay.

The piece begins by telling us the horror story that the Congressional Budget Office projects that the deficit will rise this fiscal year from its 2015 level, the paragraph ending:

"The bigger deficit will push the national debt to 77 percent of gross domestic product, the highest level since 1950, this year."

Of course if we didn't have hysterical editorials from the Post and the professional deficit hawks we would never have any clue of the fact that we are seeing the highest debt-to-GDP level since 1950. A large debt can have negative effects in two ways.

First, it can mean a high interest burden. This means that we would be diverting a substantial portion of GDP from other purposes to pay interest to the owners of government bonds. This issue is assessed not by looking at the size of the debt, but rather the size of the interest rate payments. Currently interest payments measured as a share of GDP are a bit less than 0.8 percent, after subtracting the interest payments that are refunded by the Federal Reserve Board to the Treasury. By comparison, the interest burden was over 3.0 percent of GDP in the early and mid-1990s. In other words, that one doesn't come close to passing the laugh test. (This information is available in the same CBO report cited by the Post.)

CEPR / August 27, 2016