Tag Archives: economy

Stephen King on productivity and monetary policy

August 26, 2016 By in Uncategorized Tags: , , , , , , 2 Comments

The Stephen King I’m writing about is an economic advisor to HSBC who was formerly the bank’s chief economist.  He’s one of the most interesting economists I’m aware of.  For instance, he was one of the first to warn of excesses in the US housing market a decade ago, and perhaps the most vocal in doing so.

Last week he weighed in on the issue of productivity in an Opinion article in the Financial Times.  His main points:

1. The current low level of productivity–+1% yearly in the US, flat to down elsewhere–may not be due to lack of infrastructure spending (Lawrence Summers) or that most productivity-enhancing inventions have already been made (Robert Gordon).  It may be instead that we’re seeing now is normal.  It’s the generation that rebuilt after WWII, creating high growth in productivity in the process, that’s the outlier.

2.  If #1 is true, then many of the mainstays of orthodox macroeconomic policy need to be reexamined.  In particular,

–if the world is being flooded with money, then capital is equally available at cheap prices to high productivity enterprises and low ones.  The result may be that the very process thought to be increasing economic growth is neutralizing the competitive advantage of high-productivity enterprises

–in a low-inflation, low-productivity world, interest rates will be “dragged down to incredibly low levels,” meaning recession-fighting monetary expansion may be difficult to achieve

–cultural expectations built over the past half century of ever increasing prosperity may prove to be too high.  This would be trouble for, say, pension or social security schemes around the world whose ability to deliver promised benefits assumes the robust real economic growth of the past can be extrapolated into the future.

3.  The ability of governments to create inflation may become increasingly important, as a means of keeping nominal GDP growth above zero during an economic downturn.  Monetary theorists around the globe have assumed that doing so involves only the simple expedient of increasing the money supply.  The past eight years in the US, however, have shown that creating inflation is much easier to theorize about than to do.

 

His overall conclusion:  the Lawrence Summers idea of secular stagnation–which can be addressed through increased infrastructure spending–is a much cheerier outlook than it appears at first blush.

more on productivity

August 15, 2016 By in labor productivity, Uncategorized Tags: , , , , , 1 Comment

Last Friday, Jim Paulsen, a strategist from Wells Fargo whose work I like, gave an interview with CNBC about productivity.  His take: US productivity is being substantially understated.

The interview contains an interesting chart–one well worth checking out–in which Mr. Paulsen tracks a measure of wage growth with one of productivity.  Historically, the two have moved in tandem  …until 2012.  At that time wage growth begins to accelerate …and productivity starts to drop like a stone.

His argument is that if the productivity figures are as bad as they look, employers would never be raising wages at anything like the rate they are.

To get his results, Mr. Paulsen has had to do two things:  he uses real (meaning after inflation is subtracted) wage growth and productivity; and he uses deviation from trend (sort of like a rate of change) rather than the wage and productivity figures themselves.

As a general rule, I don’t like charts (because you can manipulate the axes to add or subtract drama), and I worry when the key relationships are in derivative data.  Still, I think the Paulsen argument is right.  Wages are rising in a way that strongly suggests there’s something wrong with the official productivity calculations.

Employment Situation, July 2016

August 5, 2016 By in employment, Employment Situation report, Uncategorized Tags: , , , , , 1 Comment

This morning at 8:30 edt, the Bureau of Labor Statistics of the Labor Department released its monthly Employment Situation report for July.

The numbers were strong.

The economy created +255,000 new jobs last month.  Revisions to the prior two months’ data were also positive.  The very weak May figures that caused financial markets alarm bells to ring were bumped up from +11,000 new positions to +24,000; the extra-strong June results edged higher to +292,000 from +287,000.

The effect of this ES report, I think, is to dissipate all the concern about incipient economic weakness that caused the Fed to refrain from raising interest rates at its last two meetings.

Although I’ve never been a big fan of financial companies, traditional banking operations, where interest margins on loans have been severely squeezed by years of easy monetary policy, would seem to me to be the biggest beneficiaries of this development.  My guess is that the ES will also encourage the stock market to continue its drift away from mature cash-generative companies to more capital investment-intensive secular growth names.

the Federal Reserve and the election

August 4, 2016 By in Federal Reserve, Uncategorized Tags: , , , , , , 1 Comment

The Fed is in an awkward position.

From a monetary stimulus perspective, the US has been in the equivalent of hospital intensive care for eight years.  In fact, by some measures the amount of stimulus being applied to the economy today is greater than it was during the depths of the 2008-2009 recession.

On the other hand, there’s the cautionary tale of Japan, which has been in quasi-recession for almost three decades.  At least part of this is due to three instances–one monetary, two fiscal–where the Land of Wa withdrew stimulus prematurely and nipped recovery in the bud.  Japan’s history also seems to show that reversing a policy mistake once made doesn’t undo all the damage of having made it in the first place.  This is the cause of the Fed desire to err on the side of having too much stimulus or having it for too long.

The Fed knows, too, that the legislative and executive branches in Washington are dysfunctional–that there’s no hope of government spending that would attack pockets of economic weakness through, say, programs to retrain workers displaced by technological advance or on repairing aging infrastructure.  This is despite the fact that extra dollops of monetary stimulus only improve the overall economic tone of the country and are less and less effective at addressing specific issues of great concern like chronic unemployment and bad roads.  On the other hand, the Fed is enabling this craziness by monetary accommodation.

On top of all this, the Fed is hemmed in by the presidential election cycle.  It typically does not want to make a move that could be interpreted as an attempt to influence the November election, either by lowering rates to make the economy seem more vigorous (favoring the incumbent) or raising them to make it seem less so (favoring the challenger).  In today’s case, of course, it has no scope to do the former.  And the Republicans are the party that wants to eliminate the Fed as an independent body (a lunatic move, from an economic standpoint).

So, what is the Fed going to do?

Its recent rhetoric says it wants to raise rates again before yearend.  There are three scheduled meetings left in 2016:  September, November and December.  It would seem to me that acting after either of the first two amounts to meddling in the election.  That leaves either an unscheduled meeting in August or the scheduled one in December.

 

 

 

internal and external economic adjustment

July 12, 2016 By in Balance of Payments, currency effects, currency markets, economics, Uncategorized Tags: , , , , , Leave a comment

This is ultimately about the euro and the EU.  Today’s post is about creating a framework for thinking about this issue.

It’s a condensed version of a longer post I wrote six years ago on Balance of Payments (actually, a series, for anyone who’s interested).   Although a big simplification of what is actually going on in the world, it highlights what I believe is a central structural issue facing the EU and Japan today   …and potentially the US, at some point.

 

imports and exports

The residents of any given country typically don’t consume only items made in that country.  They buy imported goods as well.  In fact, the marginal propensity to consume imports is normally higher than the marginal propensity to consume, meaning that as spending increases imports rise at a faster rate.

paying for imports

The country as a whole gets the money to pay for imports in one of a number of ways:  it can make things to sell to foreigners, it can use accumulated savings, it can sell assets to foreigners or it can borrow.

imbalances

In an ideal world, every country would make and sell exactly enough goods and services through export to pay for the imports it purchases.  That’s seldom the case, however.

chronic deficit

Consider a country that, year after year, buys more from foreigners than it can pay for with the proceeds from what it sells.  To continue consuming foreign goods at the same rate, such a country has to either sell assets, like land or companies, or borrow from foreigners.  At some point, however, it will reach the limits either of what it has that others want to buy or the amount foreigners will lend.

This situation sets the stage for a potential foreign currency/trade/economic growth crisis.

internal/external adjustment

Here’s where we get to internal/external adjustment.

There are two ways of dealing with this issue:

internal

–the government can slow down overall consumption (essentially, create a recession) by raising interest rates/taxes by enough to decrease consumption of foreign goods and services

–domestic industries can voluntarily restructure themselves, with/without government help, to improve quality and lower prices so they make more things foreigners will want (unlikely to happen on a large scale)

–the government can erect tariff or regulatory barriers to imports, to try to redirect consumption to domestic goods (almost always a bad idea:  look at the US auto industry since the mid-Seventies)

None of these actions are likely to win unanimous applause from voters.  And if legislative action produces negative results, it will be completely clear who is to blame.  So politicians everywhere, and particularly in badly-run countries, tend to not to want to choose any one of them.  Instead, they most often opt for the external adjustment route.

external

–This means to encourage or embrace a decline in the local currency versus that of trading partners.  That simultaneously makes foreign goods more expensive for locals and local goods cheaper for foreigners.  Devaluation will encourage exports and inhibit imports, achieving the same end as rising interest rates, but without the sticky legislative fingerprints attached.  It’s those horrible foreign exchange markets instead.

 

More tomorrow.