Traditional economic theory suggests that savers would rather hold cash than lose money by leaving it in a bank. Positive interest rates benefit both savers and borrowers. However, in the past few years, central banks have been rethinking the idea of the zero lower bound and pushing interest rates into the negative. In 2009 and 2010, Sweden led the way as the first nation to set negative interest rates following the financial crisis. Switzerland and Denmark have since followed suit. Last year, even the European Central Bank issued a negative interest rate. Since the absolute value of these interest rates is so low (mostly around -0.75% and -0.85%), there has not been a huge amount of backlash since the negative rates have in fact benefited these nations’ economies. Overall, this technique has given central banks the ability to change the way that they conduct policy. Having the ability to set negative interest rates is enabled by such low inflation of recent years.
The latest oil conundrum revolves on where to put it. U.S. crude oil-supplies are at the highest level in more than 80 years, equal to almost 70% of our storage capacity. Likewise, Citigroup Inc. estimates that European commercial crude storage has reached approximately 90% capacity, and inventories in South Korea, South Africa, and Japan are almost at 80% capacity. Some analysts predict that already low oil prices could continue to fall, as producers sell oil at a discount to the handful of existing buyers that have room to store it.
Accordingly, production exists at nearly 1.5 million barrels a day more crude than the world needs, as a result of decreasing demand and rising production in the U.S. If this continues, many producers may be forced to shut their wells, and store oil below ground.
As a result, storage space is now becoming a tradable commodity. CME Group Inc., plans to launch the first oil-storage futures contract on March 29. This will allow traders and producers to buy and sell the right to store specific types of oil in Lafourche Parish, La., for a defined month.
The effects of bad weather, a stronger dollar, and cheaper oil all might lead to a disappointing jobs number this Friday, analysts suggest. Preliminary data has been fairly cool, increasing the likelihood of a slowdown in hiring. While we have seen a strong dollar and cheap oil for months already, their impact on jobs might carry somewhat of a lag. Furthermore, recent positive momentum in the size of the labor force could also put pressure on the unemployment rate. Altogether, markets might prove most attentive to that last point. If we see strong labor force growth, that might give the Fed some more time before they raise rates. Indeed, slack in general will receive plenty of attention. The picture below demonstrates the remaining gap between unemployment and underemployment, another gauge of the economy’s factor utilization.
In the past two years, more than 50 U.S. venture-backed tech startups reached a valuation of $1 billion plus. Specifically, Snapchat Inc. and Pinterest Inc., are planning to raise financing at valuations of $19 billion and $11 billion, respectively. Uber Technologies Inc. has a valuation of approximately $40 billion, the highest for a private U.S. company.
Venture capitalist Bill Gurley claims, “we are not in a valuation bubble, as the mainstream media seems to think. We are in a risk bubble”.
The Nasdaq recently hit above the 5,000 mark, for the first time since 2000. The end of these increasing tech valuations may come with a stock market correction. Mark Cannice, professor at University of San Francisco claims “For some of these companies, it is hard to imagine a successful exit”.
If we are in a tech bubble, who is the most at risk? One would immediately think private investors and VCs, since they have the most invested in these private technology companies. But Mark Cuban, the Dallas Maverick’s owner, argues that there thousands (225,000) of “angel investors” in the US, that have invested large sums of money in private startups. He claims that “A bubble is when uninformed investors, in search of a huge payday invest money at prices far greater than their actual value and end up getting a reduced amount in return. In this case, with the private market lack of liquidity. Ten minutes after they invest, their investment is basically worthless. That’s a bubble”.
Do you all think that this potential tech bubble is as dangerous as the tech bubble 0f 2000? Could it reach the stock market?
Bloomberg and qz.com
The Institute for Supply Management issued [its latest survey results] on March 4th that U.S. non-manufacturing expanded at a rate slightly better than expected in February. The ISM stated that “overall, supply managers feel mostly positive about the direction of the economy.” Despite this positive outlook, ISM non-manufacturing members said labor problems at West Coast ports were causing a disruption in supply, stating “Business is good, but waiting and not shipping on time will cost us big time.”
Some economists attributed this weakness to a possible There’s also the weather effect. 181,000 new jobs were created in February according to the ADP jobs report. It is interesting that service-sector activity increased in February despite these supply disruptions.
The president of the New York Fed, William Dudley, firmly questioned the riskiness – as well as the effectiveness – of the current program of government backed student loans. Dudley finds fault with the status quo lending practice in a number of areas. The current method assigns a fixed rate to all student borrowers, with no consideration to their course of study or intended career. This increases both the risk profile of outstanding debt and encourages some students to take out lofty loans with no hope of repayment. For those students, Dudley claims, returns on the investment in college “may be negative.” In the end, the burden falls on the U.S. taxpayer.
Does anyone have any thoughts on alternative student loan programs? Perhaps one that is centralized around universities themselves – who might be able to better evaluate repayment prospects based on the student’s major and performance?
Just a few weeks ago, Wal-Mart announced that it would raise the wages of 500,000 of its employees to $9 per hour by April and over the course of the year to over $10, currently 38% higher than the federally mandated minimum wage of $7.25. Wal-Mart, as the nation’s largest private employer, is set to lose profit as a result of the move. However, Wal-Mart executives have stated that the move was made to attract more skilled workers while also reduce the rate of the company’s employee turnover, benefitting the company in the long run.
Many economists, in response to Wal-Mart’s announcement, believe that this move will trigger other large-scale employers of low-wage employees (i.e. fast food restaurants) to make similar moves in the weeks and months to come. Demand for low-wage employees has risen continually in the past 5 years and looks to continue to rise as the economy experiences post-recession expansion. Interestingly, economists have also pointed out that many of these employees who are receiving this raise currently receive government benefits and as a result, the wage increase will reduce stress on these government programs.
The debate over minimum wage has been a political hot-button in recent years and this development undoubtedly continues to fuel the discussion. What are some of the other potential large-scale effects that may occur with this announcement? It will be interesting to monitor this development going forward and see if any other large companies or employers follow suit in raising their lowest wages.
As the job market has started to pick up in the recent months, there has been some talk at the Federal Reserve to start raising shor-term interest rates. An interesting article from the Wall Street Journal depicts that some central bank officials believe that the rate will increase towards the middle/end of this year (probably during the Fed’s meeting in June). The presidents of the Fed in Atlanta, St. Louis, and San Francisco are all behind the idea. They have each seen hearty improvements in their job markets, and the Fed believes the strong job growth to continue into the future. Some Fed officials would like to see inflation rise before the interest rate increases. Inflation has been short of the Fed’s 2% target rates for quite sometime. “Ms. Yellen told Congress this past week that the Fed expects to start lifting rates once it is ‘reasonably confident’ inflation will rise toward that goal, if the labor market continues to improve as expected.” Fed officials have seen the decrease in unemployment and believe that inflation will increase. As the unemployment rate continues to drop, currently it is 5.7%, it can create pressure within the labor market, which will cause inflation to rise. Using employment statistics will help the Fed gauge when it is appropriate to start increasing the short-term interest rate.
Over the past couple of years, the Fed’s aggressive monetary policy has led to a widely expanded balance sheet. With roughly $4.5trillion worth of assets on its books – predominantly treasuries and mortgage-backed securities – the Fed might appear far more exposed to risk than it might permit for US companies. At Janet Yellen’s recent Senate testimony, South Carolina Republican Sen. Tim Scott remarked, ” But it appears that nobody is stress-testing the Fed. The Proverbial Fox is guarding the hen house from my perspective.”
Yellen responded by saying that the Fed does in fact conduct stress tests on itself. However, as many of the graphs in the linked article demonstrate, the Fed appears to have far more risk than the banks it regulates. Yellen explained that the Fed’s powers and function give it more flexibility with its balance sheet. Yellen certainly has a point, yet this is the first time an experiment like this has been run. I really wonder what a net release of some assets would like. Of course, that is years or decades away, but it by no means seems like something that will go over smoothly.
I read Eric Liu and Nick Hanauer’s Atlantic article “’Middle-Out’ Economics: Why the Right’s Supply-Side Dogma Is Wrong” which originally appeared in an Atlantic partner publication Democracy: A Journal of Ideas. Both Liu and Hanauer are from Seattle and both have TED Talks.
Liu runs an organization called Citizen University that seeks to make “civics sexy” and make citizens active in the power dynamics of their communities. And Hanauer is rides the top of the heap as a 0.1%er, who is convinced that his fellow plutocrats ought to go Henry Ford’s route and pay wages that allow workers to buy what they produce, because if Mr. Ford is the only one who can buy an automobile, no one’s going to be very well off. He takes the view that it is the consumer and not the entrepreneur who makes the entrepreneur rich.
Liu and Hanauer argue that strong capitalist economies pursue middle class economic growth and not trickle-down economic growth. The most prevalent economic issue facing our country currently is that entrepreneurs take too much wealth for themselves and don’t leave enough for the vast majority of people to take advantage of the goods and services they produce. Those goods and services are meant to meet a demand; without demand they have no purpose. You cannot sell without demand.
Monetary policy is ineffectual, because it is a short-run solution that disproportionately affects investments in the supply-side. And there’s plenty out there for us to buy; Hanauer gives the example that he has two pairs of “manager pants” and even though he makes 1000x the median wage he is not going to buy 2000 pairs of pants. The feedback loop of demand meets supply is skewed, has been for a while and is worsening. Hanauer sends a message to his fellow plutocrats to wake up and realize that their good times will end in fire and pitchforks like rentier France if changes are not made in favor of the middle and lower class. He calls for higher wages, a higher minimum wage, less inequality, because “we know in our gut that we’re all better off when we’re all better off.”
According to the WSJ article “Why Is Tuition So High?”, college tuition has risen three times as fast as the CPI, and twice as fast as medical care. In the article, the WSJ interviews three different economists to discuss the issue.
Rudy Fichtenbaum, a professor at Wright State University, attributes the high costs to the decline in state support for higher education, as well as the bloated salaries of university administrators. Richard Vedder, the director of the Center for College Affordability and Productivity in DC, adds that tenured professors can be costly. He claims that as some professors reach tenure, they also acquire low teaching loads, thus universities must pay adjunct professors to pick up the slack. Dr. Vedder also notes that rising federal financial aid programs are driving up costs, a theory known as the “Bennett hypothesis”. Lastly, Katharine Lyall, former president of the University of Wisconsin System claims that the IT boom in universities is largely to blame for the cost issue.
In terms of how to reduce costs, Dr. Vedder argues for a reduction of federal presence in financial aid. In doing so, he claims that enrollment would fall slightly, therefore lowering the ability of colleges to raise prices, and forcing them to economize. Additionally, he claims that states should subsidize students instead of universities, in order to bolster competition. Dr. Lyall proposes that we must shift our view of higher education as a subsidized public good to a competitive market good. Essentially, Lyall wants to remove all regulations and requirements that universities face from the government, and allow them to manage their resources and capital. Finally, Dr. Fichtenbaum claims to “partially agree with Lyall”, but does not want to give up education being a subsidized public good, as he finds this will heighten the already growing inequality issues in our society.
Ukraine has been in the news consistently for over a year now due to major conflict between Russia. The economic downturn that has happened because of this conflict is severe. Ukraine is not in good shape while the fate of Russia’s economy is more of a controversy. President Obama described Russia’s as being “in tatters” based on falling oil prices and likely as a result of economic sanctions put on the country by other powers. Others are not so convinced and so our focus moves to the underdog in this situation, Ukraine. More recently the news is talking about the financial crisis in Ukraine and what that means for the rest of the world. Ukraine’s GDP is low and may deplete to as low as $70 billion. The graph above shows Ukraine’s GDP from 1987 to 2011 and in comparison to 2008 at $180 billion we can see that they are not in a good place.
Additionally, their currency, the hryvnia is losing value fast. In response the IMF has promised a total of $40 billion over a four year time period but has only pledged $17.4 hoping to gain the rest from outside sources. While this would be great to aid Ukraine’s economy many are concerned about where the IMF pledge will actually be coming from. Currently inflation is as high as 29% and in two years gas prices are predicted to be five times what they were in 2013. Based on these projections the citizens of the country are expected to be a third poorer than when the Soviet Union collapsed; a very dire time indeed. It will be important to keep an eye on Ukraine in the future and to see if the IMF is about to come up with money necessary over the next four years to help the flailing economy.
Inflation and unemployment certainly serve as the headline numbers that drive Fed policy. Still, a recent Bloomberg article suggests that Yellen is increasingly evaluating the economy’s productivity statistics as the Fed gears up for a policy change. That said, productivity growth derives most of its policy importance from its effect on the price level.
Without productivity growth, increases in demand for an economy functioning at or near its supply capacity will apply upward pressure on the price level. While recent growth in the labor force might ease some supply pressures, ultimately the economy will start experiencing some upward trending inflationary forces without increases to productivity.
The Fed looks at both TFP and labor productivity statistics. I do wonder if one or the other remains more pertinent to inflation. Wage growth certainly is key, but might isolating labor lead to a less direct relationship with the aggregate economy’s price level?
The other day, I made a blog post about the Greek debt crisis. After reading Professor Smitka’s comment, I wondered how effective/ineffective the IMF’s austerity policy has been in European debtor countries like Greece. Gechert et al. attempt to answer this question by estimating changes in fiscal multiplier during an economic downturn in their paper “Fiscal multipliers in downturns and the effects of Eurozone consolidation”.
For those who are not familiar with the term ‘fiscal multiplier’, it is the ‘ratio of a change in national income to the change in government spending that causes it’. In other words, it measures how GDP responds to a specific fiscal instrument such as taxes and government transfer.
The values of multiplier are drawn from standardized fiscal impulses which allow for comparable input-output responses. Gechert et al. use a meta-regression analysis of multipliers collected from a set of empirical reduced form models conducted by Gechert and Rannenberg (2014). This database incorporates 98 previous studies published between 1992 to 2013, thus providing a sample of 1882 observations of multiplier values. Lastly, they control for the economic regime (as in good/normal/bad condition of economy) associated with a given fiscal multiplier estimate in order to observe how multipliers vary in different economic circumstances.
Their regression results show that multipliers of general government spending vary between 0.4 and 0.7 in normal economic circumstances or booms. In crisis situations, however, the multipliers become larger, exceeding the average range by 0.6 to 0.8. Furthermore, some instruments increase fiscal multipliers by much more than others do during a recession. As the graph below depicts, fiscal transfers (which is the second least effective instrument after the military spending in average/ above average economic circumstances) yields the steepest increase in multipliers during below average economic circumstances. On the other hand, the tax multipliers become much lower in the downturn – the opposite result compared to spending multipliers. This finding illustrates that that tax reliefs are less efficient at countering a recession.
What does this mean for countries like Greece mired in the Eurozone Crisis? When Gechert et al. apply their multiplier estimates to the cumulative changes of the fiscal instruments in the Eurozone, they estimate that the fiscal consolidation (i.e. austerity policy) reduced GDP by 4.3% in 2011, 6.4% in 2012, and finally 7.7% in 2013. The authors also find that the biggest contribution to this decline by far comes from significant transfer cuts, (which is consistent with the graph above).
So, Gechert et al. make it very clear that austerity policy might be doing more harm than good. Is fiscal sustainability really that much worthy of a goal to overlook more than 7% of GDP contraction?
In January, the United States saw its first dip in overall prices in five years. This is most likely driven by the fall in oil prices since the Summer of 2014. While this dip is interesting, some U.S. economists emphasize that the American economy has not suddenly become the Eurozone or Japan, and this does not necessarily reflect the underlying health of the economy. The fall in consumer prices primarily comes from the energy sector where costs fell roughly 20% over the course of last year. Consumer prices outside of energy illustrate a different story. For example, food costs are up 3.2%, shelter costs are up 2.9%, medical care costs rose 2.3%, and without energy consumer prices rose 1.9% in January. John Williams, president of the San Francisco Fed, stated that he believed inflation will rise to the Fed’s desired level by the end of 2016. Yellen reinforced the emphasis on the energy sector in her testimony to Congress, but also cautioned that inflation in other areas has slowed since last summer. There have also been comments that a tightening labor market could put upward pressure on wages. Many analysts also believe oil prices are about to rebound, which might rebound overall consumer prices. It is interesting to see how energy can have such a severe effect on inflation as the Fed continues to strive for their target inflation of 2%. This might also have an interesting effect on interest rates as the Fed has hinted at raising them in the near future.
Yesterday, the FCC voted in favor of new net neutrality rules, which will ensure that all Internet service providers will treat all legal content equally. Internet service providers, primarily large cable or telephone companies, will now be prohibited from prioritizing certain content over others, by blocking or slowing transmission speeds, and by requiring fees for faster lanes of their Internet networks, a practice known as “paid prioritization.”
I found this article on Forbes called “Am I The Only Techie Against Net Neutrality?”. While the article is dated (May 2014), I found it to be very interesting. First, author Joshua Steimle notes that he wants, just like everyone else, to see more competition, “Proponents of Net Neutrality say the telecoms have too much power. I agree… But if monopolies are bad, why should we trust the U.S. government, the largest, most powerful monopoly in the world?”. He raises the point that industries such as public schools, health care, higher education, student loans, housing, banking, physical infrastructure, immigration, the space program, the military, the police, AND the post office, are all heavily regulated by the government, and all suffer major problems.
Next, he brings up the issue of privacy, “Should we believe that under Net Neutrality the government will trust the telecoms to police themselves?”. Steimle warns that the government will likely need to install its own hardware and software to monitor Internet traffic. Is this something we want? Lastly, he explains that governments effectively regulate tech companies because they are too inefficient. Technology is constantly changing, and the government simply cannot move fast enough to monitor a resource like the Internet.
What do you all think?
Expected inflation has fallen sharply since last summer, and the European Central Bank and the Fed have responded in very different ways. The European Central Bank launched quantitative easing, while the Fed has been biding its time. If businesses, consumers, and investors expect inflation to fall, they will begin to act in a way that will make that happen. Market based measures of inflation, such the difference in yields between regular and inflation-indexed bonds, began to fall last summer with the fall in oil prices. The fed has acknowledged the drop, but instead has placed its trust in the stability of survey-based measures. The Fed also indicated earlier this week that they may raise interest rates sometime in the near future. With conservative language, Yellen noted that the FOMC would take interest rates on a meeting by meeting basis and has relaxed her emphasis on longer term patience. Some analysts predict an interest rate raise by June. Low inflation might undermine the hopes to raise interest rates, as the Fisher effect notes the importance of inflation in determining nominal interest rates.
As yet more snow falls, we’re reminded … that it’s the start of spring? While this year is colder than any I remember, though not so bad in terms of total snow, it does raise the question of how to interpret economic data. Of course housing starts are down, but they’re always down this time of year. Some prices are up and others down, again as in the past. Since it was the most recently updated series — the new data were released at 8:30 am this morning — I use the Consumer Price Index as an example.
The graph on the left is of the raw CPI “headline” series, unadjusted for seasonality. As you can see there are regular spikes, up and down, in the data. If you look at the unadjusted series, you’ll find that there is a downward spike every November, and an upward spike that includes March. (Click to open it in the FRED database, if you hover your cursor over the graph you’ll see the date and value for each point.) If we’re the Federal Reserve, trying to gauge what is happening to inflation, we thus know the March number will give a number that is too high, the November one too low. Now we can look at changes from the year before, but that is less than perfect because random factors — unseasonal weather, Easter falling in March rather than April — might make price changes in one month higher or lower than normal. We could do a regression to get a monthly adjustment factor, but that implicitly assumes a constant pattern across a span of a dozen or more years.
Work by economists in statistical agencies around the world points to using deviations from a rolling average as superior to a regression. (In fact the methodology was initially implemented in Canada, not in the US.) Formally this is an ARIMA correction [AutoRegressive Integrated Moving Average], which in the software iteration currently used across the government allows correcting for anticipated idiosyncratic factors such as alternate dates for major holidays, e.g., a New Years that falls in the middle of a week or an Easter that falls in April and so shifts the timing of the Spring Break found in many school schedules.
The result is a seasonally adjusted series; I have that for the CPI just below the unadjusted one. It’s not a totally smooth series, because the underlying data aren’t smooth, but the upward spike in March is muted or absent, and the downward November spike vanishes. The real test comes from looking backward: the consensus of the users of the data is that the correction is pretty good, and that large deviations are generally a function of one-time events that all know will affect the data, but for which there’s no historical precedent to make a correction. (An example is the impact of this winter’s series of blizzards in the Northeast or the Federal shutdown of a few years ago on employment data – we know there will be one, but it’s hard to know the magnitude.)
Now seasonal corrections are not for everyone. If you’re trying to do a short-term budget, you want to know the actual price change this year, not whether it is higher or lower than in recent months or relative to a “normal” year. For most purposes, however, we do want seasonal corrections.
Reposted from Autos & Economics on blogspot. For more detail see the relevant BLS page.
Huffington Post had a very interesting read yesterday.
Mark Dayton, governor of Minnesota since 2011, proves once and for all that trickle down economics does not work. Unlike his precedent Tim Pawlenty, a Conservative who prides himself in having never raised state taxes during his term, Dayton increased the state income tax from 7.85 to 9.85 percent on individuals earning over $150,000 (or over $250,000 for couples who file jointly). Moreover, Dayton approved to raise the state’s minimum wage from $6.15 (for large employers) to $9.50 per hour by 2018. Dayton’s bold moves attracted concerns and criticism from many Republicans. Quoting Rep. Mark Uglem, for instance, “the job creators, the big corporations, the small corporations, they will leave. It’s all dollars and sense to them”. In other words, Republicans anticipated rising costs that firms in Minnesota must incur in both income tax and wage will slow down the economy and decrease employment opportunities.
Quite contrary to the concern among financial Conservatives, Minnesota’s economy fared very well. Between 2011 and 2015, Dayton successfully added 172,000 new jobs, that is 165,800 more jobs in Dayton’s first term than Pawlenty added in both of his terms combined. According to Bureau of Labor Statistics, Minnesota now boasts the 5th-lowest unemployment rate (3.6%) in the U.S. Whereas Dayton inherited from Pawlenty a deficit of $6.2 billion, he successfully managed to turn the situation and achieved a 1.5 billion budget surplus since this January. Despite the initial worry that business will flee the state, Minnesota actually became the hub of economic opportunities, becoming the 9th best state for business according to Forbes . Thanks to the rise in minimum wage, Minnesota also has median income that exceeds the U.S average by $8,000 today.
So, the case of Minnesota clearly shows that progressive income tax and raising minimum wage are indeed more effective in promoting economic growth.
The financial ministers of 19 EU nations agreed to keep the EU bailout funds flowing to Greece. Bloomberg reports that the government in Athens may run out of cash as early as next month. Yesterday, Germany rejected a Greek proposal for a six-month extension of loan agreement, arguing it was “not a substantial solution”. Along with other European creditors, Germany has been reluctant to risk its taxpayer money by lending it to Greece. After much heated debates and negotiations, Germany finally accorded to extend Greece’s bailout for another four months. The loan will help temporarily stem flights of deposits from the Greek banks, but many doubt it will resolve the essential economic and financial troubles of the nation.
At the same time, Greek politicians face serious domestic backlash. Alexis Tsipras, the newly elected prime minister of anti-austerity party Syriza, is at the greatest risk. During his campaign, he promised the mass “No more bailouts, no more submission, no more blackmailing”. As a condition for its bailout loans, IMF had required the Greek government to adopt severe austerity measures including tax increase and cut in government spending. While unemployment rate in Greece has long surpassed 25%, the safety nets for jobless workers continue to diminish. Many critics worry that IMF’s policy recommendation will adversely affect the Greek economy in a long run.These policies is in discordance with Keynesian method of overcoming economic recession through fiscal expansion.
Starting next week, the Greek government must show a list of overhaul measures, which EC, ECB,and IMF will review. It will be interesting how this decision will unfold in Greece and rest of the Europe.
References: Articles from Bloomberg, CNN, Reuters, and NYTimes
Graphs inserted by the Prof. Note the extraordinary rise in interest rates, which are rising again, and the collapse of employment, down roughly 20% over 4 years (from 2009Q3 to 2013Q3). See comments as well.