MacroScope

Pirate economics at the Fed

Avast ye swabs! Maybe the disconnect between improving labor markets and sluggish economic growth that  has Federal Reserve policymakers scratching their heads makes sense if viewed through a pirate’s spyglass – with a lot of latitude, according to a top Fed official.

St. Louis Fed President James Bullard sees the 8.3 unemployment rate continuing to fall at a sprightly pace. That’s even though Fed Chairman Ben Bernanke has fretted the jobless rate’s precipitous tumble since August, when it was 9. 1 percent, doesn’t square with the relatively modest pace of growth.

Bernanke has explained that according to a rule of thumb that has currency among economists, Okun’s Law, the jobless rate shouldn’t  fall much if growth doesn’t exceed the economy’s long-run average. So he and others at the Fed find it hard to be confident a growth rate of around 2 percent – the forecast for the first three months of the year – can do much to boost hiring.

Asked to explain his optimism regarding labor markets despite this discrepancy, Bullard offered a swashbuckling interpretation.

“Okun’s Law – it’s like Pirates of the Caribbean – it’s more of a guideline,” he told reporters after a speech,  referring to the Hollywood blockbuster movie series. “I don’t think it’s that reliable of a rule of thumb.”

Spain: ¿Cómo se dice “contagion”?

It was not a good day for Spain.

The euro zone’s fourth largest economy had to pay dearer to borrow through medium-term bonds, a sign that concerns over the country´s fiscal problems was curbing appetite for its debt. It sold 2.6 billion euros of 2015, 2016 and 2020 paper – at the low end of the target range.

In contrast, Portugal’s 1 billion euros sale of 18-month treasury bills was a successful test of market appetite for the longest-dated debt since it took an international bailout. Appetite for short-dated paper has been especially supported by the one trillion euros of cheap three-year European Central Bank funding injected into the financial system since December.

The problem is that Spain is the latest country to come into the firing line of the euro zone debt crisis. This week’s tough budget was not enough to calm investor nerves and many fear too much austerity could choke an already struggling economy where unemployment rose to a staggering 22.9 percent in the fourth quarter of 2011 – the highest in the European Union. Meanwhile, the government expects Spain’s public debt to jump in 2012 to its highest since at least 1990.

The new dovish minority at the Fed

Suddenly, it’s the two lone doves who find themselves on the outside of the Federal Reserve’s policy consensus. Until recently, it was the hawks who were in the minority. But minutes of the central bank’s March meeting suggest policymakers are becoming less keen to launch a fresh round of monetary stimulus as the U.S. economy improves.

They key difference came from the minutes’ characterization of officials’ inclinations toward a third round of quantitative easing or QE3.

Here is what the January minutes had said:

A few members observed that, in their judgment, current and prospective economic conditions – including elevated unemployment and inflation at or below the Committee’s objective – could warrant the initiation of additional securities purchases before long. Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.

Europe’s triple threat: bad banks, big debts, slow growth

The financial turmoil still dogging Europe is most often described as a debt crisis. But sovereign debt is only part of the problem, according to new research from Jay Shambaugh, economist at Georgetown’s McDonough School of Business. The other two prongs of what he describes as three coexisting crises are the region’s troubled banks and the prospect of an imminent recession.

These problems are mutually reinforcing, and require a more forceful policy response than the authorities have delivered to date. In particular, Shambaugh advocates using tax policy to lower labor costs, fiscal stimulus from those economies strong enough to afford it, and more aggressive action from the European Central Bank:

It is possible that coordinated shifts in payroll and consumption taxes could aid the painful process of internal devaluation. The EFSF could be used to capitalize banks and to help break the sovereign / bank link. Fiscal support in core countries could help spur growth.  Finally, the ECB could provide liquidity to sovereigns and increase nominal GDP growth as well as allow slightly faster inflation to facilitate deleveraging and relative price adjustments across regions.

Gimme a P, gimme an M, gimme an I

If you have ever wondered why financial markets and economists are interested in purchasing managers indexes, here is why:

Stocks rally not sustainable: Prudential

Want the recent rally in stocks to last? Don’t count on it, says John Praveen of Prudential Financial. The Dow Jones industrial average is up over 20 percent since September, and has gained 7 percent since the start of the year. But Praveen sees too many headwinds for the boom to continue.

The pace of gains thus far in 2012 is likely to be unsustainable and volatility is likely to remain high as several downside risks remain. These include:

1) Greek risks: The second Greek bailout and debt restructuring deal are likely to be a short-term reprieve, with still high Greek debt/GDP burden and Greek elections due in April.  A negative election outcome with no clear mandate and/or a new government reneging on its commitments (to reduce debt) could potentially roil markets.

Employer of last resort, Arab Spring style

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The concept that the government should serve as an employer of last resort in times of economic stress was first floated by the late economist Hyman Minsky. Its modern-day proponents remain largely marginalized, despite the nation’s persistently high unemployment and the extreme damage to the job market that was done by the deepest recession in generations. 

But Ali Kadri, senior research fellow at the National University of Singapore, argues the policy, which works as an automatic stabilizer when economies are struggling, is all the more appropriate for an Arab world that has been plagued by extremely high joblessness and a general lack of infrastructure and development. He says the Arab spring creates an opportunity for a drastic shift in the region’s approach to social and economic policy.

The retention of resources and their redeployment within the national economy are indispensable conditions for development and job creation. Employment policies are best set subject to social efficiency criteria distinct from the salient neoclassical productivity ones. It is highly unlikely, in view of the sheer smallness to which industry and the productive economy have shrunk under neoliberalism, that it would be possible to reemploy the massive redundant labour force on the basis of expanding private sector expansion and productivity gains. A criterion valuing and remunerating social work may be costly in the short term, but the social returns will reimburse initial expenses over the long term.

U.S. retail sector perks up

One month’s data may not a trend make. Even so, this morning’s batch was pretty solid. U.S. retail sales rose 1.1 percent in February, the biggest gain in five months, and January’s numbers were revised up. Some of the rise reflected higher gas prices, but much of it appeared to be real.

The National Federation of Independent Businesses’ small business optimism index also rose, for a sixth straight month.

Eric Green at TD Securities says that as far as potential revisions to GDP forecasts, he’s keeping his powder dry for now:

A recovery in Europe? Really?

There’s a sense of relief among European policymakers that the worst of the euro zone’s crisis appears to have passed. Olli Rehn, the EU’s top economic officials, talked this week of a “turning of the tide in the coming months”. Mario Draghi, the president of the European Central Bank, speaks of “sizeable progress” and “a reassuring picture”.

At last week’s spring summit, EU leaders couldn’t say it enough: “This meeting is not a crisis meeting … it’s not crisis management,” according to Finnish Prime Minister Jyrki Katainen. All the talk is of how the euro zone’s economy will recover in the second half of this year.

But for the 330 million Europeans who make up the euro zone, the outlook has, if anything, darkened. As euro zone governments deepen their commitment to deficit-cutting, and rising oil prices mean higher-than-expected inflation, households can’t be counted on to drive growth. Not only did housing spending fall 0.4 percent in the October to December period from the third quarter, but unemployment rose to its highest since late 1997 in January.

A highly unequal U.S. recovery

No wonder most Americans feel like the recession never ended. A new paper from Emmanuel Saez, a Berkeley professor and expert on inequality, shows the overwhelming majority of income gains – 93 percent – accrued in 2010, the first full year of the U.S. recovery, went to the top 1 percent richest Americans. (Thanks to our friends at Counterparties for bringing the paper to our attention.)

The research suggests economic growth, even if it gathers speed, will not be nearly sufficient to close the income gap that has been the target of national Occupy protests. Instead, only drastic tax reforms of the sort seen during the 1930s might do the trick.

In 2010, average real income per family grew by 2.3% but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality. It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover.