Politics and Yellen's Nomination

When Janet Yellen was nominated to be a Fed Vice-Chairperson, all four Republican members of the Senate Banking Committee voted against her. With Bob Corker of Tennessee saying:

"She was not particularly modest about the role of monetary policy in the economy and I don’t see any evidence that’s changed."

Note that this is not a statement on a specific theory of monetary policy or even on a side of any general debate about monetary policy, such as what the inflation target should be. Mr. Corker is saying he doesn’t like her because she believes that Fed policy has an important influence on the economy. That period is bold for emphasis. That should be requirement number 1 for a Fed Chair. Paul Volcker is famous for showing how easily the Fed can stifle inflation. Even the libertarian Alan Greenspan recognized the importance of monetary policy enough to not feel any need for modesty. Ben Bernanke's academic career was about how influential monetary policy remained over the economy even when interest rates are near 0%.

Here’s a metaphor economists like to use. Say you are a passenger in a car, and have never seen a car before. The car is driving along a hilly road, and maintains a constant speed uphill and downhill. The driver is so skilled that yo can adjust the acceleration and breaking to cancel out the effect of the hills. Without controlling for anything else, you would find that the actions of the driver have no effect on the speed of the car. The speed stays constant whether the driver hits the breaks or the gas. Bob Corker, among others, is that passenger, and probably has about the same understanding of economics as the theoretical passenger has about cars, or hills for that matter.

Typically monetary policy stays in the background, keeping inflation from rising above its target. But in a debt crisis, the reaction of monetary policy can greatly influence the severity of the damage; it can mean the difference between a depression and recession. There's no need for modesty.

The Next Chairperson of the Federal Reserve

Or at least she better be. Janet Yellen was nominated for the Chair of the Federal Reserve, and no nominee has gotten less than 70 votes in the Senate for their confirmation. But the low of 70 was for the current Chairperson, Ben Bernanke, a Republican nominated by a Democrat.

She is the first woman to be nominated for the position; and the best person for the job. She is immensely experienced, and respected in the economics community. She has frequently been called a "dove", which is to suggest she is less concerned about inflation than a "hawk" would be. This is a lazy misnomer: Yellen has defended the Fed's 2% inflation target as much as anyone. It's only now that unemployment is above "full employment" and inflation has been consistently below the Fed's target that she has been a leader in structuring the Fed's unconventional policy responses. 

The correct debate isn't about inflation hawks vs. doves. It's about whether a person feels monetary policy is effective enough to bring unemployment down, and inflation up, to target even when interest rates are near 0%. It is, and Dr. Yellen knows this.

September Jobs Report

There was no jobs report due to the shutdown. A private estimate by ADP, puts September job growth at 166,000ish. But the private estimates are often well off from the BLS figures, which go through at least two more (sometimes substantial) revisions. The private estimates certainly aren’t the market movers the BLS figures are. But this figure, if accurate enough, provides evidence of a slowing economy. Not to mention that 800,000 people are temporarily out of paid work, and around 1 million are working with delayed pay, due to the shutdown.

This points to a reality of the shutdown: it is costly, and increasingly so the more time passes. From the 70% of federal intelligence employees furloughed, to new NIH patients turned away, to NOAA furloughing employees just to bring some back again for an approaching storm, to Maryland projected to lose $5 million of tax revenue per day. In the longer run, far more of these jobs become essential than the label suggests. 

But an overlooked effect of the shutdown is the lack of data. The Federal Reserve has pursued a policy that has a rough unemployment target (down to under 7%), and an inflation target (long term expectation no higher than 2%). Now neither statistic is being collected or reported by the BLS, the primary source for these figures. So the longer the shutdown lasts, the less reliable the data that guides monetary policy will become. 

August Jobs Report

Definitely a bad one. Only 169,000 jobs were added in August. The unemployment rate dropped to 7.3% due to people leaving the labor force. And the past two months of lackluster job growth were revised down by a total of 74,000 jobs. The last three months have been the worst since the recent round of Quantitative Easing (QE) began.

Coincidentally, this comes as the Fed has been making noises about "tapering" or removing stimulus in the near future. Unexpectedly, after this began, around March, inflation expectations dropped (and were never high anyway). This is the same pattern as the previous rounds of QE: as their end became apparent inflation and hiring declined, leaving the economy stagnant and making future rounds of stimulus necessary. 

That being said employment data is always volatile, and other data such as car sales and new Unemployment Insurance claims still point to strong growth. But as long as inflation, and inflation expectations aren't high, and wages aren't rising, the Fed clearly has room to stimulate without much downside risk[1]. And the fastest way to stop using unconventional monetary policy, and thus reduce that risk, is to use it correctly the first time. Withdrawing stimulus in the near future would be a mistake, at least one person at the Fed understands this.

Money

Here is a chart of money: 

Approximately all of it (at the time, and in dollars) and examples of what it can be used for. As the chart states: "All this money flows in and out of, and between, households, corporations, and governments. This process is complicated". Basically, there is a circular flow to all of this money, so there is double counting. But it is a great snapshot to look at whenever one is bored.

So…That Immigration Bill

If anyone reads this regularly, they know I’ve done a few posts about the economics of migration (here, here, and here). That’s because freer migration is the single best thing for the world economy. Since that statement isn’t at all controversial, and Latinos voted against Republicans in droves in the last election, it was natural that a bipartisan immigration bill passed the senate. The bill, while still flawed, was progress in the right direction. However, it died in the House, where Republicans refused to let it come up for a vote. 

So what would the immigration bill have done for the economy? It would have been a net benefit. The CBO found that, over the next 20 years, passage of the immigration bill would increase GDP by 5.4%, and reduce federal debt by $300 billion. Average wages would be 0.5% higher[1]; the rate of return on capital investment would be higher. Immigrants added to the population would “participate in the labor force at a higher rate”, or because they would be both less skilled and work at lower wages, on average (the bill would also allow for more skilled immigrants), they would be employed at a higher rate[2]. Overall, the bill would increase the productivity of capital and labor, meaning it would be profitable to employ more of both. Illegal immigrants who would obtain legal status would see a wage increase of 12%, and increased productivity. It would lead to a higher return on savings, which, combined with increased wages would lead to a higher savings rate.

Economist Quotes

"What are you? Blind? In which case maybe. I mostly support projects working to restore sight and prevent eye disease. Or 'expanding the market' as you might call it."

- Banksy

July Jobs Report

162,000 jobs were added in July. It's neither relatively good nor bad. The previous two months were revised down by 26,000 jobs total.

It's a mixed signal, and there have been a lot of mixed signals in the economy lately. The good part is that the innovative Fed policy we currently have automatically adjusts to economic conditions. If the economy slows down it means monetary stimulus will last longer. And the mixed signals in the economy have already triggered some subtle but telling word changes in Fed policy statements, which point to the need for continued stimulus.

The Walmart Living Wage Bill is a Bad Idea

The bill that recently passed the D.C. City Council  yet to be signed by the mayor, requiring Walmart to pay a “living wage” of $12.50 an hour is a bad idea[1]. At worst it will harm the poor and unskilled, at best it is a very inefficient way to benefit a small number of them.

Suburban Poverty

"...it is true that poverty rates tend to be higher in cities and the countryside. But the suburbs are where you will find America’s biggest and fastest-growing poor population."

June Jobs Report

195,000 jobs were added in June. A relatively good number given the recent past. The labor force participation rate stayed about the same. Furthermore, both April and May were revised upward to nearly 200,000 jobs added.

Current job numbers represent a break with the previous post-recession trend of relatively strong winters and weak summers. 2013 is on track to be the  strongest year of the recovery. All this despite fiscal austerity, and weaker growth in Europe and developing countries. Monetary policy, however, has been at its most expansionary of the recovery.

Abortion

The state of Texas is currently trying to pass a bill that would limit access to abortions, which, according to the Supreme Court, is at least against the spirit of the Constitution. Anyway, a Democratic State Senator, Wendy Davis, successfully filibustered the bill in a special legislative session. However, the governor just declared a new special session, so its passage is very likely.  

Due to these current events, now seemed like a good time to share a couple graphs I've come across in The Economist. First, a graph of teenage pregnancy, birth, and abortion rates. 

All rates have been decreasing, despite the legality of abortions. Surely the large decrease in teenage pregnancy has contributed, so it would seem that if Texas wants to reduce abortions it should reduce its higher than average teen pregnancy rate. But Texas has abstinence-only education.

The second graph shows the rates of safe and unsafe abortions in the world:

According to the data, Latin America and Africa have the highest rates of abortions, despite having some of the strictest laws limiting the procedure, or making it illegal. At the same time, they have the highest rates of unsafe abortions. The least that can be said is that laws limiting or making abortion illegal are negatively correlated with the rate of abortions. The United States and Canada, where abortion laws are generally more liberal, have lower rates of abortions and nearly no unsafe abortions. And those rates are decreasing.

No one wants there to be more abortions. But it seems that "legal, safe, and rare" is a more successful policy than the alternative, which, according to these graphs, could be described as "illegal, unsafe, and more common".

May Jobs Report

The Economy added 175,000 jobs in May. A very average number. The unemployment rate went up 0.1% to 7.6% due to more people entering the labor force. 

Not much more to say / gonna be lazy on this one. Sorry I'm not sorry.

Pakistan

A pretty newsworthy event has occurred in Pakistan: after winning an election, the new Prime Minister was sworn in. But this is no ordinary political event; it is in fact the first time since independence that an elected civilian government has finished its full term, and been replaced by another elected government. The new Prime Minister, Nawaz Sharif, also set a record by being elected to the post for a third time.

Additionally, there is a new opposition party, led by Imran Khan. His party had never won a seat previously, but now is the third largest in the parliament. The vote, while beset by some violence, was largely free and fair. Turnout increased to 60%. It only takes one time to set a precedent. Here's to a better more democratic future.

Mr. Sharif called for the end to drone strikes in Pakistan after being sworn in. Imran Khan has done so repeatedly as well. A new data visualization tells the story of drone strikes in Pakistan. Less than 2% of those killed have been "high-level" targets, 22% were confirmed civilians, and the remainder are "alleged combatants", whom the authors treat as "other" or those who can't be proven non-combatants.

The drone program got off to a pretty slow, yet horrible start, generally killing more children than anyone else, to say nothing of adult civilians. Over time, civilian deaths continued to increase, but alleged combatant deaths increased faster. Presently, around 76% of those killed are alleged combatants. Better targeting I guess, but it bears repeating: less than 2% have been high profile targets.

Economics of Emigration and the American South

A while ago I posted about the immense benefits of freer migration for migrants, the places they leave, and the places they go. Most research focuses on immigration, and partly as a result there is concern that emigration makes a sending country worse off by reducing its productive capacity. As I outlined in my original post, emigration is a net benefit, and increases growth.

Since then, I came across a paper on emigration and growth in the Southern United States. At the beginning of the 20th century the South was proportionally poorer than the North. Starting in the 1940s, the South grew faster than the North and closed the gap significantly. At the same time, there was large black emigration out of the South.

To get at the causation, Richard Hornbeck and Suresh Naidu of Harvard and Columbia University respectively, look at The Great Mississippi Flood of 1927.