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  • Chinn and Frieden on Conditional Inflation Targeting

    In the latest Foreign Policy , Menzie Chinn and Jeffry Frieden argue on behalf of conditional inflation targeting. A little inflation would be welcome, they say, in that it would "reduce the debt burden to more manageable levels." They write: Today our highest priority should be to stimulate investment, growth, and employment. Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems. To back up his assertion that a little inflation is not a threat, Chinn adds this graph of implied inflation at the Econbrowser blog. Do you agree with Chinn that fear of inflation is "unwarranted"? Read A Call for Action: Conditional Inflation Targetting here .

  • Jay Shambaugh: Export Strength Sign that 'Economy is not Fundamentally Flawed'

    As much as the US economy is struggling, exports have been strong ever since the recession ended. According to Jay C. Shambaugh , of the McDonough School of Business at Georgetown, exports have risen 23% since the end of the recession. This is easily explained by the weakness of the dollar, right? The costs for US goods abroad have decreased along with the strength of the US economy. Not so fast, says Shambaugh. Writing at Econbrowser , he points out that the patterns of where exports have risen do not match the dollar's relative decline: The takeaway for Shambaugh seems to be that, while exports can not serve as the fix for the US economy's problems, their relative strength is a sign that the foundation might not be as cracked as some suggest: The ability of U.S. firms to increase production and sell to markets where demand is growing is just more evidence that the U.S. economy is not fundamentally flawed or broken. Firms can find workers and increase output where they have customers. Yet while exports to growing foreign markets have been soaring, at home, residential construction has collapsed, structures investment by firms has collapsed, and state and local government spending has declined. All of these are a serious brake on demand. Compounding all this is the fact that real Federal Government consumption expenditures and gross investment in the third quarter was 2% below that of a year ago. This acts as a further brake on growth in output and employment. Some businesses may complain about fear of regulation (though in surveys their number one complaint is lack of customers) and some commentators may worry about structural unemployment and a lack of appropriate skills amongst the U.S. work force. There is plenty of reason to always make sure that supply side policies are sensible and worker training and education is adequate. But these do not seem to be the problems of today. Based on exports, the evidence shows that where there is demand for their products, American firms are more than ready to produce and to sell. Read What can exports tell us about the economy? here .

  • EconBrowser: Climbing the Mountain that is the Mortgage-Debt-to-Income Ratio

    James Hamilton thinks that in order to return to a healthy economy we need to do something about this: Household mortgage debt skyrocketed in the 2000s, and income did not keep up. The solution depends on some mix of foreclosures, increased saving, and GDP growth. But these elements don't make good teammates with the economy in its current state. So Hamilton, writing at EconBrowser , offers some support for the Federal Housing Finance Agency proposal to alter the Home Affordable Refinance Program : One obstacle to refinancing has been mortgages that are underwater, which means that, as a result of declines in house prices since the time of the purchase, the principal owed on the mortgage exceeds the current resale value of the home. Previous rules would not allow Fannie or Freddie to guarantee a loan whose value exceeds that of the home, which refinancing an underwater loan would require. The new FHFA proposal relaxes that requirement so as to allow refinancing for underwater loans that were originated more than 2-1/2 years ago and on which the borrower is current on the payments with no late payments over the last 6 months. One question of interest is, who will ultimately end up losing the income that corresponds to the household's gain from refinancing? Since the original loans are currently guaranteed by Fannie or Freddie, and since Fannie and Freddie's liabilities in turn are now de facto guaranteed by the U.S. Treasury, one's first thought might be that the household's gain is ultimately the loss of the U.S. Treasury. However, Fannie and Freddie guarantee against default but not against the loss that comes from pre-payment, so it's the holder of the loan, not the U.S. Treasury, that loses. On the other hand, Fannie and Freddie own over a trillion dollars of the loans themselves, and the Federal Reserve owns another trillion. The Federal Reserve contributed $82 billion to the U.S. Treasury this year from its earnings on the mortgage-backed securities and other assets that it holds. A lower income flow from these would reduce the size of the payments to the Treasury that the Fed is able to make and increase the net contribution the Treasury needs to make to keep Fannie and Freddie solvent. Read Hamilton's full analysis here .

  • Mark Zandi, Menzie Chinn, Analyze 'American Jobs Act'

    It is a bit trying to separate the economic anaylsis of President Obama's jobs speech and the proposed American Jobs Act , but some economists worked overnight to cut through the talk and look into the details. Mark Zandi , chief economist of Moody's , has come out with the headline worthy number of 1.9 million. That's how many jobs he says the jobs plan would add. He also projects GDP growth of an additional 2 points next year if the act is passed. You can read the analysis here (subscription required), or Politico's coverage of the report here . Menzie Chinn took a stab at textbook analysis of the president's proposals. At Econbrowser , Chinn writes that, following "textbook" thinking, the president was right to focus on the short run output gap, as demonstrated in the below figure: Using the CBO's measure of potential, the lost output has been $2.8 trillion (Ch.2005$) through 2011Q2. Using the WSJ mean forecast, another $1.4 trillion will be lost by 2012Q4. The CBO-implied output gap as of 2011Q2 is 7.1% (log terms). Using a cubic in time trendline, the gap is still 3.4% (and then one has to believe that output was above potential 3.3% in 2007Q3). Extended unemployment insurance, extension of the payroll tax holiday [CBPP], and infrastructure spending are all means by which aggregate demand can be sustained. To the extent that extended UI and payroll tax holiday benefit lower income/liquidity constrained individuals, the marginal propensity to consume is relatively high and hence the multiplier fairly large. Investment in infrastructure also makes a lot sense given the multiplier is fairly large for direct spending. Read Recovery, or Replaying 1937 (and 2008)? here .

  • James Hamilton: Signs the US Economy Will 'Hang in There' In 3rd Quarter

    At Econbrowser , James Hamilton lays out the case for the economy to stabilize somewhat in the second half of 2011. He can't quite bring himself to say that it will get better, instead saying that he doesn't "expect things to get a whole lot worse." A major culprit for the slowing recovery has been oil prices--and specifically the impact of oil prices on new car sales. But Hamilton expects car sales to pick up as retail gas prices come down. He shares this look at the trend in car sales: Hamilton argues that the recent trouble for auto sales were very different from the back in 2008. Read his analysis here .

  • James Hamilton on 'A Weakening Economy'

    At Econbrowser , James Hamilton has a rather distressing roundup of recent economic data. The already sluggish recovery has slowed down, he says. Manufacturing numbers are getting weaker, housing prices keep going down in most markets, employment may not have hit bottom...all leading to meager GDP growth: The national income and product accounts updated last week by the BEA suggested that first quarter GDP growth was even weaker than previously indicated. GDP can be calculated in two ways, by summing up data on either what gets produced or the income generated by that production. Conceptually (and by definition) the two numbers should be exactly the same, but in practice you don't come up with quite the same number using different methods. Jeremy Nalewaik has argued that the income-based measure of GDP (referred to as gross domestic income, or GDI) may be a slightly better indicator of business cycle turning points. For example, GDI gave a clearer signal than GDP of a weakening economy in 2007. GDI had been showing a little stronger growth than the GDP indicator in early phase of the current recovery (2009:Q4-2010:Q2), but has been signaling weaker growth than GDP for the most recent quarters (2010:Q3-2011:Q1). The latest BEA numbers report that total U.S. real output was growing at a 1.8% annual rate in 2011:Q1 according to the GDP measure but at only a 1.2% rate according to GDI. Read A weakening economy here .

  • Gas Prices Up, Consumer Sentiment Down

    Consumer sentiment is dropping, according to the University of Michigan's Consumer Sentiment Index . Here are the key survey findings from Reuters : The preliminary March reading of the University of Michigan's consumer sentiment index for March came in at 68.2, down from 77.5 in February. That was the lowest level since October 2010 and was well off the median forecast of 76.5 among economists polled by Reuters. The survey's barometer of current economic conditions was at 83.6, down from 86.9 the month before and below a forecast of 86.0. The survey's gauge of consumer expectations tumbled to 58.3 from 71.6, the lowest level since March 2009. Here's a look at the Consumer Sentiment Index since 1978 (chart from James Hamilton ): At Econbrowser , Hamilton shares some helpful research on the relationship between rising gas prices and consumer attitudes: We had been getting some good economic news on other fronts lately, which I had been hoping would be enough to offset the hit to consumers' budgets from energy prices. The March numbers so far are just preliminary, and consumer sentiment is a somewhat noisy indicator. But whatever you make of the latest report, it is not good news. Another question asked in the survey pertains to expectations of inflation. Consumer expectations of inflation for the next year jumped from 3.4% to 4.6%. Again gasoline prices seem to figure more prominently in consumers' expectations than we might have expected, and again we can do a simple mechanical calculation of the direct effect. Gasoline prices have a weight of about 5% in the CPI, so if all other prices were held fixed, the 20% increase in gasoline prices we've seen over the last 3 months would add about one percentage point to the CPI. Read Consumers see bad news here .

  • Econbrowser: Progress Report on QE2

    At Econbrowser , James Hamilton takes a crack at evaluating the effectiveness of the Fed's latest quantitative easing tactics (and includes some helpful graphs for anyone trying to teach the subject): The graph below provides our calculations of the average maturity of publicly-held debt both before and after the Fed's operations, updated to include the first 3 months of QE2. The blue line is the average maturity (in weeks) of debt issued by the U.S. Treasury. The green line is the average maturity of publicly held debt, that is, the green line represents the results of subtracting off the Fed's holdings of Treasury debt. Historically the green line was above the blue. This is because the Fed preferred to buy the shorter-term debt, as a result of which the average maturity of the remaining debt held by the public (green) was bigger than that for the debt as originally issued (blue). However, since the start of 2008, that relation has been reversed-- the Fed has been buying a disproportionate share of the longer-maturity debt, and thus has been a factor in reducing the average maturity. But also since 2008, the Treasury has been issuing more long-term debt faster than the Fed has been buying it, so that the green line continues to rise over time. What we find in the latest data is that this trend has continued over the last 3 months, even with QE2. The graphs below highlight details of the last year. The top panel is the average maturity of publicly-held Treasury debt inclusive of all Fed operations, that is, it corresponds to the green line in the preceding figure. Although the average maturity in the second and third months of QE2 (December and January) fell a little below that for the first month (November), the average maturity in every one of these three months was bigger than in every month of the two years prior to QE2. The second panel shows the fraction of publicly-held Treasury debt (again, after netting out the Fed's operations) that is of 10 years or longer maturity. This has gone on to make new highs in both December and January. Our conclusion is that if QE2 made a positive contribution to the improving economic indicators since the program began, it could not have been through the mechanism of shortening the maturity of publicly-held Treasury debt. There are, to be sure, other places where the Fed's QE policies could have made some sort of impact, and Hamilton notes this in his post. Read Progress report on QE2 here .

  • James Hamilton: Inside the Numbers on Latest Unemployment Report

    According to the Bureau of Labor Statistics unemployment report for December , released on Friday, the US unemployment rate has dropped to 9.4%. Good news, right? Not so much, says James Hamilton , writing at Econbrowser : Unfortunately, the household numbers look much less rosy when you look at them a little more closely. For one thing, the impressive December gain comes right after an estimated loss according to the household survey of 175,000 jobs in November and a whopping loss of 294,000 in October. How can the household survey be signaling a falling unemployment rate over the last 3 months if its measure of the number of people working has actually gone down? Hamilton goes on to provide an answer to that question, and his approach is very instructive: Let me use an average over the last two months to smooth out some of the wild volatility in the household employment numbers and highlight what's changed in terms of people's employment status. In November and December, the civilian noninstitutional population over age 16 increased by 180,000 per month. The figure below illustrates what would have happened if these new people had entered into the respective employment categories at the same rate as the existing population. For example, if 58% of those 180,000 new potential workers found jobs, the number of employed individuals would have increased by 105,000 each month. If in December the number of employed had increased by 105,000, the number of unemployed increased by 11,000, and the number not in the labor force by 64,000, then measures such as the unemployment rate and the labor force participation rate would have been unchanged. Average additions (in thousands of people per month) that would have kept the unemployment rate, employment rate, and labor force participation rate unchanged between October and December. But we know that in reality, the unemployment rate was not unchanged, but fell from 9.7% in October to 9.4% in December. The figure below shows that this is attributable mathematically to the fact that almost 200,000 fewer workers were counted as being unemployed in December compared with October. Actual average monthly changes in November and December in the number of people in different employment categories, with the actual change minus the change predicted in the previous figure indicated in parentheses. Read Interpreting the employment numbers here .

  • Graph: Unemployment and Unemployment By Income

    At Econbrowser , Menzie Chinn breaks out some recent research on how unemployment during the recession and the "jobless recovery" is affecting Americans in the lower income brackets. From the work of Andrew Sum , Ishwar Khatiwada , and Sheila Palma , of Center for Labor Market Studies at Northeastern University , Chinn has created this graph. It shows the unemployment and underemployment rates for the first eight months of 2010, by income. And, it is important to note, the income here is 2008 household income: Read The Incidence of Unemployment and Underemployment, by Income here .

  • James Hamilton Tries to Quiet Fears of a Double Dip Recession

    To those who are concerned the economy is headed toward a second recession, ( or the long slow depression that Paul Krugman fears ), James Hamilton lays out a series of reasons not to worry. Hamilton argues that the economy is still growing--albeit very slowly. His first piece of evidence: the PMI Composite Index for June. At first glance, this looks like an indication that things are getting worse in the manufacturing sector: Here´s why Hamilton thinks this is not a sign of a downturn: The ISM manufacturing PMI index for June was 56.2, the lowest value since December. But any value above 50 means that a plurality of managers reported that June was better than May. The uninterrupted string of above 50 readings we've seen going back to August of 2009 means that mangers have seen improvements month after month. A value of 56.2 is higher than that seen in 80% of the months over the last ten years. This is just one of many economic indicators Hamilton explains in defense of his measured optimism. Read his full post here .

  • Estimating the Cost of Gulf of Mexico Oil Spill

    Oil continues to spill into the Gulf of Mexico at a rate of 800,000 liters a day from the BP oil rig that sank in late April. BP Chief Executive Tony Hayward described his company's efforts to seal the oil leak to the BBC this morning , and he said it was not possible to estimate how much BP will have to spend to contain the leak. The first concern--for federal and regional government officials at least, if not for most people--is on the potential damage to the environment and the economic impact of that damage, rather than the cost to BP. Still, the question of cost for BP is an important and interesting economic exercise, at the very least. Ben Fissel , a PhD candidate at the University of California, San Diego , has taken a stab at analyzing the economic impact of the oil spill on BP for Econbrowser . Fissel evaluated the change in stock value to measure what the market anticipates to be the long term costs: When an event, such as this oil spill, impacts a company it will also impact its long run profitability. The divergence of the stock price from what we would have expected had the event never happened is a measure of the net present value of the cost incurred by the oil spill. Event study analysis gives us a framework to answer just this question. BP prices since Jan. 1 st have been plotted below in Figures 1 and 2. The black line gives the real prices and the red line shows the model estimate of what would have happened if the spill had not occurred. Table 1 lists the prices and returns over the event window for both the real time series and the estimate. Event studies use other factors in the market to estimate what BP's stock price would have been. A list of these factors can be found on Table 4. The event window spans 7 trading days April 26 th - May 4 th and is centered on April 29 th . A 10-day event window buffer was used to separate the estimated model from the event window. The 250 trading days prior to the event window and buffer were used to estimate the model. Figure 1 Figure 2 Read Fissel's full post at Econbrowser, here .

  • Menzie Chinn Takes a Macro Look at Doubling Exports

    Commerce Secretary Gary Locke introduced the National Export Initiative yesterday. The new plan calls for increasing the amount of export financing available to small and mid-sized businesses to $6 billion in the next year--up from $4 billion. The goal is to double exports over the next five years. Sounds like quite a task, but as Menzie Chinn points out, it is not without historical precedent. And he shows us this graph at Econbrowser: Chinn shows us that nominal exports have doubled twice in the last forty years, and almost doubled twice more (1990 and 2008). He writes that the key factors, "from a macro perspective," are "(i) the price level of exports, (ii) the quantity of exports." Chinn analyzes these factors further in his Econbrowser post. Read it here .

  • Teaching Macro After the Great Recession

    Menzie Chinn taught Macro at the University of Wisconsin this past semester. It was the first time he taught the course since the Great Recession. The last time he taught the course, the "key topics were inflation, the possibility of stagflation, and the possibility of containing the ongoing housing slowdown." This time: "the two big concerns were (1) dealing with the Taylor rule, and (2) dealing with the banking sector. A less difficult-to-deal issue is the consumption function." Over the past ten years, the trend in macro textbooks has been to dispense either partly or fully with the IS-LM construct, where the quantity of money enters into the determination of GDP, and substitute in a monetary reaction function, where the arguments are the output and inflation gaps, i.e., the Taylor rule. This was a useful innovation, but was difficult to apply to Japan (as I stressed in my lectures) and as of late 2008 as the zero interest bound became a reality for American policymakers. And heading into next semester, Chinn is planning on addressing the long term implications of the recession: One important macro factor involves the implications of the financial sector turmoil for the capital accumulation, and unemployment and the decline in asset values for labor force participation rates. In my seminar on the Great Recession, I discuss the recent OECD Economic Outlook Chapter 4 on this subject. You can read his full post at Econbrowser . And if you are teaching macro, let us know how you have changed your course since the global economic crisis hit (click on comments).

  • Closer Look at GDP Numbers, Stimulus Effect, and Consumption Details

    The rise in GDP during the third quarter prompted the Room for Debate blog of the New York Times to ask whether the Obama Administration's $787 billion stimulus plan worked. MIT and Baseline Scenario 's Simon Johnson says the stimulus package worked on both an economic front and a political front (which then led to larger stimulus effects globally). Harvard University Economist Jeffrey Miron says no, look to monetary policy. Russell Roberts , economist at George Mason University, is sekptical of the stimulus plans power and suggests the growth might have occurred without it. And Mark Thoma says that "the stimulus programs in place now are probably too small." Read the full "debate" here . Meanwhile, James Hamilton had one of the most instructive pieces on the GDP numbers at the Econbrowser blog. Hamilton feels very positive about the GDP growth, and he neatly breaks down, and illustrates, the various contributors to the growth: Consumption spending is the biggest component of GDP and the main contributor to third quarter growth, accounting by itself for 2.4 percentage points out of the 3.5% total, and with consumer purchases of motor vehicles and parts alone 3/5 of the contribution of consumption. Next in importance was inventory rebuilding, which added 0.9 percentage points to the total and could make a significant further contribution in the quarters ahead. Housing is finally making a positive rather than a negative contribution, and nonresidential fixed investment was a smaller drag than I had been expecting. Imports grew faster than exports, though I'm relieved that trade overall is coming back. The government sector made a smaller contribution than one might have thought given the fiscal stimulus, in part because lower state and local spending offset some of the increased federal spending. For a healthier long-run growth path I'd prefer to see business fixed investment and net exports adding rather than subtracting. But, compared with what we've been seeing recently, this overall is a quite welcome report. Hamilton and Menzie Chin n track recessions through their Econbrowser Recession Indicator Index --a pattern recognition algorithm for identifying recessions that waits one quarter for data revisions and clear trend identification before making an assessment. With the third quarter GDP numbers out they looked at the revised second quarter figures. And they conclude that the recession did not end during the second quarter. Read the full GDP analysis here .
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