Browse by Tags

In his CBS Moneywatch column, Mark Thoma writes that while things may be looking up a bit, it does not seem that real economic recovery is happening anytime soon. He points to these graphs to remind us where we stand: Thoma: The problem we face is that the sectors that generally lead us out of a recession are the sectors that were most damaged from the collapse of the housing bubble and the subsequent recession. Housing construction is unlikely to increase anytime soon, and households are still struggling to pay off their debt, debt that was made worse by the unemployment, stock crash, and housing price crash that came with the recession. (The automobile sector is also important in recoveries, but the signs there aren't any better.) Recessions have different causes, and some types of recessions are easier to recover from than others. An increase in oil prices or an interest-rate hike by the Federal Reserve can be reversed quickly, and the recovery time is generally relatively fast. But as Carmen Reinhart and Kenneth Rogoff explain in their book This Time is Different, recessions that are caused by financial collapses are among the most difficult to recover from. When this type of a recession hits an economy, lost decades are not at all unusual. Unfortunately for us, both housing markets and household balance sheets were severely damaged by the recession, and repairing them will take time. Housing values remain depressed with no sign of a robust recovery in sight, and households continue with the debt deleveraging process. Neither sector seems poised to lift us out of the doldrums in the near future. Read Will the economy turn around in 2012? here .

In his Money Watch column, Mark Thoma looks at the below graph and sees signs that the Fed will pursue further quantitative easing measures: Thoma writes: The Fed is very sensitive to and very fearful of deflation, and the fall in inflation expectations evident in the graph was one of the reasons the Fed decided to implement QE1. And as you can see from the graph, this (along with the other steps the Fed took at that time) turned the expectations around, at least for awhile. However, just before the dotted vertical line on the graph, expectations began falling again. What is the vertical line? It shows the point in time when QE2 was announced by Ben Bernanke (August 27 of 2010 at Jackson Hole, Wyoming), and once again inflation expectations turned around. However, notice that recently the trend has turned downward again and if this continues the Fed is likely to intervene once again. What do you see in the graph? Do monetary policy measures need to be taken? What are the lessons from QE1 and QE2? Read The Fed Is Laying the Groundwork for Further Easing here .

Mark Thoma is no pessimist. He believes that the economy will recover, just as it has after past recessions, and even the Great Depression. He even points out that the US economy is now recovering at "trend rate"-matching the long, long term rate of growth of GDP from 1870-2008. BUT, Thoma points out that this recovery is still going to take a good bit of time. He shares this projection in his CBS Moneywatch column: Read Does This Ease Your Worries?: US GDP from 1870-2008 here .

Unemployment dropped below 9% in Feburary, but it appears we will wait a long time before it gets down to 4%. Mark Thoma has two projections for how long it will take for the US to return to "full employment." Here's the optimisitc forecast, based on employment recovery following recessions since 1948: Here's the pessimistic projection, based on only the last two recessions: Thoma's methodology is available here and here .

With Republicans taking control of the House of Representatives, but the Democrats still the majority party in the Senate, we will be watching moves on financial regulation over the early months of the next Congressional session. Mark Thoma , economist at the University of Oregon, made some top-line predictions in his column this morning on CBS's Money Watch. In short, Thoma expects that some recent reforms--Dodd-Frank, Basel III--will survive, but will not be changed much. If the Republicans get any repeal efforts through Congress, the White House will use veto power. If the Democrats push efforts to add regulatory measures to existing legislation, Thoma expects Republican leadership to successfully block them. The most important change in regulation is the resolution authority regulators now have over large financial institutions that get into trouble. When the crisis hit, regulators did not have the authority they needed to take over a failing financial institution. That authority exists for traditional banks, and is used frequently, but it had never been extended to financial institutions that are part of what is known as the shadow banking system. That left regulators with only two choices, neither of them good ones. They could let large institutions fail and risk a meltdown of the entire system, or they could bail out the banks and, in the process, reward those who caused the problems in the first place. If a traditional bank had been involved, they would have had other options that allowed them to minimize the costs of a meltdown while imposing losses on equity holders and removing management, but no such option existed for shadow banks. Will resolution authority survive? I don’t expect that resolution authority will be impacted much if at all by the change in the political atmosphere. Both sides of the political fence are in general agreement that this is a good idea. The second important regulatory change in the Dodd-Frank legislation is the Volcker rule. This rule limits the ability to make speculative investments with government insured money. The regulatory restrictions the legislation imposes are weaker than many people would prefer, and banks are already pushing against the boundaries . Will the Volcker rule be changed? Any attempt to further weaken this provision would likely be vetoed, but nothing will be done to strengthen the bill should banks discover ways to bypass the legislation’s intent. A third feature to highlight in the Dodd-Frank legislation is the attempt to make derivative markets more transparent by forcing the trades through organized markets. Again, I don’t expect big changes here, but Republicans have, in general been more sympathetic to arguments that some derivatives must be traded outside of over-the-counter markets. They will likely push for exceptions, and the more exceptions that are granted, the more likely it is that banks can find creative ways to bypass the legislation. So this could, over time, weaken this provision of the bill. Read What Impact Will the Election Have on Financial Reform? here .

The Bureau of Labor Statistics released Producer Price Index data yesterday, and the year over year numbers show a rise in the price of finished goods that we have not seen since September of 2008. The monthly increase during the month of March was 0.7%. The PPI for intermediate goods showed a similar pattern. Here's a look at the finished goods data. First, the monthly percent change, seasonally adjusted: And the 12-month percent changes (this is not seasonally adjusted): So does this data mean it is time to consider inflation again? Mark Thoma says no. In his latest Money Watch column, Thoma argues that the "pass through from producer prices to consumer prices is less than 100 percent in any case, and in some cases it is close to zero," and he gives an interesting lesson in why we should look at "core inflation": First, core inflation is used to forecast future inflation. For example, this recent paper uses a “bivariate integrated moving average … model … that fits the data on inflation very well,” and finds that the long-run trend rate of inflation “is best gauged by focusing solely on prices excluding food and energy prices.” That is, this paper finds that predictions of future inflation based upon core measures are more accurate than predictions based upon total inflation. Second, we also use the core inflation rate to measure the current underlying trend in the inflation rate. Because the inflation rate we observe contains both permanent and transitory components, the precise long-run inflation rate that consumers face going forward is not observed directly, it must be estimated. When food and energy are removed to obtain a core measure, the idea is to strip away the short-run movements thereby giving a better picture of the core or long-run inflation rate faced by households. (I should note, however that this is not the only or even the best way to extract the trend, and the Fed also looks at other measures of the trend inflation rate that have better statistical properties, e.g. “trimmed mean” measures. Also, the first use of core inflation described above is for forecasting future inflation rates, the second attempts to find today’s trend inflation rate. There is a way to combine the first and second uses into a single conceptual framework, but it seemed more intuitive to keep them separate.) Let me emphasize one thing. If the question is “what is today’s inflation rate,” the total inflation rate is the best measure. It’s intended to measure the cost of living and there’s no reason at all to strip anything out. It’s only when we ask different questions such as what the inflation rate will be in the future — essential knowledge for policymakers due to lags between the implementation of policy and its effects — that different measures are used. Third, and this is the function that is ignored most often in discussions of core inflation, but to me it is the most important of the three, it is the inflation target that best stabilizes the economy (i.e. best reduces the variation in output and employment). Read Thoma's column here . For the BLS data on producer prices, click here .

As the econoblogosphere debates the economic benefits of health care reform, and anticipates monthly job figures (coming in a week), Mark Thoma , of EconomistsView , shares this image:

Mark Thoma thinks Alan Greenspan and Ben Bernanke were wrong to give their opinions about fiscal policy during Congressional testimony. But he does think that the Fed chair should address the effect of fiscal policy on monetary policy: That is, while I don’t think the Fed chair should give advice on the specifics of fiscal policy, the chair should make clear how fiscal policy choices will affect or constrain monetary policy. Let me try to explain how monetary and fiscal policy are connected through the budget deficit. There are two different government budget issues to think about. The first concerns the long-run trajectory for the debt, and the projections are that the debt will expand to unsustainable levels if we don’t do something to stop it. That means, above all else, reducing the growth in health care costs. The second issue concerns the short-run debt created in an attempt to stimulate the economy. This is a small amount compared to the long-run debt problem, but it is still a lot of money and we will need to pay this back when things are back to normal (but not before then, since paying it back too soon could undermine a recovery). And Thoma goes on, in his Money Watch column, to look at "the long-run debt problems" as a way of exploring the potential challenges of the Fed moving forward. Read The Relationship Between Budget Deficits, Fed Independence, and Inflation .