Tuesday, January 15, 2019

Is There Too Little Inflation?

Financial FAQs 

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in December on a seasonally adjusted basis after being unchanged in November, the U.S. Bureau of Labor Statistics reported Friday. Over the last 12 months, the all items index increased 1.9 percent before seasonal adjustment.

The major reason has been falling gas prices. Energy fell 3.5 percent in December as gasoline prices dropped for a second straight month, down 7.5 percent. Transportation costs in general slipped as airfares continued their decline, down 1.5 percent on the month following a 2.4 percent drop in November, according to Econoday.

It’s also why we have abnormally low interest rates at this late stage of the recovery, which actually mirror the amount of excess savings. No matter how much individuals and businesses have borrowed since the Great Recession, interest rates have stayed low. It’s as if there’s a bottomless supply of liquidity that holders of said currencies—including most of the world’s central banks—are eager to put to work in some way.

This could also be a worrisome indicator of what economists call slack demand. Consumers and businesses are spending less and saving more, in spite of the U.S. economy being fully employed with a 3.9 percent unemployment rate. The overall demand for goods and services has fallen from historical levels since the Great Recession as consumers and businesses have become more cautious than in other recoveries, when consumer economic activity now determines some 70 percent of economic growth.

This is while household incomes have barely kept up with inflation for decades from the progressive weakening of employee bargaining rights since the 1980s, and may only now be increasing with the fully-employment economy.

Former Fed Chair Janet Yellen has entered the discussion with her prediction that the U.S. is stuck in a low-inflationary environment. “All evidence suggests we’re going to be in an environment of low interest rates for a long time,” she said at a recent tech conference.

Such slack overall demand could also be a problem because the Trump trade wars are pushing up the cost of materials. This is hurting U.S. sales overseas, because U.S. export firms have had to raise their prices due to the rising costs of imported materials, such as aluminum and steel that have 10 and 25 percent tariffs, respectively.

Low inflation is therefore a two-edged sword in many ways. Lower inflation means products are more affordable to larger segments of the population, but it is also a sign that without rising prices producers cannot boost profits, hindering their growth prospects.

All-in-all, such stubbornly low inflation can also mean lower prospects for future job and income growth, hence lower overall economic growth, as well.

Harlan Green © 2019

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Wednesday, January 9, 2019

America’s Immigration Problem

Popular Economics Weekly

The Calculated Risk graph says it best in the Labor Department’s latest Job Openings and Labor Turnover Survey (JOLTS). There are still about one million more job openings (yellow line) than hires (deep blue line). There have been more openings than hires since January 2015, according to Calculated Risk.

This tells us several things about the U.S. economy. Firstly, America has a skilled labor shortage because technological innovation exceeds the existing labor force—in fact throughout its history.

America is still a young country in many ways, and our birthrate is declining. This is in contrast to older developed and developing countries in Europe and Asia that have had existing labor surpluses before the various technological revolutions.

Secondly, it is why we so badly need new immigrants to fill those vacancies. Therefore restricting immigration is counter-productive in so many ways. It restricts the growth of our labor force, which directly affects economic growth, and denies America’s history as the land of opportunity. America was founded by immigrants, and it is immigrants that contribute new ideas as well as new blood to our creative mix.

Lastly, the huge gap between job hires and openings tells us there shouldn’t be a fear of recession, or even a significant slowdown, for maybe years to come. Why? Job openings continue to far exceed the six million looking for work, according to the (BLS).

The number of job openings fell to 6.9 million on the last business day of November, the U.S. Bureau of Labor Statistics (BLS) reported today. Over the month, hires edged down to 5.7 million, quits edged down to 3.4 million, and total separations were little changed at 5.5 million. Within separations, the quits rate and the layoffs and discharges rate were unchanged at 2.3 percent and 1.2 percent, respectively. This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by four geographic regions.

The BLS said large numbers of hires and separations occur every month throughout the business cycle. When the number of hires exceeds the number of separations, employment rises, even if the hires level is steady or declining. Conversely, when the number of hires is less than the number of separations, employment declines, even if the hires level is steady or rising.

And over the 12 months ending in November, hires totaled 68.0 million and separations totaled 65.6 million, yielding a net annual employment gain of 2.4 million. (These totals include workers who may have been hired and separated more than once during the year.)

So U.S. economic growth should continue to perk along, even if it slows to the historical rate of 2 percent that has prevailed since the end of the Great Recession. It may never climb above that rate without more workers joining the workforce, and there is more public sector investment. We know what those investments should be—infrastructure modernization, improving educational opportunities, combating global warming, etc.—that would give a big boost to labor productivity as well.

The ideal would be to spend more in public investments, but if congress can’t agree on more spending, either American households increase their number of offspring (which is highly unlikely) and/or we reverse the current administration’s anti-immigration policies.

Harlan Green © 2019

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Monday, January 7, 2019

A Gangbusters December Employment Report

Popular Economics Weekly

Total nonfarm payroll employment increased by 312,000 in December, and the unemployment rate rose to 3.9 percent, reported the U.S. Bureau of Labor Statistics last Friday. Job gains occurred in health care, food services and drinking places, construction, manufacturing, and retail trade.

It looks like the U.S. economy isn’t slowing as much as feared, contrary to the pessimists that have been driving down stock prices, while driving up bond prices, so that the 10-year Treasury bond yield is now 2.65 percent, and conforming 30-year fixed mortgage rates are at 3.875 percent with a 1 point origination fee for the best credit holders.

Health-care providers hired 50,000 people, professional firms filled 43,000 positions, manufacturers added 32,000 jobs, construction firms’ payrolls rose by 32,000 and restaurants hired 41,000 additional workers.

The unemployment rate, meanwhile, rose to 3.9 percent from a 49-year low of 3.7 percent. The percentage of working-age Americans in the labor force climbed to a one-and-a-half-year high as more people looked for jobs. That is a good sign since it means people think more jobs are available.

Strong hiring has also given workers more bargaining power. The amount of money the average worker earns climbed 11 cents or 0.4 percent to $27.48 an hour last month.

Who says the housing market is dead, as well? These low interest rates will stimulate more borrowing and home buying. And Fed Chairman Jerome Powell said the Fed would be flexible about raising interest rates this year at a recent conference. “We will be patient as we watch to see how the economy evolves,” given the low inflation outlook, he said.

The employment report contradicted yesterday’s December ISM Manufacturing Index that showed a slowdown in manufacturing hiring, falling more than 5 points to a 54.1 level. This is the lowest showing for this index since November 2016. Especially new orders slowed by 10 points to a 51.1 level that is suddenly very close to breakeven 50. It means approximately half of the supply managers surveyed saw an order slowdown.

This is the lowest showing for new orders since August 2016. Weakness is entirely on the domestic side, says Econoday, as one of the few positives in December's data is a 6 tenth rise in new export orders to 52.8 which is respectable for this particular reading.

The real question is what will economic growth look like in 2019. It will depend largely on a favorable outcome of the trade talks, which means a lowering of the Trump tariffs that do little for American interests, or American consumers.

That’s because higher tariff fees get passed on to consumers, ultimately, which pushes up inflation, then Federal Reserve interest rates; which cuts into consumer spending. And we have to worry about the soaring federal deficits, which means new taxes will be enacted sometime down the road.
However, this doesn’t worry Nobelist Paul Krugman at the moment in a recent NYTimes Op-ed: “…there are things government should be spending money on even when jobs are plentiful—things like fixing our deteriorating infrastructure and helping children get education, healthcare and adequate nutrition. Such spending has big long-run payoff, even in purely monetary terms.”
The bottom line is money is cheap at the moment with the very low interest rates, so this isn’t the time to worry about budget deficits. It’s much more important to be investing public monies into future growth and productivity that could even prolong this business cycle, now in its tenth year of continuous growth.

Harlan Green © 2019

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Will 2019 Be Year U.S.Begins to Reunite?

Popular Economics Weekly

Wonder of wonders, is New York Times conservative columnist David Brooks becoming a neo-Keynesian, New Deal economist? This is the term coined for those younger economists, such as Nobel economists Paul Krugman, Joe Stiglitz and George Akerlof, who have updated John Maynard Keynes’ New Deal theories that helped to bring us out of the Great Depression and created today’s developed economies.

Brooks isn’t a trained economist, but he has been looking for a new political center in his more recent columns—mostly in reaction to the Trump administrations betrayal of free trade and limited debt, mainstay ideas of the former Republican Party, but also its takeover by the Trump administration.
Brooks said in a recent NYTimes Op-ed, “The nations that have the freest markets also generally have the most generous welfare states. The two are not in opposition. In the real world they go together.”
“What generous welfare states?” Western national governments have stepped in wherever the private sector has proved unable or unwilling to support economic growth and general prosperity since World War II. And it was Roosevelt’s New Deal programs that created social security, unemployment insurance, enshrined workers’ rights, and the modern industrial economy that enabled us to win World War II.

So 2019 may be the year that the political parties and American electorate begin to come together, to show a willingness to compromise their ideals and their convictions in reaction to the “Make America First” doctrine of the Tea Party and white nationalist supporters of the Trump administration.

The newly elected Democratic House of Representatives may be the first concrete result of this trend towards more centrist policies in January 2019 with more than 200 women now in the 435 member House. Who better than women to make compromises in the name of getting things done, as they have done in their households since the beginning of time?

Another sign is the more centrist views of conservative writers that Brooks has cited, beginning with the Niskanen Center, an offshoot of the conservative Cato Institute, which released a comprehensive report called, “The Center Can Hold: Public Policy for an Age of Extremes,” written by Brink Lindsey, Steven Teles, Wilkinson and Hammond. The report is a manifesto for a new centrism based on what the authors call a “free-market welfare state model, says Brooks.
“They want government to protect citizens against the disruptions of global capitalism: “Without strong income supports that put a floor beneath displaced workers and systems that smooth the transition to new employment, political actors and the public tend to turn against the process of creative destruction itself.”
By creative destruction, Brooks means the tendency of capitalist economies to throw out the old to make room for new innovations and industries, regardless of the consequences to workers in the old industries—like manufacturing in the Midwestern rustbelt. The economic consequences have been devastating for those regions, needless to say.

What Brooks and his fellow conservative centrists don’t say, however, is that modern capitalists have become monopolists is almost every sense of the world. Just a few major corporations dominate the old manufacturing and energy sectors. And the new digital economy is dominated by the so-called Silicon Valley Big Five—Google, Microsoft, Facebook, Apple and Amazon—that have almost totally escaped oversight; until now.

This tendency towards ‘monopsony’ in under-regulated capitalist economies—the economic term for employers having excessive control over their labor market—is what led to “global capitalism” and too big to fail multinational corporations.

This is in fact earth shaking news emerging from the past of a Republican Party that created the U.S. Environmental Protection Agency and first proposed expanding government-subsidized health care in the 1970s. Let us hope America can return to the two-party system that enabled compromise, a more generous welfare state, and less destructive form of capitalism.

It would be a new beginning for the Re-United States of America.

Harlan Green © 2019

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Wednesday, January 2, 2019

In Search of a Moral Economy

Financial FAQs

Vermont Senator Bernie Sanders defined a moral economy in a recent Duke University dialogue with the Reverend William Barber II: “A moral economy is one that says, ‘In the wealthiest country in the history of the world, all our people should be able to live with dignity and security.’”

We don’t have to quote the very progressive U.S. Senator to know what a moral economy should look like. One has only to study the history of income and wealth redistribution since 1980 when demand-side economic theory—the Keynesian economics of English Lord John Maynard Keynes that guided Roosevelt’s New Deal—was replaced by so-called supply-side policies—under the conservative but never validated premise that enhancing the wealth of holders of capital with lower taxes and regulations would maximize production, while suppressing the rights and wages of their workers.

History since then has borne out the immorality of what came to be called trickle-down economics—record income inequality in the American workforce. Its rationale came from a diagram on a napkin that then White House Chief of Staff Dick Cheney took to heart as the mantra that guides conservative Republicans even today.

It’s an absurd equation. President Reagan at the time believed that lower taxes would motivate workers to work harder and produce more. The problem was reducing everyone’s taxes would stymie government programs that helped to level the opportunity table. It was the wealthiest that benefited most with reduced personal tax rates that were as high at 92 percent in the Eisenhower administration, which financed the federal highway system, sent us to the moon, and instigated many of the public programs that have made America so productive.

It’s hard to know where this thought process came from. History shows that people work just as hard—sometimes even harder—when they receive a smaller share of their paycheck; especially when a portion goes to insure future benefits like workman’s compensation insurance, social security, Medicare and Medicaid.

But conservatives latched onto several Austrian economists who hated almost any form of authority; so much so that they advocated limiting the powers of democratically elected governments to care for their own citizens. Such was the fear of centralized authority by economists like Fredrick Hayek in his book, The Road to Serfdom, called any regulations to tame capitalism a form of enslavement without recognizing that raw, unregulated capitalism meant serfdom and exploitation of those workers.

We do now have a better understanding of how capitalism—the worst economic system, except for all of the others (to paraphrase Churchill)—works for Main Street as well as Wall Street.

It means in part returning to the much more progressive personal tax rates of earlier U.S. administrations—before President Reagan made the immoral tax cuts that even underfunded the military at the time, and initiated the massive federal debt burden we carry today.

All the public programs funded by governments enhance prosperity and productivity in some way—whether it’s to upgrade our infrastructure, fund new health discoveries, strengthen the public insurance and pension programs; and protect the environment, without which no Americans can prosper over the long term.

Then we can afford to protect those most in need. That is what a moral economy looks like.

Harlan Green © 2018

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Friday, December 21, 2018

Why the Fed’s Obsession With Inflation?

Popular Economics Weekly


The Federal Reserve’s December FOMC statement, said, after increasing their overnight rate another one-quarter percent: “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”

Why is there still worry over inflation, 40 years after the 1970’s wage-price spiral that caused so much pain, and initiated the Fed’s obsession with keeping a low inflation target in the first place?

One has only to look at the decline of real wages and salaries since the 1980s to realize the Fed puts most of the inflation blame on real wages, the incomes of the working and middle classes. They use the outmoded formula that labor costs make up two-thirds of product costs; ergo, every time wages begin to rise the Fed must raise rates to keep wages from rising higher to prevent more inflation.

But the history of the Consumer Price Index gauge of retail inflation from 1929 portrayed in the above graph proves that inflation has been almost non-existent above 2 percent, with occasional bumps to 4 percent during boom times; except for the sharp spike in 1980 due to the wage-price spiral precipitated by the jump in oil prices of the 1970’s Arab oil embargos.

Then what are the “strong labor conditions” the Fed seems to be worried about that merit the quarter-point raise this week? The unemployment rate is 3.7 percent, but wages are barely rising above today’s 2 percent inflation rate these days, even in a fully-employed economy. And the Fed predicts 2 percent inflation through 2021 in its just-released predictions with full employment also continuing through 2021.
They must not really believe wage costs determine inflation, if they predict low inflation will persist with full employment in the 3 percent range, per their above matrix. That can’t happen. The “strong labor market conditions” haven’t pushed up production costs, with so-called unit-labor costs rising just 0.9 percent Q-to-Q.

So what is the Fed to do? It should not tie their inflation predictions to wage increases, for starters. Inflation is caused by much more than rising wages. In today’s low inflation environment where robots are replacing many workers, the costs of production are tied more to the costs of robots, rather than labor personnel.

Tesla’s new Fremont, CA fully-automated Model 3 electric vehicle factory that was set up in just 3 weeks is evidence robots now control the cost and pace of production more than the personnel.

Harlan Green © 2018

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Tuesday, December 18, 2018

What Happened to Inflation?

Popular Economics Weekly

It looks like inflation will no longer be a problem holding back consumer spending for the forseeable future; or in any other economy in the developed world as well.

It’s not a problem because economies today can quickly ramp up production and sell into multiple international markets due to the new technologies and labor-saving devices that keep popping up. It’s why the Consumer Price Index (CPI) is increasing just 2.2 percent annually, when energy and food price fluctuations are taken out.

This is both good and bad for a number of reasons. Firstly, it means interest rates won’t rise very fast, lowering borrowing costs for consumers and businesses, the boost to consumers.

The increased use of robotics in the service and manufacturing sectors is just one example that makes this possible. Labor productivity has surged. The U.S. Bureau of Labor Statistics just reported nonfarm business sector labor productivity increased 2.3 percent during the third quarter of 2018, I reported last week, as output increased 4.1 percent and hours worked increased just 1.8 percent. Declining unit labor costs over the past 12 months are the reason productivity has increased at the same time as output.

That means labor costs aren’t rising either, which boosts labor productivity, and higher productivity boosts everyone’s standard of living. The average labor productivity rate of 2 percent since World War II has doubled the standard of living every 25 years for workers.

It means personal incomes are rising faster than inflation, at the moment, which boosts consumer buying power. But the prolonged low inflation since the end of the Great Recession also means aggregate demand (the overall demand by consumers, investors and government for ‘things’) has not been strong enough to boost GDP grown above 2 percent.

But we could also be returning to a period of disinflation—falling inflation—or outright deflation that lasted for two decades in Japan, and that Federal Reserve officials worried about in the past—hence Ben Bernanke’s ‘Helicopter Ben’ moniker when he said in early 2000s somewhat facetiously that dropping money from helicopters is one way to combat deflation.

Should we worry about continued low inflation that worried the Fed for so long and resulted in the QE security purchases that have kept interest rate at rock bottom for so long? Yes, because wages and salaries are not rising as fast as they should to boost aggregate demand and therefore maintain economic growth in the longer term 3 percent average range. This due to a number of reasons, including labor-unfriendly administrations that took away labor protections.

And that’s why there isn’t the money for badly needed infrastructure, healthcare, education, and just about everything in the public sector that only governments can do. Slow growth also means many lack a decent living wage, or standard of living.

Harlan Green © 2018

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