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August 31, 2005

Today's Economic News: More Of The Same

Which is to say nothing particularly great.  Barry Ritholtz thinks that the revised report on second quarter GDP helped "stink up the joint," but it seems like more of a non-event to me.  From Bloomberg:

U.S. economic growth slowed to a 3.3 percent annual rate in the second quarter as consumers, pinched by rising energy costs, spent less than the government first estimated.

Sure, but this is largely what we already knew:

The quarter's gross domestic product, the value of all goods and services produced in the U.S., compares with the 3.4 percent pace estimated a month ago and 3.8 percent growth in the year's first three months, the Commerce Department said today in Washington.

And if you like to look on the bright side of things, inflation measured by the Personal Consumption Expenditure Price Index looked a little better than was previously thought:

The government's personal consumption expenditures price index excluding food and energy rose at a 1.6 percent annual rate last quarter compared with a previously reported 1.8 percent rise. The core measure, which Fed policy makers monitor, rose 2.4 percent in the first three months of the year.

Barry has a better case with the Chicago Purchasing Manager's Index. From Reuters:

The Chicago purchasing management index for August came in at 49.2, sharply below market forecasts for a reading of 61.5 and under 50, which denotes a contraction. August's reading was the lowest since April 2003...

"On balance, (the PMI) is a dollar-negative number because it compounds concerns about the dampening affects of high oil prices on growth and supports the view U.S. interest rates may top out at a lower level than previously anticipated," said Alex Beuzelin, senior market analyst at Ruesch International in Washington.

Those concerns are expressed at Econbrowser too, following up yesterday's gloomy (but not unjustified) analysis of Katrina's effect on energy prices.

Elsewhere, the Skeptical Speculator shares the tough-today-but-not-throwing-in-the-towel-yet news from Japan.  And while we are spanning the globe, The Nattering Naybob Chronicles provides a handy snapshot comparison of economic performance across the U.S., Europe, and Japan.

 

August 31, 2005 in Asia, Data Releases, Europe | Permalink

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» Europe Does It's Bit from A Fistful of Euros
Apart from the human tragedy dimension, the events which are unfolding in and around New Orleans will have an economic impact which in a globalised world can ripple through each and every economy. Fears that gasoline shortages could produce a... [Read More]

Tracked on Sep 2, 2005 9:11:41 AM

» Europe Does Its Bit from A Fistful of Euros
Apart from the human tragedy dimension, the events which are unfolding in and around New Orleans will have an economic impact which in a globalised world can ripple through each and every economy. Fears that gasoline shortages could produce a... [Read More]

Tracked on Sep 2, 2005 11:50:41 AM

Comments

Looks like the Fed has one more hike then they are done. Why am I not surprised? If it weren’t the hurricane it would have been some other reason they would stop. Seriously, this Fed has a history of grossly accommodative monetary policy. Does anyone actually believe they are going to invert the yield curve? They have no credibility and the bond market knows it. If they really thought rates needed to be higher they would have been done hiking rates months ago. When you create asset bubbles you might as well condone them.

Posted by: Matt | September 01, 2005 at 12:27 AM

"If it weren’t the hurricane it would have been some other reason they would stop."

Well I stick to my guns that it will be weak growth in Europe and low interest rates over here that are going to cramp the Feds style in a globalised environment. Too many opportunities for the carry trade.

Now, although not a Keynesian in letter, I certainly am one in spirit. And what did the grand old man of UK economics say: 'what use is an economist if after the storm is past all he can say is that we have had bad weather'.

But this works both ways, if the storm is a real - and not a metaphoric - one what use is the economist who can only say 'this is going to do a lot of damage'?

I think Dave has it more or less well-read. We will see a gasoline spike, we will see stresses and strains, we will probably need to revise down US growth forecasts a little, but we will not see an imminent recession.

I'll go further: I don't expect a recession in the US in 2006. Any forecast further out is foolhardy.

China will stay strong, but maybe a touch weaker in 2006,as will India and Turkey, and Germany (I don't think you can talk of Europe all in one breath) and Japan will not have a spectacular recovery, but nor will they go crashing anywhere. They will continue to dip in-and-out between negative growth and the odd quarter of stunning growth, following a trend line of maybe between 0 and 1%. Risk economies where you could see fireworks:UK and Italy.

There, that's Edward's global outlook for 2006 in a nutshell.

Posted by: Edward Hugh | September 01, 2005 at 03:55 AM

Dave,

Thanks for the mention.

Posted by: The Nattering Naybob | September 02, 2005 at 01:04 PM

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Funds Rate Probabilities: Special Katrina Edition

Several people commented yesterday on the release of the minutes from the August 9 meeting of the Federal Open Market Committee.  The Prudent Investor highlighted the usual clause identifying the importance of intervening economic developments on the ultimate outcome on the funds rate. So did William Polley.  At Economist's View, Tim Duy takes a contrarian position and projects that "Minutes+Katrina = More Tightening."

Today, that looks contrarian indeed, as the horrific intervening economic development represented by Katrina appears to have softened the sentiment for future funds rate hikes, not so much for September but for November for sure.  Thanks to the ever alert Erkin Sahinoz, we have these estimates from the options on federal funds futures:

October_post_katrina

 

November_post_katrina

That was as of the market close yesterday.  We'll see how things develop over the week.

UPDATE: Professor Polley takes issue with Professor Duy.

August 31, 2005 in Fed Funds Futures, Federal Reserve and Monetary Policy | Permalink

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» Katrina and the probability of recession from William J. Polley
Kash returns from his hiatus and tries to discern the "animal spirits." He's worried. Even temporary problems can get magnified if they contribute to a broader change in psychology. And I think that the current situation contains the seeds for... [Read More]

Tracked on Aug 31, 2005 6:44:23 PM

Comments

First I want to kick of saying that everyone I know here in Europe is deeply concerned by what is happening in New Orleans, Louisiana, Missisipi and elsewhere. I am watching live streaming video from Jefferson Parish as I type. So from all my fellow bloggers on Afoe and me, we are thinking of you.

Now on the economic consequences I think you are certainly in the right ballpark. We may see moderate changes in the Fed response curve in the coming months.The kind of disaster scenarios that the Economist heading editor engaged in just aren't on the agenda.

But I also want to post here about something I feel - in a different way - just as strongly about: some of the ways which quotes from the Bob Hall paper are being used.

Angry bear - and Brad Delong repeats him here - totally distorts a short extract from Hall's paper in an absolutely scandalous way.

http://delong.typepad.com/sdj/2005/08/department_of_h.html

Now lets look at the full Hall quote:

"When asked to describe a particular recession or recessions in general, the practical macroeconomist will tell a story that focuses on the collapse of purchases of certain categories of products—producer and consumer durables. For example, all practical accounts of the recession of 2001 emphasize the huge decline in high-tech investment. In earlier recessions, declines in home-building were prominent features. On the other hand, more theoretically inclined macroeconomists tend to take a decline in productivity—or at least a pause in the normal growth of productivity—as the central driving force. New ideas discussed here may help bridge this important gap between practical and theoretical macroeconomists."

This is on page 41 of the paper in the Adobe acrobat reader. Now what Hall is doing - and I personally am neither for him nor against him - is contrasting two traditions, and saying he is going to try to bridge the gap between them. Nowhere - as far as I can see - does he argue that a decline in productivity was responsible for the 2001 recession.

Basic literacy rather than knowledge of economics would seem to be all you need here. So my response to Brad is 'huh'.

But then maybe I spend too much time in the gamma quadrant.

All of which is just my way of saying that I think you're taking a hell of a lot of unfair stick here. Keep it up, some of us are enjoying the read.

Posted by: Edward Hugh | August 31, 2005 at 01:10 PM

Edward -- Thanks. I can use all the help I can get.

Posted by: Dave Altig | August 31, 2005 at 05:06 PM

I think this time you've really missed what the market is pricing...

As of the close today.. market was unambiguously pricing in nearly 20-25% probability that the FED would pause at the September FOMC.

October 96.25 calls settled at 4 ticks. Simple arithmetic: FED pauses in September Oct FED Funds go to 96.50.. 4 ticks make 21.....
As close to 20% probability as you would like...

Take a look at our FFEP page on Bloomberg for live updating of the probabilities and their impact on the entire fixed income curve....

Posted by: sjonas | August 31, 2005 at 11:53 PM

As America's perhaps greatest natural disaster unfolds, coincidentally and, for the most part - unrelated, as demonstrated by recent equity valuation activity - so unfolds the second of three daily decay fractals that will make up the primary 2005 equivalent of the 1929 drop.
The first decay fractal had a base of 11 days. Wednesday 31 August was the 18th day of a 27 to 28 day second fractal sequence. The ideal expected secondary top of this fractal sequence will range from 1.62 x 11days or 18 days to 2 x 11 days or 22 days.

Smart money is flowing into the ten year notes and thirty year bonds just as the waters are naturally flowing into the low areas through the disrupted dikes. Even as equities rose yesterday there was an uncharacteristic abrupt divergent lowering of the long term US interest rates (as previously predicted) driving TNX sharply down to 40.20. Three month treasuries likewise were driven down but to a lesser extent with IRX at 34.30 on August 31, 2005. The spread of 6.9 is the smallest in over three years. The spread will most likely become temporarily negative within the next few months.

Just like in 1929 it will most likely be the third decay fractal of 27-28 days that will witness the profound drop that will be the equivalent of a very slow moving category 5 hurricane moving across the entire nation without benefit of a dissipating landfall. The civil and social chaos witnessed in New Orleans may well be a representative microcosm of the general unrest that could follow.
Gary Lammert The Economic Fractalist http://www.economicfractalist.com/

Posted by: gary lammert | September 01, 2005 at 07:22 AM

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Not The Most Bullish Day For Economic News

From MarketWatch:

Orders for U.S.-made factory goods fell back in July after two straight monthly gains, the Commerce Department said Tuesday.

Orders for factory goods fell 1.9% in July, after rising 0.9% in June and 4.2% in May, the government said. Read full report...

It was the biggest drop in factory orders since April 2004. Excluding transportation goods, orders were down 0.5%.

Orders for non-defense capital goods excluding aircraft - so-called core factory orders - fell 4.1% in July, reversing a 4.9% increase in June. Shipments of core capital goods fell 0.5%.

Meanwhile, Edward Hugh, guest blogging at New Economist has this...

The FT notes that outstanding mortgage debt rose between June and July at the slowest rate in 3 years, and unsecured consumer credit rose more slowly than expected. On the back of this comes news that retail sales fell for the sixth consecutive month according to a CBI survey.

... and the Skeptical Speculator this:

Japan's recovery looks as though it is starting to sputter again. Bloomberg reports:

Japan's household spending fell for a third month in July, retail sales slumped and unemployment unexpectedly rose, suggesting a rebound in the world's second- largest economy is losing momentum.

Spending by households headed by a salaried worker dropped 3.5 percent from June, seasonally adjusted, the statistics bureau said today. Retail sales fell 2.2 percent in July, the trade ministry said. The jobless rate rose to 4.4 percent from 4.2 percent, as more people sought work.

In the midst of yet another major energy shock that may be getting worse, some of this should probably be expected.  Nonetheless, U.S. consumers -- perhaps focusing on the trends and not the month-to-month drama -- have been taking it well.  Again from MarketWatch:

Led by the best assessment of current conditions in nearly four years, U.S. consumer confidence bounced back in August, the Conference Board said Tuesday.

The consumer confidence index rose to 105.6 in August, reversing most of July's decline to 103.6, the private economic research group said...

In the Conference Board report, feelings about the current situation improved to their highest level since September 2001. The present situation index rose to 123.6 from 119.3.

The assessment of the labor market turned up, with more consumers saying jobs are plentiful than are saying jobs are hard to get, the first time since October 2001 that "plentiful" has "outnumbered hard to get."

The number of consumers saying conditions are "good" outnumbered those saying conditions are "bad" by nearly two-to-one, at 29.8% to 15.1%.

The expectations index, meanwhile, increased to 93.7 from 93.2.

Go figure.

UPDATE: The Capital Spectator accentuates the positive:  The factory orders report wasn't as bad as many expected, and the consumer confidence report was quite a bit better.  A caveat: Oil prices have risen by 8 percent since the confidence survey was taken. Environmental Economics has  several links to blogger analysis of Katrina's effects on gas prices.

August 31, 2005 in Asia, Data Releases, Europe | Permalink

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Well I think, as always, the devil is in the details here Dave. Each of these is distinct. Japan and Germany have ageing problems, the UK is just coming out of a housing boom, and the US & China (or should that be China and the US, either way you are roped together) are really pretty robust, or at least that's my take (see my remarks on the Economist at NE).

The Japan story is a case of failed unrealistic expectations (I have been preparing a post on this for NE, later today or tomorrow). Consumer driven demand simply cannot take off for sound demographic reasons, and as the labour market tightens and wages rise, then companies obviously have difficulty maintaining pricing competitiveness. Too many elastic bands tightening in too many different directions all at once.

How do I know all this so easily? Oh, that's pretty straightforward, I just have a wall chart with a list of median ages pinned over my desk, and when I need an instant analysis I just read it off. Seldom fails :).

Posted by: Edward Hugh | August 31, 2005 at 08:53 AM

Incidentally, I do rather put myself about a lot, don't I. What does that make me, the Jean Harlow of blogging?

Posted by: Edward Hugh | August 31, 2005 at 08:59 AM

CR -- Thanks for the update.
Edward -- You're always welcome here. (And I do take your point about taking care with the grouping of Japan and Germany with the U.S. and China.)

Posted by: Dave Altig | August 31, 2005 at 05:08 PM

CR -- Thanks for the update.
Edward -- You're always welcome here.

Posted by: Dave Altig | August 31, 2005 at 05:10 PM

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August 30, 2005

More On The Labor Compensation Issue

In yesterday's Wall Street Journal (page A9 in the print edition), Stephen Moore made an observation similar to the one emphasized in my previous post: While wage and growth has been pretty anemic  over the past several years, it is difficult to make the same case with respect to total labor compensation, which adds benefit payments to wages.

In his brand spanking new blog, Daniel Gross takes exception to one of Moore's comments (duly noted by Brad DeLong):

Stephen Moore, a member of the Journal's editorial board, writes in today's paper:

The explosion of benefits paid to workers is in large part an artifact of the federal tax code, which allows employers to deduct from taxes pensions, health care, child care, and the like, but not wages.

Read it twice. Stephen Moore apparently thinks companies can't deduct wages paid to their workers from their taxable income the way they can deduct pension, health care, and child care costs. And apparently nobody at the Journal's op-ed page knew enough, or thought enough, to correct him.

Maybe Dan is mainly upset, one newspaper guy to another, about sloppiness of any kind.  But the economics of the central claim -- that the tax code favors payment in non-wage form -- does not seem wrong to me.  While it is true that employers can deduct wage expense just as they can other employee costs, it is not true that wage payments and benefits are the same when they get into the hands of employees.  Wage payments are taxed, benefits are not.  When the tax system is taken as a whole, a pre-tax dollar delivered to employees in the form of benefits yields a higher net payout to workers than a dollar delivered in the form of explicit wages.  To me, that sounds like the type of tax distortion Moore was trying to describe.

On a (sort of) related point, in the comment section of the previous post Angry Bear's pgl takes me to task (probably with some justification) for not addressing an argument that he has made before:

In my 1st RBC post, I noted Kash's argument that the rise in real compensation is substantially due to more costly health insurance. Not better, just more costly. Why did I mention it? It's a supply side. And yet you don't note that this is the reason for the divergence between real wage growth v. real compensation. Huh?

The reason that I did not take note of it is that I'm not convinced the observation is relevant.  Health insurance is the largest single component of employee benefit expenditures.  For a given total amount of compensation, increasing payments in the form of more insurance expenditure means less in other forms -- including wages.  Whether we get more or less for those higher insurance expenditures is an interesting and important question, as is the question of whether the tax code is introducing welfare-degrading means of compensating workers.  But I don't think it has much to do with the question I was trying to address, which was whether or not the return to working has been growing at an abnormally low rate.

UPDATE: Angry Bear (the orginal!) notes that the offending passage has been corrected:

THE AUG. 27 feature, "The Wages of Prosperity," by Stephen Moore mistakenly reported that wages are not tax deductible to employers. The relevant sentence should have said, "Fringe benefits have exploded in recent years because benefits are tax free to employees, but wages are taxed."

AB is still not happy.

The corrected wording doesn't pass muster as an explanation for flat wage growth, either. Benefits have been tax free to employees, and wages have not, for as long as I can remember. So the ongoing taxability (to the employee) of wages but not benefits simply cannot explain why wage growth has been flat in the last 4 years.

The best I can do here is to simply repeat that I think it can.

 

August 30, 2005 in Health Care, Labor Markets | Permalink

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I think pgl really makes a point that is also in your chart in the earlier post. Real compensation (he would argue), when properly deflated, has not been rising significantly, whereas overall domestic product (per worker) clearly has been rising, no matter how you deflate it. Something – presumably something about the labor market – is causing workers to get the short end of the stick when it comes to dividing the proceeds from recent economic growth. This same point is made by noting that the compensation line in your chart has been consistently (and increasingly) below the productivity line in recent years.

I believe, however, that we are barking up the wrong tree by talking about (ex post) real compensation. To my mind, the whole basis for talking about labor market slack originates from the finding of very strong empirical links between “slack variables” (most typically the unemployment rate) and changes in the inflation rate. I’ll leave you and pgl to argue about the implications of the division of output between labor and capital, and whether policymakers can or should do anything about that, but I think we can all agree that more employment is generally a good thing if it doesn’t put upward pressure on the overall inflation rate. Therefore, the sense in which I would mean the word “slack” is that there is room for more employment without exacerbating inflation.

Thus, when I cite low help wanted advertising as evidence of slack, it is specifically with the knowledge that, historically, there is a strong correlation between help wanted advertising and changes in the inflation rate. (Indeed, the fact that help wanted advertising reached its all-time high in the late 1970s might suggest that oil prices are less important than one might think, both as a source of inflation and as a depressant to labor demand.) Of course, the correlation isn’t perfect, and it exhibits the same sort of instabilities as the inflation-unemployment correlation. However, when we take into account a variety of slack variables (e.g. average duration of unemployment, growth rate of payroll employment, etc.), all of which have strong empirical correlations with inflation changes, the picture that emerges (at least to me) is one of substantial slack.

Posted by: knzn | August 31, 2005 at 10:51 AM

I think at this point, we just agree to disagree. I interpret the instability in the inflation/slack relationships -- which I guess I think are more substantial than you do -- as a sign that the slack concept is on shaky ground. I understand that I am in the minority on this. I do indeed believe that employment could grow much faster without generating inflationary pressures. But I also beleive that this will happen when the real environment changes to make it so.

Posted by: Dave Altig | August 31, 2005 at 05:17 PM

I’m willing to acknowledge that the glass of Keynesian economics is only half full, but you and Bob Hall seem to be saying that, because it’s half empty, we need to go back to the refrigerator. Maybe it is a disagreement about the severity of the instability, as you suggest. But I could imagine a “composite slack indicator” that would have a much more stable relationship to inflation than its individual components.

I’m not sure what you mean when you say that “employment could grow much faster without generating inflationary pressures.” Almost anyone would have to agree there are some circumstances (e.g., a change in labor/leisure preferences) where that could happen. Are you making a substantive statement? What changes in the real environment do you think are necessary, and why?

Posted by: knzn | August 31, 2005 at 06:23 PM

knzn -- Productivity growth -- in the fundeamental, exogenous sense -- is the obvious example. I cannot answer definitively what the circumstances would be that would lead to a pickup in employment growth. That would suggest I know how to explain the pattern of labor market dynamics over the past five years, which I don't. I don't think anyone else does either. There is a pattern that represents a slowdown relative to the fire-breathing pace of the latter 1990s, for sure. I am not providing an answer, but rather objecting to the assumption that deficient demand, in the traditional Keynesian sense, is the explanation.

By the way, when it comes to an explanation of unemployment, I'm not saying the Keynesian glass is half empty. I'm saying that, for all practical purposes, it is completely empty. This should be read the way Hall offers it: Standard neoclassical synthesis models are just not suited to thinking about unemployment. That is not to say, however, that it is never the case that monetary policy mistakes create unemployment, or that policy is impotent to affect the unemployment rate more generally. I think there is a lot of confusion in all of this that comes from not separating the methodological case made by Hall with the interpretation of what types of shocks are actually driving outcomes today. I hope I have not contributed to that confusion.

Posted by: Dave Altig | September 01, 2005 at 01:17 PM

Health insurance is a great benefit and I think all employers should provide it.

Posted by: California Health Insurance | November 04, 2005 at 06:20 PM

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The Non-Mystery Of Labor Compensation (Bob Hall Explains It All, Take Three)

At Angry Bear, pgl joins Max Sawicky in his skeptical view -- the latest manifestation of it, at any rate -- of my lack-of-slack orientation.  Actually, this is a follow up to earlier comments from pgl, following up a blast from Brad DeLong, following up my response to Max, who was following up our Econoblog debate (with Tom Walker joining him on the prosecution's team).

I've been mulling over pgl's earlier post, as he honed in a argument that I did not adequately address in the Econoblog exchange, and haven't since.  Here's the money passage:

... David is arguing for a classical demand and supply explanation. But not only do we need to think in terms of quantity variables (EP and LFP), we should also think in terms of real compensation, which have not kept pace with productivity, and real wages, which have been flat. The introduction of price as well as quantity variables is where I think Brad has David cold.

Fair enough.  But I don't think that the facts on the price variables clearly bear witness to slack labor markets.  Here's a picture of real labor-compensation growth for the past fifteen years:

Real_labor_compensation_growth_1

Much of the commentary on labor income has focused on the growth of salary and wages, but I'm not sure what theory of the labor market would make wages the correct series upon which to focus.  Benefits are a part of the returns to employment as well.  Because total compensation includes benefits as well as wages, it is that series that best represents payments from firms to workers.

If we focus on total compensation growth, it is not obvious that one would want to characterize growth in labor income as extraordinarily weak over the past five years.  For the period from the fourth quarter of 1996 through the fourth quarter of 2000, four-quarter growth in real compensation averaged 1.02 percent.  For the period from the fourth quarter of 2001 through the second quarter of this year the average was 1.55 percent.  This reverses the picture one would get from looking at wage growth alone, where the corresponding averages were 1.2 percent and 0.59 percent.  In terms of total compensation -- which I argue is the right thing to look at -- the recent past has actually been better than the go-go days of the latter 1990s.

It is true that the trend has been down over the past year-and-a-half, but that observation is not clearly out of line with productivity developments:

Labor_compensation_growth_and_labor_prod

One might wonder why the labor-return and productivity patterns aren't even closer-- as Max and Tom did in the Econoblog discussion -- but here is where Bob Hall steps into the conversation again.  Hall's extended discussion of how to think about labor markets centers on the frontier of models in the tradition of Peter Diamond, Dale Mortensen, and Chris Pissarides.  Without going into too much detail about these models -- you can find much more in Hall's paper, or in the article by Richard Rogerson I referred to in the Econoblog feature -- these models treat employee/employer relationships as the outcome of costly search and negotiation processes, as opposed to the anonymous spot-market like constructs of typical macro models.  Here's a key passage: 

Our model delivers wage rigidity by disconnecting wage bargaining from conditions in the labor market. Once a qualified worker and an employer have found each other and determined that they have a joint surplus, costs of delay, not outside conditions, determine the bargain they make.

The wage does respond to productivity, but only half as much as in the standard model. The result is a strong response of unemployment to productivity and other driving forces. The wage no longer has a strong equilibrating role. If productivity falls, the part of the surplus accruing to employers falls sharply and they cut back on recruiting effort. The labor market softens dramatically.

That last part is particularly striking  in light of the picture (courtesy of knzn) I posted earlier showing the dramatic fall off in help-wanted advertising  post-2000. 

There are, of course, many variants of the Diamond-Mortensen-Pissarides model, with differing implications for the how various types of shocks alter equilibrium levels of employment, unemployment, wages, and so on.  I don't think anyone is claiming that any one of these models has all the answers just yet.  I certainly am not.  But they do lead the way to a view of the world where it is sensible think of labor markets as "soft" without the implication that there are obvious monetary policies that will make things all better.  That's what I'm talkin' about.

August 30, 2005 in Federal Reserve and Monetary Policy, Labor Markets | Permalink

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So when labor comp grows slower than productivity, labor's share falls. How does Hall's perspective explain things if we take labor's share as being a somewhat fundamental level in the economy. That is, it doesn't move around much, and shouldn't in some sense, but I'm not sure I see how Hall can explain its stability in light of the model he's sketching out.

Posted by: Ian D-B | August 30, 2005 at 04:57 PM

I'm enjoying this tremendously and will have more to say when I've got one or two more things straight. Basically I'm with you, especially over this:

"a view of the world where it is sensible think of labor markets as "soft" without the implication that there are obvious monetary policies that will make things all better."

Monetary or fiscal I would say. Incidentally:

"Robert Solow described the component of economic growth not explained in statistical models by labor or capital as productivity, as well as "the measure of our ignorance."

This was Moses Abramovitz talking about the residual :). There are some interesting points to be made about this, but again they will wait.

Solow having been mentioned, I have in my mind this plagiarism:

Spain - I can see the boom everywhere, except in the productivity numbers. (They are in fact in negative territory, those damn housing bubbles!).

Posted by: Edward Hugh | August 30, 2005 at 05:48 PM

One of the things that you already know I think is that the US went through a pretty profound demographic shock due to enormous immigration from the late eighties onwards. So the age structure of the population has changed from trend, you can also see this in the TFR which stabilised after years of going down (various factors at work here).

The issue is you can't simply talk about EP and LFP issues without addressing this. In a sense absolute numbers of jobs created and jobs lost are more revealing. In a weird way this whole debate reminds me of Searle's Chinese Box argument, an economic system is like the person over the other side of the interface receiving the coded information and interpreting. Economic systems don't peer over the screen and say jeez, there are a hell of a lot of young people lining up looking for work today, a lot more than yesterday, maybe I'd better adapt by doing 'x'. Things just don't work like that.I suspect there is some version or other of anthropomorphism knocking around.

What I'm trying rather to say in a rather awkward way is that economic systems run on signals, they don't peer beyond them to try to 'understand' the bigger picture.

Incidentally all this came up with Keynes after WWI. This was what the tract on monetary reform was all about. British demographics meant that an extra 250,000 or so workers hit the labour market every year, and unemployment could only be kept from rising by creating sufficient jobs, Japan, in contrast, has falling (except this month) unemployment based largely on a declining potential workforce.

What surprises me is that these issues have been around for so long, but they are only now begining to be addressed.

Posted by: Edward Hugh | August 30, 2005 at 06:06 PM

In my 1st RBC post, I noted Kash's argument that the rise in real compensation is substantially due to more costly health insurance. Not better, just more costly. Why did I mention it? It's a supply side. And yet you don't note that this is the reason for the divergence between real wage growth v. real compensation. Huh?

Posted by: pgl | August 30, 2005 at 09:16 PM

Ian -- Some versions of the DMP model replicate a constant share of labor easily enough. However, you are right that it is not so easy to see it in the variant I was emphasizing. If you look at the data, however, you do see that labor share looks quite a bit less constant than a fixed-coefficient Cobb-Douglas production technology would suggest.

Edward -- Your emphasis on demographics is clearly correct. However, I don't think pgl or Max or others are taking issue with the flattening of the trends post 1990, but the drop after 2000. It is easy to see population patterns in the former, less clear in the latter. However, it definitely is true that the post-2001 decline in participation rates and so on are heavily concentrated in the youn nger age groups. There is almost certainly information there -- I'm just not sure what it is.

pgl -- you have your very own post, above.

Posted by: Dave Altig | August 30, 2005 at 11:21 PM

I'm puzzled by the real labor compensation graphs. They don't look like what I think they should look like. What precisely is being plotted?

Since it ends up being plotted alongside labor productivity, I would have thought the compensation series to look at would be real hourly compensation for the nonfarm business sector. (The productivity series looks like labor productivity for the nfb, but maybe missing the last quarter and maybe from before the last round of GDP revisions.) But over the last four quarters, nfb real hourly compensation has increased by 3.6% (http://data.bls.gov/PDQ/servlet/SurveyOutputServlet;
jsessionid=f030b0ad3d72$3F$3Fs$)
, whereas the graph in this posting shows growth of 0.4% or 0.5%.

Real hourly compensation and labor productivity track each other much better than the two lines in the posting's second graph. But even the levels of those two measures slowly diverge, with productivity growing faster. But that is largely due to the fact that the BLS uses the CPI-U to deflate hourly compensation. Besides the usual drawbacks of the CPI, a consumptions goods measure of prices is wrong concetually. One should use something that measures all the prices of the goods produced by the sector. That is, one should use the price index for the nfb. The resulting series tracks productivity quite closely over reasonable periods of time. This is what one would expect from the fact that labor's share fluctuates in a fairly narrow band.

Posted by: dgsullivan | August 30, 2005 at 11:43 PM

Benefit increases are meaningful, but benefit COST increases are meaningless!
Methinks you are treating the later as if it was a measure of the former.
My benefit costs have gone up each year, yet I still have the same dental and medical services, life ins. To include benefits is to pretend that I now have my teeth cleaned 4 times a year instead of the same old 2 times, or that I now visit my doctor each quarter instead of yearly, or that my co-pay has gone down...ahahaha...funny stuff!

Posted by: RP | August 31, 2005 at 06:22 AM

Dan -- The series is the BLS' employee cost index (ECI). I am essentially replicating the pictures which appear in this month's Economic Trends publication from the Cleveland Fed: http://www.clevelandfed.org/Research/ET2005/0805/empcost.pdf

You are correct in guessing that I adjusted the series using the CPI. I did this because it tends to be the calculation that is emphasized by many of the people in this debate, who are focused on the return to workers. However, I think you are correct in asserting that, if I am going to compare these costs to productivity growth, I should be using an index which reflects product prices. I will follow up on that.

RP -- An increase in health insurance costs is conceptually no different from an increase in gas prices or the price of any other good or service. If your employer has to pay more to provide you a service, their compensation to you rises, pure and simple. The inflation adjustment controls - subject to all the usual caveats -- for cost-of-living increases.

Posted by: Dave Altig | August 31, 2005 at 07:00 AM

Dave,

> "The inflation adjustment
> controls...for the cost-of-living
> increases".

If you believe the adjusted figure reflects reality, I suppose we'll have to agree to disagree. Never wrestle a statistical pig, right?

Posted by: RP | August 31, 2005 at 04:51 PM

RP -- Agreed.

Posted by: Dave Altig | August 31, 2005 at 05:19 PM

Ah ... The ECI. Thanks for the enightenment.

Posted by: dgsullivan | September 01, 2005 at 08:20 AM

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Bob Hall Explains It All, Take Two

Max Sawicky has a look at Bob Hall's Jackson Hole paper, and remains unconvinced.  Aside from the fact that Hall's take on things doesn't quite pass Max's smell test, the crux of the complaint seems to be summed up by this:

A smarter colleague writes:

"This stuff really is incredible -- he attributes cyclical fluctuations in output to changes in productivity -- rather than causal , this is almost definitional. If firms don't respond instantaneously to changes in demand by hiring more or less labor in exact proportion to the change in output, then higher output implies higher productivity and vice-versa. arghhhh."

It is true enough that identifying causality is one of the trickier aspects of data interpretation -- and one of the reasons there is so much scope for disagreement, even among people who are not really looking for a fight.

In his paper, Professor Hall does a simple decomposition and shows that over a seven-year horizon, the series identified as multifactor productivity by the Bureau of Labor Statistics accounts for about 60 percent of the variability in real GDP.  In my own work, with Larry Christiano, Marty Eichenbaum, and Jesper Linde, we attempt to disentangle the contribution of permanent technology shocks -- both the multifactor type and the type that is specific to investment goods -- using statistical techniques that attempt to take the causality issue seriously. We find that, over roughly the same horizon, the productivity shocks account for roughly 30 percent of the variation in GDP.  This is almost certainly an understatement, as this is just the effect of permanent productivity surprises. One of the themes of my many comments on this subject -- and one that I think is in the spirit of Hall's argument -- is that persistent, but not strictly permanent, real shocks are an important part of understanding the path of the economy over the typical business cycle. 

Max may still argue these productivity variables still represent the "measure of our ignorance" -- and with some, not insubstantial, claim to legitimacy.  But then the question remains:  Are fluctuations in economic activity driven by things about which we are largely in the dark really the appropriate objects of aggressive monetary (or fiscal) policy?

August 30, 2005 in Federal Reserve and Monetary Policy, Labor Markets | Permalink

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Check out DeLong's graph of productivity after reading my take (Angrybear) of Hall's explanation for 2001's recession. Shorter Brad/Max/PGL:

Huh?

Posted by: pgl | August 30, 2005 at 03:11 PM

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August 29, 2005

The Future Funds Rate: No Story

No new news reflected in our estimates of the funds rate probabilities for October and November.  We will start exploring later contracts soon, but this morning we will expend our energies on thoughts and prayers for our neighbors down south. 

The pictures:

October_15

November_4

The data:

Download Imp_pdf_slides_for_blog_082605.ppt

Download October.xls

Download November.xls

August 29, 2005 in Fed Funds Futures | Permalink

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If Hurricane Katrina's economic effects turn out to be as bad as some fear, including big increases in gasoline, natural gas and heating oil costs, would that motivate the Fed to hold off on some of their planned increases?

Posted by: Hal | August 30, 2005 at 05:43 PM


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August 28, 2005

Bob Hall Explains It All

In a couple of posts (here and here) responding to some most excellent challenges from Max Sawicky (here and here, with an assist from Brad DeLong), I attempted to explain my hesitancy to apply the term "slack" to the labor market (expounded on at length over at Econoblog, but you probably already knew that).   As if to rescue me from my clumsy attempts at clarification, Bob Hall takes on the same topic -- and comes to similar conclusions -- in a paper delivered at the Federal Reserve Bank of Kansas City's annual Jackson Hole conference. 

Hall begins with a crystal-clear description of the "traditional" view of ups and downs in the economy:

The traditional idea is that neoclassical constructs – production functions, consumption demand functions, labor supply functions, embedded in markets that clear – describe the actual operations of the economy in the longer run. There is a *-economy that generates variables such as y*, called potential GDP, u*, called the natural rate of unemployment, r*, called the natural rate of interest, and so on…

In the early years of what Paul Samuelson called the “neoclassical synthesis,” the *-economy was viewed as generating smooth trends, as described by Solow’s growth model, the keystone of neoclassical macroeconomics. Short-run movements around the smooth trend were transitory, the result of imperfect information, delayed adjustment of prices, or other non-neoclassical features of the economy.

He then goes on to explain why this will no longer do:

An early milestone in the unfolding breakdown of the neoclassical synthesis was Kydland and Prescott (1982)’s discovery that the *-economy is anything but smooth, once the actual volatility of productivity growth is included in the model… This discovery forbids extracting the disequilibrium cyclical movements as deviations from a smooth trend. Instead, one would have to solve the *-model and calculate deviations from the volatile *-variables. I’m not sure that this lesson has fully informed the community of practical macroeconomists who try to use signal-extraction methods based on statistical characterizations of the *-variables as moving smoothly over time.

The second element in the breakdown is the high persistence of the deviations of actual from neoclassical performance. The puzzle is the most visible in unemployment… Unemployment has large low-frequency swings – low in the 1950s and 1960s, high in the 1970s and 1980s, low again in the 1990s and 2000s. The idea is unpalatable that these movements are the result of transitory cyclical forces, for they are only barely transitory. The standard view that the *-economy explains longer-run movements seems to call for adding low-frequency movements of unemployment to the *-economy – that is to create a model of the natural rate of unemployment that permits slow-moving changes...

I conclude that neoclassical principles properly applied in an environment with volatile driving forces delivers predictions rather different from the smooth growth implicit in most thinking based on the cycle over trend. Sudden movements in GDP and other variables are not necessarily part of the disequilibrium business cycle – they may reflect the neoclassical response to shifts in productivity and exogenous spending. And non-neoclassical forces in the labor market may result in long-lasting, smooth changes in unemployment that are not distinguishable from the more rapid movements that observers have earlier assigned to transitory disequilibrium.

Those "non-neoclassical forces" that Hall refers to include imperfect information and "search frictions" that are the bedrocks of any sensible approach to thinking carefully about labor market phenomena like the unemployment rate.  I haven't made the following point in any of ramblings on this topic, but I wish I had:

Subtle changes in the economic environment, such as changes in the distribution of information known to one side of the unemployment bargain but not to the other, can cause large changes in unemployment. And these changes can be long-lasting – they may play an important role in the sub-cyclical movements of the labor market that are so prominent in the data but escape existing models.

Not only that, this way of thinking about labor markets has important implications for the way we think about wage deterimination and how changes in compensation to employees might or might not be useful in interpreting  what is going on in labor markets.

More on that to follow, but it is worth emphasizing that Hall is no more sympathetic to constructs like the "neutral rate of interest" than he is the natural unemployment rate concept:

Wicksell's natural or normal interest rate, as distingushed from the actual market rate, is not a feature of modern macro-finance models. Each of the many real interest rates in the economy moves differently -- they do not obey even the relatively unrestrictive principles of basic finance models.  We are not equipped to judge when monetary policy is neutral in terms of interest rates.

This may all sound very nihilistic, but I don't read it that way.  Theory may still be ahead of our abilities to measure what we really want to measure, but at least we know where to look, and that is  a result of the vast amount we have earned in the last 25 years. And Hall, for one, is not so sure it matters anyway:

None of these conclusions stands in the way of intelligent monetary policy-making.  Under Alan Greenspan's stewardship, the U.S. has acheived remarkably low levels of inflation and inflation volatility, despite the lack of real reference points.  We do not need to know the GDP gap, the unemployment gap, or the neutral real interest rate, to keep the price level near constancy.

UPDATE: New Economist has the entire Jackson Hole agenda.

UPDATE, THE SEQUEL: Arnold Kling finds Hall's paper at the professor's website (Duh!), and has a few comments of his own.

EMBARASSING UPDATE: Max and PEmberton both note a typo in my original post in the last paragraph.  Hall, of course, said what now reads above -- We do NOT need to know the output gap etc. to maintain price stability.

August 28, 2005 in Federal Reserve and Monetary Policy, Interest Rates, Labor Markets | Permalink

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» Papers from the August 2005 Jackson Hole symposium from New Economist
The Greenspan Era: Lessons for the Future A Symposium sponsored by the Federal Reserve Bank of Kansas CityJackson Hole, Wyoming, 25-27 August 2005. Times are shown where known. Note: The Kansas Fed have not yet posted the agenda or any papers from thei... [Read More]

Tracked on Aug 28, 2005 2:29:05 PM

» PANGLOSS, RESURGENT from MaxSpeak, You Listen!
David Altig assigns us more reading material, this time by Robert Hall (PDF file), in support of his no-slack platform. I was momentarily struck by the following, which reminded me of Calvin Coolidge: "A careful look at detailed historical data... [Read More]

Tracked on Aug 29, 2005 3:26:50 PM

» Dean Baker slams Greenspan's record from New Economist
While Brad DeLong is marvelling at the cell phone reception in Wyoming, and Mark Thoma and Dave Altig analyse various Jackson Hole papers, Dean Baker provides five reasons he was glad not to be invited to the Greenspanfest '05:Let’s get a few facts on ... [Read More]

Tracked on Aug 30, 2005 8:23:38 PM

Comments

Odd, I find myself agreeing with this:

"We do need to know the GDP gap, the unemployment gap, or the neutral real interest rate, to keep the price level near constancy."

:-)

Posted by: Miracle Max | August 29, 2005 at 03:03 PM

I think the original article by Hall reads "We do NOT need to know the GDP gap....to keep the price level near constancy

Posted by: PEmberton | August 29, 2005 at 03:30 PM

Oh my. My brief agreement with Max has vanished. PEmberton found the critical typo that changes everything. I fixed it.

Posted by: Dave Altig | August 30, 2005 at 07:53 AM

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August 27, 2005

The Top Ten Things We Have Learned From Alan Greenspan...

... according to Alan Blinder and Ricardo Reis, in a paper presented at the Federal Reserve Bank of Kansas City Fed's Jackson Hole policy conference.  I report, you decide:

Principle No. 1: Keep your options open – Blinder and Reis very much favor discretion over rules.

Principle No. 2: Don’t let yourself get caught in an intellectual straightjacket – The authors attribute Mr. Greenspan’s success, in part, to his willingness to cast-off received wisdom, as when the Committee abandoned all hope for monetary-aggregate targeting. They also cite the Chairman’s insistence in the latter 1990s that productivity gains made brisk GDP growth consistent with low and stable inflation.

Principle No.3: Avoid policy reversals – The rationale for a measured pace.

Principle No. 4: Forecasts, though necessary, are unreliable – Yet another rationale for a measured pace, and an argument for a let’s-look-at-the-data-that-seems-important-at-the-moment mode of analysis.

Principle No. 5: Formal optimization procedures work in theory, but risk management works better in practice – especially as a safeguard against very adverse outcomes – It takes a bunch of wise guys and gals – not a bunch of tooled-up egg-heads -- to make this whole monetary policy thing work.

Principle No. 6: Recessions are bad, as is growth below potential – In Blinder and Reis’ words, “The Greenspan standard… takes the Fed’s dual standard seriously.” They don’t suggest others in the Federal Reserve fail to take that seriously, just that the Chairman takes it really, really seriously. The contrast is with other central banks – the Bank of England and the ECB, for example – that do not have mandates for real activity on par with price stability objectives.

Principle No. 7: Most oil shocks should not cause recessions – The authors credit Greenspan with keeping the eye on the core-inflation ball, and thereby not unduly compromising the Fed’s growth objective chasing temporary price blips.

Principle No. 8: Don’t try to burst bubbles: mop up afterwards – It’s worked pretty well, say Blinder and Reis, so why tighten prematurely, which may or may not burst a bubble that may or may not exist?

Principle No. 9: The short-term real interest rate, relative to its neutral value, is a viable and sensible indicator of the stance of monetary policy – Although the introduction of the neutral rate is a relatively recent innovation in policy communications and speeches, Blinder and Reis seem to suggest that it is basically what the Chairman had in his head all along (a notion that is presumably consistent with the observation that the FOMC appears to have followed a Taylor rule during the Greenspan reign).

Principle No. 10: Set your aspirations high, even if you can’t achieve them – Go West, young man. No, that’s not it. Here it is: Fine-tune, fine-tune, fine-tune. If you’re really smart, you can make it work most of the time. 

One could read Blinder and Reis' analysis as a pretty direct challenge to the beliefs that central bank discretion should be limited, that inflation objectives should be the sole mandate for a central bank, and that better policy outcomes have been made possible by a Fed that has focused less on fighting economic downturns and more on containing price pressures. I list those in ascending order of disagreement (by my reading) with what have become some common, even if not universal, assumptions about how central banks ought to behave.  Is Mr. Greenspan's legacy really , as the authors might suggest, that some of that conventional wisdom ought to be rethought?

(The paper is not yet available on the KC Fed website -- I will link to it when it is.  Press reports can be found in the Washington Post and at MarketWatch.)

UPDATE: The Wall Street Journal Online has the story as well (hat tip, Mark Thoma).

UPDATE II: Dean Baker does his own summing up, at Max Sawicky's place.

UPDATE III: I'm a bir late on these, but New Economist offers more, here and here.

August 27, 2005 in Federal Reserve and Monetary Policy | Permalink

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» Dean Baker slams Greenspan's record from New Economist
While Brad DeLong is marvelling at the cell phone reception in Wyoming, and Mark Thoma and Dave Altig analyse various Jackson Hole papers, Dean Baker provides five reasons he was glad not to be invited to the Greenspanfest '05:Let’s get a few facts on ... [Read More]

Tracked on Aug 28, 2005 2:11:05 PM

» [BOJ][economy]Japanese Translated Version of The Top Ten Things We Have Learned From Alan Greenspan... from bewaad institute@kasumigaseki
少々時間が経ってしまいましたが、macroblogにて紹介されたBlinderとReisによる中央銀行にとっての10の教訓、さて、日銀にはどれだけ当てはまっているのでしょうか? Principle No. 1: Keep your options open 第1の原則:選択の幅を広く保つべし Principle No. 2: Don't let yourself get caught in an intellectual straightjacket 第2... [Read More]

Tracked on Sep 24, 2005 1:01:18 PM

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August 26, 2005

The Chairman Sums Up

From the text of Alan Greenspan's speech on central banking at a Federal Reserve Bank of Kansas City symposium in Jackson Hole, Wyoming, as reported by Bloomberg:

In the spirit of this conference, I asked myself what developments in the past eighteen years--both in the economy and in the economics profession--were most important in changing the way we at the Federal Reserve have approached and implemented monetary policy.

A succinct description of why there is no longer any "money" in "monetary policy"...

M1 was the focus of policy for a brief period in the late 1970s and early 1980s. That episode proved key to breaking the inflation spiral that had developed over the 1970s, but policymakers soon came to question the viability over the longer haul of targeting the monetary aggregates. The relationships of the monetary aggregates to income and prices were eroded significantly over the course of the 1980s and into the early 1990s by financial deregulation, innovation, and globalization. For example, the previously stable relationship of M2 to nominal gross domestic product and the opportunity cost of holding M2 deposits underwent a major structural shift in the early 1990s because of the increasing prevalence of competing forms of intermediation and financial instruments.

... and what replaced it:

In the absence of a single variable, or at most a few, that can serve as a reliable guide, policymakers have been forced to fall back on an approach that entails the interpretation of the full range of economic and financial data. Policy is implemented through nominal and, implicitly, real short-term interest rates. However, reflecting the progress in economic understanding, our actions are now better informed about the pitfalls associated with relying on nominal interest rates to set policy and the important role played by inflation expectations in gauging the stance of monetary policy.

How understanding the role of expectations has informed FOMC communications:

Our appreciation of the importance of expectations has also shaped our increasing transparency about policy actions and their rationale. We have moved toward greater transparency at a "measured pace" in part because we were concerned about potential feedback on the policy process and about being misinterpreted--as indeed we were from time to time. I do not intend this brief and necessarily incomplete review of events to illustrate how far we have come or to despair of how far we have to go. Rather, I believe it demonstrates the inevitable and ongoing uncertainty faced by policymakers.

On the "risk management" approach to monetary policy:

Given our inevitably incomplete knowledge about key structural aspects of an ever-changing economy and the sometimes asymmetric costs or benefits of particular outcomes, the paradigm on which we have settled has come to involve, at its core, crucial elements of risk management. In this approach, a central bank needs to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path. The decisionmakers then need to reach a judgment about the probabilities, costs, and benefits of various possible outcomes under alternative choices for policy...         

In effect, we strive to construct a spectrum of forecasts from which, at least conceptually, specific policy action is determined through the tradeoffs implied by a loss-function.

An example?  Sure.

In the summer of 2003, for example, the Federal Open Market Committee viewed as very small the probability that the then- gradual decline in inflation would accelerate into a more consequential deflation. But because the implications for the economy were so dire should that scenario play out, we chose to counter it with unusually low interest rates.      

The product of a low-probability event and a potentially severe outcome was judged a more serious threat to economic performance than the higher inflation that might ensue in the more probable scenario. Moreover, the risk of a sizable jump in inflation seemed limited at the time, largely because increased productivity growth was resulting in only modest advances in unit labor costs and because heightened competition, driven by globalization, was limiting employers' ability to pass through those cost increases into prices. Given the potentially severe consequences of deflation, the expected benefits of the unusual policy action were judged to outweigh its expected costs.         

Does the Committee pay any attention at all to all this asset-price stuff?  You bet.

Our forecasts and hence policy are becoming increasingly driven by asset price changes.

Beyond that, not much comment, excepting this warning:

[The] vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

And finally, a very modest assessment of why things have, on balance, gone very well during the Chairman's tenure:

The more flexible an economy, the greater its ability to self-correct in response to inevitable, often unanticipated, disturbances. That process of correction limits the size and the consequences of cyclical imbalances. Enhanced flexibility provides the advantage of allowing the economy to adjust automatically, reducing the reliance on the actions of monetary and other policymakers, which have often come too late or been misguided.         

In fact, the performance of the U.S. economy in recent years, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence that we have benefited from an enhanced resilience and flexibility.         

We weathered a decline on October 19, 1987 of a fifth of the market value of U.S. equities with little evidence of subsequent macroeconomic stress--an episode that provided an early hint that adjustment dynamics might be changing. The credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 were absorbed with the shallowest recessions in the post-World War II period. And the economic fallout from the tragic events of September 11, 2001, was limited by market forces, with severe economic weakness evident for only a few weeks. Most recently, the flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for crude oil and natural gas that we have experienced over the past two years.         

Did the central bank help?  Yes, but again in a very modest , even if extraordinarily important, way:

I acknowledge that monetary policy itself has been an important contributor to the decline in inflation and inflation expectations over the past quarter- century. Indeed, the Federal Reserve under Paul Volcker's leadership starting in 1979 did the very heavy lifting against inflation. The major contribution of the Federal Reserve to fashioning the events of the past decade or so, I believe, was to recognize that the U.S. and global economies were evolving in profound ways and to calibrate inflation-containing policies to gain most effectively from those changes.

Hear, hear.

UPDATE: Calculated Risk takes note of the Chairman's closing remarks. Mark Thoma too. More, from Bloomberg.

UPDATE: Another report, from Tax Policy Blog.

LAST UPDATE I NEED ON THIS ONE, I THINK: Basically, The Mess That Greenspan Made has it all

August 26, 2005 in Federal Reserve and Monetary Policy | Permalink

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