The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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July 30, 2006

All Systems Stop

At midweek, Tim Duy wrote this at Economist's View:

Futures markets appear to have no clear conviction on the outcome of the next FOMC meeting. The message is that market participants are looking for one more rate hike, either in August or September. Moreover, they doubt the Fed’s position that “pause does not mean done.”

That was indeed the case then, but this is now.  Bringing you tomorrow's news today, here is what the probabilities estimated from options on federal funds futures look like as the week of before the next meeting of the Federal Open Market Committee begins:




Friday's second quarter GDP report really wasn't all that bad, but apparently not as good as expected was enough.  And Professor Duy was right -- the market does seem to doubt the Fed’s position that “pause does not mean done.”




It's still a relatively long time to September, but at this point it is hard to see what might significantly shift sentiment about this week's meeting.

UPDATE:  I take it back. Tomorrow's ISM and PCE reports could loom large.  And there was this, from Federal Reserve Bank of St. Louis president William Poole:

Federal Reserve Bank of St. Louis President William Poole said he's undecided on whether the central bank should raise interest rates at its next meeting in eight days.

Poole, speaking to reporters after a speech in Louisville, Kentucky, said he's "50-50'' on the decision, which needs "all our analytical skills.'' Recent data show slowing economic growth, while inflation has "tilted'' upward, he said. Containing inflation is the Fed's "primary'' goal, he added.

UPDATE II: Action Economics (subscription required) reports:

SF Fed's Yellen did note rule out more rate hikes though she said that the Fed funds rate is "in the vicinity" of the right level, noting the Fed remains responsive to the data and she expects below-trend growth later in 2006 to pull down inflation. Yellen also confirmed that the Fed was mindful of policy lags and even though core inflation is above her comfort zone, the Fed can pause before it begins to decline, while retaining a more restrictive policy setting... Overall the comments are fairly balanced and do not rule in or out another hike in August

July 30, 2006 in Fed Funds Futures | Permalink


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It does seem as though if the Fed pauses, it will be because they believe the data is pointing to a slowdown. If there is a slowdown there it won't be a pause, but a stop.

So if they believe the data shows a slowdown, then we would need to see strong subsequent data to cause a reversal of opinion. That's in sharp contrast to the attitude of the last 2 years, where the default position was to hike.

Posted by: Tom Graff | July 31, 2006 at 04:02 PM

It is hard for me to see why the fed wants to create all this uncertainty. They say they are forward looking but want to find out what next weeks data brings before they make up their minds. Is that a consistent position?

One thing we had when Gspan was running the fed was a fed bias. The fed would tell you if they are more biased towards hiking or easing. Bernanke has no bias -- so every meeting is essentially a guess for the markets.

Then you have the big white dove Yellen suggesting it may be prudent to pause in Aug in hike in Sep. LOL. Why not ease in Aug and hike 50bp in Sep?

Posted by: vincentm | July 31, 2006 at 09:30 PM

Meanwhile ..... the speculators are still pushing prices up, up, up as Janet chews on her foot.

The Fed better punish the poulation until those nasty hedge funds and super banks stop jacking inflation.

Posted by: quiz | August 01, 2006 at 12:28 AM

Personally, i'm more interested discussions of the combined effect of price inflation & wide open credit markets.
Check out Ca electric bill increases, for instance. Mine's up 60% yoy with only a 14% kwh usage increase. That put our last monthly bill at $350/month. But, don't worry for me, I'm making no spending adjustments to pay for it. I'm putting it on one of my 0% interest rate (thru mid 2007) credit cards.
On a not so separate topic, can you tell us if anyone at the Fed is looking into the effects from repealing Glass-Steagall?

Posted by: bailey | August 01, 2006 at 10:09 AM

There's something comical about Yellen suggesting that the current rate environment is "restrictive". Is 5.25% really "restrictive"? As a simple example let's say I borrow $100 IO (balloon and interest due at years end) for one year at 5.25%. My real cost at the end of the year for borrowing the $100 is only $.72 (using June '05-'06 CPI 4.3%.) It must be that my math skills are rusty, or most likely completely flawed, because that seems awfully close to free borrowing costs to me. I'd hazard a guess too that by the time you factor in the ubiquitous tax breaks for interest payments, it's perhaps even better than free. Can someone more mathematically gifted or economically insightful show me how 5.25% is "restrictive"?

Posted by: JS | August 01, 2006 at 11:10 AM

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July 29, 2006

Fifty Percent Less Disagreement Than Meets The Eye

Brad DeLong appears to be unhappy with me. First, the background.  DeLong said this:

What proportion of students will be able to follow the syllogism?

  • Tax relief is good for growth only if the tax reductions are financed by spending restraint.
  • The Bush tax reductions have been financed not by spending restraint but by borrowing.


  • The Bush tax reductions have been bad for growth.

I said this:

I hope the answer is none, because one of the premises is irrelevant.  The question is not have the tax cuts been financed by spending cuts, but rather will they be financed by spending cuts.   Brad's expectation may be reasonable given the politics of the situation, but you obviously cannot draw conclusions by assuming a condition that has yet to be determined.

Today, Professor DeLong responds:

It's possible that there are huge spending cuts relative to GDP in our future. It's not terribly likely.

Uh, gee. Isn't that exactly what I said?  OK, I'll always accept the possibility I just wasn't clear enough, but I'm not sure where this comes from:

If I were Macroblog, I would say, instead, that the Bush tax cuts are good for growth because in response to the tax-cut magic the Growth Fairy will appear, wave her wand, and instantaneously boost labor productivity by 5%. That seems more likely than Macroblog's scenario.

I wasn't aware that I was proposing any scenario.  I was really making a pretty simple, and minor, observation.  The Treasury analysis in question was based on assumptions about what policy might be in the future, not on what policies are already in place (which I think everyone agrees are incomplete). Brad built a syllogism on a premise related to current and past policy, which is quite beside the point of the analysis.  If the premise had been "The Bush tax reductions will not be financed by spending restraint..." I would have been perfectly happy (although I might still have suggested that opinions remain distinct from facts). 

In the balance of my original post I waxed enthusiastic about Menzie Chinn's assertion that seriously evaluating spending reductions requires that those cuts be explicitly identified.  And as I noted above, I did in fact say that the "Brad's expectation [that taxes will have to be increased] may be reasonable" and coupled that with a call to combine that conclusion with advocacy for a broader look at how the tax system can be made more conducive to enhanced economic performance. How that adds up to a belief in some magic tax-cut Growth Fairy is beyond me.

Brad goes on:

... only tamed economists give politicians credit for policies the politicians won't propose. It muddies the waters and degrades the quality of debate to do so.

I think that there is a knee-jerk tendency to assume that any objection to someone's criticism of a policy is the same thing as an endorsement of that policy. It is not.  So, for the record: I endorse no blanket solution to bringing the government's budget back into balance. I am highly skeptical of the proposition that it can be done by reducing spending alone.  I am also highly skeptical of the proposition that simply reversing the Bush tax cuts is the best possible answer.  And I am 100% in agreement with the DeLong appeal that "the Bush administration propose a policy mechanism--like the Budget Enforcement Act, say--to cut discretionary and entitlement spending, title by title, as shares of GDP starting in 2010".  There a quality debate awaits.   

July 29, 2006 in Federal Debt and Deficits, Taxes | Permalink


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Well said.

Your first post was clear.

And, yes, the question needed to be reframed.

Quick eye, Dave.

Posted by: Movie Guy | July 29, 2006 at 01:38 PM

RE: "I think that there is a knee-jerk tendency to assume that any objection to someone's criticism of a policy is the same thing as an endorsement of that policy. It is not."
Hey, I'd appreciate being addressed as Mr. Knee Jerk, thank you. I IMMEDIATELY assume this is a misdirection ploy of a partisan.
It makes no sense to me that anyone, Socrates excluded (and he wasn't Fed senior staff), would jump into a charged argument he didn't support to dispute a criticism of that argument.

Posted by: bailey | July 29, 2006 at 02:48 PM

Pardon the interruption but many of us economists on the left would be all for a package of spending cuts and tax increases. The problem is that this White House is opposed to either this bipartisan approach and seemingly incapable of finding any significant spending cuts. Given the fact that the General Fund deficit is near $600 billion (see CalculatedRisk for repeated reminders), trimming $30 billion in pork and waster from Federal spending is about 5 cents on the dollar. Maybe a few other cuts can be found, but the notion that we will not have to reverse some of the Bush tax "cuts" (really deferrals) is simply not credible.

Posted by: pgl | July 29, 2006 at 08:44 PM

bailey -- I might have some blinders on about this, but I really didn't think my comments about Brad's post would be construed as support for anything in particular (especially since I thought I was clear about what I did support later on in the post -- and thanks for the support o that MG). Maybe part of the confusion is that I approach my contributions on this blog from a slightly different angle than, for example, my friend pgl. Because I am in fact "Fed senior staff" I try pretty hard to not bring partisan opinions to the argument. It's no secret, I think, that I lean to the right (just as pgl and DeLong lean to the left), so my opinions may often align with proposals of right-leaning partisans. But I assure you I am not in the business of carrying water for anyone but myself.

I would make the same comment, in essence, about pgl's comment. My enthusisam for what the Treasury department is trying to do with dynamic analysis should not be construed as support for the policies they are analyzing. I've yet to see the policy that I would actually support, exactly because I agree that the policy options ought to be more explicitly articulated. I do, however, think it is incorrect to say we will have to reverse some of the Bush tax cuts. Even if you believe that revenues will have to be increased -- and in my post I did indicate that I tend to that belief -- there is no reason that it has to be from undoing the specific provisions in the original Bush tax legislation. It may or may not be the sensible thing to do, but logic does not compel it.

Which brings me to my criticism of Brad's post. Chalk that one up to the fact that in my heart and soul and blog my perspective is that of a teacher. I thought Brad's comments were illogical in the context of the debate. Because I was rounding up blog commentary on the point -- and because DeLong is smart guy who I recommend that my students read -- I thought it appropriate to call him out on that one.

(John -- Sorry I had to delete your post. It was off-point, but the real problem was that you included a commercial appeal which is verboten here. I would be glad to accommodate your thoughts in some other fashion.)

Posted by: Dave Altig | July 30, 2006 at 09:04 AM

I think that those that are talking about raising taxes are traveling with blinders on. The facts are pretty straight forward. Since the Bush tax cuts took effect, (and if you go back in time the Reagan tax cuts) government revenues have INcreased. The richest part of the population is paying more than ever. There is more economic activity, and GDP has increased.

I would agree that we need to cut spending. I think that the Congress has done a horrible job in this regard, and the Bush administration has not put any restraints on them. I was hopeful that a Republican president and Republican Congress would decrease the size of the governement, and decrease the size of government outlays. Notwithstanding the war on terror, they have not done that.

Suppose we had cut actual domestic, not just proposed budgeted, spending by 5%. Where would we be then? We would still have a deficit due to the war, it just wouldn't be as large. But then the left wing would trot out all the stories in a media blitz about how Uncle Sam is leaving poor people in the lurch. Did it ever occur to them that able bodied people might help themselves?

Posted by: jeff | July 30, 2006 at 11:13 AM

I second Movie Guy's post. You are correct--the analysis in the study doesn't assume contemperaneous tax and spending cuts.

Posted by: Isocrates | July 30, 2006 at 08:04 PM

Posted by: Lous | June 10, 2007 at 08:21 AM

Posted by: Lous | June 10, 2007 at 08:21 AM

Posted by: Lous | June 10, 2007 at 08:21 AM

Posted by: Lous | June 10, 2007 at 08:22 AM

Posted by: Lous | June 10, 2007 at 08:22 AM

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Minimum Wage Buzz

It seems to be a theme of the week, motivated by two, very visible, developments: A new Chicago ordinance requiring that "big-box retailers pay higher wages and benefits to workers", and the gambit by Congressional Republicans "to allow the first minimum wage increase in a decade but only if it's coupled with a cut in inheritance taxes". Maybe predictably, the reaction among the econ-types was less than positive.  Captain Capitalism had this to say:

Again, it seems the parasite has killed off its host and not realized it and in doing so has condemned itself. For while it may be grand that wages are now higher, unfortunately, this will deter companies and potential employers from conducting business in Chicago, and thus THERE WILL BE NO FREAKING JOBS, let alone ones that pay $10/hr. Furthermore, this will contribute to the divide between rich and poor in Chicago as now the only businesses that will set up shop are those that need specialized labor and would have to pay about $10/hr anyway, and thereby denied unskilled and presumably poor labor any employment prospects.

Similar sentiments are expressed by Phil Miller, by Tim Swanson, and by Ryan McMakenRussell Roberts notes that this seems to be a unique character trait among economists, a fact that Russell's blogging partner Don Boudreaux explores in some detail:

Do we know with certainty what effect raising the minimum wage will have? Maybe not. But even if we don't, that doesn't mean we can't take a position on the matter...

The evidence is indeed imprecise. Some empirical studies -- most famously one published in 1994 in the prestigious American Economic Review by David Card and Alan Krueger -- find that on at least some occasions raising the minimum wage might actually increase employment of low-skilled workers. Other studies -- for example, this 2004 one by David Neumark and Olena Nizalova -- find that the higher the real minimum wage, the worse are the employment prospects of low-skilled workers...

Basic economics tells us that the higher the cost of choosing X the less likely is X to be chosen. Economists call this relationship between cost and choice "the law of demand." Non-economists call it common sense. Does anyone really doubt that the law of demand is both true and robust? I think not -- even though persons who insist that a higher minimum wage is good for low-skilled workers carve out employer decisions on hiring workers as an inexplicable exception to this rule...

We don't know exactly how, or exactly by how much, employers as a group respond to higher minimum wages -- but the theoretical case that they do respond in ways unfavorable to low-skilled employees is too powerful to dismiss.

Greg Mankiw is skeptical that this argument will carry the day, but thinks the evidence is nonetheless on side of the minimum-wage's critics:

In the end, there is no good substitute for an appeal to facts. What the facts show is that the minimum wage is poorly targeted as an anti-poverty program. Moreover, while the evidence is controversial, some studies find significant long-term adverse effects. As a result, most economists prefer more efficient and better targeted anti-poverty tools, such as the EITC, which has grown significantly over the past few decades.

Andrew Samwick makes a similar appeal in discussing the minimum-wage/estate-tax package offered up the Republican Congressional leadership (an offer that is reviewed, without much enthusiasm, by pgl, by Mark Thoma, by Dean Baker, and by Daniel Gross.)  Says Andrew:

If you want to make sure that household heads are above poverty, then make a program directly for them and them alone. That's the EITC. Compared to the minimum wage, the EITC allows us to condition on total hours worked and family status in redistributing income. By all means, argue for its expansion if you want to help low-income heads of household...

Basically, I won't support an increase in the minimum wage until I hear the explanation of why we need a minimum wage if we have an EITC.

On the superiority of the EITC, I'm with Andrew and Greg -- and Chairman Bernanke.

P.S. Alexander Villacampa at Mises Economic Blog also highlights a proposal out of the Chicago City Council that would ban the use by restaurants of oils containing trans-fats.  (A related item from Raymond Sokolov appears on the opinion page of Thursday's Wall Street Journal.)  First smoking and foie gras, and now KFC (and other things much beloved by yours truly)?  Time to check the stuff they are using to dye that river.

July 29, 2006 in Labor Markets | Permalink


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» Minimum Wage Disaster from Economic Investigations
Macroblog sums-up the reactions of various econ. bloggers to the 2 recents events related to minimum wage laws in the US: the setting of the minimum wage for Chicago to 10 USD/hour and the proposal of US Republicans of mixing... [Read More]

Tracked on Jul 29, 2006 1:06:30 PM



The deficiency is thinking ceteris paribus. Any policy action has multifold consequences and while focusing on the obvious is simplistic, it demonstrates lack of imagination more than anything else.

As a poverty program, the EITC makes some sense, but as a jobs program it does not. The EITC subsidizes jobs that probably shouldn't even be done in this country. Meanwhile the minimum wage promotes investment, productivity, and with the support of education and training can improve the workforce, the economy, and the country.

Posted by: Lord | July 29, 2006 at 04:13 PM

Lord -- I agree that the EITC is not a jobs program per se, but neither is the minimum wage -- in fact, I'd argue it is an anti-jobs program and I am unclear as to how it generates the benefits you suggest. Further, I'm not sure I understand how the EITC subsidizes jobs that shouldn't be done, unless you are thinking that it promotes labor force participation by those who should be doing something different. Since the EITC is really just a tax cut that lowers the tax distortion on labor supply at lower-end jobs, I think I would argue that the opposite to true. Maybe you can clarify your thinking for me?

Posted by: Dave Altig | July 30, 2006 at 09:11 AM

As to this quote:

«Basic economics tells us that the higher the cost of choosing X the less likely is X to be chosen. Economists call this relationship between cost and choice "the law of demand." Non-economists call it common sense. Does anyone really doubt that the law of demand is both true and robust?»

There is overwhelming evidence, both factual and theoretical, that the ''law of demand'' is in the general case a figment of the imagination, and even more so in the case of factor prices.

I believe that only a profoundly incompetent and dishonest economist can openly profess to ignore reswitching and the demand curve aggregation problem, which have been well known for decades.

I also reckon that the argument above depends on another standard tool of intellectual dishonesty, picturing aggregate demand and offer graphs not just as smoothly sloped curves but as lines instead of ''bands''/''ribbons'', and their meeting regions as points instead of areas within which price is indeterminate, that is, determined by negotiation power.

What I see as another display of crass prevarication and extensive intellectual dishonesty is that those who write «THERE WILL BE NO FREAKING JOBS» seem to be all too eager to show that they ignore the concept of elasticity and that even when (and it does happen) the slope of a factor demand band is smoothly downward the degree of declination matters a great deal.

The current evidence on the minimum wage story is:

* Modest increases in the minimum wage (e.g. not to $100) seem to have very little effect.

* If they have an effect it is mostly on profits, rather than employment, which rather explains why the Restaurant Association of America pays good money to lobby.

* When they have an effect on employment, a raise of 10% in in the minimum wage may result in a reduction of 1% in minimum wage employment.

Again all this applies for some region around the current level, not for order-of-magnitude increases.

Now instead of applying the intellectually dishonest attitude of a claim that many make that the sole effect of minimum wage increases is on employment, and it is large, let's look at it rationally, in the sense of looking at likely outcomes and their welfare effect.

Increasing the minimum wage by 50% may lead to 5% lower employment at the minimum wage, and by 100% to 10% lower. Do either seem bad tradeoffs? To me it seems pretty obvious that the welfare of minimum wage earners overall has increased substantially in both cases.

Posted by: Blissex | July 30, 2006 at 09:20 AM

«Economists call this relationship between cost and choice "the law of demand." Non-economists call it common sense.»

As to «common sense», perhaps some people who have got some yet are prepared to believe disingenuous mumbo jumbo on the supposed ''law of demand'' might benefit from a more realistic explanation of why not huge raises in the minimum wage affect a bit profits and not much else... What follows is a folksified discussion drawn from basic economics (as taught outside the USA perhaps :->).

There are several theories of demand and prices, depending on the type of thing being traded.

For labor, well, things are special, because factors of production have no intrinsic utility. If you pay someone to work for a day, that work by itself that adds nothing to your welfare, unless you just enjoy watching people exhert themselves. That is quite different from buying food: you need food as such; and it is different again from buying a movie DVD: watching the movie is something you enjoy directly.

People buy factors of production for only one reason, and that is profitability. If buying one extra lathe is profitable, it will be bought, if hiring an extra worker is profitable it will be hired. Unless the same money can be used to buy something even more profitable at the same level of risk.

Now look at a fast food restaurant owner: he has 10 employees, pays them each $5/h and each generates $10/h of profit, for a total of $800/shift profit with $400/shift of labor cost. Good stuff.

Now because of some reason or another he has to pay his employees $10/h, and his profit goes down to $5/h, for a total of $800/shift of labor cost, much higher than the previous $400/shift. Should he sack some of the 10 workers because his costs have gone up? Well, the owner is still making $400/shift profit, and if he sacks 1 of the 10, his profit goes down to $360/shift, so he won't. Unless he can find a way to spend the same $80/shift a worker costs him in a way that gives him a better profit than $40/h, which because of a host of reasons might not be that easy.

Also, he can increase the price of his products to recover margin, and if *all* ''restaurants'' are subject to the same increase in labor costs, that will be a lot easier, and part of the increase in the pay of workers will be borne not by the owners but by the customers.

Now of course raising wages to $20/h will have a very different effect (but not necessarily a fatal one), but the example above just shows that usually within a fairly significant band, how value added gets partitioned between profits and wages is quite arbitrary, and that as long as a worker generates enough (absolute and relative) profits employment will not be impacted. There is are some studies that show that this story happens in practice.

This is all just business «common business», and the Restaurant Association of America knows all this a lot better than many self important professors of Economics professes to show.

Hint: the Restaurant Association of America perhaps is investing quite a bit of money in lobbying to protect the jobs of restaurant employees, not the profits of restaurant owners, or perhaps not :-).

Posted by: Blissex | July 30, 2006 at 09:59 AM

Blissex, you make some good points on restaurants. However, the Chicago wage hike is targeted at large retail stores.

The population is mobile. I can choose to shop outside of Chicago if I want. I also can buy on the internet.

The increase in the minimum wage from a state mandated 6.5 bucks to a city mandated 10 bucks
seems a bit excessive. Once a government capriciously selects a small segment for wage change, where does it stop? In Chicago's case they have a pretty activist city council these days. They have banned the sale of fois gras, are getting ready to ban the use of lard and other trans fats, and even looked a microchipping dogs!

The big box stores will still build in Chicago, just in the suburbs. This will not only cost Chicago sales tax dollars, but jobs at each of the stores.

Raising the minimum wage in this case hurts the poorest people, and the most vulnerable. Because most of the stores were going to be built in the poorest neighborhoods, so the lower prices and the jobs were going where they were needed most.

Posted by: jeff | July 30, 2006 at 01:36 PM

«However, the Chicago wage hike is targeted at large retail stores.»

But large retail stores claim they already pay more than $10/h to their employees, so the Chicago wage hike is ostensibly an empty declamatory gesture, as so much ''radical'' politics is.

«The population is mobile. I can choose to shop outside of Chicago if I want. I also can buy on the internet.»

Indeed I suppose that it is even more of an empty declamatory gesture because of that.

«The increase in the minimum wage from a state mandated 6.5 bucks to a city mandated 10 bucks seems a bit excessive.»

Perhaps yes, perhaps not. Again, big box retailer claim they already pay more than $10/h and that they are not creating a lot of working poor.

Anyhow my argument was mostly about not the specific case, but the general contention that necessarily wage increases solely result in significant increases in unemployment, and that instead it depends on the details of the case.

Even if I suspect that, if the big box retailers have been honest and really pay more than a $10 wage on average, that is going to have a very modest impact anyhow.

«Once a government capriciously selects a small segment for wage change, where does it stop?»

Such a disingenuous argument, as if the government, and its sponsors, did not already work like that to their benefit.

The government picks favourites all the time, even if the favourites usually are republican sponsors who want ''protection'' from ''unfair business practices'' of one sort of another. Why do you think K-street exists if not to channel the money of republican sponsors to their legislators? ''Helping'' big business is how the USA government has been run for a very long time.

As to our contemporary times, never mind petty things like hereditary peanut monopolies, there are laws on the statute books and have been duly enacted and signed into effect, and the current administration has chosen to waste less time and money enforcing them, such as immigration law and estate tax law, thanks to the generous attentions of some important sponsors. $10/h for big box store employees is minuscule compared to that.

«The big box stores will still build in Chicago, just in the suburbs. This will not only cost Chicago sales tax dollars, but jobs at each of the stores.»

But this is just disingenuous (at best) handwaving. Where is the evidence? How much of that is going to happen? Wishful thinking, never mind imbecilities like the ''the law of demand'', does not make for a good argument.

As far as theory and experience go, in this particular case a possible and arguably likely outcome is that the profits at some big box stores will go down a bit, as average salaries go up a bit.

Posted by: Blissex | July 30, 2006 at 02:12 PM

«The big box stores will still build in Chicago, just in the suburbs.»

This statement gives as a fact that if only the minimum wage had been kept at $7.50/h then there would have built more stores in Chicago and less in the suburbs. Pure declamation, as far as it goes.

My recollection is that big box stores choose the suburbs anyhow, as this article says, for example:
«Like today's Republican Party, it focuses intensely on rural areas and generally avoids cities. (Republican conventioneers won't be able to shop at a Wal-Mart when they visit New York City.) As this Bloomberg story notes, "Sixty-seven percent of Wal-Mart's stores are in the 30 states that voted for Bush and Cheney in 2000."»

However consider the same article on CostCo:

«Pay starts at $10 an hour. About one in six employees is represented by a union, and workers receive nice health benefits.»

which suggests that CostCo is not affected by the new minimum wage (coincidence?).

Perhaps setting the minimum wage for big box employees to $10 in Chicago is note mere posturing, it is just an indirect way to make CostCo feel more welcome, and Wal*Mart less welcome. Not all big box shops have the same policies, and perhaps it is in the interest of municipalities to favour those that add better jobs.

After all someone on a rate of less than $10/hours has a fairly high chance of getting some form of welfare:

Posted by: Blissex | July 30, 2006 at 05:59 PM

Raising the minimum wage tells the employer to raise the productivity of his workforce through training, raise his prices, if he can, or reduce his demand for labor by capital investment, or by shrinking. Businessmen are creative and much prefer the former solutions to the latter, all of which I find desireable as well. A rising minumum wage in this case is little different from the technological changes any business must face. The minimum wage is not an anti-jobs measure but an anti-poorjobs measure and is exquisitely targeted at underperforming industries.

If government paid all the wages of low income workers, I am sure businesses would have no trouble finding a use for them. It is just that those uses would not generally be the most productive. As it is, the EITC pays a portion of them which leads to somewhat less productive uses. It is more likely therefore to lead to poor people being locked in poor deadend jobs with little training or advancement. I am not surprised EITC has been growing as a result. I would rather we spent our taxes on education and training to raise the quality of the workforce so they could get wellpaying jobs.

The EITC is lacking even as an anti-poverty program since it doesn't address those that are unemployable or even unemployed.

France may not be the most desireable objective to strive for, but even it is more desireable than Mexico.

Posted by: Lord | July 31, 2006 at 06:50 PM

I don't think my arguments are disingenuous at all. I think that Wal-Mart has certainly shown it will put it's money where its mouth is. One butcher shop unionized, and they eliminated ALL butcher shops throughout the country. 180 of them. Now you can buy pre sliced meat at Wal-Mart in the US.

People in Chicago drive to the suburtbs for gas and cigarettes. Why won't they add a trip to Target or Wal-Mart?

Two things really concern me. Chicago has basically said it is closed for development. It chased away retailers by passing a bad law. The govt hurt the poor people in places that could really use the employment.

The other is not unfounded. Where does government control and manipulation stop? If I am Nieman-Marcus, I have to pay my window washer $10 an hour now. If I am not paying that, it increases my costs unnecessarily.

Chicago set a size of store part of the ordinance. So now, businesses will build stores to be under that size to avoid paying the higher wages, if they build at all. So what will happen...the govt will amend the law to catch the smaller retailers. Then the cycle starts again.

You guys are so blinded by partisanship that you have trouble understanding the basic economics. An activist government, using poor economic policy to try and cause social redistribution of wealth is not a good thing. I recall a tea party in Boston that started an uprising. It is a known fact that increasing the minimum wage increases unemployment, and it generally hurts the poor, the uneducated first and hardest.

BTW, recent polls have shown that 65% of Chicagoans don't like the new ordinance. Maybe we will get some new alderman-but I doubt it because the Democratic Machine is so strong here.

Posted by: Jeff | July 31, 2006 at 09:16 PM

In regards to the minimum wage increase and the issue of economists believing that it will only drive employers to deny unskilled workers, I feel I have another way to look/approach it. Well, with the expansionary fiscal policy econonmy that we're in, Govt spending is up and taxes are down, which increases pressures on prices and wages. With that, in my mind, it tends to make the standards of living greater than they were, things just cost more. And if things cost more the govt. needs to set regulations in order to help the public adjust to a higher standard of living. I realize that employers will have a thing or two to say, but hey tough its the law. If I were an employer and I had to pay my worker $7.25/hr in the future and they weren't quite to the skill that I wanted them at ok, I would take a bit of time to invest in their training and then, if they decided to leave and move on to another job in the same field at least they'd be taking knowledge with them. But this is all in a perfect world.

On to the EITC, is it just me, but the last time I checked we were trying to keep inflation and rates in check. My main concern is, if we cut taxes for a certian tax braket, while I understand it is beneficial to them, how will it affect the economy and the public? I mean if you cut taxes for one group you need to make up for it elsewhere and if the govt. had the bright idea of transferring on...well I'm sure they'll have a hell of a force to reckon with come election time. Bottom line, I say keep the wage increase and let employers and other piss and moan all they want, its a much needed change.

Posted by: short1918 | July 31, 2006 at 10:37 PM

Buy only on the Internet that which you can't get anywhere else. The shipping costs take away any price gains.

Posted by: big Al | July 31, 2006 at 11:51 PM

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July 28, 2006

Tell Me Something Good

What to make of today's advance report on second quarter economic activity?  When I started writing this post, I had in mind this rather glum summary: slower growth, higher inflation (again).  And then I started reading the reactions of my colleagues in blogville. Brad DeLong referred to the real GDP number as "disappointing." pgl calls the second quarter performance "weak" and correctly notes that the "slowdown in domestic demand growth was across all sectors." At Alpha.Sources blog the reaction was "It sure could look as if the US is finally beginning to lose momentum." Calculated Risk thinks that "overall this is a negative report."

Those were the positive reactions.  Barry Ritholtz offered the view that "The U.S. economy stunk the joint up in Q2, slowing sharply as inflation continued to climb." Nouriel Roubini could barely contain himself, saying the growth number was "awful and dismal."

Wait a minute.  Aren't we going just a little bit overboard here?  After all, we are talking about 2-1/2 percent growth hot on the heels of 5 percent plus. Here's a bit of pretty reasonable perspective, from BizzyBlog: "Not stellar, but given the oil-price situation, I’ll take it." And this, from Jim Hamilton:  "Nevertheless, the 2006:Q1 growth was so strong that it brought the recession probability index down from 7.1% for 2005:Q4 to 3.4% for 2006:Q1, a very favorable reading."

Professor Roubini is having none of it:

... the details of the report are just simply even more awful than the headline number: they are suggesting a coming U.S. recession of the sort that I have been predicting...

Residential housing, of course, is a big part of the story. Michael Shedlock says "Rest assured GDP at 2.5% with housing collapsing and 2.5 trillion dollars worth of ARMS resetting over the next two years is not good news", and if you really need any confirmation that the housing market has cooled you can get it at Econbrowser and at Calculated Risk (here and here).  That and the savingless state of consumers -- duly frowned over by Andrew Samwick and in the first post from Calc. Risk linked above -- raise reasonable doubt about the near-term strength of consumer spending.  But there is nothing new about this.  For some time, the only question has been whether things would slow easy or slow hard.  As CR says, "I suppose [the housing report] shows that the housing slowdown is orderly - so far."

What may be more troubling is Nouriel's claim that

Even non-residential investment is melting down: the headline growth rate of  2.7% growth hides an actual fall in real investment of equipment and software of 1%.

That worries Professor Hamilton too:

Fed Chair Ben Bernanke has expressed hope that

investment in nonresidential structures, which had been weak since 2001, seems to have picked up appreciably, providing some offset to the slower growth in residential construction.

But with nonresidential investment contributing +0.28% to 2006:Q2 and residential investment -0.4%, it seems safe to say that Bernanke's optimism does not find much confirmation in the 2006:Q2 advance estimates.

OK, but yesterday's report on June Manufacturer Shipments, Inventories, and Orders gave reason to be hopeful, and in the slightly longer view there doesn't seem much cause to run for the bunkers:




Look.  I worry as much as the next guy.  I'm even one of the few who are still anxious about the inverted yield curve. But we sure seem to be working ourselves into a pretty good lather over one quarter of 2-1/2 -- 2-1/2! - percent growth.

In my opinion, the really scary stuff is in the inflation numbers.  In case you missed those details, The Nattering Naybob summarizes:

GDP price deflator index +3.3% for the 3rd straight quarter. Consumer prices including food and energy +4.1% vs prior 2.7%. Core PCE +2.9% annualized, the fastest in 12 years. Consumer prices YOY + 2.3%, the fastest growth since 1995.

Employment Costs: +0.9% vs prior +0.6%
Full Report

Jared Bernstein, via Brad DeLong, points out that real labor compensation, measured by the CPI-inflation-adjusted Employment Cost Index actually fell, so you might argue that labor costs remain contained.  But it is generally nominal ECI growth that forecasters relate to inflation, and the news on that front was not good.  In any event, the inflation picture drawn from the ECI crystal ball is generally pretty murky.  To the extent that we want to rest our fortunes on the forecast that price pressures will cool, we'll have to look elsewhere. And there I'm at a loss. 

UPDATE: voluntaryXchange awards the 2nd-quarter performance a C. Kind of sounds like Mark Thoma's "average".

July 28, 2006 in Data Releases | Permalink


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I'm in agreement on the scary stuff being inflation. Core PCE at +2.9% is ugly, and this data was completely ignored by the market. The financial press was all over the GDP moderation, but the inflation news was mostly buried in the last line of back page paragraphs. Perhaps this view was fostered by Bernanke's recent claim that moderation in economic growth would calm inflation. Whatever the source of this view is, it certainly seems very risk prone to me. It seems that there is a bit of collective amnesia afoot, and that most folks have forgotten that there is something called stagflation. Does a core number of +2.9% really warrant a pause, even with a moderating GDP? I suspect the Fed is going to get its economic slowdown, but there may be more inflation baked into the cake than anyone is anticipating.

Posted by: JS | July 29, 2006 at 08:00 AM

I think we'll see "the really scary stuff" pretty soon. As I see it, our economy is in a deep hole, and if the Fed stops raising ff rates everyone's going to start digging faster. We're here because no one's been responsible; not the Administration, not Congress, not the Fed & not our private financial sector.
This time, we NEED to see our Fed raise ff rates TOO far to remind us that money's more than a commodity, it's a store of value. If the Fed stops now it will reenergize (or reignite if it's smoldering) the rampant risk-taking that hijacked our economy. From profligate Gov't. deficit spending to unmonitored hedge fund leveraging to no-down, no-doc., cash-back, pick-a-payment real estate lending, the pendulum has swung recklessly far.
The Fed's job is NOT to see that we never again endure two successive quarters of declining growth, it's to see we follow a path likely to produce a sound economy growing at a sustainable rate. Without a recession, how are we to rectify housing prices that have doubled & in some cases tripled in 10 years with wages that have been close to stagnant for 20 years? It's clear, we just can't do it.
Until BB convinces our markets his Fed will NOT honor the Greenspan put, until he convinces the oil cartel he will no longer tolerate its antics, until he tells Congress it's their mess he must now deal with & deal with it he will, until he ACTS (not just talks) to encourage personal saving over spending, his Fed will be treated as a continuation of AG's - a puppet for powerful, but extremely nearsighted interest groups.
I recognize this is a tall order, but it's his job.

Posted by: bailey | July 29, 2006 at 09:33 AM

You may be right in focusing on average growth rates rather than the quarter by quarter noise. Of course, the Bush cheerleaders do focus on the noise when it's above tthe average. Let's see - average real GDP for the 2nd half of the 20th century was 3.5% per year. What's it been over the past 5.5 years?

Posted by: pgl | July 29, 2006 at 04:58 PM

I should have been clearer -- 2.5% stunk the joint up relative to consensus expectations of 3.2%. That's a pretty big percentage miss.

That, plus the decaying grwoth rate and obviously cooling housing market mean that the slow motion slow down is continuing . . .

Posted by: Barry Ritholtz | July 29, 2006 at 05:12 PM

The inflationary push seems to be coming from speculation in the futures market.

Why does the Fed have to raise rates on 300 million to stop 20 banks and hedge funds from driving the price of everything out of sight ?

Why don't we raise the margin requirements in the futures market to a level that shakes the speculators out ?

Posted by: zink | July 30, 2006 at 04:56 PM

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July 26, 2006

A Teachable Moment

The Treasury Department has released a new analysis of "the President’s proposal to permanently extend the tax relief provisions enacted in 2001 and 2003 that are currently set to expire at the end of 2010."  It is attracting its share of controversy, of course, but interestingly the argument does not seem to be about its reliance on "dynamic analysis using a model that accounts for the effects of this greater work effort, increase in savings and investment, and improved allocation of resources on the size of the economy." 

Writing in today's Wall Street Journal, in an article reproduced on Greg Mankiw's blog, Robert Carroll (Deputy Secretary for Tax Analysis) and Professor Mankiw summarize the key lessons from the report:

Lesson No. 1: Lower tax rates lead to a more prosperous economy...

Lesson No 2: Not all taxes are created equal for purposes of promoting growth...

Lesson No 3: How tax relief is financed is crucial for its economic impact.

That last bit provides the foundation for criticisms from Daniel Gross, from Menzie Chinn, and from Brad DeLong.  At issue is this (from Mankiw and Carroll):

The Treasury's main analysis assumes that lower tax revenue will over time be accompanied by reduced spending on government consumption. But the report also shows what happens if spending cuts are not forthcoming. In this alternative scenario, a permanent extension of recent tax relief is assumed to lead to an eventual increase in income taxes.

The results are strikingly different. Instead of increasing by 0.7% in the long run, GNP now falls by 0.9%.

Says DeLong:

What proportion of students will be able to follow the syllogism?

    • Tax relief is good for growth only if the tax reductions are financed by spending restraint.
    • The Bush tax reductions have been financed not by spending restraint but by borrowing.


    • The Bush tax reductions have been bad for growth.

I hope the answer is none, because one of the premises is irrelevant.  The question is not have the tax cuts been financed by spending cuts, but rather will they be financed by spending cuts.   Brad's expectation may be reasonable given the politics of the situation, but you obviously cannot draw conclusions by assuming a condition that has yet to be determined.

Menzie Chinn has a better point:

It is important to understand that there is no welfare calculation undertaken, despite the fact that under certain conditions, GNP is higher than under baseline. That is because undertaking a welfare analysis would require taking a stand on the utility associated with government spending on goods and services. So even if one were to take the Treasury's high end estimate for the long run steady state effect, the answer to the question of whether tax cuts are desirable depends upon the utility associated with spending on civil servant wages, bridges, and body armor.

Very true, and wouldn't it be nice to have a serious discussion about those trade-offs?  And while we are at the business of pointing out that either spending or taxes have to give, why not put even more aggressive tax reform back on the table.  Carroll and Mankiw report:

According to the Treasury analysis, a permanent extension of the recent tax cuts leads to a long-run increase in the capital stock of 2.3%, and a long-run increase in GNP of 0.7%.

Contrast those numbers with these, from a Treasury report released a few months ago on the dynamic effects of tax reform s that would, to varying degrees, shift the tax burden away from saving and capital accumulation:

.. models suggest that the [Growth and Investment Tax] recommended by the [President's Advisory Panel on Federal Tax Reform] could lead to long-run increases in the capital stock ranging from 5.6 to 20.4 percent and long-run increases of national income ranging from 1.4 to 4.8 percent. The simulated growth effects of the [Simplified Income Tax] plan were considerably smaller, with long-run increases in the capital stock ranging from 0.9 to 2.3 percent and national income increases ranging from 0.2 to 0.9 percent. The growth effects of the [Progressive Consumption Tax] were the largest of the three plans, with long-run increases in the capital stock ranging from 8.0 to 27.9 percent, and long-run increases in national income ranging from 1.9 to 6.0 percent.

Now we're talking real money.  I'd have a lot more sympathy for the call to raise taxes rather than cut spending if the former came with an advocacy for some real tax reform.

Other interesting items:

Gerald Prante at Tax Policy Blog notes:

[The] final paragraph of the report is interesting because it shows that the better way through tax policy to increase long-run economic growth is to target directly at marginal tax rates, whereby people make their economic decisions, and not to mess with credits, deductions, phase-outs, phase-ins, etc, which have little economic value.

Mark Thoma makes a good, although somewhat subtle, catch:

I want to point out that Lesson 1 summarizes the effect of the policy on the level of output, a movement to a new steady state. It is not a change in economic growth... Quoting from the report, "In the steady state, per-capita growth in the model is equal to a constant rate of technological change." I've missed something somewhere. The commentary is about changes in economic growth, not changes in the level of output, so it would be helpful to see the connection between tax cuts and the (constant) rate of technological change explained further since an increase in the rate of technological change is needed to increase the growth rate of per capita output.

I think the answer is that Carroll and Mankiw are being a little fast and loose with their language.  If the long-run level of income is higher under a particular policy, then it must be the case that the growth rate of income is higher than it would otherwise be for some period of time along the transition from the old policy to the new one.  In the short-run or medium-run, the growth rate of the economy is stimulated, even though there is no impact on growth in the long run.

UPDATE: pgl adds his thoughts at Angry Bear.  I especially think his admonition that there is often a tension between short-run stimulus and long-run capital formation is worth taking to heart.

July 26, 2006 in Taxes | Permalink


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Thanks for summarizing the economist blog debate so far. After I read the Treasury report, I was rather shocked at the bait and switch arguments in it. More over at Angrybear.

Posted by: pgl | July 28, 2006 at 07:33 PM

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July 25, 2006

What The Dollar Bears Have Been Waiting For

From Bloomberg:

China should increasingly diversify its foreign-exchange reserves to reduce the risk of losses from declines in the dollar, the country's National Bureau of Statistics said...

"The U.S. dollar may continue to weaken, increasing the risks of foreign-exchange losses in our currency reserves,'' the statement said. Speculation that the dollar will fall "also boosts expectations that the yuan will strengthen.'' The bureau didn't provide reasons why it expects the dollar to fall.

Well, beyond the obvious fact that the U.S. current account deficit is pretty large, there are the reasons included in the update in this post.  And, of course, there are the simple facts on the ground.  From Brad Setser:

Floyd Norris of the New York Times highlights something that was also on my radar screen:  a sharp fall off in foreign demand for US treasury bonds. For the first time in years, the US budget deficit is being financed by domestic investors.

Foreign inflows to the US haven’t fallen off, to be sure.   But the composition of these inflows has changed.  Foreigners are buying more agencies and US corporate debt and fewer Treasuries.  First quarter data is here; the TIC data from April and May do not indicate that the story has changed.

And (again from the Bloomberg article):

"Diversification is a continuation of China's reserves management,'' Standard Chartered's Hui said. "There's evidence or suggestions China has been moving gradually away from U.S. dollars into other major currencies, such as the yen or euro.''

There are, of course, the not atypical mixed messages:

[China] should also encourage Chinese companies to invest abroad to curb expectations of a stronger yuan, the bureau today said in a statement on its Web site...

Today's statement came a day after China said it may allow its brokerages to raise hard-currency assets and invest them overseas for the first time As part of the central bank's efforts to encourage capital outflows and reduce pressure on the yuan to rise.

That should give you pause, but if you are looking for a fearless prediction, here it is:

Fund outflows "will be gradually increasing, but they probably won't have an immediate effect in reducing the upside pressure of the yuan,'' [Tai Hui, an economist at Standard Chartered Bank in Hong Kong] said. The Chinese currency may strengthen 3.8 percent to 7.80 to the dollar by the end of this year, he said.

Even at the lower end of that range, I'd declare Nouriel Roubini's 5-percent prediction a winner.

July 25, 2006 in Asia, Exchange Rates and the Dollar | Permalink


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Since US Dollar is in poor condition, how come the interest on High Interest US Dollar savings accounts is still high? 4.5% on some.

Posted by: L505 | August 11, 2006 at 04:19 PM

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A Hat Tip, Nothing More

I really can't add much to Jim Hamilton's wonderfully clear exposition of the yield curve, the expectations hypothesis of the term structure, and what it all might mean in the current economic environment beyond advising you to go read it.  Extra cool points are awarded for the link to the "recession predictor" at Political Calculations, an interactive program based on research by the Federal Reserve Board's Jonathon Wright that allows you to plug in relevant information about the Treasury yield curve and receive, free-of-charge, an estimate of the probability of recession arriving within in a year.  It's been around for awhile, so I somehow missed it the first time around.  To atone, you will henceforth find the path to the recession predictor in the "Useful Links" list of this weblog.

July 25, 2006 in Interest Rates | Permalink


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July 24, 2006

More On China And The Yuan

Hat tip to Claus Visteen for bringing to my attention this comment from Dan Harris at China Law Blog in response to my WSJ debate with Professor Roubini:

... both [Roubini and Altig] talk about China's overheating as a fact and they both cite Chinese growth statistics as though they are wholly accurate.

More importantly, however, is that both economists ignore the political and social imperative for continued growth in China.  I am of the view that the Chinese government wants growth.  I am of the view that the Chinese government needs growth.  I am of the view that the Chinese government's comments about wanting to slow down the economy are mainly for foreign consumption...

And is China's economy really "overheating," anyway?  I have certainly seen a lot of talk about inflation fears, but I have yet to see any numbers indicating much of it already...

I am not going to predict whether China will or will not allow the Yuan to appreciate further, but I will say that in analyzing this question, one must do more than just look at the economics; domestic politics must be considered and domestic politics say there will be no appreciation.

Good observations all, though I would point out that if it is difficult to trust Chinese growth statistics, it must be equally difficult to trust the inflation numbers.  And the Chinese government does seem to take the overheating issue seriously.  As Claus points out on his blog today, China has, for example, just announced plans to trim export subsidies "as part of measures aimed at rebalancing and restraining economic growth and its swelling trade and current account surpluses. "

However, the point that the exact truth regarding economic circumstances in China remains murky is well taken, and it is one of the reasons I believe that estimating the future of the yuan is even trickier than the usual shadow-chasing business that is exchange rate forecasting.

July 24, 2006 in Asia, Exchange Rates and the Dollar | Permalink


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Yes, but is China trimming those export subsidies out of concern for overheating or concern for looking good to the U.S? And, didn't it increase export subsidies for its tech products at the same time?

Posted by: China Law Blog | July 24, 2006 at 01:22 PM

Perhaps China's exports will slow, but I don't believe it.

Here's why.

China's Economic Hydrology Powers - Part I

Betting against China's continued growth has been a losing bet. For good reason.

UNCTAD's Report, 'Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, 2005-2008' advises that "prospects for global foreign direct investment (FDI) are promising in both the short term (2005-2006) and the medium term (2007-2008)."

China is by far and large the most attractive global location for FDI investment, according to surveyed TNCs. "Half of the top ten countries ranked by both experts and TNCs alike belong to the developing world. China is considered an attractive location by 87% of TNCs and 85% of experts - at least 30 percentage points above the ranking of the next best performer. The other countries in the top five tier were the United States, India, the Russian Federation, and Brazil."

TNCs ranked the top ten FDI opportunities of interest in this order: 1. China (87%), 2. India (51%), 3. USA (51%), 4. Russia (33%), 5. Brazil (20%), 6. Mexico (16%), 7. Germany (13%), 8. UK (13%), 9. Thailand (11%), and 10. Canada (7%).

A.T. Kearney's 2005 Foreign Direct Investment Confidence Index Report states that "China and India are considered the world's 1st and 2nd most attractive FDI locations globally. China held the top spot for the forth year in a row and India rose from 3rd to 2nd place, surpassing the United States. Hong Kong and South Korea dipped slightly from 8th to 10th and 21st to 23rd, respectively. Singapore and Thailand maintained their positions at 18th and 20th place." As importantly, do not overlook the number of greenfield FDI projects in China as compared to other nations. China sits atop the greenfield investment list.

According to the US-China Business Council, China had over 44,001 FDI projects in 2005. Of that total, there were 10,480 equity joint venture (EJV) projects, 1,166 cooperative joint venture (CJV) projects, 32,308 wholly foreign-owned enterprise (WFOE) projects, and 47 foreign-invested shareholding venture (FISV) projects. In addition, the Ministry of Commerce (MOFCOM) of China reported 18 foreign-invested banks, insurance companies, securities firms, and fund management operations. "Although official MOFCOM statistics still do not count these deals toward China's total FDI, they accounted for an additional $12.08 billion in capital inflows and would combine with the official FDI figure to reach a total of $72.41 billion in foreign investment." Looking forward, "issues likely to affect foreign investment in 2006 include the new labor contract law, the discontinuation of foreign-invested enterprise representative offices, the antimonopoly law, and the implementation of distribution rights."

A study cited by UNCTAD indicates that "China has no significant effect on [FDI] inflows to other East Asian countries. In fact, during 1992-2001, China's FDI was positively related to FDI in other countries. This would indicate that most FDI flows do not compete with each other, and that for potentially competitive (export-oriented) FDI, China is encouraging investment in other countries as a complement to its role within Asian production networks. Thus, the Asian giant appears to be crowding in rather than crowding out FDI in the region."

China FDI inflows (excluding Hong Kong):
1998 - $45.462 billion (global rank - 3)
1999 - $40.318 billion (global rank - 7)
2000 - $40.714 billion (global rank - 7)
2001 - $46.877 billion (global rank - 5)
2002 - $52.742 billion (global rank - 2)
2003 - $53.505 billion (global rank - 1)
2004 - $60.600 billion (global rank - 2)
2005 - $72.410 billion (global rank - 3)

Hong Kong, China FDI inflows:
2001 - $23.8 billion
2002 - $ 9.7 billion
2003 - $13.6 billion
2004 - $34.0 billion
2005 - $35.9 billion

China FDI data sources:

World Investment Report 2004 - FDI inflows page, UNCTAD

Trends and Recent Developments in Foreign Direct Investment, June 2006, OECD

Other sources cited:

Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, 2005-2008, UNCTAD

2005 Foreign Direct Investment Confidence Index Report, A.T. Kearney,3,1,140,1

World Investment Report 2004, UNCTAD

World Investment Report 2005, UNCTAD

US-China Business Council document mentioned:
Foreign Investment in China
Published April 2006

Study cited by UNCTAD:
China is not Crowding Out FDI from the Rest of East Asia, Experts Say


Posted by: Movie Guy | July 24, 2006 at 11:10 PM

Perhaps China's exports will slow, but I don't believe it.

Here's why.

China's Economic Hydrology Powers - Part II

U.S. technology transfers to China growth initiative. A major move.

I am expecting this initiative to drive further export growth of China. I don't see how it won't cause it.

April 11, 2006
U.S.-China Meeting and Agreement:
United States-China High Technology and Strategic Trade Cooperation

May 26, 2006
U.S. Asks Taiwan to End China Trade Limits
U.S. trade representative calls on Taiwan to lift restrictions on trade with China
TAIPEI, Taiwan
By STEPHAN GRAUWELS Associated Press Writer

June 9, 2006
Speech: Win-Win High Technology Trade With China
David H. McCormick
Under Secretary of Commerce for Industry and Security
U.S. Department of Commerce
At Center for Strategic and International Studies


Posted by: Movie Guy | July 24, 2006 at 11:11 PM

So, there you have my input.

I don't believe that China's exports will drop off very much absent major currency valuation changes or a large global downturn.

Too many inbound props and external incentives (FDI and other considerations) are driving China's export growth.

This doesn't mean, of course, that China's domestic consumption economic won't experience continued growth. It will. At least until the crisis occurs.

Posted by: Movie Guy | July 24, 2006 at 11:19 PM

I stumbled across your blog while I was doing some online research. As someone who has lived and worked in China, as well as in other Asian countries, this is a topic that particularly interests me. Thanks for an informative and thought provoking post!

Posted by: thebizofknowledge | July 31, 2006 at 05:40 PM

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Why Don't Rising Productivity Tides Raise All Boats (Equally)? A Clarification.

Last week I contrasted some comments by Ben Bernanke on productivity growth in the U.S. relative to other industrialized economies with the a results of a paper by Ian Dew-Becker and Robert Gordon titled "The Slowdown in European Productivity Growth: A Tale of Tigers, Tortoises and Textbook Labor Economics."  My claim was that while Bernanke points to things like greater labor market flexibility and competition in the U.S., Drew-Becker and Gordon's research points to tax policy in Europe.

Ian -- the author of the aforementioned research -- took me to school in the comment section of that post:

In that paper, I don't think we so much disagree with Bernanke's explanation as argue that there is more to the story (as you say). If you break the LP growth gap into TFP and capital deepening, TFP accounts for the majority -- that's what Bernanke is referring to. The problem is, TFP is pretty tough to talk about -- it's just a residual.

When Bob and I talk about the effects of tax rates, we're referring to capital deepening. It's also important to note, as have other papers recently, that capital deepening in the US recently has been driven by low hours worked, rather than high investment -- slightly troubling.

Well, those are certainly great points.  Lesson learned.

UPDATE: While we are on the topic, this comes from today's Wall Street Journal (page A1 of the print edition):

After a long slump, strong exports and new flexibility in companies' labor relations are laying groundwork that could sustain economic recovery in Germany and some other parts of Europe...

The euro region is poised to post its strongest economic growth since the technology boom of 2000. The 2.2% expansion projected for this year would be the largest improvement in the growth rate among the world's big, developed economies. Amid signs that U.S. growth is losing steam, it is a timely revival that could help prevent a global slowdown...

...Germany is Europe's largest economy and in recent years has been one of its most stagnant. But the nation has led in developing a robust export industry and in the corporate restructuring that has finally begun to create jobs.

... Europe's economic slump has given companies new muscle in their negotiations with workers. Governments in Europe have been slow to overhaul worker-friendly labor laws for fear of incurring voters' wrath. That slowed job growth as companies transferred operations overseas where labor costs were lower. High unemployment in Europe depressed consumer spending, helping limit economic growth in the past five years to a meager 1.4% average in the 12 countries that use the euro...

German industry has gone furthest in overhauling work practices within the strict labor laws and union accords common across Europe. Companies now are pressing their employees to work longer, more flexible hours and to forgo pay increases, using the threat of moving jobs abroad as bargaining leverage. While pinching employees, the changes have made operating in Germany more attractive, stimulating local investment and helping the country hold on to more jobs.

If you are the type who likes to think in terms of what developments like these could mean for, I don't know, the value of the dollar or something, the WSJ article might be usefully read along with this

July 24, 2006 in Economic Growth and Development, Europe | Permalink


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July 22, 2006

Odds And Ends -- July 22 Edition

A rainy morning in Cleveland, and an opportunity to do some quality blog-surfing.

The confluence of Chairman Bernanke's Congressional testimony and the release of the June FOMC meeting minutes got lots of people thinking about what is next for U.S. monetary policy. Brad Delong is "surprised that there hasn't been a pause yet" and thinks that we haven't seen one because "the Fed is scared of the 'soft on inflation' headlines that a pause would generate."  The Capital Spectator offers a terrific round-up of the week's economic news, and claims that "In theory, a slowing economy makes it easier for the Federal Reserve to cease and desist with its current round of interest rate hikes. In practice, life's more difficult, thanks to the worrisome rise in core CPI in June..."  Tim Duy also thinks that "although the Bernanke sounded soothing relative to expectations, the incoming data argue for another rate hike in August."  Toni Straka believes the "rate trend will stay the same and probably accelerate." At Hypothetical Bias, the opinion is "Once more and done (for a bit, at least)". William Polley is leaning that way tooBarry Ritholtz reiterates: The Bernanke bounce in the stock market is a "sucker bet".

Speaking of the Chairman -- more specifically his ideas about the global savings and investment and their relationship with interest rates -- Mark Thoma has a legitimate beef with the use of the word "glut."

Other summaries of, and commentary on, the week's economic news: From Dr. John John Rutledge (here and here). Calculated Risk provides a nice graphical look at where housing inventories are building, replicated from the Wall Street Journal. The Nattering Naybob Chronicles has its usual rundown of the week in bond and equity markets. MacroMouse contemplates the end of quantitative easing in Japan, and sees lessons for U.S. policymakers.  Tim Iacono has plenty of this and that, as does The Skeptical Speculator.

On my exchange with Nouriel Roubini on Chinese currency reform, Kash agrees "it does not feel like we're getting closer to some sort of crisis" but wonders "what should we expect it to feel like?"  Paul at Truck and Barter gets right to the substance of our exchange, while Brad Setser adds his own, ever insightful, thoughts at RGE Monitor. The Skeptical Speculator notes that "China has taken additional steps to cool its economy." Though not about the Chinese case specifically, Daniel Gross addresses a related and really important question: Is the end of American dominance in capital markets done?

Russell Roberts echoes an argument made this week by Ben Bernanke: In dealing with low-wage workers, an earned-income credit is preferable to a minimum wage.  He also takes on Paul Krugman's position on both the minimum wage and the inequality statistics that Krugman argues support a minimum wage policy.

Brad DeLong highlights an interesting column by Hal Varian on luck and taxation.  (Bottom line: If luck -- as opposed to hard work and risk-taking -- is a big part of being rich  progressive taxation makes good economic sense.  The intuition would be that luck is not sensitive to prices, and so won't be diminished by relatively high taxes.) 

Mark Thoma noticed the Varian piece too, and has several links to others opining on the inequality debate more generally. I'd also check out Greg Mankiw's ruminations, Tom McGuire's recent "Stalking Points", and, if you have the time, everything in the Cafe Hayek archive on inequality.

Taking a more global perspective on poverty and inequality, J.S. at Environmental Economics shares some thoughts on "Rethinking Development Aid For The 21st Century" (thoughts which sound pretty darn sensible to me).  Also, NEI Nuclear Notes asks "Should Developing Nations Embrace Nuclear Energy?"  In the category of excellent advice, The New Economist quite rightly commends your attention to the Private Sector Development Blog. (So do I.)

A colorful picture of who gets what from oil revenues across the G7 is available at Contango.

John Irons documents the continuing, and puzzling, mix of profits versus labor compensation in overall income.  As I've noted before, however, there may be more to this story than meets the eye.

Hat tip to Captain Capitalism for the link to this article about a county in Oregon that is running its own monetary systemMark Thoma comments intelligently on a proposal to implement a commodity-based monetary system backed by "local renewable energy" (whatever that might mean).

Daniel Drezner links to an interesting article in the Economist on the value (or lack thereof?) of large quantitative trade models.

July 22, 2006 in Asia, Economic Growth and Development, Energy, Exchange Rates and the Dollar, Federal Reserve and Monetary Policy, Housing, Inequality, Saving, Capital, and Investment, This, That, and the Other | Permalink


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These posts of yours are great Dave ...



Posted by: claus vistesen | July 22, 2006 at 07:25 PM

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