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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February 26, 2007

Has The NAIRU Gone Away?

Dean Baker is prompted to ask that question, upon discovering Greg Ip's discovery of "new thinking" at the Fed:

For decades, a simple rule has governed how the Federal Reserve views the nation's economy: When unemployment falls too low, inflation goes up, and vice versa.

... From 1979 to 2003, Fed Chairman Paul Volcker and his successor, Alan Greenspan, exploited this idea, periodically using interest rates to push unemployment higher to achieve lasting reductions in inflation.

But even as they were doing so, the short-run impact of unemployment on inflation began to diminish. Though the trend has been under way for 25 years, only recently has intensive research by Fed economists and others incorporated it into mainstream thinking.

Well, I'm not sure how recent recently is, but my colleagues Terry Fitzgerald, Peter Rupert, and I wrote this in 1997:

A key aspect of [the conventional] perspective is the implicit, but critical, role of the potential-output and full-employment concepts in determining whether a particular growth rate or unemployment rate is inherently "inflationary." The meanings and implications of these concepts are the subject of considerable debate among economists. We are ourselves skeptical that there exists a definitive notion of labor market tightness associated with above-trend (or above-potential) real GDP growth that is reliably related to price pressures.

I don't present this to suggest that we were particularly prescient.  As Dean notes, the conventional perspective is wrapped around the idea of the so-called NAIRU...

According to articles in both the Wall Street Journal and the Financial Times, the Fed may no longer view the non-accelerating inflation rate of unemployment (NAIRU) as a useful tool for guiding monetary policy. The problem seems to be that they don't know where it is and what it means.

... and, at the time we wrote those words above, many, many others shared skepticism about the usefulness of NAIRU-related concepts -- not least several members of the Federal Open Market Committee.  From the transcript of the May 21, 1996 meeting of the FOMC:

CHAIRMAN GREENSPAN... The key to this outlook, as I see it, is not an evaluation of the physical side of the economy that appears in the Greenbook because I suspect that starting at midyear economic growth may well be on the low side of recent experience. The crucial question is the linkage to inflation. At this stage it is very difficult to take the existing structure of the NAIRUs, capacity limits, and the usual potential analysis that we do and square it in any measurable way with what we sense from anecdotal reports.

From the July 2-3, 1996 meeting:

MR. JORDAN [Cleveland Fed]... Is your confidence in the 5-3/4 percent NAIRU instead of, say, 5-1/2 or 5-1/4 percent? Is it in the or 2-3/4 percent real fed funds rate versus 2-1/2 or 2-1/4 percent?  Or is it in a particular measure of inflation or inflation expectations.

Mr. KOHN. I would have to say that I am not very confident about any of those measures.  There is a band of uncertainty around them all. I do think that, as Mike Prell has commented--and I think Governor Meyer said this yesterday as well--there used to be more confidence about the NAIRU calculation.

From the November 13, 1996 meeting:

CHAIRMAN GREENSPAN... The evidence that there is a significant shortfall in measured wages from the predictions of our wage-NAIRU econometric relationships is pretty clear.

From the February 4-5, 1997 meeting:

VICE CHAIRMAN MCDONOUGH [New York Fed]... One of the things we have become rather convinced of is that the NAIRU is a very interesting analytical tool, but it is a very poor forecasting tool...

MR BOEHNE [Philadelphia Fed]... The NAIRU concept, while it means a lot to economists, is a very unfortunate way of communicating because 99.99 percent of the people do not understand it and it comes across as meaning that we are against growth and against more jobs.

From the July 1-2, 1997 meeting:

MR. MCTEER [Dallas Fed]... There’s a sentence on page 6 of the Bluebook that says: “In the staff model, the sacrifice ratio over five years is about 2; that is, a 1 percentage point reduction in inflation can be achieved only by pushing the unemployment rate above the NAIRU by the equivalent of about 2 percentage points for one year.” At the end of 1996, in December, the CPI inflation rate was 3.3 percent, and I think the latest reading is 2.2 percent. It has come down then on that trailing basis more than a full percentage point at a time when the unemployment rate has come down by half a dozen notches...

MR. STERN [Minneapolis Fed]... if there is a NAIRU, it bounces around a lot.

From the February 3-4, 1998 meeting

MR. KOHN... In fact, we are very uncertain about the level of the NAIRU, and some of these supply shocks could be affecting it in a more permanent way.

You get the idea.  I've cherry-picked the comments, but they accurately reflect my recollection of what was in the air at the time.  In fact, to greater and lesser degrees, the reputation of the NAIRU way of thinking has been under attack for as long as I have been employed by the Federal Reserve System (starting in 1989). On the other hand, if you push most Fed folk about their view of how the world works, chances are very good that you will receive back a story about the NAIRU (or its close relations, the output gap and the natural rate of interest). 

Remember the "New Economy"?  File this story with that one.

February 26, 2007 in Federal Reserve and Monetary Policy | Permalink


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Tracked on Feb 27, 2007 3:49:49 PM


I've been pushing the natural rate of the employment to population ratio (EP*)? But is EP* closer to 64% or 63.5%? Either way, the Financial Times suggestion that we are beyond full employment strikes me as silly.

Posted by: pgl | February 27, 2007 at 08:38 AM

Seems to me it makes sense to see NAIRU per se (that is, nairU and not nairSomethingElse) as being mostly a theoretical concept that shouldn't be taken too seriously empirically. Unemployment is only one measure of economic slack and possibly not the best. Surely the sensible thing to do is to look at many indicators of slack. I don't think Milton Friedman ever intended the Natural Rate of Unemployment to be a direct empirical guide for policy. One can stunchly support Friedman's advocacy of the NAIRU as a theoretical concept without believing that it has to be used in the way that Gordon (or someone else) might advocate.

Posted by: knzn | February 28, 2007 at 02:04 PM

As a side-note, watching Bernanke this morning respond to a question from Paul Ryan of Wisconsin, he made roughly the same point, that the link between employment and inflation has weakened, and that even if there was a relationship it was pretty difficult to estimate NAIRU. I believe that eliminates the doubt there.

Posted by: Nathan | February 28, 2007 at 03:41 PM

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February 24, 2007

The Euro Vs. The Dollar

Although I've not written much about the topic lately, I have been monitoring the debate of the last several months about the rise of the euro, and the related question of whether it will eventually emerge as the world's dominant international money.  The discussion has been prompted in part by the fact that euro appreciated by about 11 percent from December 2005 to December 2006, but also by some really splashy news: The observation that the value of euro notes in circulation has surpassed the value of dollar notesthe reported desire of oil-producing countries to diversify their foreign-exchange reserves,  and the fact that euro-denominated debt has become a larger share of the global cross-border total than dollar-denominated debt.  Yesterday Brad Setser published some ruminations about whether the Japanese yen can ever be the "un-dollar", but the reality is that the euro remains the only real contender for the foreseeable future.

A couple of pictures (constructed by my colleague Owen Humpage) helps to put things in perspective.  To begin with, international currency reserves are still dollar dominated:




There are definitely some problems with those statistics -- see, for example, the picture provided by Brad Setser, provided by Menzie Chinn -- but here is another relevant fact: The overwhelming share of foreign exchange transactions involve dollars:




It seems pretty clear that most of the euro activity is still taking place on the European stage.  That could change -- there is an interesting discussion about the expanding importance of the export sector being conducted at Eurointelligence and at Eurozone Watch -- but my guess is that the "tipping point" for the euro depends critically on whether the eurozone ultimately expands.

As I have noted in the past, the research of Menzie Chinn and Jeffrey Frankel suggests that the wildcard involves the UK's designs on the euro.   But the incorporation of the so-called "accession countries" is at issue as well.  For that reason, this, from the Financial Times, got my attention:

On Monday Standard & Poor’s lowered the outlook for Latvia’s long-term sovereign debt from stable to negative. The country has a huge current account deficit, accelerating inflation and loose monetary policy, just like Thailand in 1997. And, as in Asia a decade ago, the symptoms are not limited to one country. As growth has accelerated in the European Union’s 10 newest central and eastern members, it has become unbalanced, propelled by consumers rather than exports. The results are predictable – worsening trade imbalances, mounting inflation and wage pressures. Only Poland and the Czech Republic currently meet the inflation requirement for euro membership, while current account deficits in six of the EU-10 hover near or beyond 10 per cent of gross domestic product. Meanwhile, credit is expanding dramatically – at more than 50 per cent year-on-year in Latvia, Lithuania and Romania, according to Danske Bank.

The difficulties of integrating new-Europe and old-Europe are also on the radar at The Economist (via Edward Lucas and Claus Vistesen):

If the EU were to fracture, the natural fault-line would be the edge of the euro zone, as Toomas Hendrik Ilves, Estonia ’s thoughtful president, has observed...

The common currency includes most of old Europe, but excludes most of the new democracies (including his). What would happen to the outsiders? It would be nice to think, as a worst-case scenario, that the single market would hang together, and that the baker's dozen of countries outside the euro zone would at least remain part of this thriving free-trade area...

Probably, however, the unraveling would go further. The EU already finds it a huge effort to make the Poles, for example, abide by European competition law. Without a seat at the top table in Brussels, no Polish government would allow foreigners to claim full national treatment, especially when it came to buying the country’s big companies. With that, the single market would unravel too.

That all may be a bit alarmist -- the worst-case scenario is important to think about, but it rarely happens.  The point is that, despite the challenges that undeniably confront policy makers in the United States, there are equal, if not more daunting, challenges elsewhere.  I have my doubts that the "exorbitant privilege" of being the world's dominant currency is likely to pass from the dollar any time soon.

UPDATE: Export activity in Germany (and Japan) is also on the mind of Edward Hugh, at Bonobo Land.

UPDATE II: Claus Vistesen uncovers an article from the Financial Times suggesting that central bankers are chasing yield by by taking on more risk, as well as by diversifying the currencies in their reserve portfolios.  My sense is that this sort of motivation drives "investment" decisions at the margin, but that core portfolio choices are still driven by "fundamentals" related to trade flows, financial market activity, and internal exchange rate policies. But as the FT article notes, central bankers are "a secretive bunch," so there is a lot we -- or at least I -- don't know.

February 24, 2007 in Europe, Exchange Rates and the Dollar | Permalink


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David -- the Humpage chart on the $ share of the fx reserves of emerging economies is based on the COFER data, and to be clear, I have no specific problem with that data. Or no problem with it other than the fact that it is incomplete -- many emerging economies don't report data to the IMF, including China. Personally, I think the countries that do not report (China, a lot in the middle east) have a higher dollar share than those that do. Which reinforces your argument --

the problem here is that we don't know whether the countries that don't report have also been holding the dollar share of their reserves constant. my guess is generally speaking their dollar share is trending down but very, very slowly -- almost imperceptably.

The data that I think is off is the BEA data on official inflows, which, if my argument above is right, significantly understates central bank inflows. moreover, the BEA in principle captures all official inflows -- Temasek of singapore, norway's government fund, the oil inv. funds of the middle east. So when you look at total official asset growth (@$900b in 06, based on the numbers I track), the BEA's recorded inflows (@$300b) look a bit too low.

My critique of the Humpage chart would be a bit different -- it looks at shares, when the real story is the growth in the stock. Emerging economies are holding more reserves of all kinds right now -- and their reserves are growing at an exceptional pace, something which a chart that just shows the share doesn't really capture. the stock of euro reserves held by central banks today is probably far larger than the stock of $ reserves held by central banks ten years ago, simply b/c the overall stock of reserves has gone up so much. incidentally, recent offiical sector inflows into euros and pounds (@$300b in 05, probably more like $200b in 06, based on my estimates which try to flesh out the hidden parts of the COFER data set) are very large absolutely -- they would top $ reserve growth in say 2000 or 2001. they only don't seem big b/c in say 2006, i would bet the central banks added $550b to their dollar reserves (counting SAMA foreign assets and PBoC swaps as part of reserves -- there are a lot definitional issues)

Posted by: brad setser | February 25, 2007 at 10:24 AM

Brad -- Thanks. I should have been clear that the issue with the data is incompleteness. I'm not sure I follow your position concerning shares vs. levels, at least not in the context of the post. Because the share of official reserves held in euro has beem rising, it has to be the case that the growth in euro levels has been greater than the growth in dollars. No argument there. It is also true that the growth in levels is a lot bigger than can be accounted for by a simple cut on the growth in trade -- at which point we may proceed to debates about dark matter, global saving gluts, fiscal deficits, and so on. But for the narrower question of which currency is the dominant reserve vehicle, it seems to me that shares are the appropriate thing to be thinking about.

Posted by: Dave Altig | February 26, 2007 at 08:08 AM

Hi Dave,

Thanks for the plug (both of them that is :))

In terms of central bank management I take your point that this move into riskier assets occurs on the margin as it were on the reserves but then again what are the 'margins' of a reserve portfolio in for example China or any of the other dollar peggers. I guess the question here is to what extent these CB portfolios will end up being major market movers in equity markets too?

As for the dollar v euro question ... well well, that is a question for you is it not :)?

It is very difficult for me to see the Euro taking up the slack of the dollar. This of course has some imminent implications since ...

1. I don't think the dollar is headed for any crash soon at least not so long that the Breton Woods II persists. We won't see any major cb reserve diversification into Euros I think.

2. Even in a long term structural perspective I do not see the Euro replacing the dollar as the global reserve currency, that honour is going to go to the Indian Rupee or the Yuan I think.

Of course this may very well change if the Eurozone expands as you say but then again there are notable challenges associated with such an expansion and in fact even the current Euro zone setup seems to have enough structural difficulties as it is.

Posted by: claus vistesen | February 27, 2007 at 03:21 PM

Claus -- I think we are in agreement on this one. Cheers.

Posted by: Dave Altig | February 28, 2007 at 09:18 AM

The EUR/USD continues to flirt with the 1.440 price handle, teasing the forex market with an initial push higher, only to fall back exhausted in later trading, and today's price action has replicated this once again, promising much in the morning, only to fail to deliver later in the day. However before we assume that this level may prove to be an immovable barrier to any move higher for the euro vs dollar, it is important to note the role of the 40 day moving average, as once again yesterday it provided the platform for a push higher following the wide spread down bar of the previous day, and creating once again a series of lower highers as we edge on up towards this price level. Yesterday's candle also closed above the 14 day moving average, but marginally below the 9 day average. If today's candle holds firm then in my view this will be another in a long series of failures to break through the 1.44 barrier, and each time we see a failed attempt on the daily chart then this adds to the likelihood of a move lower in the medium term.

Posted by: Anna Coulling | September 08, 2009 at 04:45 AM

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February 22, 2007

Hedge Funds Get A Regulatory Stay

From The Wall Street Journal:

After months of reflection, the overseers of the U.S. financial system have concluded that current regulations, administered carefully, are sufficient to prevent hedge funds, private-equity investors and other "private pools of capital" from threatening the stability of the broader financial system.

The report by the President's Working Group on Financial Markets -- the heads of the Treasury, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission -- is their first comprehensive statement on hedge-fund risks since a study that followed the near-collapse in 1999 of giant hedge fund Long Term Capital Management.

The "principles and guidelines" released Thursday said that while hedge funds "present challenges for market participants and policymakers," the risks can be maintained through a combination of "market discipline" and limiting the private pools of capital to wealthy investors. It urged policy makers to scrutinize hedge fund counter-parties, such as banks and mutual funds, and rely on investors and their financial advisors to help mitigate risks.

...Mr. Paulson said. "What we've emphasized is market discipline."

Of course, it ain't over until it's over...

Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, said his panel will hold hearings on hedge funds this spring. He called the working group's report "a first step in addressing questions presented by the significant growth of hedge funds," but added "further study and monitoring" of systemic risk and investor protection were needed.

... but for now, the view is that the players are big boys and girls and that the exposure of banks, for example, are being contained through the prudent exercise of current oversight.  Or, in the workds of the headline writers at Forbes.com: Caveat Emptor.

February 22, 2007 in This, That, and the Other | Permalink


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Tracked on Feb 23, 2007 8:54:40 AM


I'm very reassured that Henry and Ben have vowed to protect the big money, overleveraged, high stakes gamblers they represent.

How about the rest of us?

Posted by: zinc | February 22, 2007 at 09:37 PM

I'd quickly side with those who believe in "market discipline" and "caveat emptor" along with this IF ONE responsible party would assure us the carnage will be limited to the emptor and the greater public will not be left with the bill. But, what are the odds of that?
This was an IDEAL opportunity for BB to address banking interests as separate from those of securities pushers.
It was an ideal opportunity for BB to call for single-body regulatory control of our wildly out of control financial sector.
It was an ideal opportunity for the FED to restore its independence from our executive branch.
It was another opportunity lost.

Posted by: bailey | February 23, 2007 at 10:53 AM


Just another sad example that the principle of 'might is right'.

Posted by: Martin | February 24, 2007 at 02:54 AM

I believe EVERYONE would benefit if more Economists would use the WEB (a little more productively) to hone their arguments.
We've had plenty of time to evaluate the growth of unregulated hedge fund industry, so much so that it should no longer be a matter of opinion whether they present a real risk to our economy that the FED will surely have to jump in with both feet to resolve.
So, why aren't we seeing an academic argument among our best & brightest to address the concerns of Dean Baker & afew others? Why in 2007 are we STILL left to the unquestioned decision of six or so representatives without a national discussion of this most important topic and why is Henry Paulson issuing a decree on this without first airing it out in a public forum? Where's the FED argument to support BB's position & why hasn't it been challenged by more Economists?
I think Dean Baker makes some WONDERFUL points, is the problem that it's just not rewarding to ALWAYS being on the outside? I would guess FED has within its staff & contractees MANY of the best & brightest Economic thinkers in the country. Is independent thinking not encouraged in BB's FED? http://www.prospect.org/deanbaker/

Posted by: bailey | February 24, 2007 at 02:45 PM

From Forbes: "Despite all the hand-wringing then and now about the 'dangers' of hedge funds to the markets, regulators have been reluctant to clamp down on them."

Yep.. Could it be that the reluctance comes from the high probability that even a whiff of regulatory furver would bring the houses of cards down immediately?

"'One of their key characteristics is that they are very nimble ... and that is good for the economy, because they help to create liquidity in markets, they help to spread risks around more broadly, and a regulatory regime that inhibited that flexibility and nimbleness would eliminate a lot of the economic benefits,' Bernanke said in Congressional testimony earlier this month."

I would agree with Bernanke, had not the Government set themselves up six ways to Sunday for Moral Hazard in this mess. So I have to agree with Bailey.

Too bad the US gov didn't set up a real "caveat emptor" at or just after the LTCM mess. The next time around the fallout will likely be much greater.

Dave, you or someone from the FED ought to read Michael Panzner's "Financial Armageddon" sometime soon and tell us why Panzner, (along with Doug Noland, Peter Bernstein and others) have it all wrong. Panzner's book scares the hell out of me, and I've been following these events for a bunch of years, even attempting to blog some of it on my site.

Posted by: Dave Iverson | February 24, 2007 at 07:22 PM


Bernake seems to prefer 'liquidity' to 'stability'.

Posted by: Martin | February 25, 2007 at 03:53 AM

Guys --

Let me be big clear that I don't think this is a settled issue. But much of the discussion seems to me to be imbalanced in exactly the opposite way you all suggest. Let's think about starting the conversation from the other direction: What are the benefits of hedge funds to the functioning of financial markets, and how can regulation be best constructed to ensure safety and soundness while preserving those benefits. The answer just isn't that obvious to me, and I think the current appproach makes a lot of sense -- conditional, of course, on the expectation that there will not be 1980s-style forebearance in the case of a big failure.

We do have some experience with hedge fund default and systemic risk, after all, in the form of LTCM and Amaranth. The former remains controversial, of course, but is it not fair to take the more recent Amaranth case and suggest that the larger issue in that case may have been the global currency crises -- or at least that big fund failures are like the failure of any other important financial concern: Of limited moment except when combined with excessive volatility on the broader stage?

Posted by: Dave Altig | February 26, 2007 at 08:25 AM

Dave, I'd love a real discussion on this issue, from ANY side. But, this Administration has only 20 months remaining (arguably less) - the discussion is OVER!
Let's face facts - Paulson was one of the fiercest traders on Wall Street, there aren't many people he couldn't run over. What's inexplicable is why BB wouldn't have extracted TREMENDOUS concessions for signing on.
I have no idea how this is going to play out, but let's be absolutely clear - there may be 6 or 7 signatures on Paulson's decree but the only one Wall Street cared a hoot about was BB's.

Posted by: bailey | February 26, 2007 at 11:14 AM


You are a much better economist than I am, so when you write,

"What are the benefits of hedge funds to the functioning of financial markets, and how can regulation be best constructed to ensure safety and soundness while preserving those benefits. The answer just isn't that obvious to me,"

I'm not exactly filled with confidence.

Posted by: Martin | February 26, 2007 at 04:29 PM

bailey -- I think you are being a little hard on BB. For one thing, the issue is very much in the sights, and really good people within the system are paying attention. Second, as the regulatory framework exists now, the Fed's authority essentially stops at the banking waters' edge, and it takes a lot of people signing on to move that authority onto shore. It's really not the sort of thing that could be pulled out as a bargaining chip in a job interview.

Martin -- Everyone is right to be asking questions, and to be concerned that we don't yet have the answers. All I am sayng is that I hope we ask the right questions, and be careful about the babies in the bath water.

Posted by: Dave Altig | February 27, 2007 at 07:41 AM

Dave, Yes I am, very glad to hear it, I have no doubt of that (or I wouldn't be incessantly haranguing about it), & if I didn't strongly believe single regulatory control didn't belong with the FED I'd have moved on long ago.
Obviously, I see this as the DEFINING issue for BB's FED so I'll sincerely apologise for my glibness; this is serious enough that it should not be minimalized in any way.
No one easily relinquishes such enormous power as was grabbed in our recent financial deregulation. Without a meltdown it will require an enlightenment tsunami within Congress to move the idea forward. BUT, how about a single sign from the FED to encourage us it's aware of, let alone up to the task? To date, BB has resolutely conformed to AG-like rhetoric that's way too easily interpreted as politically based (highlighting enormous costs of future entitlements while ignoring enormous costs of recent fiscal profligacy & the benefits of the deregulation over the costs.) I'd argue this tact back in the early days of this Administration when every sign of independence provoked a severe response, but times have changed.
While this Administration is adamently opposed to single-body regulatory responsibility, I'd expect the next one (whichever party wins) will not be so predisposed. So why not extend an olive branch to demonstrate openness & independence?

Posted by: bailey | February 27, 2007 at 11:40 AM

I for one would be against single body regulation. Which regulator do you pick. The SEC has been a terrible regulator over the years. They seem to be three steps behind. The SEC would destroy the futures industry. The CFTC has been a good regulator, especially since the CMFA act in 2000.

There certainly should be ways for these guys to interact with each other, and int he case of a financial crisis work together, but one regulator doesn't make sense to me. There are too many idiosyncracies in each market place for that.

Hedge funds are not a bad thing. If mismanaged and allowed too much leverage, they can bring about pressure in places that we may not want it. Amaranth was a classic bust, and most of its positions were in regulated futures. They were just able to manipulate settlements to give them good equity day after day.

LTCM was a different animal. It was given funding by Wall Street, and Wall Street was forced to bail them out. Of course, Goldman made a tidy profit in the bailing ; ).

I like the way they are proceeding on hedge funds. They are becoming an integral part of the flows of funds. It would be a shame to over regulate them for emotional reasons.

Posted by: jeff | March 03, 2007 at 05:25 PM

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February 21, 2007

A Dent In The Yen Carry Trade... Oh, Wait

A few weeks back, my friend Edward Hugh was monitoring the then latest thinking from the Bank of Japan:

Bank of Japan policy board member Hidehiko Haru has underlined what most Bonobo readers should already know, that internal consumption in Japan is week and that there's no threat that rising prices will cripple economic growth. Conclusion: there's no hurry to raise rates:

"Given that there's no evidence of any inflationary risk, there's no need to rush,'' Haru, 69, said today in a speech to business executives in Shizuoka city, Japan. "Gradual adjustments will be needed and will be made based on improvements in the economy and prices.''

Apparently, the "gradual adjustments" phase has arrived.  From the Financial Times:

The Bank of Japan’s policy board on Wednesday voted eight to one to raise interest rates a notch to 0.5 per cent, pointing to strong economic growth data as it made the first increase since July...

The BoJ’s decision to raise rates came as the result of strong growth in the fourth quarter, when gross domestic product expanded by 4.8 per cent on an annualised basis. That was the only significant positive piece of data released since last month when the board voted six to three against a rate increase.

Why?  Good question, I guess:

Masaaki Kanno, chief economist at JP Morgan in Tokyo, said: “It is a little puzzling to explain why five board members changed their mind.” He said the GDP data on its own, by definition backward looking, was not enough to explain a rise in terms of the bank’s stated forward-looking framework...

However, leaving aside what he said was the bank’s failure properly to explain its rationale, Mr Kanno said the board was justified in raising rates. He said it had stressed the second pillar of its policy framework, which concentrates on risks. These included the possibility of an asset price bubble and, particularly, risks associated with the weak yen, he said.

Yuka Hayashi, reporting for The Wall Street Journal, expands on that idea:

"As world financial markets become integrated, the time has come for us central bankers to conduct monetary policy while keeping firmly in mind its external consequences," BOJ Governor Toshihiko Fukui told a news conference.

Specifically, the governor said the BOJ wanted to quench expectations that Japanese rates would stay very low for very long, which might cause them to take "extreme positions." He said the BOJ had in mind, among other aspects of global markets, the so-called "carry trade," where investors borrow money at Japan's low rates and invest it elsewhere where returns are higher. Mr. Fukui said such borrowing could present a risk to the global economy if unwound suddenly.

But, my oh my, how events have a way interfering with the message.  From Bloomberg

The dollar approached a four-year high against the yen and rose versus the euro after a government report showed U.S. consumer prices in January increased more than economists forecast.

Investors bought the U.S. currency as signs of inflation may cut speculation that the Federal Reserve's next move is to reduce borrowing costs. The dollar's advance started after the Bank of Japan said further interest-rate increases would be gradual. The yen declined to near an all-time low versus the euro.

"The report works in favor of the dollar,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. "Inflation is creeping up. The Fed is going to keep rates on hold. There isn't a rate decrease anytime soon.''

The more things change...

UPDATE: Brad Setser, insightful as ever, has some thoughts on the size of the carry trade, and adds that "the market consensus certainly seems to be that Japanese rates aren't going to rise far or fast enough to put a real dent in the carry trade."

February 21, 2007 in Asia, Data Releases, Exchange Rates and the Dollar, Federal Reserve and Monetary Policy, Inflation | Permalink


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Dave, (OT) If you haven't seen it, this Charles Hugh Smith post of 2/21/07 on our housing exposure presents a wealth of info. & includes a few wonderful links which were new to me.

Posted by: bailey | February 22, 2007 at 02:11 PM

the boj has lost a lot of credibility (if not all....).

on the one hand they want to stop the addiction of cheap money, they want to end the carry trade, they want to implement a forward looking policy, and they have adopted the "core" rate excluding food.....(they are really serious about their inflation fighting mission....) etc.......

The bank is counting on consumption, which accounts for 55% of Japanese GDP, to become the locomotive of the economy. Households are certainly spending what they have. According to the OECD, Japan's household saving rate has fallen by over eight percentage points since 1998, a deeper plunge than America's. The country's households now fail to dispose of just 2.9% of their disposable income.........(wow!!)


Posted by: jmf | February 23, 2007 at 03:30 PM

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February 16, 2007

Is A Tight Labor Market Consistent With No Job Growth?

Chicago Exec-MBA Germana Paterlini noticed his passage from Ben Bernanke's Congressional testimony this week (emphasis added):

The rate of resource utilization is high, as can be seen in rates of capacity utilization above their long-term average and, most evidently, in the tightness of the labor market. Indeed, anecdotal reports suggest that businesses are having difficulty recruiting well-qualified workers in certain occupations.

Germana's company, Certusoft, is apparently one of these businesses.  Certusoft is a software company, and you might think that this sort of high-skill enterprise is not exactly representative.  But the data from the Bureau of Labor Statistics' Job Openings and Turnover Survey (JOLTS) suggests the phenomenon is fairly widespread.  Job openings -- or unfilled positions -- have been rising steadily for about three years and, after flattening out in the first half of 2006, the growth of job vacancies accelerated in the latter part of the year:




This pattern even emerges in manufacturing, a sector in which net job creation continues on in negative territory:





To be sure, a combination of rising job openings and no job growth does not prove that there is a skill-match problem restraining employment growth (resulting in labor-market "tightness" even though the pace of job expansion appears modest).  But it does make you think.

February 16, 2007 in Labor Markets | Permalink


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We have a similar problem in our semiconductor company -- the good-quality resumes have dried up.

Posted by: RB | February 16, 2007 at 06:35 PM

the good-quality resumes have dried up.

I'm an engineer, and every job I see advertised has a list of very specific acronyms 3 pages long; the only constant is the pay, which seems to top out at 90k/year.

Salaries are nominally higher in the Bay area or Cambridge due to the cost of living, but only incrementally so, and certainly not enough to offset the cost of housing or relocation.

My pay is considerably above the going rate; I get glowing reviews from my current employer, and they're happy to have me on board because I have very good soft skills. Effective client interaction and fostering productive internal relationships doesn't lend itself to easy HR labels or acronyms.

But my resume always seem to miss a few of the TLA's prized by HR folks and hiring managers, so I stopped looking long ago.

Posted by: eightnine2718281828mu5 | February 16, 2007 at 10:33 PM

"businesses are having difficulty recruiting well-qualified workers in certain occupations."

Would those be the same businesses that have shares in the stock market where there is wads (I saw the figure $2.7T in a recent NYT article ) of business investment just waiting for some opportunity?
It appears that training the graduates beyond their current qualifications is just not one of those opportunities.
Is that because India and other offshore countries are more attractive?
I see lots of "help wanted" signs for minimum wage jobs too. My impression is that some former workers esp assoc with Real Estate, do not have to do those menial jobs...yet. And businesses do not have to encourage workers by offering to train promising candidates...yet.

Posted by: calmo | February 17, 2007 at 02:21 AM

but, if you are a promising candidate, you will get higher returns if you pay for the training yourself...

Posted by: jeff | February 17, 2007 at 10:29 AM

Yes, of course jeff, and if you are a really promising candidate, you set up shop, steal their client and do these wimpy businesses in, who have the gall to claim that they can't find qualified personnel and yet have that stash from record profits that is not interested in improving staff qualifications...that is too risky.
Secondly, if the demand for those qualifications was legitimate, why don't better wages sort this matter out?
These guys need to take lessons from the NAR.

Posted by: calmo | February 17, 2007 at 10:08 PM

It could be a combination of things. One, the employee does not want to take the risk of starting their own business.

Two, it is cheaper for a business to hoard cash than pay it out to shareholders in the form of dividends or stock repurchases.

Third, globalization has driven down the wage for lower skilled employees. Get more skills, differentiate yourself, and you should realize returns from investment. Hence, the increase in EMBA enrollment.

Posted by: jeff | February 17, 2007 at 10:38 PM

After one looks for an extended period of time without response, one no longer responds to these openings. If someone really wants to find someone, I have no doubt they can, but most just keep putting out the same openings year after year and wonder why no one bothers responding anymore. The manufacturing openings are the most telling. If they can't fill a opening in a declining industry, it is because it never really existed.

Posted by: Lord | February 17, 2007 at 11:35 PM

Next thing we'll hear is that companies need to "import" a whole bunch of foreign engineers.

I would not be surprised if one of the main criteria these guys/gals are looking for are people under 40. Just a reminder that the improbably low unemployment rate has been accompanied by an offsetting rise in "people leaving the workforce". Yea, right.

Posted by: zinc | February 18, 2007 at 12:49 PM

Is it possible businesses could be deliberately doing this in order to lobby the government for more H1-B visas ? I think companies are less willing now more than ever to take on candidates that have any leverage in salary growth due to rising health care costs that companies have had to take on the last few years. They have offset this by hiring those on H1-B visas who may be as qualified but will almost always work for a lower wage in order to stay in the country and get their labor certification processed by the company.

Posted by: Casual Suburbanite | February 18, 2007 at 12:54 PM

I talk to a lot of business execs and owners, and they mostly tell me that it's hard to find good people. They especially mention soft skills, such as showing up on time, working with others, etc.

However, when I wanted a telecommuting assistant, an ad on Craig's List got me lots of qualified candidates in short order.

I think that there's a disconnect between the kind of people employers want, and the kind of jobs that people want; and it's not just about the types of skills, but also about work conditions.

Posted by: Bill Conerly | February 18, 2007 at 02:41 PM

Isn't this really where the "short-termism" that dominates management today shows up..

I always thought it was the role of the CEO to look down the road several years and plan on what the company needed to do now to be successful in the future. One of the key things in this was bringing on and training the people the firm would need in the future. But no one seems interested in doing that now.

If a CEO tells his board that the firm is going to grow twice as fast as the economy over the next five years but does nothing to assure that it is bring on board and training the right people to manage the firm 3 to 5 years down the road why should anyone take that CEO seriously? But isn't that the world we live in now?

Posted by: spencer | February 19, 2007 at 01:11 PM

I would agree that most CEO thinking is supposed to be long term, but turns out to be short term. Maybe they are practicing JIT inventory managment with employees and hiring temps instead of full time because temps are far cheaper. The business climate may be uncertain, and hiring temps makes more economic sense.

Or it could be that it is too expensive to hire full time with all the rules regarding insurance and pension, so it takes a larger incremental demand to hire.

Posted by: jeff Carter | February 20, 2007 at 07:01 AM

Best I can figure, the underlying trend in the participation rate (backing out cyclical variation) has been stagnant for about a decade now, and is probably even declining slightly. Couple that with a steep decline in the growth rate of the population aged 20-64 (based on census figures) and it's not surprising that the unemployment rate is low, job growth numbers are mediocre, and employers have a difficult time filling positions.

I expect that the tight labor market will persist for at least the next 20 years. If employers aren't looking at developing internally, they will be.

Posted by: Morgan | February 20, 2007 at 10:24 AM

I personally think the staggering costs of housing in our location in California is discouraging well-qualified applicants who have a choice.

Posted by: RB | February 20, 2007 at 02:15 PM

and how much you have to pay in taxes in California!

One unique idea for employers would be to set up their own private school systems. Train their own workers from the ground up. I am talking from K-12. Send them off to college to gain a little knowledge and then hire them.

Posted by: jeff Carter | February 20, 2007 at 03:39 PM

In response to the question, have homes bottomed I ask: how many homes in '06 & even in '07 have been financed with funny money Mtg. loans? Here's one Fla Mtg. loan ad of a broker who's STILL writing funny home loans. Fla is only one of many bubble states who've yet to sign onto the CSBS version of the TOOTHLESS FED nontraditional Mtg. loan guidance.

"We still do stated up to 100% one loan no MI with a 640+ score for W2 or Self Employed. Call me so we can go over the scenario and pricing."

Posted by: gbailey | February 20, 2007 at 07:04 PM

I think a lot of it may be managerial excuse. We can't do that because we don't have the time and staff. We can't find anyone (because we can't afford them or won't train them), so we will just build a work backlog so our jobs will be secure when lean times come and we won't have to lay anyone off.

Posted by: Lord | February 20, 2007 at 07:23 PM

I think in some of the tech fields there are fewer fresh young things in the pipelines. Enrollment in computer science is down 50-70% in large part because the field was percieved to be declining (offshoring), high pressure, and insecure.

Companies have been cutting and cutting, applying the pressure, and cutting some more.

In some cases, a more secure job (govt bureaucracy, teaching) is preferable to a higher paid job in the mercenary 'globalized' corporation.

You reap what you sow.

Posted by: dissent | February 20, 2007 at 11:22 PM

There was a professor who noticed that employers were complaining about not enough qualified employees. He got the requirements and had folks in their 40s with those exact qualifications apply. 100% were turned down.

Posted by: vader | March 15, 2007 at 02:12 PM

vader -- That would be interesting. Do you have a citation?

Posted by: Dave Altig | March 15, 2007 at 02:32 PM

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February 15, 2007

Where The Troubles Are

Although extensive fourth-quarter information on the financial state of US homeowners has yet to fully arrive, it has been clear for awhile that the most serious problems are concentrated in the market for adjustable rate mortgages (ARMs), and sub-prime ARMs specifically:




From a macro policy point of view, the largest concern is that problems in the housing market might spill over into consumer spending or, what in my opinion would be more troubling, financial markets, which provide the necessary support for both consumption and investment activity going forward.

Despite lower-than-expected retail sales in January, I think it hard to argue with Federal Reserve Chairman Ben Bernanke's assessment:      

The principal source of the ongoing moderation has been a substantial cooling in the housing market, which has led to a marked slowdown in the pace of residential construction. However, the weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy. Consumer spending has continued to expand at a solid rate, and the demand for labor has remained strong.

And of spillovers into the health of the financial sector?  So far, so good, but this, from today's Wall Street Journal (page A4 in the print edition) is worth watching:

Efforts by major banks and Wall Street firms to unload bad U.S. housing loans are speeding up a shakeout in the subprime mortgage industry.

As more Americans fall behind on mortgage payments, Merrill Lynch & Co., J.P. Morgan Chase & Co., HSBC Holdings PLC and others are trying to force mortgage originators to buy back the same high-risk, high-return loans that the big banks eagerly bought in 2005 and 2006...

As more subprime lenders face losses or bankruptcy, big banks also face another problem: Many lent money to small firms like ResMae so that those firms could make more mortgage loans to borrowers. It isn't clear how much of these loans will be paid back to the banks. Wall Street firms also are increasing their own internal generation of subprime loans by acquiring smaller mortgage loan originators or processing companies.

In 2005 and 2006, banks such as HSBC and brokerage firms like Merrill Lynch went on a buying spree, snapping up subprime loans from typically small mortgage banks that had lent money to homebuyers. At the same time, many lenders were loosening their credit standards and making riskier loans.

That risk is getting its due attention now:




As I said, worth watching.

UPDATE: XP77 econ master Ken Sutton reminds me of this from Caroline Baum, appearing at Bloomberg earlier this week:

The issue isn't whether loans defined as risky carry risk; they do. The real question is whether the risk was priced correctly; whether rising delinquency rates on subprime loans, sometimes made without proper documentation, will spill over into the rest of the home-loan market; whether borrowers will default when teaser rates on adjustable-rate mortgages reset higher at a time when home prices are falling; and -- the big kahuna, the one that matters to the Federal Reserve -- whether any of the bad- loan problems will affect financial institutions' ability to lend.

In its January survey on bank lending practices, the Fed said that a net 15 percent of domestic banks reported tightening credit standards on residential mortgage loans over the past three months, the biggest net increase since the early 1990s. That was the last time banks were saddled with -- guess what? -- bad real-estate loans.

Still watching.

February 15, 2007 in Housing | Permalink


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What about systemic market risk? The DOW continues to ROCKET FORWARD and ten year treasury yields are more than 50 basis points BELOW the Fed Funds rate. This is so ludicrous no one even mentions it anymore.
It sure looks like Wall ST. is ABSOLUTELY CONVINCED BB will cut rates DRAMATICALLY at the very first hint of weakness. Why would they think this? It sounded today like BB is not concerned, unless the run-up turns into a bubble that pops. And then it's no big deal, the FED can easily clean it up, right?
The two questions I wish SOMEONE in Congress would have asked BB over the last two days:
1. Is it the FED's role to see we never again have to suffer the horrors of two successive quarters of declining GDP? (Is it the FED's position that Business cycles no longer serve important societal benefits?)
2. Do you believe we would benefit significantly from single-body regulatory control over our financial sector?

Posted by: bailey | February 15, 2007 at 05:02 PM

One thing that smells in all this is Fannie and Freddie. They issued a lot of loans in the run up. Many were loans that would not normally have been approved. They used their defacto govt guarantee to extend themselves. There is a hole in their boat. The WSJ has done some excellent reporting here, shining sun where it needs to be. If Congress took correct action, you might see a lot of the market correct like it should. Instead, it has turned a blind eye to the problem (politics as usual), and we should not expect anything to happen.

I don't think its the FED's role to make sure we never have bad quarters. I just think that the drop in marginal tax rates combined with the advances in technology, along with globablization have increased GDP. The FED just makes sure conditions are right.

There is too much regulation in our financial sector, but one super regulator is not the answer. The SEC is a terrible regulator. I think they just discovered computers.

We have disparate regulation in banking, insurance, stocks, futures, and derivatives.
Glass-Steagal repeal allowed banks and insurance companies to merge, along with investment banks. It was right to repeal that legislation, but we may have created too much concentration of risk in one spot. If Citibank went down, is it too big to allow it to fail?

We need good financial reporting, and I think we need good boundries. I am not sure it is a good ideal to allow firms like Goldman to trade against their customers. Is it a good idea not to have a central clearing house for OTC derivatives? We need to make sure market structures are in place to make everything work. The cash equity market is imperfect-not all the orders hit the market. There is limited information because of this, and Sarbanes-Oxley. Everyone is so afraid of going to jail, no information gets out at all.

Shareholders are not as informed as they once were.

Posted by: jeff | February 15, 2007 at 09:21 PM

The Federal Reserve is now clearly in the inflation business. The prices of commodities are on their way back up, the clearest inflationary harbinger available.

So far the Fed has been sidestepping the potholes in their efforts to do as they do, not as they say. At some point, the foreign debt-finance machine may slow and the bond market may begin demanding an inflation premium at the same time borrowers (the Guv) has to increase rates to cover it's current, bloated short-term debt needs.

I am hopeful that the Fed is able to monetize the countries debt without a collapse. So far so good.

Posted by: zinc | February 18, 2007 at 01:05 PM

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February 14, 2007

The Twins Part Ways

From the AP (via abcNews.com):

The deficit for the first four months of the current budget year is down sharply from the same period a year ago as the government continues to benefit from record levels of tax collections.

The Treasury Department reported Monday that the deficit for the budget year that began Oct. 1 totals $42.2 billion, down 57.2 percent from the same period a year ago.

From the New York Times:

The United States ran a record trade deficit in 2006 for the fifth consecutive year, the Census Bureau reported Tuesday in an announcement that quickly reignited the dispute between the Bush administration and Democrats over the value of past and future deals lowering trade barriers.

The bureau said that the trade deficit, or gap between what the United States sells abroad and what it imports, reached a new high of $763.3 billion last year, a 6.5 percent increase over the year before. The deficit was fueled by the continuing American need for foreign oil and imports of consumer goods from China and other countries.

The fact that the two deficits are moving in opposite directions is not really anything new:




Twin deficits?  Not so much.

February 14, 2007 in Federal Debt and Deficits, Trade Deficit | Permalink


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While it is gratifying to see a graph indicating a decrease in the rate of increase in the cumulative Federal budget deficit, the continuing rate of increase in trade deficit is much more fundamental. One speaks to the Federal government deficit while the other speaks to a looming economic deficit.

The real question is "how long the US can continue to consume an excess of goods, produced off-shore, and maintain a vibrant, balanced domestic economy?".

Macro-economic theory clearly predicts that, at the peak of an economic boom, the Federal deficit should decline. We can all take one breath that, finally, the rate of growth of the deficit has, at least temporarily, declined. Okay, back to the wait for the other shoe to drop.

Macro-economic theory also predicts that, should massive losses of high paying jobs and key industries to Foreign competition bring on a recession, the deficit will increase.

The trade picture is much worse than the deficit picture is better.

Posted by: zinc | February 15, 2007 at 07:26 AM

The deficit picture that takes a climb from mid 2003 may be based on revenues received from capital gains on RE, but that picture may be quite different with a sobering of house prices now under way.

Posted by: calmo | February 15, 2007 at 11:48 AM

Please be wary of the budget deficit numbers. They do not include deficits incurred by war spending on Iraq and Afghanistan. These are "off budget" items which are not show in the normal quarterly budget deficit numbers. Including this would spread out about $500B in deficit spending over the period from 2003-2006.

Posted by: Sekar | February 18, 2007 at 01:02 PM

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February 13, 2007

Poverty In The Suburbs

I'm a little slow in noticing, but Garth Brazelton at Reviving Economics was all over this story at the MSNBC/Newsweek website:

Once prized as a leafy haven from the social ills of urban life, the suburbs are now grappling with a new outbreak of an old problem: poverty. Currently, 38 million Americans live below the poverty line, which the federal government defines as an annual income of $20,000 or less for a family of four. But for the first time in history, more of America's poor are living in the suburbs than the cities—1.2 million more, according to a 2005 survey. "The suburbs have reached a tipping point," says Brookings Institution analyst Alan Berube, who compiled the data.

Cleveland, as it turns out, is chosen as the poster city for suburban poverty:

Six years ago, Brian Lavelle moved out of the city of Cleveland to the nearby suburb of Lakewood for what he thought would be a better life... Then, three years ago, the steel mill closed and Lavelle found that the life he dreamed of was just that, a dream. The suburbs, he quickly learned, are a tough place to live if you're poor.

... five years ago, a Hunger Network food pantry in Bedford Heights, a struggling suburb of Cleveland, served 50 families a month. Now more than 700 families depend on it for food.

Howard and Jane Pettry, of Middleburg Heights, Ohio [another Cleveland suburb], see themselves as working-class—just facing hard times. In December, Jane was laid off from her job at a local supermarket, and a week later Howard had a heart attack and missed a month of work from his job at a grain mill. Now Jane's collecting unemployment and they're staring at the poverty line as they struggle to pay the mortgage and the bills.

Is it really the case that the suburbs are increasingly poverty-ridden?  I'm suspicious.  Not too long ago, my colleagues Mark Schweitzer and Brian Rudick examined the case of Cleveland specifically:

Cleveland is the poorest big city in the United States, according to the Census Bureau, with nearly a third of the city’s residents living in poverty. The city’s poverty rate also rose since it was last measured. These numbers have received a lot of attention since they were released, but unfortunately, they are easily misinterpreted.

The numbers tell us that Cleveland has many poor people. But the numbers don’t tell us that Clevelanders have become worse off, that the region’s economy has deteriorated, or even that there are more poor people in the city than before.

A closer look at the American Community Survey results suggests that Cleveland’s poverty rate reflects the fact that the region’s poor are concentrated in the central city, while the wealthier live in the suburbs. The rate may have risen because people are moving out of the city, and those that leave are disproportionately better-off than those that stay behind. Neither of these facts on its own says anything about the economic health of the region, but they do say something about the relative desirability of living in the city versus its outskirts.

The definition of the Cleveland MSA has recently changed to exclude Ashtabula County, but under either the old or new definition, poverty is far lower outside the city than inside it.

... Looking at the poverty rate of the MSA [metropolitan statistical area] reveals that Cleveland (officially the Cleveland-Lorain-Elyria MSA) is not too different from other U.S. cities. The poverty rate of the Cleveland MSA is just a little above the average for all metropolitan areas in the United States. And like other cities in the country, Cleveland’s suburbs have far lower poverty than the city itself.

...the 2005 rise in metro area poverty figures seen in this figure is almost entirely accounted for by the increase in the number of poor people in the city of Cleveland, rather than in the suburbs. In the 2004-2005 shift that boosted the poverty rate for the MSA, for example, the number of poor people in the MSA grew by 43,540, but 36,991 of that increase occurred in the city.

It is true that the number of poor people in the suburbs is larger than the number of poor people in the city -- according to Schweitzer and Rudick "about two-thirds of the metro area’s poor live outside the city of Cleveland" -- but this is simply a function of the fact that the population of the MSA is heavily concentrated outside of the city.  In terms of poverty trends, there just isn't that much happening in the suburbs:




If one wants to use Cleveland to tell a story about poverty -- especially concentrated poverty -- the action is still in the central city.

February 13, 2007 in Inequality | Permalink


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I hate to be cynical about these types of stories. My heart goes out to people that truly need help. However, I am reminded about something Milton Friedman said. If you offer something for free, people will take it and use more of it than is available. He was talking about welfare. He also said, "There is no free lunch."

I am worried about the compunction of the people that are receiving the free stuff. Do they really need it? Or are they just taking it because it is free?

Like I said, I hate to be a cynic, but there is so much to be cynical about, it is too bad that we have to ask the question.

Posted by: jeff | February 14, 2007 at 04:22 PM

Jeff. That wasn't cynical, this excerpt from a 2/07/07 Mish post is cynical. (Dave, excuse the length but I, a true cynic, loved it.)
Thursday, February 08, 2007 Mike Shedlock Counterfeiting Money - Crime or Good Economics?
Did you ever think that a counterfeiting money could be good for the economy and that the counterfeiter could be considered an economic genius or even a national hero? I received an Email from Nic Corsetti, a friend of mine, describing exactly how that might happen. Here goes from Nic:
Let’s say that I invent a printing press that allows me to produce counterfeit money (let’s say US dollars) by the trillions – these dollars look EXACTLY like real ones, so no one can tell the difference, not even the government or the bank. So I start off the first year by counterfeiting $3 trillion dollars.
I use $1 trillion to buy stocks (jump starting the bull market)
I use $1 Trillion to buy U.S. Treasury bonds (thus driving bond prices higher and interest rates lower)
I use $1 Trillion to go around to every neighborhood in every major city of the U.S. and start buying houses for 10% higher than the listed price
Obviously, this is a lot of work, so I hire a whole network of employees and consultants to help me achieve those lofty goals in a reasonable time period. The apparent benefits would be huge.
This will create jobs, since lots of employees and consultants will be needed to spend $3 trillion.
The stock market indices will soar. Everyone's 401(k) and day-trading portfolios will increase in value.
Home prices will increase by 10% overnight.
Interest rates will fall which will make it even cheaper for everyone to borrow money to buy new cars, upgrade into a bigger homes, and buy new gas plasma TVs every year hoping against hope of getting to watch the CUBs someday play in the World Series.
The lifeblood of America, vastly underpaid Real Estate Agents, will get a much needed and well deserved infusion of cash.
The economy will be humming so fine that no one will care about the loss of jobs to India and China.
Cheap goods will continue to pour into the US and the CPI will show only a modest 2% rise in the price of goods.
Additional Printing Presses
This is such a good plan, I decide to let some of my best friends in on the action. So I pick twelve of my closest cronies and give them identical printing presses, and instruct each of them to buy stocks, bonds and real estate with their counterfeit money. I tell them to loan the money to anyone who asks. Now we are really getting somewhere.
The stock market will rise 30%-50% every couple years
By buying massive amounts of treasuries, interest rates will stay at historic lows
Everyone's net worth will double every few years if they just buy more real estate
There will be no reason to save money, because assets will just keep skyrocketing in value.
Wave after wave of immigration proves adequate enough to supply the homebuilding industry with enough manpower to get the job done.
So much money is made in the stock market that $50 billion in bonuses can be distributed.
Home prices start rising so fast that people start buying two or even three of them. It's a "can't lose" venture.
There is so much money floating around that credit standards drop and everyone who wants a home gets one.
So many homes are being bought that massive numbers of jobs are created in the mortgage industry, home builders, architects, real estate agents, title insurance, property insurance, home decoration, lumber, copper, cement, truck manufacturers, granite miners, brick layers, roofing, repairmen, industry analysts, home flippers, internet bloggers, internet site maintenance, newspaper ads, Wall Street specialists(to create RMBS, CDO, CDS, Index swaps), hedge fund employees (someone has to trade all these securities, and accountants and lawyers to keep track of all of the above.
There are additional profits to be made on Wall Street by investing in IPOs, private equity LBOs, M&A, trading, mutual funds, and hedge funds.
There is job growth in investment advisers, investment analysts, day-traders, media cheerleaders, SEC regulators, state regulators, New York D.A. office, and accountants and lawyers to keep track of everything.
Government jobs explode. State and local governments get all sorts of funding for projects of all types – big and small. This creates still more jobs.
Everyone needs a place to spend their money. Shopping malls, strip malls, big box stores, specialty stores, boutiques and nail salons spring up everywhere.
People are so busy shopping they do not have time to cook. This creates a need for more restaurants or coffee shops on every corner.
Even with all of that there is STILL NO INFLATION!

Posted by: bailey | February 14, 2007 at 06:54 PM

Rising poverty in the suburbs would not be surprising given the revitilization of many central cities around the country. I think Cleveland may be a bad comparison of city versus suburb. If one looks around to other cities where baby boomers have migrated downtown and away from their suburban life for a higher quality of life in the city. Cities are the lifeblood, creativity and growth engines of the 21st century. While suburbs offer a quieter lifestyle, they also offer less in terms in new economic opportunity, entrepreneurialism, culture, diversity and personal growth than the city. These are the traits that give rise to a stronger, differentiated America for the 21st century global economy. Globalization will force more poverty into the suburbs as this is where most that work at globalized corporations tend to live. A service oriented economy will be the economy of the future, giving rise to localization as a means for economic growth.

Posted by: Casual Suburbanite | February 18, 2007 at 12:36 PM

I have a question for Bailey, about the long post about spending $3 trillion. How does he figure that there would be no inflation? First of all, if he buys things at 10% above price, wouldn't this translate to 10% inflation? Secondly, with that immediate influx of cash, people will be willing to pay more money for the same number of items- meaning prices will rise. I am student and have only taken one very basic economics class, but I am imagining the Supply-Demand diagram from Econ 101; if the supply curve remains unchanged and the demand curve moves up, doesn't this mean prices will rise?

Posted by: Kevin | February 21, 2007 at 10:12 PM

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February 12, 2007

Another Thought On The Edwards Health Care Plan

I find myself agreeing with Dean Baker's opinion that this is the most interesting part of presidential candidate John Edwards' health care plan:

The U.S. government will help states and groups of states create regional Health Markets, non-profit purchasing pools that offer a choice of competing insurance plans. At least one plan would be a public program based upon Medicare. All plans will include comprehensive benefits, including full mental health benefits. Families and businesses could choose to supplement their coverage with additional benefits. The markets will be available to everyone who does not get comparable insurance from their jobs or a public program and to employers that choose to join rather than offer their own insurance plans.

The one thing that worries me is the possibility that the endgame is domination by the public Medicare-like program, not because it is the best or most efficient means of providing insurance, but because state-run enterprises can stifle the competition by exploiting their access to taxpayer capital.

Fortunately, there is something of a model for markets in which government and private firms compete. That model comes in the form of the Monetary Control Act of 1980, which governs the behavior of the Federal Reserve when it participates in businesses for which there are actual or potential private-sector alternatives. (An example of such a business would be the collection and clearing of checks.)  In essence, the rules of the Act require that the Federal Reserve cover its economic costs, which include the return to capital that would be required by the owners of for-profit businesses.

Why is is it necessary to have the government producing services that private firms are able and willing to provide?  Whether you are talking about medical insurance or check-processing, it's a good question.  But arguably the provisions of the Monetary Control Act resulted in an efficiency-focused government supplier with some devotion to serving markets (community banks in particular) that might have been less desirable to private providers of those services.  And that doesn't sound like a bad outcome for a health care system.

February 12, 2007 in Health Care | Permalink


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Maybe the times are a changing? First, I find myself in total agreement with you on Gov't's seeming inability to "do" very little right. Then, I realized it's been at least two weeks since I last received a 0% interest credit card offer & this I hope is a sign of a tremendous turn for the best. And, lastly, I found Fed Pres. Pianalto's speech last week illuminating.
We don't need the FED to raise rates, we do need them to be extremely deliberate about lowering them.

Posted by: bailey | February 13, 2007 at 09:09 AM

Health Care reform requires a better people who will handle the new system that are more effecient and more trustworthy.

Posted by: cheap Soma online | August 25, 2009 at 10:37 PM

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February 11, 2007

John Edwards Leaves The Gate On Health Care

From Dean Baker I learned...

John Edwards jumped ahead of the other designated major candidates in proposing a detailed plan to get to universal coverage.

Hooray for Senator Edwards, who deserves nothing but credit for jump-starting the debate.  His proposal envisions a future with mandatory universal insurance coverage, provided through a combination of public and private sources, and "regional Health markets" designed to resolve the problem of constructing adequate risk pools.

The risk-pool problem has presumably helped (along with tax subsidies, of course) to entangle the provision of insurance with employment, but Senator Edwards is apparently uninterested in moving away from employer-based health care plans:

Businesses have a responsibility to support their employees’ health. They will be required to either provide a comprehensive health plan to their employees or to contribute to the cost of covering them through Health Markets.

This doesn't seem like such a good idea to me.  As Gary Becker wrote not too long ago:

The tying together of health insurance with employment is partly a legacy of World War II, when employers began to offer health insurance as a fringe benefit to help them compete better for workers whose wages were regulated by the wartime government. Employer-provided health insurance expanded over time even after wage controls were abolished because income tax rates rose greatly over time. This artificial incentive to combine health insurance with employment would be eliminated under [President Bush's] proposal.

Or, as Mark Thoma notes (citing an argument by Ezekiel Emanuel and Victor Fuchs that was also picked up by Arnold Kling):

...there does seem to be movement toward universal care, and all sides generally agree that employers should get out of the health insurance business.

An argument for employer-based system might start with arguing that it is the only way to combat the isolate and kill strategy of insurance companies described by Brad DeLong

Insurance companies work like dogs to avoid selling insurance to people who are expensively sick or likely to get expensively sick. As a result, a huge amount of people's work-time and information technology processing power are wasted on the negative-sum game of trying to pass the hot potato of paying for the care of the sick to somebody else. The more people separate themselves or are separated into smaller and smaller pools with calculably different exposures to risk, the worse this problem gets. The way to solve it is to shove people into pools as big as possible.

Tyler Cowen has a response to this, but in any event it would seem that the Edwards regional Health markets gets to that issue independently -- why the insistence that businesses "provide a comprehensive health plan to their employees"?

The best -- or at least the cleverest --argument I've seen for employer-provided insurance comes from Steve Landsburg in his book The Armchair Economist:

Employers typically have less than perfect information about what their employees are up to. This makes it hard to get incentives right. You can't reward productivity that you can't observe...

Many employers provide their employees with more health care coverage than is required by law, essentially giving an extra $500 worth of medical insurance instead of an extra $500 in wages. At first this seems mysterious: Why not give employee the cash and let them spend it as they want?  A partial answer -- and perhaps the entire answer -- is that employees prefer nontaxable benefits to taxable wages.  But another possible answer is that good health care enhances productivity.  If productivity were easily observed and rewarded, there would be no issue here, because employees would have ample incentives on their own to acquire adequate health care.  But in a word of imperfect information, employee benefit packages can be the best way to enforce good behavior.

Interesting argument, but it is, of course, a reason employers would continue to provide health care benefits of their volition -- no mandate, or tax subsidy, required.   

So, I'm not quite sold on the whole Edwards package, but do say kudos again for laying the ideas out in plain view. Now, I think, the onus is on everyone else to explain what they have in mind, and why it is better than what is now on the table.

UPDATE: Arnold Kling lays out his own vision, at TCS Daily.  (Here I offer a wildly unnecessary, but nonetheless obligatory, hat tip to Instapundit.)  As far as I know, Arnold is not running for anything, but some smart candidate might think about adding him to the team.

February 11, 2007 in Health Care | Permalink


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» Blog Round Up: Karl Rove, Health Care, and More from John Edwards 08 Blog
piIs anyone talking about their agenda for America? [Karl]Rove asked, noting the possible exception of former Sen. John Edwards, D-N.C., who has been out of office since 2005./i/p pSo says Rove in a hre... [Read More]

Tracked on Feb 14, 2007 11:55:01 PM


I see the Edwards' "pay or play' strategy as a path away from employer-based insurance. It's pretty hard to envision that Congress will just mandate a complete overhaul of the current employer-based system overnight. However, if you mandate a pay or play option, and the pay option becomes progressively more attractive through time (or employers buy into the publicly run system, which gets you pretty much the same place), then we can work our way out of employer-based insurance.

I see 3 basic options in this story;
1)a government-run universal system, similar to medicare;
2) an employer-based system; and
3) an individual based system.

Because I believe so strongly in markets, #3 would be a complete disaster. Private insurers will be far more effective in denying coverage to people who need care, than the government bureaucrats who try to regulate them and prevent this cherry-picking from taking place.

Posted by: Dean Baker | February 12, 2007 at 08:13 AM

Dean -- I do appreciate the sentiment that it is hard for regulators to stay in front of the designs of profit-maximizing market participants. But that to me also cuts in the direction of feeling a bit queasy at the thought of relying on a government-run system similar to medicare. I can't quite get a glimpse of a workable outcome that doesn't involve some sort of governmental hand in solving the pooling issue. But I also think that on the other side of the negotiating table should be someone who can walk away in the event that what the public's government agent wants to implement is the unworkable or foolish -- which in turn suggests to me that the provision of the insurance itself is best done by competing private firms.

Your point that political feasibility may require a plan that gradually evolves away from an employer-based mechanism is well taken. Maybe we primarily disagree on what it should evolve toward.

Posted by: Dave Altig | February 12, 2007 at 09:25 PM

John Edwards wants to increase taxes to fund universal healthcare in the taxpayer's view. However, in the long run, Universal Health Care will save money for the American people.
The increase in taxes will be small to the individual in comparison to the cost for a health plan that they face today. Discuss this whether you support or not this proposal at

Posted by: Amy | March 19, 2007 at 12:05 PM

Easystm.com will give Coverage of short term health insurance as early as the next day... just a few simple medical questions to answer. Best of all, you can choose to receive your policy electronically!


Posted by: kurt jarcik | March 30, 2007 at 01:11 PM

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