Macro Roundup

The blog post below does a great job of summarizing Summers' recent comments at Brookings.

Below is the "trillion dollar" transfer comment I mentioned. Following that is a summary of the blog post from a guy who works for me. After that is the post, which provides a long summary of Larry's comment. (I also watched the video of Larry's comments and believe the summary is quite comprehensive.)

Summers: "One of the puzzles of our economy today is that on the one hand, we have record low real interest rates, ones that are expected to be record low for 30 years if you look at the index bond market. And on the other hand, we have record high profits....The way to think about that is there's a lot of rents in what we're calling profits that don't really represent a return to investment.

The question then is who's going to get those rents? Which goes to the minimum wage, goes to the power of union, goes through the presence of profit sharing, goes to the length of patents and a variety of other government policies that confer rents and then when those are received, goes to the question of how progressive the tax and transfer system is. That has got to be a very, very large part of the picture.

If we had the income distribution in the United States that we did in 1979, the top 1% would have $1 trillion less today, and the bottom 80% would have $1 trillion more.

I don't know what the number is, but my guess is that the total cost of the Earned Income Tax Credit is $50 billion. Nobody's got on the policy agenda doubling the Earned Income Tax Credit. The big, aggressive agendas are probably to increase it by a third or a half. So, I'm all for it, but we are talking about 2.5% of the redistribution that has taken place.

Summers on education. Looking forward to hearing the full panel. "...I think the policies that Aneesh is talking about are largely whistling past the graveyard. The core problem is that there aren't enough jobs. If you help some people, you could help them get the jobs, but then someone else won't get the jobs. Unless you're doing things that have things that are effecting the demand for jobs, you're helping people win a race to get a finite number of jobs. …Folks, wage inflation in the united states is 2%. It has not gone up in five years. There are not 3% of the economy where there's any evidence of hyper wage inflation of a kind that would go with worker shortages.The idea that you can just have better training and then there are all these jobs, all these places where there are shortages and we just need the train people is fundamentally an evasion... I am concerned that if we allow the idea to take hold, that all we need to do is there are all these jobs with skills and if we can just train people a bit, then they'll be able to get into them and the whole problem will go away. i think that is fundamentally an evasion of a profound social challenge....What we need is more demand and that goes to short run cyclical policy, more generally to how we operate macroeconomic policy, and the enormous importance of having tighter labor markets, so that firms have an incentive to reach for worker, rather than workers having to reach for firms...I think that the broad empowerment of labor in a world where an increasing part of the economy is generating income that has a kind of rent aspect to it, the question of of who's going to share in it becomes very large. One of the puzzles of our economy today is that on the one hand, we have record low real interest rates, ones that are expected to be record low for 30 years if you look at the index bond market. And on the other hand, we have record high profits. If you tend to think record high profits would mean record high returns to capital, which would mean really high interest rates. And what we actually have is really low real interest rates. The way to think about that is there's a lot of rents in what we're calling profits that don't really represent a return to investment, but represent a rent. The question then is who's going to get those rents? Which goes to the minimum wage, goes to the power of union, goes through the presence of profit sharing, goes to the length of patents and a variety of other government policies that confer rents and then when those are received, goes to the question of how progressive the tax and transfer system is. That has got to be a very, very large part of the picture...."Konczal, Mike, "The One Where Larry Summers Demolished the Robots and Skills Arguments,"Roosevelt Institute Blog, February 20, 2016. Available at:http://www.nextnewdeal.net/rortybomb/one-where-larry-summers-demolished-robots-and-skills-argumentsThe One Where Larry Summers Demolished the Robots and Skills Arguments Feb 20, 2015Mike KonczalEveryone should take it easy on the robot stuff for a while. There's been a small, but influential, hysteria surrounding the idea is that a huge wave of automation, technology and skills have lead to a huge structural change in the economy since 2010. The implicit argument here is that robots and machines have both made traditional demand-side policies irrelevant or naïve, and been a major driver of wage stagnation and inequality. Though not the most pernicious story that gained prominence as the recovery remained sluggish in 2010 to 2011, it gained important foothold among elite discussion. That is over. They say Washington DC has had a huge crime decline, but I just saw one of the most vicious muggings I’m likely to see, one where David Autor and Larry Summers just tore this idea that a Machine Age is responsible for our economic plight apart ona panel yesterday at the Hamilition Projectfor the launch of anew Machine Age report. Summers, in particular, took an aggressive tone that is likely to be where liberal and Democratic Party mainstream economic thinking is in advance of 2016. It is a very, very good place. As Larry Mishelnoted in an American Prospect pieceon the eve of the event, the robots and skills story has many problems. But I was genuinely surprised at how poorly those pushing the argument - Erik Brynjolfsson and Andrew McAfee, authors of the influentialThe Second Machine Age, were there - could address the pretty obvious counterarguments that were brought up. You can see the eventat CSPAN here. This piece will mostly be blockquotes, because the quotes are too good to try and summarize. (Any transcribing errors are my own.) First up, economist David Autor of MIT demolished the core claims in about a minute of speaking. For those with ears to hear it, this is him also moderating and walking back portions of his“job polarization”arguments from 2010. Autor:

The second point i want to make, when we think about how technology interacts with labor market we think of substitution of labor with machinery. What is neglected is that it complements us as well. Many activities require a mixture of things. it requires a mixture of information process and creativity, motor power and dexterity. if those things need to be done together if you make one cheaper and more productive, you increase the value of the other. It got worse for the robots. Here's Larry Summers:

On the one hand we have enormous antidotal evidence and visual evidence that points to technology having huge and pervasive effects. Whether it is complementing workers and making them much more productive in a happy way, or whether it is substituting for them and leaving them unemployed can be debated. In either of those scenarios you would expect it to be producing a renaissance of higher productivity. So, on the one hand are convinced of the far greater pervasiveness of technology in the last few years, and, on the other hand, the productivity statistics on the last dozen years are dismal. Any fully satisfactory view has to reconcile those two observations and i have not heard it satisfactorily reconciled.

If you believe technology happens with a big lag and it's only going to happen in the future, that's fine. But then you can't believe it's already caused a large amount of inequality and disruption of employment today. Let's take retailing. You can imagine you can have all kinds of spiffy technology so you no longer have to have people behind cash registers. The problem is you wouldn't expect the people behind the cash registers would get fired before the people working the systems got the new systems working. I understand why it might take years for it all to have an effect. What i have a harder time understanding is how there can be substantial disemployment ahead of the effect of the productivity. That is, if you thought that it just was impossible to put in these systems and so forth, then you might think that in the short run it would be a big employment boom. You have to keep your old legacy system going and you have to have a million guys running around figuring out how to put the new computer system in.

I think the policies that Aneesh is talking about are largely whistling past the graveyard. The core problem is that there aren't enough jobs. If you help some people, you could help them get the jobs, but then someone else won't get the jobs. Unless you're doing things that have things that are effecting the demand for jobs, you're helping people win a race to get a finite number of jobs. Folks, wage inflation in the united states is 2%. It has not gone up in five years. There are not 3% of the economy where there's any evidence of hyper wage inflation of a kind that would go with worker shortages. The idea that you can just have better training and then there are all these jobs, all these places where there are shortages and we just need the train people is fundamentally an evasion. I am concerned that if we allow the idea to take hold, that all we need to do is there are all these jobs with skills and if we can just train people a bit, then they'll be able to get into them and the whole problem will go away. i think that is fundamentally an evasion of a profound social challenge.

What we need is more demand and that goes to short run cyclical policy, more generally to how we operate macroeconomic policy, and the enormous importance of having tighter labor markets, so that firms have an incentive to reach for worker, rather than workers having to reach for firms. I think that the broad empowerment of labor in a world where an increasing part of the economy is generating income that has a kind of rent aspect to it, the question of of who's going to share in it becomes very large. One of the puzzles of our economy today is that on the one hand, we have record low real interest rates, ones that are expected to be record low for 30 years if you look at the index bond market. And on the other hand, we have record high profits. If you tend to think record high profits would mean record high returns to capital, which would mean really high interest rates. And what we actually have is really low real interest rates. The way to think about that is there's a lot of rents in what we're calling profits that don't really represent a return to investment, but represent a rent. The question then is who's going to get those rents? Which goes to the minimum wage, goes to the power of union, goes through the presence of profit sharing, goes to the length of patents and a variety of other government policies that confer rents and then when those are received, goes to the question of how progressive the tax and transfer system is. That has got to be a very, very large part of the picture.

If we had the income distribution in the United States that we did in 1979, the top 1% would have $1 trillion less today, and the bottom 80% would have $1 trillion more. That works out to about $700,000 a family for the top 1%, and about $11,000 a year for a family in the bottom 80%. That's a trillion dollars. I don't know what the number is, but my guess is that the total cost of the Earned Income Tax Credit is $50 billion. Nobody's got on the policy agenda doubling the Earned Income Tax Credit. The big, aggressive agendas are probably to increase it by a third or a half. So, i'm all for it, but we are talking about 2.5% of the redistribution that has taken place. So, you have to be looking for things and there's no one thing that is going to do it. My reading of the evidence, it's a fairly general evidence, is that while there may be some elasticity, the elasticity around the current level of the minimum wage is very low.

We may need an increase in the income tax credit, not only for those who receive it at the present time but perhaps much further up the income scale. Measures that facilitate collective bargaining can result in a broader participation in the benefits of productivity and growth If we have ever rapid technological development and it is labor displacing, at some point in the future -- as i say, that may be some distant point in the future -- should that lead to some basic change in our lifestyles with less work, more lecture and a richer, more robust use of that leisure? In addition to everything that needs to be done to enhance growth, tighten labor markets and to improve the position of middle and lower income workers, should there be increased redistribution to accomplish the broad objectives of our society?

I think there's reason for some skepticism about how fast things are actually moving. There’s a lot of aggregate data that don't support the idea the labor market is changing or the economy is changing as rapidly as this very dramatic story. The premium to higher education has plateaued over the last 10 years. We see evidence highly skilled workers have less rapid career directories and are moving into less skill occupation if anything. Productivity is not growing very rapidly, and a lot of the employment growth we’ve seen in the past 15 years has been in relatively low education, in-person service occupations.

great rotation, european edition"...To summarise, that suggests the Eurozone’s NIIP needs to rise from -10 per cent of GDP to at least 30 per cent for Europe’s CA surplus to become sustainable and that even if negative rates and ECB QE have and will accelerate this process it’s still going to be decades before it’s finished. Which in turn suggests that euro weakness — along with a more general pressure on foreign asset prices, bond yields and an urge to use Exorcist gifs — is here to stay...."Keohane, David, "That euroglut outflow and the real Japanisation of Europe,"FT Alphaville, March 11, 2015. Available at:http://ftalphaville.ft.com/2015/03/11/2121480/that-euroglut-outflow-and-the-real-japanisation-of-europe/That euroglut outflow and the real Japanisation of EuropeDavid KeohaneAll hailthe Euroglut,that oh so corpulent result of Europe’s (read:Germany’s) huge excess savings — which hit a record €234bn at the end of last year as oil prices collapsed and are projected to hit €300bn over the course of 2015 if oil prices stay that way.

And, thing is, the euro area is far from being a Japan-style net creditor — it currently owes the world roughly 10 per cent of its GDP and Deutsche say it “will take trillions of Euros worth of further investment outflows as well as significant depreciation over several years for the euro area to accumulate the net foreign wealth position associated with mature creditor economies.”

In other words,” like Japan, Europeans will need to turn into net creditors to the rest of the world to mirror structurally higher saving preferences. In turn this means that Europe’s negative net international investment position needs to turn positive. Europeans will need to own more foreign assets than foreigners do in Europe.”

Obviously, not all euroland net international investment positions (NIIP) are created equally and the imbalance represented by the euroglut can be seen replicatedwithin the eurozone itself. Fun, particularly considering the Euroglutwill now becomethe key determining factor driving European policy:

The Eurozone’s incomplete transition is palpable when plotting average G10 current accounts against the latest NIIPs for Q3 2014 (Figure 7). All countries except the euro-area are in balance, with their structural surpluses (deficits) reflected in positive (negative) NIIPs. The EMU cuts a lonely figure in the bottomright quadrant. 3 We also include South Korea, which scraped into the first quadrant only last autumn following a twenty-year adjustment process. Korea is further advanced than Europe on a similar path towards economic Japanization, and we therefore study its case in more detail below.

The external accounts of individual member states vary significantly.4 Germany and the Netherlands are long-standing creditor nations. Germany’s NIIP remained positive even as it borrowed heavily during the 1990s to finance reunification. Yet while Germany and the Netherlands account for much of Europe’s surpluses, others are behind the structural shift: the GIIPS. Those states whose governments were on the verge of default in 2012 had also accumulated vast external debt ratios. Post-2012 austerity extends to their external accounts, but despite painfully sustained current account surpluses, it will take a generation for Greece and Spain in particular to align their NIIPs with their newly found prudence.

Now comes the actual guesswork and, as Deutsche admits, modelling stationary conditions for NIIPs is one of the most central and contentious exercises in modern macroeconomics… But:

The most data-driven approach is to pool all stock-flow observations for the G10 space ex-Sweden over the past twenty years. A simple regression suggests that the current external surplus of the euro area would be consistent with a NIIP of roughly 30%. This estimate varies by a few percentage points as one includes time and/or country effects, effectively running a panel regression. 6 Yet while this exercise necessarily remains indicative, it does yield a strong sense that the stockflow adjustment will not be complete at any NIIP levels below 30% of GDP.

On this baseline estimate of a terminal NIIP of 30%, the Eurozone would need to invest 40% of its current GDP abroad in net terms, at least in the absence of valuation and growth effects. This amounts to a staggering €4 trillion. Assuming net financial outflows of €150bn a quarter, this process will take the rest of the decade.

With the exchange rate being endogenous to this process, the depreciation of the Euro caused by large outflows will both speed up the process and reduce the outflows required for adjustment. A weaker Euro raises the value of European assets abroad, mechanically raising the NIIP. A sensitivity analysis indicates that further Euro depreciation by 20% would shave only around 10% off the outflows implied by a 30% NIIP.

To summarise, that suggests the Eurozone’s NIIP needs to rise from -10 per cent of GDP to at least 30 per cent for Europe’s CA surplus to become sustainable and that even if negative rates and ECB QE have and willaccelerate this processit’s still going to be decades before it’s finished. Which in turn suggests that euro weakness — along with a more general pressure on foreign asset prices, bond yields and an urge to useExorcist gifs— is here to stay.

As Deuctsche suggest (while forecasting a EURUSD move down to 1.00 by the end of the year and a new cycle low of 85cents by 2017):

Importantly, the fall in the Euro since Q3 cannot have fully priced these outflows due to its sheer magnitude. Even the speculative FX market would be too small to price this immense shift in Europe’s economy ex ante even if participants fully understood the massive implications of Euroglut.

Ultimately, portfolio outflows are likely to exceed the euro area’s current account surplus even under extremely conservative assumptions as to the pace of NIIP adjustment. The current pace of portfolio outflows is double the current account surplus, explaining the recent weakness of the Euro. Even if one assumes that the pace of adjustment slows and that it would take a decade for the new NIIP equilibrium to be reached, portfolio outflows would still exceed the current account surplus, maintaining downward pressure on EUR.

In closing, Europe is the new China and will be the new Japan. Or something.

UPDATE at: ViaRaja Kormanhere’s someGabriel Zucmandemonstrating the opacity of this stuff and a further warning that DB’s guesswork is, er, guesswork. From Zucman’s abtract (our emphasis as usual):

This article shows that official statistics substantially underestimate the net foreign asset positions of rich countries because they fail to capture most of the assets held by households in offshore tax havens. Drawing on a unique Swiss data set and exploiting systematic anomalies in countries’ portfolio investment positions, I find that around 8% of the global financial wealth of households is held in tax havens, three-quarters of which goes unrecorded. On the basis of plausible assumptions, accounting for unrecorded assets turns the eurozone, officially the world’s second largest net debtor, into a net creditor. It also reduces the U.S. net debt significantly. The results shed new light on global imbalances and challenge the widespread view that after a decade of poor-to-rich capital flows, external assets are now in poor countries and debts in rich countries. I provide concrete proposals to improve international statistics.

Portfolio outflows from the euro area have been searching for yield overseas. Relative to the allocation of the EMU’s total stock of foreign portfolio assets, recent flows have disproportionately favoured assets in the US, the UK, and Canada (Figure 4). By contrast, the rest of the European Union—Scandinavia and Eastern Europe—have seen disproportionately small outflows as a result of being drawn into the Eurozone’s disinflationary spiral. If one plotted outflows against assets at the beginning of the four-quarter period, the new investor bias towards the Anglo-Saxon countries would be even starker.

The large current account surplus combined with ECB easing and negative rates has initiated a process of large-scale capital outflows from Europe. In the second half of 2014, the euro area saw record net investment in foreign portfolio assets, reaching €135bn in Q4 (Figure 3), or around half a trillion in annualized terms. There are no indications that this trend has reversed or slowed down since. More than 90% of these flows are attributable to fixed income, though equity outflows accelerated markedly in December. At the same time, ‘other investment’ outflows- -mostly bank lending in the European periphery—have diminished relative to the financial account. The expansion of the Eurozone’s financial account has thus been driven by portfolio outflows. This stands in stark contrast to the pre-crisis decade, during which the Eurozone recycled its intermittent and meager surpluses through EUR-denominated loans to the European periphery.

First though, from Deutsche, on those yield-hungry ouflowsso far(with our emphasis):

As to the eventual size of these outflows? Well, Deutsche’s George Saravelos and Robin Winkler, they of the original Euroglut conception back in September, have attempted to go beyond just “massive”. They’re guessing the adjustment being talked about here will eventually demand net capital outflows in the region of €4tn - that would mean a continuation of the current pace of outflows for the next eight years. Nice to know roughly what “massive” means, at least.

You can, in part, blame said Euroglut (along with ECB QE and negative rates) for this type of thing…