Macro Roundup

these guys ~ lifted your metric

"...Before the tax reform took effect the CBO projected that the tax cuts would have only a modest impact on economic growth, and it continues to predict that stagnation lurks around every corner. Yet it now has projected in consecutive annual reports that higher-than-expected growth will add an extra $1.2 trillion to federal revenue in the coming decade, covering about 80% of the Treasury’s original projected cost of the tax cuts. If 3% growth is sustained for another year, the growth surge will have paid for the tax cuts....."
Phil Gramm and Michael Solon, "Tax Reform Unleashed the U.S. Economy,"Wall Street Journal, March 4, 2019, https://www.wsj.com/articles/tax-reform-unleashed-the-u-s-economy-11551740837

"... “If you can hold unemployment at a low level for a long time there are substantial benefits,” Janet Yellen, the former chairwoman of the Federal Reserve, said in an interview. “Real wage growth will be faster in a tight labor market. So disadvantaged workers gain on the employment and the wage side, and to my mind, that’s clearly a good thing.” This was one of Ms. Yellen’s hopes when she was running the Fed from 2014 to 2018; keep interest rates low and let the economy run strong enough to keep driving hiring. In the process, the theory went, disadvantaged workers could be drawn from the fringes of the economy. With luck, inflation wouldn’t take off in the process. Her successor, Jerome Powell, has generally followed the strategy, moving cautiously on rates. “This is a good time to be patient,” Mr. Powell told members of Congress Tuesday.... The plan seems to be paying big dividends now, but will it yield long-term results for American workers? Two risks loom. The first is that the low-skill workers who benefit most from a high-pressure job market are often hit hardest when the job market turns south. Consider what happened to high-school dropouts a little more than a decade ago. Their unemployment rate dropped below 6% in 2006 near the end of a historic housing boom, then shot up to more than 15% when the economy crumbled....The U.S. is adding jobs in low-skilled services sectors. Four of the six occupations the Labor Department expects to add the most jobs through 2026 require, at most, a high-school diploma. Personal-care aide, a job which pays about $11 an hour to help the elderly and disabled, is projected to add 778,000 jobs in the decade ended in 2026, the most of 819 occupations tracked. The department expects the economy to add more than half million food prep workers and more than a quarter million janitors. Those low-skill workers are reaping pay gains in part because there aren’t a lot of people eager to fill low-skill jobs anymore. Only about 6% of U.S. workers don’t hold a high school diploma, down from above 40% in the 1960s, according research by MIT economist David Autor James O. Wilson dropped out of high school in the 10th grade and started selling drugs, which eventually led to a lengthy incarceration. When Mr. Wilson, 59, was released in 2013 he sought out training at Goodwill, where he learned to drive a forklift. Those skills led him to a part-time job at a FedEx Corp. facility at an Indianapolis, Ind., airport. He was promoted to a full-time job in 2017, and is now earning more than $16 an hour. He has a house with his wife and enjoys taking care of his cars, including a prized Cadillac. “I wanted to show FedEx you can take a person, and he can change,” he said. “I want FedEx to say, ‘Do you have any more people like him?’” Skilled workers in high-tech and managerial positions are also benefiting from the high-pressure labor market, particularly in thriving cities. Of 166 sectors that employ at least 100,000 Americans, software publishing pays the highest average wages, $59.81 an hour in the fourth quarter of 2018. Wages in the field grew 5.5% from a year earlier, well outpacing 3.3% overall growth in hourly pay. The average full-time employee in the sector already earns more than $100,000 a year...."

Eric Morath and Lauren Weber, "Inside the Hottest Job Market in Half a Century,"Wall Street Journal, March 1, 2019, https://www.wsj.com/articles/inside-the-hottest-job-market-in-half-a-century-11551436201

"...Research on the effect of an aging population on economic growth has tended to focus on labor force participation and the dependency ratio, and the limited work that has examined the effect of aging on productivity remains inconclusive. This analysis contributes to the aging and productivity literature and finds a strong negative effect of aging on productivity using both state-industry aggregate data and matched employeremployee microdata. The aggregate data show a clear relationship between an older workforce and lower productivity at the state-industry level, in both cross-section and panel models. The results are confirmed using employer-employee linked data from private sector human resource company ADP that show having older coworkers reduces an individual’s wages. Robustness tests include three-digit ZIP code geographic fixed effects and firm fixed effects for a sample of large nationwide firms. The results suggest that between a quarter and full percentage point of the slowing in annual productivity growth in recent years may be due to aging, an effect that is likely to persist for the next decade... Given this, the aging of the workforce has reduced productivity by between 3% and 9%, equal to between 0.25% and 0.7% per annum.."..."

Adam Ozimek, Dante DeAntonio and Mark Zandi, "Aging and the Productivity Puzzle," Moody's Analytics, September 4, 2018, https://ma.moodys.com/rs/961-KCJ-308/images/2018-09-04-Aging-and-the-Productivity-Puzzle.pdf

"......The United States has been running trade deficits for so long that we have forgotten how strange this is, and if we think about it at all we tend simply to dismiss the problem as a consequence of American profligacy. But even if profligacy were truly a problem, in a well-functioning world of global trade, if a country like the United States were to run deficits, after a fairly short time these deficits would force changes (mostly monetary but also structural) in the U.S. economy that would eliminate the deficits. Persistent U.S. trade deficits are unnatural, and there has to be a reason they exist. What is more, these U.S. trade deficits force the United States into accepting either higher unemployment or a more rapid increase in debt. If the country wants to escape this condition, the United States must reduce its trade deficit with the world, but not by addressing the trade deficit directly through import tariffs or quotas. Instead, the United States must address foreign capital inflows directly, perhaps by taxing them..... all or most investment falls into one of two categories. The first category consists of projects whose value is not sensitive to marginal changes in demand, perhaps because they bring about very evident and significant increases in productivity, or because the economy suffers from significant underinvestment. The second category consists of projects whose value varies as a function of future expected changes in demand. I discuss this topic further in the “Where Might This Argument Be Wrong?” section of a previous blog post. I show in that post that in economies like the United States, in which the profitability of most investments is a function of changes in demand (the second category) rather than in the cost of borrowing (the first category), rising income inequality and higher ex-ante savings can actually result in less investment rather than more. The point is that U.S. income inequality could increase the gap between savings and investment by even more than we might otherwise assume. Not only does it cause the savings of the rich to rise faster than investment, but it might actually cause investment to decline.This isn’t just theory. The increase in the savings share of German GDP after the Hartz reforms was matched by a reduction in the investment share, not the expected increase. And while it is too early to make the same claim about the Trump tax cuts of December 2017, which were supposed to boost investment by boosting savings, so far they seem to have done nothing of the sort.. Be that as it may, whether investment actually declines or merely grows more slowly than the decline in consumption, in a closed system like the global economy, savings and investment are by definition equal. This implies that in any country if a policy causes savings in one part of the economy to rise and investment to rise more slowly, or even decline, the domestic imbalance between savings and investment can be resolved in one (or some combination) of only two ways:1) The excess savings can be exported, in the form of capital account deficits along with the corresponding trade and current account surpluses. 2) Something else must happen to cause savings in another part of the economy to drop, so in the aggregate there is no net increase in savings. It is clear that the first of these two conditions does not apply to the United States. The country has no control over its ability to import or export savings. Its capital account is largely determined abroad. Why? Because the United States has deep, completely open, and highly flexible capital markets and very strong governance, so the country ultimately absorbs a large part of the excess savings of the rest of the world—roughly 40-50 percent of the sum of foreign capital account deficits in recent years—the extent of which is only partially determined by domestic U.S. conditions or policies. As long as the United States runs a capital account surplus, and as long as this surplus is determined by foreign conditions and policies the country largely cannot control, the United States cannot be a net exporter of any excess savings accumulated through its high level of income inequality. This means the second condition must apply. This is not a theoretical proposal but rather an accounting identity that cannot be broken: if the United States cannot export the excess of savings over investment, it cannot have these excess savings. That being the case, something else must happen to cause savings in another part of the U.S. economy to drop by enough to absorb the sum of excess U.S. savings caused by income inequality and excess foreign savings imported into the United States. This has been the hardest part for even trade experts to understand, but there are many ways in which conditions that drive up savings in one part of the U.S. economy can drive them down elsewhere. I discuss some of these ways in the “What Drives Down Savings” section of my previous blog post. What this all means is that, in one way or another, distortions (either in the U.S. economy or abroad), have transformed the United States from what should have been a reasonably persistent surplus economy into the world’s largest deficit economy. As I have explained before (including here, here, here, and here), ultimately the United States must respond to the distortions created by net capital inflows, and the consequent current account deficit, with either more unemployment or more debt. This explains the real relationship between the fiscal deficit and the current account deficit: if the United States is to avoid higher unemployment, either the U.S. government must run a fiscal deficit or U.S. authorities, including the Federal Reserve, must create conditions under which private American (mainly households) run deficits and raise debt levels. The extent of the distortion can be enormous. Assuming that the United States should normally run a current account surplus of roughly 2-3 percent of GDP, in line with that of other rich, capital-exporting countries and substantially lower than the UK’s surplus at the end of the nineteenth century, the American current account deficit of roughly 3 percent of GDP implies a distortion equal to 5-6 percent of U.S. GDP, or a very high 1 to 1.5 percent of global GDP. This suggests that, while the United States currently absorbs 40-50 percent of the world’s current account deficits, it may be absorbing up to two-thirds of all the world’s excess savings...."

Michael Pettis, "Should the United States Run a Trade Surplus?,"China Financial Markets, March 4, 2019, https://carnegieendowment.org/chinafinancialmarkets/78496

Fed economist are presenting this at Brookings tomorrow. Supports your view of the high cost of low skilled workers, paper finds that tight labor markets boost the employment of marginal workers, "...Over our entire sample, the unemployment rates of each group we study moves in tandem with the aggregate unemployment rate. Second, like others, we also find that the fluctuations of less advantaged groups including blacks, Hispanics, and those with less than a college education are more pronounced. When the labor market weakens, these groups tend to suffer disproportionately; when it recovers, their experience improves disproportionately...."

Stephanie R. Aaronson, Mary Daly, William Wascher and David Wilcox, "Okun Revisited: Who Benefits Most From a Strong Economy?" Brookings Paper's on Economic Activity, March 8, 2019, https://www.brookings.edu/wp-content/uploads/2019/03/Okun-Revisited-Who-Benefits-Most-From-a-Strong-Economy.pdf

"....We use two variables: annual own income (sum of all earnings and all other income) and annual household income (sum of all income across all household members). All measures from the ADF are annual and refer to the years 1988 to 2017, corresponding to the calendar year preceding the survey year. In line with previous research we focus our attention on 25-64 year olds because this age group consists of individuals who are most likely to be finished with schooling and below normal retirement age. Within this group we examine the relative outcomes of historically less advantaged groups defined by race, gender, and educational attainment. We define three mutually exclusive groups for race and ethnicity: African Americans/blacks (we will use the terms interchangeably); Hispanics or Latinos (again, we will use the terms interchangeably); and whites.....A key feature evident in figure 2 is that fluctuations in the unemployment rates for African Americans and Hispanics—both males and females—are roughly synchronized with fluctuations in the unemployment rate for whites (top tier of panels). However, these rates are uniformly higher than the rates for white men and women and exhibit considerably greater amplitude. As a result, when the labor market weakens, the gaps between these rates widen markedly; they then shrink again when the labor market tightens. Compared to the unemployment rate, the labor force participation rate (middle tier of panels) is considerably less cyclically sensitive. A much greater fraction of the variation in the gaps in labor force participation rates across different races and ethnicities appears to reflect secular trends. Overall, black men have lower labor force participation rates than white or Hispanic men. Among women, Hispanic women participate at a lower rate than either black or white women. Finally, the employment-to-population ratio (EPOP), which combines the information in the unemployment rate and the labor-force participation rate, also varies considerably over the business cycle.9 In terms of levels, black men and Hispanic women have lower EPOPs than their counterparts, reflecting both their lower rates of labor force participation and higher unemployment rates....Figure 3 presents similar information for groups at different levels of educational attainment. On average, the unemployment rates (top two panels) of individuals without a college degree are more cyclically sensitive, rising by more in downturns and falling by more in expansions. At all points the unemployment rates for those without a college degree are higher than the rates for those with a college degree....On average, the unemployment rates (top two panels) of individuals without a college degree are more cyclically sensitive, rising by more in downturns and falling by more in expansions. At all points the unemployment rates for those without a college degree are higher than the rates for those with a college degree. Labor force participation rates and EPOPs (the middle and lower panels) are lower for those with less education.Similar to the results by race and ethnicity, labor force participation exhibits very little observable cyclical sensitivity. EPOPS are slightly more cyclical. The gaps in both LFPRs and EPOPs by educational attainment are large and persistent..... That said, there is very little visual evidence that the strength of the labor market affects the gaps in these variables across less-advantaged and more advantaged groups. In general, these aggregate income measures for blacks and Hispanics are far lower than the analogous measures for whites; similarly, the average incomes of those with lower educational attainment are well below those of persons with higher educational attainment....... A few observations seem clear. First, as previous researchers have shown, when the economy gets weak everyone suffers and when the economy gets stronger, everyone benefits. This is seen most clearly in unemployment rates: Over our entire sample, the unemployment rates of each group we study moves in tandem with the aggregate unemployment rate. Second, like others, we also find that the fluctuations of less advantaged groups including blacks, Hispanics, and those with less than a college education are more pronounced. When the labor market weakens, these groups tend to suffer disproportionately; when it recovers, their experience improves disproportionately. Third, inspired by Arthur Okun, we have also searched for evidence that high-pressure economies are qualitatively different, and found suggestive evidence that this is the case. A high-pressure economy does afford greater improvement for some less-advantaged groups in some key labor market variables, although the evidence is complicated by the heterogeneity observed across the various cycles. Finally, we also find suggestive evidence that these benefits persist at least for a while. All in all, the evidence presented here supports the idea that high-pressure economies are different than normal expansions, but just how different remains a topic of further study...."

Summer is back on the secular stagnation beat his new paper finds that the neutral real rate for the advanced economies has declined by ~3% points over past 40 years, is slightly above 0 in real terms, would be even lower if not for increases in government debt

"....This paper demonstrates that neutral real interest rates would have declined by far more than what has been observed in the industrial world and would in all likelihood be significantly negative but for offsetting fiscal policies over the last generation. We start by arguing that neutral real interest rates are best estimated for the block of all industrial economies given capital mobility between them and relatively limited fluctuations in their collective current account. We show, using standard econometric procedures and looking at direct market indicators of prospective real rates, that neutral real interest rates have declined by at least 300 basis points over the last generation.....Our results suggest that real rate for the advanced economy block - what we call AE R* for brevity - declined by around 3pp over the past 40 years, and is currently only slightly above zero in real terms. This is consistent with the evidence presented above on the evolution of measures of long term real interest rates....We argue that these secular movements are in larger part a reflection of changes in saving and investment propensities rather than the safety and liquidity properties of Treasury instruments. We then point out that the movements in the neutral real rate reflect both developments in the private sector and in public policy. We highlight the levels of government debt, the extent of payas-you-go old age pensions and the insurance value of government health care programs have all ceteris paribus operated to raise neutral real rates..... Overall, then, we find that the rising government debt accounts for around 1.5pp (0.8pp+0.7pp) upwards pressure on the neutral real interest rate, consistent with our calculations based on the empirical elasticities.... Using estimates drawn from the literature, as well as two general equilibrium models emphasizing respectively lifecycle heterogeneity and idiosyncratic risks, we suggest that the “private sector neutral real rate” may have declined by as much as 700 basis points since the 1970s. Our findings support the idea that, absent offsetting policies, mature industrial economies are prone to secular stagnation. This raises profound questions about stabilization policy going forward. Achievement of levels of deficits and government debt generally considered desirable - especially if complemented by reductions in social insurance - would likely mean negative neutral real rates in the industrial world. Policymakers going forward will need to engage in some combination of greater tolerance of budget deficits, unconventional monetary policies and structural measures to promote private investment and absorb private saving if full employment is to be maintained and inflation targets are to be hit..... Our findings suggest that the private sector forces dragging down on interest rates are more powerful than previously anticipated, and that on average across the business cycle, equilibration of private-sector saving and private-sector investment may indeed require very low real rate of interest in advanced economies for years to come. This conclusion is consistent with findings of Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alan Taylor (2017), who established that the current low levels of interest rates are not unusual in historical terms.9 It is also consistent with the Japanese experience.10 Our findings raise the possibility that the developed world is at risk of mirroring the experience of Japan, whereby the very low equilibrium rate of interest appears to be a semi-permanent feature of the economic landscape....We draw three main conclusions from the analysis in this paper. First, the neutral real rate for the industrial world has trended downward for the last generation and this is best understood in terms of changes in private sector saving and investment propensities. In the face of neutral real rate estimates, past trends in indexed bond yields, and measures of real swap yields, this conclusion seems inescapable. It is also noteworthy that current real rates appear to be quite well predicted by pre-financial crisis trends. We believe that the these trends are best analyzed in terms of changes in saving and investment propensities or equivalently in terms of trends in desired wealth holdings by consumers and desired capital accumulation by producers. While factors involving liquidity, scarcity and risk no doubt bear on levels of real interest rates we find it highly implausible that they are the main factor accounting for trend movements. The movements are too large and too pervasive across assets and the fluctuations in spreads are too small and lacking in trend for these factors to account for the observed trends in the data.Second, the neutral real rate would have declined substantially more over the last generation but for increases in government debt and expansions in social insurance programs. Both straightforward extrapolations of existing rules of thumb regarding debt and deficit impacts on interest rates and calculations using workhorse general equilibrium models suggest that fiscal policies have operated to raise real interest rates by several hundred basis points over the last generation. While this conclusion is dependent on our rejection of Ricardian equivalence, we see nothing that leads us to believe that increased government debt automatically calls for increased saving or that pay-as-you-go social security programs alter bequests for most families. The specific magnitudes are very uncertain, but open economy aspects and the possibility suggested by our analysis - that budget deficits emerge in response to excesses of private saving over private investment - lead us to think that we are more likely to understate than overstate the extent of fiscal support for real interest rates in recent years. Third, the implication of our analysis that but for major increases in deficits debt and social insurance neutral real rates in the industrial world would be significantly negative by as much as several hundred basis points suggests substantial grounds for concern over secular stagnation. From the perspective of our analysis the private economy is prone to being caught in an underemployment equilibrium if real interest rates cannot fall far below zero. Full employment in recent years has been achieved where it has been achieved either through large budget deficits as in the United States or Japan or large trade surpluses as in Germany. It is worth considering that in the United States during the period prior to the financial crisis, negative real short term interest rates, a huge housing bubble, erosion of credit standards and expansionary fiscal policy were only sufficient to achieve moderate growth. Adequate growth in Europe was only maintained through what in retrospect appears to have been clearly unsustainable lending to the periphery...."

Łukasz Rachel and Lawrence Summers, "On Falling Neutral Real Rates, Fiscal Policy, and the Risk of Secular Stagnation,"Brookings Papers on Economic Activity, March 6, 2019, https://www.brookings.edu/wp-content/uploads/2019/03/On-Falling-Neutral-Real-Rates-Fiscal-Policy-and-the-Risk-of-Secular-Stagnation.pdf

Found Brad DeLong's thoughts on some of his takeaway from Summer's paper on the ERP interesting

"...Economic and finance professors continue to attempt to understand this large equity return premium as somehow reflecting some market-maker somewhere's attitude toward risk. They fail. They will continue to fail. The gap between the risky discount rate and the safe interest rate is5.5%-points today, was 1%-point 20 years ago, was 7.5% 40 years ago, and was 4% 50 years ago.Most of the time since the development of stock markets that were more than grifter cons for insiders 150 years ago, this gap has been vastly in excess of any rational assessment of the extra risk born from investing in a diversified portfolio of stocks rather than in safe government bonds. But sometimes—1998, when the risk associated with investments in stocks was not low but was unusually high—it is not....tempted by the following narrative to account for the past 20 years' moves in the equity return premium:The end of dot-com irrational exuberance that drives the equity premium up from 1998-2002 with no effect on the *safe interest rate. The financial side of the China shock 2002-2008 that greatly increases the demand worldwide for safe assets.Political risks in emerging markets and economic risks of stalling emerging-market growth greatly increased demand for safe assets like U.S. Treasuries: it seems sensible to hold U.S. Treasuries for that portion of your portfolio which will be the only thing left if the balloon goes up and you have to flee your country in the Learjet, or in a rubber boat. This drives the equity premium up further. The financial crisis's destruction of confidence that any organization besides Global North governments is or will be in the business of providing AAA assets eliminated AAA and near-AAA private close substitutes for Treasuries.This drives the equity premium up still further.The natural conclusion I am tempted to draw—which Łukasz Rachel and Lawrence H. Summers do not—isThe world economy today desperately wants to hold its wealth in claims on Global North sovereigns with exorbitant privilege issuing reserve currencies. A well-functioning economy creates things of value. The Global North sovereigns with exorbitant privilege issuing reserve currencies can create a lot of value. They should do so: governments should run up their debts until they satisfy demand with an equity return premium at a value we think is sensible and "normal"...."

Brad DeLong, "On Falling Neutral Real Rates, Fiscal Policy, and the Risk of Secular Stagnation,"Grasping Reality, March 7, 2019, https://www.bradford-delong.com/2019/03/which-interest-rate-on-on-falling-neutral-real-rates-fiscal-policy-and-the-risk-of-secular-stagnation.html