Brad DeLong's Semi-Daily Journal: A Weblog

You assume this is honest error. Actually, Greenscam is doing this deliberately. Remember, the Republicans *WANT* people to be afraid of losing their jobs (and health care) at any moment, because it makes it easier to keep them in line. To the Shrubbists, a buyer's market in labor is a good thing. Don't believe anything they say to the contrary.

"The Fed appears to be slowly coming together on a view that the economy does not have all that much slack left in it--a view that the unemployment rate is a better indicator of the labor market than simply comparing payroll employment to population trends."

There have been epochs in American history where people have retreated from the labor market for more than a decade. The 1930s are an example. Perhaps the Fed has come to the conclusion that we are in for another such period? We would not need something as dramatic as the 1930s to still see a fairly big rift open up between trends in populatoin growth versus trends in labor particpation. And although in the past everytime "people" retreated from the labor market it was women doing the retreating, and even though that kind of gender bias is less likely now, still we could see some kind general retreat from particpation in the workforce, at least for several years.

There is also the question of how long the rate of population working for money will rise. The rate was 22% in 1776 when America gained independence from Britain. It rose 2% in most decades save for the 1930s. It peaked in the 1990s at 68% of all adults. Assuming that there are groups of people who will never work (the severly retarded, people in comas, people over the age of 90, mothers with one-week old children) what is the upper limit of adult partipation in the work force? Let's say, hypothetically, that 75% is the absolute peak that any society can ever hope to aspire to. That is, if you put together all the groups that can never, ever work, you'd have 25% of the adult population, so that 75% partipation represents the absolute limit that we might ever expect to reach. Isn't it reasonable to think that as we close in on that absolute limit the rate of growth might slow? Instead of increasing by 2 percentage points each decade, perhaps from now on the percent of the adult population participating in the work force will only grow by 1 percentage point each decade.

I suggest this hypothetically, but if any of it were to turn out to be true, it would justify the Fed in treating the unemployment rate as the more accurate measure of the slack in the labor force.

"The Fed appears to be slowly coming together on a view that the economy does not have all that much slack left in it--a view that the unemployment rate is a better indicator of the labor market than simply comparing payroll employment to population trends."

There have been epochs in American history where people have retreated from the labor market for more than a decade. The 1930s are an example. Perhaps the Fed has come to the conclusion that we are in for another such period? We would not need something as dramatic as the 1930s to still see a fairly big rift open up between trends in populatoin growth versus trends in labor particpation. And although in the past everytime "people" retreated from the labor market it was women doing the retreating, and even though that kind of gender bias is less likely now, still we could see some kind general retreat from particpation in the workforce, at least for several years.

There is also the question of how long the rate of population working for money will rise. The rate was 22% in 1776 when America gained independence from Britain. It rose 2% in most decades save for the 1930s. It peaked in the 1990s at 68% of all adults. Assuming that there are groups of people who will never work (the severly retarded, people in comas, people over the age of 90, mothers with one-week old children) what is the upper limit of adult partipation in the work force? Let's say, hypothetically, that 75% is the absolute peak that any society can ever hope to aspire to. That is, if you put together all the groups that can never, ever work, you'd have 25% of the adult population, so that 75% partipation represents the absolute limit that we might ever expect to reach. Isn't it reasonable to think that as we close in on that absolute limit the rate of growth might slow? Instead of increasing by 2 percentage points each decade, perhaps from now on the percent of the adult population participating in the work force will only grow by 1 percentage point each decade.

I suggest this hypothetically, but if any of it were to turn out to be true, it would justify the Fed in treating the unemployment rate as the more accurate measure of the slack in the labor force.

Or they're worried about inflation, the declining dollar, etc.

To be cruel (probably deservedly so) - Bush has been re-elected. If there needs to be a recession (excuse me, 'plateau', 'time to catch a breath') soon, this is a good time for it.

Evidently the Federal Reserve Governors have decided that we are close enough to full employment to raise short term interest rates each meeting. We can look for at a Federal Funds Rate that will rise from 2% to 3% in coming months. The economy will be slowed in growth from this winter. Hopefully the slowing growth will not be much of a problem for workers. Long term interest rates may finally begin to rise to approach 5%. We need to hope the commercial and residential real estate markets are not too harshly effected.

The problem I have with the Fed perception that the labor market is strong enough for a continuing of the cycle of interest rate increases, is that wage and benefit increases are barely keep up with inflation. Possibly the Fed expects labor costs to climb, possibly the concern is that material cost increases are likely to increasingly effect consumer prices.

"The Fed appears to be slowly coming together on a view that the economy does not have all that much slack left in it--a view that the unemployment rate is a better indicator of the labor market than simply comparing payroll employment to population trends."

If the Governors really thought this, we would be seeing a 50 basis point hike, not 25. The Fed would be taking rates more rapidly to where they presumably belong in a steady state.

They still see some downside risk, and slack in the labor market, it seems to me. In any case, Fed actions seem more than anything else to be aimed at containing risk aversion. Thus we see caution in each move, and a desire not to surprise market participants driving each decision, rather than economic technicals.

Thus we see death by a million paper cuts, instead of the single, humane slash to the jugular.

And we create an environment where the market starts to expect increases independent of whether they are justified.

And, having gone from 66% employment to 62% employment, we speak of how well things are going.

Could this be a return to form for Greenspan? Back in 1990-'92, Greenspan spent some time scurrying around the world telling business leaders that the Fed's job was to hold down inflation by keeping 6 to 8 million people out of work. His theory then was that inflation is driven solely by wage increases.

Today, adjusting for population increases and people working in what would normally be their retirement years, those numbers would be just about double--14 to 16 million unemployed. Thus does present-day policy seem but an extension of previous policy: By forcing down labor participation rates, Greenspan prevents inflation.

"The Fed appears to be slowly coming together on a view that the economy does not have all that much slack left in it--a view that the unemployment rate is a better indicator of the labor market than simply comparing payroll employment to population trends. It's not at all clear to me why they are reaching this judgment, because it is not mine."

Or is it just a pretext? The Fed is not mandated to support the dollar so they can't openly argue to be doing anything for that purpose. But they may still want to do so perhaps because they are worried that a dollar crisis would result in an acceleration in the inflation rate (as the dollar cost of consumer imports and some intermediary goods, including oil, rises and aggregate demand is boosted via net exports). Just an hypothesis.

Brad, it's simple. Now that Bush has been reelected, they have to keep pretending that the economy is going well.

(of course, the "they're propping it up" conspiracy theory is diametrically opposed to the "they're orchestrating another recession *now* - ASAP after the election - so recovery is kicking in for Bush'08" conspiracy theory. They can't both be right... but that means they can't both be wrong, doesn't it?)

In Argentina, raising the prime rate is called an "austerity measure", designed to increase interest payout to Argentina's global investors through the World Bank/IMF. Never mind principal.

But in the Good Old USA, Fed puts a different spin on it. Instead of saying it's an austerity measure imposed by foreign creditors to stop the plunge of the US$ against world currencies, they say "Chairman Greenspan raised the prime to put the brakes on inflation", though that statement is absurd on the face of it.

Commodity inflation is due to the war in Iraq, the burgeoning Chinese economy, and the death of American IT, manufacturing and farming. There is zero labor inflation, credit inflation is stable at 19%, and mortgage rates are falling again.

None of which is reversed by raising the prime. China is growing like a weed. The Fed couldn't raise the prime fast enough to starve the $ pump China has devised, siphoning off US$'s for black plastic wampum, then rolling them into AU real estate and CA resources, while holding their own currency to ours, like a tick on a coon hound.

Why can't the Fed M-F'rs just be honest, once in their miserable lives, and just say, "We raised the prime rate because the foreign banks imposed it as an austerity measure for our profligacy. It won't do a damn thing for inflation, better buy what you need while you still can, because between currency devaluation and commodity inflation, your future lie in a wheelbarrow."

Asking the obvious question.

In light of High gas price but no signal of inflation. Could it indicate that we don't make our own consumer products? And that the reason price remains so low because a lot of people shop in Walmart where the products are made somewhere else that is not affected by local gas price.

ie. we shouldn't be too happy that high gas price doesn't introduce consumer product inflation. It should tell us we are CONSUMING TOO MUCH imported consumer product!

(I'm not an economist as should be obvious. I'm also not the biggest Greenspan fan but...)

Brad needs to stop looking at payrolls and start looking at the dollar. The tightening is measured and makes perfect sense. Given that Alan Greenspan can not effect the fiscal impulses of our beloved Politburo, he has to do what he canto put the dollar in a better position, as steadily as he can. If the foriegn banks are to be rewareded for funding our deficits they must be paid for it and interest rates need to rise. Likewise, if we are going to increase the pain of borrowing and increase the gain of saving, interest rates need to rise. If we are to avert inflationary effects of high oil prices interest rates need to rise. If we are to moderate a surge in economic activity if oil falls quickly interest rates need to rise. The rate can't stay accomodative for ever. Alan Greenspan is using the only lever he truly controls to send the only signal he should be.

The late 1990's are over and we have to be grownups about that. I'm happy to have lived during an era when labor had pricing power but that era is over and given that we are ruled by morons we have to adjust to irresponsible fiscal policy and the people with brains need to work subtly to rebalance the global accounts situation in very measured ways.

The crystal ball I found in my basement last week says the interest rate should be around 4 percent right now. Who am I to argue. If we need to get there in fits and starts with 25-point steps that's probably fine because it beats having to go to 8 percent in the blink of an eye to defend the dollar in the year 200? when the Asian pegs evaporate. Steady as she goes Captain Greenspan!

It strikes me the dollar is set up for a triple-whammy: 1) The only politically doable way out of our debt situation is to inflate it away by printing more dollars. Who in their right mind would hold dollars against that trend, all else equal? 2) There are already a huge surplus of dollars held by our "investors". They're misallocated already, and it would be only sensible for them to look to reallocate to less risky options. 3) Those dollars are only as good as the assets they can purchase. Which means what? Bonds? Headed down as interest rates rise on short-term fed moves and long term risk premium rises. Stocks? American companies are less competitive by the hour. As Bill Gross puts it, we're gone from being a manufacturing economy to a service economy to a finance economy. We "make" money increasingly by just shifting it around, not doing anything competitively against world manufacturing or services. How can US stocks at these historically high ratios be a good bet under these competetive conditions? Real estate? Look at the values. What sane person would buy real estate denominated in dollars at these levels? 4) With Bush in again, there's no sanity in sight as far as dealing with any of these issues.

Besides currency pegs (the longer they hold, the more power China gets over us) I can't see any affirmative reason to hold dollars right now. I get the sense China's quietly pulling the rug out without causing too much of a fuss (loosening gold holding regulations for its citizens, for example).

I suspect the way it may play out is at some point the American consumer will be just too underwater to keep up spending at high levels. China will observe this and reason that the peg has lost its effectiveness relatively speaking, as the American consumer will have spent herself under the table. At that moment it may make sense for China to start unloading dollar-denominated assets and release the peg. I'd imagine at that stage all hell breaks loose as bond prices collapse, interest rates go back up to double-digits, and the dollar finds amazing new lows.

Does this make sense to anyone else?

By taming the deflationary threat, the Fed is appropriately unwinding the extraordinary easing or safety net that it created to address the risk of a deflationary spiral. Unemployment figures and economic slack aside, the Fed is simply trimming excess liquidity in context to what it perceives the current economic environment to be -one of price stability rather than deflation.

On a side note, the interplay between fiscal and monetary authority has been on the minds of Fed officials for a couple of months now. My take on this issue and specifically and pressures being imposed on the monetary authority by the fiscal authority can be read at my blog, www.thecapitalwire.com.

hbj,

"3) Those dollars are only as good as the assets they can purchase. Which means what? Bonds? Headed down as interest rates rise on short-term fed moves and long term risk premium rises."

If the yield curve steadily goes flatter as we raise short term rates to 4-5 percent. It has been argued that 10-30 year bonds (treasuries in particular) would hold their value as investors antiicpate an inverted curve and begin to try and protect themselves from recession.

Here is my cheat Sheet:

http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve#flat

China does not want to get caught holding worthless dollars any more than we want to stagflate our way out of our obligations. As unfair as it seems if things turn ugly we still have that ace at the end of the day.

Why is the Left so confident that labor demand is weak? I've explained why payrolls are malfunctioning, but even if we accept household numbers as correct ... then the debate becomes a question of labor force participation rates. But is it so hard to imagine that labor supply is the cause, not "weak labor demand"? Is it possible that wealthy American teens have shifted their labor-leisure preferences after 9/11? Or are those preferences eternal and unchanging?

How can we resolve whether declining participation is driven by LS or LD? I think we can look to real hourly earnings (the price of labor) ... which is up over the last 3+ years. That implies LS is contracting and/or LD is expanding. Other ideas?