Brad DeLong's Semi-Daily Journal (2004)

I agree with Brad. Given the Fed's history under Greenspan, they will not move unless unemployment moves significantly lower. My thought is that in the absence of even hotter growth, unemployment has to go below 5% for the Fed to start applying the brakes. I think investors will bail on the bond market before the Fed makes its move. If the Fed raised rates before the election with employment still lagging, it would set the Bush administration to howling.

So what has been the cumulative productivity growth over the past several years?

As high as 20%?

Seems hard to believe. Does anyone have any hard information (case studies, etc) on the detailed changes which caused this?

The productivity and GDP figures are impossible to believe if you accept that the CPI and PPI are hedonically adjusted (lower). If the inflation numbers were honest, a 5% GDP would get me excited. (If GDP and productivity are so great, why hasn't my paycheck gone up???)

I don't know how much more expansionary the monetry policy can get. We have got to be in a period of world record monetary expansion and 5% is the best our central planners can engineer.

I agree with Brad that the Fed will hold off on increasing rates until the employment picture improves. The bond market is starting to smell inflation and will bail before the Fed moves. Well, at least the experts with real money to manage will bail, i.e., Bill Gross.

http://www.bls.gov/schedule/archives/prod_nr.htm

Productivity increases are a combination of new technology and structural change. The specifics are not clear from the aggregate numbers. There is a lot of inefficiency in American business. There are numerous factors making a contribution.

For example, in steel, the glut forced consolidation of numerous inefficient big dinosaur steel factories. Many of the big dinos closed. The far more efficient mini-mills are left. The mini mills are about 7 times more efficient in labor productivity than the dinosaurs. This means there is a lot of room for productivity to increase. Closing a large inefficient factory can significantly increase productivity.

Other industries have similar stories, but each has its unique attributes.

At the beginning of 2001, we had a big glut of tech products and underutilized capacity. We still have low capacity utilization. This is best addressed by fiscal demand stimulus. However, since Bush is a supply side idiotlogue, the Fed monetary stimulus is getting no fiscal demand help. Bush is even delaying military spending and driving down weapons stocks. Anything to support his tax cuts for the wealthy. Nothing in the way of demand stimulus.

Bush fired his first economic team after the 02 election. His new one does not seem to be an improvement.

when will you economists realize that the fed is playing politics -- how shocking! There will be no significant rate change unless and until the President has won reelection. Dr. G won't have two Bush scalps to what he regards as his discredit. I might add that the number of Fed governors who would feel definitely is very close to zero. but you enjoy your strange unreal world so do pay no attention to what is going on.

Is the converse of Brad's point true? If growth isn't all that high, meaning a shrinking output gap, would the Fed consider raising rates, even in the face of no inflation? Is it because there are so many rate increments to tick off before we're even close to contractionary policy, and the Fed wants to get started? (Has there ever been a 3 point hike?)

I don't get the talk of raising rates, I guess. I've seen one report of a mild increase in producer prices. Is that enough to begin to move the foot from the accellerator to the brake?

Talk of impending rate hikes stimulates the very last of the house buyers to act. Expectations management, it is. "Everything is normal and in control. We're about to raise rates, in fact."

red is right. You economist keep talking about, emmm, the economy. No way is a Greenspan led Fed going to raise interest rates during an election year with a sitting Republican president.

I think Red's hit it right. Greenspan has proven beyond doubt that he's completely sold out to Bush's political needs. His public backing of Bush's tax cuts despite his definite knowledge of their ineffectiveness for the stated purpose AND his knowledge of their effect on federal deficits tells us he no longer gives a shit about the actual effects of monetary policy beyond getting Bush re-selected.

My guess would be that rates will remain unchanged until after the election. Even if the numbers over the next two quarters show inflaton ramping up to double-digit territory and employment skyrocketing to fuel that inflation. Greenspan will wheel out all manner of insane rationalizations to leave rates where they are because that's what will help the Shrub to win.

I don't disagree with the suspicions about Greenspan--I want the tape of the January, 2001, private meeting the troika held before the Younger took office--but the market certainly believes rates are going up at least 0.25% in the next three months.

Proof: look at the 3x6 implied forward of the last three T-Bill auction results (4/15, 4/22, and 4/29; dates in parenthesis are dates of the auction):

Date 3-Month 6-Mont 3x6fwd
15 April (12 Apr) 0.915% 1.025% 1.132%
22 April (19 Apr) 0.949% 1.101% 1.250%
29 April (26 April) 0.985% 1.188% 1.388%

By April 19th, rumor was out that Greenspan’s address the next day would focus on inflation and suggest a rate rise. On April 20th, he appears to have removed the doubt from the market that there would be at least a 25 bp rise.

Given all the publicity about the “error” of 1994, one might think that a 50bp rise would be more appropriate (i.e., throw the elbow once, and you won’t have to do it again before the election.). So maybe the market believes that there is a 50% chance of a 50bp rise in the next three months.

But that’s not the way to bet.

I have no idea what the Fed will do. But there are abundant signs of price increases at the wholesale level. And it's hard to see how the Fed ignores nominal income in favor of some labor market target, especially with a jittery bond market ready to take yields higher. Does the fed wait until it's too embarassing not to act?

slightly off-topic, but topical:

Europen competitiveness report, first quarter 2004

The full report is available on
http://www.europa.eu.int/comm/economy_finance/publications/priceandcostcompetiteveness_en.htm

Price and Cost Competitiveness
--Last update 23 April 2004--

First quarter of 2004
This report contains data for the European Union Member States, the ten future Member States, two candidate countries and five other industrial countries. Aggregate measures for the European Union as a whole (EU) and the group of countries participating in the euro area (EUR-12) are presented as well. Each country (or country group) is compared with (the rest of) 24 industrial countries (the 15 EU countries, Norway, Australia, Canada, Japan, the United States, Mexico, New Zealand, Turkey and Switzerland), with the European Union and with the euro area.

ECFIN/C-1/208/1/04-EN
PART 1
MAIN DEVELOPMENTS

DEVELOPMENTS IN THE COST COMPETITIVENESS
OF THE EUROPEAN UNION, THE UNITED STATES AND JAPAN
MAIN FEATURES
The euro against major international currencies
• During most of the first quarter of 2004, the euro continued to appreciate against most
other major currencies. On average, the euro gained 5% against the US dollar, 3.5%
against the Japanese yen, and 1% against the Swiss franc. The appreciation came to an end
in March, when the euro returned to levels comparable to the average rates in December
2004 against the US dollar, the Japanese yen and the Swiss franc.
• The nominal effective exchange rate of the euro against the currencies of 12 industrialised
countries appreciated by 1.5% during the first quarter, leaving it at around 10% above its
inception level. The pound sterling appreciated by around 4%, while the dollar and the yen
depreciated by about 3% and 1% in effective terms.
Relative cost and price indicators: international developments
• The continuing appreciation of the euro exchange rate led to a further deterioration of the
cost competitiveness of euro area producers (based on ULCE and measured against 12
industrialised countries) of about 1.5% in the first quarter. Compared to one year ago, cost
competitiveness of the euro area producers deteriorated by 6%. In a long-term perspective,
the current euro area competitiveness position is about 4% worse than its 1980-2003
average.
• Due to the general trend depreciation of the US dollar, the real effective exchange rate of
the dollar depreciated by more than 3% over the first quarter of 2004. Compared to the
first quarter of 2003, the US cost competitiveness has gained more than 12%. The current
competitiveness position is about 10% better than its historical average. The yen
depreciated by 1.6% in real effective terms over the last quarter, leading to a competitive
situation that is more than 10% better than its historical average.
Relative cost and price indicators: intra-euro area developments
• Over the last year, the Netherlands, Spain, and Italy saw a continuing deterioration in cost
competitiveness relative to euro area partners. In contrast, Belgium and Luxembourg,
Germany, France and Finland experienced an improvement in intra-euro area cost
competitiveness. In the other Member States, the indicators are mixed.
• In a longer term perspective, intra-euro area cost competitiveness is better than the 1980-
2003 average in France and Finland. The current position of Spain, the Netherlands and in
particular Portugal is considerably worse than their respective long-term averages. For
other countries, the situation is less straightforward as different indicators lead to different
results. In Ireland, the cost competitiveness situation is much better in the manufacturing
sector (improvement by 49%), while deteriorating in terms of GDP deflators (deterioration
by 12%). In Germany, the cost competitiveness has deteriorated in the manufacturing
sector, while improving in the whole economy in general. In Greece, the cost
competitiveness has deteriorated in the whole economy (by about 16%), but improved in
the manufacturing sector.
Relative cost and price indicators: non-euro area Member States
• Danish competitiveness slightly worsened against the euro area over the last year,
maintaining the Danish price and cost competitiveness in a less favourable situation
compared to its historical average. On the contrary, the competitiveness position of
Sweden has slightly improved and is more than 7% better than its historical level (ULCE).
• Despite the appreciation of the pound sterling against the euro and the US dollar in the
first quarter of 2004, UK cost competitiveness relative to the euro area has improved
slightly over the last year. However, competitiveness indices in terms of unit labour costs
in whole economy remain about 14% above their 1980-2003 average relative to the euro
area.

II. DEVELOPMENTS WITHIN THE EUROPEAN UNION
Within the euro area, diverging movements in costs and prices may change the
relative cost competitiveness positions of euro area Member States. Table 5 and Chart
10 show three measures of the real effective exchange rate of individual Member
States against EUR12. The different measures do not always give a uniform picture of
the movement over time in the real effective exchange rate of a given country against
its partners and, as such, the indicators of cost and price competitiveness need to be
interpreted carefully.
In some cases, deviating price and cost trends among euro area Member States could
lead to a build-up of competitive imbalances which might ultimately hamper
economic growth and cause unemployment in individual Member States. In other
cases, however, longer-term changes in relative prices and costs may be justified by
changes in economic fundamentals related e.g. to a catching-up in the level of
economic development, changes in non-price competitiveness factors, or changes in
underlying savings and investment patterns. Moreover, differences in cyclical
positions may cause movements in relative costs and prices in the short term. An indepth
assessment of movements in real exchange rates therefore requires a
comprehensive analysis of the economic situation in each country seen in a longer
term perspective. This report merely provides a descriptive overview of movements in
intra-euro area cost and price competitiveness indicators.

There is also the ( Bianco) view ( a tad more sophisticated than red's?) that a June move (increase) in the rate would be perceived as politically neutral whereas a Sept move would be a harder proposition to make out.
Jim's remark about embarassment I think is covered by incessant self promotion from both Greenspan and Bernanke. It is the fashion, no?
Thanks Ken for the numbers on the last 3 T-bills. Can you tell us ( I mean me) how this is related to Japan's exit from the fx market?

The problem with looking to productivity to assess the Fed's read on GDP is that it may be backward. If the Fed is on hold till the labor market improves, then productivity is important partly because it mediates between output growth and employment growth (also because it mediates between output growth and inflation pressures). We already know most of what there is to know about hours worked in Q1. The productivity data are derived from hours worked (and GDP), not the other way around.

So, unless Fed officials take the view (as some seem to) that they have been wrong about the trend in productivity, and need to see Q1 productivity to assess the that trend before they have any faith in their jobs forecast for Q2 and beyond, I'm not sure why the Q1 GDP link to productivity would have a big impact on Fed thinking about rates.

Oh, for those who have once again fallen for the "dumb economist" story, I think you're seeing the nearby trees, while missing the forest. The discussion here, today, is about the Fed and the economy. Economists also discuss, on Brad's web log and elsewhere, the Fed and politics. You were apparently not in class that day, so you missed the discussion. Today's discussion, today's trees. Make a practice of reading economic discussions, see the forest.

"Oh, for those who have once again fallen for the "dumb economist" story, I think you're seeing the nearby trees, while missing the forest. The discussion here, today, is about the Fed and the economy. Economists also discuss, on Brad's web log and elsewhere, the Fed and politics. You were apparently not in class that day, so you missed the discussion. Today's discussion, today's trees. Make a practice of reading economic discussions, see the forest."

Posted by K Harris at April 27, 2004 08:27 AM

IIRC, Greenspan endorsed the Bush tax cuts, way back in 2001.

K Harris divides the class in 2 ( politics & economics ) and Barry gives us a snapshot of why interdisciplinary studies are so popular.
I need to hear K expand on "mediates" here:
"If the Fed is on hold till the labor market improves, then productivity is important partly because it mediates between output growth and employment growth (also because it mediates between output growth and inflation pressures)."
Are you saying that the first appearance of declining productivity growth will be a signal that employment growth is on its way? That declining productivity growth will herald lower inflation?
You can tell mediation is not my field.
Greenspan is using "awsome" productivity (NPR ) to placate those who fear interest rates are on the horizon.
Is this "backward" (productivity calculations -> employment forecasts)? Just deceitful IMHO. We are supposed to feel reassured that the economy is strong and healthy ( look at those quarterly profits!) despite the poor employment picture, a picture that will brighten(?) in the near term. So with current inflation running around 5% and Taylor rules suggesting prime should be ~3%, our economy is strong enough to withstand the current 1% prime. This is persuasive if you view the chairman as The Pope. (no offence to Catholics)
AG's earlier remarks about ARMs indicate that he has a wider view of the economy than the awsome productivity that is improving the picture for Wall street.

Greenspan isn't in Bush's pocket. I remember a lot of similar accusations the other way - that he was in Clinton's pocket - during the early '90s. He is managing the money supply as best he can. Of course that works to the advantage of the incumbent president. (That said, I'm sure he is much more comfortable with the idea of Bush appointing his successor than Kerry. He is still a Republican.)

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