Tuesday, June 18, 2019

Is the interest rate the Fed pays banks on reserves now more important than the Federal Funds Rate?

The Federal Funds Rate is set (maybe influenced is better) by the Fed. It is what banks pay each other when they borrow to meat their required reserves. But this market is smaller than it used to be. So maybe the Federal Funds Rate is not what matters any more. And maybe the sectors of the economy that are most affected by interest rates make up less of the GDP than they used to.

See Has the Federal Reserve Lost Its Mojo? The central bank has less control over market interest rates today than at any time in its history by Phil Gramm and Thomas R. Saving. Excerpt:
"When the Federal Open Market Committee’s meeting concluded last month, reporters focused on the federal-funds rate, announcing that it would be held constant at 2.25% to 2.5%. Unnoticed by even the financial media, and unmentioned in the lead section of the FOMC’s statement, was its decision to cut the interest rate the Federal Reserve pays on bank reserves—a rate that, unlike the fed-funds rate, still has a direct effect on the money supply. The Fed cut the rate paid on reserves because the market yield on one-year Treasurys had fallen below it, inducing banks to build up excess reserves. When banks expand reserve holdings, the money supply contracts—so the Fed was forced to act.

But it wasn’t enough. Because market rates have continued falling since the last FOMC meeting, even the lower rate that the Fed now pays on reserves is 0.35 percentage point higher than Friday’s yield on one-year Treasurys and 0.25 point above the yield on 10-year Treasurys. The return differential has caused banks to increase excess reserves by 5.5%, or $65 billion, over the past month. The size of these yield spreads and the buildup of excess reserves virtually guarantee that the Fed will again cut the interest paid on reserves at Tuesday’s FOMC meeting.

The rate paid on reserves receives too little attention. As a result of the unprecedented monetary easing of the Obama era, when the Fed bought or offset 45% of all federal debt issued—more than five times the amount it bought to support the World War II effort—commercial banks now hold massive excess reserves. By paying interest on reserves, the Fed effectively converted them into income-yielding assets, giving banks an incentive to hold excess reserves instead of expanding credit and the money supply. As banks became awash in liquidity, they all but stopped engaging in borrowing and lending in the overnight fed-funds market. The fed-funds market has contracted 80% since 2008, meaning the fed-funds rate has almost no direct effect on monetary policy."
Related article: Fed Stimulus Just Ain’t What It Used to Be: Federal Reserve may cut rates soon, but its efforts may have less oomph due to changes in the U.S. economy by Justin Lahart of The WSJ. Excerpt:
"A big reason is that the role of some of the most interest-rate sensitive industries in the labor force—the ones that hire like crazy in response to low rates—has been greatly diminished, argue economists at the Federal Reserve Bank of Kansas City. In 1980, construction and manufacturing accounted for about 25% of total U.S. employment. By the time the 1990-91 recession began, that had fallen to 21%, slipping to 18% before the 2001 recession and 15% ahead of the last recession. Now it is at 13%.

Another important difference between this last expansion and previous ones is that housing, after falling by so much in the downturn, had such a modest comeback. Home sales remain below their late 1990s levels, when the U.S. population was lower, and housing’s direct share of gross domestic product is now at levels which in other periods would have been associated with recession. The share of Americans who own the home they live in also has fallen.

Although lower rates might stimulate home sales a bit, a variety of forces are weighing on housing, including out-of-reach prices. This matters because housing is one of the ways that rate cuts have traditionally boosted the economy. Lower mortgage costs prompt people to buy not just a house but many other things—furniture and appliances—that go with it.

Mortgage refinancing—another avenue for lower rates to make their way into consumer spending—also might be lacking. Many homeowners already refinanced during the years coming out of the recession, locking in ultralow rates.

Then, there is the increased caution Americans seem to be taking with their finances since the financial crisis, leaving the saving rate substantially higher than before the recession. Even a decade later, memories of the severity of the downturn may still be too fresh for people to respond exuberantly to lower rates.

It could take more than just rate cuts to get the economy really going again."

Monday, June 17, 2019

What about all this plastic pollution?

I use the book The Economics of Public Issues as a supplemental book in my principles classes. It often chapters on trash, recycling and plastic bags.

The San Antonio Express-News ran an article by Chris Tomlinson called Solving plastics pollution takes more than just banning bags. Excerpts:
"More than half of all plastic by weight is used only once before going to a landfill or the ocean"

"Only 7 percent is recycled, but only once, before it goes to a landfill."

"Most marine plastic waste comes from Asia, and overwhelmingly from China, India and Thailand. More than 86 percent of the plastic found in the ocean was dumped first in either an Asian or African river and flowed to the sea."

"Plastics play an essential role in solving our other global problem: climate change. Plastics make things lighter, which means they require less energy. Plastics can seal buildings and coat windows to provide insulation and save on climate control.

Some plastic items should be banned, but most improve our lives. They need to be recycled."

"The root cause of plastic pollution is not what most people imagine. The solution is more complicated than they would prefer, and simple slogans will take us down the wrong path. Cleaning up the plastic pollution smothering the planet requires industry, consumers and government to compromise - not vilify one another."

Sunday, June 16, 2019

Do We Have A Zombie Economy?

See When Dead Companies Don’t Die: The policies created to pull the world out of recession are still in place, but now they are strangling the global economy by Ruchir Sharma in The NY Times. He is author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World” and is the chief global strategist at Morgan Stanley Investment Management.

This ties in to some recent posts I did on the recovery and Joseph Schumpeter (links below). Excerpts:
"Since the end of the recession, the economy has grown at about 2 percent a year in the United States and 3 percent worldwide — both nearly a point below the average for postwar recoveries.

What explains the longest, weakest recovery on record? I blame the unintended consequences of huge government rescue programs, which have continued since the recession ended."

"Once the crisis hit, however, governments erected barriers to protect domestic companies. Central banks aggressively printed money to restore high growth. Instead, growth came back in a sluggish new form, as easy money propped up inefficient companies and gave big companies favorable access to cheap credit, encouraging them to grow even bigger."

"Central bankers had hoped that low interest rates would spur investment, increasing productivity and boosting growth. But a recent paper from the National Bureau of Economic Research shows that low rates gave big companies an incentive and means to grow bigger. As their power grows, workers’ share of national income has been shrinking, fueling inequality — and anger.

Four airlines and three rental car companies account for more than 80 percent of the American travel markets."

"Start-ups represent a declining share of all companies in Britain, Italy, Spain, Sweden, the United States and many other industrialized economies. The United States is generating start-ups — and shutting down established companies — at the slowest rates since at least the 1970s."

"Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s. Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials and labor."

"The problem, however, is that government stimulus programs were conceived as a way to revive economies in recession, not to keep growth alive indefinitely. A world without recessions may sound like progress, but recessions can be like forest fires, purging the economy of dead brush so that new shoots can grow. Lately, the cycle of regeneration has been suspended, as governments douse the first flicker of a coming recession with buckets of easy money and new spending. Now experiments in permanent stimulus are sapping the process of creative destruction [see link below about Joseph Schumpeter] at the heart of any capitalist system and breeding oversize zombies faster than start-ups.

To assume that central banks can hold the next recession at bay indefinitely represents a dangerous complacency. Corporate debt levels continue to rise; government debts and deficits continue to rise. If there is a sudden break in confidence, the damage will be that much greater and governments may find themselves too broke to stem it."
Related posts:

Saturday, June 15, 2019

Over 40 years, 70% of the population made it into the top 20% of earners for at least one year

See Earnings in the U.S.: A Game of Chutes and Ladders by Jo Craven McGinty of The WSJ. Excerpts:
"Over roughly 40 years, 70% of the population made it into the top 20% of earners for at least one year, according to researchers at Cornell University and Washington University in St. Louis. But only about 21% remained there for 10 consecutive years, and even fewer clung to the top rung for a solid decade.

“A small group of people persist at the high and low levels,” said Thomas A. Hirschl, a Cornell sociologist and one of the researchers who studied the phenomenon. “But a big crowd of people move in and out.”"

"by age 60, more than half the population occupied the top 10% for at least one year, and 11% made it to the top 1% for that length of time."

"But only 0.6% remained at the highest level for 10 consecutive years, and less than 7% remained in the top 10% for that long.

On the lower rungs of the ladder, 79% of the population experienced at least one year of economic insecurity, when, for example, the head of a household was unemployed, and half the population experienced at least one year of poverty or near poverty."

"In 2016 . . . the income cutoff for the top 1% was $480,804. The top 50% earned 88.4% of total adjusted gross income. And the bottom 50% earned 11.6%."

"Earlier studies examining PSID data, from 1967 through 1976 and from 1977 through 1986, found that around 50% of earners fell out of the top quintile, while around 45% moved up from the lowest quintile."
Related posts:

The preference for partners of the same education has significantly increased for white individuals

Is The Rich-Poor Education Gap Getting Bigger?

Mean Family Income By Quintiles

The American middle class is shrinking because more people are becoming upper middle class and rich

Some Possibly Surprising Facts About Poverty

Does the top 1 percent earn 85 percent of income? Is it 52 percent? Something Else?

Study Finds Wealth Gap in Graduation Rates

Friday, June 14, 2019

Are Farmers Markets An Example Of Perfect Competition?

Perfect competition is one of the four market structures (the others being monopoly, oligopoly and monopolistic competition). It has free entry, meaning nothing stops new firms from coming in, there are many competitors and all selling an identical product. This report from Jodi Helmer of NPR seems to show this.

See Why Are So Many Farmers Markets Failing? Because The Market Is Saturated. Excerpt:
"When the Nipomo Certified Farmers' Market started in 2005, shoppers were eager to purchase fresh fruits and vegetables, as well as pastured meats and eggs, directly from farmers in central California.
But the market was small — an average of 16 vendors set up tables every Sunday — making it harder for farmers to sell enough produce to make attending worthwhile.

"The market in Santa Maria is 7 miles in one direction [from Nipomo], and the market in Arroyo Grande is 7 miles in the other direction. Both are bigger markets, so shoppers often went to those markets instead," explains market manager and farmer Glenn Johnson.

The decision to host the market on Sundays also proved detrimental. Many of the farmers participated in six or more additional markets each week and wanted Sundays to rest, says Johnson.
In 2018, with attendance down and just five vendors signed on to sell produce, organizers of the Nipomo Certified Farmers' Market decided to shut down the event at the end of last season.

Nationwide, the number of farmers markets increased from 2,000 in 1994 to more than 8,600 in 2019, which led to a major problem: There are too few farmers to populate the market stalls and too few customers filling their canvas bags with fresh produce at each market. Reports of farmers markets closing have affected communities from Norco, Calif., to Reno, Nev., to Allouez, Wis.

Markets in big cities are hurting too. The Copley Square Farmers Market in Boston reported a 50 percent drop in attendance in 2017. In Oregon, where 62 new markets opened but 32 closed, the researchers of one multiyear study concluded, "The increasing popularity of the markets is in direct contrast with their surprisingly high failure rate."

Diane Eggert, executive director of the Farmers Market Federation of NY, received numerous reports of closings; she believes the problem is one of pure mathematics.

"There are way too many markets," she says. "The markets have started cannibalizing both customers and farmers from other markets to keep going."

Eggert also points to myriad other options that consumers have for accessing fresh foods, including community-supported agriculture and home delivery options from companies such as Amazon, Instacart or Blue Apron that might be more convenient than shopping at a Saturday morning market."

Thursday, June 13, 2019

Joseph Schumpeter, Capitalism and Intellectuals

See Socialists, Knowledge of History and Agency. These are letters to the editor of The WSJ in response to an article about socialism by Joseph Epstein. The one below reminded me of a 1992 article by Robert Samuelson in Newsweek.
"Joseph Epstein’s “Socialists Don’t Know History” (op-ed, May 30) on the abysmal historical knowledge of young people brings to mind the prophesy of the keenest of economists, Joseph Schumpeter, in 1942 when he said that capitalism would destroy itself by breeding a “new class: bureaucrats, intellectuals, professors, lawyers, journalists, all of them beneficiaries and, in fact, parasitical on them and yet, all of them opposed to the ethos of wealth production, of saving and of allocating resources to economic productivity.” The 77 years since then has proven Schumpeter a major prophet.

Larry W. White
See also Schumpeter: The Prophet by Robert Samuelson. Excerpts:
"He is best known for his evocative phrase "creative destruction." Schumpeter saw capitalism as a system that produces material progress-rising living standards, more creature comforts-through the turmoil of new technologies and business methods. The "entrepreneur," a man of great vision and energy (in his day, there were few women in business), was the driving force of change. Sam Walton and Wal-Mart fit his theory perfectly."

"It is precisely because the "gale" (his term) of creative destruction seems so ferocious that Schumpeter has enjoyed a revival. But he had a second stunning insight that also is relevant. He argued that capitalism's vast economic success generates popular dissatisfaction with capitalism. As prosperity increases, progress is taken for granted. Capitalism's remaining shortcomings-including the disruption caused by creative destruction-become increasingly intolerable. Finally,, prosperity expands the class of intellectuals who are contemptuous of capitalism."

""[C]apitalism ... creates, educates and subsidizes a vested interest in social unrest," Schumpeter wrote. Popular discontent and intellectual hostility would, he thought, doom capitalism and lead to socialism."

"capitalist economic success, because it is incomplete and interrupted, breeds its own backlash. The sour public reaction to the present slow economic recovery only highlights a longstanding trend. The growth of Big Government-here, in Europe and in most advanced market societies-has aimed to placate popular discontent without undermining capitalism's ability to raise living standards."

"Its [his book Capitalism, Socialism and Democracy] genius is to explain why capitalism succeeds as Adam Smith imagined, even though modern economies lack Smith's perfect competition with hordes of tiny companies. In today's industries, big firms often dominate and enjoy monopoly profits. But most monopolies are temporary, Schumpeter argued. Their high profits, far from stifling competition, inspire more innovation from entrepreneurs and big companies alike. Cable TV assaults the networks; fax machines replace mail; McDonald's invents fast food.

But the drawn-out nature of this process makes capitalism hard to defend politically, Schumpeter said. The argument for it "must rest on long-run considerations." The "unemployed [worker] of today [has] to forget his personal fate and the politician of today his personal ambition." This was not likely."

Wednesday, June 12, 2019

Is there really a shortage of construction workers?

See Behind Deadline: Home Projects In Colorado Suffer From Worker Shortage by KAREN SCHWARTZ of the Associated Press.

A shortage means that the price is below the intersection of supply and demand and that the quantity demanded is greater than than the quantity supplied. It does not mean we simply have less of something than we used to. If price were too low, we would expect to see it rise until quantity demanded equals quantity supplied again.

This article talks about a shortage of construction workers. If there really is a shortage, we would see wages starting to rise. But that is not discussed.

Lowe’s offering employees tuition and other incentives might be the equivalent of rising wages since if a worker does not have to pay to learn to be a carpenter, that field becomes more lucrative. But again, the article does not discuss that.

Some of this is driven by retirements, which means a decrease in supply which leads to higher prices (or, in this case, wages). Excerpts from the article:
"Current estimates indicate there are about 300,000 unfilled jobs in the construction industry, and the industry is expected to need an additional 747,000 workers by 2026, according to the U.S. Bureau of Labor Statistics.

An August survey of nearly 375 members of the National Kitchen and Bath Association found that almost two-thirds of the respondents said they had difficulties hiring skilled workers in the previous year, and nearly 70% felt the problem had gotten worse since 2016.

“Labor shortages have impacted start dates and completion dates on construction and renovation projects, with NKBA members citing delays on 30% of jobs,” said Bill Darcy, chief executive officer of the trade association.

A look at 15 different trades found shortages in them all"

"The seeds of the current labor shortage were planted during the Great Recession, when a lack of construction jobs prompted many workers to leave the industry.

“Not enough of them have returned to help us close the gap,” Darcy said.

Compounding the problem is the graying of the remaining workforce, with the median age for a construction worker at 42.5 years, according to January figures from the Labor Bureau. It’s estimated that for every five workers retiring from the industry, only one is entering it"

"Players in the industry are ramping up efforts to address the impending crisis, launching incentives to try to recruit new workers, especially young people, to the trades."

"Lowe’s last year started offering employees tuition and other incentives to train for jobs such as carpentry, plumbing, and appliance repair."