Worthwhile Reads – October 3rd

Annie Lowrey, from New York Magazine, correctly states that the monthly jobs report, though good, is not as important as it used to be. She follows Chair Yellen’s lead and notes other indicators that are not so promising:

“A broader set of indicators generally gives a dimmer view of the economy — and that remains true this month, good headline number aside. Labor-force participation has declined — partially because the baby boomers are retiring, but also because prime-age workers are fleeing the job market. Churn has remained slow, with workers too timid to quit their jobs. The middle class is poorer than it was when the recession started, poorer than it was when the recession ended, and poorer than it was in 1989. In real terms, wages are stagnant even though the jobless rate has dropped.”

Last Friday, ProPublica and This American Life published information regarding the New York Federal Reserve and its relationship with Goldman Sachs. In 2011, Carmen Segarra was hired by the New York Federal Reserve to oversee Goldman Sachs and advise the bank in regulatory issues. She experienced problems with her managers and other Fed employees when trying to report issues with the bank’s policies and actions. This led her to record 46 hours of meetings that show how the New York Federal Reserve failed to properly oversee Goldman’s actions. The coziness between Fed employees and the bank along with the need for consensus has hurt the Fed’s ability to monitor and regulate the nation’s largest banks, making our financial system more fragile and crisis prone than it needs to be.

In an opinion piece for the Fiscal Times, Mark Thoma, a macroeconomist at the University of Oregon, argues that the decline in worker’s political power is the driving force in the lack of action to Fix the Jobs crisis:

“Why do we hear so much about the need to raise interest rates now rather than later, or get the deficit under control immediately despite the risks to households who are most vulnerable to an economic downturn? Those who are most in need – those least able to withstand a spell of unemployment or other negative economic events – have the least power in our political system.

With the decline in unions and other institutions that used to give workers a voice in the political process along with rising inequality that gives even more power to those at the top, the problem is getting worse. No wonder policy has been tilted so much in favor of those at the top. Fiscal policy in particular has been far too responsive to the interests of those with political power rather than those in greatest need.”

Finally, Ryan Avent, worries about the zero lower bound (ZLB) and the next recession:

“So why is the Fed so determined to find itself right back at the ZLB in future, assuming it ever leaves it in the first place?

In the FOMC’s most recent economic projections, the median expectation for the longer run level of the federal funds rate is 3.75%. Now that’s according to the so-called dot plot, which virtually every member of the FOMC suggests markets should ignore (and yet they include it…). But even if we assume that the highest dot is Janet Yellen’s and that by 2017 she will be exerting dictatorial control over the Fed, that only takes the fed funds rate to 4.25%. Markets are also betting that rates will come to rest around that level.

But this is not good at all. The fed funds rate rose to 5.25% prior to the Great Recession and nonetheless tumbled to the ZLB. The 2001 recession was far milder, yet in battling it the Fed reduced interest rates from a high of 6.5% down to 1%, and felt it necessary to leave the rate there for some time. There is plenty of uncertainty regarding precisely how much cushion one needs between the federal funds rate and the ZLB, yet we can be pretty safe in concluding that roughly four percentage points counts as ‘not nearly enough’.”

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