Recoveries have been getting weaker and weaker because that's how the Fed wants them
It's time to talk about everybody's least favorite Davos buzzword -- New Normal.
With GDP unexpectedly contracting 0.1 percent in the fourth quarter of 2012 (though the private sector mostly kept up, despite the obstacles we've thrown in its way), it's enough to make you wonder if this time really is different. In other words, has the economy settled into a, well, new normal of slower growth?
If it has, it's not quite new, at least when it comes to recoveries. As you can see in this Minneapolis Fed chart of job gains following recessions, something changed after 1981. Recoveries went from being V-shaped affairs characterized by rapid bouncebacks in employment to U-shaped ones better described as nasty, brutish, and long.
(Note: I excluded the recovery from the 1980 recession, because the double-dip in 1981 cut it short).
The story of the jobless recovery is one of what the Fed isn't doing. As Paul Krugman points out, recessions have become post-(or perhaps pre-) modern. Through the 1980s, postwar recessions happened when the Fed decided to raise rates to head off inflation, and recoveries happened when the Fed decided things had tamed down enough to lower rates. But now recessions happen when bubbles burst, with financial deregulation and the global savings glut making these more of a recurring feature of our economy, and the Fed hasn't been able to cut interest rates enough to generate strong post-crash recoveries. Or maybe it hasn't wanted to.
Here's a stupid question. Why have interest rates and inflation mostly been falling for the past 30 years? In other words if the Fed has been de facto, and later de jure, targeting inflation for most of this period (and it has), why has inflation been on a down trend (and it has)? As you can see in the chart below, core PCE inflation, which excludes food and energy costs, fell substantially from the Reagan recovery through the bursting tech bubble, and has more or less held steady since, though a bit more on the less side recently.
Say hello to "opportunistic disinflation." Okay, let's translate this from Fed-ese. Remember, the Fed is supposed to target 2 percent inflation, meaning it raises rates when prices rise by more than that much and lowers them once the economy's cooled off enough, but it wasn't always so. Back in the mid-1980s, inflation was hovering around 4 percent, a major achievement following the stagflation of the previous decade, but the Fed wanted it to go lower -- here's the crucial bit -- without taking the blame for it. The Volcker Fed had come in for quite a bit of abuse when it whipped inflation at the expense of the severe 1981-82 downturn, and the Fed seems to have learned it was better not to leave its fingerprints on the business cycle.
In other words, Let recessions do their dirty work for them.
It's not hard for central bankers to get what they want without doing anything, as long as what they want is less inflation (and that's almost always what central bankers want). They just have to wait for a recession to come along ... and then keep waiting until inflation falls to where they want it. Then, once prices have declined enough for their taste, they cut rates (or buy bonds) to stabilize inflation at this new, lower level. But it's one thing to stabilize inflation at a lower level; it's another to keep it there. The Fed has to raise rates faster than it otherwise would during the subsequent recovery to keep inflation from going back to where it was before the recession. It's what the Fed calls "opportunistic disinflation," and it's hard to believe this wasn't their strategy looking at falling inflation the previous few decades. Not that we have to guess. Fed president Edward Boehene actually laid out this approach in 1989, and Fed governor Laurence Meyer endorsed the idea of "reducing inflation cycle-to-cycle" in a 1996 speech -- the same year the Wall Street Journal leaked an internal Fed memo outlining the policy.
In short: Recoveries have been jobless, because that's how the Fed likes them.
But it gets worse. Pushing inflation progressively lower means recoveries get progressively weaker, since the Fed has to choke off inflation, and hence the recovery, at lower and lower levels. Now, to be fair, the Fed, and Ben Bernanke in particular, have awoken to the dangers of this approach. The danger, of course, is that the Fed gets in a situation where short-term rates are stuck at zero, but the economy stays stuck in a slump. Sound familiar? Bernanke realized this was a threat in 2002 when the economy was flirting with deflation despite 1.34 interest rates, and vowed not to let it happen here. (Remember, "disinflation" means falling inflation, and "deflation" means negative inflation).
The Fed, of course, did let it happen here. But it didn't let prices actually start to fall, which would make debt and borrowing more expensive at the worst possible moment, due to the Fed's bond-buying and to wages that are sticky downwards. Bernanke got the Fed to accept that opportunistic disinflation had gone too far with QE1 and QE2, but it's not clear that he's gotten them to give up on the idea altogether. Core inflation has settled in below 2 percent, and the Fed's economic projections don't show it rising above that level anytime soon. That's pushed nominal GDP growth -- the growth of the total size of the economy -- down to 4 percent for each of the past three years; a low level the Fed is apparently comfortable with. Bernanke seems to be trying to shift the consensus towards undoing some of this disinflation -- unlike previous rounds of bond-buying, QE3 was aimed at lowering unemployment, and not stopping lower prices, while the Evans rule explicitly says the Fed will tolerate inflation up to 2.5 percent -- but there's been no shift in the data so far. The Fed needs to realize there is no try when it comes to reflation. It has to promise to do whatever it takes.
The new normal doesn't have to be new or normal if the Fed doesn't want it to be.
A CFPB investigation concluded that Transunion and Equifax deceived Americans about the reports they provided and the fees they charged.
In personal finance, practically everything can turn on one’s credit score. It’s both an indicator of one’s financial past, and the key to accessing necessities—without insane costs—in the future. But on Tuesday, the Consumer Financial Protection Bureau announced that two of the three major credit-reporting agencies responsible for doling out those scores—Equifax and Transunion—have been deceiving and taking advantage of Americans. The Bureau ordered the agencies to pay more than $23 million in fines and restitution.
In their investigation, the Bureau found that the two agencies had been misrepresenting the scores provided to consumers, telling them that the score reports they received were the same reports that lenders and businesses received, when, in fact, they were not. The investigation also found problems with the way the agencies advertised their products, using promotions that suggested that their credit reports were either free or cost only $1. According to the CFPB the agencies did not properly disclose that after a trial of seven to 30 days, individuals would be enrolled in a full-price subscription, which could total $16 or more per month. The Bureau also found Equifax to be in violation of the Fair Credit Reporting Act, which states that the agencies must provide one free report every 12 months made available at a central site. Before viewing their free report, consumers were forced to view advertisements for Equifax, which is prohibited by law.
The MIT economist Peter Temin argues that economic inequality results in two distinct classes. And only one of them has any power.
A lot of factors have contributed to American inequality: slavery, economic policy, technological change, the power of lobbying, globalization, and so on. In their wake, what’s left?
That’s the question at the heart of a new book, The Vanishing Middle Class: Prejudice and Power in a Dual Economy, by Peter Temin, an economist from MIT. Temin argues that, following decades of growing inequality, America is now left with what is more or less a two-class system: One small, predominantly white upper class that wields a disproportionate share of money, power, and political influence and a much larger, minority-heavy (but still mostly white) lower class that is all too frequently subject to the first group’s whims.
The party appears to be struggling to convince the public it represents a better alternative to President Trump and the GOP.
If Democrats want to regain the power they’ve lost at the state and federal level in recent years, they will have to convince more voters they can offer solutions to their problems.
That may be especially difficult, however, if voters think the party and its representatives in government don’t understand or care about them. And according to a recently released poll, many voters may, in fact, feel that way. The Washington Post-ABC News survey, released this week, found that a majority of the public thinks the Democratic Party is out of touch with the concerns of average Americans in the United States. More Americans think Democrats are out of touch than believe the same of the Republican Party or President Trump.
In 1985, Neil Postman observed an America imprisoned by its own need for amusement. He was, it turns out, extremely prescient.
Earlier this month, thousands of protesters gathered at Washington’s National Mall to advocate for an assortment of causes: action against global climate change, federal funding for scientific research, a generally empirical approach to the world and its mysteries. The protesters at the March for Science, as scientists are wont to do, followed what has become one of the established formulas for such an event, holding clever signs, wearing cheeky outfits, and attempting, overall, to carnivalize their anger. “Make the Barrier Reef Great Again,” read one sign at the March. “This is my sine,” read another. “I KNEW TO WEAR THIS,” one woman had written on the poncho she wore that soggy Saturday, “BECAUSE SCIENCE PREDICTED THE RAIN.” Three protesters, sporting sensible footwear and matching Tyrannosaurus rex costumes, waved poster boards bearing messages like “Jurassick of this shit.”
The wealthiest Americans donate 1.3 percent of their income; the poorest, 3.2 percent. What's up with that?
When Mort Zuckerman, the New York City real-estate and media mogul, lavished $200 million on Columbia University in December to endow the Mortimer B. Zuckerman Mind Brain Behavior Institute, he did so with fanfare suitable to the occasion: the press conference was attended by two Nobel laureates, the president of the university, the mayor, and journalists from some of New York’s major media outlets. Many of the 12 other individual charitable gifts that topped $100 million in the U.S. last year were showered with similar attention: $150 million from Carl Icahn to the Mount Sinai School of Medicine, $125 million from Phil Knight to the Oregon Health & Science University, and $300 million from Paul Allen to the Allen Institute for Brain Science in Seattle, among them. If you scanned the press releases, or drove past the many university buildings, symphony halls, institutes, and stadiums named for their benefactors, or for that matter read the histories of grand giving by the Rockefellers, Carnegies, Stanfords, and Dukes, you would be forgiven for thinking that the story of charity in this country is a story of epic generosity on the part of the American rich.
There’s a common perception that women siphon off the wealth of their exes and go on to live in comfort. It’s wrong.
A 38-year-old woman living in Everett, Washington recently told me that nine years ago, she had a well-paying job, immaculate credit, substantial savings, and a happy marriage. When her first daughter was born, she and her husband decided that she would quit her job in publishing to stay home with the baby. She loved being a mother and homemaker, and when another daughter came, she gave up the idea of going back to work.
Seven years later, her husband told her to leave their house, and filed for a divorce she couldn’t afford. “He said he was tired of my medical issues, and unwilling to work on things,” she said, citing her severe rheumatoid arthritis and OCD, both of which she manages with medication. “He kicked me out of my own house, with no job and no home, and then my only recourse was to lawyer up. I’m paying them on credit.” (Some of the men and women quoted in this article have been kept anonymous because they were discussing sensitive financial matters, some of them involving ongoing legal disputes.)
“Somewhere at Google there is a database containing 25 million books and nobody is allowed to read them.”
You were going to get one-click access to the full text of nearly every book that’s ever been published. Books still in print you’d have to pay for, but everything else—a collection slated to grow larger than the holdings at the Library of Congress, Harvard, the University of Michigan, at any of the great national libraries of Europe—would have been available for free at terminals that were going to be placed in every local library that wanted one.
At the terminal you were going to be able to search tens of millions of books and read every page of any book you found. You’d be able to highlight passages and make annotations and share them; for the first time, you’d be able to pinpoint an idea somewhere inside the vastness of the printed record, and send somebody straight to it with a link. Books would become as instantly available, searchable, copy-pasteable—as alive in the digital world—as web pages.
China has profited immensely from the open global trading system. But whether it remains open depends on the actions of the West’s increasingly reactive democracies.
In January 2017 the global economy changed guard. The venue was Davos, the annual gathering of the world’s wealthiest recyclers of conventional wisdom—and consistently one of the last places to anticipate what is going to happen next. This time was different. The assembled hedge-fund tycoons, Silicon Valley data executives, management gurus, and government officials were treated to a preview of how rapidly the world is about to change. Xi Jinping, the president of China, had come to the Swiss Alpine resort to defend the global trade system against the attacks of the U.S. president-elect, Donald Trump. With minimal fanfare, the leader of the world’s largest developing economy took over the role of defending the global trading system in the teeth of protectionist war cries from the world’s most developed nation. It portended a new era in which China would apparently play the role of the responsible global citizen. The bad guys were swapping places with the good. “Some people blame economic globalization for the chaos in our world,” Xi told Davos. “We should not retreat into the harbor whenever we encounter a storm or we will never reach the other shore. … No one will emerge as a winner from a trade war.”
Silicon Valley’s new member of Congress has some big ideas for combatting wage stagnation.
Ro Khanna has a $1 trillion plan to fatten Americans’ wallets.
The newly elected member of Congress, who represents Silicon Valley, has become a loud progressive voice on the Hill during his brief tenure there. The way he sees it, Democrats have failed by not offering families a radical plan to end wage stagnation and bring prosperity to the middle class once again. He is working on a bill he believes will do just that, by boosting the Earned Income Tax Credit to provide as much as $6,000 a year for individuals and $12,000 for families. (That would roughly double the maximum payout for families, and increase it tenfold for childless workers.) The plan is being heralded as a move towards a universal basic income in the United States, and Khanna hopes to pair it with efforts to move federal jobs out of Washington, expand universities and colleges, and encourage investment in depressed communities. Such a moonshot effort is not going anywhere soon, he concedes. But it would at the very least demonstrate to voters that Democrats had something new and bold to offer them.
They say religious discrimination against Christians is as big a problem as discrimination against other groups.
Many, many Christians believe they are subject to religious discrimination in the United States. A new report from the Public Religion Research Institute and Brookings offers evidence: Almost half of Americans say discrimination against Christians is as big of a problem as discrimination against other groups, including blacks and minorities. Three-quarters of Republicans and Trump supporters said this, and so did nearly eight out of 10 white evangelical Protestants. Of the latter group, six in 10 believe that although America once was a Christian nation, it is no longer—a huge jump from 2012.
Polling data can be split up in a million different ways. It’s possible to sort by ethnicity, age, political party, and more. The benefit of sorting by religion, though, is that it highlights people’s beliefs: the way their ideological and spiritual convictions shape their self-understanding. This survey suggests that race is not enough to explain the sense of loss some white Americans seem to feel about their country, although it’s part of the story; the same is true of age, education level, and political affiliation. People’s beliefs seem to have a distinctive bearing on how they view changes in American culture, politics, and law—and whether they feel threatened. No group is more likely to express this fear than conservative Christians.