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Date: Sunday, 13 Jul 2014 14:24

Quick links to a few items I found interesting.

Nowcasts of GDP. Want to know what the latest economic releases imply for the current quarter’s GDP? The Federal Reserve Bank of Atlanta is now making publicly available the forecasts from its GDPnow model which is updated with each new economic release. The July 10 inference is that we might see 2014:Q2 GDP come in at a 2.6% annual growth rate. Private-sector services like Now-casting.com provide estimates based on alternative models for a number of different countries.


Missy Hamilnook reflects: “Play is the work of the young child.” Read Susan Medley’s review of the book or order from Amazon.


Meeting Menzie Chinn. Most people are surprised to learn that although Menzie and I have been working as a cyberspace team and have been in nonstop email communication with each other every week for the last 10 years, we had never met in person until this week. Fate finally brought us together in non-cyberspace reality when we converged in Boston for seminars and discussions hosted by the National Bureau of Economic Research. Photo courtesy of University of Houston Professor David Papell.


Author: "James_Hamilton" Tags: "here and there"
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Date: Thursday, 10 Jul 2014 11:50

From Reuters today:

Russia’s economy is stagnating as data showed on Wednesday that capital worth $75 billion has left the country so far this year following sanctions on Moscow over its involvement in Ukraine.

“We have for now a period of stagnation, or a pause in growth,” Deputy Economy Minister Andrei Klepach was quoted as saying in an interview where he also said that GDP was flat from April to June after shrinking 0.5 percent in the first quarter.

Here are some indicators of stress from political uncertainty, from the IMF’s recent Article IV report on the Russian Federation.


And here is an updated version of GDP growth.


Figure 1: Russian q/q annualized GDP growth, in 2000 prices. Source: OECD via FRED through 2013Q4, Reuters for 2014, and author’s calculations.

From the report:

Net private capital outflows increased significantly in the first quarter of 2014 to US$51 billion (Figure 2 and Box 3). Reserves at the CBR experienced additional downward pressures following the sharp increase in FX intervention in early March. The increased level of FX swaps and correspondent accounts between the CBR and domestic banks has temporarily cushioned the level of reserves, which have not declined by the total amount of interventions. While FX swaps were used to access CBR liquidity, the increase in the level of correspondent accounts at the CBR has reflected increased foreign assets repatriation by domestic banks amidst increasing geopolitical uncertainties.

Geopolitical tensions are negatively weighing on the cost and access to financing. Since March, sovereign and private issuances have declined very sharply, with borrowing rates increasing by an average of 100–150 basis points (Figure 2). The government has also cancelled a number of domestic auctions. Moody’s and Fitch revised the outlook on Russia’s sovereign BBB rating from stable to negative while S&P downgraded the sovereign rating by one notch to BBB-, its lowest investment grade category. This downgrade forced similar ratings cut on major Russian corporations such as Gazprom, Rosneft, and VTB bank, as well as subsidiaries of international banks. The geopolitical uncertainty has also given rise to dollarization pressures.

The outflow of $75 billion means that $24 billion worth of capital left Russia (on net) in the second quarter. While this means the pace of outflows is declining, it also means that the first half of the year witnessed a greater outflow than in the entirety of 2013. For certain, Russia seems on the way to the $100 billion outflow for 2014 that some had warned of.

How much of this outflow, and hence weakness in growth, is due to the imposition of sanctions, or the uncertainty associated with the possibility of additional sanctions? From Reuters:

Deputy Finance Minister Sergei Storchak said on Tuesday that sanctions were having a serious indirect impact” and warned of retaliation against further measures by the West.

“The real damage to the economy is potentially much more serious and comes from the voluntary self-sanctions taken by foreign investors, credit providers and some foreign companies active in Russia,” Chris Weafer, a partner of Macro-Advisory, a consulting firm in Moscow, said in a note published by the European Leadership Network.

“While not compelled legally to restrict activities in Russia it is clear that many investors and big international companies have suspended new deals in Russia and have cut risk exposure.”

In other words, the impact has been greater than some skeptics have asserted, and perhaps more in line with my earlier views [1]

Author: "Menzie Chinn" Tags: "international"
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Date: Thursday, 10 Jul 2014 02:00

Reader Rick Stryker writes, after asserting Paul Krugman has misrepresented history:

…apologists fall back on the claim that Obamacare is a conservative idea. … That’s nonsense.

Let me quote from A National Health System for America (Heritage Foundation, 1989), chapter 2, by Stuart A. Butler, Director of Domestic Policy Studies at the Heritage Foundation:

Creating a New Health Care System for Americans

By modifying the existing system, the U.S. can develop a new health care system that will achieve the stated but unfulfilled goals of health care systems overseas — choice, access, and economy.

Element #1: Every resident of the U.S. must, by law, be enrolled in an adequate health care plan to cover major health care costs.

This requirement would imply a compact between the U.S. government and its citizens: in return for the government’s accepting an obligation to devise a market-based system guaranteeing access to care and protecting all families from financial distress due to the cost of an illness, each individual must agree to obtain a minimum level of protection. This means that, while government would take on the obligation to find ways of guaranteeing care fore those Americans unable to obtain protection in the market, perhaps because of chronic health problems or lack of income, Americans with sufficient means would no longer be able to be “free riders” on society by avoiding sensible health insurance expenditures and relying on others to pay for care in an emergency or in retirement.

The requirement to obtain basic insurance would have to be enforced. The easiest way to monitor compliance might be for households to furnish proof of insurance when they file their tax returns. … If the family did not enroll in another plan before the first insurance coverage lapsed and did not provide evidence of financial problems, a fine might be imposed.

The entire Heritage Foundation document is here. Chapter 2, written by Stuart A. Butler, Director of Domestic Policy Studies at the Heritage Foundation, starts at page 35.

Author: "Menzie Chinn" Tags: "health care"
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Date: Tuesday, 08 Jul 2014 19:00

From today’s FT:

ECB under pressure to tackle ‘crazy’ euro

Pressure is mounting on the European Central Bank to take action against a persistently strong euro with a leading industrialist calling on Frankfurt to tackle the “crazy” strength of the currency.

Fabrice Brégier, chief executive of Airbus’s passenger jet business, said the ECB should intervene to push the value of the euro against the dollar down by 10 per cent from an “excessive” $1.35 to between $1.20 and $1.25.

Following the euro over time, it’s clear that the euro is fairly strong, although not matching the levels in period just around the financial crisis. Remember, however, the dollar was particularly weak — and hence the euro particularly strong — just before the onset of the recession.


Figure 1: Log trade weighted value of the euro (broad), nominal (blue) and real (red), 2010=0. NBER defined US recession dates shaded gray. Dashed line at Lehman bankruptcy. Source: BIS.

Still, with euro area growth just barely creeping into the positive area, and with inflation far below target range, one could easily see how a weaker euro could help on both counts.

In terms of competitiveness, one would want to look to the unit labor cost deflated measures, rather than the CPI-deflated measure. Here, the same pattern emerges.


Figure 2: Log CPI-deflated trade weighted value of the euro (blue), and relative unit labor cost deflated (red), 2010=0. NBER defined US recession dates shaded gray. Dashed line at Lehman bankruptcy. Source: IMF IFS.

In the past, I (along with Jeff Frieden) have urged an increase in inflation. We didn’t post a mechanism for achieving that higher inflation, although the usual unconventional monetary policy measures — including credit easing– would have been in contention. However, increasing the ECB’s balance sheet faces some difficulties, ranging from legal to operational.

Nonetheless, today’s headline reminded me of Jeff Frankel’s proposal, made back in March.

The ECB should further ease monetary policy. Inflation at 0.8% across the Eurozone is below the target of ‘close to 2%’, and unemployment in most countries is still high. Under the current conditions, it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do. If inflation is below 1% Eurozone-wide, then the periphery countries have to suffer painful deflation.

The question is how the ECB can ease, since short-term interest rates are already close to zero.

What, then, should the ECB buy, if it is to expand the monetary base? It should not buy euro securities, but rather US treasury securities. In other words, it should go back to intervening in the foreign exchange market. Here are several reasons why.

First, it solves the problem of what to buy without raising legal obstacles. Operations in the foreign exchange market are well within the remit of the ECB.

Second, they also do not pose moral hazard issues (unless one thinks of the long-term moral hazard that the ‘exorbitant privilege’ of printing the world’s international currency creates for US fiscal policy).

Third, ECB purchases of dollars would help push the foreign exchange value of the euro down against the dollar.

Frankel discusses some of the challenges to this measure. Certainly, there is some question of how other policymakers would react to such a policy measure; however, given current conditions — particularly the pace of inflation in the euro area — this approach should be given serious consideration.

Author: "Menzie Chinn" Tags: "exchange rates, financial markets, inter..."
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Date: Sunday, 06 Jul 2014 14:02

I am a little slow responding to the stunning revision to the first-quarter GDP estimates that came out two weeks ago, but here are my thoughts about the new estimates.

The Bureau of Economic Analysis announced on June 25 that U.S. real GDP fell at a 2.9% annual rate during the first quarter, compared with an initial estimate of 0.1% growth for the quarter that the BEA had initially put out in April. The revision sets a couple of records. For one, it makes 2014:Q1 the worst quarter for GDP since World War II that was not part of an economic recession. The next closest contenders were a drop of almost 2.9% in the second quarter of 1981 and a 2.2% drop in the third quarter of 1973. Each of those was followed by a single quarter of solid GDP growth after which the economy fell into a full-blown recession, constituting some of the evidence behind Jeremy Nalewaik’s claim that the economy often reaches a stall speed just before falling into a recession.

A second record was noted by the White House’s Council of Economic Advisors Chair Jason Furman:

the estimates of GDP growth for 2014:Q1 represent the largest revision from an advance estimate to a third estimate, as well as the largest revision from a second estimate to a third estimate, in the roughly thirty years the Bureau of Economic Analysis has done these estimates.

The biggest single source of discrepancy from the earlier estimates came in health care services, which account for 1/6 of total personal consumption expenditures. Last month the BEA had claimed that health care added 1 percentage point to the Q1 GDP growth rate, whereas the new estimate is that it instead subtracted 0.2 percentage points. Jason Furman explains that the main survey that the BEA uses to track health care spending was not available until this month, and hence there was considerable guesswork in the original estimate. MFR’s Joshua Shapiro nevertheless opines:

This is a crazy-sized revision, and speaks very loudly to the fact that nobody has a real handle on how the introduction of Obamacare has affected these data, nor for how long the distortions may last until things settle down.


The second most important factor in the revision is that the Q1 deterioration of exports is now seen as even worse than originally reported, with lower exports subtracting 1.2 percentage points from the GDP growth rate. Part of this may be payback for unusually strong export numbers for 2013:Q4. But if it signals a weakening in China or other key trading partners it could be more worrisome.

Jason Furman makes a convincing case that some of the other weaknesses in the U.S. first-quarter GDP numbers represent a temporary effect of the unusually severe winter in much of the U.S., as evidenced for example in the March rebound from the January-February dip down in indicators such as light vehicle sales, core retail and food sales, and core capital goods shipments.

The June BLS employment report ([1], [2]) gave added confirmation that the economy was back to more solid growth for Q2.

So 2014:Q1 does not mark the beginning of a new recession. As for whether it could turn out to be a replay of 1981:Q2 or 1973:Q3, we’ll have to wait and see.

Author: "James_Hamilton" Tags: "economic indicators, recession"
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Date: Friday, 04 Jul 2014 03:19

A reader writes:

“…SNAP and Medicaid. These are programs for People Who Do Not Work.”

Is this statement true?


From SNAPtoHealth:

Stigma associated with the SNAP program has led to several common misconceptions about how the program works and who receives the benefits. For instance, many Americans believe that the majority of SNAP benefits go towards people who could be working. In fact, more than half of SNAP recipients are children or the elderly. For the remaining working-age individuals, many of them are currently employed. At least forty percent of all SNAP beneficiaries live in a household with earnings. At the same time, the majority of SNAP households do not receive cash welfare benefits (around 10% receive cash welfare), with increasing numbers of SNAP beneficiaries obtaining their primary source of income from employment.


According to Garber/Collins (2014):

Prior to the waiver approval, working parents up to 16 percent of poverty were eligible for Medicaid…Currently, working parents under 33 percent of poverty and individuals ages 19 and 20 under 44 percent of poverty are eligible for Medicaid.

Now it is true that, as CBPP notes, many working poor do not qualify for Medicaid under the old provisions (and in states that refused to expand Medicaid):

In the typical (or median) state today, a working-poor parent loses eligibility for Medicaid when his or her income reaches only 63 percent of the poverty line (about $12,000 for a family of three in 2012). An unemployed parent must have income below 37 percent of the poverty line (about $7,100 in 2012) in the typical state in order to qualify for the program.

The irony is that Medicaid expansion would eliminate disincentives to earn income through working. As outlined here, most of the beneficiaries of a Medicaid expansion in those states that have not yet taken the offer would be working poor — between nearly 60 to 66% in Virginia, Missouri and Utah.

I don’t typically cite anecdotes, but this one seemed sufficiently illustrative to merit quotation. From an October 2013 NYT article:

About half of poor and uninsured Hispanics live in states that are expanding Medicaid. But Texas, which has a large Hispanic population, rejected the expansion. Gladys Arbila, a housekeeper in Houston who earns $17,000 a year and supports two children, is under the poverty line and therefore not eligible for new subsidies. But she makes too much to qualify for Medicaid under the state’s rules. She recently spent 36 hours waiting in the emergency room for a searing pain in her back.

“We came to this country, and we are legal and we work really hard,” said Ms. Arbila, 45, who immigrated to the United States 12 years ago, and whose son is a soldier in Afghanistan. “Why we don’t have the same opportunities as the others?”

Update, 7/5, 12:10PM: Just to be sure we are in agreement, I want to remind readers of how many of the people you meet on a day to day basis working at their job are on SNAP (Bloomberg, October 25, 2013):

America’s low-wage, fast-food workers have been making a lot of news lately. Researchers at Berkeley released a report calculating that 52 percent of families of fast-food workers are enrolled in at least one public-assistance program, at a cost to taxpayers of about $7 billion a year. McDonald’s employees, working for the biggest burger chain in the country, accounted for about $1.2 billion of that total.

Now a McDonald’s (MCD) help line for employees, called McResource Line, has come to broader attention, courtesy of an advocacy group called Low Pay Is Not OK. In a taped conversation published online, a help-line representative is heard offering to help one McDonald’s worker access a range public resources, from food stamps to Medicaid.

The employee, Nancy Salgado, earns $8.25 an hour after working for a decade at a McDonald’s in Chicago. She can be heard describing the two kids she is raising on her own and asks for help to make ends meet. The McResource representative does her job well: She’s matter-of-fact about Salgado’s predicament, calmly explains the benefits Salgado might be eligible for, and answers all her questions. During the entire 14-minute conversation reviewed by Bloomberg Businessweek, Salgado doesn’t ask why the McDonald’s franchisee pays her less than she needs to raise a family, and the McResource representative never suggests Salgado should be paid more.

So, I will hazard a guess that there is not an inconsequential number of people on SNAP who “work”.

Author: "Menzie Chinn" Tags: "Uncategorized"
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Date: Thursday, 03 Jul 2014 22:21

Rapid and broad based employment growth

First, nonfarm employment has exceeded the previous peak level.

Figure 1: Log nonfarm payroll employment from establishment series (blue), and from household series adjusted to conform to NFP concept (red), 2007M12=0, seasonally adjusted. NBER defined recession dates shaded gray. Source: BEA, NBER, and author’s calculations.

It is of interest to note that the household adjusted series — touted by conservatives during the G.W. Bush era as a better measure of nonfarm payroll employment — first exceeded the previous peak in January 2014, with no apparent mention by those same individuals. By that metric, total nonfarm employment has exceeded its previous peak by nearly one percent.

Private employment exceeded its previous peak in April. Employment and hours are now 0.8% above the previous peak.

Figure 2: Log private nonfarm payroll employment from establishment series (blue), and aggregate hours (red), 2007M12=0, seasonally adjusted. NBER defined recession dates shaded gray. Source: BEA, NBER, and author’s calculations.

Not only has growth (by either total or private employment) over the past five months matched or exceeded 200K, revisions are typically to the upside.


Figure 3: Nonfarm payroll employment January release (blue), February release (red), March release (green), April release (black), May release (teal), and June release (purple). Source: BLS.

Figure 4: Private nonfarm payroll employment January release (blue), February release (red), March release (green), April release (black), May release (teal), and June release (purple). Source: BLS.

A reassuring point, made by Jason Furman at the CEA, is that the advance in employment is broad based.


Figure 5: Source: Furman/CEA.

None of the foregoing should be viewed as a triumph of macroeconomic policy. For once I agree with Joint Economic Committee Chair Kevin Brady who stated “Today’s strong jobs report comes as a welcome relief to Americans on Main Street. Unfortunately, as good as today’s report is, the rate of job growth still isn’t sufficient to eliminate the private sector jobs gap by the time President Obama leaves office.” And the reason for that, in addition to the hangover from the debt binge of the 2000′s, is the imposition of too-early and unwise fiscal contraction (think sequester, cutting off extended unemployment, failure to extend SNAP, and failure to undertake additional infrastructure investments). Had there been less single-minded obstructionism, fiscal policy would have been much more counter-cyclical in nature, and the employment recovery accelerated.

With the acceleration in employment growth, there is ample discussion of tightening labor market and — without too much evidence — rising compensation costs. [1] The latest release does not provide much additional evidence of accelerating wage costs.


Figure 6: 12-month percent change in average hourly earnings for private sector production and nonsupervisory workers (blue), and for all private sector workers (red), and for CPI-all, all calculated as 12 month log differences. NBER defined recession dates shaded gray. Source: BLS via FRED, NBER, and author’s calculations.

For more on the employment release, see CalculatedRisk, Madigan/WSJ RTE, Tim Duy, Applebaum/NYT Upshot, Norris/NYT Upshot, and Stone/CBPP.

Author: "Menzie Chinn" Tags: "employment"
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Date: Wednesday, 02 Jul 2014 21:18

Many reporters have been pushing the meme that:

Consumers will pay the highest Fourth of July gasoline prices in six years.

That’s true, though as the EIA noted today:

Although this is the highest average heading into the Fourth of July holiday since 2008, gasoline prices in 2014 have remained well below the spring peaks reached in each of the previous three years.

New Jersey Historical Gas Price Charts Provided by GasBuddy.com

Oil prices have actually moved lower over the last three weeks, meaning that as long as the situation in Iraq does not deteriorate further, U.S. retail gasoline prices are likely headed down, not up over the next few weeks.

But we wouldn’t want to let the facts get in the way of trying to make a story sound more interesting, would we?

Author: "James_Hamilton" Tags: "energy"
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Date: Tuesday, 01 Jul 2014 06:26

I’ve just returned from two highly stimulating conferences in Beijing. The first was a Columbia-Tsinghua conference on “Capital Flows and International Financial Systems”, organized by Jiandong Ju and Shang-Jin Wei, and the second a NBER-China Center for Economic Research conference on “China and the World Economy”, organized by Yang Yao, Shang-Jin Wei, and Chong-En Bai.

The RMB Exchange Rate, Capital Market Openness, and Financial Reforms in China


Figure 1: Aizenman-Chinn-Ito trilemma indices for China. ERS (blue) is exchange rate stability, inverse of standard deviation of exchange rate changes; MI (red) is monetary independence, inverse of correlation of policy interest rate with base country interest rate; KAOPEN is Chinn-Ito financial openness index. See here. Source: ACI

A policy panel at the Columbia-Tsinghua conference was chaired by Chaired by Shang-Jin Wei (Chief Economist Designate, Asian Development Bank, Professor of Economics at Columbia University, and NBER). The participants were:

  • Joshua Aizenman (Professor of Economics and International Relations, University of Southern California and the NBER)
  • Menzie Chinn (Professor of Public Affairs and Economics, University of Wisconsin, Madison, and NBER)
  • Pierre-Olivier Gourinchas (Professor of Economics, University of California Berkeley and NBER)
  • Fan He (Professor and Associate Dean, The Institute of International Economics and Politics, The Chinese Academy of Social Science)
  • Jiandong Ju (Professor and Director, Center for International Economic Research at Tsinghua University)
  • Jun Ma (Chief Economist, Research Department, People’s Bank of China; former Chief Economist for Greater China, Deutsche Bank)

The presentations were not made available online, and I can’t do justice to all the presentations. However, one surprising aspect of the discussion was the widespread agreement that capital account liberalization was an undertaking that needed to be conducted very slowly and deliberately. Aizenman (presentation), Gourinchas and He highlighted the potential for financial or balance of payments crises should capital account and domestic financial liberalization be improperly sequenced. Gourinchas further noted that the benefits of capital account openness were uncertain, and apparently relatively small, so the urgency for liberalization was not so great. (Update: Gourinchas’s points here.)

Both He and Ma noted that capital account liberalization had already progressed to a certain extent, with Ma making the case more forcefully. Ju argued that premature liberalization of the capital account could lead to capital flight and and domestic financial crisis as the housing market collapsed. Some discussion of the Ma, He, and Ju presentations are reported in the People’s Daily.

The major point of my presentation was that development of the RMB as an international currency was not costless, despite the pride that might be engendered by such a outcome. In particular, an internationalized currency exposes an economy to external shocks, and some loss of monetary autonomy if other countries peg to it. Such already seems to be the case for China. Some of these points are discussed in this paper.

International Economics (Columbia-Tsinghua)

I couldn’t attend all the sessions at the Columbia-Tsinghua conference (there were at times parallel sessions), but here are some of the papers I caught.

Jing Zhang (FRB Chicago) presented “Saving Europe?: The Unpleasant Arithmetic of Fiscal Austerity in Integrated Economies” (with E. Mendoza and L. Tesar).

What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore crosscountry spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong cross-country externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a “race to the bottom” in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria.

Yinqiu Lu (IMF) presented “Emerging Market Local Currency Bond Yields and Foreign Holdings in the Post-Lehman Period – a Fortune or Misfortune?” (with C. Ebeke):

The paper shows that foreign holdings of local currency government bonds in emerging
market countries (EMs) have reduced bond yields but have somewhat increased yield volatility in the post-Lehman period. Econometric analyses conducted from a sample of 12 EMs demonstrate that these results are robust and causal. We use an identification strategy exploiting the geography-based measure of EMs financial remoteness vis-à-vis major offshore financial centers as an instrumental variable for the foreign holdings variable.The results also show that, in countries with weak fiscal and external positions, foreign holdings are greatly associated with increased yield volatility. A case study using Poland data elaborates on the cross country findings.

Likun Wang (Goethe University Frankfurt) presented “Exchange rate, risk premium and factors: what can term structure of interest rates tell us about the dynamics of the exchange rate?”:

In this paper, I investigate the role of expectations on the current and future status of economies in determining the dynamics of the exchange rate, through the channel of risk premium for holding a currency. The risk premium is introduced as an additional term to a best-fit time series model and is instrumented by bilateral latent factors obtained from the term structure of interest rates. Results show that it can significantly improve the baseline model in terms of in-sample goodness of fit and out-of-sample accuracy of forecast in exchange rate changes. The non-linearity of the risk premium in latent factors further renders state-dependent and time-varying response of change in exchange rate to an identified monetary policy adjustment. Above findings hold for seven out of eight advanced-economy currency pairs (AUD, CAD, GBP, JPY, NOK, NZD, SEK against USD). Once included in the Fama regression, the risk premium can also help in solving the UIP Puzzle, which has been detected in the cases of GBP/USD and JPY/USD.

Other presentations (w/o papers online):

  • Jie Li (Central University of Finance and Economics), “Volatility of capital flows: the role of financial reforms” (with Z. Shen).
  • Xiaoqiang Cheng (Hong Kong Monetary Authority), “Market segmentation, fundamentals or contagion? Assessing competing explanations for CNH-CNY pricing differentials” (with M. Funke, Chang Shu, and S. Eraslan.
  • Oliver Hossfeld (Deutsche Bundesbank), “Carry funding and safe haven currencies: a threshold regression approach” (with R. MacDonald).

Keynote Presentations

picture here (Ju, Chinn, Antràs, Gourinchas, Wei)

International Finance (NBER-CCER)

[my inexact summaries in brackets when the paper is not available online]

  • Menzie Chinn (Wisconsin, Madison and NBER), “The Trilemma and Reserves: Measurement and Policy Implications” (presentation)
  • Yang Yao (CCER), “Financial Structure and Current Account Imbalances” (not online) [growth differentials in the context of overlapping generations model explain current account imbalances between the US and China]
    Jianguo Xu (CCER): China A-share Stock Valuation: Fundamental Risk and Speculation premium (based on this paper).
  • Pierre-Olivier Gourinchas (UC Berkeley and NBER), “Global Safe Assets” (based on this chapter)
  • JU Jiandong (Tsinghua), “A Dynamic Structural Analysis of Real Exchange Rate and Current Account Imbalances: Theory and Evidences from China” (with J. Lin, LIU Q., and SHI K.) (not online) [a three sector exportables/importables/nontradables model with excess labor supply explains real exchange rate changes prior to the Lewis turning point]


Financial Markets (NBER-CCER)

I’ve focused my review on the international/macro topics. Other fascinating issues in economics were also covered, including intergenerational mobility, retirement and higher education. For those, see the agenda.

Author: "Menzie Chinn" Tags: "exchange rates, financial markets, inter..."
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Date: Monday, 30 Jun 2014 18:00

The Extreme Supply-Sider one in Topeka, that is. Josh Barro notes how tax cuts failed to result in entrepreneurial renaissance that would result in revenue increases; Wonkblog further observes (I did before) that employment growth has collapsed utterly and completely. Paul Krugman has dissected the social dynamics underpinning the adherence to patently unsupported ideas, but it is always useful to reiterate the facts of the case.

Kansas is doing so poorly in terms of private employment growth since 2011M01 — the beginning of Governor Brownback’s administration — that it rivals in (poor) performance Wisconsin [1].


Figure 1: Log private nonfarm payroll employment for Wisconsin (red), Minnesota (blue), California (teal), Kansas (green) and the US (black), all seasonally adjusted, 2011M01=0. Vertical dashed line at beginning of terms for indicated governors. Source: BLS, and author’s calculations.

It turns out that broader measures of economic activity confirm the collapse in growth. The recently released Philadelphia Fed coincident index shows May activity lower than that in January of the year. This means the cumulative growth gap (from 2011M01) between national activity and Kansas has widened to 2.8% (log terms).


Figure 2: Log coincident indices for Kansas (blue) and the US (black), seasonally adjusted, 2011M01=0. Implied levels from leading indices for Kansas (blue square) and US (black triangle) for 2014M11. Dashed lines at 2011M01 (beginning of Brownback administration). Tan shading denotes period that tax cuts apply to. Source: Philadelphia Federal Reserve May releases for coincident indices and leading indices, author’s calculations.

Forward looking indicators from the Philadelphia Fed indicate that over the next six months, the gap will widen — to 3.8% (Figure 2). Figure 3 depicts where Kansas sits in the distribution of state six month growth rates (not annualized). The wisdom of Moody’s decision to downgrade Kansas government bonds in April seems to have been borne out. [3]


Figure 3: Frequency distribution of six month non-annualized growth rates. Solid red line at Kansas growth rate; solid black line at US growth rate. Source: Philadelphia Fed leading indices, May release.

Kansas sits in the bottom quarter of the distribution. The gap between the US and Kansas non-annualized six month growth is over a percentage point. The corresponding gap over the entire period which the Philadelphia Fed has been tabulating the coincident indices is about a quarter of a percentage point (this is essentially a state-specific “fixed effect”). (Note: one cannot appeal to antediluvian views on the negative impact of minorities on growth, as in this comment, since Kansas is relatively homogeneous.)

Concluding thoughts: After three years of an experiment in ALEC-Laffernomics, Kansas lags the US economy significantly. This should be no surprise to anyone. Over thirty years ago, I interviewed Arthur Laffer for the Harvard International Review about the supply-side scenario. I was skeptical then. I see no reason, from the experience of Kansas, to be any less skeptical now (See this post for a statistical analysis, and links to more comprehensive empirical analyses).

Addendum, 5:50PM Pacific: Bruce Hall, who previously asserted Wisconsin’s negative performance with respect to Minnesota was partly due to the higher minority population in Wisconsin, now asserts California’s outperformance with respect to Kansas is comparable ‘to an F student who raises his grade to a C to an A student who just “plods along.”’, where Kansas is the A student because its government is “well run”.

I have calculated the log ratio of Kansas to California coincident index, taken the first difference and multiplied by 12 (so the coefficients are interpretable as impact on annual growth rates) regressed it on a constant, time trend, and a dummy that takes on a value of one when Governor Brownback comes into office. The time trend thus accounts for the alleged poorly run policies of California. Here are the results:

Δz = -0.020 + 0.00004×time – 0.016×BrownbackDummy

Adj-R2 = 0.02, SER = 0.03. Bold face entries denote significance at the 5% MSL.

The results indicate that relative annual growth is 1.6 percentage points slower under Governor Brownback.

Author: "Menzie Chinn" Tags: "budget, taxes"
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Date: Sunday, 29 Jun 2014 08:29

Also at the meeting of the International Association for Energy Economics last week I was honored to receive an award from the association for outstanding contributions to the profession. Here are the remarks I made at the awards banquet.

In 1980 this organization was three years old and I was in my third year in the economics Ph.D. program at Berkeley. There was a lot of interest in what was going on in energy markets at that time. The oil embargo by the Organization of Arab Petroleum Exporting Countries in 1973-74 and the Iranian revolution in 1978-79 were both associated with significant disruptions in world oil production and big spikes in energy prices. Many of us were persuaded that these events made a contribution to the two economic recessions that followed the two oil supply disruptions.

I was supposed to write a third-year empirical paper at Berkeley. As I was looking into these events I was surprised to find that this wasn’t the first time something like this had happened. The Suez Crisis of 1956-57 resulted in a significant disruption in the flow of oil, and that had also been followed by an economic recession. There were quite dramatic increases in oil prices in 1947-48, and these were followed by the first of the postwar U.S. recessions. In fact, as of 1980, we’d seen seven recessions in the United States since World War II, and six of those had been preceded by a spike in oil prices. I thought, ok, maybe I should use this for my third-year paper.

As I was working on this topic, Iraq invaded Iran, knocking out even more global oil production, and sending oil prices to all-time highs. The National Bureau of Economic Research declared that the U.S. entered an eighth recession just 12 months after we got out of recession number seven. I thought, ok, maybe I should use this for my dissertation.

And so I did. I was resolved that once I finished the dissertation I was going to move on to other areas of research. But world events kept dragging me back. In 1990, after eight years of falling oil prices, and eight years without an economic recession, Iraq invaded Kuwait, knocking out two of the world’s biggest oil producers. Oil prices rocketed back up, and it was déjà vu all over again as the U.S. fell into postwar recession number nine. There was another dramatic move up in oil prices prior to the 2001 recession. And you’re all very familiar with the spectacular oil price spike of 2007-2008, which was as big in magnitude as any of these other episodes, and which was followed by what we have now come to refer to as the Great Recession. So the count is now up to 10 out of 11 postwar recessions were preceded by a spike in oil prices. I think there’s something to this.

But what could account for this apparent relation? It’s easy to write down a model in which energy shouldn’t be all that important for the economy. In a frictionless neoclassical model, the key parameter is the dollar share of energy out of total spending, and this is a relatively small number. According to neoclassical theory, equilibrium prices persuade firms and consumers to reduce their energy consumption in response to an exogenous disruption in supply, and any economic costs associated with voluntary reductions in energy use should be smaller than had the users decided just to pay the higher price and go on using energy the way they had been. The total economic loss should be less than the dollar cost of the lost energy.

But a frictionless neoclassical model won’t get you very far in understanding economic recessions no matter what kind of shocks you’re looking at. Most of us are persuaded that there are important inefficiencies associated with recessions, as labor and capital become underutilized relative to the efficient frontier. Once you start thinking along these lines, it’s easy to see how an energy shock could make a contribution. For example, we often see consumers suddenly stop buying the larger, less fuel-efficient vehicles that have historically been key to U.S. auto industry profits. Loss of income and layoffs in the auto sector then become a separate factor contributing to the overall decline in economic activity.

Certainly many of the economic developments in 2007 and early 2008 were consistent with the patterns in earlier oil shocks. Sales of larger vehicles plunged, and consumer sentiment and overall consumer spending responded to higher gasoline prices in much the same way we had seen them do in previous episodes.

But there was one important difference. Many of the historical oil shocks that I mentioned were associated with dramatic geopolitical events such as wars in the Middle East. But there were none of these in 2007-8. Instead what happened was global oil production stagnated even as demand from the emerging economies continued to surge, and this produced the dramatic spike in oil prices.

I think it’s clear today that this episode marked the beginning of a new era in which it has been hard for oil production to keep up with growing demand without big increases in oil prices. Since 2005, field production of crude oil has increased very little worldwide, with U.S. shale oil production accounting for more than 100% of the increase—in the absence of these new sources of supply, global production today would be lower than it was in 2005. Add to this the challenges of dealing with the consequences for the world’s climate of our fossil fuel consumption, and also add this week’s news coming out of Iraq, and it seems pretty clear that it is extremely important to study what is going on in energy markets right now, just as it was in 1980. So I think all of you are in the right place at the right time. The right place being the International Association for Energy Economics, the right time being June 2014. The world is in real need of the insights that each of you can bring to these challenges.

Thank you very much for this great honor.


Author: "James_Hamilton" Tags: "energy"
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Date: Thursday, 26 Jun 2014 10:37

How tight is the labor market? A recent article summarizes the argument that wage pressures are building. From K. Madigan in WSJ Real Time Economics:

Economists now are debating whether the Fed has set its Nairu sights too low. And they point to two reports out Tuesday as proof.

The first report was the small business survey done by the National Federation of Independent Business.

The May survey showed optimism among business owners is the highest since before the Great Recession and a few labor-market indicators have also left the recession behind. A cycle-high percentage of business owners report having problems filling certain job openings. The share saying they cannot find qualified candidates was the highest since October 2007.

Another sign that the U.S. is closer to full employment came from the Job Openings and Labor Turnover survey from the Labor Department.

The Jolts report showed a large gain in job openings in April. …

Since mid-2009, the Beveridge curve has shifted to the right. At every level of openings, the jobless rate is now higher–a possible sign of skills mismatch between the unemployed and the workers companies seek.

It also suggests the labor markets are tighter than implied by the jobless rate.

It may very well be that the labor market is signalling higher wage growth. However, those signals have not yet shown up in price indicators. Figure 1 depicts the costs from the productivity and costs release, as well as from the employment release.


Figure 1: Four quarter growth rates in nonfarm business sector compensation costs (blue), nonfarm private production and nonsupervisory employee wages (red), and nonfarm private employee wages (dark gray), all seasonally adjusted. 2014Q2 observations are for the first two months of the quarter. NBER defined recession dates shaded gray. Source: BLS.

We have certainly seen higher wage inflation in the past.

In addition to muted compensation growth thus far, it’s interesting to observe that the level of unit labor costs, an important indicator of production costs (and hence price level trends) is only 1% (log terms) higher than they were half a decade ago.


Figure 2: Log nonfarm business sector compensation costs (blue), and unit labor costs (red), seasonally adjusted, 2009=0. NBER defined recession dates shaded gray. Source: BLS.

Obviously, one wants to be careful about extrapolating these trends. The deceleration in productivity growth has clear implications for unit labor costs, so one might see a jump in unit labor costs. However, as John Fernald has observed, the deceleration has already occurred, so there is no a priori reason to expect a further deceleration.

Hence, from my perspective, the case for an imminent surge in compensation costs has yet to be made.

Author: "Menzie Chinn" Tags: "labor market"
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Date: Tuesday, 24 Jun 2014 14:08

Last week I was at the annual meeting of the International Association for Energy Economics in New York City. One of the many interesting presentations was by Professor David Stern of Australian National University describing his research with Zsuzsanna Csereklyei and Maria del Mar Rubio Varas developing some stylized facts about energy and economic growth.

Below is one of the figures from Csereklyei, Rubio, and Stern (2014). Energy consumption per person is plotted on the vertical axis, and
GDP per person on the horizontal axis, both on logarithmic scales. Each dot represents the values for energy and GDP for one of 99 different countries in 2005. The slope of the relation implies that a country with 10% higher income than average would be expected to consume about 7% more energy than average.

The team also put together a fun animated gif showing this relation for each different year between 1971 and 2010. You can see the scatterplot move to the right as countries become richer over time, but the relation and its slope remain remarkably stable.

The IMF estimates that world GDP increased by 27.7% (logarithmically) between 2005 and 2013. I used Csereklyei, Rubio, and Stern’s income elasticity of 0.7 to calculate what world petroleum demand might have been expected to be for each year since 2003 if the price of oil had not risen.
These calculations are shown in the red line in the graph below. By contrast, the blue line shows actual crude oil production, which increased only 3% since 2005. The gap between the two amounts to 13.5 million barrels per day by 2013, a shortfall of about 16% (0.7 x 27.7 – 3.0 = 16.4).

Blue line: actual world field production of crude oil and condensate, 2002-2013, in millions of barrels per day, from EIA.  Red line: calculated by multiplying height of blue line in 2002 by exp(0.7 x [ln y_t - ln y_2002]) for y_t world GDP in year t, from IMF.

Blue line: actual world field production of crude oil and condensate, 2002-2013, in millions of barrels per day, from EIA. Red line: calculated by multiplying height of blue line in 2002 by exp(0.7 x [ln y_t - ln y_2002]) for y_t world GDP in year t, from IMF.

What happened to the 13 mb/d shortfall? Something else had to change to keep demand from rising, that something else being a rise in the price of oil. If we assume a long-run price elasticity of oil demand of 0.25, to achieve a 16% reduction in quantity demanded the change in the real price of oil would be expected to satisfy the equation 0.164 = 0.25 x [ln Pt - ln P2002]. With a price of oil of $60/barrel (in 2014 dollars) at the start of 2005, this would imply a predicted price of P2013 = 60 exp(0.164/0.25) = $116/barrel today, about where we are right now.

Steve Kopits (energy analyst and frequent contributor to the discussion at Econbrowser) was also at the IAEE meeting and raised an interesting observation. He noted that forecasts of the potential for future energy production by the companies that many may be counting on to meet future energy demand appear to be inconsistent with the relation between energy use and GDP growth that held for the last 40 years. For example, for the next 30 years ExxonMobil is anticipating an annual world GDP growth rate of 2.8% per year with only 1% annual growth of energy production, consistent with an income elasticity of 0.35, half the historically observed 0.7 elasticity. BP has a similar forecast.

One possibility is that GDP growth is going to be slower than it has been. Another is that energy price increases are likely to continue.

Author: "James_Hamilton" Tags: "energy"
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Date: Saturday, 21 Jun 2014 18:55

What do recent developments in Iraq imply for the price U.S. motorists should expect to pay for gasoline?

For the last two years I’ve been using a simple summary of the long-run relation (sometimes described as a “cointegrating relation”) between the U.S. retail price of gasoline and the price of crude oil. The relation implies that a $10 increase in the price of a barrel of Brent crude oil is typically associated with a 25 cent increase in the average U.S. retail price of a gallon of gasoline. The relation only captures the long-run tendency, and leaves out seasonal factors that for example brought the price of gasoline temporarily lower this last winter. But since this spring U.S. gasoline prices have moved back in line with what you’d expect given the long-run fundamentals.

Average retail price of U.S. gasoline (black) and price predicted on the basis of price of Brent crude oil (blue).  Black: average U.S. price of retail gasoline, all formulations, in dollars per gallon, weekly Jan 10, 2000 to June 16, 2014 (data source: EIA).  Blue: 0.84 plus 0.025 times price of Brent, in dollars per barrel, weekly Jan 7, 2000 to Jun 13, 2014 (data source: EIA).

Average retail price of U.S. gasoline (black) and price predicted on the basis of price of Brent crude oil (blue). Black: average U.S. price of retail gasoline, all formulations, in dollars per gallon, weekly Jan 10, 2000 to June 16, 2014 (data source: EIA). Blue: 0.84 plus 0.025 times price of Brent, in dollars per barrel, weekly Jan 7, 2000 to Jun 13, 2014 (data source: EIA).

Here’s a little calculator courtesy of Political Calculations that you can use to get the predicted gasoline price plotted in blue in the graph above. Just enter the current price of Brent to see the implied long-run gasoline price.

Crude Oil Price Data
Input Data Values
Price per Barrel of Brent Crude Oil
Implied average U.S. gasoline price
Calculated Results Values
Average U.S. Price per Gallon
Code created with the assistance of Political Calculations

And here's a self-updating reference to the current Brent price, which you could use if you come back to this page to update the above calculation. Brent moved up last week to about $115/barrel, consistent with an average U.S. retail price for gasoline of $3.71/gallon, just a little above its current value. So based on what has happened so far to the price of crude oil, I would not expect more than a minor further increase in the retail price of gasoline.

Using the above 25-cent rule, even another $10 increase in the price of crude (bringing Brent to $125/barrel) would still only imply a gasoline price of $3.96/gallon, close to the price we were paying two years ago.

New Jersey Historical Gas Price Charts Provided by GasBuddy.com

But the bad news is that if the conflict spills over into the major oil fields in the southern part of Iraq, oil would be headed much higher than $125/barrel.

Author: "James_Hamilton" Tags: "energy, Iraq"
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Date: Friday, 20 Jun 2014 16:26

State-level employment figures released this morning by the BLS indicate indicate that as US (and regional peer Minnesota) employment powers along, Wisconsin lags. As does Kansas. Hence, the negative correlation between the ALEC-Laffer economic outlook index and actual economic activity persists [1] [2]


Figure 1: Log private nonfarm payroll employment for Wisconsin (red), Minnesota (blue), California (teal), Kansas (green) and the US (black), all seasonally adjusted, 2011M01=0. Vertical dashed line at beginning of terms for indicated governors. Source: BLS, and author’s calculations.


Figure 2: Log nonfarm payroll employment for Wisconsin (red), Minnesota (blue), California (teal), Kansas (green) and the US (black), all seasonally adjusted, 2011M01=0. Vertical dashed line at beginning of terms for indicated governors. Source: BLS, and author’s calculations.

The flat growth for Wisconsin and Kansas are consistent with trends indicated by the Philadelphia Fed’s leading indicators, discussed in this post. Now, this is just one month’s observation, sure to be revised. However, the general pattern of stagnant employment growth remains there. There is little succor to be gained from appealing to alternative labor market measures, such as the Quarterly Census of Employment and Wages. As several reports have noted, Wisconsin came in 37th in 2013 employment growth. [3] Further, as I observed in May, the BLS private employment series will likely be revised downward as a consequence of these QCEW figures.

Note that the gap between the path consistent with Governor Walker’s promise of 250,000 net new jobs and actual employment has increased (to 95,400 from 89,800). This means that 17,100 jobs per month have to be created for each of the next eight months in order to hit Governor Walker’s target, something that is highly unlikely given the mean job creation number (1,700 per month, since 1990M01).


Figure 3: Nonfarm private payroll employment for Wisconsin (blue), quadratic match interpolation of quarterly forecast (red), and linear trend for Walker’s target of 250,000 new jobs (black). Source: BLS and Wisconsin Economic Outlook (March 2014).

On a related note, Ed Hanson stated back in February that he would await the 2013 GSP release before making judgments about the relative performance of Minnesota and Wisconsin. Well, those numbers are in.


Figure 4: Log real Gross State Product for Minnesota (blue) and Wisconsin (red), 2010=0. Source: BEA, and author’s calculations.

Since 2010, Minnesota has grown a cumulative 2.8% (log terms) more than Wisconsin. Relative to 2011, the cumulative growth is 2.1%.

At that time, Ed Hanson argued that there was an incipient acceleration of Wisconsin per capita growth vis a vis Minnesota. In fact, year-on-year per capita growth for 2013 confirms that Minnesota continues to outpace Wisconsin (2.0% vs 1.4%, in log terms).

Author: "Menzie Chinn" Tags: "Wisconsin"
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Date: Thursday, 19 Jun 2014 01:00

Senator McCain has argued forcefully for intervention in Iraq, in response to events outlined by Jim. It is conceivable that surgical strikes might tip the balance and restore stability to Iraq. But hope is not a basis for policy (or shouldn’t be).

The Senator has in the past opined on the Iraq issue. Regarding the challenges of a conflict in Iraq, this quote from 2002:

…I am very certain that this military engagement will not be very difficult. It may entail the risk of American lives and treasure, but Saddam Hussein is vastly weaker than he was in 1991. He does not have the support of his people.

Regarding at least part of the casus belli, this 2003 statement FoxNews:

I remain confident that we will find weapons of mass destruction in Iraq.

This his view today The Hill:

“There is a need for immediate action,” McCain said on the Senate floor. “The worst option is to do nothing.” … McCain said political reconciliation between Islamic groups in Iraq is key to peace, but said that can’t be a “prerequisite for military action.”

McCain called for U.S. airstrikes in the region, if for nothing else than boosting morale.

At this juncture, it might be useful to recall what budgetary costs we have already incurred in Iraq (from this post).


Figure 1: Cumulative direct costs, in current dollars by fiscal year, in the Iraq theater of operations (“Operation Iraqi Freedom”). Does not include resulting debt service. Source: Amy Belasco, “The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11,” RL33110, Congressional Research Service, March 29, 2011, Table 3. Data for FY2011 is for continuing resolution, for 2012 is Administration FY2012 request.


Figure 2: Cumulative real direct costs, in constant (FY2010) dollars by fiscal year, in the Iraq theater of operations (“Operation Iraqi Freedom”). Does not include debt service costs. Source: Nominal figures from Amy Belasco, “The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11,” RL33110, Congressional Research Service, March 29, 2011, Table 3. Data for FY2011 is for continuing resolution, for 2012 is Administration FY2012 request. Deflated by CPI-all. CPI for 2011 assumes September 2011 m/m inflation is the same as August 2011 m/m inflation. Assumes 2012 inflation is equal to August 2011 CBO forecast for CY2012 inflation.

Figures 2 and 3 incorporate only direct fiscal costs to the United States government, and excludes interest costs. See here for another tabulation.

To recap, the $61 billion war [1] ended up costing (through FY2012) an estimated 874 billion, in FY2010 constant dollars. To place this in more current context, this works out to approximately 934 billion, in FY2013 dollars.

Given this investment, one might conclude that we cannot allow the sacrifice of treasure (and blood, see here) be in vain. However, economic theory suggests that sunk costs should not be considered in evaluating whether an enterprise should be undertaken. Rather, the (realistically appraised) costs and benefits of given options should be compared — that is a prospective evaluation is called for.

Moreover, this debate should be explicit and public. That is because, should Iraq descend into chaos or break up, there will doubtless be recriminations emanating from certain circles (well, they’re already emanating). In this regard, we do not need a replay of the “Who Lost China?” debate (as if it was America’s to lose), which distorted American foreign policy for decades.

Author: "Menzie Chinn" Tags: "Iraq"
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Date: Sunday, 15 Jun 2014 14:23

The group is calling itself the Islamic State of Iraq and al Sham, translated as the Islamic State of Iraq and Greater Syria, or ISIS. And so it may come to be.

From Friday’s Wall Street Journal:

A militant Islamist group that has carved out control of a swath of Syria has moved into Iraq, conquering cities and threatening the Iraqi government the U.S. helped create and support with billions of dollars in aid and thousands of American lives.

The group– known as the Islamic State of Iraq and al Sham– isn’t a threat only to Iraq and Syria. It seeks to impose its vision of a single radical Islamist state stretching from the Mediterranean coast of Syria through modern Iraq, the region of the Islamic Caliphates established in the seventh and eighth centuries.

Source: WSJ.

Source: WSJ.

Kurdish Peshmerga forces in the northeast claimed separately to have taken control of Kirkuk, center for the key oil fields in northern Iraq, and roughly dividing up the country along sectarian lines between the Kurds, Sunni, and Shia.

Source: Juan Cole.

Source: Juan Cole.

Let’s start with the immediate implications for Iraq’s oil production. Not too long ago, Iraq was claiming that it would be producing 12 mb/d by 2017. To describe those plans as “ambitious” seems too gentle a criticism. Gross overstatement of what was feasible was a necessary consequence of a bidding procedure in which awards were based on the daily volume that a company promised to produce. Nevertheless, some analysts like Leonardo Maugeri took Iraq’s claims half-seriously (literally), assuming that Iraq would be able to achieve half of those target levels by 2020.

Historical Iraqi oil production in thousands of barrels per day, 1973:M1 - 2013:M12, and linear extrapolation to goal of 12 mb/d by end of 2017.

Historical Iraqi oil production in thousands of barrels per day, 1973:M1 – 2013:M12, and linear extrapolation to goal of 12 mb/d by end of 2017.

Daniel Yergin, another of the former Iraq optimists, was quoted by the New York Times as saying on Friday:

All the oil companies are on alert… They are going to worry about the security of their people and installations. Obviously, no one is going to do anything new.

Field(s) Plateau (mbd) Co. Resv (gb) Depletion Fee ($/b) Links
Rumaila 2.85 BP, CNPC 17 6.1% $2.00 1
West Qurna Ph I 2.33 Exxon, Shell 8.7 9.8% $1.90 1, 2
West Qurna Ph II 1.8 Lukoil, Statoil 13 5.1% $1.15 1
Majnoon 1.8 Shell, Petronas 12.6 5.2% $1.39 1, 2, 3
Halfaya 0.535 CNPC, Total, Petronas 4.1 4.8% $1.40 1, 2, 3
Zubair 1.125 ENI, Kogas, Occidental 6.6 6.2% $2.00 1, 2
Gharaf 0.23 Petronas, Japex 0.86 9.8% $1.49 1, 2
Badra 0.17 Gazprom, Petronas, Kogas 0.8 7.8% $5.50 1, 2, 3
Al-Ahdab 0.115 CNPC N/A N/A $3 1
Qaiyarah 0.12 Sonangol 0.8 5.5% $5.00 1, 2
Najmah 0.11 Sonangol 0.9 4.5% $6.00 1, 2
Total 11.185 65.36

Four years ago, Stuart Staniford tracked down the specific details (reproduced in the table above) behind the proposed increases in Iraqi production. All but 200,000 b/d of the increase was supposed to come from southern and central Iraq, away from the areas now controlled by ISIS.

Iraq's major oil fields. Source: Energy-pedia.

Iraq’s major oil fields. Source: Energy-pedia.

Oil fields targeted for big production increases in second auction. Source: Petroleum World.

Oil fields targeted for big production increases in second auction. Source: Petroleum World.

Only 10% of Iraq’s recent oil exports went through the north, and even these had been shut down for several months before the latest developments. The main oil field in the north is the Kirkuk oil field, which appears now to be in the hands of the Kurds. The New York Times opines:

Paradoxically, the unrest may help increase exports from the oil-rich northern Iraqi region of Kurdistan. The Kurdish government has recently opened a pipeline directly linking oil fields in the enclave to Turkey, raising the possibility of substantial exports in the range of 400,000 barrels a day of Kurdish oil though Turkey.

Although the consequences for Iraqi oil production of what has happened so far appear to be minimal, all this comes at a time when the earlier and still ongoing conflicts in Libya and Syria have already disrupted nearly 2 mb/d in world oil production. If Iraq’s recent 3 mb/d was also taken out, we would be talking about a significant disruption in world oil supplies, and likely an oil price in excess of $150 a barrel.

Crude oil production from Libya and Syria, 1994:M1 to 2013:M12, in thousands of barrels per day.  Data source: EIA

Crude oil production from Libya and Syria, 1994:M1 to 2013:M12, in thousands of barrels per day. Data source: EIA

How vulnerable would the U.S. economy be to another oil price spike? One of the mechanisms by which earlier oil shocks contributed to economic downturns was a sudden change in the composition of spending, as consumers for example stopped buying the less fuel-efficient vehicles that were historically central for North American car company profits. Sales of light trucks and SUVs manufactured in North America fell to the same numbers as cars during the Great Recession, but have since climbed back up to their pre-recession levels.

Retail sales of domestically manufactured cars and light trucks in thousands of units, seasonally adjusted.

Retail sales of domestically manufactured cars and light trucks in thousands of units, seasonally adjusted.

But even so, the new vehicles people are buying today are much more fuel-efficient than the ones sold in 2006, and both the manufacturers and prospective buyers were already paying a lot of attention to fuel economy well before the latest developments. Another oil price spike in today’s environment is unlikely to have the same shock potential for the U.S. auto industry as it did the first time gasoline prices went to $4.00 a gallon.

Average sales-weighted fuel-economy rating (window sticker) of purchased new vehicles.  Source: University of Michigan Transportation Research Institute.

Average sales-weighted fuel-economy rating (window sticker) of purchased new vehicles. Source: University of Michigan Transportation Research Institute.

North Sea Brent crude oil closed Friday at $113/barrel and West Texas Intermediate at $107. That’s up sharply for the week, but still below the highs of $125 and $110, respectively, that we’ve seen since 2011.

Price of Brent, dollars per barrel.  Source: EIA.

Price of Brent, dollars per barrel. Source: EIA.


The average U.S. retail price of gasoline is still 30 cents a gallon below recent highs as well. A modest move back up seems unlikely to shock consumers into different patterns of spending than they had already been planning.

New Jersey Historical Gas Price Charts Provided by GasBuddy.com

Energy expenditures overall are back down to about 5-1/2 percent of the average household’s budget.

Energy expenditures as a percentage of consumer spending, 1959:M1 to 2014:M4. Calculated as 100 times nominal monthly consumption expenditures on energy goods and services divided by total personal consumption expenditures. Data source: BEA Table 2.4.5U. Blue line is drawn at 6.0%.

Energy expenditures as a percentage of consumer spending, 1959:M1 to 2014:M4. Calculated as 100 times nominal monthly consumption expenditures on energy goods and services divided by total personal consumption expenditures. Data source: BEA Table 2.4.5U. Blue line is drawn at 6.0%.

To summarize, my view is that the U.S. economy is less vulnerable to an oil price shock than we were in 2007. Moreover what has happened on the ground so far in Iraq should not have major immediate implications for the price of oil.

But longer term, we may have just witnessed the creation of an important new power in the Middle East. Among other spoils, ISIS apparently seized $425 million from the Iraq central bank in Mosul. From ABC News:

Analysts say the financial and strategic spoils of ISIS’s capture of Mosul and Tikrit could provide a significant, nearly unstoppable boon to its Syrian arm, helping turn the tide in the months-long battle for Deir Ezzor.

So the immediate implications for the U.S. economy may turn out to be minor. After that? The world seems to be changing.

Author: "James_Hamilton" Tags: "autos, energy, Iraq"
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Date: Wednesday, 11 Jun 2014 16:30

Quick links to a few items I found interesting.

Oil exports: Jim Brown lays out the case against allowing exports of U.S. crude oil. I reviewed the case in favor here.

VA scandal: Political Calculations has some interesting evidence on the role of budget decisions in the recent problems encountered by the Veterans Health Administration. See the Washington Post for a summary of some of the problems and the Wall Street Journal for the latest disturbing revelation.

Piketty, Piketty: I’ve explained [1], [2] why the economic theory underlying Thomas Piketty’s Capital in the Twenty-First Century is deeply flawed, with Per Krusell and Tony Smith [1], [2] making essentially the same point. Useful third-party summaries on this issue include Free Exchange and Alex Tabarrok. Brad DeLong [1], [2], continues to vigorously criticize Krusell and Smith without even mentioning or addressing the actual issue raised in their analysis. See also Rick Stryker [1], [2] for elucidation.

Labor force particpation: The always-indispensable Bill McBride makes some insightful observations about trends in labor force participation rates, noting for example that “a researcher looking at this trend in the year 2000 might have predicted the 40 to 44 year old men participation rate would about the level as today.”

Author: "James_Hamilton" Tags: "economic growth, employment, energy, her..."
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Date: Tuesday, 10 Jun 2014 07:26

Some argue that minimum wage hikes cause labor crises [1] or recessions [2] [3]. Is this true?


Source: Idiosyncratic Whisk.

This graph is at first glance highly persuasive. But then I realized the graph plots the minimum wage divided by the average level of compensation, so it’s tracking a ratio. Hence, average compensation (which declines during a recession) is also imparting some of the movement in the ratio. That prompted me to wonder what minimum wage increases look like in relation to recessions. Here is the relevant graph.


Figure 1: Log first difference of real minimum wage (blue), and NBER defined recession dates (shaded gray). Deflation uses CPI-all. Source: BLS, NBER, and author’s calculations.

It certainly seems like plenty of recessions don’t follow increases in the minimum wage. But to test formally, I undertake some Granger causality tests (remembering that Granger causality is merely temporal precedence). Using four leads and lags, I find that I can reject the null hypothesis that recessions do not cause minimum wage changes, at the 10% significance level. On the other hand, I cannot reject the null hypothesis that minimum wage increases do not cause recessions.

What about the weaker proposition that minimum wage increases induce noticeable decreases in employment? The Employment Policies Institute (not to be confused with the Economic Policy Institute) has been a vociferous advocate of this view. [4] A recent study by Professor Joseph Sabia [5] documents negative impacts of minimum wage increases. I have repeatedly asked for Professor Sabia’s data set in order to replicate his results, to no avail. Using the Meer and West dataset, I have found little evidence of the purported negative effects (see here). However, the Meer and West dataset is freely available, and anyone with the requisite skills can replicate my results.

(By the way, this is not a “spurious correlation” in the sense noted by Granger; for an instance of that, see this post.)

Author: "Menzie Chinn" Tags: "Uncategorized"
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Date: Saturday, 07 Jun 2014 18:39

The European Central Bank announced on Thursday that it is moving interest rates into negative territory, charging banks for maintaining deposits with the ECB rather than paying the banks positive interest. The hope is that lower (now even negative) interest rates may provide some stimulus to the European economy which might help bring European inflation closer to the ECB’s 2% target. Here I offer a few thoughts on this move.

Let’s start by clarifying what the measure will not do. The measure is not intended, as many people seem to suppose, to get banks to “lend out” their ECB deposits. The reason is that when an individual bank makes a loan or buys an asset, what they do is instruct the ECB to transfer the deposits from their account with the ECB to the bank of the counterparty who received the loan or sold the assets. The deposits of Bank A go down, but those of Bank B go up, with the result that some bank somewhere must always be left with those deposits at the end of the day. Actions by the ECB itself, or direct borrowing or cash withdrawals by banks from the ECB, could change the aggregate level of deposits that banks hold in their accounts with the ECB. But the lending and investment decisions of individual banks would not change aggregate ECB deposits.

But that doesn’t mean that individual banks won’t try to free themselves from this extra cost. If you know you’re going to be charged 0.l% (at an annual rate) for deposits you end up with at the end of the day, but see a 3-month government security paying say 0.2%, you’d want to buy the security on the open market. When Bank A makes that purchase, it gets itself out of a 0.1% loss and into a 0.2% gain. But Bank B receiving the deposits will realize that they’d also be better off using those deposits to get the 0.2% return, so they’ll also be buying any short-term securities that yield 0.2% in hopes of not getting stuck paying a fee on deposits. None of these efforts will change the fact that some bank somewhere will be left at the end of the day paying the 0.1% fee. But if all banks are out there trying to buy short-term government securities as a result of these incentives, what’s likely to happen is that the price of short-term government securities gets bid up above par. Once that happens, the 3-month securities effectively offer a negative return just like deposits with the ECB, and banks would be indifferent between buying the government security and getting stuck with the bill for reserves. For example, that’s what we saw happen to the 3-month yield when Denmark’s central bank implemented negative deposit rates in July 2012, an experiment that the Danes abandoned this April.

Source: Investing.com

3-month Danish bond yield. Source: Investing.com

But if 3-month government securities only offer a negative return, banks might then also bid the yield on longer-term government bonds down, or be willing to lend to customers at lower rates or make higher-risk loans than they otherwise would, or try to buy assets denominated in something other than euros, driving the value of the euro down relative to other currencies. Again none of these efforts would change the aggregate volume of deposits, but instead would shift the entire constellation of returns to be consistent with the new -0.1% rate at the short end of the yield curve. The hope is that more borrowing, inflated asset values, and a weaker currency might all encourage more spending and ultimately help the ECB achieve its 2% inflation target.

Though speaking just for myself, an extra 10-basis-point spread on Greek debt relative to German bonds wouldn’t make me any more keen to be holding the former, despite the insult of taking a sure (but small) loss on the latter.

And of course there’s a fun game for an enterprising entrepreneur here. Offer a bank (or anybody else settling for a -0.1% return) a service where you’ll accept physical cash from them and hold it for 3 months for a 5-basis-point annual fee. You take the cash and simply hoard it for 3 months. You earn 50 cents on every $1000 over the year playing entirely with somebody else’s money. The bank gains too, being better off paying you 5 basis points than paying the ECB 10 basis points. The New York Times reported this quip on negative interest rates from Harvard’s Greg Mankiw:

the only thing you’ll generate is a demand for safe assets– and by that I mean . . . they’re going to be buying a bunch of safes so people can put their money in their safes rather than in the bank.

And there are some obvious downsides to the ECB’s strategy. For starters, it’s unambiguously a tax on the banking system that undermines efforts to replenish capital buffers. If you have concerns about financial stability, such a move is contraindicated. A variety of institutions– money market funds, customers’ accounts with private banks, brokerage accounts– are all set up on the assumption that the customers won’t lose any money held in those accounts. Remember that “breaking the buck”– the possibility that investors would discover they’re vulnerable to a capital loss on money market funds– was a key concern of U.S. policy-makers in 2008 as something that could have triggered a run on some financial institutions and instruments.

It may be possible that the measure matters more as a signal of future ECB intentions beyond the direct effect of lowering the short end of the yield curve by another 10 basis points. Certainly the mere announcement two years ago by ECB President Mario Draghi that he would do “whatever it takes” to preserve the euro seemed to have a pretty dramatic effect, even if nobody was quite sure what that expression meant.

This week I think we learned that it means, “whatever I can think of.”

Author: "James_Hamilton" Tags: "exchange rates, Federal Reserve, financi..."
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