Tuesday, January 29, 2019

Bringing Jobs Back to America

When the children grow up and leave the nest to go to college or take jobs, parents are often relieved. But they also miss their brats. Few of them, however, take serious steps to bring them home again. Birds leave the nest for good reason and so do the children.

It is, therefore, clear that bringing something back home is not always good or desirable. And so it is with jobs.  The trouble is with the word in my title “Back”. Having a strong job market does not necessarily mean bringing the jobs back. A strong job market and a healthy economy is a very desirable thing and it is possible that bringing jobs back might not be the best way to accomplish that.

I recently read an article that explained that the US dollar’s role as a reserve currency is our main employment problem. If the dollar was no longer the world’s key reserve currency then jobs would come roaring back. How silly can you get?

The rationale is something like this. Countries sit on a bunch of dollars. They are nice to have around in the case that their government ruins their economy and destroys the value of their own currency. This desire to have dollars, therefore, leads to countries buying more dollars and raising the price of the dollar. The latter induces people to buy fewer American goods and more Chinese, Cuban, Estonian, and Vietnamese goods. If only they held fewer dollars, the value of the dollar would fall and the world would orgy on American-made goods. American workers would have so many jobs that they would dance their way through life like Zorba on the beach.

Okay I got a little sarcastic. Sorry. But it really is a silly theory. Does the reserve currency story have some truth? Of course. But that does not mean it is very important in the overall picture of exchange rates and where people like to buy their goods and services. Take exchange rates first. Reserves are but one of many things that impact the demand for US dollars. The value of the dollar seesaws by the minute and by the month because of many key determinants.

For example, global investors love to earn money and they look around for places to invest. When America’s economy seems strong or when the Fed policy leads to juicier bond or stock returns – folks all over the world sell their own currencies and buy dollars so they can buy US assets and get richer. Interesting that good news in US financial markets that raises the value of the dollar might be very important when it comes to hurting exports of US goods and services. Solution – mess up the US economy so it looks weak – that will help US exports of goods and services. I would not recommend this.

The second point is to think more broadly about why people trade goods across countries. Is the exchange rate the only thing impacting trade? Of course not. When we make decisions about sourcing goods we worry about such things as quality and price and those two things depend on many factors. What technology is employed? What design is used? How expensive is the labor? What is the shipping cost? How much do firms have to pay in the way of taxes or how are their costs affected by government regulations? How much does water and energy cost? And the list goes on.

Like many good stories, this one about bringing jobs back to America is more complicated than some people make out.  The reserve currency gambit is silly because it takes one out of hundreds of factors and pretends it is prominent. There is a simple way to look at all this. Americans average somewhere around $60,000 income per year. To make American workers worth that amount in a sustainable way, it makes no sense to compete with Vietnam on low-skilled manufacturing or with any country that has an ability to make a particular good or service better and cheaper than we can make it.

Does that mean we give up? No. It means we use our considerable resources to make the things we are the best at. It won’t be easy but we already do it all the time. Our prowess in digital is amazing. We have new companies popping up like JD at a tailgate party. We will need a smart and determined set of policies that support that effort. We need to think how we reshape government resources and incentives so they support an effort to be the very best at producing things that can generate good pay for many employees. 

We also need to continue to press cases against cheaters. It is one thing for the Rams to be tougher and smarter than Patriots – but if New England cheats, then the Rams still might not win. If China or any other country cheats -- then it is harder for the rest of us to make gains. 

Tuesday, January 22, 2019

Debt Bomb

Thanks to alert blog-buddy Johnny H the General, I saw this article that quoted our Federal Reserve Chairman Powell warning that government deficits are not a good thing: https://www.cnbc.com/2019/01/10/fed-chairman-powell-says-he-is-very-worried-about-growing-amount-of-us-debt.html

In reading that article and trying to keep up with this ongoing saga called government, I decided that I should try to provide some background. Like making a perfect Old Fashioned, this discussion of government debt and deficits can be daunting. I was taking a poll in a Sanibel haunt last night and learned from a gentle person teetering on his stool that a perfect Old Fashioned had to have sugar in it. So, of course, that sent me into professor mode, and I almost finished my lecture by midnight.

Let’s begin at the beginning. A government deficit occurs whenever the government spends more than it takes in taxes. Like you, the government might spend more than it earns in a given month. The government has a deficit. You have an unpaid charge on your Visa bill. Assuming you never did such things in the past, that deficit now means you have a debt. You owe the credit card company. The government facilitates its debt by selling a government bond to you, me, or Young Jin. 

Next month, if you don’t have as many JDs and manage to keep your spending below your income, you might have a surplus that you can use to payoff your debt. The debt went up and then the debt went down.

The trouble comes when you do not have a surplus. That is, every month you spend more than you earn. The debt increases every month by the amount of the deficit. This is easily solved when the mafia sends a well-dressed representative to your house and removes your collection of authentic German nutcrackers.

In the case of the government, the solution is a bit more complicated. Our national debt in the USA is about $20-something trillion. Yes, Tuna, trillion is a very big number. We are a large and wealthy country, so we seem to be able to handle that debt. No sweat. That debt is held by people both inside and outside the USA. So long as they get their monthly interest payments, they are cool.

What our Fed Chair was saying in his article is that two contingencies worry him. First, his own Federal Reserve buddies are engaged in a project of raising interest rates. This means that the club we call government (I refuse to capitalize that word) is going to have to pay even more dollars every month to bondholders. The second worry is that the USA economy might go into a recession. Just like shining our shoes, recessions tend to come now and then. When a recession comes, it reduces our national income, and we are less rich and less able to pay off our debts.

But you say, Balderdash! We are a rich and powerful country. So what if we have a little bitty recession and interest rates go up a smidge? Well, keep saying that. Ask your Greek friends or maybe your Venezuelan friends what happens when the world decides that you might not pay your lenders. You say, Balderdash again! Those are foreign places, not the USA.

Mr. Powell says he is not convinced it makes a difference. Once we look vulnerable, people will sell US bonds like hotcakes at Denny’s on a Tuesday night. Once the door is opened a crack, all hell will break loose. You don't want to be the last person holding a worthless US government bond! US interest rates will soar, the stock market will crumble, and the value of the dollar will be lower than scum on a snail’s belly.

The Fed will eventually raise interest rates to a normal level. A recession will eventually hit. In the meantime, our government is whistling Dixie. What a bunch of morons. Reduce the deficit dudes. You don’t have a lot of time. Reduce it.

Tuesday, January 15, 2019

Government Shutdown

We are going through the pain of a government shutdown. It is painful for me since it is harder to find macro data on federal government sites. But my pain is tiny compared to people who are really feeling important life-changing consequences.

So today I ask why?

Apparently the $5 billion proposed to build a wall is more important than everything the federal government does. We have all sorts of problems. We have too many people in poverty. We have too many people with insufficient livelihoods. We have poor infrastructure, and we have terrorists killing people all over the planet. But who cares about doing something about all that? Let's shut down the government over a $5 billion wall.

Do I have that wrong?

Since I was in a playful mood this morning and had not yet ingested my first JD, I decided to do the little table below. The first column shows how much we plan to spend in fiscal year 2019 on major programs. The numbers are in billions of dollars. The second column shows how much we could spend on each of those items if we allocated the $5 billion to that category instead of a wall. The third column compares the second column to the first in percentage terms.

Notice that we plan to spend $4.4 trillion for all federal government programs in FY 2019. A reallocation of the $5 billion would not change that total. So the change is zero dollars and zero percent. But even if that total could go from $4,407 billion to $4,412 billion -- the percentage increase would be very close to zero. This indicates that the $5 billion is virtually nothing when you compare it to all government spending. Why has nothing become everything?

Federal Government Spending USA FY 2019
Billions of dollars
       2019     2019'            %Increase
Healthcare 1,225 1,230 0.41
Pensions 1,108 1,113 0.45
Defense 949 954 0.53
Interest 363 368 1.38
Welfare 348 353 1.44
Education  113 118 4.42
Other 110 115 4.55
Transportation  94 99 5.32
General 53 58 9.43
Protection 42 47 11.90
Wall 5 0             na
Total 4,407 4,407 0.00

Tuesday, January 8, 2019

Data Dots and Thoughts

Lately some of us have been discussing interest rates. I made the point they were falling despite the Fed raising the Federal Funds Rate (FFR). Some of you believe that interest rates are rising. So I decided to put down my JD for a minute and check with Fred at the Saint Louis Fed.

The chart below shows the rate on 30 year mortgages since 2007. The chart happily says we are both right if you look at the graph in more than one way. That's the nice thing about graphs -- if you look hard enough you can find a historical time period that fits what you told your friends while teetering on a bar stool at 11 pm. I won't name any bars in Bloomington except to note that the bartenders at Finch's Roost, the Malibu and Uptown Cafe now know how to make a Larry Old Fashioned.

Where was I ? Oh yea -- mortgage rates. I chose the mortgage rate because even Nathan understands mortgage rates. I chose the 30 year rate but the 15 year rate would tell us pretty much the same story. I also decided to start the charts in 2007 so we get a nice before and after photo. Notice the shaded area from 2008 to mid-2009 is the great recession. In case you were wondering, the rate before 2007 was generally higher than the 6ish rate right before the recession.

Most of us don't care that much about rates of the past. If you want to borrow money today you are going to pay around 4.5% -- the last dot on the chart. If you want to borrow money next week or next year then the whole chart might help you think about what rates are possible for sometime ahead in 2019.

What might you conclude about the future?

     Focusing on the last few dots you might wonder if rates are going to fall further. There is a tiny little downward trend going on. Will it continue?

     If you go back to early 2017 you see an upward trend interrupted by several months of downward movement. So you might wonder if that upward trend will continue into the future. Notice that by looking at previous upward trends (e.g. 2011 and 2013) the upward movement of the rate was followed by a negative trend.

      If you look at today's rate of 4.5%, it's lower than most of the dots before 2012  but higher than nearly all the dots after 2012.

     If you turn the graph sideways and the changes are left and right instead of up and down -- it kinda looks like a drunk stumbling down the sidewalk on Kirkwood Avenue in Bloomington.

Data is fun but it isn't the whole story. The above exercise is tedious if not frustrating. This is where analysis comes in. I hate to use the word "theory" because many of you skeptics get even more skeptical. But I like theory and it helps us think more about all these dots. What causes the mortgage rate to rise and fall? Thinking about all the causes might shed some light on the above speculations.

Applying theory to this discussion doesn't solve it because there will be differences of opinions about the importance of each causal factor we might discuss. But it does have the benefit of widening the discussion. For example, if the Fed raises the FFR, that increases of cost of money to the IU Credit Union and raises the interest rate. But if global economic changes imply less demand for borrowing, then that would have the opposite effect on interest rates. Which effect will be bigger in the future?

I think the global effect will dominate and rates are going to continue falling. Some of you hold the opposite opinion. Neither the data nor the theory can crown the winner. I guess we will just have to wait and see.

Tuesday, January 1, 2019

Happy New Year

In the spirit of HAPPY New Year, I thought it might be fun to have a little contest. 

There is always something to be happy about if you work at it. Right now, it seems especially hard. I could list all the things that we are worried about and that list is not inconsequential. We have good reason to be worried about many things.

But then it occurred to me that while worries go through cycles with highs and lows, there is always room for worry if not outright fear. I remember a lot of those times and wonder about your experiences.

I recall:
  • being a young boy in the 1950s who regularly participated in nuclear attack exercises at Coconut Grove Elementary School wherein we had to sit under our school desks after the alarm sounded.
  • being a teenager at Ponce De Leon Junior High School in Miami when Kennedy faced down a Russian ship with missiles headed to Cuba.
  • getting drafted in 1968 and then being shipped to Vietnam in 1972.
  • leaving the military only to experience Nixon’s Wage and Price Controls and the resulting high inflation of the early 1970s.
  • sitting in long lines hoping to buy 5 gallons of gasoline during the energy crises in 1974 and then 1979.
  • my dissertation committee at the University of North Carolina not accepting my dissertation in 1976 right before I went to Indiana to be a professor.
  • watching inflation rise in the latter 1970s and getting a mortgage on my first home with an interest rate of 14%.
  • a world recession and stock market collapse right before I retired from teaching at Indiana University.
Somehow I lived through all that and life went on. Things seem really crappy today but I am guessing we will waddle through as always. JD helps a bit so keep that in mind as well. 

So I am wondering, what is your list? What did you endure in your lifetime? How did you get through the bad stuff?

Now don't you feel better?  :-)