Tuesday, May 12, 2015

Full steam ahead on 3 cylinders

JOLTS data continues to look strong.  Growth in the major categories continues to be strong (the slopes of the weighted moving averages), and the rates are basically at full employment levels.  Because a labor force that skews older will have lower turnover, hires and quits are topping out slightly lower than in the previous recovery and job openings are slightly higher.  It would be tempting to blame this on structural issues (read: my political hobby horses), but these small changes in rates are about where a back-of-the-envelope estimate of demographic effects would suggest.  Older workers, in aggregate, have much lower unemployment rates and much longer unemployment duration, which means dramatically lower employment churn.

But, the New York Fed's Household Debt and Credit Report showed no growth in housing debt still in the first quarter, in spite of some signs that mortgages have begun to grow.

Until mortgages show sustained growth, annual growth in bank credit probably will be limited to less than 10%.  If that is where we stay, it seems like we could have decent GDP growth.  I suspect that non-shelter inflation will remain tame if that is the case, but I am not sure about that.  I don't see how long term interest rates would be able to rise in that scenario, though.  It's strange that FOMC members still talk about low interest rates as if they are stimulative, when clearly the asset class that is unable to gain traction is housing and clearly interest rates are not the constraining factor there.  I am afraid that if mortgages don't move, long term interest rates will collapse, and the Fed will interpret that as stimulative, giving them more confidence about raising interest rates on reserves.

What a strange economy this is.  Housing, education and health care have been eating up our productive capacity for some time.  The details differ for each sector, but each is giving us a declining share of real output while we keep spending the same or more.

There is so much talk about inequality, usually revolving around confiscation and redistribution, and a shared feeling among progressives that those who balk at that are simply heartless.  But, what good would redistribution do us in the face of these problems?  We basically have pushed ourselves into a banana republic scenario, where those who own residential real estate capture huge excess rents because of barriers to entry.  Why would we solve that problem with redistribution?  All the redistribution in the world isn't going to build any new houses.  In fact, it will make the problem worse if it discourages what little new building we have now.

Sometimes I feel very grateful that we have somehow overcome our terrible intuitions about emergence for so long that so many of us are able to enjoy the fruits of abundance that come from the modern global marketplace.  But, then I look at issues like this.  There is such a widespread distrust of prices and market participants, and a willingness to impose disorder.  We console ourselves that even many economists as late as the 1970s supported price controls, and that policy norms have come a long way.  But, how is the current housing situation any different?  There aren't price controls in terms of forcing homes to sell at target prices, but there basically is a consensus among the public and among economists that if home prices reach some general level, we have to correct them, even at the expense of causing the worst economic downturn in nearly a century.  At least the economists in the 1970s were hurting the economy by accident.  They weren't imposing price controls knowing that they were creating significant dislocations.  To simply suggest that we let home prices float, mortgage credit flow at the discretion of private lenders and borrowers, and housing supply to expand at least enough to end 35 years of housing inflation is, as far as I can tell, generally considered to be an extreme opinion.

And, it also seems to be widely assumed that economic rents are the result of an elitist cabal directing Washington from smoke-filled rooms.  But, the economic rents going to current home buyers are the result of the collapse of the mortgage market.  The consensus has the whole story so completely bass ackwards.  I'm pretty sure BlackRock Blackstone wasn't secretly directing the Fed to tank the banks so they could spend the next decade buying up cheap real estate.  The rents have come from the demands of the consensus.  A robust mortgage market would cause the rents to be bid away.  It's certainly not the financial sector that is demanding that we tighten up lending.

And, look at education.  In that case, it's not so much a case of capitalists pocketing extra profits.  It's just a matter of bloated post-secondary administrations, over-consumption, and primary and secondary schools that are insulated from competitive pressures to be more responsive and efficient.  So, there are millions of middle class wage earners in that sector who are doing work that appears to be useful, but is really only necessary because of inefficient providers and subsidized demand.  At the end of the process, the Federal government shuffles students through colleges with little regard for outcomes, so we end up subsidizing those who will become the highest wage earners in the economy and saddling future low wage earners with debilitating, pointless debt.  I suppose redistribution can alleviate some of these problems, but is it really a heartless, extremist position to address the obvious problems at their roots?  After the decades (centuries!) of damage that publicly disbursed education has inflicted on marginal communities, how can it be that the "social justice" label is most closely affiliated with people who want to prevent parents in those communities from exercising choice?

And, also, with health care.  We have certificates of need requirements for hospitals, longstanding severe barriers to entry for physicians, state level committees that must approve insurance prices and prices that basically don't exist in the actual delivery of the service because of decades of federal meddling, and such a disconnect between consumers and providers that there is massive over-consumption of absurdly expensive health services that no rational consumer would demand.  These are obvious problems that we all know about.  Yet the debates, again, are about redistribution.

Time and again, we arbitrarily hamstring supply with public policy and our public solutions are to subsidize demand.  I think I can safely say that in the next election, no major candidate will be running ads pointing out how insane it is that existing hospitals get to decide if a hospital can open up or add new services.  That problem, along with many of these supply side problems, is a clear case where the problem is that there aren't enough markets or markets aren't trusted enough.  We all walk through this health system watching thousands or tens of thousands of dollars get spent where reasonable outcomes could be achieved for a small fraction of that cost, but it is basically illegal for anyone to provide those services to us in a sane manner.  The solution to this problem isn't to tax the doctor so that a poor and sick person can spend those pointless tens of thousands of dollars.

The inhumane position is to burn political bridges in battles over redistribution in the face of these preposterous supply problems.


  1. Are you following the NGDP futures market SS set up at all? It has dropped from 4.6+ in Jan to 3.3-.3.6 range this past week. Declines have persisted despite the expected Fed hike being pushed back as data comes in.

    1. Yes. Oddly, though, expected inflation is recovering.

    2. 5 year is the shortest I have glanced at.

    3. short term low growth + long(er) term inflation expectations is consistent with a service economy.

  2. Higher employment and struggling retail sales (as seem to be coming in) also fit very well.

  3. Interesting blogging. NIMBYism is of course rampant. How to build millions of units of cheap housing?