Topic: Finance, Banking & Monetary Policy

Did The U.S. Lose 2.4 Million Jobs from China Imports?

A major Wall Street Journal article claims, “A group of economists that includes Messrs. Hanson and Autor estimates that Chinese competition was responsible for 2.4 million jobs lost in the U.S. between 1999 and 2011.”  In a recent interview with the Minneapolis Fed, however, David Autor said, “That 2 million number is something of an upper bound, as we stress.” The central estimate was a 10% job loss which works out to 1.2 million jobs in 2011, rather than 2.4 million.  Since 2011, however, the U.S. added 600,000 manufacturing jobs – while imports from China rose by 21% – so both the job loss estimate and its alleged link to trade (rather than recession) need a second look.

“The China Shock,” by David Autor, David Dorn and Gordon Hanson examined the effect of manufactured imports from one country (China) on local U.S. labor markets. That is interesting and useful as far as it goes.  But a microeconomic model designed for local “commuting zones” cannot properly be extended to the entire national economy without employing a macroeconomic model.  

For one thing, the authors look only at one side of trade – imports – and only between two countries.  They ignore rising U.S. exports to China - including soaring U.S. service exports to China.  They are at best discussing one side of bilateral trade. And they fail to consider spillover effects of China’s soaring imports from other countries (such as Australia, Hong Kong and Canada) which were then able to use the extra income to buy more U.S. exports. 

Autor, Dorn and Hanson offer a seemingly rough estimate that “had import competition not grown after 1999” then there would have been 10% more U.S. manufacturing jobs in 2011.  In that hypothetical “if-then” sense, they suggest that “direct import competition [could] amount to 10 percent of the realized job loss” from 1999 to 2011. 

Choosing Financial Stability

Tomorrow the House Financial Services Committee moves to “mark-up” (amend and vote on) the Financial Choice Act, introduced by Committee Chair Jeb Hensarling.  The Choice Act represents the most comprehensive changes to financial services regulation since the passage of Dodd-Frank in 2010.  Unlike Dodd-Frank, however, the Choice Act moves our system in the direction of more stability and fewer bailouts.

At the heart of the Choice Act is an attempt to improve financial stability by increasing bank capital, while improving the functioning of our financial system by reducing compliance costs and over-reliance on regulatory discretion.  While I would have chosen a different level of capital, the Choice Act gets at the fundamental flaw in our current financial system: government guarantees punish banks for holding high levels of capital which, unfortunately, leads to excessive leverage and widespread insolvencies whenever asset values (such as houses) decline.  Massive leverage still characterizes our banking system, despite the “reforms” in Dodd-Frank.

The Choice Act also includes important, even if modest, improvements in Federal Reserve oversight (see Title VII).  There was perhaps no contributor to the housing boom and bust that has been as ignored by Congress as the Fed’s reckless monetary policies in the mid-2000s.  Years of negative real rates (essentially paying people to borrow) drove a boom in our property markets.  The eminent economist John Taylor has written extensively and persuasively on this topic, yet it remained ignored by legislators prior to Hensarling’s efforts.  Such reforms are too late to unwind the Fed’s current distortionary policies, but they may prove helpful in moderating future booms and busts.

Despite its daunting 500+ pages, the Choice Act is still best viewed as a modest step in the right direction.  Considerably more needs to be done to bring market discipline and accountability to our financial system.  But at least the Choice Act moves us in the right direction, for that the bill merits applause and consideration.

 

The Bipartisan Push to Fully Restore the Export-Import Bank

Export-Import Bank supporters are back at it again. According to a document from the Office of Management and Budget, the administration is reportedly asking lawmakers to include a provision restoring the agency’s full lending authority as part of the continuing resolution that needs to be passed in order to keep the government functioning after September 30th. It was just a few weeks before his election in 2008 that Obama said it had “become little more than a fund for corporate welfare,” and cited it as an example of why he wasn’t someone “who believes we can or should defend every government program just because it’s there.” What a difference eight years can make.

Opponents of cheered last year when Congress let the bank’s charter lapse, only for it to be reauthorized months later when a provision was attached to the highway bill in December to reauthorize the agency through September 2019.

The agency, which provides financing and loan guarantees for U.S. export transactions, has since been limited in the scope of its lending authority, as the Senate has declined to approve the administration’s nominee to its board of directors. With three of five board seats vacant, quorum rules prevent the bank from approving any transactions over $10 million until the vacancy is filled.

This latest request from the administration is the culmination of a concerted effort on both sides of the aisle to restore full authority to the agency, without which it cannot approve the larger deals that would benefit the bigger companies that receive so much of the bank’s support. This is hardly a partisan affair, as earlier this year Republican Rep. Charlie Dent introduced an amendment to the State and Foreign Operations Appropriations Bill that would achieve the same objective.

Has the Fed Been Breaking the Law?

No, I don’t mean sections 8 and 10 of the Constitution’s first article — though goodness knows a case can be made (and has been made recently, and most eloquently, by CMFA Adjunct Scholar Dick Timberlake), that it hasn’t adhered to the letter of that law, either. I’m referring to the law authorizing the Fed to pay interest on depository institutions’ reserve balances, or IOR, for short.

You see, according to Title II of the 2006 “Financial Services Regulatory Relief Act” — that law that originally granted the Fed authority, commencing October 1, 2011, to begin paying IOR — the Fed is allowed to pay interest, not at any old rate it chooses, but “at a rate or rates not to exceed the general level of short-term interest rates.”

As the name of the 2006 Act suggests, its purpose was to relieve financial institutions of unnecessary regulatory burdens. The fact that depository institutions’ reserve balances at the Fed, including minimum balances they were required to hold, bore no interest, had long been regarded as one such unnecessary burden. So long as reserve balances paid no interest, reserve requirements amounted to a distortionary tax on bank deposits subject to them. In the words of then Fed Governor Donald Kohn, who testified in favor of IOR back in 2004, the payment of interest on reserves, and on required reserves especially, would result in improvements in efficiency that “should eventually be passed through to bank borrowers and depositors.”

Since the original intent of IOR was to remove an implicit tax on deposits, and not to have the Fed subsidize those deposits, it’s easy to understand the law’s insistence that the Fed pay IOR only at “a rate or rates not to exceed the general level of short-term interest rates.” It also easy to see why most economists, including the Fed’s own experts, treat the federal funds rate as an appropriate proxy for the opportunity cost of reserve holding, and hence as one of the short-term rates that the rate of interest on bank reserves ought “not to exceed.” Indeed, because overnight lending involves some risk and transactions costs, while banks would earn IOR effortlessly and without bearing any risk, the IOR rate should logically be strictly below, rather than below or equal to, the federal funds rate.

Miami Vice

The City of Miami has come up with an ingenious plan: raise revenue without asking for a dime from taxpayers and make Wall Street banks pay for it, all under the auspices of fighting racial discrimination. Actually, it would be unfair to give Miami full credit for the idea: so far, it’s only one of more than a dozen cities, counties, and school districts that have tried the same scheme.

The plan works by engaging the services of plaintiffs’ counsel (who typically work on a contingency fee, requiring the city to pay nothing out of pocket) to sue mortgage lenders under the Fair Housing Act (FHA). The city claims that it has suffered from a diminished tax base, in addition to an increase in the need for its services, all thanks to lenders’ alleged discriminatory practices.

While this is an interesting theory, it falls well outside the problems the FHA was designed to address. It seems the Supreme Court may also question whether the FHA permits this type of suit as it has granted certiorari in the case Bank of America v. City of Miami. On Monday, the Cato Institute filed a brief in support of Bank of America and its co-defendant, Wells Fargo.

Thomas Paine, Advocate of Sound Money and Banking

Between writing his well-known revolutionary liberal tracts Common Sense (1776) and The Rights of Man (1791), Thomas Paine contributed knowledgeably to a 1785-6 debate over money and banking in Pennsylvania. Paine defended the Bank of North America’s charter and it operations in a number of lengthy letters to Philadelphia newspapers during 1786, followed by a December monograph that summarized his case, Dissertations on Government; The Affairs of the Bank; and Paper Money.[1]

Paine argued that to repeal the bank’s charter violated both the rule of law and the maxims of sound economic policy. His writings show that he well understood the benefits of banking. Although proponents of the repeal accused Paine, publicly known to be in dire financial shape, of being paid by the BNA’s proprietors for defending it (one called him “an unprincipled author, who lets his pen out for hire”), Paine vociferously denied the charge, and historians (such as Philip S. Foner, who edited an anthology of Paine’s works), have found no evidence to support the accusation. Prima facie evidence for Paine’s sincerity is found in his marshalling of serious arguments that were consistent with the classical liberal principles of his earlier writings.

The Fed Is Overestimating Economic Growth

In her speech yesterday at the Federal Reserve’s annual conference in Jackson Hole, Wyoming, Fed Chair Janet Yellen stated that “the case for an increase in the federal funds rate has strengthened in recent months.” She based that view on “the continued solid performance in the labor market” and “our outlook for economic output and inflation.”

As documented by Jon Hilsenrath in yesterday’s Wall Street Journal,the Fed has consistently overestimated economic growth since 2004. The Fed’s economic model is wrong and there is no reason to believe it will suddenly produce reliable predictions. The model also does poorly in predicting inflation, though it does not show such a bias one way or another. Continuing to rely on the Fed’s flawed model to determine policy would be foolish.

Characterizing the labor market as “solid” is misleading in the extreme. Much of the decline in the unemployment rate to which Yellen directs our attention has been due to the decline in the civilian labor market participation rate. If people give up on the labor market, they are not counted as unemployed. Far from being a sign of strength, a fall in the unemployment rate for that reason is arguably a sign of weakness in labor markets. Since the unemployment rate is no longer a reliable indicator of labor market conditions, it should be dropped as a policy gauge.

For these and other reasons, I stand by my post of August 9th that the Fed will not be able to raise rates. My only hedge on that prediction is that Yellen is putting the Fed’s credibility on the line with her continued predictions of raising interest rates. Loss of face is a poor justification for raising interest rates, but the human factor cannot be dismissed in policy making.