Is Another Round of Quantitative Easing Coming?

October 22, 2013Danny Vinik Leave a comment

Today was a special Jobs Day Tuesday as the Bureau of Labor Statistics released the September jobs report, which had been delayed due to the government shutdown. It wasn’t very good. Total non-farm payrolls increased by 148,000, which was less than the expected 180,000, while the unemployment rate dropped from 7.3% to 7.2%. The labor force participation rate remained unchanged at 63.2%. The July (-15,000) an August (+24,000) revisions combined for an increase of 9,000 jobs.This report was disappointing, but what’s even scarier is the trend lines.

Here’s the three-month moving average going back to the end of 2011:

There’s a pretty good chance that something is wrong with the way the BLS seasonally adjusts the numbers. Every winter has been much better than the following summer, but the trend is still not good. We’re into Obama’s second term and the economy is still barely growing. The reasons for this aren’t clear, but the government likely has a lot to do with it. Sequestration is terrible policy that is taking a chunk out of the economy at the wrong time. Austerity is the last thing we need right now. The expiration of the payroll tax cut at the start of this year is likely having some effect as well. And, of course, shutting down the government and risking a default is about as boneheaded as it gets. Instead of constructing policies looking to get the economy back going, the federal government (read: Republicans) have stood in its way.

The Federal Reserve has been concerned about fiscal policy and chairman Ben Bernanke has repeatedly emphasized that Congress needs to do more. Except that’s never going to happen. The question then is will the Fed do more? The economy is slowing down, not recovering. The FOMC had hinted at tapering in September, but pushed it off due to weak data and the impending fiscal fights. The market had assumed that the Fed was going to reduce its bond purchases regardless of the underlying data. By delaying the taper, the central bank attempted to regain its credibility and prove to investors that it’s data-dependent. Now, this is another test of that credibility.

This was a bad report and the economy is trending downwards. More fiscal fights loom and sequestration will be worse in 2014 than it was this year. Inflation is still running well below the Fed’s 2% target. If the Fed is really data-dependent, it will seriously think about making its policy even more accommodative either through QE4 or another mechanism.. The economy is no longer improving at a moderate pace. It’s slowing and there’s no chance that fiscal policy will help. It’s time for the Fed to pick up the slack.

Raising the Debt Ceiling Is Paying Our Bills

October 21, 2013Danny Vinik 1 Comment

Rep. Andy Barr (R-KY) is confused:

President Barack Obama says we need to pay our bills. I agree. But raising our debt limit without reform is not paying our bills. It is asking China, bond holders and other creditors to pay our bills.

The president says we need to avert a default. I agree. But raising our debt limit without any reform is not averting default. It is merely postponing default. Instead of simply opening up a new credit card in our childrens’ name because we’ve maxed out all of our own, we must take responsibility and stop business as usual in Washington. We owe it to our children and grandchildren to end the spending spree and start making the tough choices that will finally force the government to live within its means.

Here’s how U.S. fiscal policy works: The federal government takes in a certain amount of money and spends a certain amount of money each year. Congress passed laws that dictate what people have to pay to the government and how much the government will spend. In the U.S., the federal government almost always spends more than it takes in. It makes up the difference by taking on debt, but the debt ceiling prevents us from taking on more debt. It doesn’t change how much we’re spending or taking in. When Congress refuses to pay the debt ceiling, it stops us from making up that gap. The amount we owe doesn’t change. We just aren’t paying our bills.

The part about China is particularly bad. Rep. Barr really thinks that raising the debt limit is us asking China to pay our bills? China’s decision to purchase Treasuries has nothing to do with helping the U.S. out. China makes its own fiscal policy decisions that it thinks is best for itself, not the United States.

Finally, raising the debt ceiling without reforms does nothing to our odds of a future default. In fact, the only reason there is a chance the U.S. breaches the debt limit in the future (and I don’t think there is one) is the Tea Party’s willingness to do so. In a sane world, Congress would abolish the debt ceiling and there would be zero chance of a U.S. default, but sadly we don’t live in a sane world. Raising the debt ceiling now only increases the odds of a future default in that it makes Tea Party Republicans even more anxious to commit economic suicide.

Were Mainstream Conservatives To Blame for the Shutdown?

October 18, 2013Danny Vinik 2 Comments

The post-mortem of the McConnell-Reid deal to open the government and avoid a default has focused a lot on who is to blame on the Republican side. Many have laid the blame at Speaker Boehner’s feet – something I have pushed back against a number of times. House Republicans blame Senate Republicans. Senate Republicans blame Ted Cruz and Co. The Tea Party blames the establishment. The Washington Post’s Jonathan Bernstein has narrowed it down more, specifically focusing on mainstream House Republicans:

There’s plenty of blame to go around for the shutdown and debt-limit fiasco, but any account which focuses mainly on Boehner is probably letting both the moderates and the mainstream conservatives — in other words, most House Republicans — off far too easy.

Bernstein has named this group the ‘Fraidy Cat Conference:

These 175, too, are mostly paranoid about renomination, even if they want reporters to know that they’re not actually nuts. They’re the ones who drive what Boehner does. They’re the ones who have to bear the brunt of the responsibility for this shutdown. They’re the ones who are the ‘fraidy cat conference — so paranoid about renomination, and more broadly about allowing any distance to appear between themselves and the “conservatives” who they probably honestly have contempt for, that they’re willing to run their party right into a ditch.

The problem with this argument is that the ‘fraidy cat conference is right to be afraid. They have seen the power of the Tea Party and how tough primaries can be. They’re right to be paranoid about renomination.

This gets to a larger problem with diagnosing who is to blame for the shutdown. It’s important to look at the incentive structure for all of the actors involved.

Mainstream conservatives – the ‘fraidy cats – have an incentive to put as little distance as possible between themselves and the right wingers. Many are part of the “hope yes/vote no” conference that is glad the shutdown is over with and a clean CR passed, but couldn’t vote for the legislation themselves for fear of conservative blowback. I imagine that for many, this was an easy decision. Stick with the Tea Party through and through.

Like Boehner, these members had the power to end the shutdown anytime they wanted. Like Boehner, they had both individual and group incentives to keep the shutdown going until the 11th hour. Supporting the shutdown reduced the chances that these mainstream conservatives would face a primary challenge while also keeping the party unified. This point cannot be repeated enough: the GOP cannot allow a civil war to break out between the establishment and the Tea Party. It must do everything in its power to avoid that.

The reason that Boehner and the mainstream conservatives are incentivized towards making extreme demands and shutting down the government is because the Tea Party sets those incentives. The far-right members are the ones willing to jump ship from the Republican Party and commit political suicide. In doing so, they would take the Republican Party down with them. That gives them the power to set the framework of the House Republican strategy. If the Tea Party wants to fight, then Boehner and mainstream conservatives must listen. They have every incentive to do so. These are rational decisions.

The Tea Party is being irrational. They chose a strategy guaranteed to fail, forced their fellow Republicans to use those futile tactics, and caused needless suffering and economic harm. Their incentives are shaped not by outside forces, but by themselves. Yet, they decided on this radical plan to shut down the government if the president did not make drastic alterations to his greatest legislative achievement. It was bound to fail and blow up in their face. Yet, the Tea Party irrationally chose to take this route anyways.

Ultimately, they are the ones to blame.