The President of Federal Reserve Bank of Chicago came to speak at the CFA Society of Iowa Strategy Dinner last night and I was lucky enough to attend. Although, we did not learn anything really new from the speech, Evans nicely summarized the Fed’s motivation for implementing the unemployment and inflation thresholds that are his namesake along with the reiterating that the Fed will not remove accommodation, whether it be QE or the near zero federal funds rate too quickly. His view on the economic growth was pretty optimistic. Evans stated,
I am optimistic that we have appropriate policies in place to help the economy achieve escape velocity by 2014. So, after rising a disappointing 1-1/2 percent in 2012, real gross domestic product (GDP) should increase in the range of 2-1/2 to 3 percent this year and then grow between 3-1/2 and 4 percent in 2014, according to my forecast. This growth ought to be sufficient to bring the unemployment rate close or maybe even a little below 7 percent by the end of next year.” Read more
If you want Aaa-rated government debt, you’ll have to go looking to Canada, or Australia, or Germany, because late last week, ratings agency Moody’s officially downgraded the United Kingdom’s government bond rating from Aaa (their highest level) to Aa1 (their second highest level). Moody’s downgrade was based on three factors: the UK’s weak medium-term growth outlook; the impact of the weak economic outlook on the government’s fiscal consolidation plan; and the high and rising public debt burden. On the last point, Moody’s expects debt to peak at over 96% of GDP in 2016.
The downgrade wasn’t really a surprise, but it did come earlier than expected. The Office of Budget Responsibility had projected that government debt would remain over 90% of GDP for at least six years – that’s inconsistent with a triple-A rating. However, the downgrade came before the official budget was announced on March 20, which is when most figured the nudge downward would have come. Read more
Continuing the thoughts from the post I had on Valentine’s Day, I wanted to address a few of the questions I received surrounding the proposed hike to the federal minimum wage. During his State of the Union speech, President Obama stated that a full-time worker earning the current federal minimum wage of $7.25 per hour would fall below the poverty line. So the question popped up, what’s the relationship between low-wage workers and those who require government assistance?
Well, I was able to track down some research through the Office of The Assistant Secretary for Planning and Evaluation (that’s in the U.S. Department of Health & Human Services), and it paints an interesting picture.
The first thing to realize is that not everyone earning around the minimum wage is in dire economic straits. Read more
Back on Valentine’s Day, I posted about the link (or lack of one) between a proposed hike in the federal minimum wage and unemployment levels. I know…not a very romantic post for Valentine’s Day. I got several questions, so I thought I’d expand on them and do a couple follow-ups with a bit more information. To recap, basic economics would suggest that as the minimum wage increases (the price of labor), the consumption of labor (employment rate) would decrease as employers consume less of it. The problem though is that a good deal of research shows that this relationship doesn’t exist.
In my initial post, I referenced Washington and Oregon as two states whose minimum wages were already above or near the proposed $9/hour federal minimum. So the question is…how have they been doing? Has that higher minimum wage meant higher unemployment? Read more
The 2008 meltdown is finally in the rear view mirror. The global economy has moved on.
But the current market rally is driven largely by the growing sentiment that the worst is over: America has not gone over the fiscal cliff, the Eurozone has not split, China has not had a hard landing, and the price of oil has not spiked despite the unrest in the Middle East.
Previous rounds of quantitative easing in Europe and the U.S. have prevented all-out deflation. The latest round is the most potent. Markets have struggled to shrug it off.
Equities are set for a bounce. They look attractive relative to bonds. But the ice age for equities will thaw only when economic fundamentals begin to look stronger and more sustainable. The much-predicted stampede out of bonds will occur later rather than sooner – if there is one. Read more
Your entry-level economics class taught you (or should have) that when the price of something goes up, less of it is consumed. This holds for cars, interest rates, widgets, and wages. So, during this week’s State of the Union address, when President Obama called for raising the federal minimum wage from its current level of $7.25 per hour to $9.00 per hour, and tagging the minimum wage to the cost of living, it drew a decent amount of criticism. The thinking against raising the minimum wage goes like this: if you raise the minimum wage, employers will be able to afford fewer workers; employment will go down; the economy is worse off. The counterargument is that with more money in their pockets, minimum-wage workers, will contribute more to the economy. However, with unemployment at 7.8%, nobody wants to be on the wrong side of the argument.
The problem is that basic economics seems to break down on this point. A recent paper from John Schmitt at the Center for Economic Policy Research surveys recent research on minimum wages and finds that there’s little effect on employment.
Before we look at that, though, let’s look at what this minimum-wage issue really looks like. Read more
This month, Iowa’s soon to-be retired Senator Tom Harkin and Oregon Senator Peter DeFazio are planning to reintroduce their bill for a so-called Tobin tax. The Tobin tax is named after –wait for it—the economist who theorized it – James Tobin. In the 1970s, Tobin developed the idea for a transaction tax (amounting to less than 0.1%) on foreign currency to reduce currency speculation and reduce exchange-rate volatility. The concept of a Tobin tax gained favor during the Asian financial crisis of the late 1990s. And in the midst of the European debt crisis, many governments needing cash, and lots of debate of between Wall Street and Main Street, the Tobin tax is en vogue once again as way to both collect revenue and reduce high frequency trading. Eleven European Union countries have a draft to implement a Tobin tax at a rate of 0.1% on securities trades and 0.01% on derivatives trades. As comparison, the Harkin-DeFazio bill asks for only 0.03% for most trades.