Testimony before the House Financial Services Committee. Read full testimony here.
I explain why the current mix of prudential regulations of banks developed over the past three decades is not designed well enough to get us there. The pillars of that system include Basel risk-based capital ratio requirements, leverage limits, liquidity regulations, stress tests, and “orderly resolution.” As I will show, it is not just the particulars of these standards that are inadequate; they are misconceived and poorly designed. I propose regulatory reforms that would not only credibly limit private risk taking at public expense, but do so in a way that would improve the efficiency of our banking system. It is possible to credibly and substantially reduce (if not eliminate) bank bailouts, while also improving bank performance, and reducing the risks banks face from regulatory uncertainty.
Read the full testimony here.
I recently wrote a scintillating essay on the best way to adjust household income growth to take inflation into account. If you loved that one—and you both know who you are—the next 3,000 words are going to be pure bliss.
Testimony Submitted to the House Republican Policy Committee. The political party that can brand itself as the party of entrepreneurs and innovation is the party that will make headway towards claiming the millennial generation.
An increase in the fast food minimum wage to $15 an hour, as the Wage Board is considering, represents an increase of 66 percent. According to the Bureau of Economic Analysis, labor costs account for slightly more than one-third of revenue for food and drinking establishments. Assuming no substitution effects, prices would go up by about 22 percent. If management could substitute away from direct labor, prices could go up by about 15 percent. To assume that prices would not increase with a 66 percent labor price hike is economic naïveté.
I’ve spent much of the 2010s trying to make the case that American living standards are better, and have improved more than the conventional wisdom would suggest. The flood of overly pessimistic analyses and claims could occupy my entire workweek if I had nothing else to do and were to focus daily on pushing back against it. Unfortunately, making the case that the conventional wisdom is wrong involves some moderately technical arguments about how we measure income and prices and about the proper demographic context for understanding income trends.
America's economic growth depends on ports for a competitive edge in exports and for the flow of imported goods that bolster Americans' paychecks. The costs incurred during slowdowns at U.S. ports, recent and otherwise, highlight the considerable importance of ports to the U.S. economy and the need to reform U.S. port labor law. Indeed, if America is to reap the benefits of the two major new free-trade deals currently under negotiation, the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP), U.S. ports must be open for business.
Economic growth since the deep recession of 2008-2009 has been modest but balanced, and momentum is now building. The outlook for sustained cyclical growth is favorable. So far this expansion, the pace of growth has been dampened by real and financial adjustments following the unsustainable debt and housing bubbles, along with harmful economic and regulatory policies. Not surprisingly, the Fed’s unprecedented monetary stimulus has been largely ineffective in addressing the real, nonmonetary constraints. As these post-crisis adjustments conclude, economic performance will strengthen in 2015-2016, supported by the Fed’s aggressive monetary accommodation and lower energy prices.
The Federal Reserve should fix the interest on reserves floor for the federal funds rate to facilitate the normalization of interest rate policy without interfering in financial markets. Instead, the Fed's intention to employ reverse repurchase agreements to establish a funds rate floor inserts the Fed into money market arbitrage and violates the minimum intervention principle of central banking.
The Federal Reserve is preparing to normalize monetary policy and has plans to raise its policy rate from zero in the very near future. Economic conditions have improved markedly in the past year. This is seen in respectable economic growth and the unemployment rate has been falling below 5.5%, the Fed’s estimate of the natural rate. Until earlier this year the FOMC has been reluctant to normalize monetary policy and raise the federal funds rate because it felt that labor market conditions were still too soft. That reason is vanishing very quickly.
Federal Reserve policy statements provide a favorable outlook for the U.S. economy with solid economic growth, strong job gains, and renewed momentum heading into 2015. Real gross domestic product, our broadest measure of inflation-adjusted income and spending, grew at an annualized rate very close to 4 percent for the final three quarters of the year just past. More than 3.5 million new jobs have been created, on net, since the beginning of 2014, and at 5.5 percent, the unemployment rate is down more than a full percentage point from 12 months ago. Propelled by these strong fundamentals, and undoubtedly helped along by falling energy prices, too, real disposable personal income growth has accelerated and measures of consumer confidence have moved sharply higher.
John Taylor is of course one of the world’s most influential academic commentators on monetary policy and, I might say, one whose judgements most (if not all) of us on the SOMC usually agree with to a very great extent. One of his most notable accomplishments is, of course, the development of the well-known “Taylor Rule” as a guideline for the conduct of monetary policy. Almost every one in this room is, I suspect, at least somewhat familiar with this proposed policy rule.
The economy is growing, labor markets have improved dramatically, and inflation is forecast to return to two percent over the intermediate term. However, the Fed still expresses extreme caution about normalizing monetary policy, citing myriad concerns, ranging from sluggish wage growth and low inflation to foreign economic and political risks, which might delay the date at which interest rates finally lift off their zero lower bound. This creates the potential for an erosion of the FOMC’s credibility and suggests the Fed lacks a clear strategy for getting monetary policy back on track.
The Federal Open Market Committee’s Policy Statement from its January 27-28 meeting provides a favorable outlook for the US economy with solid economic growth and strong job gains and renewed momentum heading into 2015.
Real gross domestic product, our broadest measure of inflation-adjusted income and spending, advanced at a 2.5 percent rate during the past year, weighed down considerably by the severe weather-related decline in 2014Q1; real GDP growth exceeded 4 percent in the final three quarters of 2014.. This healthy growth generated more than three million new jobs during 2014, and the Employment Report for January 2015 brought even more good news from the American labor market. 257,000 new jobs were created and upward revisions to already strong gains in prior months lifted the cumulative 3-month job gain above one million. At 5.7 percent, the unemployment rate is down almost a full percentage point from a year ago, and wage growth rebounded in January, suggesting that December’s puzzling decline was an anomaly.