July 23, 2017

Economic Scene: Fisticuffs Over the Route to a Clean-Energy Future

The conclusion of the critique is damning: Professor Jacobson relied on “invalid modeling tools,” committed “modeling errors” and made “implausible and inadequately supported assumptions,” the scholars wrote. “Our paper is pretty devastating,” said Varun Sivaram from the Council on Foreign Relations, a co-author of the new critique.


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The experts are not opposed to aggressive investments in renewable energy. But they argue, as does most of the scientific community represented on the Intergovernmental Panel on Climate Change, that other energy sources — atomic power, say, or natural gas coupled with technologies to remove carbon from the atmosphere — are likely to prove indispensable in the global effort to combat climate change. Ignoring them risks derailing the effort to combat climate change.

But with the stakes so high, the gloves are clearly off.

Professor Jacobson is punching back hard. In an article published in the same issue of the Proceedings and in a related blog post, he argues that his critics’ analysis “is riddled with errors and has no impact” on his conclusions.

In a conversation over the weekend, he accused his critics of being shills for the fossil fuel and nuclear industries, without the standing to review his work. “Their paper is really a dangerous paper,” he told me.

In San Francisco, cooking oil is collected for recycling into biofuels. Mark Z. Jacobson, a Stanford engineer, claims renewables can provide 100 percent of the nation’s energy needs in a few decades without bioenergy, which today contributes about half of the country’s renewable energy production Credit Justin Sullivan/Getty Images

But on close examination, Professor Jacobson’s premise does seem a leap of faith.

Renewable sources provide only about a tenth of the United States’ energy consumption. Increasing the penetration of intermittent energy sources from the sun and the wind is already proving a challenge for the electricity grid in many parts of the world.

Professor Jacobson not only claims renewables’ share can be ramped up on the cheap to 100 percent within a few decades, but also that it can be done without bioenergy, which today contributes about half of the country’s renewable-energy production.

And yet under the microscope of the critics — led by Christopher Clack, chief executive of the grid modeling firm Vibrant Clean Energy and formerly with the National Oceanic and Atmospheric Administration and the University of Colorado, Boulder — his proposed system does not hold together.

The weakness of energy systems powered by the sun and the wind is their intermittency. Where will the energy come from when the sun isn’t shining and the wind isn’t blowing? Professor Jacobson addresses this in two ways, vastly increasing the nation’s peak hydroelectricity capacity and deploying energy storage at a vast scale.

“To repower the world, we need to expand a lot of things to a large scale,” Professor Jacobson told me. “But there is no reason we can’t scale up.”

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Actually, there are reasons. The main energy storage technologies he proposes — hydrogen and heat stored in rocks buried underground — have never been put in place at anywhere near the scale required to power a nation, or even a large city.


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His system requires storing seven weeks’ worth of energy consumption. Today, the 10 biggest storage systems in the United States combined store some 43 minutes. Hydrogen production would have to be scaled up by a factor of 100,000 or more to meet the requirements in Professor Jacobson’s analysis, according to his critics.

Professor Jacobson notes that Denmark has deployed a heating system similar to the one he proposes. But Denmark adapted an existing underground pipe infrastructure to transport the heat, whereas a system would have to be built from scratch in American cities.

Professor Jacobsen envisions extensive systems to store the intermittent energy produced by solar and wind technologies. Credit Scott McIntyre for The New York Times

A common thread to the Jacobson approach is how little regard it shows for the political, social and technical plausibility of what would undoubtedly be wrenching transformations across the economy.

He argues for the viability of hydrogen-fueled aviation by noting the existence of a hydrogen-powered four-seat jet. Jumping from that to assert that hydrogen can economically fuel the nation’s fleet within a few decades seems akin to arguing that because the United States sent a few astronauts to the moon we will all be able to move there soon.

He proposes building and deploying energy systems at a scale that has never been achieved and at a speed that nobody has ever tried. He assumes an implausibly low cost of capital. He asserts that most American industry will easily adjust its schedule to the availability of energy — unplugging when the wind and sun are down regardless of the needs of workers, suppliers, customers and other stakeholders.

And even after all this, the system fails unless it can obtain vast amounts of additional power from hydroelectricity as a backup at moments when other sources are weak: no less than 1,300 gigawatts. That is about 25 percent more power than is produced by all sources combined in the United States today, the equivalent of 600 Hoover Dams.

Building dams is hardly uncontroversial. So Professor Jacobson proposes adding this capacity with “zero increase in dam size, no annual increase in the use of water, no new land,” simply by adding a lot more turbines to existing dams. It is not obvious that so many of them can be added, however, or at what cost. Especially considering they would be unproductive 90 percent of the time and for use only as a backstop. What’s more, adding turbines does not increase the available energy at any given time unless there is more water pushing through them.

Ken Caldeira of the Carnegie Institution for Science, one of the lead authors of the critique, put it this way: The discharge rate needed from the nation’s dams to achieve the 1,300 gigawatts would be equivalent to about 100 times the flow of the Mississippi River. Even if this kind of push were available, it is not hard to imagine that people living downstream might object to the release of such vast amounts of water.


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“The whole system falls apart because this is the very last thing that is used,” Professor Clack noted. “If you remove any of this, the model fails.”

It is critically important to bring this debate into the open. For too long, climate advocacy and policy has been inflected by a hope that the energy transformation before us can be achieved cheaply and virtuously — in harmony with nature. But the transformation is likely to be costly. And though sun, wind and water are likely to account for a much larger share of the nation’s energy supply, less palatable technologies are also likely to play a part.

Policy makers rushing to unplug existing nuclear reactors and embrace renewables note: Shuttering viable technological paths could send us down a cul-de-sac. And we might not be possible to correct course fast enough.

Correction: June 20, 2017

An earlier version of this column included an outdated affiliation for one scientist, Christopher Clack. He is now chief executive of the grid modeling firm Vibrant Clean Energy; he is no longer with the National Oceanic and Atmospheric Administration and the University of Colorado, Boulder.

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Article source: https://www.nytimes.com/2017/06/20/business/energy-environment/renewable-energy-national-academy-matt-jacobson.html?partner=rss&emc=rss

Robot Revolution: Amazon’s Move Signals End of Line for Many Cashiers

But it has become increasingly clear that parts of every job will be automated — and that the service sector is next. Although certain service jobs like health aide or preschool teacher still seem safe, others, like those in retail and food service, are already being displaced. It’s not hard to teach a machine to do routine tasks like scanning bar codes, stocking shelves or dunking fries in oil.


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Eight million people, 6 percent of American workers, are retail salespeople and cashiers, according to the Bureau of Labor Statistics. Cashier jobs are expected to grow 2 percent by 2024, significantly slower than 7 percent job growth over all, and technology is the main reason, according to the bureau.

Half the time worked by salespeople and cashiers is spent on tasks that can be automated by technology that’s currently in use, according to a recent McKinsey Global Institute report. Two-thirds of the time on tasks done by grocery store workers can be automated, it said. Another report, by Forrester, estimated that a quarter of the tasks salespeople do would be automated this year, and 58 percent by 2020.

Estimates like these are guesses at best, because imagining the future is an act of science fiction. And even when technologies exist, companies adopt them slowly. That’s one reason productivity isn’t increasing at the rate economists might expect, even though more work is able to be automated. But there is evidence that retail jobs are transforming rapidly.

Look no further than the Amazon Go store. It has no cashiers or checkout lines. People scan their phones to enter, and sensors with computer vision monitor what they put in their carts. When they leave, they are automatically charged for what they have bought. Amazon calls it “just walk out technology.”

Amazon Go is open only to Amazon employees for now, and has reportedly had problems during its testing phase, particularly when the store is crowded. But the technology will improve as Amazon and other retailers keep testing and developing it. Elsewhere, Amazon uses automatic payment technology, drones that deliver purchases, and robots that restock shelves and fill boxes.

Lowe’s stores in California have customer service robots that roam the aisles to answer customers’ questions and monitor inventory. The Eatsa chain of restaurants has no human workers in sight. Customers order on store iPads or on their phones, and pick up their meals from a cubby that shows their name. Several fast-food chains, including McDonald’s and Panera, also use digital kiosks for customers to order and pay by themselves.

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Companies won’t invest in technology unless it’s less expensive than employing people, and most retail workers make near minimum wage. But in a case study of grocery stores, McKinsey found that the savings from automation were three times the cost, and 68 percent of the savings were from reduced labor costs.

Retailers say automating certain tasks doesn’t necessarily displace employees, but frees them to do other things that are more valuable to customers. Lowe’s, for instance, said its customer service robot answered simple questions so employees could provide more personalized expertise, like home project planning.

Whole Foods, before the Amazon acquisition, made a similar argument to Forrester. “We intentionally don’t over-automate our stores, at least not on the front end,” an executive told Forrester, which didn’t name the person in its report. “We want to have the personal touch of real people.”


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But shoppers often prefer to save time by interacting with fewer people, especially when they just need coffee or paper towels — thus the convenience of online ordering for in-store pickup at places like Walmart and Starbucks.

If salespeople and cashiers lose their jobs in large numbers, as economists say seems likely, they could be in better shape in some ways than those who have lost jobs in industries like manufacturing. Sales jobs are not geographically confined, and high turnover means wider availability.

On the other hand, said David Autor, an M.I.T. economist, it would make the job market even more challenging for a group of workers who already struggle to find stable, well-paid employment and are unlikely to have the education to move into better jobs.

Amazon said it had no plans to lay off Whole Foods workers or use Amazon Go technology to automate cashiers’ jobs.

Erik Brynjolfsson, director of the M.I.T. Initiative on the Digital Economy, said Amazon’s plans could be much bigger than simply automating stores.

“The bigger and more profound way that technology affects jobs is by completely reinventing the business model,” he said. “Amazon didn’t go put a robot into the bookstores and help you check out books faster. It completely reinvented bookstores. The idea of a cashier won’t be so much automated as just made irrelevant — you’ll just tell your Echo what you need, or perhaps it will anticipate what you need, and stuff will get delivered to you.”

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Article source: https://www.nytimes.com/2017/06/17/upshot/amazons-move-signals-end-of-line-for-many-cashiers.html?partner=rss&emc=rss

Popularity Contest: Trump Is Offering Populism, Minus the Free Candy

They dust off the policy white paper that the campaign staff issued months earlier, and spend their time on Capitol Hill trying to cobble together a coalition to pass a bill aimed at helping the people who put Mr. Trump in the White House.


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The bill has lots of money to fight the opioid epidemic and to invest in communities left behind by the modern economy. There is money to prop up troubled health insurance markets, so that Mr. Trump can say he has replaced Obamacare with something better. There are a trillion dollars for public infrastructure — not some complex tax credit that favors revenue-generating projects in affluent areas, but the brute force of government dollars to build roads and bridges in every corner of the nation.

Each project, of course, will have a big sign crediting the Make America Great Again Act with a big photo of Mr. Trump flashing a thumbs up.

To help keep conservatives and business interests on board with all that spending, the bill loosens environmental laws and bank regulations, among other policy goodies that make C.E.O.s’ hearts flutter. But it wouldn’t achieve a filibuster-proof majority in the Senate unless packaged with those aforementioned goodies that appeal to Democrats. Maybe it could increase the minimum wage, but also include a tax credit for companies that hire American workers to offset the cost to businesses.

The government would pay for it all with higher deficits. Free candy for everyone! The cost — in the form of higher interest rates and perhaps inflation — would come later. It’s the kind of bill that anti-spending conservatives would complain about, and die-hard anti-Trump liberals would resist. Cobbling together a coalition to pass it may not be easy, but a savvy deal maker could plausibly attract enough bipartisan support to make it law — and in the process maybe build trust for further deal making down the road.

My MAGA Act is hypothetical, but in the weeks after the election, the idea that Mr. Trump would emulate European and Latin American populists — who are often staunch defenders of social welfare programs and enthusiasts of showy public works projects — seemed plausible.

Mr. Trump has often been compared to the right-wing Latin American populists who, like him, have used machismo, opposition to elites and personal grandiosity (“I alone can fix it,” as Mr. Trump said) to win elections. His nationalist, anti-immigration “America First” message also resembles that of European nationalists.

Juan Perón, the president of Argentina from the mid-1940s to the mid-1950s and again briefly in the 1970s, is among the most famous of the Latin American populists and one whose personality has been compared to Mr. Trump’s. But while Perón had an authoritarian approach, his policies included a universal public pension and universal access to health care. He spent lavishly on public works projects.

Juan Perón, the Argentine president from 1946 to 1955, knew how to be popular. Credit El Dia De La Plata/Agence France-Presse — Getty Images

More recently, Rafael Correa, the president of Ecuador from 2007 until last month, who came to office on an anti-elite wave and shared with Mr. Trump a predilection for tweeting insults at his enemies, spent public funds abundantly on schools, poverty, health clinics and highways.


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Right-wing parties in Europe often exhibit antagonism to immigration, but position themselves as defenders of public spending domestically. The National Front in France, for example, which recently lost the presidential election, was calling for lowering the retirement age and increasing welfare benefits to go along with its message opposing immigration and the European Union.

The “let them have candy” approach isn’t necessarily sound policy. In a 1991 economics paper, Rudiger Dornbusch of M.I.T. and Sebastian Edwards of U.C.L.A. showed how the populist movements of Latin America had often generated a disastrous boom-bust cycle.

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“Again and again, and in country after country, policy makers have embraced economic programs that rely heavily on the use of expansive fiscal and credit policies and overvalued currency to accelerate growth and redistribute income,” wrote Mr. Dornbusch and Mr. Edwards in “The Macroeconomics of Populism in Latin America.” “After a short period of economic growth and recovery, bottlenecks develop provoking unsustainable macroeconomic pressures that, at the end, result in the plummeting of real wages and severe balance of payment difficulties. The final outcome of these experiments has generally been galloping inflation, crisis and the collapse of the economic system.”

Based on the early policy moves of the Trump administration, spending too much on goodies for his working-class supporters isn’t something Americans need to fear. He has chosen a very different path — even when following through would be more consistent with his campaign promises.

During the campaign, Mr. Trump promised not to cut Social Security, Medicare or Medicaid. As president, his budget would cut the Social Security disability insurance program and Medicaid.

His first major legislative effort was a health care bill that would cause 23 million people to lose coverage, according to the Congressional Budget Office’s estimate, while cutting taxes for the affluent. It would hit older Americans, who disproportionately voted for Mr. Trump, particularly hard in the form of higher health insurance costs. The bill, which is being revised by the Senate, is deeply unpopular, according to public opinion polls.

Despite the president’s talk of a bold $1 trillion infrastructure plan, there is not yet an actual legislative proposal, and the approach the administration has described relies heavily on tax credits to encourage private investment. That tends to limit the scope of any projects to those that can generate revenue to pay off investors.

On taxes there is also no legislative proposal yet, and the bullet points the administration has released imply much bigger advantages for corporations and the highest earners than for middle-class Americans.

On opioid addiction and other problems facing some of the troubled communities that heavily favored Mr. Trump at the voting booth, the most visible thing the administration has done is appoint a task force. His budget would slash regional development funds, through the Appalachian Regional Commission and the Delta Regional Authority, for example, both of which benefit areas that voted overwhelmingly for Mr. Trump.


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On top of it all, Mr. Trump has set a political tone that makes it harder to change course and find bipartisan support for something like the MAGA Act later. Instead of putting Democrats in a jam by proposing something broadly popular, the president has made it easy for them to be united in opposition.

Essentially, for all of Mr. Trump’s populist rhetoric, he has outsourced his domestic policy agenda to the austere, spending-averse congressional Republicans.

It’s hard to know how much of this reflects the president’s actual policy preferences versus the ideology of the people he has surrounded himself with, and how much of it is simply the path of least resistance. Letting House Speaker Paul Ryan and the Senate majority leader, Mitch McConnell, set the domestic policy agenda is easier than doing it yourself.

But given the choices the Trump administration has made, the president’s sub-40-percent public approval ratings are understandable. It may be a tautology to say that doing popular things will make a politician more popular, but it’s one the president may just want to remember.

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Article source: https://www.nytimes.com/2017/06/17/upshot/trump-is-offering-populism-minus-the-free-candy.html?partner=rss&emc=rss

Economic Trends: The Amazon-Walmart Showdown That Explains the Modern Economy

Men’s dress clothing, mine included, can be a little boring. Like many male office workers, I lean toward clothes that are sharp but not at all showy. Nearly every weekday, I wear a dress shirt that is either light blue, white or has some subtle check pattern, usually paired with slacks and a blazer. The description alone could make a person doze.


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I used to buy my dress shirts from a Hong Kong tailor. They fit perfectly, but ordering required an awkward meeting with a visiting salesman in a hotel suite. They took six weeks to arrive, and they cost around $120 each, which adds up fast when you need to buy eight or 10 a year to keep up with wear and tear.

Then several years ago I realized that a company called Bonobos was making shirts that fit me nearly as well, that were often sold three for $220, or $73 each, and that would arrive in two days.

Bonobos became my main shirt provider, at least until recently, when I learned that Amazon was trying to get into the upper-end men’s shirt game. The firm’s “Buttoned Down” line, offered to Amazon Prime customers, uses high-quality fabric and is a good value at $40 for basic shirts. I bought a few; they don’t fit me quite as well as the Bonobos, but I do prefer the stitching.

I’m on the fence as to which company will provide my next shirt order, and a new deal this week makes it a doubly interesting quandary: Walmart is buying Bonobos.

Amazon vs. Walmart

Walmart’s move might seem a strange decision. It is not a retailer people typically turn to for $88 summer weight shirts in Ruby Wynwood Plaid or $750 Italian wool suits. Then again, Amazon is best known as a reseller of goods made by others.

Walmart and Amazon have had their sights on each other for years, each aiming to be the dominant seller of goods — however consumers of the future want to buy them. It increasingly looks like that “however” is a hybrid of physical stores and online-ordering channels, and each company is coming at the goal from a different starting point.

Amazon is the dominant player in online sales, and is particularly strong among affluent consumers in major cities. It is now experimenting with physical bookstores and groceries as it looks to broaden its reach.

Walmart has thousands of stores that sell hundreds of billions of dollars’ worth of goods. It is particularly strong in suburban and rural areas and among low- and middle-income consumers, but it’s playing catch-up with online sales and affluent urbanites.


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Why are these two mega-retailers both trying to sell me shirts? The short answer is because they both want to sell everything.

More specifically, Bonobos is known as an innovator in exactly this type of hybrid of online and physical store sales. Its website and online customer service are excellent, and it operates stores in major cities where you can try on garments and order items to be shipped directly. Because all the actual inventory is centralized, the stores themselves can occupy minimal square footage.

So the acquisition may help Walmart build expertise in the very areas where it is trying to gain on Amazon. You can look at the Amazon acquisition of Whole Foods through the same lens. The grocery business has a whole different set of challenges from the types of goods that Amazon has specialized in; you can’t store a steak or a banana the way you do books or toys. And people want to be able to make purchases and take them home on the spur of the moment.

Credit Neil Irwin

Just as Walmart is using Bonobos to get access to higher-end consumers and a more technologically savvy way of selling clothes, Amazon is using Whole Foods to get the expertise and physical presence it takes to sell fresh foods.

But bigger dimensions of the modern economy also come into play.

A Positive Returns-to-Scale World

The apparel business has long been a highly competitive industry in which countless players could find a niche. Any insight that one shirt-maker developed could be rapidly copied by others, and consumer prices reflected the retailer’s real estate costs and branding approach as much as anything.

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That helps explain why there are thousands of options worldwide for someone who wants a decent-quality men’s shirt. In that world, any shirt-maker that tried to get too big rapidly faced diminishing returns. It would have to pay more and more to lease the real estate for far-flung stores, and would have to outbid competitors to hire all the experienced shirt-makers. The expansion wouldn’t offer any meaningful cost savings and would entail a lot more headaches trying to manage it all.

But more and more businesses in the modern economy, rather than reflecting those diminishing returns to scale, show positive returns to scale: The biggest companies have a huge advantage over smaller players. That tends to tilt markets toward a handful of players or even a monopoly, rather than an even playing field with countless competitors.

The most extreme example of this would be the software business, where a company can invest bottomless sums in a piece of software, but then sell it to each additional customer for practically nothing. The apparel industry isn’t that extreme — the price of making a shirt is still linked to the cost of fabric and the workers to do the stitching — but it is moving in that direction.

And that helps explain why Walmart and Amazon are so eager to put a shirt on my back.

Already, retailers need to figure out how to manage sophisticated supply chains connecting Southeast Asia with stores in big American cities so that they rarely run out of product. They need mobile apps and websites that offer a seamless user experience so that nothing stands between a would-be purchaser and an order.


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Larger companies that are good at supply chain management and technology can spread those more-or-less fixed costs around more total sales, enabling them to keep prices lower than a niche player and entrench their advantage.

These positive returns to scale could become even more pronounced. Perhaps in the future, rather than manufacture a bunch of shirts in Indonesia and Malaysia and ship them to the United States to be sold one at a time to urban office workers, a company will have a robot manufacture shirts to my specifications somewhere nearby.

If that’s the future of clothing, and quite a few companies are working on just that, apparel will become a landscape of high fixed costs and enormous returns to scale. The handful of companies with the very best shirt-making robots will win the market, and any company that can’t afford to develop shirt-making robots, or isn’t very good at it, might find itself left in the cold.

What It Means for the Economy

If retail were the only industry becoming more concentrated, it would be one thing. But a relative few winners are taking a disproportionate share of business in a wide range of industries, including banking, airlines and telecommunications. A study by the Obama White House’s Council of Economic Advisers found that in 12 of 13 industry sectors, the share of revenue earned by the 50 largest firms rose between 1997 and 2012.

That in turn may help explain why the income gap has widened in recent years. Essentially, the corporate world is bifurcating between winners and losers, with big implications for their workers.

Research by Jae Song of the Social Security administration and four colleagues found that most of the rise of inequality in pay from 1978 to 2013 was because some companies were paying more than others — not because of a wider gap between high-paid and low-paid workers within a company.

“Employees inside winning companies enjoy rising incomes and interesting cognitive challenges,” the Stanford economist Nicholas Bloom, one of the co-authors of that paper, wrote recently in Harvard Business Review. “Workers outside this charmed circle experience something quite different.”

And David Autor of M.I.T. and four colleagues found in a recent paper that the rise of these “superstar firms” — the big winners in the kind of face-off that Walmart and Amazon are now engaged in — is a likely explanation for the decrease in the share of the overall economic pie that is going to workers.


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How much of that is because of shifting technology — as opposed to changing corporate behavior, or loose antitrust policy — is an open debate.

What isn’t is this: The decision by Amazon and Walmart to compete for my grocery business — as well as for space in my closet — is a tiny battle in a war to dominate a changing global economy.

And for companies that can’t compete on price and technology, it could cost them the shirt off their backs.

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Article source: https://www.nytimes.com/2017/06/16/upshot/the-amazon-walmart-showdown-that-explains-the-modern-economy.html?partner=rss&emc=rss

Trump Move on Job Training Brings ‘Skills Gap’ Debate to the Fore

Corporate groups hailed the idea of expanding apprenticeship programs and making them more flexible, arguing that apprenticeships are a reliable path to good-paying jobs in sectors like retail and hospitality for those who could no longer support themselves in production sectors like manufacturing.


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“We applaud the Department of Labor and the administration for being willing to look at how to craft this in a way that brings apprenticeships to a new range of audiences,” said Rob Gifford, executive vice president of the National Restaurant Association Educational Foundation, which oversees the industry group’s apprenticeship programs.

Mr. Gifford gave credit to the Obama administration for making industries like his eligible for apprenticeship funding. The restaurant industry group won a contract worth up to about $9.75 million under the Obama-era program to create apprenticeships that would run from six months to two years and help candidates for management positions acquire skills in such areas as accounting and sanitation practices.

But Mr. Gifford said that streamlining regulations could make apprenticeship programs even more effective.

The administration’s interest in apprenticeships stands in contrast to the cutbacks for other forms of job training in its budget proposal, involving far larger sums. The Association of Community College Trustees said that while it welcomed Thursday’s move, it remained worried about “the severe cuts proposed to federal work force and education programs.”

Underlying the relatively modest size and scope of Mr. Trump’s proposal is a much bigger idea about why workers who have lost good-paying jobs that do not require a college degree are struggling to find work at comparable wages.

In the eyes of the president and many corporate leaders, the crux of the problem is skills — the proposition that employers are eager to fill millions of good-paying jobs that workers lack the skills to perform.

“The U.S. faces a serious skills gap,” Labor Secretary R. Alexander Acosta said during a call with reporters last week, pointing to six million vacant jobs — the most since the department starting keeping track in the early 2000s. The vacancies were especially abundant in manufacturing, information technology and health care, he said.

If the unemployed could acquire the necessary skills through apprenticeships or course work, the thinking goes, companies could quickly fill these jobs, providing workers with economic security and stimulating the economy.


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Despite the belief of some, however, there is little evidence that the economy is suffering from an unusually large skills gap.

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While economic indicators do show a historically high number of job vacancies, as Mr. Acosta pointed out, research economists tend to believe that the skills gap accounts for, at most, a limited portion of this development. Many experts believe it plays almost no role at all.

One way to see this is to hypothetically assign unemployed workers to jobs or industries regardless of their qualifications, essentially assuming away the skills gap. The difference between the hypothetical unemployment rate that results from this exercise and the actual unemployment rate would show the extent to which the skills gap is driving unemployment.

But when you do this, according to Aysegul Sahin, an economist at the Federal Reserve Bank of New York, the size of the skills gap today is unremarkable. “The level of mismatch at the occupation level is pretty much where it was before the Great Recession,” she said.

Ms. Sahin points to two other factors causing employers to take longer to fill jobs: the aging of the work force and a long-term decline in the proportion of start-ups in the economy. Older businesses tend to grow more slowly and typically take longer to fill vacancies as a result. They often devote more resources to the process and have more bureaucracy overseeing it, such as a human resources department.

Steven J. Davis, an economist at the University of Chicago, helped create an index showing that the average time it takes to fill a job is the longest since January 2001. He believes that a skills gap could be part of the explanation, but he also sees several other factors. For example, he said, employers have better technology and data to screen candidates for drug problems, criminal records or credit problems, prolonging the hiring process.

Proponents of the skills gap hypothesis typically contend that the loss of many jobs in manufacturing, for example, is offset by the creation of jobs at comparable pay that the same workers could perform with somewhat more training.

“Demand is growing for middle-skill workers — machinists, technicians, health care practitioners and a broad range of other roles,” Jamie Dimon, the chief executive of JPMorgan Chase, said in a Politico op-ed in 2014.

But extensive economic research on the subject suggests essentially the opposite trend: The proportion of middle-skill jobs in the economy has declined since the 1980s, while relative job growth has been concentrated at either the low end of the spectrum, like retail, or the high end, like software development, a related phenomenon economists refer to as job-market “polarization.” The former class of jobs tends to be undesirable for many former factory workers. The latter tends to be out of reach even with additional training.

Emergency room nurses at Lenox Hill Hospital in Manhattan getting a daily noon briefing. Credit Christian Hansen for The New York Times

“When the jobs these guys filled go away, it’s not clear there is something new and substitutable any time soon,” said Jason Faberman, an economist at the Federal Reserve Bank of Chicago who has studied the skills gap issue.


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Consider health care, one of the sectors both Mr. Acosta, the labor secretary, and Mr. Dimon alluded to as a promising source of middle-skill jobs for retrained workers. Of the six million vacancies Mr. Acosta cited in the overall labor market, one million were in the health care sector as of April, the latest month for which data is available. But the industry hired only about a half-million workers that month — the largest absolute gap of any sector between vacancies and hires.

Some of these jobs are in fact good-paying middle-skill jobs, like diagnostic medical sonographers. The same is true in areas like retail and hospitality, where workers can earn a reasonable living by getting on the management track. Apprenticeships, which have been shown to lead to higher-paying jobs, may well help more workers land these jobs.

But about 70 percent of the health care jobs that the Labor Department predicts will exist in 2024 and classifies among the fastestgrowing occupations in the economy paid a median wage of less than $26,000 in 2016 — primarily home health care aides and personal care aides. By contrast, many of the high-paying jobs, like nurse practitioners and nurse midwives, require college or post-college degrees.

So the potential for skills-building to fill many of the economy’s job vacancies is limited.

“I don’t want to say the skill-mismatch problem is irrelevant — it certainly isn’t if you think about a 45-year-old who loses a job in a traditional industry and needs to find a new job,” said Gordon Hanson, an economist at the University of California, San Diego, who has studied job-market polarization. “But we do have abundant evidence that there are just fewer of those middle-skilled jobs available.”

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Article source: https://www.nytimes.com/2017/06/15/business/economy/trump-job-training-skills-gap.html?partner=rss&emc=rss

Fed Actions Show Confidence but Are Not at Trump Speed

The administration has not ruled out a second term for Ms. Yellen, but Mr. Trump said on the campaign trail that he would “most likely” pick a new person. Ms. Yellen’s management of monetary policy may matter less than her disagreements with Mr. Trump about regulatory policy and Mr. Trump’s preference for people he knows.


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Ms. Yellen said Wednesday that she had not had any conversations with the administration about its plans. She declined to comment on her interest in a second term.

If Ms. Yellen is replaced, she would become the first Fed leader in 40 years to serve only a single term. The last three leaders — Ben S. Bernanke, Alan Greenspan and Paul A. Volcker — were renominated by a president of a different party.


Why the Fed Raised Rates

The Federal Reserve raised interest rates for the third consecutive quarter.

The Fed has increased its benchmark interest rate by a full percentage point over the last two years, after leaving the rate close to zero from late 2008 to late 2015.

Ms. Yellen and her colleagues have concluded that the economy is growing about as fast as it can. Low rates encourage borrowing and risk-taking; the Fed is now trying to raise rates to a level that neither encourages nor discourages economic activity. Most Fed officials expect that the Fed will raise rates at least one more time this year.

So far, however, financial markets are not cooperating. Interest rates on auto loans have increased a little since the Fed started raising rates in 2015, but rates on mortgage loans are about the same. Rates on some corporate loans have even declined. Measures of financial conditions have loosened.

The march toward that neutral stance reflects the Fed’s upbeat view of economic conditions. “The labor market has continued to strengthen,” the Fed said in a statement published at the end of a two-day meeting of its policy-making panel, the Federal Open Market Committee.

The Fed added that economic growth “has been rising moderately so far this year,” making no mention of weakness during the winter.

The Fed in recent years has been consistent in predicting faster inflation — and in being wrong. The Fed conceded it was overly optimistic in predicting stronger inflation this year. In economic forecasts published Wednesday, Fed officials predicted that prices would rise by just 1.6 percent this year, down from a forecast of 1.9 percent in March.


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Ms. Yellen said the Fed was keeping a close eye on a recent downturn in inflation. But she also said officials expected inflation to rebound because of the continued decline of the unemployment rate and other signs of a tighter labor market, including worker shortages in some parts of the country. The unemployment rate fell to 4.3 percent in May, and in a new set of forecasts the Fed published Wednesday, some officials predicted the rate could fall below 4 percent.

Ms. Yellen also noted a sharp decline in the price of cellphone service is weighing on inflation. That is a good thing for consumers, and a one-time event.

“We continue to feel that with a strong labor market and a labor market that’s continuing to strengthen, the conditions are in place for inflation to move up,” she said.

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The Fed affirmed Wednesday that it planned later this year to start reducing its portfolio of more than $4 trillion in Treasuries and mortgage-backed securities.

The Fed said it would initially shed $10 billion a month for three months, divided 60-40 between Treasuries and mortgage bonds. It will then raise the pace by $10 billion every three months, maintaining the same division, until reaching $50 billion a month.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, was the only member of the Federal Open Market Committee to vote against the rate increase at Wednesday’s meeting. He has argued that economic conditions remain too weak.

Mr. Trump, by contrast, has shown some interest in appointing Fed officials who want to raise interest rates more quickly. The administration is planning to fill two vacancies on the Fed’s board by nominating Randal K. Quarles, a Treasury Department official in the George W. Bush administration, and Marvin Goodfriend, a former Fed official who is a professor of economics at Carnegie Mellon University.

Both men have criticized the Fed for its efforts to stimulate growth in the aftermath of the financial crisis.

At times, however, Mr. Trump also has praised Ms. Yellen’s efforts. When Mr. Trump first met Ms. Yellen, at the White House earlier this year, he told her they were both low-interest-rate people.


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Asked about the conversation on Wednesday, Ms. Yellen smiled. “I have felt that it’s been appropriate for interest rates to remain low for a very long time,” she said.

The sharper differences regard regulatory policy. Mr. Trump has repeatedly promised to relax financial regulations, and the Treasury Department earlier this week released a description of its plans for doing so, which it says will increase economic growth.

Ms. Yellen, by contrast, played a key role in strengthening financial regulation after the 2008 crisis, and she remains a staunch defender of the benefits of those changes.

“I don’t think our regulations have played an important role, at least broadly speaking, in impeding credit growth and the growth of the economy,” Ms. Yellen said Wednesday.

While the administration is at the beginning of the search process for a new leader of the Fed, speculation among investors and other close watchers of the central bank is already in high gear.

Mr. Cohn, who has the president’s ear on economic issues, is widely seen as a potential candidate for the post. Kevin Warsh, a former Fed governor who is a member of Mr. Trump’s business advisory council, is also expected to receive consideration.

Neither man is an economist. The last Fed leader without a doctorate in economics was G. William Miller, a businessman who served for about 17 months in the late 1970s. Mr. Trump has shown a marked preference for business leaders. But he could consider prominent conservative economists like Glenn Hubbard, the dean of the Columbia Business School and a former adviser to Mr. Bush, and John Taylor, a Stanford University professor.

Ms. Yellen could choose to remain on the Fed’s board even if she is not nominated to a second term as chairwoman. Her term as a Fed governor does not end until 2024.

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Article source: https://www.nytimes.com/2017/06/14/us/politics/federal-reserve-meeting-interest-rates.html?partner=rss&emc=rss

Economic Trends: Janet Yellen and the Case of the Missing Inflation

Using the economic models on which the Fed has traditionally relied and which were taught to generations of undergraduates, that would seem to set the stage for higher inflation. Employers would compete for workers and hike wages, fueling broader price increases for all types of goods and services.


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But there is little evidence this cause-and-effect is actually happening.

The Fed has defined stable prices as inflation of 2 percent. Right now, not only are key inflation measures below that level, but they are also falling. The most recent reading of the inflation measure favored by the Fed is at only 1.5 percent. And the Consumer Price Index, excluding volatile food and energy prices, rose 1.7 percent over the year ended in May, down from 2.2 percent in February.

In other words, the jobs side of the mandate would seem to offer Ms. Yellen and her colleagues a green light to raise rates steadily to keep the economy from overheating, while the inflation side would seem to offer instead a yellow light, and arguably a red one.

But at Wednesday’s meeting, only one official with a vote dissented from the rate increase: the Minneapolis Fed president, Neel Kashkari. Moreover, 12 of 16 Fed officials think that at least one more rate increase this year would be justified, based on newly released projections the central bank released.

This sure looks like a central bank that has set its course for 2017 and will continue on it unless strong evidence emerges that it has misread the state of the economy. The line between intellectual confidence and mere stubbornness can be thin, however.

Ms. Yellen emphasized that monetary policy “is not on a preset course” and that she and her colleagues “have taken note of the fact that there have been several weak readings” on inflation lately.

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But, she added, “it’s important not to overreact to a few readings, and data on inflation can be noisy.” Twice, she mentioned factors that seem to be temporarily depressing inflation measures. A pricing war among mobile phone service providers has led to falling prices for cellphone plans, and prescription drug prices have made what appears to be a one-time drop.

In effect, she argued, brushing off those one-time drops is the equivalent of brushing off a one-time surge in, say, energy prices that may drive inflation higher but not affect the long-term trend on inflation.

But evidence from the bond market suggests that global investors aren’t so sure. The gap between rates on regular and inflation-protected bonds suggests that consumer prices in the United States will rise only 1.6 percent a year in the next five years, down from 2 percent in March. Even for the five years after that, the rate of inflation implied by bond prices has fallen from 2.1 percent to 1.9 percent.

The recent inflation numbers are not so low as to suggest some deflationary spiral is imminent. It’s probably not worth obsessing too much over prices rising 1.5 percent instead of the targeted 2 percent. The direct cost of mildly undershooting the Fed’s inflation target is low, favoring creditors over debtors, for example, but it’s not likely to cause any broad economic distress.


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What is worrisome is not direct economic damage, but the fact that the Fed has missed its (arbitrary) 2 percent target in the same direction — undershooting — year after year. If it’s not a drop in prices for cellphone plans, it’s a falloff in oil prices, or cheaper imports because of a strong dollar.

That in turn implies that the low-growth, low-inflation, low-interest-rate economy since 2008 isn’t going anywhere. This would prove especially damaging if the economy ran into some negative shock; a lack of Fed credibility could leave it less able to prevent a recession. Already, the combination of lower inflation and interest-rate rises adds up to higher “real,” or inflation-adjusted, interest rates, which could constrain growth in the quarters ahead.

Setting monetary policy, it has been said, is like trying to drive a car by looking only in the rearview mirror. If that’s so, the Fed has tended to optimistically see colorful balloons and higher future inflation. At least in terms of inflation, it hasn’t panned out. Credit Rahmat Gul/Associated Press

Setting monetary policy, it has been said, is akin to driving a car by looking only in the rearview mirror. When Federal Reserve officials set interest rate policy, they can look only at how the economy has performed in the past and feed information into models to make decisions that will not show their effects until months into the future.

Ms. Yellen has earned the benefit of the doubt as an economic forecaster: Her abilities to peer into the rearview mirror and direct the car appropriately are strong. She was early to understand the peril of the financial crisis and the need for aggressive monetary intervention, according to transcripts of Fed meetings from 2007 to 2010. Her decision to plod ahead with gradual rate increases as chairwoman looks pretty good so far — the job market is looking healthier than it has in a decade.

There’s a good chance the Yellen chairmanship will end early next year, if President Trump declines to reappoint her. For the sake of the economy, we should hope she has one more good call in her, and that the June 2017 Fed meeting is one we soon forget.

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Article source: https://www.nytimes.com/2017/06/14/upshot/janet-yellen-and-the-case-of-the-missing-inflation.html?partner=rss&emc=rss

A President at War With His Fed Chief, 5 Decades Before Trump


JUNE 13, 2017


President Lyndon B. Johnson and his Fed chairman, William McChesney Martin, at a bill-signing in 1966. Their differences over the economy led to a fiery confrontation.CreditAssociated Press

A new president takes office with big plans, and needs a booming economy to help underwrite his promises. A Federal Reserve chief sees an economy starting to overheat, and begins warning of the need for higher interest rates.

They were bound to clash: Lyndon B. Johnson, the new president, and William McChesney Martin, the longtime, fiscally conservative Fed chairman.

It is a conflict from the 1960s with echoes in the present day, as President Trump’s campaign talk of robust tax cuts, job growth and economic expansion is bumping up against calls by the Fed chairwoman, Janet L. Yellen, for a cautious rise in interest rates, lest inflation get out of control.

Today, when Ms. Yellen acts, we figure she is not doing Mr. Trump’s bidding. She and Fed policy makers are expected this week to increase the benchmark rate for the fourth time in less than two years. But that independence was not always assumed in the Fed’s early years, and Martin’s standoff with Johnson provided a template for interactions between the Federal Reserve and the White House for decades to come.


Within days of ascending to the White House after President John F. Kennedy’s assassination in November 1963, Johnson had an agenda that included passage of a big income tax cut that had been one of Kennedy’s legislative priorities. A year later, after winning the 1964 election, Johnson pursued fighting two wars: one on poverty, and one in Vietnam. Both would lead to significant budget deficits.

Martin saw all this additional spending as a formula for inflation. He also feared he was not getting accurate information from the administration on their spending plans — that some spending on the Vietnam War was not being reported.

Johnson visiting American soldiers at Cam Ranh Bay in South Vietnam in 1966. The war in Vietnam and the president’s antipoverty efforts at home spurred an increase in spending.CreditAssociated Press

Their conflict led to a fiery climax at the Johnson Ranch near Johnson City, Tex., when Martin was unwilling to bend to the president’s will.


The relationship — destined to range from warm to cagey to confrontational — was off to a good start when, eight days after the tragic shooting in Dallas, Johnson telephoned Martin to express gratitude for a note of support.

Johnson: Bill, I just want to thank you for your most thoughtful and generous letter and I appreciate it so much, and I feel quite comfortable and get strength from the knowledge that you’re at that desk.

Martin: Well, that’s very nice of you, Mr. President. I’m just delighted to do anything I can to be of help. You can count on me completely.

Johnson: Well, you just assume that you’re starting out with someone who doesn’t know much about your shop and then you start to tell me what I ought to know about it.

Martin: Well, I certainly will help in every way that I can, Mr. President. I’m sure you know a great deal already, but I’ll help in every way I can.


Martin, named the Fed chairman by President Harry S. Truman, was overseeing an economic expansion that had begun two and a half years earlier, in early 1961. But he was keenly aware of the Fed’s role of anticipating and preventing recessions. And he liked a good line. “The function of the Federal Reserve,” he said, “is to take away the punch bowl just as the party is getting good.”

Johnson, the shrewd Texas lawmaker who had seemed out of sorts as Kennedy’s vice president, had no interest in slowing growth. In his first major address after taking office,he called on Congress to pass the income tax cuts first proposed by his predecessor.

“No act of ours could more fittingly continue the work of President Kennedy than the early passage of the tax bill for which he fought all this long year,” he said, speaking to a joint session of Congress and a national television audience. A thunderous ovation followed.

Less than a month later, Martin, caricatured by the political cartoonist Herblock as a tightwad with a stiff, high collar, said the prospect of a tax cut was causing “excessive optimism.”

Martin saw dangers in “perpetual deficits and easy money.” CreditGeorge Tames/The New York Times

“If the present euphoria should be translated by a tax cut in a real surge in the economy,” he warned Fed policy makers on Dec. 17, “the system might be faced with the need for a change in the discount rate or some other drastic action to be taken at the first opportunity.”


By March 1964, Congress had passed the tax cut and the economy was cruising. In August, Guy Noyes, the Fed’s chief economist, was nothing short of effusive. “It is hard to be critical of the recent performance of the economy,” he said. “It has been little short of magnificent.”


This rosy picture was disrupted by an event across the Atlantic.

Johnson: Hi, Bill.

Martin: Hello, Mr. President.

Johnson: How’re ya.

Martin: Fine. I thought that, I had a little press conference …

Johnson: Yup.

Martin: … this afternoon on this action we took.

Martin’s folksy banter belied a crisis that had demanded quick reflexes by the Fed. By a narrow margin, British voters elected the first Labour government in 15 years, and its ministers followed with a series of big spending plans to nationalize industries and expand social services. The prospect of inflation prompted currency traders to dump the British pound, forcing the Bank of England to raise its discount rate to 7 percent from 5 percent, a huge jump. To prevent those higher rates from drawing dollars away from the United States, the Fed raised its own rate, by one-half of 1 percentage point.

Martin: What  I said to the press was this, that I wanted to make it clear that we would not have raised the discount rate at this time if it had not been for the British action, that we had been for some time watching the possibility of inflationary pressures developing or some problems with the balance of payments developing, but that you had indicated that you wanted us to stimulate the economy in every way that we could. … We have not — the Federal Reserve — given them any advice or had they asked any advice. We had informed them of what we were doing, but we had taken our action entirely independently, and as an insurance premium on behalf of the American dollar.

Johnson: That’s good.

Martin: I just wanted you to know.  You know, you never can tell what the press will do with these things.

Johnson. Yup.

Johnson seemed to appreciate how Martin used a news conference to calm any distress in the markets, but he had one question: Would the rate increase tighten the money supply in the United States?

Johnson: You don’t see in this any lack of availability of funds?

Martin: I don’t see any at all. We’re watching it very carefully in the exchange market, and the market behaved pretty well today — of course, this was before our announcement this afternoon. But my guess is that we can handle it and we’re going to try to increase, actually increase over the next 10 days, the availability of money through the reserve mechanism.

Johnson: That’s wonderful, Bill. I hope you’ll watch that and do everything you can. I’d hate for this to turn the other way on us.


In Martin’s eyes the situation was already turning, and in 1965 he began speaking publicly about his concerns. He was afraid the growing cost of the Vietnam War would force a devaluation of the dollar. He saw yet another budget deficit (there had been several in a row) at a time when budget deficits were still looked at askance. In a speech in May, he called it an era of “perpetual deficits and easy money” — red flags among central bankers.

Then in June, at Columbia University, he laid down the gauntlet in a speech that described “disquieting similarities” between the current economic climate and the years leading to the Great Depression: “Then, as now, government officials, scholars and businessmen are convinced that a new economic era has opened, an era in which business fluctuations have become a thing of the past.”

His words were heard. That afternoon the New York Stock Exchange had one of its sharpest declines since Kennedy’s assassination, and the next day The New York Times reported on Page 1 that “Reserve Board Chief Compares Boom Today With That of 20’s.” Johnson, at his next news conference, went out of his way to dispel “gloom and doom” about the economy.


Behind the scenes Johnson was viscerally angry over Martin’s remarks. According to Robert P. Bremner in his book “Chairman of the Fed,” Johnson asked his attorney general, Nicholas Katzenbach, to determine if a president could legally remove a Fed board member from office. (He was advised that disagreeing with administration policies did not constitute “termination for cause.”)


Martin, left, and Henry H. Fowler, the Treasury secretary, in 1968. CreditUnited Press International

In late November Martin signaled to Johnson’s Treasury secretary that he thought he would have the votes for a rate increase at the Fed’s Dec. 3 meeting. The secretary, Henry H. Fowler, relayed this news to Johnson, and they agreed that Martin should delay any action, at least until January, when the administration’s budget estimates would be available.

Martin’s behavior, Fowler said, was giving Americans the impression there were “two quarterbacks” running the economy — Martin and Johnson.

Fowler: We ought to really try to hold him back now. One, because it’s not the right way to operate — it’s just not right for him to go ahead without knowing what the cards are. Number two, it makes the country feel that we’re divided, and it makes the country feel there are two quarterbacks down here — one fellow’s playing one game and one fellow’s playing another. And as I told him the other day, the country is entitled to have the assurance that its economic and financial policies are being determined by a sensible group of reasonable men sitting around together.

On the morning of Friday, Dec. 3, the day of the Fed’s policy-making meeting, Martin again called Fowler to tell him of the imminent rate increase. Johnson, at his Texas ranch recovering from gallbladder surgery, was livid that his calls for a delay were being ignored. Speaking to Fowler by phone, he made a historical reference going back nearly 150 years: the so-called Bank War when President Andrew Jackson whipped up a populist frenzy against Nicholas Biddle and his Bank of the United States, a predecessor of the Federal Reserve.

Johnson: I would hope that he wouldn’t call his board together and have a Biddle-Jackson fight — I’m prepared to be Jackson if he wants to be Biddle — have a fight like that. Right now I don’t want that in public.

Johnson made sure Fowler passed along his warning.

Johnson: It’s going to hurt my pride, and it’s going to hurt my leadership, and it’s going to hurt the best champion business has got in this country.

His voice rising, he then told Fowler they needed to replace Martin with a “tough guy” to run the central bank.


Johnson: Then, Henry, you all got to think of — around the clock, too, before you get sick — as to where we can get a real articulate, able, tough guy that can take this Federal Reserve place.

Martin resisted the appeals. At the Board of Governors meeting that afternoon, he called for a vote to raise the discount rate a half-percentage point, to 4.5 percent. But before the vote, he conceded that raising the rate would essentially wave a red flag before the critics of an independent Federal Reserve, in Congress and in the White House. “We should be under no illusions,” he told his colleagues. “A decision to move now can lead to an important revamping of the Federal Reserve System, including its structure and operating methods. This is a real possibility and I have been turning it over in my mind for months.”

The vote was 4 to 3. Martin cast the deciding ballot.

In Texas, Johnson was enraged. Joseph Califano, an aide (later a cabinet secretary under President Jimmy Carter), recalled Johnson’s “burning up the wires to Washington, asking one member of Congress after another, ‘How can I run the country and the government if I have to read on a news-service ticker that Bill Martin is going to run his own economy?’”

Martin was summoned to explain why he had defied the president.


Johnson meeting Martin and advisers at the Johnson Ranch airstrip in Texas on Dec. 6, 1965.CreditLyndon B Johnson Presidential Library

Martin flew down to the Johnson Ranch on Monday, Dec. 6, along with Fowler and other advisers. The president met them at an airstrip behind the wheel of his Lincoln convertible. They piled in and he drove them to the house.

There, Johnson got Martin alone and did not mince words. According to different accounts, the 6-foot-4 Johnson pushed the shorter Martin up against a wall.

“You went ahead and did something that you knew I disapproved of, that can affect my entire term here,” Johnson said, as Martin recalled later in an oral history. “You took advantage of me and I’m not going to forget it, because here I am, a sick man. You’ve got me into a position where you can run a rapier into me and you’ve run it.”

“Martin, my boys are dying in Vietnam, and you won’t print the money I need,” he said.

Martin stood his ground. He pointed out that he had given the president fair warning that a raise was coming. More broadly, he insisted that he and the president had different jobs to do, that the Federal Reserve Act gave the Fed responsibility over interest rates.

“I knew you disapproved of it, but I had to call the shot as I saw it,” he said.

The two eventually stepped outside and tried to assure reporters that any differences had been patched up. Their sour expressions, captured in newspapers the next day, suggested otherwise.

From The Times’s front page of Sept. 7, 1965.Credit

Despite their differences, Johnson renominated Martin to the Fed chairman’s job one year later. Martin would step down in 1970 during the administration of Richard M. Nixon, the fifth president he served under, after having had the longest term of any Fed chief.

The economic expansion that started in 1961 would continue until nearly 1970 —the second longest ever, a credit to Martin’s stewardship. But many argue that he was too slow to raise the discount rate.

In fact, the increase in rates approved in December 1965 did little to control inflation, which would creep higher after the mid-1960s and become a defining issue in the next two decades. A successor, Paul A. Volcker, was forced to push interest rates to nearly 20 percent to bring prices down.


In the end, it appears Martin left the punch bowl out too long.

Sources: “Chairman of the Fed: William McChesney Martin Jr. and the Creation of the American Financial System,” by Robert P. Bremner; and “The Power and Independence of the Federal Reserve,” by Peter Conti-Brown

Audio recordings from the LBJ Presidential Library, Austin, Tex.

Article source: https://www.nytimes.com/2017/06/13/business/economy/a-president-at-war-with-his-fed-chief-5-decades-before-trump.html?partner=rss&emc=rss

Markets Unfazed as Federal Reserve Nears Plan to Shed Bonds

It also helps that the Fed has indicated that it plans to move very slowly. Analysts expect that the Fed might initially reduce its holdings by $10 billion a month — which would put it on pace to complete the normalization process in about 30 years.


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Stanley Fischer, the Fed’s vice chairman, offered the “tentative conclusion” in an April speech that “we appear less likely to face major market disturbances now than we did in the case of the taper tantrum,” the name often given to the sell-off in mid-2013.

The Fed, which held less than $900 billion in assets a decade ago, staged a series of bond-buying campaigns in the aftermath of the financial crisis, often described as quantitative easing. The Fed wanted to further reduce longer-term interest rates, but it had already lowered its benchmark interest rate to near zero.

Buying bonds reduced the supply available to investors, increasing competition so investors had to accept lower interest rates. The Fed, and some outside economists, argued that the purchases modestly reduced borrowing costs on mortgages and commercial loans, contributing to the gradual revival of economic activity.

The Fed estimated in an April analysis that its holdings reduce by about 1 percentage point the interest rate on the benchmark 10-year Treasury note, which is 2.2 percent.

Fed officials now say they expect to start reducing those holdings this year. The retreat is expected to reinforce the effects of the ongoing increases in its benchmark rate: higher borrowing costs for businesses and consumers, some outflow of money from the stock market into bonds, and some strengthening of the dollar.

Among outside economists, there is a range of views about the effects of the reduction. Some who doubted the benefits of the program expect the retreat to be similarly inconsequential. Others think the Fed’s analysis is in the ballpark. Still others worry that the Fed could roil financial markets.

The Fed does not plan to reduce its balance sheet to the precrisis level. The most basic reason is that demand for dollars has increased, and the Fed supplies that demand by purchasing securities. Currency in circulation has nearly doubled over the last decade, from $774 billion in May 2007 to $1.5 trillion last month. At the current rate of growth, the Fed projects currency in circulation would reach $2.8 trillion by 2027.

“It’s hard to see the balance sheet getting below a range of $2.5 to $3 trillion,” Jerome H. Powell, a member of the Fed’s board of governors, said in a recent speech to the Economic Club of New York.


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The Fed also acquires securities to provide reserves to the banking system. Before the crisis, the Fed’s control of interest rates depended on keeping those reserves at a minimum level in normal times — on average, about $15 billion. But those balances soared in the aftermath of the crisis as the Fed pumped money into the financial system. Banks now hold about $2.2 trillion in reserves.

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Moreover, the Fed has changed the mechanics of monetary policy so it can control interest rates without draining those reserves. And the new system is working: The Fed has successfully carried out three rate increases.

In his recent speech, Mr. Powell contrasted the Fed’s current approach, which he said “is simple to operate and has provided good control over the federal funds rate,” with the old system, which he described as complex and unwieldy.

He said the Fed had not decided whether to keep the new system. But his comments and those of other influential Fed officials have fostered an expectation that the Fed will maintain it. If the Fed does so, the level of reserves will remain above its precrisis level, and that means the Fed’s balance sheet will be larger, too.

In an April survey of two dozen Wall Street firms conducted by the Federal Reserve Bank of New York, the median estimate was that bank reserves would remain at roughly $688 billion in 2025 — and that the Fed’s balance sheet would sit at $3.1 trillion.

John C. Williams, president of the Federal Reserve Bank of San Francisco, said he still expected that in five years, the balance sheet would be “much smaller than today.”

But others think the reduction could end up being quite small.

“In a sense, the U.S. economy is ‘growing into’ the Fed’s $4.5 trillion balance sheet, reducing the need for rapid shrinkage over the next few years,” wrote Ben S. Bernanke, the former Fed chairman. Mr. Bernanke calculated that the Fed could need a balance sheet of roughly $4 trillion within 10 years.

The mechanics of the Fed’s retreat are more certain. The Fed plans to reduce its holdings without selling securities. That is possible because some of the securities mature each month.

Analysts estimate about $280 billion in securities will mature during the remainder of 2017, and another $650 billion will mature during 2018.


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By gradually reducing the amount it reinvests each month, the Fed can gradually reduce its investments while avoiding potentially disruptive sales.

Some analysts expect the Fed to wait until December; some say September. There is also a range of predictions about the pace of the retreat.

The Fed said in May, in an account of its most recent policy meeting, that it expected to publish a schedule for the entire process. It will reduce purchases by the same amount for three months, and then increase that cap each quarter.

The plan is orderly on paper, but it assumes the continuation of what is already an unusually lengthy economic expansion. If the economy weakens, the Fed could pause.

It might even see the need to once again expand its balance sheet.

Correction: June 12, 2017

An earlier version of this article misstated the Federal Reserve’s projection of the amount of currency in circulation by 2027. At the current rate of growth, the Fed projects the currency in circulation will reach $2.8 trillion, not billion.

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Article source: https://www.nytimes.com/2017/06/12/business/economy/federal-reserve-bonds-interest-rates.html?partner=rss&emc=rss

Head Start at Video Game Jamboree; Fed Expected to Raise Interest Rate Again

Here’s a look at what’s coming up this week.


As E3 starts, companies pitch new products.

The video game industry’s annual jamboree, E3, is set to open in Los Angeles on Tuesday, but some of the biggest companies in the business will begin their quest to build buzz before then. On Sunday, Microsoft revealed a new game console that supports 4K video, called Xbox One X. It will go on sale on Nov. 7. On Monday, Sony is expected to promote exclusive games for its PlayStation 4, while Nintendo on Tuesday plans to show off games for its new Switch console, including the much-anticipated Super Mario Odyssey. Nick Wingfield


A third straight quarterly rate increase is expected.

The Federal Reserve is expected to raise its benchmark interest rate on Wednesday after a two-day meeting of its policy-making committee. That would be the Fed’s third straight quarterly rate increase; the benchmark rate would rise to a range between 1 percent and 1.25 percent. With the increase viewed as a foregone conclusion, attention has shifted to what comes next. The Fed has been devising plans to reduce its investment holdings, a final stage in unwinding its postcrisis economic stimulus program. Janet L. Yellen, the Fed’s chairwoman, could discuss those plans at a news conference on Wednesday afternoon. The Fed’s policy statement, and Ms. Yellen’s comments, will also shape expectations about the likelihood of another rate increase in September. Binyamin Appelbaum

New retail sales data may show a tiny rise.

On Wednesday, at 8:30 a.m., the Commerce Department will report data on retail sales in May. Economists are forecasting a 0.1 percent rise in overall retail sales, which they believe were held back by anemic automobile sales and gas purchases. Excluding those more volatile categories, economists expect a gain of 0.2 percent. If the data turns out to be weaker than that, or there is softness beyond those two particular sectors, look for economists to ratchet down their estimate of overall economic growth in the second quarter. Nelson D. Schwartz

Greece’s bailout is back on the eurozone agenda.

Eurozone finance ministers will meet on Thursday in Luxembourg after failing to reach a deal last month to unlock loans for Greece. Athens must pay about 7 billion euros (about $7.8 billion) next month to service its towering debt, and that has raised pressure on Germany and the International Monetary Fund to resolve a dispute that has held up progress. The I.M.F. is pushing European lenders to make it easier for Greece to manage its repayments as a condition for its involvement in the €86 billion bailout — the country’s third since 2010. Prime Minister Alexis Tsipras of Greece also wants concessions after another round of divisive reforms. But Germany has dug in its heels, wary that offering so-called debt relief to Athens could slow the pace of change and damage the popularity of the government in Berlin before German federal elections in September. James Kanter


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Cellphone use in Europe is set to become cheaper.

The cost of making cellphone calls, sending text messages and browsing the internet will fall across Europe on Thursday when new rules go into effect that limit charges when people use their mobile devices outside their home countries. The digital overhaul applies only to European cellphone contracts, meaning Americans and others may still see hefty fees when they use their phones in the region. It also comes as Europe is facing mounting pressure to make sure its digital economy keeps pace with those of the United States and China. Mark Scott

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Bank of England may keep interest rates steady.

The Bank of England will release its latest monetary policy decision on Thursday, but could be overshadowed by the expected actions of the United States Federal Reserve. Much like the European Central Bank last week, the Monetary Policy Committee at the Bank of England is widely expected to keep interest rates steady.

After dropping rates to the lowest level in its history in August, the Bank of England has kept rates steady as the British economy has performed better than expected since Britain’s vote to leave the European Union last June. Chad Bray

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Article source: https://www.nytimes.com/2017/06/11/business/video-games-fed-interest-rates.html?partner=rss&emc=rss