October 1, 2020

Today’s Economist: Laura D’Andrea Tyson: Why the Unemployment Rate Is So High

DESCRIPTION

Laura D’Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Bill Clinton.

According to the last jobs report for 2012, the United States labor market continues to recover at a steady but modest pace despite a global slowdown, Hurricane Sandy and anxieties about future fiscal policy. Private payrolls increased by two million in 2012, and the unemployment rate fell by 0.7 percentage point to 7.8 percent. Over the last 34 months, the economy has added 5.8 million jobs.

Today’s Economist

Perspectives from expert contributors.

But that leaves a four million shortfall in employment relative to its 2007 peak. And the jobs gap, the number of jobs necessary to return to this peak and cover the growth in the labor force since then, is stuck around 11 million. The labor market is still far from full recovery, with a tremendous waste of human talent and a personal toll on unemployed workers and their families.

This year is likely to be more of the same, as the deal on the fiscal cliff — the American Taxpayer Relief Act — will take about 0.4 to 0.6 percent off the economy’s growth rate.

Additional cuts in government spending later this year, above those already emanating from the cap on discretionary spending, would further restrain job creation. Proven policies to increase aggregate spending and near-term job growth, like the continuation of payroll tax relief and infrastructure investment, appear to be off the table. That’s a mistake, because weak demand and slow growth of gross domestic product are the primary factors behind the tepid pace of job creation.

Despite anecdotes about how employers cannot find workers with the skills they need, there is little evidence that the unemployment rate remains elevated because of mismatches between the skill requirements of available jobs and the skills of the unemployed.

When the recession hit in 2008, unemployment rates soared in every industry. As usual during recessions, mismatches between employer needs and worker skills also increased temporarily, reflecting greater churn in the labor market as workers were forced to move across industries and occupations.

But industrial and occupational mismatch measures are now back to their prerecession levels, indicating that the overall unemployment rate is high because unemployment rates remain high across all industries and most skill groups, not because of a growing skills gap relative to the gap that existed before the recession.

Edward P. Lazaer and James Spletzer, “The United States Labor Market: Status Quo or a New Normal?” National Bureau of Economic Research, September 2012, with data from the Conference Board.

The unemployment rates for all workers at all education levels jumped during the recession and have not recovered to prerecession levels. Even before the recession, the unemployment rates for workers with a high-school education or less were much higher than those for workers with a college education or higher. And there were high vacancy rates and low unemployment rates for professional occupations, while many service and blue-collar occupations had low vacancy rates and high unemployment rates. These structural differences persist but are no larger than they were before the recession.

Increases in educational attainment levels and effective training programs would ameliorate such differences and the growing wage inequality they have generated. They would also facilitate the movement of workers among industries and occupations, making the labor market work better and reducing the structural unemployment rate from industrial and occupational mismatches.

Alas, state funds for such programs have been slashed and federal funds will probably get an additional haircut later this year, even if the debilitating cuts in the sequester are averted as part of a long-run budget deal.

Another feature of the current recovery is the long duration of unemployment for many workers. At the end of last year, 4.8 million Americans were unemployed for 27 weeks or more, and their share in the total number of unemployed workers fell to 39 percent after peaking at 45.5 percent in March 2011 and exceeding 40 percent for 31 consecutive months. The previous peak was a far lower 26 percent in 1983, at a time when the unemployment rate was about as high as it is now.

Center on Budget and Policy Priorities, using data from Bureau of Labor Statistics and National Bureau of Economic Research

Moreover, the number of workers who are grappling with long-term job loss is probably far larger than the official number of long-term unemployed, as it does not include 1.1 million discouraged workers who want a job but are not currently looking for work, and many of the 1.7 million workers who have joined disability rolls because they cannot find a job.

Why is the long-term unemployment problem so much more severe in this recovery? Part of the answer lies in the fact that the loss of jobs in the 2008-9 recession was more than twice as large as in previous recessions and the pace of gross domestic product growth during the recovery has been less than half the average of previous recoveries.

The relationship between the vacancy rate and the unemployment rate — the so-called Beveridge curve — suggests other forces are at work as well. When the vacancy rate rises, the unemployment rate usually falls along a path that has remained quite stable over long periods of time, including the 2001 recession and subsequent recovery.

But a recent study finds that during the current recovery the normal relationship has broken down for the long-term unemployed — the increase in the vacancy rate has produced a smaller-than-expected decline in the long-term unemployment rate. In contrast, the usual relationship between the vacancy rate and the unemployment rate has held for those unemployed for fewer than 27 weeks.

There are several reasons that the long-term unemployed are not benefiting as much as the short-term unemployed from the increase in job vacancies as the economy recovers. Many long-term unemployed may not have the qualifications required for posted job vacancies, and the longer they are unemployed, the more their skills become obsolete and their actual or perceived employability erodes. To make matters worse, the longer workers are unemployed, the more skeptical employers become about their employability and work habits. Another recent study found that the likelihood that a job applicant receives a call-back for an interview significantly decreases with the duration of his or her unemployment.

In addition, many jobs are filled through contacts and informal networks, and the longer workers are unemployed, the weaker their contacts with potential employers and the less information they have about job opportunities.

Some long-term unemployed may also be searching less intensively or may be less willing to accept job offers during this recovery, in part because good jobs are so much harder to find and because unemployment benefits last longer and are more generous than in previous recoveries.

During his first term, President Obama proposed several initiatives to reduce long-term unemployment, including more flexibility for states to use unemployment funds for training and placement programs, a tax credit to businesses to hire workers out of a job for more than six months, and an $8 billion fund to support training and job placement at community colleges.

These programs failed to win Congressional approval, and they have dropped out of the debate as Washington’s focus has shifted from job creation to debt reduction.

The economic evidence is compelling. The high unemployment rate is the result of weak demand, not structural mismatches. And the longer workers are unemployed, the more their skills, contacts and links to the labor market atrophy, the less likely they are to find a job and the more likely they are to drop out of the labor force.

As a result, what is currently a temporary long-term unemployment problem runs the risk of morphing into a permanent and costly increase in the unemployment rate and a permanent and costly decline in the economy’s potential output. That’s what the Federal Reserve is worried about. It’s too bad that more members of Congress don’t share this concern.

Article source: http://economix.blogs.nytimes.com/2013/01/11/why-the-unemployment-rate-is-so-high/?partner=rss&emc=rss

High & Low Finance: Models for Financial Risk Are Still Seen as Flawed

Five years ago, the financial regulators of the United States — and more broadly the world — didn’t see the storm coming.

Would they if a new one were brewing now?

The answer to that is far from clear. The regulators have more information now, and they have applied the tools they have to measure risk with more vigor.

But a new assessment from a little-known agency created by the Dodd-Frank law argues that the models used by regulators to assess risk need to be fundamentally changed, and that until they are they are likely to be useful during normal times, but not when they matter the most.

“A crisis comes from the unleashing of a dynamic that is not reflected in the day-to-day variations of precrisis time,” wrote Richard Bookstaber, a research principal at the Office of Financial Research, in a working paper released by the agency. “The effect of a shock on a vulnerability in the financial system — such as excessive leverage, funding fragility or limited liquidity — creates a radical shift in the markets.”

Mr. Bookstaber argues that conventional ways to measure risk — known as “value at risk” and stress models — fail to take into account interactions and feedback effects that can magnify a crisis and turn it into something that has effects far beyond the original development.

“What happens now when people do stress tests,” he said in an interview, “is they look at each bank and say, ‘Tell me what will happen to your capital if interest rates go up by one percentage point.’ The bank says that will mean a loss of $1 billion. That is static. That is it.”

But, he added, “What you want to know is what happens next.” Perhaps the banks will reduce loans to hedge funds, which might start selling some assets, causing prices to drop and perhaps have additional negative effects on capital. “So the first shock leads to a second shock, and you also get the contagion.”

The working paper explains why the Office of Financial Research, which is part of the Treasury Department, has begun research into what is called “agent-based modeling,” which tries to analyze what each agent — in this case each bank or hedge fund — will do as a situation develops and worsens. That effort is being run by Mr. Bookstaber, a former hedge fund manager and Wall Street risk manager and the author of an influential 2008 book, “A Demon of Our Own Design,” that warned of the problems being created on Wall Street.

He said the first work, being done with the help of Mitre, a research organization that came out of the Massachusetts Institute of Technology, on the interactions between banks and leveraged asset managers, with particular attention on how so-called fire sales develop as asset values plunge. Additional work is being done by central banks in Europe, including the Bank of England.

“Agent-based modeling” has been used in a variety of nonfinancial areas, including traffic congestion and crowd dynamics (it turns out that putting a post in front of an emergency exit can actually improve the flow of people fleeing an emergency and thus save lives). But the modeling has received little attention from economists.

Richard Berner, the director of the Office of Financial Research, said in an interview that his agency was trying to gather information in many areas, understanding that “all three of those things — the origination, the transmission and the amplification of a threat — are important.” The agency is supposed to provide information that regulators can use.

Mr. Bookstaber said that he hoped that information from such models, coupled with the additional detailed data the government is now collecting on markets and trading positions, could help regulators spot potential trouble before it happens, as leverage builds up in a particular part of the markets. Perhaps regulators could then take steps to raise the cost of borrowing in that particular area, rather than use the blunt tool of raising rates throughout the market.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/01/11/business/economy/models-for-financial-risk-are-still-seen-as-flawed.html?partner=rss&emc=rss

Economic View: In Fiscal Debate, a Little Symbolism May Go a Long Way

“GRANT me chastity and continence, but not yet.” That line from St. Augustine could describe the undercurrent of the fiscal negotiations in Washington. We must decide whether to pursue a relatively loose and stimulative policy, and to trust in our later discipline, or to slam on the brakes now.

Yet there may be a way to square this circle. When it comes to income tax rates, we could raise them for virtually everyone, to send a clear message that the current fiscal situation is unsustainable. At the same time, we could limit those tax increases for most income classes to a relatively small percentage, much less than the full expiration of the Bush tax cuts would imply.

The sorry truth is that we Americans seem like the addict who keeps saying “I can quit any time,” yet doesn’t cut back. So what else might we say to frame this problem in a more useful way?

To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount.

Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cuts. A small but publicly trumpeted clawback of some of the cuts would send the right message to voters, while minimizing the macroeconomic fallout. The nice thing about symbols — single shots across the bow — is that they often can suffice.

If people already rationally expect these tax increases, this signal would do neither good nor harm, but perhaps such an approach would nudge political expectations closer to reality without draining the economy.

With such a deal, President Obama would get much of what he wants, which many Republicans find objectionable. Still, the Republicans are in any case unlikely to win this round of budget negotiations. The positioning suggested here would highlight the major weakness and, indeed, an evasion in the Obama administration’s fiscal stance — namely, the president’s campaign pledge to protect the middle class from income tax increases. It is commonly agreed that raising taxes on the wealthy alone will close only a small part of our fiscal gap over the next 10 years; an estimate of 15 percent is optimistic.

It could also be agreed that taxes could come back down in the future, but only if politicians found matching spending cuts.

Think of this stance as a first step toward the explicit pairing of spending and taxes, toward a goal of more responsible fiscal decisions. Although taxes would go up for now, this could lead to a smaller, more effective government than our current mismatch of taxes and spending would produce.

Economic conservatives often stress the connection between low taxes and smaller government. But that observation, as an argument for lower current taxes, looks weaker as the years pass. Keeping taxes low doesn’t stop the growth of government spending and, indeed, makes spending taste like a free lunch, because the bill is paid much later. The conservative strategy has long been to hold the line on taxes now, but it would be better to encourage the public to more readily grasp and internalize the costs of government spending.

There is something to be said for “pricing” big government by making an explicit connection to taxes, much the way utilities explicitly price water and electricity. And higher tax revenue now will decrease the extent to which interest on the debt consumes future budgets — and that probably means lower taxes in the future. Counterintuitively, raising tax rates sooner rather than later may be the true “low-tax policy” because it may increase the chance of limiting future taxes.

In the minds of many moderate and independent voters, the Republicans are currently identified with dysfunctional politics. But this proposal would let them take a credible stand against obstructionism. If the president didn’t like such a deal, he would be the naysayer, and the resulting publicity would shine a bright spotlight on the tax-and-spend mismatch. Suddenly, it would be the Republicans emphasizing the classic American line that “we are all in this together.”

OF course, the notion of tolerating — and especially endorsing — any tax increase is anathema to many of President Obama’s opponents. But keep in mind that possible alternatives, like another debt-ceiling debacle or an agreement that panders to our fiscal illusions, would probably be worse for both the economy and the longer-term reputation of the Republican Party.

In our country, the typical approach to fiscal deadlines is to kick the can down the road. But that assumes we are kicking a can, not a grenade. It’s time for at least one party — and why not the electoral loser? — to do something just a little shocking. It can give in on much of the negotiations, but insist that both sides start stressing the fiscal truth.

Tyler Cowen is a Professor of Economics at George Mason University.

Article source: http://www.nytimes.com/2012/12/23/business/in-fiscal-debate-a-little-symbolism-may-go-a-long-way.html?partner=rss&emc=rss

Economix Blog: Q. and A.: Understanding the Fiscal Cliff

In the first two days of 2013, large tax cuts passed in 2001 and 2003 will expire and across-the-board cuts to defense and nondefense programs in the government will begin a drastic and sudden hit to the economy — a so-called fiscal cliff — that both parties say could be damaging to the unsteady recovery. Here is a primer on the tax increases and program cuts and their potential impact on the economy.

How large are the prospective tax increases and spending cuts?

Almost everyone who pays taxes would see a hit to take-home pay in the first paycheck of January. The lowest income tax rate would rise to 15 percent from 10 percent. The highest rate would rise to 39.6 percent from 35 percent. The 25 percent, 28 percent, and 33 percent rates would rise to 28 percent, 31 percent and 36 percent respectively. Most capital gains taxes would rise to 20 percent from 15 percent. The tax rate on dividends, now set at 15 percent, would jump to ordinary income tax rates, and since most dividend taxes are paid by the wealthy, that would mean a new dividend tax rate of 39.6 percent. The exemption on taxation of inherited estates would drop to $1 million from $5 million. The tax rate above that exemption would jump to 55 percent from 35 percent.

Even many of the working poor who do not earn enough to face such taxes would take a hit when a temporary, two-percentage-point cut to the payroll tax that funds Social Security and Medicare expires on Jan. 1. In all, taxes would rise by as much as $6 trillion over 10 years, $347 billion in 2013 alone, if the Bush-era tax cuts expire along with the payroll tax cut, and Congress fails to deal with the expanding alternative minimum tax, according to the Congressional Budget Office and Decision Economics Inc., a private economic forecaster.

On the spending side, most defense programs would be sliced by 9.4 percent. Most nondefense programs outside the big entitlements — Social Security, Medicare and Medicaid — would be cut by 8.2 percent. Medicare would be trimmed by 2 percent. Social Security, veterans benefits, military personnel, Medicaid and the Children’s Health Insurance Program would be exempt.

What would the economic impact be?

Most economists and the nonpartisan Congressional Budget Office predict that if nothing is done, the twin impacts of broad tax increases and across-the-board spending cuts would send the economy back into recession. The 2013 impact alone — about $600 billion in tax increases and spending cuts — exceeds the projected growth of the gross domestic product. The Bipartisan Policy Center estimates that the cuts — called sequestration — could cost one million jobs in 2013 and 2014.

The Congressional Budget Office projected that real economic growth would decline at an annual rate of 2.9 percent during the first half of 2013. Unemployment would rise to 9.1 percent by the end of next year.

How did we get here?

President George W. Bush and Republicans in Congress could not muster the 60 votes in the Senate to pass Mr. Bush’s initial 10-year, $1.7 trillion tax cut in 2001, so they used a parliamentary tool called reconciliation to pass the tax cuts with a simple Senate majority of 51 votes. The catch was that this meant the tax cuts would expire after the 10-year budget window closed in 2011. In 2003, when Mr. Bush went back for another round of tax cuts, Republicans in Congress again used reconciliation to avoid a Democratic filibuster and maximized the initial size of the tax cuts by having them expire at the same time as the first tax cuts, in 2011.

After the 2010 elections, President Obama struck a deal with Republicans to extend the tax cuts for another two years, as well as add other tax measures, like the payroll tax cut, to help the economy. Now that extension is ending.

The across-the-board cuts are more complicated. The newly elected Republican House in 2011 refused to raise the debt ceiling, the nation’s statutory borrowing limit, without legislation guaranteeing that the increase would be at least matched by deficit reduction. Congress and the White House agreed to spending caps that shaved about $1 trillion off projected growth over 10 years. They also created a special, bipartisan deficit reduction committee to find another $1.2 trillion in savings over 10 years. If that effort failed, savings would be guaranteed by automatic cuts to both defense and nondefense programs beginning in 2013. The so-called supercommittee failed, and the government is now staring at the consequences.

How do we get out of it?

Some fledgling bipartisan talks have begun with an eye toward staving off the fiscal cliff after the election but before Jan. 1. The so-called Gang of Six searching for a deal includes Senator Richard J. Durbin of Illinois, the second-ranking Senate Democrat; Senator Kent Conrad of North Dakota, the Budget Committee chairman; and Senator Mark Warner, Democrat of Virginia, and three Republican senators, Tom Coburn of Oklahoma, Mike Crapo of Idaho and Saxby Chambliss of Georgia. In addition, Senators Michael Bennet, Democrat of Colorado, and Lamar Alexander, Republican of Tennessee, are trying to negotiate a framework moving forward that would set up a deficit reduction outline, instruct Congressional committees to make it real in six months, then punt the spending cuts and tax increases into next year.

Most of these negotiations accept that savings would have to come from entitlement programs like Social Security and Medicare, and an overhaul of the tax code that raises revenue by closing loopholes and curtails or ends tax deductions and credits. Most Republicans and some Democrats say they can generate additional revenue that way and still lower tax rates across the board.

The leadership is more hesitant. Senator Mitch McConnell of Kentucky, the Republican leader, and Senator Charles E. Schumer of New York, the third-ranking Democrat in the Senate, both say they want a sweeping deficit deal in the coming lame duck session of Congress to avert the cliff. But Mr. Schumer says he will not accept any deal that cuts the top income tax rates for the rich. The House speaker, John A. Boehner, Republican of Ohio, says he will not accept any deal that raises tax rates for the rich beyond the current Bush-era levels.

Where is President Obama on all of this?

Regardless of the results on Election Day, Nov. 6, Mr. Obama will be in office on Jan. 1. He has said he will not sign any bill that extends the tax cuts for the rich but wants legislation that extends the tax cuts for families earning $250,000 or less. That alone would be enough to mitigate the economic impact of the fiscal cliff. He also opposes across-the-board spending cuts, but says there should be no “easy off-ramp,” that is, he will not sign legislation simply canceling the cuts unless Congress comes up with a plan for deficit reduction at least equal to $1.2 trillion. Mr. Obama’s budget foresees about $4 trillion in deficit reduction over the next decade: $1 trillion already locked in with the 2011 Budget Control Act; about $1.5 trillion in additional revenues, largely from allowing tax cuts for the rich to expire; and another $1.5 trillion in additional savings. He has signaled he will accept changes to Social Security, Medicare and Medicaid as part of that last portion of savings. Republicans complain that Mr. Obama has not forcefully led his party to a deficit deal.

What if Mitt Romney wins?

If Mitt Romney, the Republican presidential nominee, wins, he will not be president until he is sworn in on Jan. 20. Since Mr. Obama says he will not accept an extension of tax cuts for more affluent families, Congress will most likely have to let the government go off the cliff. Mr. Romney says that in his first days in office, he will sign a temporary extension of all the tax cuts, effective retroactively to Jan. 1. He has said he will not allow the automatic cuts to happen, but he has not specified how he would do that.

Article source: http://economix.blogs.nytimes.com/2012/10/09/qa-understanding-the-fiscal-cliff/?partner=rss&emc=rss

Italy Pulls Off Another Strong Debt Auction

The Italian Treasury sold a total of about €4.8 billion, or $6.1 billion, of medium-term debt, including €3 billion of three-year bonds priced to yield 4.83 percent, down sharply from the 5.62 percent it paid at the last auction of such securities in late December. The bid-to-cover ratio, a measure of demand, was 1.2 times, below the 1.36 times at the last sale.

The European Central Bank last month began a massive new funding program to backstop banks, which has helped to restore a semblance of stability to the battered market for euro zone sovereign debt. In Madrid, the Spanish government on Thursday sold €10 billion of bonds — twice the targeted amount — with yields falling about 1 full percentage point from previous auctions.

Yields rise as the price of the underlying bonds falls, so lower yields suggests investors have more confidence in the debtor’s ability to repay its borrowings.

The Spanish auction, as well as a successful Italian auction Thursday of 12-month bills, had lifted hopes for another strong showing by Italy on Friday. But another confidence gauge — the gap, or spread, between Italian and German 10-year bonds — barely budged. Rome’s long-term borrowing costs are still more than three times higher than Berlin’s.

The cost of financing Spanish and Italian debt has been in the spotlight since last year, when contagion from the euro crisis that led Greece, Portugal and Ireland to seek bailouts began to spread.

Though Italy’s public sector deficit is actually much smaller than in many other countries, including Britain and the United States, its public debt — a legacy of past spending and slow growth — is seen as dangerously high.

European banks have been borrowing heavily from the E.C.B. since the central bank announced its longer-term refinancing operations last month, under which it lent €489.2 billion for three years at its 1 percent benchmark interest rate.

E.C.B. data released Friday
showed that banks had deposited a record €489.9 billion — almost the same amount lent under the three-year program — in a reflection of the continuing stresses in the interbank funding market.

A bank that borrows from the E.C.B. at 1 percent and then parks the funds with the central bank gets just 0.25 percent in interest, meaning institutions are losing money on their deposits.

The Bank of Spain said Friday that Spanish banks borrowed €132.4 billion in December, Reuters reported, up from €106.3 billion in November and close to the €140 billion record of July 2010.

Article source: http://www.nytimes.com/2012/01/14/business/global/italy-pulls-off-another-strong-debt-auction.html?partner=rss&emc=rss

Australia Lowers Key Interest Rate to 4.25 Percent

SYDNEY (AP) — Australia’s central bank cut its benchmark interest rate by a quarter percentage point on Tuesday, the second such move in as many months as concern mounts over the fragile global economy.

The Reserve Bank of Australia said its decision to lower the rate to 4.25 percent comes amid uncertainty over the European debt crisis, and concern that global economic conditions could worsen.

“Financial markets have experienced considerable turbulence, and financing conditions have become much more difficult, especially in Europe,” Reserve Bank Governor Glenn Stevens said in a statement. “This, together with precautionary behavior by firms and households, means that the likelihood of a further material slowing in global growth has increased.”

Economists were split on what the bank would do, after it cut the cash rate by a quarter percentage point in November. Tuesday’s decision marked the first time the bank has cut rates in consecutive months since Dec. 2008, the height of the global financial crisis.

The move will provide a savings of an extra 50 Australian dollars ($51) a month on a AU$300,000 mortgage, Treasurer Wayne Swan said.

“Christmas is a time when family budgets are stretched, so I’m certain it will be welcome,” Swan told reporters.

The treasurer said the country’s economy remained strong, but said there are “serious risks” arising from Europe’s debt woes. European Union leaders will hold a summit later this week to discuss a plan to resolve the crisis.

“There is a lot riding on what is happening in Europe as we go through the rest of this week,” Swan said. “All of us hope and pray that the Europeans get their act together.”

Australia’s economy remained strong throughout the global financial crisis thanks to a mining boom largely fueled by China’s demand for iron ore, coal and natural gas.

Craig James, chief economist with the Commonwealth Bank of Australia, said the Reserve Bank will probably cut the rate by another quarter percentage point when it meets again in February. Should the European crisis worsen dramatically, he said, the bank may issue an even steeper cut of half a percentage point.

“In the global financial crisis, they were quite aggressive with cutting interest rates,” James said. “This time around, they’re not taking any chances.”

Article source: http://www.nytimes.com/aponline/2011/12/05/business/AP-AS-Australia-Economy.html?partner=rss&emc=rss

Your Money: Pimco Retirement Funds Are Built for Skittish Times

When mutual fund companies start quoting Yoda while trying to persuade you to hand over your money, it’s a sure sign that something new is going on.

But Pimco, a bond specialist now selling the popular target-date retirement funds that blend stocks and bonds and become more conservative as you near retirement, would have you believe that it has a revolutionary approach to these funds, which populate most employers’ 401(k) and other plans.

Pimco believes we are experiencing a “new normal,” where markets in the future are much less likely to deliver the returns people remember from retirement investing in the 1980s and 1990s.

Plenty of people have ended up looking like idiots after declaring that this time is different, so it’s tempting to dismiss their proclamations as a lot of hot air. But Pimco has created its RealRetirement target-date funds with a strategy that appears to be custom-built for these skittish times. There’s less money in stocks, more inflation protection, hedging to protect against large losses and freedom for the Pimco fund managers to make bets on the fly.

For the period that began March 31, 2008, and ended in the middle of this month, Pimco’s funds for people retiring in 2020 and 2040 outperformed each of the big three in the target-date arena, Fidelity, T. Rowe Price and Vanguard, according to Morningstar data.

Still, the margin of victory over the next best-performing fund was less than one-quarter of a percentage point annually in both cases. And as Yoda himself might put it, three years of returns matter not when worried you are about many decades of future.

That outperformance is something, though. So it’s worth a peek under the hood to see what Pimco is up to.

But first, how did we get here? Target-date funds grew out of the utter lack of preparedness that many people felt when employers left pensions and made workers pick investments in a 401(k).

“People were given investment discretion when they didn’t want it,” said Joe Nagengast, a principal at Target Date Analytics, a research and consulting firm that does not work with Pimco but would like to someday. “The way to address that was to put everyone in these broad age buckets and say, ‘For investment management purposes, we’re not insulting your individuality but if you’re 25, you are the same as every other 25-year-old.’ ”

So a 25-year-old today can invest in a 2050 fund with a high allocation of riskier assets like stocks. Over time, the fund would gradually switch to bonds and other more conservative investments that can reduce risk as retirement looms.

Pimco introduced some of its target-date funds right before the stock market fell to pieces in 2008, which dragged down many other companies’ 2010 and 2015 target-date funds that had a lot of money in stocks. What Pimco had surmised was that one big loss near retirement would set many retirees back so far they’d have difficulty recovering. So it wanted to try to protect people from that.

“You only get one shot to do this properly,” said Vineer Bhansali, the Pimco managing director who oversees the investment strategy behind the target-date funds. “Most participants don’t worry so much about marginal underperformance as they do about underperforming significantly on the downside.”

Mr. Bhansali has a Ph.D. in particle physics from Harvard, did time in the trenches on Wall Street and is qualified to fly all sorts of airplanes even when he can’t see 100 feet in front of him. But he has no instruments for predicting returns, and he worries about once-in-a-while calamities like hyperinflation. “We believe that just like losing your money to someone who doesn’t pay you back is a very immediate threat to your capital, so is a loss of buying power,” he said. “It’s the same thing. You can’t buy stuff that you need.”

One way Pimco tries to avoid that possibility is by gradually moving as much as 35 percent of the target-date portfolio to TIPS, which are United States Treasury bonds with built-in inflation protection. To avoid outsize stock market risk, Pimco’s targets for its stock allocation are never higher than 55 percent.

Another big difference here are the hedges that Pimco has in place to protect against a collapse in the stock market. By using various complex tools, Pimco sets a maximum loss it is willing to tolerate. For a fund with a retirement date that is relatively soon, it wants no more than a 5 percent loss; for a retirement date that is much further away, it may be willing to suffer a 15 or 20 percent decline, though the targets can move some.

Article source: http://feeds.nytimes.com/click.phdo?i=9f4014872f97366d9bf8efbb5a7110e9

Regulators Defend Extra Capital Buffer for Banks

The Basel Committee on Banking Supervision and the Financial Stability Board said their joint study group estimated that a one percentage point buffer on the top 30 banks over eight years would cut economic growth by less than 0.01 percent a year during the phase-in period, but “the benefits from reducing the risk of damaging financial crises will be substantial.”

Both bodies have approved the bank capital surcharge plan that leaders of the world’s top 20 economies are set to endorse in November.

A surcharge of 1 to 2.5 percent — the amount depending on five factors like complexity and international reach — will be introduced from 2016 over three years. Banks including JPMorgan Chase, HSBC, Barclays and Deutsche Bank are almost certain to be included.

The surcharge comes on top of a minimum of 7 percent capital buffers that all banks must hold under the global Basel III accord being phased in from 2013.

The aim is to avoid taxpayers’ having to bail out banks again in the next crisis. It is part of a wider effort to tackle “too big to fail” lenders by ending market assumptions that governments will not allow them to collapse.

JPMorgan Chase’s chief executive, Jamie Dimon, has described the surcharge as anti-American and has clashed with the Bank of Canada governor, Mark Carney, who will take over at the Financial Stability Board in November. The banking industry warns that piling capital requirements on lenders will crimp their ability to aid growth, but regulators say banks fail to calculate the benefits of tougher standards.

The two bodies estimated that the Basel III proposal combined with the capital surcharge “contribute a permanent annual benefit of up to 2.5 percent of G.D.P. — many times the costs of the reforms in terms of temporarily slower annual growth.”

The Basel III rules and surcharge combined will lower economic growth by an estimated 0.34 percent at the point of peak impact, the regulators said.

Article source: http://feeds.nytimes.com/click.phdo?i=ed37f0933da9ffefaa41ccbf73851164

Economix: Economic Growth Worse Than Thought

The good news six months ago was that the United States economy, as measured by gross domestic product, had completely recovered all the losses it suffered in the recession.

Never mind.

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

The revised G.D.P. numbers put out by the government today make the recent history, which we thought was pretty poor, even worse.

Even with a small gain in real G.D.P. in the second quarter, the total size of the economy, $13.27 trillion in 2005 dollars, is $55.9 billion, or 0.4 percent, smaller than the revised number for the fourth quarter of 2007. The revisions indicate the economy was larger before the downturn than we had thought and is smaller now.

We are now told that during the recession, the economy shrank by 5.1 percent. That is a full percentage point more than the 4.1 percent the old numbers showed. The recovery has also been slower.

The changes are pretty much across the board in the G.D.P. numbers. Personal consumption expenditures fell by a full percentage point more than previously thought. Gross private investment — on such things as buildings and planes and computers — declined by 34.2 percent during the recession, 2.6 percentage points more than previous estimates.

A note to those who are complaining the federal government is too big: we are now told that nonmilitary spending contributed less than thought to the G.D.P., both during the recession and the recovery. The same is true of state and local government spending.

There is one area where the changes make history look better — corporate profits. They were a little lower than we thought in 2008 and significantly higher in 2009 and 2010.

It is small comfort, but the United States still looks relatively good in G.D.P. recovery. Following is the change in real G.D.P. from the prerecession peak to the most recent numbers available. For the United States and Britain, that is the second quarter of this year. For the others it is the first quarter.

Switzerland, +1.2%

Germany, +0.1%

United States, -0.4%

France, -0.8%

Netherlands, -1.0%

Euro zone, -2.1%

Portugal, -2.7%

Britain, -3.9%

Spain, -4.0%

Italy, -5.1%

Japan, -5.6%

Greece, -9.9%

Ireland, -11.5%

Article source: http://feeds.nytimes.com/click.phdo?i=4d2a62a6c23d22e32083e3f9285cc62e