Comments & Context

Trade: it’s complicated

With trade & tariffs much in the news, Colin J. Hoffman & Ryan Monarch, both in the International Finance Division of the Fed’s Board of Governors, just released the paper “Distributional Consequences of Trade for U.S. Consumers: Estimating Group-Specific Import Price Inflation.”

They work to shift the focus from the effects of international trade on different groups of workers to different groups of consumers, and want to know if changes in prices driven by increased international integration exacerbate or ameliorate real income inequality, driven by nominal income changes.

The authors reference a 2016 paper, “Measuring the Unequal Gains from Trade,” in which Pablo D. Fajgelbaum & Amit K. Khandelwal (of UCLA and Columbia) review the effects of import price disparity on high- and low-income consumers. Their scenario involves closing down trade, which is extreme and we don’t expect, but their work is still worth a look. Using the elasticity of imports, incorporating both trade costs and income, they find that such a closing off of trade would be about twice as hard on lower income groups than on the top decile: lower-income consumers spend more on traded goods, with lower elasticities, whereas higher income groups spend more on services. This bias extends around the world, but in countries with lower elasticity of exports, fewer gains would accrue to the poor from opening trade.

Hoffman and Monarch find that low- and high-income groups have about the same share of expenditures on imports, and both have increased to about 10% as of 2014 from around 7% in 1998. However, the 1st decile’s share of imports excluding food and fuel is about 70%. That share falls to about 66% for the second decile, and then rises through the deciles to 77% for the top. But all goods are not equal. Those much disparaged washing machines are about 1.8% of expenditures for the lowest decile, steadily falling to just 0.8% for the highest, whereas spending on imported sporting goods rises from about 0.5% for the lowest to 2.2% for the highest decile.

We can see where this is going. Although inflation in imported goods has risen for all groups, the lower income groups have faced higher inflation in import prices. Using prices for 228 Harmonized Commodity Description and Coding System sectors—let’s stick with HS—the authors find statistically significant differences in price changes across income groups. As the graph on p. 2 shows, import inflation was up 24% for the first decile, and 15% for the ninth.

And China held yearly changes in import inflation down for all deciles. Without China, yearly import inflation would have been up an additional 0.5–0.6 percentage points.

Since the method used to produce the results allows the authors to see different expenditure shares of the deciles within the same sector, and different expenditure shares across product varieties, the authors were able to demonstrate that taking out cross-sector differences aligns yearly increases for all deciles at 1%. That indicates to the authors that high-income consumers gravitated to sectors with lower inflation, and leads them to conclude that nominal income inequality that has risen owing to trade in the last decades, was not mitigated by changes in import prices across income groups. This is pretty specific information, but it underscores how much more specific the debate should be.

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Richard Yamarone

Many of you already have the heart-breaking news that the wonderful Richard Yamarone stopped breathing yesterday afternoon; he had a heart attack on Thursday morning while playing hockey with his team, his Thanksgiving tradition.

In 2009, Captain Chesley Sullenberger safely landed his crippled plane on the Hudson River. So accomplished was he that he planned to hit the river where he thought there would be no boats, telling passengers to, “Prepare for a hard landing.” I remember thinking at the time it would have been admirable if the monetary officials could have been so blunt in 2007.

Rich was. Back in the early days of the recovery he wrote, “The recent depression—ask any real economist.” He never confused the height of the markets with the state of the economy. He thought about workers and wages, inequities, rigged systems, and he worked incredibly hard. He was incisive, deep, an awesome singer, and truly hilarious. His humor made it easier to take some of his darker observations. Once he was outlining a dreadful eventuality when suddenly he noted it was odd that we were both laughing. (I’ll leave it to those in his league to cover his fly-fishing abilities.)

A tremendous man, a tremendous friend, and a tremendous economist, the real kind.

And he had a burly Welsh heart. Also a pilot, Rich too would have thought about the boats on the river.

Rich was 55.

In today’s note his closest friend Dave Rosenberg wrote that Rich “managed to squeeze many lives into one short one.” Josh Frankel added a lovely image, his idea for a Bloomberg late night show called “Yammy in his Jammies,” featuring Rich running down, say, the nonfarm payrolls in feety pajamas. Dean Eisen called him open and honest about himself—simple words but hard to do. Josh Rosner, “He measured others, generously, by the kindness in their hearts, but few could have truly been measured against his own.” (More here.)

And don’t miss him singing and playing.

We loved Richard.

Last night I dreamed that a mighty redwood fell in the forest.

Philippa

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Charlottesville

mont4

This commentary was co-authored by Philippa Dunne (The Liscio Report) and David Kotok (Cumberland Advisors). It reflects their personal views. Philippa notes it was a real honor to write this with David. And that it was so very “David” of him to remind her that James Alex Fields, Jr., is innocent until proved guilty.

A saga unfolds. First, snippets of online news, followed by TV images and “breaking news” reports. “Another one,” she thinks. “Ugh!” he exclaims, “madness! Why? What is the matter with these people?”

Two thousand miles apart, each in their own home, these two friends experience a similar aching angst over the futility of their efforts to try to improve a world that now seems to be rejecting their vision. After all, hate and anger triumphed in Charlottesville. Death arrived on scene, and innocents and innocence were among the casualties. Hate always seems to end that way.

Is hate learned, or is it embedded in some strand of DNA passed down through every human generation? Nazis hated, and Jews died. Then millions more died worldwide. Generations were seared and scarred. For what? To what end?

Geneticists who have decoded the human genome tell us that there is really only one human race, not multiple races within the species, yet the notion of a color scheme still grips some human imaginations, with disastrous results. White hated, and black and red died. And within this awful spectrum, each race’s history is replete with its own internecine murder and torture. Yellow on yellow, brown on brown. White on white. Red on red. That’s our history.

Bling! That little noise is now nearly continuous, announcing incoming mail in the wake of tragedy. A quick look. She has written:

“I am guessing you are sharing my grief today. I know grief isn’t much better than hope as a tactic – perhaps worse, but…”

Yes, he thinks. Grief, like regret, is an emotion that is not very effective, since it occurs after the damage is done.

He taps her cell number on his iPhone. They chat, just as if they are in the same room. How can his miracle of communications and the hate that ripped through Charlottesville occupy the same space and time? How can humanity have come so far and yet never seem to progress?

How can the many heroes who put their own lives on the line to shelter Jews and fleeing slaves people the same world as an individual who decides to plow his car into a group of people he has never met, or one who feels OK about walking down our streets wearing a T-shirt quoting Hitler. Quoting Hitler, you understand.

Pained, each recalls the writings of Joseph Conrad, and they share that sad understanding. Each feels the heaviness of this latest door opened into a “heart of darkness”.

Those of good will must not succumb, she and he agree, as futile as their efforts may seem at times. That is their closing pledge.

Conversations like ours must have taken place among friends all over the country, as we as a nation reckon with the events that unfolded in Charlottesville, Virginia, last week.

How do we brighten that dark heart? Platitudes abound, but first, we should take an honest look at our own motives. Listen to the stories we tell about why the economy is the way it is, why there is a growing number of disenfranchised citizens in our country.

If our theories are overly complicated, they are likely constructed to obscure basic truths. Think, by way of an analogy, of the tortuous paths the planets were said to follow in order to keep the Earth at the center of the old Ptolemaic view, obscuring for centuries the simple beauty of the heliocentric system.

Reality insists that we seek answers to life’s puzzles – and answer to ourselves. We’re forced to admit that we’re probably not up to sitting down and having a chat with someone who believes certain groups of people are subhuman. How do you shake hands with someone who was happy to call Sasha Obama a monkey on her sixteenth birthday? You don’t.

But we can do something about the decades of reckless neglect that are an integral part of our heritage. Targeting each other is clearly not working; targeting the neglect that drives the anger is, perhaps, the only way through.

Jobs are just one telling example: Yes, jobs are being generated by the sharing economy, but many of them are makeshift and do not make up for jobs lost to globalization and displacement of industry. The state of our workers is not an artifact of poor measurement. If that’s your argument, you aren’t looking at the facts on the ground.

There are many simple things to do. Someone recently suggested that PTAs in rich districts might take some of the money they raise to struggling sister schools. We’d add: Don’t mail it to them. Walk it over and tell the kids you are funding a specific project.

The US economic pie isn’t growing as it once did. Maybe we can do something about that through broader capital investment, especially in research & development.

Maybe we can’t… or maybe we won’t. We have to think about what it means that our workers are worse off today than they were in the 1950s. We need to recognize how easy it is for some to manipulate the anger that hardship generates. Set up a straw man, and by and by, someone succumbs to the urge to drive his car into a group of people he has never met. Wherever did those guys marching by eerie torchlight last Friday get the idea that Jews are out to “replace” them? Many of them are feeling shunted aside, that’s for sure.

We get to decide if the threat of manipulated anger is something we want our children to live with. Yes, that’s right. We get to decide. Note indecision or do nothing is also a decision.

As it is, everyone loses. Though James Alex Fields, Jr., is innocent until proven guilty, if he took Heather Heyer’s life as alleged, it’s hard to believe he didn’t also ruin his own.

(Photograph: The thousand-foot garden at Monticello)

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Inflation, that dog just won’t bark

We are happy to report that Hale Stewart will be contributing to our blog going forward. Here’s a longer look from him, with an assist from the St. Louis Fed, at pricing trends.

Friday’s inflation report was, yet again, underwhelming, further confirming that upward price pressures are contained. Core and overall CPI are 1.7% Y/Y:

fredgraph-16

Both measures are below the Federal Reserve’s 2% inflation target. Core (in blue) was slightly above 2% for most of 2016 while total CPI (in red) was rising. But its increase did not influence overall CPI, indicating that commodity pressures are weak. Although they are part of the misery index, neither food nor energy prices should concern us in terms of sticky inflation:

fredgraph-17

fredgraph-21

The top chart shows the year Y/Y percentage change in food and beverage prices, which were declining from the beginning of 2015 to 3Q2016. They are now increasing, but are only slightly above 1%. The bottom chart shows energy prices which were negative for approximately two years, turning positive at the beginning of 2017. Yes, they did spike to about 15%, but that’s as much a function of statistics as the marketplace activity. Now they are quickly declining. Just as importantly, food and beverage prices are only 13.63% of CPI while energy prices are 7.35%, meaning both would have to increase at sharply faster rates for an extended period time for us to be concerned.

Energy and food prices are the only commodity prices adding to CPI:

fredgraph-19

All commodities less these two items have subtracted from CPI for over four years. This sub-index of overall CPI accounts for 18.95% of CPI. Its negative contributions counterbalance any upward pressure from food and energy prices.

Finally, we have the sub-index for services less energy:

fredgraph-20

This was between 3%-3.2% for most of 2016, but has since decreased sharply. The underlying reasons for this spike have dissipated.

Readers sometimes suggest we adjust spending measures, like retail sales, for certain segments’ own personal deflation in order to show that spending is actually quite strong. That gets a “Huh?” from us. If spending were strong, prices would be floating up. The point is that they are not.

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