The Fed Should Print Trailers

A Benjamin Cole post

Thanks to the extraordinary insights of blogger Kevin Erdmann, the issue of housing costs and inflation has been brought into better focus. Erdmann recently brought up manufactured housing, or house-trailers, a wonderful topic.

This is no small matter. Housing consumes about 27% of typical household budget, but food only 10% and gasoline less than 4%. See here.

Yet housing is hardly a free market. Zoning out housing density is ubiquitous in U.S. cities, and trailers are criminalized routinely. The result is artificial scarcity, a housing shortage ironically made worse by tight money.

Manufactured Housing

According to the Manufactured Housing Institute, the average cost of a manufactured home in 2014 was about $65,000, and cost about $45 a square foot at retail. The price of a traditional, “stick-built” home was more than double that, or $97 a square foot (yes, that excludes land).

My guess is that in free markets, we would see innovations such as stackable manufactured housing units for urban or close-in suburban settings. Pioneer-types are already experimenting with shipping containers in this way, another type of housing that should be rapidly legalized.

A real-estate entrepreneur could buy a lot in or near a city, drag on some manufacturing housing or shipping containers, and be good to go. When his units filled up, he starts stacking.

Inflation, Money And Trailers

Milton Friedman famously said the inflation everywhere and always is a monetary phenomenon. But there are structural impediments that cause inflation as measured, and property zoning and housing regulations appear to be one. One can drive down “T” in MV=PT, and get to higher “P.” You can blame the central bank for that, but I think you can also blame the guys driving down “T.”

My guess is that Americans are not ready to un-zone property, or stand idly by while the next-door neighbor pulls a couple trailers into the backyard to work as rentals. Voters become greenie-socialist control-freaks in their own neighborhoods, from Newport Beach, Ca. to Brooklyn.

Conclusion  

For the U.S. Federal Reserve to obsess about measured rates of inflation, when there are substantial structural impediments in a major component of measured inflation (that is, housing) raises troubling questions.

To date, the Fed’s announced 2% PCE inflation target rate, which evidently has become a ceiling, appears to be a noose around the economy’s neck, judging from real GDP growth, or from falling NGDP trends.

As cities continuously raise barriers to new housing supplies, one wonders if the 2% inflation target is too low.

One might also ponder why FOMC transcripts are full of jibber-jabber about energy prices, and so rarely touch upon urban housing costs.

The BLS and the Labour Force Participation rate two-step: chart version

A James Alexander post

I showed in the previous post how the Bureau of Labour Statistics (BLS) has quietly shifted its expected drop in the LFP rate forward by several years to fit with observed drop in the rate. At Historinhas we argue that this much earlier than expected drop is due to the neglect of NGDP leading to inadequate Aggregate Demand.

RGDP growth was likely to slow due to demographic factors, but gently over the next 15 years – other things being equal. By “other things being equal” I specifically mean no secular changes in innovation or supply-side reforms that would boost productivity. The growth in the labour force was always expected to slow, due to lower population growth and the ageing of that population leading to a lower Labour Force Participation Rate (LFPR), especially the large baby-boomer cohort. Assuming inflation was unchanged, the lower growth in the absolute size of the workforce would also gradually have taken the edge of the NGDP growth rate too.

JA LFPR A_1

The effect of the much earlier than expected weakness in the LFPR on the size of the Civilian Labour Force was partially offset by a higher than expected population pool out of which the Civilian Labour Force selects itself, or is selected.

I used some percentage numbers in my previous post but did also want to show the charts that express this BLS two-step (left and down) more clearly.

The BLS has only made three long-term projections to 2050 since the turn of the century, and at rather odd intervals. The earliest was published in May 2002 and forecast a decline in the LFPR to 61% by 2050. Most of the decline was due to occur in the twenty years from 2010 to 2030. One interim projection for 2015 gave an LFPR of 67%, suggesting the decline would only really start in earnest after 2015. There was a mild acceleration in the decline in the LFPR projected in November 2006, the second long term projection made a few years later.

However, in the next long term projection published in October 2012 the impact of the recession had brought forward the start of the period of rapid decline by at least ten years. The BLS now projected a much lower, sub-60% end point in 2050.

JA LFPR A_2

The bi-annual medium-term-projections only look ahead 10 years, but the same drop and leftward shift in the LFPR curve can be clearly seen. I have included the long term projection from May 2002 to illustrate the size of the early onset of the slump in LFPR from the initial, pre-recession view.

Kevin Erdmann has drawn my attention to an interesting, as ever, post he wrote back at the end of 2013 where he analysed the trends in more detail, by age cohort. He argued that the BLS was optimistic in its projections in the 2007 medium term forecast suggesting that the labour market was “very hot” back then and it was therefore a poor base year.

I am not so sure the labour market was very hot back then, and why 4.5% unemployment should be seen as full employment. Average hourly wages were only rising just over 4% YoY. It was OK but nothing special. It was more as if the developed world was at the start of a period of prosperity rather than a peak.

JA LFPR A_3We are sometimes in danger of becoming conditioned to high levels of unemployment that we forget what a red hot market is really like. Even in the 1990s you couldn’t walk of out of one job and into another the next day. That lovely nirvana for workers was back in the 1950s and 1960s when you had surging labour force growth and a red hot market. It is unimaginable to today’s youth  but a fact. Good stuff happens when central bankers are forced to focus on prosperity over inflation. The awful consequences of the inflation phobia at the Fed are gradually beginning to dawn on the markets.

Kevin Erdmann Writes One of the Most Important Blog Posts of The Year

A Benjamin Cole post

Kevin Erdmann, of blog Idiosyncratic Whisk, has written extensively and persuasively about housing costs and inflation, but lately topped himself when addressing wages.

Erdman in his Sept. 9 post, Real Wage Rates and Tight Labor Markets, takes a look at “quit rates,” and concludes quitters, probably better referred to as “job hoppers,” get higher wages. The quitters move into jobs in which they are more valuable to the employer.

So wages in general can rise, but productivity rises too. “This is why the relationship between real wage growth and inflation is not strong,” says Erdmann.

Erdman further ponders the scene, and concludes, “In any case, it seems as though the overwhelming factor for positive outcomes [for both business and labor] is stability. That seems to be associated with inflation rates in the 2% to 4% range. Stability will be related to low unemployment and low risk premiums. The risk to our economy of wage growth, if there is any risk at all, seems greatly overshadowed by the risk of business cycle instability.”

Yeah, you know, snuffing out an economic recovery to fight minor wage growth is a bad trade-off.

Erdmann notes that present-day wage hikes are below 1990s levels even yet, btw. I note that Q2 saw unit labor cost deflation, as measured by the Bureau of Labor Statistics.

The Frantic Fed

The Fed, as widely observed, seems to be in a heightened, frantic, even hysterical state of prissiness regarding the possibility that inflation might migrate back up towards its 2% target (which evidently even Fed Chief Janet Yellen forgets is an average target, not a ceiling).

Even worse, the empirical evidence that 2% is a good IT is seriously wanting. As I have oft-noted, from 1982 to 2007 in the United States, the average inflation rate in the United States (CPI) was just under 3%, and real growth just north of 3%.

Question

Q: Given the historical record, and the observations of Kevin Erdmann, what makes a 2% IT attractive to central bankers?

A: They can undershoot it and be close to zero, their real goal.

Conclusion

What if a 3% average inflation is a better central bank IT (let alone NGDPLT)?

Could the Fed ever alter its IT? Could the Fed go to an IT-band, such as that of the Reserve Bank of Australia?

Have American policy-makers and central bankers become so inflexible, so hidebound, so PC, that a moderate increase in the IT is not possible?

And if a moderate increase in the IT is not possible with independent central bankers, is independence a good idea?