Boeing Will Build a Factory in Your Town If You Pay For The Factory
It's no secret that big companies with lots of jobs to throw around try to strike good deals with state and local governments in exchange for deigning to locate there. But Boeing's wish list for building a 777X factory is extremely ambitious. For example, they would like to build the factory in a city that will pay for the entire building of the factory, with the following three points listed as desirable:
— “Site at no cost, or very low cost, to project.”
— “Facilities at no cost, or significantly reduced cost.”
— “Infrastructure improvements provided by the location.”
That's a little nutty. If your strategy for attracting the construction of an airplane factory to your town includes footing the entire bill for an airplane factory, then you might as well just launch an airplane manufacturing company. You can read the whole list here. They are ideally looking for a highly skilled yet low-wage workforce at a location with a dedicated railroad spur and a seaport. Plus low taxes!
No Sign of a Jobs Liftoff
Not to be Mr Sourpuss or anything, but I think the chart above undercores the fact that some of the celebratory atmosphere surrounding this morning's jobs report is a bit premature. It was a decent number of new jobs and nothing to cry about. But we've seen better months. Not just back in the pre-crash days, but during the disappointing recovery of the past four years.
That's a big part of the reason all this talk of accelerating tapering seems so badly premature to me. If next month is better than this month and the next after that is even better then, sure, maybe. But we're hardly experiencing some amazing boom.
Banks Aren't Going To Be Happy With The Volcker Rule
The so-called "Volcker Rule" has always had a somewhat ambivalent place in the firmament of Obama administration financial regulation, but based on a preview provided by a senior Treausury official yesterday I think it's fair to say that when it's finalized in the next week or two the financial industry isn't going to be happy with it.
The rule got its name from Paul Volcker, who advocated for it in the counsels of government. And the idea is essentially to do something in the spirit of Glass-Steagall by preventing financial institutions that have insured deposits from also doing speculative trading. That is an easy sentence to write down, but it's harder to pin it down in legal language because the intention of the rule is to allow for "market making" trades and "hedging" trades. The issue is that there isn't an entirely cut-and-dried difference between a hedge and a gamble. A rule that bans all gambles will end up banning some hedges, and a rule that allows all hedges will end up allowing some gambles.
As a matter of politics, this got messy because the President was enthusiastic about the idea but the top financial policy people in his administration—Lawrence Summers and Tim Geithner—were not. Geithner eventually got on the bus, Summers left the administration, and congress wrote it into law. But the actual work of operationalizing the rule kept dragging on and on and it looked like a relatively soft version of the rule was likely to be adopted. But momentum shifted over the past several months as the relevant regulatory agencies tried to zero-in on consensus, with some changes in the composition of the Securities and Exchange Commission perhaps playing the most important role.
Unlike his predecessor, Treasury Secretary Jack Lew doesn't have a deep background as a financial regulator but in his role as a convenor and head-knocker he's pushed the idea that it's better to start out by erring on the side of a strict rule. That's the right idea, and according to the senior official it's the principle that will be entrenched. In particular, banks had been hoping for a rather broad loophole around the idea of "portfolio hedging" that they now look unlikely to get.
Industry pushback is that a strict Volcker Rule will result in an unnecessary level of market instability driven by a lack of liquidity. You should be skeptical of this argument, as the rule doesn't attempt to ban market speculation—just ban a particular class of firms from engaging in it. If the Volcker Rule leads to some large set of profitable trades to go unmade, then other firms will step into the breach and go make them. That will be a loss for the particular regulated entities, but not for the economy at large.
Economy Added 203,000 Jobs In November
A very decent jobs report today says the economy added 203,000 jobs in the month of November and revised the previous data up slightly. The unemployment rate as measured by the household survey has fallen to seven percent. And this month it fell despite an increase in the size of the labor force. Steady growth, continuous improvement.
Naturally this is going to heighten "taper" fever as Fed watchers (and FOMC members) with itchy trigger fingers have a palpable yearning for a return to normalcy. But I think it's quite important at this time in American history for the central bank, not to regard itself as the institution whose job it is to take the punch bowl away before the party gets started.
One reason for that is fiscal policy. The nature of the deadlock in congress is driving us toward more austere policies. Even the negotiations around sequestration are all about replacing it with other kinds of spending cuts or revenue-raisers. Nobody is talking about doing anything to increase the budget deficit. When that's the case, there's much less need for a bunch bowl watchdog.
But the more important reason is the longer term context. The idea of a central bank whose main job is to take the punch bowl away before the party gets too fun belongs to a time of moderate macroeconomic fluctuations. If it's been a long time since you've had a prolonged or serious recession, then it makes a ton of sense to become very vigilant about inflation—even "incipient" or largely hypothetical inflation. But when you had a year of recession (2008) followed by a year of extreme recession (2009) followed by a year of slow growth in which unemployment remained high (2010) followed by another year of slow growth in which unemployment remained high (2011) followed by another year of slow growth in which unemployment remained high (2012) followed by a fourth year of slow growth in which unemployment remained high (2013) it would be very unbalanced to act hyper-vigilant about inflation. It's been a long time since the bulk of workers have had any meaningful bargaining power, and the wise thing to say would be that, yes, we would in fact actually like to see a party get started here.
The Real Harvard Inflation Crisis
The news that the median grade at Harvard these days is an A-minus has naturally reignited the conversation around "grade inflation" especially at elite colleges.
One thing to note about this is that the inflationary dynamic at elite schools is pretty literally a case of inflation. Between 1990 and 2013, the size of the American population has grown 27 percent. The size of the Harvard freshman class has grown about zero percent. As measured by NAEP, the quality of the average American high school student has risen slightly during that period and the size and quality of the international applicant pool has grown enormously. With demand for a fixed supply of slots skyrocketing, you see a lot of inflationary dynamics. University spending per student is much higher at fancy private colleges than it was a generation ago. And it is entirely plausible that the median Harvard student today is as smart as a A-minus Harvard student from a generation ago. After all, the C-minus student of a generation ago would have very little chance of being admitted today.
And that, rather than "grade inflation" is the problem. If you go back 40 years ago, nobody was saying "the big problem with Princeton is it's not exclusive enough." And yet over time top schools have failed to expand supply.
If rich highly selective universities wanted to serve their public missions properly, they would do something like approximately double in size to return to the selectivity of the 1970s. NIMBY issues would probably prevent many (or most) of these schools from literally doubling their current footprint. But mayors of cities that aren't lucky enough to host world-famous universities know that the presence of one is an enormous asset. If Cambridge won't let Harvard and MIT double in size, then build expansion campuses in Worcester. I bet Bridgeport and Fall River would love to host Yale II and Brown II. University officials say they're worried that expansion would dilute the value of their brands, but the message of grade inflation is that the brands have become excessively precious. Double the Ivy League and bring admissions standards down, and I might even reconsider my fatwa against donating to fancy colleges.
Uber's Weird Christmas Tree Program
The car-hiring service Uber is doing an Uber Tree offering today in several cities where while supplies last they will deliver a Christmas tree on-demand to your house in partnership with Home Depot.
Obviously a fair amount of this is just a marketing gimmick. For a service like this scale matters a lot, so anything that gets people talking (or writing blog posts) about the company helps. But Uber CEO Travis Kalanick has been talking lately about wanting Uber to be understood not just as a transportation service provider but as a kind of all-encompassing urban logistics firm. At the moment, though, they're actually just a transportation service provider.
But his underlying point is correct. The basic technology of calling for vehicles and routing them through cities has lots of applications beyond transporting people. You could imagine Uber growing to fulfill the lost promise of Kozmo.com and arbitrary same-day small parcel delivery. Or food delivery.
Yet for now they don't seem to have any concrete lines of business like that that they think they can launch profitably. So the next best thing is the occasional marketing stunt—this tree thing, the kitten delivery promotion from a few months back—that generates a little buzz and also plants in people's mind the idea, "wouldn't it be great if I could get Uber to bring me some X." The one thing I don't get about this is the price: $135 seems like an awful lot to pay for a Christmas tree. And even at that high price point, they say "availability will be very limited." If supply is going to be tightly constrained anyway, why not make it more affordable, so everyone who gets an Uber Tree has a great experience, and write the cost off as marketing?
Lew Calls for Proper Funding of Financial Regulation
Treasury Secretary Jack Lew delivered a speech this morning at Pew about financial regulation, largely dedicated to making the case that the Obama administration's moves have been tough and have meaningfully increased the safety of the financial system.
But the most interesting section of the piece was less about regulations than about Lew's core subject area of budgeting. Or, rather, about their intersection. It doesn't matter what laws we put on the books against Wall Street malfeasance unless there's money in the budget to pay the cops who enforce the law:
An essential part of meeting that test will be to make sure regulators have the resources necessary to police markets and financial institutions effectively. Even with the best rules, illegal behavior or excessive risk taking will go unchecked unless regulators have the resources to conduct regular examinations, monitor suspect behavior, and go after those who break the law. The point is, this is not an either/or proposition. The best rules will fall short without effective supervision and enforcement. And effective supervision and enforcement are only possible with sufficient resources.
After failing in efforts to block or rollback reforms, some in Congress would now simply starve the regulatory agencies of funding so they lack the resources to do their job. Failing to fund supervision and enforcement of the new rules amounts to virtual deregulation. And it puts Americans at risk that financial threats will go unchecked.
I would add that this is one of these cases where money isn't just money. The American military is effective in part because Congress dedicates a lot of money to it. But I think it would be better to say that Congress dedicates a lot of money to the American military in large part because Congress wants the military to be effective and that "the military should be effective" is a notion that has widespread support throughout the American political system.
The question for medium-term financial regulation is whether politicians in Washington want the institutions charged with policing Wall Street to do a good job. Republican refusal to pony up the money is just one small sign that basically they don't.
Today's Good GDP News Is Actually Bad News
I saw a lot of celebratory tweets just now when the Bureau of Economic Analysis revised its estimate of third quarter GDP upwards to 3.6 percent growth. And, indeed, that's a good number and an upside surprise. But the details are actually quite bad:
The acceleration in real GDP growth in the third quarter primarily reflected an acceleration in private inventory investment, a deceleration in imports, and an acceleration in state and local government spending that were partly offset by decelerations in exports, in PCE, and in nonresidential fixed investment.
The key phrase here is "private inventory investment" which is when businesses build up their stock of goods. Inventory investment tends to swing. If firms build up inventories of unsold goods in one quarter, they typically spend down that inventory in the next quarter. The workhorses of exports (selling stuff to foreigners), PCE (selling stuff to Americans), and nonresidential fixed investment (so companies can make the stuff they sell to foreigners and to Americans) all decelerated.
Relatedly, Gross Domestic Income—an alternative procedure for counting up the same concept that GDP measures—rose only 1.4 percent in this report. The GDI approach is generally more accurate, further underscoring there are a lot of dark clouds to this silver lining.
Driving Is Going Out of Style
A new study from U.S. PIRG gives us perhaps the most detailed yet look at the "peak car" phenomenon whereby America's passenger-miles driven keeps falling. As Ashley Halsey writes, perhaps the most important contention of the report is "data that show the cities with the biggest drop in driving suffered no greater unemployment peaks than those cities where driving declined the least."
Specifically, the second- and third-largest declines in car commuting were seen in the Washington, DC and Austin, TX metropolitan areas which had two of the most robust job markets during the recession.
PIRG's takeaway is that it's time to stop lavishly funding new highway construction and instead focus money on a mix of maintaining existing infrastructure and improving mass transit services. I agree with that, but the budget allocations are in some ways the smallest pieces of the puzzle. The real gains are to be made in rolling back the implicit subsidies to parking and barriers to multi-family apartments, leveling the regulatory playing field between private cars and private transit, and looking at operational issues that prevent cost-effective transit operations in the United States. All of which is to say that while money is nice, what's really needed is a much broader change of mind that doesn't regard all alternatives to living in a detached single-family house with one car per adult as deviant behavior that needs to be regulated into a special box.
Hold off on That Malaria Donation
In my post yesterday on why you shouldn't give money to an exclusive American college or university, I suggested instead that your money might be better used by the Against Malaria Foundation. That was an example I used because the last time I checked, the AMF was GiveWell's top-ranked charity. As a number of people pointed out to me, this is no longer the case and GiveWell recently decided to stop recommending AMF, essentially because it's not clear that AMF currently has the capacity to use more money effectively.
GiveWell's new No. 1 choice is GiveDirectly, which I've written about several times before and is just great. Not unrelated to this, one advantage of the GiveDirectly concept is that it's a lot easier to see a path forward for endless scaling.