Pethokoukis, Economics, U.S. Economy

Is the secret to better economic growth this simple — E-I-E-I-O?

Image Credit: Shutterstock

Image Credit: Shutterstock

So this year is not shaping up much better, growth-wise, that any other year during the Not-So-Great Recovery. What should we be doing right now to move from stagnation to acceleration? Here is MIT’s Andrew McAfee, co-author with Erik Brynjolffson of “The Second Machine Age,” giving some good policy advice on a recent EconTalk podcast episode:

In the book, Erik and I talk about the Econ 101 playbook, just to convey this idea that there are very simple macroeconomic things that we should be doing that we’re doing a pretty poor job of right now. And my mnemonic for them is–I have the “Old McDonald” theme song running in my head–it’s EIEIO.

We should be doing a better job on entrepreneurship, on infrastructure, on education, on immigration, and then the ‘O’ is original research, or basic research. You’d have to go very far left or very far right before you find a well-trained economist who would disagree that government has a role to play in all these 5 areas. We’re doing a mediocre to actively lousy job in all those 5 right now. …

Immigration is just so easy, right? Like I said earlier, we have the world’s most ambitious, tenacious, dedicated entrepreneurial people begging to come here, and we’ve put these Kafkaesque hurdles in their way. At every level, from education to H-1B visas. Other countries have made progress in getting a startup visa in place. If I were designing a way to hamstring economy I could not do better than what we are doing with immigration policy right now.

Pethokoukis

Will a ‘Recovery Fall’ + Facebook help Democrats keep the Senate?

Image Credit: shutterstock

Image Credit: shutterstock

Despite many forecasts that 2014 would be the year the US economic recovery finally — finally! — would hit its stride, that optimism has so far been unfounded. While job growth has been stronger, not so GDP growth and wages. Disappointing news for Democrats hoping that economic acceleration would help their candidates in the midterm congressional elections. With September approaching, time has run out for that theory. Or has it? From The New York Times last month:

Nonetheless, the Democratic pollster Peter D. Hart, who works with Mr. McInturff, the Republican, on polls for NBC News and The Wall Street Journal, predicted “the economy may produce a positive wild card” for Democrats. He also took issue with Mr. McInturff’s contention that the year’s political dynamic is “set.” While Democrats suffer from the fact that Senate battles are mostly in conservative states that Mr. Obama twice lost, Mr. Hart said, “in this era of social media, the old formula — that anything that happened after July 1 did not count in terms of the economy — is no longer the case.”

So even though the economy has been meh all year, if the September jobs report to be released on Oct. 3 or the third-quarter GDP report to be released on Oct. 30 come in gangbusters, they will alter the political landscape. The good econ numbers will blow up on Facebook and Twitter (#RecoveryFall) and be the subject of numerous BuzzFeed listicles. Optimism will rise. Democratic voters will get enthused. The GOP will fail to take the Senate on Nov. 4.

Anyway, I think that’s the theory. Two problems: First, the economy doesn’t seem to be a big vote changer in midterm elections. National Journal: “A plethora of political-science research suggests the economy, except in extreme circumstances, doesn’t matter much in midterm elections anyway. A boost in growth certainly wouldn’t hurt, but its effect on candidacies would be indirect and minor.”

Second, for a good economic surprise to help the Dems, there needs to be a good economic surprise. And the chances of that seem to be uncertain, at best. A Barclays research note from this morning:

Personal spending in the US fell 0.1% m/m in July, well below our forecast and the consensus (both 0.2%). Personal income was also softer than we had expected, rising only 0.2% versus our forecast of a 0.4% gain. Headline and core PCE inflation rose 0.1% m/m and are now up 1.6% y/y and 1.5% y/y, respectively. Both readings were in line with our forecast. Adjusting for inflation, real personal spending fell 0.2% on the month and weakness was broad based, as declines were registered in durables, nondurables and services. The largest drop came in durables, which is unsurprising given the 14.3% (q/q saar) rise in durable goods consumption in Q2. However, we were not expecting weakness in the remaining categories. Altogether, the report suggests a much softer start to consumption in Q3 and is a negative for our GDP tracking estimate as the level of real personal spending in July is below the Q2 average. After today’s report, we are now tracking 2.2% for Q3 real GDP, down five-tenths from 2.7% prior to the report.

In other words, the third-quarter — as of now — is looking like a fairly typical one for this anemic recovery. And it’s that persistent weakness is why “71 percent think the country is on the wrong track, [and] 60 percent believe the United States is in a state of decline,” according to a recent WSJ survey.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

What we’re reading today: August 29, 2014

Check out the top pieces we’re reading today on the economy, technology, education, and more.

1.)The Atlantic goes inside Google’s secret drone-delivery program here.

2.) From WSJ: Ebola virus outbreak could hit 20,000 within nine months, warns WHO.

3.) Is Ed reform tripping with a testing high? asks Jap P. Greene at Education Next.

4.) Eric Pianin looks at why we’re so down in the dumps about the economy in his piece at The Fiscal Times.

5.) US workers, kick off Labor Day weekend with some depressing charts, says Quartz. Here’s one of them:

Labor's share of US national income

6.) IEEE explains how to turn tires into batteries for electric cars.

7.) Money is not the answer for our bloated public education system, according to Diana Furchtgott-Roth in e21.

8.) From the IMF blog comes a post titled “More jobs that pay decent wages: How to fight poverty in the US.”

9.) Neil G. Ruiz at Brookings writes on the geography of foreign students in US higher education: origins and destinations.

10.) From MIT Technology Review: Massive internet outage points to flaws in policy and technology.

Follow AEIdeas on Twitter at @AEIdeas.

Pethokoukis, Economics, Taxes and Spending, U.S. Economy

Let’s cut taxes for job creators and worker creators

By Tax Credits (CC BY 2.0)

By Tax Credits (CC BY 2.0)

The Federalist website offers yet another critique of expanding the child tax credit vs. sharply lowering top tax rates. A few things:

1.)  As a supporter of CTC expansion, I feel at a bit of a disadvantage since critics such as Cato’s Dan Mitchell aren’t offering constructive alternatives. If they desire a tax reform plan that only generates, say, 15% federal revenue as a share of GDP — while also proposing a legit way to reduce government spending to that level — more power to them.  Love to hear about it. But as the recent Dave Camp tax-reform plan — as well as the 2012 Mitt Romney tax proposal —  show, it is extraordinarily difficult to combine large, across-the-board tax cuts that don’t increase the deficit or increase the middle-class tax burden.

2.) Frankly, doing anything significant on personal income taxes when (a) half the country pays no income tax and (b) we are future facing large, entitlement-driven deficits is really, really hard. See, where you are going to really get the most supply-side bang for your tax-cut buck (at least by cutting tax rates) is on the corporate side. That’s one reason conservative reformers are so adamant about corporate tax reform that will enhance US competitiveness, reduce cronyism, and raise living standards for workers.

3.) Let me again point out two flaws in the “crank up GDP and all will be well” argument. First, modest cuts in top rates aren’t going to produce a dramatic acceleration economic growth. And deep cuts, as I point out above, are problematic. Second, recent economic trends suggest that income gains from higher growth may flow mostly, if not almost entirely, to a sliver at the top thanks to macrotrends in globalization and automation. Average incomes may rise, but median income might not. Mitchell, in his Federalist piece, seems to acknowledge this possibility but wonders, “Isn’t it better to get come extra growth rather than know extra growth?”

It is. So reform the corporate tax code, while also immediately boosting middle-class family incomes with needed tax relief and offsetting the unfair double-tax on parents. Here is Senator Mike Lee on that last point:

As you know, the federal senior entitlement programs – Social Security and Medicare – operate as generational transfer payments, not individual insurance policies. Taxes that workers pay today fund today’s seniors’ benefits. In the same way, when you retire, your benefits thenwill be paid by the taxes of workers in the future.

In the simplest terms, any one generation pays for the Social Security and Medicare benefits of its parents… and then, in turn, has its own benefits paid by its children. Therein lies the familiar bargain of the system, but also an unintended consequence: the parent tax penalty.

Under the current system, all seniors are entitled to the same benefits, based on their total lifetime contributions. But parents are required to contribute to this system not once, but twice. First, when they pay their taxes, just like everyone else. And then again, by bearing the enormous economic costs of raising their children, who in time, of course, grow up to become the next generation of taxpayers.

Under the current system, parents receive no additional benefits for having contributed or sacrificed hundreds of thousands of additional dollars raising their kids. This is the inequity my bill is designed to highlight and address. …  Another way to think about it is that current policy imposes an enormous “capital gains” tax on the economic, human, and social capital that all parents invest in their children, and in our country

Let’s help the job creators and the worker creators.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

This map shows where slavery and forced labor are happening around the world

Citi

Citi

Citigroup has a fascinating — and harrowing — report out about modern slavery and child labor. Here is a bit from the summary:

An estimated ~21-30m people are in slavery around the world, including forced labour, bonded labour, human trafficking and child slavery. There are also estimated to be 168m child labourers, including 85m children in hazardous work. Human rights controversies including modern slavery and child labour could be detrimental to shareholder value, through reduced sales or business opportunities, or diversion of management and board resources. …

We would encourage investors to look favourably on companies that become more transparent about occasional instances of child labour, modern slavery and human trafficking discovered within their supply chains, as long as breaches are not widespread, the companies generally have robust programs designed to avoid them, and corrective action plans are implemented to address breaches. Some companies’ codes or supplier policies and some industry initiatives include explicit requirements relating to recruitment fees and/or document retention, to avoid instances of bonded labour/modern slavery – e.g. Apple, Nike, HP, Motorola, and Procter & Gamble.

Citi

Citi

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

If you are excited about driverless cars, you will find this very depressing

Andre Torrez (Flickr) (CC-BY-2.0)

Andre Torrez (Flickr) (CC-BY-2.0)

Google has been working on self-driving cars, and while there has been a lot of progress made, here, according to MIT Technology Review, are some of the obstacles left to be conquered:

  • The self-driving car can’t drive itself in 99% of the country.
  • It knows almost nothing about parking, and can’t be taken out in snow or heavy rain.
  • If a new stoplight appeared overnight, the car wouldn’t know to obey it.
  • Google’s cars can detect and respond to stop signs that aren’t on its map, but at an unmapped intersection stop sign the car wouldn’t know what to do after it had stopped, and would probably remain stationary until a human driver intervened.
  • The car hasn’t yet tackled big, open parking lots or multilevel garages.
  • The car’s video cameras detect the color of a traffic light, and they’re still working to prevent them from being blinded when the sun is directly behind a light.
  • Pedestrians are detected just as moving, column-shaped blurs of pixels—meaning that the car wouldn’t be able to spot a police officer at the side of the road frantically waving for traffic to stop.
  • The car’s sensors can’t tell if a road obstacle is a rock or a crumpled piece of paper, so the car will try to drive around either. The car also can’t detect potholes or spot an uncovered manhole if it isn’t coned off.

What’s next? Well, researchers “say the unsolved problems will become increasingly difficult. For example, John Leonard, an MIT expert on autonomous driving, says he wonders about scenarios that may be beyond the capabilities of current sensors, such as making a left turn into a high-speed stream of oncoming traffic.” And Alberto Broggi, a professor studying autonomous driving, “says he worries about how a map-dependent system like Google’s will respond if a route has seen changes.” Chris Urmson, director of the Google car team, is more optimistic, aiming to have the car ready in about five years.

The technical issues may not be the only barriers the driverless cars face though, according to Jim Pethokoukis. Government regulation could also prove to be a problem.

Follow AEIdeas on Twitter at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

What we’re reading today: August 28, 2014

Check out the top pieces we’re reading today on the economy, technology, family, and more.

1.) Should the SAT be optional? Jonathan Wai weighs in at Quartz.

2.) Carson Bruno looks at the economic impact of the Napa earthquake in this Real Clear Markets piece.

3.) Here are the hidden obstacles for self-driving cars, according to MIT Technology Review.

4.) In City Journal, Dennis Daffran writes on Colbert, Fallon, and the crony capitalism of the creative class.

5.) From Brookings comes this chart that shows today’s college-educated parents spend a lot more time with their kids than any parents did in the 1970s:

Growing class gap in time spent with parents

6.) Research from the St. Louis Fed finds that despite aggressive deleveraging, Generation X remains “Generation Debt.” They found that “on average by 2008, members of Gen X (those born between 1965 and 1980) had accumulated about twice as much total debt at a given age as birth-year cohorts observed at the same age in 2000.”

7.) It seems there has been progress on a powerful new way to generate electricity, says this MIT Technology Review piece by Kevin Bullis.

8.) In this Education Next piece, Jed Wallace looks at California, a case study for charter school success.

9.) From the Manhattan Institute: “New York’s rent-burdened households: Recalculating the total, finding a better solution.”

10.) DARPA project starts building human memory prosthetics, notes this IEEE article. “The first memory-enhancing devices could be implanted within four years.”

11.) Right-to-work laws could come to a city near you, according to this e21 piece.

Follow AEIdeas on Twitter at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

When economists talk about mismanaged US states, one gets special mention

082814state1

A new IGM Forum poll of economists finds large, confident majorities who think US states are (a) understating pension liabilities and (b) at risk — at least some of them — of eventually needing a combo of austerity budgets, a federal bailout, and/or default unless they soon increase taxes, cut spending, or change their pension systems.

Now this post really isn’t about pension liabilities. It is about how in the survey of these economists one state repeatedly received special mention for its fiscal woes: Illinois.

But the Prairie State has lots of problems, in addition to government making promises it can’t reasonably keep. The US Chamber of Commerce recently looked at the difficulty of starting a business in different cities. I choose Dallas and Chicago. As you may know, Texas has been a leading state for job creation, Illinois not so much — as this chart shows:

082814jobs1

So how do Dallas and Chicago compare on the regulatory ease of starting a business? Here is Chicago:

US Chamber of Commerce

US Chamber of Commerce

And here is Dallas:

US Chamber of Commerce

US Chamber of Commerce

How to fix Illinois? Spend and regulate less would seem to be a smart start.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Pethokoukis

Fewer Americans now self identify as ‘middle class’

Pew

Pew

What do years of stagnant wages, declining labor force participation, and job polarization (more jobs at the skill extremes, fewer in the middle) produce? Fewer people who consider themselves middle class, as the above Pew Research poll shows. (Thanks to Brookings’ Richard Reeves for the pointer.)

In 2008, 72% of Americans considered themselves “middle class (53%) or upper-middle class (19%). Now just 57% consider themselves “middle class” (44%) or “upper-middle class” (13%) Meanwhile, the number who see themselves as “lower-middle class” or “lower class” has risen to 40% from 25%.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

Why we shouldn’t grow the economic ‘pie’

Image Credit: shutterstock

Image Credit: shutterstock

Conservatives are for growth. Liberals are for redistribution. Conservatives worry about growing the pie. Liberals worry about slicing and re-slicing the pie to make sure everyone gets a fair piece.

At least those are the shorthand, flawed stereotypes. But it is the “pie” metaphor that I want to focus on for a second. A great blog post from awhile back by Keith Hennessey (as pointed out by Reihan Salam) argues that the economy isn’t a pie where some central planner with an apron predetermines the proper size of the dessert. Nor is the real economy some zero sum gain where if one pie slice grows, another must shrink. Hennessey:

A flower garden is a better metaphor for looking at economic growth and income distribution. A flower’s growth depends on the individual characteristics of that type of flower and that particular seed. It also depends on common factors shared with other flowers in the same garden (e.g., the local climate, pests, the skill and diligence of the gardener) as well as its particular advantages relative to other flowers (better sunlight, soil, and water in this part of the garden than that part over there).  Although there is some interdependence, the rapid growth of a sunflower at one end of the garden largely does not come at the expense of a struggling tulip at the other end. The sunflower may have advantages the tulip does not, even unfair ones, but the fast-growing sunflower is not “taking growth” from the slow-growing tulip.

Flowers will grow at different rates for a variety of different reasons. Policymakers should focus their energies on absolute growth rates rather than relative ones. It’s not a problem that some flowers are growing faster than normal, unless (a) that growth is indeed coming at the expense of other flowers, or (b) that more rapid growth is because the gardeners are neglecting the tulips to help the sunflowers grow faster.

In the same way it makes more sense to think of economic growth as the sum of the unequal income growths of tens of millions of separate individuals, rather than as a single growing pie to be divided. Any particular individual’s income growth depends on his innate talent, education, and skills, his effort and diligence, and some degree of luck. It also depends on common factors such as the health of the local, regional, national, and world economies, as well as shared resources like transportation and communications infrastructures and a stable and predictable system of law, property rights, and government rules.

The principal economic challenges are to maximize the growth potential of the entire economy/garden and to maximize the opportunities for those individuals/flowers struggling to succeed/grow. And just as a gardener should spend more time tending to the parts of his garden that are struggling, policymakers should devote greater effort to maximizing opportunities for those at the bottom of the income distribution to improve their lot. In the long run this means things like improving elementary and secondary education, expanding free trade, and reducing the growth burden of regulations, government spending, and debt. In the short run it means getting the incentives right so that those on means-tested government assistance don’t face exorbitant marginal effective tax rates from poorly designed income phase-outs.

The flower garden metaphor has one final advantage over the pie metaphor. A pie does not exist without a baker, whereas flowers grow naturally. The growth comes from the flowers, facilitated but not created by a good gardener. In the same way policymakers and elected officials neither “create jobs,” nor “increase economic growth.” Smart policymakers create the conditions under which private firms create jobs and in which millions of individuals combine their separate efforts to create economic growth. The origins of economic growth are in the private sector, not the public.

As long as the roots are not severed, all will be well in the garden.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.