Peter Thiel on the gold standard

I’ve had little good to say about returning to the gold standard. But in the interest of fairness, here is entrepreneur and venture capitalist Peter Thiel on the gold standard — and how he sees it in the context of America’s capacity for innovation:

Where we’ve had progress in the world of bits but not in the world of atoms, and this world of bits, we’ve had progress in computers, Internet, mobile Internet. Technology just means information technology. It’s all about bits, but the world of atoms, space travel, energy like nuclear power, biotech, new medical devices, that’s been much slower, and there’s been much less progress in those areas in the last forty years. …

 One’s been regulated, the other has not, but we’ve had this sort of dualistic world where the virtual world of bits has been growing very fast, but the real world of atoms has been kind of stagnant. And I think there’s a strange counterpoint where the same thing happened with our currency, where the real value of money became separate from the virtual in August of ’71 when we went off the gold standard. And so, you know, whatever you think of the gold standard, it had the virtue of connecting the real with the virtual.

 So I think there’s nothing wrong with cyberspace or computers or anything, but it’s when it becomes separated from the real that it’s bad. And these successful companies have actually been the ones that somehow connected it. Facebook succeeded because it was about real people having a presence on the Internet. There were all these other social networking sites people had, but they were all about fictional people. One of my friends started a company in 1997, seven years before Facebook, called SocialNet. And they had all these ideas, and you could be like a cat, and I’d be a dog on the Internet, and we’d have this virtual reality, and we would just not be ourselves. That didn’t work because reality always works better than any fake version of it.

Pethokoukis, Economics, U.S. Economy

2 great ideas to help the poor and jobless find work

Oran Viriyincy -ShareAlike 2.0 Generic (CC BY-SA 2.0)

Oran Viriyincy -ShareAlike 2.0 Generic (CC BY-SA 2.0)

The Economist magazine’s Free Exchange column cites new research suggesting that geography is a big factor in unemployment, especially for lower income Americans, Simply put. “Jobs are often located where poorer people cannot afford to live.” 

One study the piece does not mention is that from the Equality of Opportunity Project,which finds that cities with greater economic mobility and less unemployment also tend to have less segregation: 

Areas with larger black populations tend to be more segregated by income and race, which could affect both white and black low-income individuals adversely. Indeed, we find a  strong negative correlation between standard measures of racial and income segregation and upward  mobility. Moreover, we also find that upward mobility is higher in cities with less sprawl, as measured by commute times to work. 

Equality of Opportunity Project

Equality of Opportunity Project

OK, then. So what to do about it? Well, you could force business to locate where the jobless live. Or this:

A better approach would be to help workers either to move to areas with lots of jobs, or at least to commute to them. That would involve scrapping zoning laws that discourage cheaper housing, and improving public transport. The typical American city dweller can reach just 30% of jobs in their city within 90 minutes on public transport. That is a recipe for unemployment.

Good ideas. Those sky-high housing prices are the result of regulatory and zoning policies that discourage new building. Such restrictions on development should be loosened. But don’t forget about the infrastructure bit. AEI’s Michael Strain:

One way to support employment and earnings is to spend money on transportation infrastructure to connect low-income workers with jobs. The amount of money involved could be relatively small: We could simply buy buses, have them pick up workers in lower-income, outer neighborhoods and exurbs, and then run them express from those places — not stopping along the way in middle- and upper-income neighborhoods — all the way into commercial centers. In larger cities, we could run the buses express from low-income exurbs to the last stop on commuter rail lines; basically, we could give low-income workers a fast lift to the train, connecting residents of exurbs with the labor markets of major cities.

Buses are great because they’re flexible, cheap and use existing roads. Additionally, we could spend more money to build more sophisticated transportation networks — more roads, maybe rail; roads that function as dedicated bus lanes? — to support working-class Americans in their noble effort to earn their own success in the labor market. By significantly decreasing commuting times from lower-income neighborhoods and exurbs — which are often measured in hours, not minutes — we would effectively increase the number of jobs available to low-income workers.

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

Economics, Entitlements, Pethokoukis

Is the GOP changing its stance on entitlement reform?

Image Credit: Shutterstock

Image Credit: Shutterstock

Well, this is curious. Part of the Republican brand, I thought, was that the GOP was the party of debt reduction and the need to reform entitlements. Paul Ryan made his name as a policy wonk because of his support for Medicare reform. And recall that President Bush unsuccessfully pushed for Social Security reform. Then I read this from the WaPo’s ace policy reporter Lori Montgomery:

Cutting federal health and retirement spending has long been at the top of the GOP agenda. But with Republicans in striking distance of winning the Senate, they are suddenly blasting the idea of trimming Social Security benefits. … But what has drawn attention – and charges of hypocrisy – is the decision by Republican groups to attack Democrats for supporting conservative ideas in a proposed “grand bargain” on the budget drafted by Democrat Erskine Bowles and former Republican senator Alan K. Simpson of Wyoming. … Republicans would raise taxes, the theory goes, in exchange for Democrats cutting health and retirement spending. Among its proposals: trim Social Security benefits for well-off seniors, raise the retirement age to 69 by 2075 and adopt the new inflation measure, known as the chained Consumer Price Index, or chained CPI.

Shorter: The GOP is bailing on these supposedly commonsense, bipartisan reforms because older voters dominate in midterm elections, and Republicans see an opportunity to slam Dems for supporting changes seniors might not like. That’s the gist of the WaPo story. A few thoughts:

1.) From a policy standpoint, raising the retirement age makes sense given the rise in life expectancy and improvement in health and working conditions. AEI’s Andrew Biggs has suggested gradually increasing the early retirement age from 62 to 65 for workers retiring in the 2030s. But this is key: The best reason to prevent early retirement claims is not to slash benefits but rather to delay and thus increase them for when individuals are older and need them more. Early retirement incurs a 25% benefit reduction. And as Biggs also wrote:

“It is inevitable that Social Security, Medicare, and other government programs will become less generous toward the rich than they are today. The only alternative is ever-increasing taxes and their toll on personal welfare, individual freedom, and economic growth.

2.) One other policy note: Republicans are correct in rejecting the chained CPI fix. Again, here is Biggs:

 … However, the chained CPI is the wrong measure for Social Security benefits and the income tax code. A better measure for Social Security would be a chain weighted version of the CPI-E, which measures price changes for individuals over 65. This probably would still show lower inflation than the current CPI, by around 0.1 percentage point annually, but would be superior to the current CPI-W, the chained CPI, or the CPI-E on its own (which tends to show higher inflation).

The chained CPI is also inappropriate for use in the tax code. By lowering adjustments to the tax brackets, over time it would make more of individuals’ earnings subject to higher tax rates, an effect known as “bracket creep.” Even using the current CPI, and assuming that the Bush tax cuts were made permanent, average tax rates and tax revenues relative to the economy would soon rise to record levels, according to the Congressional Budget Office (CBO). Applying the chained CPI to the tax code would only speed up this effect.

3.) Last year, the Wall Street Journal’s Holman Jenkins wrote a great piece on how the Affordable Care Act would change how Republicans and conservatives argue about entitlements and welfare. They will draw a line, Holman  writes, between “earned” entitlements such as Medicare and Social Security vs. “unearned” welfare such as Obamacare subsidies, Medicaid, and food stamps. Jenkins:

Tea-party activists have good reason to suspect their stand will pay electoral dividends in the months and years ahead. Not appreciated is the powerful new meme Mr. Obama has handed them, which will transform entitlement politics in our country. The new “conservative” position will be to defend Social Security and Medicare, those middle-class rewards for a life of hard work and tax-paying, against Mr. Obama’s vast expansion of the means-tested welfare state for working-age Americans. … Look for means testing possibly even to evolve into a new pejorative in Republican mouths, suggesting undeserved benefits for groups that mostly vote Democrat.

Unfortunately for this tactic — which may be what’s happening right now – you cannot solve realistically America’s long-term debt problem without entitlement reform. And given the evolving nature of the US economy, we may need more expansive supports for lower-income Americans, like an expanded Earned Income Tax Credit. Differentiating between good (deserved) vs. bad (undeserved) safety net spending might be an effective political approach, but it would make for poor policy.

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



The eurozone, slow growth, and debt

Image Credit: shutterstock

Image Credit: shutterstock

Standard & Poor’s has some triple-dip recession concerns for the eurozone, arguing in a new report that the region’s “tentative recovery has lost momentum this year.” That is certainly true. The EZ is a mess. But I partially disagree with this analysis:

As we have said before, we believe that one of the main impediments to a more robust recovery is the large overhang of debt. The recent slowdown should therefore not come unexpectedly. Government debt burdens make headlines and are much discussed in policy circles, but the private indebtedness of corporations and households is just as important.

Leaving Greece to one side, we repeat our view that the origins of the eurozone crisis were not public profligacy and burgeoning budget deficits. Its root cause was excessive private-sector borrowing from external sources. The continued refinancing of those external debts at affordable rates had in many instances become impossible following the collapse of Lehman Brothers and the sudden halt to cross-border capital flows to the so-called periphery eurozone countries. Some of this leverage has been unwound, but many countries’ economies still have a long way to go.

Only after public and private debt levels are back to their appropriate levels will, we believe, national savings rates moderate and demand and growth return. Until then, deleveraging has stunted growth and we expect it will continue to do so–despite ultra-low interest rates and official efforts to reverse contracting credit. Debt reduction detracts from domestic demand–and therefore economic growth–because it reflects essentially an increase in the savings rate, which means less consumption, less investment, less government spending, and perhaps higher taxes. Much of these deleveraging-induced consequences are unavoidable in a balance sheet recession–unless liabilities are restructured.

Too much debt, sure. And the region is structurally uncompetitive.  But the EZ has a core NGDP problem, meaning debt levels become unsustainable even at moderate interest rate levels given such persistently anemic growth. This from Scott Sumner back in 2012 still seems applicable:

Ultimately the eurozone crisis is a massive failure of imagination among the Very Serious People than run Europe.  We have a huge demand shock creating a depression with year after year of high (and still rising) unemployment, just as all the textbooks say it should.  You have a severe NGDP growth plunge producing a debt crisis, just as the textbooks say it should.  We have low interest rates being a very poor indicator of the stance of monetary policy, just as the textbooks say it is.  And even with this massive demand shock occurring right in front of their eyes, they can’t see it.  All they can see are the symptoms, and they assume those symptoms are the causes.

And this from David Glasner:

It has been fashionable to blame the crisis on the fecklessness of the politicians in these countries, the greediness of their public employee unions and the overly generous pensions that they have extracted from taxpayers, overly generous welfare benefits, and an unwillingness to work hard and save like the good old solid Northern Europeans.  There probably is some truth in that assessment, though there is probably some exaggeration as well.

However, assigning blame in this way is really a distraction from the true cause of the crisis, which is a stagnation of income growth, making it impossible to pay off debts that were undertaken when it was expected that incomes would be rising.  Since the debts are fixed in nominal terms, the condition for being able to pay off the debts is that nominal income (NGDP) rise fast enough to provide enough free cash flows to service the debts.  That hasn’t happened in the five countries now unable to borrow at manageable rates.

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

Economics, Pethokoukis, Taxes and Spending

The 1950s and high tax rates, again

It’s becoming something close to consensus on the left that very high tax rates won’t hurt economic growth. After all, the US did just fine in the 1950s with a 91% top rate, right? Here is a bit of my thinking on that, from a post over at NRO’s The Corner:

More importantly, the U.S. economy benefited from a set of one-factors that offset the high tax rates. A National Bureau of Economic Research study described the situation this way: “At the end of World War II, the United States was the dominant industrial producer in the world. With industrial capacity destroyed in Europe—except for Scandinavia—and in Japan and crippled in the United Kingdom, the United States produced approximately 60 percent of the world output of manufactures in 1950, and its GNP was 61 percent of the total of the present (1979) OECD countries. This was obviously a transitory situation.”

What’s more, as American Enterprise Institute scholar Ed Conard has explained about the 1950s, “The United States was prosperous for a unique set of reasons that are impossible to duplicate today, including a decade-long depression, the destruction of the rest of the world’s infrastructure, a failure of potential foreign competitors to educate their people, and a highly restricted supply of labor.”

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

Pethokoukis, Economics, U.S. Economy

Robots vs. restaurant servers — check, please!

Image Credit: Shutterstock

Image Credit: Shutterstock

I wrote yesterday about the possibility of McDonald’s possible automating away its cashiers. Now Mickey Ds denies that’s the intention of their plan to, as the Wall Street Journal puts it, “roll out new technology in some markets to make it easier for customers to order and pay digitally and to give people the ability to customize their orders, part of what the company terms the ‘McDonald’s Experience of the Future’ initiative.”

Indeed, economist Adam Ozimek argues that machines in place of cashiers wouldn’t really save much time or lead to increased sales, but adds that “in the event of a $15 minimum wage, I think the calculus here would change, but right now machines don’t have a huge operating advantage in these environments.”

Sit-down restaurant servers, however, might be a different matter:

Right now you wait for a server to come to your table, you order you drinks and wait again, then you wait for them to come back so you can order your meal, and there is still more waiting at the end of the meal. If you need anything else along the way you are waiting until they check in again. It’s true that in a restaurant we are often not in a hurry, but even assuming we don’t always want to order immediately, the server does not materialize after an exactly optimal wait time, but instead appears with some random noise that’s unlikely to match our preferences. Some would rather order in 30 seconds after the server arrived, some would rather order 30 seconds before they arrived. Optimal doesn’t mean rushed, but it allows rushed, and it means you choose your pace.

And it’s not just impatient customers who wish to speed thing up. For restaurants, every minute extra you are at a table beyond when you want to be is time that another customer ordering food could be there. In other words, it’s in their interest to speed things up and get more sales per table per day.

Although I have never seen one myself, this table top ordering system is exactly what the company Ziosk has been providing at places like Chilis and Red Robin. If I understand correctly -and correct me if I’m wrong, Chilis fans- you only use these things to order appetizers, drinks, and deserts, and then to pay the bill. The actual meal order is taken by waitstaff. This makes some sense, since the beginning and end of the meal are the biggest periods of “wasted” time, so the system is getting rid of the lowest hanging fruit first. So maybe this is where it will end. But this also could easily represent a toe in the water for the industry. It allows customers and employees to get familiar with the system, and has a built in human on hand in case computer ordering not working for someone. You can imagine the machines gradually taking over all ordering eventually.

Of course, high-end restaurants might continue to use human servers as a novelty or special attraction for their upscale clientele. Something a bit more artisinal. Indeed, people may be willing to pay extra for human messiness and irregularity for all sorts of goods and services as they value the human and hand-crafted  and hand-delivered over robotic perfection and efficiency. At least, if money or time isn’t an issue.

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

Economics, Pethokoukis, U.S. Economy

Goldman Sachs: The US middle class is finally seeing a recovery

While Washington keeps talking about income stagnation for the 99%, seem incomes have stopped stagnating — at least for the 80%. From a new Goldman Sachs note:

Perhaps more importantly from the perspective of overall consumption growth, lower- and middle-income wage earners … are sharing fully in the recovery. This is shown in the growth rate of real pre-tax labor income of production and nonsupervisory workers, a group that accounts for roughly the bottom 80% of the private-sector wage distribution. … This measure is already up 3.5% year-on-year as of August 2014, and a further acceleration to around 4% is likely over the next six months as headline inflation declines. Except for a period of about one year at the end of the 2001-2007 expansion, this would be the fastest growth pace since the 1995-2000 boom.

Claims that lower and middle-income wage earners are seeing strong income gains will seem surprising to many readers, given the well-documented weakness in hourly wage growth and the well-documented increase in US income inequality. But it is important to keep two points in mind.

First, hourly wage growth is only one component of overall real labor income growth, and the other components–employment, the workweek, and headline inflation–are all quite helpful at the moment. Second, while inequality has increased significantly over the longer term, the information in Exhibit 2 is consistent with other indications showing a relative improvement at the bottom end of the income distribution over the past year or two.

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

Economics, Pethokoukis, U.S. Economy, Uncategorized

Did Fed boss Janet Yellen make a huge mistake by talking about inequality?

Image Credit: YouTube

Image Credit: YouTube

That’s the question raised in a new Washington Post column by AEI economist Mike Strain. Or as the click-friendly headline puts it: “Janet Yellen is in danger of becoming a partisan hack: The Federal Reserve chair shouldn’t be picking a side in political debates.” Keep in mind Strain is no reflexive Yellen critic. As he writes, “I forecast Yellen will be an outstanding Fed chair.” But he doesn’t much like how Yellen, first, presented an incomplete analysis of how middle-class incomes have been doing the past three decades, and, second, came close to advocating expanded preschool funding, a contentious issue both politically and economically. Strain:

But even by focusing on income inequality she has waded into politically choppy waters.  … Like many conservatives, income inequality isn’t on my list of the top problems facing the country. But it is a live issue for progressives, many of whom still share the president’s earlier sentiment. By expressing her “great concern” over the issue, Yellen is putting herself squarely in the progressive camp. … If Yellen continues to sound like a left-leaning politician, the political pressure on the Fed will mount, and the ability of the Fed to operate independent of politics will be threatened. If those threats are realized, everyone loses.

Strain is correct. Also, left-liberals/progressives underestimate just how deep and wide Fed hostility is on the right. It’s not just the Ron Paul crowd. I recall speaking before a group of preppy, college-age Republicans who almost to a person thought the Fed should be flat-out abolished. Getting involved in the pre-kindergarten debate — an issue likely to be a big one in 2016 — isn’t going to help the Fed’s reputation with GOPers, conservatives, and libertarians. But it did not surprise me that Yellen spoke on inequality. The theory of “secular stagnation” being advanced by center-left economist Larry Summers — Yellen’s former rival for the Fed job — partly blames the economy’s extended poor performance on rising inequality’s affect on consumer demand. This from a Summers’ interview with New York Times reporter Annie Lowrey:

I asked Mr. Summers what was behind secular stagnation, and he said he was still thinking through all of its causes. But globalization, automation, income inequality and changes in corporate finance might be important factors, he said. Income is now more concentrated in the hands of the rich. Those well-off households tend to save and invest higher proportions of their earnings than middle-class or low-income families do. That might mean, on aggregate, less spending and less demand across the economy for a given level of income.

I call this the left’s “unified theory” of what’s wrong with America. It’s a version of secular stagnation theory (one that focuses more on demand than supply factors) that connects inequality with economic stagnation — and provides a plausible pro-growth justification for government redistribution of wealth and income. And guess what? Yellen just might be a secular stagnationist: From a Reuters report last summer:

The world’s central bankers will cut interest rates to zero more often if economists are correct in thinking that many nations have entered a prolonged period of stagnation, U.S. Federal Reserve Chair Janet Yellen said on Wednesday.

Asked about the future of monetary policy at a conference hosted by the International Monetary Fund, Yellen brought up the possibility that “secular stagnation” would make it more likely overnight interest rates would again scrape against the so-called zero lower bound.

And inequality might be a topic Yellen returns to again.

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


Where I answer Janet Yellen’s question about inequality

From my new The Week column:

Now you can add Federal Reserve Chair Janet Yellen to the list of policy-makers fretting about the gap between the rich and everybody else. “The extent of and continuing increase in inequality in the United States greatly concern me,” she said last week. “I think it is appropriate to ask whether this trend is compatible with…the high value Americans have traditionally placed on equality of opportunity.”

Let me answer Yellen’s question: So far, yes, rising inequality seems to fit just fine with an American society that puts great importance on improving your lot in life through smarts and hard work. A highly regarded study earlier this year found, after examining millions of tax records, that children entering the job market today have the same chance of climbing the income ladder as children born in the 1970s — that despite rising inequality. Indeed, the economists found little correlation between income mobility and high-end income inequality between the 1 percent and 99 percent.

The rich getting richer isn’t what keeps people from climbing the success ladder. In fact, having lots of super-rich people can create more opportunity for everybody. Well, at least the right kind of super-rich. Not so much old money scions or CEOs with lucrative stock options. But entrepreneurs are a different breed of billionaire. We want risk-takers creating new businesses that offer innovative and amazing new goods and services. And we want those start-ups to grow and grow and hire lots of people.

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

Pethokoukis, Economics, U.S. Economy

The latest on Lockheed Martin’s possible nuclear fusion breakthrough

MIT Technology Review’s David Talbot offers some helpful perspective on that Lockheed Martin announcement of a breakthrough in nuclear fusion. The company says it’s on track to sell a small, very powerful reactor within a decade. Not surprisingly, the piece gives room to the skeptics to make their case, although they don’t have much info on the details of what Lockheed is doing:

Ian Hutchinson, a professor of nuclear science and engineering at MIT and one of the principal investigators at the MIT fusion research reactor, says the type of confinement described by Lockheed had long been studied without much success.Hutchinson says he was only able to comment on what Lockheed has released—some pictures, diagrams, and commentary, which can be found here. “Based on that, as far as I can tell, they aren’t paying attention to the basic physics of magnetic-confinement fusion energy. And so I’m highly skeptical that they have anything interesting to offer,” he says. “It seems purely speculative, as if someone has drawn a cartoon and said they are going to fly to Mars with it.”

But it’s not just Lockheed on the case, by the way:

Lockheed joins a number of other companies working on smaller and cheaper types of fusion reactors. These include Tri-Alpha, a company based near Irvine, California, that is testing a linear-shaped reactor; Helion Energy of Redmond, Washington, which is developing a system that attempts to use a combination of compression and magnetic confinement of plasma; and Lawrenceville Plasma Physics in Middlesex, New Jersey, which is working on a reactor design that uses what’s known as a “dense plasma focus.”

Another startup, General Fusion, based in Vancouver, British Columbia, tries to control plasma using pistons to compress a swirling mass of molten lead and lithium that also acts as a coolant, absorbing heat from fusion reactions and circulating it through conventional steam generators to spin turbines (see “A New Approach to Fusion”).

And as I have written before, Silicon Valley has a growing interest in the technology.