Pethokoukis

Wow. 5 years into a recovery, 65% think the US is on the ‘wrong track,’ while 64% say things are ‘out of control’

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Which of these polls is more depressing? This one:

The depressive donkey in A.A. Milne’s “Winnie the Pooh” stories pretty much matches the mood of Americans lately, according to the new Wall Street Journal/NBC News poll released last week. When 1,000 potential voters were asked whether they think the nation is on the right or wrong track, 65% of them said the country had taken a wrong turn, and only 25% said the U.S. was on the right path.

The only time the public has felt worse was in October 2008, during the first, deep spasms of the recession. Then, 78% said the nation was on the wrong track, and only 12% felt good about the country’s direction. The last time “right direction” beat out “wrong track” was in January 2004 — and the last election cycle where that was the case was 2002.

Or this one:

An overwhelming majority of voters in the most competitive 2014 elections say it feels as if events in the United States are “out of control” and expressed mounting alarm about terrorism, anxiety about Ebola and harsh skepticism of both political parties only three weeks before the Nov. 4 midterms.

In a POLITICO poll testing the hardest-fought states and congressional districts of the year, two-thirds of likely voters said they feel that the United States has lost control of its major challenges. Only 36 percent said the country is “in a good position to meet its economic and national security” hurdles.

I mean, the Ebola outbreak is scary, but more than five years into an economic recovery, and most Americans think the country is on the “wrong track” and “out of control.” Maybe it’s time for another Washington pep talk about how bad the economy was in January 2009 …

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

Pethokoukis, Economics, U.S. Economy

Here’s another way Yellen’s big inequality speech was a missed opportunity

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The apparent decline in US startups is bad news for two reasons. First, it means fewer potential Googles and Apples and Twitters and other high-impact businesses. Second, it also means fewer small businesses that — while they may not make their owners millions or billions — might provide a rung or two up the economic ladder. Although I had many problems with Fed Chair Janet Yellen’s inequality speech last week, at least she did address the business formation issue:

For many people, the opportunity to build a business has long been an important part of the American dream. In addition to housing and financial assets, the SCF shows that ownership of private businesses is a significant source of wealth and can be a vital source of opportunity for many households to improve their economic circumstances and position in the wealth distribution. …

Owning a business is risky, and most new businesses close within a few years. But research shows that business ownership is associated with higher levels of economic mobility. However, it appears that it has become harder to start and build businesses. The pace of new business creation has gradually declined over the past couple of decades, and the number of new firms declined sharply from 2006 through 2009. The latest SCF shows that the percentage of the next 45 that own a business has fallen to a 25-year low, and equity in those businesses, adjusted for inflation, is at its lowest point since the mid-1990s. One reason to be concerned about the apparent decline in new business formation is that it may serve to depress the pace of productivity, real wage growth, and employment. Another reason is that a slowdown in business formation may threaten what I believe likely has been a significant source of economic opportunity for many families below the very top in income and wealth.

Still, while Yellen had plenty to stay about public funding and education, she had nothing to say about how regulation is sapping our startup culture. I mean, not even a word about the terrible burden of occupational licensing on lower-income Americans. What a missed opportunity to bring some light to an issue that plenty of folks across the political spectrum agree on.

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

Pethokoukis, Economics, U.S. Economy

What happened to our entrepreneurial society?

538

538

I have written a lot about the secular decline in US entrepreneurship. As economist Ian Hathaway noted in a podcast with me:

If you look at the number of freshly launched firms in a given year and you take that as a share of all firms, that rate declined from about 15 percent or so in the late ’70s to about 8 percent in 2012, which is our latest data. We actually just had a data release yesterday.  So the startup rate has declined by about half over that period.

What’s more, the number of young tech firms—the kinds of firms generating new ideas, products, services, and jobs—has fallen below 80,000 from a high of 113,000 in 2001. Blame the tech bubble if you want, but that was 14 years ago. And as Irving Wladawsky-Berger noted in the Wall Street Journal earlier this month (h/t to Jone Dearie), this is supposed to be an age of entrepreneurship:

Five years ago, The Economist published a special report on entrepreneurship. “Entrepreneurialism has become cool,” it said, and called it “An idea whose time has come.” The Economist concluded that “The rise of the entrepreneur, which has been gathering speed over the past 30 years, is not just about economics. It also reflects profound changes in attitudes to everything from individual careers to the social contract. It signals the birth of an entrepreneurial society.”

Moreover, as plenty of books and articles remind us, it’s never been easier to become an entrepreneur and start your own company. Digital technologies are inexpensive and ubiquitous, startups have access to all kind of cloud-based business services, and customers can now be easily reached and supported over mobile devices. What happened to our entrepreneurial society?

I have my theories.

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

Economics, International economy, Pethokoukis

Why the days of superfast Chinese economic growth may be over

Back in 2010, there was an issue ad showing a “Chinese professor” in the year 2030 lecturing his students about America’s collapse. “Why do great nations fail?” he asked. “The ancient Greeks, the Rome Empire, the British Empire, the United States of America — they all make the same mistakes, turning their back on the principles that made them great.”

Sure, America faces some big economic challenges. But what about the other side of that equation? Does China have the right principles and institutions to dominate the 21st century?

Consider: China currently has a $9 trillion economy vs. $17 trillion for America. It makes a great deal of difference how fast China grows in the future. For instance: If China were to grow as fast the next two decades as it did 2000-2010, about 9.7% a year, its GDP would grow to $60 trillion by 2033. Such an increase, Lant Pritchett and Larry Summers write in their new paper “Asiaphoria Meets Regression to the Mean,” would mean a gain in GDP “more than three times as large as the current U.S. economy. The continuation of current growth rates would make China far and away the world’s dominant economy.” This is the future depicted in the Chinese professor ad.

But most economists don’t think that scenario as likely as a slowdown. So let’s knock off a couple, three percentage points and figure 7% growth. If that were to happen, China GDP would grow to $36 trillion by 2033.

But Pritchett and Summers are even more pessimistic. As they calculate, historical trends suggests Chinese growth of just 3.9%, meaning a 2033 China GDP of $21 trillion, not $60 trillion. By contrast, US GDP — modestly assuming 2% real growth and 2% inflation — would be $36 trillion. America would remain the world’s dominant economy.

Here is why Pritchett and Summers are gloomy about China (and India for that matter):

Consensus forecasts for the global economy over the medium and long term predict the world’s economic gravity will substantially shift towards Asia and especially towards the Asian Giants, China and India. While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated.

Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth. Indeed, regression to the mean is the empirically most salient feature of economic growth. It is far more robust in the data than, say, the much-discussed middle-income trap.

Furthermore, statistical analysis of growth reveals that in developing countries, episodes of rapid growth are frequently punctuated by discontinuous drop-offs in growth. Such discontinuities account for a large fraction of the variation in growth rates. We suggest that salient characteristics of China—high levels of state control and corruption along with high measures of authoritarian rule—make a discontinuous decline in growth even more likely than general experience would suggest. 

In other words, not only does history suggest superfast growth is tough to maintain, but that finding may especially be true of nations with awful institutions. Authoritarian states or those with statist macroeconomic policies rife with crony capitalism are typically not the sort able to generate dynamic growth over the long term. (You need to think about this, too, Washington.)

This is hardly good news, though. The faster China and India grow, the faster the global economy grows and the faster millions of people move out of poverty. What’s more, slower growth might affect the stability of the Chinese regime with unpredictable consequences:

 … much geopolitical analysis has focused on the implications of a rising China, and certainly Chinese international relations theorists have extensively studied past rising powers. Contingency planning should also embrace scenarios in which Chinese growth slows dramatically, presumably bringing with it a range of domestic and international political implications.

Then again, without regime change China may be unable to transition to a more organic, free enterprise-driven economy capable of better generating and using innovation. I think I have a few questions for that Chinese professor.

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

Pethokoukis

What are the most and least conservative cities in America?

This chart, via boingboing, is from the MIT paper “Representation in Municipal Government” by Chris Tausanovitch and Christopher Warshaw:

"Representation in Municipal Government"

“Representation in Municipal Government”

And from the paper’s summary, which challenges the idea that there isn’t a liberal or conservative way to collect the trash:

Municipal governments play a vital role in American democracy, as well as in governments around the world. Despite this, little is known about the degree to which cities are responsive to the views of their citizens. In the past, the unavailability of data on the policy preferences of citizens at the municipal level has limited scholars’ ability to study the responsiveness of municipal government.

We overcome this problem by using recent advances in opinion estimation to measure the mean policy conservatism in every U.S. city and town with a population above 20,000 people. Despite the supposition in the literature that municipal politics are non-ideological, we find that the policies enacted by cities across a range of policy areas correspond with the liberal-conservative positions of their citizens on national policy issues.

In addition, we consider the influence of institutions, such as the presence of an elected mayor, the popular initiative, partisan elections, term limits, and at-large elections. Our results show that these institutions have little consistent impact on policy responsiveness in municipal government. These results demonstrate a robust role for citizen policy preferences in determining municipal policy outcomes, but cast doubt on the hypothesis that simple institutional reforms enhance responsiveness in municipal governments.

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

Economics, Health Care, Pethokoukis

Some key principles for fixing Obamacare

Image Credit: shutterstock

Image Credit: shutterstock

I am on the record as being dubious about the “repeal and replace” approach to Obamacare. I think the politics are formidable, to say the least. Now that does not mean I am arguing for the status quo. Far from it. Avik Roy has an impressive reform plan that would “transcend” the Affordable Care Act. So do James Capretta and Lanhee Chen, who makes their case over at Politico. In Capretta and Chen’s very good piece, this may be the most important bit:

Returning to the pre-Obamacare status quo will not appeal to most voters because the problems were rampant. A Republican plan to replace Obamacare needs to provide secure insurance for the sick and put affordable coverage within the financial reach of all Americans. And it should not disrupt the employer coverage that most middle-income families have and like. These principles can form the basis of a practical strategy to replace Obamacare, and Republicans would be wise to rally around them to set the stage for the next presidential administration, rather than engaging in a protracted debate over the perfect reform plan.

No going back, and everybody gets affordable access to health, quality insurance — important principles for reform.

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

Pethokoukis, Economics, U.S. Economy

Here’s a big thing that Janet Yellen got wrong in her inequality speech today

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Fed Chair Janet Yellen spoke today at a Boston Fed conference on inequality:

The extent of and continuing increase in inequality in the United States greatly concern me. The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then. It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.

While I could pick through her entire speech, the part I put in in boldface really jumped out. “Stagnant living standards for the majority” for the past few decades? Really?

I don’t think that is correct. According to the Congressional Budget Office, average real after-tax household income between 1979 and 2007, grew by 275% for the top 1%, by 65% for the next 20%, and by 40% for “the 60 percent of the population in the middle of  the income scale (the 21st through 80th percentiles).” Those numbers more or less match the findings of researcher Richard Burkhauser who finds a 37% increase in median incomes over that same span. Now, 40% isn’t 275%, but it is also not stagnation.

Here is Manhattan Institute’s Scott Winship on the same topic:

The story over the long-run is one of strong improvement in living standards, driven in part by greater work and higher wages among women, but in part by continued gains in male earnings, declining family size, lower taxes, and more federal and employer benefits. While the range of estimates is wide, a reasonable conclusion from the totality of the evidence is that poor and middle class households are at least 30 percent richer today than their counterparts from 35 years ago.

Of course, we all wish middle-class incomes had risen more — just like we all wish, for instance,  the US education system had better prepared a generation of Americans for success in a post-industrial economy facing intense global competition. But too often the stagnation argument is used as a cudgel against the beneficial tax and regulatory policies of the 1980s forward. President Obama has done this repeatedly. But I would expect a more careful,  data-driven analysis by the Fed chair.

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

Pethokoukis

Meanwhile, the White House science office wants your ideas for ‘massless exploration and bootstrapping a Solar System civilization’

Well, you certainly can’t accuse the Obama administration of being obsessed with the day-to-day crises on hotspots. Tom Kalil, deputy director for Technology and Innovation at the White House Office of Science and Technology Policy, offers this blog post, “Bootstrapping a Solar System Civilization.”

In one of my meetings with NASA, a senior official with the space agency once observed, “Right now, the mass we use in space all comes from the Earth. We need to break that paradigm so that the mass we use in space comes from space.”

NASA is already working on printable spacecraft, automated robotic construction using regolith, and self-replicating large structures. As a stepping stone to in-space manufacturing, NASA has sent the first-ever 3D printer to the International Space Station. One day, astronauts may be able to print replacement parts on long-distance missions. And building upon the success of the Mars Curiosity rover, the next rover to Mars — currently dubbed Mars 2020 — will demonstrate In-Situ Resource Utilization on the Red Planet. It will convert the carbon dioxide available in Mars’ atmosphere to oxygen that could be used for fuel and air — all things that future humans on Mars could put to use.

There’s interest outside government as well, with various private companies that see a potential business in mining of asteroids and celestial objects for use in space.

Recently, I caught up Dr. Phillip Metzger, a former research physicist at NASA’s Kennedy Space Center who has recently joined the faculty of the University of Central Florida, to discuss the longer term goal of “bootstrapping a solar system civilization.” …

Have ideas for massless exploration and bootstrapping a Solar System civilization? Send your ideas for how the Administration, the private sector, philanthropists, the research community, and storytellers can further these goals at [email protected]

The post is certainly worth reading for that conversation between Kalil and Metzger, the NASA guy — even if you don’t have any ideas to offer for massless exploration and such.

Pethokoukis

Here’s what Goldman Sachs is saying about Ebola

Image Credit: European Commission DG ECHO (Flickr) (CC-by-2.0)

Image Credit: European Commission DG ECHO (Flickr) (CC-by-2.0)

Don’t know if I would call this analysis from Goldman Sachs’ morning note “calming” necessarily but, well, see for yourself:

– News about the spread of the Ebola virus has been an increasing focus for market participants in recent days. Despite rising media coverage, Ebola seems to have had little discernible effect on consumer sentiment to date. However, the “fear factor” associated with Ebola appears more significant than in past instances of pandemic concern, in our view.

According to expert opinion, the likelihood of a significant outbreak of Ebola in the United States is very low. As such, any negative macroeconomic consequences are most likely to be transmitted through fear or risk-aversion channels. Past episodes of pandemic concern in the US—including SARS, bird flu, and swine flu—had very little effect on macroeconomic data. The aftermath of the September 11th terrorist attacks—which coincided with widespread avoidance of air travel—may be an instructive downside scenario. Finally, the example of the SARS outbreak in Hong Kong, which had very significant local economic effects, could be considered a worst-case tail risk scenarion.

– Direct disruptions to the global supply chain associated with the deteriorating situation in West Africa are likely to be limited.

So probably no contagion here. Now about that last bit, the “deteriorating situation in West Africa” part. Whatever the likely impact on the US economy or other OECD nations, the wildfire in West Africa must be stopped. Good stuff from Yuval Levin on this:

Allowing the disease to spread into densely populated parts of the world beyond the three nations now affected by it would ultimately be at least as dangerous to the United States as keeping passenger travel from those countries open at the moment. 

And all of this points to one further lesson that encompasses the rest, and which we probably haven’t really learned yet: not to underestimate this disease and this outbreak. This is really the original mistake, made by public-health officials throughout the world who worked to help the West African nations affected. It, too, was understandable. Past outbreaks of Ebola have all involved a very limited number of people in very contained zones. It was becoming apparent by the beginning of the summer that this one was different, but that’s much easier to see in retrospect than it could have been at the time. And no one really has any experience dealing with an outbreak of this particular disease that begins to grow exponentially as this one has. It is out of control in parts of West Africa, and is going to get much, much worse before it gets better.

Think about the nations with health systems ranked below 100 by the World Health Organization: India, Pakistan, Brazil, China. That’s a lot of people. Now this doesn’t mean those nations necessarily would have a poor public health response to an Ebola outbreak.  Still, scary and daunting nonetheless.

Economics, Pethokoukis, U.S. Economy

Stocks, shmocks | The US economy doesn’t look like an economy anywhere near a recession

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What is the volatile stock market saying about the economy? Recall this analysis from economist Mike Darda in a post earlier this week:

If financial market turbulence is going to have broad-based macroeconomic repercussions (shocks to the money demand function not accommodated by the Fed), we would look for it to show up in confidence and jobless claims data. Claims will tend to rise 20% year-to-year on a four-week moving average basis heading into a recession whereas the Conference Board’s Present Situations Index tends to fall 15 Index points or more.

1.) The initial claims numbers report from yesterday showed a drop of 23,000 to 264,000 during the week ending October 11, reaching the lowest level reported since April 2000. That’s good.

2.) Today’s consumer confidence number, though from the University of Michigan survey not the Conference Board, was strong. From JP Morgan: “The survey’s current conditions index was unchanged at 98.9 in October while the more important expectations index popped up 3.0 points to 78.4, getting back up near its high for the expansion.” That’s good, too. Also, the Bloomberg Consumer Comfort Index, “climbed to 51 this month, the strongest since November 2012, from 41.5 in September,” with falling gas prices getting a lot of the credit.

So does the global market selloff mean anything? Here is Scott Sumner:

The global stock/oil/bond yield plunge is at least partly due to expectations of slower nominal GDP growth. I know of no other economic news could explain a sudden decline of this magnitude. One plausible theory is that investors are losing confidence in the ECB, and/or the slowdown in China. … With the S&P now trading around 1800, a recession in the US next year seems very unlikely, albeit slightly more likely than a month ago. More likely the Fed will once again be wrong about its 3% growth forecast for “next year” for the umpteenth consecutive time. … Monetary policy in all the major economies has tightened somewhat in the past month. However the degree of tightening may well be less than many people assume. Again, we simply don’t know, but could easily find out if we wanted to. Nobody (including the economics profession) seems to care.

Of course, a contrarian might find the headline of this post to be unsettling.