Economics, International economy, Pethokoukis, U.S. Economy

Europe is teaching the world a terrible economic lesson

Image Credit: shutterstock

Image Credit: shutterstock

Europe’s $13 trillion economy — nearly a fifth of world GDP — failed to grow in the second-quarter, losing whatever smidge of momentum it had after escaping a double-dip recession. (Germany actually shrank.) Private consumption and investment are still below 2007 levels. French unemployment is at an all-time high, and a desperate and unpopular President Francois Hollande just formed a new government. Meanwhile, prices climbed just 0.4%, year over year, in July. And, as Business Insider’s Myles Udland recently noted with the following chart, “expectations of Eurozone inflation are at their lowest levels since the depths of the financial crisis in 2009.”


So what the the heck went wrong in Europe, and what continues to go wrong? Yes, the region has many structural, supply-side problems. But it wasn’t a debt crisis that caused what is, really, a long depression. That was a result, not a cause. Here is a really great explainer from Scott Sumner:

The ECB tightened monetary policy sharply in 2011.  This caused NGDP growth to plunge, and the eurozone fell into a double-dip recession. Whenever you have a demand-side recession, some people will look at specific industries, and/or specific regions, to see what caused it. This is mistake. The US housing industry was hit hard in the recent recession, but didn’t cause it. The PIIGs were hit especially hard after 2011, but did not cause the eurozone recession. In any recession, there will be regional and industry variation in intensity, due to supply-side factors.  But those specific factors cannot explain a generalized decline in NGDP growth for an entire currency zone. Only monetary policy can explain that. …

The ECB caused the double-dip recession—even new Keynesian models will tell you that.  (After all, the ECB raised rates twice in 2011, so this wasn’t one of those zero bound issues.)  Odd that Mario Draghi doesn’t understand that the ECB caused the NGDP growth collapse, and that debt crises are the result of NGDP growth crashes.  That doesn’t make me very hopeful that the eurozone’s long nightmare will end anytime soon.

And, again, here is a favorite chart demonstrating the impact of those 2011 rate hikes:

MKM Partners

MKM Partners

Just like the Fed’s untimely 2008 tightening help turn a moderate US downturn into the Great Recession, the ECB did the trick in Europe. Except while the Fed eventually took extraordinary action to try and reverse its mistake, the ECB continues to dither.


Reform conservatives vs. the supply siders. Begun, the Tax War has! Or has it?

Tax cuts are the defining economic policy issue of the modern GOP. As the late columnist Robert Novak once said, “God put the Republican Party on earth to cut taxes.”

But personal income tax rates today are way lower than they were before Reaganomics. And the national debt has soared in the 2000s and is headed toward crippling levels. These realities, along with current economic challenges such as middle-class wage stagnation and job polarization, are causing a rethink on the right concerning what tax reform should look like in the 2010s and beyond. Mike Lee, for one, would like a much bigger child tax credit to boost take-home pay for families. Paul Ryan would prioritize cutting the top personal tax rate to 25% from 40% to boost economic growth. (Ignore, for a moment, that the Lee plan would lower the top rate, too, just not as far as Ryan would prefer.)

The media, of course, would like to frame this policy disagreement as an emerging ideological and spiritual death match among conservatives and Republicans. The reformocons/reformicons vs the supply siders.  Begun, the Tax War has.

But war, either civil or uncivil, is unnecessary. For starters, and the media usually misses this, both sides understand that the business tax code is terribly anti-growth and uncompetitive. Deeply cutting the corporate tax rate, ending business tax breaks, and allowing businesses to write off the full cost of their investments immediately are among the ideas with wide support. And here is Ramesh Ponnuru on how to best blend these competing though complementary approaches to individual tax reform:

You can’t draw up a realistic budget with a top tax rate of 25 percent and a large child credit. (You might not be able to draw up a realistic budget with a top rate of 25 percent even without the credit.) You probably can, however, draw up one with a lower top rate than we have today and better treatment for investment — including parents’ investment in the next generation. Because that mix of policies would leave many millions of middle-class families ahead, it may well be easier to enact than a plan that concentrates solely on reducing the top rate. Supply-siders, that is, might achieve more of the rate reduction they seek if they embrace the credit.

Combining these ideas, as Senators Lee and Marco Rubio of Florida are now trying to do, seems like the obvious sweet spot for Republicans. It would allow them to be both pro-business and pro-middle class, pro-growth and pro-family. And if Chairman Ryan came on board, the party would find itself in a new friendly agreement.

Yes, the healing power of “and” in action. I wrote pretty much the same thing the other day. It’s an approach the average person might say makes so much sense, the politicians would never go for it. But a tax plan to shore up two key American institutions, the family and the private sector, really makes too much sense to ignore. And then we can move on to ideas for reforming and repairing healthcare, education, entitlements, the safety net infrastructure, financial regulation, internet regulation, energy regulation, patent and copyright law, the Federal Reserve …

Economics, International economy, Monetary Policy, Pethokoukis

Is this the helicopter drop the euro zone needs?

Image Credit: shutterstock

Image Credit: shutterstock

Some eyeopening stats from “How to jumpstart the Eurozone economy by Francesco Giavazzi and Guido Tabellini:

At the end of 2013, private consumption in the Eurozone was 2% below its 2007 level, [while] private investment was 20% below the 2007 level … In the US, by contrast, GDP and private consumption are 6–7% above where they were six years ago, and investment too is above its pre-crisis level.

I call this the QE Difference. So what should the euro zone do now? Giavazzi and Tabellini suggest a helicopter drop:

• All countries should enact a large tax cut, say corresponding to 5% of GDP. • They should be given several years (say three or four), to reduce the budget deficit created by this tax cut, through a combination of higher growth and lower expenditures. • To finance the additional deficits, members states should issue long-term public debt with a maturity of say 30 years. This extra debt should all be bought by the ECB, without any corresponding sterilisation, and the interest on the debt should be returned to the ECB shareholders as seigniorage.

But this seems to be a temporary move, reversed over three or four years. And that may be probematic. Here is David Beckworth on the issue of permanent vs. temporary monetary action:

In other words, we should not be surprised that the Fed’s QE programs have not packed more of a punch. U.S. monetary authorities have clearly indicated the programs are temporary. (QE3, though, has added some permanency with its data-dependent nature and appears to have offset much of the 2013 fiscal drag.) We should also, then, not be surprised that Abenomics–which has signaled a permanent expansion of the monetary base–is doing so much better than the original Bank of Japan QE program of 2001-2006. Finally, we should also not be surprised as to why FDR’s 1933 decision to go off the gold packed such a punch. It permanently raised the monetary base. All of these experiences paint a picture of the relationship between the expected permanency of monetary base injections and aggregate demand growth. … So stop worrying about whether large scale asset purchases or helicopter drops are more effective. This is the wrong debate. Instead, start worrying about how we can change the Fed’s target to something like a NGDP level target.

Economics, Pethokoukis, U.S. Economy

Large jumps: The radical case for radical innovation

My baseline case here is that innovation is a key driver of productivity. Startups are critical to innovation both in the new goods/services they generate, and the competitive pressure they put on incumbents to improve. And the more game-changing the innovation the better. Not surprisingly then, I find “Firm growth dynamics: The importance of large jumps” by Yoshiyuki Arata to be bang on:

Radical innovations involve the development or application of something fundamentally new that creates a wholly new industry or causes a complete transformation of the market structure. In our model, the radical innovations correspond to large jumps. Radical innovations are critical to the long-term growth of firms and differ significantly from incremental innovation.

Firms that dominate the existing market but lag behind in competition for radical innovation often fail to maintain their leading positions Small firms that engage and succeed in radical innovation usually bring down giants and gain the leading position in the market.

Thus, radical innovation (or large jumps) is a key element in the long-term success of a firm. … Moreover, radical innovation is an engine of economic growth. It revolutionises existing markets or opens up whole new industries. As Schumpeter (1942) states, “Creative destruction is the essential fact about capitalism.”

Economics, Monetary Policy, Pethokoukis, U.S. Economy

When the US had to use clam shells for money

Look, as bad as the Great Recession was, at least we didn’t have to resort to using mollusk exoskeletons for money. From the NY Fed blog:

While money has taken all forms—precious commodities, beads, wampum, the large stones of Yap—we tend to think of those forms of money as archaic. Yet shells were used as money in California as late as 1933! 

Here is what happened. In 1933, during the Depression, the nation experienced a banking panic as people scrambled to withdraw their savings before their bank failed. In March of that year, President Roosevelt ordered a four-day bank holiday to curtail the run on banks. The closing of the banks prompted many people to hoard their money. With less cash in circulation, communities created emergency money, or “scrip,” so that they could continue doing business. For example, Leiter’s Pharmacy in Pismo Beach, California, issued this clamshell as emergency money. As the clamshell went from person to person, it was signed, and when cash became available again, the clamshell could finally be redeemed. Other forms of emergency money were also fashioned.


A follow-up post notes that clams actually were found when the site that became the NYFed was being dug out.

Pethokoukis, Economics, U.S. Economy, Uncategorized

The best-case scenario for automation? Still worrisome for workers

Image Credit: Shutterstock

Image Credit: Shutterstock

Just how much should workers really worry about the rise of the robots? Will technological advancement make most workers better or worse off?

Economist David Autor offers what is probably a best-case scenario in his new paper “Polanyi’s Paradox and the Shape of Employment Growth.” Autor argues that “journalists and expert commentators” who fret about automation fail to understand that (a) many complementarities between man and machine will raise wages for the tech savvy; (b) the decline of middle-skill jobs should ease since many of the remaining jobs — medical support, skilled trade — require both routine task skills and skills involving “interpersonal interaction,flexibility, adaptability and  problem-solving;” and (c) machines are limited by their lack of common sense and intuitive understanding of how the world works. For instance: A human doesn’t need to scan a database of images to figure out what a chair is or what makes for a good chair. (Here is decent New York Times summary of the paper.)

So don’t fear, just invest more in making ourselves smarter. Particularly for the middle-skill, middle-wage jobs, “they do at least demand two years of post ‐‑ secondary vocational training. Significantly, mastery of “middle skill” mathematics, life sciences, and analytical reasoning is indispensable for success in this training.”


To put a spin on an old joke, perhaps in the future there will be just a single, automated megafactory that can make everything. It will employ just two living creatures, a man and a dog. The man’s job will be to feed the dog, while the dog’s job will be to keep the man away from the machines. If your concern is that robots will take all the jobs, then Autor’s paper — and well as the history of automation– does provide comfort.

But that is not really the prime concern of automation worriers. Rather it something more like the hyper-meritocracy scenario posited by economist Tyler Cowen. Self-starting, entrepreneurial STEM-savvy workers — maybe 10% or 15% of the population — will find high-paying jobs plentiful, while everybody else — assuming you’re conscientious and hardworking — will be employable as personal trainers, valets, nannies, and such. In his paper, Autor notes that the supply of brain jobs — or, if you prefer, “abstract task-intentive jobs — is not growing as fast as the potential supply of highly-educated workers. As a result, those workers “seek less educated jobs, which in turn creates still greater challenges for the lower educated workers competing for routine and manual task ‐‑ intensive work.”


So the low-skill jobs and what’s left of the middle-skill jobs face a glut of potential workers, holding down wages. This is support of the Cowen “average is over” scenario. Even Autor concedes that adjusting to automation is “frequently slow, costly,  and disruptive.” It would seem, then, that one possible solution — beyond education — is to create more of those high-value, “abstract, task-intensive jobs.” And doing that means creating more startups firms with the potential to become high-growth companies. Start-ups generate the “disruptive innovation” that creates new goods, services, and jobs. One criticism of firms such as Apple, Facebook, and Google is that while they create good-paying jobs, they don’t create that many jobs versus profits. And if that’s just the nature of these tech firms, then perhaps the solution is producing many more of them. There is evidence, however, high-growth entrepreneurship began declining around 2000. So what to do? As Erik Brynjolfsson, coauthor with Andrew McAfee, of The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies  explained podcast with me earlier this year, “We think we can take action to do a lot, to re-skill people, to encourage more entrepreneurship that will invent and discover new occupations and jobs for some of those people, the 85 percent or whatever the number is that have their previous jobs automated.”

Economics, Pethokoukis, U.S. Economy

Study: US workers are staying put more than ever. And government is making the problem worse

Image Credit: shutterstock

Image Credit: shutterstock

A deep, dynamic, fluid, flexible labor market is supposed to be one of America’s economic strengths and competitive advantages. Jobs are created, jobs are destroyed as a changing market demands. Workers come and go, always looking for better-paying, more-fulfilling gig. But that process is breaking down. From the Jackson Hole conference, “Labor Market Fluidity and Economic Performance” by Steven J. Davis and John Haltiwanger:

1.) The U.S. economy experienced large, broad-based declines in labor market fluidity in recent decades. Declines in job and worker reallocation rates hold across states, industries, and demographic groups defined by gender, education and age. Fluidity declines are large for most groups, and they are enormous for younger and less educated workers.

2.) Many factors contributed to reduced fluidity: a shift to older firms and establishments, an aging workforce, the transformation of business models and supply chains (as in the retail sector), the impact of the information revolution on hiring practices, and several policy-related developments. Occupational labor supply restrictions, exceptions to the employment-at-will doctrine, the establishment of protected worker classes, minimum wage laws, and “job lock” associated with employer-provided health insurance are among the policy factors that suppress labor market fluidity.

3.) The loss of labor market fluidity suggests the U.S. economy became less dynamic and responsive in recent decades. … These developments raise concerns about productivity growth, which has close links to factor reallocation in prominent theories of innovation and growth and in many empirical studies. The high-tech sector’s sharp drop-off in business entry rates and in the incidence of fast-growing young firms after 2000 reinforces this concern. …  Our econometric evidence supports the hypothesis that reduced fluidity lowers employment rates, especially for younger and less educated workers.

4.) If our assessment of how labor market fluidity affects employment is approximately correct, then the U.S. economy faced serious impediments to high employment rates well before the Great Recession. Moreover, if our assessment is correct, the United States is unlikely to return to sustained high employment rates without restoring labor market fluidity.

Labor Market Fluidity and Economic Performance  by Steven J. Davis and John Haltiwanger

Labor Market Fluidity and Economic Performance
by Steven J. Davis and John Haltiwanger

So, another piece of evidence that America’s economic problems did not start with the usual suspects: George W. Bush, Obamanomics, or the Great Recession. Yes, an aging workforce plays a role. So do big changes in the US retail sector where big-box retailers show less job churn than the smaller players they replaced. Technology has made it easier for employers to screen applicants, including access to criminal records, credit histories, media attention, and social networking activity.

And there is some upside here to having more stability. Job losses can lead to lower earnings and can have negative affects on mortality rates, family stability, and mental health. What’s more, the transformation of the US retailers has boosted productivity and consumer purchasing power.

On the downside, less labor dynamism “goes hand in hand with a slower arrival rate of new job opportunities” which “increases the risk of long jobless spells” and hampers the ability to “switch employers so as to move up a job ladder, change careers, or satisfy locational constraints.” When Americans are on the move, America is on the move. And right now, we aren’t — with evidence to suggest bad government policy shares a large chunk of the blame.

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

Economics, Pethokoukis, U.S. Economy

Michael Strain: Here’s how we should fix US infrastructure — and boost upward mobility

In his Washington Post column, AEI economist Michael Strain makes the case that any way you want to massage the data, it’s clear the US has an infrastructure problem. So how can you go about fixing and upgrading the power grid, bridges, roads, and schools without turning the whole effort into a top-down, Keynesian boondoggle? Keep the project-picking local and give cities and states the flexibility to figure out how to fund their share. What’s more, helping upward mobility for working-class Americans should be a key policy goal. Strain:

We know that urban areas characterized by a high degree of socioeconomic segregation often have relatively low mobility rates and high unemployment rates. 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. Some workers on the margin of participating in the labor market may enter if their commute time is one hour rather than two. The long-term unemployed, currently in the labor market, would have more jobs to which they could apply. And the quality of life for low-income workers with long commutes would increase.

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

Pethokoukis, Society and Culture, Economics, U.S. Economy

What we’re reading today: August 22, 2014

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

1.) Working from home seems more legitimate if you have a kid, according to this piece from The Atlantic. “And dads, a study finds, are typically granted more leeway than moms.”

2.) From WSJ: “Unemployed by Obamacare: Three new Fed surveys highlight damage to the labor market.”

3.) In his New York Times column, Ross Douthat looks at teen births and the complexities of culture.

4.) Diana Furchtgott-Roth, in her latest on e21, presents three reasons an Obama executive order on immigration would backfire. Reason number two: “even if the Obama executive order survives court challenge…an executive order does not have the comprehensive and permanent power of a law…. Individuals protected by a law have a permanent protection, even should a future Congress write a different law; individuals protected by an executive order have little certainty beyond the next Inauguration Day.”

5.) Mercatus has a new paper out titled “The United States’ debt crisis: Far from solved.”

US debt interest and GDP

6.) US coal exports do not offset massive emissions reductions from natural gas, says The Breakthrough.

7.) In Education Next, Andy Smarick writes on being stuck in the middle with state-level reform.

8.) John Cochrane discusses a few things the Fed has done right.

9.) Did you know: 41% of American workers let their paid vacation days go to waste. Read more from The Atlantic here.

10.) Turns out online shopping isn’t as profitable as you think. Harvard Business Review explains.

US e-commerce growth rates

Follow AEIdeas on Twitter at @AEIdeas.

Economics, Pethokoukis

This chart shows the stunning disappearance of middle-class jobs — everywhere

"Polanyi’s Paradox and the Shape of Employment Growth" by David H. Autor

"Polanyi’s Paradox and the Shape of Employment Growth" by David H. Autor

You are not imagining it. The above chart is from “Polanyi’s Paradox and the Shape of Employment Growth, “ a new paper (my analysis to come) by David Autor at the Federal Reserve’s Jackson Hole conference. And here is how Autor defines, high-, middle-, and low-wage jobs:

High-paying occupations  are corporate managers; physical, mathematical and engineering professionals; life  science and health professionals; other professionals; managers of small enterprises;  physical, mathematical and engineering associate professionals; other associate  professionals; life science and health associate professionals.

Middle-paying occupations  are stationary plant and related operators; metal, machinery and related trade work;  drivers and mobile plant operators; office clerks; precision, handicraft, craft printing and  related trade workers; extraction and building trades workers; customer service clerks;  machine operators and assemblers; and other craft and related trade workers.

Low  paying occupations are laborers in mining, construction, manufacturing and transport;  personal and protective service workers; models, salespersons and demonstrators; and  sales and service elementary occupations.

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