Pethokoukis

James Pethokoukis: Covering the nexus of Washington and Wall Street

Pethokoukis, Economics, U.S. Economy

No, Social Security disability isn’t masking the real US jobless rate

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061413u6

Unemployed US workers who’ve exhausted their jobless benefits are not hiding out in the Social Security disability insurance system, according to a new study from the University of California, Berkeley. Although there has been a 25% rise in disability rolls — equaling 11 million Americans — since the Great Recession began, economist Jesse Rothstein found no correlation between expiring jobless benefits and rising disability claims. As the WSJ summarizes:

When the unemployment rate started rising in 2008 and 2009, the government extended unemployment benefits, leading to a drop in the number of people exhausting their payments. Yet the number of people filing for disability kept on rising. In more recent years, the government has cut back unemployment benefits, leading to an increase in expirations, but the number of disability applications has remained flat or even slowed.

Regarding the correlation between rising unemployment and rising disability filings, Rothstein suggests a weak labor market prevents injured workers from finding employment in jobs they could still do. Example: A construction worker with a bad back who’s willing to do a desk job.

Three additional points:

1. This study more or less syncs with one from Goldman Sachs that notes the rise in SSDI beneficiaries has only modestly outstripped the Social Security Administration’s pre-recession forecasts. Goldman: “Most of the growth in SSDI beneficiaries seems to be due to a larger and older population.” Combined, the two studies suggest SSDI is not turning the US into 1980s Europe, where persistently high unemployment was blamed on easy availability of long-term jobless benefits.

2. We should still try to get people off disability, since once they start receiving benefits, they rarely return to the labor market. For instance: A study of Norway’s return-to-work program — benefits of disability insurance recipients are reduced by roughly $0.6 for every $1 in earnings — is encouraging.

3. Greater effort needs to be made to aid the 4 million long-term US jobless, possibly through relocation subsidies or work-share programs, to avoid higher structural unemployment. Along those lines, AEI’s Kevin Hassett thinks even broader and more creative employment subsidies might be necessary:

If somebody’s 40 years old, and not employed for 25 years, that costs governments lots of money, and if we think rationally about reducing spending, maybe it’s worth it to pay for their first year at a private employer. Direct hiring, or a direct subsidy for hiring, could save taxpayers a fortune. … Suppose we think a 40 year old will be disconnected until retirement, and it will cost the government $2 million to support that person, both in terms of direct monies and the tax dollars we don’t get. Why not pay a search firm $100,000 if they can document that they found that guy a job? It turns out Germany set up a program like that, that has had some pretty good success. It’s the kind of creative thinking that we should all embrace, because the situation is really terrible.

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Pethokoukis

Stock market reform should be another plank of reform conservatism

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This is hardly a confidence builder for everyday investors. CNBC’s Eamon Javers reports that big banks are paying Thomson Reuters to receive important data earlier than the rest of the market, including the results of the University of Michigan consumer confidence report. This provides yet another way, explains CNBC’s John Carney, that Wall Streeters ”equipped with ultrafast computers can exploit even small timing advantages to trade before the market moves on economic data.”

While you could argue that this is merely a skirmish in longer-term battle among elite traders, Karl Smith thinks it does impact the small investor:

Each time pro traders with proprietary information load up on one side of a trade they nick ever-so-slightly the return to the average Joe. Year-after-year it adds up to an environment where the average retail return is going to be lower than the average pro return. And, since the stock market is likely the best long term investment available to the average Joe, the average Joe’s best chance at financial success is diminished.

And consider: If automation pushes down hard on labor income, access to capital income would become more important in the future for Main Street. One way for middle-incomers to share in that is by owning stocks or business equity, explains economist Noah Smith. Policies to help make this happen might include a) universal 401k plans, perhaps seeded by government, b) reducing regulation that impedes startups, and c) regulatory reform to encourage companies to publicly list their shares.

Other ideas, ones which might increase investor confidence and nudge greater small investor involvement: breaking up the biggest banks, phasing out investment taxes, and a tiny Pigovian tax — applied internationally — to tamp down on high-frequency trading and “flash crashes.” That last one might be the only way to deal with the trading edge Javers discovered. Banning the practice might be tough, as Carney explain, even though it “seems to violate at least the spirit of rules aimed at creating a level playing field for traders and investors, even though it appears to be perfectly legal under current regulations.”

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Economics, International economy, Pethokoukis

Is Japan just too far gone? And is Europe next?

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Credit: Yahoo

Credit: Yahoo

The Bank of Japan’s unprecedented monetary easing led to a near doubling in the Japanese stock market, now followed by a 20% “bear market” swoon. Of course, Capital Economics has a good point when it says better to label the decline a “substantial market correction” given the previous spectacular rise.

But whatever you call the slump, such crazy volatility has understandably raised concerns that one of Shinzo Abe’s “three arrows” has failed to stick to its target. As one Tokyo economist tweeted, “Could this be the end of the fantasy called Abenomics? There were huge expectations. But it didn’t take long for people to realize the reality isn’t that easy.”

“Easy?” Maybe it’s impossible. After two decades of deflation and stagnation — and now depopulation – perhaps the Japanese economy has crossed some tipping point and is beyond salvation. Economist Lars Christensen offers a more likely — certainly less fatalistic — explanation for what’s been happening in Japanese financial markets right now:

1. Japanese politicians continue to question the wisdom of aggressive monetary policy because of higher bond yields.

2. Even some BOJ members are fretting about higher rates, ever-so-gently hinting at an abandonment of the 2% inflation goal.

3. Last week’s BOJ meeting was a disappointment. Central bank chief Kuroda ”failed to clarify the position of the BoJ and that undoubtedly has unnerved investors further.”

To end the market turmoil, Christensen — who sees falling inflation expectations as fueling the panic – says u must state firmly that a) the increase nominal bond yields is no worry at all, and b) the BoJ’s focus is on inflation expectations. Communication is crucial to expectation setting. But revolutions are rarely executed without plenty of storm and stress. And this one may yet fail. Europe should pay close attention, says AEI’s Desmond Lachman, to avoid the same trap:

 A clear lesson from Japan’s two decades of struggling with deflation is that a central bank pays a very high price for falling behind the policy curve. … The European Central Bank’s recent behavior is all too reminiscent of the Bank of Japan’s past passivity in addressing that country’s deflation problems, for which Japan has paid a heavy price. Like the BOJ before it, the ECB is now sitting on its hands, despite the European economy’s continued deterioration and the rising risks of European deflation. This does not bode well for an end to Europe’s longest postwar economic recession or for the early resolution of the European sovereign debt crisis.

 

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Economics, Monetary Policy, Pethokoukis

Why is the US economy stronger than Europe’s right now? It rhymes with ‘Wernanke’

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Two economic data points today:

1. Retail sales increased by 0.6% last month vs. a 0.4% forecast. IHS Global Insight: “The outlook on labor market conditions has improved and consumers are considerably more optimistic in their economic outlook.”

2. Initial jobless claims fell by 12,000 to a seasonally adjusted 334,000 in the week ended June 8 vs. the 350,000 forecast. The four-week moving dropped 7,250 to 345,250. Jobless claims are back near five-year lows. JP Morgan: “Through the normal ups and downs of the claims figures, the broader trend in the data looks consistent with continued modest improvement in the labor market.”

So, OK. Not fantastic or even acceptable by any means. But it could be worse. And it probably would be if not for the Fed. Again, I realize all things touched by man have high causal densities. But monetary policy is a screaming difference between the US and Europe.

Here are two charts comparing the UK and the US economies from Marcus Nunes. Despite the US having deeper austerity than the UK — as measured by government purchases – US RGDP has been stronger thanks in part, I would argue, to the more aggressive MP+ from the Bernanke Fed.

061313austerity

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Pethokoukis, Politics and Public Opinion

Please, Marco Rubio isn’t the GOP’s Jack Kevorkian

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Image Credit: Gage Skidmore (Flickr) (CC BY-SA 2.0)

Image Credit: Gage Skidmore (Flickr) (CC BY-SA 2.0)

On Fox News, my friend Ann Coulter contributed this sizzling sound bite to the immigration reform debate: “Well, Chuck Schumer is playing Marco Rubio, the Jack Kevorkian of the Republican party.” It was a follow up to a recent column in which she wrote: “Hispanic voters are a small portion of the electorate. They don’t want amnesty, and they’re hopeless Democrats. So Republicans have decided the path to victory is to flood the country with lots more of them!”

Coulter, a bit shorter (and with a bit less hyperbole): Rubio is being suckered into dooming the GOP with permanent minority party status by allowing Democrats to effectively import 11 million new Democratic voters.

That’s a tough charge. Let me respond with three numbers: 775,000, 0, and 45%.

1. The first number refers to the Democratic Hispanic Bonanza Scenario and supposed deluge of 11 million illegal immigrants/undocumented workers. What if all those folks were citizens last November? Well, of that 11 million, only 10 million are adults. And of that 10 million, only 8 million are Latino. And of that 8 million, only 3.5 million would have been voting-age citizens if undocumented Hispanic immigrants became citizens at the rate equal to that of eligible Hispanic immigrants. And of that 3.5 million, only 1.7 million would actually bother to vote. And of that roughly 1.7 million, how many of these new Latino Americans would be net Democratic votes, nationally? Just 775,000 or so, according Harry Enten, polling analyst at The Guardian. So President Obama would have done about a half percentage point better vs. Mitt Romney. Some bonanza.

2. The second number refers to the Electoral College. Wouldn’t those 775,000 net Democratic voters have flipped a few more states Obama’s way? Not one, according to RealClearPolitics polling analyst Sean Trende. Zero. And key swing states would have been only marginally more difficult to win. Obama would have done, for instance, only 0.2 percentage point better in Ohio, New Hampshire, Missouri, and Minnesota.

3. The third number refers to the average share of the popular vote that GOP presidential candidates have garnered over the past six elections, a pathetic 45%. Republicans don’t need someone to help them commit political suicide. They’re managing just fine on their own. And that deterioration might accelerate if Americans think the GOP killed immigration reform mainly because the party feared reform would produce more Democratic voters. And why wouldn’t Americans think that given the comments of some conservative pundits such as Coulter.

America is changing. Last year, deaths exceeded births among non-Hispanic white Americans for the first time in at least a century. Immigration reform would begin to detoxify the Republican brand among Hispanics. (A powerful signaling move for Asians and young people, too). If Republicans could boost their Hispanic vote share by just three percentage points from 2012, Trende notes, “it would completely wipe out the expected vote gain for Democrats among these new voters.”

The combo of immigration reform (broadly construed) and — this is just as key — a market-populist economic agenda that appealed to middle-income Americans might end the long-term GOP death spiral.

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Pethokoukis, Economics, U.S. Economy

Can Detroit and St. Louis turn themselves into San Francisco and Seattle?

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Image Credit: Shutterstock

Image Credit: Shutterstock

St. Louis is again trying to kick start its business engine, as the WSJ explains, this time by a public-private partnership raising $100 million over five years to invest in and support local startups: “The effort is the latest in a series of steps intended to revive an entrepreneurial culture that even local boosters acknowledge has faded over the generations.”

This brings to mind a great EconTalk that Russ Roberts had with Enrico Moretti, author of The New Geography of Jobs. In the book, Moretti analyzes US cities that have succeeded — brain and innovation hubs like San Francisco and Seattle — and those that have not or have declined such as Detroit. In the podcast, Roberts mentions the Gateway City:

So, I used to teach at Washington University in St. Louis. The city struggles, very stagnant; the metropolitan area is somewhat healthy, but the city itself has done very badly over the last few decades. I always thought: we need to be more like Seattle. So, they would send city officials to Seattle, and then they would come back and say, well, the U. of Washington is a key part of Seattle’s success; they have a lot of great high tech departments; and Washington U. could also be such an anchor.

That’s somewhat interesting; but as you point out, a lot of great research universities are not–the cities around them are not thriving. But then they’d say, the second thing: Well, Seattle has a lot of farmers’ markets, so we’ll have a lot of farmers’ markets. Maybe they should have made it rain more, try to seed the clouds. And they’d forget things like St. Louis is farther from Mt. Ranier and great skiing and a thousand other things. But your point, which is more important, is it’s not just that it’s hard to imitate successful cities, and copy them and grow like they did. Your point is that they confuse often what came first and what came second. So, the U. of Washington was a great research university when Seattle was more like Albuquerque. It didn’t help.

Moretti put it this way in his book:

The reality is that a city’s economic fate is in no small part determined by historical factors. Path dependency and strong forces of agglomeration present serious challenges for communities without a well-educated labor force and an established innovation sector. Local governments can certainly lay a foundation for economic development and create all the necessary conditions for a city’s rebirth, including a business friendly climate to job creation. But there is no magic forumla for redevelopment.

Lots of logical, reasonable explanations for why some cities become entrepreneurial superstars turn out to be just after-the-fact rationalizations. Silicon Valley wasn’t planned. It was the arrival of semiconductor pioneer William Shockley that planted the seed of the region’s success. Moretti: “That serendipitous seedling was the starting point of an economic miracle that eventually brought millions to the region.” Likewise, Bill Gates and Paul Allen moved Microsoft to Seattle from Albuquerque because that’s where they grew up.

Not that you can blame a struggling city for trying anything and everything. But Moretti is skeptical of most things these urban planner try. There are demand-side approaches: Attract businesses via tax breaks and other subsides and hope educated workers follow. And there are supply-side approaches: Attract workers by making the city cool. Sometimes cities try both in a “big push.” But Moretti can’t fund an example of either a large or small US innovation hub that was the result of a big push.

Indeed, the story quotes economist Edward Glaeser who points out that while cities with high rates of entrepreneurship experience faster job growth. ”It’s not at all obvious that governments know how to promote entrepreneurship.” Economist Ajay Agrawal is equally dubious: “Lots of cities are trying to do what St. Louis is trying to do. Every city and town is trying to find the magic bullet for innovation [and] entrepreneurship. Nobody has figured it out.”

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Economics, Health Care, Pethokoukis

Yet another way Obamacare stymies health care innovation

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Credit: New York Times

Credit: New York Times

What drives value creation and innovation in the US economy? Competition. (I once asked the head of the McKinsey Global Institute how to make America more innovative. The reply: “Maximum competitive intensity.” Love it.) Well, make that most of the US economy.

In a fifth of the economy, the health care fifth, there is a notable lack of competition. New York Times reporter Eduardo Porter calls a lack of of competition in the health care sector “the elephant in the room that appears to have been overlooked in the debate over how to rein in the galloping cost of health care.”

It’s one thing for pricey new technologies to drive up health care costs. What about, however, when the culprit is the rising price of long-established, everyday treatments? What explains that? Econ 101 would suggest one possible cause is too little competition. Porter points his finger at hospital mergers:

Two decades ago, there were on average about four rival hospital systems of roughly equal size in each metropolitan area, according to research by Martin S. Gaynor of Carnegie Mellon University and Robert J. Town of the University of Pennsylvania. By 2006, the number of competitors was down to three.

The share of metropolitan areas with highly concentrated hospital markets, by the standards of antitrust enforcers at the Justice Department and the Federal Trade Commission, rose to 77 percent from 63 percent over the period.

And consolidation is continuing. Professor Gaynor counts more than 1,000 hospital system mergers since the mid-1990s, often involving dozens of hospitals. In 2002 doctors owned about three in four physician practices. By 2008 more than half were owned by hosp

Porter cites research by Northwestern University’s Leemore Dafny that found hospitals raise prices by about 40% after the merger of nearby rivals. Also, economist Cory Capps estimates that hospital concentration is increasing US health care costs by tens of billions a year. And this slide from a presentation by Avik Roy shows that those higher prices are not accompanied by increased quality:

Credit: Avik Roy

Credit: Avik Roy

Porter notes that the Federal Trade Commission in recent years has become a bit more aggressive in pursuing anti-competitive hospital mergers. In addition, big companies such as Wal-Mart and Lowe’s are cutting deals with hospitals such as the Mayo Clinic or the Cleveland Clinic “to provide specialized care, including cardiac care or spinal surgery, for all their workers across the nation.” In this way, they sidestep the market power of these local hospital monopolies.

Great. But here’s your trouble: A core element of Obamacare is the encouragement of “accountable care organizations” to control costs by getting health care providers to work together to coordinate care. And Porter finally gets around to mentioning this at the end of his story, what should have been the lede:

Professor Gaynor, for instance, worries that accountable care organizations may prove anticompetitive. Merger activity has jumped in anticipation of the law’s coming fully into effect. “Hospitals want to maintain their revenue streams and enhance their bargaining leverage,” said Professor Gaynor. “This is a way to do so.

And here is AEI’s Scott Gottlieb on the market concentration risks of ACOs:

ObamaCare erects financial incentives to stimulate the creation of “Accountable Care Organizations” – which at their core are just integrated delivery networks that take capitated risk. The problem is that the financial incentives that ObamaCare allows are too meager to attract investment capital that could stand up these new endeavors. .. The result is predictable. The only entities pursuing this sort of integration are the entrenched players. And it’s mostly the hospitals that are playing. Not because they necessarily want to run ACOs, but because they want to consolidate local physicians to secure monopoly-like positions that give them bargaining power. Studies show that this sort of market concentration leads to higher healthcare costs.

Neither hospital nor ACO monopolies will deliver the sort of disruptive innovation the US health care system needs.

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Economics, Monetary Policy, Pethokoukis

A return to the gold standard? Please, stop. Here’s a much better idea

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Image credit:Covilha's Flickr photostream (CC BY 2.0)

Image credit:Covilha's Flickr photostream (CC BY 2.0)

Some folks on the right want to go back to the ’80s — the 1880s. The idea of returning to a gold standard (and possibly scrapping the Fed) has found renewed popularity, particularly among the libertarian followers of Ron and Rand Paul.

For instance, the GOP platform at last summer’s Republican National Convention called for a resurrection of the 1980s government commission that investigated the “feasibility of a metallic basis for US currency.” (Spoiler: The Reagan-era panel advised against it.) And picking up on that idea, some House Republicans want to create a Centennial Monetary Commission to explore reforming the Fed, including possibly reinstituting a gold standard.

Of course, inflation has not been a problem for three decades. And the Great Recession-Financial Crisis, contrary to popular belief, resulted from tight money rather than too much “money printing.”

Yet concerns about the Fed “creating money out of thin air” persist, especially as the central bank engages in another round of bond buying. But economist David Andolfatto of the St. Louis Fed points out that a gold standard is no guarantee of price stability: “It is simply a promise made “out of thin air” to keep the supply of money anchored to the supply of gold.”

And that promise can be altered, as it was during the Great Depression. Over the span of two years, Andolfatto points out, Washington a) ordered all gold coins and certificates turned in at a price of $20.67 per ounce, b) abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars, and c) increased the price of gold to $35 per ounce, effectively increasing the money supply and price inflation.

(And there is the fact that the gold standard played a key role in causing the Great Depression.)

May I instead recommend what I call the “new gold standard,” having our independent central bank target the path of nominal GDP through a market mechanism. Economist Scott Sumner would have the Fed create NGDP futures contracts, pegging them at a price that would rise at 5% per year. If, for instance, investors expected NGDP growth above or below 5%, they would buy or sell these contracts from the Fed, which would automatically tighten or ease the money supply and raise or lower interest rates. The Fed’s role would be passive, Sumner explains, as the money supply adjusted automatically, as with a gold standard — but with far more macroeconomic stability.

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Pethokoukis, Economics, U.S. Economy

7 arguments for more low-skill immigration — and 1 concern

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“Filling the gap: Less-skilled immigration and the changing US economy,” a study coauthored by AEI visiting scholar Madeline Zavodny, argues that an increasingly-educated American workforce has elevated the need for less-skilled immigrant workers. The main findings (to be discussed at an upcoming AEI event):

1. American workers’ educational attainment has changed over time, and low-skilled immigrants are filling a gap created by rising education levels among Americans.

2. Low-skilled immigrants and low-skilled Americans work in different occupations that play to their different comparative advantages.

3. There is little overlap in the types of jobs held by low-skilled immigrants and low-skilled Americans.

4. There is little overlap in where the two groups live.

5. Immigrants work in jobs that are more difficult and dangerous than jobs held by most Americans.

6. Americans work in jobs that require more communications skills and managerial ability. Immigrant workers, disadvantaged by linguistic, cultural and other gaps, contribute on the job mostly with their brawn. This is no longer true for most Americans, even the least educated Americans.

7. What’s more, far from taking jobs from Americans, less-skilled newcomers complement native-born workers and boost employment among U.S. workers. Immigration reform that fails to take account of these realities risks damaging the U.S. economy and limiting opportunities for Americans.

In other words, a strong case as to why more orderly and legal low-skill immigration is good for America. At least today. But what about tomorrow? The study actually hints at this issue in its concluding paragraph: “As the U.S. economy becomes more sophisticated, there is less demand for low-skilled workers. But there will always be some need, and there are increasingly few Americans available to meet it.”

But the evolving nature of that need is a big question. Take agriculture, for instance. Reihan Salam questions the assumption among low-skill immigration advocates that “there is no way that agriculture will ever become less labor-intensive and more capital-intensive, there is no need to be concerned about the prospect that large numbers of less-skilled agricultural workers will find themselves displaced by skill-biased technical change.” Ramesh Ponnuru, a visiting fellow at AEI, has outlined concerns about guest worker programs. And I have written frequently about the issue of technological unemployment, even among higher-skilled workers. Truly this is an issue deserving of dynamic scoring.

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Pethokoukis, Economics, Taxes and Spending

Why no tax reform this year — or this decade

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Credit: Tax Foundation

Credit: Tax Foundation

The chances for fundamental tax reform this year depend heavily on either a) some sort of “grand bargain” being reached on the budget or b) the endgame of a debt-ceiling fight. (Indeed, the first may well be linked to the second.) As I wrote earlier today, the first option is unlikely. And the clock is ticking on the second one as the sharply declining fiscal deficit has pushed back the debt limit. Again, ace political analyst Chris Krueger of Washington Research Group:

The debt ceiling is the catalyst for tax reform/deficit reduction and each month you extend the discussion, you lessen the timeframe (and likelihood) of meaningful tax reform. … With a tax reform process via the debt ceiling now likely out the window, the debt ceiling showdown this autumn does not have a logical exit strategy. The only realistic scenario in the discussion is to link a debt ceiling raise to a Keystone XL pipeline approval, though that is far from certain.

So don’t expect tax reform this year. And budget expert Stan Collender makes a compelling case that we won’t see tax reform for the rest of the decade. His take: Unlike in 1986, the last time major tax reform passed, Democrats will insist any deal raise revenue. (Democrats will also insist on that in exchange for entitlement reform.) And given that requirement:

House and Senate Republicans cannot possibly agree to a tax increase before the 2016 presidential election without seriously, and probably fatally, hurting their political prospects.  …

The deficit is expected to continue to fall both in nominal terms and as a percent of GDP between now and 2017. That will make it even harder for Republicans to justify a tax increase deal to their base.

As the projected deficit starts to rise again after 2017, the pressure to do something about it will increase. This very conveniently will begin to happen after the 2016 presidential and congressional elections are over.

That’s when the real tax reform clock will start to run. … the process is likely to take at least two-plus years from that point. That makes 2019 the earliest tax reform is likely to be enacted with implementation for some, but not all of the changes, starting in 2020.

My one minor quibble: If the deficit continues to decline, doesn’t that hurt the Democrat fiscal argument for making tax reform revenue positive, a tax hike? And if the economy continues in slow-growth mode, wouldn’t the Republican case for cutting taxes, particularly on the corporate side, strengthen even if the CBO would score it as a revenue loser? Anyway, Collender and Krueger are probably correct tax reform isn’t going anywhere this year or this presidential term.

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