Pethokoukis, Economics, U.S. Economy

Obama has decided to start bragging about the US economic recovery. Really?


From the Washington Post: “President Obama has made one thing clear while traveling from the Rocky Mountains to Texas this week: The economy is the best it has been in years and is only getting better.”

Maybe, maybe not. See, the Atlanta Fed has introduced a real-time GDP forecasting model,GDPNow. As the bank explains:

The BEA’s data-construction machinery for estimating GDP is laid out in considerable detail in its NIPA Handbook. Roughly 70 percent of the advance GDP release is based on source data from government agencies and other data providers that are available prior to the BEA official release. This information provides the basis for what have become known as “nowcasts” of GDP and its major subcomponents—essentially, real-time forecasts of the official numbers the BEA is likely to deliver.

So how is 2Q looking? Not the strong rebound many have been hoping for after the first-quarter shrinkage, just 2.6%. (As Citi notes: “Mid-expansion declines in GDP are extremely rare, and the decline in the first quarter was by far the deepest in the past 70 years”). Here is the current GDPNow forecast:


And as the chart at the top shows, the GDPNow forecast at the very low end of Wall Street expectations. And here is a worrisome bit from the WSJ:

American retailers may have more than a weather problem. Family Dollar Stores Inc. said fewer shoppers came into its stores in the three months through May 31, pushing sales down 1.8%, excluding newly opened or closed stores.

In a move to win back traffic, the dollar chain said it would begin carrying beer and wine nationally next year, adding to the tobacco, frozen food and other consumables that now make up 73% of sales. “Our results continue to reflect the economic challenges facing our core customer and an intense competitive environment,” Chief Executive Howard Levine said.

The discounter’s message echoed that of Container Store Group Inc., TCS -0.61%whose shares fell sharply midweek after its chief executive told investors that the company and its fellow store chains are in a “retail funk.”

“We’ve come to realize it’s more than just weather,” Container Store CEO Kip Tindell said. Falling traffic led to the first drop in quarterly sales at the company in more than three years.

So another faux “recovery summer?” I hope not, but that could be the case.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Pethokoukis, Economics, U.S. Economy

What’s the best way of cutting taxes for parents?

Image Credit: shutterstock

Image Credit: shutterstock

AEI’s James Capretta, who wrote a knockout chapter on health-care reform in the “reformicon/reformocon” book Room to Grow, offers his own take on another RtG idea, expanding the child tax credit (authored by Robert Stein):

An alternative solution would be to directly correct for the anti-parent bias in the Social Security payroll tax system itself. For instance, parents might get a 2.5 percentage point reduction in the standard payroll tax rate for every dependent child in the home, as suggested by Charles Blahous and Jason Fichtner. Parents with three children would thus pay a tax that is 7.5 percentage points below the standard payroll tax rate.

This approach to helping middle class parents would have substantial benefits over a larger child credit. It would directly lower tax rates on the earnings of parents, and thus reinforce the pro-growth effects of an individual income tax reform plan. It would be a very visible tax cut, seen directly in the paychecks of millions of workers, and thus add to its political potency.

I emailed Stein to get his reaction:

I’m perfectly fine with delivering tax cuts to parents that way rather than via the credit.  But the rate cut on parents per child, and rate hike on everyone else, would have to be twice as large as [Blahous] and Fichtner suggest to deliver the same tax relief per child as the credit…and its just not politically plausible to do it that way.

My own additional thoughts:

1.) Any permanent cut to payroll taxes would be certainly be attacked as undermining Social Security financing. And the bigger the cut, the most plausible the charge.

2.) As Stein notes in his chapter, ” … because the size of the credit would temporarily wipe out tax liabilities for some middle-class parents it would also reduce their marginal tax rate on additional work to zero.”

3.) And I am not so sure that the payroll tax cut would necessarily be more visible than the tax credit. From the NYTimes:

In a troubling sign for Democrats as they head into the midterm elections, their signature tax cut of the past two years, which decreased income taxes by up to $400 a year for individuals and $800 for married couples, has gone largely unnoticed.

In a New York Times/CBS News Poll last month, fewer than one in 10 respondents knew that the Obama administration had lowered taxes for most Americans. …  As Thom Tillis, a Republican state representative, put it as the dinner wound down here, “This was the tax cut that fell in the woods — nobody heard it.”

Actually, the tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

Also, I think the Stein plan would be quite visible given that a married couple with two kiddies earning $70,000  would get a tax cut of roughly $5,000
vs. current law. Hardly chump change. Anyway, I love the idea flow on the issue of pro-growth tax relief for worker creators. More, please!

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

A very simple way to cut taxes for young families

Progressive Economy

Progressive Economy

Once gain, Canada is leading the way in smart government. Last year America’s neighbor to the north unilaterally abolished baby-clothes tariffs, “specifically to help young parents with the cost of living,” according to trade expert Edward Gresser of the Global Works Foundation’s Progressive Economy project. At the time, Canada’s tariff rate was 18%, the highest among advanced economies. And the results:

A survey by the Retail Council of Canada finds prices noticeably down: a 2-piece set of pants and shirts has fallen from $12.99 to $9.99 (in Canadian dollars), or by 23 percent; a snowsuit by 10 percent; and bodysuits by 12 percent. Tariffs on hockey gear went too. Employment effects appear to be essentially zero.

America’s tariff on baby clothing isn’t as high as Canada’s used to be. At 10.8%, it’s in the middle of world rankings, above Japan but below the EU. Still, a Canadian-style abolition would be a nice fillip for poor and working-class US families. Gresser’s research finds that eliminating the tariff on 1.1 billion imported “rompers, jumpers, pajamas-with-feet, sun hats, and similar baby clothes last year” might cut parent’s clothing bills by nearly $300 million, or $70 to $90 per young child each year. What would be the argument against this?

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

Does innovation lead to prosperity for everyone?

Image Credit:

Image Credit:

Not all innovation is alike. Incumbent firms replacing man with machine is a kind of innovation that may lift corporate profits and boost stock prices without necessarily broadly raising prosperity. Such technological advancement and efficiency is already contributing to polarized employment markets in advanced economies. Jobs are created at the top for high-creative workers and at the bottom for high-touch workers. But jobs in the middle— especially those involving routine, repetitive, and rules-based tasks—are automated away. In other words, the executives and janitors at a bank keep their jobs, but tellers get replaced by ATMs.

But there is another kind of innovation, termed “empowering” innovation by business consultant Clayton Christensen. This is the sort of innovation generated by fast-growing startups offering new products and services. Empowering innovation is a job creator, not a job destroyer—though some jobs may shift from uncompetitive incumbents to these aggressive new challengers.

Both sorts of innovation have their place, of course. But right now efficiency innovation may be destroying jobs faster than empowering innovation creates them. So what is the key to generating greater levels of empowering innovation? Competition—and the more the better. As economist Joseph Berliner once put it: “…the effect of competition is not only to motivate profit-seeking entrepreneurs to seek yet more profit but to jolt conservative enterprises into the adoption of new technology and the search for improved processes and products.” Vibrant economies need plenty of fast-growing startups to generate empowering innovation and to also push incumbents themselves to become more innovative.

And if incumbents can’t compete, government needs to let them fail. Free and frequent entry and exit of firms is critical. Government has to make sure tax, regulatory, and spending policy is neither impeding the creation of new startups nor giving incumbents an unfair advantage.

Some politicians think “innovation policy” means spending taxpayer money on promising young firms favored by bureaucrats. rather, innovation policy means ensuring that the status quo is continuously challenged by upstart rivals and threat of failure. Those are the keys to the Schumpeterian “gales of creative destruction” that drive innovation, which in turn drives long-term economic growth and improvement in living standards.

As published in The International Economy magazine, Spring 2014 issue.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

Here’s one reason why the Kansas state tax cuts aren’t working

Scott Sumner:

The past two years Kansas reduced its state income tax rates. As a result, the top rate of income tax faced by Kansas residents (combined state and federal) rose from 41.45% in 2012 to 48.3% in 2013 and then fell a tad to 48.2% in 2014 (if they don’t itemize.) That’s a pretty tiny drop in the top marginal tax rate in 2014, and a much bigger rise in 2013.

I consider myself a moderate supply-sider, but I certainly wouldn’t expect such a tiny tax cut to significantly affect behavior. And any effects that did occur would happen very gradually, over a period of many years. For instance, firms might be slightly more likely to move to Kansas. But even after the tax cut, the top rate is almost as high as in Massachusetts, so Kansas is certainly not a tax haven like Washington or Texas, which have no state income tax.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, Taxes and Spending

Would President Hillary really cut taxes for the ‘deserving’ rich?

Image Credit: kyle tsui (Flickr) CC

Image Credit: kyle tsui (Flickr) CC

An interesting speculation from Politico’s Ben White based on Hillary Clinton’s recent chat with Der Spiegel:

Clinton told the German weekly: “We are very grateful for where we are today. But if you were to go back and look at the amount of money that we owed, we couldn’t even get a mortgage on a house by ourselves. In our system he had to make double what he needed in order just to pay off the debt, and then to finance a house and continue to pay for our daughter’s education.” …

It seems like the “system” Clinton was referring to was the U.S. tax system, though we don’t know for sure. Ironically, it was Bill Clinton himself who signed a top rate increase to 39.6% into law in 1993. Taken together with her previous comment to The Guardian about how people don’t resent the Clintons because they pay ordinary taxes “unlike some other people,” it seems like Hillary Clinton is not too happy with the higher rate on income and lower rate on capital gains and other investment income. … Could we be seeing the early stirrings of an economic policy platform?

Whether or not Hillary Clinton prefers to pay a lower top income-tax rate, I doubt cutting those rates would be part of her economic agenda.

For one thing, doing so would lose revenue. Of course, she could balance that off by proposing to raise investment taxes, as White speculates. But wouldn’t she rather devote any new revenue from those hikes to funding government programs to supposedly help the middle-class, like universal preschool or some such? What would be the political gain from using the tax code to transfer money from, in her view, the undeserving rich to the deserving rich? (And is she really going to push that distinction, although she apparently believes it?) More likely, I would think, she would endorse equalizing both top rates at the current top income-tax rate. (Of course, her hubby did sign a capital gains tax cut.)

Second, left-wing economists such as Thomas Piketty — whose book, “Capital,” Clinton says he is familiar with — have been arguing that top income tax rates could nearly double without causing economic damage. What would be Clinton’s economic logic for a rate reduction?

Third, if elected, Clinton might be president during a time of increasing budget deficits, according to CBO forecasts:

Between 2015 and 2024, annual budget shortfalls are projected to rise substantially—from a low of $469 billion in 2015 to about $1 trillion from 2022 through 2024—mainly because of the aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. CBO expects that cumulative deficits during that decade will equal $7.6 trillion if current laws remain unchanged. As a share of GDP, deficits are projected to rise from 2.6 percent in 2015 to about 4 percent near the end of the 10-year period.

Given that, revenue-losing tax cuts for wealthier Americans probably won’t be a fiscal priority for a president facing rising red ink — especially one who promised to continue her hubby’s frugal ways when he sat in the Oval Office.

Here is my speculation: Hillary will propose an Obama-esque tax plan that raises revenue by reducing tax breaks that benefit the 1% but ignores marginal rates on labor income. And add to that perhaps raising taxes further on “unearned” investment income, on top of the Obama increases. I am not sure where exactly where Clintonomics 2.0 will break sharply from Obamanomics, but I doubt taxes will be the place.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, International economy, Pethokoukis

Wait, the eurozone financial crisis is still kind of a thing?

Image Credit: Shutterstock

Image Credit: Shutterstock

From the WSJ:

Worries over the financial health of a major Portuguese lender spooked global markets on Thursday, drubbing shares in southern Europe and sending U.S. stocks tumbling at the open.

As it happens, AEI’s Desmond Lachman flagged just this sort of risk in a recent note on what the Fed isn’t talking about:

Yet a third and perhaps even more serious longer-term risk to which both the markets and the Fed seem to be paying scant attention relates to the probable re-intensification of the European sovereign debt risk. This inattention is all the more surprising considering the mounting evidence pointing to a sputtering of the already feeble European economic recovery and to the move of the European economic periphery toward outright price and wage deflation.

It is also surprising considering the very clear indications, especially from the recent dismal European parliamentary election results, that European politics continues to become increasingly polarized and that austerity and economic reform fatigue has now firmly set in that region. In these circumstances, one would have thought that both market participants and the Fed would have agreed that it must be only a matter of time before serious questions are once again raised as to how the highly indebted European countries will ever bring those debt levels down to more sustainable levels.

Indeed, Portugal’s bond market has been taking a hit, with government debt prices continuing to decline, according to the FT: “The benchmark 10-year bond yield, which moves inversely to the bond price, climbed another 15.1 basis points to 3.93 per cent, having earlier hit its highest since mid-May. The yield has climbed 36 bps so far this week.”

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.


Should the US try to be a global, ‘high-IQ utopia’ for immigrants?


Noah Smith writes an excellent BloombergView piece on why the US needs more high-skilled immigrants. This bit nicely sums up his case:

They represent one of the last big juicy pieces of low-hanging fruit out there for the taking. They start lots of companies, which give people jobs. They power most of our highest-value-added industries. They don’t compete with working-class Americans; they employ working-class Americans, and their demand for local goods and services gives income to working-class Americans.

Yes, to all of the above. Familiar arguments but ones in need of reminder and restatement. But this sentence, after a paragraph dismissing counterarguments, made me pause:

Some even see bigotry in the call for high-skilled immigration — what, are we trying to create some kind of high-IQ utopia here?

I sure hope something like that is a goal. I hope policymakers would want to make America the premier destination for highly-educated, entrepreneurial people who want to live in a country where government encourages innovation and success rather than throwing up roadblocks. A place with the where it is easy to raise money, and hard to run afoul of cronyist regulation and intellectual property rights. A place with super-fast internet and a super-efficient public sector that can effectively deliver public goods.

It makes me think of the New Canaan Holdfast in the “Brilliance” book series by Marcus Sakey. (The second book in the series just came out.) In Sakey’s alternate America, a sliver of the US population is born with superhuman smarts. Many of these “brilliants” decide to live in a huge section of Wyoming purchased by a brilliant centibillionaire to both escape growing persecution and live in a place that encourages their talents. It’s the ultimate experiment in the economics of agglomeration. The X-Men meets Silicon Valley. In NCH, brilliant scientists greatly advance all manner of technology. Eventually those marvels will create a more prosperous America and world. But right now, the rest of the country is wigging out, thus creating the conflict around which the series revolves.

Of course I don’t want to bring in just the brainiacs. American immigration policy should be about more than just economic benefit. But there is nothing wrong with an immigration policy that consciously and directly tries to recruit many more people who can help America continue to push the technology and innovation frontier. Again, Smith:

In an ideal world, what would we be doing to increase high-skilled immigration? By far the most important thing is to increase the number of green cards — not H-1Bs — and to base the new crop of green cards on skills instead of family reunification. The idea of stapling a green card to the diplomas of foreigners who study in the U.S. is a good one, and something like this should be made a reality. Beyond that, we should increase the number of entrepreneurship visas, boost the number of H-1Bs, and reform the H-1B visa to make workers less tethered to specific employers. But green cards are really the key.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

Think the US job market is healthy again? Well, it isn’t — and hasn’t been for a long time


It’s not enough for an economy to generate jobs. There should also be a good amount of turnover in the labor market. Workers need to move around to find the best fit for themselves, not to mention higher pay from taking a new gig. A stay-put workforce is bad news.

Now net job growth is a product of total hiring minus total separations (including layoffs and quits), as measured by the Job Openings and Labor Turnover Survey. And as a Goldman Sachs memo points out, “a given level of net employment growth can be achieved with a high or a low level of gross turnover.”

So long as there is decent net growth, should we really care how it comes about? After all, as JPMorgan point out, the 231,000 average monthly job gains in the first half of the year was the best of any six-month period in this expansion. Actually, we probably should care about these job market internals. Goldman cites two reasons:

– The first is that a less dynamic labor market is likely to see weaker wage growth as workers fail to move to jobs in which they are more productive. Fed research suggests that the impact on aggregate productivity growth could be considerable.

– The second reason for concern is that a low-turnover labor market risks locking out the unemployed and marginally attached, in some cases permanently. This “hysteresis” effect is a second channel through which a lack of dynamism can reduce potential output.

More stasis means lower wages, less productivity, and higher long-term joblessness. So is labor market dynamism or churn declining? Goldman thinks it is. The firm created a measure based on (a) the sum of the hiring and separations rates in the JOLTS data; (b) the sum of the gross job gain and job loss rates in the Business Employment Dynamics data; and (c) the share of workers making job-to-job transitions in the monthly Current Population Survey (CPS, also known as the household survey) micro data. Goldman finds:

labor market dynamism has fallen substantially since 2000, with the decline occurring during and after the last two recessions. Our dynamism tracker has bounced back only weakly during the last two recoveries, in contrast to the much stronger bounce-back following the recessions of the early 1980s and 1990s.

Why the decline? There certainly may be structural reasons. Companies may be imparting specific skills that don’t easily transfer to other firms. The decline in new firms creation may also reduce worker movement. But Goldman mostly blames weak economic growth. Insecure workers are less likely to take a risk on a new job. As I have noted before, it used to be common for the US economy to post a quarter of 4% or faster real GDP growth. In the 1980s (1981-1990), there were 18 such quarters. In the 1990s (1991-2000), another 18 quarters. But in the 53 quarters since then, the US economy has generated only six three-month periods of 4% real GDP growth or faster, including just two during the Not-So-Great Recovery.

This is one reason Fed Chairman Janet Yellen includes hiring and quits rates in her “dashboard” of labor market indicators. It also why the Fed should focus on growth right now.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

Economics, Financial Services, Pethokoukis

Will Obama and the Democrats wage a ‘war on Wall Street’ to hold the Senate?

Image Credit: Shutterstock

Image Credit: Shutterstock

According to inside-the-Beltway wisdom, the Democrats’ best strategy for the fall midterms is to use social issues against the GOP. As Emma Roller writes in National Journal, “The Supreme Court just ruled 5-4 in favor of Hobby Lobby, and thereby held that some businesses may claim religious exemption and not follow Obamacare’s contraception-coverage mandate. In the run-up to a summer where midterm campaigning will begin in earnest, this may not be the worst thing for Democrats.”

If Roller is right, expect Dems to double down on “war on women” accusations. But at the same time, the party might be also wage its own war — on Wall Street. According to The New York Times, “Citigroup and the Justice Department are nearing a deal that could cost the bank roughly $7 billion to settle a civil investigation into the sale of mortgage investments, people briefed on the matter said on Tuesday.”

The NYT piece also says the Citigroup deal “raises the stakes for Bank of America, which is expected to be the next large bank to settle its mortgage case with the Justice Department.” Right now, however, talks between the feds and BofA are “dormant.” But Guggenheim Partners bank analyst Jaret Seiberg doubts whether these two legal agreements, assuming both get done, are the end of the story:

The populist dislike of the mega banks and Wall Street is as strong as ever. One just had to listen yesterday to Sen. Elizabeth Warren or Sen. Richard Shelby to see how both progressives and conservatives see upside in attacking Wall Street and the big banks. There has been no real evidence that any of these civil settlements has done anything to help the big banks on the political front and we are dubious that either the Citigroup or Bank of America deals will change the political math. This is why we continue to worry about a criminal prosecution of a large domestic bank ahead of the mid-term election. It is also why we believe the big banks will continue to be a target for civil litigation by the government. In short, we question if there is really an end in sight to all of this litigation.

And as Seiberg has also written, ” … we are not as confident that a domestic bank could survive unscathed a criminal conviction. We cannot dismiss this risk entirely as politics are driving this process. This is why we view the prospects for a Justice Department-incited financial crisis as a low risk but high impact.”

And to that, you can add this news item from last week: “President Barack Obama on Wednesday said that ‘further reforms’ of Wall Street are needed, arguing that there remains too much focus on making profits through big banks’ trading desks as opposed to investing in companies and the ‘real’ economy.”

Maybe Obama is getting ready to pursue a “break up the big banks” agenda, though I doubt it. But there is another path. Obama has shown himself willing to take executive action if Congress is unwilling to act on agenda. Immigration, climate change, and now maybe financial reform via the Justice Department.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.