Pethokoukis

Is Obama’s pre-K education plan really a can’t-miss, long-term winner?

Former Obama White House economist Austan Goolsebee writes a Wall Street Journal op-ed supportive of his old boss’s universal $75 billion pre-K plan. And as Goolsbee presents it, the case for the Obama plan is beyond reasoned dispute:

If we are committed to evidence, though, there’s one area where we ought to be able to agree: early-childhood education. Investments in pre-kindergarten education have among the highest payoffs of any government policy, and whatever budget agreement emerges should restore the country’s long-standing commitment to early education.

Of course, Goolsbee mentions the famous Perry Preschool Project study, which only proves that a large amount of money spent on a small groups of kids in the 1960s can show results. But as Charles Murray has said, “Small scale experimental efforts staffed by highly motivated people show effects. When they are subject to well-designed large-scale replications, those promising signs attenuate and often evaporate altogether.”

Not to be a downer or anything, but Goolsbee apparently is unaware of an August 2013 study looking at Tennessee’s voluntary full-day, pre-k program for four‐year‐olds from low-income families. Since 2009, a team of Vanderbilt researchers has been studying what’s in effect been a randomized trial, comparing the kids who won a lottery to enter the program against those who didn’t win.

A recent report from the Vandy group looks at how those pre-schoolers were doing in first grade. The results are not encouraging. Russ Whitehurst of Brookings points out that “the group that experienced the Tennessee Voluntary State Pre-K Program performed somewhat less well on cognitive tasks at the end of first grade than the control group, even though ¾ of the children in the control group had no experience as four-year-olds in a center-based early childhood program.” Likewise, there was no statistically difference between the two groups in their social and emotional skills as rated by the teachers. Whitehurst’s conclusion:

I see these findings as devastating for advocates of the expansion of state pre-k programs.  This is the first large scale randomized trial of a present-day state pre-k program.  Its methodology soundly trumps the quasi-experimental approaches that have heretofore been the only source of data on which to infer the impact of these programs.  And its results align almost perfectly with those of the Head Start Impact Study, the only other large randomized trial that examines the longitudinal effects of having attended a public pre-k program.

Based on what we have learned from these studies, the most defensible conclusion is that these statewide programs are not working to meaningfully increase the academic achievement or social/emotional skills and dispositions of children from low-income families.  I wish this weren’t so, but facts are stubborn things.  Maybe we should figure out how to deliver effective programs before the federal government funds preschool for all.

 

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

Relax, that $2 trillion jump in US wealth isn’t because of Fed-induced ‘bubbles’

MKM Partners

MKM Partners

US household wealth increased by $1.9 trillion to $77.3 trillion from July through September, according to new Federal Reserve data. That’s up by 2.6% from the previous three months. Of that nearly $2 trillion, $1.5 trillion came from an increase in the value of financial assets, including stocks and pension fund holdings. Another $400 billion came from the rising value of real-estate assets.

But does this increase in wealth merely reflect a Fed-generated stock and housing bubble? Not really. For one thing, there is certainly little price inflation to speak of, which one would expect to see in a “sugar high” economy. Getting to asset bubbles, let’s look at US stocks. They are trading at around 25x times the cyclically-adjusted PE ratio developed by Yale’s Robert Shiller. While that’s above the historic average of 16.5, it’s still way below the peak of 44 reached during the internet stock bubble. Now let’s say a nasty bear market dropped stocks by a third, returning the Shiller PE to its historic average. Even then, stocks would still be 100% from their 2009 lows. Are stocks even overvalued? Maybe not if the economy accelerates next year as some are forecasting.

Shiller, in various interviews, is mildly concerned about stock, less so about housing: As he recently told Barron’s:

We went through the biggest housing bubble in U.S. history in the 2000s, and there is a knee-jerk reaction among some people who think maybe we are doing that again. But you have to consider that these are very rare phenomena, and it was such a decisive break at the end of the last housing bubble that we might not be psychologically ready for another bubble.

 

Here is MKM’s Mike Darda on the bubble issue and the Fed:

Concerns about financial stability/over leverage are vastly overblown, in our view. Household leverage ratios have collapsed over the last five years even though the Q3 flow of funds data will likely show a new-all time high in inflation-adjusted net worth, thanks to rising nominal asset values and moderate nominal income growth (relative to flat or falling debt levels). Moreover, there is no evidence of a broad-based leverage or credit problem, unlike the early 2000s. The broadest measures of money (that include the shadow banking system) are growing at about the pace of NGDP. With unemployment/underemployment/long-term unemployment still a problem and inflation near record lows, the Fed is correct to focus on growth.

 

MKM Partners

MKM Partners

Pethokoukis, Economics, U.S. Economy

99 weeks and Counting: Of course we should extend unemployment benefits. But that’s not all we should do

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The Emergency Unemployment Compensation program, under which some workers could receive benefits for up to 99 weeks, is about to expire. If it is not extended, some 1.3 million long-term unemployed workers — out of a staggering 4.1 million total long-term unemployed – will immediately lose benefits.

Why would this be a good idea (a) during perhaps the weakest economic recovery, both in terms of GDP and job growth in American history, and  (b) at a time when technology may be radically changing the nature of work in America? As AEI’s Michael Strain points out in The Weekly Standard:

These millions of workers are suffering​—​financially, emotionally, spiritually. Some of them may never work again, and may be forced to subsist on welfare, increasing the rolls and expense of those programs. Society is also suffering: A large pool of willing and able workers are idle; our already segmented society is even more segmented; our country is less dynamic, vibrant, and thriving.

But just extended the programs over and over isn’t a good idea either. Again, Strain:

1. One thing conservatives might push for is relocation assistance​—​to help the long-term unemployed move from a bad local labor market to a good one. The job market varies widely across cities and states. Instead of continuing to cut UI checks to a New Jersey worker who has been unemployed for eight months, why not cut him a check to help him move to North Dakota, where he has a much better chance at getting a job?

2. As mentioned above, the evidence suggests that many long-term unemployed workers are “scarred”​—​their lengthy spell out of the workforce is making it difficult for them because firms view workers who have been unemployed for so long as risky hires. Why not reduce the risk associated with the hire by lowering the minimum wage for long-term unemployed workers? A firm may not want to take a $7.25-per-hour risk on a long-term unemployed worker, but might be willing to take a $4 risk. If we lower the minimum wage for the long-term unemployed, then we’ll need to supplement their earnings with an expanded Earned Income Tax Credit or some other government-funded wage subsidy.

3. To help make sure that we aren’t adding any new workers to the rolls of the long-term unemployed, states without worksharing UI programs​—​about half of them at the moment​—​should start them. Under worksharing, a worker who has his hours reduced by his employer in response to a temporary lull in demand can receive a prorated UI benefit. This makes it easier for firms to reduce employees’ hours by, say, 20 percent, rather than laying off 20 percent of their workforce. Government shouldn’t tilt the scales towards layoffs by prohibiting workers who have their hours reduced from receiving prorated UI benefits.

4. One way to[help the unemployed back to work and boost economic mobility] would be to improve transportation networks within cities and their outlying areas in order to shorten commute times from low-income neighborhoods to employment centers.

Recent research from economists at Harvard and the University of California, Berkeley, suggests that socioeconomic segregation within cities and their outlying areas plays an even greater role in limiting the ability of low-income Americans to rise than was previously thought. Many low-income Americans face commute times measured in hours, not minutes. Public policy can shorten the distance between working-class neighborhoods and employment centers by shortening commute times for low-income workers.

In its cheapest incarnation, this would involve extra buses that run nonstop from low-income neighborhoods to employment centers, both in city centers and in suburbs. And of course, more money for better roads, bridges, and tunnels would shorten commute times for everyone, including the working poor.

Pethokoukis, Economics, U.S. Economy

Will 2014 be the best year for the US economy since 2005?

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The US economy has not grown at 3% or faster, as measured by the Commerce Department, since 2005 when it grew at 3.4%. Here are the highlights of why Goldman Sachs thinks 2014 will be a year of acceleration:

1. The current level of housing starts stands well below our estimate of underlying demand. With vacancy rates now much lower, we expect residential construction to recover much further in coming years.

2. The debt-to-income level has fallen substantially. While it is difficult to foresee where debt levels will eventually settle, they now appear to be in line with the historical trend—and the ratio of household debt service to income is now historically low. Partly as a result, we expect the personal saving rate to edge down gradually further, which should deliver a modest boost to the growth rate of consumption relative to that of income.

3. Growth conditions have normalized globally, and we expect a further boost next year from the softening of fiscal drag abroad.

4. The fiscal drag should abate sharply in 2014.

In our view, the gradual lifting of these pressures on aggregate demand—and in particular the decline in fiscal drag next year—is likely to boost the growth rate of real GDP from the 2¼% pace of the last five years to a 3%-3½% pace over the next year.

As a counter, Barclays is less enthusiastic:

Looking ahead to 2014, we see real GDP growth picking up to 2.4%. This is partly because we project a lesser pace of government spending decline, as spending growth at the state and local level should continue to normalize, and there are no major additional sequester cuts at the federal level.

In addition, we look for stronger growth in real consumer spending, which we see improving to 2.3%, up from 1.9% in 2013. One reason is that real disposable income growth should be stronger, as it was held back significantly in 2013 by the tax increases at the start of the year and there are no major federal tax increases set to occur in 2014. In addition, positive wealth effects, especially those resulting from stock market gains, look set to provide a larger boost to consumer spending growth next year.

What could go wrong? Barclays also points to the possibility of “quicker-than-expected tapering by the Fed results in renewed financial market volatility. In turn, this could undermine business and consumer confidence, as well as generating renewed spillovers to international capital markets, resulting in downside risks.”

 

Economics, Health Care, Pethokoukis

Study: No, Obamacare isn’t yet responsible for the decline in healthcare cost growth

"Is This Time Different?The Slowdown in Healthcare Spending" by
Amitabh Chandra, Jonathan Holmes, and Jonathan Skinner

"Is This Time Different?The Slowdown in Healthcare Spending" by
Amitabh Chandra, Jonathan Holmes, and Jonathan Skinner

Is This Time Different? The Slowdown in Healthcare Spending by Amitabh Chandra, Jonathan Holmes, and Jonathan Skinner:

Why have health care costs moderated in the last decade? Some have suggested the Great Recession alone was the cause, but health expenditure growth in the depths of the recession was nearly identical to growth prior to the recession. Nor can the Affordable Care Act (ACA) can take credit, since the slowdown began prior to its implementation.

Instead, we identify three primary causes of the slowdown: the rise in high-deductible insurance plans, state-level efforts to control Medicaid costs, and a general slowdown in the diffusion of new technology, particularly in the Medicare population.

A more difficult question is: Will this slowdown continue? Here we are more pessimistic, and not entirely because a similar (and temporary) slowdown occurred in the early 1990s. The primary determinant of long-term growth is the continued development of expensive technology, and there is little evidence of a permanent slowdown in the technology pipeline. Proton beam accelerators are on target to double between 2010 and 2014, while the market for heart-assist devices (costing more than $300,000) is projected to grow rapidly.

Now the researchers add that accountable care organizations and “emboldened insurance companies” may be successful in limiting healthcare cost inflation going forward. But their best guess is that healthcare costs will grow at GDP plus 1.2% over the next two decades. That’s lower than previous estimates and half the historical growth rate, but “still on track to cause serious fiscal pain for taxpayers and workers who bear the costs of higher premiums.”

Oh, and here is an interesting bit on how paying for expensive technology that delivers little benefit drives cost growth: “For example, proton beam accelerators that cost hundreds of millions of dollars to install, have no established benefits to  patients over traditional treatment options, are expected to more than double in number between 2010 and 2014.”

Update: Here is the part of the report that directly deals with the Obamacare issue:

One explanation for the decline in health care spending growth, popular among Democrats, is the implementation (or anticipation of the implementation) of the Affordable Care Act (ACA) of 2010 (Unger, 2013), with David Cutler (2013) concluding that “…the ACA is a significant part of the reason” for the downturn, and Council of Economic Advisors stating that ‘the available evidence suggests that the ACA is contributing to these trends’ (CEA, 2013).

The problem with this explanation is thus far, cost-saving effects of the ACA have been mixed. Some characteristics of the ACA increase costs, such as the extension of insurance coverage to dependents up to age 26. One accountable care organization (ACO) pilot reduced costs by less than 2 percent (Colla et al., 2012), although a private Massachusetts initiative was able to save substantially more (McWilliams, et al., 2013; Song et al., 2012).

Most importantly, the cost-saving components of the ACA are not yet fully implemented, and thus cannot explain why health care cost growth began to moderate in 2006, when Barack Obama was still a senator from Illinois.

However, two other features of the ACA may have made a difference a few years after the start of the slowdown. The first is rule changes in Medicare that were phased-in starting in 2010, such as lower payments to Medicare Advantage plans and other providers ($17 billion over three years) as well as reduced payments to hospitals with poor quality measures ($230- $280 million per year starting in 2012). These changes may have reduced national spending growth by 0.2 percentage points in the past 3 years (CEA, 2013). Furthermore, there are spillover effects of reductions in Medicare payments rates onto commercial plans—as Medicare rates change, commercial rates change in the same direction (Clemens and Gottlieb, 2013; White, 2013). While the magnitude of these effects is still debated, payment reductions in Medicare could have been mirrored by payment reduction in private plans, with current estimates suggesting dollar-for-dollar reduction spillovers.

The second is anticipatory effects among providers and insurers who are preparing for competition through the new health exchanges and alternative payments models. While this is possible—as the private Massachusetts initiative indicates—we don’t see direct and widespread evidence of cost-saving strategies being adopted by providers, nor do we see evidence from Massachusetts that private health care costs are growing more slowly there than in the rest of the country.

Pethokoukis, Economics, U.S. Economy

Why has the US recovery been so slow? This chart suggests it’s not because of Obamanomics

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The US economy, as conventionally measured by GDP, has grown just over 2% annually over the course of the current recovery. That’s glacially and painfully slow by historic standards (although it might look pretty good if you are Europe.). At the same time, the share of Americans with a job has barely improved from its post-Great Recession low. Goldman Sachs offers its explanation for the Not-So-Great-Recovery:

The reasons for the long-lasting weakness resemble those of many other post-crisis episodes. They include excess supply of houses, pressure to deleverage consumer balance sheets, the global nature of the crisis, and the cyclically premature turn to fiscal retrenchment.

Indeed, these reasons are very much in keeping with the Reinhart-Rogoff thesis on how economies recover after a financial crisis. As an addendum I would point to The Recovery of Housing and the End of the Slow Recovery? by former Fed economist Michael Bordo, which finds the slow recovery largely attributable to the unprecedented housing bust that accompanied the financial crisis. But here is the really interesting bit from Goldman, a conclusion reflected in the above chart:

It would have taken a deeply negative real interest rate—or more broadly, a much bigger boost from conventional and unconventional monetary policy than the Fed managed to deliver—to offset these drags and return the economy more quickly to full employment. This is illustrated in simple terms in our GS Taylor rule in Exhibit 4, which suggests that the “appropriate” funds rate has been negative since 2008.

1. Yes — as market monetarists have been saying — had the Bernanke Fed been more aggressive the past five years, not only might the US have avoided as severe a downturn in 2008, but the recovery would have been far more vigorous. And had the Fed early on firmly committed to boosting total spending in the economy, it may have still done a quantitative easing program, but the bond buys may not have been as a large. In short, the US has experienced a minor replay of the Fed’s monetary mistakes during 1930s.

2. And if you accept the above thesis, it means you reject — as Goldman Sachs explicitly does — the “secular stagantion” thesis recently put forward by Larry Summers, which argued there are some deep seated problems — such as, perhaps, too little innovation, bad demographics — with the economy. Goldman sees the problems as more cyclical than secular. The Secular Stagnationists, by the way, seem to be arguing for a lot more government spending to boost demand.

3. So what role does Obamanomics play in all this? It certainly hasn’t been a plus.The 2013 tax hikes hurt growth (far more than the sequester), the stimulus could have been better designed, and policy uncertainty — whether about debt or Obamacare — may have some drag on growth. But what President Obama did or did not do with fiscal policy would seem to have been less important that (a) the nature of the recession and (b) the Fed’s response. Still it’s worth mentioning that over the longer-term, Obama’s push for higher tax rates and a more regulated economy and his decision to leaved entitlements unreformed hurts the US economy’s growth potential.

Pethokoukis

Here’s the can’t miss formula I used to nail the November jobs report

The US economy added 203,000 net new payrolls last month. And before the report came out at 8:30 ET this morning from the BLS, here was my official guess:

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Pretty good, right? Basically, I nailed it. Did I get lucky? Nope. It was the math and the science. But I am not greedy. Here is my can’t miss formula for predicting the monthly jobs numbers:

1. Find the increase in nominal blended GDP (gross domestic product) and GDI (gross domestic income) the past two months.

2. Multiply that number by the monthly US trade deficit.

3. Divide that total by the quarterly increase in S&P 500 domestic profits.

3. Divided that result by Peyton Manning’s current QB rating.

4. From that result, subtract the total number of Obamacare signups (both state and federal exchanges).

5. Multiply that total by the number of NBA playoff games Derrick Rose is likely to play this year.

6. Add that result to the average of the past three monthly jobs reports.

And there you go! My prediction for 202,000 jobs!

Pethokoukis, Economics, U.S. Economy

A ‘New Normal’ November jobs report: The long emergency for US workers continues

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If the US labor market were back at pre-Great Recession levels, this would have been a pretty decent employment report. Net new jobs were up 203,000 last month with gains broadly based, bringing lower unemployment and underemployment rates. November also saw a nice bump in hours worked, which when combined with an increase in average hourly earnings, points to “a robust advance in wage income,” according to RDQ Economics. The firm also adds, “The evidence from the labor market shows that the momentum in the economy was sustained through the period of the government shutdown.” Good stuff all.

But here’s your trouble:

1. There are still 1.1 million fewer employed Americans today than right before the recession started, despite a potential labor force that’s 14 million larger. And there are 3.6 million fewer full-time workers than back in 2007.

2. The employment rate, the share of Americans with a job, is 58.6% — exactly where it was in November 2009.

3. If the labor force participation rate were where it was a year ago, the jobless rate would be 7.9%, not 7% (and 11.3% if the LFPR were at prerecession levels, though closer to 9% if demographics-adjusted).

4. More than 4 million Americans remain out of work for 27 weeks or longer.

5. Overall, according to the Hamilton Project Jobs Gap calculator, it will take another five years to return to 2007 employment levels even at the improved job creation pace of the past four months.

Things could be worse, of course. If not for the Fed’s bond-buying program, tax hike-driven austerity may well have put the economy back into recession in 2013, sending unemployment back toward 10%. (For more: See the euro zone.) Yet the Long Emergency for workers is still in effect — particularly those who are lightly educated –even as inflation remains moribund. Of course this shouldn’t be surprising given an economy that’s growing around 2% right now.

Here’s hoping 2014 is better, a lot better.

Hamilton Project

Hamilton Project

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

Pethokoukis

Why there’s a good chance there will be another recession before the 2016 election

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As the handy chart from Hamilton Place Strategies notes, the average expansion since 1980 has been 72 months, while the current expansion is 53 months and counting. By that count, we’re closer to the end than the beginning, putting a downturn in the middle of 2015. I would think a recession capping off a weak recovery might have some political implications for the 2016 presidential race.

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

Economics, Health Care, Pethokoukis

Ba-bam! Here are 16 ways to reduce federal health spending

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From the CBO:

Most of the 16 options in this report would either decrease federal spending on health programs or increase revenues (or equivalently, reduce tax expenditures) as a result of changes in tax provisions related to health care. Some options would result in a reallocation of health care spending—from the federal government to businesses, households, or state governments, for example—and most would give parties other than the federal government stronger incentives to control costs while exposing them to more financial risk.

120513cbohealth2Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.