Sunday, October 26, 2014
Pethokoukis, Economics, U.S. Economy

How to save US workers from the robots: A Q&A with entrepreneur Ashwin Parameswaran

Image Credit: Shutterstock

Image Credit: Shutterstock

An important question and a vexing one: Why is the US recovery still so weak? Five years after the official end of the Great Recession, growth remains maddeningly subpar. Folks on the right like to talk about “uncertainty” stemming from President Obama’s economic policies, from Obamacare to environmental regulation to Dodd Frank. Folks on the left have latched onto a theory called “secular stagnation,” cooked up by former Obama White House economist Larry Summers, which see chronic inadequate demand  – partially driven by income inequality — as the big problem.

Blogger, ex-banker, and current entrepreneur Ashwin Parameswaran has an intriguing thesis of his own — much of it concerning automation –outlined in his marvelous essay “Technological Unemployment Amidst Stagnation.” This alternate explanation also attempts to explain why “the “benefits of the current economic recovery have flown disproportionately towards corporate profits with wages and employment lagging far behind.” In this episode of the Ricochet Money and Politics Podcast, I chat with Parameswaran about his ideas. Here are some edited highlights from our chat:

                                                                                                                         

Let’s start by laying out your theory. and then I’m going to try to push back a bit on it.

There are more than two ways of looking at what’s wrong with the economy right now, and there are a lot of contradictory positions. One of the contradictions that a lot of people don’t seem to focus on is the fact that we seem to be worried about technological unemployment and that robots are going to make human beings obsolete. And at the same time, we seem to have this idea that we are in the midst of this great stagnation [as seen in] Tyler Cowen’s great book on this topic.

This essay in particular and a lot of my other work is trying to argue that these two are not opposing phenomena. They both can happen at the same time. The primary argument is really that we are getting a lot of process innovation which means that we are making things that we consume today in a more efficient and cheaper manner which means less manpower. That leads to a lot of technological unemployment. But we are not getting enough product innovation. We are not getting enough disruptive innovation, which means we are not making new products that people consume.

The combination of these two things means that we can have long-run stagnation, but at the same time we get technological unemployment. It’s easy to argue why we have process innovation and technological unemployment because of it. But the larger question is why we don’t have enough disruptive innovation.

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Economics, Monetary Policy, Pethokoukis

Economists overwhelmingly reject GOP’s Fed reform plan. But should that end the argument?

Image Credit: Shutterstock

Image Credit: Shutterstock

The GOP has a big idea on how to reform monetary policy: Get Congress more involved. Economists — and this is not surprising — think that idea is not so good:

Chicago Booth, IGM Forum

Chicago Booth, IGM Forum

As you can see, 90% of the economists surveyed — when ranked by confidence level — disagree with the GOP plan. So, yeah. Kind of overwhelming. And the reason this result is not surprising is that intuition, historical example, and research suggest that without independence, central banks will submit to their political overlords and run the printing presses.

That point of view is reflected in some of the comments from the economists, such as this one from the University of Chicago’s Nancy Stokey: “A central bank should be independent. Look at Argentina as an example of where political oversight leads.” Berkeley’s Carl Shapiro offers the “If it ain’t broke, don’t fix it” defense of the status quo: “The Fed has served Americans very well over many decades; meddling by politicians would worsen the performance of the Fed and the economy.”

But what has been the American experience? And what lessons can be drawn? While conservatives often point to the Great Inflation of the 1970s as an example of the Fed gone wild, both the Great Depression and Great Recession are examples of the Fed crashing the economy by being too tight. Taken together, do they really suggest a Fed that has “served Americans very well over many decades”? Highly debatable, at least.

Perhaps what those examples suggest is that discretionary monetary policy really is problematic. There should not just be a rule, but the correct rule that is clear on what the goal is. As Stanford’s Robert Hall, who disagrees with the GOP idea, states: “Monetary policy should be based on a target for inflation and unemployment (such as difference between the two) not on an instrument rule.”

My preference is for nominal GDP level targeting. Here is Scott Sumner:

My suggestion is that we end the independence of central banks, but replace it with something else–an explicit, legal, central bank target.  Let’s suppose the Congress instructed the Fed to target 2% inflation.  Now assume Congress wants more growth because we are in a recession, but because inflation is currently 2% the Fed doesn’t want to ease.  The fiscal authorities could instruct the central bank to aim for 2% inflation in the long run, but allow a bit more inflation during the current recession, at the expense of a bit less that 2% inflation during the subsequent years.  In other words the Fed would still have some discretion, even though their long-run mandate would be 2% inflation.  They would have the legal authority to tell the fiscal authorities “OK, we’ll provide a bit more inflation right now, as long as you understand that it is being “borrowed” from future inflation.  We intend to run below 2% inflation during the next boom.”  This would allow for some fruitful policy coordination, while still protecting the central bank from pressure to alter its long run inflation target.

You might be thinking; “Lower than average inflation during booms and higher than average inflation during recessions.  What a great idea for macroeconomic stabilization.  How can we formulate that into a simple and easy to understand nominal target?”

Seriously, Congress needs to decide on some sort of explicit policy goal for aggregate demand.  Whether it be inflation, the price level, or NGDP, the point is to have clearly spelled out goals so that they and the Fed are pulling in the same direction.  Indeed if the goals are spelled out, there is no reason why Congress should ever have to do any pulling.

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

 

Pethokoukis, Economics, U.S. Economy

Surprise? Not really: Nations with more generous welfare states are hurt by higher immigration

Image Credit: Shutterstock

Image Credit: Shutterstock

The Economist highlights the key takeaways from a new study of the economic impact of immigration on 20 nations, “Immigration, Search, and Redistribution: A Quantitative Assessment of Native Welfare” by “Michele Battisti, Gabriel Felbermayr, Giovanni Peri, and Panu Poutvaara.”

First, simply shutting the doors would make the native population worse off in 19 of 20 countries. Second, most countries should allow more immigration. As for the US, “a one-percentage point increase in the proportion of immigrants in the population made the native-born 0.05% better off.” (As a side note, some advanced economies have a far greater share of the population that is foreign born, including Canada, Australia, and Switzerland.) Now the third takeaway is the perhaps the most significant:

Life can be tough for immigrants in America … And if you can’t find work, don’t expect the taxpayer to bail you out. Unlike in some European countries, it is extremely hard for an able-bodied immigrant to live off the state. A law passed in 1996 explicitly bars most immigrants, even those with legal status, from receiving almost any federal benefits. That is one reason why America absorbs immigrants better than many other rich countries. … The opposite was true in some countries with generous or ill-designed welfare states, however. A one-point rise in immigration made the native-born slightly worse off in Austria, Belgium, Germany, Luxembourg, the Netherlands, Sweden and Switzerland. In Belgium, immigrants who lose jobs can receive almost two-thirds of their most recent wage in state benefits, which must make the hunt for a new job less urgent.

This would seem to be an important finding! And it is very much in the spirit of what Milton Friedman once said about immigration and welfare state:

Why is it that free immigration was a good thing before 1914 and free immigration is a bad thing today? Well, there is a sense in which that answer is right. There’s a sense in which free immigration, in the same sense as we had it before 1914 is not possible today. Why not?

Because it is one thing to have free immigration to jobs. It is another thing to have free immigration to welfare. And you cannot have both. If you have a welfare state, if you have a state in which every resident is promises a certain minimal level of income, or a minimum level of subsistence, regardless of whether he works or not, produces it or not. Then it really is an impossible thing.

Well, not impossible. But a stingier welfare state does, apparently, help the absorption process, according to this study. Also: the tiny gains from immigration would also suggest more attention needs to paid to composition.

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

Pethokoukis, Economics, U.S. Economy

Remember, 2014 was supposed to be, finally (!), the Year of Acceleration

071514gdp

An historically bad winter may have frozen the economy last winter, but why was there no equally significant spring thaw? Real GDP decreased at an annual rate of 2.9% — the deepest mid-expansion decline in 70 years — but hopes for a strong second-quarter rebound are fading. The other day I noted that the Atlanta Fed’s real-time GDP forecasting model, GDPNow, was predicting 2.6% RGDP growth in 2Q. And here is how JPMorgan factors in the new retail sales numbers:

Retail sales increased 0.2% in June, which was below expectations, nonetheless the important details used to track real consumer spending were actually better than anticipated. …  Real consumer spending in Q2, which was previously tracking 1.5% annual growth, is now coming in around 1.8%. We continue to project real Q2 GDP growth at 2.5%; prior to today’s number we were tracking about a tenth light, and we are now tracking about a tenth firm. Even with today’s number, consumer spending can’t be described as roaring back from Q1 weakness, but at least it looks like it is returning to a moderate pace of expansion.

Along the same lines, this is what the CEO of discount retailer Family Dollar had to say in his recent earnings call with analysts:

Our observations are it’s still pretty tough out there. The low-end consumer has not benefited in this recovery at all, in fact, I think have slipped further back. Unemployment trends remain high. The government cutbacks continue. There’s quite a bit of health care uncertainty. Coming from this unbelievably cold winter, heating prices, heating oil and gas prices are moving upward. So there is — it’s a tough playing field out there.”

Of course, maybe the rebound will be more apparent in the second half. Certainly some economists argue that. But getting back to JPM note from economist Michael Feroli, “a moderate pace of expansion” would be OK if we were not still trying to close the “growth gap” caused by the Great Recession and Not-So-Great Recovery. As economist David Beckworth notes in a recent WaPo piece: ” … the CBO estimates that GDP is 5 percent below potential, and, even worse, 10 percent below its pre-crisis trend. We’ve only recently made up for the 8 million jobs we lost during the crisis, but we’re still far short of how many we need to keep up with all the population growth the past five years.”

Beckworth goes to discount the current left-wing Unified Theory of Everything, secular stagnation: “A better story is that the economy got hit by a once-in-three-generations crisis that’s taken awhile—too long, really—to overcome. But in the long run, the slump will be dead.” To that explanation, though, I would add a worrisome supply-side story that predates the Great Recession, which could be damaging US growth potential.

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

Economics, Pethokoukis

Is Obama’s focus on income inequality coming back to bite Democrats?

071414rcp

National Journal reporter Alex Roarty concludes that it’s not the economy, stupid — at least when it comes to the 2014 midterms. Roarty:

Even if job gains do spike—and there’s plenty of reluctance to predict an accelerating recovery after years of stop-and-start growth—it’s unlikely voters will feel demonstrably better about the economy in time for November. Ultimately, how voters feel about the economy and their own financial situation is what matters when they step in the polling booth—not abstract economic data.

But there’s another, more surprising reason a late-developing recovery wouldn’t help Democrats. A plethora of political-science research suggests the economy, except in extreme circumstances, doesn’t matter much in midterm elections anyway. A boost in growth certainly wouldn’t hurt, but its effect on candidacies would be indirect and minor.

In other words, a second-half acceleration won’t be the thing that keeps the Senate in Dem hands. But Roarty may have buried the lede. Deeper in the piece, a Democratic pollster offers a different explanation why a better economy won’t help incumbents:

“It’s unlikely that even if you have sustained job growth that you’re going to see a big difference in the perception of the economy,” said Jeff Liszt, a pollster who, among other races, is working with Sen. Kay Hagan’s reelection campaign in North Carolina. “And people may believe it’s getting better, but not in any way that’s helping them. Or even to extent it’s helping them, they may feel like they’re getting crumbs and others are getting the main benefit.”

That quote immediately brought to mind the “keeping up with the Joneses” effect found in the economic literature where individual happiness, at least for the middle-class, depends on relative rather than absolute wealth. Therefore rising income inequality would keep the 99% miserable even with rising take-home pay. Now who has been banging the drum about inequality and how rich are gobbling up all the income gains? Democrats, mostly.

So aren’t the the inequality alarmists on the left actually undercutting themselves by reinforcing perceptions that the Obama recovery is either (a) only helping a favored few or (b) not helping the broad middle class as much as if gains from growth were more evenly distributed. So even if the economy picks up steam and incomes rise, voters may not get much happier since they will think things would be even better if not for income inequality — a natural conclusion based on what the Obamacrats have been saying. They will think their relative position hasn’t improved much since they are not keeping up with the 1% Joneses. And are voters likely to blame Republicans for this state of affairs, given that this is Year Six of the Obama presidency and the GOP only holds the House?

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

Pethokoukis, Economics, U.S. Economy

The weak, weak US economic ‘recovery,’ in 7 charts

Image Credit: shutterstock

Image Credit: shutterstock

The key lines in the charts below are the red ones (tracking the post-Great Recession economy) and the black ones (the average of all postwar recessions). When AEI’s John Makin looks at them, he arrives at one big conclusion:

The recent drop in US unemployment to 6.1 percent has raised hopes for a stronger economy, even though analysis of the major features of the US economy since 2008-regarding growth, employment, wages, and investment-shows that all are dismal, notwithstanding the recent modest pickup in monthly employment increases. America needs a stronger recovery.

Total Nonfarm Employees, from John Makin's "Time to shift to the supply side"

Real GDP Growth, from John Makin's "Time to shift to the supply side"

Year-over-Year Change in Total Private Average Hourly Earnings of Production and Nonsupervisory Employees, from John Makin's "Time to shift to the supply side"

Year-over-Year Change in Real Personal Consumption Expenditures, from John Makin's "Time to shift to the supply side"

Year-over-Year Change in Real Private Nonresidential Fixed Investment, from John Makin's "Time to shift to the supply side"

Civilian Unemployment Rate, from John Makin's "Time to shift to the supply side"

Nonfarm Business Sector Output per Person, from John Makin's "Time to shift to the supply side"

And Makin offers these pro-growth, supply-side policy fixes:

Three specific measures to boost capital spending are: enactment of accelerated-depreciation provisions and investment-tax credits; a sharp reduction in the corporate tax rate from 35 to 15 percent to, among other things, induce corporations to repatriate the $1.95 trillion of accumulated profits being held abroad to avoid the huge tax bill that would result if those corporations brought those earnings home; and, finally, a concerted White House-led effort to set a clear, less-burdensome path for health care and other regulatory measures as a means to reduce investment-dampening uncertainty. 

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

Pethokoukis, Economics, U.S. Economy

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

071114gdpnow2

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:

071114gdpnow

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.

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