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

Study: A fourth of public school spending goes to salaries and benefits of nonteachers

Thomas B. Fordham Institute

Thomas B. Fordham Institute

A new Thomas B. Fordham Institute study finds that the number of non-teaching staff in the United States has grown by 130% since 1970. These three millions employers now account for half of the public school workforce with their salaries and benefits absorbing one-quarter of current education spending. The largest single position is now that of “teacher aide,” which was pretty much nonexistent in 1970.

What’s going on? From an analysis by Chester Finn:

We don’t know nearly as much as we’d like on this topic, but it’s not a total mystery. The advent and expansion of special education, for example, led to substantial demand for classroom aides and specialists to address the needs of youngsters with disabilities. Broadening school duties to include more food service, health care, and sundry other responsibilities accounts for still more. But such additions to the obligations of schools are not peculiar to the United States, and they certainly cannot explain big staffing differences from place to place within our country

Our sense is that these millions of people have quietly accumulated over the years as districts simply added employees in response to sundry needs, demands, and pressures—including state and federal mandates and funding streams—without carefully examining the decisions they were making or considering possible tradeoffs and alternatives. This was the path of least resistance and, at a time of rising budgets, was viable even if imprudent.

But it’s no longer sustainable in the public sector any more than the private. Observe how private firms go about reducing costs, boosting productivity, enhancing organizational efficiency, and increasing profitability: they almost always start with staffing. The Pentagon is putting itself through similar self-scrutiny. So is the U.S. Postal Service.

One could list plenty more examples. Changing staff—and staff-related budgets—is never easy, especially in the public sector, due to politics, contracts, and civil-service rules. But that’s what leaders are for: to overcome obliviousness, work through politics, catalyze rethinking, and rearrange practices that no longer deliver the required results at an affordable cost.

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

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

What we’re reading today: August 18, 2014

Image Credit: shutterstock

Image Credit: shutterstock

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

1.) Did you know: how fast you drive reveals where you drive. Learn more from IEEE on the topic here.

2.) According to The New York Times, the Workforce Investment Act leaves many jobless and in debt.

3.) From Education Next comes a piece on “the hidden half: school employees who don’t teach.” It seems that “the number of non-teachers on U.S. school payrolls has soared over the past fifty years, far more rapidly than the rise in teachers. And the amount of money in district budgets consumed by their salaries and benefits has grown apace for at least the last twenty years.”

4.) MIT Technology Review checks out robots’ effect on jobs, asking if they are “mainly putting people out of work.” Here’s one of their graphs.

MIT Technology Review chart on human workers and robots

5.) Austin Frakt comments, “Medicare advantage is more expensive, but it may be worth it.”

6.) L.A.’s infrastructure crumbles as public-employee compensation balloons, says City Journal.

7.) Firms weigh in on the ACA in August business surveys from the New York Fed: “Nearly 60 percent of service firms and nearly 75 percent of manufacturers said that the ACA had increased health benefit costs per worker at least a little; even larger proportions said it would raise costs next year.”

8.) At the National Bureau of Economic Research, Peter Cappelli writes on “skill gaps, skill shortages and skill mismatches: evidence for the US.”

9.) “A milestone is expected to be reached this fall when minorities outnumber whites among the nation’s public school students for the first time, U.S. Department of Education projections show,” according to Pew.

10.) From The New York Times: More jobs are open, but employers are slow in filling them.

NYTimes chart on available jobs and hiring numbers

Follow AEIdeas on Twitter at @AEIdeas.

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

Look out, America, here’s how Europe’s debt crisis might reignite

Image Credit: MPD01605 (Flickr) CC

Image Credit: MPD01605 (Flickr) CC

I would be more confident in the US economy’s ability to withstand a new euro fiasco if, say, a nasty bout of weather hadn’t contributed to one of the worst non-recession GDP quarters since WW II. History suggests a 2%-growth economy is a fragile economy. And newspaper headlines suggest the eurozone is still stuck in a long recession or depression, which threatens to eventually reignite the region’s debt crisis. I recently wrote about how uncertainty from the 2011 crisis may have “led to lower growth in economic activity and employment” during our recovery. Back then, by the way, the IMF predicted that a disorderly sovereign default would cause a global recession, including a 2-3 percentage point drop in annual US GDP growth over two years and at least two percentage point rise in the unemployment rate.

Of course, the crisis subsided when European Central Bank boss Mario Draghi vowed to do “whatever it takes” to preserve the euro. What the ECB should have also done is embark upon large-scale asset purchases along with, ideally, establishing a nominal GDP level target. That was then. What should the ECB do now? The FT’s Wolfgang Münchau gives his advice:

The ECB should start by ditching the inflation target and replacing it with a price-level target. This would signal to investors that if inflation is too low in one year, the ECB will make up for it by overshooting in the opposite direction the next. The ECB should starting buying equities and junk bonds. It should subsidise mortgages and consumer credit. It could fund an investment programme in transport infrastructure, energy networks and scientific research, by buying debt to fund such projects at zero interest rates. All these measures would be effective. Most would be illegal.

So what will the ECB likely do? Again, Münchau:

My guess is that the ECB will not do any of these things. It will continue blaming eurozone governments for not implementing structural reforms. Eventually, it will adopt a programme of asset purchases that is too small, which it will abandon prematurely at the first sign of recovery. The result is that the eurozone will end up looking like Japan, but with one difference. Countries whose policy goes off track have nowhere to go. The member states of a monetary union have alternatives. By failing to deliver on its inflation target, the ECB could give member countries a good reason to leave the eurozone: they could have a better central bank. My advice to the ECB: do not let that happen.

No wonder AEI’s Desmond Lachman suggests “we should start bracing ourselves for another, and possibly yet more virulent, round of the European sovereign debt crisis once the Federal Reserve starts to raise interest rates next year.” Hmm. Perhaps now is not a bad time to revisit the famous memo by Citi economist Willem Buiter on the global economic impact of a euro breakup. (Spoiler: He uses words and phrases such as “collapse,” “pandemonium,” “global depression,” and “civil war.”)

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

Economics, Pethokoukis, U.S. Economy

Here are jobs that are most and least likely to be taken by robots

Image Credit: shutterstock

Image Credit: shutterstock

So what jobs are safe from automation? Well, those with lots of routine tasks that can be broken down into discrete steps are probably in great danger. Economists David Autor and David Dorn tried to quantify jobs by their routine-ness. The jobs most at risk — proofreaders, bank tellers, secretaries — seem obvious. Pew summarizes the jobs which might stick around for the humans:

081514robots2

But there is a problem, as Pew’s Drew DeSilver notes. There are jobs on the “safe” list that really don’t seem to safe, such as bus drivers. (I would also put airline pilots, teachers, train engineers, and even actors in that group.) DeSilver: “But as computing devices have become both more powerful and ever-more woven into the fabric of our lives, they’ve steadily moved into tasks that only a few years ago would have been thought safely in the ‘humans only’ zone.”  This is a point that MIT’s Erik Brynjolfsson and Andrew McAfee have also made.

Another way of evaluating occupations comes from Oxford University researchers who posit that more a job involves (a) perception and manipulation,(b) creative intelligence, and (c) social intelligence the less like that it will be automated either by robots or software. These are the guys who found that 47% of US jobs are in the high-risk category.

081514robots3

Of course as old jobs disappear due to technology, new jobs will be created. But will there be net jobs gains, and what will those jobs pay? Will only a tiny sliver of the tech savvy really benefit? AEI’s Michael Strain:

If income for those at the top increases massively — those who can use the machines to increase their productivity, or those who own the machines — while good employment opportunities erode for the majority of Americans, it’s unclear whether society be able to function. Extreme inequality could conceivably lead to riots in the streets and political revolution. We’ve never yet gone so far down this road, so nobody knows what will happen.

And if the market can’t sustain adequate wages for a large share of the population, should the government step in with large wage subsidies to fill the gap? It could be necessary to keep the peace. We may end up in a world where the federal government pays over half of the salary for workers in some occupations. Is that political economy sustainable?

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

Economics, Pethokoukis, U.S. Economy

Study: Economic uncertainty has cost the US a million jobs since 2010

081514uncertainty

Usually talk about the impact of “uncertainty” on the US economy refers to supposed business fears about debt, tax hikes, and Obamacare. But the new study “The Asymmetric Effects of Uncertainty” by Kansas City Fed economist Andrew Foerster looks at heightened uncertainty — as measured by the Chicago Board Options Exchange Volatility Index, or VIX — from three specific events: the May 2010 European sovereign debt crisis, the August 2011 US debt ceiling crisis, and the June 2013 confusion about the Fed’s plan to wind down its bond buying program.

Foerster finds that uncertainty generated by those key events had a big negative impact on economic growth and job creation:

High uncertainty during the current recovery has led to a relatively modest recovery by historical standards. Economic theory suggests that when uncertainty increases, firms and consumers postpone their decisions, lowering economic activity. When uncertainty decreases, economic activity may rebound, but not necessarily immediately. The empirical evidence presented in this article suggests that uncertainty has asymmetric effects and that decreases in uncertainty do not necessarily offset increases. As a result, spikes in uncertainty may produce persis tent declines in economic activity.

Uncertainty’s asymmetric effects imply that the large VIX increases associated with the European sovereign debt crisis and the U.S. debt ceiling crisis—and, to a lesser extent, the taper tantrum—led to lower growth in economic activity and employment during the recovery. Combined, these three episodes resulted in a substantial cumulative loss in employment.

Foerster estimates US employment at the end of 2013 was nearly 1 million jobs lower than it would be other wise. Less uncertainty, as measured by a counterfactual VIX, have meant the following:

 … 400,000 more people would have been employed following the European sovereign debt crisis, 600,000 more after the U.S. debt ceiling crisis, and 800,000 more by the end of 2013. This cumulative deficit at the end of 2013 is equivalent to about 16,000 fewer jobs gained per month from 2010 to 2013 because of these three uncertainty episodes.

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

Economics, Pethokoukis, U.S. Economy

About that second-half economic recovery …

Here we go again. Barclays:

In the US, core retail sales increased less than expected in July, and sales in previous months  were revised down. Combined with softer inventory data, these numbers lowered our  tracking estimate for Q2 14 to 3.8%, below the advance estimate of 4.0%, while that for Q3  14 now stands at 2.4%, a bit below our 2.5% forecast.

To us, the more important message  is that the data suggest that the consensus forecast of 3.0% or better H2 14 real GDP  growth in the US may be too optimistic, echoing the trend of the past several years. 

Don’t tell the White House, which has begun to trumpet the economy’s improvement. Looking like a sub-2% GDP year if Barclays is correct …

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

Economics, Pethokoukis

Economist: ‘Americans have lost a lot of confidence and replaced it with fear’

Image Credit: shutterstock

Image Credit: shutterstock

Recall the Wall Street Journal/NBC News poll  from last week that found — five years into an economic recovery — that (a) 49% of Americans think we are still in a recession, (b) an all-time higher of 76% “lack confidence that their children’s generation will have a better life than they do, and (c) 71% think the country is on the wrong track, up 8 percentage points from June.

Which brings us to today’s new report on consumer confidence from the Reuters/University of Michigan. Its sentiment index slipped 2.6 points in mid-August to 79.2, the lowest reading since November 2013. But what really got the attention of economists was the expectations bit. Kind of sour, as the JPMorgan chart below shows:

081514expect

081514expect2

Economist Robert Brusca offers some worthwhile perspective:

The expectations index fell sharply this month and sits in the 16th percentile of its historic queue. It is weaker only about 16% of the time-repeat WEAKER only 16% of the time. … Expected business conditions are worse only about 11% of the time. That’s frightening.

 So we have extraordinary weakness in expectations and current conditions are only slowly drifting higher. It’s hard to see this is a formula for expedited growth in the second half of the year. Retail sales disappoint and yet we continue to hear optimism about how that’s temporary. Job growth has picked up to some extent, but that elevated pace cooled last month. And wages really do not have much upward momentum. There’s been enough of an uptick in inflation to erode the small nominal wage gains that there were.

 On top of all this we have very uneven geopolitical circumstances, the US is increasing its involvement in Iraq, and there is potential confrontation with the Russians at the Ukraine border.

While current conditions are improving they are grinding higher an extremely slow pace. The real problem is with expectations. People are aware of the Social Security problems that this country faces. People are worried about their pensions. Even if they have not been laid off they are concerned about the jobs because they see if they get lose their jobs that there really are not a lot of good possibilities out there.

Americans have lost a lot of confidence and replaced it with fear and concern that if something goes wrong things will get even worse. People no longer have that feeling that if they fall down they can pick themselves back up. And I think that’s expressed in the expectation variables. The economy needs to put in stronger numbers for people to feel that they are on more solid ground. And it’s fair to say that the politician simply don’t get it and don’t accept the blame for their contribution to this difficult situation. I was not very optimistic about what the Michigan index would do this week. But the survey managed to come in bellow my expectations. It’s a very depressing report.

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

Pethokoukis

What the world looks like when America doesn’t lead

I don’t write much, if really at all, about foreign policy. But when I look around and see (a) a terrorist group — “a movement of a qualitatively higher order than al-Qaeda” — setting up “a new Afghanistan in the heart of the Middle East,” (b) mass slaughter in Syria, (c) a newly aggressive Russia on the move into Europe, (c) China growing more confrontational with its neighbors … well, it makes me think about a more inward-focused America and what that means globally.

To be specific, it makes me think about the 2008 alternative history/sci-fi book “Without Warning” by John Birmingham. The McGuffin is a mysterious, never-explained “energy wave” which disappears every human in the continental United States (except for a sliver in the northwest, including Seattle), southern Canada, and northern Mexico. To further up the ante, the energy wave strikes on the eve of the Iraq War in 2003. With America in chaos, its enemies strike. Iraq and Iran team up against coalition forces in Kuwait. And things only gets worse as geopolitical chaos spreads across the globe, including Israeli nuclear strikes against its enemies and nuclear war between India and Pakistan.

Anyway, this bit of sarcastic dialogue has stuck with me:

Think about what’s going to happen there now that the evil global overlord is no longer around to oppress everyone into behaving themselves. Think about what’s going to happen to the evil world financial system now that the planet’s greatest debtor nation has winked out of existence and won’t be meeting its loan repayments to anyone. Think about what happens when you take the lid off Pandora’s box and everything that we forgot about history comes spilling out to bite you in the ass. Do you know how unusual it is in human history for children to be able to grow up in a place like this?

Just a work of fiction, of course — but one that may have something insightful to say about a world where America leads from behind or maybe not at all.

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

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

Republicans are drawing all the wrong lessons from Europe’s depression

041714darda3

Tight money and fiscal austerity are a dreadful combination. One look at the ongoing depression in Europe is evidence of that. That should be the lesson which right-of-center policymakers take from the region’s economic catastrophe. Yes, Europe has a debt problem. The real problem, however, that sparked the debt crisis was a collapse in nominal GDP, which made dealing with that debt extraordinarily difficult. And for that, blame the European Central Bank.

As economist Michael Darda noted in a podcast with me, “Europe fell into a double-dip two-year recession starting in 2011 in large measure because the European Central Bank tightened policy two times that year.” That grave policy error is reflected in the above chart which contrasts US and European economic performance since those hikes.

So given that, I have to concede Paul Krugman pretty much nails it today:

European officials eagerly embraced now-discredited doctrines that allegedly justified fiscal austerity even in depressed economies (although America has de facto done a lot of austerity, too, thanks to the sequester and cuts at the state and local level). And the European Central Bank, or E.C.B., not only failed to match the Fed’s asset purchases, it actually raised interest rates back in 2011 to head off the imaginary risk of inflation.

The E.C.B. reversed course when Europe slid back into recession, and, as I’ve already mentioned, under Mario Draghi’s leadership, it did a lot to alleviate the European debt crisis. But this wasn’t enough. The European economy did start growing again last year, but not enough to make more than a small dent in the unemployment rate.

And now growth has stalled, while inflation has fallen far below the E.C.B.’s target of 2 percent, and prices are actually falling in debtor nations. It’s really a dismal picture. Mr. Draghi & Co. need to do whatever they can to try to turn things around, but given the political and institutional constraints they face, Europe will arguably be lucky if all it experiences is one lost decade.

When Republicans look at Europe, if all they see are the dangers of high taxes, over regulation, and too much debt — which are real problems holding back potential GDP — they are really missing the story. (Amazing that the US recovery has been so much stronger despite tax hikes, rising debt, Obamacare, Dodd Frank, the EPA … . Credit the Fed.) Krugman is also right that given the fragile nature of the US recovery, the Fed shouldn’t be in much of a hurry to jack up interest rates. Thankfully Fed boss Janet Yellen seems to realize this and won’t mimic the ECB’s mistake. Hopefully.

Here is a moderately optimistic take on Europe, and it’s still pretty discouraging. From IHS Global:

Nevertheless, the Eurozone still faces significant growth constraints. Fiscal policy is still generally restrictive, despite increased flexibility over countries’ fiscal targets, and tight credit conditions persist in several countries amid still significant banking sector problems. Unemployment remains elevated (the Eurozone unemployment rate was still up at 11.5% in June) and is unlikely to come down substantially any time soon, while consumer purchasing power is limited by low earnings growth. … On balance, we believe that the Eurozone recovery will resume in the second half of 2014. Consequently, in our yet-to-be-released August forecast we project Eurozone GDP to grow by 0.9%/1.0% in 2014, down from 1.1% reported in the July forecast after the weaker-than-expected second-quarter GDP developments. A gradual continuation of the improving trend from the second half of 2014 will result in Eurozone GDP growth picking up to around 1.5% in 2015.

Indeed, Europe’s continuing problems post a threat to strength of the US recovery.  As AEI’s Desmond Lachman wrote yesterday: “With inflation now running at around one quarter of the ECB’s inflation target and with large gaps still characterizing the European labor and product markets, it is difficult to understand why the ECB is delaying a more aggressive and proactive response to Europe’s very real deflation risk.” And deflation just makes the region’s debt burden more, well, burdensome. The natural experiment in monetary policy between the US and Europe continues …

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

Economics, Monetary Policy, Pethokoukis

Please, can we stop talking about a return to the gold standard?

Photo Credit: Shutterstock

Photo Credit: Shutterstock

The same strange malady that makes otherwise rational people on right think inflation is ravaging the US economy has another odd effect: it creates a desire to return to the gold standard. Down with fiat money! Except the gold standard is just another form of fiat money, as the St. Louis Fed explains:

Unfortunately, a gold standard is not a 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. To consider how tenuous such a promise can be, consider the following example. On April 5, 1933, President Franklin D. Roosevelt ordered all gold coins and certificates of denominations in excess of $100 turned in for other money by May 1 at a set price of $20.67 per ounce. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the dollar value of gold on the Federal Reserve’s balance sheet by almost 70 percent. This action allowed the Federal Reserve to increase the money supply by a corresponding amount and, subsequently, led to significant price inflation.

What Congress creates, Congress can take away or change. Now this isn’t to say the Fed shouldn’t have a rule guiding monetary policy. My preference is for a market-based targeting of nominal GDP that would allow the central bank the flexibility to respond to economic shocks. In a way, it would be a 21st century version of the old gold standard. As Scott Sumner has explained:

It might be helpful to compare this idea to the old international gold standard. Under that system, the U.S. government agreed to buy and sell unlimited gold at $20.67 per ounce. This kept gold prices stable, and the money supply adjusted automatically. Unfortunately, however, stable gold prices did not always mean a stable macroeconomic environment. Putting NGDP futures contracts on the market along a similar model would likewise create a stable price for those contracts, hence stabilizing expected NGDP growth. And stable NGDP growth would be more conducive to macroeconomic stability than a stable price of gold, especially in a world in which rapidly growing demand from Asia might distort the relative price of gold.

And here is Milton Friedman on the gold standard:

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