Pethokoukis

James Pethokoukis: Covering the nexus of Washington and Wall Street

Pethokoukis, Economics, U.S. Economy

How Keynes may have helped cause the Financial Crisis

|

In Banking crises and political survival over the long run – why Great Expectations matter, Jeffrey Chwieroth and Andrew Walter argue that citizens have a) become more demanding of government since World War Two, and b) more unforgiving of governments unable to effectively respond to financial crises. From the paper;

Before 1946, banking crises do not heighten the risk of partisan spell termination. Everything changes after 1945, however, when banking crises sharply and significantly raise the risk of government loss of office for all countries. Moreover, it is in executive-dominated democracies where this effect is most significant – in such cases, the risk of losing office given a banking crisis is about three times higher than non-executive-dominated democracies. But the risks are greatest after 1945 in cases where there is a relatively high degree of diffusion of political power: governments in countries with relatively high numbers of veto players suffer risks of losing office given a banking crisis about six times higher than in countries where political power is more concentrated. Our results also suggest that citizens are generally unforgiving of incumbent governments in financially open economies.

But I find this bit particularly interesting: “Finally, great expectations may themselves be destabilising.” My interpretation: Voter expectations that government will “do something” to stabilize the macroeconomy have strengthened the incentive for government to bailout troubled financial institutions. That, in turn, creates moral hazard, too big to fail, and a less risk averse financial sector.

But why have voters become more demanding? Maybe because since World War Two, Keynesians have made great claims about the fiscal capabilities of government to prevent and deal with economic shocks and smooth the business cycle. Voters are merely asking politicians to walk the walk down the path Keynes laid. And despite Keynesian failures, the public’s belief government should take action remains strong.

9
Pethokoukis, Economics, U.S. Economy

Is the real US unemployment rate 11.3% or 7.5%? A new Goldman Sachs study offers an answer

|
051013jobless

The 7.5% US unemployment rate, at its lowest level since 2008, seems to be telling a story of slow-but-steady recovery after the Great Recession and Financial Crisis. Unfortunately, the bulk of evidence suggests the “real” jobless rate is far higher. As the U-3 rate has fallen, so has the labor force participation rate, or LFPR. If the LFPR were at the same level as when the downturn began, the unemployment rate would be a stunning 11.3%.

Two critical questions: First, how much of the 2.7 percentage point drop in labor force participation since 2007 reflects structural forces rather than weak demand discouraging workers? Second, is the key structural element mostly the aging of the US population or is it the shift of the workforce into Social Security disability?

A new study by Goldman Sachs, partly based on recent Federal Reserve research, offers some reasonable answers. The real jobless rate is probably more like 9%, still dreadful. And here’s why:

1. Blame the baby boomers, at least somewhat. Of that 2.7 percentage point drop, 1.2 percentage reflects demographics — a number GS arrives at by plotting the overall LFPR against a rate that assumes an over-16 workforce not aging. So most of the drop in the LFPR is not due to the boomers.

2. The US isn’t Europe. Economists blame persistently high EU unemployment in the 1980s on the relatively easy availability of long-term jobless benefits. But Goldman doesn’t think the same thing is happening here, or at least nowhere to the extent as in Europe. Since 2007, the number of SSDI disabled worker recipients has risen by nearly 2 million, or 0.7% of the over-16 population.

Yet the rise in SSDI beneficiaries has only modestly outstripped the Social Security Administration’s pre-recession forecasts. Goldman: “Most of the growth in SSDI beneficiaries seems to be due to a larger and older population. … So while we would not rule out a certain amount of hysteresis, we expect it to fall far short of the European experience.”

3. The problem is mostly slow growth. So of that big drop in the LFPR, GS concludes, the remaining 1.5 percentage points — the equivalent of 3.5 million jobs — is mostly related to weak labor demand. (That’s where I get the 9% number.) As shown in a recent Fed study, labor demand shocks can have protracted effects on participation. There are lengthy lags. More typically, a big demand shock causes a sharp rise in the unemployment rate, which then reverses over the next three years. The LFPR falls more gradually and only begins to recover three years after the shock.

But not this time. GS: “The current labor market recovery has been much slower, as the unemployment rate has reversed less than half the trough-to-peak increase more than five years after the shock. The reasons are well known — a private debt overhang, excess supply in the housing market, fiscal headwinds, and spillovers from the financial instability in Europe.” So adjusting for the weak recovery in the labor demand explains most of the LFPR decline.

Going forward, GS expects the participation rate to remain flat. Demographic changes will offset recovering labor demand. (The bank doesn’t mention it, but I would also be concerned about the impact of the PPACA on the quantity and quality of job growth.) Given the GS forecast for GDP growth, we’re looking at a 6% unemployment rate by early 2016. But that improvement will understate the true weakness of the labor market, arguing for more aggressive policy action, particularly for the long-term unemployed.

8
Pethokoukis, Economics, U.S. Economy

Is austerity really hurting the US economy?

|
50913tgdp

Two takes on the same message:

The New York Times: “Economists See Deficit Emphasis as Impeding Recovery”

National Journal: “Who Says Fiscal Policy Is Hurting the Economy? (Almost) Everyone.”

1. This is a tale of two economies. The “G” in the GDP formula (government spending + personal consumption + private domestic investment + net exports) has detracted from measured economic growth in 10 of the past 11 quarters. But private sector growth has been much stronger, growing 4.0% in the first quarter and averaging 3.0% over the past two quarters — about what it did from 1983-2007.

2. And while the private sector has added 6.8 million jobs since the employment recovery began in early 2010, the public sector has lost just over 600,000 jobs. The public sector is in recession, the private sector is modestly growing — though the latter isn’t anywhere near its pre-recession trajectory whether measured by jobs or GDP growth.

3. According to a Hamilton Project study, government employment since 1970 increased by an average of 1.7 million following a recession. So if the US had followed the typical path, more than 2 million more Americans would be working, although not in jobs producing “consumer-relevant value,” as Tyler Cowen puts it.

4. According to the McKinsey Global Institute, the decline in business creation cost the economy two million jobs between the start of the Great Recession and the end of 2010. The number is undoubtedly much larger today.

So where should policy focus going forward? On boosting government spending and permanent government jobs? Or boosting entrepreneurs and private-sector jobs? Or both? Given future fiscal constraints, I would prefer as big a private sector as possible and as small a public sector as reasonably possible.

The New York Times piece quotes President Obama saying we need to make sure “that we’re investing in things like rebuilding our airports and our roads and our bridges, and investing in early childhood education, basic research — all the things that are going to help us grow.” But what about a business creation agenda? Do higher taxes and the health care law help or hinder?

34
Pethokoukis, Economics, U.S. Economy

A bit of good news on the US labor market

|
Credit: Strategas

Credit: Strategas

The four-week average of jobless claims has now fallen back to where it was when the Great Recession started. Some smart comments from the econ team at Strategas Research:

Initial jobless claims are a key, timely series to judge the health of the U.S. labor market. As a count of state data, the series can be choppy (affected by holidays, etc) but is hard to manipulate. Claims – which measure firings – also have leading indicator properties. So, when this series makes a new 5-year low at 323,000, as it did today, markets notice.

But claims are probably additionally important for two reasons now. First, with hours worked declining in the April employment report, it’s critical that job growth remain solid to support the 71% of the U.S. economy that’s consumer spending. So far, so good on that front. Second, with eqp capex weak in 2012, if employment continues to grow - which claims suggest – capex should catch up. That is, claims are telling us a dual story about the labor market and pent-up demand for capital spending as well.

8
Pethokoukis, Economics, U.S. Economy

This isn’t the immigration reform you’re looking for — but it could be

|
marcorubio

On Earth-2, Election Night 2012 turned out to be a very near thing for the Romney campaign. What was supposed to be a comfortable victory turned into a nail biter. While the campaign team was overjoyed when that 270th electoral vote was finally locked down, the celebration was tempered by the realization of how close they came to blowing it.

Turned out there was no margin for error. What if the “47%” video had come out in September rather than a couple of days earlier? Might have cast a pall over the entire fall campaign. Or what if New Jersey Governor Chris Christie hadn’t been hospitalized with a mysterious stomach ailment when Superstorm Sandy hit? A healthy Christie might have toured the damaged Jersey shore with President Obama, maybe giving the struggling campaign a needed fillip. And counting on Project Orca without a proper shakedown? A huge gamble that easily could have come back to bite them in the keister. Sometimes it’s better to be lucky than good.

The first term of the 45th American president had hardly begun and his political team was already thinking about 2016. How to maintain or improve their showing among white, working-class voters while also beginning to reverse the GOP’s collapse among Hispanics. How to recover from Romney’s “self deportation” gaffe?

Senator Marco Rubio was tasked with shepherding a comprehensive immigration bill through Congress that would be worthwhile wonkery and, as a side benefit, helpful politics. Key elements of the package: Legalizing undocumented workers but providing them no path to citizenship without leaving the country and applying as a legal immigrant. Requiring low-skill immigrants post assimilation bonds. Using auctions to distribute most work permits and visas. Granting a green card to every foreign student who obtains an advanced degree in math, science, or engineering at a US university. Overall, a plan to a) create market-driven immigration policy geared toward producing a flexible, high-skill workforce that could adjust to technological change, and b) prevent another influx of undocumented, low-skill workers. …

Clearly, the Gang of Eight comprehensive immigration reform isn’t anywhere near what I just described. The guest worker program particularly seems a mess. But it’s better than the status quo, particularly in its attempt to make immigration policy better match future US workforce needs. It could use improvement. Some of that might happen in the Senate. Hopefully much more in the House. Now is the time for advocates of pro-growth immigration policy to shape the debate, not work to end it.

4
Pethokoukis, Economics, U.S. Economy

Why it’s bad news that rising income inequality might be ready to reverse

|
Credit: JPMorgan

Credit: JPMorgan

Why has income inequality been rising in advanced economies — it’s not just the US, people — over the past few decades? The economic consensus mostly explains the phenomenon as a race between accelerating technological change and expanding education. And the rise of inequality shows, as JPMorgan economist Mike Ferolio puts it in a new report, that the “pace of technological advance has outstripped the ability of the educational system to supply the human capital skills needed to utilize this technology, leading to out-sized earnings gains for those who have such skills (the so-called college wage premium).”

It was technology versus education, and technology won.

But that balance could be shifting, according to Feroli. First, there has been a rise in college enrollment rates, and it doesn’t appear to merely be a case of young people avoiding a bad job market by heading to university.

Second, the pace of technological change appears to be slowing if you measure innovation by the relative prices of capital equipment. Feroli’s devastating data point: “In the second half of the 1990s, the real price of computer equipment declined at a 24% annual rate, indicating an extremely rapid pace of increase in computing power. Over the last five years those prices have fallen at only a 6% annual pace, consistent with progress occurring at a much slower rate.”

Feroli thinks the tide has already turned in the race between education and technology, but the deep recession and weak recovery have masked it. He finds a linkage between the Gini coefficient — a measure of household income inequality — and the gap between the actual unemployment rate and the economy’s natural, full-employment rate.

As the economy hopefully moves back toward full employment, this alone should reduce inequality. Furthermore, if the leading explanation of inequality is correct, and recent trends in education and technological advance continue, we could see a further compression of wages.

Now here’s the other side of the trade:

1. Maybe the rising cost of education will cause college attendance to slip.

2. Maybe computer equipment prices are a poor shorthand for technological progress and productivity. There is also a strong case to be made that innovation is accelerating, which I have written about frequently.

3. Maybe the tech-education explanation for inequality has less explanatory power than commonly believed.

Feroli acknowledges all of the above, but still concludes “that the next few years have the best chance in a generation to witness a narrowing in income inequality.”

Now, the reason that might be a good thing is that American society, particularly on the lower-income end, has been buffeted by globalization and technology. Perhaps it could stand for a brief pause. Let education and the safety net catch up. Then again, I would rather deal with the technology-education race — which I really think is an automation versus education-entrepreneurship race — on the fly by making workers smarter and helping entrepreneurs to invent new ways of “combining technology and people to create new industries and innovations,” in the words of techno-optimist Erik Brynjolfsson. Reducing inequality via less growth and less innovation and less opportunity — through a “great stagnation” — seems like a lousy bargain.

8
Pethokoukis

Will Paul Ryan endorse breaking up the megabanks?

|
Image Credit: Gage Skidmore (Flickr)

Image Credit: Gage Skidmore (Flickr)

The Republican Party’s 2012 vice presidential candidate:

Banks are getting really big, and they are using the value of their insured deposits to go do other things that are really not banking and jeopardizing the stability of the system. … Dodd-Frank goes in the wrong direction. It creates a permanent bailout fund. It deems very large, interconnected  banks as too big to fail, meaning the government will back them up if they go down. And that means these really large banks can go into the markets and get money at a much cheaper rate than your community bank. … I also believe in what we call the Volcker rule, which means if you’re going to act like a hedge fund then be a hedge fund. If you’re going to be a bank, then you have to be regulated like a bank. Meaning separate the ability of banks to take the implied subsidy of insured deposits and leverage that. I think that was one of the mistakes that was made.

Rep. Paul Ryan made those remarks (h/t to Think Progress) at two recent town hall meetings back in his Wisconsin district. Ryan also said he had some problems with the Brown-Vitter beak-up-the-megabanks legislation, “though the idea is one I find appealing.”

Stop the presses. If Ryan accepts the need to go beyond the Volcker Rule to somehow shrink or restructure the nation’s largest financial institutions, that would be a game-changing bit of political support for the idea. If there is a center-right permission structure for breaking up the biggest banks, Ryan would be a key component.

Once the premise is accepted, then it’s just a matter — though hardly a small one — of figuring out the best way of going about it: size caps, activity restrictions, dramatically higher capital. Now, I don’t know if Ryan is quite there yet, but we may find out when the Government Accountability Office releases its estimate of the TBTF subsidy currency enjoyed by the biggest financial institutions. If Ryan or any other Washington politician is looking for a jumping on point, that might be the moment.

5
Pethokoukis, Economics, Taxes and Spending

Whoa! Is the US on the verge of running a budget surplus?

|
050813budget

The US government ran a surplus of $112 billion in April 2013, according to the Congressional Budget Office, $52 billion more than a year ago. Now, April is usually a good month for the treasury thanks to income tax payments. Still, the surpluses recorded in April 2012 and 2013 were the first seen in that month since 2008. More good news: Revenue for the first seven months of the fiscal year is up 16%, or $220 billion, from the year-ago period.

To the number crunchers at Potomac Research, the combo of those surging revenues and the sequestration spending cuts points to a stunning possibility:

… official forecasters will have to radically alter their projections this summer.  The CBO forecast of $845 billion in red ink this year, 5.3% of GDP, is hopelessly outdated; the deficit will fall well below 5% of GDP, perhaps to about $700 billion.  Then the improvement really takes hold – instead of the official forecast of a $616 billion deficit in fiscal 2014, we’d anticipate something like $500 billion, close to 3% of GDP.  And in fiscal 2015, the deficit could drop below 2% of GDP, perhaps to $300 billion.

Call us crazy, but if the economy finally lifts off in 2014-2015, with GDP growth in the 4% neighborhood — with the sequester still in place – a surplus by fiscal 2015 is not totally out of the question.

With revenue coming in above expectations and spending below, the deficit numbers are turning out way better than expected. Merely a sharp drop might greatly influence the current austerity debate. (Keep in mind that even if GDP growth should approach 4%, the belated upturn would still mean the recovery has been a weak one by historical standards.)

If the federal government runs an actual surplus, few politicians are going to want to hear much about the latest Simpson-Bowles debt reduction blueprint. And not only might pressure mount to rejigger the sequester, but good luck to the Obama White House in getting any more tax hikes out of Congress. The real concern, of course, is that any momentum or interest in long-term entitlement reform might evaporate.

42
Economics, Monetary Policy, Pethokoukis

Monetary policy paradox: If the Fed could time travel, could it have prevented itself from being created?

|
Credit: San Francisco Fed

Credit: San Francisco Fed

The San Francisco Fed:

The Federal Reserve was created 100 years ago in response to the harsh recession associated with the Panic of 1907. Comparing that recession with the Great Recession of 2007–09 suggests the Fed can mitigate downturns to some extent. A statistical analysis suggests that if a central bank had lowered interest rates during the 1907 panic the same way the Fed did during the 2008 financial crisis, gross domestic product would have contracted two percentage points less than it actually did.

And if the 1907 Panic would have been less severe, maybe there would have been no Fed created — at least not in 1913. And if no Fed, then would the Great Depression — or Great Contraction, as monetarists often describe it — have been merely a Great Recession, if that? As Ben Bernanke admitted to Milton Friedman: “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

And if no Great Depression, then no New Deal? That’s the conclusion of Lawrence Stratton and Paul Craig Roberts in a 2001 Hoover Institution essay: ”The great depression and its offspring, the New Deal, could both have been avoided if the Federal Reserve had performed the task assigned to it. … The Great Depression occurred because the Federal Reserve missed every opportunity to take active measures to ease the internal drain on bank reserves.”

The Great Depression shattered public faith in free markets, increased faith in big government. Indeed, market monetarists have made a similar point, arguing that big economic downturns frequently get blamed on free-market failure with government fiscal stimulus riding to the supposed rescue. Then again, conservative amnesia about the role of monetary policy in dealing with economic shocks has left the field to the Keynesian spenders. If Ben Bernanke really did have a time machine and could use it only once, maybe bringing Friedman to 2013 would be its best use.

6
Economics, Health Care, Pethokoukis

Is the weak US economy fixing America’s health care cost problem?

|
Image Credit: Shutterstock

Image Credit: Shutterstock

US health care reform expands insurance coverage, but more reform is needed to control spending. Yet even as politicians and policy wonks continue to cook up cost-control schemes, the anemic economy may be doing the heavy lifting for them. But not in the way you might guess.

A new study from Harvard economists David Cutler and Nikhil Sahni finds national health spending between 2003 and 2012 was nearly 16%, or $514 billion, below US government forecasts. The researchers attribute 37% of the unexpected spending slowdown to the Great Recession, with a decline in private insurance coverage and lower Medicare payment rates accounting for another 8%. As for the rest, Cutler and Sahni attribute 55% to a combination of structural changes, “including less rapid development of imaging technology and new pharmaceuticals, increased patient cost sharing, and greater provider efficiency.”

You could sum up many of these structural changes as different sorts of innovation. The paper outlines a number of widespread efficiency savings over the past decade from improvements such as reduced bloodstream infections and lower Medicare readmission rates. Health insurance plans became more diverse, giving consumers more choice such as health savings accounts. Cutler and Sahni point to changes in cost sharing — higher deductibles and copayments — as likely additional factors slowing spending.

And while the economists think technological stagnation played a role, too, they’re not so sure. They also speculate that perhaps improvements in digital technology and image sharing have decreased the need for re-imaging. Other economists have cited the IT and networking revolution as improving disease management.

Perhaps a decade of subpar growth has helped control costs less by limiting what consumers and business have to spend but than forcing industry to get smarter. The Great Depression 1930s, for instance, saw huge increases in innovation and productivity.  As economist Alexander Field has put it, “There is evidence that for some organizations and industries, just as for some individuals, adversity summons reservoirs of initiative and creativity that have long-term positive consequences.”

If trends continues, public-sector health care spending would be as much as $770 billion less than predicted. Already, government budget scorekeepers have been plugging lower health inflation into their forecasts. But would another economic surprise, in this an acceleration in GDO growth — make hash of these news predictions? History suggests higher spending growth will return, though much depends on the impact of the Affordable Care Act. We better hope the innovation continues.

2
  1. Pages:
  3. 1
  4. 2
  5. 3
  6. 4
  7. 5
  8. 6
  9. ...
  10. 96

You May Also Like