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

Here’s why the job market is telling the Yellen Fed to go slow, in one chart


The job market just isn’t normal. Economist Mike Darda looks at a couple of key employment indicators (as seen in the above chart) and concludes the Federal Reserve should go easy on tightening:

When the Fed commenced rate hiking cycles in 1994, 1999 and 2004, the involuntary part time labor share was materially lower, while the prime age employment ratio was significantly higher.

To wit: the prime age employment ratio stood at 78.9%, 81.4% and 79.1% as each of the last three tightening cycles got underway.  In July the prime age employment ratio stood at 76.6% (up from a 74.8% cycle trough).

As a share of the  labor force, involuntary part-time employment stood at 3.6%, 2.4% and\ 3% respectively as each of the last  three tightening cycles commenced. In July, the involuntary part-time labor share is 4.8% (down from a 6% cycle peak).

Against the tapestry of low wage growth, persistently below target inflation and the asymmetric risks associated with the ZLB on short rates, Fed Chair Yellen’s cautious approach to recent labor market  improvements and eventual policy firming seems to make sense

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


Does the GOP have a policy problem or a messaging problem? Both, it seems

Byron York offers his take on the “reform conservative” movement in “The Right Stuff: The Reformers Trying to Remake the Republican Party” in Foreign Affairs

The reformers face resistance not just from the corners of the conservative world that disagree with them on taxes, immigration, and other, perhaps lesser issues. They are also under attack from those in the Republican establishment who see no need to reevaluate GOP policies. According to this faction, the party doesn’t have a policy problem; it has a messaging problem.

Obviously I think the GOP has a policy problem. But that aside, Rs should not underestimate just how bad their messaging problem is. A recent survey from GlobalStrategyGroup has a number of interesting findings. For instance, while voters by a huge margin prefer candidates focused on “more economic growth” versus “less income inequality, voters also think  redistributionist policies — like raising the minimum wage and guaranteeing a minimum wage — are better for growth than  business tax cuts or reducing top marginal income tax rates:


And as the next graphic shows, voters seem to have a much broader view of what policies qualify as “pro-growth”:


Whatever the economic argument the GOP is making, the party does not seem to be making it very well.

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

Economics, Energy and the Environment, Pethokoukis

Silicon Valley gets interested in nuclear fusion

Bulletin of the Atomic Scientists offers a optimistic take on the future of nuclear fusion. It reminded me of a recent EconTalk podcast with Sam Altman of startup accelerator Y Combinator.

I believe that–the 20th century was clearly the carbon century. And I believe the 22nd century is going to be the atomic power century. I’m very convinced of that. It’s just a question of how long it takes us … So, I do believe that this is not a regulatory issue. I’ve actually spent a decent amount of time with the NRC [Nuclear Regulatory Commission]; I’ve been out there a number of times. And I think they want nuclear power to happen. They are mostly nuclear engineers.  …  I think the problem with nuclear is a public perception problem, not a regulatory problem first and foremost. …  I know all of the physics, I know a lot about the engineering, and I know that it’s totally safe. And I do not want a nuclear power plant on my block. I really don’t. And it’s totally irrational, but I understanding why people feel that way.

One of the Y Combinator nuclear investments, it turns out, is Helion, an experimental nuclear fusion company. The company aims to create, according to an IEEE Spectrum story, “a 50 megawatt reactor no bigger than a shipping container.” Another investor is Mithril Capital Management, founded by Ajay Royan and Peter Thiel. Royan, quoted in the piece, brings a practical approach to a technology known for unmet promises and overly enthusiastic speculation:

My criteria is we should have no miracle physics, we should have minimal or no neutron discharge—so that we’re not coming up on the same regulatory and safety concerns associated with traditional fission or even other fusion approaches,” he says. “And if successful, the design should scale to be competitive with fracked natural gas as a source of electric power. That’s a tall order. And [Helion has] shown for our diligence efforts how they can rationally get there.

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

What we’re reading today: August 21, 2014

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

1.) At The Upshot, Claire Cain Miller writes on how a part-time pay penalty hits working mothers.

2.) Tax credits won’t lift economic growth, according to Daniel Mitchell in WSJ. Read Jim Pethokoukis’s response here.

3.) “If you serve it, will they eat it?” Laura Vanerkam asks in City Journal. “Some schools are becoming foot soldiers in the battle against childhood obesity.”

4.) IEEE: US wind power growth stalled in 2013 as prices drop to all-time lows.

5.) Find out what the best small towns in America are in this NYTimes article.

6.) Proposed Bitcoin rules threaten emerging digital currencies, according to this Fiscal Times article.

7.) In The Upshot, Neil Irwin discusses why the middle class isn’t buying talk about economic good times.

Families in middle class make less than they did 5 years ago

8.) Leonid Bershidsky has some advice for Uber in his Bloomberg piece: stop hating taxi drivers.

9.) The Boston Red recently released a paper on labor market exit and re-entry: is the US poised for a rebound in the labor force participation rate?

10.) Over at The New York Times, Aaron Kessler looks at a new era in safety when cars talk to one another.

Follow AEIdeas on Twitter at @AEIdeas.

Economics, Pethokoukis, U.S. Economy

Supply-side economics needs a 21st century update: Responding to Cato’s Dan Mitchell on middle-class tax cuts

Sentier Research

Sentier Research

Median family incomes are down 6% since 1999, according to research firm Sentier. Now you can pick at that number, I suppose, but few would argue that the past 15 years have been good ones for middle-class America.

So why are some folks on the right against giving middle-class families a big tax cut and letting them keep more of what they earn? The plan outlined by economist Robert Stein in the conservative policy book “Room to Grow” – a book to which I contributed a chapter – would expand the child tax credit so that a married couple with two kids making $75,000 a year would get a $5,000 tax cut. Now Cato’s Dan Mitchell, in a Wall Street Journal commentary today, concedes Stein’s idea would indeed help middle-class families right now, especially versus a reduction in tax rates, “which would have only a modest impact on take-home pay for a family in the 10% or 15% tax bracket.” Yet Mitchell still thinks cutting marginal tax rates is the better idea:

The more effective policy—at least in the long run—is to boost economic growth so that families have more income in the first place. Even very modest changes in annual growth, if sustained over time, can yield big increases in household income.

I am not so sure about that.

1.) House Ways and Means Chairman Dave Camp has put forward tax reform with a top rate of 25% vs. 40% today. Yet his plan would likely increase the economy’s size by less than 1% over the next decade, according to the Joint Tax Committee. Marginal rates in the 35%-to-40% range are simply not as much a disincentive to productive activity as the 70% top rate that existed when President Reagan took office. From 1987 through 1992 — after the much ballyhooed 1986 tax reform — the top marginal rate was around 31%, yet real GDP growth averaged just 2.8%.  And from 2003 through 2007 when the top marginal rate was 35%, GDP growth averaged 2.9%. This is not to say lower tax rates aren’t good for economic growth. But marginal rates at those levels are almost certainly already deep on the good side of the Laffer Curve. Also, while it’s true that other things were happening in the economy during those years, that’s the point. The top tax rate isn’t the only factor influencing economic growth, either short- or long-term.

2.) And consider this: just how would the GDP gains, such as they are, from cutting top marginal rates be distributed in an economy where middle-wage jobs are disappearing and income gains are tilted toward the highly skilled and educated? The US economy needs to grow faster, but faster growth alone in the Age of Automation may not substantially increase living standards for a larger swath of the American people. That reality is a big difference between the 2010s economy and the 1980s economy, one many on the right have yet to grasp. Cranking up GDP growth is necessary but not sufficient.

3.) Mitchell asserts, “Tax-credit conservatives generally admit that child-oriented tax cuts have few, if any, pro-growth benefits.” That’s not true. In addition to raising take-home pay — which by itself is reason enough to embrace the Stein plan — expanding the child tax credit would serve as a sort of human-capital gains tax cut for worker creators (also known as families). It might just be nudge enough for financially-stressed families to have another kid since surveys suggest parents don’t have as many as they would otherwise prefer due to money concerns. Modern pro-growth policymakers should fret as much about the nation’s birthrate as productivity and labor-force participation rates. Lower birthrates and older populations are associated with less economic growth. A younger American society with a higher birth rate, helped by a tax code that offsets anti-family government policy, would be more dynamic, creative, and entrepreneurial.

4.) To give Mitchell some credit here, he does acknowledge there is more to the conservative-reform tax agenda than the child tax credit:

While the camps disagree on lower individual income tax rates vs. child-oriented tax relief, both agree that the tax code’s bias against capital formation is very misguided. The logical compromise might be to focus on reforms that boost saving and investment, such as lowering the corporate tax rate, reducing the double taxation of dividends and capital gains, and allowing immediate expensing of business investment.

Indeed, here is Stein in his 2010 National Affairs piece, where he first sketched his tax reform plan:

First, to remove impediments to capital investment, we should adopt Columbia Business School dean Glenn Hubbard’s proposal to let companies take the profits on which they pay taxes — plus interest earned from tax-free municipal bonds — and distribute them to shareholders tax-free. Corporate profits would therefore no longer face two layers of taxation, just one. Additionally, capital investment should be promoted by letting companies count 25% of plant and equipment spending as business expenses in the year the purchases are made, rather than using the current slower depreciation schedules. Cutting the effective tax rate on capital investment would encourage equity financing of new ­investment, raise workers’ wages, create new jobs, and improve the competitiveness of American firms.

5.) Let me add that there is more to the conservative reform agenda for the middle class than just tax reform, including regulatory, health care, K-12, and higher-education reform. And there should be more to the supply-side, pro-growth agenda than cutting marginal tax rates, including reducing crony capitalist barriers — such as Too Big To Fail megabank subsidies and overly strong copyright and patent laws — to the creation of  innovative, startup companies that produce new goods, services, and jobs and keep mature firms on their toes. American needs more growth, and worker creators (strong families) are just as important to achieving that as job creators (strong companies). Let’s have both.

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


Explaining the weakness in wages

Chicago Fed

Chicago Fed

What’s wrong with wage growth? How about a weak job market? From a new report by the Chicago Fed:

The authors find that the share of the labor force that is medium-term unemployed  (five to 26 weeks unemployed) and the share working part time (less than 35 hours per week) involuntarily are strongly correlated with real wage growth. Moreover, they estimate  that average real wage growth would have been between one-half of a percentage point and a full percentage point higher in June 2014 if 2005–07 labor market conditions had been restored, indicating that the slack in the jobs market still weighs heavily on the real wage prospects of U.S. workers.

Chicago Fed

Chicago Fed

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

Pethokoukis, Economics, U.S. Economy

Uber having to hire David Plouffe is all that’s wrong with America


Uber hasn’t built a new kind of nuclear power plant or reengineered the measles virus to cure cancer. Instead, it has developed a piece of software that helps connect people seeking automobile transportation with people willing to supply automobile transportation.

It’s a potentially dangerous innovation — at least to local taxicab monopolies. So Uber finds itself squaring off against politicians and regulators doing the bidding of these long-time contributors, I mean, incumbents. Uber’s response to these attacks is to hire political strategist David Plouffe to run a “campaign” — the word of choice used by Uber CEO Travis Kalanick – to win hearts and minds and political support around the world. From The New York Times: “Mr. Plouffe, who ran President Obama’s 2008 campaign, said he planned to run Uber’s communication efforts much like a political race, pushing to woo consumers and regulators alike in the company’s fast-paced expansion across the world.”

I am sure Plouffe is earning top dollar. But what choice did Uber have given the continued cronyist onslaught? The success of its expansion is hardly assured. In New York City, for instance, taxi medallions continue to sell for a million dollars each, perhaps a market-signal that the car-booking industry will eventually lose its Big Apple fight. But investors seem confident and keep sinking money into Uber, Lyft and other “sharing economy” companies. After all, valuable technological innovations have a good track record of survival, with maybe the notable exception of nuclear power.

Then again, who knows what companies and innovation we never see because they were unable to surmount regulatory burdens or other government favors on behalf of entrenched interests. And all the time and effort young companies now have to spend in wooing government — what a waste. Look, there is lots of evidence that the US economy is losing its entrepreneurial dynamism including fewer young, fast-growing firms and a rise in the share of mature companies. And now over 30% of jobs are covered by restrictive, often unnecessary occupational licensing.

Innovation and productivity and higher living standards are driven by an economy’s competitive intensity. Less competition and more cronyism means less innovation and lower growth. As a McKinsey report puts it:

How exactly do we foster economic dynamism? Instead of picking winners and funneling subsidies to them, countries must get the basics right. These include a solid rule of law, with patents and protections for intellectual property, enforceable contracts, and courts to resolve disputes; access to finance, particularly for start-ups; and an efficient physical and communications infrastructure. Once the basics are in place, the key is ensuring strong competition within sectors. Governments can encourage this by minimizing the barriers to entry and exit in an industry, opening their markets to trade, repealing subsidies and regulations that favor incumbents, and breaking up monopolies.

A simple, time-tested formula, but one the US may have forgotten.

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

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

What we’re reading today: August 20, 2014

Image Credit: shutterstock

Image Credit: shutterstock

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

1.) Keep rates low until the hidden jobless return to work, advises Adam Posen in FT. “Persistent unemployment will do more lasting damage than a rise in inflation.”

2.) IEEE profiles the start-up Pristine, which is bringing Google Glass to the hospital. The company “has developed a telemedicine app for Google Glass that will let hospital staff send real-time audio and video to specialists, wherever they may be.”

3.) “Under Obama, private debt troubles ebb—except among students,” notes Neil King Jr.: “At the height of the recession in early 2009, the sum of mortgages considered seriously delinquent topped $225 billion, while student loans in that category tallied $13 billion. As of June, the value of mortgages with payments more than 90 days past due had fallen to $52 billion, while the total of delinquent student loans had nearly doubled, to $25 billion.”

Percent of balance 90+ days delinquent, by loan type

4.) How does high-frequency trading affect individual investors? WSJ rounds up the responses from a group of experts here.

5.) From The Upshot comes a piece—and a nifty interactive graphic—that charts “the residents born in each state (and the District of Columbia) to show” how, over a 112-year period, “people have spread throughout the country.” It turns out 82% of Texas natives stay in Texas.

6.) In his latest Education Next piece, Michael Petrilli looks at what’s behind the declining support for the Common Core.

7.) Over at the Financial Times, John Kay writes on innovation disrupted by warring gurus.

8.) Check out this essay by Richard Reeves at Brookings titled “Saving Horatio Alger: Equality, opportunity, and the American dream.”

9.) From The Wall Street Journal comes an article on Uber, Lyft, and what the taxi wars teach.

10.) Take a look at a place where the police are part of mental-health care. The Atlantic writes on the Texas city where law enforcement, courts, and medical clinics are working together to treat, rather than jail, people with psychological problems.

11.) Job turnover data shows lots of churning, but little job creation, says Edward Lazear at IBD. “The labor force is larger now, so more hires are needed, specifically about 5.2 million in the average month. We are just past the halfway point in getting hiring back to normal levels.”

Follow AEIdeas on Twitter at @AEIdeas.

Pethokoukis, Society and Culture

You are Christian. You are a conservative. What should you do when the homeless put out their hands?

Image Credit: shutterstock

Image Credit: shutterstock

What should you do when the homeless ask you for money? Over at The Week, Jim Antle writes a thoughtful, heartfelt column on how — as a right-of-center Christian — he deals with these asks. Yes, Antle knows all the hard-headed reasons why he shouldn’t take out his wallet. Yet he also knows his New Testament:

Yet even when I convince myself to keep walking, I can’t block out these verses from Matthew: “Then the righteous will answer him, saying, ‘Lord, when did we see you hungry and feed you, or thirsty and give you drink? And when did we see you a stranger and welcome you, or naked and clothe you? And when did we see you sick or in prison and visit you?’ And the King will answer them, ‘Truly, I say to you, as you did it to one of the least of these my brothers, you did it to me.’” Every panhandler I help could be a scam artist. But each one I pass by could be Jesus.

For another perspective, I asked AEI scholar and homelessness researcher Kevin Corinth on what he thought of Antle’s dilemma:

This is one of the best accounts I’ve seen of a Christian’s internal struggle regarding street homelessness. It’s blatantly honest and reflects genuine love for humanity. But he goes wrong in his last sentence when he says “Every panhandler I help could be a scam artist. But each one I pass could be Jesus.” The truth is that some are scam artists, and many will do harm to themselves with the money. And yet EVERY single one of them is Jesus. We are called to love scam artists and substance abusers just as much as we are called to love those poor people society deems more “pure.”

And so the question is — if Jesus was suffering from drug addiction, had a mental illness, or was a scam artist — how could we best show our unconditional love for him? My answer? We would not give him cash in order to placate our personal fears about rejecting Jesus. We would certainly not ignore him to avoid discomfort. Rather, we would recognize the deep struggles our brother is facing. We would certainly look him in the eye and acknowledge his humanity. We would out of deep empathy for his struggle, politely decline his request for financial assistance. Depending on our schedule, we may offer to share in a meal or a cup of coffee. We would pray for him, and we might give money to organizations which can more effectively address his needs than us.

The world is an uncomfortable place with real suffering – I think we achieve our full humanity when we live inside that world as much as we can bear.

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