Economics, Pethokoukis, U.S. Economy

Once again, where’s the inflation? Answer — don’t wait for the translation!


From the WSJ: “The Federal Reserve said it would end the bond-buying program known as quantitative easing in October, but retained its guidance that short-term interest rates will remain near zero for a “considerable time” after that program ends.

Let me again ask, where the’s inflation? The Fed doesn’t see much, the WSJ notes, forecasting its preferred price gauge — the personal consumption expenditures price index — to come in at between 1.5% and 1.7% this year, 1.5% to 1.9% next year. The Fed’s official target, recall, is 2%. And here is a summary of today’s inflation report from JPMorgan:

The Consumer Price Index (CPI) surprised noticeably to the downside in August. The headline figure fell 0.2% — the weakest since March 2013 — while the ex-food and energy core index was unchanged — the weakest since January 2010. The year-ago increases in both the headline and core measures now stand at 1.7%

What economist Mike Darda wrote just before the announcement still holds:

Despite a bevy of Wall Street hawks falling all over themselves to predict an abrupt change in Fed language and an earlier than expected ZIRP exit, the case for a sharp Fed U-turn lacks credulity, in our view. With inflation running below the Fed’s target (and recently decelerating) and inflation expectations back below the 200 bps threshold at the five year horizon, there simply isn’t a compelling case for the Fed to pull forward the gradual tightening path now priced into financial markets.

Another reason for the Fed to be patient / gradual is the lopsided history of ZLB exits being premature instead of late. To wit: the Fed tried to exit prematurely (and thus failed) in 1936-1937; the BoJ presided over two premature (and thus failed) ZLB exits in 2000 and 2006 and several European central banks blew it in 2011 with premature tightening, triggering double-dip recessions and deflation risk. Looking ahead, we believe the Yellen Fed will continue to use underemployment gaps, wage growth and core inflation trends as rough guideposts for the equilibrium short rate.

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

Pethokoukis, Economics, Regulation

How to keep government from stalling the driverless car

Image Credit: Steve Jurvetson (Flickr) (CC-by-2.0)

Image Credit: Steve Jurvetson (Flickr) (CC-by-2.0)

Given that (a) driving errors and accidents cost $300 billion and 34,000 lives a year, and (b) traffic congestion caused drivers to spend an extra 5.5 billion hours on the road and purchase an extra $121 billion gallons of fuel … well, you could say driverless cars could potentially be a pretty big deal. That, if the government doesn’t put a regulatory hammerlock on this emerging technology. In a new Mercatus paper, Adam Thierer and Ryan Hagemann offers some advice on how to apply the principle of “permission innovation” to autonomous vehicles. Here’s a taste:

The government’s approach here should be  guided by humility and patience, allowing intelligent vehicle technology to develop while refraining from overbearing regulation. Lawmakers should sunset any laws that inhibit innovation and experimentation. Policymakers should also examine infrastructure and network operations, as well as licensing issues. In the private sector, businesses should work together and with policymakers to overcome hurdles to the widespread adoption of intelligent vehicle technology, and stakeholders should develop clear and fully transparent guidelines and best practices to allay safety, security, and privacy concerns.

Additionally, government data collection should be constrained to the fullest extent possible. Consensual data collection should be allowed between consumers and producers of goods and services, which will translate to practical benefits, cheaper systems, and a more robust marketplace.

Policymakers should embrace permissionless innovation when dealing with intelligent vehicle technologies. They should not live in fear of hypothetical worst-case scenarios related to security, safety, and privacy. While disruptive at times, these new technologies will bring incredible economic and social benefits to society. In the near future, it will be very difficult to use a car to hurt yourself or others. The sooner that day arrives, the better.

If this is an effective technology that creates consumer-relevant value, it will happen. But bad decisions by government could delay it.

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

Economics, Energy and the Environment, Pethokoukis

The tiny little problem with carbon taxes

Economists frequently offers carbon taxes as a market-friendly policy for dealing with climate change. It’s pretty simple: tax what you don’t want (or as an economist would put, tax unwanted externalities.) And if you want less fossil fuel consumption and the carbon emissions that go with it, make coal, oil and natural gas more expensive with a levy. But there is a slight– I feel embarrassed even to mention it — problem with carbon taxes, according to Jesse Jenkins of the Breakthrough Institute:

There’s only one hitch: people generally want their energy to be cheaper, not more expensive!  In July, Australia repealed it’s carbon tax, ending a brutal, decade-long fight over climate policy. The repeal is just the latest and most glaring example of the extremely up-hillpolitical battle facing any effort to put a hefty price on carbon—i.e., a price sufficient to fully internalize the social costs of CO2 emissions and substantially reduce greenhouse gas emissions.

In a new peer-reviewed paper published in the June edition of Energy Policy (Vol 69), I dive in to these “political economy constraints on carbon pricing policies” and their impacts on the economic efficiency and environmental efficacy of climate policy.  …

What I find is that while estimates of the full social cost of carbon range from $15 to $150 per ton of CO2 in 2012 dollars (rising steadily each year), households in the United States may be willing to pay as little as $2 to $8 per ton to combat climate change, according to a range of public values and willingness-to-pay research. … In the real-world, political constraints can mean carbon pricing policies end up falling far short. That creates an opportunity for improved climate policy designs that perform much better under political economy constraints.

One other political problem: some conservatives have embraced the carbon tax as a substitute for top-down environmental regulations, such as fuel economy standards. But many on the left see such a levy as additive, which is not surprising given the above analysis. So, indeed, there are other options

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

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

The state of food insecurity for kids in the US

County map of child food insecurity rates in 2012

A recent Brookings piece looks at the issue of food security and poverty for children in the US. The authors, Craig Gundersen and James Ziliak, note that “In 2012, over one in five U.S. children lived in households that were food insecure, defined by the U.S. Department of Agriculture as ‘a household-level economic and social condition of limited access to food.’” Food insecurity levels for children increased during the Great Recession and “have not improved much since then.” Unsurprisingly, insecurity is worse in areas such as the Mississippi Delta and Appalachia.

While income is a factor—around 40% of children “in households near or below poverty are in food insecure households”—there are some other variables to consider, write the authors. Here are five other factors they say affect food security:

  • Parental mental and physical health
  • Family structure
  • Child care arrangements
  • Immigrant status
  • Parental incarceration

They conclude:

Most studies of government food assistance programs, such as SNAP, suggest that participation in these programs lead to substantial reductions in food security. Unfortunately, the effectiveness of SNAP is limited, due to poor take-up rates in some areas and a formula for determining benefit levels that has not been updated in years…. There are many open questions about the how food insecurity affects households, but given the high numbers of Americans living in food insecure households, it’s clear that we must continue to examine it critically to help policy makers and program administrators better address this significant policy challenge.

Here’s what AEI’s Robert Doar had to say in response:

Studies like this that show the extent to which our policies are not helping to increase incomes and reduce poverty for struggling Americans remind us of how insufficient the economic policies of the United States have been at increasing jobs and raising wages. The greatest tragedy of our anemic recovery has been the extent to which America’s poor families have been left farther and farther behind. This may be ironic given our progressive president but it is no less disappointing.

To help poor Americans feel more economically secure we need regulatory and tax policies that stimulate job creation; we need more children to be raised in two parent families; and we need welfare policies that encourage and support work not replace it with increased dependency.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.


What we’re reading today: September 16, 2014

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

1.) “Doctors: Skeptical about health law, optimistic about future of medicine,” reports WSJ.

2.) A new Real Clear Policy piece asks, should governments control the internet?

3.) “Making innovation: The hubs of advanced manufacturing will be the economic drivers of the future because innovation increasingly depends on production expertise,” writes Nanette Byrnes in the MIT Technology Review.

4.) For inspiration in creating college ratings, look to health care, advises Susan Dynarski in The Upshot.

5.) Brookings makes the case for a federal robotics commission.

6.) The Atlanta Fed looks at the changing state of states’ economies.

7.) Leslie Kan writes on the empirical proof on the politics of pensions in her post for Education Next.

8.) What’s the best way to fix the patent system’s problems? This Cato Unbound piece discusses.

9.) Here are 10 big questions the Pew Research Center has tackled in the past decade.

10.) A new Third Way report asks, why not a minimum pension?

11.) From the Urban Institute comes a paper titled “Preparing youth for college and career.”

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.

Economics, Energy and the Environment, Pethokoukis

A conservative climate-change agenda: Embracing energy abundance, not scarcity

Image Credit: shutterstock

Image Credit: shutterstock

Not unexpectedly, my post yesterday, “A conservative way to think about climate change,” generated lots of negative feedback.

Arctic ice. Michael Mann. The pause. Al Gore.

But here’s a mistake many are making: the choice doesn’t have to be an all-or-nothing bet between (a) doing nothing about carbon emissions and (b) embracing a low-energy future of scarcity and stagnation.

Rather, the challenge is creating a high-growth, high-abundance, high-energy future for mankind that minimizes the risk of a dangerous climatic shock. Nassim Nicholas Taleb argues in “Antifragile” that “we are doing something new to the planet [and] the burden of evidence is on those who disturb natural systems.”

Humility is called for. Oh, that and lots of innovation. The debate, at least among, economists and realistic climate wonks, is moving beyond a solution set of either top-down government regulation or market-mechanisms such as cap-and-trade and carbon taxes. As Michael Shellenberger, Ted Nordhaus, and Mark Caine write in a Breakthrough Institute analysis:

Over the next century, global energy demand will double, and perhaps triple. But even were energy consumption to stay flat, significantly reducing emissions from today’s levels will require the creation of disruptive new technologies. It’s a task for which a doctrine focused on the efficient allocation of scarce resources could hardly be more ill-suited.

So what is the best “no regrets” climate and energy policy? In “Smaller Faster Lighter Denser Cheaper,” journalist Robert Bryce sees natural gas as a bridge to a nuclear future, or “N2N” as he puts it:

N2N provides the best no-regrets energy policy because those fuels can provide significant environmental benefits with relatively low economic costs. Natural gas and nuclear are lower carbon than oil and coal. They emit almost zero air pollution. Better yet, both sources have high power densities, require relative little land, and can be scaled up enough to meet a significant portion of continuing growth in electricity demand in places like Hanoi and Seoul.

Government has a modest but important role to play in areas such as basic research and regulatory reform. (Don’t forget government’s role in the shale revolution.) But an entrepreneurial private sector will do much of the heavy lifting. For instance: startup accelerator Y Combinator is invested in an experimental nuclear fusion company. The firm’s president, Sam Altman says he believes “the 20th century was clearly the carbon century [and] 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.”

And while much of the emphasis here is on nuclear, don’t ignore the huge innovation happening in solar. Probably the most critical thing policymakers can do is making sure the US economy is as vibrant and dynamic as possible. So the answer is Schumpeter, not Malthus or Ludd.

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

Pethokoukis, Economics, U.S. Economy

Yes, US manufacturing is still important


There is a lot of economic nostalgia — particularly on the left with its fond memories of the unionized 1950s — for manufacturing. In his 2013 State of the Union address, President Obama asked Congress to finance “manufacturing hubs” as a way of turning “regions left behind by globalization into global centers of high-tech jobs … and guarantee that the next revolution in manufacturing is made right here in America.”

Of course, manufacturing never left, although many jobs have thanks to automation-driven productivity gains (see above chart). By itself, the US manufacturing sector would be the tenth-largest economy in the world. Still, there is little reason to think manufacturing will be again be a source of mass employment gains in the future. But that doesn’t mean manufacturing isn’t economically important. From MIT Technology Review:

To understand why manufacturing matters, we must lose some misconceptions. First, manufacturing no longer derives its importance primarily from employing large numbers of people. As software drives more of the manufacturing process, and automated machines and robots execute much of it, factories don’t need as many workers.  …

Manufacturing will make its most essential economic contribution as an incubator of innovation: the place where new ideas become new products. Thanks to advanced manufacturing technologies, that place can in theory be pretty much anywhere. Robots, software, and sensors work no matter what language is spoken around them. In practice, however, advanced manufacturers thrive best in an ecosystem of suppliers and experienced talent. For this reason, specialized manufacturing networks have taken hold in many regions. Among the success stories highlighted in this report are China’s dominance as a manufacturer of consumer electronics, Germany’s lead in precision tooling and robotics, the United States’ strength in aerospace and car manufacturing, and its role in pushing forward important new manufacturing technologies.

Innovative manufacturing today requires as its base that manufacturers and their suppliers build strong relationships and share knowledge extensively, says Mark Muro, a senior fellow at the Brookings Institution.

Manufacturing and innovation are linked. As the MIT piece notes, some 70% industrial research and development spending in the US comes from the manufacturing sector. 

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


What we’re reading today: September 15, 2014

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

1.) Poverty: it’s more than a job market story, say Emily Cuddy, Isabel V. Sawhill and Richard V. Reeves at Brookings.

2.) In The Upshot, Tyler Cowen writes on why the economic gender gap will eventually close.

3.) From the National Bureau of Economic Research comes a paper titled, “It’s where you work: Increases in earnings dispersion across establishments and individuals in the US.”

4.) Yuval Levin and James Capretta, in their Weekly Standard piece, discuss how to transition from Obamacare to real health care reform.

5.) A new global index highlights the harm from the US tax code—WSJ has the details.

6.) RFF looks at the market structure of shale gas drilling in the US.

7.) Education officials flunk statistics 101, writes Harold O. Levy.

8.) Google’s first quantum computer will build on D-Wave’s approach, according to IEEE Spectrum.

9.) The Hoover Institution takes a look at how to be smart and green.

10.) From The Wall Street Journal: Obama plans major Ebola offensive.

Follow AEIdeas on Twitter at @AEIdeas, and Natalie Scholl at @Natalie_Scholl.

Pethokoukis, Economics, Taxes and Spending

Study: US has the 32nd most competitive tax code out of 34 advanced economies

Image Credit:

Image Credit:

The Tax Foundation has put together a Tax Competitive Index, which finds “the United States has the 32nd most competitive tax system out of the 34 OECD member countries.”

Tax Foundation

Tax Foundation

Here are few key reasons why:

The largest factors behind the United States’ score are that the U.S. has the highest
corporate tax rate in the developed world and that it is one of the six remaining countries  in the OECD with a worldwide system of taxation.

The United States also scores poorly on property taxes due to its estate tax and poorly  structured state and local property taxes. Other pitfalls for the United States are its individual taxes with a high top marginal tax rate  and the double taxation of capital gains and dividend income.

The study ranks advanced economies on all manner of tax issues, with a bias toward lower rates and simplicity. Given the US reputation as a low-tax country, many might find this surprising: “When including state and local taxes, the U.S. has a top marginal income tax rate of over 46 percent, which is 5 percentage points above the OECD average of 41 percent.”

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


Boston Fed paper on Bitcoin

Boston Fed

Boston Fed

Interesting new paper from the Boston Fed on Bitcoin and other virtual currencies:

The Bitcoin network as originally designed, and especially its associated digital currency, will probably not survive in the long run. Some serious design flaws of the current Bitcoin system have been identified, and some of them may eventually prove fatal. First, realistic growth projections of the scale of the blockchain indicate that it will likely become infeasible for individual users to store the data on their personal computers, and this may happen as soon as within a year or two. Currently, it already requires nearly 10 gigabytes of hard drive space to store the entire blockchain. Second, the resource cost of mining is becoming increasingly unaffordable, not to mention the inefficiency associated with this aspect of the system design. Again, it is possible that within a few years it will become infeasible to rely on this distributed model, however consolidated, to verify transactions.

Nevertheless, there is growing recognition that the lasting legacy of Bitcoin most likely lies in the technological advances made possible by its protocol for computation and communication that facilitates payments and transfers. The revolution in payments technology pioneered by Bitcoin helps to accelerate the development of better technologies for making payments and transfers cheaper, faster, and more secure. For instance, a new technology called Ripple, essentially a protocol that allows disparate systems to communicate in order to transfer funds and make payments, has recently been developed.

One notable point, made clear by Ripple, is that the development of new technologies for making payments does not need to be accompanied by a new financial claim. In fact, our confidence in predicting the emergence of one or a few protocols for making payments and transferring funds in general across many disparate systems is greater than our confidence in predicting the survival of any specific virtual currency. The current system that performs the essential functions of enabling transactions is fragmented, sometimes even within the same bank, and inefficient.

So it is imperative that new methods be invented to improve efficiency. In some cases, it may be cheaper to replace the existing system wholesale than to try to reconfigure it piecemeal. In principle, any of the functionality or services related to payment and transfer offered in the existing financial system should be, and likely will be, a candidate for reform if such reform can result in greater efficiency by using technology developed in the open-source distributed network framework that is at the foundation of Bitcoin.