Pethokoukis, Economics, Taxes and Spending

No reason to make a snap decision on cutting food stamp benefits

(Wikimedia Commons)

(Wikimedia Commons)

There’s been an 80% rise since 2007 in the number people on food stamps, officially the Supplemental Nutrition Assistance Program. University of Chicago economist Casey Mulligan thinks the bulk of the 135% cost increase comes from more generous benefit formulas and eligibility rules rather than a weak economy.

Liberal groups are aghast that House Republicans want to cut $40 billion over ten years from the $80 billion a year program. The Center on Budget and Policy Priorities calls the House GOP bill ”harsh.” The CBPP notes that many of the 3 million to 4 million Americans losing benefits are unemployed, childless adults in high unemployment areas and “low-income families who have gross incomes above the federal SNAP limits but disposable income below the poverty line.”

Now SNAP could certainly use reform. Some research has found that food stamps reduce work incentives, suggesting the program should be abolished with its funding redistributed to other antipoverty programs such at the Earned Income Tax Credit. I agree with Reihan Salam who advocates a broader rethink of how we support low-income households beyond just “rolling back” SNAP. I worry we don’t have a good feel for the dynamics of the US labor market right now, and how exactly the labor force — the low-skill bit, especially — is being affected by technology as it intersects with rising hiring costs. Certainly market income for the bottom 20% in recent decades has fallen sharply.

Economist Tyler Cowen thinks there are a growing number of Americans who business would not want at almost any price. As he writes in his new book, Average is Over, “I believe these ‘zero marginal product’ workers account for a small but growing percentage of our workforce. At the very least, they make it unlikely that we will return to 4 percent unemployment in the foreseeable future.”

Indeed, long-term unemployment remains abnormally and persistently high more than four years after the recession’s official end. A recent study on America’s back-to-back-to-back jobless recoveries has more questions than answers. If GOPers are looking for budget savings, Cowen suggests “more wasteful targets, including Medicare and also defense spending, not to mention farm subsidies.”



Why has FA Hayek rather than Milton Friedman been resurgent since the Great Recession?

Photo Credit: Ellen Meiselman (Wikimedia Commons)

Photo Credit: Ellen Meiselman (Wikimedia Commons)

Center-right debate about monetary policy and recessions often turns into a Friedrich Hayek vs. Milton Friedman debate. Which are always fun. But as my pal Russ Roberts correctly noted on a recent EconTalk podcast episode, Hayek rather than Friedman has been more the go-to guy on the right since the Great Recession. And here is an explanation as to why from guest Angus Burgin, author of The Great Persuasion: Reinventing Free Markets since the Depression:

An essential difference between Hayek and Friedman here was that Hayek was in many ways a dark thinker. If you read Hayek in the 1930s and 1940s, the thinks the world is coming apart. Certainly Hayek’s response to the Great Depression was not one that imbued with a great deal of optimism. He thought that to a certain extent you just have to wait things out; if you try to intervene to solve the problem you’ll only exacerbate it.

Whereas Friedman was this tremendous optimist. Friedman was always emphasizing–he said that what Hayek and Robbins got wrong when they were responding to the Great Depression was precisely that: that they said you shouldn’t do anything. He thought that part of what he was doing in monetary theory was to try to come up with a way to say that there was a solution, something that could be done that would prevent this kind of problem. A kind of counternarrative to Keynes. And he always emphasized–instead of dwelling on the catastrophic situation that the world was in, he always emphasized the ways in which those catastrophes could be solved by the market.

And so when you reach this moment of deep pessimism that I think a lot of people associated with organizations like the Tea Party felt, Hayek in many ways feels more consonant with that set of views. His chiliastic tones align with the perspective that a lot of market advocates have in the present day. In that sense it’s not surprising at all that there’s kind of a revival of Hayek.

At the same time, I would say to them that precisely what made Friedman so influential in the public sphere was that sense of optimism. I make an argument in the book that Friedman was in many ways the rhetorical underpinning of Reaganism, that a lot of Reagan’s messages about the benefits of the market were derived from rhetoric that Friedman had developed. And so in emphasizing this dark perspective that can be very powerful among subsets of people who agree with that perspective but in the end can limit the public influence of a group in a broader political environment that in difficult times is looking for optimistic solutions rather than expressions of despair.

Pethokoukis, Economics, U.S. Economy

‘There is no evidence to suggest that the debt ceiling will be raised in time’

Image Credit: Shutterstock

Image Credit: Shutterstock

Scary words from today’s research note by Chris Krueger, ace political analyst at Guggenheim Partners’s Washington Research Group:

There is no evidence to suggest that the debt ceiling will be raised in time.

Now you can sort of see an end-game over the budget and continuing resolution. Eventually the House passes a “clean” CR thanks to a promise from GOP leaders that they will take the Obama White House to the mat over the debt ceiling. Something like that.

Then it gets real. The White House strategy has three parts: 1) don’t negotiate, 2) don’t blink, 3) remember not to negotiate or blink. The GOP, on the other hand, doesn’t really have a plan and is far from unified on what they want to get from Obama or how exactly the battle should play out.

Who is going to blink? The non-scary options — Obama offering a quid pro quo, raising the debt ceiling by congressional disapproval and an Obama veto, a straight hike in the debt ceiling — require someone to blink.

Then you have the unilateral options where Obama just flat out bypasses Congress, both of which would likely freak out markets. Krueger:

Constitutional Option. The debt ceiling forcing mechanism could be demolished if Obama invoked the “constitutional option” and unilaterally raised the debt ceiling. Among other things, the 14th Amendment of the Constitution states the validity of the public debt shall not be questioned. Under this option, Obama would invoke the 14th Amendment and unilaterally raise the debt ceiling – a move that was encouraged by former President Clinton during the summer of 2011 in the height of the debt ceiling stare down. This option would trigger a wave of lawsuits and a likely Supreme Court decision. The biggest problem with going this route would be to – in effect – set up two tranches of Treasuries. Those that are not subject to a legal challenge (issued under the old debt ceiling) and treasuries that are subject to a legal challenge, which would likely trade at a discount. This is an unlikely end result, but one that could happen if we get past the X-date without Congressional action.

Platinum Coin Option. This is even more theoretical than the Constitutional Option, though some argue that it is a stronger legal option. There are limits on how much paper money the U.S. can circulate and rules that govern coinage on gold, silver, and copper. BUT, the Treasury has broad discretion on coins made from platinum. The theory goes that the U.S. Mint would create a handful of trillion dollar (or more) platinum coins. The President would then order the coins deposited at the Fed, who would then put the coin (s) in the Treasury who now can pay all their bills and a default is removed from the equation. The effects on the currency market and inflation are unclear, to say the least. You would also likely trigger a wave of lawsuits similar to the Constitutional Option and create two tranches of treasuries. We do not see the platinum coin option as a viable solution.

At this point Krueger sees a 40% probability the US enters “technical default scenarios” in late October or early November due to a debt ceiling impasse.

Economics, Financial Services, Pethokoukis

Market monetarism and quantitative easing: 5 questions in 5 days (Part 1)


Most folks who identify as market monetarists have been in favor of the Fed’s bond-buying, or “quantitative easing,” program. They don’t think it’s been executed perfectly, however. If the Fed’s actions had been accompanied by a stated intention to target the level of nominal GDP, there’s a strong case that QE could have been far smaller yet far more effective. Still, as I write in my new National Review column, QE has likely helped the economy and thus been worth doing.

Every day this week, I will present answers to some common QE criticisms from a market monetarist perspective. Question one:

QE is doing nothing since banks are just sitting on the money. Look at the huge increase in excess reserves! What’s the point? How is this boosting growth, exactly?


Scott Sumner, economist at Bentley University and blogger at The Money Illusion:

It boosts growth through higher asset prices and also through the expectations channel.  We know it boosts asset prices, because stock and bond and commodity prices fall on rumors it will be stopped.  It also makes future expected policy more expansionary (when rate are not stuck as zero) and that expectation of higher future NGDP tends to boost current spending.

Michael Darda, chief economist at MKM Partners:

This is true, but if banks want to hold reserves and households want to hold cash, the central bank has to satiate this demand to prevent a deflationary slump. That is basically what the Fed has done. Slow, steady growth is the result of the Fed only partially offsetting a huge velocity (demand for money) shock. Had they done less the slump surely would have been worse.

David Beckworth, economist at Western Kentucky University and blogger at Macro and Other Market Musings:

Is the economy growing too slow? Yes. Do we conclude from this fact that monetary policy is ineffective? No. The right way to think about whether QE is working is to consider where the economy would be in its absence.  One way to do that is to compare the US economy with the Eurozone. Both have fiscal austerity. But in the United States, real GDP has grown about 1.8% over the first half of the year. In Europe it has grown about 0%. The difference is QE in the United States. Now compare these outcomes to Japan where an even more aggressive QE is taking place. It has managed to generate about 3.5% during the first half of 2013. And it has far worse structural problems than the US economy.

The way QE is working is by addressing the ongoing, elevated demand for liquidity. The Fed is partially accommodating this demand which then leads to more spending.  Evidence of this demand can be seen by the fact that about 85% of US marketable debt—the most liquid asset other than US dollars—is held by individuals, their financial intermediaries, and foriegners. In other words, about 85% of the largest run in public debt continues to be supported by entities other than the Fed. Now, interest rates on treasuries have gradually risen over the past year indicating some of the liquidity demand is easing (i.e. less demand for treasuries lowers their price and raises their yield), but there is still a long ways to go.  Other evidence for this ongoing demand for liquidity is that households still hold a relatively large share of their assets in liquid form.

Josh Hendrickson, economist at the University of Mississippi and blogger at The Everyday Economist:

It is true that banks are sitting on a large amount of reserves. However, this is largely the result of the fact that they are paying interest on reserves. This hinders the monetary transmission mechanism, which means it is harder to translate changes in the monetary base to changes in broader aggregates and therefore nominal income.

To illustrate my point, suppose that the Fed had a monopoly over apples rather than currency. If they wanted to reduce the price of apples, they could just increase the supply of apples. Now suppose that the federal government announced that they were going to subsidize apple consumption. This would increase the demand for apples. If the Fed tried to hit the same price target for apples, this would now require an even greater increase in the supply of apples than it would without the subsidy. This is exactly what is happening with interest on reserves.

The Fed has increased the supply of reserves, but they have also increased the demand for reserves. Thus, if they want to lower the price of money (increase the price level/nominal income), they have to increase supply more than they would have to do in the absence of interest on reserves. The build-up of reserves is therefore not evidence that monetary policy is ineffective, but rather evidence that monetary policy requires larger quantitative changes in the face of interest on reserves.


The case, briefly, for accelerating US economic growth

The econ team at IHS Global Insight offers fours reasons to worry about the US economy: oil price volatility, Washington budget battles, the threat to housing from rising long-term interest rates, and disappointing August jobs report. But the firm also gives “ample reason to cheer.” From its morning note:

At 2.5%, second-quarter growth was stronger than previously estimated. Light-vehicle sales have reached a six-year high, household net worth is surging, and business confidence is improving. As the impacts of 2013 tax increases and federal budget cuts fade, US economic growth will likely strengthen.

Economics, Pethokoukis, U.S. Economy

Pethokoukis Podcast: John Cochrane on economic growth

How do economies grow? And where on this subject do the right and left agree and disagree?

In this episode of Ricochet’s Money & Politics podcast, I discuss that issue with John Cochrane, professor of finance at the University of Chicago’s Booth School of Business. In addition to his research on asset pricing, Professor Cochrane has written on the relationship  between deficits and inflation, the effects of monetary policy, and health insurance among other subjects. He also blogs as “the Grumpy Economist” at

In the podcast, we discuss a blog post by left-liberal economist and Larry Summers pal Brad DeLong, “The Seven Cardinal Virtues of Equitable Growth,” which outlines the center-left perspective on how to create shared prosperity.


Would Obama’s preschool ‘for all’ plan be a waste of money?

education kids

What is the logic behind pre-K for all? Why the “for all?” Why would a publicly-funded preschool program have to be universal as President Obama and New York City mayoral candidate Bill de Blasio advocate? It sure would be a lot more expensive that way. For instance, this 2012 University of Texas study found that “preschools may reduce inequalities in early academic achievement by providing children from disadvantaged families with higher-quality learning environments than they would otherwise receive.”

But “advantaged” families — not so much. As a Slate article by Melinda Wenner Moyer on the UT study succinctly put it: “If you are reading this article, your kid probably doesn’t need preschool.” Indeed, claims of high return on investment from pre-K spending by economist and Nobel laureate James Heckman refer to expensive, narrowly targeted programs aimed at very poor families.

New research raises further questions about the necessity of such programs being universal — and thus costing $75-$100 billion. Here’s the conclusion of The Impacts of Expanding Access to High-Quality Preschool Education by Elizabeth Cascio and Diane Whitmore Schanzenbach:

President Obama’s “Preschool for All” initiative calls for dramatic increases in the number of 4 year olds enrolled in public preschool programs and in the quality of these programs nationwide. The proposed program shares many characteristics with the universal preschools that have been offered in Georgia and Oklahoma since the 1990s.

This study draws together data from multiple sources to estimate the impacts of these “model” state programs on preschool enrollment and a broad set of family and child outcomes.

For lower-income children, the state programs increase the likelihood of preschool enrollment, the amount of time spent with mothers on activities such as reading, and test performance as late as eighth grade. For higher-income families, however, the programs shift children from private to public preschools, resulting in less of an impact on overall enrollment but a significant reduction in childcare expenses, and appear to have no effect on children’s test scores.

No doubt that universal pre-K would be a great financial deal for higher-income families, but if the educational outputs don’t improve, is that a good use of taxpayer dollars? One caveat raised by researchers is that test score gains observed in Georgia and Oklahoma might be caused by “peer effects” from a better classroom environment caused due to the presence of higher-income kids, a case for universality. The authors: “We cannot rule out this possibility, and we think it is an important question for future research.”

Yes, by all means. Let’s do some more research and small-scale experimentation before creating a new middle-class entitlement. Program designers must factor the impact of means testing — Obama proposes a sliding-scale subsidy, for instance — on the marginal tax rates of low-income families. But, in general, I agree with Brink Lindsey in his book Human Capitalism:

The agenda for reforming human capitalism must therefore include ongoing initiatives to learn from past successes and give disadvantaged kids access to the enriched and stimulating environment that is the launching pad for socioeconomic achievement.

Pethokoukis, Economics, U.S. Economy

The Age of Amerisclerosis: Are jobless recoveries here to stay?

Credit; Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence

Credit; Amerisclerosis? The Puzzle of Rising U.S. Unemployment Persistence

It’s not just Obamanomics. The US is stuck in its third-straight “jobless recovery,” just like after the 1990 and 2001 recessions. And new research suggests this “persistence of unemployment” could mean future US recessions and recoveries will continue to resemble Europe’s 1980s downturn. Even after growth recovered, hiring didn’t. That’s when “Eurosclerosis” was coined.

Now get ready for Amerisclerosis. US labor markets used to rebound much faster. After the 1981-82 downturn, the jobless rate was back to normal in 18 months. More than four years after the Great Recession’s official end, however, the unemployment rate is only halfway back to where it was in 2007. And even this slow rate of recovery overstates the job market’s true health given the accompanying decline in the labor force participation rate.

But don’t look for any easy answers in Amerisclerosis? The Puzzle  of Rising U.S. Unemployment Persistence, Olivier Coibion, Yuriy Gorodnichenko, Dmitri Koustas. The researchers are better at crossing off possible reasons than establishing hard causality. Among the failed candidates or candidates that provide only partial explanation: the financial crisis, too little stimulus, less geographic mobility for workers.

Now the team did find that a decline in social trust has raised unemployment because it a) makes workers more likely to claim government benefits like disability pay even if they don’t deserve them, b) has weakened social networks making it tougher to find a job. From the paper: “We find that the decline in trust in the U.S. can account for all of the rise in unemployment persistence observed since the 1980s.” A similar phenomenon was seen also in Europe. But this affect is “dwarfed” by the aging of the US population because once older workers lose their jobs they are more likely to permanently leave the labor force by retiring.

Which leaves us where, exactly? Coibion, Gorodnichenko, and Koustas.

Our interpretation of these results is that there must be additional, and more powerful, factors at  work. Identifying these other forces should be a key priority for the research agenda of macroeconomists. There is no shortage of places to look.  … . An incomplete list includes rising  economic inequality, a declining share of labor income, changes in the demand for skills, and a higher frequency of financial crises.

Let me repeat: which leaves us where, exactly? Well, while new research is being conducted, the researchers suggest government respond to recessions with a more aggressive and sustained fiscal and monetary effort given findings of “a nontrivial contribution of monetary and fiscal policies toward the higher unemployment persistence of recent recessions.” As the authors told The Washington Post’s Jim Tankersley in an email: “Future administrations should, when facing recessions, have concrete plans to deal with the fact that downturns are likely to be more protracted in the foreseeable future.”

In other words, “timely, targeted, and temporary” fiscal stimulus is out. So a future US president and Congress facing recession might want to consider a) spending on needed infrastructure, b) supply-side tax cuts such as a large investment tax credit, c) special efforts to deal with lingering long-term unemployment like job sharing and wage subsidies, d) providing any needed political cover for the Federal Reserve to meet the demand shock through monetary policy, conventional or otherwise.


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

Why the Yellenanke Fed made the right move, in under 200 words

Surprised by the Fed’s status-quo QE move? You shouldn’t have been, says MKM Partners economist Michael Darda.

Inflation is running below the Fed’s target, labor markets remain loose and while there have been some encouraging signs, the economic data remains mixed. Thus, the Fed is going to wait for more information before initiating the “taper.”

This seems logical enough, but many investors continue to view QE as a dud and want the Fed to unwind it earlier rather than later. We would simply point out (as the Fed did in its statement) that the U.S. has enjoyed steady growth despite the most intense fiscal squeeze since the 1950s, something our friends across the Atlantic have not enjoyed (thanks to premature ECB tightening in 2011).

One area we do take issue with the FOMC is in the description of financial conditions as having “tightened” due to higher bond yields. We believe this assertion is actually inconsistent with a broad interpretation of financial indicators since long rates bottomed last summer. It is also inconsistent with financial conditions indexes themselves, which suggests that financial conditions have eased. Thus, rising yields are likely a sign of an easing demand for cash and safe assets. If the excess demand for money problem recedes, the Fed will be able to taper/ end QE without damaging the recovery.

Darda also calls bubble fears ”greatly exaggerated at this time.

– The 20 year Treasury bond yield has essentially re-asserted its historical relationship with NGDP growth;

– Spreads on corporate bonds relative to Treasuries actually remain somewhat above their historical median;

– Equities, while at record highs, are also keying off record high (and probably accelerating) earnings as U.S. growth picks up, Europe moves into recovery (thanks to Draghi but not his processor), Japan grows for the first time in 15 years and China stabilizes instead of plunges into financial crisis.

Economics, Financial Services, Pethokoukis

Greg Mankiw: Keep QE going and don’t fear the Yellen Fed

Economist Greg Mankiw, whom I suggested Obama pick as next Fed chairman, was on CNBC’s Kudlow Report last night. Two big takeaways:

First, a Yellen Fed wouldn’t be some hyperinflation nightmare:

I think Janet is a great economist. She is a real consensus builder. She knows the Federal Reserve System. People in the system like her. I’ve never met anyone who doesn’t like her. And I think that’s a very good attribute to have when you’re trying to herd the cats on the FOMC. [Might she keep money too easy for too long?] I  think she could, but I think that there are enough hawks on the committee, and she is a consensus builder that she’ll listen to those. So I don’t think the FOMC as a whole would end up making that mistake.

Second, two cheers for the Yellenanke Fed’s status-quo decision on QE bond buying:

I think it’s very hard to know —  because you don’t get to observe the counterfactual — what would the economy be without this extraordinary monetary policy. My guess is it would have been weaker,and that what the Fed has done has kept long-term interest rates lower than they would be, and that has reduced the cost of borrowing. It has kept housing going a little bit and kept business going a little bit. So I think it has been a good thing. I don’t think it’s been extraordinary. The recovery is very meager, but I think it would have been even worse if the Fed hadn’t done these extraordinary things.

[Bubbles are] a risk. It’s something to keep an eye on. But the main things to keep an eye on are inflation and employment. those are the two main variables. These bubbles matter only to the extent they impinge on inflation and employment. So far there is no evidence they have. So yes, I think there is reason to be concerned. It’s one of the reasons they want to get out of this business as soon as they can. but they just don’t feel they have a reason to do so yet. Until the labor market looks stronger, or until inflation looks like it’s getting up to the 2% or 2.5% that they’re aiming for, I just don’t see that they have a rationale for getting out of this business.