Pethokoukis, Economics, U.S. Economy

A Christian, free-market response to Pope Francis

From The Washington Post: “Pope Francis has released a sharply worded take on capitalism and the world’s treatment of its poor, criticizing “trickle-down” economic policies in no uncertain terms.”

Some on the left are interpreting the Pope’s statement as the pontiff taking sides against free marketeers. I will write more on that later, but I thought this from the great Christian libertarian economist Deirdre McCloskey provides a useful lens through which to view the Pope’s comments:

Friedrich Hayek, the modern master of what people in the USA call “libertarianism” and what others call “real liberals,” once wrote an essay entitled “Why I Am Not a Conservative.” He was not a conservative, nor am I or Robert Nozick or Tom Palmer or Donald Boudreaux or Ronald Hamowy or John Locke or Thomas Paine or (the Blessed) Adam Smith.

I am a Christian Liberal. That is, I believe on the one hand that in human affairs the best policy is to let people alone to exercise their creativity. Such creativity has made the modern world. We should take power away from the massive modern state, which so often follows the Other Golden Rule: Those who have the gold, rule. States are corrupted by the rich …

But on the other hand as a Christian I also believe that as a spiritual affair we should love God and love God’s creatures, that is, our neighbors as ourselves. (It is Jewish and Muslim law, too: Rabbi Hillel was asked to summarize the law and the prophets while standing one leg. His reply was: to love God , the commandments 1-4, and our neighbors, 5-10.) In consequence, unlike fatherly and unChristian liberals, I believe in helping the poor.

At a meeting libertarians/liberals last year in the Bahamas I expressed to someone what I thought was an axiom, “But of course we all want to help the poor.” He instantly retorted, “No: only if they help me.” It took my breath away. I want to help the poor, period, not only as part of an exchange … And my liberal part adds to my Christian duty: Help the poor really, not by making them unemployable by raising the minimum wage, or uneducated by forcing them into public schools, or violent and victimized by outlawing recreational drugs.

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

Pethokoukis, Economics, U.S. Economy

Obama’s bullet train dream just derailed in California

Image Credit: Grist

Image Credit: Grist

Not a good month for the progressive policy agenda. In addition to Obamacare’s failed rollout, bad news from California about its high-speed rail plan. The San Jose Mercury News:

In rulings that threaten the future of California’s bullet train, a Sacramento judge on Monday ordered the state to draft a new budget for the multibillion dollar project and prove there’s enough money to finish the job before it is started.

Superior Court Judge Michael Kenny found the state’s High-Speed Rail Authority failed to follow voter-approved requirements designed to prevent reckless spending on the $68 billion project. Those safeguards are a key piece of the ballot measure voters approved in 2008 allowing the state to sell $10 billion in rail bonds to help build the nation’s first high-speed rail line, from San Francisco to Los Angeles.

And from Reuters:

Jon Coupal of the Howard Jarvis Taxpayers Association, an opponent of the project, said Kenny’s decisions mark a major setback for the California High-Speed Rail Authority.

“It’s a victory for common sense,” Coupal told Reuters. “I’m not sure how they salvage this.”

Critics of California’s high-speed rail effort say money will run dry before its network can be completed and that it is uncertain federal and private funds will be available for it over the long haul.

A USC Dornsife/Los Angeles Times Poll in September found seven out of 10 California voters want another vote on whether the high-speed rail project should continue and 52 percent say it should be stopped, compared with 43 percent who want it to move forward.

I don’t think that graphic at the top of this post is happening. The economics have always been dodgy, and the whole idea is likely to be technologically overtaken by autonomous vehicles. As The Washington Post put it recently: “High-speed rail was once a central part of Obama’s vision for government — one in which the nation’s infrastructure, schools and health-care systems would be modernized to meet the challenges of globalization and expand the middle class.” But bullet trains are retro tech splashed with liberal nostalgia for the 1950s and 1960s.

Transportation expert David Levinson, who blogs at Transportationist, had a great analysis of California’s plan a few years ago when it was only expected to cost half as much. A few excerpts:

1. The proposed California High Speed Rail line would be more expensive than every other active HSR proposal in the country put together. While subsidized by everyone who pays the regressive sales tax, its users would have a higher than average income, so it is a subsidy from the poor to the rich. It would cost about $600-$1000 person or $2000-$3000 per California household before a single trip is made. This money could support about 20,000 teachers or police perpetually. For every $1 spent by the passenger, it would entail $4 in public subsidy, twice the annual expenditure of the State Transportation Improvement Program/

2. HSR is slower than air travel in the main Bay Area to Los Angeles market. While proponents claim fewer delays at train stations than airports, that assumes lessened security precautions. Rail systems are at least as vulnerable to terrorism as air systems.

3. The HSR system will take less than one lane of traffic off the major North-South highways. Airports will soon have extra capacity as they increase operations in bad weather with instrumented flight controls.

4. Other modes are steadily getting cleaner, for instance fuel cell powered vehicles will emit only water and carbon dioxide. Any benefits from HSR depend on unproven forecasts. The energy for HSR must come from somewhere, if electric than probably coal or nuclear, both of which have some problems.

5.  What is the best use of $20,000,000,000 to $30,000,000,000 ? For that amount of money it would be very easy to provide improvements to air travel into the central valley, along with many other things. HSR is the least cost effective way to provide transportation services between the Valley and the coastal cities.

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

Pethokoukis, Economics, U.S. Economy

How to stop the robots from taking all our jobs: A Q&A with Noah Smith

Image Credit: shutterstock

Image Credit: shutterstock

What if smart machines do take all our jobs — or at least a lot of them and depress wages? What can policymakers do to make sure that as many Americans as possible (a) still work and have an opportunity for earned success, and (b) get more of their income from owning capital as opposed to selling their devalued labor? Those are two of several topics discussed in the latest Ricochet Money & Politics podcast. My guest was Noah Smith, an assistant professor of finance at The State University of New York at Stony Brook. Smith blogs at Noahpinion and writes occasionally writes for The Atlantic. Here are some edited highlights of our chat:

I recently interviewed Tyler Cowen, and we talked about his new book Average is Over, a book where he addresses how automation is affecting and will continue to affect the US labor market. Now sort of the killer stat in his book is that he thinks about 15% of workers, the tech savvy ones, will do great in the future, but there will be stagnant wages for everybody else. And of course some people say we’re already seeing this effect in job polarization where there’s a lot of demand for high-skill jobs and low-skill jobs, with the middle sort of a bit maybe being off-shored either overseas or to “Robotland.”  I want to read something you wrote for The Atlantic which I think relates to that:

For most of modern history, two thirds of the income of most rich nations has gone to pay salaries and wages of people who work, while one third has gone to pay dividends, capital gains, interest, and rent to people who own capital. This two thirds-one third division was so stable that people began to think that it would last forever, but in the past ten years something has changed. Labor’s share of income has steadily declined, falling by several points since 2000 and now sits around 60% or lower.

So why is this happening, and what do you see as sort of the longer term impact?

Well so everybody’s talking about this rise of the robots, skill-based inequality. But I actually think that this is not as big a story as people are claiming, at least in the past decade because one of my mentors from Michigan, Mike Elsby, has written a recent paper that basically shows that a lot of it was just because of the end of the Cold War. Half the world’s labor supply was locked up behind the Iron Curtain, with not much capital, or with a bunch of wasted capital, and so once, you know, China and India and other countries basically opened up their labor markets, we had this giant dump of labor onto the global economy and of course that is going to drive down labor’s share and is going to drive up capital’s share of income, at least temporarily. I’m not saying that this is all of the story, but I think this is a lot more of the story than people realize. There’s this giant labor dump from China and India and other countries. But going forward I think it’s something we’ll have to worry about more.

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Pethokoukis

The most important economic chart in US politics … is kind of misleading

112513pikettysaez

Some version of the above chart is familiar to anyone who’s read a news story about income inequality. It apparently shows the pre-tax income growth of the top 1% rocketing higher over the past 40 years, the 99% not so much. Powerful prima facie evidence for those promoting the “rich getting richer by taking all the money” explanation for middle-class income stagnation.

But there might be more to the story. Economist Russ Roberts points out that at the same time the growth rate in family income was flattening from 1973 through 1993, there was a big increase in (a) the divorce rate and (b) the number of households headed by women. This was especially true among poorer families. And Roberts contends this had a huge impact on data showing middle-class income stagnation: “That demographic change is going to slow the average measured rate of growth, especially when those families are disproportionately created out of married families that are poorer than the average to begin with.” And this:

So during a time when individual income is actually growing, a rise in the divorce rate, especially among families below the average income, is going to pull down the measured rate of growth. … This has nothing to do with having fewer children or spreading income over a smaller number of people. It’s a result of the divorce rate that leads to measured household income being a misleading representation of what is going on in the economy. … This is important because the measured gains in income of the bottom 99% shown here are roughly zero in the 1980′s, a decade of healthy economic growth. This leads people to conclude that the top 1% got all the gains during that decade. I think that is absurd. My claim is that much or all of this depressing claim is a misreading of the data caused by demographic changes.

Interestingly, Roberts ran this idea past the University of Chicago’s Bruce Meyer, a scholar who has done a lot of great work income and consumption inequality, during a 2011 EconTalk episode. Here is Meyer’s reply: “Well, the share of families headed by single mothers hasn’t gone up that much in the last 10 years. So what you’re describing could be true more historically.”

Indeed! Rising inequality as a historical artifact of the 1980s is very much in keeping with a variety of research suggesting inequality between the bottom fifth and the middle fifth has not grown since the Reagan years. That may also be true of inequality at the top. Using a more comprehensive after-tax, household-size adjusted income definition, one that includes yearly accrued capital gains, health benefits, and transfers among other things, “dramatically reduces the observed growth in income inequality across the distribution, but most especially the rise in top-end income since 1989,” according to researchers Philip Armour, Richard Burkhauser, and Jeff Larrimore. Their research, along with that of Meyer, also suggests average median incomes are up by 40% or so since the 1970s. ( Also interesting: highly regarded research from the Equality of Opportunity Project found “a high concentration of income in the top 1% was not highly correlated with mobility patterns.”)

The bottom line: income inequality will likely be a big issue in the next presidential election. Now would be a good time to start getting our facts straight about it and to further the analysis beyond a single chart.

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

Pethokoukis, Economics, U.S. Economy

When unemployment insurance expires, Americans aren’t going on disability

Credit: Richmond Fed

Credit: Richmond Fed

Another study suggesting that Social Security disability benefits are not masking America’s true unemployment rate in the aftermath of the Great Recession: “Unemployment Insurance and Disability Insurance in the Great Recession” by Andreas Mueller, Jesse Rothstein, and Till M. von Wachter.

Disability insurance (DI) applications and awards are countercyclical. One potential explanation is that unemployed individuals who exhaust their unemployment Insurance (UI) benefits use DI as a form of extended benefits.

We exploit the haphazard pattern of UI benefit extensions in the Great Recession to identify the effect of UI exhaustion on DI application, using both aggregate data at the state-month and state-week levels and microdata on unemployed individuals in the Current Population Survey. We find no indication that expiration of UI benefits causes DI applications. Our estimates are sufficiently precise to rule out effects of meaningful magnitude.

A recent study from the University of California, Berkeley, also found no correlation between expiring jobless benefits and rising disability claims. As the WSJ summarizes:

When the unemployment rate started rising in 2008 and 2009, the government extended unemployment benefits, leading to a drop in the number of people exhausting their payments. Yet the number of people filing for disability kept on rising. In more recent years, the government has cut back unemployment benefits, leading to an increase in expirations, but the number of disability applications has remained flat or even slowed.

Both studies support analysis by Goldman Sachs that notes 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.” Combined, the two studies suggest SSDI is not turning the US into 1980s Europe, where persistently high unemployment was blamed on easy availability of long-term jobless benefits.”

But the long-term rise in disability is a problem. Once you go on disability, you are unlikely to recenter the workforce.  And the rise in the population on disability has been enabled by government. According to a paper by David Autor and Mark Duggan, the increase is mostly due to “congressional reforms to disability screening in 1984 that enabled workers with low mortality disorders such as back pain, arthritis and mental illness to more readily qualify for benefits … Notably, the aging of the baby boom generation has contributed little to the growth of SSDI to date.”

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

Economics, International economy, Pethokoukis

Baby Bust: Will China avoid Japan’s economic stagnation?

112513citi

These charts from Citi provide a good reason for China to relax its one-child policy:

As shown in the left panel, the share of the working-age population in Japan peaked in the early 1990s, as the asset bubble burst and has subsequently fallen off sharply. Almost in lockstep, the Japanese GDP deflator (a broad measure of prices) also peaked and has since been on a downward trajectory. Similarly, nominal GDP first slowed, then stagnated, and eventually stepped down during the financial crisis. We do not believe that Japan’s twenty-year economic sclerosis can be explained solely by demographic variables, but these correlations are striking and suggest that demographics played a role.

The right panel highlights what this might mean in the years ahead for emerging Asia, a region which accounts for over half the world’s population. Notably, China’s working-age population share (that is, the share of people age 15 to 64) is slated to decline through the next two decades; indeed, the drop is expected to be almost as steep as that recorded in Japan in recent years. This doesn’t imply that China is poised for a Japanese-style stagnation, but it does suggest that demographics will be less supportive of growth than in the recent past. In contrast, other emerging Asian countries will generally see their working-age population shares continue to rise, albeit somewhat more gradually than in the recent past.

Consistent with this observation, we see the effects of population aging as likely to weigh heavily on growth in China, subtracting as much as 3  percentage points relative to the pace of expansion in recent decades. The difficulties
Chinese policymakers face as they pilot their economy through this demographic  transition strike is an under-appreciated global risk.

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

Pethokoukis, Economics, Taxes and Spending

These 3 charts show why the US tax code is just absolutely killing the US economy

Image Credit: Shutterstock

Image Credit: Shutterstock

It’s pretty simple: Income taxes penalize saving. That’s bad. Savings and investment are critical to long-run economic growth.

Consumption taxes do not penalize savings. See, under an income tax, workers who save to consume in the future are taxed more heavily than a worker who consumes today. Replacing the current income tax system with a consumption tax would boost saving, which would increase the capital stock and promote long-run growth.

Yup, pretty simple. So, of course, that is not how the United States does it — as these charts from Michael Graetz of Columbia’s law school show:

Michael Graetz

Michael Graetz

Michael Graetz

Michael Graetz

Michael Graetz

Michael Graetz

The difference here is that US is the only advanced economy without a value-added tax. So not only is the US tax code more progressive as a result of relying on the income tax, it is also less efficient. (Thank heavens for the US entrepreneurial spirit.) In The Wall Street Journal today, David Wessel outlines Graetz’s tax reform plan:

He would impose a new national value-added tax and use the money, in part, to eliminate the income tax – and the filing of income tax returns – for families with incomes under $100,000. For others, there would be three marginal tax brackets (14%, 27% and, for income above $600,000,  31%.)  He’d also lower the corporate tax rate to 15%, cut the payroll tax and give cash to low-income families with children.

While the Graetz Plan may not be my first choice for tax reform – it does, after all, keep the income tax rather than converting it into a consumption tax – it is way better than the status quo and unfortunately better than what Washington is likely to cook up.

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

Economics, Health Care, Pethokoukis, U.S. Economy

Is Obamacare really responsible for the slowdown in healthcare spending?

The White House

The White House

The White House is trumpeting as “historically unprecedented” the recent slowdown in healthcare spending, while also suggesting that the Affordable Care is playing a big role. From 2010 through 2012, the real per capita annual growth rate of national health spending was just 1.3%, less than one-third of the long-term historical average growth rate of 4.5%. It was also way below the average 2000-2007 growth rate of 3.9%. All of which is good  fiscal news, helping reduce projections of future Medicare and Medicaid spending by through 2020 by $147 billion.

So what is driving the slowdown? AEI’s Joe Antos:

A major reason for the slower growth is the sharp recession in 2007-09, followed by the anemic recovery. TheKaiser Family Foundationestimates that 77 percent of the slower growth is due to the weak economy. Slower spending growth primarily due to a poor economy and high levels of joblessness is not a welcome trend.

Other analysts dispute the importance of a slow economy in reducing health spending growth. One can debate the numbers. One cannot debate that federal policy has not been successful in bringing the economy back to life.

The Congressional Budget Office attempted to discover what is causing the slowdown in Medicare spending, and essentially came up empty-handed. Without a clearer understanding of what is going on, it seems risky to assume that the slowdown will continue well into the future-and ill-advised to base policy on that assumption.

And as I have written: a) lots of breakthrough drugs from the 1980s and 1990s became widely available in generic form in the 2000s; b) health insurance plans became more diverse, giving consumers more choice, such as health savings accounts; c) the IT and networking revolution has improved disease management. And along those lines is a JPM analysis focuses particularly on the increase in high-deductible, employer-provided health insurance, frequently paired with a health savings account. In 2012, 9% of workers with insurance from an employer were enrolled in a high-deductible plan — more than double the percentage from just three years ago. The product may be limiting consumer demand:

One circumstantial piece of evidence that this may be holding back spending is the composition of health care consumption. Higher deductibles may make one think twice about elective care for annoying but not debilitating conditions, whereas it probably won’t do much to deter one from visiting the hospital for a serious or life-threatening condition. Such a pattern appears in the recent data, as outpatient care has slowed markedly, whereas hospital care is expanding at about pre-recession levels.

Credit: JPMorgan

Credit: JPMorgan

As for Obamacare, I wouldn’t rule out that is now having an impact. We’ll see.

 

 

Pethokoukis

The Regulatory State: Was the ‘nuclear option’ the only way Obama could rescue his second term?

Sure looks that way to analyst Greg Valliere of Potomac Research in his morning note:

BARACK OBAMA’S LAST HOPE is to preside over an activist regulatory era; chances of him prevailing on legislation are virtually nil.  So yesterday’s Senate vote to radically change filibuster rules was a very big deal.  It will guarantee confirmation of activist regulators and judges who will have enormous influence over every reg from climate change to Dodd-Frank. The 93 vacancies in federal courts will be packed with mostly liberal judges.

Pethokoukis, Economics, Taxes and Spending

Sorry, Keynesians, JFK was a supply-side tax cutter

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In the new issue of the always must-read Commentary magazine, I review the new Ira Stoll book, JFK, Conservative.  The book’s analysis of President Kennedy’s economic policies is particularly enlightening. Folks on the left argue that conservative are wrong to call the Kennedy tax cuts “supply-side” as opposed to Keynesian. But I think the weight of the evidence is to the contrary:

 [Liberals] dismiss the comparison [between the Reagan tax cuts and the Kennedy tax cuts] by pointing out that one can be a good Keynesian and support temporary tax cuts to increase demand. And indeed Kennedy did argue that his tax cuts would put more money in people’s pockets.

But the president also highlighted, as Stoll shows again and again, the long-term supply-side, pro-investment impact of his plan. Kennedy didn’t see tax cuts as just a temporary fillip, which is why he demanded they be permanent. As Stoll quotes Kennedy, “Let me emphasize, however, that I have not been talking about a different kind of tax cut, a quick tax cut to prevent a new recession.” … Kennedy intended to make the tax cuts the centerpiece of his reelection campaign, a promise that would eventually be fulfilled in 1964 by his successor, Lyndon Johnson. And had Kennedy lived, Treasury Secretary Douglas Dillion said his second term would have featured calls for further rate reductions.