Pethokoukis, Uncategorized

How automation is transforming the US economy

Image Credit: shutterstock

Image Credit: shutterstock

Great encapsulation by the FT of the economic challenges facing the US:

New technologies are transforming the structure of the US economy but creating only modest numbers of jobs, according to the biggest official survey of businesses, conducted only once every five years.

The 2012 economic census shows how technology is creating a boom in output for new industries – such as shale gas and internet retail – but only a modest increase in their payrolls.

It highlights concerns that recent innovations in information technology tend to raise productivity by replacing existing workers, rather than creating new products that demand more labour to produce.

Tyler Cowen was quick to note this data seem to reinforce his “average is over” thesis. Two thoughts from me: one, the study also seems to support my point about the overrated labor market impact of fracking. Two, President Obama’s manufacturing nostalgia for 1950s America is misplaced:

In manufacturing, the story is of a productivity boom that allowed a solid increase in sales, coupled with falling employment and payrolls. Manufacturing sales rose 8 per cent between 2007 and 2012 to reach $5.8tn. However, the industry shed 2.1m jobs – employment falling to 11.3m – and its payroll dropped $20bn to $593bn.

The relatively greater drop in jobs than payrolls highlights how remaining jobs in the sector are becoming more skilled. Annual payroll per employee in the manufacturing sector rose from $45,818 in 2007 to $52,686 in 2012. That is among the highest of any big industry, but highlights how manufacturing increasingly employs skilled engineers to tend complex equipment, rather than being a source of well-paid jobs for less-skilled workers.

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


Did the ‘Reagan Revolution’ fail?


This is quite a claim from superstar, left-wing economist Thomas Piketty in his hot new book, Capital in the Twenty-First Century (which I recently wrote about), currently all the rage on the left:

There can be no doubt that British and US decline in the 1970s, in the sense that the growth rates in Britain and the United States, which had been lower than growth rates in Germany, France, Scandinavia, and Japan, ceased to be so. But it is also incontestable that the reason for this convergence is quite simple: Europe and Japan had caught up with the United States and Britain. Clearly, this had little to do with the conservative revolution in the latter two countries in the 1980s, at least to first approximation.

What Piketty is saying is that Europe started growing faster than the US in the 1960s and 1970s, and then that stopped in the 1980s. But the stoppage wasn’t because of Reaganomics turning the tide, according to Piketty. It’s just that Europe was done playing catch-up after World War Two’s devastation. Sorry, Ronnie.

Since Piketty is French and writes a lot about France in the book, let’s compare the two nations’ economic performance over the decades.

1.) In 1960, French real per capita GDP (RPCGDP) was 64% of U.S. real per capita GDP.

2.) By 1970, French RPCGDP was 75% of US RPCGDP

3.) By 1980, the gap was even smaller. French RPCGDP was 82%

This is the phenomenon that Piketty is talking up about. But there is more to this story. France actually closed the gap even further. By 1982, French RPCGDP was 85% of US RPCGDP.

But then the narrowing stopped. Weird. In fact, that is as close as France ever got to catching America. Then in 1983, the gap began to widen again. By 2007 before the Great Recession, French RPCGDP was just 72% of US RPCGDP.  As this chart shows:

032714USFrance2Here is a theory: 1983 marked the beginning of the Reagan boom and when the Reagan tax cuts really kicked in. America had a supply-side, pro-market turn in policy — lowering marginal tax rates and deregulation — and France did not. Perhaps, just perhaps, that explains the above chart. It is very important to the left, apparently, to explain away or smear the Reagan revolution since it is an inconvenient real-world example of how the economic freedom agenda can stem national decline. President Obama is also guilty of this. But as President Reagan used to say, quoting John Adams, “Facts are stubborn things.”

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

Economics, Pethokoukis

Why a national $10.10 minimum wage makes no sense


Government-mandated wage floors have their problems, one of which is that the “cost of living” varies greatly in a big country like America. Mark Perry and Andrew Biggs explain in The American:

For instance, in Pueblo, Colorado, housing costs are almost 30 percent lower than in the typical U.S. metropolitan area, health care costs are 14 percent lower than average, food costs are 12 percent lower, and the overall cost of living there is 17 percent below the national average. Couldn’t a low-skilled worker in Pueblo easily get by on a lower minimum wage when their cost of living is significantly below the national average? If $10.10 was the “correct” national minimum wage, it should only be about $8.25 per hour in Pueblo, adjusted for the lower cost of living there.

Likewise, why would the appropriate minimum wage be the same in, say, Birmingham, Alabama, as in Manhattan, where the overall cost of living is 2.5 times higher in comparison? A minimum wage of $10.10 per hour that is “right” nationally for the average cost of living would be way too low in Manhattan and way too high in Birmingham.

I should also add that the $10.10 target itself, although it has nice numerical symmetry, is one based more on politics than sound economics. As the Manhattan Institute’s Scott Winship explains, when the proper inflation adjustment is used, “the result is that 2012’s federal minimum wage would only have to have been $8.32 to match its 1968 level. In fact, the current minimum of $7.25 was nearly exactly the average—$7.30—from 1960 to 1980 before its steady fall during most of the 1980s.”


Will the US economy clinch the midterms for the GOP or save the Senate for the Democrats?

Image Credit: Shutterstock

Image Credit: Shutterstock

Republicans are “now slight favorites” to capture the US Senate, at least according to the number crunching of analyst Nate Silver. He arrives at that conclusion by looking at the generic congressional ballot, candidate quality, state partisanship, incumbency, and, of course, polling.

But what influence will the economy have? Tough to tell, according to Silver: “Voters’ views of the economy also have ambiguous effects in midterm years, especially when control of government is already divided.” A bad economy is bad for Obama, he finds, but that might not necessarily translate into voters blaming Democratic congressional candidates.

Perhaps, but if I were a Democrat running for election or reelection, I would still instinctively prefer a stronger economy so I could argue the pro-Obamanomics case. (“Slow and steady win the race!”) And a weak economy would allow Republicans to argue that Obama’s tax hikes and overregulation continue to drag on the glacial recovery.

So what will happen to the economy for the rest of this year? Goldman Sachs has been offering a bullish case:

The economic dataflow has weakened notably in recent months and our Current Activity Indicator (CAI) has declined one percentage point since the fall. But we see four reasons for a pickup in the dataflow in coming months: (1) data surprises appear to have bottomed; (2) weather normalization should boost growth; (3) financial conditions remain supportive; and (4) leading indicators for capital spending have picked up. We therefore expect that activity should bounce back and continue to expect 3%+ growth for the remainder of 2014.

Given the slow start to 2014, the Goldman scenario would seem to suggest GDP growth about like last year, though the economy would be showing signs of acceleration. Goldman has been particularly forward in putting a business investment revival as a key element of its forecast. Today’s durable goods report, however, urges caution. JPMorgan:

New orders for durable goods increased a larger-than-expected 2.2% in February, though the details of the report were disappointing and suggest that capital equipment spending is expanding at only a fairly tepid pace in the first quarter …  To the extent that the orders data looked weaker than the shipments data, we think a weather-related excuse is pretty tough to swallow. … After three disappointing quarters at the start of 2013, equipment spending perked up to a 10.5% growth rate in 13Q4, raising hopes that capex was set to accelerate. The latest data suggest those hopes may have been misplaced; while capex continues to expand at something close to a trend-like pace, there is thus far little evidence of an investment spending surge.

This was supposed to be a year of economic acceleration, not more of the same. Whomever a better economy was supposed to help politically, that party might be disappointed.

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


Is the US counting too much on the shale boom to fix the economy?

Image Credit: Shutterstock

Image Credit: Shutterstock

Calling the shale gas and oil boom an “energy revolution” is no overstatement. Between 2005 and 2013, US production of natural gas increased by 33% and liquid fuel 52% thanks to advanced drilling technology. But I get the impression that some people — particularly on the right — see fracking as a sort of magic bullet for America’s economic stagnation. Well, that and the repeal of Obamacare.

But I urge caution in equating an America energy revolution with an American economic revolution. It’s a big economy, after all. And it’s tough for any one thing to make a dramatic, overwhelming impact. For instance: the McKinsey Global Institute has projected that so-called unconventional energy production could support 1.7 million jobs by 2020. IHS Global Insight takes its forecast out to 2035 and sees a gain of 2.4 million jobs. Those are big numbers, of course, but they seem less impressive when you consider that total US employment by then might be 160-170 million jobs.

Similarly, people may be overestimating the direct impact of oil and gas product on the US economy in recent years. Goldman Sachs estimates that the sector added roughly one-tenth of a percentage point per year to growth over the past decade. The bank also estimate that “core oil and gas employment and employment directly supported by oil and gas” accounts for less than 1% of total US employment and just 3% of the jobs added since the Great Recession.

The spillover effects from the shale boom, at least so far, also seem to fewer than generally believed. Goldman:

There is little evidence of significant “induced” employment growth in downstream manufacturing industries. Similarly, cap-ex in energy-intensive sectors that might be expected to benefit most from the shale boom has not outperformed cap-ex in other sectors during the recovery, although it did decline by less during the recession. Researchers who expect a large macroeconomic impact from shale often cite the cost advantage it will give to businesses in the US over those in other regions. Access to cheap energy might therefore influence the plant location decisions of both US and foreign businesses. … [Now] there has been a spike in FDI inflows into energy-related sectors in the last few years. … [But] the magnitudes involved are modest. FDI represents only a tenth to a quarter of total investment in these industries in the US. While the spike in energy-intensive FDI is impressive, at its peak it represented about $50 billion in extra investment per year, less than 3% of US investment spending.

Goldman’s bottom line:

Whether shale becomes a true “game changer” for the US in the long-run depends on a number of highly uncertain factors, including technological innovation and the level of investment in downstream industries. In the shorter-term, however, we see only a modest boost to aggregate macro outcomes rather than a revolution.

Now that report is from late last year. But I suddenly thought of it when reading a new report — whose numbers I use above — on the shale revolution over at VoxEU. From the summary:

Our analysis suggests that commentators and policymakers need to better distinguish between the ways in which the US shale gas boom constitutes a ‘revolution’ and the ways in which it does not. The US unconventional energy boom has reversed the decline of domestic production, significantly lowered oil and gas imports, reduced gas costs for consumers, and created a political space for tougher regulations on coal-fired power plants.

But it is not a panacea. Even if current estimates of production turn out to be accurate, the benefits to the US economy in the long run are relatively small, and the benefits to manufacturing competitiveness in most sectors are even smaller.

Supporting the shale boom is an important element of pro-growth public policy. But this welcome windfall shouldn’t preclude creative thinking about other ways to fix the sputtering American growth machine.

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

Economics, Financial Services, Pethokoukis

Is the Fed giving megabanks stress tests or ‘feather tests’?

Image Credit: jaci starkey (Flickr) CC

Image Credit: jaci starkey (Flickr) CC

Maybe I got it wrong. Maybe America really doesn’t need fundamental financial reform of the sort that finally eliminates the cronyist “too big to fail” subsidy for megabanks and establishes a less-crisis prone financial system.

Maybe it’s all fixed. After all, the Fed’s annual stress test of big banks’ financial health showed, according to the WSJ,  ”29 of the 30 largest institutions have enough capital to continue lending even when faced with a hypothetical jolt to the U.S. economy lasting into 2015, including a severe drop in housing prices and a spike in unemployment.”

But just how stressful are those stress tests? Bloomberg:

Researchers at New York University have created a tool to answer the question. Drawing on the historical relationship between banks’ stock prices and the market as a whole, it estimates what the value of the banks’ equity capital would be if the market fell 40 percent over six months – similar to what happened in 2008. It then calculates, based on past crises, how much capital the banks would have to raise to be financially sound.

The results aren’t pretty. Using a start date of Sept. 30, 2013, the same as that of the Fed’s latest round of stress tests, the NYU model gives only one of the six largest U.S. banks – Wells Fargo – a passing grade. The other five – JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley – would have a combined capital shortfall of more than $300 billion. That’s not much less than they needed to get themselves out of the last crisis. …

Unfortunately, the Fed’s approach ignores a lot of the horrible things that actually happen in crises – things that NYU’s simpler approach implicitly captures. Banks’ borrowing costs, for example, tend to rise, killing profits that could offset their losses. Trouble at one bank can spread as investors wonder which others will be affected. Credit freezes can force financial institutions to sell assets at a loss, setting in motion downward spirals in which falling prices and banks’ woes reinforce each other.

The Fed also makes a passing grade too easy to achieve. Participating banks, for example, must maintain a leverage ratio of at least 4 percent, or $4 in capital for each $100 in assets. They should not be allowed to get anywhere near such a level, which research and experience suggest is well below what’s needed to avoid distress. In a crisis, banks should be a source of strength, not propagators of panic.

As Charlie Gasparino recently noted, there is a reason bankers call the stress tests “feather tests.”

032414bankFollow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas


The soft Marxism of low economic expectations

Image Credit: 360b /

Image Credit: 360b /

I urge anyone who cares about policy and political economy to read Thomas Piketty’s lengthy Capital in the Twenty-First Centurya book likely to have great influence on left-wing economic thinking — and probably that of many center-right folks, too. I offer my humble take on the famous inequality researcher’s update on Marxism over at NRO. A snippet:

Piketty is making a different and broader argument, one that intentionally rises to the level of grand theory: Embedded within the very fabric of capitalism is a powerful force pushing in the direction of rising inequality. The income generated from owning capital (everything from real estate to financial assets to intellectual property) tends to exceed the rate of economic growth. And when wealth grows faster than output — as it did in the 19th century when Marx was writing and as Piketty forecasts it will again in the 21st — inequality moves toward extreme levels since income from capital is outpacing wages from labor. When capital income gets reinvested, inherited wealth also grows faster than the economy. Even worse, from Piketty’s perspective: Not only will capital owners take more and more of national income, but more and more of labor income will go to a small group of “supermanagers” who rig the executive pay system in their favor.

“Will the world of 2050 or 2100,” Piketty asks, “be owned by traders, top managers, and the superrich, or will it belong to the oil producing countries or the Bank of China?” Actually, the answer doesn’t much matter. Whatever the exact makeup of this global plutocracy, democratic capitalism will be replaced by something more like Putin’s or Xi’s cronyist authoritarianism — unless populist progressive forces can implement a global wealth tax ASAP. And if that can’t happen right away, 80 percent top income-tax rates would be a solid first step.

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


Obama’s manufacturing hubs: Yet another example of economic reality tripping up government planners

Fitting that Reuters quotes economist Enrico Moretti in this piece “Obama manufacturing hubs face uphill struggle to create jobs.” Reporters Julia Edwards and Jason Lange note Moretti’s research showing job spillover from manufacturing jobs, particularly high-tech. Team Reuters also should have cited Moretti’s analysis that government-planned innovation and manufacturing hubs have a terrible record of success. Here is a quote from Moretti in a blog post from earlier this year:

If you look at the history of America’s great innovation hubs, they haven’t found one that was directly, explicitly engineered by an explicit policy on the part of the government. It’s really hard. This is not how innovation hubs and clusters get developed. They often get developed because of idiosyncratic factors like a local firm succeeds and it starts attracting more firms like that. And this creates a cluster that then becomes stronger and stronger, and that feeds on itself.

Not to mention that manufacturing is a high-automation business. You may get lots of output without much job growth. Edwards and Lange tell the story of how a Youngstown, Ohio, hub is doing:

The lab, called America Makes, is the first in a series of so-called “manufacturing innovation hubs” that President Barack Obama has launched with the promise that they could revitalize America’s industrial sector and spur jobs growth in downtrodden communities like Youngstown. Seven more hubs are planned by the end of the year, including projects in Chicago, Detroit and Raleigh, North Carolina, that will follow the Youngstown model of bringing together businesses, non-profits and universities to pursue technological breakthroughs.

But after more than a year of operation, the Youngstown hub underscores the challenges facing Obama’s goal of ensuring “a steady stream of good jobs into the 21st century,” as he put it in remarks at a White House event last month.

One of the biggest challenges is the nature of factory innovation itself, which often reduces, rather than bolsters, the need for workers who aren’t very skilled. That means the manufacturing initiative could help create jobs for people with highly specialized skills, such as engineers, but it may do far less to help people struggling to find work after the shuttering of local steel mills.

Three-D printers, the focus of the Youngstown project, are an example of this. Once they are programmed and loaded with raw materials, they work their magic with nary a human hand. If they are ever widely adopted, researchers say a big reason will be that they use less labor than traditional manufacturing. ”A lot of the equipment can be run automatically, so it is less labor demanding,” said Don Li, senior manager of process modeling at RTI International Metals, a Pittsburgh-based titanium manufacturer working on an America Makes project.

The Youngstown hub is still in its very early stages but so far, at least, there are no obvious signs of a wider impact. About 29,600 people held factory jobs in the Youngstown metro area in January, the latest month for which data are available. That’s actually slightly lower than the number of manufacturing jobs there when the administration awarded the hub to Youngstown in August 2012 and when it opened its doors that October. Total employment in the area was flat in 2013, while it grew nationwide.

Of six organizations in Youngstown and Cleveland – the nearest major city in the state – working on America Makes projects, none has made new hires for the work. But the non-profit managing the initiative, the National Center for Defense Manufacturing and Machining, has added 10 employees to run the lab and oversee the application process, said executive director Ralph Resnick.

Ashley Martof, an intern at America Makes, is studying 3-D printing as an industrial engineering major at Youngstown State University. Her friends and family tell her she is wasting her time because manufacturing jobs have dwindled. ”I tell them there will not be as much need for the working class, but there will be more engineers,” Martof said.

The availability of such jobs probably won’t do anything to help people like Dennis Church, 60, who is retraining for a maintenance job after 31 years at RG Steel. ”Those are tech jobs,” Church said. “My personality is more hands on.”

By the way, Obama would to set up 45 hubs around America if Congress would give him the dough.

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


‘We are back in the land of discretion. Rules did not work, because the Fed set the wrong rules’

Good stuff from Robert Brusca:

In the end, the Fed has eliminated the 6.5% trigger that wasn’t a trigger. Yellen has replaced it with a laundry list of things that matter with no objectives for any of them. We are back in the land of discretion. Rules did not work, because the Fed set the wrong rules. But the policy objective of price stability- and that means 2% inflation- is still there and still not being met. Moreover, the Fed is willing to hike rates and slow progress toward the 2% goal long before we get there, an act that slows the drop in the already too-high rate of unemployment.

The Fed continues to see lower rates of unemployment than it was projecting in the past. But the Fed’s own projections of growth are being trimmed. How does the unemployment rate make this accelerated progress? It’s all due to the magic of demographics. The Fed is relying on a continuation of a process it really does not understand and did not anticipate. It is willing to PLAN to raise rates on the notion that this process will continue. Who says the Fed ain’t got religion?

The Fed has not told you using its fabled transparency that this is the process by which unemployment rates will drop faster. Janet Yellen registers deep concern about all sorts of labor market characteristics but she is stopping QE which is the one thing the Fed was doing that might have helped. Moreover, the Fed is planning to raise the fed funds rate with inflation below target and expected to remain below target. Fed policy amounts to hoping that demographics will reduce the rate of unemployment faster. … While Janet urges you to ignore ‘the Dots’ I urge you to shred the Fed statement and to look only at ‘the Dots’ and the other projection materials. They describe the lay of the land and conditions where the Fed really plans to live. The statement is a cover story.

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


‘America’s educational productivity appears to have collapsed’

Cato Institute

Cato Institute

Cato’s Andrew Coulson:

Adjusted state SAT scores have declined by an average of 3 percent. This echoes the picture of stagnating achievement among American 17-year-olds painted by the Long Term Trends portion of the National Assessment of Educational Progress, a series of tests administered to a nationally representative sample of students since 1970. That disappointing record comes despite a more-than-doubling in inflation-adjusted per pupil public-school spending over the same period (the average state spending increase was 120 percent).

Consistent with those patterns, there has been essentially no correlation between what states have spent on education and their measured academic outcomes. In other words, America’s educational productivity appears to have collapsed, at least as measured by the NAEP and the SAT. That is remarkably unusual.

In virtually every other field, productivity has risen over this period thanks to the adoption of countless technological advances—advances that, in many cases, would seem ideally suited to facilitating learning. And yet, surrounded by this torrent of progress, education has remained anchored to the riverbed, watching the rest of the world rush past it.


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