Economics, Pethokoukis, U.S. Economy

Think the US job market is healthy again? Well, it isn’t — and hasn’t been for a long time

070914goldman

It’s not enough for an economy to generate jobs. There should also be a good amount of turnover in the labor market. Workers need to move around to find the best fit for themselves, not to mention higher pay from taking a new gig. A stay-put workforce is bad news.

Now net job growth is a product of total hiring minus total separations (including layoffs and quits), as measured by the Job Openings and Labor Turnover Survey. And as a Goldman Sachs memo points out, “a given level of net employment growth can be achieved with a high or a low level of gross turnover.”

So long as there is decent net growth, should we really care how it comes about? After all, as JPMorgan point out, the 231,000 average monthly job gains in the first half of the year was the best of any six-month period in this expansion. Actually, we probably should care about these job market internals. Goldman cites two reasons:

– The first is that a less dynamic labor market is likely to see weaker wage growth as workers fail to move to jobs in which they are more productive. Fed research suggests that the impact on aggregate productivity growth could be considerable.

– The second reason for concern is that a low-turnover labor market risks locking out the unemployed and marginally attached, in some cases permanently. This “hysteresis” effect is a second channel through which a lack of dynamism can reduce potential output.

More stasis means lower wages, less productivity, and higher long-term joblessness. So is labor market dynamism or churn declining? Goldman thinks it is. The firm created a measure based on (a) the sum of the hiring and separations rates in the JOLTS data; (b) the sum of the gross job gain and job loss rates in the Business Employment Dynamics data; and (c) the share of workers making job-to-job transitions in the monthly Current Population Survey (CPS, also known as the household survey) micro data. Goldman finds:

labor market dynamism has fallen substantially since 2000, with the decline occurring during and after the last two recessions. Our dynamism tracker has bounced back only weakly during the last two recoveries, in contrast to the much stronger bounce-back following the recessions of the early 1980s and 1990s.

Why the decline? There certainly may be structural reasons. Companies may be imparting specific skills that don’t easily transfer to other firms. The decline in new firms creation may also reduce worker movement. But Goldman mostly blames weak economic growth. Insecure workers are less likely to take a risk on a new job. As I have noted before, it used to be common for the US economy to post a quarter of 4% or faster real GDP growth. In the 1980s (1981-1990), there were 18 such quarters. In the 1990s (1991-2000), another 18 quarters. But in the 53 quarters since then, the US economy has generated only six three-month periods of 4% real GDP growth or faster, including just two during the Not-So-Great Recovery.

This is one reason Fed Chairman Janet Yellen includes hiring and quits rates in her “dashboard” of labor market indicators. It also why the Fed should focus on growth right now.

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

Economics, Financial Services, Pethokoukis

Will Obama and the Democrats wage a ‘war on Wall Street’ to hold the Senate?

Image Credit: Shutterstock

Image Credit: Shutterstock

According to inside-the-Beltway wisdom, the Democrats’ best strategy for the fall midterms is to use social issues against the GOP. As Emma Roller writes in National Journal, “The Supreme Court just ruled 5-4 in favor of Hobby Lobby, and thereby held that some businesses may claim religious exemption and not follow Obamacare’s contraception-coverage mandate. In the run-up to a summer where midterm campaigning will begin in earnest, this may not be the worst thing for Democrats.”

If Roller is right, expect Dems to double down on “war on women” accusations. But at the same time, the party might be also wage its own war — on Wall Street. According to The New York Times, “Citigroup and the Justice Department are nearing a deal that could cost the bank roughly $7 billion to settle a civil investigation into the sale of mortgage investments, people briefed on the matter said on Tuesday.”

The NYT piece also says the Citigroup deal “raises the stakes for Bank of America, which is expected to be the next large bank to settle its mortgage case with the Justice Department.” Right now, however, talks between the feds and BofA are “dormant.” But Guggenheim Partners bank analyst Jaret Seiberg doubts whether these two legal agreements, assuming both get done, are the end of the story:

The populist dislike of the mega banks and Wall Street is as strong as ever. One just had to listen yesterday to Sen. Elizabeth Warren or Sen. Richard Shelby to see how both progressives and conservatives see upside in attacking Wall Street and the big banks. There has been no real evidence that any of these civil settlements has done anything to help the big banks on the political front and we are dubious that either the Citigroup or Bank of America deals will change the political math. This is why we continue to worry about a criminal prosecution of a large domestic bank ahead of the mid-term election. It is also why we believe the big banks will continue to be a target for civil litigation by the government. In short, we question if there is really an end in sight to all of this litigation.

And as Seiberg has also written, ” … we are not as confident that a domestic bank could survive unscathed a criminal conviction. We cannot dismiss this risk entirely as politics are driving this process. This is why we view the prospects for a Justice Department-incited financial crisis as a low risk but high impact.”

And to that, you can add this news item from last week: “President Barack Obama on Wednesday said that ‘further reforms’ of Wall Street are needed, arguing that there remains too much focus on making profits through big banks’ trading desks as opposed to investing in companies and the ‘real’ economy.”

Maybe Obama is getting ready to pursue a “break up the big banks” agenda, though I doubt it. But there is another path. Obama has shown himself willing to take executive action if Congress is unwilling to act on agenda. Immigration, climate change, and now maybe financial reform via the Justice Department.

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

Economics, Pethokoukis, U.S. Economy

Declining US business dynamism: Where are all the startups?

San Francisco Fed

San Francisco Fed

One analysis of the Not-So-Great Recovery argues that rebounds after recessions with financial crises tend to be weaker than otherwise. This is the theory posited by Carmen Reinhart and Kenneth Rogoff in their book This Time is Different. 

But that’s not quite right, according to Michael Bordo. In the paper “The Recovery of Housing and the End of the Slow Recovery?,” he focuses on the housing bust rather than the financial crisis more broadly: “Residential investment is not a large component of national expenditure but it is closely linked to the purchase of consumer durables and other housing-sensitive sectors, which stimulates consumption.”

But the housing collapse might also have led to a weaker recovery through its impact on business creation. In the paper “Slow Business Start-ups and the Job Recovery,” San Francisco Fed economists Liz Laderman and Sylvain Leduc point out that in the first year of growth following the employment bottom in the terrible 1981-82 recession, net start-up employment grew 28.3%. But in the first year after the lowest point of the 2007–09 recession, net start-up employment grew only 18.8%. From the paper:

The weakness in employment growth at start-ups is likely an important factor behind the slow johttp://www.aei-ideas.org/2014/05/declining-us-business-dynamism-its-for-real-and-its-spectacular-i-mean-spectacularly-worrisome/b growth in the economy as a whole. This is because start-up employment typically grows many times faster than employment at mature businesses in the early stages of recoveries, so that start-ups make outsized employment contributions relative to their small share of total employment.

A Reagan-esque recovery in startup creation would have meant an additional 760,000 jobs between March 2010 and March 2011. Blame housing, say the economists:

The experience of start-ups in the Great Recession has been linked to the drop in house prices (Fort, Haltiwanger, and Jarmin 2013). In particular, U.S. states that experienced steeper declines in house prices also saw steeper declines in employment growth at start-ups relative to mature businesses.

A link between changes in house prices and start-up growth is intuitive. Lower house prices reduce homeowners’ equity and wealth, which can restrict an important source of funding that entrepreneurs typically access to start new businesses.  … In addition, even entrepreneurs who use assets other than their home equity to start a new business may be less willing to take that risk if they don’t have enough home value as a backstop to their investment.

If Laderman and Leduc have the story right, rising home values should start resulting in more new business creation and more jobs. Let me add, however, that there seems to be a long-term decline in startup creation that precedes the recession.

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

Pethokoukis

The Fed should focus on boosting growth

Image Credit: shutterstock

Image Credit: shutterstock

A message of growth, growth, growth from John Makin:

It is disconcerting that the Fed has so far said virtually nothing about very weak GDP growth numbers or about its implications for possible changes to policy aimed at sustaining growth. After the June 18 Federal Open Market Committee meeting, Fed Chair Janet Yellen instead chose to look ahead to a growth rebound based on stronger growth of consumption and investment, for which there is yet no evidence. So far, the Fed’s only viable policy option has been to talk about further delaying the first interest rate increase that it mandates. Markets have set that date at about mid-2015. It will no doubt slip further to 2016, given the weakness of the US economy.

At the very least, the Fed needs to stop talking about its exit strategy and when it will start raising interest rates and perhaps start talking about things it might do to boost weak growth. That option would include purchasing a wider range of assets than those currently being purchased under the Fed’s quantitative easing program. But before that happens, the Fed will have to stop dreaming about 3 percent growth and wake up to the reality that 2014 will be a slow growth year wherein a resumption of inflation is not a risk. Given the poor forecasting performance by the Fed and most pundits, perhaps we should remember that deflation remains a risk.*

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Economics, Pethokoukis

Rubio’s ideas start to offer the GOP a challenge and an opportunity

Gage Skidmore (Flickr) (CC-BY-2.0)

Gage Skidmore (Flickr) (CC-BY-2.0)

How would a 21st century American president deal with America’s 21st century economic problems?

More than a decade in, we really don’t know. The Bush administration was consumed, by necessity, with war. The Obama administration, by choice, with preserving the FDR-LBJ welfare state and adding a key missing component: nationalized healthcare. Obamanomics has been an expensive effort in economic nostalgia to recreate the supposedly prosperous, egalitarian 1950s. The Obamacrat obsession with bullet trains, the latest in 1960s transportation thinking, is illustrative and telling.

And not that the left doesn’t know where it wants to next take America. It has a big, if unoriginal, idea: a vastly more expansive and intrusive welfare state, universal in nature, financed through higher taxes on the rich, business, and eventually middle-class through a value-added tax. If it’s good enough for Scandinavia, it’s good enough for Obama’s America.

But the right has also been backward-looking. Forget about Reagan reminiscing. Some conservatives and libertarians are yearning for a leader who can be a bridge back to the 1920s, the pre-New Deal, pre-Keynes era of Calvin Coolidge. Low marginal tax rates, balanced budgets, and hard money are touted as macropolicies of such obvious intrinsic merit that justifying how they broadly enhance prosperity and meet current challenges is an afterthought. Too often the GOP settles for cruising high at 35,000 feet, its big-picture ideas far removed from the messy, everyday problems currently afflicting flyover America.

Marco Rubio is one of the few national Republicans, Mike Lee is another, offering a path out of that ideological cul-de-sac. Not by abandoning conservative principles — but by applying them in a modern, relevant way. Rubio’s big economic speech last week tied together several earlier speeches outlining new approaches to reforming key American institutions such as higher education and the welfare state and addressing problems such as wage stagnation and retirement security in a historic time of globalization and automation. As Rubio put it:

We Americans have good reason to be hopeful, for no nation is better positioned to access the full promise of the 21st-century economy. The new economy is all about innovation, creativity and productivity – and we are the most innovative, creative and productive people on the planet.

And the changes we must make to achieve this better future come
from fundamental truths about our nation: that government exists to empower its people, and that our free enterprise economy is the greatest generator of opportunity and prosperity in human history.

From these principles we see that if we reform our taxes and regulations, we can create millions of higher paying jobs by winning the global competition for talent, investment, and innovation.

And if we modernize our outdated safety net programs and revolutionize how we acquire and pay for education, millions of people will have the skills they need for the higher paying jobs of the new economy.

20th-century America was special. But 21st-century America has the potential to be even better.

Rubio might run for president. But even if he does not, he is methodically assembling a bold, smart agenda for any reform-minded national candidate wishing to move forward both America and the Republican Party.

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

Pethokoukis

This is getting weird: What is wrong with the US economy?

Hamilton Place Strategies__GDP growth and revisions for Q1

Economists have excuses aplenty for the shockingly weak first-quarter GDP numbers, revised version. A negative 2.9%? Ouch. Here is a pretty good summary by JPMorgan’s Mike Feroli:

How should we understand the weakness in Q1? It may not be the most elegant answer, but we think it was mostly a confluence of several negative, but mostly one-off, factors. A swing in inventories subtracted 1.7%-points. The expiration of extended unemployment benefits probably stung consumption, as did the weather to some extent. Finally, nonresidential investment is lumpy and volatile, and happened to have a down quarter after a few up quarters in late 2013.

What’s more, there is plenty of real-time data suggesting a second-quarter snapback in the 3% to 4% range. So no “recession,” at least as commonly defined. But still … this was supposed to be the Year of Acceleration. And you really don’t see quarters this weak outside of recessions.

Two thoughts: first, slow-growth economies are especially susceptible to recessions, as Federal Reserve research has shown. It doesn’t take much of a bump to turn slow, to sputter, to stall. Second, the stumble shows an economy lacking both momentum and resilience. Hardly what one would hope to see five years into a supposed recovery. Even Feroli raised an eyebrow at the drop:

Even so, the occurrence of such a big decline in a quarter when hours worked in the business sector was up at a 2.2% rate and the unemployment rate declined does not speak well about the supply side of the economy; indeed, business productivity likely declined at a 5.9% rate last quarter, the most since 1947.

So what’s the problem? It may be multicausal. Too little demand, too much uncertainty, and — this is key — too little innovation-generating, good-job-producing business dynamism.

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

Economics, Pethokoukis

Helping American families: Tax relief and more ….

In my new The Week column, I make the case that it makes good macroeconomic sense to reduce government roadblocks to parents having the number of kiddies they prefer:

This is not just a problem that parents should care about. America’s childless ought to care a lot about the “kid gap.” Washington should care about the nation’s fertility rate the same way it cares about the nation’s productivity and labor-force participation rates. Low fertility rates are associated with diminished economic growth. Fewer kids mean fewer tax-paying workers to support public pension programs. The Obama White House has stated that real GDP growth in the 21st century “is likely to be permanently slower… due to a decline in the growth of the working age population.” An older society, noted the late Nobel laureate economist Gary Becker, is less dynamic, creative, and entrepreneurial. Thomas Piketty argues in his best-selling Capital in the Twenty-First Century that higher fertility would reduce inequality by increasing economic growth and dispersing the wealth of the rich among more descendants. And for now, at least, bigger families would boost housing demand and near-term economic growth.

Of course, even without this supply-side kicker, letting parents keep more of their own money — such as through an expanded child tax credit — is pretty much self-recommending. But there is more to the middle-class agenda than tax relief. In “Room to Grow,” authors outline a broad agenda for making middle-class life more affordable, including healthcare and higher education reform.

 

 

Economics, Pethokoukis, U.S. Economy

Steven Rattner’s pollyannaish view of the rise of the machines

Image Credit: Shutterstock

Image Credit: Shutterstock

I knew Steven Rattner had neglected to think deeply enough about the role of automation and the job market when I read this bit from his New York Times op-ed:

Consider the case of agriculture, after the arrival of tractors, combines and scientific farming methods. A century ago, about 30 percent of Americans labored on farms; today, the United States is the world’s biggest exporter of agricultural products, even though the sector employs just 2 percent of Americans.

The trick is not to protect old jobs, as the Luddites who endeavored to smash all machinery sought to do, but to create new ones. And since the invention of the wheel, that’s what has occurred.

But must that always be the case? Will society always be able to upgrade its educational level broadly and quickly enough to say ahead of the machines? Might advancing technology create new industries that require fewer workers? The past three recessions have been notable for lengthy “jobless” recoveries and increasing job market polarization where routine, middle-wage jobs never return. And what if Rattner’s hand wave at this issue proves correct? That might be cold comfort for another generation of workers. Michael Strain:

Even if the standard economist’s answer is correct when comparing the 21st century to the 19th, it omits the fact that living through this period of transformation was wrenching. Many economic historians believe that the British working class had to endure decades of hard labor with little improvement in their quality of life before they were able to enjoy the benefits of the new economy. Real wages fell dramatically for some occupations. Many who held those occupations couldn’t be retrained to compete in the new economy. Lives were shattered. Some families suffered across generations. People flocked from the countryside to dirty, disease-infested cities.  For decades there was deep social unrest. British society was shaken to its core.

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

Economics, Pethokoukis, Taxes and Spending

Is helping middle-class families ‘social engineering’?

Image Credit: Shutterstock

Image Credit: Shutterstock

One frequently mentioned criticism of the plan in “Room to Grow” to dramatically expand the child tax credit* is that it’s somehow “social engineering.” But as Bob Stein, the author of that chapter, has patiently pointed out, the expansion would actually help offset the anti-family “social engineering” of current government policy and make Americans less dependent on government.

Anyway, all this talk of “social engineering” reminded me of a passage in “Witness to Hope: The Biography of Pope John Paul II” by George Weigel (bold is mine):

Perhaps the hardest-fought battle between Church and [Poland's] regime involved family life, for the communists understood that men and women secure in the love of their families were a danger. Housing, work schedules, and school hours were all organized by the state to separate parents from their children as frequently as possible. Apartments were constructed to accommodate only small families, so that children would be regarded as a problem. Work was organized in four shifts and families were rarely together. The workday began at 6 or 7 a.m., so children had to be consigned to state-run child-care centers before school. The schools themselves were consolidated, and children were moved out of their local communities for schooling.

Now that’s social engineering. I guess my point here is that policy reformers should think carefully about the roadblocks government inadvertently puts up to Americans conducting a healthy family life. Maybe that’s tax policy. Maybe it’s welfare policy.

Maybe it’s transportation policy. In announcing his “Transportation Empowerment Act” — which push authority over federal highway and transit programs to the states — Senator Mike Lee said last November that the bill “allows states to respond to the needs of their communities and develop systems that result in less traffic, shorter commutes, more affordable homes, and help families better manage the work-life balance.”

Is work-life balance something policymakers should care about? Absolutely.

*Nothing in the book — which isn’t meant to be a soup-to-nuts policy agenda — precludes comprehensive tax reform. Robert Stein himself has written on the need for pro-growth, pro-investment, corporate tax reform, which would raise worker incomes. Other authors, including myself, have advocated replacing the current tax code with a pro-investment, progressive consumption tax.  I alone have written some 55 (!) AEI blog posts advocating for corporate tax reform. Apparently, however, some have failed to take notice.

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

Economics, Pethokoukis, U.S. Economy

What is smart tax reform in a world awash in capital?

My previous blog post highlights some economic and fiscal realities that one might want to consider when thinking about large-scale tax reform in the United States. Here is one more, courtesy of a new HBR piece (more analysis to come), “The Capitalist’s Dilemma,” coauthored by Clayton Christensen:

But, as we will explain further, capital is no longer in short supply—witness the $1.6 trillion in cash on corporate balance sheets—and, if companies want to maximize returns on it, they must stop behaving as if it were. …

We would contend that the ability to attract talent, and the processes and resolve to deploy it against growth opportunities, are far harder to come by than cash.

The tools businesses use to judge investments and their understanding of what is scarce and costly need to catch up with that new reality.While it’s still true that scarce resources need to be managed closely, it’s no longer true that capital is scarce.

A recent Bain & Company analysis captures this point nicely, concluding that we have entered a new environment of “capital superabundance.” Bain estimates that total financial assets are today almost 10 times the value of the global output of all goods and services, and that the development of financial sectors in emerging economies will cause global capital to grow another 50% by 2020. We are awash in capital.

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