Economics, Pethokoukis, U.S. Economy

What the return of wolves to Yellowstone teaches about what’s wrong with the US economy



Where are the entrepreneurs? (One of my favorite topics.)  FiveThirtyEight’s Ben Casselman highlights the latest data on the long decline in US startup activity:

Last week, the Census Bureau released new data on so-called business dynamics (startups, failures, hirings and firings) for 2012. Entrepreneurship did rise in 2012, but barely. Americans started 410,000 businesses in 2012, up just 2 percent from a year earlier and still more than 20 percent below prerecession levels. The startup rate — the number of new businesses as a share of all businesses — was essentially flat at 8 percent.

On the one hand, the lack of a rebound shouldn’t come as too much of a surprise. The decline in entrepreneurship predates the recent recession; in economic terms, it’s a “structural” problem, not a “cyclical” one.

On the other hand, the decline did accelerate in the recession, so we might expect to see at least some increase during the recovery. And we have — just not much of one. Entrepreneurship looks a lot like other measures of economic dynamism: Companies, for example, are hiring more workers, but at a rate well below prerecession levels. Workers, similarly, remain reluctant to quit their jobs, which suggests they, too, remain cautious.

The US economy has a competitive intensity problem, and this decline in startups is at its core. Startups are the straw that stirs the drink. They generate new innovation (and new jobs) and force incumbents to improve or die. They change everything, creating a healthier, more vibrant economy in the process.

I recently watched a video report on how the 1995 reintroduction of wolves to Yellowstone National Park — after a 70-year absence — altered the park’s entire ecosystem. Yes, wolves are predators, but as the video explains, “they give life to many others.”  Without wolves, the deer population population exploded, with the animals grazing away much natural vegetation and reducing the park’s animal and plant diversity. As soon as the first wolves showed up, things started changing, They, of course, killed some deer. But they also changed the behavior of the deer, and that led to a “trophic cascade” which caused an explosion in the number and variety of plants and animals — and that changed the nature of the rivers. “So the wolves, small in number, not only transformed the ecosystem of Yellowstone National Park, but also its physical geography.”

In the US economic ecosystem, startups are wolves. And we need more of them, and the creative destruction they bring, to transform our stagnating economy.

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


Here is the real size of the federal debt, in one chart

Manhattan Institute

Manhattan Institute

Publicly held debt is 74% of GDP. But this Manhattan Institute report add in some other federal liabilities to take that number to 213%.

The “official” liabilities of the federal government are presented each year in the Financial Report of the United States Government (FRUSG). The liabilities reported in the FRUSG at this time last year included $12 trillion in debt held by the public, $6.5 trillion in federal civilian and military employees’ accrued pension benefits and other retirement and disability benefits, and $1.3 trillion in other liabilities, producing total liabilities of $19.9 trillion.

Thus, the official federal liabilities are significantly bigger than the debt held by the public, but this measure still does not include a comparable measure for Social Security and Medicare benefits.

We focus on accrued Social Security and Medicare benefits payable to current retirees because they conform to the definition of a liability, are comparable in nature to federal employees’ accrued retirement benefits, and  importantly, are available each year in the FRUSG’s Statement of Social Insurance.

Limiting the accrued Social Security and Medicare liabilities to the benefits payable to current retirees also overcomes the critique that their size can be dramatically changed by legislative action. Most Social Security and Medicare reforms are, at most, a modest effect on current retirees’ aggregate benefits.

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

Economics, Pethokoukis, U.S. Economy

This cutesy chart about wealth inequality actually makes the opposite point it intends to


From Mother Jones magazine, regarding the above chart (h/t to Timothy Lee):

It’s never been a bad time to be rich in America. But some times have been a lot better. In fact, the best time may be now, especially when you consider the amount of total income controlled by the top 1 percent since colonial times (with ancient Rome thrown in for comparison.

The point here, I guess, is that wealth inequality is a bad thing, and wealth inequality is as bad as its ever been, and we the 99% should be outraged. From 1776 to today, a quarter millennium of exploitation of the masses! (We will, for now, set aside any debate over the data.)

But Americans are a lot better off today than they were in 1776 of 1860 or 1929 or 1960, right? I mean, that is kind of an important point. In 1800, per capita GDP — adjusted for inflation — was about $2,000 a year and average life expectancy was 39 year. Today it’s over $42,000 and 79 years. Not only would I rather live in 2014 America than in any of those other time periods, I would rather live in 2014 America than 2013 America.

The folks at Mother Jones seem so concerned with what others have, they seem to have missed all that they have — not to mention the wonders created by innovation-driven capitalism. It’s also worth noting that wealth inequality — as least measured by Thomas Piketty — was about the same in 1980 as it was in 1960 — and then it took off. But even as wealth inequality has risen, middle-class incomes have continued to rise, by some 40% in real terms.

Credit: Economic Growth: Unleashing the Potential of Human Flourishing

Credit: Economic Growth: Unleashing the Potential of Human Flourishing


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

Economics, Pethokoukis

September jobs report: America’s wage-less recovery continues


The headline numbers are pretty good. The US economy generated 248,000 net new jobs last month, according to the Labor Department, while July and August added a combined 68,000 more than first thought. And the official unemployment rate fell to 5.9% from 6.1%, hitting the lowest level since July 2008. The jobless number is now just 0.4 percentage points above what the Federal Reserve considers “full employment.”

But many American workers probably aren’t celebrating when they look at their paychecks. Average hourly earnings were flat last month. And as economist Robert Brusca points out, “They are up at a 1.8% annual rate over three months and just a 2.3% annual rate over 12 months. Average hourly earnings are accelerating only slightly more than one year ago when they were going up by 2.2% year-over-year.” Once you subtract inflation, wages are pretty much flat. Along the same line, here is Barclays’ take:

Earnings were the soft spot in the September employment report. The broadest measure of average hourly earnings was flat in September, below our forecast for a 0.2% increase, and are now up 2.0% y/y. Average hourly earnings for production and nonsupervisory workers, which we view as a more reliable series, was also unchanged in September and is up 2.3% y/y, down from 2.5% in August.

So what’s going here? Why the disconnect between (a) economic and job growth and (b) wage growth? “Admittedly, the lack of any upward pressure on wage growth remains a puzzle,” writes Capital Economics economist Paul Dales in his morning note. But consider: Wage growth is weak, involuntary part-time work remain high, the employment rate — the share of total adults with a job remains low. IHS Global Insight;

One key factor discouraging entry into the labor force is wage growth.  With the one penny decline in average hourly earnings, average hourly earnings stand at only 2.0% ahead of year-ago levels – a rate that persisted since 2011.  Large declines in the unemployment rate for those without a high school diploma and among high school graduates suggests that a sizable share of this month’s new jobs occurred in low-paying sectors, depressing growth in average hourly earnings.  But still, salary growth in higher-paying areas like financial or other professional services has been inadequate to overcome this mix effect.



To me, this data continues to suggest the US economy might be moving further into a automation-driven, “average is over” scenario where the labor market is bifurcated between high-skill, high-wage jobs and low-skill, low-wage jobs — with the latter seeing little wage growth despite GDP growth. And less work — full-time or part-time — in the economy overall.

Economics, Pethokoukis

Are some Republicans unrealistic about how low tax rates can go?

Image Credit:

Image Credit:

The next American president will preside over a federal government — according to CBO — taking in revenue equal to 18% of GDP yet also running budget deficits averaging 3% of GDP — not to mention a national debt twice the pre-Great Recession level. If that president wants to cut top individual income tax rates, how low can he or she realistically go given the budget situation?

The numbers 25% or 28% often get tossed around by Republicans as desirable top rates. Both certainly have symbolic oomph. The former was the top rate under President Coolidge, while the latter was (sort of) the top rate established by the 1986 tax reform. But are rates that low — the top rate has only been 28% or lower a total of 14 years since 1913 — fiscally realistic?

Not without base broadening, eliminating or curtailing various breaks and using the resulting revenue to lower those statutory rates. (And as the Romney tax plan in 2012 shows, base broadening is no piece of cake.) That’s how the 1986 tax reform was done. But that “cut the rate, broaden the base” approach may not have been an economic game-changer. AEI’s Alex Brill and Alan Viard:

Because the Tax Reform Act of 1986 dramatically reduced statutory tax rates, including the top rate from 50 to 28 percent, many observers concluded that it would reduce work disincentives. As Alan Auerbach and Joel Slemrod noted, though, because the rate reductions were offset by base broadening, the reform left effective tax rates and work incentives roughly unchanged for the economy as a whole, although it significantly raised or lowered disincentives for particular taxpayers.

Also note that the big tax reform plan of House Ways and Means Chairman Dave Camp, which also followed the 1986 formula, only managed to reduce the top rate to 35%.

Of course, you could slash rates without base broadening and accept lots less revenue — which would almost certainly be the result even with reasonable dynamic scoring. (And any Laffer Effects are much less when bringing down the top rate from 40% than from 70% back in 1981. Top income tax rates are not on the “wrong” side of the Laffer Curve today.)

But then you would have to cut spending — likely entitlement or other safety net spending, as well a discretionary spending — to avoid enlarging an already large debt and deficit. Good luck pushing tax cuts financed by Medicaid, Medicare, Social Security cuts. Indeed, it seems more politically likely major entitlement reform would be accompanied by tax hikes, not tax cuts. AEI’s Viard and Michael Strain: 

 … entitlement reductions will be part of the fiscal solution, and the most growth-friendly approach to fiscal consolidation would go heavy on spending cuts and light on tax increases. But public and political attitudes make it clear that it will be possible to secure significant entitlement reductions only if they are accompanied by tax increases. Democrats’ opposition to entitlement cuts and Republicans’ ambivalence about them make a budget strategy that relies entirely on entitlement cuts politically unviable.

Therefore, revenue will have to rise to restore fiscal balance. Indeed, the only significant entitlement benefit reduction in recent years, the benefit cuts in the 1983 Social Security legislation, were part of a bipartisan agreement that also included tax increases. … And Republicans are starting to accept this as well. Ryan’s budget proposal calls for revenue to rise to 19.1 percent of GDP by fiscal 2023, significantly above the 1960-2013 average of 17.9 percent.

Realistic tax reform — show your math, please! — should certainly be part of any pro-growth agenda. But there should be lots more to a pro-growth agenda than just lowering top rates: reducing regulatory barriers to startups, patent and copyright reform, and ending “too big to fail,” among others.

Economics, Pethokoukis, U.S. Economy

Where’s the inflation? A reality check in 5 simple charts

Whether you look at the CPI (the inflation index most people are familiar with), the PCE (the Fed’s favorite gauge), food prices, online retailers, or expectations, it just doesn’t look like we are in a period of broadly rising prices that would suggest a monetary policy mistake. Actually, were that the case, we wouldn’t need government stat keepers to tell us.







Economics, Pethokoukis, U.S. Economy

Are we better off today than back in October 2008?


Six years ago, the US economy was in the thick of the financial crisis and the economy was tanking. Real GDP fell an annualized 8.2% over the final three months of that year — the single worst quarterly showing of the Great Recession — and nearly 2 million jobs disappeared from October through December. Clearly the economy, cyclically, is in much better shape today. The economy has been growing since June 2009, employment has been growing since March 2010, and major financial institutions are no longer teetering on collapse. So, yeah, things are better – a line pushed hard today by President Obama.

But consider: (a) the economy has been unable to consistently grow at more than 2% throughout this expansion; (b) trend GDP remains below its prerecession path; (c) the share of adults with any kind of job remains well below pre-recession levels; (d) there are just 1.2 million more private jobs today than January 2008 despite 15.6 million more adults; (e) wage growth remains weak; (f)  the megabanks are even bigger, (g) the pace of startups is lackluster; (h) median household income, as measured by the Census Bureau, was 8 percent lower last year than in 2007.

So, is American’s economic future brighter today than it was before the downturn? Are the big structural problems, including too much debt and too little competitive intensity, really being dealt with? Are we on the right track? Polls show two-thirds of Americans don’t believe we are. And I agree.

Pethokoukis, Economics, U.S. Economy

6 reasons marriage is in deep, deep trouble

From Isabel Sawhill of Brookings:

1.) Major demographic trends, once they gain a certain momentum, are hard to reverse.

2.) The youngest generation is marrying less than older ones, suggesting this is the wave of the future.

3.) Groups with low marriage rates (minorities) are becoming a larger share of the population.

4.) Other advanced countries are also seeing a decline in marriage, suggesting the trend has little to do with a lack of specific policies in the U.S.

5.) The more fundamental source of the decline appears to be women’s greater opportunities to support themselves and to establish identities separate from those of wife and mother.

6.) Single parenthood may replicate itself intergenerationally by reducing the life chances of children, especially boys with absent fathers.

Now Sawhill offers a bunch of positive factors for marriage, but I sense she thinks pro-marriage forces have a long slog ahead of them. And that’s too bad since she stresses that marriage is “one of the best antipoverty policies in existence.” And Sawhill may be overly optimistic that progressives are beginning to grasp the importance of marriage in social mobility.

Economics, Pethokoukis, U.S. Economy

Study: Higher unemployment makes people way more miserable than higher inflation

From “The Happiness Trade-Off between Unemployment and Inflation” by David Blanchflower, David Bell, Alberto Montagnoli, and Mirko Maro

Unemployment and inflation lower well-being. The macroeconomist Arthur Okun characterized the negative effects of unemployment and inflation by the misery index—the sum of the unemployment and inflation rates. This paper makes use of a large European data set, covering the period 1975–2013, to estimate happiness equations in which an individual subjective measure of life satisfaction is regressed against unemployment and inflation rate (controlling for personal characteristics, country, and year fixed effects).

We find, conventionally, that both higher unemployment and higher inflation lower well-being. We also discover that unemployment depresses well-being more than inflation. We characterize this well-being trade-off between unemployment and inflation using what we describe as the misery ratio. Our estimates with European data imply that a 1 percentage point increase in the unemployment rate lowers well-being by more than five times as much as a 1 percentage point increase in the inflation rate.

Now even the authors concede their finding probably has a limit, as one of the authors told the WSJ’s Pedro Nicolaci da Costa:

In a telephone interview, Mr. Blanchflower acknowledged that equation might change once inflation exceeds a certain level, say in the double-digits. At that point, the tradeoffs may shift. But with most advanced economies struggling to keep inflation from slipping further below official targets, that’s simply not a problem that should be concerning policy makers at the moment, he says.

Economics, Monetary Policy, Pethokoukis

Maybe Ben Bernanke does deserve a Nobel Prize — but not for economics


The Wall Street Journal’s Jon Hilsenrath makes the case for former Fed Chairman Ben Bernanke as the next recipient for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel:

Mr. Bernanke’s 1990s “financial accelerator” papers with New York University professor Mark Gertler and Simon Gilchrist presciently drew attention to the damage done to the broader economy by shocks to the credit system. His research in the 1980s on the Great Depression also proved to be a useful roadmap for how links between the financial system and the economy break down in a crisis.

The work, along with work by others like Douglas Diamond at the University of Chicago’s Booth School of Business, is seen by many academics as being at the leading edge of research in the field. Mr. Bernanke is the 25th most cited economist on the Ideas website hosted by the Federal Reserve Bank of St. Louis, just behind Nobel winner Paul Krugman and ahead of previous Nobel winners including Edward Prescott, Daniel Kahneman and Robert Shiller.

Hilsenrath concedes that Bernanke, though arguably deserving, is probably not the most likely pick. Maybe, though, the better option would be to award Bernanke the Nobel Peace Prize. Think about the counterfactual: What if the Bernanke Fed had made the same tight-money errors as the European Central Bank, calamitous moves that almost broke the eurozone and left the region mired in depression. Imagine the terrible economic feedback effects from both the US and EZ stuck in a long downturn. As it was, the possibility of a eurozone breakup led some economists to fret about potential military conflict. Now assume the absence of the US growth engine, both hurting the $300 billion in annual trade between the two regions and adding to economic uncertainty. Certainly both major economies in a depression would hardly had made for a safer, more open world. The monetary moves, including quantitative easing,  by the Bernanke Fed are a big reason the US doesn’t resemble the EZ right now. The Noble Committee could do a lot worse than Bernanke. It has in the past and likely will in the future.