Pethokoukis, Economics, U.S. Economy

Study: Immigration needs to focus on quality, not just quantity

Here is the conclusion from “Immigration, diversity, and economic prosperity” by Alberto Alesina, Johann Harnoss, and Hillel Rapoport:

The implications for immigration policy are potentially far-reaching. Typically immigration policies have focused on the quantity – how many visas are issued – and quality – what skills should be required. Immigration policy have neglected the diversity dimension. Our results imply that birthplace diversity also matters.

Moreover, one can also speculate about the formation of political economy vicious or virtuous circles emerging from the interaction between the different dimensions of immigration policy. Given that a highly skilled and more diverse immigration is not only economically more profitable but also better accepted by public opinions, it does not take much to imagine a scenario where quantity, quality and diversity of immigration interact to generate more prosperity.

Countries such as Australia, Canada and the US would seem to illustrate the virtuous regime quite well. The opposite scenario combines weak, unskilled and poorly diversified immigration where each aspect reinforces the other.

Most European countries seem to fall into the second category. They are stuck in a low-skilled and low-diversity immigration trap. Increasing the size of this type of immigration flows will do little to increase prosperity of the receiving countries. Increasing the diversity and the size of high skilled immigration would help. Certain types of low skilled immigration also are necessary to fill in for jobs not ‘sellable’ to locals, like home care for the elderly.

Note that the US is tossed into the group of nations with a “virtuous regime.” That might be an overly generous assessment.

Economics, Financial Services, Pethokoukis

Why isn’t the market already busting up the big banks?

Image credit: Shutterstock

Image credit: Shutterstock

Folks who want to break up the megabanks (BUM) may well point to this report as proof that busting up these Too Big To Fail, Too Complex Too Manage institutions is the pro-market option rather than an unwarranted intrusion by big government. From Bloomberg:

JPMorgan Chase & Co., the biggest U.S. bank by assets, would be worth 30 percent more if broken into its four business segments, an unlikely scenario, an analyst at Stifel Financial Corp. (SF)’s KBW unit said. JPMorgan’s businesses — traditional banking, investment banking, asset management and private equity — are separately worth $255.7 billion, KBW’s Christopher Mutascio said today in a note. That compares with the New York-based lender’s $197 billion market capitalization as of yesterday’s closing price.

Then again, if equity investors really think the whole is less than the sum of the parts, why is the industry becoming more concentrated rather than less? Why isn’t the market working its magic?

A look at KBW’s reasoning provides a hint. In the research note, analyst Mutascio argues that a break up “could potentially result in substantial upside for current shareholders if the segments were valued like similar companies.” He arrived at that conclusion by running the numbers, looking at the income for each unit, and applying a price-earning multiple of a similar company.

But when dealing with an industry lucky enough to have a government backstop, working a spreadsheet isn’t enough. As I wrote in National Affairs, such by-the-numbers analysis

fails to account for the implicit subsidy enjoyed by banks big enough to assume a government bailout in the event of a crisis. If these banks were broken up, the smaller units would no longer be considered too big to fail and so would lose their implicit government guarantee. The loss of the guarantee would make the smaller banks subject to higher funding costs, which would then eat into whatever additional value their more manageable size might otherwise create. This is why market forces are not already dismantling the big banks, and why Dodd-Frank almost certainly did not end “too big to fail.” Until the government proves it can resist bailing out a failing megabank, big banks will continue to do business at a major discount, and this implicit subsidy will continue to incentivize preserving the status quo.

Of course, if capital requirements were a lot higher, then the market might well break up the megabanks since the individual units wouldn’t have to maintain such a large buffer and thus would potentially be more profitable.

Pethokoukis, Economics, U.S. Economy

No, America isn’t just an accidental ‘blip’ in world history

Credit: New York magazine

Credit: New York magazine

The market for economic apocalypticism is apparently insatiable. Doesn’t matter if times are good or bad. For example: smack in the middle of a generational Long Boom, economist Ravi Batra scored a best seller with The Great Depression of 1990.

Selling doomsday is a lot easier, of course, after a decade of stagnation that witnessed a near-depression and America’s worst financial crisis in a century — maybe ever — followed by a “recovery” in name only. New York magazine’s 2nd most emailed story right now is titled “The Blip” and it’s accompanied by this provocative sub-hed: “What if everything we’ve come to think of as American is predicated on a freak coincidence of economic history? And what if that coincidence has run its course?”

The piece, written by Benjamin Wallace-Wells, explores a gloomy 2012 research paper from Northwestern University economist Robert Gordon, “Is U.S. Economic Growth Over?” In the paper, Gordon makes two unsettling claims. First, technological innovation is unlikely to be as fast in the future as it has been over the past 250 years. And even if it does somehow keep pace, a range of headwinds – demography, education, inequality, globalization, climate change, and the overhang of consumer and government debt — means economic growth overall will slow. And almost all the gains will go to the top 1% of the income distribution.

Image Credit: Robert Gordon

Image Credit: Robert Gordon

But Gordon’s grander assertion, one Wallace-Wells call “almost literary in its scope,” is that the past 250 years of economic progress — when the West’s standard of living increased by more than 4,000% — was driven by one-off factors. The general-purpose miracles of the first (steam engines, cotton spinning, railroads) and second (internal combustion engines, electric power, public sanitation) phases of the Industrial Revolution will remain forever unmatched. Sorry, Internet.

And then Wallace-Wells goes all meta big think:

There are many ways in which you can interpret this economic model, but the most lasting—the reason, perhaps, for the public notoriety it has brought its author—has little to do with economics at all. It is the suggestion that we have not understood how lucky we have been. The whole of American cultural memory, the period since World War II, has taken place within the greatest expansion of opportunity in the history of human civilization. Perhaps it isn’t that our success is a product of the way we structured our society. The shape of our society may be far more conditional, a consequence of our success. Embedded in Gordon’s data is an inquiry into entitlement: How much do we owe, culturally and politically, to this singular experience of economic growth, and what will happen if it goes away?

Now, the “Are the good times really over for good?” debate has been running hot the past few years due to America’s economic troubles. In addition to Gordon’s paper, other notable works include economist Tyler Cowen’s The Great Stagnation and Race Against the Machine by techno-optimists Erik Brynjolfsson and Andrew McAfee of MIT. (Gordon and Brynjolfsson-McAfree have debated both in person and in print.) Consultancy McKinsey has released a series of papers examining how advanced economies can boost workforce and productivity growth to avoid a permanent slowdown.

Even the Obama White House has weighed in, putting maybe a thumb or pinkie on Gordon’s side of the argument. From its recent budget: “In the 21st Century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor force growth initially due to the retirement of the post-World War II baby boom generation, and later due to a decline in the growth of the working age population.” (Hey, why didn’t we hear that in the 2012 campaign?)

My take on Gordon’s theory is this: US economic policy — and that of many advanced economies — is so horrifically suboptimal right now that there is tremendous upside to Washington getting its act together to create a better economic ecosystem for the private sector and American workers. (Here are a dozen promising policy ideas.)

And I side with Brynjolfsson and McAfee when they say that the first machine age “occurred when we harnessed steam and other energy sources to overcome the limitations of our muscles, and it transformed the world like nothing else ever has. This second one is about harnessing silicon and other materials to overcome the limitations of our minds. It will be similarly transformative.” Broad-based American economic growth is not predestined to end.

But the real problem with The Blip thesis is Wallace-Wells’ interpretation of Gordon’s other big point. The writer sees America as the accidental superpower whose ascendance was due to the cosmically lucky break of the US of A happening to exist when — for the first time in human history — economic growth started happening in a big way. And that growth is what created our open, market-loving, right-respecting society — not the other way around. American exceptionalism? Western exceptionalism? Please. We all started on third base and think we hit a triple, according to the writer.

Wallace-Wells has it completely backwards, however. Two hundred and fifty years ago, something amazing happened in Western culture, something that never happened, say, in Ancient Rome or dynastic China. The Dutch and British and then Americans began talking about and thinking about and treating the commerce class, the middle class, differently. The West became a business-admiring civilization that began treating innovators — and the creative destruction they unleashed — with respect and dignity.

Credit: Economic Growth: Unleashing the Potential of Human Flourishing

Credit: Economic Growth: Unleashing the Potential of Human Flourishing

As economist Deirdre McCloskey puts it:

When people treat the marketeers and inventors as having some dignity and liberty, innovation takes hold. It was so to speak a shift in “constitutional political economy,” as James Buchanan puts the point. People agreed on the meta-rule of letting the economy go where it will. This contrasted with the earlier mentality, still admired on the left, that treats each act of innovation as an occasion to go looking for its victims. Victims there were, but they were greatly outnumbered by winners. It was ideas, not matter, that made the winners, and brought our ancestors from $3 to over $100 a day. …

The Big Economic Story of our own times is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy, and came to attribute a dignity and a liberty to the bourgeoisie formerly denied. And then China and India exploded in economic growth. The important moral, therefore, is that in achieving a pretty good life for the mass of humankind, and a chance at a fully human existence, ideas have mattered more than the usual material causes. …

The biggest threat, meanwhile, to our prosperity is not temporary recessions, but permanent reversions to old attitudes towards profit and progress. When making money is demonized, when innovation is stifled, that’s when we lose what Adam Smith called “the obvious and simple system of natural liberty.” Respecting capitalism has worked pretty well for the people for two centuries. I reckon we should keep it.

America succeeded because it embraced what McCloskey calls the Bourgeois Deal: let innovators — the folks who imagine, change, explore, create, and inspire – do their thing and get rich, and they will make the rest of society prosperous, too. Economic freedom, an idea, is the killer app of the modern world. Ideas created the West’s success, not the random, chaotic, meaningless occurrence of two industrial revolutions. And as long as America and the West hold to those ideas and make good on the deal they imply, our age of prosperity and opportunity won’t come to an end.

Pethokoukis, Economics, U.S. Economy

Great Gatsby! The killer chart at the core of Obamanomics may not show what Obama says it does

Credit: The White House

Credit: The White House

“Whenever you feel like criticizing any one,” he told me, “just remember that all the people in this world haven’t had the advantages that you’ve had.” — “The Great Gatsby” by F. Scott Fitzgerald.

For many on the left, economic inequality is an intrinsically bad thing, a manifestation of deep social injustice. “This growing inequality,” President Obama said during his recent Knox College speech, “is not just morally wrong, it’s bad economics.” The 1% are fighting a class war against the 99%, and the 1% are winning.

But the moral argument alone doesn’t cut enough ice with aspirational America, which is why Obama needed the addendum about the “bad economics” of inequality. Specifically, the Obama White House argues that there is a connection between concentration of wealth in one generation and the ability of those in the next generation to move up the economic ladder compared to their parents. Shorter: income inequality impedes economic mobility. As former White House economist Alan Krueger has put it:

The fortunes of one’s parents seem to matter increasingly in American society. Children of wealthy parents already have much more access to opportunities to succeed than children of poor families, and this is likely to be increasingly the case in the future unless we take steps to ensure that all children have access to quality education, health care, a safe environment and other opportunities that are necessary to have a fair shot at economic success.

Team Obama’s argument-ending proof? The Great Gatsby Curve — see above chart — which supposedly “shows that children from poor families are less likely to improve their economic status as adults in countries where income inequality was higher – meaning wealth was concentrated in fewer hands – around the time those children were growing up.”

Look where Scandinavia is vs. America! Outrage!

But cross-country comparisons can be tricky. As economist and inequality expert Miles Corak has blogged: “There is no way the United States can mimic the outcomes of Denmark in the way Danes have made that accomplishment: a geographically small country, ethnically homogenous, with high levels of trust, and a labour market notably more structured is not a guide for American public policy.”

For a more apples-to-apples comparison, then, inequality researcher J. D. Vance uses US city data from the new Equality of Opportunity study by Professors Raj Chetty and Emmanuel Saez. First Vance’s chart and then an explanation:


There are 48 dots, one for each of the largest metropolitan areas in the United States. The numbers on the bottom, .38 to .52, measure inequality — the higher the number, the higher the inequality in a given area. The numbers on the left measure absolute mobility – the expected income percentile of a child born poor in those cities. Higher numbers mean greater upward mobility. As you can see, as inequality increases, nothing really happens. There are cities with high inequality and high mobility, low inequality and low mobility, and everything in between.  … In short, in our 48 largest metro areas, there is no meaningful relationship between inequality and upward mobility.

There have been other critiques of the Great Gatsby Curve. Jim Manzi was able to use a variety of variables, including country size, to mimic the GGC’s results. And other research finds the rise in top-end inequality the result of technology and globalization rather than greedy CEOs and bankers.

Then there’s this: remember how all of liberaldom gang tackled economists Carmen Reinhart and Kenneth Rogoff last April for an error in their research on the correlation between high levels of public debt and slower economic growth? But beyond a spreadsheet coding mistake, what really bugged left-liberal/progressive types all along was that Reinhart and Rogoff, in their view, were effectively arguing — without proof — that there was a causal relationship between high debt and low growth.

Hopefully the Great Gatsby Curve, the mother-of-all-public-policy charts driving the Obama White House, will attract similar investigation and scrutiny of its author’s conclusions.

Economics, Pethokoukis, Taxes and Spending

Mad Men economics? No, we can’t return to the sky-high tax rates of postwar America

Credit: AMC's Mad Men

Credit: AMC's Mad Men

As President Obama continues his Back to the Future, 1950s nostalgia economics tour, I thought it would be a good time to glance again at the idea that there would be no economic harm from returning to something like the sky-high marginal tax rates of the early postwar era. Some progressives point to the work of influential left-liberal economists Peter Diamond and Emmanuel Saez as making this case. Here’s a bit from a 2012 Wall Street Journal op-ed the economists coauthored:

According to our analysis of current tax rates and their elasticity, the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50 percent to 70 percent (taking into account that individuals face additional taxes from Medicare and state and local taxes). Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50 percent rate that held during the first Reagan administration, and possibly until the 70 percent rate of the 1970s. To reduce tax avoidance opportunities, tax rates on capital gains and dividends should increase along with the basic rate. Closing loopholes and stepping up enforcement would further limit tax avoidance and evasion.

So Diamond and Saez favor, as does Obama, broadening the tax base while also raising tax rates. A doubly whammy. Three problems here:

1. As I have written many, many times, there were so many one-off factors helping the economy back then that teasing out the impact of tax rates is especially tough. As former Bain Capital executive Edward Conard notes in his book, Unintended Consequences: “The United States was prosperous for a unique set of reasons that are impossible to duplicate today, including a decade-long depression, the destruction of the rest of the world’s infrastructure, a failure of potential foreign competitors to educate their people, and a highly restricted supply of labor. … It seems to me anyone who makes comparisons between today’s economy and that of the 1950s and 1960s without fully disclosing their differences is deceiving their readers.”

2. In rich, multifaceted analysis of Diamond-Saez, AEI economists Aparna Mathur, Sita Slavov, and Michael Strain point out that  Diamond and Saez assume sharply raising tax rates have no long-term impact on taxpayer behavior and the economy since, well, those effects are hard to measure. But economists agree those long-term effects are important. America benefits greatly from people who take risks and make career choices in hopes of striking it rich. “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate,” Mathur, Slavov, and Strain argue.

3. In a 2010 e21 analysis, Arpit Gupta looked at some of the literature examining the macro, long-term impact of tax hikes:

A clever resolution is suggested by a set of papers by Raj Chetty, an economist at Harvard. Chetty points out that the micro estimates rely on instantaneous adjustment to higher tax rates, and typically focus on short durations after law changes. However, a variety of factors may combine to make the behavior responses to tax cuts a more long-run effect. People face costs in switching jobs or entering the job force. They may simply be unaware of tax changes or lazy. Any of these plausible frictions are compatible with large long-term effects of tax cuts that are difficult to capture in micro data.

This distinction is important, because policymakers are generally interested in the economy-wide and durable impacts of tax increases, rather than their short-term impacts. Macro estimates, which use economy-wide data, may be better suited to answer this question.

In a separate paper, Chetty and coauthors develop new techniques to capture broader responses to taxation while looking at firm-level data in Denmark. They are able to obtain a set of estimates that suggest that the work disincentives of taxes, properly computed, are closer to the higher macro estimates (though lower than some estimates Prescott prefers). These figures would suggest that a sizable portion of the Europe-America income difference can be accounted for by differences in marginal tax rates.

Sadly, public discussion of this issue has been far more simplistic. The Obama Administration and other progressives have argued that because growth was high in the ‘90s and ‘50s; the higher tax rates of those periods can be revisited with few consequences. This coarse argument relies on decade-level generalizations, and ignores the difficult of isolating the effects of tax cuts from the noise of other economic activity.

These concerns and caveats should be not be waved away because they inconveniently stand in the way of certain egalitarian goals. Let me end with Mathur, Slavov, and Strain who come to this conclusion:

Diamond and Saez ignore long-term behavioral responses, assume more equality is a better social welfare function, assign no social value to the marginal dollar of consumption for the rich, and use a short-run behavioral response predicated in part on less evasion and more enforcement to compute an answer of 73 percent. Consequently, we can be pretty sure that the answer is significantly less than that. Further, we find the suggestion that the government should take more than half of a citizen’s income in taxes to be unpalatable.

Economics, Health Care, Pethokoukis

Here is HHS’s talking-point response to UPS dropping 15,000 spouses from insurance because of Obamacare

Here’s the bloodless, robotic response from HHS to the decision by United Parcel Service — a decision UPS at least partly blames on Obamacare – to drop 15,000 spouses from its health care plan because they’re eligible for coverage elsewhere.

“The health care law will make health insurance more affordable, strengthen small businesses and make it easier for employers to provide coverage to their workers,” said Joanne Peters, spokeswoman for the U.S. Department of Health and Human Services

All is well. (H/T to InsureBlog)

Pethokoukis, Economics, U.S. Economy

The Uber scandal: Here’s the difference between pro-market and pro-business

As I have been writing lately, moving from scientific invention to economic innovation requires an ecology of “maximum competitive intensity” where the big and established can be successfully challenged by startups’ disruptive innovation. (DC’s corrupt, crony capitalist crackdown on Uber would be the opposite of this.)

Economist Luigi Zingales gives about as good an explanation as I have heard about the difference between being pro-market and pro-business:

A pro-market strategy rejects subsidies not only because they’re a waste of taxpayers’ money but also because they prop up inefficient firms, delaying the entry of new and more efficient competitors. For every “zombie” firm that survives because of government assistance, several innovative start-ups don’t get the chance to be born. Subsidies, then, hurt taxpayers twice. …

And a pro-market approach holds companies financially accountable for their mistakes—an essential policy if free markets are to produce sound decisions. A pro-market party will fight tirelessly against letting firms become so big that they cannot be allowed to fail, since such firms may take risks that ordinary companies would never dream of. …

[The Republican Party] has to move from a pro-business strategy that defends the interests of existing companies to a pro-market strategy that fosters open competition and freedom of entry. While the two agendas sometimes coincide—as in the case of protecting property rights—they are often at odds. Established firms are threatened by competition and frequently use their political muscle to restrict new entries into their industry, strengthening their positions but putting their customers at a disadvantage.

Pethokoukis, Economics, U.S. Economy

Why the US economy could help Hillary Clinton become America’s 45th president

Secretary of State Hillary Clinton arrives in Burma. Image Credit:

Secretary of State Hillary Clinton arrives in Burma. Image Credit:

Economic consultancy IHS Global Insight is out with a medium-term US forecast:


The firm sees a notable GDP acceleration starting next year that would drop the unemployment rate to below 6% by Election Day 2016 (the firm assumes an average jobless rate that year of 6.1%). Here’s why:

Housing. Near-term growth in the housing sector has been affected by higher mortgage rates, but in the long term, generally good economic conditions, a lean supply of housing for sale, positive builders’ sentiment, and still-rising prices should help the housing sector resume its recovery.

The Fed. Even if the Fed tapers later this year, it will continue to purchase bonds for another couple of quarters and keep interest rates low at least until unemployment reaches 6.5%, which we anticipate to occur in late 2015. So the impact on economic growth will likely be imperceptible at this time. Meanwhile, the worst of the bond market reaction is likely behind us.

The firm wouldn’t be surprised to see some adjustment in the sequester spending cuts, though that possibility isn’t part of its baseline forecast. Even so, the two years leading up to Election 2016 would be the best two-year period for GDP growth since 2004-2005, while the unemployment rate would be at its lowest level since 2008. (And the budget might even be balanced.)

This is not a crazy forecast to be dismissed out of hand. The firm is hardly predicting utopia or a Reaganesque boom. The low jobless rate would partially result from collapsed labor force participation. Modestly faster GDP growth would still leave the US economy and wages far short of the prerecession trajectory. And the debt decline would merely be a pause before entitlements really started cranking it back up.

But it might seem to many Americans in 2016 that the economy had made some important forward strides, and that President Obama deserved a de facto third term via Hillary Clinton (assuming she’s the nominee). No guarantees, of course. But a cheerier economic environment would make it all the more critical that the GOP presidential nominee have a compelling, pro-growth economic reform agenda dealing with a broad-range of middle-class concerns.

“The economy stinks, we need to reduce debt and cut marginal tax rates and prevent Hillary from launching PRISM-directed drone strikes on Starbucks” won’t be enough.

Economics, Health Care, Pethokoukis

Is uncertainty about Obamacare really hurting the US labor market?

Credit: White House

Credit: White House

What is the truthiness level of the GOP talking point that Obamacare is largely or mostly to blame for the slow economic recovery, particularly anemic job growth?

On Monday’s edition of CNBC’s always must-watch Kudlow Report, Wisconsin governor and potential 2016 Republican presidential candidate Scott Walker offered the familiar GOP take on President Obama’s health care reform plan:

Employers need certainty and the fact is employers aren’t seeing it. When I go out and visit firms, companies and small businesses, they say ‘We don’t know what’s going to happen next. There is still incredible uncertainty about the so-called Affordable Care Act.

As it so happens, former Obama economist Austan Goolsbee was also on the program. Echoing what the the White House has been saying for months, Goolsbee argued that if the ACA really was to blame, one would expect to find weaker job growth in industries that currently offer health insurance to fewer employees. Instead, job growth in these “low coverage” industries has been faster than the rest of the private sector.

So the terms of the debate are set. My take:

1. Low-wage, low-coverage sectors have been adding jobs at an accelerating rate vs. the overall economy. Retailers and restaurants accounted for roughly half of all job growth, as measured by the BLS household survey, during the past three months vs. about a third over the past year. More than half of all jobs in July. So Goolsbee has a good point.

2. Then again, low-wage jobs usually produce a large portion of the jobs gains in a recovery. The Atlanta Fed: “The lowest-wage sectors have consistently produced 40 percent to 50 percent of the job gains in recent recoveries. Though the percentage was slightly higher in July, it was not materially so. And this recovery does not look at all unusual when taken as a whole.”

3. But what kind of jobs? Are employers spreading more hours over more jobs by hiring more part-timers? Most of the net increase in jobs so far in 2013, 71%, has been part-time gigs. (But keep in mind this is a notoriously volatile survey.)

4. Indeed, the media is full of stories of retailers and restaurant owners admitting they prefer hiring part-time workers right now because of Obamacare. What’s more, Investor’s Business Daily reporter Jed Graham has discovered ”an unprecedented drop” in average weekly work hours in industries where the legislation logically would have a big impact, including home-improvement and general merchandise stores.

4. Gallup recently asked small business owners if they had taken action in response to the ACA:

 … 41% of small-business owners say they have held off on hiring new employees and 38% have pulled back on plans to grow their business. One in five (19%) have reduced their number of employees and essentially the same number (18%) have cut employee hours in response to the healthcare law

5. A recent analysis from the San Francisco Fed gives some credence to the idea that policy and political uncertainty in general is hurting job growth, at least through last year:

Increased uncertainty may discourage businesses from filling vacancies, thereby raising unemployment. An estimate indicates that, without policy uncertainty, the unemployment rate in late 2012 would have been close to 6.5%, 1.3 percentage points lower than the actual rate.

As part of its methodology, the SF Fed draws upon the Baker-Bloom-Davis Economic Policy Uncertainty Index. It measures policy-related economic uncertainty by looking at a) newspaper coverage of policy-related economic uncertainty, b) the number of federal tax code provisions set to expire in future c) disagreement among economic forecasters as a proxy for uncertainty. Given potential work (dis)incentives created by Obamacare and its implementation woes  – the postponement of the employer mandate and troubles setting up the exchange — it’s not a stretch to think uncertainly about the health care law would be caught by the EPU index.

6. But wait! As The Washington Post’s Jim Tankersley has noted, the EPU index is now down to its lowest level since 2008. So there has been a big decline in political and policy uncertainty as Obamacare implementation approaches.


Tankersley notes that the decline in uncertainty has not been accompanied by a boom in jobs overall. Yet given this year’s fiscal austerity, it’s probably worth noting that 2013 job creation has been a bit higher than last year, 192,000 net new jobs a month vs. 180,000 through first 7 months of 2012. So maybe a decline in uncertainty plus the Fed’s bond buying has played a role.

7. There is more to Obamacare than just mandates and regulations, of course. What about the economic impact of the considerable tax hikes? AEI’s Alan Viard outlines them:

Under the healthcare law adopted in March, the Medicare tax will rise that year, from 2.9 to 3.8 percent. Also, a new 3.8 percent tax, called the Unearned Income Medicare Contribution (UIMC), will be imposed on high-income taxpayers’ interest income and most of their pass-through business income that’s not subject to Medicare tax. So, under the president’s proposal, virtually all of top earners’ ordinary income will be taxed at 44.6 percent, starting in 2013. We’re not just going back to the Clinton-era rates of 40.8 and 43.7 percent.

A similar pattern holds for capital gains. Under the president’s plan, in 2011 and 2012, the top rate on gains, now 15 percent, will go to 20 percent, with the stealth provision adding 1.2 percentage points, sending the tax back to its 1997–2002 level of 21.2 percent. Starting in 2013, though, capital gains will also be hit by the UIMC, pushing the rate to 25.0 percent.

Bottom line: one can make a reasonable, plausible case — though hardly airtight — that there are fewer full-time jobs and less GDP growth than there would be otherwise because of health care reform, in all its aspects. But is Obamacare the main reason for the slow recovery? That is a blog post for another day, one that would focus more on monetary policy, the aftermath of the collapsed housing sector, Dodd-Frank, and automation, among other factors.

UPDATE: A new Atlantic blog post by my guy Derek Thompson reminds of this chart I pulled from a Goldman Sachs report:

Credit: Goldman Sachs, AEI

Credit: Goldman Sachs, AEI

Goldman’s take;

Some employers have indicated that they either have or will shift to more part-time workers in response to the health law. If this were occurring, it would have a positive effect on payrolls (assuming one full-time job is replaced with multiple part-time jobs) but would show up as a greater number of part-time workers in the household survey. This is to some degree what we have seen in recent employment reports, where part-time workers as a share of the population have risen since the start of the year, while full-time employment has been essentially flat.

The reference period for determining full-time employment is determined by the individual employer so the timing will vary, but to meet federal requirements it is likely that most employers would need to start their reference period in Q3 if they had not already.

While it is possible that the trends over the last few months might reflect the approaching onset of the now-delayed employer mandate, it is also important to note that the shift toward part-time labor pre-dates enactment of the health law and is much more clearly associated with the economic downturn, as shown in Exhibit 1.

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

Why higher interest rates may not be so bad

10 Year Treasury Rate

Some wise and calming words from my pal Dan Greenhaus, chief global strategist at BTIG:

While some headline writers are wondering whether equities are “crashing,” there’s very people around with whom we can even discuss this matter. Interest rate developments and whether or not the bond market collapse is Larry Summers’ fault continue to dominate the landscape and no matter how many data points we trot out to show higher rates are not, and have not been, bad for equities, the conversation continues to center on this idea.

Nonetheless, we are going to try again, with yet another data point. How about this; from the recovery’s beginning through the end of 2011, quarterly GDP growth (including a negative quarter to start 2011) averaged 2.5% or so while the yield on the 10 year averaged north of 3.07%. Since the start of 2012, GDP growth has averaged just 1.75% or so and the 10 year has been around 1.90%. Lower growth has been coincident with lower yields while earlier, higher growth rates were coincident with higher interest rates. Causation/correlation/causality and all that but another data point says higher rates may not suicidal.

Exactly. Higher yields may reflect expectations of stronger growth. And as this concerns US budget deficits, stronger growth means more tax revenue to offset potentially higher debt payment from higher rates.