Any private sector forecaster who thinks the Fed would have allowed 2010 GDP to be about 2.7% less than it actually turned out to be needs to have their forecasting license revoked, that estimate is an insult to Ben Bernanke. He was not about to preside over another depression. Bernanke would have instituted price level targeting long before that outcome materialized. People working in this area need to have common sense about plausible outcomes, otherwise nothing they say will be taken seriously.
Second, the WH again neglects the Fed when talking about austerity and the US economy’s 2013 performance. Sumner:
They forgot to mention to big payroll tax increase, or the income tax increases, both occurred at the beginning of 2013. Quite a fiscal drag (the Economistmagazine estimated the effect at 1.9% of GDP, even without the shutdown), and yet RGDP growth accelerates from 1.95% in 2012 to 2.7% in 2013. Nor is there a discussion of the fact that fiscal austerity in the U.S. was slightly greater than in the eurozone in recent years. Yet the US economy did far better, solely due to the greater willingness of the Fed to do monetary offset.
Sumner’s bottom line:
Instead of comparing actual to predicted results, they have lots of graphs showing the success of fiscal stimulus based on models of the economy that simply assume the policy was successful. How is that supposed to convince anyone? … But I thought they might at least be able to come up with some plausible arguments to counteract conservative criticism of the program. Unfortunately they’ve failed at even that modest goal. They don’t even engage with their critics. This is by far the weakest economic recovery in my lifetime.
Recent years have made clear that the free enterprise system is under immense strain. But the answer is not simply to double down on budgetary arguments, tout low-tax solutions, and explain economic basics. We must stop considering free enterprise purely in terms of economic gain and wealth creation and begin considering it in terms of human fulfillment. In working with his Holiness the Dalai Lama, AEI seeks to create an open forum among scholars, social and political leaders, doctors, and scientists to discuss the ways in which material prosperity, spiritual development, and ethical leadership can maximize human flourishing.
Far from a talk, we look forward to a conversation with His Holiness about how the free enterprise system can offer the best path toward happiness when predicated on ethical leadership, morality, and compassion for others.
Panel I: Moral free enterprise: Economic perspectives in business and politics
Discussion: His Holiness the Dalai Lama Arthur C. Brooks, AEI Jonathan Haidt, New York University Glenn Hubbard, Columbia University Daniel S. Loeb, Third Point LLC
Panel II: Unlocking the mind and human happiness
(Cohosted by the Mind & Life Institute)
Discussion: His Holiness the Dalai Lama Diana Chapman Walsh, Massachusetts Institute of Technology Richard Davidson, University of Wisconsin Otto Scharmer, Massachusetts Institute of Technology Arthur Zajonc, Mind & Life Institute
His Holiness the Dalai Lama, Tenzin Gyatso, is the spiritual leader of Tibet. At the age of two, he was recognized as the reincarnation of the 13th Dalai Lama, Thubten Gyatso. His Holiness began his monastic education at the age of six. At 23, His Holiness sat for his final examination in Lhasa’s Jokhang Temple during the annual prayer festival in 1959. He passed with honors and was awarded the Geshe Lharampa degree, equivalent to a doctorate of Buddhist philosophy. In 1950, His Holiness was called upon to assume full political power after China’s invasion of Tibet in 1949–50. In 1954, he went to Beijing for peace talks with Mao Zedong and other Chinese leaders, including Deng Xiaoping and Zhou Enlai. In 1959, His Holiness escaped into exile. Since then he has been living in Dharamsala, northern India. In 1989 he was awarded the Nobel Peace Prize for his nonviolent struggle for the liberation of Tibet. He has consistently advocated policies of nonviolence, even in the face of extreme aggression. He also became the first Nobel laureate to be recognized for his concern for global environmental problems. His Holiness has travelled to more than 67 countries spanning 6 continents. He has received more than 150 awards, honorary doctorates, prizes, and the like in recognition of his message of peace, nonviolence, interreligious understanding, universal responsibility, and compassion.
Arthur C. Brooks is the president of AEI. Until January 1, 2009, he was the Louis A. Bantle Professor of Business and Government Policy at Syracuse University. He is the author of 10 books and many articles on topics ranging from the economics of the arts to applied mathematics. His most recent books include “The Road to Freedom: How to Win the Fight for Free Enterprise” (Basic Books, 2012), “The Battle: How the Fight between Free Enterprise and Big Government Will Shape America’s Future” (Basic Books, May 2010), “Gross National Happiness” (Basic Books, 2008), “Social Entrepreneurship” (Prentice-Hall, 2008), and “Who Really Cares” (Basic Books, 2006). Before pursuing his work in public policy, Brooks spent 12 years as a professional French hornist with the City Orchestra of Barcelona and other ensembles.
Richard Davidson is the founder and chair of the Center for Investigating Healthy Minds at the Waisman Center, University of Wisconsin–Madison, where he is also the director of the Waisman Laboratory for Brain Imaging and Behavior. He is also currently the William James Professor and Vilas Research Professor of Psychology and Psychiatry at the University of Wisconsin–Madison. He is the coauthor or editor of 13 books, including “The Emotional Life of Your Brain” (Penguin, 2012). He is the recipient of numerous awards for his work, including the Research Scientist Award from the National Institute of Mental Health, the Distinguished Scientific Contribution Award from the American Psychological Association, and election to the American Academy of Arts and Sciences. In 2006, he was named one of the 100 most influential people in the world by Time magazine; that same year, he received the first Mani Bhaumik Award from the University of California–Los Angeles for advances in the understanding of the brain and the conscious mind in healing. In 2011, he received the Paul D. MacLean Award for outstanding neuroscience research in psychosomatic medicine. He serves on the scientific advisory board at the Max Planck Institute for Human Cognitive and Brain Sciences in Leipzig, Germany; as chair of the psychology section of the American Association for the Advancement of Science; and has served on the board of directors for the Mind & Life Institute since 1992.
Jonathan Haidt is the Thomas Cooley Professor of Ethical Leadership at New York University’s Stern School of Business. For 16 years he was a professor in the Department of Psychology at the University of Virginia. Haidt is the author of more than 90 academic articles and two books: “The Happiness Hypothesis: Finding Modern Truth in Ancient Wisdom” (Basic Books, 2006) and “The Righteous Mind: Why Good People are Divided by Politics and Religion” (Pantheon, 2012), which became a New York Times bestseller. His three TED talks have been viewed more than 3 million times. His research focuses on morality — its economic foundations, cultural variations, and developmental course.
Glenn Hubbard, a former chairman of the President’s Council of Economic Advisers, is currently the dean of Columbia Business School. He specializes in public and corporate finance and financial markets and institutions. He has written more than 90 articles and books, including two textbooks, on corporate finance, investment decisions, banking, energy economics, and public policy. He has served as a deputy assistant secretary at the US Department of the Treasury and as a consultant to, among others, the Federal Reserve Board and the Federal Reserve Bank of New York.
Daniel S. Loeb founded Third Point LLC in 1995, where he leads portfolio management, risk management, and research activities. Before founding Third Point, he was vice president of high-yield bond sales at Citigroup. Previously, Loeb was a senior vice president in the distressed debt department at Jefferies & Co., where he worked as a bankruptcy analyst, bank loan trader, and distressed securities salesman. Before Jefferies, he was a risk arbitrage analyst at Lafer Equity Investors. Loeb began his career as an associate in private equity at Warburg Pincus. He is a trustee of the United States Olympic Committee, Mt. Sinai Hospital, the Manhattan Institute, and the Museum of Contemporary Art in Los Angeles. He is a member of the Council on Foreign Relations and AEI’s National Council. Loeb is a cofounder and board member of Students First New York, the state branch of the national education advocacy organization. He is the chairman of the board of three Success Academy Charter Schools and also serves as the chairman of its governing board. Since 2004, Loeb has been a trustee of Prep for Prep, a NYC nonprofit organization that prepares underprivileged children to attend competitive independent schools.
Otto Scharmer is a senior lecturer at the Massachusetts Institute of Technology (MIT) and founding chair of the Presencing Institute. He chairs the MIT IDEAS program and cofounded the Global Wellbeing and Gross National Happiness Lab. He is also vice chair of the World Economic Forum’s Global Agenda Council on Leadership. In his books “Theory U” (Society for Organizational Learning, 2007) and “Presence” (Society for Organizational Learning, 2004, coauthored with Peter Senge, Joseph Jaworski, and Betty Sue Flowers) he introduced the concept of “presencing” — learning from the emerging future. His new book “Leading From the Emerging Future: From Ego-system to Eco-system Economies” (Berrett-Koehler Publishers, 2013) applies mindfulness to the transformation of business, society, and self.
Diana Chapman Walsh, president emerita of Wellesley College, is a member of the Corporation and the executive committee of the Massachusetts Institute of Technology, and serves on the governing boards of the Mind & Life Institute, Broad Institute, Kaiser Family Foundation, and the Institute for Healthcare Improvement. She is an elected member of the American Academy of Arts and Sciences and was a director of the State Street Corporation (1999–2007) and a trustee of Amherst College (1998–2010). Before leading Wellesley College (1993–2007), she was professor and chair of health and social behavior at the Harvard School of Public Health.
Arthur Zajonc, president of the Mind & Life Institute, was a professor of physics at Amherst College from 1978–2012. He has been a visiting professor and research scientist at the École Normale Supérieure in Paris, the Max Planck Institute for Quantum Optics, and the Universities of Rochester and Hannover. He has been a Fulbright professor at the University of Innsbruck in Austria. His research has included studies in electron-atom physics; party violation in atoms; quantum optics; the experimental foundations of quantum physics; and the relationship between science, the humanities, and the contemplative traditions. While directing the Center for Contemplative Mind in Society, he fostered the use of contemplative practices in college and university classrooms. He continues to speak around the world on the importance of contemplative pedagogy.
At the top, we can see an elite doing well in a labor market offering big returns to human capital. This is perhaps not the just the top 1% (much though politics might be easier if that were so) but, say, the top decile, or 10%, of the income distribution. This stratum is not only prospering economically. For the people on this top rung, education levels are high and rising. Families are planned, marriages strong, neighborhoods safe and rich in social capital, networks plentiful, BMIs low and savings rates high.
Below this affluent class is a broad swath sometimes dubbed the ‘squeezed middle.’ This group have decent labor market participation rates, but wages that are rising slowly. In many cases, two wages are needed to support the family. They own a home, but are not otherwise wealthy. Savings exist for emergencies or one-off expenditures, but run out fast if the households has a serious downward shock to income. Private schooling is rarely an option, financially. (This is a group that might benefit from one of the schemes of wage insurances currently being discussed, most recently by Prof Miles Corak).
At the bottom of the social scale are those whose poverty is entrenched. Labor market attachment is weak, with many people in long-term unemployment. Teen pregnancy is still heard of, unlike in most communities today. Poverty is felt in most domains of life – crime, health, education, parenting, drug addiction and housing. The growing economic segregation of neighborhoods further isolates this group from chances of work, better schooling or valuable social networks. Upward intergenerational mobility rates are low.
And how will automation affect this trifurcation with policy intervention? Solidify the barriers between Affluent and Squeezed with the former skimming off the top bit of the latter? Worsen the mobility of the Entrenched, creating more zero marginal product workers and even less labor force participation? Much to think about here.
Image Credit: The All-Nite Images (Flickr)(CC-BY-2.0)
“I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter,” Democratic political consultant James Carville said back during the Clinton administration. “But now I want to come back as the bond market. You can intimidate everybody.”
If that position is filled when Carville passes on, returning as the Congressional Budget Office would be a solid alternative. Thanks to the CBO’s new economic-impact analysis of sharply raising the federal minimum wage to $10.10, it’s doubtful Washington Republicans would vote for the centerpiece of President Obama’s anti-inequality agenda. From Potomac Research Group’s morning note: “A minimum wage hike is dead in Congress; there’s no chance it could pass the House.”
The agency’s synthesis of existing research concluded raising the minimum would lift nearly a million Americans out of poverty – but also cost a half million jobs. And of the 16.5 million workers who would get a pay raise totaling $31 billion, just a fifth of the increased income would go to families with earnings below the poverty threshold. “Raising the minimum wage probably reduces employment,” the CBO explains. “In the long term, that reduction in the workforce lowers the nation’s output and income a little … .”
To folks on the right, those potential trade-offs strongly argue against raising the minimum wage, especially during a depressed labor market. Now the CBO could be wrong about the employment impact, of course. Team Obama argues it is and will likely continue to push hard for the policy. Additional economic research will surely be produced, giving ammo to both sides. And the debate will continue. No rush, the poor aren’t going anywhere.
But why continue the debate? In its report, the CBO notes that in contrast to a minimum wage hike, “an increase in the [Earned Income Tax Credit] would go almost entirely to lower-income families.” So there you go. More bank for the billions of bucks. Let’s expand the EITC, especially to offer more support to childless workers. And then on top of that, add a wage subsidy. AEI’s Mike Strain:
If you earn $7.25 per hour, for every hour you work the government would cut you a check for 3 bucks. Easy as pie. Around 1.8 million hourly-wage workers over the age of 24 earned at or below the federal minimum wage in 2012. Let’s take the most generous case and assume that all of them worked full-time and lived in working-class households. With a wage subsidy of $3 per hour, we’re talking an annual federal expenditure of $11 billion.
The typical Democratic response to this idea is that while conservative wonks like the idea of wage subsidies, Republican pols not so much. Yet Senator Marco Rubio, who may well run for the GOP presidential nomination, has made wage subsidies one of key element of his anti-poverty agenda. The policy window may be opening here for an effective, anti-poverty idea that both Democrats and Republicans could (should) favor.
Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects. As with any such estimates, however, the actual losses could be smaller or larger; in CBO’s assessment, there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers.
Many more low-wage workers would see an increase in their earnings. Of those workers who will earn up to $10.10 under current law, most—about 16.5 million, according to CBO’s estimates—would have higher earn- ings during an average week in the second half of 2016 if the $10.10 option was implemented. 1 Some of the people earning slightly more than $10.10 would also have higher earnings under that option, for reasons discussed below. Further, a few higher-wage workers would owe their jobs and increased earnings to the heightened demand for goods and services that would result from the minimum- wage increase.
The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold, CBO estimates. Moreover, the increased earnings for some workers would be accompanied by reductions in real (inflation-adjusted) income for the people who became jobless because of the minimum-wage increase, for business owners, and for consumers facing higher prices.
So we lose maybe 500,000 jobs (the first rung for many on the upward mobility ladder) for an anti-poverty policy where half the benefits go to families whose income is three times the poverty threshold or more (see above chart). This does not sound like optimal anti-poverty policy to me, especially as compared to expanding the EITC and adding a wage subsidy.
I suspect but don’t know that many of the people opposed to the stimulus program would agree that, look, I can’t measure it but I think as a practical matter that very likely that U.S. GDP was at least $1 higher in one quarter because we spent $820 billion. But the point is I need to have a parameter estimate that allows me to say: Is this a good use of investment resources or not?
How far was the stimulus from optimal design? And would it have been better for fiscal policy to focus on supply-side factors, and let the Fed handle demand management?
In my Q&A posted earlier today with The Second Machine Age authors Erik Brynjolfsson and Andrew McAfee, the MITers mention the need to “retool our educational system so it’s turning out workers with the skills employers need today.”
But this is where the power of disruptive innovations in education is particularly promising. Many students from disadvantaged backgrounds fall short in school not because of a lack of innate potential, but because of a lack of access to needed supports. Even though education is free in the U.S., high-quality, personalized education is still a vast area of nonconsumption. Disruptive innovations often start by offering nonconsumers access to products or services that are not-as-good-as previously existing solutions, yet better than having nothing at all. These innovations then improve predictably over time until they eventually get good enough to transform the world. … In education, personalized tutelage—which historically has been a privilege of only the wealthy elite—is increasingly becoming available anyone anywhere in the world. …
During a recent keynote speech, Sal Khan pointed out that 400 years ago scholars in Europe probably would have assumed that only 30 to 40 percent of the general population had the intellectual capacity to learn to read. Today we know that 99.99 percent of humanity is intellectually capable of reading. He then went on to suggest that we may prove in the not-too-distant future that our current assumptions about the intellectual capability of general public are wildly pessimistic. For example, we may reach a time when mastery of advanced topics like genetics and quantum physics becomes a part of basic human understanding.
In order for us to create a knowledge-worker economy where all can share in the benefits from advances in technology, we will need to find a way to educate all people in our society better than we ever have before. This is unlikely to happen through further incremental improvements to our existing education system. It may be possible, however, through disruptive innovations in personalized learning such as the Khan Academy.
Desmond Lachman isn’t quite as indifferent as Janet Yellen to currency troubles in emerging markets:
Yellen could be excused for downplaying the global risks to the U.S. economy from the emerging market currency crisis if that crisis was playing out in isolation. However, this is far from the case. The Fragile Five’s crisis is occurring at the same time that there are growing signs of slowing Chinese economic growth, as that country tries to deflate a domestic credit market boom. In this context, it is worth recalling that the emerging market economies now constitute around 50 percent of the global economy and in recent years they have accounted for the major part of global economic growth.
The Fragile Five’s economic troubles are also occurring at a time that Europe’s economy is faltering as deflationary forces take hold. They are also occurring at a time that Europe’s politics are continuing to fragment, especially in places like France, where the Marine le Pen’s National Front is now ahead in the polls, and in Greece, where the Greek government is holding on to power by its finger nails. Slowing growth and unsettled politics would seem to be a potent recipe for the resurfacing of the European sovereign debt crisis later this year.
But accelerating automation will cause huge, disruptive changes for the US labor market — in fact, we’re already seeing them — as workers “race against the machine.” The ability to work successfully with technology will become ever more valued, just as failure will be increasingly penalized. America will need to upgrade the education and skill of its labor force and help entrepreneurs create new business models that incorporate the unique capabilities of man and machine.
I recently chatted with Brynjolfsson and McAfee for my Ricochet Money & Politics Podcast on what the rise of the machines means for economic growth, job creation, and public policy such as immigration. Here is an edited transcript of our conversation:
In the book, you guys write that “we’re living in a time of astonishing progress with digital technologies, those that have computer hardware, software, and networks at their core.” That probably seems intuitively right to many people. But do we see that in the data?
Brynjolfsson: Well, I think there are some big problems with the way we measure our productivity, as you know. We are missing more and more of the digital revolution. All the free goods, by definition, don’t show up in GDP. And so that’s a big chunk of it. And new goods are badly mismeasured as well, especially when they are introduced and then a decline in price. So I think we have some serious problem with the economic statistics.
McAfee: Your question is a really good one. One of the problems is that we don’t have a universally agreed upon measure for rates of innovation, for whether that is speeding up or slowing down. So we fall back on related measures, like productivity growth and GDP growth, but those aren’t perfect proxies in any case. And like Erik says, there’s reason to believe they’re getting less good over time.
So the reason we wrote sentences like that in the book and talked about this age of astonishing technological progress is that just in the past few years, we have seen some of the really long held goals or holy grails of computer science and AI and robotics being realized, and not just in the lab, but out there in the real world. So we’ve got autonomous cars that drive themselves in traffic, on American roads without mishaps. We’ve got a computer that is the world’s Jeopardy champion, doing really tough unstructured search in natural language processing. We’ve got things on our phones now that are pretty close to the “Star Trek” computer that understands what we want and can give it back to us. And you can just keep going down the list. Humanoid robots are real things now out there in the world, instead of just being stapled with science fiction.
So over and over again Erik and I saw these examples of real, just long held goals of the disciplines and science fiction technologies becoming reality. It’s very hard for us to look at that as a period of slow or uninspiring innovation. read more >