Economics, Monetary Policy, Pethokoukis

Alan Greenspan vs. John Taylor on CNBC


A really must-watch episode of CNBC’s Kudlow Report last night as former Federal Reserve Chairman Alan Greenspan and (future Fed chair?) John Taylor debated what role the Fed played in causing the housing bubble and Great Recession.

Taylor argued, as he has before, that the Fed kept the fed funds interest rate below what the Taylor rule would have called for from 2002 through 2005. In other words, interest rates were too lowfor too long because of the Greenspan Fed. That reduced borrowing costs and juiced the housing boom into a bubble.

Greenspan, Fed chair from 1987 through January 2006, disagreed, as he has before. He again offered what Kudlow called the “Berlin Wall” scenario: The end of the Cold War added 500 million new workers to the global labor market. Incomes rose, as did savings. That in turn, as Greenspan has written, “induced a worldwide decline in real long-term interest rates that … produced home price bubbles across more than a dozen countries.”

A few points:

1. There is another explanation for the global fall in rates. The Fed is, as economist David Beckworth has written, “a global monetary superpower.” It runs the world’s reserve currency, many emerging market currencies are pegged to the dollar, and both Europe and Japan judge the strength or weakness of their currencies in relation to the dollar. Beckworth: “As as result, the Fed’s monetary policy gets exported to some degree to Japan and the Euro area as well.”

2. OK, given that transmission mechanism, was US monetary policy too easy back then? It very well may have been by 2003. From 2003 through 2006, nominal GDP growth averaged 6%. That is hardly the sign of an economy in danger of deflationary collapse and in need of exceptionally low interest rates. Yes, inflation was also low, but as Beckworth also argues, that low inflation was more likely the result of a a productivity rather than demand shock. Indeed, productivity growth average over 3% from 1998 through 2005 and reflected an IT-driven innovation surge. Beckworth:

The rapid productivity gains created structural unemployment that took time to sort out, something low interest rates would not fix. In short, it is hard to argue economic conditions justified the low interest rate by 2003.

2. In addition to the end of the Cold War, Greenspan also blames securitization and lax regulation of Wall Street. Beckworth:

Given the excessive monetary easing shown above, the Fed helped create a credit boom that found its way–via financial innovation, lax governance (both private and public), and misaligned incentives–into the housing market. Housing market activity was further reinforced by “the search for yield” created by the Fed’s low interest rates.  The low interest rates  at the time encouraged investors to take on riskier investments than they otherwise would have.  Some of those riskier investments end up being tied to housing.  Thus, the risk-taking channel of monetary policy added more fuel to the housing boom.

4. Don’t forget that more than half of the decline in home prices came after April 2008 when Fed policy stayed on pause through October despite a deteriorating economy. Although the housing slump began in mid-2006, the economy actually weathered the decline quite well until 2008. So most of the housing collapse was caused by money being too tight than too loose. Scott Sumner:

In my view there is too much focus on the upswing part of bubbles.  Housing prices also soared in the 1970s, but no one called that a bubble.  The price of Microsoft stock soared in the 1990s, but that wasn’t a bubble either (except perhaps in 2000).  Why not?  Because prices didn’t collapse afterward.  Housing prices kept rising in the 1980s, and while Microsoft stock has bounced around, it’s always maintained a pretty high market cap.  To have a bubble you need a big rise followed by a big fall.

By now you know where I’m going with this.  I believe the second half of the decline in housing prices was due to the very tight money policy of late 2008, which depressed NGDP growth about 9% below trend between mid-2008 and mid-2009.

So who is right, Greenspan or Taylor? In a way, both have parts of the story correct. But both miss the second half of the story where the Fed, mimicking its Great Depression mistake, was too tight, turning what may have been a modest downturn into economic collapse.

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

Pethokoukis, Economics, Taxes and Spending

This chart shows why GOPers shouldn’t completely freak out over the budget deal


Perhaps on Earth-2, House Budget Chairman Paul Ryan has the ability to perform Jedi mind tricks on Democrats. And perhaps in that alternate reality, he just pulled off a sweet budget deal that exchanged sequester relief for premium support Medicare reform and a cut in the corporate tax rate. And maybe he even got Patty Murray to personally put up the fee for the gaming license.

But here on Earth-1, Ryan possesses no such power. Instead, he was only able to strike a deal that likely avoids a politically disastrous — for Republicans — government shutdown, leaves the sequester trajectory intact, and shoots a few more bucks to the Pentagon. As Goldman Sachs puts it:

This is likely to be the last time that Congress adjusts the spending levels under sequestration for the foreseeable future. As shown in [the above chart], the path of spending authority will stay flat or increase slightly going forward, and there is likely to be less urgency to address these spending levels again, absent the sort of nominal decline scheduled built into current law for 2014.

And don’t forget that discretionary spending, under the current CBO baselines, is projected to drop from 8.3% in 2012 to 5.5% in 2023. Over the past 40 years, CBO notes, such outlays have average 8.6%. And a good point from Greg Valliere of Potomac Research:

The federal budget deficit will continue to fall.  Outlays will rise slightly in 2014 and will be essentially frozen in 2015 — all while receipts increase by at least 5% a year.  We’ll be close to a budget surplus by 2016.

Can we now get some entitlement reform, please?

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

Pethokoukis, Economics, U.S. Economy

Is income inequality the new climate change?

Image Credit: shutterstock

Image Credit: shutterstock

If you dare question the alarming claims about income inequality made by progressives and Democrats, including President Obama, does that make you a “denier” — akin to climate change “deniers” — whose arguments should no longer be taken seriously?

In a recent post, “Yes, Rising Inequality is a Problem,” excellent economics blogger Ashok Rao is sharply critical of Manhattan Institute scholar Scott Winship. Rao describes Winship as “a representative agent of those making the best arguments that progressives overstate the costs of inequality.” I myself have frequently quoted Winship or used his careful research in my blog posts and columns. It’s also worth noting that Winship’s profile has risen dramatically recently due to his role advising House Budget Chairman Paul Ryan, who may run for president in 2016.

Rao has a number of problems with Winship’s arguments, but his core criticism is that Winship sets an unnecessarily high bar for evaluating the “mountain of evidence” that rising inequality is a real phenomenon deserving of redistributive policy action. Rao:

Winship’s argument against inequality being a problem is a value judgement–a value judgement that those of us with a strong theoretical ex antecase must amass an enormous amount of high-quality, expensive, detailed evidence that rising inequality has in fact had the obvious consequences before we are allowed to even have a conversation about the subject, let alone make the case for policy changes. This does strike me as similar to some of the most sophisticated forms of climate-change denialism, which also focus not on reading the evidence we have differently but rather setting up a very different prior from the rest of us, and so redistributing the burden of proof. … Let us hope the future debate about inequality and its consequences does not mirror that on climate change.

Income inequality is an important issue deserving of honest and open debate. But if you’re worried about the issue becoming politicized and hopelessly muddied, Winship is hardly a concern. Unlike many center-right folks, he had conceded that high-end inequality likely has risen dramatically in recent decades. Winship, however, is highly skeptical of the supposed deleterious economic impact and disagrees with claims that middle-class incomes have stagnated since the 1970s.

These are views which receive virtually no media coverage. Winship has received a grand total of four mentions in New York Times articles, for instance. Two other like-minded and highly regarded inequality researchers, Cornell University’s Richard Burkhauser and the University of Chicago’s Bruce Meyer, have five combined mentions. By comparison, economists Thomas Piketty and Emmanuel Saez — whose research forms the core of the left-liberal argument that inequality is a mega problem — have a combined 168 mentions. This oversight might be particularly egregious in the case of Burkhauser whose cutting-edge analysis suggests it may be necessary to rethink whether inequality has been increasing. “Those who read Burkhauser and remain certain the top 1 percent has really pulled away from “the 99 percent”—or who deem it unnecessary to engage his research—are not as empirically-minded as they believe,” Winship recently wrote.

Fact is, if there is anyone who risks poisoning the debate it’s Obama. Despite a smart economic team at his disposal, he continues to present a highly distorted, partisan, and ideological version of the inequality-is-a-problem argument. Does the president take the issue seriously or just view it as a handy way of justifying polices — higher taxes, higher minimum wage, higher spending — that Democrats typically promote and of attacking pro-market “trickle-down” economics. Even the Washington Post finally slapped him on the hands for suggesting that the typical US family is no better off today than 30 years ago. (The CBO by the way, pegs the increase in after-tax income at 40% since 1979.) Listening to Obama’s recent inequality speech, one would be forgiven for thinking that it was pretty much de-unionization and the Reagan tax cuts that led to rising inequality rather than technology and globalization — or that at least the blame should be equally divided. And does Obama really think the counterfactual — no “neoliberal” reform in the US as in Japan and France — would have  America in a better place. today? More equality maybe, but also less economic dynamism. And it sure would be nice if Obama mentioned the role of family breakdown on the economic troubles in working class America.

3.) There is growing recognition on the right that whether or not income inequality has been a problem in the past, it very well may be one going forward as accelerating automation radically alters labor markets. Compensation may more resemble a power curve than a bell curve. Tyler Cowen’s Average is Over depicts a scenario where the tech-savvy 15% get rich, everyone else gets free Internet. And plenty on the right worry about the worsening economic circumstances for lower-skilled Americans, both in terms of market income and mobility.

The good news here is that many of the policies needed to deal with inequality, mobility, and stagnant wages are pretty good ideas anyway and could eventually attract bipartisan support if they don’t already: education reform, taxing consumption rather than income, wage subsidies, making it easier to start a business, universal savings accounts, more high-skill and entrepreneur immigration, decoupling benefits from jobs, patent reform, making it easier to build more urban housing, reducing traffic congestion, reforming Social Security so poorer Americans get more benefits and richer Americans less.

But doing any of those things will be harder if folks on the right, who generally think more about wealth creation than redistribution, are told it’s insane to challenge the moment’s progressive consensus in any way. It’s also not helpful if in making the case for action, progressives engage in revisionist history to score ideological debating points. Winship gets the last word here:

When conventional wisdom coheres around some accepted truth and most of the non-adherents are easily debunked, it becomes that much easier to casually dismiss any challenge as unserious and unimportant. However, a commitment to empiricism means not only refuting sketchy claims but taking seriously well-supported ones.

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

Pethokoukis, Economics, U.S. Economy

Why won’t liberals accept ‘yes’ for an answer on wage subsidies?

The New York Times

The New York Times

If your goal is to help low-income American families — rather than, say, making base-pleasing political points against businesses like Wal-Mart — then raising the minimum wage would seem to be an inferior policy compared to wage subsidies of various sorts. Economist David Neumark makes several good points on this subject in a New York Times commentary.

Most studies of the effects of the minimum wage on the income distribution in the United States suggest that a higher minimum wage does little to reduce poverty.  How is this possible?  When the minimum wage goes up, there are winners, to be sure — those whose wages increase and who retain their jobs and don’t have their hours reduced. But some low-skilled workers lose their jobs and others fail to find work because of the higher wage floor. (This point is contested by some, but the evidence that William Wascher and I have compiled is fairly overwhelming.) Research by Richard Burkhauser and Joseph Sabia shows that the balance between winners and losers, coupled with the distribution of these winners and losers across low-income and higher-income families, results in no net change in poverty from a higher minimum wage.

So from that perspective, it’s a good thing the federal minimum wage remains below its 1970s value, adjusted for inflation. And as Newmark points out, that decline has been more than offset by sharp increase in the value of the earned-income tax credit: “The combined effect of the two policies is that the real income of this family is as high or higher than it was in past decades — and much higher than it was in most of the intervening years.”

A couple of other points from Newmark. First, it’s important to keep in mind the EITC is a program aimed at working families. As a society we need to consider whether we’re providing an adequate income to childless low-wage adults. Second, the combo of a higher minimum wage along with a more generous EITC has tradeoffs:

We indeed find that a combination of these two policies leads to higher employment and income among single women with children who are eligible are for the credit. At the same time, the combined policies lead to more adverse employment effects on specific groups — like teenagers and less-skilled minority men — who are not eligible for the earned-income tax credit and have to compete with the new labor market entrants who are eligible for it.

But finance professor Noah Smith would go further with direct wage subsidies, perhaps paid out through the existing payroll tax system via employers, that would turn $8 an hour jobs into $11 an hour jobs even for childless workers. Since workers wouldn’t have to file for the subsidy as with the EITC, more would use and it would feel less like welfare. There are other good reasons, according to Smith, to favor such wage matching over the minimum wage:

Wage subsidies are better than the minimum wage. For one thing, minimum wage doesn’t necessarily raise wages for people who are slightly higher up the wage distribution but still poor. Wage subsidies can push up wages for all of the working poor.

Also, wage subsidies encourage higher employment, while minimum wage encourages higher unemployment. This is always an important difference, but much more so right now, for two reasons. First, we are in the middle of a long economic stagnation – a large number of Americans are languishing in long-term unemployment, causing their job skills and work ethic to decay. Second, we may soon face increased downward pressure on wages from increased automation – the so-called “rise of the robots” – and wage subsidies would be a way of placing our thumb on the scale for the human beings.

But, sort of amazingly, liberals seems to be scowling at the wage subsidy idea. And one of their biggest objections is that Republican politicians–  unlike center-right wonks perhaps — would never go for it. Since the minimum wage is a known and and popular policy, better that than nothing. It reminds me of their frequent objection to the center-right healthcare idea of well-funded, high-risk pools for insuring people with pricey pre-existing conditions: “For one thing, Republicans will never spend the money!” Smith has a good rejoinder to this:
The minimum wage is a lot more feasible than wage subsidies, at the present moment. But if conservatives like Pethokoukis start campaigning for it at the elite level, then I think there’s some chance Republicans could eventually come to see it as a more palatable alternative to the minimum wage.  … As for us technocratic-minded liberals, of course we should not let the better be the enemy of the good – we should still keep campaigning for a minimum wage hike, if for no other reason than to force Republicans to offer wage subsidies as an alternative. But if Republicans ever do get behind wage subsidies, we should join them, instead of sticking to the minimum wage out of pure traditionalism.
Pethokoukis, Economics, U.S. Economy

Will a stronger US economy in 2014 offset Obamacare and make Obama the Comeback Kid?

Image Credit: Austen Hufford (Flickr) CC

Image Credit: Austen Hufford (Flickr) CC

Will the US economy bail out President Obama and the Democrats in 2014 — and maybe 2016, too — after the disastrous Obamacare rollout?

Here is political analyst Greg Valliere of Potomac Research:

Obama can give a great speech in South Africa, he can take credit for the plunging deficit and relative peace on the budget, he can motivate Democrats by emphasizing immigration reform and a minimum wage hike — but there’s only one issue that really counts: the economy. That’s perhaps the most important story of the second half — both for Wall Street and Washington. Noisy cynics say they don’t believe the data or that the economy is still stagnant, but it’s increasingly clear that growth is picking up. If unemployment is 6-1/2% and trending lower by Labor Day, the 2014 elections might not be a disaster for Democrats after all. It’s way too early to count Obama out. He’s arguably the worst politician in the Oval Office since Jimmy Carter, but events shape presidencies. The great trick, as Bill Clinton discovered, is to catch a cyclical wave of economic growth and get out of the way. The jury is out on whether Obama is street-savvy enough to realize this — but after his disastrous 2013, he suddenly has a plausible chance for a comeback as the economy recovers.

The argument is plausible. Next year really might be the year the US economy shows some real pep. Goldman Sachs, for instance, is forecasting GDP growth of 3% to 3.5% in 2014, which would be the first year since 2005 that the economy grew at 3% or more. As for jobs, the bank expects average payroll gains of 225,000 in 2014 and 200,000 in 2015 before moderating a bit to 1750,000 in 2016. If Goldman’s models are correct, the unemployment rate will hit 6.5% in the second half of 2014 and 6% in mid-2015. So based on all that, it’s not unreasonable to expect a 2016 jobless rate that starts with a “5.”

The core of Goldman’s bullish forecast is based on (a) recovering residential construction, (b) declining fiscal drag from the sequester and tax cuts, (c) stronger consumption thanks to a fall in the debt-to-income level, and (d) stronger business investment based on high profits, easing lending standards, and a relative low level of capital stock. Two recent data points support the Goldman view.

New data from the Federal Reserve show not only did American net worth rise by $2 trillion last quarter, but the first rise in mortgage debt since the Great Recession suggests the deleveraging cycle may be over. What’s more, the National Federation of Independent Business reports that over half of all surveyed business owners reported hiring or trying to hire in the past three months, the strongest reading since 2007.

So the other big question is whether Obamacare will be perceived by midterm voters as anything close to an Iraq War level mistake. By the time of the 2006 midterm elections, the unemployment rate was 4.5%, the economy had created more than 4 million jobs the previous two years, and the economy was growing around 3%. Yet anti-war sentiment and outrage of the handling of Hurricane Katrina enabled Democrats to capture the House and Senate.

The Obamacare website seems to be working better, but back-end problems remain. Beyond that, there are issues of policy changes and cancellations, narrow provider networks, a risk pool that’s older and sicker than expected, and a possible second wave of rate shocks later next year. And as investment strategist Ed Yardeni points out:

Obamacare could still pose a risk to the economy if enough people reduce their spending because they remain uncertain about whether they will have coverage and about their out-of-pocket costs. There are reports that the backend of the system isn’t working so insurance companies aren’t receiving the information they need to actually provide coverage. In addition, many consumers are facing the sticker shock of not only higher premiums but also higher deductibles.

I will give political scientist Ray Fair and his well known election forecasting model the last word:

The August 5, 2013, forecast from the US model was very optimistic about the economy for the last half of 2013 and for 2014, with 4 good news quarters. The November 11, 2013, forecast is much less so, with only 1 good news quarter, the third quarter of 2014. The predicted vote share is now 49.14, a slight Democratic loss. The main conclusion is the same as it was in August, namely that if the economy grows moderately, the election is predicted to be close.



Pethokoukis, Economics, U.S. Economy

How the US safety net made the Great Recession a lot less horrible for many Americans

(Wikimedia Commons)

(Wikimedia Commons)

Yup, the Great Recession was pretty bad. Median pre-tax, in-cash income — known as market income — fell more over the first three years of the Great Recession and its aftermath than over the first three years of any other recession since 1968, falling some 7%. Lower-income Americans, the bottom 20%, did even worse, their incomes falling by 12%.

But market income stats don’t tell the whole story, thank goodness. As researchers Jeff Larrimore, Richard Burkhauser, Philip Armour explain in “Accounting for Income Changes over the Great Recession (2007-2010) Relative to Previous Recessions: The Importance of Taxes and Transfers,” government’s response made things a lot better:

 … there was an unprecedented governmental response in the form of tax cuts and government transfer increases, including both in-cash (Unemployment Insurance, etc.) and in- kind (Supplemental Nutrition Assistance Benefits (SNAP) or Food Stamps, etc.) benefits. These tax and transfer responses substantially offset the loss of market income for middle- and lower- income Americans.

Taxes and transfers boosted middle-class incomes by 3 percentage points and lower-class incomes by 8 percentage points:

Jeff Larrimore, Richard Burkhauser, and Philip Armour

Jeff Larrimore, Richard Burkhauser, and Philip Armour

These results are very much in keeping with those of Scott Winship, who has determined that middle-income buying power is essentially back at its 2007 peak — which was an all-time high. “In short, while the middle class—and especially the poor—saw declines in market income after 2007, the safety net appears to have performed just as we would hope, mitigating the losses experienced by households.”

LB&A do offer two caveats:

However something that cannot be drawn from our analysis is whether this unprecedented use of tax and in-cash and in-kind benefits indirectly discouraged work over the period. We cannot rule out the possibility that these policies lengthen d unemployment spells and thus degraded labor-market skills, so that these short-term increases in benefits during the first three years of the Great Recession made a return to work and wage earnings less likely. Furthermore, both tax reductions and increased transfers come at the cost of increased public debt, which is not included in our analysis since it does not impact short-term economic resources.


Is Obama’s pre-K education plan really a can’t-miss, long-term winner?

Former Obama White House economist Austan Goolsebee writes a Wall Street Journal op-ed supportive of his old boss’s universal $75 billion pre-K plan. And as Goolsbee presents it, the case for the Obama plan is beyond reasoned dispute:

If we are committed to evidence, though, there’s one area where we ought to be able to agree: early-childhood education. Investments in pre-kindergarten education have among the highest payoffs of any government policy, and whatever budget agreement emerges should restore the country’s long-standing commitment to early education.

Of course, Goolsbee mentions the famous Perry Preschool Project study, which only proves that a large amount of money spent on a small groups of kids in the 1960s can show results. But as Charles Murray has said, “Small scale experimental efforts staffed by highly motivated people show effects. When they are subject to well-designed large-scale replications, those promising signs attenuate and often evaporate altogether.”

Not to be a downer or anything, but Goolsbee apparently is unaware of an August 2013 study looking at Tennessee’s voluntary full-day, pre-k program for four‐year‐olds from low-income families. Since 2009, a team of Vanderbilt researchers has been studying what’s in effect been a randomized trial, comparing the kids who won a lottery to enter the program against those who didn’t win.

A recent report from the Vandy group looks at how those pre-schoolers were doing in first grade. The results are not encouraging. Russ Whitehurst of Brookings points out that “the group that experienced the Tennessee Voluntary State Pre-K Program performed somewhat less well on cognitive tasks at the end of first grade than the control group, even though ¾ of the children in the control group had no experience as four-year-olds in a center-based early childhood program.” Likewise, there was no statistically difference between the two groups in their social and emotional skills as rated by the teachers. Whitehurst’s conclusion:

I see these findings as devastating for advocates of the expansion of state pre-k programs.  This is the first large scale randomized trial of a present-day state pre-k program.  Its methodology soundly trumps the quasi-experimental approaches that have heretofore been the only source of data on which to infer the impact of these programs.  And its results align almost perfectly with those of the Head Start Impact Study, the only other large randomized trial that examines the longitudinal effects of having attended a public pre-k program.

Based on what we have learned from these studies, the most defensible conclusion is that these statewide programs are not working to meaningfully increase the academic achievement or social/emotional skills and dispositions of children from low-income families.  I wish this weren’t so, but facts are stubborn things.  Maybe we should figure out how to deliver effective programs before the federal government funds preschool for all.


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

Relax, that $2 trillion jump in US wealth isn’t because of Fed-induced ‘bubbles’

MKM Partners

MKM Partners

US household wealth increased by $1.9 trillion to $77.3 trillion from July through September, according to new Federal Reserve data. That’s up by 2.6% from the previous three months. Of that nearly $2 trillion, $1.5 trillion came from an increase in the value of financial assets, including stocks and pension fund holdings. Another $400 billion came from the rising value of real-estate assets.

But does this increase in wealth merely reflect a Fed-generated stock and housing bubble? Not really. For one thing, there is certainly little price inflation to speak of, which one would expect to see in a “sugar high” economy. Getting to asset bubbles, let’s look at US stocks. They are trading at around 25x times the cyclically-adjusted PE ratio developed by Yale’s Robert Shiller. While that’s above the historic average of 16.5, it’s still way below the peak of 44 reached during the internet stock bubble. Now let’s say a nasty bear market dropped stocks by a third, returning the Shiller PE to its historic average. Even then, stocks would still be 100% from their 2009 lows. Are stocks even overvalued? Maybe not if the economy accelerates next year as some are forecasting.

Shiller, in various interviews, is mildly concerned about stock, less so about housing: As he recently told Barron’s:

We went through the biggest housing bubble in U.S. history in the 2000s, and there is a knee-jerk reaction among some people who think maybe we are doing that again. But you have to consider that these are very rare phenomena, and it was such a decisive break at the end of the last housing bubble that we might not be psychologically ready for another bubble.


Here is MKM’s Mike Darda on the bubble issue and the Fed:

Concerns about financial stability/over leverage are vastly overblown, in our view. Household leverage ratios have collapsed over the last five years even though the Q3 flow of funds data will likely show a new-all time high in inflation-adjusted net worth, thanks to rising nominal asset values and moderate nominal income growth (relative to flat or falling debt levels). Moreover, there is no evidence of a broad-based leverage or credit problem, unlike the early 2000s. The broadest measures of money (that include the shadow banking system) are growing at about the pace of NGDP. With unemployment/underemployment/long-term unemployment still a problem and inflation near record lows, the Fed is correct to focus on growth.


MKM Partners

MKM Partners

Pethokoukis, Economics, U.S. Economy

99 weeks and Counting: Of course we should extend unemployment benefits. But that’s not all we should do


The Emergency Unemployment Compensation program, under which some workers could receive benefits for up to 99 weeks, is about to expire. If it is not extended, some 1.3 million long-term unemployed workers — out of a staggering 4.1 million total long-term unemployed – will immediately lose benefits.

Why would this be a good idea (a) during perhaps the weakest economic recovery, both in terms of GDP and job growth in American history, and  (b) at a time when technology may be radically changing the nature of work in America? As AEI’s Michael Strain points out in The Weekly Standard:

These millions of workers are suffering​—​financially, emotionally, spiritually. Some of them may never work again, and may be forced to subsist on welfare, increasing the rolls and expense of those programs. Society is also suffering: A large pool of willing and able workers are idle; our already segmented society is even more segmented; our country is less dynamic, vibrant, and thriving.

But just extended the programs over and over isn’t a good idea either. Again, Strain:

1. One thing conservatives might push for is relocation assistance​—​to help the long-term unemployed move from a bad local labor market to a good one. The job market varies widely across cities and states. Instead of continuing to cut UI checks to a New Jersey worker who has been unemployed for eight months, why not cut him a check to help him move to North Dakota, where he has a much better chance at getting a job?

2. As mentioned above, the evidence suggests that many long-term unemployed workers are “scarred”​—​their lengthy spell out of the workforce is making it difficult for them because firms view workers who have been unemployed for so long as risky hires. Why not reduce the risk associated with the hire by lowering the minimum wage for long-term unemployed workers? A firm may not want to take a $7.25-per-hour risk on a long-term unemployed worker, but might be willing to take a $4 risk. If we lower the minimum wage for the long-term unemployed, then we’ll need to supplement their earnings with an expanded Earned Income Tax Credit or some other government-funded wage subsidy.

3. To help make sure that we aren’t adding any new workers to the rolls of the long-term unemployed, states without worksharing UI programs​—​about half of them at the moment​—​should start them. Under worksharing, a worker who has his hours reduced by his employer in response to a temporary lull in demand can receive a prorated UI benefit. This makes it easier for firms to reduce employees’ hours by, say, 20 percent, rather than laying off 20 percent of their workforce. Government shouldn’t tilt the scales towards layoffs by prohibiting workers who have their hours reduced from receiving prorated UI benefits.

4. One way to[help the unemployed back to work and boost economic mobility] would be to improve transportation networks within cities and their outlying areas in order to shorten commute times from low-income neighborhoods to employment centers.

Recent research from economists at Harvard and the University of California, Berkeley, suggests that socioeconomic segregation within cities and their outlying areas plays an even greater role in limiting the ability of low-income Americans to rise than was previously thought. Many low-income Americans face commute times measured in hours, not minutes. Public policy can shorten the distance between working-class neighborhoods and employment centers by shortening commute times for low-income workers.

In its cheapest incarnation, this would involve extra buses that run nonstop from low-income neighborhoods to employment centers, both in city centers and in suburbs. And of course, more money for better roads, bridges, and tunnels would shorten commute times for everyone, including the working poor.

Pethokoukis, Economics, U.S. Economy

Will 2014 be the best year for the US economy since 2005?


The US economy has not grown at 3% or faster, as measured by the Commerce Department, since 2005 when it grew at 3.4%. Here are the highlights of why Goldman Sachs thinks 2014 will be a year of acceleration:

1. The current level of housing starts stands well below our estimate of underlying demand. With vacancy rates now much lower, we expect residential construction to recover much further in coming years.

2. The debt-to-income level has fallen substantially. While it is difficult to foresee where debt levels will eventually settle, they now appear to be in line with the historical trend—and the ratio of household debt service to income is now historically low. Partly as a result, we expect the personal saving rate to edge down gradually further, which should deliver a modest boost to the growth rate of consumption relative to that of income.

3. Growth conditions have normalized globally, and we expect a further boost next year from the softening of fiscal drag abroad.

4. The fiscal drag should abate sharply in 2014.

In our view, the gradual lifting of these pressures on aggregate demand—and in particular the decline in fiscal drag next year—is likely to boost the growth rate of real GDP from the 2¼% pace of the last five years to a 3%-3½% pace over the next year.

As a counter, Barclays is less enthusiastic:

Looking ahead to 2014, we see real GDP growth picking up to 2.4%. This is partly because we project a lesser pace of government spending decline, as spending growth at the state and local level should continue to normalize, and there are no major additional sequester cuts at the federal level.

In addition, we look for stronger growth in real consumer spending, which we see improving to 2.3%, up from 1.9% in 2013. One reason is that real disposable income growth should be stronger, as it was held back significantly in 2013 by the tax increases at the start of the year and there are no major federal tax increases set to occur in 2014. In addition, positive wealth effects, especially those resulting from stock market gains, look set to provide a larger boost to consumer spending growth next year.

What could go wrong? Barclays also points to the possibility of “quicker-than-expected tapering by the Fed results in renewed financial market volatility. In turn, this could undermine business and consumer confidence, as well as generating renewed spillovers to international capital markets, resulting in downside risks.”