Will the Fragile Five’s troubles spread to the euro zone?

Image Credit: shutterstock

Image Credit: shutterstock

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.

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


How the rise of smart machines will affect the US economy and jobs: A Q&A with Erik Brynjolfsson and Andrew McAfee


The age of innovation and technological advancement is not over. That’s the reassuring news from The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by MIT’s Erik Brynjolfsson and Andrew McAfee. Economic growth is not over, despite the slow recovery after the Great Recession. Not by a long shot.

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 >


The Obama stimulus at 5: Did it work? On humility and high-causal density


Happy anniversary, Obama stimulus! Five years after the signing of the American Recovery and Reinvestment Act into law, both opponents and proponents are rehashing the wisdom and efficacy of the government spending and tax-cut package. I’ve written frequently about the US economy’s failure to achieve Obama White House job and GDP growth projections. We still don’t have 5% unemployment or multiple years of 4%-plus GDP growth, as Team Obama economists predicted. Of course fiscal stimulus fans will argue the economy would’ve been much worse without the ARRA. And they have plenty of economic models to back them up, though not all do. Let the Multiplier Wars begin!

But life is complicated. In an excellent 2012 blog post, Russ Roberts argued for humility on both sides given the high-causal density of the US economy:

Step back for a minute and consider the challenge of measuring the impact of the stimulus. It is one of many things that happened between February 2009 and the end of 2010. For starters, massive reforms of health care and the financial sector were passed. They were passed but the details of how they would actually be implemented remained uncertain through the end of 2010 (and remain so today.) There was an unprecedented set of monetary interventions. From the end of 2008 through the end of 2009, the Federal Reserve’s balance sheet went from around $800 billion to about $2.2 trillion. And of course a million other things happened as well. The price of housing fell steadily during this period, the price of oil rose steadily, the recession officially ended and on and on and on.

No one has a model of the independent impact of these different factors or a way of measuring them accurately and reliably in a way that can be tested and confirmed or rejected. No one. That means everyone, on the left or the right, who claims to have evidence for the impact of one of them or who cherry-picks one of those out of the myriad to choose from and blames that one factor for the lousy pace of the recovery is either fooling himself or fooling you. Don’t be a fool. So when the E.J. Dionnes of the world tell you that government creates jobs, just ask them how they know. Their answer will be that someone with exemplary credentials says so. But there are those with exemplary credentials who say otherwise. Where does that leave us? It should leave us in ignorance and doubt. No certainty. No exclamation points. More humility.

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


Yes, we should still care about federal debt

Peterson Foundation

Peterson Foundation

From “Debt and Growth: Is There a Magic Threshold?” by Andrea Pescatori, Damiano Sandri, and John Simon and distributed by the IMF:

Is there a particular threshold in the level government debt above which the medium-term growth prospects are dramatically compromised? The answer to this question is of critical importance given the historically high level of public debt in most advanced economies. Yet there is currently no agreement on the answer and it is the subject of heated academic and political debate. One camp has argued that high levels of debt are associated with particularly large negative effects on growth. For example, an influential series of papers by Reinhart and Rogoff (2010, 2012) argues that there is a threshold effect whereby debt above 90 percent of GDP is associated with dramatically worse growth outcomes.

An opposing perspective is advanced by those who dispute the notion that there is a clear debt threshold above which debt sharply reduces growth and raise endogeneity concerns whereby weak growth is the cause of particularly high levels of debt. Thus, according to this view, the priority should be increasing growth rather than reducing debt and, consequently, that much less short-term fiscal austerity is appropriate.

This paper makes a contribution to the debate by presenting new empirical evidence based on a different way of analyzing the data and a sizeable dataset. Our methodology is based on the analysis of the relation between debt and growth over longer periods of time that has the potential to attenuate the concerns of reverse causality from growth to debt.

Our results do not identify any clear debt threshold above which medium-term growth prospects are dramatically compromised. On the contrary, the association between debt and medium-term growth becomes rather weak at high levels of debt, especially when controlling for the average growth performance of country peers. We also find evidence that the debt trajectory can be just as important, and possibly more important, than the level of debt in understanding future growth prospects. Indeed, countries with high but declining levels of debt have historically grown just as fast as their peers. We also find, however, that high levels of debt are weakly associated with higher output volatility. This suggests that high levels of debt may still be associated with market pressure or fiscal and monetary policy actions that, even if they do not have particularly large negative effects on medium-term growth, destabilize it.

This is an interesting, ongoing theoretical argument that should really have no impact on whether we should reform entitlements ASAP. We should, of course, so that (a) tax dollars are used more efficiently, (b) the programs provides better services to those who need them the most, and (c) “market pressure” situation where changes will need to be blunt are avoided.

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


Fewer than 10% of college students taking remedial college classes ever graduate. That needs to change

Image Credit: Shutterstock

Image Credit: Shutterstock

More than 50% of community college students enroll in remedial courses, with a healthy chunk of that financed by the federal government. But less than 10% of those students ever graduate. Andrew Kelly suggests looking to K-12 charter schools as an example for reform:

In that spirit, policymakers should target college readiness training as an area for similar policy innovation. Legislators could carve out a small portion of existing public money, certify a set of providers with a proven track record of preparing students—existing community colleges, great high school math and English teachers, for-profit tutoring firms or course providers, and so on—and then let students choose one to fill their college readiness needs. Heck, leaders could even let students count such courses for high school credit. Students who still failed to meet the college-ready standard after their course could then be left out of the main federal financial aid programs. This would give students a chance to get over the bar and lower the costs of failure.

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


Some inconvenient facts for income inequality worriers

Image Credit: shutterstock

Image Credit: shutterstock

The case that income inequality is currently harming the US economy is not a strong one. A recent blockbuster study from the Equality of Opportunity Project found “little or no correlation” between the share of income going to the 1% and upward mobility. And new data analyzed by e21 has seriously undermined the White House’s “Great Gatsby Curve,” which supposedly suggested that diminished mobility was the logical consequence of higher income inequality: “When we plot the inequality levels of the U.S., Canada, and Sweden against their relative mobility levels, the Great Gatsby Curve indicates that higher inequality corresponds with less immobility, not more.” Finally, CBO data find that real incomes for the broad middle-class were 40% higher in 2010 than in 1979, hardly stagnant.

Lots of inconvenient facts for die-hard, inequality worriers. Of course the impact of upper-tail income inequality could change in the future. A lack of GDP growth and good jobs would seem to be the bigger problem right now, though. To focus on inequality is to distract from improving mobility and raising living standards.

So with the economic case against income inequality in ill health, some progressives are switching to a moralistic, emotional one. Here is New York Times columnist Paul Krugman:

It’s all very well to talk in the abstract about the dignity of work, but to suggest that workers can have equal dignity despite huge inequality in pay is just silly. In 2012, the top 40 hedge fund managers and traders were paid a combined $16.7 billion, equivalent to the wages of 400,000 ordinary workers. Given that kind of disparity, can anyone really believe in the equal dignity of work?

How exactly would we determine “equal dignity of work?” Equal pay for all? Equal incomes for all? Some might suggest that, unfortunately. Scott Hodge of the Tax Foundation calculates that to give household in America the current average income of $82,000 would require taking 74% of the top 20%’s income versus 21% today and redistributing it. I would guess such an income grab would radically change incentives for work and risk taking for that group. Anyway, here is Krugman’s solution:

So what would give working Americans more dignity in their lives, despite huge income disparities? How about assuring them that the essentials — health care, opportunity for their children, a minimal income — will be there even if their boss fires them or their jobs are shipped overseas?

OK, he’s losing me here. I thought it was the pre-tax, pre-transfer disparity that was immoral? Is this column still about inequality? Now Krugman seems to be saying, what, that a stronger safety net and better schools will restore dignity to the middle-class despite that disparity? All is revealed in this next bit:

Conversely, the drive by conservatives to dismantle much of the social safety net, to replace it with minimal programs and private charity, is, in effect, an effort to strip away the dignity of lower-income workers.

Oh, I get it. It’s one of those columns by Krugman, the red-meat kind that assumes everyone to his right wants to return to the pre-New Deal, pre-Fed, pre-income tax status quo. This is the kind of column meant to close minds, rather than open them. Some on right do fit Krugman’s characterization — just as some on the left might want to radically equalize incomes — but hardly all or even most. Here is my boss, Arthur Brooks:

One of the things, in my view, that we get wrong in the free enterprise movement is this war against the social safety net, which is just insane. The government social safety net for the truly indigent is one of the greatest achievements of our society. And we somehow want to zero out food stamps or something, it’s nuts to want to be doing something like that. We have to declare peace on the safety net.

The reform conservative movement seeks to strengthen the middle class, reform the safety net, and increase the rewards for low-income work. At the same, it rejects crony capitalist policies that enable vast wealth through government favor rather than innovation. Lots of interesting economic policy ideas are being generated and discussed: wage subsidies, expanded child tax credit, copyright and patent reform, a college completion agenda — just to name a few. Seems like they would make for far more interesting analysis by a Nobel laureate than something meant to confirm the existing biases of readers.

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


Why we should cut the mininum wage by nearly half — and do this one other thing

AEI’s Mike Strain on helping the long-term unemployed:

Because of the federal minimum wage, the company knows that it has to take at least a $7.25-an-hour chance on a worker. If we knocked the minimum wage down to, say, $4 an hour, we would significantly mitigate employers’ risk from hiring a long-term unemployed worker.  …

Of course, we can’t just lower the minimum wage for the long-term unemployed to $4 an hour and leave it at that. Society must have as a goal that no one who works full time and heads a household lives in poverty. This policy would have to be paired with an expanded earned-income tax credit, or with more straightforward wage subsidies — federal transfer programs that supplement a worker’s labor market earnings with tax dollars. …

Let’s assume that 20 percent of the long-term unemployed take a $4-an-hour job, and that each of them works full time for a year. Under this plan, the annual cost of the wage subsidy would be about $6 billion.  …

A suggestion for paying for it: Take some money the federal government spends on the highest-earning households and divert it to this program. For example, the government spent $70 billion on the mortgage-interest deduction in fiscal year 2013, the Congressional Budget Office estimates. This spending overwhelmingly benefited households in the top quintile by income. A better use for some of that money would be to help the long-term unemployed make a transition into jobs.

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


2 ways to create more affordable post-secondary education

AEI’s Andrew Kelly on innovation and competition:

First, occupational certificate programs can serve as efficient, alternative paths to a middle class wage. But they are often criticized as a form of “tracking” that takes low-income students off the academic path. Making certificates “stackable”—like the energy industry and Texas community colleges have—allows students to layer individual certificates and build toward a higher credential if they want one. Students can then take smaller doses of occupational training when they need it and be confident it all counts toward something larger. Not all innovation requires a wireless signal.

Second, thanks to advances in technology, the components of a postsecondary education—content, instruction, assessment—are now inexpensive and abundantly available. Advances like online learning and competency-based models, where students earn credit based on how much they learn rather than time spent in class, could dramatically reduce the cost of higher education. Targeted, short-term occupational training can help close skills gaps even if it doesn’t lead to a formal credential.

But regulatory barriers like accreditation and the rules governing financial aid keep innovative, low-cost providers out and make it difficult for existing colleges to change. Lowering these barriers to entry would both expand the number of affordable options and put pressure on existing colleges to contain their costs.

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


And the ‘real’ US jobless rate is …


Fed Chair Janet Yellen thinks the big drop in the labor force participation rate since 2007 is “mostly structural” rather than cyclical — but concedes it’s tough to apportion causality. In a new research note, Citi takes its best shot at determining how much of the drop in the jobless rate is due to a structural vs. cyclical declined in the LFPR”

We define a shadow unemployment rate due to certain types of underemployed  workers who are not counted as part of the official unemployment rate. In addition  to the unemployed themselves, it includes part-time employees working fewer hours  than they would wish, as well as workers who very recently left the labor force but  stand ready to reenter when conditions improve. We provide a more refined  approach than existing broader measures of unemployment (like the BLS’s U-6, for  instance) by pinpointing how many of these underemployed workers are cyclical as opposed to frictional or structural.

Our estimate of the current shadow unemployment rate is 7.1 percent, which is ½ percentage point above the official rate. While a 50 basis point adjustment is not  trivial by any means – i.e., it increases the gap between the official rate and the  long-run natural rate of unemployment by almost 50 percent – it is also far smaller  than suggested by other broader measures of unemployment. All told, our deep  investigation of these sources of underemployment reveals surprisingly little  cyclicality over and above standard measures of the unemployed. As a result, the  shadow unemployment rate will likely provide only a moderately sized buffer to  wage and inflation pressure as the economy continues to improve.

Here is Goldman Sachs on the same LFPR issue:

 – The labor force participation rate has dropped sharply since 2007 and has only recently begun to show signs of stabilization. Economists generally agree that about half of the post-crisis decline is due to demographic factors but disagree on how much of the remainder is due to cyclical, as opposed to structural, factors. In today’s comment we examine the participation rate of the young and the old to shed new light on this issue.

– For young individuals, we show that “continuing with school” accounts for almost the entire drop in the participation rate of the 18-24 year olds. The decline in their participation rate relative to the long-run trend therefore appears both cyclical and reversible. For old individuals, stock market performance matters to those who are near retirement age. But given the cyclicality of stock prices, the division between “cyclical” and “structural” factors is blurred.

– Taken together, the evidence presented above is broadly consistent with our view that a significant proportion of the participation rate decline was driven by cyclical factors and that the unemployment rate understates the extent of slack in the labor market. But our analysis also highlights that the uncertainly about the size of labor market slack is considerable.

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


The case against out-of-control artificial intelligence

Google recently announced it was acquiring UK artificial-intelligence firm DeepMind Technologies. Reportedly as part of the deal, Google agreed to create an ethics board to make sure the AI technology was not abused. Now whether this was due to privacy concerns or Skynet concerns isn’t clear. But the action did prompt many media stories about the likelihood of out-of-control computers destroying humanity. Historian Edward Tenner is somewhat less worried:

Artificial intelligence researchers themselves acknowledge that many tasks have taken far longer than their predecessors had predicted, leading in the past to disappointing results and funding slumps known as “AI winters.” Computer scientists specializing in computational complexity aren’t sure of whether brain modeling belongs in the category of problems so hard that centuries of hardware and software progress couldn’t solve them. Every so often, strikingly efficient computer procedures take experts by surprise, such as Google’s search algorithm in the 1990s. Artificial superintelligence may seem improbable, but history is full of great minds who said new inventions were impossible. As science fiction writer Arthur C. Clarke said, “Any sufficiently advanced technology is indistinguishable from magic.” In this case, will it be black magic?

The most serious reason for skepticism about such technological developments is not a philosophical, physical, or psychological objection but one from everyday experience. I would take warnings about the dangers of superintelligent machines more seriously if today’s computers were able to make themselves more resistant to human hackers and to detect and repair their own faults. Organizations with access to some of the most advanced supercomputers and gifted programmers have been hacked again and again by individuals and groups with modest resources, compromising everything from credit card numbers to espionage secrets. We must balance charts of exponential growth of computing power, like those displayed by Kurzweil in How to Create a Mind, against more sobering ones of continuing electronic fragility.

Of course there are ways to make computer systems more robust. Some of the greatest practical successes of artificial intelligence depend on elaborate techniques to compensate for the difference between computer reasoning and human thinking. Advanced aircraft systems such as the Airbus 320 are based on five or more computers answering the same questions with diverse hardware and software, comparing answers, and “voting” where necessary; any bug in a single computer will be overruled. IBM’s Watson also did not attempt to answer Jeopardy! questions as a human contestant would but instead used many techniques in parallel and assigned a probability to each one. So if superintelligence arises, it will probably be manifested not in a super-network of total social control but in clearly defined, usually proprietary environments. And as computing power becomes ever cheaper, there will be more redundant systems watching over each other, as on the Airbus; what doomed the fictional mission in Stanley Kubrick’s and Clarke’s 2001: A Space Odyssey was that there was a single, unchecked master computer, HAL.

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