Pethokoukis, Economics, U.S. Economy

Obama’s fact-challenged inequality speech


During his economic speech at Knox College, President Obama stated, “The link between higher productivity and people’s wages and salaries was severed – the income of the top 1 percent nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.”

In other words, America’s three-decade, pro-market shift helped only the rich. Sorry, middle-class families.

But this is certainly wrong.

1. As I have written, the typical family’s income didn’t “barely budge.” This is a point the Washington Post’s Dylan Matthews also explains:

The CBO finds that, before taking taxes and transfers (like Social Security or the Earned Income Tax Credit) into account, real median household incomes grew 19.9 percent between 1979 and 2007; after taking transfers but not taxes into account, they grew 30 percent; and after taxes, they grew 38.2 percent … real median household incomes in America are growing, and it’s inaccurate of Obama to suggest otherwise.

In addition, economist Richard Burkhauser finds that median income rose 21% from 1979 through 2007 — pre-tax, pre-transfer — and 37% — post-tax, post-transfer, and including health benefits. Then there’s research from the University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan, who find that “after-tax money income plus non-cash benefits for the median family grew by 54.6% between 1979 and 2007, growing from $31,880 to $49,298.”

Obama seems to have taken his data from the work of economists and inequality gurus Thomas Piketty and Emmanuel Saez, who claim median household income rose just 3% over those three decades. But their narrow market income measure misses a lot — including how to correctly gauge household size — as these other economists and the WaPo point out.

2. There is also a problem with that bit about the “link between higher productivity and people’s wages and salaries” being severed. Left-liberal economist argue that over the past four decades, productivity doubled even as wages stagnated or even dipped.

But AEI’s Stephen Oliner, a former Fed economist, argues that (a) the measure of labor income should include all forms of compensation, not just wages, and (2) the price index used to calculate real earnings should be a broad output price index not the CPI (because businesses make decisions about labor use based on a comparison of labor costs and the revenue they can earn from employing that labor).

When you run the numbers that way, as the Heritage Foundation recently did, you find that productivity rose 100% and compensation rose 56% rather than falling 7%. There’s still a gap, which might at least be explained by an overestimate of productivity growth, but not nearly as huge as left-liberals contend.

There’s more, but I will save the rest for my upcoming National Review column, out on Monday.


The impact of 3D printing on retail jobs

My pal Derek Thompson writes about the “depopulation” of retail:

The total retail workforce tripled between 1940 and 2000, and for much of the century, the sector employed more people than construction and health care combined. Even today, the two most common occupations in America, by a wide margin, are retail salesperson and cashier. Last year, 7.6 million people held those jobs—more than the total number of workers in Florida. … Between 1950 and 1990, retail employment grew more than 50 percent faster than the general workforce did. Since 1990, it’s grown 50 percent slower. Retail now employs fewer people than it did in 1999. And those people work significantly fewer hours, too. … Twenty years ago, the shoppers went to the stores. Today, the stores go to the shoppers. From the floor salespeople replaced by informative Web sites to the cashiers nudged aside by automatic checkout machines, the daily tasks once performed by store employees are either being taken over by machines or outsourced to customers.

And that’s all before 3D printers really work their magic. Esther Dyson:

Like computers and the Internet, 3D printing will affect business and behavior around the world and across industries. Already, there is a growing number of shared 3D printing services, enabling you to print something of your own design or use (a customized version of) designs that you can find in online catalogues or order through 3D design shops.

Over time, these print shops will replace thousands of stores carrying millions of items, some of which sit around for months waiting to be bought. They will print goods using designs from online services that offer designs for both open-source, free-design goods and branded goods that may not seem very distinct except for a logo.


Economics, Monetary Policy, Pethokoukis

Why Larry Summers might be the perfect Fed chair for Obama

Given the revelation of Larry Summers as a fiscalist and Fed ZLB doubter, Scott Sumner’s analysis suggests why he might indeed be the favorite to replace The Ben Bernank:

President Obama does not believe that monetary policy exists at the zero bound. It’s reported that he said so privately to Christina Romer. And he’s acted that way since day one. … Some people argue that Summers is a fine macroeconomist. That’s not the issue. In the 21st century the most important qualification for Fed chairman is the ability to understand that monetary policy must continue to steer AD at the zero bound, and supreme confidence that the Fed will do whatever it takes to get the job done. Nothing else is remotely as important. Any fool can do a Taylor Rule when rates are positive.

Economics, Monetary Policy, Pethokoukis

Hard money GOPers will like what Larry Summers said about the Fed’s QE program

Image Credit: Wikimedia

Image Credit: Wikimedia

The Financial Times gets the goods on what Larry Summers, who may be the front-runner to replace Ben Bernanke at the Fed, thinks about monetary policy — particularly the Fed’s QE program. The FT:

Lawrence Summers made dismissive remarks about the effectiveness of quantitative easing at a conference in April, raising the possibility of a big shift in US monetary policy if he becomes chairman of the Federal Reserve.

“QE in my view is less efficacious for the real economy than most people suppose,” said Mr Summers according to an official summary of his remarks at a conference organised in Santa Monica by Drobny Global, obtained by the Financial Times.

And more from Summers:

If we have slow growth, we are not going to keep thinking that 5.5 per cent unemployment is normal. … We are going to decide rightly or wrongly that the potential of the economy is less and therefore we are going to decide that we are closer to that potential and that is going to operate in favour of suggesting that we should normalise interest rates. … I think the market is underestimating the pace at which the Fed will alter its current course and the consequences of that for interest rates … I think we are a long way from tight labour markets and therefore that the risks of acceleration in inflation are substantially less than many people suppose. Since our problem right now is that there isn’t enough pressure in labour and product markets, I don’t see the risk that we are headed for significant levels of inflation. … More of what will determine things going forward will have to do with fiscal policy and that there is less efficacy from quantitative easing than is supposed,” he said in his Santa Monica remarks. … If QE won’t have a large effect on demand, it will not have a large effect on inflation either.

Summers appears to be a fiscalist — not so surprising given his role in designing the Obama stimulus — who is dubious of Fed power to boost or maintain NGDP, particularly if rates are superlow. A Summers Fed also seems likely to raise rates sooner than a Yellen Fed (or maybe even Bernanke Fed). Markets wouldn’t much like that.

On the plus side, at least he isn’t worried about inflation. Still, as I feared, he seems oblivious of the recent “market monetarist” rediscovery of the power of central banks to deal with the sort of economic shocks that led to the Great Recession and Financial Crisis. Then again, these anti-QE comments may make Summers more acceptable to hard money GOPers, particularly as compared to Janet Yellen.

Pethokoukis, Economics, U.S. Economy

5 horrible job stats Obama failed to mention during his Knox College speech

Credit: Century Foundation

Credit: Century Foundation

Listening to President Obama’s speech at Knox College in Galesburg, Ill., one might get the impression the US labor market has rebounded with a vengeance: “Today, five years after the start of that Great Recession, America has fought its way back. … Add it all up, and over the past 40 months, our businesses have created 7.2 million new jobs. This year, we are off to our strongest private-sector job growth since 1999.” And Obama only mentioned “unemployment” a single time.

Sounds like things must be pretty good for US workers, right? But a new report from the Century Foundation highlights a few job stats that didn’t make it into Obama’s final draft:

1. Over 69 percent of the jobs created in Q2 2013 and over 57 percent of all the jobs created in the first half of 2013 were created in the three lowest wage sub-sectors of the economy, Retail Trade, Administrative and Waste Services, and Leisure and Hospitality, that otherwise account for an aggregate of only 33 percent of all private sector jobs.

2. These jobs, in the aggregate, pay an average of only $15.80 per hour, compared with the other two-thirds of private sector jobs, which pay $27.16 per hour. Relative to unemployment benefits and other assistance, jobs at $15.80 per hour put less than $3.00/hour more in the pockets of a newly working consumer.

3. About half of the jobs created during the first half of 2013, and a large majority of the jobs created in Q2 2013, appear to have been part-time jobs that offer employees as little as one hour of work per week, and up to 35 hours of work.

4. After falling from a recession high of 9.2 million to a post-recession low of 7.6 million at the end of Q1 2013, the number of people saying they are working part time because they can’t find full time work (part time for economic reasons) crept back up to 8.2 million, double pre-recession levels.

5. Nearly 100 percent of the decline in the U-3 unemployment rate has been the result of there being fewer workers in the labor force as a percentage of the employable population. If the Labor Force Participation Rate had not fallen from October 2009, when unemployment hit its Great Recession peak of 10 percent, unemployment would today still be around 10 percent. Moreover, if the LFPR were held constant from its highest pre-recession level of 66.40 percent in January 2007 (when unemployment was 4.6 percent), the U-3 unemployment rate would be nearly 12 percent today. 

Pethokoukis, Economics, U.S. Economy

What Obama’s first term on Earth Two looked like

Image Credit: Nick Knupffer (Flickr) (CC BY-SA 2.0)

Image Credit: Nick Knupffer (Flickr) (CC BY-SA 2.0)

The always great Josh Kraushaar of National Journal imagines a reality where the never-happened Obama pivot to jobs and growth was calling from inside the house.

Instead of using huge congressional majorities to push health care, “imagine if Obama began his presidency pitching an economic opportunity platform focused on, say, expanding job-retraining programs, extending the payroll tax cut, and streamlining the tax code. … With health care reform, Obama chose the path of most resistance, and paid for it both politically and at the expense of achieving other policy goals.”

And spending his political capital on immigration reform rather than Obamacare may have helped avoid the 2010 tidal wave election for the GOP. Kraushaar:

The White House would never admit they’d trade the health care law for a healthier economy and comprehensive immigration reform. But if the swap included a Democratic-run Congress, it would be hard to turn down. That prospect could have been realistic had Obama approached his legislative priorities differently. In that scenario, however, the president wouldn’t have a Republican-held House to rail against—and he seems to enjoy using the opposition party as a foil more than he’s willing to admit.

And as Reihan Salam notes, you can toss the broad-based Hubbard-Mayer mortgage relief plan into the alternate reality policy mix, too. (Also, what if Obama had nationalized Citigroup in a more Swedish approach to dealing with the banking crisis).

Now, I don’t know if any of this would have boosted growth, especially if it resulted in less action from the Fed. But a more populist agenda would certainly have sent a message to voters that Team Obama understood their biggest concerns — jobs, housing, take-home pay, bank malfeasance — and was trying to address them. And while immigration reform would have been controversial, Republicans would have been split on the issue, unlike heath care reform. And Obama could have plausibly sold immigration reform as a pro-growth measure with plenty of data to back up the claim.

Pethokoukis, Economics, Taxes and Spending

One more reason why tax reform is going nowhere

Credit: CBO

Credit: CBO

Item #1: “The Senate’s top tax writers have promised their colleagues 50 years worth of secrecy in exchange for suggestions on what deductions and credits to preserve in tax reform.”

Item #2: “Comprehensive tax reform may be nothing more than a bipartisan pipe dream, according to a new United Technologies/National JournalCongressional Connection Poll that shows Americans think it’s important for Congress to preserve many of the most popular—and most expensive—deductions up for debate.”

Credit: National Journal

Credit: National Journal

The first items sort of helps explains the second. Indeed, two of the most popular tax breaks are the ones economists hate: mortgage interest and employer-provided healthcare. These two combined will cost $400 billion a year over the next decade, by the way.


Economics, Pethokoukis, U.S. Economy

Why does Obama think income inequality is a bigger problem than unemployment?


President Obama’s big economic speech at Knox College in Galesburg, Illinois, was light on fresh, innovative policy proposals. Such is a second presidential term, especially in today’s dysfunctional Washington. But if Obama wasn’t going to offer lots of good, new ideas, at least he could have avoided repeating some bad, old ideas.

Unfortunately, the progressive president couldn’t help himself. And here’s the worst of them: the only thing America got for its pro-market shift 30 years ago — from deregulation to tax cuts to free trade — was more income inequality and less income mobility. Well, that and the Great Recession and Financial Crisis. Obama the economic historian:

In the period after World War II, a growing middle class was the engine of our prosperity.  Whether you owned a company, swept its floors, or worked anywhere in between, this country offered you a basic bargain – a sense that your hard work would be rewarded with fair wages and benefits, the chance to buy a home, to save for retirement, and, above all, to hand down a better life for your kids.

But over time, that engine began to stall.  That bargain began to fray.  Technology made some jobs obsolete.  Global competition sent others overseas.  It became harder for unions to fight for the middle class. Washington doled out bigger tax cuts to the rich and smaller minimum wage increases for the working poor. The link between higher productivity and people’s wages and salaries was severed – the income of the top 1% nearly quadrupled from 1979 to 2007, while the typical family’s barely budged.

Towards the end of those three decades, a housing bubble, credit cards, and a churning financial sector kept the economy artificially juiced up.  But by the time I took office in 2009, the bubble had burst, costing millions of Americans their jobs, their homes, and their savings. The decades-long erosion of middle-class security was laid bare for all to see and feel.

Time for a fact check.

1. It’s tough to draw policy lessons for today from the immediate post-World War II decades. Would a return to strong labor unions and high marginal tax rates really accomplish Obama’s goal of “shared prosperity” and more equality? The 1950s and 1960s were affected by a host of one-off factors: (a) America’s competitors were recovering from WWII, (b) the US labor force was constrained by the 1930s baby bust and war casualties, boosting wages, (c) wages also experienced a catch-up period to productivity after lagging prewar. We’re not going back to the future.

2. Obama is flat-out wrong that median family incomes were flat between 1979 and 2007. Analysis from the Congressional Budget Office, economist Richard Burkhauser, and economists Bruce Meyer and James Sullivan suggests median household incomes actually grew more like 40%. Overall, the median household in the US is twice as rich as it was at the peak of Obama’s postwar golden age.

3. Obama is very worried about income inequality: “This growing inequality isn’t just morally wrong; it’s bad economics.” But high-end inequality — which has grown a lot — has not led to income stagnation, as Obama suggests. And it also seems doubtful that inequality is reducing income mobility much, if at all. For instance: Brookings’ Scott Winship finds that men born in the early 1980s have experienced, at most, “only a bit less mobility” than those born in the 1950s.

Income mobility is an legitimate issue, and Obama is certainly correct in emphasizing it. Research from Winship and others at Brookings shows that a child starting out in the bottom 20% of incomes has only a one-in-three chance of being solidly middle class (escaping the bottom two-fifths) as an adult and only a 17% chance of ending up in the upper middle class. But the Reagan tax cuts aren’t to blame here.

What Obama didn’t talk enough about was how to boost economic growth (beyond spending more on infrastructure) to boost incomes and unemployment. A new report from Capitol Economics warns that the economy’s potential growth rate is probably now only slightly above 2%. To get back to just the postwar GDP trend of 3%, we need more workers and more innovation. And a reminder: We are still some 10 million jobs short of what we would need to return to the prerecession employment trend, while the unemployment rate, adjusted for the drop in labor force participation, is closer to 10% than 7%. But Obama mentioned “unemployment” just once.

Want to boost the middle class, Mr. President? Help them get a job and a raise.

Pethokoukis, Economics, U.S. Economy

Robots will not only pick our crops, they’ll drive them away, too. Should we care?

Image Credit: Shutterstock

Image Credit: Shutterstock

The number of jobs that humans can do and robots and algorithms can’t seemingly continues to decline. Just a few days ago, AP reported on the Lettuce Bot, which can zip through a lettuce field in California’s Salinas Valley in the time it takes about 20 workers to do the job by hand. As the AP reports:

The thinner is part of a new generation of machines that target the last frontier of agricultural mechanization — fruits and vegetables destined for the fresh market, not processing, which have thus far resisted mechanization because they’re sensitive to bruising.

Researchers are now designing robots for these most delicate crops by integrating advanced sensors, powerful computing, electronics, computer vision, robotic hardware and algorithms, as well as networking and high precision GPS localization technologies. Most ag robots won’t be commercially available for at least a few years.

In this region known as America’s Salad Bowl, where for a century fruits and vegetables have been planted, thinned and harvested by an army of migrant workers, the machines could prove revolutionary.

Now comes this from the Wall Street Journal:

Some 5.7 million Americans are licensed as professional drivers, steering the country’s vast fleets of delivery vans, UPS trucks and tractor-trailers. Over the next two decades, the driving will slowly be taken on by the machines themselves. Drones. Robots. Autonomous trucks. It’s already happening in a barren stretch in Australia, where will have 45 self-directed, 240-ton mining trucks maneuvering at an iron-ore mine.

Farming and driving are both the sort of jobs supposedly immune to automation. Or at least they were. Indeed, a recent study of technological unemployment specifically identified truck driving as a “non-routine manual task” and thus “computerization should have little effect on the percentage of the workforce engaged in these tasks.”

Now, some very smart economic thinkers I respect don’t seem too worried about huge levels of tech-driven unemployment or underemployment, particularly among low-skill, low-income workers. Scott Winship points out that even as computing speeds were increasing by a factor of one billion from 1964 through 2007, median household still income rose by 75%. And as technological progress continues, the result is more likely to be shorter work weeks than fewer jobs.

Ashok Ro agrees that as productivity increases, average hours worked will fall and workers will have “more time with the family, easier weeks, more vacations, and more sleep.” And technology will decrease consumption inequality and thus improve living standards by lowering prices and creating all sorts basically free goods.

As for those somehow left out of this New New New Economy, there’s this: “Governments [will be] free to subsidize lavish basic incomes and fancy roads because incentives are no longer tethered to production, which is on robotic autopilot. In fact, counterintuitively, inequality will no longer meaningfully exist in the post-scarcity world. The government – finally! – can redistribute without worrying about incentivizing effort. Because the robots plowing our fields and flying our planes don’t care. They will work hard no matter what.”

Timothy Taylor gives the baseline economic response:

At least to me, the bottom line for all concerns about machinery replacing workers is that if this was a big problem, surely it would have already been happening steadily during the last two centuries? It’s easy to make the case that machinery and robots alter what workers do, and that it will shake up occupations and wages, but it flies in the face of two centuries of history to argue that mechanization will lead to mass unemployment.

This all sounds very reassuring — until I think about (a) accelerating, exponential growth — the second half of the chessboard that Erik Brynjolfsson and Andrew McAffee describe in Race Against The Machine – and (b) the poor job we are currently doing developing human capital, not to mention creating disincentives to hire. Will these elegant models play out in the real world? And might these economist be correctly describing an end game arrived only after a long and difficult transition that cause a political backlash by workers?

Economics, Monetary Policy, Pethokoukis

Obama may want Larry Summers at the Fed. But in heaven’s name, why?

Image Credit: Wikimedia

Image Credit: Wikimedia

It’s not as if there are no good reasons for President Obama to pick Larry Summers to replace Ben Bernanke as Federal Reserve chairman. Summers is a supersmart economist, for one. And as Washington Post columnist Ezra Klein points out, Summers’ experience in the Obama and Clinton administrations makes him a financial crisis veteran. And you never know when the next shock — we’re looking at you, euro zone — will hit.

But once you get past those attributes, the pro-Summers case gets rather thin, as Klein’s column — a White House-inflated trial balloon anointing Summers as Fed front-runner — makes clear. Obama, writes Klein, (a) likes Summers personally, (b) is confident Summers appropriately views the Fed’s employment mandate as equal to its inflation mandate, (c) thinks markets “trust” Summers more than primary rival Janet Yellen, and (d) views Summers’ “does not play well with others” reputation as overblown.

Boil all that down and the case for Summers really revolves around both Obama and influential Wall Street Democrats being more personally comfortable with Summers — a Treasury secretary during the 1990s boom who later made millions at a hedge fund — than with Yellen, an academic from U-C Berkeley. Summers is a member of the club, Yellen is not.

And maybe that’s the end of the story. But it shouldn’t be. Little is known of Summers’ monetary policy views, and there is no evidence that he has absorbed the recent neo-monetarist/market monetarist revolution. As Financial Times columnist Ed Luce — a guy who used to work for Summers – recently wrote, “Among economists, he is seen as neither a hawk nor a dove. Republicans would be unlikely to question his credentials. In practice – and not just for the hearings – his reputation for neutrality would be an asset.”

When both inflation and GDP growth are below 2%, dual mandate neutrality is not what’s needed. And trust me, Republicans are going to question plenty about Summers, whom they will paint as an abrasive partisan: from his time as Harvard president (both comments on the math aptitude of women and his spectacularly wrong bet on interest rates) to his time on Wall Street to his crafting of the Obama stimulus to the Clinton-era housing policies that GOPers think caused the Great Financial Crisis. (And liberal Dems might have a question or two to ask about his role in financial deregulation.)

If Summers should somehow be confirmed, he will emerge as a politically weakened Fed chair hardly in the position to push the Fed into, say, explicitly targeting nominal GDP or income rather than inflation. Prediction: Summers will be a caretaker chairman who won’t get another term if a Republican wins the presidency in 2016. The political case for a Summers-led Fed is weak. The policy case even weaker.