Pethokoukis, Economics, U.S. Economy

Today is the 30th anniversary of the most amazing US jobs report of all time

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No September jobs report today, but oh to have been covering the economy when the September 1983 jobs report came out.

Back then, the BLS reported net new payrolls of 1,114,000. That’s right, over a million net new jobs in just one month. The Reagan Recovery was on.

That number is even more amazing when you consider the US labor force was a third smaller back then. The equivalent number of jobs today would be more like 1.6 million. In a single month. By contrast, analysts were looking for nonfarm payroll growth this month of around 180,000.

For all 1983, the US economy added 3.5 million new jobs, followed by 3.9 million in 1984.

Update: It has been noted that the September 1983 jobs number benefited roughly 640,000 AT&T workers returning from a strike. But even if you factor those jobs out, there were roughly 750,000 jobs created that month on a 2013 equivalent basis. Now that’s a jobs recovery!

Pethokoukis, Economics, U.S. Economy

10 reasons why a grand budget bargain is a total fantasy right now

Image Credit: Shutterstock

Image Credit: Shutterstock

Chris Krueger of Guggenheim Washington Research Group has a crackerjack research note out this morning that shatters any illusions there will be a mega-budget deal between Democrats and Republicans. Here’s some of his analysis:

1. No Trust.

2. No Time.

3. No Down Payment or Trigger. For Republicans, a “down payment” is essential to begin any negotiation that would reopen the government (and perhaps raise the debt ceiling). This is something along the lines of the Keystone XL pipeline, medical device tax repeal, delay of the individual mandate, etc. For Obama and most Congressional Democrats, a “down payment” is a fancy word for a ransom. Without some form of serious down payment, it seems very unlikely that any grand bargain would eventually materialize unless you attach a huge enforcement mechanism (“trigger”).

4. No Mitch McConnell (Yet…). McConnell is currently waging a bitter re-election campaign in Kentucky with both a Tea Party primary and a general election opponent. Without McConnell re-engaging on a bland bargain, it remains extremely unlikely.

5. No Staff. Grand bargains are not produced with skeleton crew staffs.

6. Entitlement Reform. For Obama, entitlement reform is probably close to a 1:1 trade between provider cuts and beneficiary cuts. This will be a very tough sell with Republicans.

7. Revenues Very Hard. Obama will likely only give on entitlements for substantial revenues (close to a 1:1 ratio), which are likely to come from the individual deductions of those making above a certain income threshold. That will be a non-starter with most Congressional Republicans.

8. House GOP.  If the current House GOP leadership overextends itself by going for too big a deal, it is not difficult to see broad replacements of the current leadership with more Tea Party-focused lawmakers.

9. Jack Lew. His relations with Congressional Republicans are less than stellar; in a nutshell: they don’t trust him and he doesn’t trust them.

10. 2014. A huge deal on deficit reduction would likely eliminate any chance for Democrats to retake the House. Doing a huge deficit reduction deal in the wake of a government shutdown and debt ceiling hostage brinkmanship would likely strike many Congressional Democrats as rewarding (and encouraging) bad behavior.

Pethokoukis, Economics, U.S. Economy

The September jobs report: Here’s what it would have been

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Thanks to the partial government shutdown, the US Labor Department’s Bureau of Labor Statistics will not be releasing the September jobs report today. This is a huge bummer for economic data junkies everywhere — and for the Federal Reserve which has been closely watching employment data as it decides when to begin tapering its bond-buying program.

But what might have the September jobs report told us about the health of the labor market? Well, there is some other data that can help us make a rough guess:

– In a pre-shutdown survey, according to The Wall Street Journal, economists expected September nonfarm payrolls to increase by 181,000 and the jobless rate to hold at 7.3%.

–  Initial jobless claims for the week ending September 28 rose by 1,000 to 308,000 which lowered the four-week moving average by 4,000 to 305,000. That’s the lowest level since May 2007.

– Over the past quarter, employee tax withholding revenues have increased at a 4.0% annualized rate, down from a recent peak of 7.0% growth this past March. At its current pace, according to Deutsche Bank, tax receipts are broadly consistent with 2.2 million per year gains in nonfarm payrolls or about 180,000 jobs per month.

– US businesses added 166,000 jobs in September, according to payroll processor ADP, just below its moving average of 175,000.

When Deutsche Bank looks at the data we do have, particularly the ADP and tax data, it concludes “whenever the September employment data are released—we are starting to think it will be toward the end of the month, we look for a similarly sized increase as ADP. Going forward, if claims (recent distortions aside) remain near 300k, then the rate of job growth should pickup to at least a 200k per month pace.”

1. Now let’s say Deutsche Bank is correct. Even at an accelerated job creation pace of 200,000 jobs a month, it would take more than five more years to return to pre-recession employment levels.

2. Remember the current jobless rate probably understates the true health of the labor market. Let’s say the consensus was correct, and the September jobs report showed a 7.3% unemployment rate. That number is based on a shrunken labor force participation rate where people who stop looking for work are disappeared from the data.

3. If the labor force participation rate were back at January 2009 levels, the unemployment rate would be just shy of 11%. As Minneapolis Fed president Narayana Kocherlakota recently put it: “Most of the declines in the unemployment rate since October 2009 have occurred because the fraction of people who are choosing to look for work has fallen.”

4. But what accounts for that drop in labor force participation? There have been many studies on this subject. Some part of the decline reflects the aging of the population. But when the Goldman Sachs econ team looks at the balance of the evidence, it suggests to them that “a bit more than half of the observed decline since end-2007 (around 1½pt) is related to the cyclical weakness of labor demand. The implication of this estimate is that the labor market is much further from full employment than the unemployment rate alone would suggest.”

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5. And if you plug the Goldman Sachs numbers into the BLS data, you get a “real” unemployment rate of 9.5%. That is, by the way, far above the 2009 White House forecast of 5% unemployment by this point in 2013. Long-term unemployment — more than 4 million Americans have been out of work for more than 27 weeks –is particularly dreadful.

So what would the September jobs report have really told us? The US labor market remains deeply depressed.

Pethokoukis, Economics, U.S. Economy

How the progressive income tax stopped the US from becoming France

Image credit: Official White House Photo (Wikimedia Commons)

Image credit: Official White House Photo (Wikimedia Commons)

The US federal income tax turns 100 today, a birthday enthusiastically celebrated by the left and bemoaned by the right. But maybe those attitudes should be reversed. America’s century-long embrace of progressive income taxation might be a big reason the US welfare state isn’t yet as obviously massive and extensive as Europe’s. For instance: total government spending in Sweden is 51% of GDP. In France, it’s 56%. The US lags behind at 42%.  And until yesterday, the US didn’t have a universal health insurance system, while Europe’s social democracies have had one for decades.

So why are we so different — though getting less so — than them?

Look at the different way these advanced economies raise tax revenue. Before the income tax in the United States, Washington relied on tariffs and excise taxes for revenue. But this system was criticized, particularly in the South and agrarian Midwest, for being regressive and raising prices on common goods. A progressive income tax, on the other hand, would fall on wealthy manufacturers and bankers in the Northeast. Indeed, once the 16th amendment became law, the first income tax applied only to the top 2%. Rates surged to pay for World War I, but fell during the 1920s.

Then income taxes shot back up during the 1930s as New Deal Washington sought to break up concentrations of wealth and redistribute to middle and lower classes so they could consume more and boost the depressed economy. This focus on economic growth through wealth redistribution (via the progressive income tax) and consumption continues to dominate left-wing economics in the US even today. Efforts to promote national sales tax ideas have gone nowhere. But the income tax has not been so durable, with top rates falling from the mid-1960s onward, particularly after America’s 1970s economic crisis.

Europe, especially Germany and France, embraced a different economic model after World War II, one that focused on rebuilding industrial production by encouraging investment and exporting while discouraging consumption and suppressing wage growth. Why did workers agree to go along with this postwar reconstruction plan? In exchange for labor harmony, they received a large welfare state financed though a national sales tax, or value-added tax. As Northwestern University sociologist Monica Prasad (whose ideas inform this entire blog post) argues in The Land of Too Much: American Abundance and the Paradox of Poverty

Progressive taxation seems to be a more politically vulnerable form of revenue generation, and may also be less economically efficient, so American resistance to regressive taxation closed off the easy source of revenue that the European states had. … Because of the agrarian resistance to regressive taxation, the United States never developed the less economically distorting taxes that underpin the European welfare state and that allow Europe to combine economic growth with redistribution. … One way corporations avoided high tax rates was through granting fringe benefits, which received preferential tax treatment. These tax preferences codified and helped develop the American private system of welfare and conversely starved the public welfare state of support.

In short, the progressive income tax has meant less American financial and political support for a larger welfare state. Now here’s the hitch: one aspect of that consumerist system of “private welfare” Prasad writes about is government-subsidized mortgage credit, what Prasad terms “mortgage Keynesianism.” Once you add back those housing subsidies, the US and European welfare states look a lot more alike. Is “mortgage Keynesianism” a better system than the social democratic welfare state, particularly in light of the collapsed US housing bubble? Prasad does not think so given the higher rates of US poverty. I’m not sure I like either option.

Pethokoukis

Why is private-sector R&D spending falling? And should we care?

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As the above Atlanta Fed chart shows, real private R&D investment spending has been on the decline. Annual change over the past 50 years has been 4.6% vs. 1.1% over the past five years. Keep in mind that R&D spending is thought to be a key source of  productivity growth. John Robertson, senior economist in the Atlanta Fed’s research department, offers one possibility

R&D is also an inherently risky endeavor, since the outcome is quite uncertain. So to the extent that economic and policy uncertainty has helped make businesses more cautious in recent years, a slow pace of R&D spending is not surprising. On top of that, the federal funding of R&D activity remains under significant budget pressure.

I find the tandem of reduce private and public sector research worrisome, but slightly less worrisome having read economist Amar Bhide’s The Venturesome Economy. Bhide is skeptical of both big government subsidies for R&D and claims America should be worried about the expanded R&D capabilities in other nations such as India and China. He argues that high-level know-how produced abroad is highly mobile and cheap and available for global use. Indeed, the Atlanta Fed chart excludes R&D performed abroad by affiliates of US companies. Bhide:

The United States is not locked into a “winner take all” race for scientific and technological leadership, and the growth of research capabilities in China and India—and thus their share of cutting-edge research—does not reduce U.S. prosperity. Indeed my analysis suggests that advances abroad will improve living standards in the U.S. Moreover, the benefits I identify are different from the conventional economist’s account whereby prosperity abroad increases opportunities for U.S. exporters. Instead, I show that cutting-edge research developed abroad benefits domestic production and consumption in the service sector. And contrary to the policy prescriptions of techno-nationalists, I suggest that the U.S. embrace the expansion of research capabilities abroad instead of devoting more resources to maintaining its lead in science and cutting-edge technology.

Pethokoukis, Economics, U.S. Economy

If austerity is boosting US growth, why hasn’t it helped Europe?

Image Credit: shutterstock

Image Credit: shutterstock

Art Laffer and Steve Moore have a piece in The American Spectator that smartly points out America’s huge but under-reported fiscal retrenchment. Federal spending as a share of GDP has fallen from 26.5% in 2009′s second quarter to probably around 23% by 2013 year end. (State and local spending is also down by more than a full percentage point.) As Laffer and Moore note, “This is the first time in 50 years we’ve had two straight years of declining spending.”

No matter what happens with the current budget and debt ceiling showdown, the GOP is winning on the budget — at least the discretionary bit of it — thanks to the Budget Control Act and sequester. But then I think Laffer and Moore go a bridge too far when they suggest all the fiscal austerity has been an obvious and indisputable good for the US economy. I think that analysis incomplete. Laffer and Moore:

Many Americans who have sucked up the Keynesian vapors floating around in the ether cannot imagine that government spending actually hurts the economy. But we would love for the government-as-stimulus crowd to explain the chart below of government spending versus unemployment … The more the government spends as a share of GDP, the more Americans are out of work as a share of the labor force. Chico Marx’s famous line in Duck Soup puts the Keynesians into perspective: “Well, who you gonna believe, me or your own eyes?”

 

Credit: The American Spectator

Credit: The American Spectator

Over the longer-term, a smaller, less-intrusive government is good for growth, as long as government has enough resources to perform key functions such as defense, research, education, and maintaining a safety net. For instance: after surveying the literature, economists Andreas Bergh and Martin Karlsson conclude than “an increase in total government size of ten percentage points in tax revenue or expenditure as a share of GDP is on average associated with an annual lower growth rate of between one-half and one percentage point.”

And to the extent current spending cuts help long-term government shrinkage, they’re part of the solution. And perhaps the expectational impact of higher future growth from smaller government offsets the impact on near-term demand from austerity.

But I am skeptical the historically large US fiscal retrenchment is helping growth right now. Don’t forget US austerity also includes higher payroll and labor/capital income taxes. Indeed, a recent study from the San Francisco Fed estimates US budget policy will knock as much as one percentage point a year from GDP growth over the next three years. And 90% of the fiscal drag comes from higher taxes.

More to the point: Why has austerity been good for America but bad for Europe, which is just now leaving a double-dip recession and has 12% unemployment? What really explains that chart Laffer and Moore present — besides how the drop in labor force participation is overstating the improvement in the jobless rate? (As Minneapolis Fed president Narayana Kocherlakota recently put it: “Most of the declines in the unemployment rate since October 2009 have occurred because the fraction of people who are choosing to look for work has fallen.”)

Economist Mike Darda may have the answer:

The fact that austerity appears to have been self-defeating in the euro area while the most rapid fiscal consolidation since the Korean War demobilization in the U.S. has been met with steady growth is a critical testament to the fact that the Fed has been more adept at offsetting demand/velocity shocks than the ECB.

In theory, easy-ish money and a tight budget (though US cuts are unbalanced) is a not-so-terrible economic approach — though not optimal — for a nation suffering below-trend growth, high debt and high unemployment. Anyway, while Laffer and Moore provide some much needed analysis of the current budgetary picture, their description of economic forces driving the US economy right now is too limited.

Pethokoukis, Economics, U.S. Economy

Are bonds markets starting to get skittish about the US debt ceiling debate?

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Economically speaking, the partial government shutdown is a big nothingburger. GDP losses from this quarter — mostly through compensation to federal workers — will be made up next quarter.

But the debt ceiling is a whole other ballgame. A temporary “technical” default where debt payments are delayed would be a terrible outcome. The US not meeting its financial commitments whatever they are would be a terrible outcome. These are low risk probabilities, but Goldman Sachs thinks US Treasury investors are starting to worry:

The Treasury bill market is clearly indicating concern about upcoming debt ceiling deadlines (Exhibit 4). In our view this is the direct result of the increasing acrimony in Washington. Starting with the bill maturing on October 17―the day the Treasury Department has suggested it would exhaust its borrowing authority―bill rates are elevated, suggesting lower investor appetite for holding these securities. The distortion in the bill curve is most apparent in the security maturing on October 31, just after Treasury is likely to have depleted its cash balance.  This unusual “humped” pattern is similar to that seen in late July 2011 during the last debt ceiling standoff.

 

Pethokoukis, Economics, U.S. Economy

Google vs. the BLS: What if Washington shut down, and Wall Street’s data junkies didn’t notice?

Credit: Google

Credit: Google

Financial markets thrive on data, the more and faster the better. But the US government shutdown could stop the flood of economic statistics from Washington. No jobs or inflation numbers from the Labor Department, no GDP or housing updates from the Commerce Department. Not that it would necessarily be such a terrible thing. Given the sometimes substantial data revisions — the payroll survey, for instance, has a 100,000 job margin of error — delaying the first print means that when numbers are released, they could be more accurate.

There is also a wealth of data coming from the private sector such as the Institute of Supply Management surveys or the weekly ADP jobs report or the confidence surveys from the University of Michigan and the Conference Board.

Also, the Internet has created a valuable new source of real-time economic data. Recall back in 2009 when White House economic adviser Larry Summers made the case the recession was over by noting the number of people searching for the term “economic depression” on Google had returned to pre-recession levels. MIT takes a more sophisticated approach with its Billion Prices Project, an alternate way to gauge inflation. The BPP “uses prices collected from hundreds of online retailers around the world on a daily basis to conduct economic research.” And track inflation trends in real time.

Google is also conducting fascinating experiment with housing numbers. From The New York Times:

An encouraging study, begun in 2009 and repeatedly updated, has used Google searches to predict home sales and prices three months into the future. In the study, the higher the frequency of search terms like “house prices,” “real estate agent” and “mortgage rates,” the more likely the national housing market would heat up.

The results of the study, “The Future of Prediction,” by Lynn Wu, an assistant professor at the Wharton School of the University of Pennsylvania, and Erik Brynjolfsson, a professor at the M.I.T. Sloan School of Management, have held up over time. In the most recent version, their model using search data predicted future home sales 24 percent more accurately than the forecasts by experts from the National Association of Realtors.

Intuit, the maker of personal finance and tax software is collecting data that mirrors what government does:

American Home Inspectors and Engineering Assessments Inc., is one of more than 200,000 that have allowed Intuit, the software maker, to gather data on their use of Intuit’s online payroll or online accounting products for research on employment and sales trends. The data are stripped of identifying information, and, in asking permission, Intuit also emphasizes that it uses the data to improve its products.  … The Intuit monthly employment data, based on online monitoring, is current. That is eight months to a year ahead of the government’s best statistical look at the health of small business, which is culled from quarterly surveys, state unemployment records and tax returns. The monthly Intuit survey data have also proved accurate, almost mirroring the government results when they are finally reported, according to Susan Woodward, a consulting economist for Intuit.

And the New York Fed sure takes Google seriously:

Economists are always looking for ways to improve their forecasts—to make their crystal ball a bit less cloudy. We find that Internet search counts possess useful information, not available in other variables, to now-cast or forecast the trajectory of some financial market data. While this predictive power is by no means universal—as we observe above, for a number of markets, Internet search data do not provide explanatory power beyond that of more traditional forecasting methods—the basic message is of a useful addition to the economist’s toolkit.

Washington better watch out. Business isn’t waiting for politicians to get their act together. Huge new private datasets are becoming more widely available. What if the government shut down and no one on Wall Street noticed?

 

Economics, Health Care, Pethokoukis

An extremely positive take on the economics of the US government shutdown

Credit:Barclays

Credit:Barclays

A US debt ceiling crisis would potentially have a large and lasting economic impact. But a government shutdown is another matter. From Brian Wesbury and Bob Steing at First Trust Advisors:

Some pundits and analysts say a shutdown will hurt the economy, but it’s hard to say that based on history. The Washington Post recently listed every shutdown from 1976 to 1996. There were 17 shutdowns totaling 110 days. Out of those 110 days, only 6 days were during recessions. That’s very few given that we were in recession about 14% of the time during that twenty–year period.

Of course, maybe that’s because politicians are more likely to forge a budget agreement during economic downturns. But the last and longest shutdown doesn’t appear to have hurt the economy either.

That was the three-week shutdown from mid-December 1995 to early January 1996 under President Clinton. Real GDP grew 2.3% in the year before the shutdown, a 2.9% annual rate in Q4-1995 and then at a 2.6% pace in Q1-1996, despite the shutdown and the East Coast Blizzard, a multiple day massive snowstorm in January that was followed by large floods.

The real result of the 1995-96 shutdown was that politicians could no longer hide the fact that government was overspending. And when politicians can’t hide, when the public finally finds out the “Emperor Has No Clothes,” there is a political reaction. In the late 1990s, that reaction slowed government spending relative to GDP dramatically and the US eventually moved into surplus.

I should add that the CBO estimates the approximately four-week shutdown in 1995-96 reduced growth by 0.5 percentage point in the fourth quarter of 1995. And the US might well be growing more slowly right now than it was back then. So the relative impact could be bigger.

But the W&S case is that the 1995-96 shutdown altered the political dynamic is favor of fiscal discipline and helped put the US budget in the black. I’m not sure about that causality, but this shutdown has put renewed focus on Obamacare and revitalized GOP opposition to it. My hope is that the near-term result is a comprehensive attempt to deregulate the Affordable Care Act to create space for more “disruptive innovation” of the US healthcare system by business.

Economics, Health Care, Pethokoukis

Can the US private sector outsmart Obamacare?

Image Credit: Shutterstock

Image Credit: Shutterstock

Two probabilities: Obamacare isn’t suddenly going away and it isn’t going to fix US healthcare. If America is going to have a more medically effective, financially sustainable healthcare system in the future, it will require plenty of disruptive innovation by the private sector. Now that’s not just some overused business conference buzz phrase. “Disruptive innovation,” coined by Harvard Business School’s Clayton Christensen, is how new competitors steadily move upmarket and supplant established players by deploying some new technique or technology to make goods and services cheaper, simpler, and easier to access.

For instance: the first PCs were less capable than mainframe computers, but they were good enough and a lot cheaper for consumers and small business, the low-end of the market. Then as the technology improved, PCs moved upmarket and grabbed market share from Big Iron.

In healthcare, disruptive technologies allow complex, expensive procedures and treatments for well-understood medical problems to be done in places other than hospitals by less credentialed and less expensive doctors, nurses and technicians. This could mean, for instance, nurses sometimes substituting for anesthesiologists or using telemedicine so photos of skin condition could be sent to a physician.

So does the Affordable Care Act make disruptive innovation harder or easier?

Well, some of both, according to Seize the ACA: The Innovator’s Guide to the Affordable Care Act by Ben Wanamaker and Devin Bean of the Clayton Christensen Institute. On the plus side, the individual mandate will likely create the need for new delivery models at the low end of the market such as retail clinics. And the employer mandate creates incentives to split true insurance from routine reimbursement by providing on-site clinics or similar services to cover primary care and contracting directly with healthcare providers for catastrophic care. On the negative side, the essential health benefits provision establishes a floor at the low end of the market that creates a barrier to entry for new and disruptive providers. Same goes for the insurance exchanges themselves, which mandate health plan actuarial values and force providers to offer plans at Silver and Gold levels thus making new providers compete directly against incumbents.

Wanamaker and Bean:

In an effort to disrupt the defunct system, we recommend that innovators focus their efforts on areas where the legislation creates opportunities for disruptive innovation, specifically the Individual and Employer Mandates, ACOs, Wellness Programs, and the CMS Innovation Center.

While these provisions are far from silver bullets, innovations positioned with the right business models and value networks will yield exactly what legislators were hoping to create: more affordable and accessible quality health care.

In contrast, where provisions of the ACA discourage disruptive innovation—namely, Insurance Exchanges, Essential Health Benefits, Cost-Sharing Requirements, Medical Loss Ratio, and Medicaid Expansion—we appeal to policymakers to focus their efforts on making the legislation more innovation-friendly.

Quality health care will not become affordable and accessible on its own; we need to be proactive in creating room for the innovations that will transform the current state of the industry.

This outline for innovators also provides a deregulation road map for legislators, such as letting nurses do more of what doctors do: diagnosing and treating patients, as well as prescribing medications — all without a doctor’s involvement. And exchanges are ripe for deregulation, especially the essential benefits and medical loss ratio requirements. The goal is to create space for innovation and new players to gain a foothold and expand against the desires of incumbent players. But the ACA is all about Big Government and Big Medicine coming together — hardly a promising situation for upstart companies and new competitors. Once Republicans tire of delay and defund, they can start on deregulate.

Credit: Clayton Christensen Institute

Credit: Clayton Christensen Institute