Pethokoukis, Economics, U.S. Economy

The solution to income inequality and immobility? It’s been right in front of us all along


Maybe it really is this simple. Maybe the solution (or at least a big part of the solution) to concerns about income inequality, stagnation, and immobility is to turn more workers into capitalists. Since the mid-1980s, as the below chart shows, owners of capital have been gobbling up an ever bigger share of national income at the expense of labor. Among the possible reasons: (a) the offshoring of labor, (b) automation, (c) the entry of women into the labor force.

Image Credit: Cleveland Fed

Image Credit: Cleveland Fed

The left-of-center response is to redistribute from a tiny slice of wealthy workers and owners to middle-and-lower wage workers. Obamacare and the tax hikes financing it are one example. But as technology makes it ever easier to substitute machines for man, this narrow redistribution strategy hardly seems sustainable, either economically or politically.

In Average is Over, economist Tyler Cowen depicts a future where the tech-savvy 15% get fabulously wealthy, while the rest of us make do with flat wages and free online games. In their excellent new book, The Second Machine AgeMIT’s Erik Brynjolfsson and Andrew McAfee argue that while “there’s never been a better time to be a worker with special skills or the right education … there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots, and other digital technologies are acquiring these skills and abilities at an extraordinary rate.”

Ex-banker and current entrepreneur Ashwin Parameswaran offers this alternative to redistribution, which he succinctly and brilliantly summarizes thusly: “Instead we should empower the low and medium wage earners of today to become the capitalists of tomorrow whilst protecting them with a safety net that protects them as individuals rather than protecting the firms and unions that they are members of.”

In short, capitalism for the masses.

Parameswaran points out that it’s never been so easy to start a business, and it’s only going to get easier. First, the explosion and success of crowdfunding and peer-to-peer lending, he explains, “shows us that speculative equity ventures and business loanss can and are being funded by the man on the street.”  Second, technology has also made turning a concept into a business simpler than ever — and not just social networking. Whether its using manufacturers in Asia or 3-D printers here at home, even the little guys can move from their bright idea from thought to physical product.

And what is the role of government? Ending big company bailouts, extreme patent and copyright protection, and cronyist licensing requirements would be a good start. “In order to enable every person to become a capitalist, we need to reduce the regulatory burden on all aspiring capitalists as well as removing the protections enjoyed by incumbent large firms,” Parameswaran writes.

And at the same time that we ask Americans to take more risks, however, we need to also modernize the safety net so that it provides a decent standard of living, including healthcare and basic financial services, in a fiscally sound way that minimizes work disincentives and family disorder. Parameswaran:

… no one is entitled to protection from the inherent instability of a competitive capitalist economy. Firms and workers should not be protected by bailouts. Individual investors should not be protected from the risks of investing their money in failed ventures. Everyone deserves a safety net but no one deserves a hammock.

The expanded safety net and increased deregulation go hand in hand. Increasing instability without a safety net will make the system more fragile.  … By combining the two, we can achieve the best of both worlds – a robust economic system that can achieve disruptive economic progress whilst protecting individuals from the worst consequences of economic failure.

Among the policy recommendation from Brynjolfsson and McAfee: a universal basic income or negative income tax, taxing consumption rather than human labor, teaching entrepreneurship throughout an improved education system, and keeping the entrepreneurial “peer economy,” such as Airbnb, deregulated.

Entrepreneurship and the safety net, two great ideas that go great together.

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

Pethokoukis, Economics, U.S. Economy

No, Paul Ryan didn’t just call for a universal basic income — but should he?

Image Credit: Gage Skidmore (Flickr)

Image Credit: Gage Skidmore (Flickr)

Back in November, ace reporter Danny Vinik of Business Insider suggested House Budget Chairman Paul Ryan publicly support a universal basic income plan or “giving everyone free money.” While the idea sounds like a socialist plot, it really isn’t. Instead of a plethora of welfare programs, everyone would just get a check instead. That’s it.

In a provocative 2006 book, AEI’s Charles Murray advocated a universal cash grant of $10,000. And as Murray wrote in a Wall Street Journal op-ed: ” … just collect the taxes, divide them up, and send the money back in cash grants to all American adults. Make the grant large enough so that the poor won’t be poor, everyone will have enough for a comfortable retirement, and everyone will be able to afford health care.” Liberals would get their redistribution, conservatives would get smaller, less intrusive government.

Now here is Ryan today at a Brookings conference on economic mobility, talking about the alphabet soup of means-test welfare programs that impose very high marginal tax rates on poor families:

The good news is, there’s a better way. Policymakers are working on a solution to this problem: simplicity. In 2012, Britain approved a far-reaching reform—something they call the Universal Credit. The government is now putting this idea into practice. And it’s going through a rough patch. But the basic concept is very sound.

The Universal Credit is not the same as a universal basic income. It is a non-universal plan by the British government to merge a half dozen means-tested programs – income support, disability benefits, tax credits, “jobseeker’s allowance” and housing benefits — into a single mean-tested credit. Prime Minister David Cameron has said the goal is better efficiency and to make it crystal clear that “it will be worth it for everyone to work, wherever they are in the income scale, whatever benefits they receive.”

Sounds great in theory, but there’s that “rough patch” Ryan mentioned. From The Financial Times:

IT failures within the government’s troubled universal credit welfare programme have cost more than £40m so far, Iain Duncan Smith admitted during a grilling by MPs. It also emerged that a further £91m of software for the scheme will be worthless in five years’ time, when the scheme will barely be up and running at a national level. Some £34m of spending on IT for the programme was written off earlier this year amid questions about the suitability of the system to support a national rollout.

Under the original plans, all current and new claimants were set to be shifted to universal credit by the end of 2017. But in a statement slipped out on the same day as the Autumn Statement last week, the minister admitted that “most” – rather than all – claimants would be moved to the new system by 2017. The anticipated delay has been blamed on a group of 700,000 people who are mostly claiming the sickness benefit, employment and support allowance, who cannot be moved over to the universal credit system until at least 2018. The National Audit Office has been highly critical of the plans, which it described as being driven by an “ambitious timescale” and suffering from “weak management, ineffective control and poor governance” in a recent report.

Yeah, it does sound kind of like what’s been happening with Obamacare! And guess what firm helped handle the IT on the Universal Credit? Accenture, the same firm that just got the contract (not that I know that they’re to blame in any way for the IT problems in the UK). Still, IT issues aside, the attraction of Universal Credit plan is obvious: simplicity, efficiency, and transparency in creating the proper pro-work incentives. And Ryan should be given credit in looking for creative solutions, and not just in the US. Still, maybe Ryan and the Republicans should at least consider the pluses and minuses of supporting a basic universal income of the sort suggested by Murray.

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

Pethokoukis, Economics, U.S. Economy

Tight money and anti-poverty policies are a bad combo for GOP

Image Credit: Shutterstock

Image Credit: Shutterstock

Ramesh Ponnuru makes an excellent point on what Republicans are missing as they devise an anti-poverty agenda:

Much of what Rubio is proposing concerns structural poverty, the kind that persists even when the economy is good. Some poverty, though, reflects the business cycle — and conservatives should take care not to make this cyclical poverty worse.

Two days before his speech, Rubio joined most of his Republican colleagues in voting against Janet Yellen’s confirmation as Federal Reserve chairman. They think money has been too easy. But if money had been tighter over the past few years, unemployment and poverty would have been even worse than they have been.

Republican senators including Rubio also recently voted against extending unemployment benefits. Many of them have worried aloud that the benefits are making it less urgent for beneficiaries to look for work. In some cases that is surely true. But when there are three unemployed workers for every job opening, a lack of drive on the part of the unemployed isn’t the labor market’s biggest problem. It’s a good thing, then, that over the weekend Rubio took the more reasonable position that he will back the benefit extension if it is paid for.

Getting macroeconomic policy right is an important way the federal government can fight poverty. On both monetary policy and unemployment insurance, Republicans have been acting on sincerely held views about what they think is best for the economy. But if there is one thing conservatives have emphasized over the years when it comes to antipoverty efforts, good intentions aren’t enough..

Bang on. The consensus GOP take on monetary policy would likely have resulted in slower growth, higher unemployment, and perhaps a double-dip recession. And extending jobless benefits while also pushing pro-work reforms is the better path forward on unemployment insurance.

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

Pethokoukis, Economics, U.S. Economy

The case against the housing bubble

Brian Wesbury and Bob Stein make the case against housing having going straight from depression to bubble:

One measure of a bubble is price-to-rent ratios, calculated using the Fed’s quarterly report on the market value of owner-occupied real estate versus the Commerce Department’s estimates of rent. Since 1959, the typical Price/Rent ratio has been 15.

At the peak of the 2003-2008 housing bubble, in early 2006, the P/R ratio hit an all-time high of 20.8. This means that national average home prices were about 40% higher than rents said they should be. The ratio then bottomed at 12.8 in late 2011, with home prices 15% below normal.

After the price gains of the past two years, the P/R ratio was back up to 14.7 in the third quarter of 2013, the most recent for which we have data and we estimate it ended last year at 15, with home prices fairly valued. In other words, there is no evidence of a bubble in housing.

Although the pace of home building is up substantially from a few years ago, this is necessary to keep up with population growth.

Pethokoukis, Economics, U.S. Economy

This chart shows how tough it is for the poor to recover from a bad start in life


Richard Reeves and Kerry Searle Grannis of Brookings have pulled together a bunch of mobility data, creating some punchy charts to go with it, include the one above. The basic theme is that there are “gaps” at each stage of life which hamper economic mobility. Without a “strong start,” at these stages, a person may not move up the ladder. For example: “a strong start in life means being born to an educated mother with adequate  parenting skills; a strong start to a family life means getting into the labor market and getting married before having  children of your own. … If America is to be an opportunity society, we need a more equal start at each of these stages.”

Family, work, and education are themes that run throughout this report as key for upward mobility. Good stuff, definitely worth reading.

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


It’s almost as if Paul Krugman doesn’t want his readers to know what Marco Rubio’s anti-poverty ideas are …

Image Credit: Ze Carlos Barretta (Flickr)(CC-BY-2.0)

Image Credit: Ze Carlos Barretta (Flickr)(CC-BY-2.0)

I wouldn’t all mind knowing what economist Paul Krugman thinks of the anti-poverty speech Senator Marco Rubio gave last week. The address had some interesting ideas including (a) giving states wide latitude over running safety net programs fully funded by the feds, and (b) replacing the Earning Income Tax Credit with a straight-out wage subsidy. I don’t think it will be the last policy speech Rubio gives on the matter, but in my opinion a strong first step.

Instead what I got was a columnist Paul Krugman and his backward-looking, nuance-free analysis of all the stuff he thinks Republicans get wrong on anti-poverty policy. Oh, and this: “For now, however, Republicans are in a deep sense enemies of America’s poor. And that will remain true no matter how hard the likes of Paul Ryan and Marco Rubio try to convince us otherwise.”

Wow. How amazingly uninsightful and unhelpful, though perhaps not to Krugman’s web traffic. Krugman knocks the GOP for being all talk on helping the poor and then completely ignores the substance of a GOP policy speech on helping the poor. Here is what I wrote about the Rubio plan:

There is much to recommend the Rubio plan. Policy analysts on the left and right should take it seriously while highlighting its pluses and minuses. The proposal gets some big things right. It doesn’t confuse poverty fighting with budget cutting, though spending will drop if poverty falls. It tries to raise the ceiling for work rewards rather than lower the floor for income support. It takes advantage of states as laboratories of policy innovation while still maintaining a federal funding role. It recognizes how globalization and automation are transforming the American labor market and changing the nature of modern work.

Add in other pro-middle class/anti-poverty ideas such as expanding the child tax credit and reforming jobless benefits, and what emerges perhaps is much of the foundation of a 21st century center-right economic agenda for greater economic mobility, and prosperity and human flourishing.

Am I right? Am I wrong? Or if I don’t embrace the current Democratic policy agenda, I am just an “enemy of the poor.” Gosh, it is almost as if Krugman doesn’t want his reader to know what Rubio’s ideas are and decide for themselves if they make any sense. Well, maybe his next column will be better!

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

Pethokoukis, Economics, U.S. Economy

For the long-term unemployed, the US job market is in a depression

JP Morgan

JP Morgan

In new a report looking at the US labor market and inflation, JP Morgan unintentionally makes a pretty good case for special help for America’s long-term unemployed (bold and underline is mine):

One of the hallmarks of the Great Recession and Not-So-Great Recovery is the unprecedented increase in the number of long-term unemployed (here, as in general practice, we define long-term unemployed as those unemployed 27 weeks of more, and short-term unemployed as those unemployed less than 27 weeks).

In December, 3.9 million individuals were long-term unemployed, or 2.5% of the labor force. This is a new recovery low, reached after about four years of labor market expansion.

For comparison, in what was previously the worst post-war recession in 1981-2, the long -term unemployment rate maxed out at 2.5%, and within a year was back down to around 1%. 

One of the many challenges facing the long-term unemployed is that they may appear stigmatized in the eyes of potential employers. Unlike most market transactions, the labor market has certain hidden information problems; for example, employers are not able to perfectly assess the motivation or work ethic of potential jobseekers. Because of this, employers may rely on some readily identifiable characteristics of applicants. Thus, employers may shy away from hiring the long-term unemployed, as they could infer (perhaps incorrectly) that the lack of a recent job history is a negative indicator of the worker’s motivation. This seems to be one of the reasons why wages upon re-employment tend to decline the longer a person is unemployed.

As the above charts show, short-term unemployment has returned roughly to broad historical ranges while long-term unemployment really remains off the charts more than four years after the official end to the Great Recession. And, again, a few ideas from AEI’s Mike Strain on dealing with long-term unemployment:

– give unemployed workers a modest cash bonus when they secure employment;

– pay jobless benefits monthly so workers who get a job at the beginning of a pay period could take in both unemployment compensation and a paycheck for that month;

– temporarily reduce or eliminate the capital-gains tax on new business investment;

–  offer assistance to some long-term unemployed workers who want to start businesses;

– offer relocation subsidies to the long-term unemployed to finance a good chunk of the costs of moving to a different part of the country with a better labor market;

– significantly lower the minimum wage for the long-term unemployed for at least the first six months after the date they begin work at their new job, and coupling that lower minimum with an expanded Earned Income Tax Credit or with wage subsidies exclusively available to the long-term unemployed;

– enable greater work sharing where a company could cut hours by, say, 20% instead of 20% of workers and each worker could claim 20% of his unemployment benefits.

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


What if business investment stays weak in 2014?


If you’re bullish on the US economy in 2014, then you’re also probably pretty optimistic about business investment. Goldman Sachs, for instance, is looking for above-trend GDP growth and an acceleration in capital spending to about 8% — about what it was in the 1990s boom — from 3% in 2013. One reason for Wall Street optimism, as noted by The Wall Journal today, is stronger consumer spending from rising “stock prices and real-estate values, sturdier household finances and lower gas prices.”

So to the extent business wants to see stronger demand before investing, a more free-spending consumer helps. Beyond that, Goldman mentions several other pro-investment drivers: high profits, supportive credit conditions, and low current investment levels. Here is Goldman on that last one:

We noted recently that the growth rate of the capital stock – even controlling for slower population growth – is extremely low by historical standards. Related to this, the average age of both equipment and structures is now on the upper end of the range seen in recent decades. Our model suggests that this low starting level of net investment is also supportive of faster growth ahead.

And the WSJ:

Companies also will need to replace machinery that is getting old, in the same way many Americans are spending money to replace aging cars.Businesses have retained old equipment longer than usual during this expansion, according to Torsten Slok, chief international economist at Deutsche Bank Securities, pushing the average age of equipment to the highest level since the mid-1990s.

Now there is a counter case: falling tech equipment prices means less spending needed, the US economy is more service based, and short-term focused CEOs would rather please investors with buybacks than invest for the long run.

We’ll see.

But what happens to business investment in 2014 is particularly interesting given all the concern that the US is suffering from “secular staganation.” A big part of that argument, as put forward by economist Larry Summers, is that there’s both a paucity of high-return investments for business and too little demand to prompt action. Weaker-than-expected investment this year would give weight to the sec-stag thesis, while a business spending spree would ague the opposite. It should be noted that Goldman is not a sec-stag believer. And when I hear about a lack of business investment, I immediately think about the idea of killing the corporate income tax, a pro-investment move if ever there was one.

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

Pethokoukis, Economics, U.S. Economy

That Bernstein-Romer jobs chart: A final appraisal


In January 2009, economists with the incoming Obama administration, Jared Bernstein and Christina Romer, devised an economic forecast that gamed out how the US economy would perform through 2013 with and without fiscal stimulus. The above chart is taken from that report. I have added the text in red.

(It is a chart most famous for its prediction that the jobless rate would never hit 8% if Congress passed the stimulus. Eventually, with the stimulus, the jobless rate topped out at 10%.)

On the surface at least, as I see it, the forecast was pretty wide the mark.

Obama White House defenders might point out that (a) the recession was worse than what the real-time data suggested, (b) outside shocks like the Eurzozone crisis slowed growth, (c) fiscal austerity here at home was also a drag, (d) economies tend to recover particularly slowly after financial crises.

I would counter thusly: (a) Team Obama almost certainly didn’t expect the labor force collapse so the forecast was even more bullish than it appears, (b) the aftermath of the financial crisis should have been no surprise, (c) the economy even had the added boost from historic monetary stimulus.

So what is the bottom line on the impact of the Obama stimulus on employment? Well, I think it is pretty tough to tease out the specific impact given everything else that was happening simultaneously from policy to macro forces that predated the downturn. Countless papers will be written and studies performed. But I sure would have preferred the fiscal stimulus been built around a big, fat investment tax credit with the Fed far more aggressive early on. I am even more sure that Bernstein and Romer wish they had never made that chart.

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

Pethokoukis, Economics, U.S. Economy

Don’t blame the weather for the dreadful December job report


Wall Street was quick to pin the mega-disappointing December employment report on Mother Nature. “Weather depresses job gains in December” is how economic consultancy IHS Global Insight put it. The US economy created just 74,000 net new jobs last month vs. expectations of 200,000. And there is plenty of reason to think a nasty cold snap mucked things up. The Labor Department said 273,000 people reported unable to work because of the weather. That is roughly double the number for a typical December. Besides, it just doesn’t make sense the economy suddenly weakened when so many other indicators, including trade and business investment, suggest growth steady or accelerating.

The unemployment rate is far more worrisome than the jobs number. It fell to 6.7% from 7.0% in November, continuing a nearly a full percentage point decline over the past year. But that drop reflects labor market exits, not strong job creation. In December, the labor force participation rate sank to 62.8% vs. 63.0 % in November and 63.6% a year ago. If the participation rate had stayed steady the past 12 months, the jobless rate would be 7.9%. The entire jobless rate drop from last month was due to workers fleeing the workforce. And don’t blame the weather for this one. Barclays:

We also do not find it plausible that adverse weather accounted for the decline in the participation rate to 62.8% from 63.0% in November. To be counted as in the labor force, one needs to be employed or have looked for work during the four weeks preceding the survey week. Therefore, it is unlikely that weather would significantly disrupt estimates of the size of the labor force in the same way it might for workers with weekly pay periods.

JPMorgan certainly isn’t dismissing the labor force drop:

More troubling though is not what we are learning about business’ labor demand, but what is happening in households’ labor supply: the unemployment rate plunged 0.3%-point to 6.7% as the labor force participation rate fell another 0.2%-point to 62.8%. So far, the fall in unemployment is not being accompanied by even the slightest hint of wage acceleration — average hourly earnings were up just 0.1% last month — but it does raise the risk that the economy may bump up against capacity constraints sooner than hoped.

Now there is quite a debate about what’s causing the labor force decline. How much is cyclical and how much is secular? Is it demographics or discouragement? Still, when you look at that participation number in combination with (a) an employment rate still barely above recession lows, (b) nearly 4 million long-term unemployed, and (c) an elevated underemployment rate, it’s pretty clear the job market’s Long Emergency continues. Washington should be doing a lot more to help, from slashing business taxes to deregulating energy to extending jobless benefits while also making the program more pro-growth. Maybe jobs will rebound strongly this month. And maybe the economy in 2014 will grow above-trend for the first time during this recovery. Even so, there is a long way to go before we’re back to the Old Normal.

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