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An interesting “what if” scenario from Deutsche Bank’s Gaël Gunubu on H.J. Heinz ‘s purchase of Kraft Food, particularly as it concerns the role of the Oracle of Omaha:
Thought experiment: how would this “merger” have been reported if you swapped the popular, cuddly Warren Buffet with Gordon Gekko? No-doubt critics would have recalled his audacious acquisition of Heinz two years ago. Next the sad tales of fired workers and shuttered factories in order to recoup the 40 per cent he paid above the decade average sector ev/ebitda multiple. Having squeezed Heinz’s ebitda margin to 28 per cent (the global sector average margin is just 11 per cent) the story turns to Gordon’s attack on Kraft. Goosed earnings on a 14 times multiple unfairly justifies taking control of the merged company (Kraft makes almost twice the revenues and more profit). Questions would have swirled around the sustainability of Heinz’s opex cuts and the fate of Kraft’s 22,000 employees. But it’s Warren, not Gordon – so such a narrative is unimaginable.
The disappearance of middle-skill, middle-paying jobs over the past generation is a global phenomenon. One I have written frequently about. The technical term is “job polarization.” Jobs are created at the top and bottom but not so much in the middle. Machines have been replacing humans in middle-skill jobs that involve, as described by economist David Autor, “performing routine, codifiable tasks.” More from the St. Louis Fed:
Whether the routine activities be manual (production, craft and repair; or operators, fabricators and laborers) or abstract/cognitive (sales, office and administrative), they have the common trait of being increasingly performed by machines or computers, goods for which prices have fallen substantially in recent years (both absolutely and relative to labor).
One pattern is that middle-skill/wage jobs suffer disproportionate losses during a recession and then see weak growth during the subsequent recovery. That certainly seems to be the case during the Great Recession and the Not-So-Great Recovery, as reflected in the above chart. But there might be a bit of good news this front, according to economist Josh Learner (via FiveThirtyEight’s Ben Casselman):
The good news is that middle-wage jobs are starting to make a comeback. 2014 was the best year for these jobs since 2005, both in the absolute number of gains and in terms of growth rates. Much of the improvement can be tied to construction workers, however 8 of the 11 broad occupational groups within middle-wage jobs picked up in 2014, including teachers and admin support, while production and transportation remained strong. While economists debate the semantics of the manufacturing renaissance, production employment is clearly on the mend.
That being said, middle-wage jobs still trail the top and bottom. Specifically, while high- and low-wage jobs have fully regained their recessionary losses and never been more plentiful, middle-wage jobs have regained just 43 percent of their losses and remain 4.6 percent below their peak levels. A majority of Americans are still employed in these occupations (62 percent), and while middle-wage jobs will continue to increase in aggregate, their share of the labor market is shrinking.
Also note this chart from Lerner showing where job growth has been:
Kind of looks like an “average is over” economy.
Goldman Sachs is out with a great report on wages — as in, “Where’s the wage growth?” The GS economics team notes the following: “Nominal wage growth as measured by our “wage tracker”—a weighted average of the employment cost index, average hourly earnings, and compensation per hour— has remained broadly flat at around 2%. In contrast, a normal rate of wage growth would be in the range of 3%-4%, as Fed Chair Janet Yellen explained at her first FOMC press conference in March 2014.”
So wage growth as been pretty anemic. Remember, those are nominal numbers. Would a tighter labor market boost wages? Perhaps. But just how tight is the US labor market right now? Sure, the jobless rate has dropped a lot, and it is now at the high end of the Fed’s so-called natural rate. But there is more to this story (as reflected in the above chart):
The “total employment gap”— counting the unemployed, involuntary part-timers, and an estimate of the number of people who dropped out of the labor force for cyclical reasons—still shows about 2pp of remaining slack. From this perspective, the current rate of wage growth appears roughly in line with historical norms.
Then again, it appears that “even clear signs of a tight labor market” in Germany “have produced only a modest increase in wage growth at best.” This perhaps suggests that broader, structural factors — globalization, automation — may be at play there and here. Still, Goldman says, “the most compelling explanation is the most mundane one: substantial slack remains in the labor market.”
What’s the link between entrepreneurship and the welfare state? Dynamic societies certainly require strong, pro-work, fiscally sustainable safety nets. But is there a trade-off where expanding the welfare states reduces entrepreneurship? Or might it actually encourage entrepreneurship?
Over at TheAtlantic, Walter Frick offers economic literature roundup that suggests the latter. A strong safety net encourages startups by making the effort seem less risky, he argues. For instance, a 2014 paper found the expansion of food stamps “in some states in the early 2000s increased the chance that newly eligible households would own an incorporated business by 16 percent.” Another paper by the same author found that “the rate of incorporated business ownership for those eligible households just below the cutoff was 31 percent greater than for similarly situated families that could not rely on CHIP to care for their children if they needed it.”
Likewise, Frick argues, “Obamacare doubles as entrepreneurship policy by making it easier for individuals to gain health insurance without relying on an employer.” Yup, we’re talking about the “job lock” phenomenon. Then there is a 2010 RAND study by RAND that found “American men were more likely to start a business just after turning 65 and qualifying for Medicare than just before.” Finally, it appears that when “France lowered the barriers to receiving unemployment insurance, it actually increased the rate of entrepreneurship.”
[As a general point, not all entrepreneurship is alike or equally beneficial. The rise of Wal-Mart may have reduced the number of mom-and-pop retailers, but it has also been a boon for US productivity. Indeed, as researchers Magnus Henrekson and Tino Sanandaji have pointed out, high rates of self employment can be a sign of economic weakness since taxes and regulation are impeding the ability of startups to become large, successful companies. At the same time, small-time entrepreneurship can get people on the first rung of that opportunity ladder, and it’s a shame government licensing regulations make it harder for so many to do so.]
Now it is one thing to argue that a more robust safety net would be good for US entrepreneurship broadly understood — I think that would be the case in some areas, though I would be careful about eliminating welfare work requirements — and quite another to make the same claim about mimicking the Scandinavian social democracies. In “Can’t We All Be More Like Nordics?”, Daron Acemoglu, James Robinson, and Thierry Verdier argue that “technological progress requires incentives for workers and entrepreneurs [and] results in greater inequality and greater poverty (and a weaker safety net) for a society encouraging more intense innovation.” If cut-throat, inegalitarian US capitalism became more like cuddly Scandinavian capitalism, the US might no longer be as capable of pushing the technological frontier. Check out this exchange between Acemoglu and Thomas Edsall in the New York Times:
Acemoglu said he believes that safety net programs in the United States are inadequate. But, if the thesis that he has put forth is correct, there is room for only modest expansion: “The fact that the United States is the world technology leader puts constraints and limits on redistribution at the top. The global asymmetric equilibrium is at the root of the United States being the world technology leader, but the mechanism through which this matters for innovation and redistribution is the very fact that the United States is such a leader.”
Indeed, the researchers have found a large per-capita gap between Scandinavia and the US when it comes to highly cited patents. The US also has a high-impact entrepreneurship rate three times as high as Sweden. (Of course, open economies benefit from innovation first produced elsewhere.) In short, the US has a pretty special thing going, and we should be careful not screw that up. But that being said, I don’t think universal healthcare access or a more expansive and generous federal wage subsidy or unemployment insurance that helped workers relocate or better public transit would screw that up. (Even a universal basic income or negative income tax would not have stopped Bill Gates or Steve Jobs or the Google guys). As I wrote in Room to Grow, “American workers deserve a safety net that protects them from the worst effects of the economy’s inevitable ups and downs.”
A much-needed corrective by the WSJ’s Greg Ip to the hysteria over the new House rule that requires the CBO dynamically score major legislation. Statically assuming that, say, big tax cuts have no impact on the economy will almost assuredly give you the wrong budget score. Ip notes that the IMF as well as fiscal scorekeepers in the UK and the Netherlands use dynamic scoring:
Done right, dynamic scoring would be an invaluable addition to the policy tool kit. To date, dynamic scoring has yet to show that any tax cut pays for itself; indeed, its results vary considerably with the underlying assumptions and seldom move the deficit dramatically one way or another. Yet it still clarifies the trade-offs and shortcomings of the different choices confronting Congress. … The challenge for the CBO and JCT is to ensure its dynamic scoring is based on models that independent and authoritative economists find reasonable. They should be transparent about their assumptions and the uncertainty surrounding their estimates, and apply those assumptions consistently to different policies. The result should be better information for policy makers.
Of course, policymakers should remember that the US economic is one massive, complicated entity. Thus dynamic models showing huge shifts by nudging tax rates a few points in either direction should be treated with great skepticism. Donald Marron of the Tax Policy Center also suggests tamping down expectations:
Some advocates hope that dynamic scoring will usher in a new era of tax cuts and entitlement reforms. Some opponents fear that they are right. Reality will be more muted. Dynamic scores of tax cuts, for example, will include the pro-growth incentive effects that advocates emphasize, leading to more work and private investment. But they will also account for offsetting effects, such as higher deficits crowding out investment or people working less because their incomes rise. As previous CBO analyses have shown, the net of those effects often reveals less growth than advocates hope. Indeed, don’t be surprised if dynamic scoring sometimes shows tax cuts are more expensive than conventionally estimated; that can easily happen if pro-growth incentives aren’t large enough to offset anti-growth effects.
The ten costliest federal tax “expenditures” were worth nearly $1 trillion, or 6% of GDP, back in 2013, according to CBO and JCT. More than half of the tax benefits from those tax breaks went to households in the top 20%. And nearly a fifth of the benefits accrued to the top 1%.
OK, in light of that data, my colleague Michael Strain offers an elegant, simple, smart idea: Move the tax code away from spending so much money on high-income Americans. Spend less money on folks who need it the least. And preferably do so by shifting, scaling back, or eliminating some of that spending through the tax code.
Strain’s preference would be to phase out the mortgage-interest deduction and the tax exclusion for employer-provided healthcare, two tax expenditures together worth over $300 billion a year. I would also take a hard look at the $80 billion state and local tax deduction. Another option would be to merely limit each household’s combined benefits “from a specified set of tax expenditures to a certain share of its income.”
And do what with all that dough, exactly? Lower tax rates is one idea. Reduce projected budget deficits is another. Here’s a third one: Help poorer Americans by making work pay more. Strain:
Only four in 10 high-school dropouts have a job, compared to seven in 10 college graduates. The reasons for this massive disparity are many, but surely a major factor is the low wages less-educated Americans can command in today’s labor market.
One way to solve this problem is to use federal money to supplement the earnings of low-income workers. Specifically, we should expand the Earned Income Tax Credit (EITC). The EITC is a federal earnings subsidy to low-income households. The basic idea is simple: If you work and your household earns below a certain amount, the government cuts you a check to supplement your earnings. … Previous expansions of the EITC have pulled significant numbers of jobless Americans into the workforce. And the EITC lifts millions of people, including children, out of poverty.
The EITC is much more generous to households with children than to households without children. For example, a household with three children can receive a maximum subsidy of about $6,000, while a childless worker maxes out at a little under $500. The maximum EITC benefit for childless workers should be expanded. President Obama has proposed an expansion that would cost roughly $6 billion a year. Rep. Paul Ryan (R-Wis.) has a similar proposal.
We could completely fund a significant EITC expansion for childless workers with less than one-tenth of the revenue from eliminating the mortgage-interest deduction, still leaving plenty of money to lower tax rates and reduce the deficit.
Hey, the X-Files is coming back. Just another sign that we are in full “I love the ’90s!” mode. It’s not just Mulder and Scully. Monica Lewinsky just gave a TED speech. Republicans are again talking about the flat tax. (In the ’90s, even the Dems were talking up the flat tax.) Hollywood is finally making an “Independence Day” sequel. And there’s a Clinton running for president. I wrote about that last bit of nostalgia in my The Week column, out today. I would say most Americans remember that decade with some fondness thanks to the booming economy. But as I note in the column, those on the left have a more nuanced view of Clintonomics:
In the progressive mind, Bill Clinton quickly ejected his “putting people first” spending agenda in favor of the Alan Greenspan-approved “bond market strategy” that focused on boosting growth by cutting the deficit. (During the Obama era, Republicans adopted the strategy and renamed it “cut to grow.”) “I hope you’re all aware we’re all Eisenhower Republicans,” Clinton fumed, as recounted in Bob Woodward’s The Agenda: Inside the Clinton White House. Not long after, Clinton’s economic council was praising the much-hated — well, at least by progressives — Reagan tax cuts: “It is undeniable that the sharp reduction in taxes in the early 1980s was a strong impetus to economic growth.” Eventually, Clinton declared that the “era of big government is over.” Not a red-letter day in Liberal Land.
Bill Clinton did raise top labor income tax rates, but he also cut them for investment taxes. And while median wages rose, so did inequality. From 1993 through 2000, the share of market income going to the top 1 percent rose to 16.5 percent from 12.8 percent, continuing a trend begun in the Reagan years. Perhaps the biggest black mark from a progressive perspective was Clinton’s signing of the bill that deregulated Wall Street. Some critics, such as Elizabeth Warren, blame that law for at least contributing to the financial crisis and subsequent recession.
Oh, and I could have tossed in NAFTA, too. You can count President Obama among those progressive critics who see the entire 1981 through 2008 period as time of stagnation and rising inequality, rather than a Long Boom. So it’s odd that the likely Democratic presidential nominee is Hillary Clinton who will certainly point to the 1990s as proof of Democratic economic competence. More from me at The Week …
Things weren’t shaping up so well even before today’s weaker-than-expected durable goods report. A few views:
While sharp decline in headline orders for February was notably weaker than expectations, orders data are often substantially revised and have a limited impact on our assessment of current economic activity. The unusually harsh February weather may be partially responsible for the slowdown in activity. Additionally, many of the historical time series for orders move concurrently with shipments, so the decline in February orders does not necessarily foreshadow a sharp slowdown for March shipments. That said, the downward revisions to January shipments data suggest an overall weaker pace of equipment investment in Q1. On net, less equipment investment cut our Q1 GDP tracking estimate by one-tenth to 1.2%.
IHS Global Insight:
The fundamental problems that the durable goods sector and manufacturing in general face are tepid domestic demand gains and drag from a strong dollar and weak foreign growth. Growth triggers demand for capital goods, and neither is growing very fast. US growth outpaces many other parts of the world, but is not strong enough to offset the double whammy in machinery markets from weak growth abroad and a strong dollar that sends machinery buyers elsewhere in the world to source their needs. Thus, lethargy reigns in the machinery portion of the investment goods sector. It should continue to dominate until either domestic growth surges or the dollar falls back significantly. Neither of those is likely to be powerful enough in the first half of this year to beat the lagged effects of a robust greenback since those changes take up to a year to affect orders and shipments. The sole source of potential strength for the durable goods world in the near term is the consumer side of the ledger and that portion was hampered by the West Coast dock mess in February as well as winter weather that once more refused to be mild. March has a decent chance to look good in durable goods orders, but only because defense orders sank to well below normal levels in February making that strength temporary. The headline number will sag and spike with noise from defense and aircraft, but underneath that will lie a central core going nowhere slowly for the remainder of the first half, and maybe until late summer.
A few explanations (or excuses) for the weakness have been put forth, including weather and the port strikes. Our own statistical analysis has found that historically neither of these factors has had a big impact on the durables numbers, particularly the orders data. Of course, given the statistical uncertainties we wouldn’t say that that’s the final word on those stories, but we do find currency strength to be a more compelling rationale. Core capital goods orders have fallen every month since August, around when the dollar began its move higher, and are now below the level of core capital goods shipmentWe had come into today’s number with notable downside risk to our 2.0% call for Q1 GDP. After this morning’s print we are revising lower our tracking to 1.5%. We are leaving our forecast for the rest of the year unchanged (our forecast table is below). While we don’t think the unseasonably harsh February weather impacted the durables report, it likely did leave an imprint on overall activity numbers, particularly in retail spending and construction activity (including in the government category).
So how are things going in the Dodd-Frank era? Well, although the assets held by the biggest five megabanks seem to have stabilized, we do have more big banks and fewer small ones. But overall we have fewer banks in total. A Richmond Fed study notes that from 2007 through 2013, the number of independent commercial banks shrank by 14%—more than 800 institutions. Most of this decrease was due to the dwindling number of community banks.”
At the same time, new bank creation has pretty much stopped. Again, the Richmond Fed: “While some of this decline [in community banks] was caused by failure, most of it was driven by an unprecedented collapse in new bank entry. The rate of new-bank formation has fallen from an average of about 100 per year since 1990 to an average of about three per year since 2010.”
Maybe it’s the slow recovery or low interest rates or regulation. The coming change in Fed policy may help answer this question. As the study concludes: “If this change persists, it will have a large impact on the composition of the banking sector as well as the fl ow of credit in the economy.” Anyway, this chart is a stunner:
On the brighter side — at least I think it is the brighter side — America’s brainiacs seem to be favoring Silicon Valley more and Wall Street less. Neil Irwin in the New York Times:
It’s easy to understand why Ruth Porat, the chief financial officer of the venerable investment bank Morgan Stanley and one of the most powerful women on Wall Street, would want to head west to become C.F.O. of Google. … More interesting are the decisions of thousands of less famous names, promising young businesspeople and engineers who will shape the future of the American economy. And to add to the anecdotal evidence that working in Silicon Valley is the hot thing on elite college campuses, there is some solid evidence that Ms. Porat isn’t the only person deciding that technology offers a more compelling opportunity than banking. Consider the records of where Harvard Business School graduateshave gone to work. In 2008, 45 percent of M.B.A. recipients there went into financial services, versus 7 percent into technology. Finance still leads the pack, but the gap is narrowing fast; in 2014, it was 33 percent finance versus 17 percent technology.
Irwin also points to a recent study by Stephen Cecchetti of Brandeis University and Enisse Kharroubi of the Bank for International Settlements that found a “negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity.” A recent piece by the Washington Post’s Jim Tankersley has more on the issue.
There is a growing body of research on the importance of determination, of grit, of stick-to-itiveness in kids becoming successful adults. In German, they call this staying-power quality “sitzfleisch.” The etymology, according to the St. Louis Fed, alludes to the ability to stay seated for a long time in order to perfectly complete a task. And possessing a healthy portion of sitzfleisch can mean higher wages. From “What Sitzfleisch Has To Do with Wages” by economist David Wiczer:
How can we measure this advantage of persevering at a task, at staying seated until the task’s conclusion? It turns out that the Armed Services Vocational Aptitude Battery (ASVAB) includes a measure. The U.S. military designed this series of tests to help place new soldiers into jobs in the armed forces. Many of the tests cover straightforward topics such as “Word Knowledge.” However, one test stands out as peculiar: “Coding Speed.” Test-takers match words with numbers from a list in accordance with another separate key. This is a tedious exercise to do over and again, and returning and checking one’s answers is a true test of stamina.
The 1979 cohort of the National Longitudinal Survey of Youth provides a way for measuring potential connections between performance on the ASVAB and future earnings, as this group’s test scores, subsequent earnings and labor force status are reported. … On average, someone with a coding speed score ranked 10 percentage points higher than another had a 1 percent wage advantage every year of his life. Compare this to a 10 percentage point advantage in the AFQT, which corresponds to a 3.3 percent increase. In fact, the effect is about one-quarter of the strength of a college degree.
The figure below shows the same effect, but via a semi-parametric method: The horizontal axis displays the percentage deviation from the expected wage, given all of these previously mentioned determinants except for coding speed. Quite clearly, respondents in the survey with higher ranks in coding speed made more than would otherwise be expected. Sitzfleisch has its rewards.