About the author
View related content: Pethokoukis
WaPo Wonkblog’s Max Ehrenfreund has a piece up, “Yes, conservatives can respond to Democrats’ big new economic proposal?” (Yes, I’ve already written about the big proposal from Rep. Chris Van Hollen a couple of times today, not to mention many tweets.) Actually, conservatives have a response ready right now. It is outlined the e-book “Room to Grow,“ for which I contributed a chapter. And it is a far more comprehensive plan. Not only would it broadly raise middle-class incomes directly — expanding the child tax and earned income tax credits — it also contains proposals to reform k-12 and higher education and occupational licensing laws to improve upward mobility. Also, unlike the Van Hollen plan, “Room to Grow” contains crucial supply-side reforms — my chapter — to boost economic growth, competitive intensity, and high-impact entrepreneurship by combating cronyist regulation in areas such as banking and intellectual property. I would also toss in business tax reform that rewarded new investment and raised workers wages.
Ehrenfreund actually mentions of a few of these ideas, and adds another:
The United States has more people in prison than any other country. Lengthy prison terms not only restrict the financial prospects of families in impoverished neighborhoods where crime often seems like the only way to make a living. Prisons are also expensive to maintain, and they’re hampering the economy as a whole. Lee and Rep. Paul Ryan (R-Wis.), among others, support more leeway for federal judges in handing down sentences, rather than attaching minimum sentences to certain crimes. Over time, as current prisoners are released and future inmates serve shorter terms, the incarcerated population would decline. Last year may have marked the beginning of the end of being “tough on crime” as a reliable strategy for winning elections. Many conservative politicians have endorsed a less punitive criminal justice system. That said, any real effort at reducing the prison population will likely involve leniency for violent criminals. It’s easy to imagine the attack ads that a Republican presidential candidate could launch in a primary campaign against a rival who endorsed Lee’s ideas, however justified they might be on humanitarian or economic grounds.
View related content: Pethokoukis
The WaPo’s Robert Samuelson rightly counters Paul Krugman for suggesting Ronald Reagan should get no credit for the inflation-fighting efforts of the Volcker Fed:
Krugman’s story is simple. The Fed is “largely independent of the political process” and, under chairman Paul Volcker, “was determined to bring inflation down,” he wrote. “[I]t tightened policy, sending interest rates sky high, with mortgage rates going above 18 percent.” The result was “a severe recession that drove unemployment to double digits but also broke the wage-price spiral.” Indeed. By 1982, the gain in consumer prices had dropped to 3.8 percent. Volcker crushed inflation.
Story over? Not really. What Reagan provided was political protection. The Fed’s previous failures to stifle inflation reflected its unwillingness to maintain tight-money policies long enough to purge inflationary psychology. Successive presidents preferred a different approach: the wage-price policies built on the pleasing (but unrealistic) premise that these could quell inflation without jeopardizing full employment.
Reagan rejected this futile path. As the gruesome social costs of Volcker’s policies mounted – the monthly unemployment rate would ultimately rise to a post-World War II high of 10.8 percent – Reagan’s approval ratings plunged. In May 1981, they were at 68 percent; by January 1983, 35 percent.
Still, he supported the Fed. “I have met with Chairman Volcker several times during the past year,” he said in early 1982. “I have confidence in the announced policies of the Federal Reserve.” This patience enabled Volcker to succeed, though it took about two years of tight money. It’s doubtful that any other plausible presidential candidate, Republican or Democrat, would have been so forbearing. During Volcker’s monetary onslaught, there were many congressional proposals, backed by members of both parties, to curb the Fed’s power, lower interest rates or fire Volcker. If Reagan had endorsed any of them, the Fed would have had to retreat.
Along the same lines, here is bit from The Age of Reagan by Steve Hayward:
The Bernanke Fed also provides examples of how important it is to have political space — even if you have to create it yourself — especially when embarking upon controversial actions. With the central bank undertaking a host of unorthodox or novel steps during the Financial Crisis, Ben Bernanke became much more visible and open than previous Fed chairman. For instance, he held town halls, went on 60 Minutes, and began holding regular press conferences.
View related content: Pethokoukis
The $1.2 trillion middle-class tax cut plan from Rep. Chris Van Hollen would be largely paid for via an $800 billion financial transactions tax, also known as “Tobin tax.” And that’s not just on high-frequency traders. “It appears to be a broad definition of what counts, as the measure is supposed to raise $800 billion over the next 10 years,” explains Guggenheim banking analyst Jaret Seiberg in a morning note.
Indeed, it is ten times bigger than the levies recently discussed to just tamp down on high-frequency trading. A piece in the Economist last year offer this analysis on the economic impact of a Tobin tax: “A Bank of Canada analysis of the effect of previous FTTs found that they tend to harm market quality, by increasing volatility, reducing volumes and raising the cost of capital. The early effect of a French equity FTT that was introduced last summer was to hit trading in the shares of smaller firms. Without a co-ordinated global approach, the taxes are also likely to be circumvented by savvier investors, leaving retail investors to pick up the bill.” And AEI’s Alan Viard has argued that such as tax would essentially be a tax on savings, affecting not just big-time hedge fund managers but anyone who invests in the stock market, even through mutual funds and 401(k)s.
Now as Seiberg notes, “This is not the first time Democrats have pushed a transaction tax. Rep. Keith Ellison has previously pushed versions of his Inclusive Prosperity Act. That bill would have imposed a 50 basis point tax on stock trades, a 10 basis point tax on bond trades, and a 0.5 basis point tax on derivative trades. They estimated this structure would raise about $350 billion a year. … Democrats in late 2014 briefly floated the idea of a transaction tax to pay for increased college assistance. That call led to some positive editorials but did not result in any substantive legislating.”
So in the past this was a headline risk sort of thing. But Van Hollen is a House big shot, the top Democrat on the House Budget Committee. Why is this idea apparently gaining traction among Democrats. One, they want a bigger policy responds to the income inequality-mobility issue. But maybe this has a role too (via the Huffington Post):
In the last two elections, according to data from the Center for Responsive Politics, Democratic Party committees and candidates saw their share of contributions from finance, insurance and real estate donors shrink to the lowest percentages since at least 1990. Democrats received only 32 percent (versus 68 percent for Republicans) in 2012 and just 38 percent (versus 62 percent for Republicans) in 2014.
The figures, when adjusted to 2013 dollars, also showed significant declines in the sheer amount of money raised from the financial sector by Democrats. The party’s $122 million haul in 2014 was its lowest total from the financial sector in a midterm election since 1998. The $170 million for 2012 was the lowest total for Democrats in a presidential election year since 1996.
Meanwhile, Republicans have never raised so much from the financial sector. The party pulled in a midterm record of $199 million in 2014 and a presidential cycle record of $356 million in 2012. That latter total was no doubt boosted by the presence of private equity multimillionaire Mitt Romney as the party’s standard-bearer.
View related content: Pethokoukis
There’s been a big gap between how Democrats have described America’s economic problems and the scope of the solutions they’ve offered. Recall President Obama’s late 2013 speech where he declared the “dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America’s basic bargain” to be the “defining challenge” of our time. Strong stuff.
But what have been the subsequent policy prescriptions? Relatively small stuff, like raising the minimum wage. You can debate whether it’s a good idea or not, but only 3% of workers age 25 and over earn the minimum wage or less. Raising it to nearly $10 would raise incomes of only 11% of workers who live in poor households. Or take the “free” community college proposal. Attendance is already essentially free for many students. What’s more, research on student outcomes suggest, notes AEI’s Andrew Kelly, that “pushing tuition to zero may not be a silver-bullet solution to lackluster student success.”
Party progressives, such as Elizabeth Warren, has pushed for bolder policies. And a new proposal by Rep. Chris Van Hollen — the ranking minority member on the House Budget Committee not some radical back bencher — certainly qualifies. This from ace Washington Post reporter Lori Montgomery:
The centerpiece of the proposal, set to be unveiled Monday by Rep. Chris Van Hollen (D-Md.), is a “paycheck bonus credit” that would shave $2,000 a year off the tax bills of couples earning less than $200,000. Other provisions would nearly triple the tax credit for child care and reward people who save at least $500 a year. The windfall — about $1.2 trillion over a decade — would come directly from the pockets of Wall Street “high rollers” through a new fee on financial transactions, and from the top 1 percent of earners, who would lose billions of dollars in lucrative tax breaks. The plan also would use the tax code to prod employers to boost wages, which have been stagnant for four decades despite gains in productivity and profits. … To spur employers to increase pay, the plan would target corporations, prohibiting companies from deducting executive performance bonuses in excess of $1 million, a benefit worth $66 billion from 2007 to 2010. To claim the deduction, companies would have to demonstrate that workers had shared in the company’s good fortunes by increasing wages about 4 percent, on par with inflation and productivity growth.
In an election postmortem, Democratic firms SKDKnickerbocker and the Benenson Strategy Group found that the party’s message had been off target, even for much of the base. Although the economy is growing and the jobless rate has fallen, most voters still don’t feel it. Sixty percent of moderates and 62 percent of independents said they would favor “a candidate who emphasizes growth” over one who wants to “improve the economy through economic fairness.” More than 70 percent of Republicans favored a “growth” message, and Democrats split 50-50 on the question.
Many Democratic lawmakers are now making the same point.“We need a pro-growth economic agenda,” said Rep. Richard E. Neal (Mass.), a senior Democrat on the influential House Ways and Means Committee. “We need to embrace the traditional Democratic positions of optimism and aspiration.” Like many Democrats, Van Hollen argues that creating a more prosperous middle class is the best route to overall growth in an economy driven by consumer spending. He began working on his action plan even before the November blowout, a tacit acknowledgment that he saw that the party’s agenda was weak.
Let me explain: Voters are more worried about economic growth and living standards than income inequality. So to make an ideological campaign against inequality actually relevant to the 99%, Democrats are now trying to strongly link inequality and growth. Since middle- and lower-income consumers have a “higher propensity to consume” than the wealthy, we need to redistribute income to lower inequality and boost growth. Indeed, liberal economist Larry Summers has argued America’s “secular stagnation” may partly result from the income gap since “rising inequality operates to raise the share of income going to those with a lower propensity to spend.”
So Democrats now have a unified theory of what’s wrong with America, as exemplified by the Van Hollen plan. To be “pro-growth” in their view doesn’t mean to raise America’s growth potential through investment and ideas — that might require, for instance, lowering the business tax burden — but instead through redistribution and spending (This might not be a hard sell.) If there was any remaining doubt left that the modern Democratic party is no longer the party of Bill Clintonomics — deregulation, free trade, fiscal restraint, lower investment taxes — this plan should erase obliterate it.
View related content: Pethokoukis
My old Reuters Breakingview colleague Edward Hadas:
The overall global economy gains from having oil as cheap as possible. Anything else is a waste of resources. From that perspective, the current price is still far too high. The production of unnecessarily expensive oil wastes skilled labour and sophisticated equipment. Oil-importing nations end up paying more than they need to for crude. The financial world is troubled by the cross-border cash flow. Exporters gain cash, but high oil revenue often leads to poor governments and weak non-oil economies.
The price could be much lower if more production came from the most efficient fields. No one really knows how much lower, because Saudi Arabia and some other producers with ultra-low cost unused resources have decided not to exploit or explore them aggressively. Still, there is no good reason to think that more than $30 a barrel is needed. That was the annual average in the 1990s, adjusted for inflation, following the calculations of the U.S. Energy Information Administration.
Those are producer prices. Hadas would have consumers pay more to encourage alternate energy development.
View related content: Pethokoukis
I recently pointed to a new NBER working paper from Jeffrey Clemens and Michael Wither of the University of California, San Diego, that suggests the 30% increase in the average effective minimum wage over the late 2000s “reduced the national employment-to-population ratio — the share of adults with any kind of job — by 0.7 percentage point” between December 2006 and December 2012. Now maybe they got the story wrong, but their research seems to add to abundant evidence about negative job impacts from raising the minimum wage.
Now consider this from the Economist:
In a brand-new McDonald’s outlet near its headquarters in Oak Brook, Illinois, customers do not have to queue at the counter. They can go to a touch screen and build their own burger by choosing a bun, toppings and sauces from a list of more than 20 “premium” ingredients, including grilled mushrooms, guacamole and caramelised onions. Then they sit down, waiting an average of seven minutes until a server brings their burgers to their table.
The company is planning to roll out its “Create Your Taste” burgers in up to 2,000 restaurants—it is not saying where—by late 2015, and possibly in more places if they do well. McDonald’s is also trying to engage with customers on social media and is working on a smartphone app, as well as testing mobile-payment systems such as Apple Pay, Softcard and Google Wallet.
When you combine the Clemens-Wither stuff with how automation is replacing routine sort of jobs, the superiority of wage subsidies like the Earned Income Tax Credit seems compelling, at least to me. As Clemens and Wither note:
By contrast, analyses of the EITC have found it to increase both the employment of low-skilled adults and the incomes available to their families (Eissa and Liebman, 1996; Meyer and Rosenbaum, 2001; Eissa and Hoynes, 2006). The EITC has also been found to significantly reduce both inequality (Liebman, 1998) and tax-inclusive poverty metrics, in particular for children (Hoynes, Page, and Stevens, 2006). Evidence on outcomes with long-run implications further suggest that the EITC has tended to have its intended effects. Dahl and Lochner (2012), for example, find that influxes of EITC dollars improve the academic performance of recipient households’ children. This too contrasts with our evidence on the minimum wage’s effects on medium-run economic mobility.
President Obama just announced a proposal to make two years of community college free “for anyone who’s willing to work for it.” (You can watch the video announcement above.) While that may initially sound like a great suggestion, in today’s Forbes, AEI scholar Andrew Kelly lists four reasons to be skeptical about this:
1.) Will “free tuition” automatically improve community colleges’ often dismal rates of student success?
Federal data show that at two-year colleges, 31 percent of first-time, full-time students graduate within three years. The implicit assumption of free-tuition plans is that the main reason students don’t finish community college is the cost of tuition. Not, say, the fact that somewhere around 50-60 percent of community college students are not college-ready, or that many community colleges are not designed with student success in mind. .… To be clear: research shows that tuition prices and grant aid do influence enrollment rates, and we’re learning more about how they influence student success. But the notion that making college free will mechanically improve student outcomes is naïve.
2.) Will direct federal funding compel community colleges to improve?
The assumption here is that the feds will be able to drive community college improvement if they hold the purse strings. Again, I’m skeptical. To be sure, policymakers could conceivably control tuition prices through funding formulas and fiat. But they will have a much more difficult time ensuring that institutions provide a quality education at the price they charge.
3.) “Free tuition” won’t change how much it costs to deliver higher education, which will continue to increase.
Simply shifting who pays the bill will do little to change the bill itself. So while additional federal investments might cover the cost of a free public option today, those same sums won’t go as far next year or the year after unless colleges also make changes to their cost structure. Taxpayers would have to foot an increasingly large bill.
4.) A public monopoly could crowd out promising innovations from the private sector.
After all, it’s hard to compete with free. This will crowd out the kinds of innovative models that have emerged from nonprofit and for-profit organizations. Western Governor’s University, Southern New Hampshire, Excelsior College, and others—all private—are perfecting competency-based models that allow students to earn credit for what they know, not how long they sit in class. …. If a private college or course provider can provide an effective, tuition-free education for the 75 percent that the feds will kick in, why shouldn’t they have access to the program as well?
View related content: Pethokoukis
The Obama White House is highlighting a number of important positives about the US labor market, after the release of the December jobs report. Among them:
— The private sector has added 11.2 million jobs over 58 straight months of job growth, extending the longest streak on record.
— Total employment rose by 2.95 million in 2014, the most in any calendar year since 1999.
— The annual average unemployment rate fell 1.2 percentage points between 2013 and 2014, the largest such decline since 1984.
— The nominal average hourly wage for production and non-supervisory workers was $20.59 in 2014, up 2.2 percent from 2013.
But these three charts show how much healing remains:
1.) Wage growth is weak:
2.) The share of Americans working remains depressed:
3.) Long-term unemployment remains elevated:
So the labor market, despite obvious and welcome improvement, isn’t where it needs to be. As Han Solo put it, “Great, kid, don’t get cocky.”
View related content: Pethokoukis
“December Employment Gain Caps Best Year for U.S. Since 1999″ is how Bloomberg sums up the new jobs data out today. And in one way — an important way, no doubt — that analysis is correct. An additional 2.95 million Americans found work in 2014 — including 252,000 last month — the most since 3.18 million jobs were created during that boom time 15 years ago.
But a comparison between back then and now shows a striking difference between the modest economic acceleration of 2014 and go-g0 late 1990s. First, the jobless rate was a lot lower in December 1999, 4.0% vs. 5.6% last month.
Second, a much bigger share of the adult population had jobs, 64.4% vs. 59.2% today. (And if you adjust for the bigger adult population today, the US economy would need to create nearly 4 million jobs to match 1999’s total.)
Third, wage growth was far most robust in 1999, increasing by nearly 4% vs. 1.7% the past 12 months. Indeed, as Bloomberg notes, “Average hourly earnings for all employees dropped by 0.2 percent, the biggest since comparable records began in 2006, to $24.57 from the prior month.” That result led JPMorgan economist Michael Feroli to note, “The oddity in the report is the move down in average hourly earnings.” Some economists prefer a different BLS wage measure, average hourly earnings for production and nonsupervisory workers. But that was also weak, the bank Barclays points out, down 0.3% month over month and up just 1.6% year over year.
This is not say the macro environment is the same today as in 1999, especially due to globalization and automation. To repeat: Job growth has accelerated markedly this year — to 2.1% vs. 1.7% 2011-2013 –which is really great. And they are full-time jobs, also great. But this is still a labor market that shows plenty of slack and plenty of room for improvement — most notably when it comes to wages. Also, the labor force participation rate fell last month and is below where it was a year ago. Capital Economics notes that the two-tenths drop in the jobless rate “had more to do with a 273,000 decline in the labour force rather than the 111,000 increase in the alternative household measure of employment.” And the long-term unemployment remains far above prerecession levels. This economy needs more people working decent paying jobs.
Some analysts think the next 12 months will show a big step-up in GDP and earnings growth, thanks in no small part to the 50% drop in oil prices. Citi just raised its projection for GDP growth by ½ percentage point to a robust 3.6% for 2015. We’ll see. As BTIG strategist Dan Green puts it, “The simple fact is we cannot consider an employment report a success, no matter how healthy the headline may be, if wage data does not begin to accelerate.”
Update: This from IHS Global Insight:
The household survey reported a drop in the jobless rate to 5.6% from 5.8% but it achieved that in semi-ugly fashion with a modest 111,000 increase in jobholders but a 273,000 drop in the labor force; truly ugly would have been declines in both jobs and the labor force. Female job-seekers over age 20 sank by a whopping 488,000, but recent months have seen large gains and a portion of the drop may have just been seasonal gains happening earlier than normal. While monthly swings in labor force participation often do not bear close analysis, the drop in overall labor force participation to 62.7% from 62.9% in November to tie the September rate for a modern low does not augur well for several years in the future when the jobless tally is lower.The job results for 2014 were good, the best since 1999 when 3.177 million jobs were created. Can 2015 beat that or even measure up? The odds are that the answer is no. The economy is bucking headwinds from a strong dollar which will both suck in more imports and hamper selling in foreign nations which often are not growing very well to start off with. Consumption will get a kick from people having more disposable income left after they leave the gas station and will save a little on imported goods dragging down retail price gains, but other than the plusses helping the first half of the year, the stimulus from bargain oil wears down when the negative dimensions of reduced drilling are added to the negative column.
Non-farm payroll growth has accelerated to its fastest year-to-year growth rate since the recovery began. At the same time, both the U3 unemployment rate and the U6 underemployment rate fell to new cycle lows in December. Importantly, aggregate hours worked are rising briskly enough to lift income growth at a 5% annual rate despite weak hourly wage growth. Two essentially unnoticed but positive recent phenomena related to the improving labor market are 1) a peak in food stamp usage and 2) the first rise in real median incomes since 2007. Still, wage growth remains anemic likely due to the still depressed (but rising) prime age employment ratio and the still high (but falling) level of part-time workers that desire full-time jobs. Thus, it will likely take a materially lower U6 rate before we start to see the 3-4% nominal hourly wage gains consistent with 2% inflation given the current underlying rate of productivity growth.
View related content: Pethokoukis
In an act of first-rate, Twitteresque trolling, new Senate Majority Leader, Mitch McConnell has impishly suggested Republicans deserve credit for the upturn in economic growth: “After so many years of sluggish growth, we’re finally starting to see some economic data that can provide a glimmer of hope. The uptick appears to coincide with the biggest political change of the Obama Administration’s long tenure in Washington: the expectation of a new Republican Congress.”
Funny stuff, though he only hints at causality. Seems unlikely, of course. The US economy has grown by 3.5% or more in four of the past five quarters, starting in the third quarter of 2013. And back then, it looked like the Senate would likely remain in Democratic hands. Plus, why would consumers, investors, and business unleash their animal spirits at the prospect for a GOP-controlled Congress — I guess that’s the supposed growth mechanism — when it seems unlikely it and Obama will agree on any big ticket items like tax or entitlement reform. Sure, Republicans can “stop the bad stuff” as House Speaker John Boehner once put, but they were already pretty much accomplishing that with control of just the House. And for what it’s worth, the Economic Policy Uncertainty Index is actually higher now than on midterm election day in November.
So who does get credit for the boomlet? A few ideas: First, credit the Fed, and its recently completed bond-buying program. Just compare the US and Eurozone economic performance in recent years, and you can see the power of active monetary policy in dealing with a massive demand shock. And why didn’t the 2013 tax hikes suffocate growth? (It actually accelerated on a fourth-quarter over fourth-quarter basis.) You can probably thank the start of quantitative easing, announced in September 2013. In the two years after QE, US job growth was 30% higher than in the two years before.
Second, you have the 50% decline in oil prices. The shale revolution was already helping US growth and jobs before the bottom fell out of the oil market, but now even more so. As Goldman Sachs noted last month:
Before the November OPEC meeting, we estimated that lower gasoline prices would be equivalent to a roughly $75bn tax cut for US households. With oil prices continuing to drop sharply, the size of the tax cut now looks likely to be $100 – $125bn. Based on our estimates, higher consumer spending should boost real GDP by four- to five-tenths of a percentage point over the coming year, although lower US energy production will partly offset this benefit.
Third, it’s been more than five years since the official end of the Great Recession. Time heals, especially when at some point people need to buy cars and purchase home for their families.
So there you go. Any other suggestions?