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Yes, Governor Chris Christie is still going to run for president. And it appears that just as pension reform has been a core part of his New Jersey agenda, entitlement reform will be key to his national presidential agenda. From the WSJ: “Gov. Chris Christie called for reduced Social Security benefits for retired seniors earning more than $80,000 and eliminating the benefit entirely for individuals making $200,000 and up in other income, along with raising the retirement age to 69 from 67.”
This proposal will get lots of attention for touching the “third rail” and all that. (Here is AEI’s Andrew Biggs on the Christie plan.) Recently Republicans have seemed less enthusiastic in talking about Social Security and Medicare reform. House GOP budgets, for instance, have only called for a plan to create a plan on Social Security. But here’s where it gets interesting. Again, from the WSJ: “Mr. Christie’s speech comes at a moment when the fiscal austerity impulse in Washington has diminished.”
I am guessing that Christie will portray entitlement reform as pro-growth, not just as a way to shore up the programs and avoid a fiscal crisis. Here’s Christie today: “Every other national priority will be sacrificed, our economic growth will grind to a complete halt and our national security will be put at even graver risk.” Christie economic adviser Robert Grady makes the growth argument in greater detail in a 2013 WSJ op-ed:
The president claims to be concerned about spurring private investment. But investors at home and abroad can readily see that his steadfast refusal to reform the country’s entitlement programs threatens spending on physical infrastructure, education, university research and other items that will contribute to the future productivity of the United States. That same unrestrained entitlement growth, and the debt that comes with it, will ultimately compromise the value of dollar-denominated assets. Public companies have trillions of dollars of cash to invest sitting on their balance sheets, but the Obama economy’s growth record is weak, and insufficient to attract capital investment. … If the goal is to deliver higher incomes and a better standard of living for the majority of Americans, then generating economic growth—not income inequality or the redistribution of wealth—is the defining challenge of our time.
This theory also syncs with what Alan Greenspan has been saying lately. Here is the former Fed boss on CNBC not so long ago: “[Entitlements] are effectively crowding out savings, and because savings are the critical aspect in investment, it’s crowding out capital investment, and capital investment is key to productivity growth.”
Well, there is an argument to be made, I guess. But will voters find it too abstract and distant?
View related content: Pethokoukis
On Monday, Jim Pethokoukis appeared on CNBC to discuss candidates for the 2016 presidential election. In this segment, Pethokoukis looks at Hillary Clinton’s recent announcement of her presidential candidacy, what the Republicans need to do, and what we should expect. Watch the video to hear what he has to say about Clinton’s message and how it compares to the approach of Marco Rubio, who makes his own presidential bid today.
It’s an economic puzzlement. The US producer inflation index suggests computer chip prices have been flattish in recent years after a rapid decline from the mid-1980s through the early 2000s. Yet there is also evidence that microprocessor performance has continued to improve. Given the apparent relationship between declining chip prices and the pace of innovation, it would be really bad news if the slowing pace of price declines means innovation is slowing too. And really bad news for the overall economy. After all, semiconductors are “general purpose” technology behind advances in areas such as machine learning, robotics, and big data. As researchers David Byrne, [AEI’s] Stephen Oliner, and Daniel Sichel explain in “How Fast are Semiconductor Prices Falling?”:
… adverse developments in the semiconductor sector could damp the growth potential of the overall economy. On the other hand, if technological progress and attendant price declines were to continue at a rapid pace, powerful incentives would be in place for continued development and diffusion of new applications of this general-purpose technology. Such applications could both enhance the economy’s growth potential and push forward the ongoing automation that has generated concerns about job displacement.
But the puzzle may been solved. Byrne-Oliner-Sichel point out that in 2006, Intel began to dominate competitor AMD such that by 2013 AMD effectively “had been relegated” to the bottom end of the market. And with less competition, Intel changed its pricing structure by keeping list prices constant — “maybe attempting to extract more revenue from price-insensitive buyers” — while offering discounts some customers on a case-by-case basis. And such “price discrimination could reduce the information content of its posted list prices, potentially biasing the quality-adjusted indexes generated from these prices,” the researchers conclude. Indeed, there may also be price measurement problem with the computing equipment that use these microprocessors. The slowing decline in their prices is also a part of the argument that US innovation is stagnating. Here is the bottom line [also refer to above chart from the study]:
The results from our preferred hedonic price index indicate that quality-adjusted MPU prices continued to fall rapidly after the mid-2000s, contrary to the picture from the PPI. Our results have important implications for understanding the rate of technical progress in the semiconductor sector and, arguably, for the broader debate about the pace of innovation and its implications in the U.S. economy. Notably, concerns that the semiconductor sector has begun to fade as an engine of growth appear to be unwarranted. Rather, these results suggest continued rapid advances in technologies enabled by semiconductors.
The New York Times had a big story recently on the California water crisis. It seemed to suggest that too many people were the problem, too much development, too many green lawns. Here is the first quote:
Mother Nature didn’t intend for 40 million people to live here,” said Kevin Starr, a historian at the University of Southern California who has written extensively about this state. “This is literally a culture that since the 1880s has progressively invented, invented and reinvented itself. At what point does this invention begin to hit limits?”
Indeed, this was the featured image:
The piece eventually did get around to the issue of farming using 80 percent of the state’s water. Those darn almonds! This Bloomberg piece cuts to the chase:
In response to the ongoing drought, California Governor Jerry Brown has set limits on urban water use—ordering cuts of as much as 25 percent. Cities across the state will stop watering highway median strips and rip up grass in public places. Golf courses and cemeteries will turn on the sprinklers less frequently, and water rates might rise. …
California has plenty of water for the people who live there—it’s the crops and gardens that are the problem. Agriculture accounts for about 80 percent of the state’s water use. The state’s urban residents consume an average of 178 gallons of water per day, compared with 78 gallons in New York City, in large part because of how much they spray on the ground: Half of California’s urban consumption is for landscaping.
The big problem with the 90 percent of California’s water used on soil is that it’s frequently provided below cost and according to an arcane distribution formula. Angelenos do pay more for their water than New Yorkers—at 150 gallons per person per day, a recent water pricing survey suggests they would pay $99 a month for a family of four, compared with $63 in New York. But they’d use less on the garden if water were priced to reflect long-term cost. And thanks to a skewed system of water rights and underpricing, many of California’s farms are idling land while others are devoted to water-hungry crops like almonds, using wasteful systems. A little under one-half of California farms still use inefficient forms of flood irrigation.
Also check out this piece in Barron’s: “The real problem is water made plentiful and cheap by tax-supported investment. Water, like any commodity, should be priced according to demand, not according to politics.”
Democrats, unions and left-wing activists frequently argue that government (actually taxpayers) subsidizes Wal-Mart and other companies that employ low-wage workers since many of those workers receive government welfare benefits such as food stamps and Medicaid. And the mainstream media pretty much accept this reasoning. Here is CBS News: “Walmart’s highly publicized pay hike is a victory of sorts for its 1.3 million employees, but American taxpayers will foot the bill for the large subsidies that will still be needed to compensate for the discount retailer’s low wages.”
So, goes the theory, if Wal-Mart would pay its workers a “decent wage” — like a minimum of $10 an hour or $15 an hour (or more) — the retailer could get off the dole! The television show “House of Cards“ recently had a fictional presidential candidate bash Wal-Mart with this reasoning: “The starting salary for an employee at Walmart is below the poverty line. Now, the American government subsidizes Walmart to the tune of $7.8 billion a year by issuing food stamps to over one in ten of its workers.”
Well, that’s one way to look at it. Here is AEI’s Michael Strain, a fan of the Earned Income Tax Credit, yesterday at the Peterson Institute for International Economics addressing the “government subsidizes Wal-Mart” issue after it was raised by an audience member:
… we have to recognize that different agents in society have different responsibilities. Imagine you have workers, firms, and the government. … It it is simply unrealistic to expect that a firm that is ostensibly trying to maximize profits, although perhaps imperfectly, will take someone who can bring in five or seven dollars an hour in revenue and pay them two to three times that amount of money. It will be losing five or ten dollars an hour on every hour that person is working. That is just unrealistic to expect a firm to do in a market economy.
So then the question becomes, who is responsible for making sure that the employees of these organizations have adequate food, adequate shelter, adequate health care and who can meet a baseline level of material standing, especially given that we live in a society where we have a lot of billionaires. And to me, that answer is government through all of society. I don’t want those workers to be poor, and I don’t want those workers to not have enough food, and I don’t want those workers to have to deal with the cognitive load [from being poor].
But I want more than McDonalds and more than Wal-Mart to be responsible for making sure that those outcomes happen. I want the Koch brothers to be responsible. I want the Walton family to be responsible. I want me to be responsible, even though I don’t employ low wage workers. And so the way to do that is to tax people who have a lot of money and to redistribute it to people who are working hard and playing by the rules and who aren’t earning what we deem socially as an adequate standard of living. So you seem to want Wal-Mart and McDonalds to bear the entire brunt of that, and that’s implicit in the argument that somehow the government is subsidizing Wal-Mart and McDonalds, and I just fundamentally disagree with that framing.
Economist Justin Wolfers also had a response as to how the issue is framed: “You could say all these guys who work at Wal-Mart are on food stamps, and if they weren’t being paid a low wage, they wouldn’t be on food stamps. So therefore implicitly we are subsidizing the hell out of Wal-Mart. [But as Wal-Mart might see it], if they weren’t working at Wal-Mart at a low wage, they wouldn’t be working at all. The food stamp [cost] would be even bigger.”
Finally, economist Jacob Funk Kirkegaard points out that according to the “government subsidizes Wal-Mart” logic, nationalized healthcare — which many on the left might like — would be one massive subsidy to business: “I mean, if you take other countries where you have essentially a single payer public funded system, you could then say, ‘Well on the one hand, that implies that the subsidy provided by the public sector to the entire corporate world is 100%,’ right? Because no firm needs to take any direct cost for health care. It’s just basically taken care of, if you like.”
I spent this morning at the Peterson Institute for International Economics, attending a panel, “Raising Lower-Level Wages: When and Why It Makes Economic Sense.” (This compendium of brief articles and papers was also released.) Economist Justin Wolfers argued that it can be good business for some employers to voluntarily pay their workers more.
Now Wolfers didn’t argue this from a Keynesian, consumerist perspective — workers with fatter paychecks can spend more — but rather from a supply-side perspective of how higher wages can boost productivity: higher wages (a) motivate employees to work harder, (b) attract more capable and productive workers, (c) lead to lower turnover, reducing the costs of hiring and training new workers, (d) enhance quality and customer service, (e) reduce disciplinary problems and absenteeism, (f) mean fewer resources devoted to monitoring workers, (g) means fewer workers concerned about income security and thus performing less well at work. Lots of research on all of this — of what quality I do not know — though Wolfers conceded he would like to run a large experiment where a company cranked up the wages for one group of workers and not for a similar group. Anyway, here is a bit from what Wolfers has written on this:
Mani et al. (2013) recruited buyers in a shopping mall and asked them to think about their finances. Researchers observed that the performance of poor subjects on a cognitive test deteriorated if they were asked to imagine a large emergency expenditure (a $1,500 car repair), but no such deterioration was observed for well-off subjects. Mullainathan and Shafi r (2013) assessed a range of related experiments, finding that mental tasks that simulate the constant stress of poverty led people to act in compulsive and improper ways. Indeed, the World Bank World Development Report (2015), citing numerous field studies, recognizes that poverty taxes people’s mental capacities and self-control.
Also speaking was AEI’s Michael Strain who emphasized the role of the Earned Income Tax Credit in boosting living standards for low-income workers. More on that to come …
This tweet from Charles Cooke watching a live interview of Scott Walker raises a pretty good economic question:
The national debt — at least the publicly held bit — as a share of GDP has doubled since before the Great Recession. And social insurance programs are on an unsustainable spending trajectory. Yet I disagree with Walker given (a) low interest rates, (b) our debt is denominated in dollars, our own currency and the world’s reserve, and (c) we know how to fix those programs. The US does not face looming bankruptcy or financial collapse. (Reform is easier said than done, I know.)
Not that debt isn’t a problem, but it wouldn’t have topped my list. How would I have answered that question? Maybe like this: “America’s greatest economic challenge is making sure we have a growing economy of work and opportunity where a rising tide lifts all boats.” Debt is factor in that, but so are (a) the quality of our education, healthcare, and infrastructure, (b) the competitive intensity of our private sector, (c) the flow of our invention and innovation — among others. (For instance: When we think about reforming Social Security, for instance, we need to make it fiscally sustainable but also in a way that promotes economic growth and better targets poor seniors.)
A couple of charts:
The streak is over. After twelve consecutive months of 200,000-plus jobs gains — the longest run since 1994 — the US economy added just 126,000 jobs in March, according to the Labor Department. That’s about half what Wall Street was looking for. Even worse, jobs gains for January and February were revised lower by a combined 69,000. So far this year, monthly jobs gains have averaged just 197,000 vs. 324,000 for the final three months of last year and 260,000 for all of 2014. “March US employment lays an egg” is how Barclays bank put it.
Sure, the unemployment rate remained unchanged at 5.5%, while the broader U-6 unemployment/underemployment measure fell to 10.9%, from 11.0%. Then again, you can thank a 95,000 drop in the labor force for that. Also, no progress on the employment rate, which stayed steady, or the labor force participation rate, which dipped a bit. And same-old, same-old on wages. Although average hourly earnings of private-sector workers rose 0.3% in March from February, to $24.86, growth over the past year is still just a meager 2.1%. Average hourly earnings for production and nonsupervisory workers were up 0.2% and 1.8% over the past year. Meanwhile, look for first-quarter GDP growth beginning with a “1” or a “0.”
If you are a believer in secular stagnation, 2015 has been a year of affirmation so far. Over at Politico, ace reporter Ben White explores whether an economic downshift could “seriously complicate matters for Obama’s would-be successor, Hillary Clinton, who could wind up squaring off against a GOP opponent promising — fairly or not —an end to the desultory growth rates of the Obama years.” And Democrats surely don’t like headlines like this one from Yahoo News: “Except for rich, Americans’ incomes fell last year.” As I see it, 2016 will revolve around voters answering “Will you be better off eight years from now?” rather than “Are you better off than eight years ago?”
Here are two key job report tweets:
And two key charts, also via Twitter:
That’s the strong claim made by venture capitalist and former Intel executive Bill Davidow for Harvard Business Review: “For all its economic virtues, the Internet has been long on job displacement and short on job creation. As a result, it is playing a central role in wage stagnation and the decline of the middle class.”
I take issue with Davidow in my new The Week piece. It’s just too much. While there is little doubt that automation has driven job polarization — bad for clerical workers and those doing repetitive factory work — one also has to acknowledge that the US economy is creating gobs of jobs right now. And there is some reason to believe wages will soon be on the upswing. Also, Davidow doesn’t offer evidence that the Internet or robots or other smart machines are behind the sharp drop in labor force participation or the employment rate vs. demographics and the aftermath of the Great Depression. Oh, and what about the nearly million app developer jobs created by the Internet? What’s more, economist David Autor argues that the “the deceleration of the U.S. labor market after 2000, and further after 2007, is more closely associated with … the bursting of the dot-com bubble, followed by the collapse of the housing market and the ensuing financial crisis … and the sharp rise of import penetration from China following its accession to the World Trade Organization in 2001.”
Along the same lines, here is Ferdinando Giugliano in the FT on some new research:
In a paper entitled “The Labour Market Consequences of Electricity Adoption”, presented this week at the Royal Economics Society meeting in Manchester, Miguel Barroso Morin, an academic at Cambridge University, takes a look at what happened in the 1930s, when a sharp fall in the cost of electricity led to its widespread adoption across US industry. … But Morin takes a close look at the cement industry during the Great Depression and, unfortunately, finds little reason to support this more optimistic theory. Cheaper electricity did not lead to any significant increase in output, while causing a 21 per cent decrease in employment. And while labour productivity jumped by 36 per cent, the share of income going to workers fell by 11 per cent. …
In a separate paper (“Robots at Work”), Georg Graetz from Uppsala University and Guy Michaels from the London School of Economics analyse the economic effects of the introduction of robots in 17 developed countries between 1993 and 2007. Their analysis mainly looks at manufacturing, though they also consider agriculture and utilities. … The good news from the study is that, on average, the increased use of robots contributed about 0.37 percentage points to yearly economic growth, which accounts for roughly a tenth of the total. It also explains around a sixth of labor productivity growth. The authors claim that this is roughly comparable to the effects that the railroads had in the 19th century.
Furthermore, unlike Morin, Graetz and Michaels find that technological development did not lead to a reduction in overall employment and, in fact, boosted wages. However, the two researchers paint a very different picture across different type of workers: their research finds robots had a detrimental effect on low- and middle-skilled workers, who saw both their employment levels and their wages fall. These effects were absent in the case of high-skilled workers.
All that said, Davidow’s policy suggestions are pretty good:
To start with those policies must be implemented with the Internet’s efficiency in mind. Raising the minimum wage, for instance, plays straight into the hands of the Internet efficiency engine. Raising the minimum wage will just drive employers to use machines to replace people. An earned income tax credit is a better approach. Low paid workers get the benefit of transfer payments and employers who will not pay hirer wages will feel less pressure to automate.
Investing in infrastructure is an excellent way to create jobs but such infrastructure should be compatible with an increasingly virtual world. Yes we should fix the roads but as more and more people work from home, as more and more of what we purchase gets delivered to our doorstep, as more and more of us go out to the movies in our living rooms, and as highway congestion grows, the chances are that more and more of us will use our cars less. … For a millennial, the infrastructure of the future will be higher bandwidth interconnections and public transportation that will take the place of his car.