About the author
From the Atlanta Fed’s blog: ” …only about one fifth of the decline in labor force participation as a result of reported illness or disability can be attributed to the population aging per se. A full three quarters appears to be associated with some sort of behavioral change.”
OK, what would change worker behavior? Loosened eligibility rules and the rising value of benefits versus work are possibilities:
The biggest driver seems to have been a change in the eligibility rules enacted in 1984. When the program was added to Social Security, the goal was to have it provide early retirement benefits for those were “totally and permanently disabled.”
But the 1984 change “substantially liberalized the disability screening program,” according to economists David Autor of MIT and Duggan in their extensive review of the program. The reforms shifted screening rules from a list of specific impairments to a process that put more weight on an applicant’s reported pain or discomfort, even in the absence of a clear medical diagnosis. In addition, workers could qualify if they had multiple conditions that affected their ability to work, even if none of the conditions was disabling on its own.
Not surprisingly, more and more workers were awarded disability benefits based on ailments that relied more on patient self-reporting and that often were not easily diagnosed independently.
Another driving force, Autor and Duggan found, is the fact that the value of disability benefits relative to wages has risen “substantially” since the late 1970s, because of the way initial benefits are calculated. That’s particularly true at the lower end of the income spectrum. When the value of SSDI benefits and the value of the Medicare benefits that SSDI enrollees qualify for are combined, the share of income replaced by the disability program climbed from 68 percent in 1984 to 86 percent in 2002 among lower- income men aged 50-61. A possible indicator of the effect this has had, Autor and Duggan note, is that “the increase in [SSDI] enrollment during the last two decades was largest for those without a high school degree.
What timing. I just wrote a blog post on how crony capitalism is hurting American business dynamism. In particular, regulation makes it harder for new firms to enter a market and gives an edge to large incumbent firms who can lobby for favorable new rules. And as I write, ” … fewer startups means fewer disruptive new competitors to force big business to innovate or die.”
Then I see this Mercatus Center study from Antony Davies:
A new metric provided by RegData counts the number of “binding words”—“shall,” “must,” “may not,” “prohibited,” and “required” —that appear in the Code of Federal Regulations , and cross-references those word counts with the industries to which they apply.
A comparison of the RegData data to production-efficiency measures provided shows that industries that are subject to less regulation have significantly higher production-efficiency measures than do industries that are subject to more regulation.
Over the period 1997 through 2010, the least regulated industries expe rienced 63 percent growth in output per person, 64 percent growth in output per hour, and a 4 percent decline in unit labor costs. Over the same period, the most regulated industries experienced 33 percent growth in output per person, 34 per cent growth in output per hour, and a 20 percent increase in unit labor costs.
The anti-growth formula: More regulation = less competitive intensity = less innovation and productivity.
The US economy may be exhibiting a long-term decline in business dynamism. One way to look at this issue is by measuring (a) how many firms are born and die, and (b) how much churn exists in the labor market. A recent Brookings study, “Declining Business Dynamism in the United States: A Look at States and Metros” by Ian Hathaway and Robert Litan finds a worrisome decline in both (charts above and below):
Economists tend to see business dynamism as a critical factor driving long-term economic growth. Hathaway and Litan: “Research has established that this process of “creative destruction” is essential to productivity gains by which more productive firms drive out less productive ones, new entrants disrupt incumbents, and workers are better matched with firms. In other words, a dynamic economy constantly forces labor and capital to be put to better uses.”
Or as I write in my The Week column: ” … fewer startups means fewer disruptive new competitors to force big business to innovate or die.” And I then blame the lack of dynamism on government favoring incumbent businesses over startups.
My pal Noah Smith offers some push-back over at his blog:
One big thing that has happened in America over the last 35 years is the coming of large chain stores and restaurants. Mom-and-pop businesses have vanished as big-box retail, and later Amazon and other e-commerce sites, have taken over. That would tend to increase firm exit and decrease firm entry. …
Should we be worried about that? Many people over the years have bemoaned the death of the mom-and-pop store or the local restaurant, but I’m not sure we should be too concerned. Go visit a poor country, and you’ll see that every other family has a food stand or little clothing stall, etc. That kind of “entrepreneurship” takes guts and ingenuity, but it’s born out of hardship, not opportunity. The birth and death of small family businesses is one kind of “economic dynamism”, but not really the kind that leads to increasing living standards or technological progress. In the U.S., it’s not clear from Brookings’ data how much high-growth entrepreneurship has changed.
Another big thing that has happened is the overall productivity slowdown, as documented by Robert Gordon and others. That will tend to mean that fewer big new industries are appearing, as a percentage of the existing number. That’s going to reduce firm churn. Of course slowing productivity growth is something we should be worried about, but it’s not clear what can be done about that. It’s also not clear how much of slowing productivity growth might actually be caused by reduced dynamism, though the global nature of the productivity slowdown hints that it’s not the biggest factor.
First, small-scale, low-end entrepreneurship may not push the technological frontier, but it still can be an important way to work and higher incomes for low-skill Americans. An Institute for Justice report on burdensome occupational licensing laws finds that “these laws can pose substantial barriers for those seeking work, particularly those most likely to aspire to these occupations—minorities, those of lesser means and those with less education. Moreover, about half the occupations studied offer the possibility of entrepreneurship, suggesting that these laws hinder both job attainment and creation.”
Second, a Kauffman Foundation report by Hathaway, John Haltiwanger, and Javier Miranda also finds a lack of dynamism in the critical tech sector: “Our findings show that the recently documented secular declines in business dynamism that occurred broadly across the U.S. economy during the last couple of decades also occurred in the high-tech sector in the post-2000 period. As part of this decline in dynamism, we find indicators of a slowdown in entrepreneurship in the high-tech sector in the post-2000 period.”
Third, Smith wonders which way the causality runs. I guess my informed bias here is that there are still plenty of big, disruptive ideas and innovation out there, but that bad government is putting obstacles in their way to becoming successful businesses. And as I have also written, maybe the US economy is generating too much “efficiency” innovation — the sort that merely replaces man with machines and makes the same good at a lower prices — and too little “empowering innovation” that spawns businesses offering new products and services. If so, government favoritism may be to blame, as I theorize.
Declining business dynamism may turn out to be a “non story,” as Smith suggests. But for now I will assume the worst given that many of the things you would do if dynamism were declining — education reform, deregulation, fewer cronyist government subsidies — would seem to be good ideas anyway.
‘When your inflation forecast fails for 5 straight years, perhaps it’s time to change your inflation model’
MKM Partners economist Michael Darda has a message for old-school monetarists who have been warning about inflation:
When your inflation forecast fails for five consecutive years perhaps it’s time to change your model of inflation?
We would start with some recommended readings from Milton Friedman, many followers of whom (Old Monetarists, or OMs) do not seem equipped with an ongoing understanding of his 1968 American Economic Review article on the role of monetary policy nor his 2003 essay on The Fed’s Thermostat.
Friedman, unlike the OM’s warning repeatedly and falsely about an imminent surge in inflation, looked not just at the money supply but also money demand (i.e. both M and V in the equation of exchange).
Of course, we don’t need to know M or V if we can directly observe NGDP (which is the functional equivalent and the focus on the Market Monetarist movement). This business cycle’s signature feature is the slowest recovery in NGDP of any post war business cycle, following the largest contraction of NGDP since the late 1930s.
It should be no surprise, then, that inflation has averaged its second lowest rate of any post war cycle. Friedman would understand that rates are low because the demand for money/risk free assets has been high and thus, the Fed has not, repeat, has not been inflationary or unduly accommodative.
Freidman would also recognize that the crocodile tears for savers, the alleged victims of zero short rates, as a faulty red herring. For it is not simply the observable market rate (or base rate) that matters, but those rates relative to the Wicksellian equilibrium (the rate that sets output at potential).
Although we cannot observe the equilibrium rate directly, a sustained period of below equilibrium rates would set off a boom and inflation. Has nominal GDP growth been rapid over the last five years? Has inflation been high? No and no. End of story.
We would add that there has never been a post war business cycle that featured average inflation above the 5% threshold that did not also feature double digit average NGDP growth. This is not the environment we have been in, and not one we are likely to see during this business cycle, in our view. Friedman would not, in our view, be making the repeated failed forecasts of soaring interest rates and surging inflation rates that some of the old Monetarists have made and continue to make.
Despite the media obsession with income inequality, political candidates are smarter to frame their message around economic growth rather than narrowing the gap between the 1% and the 99%. According to a recent survey from GlobalStrategyGroup, voters prefer a candidate focused on “more economic growth” versus “less income inequality” by 80% to 16%. Likewise, voters prefer by 62% to 33% a candidate focused on “economic growth to provide more opportunities for everyone to succeed” versus one focused on “economic justice to level the playing field for middle and low-income Americans.”
Now one might assume this finding should be good news for Republicans. But it might not be. If the GSG survey is correct, Democrats have been pretty successful in arguing that many of their old-fashioned redistributionist policies — like raising the minimum wage and guaranteeing a minimum wage — are actually growthier policies (see above and below chart) than GOP ideas such as business tax cuts or reducing top marginal income tax rates.The tradition supply-side message just isn’t selling the way it used to.
Here are the study’s takeaways:
– Focusing on growth appeals more broadly than focusing on either income inequality or low wages. In fact, candidates who emphasize “economic equality” or “economic fairness” lose badly to candidates who emphasize “economic growth.”
— More income opportunity for all” pairs well against “more economic growth,” but Democrats already win on opportunity, while the jury is still out on growth. Additionally, there are no regular, monthly measurements of opportunity, as reporting on the economy inherently focuses on aspects of economic growth.
— Most voters already believe many of Democrats’ priorities will lead to more economic growth, so Democrats should be framing them that way.
— Republicans have argued for decades that top bracket tax cuts lead to growth; Democrats should argue that increased income opportunity and increased wages leads to growth. The Democratic argument is both more credible and more convincing – and has the added benefit of actually being true!
— To be clear, Democrats do not need to alter their policy agenda one bit; rather, Democrats’ priorities should just be framed differently. For example, a new argument for increasing the minimum wage: “increasing the minimum wage leads to more economic growth by rewarding hard work and improving workers’ productivity.”
To drill down a bit, independent voters still see the GOP as the party of economic growth, but view Democrats at the “income opportunity” party. I guess if I were a GOP strategist, I would try and play on the the Dems side of the field with bottom-up policies intended to boost opportunity and mobility–particularly on education. Just saying, “If we crank up GDP growth all will be well” isn’t cutting it with voters. One other thing: an anti-regulation message would seem to have more impact than an anti-tax message. Perhaps crony capitalism stories about Big Business and Big Government trying to quash Uber and Tesla and Airbnb are getting through.
The conclusion of “Foreign STEM Workers and Native Wages and Employment in U.S. Cities” by Giovanni Peri, Kevin Shih, and Chad Sparber:
In this paper we used the inﬂow of foreign scientists, technology professionals, engineers, and mathematicians (STEM), made possible by the H-1B visa program, to estimate the impact of STEM workers on the productivity of college and non-college educated American workers over the 1990-2010 period.
The uneven distribution of foreign STEM workers across cities in 1980 — a decade before the introduction of the H-1B visa — and the high correlation between the pre-existing presence of foreign-born workers and subsequent immigration ﬂows allows us to use the variation in foreign STEM as a supply-driven increase in STEM workers across metropolitan areas.
We ﬁnd that a one percentage point increase in the foreign STEM share of a city’s total employment increased wages of native college educated labor by about 7-8 percentage points and the wages of non-college educated natives by 3-4 percentage points. We ﬁnd. Our measure of college bias is the percentage change in the college to non-college labor wage ratio, keeping their relative labor supply constant.
Citi recently came out with its second list of 10 “disruptive innovations.” Here are the potentially markets-disturbing products and processes to look for in the coming year(s):
1.) 4D printing: Taking 3D to the next level, that fourth “D” “refers to the ability of a static object to change shape and potentially self-assemble over time utilizing different materials which begin to interact with its environment.”
2.) Digital banking: Mobile banking has been on the rise, and “global m-payment volumes are expected to total $447 billion by 2016, a 3-year CAGR of 86%.”
3.) Digital currency: Bitcoin is only the beginning, as “more than 200 digital currencies exist today, with 12 having marketing capitalizations >$5 million” and there are “more created each month.”
4.) Digital marketing: Think about those targeted ads online–“real-time bidding digital ad spend is expected to reach nearly 60% of total display and mobile spend by 2016, a 3-yr CAGR of 66%.” Citi predicts digital marketing will be driven “to be the primary channel,” which will “flip spending trends, fueling further growth in digital channels,” and “cause a ripple across related areas, including software, media and staffing/external services.”
5.) Electric vehicles: Bringing in “a battery operator servicing model could reduce the cost of an electric car to the $10k range.” At a lower price than gasoline cars, you get to “attain access to a network designed to eliminate long-range anxiety, avoid residual value concerns from future battery advancements and attain certainty for monthly budgeting with unlimited miles” with EVs.
6.) Energy storage: Moving past smaller-scale electricity storage like batteries, “energy storage has the potential to be a far bigger industry in the future as it moves…to residential-level, commercial, or even grid-level scale.” And “the economic value of energy storage over a 10-year period in the US could be $228 billion, 21% of the $1 trillion global economic benefit.”
7.) Immunotherapy: With durability of responses lasting “a decade or longer,” immunotherapy “has the potential to turn cancer into something akin to a chronic disease—a $35 billion opportunity.”
8.) Insurance securitization: Most simply this is “a change in the capital structure of (re)insurance.” Unlike (re)insurance, which “naturally employs leverage,” securitization “eliminates leverage with a blunt instrument: full collateralization.” Citi says “since 2012, the new issue market for insurance-linked securities has grown by 30% per year and issuance could be $60 billion by 2015.”
9.) Precision agriculture: This includes “a set of technology-based devices which enhances the ability of growers to manage their farms,” and/or “analytics and services which provide farmers insight or predictive tools to lift productivity and reduce production volatility.” These sound like good news given the challenge ahead of agricultural producers “to support a population that is growing by ~75 million people per year.”
10.) Robots: “The market for industrial robots is forecast to grow with almost 200k units expected to be sold in 2016.” But watch out–Citi warns this trend “may not be your friend,” as a study by Oxford University academics suggested that as a result of computerization “47% of total US employment is under threat.”
Follow AEIdeas on Twitter at @AEIdeas.
If you want to compare the Chinese and American economies based on living standards, then you could argue they are about the same size. That “purchasing power parity” calculation, and a World Bank report trumpeting it, recently led to many headlines like this one from the Financial Times: “China poised to pass US as world’s leading economic power this year.”
Except that in all the ways that really suggest economic power, America remains ahead. Harvard economist Jeffery Frankel:
The US remains the world’s largest economic power by a substantial margin. … At current exchange rates, the American economy is still almost double China’s – 83% bigger to be precise. … When thinking about a country’s size in the world economy, it’s how much the yuan can buy on world markets that is of interest. PPP tells you how many haircuts and other local goods it can buy in China. … What makes the US the number one economic power is the combination of having one of the highest populations together with having one of the higher levels of income per capita. … When we talk about size or power we are talking about such questions as the following:
- From the viewpoint of multinational corporations, how big is the Chinese market?
- From the standpoint of global financial markets, will the RMB challenge the dollar as an international currency?
- From the viewpoint of the IMF and other multilateral agencies, how much money can China contribute and how much voting power should it get in return?
- From the viewpoint of countries with rival claims in the South China Sea, how many ships can its military buy?
For these questions, and most others where the issue is total economic heft, you want to use GDP evaluated at current exchange rates.
Of course, if China keeps up its fast growth rates, and American growth remains sluggish, that exchange rate advantage will disappear, too. Frankel:
But the day is not far off. If the Chinese real growth rate continues to exceed US growth by 5% per annum and the yuan appreciates at 3% a year in real terms (inflation is higher there), then China will pass the US by 2021 – soon, but not imminent.
Then again, my AEI colleague Derek Scissors says “it’s not even obvious that China will catch up at all.”
Republicans outraged the US has the highest corporate tax rate among advanced economies should be equally upset about America’s subpar national transportation system. For instance: the most recent global competitiveness report from the World Economic Forum ranked the quality of US roads as just 18th in the world.
Now the case for upgrading American transportation infrastructure isn’t about short-term Keynesian stimulus. It’s about long-term growth. “Places that have the greatest accessibility, that enable more people to interact in less time, produce the greatest wealth,” write transportation experts Matthew Kahn and David Levinson in a 2011 report. More accessibility also means more economic mobility. A 2013 analysis from the Equality of Opportunity Project found climbing the ladder much harder in cities with longer commute times. Indeed, the monetized cost of US congestion is around $120 billion a year.
Unfortunately the debate about US transportation policy resembles the one about the minimum wage. The Highway Trust Fund is almost depleted, and some in Washington want to finance it by raising the federal gasoline tax. They note the current 18.4-cent rate hasn’t increased since 1993, which mean its real value has declined by almost 40%. So why not phase in a big gas tax increase and then index it for inflation?
Likewise, advocates of raising the federal minimum wage point out it hasn’t kept up with living costs. Their solution: raise the minimum wage to $10 or more from its current $7.25 level and then index that amount for inflation. While such a proposal has the advantage of simplicity and builds on the status quo, there’s a strong argument that it’s inferior to expanding the Earned Income Tax Credit as a lever for raising living standards of low-income workers.
So, too, the easy, obvious fix for upgrading US roads and bridges — just raise the federal gasoline tax — isn’t the necessarily the best one. Here’s a better idea: instead of raising the gas tax, eliminate it. Oh, you wouldn’t have to do all at once. You could phase it out over several years. Meanwhile, states and cities could start calculating what their infrastructure needs really are — repairing existing roads vs. building new ones — and the best way to pay for them, such as state gas taxes, broader sales taxes, tolls, or advanced congestion pricing.
Senator Mike Lee, a Utah Republican with plan to cut the gas tax by 80%, puts it this way: ” … all states and localities should finally have the flexibility to develop the kind of transportation system they want, for less money, without politicians and special interests from other parts of the country telling them how, when, what, and where they should build.” Transportation expert Rohit Aggarwala says Republicans should like the idea for its federalism, while Democrats should approve because “state and local referendums on raising taxes or issuing debt to pay for transportation projects usually pass.”
With added flexibility, AEI’s Richard Geddes thinks state and local governments could consider “investment public-private partnerships” or IP3s. In return for a large, upfront payment, a government would lease a highway to a private entity to operate and collect toll revenue. That initial payment would go into a fund, which would then issue an annual dividend to citizens based on the fund’s investment earnings much like Alaska’s Permanent Fund or Norway’s sovereign wealth fund. A recent AEI analysis performed using data from Columbus, Ohio, suggests that annual payments could be as high as $1,800.
Now if killing the gas tax is too big a step for gridlocked Washington, here is another option: freeze it. Kahn and Levinson propose leaving the gas tax as is, but revenue would be devoted solely to “to repair, maintain, rehabilitate, reconstruct, and enhance existing roads and bridges on the National Highway System.” Maintenance could include developing innovative pricing schemes to reduce congestion. And even before potential new revenue from those ideas, this plan would effectively increase maintenance spending by more than $12 billion a year.
Funding for additional capacity would come from a new Federal Highway Bank, which would loan money to states “contingent on meeting a stringent performance test and demonstrating the ability to repay the loan.” Kahn and Levinson anticipate those loans would be repaid principally with a dedicated revenue stream from user charges, which would also reduce congestion.
The US needs a smoother ride to higher economic growth and increased prosperity. And it can get there without raising the federal gasoline tax.
Last night AEI presented the 2014 Irving Kristol Award, the institute’s highest honor, to Nobel Prize-winning economist Eugene Fama. During a Q&A session with Paul Gigot, editor of The Wall Street Journal’s opinion page, Fama offered a way to avoid future financial crises:
Gigot: If the government had, say, not intervened to bail out Bear Stearns, had not taken over Fannie and Freddie, had not done the various things it did, is it possible we would not have had a recession?
Fama: Oh no, no, no. The recession, I think, was already in the works. The fact that people were defaulting on their mortgages—people don’t wake up in the morning and walk away from their houses. Usually it’s because they can’t make the payments. So I think we were already headed into a recession at that point.
Now, we’ll never know. I said at the time, “Boy, it would be a nice experiment just to let these guys fail,” because failure doesn’t mean that the assets go away. Temporarily they might have depressed prices, but eventually they’ll get purchased by other people and be put back into play.
Now no government Republican, Democrat, or otherwise will ever let that happen. The inclination is always to bail. In bad circumstances the inclination is always to bail. But what really came out of that period that really bugs me is the worst possible perversion of capitalism—the whole idea of “too big to fail.” That somehow has to get taken off the table. I don’t think Dodd Frank really lays a glove on it, because the real problem is that these too-big-to-fail institutions basically have a put option on the asset side of their balance sheet, which inflates the value of their debt, basically makes it riskless because the government is going to pay it off.
One way to take that off the table is to increase the equity requirements. Not like they’ve been talking about them, though. They have to go up to maybe 20, 25% equity financing of these too-big-to-fail banks.
Gigot: Instead of 10%?
Fama: Yeah, instead of 10%. That doesn’t hurt, there’s nothing in—well, Miller got the Nobel Prize for the Modigliani-Miller theorem, which basically says the way you finance yourself is irrelevant. And the banks will scream and say, “We need all this debt-financing because otherwise it will be idle money.” Well, look at mutual funds, they’re 100% equity-financed. No problem there.
I think just letting the megabanks fail, dead stop, would have caused such a severe, deflationary depression that America would never repeat the experiment. Too Big To Fail might well become a permanent feature of the financial landscape. Where I think Fama is completely correct is on capital levels. As I wrote not long ago:
The US has suffered 14 major banking crises over the past two centuries, as documented by Charles Calomiris and Stephen Haber in their new book, “Fragile by Design: The Political Origins of Banking Crises and Scarce Credit.” (None in Canada, by the way.) One could reasonably assume US economic growth would have been a least a smidge better without all those other crises.
In a recent Wall Street Journal op-ed, Calomiris and coauthor Allan Meltzer note that at the start of the Great Depression, the big New York City banks ”all maintained more than 15% of their assets in equity” and none went bust. Likewise, “losses suffered by major banks in the recent crisis would not have wiped out their equity if it had been equal to 15% of their assets.”
Wouldn’t a 15% leverage ratio hurt bank lending and economic growth? Consider: First you have to calculate whether it would hurt economic growth more than a continuation of America’s serial financial crises. Second, it’s a pernicious myth that debt is somehow “more expensive” than equity capital. The more stock a bank issues, the less risky the bank becomes, and the lower the return shareholders demand.
Don’t banks know this? Look, banks are responding to incentives. Bank debt operates on unequal footing thanks to Washington’s “too big to fail” backstop. University of Chicago economist John Cochrane explains that without government guarantees, “a bank with 3% capital would have to offer very high interest rates—rates that would make equity look cheap.” Like researchers Anat Admati and Martin Hellwig in their book “The Bankers’ New Clothes,” Cochrane endorses dramatically higher capital levels. So should policymakers if they want to avoid another century of financial shocks.