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In a new research note, First Trust economists Bob Stein and Brian Wesbury engage in a bit of economic mythbusting. In the June jobs report, according to the Household Survey, part-time jobs increased by 799,000 out of total job gains of 407,000. That means full-time jobs fell. And that led to lots of hysterical headlines and analysis about ‘part-time America.” But it simply isn’t true. Stein and Wesbury:
The problem is that monthly employment statistics, especially from the household survey, are incredibly volatile. For example, just two months earlier, in April, part-time jobs were down 398,000 while full-time jobs were up 412,000! In other words, please be careful when playing with these statistics.
[Indeed], most jobs added in this recovery have been full-time jobs. In 2013 alone, 1.5 million full-time jobs were added while 188,000 part-time jobs were lost.
June was what statisticians call an outlier. If we look at the first five months of 2014, January through May, total jobs rose 1.23 million, while part-time jobs fell 153,000. And, during the twelve months ending in June, total jobs are up 2.15 million, with only 10,000 of them being part-time.
In other words, focusing solely on June data is a misdirection. According to Bureau of Labor Statistics data, total part-time jobs were 19.2% of all jobs in June 2014. Back in 2009, total part-time jobs averaged 19.5% of all jobs.
And, just to be clear, we do believe that Obamacare and other regulatory actions, higher taxes and more government spending in the past decade have created a less dynamic economy and more part-time jobs. We just don’t agree with spinning one month’s worth of data into an entire world view. It’s not appropriate, it’s a misuse of data and it’s probably politically motivated rather than any attempt to get a handle on the real economy.
An interesting anecdote from economic historican Carl Benedikt Frey that really syncs with what MIT’s Erik Brynjolfsson and Andrew McAfee wrote in “The Second Machine Age.” Two key ways for workers to deal with automation is through education and entrepreneurship:
Labor markets may once again be entering a new era of technological turbulence and widening wage inequality. And this highlights a larger question: Where will new types of work be created? There are already signs of what the future holds. Technological progress is generating demand for big data architects and analysts, cloud services specialists, software developers, and digital marketing professionals – occupations that barely existed just five years ago.
Finland offers valuable lessons in how cities and countries should adapt to these developments. Its economy initially suffered from the failure of its biggest company, Nokia, to adapt to smartphone technologies. Yet several Finnish start-ups have since built new enterprises on smartphone platforms. Indeed, by 2011, former Nokia staff had created 220 such businesses, and Rovio, which has sold more than 12 million copies of its smartphone-based video game, “Angry Birds,” is crowded with former Nokia employees.
This transformation is no coincidence. Finland’s intensive investment in education has created a resilient labor force. By investing in transferable skills that are not limited to specific businesses or industries, or susceptible to computerization, Finland has provided a blueprint for how to adapt to technological upheaval.
Throughout President Obama’s first term, White House economists kept predicting strong economic growth was just around the corner. Soon, very soon, real GDP would grow at 4% a year or more, quarter after quarter.
Never happened. Although the economy grew by 4.0% during the second quarter of this year — pending revisions — it was only the third such occurrence during the recovery that began in summer 2009. In fact, there has only been a single instance of consecutive quarters of even 3% growth or higher, the third (4.5%) and fourth quarters (3.5%) of last year. Now Citigroup really likes that three of the past four quarters have displayed strong, above-trend growth:
We were encouraged by this report and now are even more confident that the economy will continue to grow at more than a 3 percent rate for the balance of the year and into 2015. … So now the data reveal that the economy was growing at 4 percent both before and after the weather distortions. This suggests that the economy has been strengthening over the past year, but that upswing was masked by the weather. … Every sector that exhibited weakness in the first quarter bounced back in the second quarter. The synchronized nature of these swings suggest that there was a single underlying cause (weather). Fundamentals remain healthy and consistent with solid expansion.
But overall you are still looking at another 2%ish year. Indeed, as JPMorgan points out, the economy has expanded by 2.4% over the past four quarters vs. 2.2% over the five years of the expansion. “The big picture is one of modest, but remarkably steady, growth,” JPMorgan economist Michael Feroli writes.
Now “modest” is tolerable if you aren’t following a terrible recession. Big GDP declines, however, are usually followed by a year or two of spectacular growth before the economy settles into its natural pace. As BTIG investment strategist San Greenhaus writes,”Despite the recent strength, and including revisions to the last few years of data, the current recovery still pales in comparison to the last few recoveries. This isn’t exactly the best comparison (given the nature of the recession) but it does illustrate the degree to which the economy is lagging.”
Even with an unexpectedly strong second-quarter GDP report, the current economic recovery is the weakest since World War II. Even worse, many long-term forecasts — including those from the Congressional Budget Office, Federal Reserve, and White House — see future growth far slower than the postwar average. But the economy would be even weaker, and those forecasts gloomier, if not for the shale revolution. Here is Goldman Sachs economist Jan Hatzius:
… we estimate that the overall impact from the increase in US energy supply on real GDP growth is currently in the range of 0.2-0.3pp per year. Most of this is due to the direct effects from increased energy output and drilling activity, while the spillovers to other industries or via lower household energy bills have been more modest.
So, lots of energy industry investment and output. But a sector story rather than a macro story.
1.) Hatzius goes on to note that lower energy prices have not given a significant boost to energy-intensive industries: ” … output in the most energy-intensive manufacturing industries has in fact grown more slowly than in less energy-intensive ones.”
2.) Nor have US energy intensive industries outperformed energy-intensive industries in other countries. And Goldman hasn’t been able to find much evidence for a significant increase in capital spending in energy-intensive industries” other than chemical manufacturing.
3.) As for the potential boost to consumer spending from lower household energy costs, Hatzius points out that energy outlays as a share of disposable income have finally flattened the past few years. Assuming that the shale revolution get full credit, the bank economist guesstimates “the impact on US GDP growth through this channel may have been in the range of 0.05-0.1 percentage point per year.”
Here is Hatzius’s bottom line on the shale revolution’s total economic impact:
Whether this is a large effect or a small effect is probably in the eye of the beholder. Our view is that it is quite sizable when cumulated over a longer period, even if the spillover effects remain limited and more so if they grow. But it is probably not a first-order issue from the perspective of business cycle forecasters or macro investors who are primarily focused on the quarter-to-quarter and year-to-year fluctuations in business activity.
My bottom line is that America’s myriad economic woes will likely not be solved by the shale revolution. This is counter to what I hear from a lot of folks on the right these days. Too many view fracking as a silver bullet solution that will crank up GDP and create kajillions of high-wage jobs. No more New Normal. America can become North Dakota! Actually, it can’t. The Goldman analysis is a needed cautionary note and reality check that while the shale revolution is a wonderful economic tailwind, it probably isn’t a jetstream. Policymakers should make reasonable assumption about economic impacts and not ignore all the other things — from education reform to deregulation — necessary to create a thriving middle class.
The Ayn Rand Institute is disappointed in Paul Ryan. Here the House Budget Chairman goes to all the trouble of rolling out an anti-poverty plan, and he somehow forgets to obliterate the safety net. What gives? Does Ryan remember nothing from the Ayn Rand reading of his youth? Someone delete the “Summa Theologica“ off his iPad, ASAP!
Here is ARI’s Don Watkins:
If you’re going to have a welfare state, it’s obviously better to have one that minimizes the incentive to stay on welfare, and from what I’ve seen, I suspect that a Ryan welfare state would be marginally less destructive than our current patchwork of so-called anti-poverty programs.
But of course that assumes we should have a welfare state. … The real question is not whether we should have a “safety net” or not. The question is whether we should have a coercive welfare state. What I find offensive about Ryan’s … whole approach is that it doesn’t regard the rights and well-being of those forced to pay for the welfare state as worthy of much, if any, consideration. Instead, it starts by observing that some people are in need and jumps immediately to the question of what welfare state programs would most help them.
But that’s immoral. Just because there are people out there suffering and Ryan wants to help them doesn’t give him the right to concoct schemes that treat you and me and everyone who pays his own way as a means to Ryan’s supposedly noble ends. What about my goals and priorities? What about my right to pursue happiness? What about yours?
If you’re someone who finds that kind of reasoning — “Taxation is theft!” — appealing and persuasive, then of course you will dislike the Ryan’s anti-poverty plan and the safety net it wishes to reform. I really have no interest in engaging in that sort of dorm-room argument. What I do have an interest in is living in the real world, one where Americans, as a society, have long committed to making sure everyone is fed, sheltered, educated — even if that requires government action and taxpayer dough. The useful questions are ones of determining a limiting principle and sustainable funding. As Yuval Levin has described one conservative approach:
The federal government’s role in the provision of social services should be minimal, and largely limited to helping the states and the institutions of civil society better carry out their missions. It would still have some role as an investor (in infrastructure and education, above all), but this too should be strictly targeted to essential public needs that the private sector would not meet, and block-granted to the states whenever possible. Government at all levels should also look to contract its remaining functions out to the private sector where it can, both to improve efficiency and to avoid harmful conflicts between the government’s obligations to the people it serves and its obligations to the people it employs — conflicts that have been rampant in our time.
One of the things, in my view, that we get wrong in the free enterprise movement is this war against the social safety net, which is just insane. The government social safety net for the truly indigent is one of the greatest achievements of our society. And we somehow want to zero out food stamps or something, it’s nuts to want to be doing something like that. We have to declare peace on the safety net.
Perhaps someday ARI and like-minded libertarians will be able to persuade their fellow citizens to think and vote otherwise. But I don’t see that Overton Window opening any decade or generation soon.
Anyway, it is a stubborn fact that the safety net has cut US poverty, material deprivation, in half since the 1960s. Unfortunately in too many cases, poverty is a trap. As the Manhattan Institute’s Scott Winship notes in “Room to Grow,” ” … upward mobility among young adults who grew up poor is no higher today than it was in the mid-twentieth century.” That problem is what the Ryan reforms — from welfare to education to prison — mean to address.
Democrats rule! For the partisan left, the first sentence of “Presidents and the U.S. Economy: An Econometric Exploration” is probably plenty: “The U.S. economy has grown faster—and scored higher on many other macroeconomic metrics—when the President of the United States is a Democrat rather than a Republican.”
Case closed. Vote Democrat, at least for the big job in the Oval Office.
But the story actually isn’t so straightforward. In their working paper, Princeton economists Alan Blinder and Mark Watson note postwar real GDP growth is 1.8% percentage points higher under Democratic presidents than Republican. Now that’s a pretty big edge over a span when RGDP has averaged 3.3%. Clearly the Dems are doing something right policywise that explains the gap in macroeconomic performance, right?
Not according to Blinder and Watson, who argue half the growth gap is an economic “mystery” while the other half is due to “‘good luck’ with perhaps a touch of ‘good policy.” For instance, Republicans presidencies have been hit harder by nasty oil shocks (particularly Richard Nixon and George W. Bush,) while Democrats have benefited from timely productivity booms (John Kennedy, Bill Clinton). The researchers also find Dems fortunate to enter office with the global economy humming such as in the 1960s (Europe’s postware recovery kicking into gear) and 1990s. Just take a look at the massive good luck of Clinton presidency, as described today by the FT’s Gideon Rachman:
The Soviet Union had collapsed in 1991, just a year before Mr Clinton was first elected. Throughout his eight years as president, there was no serious competitor to the US for the role of global superpower. … The name Osama bin Laden had yet to impinge on the public consciousness. …Mr Clinton’s economic inheritance was similarly golden. The frightening deficits of the Reagan years disappeared in the 1990s, partly because of sensible fiscal decisions taken by President George HW Bush. By the time Mr Clinton took office, the US economy was already recovering strongly. He was the lucky beneficiary of a surge in American productivity, following the transformation of the workplace by computers. With unemployment at just 4 per cent and inflation under control, there was exuberant talk of a “New Economy”. Given this fortunate combination of circumstances, is it any wonder that the president had time for dalliances in the Oval Office?
Indeed, as I argued the other day, given the macro head of steam that the free-market policies of the Reagan era, plus corporate restructuring, gave the 1990s — and add in the fall of the Soviet Union and the Internet boom and declining energy prices — it may have been impossible to mess up that decade. Indeed, there are so many one-off factors that it’s hard to make generalizations. Truman benefited from the immediate postwar boom. Bush II was harmed by the Fed’s 2008 failure, as well as the oil price shock.
One more thing: if you’re going to categorize and judge presidencies, wouldn’t it be better to do so according to policy rather than party? Might not Clinton (free trade, capital-gains tax cuts, balanced budgets) and JFK (a big tax cutter) arguably be considered more presidents of the economic right than, say, Richard Nixon with his wage and price controls, massive regulatory initiatives, and push for a super-easy monetary policy? And don’t forget about big tax hikes by George H.W. Bush.
In a 2008 WSJ piece, investment strategist Donald Luskin noted that since 1948, the total return of the S&P 500 had averaged 16% with a Democrat in the White House and 11% with a Republican. But swap Clinton and JFK for Nixon and Bush I and you find that the market is up an average of 15% under the GOP and 11% under the Dems.
Anyway, I think it’s fair to say that it matters what hand a president is dealt and how that hand is played.
Study: Piketty tax plan would boost equality by making rich less rich. But poor would be poorer, too
Margaret Thatcher once accused a Liberal member of parliament of wishing to have “the poor poorer provided the rich were less rich.” The Iron Lady would probably say much the same to economist and inequality researcher Thomas Piketty after reading the following analysis from the Tax Foundation. The report looks at the results of Piketty’s suggestion to implement “top income tax rates of 80 percent on income above $5 or $10 million” and “50 or 60 percent on income above about $200,000.” Below are some of the key findings:
*If ordinary income were taxed at the top rates of 80 and 55%, our model estimates that after the economy adjusts, total output (GDP) would be 3.5% lower, wage rates would drop 1.6%, the capital stock would be 7.4% less, and there would be 2.1 million fewer jobs.
*If capital gains and dividends were taxed at the new tax rates along with ordinary income, the economic damage would be much worse. GDP would plunge 18.1% (a loss of $3 trillion dollars annually in terms of today’s GDP), the capital stock would be 42.3% smaller than otherwise, wages would be 14.6% lower, 4.9 million jobs would be lost, and despite the higher tax rates, government revenue would actually fall.
*Although Piketty’s proposed income tax increase may appear to target only upper-income taxpayers, all income groups would suffer from the economic fallout.
*Our model estimates that the after-tax incomes of the poor and middle class would drop about 3% if the higher rates do not apply to capital gains and dividends and about 17% if they do.
The report concludes: “The top individual income tax brackets that Piketty recommends—50 to 60 percent and 80 percent—would have the direct effect of reducing after-tax income inequality in the United States but the indirect effect of making people at all income levels significantly poorer.”
Dallas Fed President Richard Fisher makes the case that a too-easy Fed is what really threatens the central bank’s independence (via the WSJ):
Those of us who are the current trustees of the Fed’s reputation—the FOMC—must be especially careful that nothing we do appears to be politically motivated. In nourishing the growth of the economy and employment, we must avoid erring on the side of coddling inflation to compensate for the inability of fiscal and regulatory policy makers in the legislative and executive branches to do their job. We must continue to protect the independence of the Fed.
I dunno, for me the problem with the Fed is that its 2008 tight-money policy turned a modest recession into the Great Recession (in a minor replay of the Great Depression). And then as a followup, failed to either hit its 2% inflation target or adequately support total spending in the economy. Two charts. One inflation. The other actual nominal GDP vs. potential NGDP. Compare and I think it’s clear whether the policy error is one of being too tight or too loose. And it is that error which makes the case for a Fed with less discretion.
Sarah Kliff of Vox reads the Medicare Trustee report and finds, “Slow health cost growth has improved Medicare’s financial outlook, extending the program’s trust fund to last until 2030.” Wow, that still doesn’t seem so far off. But Kliff says not to worry:
At its core, the Medicare Trust Fund is an accounting mechanism. It’s where payroll taxes go to help finance the Medicare program — and its where the government-run insurance program draws funds to pay seniors’ hospital bills.
The projected date of insolvency speaks to a world where Congress never changes anything about Medicare, the world of health financing stays static, and, if we keep spending payroll tax dollars at current rates, the fund can’t pay its bills.
In other words, the date of projected insolvency speaks to a world that doesn’t really exist. Health financing isn’t static, and Congress has lots of tools in its legislative tool box to ensure Medicare can continue paying seniors’ bills. That’s what they’ve done in the past and, given that seniors are pretty big fans of Medicare (as well as pretty big fans of voting), its a decently safe assumption that its what they would do in the future, too.
Whatever the new insolvency projection released today is, you can rest pretty sure that Medicare won’t pack up and stop paying bills that year — or any other time soon.
Hey, a government that has the power to (a) tax its citizens and (b) borrow in its own currency has two pretty big tools for making sure Medicare bills get paid. But does that mean Medicare isn’t in dire need of reform? As the above chart shows, we are nearing a point where Medicare spends really begins to rise as a share of GDP. And the longer the wait to implement fixes, the more sweeping those fixes will have to be. Again, look at that chart and recall what the president recently said about how high is too high for tax rates.
View related content: Pethokoukis
This paper finds that a reduction in the corporate income tax leads to moderate job creation. In the extreme case, the elimination of the corporate income tax would reduce the non-employed population by 5.4 percent. … This articles finds that a corporate income tax rate of 12 percent would maximize economic welfare. In addition, we find that 87 percent of the population would be in favor of lowering the corporate income tax rate to 12 percent, and 67 percent of the population would support the elimination of the corporate income tax. In both cases, C corporations are better off from the tax policy change because they enjoy lower tax liability. Workers are also better off because they now receive higher wages. However, pass-through businesses are those who suffer from welfare loss, because they have to pay higher personal tax to government and higher wages to their employees.