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From Deutsche Bank:
This week Britain gave “the green light” to driverless cars from January 2015. Three imponderables leap to mind as government policy evolves.
Firstly will this mean more vehicles on the road? Average trips per year are falling in the UK and are 12 per cent fewer today than in 1995. Average driving distances are down a similar amount.
Secondly what happens to labour supply and productivity? Does the 60 per cent of the labour force that spends 55 minutes a day commuting by car suddenly boost the economy’s hours worked by a tenth or will everyone sit in the back seat streaming Netflix?
Speaking of streaming the third policy quandary is Europe’s beloved net neutrality. Surely if your driverless car is about to crash as you watch Downton Abbey you want the network to prioritise the vehicle over your iPad?
US job growth in July was a bit light — 209,000 vs. Wall Street expectations of 233,000 — but still showed a recovery slowly grinding along. Employment has now expanded by more than 200,000 jobs for six-straight months, a streak last seen in 1997. The 1.5 million jobs created during that stretch are the most since 2006. Average monthly job growth is up 20% from last year. Yes, the jobless rate did tick up to 6.3%, but that increase was mostly because 329,000 people joined the labor force.
In other words, the Obama recovery seems to have hit its sweet spot. And that’s the problem. This may be as good as it gets given that the expansion is five-years old and GDP growth seems stuck in low gear. The US employment rate of 59.0% is still well below its prerecession level of 62.9%, a gap of nearly 10 million jobs. There are still 3.2 million long-term unemployed vs. 1.3 million in December 2007. And as Capital Economics notes, “Despite the strength of employment gains and the decline in the unemployment rate, there is still no sign of an acceleration in average hourly earnings, which were unchanged in July.”
JPMorgan’s Michael Feroli puts it succinctly: “Another gutterball for wage growth,” and notes that “now-closely-watched wage measures in today’s report also gave no signal of binding labor resource constraints: average hourly earnings for all workers were flat on the month, and up 2.0% over the past year.”
Overall, it was a bad report for the job metrics “dashboard” of Federal Reserve Chair Janet Yellen. As economist Robert Brusca points out, ” … we see that the unemployment rate has risen, the U-6 rate is up. The long-term unemployed share of total unemployment is up. Part-time workers are up, part-time workers looking for full-time work is a higher ratio. Marginally attached workers are greater in number. There are more discouraged workers.”
Then again, what can you really expect from an economy that has expanded by just 2.4% over the past four quarters, and a mere 2.2% over the five years of the expansion? Now there are signs wage growth could be ready to accelerate. And maybe the 4% GDP growth in the second-quarter means above-trend growth for the rest of the year. But as Barclays puts it, “Overall, we view this report as consistent with a return to more moderate job growth in Q3 14 after the Q2 14 surge.”
We have a long way to go, and we are getting there oh-so slowly. Here are two more stats for you: 1.) Since 2000, the US economy has generated 5.2 million private-sector jobs vs. a total of 42.5 million in the 1980s and 1990s; 2.) The US economy has only produced three quarters of 4% or faster growth since 2000 vs. 36 in the 1980s and 1990s. There is little happening in the economy right now that suggests this expansion will ever be a whole lot more than what it currently is.
An interesting exchange today between House Budget Committee Chairman Paul Ryan and CNBC reporter John Harwood:
JOHN HARWOOD: One of the reasons why people have been – Democrats have been hostile to your ideas, and others have raised questions. Is the idea that they have taken from some of your public comments, that you think government help, per se, is the problem with the poor? The hammock is the problem and that the way to help people is actually take away government assistance.
PAUL RYAN: No, I think the hammock’s the wrong analogy.
JOHN HARWOOD: You have used it though.
PAUL RYAN: I know and I think that is wrong. I think what I worry about are government programs that actually disincentivize work. And the many cases, and I flesh this out in my report, a person can be worse off leaving government benefits because they lose a lot of money doing that going to work. We need to fix that.
And it’s the “wrong analogy” because it (a) sort of loosely suggests everyone receiving government benefits — single moms, the disabled, seniors, long-term unemployed — is an underserving loafer and moocher and (b) can lead to the conclusion that the best way to get someone out of the “hammock” is to tear it down, to shred the safety net. As Michael Strain has written:
Over the last several decades, employment in Western economies grew in both low- and high-skill occupations, but fell in middle-skill occupations. That’s because middle-skill, middle-class occupations are those that can be most easily replaced by technology. … Without middle-class jobs, many male workers have taken low-skill, low-wage jobs. And many men have simply chosen not to participate in the labor force — employment rates for less-skilled men in the U.S. have dropped significantly over the past three decades. This has coincided with a decline in real hourly wages for men without a college degree.
Smart public policy should encourage and support work through work requirements and wage subsidies. Doing just that is the intent of Ryan’s new anti-poverty plan.
“Then it’s war! Then it’s war! Gather the forces! Harness the horses! It’s war!” – Groucho Marx as Rufus T. Firefly in “Duck Soup.”
A breathlessly headlined Federalist piece, “Conservatives Need To Have It Out Over The Federal Reserve,” offers a tossed data-salad recap of the prewar Austrian-based criticisms (sigh …) of Federal Reserve policy that are currently popular on the right. (I feel really fortunate to have been handed a copy of Milton Friedman’s “Free To Choose” by my high school econ teacher. Thanks, Mr. Roelofs!)
A few observations and thoughts:
1.) Supposedly pro-Fed conservatives like myself think the central bank played a decisive role in both the Great Depression and Great Recession. So, yeah.
2.) That being said, Fed actions since the financial crisis have prevented a worse downturn and an even slower recovery. Here is a mystery: As Scott Sumner points outs, nominal GDP accelerated in 2013 from 2012 — to 4.6% from 3.5% under the weight of “of higher income taxes, higher payroll taxes and the famous “sequester” which reduced government spending.” What explains the speed up? David Beckworth — along with Sumner — makes a strong case that “monetary policy was easily able to offset the 2013 fiscal austerity despite the [zero lower bound]. … This ‘Great Experiment’ of 2013 revealed the potential of monetary policy even at the ZLB. It suggests the Fed could have done more over the past five years to restore full employment. Alas, it did not!” Alas, indeed.
3.) How about a counterfactual? Here are two charts. Each shows a different way in which the US and EZ economies have diverged thanks to the tight-money policies of the European Central Bank vs. the easier Fed.
4.) Since the Fed debate has dovetailed with the silly “Is inflation much higher than what the government says” debate, I would offer this additional data point from “How Much Do Official Price Indexes Tell Us About Inflation?“:
This paper shows that the relationship between the economic concepts of inflation and the inflation indexes reported in official statistics is nonlinear. In particular, changes in the CPI and PCE deflator overstate changes in true inflation when inflation is low, and are only accurate measures when inflation is high.
But whatever. Eggs.
5.) The way forward is not some hopeless effort of misinformed economic nostalgia to “end the Fed.” Rather this, if you want rule-based monetary policy for the 21st century:
Most simply, the Federal Reserve should begin by adopting an approach of “level targeting” of nominal GDP. This doesn’t mean keeping NGDP level, but rather targeting a specified trajectory, such as a 5% NGDP growth path, and committing to make up for any near-term shortfalls or excesses. Thus, if NGDP grew by 4% one year, the central bank would cut rates or engage in quantitative easing until its models yielded an expectation of 6% NGDP growth for the following year. …
Another approach — which would be more radical, but perhaps also more effective — would limit the Fed’s role to setting the NGDP target, and would leave the markets to determine the money supply and interest rates. This would mitigate the “central planning” aspect of the Federal Reserve’s current role, which has rightly come under criticism from many conservatives. To give a simplified overview, the Fed would create NGDP futures contracts and peg them at a price that would rise at 5% per year. If investors expected NGDP growth above 5%, they would buy these contracts from the Fed. This would be an “open market sale,” which would automatically tighten the money supply and raise interest rates. The Fed’s role would be passive, merely offering to buy or sell the contracts at the specified target price, and settling the contracts a year later. Market participants would buy and sell these contracts until they no longer saw profit opportunities, i.e., until the money supply and interest rates adjusted to the point where NGDP was expected by the market to grow at the target rate.
Note: This is an expanded and updated version of an earlier post.
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.