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If college is so necessary (college grads and higher have just a 3.3% jobless rate) and so expensive (published tuition has more than doubled in real terms since 1980) and student debt is so out-of-control (it now stands at $1.2 trillion), then why not make college free for everyone? Why not make taxpayers pick up the cost for this important public good?
It’s an idea that pops up every now and then. But expect lots more talk if Tennessee makes good on a proposal to offer two years of community college or technical school free for all students with a high school diploma or equivalency degree.
But government should think twice before creating a public option for higher education. First, strong evidence that student outcomes will improve is lacking. As AEI’s Andrew Kelly points out, retention and completion rates at California’s community colleges — which have the nation’s lowest published tuition and are free to many because of Pell grants — were above the national average but below those at some schools with tuition several times higher.
Second, Tennessee’s focus is misplaced. The problem isn’t how much students have to pay. It’s how much education costs. As economist and college president Howard Bowen described the inflationary dynamic: colleges raise and then spend all the money can. And why not? Students are at an information disadvantage. They equate higher prices with higher quality and are unable to accurately gauge the value of specific institutions or programs.
Third, the adverse though unintended side effects could be quite large. Significantly reducing costs and increasing value will require more cost-benefit transparency for students, as well as “unbundling” what colleges do. We need to rethink the delivery of knowledge and credentials, explains AEI’s Daniel K. Lautzenheiser, with reforms such as massive open online courses and competency-based education. And these disruptive innovations are best generated by outside competitors who might be crowded by a public option. It’s also worth noting a 2004 New York Fed study that found a “high-subsidy, low-tuition policies have disincentive effects on students’ study time and adversely affect human capital accumulation.”
Finally, why exactly should taxpayers subsidize the higher education of kids who can afford it and will reap huge lifetime gains from more schooling? They shouldn’t. While the Tennessee proposal is correct in signalling the importance of increasing education levels, it distracts from more fundamental reform.
The long-term, anti-employment impact of the Affordable Care Act is, unfortunately, not the worst bit of news from the Congressional Budget Office. More disturbing and important is the CBO’s gloomy US economic forecast. After nearly five years of glacial economic recovery, the agency sees GDP growth accelerating from 2014 through 2018 to 3.2% — roughly its postwar average.
Great. But that’s apparently as good as it gets: “Beyond 2017, CBO expects that economic growth will diminish to a pace that is well below the average seen over the past several decades.” Obamacare’s effect on hours worked is one factor, though hardly the only one. More important is slower labor force growth from the aging of America and the retirement of the Baby Boomers. And slower labor force growth also means less business investment to equip workers. Innovation is also lower than in previous decades.
The result? CBO expects annual growth through 2024 to decelerate back to the low level seen right after the Great Recession, just 2.2%. To put it another way, potential US GDP growth is now only two-thirds what it was in the 1980s and 1990s.
Two more CBO predictions: not only will depressed labor force participation – which CBO blames half on demographics, the rest on labor demand and worker mismatch – remain low, it’ll dip further. At the same time, budget deficits will begin rising again due to entitlements. (Also, the CBO sees $2 trillion in additional debt over a decade since its previous forecast due to slower GDP growth.)
So there you have it: slow growth, too little work, too much debt. The New Normal made permanent. Yet according to President Obama, America faces no bigger challenge than income inequality?
The Affordable Care Act is going to have an even bigger impact on the US labor market than first thought, according to the Congressional Budget Office. And it’s not good. Back in 2010, CBO estimated that the ACA would, on net, reduce the number of full-time workers — either due to quits or reduced hours — by around 800,000 over a decade. But now that number has jumped by a huge amount:
CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive
The reduction in CBO’s projections of hours worked represents a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024. Although CBO projects that total employment (and compensation) will increase over the coming decade, that increase will be smaller than it would have been in the absence of the ACA. …
Because some people will reduce the amount of hours they work rather than stopping work altogether, the number who will choose to leave employment because of the ACA in 2024 is likely to be substantially less than 2.5 million. At the same time, more than 2.5 million people are likely to reduce the amount of labor they choose to supply to some degree because of the ACA, even though many of them will not leave the labor force entirely.
Or as JP Morgan writes in a new note: “CBO now believes that the work disincentives created by the ACA will hold back the amount of labor supplied by households, thereby restraining overall economic activity.”
Here’s what’s going on: this is a story of trade-offs. Subsidies help people buy health insurance. But as those subsidies are phased out (to save money) as incomes rise, effective marginal tax rates increase. That discourages work. None of this is a revelation to the CBO, but the agency has “now incorporated into its analysis additional channels through which the ACA will affect labor supply, reviewed new research about those effects, and revised upward its estimates of the responsiveness of labor supply to changes in tax rates.” New thinking, new estimates.
OK, fine. One option is to accept this trade-off as the necessary price to pay for more people getting health insurance. Of course, how health insurance affects health outcomes isn’t so clear or straightforward. For instance: a fascinating new study from Ghana found that giving people free, formal healthcare had no impact versus the control group population. Closer to home, a much-hyped, randomized trial in Oregon found that putting people on Medicaid “generated no significant improvement in measured physical health outcomes.” This doesn’t mean universal coverage is a bad idea, but we should be aware of secondary effects, such disincentives to work at time of falling labor force participation and rising disability rolls.
As economist John Cochrane has put it, “If you means-test any benefit, you introduce a steep marginal tax rate at means-testing point. If you don’t means-test a benefit, you blow out the budget. It’s a hard nut, that you can’t get around.” And Obamacare doesn’t.
My pal Martin Hutchinson offers this tough but interesting take on Brynjolfsson, McAfee, and The Second Machine Age:
Contrary to the authors’ estimate, I do not see further inequality or mass unemployment from the robot revolution. By all means, there will be actresses and athletes paid excessive sums, as the entertainment complex has always valued the tiny extra stratum of excellence. For the rest of us however, apart from those who design robots or interact with them in some other way, there will be the universe of “long-tail” products and services appealing to a small minority audience. …
The economic disruption will be considerable, but I refuse to believe we will enter a world where four fifths of the population lives on welfare while the other fifth pay 90% income taxes to support them. Instead, I think arts and crafts will support far more of us than they do today, while others will work with the robots and a small group will push forward the technological frontiers or engage in entrepreneurship.
I’m not sure the authors are necessarily arguing for technological unemployment at the sky-high level Hutchinson writes about, but certainly they see potentially far higher levels of nonworking and want to minimize. There is no assumption that work will pay an acceptable wage, so Brynjolfsson and McAfree recommend a negative income tax along with a reduction of taxes on labor. Moreover, you might not get mass unemployment as much as few hours being worked and perhaps stagnant wages. Actually, the scenario Hutchinson lays out does look somewhat like Tyler Cowen’s Average Is Over thesis with the 85% taking care of the needs and wants of the 15% via personal services and maybe the arts, too.
While US upward mobility appears stable since the 1970s – or “stalled’ to use President Obama’s rather negative characterization — despite an increase in high-end inequality, there is no reason for complacency. First, mobility could be better. What’s more, economist Timothy Taylor points out that the results from the Equality of Opportunity Project are a little fuzzy for kids born after the early 1980s:
… their standard measure of mobility across the income distribution is to look at children’s income at age 30, and then compare it to their parent’s income. But as they write: “We cannot measure children’s income at age 30 beyond the 1982 birth cohort because our data end in 2012.” You’ll notice that in the figure above, the line includes those born into the early 1990s. For those born from 1983-1986, they look at earnings as of age 26, which they argue are pretty close correlated with earnings at age 30. Then for those born from 1987-1993, they project future income based on rates of college attendance. … Thus, while this study and a several previous studies suggests that intergenerational mobility of incomes hasn’t shifted much over time, the issue is certain to be revisited as new evidence emerges over time.
So we’ll see. Meanwhile, let’s get busy boosting growth and innovation, reforming education, and making sure more kids growing up in stable family environments.
In his book Average Is Over, economist Tyler Cowen depicts a future where only the tech-savvy 15% experience sharply rising incomes. As Cowen told me in a recent podcast, “There will still be billionaires of course, but you’ll really have large numbers of Americans with lives as good and as happy as those which current millionaires have.”
And stagnation for the rest, more or less. Now we may already be seeing some of this play out in the economic data, which suggests the US middle class has been thinning out due to job polarization. Recessions cause disproportionate losses in middle-wage — especially those that mainly require following explicit instructions and obeying well-defined rules – that aren’t offset in the subsequent employment recovery. The New York Times also finds some evidence in the retailing sector where stores are competing hard at the top and bottom of the income scale, not so much in the middle:
Stores and restaurants are chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching consumers. “As a retailer or restaurant chain, if you’re not at the really high level or the low level, that’s a tough place to be,” Mr. Maxwell said. “You don’t want to be stuck in the middle.”
The piece goes on to cite data showing that since 2009, inflation-adjusted spending by the top 5% has risen 17% vs. just 1% among the bottom 95%. And as a share of consumption, about 90% of the overall increase in inflation-adjusted consumption between 2009 and 2012 was generated by the top 20% of households in terms of income. On the surface at least, this kind of looks like the Cowen scenario playing out in real time. Income and spending gains at the top only. Of course, the exceptionally slow recovery may be distorting the data in some way. US GDP is expected to accelerate in 2014. If these spending trends hold, however, it could further bolster the argument finding a permanent split in income growth.
I don’t know, really, whether it would be good or bad politically for Republicans to tackle immigration reform this year. Some say it would be divisive and distract from the party’s Obamacare critique. Others argue that waiting would inject the issue into the 2016 GOP presidential race.
Generally, however, I am in favor of implementing good policy ideas ASAP. And reform that would legalize undocumented workers and create a more-skills based system would be a big net plus economically. (Timing-wise, as Reihan Salam argues, passing a jobs act for the long-term unemployed might be of higher priority.)
Columnist Ann Coulter apparently doesn’t want that sort of immigration reform today, tomorrow, or ever. But it’s not just a piece of legislation she’s against. Coulter is pretty much dubious of all immigration, full stop.
Immigrants — all immigrants — have always been the bulwark of the Democratic Party. … This is not a secret. For at least a century, there’s never been a period when a majority of immigrants weren’t Democrats. … The two largest immigrant groups, Hispanics and Asians, have little in common economically, culturally or historically. But they both overwhelmingly support big government, Obamacare, affirmative action and gun control. … At the current accelerated rate of immigration — 1.1 million new immigrants every year — Republicans will be a fringe party in about a decade … why on Earth are they bringing in people sworn to their political destruction?
1.) Of the 11 million illegal aliens, only 80% are Latino, and only 40% or so might actual seek citizenship. And probably less than half of those will vote. So amnesty might provide Dems with an additional 1 million votes. How would amnesty have played out in the 2012 election? Sean Trende: “Using these numbers, not a single state would have cast its votes for the electors of a different candidate in 2012. In fact, in 28 states, the president’s margin would have increased by just a half-point or less.”
2.) I have been worried that fears of a further influx of unskilled Hispanic labor would metastasize into undifferentiated restrictionism. Well, here we are. So now (some) conservatives don’t want the brainiacs, either? According to Harvard study, immigrants generally account for about a quarter of the US workforce engaged in science, technology, engineering, and mathematics fields.What’s more, according to Pia Orrenius of the Federal Reserve Bank of Dallas, immigrants accounted for well over 50% of the growth in employment in STEM-related fields between 2003 and 2008. So we want those foreign PhDs only if they are big 2nd Amendment supporters?
3.) Such a static way of viewing the world. Maybe Republicans will always have electoral problems with low-income immigrants. But can’t Republicans improve their showing with them — not to mention those Hispanics and Asians natives and immigrants in the middle and upper class — with the same set of pro-growth, pro-mobility policies that might appeal to all Americans? A CBS News report earlier this year points out that Hispanic households earning more than $100,000 were actually more likely to call themselves Republicans than Democrats, but warns that “if over the long term Hispanic voters see a distinction between the parties based more heavily through the lens of group attachments, economics matters less” and Republicans won’t be able to make much progress.
And that scenario seems far more likely to happen if Republicans treat Hispanics and Asians as a fifth column for Big Government rather than voters to be persuaded by policies that appeal to their concerns and by politicians who see them more than just a category in a poll’s crosstabs.
One take on the fourth-quarter GDP report is that it was bad news for Democrats and Keynesians. The US economy put up one of its best performances of the recovery, such as it is. Not only did the economy grow 3.2% the past three months, the growth rate for the entire second half was 3.7%. That, despite the government shutdown and debt-ceiling kerfuffle.
I am more impressed by the economy’s 2.7% real GDP growth for the year, fourth quarter to fourth quarter — its best showing since 2010′s 2.8% and an acceleration from 2012′ s 2.0%. Moreover, the upturn came despite the fiscal austerity of tax hikes (mostly) and the sequester. Scott Sumner offers an explanation, as part of his critique of the Bernanke Era:
During the summer of 2012 he had to twist arms and schmooze Fed officials to persuade them to sign on to a [QE3] policy that successfully prevented the austerity of 2013 from driving the US into a double-dip recession.
Of course, market monetarists like Sumner and myself also blame the Bernanke Fed for turning the housing bust/oil spike downturn into the Great Recession via inept monetary policy in 2008. But Sumner cuts Bernanke a bit of a break:
If the economics profession had been solidly market monetarist in 2008 then I’m confident that Ben Bernanke would have gladly implemented NGDPLT. The economics profession never gave him the support he needed to be more aggressive. The profession failed us, the Fed was just a symptom.
Seems fair. Meanwhile in the EU …
Last July, North Carolina lost its eligibility for the federal Emergency Unemployment Compensation program. So how has the benefit cut off worked out? Well, the jobless rate went way down, to 6.9% in December, according to new BLS numbers, from 8.8% in June — the month before the cut. Nationally, the jobless rate has fallen to 6.7% from 7.5%.
But why did the jobless rate drop in the Tar Heel State? Sure, state employment rose by 41,000. But that was accompanied by a sharp drop in the labor force participation rate to 61.2% from 62.2%. That full percentage point drop is even larger than the decline nationally of 0.7%. Overall, 52,000 have left the labor force since June. So more have left the labor force that have found employment.
Another way to look at it: if NC labor force participation had only fallen by the national average, just 28,000 would have left the labor force. So to sum up, the state has gained 41,000 employed while 24,000 more folks left the labor than one would expect, at least by looking at the national average. And that’s if you have confidence in all those numbers. As a BLS official told Evan Soltas:
We can say of the seasonally adjusted LAUS data for North Carolina that the approximate thresholds for statistically significant changes (90-percent level) over a 6-month period (using the change from June-December 2013) are as follows: 68,000 for civilian labor force; 61,000 for employment; 32,000 for unemployment; and 0.7 for unemployment rate. So, our official estimates indicate that unemployment (both in terms of the level and rate) in North Carolina has gone down significantly since June, but neither the labor force nor employment level changes were significant.
Now your mileage may vary here, of course, but still at this point I would rather have extended EUC — especially given the unusually high long-term unemployment rate — and combined that with smart UI reforms than just pull off the band-aid — especially given sample sizes and data reliability. As AEI’s Mike Strain has put it:
We should want to keep the long-term unemployed attached to the labor force until the economy picks up, more jobs become available, and they can find work. We should not want today’s long-term unemployed to permanently exit the labor force simply because their UI benefits expire. Why? Because many may end up on government assistance until they reach retirement age. That is worse for them, worse for the economy, and more expensive for the federal government over the long term.