Robert Samuelson discusses the slowdown in health care costs in his column today and considers possible explanations. He notes a study from Kaiser Family Foundation which attributes three quarters of the slowdown to the weak economy. This study predicted that spending would accelerate in 2014.
We actually have data on this, since the Bureau of Economic Analysis reports spending through October (Table 2.4.5U, Line 168). Through the first 10 months of 2014 we are on track to see a 3.3 percent increase in spending compared to 2013, down slightly from the 3.5 percent increase last year. (This category accounts for about 70 percent of total spending.) That would suggest that 2014 is not fitting the pattern predicted by the Kaiser analysis, which should raise doubts about the extent to which a weak economy can explain a reduction in spending.
Samuelson also touts the growth of health savings accounts (HSA) as a major factor in reducing costs. He cites data from Kaiser that HSAs went from 4 percent of covered workers in 2006 to 20 percent in 2013.
It is implausible that this growth could explain much of the reduction in costs. Almost by definition the people who sign up for HSAs are people with low expenses. (It doesn't make sense to sign up for an HSA if you anticipate that your bills will exceed the deductible.) The additional 16 percentage points of non-senior individuals who signed up for HSAs almost certainly accounted for only 2-3 percent of total health care spending. This means that even a reduction of 1.0 percentage point of national spending (reducing the growth rate by 0.15 percentage points over the last seven years) would have required a massive reduction in health care spending by these people.
A NYT article on Xiaomi, a fast-growing Chinese start-up that is now the number three seller of cell phones in the world, included the fascinating sentence:
"Xiaomi does not yet have much of a patent portfolio, leaving it vulnerable to lawsuits from competitors."
On its face, this sentence should have left readers baffled. Why would the lack of a patent portfolio make a company vulnerable to lawsuits? The answer of course is that patents are used as a harassing tactic. The idea is to bury your competitor with patent suits in the hope that one may actually get past summary judgement and go to trial. This can be time-consuming and expensive for a small company.
The advantage of having a large patent portfolio in this context is that you get to play tit for tat. You turn around and throw a pile of patent suits back at your competitor. The fight usually ends with both sides agreeing to drop suits, and occasionally some licensing fees being paid.
From an economic standpoint, these patent wars are a complete waste, but they nonetheless may prove profitable for a company that fights effectively. It's too bad that our "free traders" are so opposed to free trade, otherwise we could reduce this source of waste and upward redistribution (patent lawyers tend to be one percenters).
Yes Toto, we're back in Kansas and we're discovering some folks really don't believe in reporting that provides meaningful information to readers. After all, what will most people make of an article on projected deficits in Kansas that told readers about Governor Brownback's schedule of tax cuts which are, "projected to cost $7 billion through the end of the 2019 fiscal year?" We are also told that the state faces a shortfall of nearly $280 million in the current fiscal year, which the governor proposes to address by, "cutting more than $70 million in agency spending and transferring more than $200 million into the state general fund from various reserves to plug the gap through the fiscal year ending in June."
Do you feel informed? In case you were one of the small minority of NYT readers who have no clue how large Kansas' budget is, the projection for the current fiscal year is roughly $14 billion, which puts the shortfall at 2 percent of projected spending. The $650 million shortfall projected for next year would be more than 4.0 percent of the state's budget.
The piece also refers to a $8 billion shortfall in the state's pension funding. This comes to less than 0.3 percent of the state's projected gross state product over the next three decades, the standard planning period for pension funds. The piece also tells readers about the governor's plans to make "changes" to the pension fund in order to "create a more sustainable long-term budget."
These sorts of changes would mean cuts, as in lower pensions or higher employee contributions. It is understandable that the governor and his allies would prefer euphemisms to conceal their agenda. It is not clear why the NYT would share the same motivations.
George Will began a Washington Post column on tax reform by bemoaning the fact that we have defined success downward. He notes the celebration over the 321,000 job gain reported for November, then tells readers:
"In the 1960s, there were nine months in which more than 300,000 jobs were added, the last being June 1969, when there were about 117 million fewer Americans than there are now ."
While Will is right about the low bar for success (we should be seeing very rapid job growth following a steep downturn like the 2008-2009 recession), the sixties do not support his case for a need to cut tax rates. Through most of the 1960s the top individual tax rate was 70 percent, while the corporate rate was 50 percent. That compares to a top individual rate of 41 percent today, and a corporate tax rate of 35 percent. The top marginal tax rate in the first two months when we had 300k plus job gains was 90 percent. If Will wants to make the case for lower tax rates spurring job growth, he should not be citing the sixties.
Will then goes on to complain that one third of the people approaching retirement have no savings. This is indeed a serious problem, but it is hard to see it being cured by tax reform. Most of these people would have been in the zero, ten, or fifteen percent bracket for most of their working lives. Furthermore, they would have had the opportunity to put as much money as they plausibly would have been able into a tax deferred 401(k). It is very difficult to envision a tax reform that will enable these people to qualitatively increase their savings. Their main problem is not enough income, with close to four decades of stagnant wages.
Will also says the real estate industry really should support tax reform even if it caps the exemption for the mortgage interest deduction, because faster economic growth will lead to higher home prices. Both parts of this are wrong. Douglas Holtz-Eakin, who had been President George W. Bush's chief economist, examined all the standard macroeconomic models for the impact of large tax cuts on growth when he was head of the Congressional Budget Office. He found that even the most extreme assumptions implied that large tax cuts had only a modest effect on growth.
Furthermore, economic growth is not associated with higher house prices. House prices only kept pace with inflation during the years of rapid growth in the 1950s and 1960s.
The Washington Post ran part one of what promises to be a very good series on the plight of the middle class in the United States over the last four decades. After noting the lack of wage growth in the 2000s the piece tells readers:
"Jobs came back more slowly, if at all. Even before the 2008 crisis, the 2000s were on track to be the weakest decade for job creation since the Labor Department started tracking the statistics. The great mystery is: What happened? Why did the economy stop boosting ordinary Americans in the way it once did?"
It's not clear what is mysterious in this story. The economy was being driven by bubbles in both the late 1990s and the 2000s. When the stock bubble burst the only way to replace the demand was the housing bubble. When the housing bubble burst there was nothing to replace the more than $1 trillion in lost demand due to the collapse of residential construction and housing wealth driven consumption, as some of us said at the time.
The only mysterious aspect to this story is what anyone thought could replace this demand. Did they anticipate purchases of U.S.made goods and services by Martians?
More generally we have had a government committed to redistributing income upward for the last three decades. Currently President Obama is pursuing a trade deal that is designed to raise the price of drugs (current spending is around $400 billion a year -- this is real money) and get more money for the entertainment and software industry. He refuses to include any steps designed to reduce the trade deficit (i.e. lower the value of the dollar) which would be one obvious way to replace the demand lost by the collapse of the housing bubble.
And, these trade deals are likely to do almost nothing to increase trade in highly paid professional services, like those provided by doctors. (Many doctors are in the top one percent and virtually all are in the top two percent.) This allows pundits to run around saying that workers are losing out to an inevitable process of globalization and somehow never notice that doctors and other highly paid professionals have been deliberately protected.
And the Federal Reserve Board seems likely to raise interest rates next year for the purpose of slowing growth, which will prevent workers from getting jobs and seeing pay increases. The Fed has helped to keep the unemployment rate much higher in the years since 1980 than in the decades before as Jared Bernstein and I point out in our book.
In short, it seems pretty obvious what has happened to the middle class. The government has designed policies to help the rich at their expense. It's not clear what part of this story is mysterious.
Ron Lieber had a well-reasoned "Your Money" piece in the NYT that discussed the merits and pitfalls of buying a home with a low down payment. However it may have misled readers about the findings of the research.
It noted that some people have raised concerns about the risks of default on low down payment mortgages (it linked to a post by me) and then it referred to others disputing that low down payments are associated with higher risks, using "fresher data." The fresher data in question is a study by the Urban Institute which actually shows a strong inverse relationship between the size of the down payment and default risk for every year analyzed.
For example, in 2001, people with strong credit scores (FICO above 750) had a 0.2 percent default rate if they put 20 percent or more down on their house, their default rate was six times as high, 1.2 percent, if their down payment was between 3-5 percent. For people with low credit scores (below 700), the default rate was 2.2 percent with a down payment of 20 percent or more, it was 5.1 percent for a down payment between 3-5 percent.
The comparable numbers for 2007 were 4.5 percent for people with strong credit scores and 20 percent or more down, compared to 13.5 percent for people with strong credit ratings and 3-5 percent down. For people with low credits scores, and putting 20 percent or more down, the default rate was 20.9 percent compared to 30.6 percent for those putting 3-5 percent down.
The way the study implies a weak relationship between down payment and default risk is by comparing default rates for people who put between 5-10 percent down and people who put 3-5 percent down. Since almost all the the people in the former category are putting just 5 percent down, the study is effectively telling us that the default rate is not much higher if people put 3 percent rather than 5 percent down. This is probably true.
Due to Japan's national debt, which is well more than twice its GDP, Japan's children are burdened with interest payments that are close to 0.8 percent of GDP. That sounds pretty awful right? How are the kids going to be able to make it?
If the sarcasm isn't obvious, then you need some basis of comparison here. The interest burden in the United States is now 1.4 percent of GDP. When our children were really being crushed by the burden of the debt back in the early 1990s the interest burden peaked at a bit more than 3.0 percent of GDP, a bit less than four times Japan's current burden. In fact, the figure of 0.8 percent of GDP overstates the true burden since much of this money is paid to Japan's central bank and then refunded to the government.
The prompt for this discussion is an article in the Washington Post about the prospects for Japan's Prime Minister Shinzo Abe and his economic program, now that he has called snap elections. To get an assessment of the impact of Japan's debt on the welfare of future generations the Post turned to Kayoko Kamiya, who is identified as "a 43-year-old housewife."
"Well, we are only shifting the burden to my children, so it’s tricky, ... Raising the tax [a consumption tax increase that had been scheduled to go into effect in April, but now has been delayed by Abe] earlier would make things at least easier later. I feel unsure if it’s right that the current generation doesn’t take care of the debt."
The piece also tells us that the bond rating agencies (yes, those people who rated subprime mortgage backed securities as Aaa) are threatening to downgrade Japan's debt. It might have been worth pointing out that the financial markets appear to disagree with the bond rating agencies. The interest rate on 10-year Japanese government bonds is 0.40 percent.
In a piece providing an assessment of the economy's performance under Abe, it would have been worth noting that Japan's employment rate has risen by 2.2 percentage points since Abe took office at the end of the 2012. This would be the equivalent of adding more than 5 million workers in the United States.
This piece wrongly asserts that Japan has been in a deflationary spiral over the last 15 years. This is not true. It has consistently had very low inflation rates that did in some years turn negative. However, the deflation rate never exceeded -1.0 percent and it has not accelerated, as would be implied by a delfationary spiral. The basic problem in Japan is the same as in Europe, the inflation rate has been too low over the last two decades.
The NYT seems intent on hiding the elephant in the living room. Yesterday it gave us a piece on why men are leaving the labor force, today it gives us a piece on why women are leaving the labor force.
Both articles raise some interesting and important issues. The article on women and work in particular gives an excellent discussion of how most other wealthy countries are far ahead of the United States in providing support for working mothers in the form of paid family leave, paid sick days, and affordable child care. (These are all areas in which CEPR has done considerable research.)
The failure of the United States to meet the needs of working parents largely explains why so many countries have passed the United States in the percentage of prime age (ages 25-54) women who are employed. This figure now stands at 69.9 percent in the United States. By comparison, it is 78.4 percent in Denmark, 76.1 percent in France, and 72.0 percent in Japan.
But the failure of the United States to meet the needs of working parents doesn't respond to the headline of the piece, "why U.S. women are leaving jobs behind." The answer to this question is very clearly the state of the economy. After all, the employment to population ratio (EPOP) for prime age women peaked in 2000 at 74.2 percent, coincidentally the peak of the business cycle. After the stock bubble burst and threw the economy into recession in 2001 the EPOP for prime age women declined. It bottomed out at 71.8 percent in 2004 and then started to rise as the economy began to create jobs again. It peaked at 72.5 percent in 2006 and 2007 and then tumbled to a low of 69.0 percent in 2011. Since then it has inched up gradually as the labor market has begun to recover from the downturn.
Anyhow, it is good to see the NYT draw attention to the failure of the United States to provide adequate support for working families which leads to unnecessary hardships for both parents and children. But it is seriously misleading to imply that the causes of the drop in employment of women in this century can be found anywhere other than the failed macroeconomic policies originating in Washington.
In other words, U.S. women are leaving the labor force because Alan Greenspan and other financial regulators and the economics profession were too incompetent to recognize an $8 trillion housing bubble. And they are leaving the labor force because Washington politics are dominated by a cult of balanced budgets. This cult is so powerful that even the politicians who know it is nonsense are scared to challenge it. Washington politics is also dominated by powerful interest groups (e.g. Walmart, General Electric, the financial industry) who benefit from an over-valued dollar and don't care about the millions of jobs lost due to the resulting trade deficit.
Anyhow, these macroeconomic forces are not really questionable. Unfortunately they are rarely discussed in the media. Stories like the one today and yesterday badly mislead the public by largely ignoring these forces.
A NYT article on a change in other countries' attitudes towards the United States role in global warming negotiations seriously understated the basis for other countries' anger toward the United States on this issue. It referred to reactions to President Obama's inability to get Congress to pass a law to reduce greenhouse gas emissions:
"the United States went back to being viewed as the world’s largest economy and largest historic greenhouse gas polluter, refusing to change course."
Actually, if the United States were just polluting in the same ratio to GDP as other wealthy countries that would be an enormous step forward. However, we have taken few of the steps that Europe has done over the last four decades to reduce energy consumption. In addition, because we have taken gains in productivity growth rather than leisure, we emit more than twice as much greenhouse gas (GHG) as people in western Europe, even though we have comparable living standards.
If it were just a question of the U.S. emitting a lot of GHG because we are the world's largest economy, those concerned about global warming would be much more pleasantly disposed toward the United States.
The NYT had an interesting piece on the decline in employment rates among prime age male workers. While it discusses many of the causes of this decline, it missed the most obvious: policy decisions that have depressed demand in the economy. Many readers of the piece may wrongly believe that the current low employment rate is primarily the result of a long-term trend. This is not true.
From 1979 to 2000 the employment to population ratio (EPOP) fell by 2.1 percentage points. If it had continued this pace of decline, it would have fallen by roughly 1.4 percentage points since 2000. In fact, it has dropped by 5.1 percentage points. The most obvious explanation for this more rapid rate of decline is weak demand. The weakness of demand is in turn caused by a decision to keep down the size of the budget deficit and to sustain an over-valued dollar. These are both policy decisions made in Washington that have nothing to do with the character and skills of the workers who do not have jobs.
It's also worth noting that wages for the jobs that these men may be able to get would be considerably higher if the government decided to run a high employment policy. As Jared Bernstein and I show in our book, wages for those at the bottom of the income distribution are strongly influenced by the unemployment rate.
I apologize for a bit of a digression here for personal reasons (my wife has chronic Lyme disease), but if you'll bear with me, I think I can make some connections. The immediate prompt for this post is a snide article in Slate by Brian Palmer, warning readers that, "New York is about to change its medical misconduct law to protect quacks."
The "quacks" referred to in the article's sub-headline are doctors who provide long-term antibiotic treatment for people who have chronic Lyme disease. As the article tells us, chronic Lyme does not exist:
"The Infectious Diseases Society of America—the association of scientists and clinicians who study this sort of thing—has repeatedly characterized chronic Lyme disease as 'not based on scientific fact.'"
It's great that Palmer can be so confident of this assertion, but it turns out that the evidence is far weaker than the association of scientists and clinicians who study this sort of thing might lead you to believe. There are actually very few studies that have tried to evaluate the effectiveness of long-term antibiotic treatment of people who believe themselves to be suffering from chronic Lyme.
As explained in an analysis by Brown University researcher Allison DeLong, one of the studies was poorly designed so that it would have been almost impossible for it to have found a significant effect from antibiotic treatment. A second study did find evidence that treatment alleviated symptoms, however this finding was dismissed because the symptoms returned after the treatment stopped. (Effectively this study was testing whether six months of treatment would cure patients, some of whom had years of prior treatment. It really shouldn't have taken too much background in science to know the answer to that one would be no.)
The third study actually did find statistically significant evidence that treatment improved patients' outcomes by its main measure, a survey on fatigue. However it dismissed this finding because the researchers decided that the blind nature of the study had been compromised. When surveyed after the fact, 70 percent of the control group wrongly guessed that they had been treated. However two-thirds of the treatment group somehow recognized that they were being treated. Therefore the researchers decided that they could not accept the results, since the people in the treatment group knew they were being treated.
I'm not making this up. You can find the study here. It was published in a major medical journal and its negative findings are routinely cited by doctors arguing that chronic Lyme disease does not exist and long-term antibiotic treatment is pointless. (If you haven't figured it out yet, the study found exactly what you would want in the comparison between the control and the treatment group. The same percent of people in each group thought they were being treating. This means that the blind nature of the study was not compromised.)
Thomas Edsall has as interesting piece this morning discussing the changing plight of working class whites in the United States and their increasing estrangement from the Democratic Party. He gets much of the story right. Certainly they can no longer be assured of a comfortable middle class existence. And, if they do manage to get middle class jobs, they certainly cannot guarantee that their children will be as lucky.
However some of the argument is misplaced. Edsall notes the sharp growth in single mothers among women without college degrees. He then refers to research showing worse outcomes for children of single parents, implying that the problems for children stem from the increasing ability of parents to get divorced. This does not follow.
To take the simplest story, imagine a world in which no one is allowed to get divorced. Some children grow up in happy families with two committed parents. These children are likely on average to do well in life. On the other hand, some children grow up in dysfunctional families where parents regularly fight and a father may be abusive, alcoholic, or have other serious issues. These children will probably on average do less well in life.
Now suppose we allow couples to divorce. Presumably the happy couples stay together and the unhappy ones get divorced. If we compare outcomes of the children we would likely find that the children raised by two parents do better than the children raised by single mothers. However, it would be wrong to conclude that the problems for the children of single mothers stemmed from the fact that they are divorced, it would stem from the fact that they had been in bad relationships.
Given that divorce and single parents are a reality, the obvious policy response is to ensure that children get the education and support they need regardless of their family background. Good public child care, access to pre-K education, and affordable college education seem like obvious policy responses to these circumstances, along with laws that guarantee family friendly workplaces (e.g. paid sick days and paid family leave). These are policies that the Democrats have typically advocated.
The other set of policies for the white working class that the Democrats could (and sometimes have) advocate have to do with full employment. As Jared Bernstein and I argued in our book, Getting Back to Full Employment (download is free), full employment disproportionately benefits those at the middle and bottom of the wage distribution. The only period in the last four decades where these workers enjoyed sustained real wage gains was in the period of low unemployment from 1996 to 2000. Barring other changes in the economy, we will have to return to unemployment rates below 5.0 percent before most workers will again see substantial real wage gains.
There are three policies that the Democrats can push to again get the unemployment rate down to these low levels. The first involves additional government spending which would boost demand, growth, and employment. Unfortunately, superstitions about budget deficits makes this unlikely in the foreseeable future.
The housing bubble was apparently too far in the past for many of the people writing about housing to remember. Part of the problem was that many borrowers got loans that they were ill-situated to repay.
One of the factors that is a strong determinant of whether people will be able to pay a mortgage is the size of the down payment. The equity from a down payment serves as a cushion in bad times. It also reduces the risk to lenders, since this is money they stand to recover in the event of a default.
The NYT misled readers about the relative risk from low down payment loans in an article on the decision by the government to allow Fannie Mae and Freddie Mac to purchase loans with just 3 percent down payments. The piece cited several commentators saying that the risk of defaults would not increase substantially by lowering down payment requirements.
A study by the Center for Responsible Lending found that the default rate for loans with down payments of between 3 to 10 percent was 6.8 percent. This is 45 percent higher than the default rate it found for mortgages with down payments of 10 percent or more. The gap would be even larger of the comparison was restricted to those with down payments between 3 to 5 percent, with mortgages with down payments of 20 percent or more.
It is dubious housing policy to encourage moderate income people to take out mortgages on which they are likely to default. Furthermore, since the median period of homeownership among low income homebuyers is less than five years, a relatively small portion of households who are able to buy homes through this policy will accumulate any substantial amount of wealth. By contrast, the policy is likely to help the banking and real estate industries accumulate wealth.
In response to the questions in the comments, the study did not directly give the 57 percent figure, you had to back it out from the numbers they did give. According to their data, the additional low down payment mortgages raised the overall average from 4.7 percent to 5.2 percent. In order for this to be the case, the default rate on the additional mortgages had to be 6.8 percent -- in other words, 45 percent higher than the higher down payment mortgages.
In fact, assuming their analysis is like every other analysis of default rates, it found a strong inverse relationship between the size of the down payment and the default risk. The likelihood of defaults for those putting down 3-5 percent is probably close to four times as high as those putting down 20 percent. I think it's great to help low and moderate income people get good housing. But this policy is about helping banks get their bad mortgages insured by taxpayers.
One more point, it is a lie to say that this is an issue about people being able to get a mortgage with a low down payment. This is an issue about people being able to get a government guaranteed mortgage with a low down payment. We are talking about people paying a higher interest rate that reflects the actual risk associated with their mortgage.
Correction: An earlier version had put the difference at almost 80 percent due to an arithmetic error. Thanks to Bill Sermons, at the Center for Responsible Lending for calling the error to my attention.
Catherine Rampell's column on Uber is well worth reading. The basic point is very simple and should be obvious. There are good reasons for regulating cabs. They should have proper insurance, meet safety standards (both car and driver), and should also be limited in number. (Cabs create congestion and pollute.)
Whatever regulations are established should apply across the board. Uber doesn't get an exemption because it is run by incredibly rich twenty somethings.
Sorry, I usually find Matt's stuff interesting, but I couldn't resist the cheap shot. Anyhow, Matt seems to have gotten himself stuck in the mud of a silly debate between Obama haters and Obama apologists.
The haters are saying that all the jobs created under the Obama administration are part-time jobs -- pointing out that full-time employment is still below the pre-recession peak. Meanwhile the apologists are pointing out that most of the jobs created under Obama have been full-time jobs. With the wisdom of someone other than Solomon, Matt pronounces them both right.
Okay, let's step back for a moment and deal with two separate issues. The first is overall employment. We saw a huge fall in employment that began before Obama stepped into the White House and continued for his three months in office. Since that point the economy has gained back more jobs than it initially lost. However since part-time employment (both voluntary and involuntary, a distinction to which we return momentarily) is well above pre-recession levels, full-time employment is still below its pre-recession level.
How should this appear on the Obama scorecard? Well, it's pretty damn silly to blame Obama for the downturn. He walked into an economic disaster that was not of his doing. We can argue that the recovery should have been more robust. I know the Republicans blame Obamacare, taxes, regulations and the Redskins' defense, but none of these explanations can pass the laugh test.
The more obvious explanation, which some of us did say at the time, is that the stimulus was not large enough to fill the hole in demand created by the collapse of the housing bubble. There is a question as to whether Obama could have gotten more stimulus through Congress, either at the time or in subsequent efforts, but the main problem was congressional opposition, not the actions of President Obama.
In prior decades trade deals were largely about reducing tariffs and quotas that obstructed trade between countries. Due to the impact of these past deals, these barriers are now quite low or non-existent.
That is why the trade deals currently being negotiated by the Obama administration, the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP), are not really about reducing trade barriers. These deals are about locking in place a corporate friendly structure of regulation. This structure will limit the ability of elected governments to impose regulations on the environment, health and safety, and other areas.
Some of these regulations increase barriers to trade, such as increased patent and copyright protection. The Washington Post once again enthusiastically endorsed the TPP and TTIP in its lead editorial today. Since it is entirely possible that the increased protectionism in these trade deals will have a larger economic impact than any reduction in trade barriers, we should recognize that the Post may be an ardent supporter of protectionism for U.S. industries who find they can't make enough profit in a free market.
The paper also deserves some ridicule for touting the possibility that the Fed will raise interest rates:
"Indeed, if favorable trends such as low oil prices continue, the economy might achieve the long-awaited “escape velocity” that would enable the Federal Reserve to end its zero interest-rate policy without harming growth."
In fact, it will take about two and a half years of the job growth that we saw in November to restore the demographically adjusted employment to population ratio that we had before the recession. It is also striking how the Post seems to see it as an end in itself that the Fed raise interest rates. Low unemployment and income growth are standard economic goals, a federal funds rate is not typically viewed as a goal of economic policy.
Andrew Biggs had a column in the Wall Street Journal last week complaining that public pension funds were taking excessive risk by having 70 percent to 80 percent of their holdings in risky assets, such as stocks and various alternative investment vehicles. In a few cases, holdings of risky assets apparently cross 80 percent. Biggs argues that this is far too high and that underfunded pension plans are now taking big gambles in the hope of closing their funding gap.
Bigg's basic argument stems largely from an inappropriate comparison of pension investment patterns to individual investment. Biggs tells readers:
"Many individuals follow a rough '100 minus your age' rule to determine how much risk to take with their retirement savings. A 25-year-old might put 75% of his savings in stocks or other risky assets, the remaining 25% in bonds and other safer investments. A 45-year-old would hold 55% in stocks, and a 65-year-old 35%. Individuals take this risk knowing that the end balance of their IRA or 401(k) account will vary with market returns.
"Now consider the California Public Employees’ Retirement System (Calpers), the largest U.S. public plan and a trendsetter for others. The typical participant is around age 62, so a '100 minus age' rule would recommend that Calpers hold about 38% risky assets."
The logic of an individual following this rule is that some point individuals will retire and basically be dependent on their savings and Social Security for all their income. Retirement is usually a pretty sharp break. If the stock market happens to be down at that point, they will be in trouble if they hold lots ot stock, especially if their intention had been to buy an annuity to support themselves in retirement. They will be forced to sell their stock at a depressed value since they won't have the option to wait for the price to recover.
The NYT had an article which discussed the potential political implications of a better than expected economic picture. At one point the article comments:
"The White House’s push for fast-track trade negotiating powers — and eventually for a major Trans-Pacific Partnership trade pact — could be eased by growing confidence in the economy and the nation’s ability to compete internationally."
This comment is essentially a non sequitur. The major pacts up for negotiation, the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP) will have almost no impact on traditional trade barriers in the form of tariffs or quotas. They are about imposing a regulatory structure on federal, state, and local governments that will be more business friendly.
For example, the deals are likely to limit the sorts of environmental and health and safety restrictions that can be put in place. They will also likely limit the ability of governments to put in place privacy restrictions on the use of personal data. And they will increase patent and copyright protections, likely putting in place rules similar to those that Congress tried to impose through the Stop Online Piracy Act (SOPA). There is almost nothing about the likely provisions of the TPP and TTIP that would become more acceptable to the public due to a stronger economy.
This article also includes the bizarre comment:
"The Republican Congress will again want to pursue a balanced budget while also cutting taxes."
If the republicans want to balance the budget and cut taxes, then they want to cut spending. It would have been simpler and more informative to just say Republicans want to cut spending to offset the revenue lost through tax cuts and lower the deficit.
It is also important to note that economy is not really doing much better than expected. Through the first three quarters of 2014 the economy has grown at a 2.1 percent annual rate. At the start of the year, the Congressional Budget Office projected the economy would grow by 3.1 percent in 2014. Employment has grown more rapidly than projected and unemployment has fallen by more than projected. This is due to lower than expected productivity growth and people dropping out of the labor force.
Tax collections have been higher than expected largely as a result of the run-up in the stock market and the resulting capital gains. Part of the story of the strong stock market has been the redistribution from wages to profits. Unless the we see several more years of strong job growth like the 321,000 job gains in November, workers are not likely to see substantial wage gains. Untill workers start seeing wage growth, and thereby share in the benefits of economic growth, most people will not view the economy as strong.
The November jobs numbers were unambiguously good news. The economy is moving in the right direction and at a faster pace than we had seen in years. But we have to realize how far the labor market has to go before it makes up the ground lost in the recession.
The simplest and best measure is the employment to population ratio (EPOP), which gives the percentage of the adult population which is employed. This stood at 59.2 percent in November (unchanged from October). This is 1.0 percentage points above the low of 58.2 percent last hit in the summer of 2011, but it is still more than four full percentage points below the pre-recession peaks and more than five full percentage points below the all-time highs hit in 2000.
Many people have dismissed these comparisons by pointing to demographic changes, specifically the aging of the baby boomers. With much of the baby boom cohort now in their sixties, we would expect to see more people retiring, but if we look at prime age workers (ages 25-54) we get a similar story. The OECD reports that the EPOP for this group was 76.8 percent in the third quarter of this year, compared to 79.9 percent in 2007 and 81.5 percent in 2000. People in their thirties and forties have not just suddenly decided that they want to retire. This drop in employment is almost certainly due to the weakness of demand in the labor market.
Some other measures of slack are also useful to note. Some reports have noted the upturn in quit rates as reported in the Job Opening and Labor Turnover Survey. The most recent data puts the quit rate at 2.0 percent compared to a low of 1.3 percent at the trough of the recession. This means that more people are prepared to quit a job with which they are unhappy. But this figure is still down from 2.2 percent as a year-round average in 2006. (We should remember that even in the pre-recession period, the labor market was just getting tight enough to see some wage growth.) The quit rate at the end of 2000 and start of 2001, when the survey began, was as high as 2.6 percent. (When considering these numbers it is important to realize that the shift in employment over this period from low quit sectors like manufacturing to high quit sectors like restaurants would have added at least 0.1-0.2 percentage points to the quit rate.)
Okay boys and girls, today we learn about the erratic pattern of wage data. Ideally the Bureau of Labor Statistics (BLS) would tell us exactly how much hourly wages rose each month. Unfortunately, BLS doesn't have that ability. It has a very good survey of establishments that gives a reasonably close estimates of current hourly and weekly wages, but these numbers are not exact. And, since each month's wage estimate includes a component of error, the changes from one month can contain a very large component of error.
To see the logic, imagine that the 95% confidence interval is +/- 0.1 percent. (I haven't checked this, but 0.1 percent would be pretty good.) Suppose that one month it underestimates the average wage by 0.1 percent. Suppose the next month it overestimates the average wage by 0.1 percent. This would lead to a wage growth number from one month to the next that was 0.2 percentage points above the true number. In a context where monthly wage growth has been averaging less than 0.2 percent, this would be a very large error. That is why it is always advisable to take a longer period than a single month to assess wage growth. (My preferred measure is taking the rate of change for the most recent three months compared with the prior three months.)
Many foolish comments about the November employment report could have been avoided if reporters recognized the erratic nature of the monthly data. The 9 cent gain (0.4 percent) reported in the average hourly wage for November was widely touted. Unfortunately, reporters did not bother to note that BLS reported a gain of just 0.1 percent in October and 0.0 percent in September. As a result of the weak wage growth the prior two months, the average wage for these three months grew at just a 1.8 percent annual rate compared with the average of the prior three months. That is somewhat below the 2.1 percent increase over the last year.
When we look at these numbers we have two choices. One is to take the monthly data at face value, as almost all the reports on the November report did, and believe that wage growth virtually stopped in September and October and then surged in November. Alternatively, we can believe that the slowdown in September and October and the surge in November were both driven by measurement error.
It looks like individual choice is not supposed to get in the way of corporate profits in the world of Michael Froman and U.S. trade policy. In a Washington Post article on the Trans-Atlantic Trade and Investment Pact (TTIP), U.S. Trade Representative Michael Froman is quoted as saying:
"We’re not trying to force anybody to eat anything ... we do feel like the decision as to what is safe should be made by science."
While it is not entirely clear what Froman means by this comment, most people would probably think that individuals have the right to determine for themselves what is safe, since "science" or scientists sometimes makes mistakes, just like economists. This would mean that food should be clearly labeled, so that people can know what chemicals it contains and how it was produced. Froman's comment could be interpreted as objecting to this position.
It is also worth noting that the TTIP is not a "free trade" agreement as asserted in the article. The increased protections in the pact, in the form of stronger patent and copyright protections, are likely to do more to raise prices and block trade than any tariff reductions that are included. the pact is mostly about putting in place a set of regulations that are likely to be very friendly to the corporate interests involved in negotiating the deal, but which would face difficulty if put to a vote of democratically elected parliaments individually.