The basic story of the Great Recession is about as simple as they come. The economy was being driven by a housing bubble and the bubble burst. The combination of the loss of housing construction, due to the enormous overbuilding of the bubble years, and the loss of the consumption that had been driven by bubble generated housing wealth, created a gap in annual demand of more than $1 trillion. That's all simple and easy.

And what did economists think would fill that gap in demand, manna from heaven? Did they expect another building boom even when vacancy rates were at record highs? Better go study the basics of supply and demand. Did they expect investment to soar at a time of massive excess capacity? That one would not be supported by any studies of the determinants of investment I have seen. Would consumers just ignore the $8 trillion in housing wealth they saw vanish and spend just as though nothing had changed?

None of these sound remotely plausible, so what did economists think would fill a trillion dollar gap in annual spending? Of course the government could do it with more spending and/or tax cuts, but since we have a religious cult in Washington that says it is better to keep millions out of work than to run deficits, this was a political impossibility. (Of course we could have a lower valued dollar to reduce the trade deficit, but economists try to ignore the $500 billion trade deficit. That's another part of the cult.)

Anyhow, we have a simple story as to why we are facing a severe downturn. And of course it was simple to see the bubble. House prices had risen by more than 70 percent in real terms, breaking with a century long trend in which they had just kept pace with inflation. There clearly was nothing in the fundamentals to justify this sudden price surge. Income growth was weak as was population growth. And, there was no shortage of housing as indicated by both record vacancy rates and the fact that there was no increase in real rents.

In short, this is about as easy and simple as it gets and nearly every economist in the country completely blew it. For this the economics profession has enormous grounds for embarrassment. It's sort of like the fire department that rushes to the burning school building and watches in horror as it goes up in flames because they had forgotten to turn on the fire hydrant. No one would want to own up to that mistake. Nor are economists anxious to own up to the horrible economic disaster that happened because they were utterly clueless about basic economics.

The Washington Post did an assessment of which states had the largest share of their eligible population enroll in the exchanges and which states were least successful. California topped the charts with 42 percent of the eligible population followed by Vermont. Picking up the rear was Hawaii, where it tells us less than 15 percent of the eligible population enrolled.

There is a big problem with the Post's scorecard. The states didn't start in the same place. In last place Hawaii only 8 percent of its population was uninsured. By contrast, in California 19 percent of its population was uninsured. This means that even with the differences in ACA enrollment Hawaii likely still have a higher insurance rate than California.

While the piece notes Hawaii's problems in setting up its exchange, it is also the case that as the share of the population who is uninsured gets lower, it becomes more difficult to enroll the people who remain uninsured. These people are likely resistant to signing up for insurance or have difficulties navigating bureaucracies. Therefore it should not be surprising that Hawaii did not do well on this measure.

The piece also highlights enrollments of people 18-32. While there had been much hype around enrolling "young invincibles," as Kaiser has shown the difference in premiums largely reflects the differences in health care costs. It really doesn't matter much for the finances of the program how many young people enroll, although it is good to see them getting insurance.

Neil Irwin's Upshot column rightly points to the fact that Obamacare may have an ambiguous effect on the economy over the next few years. The point is that we want to slow health care cost growth, but in a weak economy less spending on health care means lower GDP and fewer jobs.

This is true, but this is part of a larger story. Since the economy is operating well below its potential and millions of workers are unemployed or underemployed, anything that creates demand would boost GDP. This is the old pay people to dig holes and fill them up again story. We could do that and increase employment and output. Better yet, we could pay people to retrofit homes to make them more energy efficient, to educate our kids, or to provide child care. But that would mean larger budget deficits and policy is now controlled by a perverse religious cult that says budget deficits are the devil's work. Anyhow, the health care story should be seen as part of the larger stimulus/deficit story.

The other point is that we have always had problems measuring health care. Suppose Pfizer develops a great new drug called "Placebo" that is supposed to cure depression. It sells $170 billion worth of this drug in 2014. This would be an addition to GDP of approximately 1.0 percentage point. Now suppose that a whistle-blower reveals Pfizer's secret test results that show Placebo doesn't do anything. Sales plunge to zero in 2015. GDP has just fallen by 1.0 percentage point. 

Much of health care spending has this character. We value our health, but we measure what we pay for. If we are healthier because of better diet and more exercise, and therefore spend less on heart related drugs and procedures, this counts as a drop in GDP. And many procedures and drugs really don't improve our health, just like Pfizer's Placebo drug. So, there will be many issues associated with measuring the economic impact of Obamacare, but it is wrong to imagine that we didn't previously have problems measuring the output of the health care sector.

Kevin Carey has an interesting piece in the NYT's Upshot section which notes evidence that U.S. college grads seem to perform markedly worse on standardized exams than their counterparts in other countries. While this discussion is interesting his conclusion is completely wrong.

He concludes by telling readers:

"This reality should worry anyone who believes — as many economists do — that America’s long-term prosperity rests in substantial part on its store of human capital. The relatively high pay of American workers will start to erode as more jobs are exposed to harsh competition in global labor markets. It will be increasingly dangerous to believe that only our K-12 schools have serious problems."

Actually economists would believe the exact opposite of what he asserts. If college graduates in other countries are better educated than our college graduates, and therefore more productive, then this will make us richer as a country. We will be made richer by the fact that we can get the goods and services they produce at a lower cost than would be the case if their college graduates were less educated than ours. This is good news in standard trade models.

Of course the implication is that college grads in other countries will be wealthier than college grads in the United States, but we are made better off, not worse off, by the fact that other countries have well-educated college grads. An editor at the NYT should have caught such a basic mistake.


Note: I see from comments that many are convinced that higher productivity elsewhere makes us poorer. This should not in general be true. Whatever we purchase from abroad is almost by definition better or cheaper, or we wouldn't be buying it. That makes us richer. There is the issue of unemployment created by increased imports. In the standard model (which most economists adhere to far more religiously than I do), the rise in imports should lead to downward pressure on the dollar, which will lead us to export more and import less of other goods and services. That will bring us back to full employment.

There is a distributional issue, the people displaced will make less than they had previously while everyone else will in principle earn more. Note that this displacement goes the opposite direction of displacement in prior decades when trade was structured to put our manufacturing workers in direct competition with lower paid workers elsewhere. This tended to put downward pressure on less-educated workers, whereas implicitly we are seeing a story here where our college-educated workers may suffer in international competition.

It is also worth noting that nothing about this story can drive our wages to developing country levels. There are different ways we can tell this story, but perhaps the simplest is to point out that 80 percent of what we consume is produced here. The fact that we can get some items at very low cost due to cheap labor in the developing world is not going to lower productivity for the portion of our economy responsible for this 80 percent of our consumption. Unless you have a story about redistribution from wages to profits that is about 10 times as large as what we have actually seen there is no way that we would see developing country wages.

That's the obvious question that readers should be asking after seeing the paragraph at the end of an article on the Treasury Department's plan to help low income people stay and/or become homeowners:

"The Treasury had promised that Mr. Lew would address the expansion of credit to potential home buyers, millions of whom are unable to get a mortgage with today’s tight standards. No new programs were offered, though Mr. Lew said the Treasury was working to jump-start the all-but-vanished market for private mortgage-backed securities, which would help lenders grow more confident and make more loans."

The clear implication is that lenders would be making loans that don't meet the standards of Fannie Mae or Freddie Mac, but would be packaged into mortgage-backed securities by private issuers. Some folks may be old enough to remember the last time we saw something like this.

The NYT had an interesting piece on the persistence of poverty in eastern Kentucky and rural areas more generally. However the piece is seriously misleading when it refers to "the trillions of dollars spent to improve the state of the poor in the United States and promote development." This comment would likely lead readers to believe that we are spending large amounts of money on anti-poverty programs. That is a very questionable claim.

Current spending on TANF, the main federal anti-poverty program is $17.4 billion, less than 0.5 percent of the federal budget. The budget for food stamps, which do not go exclusively to the poor, is around $75 billion or a bit less than 2.0 percent of federal spending. Other anti-poverty programs account for a considerably smaller share of federal spending.

In prior decades anti-poverty programs accounted for a larger share of the budget, but it is misleading to imply that they have ever been a major drain on the public's tax dollar. Anti-poverty programs have always been dwarfed by spending on the military and social insurance programs like Social Security (which does have an enormous impact on poverty).


My mistake, it actually began an article on Jean-Claude Juncker, the likely next president of the European Commission, by referring to the "rescue" of Greece. This seems a rather dubious characterization of an economic program that caused a plunge in Greece's GDP of more than 20 percent and pushed its unemployment rate above 25 percent. Greece would almost certainly have fared much better if it had defaulted on its debt, abandoned the euro, and re-established its own currency. In any case, it is no more appropriate to describe the economic plan that the European Commission imposed on Greece as a "rescue" than as "torture." The NYT would never use the latter term in a news story. It shouldn't use the former term either. 

The NYT noted that a sharp drop in health care spending reduced the first quarter growth rate by 0.16 percentage points. It is important to recognize that this drop followed a surge in health care spending reported for the fourth quarter of 2013 that added 0.62 percentage points to growth in quarter. That compares to an average of 0.28 percentage points for the prior four quarters. It is likely that the data overstated the actual increase in spending in the fourth quarter and therefore also overstated the drop in the first quarter. The average impact of health care spending on growth for the two quarters taken together is almost the same as over the prior four quarters.

A NYT editorial on Senator Thad Cochrane's narrow victory in a Republican primary criticized his record:

"He has consistently voted for the kinds of tax cuts that have starved discretionary spending and held down the economic recovery."

This is incorrect. There is no direct relationship between the tax cuts Mr. Cochrane has supported and the cuts in discretionary spending that Congress and President Obama agreed to. The cuts came about because of a commitment to hit arbitrary deficit targets. Given the vast amount of unemployment and underemployment in the economy, there is no reason to be reducing the deficit. There is no reason that we could not have both maintained higher levels of discretionary spending and left the tax cuts in place.

It is important to be clear on this issue since the public needs to know that the main factor slowing growth and keeping millions of people out of work is simply a perverse cult of low deficits, not the need to raise taxes on anyone.

Josh Barro has a thoughtful piece on public pensions and risk in the NYT's Upshot section. He makes many points with which I agree, most notably raising cautions about pension fund investments in "alternative investments." These are mostly private equity funds, but can also include venture capital and hedge funds. The problem with these alternative investments is that they come with unknown return distributions (essentially the pension funds have a promise that a smart investor will beat market indexes) and they come with high expenses. The public has good reason to be concerned when their pensions start to go more heavily into these alternatives to make up for funding shortfalls.

The issue where I differ is on how pensions need view the risk in the stock market. Josh notes my comment that pension funds don't need to be concerned about the short-term fluctuations in the market, only long-period averages. His counter is that many funds became underfunded when the stock market plummeted and therefore had to boost funding in the recession. He also notes that many pensions cut back funding and even raised benefits when the stock bubble in the 1990s led to considerable overfunding.

This points are correct, but they stem largely from bad projections about future returns, and I don't mean year to year, I mean long period averages. When price to earnings ratios in the market go above long-term averages, it is not possible to get historic rates of return. This means that the return projections used by pension funds in the 1990s should have been adjusted downward since there was no way on earth they would get the 7.0 percent real (10.0 percent nominal) returns that most funds were assuming.

The same story applied at the peak in the pre-recession period. They should have adjusted downward their assumption on long-term returns to a 5.0-5.5 percent real rate (8.0 percent to 8.5 percent nominal). After the market plunged they should have adjusted their return projections upward, which certainly would have been consistent with the sharp bounceback we have actually seen over the last five years. With these adjustments, pension funds would not have suddenly found themselves hugely underfunded even with the plunge in the market that we saw at the start of the recession.

None of this is 20-20 hindsight. I have been arguing this story about long period stock returns for almost twenty years, first in the context of Social Security and more recently in the context of pension funds.

Barro seems troubled by the idea that governments can benefit by investing in the stock market. It is not clear why this should be troubling, after all individuals benefit by investing in the stock market all the time. And the notion of risk arbitrage comes up in all sorts of different contexts.

For example, the claim that we made money on the TARP bailout is entirely a story of arbitrage. In a time where there was an enormous risk premium associated with lending, we made below market loans to favored banks, where the interest rate charged by the government was still above the risk free rate paid by the government. (The claim we make money on the Export-Import Bank is also a story of risk arbitrage.)

In short, we see instances of the government arbitraging risk all the time. It is not clear what policy we would be advancing if we prohibited it from doing so. We do know that such a prohibition would raise the cost of hiring public employees since they obviously value the guaranteed retirement income from a defined benefit pension.



Typos corrected -- thanks to Robert Salzberg.

The NYT had a short editorial discussing the issues raised by the refusal of insurance companies to pay for many expensive drugs of questionable usefulness. It would have been useful to point out the reason that drug prices are high and that drug companies mislead the public about the degree of their effectiveness. 

If the government did not grant patent monopolies, most of these drugs would sell for less than 10 percent of their patent protected prices and possibly less than one percent. This would make their affordability a non-issue in almost all cases. It would also take away the incentive for drug companies to mislead the public about the effectiveness and safety of their drugs. 

There are alternatives to patent support funding for research, such as the $30 billion in direct funding that the government commits now through the National Institutes of Health. While this funding mostly goes for more basic research, there is nothing except the political power of the pharmaceutical industry that prevents the funding from being used for the development and clinical testing of drugs. If the government were to increase its funding then all drugs developed through this mechanism could be sold as generics and the research findings immediately made public. This way the results would be accessible to doctors, patients, and other researchers.

Morning Edition had a strange piece discussing how regulators can punish banks for breaking the law. The piece focused on the various fines and regulatory measures that can be imposed as penalties when banks are found to have broken the law. Remarkably it never considered the underlying logic of the punishment and the likely deterrent effect on criminal activity.

While banks are legal institutions, ultimately it is individuals that break the law. The question that any regulator should be asking is the extent to which the penalties being imposed will discourage future law breaking. As a practical matter, the immediate victims of the measures mentioned in the piece are banks' current shareholders. Since there is often a substantial period of time between when a crime is committed and when regulators discover it and succeed in imposing a penalty, the shareholders facing the sanction will be a different group from the shareholders who benefited from the original crime. This makes little sense either from the standpoint of justice or from the standpoint of deterring criminal activity by bankers.

The imposition of large fines may cause current shareholders to demand the executives who broke the law be fired, but in many cases they will have already moved on to other jobs or retired. In the case of the fraudulent loans that were passed on in mortgage backed securities (MBS) in the housing bubble years, most of the top executives had already left their banks by the time actions were brought by the Justice Department.

In this case, they made enormous amounts of money by breaking the law. The financial crisis may have caused them to retire or leave their banks somewhat sooner than they would have preferred, but almost all of them come out as net gainers from their actions. 

The one sanction that would clearly be effective in deterring bankers from breaking the law would be putting them in jail for breaking the law. It is likely that the prospect of spending several years in prison, along with fines taking away most of their monetary gains, would provide a serious disincentive to bankers who might otherwise break the law. The Justice Department could have pressed cases by showing that top officials in banks had good reason to believe that many of the mortgages they were passing along in MBS were fraudulent.

It is likely that top executives at major investment banks had some knowledge that many of the loans they were securitizing were fraudulent, since there were numerous accounts in the business press about bad loans. There were also widely circulated jokes about the quality of these loans. (It was common to talk about "NINJA" loans, referring to loans where the borrower had no income, no job, and no assets.) It is likely that the top officials at these banks had at least as much knowledge of the loans their banks were securitizing as the people writing about them in the business press. (Deliberately passing along fraudulent loans is fraud.)


Suppose we proposed giving President Obama the option to put modest tariffs, say 2-3 percent, on imports of various categories of goods and services, if he felt it was important for the economy. Every right-thinking person would denounce this as crude protectionism. The argument for the export-import bank is essentially the same as the argument for selective tariffs.

The big difference is that all sorts of people who would be among the protectionist denouncers are making the case for the Ex-Im Bank. Today's effort comes from Joe Nocera.

His story begins, "In the real world, markets aren’t perfect." He then goes on to tell us that the Ex-Im Bank doesn't just help Boeing sell planes, it also helps thousands of small businesses export their goods.

Let's get out President Obama's selective tariffs. Suppose he imposes a 3 percent tariff on planes and aircraft parts. Defenders of the Obama tariffs will point out that this tariff is not only helping Boeing, but hundreds of small businesses that provides parts and services for these planes. See, in the real world, markets aren’t perfect.

We can point out that the government is actually making money off these tariffs, just like it does with the loans provided through the Ex-Im Bank, what's the problem?

At this point our free traders would jumping up and down yelling that we are paying higher prices for planes because of the tariffs. The government may be making money, but consumers are paying the price.

That's a good argument, but if our free traders have taken intro economics they would know that by diverting capital to the winners picked by the Ex-Im Bank, we are raising the price of capital for other firms. (Increased demand leads to higher prices.) This means that all the small businesses that are not privileged with subsidies from the Ex-Im Bank are now penalized by paying higher interest rates than would otherwise be the case.

In fact, we could actually treat interest rate subsidies and tariffs as interchangeable forms of protection. We can tell the plane and aircraft industry that it will have the option of either a 3 percent tariff on imports or a 3 percentage point reduction (this may not be the exact number) on the interest rate it pays on borrowing by getting loans through our protectionist bank. Is everybody happy now?

(In fairness, in the current economic environment of zero short-term interest rates and considerable unemployment, the impact of subsidized loans on borrowing costs for others would be essentially zero. However it is also easy to show that protectionist measures would increase output and employment in the current economy.)

Anyhow, it is possible to make an argument for the Ex-Im Bank, but it is an argument that people who like to boast about being free-traders should be embarrassed to make. See you at the Neanderthal dance.


That's basically the punch line in a column telling us Thomas Piketty is wrong to worry about rising inequality. After a long digression on motivations for saving among the very rich, Mankiw tells readers:

"When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers.

"Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers."

To summarize, the story is that by saving rather than spending their money, rich people will make more capital available to firms to invest, thereby raising productivity and wages.

There are two important problems with this story. First, we are operating well below the economy's potential level of output and are likely to remain below potential for many years into the future according to most projections. This is the story of "secular stagnation" that even folks like Larry Summers have embraced in recent years.

In a context of secular stagnation, more saving is harmful. If people save rather than consume there will be less demand in the economy and less employment. If we think that secular stagnation is likely to be a persistent problem, then the fact the rich save more of their money than everyone is bad news for the economy. It will slow growth and make us all poorer.

The other point is that moderate income and middle income people did actually use to save a larger share of their income. Back in the days when wages were keeping pace with productivity growth, savings rates were considerably higher than they have been in the last two decades when the wealthy got most of the benefits of growth. It tends to be the case that people save a larger share of their income when their income is rising rapidly. This means that we don't need rich people to not spend. Moderate and middle income people will also save a substantial portion of their income during prosperous times.


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We all know how hard it is for Wall Streeters to get by in a market economy, but can't we try a little bit of tough love to see if we can't wean them away from the public trough. The newest absurdity is the insurance policies that many large companies take out on their employees in order to game the tax system.

Many of us might have been led to believe that these "dead peasant" policies had been eliminated with a 2006 change in the tax law. But no, the NYT tells us that they are still there. Remarkably, the paper doesn't understand the issues involved at all. It tells readers:

"But critics say it is immoral for companies to profit from the death of employees, while employees themselves do not directly benefit."

Well some critics might be concerned about the morality of this practice, but the more obvious complaint is its economic absurdity. The article goes on:

"Companies and banks say earnings from the insurance policies are used to cover long-term health care, deferred compensation and pension obligations."

Okay, that's it -- everything we need to know is right there. Insurance companies don't give away money. Why are there "earnings" from these insurances policies that are available to "cover long-term health care, deferred compensation and pension obligations." The answer is that these policies are tax subsidized.

The question then is why are taxpayers subsidizing such absurd insurance policies? If we want to subsidize "long-term health care, deferred compensation and pension obligations," there is a very simple way to do it, subsidize long-term health care, deferred compensation and pension obligations. That way we would not waste money supporting the intermediaries who undoubtedly collect high fees and make high salaries and bonuses in the process.

Yes, but that would meet cutting out the insurance industry and we know the boys and girls in the industry can't be expected to make their way in a market economy without a big helping hand from the government. At least they aren't getting food stamps.

When economies have lots of excess capacity and idle workers, as is the case following a recession, they tend to grow very rapidly. When they are near their potential level of output growth tends to be slower.

This is why the United States economy was able to grow at a 5.6 percent rate in 1978 or a 7.3 percent rate in 1984. In both cases the economy was operating far below its potential so it had lots of room to grow simply to get back to potential. Once it reaches potential, an economy can only grow at the rate of labor force growth plus the rate of productivity growth.

If the Wall Street Journal understood this simple fact it might not have tried to imply that Japan faces some economic disaster because it is projected to have a lower rate of growth in 2015 than the other major western economies. Japan's economy is much closer to its potential than most of the other economies on the list.

Japan's unemployment rate is under 4.0 percent. And the percentage of prime age people (ages 25-54) who are employed is now 81.9 percent, 1.3 percentage points above the pre-recession level. By comparison in the United States employment among prime age workers is still down by 2.5 percentage points from pre-recession levels at 76.4 percent. Given this difference in where these economies are in relation to their potential output it would be very surprising if the U.S. economy were not growing more rapidly.

The piece also implies that a low growth rate is a major problem. Economists usually look at per capita GDP, that is why they generally think that Denmark is wealthier than Indonesia. Japan's population is shrinking at the rate of roughly 0.1 percent annually. By contrast, the U.S. population is growing at a rate of 0.8 percent annually. This means that, on a per capita basis, the 1.0 percent growth projected for Japan is equivalent to 1.9 percent growth in the United States. That is roughly the long-run potential growth rate that many analysts now project for the United States.

The Washington Post had a piece discussing a proposal to increase access to child care. The piece told readers the proposal would cost $20 billion a year. It then added this could:

"be financed through a 0.2 percentage-point increase in payroll taxes, which advocates say equals $72.04 a year for the average female worker."

While the $20 billion figure likely would mean little to most Post readers since few have much sense of how large this is relative to the budget or their tax bill, most readers likely have a clear idea of what a 0.2 percentage point increase in the payroll tax means. This simple addition to the article conveyed essential information to readers that would have been missed if the article had only reported the $20 billion figure.

Now why can't news stories do this all the time?


Addendum: I see from comments that the calculation here almost certainly refers to the earnings of the median female worker and not the average. Thanks for catching this.

Every economist knows that when you put a 20 percent tariff on imported clothes it leads to inefficiency and corruption. For some reason they don't seem to know that when you give out patent monopolies that can raise prices by 2000 percent or more above the free market price that it leads to big-time inefficiency and corruption.

Reality is working hard to teach economists. Today the Washington Post had an article reporting on how many hospitals appear to be profiting from a program that allows them to buy drugs at a discount from the patent protected price. The program is ostensibly designed to provide drugs to low-income people.

This sort of program would of course be unnecessary if drugs were sold in a free market. There would be no reason to establish complicated discount systems if drugs were selling for $5-$10 per prescription, as is generally the case for generic drugs. This would require an alternative mechanism for financing drug research, but folks who have heard of the National Institutes of Health know that alternative mechanisms exist. (Yes, NIH mostly does basic research, but that it a policy choice not a fact of nature.)

The Washington Post noted Kentucky Senator Mitch McConnell's efforts to block President Obama's new proposal for reducing carbon dioxide emissions by closing coal plants. It told readers:

"coal is a major source of energy and jobs in McConnell’s state and in several others represented by Democratic senators who are seeking reelection this year."

According to data from the Bureau of Labor Statistics Current Employment Situation survey, the coal industry employs 11,600 workers in Kentucky. This is equal to 0.6 percent of total employment (1,862,000). This puts Kentucky in second place to the 4.2 percent share in West Virginia, but in every other state represented by Democratic senators who are seeking reelection this year the share of employment in the coal industry is considerably less than in Kentucky.


Note: The share in West Virginia was corrected. The post originally said 1.6 percent.

Steve Rattner has a column in the NYT in which he correctly argues that robots should not provide any reason for concern about future labor market prospects. As Rattner correctly points out, robots are just another form of productivity growth. As a general rule, productivity growth allows for rising living standards and more leisure. Rattner is also right to point out that productivity growth has actually been unusually slow in recent years, the opposite of the concern about robots destroying jobs.

Where Rattner goes wrong is in arguing that the gainers and losers in terms of labor market prospects have been determined by technology and globalization, as opposed to policies that have been designed to make some groups winners and some groups losers. This is very clear from examining the list of winning occupations on his chart. The highest, with median pay of $187,200 in 2012, is physicians. (Most other sources put the median pay of doctors at well over $200,000.) Our doctors are paid close to twice as much as their counterparts in other wealthy countries. This is primarily because we have a government policy of protecting them from both foreign and domestic competition.

Similarly people in finance can get enormous pay because the government grants large banks too-big-to-fail insurance, meaning it bails them out when their incompetence puts them into bankruptcy. (The I.M.F. recently estimated the size of this subsidy at $50 billion a year.) The government also subsidizes the industry by taxing other sectors more so that the financial sector can largely escape taxation.

Anyhow, Rattner is right that we need not fear productivity growth but he is wrong to claim that the winners and losers have been determined by the natural course of economic development as opposed to deliberate government policy.


Adam Davidson has an interesting piece in the NYT Magazine noting the rapid growth in the percentage of young adults who continue to live in their parents’ home well into their 20s. The main explanation for this shift is the deteriorating labor market prospects for young people. While the piece does note this fact and has some discussion of the causes, it would be worth going into the latter in a bit more detail.

The country has pursued a set of policies over the last three decades that have the effect of redistributing income upwards. The most important of these at the moment is the high unemployment policy being pursued by Congress. Congress decided that it wanted to rapidly reduce the budget deficit after the 2009 stimulus. This has slowed growth and prevented millions of workers from getting jobs. It has also meant that many workers with jobs are working fewer hours than they would like.

Perhaps most importantly, high unemployment substantially weakens the bargaining power of workers in the bottom half of the wage distribution (these are disproportionately younger workers), so that they end up with lower wages. (See my book with Jared Bernstein, Getting Back to Full Employment.) In short, the decision by Congress to run lower budget deficits has forced millions of young people to move back with their parents.

There are many other policy decisions that have also hurt the wages and job prospects of young people. The decision of the Clinton Administration to have a highly valued dollar back in the late 1990s led to a large trade deficit which is another major cause of high unemployment. The protection of doctors and other highly paid professionals from international competition raises the costs of health care and other services, thereby reducing the real wages of most workers.

And of course the massive government support of the financial sector, in the form of too big to fail services, bailouts, and tax subsidies (other industries are taxed more so that the financial industry can be taxed less), has come at the expense of the rest of the economy which might otherwise be better situated to employ young workers.

Anyhow, the tales in this piece are striking, as many young people continue to need substantial support from their parents at ages where they would have been on their own in prior decades. It is important to recognize the policies that led to this outcome.

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