Robert Samuelson used his Monday column to tell readers that the problem with the economy is that we are suffering the psychological fallout of the Great Recession:
"My main explanation for this — as I’ve argued before — is the hangover from the 2008-2009 financial crisis and the Great Recession. These events changed economic psychology, precisely because they were unanticipated and horrific. They transcended the experience of most Americans (that is, anyone who hadn’t lived through the Great Depression). Corporate executives and consumers alike became more defensive; they saved and hoarded a bit more. If a novel calamity struck once, it could strike again. They’d better prepare."
The problem is that the data refuses to agree with his psychoanalysis. As I pointed out yesterday, consumption is actually higher as a share of GDP than it was before the downturn, indicating that fear is not keeping households from consuming in any obvious way.
Samuelson also points to the rise in temporary employment as evidence that firms are scared to commit themselves to permanent employees. The problem with this one is that temporary employment as a share of total employment is just rising back to the levels of the late 1990s, a time when the economy was booming.
If we look at the narrow category of temporary employment agencies, the Bureau of Labor Statistics (BLS) reports the number stood at 2,880,000 in April. That compares to 2,605,000 in December of 1999. Measured as a share of total employment, it stood at 2.03 percent in December of 1999, compared with 2.04 percent of total employment in April.
If we use the somewhat broader category of employment services, BLS reports the number at 3,547,000 in April. That compared to 3,776,000 in December of 1999. Measured as a share of total employment, jobs at employment service agencies fell from 3.77 percent in December of 1999 to 3.55 percent in April.
In short, if employment in temporary agencies is supposed to be a measure of insecurity, it doesn't appear to be going in the right direction to make Samuelson's point.
The most obvious explanation for the continuing weakness of the economy is that there is nothing to fill the gap in demand created by a $500 billion annual trade deficit (@ 3 percent of GDP). In the last decade, the demand generated by the housing bubble filled the gap, while in the 1990s the demand from a stock bubble filled the gap. In the absence of another bubble and a refusal to run large budget deficits, there is no obvious source of demand to fill this gap.
Unfortunately this explanation is far too simple to be used by economists or those writing on economy.
Undoubtedly millions of readers are wondering about the NYT's use of the term when it told readers that one of the goals of the Trans-Pacific Partnership (TPP) is to, "protect intellectual property from theft." Actually one of the goals of the TPP is to strengthen and lengthen patent and copyright protections.
After this is done, those who do not respect the new laws can be accused of "theft," however it makes no sense to accuse someone of theft for breaking laws that do not exist. The NYT may want strong and long protections, but a newspaper should not be calling people who do not adhere to its views of intellectual property "thieves."
As the world awaits the final word on the negotiations between Greece and its creditors, it's worth a quick flashback to 2010 and the report of Alan Simpson and Erskine Bowles, the co-chairs of President Obama's deficit commission. (This report is often referred to as a report of the commission. That is not true. The by-laws clearly state that to issue a report it was necessary to have the support of 12 of the 16 commission members. While no formal vote was ever taken, the co-chairs' report only had the support of 10 members.)
Anyhow, getting back to matters at hand, one of the Simpson-Bowles proposals was to raise the normal retirement age for Social Security to 69 from its current level of 66 (soon to be 67). The report recognized that many people work in physically demanding and/or dangerous jobs where it would be unreasonable to expect people to work this late in life. It therefore proposed having special lower retirement ages for certain occupations.
The reason this is relevant to Greece is that one of the sticking points at the moment is the reform of Greece's public pension system. One of the main issues is that the current system allows people in many occupations to start collecting benefits well before the normal retirement age. For example, hairdressers are apparently among this group because they are exposed to dangerous chemicals on the job.
While the Greek system was a universal target of ridicule among serious minded people everywhere, many of these same people embraced the Simpson-Bowles report as a gem of thoughtful, non-partisan, policy-making. The ability to ignore the fact that the supposedly thoughtful Bowles-Simpson gang were advocating the adoption of a pension system subject to universal ridicule is yet another example of the lack of seriousness of the serious people.
A NYT article reported on a turn to the right of politics in France and in much of the rest of Europe. Remarkably, the piece never once mentioned the decision by the European Central Bank (ECB) to impose a policy of austerity and high unemployment on the continent. Since the mainstream left parties do not want to challenge the ECB, this means they have few plausible routes for reducing unemployment and restoring wage growth for the bulk of the population.
This opens the stage for right-wing nationalist parties, which promise a better economic situation by blaming immigrants for the weak economy. It also forces the traditional left parties to the center since they must accede to the ECB's demand for austere budgets and labor market reforms.
The United States will be in the same situation if the Federal Reserve Board starts raising interest rates to slow the economy and keep the labor market so weak that most workers cannot get wage gains.
Economists may not be very good at understanding the economy, but they are quite good at finding ways to keep themselves employed, generally at very high wages. The Washington Post treated us to one such make work project as it reported on a change in consumer psychology due to the recession that has left:
"Americans of all ages less willing to inject their money back into the economy in the form of vacations, clothing and nights out.
"It’s a sharp contrast to the 1990s, when consumers spent freely as their wages rose robustly, and the 2000s, when Americans funded more lavish lifestyles with easy access to credit cards and home-equity loans."
Really? That sounds like a startling development. Let's see if we can find it in the data.
The chart shows consumption as a percentage of GDP. I went back to the late fifties so folks can see the longer term picture. People are spending far more today relative to the size of the economy than they did in the sixties, seventies, eighties, or even nineties. In fact, consumer expenditures are higher now relative to the size of economy than they were in the housing bubble days.
So, let's ask about that psychology story. Apparently the concern is that we fell from a ratio of 68.8 percent in the first quarter of last year all the way down to 68.6 percent in the most recent quarter. My guess is that modest decline is best explained by unusually bad weather in the first quarter that discouraged people from shopping and going out for meals. Also, extraordinarily strong car sales in the second half of 2014 probably let to some falloff in the first quarter since people who buy a new car in the fall generally don't buy another one in the winter.
But hey, I don't want to see a lot of unemployed economists. There should be lots of work in looking for a plunge in consumption that isn't there.
Many folks are dismissing the negative GDP number from the first quarter by arguing that the Commerce Department's seasonal adjustment is faulty. According to some estimates a correct seasonal adjustment could add as much as 0.8 percentage points, which would be enough to bring the first quarter GDP into positive territory.
However seasonal adjustments must sum to one over the course of the year. In other words, if weather and other regular seasonal factors are more of a drag on first quarter growth than the Commerce Department acknowledges in its current seasonal adjustment, then the Commerce Department must be understating the extent to which weather and other seasonal factors provide a boost to growth in other quarters. The cost of saying that the first quarters (this and prior years) is better than the data show is that it means the data for other quarters are worse than the current methodology indicate. In other words, this will not qualitatively change our assessment of how fast the economy is growing, even if it may shift the timing between quarters.
John Delaney, a Democratic congressperson from Maryland, argued against a "left-wing" Tea Party in a Washington Post column today. He gets many things badly wrong, like arguing:
"bipartisan tax reform that would free up the trillions of dollars of trapped overseas cash" which he says could be used for infrastructure spending. Sorry, corporations do have trillions in profits that they record as being overseas to avoid taxes, but the idea that we have some formula that would turn all this money into tax revenue for infrastructure is more than a bit loopy. He also seems to think that a modest expansion of Social Security, as proposed by people like Senators Elizabeth Warren and Bernie Sanders, would impose some impossible tax burden.
But my favorite part is when he denounces the opponents of the Trans-Pacific Partnership (TPP) as protectionists. I must confess to not knowing exactly what is in the agreement (it is secret), but we do know from Wikileaks that an important part of the TPP is increasing protectionism in the form of stronger and longer copyright and patent protection.
Since we already have trade agreements with most of the countries in the TPP, there will not be very much by way of tariff reduction in the TPP. In other words, the trade liberalization parts of the TPP will be relatively minor. Given this fact, it is entirely possible that the increase in copyright and patent protections will have more economic impact than the modest reductions in the remaining tariff barriers. (Remember patent protection can increase the price of a drug by a hundredfold, the equivalent of a 10,000 percent tariff barrier.)
Until it is shown otherwise, it is reasonable to call the TPP a protectionist pact. We know that it will increase protectionism in important areas. We don't know how much it will liberalize trade and therefore have zero basis for assuming that on net it moves in the direction of freer trade.
So Mr. Delaney, if it's name-calling time, right back at you. As a TPP supporter, you are a protectionist.
Morning Edition had a segment on computer tablets that many restaurants are now placing on dining tables which allow people to order and pay their bill without needing a waiter or waitress. The point of the piece is that these tablets are likely to cost the jobs of many table servers.
While this is true, we have always seen productivity growth. (That is what it means to displace workers with robots or computers.) Contrary to what you might believe from reports like this on NPR, productivity growth has actually been very slow in the last decade, as in the opposite of robots taking our jobs. Here's the data on productivity in the restaurant industry over the last three decades.
Productivity in the Restaurant Industry: 1987-2013
Source: Bureau of Labor Statistics.
As can be seen, productivity increased relatively rapidly in the restaurant industry from 1996 to 2006. Since 2006 productivity has actually fallen in the industry. That means that restaurants are getting less money for each hour of their employees' work. It might be interesting to hear a segment on why we seem to have such low productivity (i.e. negative) growth in sectors like restaurants rather than implying that we are seeing the opposite story.
Brendan Nyhan had an interesting piece in the NYT's Upshot section in which he discussed how "free trade" policies get pushed by presidents and approved by Congress even though most middle income and lower income people are opposed to them. Nyhan refers to research showing that wealthier people overwhelmingly support "free trade," and politicians are likely to act in ways that reflect their views even when this means going against the majority.
While this is interesting and important research, it misses an important part of the story. Our trade agreements have not been about liberalizing trade in all areas, as Nyhan asserts. While trade policy has been quite explicitly designed to put U.S. manufacturing workers in direct competition with low paid workers in the developing world, it has largely left in place or even increased the protections that keep doctors and other highly paid professsionals from other countries from working in the United States.
Trade theory predicts enormous economic gains from allowing freer trade in these professionals, but because trade policy is designed largely by and for wealthy people, removing barriers to foreign professionals working in the United States rarely gets on the agenda in trade deals. Unfortunately it also doesn't get mentioned in the media's discussion of the issue either.
Trade deals also increase protections in the form of patent and copyright protection. These are direct transfers of money from the bulk of the population to those who benefit from these royalties and licensing fee. Most of the people in the latter category are wealthy.
The fact that the trade deals do not conform to economists' definitions of "free trade," but are instead designed to redistribute income upward, likely explains much of the hostility of low and middle income people to "free trade." It is worth pointing out, that in responding to these polls, the public is not referring to the economic concept of "free trade," but rather real world policies that have little to do with the economic concept. It is understandable that the politicians pushing the trade deals would use the economic concept of "free trade" to promote their deals, it is less clear why reporters and commentators would adopt the same approach.
Today's culprit is National Public Radio. The point here is extremely simple. We know how fast robots and other technologies are replacing workers. In fact the Bureau of Labor Statistics measures it quarterly, it's called "productivity growth."
Productivity growth has actually been very slow in the last decade, as in the opposite of robots stealing our jobs. But hey, why should news outlets be limited by data?
By contrast, if the Fed starts raising interest rates, it can prevent millions of people from getting jobs over the next few years. This will also keep tens of millions from getting pay raises since a weak labor market will reduce their bargaining power. But hey, why bother listeners and readers with this stuff, let's have another piece on those nifty robots.
Given the obsession with the government budget deficit that NPR shares with most major news outlets, you would think they would find some room to mention a drop in the defcit of $20 trillion (yes, that's "trillion" with a "t"), but no, apparently they didn't think it was important.
If this sounds very strange to you, it's because the decline is in a bizarre measure of the deficit known as the "infinite horizon" budget deficit. Its originator was Boston University professor Lawrence Kotlikoff. The idea is to make projections of spending for the infinite future, compare them to projections of revenue, and then calculate the shortfall.
This can lead to some very large figures. For example, when NPR chose to report on the number back in 2011, the figure was $211 trillion (measured in 2011 dollars). I criticized the network at the time because this number was mentioned with absolutely zero context. Not only is there the problem that we are making projections for decades and centuries into the future (hey, will 2108 be a good year?), there is also the problem that almost no one hearing this number would have any idea what it means.
NPR has a well-educated listenership, but I would be quite certain that less than one in a thousand of their listeners would be able to tell much difference if the number was cut in half or doubled. $211 trillion is a really big number, but so is $106 trillion or $422 trillion. If the point is to convey information rather than just scare people then the number could at least have been expressed as share of future income. (It would have been just under 13 percent.)
It also would have been helpful to note that the main factor driving this large deficit was a projected explosion in health care costs. Under the assumptions used in the deficit calculations, the average health care costs for an 85-year old would be over $45,000 a year in 2030 and over $110,000 a year in 2080 (both numbers are in 2015 dollars). If these numbers prove accurate, we would face an enormous problem regardless of what we did with Medicare and Medicaid. Almost no seniors would be able to afford health care (nor would most other people). By just reporting the deficit numbers, NPR was implying that the problem was one of public spending as opposed to a broken health care system. (No other wealthy country is projected to experience a similar explosion of health care costs, which suggests the obvious solution of having people use more efficient health care systems elsewhere, but public debate is controlled by ardent protectionists.)
But there is a further point worth making about whether NPR's intentions were to scare or inform their listeners. By Kotlikoff's own calculations the deficit fell by more than $20 trillion between 2012 and 2013, a decline of just under 9 percent.
Source: Kotlikoff, 2015. Numbers adjusted for inflation using CPI-U.
If it was important for the public to know that the deficit by Kotlikoff's measure was over $200 trillion back in 2011, presumably it would also have been important for the public to know that Kotlikoff's infinite horizon deficit had fallen by $20 trillion two years later. Why no coverage?
Billionaire Peter Peterson is spending lots of money to get people to worry about the debt and deficits rather than focus on the issues that will affect their lives. National Public Radio is doing its part to try to promote Peterson's cause with a Morning Edition piece that began by telling people that the next president "will have to wrestle with the federal debt." This is not true, but it is the hope of Peter Peterson that he can distract the public from the factors that will affect their lives, most importantly the upward redistribution of income, and obsess on the country's relative small deficit. (A larger deficit right now would promote growth and employment.)
According to the projections from the Congressional Budget Office, interest on the debt will be well below 2.0 percent of GDP when the next president takes office. This is lower than the interest burden faced by any pre-Obama president since Jimmy Carter. The interest burden is projected to rise to 3.0 percent of GDP by 2024 when the next president's second term is ending, but this would still be below the burden faced by President Clinton when he took office.
Furthermore, the reason for the projected rise in the burden is a projection that the Federal Reserve Board is projected to raise interest rates. If the Fed kept interest rates low, then the burden would be little changed over the course of the decade. Of course the Fed's decision to raise interest rates will have a far greater direct impact on people's lives than increasing interest costs for the government. (The president appoints 7 of the 12 voting members of the Fed's Open Market Committee that sets interest rates.)
The reason the Fed raises interest rates is to slow the economy and keep people from getting jobs. This will prevent the labor market from tightening, which will prevent workers from having enough bargaining power to get pay increases. In that case, the bulk of the gains from economic growth will continue to go to those at the top end of the income distribution.
The main reason that we saw strong wage growth at the end of the 1990s was that Alan Greenspan ignored the accepted wisdom in the economics profession, including among the liberal economists appointed to the Fed by President Clinton, and allowed the unemployment rate to drop well below 6.0 percent. At the time, almost all economists believed that if the unemployment rate fell much below 6.0 percent that inflation would spiral out of control. The economists were wrong, inflation was little changed even though the unemployment rate remained below 6.0 from the middle of 1995 until 2001, and averaged just 4.0 percent for all of 2000. (Economists, unlike custodians and dishwashers, suffer no consequence in their careers for messing up on the job.)
Anyhow, if the Fed raises interest rates to keep the labor market from tightening as it did in the late 1990s, this would effectively be depriving workers of the 1.0-1.5 percentage points in real wage growth they could expect if they were getting their share of productivity growth. This is like an increase in the payroll tax of 1.0-1.5 percentage points annually. Over the course of a two-term president, this would be the equivalent of an 8.0-12.0 percentage point increase in the payroll tax.
That would be a really big deal. But Peter Peterson and apparently NPR would rather have the public worry about the budget deficit.
It is also worth noting that the five think tanks mentioned in this piece that prepared deficit plans were paid by the Peter Peterson Foundation to prepare defict plans. They did not do it because they considered it the best use of their time.
Last week I noted the gift from the gods that the re-authorization of the Export-Import Bank is coming up at the same time as the Trans-Pacific Partnership (TPP). The great fun here is that the TPP proponents are running around being sanctimonious supporters of free trade. However the main purpose of the Export-Import Bank is to subsidize U.S. exports (mostly those of large corporations). Subsidizing exports is 180 degrees at odds with free trade, it's sort of like having sex to promote virginity, but naturally many of our great leaders in Washington support both.
We got another treat this week along the same lines in a Politico piece by Michael Grunwald arguing against breaking up the too big to fail (TBTF) banks. There is much in the piece that is wrong (e.g. he asserts that the biggest banks were not at the center of the financial crisis) but the key section for these purposes is when he tells readers:
"There’s much to dislike about America’s financial sector, but it is America’s financial sector. It’s actually much smaller as a percentage of the economy than its counterparts in Asia and Europe, and it’s much less concentrated at the top . Unilaterally enforcing size limits on domestic banks would put the U.S. at a real competitive disadvantage in financial services."
Almost all of Grunwald's argument is completely wrong (breaking up J.P. Morgan doesn't reduce its components and competitors to "community banks"). But the key point is that this is yet another example of an Obama-type (he collaborated in writing Timothy Geithner's autobiography) arguing for a government subsidy to help a favored interest group. Allowing the implicit guarantee of TBTF insurance is a massive government subsidy that the I.M.F. recently estimated to have a value of up to $70 billion a year for the United States. So once again we have a free trader arguing for government subsidies when something really important to them is at stake, in this case the survival of the Wall Street banks.
Given all the money and power on the side of the proponents of TPP, they are likely to get their deal through Congress. At least the rest of us can enjoy the spectacle of all these elite types making incredibly silly arguments.
There are two additional reasons that a vacant property tax is a neat idea. First, we already have a tax assessment on file for properties, so it doesn't require additional work. Second, even if people try to game the system by claiming a vacant property is actually occupied, we still have succeeded in imposing higher costs on leaving a property vacant. This means that owners are less likely to do so.
Washington Post economics writer Jim Tankersley took it upon himself to explain to Bernie Sanders, the senator from Vermont and candidate for the Democratic presidential nomination that "deodorant is not starving America's children." My guess is that Senator Sanders is aware of this fact.
The context for Sanders' deodorant comment was a statement about the irrelevance of GDP growth as a measure of well-being when the bulk of the gains go to the wealthy. Tankersley was good enough to include the whole quote:
"If 99 percent of all the new income goes to the top 1 percent, you could triple it, it wouldn't matter much to the average middle class person. The whole size of the economy and the GDP doesn't matter if people continue to work longer hours for low wages and you have 45 million people living in poverty. You can't just continue growth for the sake of growth in a world in which we are struggling with climate change and all kinds of environmental problems. All right? You don't necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country."
The point appears to be one about income distribution not deodorant. In other words, when the rich have even more money they are likely to focus on relatively frivilous ways of spending it, like new types of deodorants and sneakers. The problem isn't that the rich are spending their money on deodorants, the problem is that they are the only ones who have money to spend, as opposed to hungry people having money to spend on food.
Even if Tankersley didn't get this one exactly right, it is encouraging to see economics writers trying to educate presidential candidates. Perhaps Tankersley or one of his colleagues will use their columns or blog posts to explain the basics of Keynesian economics, so that candidates will understand that in the current economic context plans to cut the deficit are in fact plans to reduce economic growth and throw people out of work. Or, maybe they could explain that our bloated financial sector is a drag on growth, so that measures that reduce the size of the financial sector (like the financial transactions tax proposed by Sanders) would actually be a boost to the overall economy.
The fast-track authority needed to get the Trans-Pacific Partnership (TPP) through Congress must be in real trouble. Why else would the Washington Post devote so much space to pushing the deal and attacking its critics?
The latest was a diatribe by editorial board member Jonathan Capehart which is directed largely at Senator Elizabeth Warren. The piece starts by basically calling Senator Warren a liar for describing the TPP as "secret." As Capehart tells us:
"Yes, it is secret from you and me. As Ruth Marcus correctly explained, 'This is not secrecy for secrecy’s sake; it’s secrecy for the sake of negotiating advantage. Exposing U.S. bargaining positions or the offers of foreign counterparts to public view before the agreement is completed would undermine the outcome.' But TPP is not secret to Warren. She has read it."
Okay, so the deal is secret from 99.9999 percent of the country, but Warren is wrong to call it "secret." It is true that members of Congress and a limited number of staff with clearance can read the deal. They cannot take notes and cannot discuss details of the deal with people without security clearance.
The trade agreement is written in technical language. Our senators and congresspeople may all be very bright, but it is a bit much to expect them to be experts on everything from patent and copyright law to consumer safety regulations. Without the assistance of staff or experts outside of Congress it would be quite difficult for members to make an informed judgment on many of the issues in the pact.
But, not to worry:
"Any member of Congress who wants to be briefed on the emerging agreement or ask questions about what they are reading can call the offices of the United States Trade Representative (USTR). According to the folks at USTR, there have been more than 1,700 in-person briefings on the deal. In fact, Ambassador Michael Froman, who is the USTR, has personally briefed Warren on various aspects of TPP."
See, the office of the USTR, possibly even the USTR himself, will be there to clear up any points of confusion. Yep, that's like the prosecutor's office making itself available to help the jury on any points that were not clear during the trial. What could be better than that?
Of course the deal could be made public tomorrow if President Obama chose to do so. After all, that great proponent of open government, George W. Bush, made the Free Trade Area of the Americas draft available to the public before asking Congress to vote on fast-track authority.
Interestingly, Capehart doesn't address Warren's often repeated concern that fast-track authority will be in place well into the term of the next president. This cedes a huge amount of Congressional power to the next president. He also didn't mention the issue that Warren has repeatedly raised of the extra-judicial Investor-State Dispute Settlement panels established by TPP. Australia has opted out of these panels, is there some reason the United States can't opt out also?
It is remarkable how many people seem unfamiliar with the idea of productivity growth. It's a fairly simple concept. It means that workers can produce more output in each hour of work. The world economy has been seeing consistent productivity growth for more than two hundred years. That is why we have seen rising living standards. We live longer and better than our ancestors.
When we hear people running around saying that the robots will take all the jobs, that is a story of productivity growth. The argument is that each worker would be able to produce much more in a day's work because she is working alongside super-productive robots. If these folks had heard of productivity growth then they would know the key question is the rate of productivity growth and whether there is any reason to believe that it will be faster in the future than what we have seen in the past, and furthermore even if faster, whether it will be so much faster as to lead to mass unemployment.
The answer is certainly "no." Productivity growth has been slow in recent years and would have to accelerate enormously to reach the 3.0 percent pace of the Golden Age from 1947-73. And, that was a period of low unemployment and rising wages. There is a story of high unemployment and stagnant wages, but that is a story of bad Fed policy, bad currency policy, and bad fiscal policy. It is not the robots' fault.
Yesterday the Post gave us the opposite picture in a piece from Max Fisher which warned of China's demographic crisis because it faces slowing and then declining population growth. The argument is that it won't have enough workers to take care of its aging population. This one is really bizarre since China has been experiencing rapid productivity and rapid wage growth, which means that even if fewer workers are supporting each retiree, both workers and retirees can still enjoy sharply rising living standards.
This can be easily seen with some simple arithmetic. Suppose they go from having five workers to each retiree to just two over a twenty year period. This is a far sharper decline than China will actually see. Now suppose their rate of productivity and real wage growth is 5.0 percent annually, much slower than they actually have seen. And, assume that a retiree needs 80 percent of the income of an average worker.
In the first year, a worker would have to pay a bit less than 14 percent of their wages in taxes to support the retired population. If we base their before their tax wage as 100, this leaves them with an after-tax wage of 86. By year twenty the tax rate would need to be almost 29 percent in order for two workers to provide an income that is equal to 80 percent of the workers' after-tax income. Sound scary, right?
Well, the wage in year 20 will be 165 percent higher than it was in year one. This means that the after-tax wage will be almost 190 on our index, or more than twice what it had been twenty years earlier. And our retiree will also have more than twice as much income as they had twenty years earlier. Where's the crisis?
Furthermore, this is a low point. Once we reach our ratio of two workers per retiree there is little change going forward. The country does not keep getting older, or at least it does so at a very slow pace. But productivity continues to grow. If we go thirty years out from our start point then the wages of workers the index for after tax wages would be over 300 in the 5.0 percent productivity growth story, more than three times the initial level. Even with 2.0 productivity growth after year 20 the index for after-tax wages would be at 230, almost 170 percent higher than the wage workers had received thirty years earlier.
As a practical matter, the reduced supply of labor just means the least productive jobs go unfilled. No one works the midnight shift at convenience stores. And, it is harder to find people to mow your lawn or clean your house for low pay. Life is tough.
This is apparently a two year old piece. I have no idea why the Post decided to feature it today.
The gods must have a great a sense of humor. Why else would they arrange to have the Trans-Pacific Partnership (TPP) and the reauthorization of the Export-Import Bank both come up as great national issues at the same time?
If anyone is missing the irony, the TPP is being sold as "free trade." This is a great holy principle enshrined in intro econ textbooks everywhere. Since the TPP is called a "free-trade" agreement, those who opposed to it are ignorant Neanderthals who should not be taken seriously.
However the Export-Import Bank is about subsidies for U.S. exports. It is 180 degrees at odds with free trade. It means the government is effectively taxing the rest of us to give money to favored corporations, primarily folks like Boeing, GE, Caterpillar Tractor and a small number of other huge corporations.
The great part of the picture is that most of the strongest proponents of the TPP are also big supporters of the Export-Import Bank. They apparently have zero problem touting the virtues of free trade while at the same time pushing an institution that primarily exists to subsidize exports. Isn’t American politics just the best?
 The supporters of the Export-Import Bank insist that the bank makes a profit and therefore does not involve a subsidy from taxpayers. This is bit of fancy footwork designed to deceive the naïve. By taking advantage of the government’s ability to borrow at extremely low interest rates, the bank can still make money on the difference between the subsidized loan rate provided to its clients and the government’s own borrowing rate. However, in standard economic models that assume full employment (the ones you need to get the story that free trade is good) the bank’s subsidized loans are raising the cost of capital for everyone else by diverting capital to the favored corporations. For this reason the subsidized loans are still effectively imposing a tax on the rest of us, the accounting system just provides an effective way to hide this fact.
Thomas Friedman, the man who told us the world is flat and told us about "hyperconnectivity," is again raising the alarm about economic disruptions ahead. He tells readers about a new study which finds that 47 percent of the jobs in the United States are at risk of being taken over by smart machines and software in the next two decades. Wow!
Economists have a technical term for smart machines and software displacing workers. It's called "productivity growth." Back in the old days, when people who wrote on economic topics for major news outlets were expected to have some knowledge of economics, we thought productivity growth was good. It created the possibility of rising wages, shorter work hours, general improvements in living standards.
We can assess the assess the implications of the study Friedman cited for productivity growth. Suppose that half of the "at risk" jobs disappear over the next two decades. This would translate into a 1.3 percent annual rate of productivity growth. That would be slower than the U.S. has experienced for any sustained period since World War II. We should indeed be worried about the slow pace of technological progress in this case.
Suppose that all the "at risk" jobs identified in the study are eliminated over the next two decades. This translates in a 3.1 percent rate of annual productivity growth, roughly the same pace as during the Golden Age from 1947-73. This should be good news. Workers should be able to enjoy higher pay, shorter hours, and longer vacations.
In a Washington Post column today, Delaware Governor Jack Markell and Third Way President Jonathan Cowan took a swipe at the progressive wing of the Democratic Party in arguing for a set of ill-defined centrist proposals. (For example, they want better schools -- great idea.) There is much about their piece that is wrong or misleading (they imply that the rebuilding of Europe and Japan impedes growth and makes us poorer, that's not what standard trade theory says), but the best part is in the last paragraph where they tell readers:
"Nine years ago, Borders Books had more than 1,000 stores and more than 35,000 employees. Four years ago, it liquidated. Those stores didn’t close and those employees didn’t lose their jobs because the economic system was rigged against ordinary Americans. They closed because technology brought us Amazon and the Kindle."
Actually, Border Books did close in large part because the economic system is rigged against ordinary Americans. One of the main reasons Amazon has been able to grow as rapidly as it did is that Amazon has not been required to collect the same sales tax as its brick and mortar competitors in most states for most of its existence. The savings on sales tax almost certainly exceeded its cumulative profits since it was founded in 1994.
While there is no policy rationale to exempt businesses from the obligation to collect sales tax because they are Internet based, this exemption has allowed Amazon to become a huge company and made its founder, Jeff Bezos one of the richest people in the world. Oh yeah, Jeff Bezos now owns the Washington Post.
I see many folks have a hard time believing that sales tax mattered to Amazon's growth. While readers here may exclusively buy books in stores or on the web. Many do both. And for most of these people it is very likely that if they had to pay 5-8 percent more for the books purchased on the web that they would have bought more in stores. If would add, that if didn't matter to these people, then we have to wonder why Amazon and other Internet retailers didn't just raise their prices by 5-8 percent and put more money in their pockets?
Again, the amount at stake here is almost certainly more than Amazon's cumulative profits. That makes it a big deal.
I see that Niall Ferguson is again pushing the case that the austerity pursued by the Cameron government in 2010 was both necessary and good. This can be a useful opportunity to show why the history since the Conservatives took power does not support this claim, even though they managed to get re-elected.
To quickly summarize Ferguson’s case, he argues that the turn to austerity was a matter of necessity, not choice. The U.K. had a high and rising debt burden. Furthermore, inflation was increasing and reaching dangerous levels. So it was necessary for the government to take quick action to reduce the deficit to keep the economy on a stable path. However, once on this course the economy quickly rebounded. The government’s actions restored business confidence leading to strong investment and growth.
Let’s start with the debt story. Ferguson cites a study from the Bank of International Settlements and argues that the government faced a much worse debt picture than other countries:
“The baseline scenario for the UK at that time was that, in the absence of fiscal reform, public debt would rise from 50% of GDP to above 500% by 2040. Only Japan was forecast to have a higher debt ratio by 2040 in the absence of reform."
Okay, that sounds pretty bad. Of course there is a long time between 2010 and 2040 to deal with rising debt if it becomes a burden on the economy, but there are two points that argue strongly there was no need for the Cameron government to be concerned about a financial panic sinking the country.